Malaysia's debt market slowdown to persist
MALAYSIA'S debt capital market (DCM) is set to slow further in the second half of 2025 (2H25) as the government presses ahead with efforts to reduce federal debt, Fitch Ratings said.
The budget deficit is on track to meet the 2025 target of 3.8% of GDP, which Fitch noted is 'primarily to reflect the government's continued efforts to reduce federal debt'.
However, the ratings agency expects 'rising funding requirements from banks and substantial upcoming corporate debt maturities' to support a notable rise in non-sovereign issuance, helping to sustain overall market activity.
'Issuance could be supported further by the first Overnight Policy Rate (OPR) reduction in five years to 2.75% in July 2025,' Fitch added.
Total DCM issuance fell 27% year-on-year (YoY) in the 1H25 (1H25) to US$41.1 billion (RM173.44 billion).
Sovereign issuance dropped 63%, partly offset by a 63.5% surge in bank and corporate issuances.
As a result, the sovereign share of total issuance fell to 36% from 71.3% in 1H24, though sovereign debt still accounted for about 60% of total DCM outstanding in 1H25.
Fitch cautioned that 'additional pressure on DCM growth could arise from ringgit volatility, interest-rate movements, commodity-price fluctuations, US tariffs and global geopolitical uncertainties'.
The Malaysian DCM 'is one of the most developed among emerging markets, with a mature regulatory framework and continued supply, issuer and investor diversity,' Fitch said.
Outstanding debt stood at US$580 billion in 1H25, up 5% YoY, with the majority denominated in ringgit (92%) and the rest mostly in US dollars (7%).
About 76% of Malaysia's ringgit DCM debt had remaining maturities of 10 years, or more, 'reflecting the government's focus on longer tenors to mitigate refinancing risk,' Fitch said.
Malaysia leads the global sukuk market with 34% of sukuk outstanding across all currencies, and 27.5% of global environmental, social and governance (ESG) sukuk.
It also has the second-largest sukuk issuance volume globally after Indonesia.
Sukuk accounted for 59% of Malaysia's outstanding DCM, although issuance fell 30% YoY.
'Fitch rates US$14.8 billion of sukuk outstanding by Malaysian issuers, all of which is investment grade and has 'Stable' outlooks,' it said.
Domestic investors held 86.4% of the ringgit-denominated DCM debt in 1H25, led by banks, the Employees Provident Fund (EPF) and insurers.
The share held by foreign investors rose to 13.6% (1H24: 13.1%), with sukuk making up 4.1%.
Fitch noted that the lower proportion of foreign sukuk holdings is 'partly due to Gulf Cooperation Council (GCC) Islamic banks' sharia intricacies, with few repo and hedging options'.
Foreign investors made up 21.8% (1H24: 21.7%) of government debt, driven by 'asset managers, central banks or governments, banks and pension funds, and inclusion in global bond indices'.
The Securities Commission Malaysia is advancing its regulatory framework for tokenised capital market products, with Public Consultation Paper No 1/2025 circulated in May 2025.
Fitch said 'such an initiative could attract a wider base of investors'. — TMR
This article first appeared in The Malaysian Reserve weekly print edition
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