Can Malaysia balance pledge to cut debt with record US$144 billion development plan?

CNA

17 hours ago

Sunway University economics professor Yeah Kim Leng said that it is important for Malaysia - classified as a middle-income country by the World Bank - to spend wisely on productive investments that expand its production capacity for instance.
He cited the Johor Bahru-Singapore Rapid Transit System (RTS) Link train system connecting Johor Bahru and Singapore - scheduled to start operating in Dec 2026 - as an example, noting that it would boost connectivity and have a multiplier effect by improving business activities across both countries.
"Efficient spending is necessary, especially if it contributes to upgrading the economy," he said, adding that any reduction in spending has to be incremental so that the growth is not severely impacted.
Yeah further noted that besides cutting wastages and leakages in spending, the other strategies to cap borrowing and reduce debt size include privatisation and partnerships between the public and private sectors.
He said that an accelerated shift to the private sector-led growth would harness entrepreneurship, competitive spirit and innovation drive.
'If private consumption and investment growth is sustained through rising confidence, the government will be able to collect more taxes that will enable the government to narrow the fiscal deficit and reduce borrowing,' he said.
CONCERNS IF DEBT GROWS
While Malaysia's debt is still manageable at current levels, economists expressed concerns if the debt-to-GDP ratio rises towards or goes beyond 70 per cent due to the need to fund the country's development plans, as this could trigger credit rating downgrades and raise borrowing costs.
'We risk entering a 'debt trap' scenario where borrowing is increasingly used to service existing obligations rather than fund productive investments,' said Dass.
He noted that interest payments already consume over 17 per cent of government revenue and this reduces resources for essential services like for education, healthcare, social protection, and infrastructure.
'In effect, future-oriented spending is constrained by the cost of past borrowing, limiting the government's ability to respond to new social and economic challenges,' Dass said, adding that critical social assistance programmes - such as cash aid - could be scaled back just as cost-of-living pressures rise.
According to Yeah, while there is no single optimal debt level, a broad range of 60 per cent to 80 per cent of GDP was considered optimal for a developing country like Malaysia.
'The higher the level of your debt, the more you would be vulnerable to economic shocks such as unintended consequences of the Trump tariffs or supply chain issues,' he said, adding that a rise in debt could cause a downgrade in sovereign ratings downgrade.
A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity.
Meanwhile, Nungsari stressed that Malaysia could not continue on its existing trajectory without risking a sovereign downgrade, adding that economic reforms, while painful, are necessary.
'This fiscal consolidation will be painful. That's why it has been delayed. People make all kinds of noise if expenditures are cut, even reallocated, and they make noise when new revenues are introduced,' he said.
'Constraints force creativity and productivity. That's what we need to be competitive. Find new things to do. Better things to do.'