KUALA LUMPUR (June 27): S&P Global Ratings on Thursday affirmed Malaysia’s sovereign ratings at A- and a “stable” outlook, citing steady growth and potential modest fiscal improvements.

Malaysia is set to benefit from a strong global semiconductor recovery, reinforcing medium-term growth prospects, S&P said in a statement. Political stability, meanwhile, is leading to a more conducive policymaking, allowing gradual stabilisation of government finances, it noted.

“The stable outlook reflects our expectations that Malaysia's steady growth momentum and strong external position, alongside narrowing deficits, will hold over the next two years,” S&P said.

Moody’s Investors Service has Malaysia at A3 with a "stable’"outlook while Fitch Ratings last maintained the country’s credit rating at BBB+ with a "stable" outlook in December 2023. All the three agencies’ ratings are investment-grade.

This year, the government is targeting to narrow its budget gap as a proportion of economic output to 4.3% from 5% last year. Malaysia has been trying to shrink a long-running fiscal deficit that stretches back to the 1998 Asian Financial Crisis.

Most recently, the government has introduced a slew of measures ranging from trimming subsidies to imposing additional taxes in a bid to fix its weakened finances. The key is the withdrawal of subsidies for fuel and other non-essential items widely panned by economists for being wasteful.

“We expect Malaysia's fiscal deficits to narrow on the back of planned subsidy rationalisation measures, the phased implementation of which has begun,” S&P said. “Although the fiscal position remains weak, it is improving with economic recovery on track and a more stable policy environment.”

S&P is projecting Malaysia’s economic growth to recover to 4.3% this year through higher exports and robust private sector investments. That compares to the official projection of 4%-5% growth this year.

In the first quarter, gross domestic product grew 4.2% year-on-year. On its part, the government is banking on external demand and higher tourist arrivals to bolster consumer spending and business investments.

“Malaysia's solid external position is a rating strength,” S&P said, drawing comfort from consistent current account surpluses for more than two decades. The agency forecasts current account surplus to stabilise around 2.3% of gross domestic product over the next three years.

Further, Malaysia's institutions have supported “generally effective policymaking for a long time” and the depth of institutional strength mitigates the risk of political instability, S&P noted.

The current coalition government led by Datuk Seri Anwar Ibrahim appears to have reached some degree of political stability which has resulted in a “more favourable policymaking environment,” S&P noted. “This has again enabled economic reforms and fiscal consolidation to gain traction.”