KUALA LUMPUR (Aug 26): Malaysia needs to build up the country’s contingency funds at regular intervals to mitigate major event risks, as demonstrated during the Covid-19 pandemic, said Malaysian Rating Corp Bhd (MARC) in a statement on Monday.

“This would help expand the size of rainy day or deficit stabilisation funds, which can be actively utilised under defined criteria in the event of major adverse developments,” the rating agency said.

The National Trust Fund of Malaysia, or Kumpulan Wang Amanah Negara (KWAN), had total assets of US$3.58 billion (RM15.56 billion) after purchasing Covid vaccines in 2021.

Under Budget 2024, RM2 billion was allocated for contingency savings.

Aside from KWAN, Malaysia also has the Federal Contingencies Fund for emergency spending.

MARC noted that Malaysia’s government debt as a share of gross domestic product (GDP) reached 64.3% in 2023 (2022: 60.2%), approaching the statutory debt limit of 65.0%, which was revised upwards from 60.0% in 2021.

“Since 2020, annually, government borrowings have grown 10.3%, surpassing the nominal economic growth of 5.1%. As at the first quarter of 2024 (1Q2024), government debt reached its highest level at RM1.21 trillion (4Q2023: RM1.17 trillion),” it said, noting that higher government expenditures in response to pandemic stimuli had driven the rising trend in recent years.

Although the Public Finance and Fiscal Responsibility Act 2023 (FRA) has capped the government debt limit at 60% of GDP, the government has projected the debt ratio to remain elevated in the near term due to the gradual pace of fiscal consolidation efforts.

“The fiscal deficit target of 3.5% over the 2024-2026 period exceeds our estimate of the debt-stabilising deficit, underscoring the risk of accelerating debt growth amid rising debt service charges, welfare-related costs, and persistent operating and development expenditures.

“Notably, the FRA does not specify the debt service charges (DSC) limit, with DSCs as a share of revenue expected to increase to 16.2% in 2024 (2023: 14.7%), surpassing the previously self-imposed threshold of 15.0%,” MARC said.

However, it added that ongoing fiscal reforms are expected to enhance the government’s capacity to meet the fiscal limits outlined in the FRA over the long term.

Off–balance sheet items, such as contingent liabilities — at 17.2% to GDP as at end-2023 compared with 14.3% in 2013 — pose additional risks to debt sustainability. The FRA limits government guarantees, which constitute the bulk of the contingent liabilities, at 25.0% of GDP.

MARC noted that a significant portion of government guarantee recipients had low or negative returns on assets because some of these assets, designed to bring about societal benefits, generate poor financial returns by nature. Hence, the potential need for future capital injections remains.

“Contingent liabilities may also arise from government-linked companies within strategic sectors such as finance and utilities during situations of severe economic stress. Therefore, enhancing stronger accountability through clear goals, rigorous supervision and law enforcement, and transparent public-private partnership (PPP) parameters are imperative to enhance the efficiency of balance sheet utilisation,” it added.

MARC stressed that effective debt management is crucial, particularly given the higher short-term debts issued since 2020 for pandemic spending. Short-term papers (less than three years) as a share of gross borrowings rose to 18.9% over the 2020-2023 period, compared with 6.2% over the 2015-2019 period.

It noted that Malaysia’s exposure to foreign exchange risk is minimal, with only 2.6% of government debt denominated in foreign currencies (2022: 2.7%) and non-residents’ share of government debt at 24.6% remaining below the 2016 peak of 32.2%.

“The country’s strong net international investment position and deep, liquid domestic capital market also mitigate external risks,” it said.

Meanwhile, MARC highlighted that while still adequate, Malaysia should strengthen its international reserves to short-term external debt ratio, which had fallen to one times in 2023 from two times in 2009, MARC said in Monday's statement.

“It would be ideal to strengthen this position to buffer against external risks,” it said.