KUALA LUMPUR (Oct 24): With Putrajaya staying on course to rein in overspending in 2025, Malaysia’s government bond supply is expected to decline with smaller deficit financing requirements.

According to fixed-income analysts, gross issuance in 2025 is expected to range from RM163.5 billion to RM164 billion, down roughly 10.5% from the projected RM183 million in 2024.

Year-to-date, government bonds issued totalled RM160.18 billion, according to Bank Negara Malaysia (BNM) data.

“The lower projected budget deficit of RM80 billion in 2025, which is RM4.3 billion below the revised estimate of RM84.3 billion in 2024, suggests milder net borrowing requirements next year,” CIMB Securities said in a note on Oct 19.

Putrajaya’s spending, and in turn borrowing, is constrained or guided by the Fiscal Responsibility Act (FRA) — which caps certain fiscal parameters in the medium term (three to five years).

These include the fiscal deficit to be capped at 3%, development expenditure to be at least 3% of gross domestic product (GDP), a debt ceiling of 60% of GDP (versus the current 65% statutory limit) and government guarantees to be limited at 25% of gross domestic product (GDP).

Federal government debt stood at 63.1% of GDP at end-June 2024, with Ministry of Finance (MOF) projections pointing to the ratio remaining at 64% for end-2024 and 2025.

With Budget 2025’s RM421 billion allocation being the largest ever, the federal government is banking on strong revenue to help cushion rising operating expenditures.

Emoluments spending is budgeted 6.17% higher year-on-year at RM105.92 billion, eclipsing the RM100 billion-mark for the first time ever, while debt service charges (DSC) are expected to rise 7.7% to RM54.7 billion.

Against RM83.5 billion in government bonds slated for maturity in 2025, a net issuance of RM80 billion to RM80.5 billion is projected, down from RM90 billion expected in 2024, suggesting Putrajaya is moving to slow the growth of its borrowing costs.

While the FRA does not set a cap on the government’s DSC, the government’s administrative guidelines set a guidance threshold of 15% of federal government revenue. For 2025, debt service charges (DSC) are to stand at 16.1% of revenue (DSC of RM54.7 billion against revenue of RM339.7 billion).

Domestic demand expected to remain healthy

Despite the expected slowdown in government bond supply in 2025, domestic demand for government-issued bonds is expected to remain healthy, based on Malaysia’s favourable macroeconomics.

“Malaysia’s macro settings remain favourable with strong economic growth and largely stable inflation although fuel subsidy rationalisation is expected to raise the inflation trajectory next year moderately,” wrote Winson Phoon, head of fixed income research at Maybank Investment Bank, in an email to The Edge.

“But foreign holdings face reversal risks after consecutive months of large gains in the third quarter [of 2024],” Phoon added, noting that the market has currently priced in about 140bp of total US Fed rate cuts until end-2025.

“If that falls short, the US dollar funding conditions may tighten, reducing risk-taking appetite and the tide of foreign flows,” he noted.

Year-to-date, bid-to-cover ratios, a measure of demand from investors, have ranged from one time to 4.4 times, averaging 2.49 times based on BNM data compiled by The Edge.

The latest Malaysian government securities issued, which matures in May 2044, pulled a bid-to-cover ratio of 2.04 times, with an average yield of 4.136%.