Fragile and uneven economic recovery limits Malaysia’s fiscal space

Published on 02 Dec 2020.

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RAM projects Malaysia’s budget deficit to come in at 5.6% in 2021 (2020 estimate: 6.1%), as the Government maintains its fiscal stimulus programmes amid the COVID-19 pandemic.  The supportive fiscal orientation will be essential towards boosting economic confidence and reviving the private sector. Such measures are also deemed appropriate as low interest rates and excess domestic capacity render big public projects more feasible.

Given the fiscal outcome and some key legislative adjustments under the Temporary Measures for Government Financing Bill 2019, government debt is forecast to escalate to 62.2% of GDP in 2020 and 62.3% in 2021 (2019: 52.5%).We estimate committed debts – defined as debts incurred by strategic entities that the government is obliged to service –  will remain  sizeable  at 17.2% of GDP as at end-3Q 2020 (end-2019: 16.7%). The Government’s debt burden is envisaged to inflate further in the medium term given its plans to revive and accelerate sizeable public infrastructure projects. Effective project management of these undertakings is therefore crucial to minimise any potential adverse impact on the nation’s fiscal position.

Despite the substantial debt load, short-term risks are deemed manageable due to a favourable maturity profile and low foreign currency exposure. Our concerns of the enlarged budget are also allayed by the positive economic impact of development spent. This can be significant due to their higher fiscal multiplier, which we estimate to be about 2 times for infrastructure projects. In other words, RM1 of fiscal expenditure can generate up to RM2 of economic activity under the present conditions. 

That said, fiscal headroom is limited in the medium term and will be vulnerable to shocks. Malaysia’s debt-servicing cost is expected to climb up to 18.0% of total revenue in 2022 (2019: 14.0%). Without stronger economic growth, we envisage at least one of the existing debt ceilings to be breached by 2022. The debt ceiling may have to be relaxed or revised to alleviate the legislative constraints arising from this policy orientation, albeit with some consequences. As such, we expect the Government to carry out meaningful fiscal reforms to ensure sufficient fiscal space through the medium term.

Below is a summary of RAM’s key projections that support our analysis.

Source: RAM, Ministry of Finance and BNM; 2020e and 2021f are RAM projections

Any upside to our forecasts will stem from swift and extensive administration of effective vaccines against the coronavirus. Conversely, the extension of or even more stringent movement restrictions will present downside risks.


Analytical contacts
Jason Fong
(603) 3385 2616

Woon Khai Jhek, CFA
(603) 3385 2512

Media contact
Padthma Subbiah
(603) 3385 2577


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Published by RAM Rating Services Berhad
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Economic Outlook 2021 02-Dec-2020 Economic Outlooks View PDF