In 2019, the federal government’s interest payments account for about 13% of its revenue, significantly higher than the A-rated median of 4%. Moving into 2020, Moody’s forecast Malaysia’s interest payment against government revenue to breach 14% and to increase further to nearly 15% by 2021.
The rating agency also expects the government’s debt burden to remain higher than similarly-rated countries, pointing out that “Malaysia’s high debt burden is a significant constraint on the rating”.
“We estimate that government debt rose to 55.7% of gross domestic product (GDP) in 2019 from around 53% in 2018, and expect the debt burden to remain close to 56% over the next two years.
“This is significantly higher than the median of around 37% for A-rated sovereigns.
“While our forecast for government debt is above the government’s self-imposed ceiling of 55% of GDP, the ceiling applies only to its direct debt,” Moody’s said in a report yesterday.
The government also faces steady increase in government guarantees, exceeding 18% of GDP at the end of September 2019 compared with around 15% at the end of 2016.
Meanwhile, committed guarantees – a subset of government guarantees and primarily related to infrastructure projects – amounted to 10.4% of GDP at the end of June 2019.
In the event the guaranteed infrastructure investments fail to generate sufficient cash flow to repay the guaranteed debt, it would result in higher contingent liabilities for the government.
Moody’s, however, said that continuing support for operations and debt servicing for weaker state-owned enterprises (SOEs), including those that have been identified as requiring committed guarantees, is already accounted for in government expenditure and consequently forms part of the deficit and the government’s debt projections.
“As for the remaining guaranteed debt, we believe that most of the SOEs are in robust financial health, suggesting limited risks to the government’s balance sheet,” it said.
Despite the concern on the government’s debt position, particularly the direct debt obligations, Moody’s said that almost 98% of the borrowings are denominated in ringgit.
This protects the country’s fiscal position from foreign exchange fluctuations.
It also said that Malaysia’s debt structure remains favourable. In addition, the government’s ability to draw upon a large pool of domestic savings for its financing provides support to Malaysia’s fiscal strength and broader credit profile.
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