PETALING JAYA: Malaysia’s debt capital market (DCM) is expected to expand modestly, reaching US$640bil outstanding by the end of 2026.
In a recent report, Fitch Ratings said the growth drivers include increased non-sovereign borrowing, a deep domestic market, a stronger ringgit, continued innovation and greater digital integration.
“Recent developments include the first tokenised sukuk out of Malaysia and regulations governing private debt,” it said.
Fitch noted that Malaysia’s DCM is the third largest in Asean and remains relatively deep and well developed. Government debt accounted for about 58% of DCM outstanding as of end-May 2026.
“Malaysia is also likely to remain the world’s largest sukuk market in the second half of 2026 (2H26), supported by the Capital Market Masterplan 2026-2030, which emphasises Islamic finance.
“Environmental, social and governance DCM rose by 44% year-on-year to US$20bil outstanding in Malaysia as of end-May 2026, supported by tax incentives,” it said.
The agency said it rated US$13.2bil of Malaysian sukuk outstanding at the end of the first quarter of 2026 (1Q26), all of which were issued by the sovereign.
“All are rated BBB+ with stable outlooks, and no Malaysian sukuk rated by Fitch has defaulted since 2021. About 88% of the rated sukuk are denominated in ringgit, and the average tenor is 17.6 years,” it said.
Fitch noted that yields on Malaysian government debt have remained stable so far in 2026 despite global volatility.
It added that local institutional investors continue to anchor the DCM, while the foreign investor participation has been broadly maintained despite macroeconomic volatility following the onset of the Iran conflict.
“Most Fitch-rated Malaysian sukuk were at the highest end of the liquidity spectrum, with liquidity improving between January to early June 2026.
“Rated Malaysian sukuk were more liquid, on average, than rated-sukuk from Gulf Cooperation Council (GCC) countries, Indonesia, Turkiye and other regions.”
Fitch said bonds, rather than sukuk, continue to be more attractive to foreign investors. Within the sukuk segment, sovereign issuances tend to attract lower non-resident participation than corporate issuances, although foreign holdings of corporate sukuk are generally more volatile.
“Low non-resident participation in government sukuk may reflect differences in syariah interpretations by foreign Islamic investors, which could constrain investments,” it said.
The agency added that expanding sukuk structures to better align with the syariah interpretations commonly applied in GCC countries could help Malaysia attract a wider pool of overseas investors.
To support this effort, the government plans to introduce its first wakalah bi al-khadamat issuance in 2026 to broaden foreign investor participation.
Meanwhile, Fitch noted a shift in the composition of non-resident holdings of government bonds. As of December 2025 and March 2026, central banks and governments had become the largest investor group, overtaking asset managers, with shares of 33.4% and 36.1%, respectively.
“Pension funds also recorded a larger share than banks in September 2025 and March 2026, pointing to stronger participation by long-term institutional investors and suggesting rising confidence in the market,” the rating agency said.
Fitch added that yields on 10-year Malaysian Government Securities (MGS) and Malaysian Government Investment Issues were broadly stable at 3.48% to 3.65% and 3.5% to 3.65%, respectively, between Jan 2 and June 12, 2026.
“This indicates steady investor confidence in Malaysia and continued demand from core domestic investors. The spread between the 10-year MGS yield and the US 10-year Treasury yield narrowed to a low of 45.7 basis points (bps) on Feb 27, 2026, before widening to a high of 105.6 bps on May 19, 2026.
“We expect inflation to rise to 2% in 2026 from an estimated 1.4% in 2025. We also expect Bank Negara Malaysia to cut its policy rate to 2.5% in 2026 from 2.75%, as low inflation and a weaker US dollar should provide some room for monetary easing.”
