Ballooning government spending looms in Malaysia

Policies on government money must be addressed to offset spending, Fitch advised.

Fitch Ratings says Malaysia faces rising negative fiscal pressures that may eventually offset existing credit strengths unless structural weaknesses in the public finances are addressed.

In a newly published report, Fitch says Malaysia's trade openness and existing relatively high public debt stock would leave its credit profile exposed to a potentially sharp increase in public debt ratios in the event of an interest rate or growth shock, although this is not the agency's base case. Its budgetary flexibility is further constrained by dependence on energy-linked revenues and extensive consumer subsidies.

Given the current domestic political context, Fitch does not expect policymakers to address the underlying weaknesses in the public finances before elections that must happen by end-June 2013. Prospects for fiscal policy management and structural fiscal reform after the elections are uncertain.

Fitch acknowledges Malaysian's funding flexibility, aided by a developed domestic debt capital market and large holdings of government debt within the broader public sector. However, greater foreign holdings of local-currency debt have heightened Malaysia's exposure to bouts of risk aversion.