Malaysia’s Fiscal Challenges Amid Growing Global Economic Uncertainty

Malaysia faces a bumpy road to achieving its ambitious fiscal deficit target of 3.8% of gross domestic product (GDP) for 2025, down from 4.1% in 2024, as global economic headwinds and domestic challenges threaten to derail progress. Analysts warn that slower growth, driven by looming US tariffs and broader trade uncertainties, could strain government budgets, while the International Monetary Fund (IMF) forecasts a sharp rise in global public debt by the decade’s end. Despite these concerns, some experts remain cautiously optimistic about Malaysia’s ability to maintain fiscal stability.

Looming Economic Risks

The Malaysian economy is grappling with external pressures that could undermine the government’s fiscal consolidation plans. A key concern is the potential impact of new US tariffs, which could dampen economic growth and disrupt trade flows. Kevin Khaw Khai Sheng, a research analyst at iFAST Capital, highlighted these risks in an interview with StarBiz, noting that “this year may not be the ideal year to achieve the 3.8% target due to looming uncertainties” and suggesting that the target might be more realistically met in 2026. The IMF has also downgraded Malaysia’s real GDP growth forecast for 2025 to 4.1%, down from an earlier estimate of 4.7%, attributing the revision to the anticipated effects of these tariffs.

Economist Geoffrey Williams emphasized the economic cost of failing to secure a favorable deal with the United States during the current 90-day pause on tariff implementation, announced by US President Donald Trump on April 2, 2025. “This is why it is imperative to negotiate a good deal during the current 90-day pause” he said, estimating the potential loss at 11.6 billion Malaysian Ringgit (US$2.5 billion) for 2025 if negotiations falter.

Debt Levels and Fiscal Stability

As of December 2024, Malaysia’s debt-to-GDP ratio stood at 64.6%, equivalent to 1.25 trillion Malaysian Ringgit (US$268 billion), according to the Finance Ministry’s latest quarterly report. While this level is considered manageable by many analysts, the IMF’s recent Fiscal Monitor report warns of a broader global trend, projecting public debt to reach 95.1% of global GDP by the end of 2025, a rise of 2.8 percentage points. The report cites economic pressures from steep tariffs and slower growth as key drivers of this trend, which could indirectly impact countries like Malaysia.

Despite these warnings, some experts believe Malaysia is well-positioned to weather the storm. Khaw pointed out that the country’s reliance on domestic revenue sources, such as dividends from Petroliam Nasional Bhd (PETRONAS) and healthy tax collections, provides a buffer against rising debt levels. “I do not expect there to be any significant negative impact on our debt levels” he said, adding that while progress toward the fiscal deficit target may be delayed, it remains achievable in the long term.

Policy Options and Challenges

Sunway University economics professor Yeah Kim Leng acknowledged that lower revenue collection and potentially higher-than-budgeted stimulus spending could “slightly” derail the government’s fiscal goals. However, he argued that a temporary loosening of fiscal policy might be less damaging if the medium-term debt trajectory trends downward and spending is targeted and productive. “These justifications for anti-cyclical government spending however do detract from the need to reduce non-critical spending or postpone large public projects that can be delayed without jeopardizing overall economic efficiency” he said.

In contrast, Williams remains more optimistic, asserting that the deficit target is still within reach despite slower growth. He cautioned, however, that fiscal consolidation and debt reduction efforts must be carefully balanced against the need to stimulate the economy. Meanwhile, Mohd Afzanizam Abdul Rashid, head of economics at Bank Muamalat Malaysia Bhd, described the IMF’s warnings as a “cautionary note” on rising global debt, particularly in light of uncertainties surrounding the Trump administration’s trade policies. “I suppose it is a fair comment considering the degree of uncertainties brought by the Trump administration, especially in areas relating to import tariffs” he said.

Structural Reforms on the Horizon

Beyond immediate fiscal concerns, analysts stress the importance of structural reforms to bolster Malaysia’s economic resilience. Liew Chee Yoong, a finance associate professor at UCSI University Malaysia, noted that while the country’s debt exposure is currently manageable, it remains vulnerable to external shocks such as oil price volatility and capital outflows. He pointed to sovereign debt vulnerability assessments by the Asian Development Bank, which highlight these risks, as well as cautions from credit rating agencies like S&P Global Ratings and Fitch Ratings about rising public debt and off-budget liabilities. Still, Liew believes an immediate credit rating downgrade is unlikely as long as fiscal discipline holds.

Among the policy options available, Liew advocates for a reintroduction of the goods and services tax (GST), which was abolished in 2018. He argues that reinstating the GST could significantly broaden Malaysia’s revenue base, especially if paired with improved tax compliance and efforts to curb evasion. “In terms of policy options, Malaysia has a range of tools at its disposal to address rising debt levels and strengthen fiscal sustainability” he said. Additional recommendations include rationalizing public spending—particularly subsidies—enhancing debt transparency, and accelerating economic transformation through targeted investments and export diversification.

Balancing Short-Term Needs and Long-Term Goals

Economists also underscore the need for counter-cyclical fiscal and monetary policies to mitigate the impact of a slowing economy driven by trade wars and tariffs. Cutting public spending, particularly on infrastructure, could prove counterproductive, warns Lavanya Venkateswaran, a senior ASEAN economist at OCBC. “While reducing capital or infrastructure spending will help balance the fiscal position in the short-term, this will produce less than ideal outcomes over the medium-term” she said. Instead, she advocates for bolstering reforms through national economic plans, focusing on industries like semiconductors, and diversifying trade and investment partners to sustain growth.

Yeah echoed this sentiment, suggesting that temporary fiscal loosening could be justified if it supports demand without derailing long-term debt reduction goals. However, he stressed the importance of avoiding deficit and debt surges that could undermine investor confidence or alarm rating agencies. Postponing non-essential projects and scrutinizing spending remain critical steps to maintaining fiscal credibility.

Global Context and Malaysia’s Path Forward

Malaysia’s fiscal challenges are unfolding against a backdrop of heightened global economic uncertainty. The IMF’s projection of public debt nearing 100% of global GDP by the end of the decade serves as a stark reminder of the interconnected risks facing nations worldwide. For Malaysia, the immediate focus is on navigating the fallout from US tariffs and securing favorable trade negotiations during the current 90-day window. Failure to do so could exacerbate economic slowdowns and delay fiscal targets further.

At the same time, domestic policy choices will play a pivotal role in determining whether Malaysia can achieve its 3.8% deficit target in 2025 or beyond. Reforming the tax system, prioritizing productive spending, and diversifying economic partnerships offer pathways to resilience, even as external pressures mount. While the road ahead is fraught with uncertainty, Malaysia’s ability to adapt and maintain fiscal discipline could set it apart in a region bracing for tougher times.

As global and local dynamics continue to evolve, the question remains whether Malaysia can strike the delicate balance between stimulating growth and curbing debt. For now, policymakers, analysts, and citizens alike are watching closely, aware that the decisions made in the coming months could shape the country’s economic trajectory for years to come.