Taking stock of Malaysia’s public debt

Nov 10, 2026

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GLOBALLY, public debt or sovereign debt is under intense scrutiny.

The global sovereign debt landscape functions on a fragile mismatch, presenting a stark paradox: short-term market liquidity remains highly resilient in absorbing historic issuances, but structural debt-servicing costs are rapidly eroding long-term fiscal budgets and debt solvency.

Public debt is not inherently a problem; it is a double-edged sword.

It allows governments to borrow money to implement development programmes and projects such as roads, hospitals, schools, public utilities infrastructure, social policies and climate-related investments.

It becomes problematic when debt repayments absorb an unsustainable share of government revenue, crowding out essential investments.

It can sharply constrain the fiscal space of many high-debt, low-income countries.

Sometimes, unsustainable public debt can lead to debt distress. This occurs when a country is unable to fulfil its financial obligations and requires debt restructuring, or faces severe liquidity and solvency pressure.

There is no single universal rule to determine the ideal amount a government should borrow.

The outcomes depend heavily on how the borrowed money is spent, the country’s current debt level, and prevailing interest rates.

The Malaysian government must keep the country’s public debt sustainable, taking into consideration the medium-term fiscal stability framework, competing trade-offs, fiscal indicators, and economic conditions to judge whether the nation’s debt load is sustainable.

Over the past decade (2016 to 2025), Malaysia’s public debt grew by a compound annual growth rate (CAGR) of 7.6% to reach RM1.32 trillion, or 65.2% of gross domestic product (GDP), at end-2025 from RM630.5bil, or 53.6% of GDP, at end-2015.

Persistent fiscal deficits driven by structural spending needs and past economic shocks, including the Covid-19 pandemic, are the primary cause of high public debt accumulation.

Federal government debt continues to increase because the nation is still running an annual fiscal deficit, albeit a smaller one, meaning that it adds new debt even though it borrows at a slower pace.

Over the period of 2023 to 2026, net borrowings of the federal government averaging RM80.9bil per year compared to RM95.4bil per year in 2020 to 2022.

The government borrows to refinance older, maturing bonds and obligations.

The increase in debt accelerated to a CAGR of 10.8% in 2021 to 2022 during the pandemic-inflicted economic crisis, before growing at a slower rate of CAGR of 7% in 2023 to 2025.

As at end-June 2026, public debt stood at RM1.38 trillion, or 63.1%, of estimated GDP.

Off-balance sheet financing and rising contingent liabilities allow the federal government to fund public projects while keeping direct public debt artificially low, though they shift significant risk to the government’s long-term fiscal health should the guaranteed loans turn sour.

The contingent liabilities are primarily caused by increased government guarantees for mega-infrastructure projects, public-private partnerships, and the structural underperformance of state-owned enterprises or government-linked companies.

For the period of 2017 to 2025, the federal government’s financial commitments and liabilities declined marginally by a CAGR of 0.3% to RM389.5bil at end-2025 from RM400.5bil at end-2017.

The federal government’s total debt and liabilities increased by a CAGR of 5.8% to reach RM1.71 trillion (or 84.4% of GDP) at end-2025, up from RM1.087 trillion (or 79.2% of GDP) at end-2017.

The rate of increase was higher by a CAGR of 6.8% in 2021 to 2022 compared to 5.8% in 2023 to 2025.

As at end-June 2026, total debt and liabilities increased further to RM1.763 trillion, or 80.7% of estimated GDP.

Overall, the public debt is overwhelmingly denominated in ringgit rather than in foreign currencies.

As of June 2026, resident investors accounted for 78.5% of the federal government’s total outstanding debt (holding RM1.08 trillion), while non-resident investors made up the remaining 21.5% (holding RM296.3 billion) of the total debt.

While having about 95% of government debt denominated in ringgit eliminates foreign exchange repayment risk for the government, high foreign ownership of these local bonds creates a direct transmission channel to the local currency market.

Key drivers of foreign bond sell-offs could come from the narrowing of interest rate differentials with the United States, causing foreign investors to flee emerging markets, including Malaysia, for safer, high-yielding US Treasuries.

In the first nine months of 2026, foreign investors made a net purchase of RM7.5bil worth of Malaysian Government Secu-rities, which was significantly lower than the net purchases of RM21.2bil in 2025.

The global “risk-off” sentiment during times of global uncertainties, geopolitical tensions, fear of a sharp global economic

slowdown, or financial instability could cause foreign funds to pull capital out of emerging market bonds to seek safe-haven assets.

Nevertheless, Malaysia’s deep domestic capital markets and Bank Negara Malaysia’s foreign exchange intervention serve as vital shock absorbers against global financial volatility.

Rising interest payments on high government debt leave less fiscal space for national development, education, healthcare, and critical infrastructure.

Debt service charges (DSC) increased by a CAGR of 8.3% to RM53.7bil in 2025 from RM24.3bil in 2015, outpacing revenue growth of 4.4% per annum during the same period.

This pushed up the DSC-to-revenue ratio from 11.1% in 2015 to 16% in 2025.

This means that for every RM1 of revenue collected, RM0.16 was used for servicing domestic and external loans.

DSC are projected to hit RM57.3bil in 2026 and rise further to RM61bil in 2027, exceeding major budget allocations for the health sector (RM48.1bil), and the transport sector (RM24.5bil).

Reconciling the imperative for proactive fiscal spending with rising deficits and high debt-to-GDP ratios requires a shift from broad-based fiscal expansion to strategic, high-efficiency public finance and debt management.

Malaysia’s public finance and debt management framework is anchored by the Public Finance and Fiscal Responsibility Act 2023 (Act 850), which governs fiscal discipline, risk control, and medium-term consolidation.

The Government Procurement Act governs the management of financial administration and the promotion of good governance in the use of public funds.

Key fiscal targets and statutory limits of Act 850 are divided into four main pillars.

First, the fiscal deficit target is to reduce to less than or equal to 3% of GDP in the medium term, with Budget 2027 projected at 3.3% of GDP and hitting 3% of GDP by 2028.

Second, the federal government debt ceiling is maintained at less than or equal to 60% of GDP. For context, this stood at 63.1% of GDP at end-June 2026.

Third, the financial guarantees and contingent liabilities ceiling is capped at less than or equal to 25% of GDP, with the position at end-June 2026 comfortably within limits at 20.4% of GDP.

Finally, development expenditure is maintained as a floor commitment of greater than or equal to 3% of GDP to safeguard productive infrastructure. This target is well-supported, with Budget 2027 allocating 3.6% of GDP.

Reconciling necessary fiscal spending with the risks of rising budget deficits and high debt-to-GDP ratios requires a shift from unconstrained spending to high-efficiency fiscal management and structural revenue growth.

On fiscal consolidation, the government must continue to maintain credible fiscal discipline, moving towards a more symmetric fiscal policy to balance its budget actions equally during both economic highs and lows, saving money during booms to spend during recessions.

Malaysia can balance these competing priorities through the following core approaches:

> Ensure efficient and effective public spending. Understand the “cost to serve” to ensure resources are priced and distribute accurately as well as strengthen public procurement and anti-corruption controls.

Target value-for-money and high- multiplier sectors in ensuring the expenditure allocation is strictly to fund productive sectors such as education, healthcare, green energy, digital infrastructure, and human capital, and targeted subsidies to ensure a sustainable economic growth.

> Rationalise, prioritise and reprioritise expenditure. Safeguard high-impact services, social safety nets for the vulnerable, or critical revenue-generating functions first. Establish continuous reviews and regular spending evaluation.

> Broaden the tax base. Expand the consumption taxes through the reintroduction of the Goods and Services Tax. Bring the informal economy into the fold, while phasing out broad exemptions with targeted subsidies.

> Targeted subsidies with mean testing. Shift away from costly, universal energy and fuel subsidies toward precise, targeted cash transfers for vulnerable households to significantly reduce fiscal strain.

> Policy and budgetary controls on contingent liabilities. To eliminate costly bailouts and moral hazards, the government should charge market-risk fees to guaranteed entities, establish dedicated contingency reserves for disaster financing, and strengthen the financial sector supervision and resolution frameworks.

> Strengthen credible fiscal frameworks. Implement transparent fiscal rules and clearly communicate debt management plans to international markets to lower sovereign risk premiums and keep borrowing costs manageable.

Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.

Article by LEE HENG GUIE

Source: Taking stock of Malaysia’s public debt (Tuesday, 10 Nov 2026). The Star. Retrieved from https://www.thestar.com.my/business/business-news/2026/11/10/taking-stock-of-malaysias-public-debt

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Taking stock of Malaysia’s public debt

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