KUALA LUMPUR, Aug 5 — Debt-fuelled growth has let Malaysia plaster over the cracks of a softening economy already showing the signs that heralded the dotcom crash and Asian financial crisis, HSBC economist Frederic Neumann warned in a recent Financial Times (FT) blog entry.

The co-head of Asian economic research highlighted that, aside from Japan, Asian countries including Malaysia are on worrying trend of rising credit against a backdrop of falling output that was proven to be untenable and — worse — difficult to reverse.

“Asia’s inconvenient truth, in short, is that the rise in debt has masked deteriorating growth fundamentals,” said Hong Kong-based Neumann.

“Productivity growth needs to rise to turn things around. And this requires lots of determined, structural reforms.”

Neumann’s opinion mirrored the assessment of ratings agency Fitch Ratings, which last week revised its financial outlook for Malaysia from “Stable” to “Negative”, citing gloomier prospects for reforms to tackle the country’s rising debt burden.

Fitch’s report noted that the federal government’s debt rose to 53.3 per cent of gross domestic product (GDP) at the end of 2012, up from 51.6 per cent from the same period the year before. The country’s debt ceiling is also not far off, at 55 per cent.

Malaysia also recently fell from 14th to 15th in World Competitive Rankings report — a closely-watched international ranking of economic competitiveness — continuing a three-year steady trend since its fall from 10th to 16th in 2011.

This came even as the Malaysia Productivity Corporation (MPC) reported that the country’s output grew 2 per cent from the previous year, higher than most advanced countries, but still lagged behind other emerging economies.

Neumann pointed out that there is a clear link between real GDP growth and yearly change in bank credit-to-GDP ratio, save for two exceptions.

The first was around 2000 when Asian growth soared even when leverage remains subdued, due to the lift from the tech bubble in the US that encouraged exports from countries such as Taiwan, which in the end still remained unsustainable.

The second period has gone on since 2010, during which productivity has declined despite leveraging increasing hotly.

“The troubling question now is: how much would growth have slowed if it wasn’t for the rise in debt?” Neumann asked.

Malaysia’s ruling coalition Barisan Nasional (BN) won with a reduced majority in the recent May polls, and analysts have noted that this may hamper the government’s push for further economic reforms, such as dismantling the decades-old pro-Bumiputera affirmative action policy, reducing cash handouts, and removing government patronage.

Fitch made particular note of this when it revised its outlook for Malaysia.

“Prospects for budgetary reform and fiscal consolidation to address weaknesses in the public finances have worsened since the government’s weak showing in the May 2013 general elections,” it said in a statement then.

“Malaysia’s public finances are its key rating weakness.”

Prime Minister Datuk Seri Najib Razak vowed to address the criticisms when he tables Budget 2014 on October 25.

“We are just looking at various policy options but we do understand that there’s a need for us to strengthen the fiscal and macro position of the government,” news agency AFP quoted him as saying. “The actual details will be unveiled shortly, particularly in the forthcoming budget.”

But it is unclear how much Najib, who is also finance minister, can afford to tinker or rein in the country’s debt without sending the economy into a tailspin now that growth is at its slowest in three years.

Since May 9, the ringgit has also fallen 8.8 per cent against the US dollar as global investors fled emerging markets as a response to a possibility that the US would retract its aggressive stimulus, making the ringgit one of Asia’s worst-performing currencies.

Last month, the World Bank had cut its forecast for Malaysia’s economy in 2013 to just 5.1 per cent, down from last year’s 5.6 per cent, as it warns of a risk that Malaysia might record its first current account deficit since 1997.