KUALA LUMPUR, Sept 4 — The negative ratings outlook placed on Malaysia over its high public and household debt was unwarranted, according to Datuk Seri Abdul Wahid Omar who said this did not account for the country’s “resilience and dynamism”.

The minister in the Prime Minister’s Department in charge of Financial Affairs also insisted that Malaysia was on track with efforts to trim a chronic budget deficit and introduce reforms that will broaden its revenue base with a new consumption tax starting next year.

“We believe we deserve better ... We have demonstrated our ability to manage government finances better (and) we are taking measures to reduce subsidies and introduce the GST (Goods and Services Tax” Wahid, who heads the Economic Planning Unit (EPU), told the Financial Times in an interview published today.

Despite his insistence, Wahid declined to confirm that the federal government will cut its budget deficit to the targeted 3.5 per cent this year.

Putrajaya has whittled down its overspending from 6.6 per cent five years ago to 3.9 per cent last year, but critics contend that this does not include contingency spending and liabilities.

Despite the reduction, however, Malaysia’s national debt still hovers just below a critical legal ceiling.

At 54.6 per cent, the Malaysian government’s debt-to-GDP ratio is jointly ranked with Pakistan’s as the second highest among 13 emerging Asian markets after Sri Lanka, according to data compiled by Bloomberg.

“Well, we are working hard in meeting that objective,” Wahid said when pressed by the British business newspaper on deficit target.

Ratings agency Fitch cut its outlook on Malaysia’s sovereign debt to “Negative” in July last year, citing gloomier prospects for reforms to tackle the country’s rising debt burden following a divisive election result in May 2013.

Fitch reaffirmed the negative outlook last month, rating Malaysia’s long-term foreign currency sovereign debt at A minus, which is the last rung of the upper-medium grade ratings.

Malaysia’s ballooning credit is now prompting others to join Fitch in eyeing Malaysia with caution.

“Some EM countries ― Malaysia, Thailand, Turkey and Brazil ― are experiencing unsustainable leverage growth,” Maarten-Jan Bakkum, senior emerging market strategist at ING Investment Management, told the FT.

“Malaysia has had dramatic leverage growth. It could really struggle (as it moves to deleverage),”

Putrajaya has continued to rack up public debt despite trimming the headline deficit number, saddling the nation with liabilities amassed primarily through government-linked firms.

Malaysian household borrowings have also kept apace, hitting 86.3 per cent of GDP in 2013 when it had been just 60.4 per cent less than six years ago, surpassing even the US’ 80.6 per cent registered in the first three months of this year. 

A major contributor to local household debt is Malaysians affinity for cars coupled with among the world’s highest vehicle prices. This along with spiralling home prices has reduced consumers’ spending power despite burgeoning debt levels.

Bank Negara raised the interest rate by 25 basis points to 3.25 per cent in July, in a further effort to tackle “imbalances” such as high household debt. A further 25bp increase is still expected and could come as early as this month.

Wahid insists, however, that the public debt being racked up right now was due to necessary infrastructure investments, such as the Klang Valley Mass Rapid Transit (MRT), which he said would reap dividend in the longer-term.

He also stressed that focusing on the debt figures was to ignore Malaysia’s resilience and dynamism, as demonstrated by the country’s economic growth that his 6.4 per cent in the second quarter.