Malaysia's economy faces high subsidy costs and controlled funding rates

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Highlights

Malaysia's subsidies and social assistance are expected to rise 34.7% to RM74.5 billion in 2024, climbing to 20.5% of total operating expenditure.
Bank Negara Malaysia's overnight policy rate remains at 2.75%, while the 10-year Malaysian Government Securities yield stands at 3.85%, despite rising global bond yields.
The divergence in global yields suggests that the attractiveness of Malaysian debt is under pressure, and pressure on low-dividend-yielding assets may increase if domestic capital costs are repriced.

This article was translated from the original. Read the original version by our correspondent here.

Fiscal pressure and the price of capital

As reported by The Edge Malaysia, Malaysia's spending on subsidies and social assistance is expected to rise 34.7% to RM74.5 billion this year, equivalent to 20.5% of total operating expenditure, according to the Fiscal Outlook and Federal Government Revenue Estimates Report 2027. The increase has been linked to the conflict in West Asia, after projections in the 2026 Budget presented last year placed the same component at 11.7% of operating expenditure.

Higher allocations for fuel subsidies, staple foods, electricity, water and cash assistance such as Sumbangan Tunai Rahmah and Sumbangan Asas Rahmah constrain fiscal space for development spending. The article stresses that such direct assistance is difficult to withdraw due to political sensitivities, while previous temporary cuts to fuel and electricity subsidies were ultimately reversed.

At the same time, domestic funding costs remain low relative to global trends. Bank Negara Malaysia's overnight policy rate stands at 2.75%, while the yield on 10-year Malaysian Government Securities is 3.85%, even as major global government bond yields have risen in recent months.

Implications for investors and Malaysia's markets

Rising U.S. Treasury yields, including a 106-basis-point increase in the 10-year note so far this year, point to expectations of higher inflation and a tighter global interest-rate trajectory. The article also states that analysts expect the U.S. Federal Reserve to raise the federal funds rate by at least another 25 basis points in December, while bond yields in Japan and fixed deposit rates in Australia are also moving higher.

The divergence raises questions about the attractiveness of Malaysian debt to foreign investors, who account for between 20% and 30% of debt market participants. If global yields continue to rise, Malaysia may need to reassess its price of capital, a move that the article says could improve capital allocation, pressure low-dividend-yielding assets to offer better returns, and support a transition away from a cycle of low growth, low productivity and low wages.

For investors, a prolonged low-rate environment also changes investment discipline. The article argues that as funding costs rise, companies and capital owners need to work harder to generate returns, while investments delivering modest yields face the risk of losing access to capital as risk-free fixed deposits become a more attractive alternative.

In our previous coverage of fiscal warnings following the 2027 Budget , we highlighted MARC Ratings' call for Malaysia to strengthen its fiscal buffers to withstand increasingly frequent global shocks. The article also explained how high operating expenditure constrains fiscal space, alongside the risk that a prolonged period of high interest rates and bond yields could raise borrowing costs and drive reforms such as broadening the tax base and improving targeted fuel subsidies.

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