S&P Affirms Malaysia's 'A-' Rating on AI-Driven Growth and Fiscal Reform

S&P Global Ratings has reaffirmed Malaysia's 'A-/A-2' foreign currency and 'A/A-1' local currency sovereign credit ratings, maintaining a stable outlook. The agency cited the country's strong economic momentum, driven by a global boom in artificial intelligence infrastructure, and ongoing fiscal consolidation efforts as key factors supporting the nation's credit profile.

AI Boom Fuels Economic Momentum

Malaysia's economy is benefiting significantly from its emergence as a primary data center hub in Southeast Asia, attracting substantial foreign investment. S&P highlighted that a global surge in generative AI has been a major tailwind for the nation's growth.

Key economic projections and factors from the S&P report include:

• Real GDP growth is forecast to reach 5.5% in 2026, following a solid 5.2% expansion in 2025.
• The country has drawn an estimated MYR386 billion in cumulative data center investments between 2021 and mid-2026.

This rapid expansion in digital infrastructure is positioning Malaysia to outperform most of its peers in terms of trend growth over the medium term, according to the rating agency.

Fiscal Reforms and Lingering Risks

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On the fiscal side, S&P noted that political stability has created a favorable environment for structural reforms. The government's efforts to rationalize subsidies, such as shifting to market pricing for diesel, and broaden its sales tax framework are expected to narrow the budget deficit.

S&P projects the general government deficit will decrease to 3.1% of GDP in 2026. However, the agency also pointed to several challenges. Persistently high global oil prices continue to pressure government spending, with subsidies for RON95 petrol accounting for 18% of the federal operating budget in the first quarter of 2026.

Infrastructure and Debt Under Observation

While the tech investment boom is a clear positive, it also presents challenges. S&P warned that the rapid build-out of data centers is straining energy and water resources, which could temper future capital inflows if utility capacity does not keep pace with demand.

Furthermore, external debt metrics are being closely monitored. Capital-intensive tech projects are driving up corporate borrowing and have pushed gross external financing needs above current account receipts and reserves. S&P expects this liquidity pressure to ease as major projects are completed, moderating the pace of external borrowing in the coming years.