This article first appeared in The Edge Financial Daily, on October 28, 2015.

KUALA LUMPUR: Fitch Ratings expects Malaysia's government debt to stay at about 52% of gross domestic product (GDP) until 2017.

Malaysia recorded a government debt to GDP, which measures a country's ability to make future payments on its debt, of 54.5% as at December 2014.

“The evolution of non-budget contingent liabilities, including government guarantees, will bear monitoring. More broadly, the economy and sovereign credit continue to face challenges associated with shifting investor risk appetite, reflected in pressure on the currency and foreign reserves,” said Fitch in a statement yesterday.

The rating agency also thinks Malaysia will miss its budget deficit target of 3.1% in 2016 from 3.2% expected this year, but added that it is unlikely that the slippage would be enough to put Malaysia's debt ratio on an upward trajectory.

“Some of the detailed assumptions in Budget 2016 look optimistic, posing some downside risk to the projections,” it added, expecting the country's fiscal and broader economic outlook to remain under pressure from weaker commodity prices into 2016.

Fitch noted that Budget 2016's oil price estimate of US$48 per barrel is below its projection of US$60.

“This could point to some upside for oil-based revenues. This would partly be offset by higher subsidy payments, although Budget 2015 had reduced fuel subsidies substantially,” it said, adding that the net effect of higher oil prices than the Budget expects in 2016 is unlikely to be larger than 0.1% of GDP.

Fitch also cited the authorities' success in insulating economic policy from intensifying political pressures when the agency revised the outlook on Malaysia’s “A-” rating to “stable” in June.

“The proposed further reduction in the deficit is in line with this conclusion, although the budget also acknowledges political realities.

“The introduction of two new tax brackets for higher earners is redistributive, although the intention may have been more political than fiscal — the government estimates just 17,000 taxpayers will be affected, generating minimal expected additional revenue of RM400 million,” said Fitch.