KUALA LUMPUR, July 23 (Xinhua) -- Moody's Investor Service said on Monday that the Malaysian government's increasingly using longer-term Islamic instruments to fund its deficit to lower liquidity risk is a credit positive.

"We view the shift toward Islamic financial instruments to be credit positive for the sovereign, because of the more stable nature of these holdings compared to conventional bonds, and the diversification that they impart to Malaysia's debt profile," the rating agency said in a report.

The Malaysian government has a sizable debt burden which, at 50.8 percent of the country's gross domestic product (GDP), is larger than the median of 40.1 percent of GDP for A-rated sovereigns.

"Relatively low-cost and liquid domestic funding, and the fact that the debt is predominantly local currency-denominated (96.4 percent of the total) partially compensate for this, by presenting low exchange rate risk. Islamic financial instruments are an important pillar of this local currency funding component," Moody's said.

The Malaysian Government Investment Issues (MGII) - local currency, Shariah-compliant debt instruments - accounted for 50 percent of total federal government financing in 2017, up from a 26.4-percent share in 2008.

As a result of the Malaysian government's growing funding via sukuk (Islamic bond), the share of MGII has grown to 40 percent of outstanding government debt at the end of the first quarter, up from 13.9 percent at the end of 2008.

"The authorities' various initiatives to support the market are likely to drive this share higher still," said Moody's.

"More broadly, active participation in Islamic finance is part of Malaysia's broader vision to position itself as an international center for the instrument, and a recognized goal in the central bank's financial sector master plan," said Moody's.