Malaysia remains on the right track.
Both the International Monetary Fund (IMF) and Fitch Ratings have hailed Malaysia’s stronger than expected economic performance in 2024, citing the implementation of economic reforms, notably under the Public Finance and Fiscal Responsibility Act, which underscores the government’s commitment to rebuild fiscal buffers.
The latest endorsement came from Moody’s Ratings, which has reaffirmed Malaysia’s sovereign credit ratings at A3 with a stable outlook while asserting that Malaysia has strong medium-term growth prospects and effective policymaking institutions.
Moody’s also commented that Malaysia will be the fastest growing A-rated economy over the next two years, citing structural credit strengths, including a well-diversified economic structure, competitiveness, and broad price stability, complemented by deep domestic capital markets and a sophisticated financial system.
We believe that Malaysia’s sovereign rating will be upgraded in three to five years on continued improvement in its fiscal metrics such as sustained reduction in fiscal deficits and debt levels.
This requires fiscal discipline, expenditure restraint and optimisation, and a wider revenue base.
From Dec 3-13, last year, the IMF team conducted discussions on the 2025 Article IV Consultation with the Malaysian authorities and other stakeholders. At the conclusion of the discussions, the team leader issued salient points, which lend credence to the government’s achievements and initiatives to address national issues.
The IMF acknowledged the Malaysian economy significantly improved in 2024, supported by strong domestic and external demand with stable and low inflation at about 2% so far.
It estimated real gross domestic product (GDP) growth to have increased by 5% in 2024 (against the Department of Statistics Malaysia’s preliminary estimates of 5.1%) though it is expected to moderate slightly to 4.7% in 2025, reflecting a moderation in investment growth, including from rising global uncertainty.
The IMF praised the government’s “bold” structural economic reforms under the Economy Madani Framework and are appropriately focused on fiscal sustainability.
The passage of the landmark Public Finance and Fiscal Responsibility Act in 2023 marked a significant milestone for fiscal management and governance, including the successful electricity and diesel subsidy reforms.
It is important to accelerate reforms further toward an inclusive and resilient economy.
The government has embarked on price reforms and the retargeting of subsidies in stages, starting January 2023 to June 2024.
These include electricity tariffs, the floating of chicken prices, water tariffs and diesel subsidies, which have resulted in estimated savings and revenue increment of about RM10bil.
The Finance Ministry has indicated that the actual fiscal deficit for 2024 will be better than the target of 4.3% of GDP and will shrink further to 3.8% of GDP this year.
The IMF also held a discussions with the Associated Chinese Chambers of Commerce and Industry of Malaysia on economic, investment and business issues, covering the inflows of China investment, the implications of ongoing geoeconomic fragmentation, including the Trump’s economic policies on the Malaysian economy, and the scope for improving business and investment climate.
We maintain a positive outlook for the Malaysian economy, thanks to the firing of two growth engines (domestic demand and export recovery). Real GDP growth is estimated to expand by 5% in 2025 (5.1% in 2024) on the continued decent pace of domestic demand and exports.
On the global economy and trade prospects, we concur with the IMF team’s view that the global economy is facing unprecedented challenges with a spectrum of tariffs and trade wars that would cast uncertainties on global trade.
If the Trump’s administration unilaterally imposes sweeping tariffs on the US imports from China and other trading partners, the direct and indirect effects (via rerouting) on Malaysia’s exports will depend on the substitutability of the affected products, reconfiguration of supply chains and production, transshipment and Malaysian firms’ products’ cost and price competitiveness.
We also shared our optimism that Malaysia has entered into a multi-year expansion of a private-investment cycle, catalysed by the implementation of strategic plans and roadmaps, such as the Madani Economy Framework, New Industrial Master Plan 2030, National Energy Transition Roadmap and National Semiconductor Strategy, that offer opportunities and competitive value propositions for both domestic and foreign investors.
We concur with the IMF that timely implementation of bold structural reform remains essential for enhancing productivity and inclusive growth. We believe that economic reforms are best undertaken when the economic outlook is benign.
The strengthening of the domestic economy, moderate headline inflation (1.8% in 2024) and stable labour market conditions (unemployment at 3.2% in November 2024) provide the best environment to press ahead economic reforms in the face of an increasingly uncertain global environment.
Continued economic reforms will be essential to mitigate both internal and external risks.
These include ongoing consolidation to rebuild fiscal buffers, contain debt, strengthen the social protection, expand growth potential, enhance a competitive business ecosystem, sustain a high level of quality investment, and preserving macroeconomic and financial stability.
Will the government rise to the challenges?
What are the government’s priorities in 2025? Prime Minister Datuk Seri Anwar Ibrahim, in his New Year’s Eve speech described 2024 as a transformative year for Malaysia, marking the prelude and foundation of the nation’s reform agenda.
In concluding his speech, the prime minister has urged Malaysians to strengthen national unity and governance.
He stressed the need for excellence, integrity and a collective effort to eradicate corruption, positioning Malaysia as a respected nation in the region and beyond.
According to the Merdeka Centre’s latest survey released on Dec 23, while the respondents were generally satisfied with the prime minister’s performance in attracting foreign investments, enhancing the country’s image and improving the civil service remuneration scheme, they gave a mixed assessment on the economy.
The economy remains the top issue for voters, with 65% identifying it as the “number one problem facing people in the country today”.
Malaysians’ top five economic concerns are the high cost of living, low minimum income, unfavourable economic conditions, unemployment, and the weakening of the ringgit.
First on the government’s priority list is to go for sustainable economic growth as it navigates global uncertainty while grappling with domestic issues, which are equally challenging.
This year is set to be a year of volatility, uncertainty, complexity and ambiguity for South-East Asian countries, including Malaysia, looking to sustain economic growth and boost investment.
We need good execution of Budget 2025 programmes and spending allocations, including timely and quick disbursement of funds.
The implementing agencies have to monitor the budget provisions and projects as well as various funds and allocations for small and medium enterprises.
Second, businesses want clarity and consistency in policy, continued enhancement of public services, streamlined bureaucratic reforms and enhanced governance and accountability to create a conducive business environment for growth and investment.
Pemudah, a special task force to facilitate business must continue to deliver on the expectations, focusing on low-hanging fruit to reduce business pains. We look forward to the finalisation of the The New Deal for Business policy document that aims to improve the business environment, boost productivity, and increase economic growth.We believe that the delivery of system-wide reforms would fundamentally change the delivery model of institutions, and public services, resulting in cost savings for the country and also ensuring the effective implementation of development expenditure for better outcomes.
Additionally, the private sector and businesses would benefit in terms of lower holding and hidden costs, resources savings, as well as increases in productivity.
Third, continue to address cost of living pressures, particularly for the middle-class households’ concerns and increasing business costs, especially for micro, small and medium enterprises.
While subsidy rationalisation for fuel is expected to be rolled out by mid-year, the price reforms need to be implemented in a gradual, programmed fashion to alleviate the financial pains of those who stand to lose and give them time to adjust their fuel consumption patterns.
Financial aid will be given to targeted groups affected by subsidy rationalisation.
The government has given its assurance that 85% of the Malaysians will not be affected by the subsidy rationalisation for RON 95 petrol.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.
