IMF downgrade weighs on Malaysia

THE International Monetary Fund (IMF) has downgraded gross domestic product (GDP) growth forecasts for most countries, including Malaysia, whose growth prediction for 2025 was lowered to 4.1% from 4.7%.

More telling is that the IMF expects the country’s economic growth to decelerate further next year to 3.8%, but this is not surprising since many research houses predict a slowdown, especially for emerging economies.

According to economists, it is premature to sound alarm bells at this stage, although they do agree that if the situation between the United States and China does not improve soon, a global slowdown can be expected.

The more cautious outlook, especially for Malaysia, is understandable, given the country’s “neutral” stance, which means the country has to balance business and political relations with both China and the United States, while the IMF’s revision, reflected in the April 2025 World Economic Outlook, mirrors broader downward adjustments across Asean-5.

Among Malaysia’s regional peers, the IMF has reduced Indonesia’s growth outlook for this year from 5.1% to 4.7%, with Singapore’s growth rate expected to slow to 2% from an initial 2.5%. Thailand’s growth rate was reduced from 2.9% to 1.8%.

Looking beyond pure numbers

Chief executive at the Centre for Market Education, Carmelo Ferlito, is sceptical about GDP predictions.

“First is the nature of the economic system itself. It is difficult for most entrepreneurs to predict their turnover for the current year.

“Therefore, it is difficult to believe that a group of ‘experts’ can accurately predict the behaviour of the entire economy by simply doing models,” he told StarBiz 7.

He believes that measuring GDP fluctuations as a whole may be pointless.

For instance, if GDP grows due to debt-financed government spending, it might not benefit the country. “The numbers are irrelevant without studying the micro foundations,” he adds.

Ferlito, who is also a visiting research fellow at Bank Negara, says the main reason for the IMF downgrade is the deterioration of international trade conditions.

Nevertheless, he believes that making growth predictions now could be immature, because the final moves regarding tariffs duties have not yet been made.

“But duties and lower international trade are risks to the general economy, including Malaysia, increasing unemployment and eroding corporate profitability, which in turn reduces government revenues,” he explains.

Ferlito acknowledges that deteriorating conditions will affect consumer confidence, but that the effect on investments may not be as straightforward because higher investments may be made to overcome the situation, which remains fluid at the moment.

Yun Liu, Asean economist at HSBC, says tariffs primarily affect economic growth through trade and foreign direct investment (FDI), but cautions that they may also impact employment and consumer sentiment indirectly.

“This is how the supply-side of factors will eventually filter through the demand-side. Malaysia, like many export- oriented economies, is facing downside risks to growth,” she says.

Economist Doris Liew, who specialises on South-East Asia, argues that the revised GDP growth forecast for Malaysia is aligned with regional trends, likely reflecting the compounding effects of global supply chain disruption in light of US tariff hikes and escalating geoeconomic tensions.

South-East Asian firms are expected to take a more cautious stance due to the uncertainty caused by the US-China trade war, she adds.

Dissecting the data

Another economist with a foreign brokerage says that a lower GDP growth rate could translate into reduced national income and weaker per capita income growth.

She says with Malaysia’s population at 33.85 million, a 0.6 percentage point reduction in projected growth equates to an estimated economic loss of RM11.6bil in 2025, assuming there are no mitigating factors.

“The impact of slower growth on household income means there will be limited wage increases and job creation, particularly in export-oriented and investment-driven sectors, potentially affecting household purchasing power.

“Similarly, companies, especially those in the manufacturing and services sectors, may face reduced demand, impacting profitability and expansion plans,” she observes.

The economist believes the IMF downgrade may also reflect on Malaysia’s fiscal consolidation efforts, as slower growth reduces tax revenues and limits the government’s ability to fund public services and infrastructure without increasing borrowing.

This is especially pertinent in the context that Malaysia’s fiscal deficit is targeted to decline to 3.8% of GDP in 2025, supported by subsidy reforms, but slower growth could challenge this trajectory.

She adds that lower revenue may force the government to prioritise spending, potentially delaying non-essential infrastructure projects or social programmes.

While Malaysia’s debt level is manageable, the economist emphasises that the IMF’s warning of rising global public debt highlights the risk of external shocks, such as oil price volatility and increasing borrowing costs.

On the flipside, she says Malaysia’s reliance on domestic revenue sources, such as dividends from Petroliam Nasional Bhd (PETRONAS) and taxes, mitigates significant debt spikes.

Manufacturing, commodities, construction, as well as services and tourism, are some of the sectors that could be affected by slower growth.

Malaysia’s manufacturing sector, which contributes over 40% of GDP, may benefit from the global tech upcycle, but it may also be at risk from global trade disruptions if tariffs do not improve substantially, she says.

Liew believes that if US President Donald Trump’s 24% reciprocal tariff is implemented after the current 90-day pause, it could further reduce Malaysia’s industrial output, especially in export-oriented sectors.

She points out that these measures could slow industrial activity and weaken the labour market, affecting employment and wage growth.

“Key sectors are already feeling the impact. Malaysia’s solar panel industry, for instance, is facing increasing pressure from tariff-related challenges,” Liew says.

She also warns that multinational firms might move their manufacturing bases to countries like the Philippines or Mexico to avoid tariff exposure, which could harm Malaysia’s competitiveness in the long term.

Delayed fiscal consolidation?

In tandem with the IMF, HSBC’s Liu has revised her GDP growth forecast for Malaysia in 2025 to 4.2% from 4.8%, and adjusted her inflation forecast to 1.9% from 2.4%.

As for inflation, it is interesting to note that the IMF, rather than fully agreeing with HSBC, projects prices to rise by 2.6% this year, something Ferlito also finds questionable in the context of the fund’s forecast for a slowdown in the Malaysian economy.

First explaining that it is difficult to pinpoint inflation for now as details of the RON95 subsidy rationalisation have not been finalised, he points out that tariffs in and of themselves are not inflationary, because they bring about a readjustment in relative prices and priorities unless the government intervenes with more spending.

The foreign research house economist sees the logic of the IMF, especially if income growth slows and Malaysians feel the pinch from targeted fuel subsidies.

It could be a vicious cycle, since higher inflation along with slower income growth could reduce real purchasing power and household consumption, which is key to Malaysia’s economic expansion.

Bank Negara has maintained the overnight policy rate (OPR) at 3% since May 2023, but upside inflation risks may lead to tighter policy, raising borrowing costs for households and businesses,” she adds.

Liew suggests that trade headwinds could even delay the government’s fiscal consolidation agenda as policymakers are forced to adopt more accommodative stances to cushion global volatility.

She agrees that inflation risks would rise if global supply chains remain disrupted, pointing out that in such a scenario, the government may be compelled to delay key fiscal reforms, such as the rationalisation of RON95 fuel subsidies or increasing sales and service tax.

According to her, household purchasing power will likely take precedence over near-term fiscal tightening as consumer demand is likely to play a more pivotal role in sustaining economic growth.

Tax to GDP ratio

Since Malaysia’s overall income generation could be affected by slower GDP growth, the country may need to look into alternative methods of fiscal expansion.

Notably, as of 2024, Malaysia’s tax-to-GDP ratio was still among the lowest in South-East Asia, reported at 13.2%. Compared to regional peers, Malaysia lags behind several Asean countries but is slightly ahead of Indonesia, with Singapore and Thailand estimated to be at 14.2% and 16.5%, respectively.

Ferlito insists that Malaysia can implement better taxes, premised on lower income tax, the reintroduction of the goods and services tax (GST), while improving enforcement.

Malaysia’s tax base is also constrained by a relatively low number of high-income individual taxpayers and limited room to increase corporate tax rates, which are already the second-highest in Asean.

Economists have repeatedly called for broadening the tax base to improve public services, suggesting Malaysia’s fiscal challenges stem from insufficient tax revenue to cover operating expenses, relying heavily on PETRONAS dividends.

Mitigating measures and impact

There are always silver linings, says the economist with the foreign research house, noting that Malaysia’s Ekonomi Madani framework, New Industrial Master Plan 2030, and National Energy Transition Roadmap are among initiatives to attract high-value investments and boost productivity.

“Strong private consumption and investment, supported by a healthy labour market, should also provide a buffer against external shocks, while the Public Finance and Fiscal Responsibility Act (2023) and successful subsidy reforms enhance Malaysia’s fiscal credibility, reducing the risk of credit rating downgrades,” she reckons.

She emphasises that the IMF downgrade stresses the need to speed up reforms in digitalisation, green energy and governance.

Malaysia’s reliance on exports and commodities highlights the importance of diversifying into high-tech and service-based industries. This will reduce vulnerability to global shocks.

“However, everything depends on how well Malaysia handles diplomacy during the US tariff pause. This could lead to exemptions or better terms, helping to maintain export market access,” she says.