PETALING JAYA: The International Monetary Fund (IMF) is urging Malaysia to rebuild its macroeconomic buffers, warning that “global uncertainty” is no longer episodic but “a new normal” even as the local economy keeps expanding at a healthy rate.
This raises a critical question on whether Malaysia has enough policy firepower to respond quickly in the event the global environment turns sour unexpectedly.
In a statement issued on Dec 19, an IMF team led by Masahiro Nozaki said Malaysia’s growth is expected to cool slightly next year, projecting a rate of 4.3% in 2026 versus 4.6% in 2025.
This mainly reflects the impact of higher US tariffs on Malaysia.
The IMF’s message is not that Malaysia is in immediate trouble. It acknowledges “notable resilience” driven by strong domestic consumption and investment, firm jobs growth and a technology sector upcycle.
But it is explicit about what could go wrong for a highly open economy, flagging risks from escalating protectionism, global market volatility and “a potential bust of the artificial intelligence boom”.
That is where buffers matter. They determine whether Putrajaya can cushion households and businesses quickly when external conditions turn, or whether it is forced into tightening that worsens the downturn.
For Mohd Sedek Jantan, director of investment strategy and country economist at IPPFA Sdn Bhd, the most urgent buffer is fiscal space, because Malaysia’s exposure to global cycles leaves little time for gradualism when conditions turn.
Malaysia, he added, remains deeply tied to global supply chains, with export concentration in electronics and close exposure to major partners including China and the United States.
“In such an environment, external shocks transmit to domestic demand almost contemporaneously,” Mohd Sedek said.
“When tariffs shift or when the semiconductor cycle softens, operating conditions tighten quickly for Malaysian firms, workers and households.”
That speed, he argued, means policymakers cannot rely on stabilisers alone.
“Automatic stabilisers such as declining tax receipts or increased welfare transfers help to smooth downturns. However, they operate with lags that are inconsistent with the speed of external contraction in a highly traded economy.”
His warning is a familiar one in emerging-market playbooks. Without room to respond, governments can end up tightening policy at the worst moment.
“Without adequate fiscal buffers, Malaysia risks being forced into pro-cyclical tightening at precisely the wrong moment,” he said, a scenario that “historically amplifies output losses, suppresses employment and extends recovery periods”.
The IMF’s own fiscal framing gives that argument political weight.
While welcoming Malaysia’s “commitment to prudent fiscal management,” including the Public Finance and Fiscal Responsibility Act passed in 2023, the IMF noted federal government debt was 64.6% of gross domestic product (GDP) at end-2024, still above pre-pandemic levels.
It also welcomed the authorities’ plan to reduce the fiscal deficit to 3.5% of GDP in 2026 and 3% by 2028, while stressing that “continuing to rebuild fiscal buffers” through sustainable revenue and spending measures “remains critical”.
That sets up the hard part: rebuilding buffers without choking growth, especially as the IMF expects a mild slowdown and sees downside risks tilted to external factors.
Targeting leakages is one of the top priorities.
“The most immediate gains lie on the expenditure side, especially in subsidy targeting,” he said, pointing to BUDI95 as proof that petrol support can be delivered digitally “without subsidising high-income consumption”.
If it can work for fuel, he argued, the targeting principle can be extended to other areas, suggesting differentiated toll rates for higher-income users and income-linked fees or insurance models in public healthcare for “VIP or T20 patients”.
Mohd Sedek paired that with a governance argument that often determines whether consolidation is real or merely announced. Procurement reform and better project execution matter because cost overruns silently erode fiscal space long before they show up in headline deficits.
With discipline, he said, such expenditure-efficiency measures can generate “measurable fiscal gains within 12 to 24 months”.
The IMF, separately, highlighted improvements on that front, welcoming steps to strengthen fiscal transparency and spending efficiency including the passage of a new Government Procurement Act.
Meanwhile, CGS International Research head economist Nazmi Idrus said he does not see one buffer outranking the rest, but wants to see the government stay the course on consolidation even if growth softens.
He hopes to see the government cutting its fiscal deficit level below the 3% target.
His caution reflects the political economy reality. Buffers are rebuilt not just by policy design, but by consistency across electoral cycles.
The IMF itself flagged global uncertainty as “a new normal,” while also urging swift implementation of structural reforms under the 13th Malaysia Plan for 2026-2030, including labour-market reforms aimed at higher private wages and stronger female labour-force participation.
As for Bank Muamalat’s chief economist Mohd Afzanizam Abdul Rashid, a critical buffer is the federal government revenue.
“I suppose the tax revenue where tax-to-GDP ratio is still relatively low,” he said, noting Malaysia’s tax-to-GDP ratio stood at 12.4% in 2024 and is anticipated to reach 12.6% and 12.7% in 2025 and 2026, still below a “benchmark level of around 15%.”
The tax ratio matters because it signals how much room the state has to respond without borrowing aggressively, and because trade-linked revenues can be cyclical precisely when spending pressures rise.
“There has been discussion that the GST would make a comeback. That perhaps resonates with the narratives of ensuring an improving revenue stream.”
Sedek, too, placed revenue stability at the heart of “fiscal space,” arguing Malaysia needs buffers “that activate faster than external shocks transmitted through trade and financial cycles.”
In his view, the medium-term solution is to broaden the base with “modern tax instruments such as digital taxation, carbon pricing and a redesigned consumption tax,” while using subsidy targeting and procurement discipline for quicker gains.
Targeted subsidy reforms, if executed well, can create near-term headroom without blunt austerity.
Publishing credible medium-term budget paths and operationalising rules under the Fiscal Responsibility Act can help anchor investor confidence and preserve access to funding at reasonable yields - another buffer in itself, because it determines whether Malaysia can borrow when global liquidity tightens.
Beyond fiscal policy, the IMF’s statement also reinforced that other stabilisers remain broadly supportive.
Inflation averaged 1.4% in January–October 2025 and is projected to gradually return to a long-term average of 2%, with monetary policy assessed as appropriate and data-dependent going forward.
It noted systemic financial sector risks are contained, with banks holding ample capital and liquidity buffers, while urging vigilance on pockets of vulnerability including highly leveraged households and exposures to firms affected by US tariffs.
