PETALING JAYA: Malaysia has the right economic policy mix to face global headwinds in 2026.
However, medium and long-term measures, economists said, should be adopted to ensure it has sufficient ammunition to weather the challenges in the event the global economy worsens.
Sunway University economics professor Yeah Kim Leng, who is also an adviser to the government, told StarBiz that Malaysia’s economic policy mix so far has delivered commendable results in 2025, as evidenced by around 5% gross domestic product (GDP) growth, low consumer price index (CPI) inflation of below 2% and a further drop in the unemployment rate to 3%.
“The performance is more impressive when viewed against a challenging global environment marked by geopolitical conflicts and an unprecedented global tariff war unleashed by the US Trump administration,” he noted.
Sunway University economics professor Dr Yeah Kim Leng.
“Internally, the absence of economic slack or overheating signs, a positive savings-investment gap and mostly stable sectoral supply-demand balances indicate that the country’s short-term economic policy mix is appropriate.”
He said there is also adequate monetary and fiscal flexibility for the government to navigate a poly-crisis world that could become more turbulent in 2026.
“The main risk is that the current gradual fiscal consolidation trajectory could be derailed by a sharper-than-expected global slowdown that may necessitate higher government deficit spending, in addition to rolling back subsidies less aggressively.
“There is also monetary policy space to increase liquidity and reduce interest rates should domestic demand weaken substantially in the event the global economy takes a turn for the worse.
“To face longer-term challenges, the policy mix across industrial, trade, labour market, competition, productivity and education dimensions requires sustained and innovative reforms with a stronger focus on implementation, monitoring and evaluation,” Yeah said.
Economic policy mix refers to a combination of monetary policy and fiscal policy tools that are used by the government appropriately to address specific economic issues.
Juwai IQI global chief economist Shan Saeed said with inflation comfortably contained below 1.5% and the 2025 budget deficit held at approximately 3.8% of GDP, Malaysia stands out as a model of fiscal discipline, institutional credibility and structural ringgit stability amid a global landscape still marked by instability and uncertainty.
“Crucially, the nation’s debt-to-GDP ratio remains on a clear downward trajectory, poised to fall below 60% in 2026, reinforcing long-term sovereign stability, policy credibility and investor confidence.”
Looking ahead, Shan said robust domestic demand remains the primary engine of growth, underpinned by rising investment activity, targeted fiscal support and sustained infrastructure development.
He said public and private capital formation continues to generate strong multiplier effects across output, employment and productivity.
Citing statistics, he said, “In the first half of financial year 2025 alone, total approved investments surged by approximately 18.7%, with capital increasingly allocated toward digital infrastructure, renewable energy, logistics networks and industrial upgrading.
“This strategic deployment of capital not only supports near-term expansion, but also strengthens Malaysia’s structural competitiveness and economic resilience over the medium term.”
Over the medium term, Shan said the country’s accelerating integration of artificial intelligence across manufacturing, information and communication technology (including semiconductors) and services value chains, combined with a growing emphasis on environmental, social and governance aligned investment frameworks, would further enhance productivity and reinforce long-term competitiveness.
Ultimately, he said Malaysia’s path toward 2026 is underpinned by sound sovereign macro fundamentals.
“In a world defined by policy fragmentation and volatility, Malaysia’s advantage lies not in speed, but in stability, anchored by credible institutions, disciplined macro management and a forward-looking investment strategy,” Shan noted.
Shan said regionally, Malaysia is also well positioned to benefit from the next phase of South-East Asia’s growth cycle.
“The Asean ‘Fabulous Five’ – Malaysia, Indonesia, Thailand, the Philippines and Vietnam – are set to drive regional expansion in 2026 and beyond, supported by favourable demographics, accelerating industrialisation, digital adoption, macroeconomic stability and rising intra-regional trade,” Shan noted.
“Within this cohort, Malaysia’s policy coherence, sovereign macro-stability and depth of investment place it in a particularly advantageous competitive position.”
It is estimated that the Asean region’s GDP will reach around 5 trillion US dollars by 2030. This outlook is strongly anchored in the region’s sovereign macroeconomic stability and a robust investment climate.
With substantial infrastructure investments and the rapid digitalisation of its economies, Asean is evolving into a critical hub for aviation, data centers, and ICT. These factors collectively create a solid foundation for the region’s economic trajectory, positioning it for significant growth over the next three to five years.
Bank Muamalat Malaysia chief economist Mohd Afzanizam Abdul Rashid.Optimistic of the domestic economy for this year, Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the Malaysian economy is in a position of strength as it enters 2026.
He said Bank Negara Malaysia (BNM) has been extremely careful in administering the monetary policy in 2025, where it only cut the overnight policy rate (OPR) by 25 basis points (bps) in July last year.
Thereafter, he said the central bank has been keeping the rate steady at a time when the economy was cruising at a respectable speed, with the third quarter of financial year 2025 (3Q25) GDP coming in at 5.2%.
In that sense, he said it was a pre-emptive move which would help to provide support to growth in 2026.
“The federal government’s efforts to reduce fiscal deficits have also shown promising outcomes.
“The fiscal deficits narrowed to 3.3% of GDP in the nine months of 2025 versus 4.1% of GDP in the similar period in 2024.
“This indicates their plans to reduce the fiscal deficits are on track,” Mohd Afzanizam noted.
Hence, he added that it is critical the government should remain steadfast in their reformist agenda, be it economic or institutional reform.
He said all this will entail efficiencies in the management of economic resources where the government should strive to promote competition in the industries that will translate into higher productivity.
He said better coordination among governments, such as the federal government, state government and local authorities, is extremely critical to ensure any projects can be planned and executed effectively.
“Perceptions towards corruption would need to be improved wholeheartedly as this will create negative perceptions among the businesses, households and investors if left unattended.
“I think the government has set the right tone for economic development through various policies such as New Industrial Master Plan 2030, National Energy Transition Roadmap and 13th Malaysia Plan.
“So in 2026, it’s about execution and the progress of the outcome especially in areas relating to income and cost of living.
“Not to mention, the communication policies to the rakyat have to be consistent and robust so that they will ensure a total buy-in among the community,” Mohd Afzanizam said.
MARC Ratings Bhd chief economist Ray ChoyMARC Ratings Bhd chief economist Ray Choy said Malaysia enters 2026 with a policy mix that is appropriate for the present phase of the economic cycle, aimed at preserving growth stability following a year of healthy investments, robust consumption and export recovery.
He said, among others, monetary policy has remained supportive, demonstrated by BNM’s 25 bps reduction of the OPR to 2.75% in mid-2025, facilitated by the fact that inflation pressures have eased materially, with headline CPI running below 2%.
“While further easing of rates is possible under the low inflation environment, a key issue in 2026 is not the cost of capital per se, but the translation of capital into productive and lasting investments which brings jobs to the economy,” Choy said.
“As such, this will need to be supported by ongoing institutional reforms and efforts to improve commercial competitiveness in the country to exceed regional and global standards.”
However, he said fiscal consolidation does not necessarily mean an automatic contraction in economic activity since public-private partnerships are increasingly leveraged to align national growth objectives.
“The largest challenge perhaps, is with execution and the need for state-led growth across the nation, with a key goal of improving national income distribution,” he said.
Choy said the central challenge for 2026 is converting fiscal space into higher-quality growth rather than expanding aggregate demand without regard for equitable distribution.
He said government revenue mobilisation is equally important.
“Measures such as the expansion of the sales tax and service tax framework in 2025 are directionally correct, but their impact also depends on actual collection efficiency.
“Without sustained improvements in tax compliance, enforcement and base broadening, revenue gains may miss the mark,” he said.
More fundamentally, Choy said labour supply and productivity need to be considered in the context of both short-term constraints and long-term aspirations.
“Demographic pressures, participation plateaus, and skills mismatches limit growth.
Policies that raise youth labour force participation, facilitate targeted high-skill immigration, and align training and education more closely with Malaysia’s present investment upcycle would have a higher growth payoff in the medium-term than further demand-side stimulus,” he said.
