Riding the rough waters

THE conflict in the Middle East has done more than disrupt regional stability; it has exposed how fragile the global economic order has become.

From energy markets to supply chains, a conflict thousands of miles away is once again reminding policymakers and investors that economics does not operate in a vacuum; it moves to the rhythm of geopolitics.  

The Strait of Hormuz, a key energy chokepoint through which about 20% of global oil and liquified natural gas (LNG) supplies transit, is practically closed. This has heightened concerns over a prolonged energy supply shock that could undermine global growth.

As a net energy exporter, Malaysia is relatively well-positioned to weather this disruption better than many of its Asian peers. While the short-term spike in crude oil prices may result in higher subsidy bills for the government, Petroliam Nasional Bhd (PETRONAS) could benefit from higher selling prices, potentially leading to a higher dividend payout than the budgeted RM20bil in 2026 (versus RM32bil in 2025).

Notably, Budget 2026 assumes crude oil price of US$60-US$65 per barrel, compared to the year-to-date average of US$80.

Nevertheless, as the Middle East accounts for 69% of Malaysia’s crude oil imports, rising energy costs will strain transportation, logistics, and energy‑intensive manufacturing sectors, possibly necessitating targeted government support. 

Stable domestic demand

We believe Malaysia’s economy is coming from a position of strength as domestic demand is likely to remain resilient with sustained consumer spending and investment activities.

Its strong fundamentals and diversified economic structure, coupled with government focus to spur higher economic growth, will help ensure Malaysia’s growth trajectory remains intact.

Domestic demand will remain a key pillar of growth in the first half of 2026 on sustained household spending, further realisation of investment projects and firm tourism activity.

Tourist arrivals should remain positive with Visit Malaysia 2026 campaign with Asia accounting for 90% of tourist arrivals.

While disruptions to Middle East transit routes may reduce tourist inflows from the United States (1.5%) and the European Union (5%), the effect should be outweighed by extended visa-free access for Chinese (15%) and Indian (5%) tourists.

The government has rolled out a RM2.2bil one-off financial handout of RM100 to all 22 million adults in February 2026, of which about 60% has been spent within a month.

The increase in financial assistance to the low-income group to a record RM15bil (versus RM13bil in 2025), together with a robust labour market and an unemployment rate at an 11-year low, should support resilient domestic consumption.

Notably, we are encouraged by the continuous growth in the labour market with employment growth outpacing labour force expansion, lifting the labour participation rate to 70.9% in January.

This certainly bode well for the economic outlook in 2026, given that domestic demand forms the bulk of our economy. 

Malaysia continued to record resilient external trade in 2025 despite concerns over trade uncertainties amid US protectionist measures, thanks to the country’s diversified export structure and deep integration into the global supply chain.

This is reflected in Malaysia’s 2025 exports and imports, which rose by 6.4% and 6%, respectively. We believe the prospects for external trade in 2026 should remain steady.   

Despite the strong appreciation of the ringgit against the US dollar in 2025 (up 10% year-on-year{[y-o-y]), Malaysia’s export competitiveness remains undeterred especially electrical and electronics (E&E) exports (up 18% y-o-y), given our entrenched position in the global semiconductor supply chain.

With E&E exports accounting for about 45% of total exports, the sustained expansion in artificial intelligence (AI)-related technology demand and continued robust capital spending by multinational tech giants bode well for Malaysia, reinforcing the strength of its established technology ecosystem.    

The new 10% US global tariff introduced on Feb 24, 2026, replacing the previous 19% tariff, offers some relief for global trade, although tariff levels are likely to remain fluid for now.

US importers may take advantage of the relatively lower tariff to front-load shipments, which could provide a near-term boost to global trade. Nevertheless, Malaysia’s January-February 2026 exports recorded an impressive y-o-y growth of 15% even before the lower tariff rate was imposed.

In fact, higher oil prices could provide a boost to Malaysia’s exports, given their broad transmission effects across commodities like chemicals, petrochemicals and palm oil.

Collectively, these products account for about 20% of total exports. 

Momentum from investment upcycle  

Thanks to the federal government’s efforts to boost economic growth under the Madani Economy Framework, 2025 gross capital formation grew by 10% after a multi-year high growth of 12% in 2024.

The positive impact arising from record-high approved investments in 2023 to 2025 and various government-led strategic developments under national blueprints is expected to provide further tailwinds in the subsequent quarters. 

More importantly, the all-time high approved investments recorded in 2025 (up 11% y-o-y) underscores Malaysia’s appeal as an attractive investment destination amid the heightened trade uncertainty. 

Approved investments have been breaking record highs for three straight years.

Meanwhile, the government is also committed to reviving economic growth in 2026 by undertaking various large-scale infrastructure projects which will create positive spillover effects to local businesses.

Major projects such as Madani Submarine Cable (RM2bil), ­sovereign AI cloud (RM2bil) and large-scale solar 6 (RM6bil) reflect the government’s focus to drive high-value investments in advanced technology and renewable energy.

In addition, various investments and financing are directed to high-impact sectors set to uplift Malaysia’s technological capabilities.

All these come on top of existing mega projects including the RM50bil East Coast Rail Link and RM3.7bil Johor-Singapore rapid transit system, which have progressed well so far.  

Cautiously optimistic

We are cautiously optimistic of Malaysia’s economic outlook, and project 2026 gross domestic product growth to come in at a relatively healthy pace of 4.5% y-o-y. Malaysia is well-positioned to benefit from firm domestic demand, underpinned by a robust labour market and strong economic activities.

Furthermore, a diversified export base and a non-aligned policy – prioritising economic cooperation and integration – provide a vital buffer against geopolitical tensions.

That said, while the direct economic spillovers are currently manageable, an extended Middle East conflict could pose indirect risks through heightened energy price volatility, disrupted global trade routes and renewed inflationary pressures, which may weigh on consumer sentiment and external demand.

Key downside risks therefore include lower-than-expected commodity production, slower global trade and a prolonged period of geopolitical instability.