Economic growth remains solid, but it is expected to slow down in 2025. Due to its very open economy, Malaysia is more vulnerable to the slowdown in China than India or Indonesia. In addition, tensions between the United States and China could make it more complicated to implement its New Industrial Master Plan, a key pillar in the country’s efforts to revitalise growth. The authorities have limited room for manoeuvre in order to support the economy. The Central Bank of Malaysia is expected to leave its key interest rates unchanged over the next six months, unlike other central banks in Asia. Inflation risks are on the upside due to the abolition of energy subsidies and wage increases. In addition, fiscal consolidation, which began two years ago, is hurting investment spending.
In Malaysia, economic growth remained robust in 2023 even if it decelerated due to unfavourable base effects. Domestic demand was the principal driver, whereas exports contracted substantially. The outlook for 2024 remains positive and economic growth is expected to recover slightly. The main areas of concern are the developments on the property market and in the construction sector (which contains a large number of the most fragile companies), the consolidation of public finances (which is still happening very gradually) and the evolution of external accounts
In 2023, for the second consecutive year, Malaysia’s external accounts have deteriorated slightly, but are still strong. Over the first nine months of the year, the current account surplus decreased by 18.3% compared to the same period last year. The strong rebound in tourism has not been enough to offset the decline in the trade surplus caused by the global economic slowdown and the sharp contraction in demand for semiconductors and electronic products, which account for 36.3% of the country’s exports.
Malaysia’s economy held up well in 2022. Economic growth may have exceeded 8% and public finances strengthened thanks to the sharp rise in oil revenues. Furthermore, although external accounts weakened due to capital outflows and increased imports, the current account balance remained in surplus and the ringgit depreciated moderately against the dollar over the year as a whole. The outlook for 2023 is less favourable. Economic growth is expected to decelerate given the monetary tightening and the global economic slowdown. Public finance risks are still contained even though debt remains above pre-crisis levels. The new government should present its 2023 budget in parliament at the end of February. Its budgetary strategy should be in line with that of the previous government
Summary: In November, Anwar Ibrahim became the new prime minister but the political environment remains particularly unstable. However, in the past three years, the Malaysia’s economy has been buoyant and resisted fairly well to successive external shocks. Economic growth is robust. Although public finances are still weaker than before the pandemic crisis, they have strengthened since the beginning of the year.
After a modest growth in 2021, Malaysia’s economy is set to recover more strongly in 2022. It will be supported by firm domestic demand, an expansionary fiscal policy and the reopening of Malaysia’s borders to tourists. The country is an exporter of commodities – mainly oil and palm oil – and should benefit from higher international prices, without being directly affected by the conflict in Ukraine. Thanks to the additional revenue from higher oil prices, the government should be able to take on most of the burden of higher inflation to prevent problems for households whose finances have already been weakened by the 2020 crisis. Another key uncertainty regarding economic growth is how long and how severe Chinese lockdowns will be, since they could drag down Malaysian exports.
Although the political situation has stabilised somewhat following the appointment of a new prime minister, the economic environment has deteriorated. The spread of the Covid-19 pandemic in April forced the government to reintroduce lockdown measures that led to an economic contraction in Q2 2021. The situation is unlikely to improve before Q4, once health restrictions are lifted thanks to an accelerated vaccination campaign. In an attempt to boost growth, the government launched a series of economic support plans, even though fiscal revenue fell short of the full-year target in the first seven months of the year. Consequently, according to the Ministry of Finances, the fiscal deficit is expected to swell to between 6
Malaysia is one of the emerging Asian countries hit hardest by the Covid-19 crisis. Although a recovery is underway, it is bound to be hampered by new lockdowns in Q4 2020 and January 2021. Public finances have deteriorated sharply, but the government does not seem inclined to pursue fiscal consolidation. It is giving priority to the economic recovery and support for the most fragile households. The public debt ratio will continue to deteriorate, and in December, the rating agency Fitch downgraded Malaysia’s sovereign rating. Yet refinancing risks are moderate: the debt structure is not very risky and the country has a large domestic bond market. Malaysia will continue to report a current account surplus and has a solid banking sector.
Malaysia is an upper-middle income, highly open economy with a record of strong economic performance and poverty reduction since independence from Great Britain in 1957. Malaysia enjoys significant natural resources, as the second largest oil and natural gas producer in Southeast Asia, and the second largest exporter of liquefied natural gas globally. Meanwhile, thanks to the diversified structure of its economy, Malaysia has proved its resilience to external shocks. In the period 2015-2019, economic growth has been robust and reached 4.9% per year on average. However, in 2020, Malaysia recorded its deepest recession in twenty years due to the COVID-19 pandemic shock. In the medium term, economic prospects are favourable although Malaysia is highly exposed to rising protectionism and trade tensions given its high degree of openness and its extensive integration in global value chains. In order to elevate potential growth and move Malaysia’s GDP per capita closer to that of high-income economies, the government needs to continue to stimulate the participation of women in the workforce and encourage investments in innovation and new technology.
Already weakened before the crisis due to the removal of the Goods and Services Tax in July 2018 (GST), public finances deteriorated further with the COVID-19 crisis. However, despite the high level of debt, refinancing risks have been moderate so far, thanks to abundant domestic savings and a wide range of domestic investors that maintain the government’s borrowings costs at a low level. However, the structural decline in the government’s revenues and the increase in the burden of gross interest payments have reduced the central government’s capacity to provide fiscal support in response to a new, large shock.
