Broader economic drivers crucial

The Star

3 days ago

PETALING JAYA: While the imposition of a lower US reciprocal tariff is good news for corporate Malaysia, economists say the country needs to focus on other vital areas instead of relying solely on strong domestic demand to drive the economy.
The United States has reduced tariffs on Malaysian imports to 19% from 25% previously.
The new rate took effect last Friday.
MARC Ratings Bhd chief economist Ray Choy
MARC Ratings Bhd chief economist Ray Choy told StarBiz that over-reliance on domestic demand, particularly if supported by sustained debt or deficit-financed spending, carries inherent risks.
In this context, he said preserving open regional and global trade, deepening external linkages, and pursuing a constructive foreign policy remain vital, even as global discourse shifts toward trade protectionism and economic nationalism.
Choy noted that Malaysia's economy remains highly dependent on trade, with a trade-to-gross domestic product (GDP) ratio of close to 137% as of 2024, well above the global average of around 95%.
This underscores the importance of tariff negotiations, whether with the United States or other major trading partners.
He added that greater progress is needed in areas such as human capital development and resource allocation.
While the importance of these areas is likely recognised, the gap lies in the intensity and consistency of execution, he said.
Choy said frameworks such as the Public Finance and Fiscal Responsibility Act and the proposed Government Procurement Act contain sound principles, but delayed implementation and unmet targets risk undermining progress.
'The challenge lies in building sufficient policy focus and societal buy-in for these institutional reforms, which are less visible than traditional growth drivers like physical investment or infrastructure.
'Ultimately, strong institutions are designed to minimise economic leaks and correct misallocations – persistent issues that have historically imposed significant costs on Malaysia's economy and development,' Choy said.
While the private sector has traditionally received much of the attention in economic discourse, he said it is equally important to recognise the government's substantial role in generating economic value through institutional improvements.
A core function of the government, he said, is to enhance allocative efficiency, particularly in areas where market mechanisms are insufficient.
This includes tighter oversight of contingent liabilities and public-private partnerships, accompanied by transparent reporting of both economic and social returns – recognising that private-sector metrics alone may not fully capture public value, he noted.
'Enhancing allocative efficiency also entails exploring calibrated forms of fiscal decentralisation, not as a move toward full autonomy but as a mean of granting states greater spending discretion in line with local needs, essential infrastructure, and institutional capacity.
'Such granularity in resource allocation can improve policy responsiveness and overall public sector effectiveness.
'Another example of the government's allocative function is in interventions where supply-demand imbalances are apparent, such as aligning educational outcomes with industry needs, or managing supply-demand imbalances in the housing sector,' Choy said.
RAM Rating Services Bhd senior economist and head of economic research Woon Khai Jhek
Meanwhile, RAM Rating Services Bhd senior economist Woon Khai Jhek said while Malaysia's economy is highly diversified and driven largely by domestic demand, external demand is still a major pillar.
'Fully insulating ourselves and completely offsetting negative (external) pressures is neither feasible nor cost‑effective. Instead, our focus should be on mitigation and diversification,' he said.
Woon noted that the recent 'goodies' package announced by the government is a form of fiscal stimulus.
Together with Bank Negara's pre-emptive 25 basis points (bps) overnight policy rate (OPR) cut in July, these measures will give a short-term boost to domestic consumption and demand.
These 'goodies' include a one-off RM100 payment to all Malaysian adults and a reduction in the RON95 petrol price.
'Furthermore, immediate outreach to new markets (such as Asean, South Asia and the Gulf Cooperation Council) for existing firms, supported by accelerated trade missions, can soften the blow while longer‑term trade deals are negotiated,' Woon said.
He said the upcoming Budget 2026 would be a good platform to expand upon some of these mitigating measures. 'We might see more measures being announced to help ensure the country is on a stronger footing, given the prevailing global weakness.'
Woon, however, said the 13th Malaysia Plan (13MP) would not directly address the immediate impact arising from US tariffs.
'Reforms that can lift medium-term growth prospects are the only sustainable way to recoup the economic losses incurred from the current US protectionist measures.
'Enduring structural reforms like diversifying import and export bases, embedding productivity‑boosting changes in labour and education policies, as well as doubling down on digitalisation and artificial intelligence adoption, can enhance Malaysia's long-term productivity and potential growth.
'Over time, this will shift Malaysia toward higher‑value activities and increase the overall income levels. Learning from the current headwinds, we should also adjust the 13MP to include reforms that will help us be even more resilient when faced with future shocks,' Woon said.
On the sectors that Malaysia needs to focus on to drive the economy forward, Woon highlighted the electrical and electronics (E&E) sector.
This sector has long been one of the key pillar sectors for the country, accounting for around 40% of gross exports and about 30% of overall manufacturing output.
He said the E&E sector has the potential to move up the value chain, which, if successfully developed, could unlock new and valuable growth areas for Malaysia.
Malaysia has long been a key global hub for the back-end manufacturing process of the semiconductor supply chain and currently commands roughly 13% of global assembly, testing, and packaging activity, he said.
'Given the well-established existing ecosystem in Malaysia, appropriate incentives for research and development and localisation of higher‑value processes (for example. semiconductor design, advanced packaging) can help local firms capture a larger share of global margins and move up the value chain.
'There could also be spillover effects as advanced E&E activities drive skills development, attract quality foreign direct investment and stimulate upstream services (such as logistics, professional services).
'This will aid Malaysia's economic development and (help the country) move up the income ladder,' Woon said.
Bank Muamalat Malaysia chief economist Mohd Afzanizam Abdul Rashid
Commenting on Bank Negara's downward revision of projected GDP growth for 2025 to between 4% and 4.8%, Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said Malaysia should be able to grow within the new target range.
'We have seen front-loading activities quite apparent with Malaysia's export growth to the United States in the (first) six months of this year, which grew by a double-digit pace of 28% from 12.4% in the same period last year.
'Along with full employment status, as well as rising investment growth, domestic demand is likely to grow at a fairly decent (pace),' he said, especially in light of the pre-emptive measures by the central bank to reduce the OPR by 25 bps and the small scale fiscal stimulus announced recently.
Mohd Afzanizam said key sectors driving growth would be construction, tourism, semiconductor and service-oriented industries.
'My sense is that 2026 would be much more critical as the effect of the US tariff would be fully accounted for and assuming that there is not much development on the tariff, the global economic outlook would be more challenging,' he added.