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The Star
03-08-2025
- Business
- The Star
Broader economic drivers crucial
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.
Malaysian Reserve
22-07-2025
- Business
- Malaysian Reserve
The emergence of US-minus trade landscape
CHINA is expected to accelerate its economic and diplomatic engagement with ASEAN as part of a broader strategy to mitigate US-centric risk and build alternative trade corridors. At the same time, an emerging trend in the region is a 'US-minus' trade landscape — one in which regional blocs such as Southeast Asia, the Gulf Cooperation Council (GCC) and the European Union (EU) are actively deepening their economic linkages in response to US protectionism and unpredictability. These were some of the views expressed at a panel discussion recently organised by MARC Ratings Bhd when presenting global and market outlook for the second half of 2025 (2H25). Moderated by MARC Ratings chief economist Dr Ray Choy, the panel included Bank Negara Malaysia (BNM) assistant governor Mohd Fraziali Ismail, former Deputy Minister Dr Ong Kian Ming and University of Nottingham Asia Research Institute Malaysia honorary research associate Professor Dr Bridget Welsh. The session explored the intensification of trade tensions, US tariff strategies, supply chain recalibration and the regional response from ASEAN economies. The panel examined the far-reaching consequences of recent US trade policies, particularly those adopted under the Trump administration, which were characterised as being driven more by short-term political motives and optics rather than by coherent, long-term economic planning. Nonetheless, the panelists noted that these policies were exerting real and lasting pressure on global supply chains, prompting businesses and governments alike to reassess their dependencies and strategic trade relationships. Focusing on Malaysia, the panel members agreed that retaliation is unlikely to be effective or desirable, noting that a negotiated, sector-specific approach was identified as the more strategic path forward. Key among Malaysia's priorities should be securing exemptions from semiconductor-related tariffs, given the sector's importance to the national economy and its role in global technology supply chains. Additionally, there was strong emphasis on maximising existing trade frameworks — such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) — to boost exports, particularly in high-impact sectors such as palm oil. Malaysia was also encouraged to continue pursuing new free trade agreements (FTAs) to diversify its trade portfolio and enhance long-term resilience, according to a statement released by MARC Ratings. On monetary and financial policy, the statement noted that the panel observed that the ringgit remains predominantly influenced by external factors, including global monetary tightening, capital flows and investor sentiment. While domestic policy can play a role in managing short-term volatility, its ability to counteract structural global trends is limited, it added. — TMR This article first appeared in The Malaysian Reserve weekly print edition
The Star
05-05-2025
- Business
- The Star
Domestic demand steadies growth
PETALING JAYA: Malaysia's economic growth for the first quarter ended March 31, 2025 (1Q25), is expected to be in line with the recently released advance gross domestic product (GDP) estimate of 4.4%. Most economists whom StarBiz spoke to had GDP projections that aligned with the advance estimate, noting that domestic demand likely anchored growth in 1Q25 amid trade tensions and uncertainties. Bank Negara is set to release the preliminary 1Q25 GDP data on May 16, which is expected to show a moderation in growth from 5% in 4Q24. The government's growth projection of 4.5% to 5.5% for the year may be revised given the recent developments. MARC Ratings Bhd chief economist Ray Choy MARC Ratings Bhd chief economist Ray Choy expects GDP growth to be in the region of 4.5%. He said the main drag would come from the mining and quarrying sector, caused by a decline in oil and gas revenues and a high base effect from 1Q24. However, Choy said consumer demand would likely remain supportive of growth, mainly due to the increase in civil servants' salaries, the rise in minimum wages and stable employment conditions. He noted that demand from wholesale and retail trade during the festive season in 1Q25 is expected to help drive growth. 'Growth in the construction sector and the electrical and electronics sector was likely healthy in the said quarter due to ongoing transport infrastructure upgrades and various urban renewal projects, alongside healthy demand for semiconductors,' he said. Choy has projected an annual GDP growth of 4.4% this year, cautioning that domestic demand may slow due to external uncertainties stemming from US tariffs and the effects of the trade war on global demand. 'Financial market volatility will also affect consumer sentiment and cause some wealth destruction. 'However, domestic demand growth will likely remain above 5%, premised on increases in civil servants' salaries, higher minimum wages and stable employment conditions. 'Typically, consumer demand growth does not fluctuate drastically compared to other sectors, such as manufacturing investments and construction,' he added. RAM Rating Services Bhd senior economist and head of economic research Woon Khai Jhek RAM Rating Services Bhd senior economist Woon Khai Jhek said the GDP deceleration for 1Q25 was within the rating agency's expectations. 'One of the key factors for the deceleration was the mining sector. 'This is to be expected amid a natural gas production facility shutdown in Sarawak in 1Q25, which resulted in a 6% contraction in the Industrial Production Index (IPI) for the mining sector during the January to February 2025 period. 'Hence, the sharp 4.9% contraction in mining output, as indicated by the advance estimates for 1Q25 (4Q24: 0.9%), (and) its drag on overall GDP growth comes as no surprise,' he said. Woon said the anticipated slowdown in the services sector also dragged overall growth lower. The advance estimates put services growth at 5.2% in 1Q25, easing from 5.5% in 4Q24. 'We had expected it in anticipation of a continued moderation in wholesale and retail trade activities, which averaged 3.9% in January to February 2025 (4Q24: 4.4%). 'There was also some anticipated drag from electricity generation, as the IPI for electricity contracted by 1.5% in January-February 2025 (4Q24: 3.1%),' he said. Drilling down further on domestic demand, Woon said public and private investments are expected to drive growth through the continued rollout of multi-year infrastructure projects and greater realisation of approved investments. These factors are expected to provide the necessary support and buoy Malaysia's overall GDP growth this year, he added, noting that the rating agency has revised its annual GDP forecast to between 3.5% and 4.5%, down from 4% to 5%. He said much of the year's outlook depends on tariff negotiations, counterbalance measures and regional trade initiatives that could materialise in the near to medium term. Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the 1Q25 advance estimate growth was within the bank's expectations for a moderate start to the year. He said despite the boost from the festive seasons of Chinese New Year and Hari Raya Aidilfitri, the headline number was somewhat underwhelming. 'Looking ahead, while domestic demand is expected to remain the main growth driver, we anticipate some moderation in 2025. 'We have downgraded our GDP growth forecast to 4.1% for this year, reflecting a softer-than-expected start to the year and increasing downside risks from the external front, including heightened geopolitical tensions and the recent escalation in US tariff measures, which could weigh on exports and investor sentiment. 'Private consumption will likely grow at a more measured pace, while investment will continue to lend support, particularly in infrastructure and manufacturing sectors. 'Overall, we expect domestic demand to grow slightly below its long-term trend, underscoring the need for continued policy support and strategic investments to sustain growth amid a challenging global backdrop,' Mohd Afzanizam said. Sunway University economics prof Yeah Kim Leng Sunway University economics professor Dr Yeah Kim Leng has projected domestic demand growth to be the main anchor of growth for the year, with a forecast range of 4.7% to 5.2% – slower than the 5.3% growth achieved in 2024. Private consumption and investment will be the main drivers of domestic demand in the face of highly uncertain and softening external demand, he said. Yeah pointed to the advance 1Q25 GDP data, which showed that retail trade has held up well, expanding 5.4% in the first two months of the year. 'Internally, the overriding imperative for policymakers is to shield the country from the economic turbulence caused by the ongoing US tariff threats, while continuing to strengthen the competitive foundations of the economy. 'These include expediting investments, diversifying trade, and continuing the reform agenda to improve government administrative efficiency and strengthen the national education and health systems, while engaging with the private sector to raise wages, skills and productivity levels,' Yeah noted. OCBC Senior Asean economist Lavanya Venkateswaran OCBC Bank senior Asean economist Lavanya Venkateswaran said resilient private consumption and a continued focus on infrastructure spending helped support economic growth for Q125. 'We forecast 2025 GDP growth of 4.3% year-on-year (y-o-y) with the risks skewed to the downside. 'The challenges for the Malaysian economy will be the headwinds mainly from the external front, which will likely have a knock-on impact on domestic demand,' she said. HSBC economist Yun Liu HSBC Asean economist Yun Liu said Malaysia's 1Q25 advance GDP growth of 4.4% y-o-y was a small surprise, as it was below the bank's original forecast of 4.9% y-o-y. Trade headwinds are likely to intensify despite the 90-day pause on the Liberation Day tariffs announced April 2. She said besides trade, foreign direct investments would also be affected due to the unprecedented uncertainty, making investors more cautious and adopt a 'wait-and-see' approach. 'That said, there are still green shoots. For one, the trade negotiations are underway as we wait for more clarity on the direction of tariffs after 90 days. 'In addition, Malaysia's trade is also diversified by products and trading partners,' she said. Liu said on a relative basis, Malaysia compares well for domestic resilience relative to its peers, with decent private consumption and public investments expanding at a strong pace. This means the domestic resilience can partially mitigate some external risks. 'We have lowered our 2025 GDP growth (forecast) to 4.2% (from 4.8%) for Malaysia, and we believe this may prompt more policymakers' responses. 'We are now penciling in a 25 basis points rate cut from Bank Negara in July,' Liu said.
