Economic Focus: Balancing growth and external risks

• Strong fundamentals and net energy exporter status to buffer energy supply shock
• Resilient growth momentum to sustain in 1H26 despite heightened geopolitical uncertainties in Middle East
• Cautiously optimistic of 2026 growth prospects with 4.5% GDP growth

Relatively well-positioned to navigate Middle East conflict

Escalating tensions in the Middle East effectively closed the Strait of Hormuz, a key energy chokepoint through which about 20% of global oil and LNG supplies transit. This has heightened concerns over a potential 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, PETRONAS could benefit from higher selling prices, potentially leading to a higher dividend payout than the budgeted RM20bn in 2026 (vs RM32bn in 2025). Notably, Budget 2026 assumes crude oil price of US$60-65/barrel, compared to the year-to-date average of US$78. Nevertheless, as the Middle East accounts for 69% of Malaysia's crude oil imports, rising energy cost will strain transportation, logistics, and energy intensive manufacturing sectors, possibly necessitating targeted government support.

Stale domestic demand

We believe steady domestic demand will remain a key pillar of growth in 1H26 on sustained household spending, further realisation of investment projects and firm tourism activity. The government has rolled out the RM2.2bn one-off financial handout of RM100 to all 22m adults in Feb 2026, of which ~60% has been spent within a month. The increase in financial assistance to the low-income group to a record RM14bn (RM13bn in 2025), together with a robust labour market and unemployment rate at an 11-year low, should support resilient domestic consumption. Meanwhile, tourist arrivals should remain positive on the back of Visit Malaysia 2026 campaigns and promotions with Asia accounting for 90% of tourist arrivals. While disruptions to Middle East transit routes may reduce tourist inflows from the US (1.5%) and the EU (5%), the effect should be outweighed by extended visa-free access for Chinese (15%) and Indian (5%) tourist. Approved investments continued to grow from strength to strength, scaling a new record in 2025 (+11% y-o-y) for the third consecutive year. This will ensure investment activities continue to gain traction in 2026.

Trade moderation could be milder than initially feared

For external trade, the new 10% US global tariff on 24 Feb 2026 in lieu of the previous 19% tariff offers some relief for global trade, though tariff levels are likely to remain fluid for now. Nevertheless, Malaysia's Jan-Feb 2026 exports already recorded an impressive y-o-y growth of 15%, accelerating from the healthy pace in 2025 (+6.4% y-o-y). In fact, Malaysia's 2026 exports could be boosted by rising oil prices, which has a broad transmission effect on commodities such as chemicals, petrochemicals and palm oils. Collectively, these products make up 20% of total exports.

In a position of strength

We are cautiously optimistic of Malaysia's economic outlook, and project 2026 GDP 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. Key downside risks include lower-than-expected commodity production and slower global trade.

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