Treading the economic fallout from a Middle East on fire
By Professor Dato Dr Ahmad Ibrahim
Today, as the Strait of Hormuz choke on conflict and oil prices convulse, Malaysia is also feeling the heat. The question is how deep the scars will be and whether our economic resilience is a tangible shield. The most immediate impact is being felt in the ledger books of our small and medium-sized enterprises. An official survey delivers a sobering statistic: 63.9 percent of Malaysian companies expect to be hit. This is about shipment delays, the cancellation of orders, and the suffocating rise in ocean freight and insurance costs. For the nearly 40 percent of our exporters actively trading with the UAE and Saudi Arabia, the Red Sea and the Gulf are no longer just trade routes; they are risk corridors.
Then there is the great enigma of Malaysian economics: oil. The conflict has shoved Brent crude up and rising, with the potential to spike further if Hormuz is truly curtailed. For Malaysia, a net energy exporter, this should, on paper, be a windfall. But this is not the 1970s. The equation has changed. Higher global oil prices act as a regressive tax on nearly everything else. They inflate the cost of our Liquefied Natural Gas (LNG) imports. This drives up industrial energy costs, makes electricity generation more expensive, and ultimately squeezes household fuel expenditures. For manufacturers, particularly in energy-intensive sectors and those relying on plastic materials linked to crude oil, this is a one-two punch: their raw material costs soar just as their logistics costs explode.
Thankfully, the government’s initial response has been one of calibrated reassurance rather than panic. The Agriculture and Food Security Minister’s confirmation that our food supply lines remain stable is a critical pillar of confidence. By sourcing staples from a diversified basket—India, ASEAN, Australia, Brazil—Malaysia has wisely avoided putting all its eggs in a basket. The assurance of a five-to-seven month rice buffer stock is precisely the kind of tangible resilience the public needs to hear. Bank Negara’s steady hand also provides a bedrock of stability.
The Governor’s affirmation that the economy expanded by a robust 5.2% in 2025 and that the financial system remains sound is a necessary counter-narrative to the daily drumbeat of bad news. By holding the OPR and acknowledging that a stronger ringgit can partially mitigate imported inflation, the central bank is signaling that it will not be spooked into rash decisions by market volatility.
Yet, resilience is not immunity. The “targeted subsidies” that keep headline inflation moderate are the same subsidies that will swell if oil prices remain elevated. While many believe the fiscal deficit target of 3.5% is still achievable thanks to offsetting oil revenues, this is a high-stakes balancing act. For every ringgit gained in oil revenue, a portion must be immediately earmarked to keep RON95 at 1.99 ringgit. It is a fiscal treadmill. Perhaps the most profound impact of this crisis will be strategic, not statistical. It is forcing a long-overdue national conversation about what kind of economy we want to be.
Firstly, the crisis in the Strait of Hormuz should be the final nail in the coffin for Malaysian complacency regarding energy security. As many argue, this is the moment to double down on energy diversification. The volatility of fossil fuel markets—both as a source of revenue and a cost input—is a feature, not a bug. Accelerating the energy transition and investing in renewable capacity is no longer just an environmental talking point; it is an industrial strategy for survival.
Secondly, MATRADE’s finding that many are considering market diversification is not just a defensive move; it is an acknowledgment that over-reliance on any single region is a vulnerability. The push to position Malaysian companies not just as commodity sellers, but as “Total Solution Providers” in high-value downstream processing, as seen at Gulfood, is the right path. We must sell innovation and food security, not just raw materials.
This moment exposes the limitations of our oil and gas services sector. While the industry posted record revenues, it has been rightly pointed out that exports make up only a tiny fraction of that total. If Malaysian firms are to truly capitalize on regional opportunities and insulate themselves from domestic shocks, they must scale up, form strategic partnerships, and compete aggressively on the global stage, not just in our own backyard.
The Middle East conflict is a brutal reminder that in a globalized world, no nation is an island. The real test of Malaysian resilience will be whether we use this crisis as a catalyst to build the diversified, innovative, and truly globally competitive economy we have always aspired to be.
The author is affiliated with the Tan Sri Omar Centre for STI Policy Studies at UCSI University and is an Adjunct Professor at the Ungku Aziz Centre for Development Studies, Universiti Malaya. He can be reached at ahmadibrahim@ucsiuniversity.edu.my.