Our economic resilience is real, risks are structural, not just external
By Professor Dato Dr Ahmad Ibrahim
Malaysia’s economy has proven remarkably resilient. Growth hit 5.2% in 2025, and while projections for 2026 have moderated to roughly 4.4%–4.9%, the economy continues to expand on the back of strong domestic demand and an electronics export upcycle. The ringgit has strengthened, and the fiscal deficit is narrowing.
But resilience is not invulnerability. Beneath the headline numbers, Malaysia faces a set of economic risks that are more deeply rooted than the typical “external headwinds” framing suggests. The real danger is not a single shock, but the compounding effect of external volatility on an economy whose domestic foundations have been quietly eroding for over a decade.
Malaysia’s openness—a source of strength—is also its primary vulnerability. The IMF and World Bank both warn that risks to growth are tilted to the downside, driven largely by external factors.
As a highly open economy, Malaysia is exposed to renewed protectionism. Higher U.S. tariffs on Malaysian exports could slow manufacturing and dampen business sentiment. The electronics and electrical (E&E) sector, which accounts for 55% of Malaysia’s exports to the U.S. and employs about 3.5% of the labor force, is particularly vulnerable.
The ongoing Middle East conflict has pushed up energy prices and shipping costs. If production disruptions emerge, the spillover into domestic costs and consumer spending could be significant.
Malaysia’s recent export strength has been heavily powered by AI-related demand for semiconductors and data center investment. The World Bank has explicitly flagged that a correction in global AI activity would hit Malaysia through both trade and financial channels—a repricing of AI assets could trigger capital outflows and tighter financial conditions. Malaysia’s dependence on this single driver is a double-edged sword.
External shocks are cyclical. What should concern policymakers more are the structural weaknesses that make Malaysia more fragile when those shocks hit.
The World Bank has documented that Malaysia’s wage growth has lagged GDP growth since 2010, with real median wages rising only about half as fast as the economy. The OECD’s 2026 Economic Survey delivers a blunt assessment: Malaysia’s education outcomes have deteriorated, with 15-year-olds ranking in the bottom third of PISA participants in mathematics, reading, and science. Between 2018 and 2022, Malaysia was among the top six countries with the largest declines across all three subjects. This is not a short-term economic risk—it is an intergenerational one.
While fiscal consolidation is progressing, the government’s commitment to reducing the deficit to 3% of GDP by 2028 relies on revenue measures that have yet to be fully implemented. Large energy subsidies remain, and the OECD has called for a shift to targeted transfers and the reintroduction of a broad-based consumption tax. Without these, public debt remains vulnerable to shocks, and the fiscal space to respond to future crises is limited.
Many tertiary-educated workers are employed in jobs below their qualification levels. These graduates face a wage penalty. This is not just a labor market inefficiency—it represents a massive underutilization of the country’s most valuable resource.
The good news is that Malaysia’s policymakers largely know what needs to happen. Malaysia needs to move from broad energy subsidies to targeted transfers, reintroduce a consumption tax, and broaden the income tax base.
This also means making preschool free and compulsory, improving teacher incentives, granting schools more autonomy, and aligning tertiary curricula with labor market needs. The productivity problem is, at its root, a skills problem. No amount of industrial policy can compensate for a workforce that is not learning the skills the economy requires.
Foreign equity caps, burdensome cross-border digital service requirements, and preferential treatment for state-owned enterprises all stifle the private investment that drives productivity growth. The government-linked company sector’s dominance in key industries crowds out precisely the kind of innovative, scaling firms Malaysia needs.
The AI boom has been a windfall, but over-reliance on any single sector—whether it’s electronics, commodities, or AI-related demand—is a vulnerability. Strengthening services exports, tourism, and high-value manufacturing beyond E&E would reduce the concentration risk.
Malaysia’s economic resilience is genuine, but it has been purchased partly through unsustainable fiscal practices and partly through luck—a timely AI upcycle, favorable terms of trade, and a domestic economy that has held up well. The risks ahead are not just about what happens in Washington, Beijing, or the Strait of Hormuz. They are about whether Malaysia can fix its productivity engine, educate its next generation, and manage its public finances before the next shock arrives.
Resilience is not a permanent condition. It is a policy choice, renewed every year. Malaysia has made the right choices before. It needs to make them again—this time with a longer time horizon than the next quarterly GDP print.
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.