MALAYSIA’S economy has proven remarkably resilient. Growth reached 5.2% in 2025. While projections for 2026 vary, the economy is expected to continue expanding, supported by strong domestic demand and an electronics export upcycle. The ringgit has also strengthened, while the fiscal deficit is narrowing.
But resilience is not invulnerability. Beneath the headline numbers, Malaysia faces economic risks that are more deeply rooted than the usual narrative of “external headwinds” 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 more than a decade.
Malaysia’s openness, a source of strength, is also a major vulnerability. The IMF and World Bank have warned 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 US tariffs on Malaysian exports could slow manufacturing and dampen business sentiment.
The electrical and electronics (E&E) sector, which accounts for 55% of Malaysia’s exports to the US and employs about 3.5% of the labour force, is particularly vulnerable.
The ongoing conflict in the Middle East has pushed up energy prices and shipping costs. If production disruptions emerge, the spillover effects on domestic costs and consumer spending could be significant.
Malaysia’s recent export strength has been heavily driven by AI-related demand for semiconductors and data centre investment. The World Bank has flagged the risk that a correction in global AI activity could affect Malaysia through both trade and financial channels.
A repricing of AI-related assets could trigger capital outflows and tighter financial conditions. Malaysia’s dependence on this single growth driver is a double-edged sword.
External shocks are cyclical. What should concern policymakers more are the structural weaknesses that make Malaysia more vulnerable when those shocks hit.
The World Bank has documented how wage growth in Malaysia has lagged GDP growth since 2010, with real median wages rising considerably more slowly than 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 in 2022.
Between 2018 and 2022, Malaysia was among the six countries with the largest declines across all three subjects.
The latest PISA results also show that Malaysian students continued to perform below the OECD average in all three subjects in 2025. 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 depends on revenue measures that have yet to be fully implemented.
Large energy subsidies remain, and the OECD has called for a shift towards targeted transfers and the reintroduction of a broad-based consumption tax.
Without these measures, public finances remain vulnerable to shocks, while the fiscal space available to respond to future crises remains limited.
Many tertiary-educated workers are employed in jobs below their qualification levels. These graduates face a wage penalty. This is not just a labour market inefficiency; it represents a significant underutilisation of the country’s most valuable resource.
The good news is that Malaysia’s policymakers largely know what needs to be done. Malaysia needs to move from broad energy subsidies to targeted transfers, broaden the income tax base and consider the reintroduction of a consumption tax.
This also means making preschool free and compulsory, improving teacher incentives, granting schools more autonomy and aligning tertiary curricula with labour 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 acquiring the skills the economy requires.
Foreign equity caps, burdensome cross-border digital service requirements and preferential treatment for state-owned enterprises can all stifle the private investment that drives productivity growth.
The dominance of government-linked companies in key industries risks crowding out the innovative, fast-growing firms Malaysia needs.
The AI boom has been a windfall, but over-reliance on any single sector, whether electronics, commodities or AI-related demand, creates vulnerability. Strengthening services exports, tourism and high-value manufacturing beyond E&E would help reduce this concentration risk.
Malaysia’s economic resilience is genuine, but it has been supported partly by fiscal practices that may not be sustainable and partly by favourable circumstances: a timely AI upcycle, favourable 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 also 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, Prof Datuk Dr Ahmad Ibrahim 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.
The views expressed are solely of the author and do not necessarily reflect those of MMKtT.
- Focus Malaysia.
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