[COLUMNIST] Malaysia's economy is a steady ship in choppy waters

MALAYSIA has been gaining attention on the international stage. Indeed, it's not hard to spot the optimism. To name just a few positives, the ringgit was the best performing currency in Asia last year, growth accelerated to 5.1% and large tech giants have committed billions of dollars of investment. Political stability and policy reforms have contributed to better sentiment both onshore and offshore.

The question is, can Malaysia's positive momentum be sustained in 2025? It's not an easy one to answer, as global uncertainty introduces volatility. That said, there are good reasons to believe in Malaysia's robust economic fundamentals. Keeping the ship steady is the key task for Malaysia in the year of the snake.

Alas, the market refuses to shift its eyes away from tariff risks. At first glance, that's understandable as Malaysia has the third-largest trade surplus in ASEAN with the U.S., just after Vietnam and Thailand. With the Trump administration repeatedly emphasizing the need to reduce its significant deficit with trading partners, this gap may generate some unwanted attention from Washington.

However, having well-diversified exports can partially mitigate some trade risks. Malaysia is not only one of Asia's few net commodity exporters but also plays a key role in the global tech supply chain. In terms of export exposure, Malaysia is better balanced than others and not solely dependent on one single market. Its recent proactive moves, like securing a free trade agreement (FTA) with the UAE and resuming its FTA negotiations with the European Union, open more opportunities to expand trade.

In recent years, booming trade has been fuelled by Malaysia's rising status as one of ASEAN's prime destinations for foreign direct investment (FDI). While tariff uncertainty may put investors on a cautious footing in the near term, Malaysia's improving long-term fundamentals will continue to create opportunities, particularly in the electronics sector.

While Malaysia may not have the large national names of other tech-exposed peers, its development in the tech sector can be traced back to the 1970s. Though this stalled for a while, it is now seeing a renaissance, with consistent, high-quality FDI relocation since the U.S.-China trade tensions began. Investment has not only poured into Penang, the electronics powerhouse in the north. Recently, large commitments have also flocked into data centres in the southern state of Johor, right across from Singapore. This matters a lot to Malaysia in looking to release its full potential, not only in terms of growing its market share but also enabling the country to fulfil its ambition to climb up the value chain.

Despite external risks, it's important not to be carried away by day-to-day tariff rhetoric. It's not hard to find plenty of vibrancy within Malaysia's domestic economy. The consumption engine still remains decent, thanks to a confluence of factors including low inflation, still-generous subsidies and an ongoing labour market recovery.

However, what caught our attention is the investment boom Malaysia is witnessing. Visitors to Kuala Lumpur are in awe of the mega construction projects in the city, with investment in both the private and public space. The former is not hard to understand, as consistent flows have been moving into data centres. The latter is worth more attention, as the government strives to push for key infrastructure projects to improve connectivity and ease congestion.

In the grand scheme of things, what matters is not only 2025 but also how Malaysia's long-term fundamentals are evolving. Thanks to government reforms, Malaysia is on the right track to unleash its potential. Just a week into 2025, Malaysia and Singapore signed the long-anticipated Johor-Singapore Special Economic Zone agreement, setting a good example for how cooperation can spur potential growth in a time of uncertainty. The ambitious initiative aims to tap into the two countries' comparative advantage, offering generous tax incentives.

The other key reform agenda is Malaysia's fiscal promises. After years of high fiscal deficits induced by the pandemic disruptions, the government has demonstrated firm commitments to reduce its fiscal deficit and reprioritize spending. Subsidy rationalization, across energy and food, has been implemented in a phased manner. Of course, all eyes are on how this will be implemented on gasoline in the middle of this year, which will have wider implications for inflation, as well as the central bank's monetary trajectory.

In a turbulent time, a steady ship is extremely necessary to keep the economy sailing. Ultimately, the key is how to ensure smooth and timely implementation of reforms to leverage Malaysia's sound fundamentals. If it plays its cards right, Malaysia can shine again.

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Yun Liu is ASEAN Economist at HSBC

** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.

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