By Muhammad Ibrahim
As a trade-dependent emerging economy, Malaysia has combined imports and exports totalling 140% of gross domestic product (GDP).
With significant exposure to global supply chains, Malaysia has experienced notable impacts from Trump’s tariff policies.
In fact, on 28 July, Malaysia just revised its GDP range from 4.5-5.5% down to 4.0-4.8%. This clearly indicates the severe impact of tariffs on the economy.
These effects have rippled through Malaysia’s fiscal and monetary policy frameworks. Policymakers have had to adapt their responses.
Direct trade impacts
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Let’s look at the export effects.
Malaysia’s manufacturing exports – particularly electronics, electrical products and palm oil – faced indirect pressure from disrupted global supply chains.
As a key supplier of intermediate goods to China and other affected countries, Malaysia experienced reduced demand. Palm oil exports, in particular, will face additional pressure from broader trade tensions.
On the import channel impacts, we saw higher costs for imported intermediate goods and capital equipment. This led to input cost increases. There were also potential disruptions to tech-related imports from the US, affecting technology transfer.
Finally, possible indirect effects through global energy price channels could adversely affect energy costs.
Fiscal policy impacts
The fiscal policy impacts could be substantial.
On the revenue side, declining export volumes will reduce export duty collections. Diminished profits in export-oriented sectors are likely to decrease corporate tax receipts. Lower consumer spending caused by economic uncertainty has negatively affected sales and service tax (SST) collections.
As for government spending adjustments, Malaysia should implement enhanced subsidies and support for affected industries through industrial support programmes where appropriate.
There ought to be increased spending on trade diversification initiatives. There should also be accelerated infrastructure projects to stimulate domestic demand.
Additionally, social safety nets should be expanded to support workers affected by trade disruptions.
The measures outlined above are expected to have a significant impact on the government’s budget. Since the 1997-98 Asian Financial Crisis, Malaysia has consistently run a fiscal deficit. It recorded a deficit of 5.9% of nominal GDP in 2023 and a projected 4.3% in 2024. Maintaining such deficits is unsustainable in the long term.
Declining revenues combined with increased expenditures will complicate efforts toward fiscal consolidation. This presents challenges in balancing the need for continued economic stimulus with the imperative of maintaining debt sustainability and prudent debt management.
This requires enhanced focus on fiscal buffers and crisis preparedness for contingency planning.
Monetary policy impacts
The central bank, Bank Negara Malaysia, has responded with a more cautious approach to rate adjustments due to external uncertainties, affecting interest rate management.
It also engaged in active management of ringgit volatility through exchange rate policy. It enhanced liquidity provisions to financial institutions through liquidity operations. We should expect these efforts to continue.
Regarding inflation dynamics, selective inflationary pressures from disrupted supply chains have affected import prices.
While inflationary pressure is not yet obvious, core inflation showed mixed effects from underlying trends. We have seen price fluctuations, including in agricultural commodities, imports and energy prices.
Financial stability concerns have also emerged. However, at this juncture they have been quite minimal. Uncertainty in global trade policies might affect portfolio flows and foreign investment, and lead to capital flow volatility.
As for exchange rate management, Bank Negara seems to have adopted a more active managed float approach. This has allowed the ringgit to depreciate gradually from about RM4.00 to the US dollar to RM4.20. This maintains export competitiveness while preventing sharp volatilities that could disrupt trade flows.
This strategic depreciation helped Malaysian exporters maintain price competitiveness in alternative markets like China and the EU. This offset some losses from US market access restrictions.
Bank Negara also took more active liquidity management measures to stabilise domestic financial markets. It conducted daily open market operations, injecting ringgit liquidity through repurchase agreements. This prevented credit tightening that could have harmed export-oriented industries affected by US tariffs.
Malaysia should also significantly increase its use of bilateral currency swap agreements, particularly with China (RM180bn), Japan and India. This would reduce dependency on dollar-denominated trade settlements.
Malaysian exporters have begun invoicing more transactions in ringgit and Chinese yuan, especially for trade with Asean partners and China. But more needs to be done. This strategy helps Malaysian companies avoid currency conversion costs and reduce financial risks associated with dollar strength during tariff disputes.
Finally, we observed balance of payments flow adjustments. Malaysia redirected shipments to emerging markets, particularly through China’s Belt and Road Initiative partnerships and Asean economic integration efforts.
Regarding trade policy adjustments, Malaysia should accelerate and strengthen Asean economic integration efforts. It should, pursue additional free trade agreements to diversify markets, and enhance trade efficiency measures to maintain competitiveness.
Policy coordination challenges
Effective policy responses require strong domestic policy integration. This is easier said than done. We need to be cognisant that failure to coordinate policies will lead to unquantifiable negative consequences.
Alignment of policies with long-term economic transformation goals, and streamlined regulations to support policy objectives should always be the objectives. In this regard, leaders should take the lead in ensuring a consistent, coordinative and effective policies.
On the international front, there must be increased international policy engagement through:
- strengthened regional policy coordination mechanisms within Asean
- active participation in international economic forums like Brics
- enhanced economic diplomacy with key trading partners through bilateral dialogues
Long-term structural adjustments
In the long term, Malaysia should focus on economic diversification, with efforts to decrease reliance on any single market.
It should also move towards higher-value segments of global value chains.
And it should enhance focus on domestic consumption and investment to strengthen domestic demand.
This also involves institutional strengthening with:
- enhanced macroeconomic policy frameworks for external shocks
- improved monitoring of external economic developments through early warning systems
- strengthened institutional capacity for crisis-preparedness.
Specific policy measures implemented
On the monetary measures side, the central bank provided clear communication on policy responses to external shocks through forward guidance.
It also used macro-prudential tools to manage systemic risks, and conducted strategic interventions in currency markets through foreign exchange interventions.
In addition to these priorities, several other policy imperatives demand urgent action:
- reducing reliance on foreign labour
- overhauling the education system
- lowering national debt
- restoring fiscal balance
- generating high-value employment
- cultivating a workforce with global competitiveness.
Addressing these long-overdue reforms is critical. Without swift and effective policy interventions to remedy these persistent weaknesses, Malaysia risks being ill-prepared to confront future external challenges.
Critical lessons
The Trump administration’s tariff policies present notable challenges for Malaysia. They compel the nation to adopt a more nimble and strategic approach in its policy framework.
Malaysia’s experience serves to underscore several critical lessons for managing external economic shocks:
Policy flexibility: The ability to rapidly adjust fiscal and monetary policies proved vital. Adaptive frameworks allowed Malaysia to cushion immediate negative effects from disrupted trade flows, fluctuating exchange rates, and altered global investment patterns.
Participation in Asean Brics and other regional economic integration efforts will strengthen Malaysia’s position.
Collaborative trade and investment agreements with regional partners provided alternative markets and supply chain channels, lessening the impact of US-centric policy shocks.
Structural diversification: Malaysia’s drive to diversify its economy – broadening from traditional commodity exports to manufacturing and service sectors – offered a buffer against external volatility. A varied economic base enabled a more tempered response to sector-specific disruptions caused by tariff adjustments.
Institutional capacity: Strong and credible institutions fostered swift, coordinated policy implementation. Central banks and fiscal authorities that operate with autonomy and technical expertise were better equipped to deploy effective countermeasures in the face of global turbulence.
Malaysia’s experience during the Trump tariff era illustrates that countries facing trade policy shocks benefit from adaptable strategies, deeper regional ties, broad-based economic structures, and robust institutions. All these ensure sustained stability and growth.
Muhammad Ibrahim is a former governor of Bank Negara, Malaysia’s central bank. These remarks were delivered at Kuala Lumpur University (UniKL) on 31 July.
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