KUALA LUMPUR (March 25): Analysts have flagged US “Liberation Day” reciprocal tariffs as a key risk to Malaysia’s economic outlook after Bank Negara Malaysia’s (BNM) better-than expected projections for the economy.

BNM's growth projection of 4.5%-5.5% for 2025 is in line with the Ministry of Finance’s outlook for the year. The central bank expects inflation to come in between 2% and 3.5%.

In a note following BNM’s annual report and economic update, Mercury Securities emphasised that the April 2 tariff announcement is crucial in determining the country's growth prospects. This is particularly important as BNM’s projections rely on the current US tariffs under President Donald Trump’s administration, and have not accounted for the new trade measures expected on April 2.

Trump is expected to announce more taxes on several countries, adding to the existing tariffs that have run afoul of trade partners and could slow down the global economy.

His latest action was to impose 25% "secondary tariffs" on buyers of oil from Venezuela — India and China.

Mercury Securities said that policy responses and the resilience of key trading partners will be crucial in managing the fallout. However, Malaysia’s growing trade diversification and repositioning within the global tech value chain may provide some insulation, it said. 

According to Public Investment Bank, while BNM’s baseline outlook anticipates a continuation of the global trade rebound, the external environment remains fragile. 

The prospect of more restrictive trade measures and retaliatory actions, alongside a potential escalation of geopolitical tensions, could weigh on global trade flows, dampen demand from key trading partners, and adversely affect Malaysia’s export performance, it said.

“Heightened uncertainty may also lead to more cautious investment and consumption decisions. Further disruptions to commodity production would add to the downside, particularly if adverse weather conditions persist,” Public Investment Bank added.

Should these risks materialise, it said growth is likely to trend towards the lower end of the forecast range for 2025.

CGS International, meanwhile, said BNM’s gross domestic product (GDP) forecast is more optimistic than market expectations.

The research house maintained its 2025 GDP growth forecast at 4.6%, placing it at the lower end of the official forecast range and slightly below Bloomberg’s consensus of 4.7%.

“This implies BNM’s perception of the current economic situation as being slightly on the optimistic side versus the market,” the house noted. 

While external risks remain, UOB Global Research expects the overnight policy rate (OPR) to stay unchanged at 3% for now, citing BNM’s confidence in domestic economic fundamentals.

BNM reiterated that domestic demand remains supported by a healthy labour market, strong investment activity, and fiscal policy measures, which will keep the output gap positive for a second consecutive year in 2025. 

“So long as heightened trade and external risks do not lead to a shock to the global and Malaysian economy, we think that BNM will continue to adopt a wait-and-see approach rather than introducing an unexpected pre-emptive interest rate cut in the coming months,” said UOB. 

BNM’s next Monetary Policy Committee meeting is scheduled for May 7 and 8.

Most analysts remain positive on the banking sector, maintaining an ‘overweight’ call due to its resilience and ability to weather external uncertainties.

BNM’s macro stress tests demonstrate that the banking system remains resilient even under stress scenarios more severe than those experienced during the 2008 Global Financial Crisis and the 2020 pandemic.

In these extreme conditions, the system-wide capital ratio stays significantly above regulatory requirements, reinforcing the ability of banks to absorb both credit and liquidity shocks without posing systemic risks.

Hong Leong Investment Bank continues to hold a bullish outlook on the sector, viewing it as a safe haven amid Trump’s tariffs. The sector also offers an attractive dividend yield of 5% and has defensive earnings potential, with scope for pre-emptive provision write-backs.

“Besides, valuations remain inexpensive compared to the five-year pre-Covid average price-to-book ratio (at -2 standard deviation). In addition, we still find that banks have a favourable risk-reward profile, after combing through the other sectors under coverage. Hence, we adopted a broad stock-buying strategy,” the house said. 

Kenanga Investment Bank, while expecting the OPR to remain stable at 3%, noted that a potential 25-basis-point rate cut would not significantly impact the sector. Lower asset yields could be offset by banks’ efforts to boost fee-based income and tighten operating expense growth.

Among analysts’ top banking picks are Malayan Banking Bhd (KL:MAYBANK), AMMB Holdings Bhd (KL:AMMB), Public Bank Bhd (KL:PBBANK), and CIMB Group Holdings Bhd (KL:CIMB).