KUALA LUMPUR (March 18): Malaysia’s economy is expected to remain resilient despite the Middle East conflict, with only a 0.2 to 0.4 percentage point downside risk to its 2026 growth forecast, according to MARC Ratings.

In a note on Wednesday, MARC maintained its baseline 2026 gross domestic product (GDP) growth forecast at 4.6%, citing Malaysia’s limited trade exposure to the Middle East and its position as a net hydrocarbon exporter.

The agency said Malaysia’s trade remains largely anchored in Asia, supported by strong exports in electrical and electronics (E&E), machinery and palm oil products. It noted that during the immediate aftermath of the Russia-Ukraine war, when Brent crude averaged above US$100 per barrel, Malaysia’s exports continued to record solid growth.

However, MARC cautioned that domestic inflation, especially in transport, may face upward pressure as market-linked diesel and jet fuel prices raise costs and trigger second-round effects.

“Nevertheless, given that the transport component accounts for about one-tenth of Malaysia’s consumer price index basket, the overall impact on headline inflation is expected to remain manageable,” it said, projecting inflation to remain around 2% in 2026.

Fiscal pressures may rise from higher subsidy spending, but the deficit is expected to stay below 4% of GDP, supported by adjustments in other expenditures and potential revenue enhancements, including contributions from government-linked entities, it added.

Key sectors including E&E, chemicals, agriculture and logistics may face higher input costs, particularly for fuel and fertilisers. However, trade diversion could benefit liquefied natural gas exporters and the crude palm oil sector amid stronger biofuel demand.

MARC also widened its ringgit forecast to RM3.92–RM4.07 against the US dollar from RM3.88-RM3.98, reflecting heightened global risk aversion and reduced expectations of US rate cuts.

Foreign bond inflows may moderate in 2026, though Malaysia’s sensitivity to geopolitical shocks remains relatively low, it added.

The agency expects Bank Negara Malaysia to maintain the overnight policy rate at 2.75% throughout the year, balancing growth risks and inflation.

Meanwhile, MARC said expectations for US rate cuts have shifted to none in 2026 due to higher inflation, although easing could resume once geopolitical tensions subside.

It projects the 10-year Malaysian Government Securities yield at 3.55%-3.60% in the near term, higher than its earlier 2026 forecast of 3.35%-3.40%.

Despite uncertainties, MARC said Malaysia’s economic fundamentals remain strong, supported by domestic demand, steady growth and structural reforms, and the country is well positioned to weather the current geopolitical shock.