Malaysia faces reform push amid global uncertainty

[MALAYSIA] Malaysia has been urged by the Organisation for Economic Co-operation and Development (OECD) to accelerate reforms aimed at boosting its economic competitiveness and resilience amid persistent global uncertainties. At a recent virtual conference, the OECD’s Southeast Asia division head, Jens Arnold, emphasized the need for Malaysia to further liberalize foreign direct investment (FDI), ensure fair competition among state-linked and private enterprises, and address labor market challenges, particularly skills mismatches, through enhanced education and workforce training.

OECD chief economist Alvaro Pereira projected Malaysia’s economy to grow by 3.8% in 2025, a slowdown from 2024’s stronger export performance, as global trade is expected to soften. Inflation, which was 1.8% in 2024, is forecast to rise to 2.2% in 2025 and 2.7% in 2026. Malaysia’s labor market remains robust, with unemployment at a decade low and rising labor force participation, supporting private consumption. Pereira noted that while monetary policy is currently neutral, there is room for easing if growth falters, though vigilance is needed against inflationary pressures from wage increases.

The regional context remains challenging. Southeast Asia’s five largest economies—including Malaysia—grew at a healthy 5% average in 2024, outpacing or matching growth in the OECD and China. However, the OECD warns that rising tariffs and policy uncertainty could dampen trade and investment in 2025, with early indicators already pointing to slowing activity. The organization recommends reducing regulatory barriers and opening markets further to foreign and new businesses to spur productivity and competitiveness.

Implications

For Businesses:

The OECD’s recommendations signal a push for a more open and competitive business environment in Malaysia. Easing FDI restrictions and leveling the playing field between state-owned and private firms could attract more international investors, foster innovation, and drive productivity. However, companies may face increased competition as regulatory barriers are lowered and markets become more accessible to foreign entrants.

For Consumers:

A stronger, more competitive economy can translate into better job opportunities, higher wages, and improved products and services for Malaysian consumers. The focus on addressing skills mismatches through education and training is likely to enhance workforce quality, potentially leading to higher living standards and greater economic mobility. However, rising inflation—especially if wage growth outpaces productivity—could erode purchasing power if not managed carefully.

For Public Policy:

Malaysia’s policymakers are under pressure to balance fiscal consolidation with growth-friendly reforms. The OECD highlights the need to mobilize more revenue, phase out broad subsidies, and invest in human capital and technology to sustain long-term growth. With the US proposing new retaliatory tax measures targeting foreign entities, Malaysia must also navigate an increasingly complex global tax and trade environment, requiring agile and forward-looking policy responses.

What We Think

Malaysia stands at a crossroads: its economic fundamentals remain healthy, but global headwinds and shifting trade dynamics demand a new level of policy ambition. The OECD’s call for deeper reforms is timely, as Malaysia’s recent gains in FDI and labor market strength could be undermined by complacency or protectionism. Opening markets and investing in skills are not just about attracting capital—they are essential for building resilience in an era of rapid technological change and geopolitical uncertainty.

The country’s commitment to fiscal reform, as seen in recent budgets and new transparency measures, is encouraging. Yet, real progress will depend on the government’s ability to implement structural changes that address inefficiencies and foster genuine competition. As Malaysia prepares to chair ASEAN and host major international events, it has an opportunity to showcase its reform credentials and position itself as a regional leader.

Ultimately, Malaysia’s path to sustainable, inclusive growth lies in its willingness to embrace change—by empowering its workforce, modernizing institutions, and ensuring that the benefits of growth are widely shared. The next few years will test the country’s resolve, but with the right mix of policy action and private sector dynamism, Malaysia can turn current challenges into long-term advantages.