Malaysia’s economic outlook remains relatively resilient despite mounting global uncertainties, while Indonesia is grappling with increasing pressure from fiscal risks and currency weakness, according to a regional assessment by OCBC Bank economists.
In a report following visits to Kuala Lumpur and Jakarta this week, OCBC senior ASEAN economist Lavanya Venkateswaran said discussions with policymakers and market participants revealed starkly different economic sentiments between the two neighbouring countries.
Malaysia remains upbeat despite external risks
The report noted that sentiment in Malaysia remained “buoyant”, although tempered by caution surrounding global geopolitical tensions and domestic political developments.
According to OCBC, discussions in Kuala Lumpur continued to focus on attracting higher-quality foreign direct investments, integrating local businesses into global supply chains, and strengthening regional cooperation.
The bank said policymakers were also balancing geopolitical tensions while positioning Malaysia as a strategic investment destination. However, the possibility of an early general election before February 2028 remains a key uncertainty.
OCBC noted that speculation surrounding a potential election in 2026, potentially aligning with upcoming state polls in Melaka and Johor, could influence the pace of economic reforms.
“Elections pose a binary risk to Malaysia’s economic growth and importantly reform prospects,” the report stated, adding that the current administration under Anwar Ibrahim has shown credibility in implementing gradual but meaningful reforms.
BNM expected to keep rates unchanged
OCBC said incoming economic data continues to point to resilient growth momentum in Malaysia, supported by strong exports from the electrical and electronics sector, firmer palm oil and LNG prices, and stable domestic demand.
The bank highlighted that advance estimates showed Malaysia’s economy grew 5.3 per cent year-on-year in the first quarter of 2026, compared with 6.3 per cent in the previous quarter.
The report also pointed to rising fiscal risks linked to elevated global oil prices and the continued RON95 fuel subsidy programme.
OCBC said further subsidy rationalisation measures could not be ruled out if disruptions in the Strait of Hormuz persist through May and June. Nevertheless, the research house expects Bank Negara Malaysia to maintain the Overnight Policy Rate at 2.75 per cent through 2026.
“BNM sounded modestly more concerned about growth versus inflation, suggesting that its near-term bias would be to hold rather than normalise the policy rate,” the report said.
Indonesia faces mounting fiscal and currency concerns
In contrast, OCBC said Indonesia’s economic optimism is increasingly overshadowed by policy concerns and weakness in the rupiah.
Although Indonesia’s first-quarter GDP growth exceeded expectations at 5.6 per cent year-on-year, driven by stronger domestic demand and government spending, the bank warned that sustaining this momentum may become more difficult.
The report said Indonesia’s fiscal deficit is currently tracking at 3.7 per cent of GDP, above the government’s official ceiling of 3 per cent, potentially forcing spending cuts or new tax measures. At the same time, Indonesia continues to maintain extensive fuel subsidies, helping to contain inflation but increasing fiscal burdens.
OCBC also warned that Indonesia’s external vulnerabilities are growing amid weaker exports, rising fuel import costs and widening current account pressures. As a result, Bank Indonesia is expected to prioritise stabilising the rupiah over supporting growth.
The report noted that the central bank has already tightened oversight of US dollar transactions and increased rates on selected monetary instruments to attract foreign inflows.
OCBC said the next line of defence for Bank Indonesia could be policy rate hikes if external uncertainties persist.
“Should the Strait of Hormuz remain closed through June 2026 with fragile risk sentiment exacerbating Indonesia’s fiscal and external vulnerabilities, we see a rising probability of a cumulative 50 basis points in rate hikes from BI in the second half of 2026,” the report added.
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