MALAYSIA IN POSITION OF STRENGTH AMID WEST ASIA CONFLICT – BNM

KUALA LUMPUR, March 31 (Bernama) --  Malaysia is in a position of strength as it faces oil price shocks following the West Asia conflict, supported by robust domestic demand, moderate inflation, a sound financial sector and a resilient external position.

Bank Negara Malaysia (BNM) said the country's standing as a net energy exporter also provided some buffer against external headwinds. 

"Nevertheless, BNM will remain vigilant to the rapidly evolving nature of this conflict and stand ready to ensure that monetary policy remains supportive of the economy while safeguarding price stability," it said in the Economic and Monetary Review 2025 released today.

Since February 28 this year, geopolitical tensions in West Asia have escalated sharply following the onset of military conflict, disrupting regional oil and gas production, as well as associated supply chain and logistics. 

Concerns over safety, rising insurance costs and the subsequent withdrawal of major commercial shipping operators led to significant disruptions in maritime traffic through the Strait of Hormuz, which sees nearly 20 per cent of the global oil supply daily.

BNM said the overall impact of the conflict on Malaysia would depend on its duration, the severity of the disruption, and how far it affects global energy production and logistics. 

The central bank also noted that during previous episodes of military conflict, including the Gulf War in 1990 and the Russia-Ukraine conflict in 2022, oil prices increased significantly for three to six months before gradually declining to their pre-conflict level. 

However, BNM noted that outcomes have varied across different episodes, and the current West Asia conflict could unfold differently. 

"If hostilities remain contained and de‑escalate gradually, disruptions may be short‑lived, characterised by temporary production outages and partial shipping disruptions through the Strait of Hormuz, with strategic reserves helping to cushion near‑term supply shortfalls. 

"In such circumstances, oil prices are likely to settle at elevated but manageable levels, with limited spillovers to global growth, trade and inflation," BNM said.

By contrast, the central bank said more persistent disruptions could result in prolonged disruptions to maritime traffic, sustained damage to energy infrastructure, and extended production shutdowns across major Gulf producers. 

"This would keep oil prices elevated for longer, dampen external demand, and weigh on global trade and growth. In this scenario, domestically,  elevated energy and input costs could increase the likelihood of broader cost pass-through to consumer prices, posing risks of more persistent inflationary pressures. This would erode household purchasing power and amplify the drag on domestic demand," it added.   

West Asia conflict: Impact on Malaysia

As a small open economy, BNM said Malaysia’s growth and inflation outlook is sensitive to geopolitical and global energy price developments.

The central bank said the conflict affects the domestic economy mainly through three key channels, including higher energy prices, which raise import costs and subsequently exert upward pressure on domestic production costs as well as consumer prices. 

These, in turn, could dampen household spending and business activity, it added. 

BNM said weaker external demand following oil price shocks could weigh on exports and overall growth, while elevated oil prices and heightened uncertainty increase risk aversion, prompting a shift towards safe-haven assets.  "This leads to more volatile capital flows across emerging markets, including Malaysia, with potentially adverse spillovers on domestic financial conditions and exchange rate," added the central bank. 

However, BNM said these effects might be partly mitigated by higher commodity-related export earnings, given Malaysia’s position as a net energy exporter.

It added that existing targeted fuel subsidies would also help cushion the transmission of higher global energy prices to domestic inflation and the economy.

-- BERNAMA