Early Policy Response Crucial To Contain US-Iran Conflict's Impact, Says Economist

By Abdul Hamid A Rahman

KUALA LUMPUR, March 1 (Bernama) -- Early and coordinated policy intervention will be critical in determining whether the escalating United States-Iran conflict remains a temporary external shock or evolves into a more persistent economic challenge for Malaysia, an economist said.

Prof Dr Tan Peck Leong, economic development professor at Universiti Teknologi MARA (UiTM) Arshad Ayub Graduate Business School, said the Middle East conflict itself is unlikely to fundamentally weaken Malaysia’s economy in the short term.

“The greater risk is not an immediate collapse in growth, but that financial volatility and opportunistic price increases could entrench inflationary expectations and translate into lasting increases in the cost of living for ordinary Malaysians,” he told Bernama.

Tan said the current situation represents a critical window for preventive economic management.

“If volatility is not managed early, short-term external shocks could crystallise into sustained domestic price pressures and affect household purchasing power,” he said.

Tan said Bank Negara Malaysia must be prepared to stabilise financial conditions and prevent excessive currency and market volatility, which may affect the ringgit’s value amid global uncertainty and could raise imported inflation pressures, particularly for food and intermediate goods.

“At the same time, government agencies should intensify monitoring and enforcement to ensure that traders do not exploit temporary global uncertainty to raise prices unjustifiably,” he added.

Tan noted that Malaysia has successfully navigated previous crises through timely and coordinated policy responses.

“The same resolve is needed today. Early and coordinated action between monetary authorities and enforcement agencies will be important to prevent a short-lived Middle East crisis from turning into longer-term economic hardship for the rakyat,” he said.

According to him, the impact on Malaysia would most likely be transmitted through three main channels: financial markets, energy prices and trade flows, with financial markets and investor sentiment typically reacting first.

“During the COVID-19 market shock in 2020, for example, Malaysia’s equity market fell sharply before the real economy weakened, illustrating how financial markets often serve as the fastest transmission channel during periods of global uncertainty,” he said.

On energy prices, he said higher oil and liquefied natural gas (LNG) prices tend to benefit Malaysia’s export revenues and government income, but they also increase production and transportation costs across the economy.

“While stronger energy prices could temporarily improve Malaysia’s external balance and fiscal position, policymakers must guard against second-round effects on domestic inflation, particularly in logistics-intensive sectors,” he cautioned.

On trade flows, he noted that Malaysia exports significant volumes of palm oil and food products to Middle Eastern and North African markets.

“The country exports roughly 1 million to 2 million tonnes of palm oil annually to the Middle East and North Africa region, making it an important destination market.

“Disruptions to shipping routes or economic activity in the region could delay shipments, increase logistics costs and weigh on trade momentum,” he said.

The professor said if the conflict remains contained and disruptions last only a few weeks, the economic impact on Malaysia is likely to manifest as short-term volatility rather than a structural shock, with energy-related sectors showing relative resilience.

However, he said, prolonged tensions could pose broader risks through sustained financial market volatility, higher shipping costs and persistent inflationary pressures.

“Evidence from past geopolitical crises shows that emerging markets often experience temporary capital outflows and equity market declines during periods of global uncertainty, even when economic fundamentals remain stable. 

“The key difference lies in how swiftly domestic authorities act to anchor expectations and stabilise confidence,” he said.

-- BERNAMA