Cover Story: How the Iran war is impacting the Malaysian economy

This article first appeared in The Edge Malaysia Weekly on June 15, 2026 - June 21, 2026 AT the time of writing, Iran had once again closed the Strait of Hormuz. Its military said the closure applies to oil tankers and commercial ships, and warned that it will fire at any ship attempting to pass through the waterway. The move followed an escalation in tensions between the US and Iran, after tit-for-tat strikes took place last week. It is anyone’s guess when the war — which has affected other countries in the Middle East — will end. The most obvious and direct impact of the war on countries around the world, including Malaysia, has been higher energy prices. As 20% of the global oil supply passes through the Strait of Hormuz, the blockage has resulted in a significant reduction in global crude oil supply and the sharp rise in oil prices. The International Energy Agency (IEA) in its May report said that the supply losses from the Strait of Hormuz closure are depleting global oil inventories at a record pace. It noted that the cumulative supply losses from oil producers in the Middle East have already exceeded one billion barrels, with more than 14 million barrels per day of oil shut in, signalling an unprecedented supply shock. The IEA sees supply recovering more slowly than demand. “As a result, the oil market remains in deficit until the final quarter of the year. With global oil inventories already drawing at a record clip, further price volatility appears likely ahead of the peak summer demand period,” it said in the report. Malaysia has secured sufficient fuel until the end of July, but the fiscal strain on the nation’s coffers from the more expensive fuel is worrying. The subsidy bill for petrol has been staggering, as crude prices soared as a result of the war. The vast majority of the rakyat is eligible to buy the first 200 litres (previously 300 litres) of RON95 petrol at RM1.99 per litre each month. The monthly fuel subsidy climbed from RM700 million in January and February, to RM5 billion in March as oil prices escalated, and peaked at RM7.5 billion in April. Crude oil prices have moderated to around US$90 per barrel, compared with the peak of over US$100 per barrel in April. Finance Minister II Datuk Seri Amir Hamzah Azizan said recently that the monthly subsidy bill is currently RM3.5 billion to RM4 billion. “Our back-of-the-envelope estimates suggest the additional fiscal burden could amount to RM18 billion, or 0.8% of gross domestic product (GDP), should elevated energy prices persist,” said Apex Securities in a report dated June 11. The higher fuel cost and resultant larger fuel subsidy bill could mean that Malaysia may not meet its fiscal deficit target this year, Amir Hamzah said in a recent interview with an international newswire. He reiterated, however, that falling slightly short of the target was “okay”, adding that the government remains determined to bring the fiscal deficit to below 3% of GDP by 2028. The government has undertaken several measures to manage the effects of the current energy crisis. While working hard to safeguard fuel supply and energy security through national petroleum company PETRONAS, it took early steps to reduce the monthly quota of subsidised RON95 petrol for eligible Malaysians to 200 litres from 300 litres. Speaking at the Invest Malaysia conference last Tuesday, Amir Hamzah said the government would only consider revising the RON95 petrol quota if Brent crude rises significantly to between US$200 and US$300 per barrel. The government has mandated work- from-home arrangements for selected groups of civil servants, reduced official travel for civil servants, and instructed government-linked companies and ministers to reduce spending. There were also proposals for spending cuts for the ministries to strengthen the country’s fiscal position. On the other hand, it announced in May the expansion of the eligibility for the diesel subsidy to cover jeeps and pickup trucks for the land goods transport sector nationwide. The central bank has also rolled out financial relief measures to aid small to medium-size enterprises facing financial difficulties due to the war on Iran. Logistics and insurance costs have also fallen victim to the geopolitical instability in the Middle East. This, coupled with higher energy costs and costlier petrochemicals, means it is only a matter of time before the effects trickle down to end consumers in the form of higher prices. Some early signs of inflationary pressures can be seen in the most recent headline inflation numbers. In April, headline inflation rose 1.9% year on year (y-o-y) from 1.7% in March. The quicker growth was mainly driven by higher transport costs, while food prices were largely flat. “Cost-push pressures are increasingly evident, with rising producer prices and a narrowing Producer Price Index- Consumer Price Index (PPI-CPI) spread indicating stronger transmission of upstream cost increases to consumers,” said MARC Rating Bhd in its monthly review dated May 29. The ratings agency also sees inflation remaining elevated in the near term due to persistently high energy and supply chain costs, alongside potentially secondary price effects on goods and services. Typically, transport will be the first segment to be hit by higher prices, with food and other goods and services following after a lag as the effects trickle down the supply chain. Kenanga Research said in a May 19 report that while targeted fiscal transfers and subsidies should cushion part of the near-term impact, rising transport and production costs are likely to erode household purchasing power over time. In other parts of the world, inflation has been gaining momentum as energy costs increase. US inflation in May increased at its fastest pace in three years, rising 4.2% y-o-y. It is the third straight month of strong increases in the CPI, implying the mounting pressure on households. In the upcoming Federal Open Market Committee meeting — the first under new chair Kevin Warsh — on June 17 and 18, market participants are largely expecting the US Federal Reserve to keep its benchmark policy rate unchanged. Market observers say, however, that with inflation showing signs of heating up and the US Fed far from its inflation goals, there is a possibility that rates will be hiked in the later part of the year. “This prolonged inflationary environment has severely eroded consumer confidence, with the University of Michigan’s sentiment index plunging to a historic low alongside a New York Fed survey revealing deepening household pessimism regarding the labour market outlook and personal financial health,” noted MBSB Research in a report dated June 11. “This challenging mix of sticky price pressures, broad-based consumer anxiety, growing concerns about the near-term outlook and volatile commodity inputs sets out a high-stakes backdrop for central bank officials.” With potentially higher rates in the US later in the year and geopolitical uncertainties in the Middle East, investors have taken flight to safe haven currencies like the US dollar. As the US dollar strengthens, the ringgit — as well as other emerging market currencies — has seen weakness over the last couple of months. Locally, the upcoming state elections and possibility of a snap election have introduced an additional layer of uncertainty for foreign investors. At the time of writing, the ringgit was trading at 4.0690 against the greenback, having weakened 3.2% over the period of a month. Since the start of the Middle East conflict, the ringgit has declined around 4% against the US dollar. However, the ringgit is still faring better than regional currencies such as the rupiah. In a surprise move, the Indonesian central bank recently raised interest rates ahead of its monetary policy committee meeting in a bid to support the rupiah and reverse the market sell-off. Year to date, the rupiah has declined more than 7% as investor confidence faltered over concern about the government’s ambitious spending plans, policy interventions and fiscal sustainability. Like Malaysia, Indonesia also provides fuel subsidies, but only for Pertalite petrol (RON90) and Biosolar diesel — widely used for motorcycles and commercial vehicles. Its other grades of petrol are not subsidised. In a recent report on Indonesia’s economic prospects, the World Bank called on the government to gradually readjust fuel subsidies to stem the rising fiscal pressures. It warned that generalised subsidies end up benefiting richer households rather than vulnerable sections of the population. Nevertheless, fuel reforms is a sensitive topic in Indonesia — no different than in Malaysia. The last time fuel subsidy reforms were undertaken, they sparked massive protests across the country. Indonesia’s current predicament should serve as a cautionary tale for other countries in the region.