• The prime minister reshuffled his Cabinet in December 2023, creating dedicated ministries to oversee Malaysia’s energy transition and the digital industry.
  • The government continues to aggressively pursue high-value foreign investment, particularly in the semiconductor and digital sectors, in a bid to raise wages and leverage skilled labor in Malaysia.
  • Johor Sultan Ibrahim Iskandar became Malaysia’s king, known as the Yang di-Pertuan Agong, in January. The outspoken monarch is known for his extensive business interests and his influence over the government, which goes beyond the precedents set by previous kings.
  • The government began phasing out diesel subsidies in early June, which will be followed by the gradual withdrawal of RON95 petrol subsidies. Fuel subsidies account for 81 percent of Malaysia’s subsidy bill, making rationalization necessary to achieve the government’s target of lowering the fiscal deficit from 5.6 percent in 2022 to 3 percent in the next 10 years.
  • The government will provide eligible people with diesel vehicles, including farmers and small commodity producers, monthly cash assistance to offset rising fuel prices since the government cut subsidies.
  • Malaysia’s patchwork of planned and existing consumption taxes may be replaced by a goods and services tax, which has been mooted by several quarters in the government. However, public perception of the rising cost of living may cause the government to reconsider implementation.
  • A snap election may be held in the state of Sabah a year before the state government’s term ends as both sides of the aisle discuss the possibility of early elections. Sabah, located in Borneo, is a key player in Malaysia’s political landscape. If the elections are held, they will serve as an important barometer for state support of the federal unity government.

Malaysia Market Overview and Forecast

Political Climate

Anwar’s Administration Settles Into Political Stability Despite Ongoing Challenges

After more than a year and half in power, Prime Minister Anwar Ibrahim has largely stabilized his administration in the short term. The reshuffling of his Cabinet in December 2023 saw the leadership of party loyalists in a few key ministries replaced by seasoned politicians and policymakers.

Anwar’s loose coalition of former rival political parties is still prone to occasional infighting, but the absence of a viable leadership alternative from the opposition Perikatan Nasional coalition gives him some room to maneuver politically. He is expected to expend significant political capital to undertake “once-in-a-generation” fiscal reforms this year, which include the rationalization of subsidies and retargeting of welfare assistance.

A potential signpost to watch is an early election in the eastern state of Sabah. Although it is not constitutionally due until December 2025, both sides of the state’s political arena have hinted at snap elections that could take place in the second half of this year. The outcome would not have a direct impact on the federal government, but it would serve as a barometer for the state’s support of federal policy.

Former Prime Minister Najib Razak, who was convicted of corruption charges for his involvement in the 1Malaysia Development Berhad scandal, had his prison sentence reduced from 12 to six years in February. He now hopes to serve the remainder of his jail sentence under house arrest. Najib retains considerable influence over the United Malays National Organization (UMNO) party, which is part of Anwar’s unity government. Although Anwar has sought to distance himself from Najib’s bid for house arrest, UMNO’s insistence on pushing for a full pardon has inadvertently dented Anwar’s popular image as a reformer against corruption. UMNO is confident that a full pardon would result in the revival of UMNO as the main party championing ethnic Malay interests.

Macroeconomic Climate

Cost-of-Living Concerns May Delay Economic Reform

Malaysia’s 3.7 percent economic growth in 2023 fell short of official government projections by 0.1 percent. The Ministry of Finance is nonetheless optimistic that Malaysia will be able to hit growth targets between 4-5 percent this year. This forecast is backed by resilient domestic demand and improved labor market conditions but tempered by external headwinds in the form of weaker-than-expected global growth and heightened geopolitical tensions.

The government is determined to follow through with major fiscal reforms, starting with subsidy rationalization plans. The mechanism to phase out blanket diesel subsidies was piloted in February and will expand by June. This will be followed by plans to gradually float prices of RON95 petrol. The rationalization of fuel subsidies is projected to save the government MYR 29 billion ($6.1 billion) annually. Fuel subsidies made up 81.5 percent of Malaysia’s increasingly unsustainable subsidy bill in 2022, valued at MYR 55.4 billion ($11.7 billion). The subsidy rationalization exercise will likely increase inflationary pressure and slow economic growth, which the government aims to offset by providing targeted assistance to affected socioeconomic groups.

The targeted assistance program is supposed to be facilitated by the Central Database Hub (PADU) system, which integrates Malaysians’ information from various government departments and provides the government with a more accurate view of the median household income. However, PADU proved unpopular with the public during its launch in January given privacy and safety concerns. That aside, the government said it has collected enough data to carry out targeted assistance programs despite only 52.6 percent of the Malaysian population 18 and above having verified their information.

Inflation is a major public concern, especially against the backdrop of a sliding ringgit. In late February, the ringgit slipped to MYR 4.80 against the U.S. dollar — its lowest since the 1998 Asian Financial Crisis. Malaysia’s central bank maintains that the ringgit’s depreciation is the result of major central bank interest rate adjustments. Nevertheless, public perceptions of the rising cost of living and import costs may delay the government’s decision to cut subsidies and implement targeted assistance programs.

Investment Environment

Focus on Renewable Energy and Digital Investments

The 2025 federal budget will be tabled in October. A major item to watch is the possible reintroduction of the goods and services tax. Although it was highly unpopular when it was first introduced in 2015 and was eventually scrapped in 2018 in favor of a sales and service tax, certain quarters in the government have voiced support for its resurrection to increase the country’s revenue base. If this happens, it will likely replace the patchwork of existing and planned consumption taxes. This includes the low-value goods tax, which took effect in January, and the high-value goods tax, which is slated for implementation in the second half of 2024 following stakeholder consultations.

Malaysia continues to seek investment in high-growth, high-value sectors, prioritizing renewable energy and digital in particular. To that end, the ministries of Digital and Energy Transition and Water Transformation were created during the December 2023 Cabinet reshuffle, highlighting the government’s focus on these sectors. The Ministry of Energy Transition and Water Transformation in April introduced Energy Exchange Malaysia, which will operate as Malaysia’s first cross-border platform to facilitate the sale of renewable energy to neighboring countries. That same month, the Cyber Security Bill 2024 was passed, which mandates that identified stakeholders comply with standard measures when managing cybersecurity threats. The regulatory and policy infrastructure being established for the renewable energy and digital sectors is aimed at making Malaysia the preferred hub for investments in Southeast Asia. In parallel, Kuala Lumpur has identified the semiconductor and data center industries as key pillars of economic growth for the country.

We will continue to keep you updated on developments in Malaysia as they occur. If you have any comments or questions, please contact BGA Malaysia Managing Director Hazree Mohd Turee at hturee@bowergroupasia.com.

Best regards,

BGA Malaysia Team