WHAT YOU NEED TO KNOW
  • Malaysia is employing a two-pronged strategy to deal with the U.S. tariffs announced in early April. Malaysia had fruitful talks with Washington in late April, setting the groundwork for negotiations in the coming months. At the same time, Malaysia is enhancing its trade relations with other major trading partners to diversify its export markets.
  • As chair of the Association of Southeast Asian Nations (ASEAN), Malaysia convened a special economic ministers’ meeting in April to discuss a regional response to the U.S. tariffs. Member countries agreed that Malaysia should lead a unified response, which will be subject to discussions in the coming months.
  • The unity government’s victory in three consecutive state by-elections has bolstered public confidence in the federal government’s stability. Despite the lack of a strong opposition, divisions between coalitions in the government constantly require Prime Minister Anwar Ibrahim’s attention.
ON THE HORIZON
  • A Cabinet reshuffle will take place in the second half of the year, likely after the state election in Sabah. The reshuffle is required to fill in the vacant positions of the minister of economy and the minister of natural resources and environmental sustainability. In addition, Minister of Investment, Trade and Industry Tengku Zafrul Aziz must step down when his second term as senator comes to an end in December.
  • A few key fiscal reforms are due to be implemented by the second half of the year. The expansion of the sales and services tax will be implemented July 1. On the other hand, the rationalization of RON 95 fuel subsidies will likely be postponed for a few months as the government evaluates the impact of the U.S. tariffs on the national economy.
  • A New Investment Incentive Framework is due to be launched in the third quarter. The framework will focus on attracting investments in Malaysia’s digital economy and will likely extend support for strategic industries impacted by the U.S. tariffs.

Malaysia Market Overview and Forecast


Political Climate
Unity Government Gears Up for Second Cabinet Reshuffle

Prime Minister Anwar’s unity government continues to remain relatively stable, primarily because the opposition Perikatan Nasional coalition does not have a clear policy direction and lacks a credible leader to rally around. Instead, Anwar’s attention will be directed toward managing intercoalition politics.

At the forefront is the upcoming state election in Sabah, which must be held by December. The Gabungan Rakyat Sabah (GRS) coalition, Barisan Nasional (BN) coalition and Sabah Heritage Party (Parti Warisan) are bitter political rivals at the state level. Notably, BN pulled out of the GRS-led state government in early 2023 over accusations of broken promises and corruption. Nevertheless, all three political stakeholders support the unity government at the federal level, and Anwar must ensure that the outcome of the state election does not spill over to fracture the federal government.

Anwar must also address the impact of the central leadership elections for his own People’s Justice Party (PKR). The party elections — which were held in May — saw Anwar’s daughter Nurul Izzah win the position of deputy president by a landslide over incumbent Deputy President Rafizi Ramli. In response, Rafizi resigned from his position as minister of economy. Shortly after, Nik Nazmi, who is aligned with Rafizi and failed to defend his vice president position, similarly tendered his resignation as minister of natural resources and environmental sustainability.

The two vacant ministerial positions will necessitate a Cabinet reshuffle in the coming months. A reshuffle was already in the cards because Minister of Investment, Trade and Industry Tengku Zafrul must relinquish his ministerial role before his second term as senator ends in December. Developments in Sabah and with the PKR party are expected to impact the choice of ministerial candidates.

Local politics aside, the unity government has a few more months to make Malaysia’s mark as ASEAN chair. In the face of sweeping U.S. tariffs, Malaysia will need to revise its initial lofty ambitions to champion regional infrastructure development and digital information investments. Although ASEAN member countries have expressed support for Malaysia to coordinate a unified regional response to the U.S. tariffs, Washington’s strong preference for bilateral agreements could hamper Malaysia’s efforts.

Macroeconomic Climate
Global Economic Uncertainty Likely To Put a Pause on Fiscal Reforms

The administration of U.S. President Donald Trump in early April imposed a 24 percent tariff rate on Malaysia’s exports to the United States, which it soon paused for 90 days. If maintained, the tariff measures will significantly affect Malaysia, given that the United States is Malaysia’s largest export market outside of ASEAN, accounting for MYR 199 billion ($46.7 billion) of Malaysia’s exports in 2024.

Malaysia established the National Geo-Economic Command Center earlier in March. The cross-ministerial initiative will monitor the impact of the U.S. tariffs and other supply chain risks. In the coming months, Malaysia is expected to continue bilateral negotiations with Washington following successful meetings with U.S. Trade Representative Jamieson Greer and Commerce Secretary Howard Lutnick in late April. The negotiations will likely center on lowering Malaysia’s nontariff barriers for the United States in exchange for a reduction in U.S. tariffs on Malaysian exports.

Malaysia will also look to enhance its relations with other trading partners, including continued negotiations with China, the European Union and other ASEAN member countries. In particular, Malaysia seeks to diversify its export markets for rare earth materials and renewable energy.

In the meantime, Malaysia will revise its growth projections for 2025. The government initially projected a 4.5-5.5 percent growth target, but the first quarter saw a weak performance due to global headwinds even before the U.S. tariffs were announced. The World Bank and International Monetary Fund have revised their projections for Malaysia’s GDP growth to 3.9 percent and 4.1 percent, respectively.

Global economic uncertainty will also likely weigh on the government’s decision to implement significant fiscal reforms. These reforms are aimed at reducing the national deficit from 4.1 percent of GDP in 2024 to 3.8 percent this year. While the government is proceeding to implement the expansion of the sales tax in July, the planned RON 95 fuel subsidy rationalization may take longer to be realized. Aside from lack of clarity over the mechanism for the targeted fuel subsidies, there are concerns that the subsidy rationalization exercise could drastically increase the cost of living.

Investment Environment
Government To Recalibrate Incentives for High-Value and Strategic Industries

Uncertainty about the U.S. tariffs will dampen Malaysia’s attractiveness as a high-value investment destination in key industries such as electronics and electric vehicles. Although semiconductors are currently excluded from the U.S. tariffs, the industry is wary that Washington could change this in the future. The rest of the electric and electronics sector, which accounted for MYR 64 billion ($15 billion) of Malaysia’s exports to the United States in 2024, still falls under the U.S. tariff regime and will closely monitor the outcome of Malaysia’s negotiations with Washington.

The U.S. tariffs have a less significant impact on Malaysia’s aspiration to become a regional digital hub. Malaysia attracted MYR 16.2 billion ($3.8 billion) in digital investments between January and April. However, a slowdown in approvals for new data centers is expected, due to the government’s concerns about the sustainability of energy consumption and the lack of high-skilled job creation in the industry.

A key signpost for the government’s medium-term plans to attract investment is the New Investment Incentive Framework, which is scheduled to be implemented in the third quarter. The framework will focus on increasing investments for the digitalization and artificial intelligence sectors.

The federal budget for 2026 will be tabled in October. The government is expected to allocate a larger share of the federal budget to mitigate the fallout from potential trade disruptions. Allocations will likely be increased for infrastructure upgrades and support for strategic sectors identified in the New Industrial Master Plan 2030, including medical devices, chemicals and the aerospace industry.

The government has also signaled plans to introduce significant incentives aimed at reducing Malaysia’s reliance on external economies. While details remain sparse, the government will likely target strategic industries to improve the country’s food security and clean energy capacity as part of broader efforts to build national resilience and value chain independence.

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 Senior Analyst Ahmad Mohsein Azman at mazman@bowergroupasia.com.

Best regards,

BGA Malaysia Team

A small ginko leaf

Senior Analyst

Mohsein leverages first-hand experience working in investment promotion and stakeholder management to provide BGA clients with a nuanced understanding of Malaysia’s investment landscape and local bureaucratic practices.  Mohsein was previously a civil servant with the Malaysian Investment Development Authority, where he focused on enhancing the country’s pharmaceutical and medical technology industries. During his tenure, Mohsein helped craft key industrial policies such as the 12th Malaysia Plan and National Vaccine Development Road Map. He also advocated for a more resilient local medical industry and increased health security in Malaysia’s 2023 budget. Besides overseeing medical manufacturing, Mohsein specializes in issues related to ... Read More