Malaysia

After experiencing a robust growth trajectory, averaging +4.7% y/y in the 2000s and +5.4% y/y in the 2010s, Malaysia was severely hit by the Covid-19 pandemic: The economy contracted by -5.5% in 2020, followed by modest and then more forceful recoveries in 2021-2022 (+3.3% and +8.7% respectively). 2023 and 2024 were subject to changes in the external environment and domestic policies, but continued to show economic resilience (+3.6% and +5.1% respectively). In 2025, despite geopolitical uncertainties and headwinds, Malaysia posted robust growth of +4.9%, supported by strong global demand for electronic goods, tourism as well as domestic private consumption. Looking ahead, we expect growth to slightly moderate to +4.4% in 2026 and +4.1% in 2027 due to dampened prospects for exports.

Fiscal policy in Malaysia has been broadly expansive after the onset of the pandemic, with the fiscal deficit widening from -4.9% to -5.9% of GDP during the 2020-2022 period. However, the fiscal deficit narrowed to -4.6% in 2023 and decreased further to -4% in 2024. The 2025 budget bolstered government revenue through expanded taxes and a global minimum tax, while also cutting subsidies as they have been a major driver of spending since the pandemic. The government is targeting a deficit of -3.6% in 2025, despite record budget spending. Fiscal consolidation will likely remain an area of focus for Malaysian policymakers, as shown by the 2026 budget, which includes tax increase measures and the implementation of a carbon tax. We expect the fiscal deficit to remain stable around -3.6% in 2026 and 2027.

With the aim of finding an equilibrium between supporting economic growth and keeping inflation under control, the Bank Negara Malaysia (BNM) – the central bank of Malaysia – implemented a cumulative 125bps hike in the policy rate in 2022-2023. With inflation lowering to +1.4% in 2025 from +3.4% in 2022, BNM delivered a -25bps policy rate cut in 2025. As we forecast inflation to remain moderate at +2.0% and +1.9% in 2026 and 2027, respectively, we expect the central bank to keep rates constant in 2026-2027.

Malaysia exhibits an above-average business environment but is facing a downward trend. The Heritage Foundation’s Index of Economic Freedom survey 2025 assigns the economy rank 44 out of 184 economies, similar to the previous year’s ranking but down from rank 22 in 2021. The deterioration reflects weaker scores in terms of financial freedom, government integrity and fiscal health. However, tax burden, trade freedom, government spending and monetary freedom remain bright spots. Meanwhile, the World Bank Institute’s annual Worldwide Governance Indicators survey indicates that Malaysia performed well in terms of government effectiveness and regulatory quality, although the voice and accountability, as well as the political stability and absence of violence/terrorism, remain weak spots. Lastly, our proprietary Environmental Sustainability Index ranks Malaysia 107 out of 210 economies. There is particular room for improvement in terms of renewable electricity output and the recycling rate.