Led by Prime Minister Anwar Ibrahim since 2022, Malaysia is slowly leaving behind its troubled past, dragged down by years of political jockeying that led to a prioritization of populism versus long-term strategic growth plans.  The budget deficit is expected to narrow to 4.3% of GDP from 5.1% in 2023 thanks to efforts to reduce subsidies to 2.7% of GDP in 2024 from 3.5% in 2023. Moreover, higher goods and services taxes (GST) to 8% from 6% will also boost revenue to make space for capex such as the resumption of light-rail transit in Penang. 

Attracting more FDI looking to diversify from too-much China concentration risks is also a priority. The government introduced the New Industrial Master Plan 2030 (NIMP 2030) in 2023, targeting sectors such as aerospace, chemical, electrical and electronics, pharmaceutical and medical devices, as well as four new growth areas such as advanced materials, electric vehicles, renewable energy and carbon capture, utilization and storage (CCUS). As the US-China tension widens to investment curbs, Malaysia finds itself a beneficiary of firms looking for a location with good infrastructure, talent, and existing ecosystem of high-tech manufacturing. Thanks to having the best infrastructure in EM ASEAN, Malaysia is well-positioned to benefit from medium to high-tech capital-intensive supply chain diversification. FDI inflows have increased to 67bn in 2022 from 34bn in 2014. Net FDI is much smaller at 9bn in 2023 from 17bn in 2022.

We expect semiconductor exports to not just stage a cyclical recovery but become increasingly more key to Malaysia’s exports as investment rises. Already, it is Malaysia’s number one export value item with increasing shipment to the US and ASEAN. Malaysia is also a major exporter of natural gas and palm oil, with China as a key destination and major source of growth for the sectors.  Meaning, Malaysia benefits from US-China tensions by increasing more chip shipment to the US and ASEAN, a trend we expect to continue with more FDI. Tourism should also be another source of growth as Malaysia tops our index of countries in ASEAN with the least hurdles to travel. 

With higher exports and tourism, GDP will likely expand by 4.3% in 2024 from 3.7% in 2023. Portfolio flows will likely turn positive as the Fed is expected cut rates in June, spurring risk appetite and inflows. With FDI firm and current account improving, we expect the ringgit to strengthen versus USD in H2 2024. A key risk to Malaysia recovery comes from domestic politics, which could derail reforms and strategic plans.

Source: Natixis Research