KUALA LUMPUR, Dec 14 — Malaysia entered 2025 amid fiscal constraints, subsidy reforms, uneven global trade, and a weak ringgit — but the economy continued to advance, even as the overall outlook remained cautious.

Yet, instead of stalling, the country held its nerve, tightened its belt, and pressed ahead with reforms that reshaped its economic landscape and strengthened the foundations for long-term resilience.

The year kicked off with cautious optimism as Malaysia recorded 4.4 per cent gross domestic product (GDP) growth in the first quarter of 2025 (1Q 2025), supported by sustained household spending, favourable labour market conditions, and government policies.

The momentum remained intact in the second quarter, with GDP expanding at the same pace of 4.4 per cent, driven by robust domestic demand despite global headwinds stemming from escalating tariff tensions under the Trump 2.0 administration and ongoing geopolitical conflicts abroad.

The economy hit a decisive stride in the third quarter, expanding 5.2 per cent — the strongest quarterly increase since 2022 — putting Malaysia firmly on track to achieve the upper end of its full-year growth target of 4.0–4.8 per cent.

Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim said domestic demand, a stable labour market, and continued investment in high-growth, high-value sectors were laying a solid foundation for sustained economic momentum.

For the first nine months of the year, the economy grew 4.7 per cent, underscoring Malaysia’s resilience amid one of the most turbulent global environments in recent years.

Economists say Malaysia may end 2025 in better shape than many had anticipated.

A combination of rising US tariffs, conflicts across Eastern Europe and the Middle East, and weakening demand from China created a challenging backdrop for emerging economies.

Against this backdrop, Malaysia’s ability to maintain its momentum was widely viewed as a notable achievement.

Sunway University economist Dr Yeah Kim Leng described 2025 as a defining year for Malaysia in demonstrating its economic resilience, noting that growth outpaced several regional peers and other upper middle-income economies.

He attributed the stronger performance to low inflation, near-full employment, and firm domestic demand, all of which helped cushion the impact of external shocks.

He added that public investment — particularly in transport, utilities, healthcare infrastructure, and industrial parks — provided additional support throughout the year.

Meanwhile, the long-awaited rebound in the global semiconductor cycle — a sector central to Malaysia’s export performance — helped stabilise shipments and lift trade numbers toward year-end.

Malaysia emerges as South-east Asia’s second-fastest growing economy

Analysts across the region have turned more upbeat on Malaysia’s economic outlook, with HSBC Global Research revising its 2025 GDP forecast upward from 4.2 per cent to 5.0 per cent, citing robust domestic activity and improving external conditions.

Several other financial institutions have issued similar upgrades, positioning Malaysia as the second-fastest growing economy in Southeast Asia in 2025 — behind only Vietnam.

Madani reforms deepen fiscal discipline

Fiscal consolidation remained the central policy theme in 2025 as Malaysia continued its medium-term reform trajectory under the Public Finance and Fiscal Responsibility Act (FRA), enacted in 2023 to strengthen fiscal governance and ensure a sustainable deficit path.

Khazanah Research Institute chairman Dr Nungsari Ahmad Radhi said Malaysia’s consolidation efforts were on track and anchored by credible reforms, including subsidy rationalisation, the expansion of the Sales and Services Tax (SST), and the nationwide rollout of e-invoicing.

These administrative measures were reinforced at the legislative level, with Parliament passing several key economic and finance-related reforms in 2025 — including procurement and tax-administration legislation — further strengthening public finance governance under the Madani Economy framework.

These fiscal measures aim to reclaim fiscal space by shifting spending away from inefficient blanket subsidies toward more productive uses — including strengthening social safety nets and maintaining manageable debt levels — thereby supporting confidence in the ringgit and preserving Malaysia’s sovereign rating.

Throughout 2025, the Madani government implemented several major policies shifts with the major fiscal milestone being the rationalisation of RON95 subsidies under Budi Madani RON95 (Budi95) programme which took effect on September 30, 2025.

Under Budi95 fuel subsidy initiative, government has allocated RM11 billion to cover the difference between the subsidised price of RM1.99 per litre and the unsubsidised pump price of around RM2.60 per litre.

It was reported that more than 84 per cent of 16.5 million eligible Malaysians, or 13.9 million, have enjoyed the RON95 petrol price of RM1.99 per litre under the BUDI95 programme as of November 30, 2025, and a sale of RM5.16 billion or petrol usage of 2.59 billion litres had been recorded.

The government is expected to generate savings of around RM2.5 billion to RM4 billion a year, subject to global oil prices and based on domestic consumption survey data prior to Budi95’s implementation.

Other reform policies included the enforcement of full e-invoicing across businesses beginning in August, followed by the continued expansion of SST base from January, and refinements to diesel subsidy in early 2025.

These reforms reinforced the government’s commitment to lowering the fiscal deficit to 3.8 per cent in 2025 and 3.5 per cent in 2026, in line with FRA targets.

Inflation contained, but households feel the strain

Headline inflation remained below three per cent, which economist Geoffrey Williams described as “one of the key success stories of 2025”.

However, he noted that households continue to feel the impact of rising prices, even if the pace of increase has slowed. This reflects structurally low incomes and the perception that essential goods are becoming more expensive, while non-essential products are increasingly less affordable.

He added that the Progressive Wage Policy is beginning to show early results, with the Deputy Economy Minister reporting that, as of October, 1,966 employers have increased the salaries of 20,737 workers.

With RM200 million allocated to expand participation to 50,000 workers, Williams said this marks a constructive start — although the current reach remains small relative to the three million individuals in the target income group.

Progressive wage would work better if simplified by removing complex requirements and mandatory training, and by introducing a straightforward reverse income tax or tax credit paid directly to workers earning RM1,700–RM5,000 a month, he added.

Monetary stability and ringgit recovery

Malaysia’s monetary environment remained stable, with Bank Negara Malaysia keeping the overnight policy rate unchanged, while the ringgit — after early-year volatility driven by global US dollar strength and geopolitical uncertainty — regained momentum in the second half as fiscal clarity and improved market conditions took hold.

Improved investment flows and easing global interest-rate pressures also aided the currency’s recovery.

The ringgit began trending higher against the greenback — revisiting the 4.12 level several times, especially in the fourth quarter of 2025 — reflecting better external conditions and firmer domestic sentiment.

Its latest and strongest showing came on December 3, when the currency reached a fresh 14-month high of 4.1200, surpassing the previous peak of 4.1210 recorded on Sept 30, 2024.  

Investment momentum strengthens in semiconductors, energy, and digital infrastructure

Investment remained robust in 2025, driven by inflows into semiconductors, clean energy and advanced industries.

The National Semiconductor Strategy (NSS) gained traction with new commitments in system-in-package manufacturing, integrated circuit design, and semiconductor-related research and development.

Meanwhile, the National Energy Transition Roadmap (NETR) made significant strides with large-scale solar deployment, hydrogen pilot projects, and power-grid modernisation initiatives.

Malaysia also strengthened its digital infrastructure during the year, marked by the introduction of the country’s Digital ID in October to ease service delivery and support targeted assistance.

Investments in data centres, cloud infrastructure, and artificial intelligence (AI) computing capabilities surged as global technology firms expanded their presence in the Asia-Pacific region. 

Strategic projects under the government’s GEAR-uP programme also advanced throughout 2025, particularly in aged care, agro-industry and semiconductor supply-chain development — sectors identified as key medium-term growth drivers.

Malaysia shapes Asean’s economic direction in 2025

Malaysia’s role as Asean Chair added regional significance in 2025, as the country steered the bloc through a period of geopolitical uncertainty while strengthening the region’s economic architecture.

Malaysia accelerated negotiations on the Asean Digital Economy Framework Agreement (DEFA), which is expected to unlock substantial growth in digital trade, enhance interoperability, and improve cross-border data governance.

The country also pushed for significant progress in upgrading the Asean Trade in Goods Agreement (ATIGA), long seen as essential for reducing non-tariff barriers and improving the flow of goods across the region.

In the energy sector, Malaysia revitalised the momentum for the Asean Power Grid, securing renewed commitments on cross-border interconnections and advancing discussions on renewable energy exchange.

Malaysia also deepened cross-border payment linkages by expanding QR payment interoperability across Asean, improving retail transactions, and supporting digital inclusion.

These regional achievements strengthened the country’s international economic profile and enhanced investor confidence during its chairmanship year.

2026: Stable outlook, but caution prevails

Looking ahead, Malaysia’s prudent fiscal and monetary stance — supported by a strong banking system — is expected to serve as the central macroeconomic anchor in 2026, underpinning both private consumption and investment.

Yeah forecasts GDP growth of 4–5 per cent next year, though he cautioned that risks remain from a global slowdown, financial market volatility, or renewed geopolitical tensions.

He said Malaysia’s most pressing challenge heading into 2026 will be firm-level productivity and competitiveness.

Nungsari said the next phase of growth depends on Malaysian firms becoming more innovative and resilient.

“We need more Malaysian firms doing new things and being strong enough to export with better margins so they can pay better wages. Policy has opened markets — now firms must rise to the challenge,” he said.

As Malaysia moves toward the 13th Malaysia Plan (13MP), which outlines the nation’s economic direction for 2026–2030 with a focus on value creation, digitalisation, talent development, and equitable growth, 2025 was less about headline numbers and more about laying the fiscal and institutional foundations for the next phase of transformation. — Bernama