Malaysia: Navigating trade crosswinds on the back of a domestic investment boom

Stephen Innes SPI Asset Management

Malaysia’s economic narrative heading into mid-2025 is less about exports and more about what’s happening under the hood. While global trade headwinds remain a persistent drag—especially with the specter of U.S. tariffs returning to the stage—the domestic engine is firing on all cylinders. The standout: a policy-fueled investment cycle that’s not just humming, but accelerating.

Fixed investment growth (+9.7% YoY in Q1) has decisively overtaken private consumption (5.0% YoY), marking a structural pivot that began in 2024 and has been building momentum since 2023. Investment levels are now cruising above long-term trend lines, with total approved investments up 16.5% in 2024—an eye-watering 83% above pre-COVID 2019 levels. That’s not noise. That’s a bona fide capital formation surge.

Critically, this isn't just a headline boost—it’s translating into real GDP traction. The high realization rate of approved investments is feeding directly into output, and the momentum looks sticky for 2025. Domestic players are driving the charge, absorbing the slack from export-facing firms still grappling with global volatility. Over half of approved ICT investments in 2024 came from local corporates, underscoring a homegrown digital pivot. Yet foreign direct interest hasn’t vanished—foreign ICT investment rose a solid 30% YoY.

Still, the external picture is far from calm. U.S. tariffs remain a major swing factor, with 9% of Malaysia’s GDP tethered to potentially affected U.S. exports. Add to that the knock-on effects of higher U.S. tariffs on China, and Malaysia’s deep integration in China's supply chain becomes a double-edged sword. Sectors like electrical goods, machinery, and high-tech optics are particularly exposed to downstream demand shocks.

On policy, Bank Negara Malaysia (BNM) turned dovish in May—rightfully so, given global fragility. But with inflation easing (1.4% YoY in April) and the subsequent U.S.-China tariff cooldown, there’s room for BNM to sit on its hands for now. Their May signal was clear: they’re on standby mode, not full pivot. A rate cut is in play only if growth materially disappoints.

The ringgit, meanwhile, is finally catching a break. With the USD on the back foot, tariffs de-escalating, and capital inflows into bonds and FX deposits rising, there’s a tangible floor forming under MYR. Foreign appetite for Malaysian debt remains robust—witness the 3.3x bid/cover on May’s 20-year GII auction—and foreign holdings of local government bonds have ticked back up to 21.5%, reversing the February dip. FX stability is also getting a boost from record-high foreign currency deposits, now 11.6% of total bank deposits.

Malaysia isn’t immune to global fragility, but it’s not a sitting duck either. The domestic investment cycle has taken the wheel. If the trade war cools and global risk sentiment remains stable, Malaysia may continue to navigate the delicate balance between global volatility and domestic resilience. The ringgit, for once, has a shot at playing offence.

Author

Stephen Innes

SPI Asset Management

With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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