Foreign direct investment in Malaysia may soften as global risks mount

PETALING JAYA, Malaysia (MNTV) — Foreign direct investment (FDI) in Malaysia is anticipated to remain subdued in the second half of this year, as foreign investors adopt a cautious stance amid uncertainties surrounding the US tariff policy and escalating conflict in the Middle East, reports The Star.

While the baseline 10% tariff on exports to the United States remains in place, the fate of the proposed 24% reciprocal tariff on Malaysia will only be known early next month. The outcome will be a crucial factor in determining FDI flows into the country.

The challenging investment climate is further intensified by the Israel-Iran war, which will likely prompt investors to take a wait-and-see approach before executing their investment strategies.

RAM Rating Services senior economist Woon Khai Jhek said that the second half of 2025 could potentially be tougher than the first, especially if US tariffs move into full swing and there is no meaningful rollback of protectionist policies.

“However, the softening is likely to be moderate rather than severe, thanks to a still healthy project pipeline and continued policy support. 

“The protectionist US measures, including the prospect of fresh ‘Trump‑era’ tariffs and renewed geopolitical tensions in the Middle East, will weigh on investment sentiment.

“The global volatility might prompt some multinational companies, especially in trade-exposed manufacturing, to defer investment decisions until policy clarity returns,” he added.

That said, Woon noted that Malaysia’s investment pipeline remains solid, judging by the numbers.

Total approved investments stood at 384.4 billion Malaysian ringgit ($84.4 billion) last year.

He said the momentum has continued this year, as investment approval amounted to 89.8 billion Malaysian ringgit ($19.7 billion) in the first quarter.

This suggests plenty of projects rolling into the second half of 2025, which should help underpin overall investment growth, he noted.

However, FDIs might come under renewed pressure as protectionist rhetoric from the United States and re-shoring push could prompt some MNCs to defer large greenfield or capacity expansion projects.

Woon said uncertainty surrounding tariff rates and the countries potentially targeted by US tariffs make investment decisions challenging, especially without clarity on the future policy landscape.

“Regions that are most vulnerable to potential global value chain shifts, such as the highly fragmented electrical and electronics (E&E) sector, face the highest risk of pullbacks. This could affect the sector’s expansion plans in the region, including in Malaysia,” he said.

Oversea-Chinese Banking Corporation Limited (OCBC) senior Asean economist Lavanya Venkateswaran said FDI inflows are likely to remain subdued in the second half of 2025.

She noted that although precise forecasts are difficult, foreign investors are expected to remain cautious in the near term.

“The investment climate is likely to remain challenging in the 2H25 (second half of 2025), similar to the 1H25 (first half of 2025). This is mainly because businesses remain in a wait-and-see mode on account of US tariff- related uncertainties.

“There has been a steady stream of foreign investment approvals into Malaysia’s E&E (electrical and electronics) manufacturing sector since 2021 and these investment flows are most at risk in the near term, in our view.”

Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the investment climate will be extremely challenging, as the 90-day pause on US tariffs is set to end in early July – before the global community can ascertain the final tariff rates.

Furthermore, the geopolitical conflict in the Middle East could easily tilt the balance of risks, he said.

Domestically, he noted, fiscal consolidation efforts such as fuel subsidy rationalization and higher expanded sales and service tax will increase the cost of doing business.

Business and consumer sentiments are expected to remain guarded in the near term, he added.

Afzanizam said FDI in the services sector will likely continue to perform well, driven largely by sustained interest in data centers dominating the investment landscape.