Economic, Monetary and Financial Developments in 2025

Global economic growth turned out better-than-expected in 2025. This occurred despite earlier concerns that higher trade barriers and heightened policy uncertainty would trigger a more pronounced slowdown (Chart 1.1). Although the United States (US) announced substantial import tariffs early in the year, the actual US effective tariff rate (ETR) was lower than initially expected and eased gradually by year-end.^[1] This helped to limit the negative impact on global trade activity. Global trade held firm in the first half of the year, aided partly by the frontloading of shipments ahead of tariff increases. As the boost from frontloading began to fade, a temporary pause in tariff implementation also supported trade activity toward year-end. Stronger-than-expected technology-related demand, driven by growing investments in artificial intelligence (AI) also lifted trade activity especially in the second half of the year. Resilient domestic demand in major economies played a role too. Continued real income growth as well as supportive fiscal and monetary policies helped bolster consumption and investment. Global inflation moderated as commodity prices eased amid improving supply conditions. Collectively, these factors helped cushion the impact of tariff-related uncertainties and geopolitical tensions, supporting global economic resilience and contributing to higher-than-expected global GDP and trade growth in 2025.

Growth in advanced economies moderated slightly in 2025. In the US, private consumption held broadly steady, underpinned by strong labour markets and healthy household balance sheets. Although employment growth weakened in the second half of the year, household spending remained firm. This was contributed by sustained wage growth, drawdown of household savings and positive equity wealth effects. Moreover, strong investments in information processing equipment and software also supported growth. The euro area continued its recovery as inflation moderated and monetary policy remained accommodative, although fiscal constraints and political uncertainties weighed on the pace of expansion.

Regional economies showed resilience despite global trade challenges. In China, production and demand were supported by strong frontloading activity early in the year and the government’s trade-in programme for household durables. However, growth remained modest compared to the previous year due to ongoing weakness in the property sector and subdued consumer confidence. In several Asian economies, easier financial conditions and targeted fiscal measures supported domestic demand. Meanwhile, supply-chain diversification and trade rerouting strategies helped mitigate the impact of tariffs on external demand.

Similarly, global trade performed better-than-expected as actual tariff outcomes were lower than earlier projections. This partly reflected the temporary pause in tariff implementation during specific periods and exemptions for certain products. Successful trade negotiations also helped to reduce ETR (Chart 1.2) and uncertainty. For example, the initial US tariff rates on China of 145% on 9 April declined to 20% on 10 November. Firms also adapted quickly by frontloading shipments, substituting from high-tariff to low-tariff items and utilising bonded warehouses to defer tariff payments. Of significance, technology-related demand also exceeded initial expectations and saw a steady increase as the year progressed. The global semiconductor market sales for 2025 expanded by 25.6% in 2025 (2024: 19.7%),^[2] driven by stronger sales of AI-related chips and data centre hardware. These combined factors supported trade activity even as the initial boost from frontloading gradually faded toward year-end (Chart 1.3).

Global headline inflation eased in 2025, reflecting improved commodity supply conditions, the absence of excess demand and lower imported costs following the broad weakness of the US dollar (Chart 1.4). Most economies experienced more pronounced disinflation throughout the year, reinforcing the downward trend in global inflation. In the US, however, early-year disinflation was short-lived.^[3] There were signs that tariffs were being passed through to consumers gradually, particularly in durable goods categories such as vehicles, electronics and furniture.^[4]

Global financial conditions eased further in 2025 amid continued global monetary policy easing in the face of  tariff-induced  volatility

In 2025, global financial conditions eased, supported by monetary policy accommodation from major central banks. This broad easing trend occurred against a backdrop of episodic volatility stemming largely from uncertainty over US trade measures and evolving expectations on the path of global monetary policy. Amid these factors, EMEs experienced portfolio inflows and currency appreciation, especially in the first half of the year.

The year began with expectations that global financial conditions would continue easing – in line with the trend seen towards the end of 2024 – driven by more accommodative monetary policy in major economies. However, this easing trend saw a reversal early in 2025 given the challenging external environment as uncertainty surrounding US trade policy weighed negatively on sentiment. This created uncertainties on the path of global monetary policy, especially the Federal Funds Rate (FFR). Financial market uncertainty then peaked in the second quarter when the US administration announced sweeping tariffs on nearly all trading partners, and signalled the likelihood of further measures.

The announcement led to a broad sell-off in  risk assets. This was most pronounced in the equity market, with the S&P 500 and Nasdaq recording their steepest declines since the pandemic (Chart 1.5). The US dollar also weakened substantially, with concerns over US fiscal policy sustainability worsening its decline. Investors rebalanced their portfolios towards alternative safe-haven assets such as the Swiss franc (CHF) and gold, while some emerging market economies (EMEs) also attracted inflows as investors diversified away from US dollar-denominated assets (Chart 1.6).

The 90-day tariff pause, announced just one week after the initial annoucement of tariffs, alongside subsequent announcements of trade deals with selected countries offered reprieve, reducing uncertainties and improving sentiment. Risk assets rebounded from the earlier sell-off, demonstrated by US equities rallying sharply following the announcement. The rebound was followed by a sustained increase in the S&P 500, in part driven by high valuations of AI-related stocks.

Global financial conditions subsequently eased, with this trend persisting towards the end of 2025. This was supported by synchronous easing of monetary policies by major central banks including the Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE). The ECB was the first to cut rates in April following the announcement of tariffs, with other advanced economy central banks following suit, including the BoE and the Reserve Bank of Australia (RBA). The Fed continued its path of gradual easing in September, followed by further cuts in October and December, reinforcing the global trend toward accommodative monetary conditions.

The ensuing shift in international capital flows and positive domestic economic prospects led to strong ringgit appreciation and inflows into the domestic bond market

Domestic financial markets were heavily influenced by the shifts in capital flows in 2025, as investors moved away from US assets amid trade-related uncertainties and global monetary policy easing. Amid this challenging global environment, Malaysia emerged as an attractive investment destination in 2025. In particular, Malaysia’s sound macroeconomic fundamentals and favourable economic growth prospects, anchored by domestic demand and steady momentum in investment activities, contributed to positive investor sentiment and helped attract portfolio inflows. Structural reforms, ongoing infrastructure projects, political stability and credibility also reinforced confidence in the country’s medium-term outlook. Further, Bank Negara Malaysia (BNM)’s ongoing coordinated efforts with the Government and corporates have also continued to balance two-way flows into the domestic financial market, including through the Qualified Resident Investor (QRI) programme.

In the foreign exchange market, the ringgit recorded the largest appreciation among regional currencies, having appreciated against the US dollar, and other regional currencies such as the Singaporean dollar, Korean won and the Indonesian rupiah (Chart 1.7). In the first half of 2025, the ringgit’s appreciation was driven by global investor interest in EME assets amid trade-related uncertainties. This trend continued into the second half of 2025, supported by the dovish stance and rate cuts by central banks of advanced economies, including the US Fed which resumed monetary easing in September. The ringgit’s overall performance was also supported by positive sentiment regarding Malaysia’s economic prospects, particularly as domestic reform efforts continued to gain traction. By year-end, the ringgit appreciated against the US dollar by 10.2% (2024: 2.7%). It also recorded a 6.3% gain on a nominal effective exchange rate (NEER) basis (2024: 7.5%) (Chart 1.7).

The domestic bond market also benefitted from global portfolio rebalancing. Net non-resident inflows into debt securities reached RM36.5 billion (2024: RM0.5 billion). Malaysian Government Securities (MGS) yields declined in the first half of 2025, in line with other regional peers. This was followed by a further decline as markets anticipated and adjusted to the OPR cut in July. Continued inflows in the second half of 2025 reinforced this trend. For 2025 as a whole, the 3-year, 5-year and 10-year MGS yields decreased by 48, 36 and 33 basis points respectively (Chart 1.8).

Following a strong 2024 performance, the domestic equity market experienced a modest pullback amid shifts in global risk aversion and non-resident outflows.  In the first quarter of 2025, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) declined as heightened global uncertainty weighed on investor sentiments. Conditions improved from the second quarter onwards, in line with the recovery in global equity markets as trade tensions eased. This was also supported by strong domestic corporate earnings, especially in the plantation and financial services sectors. Overall, the KLCI increased by 2.3% (2024: 12.9%) to close at 1680.1 points (Chart 1.9).

The Malaysian economy expanded by 5.2% anchored by resilient domestic demand

In 2025, Malaysia navigated a highly challenging global landscape marked by significant uncertainties and changing global trade dynamics. These developments affected exports performance and investment decisions. Despite these headwinds, the external sector remained resilient, supported mainly by E&E exports and inbound tourism. Domestic demand continued to anchor growth and cushioned the economy from external pressures. This was underpinned by positive labour market conditions, sustained household spending and steady investment momentum. The culmination of these factors enabled the economy to expand by 5.2% in 2025, above its long-term average of 4.9% (Chart 1.10).

Developments in Malaysia’s external sector partly reflected ongoing uncertainties and policy shifts surrounding US tariff measures. Following the US move to raise tariff on selected products and imposed a 24% reciprocal tariff on Malaysia, frontloading activity by US importers intensified. This boosted exports in the first half of 2025. As support from frontloading tapered off in the second half of 2025, the conclusion of negotiations to reduce reciprocal tariffs from 24% to 19% and to secure additional exemptions helped reduce uncertainties and restore confidence. Malaysia’s diversified exports structure provided continued resilience as weaker exports to the US were cushioned by higher exports to other markets (Chart 1.11).

Throughout 2025, Malaysia’s gross exports were supported by resilient performance in the E&E segment, driven by rising global technology demand and the rapid proliferation of AI-related applications. This contributed to higher demand and growth for exports of semiconductor, computer as well as machinery equipment and parts. This strength partly offset the drag from non-E&E segment, particularly for petroleum and chemical products, amid global excess capacity. Notably, China’s production has rapidly outpaced its domestic demand, while its exports are redirected to other markets given higher tariff environment. This has exerted downward pressure on prices, putting additional competition to Malaysia’s export performance.

Domestic supply shock from major planned maintenance activities, particularly at the Malaysia Liquified Natural Gas (MLNG) facility during the second quarter of 2025, temporarily affected mining-related production and exports. Nevertheless, production recovered more quickly than in previous maintenance cycles, supporting exports performance towards year-end (Chart 1.12). Beyond goods, services exports also expanded, buoyed by thriving inbound tourism and tourists spending, contributed in part by higher‑spending visitors from China and India. International tourist arrivals reached 26.6 million persons in 2025, exceeding the pre-pandemic level of 26.1 million persons in 2019. This was supported by improved air connectivity, visa exemption for selected countries and promotional efforts ahead of Visit Malaysia Year 2026. Higher information and communication technology (ICT) services exports amid continued data centre expansion also contributed to services export growth in 2025.

Meanwhile, gross imports growth was underpinned by the continued strength in capital imports, particularly for data centre and IT-related equipment. These imports supported investment activities in cloud services, ICT infrastructure and advanced manufacturing in E&E. On the other hand, growth in intermediate imports slowed partly reflecting base effect as well as lower demand for inputs amid weaker non-E&E and commodity exports. Nonetheless, overall nominal imports grew faster than nominal exports, leading to slightly lower goods surplus in 2025. Meanwhile, the services account recorded a surplus for the first time on an annual basis since 2011, following strong inbound tourism and exports from data centre companies. Together, these developments led to a higher current account surplus of 1.6% of GDP in 2025 (2024: 1.4%).

Domestic demand remained as the anchor of growth (Chart 1.13). Household spending was driven by higher employment and wage growth, especially in domestic-oriented sectors. Wage growth in services and domestic-oriented manufacturing^[5] increased by 4.5% and 2.9% respectively in 2025, supporting overall income growth. The civil servant salary adjustment, increase in minimum wage and policy support through the disbursement of cash transfers provided additional impetus to private consumption.

Domestic demand was further lifted by robust investment activities, which expanded well above its long-term average^[6] in 2025. Early in the year, global policy uncertainty led some firms to take a more cautious stance. Export oriented firms took the opportunity to reassess their investment plans, especially in the consumer-related, non-semiconductor E&E and steel industries. Some considered adjusting the timing of their machinery and equipment imports or cancelling investment plans.^[7] As tariff-related uncertainties eased later in the year, sentiments broadly improved and firms resumed their investment activity.

Overall, investment growth was supported by the steady progress of multi-year projects across both the private and public sectors, alongside ongoing rollout of initiatives under the national master plans. Investment momentum was further boosted by strong investment approvals recorded during the year. This reflected confidence in Malaysia’s investment landscape, particularly in high-technology services and advanced manufacturing sub-sectors. Investment approvals from previous years continued to translate into real activities in 2025, as indicated by robust construction activities and capacity expansion by firms. Notably, 84.9% of manufacturing investment projects approved by MIDA between 2021 and 2025 have progressed to various stages of implementation. Meanwhile, sustained government spending and strategic capital investments by public corporations continued to underpin public investment growth during the year.

Despite steady progress in multi‑year projects across both the private and public sectors, investment growth moderated in the year. The easing momentum reflects the near completion of several major public projects. The Government also prioritised essential infrastructure to enhance public services and support industrial activities, rather than introducing new mega projects. While these public sector initiatives are generally smaller in scale, they continue to support overall economic activity.

Domestic demand was the anchor for growth in 2025 as net exports declined

Despite the challenging global environment, the Malaysian economy expanded by 5.2% in 2025 (2024: 5.1%). Growth was anchored by resilient domestic demand, driven by continued household spending and investment activity. Meanwhile, net exports contracted as real import growth outpaced real export growth.

Private consumption grew steadily by 5.2% in 2025 (2024: 5.1%) supported by positive labour market conditions. Overall employment rose by 3.1% as more resilient domestic-oriented sectors helped to cushion the moderate growth in export-oriented sectors. Aggregate nominal wages expanded by 3.6% and 7.8% in the private and public sectors respectively. This also reflects support from income-related policies through the increase in minimum wage and civil servant salary adjustments under Phase 1 of Public Service Remuneration System (Sistem Saraan Perkhidmatan Awam, SSPA). In addition, household spending benefitted from higher policy assistance, particularly with the expansion of cash transfer schemes such as Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (SARA). Necessities expenditure remained the key driver of private consumption, rising by 5.6%, with higher spending on transport, food and non-alcoholic beverages, as well as communication. Meanwhile, discretionary expenditure grew by 6.7%, underpinned by higher spending on restaurants and hotels.

Gross fixed capital formation (GFCF) grew by 9.6% in 2025 (2024: 12%), driven by strong growth across both structures (11.1%; 2024: 15.3%) and machinery and equipment (M&E) (8.9%; 2024: 9.3%). Investment activities remained robust amid the ongoing investment upcycle in 2025.

Despite the heightened global uncertainty following the implementation of US tariffs, private investment expanded by 9.4% in 2025 (2024: 12.3%). Growth was driven by ongoing multi-year projects and investment activities in high-technology services and manufacturing sub-sectors such as data centre and cloud services under information and communications technology (ICT), and electrical and electronics (E&E). This was reflected in robust private sector construction work done (2025: 15.7%; 2024: 23%) and capacity expansion through the acquisition of new M&E, which resulted in continued growth in capital imports (2025: 29%; 2024: 29%).

Public investment grew by 10.3% in 2025 (2024: 11.1%), following robust capital expenditure by both the Government and public corporations. While some projects were nearing completion, growth continued to be driven by progress of ongoing infrastructure projects. This includes East Coast Rail Link (ECRL), Pan Borneo Highway Sabah, Johor Bahru–Singapore Rapid Transit System (RTS) Link and the Sarawak-Sabah Link Road (SSLR). In addition, growth was also supported by public corporations’ renewable energy and sustainability initiatives, such as large-scale solar and hydropower projects, and Hybrid Hydro-Floating Solar (HHFS) Photovoltaic systems.

Public consumption expanded by 6.6% in 2025 (2024: 4.7%), underpinned by higher spending on emoluments as well as supplies and services. Higher emoluments spending by the Federal Government was attributable to salary adjustments for civil servants under Phase 1 of the SSPA. Meanwhile, expansion in supplies and services spending was driven by higher expenditures on professional and administrative & support services, particularly in conjunction with ASEAN−Malaysia Chairmanship 2025.

 

Growth was driven by services and manufacturing sectors

Economic activity continued to expand in 2025, supported by sustained strength in services and manufacturing sectors amid resilient domestic demand, positive labour market conditions and continued recovery in tourism activity ahead of Visit Malaysia 2026.

The services sector grew by 5.5% (2024: 5.3%), driven mainly by stronger consumer-related subsector. This was attributed to positive labour market conditions, policy to raise income through higher minimum wage and civil servant salary increment under Phase 1 of SSPA, as well as cash transfer schemes such as STR and SARA. The subsector also benefitted from higher tourist arrivals, arising from promotional activities leading up to Visit Malaysia Year 2026 and expanded flight connectivity. In addition, Government-related services provided further support to growth following higher emoluments for civil servants under Phase 1 of the SSPA. On the other hand, business-related subsectors moderated during the year. Growth was weighed down by a moderation in the finance and insurance subsector due mainly to lower net interest income.

The manufacturing sector expanded by 4.5% (2024: 4.2%), underpinned by steady growth in both export‑ and domestic‑oriented industries. Growth in the export‑oriented segment was driven by strong E&E performance as demand for data centre and AI-related components continued to strengthen, alongside higher semiconductor investment. However, these gains were partly offset by moderation in the petrochemicals industry amid softer regional exports. Domestic‑oriented industries also expanded, due to resilient household spending, stronger tourism-related demand for food and beverages as well as transportation segments, and higher output of construction‑related materials in line with ongoing construction activity.

The agriculture sector grew by 2.2% in 2025 (2024: 3.1%), supported by sustained performance in most major subsectors. Growth in the oil palm subsector moderated, but remained positive despite adverse weather conditions in the first quarter of 2025. Conditions have since improved, supported by higher fresh fruit bunch yields, amid favourable weather and labour conditions. Other agriculture, livestock and fishing subsectors continued to grow, following higher output in paddy, fruits, vegetables, aquaculture and cattle. Growth was also lifted by ongoing efforts to strengthen the food supply chain and improve resilience in the agrofood industry. In contrast, the rubber as well as forestry and logging subsectors declined due to weaker production.

The mining sector expanded by 0.7% (2024: 0.9%), due to a strong recovery in oil and gas production, particularly in the second half of 2025 following maintenance activities in the second quarter of 2025. Natural gas production recorded higher growth, supported by the continued ramp-up in gas fields in Sarawak, while oil production also grew at a faster pace, driven by increased output from Sabah and Sarawak.

The construction sector continued to record a double-digit growth of 12.2% (2024: 17.5%), underpinned by the non-residential and special trade subsectors. Stronger expansion in the non-residential subsector was driven by industrial and commercial projects including the construction of data centres. Continued strong growth in the special trade subsector was supported by solar projects under the National Energy Transition Roadmap (NETR), small scale projects under Budget 2025 and large infrastructure projects that were nearing completion. Meanwhile, the civil engineering subsector continued to expand, but at a more moderate pace, as multi-year infrastructure projects particularly in the transportation segment approached completion.

 

Resilient labour market conditions in 2025

In 2025, positive labour market conditions provided robust support to economic growth, underpinned by continued gains in employment and income. Headline indicators pointed to broadly favourable conditions, alongside a further decline in the unemployment rate. Meanwhile, persistent structural frictions such as job matching and labour market segmentation continued to exert a drag on wage outcomes across worker groups.

Employment^[8] grew by 3.1% (+504,700 persons; 2024: 2.6%, +423,800 persons) while the labour force participation rate (LFPR) rose further to 70.8% in 2025 (2024: 70.5%) driven by individuals aged 55 to 64 years. The unemployment rate continued to trend down to 3%, remaining below its pre-pandemic levels (2024: 3.2%; 2019: 3.3%). By sector, the strongest employment gains were recorded in Services (2.5%; 2024: 1.7%), led by the wholesale and retail trade, and food & beverages and accommodation subsectors. Employment growth in Manufacturing improved slightly to 1.1% (2024: 1%), driven mainly by the electrical and electronic (E&E) products and food, beverage and tobacco sub-sectors.

By employment status, employees, which constitute the largest share of total employment (76%), grew by 2.4% (2024: 2.5%). This reflects continued labour demand in line with expansion in economic activity, alongside rising labour force participation.

Meanwhile, own-account workers recorded stronger employment growth (6.4%; 2024: 3.5%). A contributing factor is the role of own-account work as a partial safety net for employment such as part-time, gig or informal work. It serves to absorb excess labour supply from standard employment, consistent with the growth of the labour force (2.8%) and working age population (2.5%) expanding faster than standard employment (2.4%). The surge could also be attributed to a shift in worker preference with the rise in popularity of flexible work arrangements and autonomy, especially for the younger segment of the workforce. The gig economy also plays an important role as a source of supplemental income for workers seeking a second job. The Gig Workers Bill passed in Parliament in 2025 is expected to broaden social protection coverage for gig workers through the introduction of service agreements for any work conducted in the gig economy. The Bill is estimated to benefit around 1.2 million workers (7% of employed persons).

In 2025, the Social Security Organisation (SOCSO) reported average monthly vacancies of 119,095 (2024: 127,177) and average monthly job placements of 17,383 (2024: 17,068). Despite the unemployment rate trending downwards, a concurrent decline in reported vacancies suggests that labour market slack remains.^[9] This is consistent with ongoing frictions in matching employment demand with labour supply.

Overall wage growth strengthened in 2025, with aggregate nominal wages rising by 5.1%, driven by the public sector (7.8%; 2024: 4.9%) alongside private sector wages (3.6%; 2024: 2.9%). Several income-related policy measures were implemented during the year: the Civil Servant Salary Revision (CSSR) Phase 1 which led to an 8% increment for civil servants, the increase in minimum wage from RM1,500 to RM1,700 in February 2025, and the introduction of mandatory Employees Provident Fund (EPF) contributions for foreign workers at a rate of 2% for employers.

Within the private sector, wages in Services rose by 4.5% (2024: 3.6%), driven by wholesale and retail trade, while wage growth in Manufacturing improved to 2% (2024: 1.5%), supported mainly by the E&E products subsector.

Labour productivity growth, measured by value-added per worker, increased further in 2025 (3.4%; 2024: 2.4%). The improvement was broad-based across sectors, with notable gains in both Services (3.1%; 2024: 1.8%) and Manufacturing (3.7%; 2024: 2.6%). Labour productivity growth in construction moderated from the strong performance in 2024 to 11.2% (2024: 16.4%). Nevertheless, the momentum in productivity growth has yet to translate into matching wage gains. Cumulatively since 2019, productivity has grown 9%, but private sector real wage per worker has declined within the same period by 1.7%.

 

Current and financial accounts of the balance of payments

External sector remained resilient in 2025

Malaysia’s external position remained resilient despite challenges in the global environment. The current account balance registered a higher surplus of RM31.8 billion or 1.6% of GDP in 2025 (2024: RM27.7 billion, or 1.4% of GDP). This was supported by continued surplus in the goods account and a turnaround in the services account to a surplus. The primary and secondary income accounts continued to record deficits.

The goods account registered a lower surplus of RM110.9 billion (2024: RM114.5 billion) as imports grew faster than exports. The growth in exports (2025: 2.5%; 2024: 7.4%) was mainly supported by robust performance of the electrical and electronics (E&E) segment amid the continued demand for artificial intelligence (AI)-related technology, as well as the frontloading of shipments ahead of anticipated US tariff adjustments. This strength partly offset the drag from the non-E&E segment, particularly petroleum and chemical product exports, which continued to face competitiveness pressure arising from China’s excess capacity. Meanwhile, following strong growth in the previous year, imports growth moderated in 2025, partly due to a high base effect (3.1%; 2024: 10.2%). Nevertheless, import levels remained elevated. This was mainly driven by higher capital goods imports in line with the ongoing realisation of multi-year investment projects, particularly data centre investments.

The services account turned around to record a surplus of RM1.2 billion in 2025 (2024: -RM11.7 billion), supported by higher travel receipts of RM110.6 billion (2024: RM95.3 billion) on account of higher tourist arrivals, which rose to 26.6 million persons (2024: 25 million persons). The increase in ICT-related services exports to RM27.1 billion (2024: RM21.3 billion), supported by the operationalisation of data centres also provided support to the services account.

In the income accounts, the primary income remained in deficit at RM69.5 billion (2024: -RM66.1 billion). This mainly reflected continued investment income accrued to foreign investors in Malaysia, as non-resident-controlled exporters reported strong export earnings. Meanwhile, the secondary income account recorded a larger deficit of RM10.8 billion (2024: -RM9 billion). This was mostly explained by sustained outward remittances by foreign workers, offsetting inward remittances by Malaysians working abroad.

The financial account registered a higher net acquisition of foreign assets of RM21.4 billion (2024: -RM4.9 billion), mainly reflecting a turnaround in the other investment account which recorded an outflow, alongside continued portfolio investment outflows. These outflows were partially offset by larger direct investment inflows.

The direct investment account registered a net inflow of RM46 billion (2024: RM17.7 billion). Of significance, foreign direct investment (FDI) recorded a net inflow of RM53.5 billion (2.6% of GDP; 2024: +RM51.5 billion, or 2.7% of GDP). The sustained net inflows mainly reflected the continued interest of foreign investors in expanding their production capacity in Malaysia via new equity injections as well as mergers and acquisitions. Net FDI inflows for the year were mainly channelled into the services sector (2025: +RM55.3 billion; 2024: +RM40.8 billion). Within the services sector, inflows into the ICT services subsector rose (2025: +RM29.2 billion; 2024: +RM21 billion), amid capital spending on data centres. This is fuelled by global demand for data centre services given the growth of AI, expansion of cloud computing and digital transformation. Following a marked rise from 36.9% in 2023 to 51% in 2024, the share of data centre inflows in total net FDI remained stable in 2025 (RM27.3 billion, 51% of total net FDI inflows).^[10] Meanwhile, FDI flows into the financial and insurance activities subsector also improved (2025: +RM25.7 billion; 2024: +RM11.6 billion) mainly driven by higher equity injections into foreign investment holding companies.

Direct investment abroad (DIA) outflows were lower at RM7.4 billion (-0.4% of GDP; 2024: -RM33.9 billion, or -1.8% of GDP). The lower outflows were mainly driven by the settlement of short- and long-term loans as well as suppliers’ credits by foreign subsidiaries of resident MNCs. From a sectoral perspective, DIA in 2025 was mainly directed towards the services sector (2025: -RM10.9 billion; 2024: -RM28.9 billion) particularly the financial and insurance activities subsector (2025: -RM9 billion; 2024: -RM15 billion).

The portfolio investment account recorded a lower outflow of RM61.7 billion (2024: -RM84.1 billion) amid smaller investments abroad by residents (-RM86.4 billion; 2024: -RM107.3 billion). These investments were largely channelled into foreign equity securities (-RM78.5 billion; 2024: -RM62.9 billion), reflecting resident institutional investors’ asset diversification strategies. Meanwhile, net acquisition of domestic securities by non-resident investors was largely sustained (RM24.6 billion; 2024: RM23.2 billion), driven by higher non-resident acquisition of domestic debt securities (RM36.5 billion; 2024: RM0.5 billion), as foreign investors increased their exposures to emerging market bonds. These debt securities inflows were partially offset by a net liquidation of domestic equity securities (-RM11.9 billion; 2024: RM22.7 billion) amid heightened uncertainties arising from increasing trade tensions.

The other investment account turned around to record a net outflow of RM5.9 billion (2024: +RM58.7 billion). This is mainly attributable to higher interbank lending by Labuan offshore banks, as part of their ‘out-out’ financing activities.^[11] These outflows were partially offset by inflows in the form of higher borrowings of intercompany loans from non-related entities.

 

Improvement in Malaysia’s net international investment position

As at end-2025, Malaysia’s net international investment position (IIP) recorded a lower net external liability position of RM9.6 billion, equivalent to -0.5% of GDP (end-2024: -RM11.7 billion, equivalent to -0.6% of GDP). This was driven by the increase in external assets of RM85.2 billion arising mainly from residents’ purchases of foreign equity securities following institutional investors’ asset diversification strategies, as well as positive price valuation effects after higher portfolio equity security prices. This was offset by the increase in external liabilities of RM83.1 billion, primarily driven by non-resident investors’ equity injection into the services sector, notably the ICT as well as financial and insurance services.

The net foreign currency (FCY) external asset position^[12] stood at RM1,314.6 billion, or 0.6% of GDP as at end-2025 (2024: RM1,261.4 billion, or 0.7% of GDP). The increase in net FCY external asset position was driven mainly by larger acquisition of portfolio equity securities abroad. This was partially offset by exchange rate valuation effects amid ringgit appreciation.

Malaysia’s external debt amounted to RM1,394.8 billion as at end-2025, or 68.9% of GDP (2024: RM1,350.2 billion, or 69.9% of GDP). The increase in the level of external debt was due mainly to acquisition of domestic debt securities by NR investors, primarily in Malaysian Government Securities (MGS) as well as increased interbank borrowing that largely reflect the inflows by Labuan International Business and Financial Centre (LIBFC). This underscores LIBFC’s role as Malaysia’s offshore financial hub facilitating subsequent lending through ‘out-out’^[13] transactions. In addition, the increase in external debt was partly due to higher intercompany loans by firms in the ICT services industry, mainly to finance data centre investments, reflecting continued momentum in Malaysia’s digital-economy expansion. However, these flows were partially offset by exchange rate valuation effects following the appreciation of the ringgit against selected major currencies especially the US dollar, which reduced the ringgit-denominated value of FCY liabilities.

Risks surrounding Malaysia’s external debt remained contained, premised upon the favourable maturity and currency profiles of the debt. First, a high share of medium- and long-term external debt (57.3%; 2024: 57.4%) reduces rollover risks (Chart 5a). Meanwhile, Malaysia’s short-term external debt (42.7% of total external debt; 2024: 42.6%), primarily driven by the private sector, is backed by strong external buffers and are subject to strong prudential and regulatory frameworks.^[14] Second, about a third of external debt was denominated in ringgit (32.8%; 2024: 31.2%), and therefore not affected by fluctuations in the ringgit exchange rate (Chart 5b), while FCY exposures are prudently managed through hedging instruments. Notably, 59.6% of FCY denominated external debt is governed by a comprehensive regulatory framework and subject to macroprudential surveillance^[15] by BNM (2024: 60.5%). This ensures the banking sector remains resilient and corporate borrowings are adequately hedged, supported by sufficient earnings, and directed towards productive purposes. Moreover, intercompany loans accounted for 19.2% of FCY external debt, which are generally more stable and on concessionary terms (i.e. fixed rates and low risk of sudden changes in terms and conditions) and thus reduces refinancing and credit risks (2024: 18.7%). Around 14.3% of FCY-denominated external debt is backed by export earnings, providing a natural hedge against currency risk (2024: 13.7%). As at end-2025, the external debt-at-risk^[16] for banks and corporates amounted to RM87 billion and RM5.7 billion, respectively (2024: RM103 billion and RM7.8 billion, respectively).

BNM’s international reserves amounted to USD125.5 billion (or RM509.8 billion) as at end-2025 (2024: USD116.2 billion, or RM520.1 billion). This was sufficient to finance 4.6 months of imports of goods and services and was 0.9 times the short-term external debt. Notwithstanding this, other means of meeting external obligations remained available and continued to be strengthened. The progressive liberalisation of Foreign Exchange Policy (FEP) has led to the accumulation of sizeable non-reserve external assets by the private sector. In particular, the accumulation of FCY external assets by banks and corporates, with the liquid portion amounting to RM1,066.3 billion,^[17] can be drawn upon to meet banks and corporates’ short-term debt obligations of RM594 billion, without creating a claim on international reserves (Chart 6).

 

Headline inflation moderated further in 2025, while core inflation increased marginally

Headline inflation moderated further in 2025, averaging at 1.4% (2024: 1.8%), below its historical average (2011–19 average: 2.2%). This slowdown was largely driven by a continued improvement in global supply conditions and the disinflationary impact from selected domestic policy adjustments. Lower global commodity prices and easing energy costs led to a decline in domestic fresh food prices (2025: -4.4%; 2024: 2.5%) and slower growth in selected administered prices (fuel and utilities) (2025: 1.6%; 2024: 3%) (Chart 1.14). Easing global cost conditions also led to lower production costs. This was reflected in the 2% decrease in the Producer Price Index (2024: 0.3%). The decline was mainly attributed to global oil oversupply, which lowered fuel costs for producers. The relatively strong ringgit also helped contain import costs for raw materials.

While earlier expectations suggested that domestic policy adjustments could cause inflation to rise, their overall impact was much weaker than expected.^[18] This owed mostly to the design of policy measures such as the electricity tariff restructuring and the RON95 subsidy rationalisation, which correspond to the Government’s intent to cushion households from the impact of policy reforms. The electricity tariff restructuring brought electricity costs down for most households from lower domestic tariff rates and rebates for lower electricity usage under the Energy Efficiency Incentive.^[19] The phased rollout of the BUDI95 programme, particularly the introduction of a lower subsidised RON95 price of RM1.99 per litre for all eligible Malaysian citizens, contributed to lower fuel inflation during the year.

Underlying inflation, as measured by core inflation, registered a slight increase to 2% in 2025 (2024: 1.8%), converging to its long-term average. By component, the increase was driven by continued contributions from higher-weight services components, including food away from home (2025: 4.1%; 2024: 3.6%) and rental (2025: 2%; 2024: 1.7%). The moderate trend in core inflation reflected the continued strength of domestic demand, supported by positive labour market conditions and policies that boosted household purchasing power. Overall, price pressures were broadly contained. Inflation pervasiveness continued to trend below its long-term average. The share of CPI items recording monthly price increases trended lower for most of the year and below historical norms (2025: 42.1%; 2024: 43%; 2011–19 average: 45.6%) (Chart 1.15).

Monetary policy is supportive of the economy amid price stability

In 2025, the Overnight Policy Rate (OPR) was reduced by 25 basis points to 2.75% in July as a pre-emptive measure to preserve Malaysia’s steady growth path in a challenging external environment amid domestic price stability.

Throughout the year, the MPC closely monitored the volatile external environment and remained vigilant on the potential implications to Malaysia’s economic outlook. The domestic economy was assessed to be facing external headwinds from a position of strength, with growth supported by sustained domestic demand and resilient exports. While the domestic economy remained on a strong footing, the MPC assessed at its July 2025 meeting that uncertainties surrounding tariff measures and geopolitical developments posed considerable downside risks to growth prospects. The prevailing benign inflation environment provided the opportunity for the MPC to focus on ensuring domestic growth remained on a firm trajectory by reducing the OPR by 25 basis points. Over the rest of the year, Malaysia’s economy remained anchored by continued spending and robust investment activities, while inflation stayed moderate. Overall, the monetary policy stance was deemed appropriate and supportive of the economy.

Domestic monetary and financing conditions remained conducive to financial intermediation. At the system level, aggregate outstanding liquidity placed with BNM eased to RM93.5 billion (2024: RM107.5 billion) (Chart 1.16). The lower level of outstanding liquidity reflected banks reducing borrowings from BNM following the reduction in the Statutory Reserve Requirement (SRR) ratio from 2% to 1%, effective 16 May 2025. The easing in SRR facilitated more effective liquidity management by banks. At the institutional level, most banks continued to maintain surplus overnight placements with BNM.

Interbank rates trended lower in the first half of 2025 from end-2024 levels as seasonal year-end deposit competition subsided and banks priced in expectations of a lower OPR. Thereafter, interbank rates continued to ease following the OPR reduction in July. The 3-month KLIBOR decreased by 24 basis points within one day of the OPR reduction and declined further until end-October 2025. Towards year-end, the 3M KLIBOR edged higher marginally. Nonetheless, the increase was more moderate than in previous years, following less intense seasonal deposit competition amid easier liquidity conditions and pre-emptive accumulation of deposits by banks.

Correspondingly, deposit rates also decreased following the OPR reduction, with retail board fixed deposit (FD) rates, declining by between 33 and 37 basis points across tenures of 1 to 12 months. As a result of lower interbank and deposit rates, banks’ overall cost of funds eased during the year. The strong transmission of the OPR reduction to interest rates was also reflected in reference rates such as the Standardised Base Rate (SBR), Base Rate (BR) and Base Lending Rate (BLR), which adjusted fully. Consequently, the weighted average lending rate (ALR) on outstanding loans decreased by 26 basis points (Chart 1.17), while lending rates for new loans also moderated, particularly for businesses.

Continued expansion of credit to the private non-financial sector amid a resilient domestic economy and lower OPR

Credit to the private non-financial sector grew by 5.4% year-on-year in 2025 (2024: 5.2%), in line with the resilient domestic economy and lower borrowing costs following the reduction in the OPR. Outstanding loans^[20] grew by 5% (2024: 5.7%), remaining as the largest contributor to overall credit growth (Chart 1.18). Meanwhile, growth in outstanding corporate bonds increased to 6.9% (2024: 3.4%), following several large issuances for capital expenditure across sectors. These issuances were supported by lower corporate bond yields and greater flexibility in structuring bonds to better align with issuers’ financing needs.

Among borrower segments, households remained the primary contributor to loan growth during the year, with outstanding household loans growing by 5.6% (2024: 5.9%) (Chart 1.19). Notwithstanding the slight moderation, household credit demand remained firm, as reflected in higher loan applications, particularly for the purchases of houses and cars. This was supported by positive labour market conditions, income-related policy measures and lower lending rates. Higher household loan applications continued to be met by increased approvals.

For businesses, growth in outstanding loans moderated to 3.9% (2024: 5.2%) (Chart 1.20). This is mainly following slower growth in working capital loans among non-SMEs, particularly in the consumer goods and primary manufacturing sectors. Despite the softer loan growth, fund-raising activities in the corporate bond market remained sustained in these sectors. Meanwhile, working capital loan growth remained sustained among SMEs. Business loan growth for investment-related purposes^[21] also moderated, but remained above pre-pandemic levels. This reflected robust private investment activities, particularly in sectors such as electrical and electronic (E&E), real estate and construction. Ongoing implementation of public investment projects under the New Industrial Master Plan (NIMP) and the National Energy Transition Roadmap (NETR) also helped boost investment appetite.

Overall, credit conditions remained supportive of household and business financing needs. Lending activities were underpinned by banks’ healthy capital and liquidity buffers, ensuring continuous access of credit to creditworthy borrowers. Banks continued to provide repayment assistance for existing borrowers facing difficulties in servicing their debt obligations. Various debt advisory and management arrangements, including those under Credit Counselling and Debt Management Agency (AKPK) also remained in place. Among SMEs, financing measures, including credit guarantees and Bank Negara Malaysia’s financing facilities remained available to offer targeted assistance.

Notes

^[1] Between February and April 2025, the US announced major tariff measures on trading partners (Chart 1.2). However, based on World Trade Organization estimates, the actual US ETR, which takes into account reciprocal tariff rate, product tariff rate and tariff exemptions, eased to around 17.4% towards the end of the year.

^[2] Based on Semiconductor Industry Association (SIA) and World Semiconductor Trade Statistics (WSTS) Autumn 2025 report.

^[3] US headline Consumer Price Index (CPI) inflation accelerated to 2.8% in the second half of the year, higher than the 2.6% recorded in the first half and long-term average (2011–2019: 1.8%).

^[4] Based on ‘How Tariffs Are Affecting Prices in 2025’, Federal Reserve Bank of St. Louis (2025).

^[5] Include wages in manufacturing of (i) non-metallic mineral products, basic metal and fabricated metal products; (ii) food, beverages and tobacco; and (iii) transport equipment and other manufactures.

^[6] Gross fixed capital formation expanded by 9.6%, higher than long-term average of 6.8% (2011−19).

^[7] Based on engagements with 109 firms by BNM’s Regional Economic and Industry Surveillance team between March and October 2025.

^[8] The employment data series from the Labour Force Survey (LFS) underwent a rebasing exercise (incorporation of revised population benchmarks to the growth rate of the labour force and working-age population) beginning from January 2025 which was retrospectively applied to the 2024 data. This aligns the LFS with the latest Population and Housing Census of Malaysia 2020.

^[9] A decline in the unemployment rate would typically be associated with tighter conditions due to higher utilisation of the workforce. Conversely, a reduction in vacancies means an easing of demand in the labour market. A simultaneous reduction in vacancies relative to unemployed persons suggests that labour market slack persists.

^[10] For more details on the economics of data centres, kindly refer to BNM’s Third Quarter of 2025 Quarterly Bulletin box article entitled ‘From Bytes to Bucks: The Economics of Data Centres in Malaysia’.

^[11] ‘Out-out’ refers to the placement of externally sourced funds with external counterparties.

^[12] As measured by external assets in FCY less external liabilities in FCY.

^[13] ‘Out-out’ refers to the placement of externally sourced funds with external counterparties.

^[14] Further details on the drivers of Malaysia’s short-term external debt are available in the box article entitled ‘Malaysia’s Short-Term External Debt: Some Insights on Its Key Drivers’ in BNM’s Third Quarter of 2025 Quarterly Bulletin.

^[15] For more details on Malaysia’s external debt management, please refer to the ‘Malaysia’s Resilience in Managing External Debt Obligations and the Adequacy of International Reserves’ box article in BNM’s Annual Report 2018.

^[16] Corporates’ external debt-at-risk refers to offshore loans raised and bonds issued by high-risk corporate borrowers. Banks’ external debt-at-risk refers to external debt that is more susceptible to sudden withdrawal shocks, such as financial institutions’ deposits, interbank borrowings and short-term loans from unrelated non-resident counterparties.

^[17] Corporates and banks’ liquid external assets, comprising portfolio investments as well as currency and deposits.

^[18] During the year, the Government implemented several policy reforms including the rationalisation of RON95 fuel subsidies, restructuring of electricity tariffs, adjustment of water tariff rates, expansion of the Sales and Service Tax (SST), and removal of egg subsidies.

^[19] Under the Energy Efficiency Incentive, domestic households that consume less than 1,000 kWh per month are eligible for a rebate of up to 25 sen per kWh.

^[20] The figure on outstanding loans reported here under credit to the private non-financial sector also includes loans to households extended by major non-bank financial institutions (NBFIs). This is in addition to the sum of outstanding business and household loans extended by banks and development financial institutions (DFIs).

^[21] Comprises loans for the purchase of non-residential properties, residential properties for business use, fixed assets as well as for construction activities.