Worldbox Country Risk Climate August 2026
MALAYSIA
Summary
Overall Risk Score
32/40 – Stable (Unchanged)
| Political risk: 8/10 – Stable (Unchanged)
Economic risk: 8/10 – Stable (Unchanged) Commercial risk: 8/10 – Stable (Unchanged) Technology risk: 8/10 – Stable (Unchanged) A country’s risk rating is based on four areas: political, economic, commercial and technological risk. Each area is scored from 1 to 10, where 1 is the highest risk and 10 is the lowest. |
ESG Risk: 8/10 – Stable (Unchanged)
Environmental, social and governance (ESG) risk is increasingly important to companies, investors and consumers across Southeast Asia. Our quarterly country risk reports therefore include a separate ESG score and analysis of each country’s environmental, social and governance performance, along with recent developments. |
Political Risk August Update
Stable at 8
Prime Minister Anwar Ibrahim suffered a setback to his authority in May when parliament narrowly rejected a constitutional amendment that would institute a two-term limit for prime ministers, a key part of Anwar’s reform agenda. As the Diplomat publication points out Malaysia currently does not have term limits. The country’s first prime minister, Tunku Abdul Rahman, led the country for about 13 years, from 1957 to 1970, while Mahathir Mohamad served a combined 24 years from 1981 to 2003 and 2018 to 2020.
The proposed amendment was part of a package of reforms that Anwar announced in January as priorities for his government in 2026. This also included pledges to separate the powers of the attorney-general and public prosecutor, establish an ombudsman’s office, and introduce a freedom of information law. The Diplomat said that the promises were a response to growing criticisms that Anwar’s government has failed to implement the reforms that it pledged before taking office in late 2022. In December, the Democratic Action Party (DAP), an important part of Anwar’s Pakatan Harapan coalition, threatened to “reconsider” its position in the government if Anwar failed to deliver meaningful reforms within the next six months.
The Diplomat added that there have also been complaints that Anwar’s administration has gone soft on corruption, after the dropping of charges in a number of important cases, including one involving Deputy Prime Minister Ahmad Zahid Hamidi, an important member of Anwar’s ruling coalition.
Political Risk – Context
Malaysia consists of two regions, peninsular Malaysia and the states of Sabah and Sarawak, which lie on the island of Borneo. It is a multi-ethnic, multi-religious federation encompassing a majority ethnic Malay population in most of its states and an economically powerful Chinese community. Ethnic Indians are the next largest group in the country. Since 1971 Malays have benefited from positive discrimination in business, education and the civil service.
Malaysia appears to have finally entered calmer political waters after experiencing significant political turbulence since 2018. It is also on course to transition from entrenched dominant-party rule to a competitive, multi-party democracy. The United Malays National Organisation (UMNO) dominated the political environment from independence in 1957 until 2018, when it was ejected from office amid corruption scandals. Veteran politician Anwar Ibrahim became the country’s fifth prime minister in less than five years in November 2022.
The next general election is not due until February 2028 but there is growing speculation that Anwar may call an election in 2027, to exploit divisions within the opposition. One of the main opposition parties, Bersatu has seen a rupture between Bersatu president Muhyiddin Yassin and the former deputy president Hamzah Zainudin, who has been expelled from the party and is planning to form a new grouping with 19 MPs from Bersatu. Parti Islam (Pas), which wants to turn Malaysia into an Islamic state, remains a significant political force, especially among rural Malay voters. However, economic underperformance and persistent infrastructure issues such as water supply disruptions in Kelantan, are undermining its appeal. Anwar may also seek to exploit the strong economic background to gain a larger majority in parliament.
Arguments for planning the election in 2027 include the impact of the Middle East war on the economy. A survey has revealed that 70% of Malaysian respondents are concerned about rising cost-of-living pressures and these concerns are likely to increase further as fuel costs climb. Anwar’s anti-corruption credentials have also taken a beating recently. Bloomberg has reported that Anwar sought to delay the release of findings from an investigation into the country’s anti-corruption chief. The reports have been strongly denied by the government, which has threatened legal action. However, Anwar’s reputation had already taken a hit in February after a series of Bloomberg reports alleged wrongdoing involving anti-corruption officers.
Economic Risk August Update
Stable at 8
The economy expanded by 4.9% in 2025, according to the IMF, supported by strong domestic demand and a global tech-sector upcycle. Inflation remained low and stable, with average headline inflation at 1.4% in 2025, amid declining food and fuel price inflation. The IMF added that growth is expected to be resilient in the near term, supported by strong domestic demand, while slowing marginally to 4.6% in 2026 due to higher US tariffs and a moderately contractionary fiscal policy stance. Inflation is projected to remain low and stable at 1.9% in 2026.
These projections were made before the outbreak of the war in the Middle East, which is likely to lead to lower economic growth and higher inflation. Slower global growth will hit Malaysian exports, while higher energy costs will dampen domestic demand and squeeze business profits. However, the impact will be mollified by Malaysia’s good relations with Iran. Tehran says it will allow free passage of tankers carrying oil to Malaysia through the Straits of Hormuz. Malaysia is still being hit by the war through prices, tighter supply and a swelling subsidy burden. Food and other manufacturers have urged the government to stabilise diesel prices and provide temporary relief, saying the shock was now affecting transport, packaging and raw materials.
S&P Global Market Intelligence has said that Malaysia’s manufacturing sector performance in the coming months will be partly shaped by how the situation in the Middle East unfolds. Manufacturing production rose for the second consecutive month in April, with the rate of growth the strongest since December 2021. The expansion was attributed to strategic stockpiling by both manufacturers and their clients, as the war in the Middle East contributed to material shortages and rising prices. However, the ratings agency noted that with supply-chain disruptions widespread, firms continued to see stocks of inputs decline. Higher energy and material costs due to the war have contributed to a marked increase in prices in April, causing the pace of input cost inflation to hit a 45-month high.
Despite this background, the central bank raised its growth forecasts for the economy at the end of March 2026, saying it anticipated growth of between 4 and 5%, up from the previous estimate of between 4% and 4.5%. According to the central bank, Malaysia is approaching current global uncertainties from a “position of strength”, supported by a resilient banking system and a solid base of institutional investors. Key drivers for this continued momentum include steady household spending, a resurgent tourism industry, and a high global demand for Malaysian electrical and electronic exports.
It expects inflation to remain under control throughout 2026, with headline inflation projected to average between 1.5% and 2.5%. The central bank maintained the Overnight Policy Rate at 2.75% for the fourth consecutive meeting in March. This stability follows a rate cut in July 2025 intended to buffer the economy against US tariffs. Rates remained unchanged in August and the central bank is expected to hold rates at 2.75% for the rest of the year.
Malaysia has jumped eight places in the 2026 IMD World Competitiveness Ranking, marking its strongest performance in recent years. The country ranked fourth globally in economic performance, while government efficiency rose 11 places to 14th, business efficiency advanced 16 places to 16th and infrastructure improved two places to 33rd.
Economic Risk – Context
Once dependent on commodities, Malaysia has a diversified economy, with services accounting for around half of GDP and manufacturing another quarter. Agriculture and mining account for much of the remainder. Malaysia is also one of the most open economies in the world, with a trade-to-GDP ratio averaging over 130% since 2010. Openness to trade and investment has been instrumental in employment creation and income growth, with about 40% of jobs in Malaysia linked to export activities, according to the World Bank.
A report from Monash University in Australia argues the government’s recent decision to tighten rules on the hiring of expat workers will not solve Malaysia’s labour problems. The article by Andrew Woon, a Senior Lecturer at the University’s School of Business, says that while the intention to prioritise local talent is understandable, the real constraint on economic competitiveness lies elsewhere and risks being overlooked. Woon says the real issue is not the relatively small pool of about 140,000 high-income expatriates, who contribute significantly through taxes, consumption, skills transfer and participation in high-value sectors.
Rather, Malaysia’s structural weakness lies in its longstanding dependency on more than 2.1 million low-skilled foreign workers, a reliance that has consistently suppressed productivity growth and discouraged technological adoption. When labour remains cheap and abundant, firms face little incentive to automate, digitise or upgrade processes, says Woon. The result is a labour market dominated by low-wage, low-skill roles, with limited pathways for advancement. Productivity stagnates, wages remain constrained and value creation plateaux.
He adds that “this dynamic also intersects directly with Malaysia’s persistent brain-drain problem. The country’s brain-drain rate stands at 5.6% of the population, well above the global average of 3.6%. While tightening expatriate rules is framed as a mechanism to “encourage the hiring of locals” and boost incomes, restricting access to foreign talent doesn’t address why skilled Malaysians leave in the first place. At the heart of this issue is economic structure. A workforce composition heavily skewed towards low-skilled foreign labour creates a ripple effect across industries”.
Woon says that firms optimise for cost minimisation rather than innovation. Investment flows into labour-intensive activities instead of automation or research and development. Over time, this crowds out opportunities for engineers, researchers, designers and managerial talent – precisely the profiles Malaysia hopes to retain. Woon concludes that if Malaysia is serious about creating a sustainable, high-income future, policy attention must shift decisively toward digitalisation, automation and industry upgrading. He says three priorities stand out:
- First, labour-intensive sectors such as manufacturing, agriculture and infrastructure must accelerate technological adoption. These industries face chronic labour shortages, yet remain locked into cycles of low productivity and low wages. Automation, robotics and digital systems offer a pathway to break this cycle, but only if labour policy actively incentivises transition rather than substitution.
- Second, economic transformation requires targeted, sector-specific solutions, not blanket restrictions. Highly-specialised talent in fields such as semiconductors, advanced manufacturing and finance plays a critical role in building domestic capabilities. Broad-based tightening risks deterring exactly the expertise needed for industry upgrading. Today, elementary occupations still account for nearly half of the foreign workforce, underscoring where reform efforts should be concentrated.
- Third, achieving the government’s goal of reducing the share of foreign workers in the workforce from 14.1% to 5% by 2035 is only feasible if industries successfully transition away from manual labour. Without automation, reducing foreign worker quotas would simply raise business costs, slow project delivery and undermine competitiveness without improving job quality or wages for locals.
Woon points to the success of Singapore as offering a compelling example of how global talent can complement, rather than displace, a domestic workforce.
Malaysia attracted a record MYR426.7bn (US$106bn) in approved investments for 2025, an 11.0% increase from MYR384.4bn (US$95.5bn) in the previous year. Top FDI sources include Singapore (MYR302.3 billion), followed by Hong Kong (MYR148.4 billion) and Japan (MYR103.8 billion). The services sector remains the primary magnet for foreign capital, accounting for 55.0% of total FDI. The manufacturing sector follows at 38.2%, with mining & quarrying making up 4.0%.
Foreign Direct Investment (FDI) into datacentres is a key driver of the investment growth and this shows no sign of slowing up. In February 2026, the Asean+3 Macroeconomic Research Office said that investments in data centres and semiconductors in Malaysia remain resilient despite uncertainties stemming from US tariffs and tighter technology controls. Its chief economist said the global technology upcycle is likely to persist, offering Malaysia a window of opportunity to attract sustained FDI into data centre and semiconductor-related industries.
Malaysia has restricted new data centre developments not related to artificial intelligence for the past two years or so to manage power and water consumption. Prime Minister Anwar Ibrahim confirmed in February 2026 that “all new applications that were not related to AI have already been stopped,” with approvals only granted to projects offering high-technology benefits related to AI. In Johor, state authorities have imposed tighter requirements on water and power use for new data centres to prevent strain on local resources.
Commercial Risk August Update
Stable at 8
S&P Global Ratings has said Malaysia is unlikely to get a credit rating upgrade in the next one to two years unless it strengthens its external financial indicators, which have been affected by heavy foreign inflows into its bond market, while also maintaining strong economic growth and fiscal discipline.
The rating agency has maintained its A- rating with a stable outlook for Malaysia.
Commercial Risk – Context
Malaysia benefits from good infrastructure, an English-speaking business and consumer environment, and a well-established legal framework. However, the implementation of national policies varies from state to state, with Kuala Lumpur regarded as the easiest place in which to conduct business.
Corruption remains a challenge: Malaysia ranked 54th among 180 countries in Transparency International’s Corruption Perceptions Index (CPI) for 2025, moving up from 57th place in the previous year. Transparency International, the global anti-corruption coalition, argues that Malaysian politicians continually fail to combat corruption because influence and alliance-building trump accountability. Bribery is perceived as a standard business practice, while 71% of Malaysians believe officials are highly corrupt, according to a report by The Diplomat.
The Heritage Foundation ranked Malaysia as the 45th freest economy in its 2026 Index of Economic Freedom. The country scored 68, an increase of 0.9 points from last year. Malaysia is ranked 8th out of 39 countries in the Asia-Pacific region. The country’s economic freedom score is higher than the world and regional averages. Malaysia’s economy is considered “moderately free” according to the 2026 Index.
Technology Risk August Update
Stable at 8
Support from the Japanese government and industry is critical for Malaysia to build its capabilities in advanced technologies like semiconductors, AI, quantum computing, and advanced packaging, Prime Minister Anwar Ibrahim said at the Nikkei Forum in Tokyo. Anwar added that Malaysia is developing capabilities in quantum technologies, and that the energy transition is another key driver of Malaysia’s next phase of growth, supported by the country’s existing strengths in the energy sector.
Technology Risk – Context
The Global Innovation Index (GII), from the World Intellectual Property Organization, is an important index used by countries and multinational companies to assess innovation ecosystems and aid in policymaking and investment decisions.
Malaysia ranked 34th out of 139 countries in the 2025 GII and ranks 8th among the 17 economies in South East Asia, East Asia, and Oceania. It ranks 2nd among the 36 Upper middle-income group economies.
Government policies
The government ‘s 13th Malaysia Plan, released in August 2025, sets ambitious technological targets. The government aims for AI adoption to be integrated across key sectors including manufacturing, agriculture, healthcare, education, finance, security, housing, and public services.
In manufacturing, for instance, AI-powered integrated automation, predictive analytics, and robotics will enhance the production of high-value goods. In agriculture, applications such as precision crop monitoring and real-time weather forecasting aim to improve yields and reduce reliance on foreign labour.
The plan aims to expand 5G coverage to 98% of residential, industrial and rural areas by 2030. The push for digital transformation calls for 95% of federal public services to be delivered entirely online by 2030. Additionally, a unified public sector gateway will be developed to streamline interactions between citizens and government agencies, aiming to improve efficiency and accessibility.
A National Digital Trust and Cybersecurity Strategy will be launched to focus on strengthening data protection, countering cyber threats, and preserving Malaysia’s digital sovereignty.
Infrastructure
The World Bank ranks Malaysia 2nd in Southeast Asia for infrastructure quality. Investments – amounting to RM 400bn (US$ 95bn) alone during the 2021-25 development plan – focus on transportation, utilities, and digital infrastructure, solidifying Malaysia’s position as a regional leader.
The 2026-30 plan also involves heavy investment in infrastructure including a RM43bn grid upgrade to add storage and smart control so the energy system can support heavy industrial loads and rising data centre demand. The Plan also encompasses a National Semiconductor Strategy that aims for a cumulative investment of RM500bn with RM25bn in public support across the phases.
Other key infrastructure projects covered by the plan include the completion of the Klang Valley MRT3 Line, expansion of interstate highways like the West Coast Expressway and Pan Island Link 1, and the East Coast Rail Link (ECRL) corridor development with associated industrial parks and the Johor Singapore Special Economic Zone.
Education and skilled staff
Student enrolment in pure science streams remains low and learning outcomes are uneven, raising concerns about Malaysia’s preparedness for a technology-driven future. Only 15.2% of secondary students enrol in pure science streams, compared to a national target of 60%. This gap raises concerns about the country’s ability to develop a sufficient STEM workforce. Contributing factors include exam-oriented teaching practices, limited career exposure, uneven resource distribution, and insufficient teacher preparedness. Malaysia’s National Education Plan 2026–2035 seeks to address the shortage of STEM students by outlining reforms designed to strengthen education outcomes and equip students with skills relevant for the modern workforce. The plan emphasises both human development and future-ready skills, including digital literacy, artificial intelligence, STEM, and energy transition disciplines.
Environmental, Social and Governance (ESG) August Update
Stable at 8
In May, the World Bank said that Malaysia must expand green finance, strengthen local tech capacity, as well as broaden participation across sectors and regions to fully leverage the global shift towards sustainability and turn climate risk into a competitive edge in green value chains. The organisation added that significant barriers – such as low research and development investment, workforce skills gaps, and weak industry-academia collaboration risk limiting innovation – remained as Malaysia accelerates its national green transition. The World Bank added that while Malaysia has introduced green policies and fiscal tools, domestic private sector investment remains cautious, and innovation ecosystems are still developing.
Environmental, Social and Governance (ESG) – Context
The United Nations’ Sustainable Development Goals (SDGs) are recognized as a beneficial framework for responsible investment. The Sustainable Development Report from Cambridge University Press assesses the progress of all UN Member States on the SDGs. It provides a useful means of ranking Southeast Asian countries on their ESG progress.
Malaysia is ranked 84 out of 167 in the 2025 report, with a score of 69.5.
Environment – In May 2026, the World Bank warned that climate change is expected to cost Malaysia up to 8.3% of its GDP by 2050 under the most pessimistic scenario, with larger losses possible. It added that half of the predicted costs of climate change have already been realised in lower GDP figures, with crop losses, flooding, and heat-related productivity declines being major drivers of projected economic losses. The organisation added that agriculture alone could see up to 18% of its production value eroded by mid-century, and that “these cascading impacts would reverberate across society, affecting business continuity, employment, health outcomes, and the broader stability of the economy”.
“If a one-in-20-year flood were to hit following an extended heatwave, GDP losses could exceed 20% in a single year, making climate resilience an economic imperative,” said the World Bank. It added that adaptation measures could offset up to half of Malaysia’s projected climate-related economic losses, with tackling heat stress a key strategy.
Social – The US State Department’s 2024 report on Malaysia says that “there were no reports the government or its agents committed arbitrary or unlawful killings, including extrajudicial killings, during the year”.
In May 2026, the government announced Malaysia has launched a major workforce-focused economic package aimed at strengthening employment stability and future skills. Prime Minister Anwar Ibrahim announced the Progressive Acceleration for Capability and Employment (PACE) Economic Resilience Package, valued at more than US$180 million, as part of efforts to strengthen human capital development and ensure the stability of the national labour market. PACE includes a RM580 million allocation to strengthen the social safety net through Employment Insurance System benefits, aimed at assisting workers who have lost their jobs while enhancing their employability. It will also apply to cross border workers. More than 480,000 people commute across the Johor Causeway to Singapore for work.
Malaysia’s Gig Workers Act 2025 (Act 872) officially came into force on 31st March 2026, strengthening welfare and protections for more than 1.6 million workers. The new legislation introduces a comprehensive legal framework covering transparent service agreements, payment certainty, protection against discrimination, and access to dispute resolution mechanisms. It also expands social security coverage and strengthens occupational safety protections, while maintaining the flexibility that defines gig work.
Governance – The Companies Act 2016 (“CA 2016”) serves as the principal legislation governing the management and operation of companies. It outlines essential provisions regarding the roles and responsibilities of directors, shareholders’ rights and the operational procedures for corporate decision-making. In May, the government ordered law enforcement agencies, including the Malaysian Anti-Corruption Commission, to probe the allegations that a network of businessmen was colluding with anti-graft agency officials to oust executives, Bloomberg reported. The news agency reported the allegations in February.
Latest economic data
f forecasts
* Worldbox Business Intelligence
Source: International Monetary Fund, official figures, except where stated
Useful Links
https://www.imf.org/en/Countries/MYS
https://www.freemalaysiatoday.com/
Source: Worldbox
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