FDI may soften as global risks mount

The Star

23-06-2025

PETALING JAYA: The country's foreign direct investment (FDI) is anticipated to remain subdued in the second half of this year (2H25), as foreign investors adopt a cautious stance amid uncertainties surrounding the US tariff policy and escalating conflict in the Middle East.
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 by 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 Bhd senior economist and head of economic research Woon Khai Jhek
RAM Rating Services Bhd senior economist Woon Khai Jhek told StarBiz that the 2H25 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 (MNCs), 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 RM384.4bil last year, rising further from RM329.5bil in 2023. This performance was substantially higher than the 2010 to 2019 pre-Covid-19 average of RM204.5bil.
He said the momentum has continued this year, as investment approval amounted to RM89.8bil in the first quarter (1Q25), outpacing the RM86.6bil in 1Q24.
This suggests plenty of projects rolling into 2H25, 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.
OCBC Senior Asean economist Lavanya Venkateswaran
OCBC senior Asean economist Lavanya Venkateswaran said FDI inflows are likely to remain subdued in 2H25.
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, similar to the 1H25. This is mainly because businesses remain in a wait-and-see mode on account of US tarif- related uncertainties.
'There has been a steady stream of foreign investment approvals into Malaysia's E&E manufacturing sector since 2021 and these investment flows are most at risk in the near term, in our view.'
That said, Lavanya noted that Malaysia's investment climate remains positive.
'The Malaysian authorities are keen to diversify investment sources away from traditional markets such as the United States towards newer markets such as the Gulf Cooperation Council and Brics economies, while building intra-Asean resilience through initiatives such as the Johor-Singapore Special Economic Zone (JS-SEZ),' she said.
Meanwhile, 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 rationalisation and higher expanded sales and service tax will increase the cost of doing business.
In a nutshell, business and consumer sentiments are expected to remain guarded in the near term, he added.
On the FDIs outlook for the 2H25, Mohd Afzanizam said FDI in the services sector will likely continue to perform well, driven largely by sustained interest in data centres dominating the investment landscape.
'In the 1Q25, approved investment in the services sector rose 39.5%, led by a 326.6% increase in foreign investment,' he said, adding that manufacturing FDI is expected to face a challenging outlook in the near term owing to uncertainties in global demand.
In terms of domestic direct investment (DDI), RAM's Woon noted that while DDI will not be immune to pressures from external factors, it is anticipated to be more resilient than FDI in the 2H25.
Around 55% of total approved investments in 2024 were attributed to DDI, outweighing FDI after being overshadowed by the surge in FDI approvals over the preceding three years.
The momentum of DDI is also gaining, as local investment approvals jumped to RM213.1 bil in 2024 from RM141.1bil the previous year.
'Coupled with the government's recent focus on promoting DDI, this could provide a stronger lift for domestic investors, who are well-placed to fill the gap left behind by FDI.
'Furthermore, with various government efforts and masterplans like the New Industrial Master Plan 2030 and the National Energy Transition Roadmap (NETR) already in place, this suggests robust policy support and investments in the nation's development.
'Thus, we have ample reasons to be optimistic about the future trajectory of Malaysia's local investments,' Woon said.
OCBC's Lavanya said there could be a divergence between domestic and foreign investment inflows in the 2H25.
'While domestic investors focused on the US markets will likely remain wary of further expansion, investors catering to other markets may see opportunities for expansion.
'Domestic investors could also look to diversify across the country, capitalising on initiatives such as the JS-SEZ,' she noted.
To attract more investments into Malaysia, RAM's Woon said the government should focus on creating a conducive investment environment and offering targeted policy support.
'Businesses need clear, consistent policies to make long-term investment decisions. Reducing bureaucratic inefficiencies and ensuring regulatory transparency will help attract both domestic and foreign investors.
'Additionally, continued investment in physical and digital infrastructure (such as 5G rollout, industrial parks and efficient logistics) is crucial in attracting investments in high-value sectors.
'Besides that, talent development and workforce readiness are critical to ensuring Malaysia remains an attractive investment destination,' he said, adding that expanding training programmes, upskilling initiatives and fostering industry-academic collaborations will help ensure the country remains competitive.
Lavanya said the initiatives adopted by the authorities so far are steps in the right direction.
The continued focus on structural reforms – such as prudent fiscal policies, raising value-add in key sectors such as E&E, and encouraging better spatial distribution of growth across the country – would hold the economy in good stead over the medium term.
She added that the government is keen to diversify its investment and trade partnerships beyond traditional partners such as the United States.
This is underscored by initiatives to boost intra-Asean connections, deepen engagement with the Brics+ alliance, and deepening connections with the GCC economies.
These measures should help build economic resilience in times of heightened uncertainties, she said.