FDI may soften as global risks mount
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.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
The Star
2 hours ago
- The Star
OCBC commits over RM11bil for Johor growth
From left: Bank of Singapore CEO Jason Moo, OCBC Bank (M) Bhd CEO Tan Chor Sen, CBC Group CEO Helen Wong, Johor Mentri Besar Datuk Onn Hafiz Ghazi, Great Eastern Group CEO Greg Hingston, Great Eastern Life Assurance (M) Bhd CEO Datuk Koh Yaw Hui and OCBC Al-Amin Bank Bhd CEO Syed Abdull Aziz Syed Kechik. JOHOR BARU: The OCBC Group has committed over RM11bil in financing to businesses in Johor since the start of last year, as part of its commitment to the development of the Johor-Singapore Special Economic Zone (JS-SEZ). By the end of 2025, the group expects to provide at least another RM3bil in financing for investments into various sectors including real estate, oil and gas, manufacturing and data centres, said OCBC Group CEO Helen Wong during a recent courtesy visit with her senior executives to Johor Mentri Besar Datuk Onn Hafiz Ghazi at his official residence in Saujana. Reiterating the group's long-term support for JS-SEZ, Wong emphasised that OCBC's One Group approach is underpinned by the collective strengths of OCBC Bank, its insurance subsidiary Great Eastern Holdings, its private banking arm Bank of Singapore, and its leasing and wealth management capabilities. This uniquely positions the group to support business growth and cross-border collaboration. Leveraging its deep-rooted history in Johor, diverse financial capabilities, and integrated regional network, OCBC is well-placed to contribute meaningfully to the JS-SEZ, fostering stronger economic ties between Singapore and Malaysia. Meanwhile, Onn Hafiz said the OCBC Group's commitment of over RM11bil in financing, with at least RM3bil more by year-end, reflects a strong endorsement of Johor's economic direction and investment potential. 'We welcome this partnership and look forward to working closely with OCBC to unlock Johor's full potential as Asean's next economic powerhouse,' he noted. According to OCBC Bank (M) Bhd CEO Tan Chor Sen, even prior to the official signing of the JS-SEZ agreement in January this year, OCBC had already taken proactive steps in Malaysia to showcase the zone's potential to global investors. 'OCBC has a strong track record of assisting foreign businesses in establishing operations in Malaysia and has facilitated the entry of new companies from various sectors, including services, construction, manufacturing, and wholesale and retail trade. 'Our collaborative efforts in the past with the mentri besar of Johor and key stakeholders such as the Iskandar Regional Development Authority, Malaysian Investment Development Authority and Invest Johor for the JS-SEZ Trade and Investment Mission have been fruitful,' Tan said. Great Eastern Life Assurance (M) Bhd CEO Datuk Koh Yaw Hui added: 'Along with OCBC Malaysia and the wider OCBC Group of which we are a part, we are excited about having a role in bringing to fruition the strategic initiatives aimed at transforming the border region between Malaysia's Johor state and Singapore into a premier economic hub.'
The Star
3 hours ago
- The Star
Energy stocks take centrestage as FBM KLCI bucks downward trend
KUALA LUMPUR: A surprise reversal in the performance of blue chips on Bursa Malaysia suggested foreign funds were seeking out local equities even as global markets were wracked by nerves over the US's entry into the Isreal-Iran conflict. While other regional equity benchmarks wallowed in the red, Malaysia's FBM KLCI made an unexpected bounce to erase a 14-point deficit and tack on a 6.61-point gain to 1,509.35. Nestle was seen leading the blue chips higher, surging RM3.18 to RM75.70. PETRONAS and energy-related stocks performed especially well following crude oil's weekend rally. MISC gained 13 sen to RM7.69, Tenaga Nasional rose 12 sen to RM14.34 and PETRONAS Chemicals climbed seven sen to RM3.11. The lower liners on the domestic market, however, remained subdued with the declining issues outweighing the advancers 4.17-to-1. Market volume remained on pace with that of previous days, with 2.04 billion share changed for RM960.69mil. Among the top performers, Petron Malaysia rose 13 sen to RM3.86, Hibiscus Peroleum jumped 13 sen to RM1.84 and Hengyuan Refining added nine sen to RM1.94. Regionally, stock markets were a sea of red, in line with US futures as the threat of growing warfare in the Middle East sapped investor appetite for equities. Japan's Nikkei dropped 0.2% to 38,331, South Korea's Kospi slid 0.51% to 3,006 and Hong Kong's Hang Seng shed 0.13% to 23,498. On the Chinese mainland, the CSI300 fell 0.2% to 3,838, although the composite index showed some mild resilience, rising 0.15% to 3,365. With the exception of the Malaysian index, all other Asean markets were in negative territory. The Philippine and Indonesian markets led with 2.06% and 1.77% declines respectively.
Malay Mail
3 hours ago
- Malay Mail
Markets jittery as Iran tensions lift oil, weigh on global shares
Asian stock markets: Oil up 1.5 per cent, but off early highs, after US strikes Iran Wall Street futures dip, waiting to see how Iran reacts Dollar up on yen, but no broad rush to safety as yet SYDNEY, June 23 — Major share indexes slipped in Asia today and oil prices briefly hit five-month highs as investors anxiously waited to see if Iran would retaliate against US attacks on its nuclear sites, with resulting risks to global activity and inflation. Most of the market moves were restrained, with the dollar getting a modest safe-haven bid and no sign of a rush to bonds. Oil prices were up around 1.5 per cent, but well off their initial peaks. Optimists were hoping Iran might back down now that its nuclear ambitions had been curtailed, or even that regime change might bring a less hostile government to power there. 'Markets may be responding not to the escalation itself, but to the perception that it could reduce longer-term uncertainty,' said Charu Chanana, chief investment strategist at Saxo. 'That said, any sign of Iranian retaliation or threat to the Strait of Hormuz could quickly shift sentiment and force markets to reprice geopolitical risk more aggressively.' The Strait of Hormuz is only about 33 km wide at its narrowest point and sees around a quarter of global oil trade and 20 per cent of liquefied natural gas supplies. Analysts at JPMorgan also cautioned that past episodes of regime change in the region typically resulted in oil prices spiking by as much as 76 per cent and averaging a 30 per cent rise over time. 'Selective disruptions that scare off oil tankers make more sense than closing the Strait of Hormuz given Iran's oil exports would be shut down too,' said Vivek Dhar, a commodities analyst at Commonwealth Bank of Australia. 'In a scenario where Iran selectively disrupts shipping through the Strait of Hormuz, we see Brent oil reaching at least US$100/bbl (RM428/bbl).' Goldman Sachs warned prices could temporarily touch US$110 a barrel should the critical waterway be closed for a month. For now, Brent was up a relatively mild 1.4 per cent at US$78.07 a barrel, while US crude rose 1.4 per cent to US$74.88. Elsewhere in commodity markets, gold edged down 0.3 per cent to US$3,357 an ounce. Keep calm and carry on World share markets were proving resilient so far, with S&P 500 futures off just 0.1 per cent and Nasdaq futures down 0.2 per cent. MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.0 per cent, while Chinese blue chips dipped 0.2 per cent. Japan's Nikkei eased 0.2 per cent, though surveys showed manufacturing activity there returned to growth in June after nearly a year of contraction. EUROSTOXX 50 futures lost 0.4 per cent, while FTSE futures fell 0.3 per cent and DAX futures slipped 0.4 per cent. Europe and Japan are heavily reliant on imported oil and LNG, whereas the United States is a net exporter. The dollar gained 0.7 per cent on the Japanese yen to 147.07 yen , while the euro dipped 0.2 per cent to US$1.1497. The dollar index firmed marginally to 99.042. There was also no sign of a rush to the traditional safety of Treasuries, with 10-year yields rising 2 basis points to 4.395 per cent. Futures for Federal Reserve interest rates were a tick lower, likely reflecting concerns a sustained rise in oil prices would add to inflationary pressures at a time when tariffs were just being felt in US prices. Markets are still pricing only a slim chance the Fed will cut at its next meeting on July 30, even after Fed Governor Christopher Waller broke ranks and argued for a July easing. Most other Fed members, including Chair Jerome Powell, have been more cautious on policy leading markets to wager a cut is far more likely in September. At least 15 Fed officials are speaking this week, and Powell faces two days of questions from lawmakers, which is certain to cover the potential impact of President Donald Trump's tariffs and the attack on Iran. The Middle East will be high on the agenda at a Nato leaders meeting at the Hague this week, where most members have agreed to commit to a sharp rise in defence spending. Among the economic data due are figures on US core inflation and weekly jobless claims, along with early readings on June factory activity from across the globe. — Reuters
