KUALA LUMPUR (Oct 16): Malaysia’s central bank flagged tough business conditions in the second half of 2025 from cost pressures eating into profits and global uncertainties that may disrupt exports and supply chains.

The implementation of domestic policy measures is expected to raise businesses’ operating costs and weigh on profit margins, according to Bank Negara Malaysia’s (BNM) Financial Stability Review released on Thursday. Banks are vigilant, especially on borrowers in more vulnerable segments facing the cost pressures, the report noted.

“Nonetheless, moderating input prices and firms’ ongoing cost management strategies are expected to alleviate some of the pressures,” BNM said. “Additionally, strong domestic demand and continued investment activity will remain as key pillars supporting business resilience.”

Malaysia has announced an expansion of the sales and service tax, increases in tariffs on electricity and water, as well as mandatory Employees Provident Fund contributions for foreign workers.

The measures have all taken effect this year, weighing on firms’ profit margins. The median cost of goods sold as a proportion of revenue has edged higher to 75.4% from 74.9% at the end of 2024, according to BNM’s data.

“Larger firms were better positioned to manage these headwinds, supported by stronger financial positions compared to pre-pandemic levels,” BNM noted in the report. However, small and medium enterprises (SMEs) with “pre-existing vulnerabilities” face troubles repaying their loans.

A small number of SMEs were drawing down on cash reserves to manage rising costs and tightening cash flow due to delays in collections and shorter payment terms, BNM highlighted. Some also reported lower revenue and smaller profit margins amid stiff competition.

Repayment challenges nonetheless remained confined to borrowers with pre-existing weaknesses in selected sectors such as manufacturing, construction, and wholesale and retail trade, it said.

Firms are also grappling with US tariffs, though resilient domestic demand, global demand for the electrical and electronic goods, inbound tourism and the expansion of investment activities are expected to lend support to the business outlook, the central bank added.