This article first appeared in The Edge Malaysia Weekly on January 5, 2026 - January 11, 2026

By Datuk Seri Khairussalleh Ramli 

Chairman of The Association of Banks in Malaysia

The Edge: After a year marked by uncertainty on the external front mainly caused by US President Donald Trump’s tariffs and geopolitics in Ukraine and the Middle East, what are your expectations for 2026?

The Association of Banks in Malaysia: Global growth is expected to remain moderate through 2025-2026, with the impact of Trump-era tariffs largely cushioned by an AI-led technology up cycle and a gradual global monetary easing cycle. Growth is supported by stable US expansion, a slowing but resilient China and continued momentum across Asean, albeit at a more measured pace. However, the 2026 outlook will increasingly be shaped by structural forces layered over the traditional business cycle, including US-China strategic competition, trade and investment fragmentation, supply chain realignments and elements of fiscal dominance. These dynamics are contributing to a more persistent global risk premium, while also redirecting trade and investment flows towards “neutral” geographies such as Asean.

Within this environment, Malaysia’s outlook remains constructive, anchored by resilient domestic demand and a sustained investment up cycle. Growth is projected to be supported by steady private consumption, favourable labour-market conditions, robust public and private investment, and structural catalysts such as the Johor-Singapore Special Economic Zone, the New Investment Incentives Framework and Visit Malaysia 2026. Inflation is expected to remain low and stable, allowing Bank Negara Malaysia to maintain a broadly accommodative monetary stance, with scope for flexibility should external conditions weaken. Against this backdrop, the banking sector remains well positioned, underpinned by steady loan growth, easing pressure on net interest margins, stable credit costs and improving earnings momentum into 2026, supporting an overweight sector stance.

What downside risks are you watching out for? What competitive threats worry you the most in 2026?

External demand remains a key uncertainty heading into 2026, with global trade risks elevated amid unresolved US-China tensions, the possibility of renewed product-specific tariffs — particularly on semiconductors — and lingering questions over the sustainability of the AI-driven US equity rally. Additional downside risks stem from potential resurgent inflation, geopolitical tensions affecting energy and commodity markets, slowing growth in major economies such as China and Europe, volatile financial market valuations and the sophistication of the digital scam landscape. These factors could weigh on investment sentiment, disrupt supply chains, dampen loan demand, and place upward pressure on funding costs and margins amid renewed liquidity tightening and deposit competition. Nonetheless, structural shifts — such as the redirection of trade and investment towards neutral geographies including Asean — also present strategic opportunities, and proactive risk management remains critical in navigating an environment characterised by persistent global risk premia and heightened uncertainty.

Against this backdrop, the macro outlook remains cautiously constructive. We expect the US Federal Reserve to deliver two rate cuts in 2026, lowering the upper bound of the federal funds rate to 3.25% as the US labour market cools, despite lingering inflation risks. Malaysia’s economy is forecast to expand 4.5% in 2025 and moderate to 4.1% in 2026, underpinned by resilient domestic demand, firm household spending, and continued strength in electrical and electronics (E&E) exports linked to the global technology up cycle. Near-term growth will receive support from festive spending, cash transfers and civil service wage adjustments in early 2026, although softer external conditions may weigh on non-E&E exports. In this context, a further 25-basis-point (bps) overnight policy rate cut in 2Q2026 cannot be ruled out should external headwinds intensify.

What role will AI and/or automation play in your business operations? Are you investing in these in your business? What do you find most challenging when it comes to AI and automation?

AI and automation are increasingly central to banks’ strategies to enhance productivity, operational efficiency and customer outcomes. Financial institutions are embedding AI to enable faster, data-driven decision-making, automate routine processes and improve workforce effectiveness, underpinned by strong governance and responsible-use frameworks. Recent advancements include the use of AI-driven process automation, natural language processing for document handling, and end-to-end workflow automation across core operations.

Looking ahead, the scale and impact of automation are expected to accelerate, supported by smart forms, APIs (application programming interfaces), and small language models that enable deeper integration with core banking systems. These capabilities are expanding AI use cases across operations, compliance, analytics and decision-making, helping banks improve agility, strengthen controls, and deliver more consistent and seamless services as part of a broader digital transformation agenda.

While the potential benefits are significant — ranging from improved efficiency and security to enhanced customer experience — the key challenges lie in execution rather than technology itself, particularly given AI’s still-evolving nature and its broader transformational potential. Ensuring high-quality data, integrating AI across legacy systems, meeting evolving regulatory requirements and addressing skills and cultural adoption gaps are critical to successful scaling. The banking industry is approaching AI as a long-term business transformation, underpinned by structured training, proactive change management, robust data governance and embedded compliance controls.

Notwithstanding the growing adoption of AI and automation, banks continue to place strong emphasis on human touch, trust and relationship-based customer service. AI is seen as a tool to support bankers — not replace them — by freeing up capacity for more meaningful interactions, complex problem-solving and personalised advice. As technology adoption increases, the nature of skills required will evolve, with greater emphasis on digital fluency, critical thinking and customer engagement, reinforcing the role of people as central to banking and customer trust.

Do you face challenges in hiring the right people for your business?

The competition for talent in financial services has intensified, particularly for roles requiring expertise in AI, cybersecurity, data and digital transformation, where demand continues to outstrip supply. Banks now compete not only with traditional and digital peers but also with other industries for scarce, future-ready skills, while regulatory and compliance requirements add further complexity and friction to hiring processes. Beyond technical capability, organisations face challenges in securing talent that can operate effectively within complex environments, adapt to rapid change, and demonstrate real execution capability rather than theoretical knowledge. These dynamics are especially pronounced for niche, leadership and highly technical roles, where limited local supply and elevated compensation expectations heighten competition.

In response, the focus is increasingly on building sustainable talent pipelines through internal mobility, upskilling and more structured workforce planning. Emphasis is placed on ensuring banks have key skills that are aligned with future needs and long-term growth via clear career pathways, competency frameworks and industry benchmarks, alongside targeted external hiring where skills are genuinely scarce. Looking ahead, a more forward-thinking approach — including a clearer definition of critical technical competencies and more differentiated reward structures — aims to strengthen talent assessment and retention. While compensation remains important, long-term attraction and retention are anchored on meaningful work, career growth, empowerment and the opportunity to drive real impact, supported by sustained investment in skills development and change capability.

If you could ask the government for one thing, what would it be?

If the banking industry could ask the government for one thing, it would be a coordinated national approach to building AI talent. This means strengthening AI and data literacy in university curricula, investing in educators, and ensuring closer alignment between education/academia, industry and policy. At the same time, continued support for upskilling and reskilling the existing workforce is critical, so employees can adapt as AI changes how work is done. Together, this will help Malaysia build a future-ready, people-centred workforce that supports innovation and inclusive growth.

By Lee Heng Guie

Executive director of the Social-Economic Research Centre, Associated Chinese Chambers of Commerce and Industry of Malaysia

The year 2025 ended with the impact of heightened external uncertainties emanating from the US reciprocal tariffs and ongoing geopolitical conflicts on global growth being limited and lower than expected.

The global economy is maintaining a cruise speed of 3.0% in 2025, due to less severe trade tensions, resilient labour market conditions, less restrictive monetary policy and supportive fiscal policy.

Against the backdrop of a global economy performing better than feared, the Malaysian economy has demonstrated resilience to achieve an estimated 4.7% [growth] for the full year of 2025, though it has moderated from 5.1% in 2024.

Looking ahead to 2026, with so many moving parts in the global and domestic economy, what will define the year 2026? The real impact of the shift in trade policy and economic policy uncertainty on the global economy, trade and investment flows will become clearer in 2026.

We expect continued global economic expansion estimated at 2.9% in 2026, supported by further cautious pace of monetary easing against inflation risk and easier financial conditions.

However, several risks could upset the global economy and financial markets. A fragile one-year trade truce between the US and China could collapse, deepening uncertainty over the future path of tariffs, including at the sectoral level; the surge in AI-related spending in the US raises fears of a bubble; and ongoing geopolitical tensions add further uncertainty.

Meanwhile, an abundance of liquidity resulting from cuts in interest rates is often associated with inflationary pressures and the formation of asset bubbles. Additionally, the full effect of higher effective US tariffs will likely cause tariffs-induced inflation to flare up in the US economy in mid-2026.

We expect the Malaysian economy to be in reasonable health (estimated 4.5% real gross domestic product growth) in 2026, primarily anchored by domestic demand, supportive income spending policies and investment catalysts. The real test is the strength of private consumption and private investment.

Given that export strength in 2025 (estimated at 6.0% to 6.5%) was due to the front-loading of exports, this suggests that there will be some payback period ahead amid the tariff play, which will take effect fully in 2026.

The primary competitive threats for the domestic economy stem from persistent geopolitical brinkmanship, vulnerabilities to external economic shifts, especially trade and capital flows volatility, as well as policy missteps in advanced economies that would continue to weigh on the global economy, impacting Malaysia via trade and financial channels.

Malaysian businesses face a range of competitive threats, primarily stemming from intense regional and global competition, vulnerabilities to external economic shifts and specific internal business challenges, such as talent shortages and the slow adoption of digital technology, including AI.

Topping the business challenges are rising business operating costs, especially in 2025 following a series of regulatory, policy and tax changes, which among others included a higher minimum wage, the expanded sales and service tax (SST), e-invoice implementation, employers’ Employees Provident Fund (EPF) contribution to foreign workers and rationalisation of fuel subsidies.

In 2026, business cost pressures are expected to continue and potentially experience the full impact of the expanded SST, e-invoicing and the US tariffs amid the continued impact of the influx of foreign businesses on micro, small and medium enterprises (MSMEs).

Some planned measures or implemented measures could be reviewed or recalibrated to further ease cost burden on businesses. These include a review of the expanded SST, particularly on the exemption threshold for SMEs; service tax rate on rental services; and to increase the threshold (currently for the first RM150,000) for SMEs enjoying the preferential tax rate of 15%. The planned carbon tax and multi-tier levy mechanism (MTLM) implementation may be put on hold.

MSMEs have recently “sighed in relief” over an increase in the e-invoice exemption threshold from RM500,000 to RM1 million in 2026; an increase in allocation to RM4 billion from RM2 billion for tax refunds; two years of moratorium with no enforcement and no penalty on the reporting of job vacancies; consideration to exempt micro and small enterprises from the duty of reporting job vacancies; and the abolishment of the proposed RM10,000 penalty on employers who fail to notify Perkeso (Social Security Organisation) of job vacancies.

AI will be a major disruptive force for businesses in 2026, becoming a core operational infrastructure, characterised by widespread AI adoption, significant shifts in key industries and the emergence of new business models.

Businesses want government support in three key areas to accelerate AI adoption: talent development; financial incentives; and the establishment of a clear, stable regulatory environment.

There remains a great deal of challenges like initial setup costs and acquiring skilled personnel. The 2025 Malaysia Artificial Intelligence Research and Report showed that 84% of enterprises are still in the “exploration stage” and the actual usage rate is less than 20%. Another survey indicated that about 27% of Malaysian businesses have adopted AI as of late 2025. Seventy-three per cent of those using AI remain focused on basic applications for efficiency, such as scheduling assistants or ready-made data analysis tools, rather than developing new AI-driven products or services.

According to Cisco’s AI Readiness Index, only 13% of organisations in Malaysia are fully prepared to deploy and leverage AI-powered technologies.

Malaysia is making a significant, integrated push with Budget 2026, focusing on digital infrastructure (cloud), technology adoption (grants, tax breaks), talent development, and governance to accelerate its AI ambition.

Firms have cited uncertainty over the returns on AI investments as a critical obstacle for considering adopting AI. To assist SMEs that are unsure about what kind of AI solutions to adopt and how to get started, the implementation of Gen AI Navigator provides generative AI-enabled solutions for office productivity, customer engagement, marketing and human resources. We can draw on the successful schemes in Singapore and Germany supporting business transformation through a new AI-powered personalised service.

Public and private institutions can help SMEs find the information and give advice and guidance for the adoption of AI, for instance, provide guidelines or a framework to help SMEs navigate the vendor selection process, as well as create networking and collaborative platforms between public and private sectors to help businesses build AI capabilities.

Malaysia is facing a critical AI talent shortage. According to the 2024 Amazon Web Services (AWS) Report on AI Skills in the Workplace, 81% of Malaysian employers struggled to hire AI talent, despite 90% prioritising these skills. An estimated 10,000 AI engineers and specialists are needed to meet current industry demands. A Malaysian Employers Federation survey indicated that only 16.5% of companies say sufficient AI talent is available.

It is necessary to have an interactive labour market system to create early awareness and opportunity that helps our workforce reskill and upskill with the required new skillsets to better handle AI-driven tasks and take up new job opportunities created by AI. This system would provide real-time analysis of demand and supply of AI jobs, including the job roles that will be displaced by AI, the industries that will create new sources of employment, the skills that will be in demand, and also the training courses that are suitable.

Integrating AI into Technical and Vocational Education and Training and apprenticeship programmes offer a powerful way to enhance learning, improve employability and prepare students for the reality of the modern workplace.

By Datuk Seri Wong Siew Hai

President of Malaysia Semiconductor Industry Association

The operating environment for the electrical and electronics (E&E) industry in 2025 began with uncertainty due to changes in tariffs and geopolitical tensions. This made many companies look at the supply chain and determine how to build resiliency into it. In addition to China+1, US+1 and Europe+1, some companies even looked at Malaysia+1 and Asean+1. There were concerns about inflation and diminishing demands. Lead time and logistics had been a challenge.

The US Liberation Day reciprocal tariffs were set for most Asean countries at around 19%. So, relatively between the Asean countries, there was not much difference. Thus, competitiveness between the member countries remains about the same. In addition, the sectoral tariffs for semiconductor and some products were exempted. For Malaysia, the export of E&E to the US was RM120 billion and about 60% were semiconductor. So, there was relief.

In October 2025, when US President Donald Trump visited Malaysia, the US and Malaysia signed the Agreement on Reciprocal Trade (ART). The signing of ART helped restore a degree of certainty and signalled a more structured path forward. The underlying reality remains that chips are ubiquitous and are increasingly treated as a strategic sector impacting consumers, industry and national security. Meanwhile, the investigation on semiconductors by the US under Section 232 of the US Trade Expansion Act is continuing to ensure that there is no threat to US national security. Until this investigation is completed, there is always a worry about what would be the outcome of this investigation. For the time being, until the results are known, it is business as usual.

Let’s take a look at the E&E industry in 2025. The global semiconductor revenue from January to October 2025 was growing at a rate of about 21.2% year on year to US$612.4 billion (RM2.5 trillion). According to the World Semiconductor Trade Statistics (WSTS) forecast, 2025 global semiconductor sales are expected to reach US$772 billion and the 2026 forecast is about US$975 billion. Sales are expected to exceed US$1 trillion by 2027, versus what was forecast in 2024 that the semiconductor revenue will exceed US$1 trillion by 2030. This accelerated growth is mainly driven by AI, data centres, high performance computing and industrial applications. With this growth, the memory products are constrained today and prices are moving up.

For Malaysia, the growth in E&E is shown in the export growth. Exports of E&E from January to November amounted to RM638 billion, rising 17.5% y-o-y and contributing to about 44% of Malaysia’s total exports. Thus, 2025 will be another record year.

For 2026, industry forecasts already signal a strong runway into the year. Capacity is being put in place and buildings are completed, ready to support the growth.

Also, the semiconductor equipment industry is growing. The global semiconductor equipment billing surged in the third quarter of 2025 to US$33.66 billion. The global semiconductor equipment market is forecast to grow from US$125.5 billion to US$138 billion in 2026. Companies in Malaysia that are related to semiconductor equipment will have a chance to capture some of the growth. Growth is driven by expansion in capacity and investments in new factories, especially in India, Vietnam, Thailand and Malaysia.

Malaysia positions itself well as a neutral and non-aligned country. It is able to navigate the geopolitical tensions, especially between the US and China, in order to comply with each country’s requirements and restrictions. Rebalancing the supply chain is no longer a temporary adjustment, it is the operating environment. Malaysia should seize the opportunity to remain a trusted node to comply and enforce the restriction requirements.

Malaysia has tightened export control documentation and visibility requirements are increasing. It has already taken steps to control the country of origin (COO) approval and introduce trade permit requirements for certain high-performance AI chips of US origin and put in controls for export, re-export and transshipment. This is the right direction to build trust in the Malaysian system. In summary, Malaysia needs to ensure that it is a neutral, non-aligned and a trusted hub.

AI and data centres are already reshaping the semiconductor value chain. The Malaysian Investment Development Authority (Mida) reported RM90.2 billion in foreign direct investment (FDI) for 12 data centres committed between 2021 and June 30, 2024. But data centres can be resource-hungry and job-light on their own, so the multiplier depends on how much of the ecosystem we capture locally such as power infrastructure, switchgear, thermal management, precision engineering, automated equipment, printed circuit board/substrate ecosystems and high-value engineering services. Malaysia needs to figure out if there are opportunities to design any integrated circuit (IC) components, systems or modules used in the servers as well and if the country’s outsourced semiconductor assembly and test (OSAT) companies are able to manufacture them. This would be the shift to move from “Made in Malaysia” to “Made by Malaysia”. This effort will take time, possibly in the next few years.

The main downside risks cluster around four areas:

-  Trade and geopolitical shocks (tariffs, sanctions, export controls and compliance uncertainty). The US has an active Section 232 national security investigation into imports of semiconductors and semiconductor manufacturing equipment (and derivatives), which is exactly the kind of process that can add planning risk, delay capital expenditure decisions and reshape supply chain routing.

-  Talent and infrastructure constraints that require talents to support technology development to move up the value chain with reliable utilities (including energy planning) and logistics infrastructure, so that advanced projects are able to scale.

-  Malaysia needs to continue to improve its ease of doing business and remove pain points as much as possible. We need to do it all with speed, scale and sustainability.

-  Malaysia needs to review its incentive strategy to attract high-value investments. Other countries compete to attract such investments by providing attractive incentives. Once Malaysia loses such investments, it is difficult to win them back. Countries like the US and Europe have the Chips Act, while China’s “Big Fund III” was established with registered capital reported at RMB344 billion (RM200 billion). India, Vietnam, Thailand, Singapore and Taiwan have also intensified investments. Malaysia needs to figure out how to drive innovation with available funding.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.