This article first appeared in The Edge Malaysia Weekly on February 16, 2026 - February 22, 2026

MALAYSIA may well surprise on the upside for a third year running this year on both economic growth and even the ringgit’s strength — riding growing confidence fuelled by positive sentiment on the global artificial intelligence (AI)-related technology, chips and data centre boom. But rather than engineering the next headline gross domestic product (GDP) number, Malaysia needs to focus on future-proofing its economy and people to avoid becoming “a victim of its own success”.

“Malaysia has certainly delivered and probably even exceeded most people’s expectations, particularly in the past year, given the uncertainty in global trade … Malaysia has not just impressed with its resilience [and] the ongoing strength of its exports, but also the ongoing strength of investment coming in, which suggests that this is not just a short-term aberration,” Frederic Neumann, chief Asia economist and co-head of HSBC Global Research Asia tells The Edge.

“While front-loading might have flattered exports, because there’s continued investment coming into the country, there is really a vote of confidence by global manufacturers to use Malaysia as a global platform. Tourism, obviously, has bounced back very strongly. The visa agreements with China, for example, have helped. The government has continued to hit the accelerator on infrastructure spending. Within Asean, Malaysia is clearly a success story and it is very difficult to find fault with the overall economic story. Having said that, always we ask how do we future-proof ourselves, where can we do better, and how can we push to make the growth even more sustainable,” adds Neumann, who moderated a session on trade and investment strategies at the recent Malaysia Economic Forum (FEM) 2026.

“What came out of the FEM, for example, is Malaysia is a very open economy, reliant on trade, so there is clearly a risk from US trade policy and the uncertainty that injects into what is still Malaysia’s largest export market. But there are opportunities in diversification [away from the US] and exploring other markets, from Latin America to Europe to the GCC (Gulf Cooperation Council) countries,” he adds.

While Malaysia has enjoyed success in attracting investments from large global companies, particularly in the electrical and electronics (E&E) sector, Neumann notes “there is also a sense that not all small and medium enterprises (SMEs) are enjoying the degree of productivity increases that one would like”.

“And one risk is that Malaysia’s economy could, to some extent, at some point, become a victim of its own success. If you have a very, strong, successful sector like E&E, for example, that is just sucking in all the resources, the investment capital that strengthens the current [environment] then leads to an economic imbalance [where] the economy becomes too dependent on [one successful sector],” he elaborates on the need to diversify, pointing to Taiwan and South Korea where global chipmakers Taiwan Semiconductor Manufacturing Co (TSMC), Samsung Electronics Co and SK Hynix Inc have outsized weightage on the local equities market as well as the economy.

That said, Malaysia, like most parts of the world, still lacks a global chip leader like TSMC.

It is also worth noting that Singapore, an advanced developed economy, also saw 5% GDP growth in 2025 after growing 5.3% in 2024, its first back-to-back 5% growth in 15 years (since 2011). On Feb 10, Singapore revised higher its GDP forecast for 2026 to 2% to 4% from 1% to 3% previously. In December, Singapore committed S$37 billion to research, innovation and enterprise over five years, of which S$3 billion is earmarked for what it calls “grand challenges” such as semiconductor and longevity research.

For Malaysia, Neumann does not discount the possibility of a “hat-trick” even though HSBC’s current 2026 GDP growth forecast for Malaysia is 4.5% — the upper end of the official guidance of 4% to 4.5% — and just below its 4.6% GDP growth forecast for China, which is only expected to provide an official forecast in March.

This was before Malaysia announced on Feb 13 that economic growth did not slow year on year despite the global tariff angst last year, growing 5.2% in 2025 — ahead of advance estimates of 4.9% released on Jan 16 and official guidance of 4% to 4.8%. In 2024, Malaysia’s GDP grew 5.1%, exceeding official guidance of 4% to 5%. Bank Negara Malaysia’s 2026 GDP growth forecast, expected together with the release of its 2025 annual report in March, will be closely watched. Finance Minister II Datuk Seri Amir Hamzah had hinted at FEM that the central bank may have a higher forecast than Putrajaya’s guidance of 4% to 4.5%.

“But as Malaysia moves up the competitive edge, 5% GDP growth one year after next, it also means increases in living standards. That means wage costs are going up and the economy continuously needs to make efficiency gains to maintain that growth. And that becomes harder and harder the higher the per capita income is,” Neumann says, flagging the need to deepen investments into developing the services sector where many higher paying jobs exist.

“From experience in other countries, once they hit the threshold that Malaysia is at, it is very easy to scale up some labour-intensive work manufacturing, but there comes a point where you need to transfer the efficiency gains into services, because the services sector becomes increasingly important and more sophisticated than manufacturing is — R&D (research and development) services, professional services. quality checking, legal …  and the next challenge for Malaysia, [apart from] becoming more productive in manufacturing, is making sure that the services sector efficiency keeps up with the development of the economy.”

There are no shortcuts to growing the services sector productivity, which Neumann says “requires skills, human capital, changes to regulations” and ensuring that smaller firms engaged in services have access to capital to invest and move up the value chain.

“AI is an opportunity to accelerate the productivity of [the] services sector, but we need to have the right environment for that to happen. Sometimes there is a tendency in Asia, generally, to focus on the manufacturing sector as a be all and end all of development. But it is very important that professional services are productively developed to sustain growth … Malaysia has a vibrant manufacturing sector [that] will continue to be important but a very sophisticated manufacturing sector can only thrive if it has the right ecosystem, and that requires the services sector to keep pace,” he opines.

Malaysia continues to enjoy “quite a strong tailwind” and growth momentum in 2026 because of “very high investment rates” made in recent years, with a lot of productive capacity coming online and adding to GDP growth.

Neumann reckons that most of “what could go wrong for Malaysia” are external risks that are “extreme or unlikely” at this point, namely: a sudden collapse in global trade; a deep recession in the US; a collapse of the AI hardware boom; a major eruption of geopolitical tension; if oil prices were to surge to US$150/barrel and decimate global demand.

“If the global environment remains as it is, there is no pressing domestic issue: inflation is under control; the budget deficit is still gradually declining; debt levels are manageable; even household debt is manageable. There is no risk of a spike in interest rates. So, the domestic environment is relatively stable at the moment.

“But I do think investors are always looking at not just the next 12 months [but] multi-year periods. And it is important to maintain the momentum that we’ve seen, that Malaysia just keeps pushing on reforms. This is not an immediate threat to Malaysia, but certainly foreign investors would look to what extent the government is still working on optimising the spending on subsidies; to what extent are you emphasising human capital development; to what extent is Malaysia trying to make life easier for SMEs … you want to see ongoing progress [on the implementation of reforms] and in 2027 Malaysia has an election coming up … obviously, any country that engages in an election sees a slowdown on reforms … I think, generally, the government has delivered. Malaysia probably has had a more consistent, gradual reform process over last few years than some peers. So it compares quite favourably, and that is obviously reflected in the performance of markets,” he elaborates.

Neumann is also bullish on Malaysia’s “natural advantage” in the tourism sector feeding into economic growth, during Visit Malaysia 2026 and beyond. “Malaysia taps the Middle East and into North Asia. And being a cultural melting pot, this also makes it easy to attract tourists and visitors from all walks of life … Chinese tourists are very quick at playing currency advantages and disadvantages, but Malaysia’s currency is not overvalued. There was a huge advantage a year ago, [today] there is less advantage [but still not expensive],” he says, noting the importance of continued investments to retain the momentum.

Joey Chew, HSBC’s head of Asia FX Research, who recently upgraded her year-end forecast of the ringgit to 3.85 against the US dollar from a 4.00 to 4.10 range, says “the most interesting thing about the ringgit right now is that the drivers for ringgit appreciation have broadened and increased”.

“Two years ago, we were positive on the ringgit for one or two factors, mainly the government’s supportive policy regarding the ringgit. For example, repatriation by GLCs (government-linked companies) was one of the main supporting factors for the ringgit’s recovery. But, gradually over the last two years, that is not the only reason anymore. In fact, these days, when I talk to corporates, our clients, about the ringgit, that is only one small part of the conversation.

“A lot of the other parts of the conversation revolves around data centres, the FDI (foreign direct investment), bond inflow, Bank Negara policies, compared to, say, [whether] other central banks might still be easing. But Bank Negara is already signalling that it is done. So, these are all the factors that are contributing to the ringgit’s strength, which is very diversified and very broad and more than just one factor,” Chew says, noting that Asean currencies tend to be more affected by interest rate differentials and commodity prices.

“Our ringgit forecast is 3.85, partly because we are not expecting a broad [US] dollar drop. We are expecting a soft dollar, so the ringgit is still outperforming in a sense,” she adds, noting that there is a risk of a stronger dollar because the US economy is still doing well. “From a cyclical perspective, there is room for the dollar to rise. It’s just that from the structural perspective, there are headwinds from the diversification and political uncertainty story, thus a soft dollar view … the dollar is definitely something we are still monitoring and debating.”

HSBC expects the US GDP to grow by 2.3% in 2026, slower than current expectations of around 3% for 2025. The US will release fourth-quarter 2025 growth numbers on Feb 20, with growth surprising on the upside at 4.4% in 3Q2025, 3.8% in 2Q2025 versus 0.5% in 1Q2025.

HSBC’s house view of zero interest rate cuts by the US Federal Reserve is against consensus of two cuts totalling 50 basis points for 2026.

Neumann reckons that the US “has very little economic justification to cut rates” but could choose to do so. “Inflation risk goes up if they do cut into a strong economy. That would essentially push up long-term interest rates and the market would see such a cut as being inflationary.”

Chew did not rule out the ringgit outperforming regional currencies again in 2026, but reckons that the gains may not be as pronounced going forward.

“The ringgit has come a long way, right from 4.80 [against the US dollar] to now, 3.95. The ringgit is probably no longer undervalued. It spent the last 10 years being undervalued, but by our estimates, right now, the ringgit is fairly valued. It is not overvalued, but it is fairly valued. When you are undervalued, there is some way to catch up. But once you are fairly valued, you need conviction [on, for example] what is going on with trading partners, and how you are doing [domestically to break beyond],” Chew says.

“The reason Malaysia has been doing well is obviously the data centre story. But for exporters, current accounts have been stabilising, even recovering. A lot of this is also on the fact that key commodity prices have stopped falling for Malaysia. So, that is also important to monitor,” she adds, acknowledging that the yuan’s strength is also positive for the ringgit.

Neumann, for one, is looking out for “more vigorous consumption and investment spending within China, which should help not just the Chinese economy, but also the rest of the region. That would lead to “more growth opportunities for Malaysia”, he concludes. 

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