Lights are installed along Jalan Bukit Bintang for the VM2026 launch.
PETALING JAYA: While softer exports are expected to drag on Malaysia’s growth this year, Visit Malaysia 2026 (VM2026) is set to provide a boost to the economy.
Socio-Economic Research Centre (SERC) executive director Lee Heng Guie expects the country to record a real gross domestic product (GDP) growth of 4.5% year-on-year (y-o-y) this year and 4.7% y-o-y in 2025.
Lee said the key downside risks to 2026 GDP growth include the full impact of tariffs, a sharper-than-expected “payback” period for exports, delays in project implementation, prolonged uncertainty, and rising business costs that could weaken investment sentiment.
“Exports performance remains a wildcard for the economy as it is due for a ‘payback’ period after being supported by front-loading activities last year. Exports this year could normalise and we may not see continued positive growth.
“We will continue to watch closely whether the payback will be severe, or sharper-than-expected or just cruise along. We expect gross exports to see a 3.5% growth this year,” he said at a briefing on Malaysia’s quarterly economy tracker (October to December) 2025 and outlook for 2026.
Continued strength in electronics and semiconductor exports and gradual improvement in intra-regional trade with Asia are the supporting factors for local exports this year.
However, weaker external demand from major advanced economies, trade and geopolitical uncertainties, as well as commodity price volatility, are key risks to exports, Lee noted.
Lee expects Malaysia’s economy to be in “reasonable health”, underpinned by domestic demand, supportive income and spending policies, ongoing investment catalysts and a less restrictive monetary policy.
He said the “real test is the strength of private consumption and private investment”. While both are expected to moderate slightly, they are still expected to remain the economy’s key growth anchors.
Private consumption is forecast to grow at 5.1% y-o-y in 2025 and 5% y-o-y in 2026, while private investment is expected to expand by 10% y-o-y in 2025 and 8.1% y-o-y in 2026.
“Private consumption growth in 2026 will mainly be supported by the strength of the labour market; the confidence to spend. Other supporting factors are consumption-based policies like the Sumbangan Tunai Rahmah, Sumbangan Asas Rahmah and salary increment for civil servants.
“Further, there is also the VM2026 effect, which will boost the tourism-related service sectors like food and beverage (F&B), accommodation and such.”
On the risk side, Lee said cost-of-living pressures, high household debt and spillover from slowing exports remain ongoing concerns.
“Following two years of strong expansion, private investment is expected to normalise to record high single-digit growth.
“The key drivers are ongoing capacity expansion, technology-related spending, and multi-year development programmes, while the risks to growth are delays in project implementation, tighter credit conditions and policy uncertainty.
“Overall, we see the growth drivers outweighing the risks,” Lee said.
He said VM2026 is expected to sustain retail, hospitality and related services, propelling the domestic tourism industry to new heights.
“Past Visit Malaysia campaigns have consistently boosted the tourism sector in terms of international arrivals and tourism receipts,” he said.
Based on official data up to 2024, tourism contributed 15.1% of GDP, amounting to nearly RM292bil.
“In terms of employment, the tourism sector also accounted for about 21.6 million persons employed in 2024, from 21.4 million in 2023, accounting for roughly 3.5% of total employment that year,” he said.
Lee added that the ringgit’s strength against the greenback is not expected to deter tourists from coming to Malaysia. Currently, the US dollar-ringgit pair is trading at 4.06. “We see the ringgit having the potential to strengthen to about 3.90 by year-end, which is around its fair value.
“When people decide to visit Malaysia, it is not about exchange rates. Currency strength will not significantly dampen tourists arrivals,” he said.
India and China continue to be key sources of tourist arrivals, thanks to the visa exemption policy. Moreover, around 70% of total tourism spending lean towards consumption and services.
“Singapore tourists spent about RM24.8bil in 2024, with the most on shopping, followed by accommodation and F&B. Meanwhile, Chinese tourists spend mainly on shopping followed by international airfare. For Indonesian tourists, the top spending category is shopping, followed by medical services,” Lee said.
He also said that more focus should be placed on source markets with higher per-diem expenditure and longer lengths of stay like Saudi Arabia, the United Kingdom and Australia, while continuing to attract strong regional tourist flows.
On global growth, Lee said there are four forces that will be reshaping the global economy this year, namely: a fragmented trade system; financial conditions; geopolitical and climate disruptions; and artificial intelligence (AI) investment.
Lee warned that stretched AI valuations could spark a market correction, but Malaysia may be relatively insulated due to limited AI stock exposure and already low foreign shareholding.
Tariffs remain one of the key uncertainties for the global economy, as markets are still awaiting the ruling from the US Supreme Court on whether it will overturn tariffs imposed by US President Donald Trump under the International Emergency Powers Act. The US Supreme Court has delayed its ruling on the legality of President Trump’s tariffs.
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A decision had been widely expected around Jan 9, 2026, but no ruling was issued. The court is now expected to deliver its decision on Jan 14.
“If the US Supreme Court overturns the ruling, that would mean the 19% reciprocal tariff will be removed, which would be positive for us. However, there are other tariff provisions that are not subject to the court’s decision, which Trump could still invoke, such as Section 232 and Section 301. Hence, there are still risks,” Lee said.
Lee expects the US Federal Reserve (Fed) to deliver two rate cuts this year, bringing the Fed funds rate down to between 3% and 3.25% by year-end, from the current range of 3.5% to 3.75%.
With global interest rates expected to ease, abundant liquidity is expected in the market. While this could lead to a return of foreign capital flows to the region, benefitting Malaysia, Lee said the outcome would still depend on the timing.
“If we look at Malaysia, the United States has already cut rates, but we have not really seen a significant return of foreign capital inflows. This may be due to our macro narrative not being convincing enough, as well as the lack of AI-related stocks.”
To attract foreign capital flows, Lee said the government needs to enhance the quality of company listings and attract firms in new and emerging sectors.
“Compared with other markets last year, Malaysia’s overall market performance was not strong, aside from the strength of the ringgit. Hopefully, this year, the local market can catch-up,” Lee said.
