Four key risks cloud Malaysia's economic outlook in H2 2026

KUALA LUMPUR, 21 JULY 2026 —

Hong Leong Investment Bank (HLIB) raised its 2026 GDP growth forecast to 4.7% from 4.5% on July 13, citing resilient domestic demand, strong electrical and electronics exports and contained inflation.

Four risks now dominate the second-half outlook, the bank said. HLIB warned that global supply chains may take longer to normalise despite easing geopolitical tensions in the Middle East, drawing lessons from the post-pandemic period when supply chain pressures persisted long after economies reopened.

Expectations that the US Federal Reserve will maintain a tight monetary policy stance could strengthen the US dollar, putting temporary pressure on the Malaysian ringgit and dampening sentiment in the domestic stock market, it added.

Political uncertainty is also expected to rise ahead of a possible early general election in the fourth quarter of 2026, with HLIB citing the risk of another hung parliament similar to GE15 that could lift the political risk premium in local shares.

The proposed expansion of the FTSE Bursa Malaysia KLCI from 30 to 50 constituent stocks may dilute index weightings in the short term, even as it broadens market representation and benefits sectors such as automotive, gaming, real estate investment trusts, ports and technology that are expected to gain inclusion in the benchmark index.

Economy Minister Datuk Seri Akmal Nasrullah Mohd Nasir told a Kuala Lumpur seminar on July 13 that Malaysia’s E&E exports rose 39.7% year-on-year to RM382.9 billion in the first five months of 2026, accounting for 48.2% of total exports. He said Malaysia must shift from conventional security methods to a more comprehensive strategy to address rapidly evolving threats, including emerging technologies such as artificial intelligence, post-quantum cryptography and drones.

Domestic demand continues to be underpinned by a stable labour market, strong export performance and sustained investment activity, he added. Rising exports are expected to support employment and private consumption, while growing demand linked to artificial intelligence and the electrical and electronics sector is expected to provide an additional boost.

The HLIB upgrade contrasts with near-term headwinds flagged by the bank. A stronger US dollar could weigh on export competitiveness, while political uncertainty ahead of a possible early election may dampen business investment decisions, it said. The KLCI expansion, though positive for market depth, risks short-term index dilution for existing constituents as new sectors enter the benchmark.

Analysts say the ringgit’s path will hinge on the Federal Reserve’s policy trajectory and domestic political developments, with any early election likely to heighten volatility, according to HLIB. The bank expects the inflation rise to remain contained by Malaysia’s subsidy framework and subdued imported price pressures, though it will monitor energy shocks tied to Middle East conflicts.

Traders will watch the Federal Reserve’s July 31 policy decision and Malaysia’s August inflation print for cues on ringgit direction and policy divergence risks, it added.