Malaysia’s Fiscal Balancing Act: The Interplay Between FDI, Debt, and Deficit (2023–2025) - Overview by Nik Zafri

Disclaimer: The information presented in this article is compiled from various public domain sources and reflects the personal views and interpretation of the author. While every effort has been made to ensure accuracy, readers are advised to consult official publications and expert opinions for decision-making purposes.

NAVIGATING COMPLEX FISCAL LANDSCAPE

Malaysia, like many emerging economies, finds itself at a critical juncture. As the country positions itself as a hub for regional investment, the government must walk a fiscal tightrope, balancing the need to attract Foreign Direct Investment (FDI) while managing a growing national debt and persistent budget deficits.

Much I like to say about the Malaysian economy but In this article, I will attempt to explore briefly how these three financial pillars, FDI, national debt, and the fiscal deficit, interact and shape Malaysia's economic future from 2023 to 2025.

1. Foreign Direct Investment (FDI): A Double-Edged Sword

FDI has long been a cornerstone of Malaysia's development strategy. According to the Malaysian Investment Development Authority (MIDA), the country recorded RM225 billion in approved investments in 2023, of which RM127 billion were foreign investments. Key contributors included major players from the United States, China, Singapore, and Germany, particularly in high-tech manufacturing, green energy, and the digital economy.

In 2024, FDI inflows remained strong with increased interest in semiconductor manufacturing, data centers, and electric vehicle (EV) ecosystems.

However, 2025 presents both opportunities and risks, with global economic uncertainties and geopolitical shifts possibly affecting investor sentiment.

2. National Debt: A Growing Concern

Malaysia’s national debt has steadily increased, reaching RM1.5 trillion by the end of 2024, or approximately 82% of GDP when including contingent liabilities. While much of this debt is domestically held, the rising debt-to-GDP ratio poses risks to the country's credit rating and limits fiscal flexibility.

The government has been actively managing its borrowings, focusing on long-term bonds and sukuk instruments. However, interest payments consume a significant portion of the national budget around 15% in 2024 leaving less room for development spending. Between 2023 and 2024, Malaysia paid approximately RM97 billion in interest payments alone, reflecting the growing burden of debt servicing.

3. Fiscal Deficit: Persistent but Improving

Malaysia's fiscal deficit stood at 5.6% of GDP in 2023, with a slight reduction to 5.0% in 2024. The government aims to lower it further to 4.3% by the end of 2025. Several measures have been introduced to achieve this goal, including subsidy rationalisation, targeted cash assistance, and a possible reintroduction of a broad-based consumption tax like the Goods and Services Tax (GST).

Despite these efforts, challenges remain. A large portion of government expenditure is still dedicated to operational spending, including civil servant salaries and social programs, limiting capital investment.

4. Interconnections: A Delicate Balance

FDI can help reduce fiscal deficits in the long term by boosting economic growth and increasing tax revenues. However, to attract FDI, the government often needs to invest heavily in infrastructure, offer tax incentives, and ensure regulatory stability expenditures that may exacerbate short-term deficits and add to public debt.

Conversely, high debt levels and persistent deficits may erode investor confidence. Agencies like Fitch and Moody's have signaled concerns about Malaysia's fiscal discipline, potentially affecting future FDI inflows.

A key case study is the Digital Free Trade Zone (DFTZ), which has attracted significant investment but required large upfront infrastructure spending. Similarly, mega projects like the East Coast Rail Link (ECRL) have FDI elements but also contribute to rising public debt.

5. Policy Implications and Recommendations

To ensure a sustainable fiscal path while remaining attractive to investors, Malaysia should consider:

• Strengthening tax collection and broadening the tax base.

• Implementing stricter fiscal rules to manage debt accumulation.

• Enhancing public investment efficiency.

• Promoting ESG-compliant and high-value-added FDI.

• Increasing transparency and data-driven policymaking.

Conclusion: Striking the Right Balance

Malaysia’s economic journey from 2023 to 2025 underscores the delicate balancing act between attracting FDI, managing debt, and reducing fiscal deficits. While foreign investments can be a catalyst for growth, they must be aligned with sound fiscal policies to ensure long-term sustainability. With careful planning and bold reforms, Malaysia can chart a path toward economic resilience and fiscal responsibility in an increasingly complex global environment.

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2. US-China Trade Truce: A Strategic Pause or Temporary Relief?

3. Trump’s presidency raises concerns for US investments in Malaysia’s semiconductor, data centre

4. Why BRICS?

5. Data Centers in Malaysia: Purpose, Potential, and Challenges

6. ESG - 3 Parters

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FDI, GLOBAL BONDS, PRIVATIZATION ETC. ETC. (SNEAK PREVIEW BY NIK ZAFRI)

Excerpts from Bernama :

October 23, 2009 18:25 PM

BUDGET: Companies Under MOF Inc And Other Viable Agencies To Be Privatised

KUALA LUMPUR, Oct 23 (Bernama) -- The government will gradually reduce its involvement in economic activities, particularly in areas where it is competing with the private sector, said Prime Minister Datuk Seri Najib Tun Razak.

Najib, who is also the Finance Minister said to ensure this, the government will privatise companies under the Minister of Finance Inc (MOF Inc) and other viable government agencies.

"The second wave of privatisation will aim to enable the companies and agencies to operate more efficiently and expand their activities.

"This will reduce their financial dependence on the government," he said when unveiling the Budget 2020 in Parliament on Friday.

According to Najib,the public-private collaboration would be enhanced to enable the private sector to spearhead economic growth.

"High impact projects by the private sector will be undertaken jointly with the government.

"The role of government is to facilitate the provision of basic infrastructure to ensure project viablily," he said.

Among the projects to be implemented in 2010 include the development of an Integrated Customs and Quarantine Complekx (CIQ) in Bukit Kayu Hitam, construction of six UITM campuses and the development of the Matrade Centre.

Najib said the private sector contribution in driving the economy would be intensified.

Towards this end, he said the government would give priority to enhancing domestic investment while encouraging local companies abroad to remit their profits and reinvest in the country.

Currently, he said the nation faced stiff competition from neighbouring countries in attracting limited foreign direct investments (FDI).

As such, he said aggressive and inovative measures must be taken, to attract and increase FDI inflow.

On another note, the Prime Minister said the government would address structural issues to provide a more conducive business environment and be a market-oriented economy.

On this, he said, local authorities would take immediate steps to facilitate registration of businesses and expedite the issuance of development orders.

He said the government had established two Commercial Division Courts to expedite the hearing of commercial cases and resolve them within nine months, compared with a longer duration previously.

"To ensure an effective delivery system, individuals and companies are only required to use a single reference number in their dealings with government agencies.

"For individuals, the initiative known as MyID, uses the MyKad number, while for companies, the MyCoID utilises the Companies Commission of Malaysia (CCM) business registration number," he explained.

On the shift towards a high-income economy, Najib said: "We need a strong foundation in research, development and commercialisation (R&D&C) activities."

Therefore, he disclosed, to strengthen R&R&C activities, the government among others will undertake measures to rationalise all research funds and grants to be more effective to achieve set targets.

The government will also establish a National Innovation Centre supported by a network of innovation excellence centres under the Ministry of Science, Technology and Innovation in collaboration with the Ministry of Higher Education.

Other measures include integrating R&D activities with patents, copyrights and trademarks registration to ensure R&D&C processes are implemented more effectively while providing small and medium enterprises (SMEs) with a tax deduction on expenses incurred in the registration of patents and trademarks in the country.

The cooperation between patent and research agencies will expedite the commercialisation of research findings.

-- BERNAMA
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Nik Zafri's comments :

At the current state, I boldly say, Malaysia have enough domestic savings to finance private investment. But to mobilize the private sector further, there is also a need to increased access to foreign savings. This is true that based on my findings since mid 90s, private sector have boosted up its funds in global equity markets.

I foresee the 2nd wave of privatization can lead to growth in portfolio equity investment and FDI.

After Malaysia decided to :

a) relax/liberalize the foreign equity participation (for FDI - it's still on case to case basis) and
b) Disbanding of FIC by EPU,

2nd wave of privatization is now relevant and paving its way, I foresee there is a possiblity of growth in foreign investors portfolio equity investment.

We can also expect to see growth in :

a) international fund managers (few have established Islamic funds currently)
b) more foreign stock brokerage,
c) futures brokerage
d) hiring of foreign dealers,

(some are owning 100%!! So, what's the fuss?? I think perhaps information is not properly transmitted.)

To me 2nd wave of privatization is also an indicator of Government's efforts & commitment to encourage private sector development.

This will also lead to reduction of fiscal deficit and less intervention of government in economy.

Newly privatized firms is expected to be able to finance their investment by having better access to equity markets and private debts.

On global bond issue, the best statement so far I see is from BNM's Governor Tan Sri Dr. Zeti in Bloomberg interview -who said clearly that Malaysia should make a comeback to the global bond market after 8 years of 'dissapearance' whether in conventional or sukuk bonds.
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So, now, having said the abovementioned, what would be the setbacks?

The usuals - political stability - one of the most key points that foreign investment will look into...I ain't saying anything but I'm sure everyone knows about it - with only one click. It's so difficult to get everyone to agree to play a one game plan. Even the plan has been agreed uninanimously, it is still subject to scrapping.

2nd most important - the bumiputera issue. Most sensitive. More participation is required

Let's say If the plan goes well, the growth will provide a bigger pie for everyone even the bumis.

But again, this is only my personal opinion.

The Star Global Malaysian Forum

The Star Business - Wednesday November 7, 2007

Construction assets draw foreign interest - Infrastructure and development projects a boon to sector

PETALING JAYA: Local construction assets seem to be attracting the interest of foreign investors of late.

Last month, Putrajaya Perdana Bhd saw the entry of a new controlling shareholder, Swan Symphony Sdn Bhd, which bought over Eastern & Oriental Bhd¡¦s stake in the former. Swan Symphony is jointly owned by Abu Dhabi-Kuwait-Malaysia Investment Corp (ADKM) and Autron Investment. With the support of the new shareholders, Putrajaya Perdana is anticipated to expand its presence to the Middle East.

Meanwhile, PJBumi Bhd told Bursa Malaysia on Monday that its substantial shareholder, PJS Industries Sdn Bhd, planned to sell a 10.2% stake to Al-Saudia for RM3.1mil. This was on top of the 25% that PJS disposed of to Metro Utilities Sdn Bhd in September. PJBumi, which is trying to return to profitability, is involved in the design, trading, installation and maintenance of fibre-reinforced plastic, reinforced concrete sewage treatment plants and underground petrol cum storage tanks.


It also manages wastewater treatment, solid waste and garbage collection.

The Government¡¦s efforts to improve the quality of water in the country by rolling out various projects look set to benefit PJBumi. Another company that is going to see a new shareholder is low-profile water player Loh & Loh Corp Bhd. The shares, which are usually thinly traded, seemed to have sprung to life, having appreciated more than 30% over the one week period. The counter was last traded at RM4.12 before being suspended in afternoon trade yesterday.

Loh & Loh told the exchange that its substantial shareholder, Vital Achievement Sdn Bhd, intended to dispose of its shares. An analyst at AmResearch said Loh & Loh was well known as a dam builder in the water sector, having completed several jobs as a sub-contractor for Gamuda Bhd. The company also has experience in bulk earthworks and rail track construction, having built bridges for the Ipoh-Rawang double-track project.

Aseambankers in a report said the domestic construction scene could be seeing another boom, given that at least RM165bil worth of infrastructure and development projects identified by the Government and the private sector were likely to kick off by the turn of the decade. Government spending should pick up since it had to date only spent 25.4% of the RM200bil in development allocation under the Ninth Malaysia Plan, it said.

¡§We foresee high impact and chunkier projects in the rail, water, and oil and gas sectors, and the government¡¦s regional development efforts, to be the key drivers,¡¨ the brokerage added.

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The way I see it this is a good tonic for the local construction industry. Of course, this has something to do with IDR, ECER, NCER just being launched, It is also related to the relatively competitive project management costs that Malaysia has to offer. With various crisis happening almost everywhere in the world, Malaysia is drawing construction FDI interests and possibly JV, smart partnership, strategic alliance and even merging possibilities would be happening. Despite my worries about uncontrolled construction materials cost; come to think of it; the FDI may help the local construction firms in terms of long term financing - thus may help in the long run to ensure the construction industry sustains.

There are somehow other concerns:

a. Shareholding in terms of JV or smart partnerships? Will our construction firms be too strict and not embarking on a 'win-win' situation?

b. Is the local construction firms ready with

i) all the necessary expertise,

ii) possible mixed work cultures influence,

iii) more than enough 'quality' services to provide - in terms of system/process/workmanship, the necessary infrastructures/machinery/ICT capabilities, corporate governance good practices etc.?

c) Will (more and more) our financial institutions be willing to cooperate - help out the local construction industry or just hope that the foreign construction firms come out with majority of financial backups and in the end, we promise them a big amount of concessions, contra with finished properties, or share the future profit reaped from the finished projects? etc? in order to cover the financial backups that are rendered by the foreign construction firms? (via foreign financial institutions e.g. soft loan or long terms bonds or any other financial instruments)

Thus, while we are happy almost seeing big money coming in, I think the local construction firms should also think of what I've said herein. Based on history (and my experience working with the local JV partners) many mega projects management appear to love doing things 'last minute' - I hope this is not the example we're going to show them.

Let's welcome construction FDI with wide hands..WELCOME..but please...let's local construction firms be ready to show a very professional ethics in terms of our personal traits, business, technical, system etc.

The Star Global Malaysians Forum - Posted: 15 February 2006 at 6:51pm

Quickies on Global Economy

2004 - catching up. 2005 - a bit slow. 2006 - moderate perhaps at 3.5 %. average growth.Progress in developing countries - coming up fast. Performance in US, Europe and Japan - moderate. South East Asia - forecasted 5-6% growth (2006)

Key Global Issues requiring attention 2006 :

* employment,
* inflation,
* surging/fluctuation/control of oil price,
* deficit,
* stock market and other investments,
* balancing liquidity and interest rates,
* Global Exchange Rate/Fiscal policies - review and improve till the best is achieved,
* Disease & Epidemic Control
* Terrorism
* Price of Non-Oil Commodity
* Natural Disasters

Good News?

* Property Market - potentially booming
* International Trade - still OK
* more Free Trade Zone (hopefully)
* Food & Drugs Industry - still OK
* Service industry - still OK but be more susceptible 'on things happening around you'

Alert?

* Agriculture/Biotechnology - focus on domestic growth rather export,
* International Conventions - 'walk the talk - not talk the walk' - no lip services,
* More FDIs
* More financing and debt relief
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Posted: 13 March 2006 at 6:03pm

I think almost all quarters relevant have unanimously agreed that the stock market and the economy will see a better performance this year.

Since earnings from export have now shown signs of good performance, the GDP will definitely rise to - if not = 6% at least > 5%. I'm also 'betting' on this year's GLC's improved performance and FDI pouring in. I must say that I'm quite impressed with 'positive' signs been happening around me since nearly a week now (that's explains my 'long dissapearance' from this forum topic for almost a fortnight. Well, been roaming in the physical world to run some 'experiments') such as smooth mergers and acquisitions of finance/banking sectors, current stock value on the exchange, increased interest in Mesdaq, - hmmm...we should be lucky I guess.

I wanted to be optimistic for just this moment - The above concise statement would definitely be 'absorbed' into the 'uncertainties' to 'restore balance' especially those related to interest rates, oil price, policies, inflation, ringgit alignment, technology etc. The 'balancing restoration' will create the 'cushion' for future impact.

Yeap...I think we're quite ready...

p.s. 15/03/2006 - forgot to add another issue - employment...I'm also quite happy to see some 'corporate sectors' especially banking/finance move to take in graduates - training and paying them more handsome allowances - eventually employing them.