The labour market remained stable in August, with the unemployment rate holding at 3.0%, consistent with full employment.
Hiring in the services sector is expected to remain firm, supported by resilient domestic demand, though risks persist for export-oriented manufacturing sectors amid impending sectoral tariffs and geopolitical tensions.
We maintain our 2025 unemployment forecast at 3.0% (2024: 3.2%), which should help anchor household spending against external trade headwinds.
We keep our 2025 private consumption growth forecast at +5.1% YoY (2024: +5.1%) and reiterate our 2025 GDP growth projection at +4.2% (2024: +5.1%).
Industrial Production Index (IPI) growth jumped to +4.9% YoY in August (Jul: +4.2%), beating market expectations of +3.4%, driven by a stronger-than-expected recovery in mining output.
The domestic-oriented clusters remained largely on an uptrend, even as broader manufacturing growth stayed uneven. Resilient household spending and policy measures will help anchor demand for domestic-oriented products.
The ongoing semiconductor upcycle continues to support Malaysia’s manufacturing outlook. Nonetheless, bouts of volatility are likely heading into 2026 as the brunt of tariff impacts becomes more visible.
We maintain our 2025 manufacturing growth forecast at +3.7% YoY (2024: +4.2%) and GDP growth at +4.2% (2024: +5.1%).
Budget Highlights
No Surprises. As the first Budget under the 13th Malaysia Plan (13MP), Budget 2026 continues to align with the three pillars of the Madani Economy: raising the ceiling of national growth, raising the floor of living standards, and strengthening governance and public service reform. There were no major policy surprises, as the government maintained a prudent fiscal stance while modestly broadening its revenue base through selective tax measures.
Fiscal Consolidation. The government targets a narrower fiscal deficit of –3.5% of GDP in 2026F (2025E: –3.8%), in line with the 13MP goal of reducing it to below 3% by 2030. The deficit is projected to narrow to RM74.6bn (–2.7% YoY; 2025E: RM76.7bn) in absolute terms, supported by GDP growth of 4.0–4.5% (2025E: 4.0–4.8%), broadly matching our 4.1% forecast. Development expenditure (DE) will edge up to RM81bn (+1.3% YoY), below the RM86bn annual average implied by the RM430bn allocation for 2026–2030, leaving room for stronger rollout in later years.
Tax Expansion but More Handouts. Budget 2026 raises excise duties on cigarettes and alcoholic beverages from 1 Nov 2025 and introduces a carbon tax on the iron, steel, and energy industries from 2026. No further SST expansion was announced, offering relief to SMEs. These measures should lift government revenue by 2.7% YoY to RM343.1bn (2025E: RM334.1bn), while cash assistance under STR and SARA will rise 15.4% YoY to RM15.0bn (from RM13.0bn in 2025), reflecting continued social support.
Sabah and Sarawak Remain in Focus. Development allocations for the Borneo states outpace the national average, with Sabah rising to RM6.9bn (+3.0% YoY) and Sarawak to RM6.0bn (+1.7% YoY). Key projects include the RM765m Southern Link 230kV transmission line in Sabah, RM48bn for highway and road infrastructure across both states, and the RM2bn SALAM submarine cable system linking Johor, Sabah, and Sarawak.
Rare Earth in the Spotlight. The Government has allocated RM10m to continue rare-earth resource mapping, with a focus on downstream value-chain development through Khazanah-led international joint ventures, signalling Malaysia’s intent to establish a strategic foothold in the global rare-earth ecosystem.
Capital Market Measures. Stamp duty on buy-side transactions of structured warrants (previously 0.1%) will be exempted, while the existing stamp duty exemption for ETF transactions is extended to 2028 to boost market participation and trading liquidity.
Largely Neutral Market Impact. We view Budget 2026 as largely Neutral for equities, balancing social-support measures against higher sin and carbon taxes. We trim our 2025F FBM KLCI year-end target to 1,670 (from 1,680), based on 14.5x FY26F EPS, after modest earnings revisions. Despite escalating US–China trade tensions, where President Trump on Friday threatened a 100% tariff on Chinese goods starting 1 Nov citing China’s rare-earth export controls, we expect the index to hold up, supported by a prospective Fed rate cut and typical year-end window-dressing.
Sector Highlights. Budget 2026 reinforces the government’s focus on inclusive growth, high-value industries, and the energy transition, consistent with the NIMP, NSS, NETR, and APG agendas. Key sector beneficiaries are: (i) consumer, supported by higher cash handouts; (ii) tourism-related sectors such as consumer, REITs, and transport, driven by the RM700m allocation for Visit Malaysia 2026 campaign; (iii) renewable energy, benefiting from continued policy support and the introduction of 2GW LSS6 capacity; and (iv) technology, underpinned by incentives for semiconductor and AI-driven industries. Conversely, oil & gas, power, steel, and sin sectors may face earnings headwinds from new carbon and excise tax measures.
| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.212894 | 4.246402 |
| EUR | 4.925348 | 4.934954 |
| CNY | 0.592662 | 0.593823 |
| HKD | 0.542079 | 0.546393 |
| SGD | 3.250847 | 3.276896 |
