MALAYSIA concluded 2025 with notable resilience. Despite navigating global tariff tensions, the economy is projected to deliver GDP growth of 4% to 4.8% for the year. The government’s commitment to fiscal discipline has been evident, with the fiscal deficit narrowing to 3.8% and federal debt issuance declining substantially from RM100 billion in 2022 to RM77 billion in 2025.
The targeted subsidy reforms implemented this year have generated approximately RM15.5 billion in annual savings. These funds have been strategically redirected toward welfare programmes, cost-of-living support, and infrastructure development. For fixed income investors, this fiscal consolidation has eased sovereign bond supply pressures and contributed to pricing stability throughout the year.
2026 outlook: Strategic priorities and growth drivers
The 4th Madani Budget 2026, themed “The People’s Budget“, maintains the focus on fiscal discipline while advancing sustainable economic growth. We anticipate GDP growth of 4% to 4.5% alongside a further reduction in the fiscal deficit to 3.5% of GDP.
Beyond fiscal metrics, the government is advancing meaningful initiatives in Islamic finance. The establishment of Labuan IBFC as a Digital Islamic Finance Hub, coupled with the introduction of Global Sukuk Tokenisation and Tokenised Cash-Waqf Sukuk, represents significant innovation in the Islamic finance space. Additionally, Climate Sukuk issuances will finance green projects with returns structured around carbon credits, expanding opportunities in sustainable finance.
On the policy front, the government has allocated RM1 billion for wage incentives to encourage salary increases, with a commitment to achieving a RM1,800 monthly minimum wage by 2027. Infrastructure spending is accelerating, particularly in Sabah and Sarawak. While these measures support economic growth, investors should monitor their implications for government expenditure patterns and corporate profitability.
Investment implications for fixed income
The outlook for Malaysia’s fixed income market in 2026 is constructive. Continued fiscal discipline and controlled debt issuance should maintain manageable sovereign bond supply, supporting favourable pricing dynamics. The reducing deficit trajectory and disciplined fiscal framework create a supportive backdrop for fixed income investments.
The sukuk market warrants particular attention. Given the government’s emphasis on Islamic finance innovation and sustainability, we expect increased issuance of Climate Sukuk and ESG-aligned instruments. Growing institutional demand for these products may result in attractive pricing opportunities.
From a positioning perspective, we recommend maintaining core allocations to high-quality government and corporate bonds for stable income generation. Consider building exposure to sukuk, particularly sustainability-linked instruments that align with the government’s strategic priorities. Active duration management will be essential as interest rate expectations evolve throughout the year.
Investors should remain mindful of execution risks related to fiscal targets and subsidy reforms. External economic conditions and the impact of progressive wage policies on corporate margins also merit close monitoring. A diversified approach with tactical flexibility will be important for navigating the evolving landscape.
Balanced opportunity
Malaysia’s fixed income market in 2026 presents a compelling combination of fiscal discipline, Islamic finance innovation, and sustainability-focused initiatives. The fundamentals are in place for an attractive investment environment, though success will depend on effective policy execution.
We recommend a balanced portfolio approach that emphasises quality while capturing opportunities in the evolving sukuk and sustainable finance markets. The structural improvements underway are encouraging, but maintaining flexibility to adjust positioning as conditions develop will be prudent. For investors seeking stable income with exposure to innovative Islamic finance instruments, Malaysia offers meaningful opportunities in the year ahead.
This article is contributed by Franklin Templeton Malaysia country head and CEO Datin Nor Hanifah Hashim (pix).
Note: This document is for information only and does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it.
The Sun Malaysia
