(Bloomberg) -- Joel William is about to begin a feasibility study for a Chinese client weighing a chemical plant in Sarawak, Malaysia's biggest state on the northern coast of Borneo.
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Just two years ago, the manufacturer, whose products are used in chip production, had planned to build the factory in the Middle East after securing funding there. The conflict in Iran upended those plans, sending the project to Malaysia instead, drawn by the country's established industrial base and relatively stable political environment.
"Clients are doubling down on their capacity" as investments pour into sectors from semiconductors to medical devices, said William, founder of engineering consultancy Medhini Group Sdn. "Malaysia is seen as a neutral country."
Such projects will build on the more than 116 billion ringgit ($28.4 billion) of inflows that poured into Sarawak over the five years through 2025, making it one of several hotspots in a nationwide investment boom. Johor is attracting data center developers, while Penang is drawing fresh chip-related capital amid a global race to build artificial intelligence.
Malaysia's emergence as an artificial intelligence manufacturing hub marks a striking turnaround for a country that not too long ago was better known internationally for the multibillion-dollar 1MDB scandal than cutting-edge industry. As global trade and geopolitical tensions darken the outlook, a wave of investment is turning the Southeast Asian nation into an unlikely winner in the race to build AI infrastructure.
Malaysia is now one of the world's four largest net exporters of AI-related hardware, alongside South Korea, Taiwan and Thailand, according to the International Monetary Fund. Data center investments have also climbed to an estimated nearly 18% of gross domestic product — the highest share globally, HSBC Holdings Plc analysts say.
The country's growth is already exceeding forecasts and economists expect that momentum to continue, buoyed by tech-driven investment and exports.
Gross domestic product surged 5.8% in the second quarter, outpacing the 5.2% consensus estimate, as domestic demand, AI-linked investments and electronics exports countered the impact of the war in the Middle East. JPMorgan Chase & Co. subsequently raised Malaysia's 2026 GDP forecast to 5.3%, putting it ahead of most regional peers.
Malaysia's status as a net energy exporter has also helped buffer its economy as other countries grapple with rising oil prices and inflationary pressures. By comparison, growth conditions remain precarious in Indonesia amid narrowing fiscal space and policy uncertainty, while high energy costs and a graft scandal weigh on prospects in the Philippines.
"This year is a transition year" for Malaysia, said Ch'ng Cheng Siew, chief investment officer at Areca Capital Sdn., which manages 5 billion ringgit in mixed-asset portfolios across Asia, including Malaysia and Singapore, with exposure to AI and infrastructure. "Investments that have been coming in over the last few years will translate into industrial output. That's why I'm quite positive."
For investors, the question is whether political risks will disrupt the policy continuity that's underpinned the recent investment boom. The defeat of Prime Minister Anwar Ibrahim's coalition in the Negeri Sembilan state election on Saturday, following recent losses in Johor and Sabah, has raised doubts about his prospects of winning another term in the next national election that must be held by early 2028. "Malaysia's economic appeal is still strong and it's very unfortunate that it's not appreciated by the wider electorate," said Amir Fareed Rahim, director of strategy at consultancy firm KRA Group. "With the general election looming, we can expect a bumpy road and increased political noise. But broadly, policy consistency will remain."
The medium-term outlook remains supported by government projects and a private-sector push into AI infrastructure.
Malaysia has attracted billions of dollars as companies including Infineon Technologies AG, Nvidia Corp., ByteDance Ltd. and other tech giants establish chipmaking hubs and rush to carve out access to computing power. Approved data center investment between 2021 and the first half of 2025 amounted to 144.4 billion ringgit.
The northern state of Penang, known for its decades-old semiconductor ecosystem, is also benefiting from higher-value inflows that will position it for sustained growth, according to Wong Siew Hai, president of Malaysia Semiconductor Industry Association.
The state is expanding its tech ambitions with Silicon Island, a huge land reclamation project aimed at attracting more chipmakers and high-tech manufacturers. With the country's exports of electrical and electronic products — including semiconductors — expected to exceed 800 billion ringgit this year, the outlook remains robust.
Other sectors are also getting a lift. Construction and engineering firm Gamuda Bhd. said in June that its order book hit a record high of 52 billion ringgit as data center projects more than offset weakness in its property and infrastructure segments.
"The investment thesis for Malaysia still makes a lot of sense" given its skilled English-speaking workforce and lower cost, said Justin Chin, managing director of Gamuda Engineering, who expects the group's pipeline of data center work to continue growing. Gamuda is the key developer of Penang's Silicon Island.
Malaysia's competitiveness has improved markedly in recent years, climbing eight spots to 15th among 70 economies in the 2026 International Institute for Management Development World Competitiveness Ranking after an 11-rung jump last year. The country ranked 34 out of 67 nations just two years ago.
Restaurant chain owner Oriental Kopi Holdings Bhd. — known for its charcoal-roasted coffee and egg tarts — has also been expanding in Johor, the country's main data center hub, where the influx of investment is attracting workers and creating more demand for coffee and meals.
Strong tourist arrivals have supported its outlets in the south, too, as well as in capital Kuala Lumpur and at airports, Managing Director Calvin Chan said. That's giving the team confidence to press ahead with plans to open 10 new stores across the country and in Indonesia this year despite concerns over potentially softer consumption.
Malaysia attracted more than 21 million international visitors in the first half, up 2.5% from the same period last year.
Still, sustaining Malaysia's momentum may become more challenging as fiscal pressures build.
The government is relying on targeted fuel subsidies to shield households and businesses from higher energy costs, which diverts resources from infrastructure and other development projects that would support long-term growth, according to Lee Heng Guie, executive director of the Socio-Economic Research Center.
And while Malaysia is a net energy exporter, its reliance on imported crude leaves it vulnerable to higher oil prices. Spending on petrol and diesel subsidies could climb to 40 billion ringgit in 2026, more than double the 15 billion ringgit allocated in this year's budget.
Lee — who was once an economist at Malaysia's central bank — added that there's rising risk of an uneven economic growth as tech-based industries outpace consumer-facing sectors.
While Malaysia has maintained a reasonably strong investment story through a difficult period for the region, investors will be "alert to the fragility of the political arrangement underpinning that stability," said Raihan Zulimran, managing director at strategic advisory firm FGS Global in Singapore. Anwar's Pakatan Harapan coalition won only 11 of 36 seats in Negeri Sembilan over the weekend, down from 17 previously, with even Malaysia's transport minister losing his place in the state assembly.
The country also still faces governance challenges. A Bloomberg investigation earlier this year alleged that officials at the Malaysian Anti-Corruption Commission worked with businessmen in attempts to seize control of listed companies. Those allegations were denied.
For now, policymakers remain upbeat. The ringgit has remained steady this year even as the Indonesian rupiah and Philippine peso hit record lows. While local equities have lagged most regional peers, they've drawn investors seeking shelter from the volatility roiling global markets. Revenue reforms implemented since 2023 have sufficiently broadened the tax base to sustain gradual fiscal consolidation, according to Moody's Ratings, which expects the country's economy to grow faster than all other A-rated peers.
Malaysia's central bank also noted that stronger global growth on a de-escalation of the Middle East conflict, firm demand for electrical and electronic goods and higher tourism activity can provide additional upside to local businesses.
Back at Medhini, William has had to turn away work because he can't hire project managers fast enough. He's hoping to expand his workforce from 15 to around 80 people as inquiries for new projects continue to come in. Malaysia's unemployment rate is hovering around 3%, near the lowest in a decade.
"We haven't seen a slowdown," William said. "If anything, Malaysia has become more attractive."
--With assistance from Paul Abelsky, Bernadette Toh and Claire Jiao.
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