KUALA LUMPUR: Malaysia's recent stability and steady growth are paving the way for the government to implement critical reforms, including the overhaul of costly fuel and power subsidies, said Morgan Stanley Investment Management.

In a research note today, the investment management company said as a key beneficiary of the China Plus One strategy, Malaysia is well-positioned for more investments, particularly in its expanding data centre sector, capitalising on the ongoing "tech war" between the United States and China.

"We believe Malaysia is worth another look. Political stability has encouraged much-needed reforms, while MADANI Economy, a 10-year development plan launched in July 2023 aims to reduce red tape, promote economic growth of regions outside Peninsular Malaysia and enhance the efficiency of government-related enterprises," it said.

"Subsidies peaked at 4.3 per cent of gross domestic product (GDP) in 2023, accounting for almost 25 per cent of total government expenditure. This year's budget has projected a reduction in subsidies by over 30 per cent," the firm said.

It noted that the government has already removed support from chicken and eggs and applied targeted subsidies on diesel and electricity.

"The real test will come with the rationalisation of RON95 prices, which accounted for around 60 per cent of subsidies in 2023," it said, adding that the rise in RON95 prices will likely be phased in, starting later this year or in early 2025.

On the positive side, the research note said Malaysia is witnessing a resurgence in foreign direct investment (FDI) after years of stagnation.

"Since 2021, Malaysia has attracted US$24 billion in data-related investments helping the country promote itself as Asia's data centre hub," it said.

It added that with affordable land, electricity and water along with a stable geological environment outside of earthquake zones, it has become an attractive destination for tech companies, which should also bolster the ringgit.