RaboResearch - Economic Research

Country Report Malaysia

Country Report


Malaysia flag

Driven by strong domestic demand, real GDP is estimated to have grown by 5.2% in 2012. The GDP expansion may slow to 4.5% this year, because of ongoing weakness in external demand.  Domestic demand will continue to grow strongly. Private consumption will be boosted by a strong labor market and the government cash-handout program in the run-up to the national elections, while the commencement of new infrastructure projects will help to underpin growth in investment spending. On the political front, the general elections will be held in mid-2013. The ruling coalition Barisan National (BN) is expected to win the elections while possible falling short of the two-thirds majority.  Ethnic tensions will continue to prevail. Overall, the economy will remain on a sustainable growth path in 2013.

Author: Preethika Kannan

National facts of Malaysia
National facts of MalaysiaSource: EIU, CIA World Factbook, UN, Heritage Foundation, Transparency International, Reporters Without Borders, World Bank.

Economic structure and growth

Malaysia is one of south-east Asia's most vibrant economies, underpinned by decades of industrial growth and political stability. It is a federation of 13 states and three federal territories, consisting of two regions, Malaysia and Malaysian Borneo, separated by the South China Sea. It borders Thailand, Indonesia, Singapore and Brunei (over land) as well as Vietnam and Philippines (over water). Malaysia’s multi-ethnic, multi-religious society encompasses a majority Muslim population (60%), as well as Buddhist (19%), Christians (9%), Hindus (6%) and other religious minorities. The ethnic diversity of Malaysia is also large with 50% ethnic Malay and 11% non-Malay indigenous people (together called bumiputra), 24% Chinese, 7% Indian and 8% other ethnic backgrounds. Although since 1971 Malays have benefited from positive discrimination in business, education and the civil service, ethnic Chinese continue to hold most economic power and are the wealthiest community. Malaysia is a middle-income country. It hopes to achieve high-income status by 2020 and move up the production value chain by attracting investments in Islamic finance, high technology industries, biotechnology, and services. Malaysia is one of the most open countries in Asia with the export value of goods and services estimated to amount to 85% of GDP in 2012. Singapore and China are its largest export partners, closely followed by US, the former no.1, and Japan. A share of the electronic parts exports to Singapore and China are inputs for final consumer goods shipped to the US and Europe. This makes Malaysia more vulnerable to developments in the US and eurozone. Due to weak external demand from these western countries, we see that the overall export value of goods and services has dipped from 92% of GDP in 2011 to 85% of GDP in 2012.  

Figure 1: Ethnic diversity of Malaysia
Figure 1: Ethnic diversity of MalaysiaSource: EIU
Figure 2: Economic growth
Figure 2: Economic growthSource: EIU

Economic growth in 2012 is estimated at 5.2%, on a par with the 2011 performance of 5.1%. Nevertheless there is significant divergence between external and domestic demand, with the domestic economy outperforming and so far not showing any signs of a slowdown. On the external front, while the Greek sovereign debt situation weighed European demand, the demand from within Asia has also moderated, leading to a decline in exports. By contrast, low unemployment and prolonged disinflation led to an expansion in private consumption by 8.3% year-on-year in 2012. Investment spending jumped by 19.8% showcasing Malaysia's continuing appeal as an investment destination thanks to its good infrastructure, relatively low corruption, and solid rule of law. Some deceleration is expected in 2013, when real GDP expansion may slow to about 4.5%, partly because of ongoing weakness in external demand and partly due to less dramatic gains in domestic investment and consumption.

Malaysia has a rather developed, competitive financial sector compared to other countries with a middle-income level. Domestic credit to GDP is around 127% of GDP in 2012, compared to 106% in South Korea and 38% in Indonesia. The banking sector is well capitalized and therefore meeting Basel III requirements in 2015 is unlikely to be an issue. Since 2010, banks are required to report impaired loans rather than non-performing loans (NPL). Net impaired loans were 1.5% of total loans in September 2012, down from the recent peak of 2.5% in July 2011. Rising household debt and intensifying competition, especially for savings, might pose risks to profitability in the medium term. 

Political and social situation

Since its independence in 1957, Malaysia has seen an uninterrupted rule by the political alliance Barisan Nasional (BN). The multi-ethnic BN coalition currently holds 138 out of 222 seats in the parliament and consists of several parties, mainly the Malay-supported United Malays National Organization (UMNO) and its coalition partners the Chinese-oriented Malaysia Chinese Association (MCA) and the Indian-supported Malaysian Indian Congress (MIC). The first jolt of shock came in 2008 when the ruling BN coalition lost its two-thirds majority in parliament for the first time, thus losing its powers to make changes to the constitution. This loss of political clout was largely a result of a “no confidence” vote against the BN and its main party, the United Malays National Organization (UMNO). Subsequently the then-Prime Minister Abdullah Ahmad Badawi resigned in April 2009 and made way for his successor Najib Razak to take over the premiership of the country. Since then, BN has seen a revival in its political standing, as demonstrated by a number of by-election victories in 2011. While Razak has succeeded in garnering some of the lost goodwill for himself and his party on the back of his reformist attitude, there are still significant challenges to be overcome on the social and political front. The next general elections are due in mid-2013. BN is likely to face competition from the opposition Pakatan Rakyat (PR) alliance, which remains relatively strong despite internal strife. Its leader Anwar Ibrahim is highly popular among various ethnic groups. Nonetherless, BN is likely to win the forthcoming elections owing to a strong voter support base. The biggest pro-election measure that is expected to work in favor of the BN  is the government’s ongoing cash assistance program in which cash handouts are being given to the low-income and rural households. This program is expected to benefit over half of Malaysia’s voter population and therefore work in favor of BN’s electoral odds. A similar program last year immensely increased Najib Razak's popularity, therefore this pre-election measure is expected to bear fruit.

Democracy activists have expressed serious concerns that criteria for free and fair elections have not been met by the government and the government-appointed Election Commission. Over the past few years several demonstrations for open and fair elections have been led by Bersih, a loose coalition of civil-rights and human-rights NGOs. While the initial demonstrations were deemed illegal by the government and led to violent confrontations between the protesters and the police, a recent demonstration was granted a permit and passed peacefully. The government has made this shift to boost its democratic credentials ahead of the elections. In the same line of thought, some election-related rules and regulations have been adjusted,  such as the possibility for overseas Malaysians to cast a postal vote, baring those living in the ASEAN neighbourhood of Malaysia.  However, only overseas voters who have visited Malaysia for a period of 30 days or more in the past five years before the forthcoming elections have a right to cast their postal vote. This regulation, while seemingly progressive, grossly limits the voting rights as most overseas Malaysians live in neighbouring ASEAN countries. Therefore, may people consider these changes as merely perfunctory and that genuine reforms will be necessary to completely satisfy the demands of Bersih and really calm anti-government sentiment in the run-up to elections.

On the social front, the country faces the challenge of sustaining stability in the face of religious differences and the ethnic-based wealth gap. Ethnic and religious tensions have been rising due to a pro-islamic stance adopted by the ruling party, at the cost of other religions. A government supported mandate supporting legislation that bans the use of the word Allah by non-Muslims has been a major source of unrest between the majority muslim population and other religious communities. It brings to question the social notions of an Islamic state.  Affirmative-action policies that favor Malays over other ethnic groups have also caused unrest and have resulted in anti-government protests. Moreover, the government has been accused of using heavy-handed means to deal with dissent, which has angered various ethnic groups. As a result, the biggest security concern for Malaysia right now is a potential conflict between the three main ethnic groups namely Malay & Indigenous Malay, Chinese and Indian.

Malaysia is one of the founding nations of the ASEAN (Association of South East Asian Nations) and generally maintains good relationships with its neighbors, largely based on economic ties, but several issues are ever present in Malaysia’s foreign policy. The relation with Indonesia is occasionally strained by border disputes and migration issues. Problems in Thailand’s southern states, which border Malaysia, also present reccurring conflicts. Finally, Malaysia is one of the countries claiming part of the oil- and gas-rich South China Sea, but has taken a conciliatory attitude towards China. ASEAN and China reached an agreement in August 2011 to set guidelines for cooperation in the area, which is expected to ease some of the tensions built up in the past years. Malaysia’s relationship with the US and Europe is friendly, but not very close.

Economic policy

Key goal of the government is to boost income levels and make Malaysia a high income country by 2020. To achieve this, the government launched a number of programs over the past two years. Common themes of the different programs are enhancing competitiveness (e.g. via addressing corruption and improving education and infrastructure), improving efficiency (e.g. via reducing overlap between government and private sector) and boosting sectors with growth potential (e.g. the tourism and palm oil sectors. 

Figure 3: Fiscal indicators

Figure 3: Fiscal indicators

Source: EIU

Malaysia’s fiscal deficit was around 4% of GDP before the global financial crisis, but deteriorated to 7% of GDP in 2009 due to fiscal stimulus. In 2012, the general government deficit was still elevated at around 4.7% of GDP. The fiscal position is likely to remain weak in 2013-14 as the government struggles to implement fully its programme of subsidy rationalisation. Ambitious investment programs, coupled with perennial delays in subsidy removals weigh on Malaysia's fiscal health. Public debt is rather high at almost 53% of GDP (end 2012). The bulk of the government bonds is held domestically, but foreign interest has increased since end-2004, when foreign investment was negligible. Practically all government debt is ringgit denominated and placement of bonds is supported by the moderately developed capital market and high savings rate in Malaysia.

To structurally improve the fiscal position of Malaysia, the government will need to address its dependency on oil-related revenues, reform the subsidy scheme, implement the long-discussed goods and services tax (GST) and reduce tax evasion. About a third of government revenue stems from the oil and gas industry. While this is lower than a few years ago, it still leaves the government very vulnerable to international oil price fluctuations. As Malaysians are used to low petrol and cheap electricity prices, the government has lingered to implement the unpopular subsidy reform. Reducing tax evasion – currently only 1.9m people and companies pay taxes out of 6.6m registered tax payers – could provide valuable revenues. It is unlikely that these structural reforms will pass through the parliament before the elections, though. A landslide victory for the ruling Barisan Nasional coalition would probably see the gradual withdrawal of nationwide fuel subsidies.

Inflation is expected to have fallen to less than 2% in 2012 on the back of easing commodity prices, making Malaysia one of the few countries in the region where inflation is not a major issue. Since inflation is expected to remain subdued in 2013, no policy rate cuts are expected. If the government is able to push through reforms in the subsidy scheme and the GST, inflation can be expected to be elevated from 2014 onwards, although the government will be cautious and only gradually increase prices A landslide victory for the ruling Barisan Nasional coalition would probably see the gradual withdrawal of nationwide fuel subsidies.

Following a bout of volatility this year, the Malaysian ringgit is expected to follow an upward trend in 2013 and 2014, as  Malaysia's strong economic fundamentals will help to support the value of the ringgit.

Balance of payments

Malaysia generally has a comfortable current account surplus, helped by an export-oriented growth paradigm and a slightly undervalued exchange rate. However, external demand has fallen on the back of economic woes in US and Europe in the past years. This resulted in a decrease of the current account surplus from around 15-16% of GDP up to 2009 to a little over 6.8% of GDP in 2012. The shrinking of the surplus reflects the deterioration in the trade balance as Malaysia's export sector struggles to expand overseas sales against a backdrop of weak external demand in the US and the euro zone. It also reflects the persistent deficits on the services and income accounts.  The large surplus on the trade balance is the main determinant of the current account surplus in Malaysia. Sustained global trade growth in 2014-17 will result in an increase in the current-account surplus to an average of 6% of GDP Moreover, a jump in oil and gas prices could support the country’s current account balance, as Malaysia is a net energy exporter. Both direct and portfolio inward flows were healthy at 3.5% and 3.4% of GDP, respectively in 2012, but in the past year they have not grown as fast as in 2011, owing to weak export receipts. In 2013 and beyond, they are expected to stay healthy as foreign investors continue to look at economies in Asia as better investment prospects than the western world. 

Figure 4: Current account balance
Figure 4: Current account balanceSource: EIU
Figure 5: International investment position
Figure 5: International investment positionSource: Covers offered by official FX-reserves, EIU

External position

Total external debt of Malaysia is forecast at a low 30% of GDP in 2012 and 2013. In absolute numbers, foreign debt is around USD 90bn as of end 2012, which compares favorably to the FX reserves of about USD 137bn in the same time-frame. Less positive is the high amount of short-term debt, which is close to 50% of total external debt. This can largely be explained by the openness of the Malaysian economy to foreign trade, as trade finance tends to be short term. As in 2012, the main risk for reduced credit availability for Malaysia in 2013 will likely stem from an escalating global credit crisis. Malaysia’s liquidity position is strong on the back of ample FX reserves, the surplus on the current account and low debt service costs. In 2013, the liquidity ratio is expected to be 146%, the same level as 2012. The import cover of FX reserves is set at 7 months and the debt service ratio (as % of current account receipts) is forecast to be 19%.

Figure 6: External debt and FX reserves
Figure 6: External debt and FX reservesSource: EIU
Figure 7: Composition of external debt
Figure 7: Composition of external debtSource: EIU
Economic indicators of Malaysia
Economic indicators of Malaysia

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