RaboResearch - Economic Research

Country Report Malaysia

Country Report



The 2013 elections kept the ruling BN coalition in charge of Malaysia, but losing the popular vote gave the coalition a wakeup call. The outlook for economic growth is stable, although the high household debt poses a medium term risk.


Strengths (+) and weaknesses (-)

(+) Strong business environment

The sixth position on the World Bank’s Ease of Doing business ranking indicates one of Malaysia’s key strengths: a strong business environment.

(+) Strong external position                 

Malaysia’s current account balance has been in surplus since the end of the Asian crisis. Combined with an import cover of close to 7 months, external debt of just 30% of GDP and a sovereign wealth funds, Malaysia has a strong external position.

(-) Fiscal position could be better

Despite the large oil revenues, the government budget tends to show a deficit of between 3-5% of GDP. Subsidies and the practice to support growth through (infrastructure) projects reduce fiscal flexibility.

(-) Tensions between ethnic groups

Even though the Malays are the majority in the country, the Chinese and Indians dominate the economy. Affirmative action policies have created tensions between the different groups. However, the risk of full blown escalation is small. 

Key developments

1. Disappointing but eventually smooth elections

As expected, the May 2013 general elections were won by the Barisan Nasional (BN) coalition, as this coalition has ruled Malaysia since the country’s independence. However, the elections were closer than they had been for years and the opposition initially challenged the outcome. For the first time in half a century, the BN failed to win the popular vote (47.4% of votes) despite extensive cash hand-outs in the run up to the elections. Even so, the BN held on to 133 of the 222 seats in the House of Representatives, as Malaysia’s electoral system strongly favours the ruling party. As a result, the opposition Pakatan Rakyat (PR) coalition was not content with the results either. The PR has been able to gather much support among urban voters and ethnic minority groups, among others by campaigning against affirmative action policies and in favour of electoral reform. In the run up to the elections, the opposition organised several demonstrations, mainly to call for free and fair elections and relaxation of strict security laws (as an indication: Malaysia ranks 145 out of 179 on the Press Freedom Index). The government acted rather harshly in first instance, as protests were not allowed by law. However, given the negative effect on BN’s popularity, the government later eased the rules for demonstrations. When the opposition called the elections fraudulent and challenged the outcome, an escalation was feared. However, this did not materialize. Going forward, the tensions between the government and opposition and between the different ethnic groups are expected to remain an issue. However, the risk of a full blown escalation has become smaller after the relatively smooth elections.

2. Re-election of Najib bodes well for reforms

In October 2013, Prime Minister Najib Razak was re-elected as head of the UMNO party, the main party within the ruling BN coalition, despite the disappointing election results. With Najib winning the elections, the progressive wing in the UMNO party confirmed its dominant position over the conservative faction. This is expected to support a move towards more pragmatic fiscal and economic policies and a (very slow) move away from race-based policies. The affirmative action policies - the so-called bumiputra policies – were introduced in the 1970s to spur the economic development of ethnic Malays and other indigenous groups and are said to be a drain on the economy.  In September 2013, Najib introduced a new USD 3.2bn affirmative action policy, probably to gain support from the conservative part of his party. However, after winning the re-elections, he is not expected to push for an expansion of the affirmative action policies and indeed might shrink it. As this will affect the Malay support base of the UMNO party, changes will be slow.

More action is seen in the area of fiscal reform. The government announced the introduction of a goods and services tax (GST) in 2015, raised electricity tariffs as per January 2014 and cut back on subsidies on several staple food items. This will help to widen the tax base, reduce dependency on the oil and gas revenues and, most importantly, cut back on subsidies (which account for about 20% of fiscal expenditure). The government aims to bring the fiscal deficit from the estimated 4-4.5% of GDP in 2013 to 3.5% of GDP in 2013. To further improve the fiscal situation, more subsidy reductions are needed. Also, the government will need to limit public investment as a means to support growth. Actions taken to kick-start private sector investment, which has been subdued since the 1998 Asian crisis, seem to work, but it will take some a few more years to get back to pre-crisis level. Finally, the government needs to address the bloated bureaucracy. However, as the bureaucracy employs many ethnic Malays, Najib’s UMNO will be hesitant to address this. 

Figure 1: More fiscal reforms needed
Figure 1: More fiscal reforms neededSource: EIU
Figure 2: Stable growth outlook
Figure 2: Stable growth outlookSource: EIU

3. Stable economic growth, but high household debt

Economic growth is expected to be around 5% in 2014, which is very similar to the estimated 4.8% in 2013. The subsidy cuts and tariff increases will erode the spending power of consumers. However, the recovery of exports, on the back of a strengthening global economy, should be able to offset this weakness. Being a very open economy, a setback of the global recovery would negatively affect Malaysia’s economic growth. In the medium term, the level of household debt poses a risk. Rapid growth of private sector credit in the past years has pushed household debt up from around 70% of GDP in 2006 to almost 85% of GDP in 2013. This has supported economic growth at times when the global environment adversely affected export growth. However, while this level does not create acute stress, total household debt is now rather high for a country with Malaysia’s level of development. Bank Negara Malaysia (BNM, the central bank) has maintained low interest rates in the past years as inflation was benign. Subsidy cuts and later the introduction of the GST are expected to (temporarily) increase inflation. Combined with the worry about household debt and the changing global interest environment, the BNM is expected to increase its policy rate in the coming year. As more than 80% of mortgages have a variable interest rate (according to the Bank of International Settlements), rising interest rates could affect many.

Factsheet of Malaysia
Factsheet of MalaysiaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Malaysia is a medium-income country in Southeast Asia. It has a diversified and competitive economy with a major industrial sector (mainly electronics), substantial natural resource wealth (oil and gas) and a growing agricultural sector (largely palm oil and rubber). Malaysia positions itself as an Islamic Finance centre and has a rather substantial financial sector. It is one of the most open countries in Asia with the export value of goods and services mounting to 86% of GDP in 2013. Singapore and China are its largest export partners, closely followed by Japan and the US. A share of the electronic parts exported to Singapore and China are inputs for final consumer goods shipped to the US and Europe.

Malaysia is a country with a large Muslim population as well as several substantial religious minorities (Buddhist, Christian and Hindu). The ethnic diversity of Malaysia is also large with 50% ethnic Malay and 11% other non-Malay indigenous people (together called bumiputra), 24% Chinese, 7% Indian and 8% other ethnic backgrounds. The generally Muslim Malay make up the largest population group, but the ethnic Chinese and Indians dominate the economy.

Since independence from the UK in 1957, Malaysia’s politics have been dominated by Barisan Nasional (BN) coalition and its predecessor. The Malay-supported United Malays National Organization (UMNO) is the main party in the multi-ethnic coalition. Two other important parties in the coalition are the Chinese-oriented Malaysia Chinese Association (MCA) and the Indian-supported Malaysian Indian Congress (MIC). The elections in 2008 were the first were the BN coalition lost its two thirds majority in parliament due to the strengthening of the opposition Pakatan Rakyat (PR) alliance.

Economic indicators of Malaysia
Economic indicators of MalaysiaSource: EIU

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