RaboResearch - Economic Research

Country Report Malaysia

Country Report


Growth in Malaysia is expected to slow slightly in the coming years. Lower oil prices will hurt government income in 2015. As the political career of opposition leader Anwar Ibrahim has ended, the opposition coalition has been weakened. 

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 over 30% of GDP and large sovereign wealth funds, Malaysia has a strong external position.

(-)       Fiscal balance shows a structural deficit

Despite the large oil revenues, the government budget shows a deficit of between 3-5% of GDP. Subsidies and (infrastructure) investment are the main drivers of the deficit.

(-)       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. Growth is expected to slow, albeit only slightly.

Growth accelerated to 5.9% in 2014, up from 4.7% in 2013, but is expected to slow to around 5.5% in 2015 and 2016. In 2014, growth was driven by strong domestic demand growth, as usual, and a positive contribution of net exports, which is unusual. These forces counteracted a slowdown of government investment that reduced overall investment growth to 4.3% last year, the slowest pace since 2009. Although household debt is high, at about 87% of GDP in September 2014, and the central bank has been implementing macro prudential measures such as LTV ratio’s, private consumption growth is expected to remain more or less stable in 2015. Investment growth is estimated to accelerate again as a number of infrastructure projects get underway. Even so, overall growth is estimated to slow to around 5.5% (figure 1), as the external sector will once again contribute negatively to overall GDP growth. Import growth is likely to remain stable on the back of stable domestic demand growth. Export growth, meanwhile, is expected to slow on the back of lower commodity prices. 

Figure 1: Growth expected to slow slightly
Figure 1: Growth expected to slow slightlySource: EIU
Figure 2: Budget deficit to widen this year
Figure 2: Budget deficit to widen this yearSource: EIU

2. Inflation to remain at slightly elevated levels.

At an average of 3.1% in 2014, inflation is slightly elevated for Malaysian standards – but fairly low compared to regional standard. In 2012 and 2013 inflation averaged 1.7% and 2.1%, respectively. Main reason for the relatively elevated inflation level was a reduction of a number of subsidies. Fuel subsidies have been reduced and sugar subsidies were abolished. Bank Negara Malaysia (the central bank) raised its policy interest rate mid-2014 to counter rising inflation. This year, the introduction of a goods and services tax (of 6%), expected in April, will put upward pressure on consumer prices. As a result, inflation is expected rise slightly again this year, to around 3.2%, before starting to ease in 2016.

3. Lower commodity prices will undo some of the fiscal improvement.

Malaysia’s government finances had been improving in the past years, but this year the budget deficit is likely to widen again. Despite large oil and gas related revenues, Malaysia’s government usually runs a substantial budget deficit. Relatively large subsidy programs and money transfer programs, as well as spending on large long-term investment projects that aim to turn Malaysia into high-income country by 2020 are the main drivers of the deficit. In the past years, however, the government has managed to reduce the budget deficit from 4.8% of GDP in 2011 to 3.6% of GDP in 2014, as it scaled down its subsidy programs and eased public investments. Prudent spending policies are expected to be maintained, which will further lower public expenditure, which was around 26% of GDP in 2012 to around 22% in 2016. However, oil and gas related revenues, which account for roughly 40% of total government income, will be significantly impacted by the currently low oil prices. As a result, the budget deficit is estimated to widen to 4.7% of GDP this year, but  to improve again in 2016 if oil prices recover.

4Opposition has to search for new leader

The dismissal of the appeal of opposition coalition leader Anwar Ibrahim against his conviction for sodomy has ended his political career and the opposition will thus face the difficult task of finding a new leader. Malaysia’s top court dismissed Anwar Ibrahim’s appeal to his conviction for sodomising his male aid in 2008. Sodomy is a crime in Malaysia, even between consenting adults. An initial acquittal by Malaysia’s High Court in 2012 was overturned by the Court of Appeal in 2014, and Anwar Ibrahim was sentenced to 5 years in prison. He appealed the conviction, but on February 10, 2015, his appeal was dismissed. As a result, Anwar will not only have to serve his prison sentence, he will also lose his parliamentary seat and be barred from any official political position for five years after his release. It was feared that the dismissal of Anwar’s appeal could lead to street protests. However, the government distanced itself from the court’s decision and only some small protests have taken place and major unrest is unlikely. Main consequence is therefore that the opposition coalition, which constitutes Anwar Ibrahim’s PKR, the Islamist PAS and the DAP, which represents ethnic Chinese, will have to search for a new leader, which will be a difficult task as there are no candidates available of Anwar’s stature. The high court’s decision comes at a time that the opposition coalition was already weakened due to increasing differences of opinion. Overall, it therefore seems that the Barisan Nasional coalition of prime minister Najib Razak will face a more fragmented opposition that will likely lack strong leadership. This increases the likelihood that his coalition will remain in power until the next elections in 2018 even further and may face less opposition at that time. 

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 middle-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 83% of GDP in 2014. 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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