Malaysia and China look to boost two-way trade

A diplomatic approach towards regional issues has strengthened Malaysia’s efforts to boost trade and investment ties with China, setting the scene for the two countries to roll out an ambitious programme of increased financial cooperation.

Last October, China and Malaysia agreed to raise bilateral ties to a “comprehensive strategic partnership”, with a focus on boosting military cooperation and increasing two-way trade almost three-fold to $160bn by 2017.

Deputy Minister of International Trade and Industry, Datuk Lee Chee Leong, announced in July that Malaysia’s exports to China for the year had already reached $106bn (RM341bn). He added that Malaysian exports currently accounted for 23.9% of China’s total trade with Asean countries.

Although Malaysia is China’s largest Asean trading partner, more can still be done to help the dynamic reach its full potential say Malaysian business groups in particular.

Building ties

The strengthening of bilateral ties comes against a backdrop of growing tension between Beijing and key Southeast Asian nations over maritime disputes in the South China Sea.

While the sovereignty issues simmer, however, diplomatic relations between China and Malaysia remain positive, as US state department envoy John Finkbeiner pointed out in a 2013 study. “Malaysia appears to pursue a non-confrontational approach in the sovereignty dispute, which differs markedly compared to Vietnam and the Philippines,” he wrote. “The first pillar regards Malaysia’s firm commitment to increase its trade and investment ties with the world’s most dynamic economy [China] in order to hedge its other strong economic ties, with the US in particular.”

However Malaysia’s approach has contributed to a growing imbalance in bilateral cross flows between the two countries. Malaysia has channelled almost $7bn of investment into China, but received just $1bn from the Asian giant in return.

Last year, the National Chamber of Commerce and Industry Malaysia (NCCIM) called on the government to intervene by adopting a more pro-active stance in correcting the current investment imbalance, which falls in China’s favour.

The Chinese ambassador to Malaysia, Huang Huikang, has given a reassurance that efforts to address the imbalance are making headway. Chinese interest in Kuantan Industrial Park is expected to help take the country’s investment in Malaysia past the $2bn (RM6.42bn) mark this year, he said. The ambassador added that Beijing aimed to encourage more of its companies to increase their investments in Malaysia.

While Malaysian exports to China remain dominated by agricultural products, such as palm oil, Chinese firms are strengthening their presence in the technological sector as well as in cultural initiatives such as the $91.47m Impression Melaka venture, a live theatre project, which is being rolled out jointly by Malaysia’s PTS Impression Sdn Bhd and China Impression Wonders Art Development Co. Ltd in Malacca.

A readiness to do business in the Chinese currency renminbi (RMB) is giving Malaysia’s exporters an added advantage, according to a HSBC Commercial Banking survey released in July.

“The settlement of goods and services in RMB will remove the foreign exchange risk exposure from the Chinese companies and hence allow them to reduce their cost,” HSBC Bank Malaysia Bhd head of global trade and receivable finance, Vincent Sugianto, said in a statement. “Ability to trade in RMB also allows Malaysian companies to tap into a wider customer base in China which currently does not have access to foreign currency trades.”

Containing shocks

Despite Malaysia’s healthy trade relations with China, however, external factors risk weighing on bilateral ties.

The disappearance of Malaysia Airlines’ Flight MH370 in March put a strain on the relationship between the two countries, sparking a 19% drop in visitors from China for the month of April year-on-year (y-o-y), although these figures have since rallied. The casualties included 153 passengers who were Chinese nationals.

“That the Chinese press has begun to soften its tone towards Malaysia’s government [over the MH370 search] reflects the view that China is better off swallowing a tough pill than taking any action that could provide the US with a major strategic advantage at Beijing’s expense,” the South China Morning Post said.

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Malaysia braces for impact of solar energy expansion

The future of solar energy in Malaysia received a powerful boost on June 16 with the commissioning of the country’s largest solar power plant to date. The project’s operator, Malaysia-based Amcorp Group, awarded the production of the power plant’s solar panels to Chinese manufacturer Yingli Green Energy Holding Company. The project spans an area of almost 14 ha and will require some 40,000 photovoltaic (PV) units, which are estimated to produce 13.6m KWh of electricity annually.

While Amcorp Group’s decision to commission Yingli Energy is a testament to China’s dominance in the field of solar panel production, Malaysia is quickly gaining a reputation as one of the region’s leaders in renewable energy production.

In January, plans were unveiled for the installation 19 MW of solar energy units at Kuala Lumpur International Airport. Malaysia Airports’ managing director Bashir Ahmad told Renewable Energy News, “Rooftops, parking lots and ‘buffer’ areas at airports are traditionally not multi-purpose facilities, but we’ve turned them into a clean energy generation facility. This initiative also demonstrates our support towards the government’s initiative in introducing renewable energy and also to further reduce our carbon footprint.”

Pro-solar policy

Malaysia’s increasing momentum in the renewables arena is also attributed to a generous feed-in tariff (FIT) policy which requires energy providers such as Tenaga Nasional and Sabah Electricity to purchase power from Feed-In Approval Holders (FIAHs) at a rate that ranges from RM0.85 ($0.02) to RM1.23 ($0.38) per kilowatt produced. The FIT system is part of a larger development initiative set forth by the Malaysian government in June 2010, the 10th Malaysia Plan, which targets 5.5% of energy production to be derived from renewable sources by 2015 and 11% by 2020.

A tariff war currently taking place between solar panel producers in China and the US has further strengthened Malaysia’s growing status in the solar power arena. Chinese producers face US import duties of between 18% and 35% on solar panels, a response to US allegations that Chinese solar panel manufacturers have dumped their products into the US market.

To bypass the tariff, Chinese PV cell producer Comtec Solar Systems has opted to move its manufacturing operations to Malaysia. “We have been considering producing in Malaysia for over a year because we have a major customer there, but now our main consideration for moving there is to avoid trade barriers in our main markets,” John Zhang Yi, CEO of Comtec Solar, told the South China Morning Post.

The question of efficiency

As a nation historically known for an abundance of natural resources including oil, gas, hydropower and coal, the decline in hydrocarbons reserves in recent years has reinforced a national desire to secure renewable energy sources. Solar energy has proven to be chief among the renewables with a market share of 43%, followed by small hydropower (26%), biomass (26%) and biogas (5%).

As with any industry in relative infancy, technological efficiency remains a topic of debate among those for and against solar power production. The amount of energy produced per solar panel, a maximum of about 33.5% efficiency, is still a concern for many looking to invest in the technology. In comparison to conventional energy sources, the cost of solar power is relatively high.

While Malaysia’s FIT system claims to take the high cost of solar panel installations into account when considering what it takes to see a return on investment, the rates received by the FIAHs are dependent on the date of installation. Those that installed PV equipment at earlier times will receive higher rates than those which do so later on. This is based on the assumption that the price of solar technology will decrease as it becomes more efficient and widely available.

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Malaysia: In search of broader tourist base

A focus to attract more tourists from growing regional markets will spearhead Malaysia’s efforts to boost visitor numbers in 2013. However, efforts to increase arrivals from certain key segments may not be enough to drive visitor figures up across the board.

Despite ranking as one of the world’s top 10 tourist destinations, the market base remains narrow, with more than half the visitors coming from neighbouring Singapore. This year will see Malaysia focus on broadening its reach to tap into emerging markets that are demonstrating significant growth, such as India.

Final figures still to be published are expected to show that despite global economic uncertainty, visitor numbers to Malaysia from India rose 36% in 2012, according to international media in mid-January.

A total of 514,926 tourists entered Malaysia from India in the first three quarters of 2012, already up 2.6% on full-year visitor numbers for 2011, according to the Tourist Development Corporation of Malaysia (TDC). Zulkifly Md Said, the director of the international marketing division for South Asia, East Asia and Africa at the Malaysia Tourism Promotion Board (MTPB), told reporters he expected the country to have met or topped its target of welcoming around 700,000 arrivals from India in 2012. Malaysia aims to push the number up to 780,000 this year, Said added.

The rise in visitor numbers from India is thought to be due to a combination of improved connectivity between the two countries and an increase in the range of packages and products being offered to Indian tourists. Reports also suggest that India’s population, especially its affluent middle class, are increasingly looking at medium-haul destinations, such as Malaysia, which remain more affordable than Europe and North America, long popular with the Indian elite.

Zulkifly said Malaysia was benefitting from well-formulated packages aimed at targeted groups in the Indian market, including families and honeymooners. The country also offered quicker visa processing, a wide range of tourist attractions and affordable food and travel costs, he added. With the world economy still struggling, and many tourists from emerging-markets on tight budgets, officials have suggested that Malaysia’s relatively low costs are also giving the country an important competitive advantage.

Air connectivity has risen to meet growing demand, with Malaysia Airlines (MAS), the country’s flag carrier, increasing capacity between India and Malaysia by 25% in 2012. The airline expects to continue expanding its routes to India this year. Malaysia’s low-cost AirAsia, which has strengthened its regional presence in recent years, is also looking to increase the frequency of flights to the Indian cities it serves.

China is another growing market that offers potential for Malaysia’s tourism industry in both the leisure and business segments. The TDC set a target of attracting 1.5m visitors from China in 2012, up by 20% on 2011’s figures. As of end-September 2012, 1.18m Chinese tourists had visited Malaysia, up from 933,540 in the same nine months of 2011. The country hopes to break the 2m-barrier by 2014.

Boosting visitor numbers from emerging markets forms a key component of Malaysia’s bid to maintain its position as one of the world’s leading destinations. The country attracted 24.7m international visitors in 2011, placing ninth in the world, according to the UN World Tourism Organisation (UNWTO), just below Turkey, which received 29.3m visitors from abroad, and the UK, with 29.2m. France topped the list, registering 79m international arrivals.

However, the total number of international tourists in 2011 was only up 0.4% from 2010 figures, which reached 24.6m. This figure was a 4% rise on the number of visitor arrivals in 2009, when Malaysia received 23.6m international tourists. Over the same period, earnings from tourism also increased, rising from $15.8bn in 2009 to $18.2bn in 2010 and reaching $18.3bn in 2011.

But broadening its narrow market base remains a challenge for the country. Visitors from Singapore are expected to continue dominating numbers in 2013 and 2014, according to officials. In the first six months of 2012, the top 10 markets, including Singapore, China and India, accounted for 87.55% of the 11.6m arrivals.

Tourism industry leaders in the private sector are keen for the TDC to continue broadening its promotional activities, targeting both emerging markets, including Russia, the Middle East and Eastern European countries, alongside well-established outbound segments such as France and the US. Plans to boost arrivals from diverse sources should also stand the tourism industry in good stead, despite its remaining sensitive to fluctuations in the international economy.

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Malaysia: Industrial production up

Growth in Malaysia’s industrial production has so far been above expectations, suggesting that the manufacturing sector is supported by domestic expansion and reorientation toward the region even though demand in traditional export markets in the US and Europe look uncertain.

Industrial production grew by 4.9% in the first nine months of 2012, according to official data. Manufacturing output rose by 5.2% year-on-year (y-o-y), while the other indices included in industrial production – mining and electricity – rose by 5.9%.

Within the manufacturing sector, production of non-metallic minerals, as well as basic and fabricated metal products, grew by 17.7% over the first three quarters of the year; petroleum, chemical, rubber and plastics increased by 1.9%; and electrical and electronic (E&E) products by 4.4%.

Manufacturing is a vital economic driver for Malaysia, accounting for 35% of GDP when combined with the mining sector. The sector currently employs around 1.02m people, according to the Department of Statistics. The better than expected figures suggest that the regional economic slowdown is easing, supported by government spending, higher domestic consumption and a favourable interest environment. The manufacturing sector’s performance is particularly impressive, given the impact of the eurozone crisis and the slow recovery in the US, both of which have affected global growth this year. Indeed, Malaysia’s nominal exports fell 2% in the third quarter of 2012, bringing y-o-y GDP growth down to 4.9% from 5.4% in the second quarter.

However, the industrial sector may have received a boost from domestic and regional sales, offsetting broader international effects. The government’s investments in infrastructure, higher transfers to public employees, and inflows of foreign capital from investors seeking a haven from turbulent or slow-growing developed markets, have all played a role in keeping the Malaysian economy moving at an impressive pace.

In November, during a visit to Kuala Lumpur, Christine Lagarde, the managing director of the IMF, said she expected the Malaysian economy to grow by 4-5% this year, in line with the government’s target. Low and steady interest rates have helped in this regard. On November 8, Bank Negara Malaysia (BNM), the central bank, opted to keep its key overnight policy rate at 3%, where it has stood since July 2011, to support expansion. Interest rates are particularly important for the capital-intensive manufacturing sector, making it cheaper for industrial firms to borrow to invest, and easier for them to service existing debt.

However, Lee Heng Guie, the head of economic research at CIMB Investment Bank, sounded a note of caution over a possible slowdown in the fourth quarter, with a slowdown in China adding to the effect on Malaysia’s manufacturers.

Lee said that regional purchasing manager indices (PMI) were still in negative territory, and that Malaysia’s export-oriented electrical and electronics (E&E) segment could be affected by external factors. He added that industrial performance would continue to be linked to the strength of domestic consumption and investment.

Anthony Dass, the chief economist at MIDF Amanah Investment Bank, an Islamic investment and advisory services firm, said he expects the picture to be mixed, with some industrial segments performing better than others. He did suggest, however, that exports of primary industrial products, including chemicals, timber and timber goods, should hold up. Dass added that the construction materials industry would continue to benefit from the government’s investments through its long-term Economic Transformation Programme (ETP).

The ETP is a wide-ranging programme of investment and reform that aims to shift Malaysia’s economy up a gear to achieve the long-anticipated goal of “developed nation status” by 2020. Its impact on the manufacturing sector is significant, as the programme seeks to increase value-added across the economy. In the industrial sector, this entails leveraging Malaysia’s competitive advantages, including its ample natural resources, geographical position and existing strengths in certain segments.

Malaysia is also hoping to develop higher-value, higher-margin business, such as increasing its export of petrochemicals to taper down reliance on crude oil; expanding sectors such as biotechnology and medical equipment; and nurturing high-tech, knowledge-intensive businesses.

“Under the New Economic Model, growth areas that are being targeted in the manufacturing sector include biotechnology, advanced electronics, optics and photonics, renewable energy, aviation, pharmaceuticals and medical devices,” Mustapa Mohamed, the minister of international trade and industry, told OBG.

This cannot be done without capital and expertise, and, as a result, Malaysia is trying to bring in greater foreign investment through agencies such as the Malaysian Investment Development Authority (MIDA). In 2011, 61% of the $18.1bn worth of approved manufacturing projects were foreign, according to the MIDA. The development of value-added industry also goes hand-in-hand with Malaysia’s strong emphasis on improving and expanding its education system.

Malaysian manufacturers have benefitted from the relatively benign domestic climate this year, good news for a country that is rebalancing towards local consumption. The ETP is already having an effect on demand; in the coming years the challenge will be securing the investment that can drive industry up the value chain.

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Malaysia: Easing business practices

Malaysia has been one of the big movers in the latest World Bank survey on the ease of doing business, moving up six rungs on the international ladder to be ranked 12th overall. However, making it easier to obtain construction permits and start a business, two areas signalled out for improvement, will help the country achieve its goal of breaking into the top 10.

The annual study aims to provide an objective measure of business regulations for local firms and give an indication of the progress in facilitating private sector development. In the 2013 edition, released on October 23, Malaysia further consolidated its reputation for economic reform, building on its performance in 2011 when it moved from 23rd to 18th place. The improvement in the rankings puts Malaysia behind only Singapore, Hong Kong and South Korea in Asia, and ahead of regional heavyweights Japan and China.

The survey, titled “Doing Business 2013”, saw Malaysia improve its competitiveness in a number of areas, including registering property and trading across borders. The country continues to be ranked first globally in terms of gaining access to credit, and it also won accolades for the judicial network protecting investors, where it came in fourth among the 185 countries surveyed.

Recognition of the strong performance will help to further promote development and investment, said Annette Dixon, the country director for Malaysia at the World Bank. “This will help the private sector drive growth, particularly if Malaysia can build on its success by continuing to tackle long-term challenges, such as improving the quality of education,” Dixon said in a statement accompanying the release of the report.

According to Yeah Kim Leng, the group chief economist at RAM Holdings, a financial research firm, the improved business environment will help maintain Malaysia’s high profile as a prime investment destination. “It enhances business sentiment and confidence,” he said on October 24. “If the improvement is sustained, what we will likely see is an increase in business dynamism and a higher level of business activity.”

Mustapa Mohamed, the minister of international trade and industry, said that the findings of the study confirmed Malaysia’s competitiveness as an economy, and reflected the successful implementation by the government to improve the business environment, making it conducive for sustained economic growth. The next step, according to the minister, is putting in place further reforms that should move Malaysia even higher up the rankings. He did acknowledge, however, that the task would be a difficult one, given the competitive nature of the global economy.

“Our objective is to achieve a top-10 position in the World Bank’s rankings. Getting there will strengthen our position as a destination of choice for local and foreign investors,” Mustapa said. “This is with new competitors constantly emerging and economic uncertainties globally. It is apparent that more needs to be done in the shortest time possible if we are to stay ahead.”

While the study very much stressed the positives, it also detailed a few areas of improvement that will have to be dealt with before Malaysia can break into the higher rankings. Despite the government making it easier to obtain construction permits, it still placed only 96th overall in this category. There is also room for improvement in the ease of starting a business, in which was Malaysia ranked 54th this year.

Two state agencies, the Special Taskforce to Facilitate Business (Pemudah) and the Performance Management Delivery Unit (Pemandu), have been tasked with addressing these issues, as well as developing strategies to promote best bureaucratic and administrative practices, with Pemudah in particular working closely with the private sector to cut red tape.

In an opinion piece carried by The Malay Mail on October 26, Ramon Navaratnam, the chairman of the Centre of Public Policy Studies, an independent think tank within the Asian Strategy and Leadership Institute, said the World Bank study did not cover issues such as public services or the non-business sectors of society. Improvements in the provision of services in areas such as health, education and social welfare also need to be addressed when considering the state of the economy.

“The best way forward is for the public sector to adopt further best practices, forced by global competition to perform more competitively all the time or face the prospects of losing its profits and business opportunities for growth,” he said.

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Malaysia: Push for liquefied natural gas

As gas consumption levels reach record highs in Malaysia and across the continent, the country is positioning itself as a regional trade centre for liquefied natural gas (LNG). With a series of capital-intensive LNG investments, Malaysia will likely see a strong increase in LNG import-export volumes for some time to come. However, muted economic growth in China and India, and with it slowing demand, could limit the country’s ability to export its new LNG production.

Heavy gas subsidies and increasing LNG demand, which has increased from 315bn cu feet in 1990 to more than 1260 cu feet in 2010, a compounded annual growth rate of 7.2% — is expected to result in Malaysia’s consumption rate outstripping production between 2011 and 2016. This trend may lead to a potential gas shortage beginning in 2014, signalling the need for Malaysia to expand its LNG import infrastructure.

To this end, Malaysia has invested in a number of infrastructure projects, including an LNG re-gasification terminal (RGT), located offshore near the Sungai Udang port in Malacca. The RGT was developed by the gas-processing subsidiary of Petroliam Nasional (Petronas), Petronas Gas, and work was completed in mid-2012.

The RGT includes an island jetty with a re-gasification unit, two floating storage units and a new 3-km, sub-sea pipeline that connects to the onshore gas pipeline network. According to the Prime Minister’s office, the facility is expected to commence operations this month. Once it is operational, the RGT will have the capacity to process and store up to 3.8m tonnes per annum (tpa) of LNG, Petronas Gas said in a statement.

Current supply contracts with the new facility include a deal with Norway-based Statoil to supply 1bn cu metres of LNG over three and a half years, a deal with France-based GDF Suez to supply 2.5m tpa also over three and a half years, and a 20-year deal with Qatargas for 1.5m tpa. Petronas is also looking to import gas from the Santos-Petronas Gladstone LNG project in Australia, with the first shipments of LNG to arrive in 2014, once the deal is completed.

To further enhance LNG import capacity, a second re-gasification plant and import terminal is being planned at the Pengerang Integrated Petroleum Complex (PIPC) in Johor. The $56bn project will include oil refineries, petrochemical plants and a $1.3bn investment allocated specifically for the LNG terminal and the re-gasification plant.

The investment will be a joint venture among local engineering firm Dialog Group, Netherlands-based oil and gas storage company Royal Vopak, and the Johor state government, with the first phase of construction expected to be complete by 2014. Storage capacity at the terminal is expected to be around 5m cu metres and will enable international users to store and trade LNG.

According to Mohd Yazid Jaafar, the CEO of the Johor Petroleum Development Corporation, studies by oil companies and the Performance Management Delivery Unit (the state body responsible for overseeing the implementation of the country’s economic transformation programme, PEMANDU) show that the PIPC will contribute RM17.7bn ($5.73bn) to gross national income by 2020, with the PEMANDU study also showing it will provide 8500 high-skilled job opportunities by 2020.

In addition to the onshore LNG developments, Petronas has recently awarded the Technip-Daewoo Consortium with a contract to develop Malaysia’s first floating LNG (FLNG) facility, which is expected to be operational by 2015. The FLNG facility is expected to produce 1.2m tpa and increase Malaysia’s overall production capacity from 25.7m tpa to 26.9m tpa.

The Sabah-Sarawak Gas Pipeline (SSGP) in Borneo, meanwhile, has reached 85% completion and is now entering the final phase of development. According to Shaiful Bahrin Hashim, the senior project manager at SSGP, “We estimate the gas to start flowing by April 2013, if everything goes as planned.” The pipeline is approximately 521 km in length and will deliver natural gas from a terminal in Kimanis to an LNG facility in Bintulu.

With high population growth rates across Asia and increasing demand for power, Malaysia’s ongoing natural gas investments may be a highly strategic asset entering the second half of the decade, particularly if it can secure its position as a major supplier now. If, however, demand slows considerably in China, for which the IMF recently downgraded its 2012 GDP growth prediction of 8% to 7.8%, and India, which also just saw the IMF’s GDP growth estimate for the year fall from 6.9% to 6%, Malaysia could be faced with more capacity than it can use.

Still, the new projects should provide Malaysia with substantial manoeuvrability in the LNG market, both in terms of expanding export capacity, as well as developing a more sustainable import mechanism to meet domestic consumption trends.

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Malaysia: Pushing on

Despite an uncertain international climate, Malaysia is set to put in another strong economic performance this year. While growth is not expected to hit the heights achieved in recent years, a rate of 4-5% will serve to keep Malaysia on the right track.

In May, the UN Economic and Social Commission for Asia and the Pacific (ESCAP) announced its forecast for 4.5% growth in 2012, down somewhat from 5.1% last year and 7.2% in 2010. This is broadly in line with most expectations: in March, the Bank Negara Malaysia (BNM), the country’s central bank, forecast growth of 4-5%, while the IMF puts the figure at 4%.

While speaking at the launch of ESCAP’s economic report, Mohamed Ariff Abdul Kareem, a professor at the Kuala Lumpur-based Global University of Islamic Finance (ICIEF), said Malaysia’s economy will be driven both by private consumption at home and commodity exports.

According to Oliver Paddison, the economic affairs officer at ESCAP, countries in the Asia-Pacific area need to increase regional cooperation and realign their economies to increase domestic consumption. This will help offset the effects of a potential drop in exports to the developed world, which has been suffering the effects of debt and growth crisis.

Malaysia is already successfully moving in this direction, building trade with fast-growing emerging markets and supporting domestic demand. As Kareem noted, China is now Malaysia’s largest trading partner, behind Singapore. Overall, exports grew 7.1% year-on-year in the first two months of 2012, according to official figures.

The IMF reported in February that Malaysia’s “growth remains supported by robust consumption and investment”, praising “the ambitious reform agenda to boost potential growth, based on comprehensive diagnoses of the bottlenecks that hinder investment and productivity”.

Malaysia is implementing a number of strategic plans to boost productivity and growth in order to achieve its goal of becoming a “developed country” by 2020. These include the New Economic Model (NEM) and Economic Transformation Programme (ETP), which lay out reforms to increase the private sector’s role in driving growth and expanding value-added sectors in which Malaysia has competitive advantages. Extensive infrastructure investments and urban and rural development plans will also support the economy’s long-term trajectory.

Importantly, investors remain confident about the outlook for Malaysia. A May survey by international investment management firm Franklin Templeton found that 44% of Malaysian investors felt the domestic economy was improving, while only 24% felt it had worsened.

Foreigners are similarly upbeat; official figures show that foreign investment grew 12.3% in 2011, to RM33bn ($10.59bn). Government officials have said this has been spurred by the implementation of the NEM and ETP, as well as closer ties with other countries in the region.

Zeti Akhtar Aziz, the governor of the BNM, has said that domestic demand and investment by the private sector remain “highly robust”, despite global difficulties and some local inflationary pressures. Inflation is expected to be between 2% and 3% this year, underlining Malaysia’s reputation for macroeconomic stability, developed since the 1997-98 Asian financial crisis.

While the outlook for this year and beyond is indeed positive, officials and analysts are aware of the challenges Malaysia must tackle to continue its growth path.

In the IMF’s view, foremost among these is the need to maintain fiscal consolidation. The budget deficit is expected to be around 5.1%, down from 5.5% in 2011, but unsustainable in the long term, particularly given the country’s relatively high public debt.

The ICIEF’s Kareem identified over-reliance on oil and gas income (which contribute around 40% of the government’s revenue) and an unwieldy subsidy regime (which costs about 4% of GDP) as issues the government should address to strengthen its fiscal position in the future. Subsidy cuts proposed in 2011 are currently on hold due to concerns regarding the effect on inflation.

As the IMF stated, Malaysia has done well to bring down the deficit in recent years. To continue its growth path, Malaysia aims to push on with its ambitious reform and investment programmes, which should strengthen the business environment, broaden and deepen its export markets, and accelerate diversification.

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