Malaysia braced for austerity challenge

While rising domestic demand in Malaysia helped reassure investors after last summer’s regional downturn, concerns remain that the country is displaying an over-reliance on high domestic consumption levels to prop up growth.

According to the World Bank’s latest projections, Malaysia is expected to achieve 4.3% GDP growth in 2013, despite substantial capital outflows and a nearly 10% depreciation in the ringgit during the second half of the year.

Domestic demand’s key role

The significant contribution that strong domestic demand has made to Malaysia’s economic resilience is widely acknowledged, with officials, including Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, the central bank, highlighting its impact.

“The domestic sector has been solid and the anchor to drive our growth during this more challenging period,” Zeti told Bloomberg in November. “Global trade slowed down very significantly [in 2013], and of course, that affected us because of the openness of our economy. But had we not rebalanced our economy, we would have had 1-2% growth.”

In the same month, Bank Negara Malaysia announced domestic demand grew 8.3% year-on-year in the third quarter of 2013.

High household debt

In December ratings agency Standard & Poor’s, said increasing levels of household debt in Malaysia, which now exceed 80% of GDP, would be “problematic” if the country’s growth rate slowed. The agency had cut its credit outlook for four Malaysian lenders in the preceding weeks over concerns stemming from a rise in home prices and consumer leverage.

Just two weeks earlier, Nancy Shukri, the minister in the prime minister’s department, said that 16,306 people, or an average of 60 Malaysians daily, had been declared bankrupt in the first nine months of 2013.

Malaysia has one of the highest ratios of household debt to disposable income in the world, with its current level of 140% outstripping even that of the US (123%).

In a move to slow consumer credit growth, in July the central bank introduced certain restrictions on lending, including a ten-year ceiling on personal loans, a maximum tenure of 35 years on property mortgages and a ban on pre-approved personal finance products.

However, conditions may not be as dire as some have made them out to be. As Zeti pointed out in September, less than 2% of household loans were non-performing as of that time.

Effect of new budget

While national efforts to rein in spending are taking shape, they follow a wave of populist interventions, including wage hikes for civil servants introduced ahead of last May’s elections, which almost certainly boosted domestic consumption.

However, Malaysia has been more generally moving to tighten its fiscal position. Under the 2014 budget introduced in October, the government will reduce certain subsidies this year and introduce a new goods and services tax (GST) in 2015. Everyday goods and services will be subjected to a 6% levy, although basic food items and some methods of transport are to be exempt.

International critics have urged Malaysia to break the cyclical nature of spending patterns, suggesting that a new strategy would improve investor sentiment in the long term.

“The new government elected in May must consolidate its credibility by meeting its commitments to reduce the public debt without reneging on its electoral promises,” wrote BNP Paribas in an October analysis. “The prime minister also said the 2014 budget would be marked by austerity … [But] these measures … will only stabilise the public debt ratio at best, without reducing it.”

Public debt stands at around 54% of GDP. According to Douglas McWilliams, economic advisor to the Institute of Chartered Accountants in England and Wales, keeping this figure under 60% is important in terms of maintaining investor confidence and, with reforms in place, is an attainable goal.

“The fast growth is helping taxation revenues and government’s budgetary consolidation, particularly on subsidies but also GST, which means Malaysia’s debt ratio will be below 60%,” he told the local media in December.

The national drive to slow lending to consumers and keep government spending in check has been given a largely positive reception. However, accelerating initiatives and increasing their impact may well help the country in its efforts to attract investors and allay their concerns.

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Malaysia moves to target broadband speeds

A drive to bring Malaysia’s internet services up to speed is gathering pace, with ICT infrastructure earmarked for an investment boost next year and longer-term solutions, which could include a fibre optic network roll-out, under discussion.

Malaysia currently lags behind several of its peers when it comes to download speeds, while demand for faster broadband is set to rise significantly in the coming years.

Increasing ICT’s contribution to growth forms a key part of the government’s master plan for the economy. Under its Malaysia Digital Economy initiative, the administration expects the industry to contribute 17% to GDP by 2020. The leadership is also targeting a compound annual growth rate of 9.8% in five key sub-sectors – ICT services, e-commerce, ICT manufacturing, ICT trade, and content and media – over the next seven years.

Boosting broadband

Communications and Multimedia Minister Ahmad Shabery Cheek told reporters in late November that the government was looking at undertaking an in-depth study into ways of boosting broadband speeds to between 40 and 50 Mbps by the year 2020.

According to the minister, there is a rising demand for faster data transfer speeds, with one study showing that Malaysians will want a service operating at 49 mbps by 2018. To achieve this, Ahmad Shabery said, would require significant investment and a shift away from wireless technology. “It requires the installation of fibre optics which is not cheap and cannot be carried out within a short time,” he said.

At present, Malaysia offers a limited fibre optic internet service, with operations restricted to key urban areas, mainly in the capital.

Proposals to construct a fibre optic network, providing a backbone service across the country, have already been submitted by the private sector. However, the project would have limitations and require feeder-link connections to be put in place for wide-ranging access to be made available.

A fibre optic roll-out would produce extensive opportunities for ICT service providers, while the faster rates offered by a new grid should also open doors for firms to market more advanced technology suited to higher speeds. However, the cost of achieving near-total connectivity through fibre optics would make any project a long-term initiative.

Strengthening existing services

In the meantime, Malaysia is focusing on strengthening its existing information and communications backbone.

The recent national budget, handed down at the end of October, allocated funds for several projects aimed at widening the reach of the net and boosting operating speeds.

Among the new initiatives is a $566m joint public-private project, which will expand high-speed broadband coverage. The budget also set aside $571.6m to construct 1000 telecommunication transmission towers over the next three years, which will help increase internet coverage in rural areas, while access in Sabah and Sarawak is set to be improved through the laying of undersea cables.

Peer pressure

National broadband penetration currently stands at 70%, up from 30% in 2006, according to data from the Malaysian Communications and Multimedia Commission.

However, research shows that Malaysia lags behind several of its South-east Asian peers when it comes to broadband speeds.

Data compiled by web analytics firm Net Index put Malaysia’s average broadband download speed at 4.56 Mbps when tested over a 30-day period. While marginally higher than the Philippines (4.55 Mbps), Malaysia’s average broadband speed was lower than that of Brunei (4.69 Mbps), Vietnam (11.70 Mbps), Thailand (12.47 Mbps) and Singapore (39.90 Mbps).

Malaysia placed 112th globally for broadband speed on the index, which was compiled using data from the broadband connection analysis website Speedtest.net. The Philippines ranked 114th, while Thailand placed 54th.

The country gave a stronger performance, however, in the second edition of the World Wide Web Foundation’s comparative study of international web penetration, empowerment and socio-economic impact, which was released in late November.

In its first appearance on the index, Malaysia placed 37th out of the 81 countries assessed, leading the emerging nations, and clinching second position among ASEAN members, behind Singapore.

However, the survey also identified areas where Malaysia could improve, including freedom and openness. In addition, the index highlighted issues around safety, online privacy and information protection.

The foundation’s results confirm that Malaysia would benefit from faster, cheaper and easier access to the web. The government will be hoping that a combination of investment during the coming years, supported by longer-term solutions, will help the country meet demand through faster internet speeds, closing the gap on its peers.

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Malaysia plans for new taxes

Preparations in Malaysia are well under way for the rolling out of a new goods and services tax (GST) in April 2015, but opinions differ on how effective the levy will be in boosting revenue and critics have voiced concern that the tax could feed inflation.

Under the new plans, which were mapped out by Prime Minister Najib Razak on October 25 in his 2014 budget speech, a 6% tax will be levied on most purchases or transactions.

The GST forms a key part of a national drive to boost state income and reduce the fiscal deficit, which stands at 4% of GDP this year.

The government hopes that the new, broad-based consumption tax, which is set to replace a number of other tariffs, including the sales and services tax (SST), will streamline revenue gathering.

The state currently earns between $5bn and $5.3bn from the SST, which is applied to only some transactions. The Malaysian Customs Department said on November 21 that it expected to garner an additional $1.5bn in revenue each year as a minimum, once the GST replaces other tariffs, bringing the new tax’s expected total earnings annually to around $6.5bn.

Targets and exemptions

With GST exemptions not yet finalised, questions remain unanswered about which items and services will be taxed.

In mid-November, Deputy Finance Minister Ahmad Maslan told local media that exports would remain outside of the GST umbrella, in a move seen as offering support to Malaysia’s manufacturing industries. The Customs Department later issued a clarification, saying exporters would be able to recover GST paid on raw materials and components used in final export products.

The government has also said that health services will be exempt from the GST, although it remains unclear whether this will include all associated costs. In early November, the Ministry of Health said talks with the Ministry of Finance were ongoing to “minimise the effects of GST in increasing healthcare cost”, suggesting there could be ripple effects from the tax.

The final drafting of GST legislation will be completed by early 2014 at the latest, according to officials, while the infrastructure required for implementation, such as computer networks, is almost complete.

Persuading the public

This is not the first time that the government has tried to introduce a broad-based consumption tax. An initial plan, floated back in 2005, had targeted a 2007 GST roll-out, which failed to materialise. While the tax was put back on the agenda in 2009, strong opposition in parliament, which was mirrored across a significant part of the population, led to the government eventually shelving the draft legislation in 2010, a year before its planned launch.

Winning broad public support remains a challenge today, with widespread scepticism. Opponents are concerned the new tax could trigger price hikes, although the senior assistant director for GST at the Malaysian Customs Department, Mohd Sabri Saad, moved to allay such concerns at a media briefing on the tax.

“The implementation should not burden the people as it is not a new tax but a replacement of SST,” he said. “Only those goods and services which were not taxed before will have a one-off impact in terms of prices.”

Some analysts have suggested that the GST could spark a rise of up to 10% in real estate costs. The government has proposed an exemption for residential properties, but Jerry Chan, the chairman of the Penang Real Estate and Housing Developers Association, warned contractors will likely fail to set up systems to recover taxes paid on inputs, and instead pass the cost on to developers and customers.

Keen to soften the implementation of the tax, the government said the GST would be offset by a reduction in income tax of 1-3%, which will run alongside other support measures planned for low-income families. However, critics counter that only 1.34m of Malaysia’s 14m-strong workforce earn enough to be liable for income tax.

The government has given itself almost 18 months to work out the fine details of the GST and to sell its plan to the public. While the new levy could streamline tax procedures, too many exemptions and concessions risk limiting the GST’s effectiveness. The final drafting of the legislation for the GST will indicate the depth of the new tax regime and how committed the government is to standing firm against opposition to its policy and reducing the fiscal deficit.

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Malaysia’s EU trade negotiations in spotlight

With the end of an agreement granting Malaysia preferential access to the EU market looming, all eyes are on ongoing negotiations between Kuala Lumpur and Brussels aimed at securing a replacement free trade pact.

Malaysia currently benefits from the EU’s generalised system of preferences (GSP) scheme, which provides developing countries with generous tariff reductions on exports. However, the World Bank’s decision to award the South-east Asian state upper-middle-income-nation status will end its eligibility for the lower levies from January 2014.

While EU representatives are confident that a new free trade agreement (FTA) will deepen economic integration between its member states and Malaysia, local business representatives have questioned whether they can remain competitive once the lower tariffs are withdrawn.

Strong bilateral trade

The EU is a major importer of Malaysia’s goods. Figures show its members purchased 13%, or 2.22m tonnes, of the country’s palm oil exports in 2012, and spend more than $1.3bn each year on Malaysian timber. On October 22, the Malaysia External Trade Development Corporation (MATRADE) said it expected total bilateral trade to reach RM120bn ($38.2bn) in 2013. Results so far this year suggest this is an attainable goal, with exports to the EU for the first eight months amounting to RM41bn ($13bn), while imports stood at RM45bn ($14bn).

Susila Devi, the senior director of MATRADE’s Strategic Planning Division, told reporters that Europe offered Malaysia a broad range of business and investment opportunities across the industries. “It also includes information communication technology, chemicals, automotives, renewable energy, logistics, agro food processing, pharmaceuticals and financial services,” she commented.

FTA negotiations

Business leaders, however, have highlighted the significant impact that the end of GSP status is set to have on trade and investment.

The GSP scheme provides duty reductions of up to 66% on sales to the EU. Malaysia’s exports to Europe under the initiative were valued at RM13.5bn ($4.3bn) in 2011, or 17% of its overseas shipments, according to a report published by the EdgeMalaysia in April.

Tan Sri Lee Oi Hian, CEO of Kuala Lumpur Kepong, a Malaysia conglomerate with interests in the palm oil industry, warned in March that without the GSP, the tax rate on some Malaysian oleochemicals heading for the EU would be between 4% and 6%. “We will just not be competitive,” he said at a Global Malaysia Series workshop.

Lee, together with other business leaders, said the impending withdrawal of the GSP scheme heightened the need for the government to secure an FTA with Europe. The loss of the GSP could be “another nail in the coffin” for the local palm oil industry, he said.

The EU and Malaysia first entered into discussions on a FTA in late 2010, with the next round of negotiations scheduled for the fourth quarter of this year. The ambassador and head of the EU delegation to Malaysia, Luc Vandebon, told Bernama in June that if the next round of talks is held before the end of 2013, then “it should be possible to conclude negotiations in late 2014/early 2015”.

The EU delegation’s former ambassador to Malaysia, Vincent Piket, said last year that an FTA would boost the country’s GDP by 8% by 2020.

“The conclusion of the FTA would be a landmark step in the fostering of bilateral trade between the two partners and deepen economic integration,” he said.

Looking long term

FTA supporters say a deal will, over time, increase market access for goods and services, facilitate trade and investment flows, enable mutual recognition of standards and qualifications, and increase joint capacity-building programmes.

However, not all Malaysians feel that an EU trade pact, at least in its current proposed form, is the best path for securing long-term economic growth.

In a report published in late 2012 by the IFRI Centre for Asian Studies, part of a French think tank, author Tham Siew Yean noted that the proposed FTA was in conflict with key interests of Malaysia. Tham raised particular concerns about the impact of intellectual property rules on the pharmaceutical sector.

“A small trading economy such as Malaysia’s is keen to lock in its market access to other countries. … [But] Malaysia’s focus has always been in the ASEAN as well as the wider East Asian market. In this scenario, ASEAN agreements, including Malaysia’s commitments in extra-ASEAN-wide agreements, will hold more weight than an agreement with the EU,” he wrote.

Concerns have been raised that with regional competitors also vying for the EU market, Malaysia could be tempted to negotiate a deal with the union from a position of weakness or sign an agreement lacking transparency. Many Malaysians, it would seem, are keen to avoid landing an unbalanced deal that fails to dovetail with the country’s broader vision for growth.

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Malaysia 2020 targets elusive at current rates

Despite a low inflation rate and relatively stable sovereign and corporate balance sheets, Malaysia is set to miss the targets set out in its Vision 2020. As part of a long-term analysis of the South-east Asian country, Oxford Business Group recently contributed an article entitled ‘The Malaysian Quandary’ to local media website FMT, looking at the basis for this assessment and calling into question the private sector’s reliance on the government.

We welcome you to join a vibrant discussion about the Oxford Business Group view on Malaysia and invite you to share the link with others who might be interested.

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Malaysia 2020 targets elusive at current trajectory

Despite a low inflation rate and relatively stable sovereign and corporate balance sheets, Malaysia is set to miss the targets set out in its Vision 2020. As part of a long-term analysis of the South-east Asian country, Oxford Business Group recently contributed an article entitled ‘The Malaysian Quandary’ to local media website FMT, looking at the basis for this assessment and calling into question the private sector’s reliance on the government.

We invite you to read the full article and join a vibrant discussion about the Oxford Business Group view on Malaysia . We encourage you to share the link with others who might be interested.

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Malaysia: Keeping the economy running

The central bank in Malaysia is keeping an eye on macroeconomic stability at a time when a cooling external environment is putting pressure on growth. While international factors are starting to affect overall economic performance, domestic demand remains relatively robust, supported by consumer spending and public investments.

On July 11, the Bank Negara Malaysia (BNM), the central bank, announced it would be maintaining its key policy rate on hold for the 13th consecutive month. The bank kept its benchmark overnight rate at 3%, as analysts surveyed by Bloomberg had expected.

The BNM decision balanced concerns of both a slowdown in the economy and rising personal debt. Malaysia’s year-on-year GDP growth has dropped below 5% for the first time in seven quarters, while household borrowing has been increasing at an annual average 12% for five years.

In a statement, the bank noted that slow global growth had begun to act as a drag on the Malaysian economy, as in other emerging markets, despite healthy domestic demand. Domestic consumption has helped Malaysia and many of its neighbours weather the economic turbulence of recent years, with the rebalancing of the economy helping reduce dependence on exports, which have proved susceptible to slowdowns in Europe and the US.

“For the Malaysian economy, domestic demand has continued to support growth amid the continued moderation in external demand,” the bank said. “The sustained weakness in the external sector may, however, affect the overall growth momentum.”

Even so, the bank retains a positive outlook. It expects private consumption to stay steady, led by income growth and a stable labour market, and capital investment both from domestic-oriented industries and government infrastructure projects to help maintain economic momentum. Malaysia is in the process of rolling out the government’s Economic Transformation Programme (ETP), a wide-ranging package of projects, including infrastructure schemes, designed to boost productivity and increase the private sector’s ability to drive growth.

The BNM is also comfortable with Malaysia’s inflation outlook. Inflation averaged 1.6% in the first five months of the year –low given the rate of economic growth. And while the central bank expects the rate to pick up in the second half of the year, it does not foresee inflation becoming a serious risk factor.

Despite low inflation and slowing growth, the BNM avoided cutting rates, keeping a wary eye on rising debt in an economic climate that has become more volatile in recent months. Malaysia’s experience in the 1997 Asian financial crisis makes policy-makers particularly aware of the need for financial and macroeconomic stability.

In early July, the BNM tightened regulations on lending, cutting the maximum repayment terms on personal loans to 10 years and property loans to 35 years, down from 25 year and 45 years, respectively. Some analysts quoted in the international press suggest that the bank may become more hawkish on interest rates as well towards the end of the year, if growth remains resilient.

Following a period of strong capital flows to emerging markets, there has been a cooling off recently in the wake of signs from the US Federal Reserve that it would not push forward its quantitative easing (QE) policy. QE, a strategy of stimulating the economy through expansion of the monetary base, had boosted inflows to emerging markets as investors sought higher returns than those available in developed economies. Malaysia, with its macroeconomic and political stability and stable growth rate, proved particularly attractive: by February, foreigners held almost half the country’s outstanding sovereign debt.

With QE now likely to be phased out and signs of a slowdown in major emerging markets such as China (a key export market for Malaysia), investor appetite for Malaysian assets are expected to abate. However compared to advanced economies Malaysia along with the rest of South East Asia will continue to enjoy a higher rate of growth thanks to relatively stable domestic demand and investment.

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Malaysia: Economic outlook bright despite election uncertainty

While a fiercely fought general election could send ripples through Malaysia’s economy in the next few months, the country otherwise looks set for another year of solid growth on the back of strong domestic demand and higher private investment driven by a number of public sector initiatives.

Experts are divided on whether the forthcoming election, which may prove to be the closest in Malaysia’s history, is likely to have anything more than a minor impact on capital flows and the ringgit, with consensus suggesting the economy is strong enough to weather a spell of uncertainty or change of government despite recent depreciation in the local currency.

In a move aimed at encouraging growth, the Bank Negara, Malaysia’s central bank, opted earlier this month to leave its benchmark overnight policy rate at 3%. Malaysia’s consumer price index was running at 1.3% in January, year-on-year (y-o-y), although there is a risk that the low lending rate could push up inflation in the coming months.

However, the central bank said it was confident that continuing strong investment activity and higher private consumption would steer the economy forward through 2013. “The Monetary Policy Committee considers the current stance of monetary policy to be appropriate given the outlook for inflation and growth,” the bank said in a statement issued on March 7.

The reserve’s confidence is echoed in the latest assessment on the country from the IMF, which left its forecast of 5.1% growth for 2013 unchanged. The figure marks a slight drop on last year’s economic expansion, which Bank Negara put at 5.6% in data it released in late February.

The IMF pointed to Malaysia’s sound fiscal policy, saying home-grown economic activity, strong investment and high domestic consumption should continue to drive growth.

It warned, however, that external factors, such as slower-than-expected expansion in the US or China, along with the threat of continued recession in the eurozone, could weigh on the economy. In a separate note issued in late February, the agency also cautioned that the forthcoming general election could cause “some market volatility”.

Malaysia’s parliament must be dissolved on April 28 at the latest and elections held within the ensuing 60 days. Politicians have already begun courting voters, with the election manifesto of the Pakatan Rakyat opposition coalition, led by Anwar Ibrahim, focusing heavily on economic issues. The opposition has pledged to boost employment, in part by reducing the numbers of foreign workers, and increase the basic wage. Its manifesto includes a promise to lower the cost of utilities, fuel and state services, while creating a $643m fund to help small and medium-sized businesses deal with the impact of its proposed salary hikes.

Critics of the opposition have described the programme as unsustainable in the present economic climate, adding that it lacked details on how the policies would be funded. The governing Barisan Nasional bloc has yet to release its own policy platform, although Prime Minister Najib Razak has called for a further term to complete the economic reforms initiated over the past five years.

Most pundits are anticipating one of Malaysia’s tightest elections to date, with some contrarians predicting that the Barisan Nasional could lose power for the first time since independence. While international analysts remain largely positive about the economy’s prospects for 2013, a number have joined the IMF in pointing to the forthcoming general election as a possible cause for concern.

In an investors’ note issued in late February, financial services group Credit Suisse warned a change of government could prompt disturbances in the market while money managers come to terms with the new situation. “An opposition victory would likely be disruptive to capital flows and the ringgit, not because it would necessarily be a ‘bad’ outcome, but because after decades of Barisan Nasional rule, it would create significant uncertainty for investors about the direction of policy and the structure of business in Malaysia,” the group’s report said.

However, other experts, including Kenneth Akintewe, fund manager with Aberdeen Asset Management, were confident that long term, Malaysia’s economy would weather a temporary disruption. “The reform agenda may be somewhat deflected in the near term but we think there’s enough momentum behind that process that it’s not going to come to a complete standstill,” he said in an interview with Bloomberg on March 4. “We would look for opportunities if the market overreacts to the election risk to actually reposition in the currency market.”

Gundy Cahyadi, an economist with Singapore-based bank OCBC, said he was confident any disturbances in the economy would dissipate soon after the polls close. “A lot of market players have been talking about the elections. Once that is over and done with, sentiment will shift back to the fundamentals of the economy,” he told Reuters news agency on March 7.

While the election could produce a degree of uncertainty in the coming weeks, experts have suggested that an awareness across the political divide of the need for Malaysia to continue its economic expansion and attract further investment, is likely to play a key part in future policy-making.

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Malaysia: Steady and growing

Despite global uncertainty, Malaysia looks set to achieve its GDP growth target this year, thanks to a benign domestic climate, rising investment and fiscal stimulus.

According to Ahmad Husni Hanadzlah, the second minister of finance, Malaysia is on track to achieve its target of 4.5-5% economic growth for 2012. Husni, who was speaking to reporters on the side lines of a conference on October 16, said that he expected growth to be on the upper side of the target range, despite an expected slowdown in the third quarter.

Growth picked up to 5.4% in the second quarter from 4.7% in the first, but the third-quarter figure is expected to be lower, particularly after disappointing results in August, when exports fell by 4.5% year-on-year – the sharpest drop in three years – and industrial production shrank by 0.7%. The minister attributed the dip to the effects of the global economic environment.

However, Zeti Akhtar Aziz, the governor of the central bank, said that both the third and fourth quarters should show “good growth”, and indeed, the markets seem to agree, with the ringgit lifting in the first two weeks of October. The Malaysian currency has been trending broadly upwards against the dollar since June.

In an interview with the international press in October, Zeti said that she expected growth in 2013 to be “much the same” as this year, barring a deterioration of the world economic climate.

Thus far, Malaysia has performed remarkably well, despite the international uncertainties caused by the eurozone crisis, the US debt crunch and a slowdown in China. According to Zeti, domestic demand and consumption are both growing at 7%, while investment is running at 10%. The stock market hit all-time highs in October.

There are a number of reasons for Malaysia’s strong performance, including relatively high prices for some of the commodities it produces, including crude oil. Low inflation (1.4%) in the year to August has allowed the central bank to keep interest rates on hold for eight successive meetings. Meanwhile, the banking system is stable and well capitalised. Investors looking to shift portfolios towards emerging markets and away from the troubled economies of the EU and the US have alighted on Malaysia, helping to sustain growth. Further quantitative easing in developed economies, including the US, is expected to increase the flow of capital to emerging markets such as Malaysia.

Malaysia is also starting to benefit from the government’s Economic Transformation Programme (ETP), a wide-ranging series of reforms intended to release the economy’s latent potential in the quest to achieve “developed nation status” by 2020. A central aim of the ETP is to strengthen value-added industries and services, raise incomes and reduce the historic reliance on volatile commodity earnings.

While the ETP’s raft of schemes is feeding through into the economy over the long term, there has also been a significant fillip from the 2013 budget, which is already buoying consumer confidence and should help support domestic demand. The budget lays out RM251.6bn ($81.73bn) in spending, including more generous benefits for the poor, bonuses for public sector workers, as well as tax cuts. The largesse is partly linked to next year’s election, in which the ruling Barisan Nasional will face a strong challenge from the opposition.

After the election, however, the government may need to tighten its belt. While the 2013 budget foresees the deficit being reduced from 4.5% to 4% of GDP, this is still quite a high ratio, particularly as it adds to Malaysia’s debt pile, which currently stands at 52.6% of GDP – the highest in Asia after India and Pakistan, according to the international press. Malaysia is being urged to ponder long-term tax reforms to increase income and reduce its dependence on revenues from state oil and gas giant Petronas, which currently provides around 40% of government funds.

Should the global economic situation worsen, Malaysia will have limited scope for further fiscal stimulus without running the risk of undermining stability. Domestic demand has been an important factor in maintaining growth of late, which is a positive development both for the country and its international partners. But as a globalised economy, and an exporter, Malaysia cannot be isolated from the effects of international crises.

Nonetheless, Malaysia’s baseline scenario is continued impressive growth for the remainder of this year and 2013. The country is thus in a fortunate situation compared to much of the world, and it is now in a position to implement the investments and reforms that can keep it on course for its 2020 target.

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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.

Source:

Malaysia: Pushing on

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