________________________________________________________________________________ Country Report Malaysia Generated on December 9th 2012 Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom ________________________________________________________________________________
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The political scene is likely to be dominated by preparations for the next general election. The EconomistIntelligence Unit expects the government to complete its full term, which ends in April 2013.We expect the ruling Barisan Nasional (BN) coalition to win the next election. The BN hopes to regain the two-thirds majority in the lower house that it lost at the 2008 poll, but it will struggle to win enough seats toachieve this goal.The government will fail to balance the budget in 2013-17 as it continues to allocate funds to infrastructureprojects. The monetary authorities will maintain a neutral stance in 2013, but will tighten policy from 2014onwards.The economy is expected to remain on a sustainable growth path in the forecast period. The pace of expansionis forecast to slow slightly in 2013, to 4.5%, from an estimated 5.1% in 2012.Annual inflation will average 3% in 2013-17, compared with 2.5% in 2008-12. The planned introduction of a newconsumption tax and the gradual withdrawal of subsidies are expected to push up consumer prices from 2013.The current account will remain in surplus in the forecast period, to the tune of 6.2% of GDP on average,compared with an estimated 6.8% in 2012.
Review
A summit of the Association of South-East Asian Nations (ASEAN) took place in Cambodia in November.Members (including Malaysia) failed to reach consensus on the issue of competing territorial claims in theSouth China Sea.A study presented to the government of Selangor in November expresses concerns over the state's inflatedvoter list.A programme of infrastructure spending and targeted hand-outs helped to boost economic growth in the thirdquarter of 2012, when real GDP expanded by 5.2% year on year, following growth of 5.6% in the secondquarter.The currentaccount surplus stood at M$9.5bn (US$3.1bn) in the third quarter of 2012—down slightly from
M$9.6bn in the second quarter, and the smallest surplus since the third quarter of 2002.Palm oil prices have been under pressure during the past year or so. An expected fall in global commodityprices in 2013 does not bode well for the future of Malaysia's palm oil sector.The country continues to boast one of the lowest rates of consumer price inflation in Asia. The annual rate ofinflation stood at 1.3% in October, unchanged from September.
Political stabilityThe Barisan Nasional (BN) coalition government is expected complete its full term, which ends in April 2013. TheEconomist Intelligence Unit forecasts that the BN will maintain its hold on power throughout 2013-17, securing victoryin the next general election but not attaining the two-thirds parliamentary majority that it will be seeking. Politicalstability in the coming five years will largely be determined by the levels of internal discipline within both theruling BN and the main opposition Pakatan Rakyat (PR) alliance. The BN is tightly controlled by its largestconstituent party, the United Malays National Organisation (UMNO). Although the results of the last generalelection, in March 2008, revealed that UMNO could no longer count on the strong support of the majority of ethnicMalays, the PR does not offer a sufficiently credible and stable alternative to the BN to give it a strong chance ofwinning enough seats at the next election to form a majority government.
Maintaining internal discipline will be crucial if the BN does not secure a two-thirds parliamentary majority at thecoming election. Under this scenario, the PR alliance is likely to encourage members of parliament (MPs) to "partyhop" as part of a wider plan to wrest control from the BN. This strategy failed in the months following the 2008election, partly because the PR set itself the ambitious target of persuading some 50 MPs to switch political camps.However, the PR's chances of success could increase dramatically if the BN suffers losses and finds itself with merelya simple majority. A two-thirds majority would allow the government to make amendments to the constitution. Toachieve this, the BN would need to win at least 12 more seats than it currently holds. The PR has 75 seats at present,and would need to win 37 more to secure a majority. Both scenarios are unlikely to materialise.
If the BN fails to win at least as many seats as it holds currently at the approaching election, this could damage thecredibility of the prime minister, Najib Razak, and might put at risk his continued tenure of the post as well as hispresidency of UMNO. Under this scenario, conservative elements in the ruling party who are already unhappy withMr Najib's market reform programme and would prefer to maintain policies favouring bumiputera (ethnic Malays andother indigenous peoples) are likely to conspire to oust Mr Najib at UMNO's internal leadership polls next year, whichare likely to be held after the general election. The most likely contender to take over as party head is the deputy primeminister, Muhyiddin Yassin, who would appeal to conservatives in UMNO.
The stability of the PR was improved by the acquittal of Anwar Ibrahim, the leader of the opposition alliance, of asodomy charge in January 2012. Mr Anwar is regarded as the unifying figure who holds together the PR, whichincludes the reformist, multicultural Parti Keadilan Rakyat, the conservative Islamist Parti Islam se-Malaysia and theethnic-Chinese-dominated Democratic Action Party. In the short term, the PR's member parties are likely to present aunited front as they prepare for the general election. However, Mr Anwar has stated that he will step down if the PRfails to secure a majority. Those in the PR who have expressed discontent with Mr Anwar's leadership style willwelcome a challenge to his position, but such a development could bring into sharper relief the ideological differencesbetween the three PR parties. In the absence of an obvious successor to Mr Anwar, a leadership contest couldpresage the demise of the opposition alliance.
Mass protests are not frequent in Malaysia. On occasions when they have occurred, most have been sparked bypolitical concerns. In April a non-governmental group, the Coalition for Free and Fair Elections (Bersih), organised amass rally to press for reforms to the electoral system. Another protest organised by Bersih cannot be ruled outbefore the next election, but we do not expect such an event to affect political stability, primarily because thegovernment will retain firm control over the police, who can be deployed quickly to reinforce law and order (if in aheavy-handed manner).
Election watchThe next parliamentary election must be held by April 2013. Mr Najib is likely to make the performance of the economya central plank of the BN's campaign, and will emphasis the fact that, despite the gloomy global economic situation,the government's policies have helped to bolster growth in the domestic economy. The BN will also carefully craft itscampaign to appeal to voters in state assemblies that it lost to the PR at the last election. The opposition alliance,meanwhile, is likely to focus its election campaign on the need to uphold the political and economic rights andinterests of all Malaysians.
The election will see the cash-strapped PR pitted against the BN's well-oiled political machine. The BN is stronglypositioned to win the election, although the likely size of its margin of victory remains unclear. Mr Najib has workedhard to present himself as being committed to economic and social reform. However, this stance has yet to resonatewith Malaysia's ethnic minorities, who make up around one-third of the electorate and who mostly voted for the PR inthe 2008 general election.
International relationsRelations with Singapore have become closer in recent years, and we expect this trend to continue during the forecastperiod, particularly in the area of economic ties. China will become an increasingly important trading partner in the nextfive years. The Malaysian government's apprehension about China's growing economic influence is mixed withambivalence towards the ethnic-Chinese members of its own population and an awareness of the need to attractinvestment. Mr Najib has adopted a conciliatory stance on the issue of Malaysia's maritime claims in the South ChinaSea and the competing claims of other members of the Association of South-East Asian Nations (ASEAN), as well asChina. Mr Najib is keen to achieve a resolution of the dispute with China through dialogue under existing regionalsecurity mechanisms. Malaysia also wishes to strengthen its ties with Australia. Growth in trade with the lattercountry is expected to accelerate in 2013-17, following the signing of a bilateral free-trade agreement in May 2012.
Policy trendsAssuming that the BN wins the next election, its policy agenda over the next five years will centre on a host ofinitiatives outlined in two road maps, aimed at raising income levels and transforming Malaysia into a high-incomecountry by 2020. (High-income countries are defined as those with gross national income per head of at leastUS$12,476, based on 2011 data). One of these plans is the Government Transformation Programme, which outlinesseven main initiatives, including tackling corruption, improving education and upgrading basic rural infrastructure.The other is the Economic Transformation Programme, which identifies 12 national key economic areas (NKEAs). Thegovernment considers the NKEAs, which include tourism and palm oil cultivation, to be the sectors with the greatestpotential to boost economic growth. The Tenth Malaysia Plan (10MP), a spending plan for 2011-15, will support theimplementation of these programmes.
The next government is expected to continue with the current administration's plans for market reform. It is likely tofocus on a few specific reform issues, including the phasing out of price controls and subsidies—a process that the
government will struggle to complete, as it will meet strong resistance from all sections of Malaysian society. Thenext administration will also press ahead with changes to Malaysia's positive-discrimination policies, which favourbumiputera, relaxing further the requirement that companies offer minority equity stakes to bumiputera (so far the rulehas been abolished in some 40 services subsectors). The divestment of state-owned enterprises is expected tocontinue in 2013-17, as both the BN and the PR are in favour of selling off stakes in more than 30 such entities.
Fiscal policyThe next government will struggle to balance the budget in 2013-17 as it continues to allocate funds to infrastructureprojects. In addition, progress on the subsidy-rationalisation programme is likely to be slow. The intended completiondate for the scheme, which was introduced by the BN government in 2010, has already been put back to 2017, from2015 originally. The government forecasts a slight narrowing of the budget deficit in 2013, to M$40bn (US$13.2bn),equivalent to 4% of GDP, from an estimated 4.5% in 2012. However, we forecast the deficit at 4.2% of GDP in 2013, aswe believe that the government will fail to prevent a significant increase in the subsidy bill, amid elevated global oilprices and a rise in the cost of emoluments following the BN's decision in September 2012 to give civil servantsbonuses for 2013 equal to one and a half months' pay. Assuming that the authorities manage to widen the tax basethrough the introduction (probably in late 2013) of a goods and services tax (GST), and that rates of other direct taxes—such as income and corporate tax—are not lowered, we expect the deficit to narrow slightly in the remainder of the
forecast period, to an average of 4% of GDP.
Monetary policyWe expect Bank Negara Malaysia (BNM, the central bank) to keep its main policy interest rate, the overnight policyrate (OPR), unchanged at 3% in the early part of the forecast period. Given that global economic growth is likely to belacklustre in 2013, BNM will probably place greater emphasis on measures to boost economic growth. Malaysia's wasone of the first central banks in Asia to normalise monetary policy following the 2008-09 global financial crisis, but ithas kept the OPR steady at 3% since June 2011. Anaemic global economic growth will have an adverse impact onMalaysia's export-dependent economy, as exports of goods and services are equivalent to around 90% of GDP.Despite this, BNM has been reluctant to join the growing number of central banks in the region that have sanctionedcuts in interest rates. This is primarily because domestic demand is expanding at a fast clip—growth reached 11.4%
year on year in the third quarter of 2012—despite the weakness of the external environment. A pickup in global
economic activity in 2014, coupled with continued expansion in domestic demand, is expected to prompt BNM totighten monetary policy in that year. However, given the central bank's cautious approach, the initial rate rises duringany new phase of monetary tightening are likely to be modest.
International assumptions 2012 2013 2014 2015 2016 2017
Economic growth (%)
US GDP 2.1 2.1 2.3 2.3 2.4 2.4
OECD GDP 1.3 1.4 2.1 2.1 2.2 2.2
World GDP 2.2 2.3 2.8 2.9 3.0 3.0
World trade 2.9 4.3 5.2 5.5 5.5 5.6
Inflation indicators (%)
US CPI 2.1 2.5 2.4 2.2 2.3 2.3
OECD CPI 2.2 2.3 2.3 2.2 2.2 2.2
Manufactures (measured in US$) -0.5 0.4 0.7 0.8 1.2 1.8
Economic growthThe economy is expected to remain on a sustainable growth path in 2013-17. Its rate of expansion will slow slightly in2013, to 4.5%, compared with an estimated 5.2% in 2012. Real GDP grew by 5.2% in the third quarter of this year. Thismeans that even if the pace of expansion slows slightly in the fourth quarter, in 2012 as a whole the economy is set togrow at least as fast as it did in 2011.
The forecast slowdown in growth in 2013 will partly reflect a return to trend for gross fixed investment, which surgedin the first half of 2012 as a number of large infrastructure projects commenced. It will also be a consequence of thecontinued drag exerted by the external sector, which is expected to struggle to expand sales significantly next year.However, economic expansion in 2013 will be supported by private consumption, itself underpinned by one-offpayments by the government to various socioeconomic groups and also to Malaysia's 1.3m civil servants, who makeup around 10% of the national workforce.
Domestic demand will continue to grow strongly in 2014-17. Private consumption will be boosted by the strength ofthe local labour market, while the commencement of other large infrastructure projects will help to support growth ininvestment spending. Despite the government's efforts to consolidate its finances, real government consumption(which will be guided by the 10MP) will increase by an average of 7.1% annually in 2014-17. Exports of goods andservices are meanwhile expected to rise by 7.3% a year on average in the period. However, the contribution of netexports to economic expansion will remain negative as growth in imports of goods and services continues to outpaceexport growth.
Services 6.7 4.4 5.7 5.2 6.0 5.7a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.
InflationThe expected strengthening of the ringgit against the US dollar, together with moderating global fuel and food prices,should help to contain inflationary pressures in Malaysia in 2013. However, the government's moves to rationalise itsextensive subsidy scheme will put upward pressure on prices, with annual inflation averaging 2.2% in 2013, comparedwith an estimated 1.7% in 2012. That said, rises in domestic energy and fuel costs are likely to occur only gradually.From 2014 another source of inflationary impetus will be the GST, which the government will attempt to introducetowards the end of 2013. One factor that will help to keep price rises in check in 2014-17 will be the forecast steadyappreciation of the ringgit against the US dollar. Given that most of Malaysia's imports and exports are denominated inUS dollars, imports will become cheaper in local-currency terms as a consequence of the increase in the localcurrency's value.
Exchange ratesFollowing a volatile performance during much of 2012, the exchange rate is expected to stabilise in 2013, when weforecast that it will strengthen slightly, to an average of M$3.05:US$1. Stronger macroeconomic fundamentals inMalaysia than in the US in the remainder of the forecast period are expected to push up the ringgit's value against theUS dollar to an average of M$2.82:US$1 in 2017. The central bank will maintain its current exchange-rate regime, underwhich the ringgit is subject to a managed float against a trade-weighted basket of currencies. Offshore trading of theringgit is prohibited under a rule imposed in the wake of the 1997-98 Asian financial crisis. However, expected furtherprogress towards regional economic integration makes it likely that BNM will allow the ringgit to be traded offshore infuture, and possibly by 2017.
External sectorAt just 3.7%, merchandise export growth is forecast to remain sluggish in 2013 as economic activity in the euro zone—
one of Malaysia's main export markets—remains feeble (it is forecast to contract by 0.2% in real terms next year). A
gradual improvement in external conditions from the second half of 2013 is expected to boost overseas sales, as wellas leading to an increase in Malaysian demand for imports of intermediate goods used in manufacturing for export.Merchandise import growth will also be supported by firm domestic demand next year, and the pace of expansion inimports in value terms will be faster than that in exports. Owing to a slight fall in the trade surplus and persistentdeficits on the income and services accounts, the current-account surplus is expected to fall to the equivalent of 6%of GDP in 2013, from an estimated 6.8% in 2012. Subsequently, sustained global trade expansion will result in a rise inthe current-account surplus to an average of 6.2% of GDP in 2014-17.
Debt service due 8,778 12,057 13,284 11,380b 9,756 9,472 9,824
International reserves (US$ m)
Total international reserves 91,528 96,713 106,525 133,618 138,746 140,572 148,230a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.Source: IMF, International Financial Statistics.
Hottest months, April and May, 2333°C (average daily minimum and maximum); coldest month, December, 2232°C;
driest month, July, 99 mm average rainfall; wettest month, April, 292 mm average rainfall
Languages
Malay (the official language); other main languages: Chinese (Min Nan, Hakka, Mandarin and Min Dong), English,Tamil, Iban (in Sarawak), Banjar (in Sabah). There are 140 languages spoken in Malaysia (peninsular Malaysia 40,Sabah 54, Sarawak 46)
Measures
Malaysia uses the metric system, but some British weights and measures are still in use. Local measures include:
1 pikul = 25 gantang = 100 katis = 60.48 kg
1 koyan = 40 pikul = 2.419 tonnes
Currency
Ringgit or Malaysian dollar (M$ or RM); M$1 = 100 sen (cents). Average exchange rate in 2011: M$3.06:US$1
Time
Peninsular Malaysia: 7 hours ahead of GMT; Sabah and Sarawak: 8 hours ahead of GMT
Public holidays
January 1st (New Year’s Day); 23rd24th (Chinese New Year); February 6th (the Prophet Mohammed’s birthday
observance); May 1st (Labour Day); June 2nd (the king’s birthday); August 20th21st (Hari Raya Puasa); 31st
(National Day); September 17th (Malaysia Day); November 13th (Deepavali); November 6th-7th (Hari Raya Qurban);November 15th (Awal Muharam), December 25th (Christmas Day)
The king appoints a prime minister and, on the prime minister’s advice, the cabinet
Head of state
The yang di-pertuan agong (king or supreme sovereign), elected by and from among the nine hereditary rulers ofMalaysia’s states. In practice the post is rotated every five years
National legislature
Bicameral federal parliament. The Senate (Dewan Negara, the upper house) has 70 members—26 elected from the state
legislatures, and 44 appointed by the king. The House of Representatives (Dewan Rakyat, the lower house) has 222directly elected members. Senators serve six-year terms and members of the lower house five-year terms
State governments
There are state governments in each of Malaysia's 13 states, in nine of which the head of state is a hereditary ruler.Each state has its own constitution, a council of state or cabinet with executive authority and a legislature that dealswith matters not reserved to the federal parliament. There are also three federal territories, namely Kuala Lumpur,Labuan and Putrajaya
A general election took place in March 2008. The next poll must be held by April 2013
National government
The Barisan Nasional (BN), the governing 13party coalition—the main element of which is the United Malays
National Organisation (UMNO)—holds 135 of the 222 seats in the lower house. The BN has the simple majority that it
needs in order to pass legislation but not the two-thirds majority that would enable it to amend the constitution
Main political organisations
Government—the main parties in the BN are UMNO, the Malaysian Chinese Association (MCA), the Malaysian
Indian Congress (MIC), Parti Gerakan Rakyat Malaysia (Gerakan), Parti Pesaka Bumiputera Bersatu (PPBB) and theSarawak United People’s Party (SUPP). Opposition—the three founding parties in the Pakatan Rakyat (PR) alliance are
Parti Islam se-Malaysia (PAS), the Democratic Action Party (DAP) and Parti Keadilan Rakyat (PKR)
Key ministers
Prime minister & finance minister: Najib Razak
Deputy prime minister & education minister: Muhyiddin Yassin