Malaysia: Risk Assessment
Country Rating1
Rating: A2
Business Climate Rating1
Rating: A3
Risk Assessment2
Growth driven by domestic demand
Economic growth rebounded strongly in 2010, driven by dynamic domestic demand and an export recovery. Investment recovered thanks to the guarantees on loans granted by the government and the increase in spending on infrastructure, while consumption was fuelled by the growth of incomes. Exports of electronics, services (finance, insurance, tourism), and raw materials - with Malaysia being Asia's largest net exporter of oil and the world's second largest exporter of palm oil behind Indonesia - also rebounded.
In 2011, with the tightening of fiscal and monetary policy and the end of the restocking process, economic activity could decelerate slightly. GDP growth will nonetheless remain strong. Household consumption, which represents 50% of GDP, will stay the main growth engine while investment will be buoyed by the increase in infrastructure spending decided in the framework of a vast structural reform programme launched mid-2010 by Prime Minister Najib Razak. In this context, Coface monitoring records are expected to continue to reflect satisfactory payment behaviour. But the lack of transparency in financial data remains a weakness even if claims collection is effective.
Solid financial position
After widening in 2009 as a result of the stimulus plan implementation, the fiscal deficit narrowed in 2010. In 2011, it will likely however remain substantial with the launch of structural reforms in the framework of the "New Economic Model" programme intended to double per capita income - to $15,000 - by 2020. This vast undertaking replaces the "New Economic Policy" programme launched 40 years ago to reduce ethnic inequality via an approach based on positive discrimination (quotas in hiring and education, for example).
The current account surplus shrank in 2010 with imports, driven by dynamic domestic demand, recovering more rapidly than exports, a trend expected to continue in 2011. With a nonetheless still-large current account surplus, Malaysia's financial position is expected to remain strong.
The country moreover has good capacity to withstand sudden capital flight thanks to large foreign exchange reserves.
And the banking sector proved resilient to the crisis: it remains well-capitalised and sufficiently liquid with little debt abroad and a low rate of non-performing loans.
An ascendant political opposition
The government coalition, the Barisan National (BN), led by Najib Razak, had to contend in 2009-2010 with the ascendance of the opposition and their leader, Anwar Ibrahim, as the recent setbacks absorbed by BN attest: defeat in several Federal states in local elections and loss of a two-thirds majority in the March-2008 legislative elections. BN nonetheless still holds a simple majority in parliament that facilitates effective decision-making and adoption of reforms. Economic policy consistency and continuity are thus expected to be maintained.
Strengths
- Diversified exports
- Dynamic services sector
- Effective education system, good infrastructure, high R&D
- Support for investment via development of the financial market and broader access to FDI
Weaknesses
- Economy dependent on foreign demand
- Fiscal revenues heavily dependent on the performance of the gas and oil sector
- Very high stock of bank credit granted to the private sector
- Erosion of the economy’s price competitiveness associated with high labor costs
- Persistent regional disparities