Malaysia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Diversified exports
- Dynamic services sector
- Good infrastructure, high R&D
- Investment supported by expansion of local financial market and access to FDIs
- Exchange rate flexibility
- High per capita income
- Travel hub
- Reliance on external demand
- Budget income highly dependent on performances in the gas and oil sector
- Very high private debt levels (80% of GDP)
- Erosion of price competitiveness due to increasing labor costs
- Persistent regional disparities
- Ethnic and religious disputes
Growth expected to remain strong
The economy will continue to expand rapidly thanks to strong domestic demand and good performances in the services and manufacturing industries. Despite still high household debt, consumption is strong thanks to rising urbanization, real disposable income growth, and a tight labor market. And it is unlikely to be deterred by the increase in inflation, which – despite the reimplementation of a sales tax – will remain low, allowing the monetary policy to stay accommodative. This will help compensate the effects of fiscal tightening. Export growth will be less vigorous because of dimmer global demand for the country’s main exports (electronics and electrical goods) and slowing demand from the country’s main trading partners (China, United States). Palm oil export growth will also decelerate, as demand from India and China (the main importers) loses momentum. Export growth will also depend on the evolution of hydrocarbon prices (20% of total exports), which are set to be volatile in 2019. Trade should nonetheless contribute to growth, and even more so if the government decides to ratify the CPTPP that will come into force in 2019. The services industry has become a stronger driver of growth than manufacturing (53.6% of GDP in 2017), and will show strong performances in 2019, continuously benefitting from public investment to increase the sector’s potential and the growing number of tourists. The construction sector will perform less well than expected because of the cancellation or postponing of several long-term infrastructure projects. Capital investment in the private sector will continue to show strong growth, favored by the country’s growing integration and upgrading within regional value chains.
Challenging fiscal consolidation efforts and high levels of external debt
Fiscal consolidation is a priority objective for the government, but will be challenged by the revenue shortfall from the replacing of the GST by a less broad VAT. The cancelation of public investment for 2019 will help to reduce public spending and the future debt burden. The revenue shortfall should be partly compensated by new taxes, including a digital tax and one on imported services, and a special dividend (additional MYR 30 billion) for the government from the national oil company Petronas. However, this means that consolidation efforts remain exposed to the fluctuating income from state-run oil explorers and refineries, while oil prices will remain somewhat volatile throughout 2019. Public debt will remain high, but the associated risks are mitigated as it is almost completely denominated in local currency with medium- to long-term maturity – even if it is largely held externally. Moreover, although the public debt burden should be reduced in 2019, the government expects the actual debt figures to be higher than disclosed by the previous administration, and has announced that it could actually be as high as 65% of GDP for 2018. The current account surplus is expected to dip, mainly on the back of the trade surplus deteriorating, as imports (especially capital and intermediate goods) will grow faster than exports. The income balance will continue to show a deficit due to profit repatriation by foreign companies. Likewise, the transfers deficit is expected to endure because of remittances by foreign workers to their country of origin. Private external debt is high (65.4% of GDP) and mostly denominated in foreign exchange. The high levels of foreign exchange reserves (almost seven months of imports) are not at a satisfactory level to cover short-term external debt, but this shortfall could be compensated by the holding of external assets. The banking sector remains sufficiently capitalized and liquid, even if high household debt levels are a risk.
A new push for democracy
The 2018 parliamentary elections marked a turn in Malaysian politics, as the incumbent Barisan Nasional (BN) coalition lost office in favor of a center-left four party coalition: Pakatan Hrapan (PH), headed by former Prime Minister Mahatir Mohamad. The BN suffered from the corruption charges brought against its leader, Najib Razak. The BN had been in power for sixty years (since the country’s independence), and was largely expected to retain office. This surprise election result comes as an omen for renewed democracy and rule of law. It also marks a return to the “Look East” diplomatic stance underlined by revived ties with Japan and less reverential, but still healthy, relations with Beijing. Mr. Mahatir suspended two infrastructure projects part of the Belt and Road initiative, considering that Malaysia could not afford the USD 22 billion needed, and that the previous government might have overpriced the project. Governance will focus on achieving debt relief and the challenge of inequalities that are highly correlated with the segregation between the Malaysian majority and the Chinese and Indian minorities, as well as the rise of ultra-conservative Islam.