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 broader access to FDIs
- Exchange rate flexibility
- High per capita income
- Economy reliant on external demand
- Budget income highly dependent on performances in the gas and oil sector
- Very high private debt levels
- Erosion of price competitiveness in the economy due to high labour costs
- Persistent regional disparities
- Ethnic and religious disputes
Growth expected to remain strong
Already strong in 2017, growth is expected to maintain this pace in 2018. Activity will continue to be driven by internal factors, and also by good export performance (75% of GDP). Exports will benefit from robust external demand as well as the moderate recovery in hydrocarbon prices, which represent 20% of total exports. Moreover, the energy sector (liquefied natural gas and oil) will benefit in 2018 from the maturing of several projects, even if investment momentum has slowed due to ongoing low prices. The country also exports high value-added manufactured products, such as semi-conductors and other electronic products (39% of exports), for which there is strong world demand. Investment in this sector will be sustained by the good outlook for these products, especially as the country benefits from growing integration in the regional value chain. The sectors associated with tourism are expected to continue to expand, but will still suffer from the effects of Malaysia Airlines’ two air disasters in 2014 and 2015, as well as from a less favorable security context than that of its local rivals like Thailand and Vietnam.
Despite high levels of household debt (88% of GDP), private consumption will continue to be the main contributor to growth. The gradual appreciation of the ringgit will help reduce the cost of imported goods and contain inflation, while the unemployment rate is still at its lowest. Households will also benefit from tax cuts as well as higher civil service wages. Meanwhile, a still accommodative monetary stance and higher public spending in a pre-electoral period will also support growth. The country’s economy will, however, still be vulnerable to slowing demand from China, its main trading partner.
Fiscal consolidation underway and satisfactory external accounts
Fiscal consolidation remains one of the priority objectives of the government, whose ambition is to achieve a balanced budget in 2020. In 2018, the fiscal deficit is expected to continue to decline. Higher revenues, associated with better collection of taxes and duties (in particular, VAT introduced in 2015), growing mining revenues and robust domestic demand, will help offset the increase in some expenditure. The rise in expenditure will be directed towards higher infrastructure investment, as well as tax cuts for lower-income households, partially limited by the cut in subsidies. The improvement in the fiscal balance will help reduce public debt, which will remain high. This debt is essentially made up of sukuk (Islamic bonds), as well as of traditional bonds.
The current account surplus is expected to dip in 2018 due to the reduction in the trade surplus. This will be hit by the rapid increase in exports, associated with robust domestic demand, which will only be partially offset by renewed exports. The income balance will continue to show a deficit, because of profit repatriation by foreign companies. Likewise, the balance of transfers deficit is expected to endure because of remittances by foreign workers to their country of origin. The services deficit is expected to fall slightly in connection with the increasing of tourists.
The external debt is high (67% of GDP) and mostly denominated in foreign exchange. However, high levels of foreign exchange reserves (almost 7 months of imports) will help limit this risk, and enable the country to respond to any capital flight associated with a rapid tightening of US monetary policy. Meanwhile, the banking sector remains sufficiently capitalized and liquid, even if high household debt levels are a risk.
Despite the scandals, the Prime Minister is expected to remain in office
The general elections will take place in spring 2018, brought forward several months compared with the initial date set for August. The right-wing coalition, Barisan Nasional (BN), led by Prime Minister Najib Razak, is expected to remain in power, given the splits within the opposition. Effectively, despite numerous calls for co-operation, the center-left coalition Pakatan Hrapan (PH) and the Malaysian Islamic Party (PAS), are expected to stand separately at the elections, reducing their chances of success. Moreover, the country’s good economic performances are expected to consolidate the legitimacy of the Prime Minister, whose party has dominated the country’s political life since independence in 1957. In advance of the elections, the government has also increased its aid for the country’s ethnic minorities and lower-income households, especially in rural areas. The country is made up chiefly of Muslim Malays (64% of the population), but also of Chinese, Indians and indigenous communities (Orang Asli, Dayak, etc.). However, suspicions regarding the Prime Minister and his cabinet, alleged to have misappropriated a share of the assets in the country’s sovereign fund (MD 1 billion) and placed them in their personal bank accounts, could be exploited by the opposition during the electoral campaign.