Malaysia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Diversified exports
- Growing domestic demand mitigating external headwinds
- Dynamic services sector
- High R&D
- Investment supported by expansion of local financial market and access to FDIs
- Exchange rate flexibility
- High per capita income
- Travel hub
- Budget income highly dependent on performances in the gas and oil sector
- Very high private debt levels (80% of GDP)
- Low fiscal revenues (14% of GDP), lack of transparency in budget spending
- Erosion of price competitiveness due to increasing labor costs
- Persistent regional disparities
- Ethnic and religious disputes
Growth will remain strong despite external headwinds, driven by private consumption
Growth will remain resilient to global trade downturn as the economy is gradually rebalancing from an originally export-driven growth towards a domestic consumption (58% of GDP) one, which reduces the impact of external headwinds. Though household debt remains high at 83.2% of GDP, consumption is set to remain strong underpinned by high disposable income and low unemployment rate while inflation is expected to remain low. This partly offsets the sluggish export performance due to lower global demand for electronics and electrical components, especially from its main trading partners China and the United States. That said, Malaysia might see trade opportunities through free trade agreements in the region, which would partially buffer slowing exports. The ASEAN Economic Community facilitates regional integration with free flows of products, investment and productivity gains. In that sense, exports to ASEAN (28% of total exports) from Malaysia would likely to increase on the back of lower tariff barriers decline, but might not be enough to offset the US-China conflicts. Moreover, the government has yet decided to ratify the CPTPP agreement that entered into force in 2019. In addition, palm oil export, which accounts for 2.8% of GDP in 2018 would accelerate this year in the back of stronger demand from main export trade partners such India along with a pick-up in palm oil prices. Service industry contributes more to growth (55% of GDP in 2019) than manufacturing and is expected to remain strong, as domestic consumption would create more demand for services. Investment will contribute positively (albeit moderate) to growth this year, notably with a rise in public investment through large infrastructure projects Construction will perform well this year and is expected to see a 3.7% growth as the East Coast Rail Link project resumed after renegotiation of the terms with China, including bringing costs down. That said, the government unveiled an expansionary stance to boost domestic demand in order to achieve the official target growth of 4.8% which is challenged the global economic downturn. The banking industry is well capitalized and liquid, which is credit supportive. Household debt is high but NPLs are contained at this stage (1.4%).
Challenging fiscal consolidation and high external debt
The government unveiled a tighter budget for 2020 due to a fall in revenues collection. The government replaced the GST (a form of VAT) by the SST (Sales and Services Taxes), which tightened the tax base and generated a revenue shortfall estimated approximatively to 10% of the expected revenue. In this regard, the fiscal deficit is expected to widen to 3.2% from the original target of 3% which would challenge government’s fiscal consolidation efforts (targeting deficit at 2% GDP in the medium term). Public debt is set to remain high though manageable with a large share denominated in local currency, including for the part detained by non-residents, which helps to mitigate risk.
Despite pressure from the slowing global demand along with trade disputes between the US and China, the current account, although declining in result of a shift from export-led growth to domestic demand, is set to remain in surplus in line with the trade balance. The income balance deficit is expected to increase in result of higher repatriation of funds by foreign companies. External debt (61% of GDP at Q3 2019, with 77% of the total owed by private sector) is high but manageable since one-third is denominated in local currency and half has medium to long-term maturity. International reserves, fed by the current account surplus and foreign investment, remain adequate covering 7.3 months of imports and sufficient to cover total short-term debt (1.1 times).
Mahatir’s New Malaysia challenged by scandals
The center-left four-party Pakatan Harapan (Alliance of Hope) coalition led by former Prime Minister Mahatir Mohamad (1981-2003) came again to power in 2018 on high expectations. Though policy initiatives have been proposed, it struggles to deliver on the election promises which led to a sharp fall in public approval rates. Further to this, the coalition’s unity is challenged by a recent sex scandal within its largest component Parti Keadilan Rakyat (PKR, 50/129 seats of the coalition) involving Malaysia’s Economic Affairs Minister Azmin Ali. Even though Anwar Ibrahim (PKR) is expected to succeed Mahatir Mohamad as Prime Minister, this scandal exacerbates the political divide within the party – one side supporting Anwar for Mahatir’s succession and the other backing Azmin. As the country is facing internal hostility, the government reiterated its non-aligned status through the Foreign Policy Framework of New Malaysia, especially when dealing with China and the United States. The administration recently renegotiated the terms for the East coast rail link, a part of the Belt and Road Initiative with China, and construction resumed. Closer bilateral defense relationship with the United States would provide support to the country in the South China Sea where it is confronted with China.