Malaysia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Diversified exports
- Growing domestic demand mitigates external headwinds
- Dynamic services sector
- High R&D
- Investment supported by the expansion of the local financial market and access to FDIs
- Exchange rate flexibility
- High per capita income
- Travel hub
- Budget income highly dependent on performances in the oil and gas
- Very high private debt levels (80% of GDP)
- Low fiscal revenues, lack of transparency in budget spending
- Erosion of price competitiveness due to increasing labour costs
- Persistent regional disparities
- Ethnic and religious disputes
Strong but probably uneven recovery
Growth is set to recover strongly in 2021, due to lower base effects than in 2020 and driven by stronger domestic consumption, but this recovery is likely to be uneven. The resurgence of infections, following the Sabah state elections in September, was stronger than in March 2020. This prompted the government to re-impose partial lockdowns in October under the Conditional Movement Control Order (CMCO) in the capital and major states, which delayed the growth momentum to 2021. The gradual easing of restrictions on movement should set the stage for a recovery in domestic consumption (58% of GDP) in 2021, supported by five stimulus packages (4.9 % of GDP as of September 2020) that include wage subsidies to low-income groups. Interest rates, at a historic low of 1.75% after 125 bps rate cuts in 2020, should also spur the economic recovery. That said, low-interest rates in recent years have sustained a high level of household debt (87.5% of GDP) which, alongside a high unemployment rate (4.6% as of September 2020), could pose some risks to the recovery. Inflation should pick up as demand recovers and will be helped by lower base effects. Exports (67% of GDP) should also see some gains, driven by the recovery in key trade partners such as China and a higher demand for electronic components. Furthermore, palm oil exports, which account for 2.8% of GDP, should improve slightly this year on the back of stronger demand from the main export trade partners such as India and China, alongside a pick-up in palm oil price. The services industry contributes more to GDP (56.5% in 2020) than manufacturing, but it is expected to remain sluggish: tourism (13% of GDP) should remain muted due to international border closures. Investment is expected to rebound this year, as infrastructure projects should resume and will be revived under the 2021 budget, of which 4% is allocated for projects such as the largest transport infrastructure Mass Rapid Transit, or the Johor-Woodlands Train that links Malaysia and Singapore.
Fiscal deficit set to narrow amid some risks
The Parliament approved a USD 78.8 billion budget (22% of GDP) for 2021 in order to revive the economy, with an increase in welfare spending and cash handouts, which should support the recovery in consumption. The fiscal deficit is expected to narrow in 2021, as revenues will recover from the pandemic through an expected increase in tax revenue collection (15.1% of GDP). That said, it should remain higher than pre-COVID-19 levels because of support measures and political pressure for higher expenditures. The expected revenues might somehow face challenges due to oil price volatility, as petroleum revenues account for a significant proportion of public income (20% of total revenue). Another COVID-19 resurgence could also threaten revenues if lockdown measures linger on. Public debt, for which the ceiling was increased to 60% of GDP, will remain high. That said, a large share is denominated in local currency and around 24% of public debt is held by non-residents, which should mitigate the risks.
In 2021, the current account surplus is set to reverse some of its 2020 deterioration due to a base effect, as exports have rebounded faster than imports since the end of 2020 thanks to trade gradually restarting with key trade partners such as China (13% of total exports), which has recovered. This surplus is likely to be driven by a better performance in exports of goods, especially for electronic products, alongside a surplus in the secondary income (expatriates’ remittances). The services balance deficit increased with the fall in tourism receipts (6% of GDP and 9% of exports). External debt (61% of GDP in Q2 2020) is high but manageable, since one-third is denominated in local currency and a half has medium to long-term maturity. Companies (both private and public) and banks mostly owe it. International reserves, fed by the current account surplus and foreign investment, remain adequate and cover 6 months of imports as of October 2020.
The Muhyiddin administration’s legitimacy is strengthening
In a twist of events, Muhyiddin Yassin was appointed Prime Minister in February 2020 and was able to form the National Alliance coalition with Malay-majority parties dominating the government (112 out of 222 MPs). The newly formed government is not entirely secure given its razor-thin majority and political tensions are likely to linger on, as the opposition challenges its majority, although the opposition’s legitimacy has weakened. Anwar Ibrahim, leader of the opposition and president of Parti Keadilan Rakyat (PKR), claimed that he had the majority support in the lower house of parliament but failed to win the king’s support in order to topple the government, while lawmakers showed support to Muhyiddin’s administration bypassing the 2021 large budget unanimously.