Rizikové faktory a výhled

Long ranked in the second-best medium-to-long-term rating, Malaysia’s political risk remains among Asia’s lowest. This robust position results from enduring macroeconomic stability and high economic openness in a very dynamic Southeast Asian region that have led to sound economic fundamentals – low external debt, current account surplus, controlled inflation, strong average growth – over the years. Malaysia’s export-led economy has somewhat rebalanced as the  share of domestic demand and private consumption keeps rising. The large middle class increasingly supports growth but has also fuelled an alarming heavy private debt. Besides, Malaysia is moderately vulnerable to external shocks such as the Chinese slowdown (spreading to Malaysia’s other export markets), a weakened US/EU demand, and the US Fed exit from quantitative easing. The latter could trigger a renewed cycle of capital outflows and currency depreciation, but this might only be temporary given positive investor perception and comfortable foreign exchange reserves. The post- 2008 sharp deterioration of public finances has raised political risk resulting in an ongoing government budget consolidation that, together with the current monetary tightening, aims to maintain stability to the detriment of higher growth. All in all, macroeconomic forecasts are auspicious and the business environment friendly, which explains Malaysia’s best rating for short-term political risk (1/7) and systemic commercial risk (A). In future, structural reforms and economic diversification will nevertheless be key to avoid the middle-income trap.

Political continuity under the one-party rule is a major factor in Malaysia’s low political risk as it has helped a lot in the country’s economic development and it should continue to do so. However, domestic instability risks have increased since the opposition protests witnessed after last year’s much polarised poll results. Democratic aspirations, good governance and liberal reform demands from a young population are rising while ethnic considerations continue to fuel tensions particularly as the Malay majority still enjoys preferential treatment.

Fakta & Čísla

Pozitiva

  • Political and macroeconomic stability
  • Strong domestic demand from a prosperous population
  • Sound banking sector
  • Net external creditor

Negativa

  • Reliance on exports in a highly competitive region
  • Economically vulnerable to exogenous shocks
  • High household debt
  • Budget position limits countercyclical policy options

Main export products

  • Electrical and electronic products (27% of current account receipts), crude oil & LNG (10.4%), tourism (7.5%), chemicals (5.9%) and palm oil (5.4%)

Income group

  • Upper middle income

Per capita Income

  • USD 10,400

Population

  • 29.7 M

Description of electoral system (five-year cycle)

  • King election: next in November 2016
  • Legislative election: next in May 2018

Head of Government

  • Prime Minister Najib Razak

King

  • Sultan Abdul Halim Mu’adzam Shah

Hodnocení rizikovosti země

Political continuity amid increasing polarisation

Malaysia has had a smooth political history since it was declared independent in 1957 with the United Malays National Organisation (UMNO) party, Malaysia’s largest party and member of the Barisan National (BN) coalition, as sole country ruler. Malaysia’s 56-year one-party rule lies in the UMNO’s national political strength and the country’s lasting economic success. However, political stability started to erode in 2006 due to protests against corruption and about ethnic issues. Thereafter, the two latest elections (in 2008 and 2013) have shown the ruling BN coalition’s waning popularity. PM Najib Razak (UMNO) was re-elected for five years in the May 2013 general election, but it was the second successive election in which the BN failed to win a 2/3 majority in Parliament after obtaining its tightest victory ever against the opposition Pakatan Rakyat (PR) coalition. Still, the ruling BN coalition won a simple majority of seats which at first sight should favour political continuity, particularly as tensions within the opposition have grown. Nevertheless, obstacles have multiplied for PM Najib Razak who faces growing resistance from UMNO party hardliners and other potential leaders, notably about his national reconciliation policy. Therefore, although he won UMNO’s party elections last October, Najib’s position has weakened within his party, which explains the pro-ethnic Malay measures in the past months.

Najib has also lost support among the population due to less favourable economic conditions for consumers and after state institutions were strongly criticised for the mismanagement of the Malaysian airlines flight MH370’s probable crash last March. The government’s inefficiency in this high-profile event, in addition to growing dissatisfaction with corruption, alleged electoral fraud, ethnic measures and economic policy, has cost the government much popularity. As the main unitary force inside the UMNO, Najib is still expected to remain PM in the near future especially as he faces a divided opposition. The PR has indeed been shaken by the Court of Appeal’s five-year prison sentence for PR leader Anwar Ibrahim on sodomy charges that could put an end to his career if the conviction was confirmed by the Federal Court. Therefore, a period of party succession infighting is expected to destabilise and harm the opposition in Parliament and in fine, potentially affect their electoral prospects in 2018 unless a new strong and credible leader emerges. Thus, Malaysia’s first peaceful democratic transfer of power could still be a distant prospect.

Ethnic tensions, political corruption and bad governance as main risks to political stability

The changing political landscape is explained by the evolution of the Malay society that is increasingly urban and expresses modern aspirations for change in an open but still conservative country. BN traditionally gets support from rural, old and poor people whereas the PR’s rising weight is found among the urban middle class and young people who are tired of a corrupt system that is based on nepotism and privileges and divided on ethnic lines. Ethnicity is a sensitive issue in Malaysia as witnessed by sporadic interethnic tensions mainly between the Malay majority and the large Chinese community. Those tensions arise from inequalities and the preferential treatment enjoyed by the Malays under BN’s long-standing rule, and they are motivated by the initially better socioeconomic standing of Chinese/Indian minorities, in all dimensions (jobs, schools, housing…) of Malaysia’s society. Faced with the PR rise, Najib plans to change the political and socioeconomic system and make it more ethnically inclusive, but this prospect is resisted by party radicals and justice (as Anwar’s conviction shows). Moreover, his lower popularity is a disincentive to further reforms and cuts in privileges enjoyed by Malays until 2018.

Yet, internal stability is not at risk in the foreseeable future, in spite of a higher risk of unrest and interracial clashes. Although there were mass protests against the 2013 election results due to fraud allegations, calm has largely returned since then. The growing discontent from opposition supporters with government practices is nonetheless likely to trigger further demonstrations, especially in the run-up to the 2018 polls. There is also some potential risk from radicalised Muslim militants returning home after having fought in Syria and Iraq. Nevertheless, Malaysia has always promoted moderate Islam and its state foundations and intelligence services are expected to be able to mitigate the national threat of Islamist attacks.

Positive economic outlook albeit vulnerable to external shocks

Malaysia is no longer the tiger economy it was prior to the 1997-98 Asian financial crisis, but it has continued to record strong performances and enjoys the benefits accumulated over time. Years of sustained growth have contributed to build up Malaysia’s sound fundamentals characterised by macroeconomic stability, low external debt, high investment rates, reduced poverty (inequalities have grown within ethnic groups, though), low unemployment and a chronic current account surplus. Malaysia is a net external creditor and has seen its sustainable external debt-to-GDP ratio brought down to its pre-2008 level, i.e. around 38%. Malaysia is still very export-oriented but the share of external trade in total economic activity, with China as first trading partner, has constantly decreased since 2006. However, in spite of a clear downward trend in its reliance on external markets, exports of goods still account for 70% of Malaysia’s GDP and thus strongly influence economic developments.

Malaysia_Graph1EN

High economic openness makes it very exposed to exogenous shocks as witnessed during the Asian financial crisis and the 2009 global recession. In both cases, Malaysia fell into recession before recovering fast. Gradually, the average GDP growth rate has been brought down to 5% from over 8.5% before the Asian crisis. Last year, a four-year low growth was recorded at 4.7% as a result of lower commodity prices (weighing more than 1/5 of total exports and dominated by oil & gas) and lukewarm foreign demand (mainly US/EU) not sufficiently compensated by China’s, which is itself on a slowing mode. The stronger momentum carried this year (+6.2% in the first half year) confirms the 2014 positive outlook (close to 6%) that remains constrained by the uncertain global environment, though. The support to growth is broad-based, from resilient exports, with electronics and commodities, especially oil, LNG and palm oil, as key goods, to services and industrial production.

Also, consumer demand is robust, driven by a large and prosperous urban middle class. Private consumption spending might be hampered by less favourable conditions – e.g. higher consumer prices (cf. below) – and persisting high household debt, half of which comes from mortgage loans at variable rates. The latter, above 85% of GDP, represents a risk for internal stability, although it is mitigated by the bigger size of household financial assets which would represent a buffer in case of a negative shock. Given the accelerated US Fed tapering, the country is vulnerable to capital outflows from emerging markets as seen around mid-2013 with, as corollary, a 10% decline of the ringgit recorded in a few months.

Malaysia_Graph2EN

However, all in all, Malaysia should be able to cope with this downside risk and limit it to heightened short-term capital volatility thanks to a more robust domestic demand, economic rebalancing and a stronger financial sector. Moreover, the central bank has comfortable foreign exchange reserves, i.e. about 6 months of import cover and twice the short-term debt, which are likely to preserve investor confidence in the country as evidenced by the ringgit’s gradual appreciation this year.

Economic tightening to repair imbalances

In the near future, a tight policy mix will continue to be adopted and might somewhat harm medium-term GDP growth. On the one hand, for the first time since 2011, the central bank has recently raised interest rates on the back of fast growth and accelerating inflation pressures. The latter are growing (towards 3.5-4%) due to subsidy cuts and are likely to follow the introduction of a GST (Goods & Services Tax) in 2015.

On the other hand, Kuala Lumpur has to tackle deep budget imbalances as large budget deficits have succeeded and fuelled public debt since 2008. In fact, an aggressive fiscal policy had followed the global crisis to stimulate domestic demand but consequently deteriorated Malaysia’s public finances as to make it one of South-East  Asia’s worst performers. Fiscal consolidation is thus unavoidable and will move on notably through reduced fuel, electricity and food subsidies (partly compensated by transfers to poor people), the introduction of a GST and moderated development expenditures. As a result, the consolidated government budget deficit is expected to fall very gradually from a high 6.8% of GDP in 2013 to below 5% as from 2016. Public debt is forecast to decline only progressively in the coming years from one of the region’s highest levels at a high 57% of GDP, which means that it will be under investors’ scrutiny to gauge whether fiscal consolidation remains on track. The fact that it is mainly held by domestic investors in a deeper internal capital market nevertheless mitigates risks from currency or external financing shocks.

Malaysia_Graph3EN

A high growth potential, enough to escape the middle-income trap?

Najib Razak’s re-election has boosted prospects of policy continuity, particularly of his ambitious ten-year Economic Transformation Plan (ETP). The ETP aims to improve the country’s competitiveness and has already led to higher investments which, together with moderating commodity exports, have significantly narrowed the current account surplus since 2011 (from 11.6% to 4% of GDP and forecast at this level in the medium term). His ultimate goal is to make Malaysia a high-income country by 2020, moving it away from its current upper-middle- income status. Today, Malaysia’s GDP per capita stands above USD 10,000, which is much lower than in comparable neighbouring countries (e.g. Taiwan). Economic diversification has not really worked while manufacturing industry faces sharp regional competition, particularly in electronics, and strives to reach higher levels of revenues, leaving the commodity sector as a key trade growth driver. Therefore, weak productivity and R&D would need to be tackled to improve economic prospects and avoid the middle-income trap that threatens Malaysia as well as its Thai neighbour. Reaching this objective does not only require a larger supply of high- skilled workers and further developing the services sector, but also institutional reforms to transform the overall political and economic framework.

Meanwhile, the medium-term growth outlook still looks promising with planned infrastructure projects, an attractive (foreign) investment climate and a favourable demographic profile. The Malaysian economy will continue to benefit from a young active population – despite a declined fertility rate – especially compared to surrounding countries. Moreover, its business environment is one of the best in Asia which is reflected by its category A for systemic commercial risk. Indeed, companies benefit more from doing business in a politically stable country. The rule of law is good, the labour market is quite flexible, the economy is very open and competitive, and infrastructures are well developed, leaving corruption and bureaucracy as the most frequently blamed hindrances to business.

Analyst: Raphaël Cecchi, r.cecchi@credendogroup.com