Malaysia's overall 2007 economic performance has been strong and on target. GDP growth for the year is forecast to reach the government's goal of 6% following a third quarter that saw sound growth of 6.7% and a fourth quarter expected to come in at 6.1%.
The majority of this development came from robust commodity prices, with exports of palm oil and palm oil-based products up 7.2% to RM36bn ($11bn). With global oil prices now more than $100 a barrel, the price of crude palm oil is expected to follow a similarly upward trend into 2008.
On the flip side, industrial exports, a leading contributor to the economy, declined. This backslide stemmed in large part from a slumping US economy, where electricals and electronics (E&E), which make up 44.2% of all manufactured exports, stood at RM219bn ($67bn) in the first half of 2007, down from RM232bn ($71bn) in the same period a year earlier.
With increased competition from low-cost producers such as China and India and emerging South East Asian manufacturing powers like Vietnam, analysts believe that Malaysia can no longer compete in the area of low-end manufacturing. The country does not appear overly concerned about losing ground in exports of this type. The government hopes they will be replaced by emerging industries such as medical devices, aerospace and biotechnology where it can exploit a more educated workforce and advanced infrastructure to attain first-mover advantage.
Malaysia has been keen to evolve into a service-based economy, and 2007 was a strong year for tourism, education and health related services. The financial sector, under the financial services master plan, continues to be liberalised. Capital markets had a solid year, showing good resiliency to the US sub-prime crisis that affected many other countries.
While Malaysia has historically depended on the US as its major trade partner, the government can take satisfaction in the gains made in 2007 to secure greater trade and inbound investment from burgeoning Gulf Cooperation Council (GCC) countries. In 2006 the central bank gave licences to three major GCC banks - Saudi Arabia's Al Rajhi Bank, Kuwait Finance House and Qatar-backed Asian Finance Bank - to operate in the country and 2007 saw the fruits of this initiative, with each playing a major role in attracting Middle East companies to use Malaysia as a base for doing business in the region. In addition, Malaysia's strong Islamic banking and capital markets framework continued to attract international investors to the country's sharia-compliant banking and investment products.
2008 is expected to be an election year. While current Prime Minister Abdullah Badawi is widely anticipated to maintain his leadership, analysts believe that the margin by which he wins will be important. A number of measures were thus undertaken in 2007 to boost positive sentiment in the business community and among the general public.
In order to support consumer spending, in May the government increased the salaries of the nation's 1m civil service employees, with raises ranging from 7.5% to 42%. Meanwhile the annual budget, announced in September, saw corporate tax rates reduced from 29% in 2007 to 26% in 2008, to be followed by 25% in 2009.
The real estate sector benefited from several tailored government measures. In March the real property gains tax was abolished and the government further liberalised conditions for foreign ownership of property. In addition, from 2008 onwards, the 5m active members of the Employees Providence Fund, a compulsory savings programme, will now be able to make monthly withdrawals, instead of one annual transaction, to finance the purchase or improvement of a house, in a move expected to further stimulate the sector.
Although the government has set in place measures to boost the economy, many Malaysians are still waiting for a tangible impact from the government-driven investments outlined in the Ninth Malaysia Plan (2006-10). Nearing the midway point, many of the major infrastructure and construction projects announced have yet to be implemented, with contractors unable to place bids or having to wait long periods for their offers to be evaluated.
Some have dubbed 2007 the 'year of the corridors'. The majority of the country's economic wealth is concentrated in the Klang Valley, the area in Western Malaysia that surrounds the commercial capital Kuala Lumpur. In an effort to redistribute wealth and provide employment opportunities in the less developed areas, 2007 saw the official launches of the Iskandar Development Region in the south, the Northern Corridor Economic Region and the Eastern Corridor Economic Region.
Although the corridors have received mixed reviews, with citizens waiting to see what benefits they will bring to the regional economies, analysts have applauded the restructuring of government-linked companies (GCLs). Spearheaded by Khazanah Nasional, the investment arm of the government, 20 GLCs, including telecommunications firm Time dotCom and Malaysia Airlines, have so far been revamped, resulting in improved stock performance and quality of services.
While 2007 could be considered a successful year on the economic front, there are still challenges ahead. Human capital remains a major issue, with Malaysia's top brains often tempted to look for higher salaries overseas. In addition, government bureaucracy can still be cumbersome for local and international businesses. To combat these challenges, reforms have been made in the educational system aiming to graduate a more employable workforce. A special task force was set up to improve government delivery systems, with the goal of improving the country's ranking on the World Bank's annual Doing Business index from its present place at 24th to a target of 10th.