While Malaysia, as an export-oriented economy, is not immune to global events, it should hold up relatively well in the face of the global crisis in 2009 thanks to robust macroeconomic fundamentals.
Malaysia's favourable business climate helped it secure a major vote of confidence from the World Economic Forum (WEF) in October, ranking number 21 in the WEF's annual Global Competitiveness Report out of 134 countries. It scored 5.04 out of seven overall, not far behind the US, which topped the table with a 5.74 mark.
Malaysia came in at 38th overall for macroeconomic stability but was dragged down by rankings of 74th for government indebtedness and 109th for fiscal balance (i.e. it has a high fiscal deficit, which equalled 3.2% of Gross Domestic Product in 2007), indicating that balancing the budget will be a major challenge in 2009, as will reducing red tape, the top issue noted by the report.
Authorities, which are moving to tackle the issue through the Business Licensing Electronic Support System (BLESS) launched on September 5, have highlighted the need to reduce the bureaucratic burden on business as the key to pushing Malaysia's WEF competitiveness ranking up into the top 10 league internationally by 2010.
Given these factors 2008 started on a strong note, with the country's trade surplus reaching $20.31bn in the first half of the year, up 55% from the same period in 2007, while net real exports of goods and services showed a 20% growth in the second quarter, compared to the first quarter of 2008.
But as the effects of the global credit crisis became apparent in the second half of the year, trade slowed considerably. Net real exports of goods and services declined by 14.8% in the third quarter. It is expected that the implementation of a free trade agreement (FTA) with the US, which could finally come to a conclusion under President-Elect Barack Obama's administration, will boost trade in the medium-to-long term.
In a testament to the country's commitment to promoting free trade and business incentives, the government issued its fourth corridor development plan in January, which will cover the state of Sabah on the island of Borneo. The Sabah Development Corridor (SDC) is an 18-year plan aimed at positioning the state as a centre for trade, investment and leisure by 2025. Its goal is to bring in a total of RM105bn ($32.4bn) worth of investment, mostly from the private sector.
Yet another corridor project, the Sarawak Corridor of Renewable Energy (SCORE), was unveiled in February and is looking to capitalise on the country's natural gas reserves as well as integrating valuable non-energy industries like timber, livestock, and palm oil. With known reserves of around 50trn cubic feet of natural gas, 800m barrels of crude oil and some 20,000 MW of potential hydroelectric power, according to the Bintulu Development Authority, major investors such as global mining giant Rio Tinto are already moving into Sarawak to take advantage of the abundance of affordable energy allocated for development.
Palm oil another industry targeted in SCORE, saw a volatile year as prices slid sharply toward the end of the year on the back of a crude oil price slump, with marked short-term consequences for Malaysia, the world's second biggest palm oil producer.
In July, Malaysia registered oversupply of 2.1m tonnes of palm oil. Meanwhile, it has been reported in the local press that buyers from China and India have either cancelled or renegotiated deals involving around 800,000 to 1m tonnes of palm oil on the basis of lower prices. Projected total output for this year is estimated at17.4m tonnes.
Mid-2008, the government had to make an unpopular restructuring of fuel subsidies due to record high oil prices. On June 5, the retail price of petrol was increased by 41% to $0.87 a litre, while diesel was raised 63% to $0.80 a litre.
In an effort to sweeten the bitter pill, the government extended some $250m in loans on favourable terms to small-and-medium-sized enterprises (SMEs), as well as rebates for owners of smaller cars and extended subsidies for trucks and buses, with a view to easing the pressure on the less well-off.
These rebates contributed to boost otherwise slipping consumer spending in the third quarter. As a result, private consumption actually increased by 8.1% in the third quarter, leading to a slight downturn from the second quarter's 9% growth, while helping to sustain overall economic growth at 4.7%.
In an effort to sustain domestic demand and fend off the worst effects of the global crisis, Bank Negara Malaysia (BNM) announced on November 24 that it will cut the overnight policy rate (OPR) from 3.5% to 3.25% and reduce the statutory reserve requirement (SRR) from 4% to 3.5%. Both measures fell into effect on December 1.
As with most developing countries this year, inflation has been a thorn for Malaysia and has had multiple effects across the economy. The fuel subsidy restructuring contributed to an increase in headline inflation (as measured by the change in the Consumer Price Index), which hit 8.4% in the third quarter, up from 4.8% in the previous quarter. Bank Negara of Malaysia stated in November that inflation had peaked, arguing that "Going forward, the decline in global food and commodity prices, as well as moderating growth, will rein in domestic price pressures."
In June, the inflation rally caused the government to scale back some large infrastructure projects, with a planned high-speed rail link from Kuala Lumpur to Singapore and the construction of a bridge between Penang and Peninisula Malaysia put on hold in the first half of the year.
These announcements came as a setback for the local construction sector, which had anticipated growth in excess of 3.5% year-on-year until 2010 - essentially driven by the government's ambitious spending programme. Under the current 9th Malaysia plan, which runs from 2006 to 2010, the government allocated RM200bn ($63bn) for building works and RM20bn ($6.3bn) for private finance initiatives (PFIs).
High inflation rates into the third quarter also contributed to the ringgit's fall in exchange markets. The ringgit fluctuated throughout the year, falling to a yearly low of 3.1315 against the dollar on April 23. The government had still unequivocally refused to re-peg the ringgit to the dollar in September, indicating that it saw a liberal currency regime and market forces as central to the economy's long-term prospects. On December 15, the ringgit posted a respectable 3.5675 against the dollar.
On the politics front, March 2008 marked a significant turn as the ruling coalition government, Barisan Nasional (BN), experienced its lowest margin of victory in 50 years. BN secured just under two-thirds of the federal parliament seats, a significant departure from the previous elections held in 2004, when the party won 90% of the votes. Islamist and left-wing opposition parties also won control of five of the country's 13 states, up from one in the previous term.
The slim margin of victory was an indication of things to come: On October 8, Prime Minister Abdullah Ahmad Badawi, who was in power for five years, announced his resignation, effective in March 2009.
By July, political uncertainties regarding Badawi's future, combined with disappointing second quarter profits, had impacted the Bursa Malaysia, producing a downturn on the country's usually lively capital markets. From July to August the The Kuala Lumpur Composite Index (KLCI), widely considered to be the capital market barometer, dipped from 1,163.09 to 1,100.50; by November it stood at 866.14.
Nevertheless Malaysia's capital markets look robust enough to weather the storm. The solid macroeconomic outlook - with growth expected to keep apace at around 5% over the next two years - should reassure long-term investors in the Bursa.
Looking ahead to 2009, Malaysia will continue to improve its ability to control the effects of an unstable global economic situation, focusing on its ability to strengthen government-targeted sectors like tourism, pharmaceuticals, Islamic finance, food processing and medical supply manufacturing.