Malaysia: Year in Review 2011

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With many sectors of the economy having performed solidly over the past 12 months, Malaysia is hoping for more of the same in 2012. Indeed, foreign direct investment (FDI) is up, inflation well contained, and the financial sector steady. However, at least some impact from the European debt crisis is expected, with demand for exports widely predicted to ease in 2012.

Though final figures have yet to be issued, it is expected that the Malaysian economy will have expanded by more than 5% in 2011. At the end of November, the Organisation for Economic and Cooperative Development (OECD) forecast that this solid rate of growth would continue for at least the next five years, predicting Malaysia’s GDP would expand by 5.3% in each of the next few years and hit 5.6% by 2016.

The OECD’s forecast is somewhat more optimistic than the Asian Development Bank or the World Bank, which see Malaysia’s GDP rising by 4.7% and 4.9%, respectively, in 2012, though it is roughly in line with the International Monetary Fund’s projection of 5.1%. Whatever the ultimate figure, it will be well in excess of those of Malaysia’s European and North American trading partners and in advance of most regional and global economies.

Along with GDP, Malaysia’s balance of payments figures were also positive in 2011, with the current account surplus standing at $23.8bn for the nine months ending September 30, an 18% increase on the $20.2bn posted in the same period last year, according to the Department of Statistics (DoS).

However, there are some concerns that Malaysia’s export trade could suffer in the coming year, as major segments of the global economy flirt with recession. While exports rose by a healthy 15.8% in October, this rate of increase was lower than that of the previous month, though still above the 9.1% rise spread over the first 10 months of the year.

While overseas trade may raise a few concerns in the coming year, the same is unlikely to be the case with inflation. According to the latest figures released in November by the DoS, inflation is remaining fairly steady, with consumer prices rising by 3.4% year-on-year in October.

Inflation could ease further in the new year, dipping to between 2.5% and 2.8% in 2012. This will be the result of a slowing of demand, and a slight deceleration of growth, with commodity prices moderating.

There was more reassuring news in a recent report from ratings agency Fitch, which said the Malaysian banking sector is also in good shape as the year comes to a close and is well placed to ride out a renewed bout of economic retreat. The report, released in mid-December, said the outlook for Malaysian lenders was stable, though household debt, currently running at 76% of 2010 GDP, remained high.

Local banks have put in place satisfactory risk management, the report said, adding that the impact of higher credit costs resulting from a general weakening of the global economy can largely be absorbed through banks’ earnings, leaving limited risk of capital erosion.

Another sign of the stability and appeal of the Malaysian economy came in the form of inflows of FDI, which rose by 43% to $8.3bn during the first nine months of the year in comparison to the same period in 2010. Indeed, the year-end total is likely to meet or exceed the $10bn forecast by the government.

However, it is possible that Malaysia may struggle to match this total in 2012, with some indications that FDI may be drying up as eurozone economies move ever closer to recession, a move that could reduce global investor sentiment. Though there were still positive FDI inflows in the third quarter, the $1.6bn in the July to September period was some 50% less than in the quarter before, reflecting uncertainty and growing caution among international investors. This unease could well continue into 2012.

One factor that may cause Malaysia to take its eye off the economic ball in 2012 is the upcoming general election, with the government of Prime Minister Najib Tun Razak widely expected to call the ballot early in the new year. Many expect the election to be a tightly fought affair, with the opposition predicted to mount a creditable challenge to the ruling National Front coalition. A long campaign, followed by a less than decisive result, could disrupt market harmony and slow the pace of further economic reforms.

However, having successfully ridden out the global financial crisis of 2008 and 2009, Malaysia’s economy appears to be well placed to continue its progress into 2012 and beyond.

 

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