A middle-income country with serious ambitions to graduate into the ranks of developed economies, Malaysia is supported by abundant natural resources. In particular, offshore oil and gas, and foreign investment-friendly policies have nurtured a globally competitive electrical and electronics industry, while a strong banking system has financed rapid growth in consumer sectors and construction. The country’s biggest challenge is to channel its growing financial capital into more entrepreneurial companies able to compete against their peers in the global arena.
Generating Growth
The Malaysian economy is built around international trade, with export revenues in 2013 equal to 83% of GDP, according to the Department of Statistics (DoS). GDP per capita is the highest in South-east Asia, with the exception of smaller countries like Singapore and Brunei Darussalam, reaching $10,548 in 2013, based on a GDP of RM984.45bn ($307.25bn) and a population of about 30m. That compares to a GDP per capita of $5674 in neighbouring Thailand and $3509 in Indonesia, according to the IMF. However, Malaysia is still a long way from catching up with developed countries in North Asia, with which it aspires to be compared, such as South Korea which has a GDP per capita of $24,329 and Taiwan with $20,930. Led by the nationalist United Malays National Organisation since the late 1940s, economic policy has traditionally blended free markets, aggressive recruitment of foreign investment and a permissive attitude towards low-cost immigrant labour. Prime Minister Najib Razak, a former economist, has steered the country in a more fiscally conservative and economically liberal direction with the Economic Transformation Programme (ETP), which he launched in 2010.
Recent Performance
Annual real GDP growth has hovered around the 5% mark since 2005 and has been forecast by the IMF to continue at that pace through at least 2018. Most mainstream analysts were predicting a rebound to 5-5.5% growth in 2014 after a slowdown to 4.7% in 2013. In the first quarter of 2014 real growth was a bullish 6.2% year-on-year (y-o-y), driven by an upward turn in global markets, especially for electronics. Growth has been supported by a young population, with annual population growth moderating in recent years to an estimated 1.4% in 2013.
Consumption and construction have been important growth drivers, especially during a soft period for export markets in 2012 and the first half of 2013. The combination of low export receipts and increased imports of consumer goods and construction materials sharply reduced the traditionally large current account surplus, from 11.6% of GDP in 2011 to 3.8% in 2013. The lower surpluses and a pull back of international capital from emerging markets in 2013 put strong pressure on the Malaysian ringgit, which depreciated by 5.6% during the year. That was despite aggressive defence of the currency by the central bank, Bank Negara Malaysia (BNM), which saw its foreign exchange reserves decrease from $141bn in mid-May 2013 to $131bn in mid-May 2014. Over the long term the ringgit has appreciated strongly in real terms, driven by foreign investment and tightening global commodities markets. Annual GDP growth in dollar terms has averaged about 11% since 2005, and the IMF has forecast an average 9.5% pace for 2014-19.
Standing Strong
Malaysia weathered the 2008-09 global financial crisis well for such a highly trade-dependent country, with GDP in 2009 shrinking by only 1.5% in real terms and by 12.5% in dollar terms. The BNM lowered interest rates and spent reserves aggressively, while the government applied fiscal stimulus, lifting the federal deficit to 6.7% of GDP. Since then the government has been gradually consolidating, bringing the deficit down to 3.9% in 2013 and 3.6% in the first quarter of 2014, and a further reduction is planned for 2015 through the introduction of a 6% value-added tax (see analysis). However, monetary policy has remained stimulative, with benchmark rates at 3% as of June 2014, while inflation was at 3.4% y-o-y in April 2014, driven by the government’s cuts to fuel subsidies.
Oil & Gas
The backbone of the Malaysian economy is its oil and gas industry, which ranks 14th in the world in natural gas production and 28th in oil output, according to the US Energy Information Agency. Relative to its population, Malaysia’s oil and gas output of over 1.6m barrels of oil equivalent per day in 2013 was similar to the combined oil and gas output per capita of the US. The oil and gas industry is dominated by a single state-owned company, Petroliam Nasional (Petronas), with 2013 revenues totalling RM317.31bn ($99.03bn), equal to a staggering 32% of Malaysian GDP.
Combined oil and gas output volumes have been roughly stable for the past decade as increasing production from newer gas fields has compensated for declining output from older oilfields. Oil output is mostly consumed domestically as transport fuel and petrochemicals stock, with net exports of crude oil in 2013 narrowly exceeding net imports of oil products. Gas and partly imported coal are used to produce electric power and as industrial fuels, while a large portion of gas output is exported as liquefied natural gas (LNG).
Gas export revenues were RM64.17bn ($20.02bn) in 2013, according to DoS figures, up from RM61.14bn ($19.08bn) in 2012. Value added by oil and gas extraction came to RM98bn ($30.5bn) in 2013 or 9.9% of GDP, according to the DoS. Real growth in extraction was a modest 0.5% in 2012 and 1.2% in 2013. Exploration and development of increasingly deep offshore fields has gone towards extending resource life at current production levels, which Petronas estimated at 28 years for oil and 42 years for gas. The focus of sector growth is on processing fuels, lubricants, petrochemicals, plastics, synthetic rubber and nitrogenous fertilisers.
Oil refining accounted for RM37bn ($11.55bn) of value added in 2012, or 3.7% of GDP, and the sector contracted by 3.4% in 2013 after seeing 3.7% growth in 2012. Petrochemicals and nitrogenous fertilisers are not distinguished in statistics for the chemicals sector, which accounted for RM28bn ($8.74bn) of value added in 2013, or 2.8% of GDP, and saw growth of 0.9% in 2013 and 6.5% in 2012. Plastics made up RM9.3bn ($2.9bn) of value added in 2013, or 0.8% of GDP, and saw growth of 17% in 2013 and 12% in 2012.
Resurgent Electronics
Malaysia has long been a regional leader in attracting foreign investment in electrical and electronics manufacturing. As competition has increased from other South-east Asian countries, Malaysia has leveraged its industry experience, political stability, secure legal climate, cheap energy and flexible tax incentives to attract investment in more capital-intensive production. However, the industry remains dominated by contract manufacturers and units of multinationals producing foreign or standard designs for tight margins, and there are not yet any widely recognised Malaysian electronics brands. Kristina Fong, the head of research at local ratings agency RAM Rating Services, told OBG, “Malaysian electronics produced are very successful and deeply integrated in the global supply chain. The next stage that the industry is aiming for is to move up the value chain and produce more completed goods rather than only components.”
Export revenues from electrical and electronic goods came to RM263bn ($82.08bn) in 2013, equal to 27% of GDP. Value added, however, was a more modest RM49bn ($15.29bn), or 5% of GDP, and much of the industry’s inputs are imported. Real growth of the sector was moderate in 2012 and 2013 at 2.2% and 3.5%, respectively. But the pace picked up in the fourth quarter of 2013 to 9.8% y-o-y and accelerated to 12.6% yo-y in the first quarter of 2014. Malaysia is also one of the world’s leading producers of semiconductors, with exports of RM88bn ($27.46bn) in 2013, according to the DoS. That is equal to 9.1% of the $306bn in global semiconductor sales recorded in 2013 by industry group World Semiconductor Trade Statistics. Photovoltaic cells, used in solar panels, are another major product, with RM23.47bn ($7.33bn) of exports in 2013. A variety of parts for computers, tablets, telephones and other electronic devices are produced. Electrical products include air conditioners, refrigerators and specialised industrial equipment.
Ubiquitous Oil Palms
Malaysia’s rapid development in the late 20th century was partly accomplished through large-scale clearing of forests to grow export-oriented crops, mostly palm oil and rubber. The country was once the world’s largest producer of both crops, but as the Malaysian government has sought to limit deforestation, it has since slipped behind larger neighbours who have planted aggressively.
About a sixth of Malaysia’s land is planted with oil palms, and 2012 output was equal to 37% of global production, according to UN data. About 95% of the output is exported, and the value of the palm oil crop rose sharply until 2011 as global edible oil markets tightened, lifting palm oil prices from less than $400 per tonne in 2005 to a peak of around $1250 in 2011. But increased regional production and slower global growth knocked prices back under $750 in 2012, and by June 2014 they had recovered modestly to around $800. Mirroring changes in prices, value added from oil palm farming peaked in 2011 at RM51bn ($15.9bn), or 5.7% of GDP, and fell back to RM39bn ($12.17bn), or 3.9% of GDP, in 2013. Palm oil also accounts for about 90% of Malaysia’s edible oil processing sector, which in 2013 contributed RM10.7bn ($3.34bn), or 1.1% of GDP.
Malaysia’s rubber output has declined as regional competition has lowered prices, but processing and manufacturing of rubber goods continues to grow, increasingly using imported or synthetic rubber. Rubber output fell to 826,421 tonnes in 2013 from a peak of 1.28m tonnes in 2006, according to BNM data, and imports of raw natural rubber in 2013 for the first time slightly exceeded exports. Meanwhile, net exports of processed rubber and rubber goods, mostly gloves, came to RM13.2bn ($4.12bn) in 2013. Farming, processing and manufacturing of rubber and its products accounted for RM15.6bn ($4.87bn) of value added in 2012, or 1.7% of GDP.
Business & Leisure Hub
Malaysia has the second-biggest tourism industry in South-east Asia thanks to its trade-oriented economy and natural beauty. Business travellers and holiday makers come in about equal numbers, and mostly from within the region. International tourist arrivals totalled 25.7m in 2013, just behind Thailand’s 26.5m, according to UN data, while gross receipts from international tourism came to $21bn, equal to 6.7% of GDP. Singapore accounted for more than 15m international tourist arrivals, which is actually more than double Singapore’s population.
The tragic loss of Malaysian Airline passenger jet MH370 in March 2014 was expected to result in a weak year for tourism, confounding the Ministry of Tourism’s efforts to boost growth with a campaign in Asian markets declaring it “Visit Malaysia Year”. The incident also put into question the future of the national flagship airline, which was already struggling amid a boom in discount air travel led by AirAsia, a Malaysian discount carrier that has grown rapidly into one of Asia’s largest airlines. Besides rivalling Singapore as a regional administrative centre, some multinationals also have global service centres in Malaysia, and there is a growing business process outsourcing industry.
Bullish Construction
Malaysia’s construction sector has grown rapidly in recent years, driven by low interest rates and strong demand for new homes, offices and retail space, especially in Kuala Lumpur. Real growth has been very strong at 18.6% in 2012, 10.9% in 2013 and 18.9% y-o-y in the first quarter of 2014. Gross expenditures on structures was a relatively high 14.5% of GDP in 2013, or RM143bn ($44.6bn), up from 11.1% of GDP, or RM98bn ($30.5bn), in 2011. However, value added by the construction sector was a relatively low 4.2% of GDP in 2013, or RM41bn ($12.8bn).
The government, Petronas and state investment vehicle 1 Malaysia Development are big drivers of construction projects. A new public transit authority is building the first of three planned lines for the Klang Valley Mass Rapid Transit project, which will run underground in downtown Kuala Lumpur. The first line has a budget of RM23bn ($7.18bn) and is due to open in 2017. The government also plans to spend RM30bn ($9.36bn) on a high-speed rail line from Kuala Lumpur to Singapore, scheduled to open in 2020. The two projects are expected to further boost the population and economy of Kuala Lumpur and its suburbs.
Ebullient Consumption
Private consumption has grown rapidly, driven by rising incomes and expanding consumer credit. Real growth of private consumption reached 8.2% in 2012, 7.2% in 2013 and 7.1% y-o-y in the first quarter of 2014. The weight of private consumption in GDP has grown from 47.3% in 2011 to 51.1% in 2013, a ratio similar to highly trade-oriented advanced economies such as Sweden, the Czech Republic, the Netherlands and South Korea. Consumption is mainly driven by rising incomes, with the median annual household income growing at an average of 7.2% per year from 2009 to 2012 to reach RM60,000 ($19,440), according to a DoS survey. The median household income in Kuala Lumpur grew at a much faster average of nearly 15% annually during the same period to reach just over RM103,000 (about $33,400) in 2012. These figures have not been adjusted for inflation, which averaged 2.2% annually during the same period.
Consumer credit growth has been a factor, but loans for consumption and automobile purchases have not grown as rapidly as property loans. Banks’ net issuance of loans to households for purposes other than property or securities investment came to 1.4% of GDP in 2012 and 1.6% of GDP in 2013, while non-bank net issuance of such credit was about a quarter of that. The stock of such debts to all lenders reached 31% of GDP at the end of 2013. Bank net issuance of such loans turned slightly negative in the first quarter of 2014 as BNM pressured lenders to tighten credit standards.
The consumption boom is evident across consumer-oriented services sectors. Communications grew 10% in 2013 in terms of real value added and 10.1% y-o-y in the first quarter of 2014, while retail trade grew 8.1% in 2013 and 10.4% y-o-y in the first quarter of 2014. However, inflation of consumer goods and services remained relatively subdued, as a large proportion of consumer goods or their inputs are imported, and global commodity prices have been soft since 2011. The recent acceleration of inflation has been driven by the government’s reduction of subsidies for fuels, electric power and sugar, as well as a 2013 hike in tobacco taxes. The increasing popularity of cooperatives could also serve a positive role in the government’s economic goals. Nik Ali bin Mat Yunus, the executive chairman of the Malaysia Cooperative Societies Commission, told OBG, “Cooperatives in Malaysia have the potential to play a restructuring role in the society and enable equitable distribution of wealth. This strength, if properly utilised and strategically aligned with other sectors of the economy, is a vehicle for national development.”
State’s Hand
Malaysia has a strong but largely state-owned financial sector, dominated by three powerful government investment arms: the Khazanah Nasional, a sovereign wealth fund; the Employee Provident Fund, which manages mandatory pension savings; and Permodalan Nasional, which sells unit trusts exclusively to native Malaysians. The state fund managers in turn control three banking groups – Maybank, CIMB Group and RHB Bank – with about half of banking sector assets. An army fund controls medium-sized Affin Bank.
The involvement of the state investment funds, especially the direction of mandatory pension savings into capital markets, supports high equity valuations and encourages companies to go public. There were 905 companies listed on the Bursa Malaysia as of June 2014 with a total market capitalisation of more than 170% of GDP. According to the World Bank, Malaysia’s total market value of domestic listed companies relative to GDP was the 4th-highest in the world in 2012.
The banking sector is also large and well-financed thanks to high household savings. Bank assets came to RM2.06trn ($642.6bn) at the end of 2013, or 209% of GDP, while deposits and capital were equal to 74% and 9.5% of assets, respectively. Malaysia’s financial sector gets high marks in international comparisons, but ratings agencies have expressed concern about their high exposure to real estate (see analysis). The financial sector accounted for RM73bn ($22.78bn) of value added in 2013, or 7.4% of GDP. Real growth was 1.8% in 2013 and 5.6% in 2012. Several top banks own affiliates in neighbouring countries, mostly in Singapore, Thailand, and Indonesia, while Maybank and CIMB are entering markets such as Laos and Cambodia and positioning themselves as ASEAN-wide financial groups.
Gradual Transformer
Prime Minister Najib has made transformation his chief slogan, most prominently in the ETP. Overseen by a specially created agency, the Performance Management Delivery Unit ( PEMANDU), the programme’s headline goal is to enter the ranks of high-income countries, defined by the World Bank as those with a GNI per capita of $15,000, by 2020. One of the ETP’s biggest successes has been in simplifying regulation of business, a task headed up by PEMANDU. Malaysia has moved up in the World Bank’s global “Doing Business” rankings from 23rd in 2010 to 6th in 2014, supporting efforts to draw in more foreign investment and convince more multinationals to base their regional headquarters in Kuala Lumpur.
The fiscal consolidation under way since 2009 is also part of the programme, with a very ambitious goal of balancing the federal budget by 2020. The ETP also aims to boost Malaysia’s traditionally weak health care and education sectors, mainly by encouraging growth in private education and health care. Malaysia’s total health care spending came to only 3.9% of GDP in 2012, according to the World Bank, a figure that is expected to increase as incomes rise and the population ages. The ETP also includes a large measure of traditional development planning and aims to build on Malaysia’s strengths in oil and gas, electronic goods, palm oil and rubber, tourism, finance and retail trade. The plan also includes modest, piecemeal privatisation, with the largest sale so far being the RM10bn ($3.12bn) initial public offering in 2012 of a one-third stake in Felda Global Ventures, a state-owned palm oil farmer.
Outlook
As of mid-2014 Malaysia’s near-term prospects were looking up. Accelerating US growth and a nascent European recovery were alleviating concerns about China’s gradual slowdown, though the possibility of a hard landing in China was still seen as the biggest near-term risk to the Malaysian economy. In the long run few doubt that Malaysia will reach its 2020 national income target. As of May 2014 the IMF was forecasting that Malaysia would surpass its goal of seeing GDP per capita of $15,000 in 2018. Likewise, joining the World Bank’s high-income category is all but certain, as the bar in 2012 was only a $12,616 GNI per capita.
Transforming into a genuinely advanced economy will be more difficult. The main concerns that economists have expressed are that the economy could be over-reliant on credit, and top-down development planning and state ownership may be coddling the business sector. Business elites are also nervously eyeing the debates in the US over exporting LNG, which if permitted on a large scale could undermine Malaysia’s export revenues. However, Malaysia has much reason for optimism through its successful transition to the top-tier in the World Economic Forum’s “Global Competitiveness Report 2013-14”, which ranked Malaysia 24th of 148 countries. Such a ranking implies that the country already has policies and business conditions in place that are comparable to many advanced economies.
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