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Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 1
Malaysia
Unveiling Malaysia’s New Economic Model – Heading
towards a sustainable and inclusive high-income
nation
Key Highlights
Developing Asia emerges as the source of economic growth.
Economic activity in the East has rebounded faster than the
advanced economies of the West. This signals the shift of the
centre of economic activity from the West to the East. China’s
increasing dominance as an economic powerhouse is increasingly
felt by both advanced and emerging economies.
Optimistic 2010 economic growth. Economic expansion in
Malaysia is expected to be strong with the revival of exports.
However, external demand could weaken as central banks across
the globe begin to tighten fiscal and monetary policy in an effort to
curb excess liquidity in the financial markets.
Commodity prices are back on the rise. Volatile and relatively
high petrol prices are expected to persist. This would lead to
inflationary pressures and output disruptions. Higher global food,
commodity and energy prices
New Economic Model and the promise of reforms. The New
Economic Policy that was recently unveiled by the Malaysian
Prime Minister promises badly needed and long overdue reforms.
The question that remains is how many of the promises made to
the people can the Malaysian government deliver.
Contents
Page Details
1 – 2 Country Summary
3 – 11 Key Economic Indicators
12 – 15 Deconstructing the New Economic Model
16 Implementation: Going Forward
17 – 18
Timeline: Malaysia
Economic Research
Ee Suen Zheng Bachelor of Arts with First Class Honours in Banking and Finance +603-9283 8950 +6016-696 6566 [email protected] jamesesz.wordpress.com
Country Summary
Full name Federation of
Malaysia
Population 27.5 million (UN,
2009)
Capital Kuala Lumpur
Area 329,847 sq km
(127,355 sq miles)
Major languages
Malay (official), English, Chinese dialects, Tamil, Telugu, Malayalam
Major religions Main exports GNI per capita
Islam, Buddhism, Taoism, Hinduism, Christianity, Sikhism Products: Office Supplies & Forms Electronic equipment, petroleum and liquefied natural gas, chemicals, palm oil, wood and wood products, rubber, textiles US $6,970 (World Bank, 2008)
Source: BBC
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 2
Country Locator
Country Rating
Long-Term Issuer Default Rating (09 June 2009)
A-
(Stable,
Affirmed)
Short-Term Issuer Default Rating (09 June 2009)
F2
(Affirmed)
Local Currency Long Term Issuer Default Rating (09 June 2009)
A
(Stable,
Downgrade)
Country Ceiling (09 June 2009)
A
(Affirmed)
Ratings A Economic situation can
affect finance
F2 Good quality grade with satisfactory capacity of obligor to meet its financial commitment
Source: Fitch, Inc.
Background Information
Malaysia is a federation of 13 states and three federal territories. It
comprises of a multi-ethnic, multi-religious society with a Muslim
majority. The country is among the world’s largest producer of
computer disk drives, palm oil, rubber and timber. Badly hit by the
global economic downturn, the government’s $16bn economic
stimulus plan in March 2009 is seen to have prevented a deep
recession. The country faces serious challenges in maintaining
political stability in the midst of religious and ethnic diversity.
Country Data Profile
2000 2005 2007 2008
World view
Population, total (millions) 23.27 25.65 26.55 26.99
Population growth (annual %) 2.3 1.8 1.7 1.7
Surface area (sq. km) (thousands) 329.7 329.7 329.7 329.7
GNI, Atlas method (current US$) (billions) 80.18 133.45 170.49 188.06
GNI per capita, Atlas method (current US$) 3,450 5,200 6,420 6,970
GNI, PPP (current international $) (billions) 194.35 287.49 351.21 370.83
GNI per capita, PPP (current international $) 8,350 11,210 13,230 13,740
Economy
GDP (current US$) (billions) 93.79 137.95 186.72 194.93
GDP growth (annual %) 8.9 5.3 6.3 4.6
Inflation, GDP deflator (annual %) 8.9 4.6 5.2 10.3
Agriculture, value added (% of GDP) 1 8 10 ..
Industry, value added (% of GDP) 48 50 48 ..
Services, etc., value added (% of GDP) 51 42 42 ..
Exports of goods and services (% of GDP) 120 117 110 ..
Imports of goods and services (% of GDP) 101 95 90 ..
Source: World Development Indicator Database
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 3
Positive GDP Outlook
Key Economic Indicators
Figure 1
Economic activity in the US, Euro Area, Japan, and the UK is
forecasted to remain sluggish in 2010. Advanced economies are
expected to recover gradually as key economic indicators point to
lower economic activity and threats of deflation. On the other hand,
emerging and developing economies especially in Asia and
commodity producing economies will likely regain momentum in
economic activity much sooner.
Figure 2
Views concerning Malaysia’s economic growth this year remain
divergent. Foreign brokers maintain an optimistic real GDP forecast
based on strong regional production data in the first quarter, a
positive outlook for the manufacturing sector, higher commodity
prices, higher domestic demand and a V-shaped recovery in exports.
Local financial institutions remain sceptical on rise in private
investments and exports.
-6 -4 -2 0 2 4 6 8
World
Advanced economies
Euro area
Newly industrialized Asian economies
Emerging and developing economies
Developing Asia
ASEAN-5
3.0
0.5
0.6
1.8
6.1
7.9
4.7
-0.6
-3.2
-4.1
-0.9
2.4
6.6
1.7
Real GDP Growth (%)2009 2008
Source: IMF
5.5
4.2 4.3 4.8 5.0 5.2 5.3 5.3 5.7 5.86.6
7.3 7.7 8.0
Malaysia: Forecasted Real GDP Growth, %
Despite sluggish forecasted economic growth for advanced economies, foreign brokers are optimistic of Malaysia’s economic growth in 2010.
Bank Negara Malaysia
revised its 2010 GDP growth
projection to a range of 4.5-
5.5% as lead indicators point
to recovery in exports and
stronger consumer
confidence.
HSBC projected a 7.3% GDP
growth rate for Malaysia
stating in its report that
recovery has reached a self-
sustaining state.
The global economy fuelled
by emerging and
developing countries is
expected to recover
gradually. However,
recovery will be sluggish
and uneven.
Emerging and developing
Asian economies grow
despite negative external
shocks from advanced
economies
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 4
Economic Growth Trends
Figure 3
Malaysia’s economy remains highly exposed to external shocks.
The negative impact from the U.S. sub-prime mortgage crisis in 2007
is not as severe as the Asian financial crisis in 1997. Although a
highly regulated and protected domestic financial system can be
seen as a partial bulwark against the global economic downturn,
negative economic pressures flowed through trade channels and
commodity prices.
Figure 4
Protectionism has its price. Most of the key countries in
developing Asia like China, India, Indonesia and Vietnam have
already surpassed pre-1997 average annual GDP growth while
Malaysia has lagged behind due to protectionist policies, capital
controls and a national currency that is not internationally traded.
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
0
100
200
300
400
500
600
700
Malaysia's Growth Trends
National Currency, Billion Annual % Change
Source: IMF, World Economic Outlook DatabaseEstimates start after: 2008Base year: 2000
Plaza AccordCommodity and Property Crisis
Manufacturing export-led recovery
Asian Financial CrisisRM pegging
"Mega Projects"
Ringgit de-peg
Dot-Combust9-11
U.S. Sub-prime Mortgage Crisis
0 2 4 6 8 10 12
Vietnam
Thailand
Singapore
Philippines
Malaysia
Indonesia
India
China
7.16.3
Average Annual GDP Growth
2000-08 1990-99
Source: IMF, World Economic Outlook
Economic growth trends
show that protectionist
policies have not sheltered
the Malaysian economy from
negative external shocks
Malaysia is lagging behind
regional economies after the
Asian Financial Crisis in
1997. Protectionism is
taking its toll on Malaysia’s
economic growth.
A moderate contraction in
the Malaysian economy is
seen in 2009 despite a sharp
drop in GDP in the first
quarter. The collapse in
global demand and world
trade led to a massive
double-digit decline in
exports and industrial
production.
Other Asian economies,
especially China and India
are expected to continue to
lead the global economic
recovery.
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 5
Figure 5
Inflationary pressures are building. Global commodity prices are
poised to rebound. Crude oil prices have begun to show an upward
trend due to constrained supply and increased demand from BRIC
(Brazil, Russia, India and China) countries. High crude oil prices are
likely to spillover into other commodities as consumers search for
alternative sources of energy.
Removal of government subsidies and GST. Although global food
and commodity prices is forecasted to put upward pressure on
inflationary risk, Malaysia’s extensive price controls on domestic
energy prices and food items will check any advance in inflation. The
removal of these price controls and the coming implementation of
the GST (Goods and Services Tax) would likely result in a one-shot
increase in prices.
Governments and central banks exit. Fiscal and monetary policy
around the world is expected to tighten as governments attempt to
negate excess liquidity created to bail-out banks during the sub-
prime mortgage crisis. Countries that are slow to raise benchmark
interest rates may face threats from inflation.
Inflationary pressures from hot money flowing into Asia. Hot
money that is fleeing advanced economies of the West may cause
inflationary pressures in the emerging and developing economies in
the East.
-2
0
2
4
6
8
10
12
0
20
40
60
80
100
120
140
160
Malaysia's Average Consumer Prices
Index, Base year=2000 Annual % Change
Source: IMF, World Economic Outlook DatabaseEstimates start after: 2008Base year: 2000
Food and Fuel Crisis
US Sub-prime Mortgage CrisisAsian Financial
Crisis
Inflation
Weightage of Consumer Price Index (CPI) Food & non-alcoholic beverages
31.4
Alcoholic beverages & tobacco 1.9
Clothing & footwear 3.1
Housing, water, electricity, gas & other fuels
21.4
Furnishings, household equipment & routine household maintenance
4.3
Health 1.4
Transport 15.9
Communication 5.1
Recreation services & culture 4.6
Education 1.9
Restaurants & hotels 3.0
Misc goods & services 6.0
Total 100.0
Source: Department of Statistics, Malaysia Base year = 2005
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 6
Figure 6
Figure 7
Food and Non-Alcoholic
Beverages20%
Alcoholic Beverages and
Tobacco2%
Clothing and Footwear
3%
Housing, Water,Electricity, Gas
and Other Fuels22%Furnishings,
Household Equipment and
Routine Maintenance
4%
Health1%
Transport16%
Communication5%
Recreation Services and
Culture5%
Education2%
Restaurant and Hotels11%
Miscellaneous Goods and
Services9%
Composite of Average Monthly Household Expenditure (2004/2005)
Source: Department of Statistics, Malaysia
0%
5%
10%
15%
20%
25%
30%
35%
40%
Food and Non-Alcoholic BeveragesHousing, Water, Electricity, Gas
Transport
Composition of Average Monthly Household Expenditure by Class (2004/2005)
Below Rm 500 Rm 500- Rm 4,999 Rm 5,000 and above
Source: Department of Statistics, Malaysia
Household Expenditure
Food and non-alcoholic
beverages amount to one-
fifth of average monthly
household expenditure.
The higher income category
of Malaysians spends more
on transport than the lower
income category. Painful
fuel subsidies by the
Malaysian government
benefit the rich more than
the poor.
Housing, water, electricity,
gas and other fuels amount
to another one-fifth of
household expenditure.
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 7
Employment
Sector
14.2%
35.3%
16.2%
14.9%
10.3%
9.1 %
Foreign Workers in Malaysia by Sector, 2008
Maid Manufacturing
Plantation Construction
Services Agriculture
Source: Ministry of Home Affairs
Figure 8
Figure 9
Unemployment displaying an upward trend. Unemployment is
poised to display some upward pressure following the global
economic downturn. However, increased vacancies in the
manufacturing and services sector provide a healthy indicator of
economic recovery.
Figure 10
11,609.10
2.9
3
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
8500
9000
9500
10000
10500
11000
11500
12000
2002 2003 2004 2005 2006 2007 2008 2009e
Malaysia's Labour Market
Employment ('000) Unemployment (% of labour force)
Source: BNM
Unemployment trending upwards but remains low
US sub-prime mortgage crisis
0100,000200,000300,000400,000500,000600,000700,000
2005 2006 2007 2008 2009e
Vacancies Reported by Industries
Agriculture, hunting, forestry and fi shery Mining and quarrying
Manufacturing Construction
Services Others not elsewhere classifi ed
Source: BNM
1,085,658
591,481
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Number of Foreign Workers in Malaysia by Country of Origin, 1999 - 2008
Indonesia Bangladesh Thailand Philippines Pakistan Others
Source: Ministry of Home Affairs
Unemployment is displaying
an upward trend following
the aftermath of the US sub-
prime mortgage crisis.
However, unemployment as a
percentage of the workforce
remains low.
Vacancies reported by
industries are highly centred
on the manufacturing and
services sector.
The number of foreign
workers in Malaysia
continues to be high despite
the Malaysian government’s
effort to reduce their
participation in the
workforce.
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 8
External Sector
Figure 11
Figure 12
Singapore
14%Japan9%
ASEAN11%
EU13%
United States16%
NIEs11%
China9%
Rest of the
world17%
Direction of Exports: 2000
Singapore
18%
Japan13% ASEAN
8%
EU14%
United States20%
NIEs12%
China3%
Rest of the
world12%
Direction of Exports: 2007
Figure 13
Relatively undervalued local currency. After the pegging of the
Ringgit to the US dollar at the height of the Asian Financial Crisis, the
Malaysian currency has been relatively undervalued. This has helped
to boost exports by making local goods and services relatively cheap.
Malaysia has an export-to-GDP ratio of 1.2 and a trade-to-GDP ratio
of 2.2 in 2008.
Helping exports at the expense of competitiveness. An
undervalued local currency may have helped local exports but have
failed to provide enough pressure to force Malaysian manufacturers
up the value chain to produce more high valued added goods and
services. The majority of workers in Malaysia remains low-skilled.
The United States as Malaysia’s main trading partner. The United
States continues to be Malaysia’s main trading partner. This suggests
that Malaysia’s economy will be still heavily linked to the United
States despite China’s newfound economic dominance in the
international arena.
Figure 14
-15
-10
-5
0
5
10
15
20
-20
-10
0
10
20
30
40
50
Malaysia's Current Account
US$ Bil % of GDP
Source: IMFEstimates start after: 2008
Asian Financial CrisisRM pegging
Relatively Undervalued Ringgit
10.312.3
0.2
10.7
-11.9
2.5
-15
-10
-5
0
5
10
15
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
f2
01
0f
Total World Trade Volume (Goods and Services), % Growth
Source: IMF
V-shape recovery in world trade
The gradual recovery of
advanced economies
together with the strong
demand from emerging
economies will provide
ample support of global
trade in 2010.
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 9
External Sector
Figure 15
Trade surplus after the Asian Financial Crisis. Malaysia continues
to register a positive balance of trade though the exports from the
manufacturing sector. Electronics and electrical products continue to
dominate exports with the support of natural resources like
petroleum.
Figure 16
High growth in manufacturing sector expected. The
manufacturing sector is poised for a solid growth of 6.5% in 2010 as
the external environment improves and exports are expected to post
a positive performance.
-20000
0
20000
40000
60000
80000
100000
120000
0
100000
200000
300000
400000
500000
600000
700000
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
Principal Statistics of External Trade, 1970-2006, Malaysia
RM (Million)
Balance of Trade Exports Imports
Source: Department of Statistics
Export others
Off-estate …
Rubber
Wood
Textile
Petroleum
Chemicals
Electricals
Electronics
1.3
3.2
3.4
3.7
3.8
10.7
13.1
13.8
26.9
Export-oriented industries as share of manufacturing sector (2008, %)
Source: BNM
A relatively undervalued
currency has helped Malaysia
to register a trade surplus by
making local products and
services cheaper than other
neighbouring countries.
Electronics and electrical
manufactured goods
dominate Malaysian exports.
Other important exports of
the manufacturing sector
include chemicals and
petroleum.
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 10
Federal Government
Finance
Figure 19
Foreign Direct Investments
appendix)
4.8 5.2 5.3 5.4 5.5
14.5
14.214.7
14.8
14.7
7.5
11.812.5 12.5
14.9
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
0.0
5.0
10.0
15.0
20.0
25.0
2004 2005 2006 2007 2008
Malaysia's Reserves(In bil barrels of oil
equivalent)
Crude oil & condensates reserves
Natural gas reserves
Deepwater reserves as % of total reserves
Source: The Star
Figure 17
Fiscal pump-priming. Malaysia suffers from an over-reliance on
government investment which is deficit financed and unsustainable
in the long-run. The country is reliant on petroleum-derived income.
Around 40% of government revenue comes from Petronas. Research
reports have indicated that by 2014 to 2016, Malaysia will become a
net importer of oil and will probably lose a huge portion of its
government revenue.
Figure 18
-40,000
-35,000
-30,000
-25,000
-20,000
-15,000
-10,000
-5,000
0
5,000
10,0001
97
0
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
Federal Government FinanceRM mil
Source: Ministry of Finance
A persistent budget deficit after the Asian Financial Crisis suggest pump priming with petro-dollars
8052.9
14058.8
0
2000
4000
6000
8000
10000
12000
14000
16000
Foreign Direct Investments
Inflow, US$ at current prices and current exchange rates in millions
Outflow, US$ at current prices and current exchange rates in millions
Source: UNCTAD
In 2006, Malaysia’s inflow
and outflow of foreign direct
investments (FDI) broke even
for the first time in decades.
The outflow of FDIs
continued to intensify
reaching an alarming figure
of US$ 14 billion. Malaysia’s
failure to attract FDIs into the
country sends a clear signal
that the country is losing it’s
competitive edge among
emerging and developing
economies. .
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 11
External Shocks: Crude Oil
Prices
Figure 20
Figure 21
Figure 22
99.92
76.50
0
20
40
60
80
100
1201
98
41
98
51
98
61
98
71
98
81
98
91
99
01
99
11
99
21
99
31
99
41
99
51
99
61
99
71
99
81
99
92
00
02
00
12
00
22
00
32
00
42
00
52
00
62
00
72
00
82
00
9*
20
10
*
Average Prices for World Crude Oil, 1984 - 2010
Source: Bloomberg* WEO Update, IMF October 2009 - Average of U.K. Brent, Dubai, and West Texas Intermediate Crude oil
Volatile and relatively high oil prices forecasted
0
200
400
600
800
Thousand Million Barrels
40.8 69.3 111.2 117.5 143.7
755.3Proven Oil Reserves ( 2007)
Asia Pacific North America South & Central America
Africa Europe & Eurasia Middle East
Source: National Geographic
1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s
3624
53
115107
48 4332
4 511 15
6 3 1 21 1 0 0 0 0 0 0
Draining the reliable giants
Giant: 500 mil - 5 bil barrelsSupergiant: 5 bil - 50 bil barrelsMegagiant: > 50 bil barrels
Source: National Geographic
When the price of oil goes and
stays up, it has a negative
effect on the entire economy
because oil is used in the
production of virtually
everything, including steel,
aluminium, plastics, rubber,
fabrics, transportation, and
food.
One of the reasons petrol
prices are so high is because
some 80% of the world’s oil
reserves are in the hands of
state-owned oil firms that
tend to allow international oil
companies limited access.
This can evidently be seen in
countries such as Russia and
Venezuela that welcome the
high-tech and well-capitalized
oil firms when prices are high
and chase them out when
prices are low.
The decline in oil output is because most of the big and easily located fields were discovered decades ago and the recent oil field findings tend to be smaller fields. Oil producers are now stuck in having to find greater number of oil fields to produce the same amount of oil. Smaller oil fields are more costly to operate as small oil fields in ten different locations would require ten oil rigs compared to the lesser number of oil rigs at big oil fields.
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 12
Deconstructing the New Economic Model
Figure 23
New Approaches to Spur Growth
Allowing EPF to invest more assets overseas;
The Government and EPF will form a joint venture to develop
3,000 acres in Sungai Buloh into a new hub for Klang Valley
producing over RM5 new investments;
The Malaysian Industrial Development Authority (MIDA) will
be corporatized to make it more flexible to attract and retain
manpower and talents it needs to be an internationally
competitive national investment promotion agency;
Khazanah Nasional Bhd will divest its 32% controlling stake in
Pos Malaysia Bhd through a two-stage strategic divestment
process. Further details of the exercise would be announced
later;
Petronas has identified two sizable subsidiaries with good track
record to be listed on Bursa Malaysia this year; and
Several parcels of land in Jalan Stonor, Jalan Ampang and Jalan
Lidcol, Kuala Lumpur have been identified to be tendered out
and developed by the private sector. If not developed, the
Government will incur cost maintaining these assets.
High Income
Targets US$ 15,000 –20,000 per capita by
2020
Sustainability
Meets present needs without compromising
future generations
Inclusiveness
Enables all communities to
fully benefit from the wealth of the
country
New Economic Model
National Key Economic
Activities
1. Electrical and electronics
(E&E)
2. Palm oil
3. Oil and gas (O&G)
4. Tourism
5. High-value agriculture
6. Green technology
7. Financial services
8. Information technology
Key Objectives
Fostering economic growth
and higher income. The New
Economic Model (NEM)
contains the proposed
government policies to lift
gross national product (GNP)
per capita from the current
US$7,600 to US$ 17,700 by
increasing growth rates to an
average of 6.5% per annum
until 2020.
Revitalising the private
sector. Crucial change is
needed to reverse the decline
in private investments as a
result of increased government
spending after the Asian
financial crisis in 1997.
Retaining skilled workers.
Human capital development
has been highlighted as an area
of high priority as skilled
workers are a prerequisite in
supporting high value-added
industries.
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 13
Old Approach versus New NEM Approach
Old Approach New Approach
Growth primarily through capital accumulation. Focus on investment in production and physical infrastructure in combination with low skilled labour for low value added exports
Growth through productivity. Focus on innovative processes and cutting-edge technology, supported by healthy level of private investment and talent, for high value added goods and services
Dominant state participation in the economy. Large direct public investment (including through GLCs) in selected economic sectors
Private sector-led growth. Promote competition across and within sectors to revive private investment and market dynamism
Centralised strategic planning. Guidance and approval from the federal authorities for economic decisions
Localised autonomy in decisionmaking. Empower state and local authorities to develop and support growth initiatives, and encourage competition between localities
Balanced regional growth. Disperse economic activities across states to spread benefits from development
Localised autonomy in decisionmaking. Empower state and local authorities to develop and support growth initiatives, and encourage competition between localities
Favour specific industries and firms. Grant preferential treatment in the form of incentives and financing to selected entities
Favour technologically capable industries and firms. Grant incentives to support innovation and risk-taking to enable enterpreneurs to develop higher value added products and services
Export dependence on G-3 (US, Europe and Japan) markets. Part of production chain to supply consumer goods and components to traditional markets
Asian and Middle East orientation. Develop and integrate actively into regional production and financial networks to leverage on flows of investment, trade and ideas
Restrictions on foreign skilled workers. Fear that foreign talent would displace local workers
Retain and attract skilled professionals. Embrace talent, both local and foreign, needed to spur an innovative, high value added economy
New Economic Model
Key Risk
Sluggish global economic
recovery. A low momentum of
global economic recovery
would likely dampen
Malaysia’s economic growth
and consumer demand leading
to a slower than expected
accomplishment of NEM
objectives.
Times of rising cost of living
and inflation. Forecasted
rising prices of commodities
would result in many
Malaysian businesses to
operate in a hostile cost
environment which would
squeeze profit margins and
economic activity.
New entrants. The arrival of
populous third world countries
into the market like China,
Indonesia and Vietnam may
spell an end to Malaysia being
a competitive manufacturing
and services hub.
Sustainability, Inclusiveness.
While heading towards a high-
income nation is the right
choice for countries with a
small population like Malaysia,
one should also question the
sustainability and
inclusiveness of such a shift.
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 14
New Economic Model
Key Statistical Highlights
from the NEM
40% of Malaysian
households still earn less
than RM 1,500 a month.
Bottom 40% of
households comprise of
77% bumiputeras with a
huge number located in
Sabah and Sarawak
80% if Malaysia’s
workforce has only SPM
qualifications (‘O’ Level
equivalent).
Only a low percentage of
Malaysia’s (25%) labour
force consists of highly
skilled workers as
compared to Singapore
(49%), Taiwan (33%) and
Korea (35%).
There are approximately
150,000 Malaysian
working abroad and 50%
of these Malaysian have
tertiary education.
The 8 Key Strategic Reform Initiatives
SRI 1: Re-energising the private sector to drive growth – Firing
up the private sector will stimulate a jump in investment in high
value added products and services, generating sustained growth and
high income.
SRI 2: Developing a quality workforce and reducing dependency
on foreign labour – Policies will focus on generating a talented
workforce to meet the needs of a high-value knowledge economy
while wage-restraining labour market distortions, such as excessive
and indiscriminate use of foreign labour, will be removed.
SRI 3: Creating a competitive domestic economy – Subsidies,
price controls and a myriad of distortion-creating incentives will be
phased out. The impact on the vulnerable groups will be cushioned
with an enhanced social safety net.
SRI 4: Strengthening the public sector – Public sector reform
programmes will continue to improve and speed up decision making
by a lean, consultative and delivery focussed government.
SRI 5: Transparent and market-friendly affirmative action – To
truly foster equal and fair economic opportunities, affirmative action
programmes will continue but will aim to achieve their objectives by
removing the rentseeking and market distorting features which have
limited their effectiveness.
SRI 6: Building the knowledge base and infrastructure – The key
focus here is to promote an environment for innovation by
strengthening the delivery of high quality education that nurtures
innovation and technology.
SRI 7: Enhancing the sources of growth – Malaysia will leverage
its natural endowment and sectors of comparative advantage as the
main sources of high value added growth maximising spillover
effects into new areas of activities.
SRI 8: Ensuring sustainability of growth – Preserving our natural
resources and safeguarding the interest of future generations will be
complemented by sustainable public finances through stringent
fiscal discipline.
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 15
New Economic Model
Companies in Forbes 2000 by region (2005; no. of companies)
North America 821
Pacific RIM 544
Western EU 527
S. Asia 32
E. Europe 30
S. America 26
Africa 20
Middle East 9
Japan 326
S. Korea 41
Taiwan 35
Hong Kong 28
China 25
Malaysia 14
Thailand 13
Singapore 13
Indonesia 8
Philippines 2
Source: Forbes
Critical Assessment of the NEM
The NEM offers a transparent discussion of Malaysia’s
economic state and affairs. Current and potential problems in
Malaysia like slower economic growth, income inequality, brain
drain, lack of skilled workers, the failure of its education system
and the country’s relative loss of competitiveness were
accurately highlighted and discussed. Areas that the nation can
improve in order to move up the value chain was also properly
brought out in the new model.
Sufficient details on policies and their implementations
were not given. Although economic problems were accurately
identified, the lacking of critical details for the smooth
implementation of the NEM is sorely felt. The lack of details was
a disappointment to both local and foreign investors as no
concrete commitment was given on the various sectors/areas
that are in need of reform. Part II of the New Economic Model
should give a better overview of the government’s game plan in
making Malaysia a high-income nation.
Extending Malaysia’s reach beyond national capabilities?
Although radical reform and transformation is needed and
expected, the NEM aims to do too much with too little.
Overambitious claims to revamp the education system may be
easier said than done as a ‘lost generation’ of young graduates
are already out in the labour market. Besides that, achieving a
high-income society through economic growth and solving
income inequality may sound good on paper but rationally
unattainable. The danger of trying to achieve too many things at
the same time is that one ends up obtaining nothing at all.
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 16
Implementation
National Strategy
Country
National Strategy
US, UK, Germany & France
Low carbon
transport and
energy,
biotechnology,
bioscience and
advanced
engineering and
services
China & India
Infrastructure and
human capital
Brazil
Bio-fuel Technology (Ethanol based)
Hong Kong Financial services
Singapore Financial services
Korea Technology
Taiwan Middle East
Innovative SMEs Oil and Gas
Going Forward
Economic fundamentals. Up to 40% of Government revenue is derived
from Petronas and this is unsustainable in the long-term. By 2014 to 2016,
Malaysia would become a net importer of oil and the loss from the oil and
gas sector must be substituted with Government revenue from other
sources. Financial services, natural resources and information technology
are sectors that the government can support for further development.
Malaysia’s competitiveness. Brain drain is a serious issue as the total
number of Malaysian-origin researchers, scientists and engineers working
overseas have probably exceeded 20,000 with 40% of them in the United
States and 10% in Australia. A more merit-based model of employment
should be adopted to retain high-skilled workers and channel the right
personnel with the right expertise to the right place.
Privatisation of GLCs and public utilities. Privatisation would increase the
productivity and performance of GLCs and public utilities as market-driven
discipline would act as a correcting force against corruption and
incompetent management.
Income inequality. Social welfare is a serious issue as Malaysia moves
towards a high-income country. Due to the fact that economic growth cannot
be equally distributed among everyone, social security nets must be in place
to ensure that those who are unable to cope with the drastic change in the
social-economic landscape are supported by government assistance.
Infrastructure. Both telecommunication and public infrastructure should
be given utmost priority as these two areas would bring a rapid increase in
economic activity. A good infrastructure both in terms of
telecommunications and public transport would attract more foreign direct
investments, multinational corporations and tourist to Malaysia.
Price controls and subsidies. Price controls distort true underlying market
values and would result in a shortage or surplus on the goods that they are
implemented upon. Subsidies on the other hand, benefit the rich more than
the poor as the former consumes more subsidised items like petrol. Direct
cash assistance should be the preferable method instead of price controls
and subsidies to help households with incomes below par.
Revamping the education system. Education in English should be stressed
in both primary and secondary schools. The English language is likely to
remain as the lingua franca in the foreseeable future. Erecting an education
system that focuses on English would enable Malaysia to foster a new
generation of graduates that are able to face the challenges of globalisation.
National currency to be traded internationally. It is unlikely that
Malaysia would be able to achieve a high-income nation status without
liberalising its economy from constraining capital controls and a national
currency that is not traded internationally. Furthermore, the Ringgit is seen
to be relatively undervalued as compared to other regional currencies and
thus reducing its purchasing power and desirability in the international
markets.
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 17
Timeline: Malaysia A chronology of key events:
14th century Conversion of Malays to Islam begins. 1826 British settlements of Malacca, Penang and Singapore combine to form the Colony of
Straits Settlements, from where the British extend their influence by establishing protectorates over the Malay sultanates of the peninsula.
1895 Four Malay states combine to form the Federated Malay States. 1942-45 Japanese occupation. 1948 British-ruled Malayan territories unified under Federation of Malaya. 1948-60 State of emergency to counter local communist insurgency. 1957 Federation of Malaya becomes independent from Britain with Tunku Abdul Rahman as
prime minister. 1963 British colonies of Sabah, Sarawak and Singapore join Federation of Malaya to form
the Federation of Malaysia. 1965 Singapore withdraws from Malaysia, which is reduced to 13 states; communist
insurgency begins in Sarawak. 1969 Malays stage anti-Chinese riots in the context of increasing frustration over the
economic success of the ethnic Chinese. 1970 Tun Abdul Razak becomes prime minister following Abdul Rahman's resignation;
forms National Front (BN) coalition. 1971 Government introduces minimum quotas for Malays in business, education and the
civil service. 1977 Kelantan chief minister expelled from Pan-Malaysian Islamic Party (PAS), triggering
unrest, a national emergency and the expulsion of PAS from the BN coalition. 1978-89 Vietnamese refugees benefit from unrestricted asylum. 1981 Mahathir Mohamad becomes prime minister. 1989 Local communist insurgents sign peace accord with government. 1990 Sarawak communist insurgents sign peace accord with government. 1993 Sultans lose legal immunity. 1997 Asian financial crisis spells end of decade of impressive economic growth. 1998 Prime Minister Mahathir Mohamad sacks his deputy and presumed successor, Anwar
Ibrahim, on charges of sexual misconduct, against the background of differences between the two men over economic policy; Ibrahim arrested.
2000 Ibrahim is found guilty of sodomy and sentenced to nine years in prison. This is added to the six-year jail sentence he was given in 1999 after being found guilty of corruption following a controversial trial.
2001 February Government decides to proceed with construction of huge Bakun hydroelectric power project on island of Borneo despite serious environmental concerns.
2001 March Dozens arrested during Malaysia's worst ethnic clashes in decades between Malays and ethnic Indians.
2001 April Demonstrations against the Internal Security Act following the detention without trial of supporters of Anwar Ibrahim.
2001 September Malaysia, Singapore resolve long-standing disputes, ranging from water supplies to air space. They also agree to build a new bridge and tunnel.
2002 August Tough new laws against illegal immigrants come into effect, providing for whipping and prison terms for offenders. Laws prompt exodus of foreign workers.
2003 October Abdullah Ahmad Badawi takes over as prime minister as Mahathir Mohamad steps down after 22 years in office.
2004 March Prime Minister Abdullah Badawi wins landslide general election victory. 2004 September Former deputy PM Anwar Ibrahim freed after court overturns his sodomy conviction. 2004 December Scores of people in Malaysia are killed in the Asian tsunami disaster. Malaysia delays
planned deportations of many thousands of illegal immigrants, most of them from Indonesia.
2005 January Malaysia, Singapore settle a bitter dispute over land reclamation work in their border waters.
2005 March Round-up of illegal immigrants follows a four-month amnesty which sees an exodus of hundreds of thousands of illegal workers. Those remaining risk jail, a fine, or whipping.
2005 August Acrid smoke, from forest fires on the Indonesian island of Sumatra, engulfs central areas and prompts a state of emergency.
2006 April Malaysia shelves the construction of a controversial bridge to Singapore. 2006 December 60,000 displaced by flooding in the south. 2007 January Some 70,000 evacuated as second wave of floods hits south of country. 2007 February Malaysia, Indonesia and Brunei Darussalam sign deal to protect 200,000 square
kilometres of rainforest on the island of Borneo.
Asia Pacific: Malaysia April 18, 2010
Malaysia - Economic Outlook Ee Suen Zheng Page 18
2007 March US tells Malaysia it will not be able to conclude free-trade deal in summer of 2007. 2007 May Anwar Ibrahim's Parti Keadilan Rakyat loses a bitterly contested by-election to the
government. The result is seen as a blow to his efforts to revive his political career. 2007 May Malaysian, Indonesian and Saudi Arabian partners move a step closer to building a
193 mile (310km) pipeline to bypass the Malacca Strait, so oil tankers can load crude away from the busy and often dangerous waterway.
2008 March Elections. Prime Minister Abdullah Ahmad Badawi's National Front coalition suffers its worst election result in decades. It loses its two thirds parliamentary majority and control of five state assemblies.
2008 July Opposition leader Anwar Ibrahim is arrested over allegations of sodomy, in a move that exacerbates political tensions.
2008 October The government unveils a raft of measures to prop up the stock market and attract more foreign investment in expectation of slower growth in 2009.
2009 January Malaysia bans the recruitment of foreign workers to protect its citizens from unemployment during the economic downturn.
2009 March The government unveils a $16bn economic stimulus plan as it seeks to stave off a deep recession.
2009 April Mr Badawi steps down as prime minister and is replaced by his deputy, Najib Abdul Razak.
2010 January Religious tensions increase following a court decision allowing non-Muslims to use the word Allah to refer to God.
2010 February Malaysia is to extradite nine foreigners arrested on terror charges in January. Rights activists say the men are from Jordan, Nigeria, Syria and Yemen and are being held under the Internal Security Act, which allows for detention without trial. The trial for sodomy of opposition leader Anwar Ibrahim is delayed again following the refusal of Judge Mohamad Zabidin Diah to withdraw. Mr Anwar's defence has accused him of bias. Three Malay women are flogged for extra-marital sex in the first case of this Islamic punishment being meted out to women in the country.
Source: BBC, Country Profile
~ End of Report ~