Previous Quarterly Editions
Expropriation Risk: 43 44 44 44 ►Political Violence Risk:35 35 35 35 ►Terrorism Risk:32 34 34 36 ►Exchange Transfer and Trade Sanction Risk: 35 35 35 35 ►Sovereign Default Risk:37 37 37 37 ►
TREND ►
Protest intensity to date* 2022 2023 Low Low Unrest risk in 2024**Cost of living: HighAnti-austerity: Medium
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
In contrast with other Southeast Asian countries, fiscal issues and national debt have considerable resonance with the Malaysian public. To date, the closest the country has come to a debt crisis was the 2016 scandal surrounding the sovereign wealth fund commonly known as 1MDB, in which US$7 billion was embezzled and redirected to personal accounts and political operations of the then-dominant United Malays National Organization (UMNO) party.
Former Prime Minister Najib Razak remains in prison on a 12-year sentence for crimes related to the scandal. More generally, although corruption is rampant in much of the region, it is more likely to affect the outcome of elections, as it did in 2018 and 2022. Nevertheless, although corruption is a continuing concern, UMNO is one of the major parties in the current government coalition, although not the lead party.
That said, Malaysian debt was at US$260 billion in July 2023, a debt-to-GDP ratio of slightly over 60%. Economists believe that the debt is manageable, not least because Prime Minister Anwar Ibrahim is a former Minister of Finance. He intends to cut subsidies to reduce debt, although that will be politically difficult.
By the end of the second quarter of 2023, economic growth had slowed to 2.9%, having surged to 8.8% at one point in 2022, and is predicted to slow down further in 2024. This downturn is due primarily to slow growth in Malaysia’s export sector, a particular reflection of economic slowdown in China and the European Union. Moreover, as in other Southeast Asian countries, food prices will likely rise as the Russian war in Ukraine keeps grain costs high and as El Niño weather conditions impose rice shortages on the region.
In the future, however, Malaysia could incur more debt as Anwar urges Beijing to revive its Belt and Road Initiative (BRI) infrastructure projects with Kuala Lumpur. China is the largest foreign investor in Malaysia, with 21% of foreign direct investment. Three major BRI projects are at issue: the East Coast Rail Link, the Malaysia-China Kuantan Industrial Park and expansion of the Kuantan Port. The financing for these projects remains to be finalized, but Kuala Lumpur rejects comparisons with Sri Lanka, whose debt situation it attributes to mismanagement and poor negotiations. Malaysia has been successful in the past in negotiating with Beijing on finance terms and expects to do so in the future.
Although slow growth in the export sector remains a worry, the risk of expropriation in Malaysia is relatively low; however, in order to climb up the value supply chain in its manufacturing, the country will become slightly more protectionist. Anwar has called for an export bank on rare earth minerals; in particular, he aims to safeguard Malaysia’s sources of monazite and xenotime, both of which are essential to high-tech electronics and renewable technologies.
The risk of political violence in Malaysia has increased slightly. In June, six state elections showed that the general political balance between secular political parties and the fundamentalist Malaysian Islamic Party (PAS) holds. As expected, parties in the government coalition won three states, and the opposition coalition that contains PAS won the other three.
However, returns showed that the majority in the government-won states was less robust than expected, suggesting that Malay nationalism is rising further. As Southeast Asia’s food security faces growing threats from the protracted war in Ukraine, El Niño and other aspects of climate change, economic pain in the population will increase the prospects for communal violence against Malaysians of Chinese and Indian ethnicity.
The growing popularity of PAS poses an increased risk of terrorism in Malaysia, although the opposition party is more likely to win local and state elections than gain control of the national government. Malaysian radical groups, however, retain ties to regional and international terrorist groups, including the Jemmah Islamiyah, Southeast Asia’s terrorist network. As a result, an uptick in terrorist activity in Indonesia would energize Malaysian jihadist groups, although the Malaysian government is generally more effective in suppressing such spikes than is Indonesia.
The Malaysian ringgit has shown brief rallies through 2023 — it was one of only two Asian currencies to see gains against the U.S. dollar in the second quarter — but economists view those as brief respites against a downward trend, due largely to sharp corrections in oil prices and sluggish Chinese growth. In early September, the Bank of Singapore pronounced the ringgit as Asia’s worst-performing currency thus far in 2023, with a loss of 5.2%, just edging out the yuan, which has fallen 5.1%. This is a considerable fall from rosy predictions earlier this year.
For this and other reasons, the government is promoting discussion in the region of de-dollarization; in the near to midterm, this would likely translate into a modest increase in the use of the yuan to settle trade in some cases. As the largest trading partner of 61 countries, Beijing is pushing for greater use of its currency. India is also attempting to negotiate the use of the rupee to settle trade, and in April, New Delhi and Kuala Lumpur signed an agreement to make this an option.
This adds support to a growing global debate over currency diversification, brought on by the U.S. Federal Reserve’s aggressive rate hikes, fear of a U.S. debt default and the impact of sanctions related to the war in Ukraine. At the Boao Forum for Asia in Hainan in April, however, Anwar attempted to revive the concept of an Asian Monetary Fund, originally a Japanese proposal made during the 1997 Asian Financial Crisis. China supports the plan, not least because it would prop up the yuan, but the prospects for establishing a regional currency fund in the near term are slim.
With a food crisis looming and the potential to lessen the impact of the U.S. dollar, however remote, Malaysia will be increasingly inclined to look for ways around Western sanctions on Russia; however, the European Union is joining the United States in crackdowns on attempts to circumvent sanctions, and Kuala Lumpur is not likely to antagonize both economic powers at the same time.
The risk of a default in sovereign debt in Malaysia remains low, not least because public attention to this issue acts as a check on government policy to some extent.
Return to contents Next Chapter
