Previous Quarterly Editions
Expropriation Risk: 41 41 41 41 ► Political Violence Risk: 39 39 38 37 ► Terrorism Risk: 34 34 36 34 ▼ Exchange Transfer and Trade Sanction Risk: 45 45 45 45 ► Sovereign Default Risk: 27 27 37 27 ▼
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
In Malaysia, the impact of climate change is two-fold: global warming is causing flooding and droughts, and the country’s coastline on the mainland and its island states feel significant impact from rising sea levels. The cost of flooding in terms of population displacement and destruction of infrastructure exceeds USD1 billion annually. Economic growth has kept Malaysia tied to fossil fuel energy, primarily coal and natural gas. Like many South-east Asian countries, over the past decade robust, pre-COVID-19 economic growth has increased energy demand.
In 2021, in advance of the COP26 international climate meetings, Malaysian Prime Minister Ismail Sabri Yaakob’s government unveiled the ambitious 12th Malaysia Plan, which was approved by parliament in October. Climate mitigation figured heavily in the plan, seeking to make Malaysia carbon neutral by 2050 and overhauling the country’s energy, transportation, and land use sectors.
Under the plan, new coal power plants will be prohibited, urban areas will be fuelled primarily with renewable energy sources, and carbon pricing and carbon tax schemes will be put into operation. Compared to Malaysia’s neighbours, the plan is ambitious, but environmentalists and international organisations warn it may be more aspirational than operational. Although Malaysia’s plans to manage the impact of climate change generally win praise, implementation of these plans is erratic. Malaysia can, however, point to some success stories. Most notably, from the early 1980s to the mid-1990s, Malaysia reduced its dependence on oil from 90% to 15%, transitioning to natural gas.
The green movement in Malaysian civil society has traditionally been weaker than in other South-east Asian countries, particularly Thailand, but it is gaining momentum and has become a central concern of Malaysia’s younger generation. This complicates Malaysia’s relations with foreign investors; over the past decade, for example, the environmental movement has
targeted Australian mining of rare earth minerals in the country for criticism. Increasing public concern over the environment will likely result in more stringent environmental standards for foreign projects. In this sense, Malaysia’s participation in forward-looking multilateral trade agreements helped to ease bilateral trade tensions over environmental issues.
In August 2021, Malaysia updated its Nationally Determined Contribution (NDC) under the Paris Agreement framework and signalled its intention to reduce carbon intensity across the economy by 45% by 2030 as compared to 2005 levels. This is a stronger estimation than the one offered in the last modification to Malaysia’s NDC by 10%. In formulating this goal, Malaysia was measuring carbon intensity by pegging it to gross domestic product (GDP) but this can be problematic since GDP is unlikely to remain the same for the next eight years.
In 2018, the government set a target of 20% renewable energy by 2025. Hydropower, primarily in eastern Malaysia, has increased from 5% in the total energy mix in 2010 to 17% in 2017. Solar power is increasingly popular, and there is growing interest in biomass, using agricultural waste.
TREND ►
The risk of expropriation for foreign companies remains relatively low. Through the pandemic, the government has maintained its position that foreign and domestic companies are guaranteed equal compensation if private property is required for public purposes. This does not in itself prevent expropriation, but it signals commitment to rule of law in foreign investment.
Approximately 80% of Malaysia’s population is fully vaccinated against COVID-19. The success of the government’s vaccination programme and swift implementation of economic support measures has aided Malaysia’s economic recovery. Growth in 2021 was 3.1% and is projected to accelerate to slightly more than 5% in 2022.
The government continues to provide tax incentives to foreign investors in certain strategic sectors, including biotechnology and integrative connective technology. The government also seeks to incentivise foreign companies to redirect their investments from China, although supply chain issues continue to present challenges.
Although Malaysian politics have yet to return to normalcy after then-Prime Minister Mahathir Mohamad was pushed out in 2020 with the advent of COVID-19, they are stabilising under the current prime minister. A series of by-elections in the states have shown the lead party in the government coalition, the United Malays National Organization (UMNO), which held power for over 40 years, is poised for a comeback. This is less because UMNO is dominant and more down to the opposition being in disarray. The prime minister is under pressure from King Hussein to hold elections and he may do so later this year. By law, he must do so by 2023.
Despite UMNO’s apparent new strength, it has the potential to be its own worst enemy once again. There is discord within the party over corruption, and the impact of the 1MDB scandal that forced former Prime Minister Najib Razak from power in 2018 still hangs over the country. However, if Ismail Sabri can set Malaysia back on the path of economic growth, despite COVID-19’s continued impact and rising consumer prices, he will likely win the next election. Consequently, he is attempting to refurbish Malaysia’s image internationally with a principled stance on the post-coup crisis in Myanmar, and by seeking closer relations with the United States.
Malaysia’s powerful Internal Security Act historically largely prevented major attacks on Malaysian territory in comparison to Indonesia and the southern Philippines. To maintain its political viability, the Malaysian Islamic Party eschews affiliation with external terrorist networks, although its demands to make Malaysian government more theocratic feeds these extremist groups’ agendas. However, since the 1970s, the government has pursued policies to elevate the economic levels of ethnic Malays, thus undercutting the appeal of extremism.
Nevertheless, the rise of Islamic State (IS), and the return of South-east Asian IS fighters to the region have intensified the terrorism threat in Malaysia and the government’s response. Like other South-east Asian countries with significant Muslim populations, Malaysia faces an increased risk of terrorism with the Taliban victory in Afghanistan in late 2021. However, extremist groups tend to view Indonesia and the southern Philippines as more vulnerable targets and will likely focus increased activity on those countries.
In 2021, the ringgit’s depreciation against the U.S. dollar was in line with the weakening of other major and regional currencies. The central bank emphasised that adjustments were determined by the market and conducted in an orderly manner, to manage excessive volatility and ensure liquidity. That said, Malaysia’s currency decline of 3.5% in 2021 was the largest annual drop since 2016. In early 2022, however, the ringgit had strengthened by 4.18% and is expected to remain above 4% for the year.
Malaysia is not a major target for direct sanctions but, like many countries, might be subject to secondary sanctions under some circumstances. Western sanctions against the Myanmar military and targeted sectors will likely entangle South-east Asian countries if the conflict worsens. In 2021, Malaysia and Russia formed a working group to strengthen economic relations. If Western sanctions on Russia expand, following the Russia and Ukraine conflict which started in February 2022, and become applicable to third parties, Malaysia could feel the pinch in two aspects of its trade with Russia: oil and gas, and aerospace technology.
In November, the government presented the 2022 national budget, which includes the largest-ever spending plan worth over USD80 billion. The Ministry of Finance announced several measures to raise government revenue, including a rise in corporate tax from 24% to 33% in 2022. This increase is a one-off ‘windfall’ tax related to the economic impact of the pandemic and was billed as an effort to promote economic recovery through an increase in government spending. The government also expects a rise in commodity prices and the resumption of domestic and international travel will further contribute to the momentum for economic recovery.
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