Previous Quarterly Editions
Expropriation Risk: 38 39 41 41 ► Political Violence Risk: 38 39 39 38 ▼ Terrorism Risk: 34 34 34 36 ▲ Exchange Transfer and Trade Sanction Risk: 45 45 45 45 ► Sovereign Default Risk: 27 27 27 37 ▲
TREND ►
As with other South-east Asian countries, COVID-19 has affected Malaysia’s economy. Early 2021 predictions of 7% growth this year have been downgraded; as of July, the economy contracted 5%. Nevertheless, Malaysia could realise growth as high as 4% in 2021 if the government can tame COVID-19. Continued lockdowns have hampered the service sector, but manufacturing has been boosted by stronger international demand.
Public confidence in the government’s pandemic handling is below 40%, which contributed to the political transition in mid-August, in which Muhyiddin Yassin and his cabinet resigned and were replaced by Ismail Sabri Yaakob. The government’s vaccination programme has taken off; by August, 45% of Malaysians were fully vaccinated and 60% had at least one dose. This is a rise from near-zero in early March. There is a strong chance the government will meet its goal of a 60% full vaccination by end-2021.
Like other South-east Asian countries, Malaysia benefits from the Biden administration’s decision to donate unused vaccine and the vaccination programme of the Quadrennial Security Dialogue (‘Quad’) announced in mid-March that has made Western vaccines more available. In mid-July, the government announced that the vaccination programme would be driven by the Pfizer vaccine, which is expected to make up 70% of the national supply, and that use of the Chinese vaccine Sinovac would be discontinued after current supplies were exhausted.
King Abdullah has expressed the hope that Sabri’s appointment will deliver Malaysia from its ongoing political crisis, but there is scant hope of that soon. Sabri’s government has the same razor-thin majority as Muhyiddin’s: 114 out of 222 Members of Parliament. But although this portends continued political instability, the prime minister’s tenuous hold on power has become something of a norm: Malaysian stocks barely budged with the news of Muhyiddin’s resignation and Sabri’s appointment, and the ringgit has held steady.
There is little sign that the government coalition under Sabri will be more stable. If anything, Sabri will face added challenges. He will be under greater pressure to demonstrate that he is making efforts to curb corruption, both within the United Malays National Organization (UMNO) and outside. The pandemic has not completely eclipsed the 1MDB (1Malaysia Development Berhad) sovereign wealth fund scandal that arose in recent years. Moreover, Sabri will likely tangle with UMNO’s president, Ahmad Zahid Hamidi , in an effort to gain the party chair as well as the prime ministership.
The pandemic-related economic disruption increases expropriation risks on a global scale. Despite this, and despite the roiling political situation, the risk for foreign companies in Malaysia 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.
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 that is in flux because of COVID-19’s impact on regional supply chains.
TREND ▼
Malaysian internal instability usually derives from two sources: Islamist extremism that seeks to impose shariah law over the country, and ethnic tensions largely based in economic inequities. These tensions are primarily between ethnic Malays (50.1% of the population) and ethnic Chinese (22.6%), who have historically dominated the financial sector. However, in recent years, religious movements have also adopted an anti-Hindu agenda, directed against the minority Indian population (6.7%).
The government will continue to contain Islamist extremism through strong internal security measures and a ‘big tent’ approach to political parties, allowing Islamist parties to contest elections. Sabri’s inauguration may raise these tensions slightly, since he is strongly pro-Malay, and may exacerbate tensions with the minority groups. At the same time, his strong bond with the ethnic Malay population may keep anti-Chinese actions in check.
TREND ▲
Malaysia’s powerful Internal Security Act (ISA) 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 (PAS) eschews affiliation with external terrorist networks, although its demands to make Malaysian government more theocratic feeds these extremist groups’ agendas. In 2012, public objection to the ISA’s broad impact on human rights forced the parliament to repeal the law and replace it with the Special Offenses Act, which focuses more narrowly on terrorism.
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. As do 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 Mindanao in the southern Philippines as more vulnerable targets and will likely focus increased activity on those countries.
Several external economic conditions, including a drop in the oil price and a slowdown in the Chinese economy, had a negative impact on Malaysia’s economy before COVID-19. In March 2021, the central bank announced a series of foreign exchange adjustments to strengthen Malaysia’s position as a foreign direct investment (FDI) destination. These include the removal of export conversion rules and permission to allow resident exporters to settle domestic trade in foreign currency with other resident companies in the global supply chain. The government also signalled that it intends to maintain a flexible exchange rate for the Malaysian ringgit, to promote resilience against external shocks.
These policy adjustments paid off with a 95% boost in approvals for FDI projects in the first quarter of 2021, compared to that quarter in 2020. The manufacturing sector led this surge, followed by the services sector. The second quarter’s less spectacular 16% growth in foreign investment was nevertheless a sign that Malaysia will stay the course with its relatively investor-friendly stance, despite a more severe situation with COVID-19.
Malaysia continues to struggle to overcome the negative image of the 2015 corruption scandal attached to its sovereign wealth fund, 1MDB. This has improved slightly with the country’s removal from the watch list of the World Government Bond Index (WGBI). With exclusion no longer a threat, confidence in Malaysian bonds has risen, although challenged by China’s inclusion in the WGBI. However, Chinese bonds will have a long phase-in period, which will provide some relief for Malaysian bonds on the global marketplace. Malaysia’s more open economy compared to others in the region leaves it more vulnerable to fiscal weakening and consequent downgrades of its sovereign credit rating.
Malaysia’s debt levels were an object of controversy prior to the pandemic, since they were perceived as resulting from politics rather than economic planning. The COVID-19 surges have only worsened this situation, and sovereign debt exceeded the statutory 60% of gross domestic product in 2020 with a rise to 65%. Most estimates put the 2021 debt even higher with COVID-19’s Delta variant, to as much as 78%, with a slight decrease to 77% in 2022.
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