Previous Quarterly Editions
Expropriation Risk: 41 41 41 44 ▲Political Violence Risk:37 37 37 38 ►Terrorism Risk:34 36 34 32 ▼Exchange Transfer and Trade Sanction Risk: 45 45 45 35 ▼Sovereign Default Risk:27 27 27 37 ▲
TREND ▼
Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Malaysia’s foreign policy diverges from the norm in South-east Asia in two ways. First, although Kuala Lumpur subscribes to the Association of South-East Asian Nations (ASEAN) code of balancing powers while avoiding too close a relationship with any, in his long tenure former Prime Minister Mohamed Mahathir infused the country’s foreign policy with a strong anti-Western tone. This did not prevent Mahathir himself from cooperating with Western countries when he was in office but his attempts to forge a strictly Asian community rather than a more mixed Asia-Pacific region, which included the U.S. and Australia, gave rise to the ‘Asian Values Debate’ of the 1990s and occasionally resurfaces as a paradigm in the region. Mahathir’s legacy has faded considerably, but it constrains Malaysia from cooperating too closely, or publicly, with the West.
A second notable aspect of Malaysian foreign policy is its role in the global Islamic community. Despite a population one-eighth the size of Indonesia’s, Kuala Lumpur takes a more activist role in Islamic affairs than does Indonesia, which has the largest Muslim population in the world. Malaysia was instrumental in negotiating a return for Egypt to the Organization of Islamic Cooperation in 1984, after Cairo’s expulsion in 1979 for signing the Camp David Accords. Malaysia has also served as mediator in the Philippines government’s negotiations with separatist groups in Mindanao.
Malaysia often works in concert with Western policy, but also pursues a relationship with Iran opposite to that of the West, particularly the U.S. In August, for example, Prime Minister Ismail Sabri Yaakob condemned sanctions against Tehran and declared his intention to expand trade and other aspects of the relationship.
In the current geopolitical environment in the Indo-Pacific region, Malaysia conforms to the South-east Asian tendency to attempt to balance relations with the U.S. and China. Beijing is Kuala Lumpur’s largest trading partner, but Malaysia vigorously sought a free trade agreement with the U.S. through the twelve-country Trans-Pacific Partnership (negotiations the U.S. left, leaving eleven states to conclude the deal).
However, Malaysia has greater difficulty balancing its security relations with China and the U.S. During the Cold War, Malaysia was successful in suppressing the insurgency of the Malaysian Communist Party, which was supported by China, early in the 1950s. Malaysia’s was the first South-east Asian government to normalise relations with the People’s Republic of China, in 1974.
Mahathir made common cause with Beijing in the Asian Values Debate. Since then, however, China’s movements in the South China Sea present a growing challenge to the bilateral relationship. Chinese vessels have maintained a constant presence around Luconia Shoals, 80 nautical miles off the coast of Sarawak, since 2014, and have been involved in more infrequent attempts to penetrate Malaysia’s Exclusive Economic Zone. Kuala Lumpur rejects direct naval assistance from the U.S. but promotes under-the-table cooperation and is the largest consumer of U.S. maritime assistance funds in South-east Asia.
Malaysia’s inclinations towards an independent foreign policy are currently seen in Kuala Lumpur’s response to the Russian/Ukraine crisis from February 2022. Malaysia has declared itself to be neutral in the conflict and has made clear it will not curtail trade with Moscow, including the export of semi-conductors. This is in keeping with the response of most South-east Asian countries to the Russia/Ukraine crisis, with the exception of Singapore which has uniformly been reluctant to criticise Russia or to limit economic relations. Malaysia’s relations with Russia have traditionally been distant, and Kuala Lumpur’s position in this case is based more on short-term economic interest than in the ideology of non-alignment.
TREND ▲
The risk of expropriation in Malaysia remains low. Kuala Lumpur participates in the U.S.-led Indo-Pacific Economic Framework and hopes to recoup some of the possibilities to expand trade with the U.S. it lost when it left the Trans-Pacific Partnership.
In June, the World Bank assessed Malaysia’s economy as being on an upward track, in recovery from the pandemic in the wake of a successful vaccination drive and the full withdrawal of restrictions on movement. The labour market is improving with a drop, albeit slight, in unemployment from 4.3% at the end of 2021 to 4.1% in first quarter of 2022.
The 8.9% growth rate at the end of the second quarter was the fastest growth in over a year, although slower growth is expected for the remainder of the year because of the negative global economic situation. The government expects full-year growth for 2022 at 5.3-6.3%. However, on September 21, the finance minister, Tengku Zafrul Aziz, said he believes the economy will grow at a slower rate in 2023, primarily because of external conditions such as tensions in the Taiwan Strait and continued COVID-19 lockdowns in China.
TREND ►
At present, any political turbulence in Malaysia is within the United Malays National Organization (UMNO), the leader of the ruling coalition. In August, the Constitutional Court’s refusal of former Prime Minister Najib Razak’s appeal in his criminal case for corruption in the ‘1MDB’ scandal forced him to begin a 12-year prison sentence. Najib will seek a royal pardon, which he is unlikely to receive. He had been attempting a political comeback and had campaigned on UMNO’s behalf in state elections this year.
Najib’s abrupt removal from the scene has upset internal dynamics within UMNO, which may give the political opposition an advantage in general elections, which Prime Minister Ismail Sabri Yaakob must call by 2023. This could also widen an opening for the PAS, Malaysia’s longstanding Islamic fundamentalist party, although any realistic hope of a PAS victory would be in the most northern states and not across the country.
Malaysia is the 63rd-highest state for vulnerability to terrorism in the 2022 Global Terrorism Index, placing it well below Indonesia (24), Thailand (22), and the Philippines (16). This is due largely to strict security laws (although modified in recent years), Malaysia’s ‘big tent’ approach of allowing Islamist parties to contest elections, and Malaysia’s continued efforts to support economic growth in the Malay Muslim community, partly intended to limit communal tensions.
In early September, the Malaysian ringgit fell to a 24-year low, dropping nearly 9% against a strengthening U.S. dollar, with contributing factors including increased political risk and a drop in the price of oil. The government believes the currency will stabilise in late 2022, pointing to strong fundamentals. officials have reiterated they have no plans to peg the ringgit against the dollar.
Malaysia has become outspoken within ASEAN over the need to take more effective action on the crisis in Myanmar, where the military junta and the opposition in exile are facing off. Consequently, Malaysia is unlikely to face secondary Western sanctions against Naypyidaw, Myanmar’s capital. However, there is some risk Kuala Lumpur will be subject to secondary sanctions because of its continued economic relations with Russia, although none have been imposed as yet.
Malaysian national debt was USD237 billion at the end of the second quarter of 2022, down from USD239 billion in the previous quarter. Debt-to-GDP is expected to reach 60% by the end of 2022, compared with 63% in 2021. This is due primarily to the rise in commodity prices in Malaysian exports and progress in returning the economy to normal after the COVID-19 pandemic.
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