NEW YORK - For the past six months,
Malaysia has been an investor darling. The economy is
growing at a nice clip, the state-owned petroleum
company, Petronas, is profitable, and the political
transition from former prime minister Mahathir Mohamad
to Abdullah Badawi has been smooth. Inflation is low and
the nation's external debt is capably managed. Malaysia
also enjoys the advantage of high oil prices, yet even
when they fall the nation is still poised to prosper as
it has diversified its industrial base.
Malaysia
has one of the most open economies in Southeast Asia,
and as a consequence, it benefits from a greater boost
from global growth than many of its neighbors (consensus
estimates predict Malaysia will grow 7% in 2004). The
country's current account has been in surplus since
1998. As of mid-October, exports had risen 24%
year-on-year. The strong balance of payments has allowed
the central bank to accumulate more than a quarter of
its international reserves this year - US$54.5 billion
as of August - to the point that they now exceed the
external debt.
Oil prices also are high, and
this supports the Malaysian economy. Further, there has
been some progress in passing structural reforms, and
the Malaysian government also has taken steps to reduce
its external debt. Credit-rating agencies have taken
notice; Moodys is expected to upgrade Malaysia's "Baa1"
rating by one notch to "A-". Standard & Poor's
already rates the Malaysia credit at "A-".
A
credit-rating upgrade would be an important boost for
Malaysian credit quality and an affirmation of the
government's fiscally prudent policies. The 2005 budget,
which proposes a moderate pace of fiscal consolidation,
is realistic. In fact, it might be considered investor
friendly in that it eases foreign-investor rules in
brokerage, fund management, futures brokerages and
venture capital firms. It also removes the tax on
interest income for non-resident investors, which should
drive more investor interest into Malaysia's domestic
bond markets.
In addition, private investment
growth seems to be picking up. The government estimates
that by year's end investment will have grown by 14.8%.
In the meantime, the central bank - Bank Negara Malaysia
- emphasizes caution in hiking interest rates so that no
increase is expected for the next six months to a year.
While the government plans for fiscal consolidation,
balancing the budget is not sacrosanct. The government
intends to narrow the fiscal deficit from 4.5% of gross
domestic product (GDP) in 2004, to 3.8% of GDP in 2005.
The Malaysian central bank also has reinforced its
commitment to a pegged exchange rate, which it regards
as underpinned by low inflation and strong external
accounts.
After years of a stable, if partly
authoritarian and confrontational government, under
Mahathir, Prime Minister Abdullah enjoys strong and
unrivalled political support. Although some analysts
suggest that the return of Mahathir's former deputy
Anwar Ibrahim - who spent the last six years in jail on
charges of corruption and sodomy - could pose a
political threat, the mechanics of the Malaysian
political system make this unlikely for the foreseeable
future. Abdullah has made progress in improving the
public delivery system to lower the cost of doing
business and has helped increase transparency -
especially in the public bidding of projects.
The Malaysian economy is not without risks. It
must continue to attract foreign direct investment when
oil prices decline, as they eventually will. The
Malaysian corporate sector must also be made more
competitive. Corruption remains a problem in both the
private and public sectors. And a tax system overhaul is
needed to attract more multinational companies. In fact,
in 2007 the Malaysian government plans to introduce a
goods-and-services tax so that it can cut taxes for
individuals and corporations. In the meantime,
Malaysia's corporate tax rate of 28%, is uncompetitive
relative to neighboring Singapore's 20%.
Malaysia is on the right track for balanced and
steady growth going forward. It has been a strong
economic performer since the 1997 Asian financial
crisis, and there is every reason to believe that
Malaysia will continue to provide an attractive
environment for international investment.
(Posted with permission from KWR International, Inc, (KWR),
a consulting firm specializing in the delivery of
research, communications and advisory services.)
