Malaysia – Economic Outlook - Eternity in an Hour · PDF fileAsia Pacific: Malaysia...

Asia Pacific: Malaysia April 18, 2010

Malaysia - Economic Outlook Ee Suen Zheng

Malaysia

Unveiling Malaysia’s New Economic Model – Heading

towards a sustainable and inclusive high-income

nation

Key Highlights

Developing Asia emerges as the source of economic growth.

Economic activity in the East has rebounded faster than the

advanced economies of the West. This signals the shift of the

centre of economic activity from the West to the East. China’s

increasing dominance as an economic powerhouse is increasingly

felt by both advanced and emerging economies.

Optimistic 2010 economic growth. Economic expansion in

Malaysia is expected to be strong with the revival of exports.

However, external demand could weaken as central banks across

the globe begin to tighten fiscal and monetary policy in an effort to

curb excess liquidity in the financial markets.

Commodity prices are back on the rise. Volatile and relatively

high petrol prices are expected to persist. This would lead to

inflationary pressures and output disruptions. Higher global food,

commodity and energy prices

New Economic Model and the promise of reforms. The New

Economic Policy that was recently unveiled by the Malaysian

Prime Minister promises badly needed and long overdue reforms.

The question that remains is how many of the promises made to

the people can the Malaysian government deliver.

Contents

Page Details

1 – 2 Country Summary

3 – 11 Key Economic Indicators

12 – 15 Deconstructing the New Economic Model

16 Implementation: Going Forward

17 – 18

Timeline: Malaysia

Economic Research

Ee Suen Zheng Bachelor of Arts with First Class Honours in Banking and Finance +603-9283 8950 +6016-696 6566 [email protected] jamesesz.wordpress.com

Country Summary

Full name Federation of

Malaysia

Population 27.5 million (UN,

2009)

Capital Kuala Lumpur

Area 329,847 sq km

(127,355 sq miles)

Major languages

Malay (official), English, Chinese dialects, Tamil, Telugu, Malayalam

Major religions Main exports GNI per capita

Islam, Buddhism, Taoism, Hinduism, Christianity, Sikhism Products: Office Supplies & Forms Electronic equipment, petroleum and liquefied natural gas, chemicals, palm oil, wood and wood products, rubber, textiles US $6,970 (World Bank, 2008)

Source: BBC



Country Locator

Country Rating

Long-Term Issuer Default Rating (09 June 2009)

A-

(Stable,

Affirmed)

Short-Term Issuer Default Rating (09 June 2009)

F2

(Affirmed)

Local Currency Long Term Issuer Default Rating (09 June 2009)

A

(Stable,

Downgrade)

Country Ceiling (09 June 2009)

A

(Affirmed)

Ratings A Economic situation can

affect finance

F2 Good quality grade with satisfactory capacity of obligor to meet its financial commitment

Source: Fitch, Inc.

Background Information

Malaysia is a federation of 13 states and three federal territories. It

comprises of a multi-ethnic, multi-religious society with a Muslim

majority. The country is among the world’s largest producer of

computer disk drives, palm oil, rubber and timber. Badly hit by the

global economic downturn, the government’s $16bn economic

stimulus plan in March 2009 is seen to have prevented a deep

recession. The country faces serious challenges in maintaining

political stability in the midst of religious and ethnic diversity.

Country Data Profile

2000 2005 2007 2008

World view

Population, total (millions) 23.27 25.65 26.55 26.99

Population growth (annual %) 2.3 1.8 1.7 1.7

Surface area (sq. km) (thousands) 329.7 329.7 329.7 329.7

GNI, Atlas method (current US$) (billions) 80.18 133.45 170.49 188.06

GNI per capita, Atlas method (current US$) 3,450 5,200 6,420 6,970

GNI, PPP (current international $) (billions) 194.35 287.49 351.21 370.83

GNI per capita, PPP (current international $) 8,350 11,210 13,230 13,740

Economy

GDP (current US$) (billions) 93.79 137.95 186.72 194.93

GDP growth (annual %) 8.9 5.3 6.3 4.6

Inflation, GDP deflator (annual %) 8.9 4.6 5.2 10.3

Agriculture, value added (% of GDP) 1 8 10 ..

Industry, value added (% of GDP) 48 50 48 ..

Services, etc., value added (% of GDP) 51 42 42 ..

Exports of goods and services (% of GDP) 120 117 110 ..

Imports of goods and services (% of GDP) 101 95 90 ..

Source: World Development Indicator Database



Positive GDP Outlook

Key Economic Indicators

Figure 1

Economic activity in the US, Euro Area, Japan, and the UK is

forecasted to remain sluggish in 2010. Advanced economies are

expected to recover gradually as key economic indicators point to

lower economic activity and threats of deflation. On the other hand,

emerging and developing economies especially in Asia and

commodity producing economies will likely regain momentum in

economic activity much sooner.

Figure 2

Views concerning Malaysia’s economic growth this year remain

divergent. Foreign brokers maintain an optimistic real GDP forecast

based on strong regional production data in the first quarter, a

positive outlook for the manufacturing sector, higher commodity

prices, higher domestic demand and a V-shaped recovery in exports.

Local financial institutions remain sceptical on rise in private

investments and exports.

-6 -4 -2 0 2 4 6 8

World

Advanced economies

Euro area

Newly industrialized Asian economies

Emerging and developing economies

Developing Asia

ASEAN-5

3.0

0.5

0.6

1.8

6.1

7.9

4.7

-0.6

-3.2

-4.1

-0.9

2.4

6.6

1.7

Real GDP Growth (%)2009 2008

Source: IMF

5.5

4.2 4.3 4.8 5.0 5.2 5.3 5.3 5.7 5.86.6

7.3 7.7 8.0

Malaysia: Forecasted Real GDP Growth, %

Despite sluggish forecasted economic growth for advanced economies, foreign brokers are optimistic of Malaysia’s economic growth in 2010.

Bank Negara Malaysia

revised its 2010 GDP growth

projection to a range of 4.5-

5.5% as lead indicators point

to recovery in exports and

stronger consumer

confidence.

HSBC projected a 7.3% GDP

growth rate for Malaysia

stating in its report that

recovery has reached a self-

sustaining state.

The global economy fuelled

by emerging and

developing countries is

expected to recover

gradually. However,

recovery will be sluggish

and uneven.

Emerging and developing

Asian economies grow

despite negative external

shocks from advanced

economies



Economic Growth Trends

Figure 3

Malaysia’s economy remains highly exposed to external shocks.

The negative impact from the U.S. sub-prime mortgage crisis in 2007

is not as severe as the Asian financial crisis in 1997. Although a

highly regulated and protected domestic financial system can be

seen as a partial bulwark against the global economic downturn,

negative economic pressures flowed through trade channels and

commodity prices.

Figure 4

Protectionism has its price. Most of the key countries in

developing Asia like China, India, Indonesia and Vietnam have

already surpassed pre-1997 average annual GDP growth while

Malaysia has lagged behind due to protectionist policies, capital

controls and a national currency that is not internationally traded.

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

0

100

200

300

400

500

600

700

Malaysia's Growth Trends

National Currency, Billion Annual % Change

Source: IMF, World Economic Outlook DatabaseEstimates start after: 2008Base year: 2000

Plaza AccordCommodity and Property Crisis

Manufacturing export-led recovery

Asian Financial CrisisRM pegging

"Mega Projects"

Ringgit de-peg

Dot-Combust9-11

U.S. Sub-prime Mortgage Crisis

0 2 4 6 8 10 12

Vietnam

Thailand

Singapore

Philippines

Malaysia

Indonesia

India

China

7.16.3

Average Annual GDP Growth

2000-08 1990-99

Source: IMF, World Economic Outlook

Economic growth trends

show that protectionist

policies have not sheltered

the Malaysian economy from

negative external shocks

Malaysia is lagging behind

regional economies after the

Asian Financial Crisis in

1997. Protectionism is

taking its toll on Malaysia’s

economic growth.

A moderate contraction in

the Malaysian economy is

seen in 2009 despite a sharp

drop in GDP in the first

quarter. The collapse in

global demand and world

trade led to a massive

double-digit decline in

exports and industrial

production.

Other Asian economies,

especially China and India

are expected to continue to

lead the global economic

recovery.



Figure 5

Inflationary pressures are building. Global commodity prices are

poised to rebound. Crude oil prices have begun to show an upward

trend due to constrained supply and increased demand from BRIC

(Brazil, Russia, India and China) countries. High crude oil prices are

likely to spillover into other commodities as consumers search for

alternative sources of energy.

Removal of government subsidies and GST. Although global food

and commodity prices is forecasted to put upward pressure on

inflationary risk, Malaysia’s extensive price controls on domestic

energy prices and food items will check any advance in inflation. The

removal of these price controls and the coming implementation of

the GST (Goods and Services Tax) would likely result in a one-shot

increase in prices.

Governments and central banks exit. Fiscal and monetary policy

around the world is expected to tighten as governments attempt to

negate excess liquidity created to bail-out banks during the sub-

prime mortgage crisis. Countries that are slow to raise benchmark

interest rates may face threats from inflation.

Inflationary pressures from hot money flowing into Asia. Hot

money that is fleeing advanced economies of the West may cause

inflationary pressures in the emerging and developing economies in

the East.

-2

0

2

4

6

8

10

12

0

20

40

60

80

100

120

140

160

Malaysia's Average Consumer Prices

Index, Base year=2000 Annual % Change

Source: IMF, World Economic Outlook DatabaseEstimates start after: 2008Base year: 2000

Food and Fuel Crisis

US Sub-prime Mortgage CrisisAsian Financial

Crisis

Inflation

Weightage of Consumer Price Index (CPI) Food & non-alcoholic beverages

31.4

Alcoholic beverages & tobacco 1.9

Clothing & footwear 3.1

Housing, water, electricity, gas & other fuels

21.4

Furnishings, household equipment & routine household maintenance

4.3

Health 1.4

Transport 15.9

Communication 5.1

Recreation services & culture 4.6

Education 1.9

Restaurants & hotels 3.0

Misc goods & services 6.0

Total 100.0

Source: Department of Statistics, Malaysia Base year = 2005



Figure 6

Figure 7

Food and Non-Alcoholic

Beverages20%

Alcoholic Beverages and

Tobacco2%

Clothing and Footwear

3%

Housing, Water,Electricity, Gas

and Other Fuels22%Furnishings,

Household Equipment and

Routine Maintenance

4%

Health1%

Transport16%

Communication5%

Recreation Services and

Culture5%

Education2%

Restaurant and Hotels11%

Miscellaneous Goods and

Services9%

Composite of Average Monthly Household Expenditure (2004/2005)

Source: Department of Statistics, Malaysia

0%

5%

10%

15%

20%

25%

30%

35%

40%

Food and Non-Alcoholic BeveragesHousing, Water, Electricity, Gas

Transport

Composition of Average Monthly Household Expenditure by Class (2004/2005)

Below Rm 500 Rm 500- Rm 4,999 Rm 5,000 and above

Source: Department of Statistics, Malaysia

Household Expenditure

Food and non-alcoholic

beverages amount to one-

fifth of average monthly

household expenditure.

The higher income category

of Malaysians spends more

on transport than the lower

income category. Painful

fuel subsidies by the

Malaysian government

benefit the rich more than

the poor.

Housing, water, electricity,

gas and other fuels amount

to another one-fifth of

household expenditure.



Employment

Sector

14.2%

35.3%

16.2%

14.9%

10.3%

9.1 %

Foreign Workers in Malaysia by Sector, 2008

Maid Manufacturing

Plantation Construction

Services Agriculture

Source: Ministry of Home Affairs

Figure 8

Figure 9

Unemployment displaying an upward trend. Unemployment is

poised to display some upward pressure following the global

economic downturn. However, increased vacancies in the

manufacturing and services sector provide a healthy indicator of

economic recovery.

Figure 10

11,609.10

2.9

3

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

8500

9000

9500

10000

10500

11000

11500

12000

2002 2003 2004 2005 2006 2007 2008 2009e

Malaysia's Labour Market

Employment ('000) Unemployment (% of labour force)

Source: BNM

Unemployment trending upwards but remains low

US sub-prime mortgage crisis

0100,000200,000300,000400,000500,000600,000700,000

2005 2006 2007 2008 2009e

Vacancies Reported by Industries

Agriculture, hunting, forestry and fi shery Mining and quarrying

Manufacturing Construction

Services Others not elsewhere classifi ed

Source: BNM

1,085,658

591,481

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Number of Foreign Workers in Malaysia by Country of Origin, 1999 - 2008

Indonesia Bangladesh Thailand Philippines Pakistan Others

Source: Ministry of Home Affairs

Unemployment is displaying

an upward trend following

the aftermath of the US sub-

prime mortgage crisis.

However, unemployment as a

percentage of the workforce

remains low.

Vacancies reported by

industries are highly centred

on the manufacturing and

services sector.

The number of foreign

workers in Malaysia

continues to be high despite

the Malaysian government’s

effort to reduce their

participation in the

workforce.



External Sector

Figure 11

Figure 12

Singapore

14%Japan9%

ASEAN11%

EU13%

United States16%

NIEs11%

China9%

Rest of the

world17%

Direction of Exports: 2000

Singapore

18%

Japan13% ASEAN

8%

EU14%

United States20%

NIEs12%

China3%

Rest of the

world12%

Direction of Exports: 2007

Figure 13

Relatively undervalued local currency. After the pegging of the

Ringgit to the US dollar at the height of the Asian Financial Crisis, the

Malaysian currency has been relatively undervalued. This has helped

to boost exports by making local goods and services relatively cheap.

Malaysia has an export-to-GDP ratio of 1.2 and a trade-to-GDP ratio

of 2.2 in 2008.

Helping exports at the expense of competitiveness. An

undervalued local currency may have helped local exports but have

failed to provide enough pressure to force Malaysian manufacturers

up the value chain to produce more high valued added goods and

services. The majority of workers in Malaysia remains low-skilled.

The United States as Malaysia’s main trading partner. The United

States continues to be Malaysia’s main trading partner. This suggests

that Malaysia’s economy will be still heavily linked to the United

States despite China’s newfound economic dominance in the

international arena.

Figure 14

-15

-10

-5

0

5

10

15

20

-20

-10

0

10

20

30

40

50

Malaysia's Current Account

US$ Bil % of GDP

Source: IMFEstimates start after: 2008

Asian Financial CrisisRM pegging

Relatively Undervalued Ringgit

10.312.3

0.2

10.7

-11.9

2.5

-15

-10

-5

0

5

10

15

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f2

01

0f

Total World Trade Volume (Goods and Services), % Growth

Source: IMF

V-shape recovery in world trade

The gradual recovery of

advanced economies

together with the strong

demand from emerging

economies will provide

ample support of global

trade in 2010.



External Sector

Figure 15

Trade surplus after the Asian Financial Crisis. Malaysia continues

to register a positive balance of trade though the exports from the

manufacturing sector. Electronics and electrical products continue to

dominate exports with the support of natural resources like

petroleum.

Figure 16

High growth in manufacturing sector expected. The

manufacturing sector is poised for a solid growth of 6.5% in 2010 as

the external environment improves and exports are expected to post

a positive performance.

-20000

0

20000

40000

60000

80000

100000

120000

0

100000

200000

300000

400000

500000

600000

700000

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Principal Statistics of External Trade, 1970-2006, Malaysia

RM (Million)

Balance of Trade Exports Imports

Source: Department of Statistics

Export others

Off-estate …

Rubber

Wood

Textile

Petroleum

Chemicals

Electricals

Electronics

1.3

3.2

3.4

3.7

3.8

10.7

13.1

13.8

26.9

Export-oriented industries as share of manufacturing sector (2008, %)

Source: BNM

A relatively undervalued

currency has helped Malaysia

to register a trade surplus by

making local products and

services cheaper than other

neighbouring countries.

Electronics and electrical

manufactured goods

dominate Malaysian exports.

Other important exports of

the manufacturing sector

include chemicals and

petroleum.



Federal Government

Finance

Figure 19

Foreign Direct Investments

appendix)

4.8 5.2 5.3 5.4 5.5

14.5

14.214.7

14.8

14.7

7.5

11.812.5 12.5

14.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

0.0

5.0

10.0

15.0

20.0

25.0

2004 2005 2006 2007 2008

Malaysia's Reserves(In bil barrels of oil

equivalent)

Crude oil & condensates reserves

Natural gas reserves

Deepwater reserves as % of total reserves

Source: The Star

Figure 17

Fiscal pump-priming. Malaysia suffers from an over-reliance on

government investment which is deficit financed and unsustainable

in the long-run. The country is reliant on petroleum-derived income.

Around 40% of government revenue comes from Petronas. Research

reports have indicated that by 2014 to 2016, Malaysia will become a

net importer of oil and will probably lose a huge portion of its

government revenue.

Figure 18

-40,000

-35,000

-30,000

-25,000

-20,000

-15,000

-10,000

-5,000

0

5,000

10,0001

97

0

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

Federal Government FinanceRM mil

Source: Ministry of Finance

A persistent budget deficit after the Asian Financial Crisis suggest pump priming with petro-dollars

8052.9

14058.8

0

2000

4000

6000

8000

10000

12000

14000

16000

Foreign Direct Investments

Inflow, US$ at current prices and current exchange rates in millions

Outflow, US$ at current prices and current exchange rates in millions

Source: UNCTAD

In 2006, Malaysia’s inflow

and outflow of foreign direct

investments (FDI) broke even

for the first time in decades.

The outflow of FDIs

continued to intensify

reaching an alarming figure

of US$ 14 billion. Malaysia’s

failure to attract FDIs into the

country sends a clear signal

that the country is losing it’s

competitive edge among

emerging and developing

economies. .



External Shocks: Crude Oil

Prices

Figure 20

Figure 21

Figure 22

99.92

76.50

0

20

40

60

80

100

1201

98

41

98

51

98

61

98

71

98

81

98

91

99

01

99

11

99

21

99

31

99

41

99

51

99

61

99

71

99

81

99

92

00

02

00

12

00

22

00

32

00

42

00

52

00

62

00

72

00

82

00

9*

20

10

*

Average Prices for World Crude Oil, 1984 - 2010

Source: Bloomberg* WEO Update, IMF October 2009 - Average of U.K. Brent, Dubai, and West Texas Intermediate Crude oil

Volatile and relatively high oil prices forecasted

0

200

400

600

800

Thousand Million Barrels

40.8 69.3 111.2 117.5 143.7

755.3Proven Oil Reserves ( 2007)

Asia Pacific North America South & Central America

Africa Europe & Eurasia Middle East

Source: National Geographic

1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

3624

53

115107

48 4332

4 511 15

6 3 1 21 1 0 0 0 0 0 0

Draining the reliable giants

Giant: 500 mil - 5 bil barrelsSupergiant: 5 bil - 50 bil barrelsMegagiant: > 50 bil barrels

Source: National Geographic

When the price of oil goes and

stays up, it has a negative

effect on the entire economy

because oil is used in the

production of virtually

everything, including steel,

aluminium, plastics, rubber,

fabrics, transportation, and

food.

One of the reasons petrol

prices are so high is because

some 80% of the world’s oil

reserves are in the hands of

state-owned oil firms that

tend to allow international oil

companies limited access.

This can evidently be seen in

countries such as Russia and

Venezuela that welcome the

high-tech and well-capitalized

oil firms when prices are high

and chase them out when

prices are low.

The decline in oil output is because most of the big and easily located fields were discovered decades ago and the recent oil field findings tend to be smaller fields. Oil producers are now stuck in having to find greater number of oil fields to produce the same amount of oil. Smaller oil fields are more costly to operate as small oil fields in ten different locations would require ten oil rigs compared to the lesser number of oil rigs at big oil fields.



Deconstructing the New Economic Model

Figure 23

New Approaches to Spur Growth

Allowing EPF to invest more assets overseas;

The Government and EPF will form a joint venture to develop

3,000 acres in Sungai Buloh into a new hub for Klang Valley

producing over RM5 new investments;

The Malaysian Industrial Development Authority (MIDA) will

be corporatized to make it more flexible to attract and retain

manpower and talents it needs to be an internationally

competitive national investment promotion agency;

Khazanah Nasional Bhd will divest its 32% controlling stake in

Pos Malaysia Bhd through a two-stage strategic divestment

process. Further details of the exercise would be announced

later;

Petronas has identified two sizable subsidiaries with good track

record to be listed on Bursa Malaysia this year; and

Several parcels of land in Jalan Stonor, Jalan Ampang and Jalan

Lidcol, Kuala Lumpur have been identified to be tendered out

and developed by the private sector. If not developed, the

Government will incur cost maintaining these assets.

High Income

Targets US$ 15,000 –20,000 per capita by

2020

Sustainability

Meets present needs without compromising

future generations

Inclusiveness

Enables all communities to

fully benefit from the wealth of the

country

New Economic Model

National Key Economic

Activities

1. Electrical and electronics

(E&E)

2. Palm oil

3. Oil and gas (O&G)

4. Tourism

5. High-value agriculture

6. Green technology

7. Financial services

8. Information technology

Key Objectives

Fostering economic growth

and higher income. The New

Economic Model (NEM)

contains the proposed

government policies to lift

gross national product (GNP)

per capita from the current

US$7,600 to US$ 17,700 by

increasing growth rates to an

average of 6.5% per annum

until 2020.

Revitalising the private

sector. Crucial change is

needed to reverse the decline

in private investments as a

result of increased government

spending after the Asian

financial crisis in 1997.

Retaining skilled workers.

Human capital development

has been highlighted as an area

of high priority as skilled

workers are a prerequisite in

supporting high value-added

industries.



Old Approach versus New NEM Approach

Old Approach New Approach

Growth primarily through capital accumulation. Focus on investment in production and physical infrastructure in combination with low skilled labour for low value added exports

Growth through productivity. Focus on innovative processes and cutting-edge technology, supported by healthy level of private investment and talent, for high value added goods and services

Dominant state participation in the economy. Large direct public investment (including through GLCs) in selected economic sectors

Private sector-led growth. Promote competition across and within sectors to revive private investment and market dynamism

Centralised strategic planning. Guidance and approval from the federal authorities for economic decisions

Localised autonomy in decisionmaking. Empower state and local authorities to develop and support growth initiatives, and encourage competition between localities

Balanced regional growth. Disperse economic activities across states to spread benefits from development

Localised autonomy in decisionmaking. Empower state and local authorities to develop and support growth initiatives, and encourage competition between localities

Favour specific industries and firms. Grant preferential treatment in the form of incentives and financing to selected entities

Favour technologically capable industries and firms. Grant incentives to support innovation and risk-taking to enable enterpreneurs to develop higher value added products and services

Export dependence on G-3 (US, Europe and Japan) markets. Part of production chain to supply consumer goods and components to traditional markets

Asian and Middle East orientation. Develop and integrate actively into regional production and financial networks to leverage on flows of investment, trade and ideas

Restrictions on foreign skilled workers. Fear that foreign talent would displace local workers

Retain and attract skilled professionals. Embrace talent, both local and foreign, needed to spur an innovative, high value added economy

New Economic Model

Key Risk

Sluggish global economic

recovery. A low momentum of

global economic recovery

would likely dampen

Malaysia’s economic growth

and consumer demand leading

to a slower than expected

accomplishment of NEM

objectives.

Times of rising cost of living

and inflation. Forecasted

rising prices of commodities

would result in many

Malaysian businesses to

operate in a hostile cost

environment which would

squeeze profit margins and

economic activity.

New entrants. The arrival of

populous third world countries

into the market like China,

Indonesia and Vietnam may

spell an end to Malaysia being

a competitive manufacturing

and services hub.

Sustainability, Inclusiveness.

While heading towards a high-

income nation is the right

choice for countries with a

small population like Malaysia,

one should also question the

sustainability and

inclusiveness of such a shift.



New Economic Model

Key Statistical Highlights

from the NEM

40% of Malaysian

households still earn less

than RM 1,500 a month.

Bottom 40% of

households comprise of

77% bumiputeras with a

huge number located in

Sabah and Sarawak

80% if Malaysia’s

workforce has only SPM

qualifications (‘O’ Level

equivalent).

Only a low percentage of

Malaysia’s (25%) labour

force consists of highly

skilled workers as

compared to Singapore

(49%), Taiwan (33%) and

Korea (35%).

There are approximately

150,000 Malaysian

working abroad and 50%

of these Malaysian have

tertiary education.

The 8 Key Strategic Reform Initiatives

SRI 1: Re-energising the private sector to drive growth – Firing

up the private sector will stimulate a jump in investment in high

value added products and services, generating sustained growth and

high income.

SRI 2: Developing a quality workforce and reducing dependency

on foreign labour – Policies will focus on generating a talented

workforce to meet the needs of a high-value knowledge economy

while wage-restraining labour market distortions, such as excessive

and indiscriminate use of foreign labour, will be removed.

SRI 3: Creating a competitive domestic economy – Subsidies,

price controls and a myriad of distortion-creating incentives will be

phased out. The impact on the vulnerable groups will be cushioned

with an enhanced social safety net.

SRI 4: Strengthening the public sector – Public sector reform

programmes will continue to improve and speed up decision making

by a lean, consultative and delivery focussed government.

SRI 5: Transparent and market-friendly affirmative action – To

truly foster equal and fair economic opportunities, affirmative action

programmes will continue but will aim to achieve their objectives by

removing the rentseeking and market distorting features which have

limited their effectiveness.

SRI 6: Building the knowledge base and infrastructure – The key

focus here is to promote an environment for innovation by

strengthening the delivery of high quality education that nurtures

innovation and technology.

SRI 7: Enhancing the sources of growth – Malaysia will leverage

its natural endowment and sectors of comparative advantage as the

main sources of high value added growth maximising spillover

effects into new areas of activities.

SRI 8: Ensuring sustainability of growth – Preserving our natural

resources and safeguarding the interest of future generations will be

complemented by sustainable public finances through stringent

fiscal discipline.



New Economic Model

Companies in Forbes 2000 by region (2005; no. of companies)

North America 821

Pacific RIM 544

Western EU 527

S. Asia 32

E. Europe 30

S. America 26

Africa 20

Middle East 9

Japan 326

S. Korea 41

Taiwan 35

Hong Kong 28

China 25

Malaysia 14

Thailand 13

Singapore 13

Indonesia 8

Philippines 2

Source: Forbes

Critical Assessment of the NEM

The NEM offers a transparent discussion of Malaysia’s

economic state and affairs. Current and potential problems in

Malaysia like slower economic growth, income inequality, brain

drain, lack of skilled workers, the failure of its education system

and the country’s relative loss of competitiveness were

accurately highlighted and discussed. Areas that the nation can

improve in order to move up the value chain was also properly

brought out in the new model.

Sufficient details on policies and their implementations

were not given. Although economic problems were accurately

identified, the lacking of critical details for the smooth

implementation of the NEM is sorely felt. The lack of details was

a disappointment to both local and foreign investors as no

concrete commitment was given on the various sectors/areas

that are in need of reform. Part II of the New Economic Model

should give a better overview of the government’s game plan in

making Malaysia a high-income nation.

Extending Malaysia’s reach beyond national capabilities?

Although radical reform and transformation is needed and

expected, the NEM aims to do too much with too little.

Overambitious claims to revamp the education system may be

easier said than done as a ‘lost generation’ of young graduates

are already out in the labour market. Besides that, achieving a

high-income society through economic growth and solving

income inequality may sound good on paper but rationally

unattainable. The danger of trying to achieve too many things at

the same time is that one ends up obtaining nothing at all.



Implementation

National Strategy

Country

National Strategy

US, UK, Germany & France

Low carbon

transport and

energy,

biotechnology,

bioscience and

advanced

engineering and

services

China & India

Infrastructure and

human capital

Brazil

Bio-fuel Technology (Ethanol based)

Hong Kong Financial services

Singapore Financial services

Korea Technology

Taiwan Middle East

Innovative SMEs Oil and Gas

Going Forward

Economic fundamentals. Up to 40% of Government revenue is derived

from Petronas and this is unsustainable in the long-term. By 2014 to 2016,

Malaysia would become a net importer of oil and the loss from the oil and

gas sector must be substituted with Government revenue from other

sources. Financial services, natural resources and information technology

are sectors that the government can support for further development.

Malaysia’s competitiveness. Brain drain is a serious issue as the total

number of Malaysian-origin researchers, scientists and engineers working

overseas have probably exceeded 20,000 with 40% of them in the United

States and 10% in Australia. A more merit-based model of employment

should be adopted to retain high-skilled workers and channel the right

personnel with the right expertise to the right place.

Privatisation of GLCs and public utilities. Privatisation would increase the

productivity and performance of GLCs and public utilities as market-driven

discipline would act as a correcting force against corruption and

incompetent management.

Income inequality. Social welfare is a serious issue as Malaysia moves

towards a high-income country. Due to the fact that economic growth cannot

be equally distributed among everyone, social security nets must be in place

to ensure that those who are unable to cope with the drastic change in the

social-economic landscape are supported by government assistance.

Infrastructure. Both telecommunication and public infrastructure should

be given utmost priority as these two areas would bring a rapid increase in

economic activity. A good infrastructure both in terms of

telecommunications and public transport would attract more foreign direct

investments, multinational corporations and tourist to Malaysia.

Price controls and subsidies. Price controls distort true underlying market

values and would result in a shortage or surplus on the goods that they are

implemented upon. Subsidies on the other hand, benefit the rich more than

the poor as the former consumes more subsidised items like petrol. Direct

cash assistance should be the preferable method instead of price controls

and subsidies to help households with incomes below par.

Revamping the education system. Education in English should be stressed

in both primary and secondary schools. The English language is likely to

remain as the lingua franca in the foreseeable future. Erecting an education

system that focuses on English would enable Malaysia to foster a new

generation of graduates that are able to face the challenges of globalisation.

National currency to be traded internationally. It is unlikely that

Malaysia would be able to achieve a high-income nation status without

liberalising its economy from constraining capital controls and a national

currency that is not traded internationally. Furthermore, the Ringgit is seen

to be relatively undervalued as compared to other regional currencies and

thus reducing its purchasing power and desirability in the international

markets.



Timeline: Malaysia A chronology of key events:

14th century Conversion of Malays to Islam begins. 1826 British settlements of Malacca, Penang and Singapore combine to form the Colony of

Straits Settlements, from where the British extend their influence by establishing protectorates over the Malay sultanates of the peninsula.

1895 Four Malay states combine to form the Federated Malay States. 1942-45 Japanese occupation. 1948 British-ruled Malayan territories unified under Federation of Malaya. 1948-60 State of emergency to counter local communist insurgency. 1957 Federation of Malaya becomes independent from Britain with Tunku Abdul Rahman as

prime minister. 1963 British colonies of Sabah, Sarawak and Singapore join Federation of Malaya to form

the Federation of Malaysia. 1965 Singapore withdraws from Malaysia, which is reduced to 13 states; communist

insurgency begins in Sarawak. 1969 Malays stage anti-Chinese riots in the context of increasing frustration over the

economic success of the ethnic Chinese. 1970 Tun Abdul Razak becomes prime minister following Abdul Rahman's resignation;

forms National Front (BN) coalition. 1971 Government introduces minimum quotas for Malays in business, education and the

civil service. 1977 Kelantan chief minister expelled from Pan-Malaysian Islamic Party (PAS), triggering

unrest, a national emergency and the expulsion of PAS from the BN coalition. 1978-89 Vietnamese refugees benefit from unrestricted asylum. 1981 Mahathir Mohamad becomes prime minister. 1989 Local communist insurgents sign peace accord with government. 1990 Sarawak communist insurgents sign peace accord with government. 1993 Sultans lose legal immunity. 1997 Asian financial crisis spells end of decade of impressive economic growth. 1998 Prime Minister Mahathir Mohamad sacks his deputy and presumed successor, Anwar

Ibrahim, on charges of sexual misconduct, against the background of differences between the two men over economic policy; Ibrahim arrested.

2000 Ibrahim is found guilty of sodomy and sentenced to nine years in prison. This is added to the six-year jail sentence he was given in 1999 after being found guilty of corruption following a controversial trial.

2001 February Government decides to proceed with construction of huge Bakun hydroelectric power project on island of Borneo despite serious environmental concerns.

2001 March Dozens arrested during Malaysia's worst ethnic clashes in decades between Malays and ethnic Indians.

2001 April Demonstrations against the Internal Security Act following the detention without trial of supporters of Anwar Ibrahim.

2001 September Malaysia, Singapore resolve long-standing disputes, ranging from water supplies to air space. They also agree to build a new bridge and tunnel.

2002 August Tough new laws against illegal immigrants come into effect, providing for whipping and prison terms for offenders. Laws prompt exodus of foreign workers.

2003 October Abdullah Ahmad Badawi takes over as prime minister as Mahathir Mohamad steps down after 22 years in office.

2004 March Prime Minister Abdullah Badawi wins landslide general election victory. 2004 September Former deputy PM Anwar Ibrahim freed after court overturns his sodomy conviction. 2004 December Scores of people in Malaysia are killed in the Asian tsunami disaster. Malaysia delays

planned deportations of many thousands of illegal immigrants, most of them from Indonesia.

2005 January Malaysia, Singapore settle a bitter dispute over land reclamation work in their border waters.

2005 March Round-up of illegal immigrants follows a four-month amnesty which sees an exodus of hundreds of thousands of illegal workers. Those remaining risk jail, a fine, or whipping.

2005 August Acrid smoke, from forest fires on the Indonesian island of Sumatra, engulfs central areas and prompts a state of emergency.

2006 April Malaysia shelves the construction of a controversial bridge to Singapore. 2006 December 60,000 displaced by flooding in the south. 2007 January Some 70,000 evacuated as second wave of floods hits south of country. 2007 February Malaysia, Indonesia and Brunei Darussalam sign deal to protect 200,000 square

kilometres of rainforest on the island of Borneo.



2007 March US tells Malaysia it will not be able to conclude free-trade deal in summer of 2007. 2007 May Anwar Ibrahim's Parti Keadilan Rakyat loses a bitterly contested by-election to the

government. The result is seen as a blow to his efforts to revive his political career. 2007 May Malaysian, Indonesian and Saudi Arabian partners move a step closer to building a

193 mile (310km) pipeline to bypass the Malacca Strait, so oil tankers can load crude away from the busy and often dangerous waterway.

2008 March Elections. Prime Minister Abdullah Ahmad Badawi's National Front coalition suffers its worst election result in decades. It loses its two thirds parliamentary majority and control of five state assemblies.

2008 July Opposition leader Anwar Ibrahim is arrested over allegations of sodomy, in a move that exacerbates political tensions.

2008 October The government unveils a raft of measures to prop up the stock market and attract more foreign investment in expectation of slower growth in 2009.

2009 January Malaysia bans the recruitment of foreign workers to protect its citizens from unemployment during the economic downturn.

2009 March The government unveils a $16bn economic stimulus plan as it seeks to stave off a deep recession.

2009 April Mr Badawi steps down as prime minister and is replaced by his deputy, Najib Abdul Razak.

2010 January Religious tensions increase following a court decision allowing non-Muslims to use the word Allah to refer to God.

2010 February Malaysia is to extradite nine foreigners arrested on terror charges in January. Rights activists say the men are from Jordan, Nigeria, Syria and Yemen and are being held under the Internal Security Act, which allows for detention without trial. The trial for sodomy of opposition leader Anwar Ibrahim is delayed again following the refusal of Judge Mohamad Zabidin Diah to withdraw. Mr Anwar's defence has accused him of bias. Three Malay women are flogged for extra-marital sex in the first case of this Islamic punishment being meted out to women in the country.

Source: BBC, Country Profile

~ End of Report ~

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