Malaysia. Economic Research. Unveiling Malaysia s New Economic Model Heading towards a sustainable and inclusive high-income nation

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1 Asia Pacific: Malaysia April 18, 21 Malaysia Economic Research 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 21 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 Deconstructing the New Economic Model 16 Implementation: Going Forward Timeline: Malaysia Ee Suen Zheng Bachelor of Arts with First Class Honours in Banking and Finance jamesesz@yahoo.com jamesesz.wordpress.com Country Summary Full name Population Capital Area Major languages Major religions Main exports GNI per capita Source: BBC Federation of Malaysia 27.5 million (UN, 29) Kuala Lumpur 329,847 sq km (127,355 sq miles) Malay (official), English, Chinese dialects, Tamil, Telugu, Malayalam 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 $6,97 (World Bank, 28) Malaysia - Economic Outlook Ee Suen Zheng Page 1

2 Asia Pacific: Malaysia April 18, 21 Country Locator 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 $16bn economic stimulus plan in March 29 is seen to have prevented a deep recession. The country faces serious challenges in maintaining political stability in the midst of religious and ethnic diversity. Country Data Profile World view Population, total (millions) Population growth (annual %) Surface area (sq. km) (thousands) GNI, Atlas method (current US$) (billions) GNI per capita, Atlas method (current US$) 3,45 5,2 6,42 6,97 GNI, PPP (current international $) (billions) GNI per capita, PPP (current international $) 8,35 11,21 13,23 13,74 Economy GDP (current US$) (billions) GDP growth (annual %) Inflation, GDP deflator (annual %) Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Exports of goods and services (% of GDP) Imports of goods and services (% of GDP) Country Rating Long-Term Issuer Default Rating (9 June 29) Short-Term Issuer Default Rating (9 June 29) Local Currency Long Term Issuer Default Rating (9 June 29) Country Ceiling (9 June 29) Ratings A F2 A- (Stable, Affirmed) F2 (Affirmed) A (Stable, Downgrade) A (Affirmed) Economic situation can affect finance Good quality grade with satisfactory capacity of obligor to meet its financial commitment Source: World Development Indicator Database Source: Fitch, Inc. Malaysia - Economic Outlook Ee Suen Zheng Page 2

3 Asia Pacific: Malaysia April 18, 21 Key Economic Indicators Figure 1 Emerging and developing economies Newly industrialized Asian economies Source: IMF Economic activity in the US, Euro Area, Japan, and the UK is forecasted to remain sluggish in 21. 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 Developing Asia Euro area Advanced economies Real GDP Growth (%) ASEAN-5 World Malaysia: Forecasted Real GDP Growth, % Positive GDP Outlook Emerging and developing Asian economies grow despite negative external shocks from advanced economies The global economy fuelled by emerging and developing countries is expected to recover gradually. However, recovery will be sluggish and uneven. Despite sluggish forecasted economic growth for advanced economies, foreign brokers are optimistic of Malaysia s economic growth in 21. Bank Negara Malaysia revised its 21 GDP growth projection to a range of % as lead indicators point to recovery in exports and stronger consumer confidence. 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. HSBC projected a 7.3% GDP growth rate for Malaysia stating in its report that recovery has reached a selfsustaining state. Malaysia - Economic Outlook Ee Suen Zheng Page 3

4 Asia Pacific: Malaysia April 18, 21 Figure Manufacturing export-led recovery Plaza Accord Commodity and Property Crisis Malaysia s economy remains highly exposed to external shocks. The negative impact from the U.S. sub-prime mortgage crisis in 27 is not as severe as the Asian financial crisis in 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. Malaysia's Growth Trends "Mega Projects" Asian Financial Crisis RM pegging National Currency, Billion Dot-Com bust 9-11 Source: IMF, World Economic Outlook Database Estimates start after: 28 Base year: 2 Ringgit de-peg U.S. Sub-prime Mortgage Crisis Annual % Change Economic Growth Trends Economic growth trends show that protectionist policies have not sheltered the Malaysian economy from negative external shocks A moderate contraction in the Malaysian economy is seen in 29 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. Figure 4 China India Indonesia Malaysia Philippines Singapore Thailand Vietnam Average Annual GDP Growth Source: IMF, World Economic Outlook 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. Malaysia is lagging behind regional economies after the Asian Financial Crisis in Protectionism is taking its toll on Malaysia s economic growth. Other Asian economies, especially China and India are expected to continue to lead the global economic recovery. Malaysia - Economic Outlook Ee Suen Zheng Page 4

5 Asia Pacific: Malaysia April 18, 21 Figure 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. Malaysia's Average Consumer Prices Asian Financial Crisis Index, Base year=2 Source: IMF, World Economic Outlook Database Estimates start after: 28 Base year: 2 Food and Fuel Crisis US Sub-prime Mortgage Crisis Annual % Change Inflation Weightage of Consumer Price Index (CPI) Food & non-alcoholic 31.4 beverages Alcoholic beverages & tobacco 1.9 Clothing & footwear 3.1 Housing, water, electricity, 21.4 gas & other fuels Furnishings, household 4.3 equipment & routine household maintenance Health 1.4 Transport 15.9 Communication 5.1 Recreation services & culture 4.6 Education 1.9 Restaurants & hotels 3. Misc goods & services 6. Total 1. Source: Department of Statistics, Malaysia Base year = 25 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 subprime 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. Malaysia - Economic Outlook Ee Suen Zheng Page 5

6 Asia Pacific: Malaysia April 18, 21 Figure 6 Composite of Average Monthly Household Expenditure (24/25) Household Expenditure Miscellaneous Goods and Services Restaurant and 9% Hotels 11% Education 2% Recreation Services and Culture 5% Communication 5% Transport 16% Health 1% Food and Non- Alcoholic Beverages 2% Alcoholic Beverages and Tobacco 2% Clothing and Footwear 3% Housing, Water, Electricity, Gas and Other Fuels 22% Furnishings, Household Equipment and Routine Maintenance 4% Food and non-alcoholic beverages amount to onefifth of average monthly household expenditure. Housing, water, electricity, gas and other fuels amount to another one-fifth of household expenditure. Source: Department of Statistics, Malaysia Figure 7 4% 35% 3% Composition of Average Monthly Household Expenditure by Class (24/25) 25% 2% 15% 1% 5% % 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. Food and Non-Alcoholic Beverages Housing, Water, Electricity, Gas Transport Below Rm 5 Rm 5- Rm 4,999 Rm 5, and above Source: Department of Statistics, Malaysia Malaysia - Economic Outlook Ee Suen Zheng Page 6

7 Asia Pacific: Malaysia April 18, 21 Figure Source: BNM Figure 9 Malaysia's Labour Market US sub-prime mortgage crisis 11,69.1 Unemployment trending upwards but remains low e Employment (') Unemployment (% of labour force) Vacancies Reported by Industries Employment Unemployment is displaying an upward trend following the aftermath of the US subprime 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. 7, 6, 5, 4, 3, 2, 1, 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 e Agriculture, hunting, forestry and fi shery Manufacturing Services Source: BNM 1,4, 1,2, 1,, 8, 6, 4, 2, Mining and quarrying Construction Others not elsewhere classifi ed Number of Foreign Workers in Malaysia by Country of Origin, ,85, , Indonesia Bangladesh Thailand Philippines Pakistan Others Maid Foreign Workers in Malaysia by Sector, 28 Plantation Services Sector 9.1 % 1.3% 14.9% 16.2% 35.3% 14.2% Manufacturing Construction Agriculture Source: Ministry of Home Affairs The number of foreign workers in Malaysia continues to be high despite the Malaysian government s effort to reduce their participation in the workforce. Source: Ministry of Home Affairs Malaysia - Economic Outlook Ee Suen Zheng Page 7

8 f 21f Asia Pacific: Malaysia April 18, 21 Figure 13 5 Malaysia's Current Account Relatively Undervalued Ringgit 2 External Sector Asian Financial Crisis RM pegging Figure 11 Direction of Exports: Source: IMF Estimates start after: 28 US$ Bil % of GDP United States 16% NIEs 11% China 9% Rest of the world 17% 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 28. 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 Total World Trade Volume (Goods and Services), % Growth EU 13% ASEAN 11% Figure 12 Singap ore 18% Rest of the world 12% China 3% NIEs 12% Japan 9% Singap ore 14% Direction of Exports: 27 Japan 13% ASEAN 8% EU 14% United States 2% The gradual recovery of advanced economies together with the strong demand from emerging economies will provide ample support of global trade in Source: IMF V-shape recovery in world trade Malaysia - Economic Outlook Ee Suen Zheng Page 8

9 Asia Pacific: Malaysia April 18, 21 Figure 15 Principal Statistics of External Trade, , Malaysia RM (Million) External Sector A relatively undervalued currency has helped Malaysia to register a trade surplus by making local products and services cheaper than other neighbouring countries. Source: Department of Statistics Balance of Trade Exports Imports 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 Export-oriented industries as share of manufacturing sector (28, %) Electronics 26.9 Electricals Chemicals Petroleum Textile Wood Rubber Off-estate Export others Electronics and electrical manufactured goods dominate Malaysian exports. Other important exports of the manufacturing sector include chemicals and petroleum. Source: BNM High growth in manufacturing sector expected. The manufacturing sector is poised for a solid growth of 6.5% in 21 as the external environment improves and exports are expected to post a positive performance. Malaysia - Economic Outlook Ee Suen Zheng Page 9

10 Asia Pacific: Malaysia April 18, 21 Figure 17 1, 5, Federal Government Finance RM mil Federal Government Finance -5, Figure 19-1, -15, -2, -25, -3, -35, -4, Source: Ministry of Finance 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 4% of government revenue comes from Petronas. Research reports have indicated that by 214 to 216, Malaysia will become a net importer of oil and will probably lose a huge portion of its government revenue. A persistent budget deficit after the Asian Financial Crisis suggest pump priming with petro-dollars Malaysia's Reserves (In bil barrels of oil equivalent) 7.5 Source: The Star Crude oil & condensates reserves Natural gas reserves Deepwater reserves as % of total reserves Figure 18 Foreign Direct Investments 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 In 26, 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 appendix) economies.. Source: UNCTAD Malaysia - Economic Outlook Ee Suen Zheng Page 1

11 * 21* Asia Pacific: Malaysia April 18, 21 Figure Average Prices for World Crude Oil, Volatile and relatively high oil prices forecasted External Shocks: Crude Oil Prices 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. Source: Bloomberg * WEO Update, IMF October 29 - Average of U.K. Brent, Dubai, and West Texas Intermediate Crude oil Figure Figure 22 Proven Oil Reserves ( 27) Thousand Million Barrels Asia Pacific North America South & Central America Africa Europe & Eurasia Middle East Source: National Geographic Draining the reliable giants Giant: 5 mil - 5 bil barrels Supergiant: 5 bil - 5 bil barrels Megagiant: > 5 bil barrels One of the reasons petrol prices are so high is because some 8% 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. 193s 194s 195s 196s 197s 198s 199s 2s Source: National Geographic Malaysia - Economic Outlook Ee Suen Zheng Page 11

12 Asia Pacific: Malaysia April 18, 21 Deconstructing the New Economic Model Figure 23 New Economic Model Inclusiveness Enables all communities to fully benefit from the wealth of the country High Income Targets US$ 15, 2, per capita by 22 Sustainability Meets present needs without compromising future generations 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 New Approaches to Spur Growth Allowing EPF to invest more assets overseas; The Government and EPF will form a joint venture to develop 3, 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. 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$7,6 to US$ 17,7 by increasing growth rates to an average of 6.5% per annum until 22. 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 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. Malaysia - Economic Outlook Ee Suen Zheng Page 12

13 Asia Pacific: Malaysia April 18, 21 Old Approach versus New NEM Approach New Economic Model Old 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 Dominant state participation in the economy. Large direct public investment (including through GLCs) in selected economic sectors Centralised strategic planning. Guidance and approval from the federal authorities for economic decisions Balanced regional growth. Disperse economic activities across states to spread benefits from development Favour specific industries and firms. Grant preferential treatment in the form of incentives and financing to selected entities Export dependence on G-3 (US, Europe and Japan) markets. Part of production chain to supply consumer goods and components to traditional markets Restrictions on foreign skilled workers. Fear that foreign talent would displace local workers New Approach 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 Private sector-led growth. Promote competition across and within sectors to revive private investment and market dynamism Localised autonomy in decisionmaking. Empower state and local authorities to develop and support growth initiatives, and encourage competition between localities Localised autonomy in decisionmaking. Empower state and local authorities to develop and support growth initiatives, and encourage competition between localities 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 Asian and Middle East orientation. Develop and integrate actively into regional production and financial networks to leverage on flows of investment, trade and ideas Retain and attract skilled professionals. Embrace talent, both local and foreign, needed to spur an innovative, high value added economy 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 highincome 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. Malaysia - Economic Outlook Ee Suen Zheng Page 13

14 Asia Pacific: Malaysia April 18, 21 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. New Economic Model Key Statistical Highlights from the NEM 4% of Malaysian households still earn less than RM 1,5 a month. Bottom 4% of households comprise of 77% bumiputeras with a huge number located in Sabah and Sarawak 8% 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 15, Malaysian working abroad and 5% of these Malaysian have tertiary education. 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. Malaysia - Economic Outlook Ee Suen Zheng Page 14

15 Asia Pacific: Malaysia April 18, 21 Critical Assessment of the NEM New Economic Model 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. Companies in Forbes 2 by region (25; no. of companies) North America 821 Pacific RIM 544 Western EU 527 S. Asia 32 E. Europe 3 S. America 26 Africa 2 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 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. Malaysia - Economic Outlook Ee Suen Zheng Page 15

16 Asia Pacific: Malaysia April 18, 21 Going Forward Economic fundamentals. Up to 4% of Government revenue is derived from Petronas and this is unsustainable in the long-term. By 214 to 216, 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 2, with 4% of them in the United States and 1% 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. Implementation National Strategy Country US, UK, Germany & France China & India National Strategy Low carbon transport and energy, biotechnology, bioscience and advanced engineering and services Infrastructure and human capital 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. Brazil Hong Kong Singapore Korea Taiwan Middle East Bio-fuel Technology (Ethanol based) Financial services Financial services Technology Innovative SMEs Oil and Gas Malaysia - Economic Outlook Ee Suen Zheng Page 16

17 Asia Pacific: Malaysia April 18, 21 Timeline: Malaysia A chronology of key events: 14th century Conversion of Malays to Islam begins 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 Four Malay states combine to form the Federated Malay States Japanese occupation British-ruled Malayan territories unified under Federation of Malaya State of emergency to counter local communist insurgency Federation of Malaya becomes independent from Britain with Tunku Abdul Rahman as prime minister British colonies of Sabah, Sarawak and Singapore join Federation of Malaya to form the Federation of Malaysia Singapore withdraws from Malaysia, which is reduced to 13 states; communist insurgency begins in Sarawak Malays stage anti-chinese riots in the context of increasing frustration over the economic success of the ethnic Chinese. 197 Tun Abdul Razak becomes prime minister following Abdul Rahman's resignation; forms National Front (BN) coalition Government introduces minimum quotas for Malays in business, education and the civil service Kelantan chief minister expelled from Pan-Malaysian Islamic Party (PAS), triggering unrest, a national emergency and the expulsion of PAS from the BN coalition Vietnamese refugees benefit from unrestricted asylum Mahathir Mohamad becomes prime minister Local communist insurgents sign peace accord with government. 199 Sarawak communist insurgents sign peace accord with government Sultans lose legal immunity Asian financial crisis spells end of decade of impressive economic growth 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. 2 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. 21 February Government decides to proceed with construction of huge Bakun hydroelectric power project on island of Borneo despite serious environmental concerns. 21 March Dozens arrested during Malaysia's worst ethnic clashes in decades between Malays and ethnic Indians. 21 April Demonstrations against the Internal Security Act following the detention without trial of supporters of Anwar Ibrahim. 21 September Malaysia, Singapore resolve long-standing disputes, ranging from water supplies to air space. They also agree to build a new bridge and tunnel. 22 August Tough new laws against illegal immigrants come into effect, providing for whipping and prison terms for offenders. Laws prompt exodus of foreign workers. 23 October Abdullah Ahmad Badawi takes over as prime minister as Mahathir Mohamad steps down after 22 years in office. 24 March Prime Minister Abdullah Badawi wins landslide general election victory. 24 September Former deputy PM Anwar Ibrahim freed after court overturns his sodomy conviction. 24 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. 25 January Malaysia, Singapore settle a bitter dispute over land reclamation work in their border waters. 25 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. 25 August Acrid smoke, from forest fires on the Indonesian island of Sumatra, engulfs central areas and prompts a state of emergency. 26 April Malaysia shelves the construction of a controversial bridge to Singapore. 26 December 6, displaced by flooding in the south. 27 January Some 7, evacuated as second wave of floods hits south of country. 27 February Malaysia, Indonesia and Brunei Darussalam sign deal to protect 2, square kilometres of rainforest on the island of Borneo. Malaysia - Economic Outlook Ee Suen Zheng Page 17

18 Asia Pacific: Malaysia April 18, March US tells Malaysia it will not be able to conclude free-trade deal in summer of 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. 27 May Malaysian, Indonesian and Saudi Arabian partners move a step closer to building a 193 mile (31km) pipeline to bypass the Malacca Strait, so oil tankers can load crude away from the busy and often dangerous waterway. 28 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. 28 July Opposition leader Anwar Ibrahim is arrested over allegations of sodomy, in a move that exacerbates political tensions. 28 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 January Malaysia bans the recruitment of foreign workers to protect its citizens from unemployment during the economic downturn. 29 March The government unveils a $16bn economic stimulus plan as it seeks to stave off a deep recession. 29 April Mr Badawi steps down as prime minister and is replaced by his deputy, Najib Abdul Razak. 21 January Religious tensions increase following a court decision allowing non-muslims to use the word Allah to refer to God. 21 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. Source: BBC, Country Profile 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. ~ End of Report ~ Malaysia - Economic Outlook Ee Suen Zheng Page 18