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Malaysia: A Tiger Economy Punching Below its Weight?

 8 min read / 

In 2002, the term The Tiger Cub Economies was coined. Consisting of Malaysia, Indonesia, Philippines and Thailand, the four emerging economies were poised to emulate the success of their predecessors, the Four Asian Tigers, who’s export-oriented growth propelled them to advanced economy status. Fourteen years on, have the tiger cubs met the expectations that many had predicted?

Vision 2020

Vision 2020, a Malaysian ideal introduced by the former Prime Minister, Tun Dr Mahathir called for the nation to achieve a self-sufficient industrialised nation by 2020. He introduced significant reforms with an economic strategy called ‘Looking East.’He wanted Malaysia to emulate Japan and South Korea, that is implementing export-oriented policies, opening up its economy and introducing tax incentives and special economic zones, enabling it to attract more pronounced inflows of foreign direct investment, with the biggest impact being on its manufacturing and export sector.

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The economy took off, averaging a growth rate of 9.2% and its emergence as the next Tiger economy was evident in its rising skylines, such as the construction Petronas Twin Tower (the tallest twin tower in the world). On the welfare side, poverty and income inequality have fallen. Today, its economic policy is a blend of free markets, aggressive recruitment of foreign investment and permissive attitude of low-cost immigrant labour. The recent signing of a memorandum of understanding with Bangladesh, promises a continuous flow of cheap labour, freeing up the better-educated workforces to work in more skill intensive roles. One of the strong focus of the government is to create a more innovative and knowledgeable society, dedicating 20-25% of its budget to education, and its results are evident with one of the region’s highest literacy rate 94.6% in 2015 according to World Bank data.

Economic Headwinds

Putting aside the current political situation, there are still potential bumps ahead on the journey. Its economy is still highly dependent on the primary sector, which is volatile and still only a short-term growth strategy. It is true that its economy was built on its vast natural resources and recent years have benefited from the high commodity prices, particularly oil, evident through the high profits of Petronas, its state-owned petroleum firm. However, the recent volatility in oil prices has caused a currency crisis, as its national currency, the Malaysian Ringgit has devalued from an average of USD/MYR 3.2 to at its worse 4.4 on September 2015, one of the worst currency performers in 2015. Since oil-linked revenue accounts for approximately 30% of government’s revenue, the drop in global oil prices has posed a major fiscal challenge. The government had to revise its national budget, curtailing back several welfare payment and subsidies, which in the long run would be beneficial as it reduces the dependencies on state handouts, freeing funds for nation building. However, in the short run, its current debt position is worrying as the economy has a large dollarised debt, plunging currency and raising interest rates. Dollar bond spreads and long-term local-currency bond yields have increased by 50 to 60 basis points on average, and stock prices are weaker while exchange rates continue to depreciate along the increased federal government and household debts (87.9% of GDP), raising the probability of default.

Banking and Capital Markets

Malaysia was built on the global trade, manufacturing and petroleum base, which had been a core focus for the economy for many years. There is a need to move to a more service-oriented economy, and becoming an Islamic Banking Hub could catalyse that. Islamic Banking was first introduced in Malaysia in 1969 and since then, the Islamic Financial Service has grown rapidly with an increased interest in recent years among both Muslims and Non-Muslims, domestically and internationally. Malaysia operates a unique system, whereby Islamic Services and conventional services are offered, known as the dual system and reflective of Malaysia’s ethnic inclusiveness. It is the centre of Islamic financial product innovation with domestic banks issuing new financial products such as AmIslamic Bank issuing a Basel III compliant Sukuk (Islamic Financial Certificates). The Financial Sector Blueprint 2011-20 highlighted the government’s immense interest in expanding Islamic Service by improving delivery channels, training of talent and refinement of regulation and supervision with the ultimate aim of turning Malaysia into a major global player. Malaysia currently ranks first with 42.3% in Q1 2015 of Sukuk issuance (based on MIFC data), however other countries like the United Arab Emirates quickly catching up (18.2% in Q1 2015 from less than 8% the year before). Liberalisation of the market has helped expand the industry. A foreign investor can own up to 70% of Islamic Banks, attracting foreign investment keen to enter the Islamic financial market. Bank of Tokyo and Mitsubishi-UFJ have over the recent years established their presences as Malaysia boost the most Sukuk, Islamic Banking assets as well having a well-developed scholarship programme on the subject.

Suku

One of its weakness has been the Takaful (Islamic Insurance) business which has been slow to grow locally, making out only 13% of total life insurance policies in Malaysia. Further product innovation might slowly boost its appeal, and better marketing campaigns can propel awareness. Furthermore, the increase in regional powers such as Indonesia and Brunei might increase competition for capital and erode Malaysia’s dominance. Another potential challenge comes from the lack of uniformity between Shariah views between different countries. Even though the Islamic Financial Services Board, which set standard global standard is based in Malaysia, there is still divergences of opinion between the different schools of law, which complicate the matter, as do the different methodologies that may be called upon when elaborating on the law.

The property market paints a gloomier picture. Banks across Malaysia have over leveraged in recent years, which dampened their ability to issue new mortgages. Coupled with Bank Negara, recent guidance to lend conservatively, loan rejection rate is said to be forecasted to be as high as 50% this coming year. With so much uncertainty in the market, foreigners too have steered away, dampening demand even though weak ringgit offers up Malaysian assets at a bargain price.

The Private Equity market is a small but growing industry under 3% of total funding coming from PE in 2013. The stable economy, ample liquidity and low penetration make this attractive industry. The challenge comes from firms in Malaysia who are either very large stated owned companies which have a stable source of income or small family owned business. Private Equity firms are targeting medium sized firms or high growth firms which might be boosted by the government strategy that emphasises boosting productivity by building infrastructure and broadband networks, investing in skills development, and fostering small and mid-sized enterprises. Private investment is targeted to rise by an average of 9.4% per year in real terms through 2020. Furthermore, liquidity is being enhanced by the Employee Protection Fund, which promised an injection of RM 586 million which will help inject much-needed funds, providing the capital for exciting new start-ups.

An Aging Population

The government has to be prepared for a demographic crisis as even with the increase in the minimum retirement age from 55-60 in 2013; there is a pressing need to increase it retirement coverage. Whilst the population base remains young, it is expected that 11% of Malaysian will be 60 years of age or older by 2020. The creation of Private Retirement Schemes (PRS) might be a solution. PRS provides a range of voluntary and privately managed funds to offer Malaysians the option of building up a private pension and the existing mandatory private pension scheme. It has been seen to be popular among young Malaysian which will provide a long-term injection liquidity of the country capital market as greater demand for long-term bonds and other long-term asset classes. By the end of 2013, RM280 million assets were under the management showing it rise in popularity among the young working population.

Moving Forward

Compared to its neighbors, the other three tiger club economies; Malaysia was and some might argue still is in a better position than the rest to join the advanced economies club. However, its vision of 2020 can only be achieved if reforms and economic diversification continues. But most importantly keeping the country’s different ethnicity and faith communities together in a workable social contract is key. Balancing the impact of the changing times with the need for continued unity and reflect Malaysia’s long-standing tourism slogan – Malaysia Truly Asia which means Malaysians are an amalgamation of ethnicity, or not it will be a vision beyond reach.

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