BMI Malaysia Country Risk Report Q4 2016

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Malaysia
Country Risk Report
Includes 10-year forecasts to 2025
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Q4 2016
Contents
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Change...................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7

SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Maintaining Growth Forecast Amid Headwinds...........................................................................................................................8
Ongoing weakness in the Chinese economy and domestic headwinds will continue to weigh on Malaysia's economic growth. However,
we expect accommodative monetary and fiscal policies to lend some support to the economy, and we forecast 2016 real GDP growth to
come in at 4.5%.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS...................................................................................................................................................................... 9
TABLE: PRIVATE CONSUMPTION FORECASTS.................................................................................................................................................. 10
TABLE: GOVERNMENT CONSUMPTION FORECASTS....................................................................................................................................... 10
TABLE: FIXED INVESTMENT FORECASTS.......................................................................................................................................................... 10
TABLE: NET EXPORTS FORECASTS.................................................................................................................................................................... 10
Fiscal Policy And Public Debt Outlook.................................................................................................................. 11
Fiscal Position Intact As GST Takes Off.....................................................................................................................................11
The relatively successful implementation of GST in April 2015 and ongoing efforts to strengthen the revenue collection system bode well
for Malaysia's fiscal position, even as petroleum revenues continue to fall. With GST's share of government revenue increasing slowly,
we maintain our forecast for the country's 2016 fiscal deficit to come in at 3.1% of GDP, and note that Malaysia remains on the path of
gradual fiscal consolidation.
Structural Fiscal Position........................................................................................................................................ 11
TABLE: MAIN EXPENDITURE & REVENUE CATEGORIES.................................................................................................................................. 12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS............................................................................................................................................... 12
Monetary Policy........................................................................................................................................................ 13
Policy Stance Remains Unchanged Despite New Governor.....................................................................................................13
In line with expectations, BNM kept its OPR steady at 3.25% during its May 19 monetary policy meeting. We maintain our forecast
for rates to remain on hold throughout the year as the central bank seeks to support growth against a backdrop of external
headwinds.
Monetary Policy Framework.................................................................................................................................... 14
TABLE: MONETARY POLICY FORECASTS.......................................................................................................................................................... 14
Currency Forecast.................................................................................................................................................... 15
MYR: Remaining Neutral Amid Global Uncertainties.................................................................................................................15
The Malaysian ringgit has traded within a tight range over the past few months, and we expect the currency to remain range bound amid
continued uncertainty in global financial markets. As such, we maintain our 2016 average forecast at MYR4.100/USD and forecast the
currency to appreciate gradually over the longer term as an undervalued real effective exchange rate and a modest current account
surplus provide structural support.
TABLE: BMI CURRENCY FORECAST.................................................................................................................................................................... 15
Outlook On External Position.................................................................................................................................. 16
TABLE; MAIN IMPORTS & EXPORTS.................................................................................................................................................................... 16
TABLE: MAIN IMPORT & EXPORT PARTNERS.................................................................................................................................................... 16
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE......................................................................................................................................... 17
TABLE: CURRENT ACCOUNT BALANCE FORECASTS....................................................................................................................................... 17
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MALAYSIA Q4 2016
Chapter 2: 10-Year Forecast................................................................................................................... 19

The Malaysian Economy To 2025........................................................................................................................... 19
Productivity Gains To Support 4.0% Real Growth.....................................................................................................................19
Owing to strong demographic trends, a continually improving business environment, and further ASEAN economic integration, we see
Malaysian real GDP having a compound annual average growth rate of 4.5% (6.5% in nominal US dollar terms) over the next decade.
While this is slightly below the 5.1% (10.5% in nominal US dollar terms) rate seen over the past decade, this largely reflects lower
growth in the working age population, while labour productivity growth is set to rise.
TABLE: LONG-TERM MACROECONOMIC FORECASTS..................................................................................................................................... 19
Chapter 3: Political Outlook................................................................................................................... 23

SWOT Analysis......................................................................................................................................................... 23
BMI Political Risk Index........................................................................................................................................... 23
Domestic Politics..................................................................................................................................................... 24
By-Election Victories To Further Bolster Najib's Position........................................................................................................24
Malaysia's ruling BN coalition's convincing victory during the two by-elections held on June 18 indicates that embattled PM Najib Razak
still holds a considerable degree of support from the electorate. As such, we maintain our view that Najib will continue to consolidate his
position and is likely to remain as PM until the next general election in 2018.
TABLE: POLITICAL OVERVIEW............................................................................................................................................................................. 24
Long-Term Political Outlook................................................................................................................................... 26
Race Relations Still Cloud The Horizon......................................................................................................................................26
Malaysia's ethnic diversity will continue to influence domestic politics, and the rise of a stronger opposition presents myriad possibilities
in the political arena over the longer term.
Chapter 4: Operational Risk................................................................................................................... 29

SWOT Analysis......................................................................................................................................................... 29
Operational Risk Index............................................................................................................................................ 29
Operational Risk....................................................................................................................................................... 30
TABLE: OPERATIONAL RISK................................................................................................................................................................................. 30
Market Size And Utilities Analysis.......................................................................................................................... 31
TABLE: ASIA MARKET SIZE AND UTILITIES..................................................................................................................................................... 32
Labour Costs............................................................................................................................................................ 35
Latest Labour Costs Analysis......................................................................................................................................................36
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE............................................................................................... 37
Chapter 5: BMI Global Macro Outlook................................................................................................... 39

Global Macro Outlook.............................................................................................................................................. 39
Brexit Risk Casts A Long Shadow...............................................................................................................................................39
TABLE: GLOBAL ASSUMPTIONS.......................................................................................................................................................................... 39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %.................................................................................................................................... 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %................................................................................................................................... 41
TABLE: MACROECONOMIC DATA & FORECASTS.............................................................................................................................................. 43
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Executive Summary
Core Views Major Forecast Change

Ongoing weakness in the Chinese economy and domestic headwinds We have downgraded our 2016 end-year forecast to MYR4.050/USD
will continue to weigh on Malaysia's economic growth. However, we from MYR3.950/USD previously to reflect turmoil in global financial
expect accommodative monetary and fiscal policies to lend some markets as a result of the UK's decision to leave the EU on June 23.
support to the economy, and we forecast 2016 real GDP growth to
come in at 4.5%. Key Risks
Malaysia's economy is relatively well diversified and not particularly
The relatively successful implementation of GST in April 2015 and at risk from external shocks. The largest threat to the Malaysian
ongoing efforts to strengthen the revenue collection system bode well economy comes from a rapid unwind of the household credit boom
for Malaysia's fiscal position even as petroleum revenues continue that has taken place over the past few years since the global finan-
to fall. With GST's share of government revenue increasing slowly, cial crisis. This has the potential to result in a collapse in domestic
we maintain our forecast for the country's 2016 fiscal deficit to come demand amid declining property prices. This is not our core view,
in at 3.1% of GDP, and note that Malaysia remains on the path of however, as debt service ratios remain manageable at current levels.
gradual fiscal consolidation.
Increasing economic dependence with China could also have an
In line with expectations, BNM kept its OPR steady at 3.25% at its adverse effect on the Malaysian economy should the Chinese
May 19 monetary policy meeting. We maintain our forecast for rates economy experience an acute slowdown.
to remain on hold throughout the year as the central bank seeks to
support growth against a backdrop of external headwinds.
The Malaysian ringgit has traded within a tight range over the past
few months, and we expect the currency to remain range bound
amid continued uncertainty in global financial markets. As such,
we maintain our 2016 average forecast at MYR4.100/USD and
forecast the currency to appreciate gradually over the longer term as
an undervalued real effective exchange rate and a modest current
account surplus provide structural support.
Malaysia's ruling BN coalition's convincing victory during the two by-

elections held on June 18 indicate that embattled PM Najib Razak
still holds a considerable degree of support from the electorate. As
such, we maintain our view that Najib will continue to consolidate his
position and is likely to remain as PM until the next general election
in 2018.
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Chapter 1:
Brief Methodology
Economic Outlook
SWOT Analysis BMI Economic Risk Index

Malaysia's short-term economic risk score of 74.6, reflecting the country's
Strengths growth prospects in the near term. The country's long-term economic
Over the past four decades Malaysia has transformed itself from risk score stands at 71.2 in anticipation of slower external sector growth.
a commodity dependent economy into a major world source for A closer look into the numbers indicates that fiscal concerns remain the
electronics and computer parts. biggest risk factor to Malaysia's generally positive economic outlook.
It is one of the world's largest producers of rubber, palm oil, pepper,
and tropical hardwoods, and is still a net exporter of hydrocarbons. S-T Trend Regional Global
Economic Rank Rank
All this provides a solid platform for economic growth. South Korea 84.2 = 1 1
Taiwan 77.3 = 2 5
Weaknesses Singapore
Hong Kong
76.7
75.8
=
=
3
4
7
8
Economic openness can be as much of a burden as a benefit, since China 75.2 = 5 10
Malaysia 74.6 = 6 13
it confers a high degree of vulnerability to global growth and capital Philippines 74.6 - 6 13
Thailand 71.0 = 8 24
India 67.5 = 9 31
flows. Indonesia 67.5 = 9 31
Vietnam 67.3 = 11 34
Oil-related taxes contribute around 30% of the state's revenues. The Bangladesh 66.7 = 12 37
Japan 65.8 = 13 40
lack of alternative income poses a threat to the government's ability New Zealand 65.6 = 14 41
Macau 65.0 = 15 42
to function and sustain economic development, potentially leading Australia 64.2 = 16 45
Timor-Leste 59.0 = 17 62
to economic stagnancy. Bhutan 57.1 = 18 65
Fiji 55.6 = 19 68
Opportunities Pakistan
Myanmar
55.2
51.3
=
=
20
21
70
85
Papua New Guinea 50.6 = 22 88
Opportunities for private sector-led growth will improve as the govern- Sri Lanka 49.0 = 23 102
Cambodia 46.7 - 24 110
ment continues to divest state shareholdings in order to raise funds Nepal 44.6 = 25 121
Kiribati 44.4 = 26 122
to narrow the budget deficit. Brunei Darussalam 43.1 = 27 129
Mongolia 39.2 = 28 146
Rising consumption levels will provide new growth avenues in Laos 34.6 = 29 162
Afghanistan 34.0 = 30 163
industries such as retail. North Korea na
Regional ave 60.1 / Global ave 51.5 / Emerging Markets ave 47.1
Malaysia's majority Muslim population and the government's ongoing
efforts to boost Islamic finance could see Malaysia become a major L-T Trend Regional Global
financial hub. Economic Rank Rank
South Korea 78.9 = 1 1
Threats China
Singapore
75.4
75.1
=
=
2
3
6
7
Wages are higher in Malaysia than in a number of its competitors, Hong Kong 73.4 = 4 14
Taiwan 72.9 = 5 16
New Zealand 71.8 = 6 20
such as China and Vietnam, which could be a long-term hindrance Philippines 71.5 - 7 21
Malaysia 71.2 = 8 22
to economic expansion. To maintain its competitive edge, Malaysia Australia 71.0 = 9 23
Thailand 69.3 = 10 27
needs a steady stream of inward investment. Indonesia 67.9 = 11 32
Japan 65.7 = 12 41
Dependence on migrant labour, particularly for low-skilled jobs, India 65.3 = 13 42
Vietnam 64.0 = 14 45
poses a threat to long-term economic stability. Bangladesh 62.5 = 15 51
Fiji 57.2 = 16 68
Macau 56.1 = 17 72
The over-reliance on oil poses a threat to the government's ability Pakistan 54.6 = 18 76
Brunei Darussalam 53.8 = 19 83
to fund and sustain economic development. Sri Lanka 52.9 = 20 88
Papua New Guinea 51.4 = 21 94
Nepal 45.9 = 22 119
Cambodia 44.9 - 23 123
Myanmar 43.3 = 24 131
Kiribati 40.7 = 26 145
Bhutan 39.3 = 27 152
Mongolia 38.4 = 29 157
Laos 37.8 = 30 162
North Korea na

MALAYSIA Q4 2016
Economic Growth Outlook Manufacturing Exports

To Continue Facing Headwinds
Maintaining Growth We continue to anticipate a slowdown in Chinese economic
Forecast Amid Headwinds growth in 2016 to 6.3%, which will have a significant impact on
Malaysia's export-driven economy as China is one of Malaysia's
BMI VIEW largest export markets. Despite signs of stabilisation in the real
Ongoing weakness in the Chinese economy and domestic headwinds estate market, the Chinese economy is nowhere near escaping
will continue to weigh on Malaysia's economic growth. However, we from its long-term downtrend, as all of the structural factors
expect accommodative monetary and fiscal policies to lend some sup- which we have identified as undermining its growth potential
port to the economy, and we forecast 2016 real GDP growth to come remain in place (see 'Weekly Recap: Property Market Returns
in at 4.5%. To Support Growth', May 20). The poor import performance
Exports Taking A Beating in particular underscores the degree to which the Chinese
GDP By Expenditure, % chg y-o-y economy remains under pressure, pointing towards a further
slowdown going forward. Considering that Malaysian exports
to China mostly consist of intermediate goods, the decline in
Chinese imports does not bode well for the Malaysian economy.
Accordingly, we expect Malaysian exports to perform poorly
compared to historical averages over the coming quarters due
to external headwinds.
On A Downtrend
Malaysia Exports (In USD)
Source: BMI, Department of Statistics
We maintain our forecast for real GDP growth to slow to 4.5%

in 2016, versus 5.0% in 2015. While accommodative monetary
and fiscal policies will lend some support, ongoing weakness in
the Chinese economy and domestic headwinds will continue to
weigh on economic growth in Malaysia. Malaysia's economy
grew at a real rate of 4.2% y-o-y in Q116 following a 4.5%
expansion in the previous quarter due to a slowdown in export
Source: BMI, Bloomberg
growth and gross fixed capital formation. In seasonally adjusted
annualised q-o-q terms, the economy grew by 1.0% in Q116, In addition, the ongoing drought and government policy U-turns
a slightly slower rate than the 1.2% in the previous quarter. regarding labour policies will continue to undermine agricultural
and manufacturing production. While there are signs that the
Figures from the expenditure and production accounting drought that has gripped portions of Peninsular Malaysia is
methods indicate a mixed picture, with both the manufacturing abating, this will not provide considerable relief for agricultural
and services sectors expanding fairly robustly while exports production this year as many have been unable to sow their
recorded a considerable slowdown. From the production side, crops due to the lack of water. Falling water levels have also
both manufacturing and services grew by 4.5% y-o-y and 5.1% weighed on production in affected areas, with water being a key
y-o-y respectively (compared with 5.0% for both sectors in component in the production of manufactured products such as
Q415). However, real exports expanded at a significantly slower rubber gloves (of which Malaysia is a top global producer). The
rate, coming in at 0.5% y-o-y (versus a 3.7% in the previous government's policy regarding the freezing of the hiring of foreign
quarter). On the expenditure side, gross fixed capital formation labour has also weighed on the manufacturing, agricultural, and
also slowed to 0.1% y-o-y in Q116 from the 2.8% previously. construction sectors, and while the government has loosened

ECONOMIC OUTLOOK
regulations slightly, these sectors continue to face production Malaysia to keep the Overnight Policy Rate (OPR) on hold at
bottlenecks due to existing labour shortages (see 'Manufacturers 3.25% throughout 2016.
Gain Brief Respite From Partial Labour Ban Lift', May 12).
Still In Contraction
Remaining In Decline Auto Sales, % chg y-o-y
PMI, % chg y-o-y

This will enable the central bank to support growth while mini-
No Support mising volatility in the MYR. Fiscal policy has also remained
From The Domestic Economy supportive of growth, with the government reaffirming its
External headwinds and weather conditions have led to the commitment to investing in infrastructure to ensure long-term
slowing of the economy and this, in addition to the 6.0% goods growth in its 2016 revised budget. We believe that the emphasis
and services tax (GST) implemented on April 1 2015, have had on infrastructure will be positive in helping the country as it
a negative impact on domestic spending. With producers delay- seeks to achieve developed status by 2020. Continued support
ing investment decisions and reducing production, households for human capital development will also be beneficial for longer-
have also started to cut back on spending as the price of goods term growth as Malaysia seeks to move up the value chain and
increases. This is best seen in the sharp decline in car sales towards more human capital intensive industries.
since GST was implemented in 2015. Auto sales, which are a
reliable leading indicator of the business cycle, have declined
sharply, suggesting that domestic conditions are likely to remain
challenging. GDP By Expenditure Outlook
Fiscal And Monetary Private Consumption Outlook: At approximately 50%, private
Policies Remain Supportive consumption comprises a fairly large share of Malaysia's GDP
With growth facing the aforementioned headwinds, we expect in comparison to other developing markets. Given our forecast
monetary and fiscal policy to remain supportive, which will for private consumption growth to outpace headline real GDP
help prop up economic growth. Monetary conditions will re- growth over the long term, we expect private consumption's share
main sufficiently accommodative and we forecast Bank Negara of the economy to slowly rise to 56.5% over the next 10 years.
TABLE: GDP GROWTH FORECASTS

2014 2015 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f
Nominal GDP, 1,070.0 1,156.9 1,241.6 1,334.3 1,425.4 1,520.0 1,620.8 1,727.1 1,839.5 1,959.2 2,086.8 2,222.8
MYRbn
Real GDP 6.0 5.0 4.5 5.0 4.6 4.4 4.4 4.4 4.3 4.3 4.3 4.3
growth, % y-o-y
GDP per capita, 35,783.8 38,141.9 40,374.5 42,816.4 45,150.9 47,540.6 50,062.5 52,697.7 55,452.6 58,369.2 61,461.2 64,742.5
MYR
f = BMI forecast. Source: BMI, Bank Negara Malaysia

MALAYSIA Q4 2016
Government Consumption Outlook: At around 13% of GDP, modest external surpluses. We believe that the shift away from
government consumption plays a limited role in Malaysia. We export-led growth will lead to a gradual decline in Malaysia's
expect this proportion to fall slightly over the long-term as the trade surplus over the long term, but expect the current account
government actively seeks to balance its budget through the to run a small surplus for the next 10 years.
curtailment of expenditure as well as through reducing govern-
ment subsidies.
Fixed Investment Outlook: Investment as a share of the

economy will likely remain fairly constant over the next ten
years as the government continues to invest in infrastructure
as part of the its economic development plans. We forecast it
to rise to 27.1% in the next ten years, versus 26.2% in 2014.
Net Export Outlook: Having adopted an export-oriented growth

model, total exports total approximately 70% of GDP. Malay-
sia's net export position is also positive, which contributes to its
TABLE: PRIVATE CONSUMPTION FORECASTS

2014 2015 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f
Private final consumption, 554.4 626.0 677.0 731.4 785.6 843.0 903.7 968.8 1,038.6 1,113.5 1,193.7 1,279.7
MYRbn
Private final consumption, 51.8 54.1 54.5 54.8 55.1 55.5 55.8 56.1 56.5 56.8 57.2 57.6
% of GDP
Private final consumption, 7.0 6.0 5.3 5.5 5.2 5.1 5.0 5.0 5.0 5.0 5.0 5.0
real growth % y-o-y
TABLE: GOVERNMENT CONSUMPTION FORECASTS

2014 2015 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f
Government final consumption, 141.4 152.1 162.5 173.1 182.9 193.4 204.6 216.2 228.5 241.4 255.1 269.6
MYRbn
% of GDP
real growth % y-o-y
TABLE: FIXED INVESTMENT FORECASTS

2014 2015 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f
Fixed capital formation, 282.6 302.9 327.9 353.6 379.0 406.0 434.4 463.9 495.4 529.1 565.1 603.5
MYRbn
% of GDP
real growth % y-o-y
BMI/Bank Negara Malaysia
TABLE: NET EXPORTS FORECASTS

2014 2015 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f
Net exports of goods and 104.5 88.4 88.0 91.4 94.3 95.4 97.2 98.9 99.3 99.4 99.2 98.4
services, MYRbn
Net exports of goods and 9.8 7.6 7.1 6.9 6.6 6.3 6.0 5.7 5.4 5.1 4.8 4.4
services, % of GDP
Net exports of goods and 12.8 -3.7 -2.4 1.7 1.3 -0.5 0.2 0.1 -1.0 -1.3 -1.6 -1.9
services, real growth %
y-o-y

ECONOMIC OUTLOOK
compared to GST, which is levied on multiple levels), we expect

Fiscal Policy And GST to continue minimising tax leakages throughout the system.
Public Debt Outlook The government has made continued efforts to ensure smooth
revenue collection, providing assistance to small and medium
Fiscal Position Intact As GST Takes Off businesses to enable them to file their taxes properly, while
cracking down hard on GST dodgers. These ongoing efforts
BMI VIEW to strengthen the system will further bolster the government's
The relatively successful implementation of GST in April 2015 and on- revenue collection abilities. To date, it appears as though efforts
going efforts to strengthen the revenue collection system bode well to implement GST have been reaping benefits, with GST's share
for Malaysia's fiscal position, even as petroleum revenues continue to of total government revenue increasing from 13.7% in Q215 to
fall. With GST's share of government revenue increasing slowly, we 20.8% in Q116. We expect this share to continue rising as the
maintain our forecast for the country's 2016 fiscal deficit to come in at government persists with its efforts to tighten revenue collection,
3.1% of GDP, and note that Malaysia remains on the path of gradual and expect it to help offset the fall in petroleum-related revenues.
fiscal consolidation.
Revenues From GST Rising Gradually Recovery In Brent
GST & Petroleum Income Tax, % Of Total Government Revenue
To Lend Some Support
Furthermore, the recovery in Brent prices will lend a degree of
support, enabling the government to remain on the path of fiscal
consolidation. Brent has risen from its lows in January this year
and has averaged USD40.00 per barrel (/bbl) so far in 2016.
This is considerably higher than the government's estimates of
USD30.00-35.00/bbl, and lower than our Oil and Gas team's
forecast for Brent to average USD46.00/bbl in 2016. With the
government having recalibrated the budget to account for lower
oil revenues, we believe that higher oil prices will be a positive
tailwind for the budget balance, enabling Putrajaya to meet its
target for the 2016 budget deficit to come in at 3.1% of GDP.
GST Here To Stay

Source: BMI, BNM
As such, we view the government's efforts to persist with the
Introduced in the 2014 budget, Malaysia's 6.0% goods and implementation of GST despite opposition from small busi-
services tax (GST) was implemented on April 1 2015 and nesses and the electorate as positive for fiscal consolidation
represents as an important step in the government's attempts to efforts, and believe that the strict adherence to fiscal discipline
obtain a balanced budget over the medium term. In our view, continues to send a positive signal to investors. Given the rising
the relatively successful implementation of GST amid ongoing share of GST as a proportion of the government's revenues, it
efforts to strengthen the country's tax collection system bode well is also unlikely that Putrajaya will roll back GST at any point
for Malaysia's fiscal position as petroleum revenues continue in the near future despite its unpopularity among the electorate.
to fall. The slight recovery in oil prices will also lend a degree
of support, with the government deriving approximately 30%
of its total revenue from oil and oil related taxes. With GST's
share of government revenue increasing slowly, we maintain Structural Fiscal Position
our forecast for the 2016 fiscal deficit to come in at 3.1% of
GDP, and note that Malaysia remains on the path of gradual Government debt: After years of fiscal deficits following the
fiscal consolidation. Asian financial crisis in 1998, Malaysia has built up a govern-
ment debt-to-GDP ratio of approximately 55%. With external
GST Rising In Importance government debt being minimal, it is unlikely that the government
Being a more broad-based tax system than the previous sales will face any credit shortages in the near future. Furthermore,
and service tax (only imposed on one level of the supply chain debt levels remain manageable.

MALAYSIA Q4 2016
Fiscal deficit: We expect Malaysia's fiscal balance to gradually negatively. We see further decreases in spending relative to GDP,
return to surplus following many years of running a fiscal deficit particularly as the government continues on its fiscal consolida-
as the government seeks to balance the budget. tion path. Tax revenues will, however, remain on their gradual
uptrend following the implementation of GST.
Fiscal And Public Debt Forecasts
Gross Debt & Fiscal Balance (2007-2025)
Government Spending & Revenue Projections
Government Spending & Revenue (2007-2025)

As part of its fiscal consolidation attempts, the government has
gradually rolled back subsidies, which will reduce government
expenditure, as well as remove some inflationary pressures in
the economy.
Government share of GDP: Malaysia has historically had

relatively low levels of spending as a share of GDP, and the
government has room to raise taxes without impacting growth
TABLE: MAIN EXPENDITURE & REVENUE CATEGORIES

Main Sources Of Revenue % Of Total Main Areas Of Expenditure % Of Total
Corporate Tax 27.5 Emoluments 32.6
Indirect Taxes 18.4 Grants And Transfers 27.7
Income Tax 15.5 Subsidies 11.0
Returns On Investment 14.8 Debt Repayment 10.5
Petroleum Taxes 11.3 Pensions 8.6
Others 12.5 Others 9.6
Source: BMI, BNM
TABLE: FISCAL AND PUBLIC DEBT FORECASTS

2014 2015 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f
Fiscal revenue, MYRbn 220.6 219.1 224.8 232.4 240.6 249.2 258.4 268.3 278.7 289.9 301.8 316.9
Total revenue, MYR, 3.4 -0.7 2.6 3.4 3.5 3.6 3.7 3.8 3.9 4.0 4.1 5.0
% y-o-y
Fiscal expenditure, 258.0 256.3 262.7 269.3 275.7 282.1 288.6 294.9 301.4 307.7 317.3 330.3
MYRbn
Total expenditure, MYR, 2.4 -0.7 2.5 2.5 2.4 2.3 2.3 2.2 2.2 2.1 3.1 4.1
% y-o-y
Budget balance, MYRbn -37.4 -37.2 -37.9 -36.8 -35.2 -32.8 -30.1 -26.6 -22.7 -17.8 -15.5 -13.4
Budget balance, % of -3.5 -3.2 -3.1 -2.8 -2.5 -2.2 -1.9 -1.5 -1.2 -0.9 -0.7 -0.6
GDP

ECONOMIC OUTLOOK
Monetary Policy Growth Still The Main Focus

Malaysia's Q116 GDP grew at a real rate of 4.2% y-o-y, marking
Policy Stance Remains its slowest growth since Q309. The economy was dragged down
Unchanged Despite New Governor by external weakness and a slowdown in private investment.
We expect the external environment to remain challenging due
BMI VIEW to still-low oil prices and the ongoing economic slowdown in
In line with expectations, BNM kept its OPR steady at 3.25% during its China, Malaysia's largest trade partner. As such, we expect
May 19 monetary policy meeting. We maintain our forecast for rates to BNM to focus on keeping monetary policy sufficiently accom-
remain on hold throughout the year as the central bank seeks to sup- modative by maintaining its policy stance. In its statement,
port growth against a backdrop of external headwinds. BNM noted that the moderate growth was temporary, and was
expected to improve in the second half of 2016 on the back of
Bank Negara Malaysia (BNM) held its Overnight Policy Rate higher manufacturing and improved commodities production.
steady at 3.25% during its monetary policy meeting on May Accordingly, it is unlikely that the central bank will cut rates in
19. In its accompanying monetary policy statement, the central a bid to support growth as it expects the economy to gradually
bank adopted a slightly dovish tone, stating that 'structural is- pick up as external conditions improve.
sues and geopolitical developments will continue to constrain
growth of the global economy despite the highly accommoda- Back In Range
CPI, % chg y-o-y
tive monetary conditions'. With inflationary pressures likely
to remain manageable, we expect the central bank to focus on
supporting growth while providing stability by standing pat on
rates throughout 2016.
On A Downtrend
Real GDP, % chg y-o-y
Inflation Remaining Stable

Headline inflation has remained within the central bank's target
range of 2.5-3.5%, coming in at 2.6% y-o-y in March, a sharp
decline from the 3.5% recorded in February. We expect the rise
in food prices due to the ongoing drought to present upside infla-
tionary pressures. However, the impact of lower oil prices will
This meeting was the first chaired by the new central bank governor, cap imported inflation, with our Oil and Gas team forecasting
Muhammad Ibrahim, having taken over from former governor oil to average USD46.5 per barrel in 2016. Our view on inflation
Zeti Akhtar Aziz in the beginning of May. Having been trained was echoed by BNM, which noted that inflation 'is expected to
as Zeti's successor, Muhammad has been viewed as a continuity trend lower for the rest of the year due to the low energy and
candidate who is likely to maintain BNM's cautious approach commodity prices and the generally subdued global inflation'.
towards monetary policy. Indeed, the monetary policy statement Inflation is thus likely to remain within BNM's target range,
showed little deviation from BNM's previous stance, suggesting enabling it to keep rates on hold throughout 2016. We therefore
that the central bank will continue to adopt a careful approach maintain our 2016 end-year and average inflation forecasts at
towards policy making. BNM further noted that 'financing condi- 2.7% and 2.9%, respectively.
tions remain supportive of economic growth', indicating that rates
are likely to remain on hold over the coming months.

MALAYSIA Q4 2016
Rate Cut Risks Rising and hence inflationary pressures in recent years. The gradual
However, we believe that rate cut risks are rising as the Malaysian removal of government subsidies as part of the government's
economy continues to face an increasingly challenging internal move towards fiscal consolidation will also lessen distortions
and external environment. Despite cutting the Statutory Reserve in the market, reducing inflationary pressures.
Requirement Ratio to 3.50% in February, liquidity conditions
Long-Term Inflation Forecasts
have deteriorated, with both M2 and M3 growth falling to 0.9% Consumer Price Inflation (2007-2025)
y-o-y in March (compared with 2.8% and 2.7%, respectively, in
February). In addition, while growth has remained in positive
territory, it has been on a gradual downtrend. With BNM having
previously cut rates in 2009 amid a sharp downturn, the central
bank could loosen monetary policy in H216 should growth fail
to pick up as expected.
Monetary Policy Framework

We forecast inflation to average 2.3% from 2016-2020 and
interest rates to remain between 3.25-3.50% over the same
period. This is largely in line with the 2.4% averaged over the
past 15 years. The CPI basket is predominantly made up of food stuffs (33%),
energy and rent (25%), and transport (15%) which has made
CPI Breakdown
CPI Breakdown, % Of Total
inflation largely dependent on food and oil prices. The sharp rise
in housing prices from 2010-2014 has had a significant impact on
inflation. That being said, central bank policies to curb rapidly
rising house prices as well as attempts by the government to
improve the management of food supplies will keep pressures
contained for the foreseeable future.
Money supply has expanded by an average of about 12% over

the past decade and we expect this to decline slightly over
the coming years as a result of government policies aimed at
curbing speculation in the housing market, forecasting money
supply growth to average 7.5% over the coming years, thus
anchoring inflation.
Interest rates remain in line with historical averages as Bank

Negara Malaysia (BNM) has sought to control money supply
TABLE: MONETARY POLICY FORECASTS

2014 2015 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f
Consumer price inflation, 2.7 2.7 2.7 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
% y-o-y, eop
M2, MYRbn 1,544.7 1,589.2 1,684.6 1,810.9 1,928.6 2,034.7 2,136.4 2,243.2 2,355.4 2,473.2 2,621.6 2,778.8
M2, % y-o-y 7.4 2.9 6.0 7.5 6.5 5.5 5.0 5.0 5.0 5.0 6.0 6.0
Central bank policy rate, 3.25 3.25 3.25 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50
% eop

ECONOMIC OUTLOOK
Currency Forecast inflationary pressures set to stay within Bank Negara Malaysia's
(BNM) targeted band of 2.5-3.5%, the central bank is unlikely
MYR: Remaining Neutral to hike rates in a bid to curb inflation. Instead, we forecast BNM
Amid Global Uncertainties to keep rates on hold through H216 as a means of providing
financial stability. We therefore remain largely neutral on the
BMI VIEW MYR against the US dollar over the remainder of the year,
The Malaysian ringgit has traded within a tight range over the past few with volatility likely to die down over the next few months. In
months, and we expect the currency to remain range bound amid con- light of the aforementioned factors, we have downgraded our
tinued uncertainty in global financial markets. As such, we maintain our 2016 end-year forecast to MYR4.050/USD from MYR3.950/
2016 average forecast at MYR4.100/USD and forecast the currency USD previously.
to appreciate gradually over the longer term as an undervalued real Cheap By Historical Standards
Real Effective Exchange Rate
effective exchange rate and a modest current account surplus provide
structural support.
Short-Term Outlook
(three-to-six months)
The MYR has depreciated by approximately 2.5% amid turmoil
in global financial markets as a result of the decision by the UK
to leave the EU on June 24. However, we expect the currency to
stabilise as calm eventually returns to the market. In addition,
the US Fed is now unlikely to pursue further interest rate hikes
before the end of 2016. Once the market begins to price this in,
it will provide support for EM FX.
4.00 Resistance Level Still Holding Up
Exchange Rate, MYR/USD Source: BMI, Bloomberg, BIS
Long-Term Outlook (six-to-24 months)

Over the long term, we maintain our slight appreciatory bias on
the MYR as a result of its solid fundamentals and forecast the
currency to average MYR3.980/USD in 2017. We expect a return
to stability once the global markets have processed the effects
of Brexit, restoring certainty to the markets. Furthermore, an
undervalued real effective exchange rate and a modest current
account surplus should provide structural support for the unit.
Return To Political Stability Good For MYR

Much of the currency's weakness over the past two years has
been the result of continued political instability in Malaysia,
particularly with regard to concerns over indebted sovereign
Furthermore, interest rate differentials between Malaysia and the wealth fund, 1 Malaysia Development Berhad's (1MDB) abil-
US remain in favour of the ringgit, and we expect this relation- ity to repay its loans. However, it appears as though the fund
ship to remain intact, which will cap excessive weakness. With has reached a resolution of sorts with its creditors and is in the
TABLE: BMI CURRENCY FORECAST

Spot 2016 2017
MYR/USD, ave 4.09 4.10 3.98
MYR/EUR, ave 4.52 4.39 4.37
BNM Policy Rate, % eop 3.25 3.25 3.50
Source: BMI, June 28 2016

MALAYSIA Q4 2016
process of repaying these debts. This should provide some sup- Risks To Outlook
port for the currency despite global uncertainties. Furthermore, Being a relatively open economy, the currency is vulnerable to
embattled Prime Minister Najib Razak continues to consolidate changes in global market conditions, contributing to currency
his position, and we believe that the ruling coalition's election volatility. With global political risks such as a possible Trump
victories in Sarawak, Kuala Kangsar, and Sungai Besar have presidency in the US and continued risks from the Brexit pro-
further strengthened Najib's position within the government. cess being high for the remainder of 2016 and through 2017,
The gradual abatement of political tensions should thus lead to the MYR is likely to be adversely affected by these changes.
the return of investor confidence and currency strength. In particular, these risks are likely to lead to increased daily
volatility of Brent prices, which will have a negative impact
Furthermore, market perceptions that the Malaysian economy on the MYR. A sharp fall in crude oil prices therefore presents
is more dependent on crude oil than it is in reality have led the a significant risk to our forecast, with investor confidence in
currency to move in tandem with Brent oil prices. With our Oil the MYR being largely linked to moves in commodity prices
and Gas team expecting oil prices to recover gradually in 2017 as Malaysia is a net exporter of hydrocarbons. Additionally, a
and 2018 (averaging USD57.00 per barrel [/bbl] and USD62.00/ significant depreciation of the CNY could also see the MYR
bbl, respectively), compared to USD46.50/bbl in 2016, we weaken considerably in tandem with one of the country's largest
believe that the recovery in crude oil prices will provide some trade partners. On the other hand, a further rally in oil prices
support for the MYR. could see the ringgit head higher.
Positive Growth-Inflation
Dynamics To Provide Support
In addition, positive growth and inflation dynamics relative Outlook On External Position
to the US will continue to provide some degree of support for
the ringgit. Although we expect inflation in Malaysia relative Current Account: The current account posted a surplus of
to the US to be slightly higher, stronger growth and higher 2.9% in 2015 and continues to provide a degree of support for
interest rates are likely to outweigh inflationary pressures. We the currency. Over the coming years, we forecast a stabilisation
expect real GDP growth in Malaysia to outperform the US as of the current account surplus to between 2.6-3.0%. This will
domestic economic strength helps offset external weaknesses. be largely driven by faster import growth as the country seeks
Furthermore, we forecast inflation to remain within the cen- to move away from export-dependent growth and towards the
tral bank's target range, which will keep real interest rates in development of the services sector. With imports set to rise
positive territory. These factors will lend a degree of support to faster than exports, we forecast the trade balance to narrow
the currency. slightly over the next five years from 9.8% of GDP to 6.7% of
GDP (2016-2020), which will lead to declining import cover.
TABLE; MAIN IMPORTS & EXPORTS

Main Export Products % Of Total Main Import Products % Of Total
Machinery 40% Machinery 31%
Mineral Products 24% Mineral Products 19%
Animal & Vegetable By Products 7% Metals 11%
Plastics & Rubbers 6% Chemicals 7%
Metals 4% Transport 7%
Source: UN Comtrade
TABLE: MAIN IMPORT & EXPORT PARTNERS

Main Export Destinations % Of Total Main Import Sources % Of Total
Singapore 14% China 19%
China 13% Singapore 12%
Japan 10% US 8%
US 9% Japan 8%
Thailand 6% Thailand 6%
Source: Department of Statistics

ECONOMIC OUTLOOK
Imports: Imports account for 63.4% of GDP, and have remained growth to come in slightly lower than historical levels around
on a gradual uptrend as the country continues to import materials 6.5% per year (compared to 8.3% over the last 20 years).
to build infrastructure as part of its economic development plans.
External Debt Forecasts
External Trade Position Total External Debt (2014-2025)
Net International Investment Position, MYRmn
e/f = BMI estimate/forecast. Source: BMI, World Bank

Exports: Exports account for 71.0% of GDP, and are well
The country's strong manufacturing base also suggests that diversified in terms of geography and product type. Malaysia's
imports are unlikely to fall significantly over the longer term. main export markets are Singapore (14%), China (12%), Japan
Malaysia imports the majority of its goods from China (18%), (10.5%), and the EU (10%). China is likely to maintain its
Singapore (12%), the EU (10%), and Japan (8%). Its main im- dominant position as Malaysia seeks to move up the value chain
ports include crude oil and refined petroleum products (13%), and produce higher end electronic products, which will play an
electronics (10%), and machinery (4%). We forecast import integral role in Asian supply chains. Its main exports include
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE

2010 2011 2012 2013 2014 2015
Financial account, USDbn -5.9 7.4 -7.3 -5.9 -23.4 -12.4
Net FDI inflows per capita, USD -154.7 -104.9 -270.2 -58.3 873.8 632.8
Net portfolio investment, USDbn 15.1 8.4 20.5 -1.0 5.7 -2.5
Source: National sources, BMI
TABLE: CURRENT ACCOUNT BALANCE FORECASTS

2014 2015 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f
Balance of trade in goods, 38.2 25.4 25.5 26.7 27.8 28.7 29.7 30.7 31.5 32.3 33.1 33.9
USDbn
Balance of trade in goods, % 11.7 8.6 8.4 8.0 7.6 7.2 6.9 6.6 6.3 6.0 5.7 5.4
of GDP
Balance of trade in services, -6.3 -4.8 -4.4 -3.9 -3.1 -2.3 -1.3 -0.2 0.9 2.3 3.7 5.3
USDbn
Balance of trade in services, -1.9 -1.6 -1.5 -1.2 -0.8 -0.6 -0.3 0.0 0.2 0.4 0.6 0.8
% of GDP
Income account balance, -11.4 -7.5 -8.1 -8.7 -9.4 -10.0 -10.8 -11.5 -12.3 -13.0 -13.8 -14.8
USDbn
Income account balance, % -3.5 -2.5 -2.7 -2.6 -2.5 -2.5 -2.5 -2.5 -2.5 -2.4 -2.4 -2.4
of GDP
Net transfers, USDbn -5.4 -5.2 -5.1 -5.0 -5.0 -5.0 -5.0 -5.0 -5.1 -5.3 -5.5 -5.8
Net transfers, % of GDP -1.6 -1.7 -1.7 -1.5 -1.4 -1.3 -1.2 -1.1 -1.0 -1.0 -0.9 -0.9
Current account balance, 15.1 7.9 7.9 9.0 10.4 11.3 12.6 13.9 15.0 16.3 17.5 18.6
USDbn
Current account balance, % 4.6 2.7 2.6 2.7 2.8 2.9 2.9 3.0 3.0 3.0 3.0 3.0
of GDP

MALAYSIA Q4 2016
electronics (35%), liquefied natural gas (9%), palm oil (7%),

and crude oil and refined petroleum products (10%). Exports
of electronics are likely to remain a key driver of growth in line
with the government's plans to further develop that sector. As
part of the ongoing ASEAN Economic Community integration
plans, exports to ASEAN (28%) are also likely to increase as
tariff and non-tariff barriers fall, facilitating the flow of products
across borders.
Current Account Balance Forecasts
Current Account Balance (2014-2025)
Foreign direct investment (FDI): Malaysia is a net recipient

of FDI, which accounts for the majority of inflows into the
economy. FDI reached USD 1.6bn in 2014 (6% of GDP) and we
expect this figure to rise as the country continues to encourage
private-public partnerships as part of its economic development
programme. The largest sources of FDI in 2014 were from the
EU (32%), Singapore (21%) and China (13%), and we expect
Chinese investment to continue to grow in importance. Ma-
laysia's relatively open financial account has enabled portfolio
inflows to enter and exit the country easily, resulting in some
volatility in its financial markets. However, portfolio inflows in
2014 only accounted for 2% of GDP, suggesting that volatility
will be capped.

Chapter 2:
10-Year Forecast
The Malaysian Economy To 2025 the economy's growth rate, they play second fiddle to business
environment developments that can boost, or undermine, labour
Productivity Gains productivity.
To Support 4.0% Real Growth Growth Set To Slow But Remain Strong
Real & Nominal GDP Growth, %
BMI VIEW
Owing to strong demographic trends, a continually improving business
environment, and further ASEAN economic integration, we see Malay-
sian real GDP having a compound annual average growth rate of 4.5%
(6.5% in nominal US dollar terms) over the next decade. While this is
slightly below the 5.1% (10.5% in nominal US dollar terms) rate seen
over the past decade, this largely reflects lower growth in the working age
population, while labour productivity growth is set to rise.
Demographics: Still Very Positive

Malaysia's demographics are in good shape. Over the next decade
the active population is projected to grow by 1.6%, which is among Source: BMI, BNM
the highest in the region. This will provide a natural tailwind to
the economy, particularly when compared with Thailand, whose Malaysia's Economic Transformation Programme (ETP) has
active population is projected to stagnate over the next decade. been instrumental in cutting down government bureaucracy and
That said, when we compare active population growth over the improving efficiency in public service delivery. The establishment
next decade with that of the past decade, Malaysia performs rela- of PEMUDAH, a committee at inter-ministerial level to reform
tively poorly. Holding all other factors constant, this should result business regulations and procedures has helped the country shoot
in slower real GDP growth over the coming decade (although it up the global business environment rankings. In the 2016 World
should be noted that Taiwan, China, Vietnam, and Singapore are Bank's Doing Business Report the country came in 18th place
in a worse position in this regard). globally, rising two places from 2014, and building on gains in
areas such as 'dealing with construction permits' and 'resolving
Business Environment Making Progress insolvency' that it achieved in previous years.
While demographic trends are important in gaining an understand-
ing of the natural positive or negative forces that are likely to drive Reform measures under the ETP should help to unlock pro-
ductivity gains over the coming years, but there are a number
TABLE: LONG-TERM MACROECONOMIC FORECASTS

2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f
Nominal GDP, USDbn 302.8 335.7 367.9 397.4 429.3 463.7 500.5 540.5 583.7 630.6
Real GDP growth, % y-o-y 4.5 5.0 4.6 4.4 4.4 4.4 4.3 4.3 4.3 4.3
GDP per capita, USD 9,847 10,771 11,651 12,428 13,261 14,147 15,089 16,101 17,191 18,366
Population, mn 30.8 31.2 31.6 32.0 32.4 32.8 33.2 33.6 34.0 34.3
Consumer price inflation, % y-o-y, ave 2.7 2.4 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
Exchange rate MYR/USD, ave 4.10 3.97 3.88 3.83 3.77 3.73 3.67 3.62 3.58 3.52
Current account balance, % of GDP 2.6 2.7 2.8 2.9 2.9 3.0 3.0 3.0 3.0 3.0
f = BMI forecast. Source: National sources, BMI

MALAYSIA Q4 2016
of business environment shortcomings that will stand in the way Fiscal Policy:
to Malaysia becoming a 'high income country by 2020' as it is Sustainable Despite The Deficit
hoped. Affirmative action policies favouring the ethnic Malay Malaysia's public debt levels, although growing steadily, remain
population are likely to continue causing a 'brain drain' where manageable, with the vast majority of debt denominated in
talented non-Malay members of the population have sought op- local currency ensuring credit risks are minimal. That said, as
portunities overseas. Similarly, the lack of an even playing field in the government undertakes measures to address the perennial
government procurement has also undermined efficiency, while in budget deficit, this will hurt real GDP growth. These deficits
general affirmative action policies have contributed to corruption. reflect the continuous crowding out of the private sector and
According to Transparency International's Corruption Perceptions the distortive impact of the government's subsidy programme.
Index, Malaysia comes in a lowly 54th spot. These race-based Exposure To China Is High,
policies will be very difficult to address and look set to retard But ASEAN Catching Up
Exports To China, % of Total Exports
economic development for the foreseeable future.
Government Taking A Step Back

Government Spending, % of GDP
Source: BMI, Direction of Trade Statistics
Reducing these subsidies will be key to unlocking productivity

Source: BMI, Ministry of Finance gains but could cause economic disruptions, particularly if and
when domestic energy costs rise. The government implemented
Another threat comes from the full implementation of the Na- a 6.0% a goods and services tax (GST) in 2015, even as subsidies
tional Minimum Wage Policy. There is a wave of 'labour friendly' are gradually reduced. Although the implementation of a GST
policies sweeping Asia, and it is likely that Malaysia's minimum would go a long way towards shoring up the government's fiscal
wage will be raised over the coming years, undermining labour accounts, it would come at the expense of real GDP growth initially.
market flexibility. Overall, though, we view Malaysia's business
environment to be moving in the right direction. Monetary Policy: Worried About
Private Consumption Gaining Share Bubbles At The Household Level
Nominal GDP Expenditure Components, % of Total Low interest rates in recent years have helped to fuel a household
debt boom, which will act as a drag on growth and poses risks
of financial instability if interest rates need to be hiked sharply.
Although Malaysia's deposit rates have been kept above con-
sumer price inflation, suggesting they have been appropriate,
lending rates have been far shy of nominal GDP growth over
recent years, with the exception being the 2009 financial crisis.
Household debt as a share of GDP currently stands at around
89%, which is one of the highest in Asia. While debt service
ratios are still manageable, a rise in interest rates could tip service
ratios to unsustainable levels, leading to a rise in defaults. Even
if interest rates remain low and property prices do not undergo
steep declines, high household indebtedness reflects a transfer

10-YEAR FORECAST
of resources towards unproductive areas of the economy, which

will act as a drag on growth over the coming years.
External Rebalancing Will Hurt

Growth, But Support Consumption
The Malaysian economy is proceeding along a process of ex-
ternal economic rebalancing, moving away from export-driven
growth and more towards domestic private consumption. Pri-
vate consumption made up just 54.1% of GDP in 2015, while
net exports came in at 7.6%. This will act as a drag on overall
headline real GDP growth but at the same time it will see
private consumption growth outperform creating investment
opportunities in catering for the domestic middle class rather
than overseas demand . Additionally, a more domestic-focused
demand picture will allow the economy to be more resilient to
global demand shocks, reducing recession risks. This is not to
say that we see export growth collapsing. Malaysia has a well
balanced mix of exports, not being over-reliant on commodities
or a particular manufacturing industry, and also has a diversified
export market, despite its heavy reliance on Chinese demand.
ASEAN Integration
A Continued Growth Driver
The creation of an ASEAN Economic Community, creating a
single regional market and production base will be a significant
factor unlocking further productivity gains in the Malaysian
economy. While a great deal of work is still to be done, the
free flow of capital, investment and labour within ASEAN,
would allow a tremendous amount of comparative advantage
and economies of scale gains within the region. Already the
rewards of lower tariffs within the area have been seen, with
regional trade booming in recent years, and outlook for trade
growth remains very positive. The development of road, rail,
power, water and other critical infrastructure across the region
will further help enhance regional trade.
BMI's long-term macroeconomic forecasts are based on a variety of quantitative and qualitative factors. Our 10-year forecasts assume in most
cases that growth eventually converges to a long-term trend, with economic potential being determined by factors such as capital investment,
demographics and productivity growth. Because quantitative frameworks often fail to capture key dynamics behind long-term growth determinants,
our forecasts also reflect analysts' in-depth knowledge of subjective factors such as institutional strength and political stability. We assess trends in
the composition of the economy on a GDP by expenditure basis in order to determine the degree to which private and government consumption,
fixed investment and the export sector will drive growth in the future. Taken together, these factors feed into our projections for exchange rates,
external account balances and interest rates.

Chapter 3:
Political Outlook
SWOT Analysis BMI Political Risk Index

Malaysia's short-term political risk score of 76.9 is considered to be
Strengths above average, ahead of regional peers including Indonesia and the
Malaysia is an example of a successful democratic predominantly Philippines. Even as the opposition continues to challenge the ruling
Muslim country. Despite murmurs of discontent among hardline Barisan Nasional coalition with fault lines seen in rocky federal-state
Muslims in some states, it is unlikely to abandon moderate Islam. relations in certain areas we expect general political stability will be
Despite having two significant minority ethnicities, Chinese and maintained going forward.
Indians, Malaysia has not been rocked by any major racial unrest
since 1969. This lends credence to the argument that its multiracial S-T Trend Regional Global
Political Rank Rank
society is sustainable. Singapore 94.8 = 1 3
Brunei Darussalam 90.6 = 2 7
Weaknesses Japan 86.5 = 3 10
New Zealand 84.0 = 4 16
The Malay half of the population has a constitutionally enshrined Vietnam 82.5 = 5 19
Hong Kong 81.0 = 6 25
special position in society, amounting to positive discrimination in Laos 80.4 = 7 26
China 80.2 = 8 27
jobs and wealth. Resentment is an obvious by-product, and the Kiribati 80.2 = 8 27
Macau 79.6 = 10 32
Australia 78.1 = 11 37
challenge is to produce enough prosperity to reduce tension. India 77.7 = 12 38
Malaysia 76.9 = 13 41
The controversial Internal Security Act has been replaced by the South Korea 76.0 = 14 43
Taiwan 74.6 = 15 48
Security Offences (Special Measures) Act in 2012, which allows for Indonesia 72.9 = 16 59
Sri Lanka 71.5 = 17 66
detention for up to 48 hours incommunicado, has been wielded by North Korea 67.7 = 18 78
Philippines 66.3 - 19 83
the government on several occasions with the avowed intention of Bangladesh 62.7 = 20 97
Cambodia 62.1 - 21 102
Mongolia 61.7 = 22 105
quelling unrest. However, some detentions have been viewed as Bhutan 61.0 = 23 110
Myanmar 57.9 = 24 126
an attempt by the government to suppress the opposition. Thailand 57.9 = 24 126
Opportunities Fiji 51.5 = 27 152
Pakistan 50.8 = 28 155
The consolidation of power by the Prime Minister should lead to a Papua New Guinea 44.0 = 29 164
Nepal 43.1 = 30 165
stabilisation in the political environment, which will be positive for Afghanistan 40.0 = 31 173
the business environment.
L-T Trend Regional Global
Prime Minister Najib Razak came to power in 2009 promising reforms
Political Rank Rank
and changes. His actions have thus far been deemed progressive, Japan 88.1 = 1 10
Australia 88.0 = 2 11
potentially paving the way for a significant overhaul of the political New Zealand 86.0 = 3 17
South Korea 84.2 = 4 22
and economic system. Singapore 80.6 = 5 28
Kiribati 77.9 = 6 35
Threats Taiwan
India
73.4
71.9
=
=
7
8
44
49
Hong Kong 70.9 = 9 54
Although it is likely to remain non-violent, ethnic tension will continue Mongolia 67.7 = 10 63
Malaysia 66.7 = 11 66
to simmer as long as the threat of a hardline Islam revival remains. Brunei Darussalam 63.8 = 12 77
China 62.9 = 13 83
For now, however, the hardliners have lost much of their political clout. Philippines 62.8 - 14 85
Bangladesh 62.6 = 15 87
Despite a change of premier in April 2009, BN will remain under Sri Lanka 62.3 = 16 89
Macau 60.7 = 17 95
pressure from the opposition. Failure to deal adequately with issues Indonesia 60.0 = 18 97
Thailand 59.8 = 19 98
Cambodia 59.3 - 20 102
such as corruption, a slowing economy, and the divisive affirmative Vietnam 57.7 = 21 108
North Korea 55.3 = 22 119
action policy could see an opposition coalition force the BN from Papua New Guinea 53.8 = 23 123
Pakistan 53.7 = 24 124
power. Laos 53.4 = 25 126
Bhutan 51.0 = 26 135
Nepal 49.5 = 28 142
Fiji 46.9 = 29 155
Myanmar 42.9 = 30 161

MALAYSIA Q4 2016
Domestic Politics despite the numerous allegations of corruption that have been
levelled against Najib.
By-Election Victories To Further Bolster
Najib's Position The results also suggest that former PM Mahathir Mohammad's
(Najib's fiercest critic) influence has waned, as his efforts to stump
BMI VIEW for the opposition candidates did not result in significant gains
Malaysia's ruling BN coalition's convincing victory during the two by- for the opposition. Furthermore, with BN having achieved its
elections held on June 18 indicates that embattled PM Najib Razak still objective, it is likely that the dominant United Malays National
holds a considerable degree of support from the electorate. As such, Organisation (UMNO) will begin to mend ties with its coali-
we maintain our view that Najib will continue to consolidate his position tion partners and collectively oppose the Shariah law (hudud)
and is likely to remain as PM until the next general election in 2018. bill when it is discussed in parliament in October. As such, we
maintain our view that Najib will continue to consolidate his
Malaysia's ruling Barisan Nasional coalition (BN) obtained a position and is likely to remain as PM until the next general
convincing victory during the two by-elections that were held election in 2018.
on June 18, suggesting that embattled Prime Minister Najib
Razak still commands a considerable degree of support from BN's Victory Partly Due
the electorate. While BN's victory was partly due to the disor- To Fragmented Opposition
ganisation of the opposition (which resulted in three-way fights While we note that BN's retention of its seats in Sungai Besar and
between three Malay-dominated parties), it is also indicative of Kuala Kangsar with a stronger margin than in 2013 indicates that
the amount of influence BN continues to wield in the country the ruling coalition retains a significant measure of support, the
TABLE: POLITICAL OVERVIEW

System of Government Federal parliamentary monarchy, universal suffrage: 222-seat Dewan Rakyat (five-year term). Executive power
rests with prime minister.
Head of State Yang di-Pertuan Agong (Sultan Abdul Halim Mu'adzam Shah of Kedah): Elected monarch in December 2011 for
one five-year term.
Head of Government Prime Minister Najib Razak
Last Election Parliamentary May 5 2013
Composition Of Current Government Barisan Nasional coalition: 133 seats dominant partners are United Malays National Organisation (88 seats),
United Traditional Bumiputera Party (14 seats) and Malaysian Chinese Association (7 seats)
Key Figures Deputy Prime Minister: Ahmad Zahid Hamid; Finance Minister: Najib Razak; Second Finance Minister: Ahmad
Husni Hanadzlah; Defence Minister: Hishammuddin Hussein; Foreign Affairs: Anifah Aman; Home Affairs: Ahmad
Zahid Hamidi
Central Bank Governor: Muhammad Ibrahim
Main Political Parties United Malays National Organisation: 88 seats. Right-wing party, founded in 1946, which places a strong emphasis
on Malay nationalism and Islamic values. A founding member of the Barisan Nasional coalition, UMNO has ruled
the country as the dominant coalition partner uninterruptedly since independence in 1957. Led by current Prime
Minister Najib Razak.
Democratic Action Party: 38 seats. Secular, multi-racial, democratic socialist party. Founded in 1965, the party is
led by Chairman (Acting) Tan Kok Wai and Secretary-General Lim Guan Eng.
Parti Keadilan Rakyat (People's Justice Party): 30 seats. Centrist party, with a strong social justice and anti-corrup-
tion agenda. Formed in 2003 by a merger of the National Justice Party and the older Malaysian People's Party.
Parti Islam Se-Malaysia (Islamic Party of Malaysia): 21 seats. Conservative Islamic party formed in 1956 which
enjoys strong support from the northern rural and conservative areas. Led by Abdul Hadi Awang.
Other notable parties: Malaysian Chinese Association (7) and Malaysian Indian Congress (4)coalition partners of
United Malays National Organisation (UMNO); United Traditional Bumiputra Party (14)
Next Election Parliamentary 2018
Ongoing Disputes Minor territory disputes persist with neighbouring countries, namely over the Spratly Islands (with China, Taiwan,
the Philippines, Vietnam and Brunei), Sabah (the Philippines), Ligitan and Sipadan Islands and the Ambalat oil bloc
(Indonesia and the Philippines) and the land boundary around Limbang (Brunei). Separatist violence in Thailand's
predominantly Muslim southern provinces prompts both Malaysia and Thailand to monitor their mutual borders.
Key Relations/Treaties Strong alliance with US. Member of the Commonwealth of Nations, the United Nations, the Organisation of the
Islamic Conference, the Non-Aligned Movement and ASEAN.
BMI Short-Term Political Risk Index 76.9
BMI Structural Political Risk Index 66.7
Source: BMI

POLITICAL OUTLOOK
coalition's resounding victory was also partly due to the inherent In addition, the unity demonstrated by BN (with the party having
weaknesses of the opposition and BN's skilful use of the hudud mobilised key leaders and the party machinery to stump for its
issue to gain votes (see 'Hudud Bill Elevation Aimed At Winning candidates) in the face of the opposition's disarray suggests that
By-Elections', June 1). Both seats saw three-cornered fights Najib remains in control of the coalition despite challenges to
between BN, Parti Islam Se-Malaysia (PAS), and newcomer his leadership from within UMNO. We therefore believe that
Parti Amanah Negara (Amanah), the latter of which comprises the PM will continue to use the party's victories in Sarawak (see
of defectors from PAS. As such, the fight between three mainly 'Sarawak Election Outcome: BN Win Positive For Growth',
Malay parties is likely to have resulted in the splitting of the May 9) and in Peninsular Malaysia as evidence that he retains
Malay vote to BN's benefit as the coalition is better known and popular support. As such, Najib is likely to remain in power at
has a track record of ensuring economic development. least until the 2018 general elections, enabling him to continue
with his efforts at fiscal consolidation. This will be positive for
Retaining Power the economy and provide a degree of stability to the business
Number Of Votes Obtained In Sungai Besar environment.
Obtaining A Majority
Number Of Votes Obtained In Kuala Kangsar
Source: BMI, Channel NewsAsia
Furthermore, PAS's appeal among Chinese voters was consider-

Source: BMI, Channel NewsAsia
ably dimmed by its close association with the introduction of the
hudud bill in parliament. On the other hand, Amanah remains Wither Hudud?
a relatively unknown party, having just been formed in early Having achieved its aim of using hudud as a political tool for the
2016. These factors are likely to have tipped the vote in favour by-elections, we believe that UMNO will begin the process of
of BN, which undertook considerable efforts to reach voters reconciliation with the coalition partners which it had alienated
of all races and focused on local development issues instead by allowing the discussion of the hudud bill in parliament on May
of national ones. 26. With some reports indicating that the introduction of the bill
had led Chinese voters to choose BN over PAS (viewing PAS
Mahathir's Influence Weakens as being closely linked to the bill), it is likely that BN will start
As Najib Strengthens Position to distance itself from the Shariah bill during the parliamentary
Mahathir's failure to dislodge Najib further suggests that the session in October. Although the likely failure of the hudud bill
former PM does not have as much political clout as he once to pass in parliament will be positive for the country, indicating
did. Having touted the twin by-elections as a referendum on that Malaysia will continue to seek to maintain moderate form
Najib's leadership, the former PM had stumped for Amanah's of Islam, we note that the government's frequent use of religion
candidates but failed to gain traction among voters. Instead, as a political tool could undermine longer term social stability
voters returned BN candidates who focused on local issues to and destabilise the investment environment.
power, indicating the importance placed on local development
issues instead of national ones. Mahathir's waning influence is
likely to be a positive for Najib as he continues to consolidate
power within the party, and could lead to the gradual abatement
of political turbulence in the country.

MALAYSIA Q4 2016
Long-Term Political Outlook discontent among the minority races.
Race Relations Still Cloud The Horizon Declining Oil Reserves: As the Malaysian government derives
a significant portion of its income from oil profits petroleum-
BMI VIEW related income made up approximately 30% of total revenues
Malaysia's ethnic diversity will continue to influence domestic politics, in 2015 a significant drawdown or depletion of its oil reserves
and the rise of a stronger opposition presents myriad possibilities in the without adequate replacement would jeopardise the country's
political arena over the longer term. ability to fund the public sector and national projects for economic
development. This could result in reduced business activity
The Malaysian political scene is entering a new era, given that and a surge in unemployment, thus opening up the possibility
neither the ruling Barisan Nasional (BN) coalition nor the op- of political unrest.
position Pakatan Harapan (PH) coalition is in the best of health,
with both suffering from a host of unsolved problems. Many State-Level Uncertainties: The rise of a credible opposition
of the risks to political stability still centre on the delicate race alliance that denied the ruling BN coalition its two-thirds major-
relations within the country; however, we highlight that other ity in the March 2008 elections suggests that state-level politics
factors, such as the potential depletion of oil reserves, will also will become increasingly volatile within the next decade, with
weigh on stability over the long term. the potential for administrations of states with only a simple
majority to switch from government to opposition. Indeed, we
Threats And Challenges To Stability witnessed the dramatic and messy takeover of the Perak state
Antagonism Between Ethnic Groups: The wealth gap between government by BN in early February 2009 after the previous
the poorer Malays and the richer minority groups, especially opposition Pakatan Rakyat (PR) government broke apart follow-
the ethnic Chinese, has always been a point of contention in ing the defection of three of its assembly members to become
Malaysian politics and will continue to be a potential source of BN-friendly independents.
instability. Although ethnic Malays make up around 60% of the
country's population, their equity share of Malaysian corporate We also highlight that the hostilities between federal and
wealth currently stands at approximately 19%, which is well opposition-held state agencies could result in additional politi-
short of the government's target of 30%. The pro-Malay New cal friction, resulting in a war of words in the press at best, or a
Economic Policy (NEP), first instituted in the 1970s to address breakdown of the functioning of local government programmes
the racial wealth gap following deadly race riots, and its suc- at worst. We would not be surprised if there were further signs
cessive affirmative action policies have failed to resolve the of such non-cooperation, especially if the opposition continues
imbalance. Instead, the NEP has been accused of benefiting to make inroads in the forthcoming elections.
only the politically well connected, especially those affiliated
with the Malay-based United Malays National Organisation Federal-Level Political Defections: Another possible source
(UMNO), the dominant member of the ruling BN coalition. of political upheaval would be defections at the federal level,
especially by disgruntled former government ministers who
Minority groups, namely Chinese and Indians, have been previously held important posts. Needless to say, such defec-
increasingly vocal in recent years over the government's tions would have a bigger impact on the balance of power if the
perceived favouritism towards the Malays. Indeed, much of defectors were also sitting members of parliament. Currently,
the dissatisfaction has been attributed to the inability of some the ruling BN holds a simple but still substantial majority, but
Chinese and Indian citizens to secure government-sponsored this could be reduced by the next election if the opposition were
tertiary scholarships or university places owing to the NEP- able to maintain or enhance its viability. We have witnessed a
linked ethnic quotas. It is possible that such perceptions of few high-profile defections in 2009, including former Health
unfairness among the younger generation could further polarise Minister Chua Jui Meng, and see scope for future defections if
the different racial groups within the country. Furthermore, it the opposition is able to consolidate its position. These politi-
has been reported that certain quarters of the ruling UMNO and cians are well-known household names, which would serve to
opposition Islamic Party of Malaysia (PAS) both Malay-based bolster the opposition coalition's image among the electorate.
parties are considering further cooperation, which could lead
to greater concentration of power, potentially stoking more Rise Of Internet-Driven Politics: We believe that increasing

POLITICAL OUTLOOK
online penetration especially in the predominantly rural East Islamic Radicalism: Despite its status as a Muslim-majority
Malaysian states of Sabah and Sarawak will lead to a greater country, Malaysia is still at risk of being targeted for terrorist
number of votes going to politicians who are best able to harness strikes by Islamic radicals. A terrorist attack would most likely
the power of the internet as an effective political media, which have a particularly destabilising effect given the lack of prec-
has been favouring the opposition thus far. One example is the edence for such attacks, unlike neighbouring Indonesia. Indeed, a
opposition victory in Sibu in May 2010. Arguably, the major number of regional bombings have been linked to terrorists born
inroads made by the opposition parties in the 2008 general and trained in Malaysia, including Noordin Top, who was killed
elections would not have been possible without the emergence in a police raid over his alleged role in the July 2009 bombings
of alternative media. of the JW Marriott and Ritz Carlton hotels in Jakarta. If such a
scenario should occur, we would expect key landmarks, such
Social Stability A Major Risk
Long-Term Political Risk Index as the Petronas Twin Towers, to be the prime targets.
There is also a possibility of increased Islamisation of the

country, especially if the Malay-based UMNO and PAS parties
forge closer ties in the future. In such a scenario, we foresee the
proliferation of religious practices such as gender segregation in
public places nationwide which includes separate queues for
men and women in shopping centres as is currently enforced
in the PAS-dominated state of Kelantan. If that happens, we
would expect racial ties between the Muslim Malays and non-
Muslim ethnic minorities to be further strained.
BMI's long-term political risk rating for Malaysia is 66.7. The

Source: BMI
weakest score, of 55.0 out of 100, is in the 'characteristics of
BN has traditionally had the advantage of information control, society' subcomponent, which is largely weighed down by
with the mainstream media including television and printed the income disparity between the Malay majority and other
publications tightly regulated by the government. However, ethnicities. The 67.2/100 score in the 'characteristics of polity'
with the advent of the internet, opposition parties gained an subcomponent, which carries a weighting of 30%, is considered
important platform with which to break the ruling coalition's reasonably good, although it could still be improved with greater
monopoly on information and popular opinion. The influence media freedom. Malaysia scores 70.0 and 80.0 respectively
of the internet was greatest in the most wired regions, such as in the 'scope of state' and 'policy continuity' subcomponents.
the Federal Territory of Kuala Lumpur, where eight out of 11 However, the latter is subject to downward pressure if the op-
parliamentary seats were won by the opposition. This develop- position alliance gains further political influence, which could
ment also saw the rise of bloggers-turned-politicians such as Jeff lead to a disruption of nationwide or state policies.
Ooi and Tony Pua, who ran on opposition tickets and became
first-time legislators in the federal parliament. Scenarios For Political Change
A Return To Old Politics: The opposition PH's ideologically
Internal Security Act (ISA): Although Prime Minister Najib diverse nature and exclusion of PAS poses a key risk to its con-
Razak has scrapped the ISA which allows for indefinite de- tinued existence. Without the inclusion of PAS, PH will likely
tention without trial new measures have been introduced to become a largely urban coalition, which would significantly
replace it. We view the existence of laws such as the ISA as undermine its attempts to make inroads into BN's largely rural
a double-edged sword for the ruling BN coalition. On the one powerbase. Furthermore, PH is considerably weaker than its
hand, it could be a fail-safe measure by the administration to predecessor, Pakatan Rakyat (PR), with charismatic opposition
assert control over influential personalities, while on the other leader Anwar Ibrahim in jail and his centrist Pakatan Keadilan
hand it could be used by the opposition to garner sympathy Rakyat (PKR) still caught between the Chinese-dominated,
and support from the electorate. If not properly handled, these secular Democratic Action Party (DAP) and PAS (as the third
measures could very well spell the eventual downfall of BN. member consists of former PAS members). Continued scuffles
among member parties also highlight their fragile relationship.

MALAYSIA Q4 2016
Thus, we find the breakup of the opposition PH alliance to be

a plausible scenario. Its predecessor organisation the Barisan
Alternatif, formed during the reformasi period following the
sacking of then-deputy premier Anwar Ibrahim and which com-
prised of PKR, DAP, and PAS experienced a similar split in
2001 just two years after its formation. If this were to occur, we
would expect a return to the previous status quo, where the rul-
ing BN coalition retakes firm control across the federal and state
governments, with solid two-thirds majorities.
Malay-Centric Ruling Coalition: As an extension to the scenario

outlined above, if a PH breakup occurred, we also acknowledge
the possibility of a greater degree of cooperation between the
two Malay-based UMNO and PAS parties in championing the
rights of ethnic Malays. In particular, if PAS formally joins BN,
the ruling coalition would regain its two-thirds majority in the
house, which was lost in the nationwide polls in March 2008.
However, we consider such an arrangement to be politically dif-

ficult as there would very likely be significant objections from
key BN component parties, in particular the minority-based
Malaysian Chinese Association and Malaysian Indian Congress,
on the basis that this would further weaken the non-Malay voice
in the ruling coalition. Furthermore, PAS veterans would object
to any formal cooperation, having experienced a failed UMNO-
PAS marriage in the 1970s.
Two-Party State: In this scenario, the opposition PH alliance

manages to gain more seats at the federal level in subsequent
general elections, further reducing BN's simple majority. Riding
on its greater popularity, the opposition also captures a few more
Malaysian states. If this were to happen, it would probably be
swing states such as Perak and Negeri Sembilan, where the ruling
coalition enjoys only a slim majority. For a two-party state to be
realised, the opposition alliance must resolve its internal differences
while presenting itself as a capable, inclusive alternative to BN.
Outright Opposition Takeover: Over the longer term, we do not

rule out the possibility of BN losing power at both the national
and state levels. At this stage, however, we find a significant
win for the opposition to be highly unlikely given that PH has
yet to find a long-lasting solution to the internal strife afflicting
its ideologically disparate members, which has been affecting
its popularity. Nevertheless, BN, being mindful of this 'Black
Swan' event, will not rest on its laurels and will instead continue
to push for policies and reforms in order to retain the support of
Malaysian voters.

Chapter 4:
Operational Risk
SWOT Analysis Operational Risk Index

Malaysia is regional leader in terms of its overall operational risk score,
Strengths with 70.69 out of 100 placing the country sixth out of 29 states in Asia, and
A large, literate and young population, which is highly urbanised, 27th out of 170 states globally. Malaysia boasts one of the most efficient,
equates to a healthy labour market in Malaysia. developed and well-connected logistics networks in the world, which is a
Malaysia has lower crime rates than most other emerging market result of the country's integral role in regional and global supply chains.
economies in Asia. Consequently, Malaysia is one of the highest ranked countries globally in
The government has implemented policies that have significantly the BMI Logistics Risk Index, in third place out of 170 states, with a score
reduced the burden of bureaucracy on businesses. of 81.6 out of 100. Malaysia also receives its second highest ranking in
Business benefit from Malaysia's high-quality transport network, with the Operational Risk Index in terms of Trade and Investment Risk, in fifth
well-connected ports via inland transport to major economic hubs and place regionally and 23rd globally, with a score of 76.3 out of 100 due
neighbouring countries. to the healthy business environment. We warn that corruption and af-
Weaknesses firmative action policies aimed at ethnic Malays are detrimental for foreign
Businesses in Malaysia face significant costs in terms of minimum businesses; however, we do not consider these issues a major threat to
wages, labour taxes, paid annual leave and redundancy pay. business activity. The large, young, healthy and urbanised nature of the
The main threat to foreign workers and tourists is from general crimes Malaysian labour force means that there is a wide pool of available work-
such as petty theft. ers from which businesses in the country can recruit, contributing to the
The bumiputera policy continues to discriminate in favour of ethnic country's third highest regional ranking for Labour Market Risks, in ninth
Malay-owned businesses. place regionally and 36th globally with a score of 59.9 out of 100. Lastly,
At present, supply chains are heavily reliant on roads, and further Malaysia's Crime and Security Risk score is 64.8 out of 100. However,
diversification to rail will be necessary in order to ease congestion. we note that there is a key threat stemming from the activities of Islamist
Opportunities militant groups in neighbouring countries, which have the potential to spill
Investment in higher education will improve the quantity and quality of across the border. Indeed, some attacks in eastern Malaysia have already
graduates with specialised degrees, increasing the size of the skilled put foreigners and businesses in danger.
labour pool.
Further assistance from the US in counterterrorism activities will help Operational Risk Trend Regional Rank Global Rank
to secure porous land and maritime borders. Singapore 83.5 + 1 1

Hong Kong 81.6 - 2 2
The continued liberalisation of certain sectors will encourage further Taiwan 74.2 + 3 11
Malaysia 70.6 - 4 22
South Korea 69.1 - 5 26
foreign direct investment in oil and gas, tourism and electrical and Brunei 65.2 - 6 35
Thailand 61.7 + 7 50
other manufacturing. Macau 60.5 - 8 53
China 56.2 + 9 68
Sri Lanka 53.7 - 10 81
Port expansion will enable Malaysia to carve out an even greater role Vietnam 53.7 + 10 81
Indonesia 53.6 + 12 83
in regional transhipment. Philippines 50.5 + 13 94
Maldives 49.6 + 14 99
Threats Samoa
Mongolia
Bhutan
49.6
49.5
47.4
+
+
-
14
16
17
99
101
110
Tonga 46.3 - 18 113
The employment of foreign workers is restricted by law, and low- India 46.1 - 19 116
Fiji 45.3 + 20 120
wage migrant workers are frequently targeted by employment bans Kiribati 44.5 + 21 122
Cambodia 44.0 + 22 126
Micronesia 42.3 + 23 130
and expulsions. Tuvalu 41.0 + 24 136
Vanuatu 40.6 + 25 138
The extension of terrorist activity into Malaysia from its neighbours Bangladesh 40.2 + 26 141
Laos 38.9 + 27 148
Solomon Islands 37.9 - 28 150
could pose greater risks to the safety of foreign workers and tourists. Pakistan 37.8 - 29 154
North Korea 35.4 - 30 166
Corruption and the bumiputera policy will need to be addressed with Myanmar 35.0 + 31 167
Nepal 34.7 - 32 169
Timor-Leste 34.3 - 33 173
increased vigour to improve the business environment for smaller firms PNG 33.7 - 34 177
Afghanistan 24.6 + 35 194
and foreign companies. Regional ave 49.5 / Global ave 49.8

MALAYSIA Q4 2016
Operational Risk relative impunity. This allows organised crime syndicates to

flourish, with numerous instances of human, drugs and counter-
BMI's Operational Risk report series provides a comprehensive feit goods trafficking, as well as contributing to the continuation
overview of potential risks facing investors operating in a country, of the numerous terrorist organisations that harry the country.
as well as a cross-country regional evaluation of threats and The Malaysian authorities are relatively well-developed and
advantages. The Operational Risk service evaluates Logistics effective but have been accused of corruption and then severely
Risk, Trade and Investment Risk, Labour Market Risk and Crime condemned. Overall, the threat of criminality and terrorism
and Security Risk. Below are sections from these reports. facing them is often too much to contain.
Labour Risk Lowers Otherwise Strong

Malaysia is one of the most attractive emerging markets in Asia, Operating Environment Score
offering an array of advantages for investors. The country has a Operational Risk Index Scores
healthy business environment due to its stability and low crime

rates, efficient bureaucracy, sophisticated financial markets and
various incentives for investors. All of these factors encourage st
rong foreign direct investment inflows to some of the country's
key industries, including manufacturing, financial services, oil
and gas and tourism. In addition, supply chains in Malaysia
benefit from excellent regional and international connectivity
and high-quality transport infrastructure. The major issues for
businesses are related to the country's labour market, which is
restricted by the poor quality of education and the difficulty
of employing foreign workers. Strong scores across all four
pillars of BMI's Operational Risk Index mean that Malaysia is
Note: 0 = Highest risk; 100 = lowest risk. Source: BMI Operational Risk Index
a regional and global leader in terms of its overall score, with
70.6 out of 100 placing the country fourth out of 35 states in Trade and Investment (76.3 /100): Malaysia is among the
Asia, and 22nd out of 201 states globally. most attractive countries in the Asia region as a location for
investment and a base of operations. Economic growth is set to
Labour Market (59.9/100): Government policies which favour slow in the medium term; however, fundamentals are looking
the employment of ethnic Malays are having a detrimental strong, and we expect the still-buoyant economy to drive trade
effect on the availability of tertiary educated labour and are flows and increase the attractiveness of the country as an invest-
thus increasing costs through hiring international labour. For ment location. This will be further supported by the fact that the
lower-skilled positions Malaysia has high productivity and government adopts a welcoming attitude towards foreign direct
literacy levels, both of which support of the manufacturing investment into most sectors and has established policies that
sector. Flexible labour regulations and low unionisation also have lowered the burden of bureaucracy, promoted ICT activity
lowers the risk of labour disputes. and intellectual property rights protection, and generally created
a healthy business environment.
Crime and Security (64.8/100): Malaysia's crime and security
suffers from the remote regions of the archipelago and peninsular Logistics (81.6/100): Malaysia boasts one of the most efficient,
nation, affording clandestine groups the ability to operate with developed and well-connected logistics networks in the world,
TABLE: OPERATIONAL RISK

Operational Risk Labour Market Risk Logistics Risk Trade and Investment Risk Crime & Security
Risk
Malaysia Score 70.6 59.9 81.6 76.3 64.8
Asia Average 49.5 51.6 48.4 47.5 50.6
Asia Position (out of 35) 4 7 1 3 8
Global Average 49.8 50.3 49.3 49.9 49.8
Global Position (out of 201) 22 35 5 7 54
Note: 0 = Highest risk; 100 = lowest risk. Source: BMI Operational Risk Index

OPERATIONAL RISK
which is a result of the country's integral role in regional and laysia's impressive levels of competitiveness in terms of growth
global supply chains. The transport network offers a range of and resources, all of which are benefits to potential investors.
options for fast and low-cost internal freight haulage, while
international links via road, rail, air and sea provide efficient There is, however, an over-reliance on gas to fulfil much of
connections to other countries in South East Asia and further Malaysia's electricity generation. Considering the wealth of this
afield. What is more, the government has implemented policies power source available and ease of production, it is expected
to reduce the burden of trade bureaucracy, and utilities such that supply will still outstrip demand. Generous government
as electricity, water and the internet are both widely available subsidies for fuel, combined with extensive electricity coverage,
and cheap. These factors result in low-cost and efficient inter- mean that electricity and fuel are widely available and cheap.
national trade, and in reduced overheads for energy as well as However, we note that the government has introduced subsidy
a reliable supply of utilities, ensuring minimal disruption to cuts, which have increased the price of fuel and electricity,
business activities. and although costs remain low by global standards, there are
risks that it could increase further in the future. Malaysia is
therefore ranked sixth for Electricity and Fuel, with a score of
66.1 out of 100.
Market Size And
Fuel Costs Remaining Moderate
Utilities Analysis Despite Subsidy Cuts
Asia Cost Of Fuel (USD per diesel litre)
Malaysia benefits from a strong telecommunications sector,

low-cost utilities and widespread availability of fuels and elec-
tricity. This is extremely beneficial for investors who can utilise
some of the most stable infrastructures in the region. Despite
high availability, Malaysia's water infrastructure is variable and
shortages can consequently be frequent. Malaysia is predicted to
experience strong growth over the short term, with rising GDP
and economic activity spurred by high domestic consumption
and demand. It is expected to remain ahead of Singapore and
Hong Kong in terms of market size, offering strong opportuni-
ties for investors.
Cheap Electricity Encourages Source: National statistics, government ministries, BMI

Energy-Intensive Industries
Asia Cost Of Electricity (USD per KWh) Water availability is relatively good, though we note that droughts
are common in certain seasons and result in availability concerns
in some regions. The increasing interest from foreign investors is
boosting demand for reliable good-quality telecommunications
infrastructure, and Malaysia's extensive coverage is an additional
inducement. Most worryingly for investors may be the stringent
levels of censorship in the country, which could adversely affect
the level of internet marketing that may be accessible, despite
the high level of overall internet connectivity in the country. We
therefore give Malaysia a score of 75.1 for Telecommunications
and Water, putting it in fourth position regionally.
Source: National statistics, government ministries, BMI

Electricity
Malaysia's electricity network is highly developed, with poten-
With all these factors taken into account, BMI gives Malaysia tial investors benefiting from excellent access to the grid across
an overall score of 70.6 for Market Size and Utilities, which the country, in both Peninsular Malaysia and East Malaysia,
places the country third in Asia. This score is a reflection of Ma- and secure supply via a diverse mix of energy sources. The

MALAYSIA Q4 2016
relatively cheap price of gas and its easy availabilityhas pro- overly reliant on gas for electricity generation, although this is
moted its use particularly in the power sector, where gas is the not considered to be an issue due to Malaysia being a major
dominant feedstock. Investors will also benefit from relatively producer of gas. We expect supply to outstrip growing demand
low electricity prices, which make the country a competitive for electricity due to an increase in generation capacity, with
business destination, especially for energy-intensive industries. several projects in the pipeline, including coal-fired power plants
and hydroelectric dams.
Natural gas accounts for around 56% of Malaysia's power
generation due to the ready availability of domestic sources of Malaysia offers a highly developed electricity grid, with a
fuel. Coal is used for 34% of power generation, while hydro- reported 99.5% of the population connected in 2013. This is
power generation is minimal at 6.5%. The country is therefore much higher than in neighbouring Indonesia, where 72.9% of the
TABLE: ASIA MARKET SIZE AND UTILITIES

Country Electricity and Fuel Telecommunications and Water Market Size and Utilities
Taiwan 83.0 74.3 78.6
Thailand 82.1 62.6 72.3
Malaysia 66.1 75.1 70.6
South Korea 65.0 75.7 70.3
New Zealand 57.9 74.8 66.4
Australia 50.7 81.3 66.0
Brunei 68.3 61.3 64.8
Mongolia 59.8 68.4 64.1
Japan 33.7 80.9 57.3
Singapore 46.1 66.2 56.2
North Korea 51.3 58.2 54.7
Bhutan 77.9 25.0 51.5
Philippines 50.0 51.9 50.9
Vietnam 49.2 51.3 50.2
Hong Kong 37.3 61.7 49.5
India 66.2 32.5 49.4
Macau 34.7 63.6 49.2
China 33.4 64.1 48.7
Samoa 54.9 41.3 48.1
Sri Lanka 50.2 44.7 47.4
Solomon Islands 43.2 50.7 46.9
Indonesia 50.7 42.4 46.5
Fiji 44.0 44.1 44.0
Laos 48.1 37.6 42.9
Nepal 49.5 35.3 42.4
Timor-Leste 52.9 31.0 42.0
PNG 50.9 31.1 41.0
Vanuatu 32.5 48.7 40.6
Afghanistan 47.8 31.4 39.6
Maldives 47.3 25.3 36.3
Myanmar 48.1 22.9 35.5
Pakistan 37.9 30.8 34.3
Bangladesh 47.0 17.2 32.1
Tonga 48.2 15.7 32.0
Kiribati 33.1 30.1 31.6
Micronesia 15.4 34.5 24.9
Cambodia 21.6 24.6 23.1
Tuvalu 9.0 31.5 20.2
Source: BMI Logistics Risk Index

OPERATIONAL RISK
population is connected. This high level of connectivity means decrease transport costs. The drop in oil prices will, however,
that businesses are not restricted to conducting operations in hit the Malaysian government's coffers, as the state-owned oil
only the densely populated, main trading areas such as Kuala giant Petronas will see a decrease in oil revenues.
Lumpur in Peninsular Malaysia, but can also set up operations Industry Enjoys Large Share Of
in East Malaysia. Connecting to the grid is both fast and cheap, Freshwater Consumption
Malaysia Sector Freshwater Consumption
taking just 32 days, compared with the regional average of 98 As % Of Total Freshwater Withdrawals
days, and costing just 49.1% of GDP per capita, in comparison
with 79.1% in OECD countries.
Widespread Internet Access

Boosts AppealTo Investors
Asia Internet Users (Per 100 Population)
Source: World Bank
The Malaysian government is taking advantage of the falling

global oil and fuel prices to continue its steady reduction of fuel
subsidies, with a subsidy cut for RON95 petrol and diesel im-
plemented in October. Prices for the two fuels rose by USD0.06
Source: World Bank
per litre each. This is the second significant move to tackle fuel
The prices of electricity in Malaysia are the tenth lowest in subsidies in Malaysia over the past four years: in Q4 2013, the
the Asia region, at USD0.09 per KWh. Prices are artificially government cut fuel subsidies by about USD0.06 per litre for
depressed by government subsidies, although the state-owned the first time in more than two years as part of its wider efforts
power company raised prices by around 15% in Peninsular at reducing its budget deficit. The three subsidised fuels in
Malaysia during 2014. However, as there has been no price Malaysia are diesel, RON95 and RON97. RON97 is a premium
hike in H214, and the current tariff is only to be maintained fuel, mostly used by the wealthier section of the population, and
until June 2015, we would highlight that there is an increased is subsidised significantly less than the other two.
risk of further hikes in the latter part of 2015. This is because
the government is seeking to stabilise the economy by reducing A further cessation of all subsidies for these fuels was imple-
subsidies. Despite this, the price hike is expected to only affect mented in December 2014. From this date, both fuels will be
around 30% of electricity users, and we highlight that the cost priced by an automated price mechanism, similar to that which
of electricity remains low by both regional and global standards. already governs the RON97 petrol prices, based on global mar-
ket prices, production costs and the exchange rate. However, in
Fuel spite of subsidy cuts, it is important to note that fuel prices in
The cost of fuel in Malaysia is highly competitive. Malaysia Malaysia remain amongthe lowest when compared with other
has both its own natural resources and expanding refinement South East Asian countries, making it one of the cheapest and
capacity, which means investors have access to a steady and most attractive markets for fuel-reliant companies. Average fuel
well-priced source of fuelimportant considering the extensive prices stood at USD0.53 as of 2014, which remained the second
use of road freight in supply chains across the country. lowest figure regionally. This means the cost of transporting
goods in the country is reduced, especially in comparison to
A lower oil price environment internationally means that fuel nearby countries such as Indonesia and Cambodia, where the
prices will drop. This is a positive development for consumers cost of fuel is more than double that of Malaysia at USD1.24
and investors alike, especially for companies reliant on road per diesel litre and USD1.26 per diesel litre, respectively.
freight to meet their logistics needs, as lower fuel prices will

MALAYSIA Q4 2016
In addition, a reduction in subsidies could well reduce demand, demand for mobile broadband services. There is a growing de-
which would weigh on refined product imports. Malaysia has mand for additional services and mobile internet data services
a moderate refining capacity, with five oil refineries, which to- that will improve the IT literacy among the population.
gether provide the country with about 588,000 barrels per day
(b/d) as of the start of 2014, but this is not currently sufficient Government statistics have reported average broadband speeds
to meet domestic demand. Until the large RAPID refinery in Kuala Lumpur of 6.92 megabits per second (mbps) and in
comes online, Malaysia is obliged to import a great deal of some areas average speeds as high as 21.84Mbps. The Malaysian
its refined fuels , which drives up costs. Once the 300,000b/d Communications and Multimedia Commission has made an
RAPID refinery project is completed and functioning at full effort to improve broadband quality and speeds since 2010 and
capacity, this will reduce the overall cost of refined products, has begun the High Speed Broadband project, currently being
particularly fuel, as the country will become a net exporter finalised, which will further improve average speeds across the
of refined products . Along with structurally lower global oil country and allow existing operators to upgrade networks; phase
prices, this will help to offset the effects of subsidy cuts and 1 is currently underway and will see improvements to more than
thereby keep fuel prices moderate. 100 industrial towns and cities, with phase 2 bringing in more
than 400 telecommunications towers in rural areas. The reliable
Telecommunications internet connections as well as the upgrade works in process
The relatively high levels of internet penetration in Malaysia will allow e-commerce to thrive in many areas of Malaysia.
help to solidify its attractiveness to potential investors. The
country is investing heavily in improving its telecommunica- However, Malaysia has some of the most stringent censorship
tions infrastructure, and businesses will benefit not only from laws globally, with authorities placing restrictions on media
improved access to the internet but also from an increasingly outlets and entertainment. Most privately owned media outlets
tech-savvy potential workforce. This will benefit companies have close ties to government parties. Although the internet
involved in IT and e-commerce seeking to tap Malaysia's sub- has proved a popular platform for free discussion and expos-
stantial online market. ing of corruption among the ruling elite, the government has
continued to crackdown on internet users and certain websites.
Malaysia has widespread internet penetration across bothPen- This level of censorship is expected to continue in Malaysia and
insular Malaysia and East Malaysia, with an estimated80.1 could affect businesses, particularly in the media, but also in
internet users per 100 people in 2014, the ninth highest in Asia terms of access to consumers, as some websites will be banned
and the highest among developing countries in the region, with and citizens may face difficulties freely accessing the internet.
neighbouring Thailand ranked much lower in 14th place. In-
ternet usage has shown a huge increase over the past 10 years, Water
from 6.9 users per 100 people in 2005. In addition, we expect Water is readily available to consumers in Malaysia, with an
broadband internet subscriptions to have increased by 8.8% in extensive water infrastructure network, substantial natural
2014, indicating that faster and more reliable connections are water sources and high water quality throughout the country
becoming more widespread. The government's plan to develop resulting in it ranking eighth regionally for water availability.
a national cloud computing programme is likely to provide a This reduces the risk to businesses reliant on water during the
further advantage to incoming businesses over the longer term, manufacturing process; however, there have been instances of
once it is implemented. localised droughts, which could cause concern in terms of busi-
ness continuity, and the country has seen rationing take place
Although broadband prices remain high, the government is in the most populous areas of the country.
investing in internet infrastructure, which is likely to further
increase the availability of faster services. BMI notes that more The freshwater replenishment rate in Malaysia is high due to a
remote parts of Sarawak and Sabah in East Malaysia are likely large amount of rainfall, with the country having 20,168 cubic
to be less well connected, but generally internet availability in metres of renewable freshwater resources in 2011, ranking it
Malaysia is very good, meaning that businesses needing online eighth out of 29 states in Asia. This is higher than the levels
access are less restricted as to where they can locate. There are of natural water available in neighbouring Thailand, Indonesia
three well-established and five additional 3G/4G providers in and Singapore, and only fractionally less than that available in
Malaysia, and the recent upgrading of networks has led to strong Brunei. In addition, water infrastructure is generally good, and

OPERATIONAL RISK
99.6% of the population has access to improved drinking water, As the government takes steps towards privatisation, tariffs are
which means the prevalence of water-borne diseases is low. The likely to increase marginally. Furthermore, current tariffs for
water network is extensive in Malaysia, with approximately sewerage connectivity remain low, acting as a disincentive for
127,275km of water pipes across the country. However, with private sector players.
growing population rates there is expected to be a higher level
of water consumption and more demand on water infrastructure, SPAN, the national water services commission, supplies the
and two water treatment plants recently had to be shut down below water tariffs statistics for 2013.
due to contamination.
Tariffs for domestic supplies to residential homes:
Surface water stored in reservoirs is the main source of drinking
water supply in Malaysia. Groundwater, on the other hand, is In Kuala Lumpur cost 0-20m3 at RM0.57/m3, 35m3 at
limited and only occurs in certain pockets of the coastal regions. RM2.00/m3
However widespread droughts are having a deleterious effect
on the levels in many of these reservoirs. For example, owing In Johor cost 0-20m3 at RM0.6/m3, 35m3 at RM2.96/m3
to droughts, Selangor state experienced water rationing over
the past quarter in order to ensure that the limited reservoir In Negeri Sembilan 0-20m3 at RM0.55/m3, 35m3 at RM1.4/m3
supplies were not exhausted. This is a particularly high risk for
the industrial water consumers in the region. Water restrictions Tariffs for industrial and commercial supplies:
were initially imposed on car-wash businesses; however, they
have since been expanded and could do so again. In Kuala Lumpur cost 0-35m3 at RM2.07/m3, >35m3 at
RM2.28/m3
The growing industrialisation in country, particularly in the
Malaysian states in Borneo (Sabah and Sarawak) is increasing In Johor cost 0-35m3 at RM2.6/m3, >35m3 at RM2.96/m3
the demand for freshwater. This is driving the development of
the country's water treatment capacity, with both government In Negeri Sembilan 0-35m3 at RM1.5/m3, >35m3 at RM1.6/m3
and industrial funded developments in the pipeline. However,
although capacity is growing, water losses remain a serious Industrial customers, on the other hand, are charged per number
issue in the country. More than 4.27bn litres of treated water of employees; for each individual they are charged RM2.00 per
is lost every day, along with substantial amounts of freshwater person for premises receiving individual septic tank services and
and wastewater. This is largely due to old infrastructure, and a RM2.50 per person for connected sewerage services. In some
high percentage of water leakage. areas where sewerage infrastructure is constructed by private
developers and handed over to the public operator (for opera-
Agriculture is a major contributor to GDP in Malaysia, and tions and maintenance) this has lead to compromises in quality
accounts for approximately 68% of total water consumption. and negative environmental consequences.
Despite the importance of the agricultural sector to the economy,
irrigation efficiency is only 50% at best in the larger schemes
and is sometimes as low as 40% in the smaller ones. Malaysian
businesses might face drought-driven water shortages, but as Labour Costs
the country is a net exporter of water, rather than an importer,
(unlike Singapore and Taiwan, for example) there is no risk of A high minimum wage, significant labour taxes as well as
water supplies being cut off due to international conflict. That generous mandatory annual leave increase employment costs
being said, rivers are frequently the subject of bilateral water- in Malaysia. Malaysian employers are also restricted from em-
sharing agreements, and if a country upstream over-extracts, or ploying significant levels of migrant labour as the government
pollutes the rivers, then industries downstream can suffer from expands its policy of prioritising local workers. Value added
poor quality or limited supplies. to minimum wage ratio is relatively high, increasing the output
for the employer for every dollar spent on labour and part l y
Compounding excessive demand, water tariffs in Malaysia are offsetting high wage bills. A lack of regulations and unionisa-
among the lowest in the world. This has led to waste and overuse. tion also mitigate the risks of labour disputes and restrictions on

MALAYSIA Q4 2016
employer flexibility. As a result, Malaysia is middle-ranking in Cost and Flexibility of Labour: Generous worker benefits,
Asia for Labour Costs, in 18th place out of 35 countries, with relatively high mandatory social security contributions and a
a score of 60.1 out of 100. moderate minimum wage all contribute to significant employ-
ment costs for businesses based in Malaysia. Although none of
Labour Costs Environment Benefits Sectors these costs is significantly burdensome individually, together
Requiring Large Unskilled Labour Forces they amount to considerable expense, particularly for labour-
Asia Labour Costs
intensive operations. Having said that, the costs associated
with employing workers are lower in Malaysia than in several
major Asian economies and manufacturing hubs, including
China, Vietnam and the Philippines, while the value added per
worker is high, making Malaysia a cost-effective option. This
indicates that Malaysia is a more attractive location for busi-
nesses employing a large workforce than many of its regional
competitors. The country scores 47.9 out of 100 for Costs of
Employment, ranking it 21st out of 35 states in Asia.
Minimum Wage Results In An

Increase In Worker Productivity
100 = Lowest risk; 0 = highest risk. Source: BMI Labour Market Risk Index Asia Minimum Wages (USD/month), 2016
Latest Labour Costs Analysis

The Malaysian government announced new minimum wages
in April 2016. These would be implemented in the areas
of Peninsular Malaysia and in East Malaysia from July 1
2016. The government further announced that approximately
1,172 out of 81,000 employers who did not comply with
the minimum wage requirements were issued with compli-
ance notices (with hefty fines in place as a ramification of
non-compliance). This demonstrates that businesses face
heavy additional labour costs in the form of such fines (as
well as reputational damage) should they not comply with
Note: As applicable to the worker assumed in the case study. Source: World
the minimum wage legislation. Bank Doing Business'
In February 2016 the Malaysian government announced Businesses generally enjoy a high degree of flexibility with
that it would be putting a freeze on the hiring of all foreign regard to the local workforce, and employer-staff relations are
workers while they assessed gaps within the Malaysian usually cordial due to effective dispute resolution mechanisms
labour force, as well as reviewing the levy system for for- and a lack of active trade unions. This gives employers greater
eign workers in Malaysia. This hiring freeze comes on the control over hiring and firing practices and wage-setting, driv-
back of the government announcing in June 2015 that they ing Malaysia's high score of 72.3 out of 100 for Flexibility of
planned to bring an estimated 1.5mn Bangladeshi workers Labour, which places it 13th regionally. That said, the govern-
to Malaysia over three years. BMI's view is that this labour ment's policy of promoting employment for Malaysian nation-
freeze will present headwinds for the manufacturing and als complicates the process of employing foreign workers, as
agricultural sector as well as undermine the completion of certain targets and fees are set for obtaining work permits. This
the government's various construction projects. This will increases difficulties for businesses recruiting for both highly
be due to the elevated labour costs which will be brought skilled and unskilled positions, as there is a shortage of domestic
about as a result of the shortage of migrant labour which labour available for these roles.
these sectors are heavily dependent on.
Employing workers in Malaysia can be a difficult and costly

OPERATIONAL RISK
process due to a number of factors, including the high labour policies in favour of Malaysian workers, which have been
taxes and employment benefits, and the restrictive policies for heightened in response to the global financial crisis. Companies
hiring foreign workers. The rate of labour tax in Malaysia is can automatically qualify for the ability to employ expatriates
16.4%, the sixth highest in Asia and above the regional average of by providing at least MYR500,000 paid-up capital if they are
10.1%. This tax comprises employer contributions to retirement 100% foreign owned, MYR350,000 if they are joint-owned by
funds and social security payments paid on the gross salaries of foreigners and Malaysians, or MYR250,000 if they are 100%
workers. The statutory contribution mandated is 23% or 24% on locally owned. In other cases, employment passes can be is-
monthly wages. The employer is obliged to contribute at a rate sued on an ad-hoc basis providing that there are no suitable
of 12% for wages of above MYR5,000 per month and 13% if Malaysian candidates and that the foreigner is earning more
the employees' monthly wages are above MYR5,000 per month. than USD938 per month and will be employed for at least two
On top of this, the monthly minimum wage is USD280.4, which years. The expatriate must occupy a top managerial position,
is the 9th highest out of 32 countries in the region for which an important middle-management position, or a technical or
data are available. The rate of labour tax and monthly minimum specialist position. An employmentpass costs up to USD176.
wage will therefore pose extra costs to businesses in Malaysia, BMI notes the process of obtaining these passes is arduous and
particularly those in labour-intensive industries. highly bureaucratic, and the government is unlikely to improve
the efficiency of these procedures.
Having said that, Malaysia's score for the ratio of minimum
wage to value added per worker is the fourth highest in Asia The Malaysian government pursues even more restrictive policies
for those countries which have minimum wage legislation. This towards low-wage foreign workers, who comprise the major-
shows the implementation of a minimum wage rate has resulted ity of the migrant population. The government issues regular
in higher worker productivity, particularly in comparison to bans on the employment of foreigners, as well as orders for the
the nearby Philippines and India, which come in third and fifth expulsion of migrant workers, most recently in January 2014.
from the bottom regionally in this regard. This to some extent Low-skilled foreign workers may be employed for the manufac-
mitigates the expense of employing workers in Malaysia, as turing, construction, plantation, agricultural, construction and
higher added value from fewer workers boosts returns on inputs. service industries. This is providing they are from the follow-
In addition, the minimum wage is lower than in some of the ing countries: Cambodia, Indonesia, India, Kazakhstan, Laos,
region's major manufacturing hubs, such as Thailand, China, Myanmar, Nepal, the Philippines, Pakistan, Sri Lanka, Thailand,
Indonesia and the Philippines, suggesting that the country is in Turkmenistan, Uzbekistan and Vietnam. Annual levies varying
fact an attractive location for labour intensive businesses in the from USD128 to USD578 are charged for the employment of
South East Asia region. foreign workers. Temporary employment passes are valid for up
to three years and subject to quota approval from the Ministry
The employment of foreign nationals is actively discouraged of Foreign Affairs. As a result of these restrictive government
in Malaysia. The government pursues positive discrimination policies, it is difficult for businesses to obtain employment passes
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE

Contracts
Fixed-term contracts prohibited for permanent tasks? No
Maximum length of a single fixed contract (months) No limit
Working Week and Absences
Maximum working days per week 6
Premium for overtime work (% of hourly pay) 50
Paid annual leave (average for workers with 1, 5 and 10 years of tenure, in working days) 13.3
Paid or unpaid maternity leave mandated by law? Yes
Minimum length of maternity leave (calendar days) 60
Redundancy
Dismissal due to redundancy allowed by law? Yes
Notice period for redundancy dismissal (average for workers with 1, 5 and 10 years of tenure, in salary weeks) 6.7
Severance pay for redundancy dismissal (average for workers with 1, 5 and 10 years of tenure, in salary weeks) 22.8
Source: World Bank 'Doing Business'

MALAYSIA Q4 2016
for foreign nationals. This issue is exacerbated due to the poor

quality of education in Malaysia, and it means employers will
most likely have to provide extra training for local workers,
rather than bringing in skilled foreign labour.
Employers in Malaysia face additional costs with regard to

worker benefits. The average amount of severance pay for
redundancy dismissal in Malaysia is the equivalent of 17.2
weeks' salary, the 11th highest in Asia. The redundancy notice
period is also substantial on a regional comparison, at 6.7 weeks,
the fifth highest figure regionally. In addition, the amount of
paid annual leave is moderate for the region, at 13 days. These
worker benefits will pose extra costs to employers in terms of
holidays taken by employees and the difficulty of streamlining
or reducing workforce numbers.
On the other hand, businesses in Malaysia generally enjoy good

flexibility with regard to the local workforce. Trade union power
is limited by law, which means large-scale strikes and labour
disputes are not common and collective bargaining is limited.
Businesses enjoy a high degree of flexibility in terms of hiring
and firing practices and cooperation between management and
staff is strong. Employers therefore benefit from an unregulated
and poorly unionised labour force in Malaysia, which means
that in spite of relatively high minimum wages, their flexibility
in employment practices is increased, and high employment
costs are to some extent mitigated.

Chapter 5:
BMI Global Macro Outlook
Global Macro Outlook Regarding the implications of Brexit', most pertinently, a

vote to leave the EU could spur a breakup of the UK as a whole,
Brexit Risk Casts A Long Shadow because the vote to remain in the EU by Scottish (and Northern
Uncertainty looms large over the global economy and we continue Irish) voters, but to leave by the rest of the UK, could trigger a
to forecast that global real GDP growth will slow this year, to 2.6% second Scottish independence referendum. Even so, the economic
from 2.7% in 2015, with risks weighted to the downside. First and consequences for the UK of Brexit are being overblown by many
foremost, the United Kingdom made a momentous decision to observers. Indeed, the short-term impact of a Brexit is likely to be
leave the European Union (EU) in the June 23 referendum. The negative: the British has already pound has depreciated sharply.
vote to leave will likely trigger widespread political and economic We expect a significant slowdown in growth in late 2016-2017,
instability in the EU and it is not difficult to envisage this prompting led by weak gross fixed capital formation. However, the longer-
a global recession. The global economy is already in a fragile state term implications of Brexit are far less predictable and will depend
amid the China slowdown, patchy US recovery, structural frailties greatly upon the UK's ability to negotiate post-EU trade deals with
in the eurozone and general weakness across emerging markets Europe and the rest of the world. While our base case is that UK
(EMs). Over the coming weeks, we will be revising downward a potential growth will slow, due in part to lower net migration and
number of our forecasts, not least UK real GDP growth. a near-term slump in domestic fixed investment, the worst fears
about lost output are unlikely to materialise. The UK will likely
TABLE: GLOBAL ASSUMPTIONS

2015e 2016f 2017f 2018f 2019f 2020f
Real GDP Growth (%)
US 2.4 1.9 2.2 2.3 2.1 2.1
Eurozone 1.7 1.7 1.6 1.6 1.5 1.6
Japan 0.4 0.6 0.5 0.6 0.6 0.5
China 6.9 6.3 5.9 5.8 5.6 5.3
World 2.7 2.6 2.9 3.1 3.0 3.0
Consumer Inflation (ave)
US 0.4 1.8 2.5 2.0 2.1 2.1
Eurozone 0.1 0.5 1.3 1.7 1.8 1.8
Japan 0.8 0.4 1.6 2.5 2.8 2.9
China 1.6 1.8 2.3 2.5 2.5 2.5
World 2.1 2.5 2.9 2.9 2.9 2.9
Interest Rates (eop)
Fed Funds Rate 0.25 0.75 2.25 2.75 3.00 3.00
ECB Refinancing Rate 0.05 0.00 0.00 0.00 0.75 1.75
Japan Overnight Call Rate 0.10 0.00 0.00 0.00 0.00 0.25
Exchange Rates (ave)
USD/EUR 1.11 1.07 1.10 1.15 1.20 1.20
JPY/USD 121.03 112.00 113.12 113.69 114.25 114.83
CNY/USD 6.28 6.65 6.95 7.10 7.10 7.10
Oil Prices (ave)
OPEC Basket (USD/bbl) 49.77 43.50 54.00 59.00 62.00 68.00
Brent Crude (USD/bbl) 53.60 46.50 57.00 62.00 65.00 71.00
e/f = estimate/forecast. Source: BMI

MALAYSIA Q4 2016
prove resilient beyond the initial shock, comfortably outper- oil producers to feel relatively comfortable, but not so high
forming the eurozone in terms of growth over the long run. that fuel inflation becomes a pressing concern. Our Oil & Gas
analysts have a neutral outlook for prices over H216, believing
As mentioned, the US recovery is somewhat patchy, meaning that improvements in the supply-demand fundamentals have
that a key pillar of the global economy is poorly positioned largely been priced in. We see bloated inventory levels and
to withstand the shock of Brexit. Although the US consumer elevated OPEC supply forestalling any significant price rises.
sector seems to be on a firm footing, industrial production We hold to our forecast for Brent crude to average USD46.50
remains weak, having contracted for the ninth straight month per barrel (/bbl) in 2016, implying a rest-of-year average of
in May. A wide variety of sub-sectors are suffering primar- around USD52.00/bbl.
ily the energy sector, but there are also signs of negative
spillover effects from the mining sector and previous US Developed States
dollar strength, with the latter hitting other industrial seg- Brexit' will have serious ramifications for the EU. The
ments. Amid mixed economic data and a weak jobs report in blocwill become more insular and protectionist, and increas-
May, it was no surprise that policymakers voted to hold the ingly eurozone-centric. Tensions between net recipient and
Fed funds interest rate during their June meeting. One silver net contributing countries will increase on the back of reduced
lining for the global economy is that oil prices are currently UK contributions to the EU budget. Moreover, other countries
in goldilocks' territory, ie, high enough for the majority of are likely to attempt to renegotiate their relationships with the
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %

2015e 2016f 2017f 2018f
Developed States Aggregate Growth 1.9 1.7 1.9 2.0
G7 1.8 1.6 1.8 1.9
Eurozone 1.7 1.7 1.6 1.6
EU-27 1.9 1.9 1.9 1.9
Selected Developed States

Australia 2.5 2.4 2.2 2.3
Austria 0.9 1.8 1.9 1.8
Belgium 1.4 1.3 1.2 1.2
Canada 1.2 1.4 2.0 2.0
Czech Republic 4.2 2.6 2.4 2.7
Denmark 1.2 0.9 1.2 1.5
Finland 0.5 0.5 0.7 0.9
France 1.2 1.4 1.4 1.5
Germany 1.7 1.9 1.7 1.6
Hong Kong 2.4 1.7 2.2 2.4
Ireland 7.8 4.6 3.9 4.0
Italy 0.8 1.0 1.2 0.8
Japan 0.4 0.6 0.5 0.6
Netherlands 2.0 2.0 1.8 1.8
Norway 1.6 1.2 1.5 1.6
Portugal 1.5 1.7 1.6 1.4
Singapore 2.0 1.7 2.2 2.7
South Korea 2.6 2.8 3.0 3.4
Spain 3.1 2.5 2.2 2.1
Sweden 4.2 3.5 2.8 2.7
Switzerland 0.9 1.5 1.7 1.6
Taiwan 0.7 0.9 2.0 2.7
United Kingdom 2.3 1.8 2.2 2.4
United States of America 2.4 1.9 2.2 2.3
e/f = estimate/forecast. Source: BMI

BMI GLOBAL MACRO OUTLOOK
EU, if not hold outright -xit' referenda of their own, whether Emerging Markets
or not the UK leaves. Among the most eurosceptic countries One of our key global themes for 2016 is that EMs will hit rock
in this regard are Denmark, Sweden, and the Netherlands. A bottom, characterised by political crises precipitating painful
Brexit will accelerate this process in many countries, and will structural economic reforms, laying the foundations for growth
embolden eurosceptics across the EU in key member states and recovery.
such as Italy and France.
The decision taken by the Nigerian central bank to allow the naira
Regarding changes to our forecasts over the past month, we to free-float as of June 20 is the latest example of such structural
have upgraded our 2016 real GDP growth forecast for Aus- reforms. Although the change will result in a sharp devaluation
tralia to 2.4%, from 2.1% previously, following stronger-than- of the currency, it is a major positive for the economy. It will
expected growth of 4.3% in Q116 (q-o-q seasonally adjusted bring an end to the uncertainty surrounding the exchange rate that
and annualised). Nevertheless, we maintain our 2017 real has kept investors on the sidelines for over a year. Nevertheless,
GDP growth forecast of 2.2% as strong export performance is real GDP growth will be extremely subdued over the coming
unlikely to be sustained as China's economy weakens, while quarters, and we have made a major downward revision to our
the unwinding investment boom in the mining sector will be 2016 growth forecast. In light of heightened security risks to oil
compounded by housing market weakness. production and the long-running delay to the implementation of
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %

2015e 2016f 2017f 2018f
Emerging Markets Aggregate Growth 4.0 3.9 4.4 4.7
Latin America -0.1 -0.5 2.1 2.9

Argentina 2.0 -0.6 3.2 4.0
Brazil -3.8 -4.0 1.0 1.5
Mexico 2.5 2.6 3.0 3.8
Middle East and North Africa 1.1 1.4 2.4 2.9

Saudi Arabia 3.4 1.0 1.5 2.1
UAE 4.0 2.4 2.6 2.5
Egypt 2.6 2.6 3.2 3.3
Sub-Saharan Africa 3.1 2.9 4.0 4.6

South Africa 1.3 0.7 1.2 2.2
Nigeria 2.8 1.4 3.5 4.8
Emerging Asia 6.5 6.2 5.9 5.9

China 6.9 6.3 5.9 5.8
India* 7.1 7.2 6.9 6.7
Indonesia 4.8 5.2 5.7 6.1
Malaysia 5.0 4.5 5.0 4.6
Philippines 5.8 6.0 5.9 5.9
Thailand 2.8 3.0 3.5 4.1
Emerging Europe 0.3 1.3 2.6 3.0

Russia -3.7 -1.2 1.5 1.9
Turkey 4.0 3.0 3.3 3.5
Hungary 2.9 2.6 2.7 2.5
Romania 3.7 4.1 3.7 3.5
Poland 3.6 3.7 3.5 3.6
e/f = estimate/forecast; *Fiscal years ending March 31 (2015=2015/16). Source: BMI

MALAYSIA Q4 2016
the government's budget, we have revised downward our real

GDP growth projection to 1.4% from 3.1% previously.
The other key change to our EM growth forecasts over the past
month has been for Saudi Arabia. We have revised downward
our projection for real GDP growth in 2016 to 1.0% from 1.5%.
The economy is entering a protracted period of subdued eco-
nomic activity, with low oil prices negatively impacting busi-
ness confidence, banking liquidity and government spending.
In addition, real growth in the oil sector will decelerate, further
compounding the country's economic slowdown.

TABLE: MACROECONOMIC DATA & FORECASTS
2015e 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f
Nominal GDP, USDbn 296.3 302.8 335.7 367.9 397.4 429.3 463.7 500.5 540.5 583.7 630.6
Nominal GDP, EURbn 267.1 283.0 305.2 319.9 331.2 357.8 386.4 417.1 450.4 486.4 525.5
Real GDP growth, % y-o-y 5.0 4.5 5.0 4.6 4.4 4.4 4.4 4.3 4.3 4.3 4.3
GDP per capita, USD 9,767 9,847 10,771 11,651 12,428 13,261 14,147 15,089 16,101 17,191 18,366
GDP per capita, EUR 8,806 9,203 9,792 10,132 10,357 11,051 11,789 12,574 13,418 14,326 15,305
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Population, mn 30.3 30.8 31.2 31.6 32.0 32.4 32.8 33.2 33.6 34.0 34.3
Unemployment, % of labour force, eop 3.1 3.0 3.0 3.0 3.1 3.1 3.1 3.1 3.1 3.1 3.1
Consumer price inflation, % y-o-y, ave 2.1 2.7 2.4 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
Lending rate, %, ave 5.8 5.8 5.9 6.0 6.0 6.0 6.0 6.0 6.5 7.0 7.0
Central bank policy rate, % eop 3.25 3.25 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50
Private final consumption, % of GDP 54.1 54.5 54.8 55.1 55.5 55.8 56.1 56.5 56.8 57.2 57.6
Private final consumption, real growth % y-o-y 6.0 5.3 5.5 5.2 5.1 5.0 5.0 5.0 5.0 5.0 5.0
Government final consumption, % of GDP 13.2 13.1 13.0 12.8 12.7 12.6 12.5 12.4 12.3 12.2 12.1
Government final consumption, real growth % y-o-y 4.3 4.0 4.0 3.5 3.6 3.6 3.5 3.5 3.5 3.5 3.5
Fixed capital formation, % of GDP 26.2 26.4 26.5 26.6 26.7 26.8 26.9 26.9 27.0 27.1 27.1
Fixed capital formation, real growth % y-o-y 3.7 5.4 5.3 5.0 4.9 4.8 4.6 4.6 4.6 4.6 4.6
Exchange rate MYR/USD, ave 3.91 4.10 3.97 3.88 3.83 3.77 3.73 3.67 3.62 3.58 3.52
Exchange rate MYR/EUR, ave 4.33 4.39 4.37 4.46 4.59 4.53 4.47 4.41 4.35 4.29 4.23
Budget balance, USDbn -9.5 -9.2 -9.3 -9.1 -8.6 -8.0 -7.2 -6.2 -4.9 -4.3 -3.8
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Budget balance, % of GDP -3.2 -3.1 -2.8 -2.5 -2.2 -1.9 -1.5 -1.2 -0.9 -0.7 -0.6
Goods and services exports, USDbn 191.5 203.7 217.2 230.6 244.8 259.8 275.8 292.8 310.8 329.9 350.2
Goods and services imports, USDbn 170.9 182.6 194.5 205.9 218.4 231.5 245.3 260.3 276.2 293.1 311.0
Balance of trade in goods and services, USDbn 20.6 21.1 22.8 24.7 26.4 28.4 30.5 32.5 34.6 36.8 39.2
Balance of trade in goods and services, % of GDP 7.0 7.0 6.8 6.7 6.6 6.6 6.6 6.5 6.4 6.3 6.2
Current account balance, USDbn 7.9 7.9 9.0 10.4 11.3 12.6 13.9 15.0 16.3 17.5 18.6
Current account balance, % of GDP 2.7 2.6 2.7 2.8 2.9 2.9 3.0 3.0 3.0 3.0 3.0
Foreign reserves ex gold, USDbn 95.4 99.2 102.2 104.7 107.3 110.0 112.8 115.6 118.5 122.6 128.1
Import cover, months 8.5 8.2 7.9 7.7 7.4 7.1 6.8 6.6 6.3 6.2 6.1
MACROECONOMIC FORECAST
e/f = BMI estimate/forecast. Source: National sources, BMI
43
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BMI Malaysia Country Risk Report Q4 2016

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IMPORTANT NOTICE:

Chapter 1: Economic Outlook.................................................................................................................. 7

Business Monitor International Ltd www.businessmonitor.com 3

Chapter 2: 10-Year Forecast................................................................................................................... 19

Chapter 3: Political Outlook................................................................................................................... 23

Chapter 4: Operational Risk................................................................................................................... 29

Chapter 5: BMI Global Macro Outlook................................................................................................... 39

4 www.bmiresearch.com Business Monitor International Ltd

Core Views Major Forecast Change

Malaysia's ruling BN coalition's convincing victory during the two by-

Business Monitor International Ltd www.bmiresearch.com 5

SWOT Analysis BMI Economic Risk Index

Business Monitor International Ltd www.bmiresearch.com 7

Economic Growth Outlook Manufacturing Exports

Source: BMI, Department of Statistics

We maintain our forecast for real GDP growth to slow to 4.5%

8 www.bmiresearch.com Business Monitor International Ltd

Source: BMI, Bloomberg

Source: BMI, Bloomberg

TABLE: GDP GROWTH FORECASTS

Business Monitor International Ltd www.bmiresearch.com 9

Fixed Investment Outlook: Investment as a share of the

Net Export Outlook: Having adopted an export-oriented growth

TABLE: PRIVATE CONSUMPTION FORECASTS

TABLE: GOVERNMENT CONSUMPTION FORECASTS

TABLE: FIXED INVESTMENT FORECASTS

TABLE: NET EXPORTS FORECASTS

10 www.bmiresearch.com Business Monitor International Ltd

compared to GST, which is levied on multiple levels), we expect

GST Here To Stay

Business Monitor International Ltd www.bmiresearch.com 11

f = BMI forecast. Source: BMI, Bank Negara Malaysia

f = BMI forecast. Source: BMI, Bank Negara Malaysia

Government share of GDP: Malaysia has historically had

TABLE: MAIN EXPENDITURE & REVENUE CATEGORIES

TABLE: FISCAL AND PUBLIC DEBT FORECASTS

12 www.bmiresearch.com Business Monitor International Ltd

Monetary Policy Growth Still The Main Focus

Source: BMI, Bloomberg

Inflation Remaining Stable

Business Monitor International Ltd www.bmiresearch.com 13

Monetary Policy Framework

Money supply has expanded by an average of about 12% over

Source: BMI, Department of Statistics

Interest rates remain in line with historical averages as Bank

TABLE: MONETARY POLICY FORECASTS

14 www.bmiresearch.com Business Monitor International Ltd

Long-Term Outlook (six-to-24 months)

Return To Political Stability Good For MYR

TABLE: BMI CURRENCY FORECAST

Business Monitor International Ltd www.bmiresearch.com 15

TABLE; MAIN IMPORTS & EXPORTS

TABLE: MAIN IMPORT & EXPORT PARTNERS

16 www.bmiresearch.com Business Monitor International Ltd

e/f = BMI estimate/forecast. Source: BMI, World Bank

Source: BMI, Bloomberg

TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE

TABLE: CURRENT ACCOUNT BALANCE FORECASTS

Business Monitor International Ltd www.bmiresearch.com 17

electronics (35%), liquefied natural gas (9%), palm oil (7%),

f = BMI forecast. Source: BMI, Bank Negara Malaysia

Foreign direct investment (FDI): Malaysia is a net recipient

18 www.bmiresearch.com Business Monitor International Ltd

Demographics: Still Very Positive