You are on page 1of 63

Malaysia

August 1, 2009

Country Report

Published by
The PRS Group, Inc.
6320 Fly Road, Suite 102
East Syracuse, NY 13057-9358, USA
Tel: +1 (315) 431-0511 • Fax: +1 (315) 431-0200
e-mail: custserv@prsgroup.com
www.PRSgroup.com
Malaysia
Table of Contents
Page
Country Forecast
Map..................................................................................................................................................................... 2
Highlights .......................................................................................................................................................... 3
Current Data ..................................................................................................................................................... 5
Comment & Analysis..................................................................................................................................... 11
Forecast Scenarios
Most Likely Five-Year Regime Scenario: UMNO-led Coalition (60% Probability)....................... 17
Second Most Likely Five-Year Regime Scenario: PR Coalition (35% Probability) ........................ 24
Third Most Likely Five-Year Regime Scenario: Islamist (5% Probability) ..................................... 25
Forecast Summary.................................................................................................................................. 27
Political Framework
Players To Watch.................................................................................................................................... 29
Political Players ...................................................................................................................................... 30
Country Conditions
Climate for Investment & Trade
Overview ................................................................................................................................................... 1
Tariff and Non-tariff Barriers ................................................................................................................. 9
Policies ....................................................................................................................................................... 9
Legal Framework ................................................................................................................................... 12
Infrastructure .......................................................................................................................................... 15
Corruption and other Bureaucratic Obstacles.................................................................................... 16
International Agreements ..................................................................................................................... 16
Labor Conditions.................................................................................................................................... 17
Background
Geography............................................................................................................................................... 19
Recent History ........................................................................................................................................ 19
Social Conditions.................................................................................................................................... 21
Government ............................................................................................................................................ 22
Political Conditions................................................................................................................................ 23
Foreign Relations.................................................................................................................................... 24

© 2009, The PRS Group, Inc. ISSN: 1054-5727


Political Risk Services Malaysia Country Forecast
Reproduction without written permission of The PRS Group is strictly prohibited.

Thailand Vietnam Philippines


Gulf of Thailand

South China Sea


Kudat ●

● Kota Baharu Kota Kinabalu ●



Kuala Sandakan
●George Town ● Terengganu Brunei
Straitof
Malacca
● Taiping
● Ipoh Malaysia ●
➘ Lahad Datu ●
Tawau

● Lumut ● Kuantan Miri
Kuala
Lumpur
Klang ● ●
✪ Putrajaya ● Bintulu
●Seremban
● ➘ ● Sibu
● Melaka Johor Bahru

● ●
Port Dickson
Kuching

Indonesia

Indonesia

REV2003

Page 2 Map
Political Risk Services
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Malaysia
Country Forecast
Highlights
MOST LIKELY REGIMES AND THEIR PROBABILITIES
18-Month: UMNO-led Coalition 60% (50%)
Five-Year: UMNO-led Coalition 60% (50%)

FORECASTS OF RISK TO INTERNATIONAL BUSINESS


Financial Direct Export
Turmoil Transfer Investment Market
18-Month: Low B (B+) B+ A-
Five-Year: Low A B+ A-
( ) Indicates change in rating. * Indicates forecast of a new regime.

KEY ECONOMIC FORECASTS


Real GDP Current
Years Growth % Inflation % Account ($bn)
2004-2008(AVG) 5.8 3.1 25.69
2009(F) -4.0 -0.5 26.00
2010-2014(F) 4.5 2.5 28.50

Najib Pushing Reform


Key Points To Watch…

 Since becoming prime minister, Mohamed Najib bin Abdul Razak has
sought to address the factors contributing to the erosion of the BN’s political
dominance, chiefly the uneven distribution of economic benefits, rampant
government corruption, and repressive measures used against dissent…

 Steps taken include reducing equity restrictions in the services sector – with
the aim of attracting more foreign investment and promoting job creation –
eliminating some of the special economic benefits granted to the bumiputra,
and initiating the 1Malaysia Project, to reach out to minorities…

Highlights 1-Aug-2009 • Page 3


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

 However, Najib’s critics dismiss his embrace of reform as only a cynical


pose adopted solely to slow the ongoing effort by the opposition coalition to
attract enough BN dissidents to topple UMNO from power through a
confidence vote, although Anwar’s upcoming trial clouds those prospects…

Poised for Solid Economic Recovery


 In April 2009, Najib announced a reduction on equity and other restrictions
on foreign investment in 27 services categories, and then he expanded the
range of liberalized sectors to include specialized financial services, as well
as raising the equity cap for foreign investors from 49% to 70%…

 Investment liberalization, an accommodative monetary policy, and


aggressive stimulus spending, reinforced by stronger Chinese demand on
export activity, will help the economy improve over the remainder of 2009,
limiting GDP shrinkage…

 Assuming China avoids another slowdown and European and US demand


begin to recover by early 2010, a return to positive economic growth is a
distinct possibility next year.

Economic Forecasts for the Three Alternative Regimes

UMNO-led Coalition PR Coalition Islamist


Growth Inflation CACC Growth Inflation CACC Growth Inflation CACC
(%) (%) ($bn) (%) (%) ($bn) (%) (%) ($bn)
2009 -4.0 -0.5 26.00 -4.9 -0.9 21.20 -5.5 6.9 14.50
2010-2014 4.5 2.5 28.50 3.1 3.1 19.60 2.4 3.8 8.90

Page 4 • 1-Aug-2009 Highlights


Political Risk Services Malaysia Country Forecast
1-Nov-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Political Fact Sheet

CAPITAL: HEAD OF STATE:


Putrajaya Paramount Ruler Mizan Zainal Abidin (2006)
CONSTITUTION:
September 16, 1957 HEAD OF GOVERNMENT:
Prime Minister Mohamed Najib bin Abdul Razak
ADMINISTRATIVE SUBDIVISIONS:
(2009)
13 states and the capital
POPULATION: OFFICIALS:
2008: 27.01 million Muhyiddin Yassin, Deputy Prime Minister,
AREA: Education
329,758 sq. km. Haji Noh bin Omar, Agriculture
OFFICIAL LANGUAGE: Ahmad Zahid bin Hamidi, Defense
Bahasa Malaysia Peter Chin Fah Kui, Energy & Water
STATUS OF PRESS: Mohamed Najib bin Abdul Razak, Finance
mostly controlled—the government owns Ahmad Husni Hanadzlan, Finance II
most of the electronic news media, as well as Anifah bin Aman, Foreign Affairs
some of the press Hishammuddin Hussein, Home Affairs &
Internal Security
SECTORS OF GOVERNMENT
Kong Cho Ha, Housing & Local Government
PARTICIPATION:
S. Subramaniam, Human Resources
petroleum, timber, plantation agriculture
Utama Rais Yatim, Information, Communication
(rubber and palm oil), banking, trade
& Culture
CURRENCY EXCHANGE SYSTEM: Douglas Unggah Embas, Natural Resources &
managed float Environment
EXCHANGE RATE: Shaziman bin Abu Mansor, Public Works
10/23/2009 $1=3.40 ringgit Mohamed Shafie Apdal, Rural & Regional
ELECTIONS: Development
The council of ruling sultans elects a Mustapa bin Mohamed, Trade & Industry
paramount ruler every five years. Last, Ong Tee Keat, Transport
December 13, 2006; next, scheduled
December 2011. House of Representative LEGISLATURE:
members are elected for a maximum five- Bicameral Parliament: 58-member Senate and
year term; last, March 8, 2008; next, by 222-member House of Representatives. Seat
March 2013. Senators are indirectly elected distribution in the House: National Front (BN),
or appointed for six-year terms. 139; People's Justice Party (Keadilan), 30;
Democratic Action Party (DAP), 28; Islamic Party
of Malaysia (PAS), 24 other, 1.

Current Data 1-Nov-2009 • Page 5


Reproduction without written permission of
Political Risk Services The PRS Group is strictly prohibited.
1-Nov-2009
Malaysia
Databank

1999-2003 2004-2008
Average Average 1999 2000 2001 2002 2003
Domestic Economic Indicators
GDP (Nominal, $bn) 94.66 165.57 79.15 90.32 92.78 100.85 110.20
Per Capita GDP ($) 3979 6316 3488 3883 3905 4159 4458
Real GDP Growth Rate (%) 5.3 5.8 6.2 8.8 0.5 5.4 5.8
Inflation Rate (%) 1.7 3.1 2.7 1.5 1.4 1.9 1.1
Capital Investment ($bn) 22.42 34.26 17.33 23.09 23.31 23.68 24.70
Capital Investment/GDP (%) 23.7 20.8 21.9 25.6 25.1 23.5 22.4
Budget Revenues ($bn) 19.80 35.38 15.44 16.29 20.95 21.97 24.37
Budget Revenues/GDP (%) 20.8 21.3 19.5 18.0 22.6 21.8 22.1
Budget Expenditures ($bn) 24.47 41.70 17.95 21.45 25.76 27.32 29.88
Budget Expenditures/GDP (%) 25.7 25.1 22.7 23.7 27.8 27.1 27.1
Budget Balance ($bn) -4.67 -6.32 -2.51 -5.16 -4.81 -5.35 -5.51
Budget Balance/GDP (%) -4.9 -3.8 -3.2 -5.7 -5.2 -5.3 -5.0
Money Supply (M1, $bn) 22.24 41.05 19.40 20.89 20.62 23.44 26.87
Change in Real Wages (%) 4.8 -0.7 3.6 3.4 3.4 10.1 3.7
Unemployment Rate (%) 3.4 3.4 3.5 3.1 3.5 3.5 3.6
International Economic Indicators
Foreign Direct Investment ($bn) 2.78 6.43 3.90 3.79 0.55 3.20 2.47
Forex Reserves ($bn) 32.18 81.45 29.67 27.43 28.63 32.42 42.77
Gross Reserves (ex gold, $bn) 33.12 82.01 30.59 28.33 29.52 33.36 43.82
Gold Reserves ($bn) 0.06 0.06 0.06 0.05 0.05 0.06 0.06
Gross reserves (inc gold, $bn) 33.18 82.07 30.65 28.38 29.57 33.42 43.88
Total Foreign Debt ($bn) 45.74 55.92 42.67 42.39 45.64 48.86 49.14
Total Foreign Debt/GDP (%) 48.6 34.6 53.9 46.9 49.2 48.5 44.6
Debt Service ($bn) 7.06 7.60 6.32 6.79 7.13 7.33 7.72
Debt Service/XGS (%) 6.4 4.1 6.4 5.9 6.8 6.6 6.3
Current Account ($bn) 9.79 25.66 12.60 8.49 7.29 7.19 13.38
Current Account/GDP (%) 10.5 15.2 15.9 9.4 7.9 7.1 12.1
Current Account/XGS (%) 8.9 12.9 12.8 7.4 7.0 6.5 10.9
Exports ($bn) 93.78 160.95 84.10 98.43 87.98 93.38 105.00
Imports ($bn) 72.64 125.49 61.45 77.60 69.60 75.25 79.29
Trade Balance ($bn) 21.14 35.46 22.65 20.83 18.38 18.13 25.71
Exports of Services ($bn ) 13.76 23.99 11.92 13.94 14.46 14.88 13.58
Income, credit ($bn) 2.29 8.69 2.00 1.99 1.85 2.14 3.45
Transfers, credit ($bn) 0.65 0.35 0.80 0.76 0.54 0.66 0.51
Exports G&S ($bn) 110.47 193.98 98.82 115.12 104.83 111.06 122.54
Liabilities ($bn) 0.27 6.70 0.00 0.00 0.00 0.51 0.82
Net Reserves ($bn) 32.91 75.37 30.65 28.38 29.57 32.91 43.06
Liquidity (months import cover) 5.4 7.3 6.0 4.4 5.1 5.2 6.5
Currency Exchange Rate 3.800 3.606 3.800 3.800 3.800 3.800 3.800
Currency Change (%) 0.6 2.5 3.2 0.0 0.0 0.0 0.0
Social Indicators
Population (million) 23.74 26.09 22.69 23.26 23.76 24.25 24.72
Population Growth (%) 2.2 1.8 2.4 2.5 2.1 2.1 1.9
Infant Deaths/1000 21 18 22 21 21 20 20
Persons under Age 15 (%) 35 33 34 35 35 35 35
Urban Population (%) 58 65 57 57 57 58 60
Urban Growth (%) 3.3 4.1 2.4 2.6 2.1 3.9 5.4
Literacy % pop. 83 89 85 83 83 83 83
Agricultural Work Force (%) 15 13 15 15 15 15 14
Industry-Commerce Work Force (%) 35 36 35 35 35 35 36
Services Work Force (%) 50 51 50 50 50 50 50
Unionized Work Force (%) 9 9 9 9 9 9 9
Energy - total consumption (1015 Btu) 2.07 2.58 1.74 1.87 2.11 2.18 2.43
Energy - consumption/head (109 Btu) 0.09 0.10 0.08 0.08 0.09 0.09 0.10

Current Data 1-Nov-2009 ~ Page 6-7


Reproduction without written permission of
Political Risk Services The PRS Group is strictly prohibited.
1-Nov-2009
Malaysia
Databank

1999-2003 2004-2008
Average Average 2004 2005 2006 2007 2008
Domestic Economic Indicators
GDP (Nominal, $bn) 94.66 165.57 124.75 137.96 156.42 186.70 222.04
Per Capita GDP ($) 3979 6316 4956 5383 5993 7029 8221
Real GDP Growth Rate (%) 5.3 5.8 6.7 5.4 5.8 6.3 4.6
Inflation Rate (%) 1.7 3.1 1.5 3.0 3.6 2.0 5.5
Capital Investment ($bn) 22.42 34.26 26.14 28.30 32.61 40.47 43.80
Capital Investment/GDP (%) 23.7 20.8 21.0 20.5 20.9 21.7 19.7
Budget Revenues ($bn) 19.80 35.38 26.16 27.95 33.68 40.69 48.43
Budget Revenues/GDP (%) 20.8 21.3 21.0 20.3 21.5 21.8 21.8
Budget Expenditures ($bn) 24.47 41.70 31.27 32.89 38.89 46.70 58.76
Budget Expenditures/GDP (%) 25.7 25.1 25.1 23.8 24.9 25.0 26.5
Budget Balance ($bn) -4.67 -6.32 -5.11 -4.94 -5.21 -6.01 -10.33
Budget Balance/GDP (%) -4.9 -3.8 -4.1 -3.6 -3.3 -3.2 -4.7
Money Supply (M1, $bn) 22.24 41.05 30.07 32.75 38.47 49.16 54.81
Change in Real Wages (%) 4.8 -0.7 -2.8 -7.5 -2.8 6.0 3.8
Unemployment Rate (%) 3.4 3.4 3.6 3.6 3.3 3.3 3.3
International Economic Indicators
Foreign Direct Investment ($bn) 2.78 6.43 4.62 3.97 6.06 8.46 9.02
Forex Reserves ($bn) 32.18 81.45 64.91 69.37 81.72 100.64 90.61
Gross Reserves (ex gold, $bn) 33.12 82.01 65.88 69.85 82.13 101.02 91.15
Gold Reserves ($bn) 0.06 0.06 0.06 0.06 0.06 0.07 0.06
Gross reserves (inc gold, $bn) 33.18 82.07 65.94 69.91 82.19 101.09 91.21
Total Foreign Debt ($bn) 45.74 55.92 52.79 51.79 51.74 56.03 67.23
Total Foreign Debt/GDP (%) 48.6 34.6 42.3 37.5 33.1 30.0 30.3
Debt Service ($bn) 7.06 7.60 6.54 8.69 8.81 7.79 6.16
Debt Service/XGS (%) 6.4 4.1 4.4 5.2 4.6 3.6 2.5
Current Account ($bn) 9.79 25.66 15.08 19.98 25.49 28.93 38.82
Current Account/GDP (%) 10.5 15.2 12.1 14.5 16.3 15.5 17.5
Current Account/XGS (%) 8.9 12.9 10.1 12.0 13.3 13.4 15.8
Exports ($bn) 93.78 160.95 126.82 141.81 160.84 176.40 198.89
Imports ($bn) 72.64 125.49 99.24 108.65 124.14 139.08 156.36
Trade Balance ($bn) 21.14 35.46 27.58 33.16 36.70 37.32 42.53
Exports of Services ($bn ) 13.76 23.99 17.11 19.58 21.83 28.27 33.14
Income, credit ($bn) 2.29 8.69 4.33 5.37 8.46 11.30 14.01
Transfers, credit ($bn) 0.65 0.35 0.42 0.30 0.31 0.34 0.37
Exports G&S ($bn) 110.47 193.98 148.68 167.06 191.44 216.31 246.41
Liabilities ($bn) 0.27 6.70 2.99 2.43 4.21 15.83 8.02
Net Reserves ($bn) 32.91 75.37 62.95 67.48 77.98 85.26 83.19
Liquidity (months import cover) 5.4 7.3 7.6 7.5 7.5 7.4 6.4
Currency Exchange Rate 3.800 3.606 3.800 3.787 3.668 3.438 3.336
Currency Change (%) 0.6 2.5 0.0 0.3 3.1 6.3 3.0
Social Indicators
Population (million) 23.74 26.09 25.17 25.63 26.10 26.56 27.01
Population Growth (%) 2.2 1.8 1.8 1.8 1.8 1.8 1.7
Infant Deaths/1000 21 18 19 18 18 17 17
Persons under Age 15 (%) 35 33 34 34 33 32 32
Urban Population (%) 58 65 62 64 66 67 67
Urban Growth (%) 3.3 4.1 5.3 5.1 5.1 3.3 1.7
Literacy % pop. 83 89 89 89 89 89 89
Agricultural Work Force (%) 15 13 13 13 13 12 12
Industry-Commerce Work Force (%) 35 36 37 36 36 37 36
Services Work Force (%) 50 51 50 51 51 51 52
Unionized Work Force (%) 9 9 9 9 9 9 9
Energy - total consumption (1015 Btu) 2.07 2.58 2.66 2.58 2.56 2.54 2.56
Energy - consumption/head (109 Btu) 0.09 0.10 0.11 0.10 0.10 0.10 0.09

Current Data 1-Nov-2009 ~ Page 6-7


Malaysia Country Forecast
1-Aug-2009 Comparison: Malaysia

Regional Real GDP Growth (2008): East Asia/Pacific


China

Papua New Guinea

Vietnam

Indonesia

Malaysia

Philippines

Thailand

South Korea

Hong Kong

New Zealand

Australia

Singapore

Myanmar

Taiwan

Japan

-2 0 2 4 6 8 10
(percent)

Regional Inflation Rates (2008): East Asia/Pacific


Myanmar

Vietnam

Papua New Guinea

Indonesia

Philippines

Singapore

China

Malaysia

Thailand

South Korea

Australia

Hong Kong

New Zealand

Taiwan

Japan

0.0 5.0 10.0 15.0 20.0 25.0 30.0


(percent)

Page 8 • 1-Aug-2009 Current Data


Reproduction without written permission of The PRS Group is strictly prohibited
Malaysia Country Forecast
1-Aug-2009 Comparison: Malaysia

Regional Current Account/GDP (2008): East Asia/Pacific


Malaysia

Singapore

Hong Kong

China

Papua New Guinea

Taiwan

Myanmar

Japan

Philippines

Indonesia

Thailand

South Korea

Australia

New Zealand

Vietnam

-15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0


(percent)

Economic Performance Profile


Country's Ranking Relative to All Countries
Covered by Political Risk Services
2004-2008
GDP Per Capita ($)  6316
Real GDP Growth (%)  5.8
Inflation (%)
 3.1
Unemployment (%)  3.4
Capital Investment
 20.8
(% of GDP)

Budget Balance  -3.8


(% of GDP)

Current Account  15.2


(% of GDP)

Debt Service Ratio  4.3

Currency Change (%)  2.5

BEST 25% NEXT 25% NEXT 25% WORST 25%

Current Data 1-Aug-2009 • Page 9


Reproduction without written permission of The PRS Group is strictly prohibited
Political Risk Services Malaysia Country Forecast
1-Nov-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Social Indicators as of 2008

Primary Energy
Energy Consumption (1015 Btu): 2.56
Per Capita Consumption (109 Btu): 0.09

Population
Annual Growth 1.7%
Infant Deaths per 1,000 17
Persons Under Age 15 32%
Urban Population 67%
Urban Growth 1.7%
Literacy 89%

Work Force Distribution


Agriculture 12%
Industry-Commerce 36%
Services 52%
Unions 9%

Ethnic Groups
Malay and indigenous people (61%), Chinese (24%), Indian (7%), other (8%)

Languages
Malay, English, Chinese dialects, Tamil

Religions
Muslim (60%), Buddhist (19%), Christian (9%), Hindu (6%), Confucianist and Taoist (3%),
other (3%)

Page 10 • 1-Nov-2009 Current Data


Political Risk Services
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Malaysia
Country Forecast
Comment & Analysis
New Leader Pushing Reform
In a party vote held on March 26, 2009, Mohamed Najib bin Abdul Razak, standing
unopposed, won election as leader of the United Malays National Organization (UMNO),
Malaysia’s ruling party since independence. One week later, Najib was sworn in as
prime minister, replacing Abdullah Ahmad Badawi as the leader of the UMNO-
dominated National Front (BN) coalition government.

Najib entered office under something less than ideal circumstances. He inherited a
coalition that was significantly weakened as a result of losses sustained at the March 2008
elections and whose survival remains in doubt owing to strains created by the subsequent
internal power struggle that ultimately forced Abdullah to make an early departure.
Even before he was sworn in, Najib’s fitness to head either his party or the government
was publicly called into question by Abdullah’s predecessor, Mahathir bin Mohamed,
and Razaleigh Hamzah, Najib’s most powerful rival within UMNO.

Najib has pledged to address the factors contributing to the erosion of the BN’s political
dominance, chief among them the uneven distribution of the benefits of economic
development across regions and ethnic groups, the widespread corruption that permeates
all levels of government, and the government’s use of repressive measures that prevent
the free expression of discontent.

Despite the aforementioned political headwinds, he has made a strong start. Equity
restrictions in the services sector have been reduced with the aim of attracting higher
levels of foreign investment and promoting job creation. In addition, the new regime has
eliminated some of the special economic benefits granted to the majority Malay
population (bumiputra) under the New Economic Policy (NEP), an affirmative action
program initiated in 1971 by Najib’s father, Prime Minister Abdul Razak. Najib himself
has initiated a program of outreach to Malaysia’s minority communities, dubbed the
“1Malaysia Project.” The prime minister has also ordered an increase in state spending
on early childhood education and instituted a program to ensure that government
ministers are held accountable for their performance. In addition, he has pledged to
reduce bureaucratic obstacles, root out corruption, and review the repressive Internal
Security Act (ISA).

Comment & Analysis 1-Aug-2009 • Page 11


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

To a large extent, Najib’s actions so far have been more symbolic than substantive, and it
remains to be seen whether he possesses either the will or the political capital required to
see his plans through to successful implementation. For that matter, it is far from certain
whether Najib’s critics are correct in dismissing his embrace of reform as nothing more
than a cynical pose adopted for the sole purpose of slowing the momentum of an ongoing
effort by the People’s Alliance (PR)—an opposition coalition made up of the People’s
Justice Party (Keadilan), the Islamic Party of Malaysia (PAS), and the Democratic Action
Party (DAP)—to attract enough BN dissidents to topple UMNO from power by means of
a confidence vote.

In the latter regard, even some of UMNO’s allies have noted that Najib’s offer to include
the Islamist PAS in a unity government would seem to run counter to the spirit of the
“1Malaysia” effort. Moreover, critics contend that Najib is using the Malaysian Anti-
corruption Commission (MACC) to conduct a witch-hunt against his political rivals, an
allegation that took on added resonance in mid-July, when officials could not explain
why Teoh Beng Hock, a journalist and political aide to an opposition lawmaker in
Selangor State, turned up dead on the rooftop of a building adjacent to the MACC offices
one day after he was detained for questioning under the ISA.

UMNO Getting Back on Track…


The pureness of Najib’s motives aside, bolstering the position of the BN at the expense of
the PR is of course the whole point of his efforts, and, in the near term at least, the success
or failure on that score, not the depth or sincerity of his commitment to the reforms he has
proposed, will determine whether he can or does follow through. In that regard, the
results of a Merdeka Center for Opinion Research poll published in mid-July indicate that
the population is quite pleased with the results so far, as the prime minister’s approval
rating surged to 65%, from just 45% in May.

In terms of electoral indicators, the only real test to date has been a parliamentary by-
election held in mid-July to fill the seat for the Manik Urai constituency that had been
held by a member of the PAS. (Three other by-elections were held in early April, just
days after Najib took office.) The PAS retained the Manik Urai seat, but by a much
narrower margin than at the March 2008 general election. Home Minister
Hishammuddin Hussein, who is also the vice president of UMNO, declared the result to
be proof of the BN’s revival in the state of Kelantan.

The next test, and perhaps a more telling one, will come in the next few weeks, when
voters in Permatang Pasir will go to the polls to fill the parliamentary seat left vacant as a
result of the death of PAS leader Hamdan Abdul Rahman on July 31. Permatang Pasir is
a stronghold of the Islamist party, which has held the seat for 15 years. If the Manik Urai
campaign is any guide, UMNO will blame the village’s underdevelopment on the poor

Page 12 • 1-Aug-2009 Comment & Analysis


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

representation provided by the PAS, whose exclusion from power in Kuala Lumpur has
left it incapable of securing federal funding for Permatang Pasir. Should that argument
prove persuasive enough to carry UMNO to victory, or even make the race close, it
would send a strong signal to UMNO’s allies that perhaps they should not desert the BN
ship just yet.

…As Anwar’s Trial Clouds Opposition’s Prospects


In that regard, Anwar’s ability to muster the parliamentary numbers required to topple
the BN had already been cast into doubt before the handover of power in April, and
Najib’s improved standing in the polls further diminishes the likelihood of an attempted
move by the opposition in the near-term. The PR leader failed to meet his own deadline
to force a confidence vote by September 16, 2008, which he attributed to obstruction by
the parliamentary speaker, and Abdullah’s announcement of his intention to step down
in 2009 apparently appeased at least some of the BN dissidents.

Tellingly, Anwar attempted to delay Najib’s inauguration by insisting that he should be


disqualified from holding the office until authorities had investigated allegations of his
involvement in the murder of the mistress of one of his political aides and accusations of
corruption related to suspect government contracts for naval vessels. The move was
widely seen as a defensive maneuver prompted by Anwar’s fear Abdullah’s departure
would dampen popular hostility toward the government.

In fairness, Anwar has waged his battle with a significant handicap, namely, his 2008
arrest on charges of engaging in sodomy, the same crime for which he was convicted
following a falling-out with Abdullah’s predecessor, Mahathir bin Mohamed, in 1999.
Then, as now, Anwar insists that the charge is a baseless and clearly designed to
undermine his credibility among voters and drive a wedge between Keadilan and the
Islamist PAS.

The start of Anwar’s trial, which was scheduled for early July, has been delayed until
September, at the earliest, as the court considers the prosecution’s appeal of an order to
provide the defendant’s lawyers with access to all of the evidence against their client.
Should Anwar be convicted and sentenced to prison, the opposition may splinter, leaving
the BN in a stronger position. However, his acquittal would validate claims of a political
smear, and could boost the opposition.

Economy Poised for Solid Recovery


Malaysia is a trade-dependent economy; its ratio of foreign trade to GDP is more than
200%, a figure exceeded only by Hong Kong and Singapore. Not surprisingly, the global
economic recession has dealt a damaging blow to the economy, which contracted by 6.2%
(year-on-year) in the first quarter of 2009, the steepest decline in more than a decade, as a

Comment & Analysis 1-Aug-2009 • Page 13


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

nose-dive in demand for electronic components, oil, and palm oil contributed to a 20%
drop in exports compared to the first quarter of 2008. The troubles in the export sector
contributed to a general weakening of business and consumer confidence that resulted in
a 10.8% contraction in business investment and a 0.7% decline in private consumption.

The first-quarter result left no doubt that the $2 billion capital-spending program
introduced in late 2008 was wholly insufficient to check the downturn, let alone establish
a foundation for a recovery. In March, the government responded with a second
stimulus package worth $17 billion (about 9% of GDP). Meanwhile, the central bank
began loosening monetary policy in November 2008, reducing interest rates by 150 basis
points to 2%.

Perhaps the most troubling of the first-quarter figures was that for foreign direct
investment (FDI), which declined by 79% (year-on-year) in the January–March period. It
was against that backdrop that Najib took the step of relaxing restrictions on foreign
investment. In late April 2009, he announced a reduction on equity and other restrictions
on foreign investment in 27 services categories, including health, tourism, transportation,
and information and technology. Just a few days later, he expanded the range of
liberalized sectors to include specialized financial services. In addition to increasing the
cap on the equity share of foreign investors from 49% to 70%, the requirement of at least
30% bumiputra ownership was reduced or eliminated in some cases.

Economic performance is expected to improve in the second half of the year, after
recording a smaller year-on-year contraction in the April–June quarter, as the positive
impact of investment liberalization, an accommodative monetary policy, and aggressive
stimulus spending is reinforced by the beneficial effect of strengthening Chinese demand
on export activity. However, still-weak demand elsewhere will continue to hobble
export-oriented manufacturers, limiting the extent of any positive expansion in the final
quarter. Consequently, the economy is forecast to shrink by 3.5%–4.5% for the year as a
whole. The strength and timing of a rebound will be determined to a large extent by
external developments. Assuming China avoids another slowdown and European and
US demand begin to recover by early 2010, a return to positive annual growth of 3%–4%
is a distinct possibility.

The consumer price index fell for the first time in more than 30 years in June, registering a
1.4% (year-on-year) decline after easing gradually from 3.9% in January to 2.4% in May.
Price movements are expected to remain negative over the remainder of the year, mainly
owing to the base effect of high fuel and food prices in 2008, the downward revision of
electricity tariffs, and weak domestic demand. On average, consumer prices are forecast
to decline by 0.5% in 2009, but inflationary pressures will return in 2010, as demand

Page 14 • 1-Aug-2009 Comment & Analysis


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

fueled by heavy government spending and rising global commodity prices pushes prices
up by 1.8% next year.

Despite a sharp drop in both the volume and value of exports, the trade balance has
remained solidly in surplus over the first half of 2009, as imports have contracted at an
even faster pace, reflecting the negative impact of reduced manufacturing production,
inventory adjustments, and declining investment on demand for imported inputs. The
services balance will likely record a small deficit this year, owing to weaker tourist
spending, combining with a somewhat narrower trade surplus to hold the current
account surplus to about $26 billion, equivalent to a still very comfortable 13% of GDP.

Although foreign exchange reserves have fallen by nearly one-third since mid-2008, at
$88.3 billion (as of May 2009), they are sufficient to finance more than eight months of
imports and represent nearly four times the short-term foreign debt. Under the
circumstances, there is little risk that the central bank might be forced to revise its policy
of setting the ringgit exchange rate by means of a managed float against an unspecified
basket of currencies.

Comment & Analysis 1-Aug-2009 • Page 15


Political Risk Services
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Malaysia
Country Forecast
Forecast Scenarios

SUMMARY OF 18-MONTH FORECAST

UMNO-led Coalition PR Coalition Islamist


REGIMES & PROBABILITIES 60% 35% 5%

SUMMARY OF FIVE-YEAR FORECAST

UMNO-led Coalition PR Coalition Islamist


REGIMES & PROBABILITIES 60% 35% 5%

Most Likely Regime Scenario

18-Month Forecast Period: UMNO-led Growth Inflation CACC


UMNO-led Coalition (60% Probability) Coalition (%) (%) ($bn)
Five-Year Forecast Period: 2009 -4.0 -0.5 26.00
UMNO-led Coalition (60% Probability) 2010-2014 4.5 2.5 28.50

In a party vote held on March 26, 2009, Mohamed Najib bin Abdul Razak, standing
unopposed, won election as leader of the United Malays National Organization (UMNO),
Malaysia’s ruling party since independence. One week later, Najib was sworn in as
prime minister, replacing Abdullah Ahmad Badawi as the leader of the UMNO-
dominated National Front (BN) coalition government.

Najib entered office under something less than ideal circumstances. He inherited a
coalition that was significantly weakened as a result of losses sustained at the March 2008
elections and whose survival remains in doubt owing to strains created by the subsequent
internal power struggle that ultimately forced Abdullah to make an early departure.
Najib has pledged to address the factors contributing to the erosion of the BN’s political
dominance, chief among them the uneven distribution of the benefits of economic
development across regions and ethnic groups, the widespread corruption that permeates
all levels of government, and the government’s use of repressive measures that prevent
the free expression of discontent.

The new prime minister has made a strong start. Steps have been taken to create a more
inviting climate for foreign investment and promote job creation, some of the special

Forecast Scenarios 1-Aug-2009 • Page 17


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

economic benefits granted to the majority Malay population (bumiputra) have been
reduced, and Najib himself has initiated a program of outreach to Malaysia’s minority
communities, dubbed the “1Malaysia Project.” The prime minister has also ordered an
increase in state spending on early childhood education and instituted a program to
ensure that government ministers are held accountable for their performance. In
addition, he has pledged to reduce bureaucratic obstacles, root out corruption, and
review the repressive Internal Security Act (ISA).

To a large extent, Najib’s actions so far have been more symbolic than substantive, and it
remains to be seen whether he possesses either the will or the political capital required to
see his plans through to successful implementation. For that matter, it is far from certain
whether Najib’s critics are correct in dismissing his embrace of reform as nothing more
than a cynical pose adopted for the sole purpose of slowing the momentum of an ongoing
effort by the People’s Alliance (PR)—an opposition coalition made up of the People’s
Justice Party (Keadilan), the Islamic Party of Malaysia (PAS), and the Democratic Action
Party (DAP)—to attract enough BN dissidents to topple UMNO from power by means of
a confidence vote.

Whatever his motives, Najib’s actions have been welcomed by the Malaysian people. Poll
results published in mid-July showed the prime minister’s popular support surging to
65%, from 45% in May. An important electoral test will come in late August 2009, when
voters in Permatang Pasir will go to the polls to fill the parliamentary seat left vacant as a
result of the death of PAS leader Hamdan Abdul Rahman on July 31. Permatang Pasir is
a stronghold of the Islamist party, which has held the seat for 15 years. A victory by
UMNO, or even a close race, would give the smaller parties in the governing coalition
reason to reconsider whether it is in their interest to desert the BN ship just yet.

On that basis, and given the recent signs that the worst of the economic downturn is over,
the BN is likely to remain in power through the end of the current term in 2013. The
probability that UMNO will continue to head the government after that point will
depend to a large extent on whether the PR can remain united. In that regard, the
outcome of the impending trial of the opposition bloc’s leader, Anwar Ibrahim, could
prove decisive.

Anwar was arrested in June 2008 on charges of engaging in sodomy, the same crime for
which he was convicted following a falling-out with Abdullah’s predecessor, Mahathir
bin Mohamed, in 1999. Then, as now, Anwar insists that the charge is baseless and
clearly designed to undermine his credibility among voters and drive a wedge between
Keadilan and the Islamist PAS. The start of Anwar’s trial, which was scheduled for early
July 2009, has been delayed until September, at the earliest. Should Anwar be convicted
and sentenced to prison, the opposition may splinter, leaving the BN in a stronger

Page 18 • 1-Aug-2009 Forecast Scenarios


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

position. However, his acquittal would validate claims of a political smear, and could
boost the opposition.

Push for Increased Foreign Investment


The reforms introduced since Najib replaced Abdullah mark a potentially significant
departure from the New Economic Policy (NEP) that was introduced by his father, Prime
Minister Abdul Razak, in the early 1970s. The NEP was designed to boost the living
standards of the majority ethnic Malay population, whose lack of economic success
compared to the smaller ethnic Chinese and Indian population fueled destabilizing social
tensions. Critics of the affirmative action program contend that it has prevented Malaysia
from realizing its full economic potential by thwarting competition and deterring foreign
investment. In addition, it has only benefited an elite group among the Malays, whose
privileged status is perpetuated by their close relationship with UMNO, which funnels
contracts in their direction in exchange for generous contributions to the party’s coffers.
For that reason, the government has been wary of tampering with the policy. Moreover,
despite its flaws, affirmative action is popular among the broader Malay population,
which forms the backbone of UMNO’s electoral base.

Najib has called for a complete rethinking of the country’s economic development model,
which has focused heavily on investment in export-based manufacturing. He has
proposed a shift in emphasis toward services, which currently account for only 15% of
exports and slightly more than 50% of GDP, but account for nearly three-fifths of all jobs
in the country. In late April 2009, he announced the liberalization of equity and other
restrictions on foreign investment in 27 services categories, including health, tourism,
transportation, and information and technology. Just a few days later, he expanded the
range of liberalized subsectors to include specialized financial services. In addition to
increasing the cap on the equity share of foreign investors from 49% to 70%, the
requirement of at least 30% bumiputra ownership was reduced or eliminated in some
cases.

Najib has also expressed a willingness to offer generous incentives, including a 10-year
tax holiday, to attract foreign investment in regional development projects initiated by his
predecessor, which aim to pull in more than $25 billion in investments by 2020. In that
regard, the initial focus will be the Eastern Corridor, comprising the states of Kelantan,
Terengganu, and Pahang.

The prime minister has also promised thoroughgoing reform of the civil service based on
the principle that the private sector is the most effective and efficient generator of wealth
and the public sector’s chief responsibility is facilitation of private economic activity.
Najib has stated that new guidelines for assessing the performance of the civil service will

Forecast Scenarios 1-Aug-2009 • Page 19


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

be put in place that reward “outcomes” rather than “output,” and that encourage
“creativity” as well as “productivity.”

The opposition parties have expressed doubts that Najib’s commitment to reform and
building bridges between ethnic groups is genuine. Even some of the prime minister’s
allies have looked askance at his offer to include the Islamist PAS in a unity government,
a move that they see as running counter to the spirit of the “1Malaysia” effort. Moreover,
critics contend that Najib is using the Malaysian Anti-corruption Commission (MACC) to
conduct a witch-hunt against his political rivals, and his rivals within UMNO, including
former Prime Minister Mahathir and Razaleigh Hamzah, who have protested the
presence of corruption-tainted members of the party within Najib’s Cabinet.

In any case, Najib’s top priority at the moment is bolstering the position of the BN at the
expense of the PR. It is that objective, and the extent to which any policy moves promote
achievement of that goal, that will determine which course he takes. He has clearly
decided that creating a more inviting climate for foreign investment will promote
UMNO’s political revival. If that proves to be true, he will be inclined to follow through.

Even in that event, obstacles will remain. Excessive red tape will continue to be a
problem, the government will continue to heavily regulate the economy, and firms with
connections to government will enjoy competitive advantages. Nor does the recent
liberalization of investment rules by any means signal a wholesale dismantling of the
NEP. UMNO leaders have stressed that Najib’s reforms represent a modification of
policy, not a change in course. Some elements of affirmative action, such as ethnic quotas
in education and the bureaucracy, do and will remain. In general, foreign operations will
continue to face restrictions in areas such as hiring and local procurement, although the
government will show greater flexibility in the case of investment in high-priority sectors
or targeted locations, and where shortages of trained executive and technical personnel
would make enforcement of the rules unfairly onerous.

The failure of the easing of capital restrictions imposed in 1998 to produce a significant
rebound in levels of foreign direct investment (FDI) indicated that investors were seeking
further assurances that reforms of the financial and corporate sectors undertaken by the
government were sufficient to protect against the type of instability that might prompt
the reimposition of controls. A positive step in that direction came in late July 2005, when
the central bank announced that the Malaysian currency, the ringgit, would no longer be
pegged to the US dollar. Pressure for the move had grown as a result of the loosening of
capital controls, and the decision to de-peg the ringgit suggested that officials were
confident that sufficient financial stability had been achieved as to limit the danger of
speculative attacks. Under rules that took effect on April 1, 2007, Malaysian banks are no
longer required to limit their net open foreign exchange positions to 20% of capital, and
the limit for mutual funds and insurance companies was raised from 30% to 50%. Most

Page 20 • 1-Aug-2009 Forecast Scenarios


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

notable was the lifting of restrictions that prevented domestic companies from borrowing
in foreign currency.

The dollar peg has been replaced by a managed float system under which the value of the
ringgit is determined according to a basket of foreign currencies, including the dollar and
the euro. Mahathir, among others, has called for the re-pegging of the ringgit, citing the
need to prevent a loss of competitiveness as a result of a weakening dollar. However,
both Najib and central bank authorities insist that the value of the currency will continue
to be determined by market forces. Healthy foreign exchange reserves (currently
sufficient for about eight months of import coverage), combined with expectations of
strong—if not stunning—inflows of FDI, will diminish the danger that new exchange
controls might be imposed.

Modest Trade Liberalization


While Mahathir promoted the ASEAN Free Trade Area (AFTA), he stood alone in
opposing the process of uniformly lowering trade barriers within the group, largely for
nationalist reasons. Even so, only a tiny percentage of Malaysia’s manufactured and
processed agricultural products are not yet covered under AFTA’s common external
tariff, and all import tariffs have been reduced to 0%–5% under the guidelines for AFTA,
which is due to be fully launched in January 2010. AFTA’s trade agreement with
Australia and New Zealand is expected to come into force at the same time. The ASEAN
bloc is on the brink of signing FTAs covering investment with China and trade of goods
with India.

Doubts about ASEAN’s ability to achieve its goal of economic integration by 2015 will
encourage individual members such as Malaysia to continue pursuing bilateral
agreements with its main trading partners that will result in the relaxation of barriers to
trade. In general, healthy external surpluses will undermine the political rationale for
high tariffs, encouraging a trade policy that focuses on opening new markets and creating
incentives for the export sector. However, Najib, like his predecessors, will maintain
protection for such favored industries as automobile manufacturing. Restrictions will
primarily take the form of licensing requirements that allow the maintenance of unofficial
quotas on selected goods.

Limited Risk from Turmoil, but Religious Tensions a Concern


Malaysia’s cooperation in the US-led war on terrorism increased the country’s risk of
becoming a target of attack from Islamic extremists, with likely targets being the
personnel and facilities of companies from the US, the UK, and other key allies in the
fight against terrorism. There are other concerns that terrorists might seek to disrupt
traffic in the Malacca Straits, a crucial artery of international trade, possibly including
attacks on the ports of littoral states, including Malaysia.

Forecast Scenarios 1-Aug-2009 • Page 21


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

The continued liberal use of the repressive Internal Security Act (ISA), which permits
long-term detention of suspects without charge, will help the government in its efforts to
combat terrorism, and to prevent any significant increase in the risk of more general
social upheaval. Abdullah’s departure will have a calming influence, as will Najib’s
1Malaysia project.

More fundamentally, three main political and social fault lines create the danger of
greater turmoil: ethnic rivalries (primarily between Malays and Chinese), political
divisions among the Malays, particularly along religious lines; and demands for social
reform from younger Malaysians within all ethnic groups, many of whom were educated
abroad.

The deep cultural divide between Malays and Chinese dates back to the colonial era,
when Chinese immigrants probably outnumbered Malays, but now hostility stems from
the fact that the minority ethnic Chinese control a substantial share of Malaysia’s wealth.
Malays themselves are divided over how to cope with the country’s ethnic divisions.
Keadilan, comprised of mostly social reformers, would handle the issue as essentially an
economic question, while PAS includes Muslim hard-liners who view (and would treat)
the Chinese as interlopers and exploiters. UMNO has historically tried to occupy the
middle ground, advocating special rights for Malays while acknowledging that the
Chinese role is significant, even essential, for Malaysia’s progress. Najib’s tweaking of
affirmative action rules may help to ease tensions, but reform of the NEP will probably
not go far enough to eliminate it as a source of resentment and potential conflict.

Religious divisions have become manifest in elections, particularly at the local level,
where contests among Muslims have been especially bitter. Religious hostility between
UMNO and PAS still divides many villages.

Organized crime poses another threat to order. Understaffed security services are unable
to patrol the long land and sea borders, leading to widespread smuggling of many illicit
goods, including narcotics. Even the threat of the death penalty for smugglers has not
stopped the illegal drug trade.

Resilient Economy
Malaysia is a trade-dependent economy; its ratio of foreign trade to GDP is more than
200%, a figure exceeded only by Hong Kong and Singapore. Not surprisingly, the global
economic recession has dealt a damaging blow to the economy, which contracted by 6.2%
(year-on-year) in the first quarter of 2009, the steepest decline in more than a decade, as a
nose-dive in demand for electronic components, oil, and palm oil contributed to a 20%
drop in exports compared to the first quarter of 2008. The troubles in the export sector

Page 22 • 1-Aug-2009 Forecast Scenarios


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

contributed to a general weakening of business and consumer confidence that resulted in


a 10.8% contraction in business investment and a 0.7% decline in private consumption.

The first-quarter result left no doubt that the $2 billion capital-spending program
introduced in late 2008 was wholly insufficient to check the downturn, let alone establish
a foundation for a recovery. In March, the government responded with a second
stimulus package worth $17 billion (about 9% of GDP). Meanwhile, the central bank
began loosening monetary policy in November 2008, reducing interest rates by 150 basis
points to 2%.

Economic performance is expected to improve in the second half of the year, after
recording a smaller year-on-year contraction in the April–June quarter, as the positive
impact of investment liberalization, an accommodative monetary policy, and aggressive
stimulus spending is reinforced by the beneficial effect of strengthening Chinese demand
on export activity. However, still-weak demand elsewhere will continue to hobble
export-oriented manufacturers, limiting the extent of any positive expansion in the final
quarter. Consequently, the economy is forecast to shrink by 3.5%–4.5% for the year as
whole. The strength and timing of a rebound will be determined to a large extent by
external developments. Assuming China avoids another slowdown and European and
US demand begin to recover by early 2010, a return to positive annual growth of 3%–4%
is a distinct possibility.

The consumer price index fell for the first time in more than 30 years in June, registering a
1.4% (year-on-year) decline after easing gradually from 3.9% in January to 2.4% in May.
Price movements are expected to remain negative over the remainder of the year, mainly
owing to the base effect of high fuel and food prices in 2008, the downward revision of
electricity tariffs, and weak domestic demand. On average, consumer prices are forecast
to decline by 0.5% in 2009, but inflationary pressures will return in 2010, as demand
fueled by heavy government spending and rising global commodity prices pushes prices
up by 1.8% next year.

Over the medium term, the maintenance of a flexible exchange-rate policy will reduce the
threat of imported inflation and lower the cost of both consumer and intermediate
imports, providing the central bank with greater flexibility in setting interest rates,
increasing the purchasing power of consumers, and lowering the unit costs of
manufacturers, all of which will benefit the broader economy. More generally, a recovery
in external demand, together with Najib’s efforts to promote development of the services
sector and attract increased levels of foreign investment, will provide a foundation for
annual economic expansion of 5% or more over the medium term, resulting in average
real GDP growth of 4.5% per year through 2014. Although moderately healthy growth
levels will create persistent upward pressure on prices, responsible fiscal management

Forecast Scenarios 1-Aug-2009 • Page 23


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

and the use of monetary levers will help to hold inflation to an annual average of 2.5%
through 2014.

Despite a sharp drop in both the volume and value of exports, the trade balance has
remained solidly in surplus over the first half of 2009, as imports have contracted at an
even faster pace, reflecting the negative impact of reduced manufacturing production,
inventory adjustments, and declining investment on demand for imported inputs. The
services balance will likely record a small deficit this year, owing to weaker tourist
spending, combining with a somewhat narrower trade surplus to hold the current
account surplus to about $26 billion, equivalent to a still very comfortable 13% of GDP.

Steady moderate growth, high productivity, and selective trade liberalization will keep
the current account balance in surplus throughout the forecast period. Currency
appreciation will have limited negative effect on the competitiveness of exports, as
manufacturers will benefit from the lower cost of imported inputs, but steady economic
growth and increased purchasing power will fuel consumer demand for imports,
resulting in somewhat narrower trade surpluses over the forecast period. The strength of
the tourism sector will protect against a significant deterioration of the current account
surplus, which will average $28.5 billion annually through 2014.

Although foreign exchange reserves have fallen by nearly one-third since mid-2008, at
$88.3 billion (as of May 2009), they are sufficient to finance more than eight months of
imports and represent nearly four times the short-term foreign debt. Under the
circumstances, there is little risk that the central bank might be forced to revise its policy
of setting the ringgit exchange rate by means of a managed float against an unspecified
basket of currencies.

Second Most Likely Regime Scenario

18-Month Forecast Period: PR Growth Inflation CACC


PR Coalition (35% Probability) Coalition (%) (%) ($bn)
Five-Year Forecast Period: 2009 -4.9 -0.9 21.20
PR Coalition (35% Probability) 2010-2014 3.1 3.1 19.60

Despite the recent transfer of power, the risk of a leadership struggle between Najib and
Razaleigh will persist, and any developments that aggravate the resentment of smaller
parties within the BN could trigger defections that cost the governing alliance its
parliamentary majority and its hold on power. However, opposition leader Anwar is
once again facing legal prosecution for sex crimes, and there have been clear signs of
friction among the PR partners. In particular, PAS leaders have openly declared that they
view the PR as a vehicle for facilitating the establishment of a religious state—a position
that drew sharp criticism from the DAP—and have admitted to meeting with UMNO

Page 24 • 1-Aug-2009 Forecast Scenarios


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

representatives about the possibility of joining the BN coalition. Thus, even if Anwar is
acquitted and/or Najib runs into trouble with party rivals or his coalition partners, the PR
might still face difficulty forming a viable government.
Limited Easing of Restrictions
Given the assumed influence of PAS under this scenario, a PR coalition government
would pursue only limited easing of restrictions on foreign investment. Some equity
restrictions might be eased, particularly for those firms that employ sophisticated
technology. However, this government would face internal disputes over the
maintenance of affirmative action rules favoring bumiputra, and would move with
caution in the pursuit of integration with the global economy. A PR coalition would
monitor business activities closely to ensure that firms act within prescribed guidelines.
Businesses would still be urged to make sophisticated technology available to local
workers and firms; they would also be expected to train local workers for skilled
positions. The actual level of restrictions on a given firm would depend on an assessment
of that firm’s contribution to exports.
More Turmoil
At least temporary disturbances would arise because of the uncertainty of the standing of
a PR-led government. As long as PAS claimed membership in the government, its
insistence on promoting the goals and ideals of conservative Islam would provoke
protests.
Economic Recovery, Eventually
Tensions between PAS and other members of the coalition government might contribute
to uncertainty over the direction of policy that would deter investment, holding economic
growth below potential. Even though a PR regime would generally favor a more liberal
business environment, political and social strains would impede the implementation of
free-market reforms. Real GDP growth would average 3.1% annually through 2014.
Inflation would average 3.1 per year over the entire forecast period. Weaker investment
would hamper export production, resulting in smaller current account surpluses
averaging $19.6 billion per year through 2014.

Third Most Likely Regime Scenario


18-Month Forecast Period: Islamist Growth Inflation CACC
Islamist (5% Probability) (%) (%) ($bn)
Five-Year Forecast Period: 2009 -5.5 6.9 14.50
Islamist (5% Probability) 2010-2014 2.4 3.8 8.90

Although highly unlikely, it is not altogether impossible that a coalition government


promoting an Islamist political agenda might come to power during the forecast period.

Forecast Scenarios 1-Aug-2009 • Page 25


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Gains made by the PAS at the 2008 elections are believed to have resulted in large part
from a backlash against Abdullah’s efforts to position UMNO as an advocate of religious
moderation, suggesting a potential pocket of conservative Islamist sentiment that has yet
to be tapped by the PAS.

This scenario would only be possible in the near term as a result of an early election that
resulted in the emergence of the PAS as a viable challenger to the longstanding
dominance of UMNO, quietly likely following a damaging split in the main governing
party.

Increased Uncertainty Would Hamper Economy


The emergence of a conservative Islamist regime would have negative implications for
Malaysia’s relations with the US, the EU, and some of its neighbors (especially
Singapore), and would almost certainly contribute to a deterioration in the climate for
investment and trade. Friction between Malays and ethnic Chinese and Indians would
increase, raising the specter of a repeat of the deadly domestic conflict of the 1960s. That
prospect, in combination with the government’s aloofness toward the international
business community and refusal to carry out reforms sought by the global financial
community would create a barrier to maintaining sufficient levels of investment to
maintain healthy rates of growth.

Real GDP growth would slow to an annual average of just 2.4% through 2014. The
inflationary impact of a likely relaxation of fiscal discipline would be largely offset by the
disinflationary effect of slower growth and the central bank’s maintenance of a
conservative monetary stance, and consumer prices would rise by an annual average of
3.8% over the five-year forecast period.

Sluggish investment in export-related manufacturing industries would contribute to


weak growth of exports, but the slower pace of economic expansion would have a
dampening effect on domestic demand, ensuring that the trade balance would remain in
surplus. Even so, the current account surplus would be smaller than under the alternate
scenarios, averaging $8.9 billion per year through 2014.

Page 26 • 1-Aug-2009 Forecast Scenarios


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Forecast Summary
SUMMARY OF 18-MONTH FORECAST

UMNO-led PR Coalition Islamist


REGIMES & PROBABILITIES Coalition 60% 35% 5%
RISK FACTORS CURRENT
Turmoil Low Same SLIGHTLY MORE MORE
Investment
Equity Moderate SLIGHTLY LESS Same SLIGHTLY MORE
Operations High Same Same SLIGHTLY MORE
Taxation Moderate SLIGHTLY LESS Same Same
Repatriation Low Same SLIGHTLY MORE MORE
Exchange Moderate Same SLIGHTLY LESS MORE
Trade
Tariffs Moderate Same Same SLIGHTLY MORE
Other Barriers Moderate SLIGHTLY LESS Same SLIGHTLY MORE
Payment Delays Moderate Same Same MORE
Economic Policy
Expansion High MORE SLIGHTLY MORE MORE
Labor Costs Moderate SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE
Foreign Debt Low Same Same Same

SUMMARY OF FIVE-YEAR FORECAST

UMNO-led PR Coalition Islamist


REGIMES & PROBABILITIES Coalition 60% 35% 5%
RISK FACTORS BASE
Turmoil Low Same SLIGHTLY MORE MORE
Restrictions
Investment Moderate Same SLIGHTLY LESS Same
Trade Moderate Same Same Same
Economic Problems
Domestic Moderate Same SLIGHTLY MORE MORE
International Low Same Same MORE

* When present, indicates forecast of a new regime

Forecast Scenarios 1-Aug-2009 • Page 27


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Malaysia
Real GDP Growth Under Alternative Regimes

UMNO-led Coalition PR Coalition Islamist

8.0
6.0
4.0
(percent)

2.0
0.0
-2.0
-4.0
-6.0
2004 2005 2006 2007 2008e 2009f 2010-
2014f

Malaysia
Inflation Under Alternative Regimes

UMNO-led Coalition PR Coalition Islamist

7
6
5
(percent)

4
3
2
1
0
-1
2004 2005 2006 2007 2008e 2009f 2010-
2014f

Malaysia
Current Account Under Alternative Regimes

UMNO-led Coalition PR Coalition Islamist

40.0
35.0
30.0
($billions)

25.0
20.0
15.0
10.0
5.0
2004 2005 2006 2007 2008e 2009f 2010-
2014f

Page 28 • 1-Aug-2009 Forecast Scenarios


Political Risk Services
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Malaysia
Country Forecast
Political Framework
Players To Watch
Najib bin Abdul Razak: Najib was elected leader of UMNO running unopposed at an election
held in late March 2009, and succeeded Abdullah bin Ahmad Badawi as premier in early April.
He has moved aggressively to rebuild his party’s popular base and heal the rifts within the
governing BN coalition, pushing ahead with liberalization of the services sector (the chief source
of new jobs) and modestly scaling back affirmative action policies that have aggravated tensions
between UMNO and the smaller ethnic Chinese and Indian parties in the BN. The opposition PR
claims that Najib’s embrace of reform is cynical and that he is merely attempting to co-opt its
agenda. That may be so, but as long as his pursuit of reform produces the political result Najib
desires, the prime minister, who also holds the Finance portfolio, will be inclined to maintain a
liberal policy course, to the benefit of foreign investors…

United Malays National Organization: Despite suffering heavy losses at the 2008 elections,
UMNO remains by far the most powerful political party in the country. However, its internal
dynamics require constant attention, as the party is highly prone to factionalism. Abdullah’s
departure has reduced the immediate threat of a split, but Najib’s fitness to lead has been openly
called into question by Razaleigh Hamzah, a key contender to replace Najib should the prime
minister encounter serious political difficulties that generate calls for his resignation…

Islamic Party of Malaysia: The PAS benefited at the 2008 elections from a backlash against
former Prime Minister Abdullah’s “responsible Islam” campaign, gaining enough seats to make
its support essential to the success of an opposition bid to topple the BN government. The PAS is
less committed than the other parties in the opposition PR bloc to political and economic
inclusiveness, and as such represents the weak link of the alliance. There are already signs of
friction between the PAS and the ethnic Chinese DAP, and PAS leaders have admitted to meeting
with UMNO representatives about the possibility of teaming up with the BN…

People’s Justice Party: Keadilan was formed in the late 1990s as the political vehicle of the anti-
UMNO Reformasi movement, and has flourished since its de facto leader, Anwar Ibrahim, was
released from prison in 2004. Anwar became formal leader of the opposition after scoring a
landslide victory in a by-election held in August 2008, but his prospects for toppling UMNO from
power by attracting defectors from the BN have dimmed following the departure of Prime
Minister Abdullah. Moreover, the PR leader’s own political future has been thrown into
uncertainty by his prosecution on sodomy charges. As was the case in 1999, when he was
convicted and imprisoned on similar charges, Anwar contends that the allegations are baseless.
Nevertheless, the legal pressure has created tensions within the PR, and a second conviction
could very well trigger the collapse of the opposition bloc…

…more on these and other Players in the Political Players section

Political Framework 1-Aug-2009 • Page 29


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Political Players

Democratic Action Party (DAP)


Parti Tindakan Demokratik is a socialist party with origins in Singapore’s ruling People’s
Action Party. The party gained 16 seats at the March 2008 general election to bring its
total to 28, making it the second largest member of the People’s Pact (PR) alliance formed
in April 2008. The DAP’s base consists primarily of Chinese Malayans, whose suspicion
of the intentions of the Islamist PAS has posed a serious obstacle to sustaining a united
opposition alliance.

Established on March 19, 1966, DAP’s primary political role is and has been to act as an
advocate for the less wealthy among the minority Chinese community, from which it
receives virtually all its support. The party’s narrow ethnic focus gives it almost no
chance of leading the government. Although DAP had initiated plans to broaden its base
by nominating Malay and Indian candidates in elections during the 1980s, the policy was
reversed in 1989 because party leaders feared the loss of their ability to serve as a vehicle
for ethnic Chinese interests.

DAP joined the opposition Alternative Front (BA), which grew out of the Reformasi
movement in 1999, but deserted the alliance in September 2001 amid an apparent
hardening of the Islamist stance of the PAS, the dominant party in the BA. Party leaders
also sought to rise to power in 1987 in partnership with the Spirit of ‘46 Party, the vehicle
of UMNO dissident Razaleigh Hamzah, but that plan collapsed when many members of
DAP defected to the Malaysian Chinese Organization (MCA) because of objections to
Razaleigh’s cooperation with PAS.

During the 1999 election campaign, the ruling National Front (Barisan Nasional, or BN)
used the state news media to undermine DAP’s support by stirring the ethnic Chinese
community’s fears of PAS’ intentions. It warned that a BA government would bring
economic decline, social instability, and an Iranian-style Islamic state. The Islamization
threat played well among the large ethnic Chinese community, which had seen the result
of economic collapse on the Chinese population of Indonesia. DAP’s leader, the veteran
Lim Kit Siang, and the party’s deputy president, Karpal Singh, were both defeated in
their individual contests. On December 2, 1999, Lim Kit Siang resigned as leader of DAP,
taking full responsibility for the party’s defeat, although he did agree to stay on as the
party’s national chairman.

Islamic Party of Malaysia (PAS)


The fundamentalist Parti Islam sa-Malaysia benefited at the 2008 elections from a backlash
against former Prime Minister Abdullah’s “responsible Islam” campaign, gaining enough

Page 30 • 1-Aug-2009 Political Framework


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

seats to make its support essential to the success of an opposition bid to topple the BN
government. PAS is less committed than the other parties in the opposition PR bloc to
political and economic inclusiveness, and as such represents the weak link of the alliance.
There are already signs of friction between PAS and the ethnic Chinese DAP, and PAS
leaders have admitted to meeting with UMNO representatives about the possibility of
teaming up with the BN.

Although Islam is Malaysia’s official religion, the constitution and the government insist
on the protection of the rights of its non-Muslim population and retain much of the legal
system inherited from the British. The growth of Islamic fundamentalism beginning in
the late 1980s generated widespread criticism of the government’s failure to promote
Muslim values, and also resulted in increased support for PAS, which had struggled to
expand its appeal since its formation in 1955. In the 1990 general elections, PAS won
seven parliamentary seats, in contrast to winning only one in 1986. In the same year, the
party won 24 of the 39 seats in the Kelantan state elections, inflicting an embarrassing
defeat on UMNO. PAS also achieved progress in the April 1995 parliamentary elections,
finishing ahead of DAP in the popular vote (although it won fewer seats).

In the 1999 elections, PAS joined the ethnic Chinese DAP and the reformist Keadilan in
the BA alliance, and emerged as the largest opposition party after nearly quadrupling its
representation in Parliament to 27 seats. PAS made significant inroads in the northern
Malay heartland, as disillusioned native Malays turned against Mahathir because of his
treatment of former Deputy Prime Minister Anwar and other failings within UMNO.
Challengers from PAS defeated four of the 10 UMNO Cabinet ministers seeking re-
election. When Parliament convened in December 1999, the 45 members of the
opposition staged a boycott to protest what they termed the ruling coalition’s
“arrogance” and alleged violations of the constitution. It was the first time the entire
opposition had ever walked out of a new parliamentary session before even taking their
oaths of office.

However, the trend of growing support for the party was reversed following the
initiation of the US-led war on terrorism in late 2001. For many voters, the election of
Hadi Awang, an avowed supporter of the establishment of an Islamic state, as party
leader following the death of Fadzil Noor in 2002 appeared to lend credence to the
government’s claims that PAS posed a threat to domestic security and stability. The
party suffered a crushing defeat at the March 2004 general election, losing 20 of its 27
seats in the Parliament, and retaining control of the Kelantan government by just won
seat.

Political Framework 1-Aug-2009 • Page 31


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

In general, PAS has a weak record of cooperating with other parties. A limited
cooperative arrangement with Razaleigh’s Spirit of ‘46 Party forged in 1987 gradually
eroded and finally ended when PAS attempted to revise Kelantan’s state constitution to
weaken the prerogatives of the sultan, a move opposed by Spirit of ‘46. Razaleigh’s
return to UMNO along with most of the other members of the Spirit of ‘46 Party in the
1990s marked a setback for PAS and its aspirations of gaining power. Likewise, relations
between PAS and DAP became increasingly strained after the 1999 elections. In late
September 2001, concerns about the strident religious tone of PAS led to DAP’s formal
withdrawal from the BA. Suspicion of PAS among the Chinese population has a long
history. Objections to Razaleigh’s cooperation with PAS prevented the formation of an
alliance between DAP and the Spirit of ‘46 Party in the late 1980s.

The slight softening of the party’s Islamic goals in 1999 did little to attract the votes of
non-Muslims, prompting a shift to a more hard-line position. That trend was accelerated
with the emergence of Hadi, the chief minister of the PAS government in the state of
Terengganu, as the party’s leader in mid-2002. However, the results of the 2004 elections
indicate that the former UMNO supporters who flocked to the party in 1999 were in the
main social conservatives, rather than fundamentalists, and returned to the UMNO fold
as PAS adopted a less moderate position. Particularly telling was the fact that Hadi lost
not only his parliamentary seat, but also control of the state government in Terengganu.

Malayan Businesses
Although the government exerts significant influence over the private sector, the growing
Malay presence in business enhances the political importance of the business community.
The government has assisted the change by using its privatization program to increase
business ownership among Malays through a bidding process that favors the Bumiputra.
Foreigners, Malayan Chinese, and Malays control the larger business enterprises through
quasi-governmental financial institutions. Ethnic Chinese manage many large Malay-
controlled businesses, which include the strong manufacturing sector, plus agriculture
and resource extraction. Such enterprises are subject to close government scrutiny to
ensure long-term economic contributions and have experienced tremendous growth since
the early 1980s. Although most small businesses are still owned by Chinese, more Malays
are gradually becoming involved in businesses at a variety of levels, and increasing
numbers of educated Malays are finding management positions in larger firms.

As the importance of the Malay business grows, the Chinese community is investing an
increasing proportion of its resources abroad. These moves are partly based on Chinese
concerns about discrimination at the hands of Malays and partly on the fact that many
Chinese see more opportunity for profit in China and elsewhere in the region, including
expansion into the Philippines, Vietnam, Hong Kong, and the US.

Page 32 • 1-Aug-2009 Political Framework


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Malayan Chinese Association (MCA)


The MCA is one of three major parties cooperating with UMNO in the BN coalition,
which also includes the People’s Movement (Gerakan) and the Malayan Indian Congress
(MIC), along with various smaller parties. The MCA represents the interests of ethnic
Chinese, particularly the affluent Chinese who are part of the Malaysian establishment,
and its influence stems from UMNO’s desire to paint itself as an inclusive, multiracial
alliance perfectly suited to lead a country rife with ethnic tension.

However, the MCA’s leaders always have difficulty trying to appease both their UMNO
partner and the Chinese community at large. For this reason, many less affluent Chinese
support the DAP. Dissatisfaction with the party’s record as an advocate for Chinese
interests figured prominently in the MCA’s poor showing in the March 2008 election,
which resulted in net loss of 16 seats.

The MCA was originally established in 1949 as a welfare organization that aimed to
counter the influence of Communists in the Chinese community. In 1952, its Selangor
branch entered into a pact with the local UMNO branch to contest local elections in Kuala
Lumpur. After an electoral success there, the two parties joined with the MIC to contest
federal elections. The three parties became the Alliance Party, the beginnings of a
coalition that has ruled Malaysia in one form or another since 1957.

Ethnic tensions have contributed to growing dissatisfaction among all Chinese elements
of the BN. The MCA joined DAP in questioning the government’s policies on Chinese
education. The Chinese have also been concerned about the erosion of their place in the
economy as a result of government policies that favor ethnic Malays. Leaders of the
Chinese parties are concerned about their future because of the decline of the Chinese
population. The Malay population’s faster rate of growth may reduce the percentage of
Chinese from 26% to 20% by 2040.

Malayan Indian Congress (MIC)


A member of the ruling BN coalition, MIC was established in 1946, adapting its name
from the Indian National Congress. It dropped some leftist inclinations in 1948 after the
start of the Emergency in Malaya and eventually linked with UMNO and the MCA
through the Alliance after their electoral success in Kuala Lumpur in 1952. MIC has
remained the most junior partner in this tripartite arrangement ever since.

MIC is the primary vehicle to express Indian interests in Malaysia, although it tends to be
seen as out of touch with working-class Indians, many of whom are among the country’s
poorest people. In November 2007, Malaysian Indian organizations staged mass

Political Framework 1-Aug-2009 • Page 33


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

demonstrations to protest the planned razing of a 100-year-old Hindu temple in south


Johor, and blamed the MIC for failing to protect ethnic Indian interests when the temple
was demolished. Consequently, it was not entirely surprising that the party lost six of its
nine parliamentary seats at elections held in March 2008, as ethnic Indian voters flocked
to Keadilan. Tellingly, the MIC’s long-time president (and only representative in the
Cabinet), Works Minister Samy Vellu Sangalimuthu, lost the Sungai Siput parliamentary
seat he had held for more than 30 years to a Keadilan challenger.

Najib bin Abdul Razak (Prime Minister)


Najib was elected leader of UMNO running unopposed at an election held in late March
2009, and succeeded Abdullah bin Ahmad Badawi as premier in early April. He has
moved aggressively to rebuild his party’s popular base and heal the rifts within the
governing BN coalition, pushing ahead with liberalization of the services sector (the chief
source of new jobs) and modestly scaling back affirmative action policies that have
aggravated tensions between UMNO and the smaller ethnic Chinese and Indian parties
in the BN. The opposition PR claims that Najib’s embrace of reform is cynical and that he
is merely attempting to co-opt its agenda. That may be so, but as long as his pursuit of
reform produces the political result Najib desires, the prime minister, who also holds the
Finance portfolio, will be inclined to maintain a liberal policy course, to the benefit of
foreign investors.

Born on July 23, 1954, in Kuala Lipis, Pahang, Najib is the son of former Prime Minister
Tun Abdul Razak. Like his father, Najib has advanced himself by playing the role of the
loyal party member and winning the confidence of the prime minister. His various
government posts have included deputy minister of energy, telecommunications, and
posts (1978–1980), deputy minister of education (1980–1981), deputy minister of finance
(1981–1982), minister of youth and sports (1986–1990), and minister of defense (1990–
1995). In 1995, Najib was promoted to the significant post of minister of education, a
position generally regarded as a stepping-stone to the prime minister’s position.

Najib has enemies within UMNO and a reputation for unbridled expediency. Although
he initially backed the 1987 challenge to Mahathir by Razaleigh, he withdrew his support
late in the campaign, a move that still rankles Razaleigh and his followers. Nevertheless,
his political instincts are thought to be sharper than Abdullah’s. Najib bit his tongue after
being passed over as deputy prime minister in the aftermath of Anwar’s departure, and
his patience paid off when he was named as Abdullah’s deputy in 2001. As pressure
mounted on Abdullah following the 2008 elections, Abdullah announced that Najib was
his preferred successor, and Najib returned the favor by calling upon his fellow party
members to support the beleaguered prime minister’s re-election as party leader. Najib’s

Page 34 • 1-Aug-2009 Political Framework


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

loyalty to his boss made him a target of Abdullah’s critics, chief among them former
Prime Minister Mahathir.

National Front (BN)—Minor Parties


While Malay members of UMNO occupy most key positions in the government, the party
attempts to give the impression that its non-Malay partners in the BN also play an
important role. Besides the MCA and MIC, the principal party cooperating with UMNO
is Gerakan, which represents ethnic Chinese interests. Rivalries between the two Chinese
parties in the BN weaken the political influence of both. The BN parties depend heavily
on UMNO for financial support and for the votes of ethnic Malays in areas where the
Chinese or Indian population might otherwise elect a member of the opposition.

Other parties within the BN include local state parties from Sabah and Sarawak.
Mahathir’s government suffered an embarrassing defeat in 1990, when the United Sabah
Party (PBS), which had participated in the 1986 parliamentary elections as a BN member,
withdrew from the Front on the eve of general elections and joined the opposition.
However, in March 1994 the government persuaded opposition deputies in the Sabah
legislature to defect from the PBS and support the Sabah National Front (SNF). As a
result, the state government fell and was replaced by a coalition headed by the BN. In
1999, UMNO won a resounding victory in Sabah elections, effectively eliminating the
influence of the PBS and leaving UMNO in control of every state except Kelantan. In an
implicit admission of defeat, the PBS announced in late 2001 that it desired a return to the
BN fold, but Mahathir responded coolly to the request. However, the PBS did join the BN
coalition ahead of the 2004 elections.

People’s Justice Party (Keadilan)


Parti Keadilan Rakyat was formed in 2003 through the merger of the National Justice Party
(Parti Keadilan Nasional) and the People’s Party Malaysia. In its original incarnation,
Keadilan was the political vehicle of the Reformasi movement, which arose from outrage
over the government’s treatment of former Deputy Prime Minister Anwar. At the March
2004 election, Keadilan barely managed to maintain a place in the Parliament, winning
just a single seat. At the time, it appeared that Keadilan’s chief role would be to serve as a
communication link with outside human rights organizations. However, the party has
flourished under the de facto leadership of Anwar, who was released from prison in
September 2004, after a court overturned his conviction on sodomy charges. Keadilan
won 31 seats at the March 2008 elections, and subsequently formalized its alliance with
both PAS and DAP. Anwar became formal leader of the opposition after scoring a
landslide victory in a by-election held in August 2008, but his prospects for toppling
UMNO from power by attracting defectors from the BN have dimmed following the
departure of Prime Minister Abdullah. Moreover, the PR leader’s own political future

Political Framework 1-Aug-2009 • Page 35


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

has been thrown into uncertainty by his prosecution on sodomy charges. As was the case
in 1999, when he was convicted and imprisoned on similar charges, Anwar contends that
the allegations are baseless. Nevertheless, the legal pressure has created tensions within
the PR, and a second conviction could very well trigger the collapse of the opposition
bloc.

Keadilan’s unique approach has been to seek a multiracial constituency in order to


provide a third option for Malays unhappy with UMNO’s conservative, rigid, and
corrupt ways, as well as PAS’ religious conservatism. In its early days, Keadilan sought
to build support by focusing attention on corruption, cronyism, and bureaucratic
improprieties in Mahathir’s government. However, facing its first electoral challenge in
1999 with just nine days notice, Keadilan was unable to translate public disaffection with
Mahathir into votes. Its call for greater democracy won a significant share of the vote in
Kuala Lumpur, where government candidates had their majorities sharply reduced, but
Keadilan failed to make an impact elsewhere. As a result, the party won only five seats,
one by Wan Azizah Wan Ismail, Anwar’s wife and the party’s founder, who stood for
election in her husband’s former constituency.

However, the party fell on hard times in 2001, largely the result of Mahathir’s campaign
of intimidation. Six of the party’s top leaders were arrested under the Internal Security
Act (ISA) in April 2001. Government pressure has effectively taken the wind out of the
sails of the reform movement, and several leading members have left the party. Keadilan
suffered a crushing defeat in a by-election for a seat in the Perlis State Assembly in
January 2002, a portent of its performance in the 2004 general election.

Razaleigh Hamzah
A former finance minister, Razaleigh led a revolt against Mahathir in 1987, and before
that had unsuccessfully challenged Musa Hitam twice for UMNO’s deputy presidency.
However, after being tainted by the Bank Bumiputra scandal while he was finance
minister (1976–1984), Razaleigh lost a close race in 1987 against Mahathir for UMNO’s
presidency, the position always held by the prime minister. He then left the party,
eventually helping to form the Spirit of ‘46 and serving as its president until his return to
the UMNO fold in 1996.

Born in 1936 in Kelantan, Razaleigh is the son of a former chief minister of Kelantan. He
was educated at Queen’s University in Belfast and Lincoln’s Inn in London. His past
experience included being chairman of Pernas (1971–1974) and chairman of the national
oil company, Petronas, (1974–1976). In addition to the Finance portfolio, he also served as
vice president of UMNO (1975–1986) and as minister of trade and industry (1984–1987).
In 1999, Razaleigh became the leader of UMNO’s effort in Kelantan to regain control of

Page 36 • 1-Aug-2009 Political Framework


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

the state government, now held by PAS. Ironically, he became a defender of the federal
status quo that he himself challenged in the 1987 elections.

Razaleigh’s return to UMNO in June 1996, along with most members of his Spirit of ‘46
Party, revived his chances of regaining his former status as a senior leader of UMNO. He
insisted that he rejoined UMNO to create greater unity among the Malays and does not
seek a senior post, but as a member of Kelantan’s royal family, many members of UMNO
hold Razaleigh in high regard. If Najib encounters difficulties that raise doubts as to his
fitness to serve as UMNO leader and prime minister, Razaleigh could maneuver himself
into that position.

United Malays National Organization (UMNO)


Despite suffering heavy losses at the 2008 elections, UMNO remains by far the most
powerful political party in the country. However, its internal dynamics require constant
attention, as the party is highly prone to factionalism. Abdullah’s departure has reduced
the immediate threat of a split, but Najib’s fitness to lead has been openly called into
question by Razaleigh Hamzah, a key contender to replace Najib should the prime
minister encounter serious political difficulties that generate calls for his resignation.

In its current form, UMNO began in 1988. The original UMNO splintered in April 1987
when dissidents headed by Razaleigh and Musa opposed Mahathir’s leadership in a
bitter and closely fought contest. The narrow victory by the prime minister and his
deputy, Ghafar Baba, was challenged in the courts, which ruled that while the election
was legal, UMNO was not. Mahathir obtained permission from the registrar of societies
to form the “New UMNO,” while Razaleigh and his dissident faction, including former
Prime Minister Abdul Rahman, applied to form another group, “UMNO Malaysia.” The
courts legitimized Mahathir’s New UMNO and denied the dissidents’ claim. Razaleigh
eventually formed the Spirit of ‘46 Party, but rejoined UMNO in the mid-1990s, a
development that helped to solidify both UMNO’s and Mahathir’s political power.

The economic difficulties of the late 1990s and Mahathir’s battle with Anwar stimulated
anti-UMNO sentiment among the population. The rise of the Reformasi movement and
the emergence of Keadilan, which joined DAP and PAS in forming the BA alliance,
presented a potentially viable challenge to UMNO’s stranglehold on power. However,
the opposition parties were given just nine days to campaign for the 1999 election,
and the state-run media drowned out their message. There were daily attacks on Anwar
in the newspapers and a videotape was produced that supposedly proved claims he had
committed sexual improprieties. According to PAS, the BN even circulated a fake PAS
newspaper, full of reports of how their leaders secretly favored Mahathir. There were no
complaints of vote buying or intimidation in the election, but the opposition did complain

Political Framework 1-Aug-2009 • Page 37


Political Risk Services Malaysia Country Forecast
1-Aug-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

that there were more than 200,000 phantom voters on the electoral lists that were used to
swing marginal constituencies in favor of the BN.

The results of the 1999 elections, which saw UMNO’s share of seats fall from 49% to just
37%, suggested that while the electorate was not prepared to take the risk of a completely
new government at such a precarious economic juncture, it was prepared to fire a
warning shot across Mahathir’s bow. However, the replacement of Mahathir with the
“gentler” Abdullah, as well as the renewed strength of the economy, left the reform
movement with no potent issues on which to challenge the government in 2004. UMNO
put in a spectacular performance at the 2004 election, gaining 38 seats and very nearly
winning a parliamentary majority on its own.

Unfortunately, that result did little to relieve tensions within UMNO. Party elections held
in September 2004 saw two members of the party’s old guard, which has balked at
Abdullah’s efforts to remake the party in his own image, voted into the top two vice
presidential posts. One of those, First Vice President Isa Abdul Samad, was subsequently
removed over his involvement in a vote-buying scam, and Isa’s old-guard allies accused
Abdullah of conducting a witch-hunt aimed at purging his political rivals from positions
of power within the party. Tensions only increased after the March 2008 elections, at
which the party lost 30 of its 109 seats and its share of the popular vote fell below 30%.

Page 38 • 1-Aug-2009 Political Framework


Political Risk Services
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Malaysia
Country Conditions
Climate for Investment & Trade
Overview
Openness to Foreign Investment
The Government of Malaysia (GOM) encourages foreign direct investment (FDI) by providing a number of
incentives, particularly in export-oriented high-tech industries and “back office” service operations. The
GOM also hosts international trade shows and advertises broadly to attract FDI. Many U.S. companies have
operations in Malaysia, including Intel, Microsoft, Dell, GE, UPS, Mattel, and Motorola, just to name a few.

Inflows of FDI to Malaysia increased by 38.9% from USD 6.4 billion in 2006 to USD 8.4 billion in 2007,
according to the UN Conference on Trade and Development (UNCTAD). Malaysian outflows increased by
81.9% during the same period, rising from USD 6.04 billion to USD 10.98 billion. One GOM official
attributed the substantial increase in outward flows largely to cross-border acquisitions in the service,
telecom, and oil & gas sectors. Malaysia slipped from its 2006 global rank of 67th largest destination for FDI
to the 71st in 2007.

As a destination for FDI, Malaysia’s attractiveness for lower-wage manufacturing has diminished as years
of steady economic growth have made it a middle-income country. The GOM seeks to move the economy
“up the value chain” by promoting specific sectors. In its 2006-2020 Third Industrial Master Plan, the GOM
identified specific higher-tech industries it wanted to attract and develop. In the manufacturing sector these
included electrical & electronics; medical devices; textiles & apparel; machinery & equipment; metals; and
transportation equipment. Also targeted for growth were a number of resource-based industries and some
services sub-sectors including logistics; however, the extent to which foreign investors are allowed to
participate in these sectors is limited.

The Ministerial Functions Act grants relevant ministries broad discretionary powers over the approval of
specific investment projects. Investors in industries targeted by the GOM often can negotiate favorable
terms with the ministry or other regulatory body. This can include assistance in navigating a complex web
of regulations and policies, a few of which can be waived on a case-by-case basis. In general, the GOM
welcomes foreign investment; however, investors in non-targeted industries tend to receive less GOM
assistance in obtaining the necessary approvals from the various regulatory bodies and therefore face more
bureaucratic obstacles.

Nevertheless, the GOM actively reaches out to targeted industries and negotiates terms that successfully
attract FDI. According to the Malaysian Industrial Development Authority (MIDA), the total value of
manufacturing projects approved in 2008 was USD 17.7 billion. This exceeds project approvals for 2007
(USD 17.4 billion). Australia was the largest source of foreign manufacturing investments in 2008, followed
by the US, Japan and Germany. (Note: approval statistics are not directly comparable to actual FDI
statistics. Also, manufacturing investment statistics do not capture investments in non-manufacturing-
related services or upstream oil and gas production.)

Malaysia made progress in developing an export control law in 2008 and plans to present legislation to
Parliament in 2009. Implementation of an export control law will qualify Malaysian exports for expedited

Climate for Investment & Trade 1-May-2009 • Page 1


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

customs handling upon import to the U.S. and to other countries. An export control law also will be
essential if Malaysia is to achieve its goal of becoming a “logistics hub,” particularly in light of the
international trade system’s growing emphasis on secure supply chains and transparent cargo movements
throughout the manufacturing and shipping process.

Regulatory Burden. The World Bank compiles an annual “Doing Business” report comparing regulations
affecting ten areas of everyday business across the globe. In its Doing Business 2009 report, which covers
the period through June 2008, Malaysia moved up from 24th to 20th place among the 181 economies
covered in this survey.1 Malaysia’s best rankings were in the standardized indicators “getting credit” and
“protecting investors,” where it ranks first and fourth, respectively. Malaysia’s worst ranking at 104th place
is in “dealing with construction permits” which, in the standardized example of obtaining the approvals
necessary to build a warehouse, involves 25 procedures and takes 261 days, at a cost of 7.9% of per capita
income, all before construction can begin. This year’s ranking is marginally better than last year, when the
duration was 285 days and the cost 10% of per capita income.

Malaysia improved its rankings in starting a business, where it moved up from 82nd to 75th place, closing a
business, moving from 57th to 54th place, and enforcing contracts, moving from 60th to 59th place.
Malaysia’s ranking declined in employing workers, registering property, and trading across borders, where
it now ranks 48th, 81st, and 29th, respectively.

The most dramatic improvement in this year’s ranking was in the ease of paying taxes where Malaysia rose
by 39 rankings, moving from 60th place last year to 21st this year. The credit for this improvement goes to
PEMUDAH, a committee established by Prime Minister Abdullah in February 2007 in direct response to the
Doing Business report.

PEMUDAH consists of 23 high-level government and private sector leaders with a mission to identify and
evaluate bureaucratic impediments to conducting business in Malaysia and to make recommendations to
the PM on how to address them. PEMUDAH’s focus is specifically on administrative reforms designed to
enhance the efficiency of the government bureaucracy’s interaction with the private sector. It does not have
the authority to make deeper reforms needed to address policy-level structural inefficiencies in Malaysia’s
economy. More information about the committee is available at www.pemudah.gov.my.

One significant impediment to Malaysia’s economic growth is its complex network of racial preferences to
promote the acquisition of economic assets by ethnic Malays and other indigenous groups (bumiputera).
The details of implementation are largely left to the various ministries. Policies and practices vary greatly.
Some practices are explicit while others are informal, leaving much ambiguity for potential investors.

The initial public aim of these programs when they were implemented in 1970 was to establish a more even
distribution of wealth among races to rectify a situation whereby bumiputra made up nearly 60 percent of
the nation’s population but held less than three percent of the nation’s wealth. Despite a stated goal of
poverty alleviation, these race- based policies are not subject to upper income limitations; in practice
wealthy and well- connected bumiputera receive the lion’s share of the benefits. The resulting economic
distortions in the property, labor, and stock markets inhibit growth and deter both foreign and domestic
investment.2

1 Doing Business in 2007: How to Reform, published by the World Bank Group.
2 Citigroup Special Report: “Regaining Investor Confidence” October 30, 2006, The Edge Malaysia

Page 2 • 1-May-2009 Climate for Investment & Trade


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

The GOM set a target of 30 percent of the nation’s wealth to be held by bumiputera. Several studies have
demonstrated that the 30 percent equity target has been reached or exceeded; however, official government
figures place bumiputera equity at 18.9 percent. The GOM has not responded to public requests to make its
methodology fully transparent, but does admit to including government-owned corporate equity in its
calculations, placing it squarely on the non-bumiputera side of the ledger. This approach weighs heavily on
the result, as the government owns more than a third of publicly traded corporate equity. A further
distortion in the government figure is the unusual practice of measuring equity based on par value rather
than market value. However, increasing discussion of the race-based policies in both private and public
sector circles, as well as several government-commissioned studies on how best to enhance the country’s
business and investment climate, may be indicators that the government recognizes the high social and
economic costs of these policies and may be open to efforts to re-focus the policies on poverty reduction as
originally intended. Effectively eradicating poverty will become increasingly urgent over the coming years
as Malaysia is expected to become a net importer of oil. This year, approximately 40% of federal revenue
came from Petronas, the national oil company.

Corporate Equity. One of the government’s racial preference policies is a requirement that foreign and
domestic non-manufacturing firms take on bumiputera partners (with a minimum of 30% of share capital).
If a company seeks public listing on the Bursa Malaysia (formerly Kuala Lumpur Stock Exchange), it is
required to reserve at least 30% of its initial public offering (IPO) for purchase by bumiputera. In 2003 the
GOM ended a formal requirement that corporations issue additional stock to bring bumiputera equity back
up to 30% if those shareholders had sold their stock. This was a welcome change, especially in light of
critics’ complaints that individual bumiputera taking advantage of these offers often sold the stocks
immediately for a quick profit, thus reducing the company’s bumiputera equity to below 30% almost
immediately. However, bumiputera equity remains a consideration when companies apply for an array of
required permits and licenses, many of which must be renewed either annually or biennially. In November
2008, the government announced that it would relax the minimum 30% bumiputera equity requirement for
domestic companies seeking listing on Bursa Malaysia. However, the IPO must first be offered to bum
iputera-controlled institutional investors and then to bumiputera individuals. If neither is interested, the
requirement can be waived.

The government caps foreign investment shares in most sectors. To alleviate the effects of the regional
economic crisis, in 1998 Malaysia temporarily relaxed foreign-ownership and export requirements in the
manufacturing sector for companies that did not compete directly with local producers. In June 2003, the
government extended this policy indefinitely, permitting expansion of existing investments in
manufacturing concerns to be foreign-owned. Manufacturing investments approved under the liberalized
measures are not subject to racial preference requirements for divestment or dilution. Those with prior
investments must honor the initial conditions to which they agreed but may request that they be changed.
Malaysia’s 2003 liberalization of foreign equity ceilings in manufacturing led to a spike in both foreign and
domestic investment in the sector.

In 2004, the government announced that venture capital firms could be 100 percent foreign-owned, in
addition to manufacturing and information technology firms, subject to government approval. The
Securities Commission approved the establishment of the first foreign venture company in Malaysia, Japan
Asia Investment Co Ltd (JAIC), in September 2008. Approvals are handled by the Malaysian Industrial
Development Authority (MIDA) for most manufacturing projects and the Multimedia Development
Corporation (MDC) for Multimedia Super Corridor (MSC) status companies (see below). Especially in the
case of investments focused toward the domestic market and those in sectors other than manufacturing, the
GOM has used this authority to restrict foreign equity (normally to 30 percent) and to require foreign firms
to enter into joint ventures with local partners. The GOM often approves investments in high-tech

Climate for Investment & Trade 1-May-2009 • Page 3


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

industries, but is less inclined to approve lower-wage manufacturing and in some cases will not renew tax
abatement agreements to existing manufacturers that rely heavily on low-wage foreign workers or are not
perceived as sufficiently high-tech.

Manufacturing. MIDA screens all proposals for manufacturing and related projects in Malaysia, both
foreign and domestic, to determine the extent to which they contribute to the government’s goals and
objectives. These are outlined in the Third Industrial Master Plan (2006-2020), the various regional
initiatives (Iskandar Development Region and the Northern, Eastern, Sabah and Sarawak Economic
Regions) as well as other strategic economic and social development initiatives and policies. Project
approval depends on many other factors as well. MIDA may consider the size of an investment, the export-
orientation of production, the type of financing required (both local and offshore), capital/labor ratio, the
potential for technological diffusion into the local economy, the ability of existing and planned
infrastructure to support the effort, and the existence of a local or foreign market for the output. If both
local and foreign firms propose similar projects, the local firm will be given preference. All requests are
handled on a case-by-case basis. Effective December 1, MIDA now has the authority to issue or renew
licenses for most manufacturing companies, eliminating a second layer of approval from MITI. A RM 50 fee
also has been eliminated and tariffs on 48 raw materials and intermediate goods have been reduced or
eliminated. MIDA maintains a Business Information Center which provides information on investment,
productivity, trade, and financing, as well as staff who can discuss a variety of manufacturing sectors. The
center also has space for business meetings. MIDA established an on-site immigration unit in 2007 which
has helped expedite the processing of expatriate work visas. Applications for investment in sectors other
than manufacturing are handled by the relevant regulatory agencies and sometimes require multiple
approvals.

Investment regulations are specified in the Promotion of Investments Act of 1986 (PIA) and the Industrial
Coordination Act of 1975. The government pledged in 2004 to replace the PIA with a more concise law
covering investments in both manufacturing and services, but has yet to do so. The PIA does not address
services investment. The Securities Commission and the Foreign Investment Committee (FIC) implement
the regulations specified in the Malaysian Code on Takeovers and Mergers. The FIC also formulates policy
guidelines for foreign participation in non-manufacturing sectors. Private entities, both foreign and
domestic, may acquire, merge with, and take over business enterprises, subject to FIC approval according
to their 1974 guidelines. However, the acquisition or disposal of five percent or more of interests in any
local financial institution requires the prior approval of the Minister of Finance.

Historically, non-export-oriented foreign firms that had negotiated temporary exemptions from general
equity limits were required to restructure within a definite timeframe. A restructuring program could
involve taking on new local partners, giving existing local partners a greater equity share, or floating shares
on the Bursa Malaysia. The government’s goal at that time was to reduce foreign ownership of most firms
producing for the domestic market to 30%.

Distribution Services, including Direct Selling. Malaysia’s requirements for the licensing and operation of
direct selling companies include a provision that a locally incorporated direct selling company must allow
for 30 percent bumiputera equity. The Ministry also “recommends” local content targets. Local companies
that seek multi-level direct selling licenses require paid-in capital of RM 1.5 million ($423,700), while
companies with foreign shareholders must have paid-in capital of RM 5 million ($1 .4 million).

The Malaysian government also included local content requirements in “Guidelines on Foreign
Participation in the Distributive Trade Services” that came into effect in December 2004. Among other
provisions, department stores, supermarkets and hypermarkets are required to reserve at least 30 percent of

Page 4 • 1-May-2009 Climate for Investment & Trade


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

shelf space in their premises for goods and products manufactured by bumiputera-owned small and
medium sized industries. The guidelines also require that at least 30 percent of a store’s sales consist of
bumiputera products, a rule that does not take into account discretionary behavior on the part of
consumers.

Legal Services. Foreign lawyers may not practice Malaysian law, nor may they affiliate with local firms or
use their international firm’s name. Foreign law firms may not operate in Malaysia except as minority
partners with local law firms, and their stake in any partnership is limited to 30 percent. Under the Legal
Profession Act of 1976, the practice of Malaysian law normally is restricted to Malaysian citizens or
permanent residents who have apprenticed with a Malaysian lawyer, are competent in Bahasa Malaysia
(the official language), and have a local law degree or are accredited British Barristers at Law. The Attorney
General has authority to grant limited exceptions on a case-by-case basis, provided the applicant has seven
years of legal experience. Malaysian law does not allow for foreign legal consultancy except on a limited
basis in the Labuan International Offshore Financial Center. Malaysia limits such foreign attorneys’ scope of
services to advice concerning home country and international law. Persons not licensed as lawyers are
subject to criminal penalties if they directly or indirectly undertake activities relating to the Malaysian legal
system, including drafting documents.

Architectural Services. A foreign architect may operate in Malaysia only as a joint-venture participant in a
specific project with the approval of the Board of Architects. Foreign architectural firms are not permitted to
operate in Malaysia, either independently or as partners of Malaysian architectural firms. Foreign architects
may not be licensed in Malaysia but are allowed to be managers, shareholders, or employees of Malaysian
firms. Only licensed architects may submit architectural plans. Architectural services are governed by the
Architects Act of 1967 and are regulated by the Ministry of Works.

Engineering Services. Foreign engineers may be licensed by the Board of Engineers only for specific
projects, and must be sponsored by the Malaysian company carrying out the project. The license is valid
only for the duration of the project. In general, a foreign engineer must be registered as a professional
engineer in his or her home country, have a minimum of 10 years experience, and have a physical presence
in Malaysia of at least 180 days in one calendar year. To obtain temporary licensing for a foreign engineer,
the Malaysian company often must demonstrate to the Board that they cannot find a Malaysian engineer
for the job. Foreign engineers are not allowed to operate independently of Malaysian partners, or serve as
directors or shareholders of an engineering consulting company. A foreign engineering firm may establish
a commercial presence, subject to meeting government requirements on Malaysian citizen participation.
Foreign engineering companies may collaborate with a Malaysian firm, but the Malaysian company is
expected to design the project and is required to submit the plans for domestic approval. Engineering
services are governed by the Registration of Engineers Act and regulated by the Ministry of Works.

Accounting and Taxation Services. Foreign accounting firms may provide accounting and taxation services
in Malaysia only through affiliates. All accountants who wish to provide auditing and taxation services in
Malaysia must register with the Malaysian Institute of Accountants (MIA) before they may apply for a
license from the Ministry of Finance. Citizenship or permanent residency is required for registration with
MIA. Malaysian citizens or permanent residents who received degrees from local universities or are
members of at least one of the 11 overseas professional bodies recognized by Commonwealth countries
may apply for registration. The American Institute of Certified Public Accountants (AICPA) is not
recognized by Commonwealth countries.

Energy. Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is
controlled by the parastatal, Petroleum Nasional Berhad (Petronas), the sole entity with legal title to

Climate for Investment & Trade 1-May-2009 • Page 5


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Malaysian crude oil and gas deposits. Foreign investment takes the form of production sharing agreements
(PSAs). Foreign operators include ExxonMobil, ConocoPhillips, Amerada Hess, Baker Hughes, Newfield,
and Murphy Oil from the U.S., as well as Royal Dutch Shell. Non-Malaysian firms are permitted to
participate in oil services either in partnership with local firms or as contractors. They are restricted to a
30% equity stake if they are incorporated locally.

Telecommunications. Under the WTO Basic Telecommunications Agreement, Malaysia made limited
commitments on most basic telecommunications services and partially adopted the reference paper on
regulatory commitments. Foreign companies are limited to a 30 percent equity stake in existing fixed line
operations, an investment ceiling codified as part of Malaysia’s WTO services offer which limits market
access commitments to facilities-based providers. These restrictions constitute one of the most restrictive
regimes for an economy of Malaysia’s level of development. Value-added service suppliers are similarly
limited to 30 percent foreign equity. Restrictions on these activities tend to benefit the dominant provider,
government-controlled Telekom Malaysia, and hamper the development of a more efficient information
infrastructure.

In December 2005, Malaysia issued its revised WTO services offer, which offers to increase foreign equity
limits to 49% in “application service providers” (ASP); however, precisely what this category encompasses
is unclear. Foreign ownership of “network facilities providers” (NFP) and “network service providers”
(NSP) would be limited to 30% under the revised offer. One foreign NSP negotiated a five-year exemption
which allowed the company a temporary 61% stake with a requirement that the foreign equity holding be
reduced to 49% over a 5-year period commencing on the date of incorporation.

Broadcasting. Private broadcasting companies are regulated by the Ministry of Energy, Water, and
Communications and the Malaysian Communications and Multimedia Commission. Foreign ownership of
radio and television stations is not permitted. Foreign investment in terrestrial broadcast networks is
prohibited. As a condition for obtaining a license to operate, video rental establishments are required to
have 30 percent local content in their inventories. Malaysia maintains a Censorship Board under the
Ministry of Home Affairs that regularly censors movies and television shows deemed inappropriate on
religious or sexual grounds.

Advertising. Advertising falls under the purview of multiple ministries and agencies, complicating the
adoption of a single set of advertising regulations and enforcement procedures for all stakeholders in this
process. International firms have concerns about the lack of clear and consistent advertising content
guidelines, and how some advertisers misrepresent their products and services through advertising. The
Government of Malaysia has an informal and vague guideline that commercials cannot “promote a foreign
lifestyle.”

In July 2007 Culture, Arts and Heritage Minister Seri Dr. Rais Yatim announced a Cabinet decision that at
least 70% of television commercials must be made in Malaysia, feature local actors, and be shot in locations
within the country. He said the same percentage would be required for post-production of the commercials
and for the usage of equipment and facilities available.

Product labeling also is weak; for example, products can be found on store shelves with no indication of the
manufacturer or country of origin.

Other industries. The GOM also restricts foreign investment in the financial services and insurance sectors
(see section on capital markets below). Foreigners are permitted to hold a 70% stake in shipping companies,
49% in forwarding agencies, and 51% in insurance companies (note: new companies entering the market

Page 6 • 1-May-2009 Climate for Investment & Trade


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

may own up to 49% equity but those already in the market can request permission to increase their equity
to 51%). In December, Bank Negara announced that it would allow foreign financial institutions to hold up
to a 75% stake in local insurers on a case-by-case basis, provided they also acquired one or more other
smaller general insurance companies. Malaysia restricts foreign participation in professional services (other
than “back office” operations that support foreign business activities), agriculture (unless it is an agro-
tourism linked project), and construction. Ownership of agricultural land is restricted to Malaysian citizens.

Government holdings. The government owns approximately 36% of the value of firms listed on the Bursa
Malaysia through its seven Government-Linked Investment Corporations (GLICs), including a majority
stake in a number of companies. Only a minority portion of stock is available for trading for some of the
largest publicly listed local companies. After the economic crisis of the late 1990s, the government began to
re-acquire a number of entities it had privatized earlier, including the national air carrier, MAS, and Kuala
Lumpur’s light rail transit system. The government has given no indication of interest in restarting its
privatization efforts. Khazanah, the government’s largest GLIC, handles many of the country’s major
infrastructure projects, typically through companies in which it owns a majority stake. The Prime Minister
sits on Khazanah’s Board of Directors.

The current draft of a proposed Competition Policy reportedly exempts government- linked companies.
Further details are not available at this time. The text of all pending legislation in Malaysia is covered by the
Official Secrets Act, thereby making it a crime to divulge its contents before adoption.

Corporate taxes. For tax purposes, local and foreign enterprises are treated essentially the same. Resident
petroleum companies pay 38% income tax; all other resident companies currently pay an income tax of 26%
for 2008, reduced from 27% in 2007. The 2009 budget includes a reduction to 25% in 2009 for non-petroleum
resident companies. Dividends are taxed at the corporate rate. A company is resident in Malaysia for tax
purposes if its management and control is exercised in Malaysia, that is, if directors’ meetings are held in
Malaysia. Payments made to non-residents for technical or management services and rental of movable
properties are subject to withholding tax at the rate of 10%. In the 2009 budget, the income tax rate for non-
resident individuals was reduced to 27% from 28%. The U.S. and Malaysia have not concluded a bilateral
tax agreement and no negotiations are anticipated at this time. In 2005, the government passed legislation
mandating a new Goods and Services Tax (similar to a value-added tax) that was scheduled for
implementation in 2007 but this has been delayed temporarily. .

Human Resources. Beyond the heavy regulatory burden and the investment restrictions resulting from the
bumiputera policies, Malaysia’s shortage of skilled labor is its most oft-cited impediment to economic
growth. (See sections on labor and performance requirements).

Transparency of the Regulatory System


Transparency. Malaysia’s Official Secrets Act makes it a crime to divulge the contents of any proposed law
or regulation before it comes into effect. This denies stakeholders an opportunity for input into the drafting
of legislation that affects their interests. U.S. companies have indicated that they would welcome
improvements in the transparency of government decision-making and procedures, including government
tenders.

In addition to secrecy laws regarding proposed new legislation, Malaysia maintains a complex network of
practices for which no documentation is available. In response to U.S. government requests for a list of laws
and regulations pertaining to market access in various sectors, one government official responded that
ministries and agencies were “not in a position to make available an exhaustive list of the laws and

Climate for Investment & Trade 1-May-2009 • Page 7


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

regulations pertaining to their respective sectors,” in part because these were “still being streamlined and in
some cases being developed,” and in part because “a number of market access issues are addressed by way
of administrative circulars/guidelines/polices which not may be stated explicitly in any document.3“

In some cases, local private sector associations discriminate against foreign-owned companies. For example,
an association of local banks decided to charge foreign banks significantly higher fees for joining an
automated clearinghouse (ACH) system. According to one foreign bank contact, the fee for a local bank to
join was nominal; the fee for a foreign bank to join was based on the approximate cost of setting up a new
branch.

Government Procurement. Malaysia is not a signatory of the WTO Government Procurement Agreement
(GPA). Malaysia’s official policy is explicitly discriminatory, calling for procurement to be used to support
national public policy objectives. These objectives include encouraging greater participation of bumiputera
(ethnic Malays) in the economy, transferring technology to local industries, reducing the outflow of foreign
exchange, creating opportunities for local companies in the services sector, and enhancing Malaysia’s
export capabilities.

Generally, international tenders are invited only where domestic goods and services are not available. In
domestic tenders, preferences are provided for bumiputera suppliers and other domestic suppliers. As a
result, foreign companies do not have the same opportunities as local companies to compete for contracts.
In most procurements, foreign companies are required to take on a local partner before their bids will be
considered.

Another concern with Malaysian government procurement is the lack of transparency and competitive
bidding. In October 2003, Prime Minister Abdullah Badawi announced that the Government would
introduce open tenders for government procurements and major projects, with direct negotiations limited
to special cases; however, little progress has been made. U.S. companies have voiced concerns about the
non-transparent nature of the procurement process in Malaysia. The government’s central tender website
provides links to other ministries’ websites, but not all of them provide user- friendly information on
government tenders. In September 2005, the Ministry of Finance announced that the purchase of roadway,
decorative, and outdoor lighting fittings, together with equipment and accessories for all government
projects, must be sourced from one of three local bumiputera manufacturers. In October 2007 press reports
highlighted several recent government directives instructing relevant ministries to award contracts for
certain products only to bumiputera-owned businesses, in one case naming a specific company to receive
the contract.

Foreign/Free Trade Zones/Ports


The Free Zone Act of 1990 authorized the Minister of Finance to designate any suitable area as either a Free
Industrial Zone (FIZ), where manufacturing and assembly takes place, or a Free Commercial Zone (FCZ),
generally for warehousing commercial stock. Currently there are 13 FIZs and 12 FCZs in Malaysia. In June
2006, the Port of Klang Free Zone opened as the nation’s first fully integrated FIZ and FCZ. The Minister of
Finance may appoint any federal, state, or local government agency or entity as an authority to administer,
maintain and operate any free trade zone.

Raw materials, products and equipment may be imported duty-free into these zones with minimum
customs formalities. Companies that export not less than 80% of their output and depend on imported

3 December 6, 2006

Page 8 • 1-May-2009 Climate for Investment & Trade


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

goods, raw materials, and components may be located in these FZs. Ports, shipping and maritime-related
services play an important role in Malaysia since 90% of its international trade is seaborne.

Goods sold into the Malaysian economy by companies within the FZs must pay import duties. If a
company wants to enjoy Common External Preferential Tariff (CEPT) rates within the ASEAN Free Trade
Area, 40% of a product’s content must be ASEAN- sourced. In addition to the FZs, Malaysia permits the
establishment of licensed manufacturing warehouses outside of free zones, which give companies greater
freedom of location while allowing them to enjoy privileges similar to firms operating in an FZ. Companies
operating in these zones require approval/license for each activity. The time needed to obtain licenses
depends on the type of approval and ranges from 2- 8 weeks

Tariff and Non-tariff Barriers


The Government of Malaysia operates a system of import licensing. Import licenses are required for a
number of items, including arms and explosives; motor vehicles; heavy construction equipment; certain
drugs and chemicals; plants; timber; soil; tin ore, slag or concentrates; and various essential foodstuffs.
Prohibited imports include any “indecent or obscene” articles and certain poisonous chemicals.

Imports of meat and poultry are regulated through licensing and sanitary controls. All imported beef, lamb,
and poultry products must originate from facilities that have been approved by Malaysian authorities as
“halal,” or acceptable for consumption by Muslims.

Malaysia has an export licensing system. For some products, such as textiles, export licenses are used to
ensure compliance with bilateral export restraint agreements. For other products, such as rubber, timber,
palm oil, and tin exports, special permission from government agencies is required. Export duties ranging
from 5% to 15% are imposed on the principal commodities of timber and palm oil. A flat rate of 10% export
duty is imposed on petroleum.

Malaysia is not party to the WTO Government Procurement Agreement, and as a result foreign companies
do not have the same opportunity as some local companies to compete for contracts, and in most cases are
required to take on a local partner before their bids will be considered.

Malaysia’s services sector, which constitutes about 56% of the national economy, remains highly protected.
At a September 2005 WTO meeting, Malaysia joined other developing economies in protesting proposals to
change WTO rules in order to accelerate the liberalization of services in developing countries. In sectors
such as telecommunications, legal services and direct selling, foreign firms are limited to a 30% share in
local operators. Other services, including architecture and engineering, can only operate as a joint-venture
participant, and accounting and taxation firms can only operate through affiliates.

Protection of intellectual property rights is also a trade barrier for certain industries, and this issue is
discussed in Chapter 6. For a full report on trade barriers in Malaysia, please visit the U.S. Trade
Representative’s report.

Policies
Conversion and Transfer
In an effort to insulate the Malaysian economy from risks posed by volatile short-term capital flows and to
eliminate offshore trading of the ringgit, the government imposed selective capital controls on September 1,

Climate for Investment & Trade 1-May-2009 • Page 9


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

1998. Since that time, the government gradually has relaxed controls on foreign direct investment flows,
wages, dividends, interest, and rental income earned in Malaysia.

On May 28, 2008 the government further liberalized the foreign exchange administration rules on
borrowing in foreign currency by residents as well as borrowing and lending in ringgit between residents
and non-residents. More information on Malaysia’s foreign exchange administration can be found at
www.bnm.gov.my.

All payments to other countries must be made through authorized foreign exchange dealers in foreign
currency. Banks must record the amount and purpose of each cross- border transfer over RM 50,000
(approximately $14,124).

Resident and non-resident travelers may carry no more than RM 1,000 into or out of Malaysia. Residents
may not carry out foreign currency more than the equivalent of RM 10,000 (U.S. $2,825). Non-residents may
carry in any amount of foreign currency, but are required to declare currency amounts in excess of USD
$2500. Non-residents may carry out foreign currency up to the amount they carried in.

On July 21, 2005, Bank Negara ended its policy of pegging the ringgit at a fixed rate of RM 3.80 to the dollar
and shifted to a managed float against a trade-weighted basket of currencies. Over the course of the year,
the ringgit fluctuated between its high of RM 3.13 on April 23 and its low of 3.64on December 2. As of
December 31, the ringgit had appreciated 8.8% against the dollar since the end of the peg but had weakened
4.8% since end 2007 with the onset of the global economic crisis.

Performance Requirements
Fiscal incentives granted to both foreign and domestic investors historically have been subject to
performance requirements, usually in the form of export targets, local content requirements and technology
transfer. Performance requirements are usually written into the individual manufacturing licenses of local
and foreign investors.

In the May 2003 Economic Stimulus Package, the Malaysian government extended the full tax exemption
incentive from ten to fifteen years for firms with “Pioneer Status” (companies promoting products or
activities in industries or parts of Malaysia to which the government places a high priority), and from five
to ten years for companies with “Investment Tax Allowance” status (those on which the government places
a priority, but not as high as Pioneer Status). Government priorities generally include the levels of value-
added, technology used, and industrial linkages. If a firm (foreign or domestic) fails to meet the terms of its
license, it risks losing any tax benefits it may have been awarded. Potentially, a firm could lose its
manufacturing license. The government has stated that in the long term, it intends gradually to eliminate
most of the fiscal incentives now offered to foreign and domestic manufacturing investors. More
information on specific incentives for various sectors can be found at www.mida.gov.my.

Malaysia also seeks to attract foreign investment in the information technology industry, particularly in the
Multimedia Super Corridor (MSC), a government scheme to foster the growth of research, development,
and other high technology activities in Malaysia. Foreign investors who obtain MSC status receive tax and
regulatory exemptions as well as public service commitments in exchange for a commitment of substantial
technology transfer. For further details on incentives, see www.mdc.com. Some corporations have used the
MSC to outsource call center and back office operations, including HSBC, AIG, and BMW. The Multimedia
Development Corporation (MDeC) approves all applications for MSC status.

Page 10 • 1-May-2009 Climate for Investment & Trade


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

In the services sector, the government’s stated goal is to attract foreign investment in regional distribution
centers, international procurement centers, operational headquarters, research and development, integrated
market and logistics support services, cold chain facilities, central utility facilities, industrial training, and
environmental management. To date, the GOM has had some success in attracting regional distribution
centers; however, there has been little progress in the other targeted areas. Industry contacts cite Malaysia’s
poor record in protecting intellectual property rights as their primary reason for not bringing their R&D to
the country.

Malaysia also has stated that it would welcome foreign investment in biotechnology; however, to date no
U.S. biotech companies are operating here except representative offices of some pharmaceutical companies.
Prime Minister Abdullah repeatedly has expressed strong interest in using biotechnology to help invigorate
the agricultural sector in Malaysia. Investment in biotechnology figures prominently in the national budget
and is a lynch pin in the 9th Malaysia Plan (the government’s five-year economic development plan),
launched in March 2006.

Employing Expatriates. Despite broad recognition of Malaysia’s shortage of skilled labor, most foreign
firms face restrictions in the number of expatriate workers they are allowed to employ. Foreign workers are
categorized as follows: “expatriates” (anyone earning at least RM 5000, or USD 1429, per month); “foreign
skilled workers,” and “foreign unskilled and semi-skilled workers.”

Employing expatriates involves two phases. First, the company must be granted approval for the expatriate
post; then the individual must be approved by receiving a “reference visa” from the Malaysian embassy in
the expatriate’s home country and approval from the Immigration Department. More details can be found
at www.pemudah.gov.my/guidebook.pdf.

Companies in different sectors must apply for approval for expatriate posts through the respective
government authority: manufacturing and manufacturing-related companies apply through MIDA;
companies with “Multimedia Super Corridor” status through the Multimedia Development Corporation;
banking and insurance companies through the central bank (Bank Negara Malaysia); securities brokers
through the Securities Commission; biotechnology companies through Biotech Corp; and companies in
other sectors through the Expatriate Committee. Each authority has its own set of requirements and
decisions are made on a case-by-case basis.

MSC-status companies are not restricted as to the number of expatriates they can bring into the country. In
August the GOM unveiled three “e-Xpats” centers in the Penang and Kulim industrial parks and
announced its intention to establish a third in Cyberjaya.

Only applicants from select countries working for companies with MSC-status are eligible to use the
services of the centers, which process a work visa in six days.

Manufacturing companies that are 100% foreign-owned must have a minimum paid-up capital of RM
500,000 (as of January 1, 2009) to be allowed to employ expatriates. Companies with joint foreign and
Malaysian ownership must have a minimum paid-up capital of RM 350,000 while Malaysian-owned
companies must have a minimum of RM 250,000. Manufacturing-related companies in sub-sectors targeted
by the government for development are given priority. These include regional establishments (operational
headquarters, international procurement centers, regional distribution centers); support services (integrated
logistics services, integrated market support services, central utility facilities, cold chain facilities); research
and development; software development; hotel and tourism projects; technical and vocational training;
some environment-related services; and film or video production. Except manufacturing companies with

Climate for Investment & Trade 1-May-2009 • Page 11


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

automatic allowances, a firm wishing to employ expatriate personnel generally must demonstrate that there
is a shortage of qualified Malaysian candidates and that a Malaysian citizen is being trained. In practice this
is difficult for firms to document. Expatriate visas are issued for a period of two years, with possible – but
not guaranteed – renewals for up to a maximum of ten years. The uncertainty of whether investors will be
permitted to remain in the country after their businesses become profitable remains a significant barrier to
foreign direct investment. Unskilled foreign workers receive a three-year work permit, renewable annually
up to five years, and foreign skilled workers can qualify for up to 12 months. If an unskilled worker
acquires “skills certificates,” he/she may apply for a permit as a skilled worker after exhausting the five-
year maximum as an unskilled worker. Only foreign domestic helpers are permitted to remain in Malaysia
on a work permit beyond ten years. Malaysia’s freeze on permanent resident visas remains in place;
however, it has launched the “Malaysia, My Second Home” program that provides long-term resident visas
for well-off expatriates.

To its credit, the government has made significant progress in simplifying and expediting permit approvals
for some categories of foreign personnel. In 2007 it established four additional immigration units intended
to expedite visa approvals for expatriates, and the Pemudah Committee developed a guidebook clarifying
the various procedures and requirements. Processing times have been shortened considerably. The spouse
of an expatriate holding a Dependent Pass is allowed to take up paid employment without converting the
Dependent Pass to an “Employment Pass” or to a “Visit Pass for Temporary Employment” on the condition
that permission to take up the paid employment is endorsed on his/her passport by an authorized
Immigration officer. In 2009 the GOM began issuing Dependent Passes to husbands of Expatriates holding
Employment Passes. Previously husbands of professionals were issued a six-month “social visit pass”
which required them to leave the country and return.

Legal Framework
Expropriation and Compensation
The Embassy is not aware of any cases of uncompensated expropriation of foreign-held assets by the
Malaysian government. The government’s stated policy is that all investors, both foreign and domestic, are
entitled to fair compensation in the event that their private property is required for public purposes. Should
the investor and the government disagree on the amount of compensation, the issue is then referred to the
Malaysian judicial system.

Dispute Settlement
Malaysia has signed and ratified the Convention on the Settlement of Investment Disputes Between States
and Nationals of Other States. Malaysia became a Contracting State on October 14, 1966 when the
Convention entered into force, granting jurisdiction over investment disputes between the Government of
Malaysia and non- Malaysian citizens to the International Center for Settlement of Investment Disputes
(ICSID, www.worldbank/org/icsid). ICSID is affiliated with but independent of the World Bank.

Malaysia also is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral
Awards. The domestic legal system is accessible but generally requires any non-Malaysian citizen to make a
large deposit before pursuing a case in the Malaysian courts (i.e., $100,000), and can be slow and
bureaucratic. The U.S. Embassy is aware of one case where a U.S. investor plaintiff reports that, after 44
months and 26 hearings, the Malaysian court has yet to address the merits of his case. Plaintiff claims to
have provided the court with documentation both from Malaysia and from a U.S. court case involving the
same company that the company’s assets continue to be drained through ongoing fraud. However, the

Page 12 • 1-May-2009 Climate for Investment & Trade


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

court stayed his petition that the company be put in receivership until the matter is resolved. The court also
stayed plaintiff’s petition for discovery.

One local law firm reports that cases involving intellectual property rights generally take five to eight years,
with more complex patent infringement cases taking ten to fifteen years.

Many firms choose to include mandatory arbitration clauses in their contracts. The government has set up
the Kuala Lumpur Regional Center for Arbitration (http://www.rcakl.org.my) under the auspices of the
Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation
for trade disputes. The KLRCA is the only recognized center for arbitration in Malaysia. The U.S. Embassy
is aware of one contractual dispute with a U.S. company where the Malaysian firm chose not to honor
mandatory arbitration clauses as stated in their contract. Resolution of that case is pending.

Right to Ownership and Establishment


The World Bank ranks Malaysia81st among 181 countries for the ease of registering property, which takes
an average of 144 days, and 75th in starting a business, which involves 9 government-required procedures
and takes an average of 13 days.

Patents registered in Malaysia generally have a 20-year duration from date of filing, which can be extended
under certain circumstances. The length of time required for patent registration averages five years and
trademark registration averages two years. Registrations are handled by the Patents and Trademarks
Department of the Ministry of Domestic Trade and Consumer Affairs. Copyright protection extends to
computer software and lasts for 50 years after the author’s death. The Copyright Act includes enforcement
provisions allowing government officials to enter and search premises suspected of infringement and to
seize infringing copies and reproduction equipment.

Protection of Property Rights


Malaysia is a member of the World Intellectual Property Organization (WIPO) and is a party to the Berne
Convention for the Protection of Literary and Artistic Works and the Paris Convention for the Protection of
Industrial Property. In 2006 Malaysia acceded to the Patent Cooperation Treaty. Malaysia has not ratified
the WIPO Copyright Treaty or the WIPO Performance and Phonograms Treaty (which extend traditional
copyright principles to the digital environment) but has indicated its intention to accede to these
conventions eventually.

In 2000, Malaysia’s parliament amended the Copyright Act, the Patents Act, and the Trademarks Act, as
well as legislation on layout designs of integrated circuits and geographical indications, in order to bring
Malaysia into compliance with its obligations under the WTO TRIPS Agreement. In 2004, Malaysia passed
the “Protection of New Plant Varieties Act 2004” in line with the requirements of Article 27.3 (b) of the
TRIPS Agreement. Enabling regulations for this law are pending. Malaysia does not prohibit other
companies from relying on test and other undisclosed information submitted by another company to the
government to obtain marketing approval of pharmaceuticals and agricultural chemicals, as called for
under TRIPS Article 39.3.

Optical Media Piracy. Malaysia has a significant problem with piracy of copyrighted materials,
particularly those stored on optical media. Malaysia’s production capacity for Compact Discs (CDs) and
Digital Video Discs (DVDs) significantly exceeds local demand plus legitimate exports. U.S. industry
estimates Malaysia’s excess capacity is between ten to twenty times that needed for the legitimate market.
The resulting surplus is exported globally. Pirated products believed to have originated in Malaysia have

Climate for Investment & Trade 1-May-2009 • Page 13


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

been identified throughout the Asia-Pacific region, North America, South America, Europe, and Africa. The
Malaysian government has revoked 14 optical disc factory licenses in the past two years, reducing the
number of licensed factories to 33.

The International Intellectual Property Association (IIPA) estimates 2005 industry losses in Malaysia due to
piracy at $147.3 million. IIPA estimates 2005 piracy rates at 60 percent for business software, 49 percent for
music, and 50 percent for movies. Malaysia has remained on the Special 301 Watch List since October 2001,
specifically because of its failure to substantially reduce pirated optical disc production and export.

The Optical Disc Act of 2000 established a licensing and regulatory framework to control the manufacture
of optical discs and to fight piracy. Under the Act, manufacturers are required to obtain licenses from both
the Ministry of International Trade and Industry and the Ministry of Domestic Trade and Consumer Affairs
(MDTCA), to place source identification (SID) codes on each disc, and to allow regular inspections of their
operations. This law should be modernized to ensure inspection authority covers all locations where optical
media production may occur and also include as offenses acts such as “gouging” or tampering with the SID
codes and “burning” of recordable discs.

In 2007, the Malaysian government continued to make progress in IPR enforcement. The MDTCA reports
32,245 raids in Malaysia in the first half of 2007, compared to 38,166 in all of 2006. Although prosecution
continues to be an ongoing challenge, the establishment of a specialized IP court in mid-2007 should help
alleviate the backlog of infringement cases. Both judges and prosecutors have been assigned full time to
handle IPR cases. The court was initially established in Kuala Lumpur, but will eventually have branches
throughout Malaysia. U.S industry representatives in Malaysia have been pleased with the pace and
outcome of the court’s initial cases. The government is registering significantly more IP cases in court; 538
cases had been registered by mid- 2007, more than in all of 2006. Malaysia’s courts have imposed sentences
of imprisonment and/or fines for convicted offenders. In 2007 Prime Minister Abdullah Badawi announced
a new national IP policy that includes some 5 billion ringgit (USD 1.4 billion) earmarked for spending over
the next several years; a task force has been formed to solicit the best use for these funds. The MDTCA’s
enforcement staff has more than doubled in the past two years and now includes over 2000 officers.

Pharmaceuticals. Sales of counterfeit pharmaceuticals are a problem in Malaysia. Counterfeit medicines


that have been identified include “drugs” with the wrong ingredients, insufficient active ingredients, and
those with fake packaging. The copied drugs are believed to originate in China. Unregistered generic copies
of patented products, primarily imported from India, are also available in Malaysia. Both street vendors
and health professionals sell the counterfeit products. The Ministry of Health and the Ministry of Domestic
Trade and Consumer Affairs are improving their enforcement efforts, and share information and
collaborate with industry on those efforts. The new IP Court is expected to improve legal prosecution of
counterfeit pharmaceuticals.

In April 2007 the Ministry of Health announced that Malaysia would provide data protection for
pharmaceuticals for five years for new chemical entities, and three years for new indications. The time
periods would be based on a drug’s approval date in its country of origin. An interagency committee has
been set up to explore all issues related to the implementation of data protection, which was expected to be
finalized by the end of 2007. The Malaysian government does not have an effective patent linkage
mechanism to prevent the regulatory approval of copied versions of pharmaceuticals that are still patented;
U.S. industry has reported several cases of the registration of generic versions of pharmaceuticals which are
still under patent protection.

Page 14 • 1-May-2009 Climate for Investment & Trade


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Trademarked Consumer Products. A number of U.S. consumer product companies also have suffered
significant losses due to the manufacture and sale of counterfeit trademarked products. The volume is
difficult to determine because of the broad scope of products involved. Counterfeiting in Malaysia includes
printer cartridges, plastic container systems, motor oil, household cleaning agents, shampoo and skin care
items, herbicides, and penlight batteries. Counterfeiters have improved the quality of packaging and
marketing so that consumers are misled into purchasing the products. The products have caused harm to
individuals and damage to automobiles and household goods. Some of the pirated goods are produced in
Malaysia, while many are brought into the country from China, Thailand, and India.

Enforcement by the local government is hampered by the lack of training and scarcity of information about
ongoing counterfeit activities. Complicating enforcement of trademark- related violations is a Malaysian
Court of Appeals interpretation of the trademark law that requires enforcement officials to have a “Trade
Description Order” to conduct criminal raids when the counterfeit product seized is not identical to the
trademarked original. High specificity requirements necessary to seize a shipment suspected of containing
pirated or counterfeit products also represent an enforcement obstacle to U.S. industry.

Infrastructure
Malaysia’s central location in the Asia Pacific region makes it an ideal gateway to Asia and the ASEAN
markets. Air cargo facilities are well developed in the five international airports - the Kuala Lumpur
International Airport (KLIA), Penang International Airport and Langkawi International Airport in
Peninsular Malaysia, Kota Kinabalu International Airport in Sabah, and Kuching International Airport in
Sarawak. Malaysia’s ultra-modern Kuala Lumpur International Airport (KLIA) is the nation’s largest,
located 50 kilometers south of Kuala Lumpur. Cargo import and export procedures are fully automated at
KLIA.

Kuala Lumpur is served by a number of international airlines, though no U.S. airlines fly to Malaysia
directly. Additional international connections are available via Singapore, from which there is a joint
Malaysian Airlines/Singapore Airlines air shuttle service. Direct flights to Singapore are available from the
U.S., Europe, the Middle East, and Asia. Within Malaysia, the national airline - Malaysian Airlines (MAS) -
provides frequent service to all major cities, as does low-cost competitor Air Asia.

Peninsular Malaysia’s network of well-maintained highways link major growth centers to seaports and
airports throughout the peninsula and provide an efficient means of transportation for goods. To
complement these highways, a Kuala Lumpur-Bangkok rail service known as the ASEAN Rail Express
(ARX) has been initiated with the aim of expanding it to become the Trans-Asia Rail Link that will include
Singapore, Vietnam, Cambodia, Laos and Myanmar before ending up in Kunming, China.

International telephone service from Malaysia is adequate and more investment is being undertaken to
keep up with the very rapid increase in demand. GSM is the Malaysian standard for digital cellular
communications. One of its cellular providers is GPRS enabled, while the other two are 3G spectrum
holders. The later have commenced their 3G pilots and it should be commercially deployed early 2005.

Broadband Internet access is widely available in most major hotels. Offices and residential customers gain
dial-up or broadband Internet access via ISDN, ADSL, SDSL, WiFi and/or WiMax. WiFi/WiMax Internet
access are mushrooming in coffee outlets in metropolitan Kuala Lumpur and other major cities. As of the
most recent statistics provided by the Malaysian Communications and Multimedia Commission, over 45
percent of Malaysian households use dial-up Internet connections, while 17.5 percent of households have

Climate for Investment & Trade 1-May-2009 • Page 15


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

broadband access. Residential broadband access pricing has been slashed recently, so rising penetration
rates will likely continue.

Corruption and other Bureaucratic Obstacles


Malaysia’s ranking in Transparency International’s Corruption Perception Index slipped to 47th in 2008
down from 44th place among 180 countries although the score remained at 5.1.

The Malaysian government considers bribery a criminal act and does not permit bribes to be deducted from
taxes. Nevertheless, corruption remains a serious concern. The Anti-Corruption Agency (ACA) began
operations in 1967 under the Prime Minister’s department. Since June 1997, senior state-level officials have
been required to declare their assets to the ACA upon taking office. Foreign businessmen are asked to
report any individuals who ask for payment in return for government services. The ACA is authorized to
conduct investigations and prosecute cases with the approval of the Attorney General. ACA investigations
are sometimes reported in the newspapers, but are rarely targeted at high-ranking officials or business
representatives with well- connected companies. Prime Minister Abdullah declared after assuming office
that the fight against corruption was one of his priorities, but by 2005 the battle had slowed. There were a
few high profile prosecutions in 2004 and arrests of some senior officials in 2008. By the end of 2008 the
government had done little to implement recommendations from an April 2005 royal commission on police
reform.

On December 16, Parliament passed the Malaysian Anti-Corruption Commission (MACC) bill and, a day
later, a bill intended to make judicial appointments more transparent (the Judicial Appointments
Commission Bill). The MACC, which replaces the ACA, widens powers of investigation and questioning to
include public bodies and extended family members; provides for the seizure of properties; protects
whistleblowers; and permits the prosecution of Malaysians for offense committed overseas as well as the
prosecution of “foreign public officials” who abuse their positions to accept or offer bribes. These
provisions are consistent with Article 16 of the United Nation’s Convention Against Corruption (UNCAC)
which Malaysia ratified in September 2008. Critics have questioned the bills’ potential effectiveness, as all
key personnel under these bills will be appointed directly by the Prime Minister’s office and the MACC,
like the ACA, will not have independent authority to proceed with prosecutions.

International Agreements
Trade Agreements. Malaysia has pursued bilateral and regional free trade arrangements in complement to
its active participation in the World Trade Organization. Malaysia’s specific objective in concluding FTAs is
to maintain the country’s competitive position vis-à-vis its neighbors. Malaysia also requires that the FTAs
it negotiates include elements of trade and investment cooperation that allows its industry to build capacity
through technical cooperation and collaboration. Malaysia is a member of the ASEAN Free Trade Area
(AFTA), which aims to reduce trade barriers among the member countries over a 15-year period. A key
AFTA objective is for the six original ASEAN members (Malaysia, Indonesia, Singapore, Thailand, the
Philippines, Brunei) to reduce import duties to 5% or less by 2010, with newer members (Vietnam, Laos,
Burma, and Cambodia) to do the same by 2015. By 2003, 99.26% of Malaysian goods included in the AFTA
Common Effective Preferential Tariff (CEPT) scheme were subject to duties of less than 5%; of these
products, 60.4% were subject to zero tariff. As a member of ASEAN, Malaysia is currently negotiating free
trade agreements (sometimes referred to as “Economic Partnership Arrangements”) with China and India.
An ASEAN-Korea FTA is under consideration. In general, a two-track process is envisaged for these FTA
negotiations: bilateral FTAs between China, Japan and India with selected ASEAN countries with a
common set of rules of origin, followed by a region-wide CEP to be implemented by 2012. Malaysia and
Japan signed an Economic Partnership Arrangement in December 2005, and Malaysia is negotiating FTAs

Page 16 • 1-May-2009 Climate for Investment & Trade


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

with the U.S., Australia and New Zealand. The U.S. and Malaysia signed a Trade and Investment
Framework Agreement in May 2004. The TIFA established a Trade and Investment Council (TIC) that
meets several times a year to discuss ways to improve the bilateral trading relationship. Malaysia and the
U.S. are currently FTA negotiating partners. Malaysia is also a member of the Asia-Pacific Economic
Cooperation (APEC) group.

Bilateral Investment Agreements. Malaysia has bilateral investment guarantee agreements with over 70
economies and has double taxation treaties with 60 countries. Malaysia’s double taxation agreement with
the U.S. currently is limited to air and sea transportation. Efforts to negotiate a more comprehensive
bilateral investment treaty would require resolution of several issues, the most important of which is
differing interpretations of national treatment. In April 2002, the GOM passed the Mutual Assistance in
Criminal Matters Bill, and in July 2006 concluded a Mutual Legal Assistance Treaty with the United States.
Malaysia concluded a similar treaty among like-minded ASEAN member countries in November 2004.

OPIC and other Investment Insurance Programs. Malaysia has a limited investment guarantee agreement
with the U.S. under the U.S. Overseas Private Investment Corporation (OPIC) program, for which it has
qualified since 1959. However, few investors have sought OPIC insurance in Malaysia.

Labor Conditions
Other than Malaysia’s extensive regulatory burden, its shortage of skilled labor is the most oft-cited
impediment to economic growth cited in numerous studies. Malaysia has an acute shortage of highly
qualified professionals, scientists, and academics.

Labor. The government of Malaysia reported that the domestic labor market remained steady in 2007 with
3.2% unemployment (the official full employment rate is 4.0%). Unemployment for 2008 `is expected to stay
at 3.2%. The number of unemployed university graduates has declined to 49,406 as of end-2007 from 65,700
in 2006, accounting for roughly 13% of total unemployed in the country. In an effort to improve the
employability of local graduates, the GOM offers additional training modules at public universities in
English language skills, presentation techniques, and entrepreneurship.

The government no longer seeks to entice labor-intensive companies to establish operations in Malaysia,
and reserves its fiscal incentives for higher value-added projects. In 2007 the number of registered foreign
workers increased 9.4% to 2.08 million, including 34,822 expatriate professionals. Most of the unskilled and
semi-skilled foreign workers were employed in the manufacturing (36%) and agricultural (25%) sectors.
The majority of the foreign workers are from Indonesia, followed by Nepal, India, and Myanmar. The
expatriate professionals were engaged primarily in the services (60%) and manufacturing (33%) sectors. In
July 2005, the government increased the levy on foreign workers in the services and plantation markets by
50%. In 2007 the GOM reduced the time required to process expatriate work permits to less than 7 days and
extended the validity from 2 years to 5-10 years.

The government rigorously monitors the ethnic balance among employees of both foreign and domestic
firms, especially in the areas of technology, management and the like. Meeting GOM recommendations is
essential for obtaining and renewing any of a multitude of licenses and approvals, which are essential to
doing business in Malaysia’s closely-managed economy. However, companies not meeting the racial quotas
recommended by the GOM sometimes have been successful in obtaining renewals of their licensing
requirements upon clearly demonstrating their inability to attract and hire qualified bumiputera
employees.

Climate for Investment & Trade 1-May-2009 • Page 17


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Race-based preferences in hiring and promotion are widespread in government and in government-owned
universities and corporations. While bumiputera represent about 60% of the population, they make up 77%
of the civil service, including 84% of the top management group and 85% of the diplomatic service.4

With regard to employing workers, Malaysia ranks 48th among 181 countries in the World Bank’s report
Doing Business 2009. A notable impediment to employing workers in Malaysia is the high cost of
terminating their employment, even in cases of wrongdoing. The World Bank estimates that the financial
cost of firing an employee averages 75 weeks of salary for that worker.5

Malaysia is a member of the International Labor Organization International Labor Organization (ILO).
Labor relations in Malaysia are generally non-confrontational. A system of government controls strongly
discourages strikes. Some labor disputes are settled through negotiation or arbitration by an industrial
court, though cases can be backlogged for years. Once a case is referred to the industrial court, the union
and management are barred from further industrial action.

While national unions are proscribed, there are a number of national confederations of unions. The
government has prevented some trade unions, such as port workers’ unions, from forming national
federations. There are no labor unions in the electronics sector. Employers and employees share the costs of
the Social Security Organization (SOSCO), which covered 12.9 million workers as of November 2008. No
welfare programs or government unemployment benefits exist; however the Employee Provident Fund
(EPF), which employers and employees are required to contribute to, provides retirement benefits for
workers in the private sector. Civil servants receive pensions.

Sources: MALAYSIA COUNTRY COMMERCIAL GUIDE FY 2009, US & FOREIGN COMMERCIAL SERVICE AND US
DEPARTMENT OF STATE; PRS Data files.

4 Center for Public Policy Studies, “Toward a More Representative and World Class Malaysian Civil Service,” February 2006
5 World Bank Doing Business 2009 report.

Page 18 • 1-May-2009 Climate for Investment & Trade


Political Risk Services
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

Malaysia
Country Conditions
Background
Geography
Malaysia comprises the peninsular states formerly known as Malaya and the East Malaysian states of Sabah
and Sarawak on the island of Kalimantan (Borneo). Its economic and strategic importance stems from its
geographic position. Located on the Malacca Strait and straddling the South China Sea, Malaysia
encompasses access to vital commercial and military sea routes in Europe, the Middle East, and Africa on
one side and East Asia, Japan, and the west coast of the US on the other. Peninsular Malaysia consists of
coastal plains surrounding heavily forested mountains and is separated from East Malaysia by 644
kilometers of the South China Sea. Its tropical climate fosters the production of agricultural products,
including palm oil, rubber, timber, pepper, and cocoa. It also contains significant reserves of petroleum,
natural gas, and tin. However, since the 1980s, Malaysia has become a manufacturing center. It is among
the world’s leading exporters of microchips, electronic components, air conditioners, and other high-tech
manufactured products.

During January, the capital, Kuala Lumpur, has an average low temperature of 22°C and an average high of
32°C, and averages of 14 days of significant precipitation. During June, average low and high temperatures
are 22° and 33°C, respectively, and it receives an average of 13 days of significant precipitation.

Recent History
August 8, 2000: After taking over his own defense to tell the court that he as a victim of plotting by
Mahathir, Anwar Ibrahim was found guilty of sodomy and received an additional nine years in jail.

March 8, 2001: Ethnic violence erupted between Indians and Malays in the Petaling Jaya area of Kuala
Lumpur, an area comprising five villages that are home to about 2,000 families, mostly poor laborers or
squatters. This was the most intense ethnic conflict seen in Malaysia since hundreds the bloody violence
between Malays and Chinese in 1969.

June 2001: Since the 1999 elections, the main opposition centered on the Islamic PAS party, which spreads
its message through mosques and quasi-religious lectures, but to win support from the Chinese community
and shift closer to UMNO, the party appointed the first ethnic Chinese to its policy-making body.

July 15, 2001: Police broke up a demonstration by 500 at the Kamunting detention camp to protest the use
of the Internal Security Act (enacted in 1960 by the British) to lock up six Anwar supporters without trial.

September 2001: Both the Malaysian government and the Islamic opposition condemned the terrorist
attacks on the US, but also condemned the US military action in Afghanistan.

June 22, 2002: Mahathir declared that he would resign from his post in October 2003.

July 18, 2002: The UMNO won the parliamentary elections, but the Kedah parliamentary seat went to PAS.

Background 1-May-2009 • Page 19


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

August 2002: After the imposition of stringent laws against illegal immigrants, providing for whipping and
prison terms, an exodus of foreign workers began.

September 2002: Despite a unanimous Federal Court ruling that a 60-day detention order lodged by the
police against four opposition leaders and activists was unlawful, they remained in prison since the Court
had no power to change an order based on the Internal Security Act.

October 27, 2002: Keadilan agreed to merge with the Malaysian People’s Party (MPP).

June 24, 2003: Mahathir announced a minor Cabinet reshuffle after two senior MCA leaders resigned.

August 2003: The Court of Appeal rejected Anwar’s final attempt to overturn his sodomy conviction.

October 2003: The US Senate voted to withhold $1.2 million in military aid until Malaysia improved its
tolerance of religious diversity, following Mahathir’s tirade against Jews, causing an international furor.

October 31, 2003: After 22 years in office, Mahathir turned over the reins of government to his chosen
successor, Abdullah bin Ahmad Badawi.

March 21, 2004: The National Front, including Prime Minister Badawi’s UMNO party, won a landslide
victory in general elections.

September 2004: The Malaysian Federal Court, in a surprise ruling, overturned the 2000 sodomy conviction
against former Deputy Prime Minister Anwar Ibrahim; he had been sentenced to nine years imprisonment
on that charged and had been previously sentenced to six years in prison, in 1999, for abuse of power;
because Anwar had served his time on the first charge, he was immediately released from custody, but
since the first conviction still stands, he is barred from holding an elected office until 2008.

December 25, 2004: Malaysia was hit in the Asian tsunami disaster; its death toll was 68; the disaster led to
Malaysia’s decision to delay the deportations of thousands of illegal immigrants, mostly from Indonesia.

March 2005: Malaysia reached a production-sharing agreement with Royal Dutch/Shell covering two
exploration blocks that Indonesia claims as being within its territorial waters. Indonesia authorized oil
exploration in a long-disputed offshore area of the Sulawesi Sea.

June 2005: First Vice President and federal territories minister Isa Abdul Samad was suspended from his
post for six years by the UMNO disciplinary board after he was found guilty of being involved in a vote-
buying scam during the party’s leadership elections in September 2004. At PAS internal elections, a raft of
reformers were elected to key posts at the expense of some of its most ardently conservative clerics;
although the party’s conservative president, Hadi Awang, was re-elected without opposition.

December 6, 2005: Prime Minister Badawi received something of a boost when Hanafi Mamat, the
candidate of the UMNO-led and governing National Front (BN) coalition won a hotly contested by-election
for the Pengkalan Pasir constituency seat in the Kelantan state assembly.

November 2006: Riot police intervened to block hundreds of Muslims preparing to storm a Christian
church (because they had heard rumors that Muslim youths were being baptized inside). The government
began allowing non-Malaysians to purchase property valued at up to $71,000 for personal use without
approval.

Page 20 • 1-May-2009 Background


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

May 2007: Anwar Ibrahim lost a by-election, thereby failing to make a political comeback.

March 8, 2008: Badawi’s ruling 14-party BN alliance headed by UMNO made its worst electoral showing
since independence in 1957, as the BN won just 140 seats in the 222-member House of Representatives,
compared to 198 in the 2004 elections and the alliance’s share of the popular vote fell from 63.9% in 2004 to
just 50.3%, a bare majority.

July 2008: A decade after his political travails, opposition leader Anwar finally got his revenge as Keadilan
increased its parliamentary representation in the March elections from just one seat to 31, while UMNO lost
30 of its 109 seats, but then he was arrested again on charges of sodomy, heightening political tensions.

October 2008: The fallout from the humiliating election loss for the ruling coalition led to Badawi’s
announcement that he would resign in March 2009.

Social Conditions
Ethnic and Racial Divisions. The constitution provides for equal protection under the law and prohibits
discrimination against citizens based on religion, race, descent, or place of birth. Ethnic Malays represent
more than half the population, and most of the rest are either Chinese or Indian. Policies give preference to
ethnic Malays and other indigenous peoples (together known as Bumiputra) in control of some industries,
housing, the awarding of government contracts, university entry and educational scholarships, and other
areas. Despite such efforts, the average wealth of Malays is substantially less that the Chinese minority.
Differences between Malays and Chinese, both cultural and economic, constitute the primary threat to
stability. The unwritten compromise underlying the formation of Malaya was that the Chinese would retain
their economic holdings, while the Malays would exercise dominant political and administrative power
and control. Over time, and particularly after the racial rioting in 1969, the Malays have pressed for greater
economic power, while resisting Chinese demands for increased political influence. In 1971, the New
Economic Policy (NEP), the original compact instituted at the birth of Malaya, was restructured to give
Bumiputra economic and educational advantages intended to bring them into the advancing national
economy. However, the Chinese and Indians were not provided with equivalent and reciprocal access to
the political process, which continues to be a source of major discontent among these minorities. Chinese
demands became more concerted in the wake of government adjustments to try to control the economy
after the financial crisis of the late 1990s and as the Malay community became more divided over the fate of
Anwar Ibrahim. The constitution grants everyone essentially the same rights, but in practice, federal laws
pertaining to indigenous people (some among the poorest) vest almost total power in the Ministry of
National Unity and Social Development to protect, control, and decide issues concerning minority groups.
Although the constitution guarantees freedom of religion, religious minorities, which include large Hindu,
Buddhist, Sikh, and Christian communities, generally face government restrictions on their worship. Islam
is the official religion; the practice of Islamic beliefs other than Sunni Islam is severely limited.

Regional and Class Divisions. Peninsular Malaysia is divided by a north-south mountain range that has
separated the population into what have become modern and traditional groupings. Since the western part
of the country was the site of British outposts and is the residence of most of the Chinese and Indian
populations, it has historically been more outward-looking. The east coast, particularly the northeast, has
retained more of its historical character and become the center of fundamentalist Islam, but the vast
majority of the population lives in the west. There is also a cleavage between the peninsula and the states
on the island of Kalimantan. Sabah and Sarawak joined the Federation of Malaysia in 1963 to balance the
inclusion of the largely Chinese state of Singapore. They retained many state prerogatives in Malaysia’s
constitution. With Singapore’s departure in 1965, much of the rationale for their being part of Malaysia

Background 1-May-2009 • Page 21


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

disappeared, but they remain and continue to have a unique relationship with the federal government,
enjoying many more rights than the peninsular states do. In addition to this source of tension, Malays
remain a minority in Sabah and Sarawak, which is populated by related ethnic groups such as the
Kadazans, Dyaks, and Ibans, along with a substantial Chinese population. Industrialization, education, and
public sector participation in the economy, together with preferential treatment for Malays in hiring and
licensing, have reduced the economic disparity between the Malays and Chinese. The urban Malay middle
class, business class, and work force developed and grew after the NEP, a form of affirmative action, was
initiated in 1971. The share of national wealth held by Malays exceeded 20% in 1999, compared with about
2% in 1970. Despite the Malays’ improvement in living standards, the economic disparity between them
and the Chinese fosters Malay nationalism, which some Malay and Islamic politicians seek to exploit in
efforts to wrest control from the multiracial BN.

Education. Education is free and compulsory for all children up to the age of 15. Attendance at the primary
level is nearly universal, and attendance rates at the secondary level are very high as well. However, the
emphasis in most government-run schools is on rote memorization, not critical thinking skills. For Muslim
children, religious education according to a government-approved curriculum is compulsory. Despite
increased enrollment in tertiary education made possible by increased government expenditure, the quality
of university education is declining. An earlier shift from English medium curricula to separate vernacular
schools for Malays, Chinese, and Tamils (Malaysia’s three main ethnic groups) elicited considerable
controversy regarding the quality of education, social cohesion, the global competitiveness of Malaysians,
and differentiated funding for Malay vs. non-Malay-medium schools. Further complicating the declining
quality of tertiary education, Malaysia offers across-the-board racial preferences for university admissions
and scholarships, and decisions regarding recruitment and promotion of faculty often are based on racial
quotas more than on merit. The government spends close to 20% of its budget on education. Malaysia has
one of the highest literacy rates in the region (about 89% in 2008).

Health. The government provides most health services. The general state of public health is quite good and
has improved notably; the infant mortality rate stood at 17 per 1,000 live births in 2008, and the average life
expectancy is just under 72 years. Those in rural areas often suffer from such problems as malaria outbreaks
and insufficient health facilities and services, but the health care system is one of the best in Asia.



The following sections are extracts from the publication:


Background Note: Malaysia, December 2008
Published by Bureau of East Asian and Pacific Affairs, US Department of State
Government
Malaysia is a constitutional monarchy, nominally headed by the Yang di-Pertuan Agong, customarily
referred to as the king. Kings are elected for 5-year terms from among the nine sultans of the peninsular
Malaysian states. The king also is the leader of the Islamic faith in Malaysia.

Executive power is vested in the cabinet led by the prime minister; the Malaysian constitution stipulates
that the prime minister must be a member of the lower house of parliament who, in the opinion of the Yang
di-Pertuan Agong, commands a majority in parliament. The cabinet is chosen from among members of both
houses of parliament and is responsible to that body.

The bicameral parliament consists of the Senate (Dewan Negara) and the House of Representatives (Dewan
Rakyat). All 70 Senate members sit for 3-year terms, which are normally extended for an additional 3 years;
26 are elected by the 13 state assemblies, and 44 are appointed by the king following the prime minister’s

Page 22 • 1-May-2009 Background


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

recommendation. Representatives of the House are elected from single-member districts by universal adult
suffrage. The 222 members of the House of Representatives are elected to parliamentary terms lasting up to
5 years. Legislative power is divided between federal and state legislatures.

The Malaysian legal system is based on English common law. The Federal Court reviews decisions referred
from the Court of Appeal; it has original jurisdiction in constitutional matters and in disputes between
states or between the federal government and a state. Peninsular Malaysia and the East Malaysian states of
Sabah and Sarawak each have a high court.

The federal government has authority over external affairs, defense, internal security, justice (except civil
law cases among Malays or other Muslims and other indigenous peoples, adjudicated under Islamic and
traditional law), federal citizenship, finance, commerce, industry, communications, transportation, and
other matters.

Political Conditions
Malaysia’s predominant political party, the United Malays National Organization (UMNO), has held power
in coalition with other parties continuously since independence in 1957. The UMNO coalition’s share of the
vote declined in national elections held in May 1969, after which riots broke out in Kuala Lumpur and
elsewhere, mainly between Malays and ethnic Chinese. Several hundred people were killed or injured. The
government declared a state of emergency and suspended all parliamentary activities.

In the years that followed, Malaysia undertook several initiatives that became integral parts of its
socioeconomic model. The New Economic Policy (NEP), launched in 1971, contained a series of affirmative
action policies designed to benefit Malays and certain indigenous groups (together known as bumiputera
or “sons of the soil”). The Constitution was amended to limit dissent against the specially-protected and
sensitive portions of the Constitution pertaining to the social contract. The government identified
intercommunal harmony as one of its official goals. The previous alliance of communally based parties was
replaced with a broader coalition--the Barisan Nasional (BN) or National Front. The BN won large
majorities in the 1974 federal and state elections.

Dr. Mahathir Mohamad was Prime Minister between 1981 and 2003, leading UMNO and BN to successive
election victories. Mahathir emphasized economic development during his tenure, in particular the export
sector, as well as large scale infrastructure projects. Mahathir attributed the success of the Asian tiger
economies to the “Asian values” of its people, which he believed were superior to those of the West.
Mahathir sharply criticized the International Monetary Fund (IMF), international financiers such as George
Soros, and Western governments during the sharp economic and financial crisis that affected Asia in 1997-
8, and denied that the downturn was due to the failures of corruption and “crony capitalism.”

The end of Mahathir’s tenure was marred by a falling out with his deputy and presumed successor, Anwar
Ibrahim. In September 1998, Mahathir dismissed Anwar and accused him of immoral and corrupt conduct.
Although Anwar was convicted on both charges in 1999 and 2000, the trials were viewed as seriously
flawed. Malaysia’s Federal Court eventually freed Anwar after overturning his immoral conduct conviction
in September 2004.

Mahathir stepped down as prime minister in October 2003 after 22 years in power, and his successor,
Deputy Prime Minister Abdullah Ahmad Badawi, was sworn into office. Abdullah called elections and won
an overwhelming victory in March 2004. Since taking office, Abdullah, an Islamic scholar, has promoted the
concept of “Islam Hadhari” or “civilizational Islam,” emphasizing the importance of education, social

Background 1-May-2009 • Page 23


Political Risk Services Malaysia Country Conditions
1-May-2009 Reproduction without written permission of The PRS Group is strictly prohibited.

harmony, and economic progress. His relationship with Mahathir eventually soured, and the former prime
minister now expresses regret at supporting Abdullah to be his successor.

Malaysia held national elections in March 2008. UMNO and its coalition allies in the BN won a simple
majority of the seats in the national parliament but for the first time in history failed to gain the two-thirds
majority necessary to amend the constitution. A loose coalition of opposition parties, called the Pakatan
Rakyat or Peoples Alliance, led by Anwar Ibrahim, won 82 of 222 seats in parliament and took control of
the state-level assemblies in five of Malaysia’s thirteen states. In October 2008, Prime Minister Abdullah
announced that he would step down as UMNO party president, and by extension as Prime Minister, in
March 2009, and he endorsed a transition of power to Deputy Prime Minister Najib Tun Razak.

Foreign Relations
Regional cooperation is a cornerstone of Malaysia’s foreign policy. It was a founding member of the
Association of Southeast Asian Nations (ASEAN) and served as the group’s chair most recently in 2005-
2006. It hosted the ASEAN Summit and East Asia Summit in December 2005, as well as the ASEAN
Ministerial and the ASEAN Regional Forum in July 2006.

Malaysia is an active member of the Asia Pacific Economic Cooperation (APEC) forum, the Organization of
the Islamic Conference (OIC), the Non-Aligned Movement (NAM), and the United Nations. It was chair of
the OIC until March 2008 and has also chaired the NAM.

Malaysia is a frequent contributor to UN and other peacekeeping and stabilization missions, including
recent deployments to Lebanon, Timor-Leste, Philippines, Indonesia, Pakistan, Sierra Leone, and Kosovo.

U.S.-MALAYSIAN RELATIONS. The United States and Malaysia share a diverse and expanding
partnership. Economic ties are robust. The United States is Malaysia’s largest trading partner and Malaysia
is the sixteenth-largest trading partner of the U.S. Annual two-way trade amounts to $44 billion. The United
States and Malaysia launched negotiations for a bilateral free trade agreement (FTA) in June 2006.

The United States is the largest foreign investor in Malaysia on a cumulative basis. American companies are
particularly active in the energy, electronics, and manufacturing sectors. The U.S. direct investment position
in Malaysia for 2007 was $15.7 billion.

The United States and Malaysia cooperate closely on security matters, including counter-terrorism,
maritime domain awareness, and regional stability. The relationship between the U.S. and Malaysian
militaries is also strong with numerous exchanges, training, joint exercises, and visits. The U.S. and
Malaysia signed a Mutual Legal Assistance Treaty (MLAT) in July 2006 during the visit to Kuala Lumpur
by Secretary of State Condoleezza Rice.

Page 24 • 1-May-2009 Background


Copyright of Political Risk Yearbook: Malaysia Country Report is the property of PRS Group, Inc. and its
content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's
express written permission. However, users may print, download, or email articles for individual use.

You might also like