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Country Profile 2005

Malaysia This Country Profile is a reference work, analysing the country�s history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit�s Country Reports analyse current trends and provide a two-year forecast.

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Comparative economic indicators, 2004

Gross domestic product(US$ bn)

Sources: Economist Intelligence Unit estimates; national sources.

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Malaysia 1

© The Economist Intelligence Unit Limited 2005 www.eiu.com Country Profile 2005

Contents

Malaysia

3 Basic data

4 Politics 4 Political background 6 Recent political developments 9 Constitution, institutions and administration 10 Political forces 12 International relations and defence

15 Resources and infrastructure 15 Population 16 Education 17 Health 17 Natural resources and the environment 18 Transport, communications and the Internet 19 Energy provision

20 The economy 20 Economic structure 21 Economic policy 23 Economic performance 25 Regional trends

26 Economic sectors 26 Agriculture 28 Mining and semi-processing 28 Manufacturing 30 Construction 30 Financial services 32 Other services

33 The external sector 33 Trade in goods 35 Invisibles and the current account 36 Capital flows and foreign debt 37 Foreign reserves and the exchange rate

38 Regional overview 38 Membership of organisations

41 Appendices 41 Sources of information 42 Reference tables 42 Population 43 Labour force 43 Transport statistics 43 Energy production

2 Malaysia


44 Federal government finances 44 Consolidated public-sector finances 44 Money supply 45 Interest rates 45 Gross domestic product 45 Real gross domestic product by expenditure 46 Gross domestic product by sector 46 Prices and earnings 46 Agricultural and forestry production 46 Minerals production 47 Manufacturing production 47 Banking statistics 48 Stockmarket indicators 48 Main composition of trade 48 Main trading partners 49 Balance of payments, IMF series 49 External debt, World Bank series 50 Official development assistance 50 Foreign reserves 50 Exchange rates

Malaysia 3


Malaysia

Basic data

330,113 sq km

26.1m (mid-2005 estimate)

Population in �000 (2002)

Kuala Lumpur (capital) 1,367 Johor Baharu 724 Ipoh 601 Klang 503 Petaling Jaya 460

Tropical

Hottest months, April and May, 23-33°C (average daily minimum and maximum); coldest month, December, 22-32°C; driest month, July, 99 mm average rainfall; wettest month, April, 292 mm average rainfall

Malay (the official language); main other languages: Chinese dialects (including Mandarin), English, Tamil, Iban (in Sarawak), Banjar (in Sabah). There are 139 living languages altogether

The metric system has gradually replaced the UK (imperial) system. Local measures include:

1 pikul=25 gantang=100 katis=60.48 kg 1 koyan=40 pikul=2.419 tonnes

Ringgit or Malaysian dollar (M$, or RM)=100 sen (cents). Average exchange rates in 2004: M$3.80:US$1 (pegged at this rate since September 2nd 1998; peg replaced by a managed float against a trade weighted basket of currencies on July 21st 2005); M$6.20:£1. Exchange rates on September 16th 2005: M$3.77:US$1; M$6.82:£1

Peninsula: 7 hours ahead of GMT; Sabah and Sarawak: 8 hours ahead of GMT

January 21st (Hari Raya Haji); February 9-10th (Chinese New Year); February 10th (Islamic New Year); April 21st (the Prophet Mohammed�s birthday); May 1st (Labour Day); May 22nd (Vesak day); June 5th (the king�s birthday); August 31st (National Day); November 1st (Deepavali); November 4th (Hari Raya Puasa, the end of Ramadan); December 25th (Christmas Day)

Total area

Climate

Weather in Kuala Lumpur (altitude 39 metres)

Languages

Measures

Currency

Time

Public holidays, 2005

Population

Main towns

4 Malaysia


Politics

Political background

Fundamental to the understanding of Malaysia�s political development is an appreciation of its geographical, ethnic and cultural diversity. Political parties are largely based on ethnicity, locality or religion. Basic themes of post-war political history are the maintenance of racial harmony, positive discrimination in favour of the bumiputera (�sons of the soil��ethnic Malays and other indi-genous peoples) and friction between Islamic parties and the government. Since independence in 1957, Malaysia has been ruled by coalition governments dominated by the principal Malay party, the United Malays National Organisation (UMNO).

British colonial policy was the major formative influence on Malaysia. From the late 18th century, British influence was gradually extended across the Malay peninsula and North Borneo. The colonial administration encouraged (and sponsored) the arrival of immigrants from southern China and southern India to work in tin mines and on rubber plantations. As the region developed into a commodity exporter, it remained administratively fragmented, with internal government largely under local control. By the 1930s, �Malaysia� consisted of the Straits Settlements (Malacca, Penang and Singapore), the Federated Malay States (Selangor, Perak, Negeri Sembilan and Pahang) and the unfederated states (Kedah, Perlis, Kelantan, Terengganu and Johor), as well as North Borneo (Sabah) and Sarawak.

After the second world war, the restored British colonial system sought to create a more integrated territory, a more cohesive society and a stronger central government. The ethnic Chinese were in the majority on the Malayan peninsula, including Singapore. The new Malayan Union (1946-48) soon collapsed as a result of opposition from the Malay rulers to a loss of sovereignty and proposed citizenship for non-Malays. Relations between the different ethnic groups, especially between the Malays and the Chinese, have remained a highly sensitive issue in Malaysian political life.

After the second world war, many of the ethnic Chinese sympathised with the communist revolution in China. A guerrilla war was started by the largely ethnic-Chinese Malayan Communist Party, leading to the declaration of a State of Emergency in 1948, which did not officially come to an end until 1960. One of the measures used by the colonial regime to suppress the insurrection was detention without trial, a practice that successive Malaysian governments have continued to employ. The Emergency was to cast a long shadow over Malaysian politics.

Rapid progress towards full independence�which was proclaimed in 1957�and the establishment of democracy in a pluralist society formed part of the anti-insurgency strategy. The successor of the Malayan Union, the Federation of Malaya (1948-63), passed some powers back to the states. Singapore, with its

Malaysia under British influence

A delicate ethnic balance

Independence was proclaimed in 1957

Malaysia 5


largely Chinese population, was excluded from both arrangements. The political framework that emerged at this time reflected Malaysia�s ethnic variety. UMNO was formed in 1946, and the Malaysian Chinese Association and the Malayan Indian Congress were founded in 1949. These three parties formed the Alliance in 1952 and have remained the core of post-independence governments.

British decolonisation policy continued to shape the country after independence. Sarawak, Sabah and Singapore were added to the peninsula-based federation in 1963 to form a new Federation of Malaysia, with the North Borneo territories offsetting the preponderance of ethnic-Chinese citizens resulting from Singapore�s membership. Brunei refused to join the federation because of a disagreement over the position of the sultan and the control of oil resources. When Singapore withdrew from the federation in 1965, there was a decisive switch in political power towards the ethnic Malays and the central government in Kuala Lumpur.

Losses for UMNO in the 1969 general election stirred up anti-Chinese sentiment and provoked serious race riots, in which many Chinese were killed. The riots were a political and an economic turning point. In the crisis that followed, parliamentary government was suspended for 21 months. The Alliance that had ruled since independence was replaced by a broader-based coalition, the Barisan Nasional (BN, National Front). With minor changes in its composition, the BN has ruled Malaysia ever since. After the riots the BN government instituted a 20-year New Economic Policy (NEP), a programme of positive discrimination aimed at reducing interracial tensions by improving the incomes and economic weight of the bumiputera. The National Development Policy (NDP), which followed the NEP after 1990, relaxed some of the positive discrimination measures that favoured the bumiputera. An extended period of strong economic growth until 1998 made it possible to raise the status of the bumiputera and avoid serious intercommunal conflict.

A decisive shift towards more authoritarian government occurred in 1987, when there was a serious split in UMNO in which Mahathir Mohamad, who had been party president and prime minister since 1981, nearly lost power. Dr Mahathir responded by consolidating his power within UMNO and making it difficult to challenge an incumbent leader. The judiciary was stripped of much of its independence and power, and the constitution was changed after the government lost a number of cases in the High Court. The following year, the government intimidated the judiciary by sacking the chief justice, suspending five Supreme Court judges and increasing the powers of the attorney-general, leaving little check on the government�s exercise of power.

The 1997-98 Asian financial crisis plunged Malaysia into a severe economic downturn, but also exposed corruption within UMNO. Calls for political reform and a change in leadership intensified, especially among younger UMNO politicians. The deputy prime minister, Anwar Ibrahim, who became the focal point of the reformasi movement, was dismissed from the government in September 1998, expelled from UMNO and later jailed for a total of 15 years

The Federation of Malaysia was formed in 1963

The 1969 race riots were a political watershed

A shift towards authoritarianism in 1987

The 1997-98 Asian crisis leads to calls for political reform

6 Malaysia


on charges of obstruction of justice, sodomy and corruption. The dubious treat-ment of Dr Mahathir�s long-standing heir apparent and his controversial trials upset UMNO�s traditional supporters and revitalised the opposition. In the November 1999 general election, UMNO lost its Malay majority. The main beneficiary was the Malay-based Islamist opposition party, the Parti Islam sa-Malaysia (PAS), which gained control in Terengganu while retaining the neighbouring state of Kelantan, and made strong inroads in other northern Malay-belt states. The BN nonetheless retained its two-thirds majority in parlia-ment owing to the continued allegiance of a majority of the Chinese electorate.

UMNO�s appeal received a boost from the discrediting of Islamic funda-mentalism after the September 11th 2001 terrorist attacks on the US. During the past two decades the government has actively promoted and favoured Islam, which is the country�s official religion. There has been little public opposition to Islamisation, despite the fact that on independence Malaysia was declared to be a secular nation and that some 40% of the population is non-Muslim. To counter the pledge made by PAS that it would set up an Islamic state should it win power, Dr Mahathir declared in September 2001 that Malaysia was already an Islamic state, and promised further Islamisation. By associating PAS with Islamist extremism and economic backwardness, UMNO hoped to rally the moderate Malays, while cracking down on Islamist extremists.

Recent political developments

Dr Mahathir retired in October 2003, after 22 years of strong leadership as prime minister and UMNO president. His successor, Abdullah Badawi, has proved better able to defend UMNO�s moderate, progressive version of Islam against PAS. On March 21st 2004 the BN gained a spectacular election victory, winning nine-tenths of the available 219 parliamentary seats, the coalition�s best-ever result. UMNO recovered the majority support of Malay voters. In simultaneous state elections, PAS lost control of Terengganu. Mr Abdullah, who is an Islamic scholar and is not linked to any known scandals, campaigned with his own agenda of moderate Islam. The polls had been preceded by carefully orch-estrated anti-corruption measures that attracted strong public approval.

Mr Abdullah has so far failed to build a strong power base after his election victory. The campaign against corruption turned out to be more about establishing rules for ethical government than punishing corrupt politicians and civil servants. Mr Abdullah had been expected to strengthen his support on the UMNO council during the September 2004 party elections. Instead, two regional politicians, Isa Samad and Mohd Ali Rustam bought their way into the party�s Supreme Committee in a seriously bribery-tainted election for party posts. Ten of Mr Abdullah�s cabinet ministers failed to be elected. Mr Isa gained the highest number of votes and became third in the official UMNO hierarchy, behind Mr Abdullah and Najib Razak, who is the deputy prime minister, and defence minister. A few weeks before UMNO�s annual congress in July 2005 Mr Abdullah finally struck back. UMNO�s disciplinary committee suspended Mr Isa for six years for vote buying.

The fundamentalist opposition is discredited

Progressive Islam wins the 2004 election for UNMO

Mr Abdullah fails to build a strong power base

Malaysia 7


In another sign of Mr Abdullah�s weakness, the UMNO annual congress in July 2005 voted to revive the bumiputera policies, to the alarm of the Chinese parties in the ruling BN. The main aim of these policies is to increase the economic participation of the Malay population. Malay privileges had been gradually dismantled and de-emphasised after the Asian financial crisis. The Malay elite has been stirred by plans to privatise government-controlled companies, and remembering the windfalls of previous privatisations in the 1980s, wants to secure its share of the spoils. Mr Abdullah lacks Dr Mahathir�s charisma and effectiveness to bring about overdue changes in economic and social policies. His opponents are making use of the fears of the Malays to frustrate his policies and the campaign against endemic corruption within the government and UMNO.

Parliamentary forces (no. of seats)

1995 1999 2004Barisan Nasional (BN, National Front) 162 148 198 United Malays National Organisation (UMNO) 88 71 109 Malaysian Chinese Association (MCA) 30 29 31 Malaysian Indian Congress (MIC) 6 7 9 Gerakan Rakyat Malaysia (GRM) 7 6 10 People�s Progressive Party (PPP) 0 0 1 Parti Pesaka Bumiputera Bersatu (PBB) 13 10 11 Sarawak United Peoples� Party (SUPP) 6 8 6 Parti Bansa Dayak Sarawak (PBDS) 4 6 6 Sabah Progressive Party (SAPP) 0 2 2 Parti Bersatu Sabah (PBS)a � � 4 Liberal Democratic Party (LDP) 0 1 � Parti Bersatu Rakyat Sabah (PBRS)b 1 Sarawak National Party (SNAP)c 4 4 � United Pasokmomogun Kadazandusan Murut Organisation (UPKO)b 4 3 4 Sarawak Progressive Democratic Party (SPDP)d 4 BN Direct 0 1 0

Oppositione � 42 20 Parti Islam sa-Malaysia (PAS) 7 27 7 Keadilan PRMf � 5 1 Democratic Action Party (DAP) 9 10 12 Parti Bersatu Sabah (PBS)a 8 3 � Parti Melayu Semangat �46 (S46)g 6 � �Independent 0 0 1Total 192 193 219

a PBS rejoined the BN in 2001. b UPKO and PBRS are splinter parties of PBS, which left the BN in 1990. c SNAP was forced to leave the BN in 2002. d SPDP was formed by former SNAP members. e PAS, DAP and Keadilan contested the 1999 as a coalition, the Barisan Alternatif (BA); DAP left the BA inSeptember 2001. f The Parti Keadilan Nasional merged in December 2002 with Gerakan Rakyat Malaysia (GRM). g Reunited with UMNO in 1996.

The March 2004 election defeat had a devastating effect on the opposition alliance, the Barisan Alternatif (BA, Alternative Front), which consists of PAS and the Parti Keadilan Rakyat (Keadilan), the party led by Wan Azizah, the wife of Mr Anwar. The mainly ethnic-Chinese left-wing Democratic Action Party (DAP)�which left the BA in September 2001, protesting at the intention of PAS

UMNO members call for renewal of Malay privileges

The release of Mr Anwar raises the opposition�s hopes

8 Malaysia


to found an Islamic state�became the largest opposition party. The release of Mr Anwar in September 2004 after nearly six years in jail gave new hope to a demoralised opposition to whom the inspiring former deputy prime minister may be a natural leader.

Important recent events

September 2001

Following the September 11th 2001 attacks on the US, the ruling Barisan Nasional (BN, National front) government tightens the already stringent security regulations. The dominant BN party, the United Malays National Organisation (UMNO), gains support among Malay moderates by associating PAS with Islamist extremism. Responding to the intention of PAS to set up an Islamic state, the prime minister, Mahathir Mohamad, declares that Malaysia is already an Islamic state and announces further Islamisation measures, raising fears among the ethnic minorities that the secular constitution might be changed. The opposition coalition Barisan Alternatif (BA) splits, as the largely ethnic-Chinese Democratic Action Party (DAP) leaves over PAS�s Islamic agenda.

October 2003

Dr Mahathir retires from all his functions and is succeeded by his deputy Abdullah Badawi, who states his intention to fight corruption. Shortly afterwards, Mr Abdullah cancels several of Dr Mahathir�s �mega-projects�.

January 2004

Mr Abdullah appoints the defence minister, Najib Razak, as his deputy prime minister. Mr Najib is Dr Mahathir�s preferred choice and Mr Abdullah�s rival.

March 2004

The BN wins its largest-ever election victory, thrashing PAS, which loses control of Terengganu, and reducing the Parti Keadilan Rakyat (Keadilan) to a single seat. The election outcome strengthens Mr Abdullah�s authority.

September 2004

The former deputy prime minister and one-time heir apparent to Dr Mahathir, Anwar Ibrahim, has his conviction for sodomy overturned by the High Court and is released from prison, after serving nearly six years for corruption.

June 2005

UMNO�s disciplinary committee suspends Isa Samad for six years on charges of vote buying.

July 2005

UMNO�s annual congress votes to renew the system of Malay privileges; Mr Abdullah plays down its significance to his non-bumiputera coalition partners.

Malaysia 9


Constitution, institutions and administration

Malaysia is a federal, constitutional monarchy within the Commonwealth. The position of king (yang di-pertuan agung, meaning �supreme ruler�) is rotated every five years. The nine-strong Conference of Rulers of the states of the peninsula, excluding Malacca and Penang (the sultans of Kedah, Perak, Johor, Selangor, Pahang, Terengganu and Kelantan; the yang di-pertuan besar, or supreme minister, of Negeri Sembilan; and the raja of Perlis) elects one of its number to serve as king.

The king�s powers were cut back under Dr Mahathir. After a constitutional crisis in 1983, the powers granted to the traditional rulers on independence were reduced. Although the constitution does not say so explicitly, the king must in practice accept the government�s advice and must not withhold royal assent from parliamentary bills. In 1992 UMNO drew up a code of conduct for rulers, after the rulers and their families were accused of abusing their power for private gain and exceeding their constitutional authority. In February 1993 constitutional amendments were passed that limited rulers� personal legal immunity.

The federal parliament consists of an upper chamber, the Senate or Dewan Negara (Council of the Nation), which has 69 members, 43 of whom are appointed by the king and 13 pairs are elected by the state legislatures, and a lower chamber, the House of Representatives or Dewan Rakyat (Council of the People), directly elected by universal suffrage, with 219 seats. The lower house has long been a rubber stamp for the BN, and little real debate on draft legislation or issues takes place there, but Mr Abdullah has introduced measures to stimulate parliamentary discussion and initiative.

Each of the 13 states in the Federation has an Executive Council dealing with non-federal matters under a menteri besar (chief minister), who is answerable to elected state assemblies. The constitutional head of each state government is either one of the traditional rulers or (in Penang, Malacca, Sabah and Sarawak) a state governor appointed by the king on the advice of the federal government.

The Malaysian judicial system still resembles the UK system inherited from the colonial period, but also borrows from the US system. The constitution gives an independent judiciary the powers to pronounce on the constitutionality and legality of executive acts. The independence of the judiciary was effectively curbed by Dr Mahathir in 1987-88 in response to a court ruling on the April 1987 UMNO leadership contest, which declared the elections invalid. Dr Mahathir pushed through amendments to the constitution, stripping the High Courts of the power of judicial review and terminating the separation of executive and judicial power. The government established a code of conduct for judges, the breaching of which could result in dismissal. In the years that followed the power of the executive increased further. The legal framework leaves little room for the judiciary to reassert its independence, and dubious appointments of officials with a controversial past have further reduced the likelihood of judicial reforms. The acquittal by the High Court of Mr Anwar in September 2004 is

A federal constitutional monarchy

The federal parliament

The states� executive councils

Changes to the judicial system

10 Malaysia


widely viewed as a sign that the prime minister, Mr Abdullah, will allow the judiciary greater independence, but there has been no sign of judicial reform.

In September 2001, to counter criticism from PAS, Dr Mahathir stated that Malaysia was �already� an Islamic state. This raised fear among the non-Muslim 40% of the population and remained a controversial subject. The constitution says that Islam is the official religion, but other religions are free to be practised. During the past two decades the government has actively promoted and favoured Islam. Islamic or sharia law is enforced at a state rather than federal level, and applies only to Muslims. Ethnic Malays are by definition Muslim. Apostasy or deviation from the established (Sunni) Muslim faith is likely to be punished by sharia courts. Continuing Islamisation means that conflicts between sharia law and human rights principles, enshrined in the federal constitution, are increasing.

After the May 1969 race riots, the government decided to marginalise Chinese and Indians in the civil and armed services. The government practises tokenism and has raised a few non-Malays to a high rank, but the careers of non-Malays are strictly circumscribed unless they become Muslim. The government is having second thoughts about its racial policies, but after 30 years it finds it difficult to change the attitudes of Malay public servants or to arouse interest among non-Malays in a career in the civil service or the army.

Political forces

UMNO, the party of Malay nationalists in the colonial period, remains the most important of the Malay parties. In the March 2004 election it regained the majority support of the Malay section of the population, which it had lost in the 1999 election. The president of UMNO invariably serves as the prime minister. Elections to leading party posts and to the UMNO supreme council determine the leadership succession and can also affect the posts occupied by ministers in the cabinet. An incumbent leader is rarely challenged; when this happened to Dr Mahathir in the internal UMNO election of April 1987 he altered the voting mechanism in favour of the incumbent in future party elections. UMNO is the dominant party in the multiracial ruling coalition, the Barisan Nasional BN.

Race is the major defining feature of the political system. PAS is the alternative to UMNO for the Malay population, a conservative Islamic party and a haven for Malay protest votes, offering a greater devotion to Islam and possibly also a stronger commitment to Malay nationalism than UMNO. From its inception, PAS has intended to set up an Islamic state and introduce Islamic law. As only 60% of Malaysians are Muslims, PAS�like UMNO�would need to align itself with other parties. But the intention of creating an Islamic state presents a major obstacle to the building of a coalition of opposition forces. PAS remains a formidable rival to UMNO for the hearts and minds of Malays.

Racial discrimination in administration

UMNO is the dominant Malay party

Opposition groups remain fragmented

Islam is the official religion

Malaysia 11


The Malaysian Chinese Association (MCA) was the acknowledged political representative of the ethnic Chinese at independence in 1957. It quickly became an apologist for the government coalition in which it served, and was identified with the richer Chinese and business interests. It is the second-largest party in the BN after UMNO, but it suffers from internal divisions, and the leadership has been accused of links with Chinese criminal secret societies. Gerakan Rakyat (Parti Gerakan Rakyat Malaysia, or PGRM, Malaysian People�s Movement Party) was founded as a left-of-centre multiracial party, and has an awkward relationship with the MCA in the BN.

The left-of-centre, largely ethnic-Chinese Democratic Action Party (DAP) became the largest opposition party after the March 2004 election. In September 2001 DAP left the opposition alliance, BA, over the PAS commitment to transform Malaysia into an Islamic state. Keadilan Rakyat remains in the BA, representing the political reform programme of Mr Anwar. Gerakan, DAP and Keadilan are in theory multiracial parties, but Gerakan and DAP attract mainly ethnic-Chinese voters, while Keadilan relies largely on Malay support.

Key political figures

Abdullah Ahmad Badawi

Malaysia�s prime minister and president of the United Malays National Organisation (UMNO) since November 1st 2003. Mr Abdullah, an Islamic studies graduate whose name has not been linked to any scandals, has had limited success in fighting corruption. Lacking Dr Mahathir�s charisma and strong power base, it remains doubtful to what extent he will be able�or wish�to change Malaysia�s political life.

Najib Razak

Deputy prime minister and UMNO�s deputy president, defence minister and son of a former prime minister. A rival to Mr Abdullah, he is expected to challenge the prime minister in the future.

Mahathir Mohamad

Dr Mahathir was the prime minister and president of UMNO from July 1981 until November 2003. He is the principal architect of the economic advance of the Malay community and the rapid industrial growth of Malaysia. Dr Mahathir dominated political life for two decades, and is likely to remain influential in Malaysian politics.

Anwar Ibrahim

Dr Mahathir�s former deputy in UMNO and the former deputy prime minister, jailed in 1999 for six years for abuse of power, and in 2000 for another nine years for sodomy, to run consecutively. Mr Anwar was released in September 2004 after his sodomy conviction was overturned by the High Court. As an advocate of political reform and a possible bridge between UMNO and fundamentalist Islam, he remains a possible future prime minister.

Abdul Hadi Awang

The president of the opposition Parti Islam sa-Malaysia (PAS), who lost his position as chief minister of Terengganu in the March 2004 election. Unlike many senior PAS leaders, Mr Abdul has a pragmatic attitude to political strategy, which PAS will need if it is to rebuild its power base.

12 Malaysia


International relations and defence

Under Dr Mahathir, Malaysia followed a policy of non-alignment, and became a champion of the interests of the developing world and, with little success, a defender of the interests of the Islamic world. Mr Abdullah shares the same ambitions, but not Dr Mahathir�s urge to upset Western audiences with frequently controversial opinions. Under Mr Abdullah, Malaysia�s diplomatic relations have begun to reflect economic interests more closely than in the past.

Malaysia, aware of its limited influence as a small country acting on its own, is an active member of numerous international bodies, especially Asian regional organisations (see Regional overview: Membership of organisations). The Association of South-East Asian Nations (ASEAN) remains important to Malaysia�s foreign policy objectives.

Relations with the US have in the past been complicated by Dr Mahathir�s comments, for example his outspoken criticism of US behaviour over the Iraq war. In July 2004 Mr Abdullah was received in the US capital, Washington, as a moderate Muslim leader of an Islamic country with whom the US could do business. Malaysia has continued to co-operate closely with the US in the fight against terrorism. An even more striking change in foreign policy has been the strengthening of ties with Australia, which was boycotted under Dr Mahathir as an alien, white invader in the region.

Relations with Indonesia are generally good, despite the latter country�s apparent failure to deal with terrorist threats within its borders, illegal immigration and air pollution from forest fires. Relations with Singapore have become less edgy since Mr Abdullah became prime minister, co-operation is increasing, and many outstanding quarrels about minor issues are likely to be solved. Regional co-operation to suppress and prevent terrorist activity has increased. Malaysia has border disagreements with Indonesia, Singapore, the Philippines and China.

In 2002 Malaysia restarted the modernisation of the armed forces that was derailed by the Asian economic crisis. The intention is to develop an all-round modern conventional capability, with enhanced maritime security, from what was originally a counter-insurgency force. Malaysia, together with Singapore, the UK, Australia and New Zealand, is a member of the Five Power Defence Arrangement, which provides for co-operation and consultation in case of attack. Malaysia co-operates on border security with its neighbours. According to Mr Razak, Malaysia�s primary security threat is internal; counter-terrorism and urban warfare capabilities are being developed to deal with violent extremism. In 2004 Malaysia started a limited obligatory national service, although mainly as a nation-building exercise.

Defence spending is to remain high

Relations with the US have improved

Co-operation with Singapore has grown

The role of ASEAN remains important

Malaysia 13


Military forces, 2004/05 Malaysia Thailand IndonesiaArmy Personnel 80,000 190,000 233, 000 a

Main battle tanks - 333 -

Navy Personnel 15,000 70,600 45, 000 a

Frigates 4 12 16Submarines - - 2Air force Personnel 15,000 46,000 a 24,000Combat aircraft 73 190 94

a Estimate.

Source: International Institute for Strategic Studies, The Military Balance 2004/05.

Security risk in Malaysia

The security risk to foreign companies operating in Malaysia is real but moderate. There have been no terror attacks on Malaysian soil. The most serious regional attacks have taken place in neighbouring Indonesia: the bombings in Bali in October 2002, of the Jakarta Marriott hotel in August 2003 and of the Australian embassy in Jakarta in September 2004. A militant Islamist group, Jemaah Islamiah (JI), which is linked to the al-Qaida international terror network, has been blamed for the attacks. JI acts as a central co-ordinator for radical groups across the South-east Asian region, as it works towards its goal of establishing an Islamist state embracing Malaysia, Indonesia, Singapore, Brunei and the southern Philippines. In September 2002 Singapore foiled a series of planned terrorist attacks on foreign targets, private companies and embassies; the terrorists intended to destabilise the governments of Singapore and Malaysia and foment ethnic strife between the Chinese and Malays. During 2004 there were security scares involving the US and Australian embassies in the capital, Kuala Lumpur. The Malaysian government has blamed Indonesians for inspiring Islamic militancy in Malaysia. However, international investigations of Islamist terrorism have made it clear that for many years Malaysia was considered a safe haven by Islamic extremists. The Malaysian branch of JI is Kumpulan Mujahidin Malaysia (KMM, Malaysian Mujahideen Group). By September 2004 around 90 Islamic militants were being held under the Internal Security Act, which allows for a two-year detention period that can be renewed indefinitely. In July 2004 the prime minister, Abdullah Badawi, declared that South-east Asia was slowly winning the war against terrorism. To fight terrorism effectively, the countries of the region have begun to co-operate closely, involving the US and Australia. In 2003 a co-ordinating regional counter-terrorism centre was opened in Kuala Lumpur. A major concern is the vulnerability to piracy and terrorist attacks of shipping in the Malacca Strait, through which one-third of global trade and one-half of the world�s oil supplies pass each year. In July 2004 Singapore, Indonesia and Malaysia started co-ordinated patrols.

14 Malaysia


Social unrest

The major long-term risk to business comes from a return of economic and political conditions that could lead to an outbreak of racial violence. Tensions persist below the surface between the majority Malays on one hand and the minority ethnic Chinese and Indian populations on the other. In the most serious post-war racial conflict, in 1969, divisions within the Malay majority led to the scapegoating of the ethnic Chinese, hundreds of whom were killed in riots. Any attempt to reduce the privileges of the bumiputera (�sons of the soil��ethnic Malays and other indigenous peoples) could stoke Malay resentment. However, the short-term risk of large-scale racial violence appears low. Large-scale demonstrations against the government and the ruling United Malays National Organisation (UMNO) were last held in 1998, when the deposed deputy prime minister, Anwar Ibrahim, led reformasi (reform) demonstrations. Although Mr Anwar was released from prison in September 2004, a revival of large-scale public protests looks unlikely under the reform-minded Mr Abdullah, even though most traditional means of protest remain blocked. There is widespread awareness within Malaysia that it is heavily dependent on foreign direct investment, and the opposition is unlikely specifically to target foreign businesses.

Armed conflict

The risk of armed conflict affecting business is low. Sporadic Islamist violence has occurred during the past few years. In 2001 KMM members were arrested and accused of involvement in bank robberies, the murder of a state assembly representative, and the bombing of a church and a temple. There are no �no-go areas� in Malaysia, and the government remains very much in control of the country. It is unlikely that Islamist extremists could develop the ability to stage an armed conflict. The revival of Islamic militancy in southern Thailand, where the population is mainly of Malay origin, poses no direct threat to Malaysian security but strains relations with Thailand.

Organised crime

Malaysia is, in general, a fairly safe country. Violent crime, kidnapping and extortion are rare, although they have attracted more publicity in recent years. Organised crime is seldom a threat to foreign business. Foreigners are, however, often the target of pickpockets, burglars, car break-ins and purse-snatching. Credit-card fraud is a growing problem. Chinese criminal gangs, or triads, do operate in Malaysia but their activities do not usually attract much publicity. Illegal activities by organised Malaysian groups that are most frequently mentioned by law-enforcement agencies are piracy�the illegal copying and distribution of CDs and DVDs�as well as credit-card counterfeiting and drug trafficking.

Resources and infrastructure

Population

The Malaysian population is estimated to have reached 26.1m by mid-2005. The annual average rate of growth was 2.1% in 2001-05, somewhat slower than the 2.4% a year registered in 1996-2000. Around 80% of the population lives in

Population growth is slowing

Malaysia 15


peninsular Malaysia. The rate of growth will continue to be fastest in Malaysia�s more developed states. The dependency ratio (those under the age of 15 and over the age of 64 divided by the rest of the population) is estimated to have declined from 61.4% in 2000 to 58.6% in 2005, as the median age rises from 23.4 years in 2000 to 24.2 years.

Population, 2004 (mid-year estimates)

�000 %Total 25,581 100.0 Malaysian 23,887 93.4 Bumiputera 15,701 61.4 Malay 12,893 50.4 Other bumiputera 2,808 11.0 Chinese 6,074 23.7 Indian 1,806 7.1 Others 304 1.2 Non-Malaysian 1,694 6.6

Age structure 0-14 8,416 32.915-64 16,091 62.965+ 1,074 4.2Life expectancy, total (yrs) 72 -

Source: Department of Statistics, Yearbook of Statistics.

Rates of population growth vary considerably between the main ethnic groups, probably owing to differences in geographical location, income levels and cultural factors. In 2001-04 the annual average rates of growth of the bumiputera (�sons of the soil�, ethnic Malays and other indigenous peoples), Chinese and Indian communities were 2.2%, 1.2% and 1.6% respectively. The Chinese, long urbanised and enjoying higher average incomes, now have smaller families; the Malay urban population is growing, but most families remain in rural areas.

Mean monthly gross household income increased from M$2,472 (US$650) in 1999 to M$3,011 in 2002, an average growth rate of 6.8% a year, according to official data. The proportion of lower-income households, defined as those earning less than M$1,200, decreased from 33.1% in 1999 to 25.9% in 2002. Growth rates varied by ethnic group. The mean monthly income of Malay households expanded by 6.2% annually during this period to reach M$2,376 in 2002, while that of Chinese households rose by 7.4% a year to M$4,279 and that of Indian households increased by 4.1% a year to M$3,044. The mean monthly income of urban households rose by 5.6% annually to M$3,652 in 2002, and that of rural households grew by 0.2% to M$1,729.

In the 2000 census, 94.1% of the total population of Malaysia were Malaysian citizens. Bumiputera made up 65.1% of Malaysian citizens, ethnic-Chinese 26% and Indians 7.7%, compared with an ethnic composition of 60.6%, 28.1% and 7.9% respectively in 1991. Non-Malaysian citizens numbered 1.4m or 5.9% of the population. In Sarawak the predominant ethnic group was the Ibans, accounting for 30.1% of the state�s total of Malaysian citizens, followed by

Growth rates vary between the main ethnic groups

The bumiputera share of the population continues to grow

16 Malaysia


Chinese (26.7%) and Malays (23%). In Sabah the predominant ethnic group was the Kadazan Dusun (18.4%), followed by Bajau (17.3%) and Malays (15.3%). The average population density, at 77 persons per sq km in 2004, is relatively low. However, there are wide disparities between the peninsula and the sparsely populated Borneo states.

Education

The government places great emphasis on education, which is the largest item in the federal budget. The aim is to provide a �world-class quality education system�. Primary education is compulsory for all Malaysian children. Primary and secondary education is free for students aged 7-17 in the public school system (which includes national-type schools teaching in Mandarin and Tamil). Malaysia has a literacy rate of 93%. Over 97% of seven-year-olds are enrolled in the public school system. The private fee-paying sector plays an important role only in higher education. There are public examinations at the end of the primary level (at age 12), the lower secondary level (usually at 17) and the higher secondary level (at 19). Malay and English are compulsory subjects. The matriculation exam at the end of the higher secondary level gives access to Malaysian public universities.

In 2003, there were around 271,000 students, including 15,000 international students, enrolled at 690 private colleges, 14 private universities and four foreign university branch campuses, which teach in English. This compares with 80,000 students at the 16 public universities, which use Malay as a medium of instruction. Sending pupils abroad was especially popular before the Asian financial crisis, but the need to do so has been reduced by twinning arrangements with foreign universities. There is also a large number of private and public colleges offering vocational and skill-based education and training. State assistance mostly takes the form of soft loans, repayable when students graduate and take paid employment. University entrance is in theory based on merit but is in practice biased towards the children of bumiputera. Employers frequently complain about the low quality of Malay graduates. With this in mind, science and mathematics have been taught in English since 2003. After independence in 1957 the role of English was systematically reduced for Malay-nationalist reasons.

Health

Malaysia�s public healthcare system, with its emphasis on community-based, preventative care, provides high-quality services at little or no cost to consumers and compares favourably with provision in most other Asian countries. There is an extensive network of primary healthcare services, which in 2004 was supported by more than 3,000 health clinics and 2,900 dental units as well as 124 public hospitals with more than 34,000 beds. Clean water, safe food and sanitary disposal of waste are generally available. But there are wide geographical variations: health indicators for Sabah, Sarawak and some pre-dominantly rural states on the Malayan peninsula are well below average. The 225 private hospitals are generally smaller and better equipped, providing

A model system, albeit with geographical disparities

Education is given a high priority

Malaysia 17


around one-quarter of total beds. But there is an acute shortage of manpower, and partly in response to this the government is developing electronic medical services and paperless hospitals.

Government spending on the health sector fell from 3% of GDP in 1990 to 2.4% in 1998, reflecting the authorities� desire gradually to reduce their role as a healthcare provider. However, the Eighth Malaysia Plan, which covers the 2001-05 period, targeted an increase of nearly 50% in government spending on health compared with the Seventh Malaysia Plan (1996-2000), at M$5.5bn (US$1.4bn). In October 2003 the revision of the Eighth Malaysia Plan raised the total to M$9.5bn, with the additional funds to be spent largely on construction and renovation of hospitals.

Whereas the Seventh Malaysia Plan focused on an expansionary development programme that saw a large increase in the numbers of new private hospitals and clinics, the Eighth Malaysia Plan aims for an overall improvement in the quality of public health services, with greater emphasis on the use of information technology, improvements in the quality of health personnel and an upgrade of rural facilities. Under the revised plan, a total of M$898m (US$236m) has been allocated for rural and environmental health.

Natural resources and the environment

Malaysia has a tropical climate. Its economic development was dominated by the cultivation of plantation crops, such as natural rubber and palm oil, as well as by tin mining. Malaysia lost its dominant position as the world�s largest producer of tin concentrates after depletion of the richest, lowest-cost tin deposits. However, it is still one of the world�s main centres of tin refining, although it must supplement declining domestic mine output with imported concentrates. Malaysia is also no longer the world�s biggest producer of natural rubber, its declining output having been overtaken in 1993 by rising production in Thailand and Indonesia. Plantation companies have for many years been switching to the more profitable cultivation of palm oil. Malaysia, until recently, was the world�s largest producer of palm oil, having been overtaken by Indonesia.

Malaysia is one of the world�s leading producers of tropical saw logs. Controls on tree-felling by loggers continue to be flouted, but output is gradually declining. Bans on log exports were originally imposed as much to encourage more downstream processing as to preserve the Malaysian rainforest. Controls are now linked to replanting.

Crude oil and natural gas are now far more important primary products for Malaysia. Both oil and natural gas are extracted from two main areas in the South China Sea, off Terengganu and Sabah. Malaysia is, by international standards, a small producer of crude oil but a large exporter of natural gas. It has been the aim of successive Malaysian governments to raise earnings from all primary products by increasing the degree of domestic processing. The country now has large commodity-based industries, which continue to expand,

Plantation crops still have an important economic role

Domestic processing is being stepped up

18 Malaysia


especially the chemical industries based on oil and gas, but also the manufacture of rubber goods and wooden furniture.

Transport, communications and the Internet

Malaysia�s physical infrastructure compares favourably with that of most other countries in the region. Substantial investment during the boom years by the private and public sector was interrupted by the 1997-98 financial crisis, but investment has since resumed, albeit at a slower pace. By 2003 the national road network stood at 77,403 km. Malaysia has made considerable progress in the creation of a more integrated, efficient and reliable urban transport system. An express railway links Kuala Lumpur to Kuala Lumpur International Airport (KLIA), connecting to an urban rail system and monorail network, which also serves the administrative capital, Putrajaya. Public transport is being promoted.

KLIA was opened in June 1998, with a capacity of 25m passengers a year. New regional airports have been added since; the upgrading of others is being planned. Malaysia is determined to become the regional hub for air transport. In 2001 the government concluded �open sky� policy agreements with several developed countries, obtained additional international landing rights, increased flight frequencies and added new destinations. In the same year the national carrier, Malaysia Airlines (MAS), was restructured. In September 2003 landing and parking fees at all airports were waived for international flights for a period of five years. Air travel was hit by the impact of Severe Acute Respiratory Syndrome (SARS) early in 2003. A low-fare airline, Air Asia, started domestic flights in December 2001.

Malaysia�s ports handled 339m tonnes in 2003, up from 234m tonnes three years earlier, an average increase of 13.2% per year. Growth was the result of a rise in containerised and liquid bulk cargo, but also of diversion of traffic from the Port of Singapore (POS). A huge expansion is continuing on the central west coast at Port Klang, as well as at the Port of Tanjung Pelepas (PTP) in Johor, in direct competition with POS. Planned port capacity by 2005 is 481m tonnes, a 50% rise compared with 2000. Malaysia is determined to become the preferred regional transshipment point.

State-owned Telekom Malaysia is the dominant provider of fixed-line services and an important operator of cellular services; five companies compete in each market section. In 2005 the market for fixed-line telephones was stagnating, with 16.5 fixed-line telephones for every 100 people. Telekom is the central provider of the fibre-optic communications infrastructure. Cellular services have continued to grow rapidly. Tariff liberalisation boosted the number of mobile-phone users from 5.1m in 2000 to an estimated 16.5m by mid-2005, 14m of whom use prepaid services. For security reasons, the government plans to register all users of prepaid services. Telekom continues to be favoured by the government: in July 2002 Malaysia awarded third-generation (3G) spectrum licences to Telekom Malaysia and a local private-sector firm, Maxis Communications, shutting out other bidders.

Large investments in infrastructure

Kuala Lumpur International Airport attracts more traffic

Aggressive expansion of port capacity continues

Telecommunications

Malaysia 19


The government wants to position Malaysia as a regional and even a global hub for information and communications technology (ICT) and multimedia. ICT is considered a crucial element to achieve a competitive knowledge-based economy. The future development of the Multimedia Super Corridor (MSC) will play an essential role in the fostering of local capabilities. But ICT usage remains relatively low by international comparison, with 4.2m personal computers estimated to have been installed by 2003. The number of Internet subscribers increased from 1.7m in 2000 to 3.6m by mid-2005, with an estimated 10.7m users. This represents a penetration rate of 42%, which is comparable with 40-50% in Singapore, Japan, South Korea and Taiwan. Malaysia has eight Internet service providers, but the government keeps a wary eye on the Internet, fearing uncensored criticism. The government has set a target of 50% broadband penetration by 2007.

Energy provision

Malaysia is well endowed with energy resources. It is a net exporter of oil and gas, which are extracted from beneath the South China Sea. Reception installations in Terengganu handle the oil and gas extracted from fields east of the peninsula; other fields are located north of Sarawak and around the coast of Sabah. Proven oil reserves have declined in recent years owing to a lack of new discoveries. Large coal reserves are found in Sarawak and Sabah, but their low grade and difficulty of access have discouraged development. The high rainfall and rugged topography of peninsular Malaysia and also Sabah and Sarawak provide extensive scope for hydroelectric power. The biggest hydroelectric project is the 2,400-mw Bakun dam under construction in Sarawak.

Rapid industrial development significantly boosted demand for electricity in the 1980s, and the resulting supply shortfall led the government in the early 1990s to award contracts to private consortia, known as independent power providers (IPPs), to build and operate thermal generating plants to supply the national grid. The IPPs produced 40% of peninsular Malaysia�s electricity in 2004; state-owned Tenaga Nasional (TNB) provided 60%.

Fuel used for electricity generation is mostly natural gas, followed by coal, hydroelectricity and oil; renewable energy (especially biomass, from palm oil and wood waste) will soon overtake oil. The reliance on oil continues to be reduced; coal will cover the bulk of the expanding demand for power, but gas will remain the major fuel for power generation.

Malaysia�s reserve margin�the difference between installed capacity and peak demand�stood at 46% in June 2004. Although this represents a minor improve-ment on 2003 when the reserve margin was 47%, it is large in comparison with other Asian economies. But total installed capacity has risen significantly in recent years to keep up with demand. The bulk of installed capacity is in peninsular Malaysia. The government has revived the giant 2,400-mw Bakun hydroelectric project in Sarawak, but it is highly doubtful whether it will be able to find customers for the electricity when Bakun is commissioned in 2006.

There are substantial energy resources

Coal will be used as the bulk of the new power demand

ICT is considered crucial for knowledge-based economy

20 Malaysia


The economy

Economic structure Main economic indicators, 2004 (Actual unless otherwise indicated)

Real GDP growth (%) 7.1

Consumer price inflation (av; %) 1.5

Current-account balance (US$ m) 14,770.0a

Exchange rate (av; M$:US$) 3.80

Population (m) 25.6

External debt (year-end; US$ m) 52,266.1a

a Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit, CountryData.

For 30 years Malaysia has industrialised rapidly, transforming itself from an economy whose livelihood relied primarily on the production of mineral and agricultural export commodities�palm oil, natural rubber, tropical timber and other minor mineral and agricultural products�into one dominated by manu-facturing and services. In 2004 manufacturing accounted for 31.4% of nominal GDP, with services accounting for 47.1%. Agricultural output, on the other hand, accounted for some 9.5% of nominal GDP in 2004. Malaysia aims to become a fully developed nation by 2020.

Malaysia still plays a leading role in world markets for some of its commodities. It is still an important source of rubber, and is a leading producer of palm oil. Palm oil output reached a record 14m tonnes in 2004. Manufactures account on average for 85% of gross export earnings. Electronic goods make up the single most important category, and have increased their output by over 10% year on year for most of the past 25 years, declining only in 1985 and in 2001. Electronic goods production is heavily dependent on imported parts. It is government policy to raise the domestic content of exports and the value added in production. The strong export orientation of the electronics industry makes it vulnerable to fluctuations in global demand. In 2004 Malaysia�s total exports of goods and services were equivalent to 121% of nominal GDP, a high figure by international standards.

A major change in economic structure in Malaysia during the past decade has been the decline in capital investment. Two economic downturns in the past six years have severely dented gross fixed investment, which dropped from 43.1% of nominal GDP in 1997 to 20.4% in 2004. The reduction was caused by falls in foreign direct investment (FDI) together with lower private domestic investment. A modest recovery in private investment started in 2003, but the government�s desire to cut back bloated public investment will restrain growth in total capital investment in the years ahead.

Manufacturing is the largest industrial sector

Electronics production dominates manufacturing

Private investment begins to recover

Malaysia 21


Comparative economic indicators, 2004 Malaysiaa Indonesiaa Singaporea Thailandb Japanb

GDP (US$ bn) 117.8b 257.6b 106.8B 163.5 4,669.6

GDP per head (US$) 4,630 1,080 25,170 2,510a 36,672

GDP per head (US$ at PPP) 10,690 3,500 31,200 7,960a 30,111

Consumer price inflation (av; %) 1.5b 6.1b 1.6b 2.8 0.0

Current-account balance (US$ bn) 14.8 2.8 30.3 7.1 172.1

Current-account balance (% of GDP) 12.5 1.1 28.4 4.3 3.7

Exports of goods fob (US$ bn) 126.6 71.7 200.5 96.1 539.0

Imports of goods fob (US$ bn) -99.1 -50.5 -168.9 -85.0 -406.9

External debt (US$ bn) 52.3 136.9 23.6 50.8a �

Debt-service ratio, paid (%) 5.9 16.8 1.6 9.7a �

a Economist Intelligence Unit estimates. b Actual.

Source: Economist Intelligence Unit, CountryData.

Economic policy

After the 1997-98 regional financial crisis the government pursued a stimulatory fiscal policy, initially to aid economic recovery from the regional financial crisis and later to help narrow the wide, persistent gap between actual and potential output. Previously fiscal policy tended to be prudent, with revenue during the boom years outstripping current outlays and, for much of the 1990s, develop-ment spending as well. However, the government has continuously run a budget deficit since 1998.

The 2004 budget marked a turning point, starting the necessary process of fiscal consolidation with large cuts in government development spending. However, the government had second thoughts during 2004 about the speed of deficit reduction, allocating an extra M$10bn of expenditure. The 2005 budget continues the process of fiscal consolidation at a leisurely pace, forecasting a decline in the fiscal deficit to 3.8% of GDP from 4.3% in 2004. Data for the first half of 2005 show that this is achievable. Nevertheless, the government admitted that it had given up on its target of balancing the budget by 2006. Assuming that the 2005 budget will be carried out as planned, the government�s finances in the first two years (2004-05) of Abdullah Badawi�s tenure as prime minister show some worrying trends. Large cuts in government investment are matched by substantial increases in government consumption. Revenue growth is surprisingly slow, given the strength of the economy, especially in 2004 when real GDP grew by 7.1%.

The most important future taxation change is the introduction of a goods and services tax (GST)�a comprehensive value-added tax�by 2007. It will achieve a long-planned shift from direct to indirect taxation, made necessary by the volatility of direct taxes and their failure to keep up with economic growth. The GST is expected to improve tax collection and provide a more stable source of revenue. The government has stated that it will cut corporate and individual income tax rates at the same time as introducing the GST. Malaysia�s 28% corporate tax rate may then be reduced to a level closer to Singapore�s 20%. In addition, the government aims to reduce or abolish subsidies, not just those connected with fuel.

The government begins to tighten fiscal policy

New tax will provide a stable revenue source

22 Malaysia


Finding additional government revenue is also part of the reason for the reform of the government-linked corporations (GLCs). The 40 GLCs include some of Malaysia�s largest companies, such as the oil company, Petronas, and the energy company, Tenaga Nasional. Together, the companies account for some 36% of the capitalisation of the Malaysian stockmarket. The government intends to boost the return on its investments, with the likely aim of selling off part of its holdings later. The GLCs have been given guidelines and targets, and told to improve their efficiency and competitiveness, and make their management more accountable. The transformation of the government-owned sector is meant to have a powerful effect on the private sector and boost the efficiency of the whole economy.

Federal government finances, 2004 M$ bn % change, year on yearRevenue 96.9 2.9 Tax revenue 70.8 9.0 Direct taxes 46.4 7.9 Indirect taxes 24.4 11.2 Non-tax revenue 26.2 -5.6Expenditure 116.8 7.1 Operating 91.5 21.7 Development (net)b 25.3 -33.9Balance -19.9 4.8

a Estimated outcome. b Net of loan recoveries.

Source: Ministry of Finance, Economic Report 2004.

Malaysia�s economic planning takes place within a broad framework, which covers long-, medium- and short-term planning periods. Vision 2020, launched in 1991, sketches a 30-year path to developed-nation status and provides an overall focus. The Third Outline Perspective Plan (OPP3) sets the broad thrust and strategies for the national development agenda for 2001-10. Medium-term planning is based on five-year plans. The Ninth Malaysia Plan 2006-10 (9MP) will be completed by the end of 2005. The annual budget is on the short-term planning horizon. In conducting economic policy, the government is assisted by the Economic Planning Unit (EPU), which is part of the office of the prime minister. In addition to the prime minister, the ministers of finance, and of trade and industry determine policy.

Malaysia�s five-year plans Seventh Plan (1996-2000) Eighth Plan (2001-05) 2001-03 Target Outturn Target OutturnReal GDP growth (%) 8.0 4.7 7.5 3.0

Inflation (av; %) 2.7 3.4 2.7 1.6GNP per head (M$; end-period) 14,788 13,359 17,779 14,432Unemployment (%) 2.8 3.1 2.7 3.5

General government balance (% of GNP) 1.5 1.5 1.5 -1.5Current-account balance (% of GNP) 0.5 6.5 3.9 10.2

Source: Economic Planning Unit, Eighth Malaysia Five-Year Plan (2001-2005).

Bank Negara Malaysia (BNM, the central bank) is not independent. Its task is to reinforce the impact of the government�s fiscal policies. Since the Asian

The GLCs are being transformed

BNM has a crucial role in reforming the financial sector

There is a long-established economic planning framework

Malaysia 23


financial crisis, it has followed an accommodative monetary policy, which may be coming to an end in 2005 because of rising inflation. Despite its lack of inde-pendence, the BNM is influential, largely because of the prestige built up under its governor, Zeti Aziz. The central bank played a crucial role in strengthening and reorganising the weakened banking system after the financial crisis. It actively promotes structural reform, introducing measures to boost the liquidity of financial markets and allowing foreign institutions greater freedom to expand. At the same time it is also supporting the development of the Islamic banking and insurance sector. Recently, the central bank has extended the range of financial instruments. In April 2004 a new Overnight Policy Rate (OPR) was introduced. The central bank will also continue to monitor the ringgit closely, following the adoption of a new currency regime in July 2005. The fixed exchange rate system, which fixed the ringgit to the US dollar at M$3.80:US$1, was abandoned in favour of a managed float against a trade weighted index of currencies of Malaysia�s major trading partners.

Economic performance

In line with other countries in South-east Asia, Malaysia has suffered two re-cessions during the past six years. The country had enjoyed a decade of consistently fast growth, with economic expansion driven by manufacturing investment and exports, until the Asian financial crisis of 1997-98. Malaysia benefited from the surge in global demand for information and communication technology goods, which pulled the economy out of recession in 1999. But by 2001 it was hit by a downturn in global demand, which resulted in a plunge in exports and a sharp fall in GDP growth to only 0.3%. Growth resumed in 2002 and picked up significant momentum in 2004, when the economy expanded by 7.1%, but the latest data point to a more modest pace, of 5.2%, for 2005. Malaysia�s dependence on exports, particularly electronics and electrical goods, which made up 53% of exports in 2004, means that economic growth is vulnerable to global fluctuations in the demand for these products. This depen-dence cannot be reduced quickly, and a shift to other sources of economic growth, which the government is now promoting, could take a long time.

Gross domestic product (1987 prices; % real change year on year)

Annual average 2004 2000-04Private consumption 10.5 7.3

Government consumption 6.0 9.2Gross fixed investment 3.1 5.3

GDP 7.1 5.2

Sources: Bank Negara Malaysia; Ministry of Finance; Economist Intelligence Unit; official estimates.

Malaysia�s growth over the past 20 years has been financed and sustained by high domestic savings and large inflows of FDI, attracted by Malaysia�s well-developed infrastructure, capable administration and well-educated workforce. These inflows reached a peak of 8.7% of GDP in 1992-93. However, they never fully recovered after the Asian financial crisis: FDI inflows were barely positive

The approach to foreign investment is changing

Growth depends strongly on exports

24 Malaysia


in 2001 but had risen to 3.9% of GDP in 2004. Nevertheless, Malaysia continues to benefit from the trend among companies in developed countries to relocate some of their operations to lower-cost centres. A large part of FDI inflows is channelled into manufacturing, but a growing share is going into the services sector. Malaysia is having to do battle with its regional neighbours, most notably China, in vying for foreign investment. It is hoping to attract investment in higher-knowledge-content industries, in line with its ambition to become a knowledge-based economy, and in higher value added manufacturing.

In the years before the Asian financial crisis, the Malaysian economy was growing at a rate that exceeded its potential growth, defined as the rate that can be achieved with full utilisation of capital and labour. After the crisis, an �output gap� opened between actual and potential production. The drop in potential growth was largely owing to plunging capital investment and structural change. The �output gap� had disappeared by 2004, according to the central bank. Malaysia�s best hope of raising the economic growth rate is to boost capital and labour productivity. The BNM thinks capital is being used more efficiently, in part owing to past infrastructure investments (which have a long gestation period). Government policy is aiming to boost productivity growth, for instance, by increasing the efficiency of the GLCs. The evidence on labour productivity is mixed: there are regular complaints about skill shortages and the low quality of Malay graduates. But the authorities have high hopes that the implementation of the Knowledge-Based Economy Master Plan, which includes large investments in education and training, will help to close this �output gap�.

The government seeks to control inflation by means of fiscal, monetary and industrial policies, and also intervenes directly to monitor and control prices. There are tight price controls on some 20 basic goods with a high weighting in the consumer price index. Inflationary pressures have increased with the surge in global oil prices during 2005 and a decline in the spare capacity of the Malaysian economy, although they have been partially offset by increased competition, as a result of falling trade barriers.

Inflation (% change)

Annual average 2004 2000-04Consumer price index (2000=100) 1.5 1.5

Source: Bank Negara Malaysia.

Malaysia has traditionally had a tight labour market. The unemployment rate averaged 3.5% in 2004, close to the rate of 4% or less which the Malaysian authorities consider a full employment level. Malaysia attracts large numbers of foreign workers, especially from Indonesia, whom the government repatriates from time to time for economic or security reasons. In mid-2004 there were 1.3m legal foreign workers and a similar number of illegals. Construction, the plantation sector and parts of the service sector would grind to a halt without the�mainly unskilled�foreign workers. Over the past decade Malaysia has also experienced persistent shortages of skilled labour, which is being filled by

Inflation is being kept in check

Malaysia�s growth potential

Some shortage of skilled labour

Malaysia 25


controlled immigration from other Asian countries. As the country moves to become a knowledge-based economy, one of its greatest challenges is the need to equip workers with new skills. Many government schemes and incentives set up to train or retrain workers and upgrade skills are in place; the 2005 budget added further incentives.

Malaysia�s relatively high wage levels (compared with some of its neighbours, such as Indonesia, for example) make the country a magnet for foreign labour but also lead to a steady loss of less-skilled jobs to surrounding countries, especially in recent years. Given the economy�s export dependence, it is not surprising that wages in the exposed sectors of the economy respond quickly to business cycle changes, in part also because of a lack of trade union bargaining power. Since 2001 the growth in salaries in the private non-manufacturing sector has exceeded that in manufacturing, reflecting a shift in the economy towards services.

Manufacturing sector real wages (% change)

Annual average 2004 2000-04Wages 2.5a 0.9

a Economist Intelligence Unit estimate.

Source: Bank Negara Malaysia; Economist Intelligence Unit; official estimates.

Regional trends

Economic development is concentrated in the western states of the peninsula. Tin mining and plantation development began in the 19th century in Selangor, Perak and Johor�the areas that, together with Penang, still have the largest concentrations of manufacturing industry. Penang and the Klang Valley (in central Selangor, between the capital, Kuala Lumpur, and the coast) are the main locations of export-oriented manufacturing. Penang�s customs-free industrial zones have been the focus of investment by international electronics companies, whereas the Klang Valley has the largest and longest-established concentration of general manufacturing operations.

Successive five-year plans have fostered the location of industrial projects in new areas, still mainly in states on the west of the peninsula (Kedah, Negeri Sembilan and Malacca). In the predominantly rural states on the eastern coast of the peninsula (Kelantan, Terengganu and Pahang) and the two Borneo states (Sabah and Sarawak), industrial activity is mainly related to the processing of local raw materials. Timber processing has developed in all of these states.

Primary oil and gas installations are necessarily located close to offshore sources. Terengganu and Sabah have reception units. Manufacturing operations using oil and gas have grown up around these primary industries, including petrochemical facilities in Terengganu and Pahang. Other primary industries have generated similarly related manufacturing units: for instance, a tinplate production line in the southern state of Johor serves Malaysia�s main fruit-

Imbalances in development

Wages respond to changes in global demand

26 Malaysia


canning industry. Production of plantation crops is widely dispersed among all states of the federation.

Kelantan is still dominated by agriculture. Rice and natural rubber account for two-thirds of the cultivated area. The state also produces 90% of domestically grown tobacco. There is substantial logging activity, but little local sawing and processing capacity. Income per head in Kelantan is the lowest and slowest-growing in Malaysia.

Economic sectors

Agriculture

In recent years the output of agriculture, forestry and fisheries taken together has expanded fairly quickly, although the relative importance of these rural-based sectors within the economy has continued to decline because of the faster growth of the industrial and services sectors, shortages of labour and suitable land, and trade liberalisation. The most important agricultural activities are production of food commodities (fisheries and the cultivation of rice being the most important subsectors) and plantation crops for international markets, led by palm oil, rubber, cocoa and timber. The government has committed itself to revitalising the agriculture sector, and making it the third engine of economic growth and raise rural incomes. It plans to develop the unused potential in out-put of fruit, aquaculture and livestock. Labour-saving techniques, innovation, biotechnology and more efficient farm management are being promoted with a growing number of incentives, subsidies and training schemes.

Agriculture and forestry production, 2004 (�000 tonnes unless otherwise indicated)

Crude palm oil 13,976Rubber 1,190Saw logs (�000 cu metres) 21,509

Cocoa 33,423Source: Bank Negara Malaysia, Annual Report.

Production of rice, once the dominant subsistence crop of Malay farmers, has been threatened by the general population drift to the towns, competing with more profitable uses for land, such as the cultivation of fruit and vegetables, and facing competition for labour from manufacturing industries. As a potent symbol of traditional Malay life, rice growing continues to attract special government help, such as schemes for raising yields and productivity. Malaysia is a net importer of rice, but is aiming for a minimum self-sufficiency level of 65%.

Natural rubber, Malaysia�s longest-established large-scale agricultural product, is no longer a declining sector. Although refinements in plant breeding and biological controls have raised yields and enabled growers to manipulate output, the availability of cheap or family labour is crucial to productivity levels. Plantation companies rely heavily on immigrant labour, and have steadily converted plantings to the more profitable oil palm. The main source of

Agriculture is given a new importance

Natural rubber

Rice

Malaysia 27


output is now the smallholder sector. Rubber output, in decline since the late 1980s, reached a low of 769,000 tonnes in 1999 but recovered thereafter, helped by higher prices. Production stood at 1.19m tonnes in 2004, the highest level since 1996. The government is trying to sustain production of rubber as an alternative to oil palm and as a supplier of timber to the furniture industry.

Malaysia is one of the largest global producers of palm oil. Output of palm oil and associated products has continued to expand, reaching a record 14m tonnes in 2004 and accounting for well over one-third of total value added in the agricultural sector. Malaysia continually tries to find new uses for palm oil, to develop new varieties and to boost productivity through labour-saving techniques. The commodity has benefited from the view of dieticians that it is a healthy alternative to animal fats and oilseed products. Malaysia has started to develop palm oil as a substitute for mineral oil�a potentially huge market.

Malaysia is still a major supplier of tropical timber, but supplies are diminishing and logging has gone well beyond the level of sustainability, despite official policy to prevent this. Malaysia is also a source for illegally harvested timber from Indonesia. The country has set up a timber certification scheme and promotes good forest management and reafforestation, but these controls are ineffective. Logging permits are often a source of income for politicians. In the interests of maximising income from forest products, the government has gradually extended the ban on direct exports of saw logs and promoted higher value added production of wood products and furniture. Log production has stabilised in recent years at one-half of the level achieved in the early 1990s. The two major customers are the construction sectors in Japan and South Korea.

Mining and semi-processing Minerals production, 2004 Crude oil (�000 barrels/day) 762Natural gas (m standard cu ft) 5,196

Tin (�000 tonnes) 3

Source: Bank Negara Malaysia, Monthly Statistical Bulletin.

Some 22% of Malaysia�s industrial output is accounted for by the production of minerals, mostly petroleum and natural gas (marketed as liquefied natural gas, or LNG). In global terms, Malaysia is a small net exporter of oil but a large exporter of LNG. Reception installations in Terengganu handle the oil and gas extracted from fields east of the peninsula; other fields are located north of Sarawak and around the coast of Sabah. Proven oil reserves have declined in recent years, partly owing to the lack of major new discoveries. Crude oil reserves stood at 4bn and natural gas at 87 trn cu ft at the end of 2004, sufficient for about 15 years of further production in the case of crude oil and 33 years for natural gas. In recent years 63% of crude oil output has come from offshore fields in peninsular Malaysia, 23% from Sarawak and 14% from Sabah. Production of crude oil has risen steadily over the past three years; rising to a record high of 762,000 barrels/day in 2004.

Palm oil

Timber

Crude oil output and refining

28 Malaysia


In contrast with the stability of crude oil output, production of natural gas has continued to grow. Between 1992 and 2003 production increased by nearly 200%. The heavy reliance on natural gas for electric power generation is quickly being reduced. The main customers for LNG exports are Japan, South Korea and Taiwan. A large number of gasfields have been opened up in recent years or are being explored. One of the most interesting is a joint development with Thailand of fields in the lower part of the Gulf of Thailand. All the gas produced will initially go to Malaysia. Once the Bintulu LNG complex on Sarawak is fully operational, Malaysia will become the world�s second-largest exporter of LNG.

The output of tin�which played a crucial role in Malaysia�s industrial history�went into precipitous decline in the mid-1980s. In 2004 only 2,746 tonnes of tin concentrate were produced, a new post-war low and 16.6% down from the preceding year. Malaysia still has large but mostly low-grade reserves of tin. Large coal reserves are found in Sarawak and Sabah, but their low grade and difficulty of access have prevented development, except on Sarawak. Malaysia also produces barite, bauxite, dolomite, feldspar, gold, ilmenite, iron ore, kaolin, lead, limestone, mica, monazite, sand and gravel, silicon, silver, struverite and zircon concentrate, mostly in relatively small volumes.

Manufacturing

Since the 1970s Malaysia has built up its export-oriented manufacturing capacity based on inward foreign direct investment. Previously, the country had developed import-substitution industries and industries based on processing output of the domestic primary sector. Malaysia�s development of export-related production has been highly successful: exports of goods and services as a percentage of current-price GDP, which in 1980 stood at only 14%, reached 121.2% in 2004. Manufacturing accounted for 31.4% of GDP in 2004.

The export-oriented industries are the biggest component of manufacturing, accounting for around three-quarters of the total. Manufacturing has a 70% share of the industrial production index (1993 base). The domestic-oriented sector accounts for around one-quarter of manufacturing, its main components being the fabrication of metal products, non-metallic mineral products, food products and transport equipment.

The main locations of export-oriented manufacturing were until not long ago the island of Penang and also the Klang Valley, the central industrial belt to the west of the capital, Kuala Lumpur. Government policy to disperse manu-facturing has resulted in over 200 industrial estates and 14 free industrial zones (FIZs) throughout the country. The FIZs are export-processing zones, where companies are allowed duty-free imports of raw materials, components, parts and equipment. There are also a number of special industrial parks for high-technology industries. The development of a centre of high-tech industry in the so-called Multimedia Super Corridor (MSC), a 750-sq km information-technology zone near Kuala Lumpur, has been slow. In September 2005 there were 1,112 companies with MSC status, employing some 23,000 workers. A

Tin and other minerals

Manufacturing is dominated by export-orientated industries

Gas

Malaysia 29


second phase of development started in 2004, with a considerable enlargement of the area and a target to add biotechnology to information and com-munications technology activities over the next seven years.

Although the government aims to stimulate inward investment, all industrial projects are subject to an approval system, operated through the Malaysian Industrial Development Agency (MIDA). This involves vetting equity stakes, financing, technology transfer, local content and, increasingly, the products and processes concerned. In the past the government seemed ready to welcome any investment promising industrial employment, but more recently MIDA has stopped granting approvals to low-productivity industries. In recent years competition from China has made it difficult to attract foreign manufacturing investment to Malaysia, stronger incentives and reduced restrictions notwithstanding.

Fluctuations in overseas demand for products from the electronics sector continue to be the major determining influence on manufacturing production. However, the electronics sector is losing some of its dynamism as regional competition increases and the economic structure switches towards services. Manufacturing is becoming more diversified, with higher value added products and new emerging industries. Future growth in manufacturing will be more moderate than before the Asian economic crisis, more focused on domestic and regional demand than in recent decades, and less heavily dependent on electronics production.

Construction

The 1997-98 regional financial crisis was a turning point for the construction industry. Construction had been an important contributor to GDP growth, expanding rapidly in the years preceding the 1997-98 recession, driven by strong private- and public-sector demand, the expectation of continuing high economic growth and attractive capital gains from property, and the easy availability of funds from the local banking system and stockmarket. The good times are unlikely to return soon. Activity in the construction sector, which had regularly expanded at a double-digit rate, plunged by 24% year on year when the crisis hit in 1998, major projects were cancelled or abandoned and planned infrastructure developments dropped. Another decline, of 4.4%, in 1999 was followed by three years of low growth, as government spending and special incentives brought a measure of stability.

However, in 2003 and 2004 production fell by 4.5% and 1.5%, respectively, as government projects dried up. The industry remains inefficient and is riddled with corruption, caused in part by excessive red tape; shoddy work, delays, un-finished projects and cost overruns are a frequent occurrence. To boost productivity, lower costs and reduce the number of foreign workers, the govern-ment is promoting the use of new building techniques, using prefabricated elements under Industrial Building Systems standards. Part of the industry�s problem is the existence of small, bumiputera-owned companies, which rely on

An approval system for foreign investment

More subdued growth in manufacturing

The construction sector remains weak

The construction industry is inefficient

30 Malaysia


government contracts. The government allocated extra development funds in 2004 but told companies in 2005 that they needed to reorganise or merge. Although corporate investment has picked up, it is unlikely to make up for the drop in public-sector spending under the Ninth Malaysia Plan (2006-10). Although demand for private residential housing is improving, interest in new developments, especially commercial, is still low. Consequently, the cons-truction sector is likely to remain in the doldrums in the next couple of years.

Financial services

Malaysia has a well-developed financial sector. Banks (Bank Negara Malaysia, the central bank; commercial banks; finance companies; merchant banks and discount houses) account for two-thirds of the sector in terms of assets, and non-bank financial intermediaries (provident, pension and insurance funds; development finance institutions; savings institutions; and other financial intermediaries, such as unit trusts, building societies, leasing, factoring, and venture-capital companies) for one-third. Since the 1997-98 financial crisis the authorities have reorganised the financial system, tightened supervision and set long-term targets for the development of financial institutions and capital markets.

An unusual feature of the Malaysian financial sector is that financial institutions are required to provide loans �at reasonable cost� to priority sectors�all bumiputera organisations (those owned by ethnic Malays or other indigenous peoples), low-cost housing and small-scale enterprises. Lending to small and medium-sized enterprises (SMEs) is receiving particular attention, as the government is promoting the development of SMEs across all sectors to boost domestic investment and growth and to reduce dependence on large companies and global demand. A microfinancing scheme for micro-enterprises was established in 2003.

The 1997-98 financial crisis was a watershed for the financial sector, which was overextended and undermined by imprudent lending. During the decade before the crisis credit had expanded by an annual average of almost 30%, largely for property development and stockmarket investments. When the crisis hit and the economy turned downwards, non-performing loans (NPLs) soared, precipitating a serious banking crisis. The government played a more active role than in most other crisis-hit Asian countries in solving the bad-debt problem and restructuring the financial sector. This was virtually completed during 2003, with a small part of the total of recoverable NPLs still outstanding.

The government also used the financial crisis as an opportunity to push through the restructuring of the financial sector, the first stage of which was completed in June 2002. A major consolidation of the financial sector was considered necessary to ensure the emergence of strong, well-capitalised institutions capable of competing effectively in a globalised, deregulated en-vironment. From 71 institutions before the Asian crisis, the merger programme resulted in ten domestic banking groups with 30 banking institutions. Under a

The financial sector is well-developed

Priority sectors receive cheap loans

The banking sector is strengthened

A master plan for the financial sector

Malaysia 31


ten-year Financial Sector Master Plan (FSMP), published in March 2001, the first phase of development focused on the building of domestic banking capacity, which is closely monitored by the central bank. Further banking consolidation took place during 2004. The aim was to create a core of strong domestic players able to compete with foreign banks. In 2005 the FSMP moved to a second phase, focusing on liberalisation. Foreign institutions were encouraged to compete with domestic banks, and the 30% ownership limit of domestic banks was relaxed. Rules for the setting of interest rates were eased and the range of permitted financial products was expanded.

Malaysia has a sizeable, fast-growing Islamic banking sector, which at end-2004 accounted for 10.5% of banking system assets and 11.2% of deposits. Rapid expansion has been fostered by the introduction of new Islamic financial instruments, as well as by official promotion of Islamic banking and of Kuala Lumpur as a regional Islamic financial centre. The FSMP has set a target for Islamic banking to account for 20% of banking assets by 2010.

The capital market, comprising the equity and bond markets, is gaining renewed importance as a source of financing, especially for the private sector. The equity market in particular was badly hurt during the 1997-98 financial crisis by the government�s imposition of currency and capital controls, and by bail-outs of politically well-connected entrepreneurs to the detriment of minority shareholders. Undaunted, in February 2001 the government published a ten-year Capital Market Master Plan (CMP), to establish an internationally competitive capital market. The major objectives of the first, foundation-building phase were to strengthen corporate governance and surveillance, to develop a broad corporate bond market, to make fundraising more efficient and reduce transaction costs, to unite the existing exchanges and to boost the liquidity of the stockmarket. The second phase of the CMP started in 2004 and involves liberalisation of stockbroking and investment manage-ment, removal of structural impediments to market access, deregulation, enhancing secondary-market liquidity and allowing greater international participation in the domestic capital market. The changes in part reflect the fact that, since the Asian financial crisis, Malaysia has had excess savings that it needs to invest abroad.

Other services

Services (including financial services) are the largest part of national output, accounting for 57.4% of constant-price GDP in 2004. The share of services in GDP has increased steadily over the years, but its share tends to decline when manufacturing grows strongly, usually during export-led recoveries. The sector is usually divided into intermediate services (23.8%) and final services (33.6%). Intermediate services include transport, storage and communications, and finance, insurance, property and business services. Final services consist of utilities; wholesale and retail trade, hotels and restaurants; government services; and other services.

Islamic banking continues to grow strongly

A capital market master plan

Services sector continues to expand

32 Malaysia


During the past four years, intermediate services have expanded rapidly. The sector has benefited from the fast growth of mobile-phone and Internet services and strong demand for financial services, as well as increasing transshipment activities in local ports, which have been promoted as an alternative to the Port of Singapore; all three factors are likely to persist in the near future. Production of intermediate services grew in real terms by 7.1% in 2004.

The growth of final services has generally been fairly stable in recent years, in part because of the government�s expansionary economic policies. Final services grew in real terms by 3.7% in 2003 and 6.6% in 2004. Growth in 2004 was supported by an 8.1% year-on-year increase in the production of utilities (gas, water and electricity) and a strong performance from the �wholesale and retail trade, hotel and restaurants� category. However, final services will be affected by slower growth in government services in the years ahead as the government cuts back on spending in an attempt to achieve a balanced budget.

The trade, restaurants and hotels subsector accounts for 43% of total final services. Tourism has become Malaysia�s most successful services sector, and continues to increase in importance as a source of economic growth. The government considers the tourist industry a means of diversifying and broadening the economic structure. Tourism has been affected in recent years by the impact of Islamist terrorist activity in South-east Asia and in early 2003 by the outbreak of Severe Acute Respiratory Syndrome (SARS) in the region. A powerful recovery in tourist arrivals took place in 2004, and it appears likely that records will again be broken in 2005. Malaysia is benefiting from the strong growth in disposable incomes in the Asia region, and it also increasingly appeals to tourists from Islamic countries. In addition, the government is increasingly promoting tourism by hosting international conventions and major sporting events. The Eighth Malaysia Plan set a target of 9.5% annual average growth in tourism receipts, but this is likely to be easily exceeded.

The external sector

Trade in goods

International trade has played a crucial role in Malaysia�s economic development, starting with the export of raw materials in the 19th century. During the 1970s industrial development was mainly based on export-oriented manufacturing and on imported inputs. Many of the fastest-growing production lines, particularly in the electronics sector, were set up on the basis of low local content, with the result that the bill for imported manufactures tends to rise in revenue from exports. Malaysia�s merchandise trade account has usually been in surplus; the surplus soared during the 1997-98 recession, and has remained high in its aftermath. In 2004 the trade surplus (customs basis) narrowed slightly to M$80.7bn (US$21.4bn) from a record M$81.3bn in 2003. Although domestic demand strengthened and imports soared, commodity export earnings were boosted by high commodity prices.

Tourism boom continues

Export growth is matched by rising imports

Malaysia 33


High global commodity prices have in recent years pushed up the share of the primary commodity sector in total exports from 11.4% in 2001 to 14.5% in 2004. Minerals accounted for 8.2% and agricultural commodities 6.3%. The government�s intention to make agriculture an important engine of economic growth will, if successful, be felt mainly in a reduction of the food import bill, rather than in a change in the composition of agricultural exports. With the exception of palm oil, Malaysia�s economy continues to move away from plantation and forestry products, which form the bulk of agricultural exports. Exports of minerals consist almost entirely of crude oil and liquefied natural gas. The main determinant of primary export earnings is the global oil price; fluctuations in export volumes are of less importance.

Exports of manufactured goods accounted for 81.2% of Malaysia�s total exports in 2004. The share of manufactured goods in total exports soared during the 1980s and 1990s from 20% in the late 1970s. Exports of electronic and electrical goods accounted for 65.8% of manufactured goods exports in 2004, a share that stood at around 30% in the late 1970s. The heavy dependence on electronic and electrical goods means that total exports rise and fall as global demand for the products of the two sectors fluctuates. The Malaysian government is encouraging manufacturers and exporters to move up the value chain and improve product quality in order to maintain international competitiveness, especially in relation to China. The government promotes export trade through the Malaysian External Trade Development Corporation (Matrade).

According to data from national sources (Bank Negara Malaysia, or BNM, the central bank, and the Department of Statistics) the US remains the largest export market and most important trading partner in aggregate, with a trade value of M$148.1bn and a share of 16.8% of total trade (exports plus imports) in 2004. Japan remains Malaysia�s principal source of imports, and competes with Singapore for the position of Malaysia�s second-largest trading partner. In 2004 Singapore�s aggregate trade value of M$116.7bn and its 13.2% share of Malaysia�s total trade just exceeded Japan�s M$112.3bn and 12.7% share of trade. The importance of Japan is gradually declining as trade with other Asian countries intensify. The expansion of port facilities in Malaysia is taking entrepôt trade away from Singapore. Total trade with the EU reached M$108.4bn in 2004, equivalent to a share of 12.3%.

Main trading partners, 2004 Exports to: % of total Imports from: % of totalUS 18.8 Japan 15.9Singapore 15.0 US 14.5Japan 10.1 Singapore 11.1China 6.7 China 9.8

Hong Kong 6.0 Thailand 5.5Thailand 4.8 Taiwan 5.4

Source: Bank Negara Malaysia, Annual Report, Department of Statistics Malaysia.

Radical changes in trade patterns are taking place, particularly in regional trade. Following China�s entry into the World Trade Organisation in December 2001,

The global market determines primary export earnings

Manufactured goods form the bulk of exports

Trade with Greater China has overtaken trade with US

Malaysia�s main trading partners

34 Malaysia


trade with China has surged: it was Malaysia�s fourth-largest single trading partner in 2004, with a 6.7% share of total trade. Trade with Greater China (comprising mainland China, Taiwan and Hong Kong) reached M$148.4bn in 2004, overtaking trade with the US. Internal trade between the countries of the Association of South-East Asian Nations (ASEAN) also continued to expand rapidly. In 2004 Malaysia�s trade with other ASEAN countries was worth M$216.3bn, or 24.6% of total trade. Intra-regional trade tends to reflect fluc-tuations in global demand for manufactured products, but the region is quickly becoming a source of trade growth in its own right.

Trade liberalisation and regional economic integration will be highly significant for economic growth in next decade. China and ASEAN have opened talks about a free-trade agreement (FTA), which may include Australia and New Zealand. Malaysia is likely to conclude an FTA with the US in the next couple of years. The Malaysian prime minister, Abdullah Badawi, has called for the setting up of an Asian inter-regional trading group similar to the EU, to include ASEAN, China, Japan and South Korea.

Invisibles and the current account Current account, 2004 (M$ bn)

Goods: exports of goods 481.2

Goods: imports of goods 376.8Trade balance 104.4Invisibles: credits 63.7Invisibles: debits 72.5

Invisibles balance -8.8Net transfers -14.6Current-account balance 56.5

Source: Bank of Malaysia, Monthly Statistical Bulletin.

Malaysia has a persistently large deficit on invisibles trade. The two largest categories of net payments are both by-products of the country�s successful industrialisation drive: a deficit on investment income, mainly as a result of past foreign direct investment (FDI), and a shortfall on services associated with merchandise trade, such as insurance and freight.

The deficit on the income account, which consists mainly of investment income flows, widened from M$22.5bn in 2003 to M$24.5bn in 2004. There was an increase in outflows of profits and dividends accruing to foreign direct investors, particularly in the export-oriented electronics and electrical goods industries. But they were partially offset by higher inflows from other Malaysian-owned investments overseas. The central bank treats all profits on the overseas equity of Malaysian FDI ventures as if they are payments across the exchanges, even if they are retained and reinvested. When they are re-invested, such payments are then treated as capital inflows.

A continued large outflow of profits to overseas equity holders is a consequence of past FDI-financed industrialisation. Remittances from overseas

The invisibles balance is in the red

The investment income deficit remains substantial

Trade liberalisation will be a major influence

Malaysia 35


investment by Malaysian companies have doubled over the last two years and are beginning to reduce the net size of deficit, but they are still relatively small, only just over one-third of gross profits due to non-residents.

The deficit in Malaysia�s trade-related services is of long standing, and tends to be highlighted when goods exports rise quickly during export-led economic recoveries. However, this tendency was less obvious in 2004 when the services deficit narrowed to M$8.8bn from M$15bn in 2003, as exports surged by a whopping 20.8% year on year. The main reason for the smaller services deficit was a surge in tourism receipts, which bounced back after travel restrictions (which were imposed during the outbreak of Severe Acute Respiratory Syndrome, or SARS, in 2003) were lifted. As a result, the travel-account surplus soared from M$11.6bn in 2003 to M$19.4bn in 2004. A continued rise in tourist arrivals made it appear likely that 2005 would again be a record year for tourism.

Capital flows and foreign debt

Malaysia has long had a low rate of international indebtedness on both the official and private accounts, although external indebtedness rose sharply during the Asian financial crisis. At its peak in 1998 the ratio of external debt to GDP stood at close to 60%; it declined in the two following years, reaching 46.4% of GDP in 2000, but rose again in subsequent years, largely because of higher federal government debt. At end-2004 the ratio stood at 44.6%, down from 47.2% in 2003 and 51.4% in 2002.

Malaysia has been careful to avoid becoming dependent on external debt, and this determination has intensified since the Asian financial crisis. The government�s external debt management strategy requires that corporations seeking external funds for operations in Malaysia must assure the authorities that they will have the foreign-exchange income to repay the debt. The govern-ment encourages companies to raise medium- and long-term loans and avoid short-term debt. In 2004 about 60% of outstanding medium- and long-term debt had remaining maturities of more than three years. Short-term debt is matched against international reserves. National sources indicate that by mid-2005 short-term debt was equivalent to 15.2% of international reserves and represented only 22.2% of total external debt. The bulk (77%) of Malaysia�s medium- and long-term external debt is denominated in US dollars; 12.5% was denominated in yen at end-2004.

The share of government external borrowing increased rapidly after the 1997-98 crisis to finance the expansionary fiscal programme; at end-2004 it had fallen to 17.3% of total external debt from 20% at end-2003, as the government continued to pursue a tighter fiscal policy. Federal government external debt outstanding fell to M$34.7bn at end-2004, down from M$37.3bn at end-2003, according to government sources. The main funding source for the government�s financing requirement is the domestic capital market.

Travel income compensates for trade costs

Most external debt is medium- and long-term

36 Malaysia


Foreign perceptions of Malaysian government policy are still coloured by the authorities� reaction to the balance-of-payments crisis in 1997-98, the most serious economic crisis Malaysia has experienced in recent history. As the Asian financial crisis deepened, a sell-off in the currency and equities markets resulted in huge short-term capital outflows, officially estimated at M$12.9bn in 1997 and M$20.6bn in 1998. The then prime minister, Mahathir Mohamad, resisted adopting the widely accepted response of raising interest rates and cutting public expenditure. Instead, Dr Mahathir imposed a range of capital controls in September 1998, and fixed the exchange rate to the US dollar at M$3.80:US$1.

This deviation from economic orthodoxy earned Malaysia widespread inter-national condemnation, not least from portfolio managers whose Malaysian investments were frozen. The government lowered interest rates and boosted public expenditure, protected by its tightly monitored controls, which were largely abolished during the following two years. Foreign portfolio capital has been reluctant to return to Malaysia. However, the retirement of Dr Mahathir and an improvement in Malaysia�s economic performance resulted in a net inflow during 2003 for the first time since the Asian crisis. This trend continued in 2004, as more investment managers adopted a favourable view of Malaysia.

Foreign reserves and the exchange rate

Malaysia has carefully preserved its foreign reserves during the past five years. During the 1997-98 balance-of-payments crisis, large outflows of non-resident short-term capital and intervention to support the exchange rate of the ringgit reduced foreign-exchange reserves from M$70bn at end-1996 to M$59.1bn at end-1997, but capital controls quickly led to the rebuilding of reserves to M$99.4bn at the end of 1998.

At the end of August 2005 the central bank�s international reserves stood at M$304.3bn, compared with M$170.5bn at end-2003 and M$131.4bn at end-2002. The acceleration in the build-up of foreign reserves, in recent years, has been caused by a number of factors. It reflects the repatriation of export earnings, which was also evident in the record levels of the trade and current-account surpluses. The reserves accumulation was caused by FDI inflows as well as inflows of portfolio funds; together, the inflows more than offset payments for services and external loan repayments. Portfolio inflows, in particular, have been swollen by funds speculating on a rise in the external value of the ringgit.

In July 2005 the BNM replaced the ringgit:US dollar peg, which was fixed at M$3.80:US$1 during the 1997-98 Asian crisis, with a managed float of the ringgit against a trade-weighted index of currencies of Malaysia�s major trading partners. Shortly before, China�s government declared that it had replaced its renminbi peg with the US dollar with a managed floating exchange-rate system. The BNM stated that, because of changes in the international and regional financial and economic environment, it was important for Malaysia to have a stable exchange rate against its major trading partners and, in particular, other countries in the region. By adopting a managed float against a trade-weighted

Foreign trust has slowly returned

Foreign reserves are substantial

The ringgit moves to a managed float

Malaysia 37


basket of currencies, the BNM is, effectively, returning to the currency manage-ment that existed between 1971 and September 1998. Under the new system, ringgit short-selling, ringgit trading overseas, and ringgit lending to non-residents continue to be forbidden.

Regional overview

Membership of organisations

The Association of South-East Asian Nations was established in 1967. The five original members were Indonesia, Malaysia, the Philippines, Singapore and Thailand. Brunei joined in 1984, as did Vietnam in 1995, Laos and Myanmar in 1997 and, most recently, Cambodia in 1999.

ASEAN summit meetings, which bring together the heads of government of member states, must now be held every three years. The most recent was in Indonesia in 2003. Informal summits of heads of governments are also held. In addition, the foreign and economic affairs ministers of member countries meet annually. Joint meetings of foreign and economic affairs ministers are held before each ASEAN summit. There is also a standing committee (consisting of the members� accredited ambassadors to the host country), which usually meets every two months. There is a permanent secretariat, based in the Indonesian capital, Jakarta, and a number of committees.

The organisation started with some grand objectives, but has generally failed to deliver. Early hopes that ASEAN could engineer a regional economic develop-ment strategy�with particular countries concentrating on particular industries�were soon dashed. In 1977 the Basic Agreement on the Establishment of ASEAN Preferential Tariffs was concluded, but a decade later only about 5% of trade between members was covered by this system. (Members had been permitted to exclude �sensitive� sectors, a let-out clause that a subsequent agreement in 1987 only slightly curtailed.)

Plans for a proper ASEAN free-trade area (AFTA) were unveiled in 1992, with the aim of achieving this by 2008. A common effective preferential tariff (CEPT) scheme was applied in 1993, providing for the gradual reduction of tariffs on intra-ASEAN trade in certain goods over a number of years. Again, however, member states could exclude �sensitive� items, limiting progress. A new AFTA programme, covering a wider spread of products, was launched in 1994. During the mid-1990s the timescale for implementing the programme was steadily tightened, with the aim being to reduce tariffs on most goods to below 5% by 2000. A limited AFTA, between the original six members of ASEAN and involving a reduction on tariffs on intra-ASEAN trade to between 0% and 5%, came into operation on January 1st 2002. (Countries joining recently have been allowed more time.)

The 1997-98 regional financial crisis exposed ASEAN�s failings in a brutal fashion. The organisation was unable to stop the regional currency devaluations or alleviate the subsequent economic hardship. A Statement on Bold Measures, released at end-1998, was exactly the opposite of what the title implied. Unfolding events in Indonesia then moved the focus on to the

Association of South-East Asian Nations (ASEAN)

38 Malaysia


organisation�s security plans. ASEAN members� commitment to the principle of non-interference in the internal affairs of other members complicated the response to the crisis in East Timor. (Some members did eventually participate in the multinational force that intervened in East Timor, but not under ASEAN auspices.)

On the economic front, ASEAN�s slow progress towards AFTA has encouraged some of its members, notably Singapore, to opt instead for bilateral trade pacts. Singapore�s free-trade agreement (FTA) with New Zealand in 2000 prompted protests from other ASEAN members, but the island state has since reached bilateral trade agreements with the US, Australia and other countries. (It is unlikely that this approach will prove universally applicable, as the absence of an agricultural sector in Singapore makes it much easier for it to negotiate with trading partners with heavily protected primary sectors.) A decision in 2001 by various ASEAN members to set up bilateral currency-swap arrangements to protect against currency volatility is limited in scope, and does not presage further ASEAN economic collaboration.

The organisation�s political hopes could be severely tested in the next few years. Changing governments in member countries could undermine any remaining pretence of political consensus in the region. On the security front, the ASEAN Regional Forums (ARFs, which bring together the ASEAN ministers of foreign affairs with those of other countries, notably China) are likely to remain little more than talking shops, with negligible impact on changing geopolitical trends.

APEC started life as a forum for informal discussion between six members of the Association of South-East Asian Nations (ASEAN), Brunei, Indonesia, Malaysia, the Philippines, Thailand and Singapore, and their six dialogue partners in the Pacific, Australia, Canada, Japan, New Zealand, South Korea and the US. In 1991 China, Hong Kong and Taiwan became members, followed by Mexico and Papua New Guinea in 1993, and Chile in 1994. Peru, Russia and Vietnam joined in 1998. APEC describes itself as �the primary vehicle for promoting open trade and practical economic co-operation� in the region, with the goal of advancing �Asia-Pacific economic dynamism and sense of community�.

APEC has had a permanent secretariat since 1992, and also runs four permanent committees�on budget and managerial issues, on trade and investment, on economic trends generally, and on economic and technical co-operation. In addition, there are 11 working groups�on agricultural technical co-operation, energy, fisheries, human resources, industrial science and technology, marine resource co-operation, small and medium-sized enterprises, telecom-munications, tourism, trade promotion and transport. There is also an APEC business advisory council (ABAC), which includes up to three senior private-sector representatives from each member country. APEC as a whole has its headquarters in Singapore, while ABAC is based in the Philippines. APEC�s main business is done at annual meetings of member states� ministers of foreign affairs and economic affairs, which are followed by informal gatherings

Asia-Pacific Economic Co-operation (APEC) forum

Malaysia 39


of members� heads of state. Every other ministerial meeting is held in a South-east Asian country. The chairmanship of APEC rotates on a yearly basis.

During the 1990s APEC�s star first waxed brighter and then started to wane. The high point was probably reached in 1994, when members agreed a timetable for the liberalisation of trade across the region: the ambitious aim was to eliminate all trade barriers by 2020, and then to extend reciprocal concessions to non-members. In 1995 and 1996 APEC debated how best to achieve this target, but discussions in 1997 and 1998 were driven off course by the regional financial crisis. APEC�s response to the crisis�generally worded exhortations to member states to develop financial and capital markets, and so on�was far from convincing and signalled the inherent weaknesses of the organisation. Subsequent meetings also provided other distractions from the trade liberali-sation theme: East Timor in 1999, information technology in 2000 and security (following the September 11th terrorist attacks on the US) in 2001. Discussion returned to trade relations in 2002, but was only very general in nature. The 2003 meeting in Bangkok made little further progress, concluding with broad commitments to multilateral trade and investment liberalisation, and to improving regional security arrangements. Thus, APEC has in effect gone back to its roots and become an informal talking shop, giving up all aspirations to be a serious regional reformer.

40 Malaysia


Appendices

Sources of information

Bank Negara Malaysia, Annual Report

Bank Negara Malaysia, Monthly Statistical Bulletin

Department of Statistics, External Trade Summary

Department of Statistics, Survey of Manufacturing Industries

Department of Statistics, Yearbook of Statistics

Economic Planning Unit, Eighth Malaysia Five-Year Plan (2001-2005) Economic Planning Unit, Mid-Term Review of the Eighth Malaysia Plan (2001-2005)

Malaysian Industrial Development Agency (MIDA), Statistics on the Manufacturing Sector

Ministry of Finance, Economic Report (annual)

Asian Development Bank, Key Indicators

Bank for International Settlements, International Banking and Financial Market Developments (quarterly)

IMF, International Financial Statistics (monthly)

International Institute for Strategic Studies, Military Balance (annual)

OECD, Financial Statistics (monthly)

OECD, Geographical Distribution of Financial Flows to Developing Countries (annual)

UN, Monthly Bulletin of Statistics

UN, World Investment Report (annual)

World Bank, World Debt Tables (annual)

World Bank, World Development Report (annual)

Anwar Ibrahim, The Asian Renaissance, Singapore, 1996

H Crouch, Government and Society in Malaysia, Cornell University Press, Singapore, 1996

J H Drabble, An Economic History of Malaysia, c. 1800-1990, Palgrave Macmillan, Canberra, 2000

E T Gomez (ed.), The State of Malaysia: Ethnicity, Equity and Reform, Routledge Curzon, London, 2004

T N Harper, The End of Empire and the Making of Malaya, Cambridge, 1999

National statistical sources

Select bibliography and websites

International statistical sources

Malaysia 41


J Hilley, Malaysia: Mahathirism, Hegemony and the New Opposition, Zed Books, London 2001

Ho Khai Leong and James Chin (eds), Mahathir�s Administration: Performance and Crisis in Government, Times Academic Press, Singapore, 2001

K S Jomo (ed.), Malaysian Eclipse: Economic Crisis and Recovery, Zed Books, London, 2001

R Karim, Ceritalah: Malaysia in Transition, Times Books, Kuala Lumpur, 1996

F Loh Kok Wah and Khoo Boo Teik (eds), Democracy in Malaysia: Discourses and Practices, Curzon Press, London, 2002

Bank Negara Malaysia (BNM, the central bank): www.bnm.gov.my

Department of Statistics: www.statistics.gov.my

National News Agency, Bernama: www.bernama.com

Economic Planning Agency: www.epu.jpm.my

Malaysian Civil Service Link: mcsl.mampu.gov.my

Asian Development Bank: www.adb.org

Reference tables Population 2000 2001 2002 2003 2004Population (m) 23.5 24.0 24.5 25.0 25.6 Male 12.0 12.2 12.5 12.7 13.0 Female 11.5 11.8 12.0 12.3 12.6Population density (per sq km) 71 73 74 76 77

% distribution by age: 0-14 34.1 33.8 33.5 33.2 32.9 15-64 62.0 62.2 62.5 62.7 62.9 65+ 4.0 4.0 4.1 4.1 4.2Crude birth rate (per 1,000) 23.2 22.6 22.2 21.9 21.3

Crude death rate (per 1,000) 4.5 4.6 4.6 4.7 4.6Infant mortality (per 1,000 live births) 6.6 7.0 6.6 6.3 5.9Life expectancy Males 70.4 70.6 70.7 70.3 70.4 Females 74.9 75.1 75.3 75.9 76.2

Sources: Ministry of Finance, Economic Reports; Department of Statistics, Monthly Statistical Bulletin; Yearbook of Statistics.

42 Malaysia


Labour force (�000)

2000 2001 2002 2003 2004Total employed 9,271 9,533 9,840 10,181 10,546 Agriculture, forestry & fishing 1,408 1,406 1,406 1,403 1,400 Mining 41 42 42 43 43 Manufacturing 2,558 2,556 2,680 2,858 3,065 Finance, insurance & business services 509 575 607 652 677 Transport & communications 462 495 509 528 550 Government services 981 980 995 1,026 1,037 Other servicesa 2,558 2,707 2,810 2,880 2,975 Construction 755 772 782 792 798

Unemployed 302 359 359 385 380Total labour force 9,573 9,892 10,199 10,566 10,925

a Includes wholesale and retail trade, catering industry and utilities.

Sources: Bank Negara Malaysia, Annual Reports; Ministry of Finance, Economic Reports.

Transport statistics 1999 2000 2001 2002 2003Rail No. of passenger journeys (�000) 4,881 4,340 3,984 3,813 3,701Passenger train journeys (bn km) 1.33 1.24 1.20 1.14 1.03Goods traffic (�000 tonnes) 3,863 5,506 4,168 3,773 4,622Goods train journeys (bn km) 0.91 0.92 1.09 1.07 0.87Length of track (km) 1,949 1,949 1,949 1,949 1,949Road Motor vehicles registered (�000) 9,930 10,599 11,303 12,022 12,819 Passenger cars 3,787 4,146 4,558 5,001 5,429 Motorcycles 5,082 5,357 5,609 5,843 6,165 Goods vehicles 643.0 665.3 689.7 713.1 740.5 Other vehicles 304.1 315.7 329.2 345.6 361.3Sea Cargo loaded & discharged (�000 tonnes)a 94,674 101,790 n/a n/a 161,435 Loaded 39,920 43,480 n/a n/a 69,044 Discharged 54,754 58,310 n/a n/a 92,391

a Peninsular Malaysia only.

Source: Department of Statistics, Yearbook of Statistics.

Energy production 2000 2001 2002 2003 2004Crude oil (�000 barrels/day)a 681 666 698 738 762

Natural gas (m standard cu ft) 4,367 4,542 4,676 5,013 5,196Coal (�000 tonnes) 383 n/a n/a n/a n/aElectricity (m kwh) 66,678 72,280 75,328 84,022 n/a

a Including condensates.

Sources: Department of Statistics, Yearbook of Statistics; Bank Negara Malaysia, Statistical Bulletin.

Malaysia 43


Federal government finances (M$ bn unless otherwise indicated)

2000 2001 2002 2003 2004

Total revenue 61.9 79.6 83.5 92.6 96.9

Tax revenue 47.2 61.5 66.9 64.9 70.8

Direct taxes 29.2 42.1 44.4 43.0 46.4

Indirect taxes 18.0 19.4 22.5 21.9 24.4

Non-tax revenue 14.7 18.1 16.6 27.7 26.2

Total expenditure 81.6 98.0 103.8 113.5 116.8

Operating expenditure 56.5 63.8 68.7 75.2 91.5

Development expenditure (net) 25.0 34.2 35.1 38.3 25.3

Balance -19.7 -18.4 -20.3 -20.9 -19.9

% of GDP 5.7 5.5 5.6 5.3 4.5

Memorandum item

GDP at current market prices 343.2 334.4 362.0 395.0 449.6


Consolidated public-sector finances (M$ bn unless otherwise indicated)

2000 2001 2002 2003 2004

General government

Revenuea 76.0 91.6 96.8 107.1 112.9

Operating expenditure 64.4 72.3 75.5 84.2 102.3

Current surplus 11.6 19.3 21.3 22.9 10.6

Non-financial public enterprises

Revenue 115.4 105.1 126.6 155.9 162.5

Current expenditure 71.7 65.4 81.0 99.4 110.7

Retained income 43.7 39.7 45.6 56.4 51.8

Public-sector current surplus 52.8 58.8 66.6 78.5 62.3

Development expenditure 50.4 59.7 69.1 83.3 64.7

General government 27.1 35.7 36.8 43.2 31.3

Non-financial public enterprises 23.4 24.0 32.3 40.2 33.5

Overall balance 2.3 -0.9 -2.5 -4.8 -2.4

% of GDP 0.7 -0.3 -0.7 -1.2 -0.5

Memorandum item

GDP at current market prices 343.2 334.4 362.0 395.0 449.6

a General government comprises federal government, state governments, statutory authorities and local governments. Excludes transfers withingovernment.


Money supply (M$ bn unless otherwise indicated; end-period)

2000 2001 2002 2003 2004

Money (M1) incl others 79.6 82.5 90.2 103.9 112.7

% change, year on year 6.8 3.7 9.3 15.2 8.5

Quasi-money 259.9 265.2 270.5 291.4 358.8

Money (M2) 339.5 347.7 360.7 395.3 471.5


Source: IMF, International Financial Statistics.

44 Malaysia


Interest rates (%; period averages unless otherwise indicated)

2000 2001 2002 2003 2004

Lending interest rate (%) 7.5 6.7 6.5 6.1 6.0

Deposit interest rate (%) 3.5 3.2 3.2 3.0 3.0

Money-market interest rate (%) 3.2 3.1 2.9 2.9 2.8

Long-term bond yield (%) 5.9 4.3 4.3 4.1 5.0


Gross domestic product 2000 2001 2002 2003 2004

Total (US$ m) At current prices 90,319.7 88,001.1 95,164.2 103,737.8 117,776.2

Total (M$ bn) At current prices 343.2 334.4 361.6 394.2 447.5

At constant (1987) prices 210.6 211.2 220.4 232.4 249.0


Per head (M$) At current prices 14,730 13,928 14,742 15,770 17,578

At constant (1987) prices 9,037 8,797 8,986 9,296 9,778

% change, year on year 6.1 -2.6 2.1 3.5 5.2

Sources: IMF, International Financial Statistics; Bank Negara Malaysia, Annual Reports.

Real gross domestic product by expenditure (M$ bn at constant 1987 prices; % change year on year in brackets)

2000 2001 2002 2003 2004

Private consumption 95.4 97.6 101.9 108.7 120.2

(13.0) (2.4) (4.4) (6.6) (10.5)

Government consumption 23.9 28.0 30.9 34.5 36.6

(1.6) (17.3) (10.4) (11.5) (6.0)

Gross fixed investment 64.8 63.0 63.2 65.0 67.0

(25.7) (-2.8) (0.3) (2.7) (3.1)

Stockbuilding 3.4 -1.3 3.2 -1.3 5.5

(1.1)a (-2.2)a (2.1)a (-2.0)a (2.9)a

Exports of goods & services 246.2 227.7 237.9 251.5 292.5

(16.1) (-7.5) (4.5) (5.7) (16.3)

Imports of goods & services 223.1 203.9 216.8 226.0 272.7

(24.4) (-8.6) (6.3) (4.2) (20.7)

GDP 210.6 211.2 220.4 232.4 249.0

(8.9) (0.3) (4.4) (5.4) (7.1)

a Change as a percentage of GDP in the previous year.

Source: Bank Negara Malaysia, Annual Report

Malaysia 45


Gross domestic product by sector (M$ bn unless otherwise indicated; current prices)

2000 2001 2002 2003 2004Agriculture 30.2 27.6 33.1 38.0 42.7 % of total 8.8 8.3 9.1 9.6 9.5Mining 37.5 33.9 34.1 41.2 56.7 % of total 11.0 10.1 9.4 10.4 12.6Manufacturing 111.9 101.7 110.6 122.7 141.2 % of total 32.7 30.4 30.6 31.1 31.4Construction 13.9 14.2 14.6 15.1 15.2 % of total 4.1 4.2 4.0 3.8 3.4

Services 165.8 173.3 186.6 195.4 211.9 % of total 48.4 51.8 51.5 49.5 47.1GDPa 343.2 334.4 362.0 395.0 449.6

a At purchasers� value, less imputed bank service charges plus import duties.


Prices and earnings (% change, year on year)

2000 2001 2002 2003 2004

Consumer prices (av) 1.5 1.4 1.8 1.1 1.5

Average nominal wages 2.0 2.0 2.0 2.0 4.0

Average real wages 0.5 0.6 0.2 0.9 2.5

Unit labour costs -1.7 4.1 -1.8 0.1 -0.5

Sources: Bank Negara Malaysia, Monthly Statistical Bulletin; ILO, Yearbook of Labour Statistics.

Agricultural and forestry production 2000 2001 2002 2003 2004Palm oil (m tonnes) 10.8 11.8 11.9 13.4 14.0

Rubber (m tonnes) 0.9 0.9 0.9 1.0 1.2Saw logs (�000 cu metres) 23,074 18,923 20,649 21,530 21,509

Cocoa (�000 tonnes) 70 58 48 36 33


Minerals production 2000 2001 2002 2003 2004Crude oil (�000 barrels/day) 681 666 698 738 762Natural gas (m standard cu ft) 4,367 4,542 4,674 5,013 5,196

Bauxite (�000 tonnes) 123 64 40 6 n/aCopper (�000 tonnes) 21 n/a n/a n/a n/aTin (�000 tonnes) 6 5 4 3 3

Iron ore (�000 tonnes) 259 376 404 597 n/a

Sources: Bank Negara Malaysia, Annual Reports; Monthly Statistical Bulletin; Ministry of Finance, Economic Reports; Department of

Statistics, Yearbook of Statistics.

46 Malaysia


Manufacturing production (% change, year on year)

2000 2001 2002 2003 2004Chemicals 15.1 -7.7 2.7 20.8 14.1Electrical products 28.7 -2.8 -5.1 -7.0 -9.4

Electronic products 44.8 -20.2 13.4 15.1 25.0Off-estate processing 11.7 7.7 7.1 11.8 4.0Food 16.2 4.3 8.7 8.8 3.0

Non-metallic mineral products 20.5 9.6 5.1 9.7 -4.9Wood products 4.0 1.2 -6.0 0.9 12.7

Textiles 8.7 -8.3 -6.2 -2.2 -11.7Tobacco products 75.3 -6.0 -10.0 3.9 2.6Transport equipment 19.1 19.0 6.2 -5.5 8.6

Basic metals 16.6 -0.7 2.4 10.8 4.4Rubber products 4.0 3.3 2.0 18.7 14.8

Metal products 33.8 3.9 0.8 7.4 29.2Petroleum products 19.9 19.3 -4.1 2.3 1.3

Beverages 6.0 3.2 -11.9 20.8 -1.9All manufacturing industries 25.0 -6.6 4.5 10.5 12.7

Source: Bank Negara Malaysia, Annual Report.

Construction statisticsa 2000 2001 2002 2003 2004 b

Office (sq metres) 2,921,324 547,864 374,750 169,548 221,532 % occupancy 78.3 77.8 77.9 80.0 81.9Retail (sq metres) 737,828 257,743 210,657 507,637 265,324 % occupancy 73.9 75.6 77.7 77.9 79.6

a Supply of new property in Malaysia.b January-September.

Source: Bank Negara Malaysia, Annual Report.

Banking statistics (M$ m; end-period)

2000 2001 2002 2003 2004Domestic commercial banks Assets 388,727 398,156 426,224 470,256 576,986Deposits 279,438 283,167 299,484 328,213 429,159Loans & advances 231,242 244,321 252,263 262,694 345,983Foreign commercial banks Assets 123,988 131,580 137,030 159,719 184,269Deposits 83,554 85,625 88,922 104,795 121,771Loans & advances 72,125 80,654 85,731 92,916 101,470


Malaysia 47


Stockmarket indicators (Kuala Lumpur Stock Exchange)

2000 2001 2002 2003 2004KLSE composite market index

(Apr 4th 1986=100) 680 696 646 794 907Value of shares traded (M$ bn) 244.1 85.0 117.0 183.9 215.6Volume of shares traded (bn) 75.4 49.7 55.6 112.2 107.6

Market capitalisation (M$ bn) 444.0 465.0 481.6 640.3 722.0No. of companies listed 795 812 865 906 963

Sources: Bank Negara Malaysia, Annual Report; Monthly Statistical Bulletin.

Main composition of trade (US$ m; fob-cif)

2000 2001 2002 2003 2004

Exports fob Electronics 43,892 36,745 40,628 43,000 47,950

Electrical machinery 16,747 15,967 14,408 14,900 15,800

Chemicals & chemical products 3,950 3,916 4,549 4,400 4,800

Palm oil 2,618 2,599 3,905 5,322 6,000

Total exports incl others 98,266 88,012 94,135 104,969 126,532

Imports cif Machinery 7,632 8,618 9,474 9,500 11,725

Metal products 4,461 4,592 4,737 4,750 5,025

Transport equipment 4,421 4,711 4,868 4,500 4,950

Food 1,974 2,243 2,421 2,550 2,810

Total imports incl others 82,168 73,824 79,841 83,618 105,170

Source: IMF, Direction of Trade Statistics; International Financial Statistics.

Main trading partners (% of total)

2000 2001 2002 2003 2004

Exports fob to: US 20.5 20.2 20.0 19.6 18.8

Singapore 18.4 16.9 17.0 15.7 15.0

Japan 13.0 13.4 11.2 10.7 10.1

China 3.1 4.3 5.6 6.5 6.7

Imports cif from: Japan 21.1 19.2 17.7 17.1 15.9

US 16.6 16.0 16.4 15.4 14.5

Singapore 14.3 12.6 12.0 11.7 11.1

China 3.9 5.2 7.7 8.7 9.8

Source: IMF, Direction of Trade Statistics; International Financial Statistics.

48 Malaysia


Balance of payments, IMF series (US$ m)

1999 2000 2001 2002 2003

Goods: exports fob 84,097 98,429 87,981 93,383 104,999

Goods: imports fob -61,453 -77,602 -69,597 -75,248 -79,289

Trade balance 22,644 20,827 18,383 18,135 25,711

Services: credit 11,919 13,941 14,455 14,878 13,578

Services: debit -14,735 -16,747 -16,657 -16,448 -17,532

Income: credit 2,003.0 1,986.0 1,847.0 2,139.0 3,448.0

Income: debit -7,499.0 -9,594.0 -8,590.0 -8,734.0 -9,376.0

Current transfers: credit 801.0 756.0 537.0 661.0 508.0

Current transfers: debit -2,529.0 -2,680.0 -2,689.0 -3,442.0 -2,955.0

Current-account balance 12,604.0 8,488.0 7,287.0 7,190.0 13,381.0

Direct investment in Malaysia 3,895.0 3,788.0 554.0 3,203.0 2,473.0

Direct investment abroad -1,422.0 -2,026.0 -267.0 -1,905.0 -1,369

Inward portfolio investment (incl bonds) 118.0 -724.0 1,584.0 3,004.0 2,081.0

Outward portfolio investment -133.0 -387.0 254.0 -563.0 -196.0

Other investment assets -7,936.0 -5,565.0 -2,702.0 -4,597.0 -4,502.0

Other investment liabilities 0.0 0.0 -829.0 1,868.0 -895.0

Financial balance -5,478.0 -4,914.0 -1,406.0 1,010.0 -2,699.0

Net errors & omissions -1,273.0 -3,221.0 -2,394.0 -391.0 -4.0

Overall balance 4,712.0 -1,009.0 1,000.0 3,657.0 10,181.0

Financing (� indicates inflow) Movement of reserves -4,970.0 1,069.0 -949.0 -3,753.0 -10,298.0

Use of IMF credit & loans 0.0 0.0 0.0 0.0 0.0


External debt, World Bank series (US$ m unless otherwise indicated; debt stocks as at year-end)

1999 2000 2001 2002 2003

Public medium- & long-term 18,900 19,200 24,100 26,500 25,500

Private medium- & long-term 17,000 18,100 14,200 14,000 14,700

Total medium- & long-term debt 35,900 37,300 38,300 40,500 40,200

Official creditors 4,820 4,950 5,860 5,780 6,110

Bilateral 3,390 3,640 4,640 4,640 5,010

Multilateral 1,440 1,310 1,220 1,150 1,100

Private creditors 31,050 32,390 32,490 34,690 34,170

Short-term debt 6,010 4,640 6,290 8,370 8,830

Interest arrears 0 0 0 0 0

Use of IMF credit 0 0 0 0 0

Total external debt 41,910 41,940 44,590 48,870 49,030

Principal repayments 2,850 4,150 4,090 5,870 7,300

Interest payments 1,919 2,296 2,145 1,965 2,185

Short-term debt 319 266 195 235 275

Total debt service 4,769 6,446 6,235 7,835 9,485

Ratios (%) Total external debt/GDP 53.0 46.4 50.7 51.4 47.3

Debt-service ratio, paida 4.8 5.6 5.9 7.0 7.7

a Debt service as a percentage of earnings from exports of goods and services. Source: World Bank, Global Development Finance.

Malaysia 49


Official development assistance (US$ m)

1999 2000 2001 2002 2003Bilateral 1,482.2 -217.9 413.6 3,593.9 495.3 Japan 264.5 -247.4 1,220.3 609.9 462.7 UK 693.4 -1,127.0 -975.5 1,030.0 229.0 US 654.0 88.5 -201.4 2,266.2 819.6Multilateral -78.5 -70.6 -39.4 -91.5 -55.2

Total (incl others) 1,378.8 -307.2 383.2 3,501.0 446.0 Grants 101.7 90.7 75.7 78.3 75.9

Source: OECD, Geographical Distribution of Financial Flows to Aid Recipients.

Foreign reserves (US$ m; end-period)

2000 2001 2002 2003 2004

Total reserves incl gold 29,576.0 30,525.0 34,278.0 44,576.0 66,448.0

Total international reserves excl gold 29,523.0 30,474.0 34,222.0 44,515.0 66,384.0

Gold, national valuation 53.0 51.0 56.0 61.0 64.0


Exchange rates (M$ per unit of currency unless otherwise indicated; annual averages)

2000 2001 2002 2003 2004

US$ 3.80 3.80 3.80 3.80 3.80

£ 5.75 5.47 5.70 6.20 6.96

� 3.40 3.40 3.87 4.66 5.1

Bt 0.095 0.086 0.065 0.092 0.094

Rmb 0.459 0.459 0.459 0.459 0.459

¥ 0.035 0.031 0.030 0.033 0.035


Editors: Fung Siu (editor); Gerard Walsh (consulting editor) Editorial closing date: September 26th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

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