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Country Profile 2007

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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Malaysia 1

© The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

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 16 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 27 Mining and semi-processing 28 Manufacturing 29 Construction 29 Financial services 31 Other services

32 The external sector 32 Trade in goods 33 Invisibles and the current account 34 Capital flows and foreign debt 34 Foreign reserves and the exchange rate

36 Regional overview 36 Membership of organisations

38 Appendices 38 Sources of information 39 Reference tables 39 Population 39 Labour force 40 Transport statistics 40 Energy production

2 Malaysia


41 Consolidated public-sector finances 41 Money supply 41 Interest rates 42 Gross domestic product 42 Real gross domestic product by expenditure 43 Gross domestic product by sector 43 Prices and earnings 43 Minerals production 44 Manufacturing production 44 Banking statistics 44 Stockmarket indicators 45 Main composition of trade 45 Main trading partners 45 Balance of payments, IMF series 46 External debt, World Bank series 46 Official development assistance 47 Foreign reserves 47 Exchange rates

Malaysia 3


Malaysia

Basic data

330,113 sq km

27.2m (2007 mid-year government estimate)

Population in !000 (2004)

Kuala Lumpur (capital) 1,580 Johor Baharu 724 Klang 632 Ipoh 624 Petaling Jaya 476

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 (Min Nan, Hakka, Mandarin and Min Dong), English, Tamil, Iban (in Sarawak), Banjar (in Sabah). There are 140 languages spoken in Malaysia (peninsular Malaysia 40, Sabah 54, Sarawak 46)

Malaysia uses the metric system but some British weights and measures are still in use. 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 2006: M$3.67:US$1; M$6.75:£1. On July 21st 2005 the central bank abandoned the fixed exchange-rate system, which pegged the ringgit to the US dollar at M$3.8:US$1, for a managed float against a trade-weighted basket of currencies. Exchange rates at end-October 2007: M$3.35:US$1; M$6.87:£1

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

January 1st (New Year!s Day); January 20th (Awal Muharam); February 18th and 19th (Chinese New Year); March 31st (the Prophet Mohammed�s birthday); May 1st (Labour Day); May 31st (Vesak day); June 5th (the king�s birthday); August 31st (National Day); October 13th and 14th (Hari Raya Puasa); November 9th (Deepavali); December 20th and 21st (Hari Raya Qurban); December 25th (Christmas Day)

Total area

Climate

Weather in Kuala Lumpur (altitude 39 metres)

Languages

Measures

Currency

Time

Public holidays, 2007

Population

Main towns

4 Malaysia


Politics

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 indigenous 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).

Political background

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 largely Chinese population, was excluded from both arrangements. The

Independence was proclaimed in 1957

Malaysia under British influence

Malaysia 5


political framework that emerged 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 independ-ence. 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 economic turning point. In the crisis that followed, parlia-mentary 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 dis-crimination 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 dis-crimination 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. In response to the government losing a number of cases in the High Court, the constitution was changed, and by 1988 the judiciary had been stripped of much of its independence, leaving little check on the government�s exercise of power. Decision-making became highly concentrated around Dr Mahathir and an expanded prime minister!s department.

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, became the focal point of the reformasi (reform) movement. In September 1998 Mr Anwar was dismissed from the government, expelled from UMNO and later jailed for a total of 15 years on charges of obstruction of justice, sodomy and corruption. The dubious treatment of Dr Mahathir�s heir-apparent upset UMNO�s

The Federation of Malaysia was formed in 1963

The 1969 race riots were a political watershed

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

6 Malaysia


traditional supporters. In the November 1999 general election, UMNO lost its Malay majority but the BN nonetheless retained its two-thirds majority in parliament, owing to the continued support of the ethnic Chinese. The main beneficiary was the conservative Malay-based Islamic party, Parti Islam sa-Malaysia (PAS).

To counteract the influence of PAS, UMNO stepped up its policy of favouring and promoting Islam. The position that only sharia courts can decide about Islamic issues was enshrined in the constitution in 1988. In September 2001 Dr Mahathir declared that Malaysia was already an Islamic state, reacting to the pledge made by PAS to set up an Islamic state should it gain power. The constitution only gives Islam the status of official religion and grants freedom to practise one!s religion. Sharia law continued to encroach steadily upon the civil area, upsetting non-Muslims, who form some 40% of the population, and many progressive Malays. Although there was a crackdown on Islamist extremism after the September 11th 2001 terrorist attacks on the US, the war in Iraq has helped to boost Islamisation.

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, called an election on March 21st 2004. The polls were preceded by anti-corruption measures and promises of further action that attracted strong public approval. 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, while PAS lost control of the state of Terengganu.

Mr Abdullah failed to build a strong power base after his election victory. His leadership has been weak and policy has drifted. Many of the prime minister!s candidates for key posts within UMNO were defeated at the first post-election party congress in 2004, which was heavily tainted by bribery. A further sign of Mr Abdullah!s weakness was UMNO!s vote in July 2005 to strengthen the bumiputera policies. Another example of Mr Abdullah!s weak leadership came in November 2006, when he failed to halt the display of racism and Islamic zeal at the party congress, which upset the Chinese and Indian parties, the two senior partners of the BN. The fight against corruption has been an empty promise: no high-level politicians or civil servants have been prosecuted.

While more tolerant of dissent and criticism, Mr Abdullah has been unable to control growing religious and racial tensions. Creeping Islamisation, religious intolerance and racial prejudice alarmed non-Muslim ministers in the BN cabinet to such an extent that, in an unprecedented move, they called on the prime minister in January 2006 to defend the rights of the religious minorities. However, the request was withdrawn after loud protests from Malay and Islamic organisations and the media. During 2006 the government began to tighten its control over the media, especially on subjects such as Islam and race.

Creeping Islamisation begins to divide the nation

Mr Abdullah proves to be a weak leader

Religious and racial tensions rise

Malaysia 7


In mid-2007 it clamped down on Internet critics, who regularly expose corruption scandals in government circles.

Dr Mahathir!s mounting dissatisfaction with his successor finally led in August 2006 to a call for his replacement. Divisions deepened with revelations of past and present scandals. Dr Mahathir!s challenge threw UMNO into disarray but Mr Abdullah, with his powers of incumbency, was never at risk. Dr Mahathir!s failing health also cut short his campaign.

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.

Source: The Star.

The last election had a devastating effect on the opposition alliance, the Barisan Alternatif (BA, Alternative Front), which consists of PAS and the Parti Keadilan Rakyat (PKR), the party led by Wan Azizah Ismail, the wife of the former deputy prime minister, Anwar Ibrahim. The mainly ethnic-Chinese left-wing DAP"which left the BA in September 2001, protesting at the intention of PAS to found an Islamic state"became the largest opposition party. Mr Anwar was released from prison in September 2004, after his conviction for sodomy was quashed, but did not return fully to national politics until April 2007. In May 2007 he had to withdraw from the election for PKR president, after the

The DAP is the largest opposition party

8 Malaysia


government threatened to send him back to jail. Owing to an earlier conviction for corruption, Mr Anwar is disqualified from standing for public office until April 2008. It is widely assumed that a general election will be called before that date.

Important recent events

October 2003

Mahathir Mohamad retires after 22 years of strong leadership and is succeeded by his deputy, Abdullah Badawi.

March 2004

The Barisan Nasional (BN, National Front) wins its largest-ever election victory with an anti-corruption agenda, thrashing the Parti Islam sa-Malaysia (PAS), which loses control of Terengganu, and reducing the Parti Keadilan Rakyat (PKR) to a single seat.

September 2004

The High Court overturns the conviction for sodomy of the former deputy prime minister, Anwar Ibrahim, who is set free after serving nearly six years for corruption. Corruption thrives at the United Malays National Organisation (UMNO) party elections, in which many of Mr Abdullah!s candidates are defeated.

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.

January 2006

Non-Muslim ministers in the BN cabinet call on Mr Abdullah to defend the rights of religious minorities.

August 2006

Dr Mahathir calls on UMNO to replace Mr Abdullah as party leader.

November 2006

The televised UMNO general assembly shocks the other BN parties with its display of racism and Islamic zeal, threatening violence if they dared question the special status of Islam and Malays.

April 2007

The former deputy prime minister, Anwar Ibrahim, returns to national politics. But after threats that he might be jailed, Mr Anwar pulls out of the election for president of the opposition PKR, leaving the party in disarray.

August 2007

Malaysia celebrates 50 years of independence amid displays of national unity.

Malaysia 9


Constitution, institutions and administration

Malaysia is a federal, constitutional monarchy within the Commonwealth. The federation consists of 13 states (11 in peninsular Malaysia, plus Sarawak and Sabah). In addition, there are three federal territories"Kuala Lumpur, Labuan island, and the federal administrative capital, Putrajaya.

The position of king (yang di-pertuan agung, meaning �supreme ruler�) is largely ceremonial and 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. Each ruler is also the leader of the Islamic faith in his state.

The federal parliament consists of an upper chamber, the Senate or Dewan Negara (Council of the Nation), which has 70 members, 44 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. Although Mr Abdullah has introduced measures to stimulate greater parliamentary participation, little has changed.

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. Federal territories are administered directly by the federal government.

The Malaysian judicial system still resembles the UK system inherited from the colonial period. The independence of the judiciary was effectively curbed by Dr Mahathir in 1987-88 in response to a court ruling declaring the April 1987 UMNO leadership elections invalid. The High Court was stripped of the power of judicial review and the separation of executive and judicial power was terminated. Judges were given a code of conduct, the breaching of which could result in dismissal. In the years that followed the powers of the executive were increased further. The legal framework leaves little room for the judiciary to reassert its independence. The acquittal of Mr Anwar, on the charge for sodomy, in September 2004 did not mark a willingness by Mr Abdullah to allow the judiciary greater independence.

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

A federal constitutional monarchy

The federal parliament

The states� executive councils

Islam is the official religion

The independence of the judiciary has been curbed

10 Malaysia


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. A few non-Malays have been promoted to high ranks of office, but the careers of the majority of non-Malays are strictly circumscribed unless they become Muslim.

Political forces

Race is the major defining feature of the political system: all major political parties are organised along racial lines. Malaysia has been ruled by coalition governments since independence, but in reality the BN coalition is totally dom-inated by UMNO and is unlikely to lose power. UMNO controls the Election Commission, which supervises elections and checks electoral rolls, and the redrawing of constituency boundaries. Because of rock-solid support for the BN in Sarawak and Sabah, the BN coalition seems almost impossible to dislodge.

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 and UMNO members hold the deputy prime minister and key cabinet posts. Elections to the UMNO supreme council determine the leadership succession. The party voting system makes it difficult to challenge an incumbent leader but encourages bribery for other positions.

UMNO!s position within the BN coalition is disproportionate to the number of votes it attracts (only 35.9% of votes cast in March 2004). This reflects the subservient position of the Chinese parties (the Malaysian Chinese Association, or MCA, and the Parti Gerakan Rakyat Malaysia, or Gerakan) and the Indian party (Malaysian Indian Congress, or MIC), which goes back to independence in 1957. Chinese and Indian community leaders accepted the notion of Malay special rights and the special status of Islam in exchange for citizenship.

PAS is the alternative to UMNO for the Malay population. It is an ultra-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. Its intention of creating an Islamic state presents a major obstacle to the building of a coalition of opposition forces.

PAS is allied to the PKR in an opposition alliance, the Barisan Alternatif, or BA. The PKR has continued with the political reform agenda that started with the 1998 reformasi demonstrations, but its members have become increasingly disillusioned with their de facto leader, Mr Anwar. After the March 2004 election the PKR was left with only one seat. The left-of-centre, largely ethnic-

Racial discrimination in administration

The BN coalition is dominated by UMNO

The opposition is weak and divided

Malaysia 11


Chinese DAP is the largest opposition party. Although low in parliamentary seats, the opposition gathered 34% of the vote in the 2004 election, down from 40% in 1999.

The entitlement of the bumiputera to special rights is laid down in the constitution. UMNO regularly warns other parties not to question Malay special privileges, the position of Islam or relations between the different races; those who do will be accused of sedition. The political system has remained stuck in this mode for over 50 years. But the gap between the races has widened noticeably over the past decade. Residents continue to define themselves in the first place by race, rather than by a Malaysian identity.

Key political figures

Abdullah Ahmad Badawi

Prime minister and president of the United Malays National Organisation (UMNO). Mr Abdullah, an Islamic studies graduate, has had limited success in fighting corruption. Lacking the charisma and strong power base of his predecessor, Mahathir Mohamad, disappointment is growing over his ineffectiveness and failure to fulfil promises.

Najib Razak

Deputy prime minister and UMNO�s deputy president, defence minister and son of a former prime minister. A rival to Mr Abdullah, but political scandals may stop him from challenging the prime minister in the future.

Mahathir Mohamad

Prime minister and president of UMNO for 22 years until October 2003. He is the principal architect of the economic advancement of the Malay community and the rapid industrial growth of Malaysia. Dr Mahathir became increasingly critical of his successor, but lacked the power to arrange his replacement.

Anwar Ibrahim

Former deputy prime minister, dismissed in 1998 and jailed for abuse of power and sodomy. Mr Anwar was released in September 2004 after his sodomy conviction was overturned. However, owing to an earlier conviction for corruption he is unable to stand for public office until April 2008. As an advocate of political reform and a possible bridge between UMNO and ultra-conservative Islam, he remains a powerful political influence and a possible future prime minister.

Khairy Jamaluddin

The son-in-law of the prime minister and deputy head of UMNO Youth, who is believed to control access to Mr Abdullah and the distribution of many government contracts.

Political structure is fossilised

12 Malaysia


International relations and defence

Under Mr Abdullah, Malaysia�s diplomatic relations have begun to reflect economic interests more closely than under Dr Mahathir, who irritated some Western governments with his controversial opinions. Malaysia remains a champion of the interests of the developing world and a defender of the interests of the Islamic world. Membership of the Association of South-East Asian Nations (ASEAN) remains central to Malaysia�s foreign policy. Greater economic integration, through bilateral trade agreements, is also leading to closer relations with its largest trading partners.

Malaysia!s relations with Singapore, the US and Australia have warmed notably. Co-operation and an emphasis on mutual interests rather than constant bickering now characterises relations with Singapore, although several long-standing disagreements remain unresolved. Malaysia works closely with the US in the fight against international terrorism but remains critical of US intervention in Iraq. The strongest improvement is in relations with Australia (which Dr Mahathir refused to visit during his tenure as prime minister).

Relations with Indonesia, Malaysia!s largest provider of foreign labour, are generally good, despite Indonesia!s poor record of dealing with terrorist threats within its borders, illegal immigration and air pollution from forest fires. Islamic militancy among the 3m ethnic Malays in southern Thailand, and the heavy-handed response of the Thai army, continues to sour relations between the two countries.

Given the proliferation of trade agreements concluded or being negotiated"either multilaterally in Asia or bilaterally, for instance the free-trade agreement with the US, Malaysia!s largest export market"economic diplomacy is playing a larger role. But growing competition for energy resources in Asia has increased the chances of territorial disputes. 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 the defence minister, Najib 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 growth is slowing as major equipment purchases are being delivered.

Malaysia is part of the Five Power Defence Arrangement

Islamic militancy is souring relations with Thailand

Foreign relations have improved under Mr Abdullah

There is an increasing chance of territorial disputes

Malaysia 13


Military forces, 2007 Malaysia Thailand IndonesiaArmy Personnel 80,000 190,000 233, 000Main battle tanks - 333 -

Navy Personnel 14,000 70,600 45, 000Frigates 4 10 12Submarines - - 2Air force Personnel 15,000 46,000 24,000Combat aircraft 63 165 94

Source: International Institute for Strategic Studies, The Military Balance 2007.

Security risk

The security risk to foreign companies operating in Malaysia is real but moderate. There have been no terror attacks on Malaysian soil and there have been no security scares in recent years. 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. During April and May 2006 police in eastern Sabah arrested 12 members, including six Malaysians, of the Indonesia-based militant group, Darul Islam, who were alleged to have links with the Bali bombers. 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 end-October 2006, 60 Islamic militants were being held under the Internal Security Act, which allows for a two-year detention period that can be renewed indefinitely. 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. In July 2006

14 Malaysia


Malaysia signed a mutual legal assistance treaty with the US to facilitate criminal investigations, including into corruption and terrorism.

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 the 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 (ethnic Malays and other indigenous peoples) could stoke Malay resentment. An even more sensitive issue is religion; a growing feeling on the part of Muslims that the position of Islam is being undermined may cause unrest. Nonetheless, 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. A prolonged campaign of large-scale public protests is unlikely, even though most traditional means of protest remain blocked. This is in part because of the widespread awareness within Malaysia that it is heavily dependent on foreign direct investment, and the opposition is unlikely to target foreign businesses specifically.

Armed conflict

The risk of armed conflict affecting business is low. Sporadic Islamist violence has occurred in recent years. 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. 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.

Malaysia 15


Resources and infrastructure

Population

The Malaysian population is estimated by the government to have reached 27.2m by mid-2007, up by around 2% compared with the year-earlier period. The annual average rate of growth was 2% in 2003-07, somewhat slower than the 2.5% a year registered in 1998-2002. Around 80% of the population lives in peninsular Malaysia. The rate of growth will continue to be fastest in Malaysia�s more developed states.

Population, mid-2006 m % of totalTotal 26.64 100.0 Malaysian 24.80 93.0 Bumiputera 16.40 61.6 Chinese 6.22 23.3 Indian 1.86 7.0 Others 0.32 1.2 Non-Malaysian 1.84 6.9Age structure 0-14 8.63 32.4 15-64 16.86 63.3 65+ 1.15 4.3

Life expectancy, total (yrs) Male 71.8 - Female 76.3 -

Source: Department of Statistics, Yearbook of Statistics 2006.

Rates of population growth vary considerably between the main ethnic groups, probably owing to differences in geographical location, income levels and cultural factors. In 2002-06 the annual average rates of growth of the bumiputera (ethnic Malays and other indigenous peoples), Chinese and Indian communities were 2.3%, 1.3% and 1.5% respectively. The Chinese, long urbanised and enjoying higher average incomes, have smaller families; the Malay urban population is growing, but the majority of families remain in rural areas.

Income inequality has increased in recent years, especially within the bumiputera population group; the Gini-coefficient (a key measure of inequality) for Malaysia as a whole rose from 0.452 in 1999 to 0.462 in 2004, but from 0.433 to 0.452 for bumiputera. There remains a significant income disparity between the Chinese and bumiputera. The politically sensitive income disparity ratio stood at 1:1.64 in 2004, slightly lower than the ratio of 1:1.74 recorded in 1999, but this is still high. The income disparity ratio between bumiputera and Indians narrowed from 1:136 in 1999 to 1:1.27 in 2004. Poverty is predominantly rural, concentrated among bumiputera and to a lesser extent Indians. Mean monthly gross household income increased from M$2,472 (US$650) in 1999 to M$3,249 in 2004, an average growth rate of 5.6% a year, according to official data. The mean monthly income of urban households stood at M$3,956 in 2004, and that of rural households at M$1,875.

Growth rates vary between the main ethnic groups

16 Malaysia


Malaysia has, throughout its history, been a country of immigrants. In late 2007 foreign residents numbered 2m or 7.4% of the population, but there were probably another 1m illegal immigrants, attracted to Malaysia by the availability of work. The government, believing illegal immigrants are a threat to public order, organises regular campaigns to expel them. Given Malaysia!s porous borders, corruption among officials and high unemployment, the campaigns have little effect on deterring this type of migration and regularly cause economic disruption. Official plans to reduce the economy!s dependence on low-skilled labour may have more effect in the longer term.

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 2005 there were 731,698 students enrolled in 630 private- and public-sector colleges and universities. There were 71 tertiary education institutions in the public sector and 559 in the private sector, but more than 53% of the total number of students attended public institutions. The international rating of Malaysian universities has declined in recent years. Sending pupils abroad was especially popular before the Asian financial crisis, but this has been reduced by twinning arrangements with foreign universities. A large number of private and public colleges also offer 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. As a result, science and mathematics have been taught in English since 2003, but this is currently under review. After independence in 1957 the role of English was systematically reduced for Malay-nationalist reasons.

Health

Malaysia provides an integrated and comprehensive system of public and private healthcare services but the system is under serious strain. For many years the government has underfunded public healthcare, which is suffering from long waiting lists and an outflow of senior staff, largely because of low remuneration. The private sector has filled the gap. With greater prosperity and

The public healthcare system is under strain

Malaysia continues to attract immigrant workers

Malaysia 17


increased demand for medical services, health policy is shifting towards more preventative medicine, tighter cost controls and higher private contributions. The government is considering setting up a national health fund with contrib.-utions linked to different levels of services, while maintaining free access to medical services for the poor, especially in rural areas.

There is an extensive network of primary healthcare services. In the public sector there were more than 200 mobile teams, 800 health clinics, 1,900 rural clinics and 122 hospitals across Malaysia in 2005. The total capacity of hospitals stood at 30,121 beds. The private sector has more hospitals (at 222 in 2005), but they are much smaller, with a total of just 10,794 beds. In 2005 the number of registered doctors stood at 20,105, up from 15,619 in 2000, with just over 50% of them working in the public sector. Only a minority of Malaysians are believed to be able to afford private medicine. 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 predominantly rural states on the Malayan peninsula are well below average.

According to national statistics, Malaysia is estimated to have spent around 3.6% of GDP in 2006 on healthcare, divided roughly equally between the govern-ment and the private sector. This is low compared with the World Health Organisation!s recommendation of 5-8% of GDP. Growth in government healthcare spending has continued to trail overall public spending. Rather than building more hospitals and clinics, the government is upgrading and enhancing existing services and facilities under the Ninth Malaysia Plan 2006-10 (9MP). The plan envisages large increases in development spending on health facilities in 2007 and especially in 2008.

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 remains an important centre of tin refining, supplementing its declining domestic mine output with imported concentrates. Malaysia is the world!s third-largest natural rubber producer, after Thailand and Indonesia. High commodity prices have bolstered production in the last three years. Malaysia is the world�s largest producer of palm oil; output continues to expand as international demand grows for dietary reasons and, in recent years especially, as a substitute for mineral oil.

More than half of Malaysia is still covered in tropical forest and swamps. Malaysia remains one of the world�s leading producers of tropical saw logs. Controls on tree-felling by loggers continue to be flouted, but output is grad-ually declining. Controls are now linked to replanting, usually with commercial crops, and forestry resources are, at least in theory, managed on a sustainable basis. The diversity and complexity of Malaysia!s ecosystem is particularly rich. Nonetheless, there has been serious environmental degradation as a result of uncontrolled logging, industrial development, expansion of palm oil plant-ations and urbanisation. A regular annual occurrence and threat to public health is haze, which is caused by forest fires in Indonesia.

Plantation crops still have an important economic role

18 Malaysia


Crude oil and natural gas are the most important primary products. 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 manufacturer of natural gas. According to an industry body based in France, the International Group of Liquefied Natural Gas Importers, Malaysia was the world!s second-largest exporter of liquefied natural gas (LNG) in 2006 after Qatar. At current usage rates, reserves of crude oil will last for 21 years and natural gas for 34 years. The other main minerals produced are copper, iron ore, bauxite, coal and gold. Industrial minerals mined are clay, kaolin, silica, limestone, barite, phosphates and stone.

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. Investment has since resumed and another surge is taking place under the Ninth Malaysia Plan (9MP). By 2005 the national road network stood at 87,025 km. Malaysia has made considerable progress in the creation of a more integrated, efficient and reliable urban transport system. But traffic congestion is getting worse, especially in Kuala Lumpur, despite the promotion of public transport. 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. KLIA, a spectacular modern airport that was opened in June 1998 with a capacity of 25m passengers a year, has been expanded and now includes a terminal dedicated to serving low-cost airlines. A bullet train link between Kuala Lumpur and Singapore is under consideration. Malaysia is determined to become the regional hub for air transport, which has expanded strongly since the start of a budget airline, Air Asia. There are 117 regional airports, covering the whole of Malaysia, of which 38 have paved runways.

Malaysia�s ports handled 369m tonnes in 2005, up from 224m tonnes in 2000, an increase of 65% over the period. 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). Strong expansion is continuing on the central west coast at Port Klang (for conventional cargo), as well as at the Port of Tanjung Pelepas (PTP), for containerised traffic, in Johor in direct competition with POS. Planned port capacity by 2010 is 570m tonnes, a 29% rise compared with 2005, after a 36% increase in the preceding five years. Malaysia is determined to become the preferred regional transshipment point.

State-owned Telekom Malaysia plays a central role in telecommunications: it is the dominant provider in the (declining) market for fixed-line services and an important operator of mobile services; five companies compete in each market section. By mid-2007 the number of fixed-line telephones had dropped to 16 for every 100 people. Telekom is the central provider of the fibre-optic commun-ications infrastructure. Cellular services have continued to grow rapidly. Tariff

Investments in infrastructure have resumed

Aggressive expansion of port capacity continues

Telecommunications

Malaysia still has large reserves of crude oil and gas

Malaysia 19


liberalisation boosted the number of mobile-phone users from 5.1m in 2000 to 21.2m by mid-2007 (a penetration rate of 78.2%), most of whom use prepaid services. Up to 95% of residential areas have mobile-phone coverage. Malaysia has four 3G (third-generation) licensees and four WiMAX licensees. Strong growth in mobile Internet services is expected in the next two years.

Malaysia intends to position itself as a regional and even a global hub for information and communications technology (ICT) and multimedia. ICT is con-sidered a crucial element to achieve a competitive knowledge-based economy. The extended Multimedia Super Corridor (MSC) plays an essential role in the fostering of local capabilities. But ICT usage remains relatively low by international comparison, with 5.7m personal computers installed by 2005. The number of Internet dial-up subscribers stood at 3.9m in mid-2007, a 14.2% penetration rate, while the penetration rate for broadband subscribers was just 4.1%. These rates were well below those of Singapore, Japan, South Korea and Taiwan. The government has set a target of 13% broadband penetration by 2010 and 35% for dial-up connections. It is keeping a wary eye on Internet content, fearing uncensored criticism.

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 install-ations 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. Oil reserves will last for another 21 years and natural gas for another 34 years at the current rate of usage. Half of the oil produced is exported. 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 provide extensive scope for hydroelectric power. Completion of the 2,400-mw Bakun dam in Sarawak will more than double the country!s hydroelectric capacity.

Fuel used for electricity generation is mostly natural gas (two-thirds of total), followed by coal, hydroelectricity and oil; renewable energy (especially biomass, from palm oil and wood waste) will soon overtake oil. Coal will cover the bulk of the expanding demand for power, but gas will remain the main fuel for power generation.

Malaysia�s reserve margin"the difference between installed capacity and peak demand"stood at 39.5% at end-2005. The extraordinarily high margin was the result of a 1990s! privatisation policy, under which independent power producers (IPPs) built and operated 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%. The unusually favourable supply contracts are under renegotiation. Notwithstanding tariff increases in 2006, the average electricity selling price to industrial and commercial customers is among the lowest in ASEAN.

Power generation is driven by gas and coal

ICT is considered crucial for knowledge-based economy

There are substantial energy resources

20 Malaysia


The economy

Economic structure Main economic indicators, 2006 (Actual unless otherwise indicated)

Real GDP growth (%) 5.9

Consumer price inflation (av; %) 3.6

Current-account balance (US$ m) 25,488.0

Exchange rate (av; M$:US$) 3.7

Population (m; mid-year) 26.6

External debt (year-end; US$ m) 50,477.6

Source: Economist Intelligence Unit, CountryData.

During the past 40 years Malaysia has transformed itself from an economy depending primarily on the production of mineral and agricultural export commodities"palm oil, natural rubber, tropical timber and tin"into one dominated by manufacturing and services. In 2006 manufacturing accounted for 29.8% of nominal GDP, while services accounted for 46.2%. 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 an important source of rubber and is the dominant world producer of palm oil. Palm oil output reached a record 15.9m tonnes in 2006 and accounted for 3.7% of total exports in value terms. Manufacturing goods accounted for 80.3% of gross export earnings. Electronic goods are the single most important category. 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 2006 Malaysia�s total exports of goods and services were equivalent to 117% of nominal GDP, a high figure by international standards.

Comparative economic indicators, 2006 Malaysiaa Indonesiab Singapore b Thailanda Japana

GDP (US$ bn) 156.1 364.5a 132.2 a 206.3 4,365.3

GDP per head (US$) 5,859 1,572a 29,473 3,126b 34,248

GDP per head (US$ at PPP) 11,374a 4,004 37,035 9,085b 31,992

Consumer price inflation (av; %) 3.6 13.1a 1.0 a 4.6 0.2

Current-account balance (US$ bn) 25.5 9.7 41.3 3.2 170.5

Current-account balance (% of GDP) 16.3 2.7 31.2 1.6 3.9

Exports of goods fob (US$ bn) 160.8 102.7 289.4 128.2 615.8

Imports of goods fob (US$ bn) -124.1 -73.0 -244.6 -113.4 -534.5

External debt (US$ bn) 50.5a 130.2 24.4 59.9b �

Debt-service ratio, paid (%) 4.8a 19.4 1.3 8.7b �

a Actual. b Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit, CountryData.

Manufacturing is the largest industrial sector

Economy is vulnerable to changes in global demand

Malaysia 21


Economic policy

The new prime minister, Abdullah Badawi, tightened fiscal policy when he first took up office in 2004, following six years of budget deficits. Some large projects were cancelled and development spending (spending on facilities) was cut back. However, owing to political resistance, the pace of budget consolidation slowed dramatically between 2005 and 2006. Fiscal plans during this period were also thrown into disarray by a sharp increase in international oil prices, which caused a surge in direct fuel subsidies. It led to several increases in domestic fuel prices and made the government more determined to phase out fuel subsidies.

Government spending began to accelerate in late 2006 ahead of new projects planned under the Ninth Malaysia Plan 2006-10 (9MP). Figures in the 2007 and 2008 budgets showed a clear shift towards greater stimulation, with gross development spending increasing by 17.2% in 2006 and by an estimated 14.1% in 2007. Corporation tax rate was also cut. Operating expenditure rose by 10.2% in 2006 and is estimated to increase by 15% in 2007, largely because of a generous salary increase to the civil service. Revenue growth (up by 16.2% in 2006) remained strong because of a firm economy and high commodity prices (petroleum-related revenue accounted for around one-third of revenue). A reduction of the budget deficit, to an estimated 3.2% of GDP in 2007 from 3.3% in 2006, has been given lower priority.

The most important future taxation change is the introduction of a goods and services tax (GST)"a comprehensive value-added tax"originally planned for 2007 but delayed until a later date. 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 would cut income tax rates at the same time as introducing the GST. It started reducing the corporate tax rate in the 2007 budget, which is set to fall to 25% in 2009. With the increases in the prices of mineral oil and food commodities, a reduction or abolition of subsidies has become more urgent.

Finding additional government revenue is also part of the reason for the reform of the government-linked corporations (GLCs). The 47 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 35% of the capitalisation of the Malaysian stockmarket. Under a GLC transformation programme, the government aims to boost the companies! profitability by selling off part of its holdings at a later date. The GLCs have been given guidelines and targets, and told to improve their efficiency and competitiveness, and make their management more accountable. The reform of the government-owned sector is meant to have a powerful effect on the private sector and boost the efficiency of the whole economy.

New tax will provide a stable revenue source

The GLCs are being reformed

Fiscal consolidation stalls

22 Malaysia


Some of Mr Abdullah!s priorities are different from those of his predecessor, Mahathir Mohamad. This is especially the case with the promotion of agri-culture, which is intended to become the third engine of economic growth, after services and manufacturing. Linked to this are incentives to boost investment in agriculture and food production. The government is promoting the biotechnology industry, which is expected to find uses and applications for the country!s unusually rich natural resource endowment. Another area singled out for special treatment are small and medium-sized enterprises (SMEs), which the government intends to develop into an internationally competitive small-company sector, to fill a gap in an economy that has been dominated by large, often foreign-owned, corporations.

Federal government finances, 2006 M$ bn % change, year on yearRevenue 123.5 16.2 Tax revenue 86.7 7.5 Direct taxes 61.6 15.1 Indirect taxes 25.1 -7.4 Non-tax revenue 36.0 43.7Expenditure 142.6 14.0 Operating 107.7 10.2 Development (net)a 34.9 28.1Balance -19.1 2.1

a Net of loan recoveries.

Source: Ministry of Finance.

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 current plan, the 9MP, extends until the end of 2010. 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.

Bank Negara Malaysia (BNM, the central bank) is not independent. Its task is to reinforce the impact of the government�s fiscal policies. Despite its lack of independence, the BNM is influential, largely because of the prestige built up under its governor, Zeti Akhtar Aziz. It actively promotes structural reform and has moved towards liberalisation and greater transparency. The range of financial instruments available is being extended, and measures have already been taken to boost the liquidity of the financial markets. At the same time foreign institutions have been given greater freedom to expand. The development of the Islamic banking and insurance sector is being given special attention; and the efficiency and responsiveness of the money market were enhanced by the introduction of a new overnight policy rate (OPR) in April 2004. The flexibility of monetary policy has been increased by the abolition of

BNM has a crucial role in reforming the financial sector

There is a long-established economic planning framework

Fiscal policy favours agriculture and SMEs

Malaysia 23


the fixed exchange-rate system in favour of a managed float against a trade-weighted index of currencies of Malaysia!s major trading partners in July 2005.

Economic performance

The most striking aspect of the performance of the Malaysian economy is its dependence on exports, particularly electronics and electrical goods, which made up 51.1% of exports in 2006. This means that economic growth is vulnerable to global fluctuations in the demand for these products. This dependence cannot be reduced quickly, and a shift to other sources of economic growth, which the government is promoting, may take a long time. In line with other countries in South-east Asia, Malaysia has suffered two recessions during the past nine years. The country 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 slowdown in GDP growth to only 0.3%. Growth resumed in 2002 and peaked at 6.8% in 2004; it dipped to 5% in 2005 but quickened to 5.9% in 2006.

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

Annual average 2006 2002-06Private consumption 7.1 7.5

Government consumption 5.0 7.8Gross fixed investment 7.9 4.0

GDP 5.9 5.8

Sources: Bank Negara Malaysia; 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 foreign direct investment (FDI), attracted by Malaysia�s well-developed infrastructure, capable administration and fairly well-educated workforce. These inflows reached a peak of 8.7% of GDP in 1992-93. Inflows have been lower following the 1997-98 Asian financial crisis: FDI inflows were barely positive in 2001, recovered to 3.7% of GDP in 2004, dropped to 2.9% in 2005 and stood at 3.9% in 2006. 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.

The approach to foreign investment is changing

Growth depends strongly on exports

24 Malaysia


According to the central bank, potential output growth, determined by the ex-pansion and non-inflationary utilisation of physical capital and the labour force, as well as by total factor productivity growth (TFP), stood at 6.3% in 2006, when real GDP grew by 5.9%. Before the Asian financial crisis, the economy was growing at a rate that exceeded its potential growth. After the crisis, a gap opened between actual and potential production, more commonly referred to as the output gap, largely owing to plunging capital investment. The biggest difference in the composition of economic growth after the Asian crisis is the much larger contribution made in recent years by TFP, which incorporates technological progress and greater efficiency. The central bank estimated that, with continuous improvement in productivity and expansion of capital stock and the labour force, the output gap closed in the second half of 2006. Capital is being used more efficiently, in part owing to past infrastructure investments and structural reforms. 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 hope that the implementation of the Knowledge-Based Economy Master Plan, which includes large investments in education and training, will help to close the 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 2005/06 and a decline in the spare capacity of the Malaysian economy, although they have been partly offset by increased competition, as a result of falling trade barriers.

Inflation (% change)

Annual average 2006 2002-06Consumer price index (2000=100) 3.6 2.2

Source: Bank Negara Malaysia.

Malaysia has traditionally had a tight labour market. The unemployment rate averaged 3.3% in 2006, below the rate of 4% or less that 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 late 2007 foreign residents numbered 2m or 7.4% of the population, but there were probably another 1m illegal immigrants, attracted to Malaysia by the availability of work. In mid-2006 there were 1.8m legal foreign workers and at least half a million people working illegally. Manufacturing, plantation and construction as well as Malaysian households depend on"mainly unskilled"foreign workers. Over the past decade Malaysia has also experienced persistent shortages of skilled labour, which is being filled by 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.

Inflation is being kept in check

Shortages of skilled labour continue

Raising efficiency determines the growth potential

Malaysia 25


Malaysia!s relatively high wage levels (compared with some neighbours, such as Indonesia) make it 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 2006 2002-06Wages -0.9 1.3

Sources: Bank Negara Malaysia.

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 peninsular Malaysia, while long-term plans have focused on specific regions. In 2006 the government released details of the Iskander Development Region, which focused on boosting economic growth in the southern state of Johor. This was followed by the launch of the Northern Corridor Economic Region in 2007, covering the states of Perlis, Kedah, Penang and Perek.

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-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.

Wages respond to changes in global demand

Imbalances in development

26 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 is committed to revitalising the agricultural sector, making it the third engine of economic growth and raising rural incomes. It plans to develop the unused potential in output of fruit, aquaculture and livestock. Labour-saving techniques, inno-vation, biotechnology and more efficient farm management are being pro-moted with a growing number of incentives, subsidies and training schemes. In 2006 agriculture accounted for 8.7% of GDP and 12.9% of employment.

Agriculture and forestry production, 2006 (�000 tonnes unless otherwise indicated)

Crude palm oil 15,881Rubber 1,260

Saw logs (�000 cu metres) 21,180Cocoa 32

Source: 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 is Malaysia�s longest-established large-scale agricultural product. Refinements in plant breeding and biological controls have raised yields and enabled growers to manipulate output, but the availability of cheap labour is crucial to productivity levels. The main source of output is the smallholder sector. Malaysia produced 1.3m tonnes of rubber in 2006, the highest level since 1996. This compares with a low of 769,000 tonnes in 1999. Malaysia is the third-largest global producer. The government is trying to sustain production of rubber as an alternative to palm oil and as a supplier of timber to the furniture industry.

Malaysia was the largest global producer of palm oil in 2006, accounting for almost one-half of world exports. Boosted by high global commodity prices, output of palm oil and associated products has continued to expand, reaching a

Rice

Agriculture is given a new importance

Palm oil

Natural rubber

Malaysia 27


record 15.9m tonnes in 2006 and accounting for 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 an alternative to animal fats and oilseed products. The use of palm oil as a substitute for mineral oil"biofuel"has opened up 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 pro-motes good forest management and reforestation, but these controls are in-effective. Logging permits are often a source of income for politicians. In the interests of maximising income from forest products, the government has grad-ually extended the ban on direct exports of saw logs and promoted higher value added production of wood products and furniture. Log output has stab-ilised 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, 2006 Crude oil (�000 barrels/day) 667

Natural gas (m standard cu ft) 5,774Tin ('000 tonnes) 2.4

Source: Bank Negara Malaysia, Monthly Statistical Bulletin.

Some 23% 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. In 2006 it was the world!s second-largest LNG exporter. 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. At the current rates of usage, crude oil reserves are sufficient for 21 years and reserves of natural gas for 34 years. In recent years, around 60% of crude oil output has come from offshore fields in peninsular Malaysia, around 20% from Sarawak and some 15% from Sabah. Condensates account for a growing share (some 20% in 2006) of production. A National Depletion Policy ensures sustainable development of oil resources. Future production will increasingly have to come from deep-level offshore fields, requiring higher levels of investment.

The heavy reliance on natural gas for electric power generation is being reduced. The main customers for LNG exports are Japan, South Korea, Taiwan and China. New gasfields continue to be discovered. Some 20% of the natural gas used in peninsular Malaysia is imported from Indonesia (West Natuna field) and from the Malaysia-Thailand Joint Development Area (MTJDA). The large LNG production facility at Bintulu on Sarawak will be expanded further, helping Malaysia to maintain its leading position in the global LNG market.

Timber

Gas

Crude oil output and refining

28 Malaysia


The output of tin"which played a crucial role in Malaysia�s industrial history"went into precipitous decline in the mid-1980s. In 2006 only 2,400 tonnes of tin concentrate were produced, setting a post-second world war low. 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%, stood at 117% in 2006. Manufacturing accounted for 29.8% of GDP in 2006.

Manufacturing has a 71% share of the industrial production index (2000 base). The export-oriented industries are the biggest component of manufacturing, accounting for around three-quarters of the total. 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 to take off. In October 2007 there were 1,937 companies with MSC status. A second phase of development started in 2004, with a considerable enlargement of the area and a target to add biotechnology to information and communications technology activities over the next few 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. With a growing shortage of skilled workers and an official policy to encourage high value-added production, MIDA stopped granting approvals to low-productivity industries. The government is encouraging exist-

Tin and other minerals

Foreign investment is discouraged in some industries

Manufacturing is dominated by export-orientated industries

Malaysia 29


ing low-productivity industries to relocate elsewhere and making it more ex-pensive to attract unskilled foreign workers. Growing competition from China has made it difficult in recent years to attract foreign manufacturing investment to Malaysia, notwithstanding stronger incentives and reduced restrictions.

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

Construction had been an important contributor to GDP growth, with a powerful impact on other parts of the economy and employment. 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 and by 4.4% in 1999, as major projects were cancelled or abandoned and planned infrastructure developments dropped. Despite heavy government support, the construction sector remained in the doldrums, to be hit again by public works cutbacks at the start of the government of Abdullah Badawi in 2004. The outlook improved significantly with the start of new projects under the Ninth Malaysia Plan 2006-10 (9MP) and the deepening recovery of private investment.

The construction industry employs more than 600,000 workers (over 100,000 legal foreign workers and many more working illegally) in 54,500 mainly small and medium-sized companies. However, the industry is inefficient and 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 pro-ductivity, lower costs and reduce the number of foreign workers, the govern-ment is promoting the use of new building techniques, such as the use of prefabricated elements, as well as simplifying and shortening the planning permission process. Part of the industry�s problem is the existence of large numbers of small, bumiputera-owned companies (those owned by ethnic Malays or other indigenous peoples), which rely on government contracts. Although the government told companies in 2005 that they needed to re-organise or merge, political rather than economic factors tend to determine government contracts.

Financial services

Malaysia has a well-developed financial sector. Two-thirds of assets are held by banks (Bank Negara Malaysia, the central bank; commercial banks; finance companies; merchant banks; Islamic banks and discount houses). The remain-

More subdued growth in manufacturing

The construction industry is inefficient

The financial sector is well developed

Construction sector faces brighter prospects

30 Malaysia


ing one-third of assets are accounted for by 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). Since the 1997-98 financial crisis the authorities have executed a continuous programme of financial system reorganisation, following a detailed plan with 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, 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. A special SME Bank, started in October 2005, is intended to act as a one-stop centre for the funding and development needs of SMEs.

The 1997-98 financial crisis devastated the banking sector, which was hit by a surge in non-performing loans (NPLs). The government used the 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 environment. From 71 institutions before the 1997-98 financial crisis, the merger programme resulted in ten domestic banking groups with 30 banking institutions. Under a 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 in 2004 and 2005. 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 given more room 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-2006 accounted for 13%. In September 2007 Malaysia had 11 Islamic banks. 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. In 2005 foreign Islamic banks were admitted and the formation of Islamic subsidiaries by domestic banking groups was allowed. The FSMP has set a target for Islamic banking to account for 20% of banking assets by 2010.

Priority sectors receive special treatment

There is a master plan for the financial sector

Islamic banking continues to grow strongly

Malaysia 31


Malaysia!s reputation with investors was compromised 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. In February 2001 the government published a ten-year Capital Market Master Plan (CMP), to establish an internationally competitive capital market. Corporate governance and surveillance were strengthened and the financial markets reorganised, with the aim of developing a broad corporate bond market and boosting market liquidity, to make fundraising more efficient and reduce transaction costs. The second phase of the CMP started in 2004 and involves liberalisation of stockbroking and investment management, removal of structural impediments to market access, deregulation, enhancing secondary-market liquidity and allowing greater international participation in the dom-estic capital market. The liberalisation is, in part, a reflection of the need to invest Malaysia!s excess savings abroad.

Other services

Services (including financial services) is the largest part of national output, at 46.2% of constant-price GDP in 2006. The sector is divided into intermediate services (42.7% of total services) and final services (57.3%). 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.

Intermediate services have expanded rapidly over the past five years. 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 7.6% in 2006.

The growth of final services has generally been firm in recent years, unaffected by a mild slowdown in government spending. Final services grew in real terms by 7% in 2006. Growth in 2006 was supported by a 9.8% year-on-year increase in government services and a relatively strong performance from the wholesale and retail trade, hotel and restaurants category. The production of utilities (gas, water and electricity) grew by 5.2%, the smallest rise for three years.

The retail trade, restaurants and hotels subsector accounted for 46.3% of total final services in 2006. Tourism has become the most successful services sector, and continues to increase in importance as a source of economic growth. The government considers the tourism industry as a means of diversifying and broadening the economic structure. It is the second-largest foreign-currency earner, after the electronics and electrical goods sector. Malaysia is benefiting from the strong growth in disposable incomes in the Asia region, and it also increasingly appeals to tourists from Islamic countries. The government is also promoting tourism by hosting international conventions and major sporting events. Under the 9MP, the tourism industry is set to remain a major source of new growth and a key driver of the development of the services sector.

A capital market master plan

Tourism is the most successful services sector

Services sector continues to expand

32 Malaysia


The external sector

Trade in goods

International trade has played a crucial role in Malaysia�s economic develop-ment, starting with the export of raw materials in the 19th century. In the 1970s industrial development was mainly based on export-oriented manufacturing and on imported inputs. Many of the 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. Demand for imported capital goods did not return to its pre-crisis level, as private investment remained relatively low. In 2006 the trade surplus (customs basis) rose to a record M$134.6bn (US$36.7bn) from M$125.6bn in 2005.

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 15.5% in 2006. Minerals accounted for 9.3% and agricultural commodities for 5%. The govern-ment�s intention to make agriculture an important engine of economic growth, if successful, will 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 80.3% of total exports in 2006, compared with just 20% in the late 1970s. Exports of electronic and electrical goods accounted for 51% of manufactured goods exports in 2006, 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 government is encouraging manu-facturers 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 the IMF, the US remains Malaysia!s largest export market, absorbing 18.8% of total exports in 2006. In value terms, exports to the US increased to US$30.2bn in 2006 from US$27.8bn in 2005. The US is also Malaysia�s second-largest source of imports. The importance of Singapore is declining as trade with other Asian countries intensifies.

Malaysia�s main trading partners

The global market determines primary export earnings

Export growth is matched by rising imports

Manufactured goods form the bulk of exports

Malaysia 33


Main trading partners, 2006 Exports to: US$ bn Imports from: US$ bnUS 30.2 Japan 17.3Singapore 24.7 US 16.4Japan 14.2 China 15.9China 11.6 Singapore 15.3

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

Trade liberalisation and regional economic integration will be highly significant for economic growth in next decade. China and the Association of South-East Asian Nations (ASEAN) are negotiating the final part of a free-trade agreement (FTA). An early agreement covering trade in goods came into force in July 2005, while an agreement on services was signed in January 2007. Talks are currently under way to finalise an agreement on investment. Malaysia is likely to conclude an FTA with the US in 2008. 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, 2006 (M$ bn)

Goods: exports of goods 589.7

Goods: imports of goods 455.2Trade balance 134.6Invisibles: credits 80.0

Invisibles: debits -86.9Invisibles balance -6.9Net transfers -16.9Current-account balance 93.4

Source: Bank of Malaysia, Monthly Statistical Bulletin.

Since the start of the decade Malaysia has consistently posted large deficits on the services account. The two largest categories of net payments are both by-products of the country�s successful industrialisation drive: a deficit on invest-ment 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. However, the other major components of the services account, tourism and other services, have showed substantial improvement during 2006-07. The latest trade data suggest that structural changes are taking place in the economy, in which a shift is occurring out of manufacturing and into services.

The deficit on the income account, which consists mainly of investment income flows, narrowed from M$23.9bn (US$6.5bn) in 2005 to M$17.4bn in 2006. The improvement reflects soaring investment earnings of Malaysian entities over-seas. Malaysia!s high current-account surpluses are enabling corporations and the government to build up large capital and portfolio assets overseas. Bank Negara Malaysia (BNM, the central bank) treats all profits on the overseas equity of Malaysian FDI ventures as if they are payments across the exchanges,

Trade liberalisation will be a major influence

The deficit on the invisibles balance is shrinking

The investment income deficit is shrinking

34 Malaysia


even if they are retained and reinvested. When they are reinvested, such payments are then treated as capital inflows.

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 60%; it declined to 46.9% of GDP in 2000, but rose again in subsequent years, largely because of higher federal government debt. Fiscal tightening, firm economic growth and an expanded, more liquid domestic bond market reduced the external debt to GDP ratio to 37.2% by end-2005, down from 47.9% in 2002.

Malaysia has been careful to avoid becoming dependent on external debt, and this determination has intensified since the Asian financial crisis. The govern-ment�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 government en-courages companies to raise medium- and long-term loans and avoid short-term debt. In 2005, 76% of external debt was medium- and long-term debt. Short-term debt is matched against international reserves. National sources indicate that by end-2005 short-term debt was equivalent to 15% of international reserves and represented only 24% of total external debt. In 2005 the bulk (around 70%) of Malaysia�s total external debt was denominated in US dollars; 20% was denominated in yen and just 5% in euro.

The share of government external borrowing increased rapidly after the 1997-98 crisis to finance the expansionary fiscal programme, but by end-2006 it had fallen to 13.5% of total external debt from 17.3% at end-2004, as the government continued to pursue a tighter fiscal policy. Federal government external debt outstanding fell to M$25bn at end-2006, down from M$37.3bn at end-2004, according to government sources. The main funding source for the govern-ment�s financing requirement is the domestic capital market.

Foreign reserves and the exchange rate

Malaysia!s foreign reserves have tripled in size since the end of 2002. The acceleration in the build-up of foreign reserves is the result of a number of factors. It reflects record levels of trade and current-account surpluses as well as FDI inflows and especially inflows from portfolio funds. Net reserves stood at US$98.2bn at end-October 2007, compared with US$33.4bn at end-2002.

Most external debt is medium- and long-term

Malaysia 35


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. By adopting a managed float against a trade-weighted basket of currencies, the BNM is, in effect, returning to the currency management that existed between 1971 and September 1998. The ringgit has appreciated steadily against a generally weak US dollar since July 2005 to average M$3.48:US$1 in October 2007. Although little remains of the foreign-exchange controls, imposed during the 1997-98 Asian financial crisis, one last major restriction remains in place"the ban on ringgit trading overseas.

The ringgit moves to a managed float

36 Malaysia


Regional overview

Membership of organisations

The Association of South-East Asian Nations (ASEAN) 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 be held at least every three years. 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 failed to deliver in most areas, with the exception of tariff reform. Early hopes that ASEAN could engineer a regional economic development 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 members were permitted to exclude "sensitive" sectors, a let-out clause that a subsequent agreement in 1987 curtailed only slightly.

Plans for a proper ASEAN Free-Trade Area (AFTA) were unveiled in 1992, with the aim of implementing it 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 range of products, was launched in 1994. During the mid-1990s the timescale for implementing the programme was steadily tightened, with the aim of reducing tariffs on most goods to below 5% by 2000. A limited AFTA, between the six earliest members of ASEAN and involving a reduction of tariffs on intra-ASEAN trade to between zero and 5%, came into operation on January 1st 2002. (Countries joining more recently have been allowed additional time.) The momentum for change has been maintained in recent years, and an ASEAN finance ministers! meeting in September 2004 agreed to abolish tariffs in 11 industrial sectors by 2012.

Before the recent acceleration in tariff reform, ASEAN!s slow progress towards AFTA had encouraged some of its members, notably Singapore and Thailand, to opt instead for bilateral trade pacts. But ASEAN!s hopes of further multilateral deals have not been extinguished. In December 2004 ASEAN and China signed a major trade deal, which aims to eliminate most tariffs on trade between ASEAN and China by 2010 (2015 for the less developed members of ASEAN). Tariffs will not go completely: countries will be able to designate a number of sectors as sensitive, and the greatest liberalisation is therefore likely to occur in areas where Chinese and ASEAN trade is complementary. In 2006 a similar

Association of South-East Asian Nations (ASEAN)

Malaysia 37


trade agreement was signed between ASEAN and South Korea, but Thailand refused to participate owing to the fact that South Korea opted to exclude rice from the deal.

The 1997-98 regional financial crisis exposed in a brutal fashion ASEAN!s failings in other areas. The organisation was unable to arrest the regional currency devaluations or alleviate the resulting economic hardship. Unfolding events in Indonesia then moved the focus of attention to the organisation!s security plans. ASEAN countries! commitment to the principle of non-interference in the internal affairs of other member states complicated the response to the crisis in Timor-Leste in 1999.

The non-interference principle has until recently also enabled the ruling military junta in Myanmar to escape strong criticism by the governments of other ASEAN countries. However, in July 2005 Myanmar gave in to international and regional pressure and agreed to forgo its turn to chair the association, thus sparing ASEAN embarrassment in its relations with the US and the EU. Moreover, since the end of 2005 ASEAN�s relations with the Burmese junta have become increasingly tense. In March 2006 a special ASEAN envoy to Myanmar was forbidden to visit the opposition leader, Aung San Suu Kyi, who is currently under house-arrest, and ASEAN leaders have become more vocal in their criticism of Myanmar!s glacial progress on political reform. Myanmar is increasingly seen as a serious impediment to ASEAN!s attempts to raise its profile and improve its credibility. In January 2007, at the most recent ASEAN summit, held in the Philippines, leaders of the association!s ten member countries endorsed recommendations for a charter that would give ASEAN the authority to enforce commitments and penalise members for misbehaviour. Member states pledged to complete a draft charter by November 2007. If this is implemented, the long-standing principle of non-interference in member countries! internal affairs will cease to apply.

38 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, Ninth Malaysia Five-Year Plan (2006-2010)

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)

C Abraham, Speaking Out: Insights into Contemporary Malaysian Issues, Utusan Publications, Kuala Lumpur, 2006

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

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

Select bibliography and websites

International statistical sources

Malaysia 39


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

Government official portal: www.gov.my

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 Treasury: www.treasury.gov.my

Reference tables Population 2002 2003 2004 2005 2006Population (m; mid-year) 24.5 25.0 25.6 26.1 26.6Population density (per sq km) 74 76 77 79 n/a

Crude birth rate (per 1,000 population) 22.2 20.6 19.1 19.4 19.0Crude death rate (per 1,000 population) 4.6 4.7 4.6 4.5 4.5Infant mortality (per 1,000 live births) 6.6 6.3 6.5 6.3 6.2

Sources: Ministry of Finance, Economic Reports; Department of Statistics, Monthly Statistical Bulletin; Yearbook of Statistics 2006.

Labour force (�000)

2002 2003 2004 2005 2006Total employed 9,840 10,181 10,546 10,893 11,159 Agriculture, forestry & fishing 1,406 1,403 1,400 1,401 1,392 Mining 42 43 43 43 43 Manufacturing 2,680 2,858 3,065 3,133 3,244 Finance, insurance & business services 607 652 677 734 771 Transport & communications 509 528 550 631 646 Government services 995 1,026 1,037 1,053 1,064 Other servicesa 2,810 2,880 2,975 1,118 1,155 Construction 782 792 798 760 755Unemployed 359 385 380 397 386

Total labour force 10,199 10,566 10,925 11,290 11,545

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

Source: Ministry of Finance, Economic Reports.

40 Malaysia


Transport statistics 2001 2002 2003 2004 2005Rail No. of passenger journeys (�000) 3,985 3,863 3,701 3,993 4,024Passenger train journeys (bn km) 1.20 1.14 1.03 1.15 1.19Goods traffic (�000 tonnes) 4,168 3,774 4,622 5,016 4,123Goods train journeys (bn km) 1.09 1.07 0.87 1.02 1.17Length of track (km) 1,949 1,949 1,949 1,949 1,949

Road Motor vehicles registered (�000) 11,303 12,022 12,819 13,765 14,816 Passenger cars 4,558 5,001 5,429 5,912 6,473 Motorcycles 5,609 5,843 6,165 6,572 7,008 Goods vehicles 689.7 713.1 740.5 772.2 805.2 Other vehicles 329.2 345.6 361.3 377.8 393.4

Sea Cargo loaded & discharged (�000 tonnes)a n/a n/a 161,435 175,021 n/a Loaded n/a n/a 69,044 77,577 n/a Discharged n/a n/a 92,391 97,444 n/a

a Peninsular Malaysia only.

Source: Department of Statistics, Yearbook of Statistics 2006.

Energy production 2002 2003 2004 2005 2006Crude oil (�000 barrels/day)a 698 738 762 704 667Natural gas (m standard cu ft) 4,676 5,013 5,196 5,797 5,774Electricity (m kwh) 75,328 84,022 90,661 96,214 n/a

a Including condensates.

Sources: Department of Statistics, Yearbook of Statistics 2006; Bank Negara Malaysia, Statistical Bulletin.

Malaysia 41


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

2002 2003 2004 2005 2006

General government

Revenuea 83.5 92.6 99.4 106.3 123.5

Operating expenditure 68.7 75.2 91.3 97.7 107.7

Current surplus 14.8 17.4 8.1 8.6 15.9

Non-financial public enterprises

Revenue 126.6 155.9 162.5 243.5 270.9

Current expenditure 81.0 99.4 110.7 185.6 210.5

Retained income 45.6 56.4 51.8 57.9 60.4

Public-sector current surplus 66.6 64.1 75.3 73.3 104.5

Development expenditure 69.1 83.4 56.7 64.5 84.4

General government 36.8 43.2 32.1 30.1 38.4

Non-financial public enterprises 32.3 40.2 24.6 34.4 46.0

Overall balance -2.5 -19.3 18.6 8.9 20.2

% of GDP -0.7 -4.9 4.1 1.8 3.7

Memorandum item

GDP at current market prices 383.2 418.8 474.0 519.5 572.6

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

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

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

2002 2003 2004 2005 2006

Money (M1) incl others 87.6 101.6 113.0 122.9 137.8

% change, year on year 11.8 16.0 11.2 8.7 12.2

Quasi-money 408.2 434.4 485.9 514.0 572.3

Money (M2) 495.8 536.0 598.9 636.9 710.1


Source: IMF, International Financial Statistics.

Interest rates (%; period averages unless otherwise indicated)

2002 2003 2004 2005 2006

Lending interest rate 6.5 6.1 6.0 6.1 6.6

Deposit interest rate 3.2 3.0 3.0 3.0 3.2

Money-market interest rate 2.9 2.9 2.8 2.9 3.3

Long-term bond yield 4.3 4.1 5.0 4.3 4.3


42 Malaysia


Gross domestic product (market prices)

2002 2003 2004 2005 2006

Total (US$ m) At current prices 100,846 110,202 124,750 137,163 156,087

Total (M$ bn) At current prices 383.2 418.8 474.0 519.5 572.6

At constant (2000) prices 377.6 399.4 426.5 447.8 474.4


Per head (M$) At current prices 15,622 16,717 18,532 19,879 21,492

At constant (2000) prices 15,392 15,945 16,673 17,138 17,808


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

Real gross domestic product by expenditure (M$ bn at constant 2000 prices where series are indicated; otherwise % change year on year)

2002 2003 2004 2005 2006

Private consumption 166.9 180.4 198.2 215.4 230.6

3.9 8.1 9.8 8.7 7.1

Government consumption 46.9 50.9 54.8 58.3 61.3

11.9 8.6 7.6 6.4 5.0

Gross fixed investment 88.8 91.3 94.6 99.3 107.1

0.6 2.8 3.6 5.0 7.9

Stockbuilding 4.9 1.0 4.1 -1.7 -1.1

1.8a -1.0a 0.8 a -1.3a 0.1a

Exports of goods & services 419.4 441.0 511.8 552.1 592.9

5.4 5.1 16.1 7.9 7.4

Imports of goods & services 349.4 365.2 436.9 475.7 516.4

6.2 4.5 19.6 8.9 8.6

GDP 377.6 399.4 426.5 447.8 474.4

5.4 5.8 6.8 5.0 5.9

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

Source: Department of Statistics.

Malaysia 43


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

2002 2003 2004 2005 2006Agriculture 34.4 39.0 43.9 43.4 49.9 % of total 8.9 9.3 9.3 8.4 8.7Mining 34.2 41.9 56.9 73.8 84.5 % of total 8.9 10.0 12.0 14.1 14.8Manufacturing 112.1 125.3 144.0 154.7 170.6 % of total 29.3 29.9 30.4 29.8 29.8Construction 14.7 15.2 15.5 15.4 15.4 % of total 3.8 3.6 3.3 3.0 2.7

Services 198.6 208.2 224.9 243.0 264.5 % of total 51.8 49.7 47.4 46.8 46.2GDPa 383.2 418.8 474.0 519.5 572.6

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


Prices and earnings (% change, year on year)

2002 2003 2004 2005 2006

Consumer prices (av) 1.8 1.0 1.5 3.0 3.6

Average nominal wages 2.0 2.0 4.0 5.0 4.0

Average real wages 0.2 1.0 2.5 1.9 0.4

Unit labour costs -2.7 -0.3 -0.2 1.7 5.0

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

Minerals production 2002 2003 2004 2005 2006Crude oil (�000 barrels/day) 698 738 762 704 667Natural gas (m standard cu ft) 4,674 5,013 5,196 5,797 5,774

Bauxite (�000 tonnes) 40 6 2 n/a n/aTin (�000 tonnes) 4 3 3 3 2

Iron ore (�000 tonnes) 404 597 664 n/a n/a

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

Statistics, Yearbook of Statistics 2006.

44 Malaysia


Manufacturing production (% change, year on year; 2000=100)

2002 2003 2004 2005 2006Chemicals 6.2 17.7 15.1 11.0 3.2Electrical products 3.0 0.9 5.5 -0.8 -2.9

Electronic products 13.0 22.6 25.6 5.2 11.8Off-estate processing 4.8 5.6 2.7 8.1 5.7Food 8.1 5.9 2.0 7.6 6.7

Non-metallic mineral products 5.7 6.8 -2.6 2.0 3.3Wood products -6.4 0.9 12.8 1.5 3.8

Textiles -4.3 -1.6 -4.8 3.4 6.1Tobacco products -9.9 3.9 2.9 -3.0 -4.7Transport equipment 8.0 -3.4 11.7 8.5 -1.5

Basic metals 3.1 6.6 9.7 -5.3 3.0Rubber products 3.7 17.4 8.1 -0.4 7.2

Metal products 10.0 6.3 11.4 -4.9 26.5Petroleum products -2.9 9.5 9.8 10.8 13.6

Beverages -9.8 22.4 1.4 6.1 -5.3All manufacturing industries 5.2 10.9 12.8 5.1 7.5

Source: Bank Negara Malaysia, Monthly Economic Bulletin.

Banking statistics (M$ m; end-period)

2002 2003 2004 2005 2006Domestic commercial banks Assets 426,224 470,256 576,986 684,921 805,727Deposits 299,484 328,213 429,159 506,216 608,017Loans & advances 252,263 262,694 345,983 416,174 462,260Foreign commercial banks Assets 137,030 159,719 184,269 199,678 222,086Deposits 88,922 104,795 121,771 138,675 160,068Loans & advances 85,731 92,916 101,470 108,545 118,096


Stockmarket indicators (Kuala Lumpur Stock Exchange)

2002 2003 2004 2005 2006KLSE composite market index

(Apr 4th 1986=100) 646 794 907 900 1,096Value of shares traded (M$ bn) 117.0 183.9 215.6 177.3 250.6Volume of shares traded (bn) 55.6 112.2 107.6 102.3 197.5

Market capitalisation (M$ bn) 481.6 640.3 722.0 695 848.7No. of companies listed 865 906 963 1,021 1,027

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

Malaysia 45


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

2002 2003 2004 2005 2006

Exports fob Electronics 40,628 44,048 49,633 54,943 60,414

Electrical machinery 14,408 14,597 18,012 19,669 21,691

Chemicals & chemical products 4,549 5,578 7,307 7,841 8,998

Palm oil 3,905 5,312 5,291 5,023 5,945

Total exports incl others 94,135 104,969 126,511 140,979 160,676

Imports cif Machinery 9,474 9,500 11,725 13,980 14,200

Transport equipment 4,868 4,500 4,950 6,500 6,689

Metal products 4,737 4,750 5,025 5,200 5,640

Food 2,421 2,550 2,810 3,100 3,350

Total imports incl others 79,841 83,618 105,283 114,625 131,153

Source: Ministry of International Trade and Industry.

Main trading partners (% of total)

2002 2003 2004 2005 2006

Exports fob to: US 20.0 19.6 18.8 19.7 18.8

Singapore 17.0 15.7 15.0 15.6 15.4

Japan 11.2 10.7 10.1 9.3 8.9

China 5.6 6.5 6.7 6.6 7.2

Imports cif from: Japan 17.7 17.1 15.9 14.5 13.2

US 16.4 15.4 14.5 12.9 12.5

China 7.7 8.7 9.8 11.5 12.1

Singapore 12.0 11.7 11.1 11.7 11.7

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

Balance of payments, IMF series (US$ m)

2002 2003 2004 2005 2006

Goods: exports fob 93,383 104,999 126,817 141,808 160,842

Goods: imports fob -75,248 -79,289 -99,244 -108,653 -124,144

Trade balance 18,135 25,711 27,572 33,156 36,698

Services: credit 14,878 13,578 17,111 19,576 21,831

Services: debit -16,448 -17,532 -19,269 -21,956 -23,720

Income: credit 2,139.0 3,448.0 4,329.0 5,373.0 8,463.0

Income: debit -8,734.0 -9,376.0 -10,751.0 -11,691.0 -13,192.0

Current transfers: credit 661.0 508.0 422.0 299.0 313.0

Current transfers: debit -3,442.0 -2,955.0 -4,335.0 -4,776.0 -4,904.0

Current-account balance 7,190.0 13,381.0 15,079.0 19,980.0 25,488.0

Direct investment in Malaysia 3,203.0 2,473.0 4,624.0 3,966.0 6,064.0

Direct investment abroad -1,905.0 -1,369.0 -2,061.0 -2,972.0 -6,043.0

Inward portfolio investment (incl bonds) 3,002.3 2,081.0 12,807.5 -220.0 7,793.0

Outward portfolio investment -563.0 -196.0 -287.0 -715.0 -2,123.0

46 Malaysia


Balance of payments, IMF series (US$ m)

2002 2003 2004 2005 2006

Other investment assets -4,597.0 -4,502.0 -10,756.0 -4,877.0 -8,531.0

Other investment liabilities 1,868.0 -895.0 4,602.0 -2,164.0 -6,883.0

Financial balance 1,008.3 -2,408.0 8,929.5 -6,982.0 -9,723.0

Net errors & omissions -391.0 -4.0 1,880.0 -6,555.0 -6,731.0

Overall balance 3,657.0 10,181.0 22,050.0 3,620.0 6,864.0

Financing (� indicates inflow) Movement of reserves -3,844.0 -10,466.0 -22,062.0 -3,964.0 -12,285.0

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)

2001 2002 2003 2004 2005

Public medium- & long-term 24,156 26,415 25,400 25,570 22,449

Private medium- & long-term 14,181 13,488 14,532 15,153 16,356

Total medium- & long-term debt 38,337 39,903 39,932 40,724 38,805

Official creditors 5,877 5,821 6,193 6,976 6,542

Bilateral 4,642 4,637 5,011 5,884 5,606

Multilateral 1,236 1,184 1,182 1,092 936

Private creditors 32,460 34,082 33,739 33,748 32,263

Short-term debt 6,752 8,369 8,625 11,432 12,176

Interest arrears 0 0 0 0 0

Use of IMF credit 0 0 0 0 0

Total external debt 45,089 48,272 48,557 52,156 50,981

Principal repayments 4,091 5,973 7,409 7,102 7,192

Interest payments 2,140 1,965 2,184 2,089 2,197

Short-term debt 195 235 275 306 325

Total debt service 6,231 7,939 9,593 9,191 9,389

Ratios (%) Total external debt/GDP 48.6 47.9 44.1 41.8 37.2

Debt-service ratio, paida 5.9 7.1 7.8 6.2 5.6

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Official development assistance (US$ m)

2001 2002 2003 2004 2005Bilateral 440.5 3,594.0 1,193.2 2,003.6 730.4 Japan 1,220.3 609.9 462.7 -189.5 -465.2 UK -975.5 1,030.0 630.7 664.1 -515.5 US -201.4 2,266.2 819.6 216.4 923.7Multilateral -39.5 -91.5 -55.2 -110.0 -124.4

Total incl others 410.1 3,501.0 1,142.2 1,917.9 630.1 Grants 75.7 78.3 75.9 78.3 73.5

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

Malaysia 47


Foreign reserves (US$ m; end-period)

2002 2003 2004 2005 2006

Total reserves incl gold 33,417 43,883 65,945 69,909 82,194

Total international reserves excl gold 33,361 43,822 65,881 69,850 82,132

Gold, national valuation 56 61 64 59 62


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

2002 2003 2004 2005 2006

US$ 3.80 3.80 3.80 3.79 3.67

£ 5.70 6.20 6.96 6.89 6.75

� 3.59 4.30 4.72 4.72 4.61

Bt 0.088 0.092 0.094 0.094 0.097

Rmb 0.459 0.459 0.459 0.462 0.460

¥ 0.030 0.033 0.035 0.034 0.032


Editors: Fung Siu (editor); Gerard Walsh (consulting editor) Editorial closing date: November 12th 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected]

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