CIA’s Outlook on Malaysia 2011- 2015

ARCHIVES 2011

By MT Webmaster On Jan 6, 2011

The March 2008 general election revealed that UMNO could no longer count on the strong support of the majority of Malays. However, the main opposition Pakatan Rakyat (PR) alliance will not be able to offer a sufficiently credible, stable alternative to the BN. Political intrigues within UMNO itself therefore constitute the biggest threat to political stability in Malaysia.

Country Report Malaysia – Main report: January 1st 2011

Highlights

Outlook for 2011-15

The ruling Barisan Nasional (BN) coalition is expected to maintain its hold on power in the coming five years, securing a victory at the next election.
The Economist Intelligence Unit expects the BN, which is controlled by its largest component party, the United Malays National Organisation (UMNO), to call an election as early as 2011, two years before its current term ends.
Fiscal policy will be tightened gradually during the forecast period (2011-15) as the government strives to balance its budget by 2020. Monetary policy will also be tightened as domestic demand strengthens.
The economy is expected to resume a fairly stable growth path in 2011-15, following a mild recession in 2009 and a strong rebound in 2010. Real GDP growth will average 5% a year in 2011-15.
The annual rate of inflation is expected to average 3.4% in 2011-15. Government efforts to rationalise the country’s extensive subsidy schemes will exert an upward influence on prices.
Despite the relatively rapid pace of growth in merchandise imports compared with that in exports, Malaysia will continue to run substantial trade and current-account surpluses in 2011-15.

Monthly review

UMNO announced in November that it had postponed internal party elections for 18 months. The decision intensified speculation that a snap general election could be called in 2011.
In December federal legislators voted to suspend from parliament Anwar Ibrahim, the de facto head of the opposition Pakatan Rakyat alliance, for six months for misleading the House of Representatives (the lower house).
The government trimmed sugar and fuel price subsidies further in December. The reduction is part of the government’s rationalisation programme, which aims at a gradual reduction of subsidies on a range of goods and services.
In December the government unveiled the second part of an Economic Transformation Programme that it hopes will transform the country into a high-income nation by 2020.
The successful initial public offering of a stake in a subsidiary of the state-owned energy company, Petronas, in November has triggered speculation that Petronas itself could be brought to the market in the near future.
Industrial production growth has remained weak, standing at just 3% year on year in October. The slow rate of expansion has been mainly the result of a decline in mining output.

Outlook for 2011-15: Political stability

Political stability in Malaysia will come under moderate threat during the next five years as the Barisan Nasional (BN) coalition, which is tightly controlled by its largest component party, the United Malays National Organisation (UMNO), faces greater challenges to its grip on power. The March 2008 general election revealed that UMNO could no longer count on the strong support of the majority of Malays. However, the main opposition Pakatan Rakyat (PR) alliance will not be able to offer a sufficiently credible, stable alternative to the BN. Political intrigues within UMNO itself therefore constitute the biggest threat to political stability in Malaysia.

Since March 2008 the ability to make or break the BN has been in the hands of political parties from Sabah and Sarawak. BN legislators from the two states, which are located on the island of Borneo, number 52, thus making up over one-third of the BN’s total of 137 members of parliament (MPs). The BN’s Borneo power base is likely to be severely tested at the Sarawak state elections, which must be held by July 2011. Unresolved issues, such as illegal foreign immigration to Sabah, may cause the BN parties based in Borneo, or individual MPs from the island, to defect to the opposition or use the threat to do so to secure greater influence within the coalition in the run-up to the next general election. Moreover, the Borneo-based parties will become even more influential if MPs from the island retain their seats at the next election and a substantial number of BN legislators based in peninsular Malaysia lose theirs.

Although voters in the rural heartland of peninsular Malaysia continue to support UMNO, a significant number of better-educated, liberal middle-class Malays have deserted the ruling party in favour of the opposition. This shift in support away from UMNO could be further encouraged by the greater availability of uncensored information on Internet news sites and blogs. Given the Malaysian government’s heavy censorship of the print media and broadcast services, the Internet will continue to be the main arena for the exposure of alleged government corruption and the political intrigues of individual MPs. Some conservative Malays have also voiced concerns over the government’s plan to reform policies that favour bumiputera (ethnic Malays and other indigenous peoples), believing that the special rights accorded to them in the constitution may be rescinded.

UMNO’s internal leadership elections, which have been postponed until 2012, could be a source of instability, particularly if the party fails to secure a resounding victory in the snap general election that may well be called in 2011. Under such circumstances there would be even greater resistance to economic reforms, undermining the credibility of the prime minister, Najib Razak, and potentially placing his position as president of UMNO—and hence his role as head of government—at risk. The most likely contender to become UMNO’s next leader is the deputy prime minister, Muhyiddin Yassin.

The leader of the PR, Anwar Ibrahim, a former deputy prime minister, is likely to be convicted on a charge of sodomy in the coming months. Mr Anwar claims that the case against him is politically motivated. Without him, the ties that unite the disparate parties making up the PR—the reformist, multicultural Parti Keadilan Rakyat (PKR), the conservative, Islamist Parti Islam se-Malaysia (PAS) and the left-of-centre, predominantly ethnic-Chinese Democratic Action Party (DAP)—are likely to fray, while the process of choosing a new PR spokesman could deepen divisions within Mr Anwar’s PKR party and also between the opposition coalition’s members. Yet the likely sentencing of Mr Anwar to a prison term could also facilitate a realignment of the opposition and elements of the BN, thus offering an alternative to the current political groupings.

Outlook for 2011-15: Election watch

A general election has to be held every five years, and the next one must take place before April 2013. However, the Economist Intelligence Unit believes that a poll will be held sooner. Traditionally, the BN has preferred to call elections about a year before the end of its term of office, and this makes early 2012 a possible date for the next election. However, developments in recent months, such as the postponement of internal UMNO elections, suggest that BN may consider holding a snap poll in 2011. We still believe that Mr Najib will set a general election date after the Sarawak state election, which must be held by July 2011 and is the main event on the political calendar before the next national poll. The results of the Sarawak election will provide a good indication of the level of public support for the government and its reform plans. Recent by-elections suggest that the electorate—and especially non-Malay voters—have become much more volatile. The results of two by-elections in November 2010 point to a slight shift in non-Malay sentiment in favour of the BN, suggesting that the government’s plans to reform policies favouring bumiputera has increased its appeal among ethnic minorities.

Outlook for 2011-15: International relations

Under the leadership of the previous prime minister, Abdullah Badawi, and that of Mr Najib, economic links with Singapore have become closer, and we expect economic ties to strengthen further in the next five years. There is no longer constant bickering over minor issues, although a degree of racially tinged wariness persists. Solutions to outstanding disagreements—especially over water supplied to Singapore by Malaysia—are likely to be reached in the forecast period (2011-15). China will become an increasingly important trading partner in the next five years. The Malaysian government’s apprehensiveness about China’s rise and growing economic influence is mixed with ambivalence towards ethnic Chinese among its own population and a need to attract investment. As Malaysia’s economic dependence on China grows, uneasiness in Malaysia about Chinese power in South-east Asia is expected to increase.

Outlook for 2011-15: Policy trends

The policy agenda during the forecast period will be centred on a host of initiatives aimed at raising income levels and achieving the government’s goal of turning Malaysia into a high-income nation by 2020. Under the Government Transformation Programme, the BN has outlined six “national key result areas”, which include tackling corruption, improving education and upgrading basic rural infrastructure. In addition, a recently unveiled Economic Transformation Programme identifies eight strategic reform initiatives, including reinvigorating private investment, and 12 national key economic areas (NKEAs) that are to be prioritised. The government considers the NKEAs, which include tourism and palm oil cultivation, to be the sectors with the greatest potential to boost overall economic growth. The Tenth Malaysia Plan (10MP), a medium-term spending plan for 2011 15, will support the implementation of these programmes. Specific issues on the reform agenda for the next few years include the phasing out of price controls and subsidies, in a process that is widely considered to be necessary to create a competitive domestic economy. The government will also push ahead with changes to the bumiputera positive-discrimination policies. It has already relaxed a requirement that obliged companies to offer minority equity stakes to bumiputera. It hopes that further reforms will attract greater inflows of foreign direct investment, as it believes that such investment has the potential to be a major engine of growth in the next five years. However, the government is unlikely to dismantle affirmative-action policies altogether for fear of alienating its Malay support base.

Outlook for 2011-15: Fiscal policy

The government will make only slow progress in bringing its finances close to balance during the next five years. In its budget plans for 2011 the government is targeting a deficit equivalent to 5.4% of GDP. This would represent only a small improvement compared with the government’s estimate of a shortfall of 5.6% of GDP in 2010. We expect the government to be fairly successful in adhering to its budget plans for 2011, which feature an increase in spending of 2.8% compared with estimated total expenditure in 2010. Although it will rein in subsidies, the government will continue to spend heavily on supplies and services in 2011. Debt-servicing costs will also rise and are expected to account for around 10% of total operating expenditure in 2011. The budget is forecast to remain in deficit in 2012-15. However, assuming that the government reduces operating expenditure and has some success in increasing revenue by expanding the tax base, the deficit will shrink to an average of 4.3% of GDP during that period. A widening of the tax base is expected to be achieved through the introduction of a goods and services tax (GST), although implementation of the tax is likely to be hampered by opposition from households and businesses. Further moves to alter the subsidy structure could also prove unpopular.

Outlook for 2011-15: Monetary policy

Bank Negara Malaysia (BNM, the central bank) is expected to continue to make incremental changes to its main interest rate, the overnight policy rate (OPR), during the early part of the forecast period as it proceeds with the normalisation of monetary policy. BNM has raised the OPR three times since March 2010, by a total of 75 basis points, bringing the rate up to 2.75%, after having cut it to a record low in response to the dramatic downturn in the Malaysian economy that occurred in 2009. However, the recent sharp appreciation of the local currency, the ringgit, and signs of slower economic growth suggest that further rises in official interest rates in the next few months are unlikely. BMN does not expect inflation to rise to problematic levels, believing that it will remain moderate in 2011 as strengthening domestic demand is accompanied by only a gradual acceleration in the rate of price increases. In 2011 we do not expect the OPR to exceed the high of 3.5% at which it stood during 2007 and much of 2008. But a quickening in the pace of domestic demand growth from 2012 will prompt BNM to raise the OPR above this level during the remainder of the forecast period to contain inflationary pressures.

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