BERI - Business Environment Risk Intelligence

v R Factor ratings are improving with a record high current account surplus in 2003-2004. Foreign exchange reserves were US$51.955 billion on 30 June, up US$8.489 billion in 5.5 months. The banks had US$11.425 billion in foreign currency deposits at end-March, up US$2.057 billion during the three months. During January-May 2004 merchandise exports were US$48.989 billion, up 19.2% from the 2003 period. Imports increased 25.8% to US$40.484 billion because of the fixed rate with the weak US$. The merchandise trade surplus was US$8.505 billion (US$8.852 billion in the 2003 period. During the five months, crude oil, refined petroleum, and LNG receipts jumped 16.2% to US$3.942 billion. With an invisibles deficit of US$5.026 billion, the current account surplus was US$3. 479 billion during January-May.

v The central government’s total debt was RM194.259 billion at end-March, or 44.9% of GDP. The foreign debt component was lower at RM37.276 billion, or 19.2% of the total. The capital adequacy ratio of commercial banks was an acceptable 13.1% at the close of March. Lending to private borrowers increased 5.7% during the twelve months ending in March. The BNM intervention rate rose from 2.5% to 2.7% on 26 April. The prime lending rate is 6.04% in early July, and the three-month interbank rate was slightly higher at 2.91% on 4 July. The ringgit is currently about 19.25% undervalued.

v Political risk ratings are recovering. The credibility of Prime Minister Abdullah Ahmad Badawi has grown since the late March parliamentary election. The Barisan Nasional (National Front) won 198 of 219 seats in the Dewan Rakyat (House of Representatives), compared to 148 of 193 seats in 1999. The Islamic Party of Malaysia (PAS) dropped from 27 to seven. The Democratic Action Party moved from ten to twelve members. The victories by UMNO candidates under Mr. Badawi’s leadership gave the Prime Minister total control of the party and its Supreme Council. His candidates are assured of being elected in the September UMNO elections. In July Foreign Minister Datuk Seri Syed Hamid Alber gave an early warning to such potential candidates as veteran Tengku Razaleigh Hamzah not to oppose the Badawi slate. Under the National Integrity Plan, four ministries (Women, Family and Community Development, Housing and Local Government, Higher Education, and Domestic Trade and Consumer Affairs) have been instructed to establish programs to improve their public image. The government is considering a regulation to make developers complete houses before they sell them.

v Operating conditions have stabilized. The economy expanded 7.6% in the first quarter from the 2003 period, and the forecast for this year is now 6.5%. Manufacturing jumped 12.5% during January-March year-on-year, and industrial production was 14.0% higher in April than a year earlier because export output benefits from the fixed rate to the weakened US$. Average monthly pay in manufacturing was RM1639.4 in April. The unemployment rate was up sharply to 3.8% in the first quarter from 3.2% in the fourth quarter. Consumer price inflation was 1.2% in May from that 2003 month. Iran has invited Malaysian companies to invest under its five-year development plan, particularly in oil and gas.

MALAYSIA’S ECONOMIC AND FINANCIAL INFORMATION

(US$ Millions unless otherwise indicated)

2001 2002 2003E 2004F 2005F

Population (millions, 2.05%/year) 23.49 23.97 24.46 24.96 25.47

Gross Fixed Capital Formation, % of GDP 24.9 23.2 23.0 23.5 24.0

Production–Industrial (% change) -4.1 4.6 9.3 10.5 6.0

Economic Growth (% change) 0.4 -0.7 10.4 6.5 6.0

Consumer Price Index (% change) 1.4 1.9 1.0 1.2 1.5

Central Govt. Budget Deficit (% of GDP) 3.3 4.8 4.1 3.4 2.9

Private and Public Foreign Debt 41323 41127 40473 39850 39250

Debt Service 8833 8756 8589 8625 8425

Foreign Exchange Earned 104819 111061 118531 123750 129350

Current Account Balance 7287 7190 12964 10150 7250

Foreign Exchange Reserves (year-end) 29585 33280 43058 47250 51150

Average Exchange Rate: US$1= ringgits 3.8000 3.8000 3.8000 3.8000 3.8000

Malaysia (RM) 3 August 2004: 3.8069

Note: The capital assets exchange rate is US$1=RM4.75

Profile of the Economy: Malaysia had experienced impressive growth in manufacturing before the 1998 depression, and it accounted for 30.7% of GDP in 2002. Electronic products are its leading export. However, six primary commodities still account for 45% of its export earnings. Malaysia is the world’s largest producer of rubber and palm oil and is among the top producers of timber; in 2002 petroleum exports were US$3.052 billion (US$2.195 billion in 1998), and LNG sales were US$2.614 billion (US$1.015 billion in 1998). Unemployment persists in rural areas, and labor shortages were again becoming a factor in industrialized zones until the decline in demand began in the second half of 2001.

Governmental System: The country is a federation of thirteen states, the Federal Territory of Kuala Lumpur, and the Federal Territory of Labuan. It is a parliamentary democracy under a constitutional monarch, who is elected for a five-year term by the thirteen sultans. The Dewan Negara (Senate) has 70 members, 30 elected by the states and territories and 40 appointed by the head of state. The Dewan Rakyat (House of Representatives) has 192 members serving five-year terms. The head of state appoints the prime minister and his Cabinet, which is responsible to Parliament.

Changes in Government: In the 21 March 2004 Dewan Rakyat elections, the Barisan Nasional won 198 of 219 seats, up from 148 of 193 in November 1999. The alliance of eleven parties (those winning seats) was led by United Malays National Organization with 97 members (71 in 1995) and the Malaysian Chinese Association with 26 (29). The fundamentalist Islamic Party of Malaysia (PAS) fell to 7 from 27 members in 1999. The Democratic Action Party moved from ten to twelve members. Dato’ Seri Abdullah bin Haji Ahmad Badawi has been prime minister since 1 November 2003.

MALAYSIA’S OUTLOOK

MALAYSIA’S ECONOMIC AND FINANCIAL INFORMATION