DIAMONDS ARE FOREVER

The Case of Malaysia, the Former « Asian diamond of the Empire »

By Jean-François di Meglio and Candice Tran Dai

The Case of Malaysia, the Former « Asian diamond of the Empire »

By Jean-François di Meglio and Candice Tran Dai

AprilApril, , 2016 2016 2

EXECUTIVE SUMMARY

Smart policymaking and strong macroeconomic foundations will ensure the continuation of Malaysia’s growth story.

In a region that has been repeatedly plagued by political and economic instability, Malaysia is a robust, booming and stable market, helped by a thorough national political program. With careful management of the relevant mechanisms and methods, it has succeeded in achieving a balanced and diverse economy – just one of many factors that makes Malaysia a credible investment opportunity.

Being a key economic player in the ASEAN region, Malaysia is a contributing force in the evolution of local, regional and global trade, and its successes are built on strong macro-economic foundations. A key element in understanding Malaysia’s economic development is its latest five-year plan, which aims to elevate the country to the ranks of a high income or “developed” nation. A steadily established and maintained trade surplus, the beginnings of which can be traced back to the Asian economic crisis of the late 1990s, also plays a part in buoying the fortunes of one of the more resilient Southeast Asian economies.

Due to the reasons outlined above, prospects for future growth remain strong in Malaysia under the current leadership, despite China’s economic slowdown and falling oil prices.

However, dovetailed with the marked downward turn in investor confidence that was caused by the 1MDB saga, Malaysia suffered a significant depreciation in foreign exchange rates from which it now recovering. This situation is further exacerbated by the continuation of the bumiputra, or, 'sons of the soil' policy, which favours native Malays in a number of areas over other ethnicities, although there are signs that

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support for this policy is weakening under the pressure of Malaysia's commitment to liberal mechanisms.

Internationally, and especially beyond the immediate arena of Southeast Asia, the current Malaysian leadership has succeeded in establishing a number of strong economic relationships through shrewd diplomatic initiatives – a political balancing act that has served to tie in Malaysia's fortunes with nations such as China, the US, France and the collective members of ASEAN. Consequently, Malaysia is now placed at the centre of a nexus of partnerships that spans three continents and is well placed to grow further. Of these, ties to Europe have an elaborate history, consolidated in recent years by the so-called “gas-tanker” contract signed with France in the 1990s, and further developed by cooperation on matters of trade and defence. Relations with the east have in no way been neglected either, and Malaysia has managed to maintain a highly productive economic accord with China. Ties between the two nations were further strengthened in 2015 when Malaysia held the rotating presidency of ASEAN, overseeing the governance and implementation of a number of key initiatives, as well as welcoming the Chinese premier in November. This visit also coincided with the conclusion of the US-led Trans Pacific Partnership Agreement (the TPPA), which Malaysia is a party to, but China is not. In this regard, it is clear that Malaysia has fostered excellent relations with a number of significant economic powers, whilst holding on to the freedoms provided by an entirely non- partisan approach to foreign affairs. One obvious such freedom is the capacity to act as an intermediary between the world's great economic blocs; jockeying for a position of potentially unparalleled inclusion and influence.

On a sectoral and micro-economic basis, Malaysia can count upon its considerable resources to attract foreign direct investment; especially

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should the issue of the 1MDB saga and the bumiputra policy be more effectively addressed. In rebalancing its assets, and in the newly acquired leverage that the TPPA provides, the nation is set to develop more value-added products and activities. Most notable among these products are electrical/electronic components, as well as those relating to other industrial sectors such as the automotive industry. With the advent of big data processing, Malaysia has climbed yet another springboard of opportunity from which to assert its competitive edge and fully benefit from the framework of the TPPA. Resilience and smart management of various factors within the make up of its national wealth, along with an effective combination of reforms, have all contributed in making Malaysia a lasting source of growth in the region and an attractive place within which to do business.

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CONTENT

I. Malaysia's economy at a glance ...... 8 RANKINGS AND RATINGS THAT REFLECT MALAYSIA'S CURRENT STANDING IN THE GLOBAL MARKETPLACE.

II. National Policy ...... 10 THE 2016 BUDGET; OBSERVATIONS BY THE IMF; VISION 2020; THE EDUCATION SYSTEM; ETHNIC INTEGRATION; LABOR FORCE DEVELOPMENT AND THE MINIMUM WAGE; THE BUMIPUTRA.

III. A key member of ASEAN ...... 17 MALAYSIA'S KEY ROLE AS INTERMEDIARY; FORMER IMPOTENCE OF ASEAN AND CURRENT RISE; THE VALUE OF INTRA-ASEAN TRADE.

IV. Malaysia by GDP ...... 21 CONTINUING HIGH HOUSEHOLD EXPENDITURE; DIVERSIFICATION OF ECONOMIC INTERESTS; THE GROWING TRADE SURPLUS; GOODS & SERVICE TAX; SPENDING ON DEVELOPMENT PROJECTS.

V. Lessons learned: key competitive advantages ...... 28 THE CURRENT ECONOMIC CLIMATE; DEPRECIATION; THE COMMITMENT TO LIBERALISM; VALUECAP; PROTON CARS AND THE INFLUENCE OF NATIONALISM; AN IMPROVED BANKING SYSTEM; FOSTERING THE GOOD FAITH OF FOREIGN INVESTORS.

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VI. Economic structure: key sectors and players ...... 37 THE FIVE MAIN SECTORS; LEADING EXPORTERS AND PERFORMERS; THE PERIPHERAL BENEFITS OF TOURISM; DIVERSIFICATION; LIBERAL INCENTIVES; TAX EXEMPTIONS.

VII. The Trans Pacific Partnership Agreement ...... 45 THE BENEFITS OF MEMBERSHIP; KEY FACTS; ITS ROLE IN DIFFERENT INDUSTRIES; THE REMOVAL OF TARIFFS.

VIII. Global economic relations ...... 49 PRIME MINISTER NAJIB RAZAK’S VISION; THE RELATIONSHIP WITH FRANCE AND THE EU; RELATIONS WITH CHINA; THE CHINESE DIASPORA IN MALAYSIA.

IX. Conclusion ...... 55 MALAYSIA'S DECISIVENESS AND LONG-TERM AIMS; THE POTENTIAL TO BECOME SEA'S FUTURE LEADER; THE KEY POSITIONS MALAYSIA OCCUPIES WITHIN ASEAN AND THE TPPA; PREDICTED GROWTH AND MATURITY INTO A GLOBAL ECONOMIC POWER.

X. About the authors ...... 59

XI. References ...... 61

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I. MALAYSIA'S ECONOMY AT A GLANCE

Malaysia’s global rankings in terms of competitiveness and business environment are extremely robust and well above its GDP global ranking (44th in the world). The following rankings, facts, and figures paint a clear picture of the healthy business environment that continuous economic reforms have fostered.

• As a global off-shoring destination, Malaysia ranks 3rd in the world (confirmed by AT Kearney).

• It ranks 5th worldwide in terms of investment protection, according to the World Bank rankings (2014).

• It is the 6th most attractive destination for investors and has the 14th most competitive environment (IMD’s World Talent Yearbook, 2014).

• It ranks 18th in terms of “ease of doing business” (World Bank Doing Business index).

• Malaysia ranks 14th for “starting a business”(World Bank)

• It is 33rd for access to credit.

• In terms of ease of doing business, of starting a business and of access to credit, only Singapore (ranking at 1st, 6th and 17th place respectively in these

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indexes) and Hong Kong (3rd, 8th and 23rd) perform better in the wider Southeast Asia region.

• With a total GDP of US$327 billion in 2014, Malaysia's per capita income is just above US$14,000. With a target set by the Malaysian government of US$15,000 to achieve high income status, this indicates an inherent capacity to escape the “middle income trap”, to maintain a respectably broad distribution of wealth and, in consequence, to develop a powerful domestic market - contrary to other “dragons” in the region.

• Its Euler Hermes rating (BB2) is roughly equivalent to Ireland’s, yet according to World Bank indexes and polls, Malaysia's healthy business environment places the country in a position of prominence far above such solely mathematic considerations.

• According to Scotia Bank’s recent report (June 2015), Malaysia’s sovereign credit rating outlook is showing firm signs of positive mobility. Fitch Ratings confirmed this trend by switching Malaysia's long-term foreign currency rating from “negative” to “stable”. Moody’s maintained an equivalent “A3” assessment and Standard & Poor’s echoed this positive outlook with a further “stable” rating.

• General Indicators such as growth rate (in the range of 4% per annum), low inflation, and a small budget deficit, all confirm a well-distributed structural framework of revenues and expenses.

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II. NATIONAL POLICY

When it comes to macroeconomic forecasting, two elements stand out in Malaysia’s policymaking process: the five-year plan and the yearly budget. When combined, the two show a nation that stands out in the region due to its inherent predictability and stable policies.

The 2016 budget of Prime Minister Najib Razak has been generally well received, considering the challenges presented in meeting the budgetary constraints associated with reaching “developed status” by 2020. The document spells out five economic pillars, namely, economic sustainability; increasing productivity; innovation and green technology; human capital building; empowering the Bumiputeras; and alleviating the cost of living. As Prime Minister Najib himself admitted, the 2016 budget has been “one of the most difficult”1 that the country has ever experienced. Perhaps the greatest challenge for the Malaysian government has been maintaining a balance between providing for its populace and buoying the confidence of global investors. The strong economic weight of state-owned GLC’s (Government Linked Companies),

1 http://www.themalaysianinsider.com/malaysia/article/najib-wants-budget-2016- execution-to-be-monitored-closely

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for instance, is just one example of a people-centric approach towards national policy; often most prevalent in energy intensive industries to preserve those resources essential to the population in addition to forcing the affordability thereof. The presence of GLCs, although usually considered a negative indicator in terms of foreign investment, appears to have had little impact upon Malaysia's business environment. Indeed, the appetite of foreign investors has remained strong, partly due to a carefully managed national program, while Malaysia’s financial sector remains one of the strongest in the region – despite this degree of interventionism.

Christine Lagarde, the Managing Director of the International Monetary Fund (IMF), recently made the following statement in an interview with “The Straits Times” (Nov., 13th, 2015):

“Asia in general, and certainly Malaysia, are countries where there are reasonable growth and vibrancy, yield, and if there is political stability and a business-friendly environment, economic activities, capital and investments will continue to move, too...Everyone took a hit but those who recovered were the strongest and the authorities used the tools in a judicious way, as in Malaysia’s case”.

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Therefore, according to Lagarde, Malaysia’s current leadership has wisely deployed the monetary and fiscal tools at its disposal and achieved the enviable performance of bouncing back from the commodities super cycle slowdown. In an updated statement released by the IMF in February 2016, the Fund estimated that Malaysia’s economy continues to perform well and growth should remain solid in 2016, in spite of external shocks such as commodity price declines. The current account surplus is also expected to stay in the surplus, boosted by “consumption growth, strong employment and expanded federal transfers to lower income groups”

The latest five-year plan, part of a strategy known as Vision 2020, is a key part of the move towards long-term policymaking in Malaysian economics. Essentially aiming to position Malaysia in the exclusive club of high income or developed countries by the year 2020, the plan is attempting to make inroads in tackling the economic issues that are currently standing in the way of reaching this target. Malaysia aims to diversify its industrial base and pour billions of public funds in ambitious investments: high-speed rail, big data infrastructure, and innovation in a range of sectors. Inchoate policymaking, unrealistic assumptions and expectations, arbitrary development targets and related methodologies, which had plagued previous versions of the plan, were all taken into consideration during the development of the 2016 budget. With the

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1MDB political issue officially dismissed by the Attorney General, the government can now look to enforcing the Vision 2020 policies. Najib's Malaysia has subscribed to a policy of developing its labour force, both in training provision and in establishing a national minimum wage that has catapulted its citizenry into an enviable position of affluence. According to the World Bank, poverty within the nation has almost been eradicated. Indeed, with only 3.8% living under the national poverty line according to CIA ratings2, Malaysia has a lower proportion of people living in poverty than nearly any European or North American nation.

As part of a longstanding drive for boosting its competitiveness, Malaysia has implemented plans to promote its status, stress its existing assets and further develop its comparative advantage. For instance, selected services sectors and manufacturing may now be wholly foreign-owned, with greater freedoms given to repatriate capital, interest, dividends and profits, and waiving restrictions on expatriate positions. Such firm action displays a commitment to the further development of traditional liberal economic policy, albeit within a state-monitored system.

2 https://www.cia.gov/library/publications/the-world- factbook/fields/2046.html

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Something of an obstacle to Malaysia's aims in positioning itself as both a liberal and developed nation has been the peculiarly Southeast Asian concept of bumiputra or “sons of the soil” policies which favour native Malays over other nationalized ethnicities. Around two thirds of the population currently falls into the former category, which secures university quotas for qualifying citizens as well as job quotas in the civil service. Additionally, it has been the case since bumiputra's introduction that a certain proportion of public company shares are required to remain in ethnic Malay hands. Initially introduced to protect the fortunes of Malays against the generally better educated and wealthier Chinese and Indian immigrants in the 1960s, it has become an oddity of local politics that elicits significant negative attention abroad. Not to mention that fact that the current system fosters a certain degree of mistrust in the legitimacy of the Malaysian business environment, to the point of potentially undermining earlier attempts to join the TPPA. However, there are signs that the will that has thus far kept the bumiputra system in place is weakening, both in government and amongst the nation's populace, and it is expected that this anachronistic practice will be slowly phased out in the years to come. A national push towards the use of the more inclusive term “Malaysian” as opposed to the exclusive “Malay” in part demonstrates this desire to discard ethnocentric policies.

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A key competitive advantage for Malaysia is the strength of its education system, in tandem with a mastery and common use of English. This makes the country one of the most foreign-friendly, globalization-ready nations in the region (as opposed to Thailand and, to an even lesser extent, Indonesia). In this regard, only the Philippines can match Malaysia in terms of ability to conduct business with foreign partners but, even though the Philippines has been catching up of late, it has a long way to go before reaching the relative sophistication and diversity present in the Malaysian economy. Singapore, a former member of the Malaysian federation (until the decision was made to part ways in 1965), is its closest contender. But the city-state, although gifted with obvious assets (from its visionary political regime to its strategic positioning in the Straits) does not enjoy the same depth and diversity of resources nor the same domestic market size.

Much as in the case of Singapore, Malaysia has striven to overcome ethnic, cultural and language differences to attempt to create a tolerant and homogeneous society. This reflects the leadership of Malaysia’s founding fathers, in addition to the quality of education available to the country’s population, collectively contributing to a balanced and considerate sense of cultural unity which has transcended political rhetoric to find its way into the common dealings of day-to-day life. Some have expressed concerns over the rise of an Islamic consciousness in the

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nation but this is not, as of yet, serious enough to have a significant impact upon the current political stability.

Malaysia's greatest challenge, in the run-up to the 2018 elections, would seem to be the need to bring about deeper reforms within this limited time-frame. Successful implementation of the latest five-year plan would boost confidence and overcome regional difficulties, which are mainly related to the downturn in the commodity super cycle. The desired promotion of the Malaysian economy to the next stage of its development is another very current and crucial challenge, only achievable through improved competitiveness and consequent success in producing higher-value goods. This would, in turn, make Malaysia less reliant on basic exports. As for domestic consumption and the tertiary sector of the economy, Malaysia is perfectly positioned to generate high returns in the not-too-distant future. Consider the “Labuan” experiment of the 1990s, which consisted in the creation of a trade and financial zone off the country’s mainland. Labuan still works well as a subcontracting, export, and financial zone, giving a promising preview of what Malaysia could become now that both the ASEAN community and the bilateral relationship with the United States via the TPPA are growing towards closer integration (the details of which will be elaborated upon in later sections.)

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III. A KEY MEMBER OF ASEAN

Malaysia’s leadership position within ASEAN is a source of strength

A number of recent rankings, ratings, various macro-economic data, and comments by external professional bodies and experts alike, provide a clear understanding of why Malaysia’s structural strengths have largely overcome recurrent weaknesses and recent setbacks. Much of Malaysia's success in this area is due to the very central role it plays within Southeast Asia; a position which needs to be emphasized in order to better understand how key the nation is to the region's success and its vitality in commercial matters. As founding member of the main regional organization, ASEAN, Malaysia has played a proactive role in the community-building and integration process of the ten member strong group.

In existence since 1967, and comprising a membership that includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, ASEAN has become a major hub of global trade and manufacturing, in addition to a consumer market that is growing at an exponential rate. As it seeks to deepen its ties and command an even greater share of global trade, the economic profile of

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the ASEAN region is achieving unprecedented heights – a powerhouse that lies only a stone's throw away from realistically mounting a challenge to other established economic powers. Yet the importance of ASEAN lies not only within the potential of its ever-deepening coffers, but also in the stability of the macro-economic approach it inherently maintains. Not only does ASEAN's existence guarantee a level of stability within its domestic markets, but it also provides fortifying support to neighbouring and other reliant markets.

In its formative years, ASEAN suffered from a degree of political impotence, able to display only the merest semblance of unity or common ambition. In 2012, for example, at the Phnom Penh summit, no communiqué was issued due to a lack of consensus; a failure almost certainly due to the weak leadership of the chair. In the present day, however, this regional group appears evermore determined to capitalize on its strengths and work together toward greater integration. Malaysia successfully assumed the 2015 chairmanship of the ASEAN and managed to push through several important features and initiatives that have played no small part in contributing towards the implementation of the ASEAN Economic Community (AEC). The main goals of the AEC are to achieve “a single market and production base, allowing the free flow of goods, services, investments, and skilled labour, and the freer movement of capital across the region” (24th ASEAN Summit 2014, Nay Pyi Taw

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Declaration). Although the socio-cultural and political environs of member countries differ greatly, comparisons can be drawn to the relevant stages of European integration (an example closely studied by key ASEAN countries, to which one of this report’s authors can testify3), substantiating the widespread intra-regional and international belief in a new virtuous circle for those nations involved.

Among the most recently compiled facts and figures about ASEAN, several stand out as particularly compelling evidence for the relative strength of its position and potential for further development. These are as follows:

• Taken as a bloc, ASEAN is now the seventh largest economy in the world with a combined GDP of US$2.4 trillion.

• ASEAN has 625 million inhabitants (contrast this with the 500 million of the European Union and the 350 million of the United States), which gives it the capacity to leverage a potentially huge internal market, thus creating an alternative to the export model of the early years. Today, intra-ASEAN trade represents 24% of ASEAN total trade (US$ 2.51 trillion in 2013). A

3 In his capacity as President of Asia Centre and close cooperation with European institutions and French official circles and decision-makers, Jean-François Di Meglio had been invited several times to ASEAN Secretariat to deliver testimonies or speeches about connectivity and integration illustrated by the European example.

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traditional regional role as a re-exporter or subcontractor for China or Japan has been well and truly outgrown by a vital and evolving organization.

• Total FDI inflows into ASEAN countries stood at US$122 billion in 2013. While extra-ASEAN countries invested US$101 billion, intra-ASEAN countries contributed 17% of the total, demonstrating their growing appetite for integration.

• With the establishment of the AEC, as much as 97.3% of traded products within the region will be duty-free in the very near future, following the recent and successful implementation of across-the-board cancellations on import and export duty taxes.

Malaysia is a key component of this regional dynamic, often acting as a conveyor belt between member states and/or external interests, while committing to the further enhancement of the global positioning of the ASEAN Economic Community. In light of its significant political clout, Malaysia is well placed to benefit from these new dynamics. Indeed, its foremost partners hail from neighbouring states, firmly rooting Malaysia in the region’s economic integration process. The only significant trading partner outside Asia, both in terms of imports and exports, is the United States. To put that claim into perspective, however, it is worth noting that Malaysian exports to the US account for just 8.4% of the total compared to the 14.2% commanded by one ASEAN member, Singapore, alone. However, as this report shows, following the signing of the TPPA, that figure is expected to rise considerably.

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IV. MALAYSIA BY GDP

With a nominal gross domestic product of $375 billion, Malaysia is the third largest economy in Southeast Asia and the 35th largest in the world.

FIGURE 1. MALAYSIA CONTRIBUTION TO GDP GROWTH BREAKDOWN BY ITEM OVER THE LAST FOUR YEARS (SOURCE: CEIC, NATIXIS, ADAPTED FROM FRENCH)

A striking feature of Malaysia's financial landscape in recent years, especially in terms of GDP stability, has been the steadiness of household expenditure at a time when other components of growth have

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proven to be more volatile. Malaysia's export structure, for instance, has been steadily yet forcibly diversified away from a focus upon electrical and electronic goods, after it became apparent that a reliance upon single sector manufacturing was too susceptible to the whims of world trade.

FIGURE 2. MALAYSIA TRADE STRUCTURE BY DESTINATION/ORIGIN (SOURCE: MIDA)

TRADE PARTNERS EXPORTS RANK IMPORTS TRADE PARTNERS

Singapore 14% 1 17% China

China 12% 2 13% Singapore

Japan 11% 3 8% Japan

USA 8% 4 8% USA Thailand 5% 5 6% Thailand

China Singapore Singapore China Japan Japan USA USA Tailand Tailand others others

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Likewise, and for similar reasons, the markets targeted have been diversified in tandem. Steady household expenditure, however, generally bodes well for the direction of an economy and for its successful transition to a more elaborate model.

FIGURE 3. MALAYSIA GDP BY DEMAND COMPONENTS (SOURCE: CEIC, UOB)

The domestic management of economic parameters has improved greatly in the first half of 2015, with tax revenues and lower expenditures bringing the deficit down to 1.2% of GDP compared to 2.2 % in the equivalent period of the previous year.

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FIGURE 4. MALAYSIA’S GOVERNMENT BUDGET (GDP %) (SOURCE: CEIC, NATIXIS, ADAPTED FROM FRENCH) : CURRENT FIGURES FOR 2014, FIGURES TO BE CONFIRMED, TAKEN FROM GOVERNMENT FORECASTS FOR 2015 AND ONWARDS.

Additionally, in terms of trade, Malaysia has consistently enjoyed a surplus following the Asian financial crisis of 1998. In spite of falling oil (and palm oil) prices, the trade surplus has grown and the current account surplus is set to remain above 2% of GDP. Indeed, as mentioned before, the IMF estimates that the country will maintain a current account surplus in 2016 as well.

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FIGURE 5. MALAYSIA BALANCE OF PAYMENTS (SOURCE: CEIC, NATIXIS, ADAPTED FROM FRENCH)

According to the Institute of International Finance, “the fall in oil and gas revenues was partially offset by gains from the GST (Goods and Services Tax) and improvement of the tax administration system”. GST, elsewhere commonly known as VAT, or Value Added Tax, is a multi stage consumption tax implemented nationally in May 2015, whereby goods and services are taxed equally and where each stage of supply to be taxed is always deducted by the businesses in the next stage of the

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supply chain. This method eases the deduction process in the taxation system and relieves administrative pressure. This is turn alleviates the burden upon a civil service that was previously charged with dealing with the various inconsistencies in the taxation process, freeing it up to be put to better use elsewhere in the governance of the economy. Because no GST is imposed on exported goods, not only is the process fairer, more transparent and inherently easier to administrate, but it also increases global competitiveness. According to an IMF note, the GST is credited with playing the crucial role in helping Malaysia weather global headwinds and falling oil prices. What’s more, prudent monetary policies helped contain any inflationary pressures arising from its implementation and the depreciation of the foreign exchange rate.

The GST approach to taxation is not an isolated example of Malaysia’s evolutionary journey along the economic path. The Institute of International Finance (IIF), for example, has pointed out that the government is significantly engaged in reducing unproductive expenditure while maintaining spending on development projects. The government endeavoured to back households, for instance, by providing liquidity made available through the elimination of fuel subsidies. Public debt is due to stabilize at around 52% of GDP, with another 15% of GDP in contingent liabilities and, while the borrowing program remains manageable, Malaysia may return to the global bond market to refinance

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a USD 1.2 billion Sukuk (Islamic financing) in 2016. Bond yields have eased considerably over the past few months, pushing down the 10-year paper from 4.3% in December 2015 to 3.8% in April 2016.

FIGURE 6. GOVERNMENT SECURITIES YIELD (SOURCE: BLOOMBERG)

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V. LESSONS LEARNED: KEY COMPETITIVE ADVANTAGES

As the recovery from the 1997 Asian financial crash showed, Malaysia stands out in the region as one of the nations best placed to overcome future crises.

Malaysia displays several unique socio-cultural features rooted in a delicate ethnic balancing act on the one hand, and a steadfast governance system on the other, (albeit biased4, as already elaborated upon in the section on national policy and the bumiputra). Recent tribulations have had a patently tangible impact on the country, yet Malaysia has piloted its way through a number of similar stretches of economically stormy waters since 1985 (when the stock market was closed for a few days before recovering). Unsurprisingly, the main impact of Malaysia's 1MDB saga, in tandem with the broader regional economic issues, was upon foreign exchange rates, as shown in the following figure.

4 In favour of « Bumiputra » population (i.e Malaysian of Malay descent, as opposed to Chinese ethnics).

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FIGURE 7 . RINGGIT PERFORMANCE AFFECTED BY GLOBAL FINANCIAL DEVELOPMENTS (BLOOMBERG)

6

5

4

3

2

1

0

Within a few months the MYR sharply depreciated; just as it had in 1997. Although depreciation never bodes well for an economy, this is one particular cloud with a weighty silver lining in favouring Malaysia as an oil (USD-denominated) exporter. As such, lower exchange rates will increase the profitability of Malaysia’s oil producers (the government- owned Petroliam Nasional Berhad – Petronas). The current downturn certainly weakens Malaysia at a critical moment, but the eventual return in commodity prices should, sooner or later, prove of benefit. By April 2016, the exchange rate had returned to the pre-1MDB levels, strengthening the current government’s position.

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In spite of apparent similarities, it would be misguided to compare the current situation with the financial crisis of 1997-1998, which unfolded under the nationalist leadership of Prime Minister Mahathir Mohamad. Indeed, against a backdrop of the sharp regional slowdown, there was little leeway at that time for Malaysia to reinvigorate its economy without enacting the strictest measures, such as capital controls and pegging its currency exchange rate to the dollar. The crisis was exacerbated by political backdoor dealings surrounding the bailout of the UEM-Renong conglomerate that prompted the Prime Minister to order a suspension in the rules of the stock exchange, which wiped off 20% of its capitalization over three days in November 1997.

However, the current Malaysian leadership has clearly stated that they would not renege on their liberal commitments, nor consider resorting again to such extreme mechanisms and measures. Even regionally, the picture stands in sharp contrast to the situation in the late 1990s, a time when all Southeast Asian nations were affected by swift withdrawals of “hot money”, a standstill of inbound investments and the logical consequences of sharp depreciations of regional currencies – not to mention the rapid exhaustion of an already thin cushion of foreign reserves. Now, neighbouring countries may be experiencing an obvious slowdown, but not to the point of threatening the regional equilibrium.

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Most crucially, the lessons taught by the financial crisis of the late 1990s have been learned region-wide. As the Asian crash illustrated, nations need to build up stronger foreign exchange reserves to better manage their disbursement in case of market instability, and to depend less on the export model, whereby any slowdown in demand from the countries’ clients would jeopardize the fragile balance between foreign-currency denominated borrowings and domestic revenues. Part of Malaysia’s debt service is still denominated in foreign currencies, chiefly USD, and consequently the risk remains that the costs of borrowing (and repaying interest) could deteriorate to a point that might seriously impede the economy's expected rebound. Yet, financing conditions for Malaysia have remained relatively comfortable with rates shifting only marginally, including corporation rates. Indeed, the management of debt service is far from negligible and is closely monitored (please see below).

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FIGURE 8 . MALAYSIA'S RATIO OF EXTERNAL DEBT SERVICE TO GDP AND CURRENCY LEVEL AGAINST USD (SOURCE: BLOOMBERG, NATIXIS, ADAPTED FROM FRENCH)

In order to support under-performing shares and stabilize the equity market, rather than resting on its laurels as had previously been the case, Malaysia’s government this time responded to negative market conditions by injecting 20 billion MYR (around 5bn USD) into the stock market through the “ValueCap” scheme – a concept which had previously existed but had not been used to its full extent. This particular policy mix allows the government to support the markets through appropriate

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measures against a managed yet “open economy” backdrop. This has led the index to rebound from its recent lows to reach 1717 (Apr., 8th, 2016), from a previous rock-bottom low of 1532. Despite the poor performance of the ringgit, however, a relatively solid performance in managing its value back towards more desirable levels remains encouraging and fosters some confidence in the economy's ability to perform better in the future.

FIGURE 9 . MALAYSIA STOCK MARKET (SOURCE: TRADINGECONOMICS.COM)

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The Malaysian government has learned its lesson on the follies of allowing nationalism to influence commerce. Especially under the 22- year leadership of Mahathir, nationalism and import substitution strategies had grown to become excessive influences in Malaysia’s development strategy and led, in consequence, to a number of dead ends. Known for his authoritarian leadership style, Mahathir possessed a rudimentary knowledge of economic principles and contributed to many of the problems that led to the 1997-1998 crash. Inspired by Japan’s industrial conglomerates, Mahathir pushed for the creation of their Malaysian counterparts by heavily relying on state intervention in the economy. Proton, a failed car manufacturer that was chaired by Mahathir until March 2016, is a case in point. Once lauded as a paragon of national pride and imposed upon most administrative services, its relative failure (at least in terms of attempted exports) led to a full reconsideration of the industrial plan, with a renewed focus upon partnerships with established multinationals that would allow Malaysia to develop its production of related electronic and electrical parts. Proton cars are still widely used and seen in Malaysia, but remain, apart from some brief and early successes in the UK and China, a uniquely Southeast Asian feature.

Making a significant policy shift, the current government sought to pursue more market-oriented strategies. As such, it may be discerned

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that Malaysia's key assets are its resilience, its growing inclusion in an increasingly integrated region (which now has a positive effect, contrary to 1997-1998) and its demonstrated ability to weather temporary crises. Regarding the corporate sector, it is clear that cash balances are in a much better state than in 1997-1998. Despite being affected by the fall in the ringgit, these foreign reserves still remain at a very respectable level.

FIGURE 10 . MALAYSIA'S FOREIGN RESERVES AND EXCHANGE RATE (SOURCE: BLOOMBERG, NATIXIS, ADAPTED FROM FRENCH)

160 140 120 Ringgit and reserves 100 index 60=3,8 MYR/ USD and 60 bn USD 80 foreign reserves 60

40 20 0 1 2 3 4 5 6 7 8 9 Years

From a figure of around US$ 17.5 bn in 1997, foreign reserves have now grown sevenfold. Moreover, they will be sufficient to cover 7.6 months of

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imports against 3.2 months in 1997, but in collaboration with a far better capitalized banking system than was ever then the case.

These strong fundamentals have proved a boon to the Malaysian economy throughout the course of 2015, helping negate the landslide effect of crashing levels of FDI in the first quarter (a crash which was mirrored by other countries in the region). The second quarter witnessed an uptick registering a large enough inflow (approx. RM12.5 billion) with which to halt any further decline. Beyond a fairly positive long-term economic outlook, investors have otherwise indicated their faith in the government's commitment to the economy and in its capacity to learn from the lessons of the past. While the net outflows observed throughout 2015 might be explained by temporarily mitigating factors, the long- standing commitment of several investors, such as Nestle, Carlsberg and Amway, provide at least some confidence in the long-term picture.

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VI. ECONOMIC STRUCTURE: KEY SECTORS AND PLAYERS

A diversified economy and strong fundamentals are the linchpins to meeting future challenges

As of 2015, Malaysia's five main economic sectors are agriculture (accounting for approximately 7% of GDP), construction (4%), manufacturing (25%), mining (8%) and services (55%). Agriculture represents the least mobile of these sectors as the government's focus has shifted away from traditional industries in order to pursue a more diverse portfolio, adapted to the rigors of the 21st century. While construction and mining have shown significant growth in recent years and still provide notable ground level stability in buoying the nation's senior industries, manufacturing and services are the sectors where the greatest interest and returns are to be found. The most notable industries that exist within these sectors, by value of contribution to GDP, are oil and gas, financial services, automotive production, E&E (electrical and electronics), and tourism.

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As an industry, tourism is a complicated one to measure the impact of, providing peripheral benefits that range beyond the revenue generated by airlines, hotels and eateries. However, this revenue is significant enough to earn a mention, with direct tourism revenue contributing 5.7% to total GDP in 2014 – a sum of USD $14bn5. Taking into account the industry's indirect and induced contributions, i.e. investment spending and industry employee spending, that sum more than doubles. Visitor exports alone account for 8.6% of total national exports. And of course, with 26 million tourists visiting the nation every year6 the employment needs are vast, requiring a total employment contribution of 1.8 million jobs – a stable foundation of domestic spending and saving. However, it is the lifestyle tourism provides which is often one of its most valuable assets. Investors, for instance, are more likely to be drawn to a country that provides them with the kind of lifestyle that they aspire to. Knowing that world-class beaches and forests, as well as dynamic and modern cities, are only a stone's throw away, is an attractive proposition for the expat abroad who is being asked to relocate his work and personal life to an entirely unfamiliar environment. Malaysia has not failed to capitalize upon its own assets in this matter, and currently ranks as the 26th most

5 https://www.wttc.org/- /media/files/reports/economic%20impact%20research/countries%202015/ malaysia2015.pdf

6 http://data.worldbank.org/indicator/ST.INT.ARVL

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important travel and tourism destination in the world. With plans to turn Kuala Lumpur into “Greater KL” as part of Vision2020, including a new and improved transport infrastructure, and a number of other cities in the nation already vying for international recognition – such as Seberang Perai, George Town and Malacca – lifestyle and leisure are covered just as thoroughly as the business environment itself.

In terms of exports, the gas and oil, and E&E industries are the clear leaders, with the latter responsible for over 30% of all exports and the former not too far in its wake7. The companies that dominate exports and services, naturally also dominate Malaysia’s answer to the Fortune 500. Many firms, such as Sime Darby (Malaysia's fifth largest company), are multinational conglomerates which maintain interests across the sector range, but the top ten firms operating from Malaysia, according to Forbes, also display a more diverse portfolio including: financial services (Maybank, CIMB, etc.), utilities (Tenaga), telecommunications (Axiata), entertainment (Genting) and shipping (MISC). Such diversity at the top of Malaysia's leader-board indicates an economy which has found stability in diversity and which, unlike other neighbouring economies, has not made the mistake of placing all its eggs in one basket.

7 https://qualityinspection.org/malaysia-production/

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A significant part of Malaysia's plan to achieve high-income status, and escape the middle-income trap, is to pilot a shift towards higher-end manufacturing. Lauded by the OECD for this change of direction, Malaysia has maintained and improved a sound industrial base from which to launch high-end operations. Neighbours such as Vietnam and Thailand are still very much stuck in a middle-income mind set with no real plans to move away from traditional operations in agriculture and low-end manufacturing. These types of operations will also form part of Malaysia's economic plan for a number of years to come, with agriculture still being a subsidized industry for instance, but the vision of a rather different future for Malaysia is also becoming more apparent. Malaysia also looks set to stay in line with its tradition of providing intermediary- level tech goods, and will continue to be a competitive recipient of investment from other Asian countries while exporting mostly electrical and manufactured goods (40 % of total exports, versus less than 30 % for natural resources). As the civil service is a key component of the Malaysian economy (employing 1,5 MM civil servants altogether) and hence also an element of stability, wage increases are being planned which confirm that the consumption sector will maintain a significant growth factor in the coming years.

The global view of the Malaysian economy, although supported in part by the strength of the country’s relations with other powers, shows it to be a

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healthy and diverse entity with serious political ambition. China’s slowdown has weighed heavily upon the whole region and has affected Malaysian exports as well as those of its neighbours. However, the November 2015 visit by Premier Li Keqiang has offered some evidence that Malaysia will not be left aside in the Chinese drive to build infrastructure in the region – such as the US$10 billion in loans that has been offered by Beijing to fund infrastructure projects. Indeed, on an unofficial visit to Malacca, Li was keen to outline Malaysia's importance as a key part of the new “maritime silk route”. In April, the two countries formed a port alliance between 10 Chinese and 6 Malaysian ports meant to accelerate trade by reducing customs red tape and bottlenecks. Malacca is expected to be the biggest port in region when completed in 2025.

Malaysia’s key economic sectors have been thoroughly promoted by the MIDA (the Malaysian Investment Development Agency). These include those five sectors mentioned above, as well as other contributing industries such as business services, wholesale and retail, information and communication infrastructure, palm oil, health-care and education, renewable energies and aerospace. Plans to develop the historic capital Kuala Lumpur under the new guise of Greater KL, “a smarter city for the new century”, have also been identified as one of the economic drivers under Vision 2020, also known as the Economic Transformation

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Program. Many projects are backed by public funding according to a case-by-case basis, with salient regulations often adapted to suit the needs of projects where it is established that doing so would be beneficial for the economy.

Another encouraging element in the nation's economic development plans is the fiscal incentives, which form a core part of efforts to attract further investment. These contain exemptions such as 70% to 100% tax breaks for up to 10 years in certain sectors, investment tax allowances which lower taxes by 60% to 100% in the case of capital expenditure committed over 5 years, 60% on capital expenditure rolled over for 15 years, and tax and duty exemptions for imports of raw material, machinery and equipment. These exemptions have stimulated investment in industry and technology and have been particularly successful in making Malaysia an attractive destination for foreign direct investors, as well as achieving high levels of domestic private investment. Perspectives for the future of Malaysia could also be based on the observation of its current trade structure:

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FIGURE 10. MALAYSIA TRADE STRUCTURE (SOURCE: ITC, 2014)

SECTORS EXPORTS RANK IMPORTS TRADE PARTNERS

Electronic Electronic equipements 28% 1 26% equipements Mineral fuels 22% 2 17% Mineral fuels Machinery 10% 3 11% Machinery Animal and vegetable Plastics fats 7% 4 3% Plastics 3% 5 3% Vehicles Others 30% 5 40% Others

EXPORTS Electronic equipments Mineral fuels Machinery Animal and vegetable fats Plastics others

IMPORTS Electronic equipments Mineral fuels Machinery Plastics Vehicles Others

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Malaysia appears to have climbed up the value chain and balanced its strategic choices based upon a number of salient practicalities. Relying less upon traditional sources of income – such as its natural resources, for instance, where it enjoys a natural edge – Malaysia has broadened its outlook and diversified the focus of its key sectors.

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VII. THE TRANS PACIFIC PARTNERSHIP AGREEMENT (TPPA)

The ratification of the TPPA will greatly expand Malaysia’s exports

As a key partner to the US in the region, a relationship that has been increasingly fostered as part of the nation's plans to diversify its interests, Malaysia has been singled out as a nation most likely to benefit from being a signatory to the TPPA. But benefits are predicted to carry over into the longer term, in addition to the immediate, bearing significant fruits for future generations – all conclusions that can be drawn from a recently conducted detailed study. The key elements of this study figure below:

• The final agreement was signed in November 2015 and the treaty covers 40% of world GDP.

• The main drivers for Malaysia to join the TPPA, in addition to political considerations, were first and foremost to assist Malaysia in its aim to become a regional hub for investors seeking to gain a foothold in the region, as well as to ease the access of Malaysian firms to foreign markets. Transparency and predictability of the associated trading terms are key words for inclusion into the TPPA.

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• Those sectors contributing over 20% of Malaysia’s GDP are expected to register higher output growth.

• Export-oriented firms will benefit from greater market access, particularly in textile, automotive components and E&E (electric and electronic) sectors.

• Some firms in sectors that will be liberalized after the TPPA implementation will face increased competition and capacity building measures, making it important for these firms to improve their competitiveness during the transition periods granted.

• The TPPA provides for stronger intellectual property protections, which is a key element of Malaysia’s budding innovation sector

According to the Peterson report on the TPPA8, Malaysia is likely to gain a 12.4% increase in the percentage value of exports by 2025 – the second highest in the region - by the sole virtue alone of being a member of the agreement. Whilst those industries that are dominated by GLCs, such as oil and gas, for example, might be perceived to be negatively affected by the implementation of the TPPA – chiefly due to the necessity of implementing the liberal structural reforms demanded by the agreement – such effects are likely to be confined to the short term. Industries such as textiles, automotive (including assembly chains), plastics and wood processing, however, are due to benefit in both the

8 http://www.iie.com/publications/pb/pb12-16.pdf

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short and long term, with growth expected to exceed 3% on average throughout the following years, and in some cases as a direct result of the effects of the TPPA.

A particularly interesting example of such industries is that of data processing and “big data” storage and treatment. Studies have shown that Malaysia has more than tripled its capacity in this field over the last four years and this consolidation has accelerated production and improved efficiency.

As for the automotive sector and without waiving the 1971 New Economic Policy (which favours national production, including automotive production and the “Proton” brand), the TPPA is set to support the development of original equipment manufacturers as well as boosting investment into this sector in Malaysia, according to a PwC report. This ought to be achievable through investments by carmakers and components manufacturers alike.

The case of electric and electronic manufacturing, a key sector for Malaysian exports, is particularly striking. One of the key reasons that Kuala Lumpur stands to benefit from the agreement stems from the fact that Malaysia is the world’s 11th biggest such exporter and TPPA countries comprise 41 % of its export markets. With export tariffs being

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removed under the TPPA regarding the export of such goods, not only is Malaysia set to reap the rewards of increased profit from existing trade partners, but also benefit from greater access to other markets (chiefly, the US).

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VIII. GLOBAL ECONOMIC RELATIONS

Malaysia stands at the centre of a nexus of profitable international partnerships

Malaysia’s assets in terms of international positioning are not necessarily well known abroad but do reflect the government’s vision for the country’s economy. Indeed, the numerous bilateral visits of neighbouring heads of states provide evidence of Malaysia's skill in striking a balance with other regional powers.

In order to more clearly illustrate how Malaysia has managed its reputation and capitalized on the relationships it has thereby fostered – or, how effectively it has managed to “punch above its weight” – the example of France is one worth exploring. A bilateral relationship that is unrivalled within the EU, despite the ever present spectre of its colonial past, Malaysian-French ties have experienced remarkable growth in various sectors, including both defence and economic cooperation. Malaysia is, for example, France’s second largest commercial partner in the ASEAN region, with some 260 French companies already operating in the country and new French investors launching Malaysian operations on

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a regular basis. A biotech firm in Terengganu is just one amongst a number of recent French investments, as is a US$135 million carbon manufacturing plant in Negeri Sembilan that will supply the entire Asian market with aircraft brake discs.

As mentioned, cooperation between the two nations on matters of defence thrives as much as it does on economic matters – if not even more so, as illustrated by the significant number of reciprocal visits to facilitate this relationship. France remains a main supplier of Malaysia’s military equipment and a key partner for defence training and related technical assistance. Purchases include A400 M aircraft, EC 725 helicopters, missiles, military electronics/equipment for heavy tanks, and tactical radios for Malaysia’s armed forces. The latest official visit by French Defence Minister Jean-Yves Le Drian was a crucial one in cementing this relationship, and is one in a long line of such visits that point to its strength (please see the footnote on the previous page). That Le Drian’s visit took place during turbulent times for Malaysia’s domestic affairs, has not gone unnoticed.

These developing strategic and military relations have consolidated a French-Malaysian partnership that dates back to the latter's purchase of

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a number of large methane tankers in the late 1990s9. Bilateral relations have evolved to the point that French officials are now considering upgrading the relationship's status to that of “strategic partnership”, one that very few countries enjoy, especially in Asia, according to government officials. That the upgrade has not already taken place is due to worries over the possibility of invoking the so-called “bias effect”. At a time when the Southeast Asian nation was struggling to garner support elsewhere,

9 Official visits from Malaysia to France:

2012, September: Resource and Plantation Minister Bernard Giluk Dompok (a meeting with his French peer Bernard Le Foll, Agriculture Minister)

2012, November, 13th to 16th : Minister for Energy, Green energy, and Water

2013, June, 19th to 21st (Le Bourget airshow) : Hishammuddin Hussein, Minister for Defence and interim minister or Transports

2013, November, 5th to 8thVice-Premier Muhyiddin Yassin (UNESCO)

2013, December, 10th, 11th Foreign Minister Anifah Aman

2014, June : Mme Rosmah Mansor, Prime Minister’s spouse (World Women’s forum in Deauville)

2014, Octobre, 21st to 24th, Minister for National Unity Josef Kurup

2014, Dec., 4th and 5th Defence Minister, High Defence Committee between France and Malaysia

2015, April, 13th Prime Minister M. Muhyddin Yassin

Officials visits from France to Malaysia :

2013, June, 6th : Mme Nicole Bricq, Foreign Trade Minister

2013, July, 28, 29th Prime Minister Jean-Marc Ayrault, with three cabinet members (Mme Bricq, Mme Fleur Pellerin, in charge of SME’s and innovation, and Ms Conway-Mouret, in charge of non- resident French)

2014, 3rd November 2014 : M. Jean-Yves Le Drian, Defence Minister

2015, April, 13th : M. Matthias Fekl, in charge of Foreign trade (undersecretary)

2015, September, 1st: KEY VISIT : M. Jean-Yves Le Drian, upon the occasion of the High Defence Committee (a bilateral, Franco-Malaysian summit

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this upgrade and its inexplicable show of confidence may have been perceived as an attempt by France to shore up Malaysia in its time of need. Once any risk of blame (and the usual and potential associated accusations of bribery or influence) has faded away, there is a strong possibility that talks will resume – at least according to certain high-level French officials who spoke to us on condition of anonymity.

Malaysia's relationship with other nations has not been limited to just the EU and US however (see the earlier section on the TPPA) and it has effectively maintained a careful balance between the various conflicting forces present in both the ASEAN and Asian region on a number of matters – including strategic and military issues. During the days following the yearly ASEAN summit (held in Malaysia in late November 2015), a highly publicized visit by Chinese Premier Li Keqiang gave substantial evidence of China's supportive stance. China would buy further Malaysian bonds and grant Malaysian investors a quota to the sum of 50 billion RMB (yuan) to invest in Chinese stock, equivalent to around 6 billion US$. Entry into the Chinese stock market is highly regulated and usually only extended to “qualified” investors (QFII), who are granted this status through an application averaging between 100 and 200 million US$ on a singular basis. Such quotas, therefore, are usually negotiated by individual banks or financial institutions, and are almost unheard of at a governmental level.

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Relations between China and Southeast Asia have, as a whole, been significantly strained of late due to the former's disputed territorial claims in the South China Sea. The recent strengthening of ties between Malaysia and China is patently a reflection of Beijing's efforts to readdress the region's loss of faith, and illustrates a push towards better relations between the two nations. However, in assessing Beijing's motivation for strengthening ties with Malaysia, it would be remiss not to mention the importance of the large Chinese community that resides there and has, for the most part, done so for centuries.

In fact, around 7 million Malaysian citizens self-identify as Chinese, one of the world's largest overseas Chinese populations, creating a socio- economic entity that largely occupies the middle classes. This community maintains a consistently high level of educational attainment, as well as disproportionate representation in terms of household income and commercial influence. Such significantly elevated characteristics are not at all unusual, with the Chinese diaspora proving a valuable asset to every nation in which it has settled. The Chinese community in Malaysia is no exception to that rule, and with an overseas presence that is second only to Thailand's, this is a position of leverage that would prove beneficial to any future dealings with Beijing.

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Malaysia's plan to reach high-income status by the year 2020 has a focus that is balanced equally between domestic and international concerns. There is no doubt, however, that trade relations with overseas nations are vital to building the economy to the extent that its government wishes. The first quarter of 2015 was disappointing in economic terms, but there has been steady growth since then, largely due to recognition of Malaysia's international ambitions. Overseeing key new developments in ASEAN, being a regional leader in the TTPA, and fostering increasingly convivial trade relations with certain EU nations, the US and China, Malaysia is well positioned to act as an intermediary pivot around which Southeast Asia will finally begin to play a full and active part in the global marketplace.

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IX. CONCLUSION

A STRONG FOUNDATION

Malaysia’s track record and resilience over the past thirty years are key elements of any analysis of the nation’s economic outlook. Any attempt to make such an analysis based upon current statistics alone would be misguided, as it would fail to take into account neither its history nor the fact that Malaysia is in a process of hedging away from its traditional partners and is currently “bottoming out” on several fronts. A certain decisiveness, which has often been evident throughout the preceding decades, is steering Malaysia back on course again after the recent regional and domestic economic trials.

Whilst the whole region is under pressure from factors it cannot control, such as the global slowdown of emerging markets, for instance, and its dependency upon US macroeconomic indicators (the Federal Reserve’s interest rate, for one), it is the view of this report that Malaysia is well positioned to weather the current climate, and possesses a strategic advantage over its regional rivals for the following reasons:

• A highly conducive and well-established business environment.

• An ability to use various levers in policy-making.

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• A pivotal role at the heart of ASEAN.

• A number of prestigious and valuable multinational investors.

• An attractive and beautiful environment with which to enthral visitors.

• Its proven and time-tested resilience.

LOOKING AHEAD

Malaysia occupies a widely recognized position as one of the nations most likely to take the political and economic lead in Southeast Asia. Recent studies on the potential impact of the TPPA for Malaysia confirm this positive outlook. As an export juggernaut, Malaysia will gain easier and broader access to larger markets through its membership in both the budding ASEAN Economic Community and the TPPA. Malaysia could leverage its positioning within the TPPA to provide access to ASEAN countries that are not a party to the agreement, and subsequently play a unique role as a powerful trade enabler. The sectors involved are clearly textile, automotive components and electric/electronic devices and products, with the TPPA track alone set to create an extra 12.4% of GDP from export growth, while other sectors would also be buoyed by domestic incentives, for example big data processing.

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The country's GDP is expected to grow by about US$ 200 billion between now and 2027 and 90 % of this increase is predicted to stem from “non- tariff” measures deriving from TPPA adoption. The FDI is predicted to amount to another US$200 billion over the same period. As evidenced within this report, there are numerous reasons why Malaysia's future economic environment is likely to prove worthwhile and profitable for potential investors:

• The further emergence of a strong domestic market, supported by clear and realistically planned strategies to reach high-income status through Vision 2020 and the five-year plan.

• The opportunities provided by a new stage for the ASEAN members in the form of the ASEAN Economic Community – one of the wealthiest such communities in the world.

• The decisive progress made in the implementation of the TPPA and the potential to exploit Malaysia's role as a main facilitator and intermediary within its auspices.

• The push towards high-value industries as opposed to the low-end industries dominating elsewhere in ASEAN region.

• Plans to develop an already excellent infrastructure, as part of Vision 2020, in addition to the access to infrastructure improvement loans supplied by the Chinese government.

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SUMMARY

There are, despite some recent issues a number of signs which indicate that Malaysia is well placed to embrace a position of strategic importance in the global economic arena. Malaysia’s fundamentals remain strong and the country is expected to grow and increase its appeal to international investors.

The ASEAN region as a whole has recently come under the international spotlight – chiefly due to the formation of the TPPA and the AEC – as one of the most significant areas of potential for new investment. However, compared to the political and economic issues that have occurred in neighbouring states, equal to if not worse than its own, Malaysia stands out by merit of its relatively progressive approach to moving away from traditional sources of investor concern, in addition to its commitment to engendering liberal mechanisms in national policy. Although still having much work to do in a number of areas, Malaysia, nonetheless, remains a more than credible investment option.

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X. ABOUT THE AUTHORS

Jean-François DI MEGLIO has devoted his professional and academic careers to better understanding Asia as a whole and to building bridges between French and Asian economic, business and political circles. He has spent over 35 years in several Asian countries as a banker working for BNP Paribas but also as a researcher and expert.

He is currently the President of the Paris-based Asia Centre, which he co- founded in 2005 alongside François Godement (www.centreasia.eu). Jean-François often lectures and frequently writes for French and international media organizations on monetary, energy events and developments in Asia and France. Most recent publications include “China and the global financial crisis: a comparison with Europe” (Routledge, 2010), which he co-edited, and the upcoming “Framing China‘s energy security” (Routledge, TBD).

Jean-François is an alumni of the Ecole Normale Supérieure (Paris) and the Beijing University. He is a Board member of INALCO (The National Institute for Oriental Languages and Civilization in Paris) and a visiting Professor at the Cheng Ch’I University in Taiwan. He also teaches at the Dauphine University and the École Centrale Paris-Supélec.

Jean-François is a regularly invited to speak on the French business channel BFM (both radio and TV) on the “Chine Hebdo” and “Les décodeurs de l’’éco” programs, as well as on the English and French

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channels of France24, GB Times, and the Chinese and international editions of People’s Daily as well as other Asian media organizations.

Jean-François’ academic contributions date back to the late ‘80’s (in French: Presses Universitaires de Paris 8 “Extrême-Orient Extrême- Occident”, issue number 3, introduction to the French translation of Xunzi, Le Cerf, 1985).

Selected publications:

• International Spectator : Internationalisation of the Chinese Currency, Act II -: http://www.iai.it/en/persone/jean-francois-di- meglio#sthash.8pOXFQmm.dpuf

• Observatory of South East Asia (an Asia Centre program) with regular releases on www.centreasia.eu in English

• Annuaire Asie: 2012, 2013, 2014 (regional economic overview) released by La Documentation Française

• Rapport CyclOpe (edited and directed by Philippe Chalmin): English and French edition, 2014 and 2015 (to be released)

Candice Tran Dai is an Associate Member within the Economics and Business program of the Asia Centre. She is responsible for the Cyberspace program. Candice has been working with the Asia Centre since 2005. She has also been working as a consultant in international development strategy since 2006. She advises European companies in defining and implementing their market entry strategies in China and South East Asia.

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XI. REFERENCES

Bank Negara, Quarterly Bulletin, Malaysia Ministry of Finance, First Quarter 2015, Second Quarter Quarterly Update on the Malaysian 2015, Third Quarter 2015 Economy – 3rd Quarter 2015

Euler Hermes Economic Research, OCBC Bank, Malaysia Monitor, 13th Country Report Malaysia, November 2015 September 2015

OCBC Bank, Malaysia Monitor, 23rd Hal Hill, Tham Siew Yean, Ragayah October 2015 Haji Mat Zin, Malaysia's Development Challenges: PricewaterhouseCoopers, Doing Graduating from the Middle, Business in Malaysia 2013 Routledge, 2013

PricewaterhouseCoopers, Study on Har Wai Mun, Malaysian Economic Potential Economic Impact of TPPA Development, Issues and Debates, on the Malaysian Economy and 2007 Selected Key Economic Sectors, December 2015 Institute of International Finance, Update on Malaysia, November RHB Economic Outlook, Malaysia, 2015 25 September 2015

International Monetary Fund, IMF Scotiabank, Executive Briefing, Country Report No. 15/58, Malaysia, August 2015 Malaysia, March 2015

UOB Flash Notes, 23rd November Malaysia Investment Development 2015 Authority (MIDA Stockholm), Malaysia in Dynamic Asia, 2015 World Economic Forum, The Global Competitiveness Report 2015-2016, September 2015

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