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 AprilApril, , 2016 2016 3 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 AprilApril, , 2016 2016 4 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. AprilApril, , 2016 2016 5 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. AprilApril, , 2016 2016 6 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 AprilApril, , 2016 2016 7 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 April, 2016 8 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. January,April,