Economy
The economy of Malaysia is the third largest in Southeast Asia and the 35th largest in the world, with a nominal GDP US$364.7 Billion in 2019 (current US$) (US$398.67 Billion at constant 2010 US$ prices). The economy of Malaysia was in 2019 the 27th most competitive in the world, in a much better position regarding its productivity compare to Thailand, Indonesia, Philippines and Vietnam. The economy of the country is relatively open, state orientated and newly industrialized with export orientation. Although the state plays a significant role in guiding the economic activities through macroeconomic plans, its part is slowly declining.
Since the 1970’s the economy of Malaysia has transformed from being based primarily on the exports of raw materials, to one that is among the strongest most diversified and fastest growing in Southeast Asia. Although primary production such as palm oil, rubber, tin, petroleum, and natural gas commercial hardwood remain important part of the economy, Malaysia has emphasized to export-oriented manufacturing in order to enlarge its economic growth. Factors such as educated labor force, well developed infrastructure political stability and undervalued currency helped Malaysia to attract foreign investment from Japan and Taiwan and establish a productive and competitive manufacturing sector.
Since the early 1970’s the Malaysian government has promoted a social and economic restructuring strategy. Initially this strategy was called New Economic Policy (NEP) and later New Development Policy (NDP) and sought to achieve a balance between economic growth and the fair redistribution of the wealth to the society. One of the most important goals of this strategy was to help the Malay population and other indigenous groups to obtain greater economic opportunities and develop their management and entrepreneurial skills.
Furthermore, this strategy promoted the privatization of many public sector activities including the national railway, airline, automobile manufacturer telecommunications and electricity companies. This procedure continued throughout the 1980’s and 1990’s thanks to the reformer Prime Minister Mahathir Mohamad. The later, in 1991 presented the strategic plan “Vision 2020” according to which Malaysia would become a self-sufficient industrialized nation by 2020. The strategic plan of the Prime Minister Mahathir Mohamad was adopted and implemented by his successor Prime Minister Najib Razak (April 2009 - May 2018) who inaugurated two program concepts in 2010, the “Government Transformation Program” and the “Economic Transformation Program”.
The two programs helped the Malaysian Economy to become one of the most competitive in Asia in 2014-2015, ranking 6th in Asia and 20th in the World, higher than countries like Australia, France and South Korea. It is important to mention that Malaysia achieved an average annual 6.5% grow of its GDP from 1957 - 2005. According to the IMF, the GDP per capita of Malaysia in 2020 could reach US$11,485 while according to a HSBC report, Malaysia will become the world’s 21st largest economy by 2050, with a GDP of US$1.2 Trillion (US$ year 2000) and a GDP per capita of US$29,247 (US$ year 2000).
The development of the Malaysian economy will be based primeraly on the fields of the production of electronic equipment, liquefied natural gas and petroleum. In order to further divert its economy, the Malaysian government tried hard to increase country’s tourist industry. Furthermore, the Malaysian government promoted “My Second Home” program, which allows foreigners to live in the country in a long stay for up to ten years. The new program helped Malaysia ranked in 2016 at the 5th position on “The World’s Best Retirement Havens”. As a result, tourism became Malaysia’s third largest source of foreign exchange.
Finally, Malaysia invested a lot on trying to improve the banking and financial services sector of the economy. As a result to that Malaysia has become the world’s largest Islamic banking and financial center. A typical example of this successful policy is the island of Labuan located off the southwest of Sabah which since 1990 has served as an international financial center. The Malaysian governments have been encouraging foreign investments in the country, promoting competition and the privatization of publicly held enterprises. The state-run Bank Negara Malaysia is responsible to regulate the banking and insurance sector of the economy.
After the Asian financial crisis of 1997-1998, Malaysia’s economy has been on an upward trajectory, averaging growth of 5.4% since 2010, and is expected to achieve its transition from an upper middle-income economy to a high-income economy by 2024. According to the World Bank, the GDP of Malaysia in 2019 was US$364.7 Billion (at current US$ prices) increased by 1.7% compared to 2018 (US$358.58 Billion at current US$ prices) and US$398.67 Billion (at constant 2010 US$ prices) increased by 4.18% compared to 2018. In general terms the GDP of the country has been increasing significantly since 1987 (US$32.18 Billion in current prices, and US$62.58 Billion in constant 2010 US$ prices) till today.
Between 1987 and 2019 within a period of 32 years, the GDP of the country was reduced or remained stable only 6 times.This was in 1997 and 1998 (the Asian financial crisis), 2001 (the 9/11 terrorist attack in N.Y, U.S.A), 2009 (world economic crisis), and finally 2014-2015.
According to the Bank of Malaysia the composition of the GDP (at current prices) of the country in 2019 was as follows:
• Agriculture: 7.25%
• Mining and Quarrying: 8.56%
• Manufacturing: 21.44%
• Electricity, Gas and Water: 2.7%
• Construction: 4.69%
• Wholesale and Retail Trade, Accommodation and Restaurants: 20.54%
• Transport, Storage and Communication: 9.47%
• Finance, Insurance, Real Estate and Business Services: 11.12%
• Other Services: 4.96%
• Government Services: 8.09%
• Import duties: 1.12%
Malaysia is an export orientated economy with a large trade surplus since late 1990’s.
In 2019 Malaysia’s trade surplus reached US$33.11 Billion and continued to register double digit growth for 3 consecutive years. The trade surplus of the country was increased compared to 2018 by 11%, although total trade was contracted by 2.5%. According to the Malaysian External Trade Statistics (December 2019) the exports of Malaysia were decreased marginally by 1.7% from the preceding year, while imports declined by 3.5%. The value of the exports of Malaysian goods around the globe in 2019 was US$238.1 Billion.
The biggest export customer of Malaysia in 2019 are the countries of ASEAN which consume 28.8% of Malaysia’s total exports although the exports to the ASEAN were marginal decreased of 1.1%. Out of the ten member states of ASEAN, Singapore, Thailand and Viet Nam remained Malaysia’s top 3 export destinations for 2019 accounting for 80% of the country’s exports to ASEAN. Meanwhile the exports of Malaysia to the Philippines increased by 7.3%, to Cambodia by 61.1% and to Brunei by 3.4%.
The second biggest customer of Malaysia in 2019 was China, which has been for 11 consecutive years one of its largest trading partner. In 2019 the Malaysian exports to China constituting 14.2% of the total exports of the country, marking an increase of the exports in 2019 by 0.3% compared to 2018. The fourth largest customer of Malaysia in 2019 was the E.U which imported 9.7% of the total exports of Malaysia, although the exports were reduced during this year by 2.9% compared to 2018.
Similarly, the US imported 9.7% of Malaysia’s total exports of goods in 2019, constituting the U.S the fourth largest customer of Malaysia.The fifth largest consumer of the Malaysian goods in 2019 was Japan which imported 6.6% of the total exports of the country, although that year the Malaysian exports were reduced by 7.3% due to lower exports of LNG, wood products and E&E products. From continental perspective 72.3% of Malaysia exports by value were delivered to Asian countries and 11% were sold to North American importers.
The top 10 export goods of Malaysia by value in US$ and as a percentage of the overall exports during 2019 are:
• Electrical machinery, equipment: US$82 billion (34.4% of total exports)
• Mineral fuels including oil: $34.5 billion (14.5%)
• Machinery including computers: $21.8 billion (9.1%)
• Animal/vegetable fats, oils, waxes: $11.5 billion (4.8%)
• Optical, technical, medical apparatus: $10.1 billion (4.2%)
• Plastics, plastic articles: $9.6 billion (4%)
• Rubber, rubber articles: $7.1 billion (3%)
• Iron, steel: $4.4 billion (1.8%)
• Other chemical goods: $4.1 billion (1.7%)
• Organic chemicals: $4 billion (1.7%)
The products mentioned above accounted for 79.4% of the overall value of the global exports of Malaysia in 2019. Iron and steel were the fastest grower among the top 10 export categories, increased by 36.1% from 2018 to 2019. The products with the second better improving export sales record were, optical, technical, and medical apparatus, increased by 6.5% from 2018 to 2019. Regarding the Malaysian imports in 2019 the country imported from around the world goods worth of US$204.9 Billion. From a continental perspective 73.5% of Malaysia’s total imports by value in 2019 were purchased from Asian countries, 10.9% from European trade partners, 8.7% from North America and 3.2% from Australia and New Zealand.
The top 10 goods that Malaysia imported in 2019 by value in US$ and as a percentage of the overall Malaysian imports are:
• Electrical machinery, equipment: US$55.8 billion (27.3% of total imports)
• Mineral fuels including oil: $29.8 billion (14.6%)
• Machinery including computers: $20.8 billion (10.1%)
• Plastics, plastic articles: $8.9 billion (4.4%)
• Iron, steel: $6.6 billion (3.2%)
• Vehicles: $6.5 billion (3.2%)
• Optical, technical, medical apparatus: $5.6 billion (2.8%)
• Gems, precious metals: $4 billion (2%)
• Organic chemicals: $3.8 billion (1.9%)
• Other chemical goods: $3.7 billion (1.8%)
Malaysia’s top 10 imports accounted for 71.1% of the overall value of its product purchases from other countries. The import of optical, technical and medical apparatus was the fastest-growing category of products increased by 2.7% in value from 2018 to 2019. In second place was the vehicles category which increased by 2.3% during the same period. The only other product category to expand in Malaysian purchases was plastics including articles made from plastic increased by 1.9%.
State Budget, Deficit, Debt
The expenditure of the Federal Malaysia state budget during 2020 is forecast to be RM297.02 Billion (approximately US$70.51 Billion) reduced compared to RM315.96 Billion (approximately US$76.27 Billion) in 2019. According to the data published the “2020 Federal State Budget” will be distributed as follows:
Ringgit Malaysian (RM)
• Finance RM68,340,173,500 (23% of the total budget)
• Education RM64,122,868,300 (21.58% of the total budget)
• Health RM30,602,080,900 (10.3% of the total budget)
• Home Office RM16,928,194,700 (5.7% of the total budget)
• Defence RM15,579,892,600 (5.24% of the total budget)
• Rural Development RM8,415,535,400 (2.83% of the total budget)
• Prime Ministers Offices RM7,900,435,900 (2.65% of the total budget)
• Agriculture RM4,898,010,400 (1.65% of the total budget)
• Housing Local Government RM4,781,888,800 (1.6% of the total budget)
• Water Natural Resources RM4,776,733,000 (1.2% of the total budget)
• Transport RM3,614,058,500 (1.09% of the total budget)
• Economic Affairs RM3,238,185,100 (0.65% of the total budget)
• Communications RM1,951,426,400 (0.53% of the total budget)
• Energy, Science and Technology RM1,587,215,000 (0.49% of the total budget)
• Federal Territories RM1,462,620,300 (0.49% of the total budget)
• Youth and Sports RM1,155,197,100 (0.38% of the total budget)
• Domestic Trade RM1,098,461,400 (0.37% of the total budget)
• Foreign Affairs RM817,775,000 (0.27% of the total budget)
• Primary Industry RM670,150,000 (0.22% of the total budget)
The high Public debt has been one of the most serious problems of the economy of Malaysia. In the 1990 the Malaysian total Public debt reached an all time high of 80.7% of the GDP and several years later in 1997 it was reduced to 31.8% of the GDP, although it averaged 50.2% of the GDP from 1990 till 2018. For this reason, the Malaysian government self-imposed a debt ceiling which has been raised multiple times from 40% of the GDP in 2003 to 45% of the GDP in 2008 and 55% of the GDP in 2009.
The last 5 years the Public debt has been stable about 51.86% of the GDP (2015: 53.6%, 2016: 51.9%, 2017: 50.1%, 2018: 51.2%, 2019: 52.5%). According to the IMF-World Economic Outlook Database the General Government Gross Debt in 2020 is estimated to reach 56.5% of the GDP, higher than the Debt the country had the previous years. On the other hand, the real GDP of the country had an annual growth close to 6% from 1971 to 2018.
According to analysts the increase of the Malaysian Public debt especially during the recent years might be related to the “Vision 2020” strategic plan initiated in 1991. The plan envisioned to make Malaysia a developed and high-income country by the year 2020. It is estimated that the high level of Public debt may limit the development and the objectives of the Malaysian economic transformation plan while uncertainties of the national debt service payments could create discouragement and difficulties in the pursuit of economic reforms.
The Malaysian Federal government sector accounts have been always in a state of deficit with the exception in 1960 and 1993-2018. The deficit of the Federal government was quite high in 1981, 1982 and 1986 where the deficit to GDP was 15.6%, 16.7% and 10.5% respectively. The Malaysian deficit is due to the expansionary fiscal policy implemented from 1980 to 1987 in order to address the recession problem.
In the early 1990’s the deficit of the Federal government of Malaysia started to decline and since then has become excessive due to the government’s public policies reducing spending and relaxing its role in the economy. According to “Focus Economics” the expected deficit in 2019 was 3.4% of the GDP and estimated to be reduced to 3.2% in 2020, although the initial estimated was 3% of the GDP. According to the forecast of the Malaysian government the deficit will further reduce in 2021 and it will reach to 2.8% of the GDP.