MALAYSIAN ECONOMY

More Upside to Malaysia

By Yiannis G. Mostrous 5/5/2011
Emerging Markets

Readers of the Global Investment Strategist know that we’ve been bullish on Malaysia for some time, a stance that has generated solid returns. Even after delivering such a strong performance, Malaysia remains one of our favorite investment destinations for 2011.
Malaysia traditionally has been viewed as a backward economy with a very defensive market. But Prime Minister Najib Razak is widely viewed as someone who can lead Malaysia’s people and economy. The success of his efforts thus far has provided a roadmap to the country’s long-term development, and investors like what they see.

The country’s economy expanded by 7.2 percent in 2010 as exports recovered on the back of a strengthening global economy. And although this performance may be difficult to replicate this year, Malaysia’s economy can still deliver gross domestic product (GDP) growth of 5 percent in 2011.

The economy has benefited from strong commodity prices; Malaysia is a net exporter of crude oil, palm oil and rubber, among other commodities. Given the size of the country’s rural economy, strength in commodity prices should provide a boost to rural household incomes, as most rubber and palm oil farmers are small producers.

Nonetheless, Malaysia’s long-term economic future will depend on improving the country’s infrastructure. To this end, Malaysia has launched an ambitious Economic Transformation Program (ETP) to revitalize the country. The government aims to attract USD444 billion in investments in 131 projects over the next 10 years and to double the country’s per capita standard of living.

This program will be very beneficial to the economy. Not only does the ETP allow for new investment in the country, it will also reduce much of the red tape that has long frustrated the private sector.

Foreign investors have responded to these positive developments. Oil services company Schlumberger (NYSE: SLB), for example, has chosen Malaysia as its regional hub. Meanwhile, foreign direct investment (FDI) inflows have risen strongly; in the fourth quarter FDI inflows rose to USD3.4 billion. That’s the highest level of FDI seen for the past 10 years, save for the month of June, 2008.

The top three contributors to Malaysia’s FDI are South Korea, the Netherlands, and Japan; most of the investment is allocated to the manufacturing, trade and financial sectors.

Malaysia’s general elections are set for March 2013, though there have been calls for an earlier, snap general election. Even if this were to be the case, the election would not occur before next year because the prime minister will need time for his initiatives to produce results and galvanize public opinion. This should be viewed, for now, as a positive for the stock market.

The success of government’s initiatives and the proper execution of projects will be critical to the long-term health of Malaysia’s economy. But the short-term picture suggests the country is on track to achieve these goals.

Malaysia currently runs a large current account surplus and has gone on a shopping spree for overseas assets. The country boasts ample foreign reserves that provide a cushion against external financial shocks. However, the country’s fiscal deficit is 5.6 percent of GDP. Although this is down from the 7 percent recorded in 2009, it remains one of the highest readings in all of Asia.

We may see a slight improvement in the deficit this year, as subsidies will rise while commodity prices remain high. Malaysia’s status as a net exporter of energy and materials means that government revenue should also increase this year. But we don’t expect to see a drastic change in the country’s deficit in 2011.

Investors should keep in mind that the Malaysian economy is small and relatively open to trade, which makes it susceptible to any downturn in global trade. Although a slowdown in global trade this year would impact Malaysia, we believe that the global economy will post respectable growth this year.

Investors seeking a foothold in Asia beyond the behemoths of China and India should consider adding Malaysia to their portfolio.