My travels recently took me to Malaysia, a country that has experienced robust growth rates, but also some growing pains. Malaysia has been benefiting from favorable fundamentals generally in Southeast Asia and the 10 states comprising the Association of Southeast Asian Nations (ASEAN), including a youthful demographic and an expanding middle class. During his 22-year term in office, former Prime Minister Dr. Mahathir Mohamad led Malaysia in diversifying its economy away from dependence on exports of raw materials, which earned him the nickname, “Father of Modernization.” The current prime minister, Dato’ Sri Mohd Najib Bin Tun Haji Abdul Razak, has continued pro-business policies and initiated civil reforms. We think that as the government continues to make progress toward reform efforts, Malaysia’s investment potential should expand. Additionally, we believe liquidity being provided by the Bank of Japan and the People’s Bank of China—which cut its benchmark interest rates for the first time in more than two years—should help support Malaysia and other regional markets as the US Federal Reserve has ended its long-standing quantitative easing program and is considering raising rates.
Lofty Goals
Malaysia has set an ambitious goal of achieving “high-income” status by 2020, a standing the World Bank uses to define developed markets.1 Since we began investing in Malaysia in the late 1980s, we’ve seen a lot of changes take place. The country has opened up to more foreign investment, while the number of listed companies and market liquidity have grown significantly, providing investors with an expanded opportunity set. Known as a leader in rubber production, Malaysia has been successful in diversifying its economy into areas including tourism, electronics, pharmaceuticals and medical device manufacturing, and even as a hub for Islamic finance. In recent days, we have seen Malaysia embrace the reform efforts we think are needed to help achieve the ambitious goals the country has set, not only in attaining developed-nation status but also in working to become a regional hub in trade, education and manufacturing. We think Malaysia has a particularly symbiotic relationship with neighbor Singapore: Malaysia offers lower-cost labor, and Singapore offers technological prowess.
Subsidies Subsiding
Malaysia’s old system of subsidies, while popular with the people, created a drain on government resources. Malaysia is running a fiscal deficit, and there is concern it could find itself with a current account deficit as well. The government has been making strides at avoiding this “twin-deficit” scenario, including removing some long-standing subsidies. As of December 1, fuel subsidies were removed; the cost of a popular grade of gasoline and diesel will be based on a managed float system going forward. The Malaysian equity market—which has been underperforming some other equity markets in the region this year—reacted positively to the announcement, as the phasing out of these subsidies could result in annual savings to the government of about 20 billion ringgit (US$6 billion), according to various reports. The International Monetary Fund (IMF) announced that removing the fuel subsidies would reduce Malaysia’s projected deficit to below 3% of gross domestic product (GDP) in 2015, down from 3.9% in 2013.2 The IMF also praised the introduction of a goods and services tax (GST) and the strengthening of social safety nets as decisive moves that should help ensure the sustainability of government finances, and allow more spending aimed at promoting sustainable and equitable medium-term growth. We agree! The nation’s central bank, Bank Negara Malaysia, has also been making strides to reduce household leverage and contain inflationary pressures.
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