Malaysia located in Southeast Asia is a modern, progressive Muslim country home to a vibrant population of whom many enjoy a high end lifestyle consuming many of the world’s top brands at several affluent shopping centers. Muslim Malays represent approximately 60 percent of the population. Since independence from the United Kingdom in August 1957, Malaysia with its 23.9 million citizens has successfully evolved from an exporter of rubber, tin to that of a hi-tech industrial manufacturing economy including cars & electronics to finally now advancing into an information knowledge based economy. The Malaysian government is actively promoting the development of the ‘Multimedia Super Corridor’ (MSC) located in Cyberjaya, Malaysia (50 miles south of Kuala Lumpur) which is hyped to be the next Silicon Valley of Asia. Malaysia is globally known for its famous landmark of being home to the two tallest skyscrapers in the world, the twin state-owned oil company Petronas Towers.
The beginning of the Asian financial and regional currency crisis that began in mid 1997 greatly impacted the valuation of the ringgit resulting in a large devaluation for the currency. In September 1998, the Malaysian government shocked the world by abandoning tight monetary and fiscal policies in favor of implementing capital controls to help stabilize capital flows thus giving the economy greater flexibility in lowering interest rates. The ringgit was accordingly pegged at 3.80 MYR to the US-dollar (USD) which has stabilized the economy and allowed Malaysia to further develop into a middle income country.
POLITICS:Prme Minister Abdullah bin Ahmad Badawi of the ruling moderate government coalition United Malays National Organization (UMNO) has been in power since October 2003 after he replaced former Prime Minister Dr. Mahathir Mohamed. Similar to Dr. Mahathir, they both represent the UMNO led coalition which has been in power since 1981. PM Abdullah is continuing the party platform of stability and economic growth focusing on a pro-business platform. Dr. Mahathir during his term in power successfully transformed Malaysia from a racially divided colonial economy based on commodities production into a modern Islamic state with a large Malay middle class. Prime Minister Abdullah won a decisive election victory in March 2004 as the opposition Islamic Party of Malaysia (PAS) who support fundamentalist Islamic views lost significant electoral support.
Dr. Mahathir’s choice for capital controls and rejection of Western money and IMF policies in 1998 have worked surprisingly well for Malaysia as it has stabilized the economy and currency. Although criticized by the world community for implementing capital controls, the policy however worked well in minimizing capital flight. Dr. Mahathir was considered to be anti-West, he was also in favor of regional and economic policies that will reduce Western influence over Southeast Asia. Since February 1999, the government began to ease up on capital controls and signaled its intention to relax restrictions in foreign ownership of Malaysian firms.
Dr. Mahathir took a tough stand on domestic terrorism activities by implementing draconian laws that arrested and cracked down on militants alleged to belong to regional terrorist networks with links to al Qaeda. These are tough laws for a Muslim country that allow suspects to be held indefinitely without trial. Political risk concerns for Malaysia deal with the future potential rise in support for the Pan-Malaysian Islamic party (PAS) in the next election. Politically, Malaysia is still for the most part a semi dictatorship where absolute freedom does not exist as it is feared that true democracy may undermine the stability of the nation.
ECONOMY: free open market economy, modern, advancing. The Malaysian economy has followed an ‘East Asian economic model’, that is foreign-invested export manufacturing industries were encouraged at the expense of other industry groups. The economy consists of a fairly large domestic and an export based economy with industry segments including agricultural, rubber, light manufacturing, electronics, textiles, wood products, tin mining and timber-logging. A massive fiscal led expansion after the 1997-98 financial crisis was implemented resulting in persistent fiscal deficits although expected to be balanced in the next few years.
Malaysia is a net exporter realizing large trade surpluses classifying it as a middle income country, both the United States and Japan are its two largest trading partners. The information technology slump in 2001 hit Malaysia’s export based economy hard as GDP came in at 0.3 percent as exports fell by 11 percent. Economic fundamentals have improved with growing foreign exchange reserves makes a Malay domestic currency crisis less likely in the near term. The Malay economy does have an over reliance on low value added exports, it is a trade dependent economy, merchandise exports were valued at equivalent of nearly 100 percent of its GDP. Capital inflows have been strong as much speculation has been taking place on the event or a ringgit appreciation. Malaysia’s high public debt at 69 percent of GDP (2003) is forecasted to decline to the 40 percent level by year 2009.
Malaysia has realized strong growth in its electronics and energy exports as they are both the mainstay of the economy. The future of the Malaysian economy may resemble a similar pattern to what has happened in South Korea. A transformation from an old economic model of favoring export industries and large infrastructure projects towards domestic consumption. The next phase of Malaysian economic growth will move away from its very high domestic saving rate of 40 percent to a consumption based economy similar to that of the United States of borrow and spend.
Economic Statistics
As measured by purchasing power parity, total GDP stands at approximately $230 billion USD (2004) with corresponding GDP per capita at $9,700 USD. Nominal GDP stands at 480 billion MYR (2005 estimate). GDP growth rates include year 2004 at 7 percent, 2005 estimated at 6 percent, year 2006 at 6.2 percent. Other GDP growth figures for interest include year 2003 at 5.5 percent and 2002 at 4.1 percent. CPI inflation has stayed low since a high of 36 percent in 1996 and is currently running at 2.5 percent annually and projected for 2006 at 2.5 percent, year 2000-04 inflation ranged from 1.1 to 1.8 percent. Huge current account surpluses with year 2004 at 13.5 percent of GDP, year 2005 projected at 10 percent range. Trade component is also in a large surplus with year 2004 at $24.2 billion USD. On the fiscal account, it is in deficit with year 2004 projected at 4.25 percent and 2005 at 3.25 percent, deficit to be in balance by 2008 with the implementation of a value added tax in 2007. Fiscal shortfall from year 2000-04 ranged from 4.5 to 5.7 percent of GDP. Public debt is at 45 percent of GDP, external debt is at $49.2 billion USD (2004) of which 30 percent is in short term instruments. Unemployment is low at 3 percent (2004).
Oil and Natural Gas
A quick energy summary has Malaysian total oil reserves at 3.2 billion barrels (2004), oil production at 785,000 bpd and exports at 230,000 bpd. Natural gas reserves for year 2004 were at 2.23 trillion cu m with exports during year 2001 measured at 22.4 billion cu m. Of concern over the immediate term is the realization that Malaysia may run out of oil reserves, possibly become a net importer of energy in 10 years time?
POSITIVE: higher levels of business and consumer confidence, cleaning up high level cronyism from many top corporate executives - corporate restructuring, full employment - low poverty rate, large middle class population, legal system based on English common law. CONCERN: human-rights record with political opponents jailed.
BANKING SYSTEM: improving along with corporate balance sheets, strong capital adequacy levels with the banks. Healthy levels of gross official reserves to more than cover Malaysia’s short term debt requirements. As of March 2005, Bank Negara, Malaysia’s central bank had official reserve assets of $72 billion USD representing 6 months of import coverage. This increase in Malaysia’s foreign exchange reserves will allow the central bank to defend the currency peg for the ringgit if required. The overall banking system is relatively free of non-performing loans (NPL) which is a tremendous improvement from the fallout of the 1997 Asian financial crisis, the banking system then deteriorated resulting in a non-performing loan level of 20 percent. Since then, the Malay banking system has been restructured with several financial institutions being closed down. May 2005 overnight interest rates are at 2.69 percent. Broad domestic money growth is relatively low and stable. Bank Negara like other Asian central banks have been buying USD to support the USD exchange rate and to hold down their respective own currencies.
REGIONAL ANALYSIS: Indonesia, Iraq, Islamic Axis, China, Thailand
The rise of Islamic tension throughout the region is a cause for concern particularly after the devastating bombing in Bali, Indonesia where upwards of 200 people were murdered. The rise of the al Qaeda terrorist group is a growing concern in Malaysia with sleeper cells. Other Islamist cells in Malaysia include the extremist Jemaah Islamiyah group and also the Kumpulan Mujahedeen Malaysia (KMM) within the Kelantan State of Malaysia. Trade with Iraq may increase if stability holds, but more importantly higher world oil prices are certainly a large financial windfall for Malaysia’s energy producing sector. China is exporting deflation with its cheap products which will force Malaysia to advance to knowledge based industries quicker than originally planned as manufacturing gets transferred to China. A China revaluation of its own peg to the USD will force Malaysia to follow the move should China move before Malaysia. Both the Chinese yuan and Malaysian ringgit are moving towards floating currencies in the medium to long term. Many Asian countries are realizing fast growing USD reserve positions such as Thailand. Other regional concerns include the problem with piracy within the Malacca Strait for shipping.
KNOWLEDGE: Islamic Opposition, Gold Dinar
Radical Islamic opposition in Malaysia particularly in the Northern provinces, potential growing threat to regional peace and stability. Malaysia with a Muslim majority has lived peacefully for decades as the nation has become wealthier mixed in with the Buddhist, Taoist, Confucian, Hindu, Christian, Sikh minorities. To date, Malaysia’s internal security police are very good and effective keeping the peace. To date, the impact of terror threats and domestic Islamic fundamentalism has had no impact on the value of the ringgit?
The ringgit was pegged at 3.80 MYR to the USD in September 1998 as the Malay government tried to force hedge funds to be more transparent. Today, many parts of the Islamic world see gold as a much more stable currency than the unjust unstable Western global monetary system, particularly after September 11, 2001. The Malaysian government implemented the Islamic gold dinar in mid 2003 to commence bilateral trade in the gold-backed currency with a goal of replacing the USD for commercial transactions. Former Malay Prime Minister Dr. Mahathir at the time seeked to insulate Malaysia from the global forces even as increased exports drive the economy forward.
It is thought that implementing the gold dinar will help Malaysia reduce its dependence on Western finance treasury. It should be noted that the ringgit will remain as the currency for the majority of transactions as Malaysian trade with the Islamic states is very small percentage of national trade. The gold dinar is to be used exclusively for international trade ‘trading currency’ and not to be used as local currency within Malaysia. The Islamic world forbids the use of fiat currency since it is essentially a promissory note. These currency developments are very bullish for gold bullion and will help to provide a pillar of support for the precious mineral.
CURRENCY: ISO symbol ‘MYR’, Malaysian ringgit. At the time of review on May 25, 2005, the ringgit remained pegged at 3.80 MYR to the US-dollar (USD). The currency crash of the USD over the last three years has certainly helped to support the exchange peg as the ringgit gets even more undervalued to many its neighboring countries currencies. Several Asian currencies have appreciated to the USD since 2002 thus further giving the ringgit a competitive advantage in exports with a cheaper currency. As measured by purchasing power parity, the ringgit was in the vicinity of being undervalued to the USD by upwards of 55 percent (December 2004). Liberalization of foreign exchange regulations as most of the capital controls have now been eliminated as Malaysia is ultimately on its way to a floating exchange rate regime.
CURRENCY HISTORY: the formal name for the ringgit to be used for national currency came into circulation in 1975, previously, the Malaysian dollar was in use since Malaysian bank notes were first issued in 1967. Historical valuations include January 1993 at 2.59 MYR to the USD, January 1994 at 2.71, January 1995 at 2.55, June 1995 at 2.439, January 1996 at 2.55, January 1997 at 2.48, August 1997 at 2.76, December 1997 at 3.76, August 1998 at 4.19, September 1998 the government re-pegged the ringgit to 3.8 MYR to the USD where it stands today.
CURRENCY FORECAST: possibility of a new currency exchange framework. A movement towards a managed float within a band trading range against a trade-weighted basket of hard currencies is likely rather than a revaluation of the peg. Appreciation is ahead for the ringgit, expect a minimum 10 to 15 percent appreciation of the ringgit to the USD for starters. The current valuation for the ringgit exchange peg is considered by many analysts one of the world’s most undervalued currencies. Many of the Asian countries are getting much stronger economically, volatility and currency crash risk is becoming less likely. But of importance to Malaysia is that it comparatively in a sounder financial position than many of its neighbors such as Indonesia. Further, the currency correction of the USD itself over the last 3 years supports a ringgit appreciation. Any significant move in a trading partner currency valuation, Malaysia will be forced to adjust as has been the case with the very large USD move. Examples of this include a USD move to 1.40 to the EUR or a Japanese move of the yen falling below 100 JPY to the USD. Japan for example is a large source of Malaysia’s imports, increasing cost of imports will hamper Malaysia’s cost structure and quite possibly slow the economy. China a major export competitor to Malaysia, if it moves, expect Malaysia to soon follow.
Historically, currency pegs ultimately fail. The majority of industrialized nations that have had pegs have experienced a currency crisis and Malaysia is no exception. BankINTRO.com forecasts that Malaysia’s currency peg will be replaced by a free floating or the more likely managed float currency within the next 2 years. All eyes will certainly be on China as well as they move towards a freer exchange rate regime going forward. In the longer term, perhaps by 2012, Malaysia may eventually consider the gold dinar for domestic currency use or the ringgit itself backed by gold. Other options in the long term include the consideration of a single zone Asian currency possibly to be sponsored by the Asian Development Bank (ADB) to compete with the North American dollar zone, the Japanese yen and the Euroland euro.
The ringgit is sound at it is supported by large international reserve position, low inflation and small external debt.When analyzing Malaysia’s reserve adequacy ratio of short term debt divided by reserves, currency stability is good. Malaysia has a 4.5 month coverage of short term debt to external debt coupled with solid credit ratings given by major global credit rating firms.
UPDATED: May 25, 2005
