Malaysia

Basis for a robust growth outlook, but beware of downside risks

BB2

MEDIUM RISK for enterprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

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GDP	USD336.66bn (World ranking 37, World Bank 2020)
Population	32.37mn (World ranking 45, World Bank 2020)
Form of state	Constitutional Monarchy
Head of government	Ismail Sabri Yaakob (PM)
Next elections	2023, legislative

Member of the Association of Southeast Asian Nations (ASEAN)
Low inflation
Generally strong business environment
Resilient banking sector

Vulnerable to external pressures
Export dependency leads to cyclical risk
High level of private external debt
High household debt and high external debt burden

Economic recovery delayed by a new outbreak

Malaysia’s economic activity slowed down in Q1 2020 (+0.7% y/y) as a consequence of the Covid-19 pandemic. Numerous strict lockdown measures implemented by the government since 18 March led to a collapse in private consumption and business investment, affecting both the manufacturing and service sectors. As a result, GDP dropped by -17.1% y/y in Q2 2020. However, with restrictions being eased in stages, the recovery proved to be strong in Q3 2020 (GDP only down by -2.7% y/y), supported by both domestic consumption and exports. This rebound exceeds the performance of the country’s regional peers (e.g. Indonesia, Thailand and the Philippines). A third outbreak of Covid-19 led to the reintroduction of tougher movement restrictions in November 2020. This is likely to lead to another contraction in GDP in Q4 2020 (we expect -6.9% y/y). Therefore, we forecast Malaysia’s overall GDP to contract by -6.5% in 2020, before recovering to growth of +7.9% in 2021. This means that GDP could come back to pre-crisis levels in the second half of 2021. Downside risks include movement restrictions that last for longer than expected and a swift pace of policy normalization in 2021.

Meanwhile, business conditions have continued to improve, supporting long-term growth perspectives. Malaysia has advanced to rank 12 in the latest World Bank Doing Business survey (thus gaining three places), mainly thanks to the ease of getting credit and strict contract enforcement.

Macro-policies: risk of fiscal tightening in 2021

In an aim to mitigate the economic crisis, Malaysian authorities have provided rapid and relatively strong policy responses. Five fiscal stimulus packages have been unveiled since 27 February 2020, amounting to a total of RM72bn (5.1% of GDP) and demonstrating a willingness to support low-income households, help employers retain workers (wage-support scheme) and increase health spending during the crisis. However, the large fiscal deficit (we expect 8.6% of GDP in 2020) and public debt (we expect 62% of GDP in 2020) mean that the leeway to increase policy support further is limited. Some fiscal tightening is likely in 2021.

In response to the Covid-19 pandemic, Bank Negara Malaysia (BNM) lowered its key interest rate in 2020 by a cumulative 125bp (to 1.75%). Inflation was modest in 2019 (at +0.7%) and went into negative territory in 2020 (we expect -0.9% for the year). In this context, we think the policy interest rate is likely to remain low in the coming year to continue helping the economic recovery become more broad-based. In addition, the BNM announced in July 2020 that banks would provide repayment flexibility and a targeted extension of the moratorium to individuals and SMEs affected by the outbreak.

Weak external position, manageable for now

Additional financial vulnerabilities arise from external factors, including uncertainties about the outlook for world trade and commodity prices and high external debt. Domestically they stem from high household indebtedness.

Total external debt is still very high at an estimated 73.6% of GDP at the end of Q3 2020, with foreign currency-denominated external debt standing at 46% of GDP, representing two-thirds of Malaysia’s external debt. This makes the country vulnerable to external financing risks. They are mitigated to some extent by large FX reserves, covering almost seven months of imports and providing a solid cushion against potential exchange rate pressures.

Trade structure by destination/origin

(% of total, 2020)

Exports	Rank	Imports
China 17.2%	1	20.4% China
Singapore 15.4%	2	15.5% Korea, Republic of
United States 8.6%	3	8.1% United States
China 8.3%	4	7.3% Singapore
Japan 6.3%	5	7.1% Japan

Trade structure by product

(% of total, 2020)

Exports	Rank	Imports
Electrical machinery, apparatus and appliances, n.e.s. 34.0%	1	26.9% Electrical machinery, apparatus and appliances, n.e.s.
Petroleum, petroleum products and related materials 7.8%	2	8.7% Petroleum, petroleum products and related materials
Office machines and automatic data processing machines 5.7%	3	4.2% Other industrial machinery and parts
Fixed vegetable oils and fats, crude, refined or fractionated 4.3%	4	3.8% Iron and steel
Telecommunication and sound recording apparatus 3.4%	5	3.8% Non-ferrous metals

Even though the payment behaviour of domestic companies is good, the law provides no framework when it comes to late payment. As a result, interest rates and collection costs should be considered as part of the contract but often have little impact.

Low
Medium
Sensitive
High

Payments
Court proceedings
Insolvency proceedings

Payments
Court proceedings
Insolvency proceedings

Despite recent efforts, the courts' independence and transparency still have margin for improvement. While lawsuits can be slow and should be avoided whenever possible, recent reforms have seen lawsuits resolved more quicky.

In the absence of an efficient and functional debt restructuration scheme, debtor insolvency would only be dealt with through liquidation proceedings, which generally results in low recovery chances for unsecured creditors.