Malaysia

Malaysia has exhibited dynamic GDP growth over the past years, with +4.7% per year on average in the 2000s and +5.4% in the 2010s. However, the Covid-19 pandemic since early 2020 and the ensuing Movement Control Orders put in place by the government have led to strong volatility in Malaysia’s growth path. The economy experienced a -5.7% full-year recession in 2020 (the lowest rate since 1998), which was followed by a patchy recovery of +3.1% in 2021. The recovery was strong in 2022, with growth of +8.7%, thanks to the buoyant global environment, global commodities boom and domestic demand recovery. However, growth will slow down in 2023 amid weakening external demand, high inflation and tightening monetary policies. We forecast GDP growth to be +3.8% in 2023, followed by a mild recovery of +4.3% in 2024.
 
Fiscal policy has been and is likely to remain expansive in the short-term through subsidies on electricity tariffs and fuel and infrastructure expenditures. Policymakers remain more focused on supporting the country’s economic recovery rather than debt sustainability. As such, the fiscal deficit reached 5.5% of GDP in 2021, followed by 4.4% in 2022, and is likely to remain around 3.4% in the coming years (compared with 2.0% before the pandemic). 

On the monetary side, the Bank Negara Malaysia (BNM) implemented policy rate hikes by a cumulative 100bps in 2022. Though the inflation rate moderated to 3.8% in December, compared to 4% in October and November, underlying prices remain high and the BNM is likely to continue to tighten monetary policy till the mid of 2023.

Malaysia exhibits an above-average business environment but is facing a downward trend. The Heritage Foundation’s Index of Economic Freedom survey 2022 assigns Malaysia rank 42 out of 184 economies (rank 22 in 2021), which pushed it down to the "Moderately Free" category, from “Mostly Free” previously. The drop relects the decrease in fiscal health, business freedom and labor freedom, yet monetary freedom and trade freedom are still bright spots. Meanwhile, the World Bank Institute’s annual Worldwide Governance Indicators survey indicates that Malaysia performed well in government effectiveness and regulatory quality, though problems related to voice and accountability need serious attention. Given its poor renewable electricity output and climate-change vulnerability, Malaysia ranked 147 out of 210 economies in our proprietary Environmental Sustainability Index.

Malaysia’s predominant political party, United Malays National Organization (UMNO), has long held power in the ruling coalition. The situation changed in 2018 amid a corruption scandal, launching an era of political instability, with four different prime ministers over a period of five years. In the November 2022 election, no party coalition won a majority of 112 seats, which is the first time that Malaysia has seen a hung parliament since its independence. The leader of the multicultural Pakatan Harapan (PH) became the 10th prime minister of Malaysia and heads a unity government. While the signing of a memorandum of agreement among the component parties of the coalition will ease political uncertainty, the state assemblies led by the opposition refused to hold elections concurrently with the national election, which will bring some political instability in 2023.