WHAT A YEAR

Malaysia 2016 | DIPLOMACY | YEAR IN REVIEW

When it comes to diversification, Malaysia doesn't just talk the talk. Having learned a hard lesson after the 1997 Asian financial disaster, Malaysia faces the current spate of external economic pressure with enviable resilience.

On the one hand, Malaysia is an energy giant and the world's second largest LNG exporter, while on the other it boasts a diversified economy that has proven its mettle in the face of external shocks. Malaysia posted a GDP growth of 6% in 2014, with an average growth rate of 5.7% since 2008. That said, short-term objectives have been somewhat underlined by declining oil prices, with a new budget thrown together in January in line with new expectations. Looking to fill the gap in the state coffers left by reduced hydrocarbon revenues, the government cut expenditures and made new attempts to broaden the tax base by encouraging firms to register with the authorities. But with the government firmly invested in the support of non-oil export growth, as well as an increase in domestic consumption, Malaysia isn't looking as worried as other major oil producers, especially those in the Middle East. Long term, the country's plan to reach high-income status by 2020 remains on track.

Elsewhere, Malaysia is currently chairing the Association of South-East Nations (ASEAN), as well as sitting on the UN Security Council as a non-permanent member from the Asia-Pacific. Malaysia also took the plunge and signed up to the controversial Trans-Pacific Partnership (TPP), a structure it hopes will cut trade barriers and create the world's largest free trade area.

One reason for Malaysia's relatively diversified economy is the finite nature of its hydrocarbons pool. According to experts, the country has only 33 years of remaining adequate natural gas reserves and just 19 years of oil before replacement sources, currently peripheral, must become properly mainstream. And aside from exports, which Malaysia is replacing with an ever-expanding industrial matrix, it also must look to sustainable options to cover growing electricity consumption, which has doubled over the last five years. Currently, oil, gas, and coal account for over 93% of total power generation, yet there is hope; the Sarawak region is leading the way in renewables, boasting an energy mix including 75% hydroelectric.

Switching sights to industry and manufacturing, which account for 45% of all electricity demand, and the true shape of Malaysia's economy becomes obvious; manufacturing represents 25% of GDP, with a number of diverse industries, including electronics, metals, rubber, automotive, and aerospace sitting high up the value chain. The sector is also popular with foreign investors, pulling in 38% more FDI (worth $17.44 billion) over 2014 than in the previous year. That said, there are still calls for Malaysia to redouble its efforts to pile on more value, with even manufacturing unable to shield itself completely from the woes of emerging markets in the current climate. Indeed, the World Bank revised its growth forecast for 2015 down from 4.9% to 4.7%, citing slower export growth, obvious concerns in the oil sector, and a moderation in consumer consumption after a new goods and services tax kicked in.

There is more than enough reason to shout, however, with Cushman and Wakefield ranking Malaysia as its top global manufacturing location in a recent report, on a list that also included many of the country's Asian neighbors, such as Taiwan and South Korea. This should calm concerns that the services sector is getting all the attention, with manufacturing and industry having once been three points higher than it currently is, at 28%, in terms of its contribution to GDP, compared to the services sector's 55%. Looking at banking, though, and there are hints that the sector could be slowing somewhat. While most independent analysts project overall bank loans to grow by between 7.5 % and 8% in 2015, many are less optimistic and believe slower growth rates are in store. That said, Moody's maintained its stable outlook for the banking system over the next 12-18 months, citing strong capital and stable funding levels, as well as the continued expectation of government support.
Agriculture plays a vital role in the country's 2020 targets. Malaysia's Economic Transformation Program (ETP) focuses on aquaculture, seaweed farming, herbal products, fruits and vegetables, and premium processed foods. Growth in these areas would support the giants of the sector, namely palm oil and rubber. Malaysia exports food products to over 200 countries, although the country itself is a net importer, bringing in $3.55 billion worth of goods in 2013.

Elsewhere, tourism is also a growth area, and currently contributes 5.7% to GDP, a figure that is expected to rise by 5.6% by end-2015. The sector's contribution to GDP grows by an average of 12% a year, with the government keen to target both business and leisure tourism.
All in all, Malaysia, while somewhat sensitive to the sorry state of affairs in the global commodities market, is coping far more competently than some of its oil-fed brethren. With a modus operandi of more is better, Malaysia is showing no signs of becoming complacent as it looks to heap value onto its exports as the world waits out the slump in oil prices.