Malaysia’s economic issues are overwhelming. The country wants to implement development projects such as Iskander Malaysia, the high speed rail track with Singapore and the growth of its Islamic Finance industry, while at the same time attempting to solve its debt problems. This balancing act will be a difficult task for Najib Razak, the country’s prime minister.

In an interview by Bloomberg News, Prime Minister Najib was quoted as saying “We’re very closely monitoring how we manage our macro position as well as our fiscal and debt to make sure that we will not be downgraded”. This was said due to Malaysia’s mounting concerns about its rising debt following a Fitch Ratings decision to cut the country’s credit outlook in July of 2013. Malaysia has run up its annual budget deficit every year since 1998.

In September 2013, Moody’s Investor Service indicated that Malaysia’s deficit measured as a percentage of overall GDP might exceed Najib’s target of 4.0%. The agency warned the Malaysian government that if its “fiscal house” is not put in order, any new targets will become “increasingly out of reach” unless further measures are taken. Moody’s currently has a debt rating of Malaysia’s government bonds at A3 with a stable outlook.

The Malaysian Ringgit, along with many currencies in Asia such as the Thai Baht and Indian Rupee, declined sharply in late 2013. This was due to the U.S. Federal Reserve’s change in monetary policy and decision to reduce quantitative easing (QE).

During this time, emerging economies such as Malaysia suffered some of the worst capital outflows in history. This meant significant declines across the board for many regional currencies, including the Ringgit, and a loss of confidence from investors.

 

Trying to Solve Malaysia’s Economic Issues

Malaysia’s problems, along with the current investment climate, makes people question whether Malaysia is able to continue its growth.

After the elections in May of 2013, Prime Minister Najib Razak and his ruling United Malays National Organization (UMNO) party was reelected, but with a slim majority. Investors, market watchers and local voters are all looking for indications that the Malaysian government is serious in tackling the country’s challenges.

Given Malaysia’s fiscal situation, the government has decided to implement stricter fiscal regulations which include raising fuel subsidies and postponing some public infrastructure projects. The Prime Minister has also set his goal for the country’s overall GDP growth at about 4.0% to 5.0% growth in 2014.

Malaysia seems to be attempting to put its fiscal issues in order while at the same time convincing both foreign and domestic investors that the necessary reforms are being made to solve these problems. However, one could question whether these reforms are simply a public relations tactic used by the UMNO-led government to please some of the dissatisfied voters from the May 2013 election.

Furthermore, the reduction in government spending at a time when the global economy is slowing may result in the country cancelling or delaying some  public infrastructure projects. These include the cross-border high speed rail system between Singapore and the country, which could help enhance foreign direct investment, tourism, employment and trade. These are benefits that would help make sure that Malaysia remains one of the region’s most important financial centers and a major business destination for many years.

 

About Kate Wong

Kate previously worked in asset management for a major bank headquartered in Beijing and now manages her own venture capital fund. She also works as a freelance consultant to start-up companies in mainland China and Hong Kong.
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