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Euromoney Country Risk

Country risk expert insight: Malaysia investment risk set to ease

Malaysia has been hit by political scandal and economic woes, but ECR experts believe it should begin to recover this year.

Malaysia stock market-R-600

Upon reflection: Things are looking up at Bursa Malaysia in Kuala Lumpur

In Q4 2015, Malaysia’s risk score was hit by sweeping declines in the political assessment criteria.

ECR experts noted increased risks in everything from corruption and transparency to institutional risk and the regulatory environment in the country. The largest decrease in the political scores was for overall government stability.

However, as the latest round of ECR scoring comes to an end, there are signs of improvement.

There is also mixed news in the economic risk assessment categories. So far in the Q1 2016 survey, experts have noted improvements in the areas of monetary policy and government finance.

The overall ECR score is 61.88, which places Malaysia 36th out of 186 countries worldwide.

Meg Mulry-160x186

Meg Mulry, senior economist, economic and industry research, AM Best

“Malaysia benefits from having significant natural resources, well-developed infrastructure and a pro-business outlook, which has led to the expansion of a well-diversified and thriving economy.

“However, in 2015, the country faced some more significant headwinds with depressed oil prices (oil exports represent 20% of government fiscal revenues); currency weakness (the ringgit is down 20% year/year versus the US dollar); global growth concerns (most notably from China, one of Malaysia’s largest trading partners); and a significant corruption scandal involving personal money transfers to prime minister [Najib] Razak, which has resulted in a number of international investigations.

“While a number of these headwinds are expected to ebb with the recent rebound in the global price of oil and the stabilization of the ringgit, longer-term concerns over the corruption allegations, a government crackdown on opposition groups, and the growing calls for the resignation of the prime minister could linger.

“Ongoing government turmoil has the potential to reduce foreign direct investment and weigh on consumer and business sentiment, depressing growth. Fiscal headwinds and global growth concerns will also remain in place near-term as budget cuts are made and China repositions its economy towards services.

“Malaysia remains a top destination to do business. However, near-term concerns over political transparency, fiscal headwinds and a weaker global outlook could constrain growth in 2016.”

Rahul Bajoria-160x186
Rahul Bajoria, regional economist, Barclays

“Economic activity is slowing down gradually in Malaysia. Growth slowed to 5.0% in 2015, from 6.0% in 2014, and the government expects it to slow further in 2016, to 4.0% to 4.5%. The slowdown in activity is led by private investment, as key sectors linked to commodity prices continue to face headwinds.

“Private investment growth slowed to a six-year low of 6.5% in 2015, after three consecutive years of double-digit upticks. Government spending continues to be a drag on activity. With falling oil prices, the government has announced more cuts to its planned expenditure, in order to achieve its fiscal targets.

“Malaysia’s external position is improving gradually as exports are performing marginally better and imports are weakening in line with slower growth in domestic demand. This will likely lead to a gradual turnaround in Malaysia’s current-account surplus.

“Even capital outflows have been softening, as domestic institutions have been liquidating assets abroad and bringing funds back to Malaysia.

“Political noise continues to fade. After securing buyers for some assets of 1Malaysia Development Berhad (1MDB), Razak appears to have consolidated his position within both the government and his party, helping to stabilize market sentiment as well.

“The stabilization in ratings is indicative of this relative stability.”

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.

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