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Investor Alert: Malaysia Faces Tough Going in 2015

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Malaysia is going through rough times and investors need to be informed. With the falling price of crude oil and other commodities, the slow global economy, reduced consumer demand at home and flooding by monsoons, its economy has suffered—and the trend looks likely to continue in the year to come.

Exports make up a significant part of Malaysia’s economy, although it has worked hard to transform itself to lessen dependence on that sector. However, economic research firm Malaysian Rating Corporation Berhad (MARC) said in reports that it expected the country’s 2015 GDP growth to decrease to 4.7%. That’s lower than the government’s projection of 5–6% in the 2015 budget.Malaysia

According to MARC, low oil prices will play a large roll in that reduced growth forecast. And with the oil and gas sector providing about 32% of government revenue in 2013, the drop in oil prices has taken a toll on the economy that looks likely to spill over into cutbacks in both public projects and subsidies.

The 2015 budget had been calculated on the basis of an average crude oil price of $100–$105 per barrel, but with the current price lingering below $50, substantial adjustments will likely be required as the year progresses.

Other financial stresses on Malaysia’s exports include lower prices for natural rubber and crude palm oil, both of which make substantial contributions to the bottom line.

But in a bad-news-is-good-news kind of way, recent flooding in Malaysia drove up the price of palm oil even as the sector feared substantial damage because of heavy rains. While the country’s December output could be as much as 20% below November’s tally, thanks both to the rain and to a seasonal slowdown, a change in the forecast indicated that downpours could be less than initially feared, even as concerns on the world market about palm oil supply brought an increase in the price.

Of course, the flooding still caused considerable damage to property and required that hundreds of thousands of people be evacuated. The weather also pushed flood mitigation projects to the top of the government’s priority list in its next five-year plan, the 2016-2020 development blueprint.

The consumer sector, according to MARC, is going to drag on the economy in 2015. Inflation will weigh on private consumption, which accounts for 52% of GDP. Add to that a 6% goods and services tax that goes into effect this year and tighter controls on household credit, and it’s highly likely that consumption will fall, further slowing the economy.

According to CIMB Research, another area in for lean times is real estate, with the GST affecting would-be buyers who would likely hold off on potential purchases. CIMB said in a report, “The net effect is that 2015 could end up being a similar year to 2014 in terms of property transactions, which we would categorize as a lackluster year.”

Pressure on the ringgit has also cost the country more, as its foreign exchange reserves have dropped to their lowest level since 2011 and the currency itself has fallen to a five-year low. The spread between its sukuk—Islamic bonds—and comparable U.S. Treasuries has widened. In addition, in the local-currency debt market, central bank data at the close of the year indicated that in November, global funds cut their holdings of Malaysian government bonds by 5.8% to 236.5 billion ringgit ($66.9 billion); that’s the most since September of 2011.

But Malaysia isn’t just standing around waiting for things to improve. In December, its second-largest pension fund, the $31 billion Kumpulan Wang Persaraan (Diperbadankan), cut its cash holdings to become a net buyer of Malaysian stocks and bonds even as much of the rest of the world engaged in the emerging market selloff.

The fund’s CEO, Wan Kamaruzaman Wan Ahmad, has said in reports that he does not see much risk in emerging markets and believes that developing countries, with higher foreign reserves and current account surpluses, are in better shape than they were during 1997 and 1998. Malaysia’s ringgit may have lost 5.3% during the fourth quarter of 2014, but that’s a far cry from the 1997-98 crisis, when after the Thai baht was devalued, the ringgit fell 35%.

In addition, the country is promoting itself as a business education hub within Asia. In a push to achieve high-income nation status by 2020, Malaysia has wooed numerous western business schools, including several from the U.K., and it has become the eleventh largest exporter of educational services.

Malaysia’s Kuala Lumpur is also the home base for Asia e-University, a collaborative effort among 31 Asian countries. The Malaysian government is pushing for an increase in international online student enrollment from 7,000, where it was in 2010, to 130,000 by 2020.