It has been another year of good growth for Malaysia, even as the international economic climate has been uncertain. Strong domestic demand, government investment, greater diversification and regional resilience have all played their part.
Gross domestic product (GDP) growth was expected to hit five per cent this year or possibly exceed it, according to several analyses. The economy has been supported by higher incomes and accommodative monetary policy, as well as by government spending.
Malaysia has been pushing ahead with its Economic Transformation Programme (ETP), which seeks to lift the country to its long-term target of achieving middle-income status by 2020.
To this end, the ETP entails large-scale investments in infrastructure, health and education, as well as interlinked efforts to push key sectors further up the value chain, in order to reduce Malaysia’s reliance on raw material exports and increase skill and income levels.
After talks between Malaysia and Singapore in January, the two countries agreed to strengthen transportation links to benefit bilateral trade and the construction sector. Progress has been made on a S$9.7 billionn mass-transit railway system linking Malaysia’s southern Johor state and Singapore, which is part of a new line that will cut travel times from Kuala Lumpur to Singapore from six hours to 90 minutes.
In May, the international business press reported that AECOM Technology had been awarded the S$42 million contract for the design and engineering study for the Malaysia-Singapore Rapid Transit System (RTS) link by the relevant Singaporean and Malaysian authorities.
Infrastructure development also entailed the expansion, upgrading and diversification of Malaysia’s power-generation capacity. In May, Peter Chin Fah Kui, the Minister of Energy, Green Technology and Water, announced that Malaysia would increase the proportion of electricity it generated from coal to 44 per cent, up from 30 per cent, and lower the share derived from gas to 46 per cent from 60 per cent.
The government’s desire to lower dependency on gas supply was informed by rising gas prices, and a desire not to pass them on to customers, as well as by a connected gas supply shock in 2011.
In May, the government confirmed plans to invest US$3 billion through state power firm Tenaga Nasional to construct two new hydropower plants and two new coal-fired stations, with a total of more than 2,500 megawatts of installed capacity.
Meanwhile, further generation capacity is needed to support the demands of Malaysia’s manufacturing sector, which has performed well in 2012. Industrial production rose by 4.9 per cent in the first nine months of 2012, according to official data.
Manufacturing output rose by 5.2 per cent year-on-year, while the other segments included in industrial production – mining and electricity – grew by 5.9 per cent.
Growth came despite the uncertain global economic climate, which was affected by the eurozone crisis, the US debt problems and slowdowns in major emerging markets. However, strong domestic demand has helped manufacturers offset slower exports.
Together, manufacturing and mining contribute 35 per cent of GDP, so the expansion of industry has been key to the economy’s good performance in 2012. Next year seems likely to see similarly healthy levels of GDP growth, as both upside and downside risks from 2012 are likely to continue into 2013.
On one hand, the Malaysian economy should continue to benefit from its realignment towards domestic demand, supported by an expected maintenance of low-interest rate policy and the further roll-out of the ETP.
The development of value-added industries, as well as service sectors such as tourism, should also help the economy.
On the other hand, Malaysia cannot be immune from international events. A significant worsening in the eurozone, the US, or a ‘hard landing’ slowdown in China would undoubtedly have an impact.
The Malaysian general election, due by June 2013, may also create an element of political uncertainty, though it is also spurring government spending.
The economy, particularly government finances, remains sensitive to fluctuations in commodity prices, including that of oil.
Observers were split on whether there will be a slowdown, or if the economy could accelerate further.
The UK’s Institute of Chartered Accountants in England and Wales saw a drop to 3.8 per cent, and international investment bank Nomura expected a fall to 4.3 per cent from 5.3 per cent in 2012.
Manokaran Mottain, the chief economist at Kuala Lumpur-based Alliance Investment Bank, has forecast a slight fall to five per cent from the 5.2 per cent he expected this year.
The independent Malaysian Institute of Economic Research, however, forecast a pick-up from 5.1 per cent to 5.6 per cent.
Policy-makers will be keeping a keen eye on the international environment, as Malaysia cannot go it alone.
However, next year should see the developed and diversified future economy envisaged by the ETP move closer.