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Malaysia
Summary
Moody’s A3 / S&P A- / Fitch A-1
Economy: Agriculture 9%, Industry 37%, Services 54%
Malaysia is a middle-income country with an open, diversified economy. The country’s economic
fundamentals are solid with high economic growth, low and stable inflation, a comfortable current
account surplus, and a relatively flexible exchange rate. The Economic Transformation Program
(ETP) has benefited Malaysia’s economy and helped boost growth and investment, which is at its
highest level since the Asian financial crisis in 1997–1998.2 The ultimate goal of the ETP is to make
Malaysia a high-income economy by 2020.3 Malaysia’s main challenge stems from high debt levels
and potential contingent liabilities. Political noise has increased as a result of a major corruption scan-
dal at an important quasi-sovereign entity, although the current government is expected to remain
in power and continue to move forward with the ETP. Market participants are likely to increasingly
focus on the next election, which is scheduled to take place before August 2018. Despite corruption
allegations, the current prime minister, Najib Razak, remains the favorite.
Economic Indicators
2013 2014 2015 2016 2017F 2018F
Population (Millions) 29.9 30.6 31.0 31.5 32.1 32.6
GDP per Capita (USD) 10,809 11,049 9,559 9,418 9,147 9,060
Nominal GDP (USD Billions) 323.4 338.1 296.3 296.9 293.3 295.4
Real GDP (%) 4.8 6.0 5.0 4.2 5.8 5.3
Year-End CPI (%) 3.2 2.7 2.7 1.8 3.8 2.7
Fiscal Balance (% of GDP) -3.8 -3.4 -3.2 -3.1 -3.2 -3.2
Interest (% of Revenues) 9.7 10.2 11.1 12.5 11.1 11.1
FC Debt/Public Debt (%) 3.1 2.9 3.4 4.1 3.9 3.8
Government Debt (% of GDP) 53.0 52.7 54.5 52.7 51.3 51.9
Government Debt (% of Revenue) 253.0 264.2 287.8 305.3 283.2 282.3
Current Account (% of GDP) 3.5 4.4 3.0 2.4 2.7 2.5
FDI (% of GDP) -0.6 -1.6 -0.2 1.1 0.1 0.1
External Debt (% of GDP) 68.4 67.6 73.2 74.5 73.1 75.8
Foreign Reserves/External Debt (%) 19.2 15.3 11.1 10.2 10.8 11.3
Foreign Reserves (Mo. of imports) 7.5 6.4 6.2 6.3 6.7 7.0
Foreign Reserves (% of GDP) 13.1 10.4 8.1 7.6 7.9 8.6
As of November 2017
Forecasted or estimated results do not represent a promise or guarantee of future results and are subject
to change.
Source: Lazard, Central Bank of Malaysia, Haver Analytics, IMF
49
Lazard Emerging Markets Debt
Rating History
Below is a history of the country’s foreign and local currency ratings by the major agencies
dating back to 2000. We have also included a chart of the country’s hard currency external
debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison.
Rating History
Hard Currency Local Currency
A AA-
A- A+
A
BBB+
A-
BBB
BBB+
BBB-
BBB
BB+ BBB-
BB BB+
2000 2009 2017 2000 2009 2017
Moody’s S&P Fitch Moody’s S&P Fitch
As of December 2017
Performance represents past performance. Past performance is not a reliable indicator of future results.
Source: Bloomberg, Fitch, Moody’s, Standard and Poor’s
Bond Spreads Local Yield
1000 10
800
8
600
6
400
4
200
0 2
2007 2010 2017 2007 2010 2017
Malaysia EMBIGD Malaysia GBI-EM Global Div
As of December 2017
Performance represents past performance. Past performance is not a reliable indicator of future results.
Source: JP Morgan
50Malaysia
Strengths
High Rates of Economic Growth
Malaysia has grown at an average pace of 5.0% over the past 15 years, which is among the
highest growth rates in the emerging markets and one of the highest rates among middle-
income countries with a similar GDP per capita.4 The government is seeking to increase
growth to 6% in the medium term through different economic programs such as the ETP,
which was initiated in 2010 with the objective of helping Malaysia become a high-income
economy by 2020.5 As part of this program, the government identified investment projects
amounting to US$444 billion, which is close to 200% of GDP, including the construction of
a US$11.5 billion mass transit rail system in Kuala Lumpur. Programs like these have helped
rebalance the economy from exports toward investment. Indeed, exports as a share of GDP
have fallen from a peak of 117% of GDP in the early 2000s to 70% of GDP as of the end of
the second quarter of 2017, while private investment has risen from less than 11% of GDP as
recently as 2009 to close to 17.5% as of the second quarter of 2017.6 Total investment (public
and private) has reached its highest level since the Asian financial crisis in 1997–1998.7
Friendly Market Conditions
Malaysia has relatively business friendly conditions and ranks toward the top across vari-
ous global indices. Malaysia was ranked 23 out of 190 countries in the World Bank’s Ease
of Doing Business rankings in 2017.8 Within the region, only Singapore, Hong Kong,
and Taiwan ranked higher, and Malaysia stands at the top among upper middle-income
countries. The International Monetary Fund considers Malaysia a leader of free trade in the
ASEAN region,9 but has noted that further progress is needed in improving the lack of skilled
labor and increasing female participation.10
Malaysia’s high-quality institutions are also reflected in the authorities’ ability to control
inflationary pressures despite very high growth rates. Inflation has averaged 2.5% over the
past decade, among the lowest rates in the emerging markets universe and certainly the lowest
among the fast-growing economies.
Diversification
The government has done an excellent job at diversifying the economy over the past couple of
decades. In the 1970s, Malaysia was dependent on commodity exports, but it has diversified
into higher value-added products and industries. In addition to being an important exporter
of oil, gas, rubber, and palm oil, Malaysia also has a dynamic industrial sector that includes
light manufacturing, pharmaceuticals, medical technology, electronics, and a strong financial
sector. The government also continues to move forward with its plan to add higher value-
added activities in the industrial and service sectors.11
Solid External Position
Malaysia has a solid external account as a result of a large current account surplus, high inter-
national investment, and low external debt levels. Over the past 15 years, the current account
surplus has averaged 9.6% of GDP, although it has declined in recent years. The current
account surplus fell to close to 2% of GDP in 2017 due to a decline in Malaysia’s terms of
trade, resulting from the decline in commodity prices, which have recently recovered. Foreign
reserves are slightly above $100 billion and cover almost 100% short-term debt, which is
low compared to similarly rated countries. However, Malaysia’s flexible exchange rate helps
to compensate for the moderate reserves levels and has helped to adjust to external shocks.
51Lazard Emerging Markets Debt Malaysia also has more than US$55 billion in currency swaps open with the People’s Bank of China (PBoC), Bank of Korea, and under the Chiang Mai multilateral initiative. Weaknesses High Deficit and Leverage Levels The current government has done an excellent job at reducing the fiscal deficit, but total debt levels remain high. The fiscal deficit declined from above 5.0% of GDP in 2010 to an estimated deficit of around 3% of GDP in 2017. In 2018, the government is targeting a further reduction in the deficit to 2.8% of GDP despite upcoming elections, which shows the government’s commitment to fiscal discipline. The government has passed a series of reforms to offset lower oil revenues while expenditures have remained under control. Debt ratios have improved and are stable at roughly 52% of GDP, still high but below the self-imposed debt limit of 55%. The majority of debt is denominated in local currency. Potential Contingent Liabilities Another key risk is potential liabilities for the state, as some quasi-sovereign entities face financial stress and may potentially need a government bailout. These contingent liabili- ties amount to 15.2% of GDP.12 One such entity facing financial stress is 1Malaysia Development Berhad (1MDB), which is under investigation for a corruption scandal. The government has explicitly guaranteed about MYR5.8 billion of 1MDB’s total debt of MYR42 billion (about 4% of GDP). Prime Minister Razak has been accused of involvement with 1MDB, although he denied wrongdoing.13 The market initially feared that protests would result in the removal of the Prime Minister.14 However, he has consolidated his power and his removal now appears unlikely. International criticism has declined and he has even meet with President Trump despite an ongoing investigation by the US department.15 Inflation/Monetary Policy Bank Negara Malaysia (BNM) does not operate under a formal inflation-targeting regime. The overnight policy rate is the central bank’s main policy instrument among a set of liquid- ity management tools: reserve requirements, repos, and currency forwards. Inflation has nonetheless been remarkably stable, with average headline inflation at 2.5% since 2006— levels closer to inflation in developed economies than in EM—and volatility has been low. Core inflation has been below 2% on average. The 12-month headline CPI printed at a high 4.3% in September 2017. We expect a fall in the 12-month number below 2% in 1Q18 and a reversal to its 2.5% average by end of next year. Stable core CPI just below 2% reveals that the spike in the headline CPI is transitory (food and energy—pump prices liberalization) and not a signal of macroeconomic imbal- ances. The economy has rebounded in 2017 towards its 5% potential growth that should be sustained into 2018. Services inflation is below 2% and there are no visible pressures from the labor market. The unemployment rate is at 3.5%—in line with historical levels—and unit labor costs are growing below 2%. BNM has kept its policy rate unchanged at 3% since July 2016. With the economy growing at potential without inflationary pressures we expect BNM to follow the policy normaliza- tion in core markets and eventually raise rates towards the end of next year. In real terms (defined as the policy rate deflated by the 12-month CPI), the policy rate is at -1.3% (versus a 0.5% long-term average), but should passively increase to +0.5% by 1Q18. If our target for 52
Malaysia
December 2018 CPI (2.5%) is on the mark, BNM should move its real policy slightly above
the long-term average with one or two 25 basis-point hike.
Exchange Rate Policy
The MYR is a non-deliverable managed floating currency. There is no capital control for
nonresidents, but the MYR is not allowed to trade offshore. Post US elections, the BNM
tightened its grip on MYR trading. Local entities were not allowed to trade MYR NDF
offshore and international investors trading onshore started facing limits for hedging activity.
As a result, the derivatives market for MYR has become fairly illiquid. As of September 2017,
Malaysia foreign reserves were at US$101 billion.
Malaysia's basic balance surplus was at 3.1% of GDP (July 2017), down from 3.3% a year
earlier. Diminished FDI inflows was the driver behind the small deterioration.
Malaysia’s current account surplus was at 2.7% of GDP (July 2017) versus 2.1% 12 months
ago. Most of the improvement came from a narrower secondary income (transfers). Mineral
fuels balance seems to have found a floor with a 6.7% surplus versus 8.3% in 2015 and 12%
in 2010. The financial account saw a sharp change in its profile. Portfolio outflows stand out
at 3.5% of GDP versus 0.7% inflows a year earlier. Most of it came on the back of US elec-
tions and BNM response that seems to have alienated some investors. Short-term flows and
errors and omissions increased substantially. Despite financial outflows, BNM was able to
rebuild reserves.
China represents 21% of Malaysia's trade; the European Union, the United States, and Japan
represent 12% each.
Following the global financial crisis of 2008, the USD-MYR reached a high at 4.50 in
January 2017. Over the past 12 months it has traded in a wide 4.18–4.50 range. The MYR
real effective exchange rate (REER) is currently 12% cheap versus its 10-year average.
Adjusted for unit labor costs the REER is 6% undervalued, in our view.
53Lazard Emerging Markets Debt
Inflation USD/MYR
10 6
8
5
6
4
4
2
0
3
-2
-4
2
2000 2010 2017 2000 2010 2017
Inflation Reference Rate
As of December 2017
Source: Bloomberg
REER
110
104
98
92
86
80
1999 2010 2017
REER Median since Dec 1999
Median last 10 yrs Median last 5 yrs
As of December 2017
Source: JP Morgan, Lazard
54Malaysia
Country Background
Size 329,847 KM2 (67th)
Capital Kuala Lumpur
Population 30.9 Million
Religion Muslim 61.3%, Buddhist 19.8%, Christian 9.2%, Hindu 6.3%,
Other 3.4%
Median Age 28.5 Years
Literacy Rate 94.6%
Independence 31 August 1957
Political System Federal Parliamentary Constitutional Monarchy
Government Leadership Prime Minister Najib Razak
Next Election August 2018
Legislative Branch Bicameral Parliament
Economy Agriculture 8.7%, Industry 37.0%, Services 54.4%
Labor Force Agriculture 11.0%, Industry 36.0%, Services 53.0%
Merchandise Exports Semiconductors and Electronic Equipment, Palm Oil, Petroleum
and Liquefied Natural Gas, Wood and Wood Products, Rubber,
Textiles, Chemicals, Solar Panels
Export Partners Singapore 14.7%, China 12.6%, United States 10.3%,
Japan 8.1%, Thailand 5.7%, Hong Kong 4.8%, India 4.1%
Currency Malaysian Ringgit (MYR)
As of November 2017
Source: CIA
55Lazard Emerging Markets Debt
Country Timeline
1998 Prime Minister Mahathir Mohamad sacks his deputy and presumed successor, Anwar
Ibrahim, on charges of sexual misconduct, against the background of differences between
the two men over economic policy; Ibrahim arrested.
2001 Dozens arrested during worst ethnic clashes in decades between Malays and ethnic Indians.
Demonstrations against the Internal Security Act following the detention without trial of sup-
porters of Anwar Ibrahim. Malaysia, Singapore resolve long-standing disputes, agree to build
a new bridge and tunnel.
2004 Prime Minister Abdullah Badawi wins landslide general election victory. Former deputy PM
Anwar Ibrahim freed after court overturns his sodomy conviction. Scores of Malaysians die
in Asian tsunami disaster. Malaysia delays planned deportations of many thousands of illegal
immigrants, most of them from Indonesia.
2008 Prime Minister Abdullah Ahmad Badawi’s National Front coalition suffers its worst election
result in decades, losing its two-thirds parliamentary majority and control of five state assem-
blies. Opposition leader Anwar Ibrahim is arrested over allegations of sodomy, in a move that
exacerbates political tensions.
2014 Malaysian Airlines flight MH17 travelling from Amsterdam to Kuala Lumpur crashes in east-
ern Ukraine, close to the border with Russia, with the loss of all 298 people on board. The two
sides in the Ukrainian conflict accuse each other of shooting the plane down. The incident
and its aftermath spark international outrage and condemnation.
2015 Opposition Pan-Malaysian Islamic Party (PAS) seeks parliament’s approval to expand hudud
laws, a strict Islamic penal code which permits punishments such as flogging, stoning and
public execution, in the northeastern state of Kelantan. Police arrest opposition politician
Nurul Izzah Anwar, the eldest daughter of jailed opposition leader Anwar Ibrahim, for alleged
sedition over a speech she made in parliament.
2016 Anti-Corruption Commission announces appeal after attorney general clears Prime Minister
Najib Razak of wrongdoing in financial scandal over Saudi funds.
Source: BBC
56Malaysia
Notes
1 As of December 2017.
2 “Harnessing natural resources (English),” World Bank, Malaysia Economic Monitor, June 2013, http://
documents.worldbank.org/curated/en/2013/06/17957688/malaysia-economic-monitor-harnessing-natural-
resources.
3 Fitch Affirms Malaysia at A-;Outlook Stable, 17 August 2017, https://www.reuters.com/article/fitch-affirms-
malaysia-at-a-outlook-stab/fitch-affirms-malaysia-at-a-outlook-stable-idUSFit4jxqm5
4 Haver Analytics, “World Economic Outlook Database” International Monetary Fund, accessed on 2
December 2013, http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/index.aspx.
5 “Malaysia: 2012 Article IV Consultation,” IMF Country Report No. 13/51, February 2013, http://www.imf.org/
external/pubs/ft/scr/2013/cr1351.pdf.
6 As of September 2017, Source: Haver Analytics.
7 As of September 2017, Source: Haver Analytics.
8 “Economy Rankings,” Doing Business, accessed 3 October 2017, http://www.doingbusiness.org/rankings.
9 “Malaysia: 2016 Article IV Consultation,” IMF Country Report No. 16/110, May 2016, http://www.imf.org/
external/pubs/ft/scr/2016/cr16110.pdf
10 “Malaysia: 2014 Article IV Consultation,” International Monetary Fund, IMF Country Report No. 14/80, March
2014, http://www.imf.org/external/pubs/ft/scr/2014/cr1480.pdf.
11 “Malaysia Overview,” World Bank, accessed on 2 December 2013, http://www.worldbank.org/en/country/
malaysia/overview.
12 “Malaysia: 2016 Article IV Consultation,” IMF Country Report No. 16/110, May 2016, http://www.imf.org/
external/pubs/ft/scr/2016/cr16110.pdf
13 Chandran, Nyshka, “Only a 1MDB smoking gun can topple Najib,” CNBC, 12 July 2015, accessed on 14
December 2015, http://www.cnbc.com/2015/07/12/will-malaysia-pm-najib-razak-survive-1mdb-scandal.html;
Wright, Tom, and Simon Clark, “Investigators Believe Money Flowed to Malaysian Leader Najib’s Accounts
Amid 1MDB Probe,” The Wall Street Journal, 2 July 2015, accessed on 14 December 2015, http://www.
wsj.com/articles/SB10130211234592774869404581083700187014570; and Wright, Tom and Simon Clark,
“Malaysia’s Najib Razak Played Key Role at Troubled 1MDB Investment Fund,” The Wall Street Journal, 15
October 2015, accessed on 14 December 2015, http://www.wsj.com/articles/malaysias-leader-at-center-of-
a-storm-1444963838.
14 Fernandez, Celine, and James Hookway, “Thousands Protest Against Malaysia’s Najib Razak,” The Wall
Street Journal, 30 August 2015, accessed on 14 December 2015, http://www.wsj.com/articles/malaysia-
braces-for-protests-against-prime-minister-najib-1440766294
15 “Trump Welcomes Najib Razak, the Malaysian Leader, as President, and Owner of a Fine Hole” New York
Times 12 September 2017 https://www.nytimes.com/2017/09/12/world/asia/trump-najib-razak-malaysia-
white-house.html
57Important Information Published on 26 February 2018. Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of 24 February 2017 and are subject to change. Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Specific to the political, religious and military unrest in Iraq, and as described in this paper, there exists a heightened risk of ongoing armed conflict and subsequent economic, political and social reper- cussions to all parties involved. Specific to the political and military unrest in Ukraine and Russia, and as described in this paper, there exists a heightened risk of ongoing armed conflict and subsequent eco- nomic, political and social repercussions to all parties involved. An investment in bonds carries risk. If interest rates rise, bond prices usually decline. The longer a bond’s maturity, the greater the impact a change in interest rates can have on its price. If you do not hold a bond until maturity, you may experience a gain or loss when you sell. Bonds also carry the risk of default, which is the risk that the issuer is unable to make further income and principal payments. Other risks, including inflation risk, call risk, and pre- payment risk, also apply. High yield securities (also referred to as “junk bonds”) inherently have a higher degree of market risk, default risk, and credit risk. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trad- ing markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries. This document is provided by Lazard Asset Management LLC or its affiliates (“Lazard”) for informational purposes only. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service or investment product. Investments in securities, derivatives and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard’s invest- ment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. 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