Economic and Political Overview

flag Malaysia Malaysia: Economic and Political Overview

In this page: Economic Outline | Political Outline | COVID-19 Country Response

 

Economic Outline

Economic Overview

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

Malaysia is the 4th largest economy of South East Asia and has continued to perform strongly in recent years, due to a strong global demand for electronics, increased demand for commodities, such as oil and gas, an improving labour market, a pro-cyclical budget and ample infrastructure spending. However, the government's declining expenditure as well as lower public and private investments already reduced economic growth to 4.4% in 2019. Due to the COVID-19 pandemic, the growth has been sharply reversed to -5.6% in 2020 but rebounded at 3.5% in 2021. The IMF's latest forecast is expecting another strong rebound at 6% in 2022 and a stabilisation at 5.7% in 2023, subject to the post-pandemic global economic recovery.

During the past few years, a political crisis, low oil and commodity export prices and the slowdown in China have deeply affected Malaysia’s economy, putting pressure on the country's finances. Malaysia has the highest debt level in the region, estimated at 70.7% of GDP in 2021 (IMF, October 2021), with spending increasing faster than GDP. Debt levels are expected to remain stable in 2022 and 2023 (69.9% and 70.1% respectively). Given the boost in oil prices and the government’s previous measures to reduce expenditures by cutting subsidies, the fiscal deficit was reduced to 1.8% in 2019. The government had embarked on a fiscal reform program aimed at achieving a balanced budget by 2020, including rationalisation of subsidies. The 2019 budget continued the government's transformation plans to create new opportunities for wealth generation by ensuring the country is prepared for the digital economy. However, due to the economic crisis caused by the Covid-19 pandemic, the deficit has risen again to -4.5% in 2020 and -4.9% in 2021. It is forcasted to be -3.3% in 2022 and -3.4% in 2023. Future budget measures include a more inclusive economy for the population: increased cash support for low-income families, extra funds for affordable housing projects, more entrepreneurship programmes to elevate lower-income groups and an increase in Malaysia’s competitiveness. The government faces various challenges, including the weakening of the Malaysian currency, the drop in oil prices (since oil revenues account for 30% of state revenue) and the fall in commodity export prices. Inflation went negative in 2020 at -1.1% and then reached 2.5% in 2021. It is expected to stabilise at 2% in 2022 and 2023 (IMF, October 2021).

Malaysia is on track to achieving high-income status by 2024. The country has one of the highest standards of living in Southeast Asia and a low unemployment rate estimated at 4.7% in 2021 (IMF, October 2021), but the youth unemployment rate is more than triple (11.7%, World Bank, 2020) and rural youth doesn't count statistically. The 11th Malaysia Plan charts a path toward advanced economy status and greater inclusion, through a range of development issues such as equity, inclusiveness, environmental sustainability, human capital development, and infrastructure. Less than 1% of Malaysian households live in extreme poverty. The IMF expects the unemployment rate to stabilise at 4.5% in 2022 and 4.3% in 2023. In 2022, the country’s most immediate challenge remains related to the economic, social and public health impacts of the COVID-19 pandemic.

 
Main Indicators 201920202021 (e)2022 (e)2023 (e)
GDP (billions USD) 365.28e337.01e371.11415.38458.21
GDP (Constant Prices, Annual % Change) 4.4e-5.6e3.55.75.7
GDP per Capita (USD) 11,231e10,231e11,12512,29613,397
General Government Balance (in % of GDP) -1.8-4.5e-4.9-3.3-3.4
General Government Gross Debt (in % of GDP) 57.167.4e70.769.970.1
Inflation Rate (%) 0.7-1.1e2.53.02.4
Unemployment Rate (% of the Labour Force) 3.34.5e4.74.54.3
Current Account (billions USD) 12.7714.28e14.1415.5616.79
Current Account (in % of GDP) 3.54.2e3.83.73.7

Source: IMF – World Economic Outlook Database, October 2021

Note: (e) Estimated Data

 

Main Sectors of Industry

Since gaining its independence in 1957, Malaysia has successfully diversified its economy from agriculture and commodity-based to solid manufacturing and service sectors. It had a labor force of 16.1 million people out of a 32.97 million population in 2022. Agriculture employed 10.1% of Malaysians in 2020 and contributed to 8.2% of GDP (World Bank, 2022). Malaysia is the second main producer of palm oil and tropical wood, and the fifth largest exporter of rubber. The country has successfully developed its economy based on raw materials and has significant reserves of oil, gas, copper and bauxite.

Industry contributed to around 35.9% of GDP and employed 26.8% of the active population in 2021 (World Bank, 2022). Malaysia is one of the world's largest exporters of semi-conductor devices, electrical goods and appliances, and the government has ambitious plans to make the country a key producer and developer of high-tech products, including software. Malaysia is a major outsourcing destination for components manufacturing, after China and India. The country has attracted significant foreign investment, which has played a major role in the transformation of its economy.

The service sector employs the majority of the population (63.1% in 2021) and accounts for 54.8% of GDP (World Bank, 2022) which is due mainly to healthcare services, transport, distributive trade and tourism. Tourism was the third biggest contributor to Malaysia’s GDP, after manufacturing and commodities, with over 7% of GDP and 26.1 million foreign tourists in 2019, according to Tourism Malaysia. Over the years, Malaysia has become one of Southeast Asia's major tourist destinations, and since 2020 the country is waiting for the world's borders to open again to international travel.

The COVID-19 pandemic has had a powerful impact on the global economy since 2020. Nevertheless, the global recovery continues, even if the momentum has weakened towards the end of 2021 and uncertainty has increased as the pandemic resurged, leaving lasting imprints on medium-term performance. The surge in global inflation has investors fretting about future growth, but many economists say price surges will subside, making way for 4.7% global GDP growth in 2022 (International Monetary Fund - IMF, 2022 & Morgan Stanley, 2021). The impact of the pandemic appears to have affected both sides of most sectors and markets in Malaysia for the second year in a row - demand disruptions having run up against supply problems - making the short-term outlook uncertain for agriculture, industry and service sectors.

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 10.3 27.0 62.7
Value Added (in % of GDP) 8.2 35.9 54.8
Value Added (Annual % Change) -2.2 -6.1 -5.7

Source: World Bank, Latest available data.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.

Score:
74,4/100
World Rank:
22
Regional Rank:
5

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
7.24/10
World Rank:
27/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024

 

Country Risk

See the country risk analysis provided by Coface.

 

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Political Outline

Current Political Leaders
King: King Sultan ABDULLAH Sultan Ahmad Shah (since 24 January 2019)
Prime Minister: Tan Sri Muhyiddin Yassin (since 1 March 2020)
Next Election Dates
King nomination: 2024
Parliament: September 2023
Current Political Context
Malaysian politics has been relatively stable over the last decades. The Barisan Nasional coalition ruled the country since its independency from Britain in 1957, but it lost its hold of the parliament for the first time in Malaysian history in the general election which was held on 9 May 2018. Former Prime Minister Mahatir Mohamad returned to the office as the leader of the Pakatan Harapan centre-left four-party coalition 15 years after his first tenure. Muhyiddin Yassin was appointed prime minister in February 2020 and was able to form the National Alliance coalition with Malay-majority parties dominating the government. Despite the formation of a new coalition government, the political situation remains fluid throughout 2020.
Tested by one of the largest pandemics in recent history, and despite relatively sound management of the crisis since 2020, Muhyiddin position in the new government coalition (Perikatan Nasional) is complex vis-à-vis the weight and popularity of United Malays National Organisation (UMNO), the old ruling party he allied with.
The government reiterated its non-aligned status through the Foreign Policy Framework of New Malaysia, especially when dealing with China and the United States.
The administration recently renegotiated the terms for the East coast rail link, a part of the Belt and Road Initiative with China, and construction resumed.
Main Political Parties
The Barisan Nasional coalition, in charge since 1957, was defeated in historical general elections in April 2018 and most of the parties left the coalition. The election was won by Pakatan Harapan, an opposition party led by Mahathir Mohamad, who had already been Prime Minister of Malaysia from 1981 to 2003. At the age of 92, Mahatir Mohamad became the oldest head of government in the world.

Barisan Nasional:
- United Malays National Organisation (UMNO): right-wing, known for being a major proponent of Malaysian nationalism
- Malaysian Chinese Association (MCA): right-wing, represents Malaysian Chinese contingency
- Malaysian Indian Congress (MIC): right-wing
Pakatan Harapan:
- Democratic Action Party (DAP): centre-left, social democracy
- People's Justice Party (PKR): centre-left
- Malasyan United Indigenous (BERSATU): centre-right, nationalism
- National Trust Party (AMANAH): centre-left, Islamic modernism
Other parties:
- Parti Gerakan Rakyat Malaysia (Gerakan): centre
- Parti Pesaka Bumiputera Bersatu (PBB): right-wing
- Parti Rakyat Sarawak (PRS): centre
- Parti Bersatu Sabah (PBS): centre, multi-racial
- Sarawak Progressive Democratic Party (SPDP)
- United Pasok Momogun Kadazandusum Organisation (UPKO): right-wing
- Sarawak United People's Party (SUPP): centre
- Parti Bersatu Rakyat Sabah (PBRS): nationalist-oriented

Type of State
Malaysia is a multiparty federal parliamentary monarchy operating under the Westminster system. The country comprises of 13 states which enjoy a fair amount of federal decentralization.
Executive Power
The head of state is the Paramount Ruler, commonly referred to as the King. The King is selected from nine hereditary rulers (called Sultans) of the Malay states to serve a five-year term; the other four states (which have titular Governors) do not participate in the selection. Following legislative elections, the leader of the party that wins most seats in the lower house of the parliament becomes the Prime Minister to serve a five-year term, subject to approval by the King. The Prime Minister is the head of Government and holds the executive powers which include implementation of the law and running the day-to-day affairs of the country. The Cabinet is appointed by the Prime Minister from among the members of parliament with the consent of the Paramount Ruler.
Legislative Power
The legislature in Malaysia is bicameral. The parliament consists of the Senate (the upper house) with 70 seats, out of which 40 are appointed by the Paramount Ruler and 26 are appointed by the 13 state assemblies, to serve six-year terms; and the House of Representatives (the lower house) with 222 seats, its members elected by popular vote to serve five-year terms. The King can dissolve parliament if he wishes, but usually only does so upon the advice of the Prime Minister. In general, more power is vested in the executive branch of government than in the legislative branch. Legislative power is divided between federal and state legislatures. Each state has its own Government, a cabinet with executive authority, and a legislature that deals with matters not reserved for the federal parliament.
 

Indicator of Freedom of the Press

Definition:

The world rankings, published annually, measures violations of press freedom worldwide. It reflects the degree of freedom enjoyed by journalists, the media and digital citizens of each country and the means used by states to respect and uphold this freedom. Finally, a note and a position are assigned to each country. To compile this index, Reporters Without Borders (RWB) prepared a questionnaire incorporating the main criteria (44 in total) to assess the situation of press freedom in a given country. This questionnaire was sent to partner organisations,150 RWB correspondents, journalists, researchers, jurists and human rights activists. It includes every kind of direct attacks against journalists and digital citizens (murders, imprisonment, assault, threats, etc.) or against the media (censorship, confiscation, searches and harassment etc.).

World Rank:
119/180

Source: World Press Freedom Index, Reporters Without Borders

 

Indicator of Political Freedom

Definition:

The Indicator of Political Freedom provides an annual evaluation of the state of freedom in a country as experienced by individuals. The survey measures freedom according to two broad categories: political rights and civil liberties. The ratings process is based on a checklist of 10 political rights questions (on Electoral Process, Political Pluralism and Participation, Functioning of Government) and 15 civil liberties questions (on Freedom of Expression, Belief, Associational and Organizational Rights, Rule of Law, Personal Autonomy and Individual Rights). Scores are awarded to each of these questions on a scale of 0 to 4, where a score of 0 represents the smallest degree and 4 the greatest degree of rights or liberties present. The total score awarded to the political rights and civil liberties checklist determines the political rights and civil liberties rating. Each rating of 1 through 7, with 1 representing the highest and 7 the lowest level of freedom, corresponds to a range of total scores.

Ranking:
Partly Free
Political Freedom:
4/7
Civil Liberties:
4/7

Political freedom in the world (interactive map)
Source: Freedom in the World Report, Freedom House

 

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COVID-19 Country Response

COVID-19 epidemic evolution
To find out about the latest status of the COVID-19 pandemic evolution and the most up-to-date statistics on the COVID-19 disease in Malaysia, please visit the portal of the Malaysian Ministry of Health for the official data.
For the international outlook you can consult the latest situation reports published by the World Health Organisation as well as the global daily statistics on the coronavirus pandemic evolution including data on confirmed cases and deaths by country.
Sanitary measures
To find out about the latest public health situation in Malaysia and the current sanitary measures in vigour, please consult the official portal on COVID-19 (in Malaysian), including the up-to-date information on the containment measures put in place and public health recommendations. Further updates are available on the website of the US embassy in Malaysia.
Travel restrictions
The COVID-19 situation, including the spread of new variants, evolves rapidly and differs from country to country. All travelers need to pay close attention to the conditions at their destination before traveling. Regularly updated information for all countries with regards to Covid-19 related travel restrictions in place including entry regulations, flight bans, test requirements and quarantine is available on TravelDoc Infopage.
It is also highly recommended to consult COVID-19 Travel Regulations Map provided and updated on the daily basis by IATA.
The US government website of Centers of Disease Control and Prevention provides COVID-19 Travel Recommendations by Destination.
The UK Foreign travel advice also provides travelling abroad advice for all countries, including the latest information on coronavirus, safety and security, entry requirements and travel warnings.
Import & export restrictions
For information on all the measures applicable to movement of goods during the period of sanitary emergency due to the COVID-19 outbreak (including eventual restrictions on imports and exports, if applicable), please consult the Ministry of International Trade and Industry’s webpage and that of the Royal Malaysian Customs Department.
For a general overview of trade restrictions due to COVID-19 pandemic, please consult the section dedicated to Malaysia on the International Trade Centre's COVID-19 Temporary Trade Measures webpage.
Economic recovery plan
For the information on the economic recovery scheme put in place by the Malaysian government to address the impact of the COVID-19 pandemic on the national economy, please visit the portal of the Prime Minister, as well as the dedicated page on KPMG's website.
For a general overview of the key economic policy responses to the COVID-19 outbreak (fiscal, monetary and macroeconomic) taken by the Malaysian government to limit the socio-economic impact of the COVID-19 pandemic, please consult the section dedicated to Malaysia in the IMF’s Policy Tracker platform.
Support plan for businesses
For information on the local business support scheme established by the Malaysian government to help small and medium-sized companies to deal with the economic impacts of the COVID-19 epidemic on their activity is outlined in the dedicated page on KPMG's website. Further info is available on the portal of the Central Bank of Malaysia.
For a general overview of international SME support policy responses to the COVID-19 outbreak refer to the OECD's SME Covid-19 Policy Responses document.
You can also consult the World Bank's Map of SME-Support Measures in Response o COVID-19.
Support plan for exporters
For the up-to-date information on possible support plans for exporters in Malaysia, if applicable, please consult the website of the Ministry of International Trade and Industry.
 

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Latest Update: June 2022