Is Malaysia Asia’s Weakest Link?

By William Pesek
Bloomberg View
Jun 5, 2014

From missing airplanes to jail-bound opposition leaders, Malaysia has recently made international headlines for all the wrong reasons. Will the nation’s economy be next?

That’s the thrust of new report from Sarah Fowler of U.K.-based Oxford Economics, which ranks Malaysia the “riskiest country in Asia of those we consider,” more so than India, Indonesia and even coup-happy Thailand. On the surface, she points out, all’s well: Growth is zooming along at 6.2 percent, the external balance is reasonably sound and political stability reigns. But all’s not what it seems. “Prompted by its high levels of public debt, rising external debt and shrinking current account surplus, there has been a shift in the perception of risks towards Malaysia and away from Indonesia,” Fowler explains.

Malaysia wasn’t included in Morgan Stanley’s “fragile five” list of shaky emerging economies last year, as were India and Indonesia. But Fowler scratches at a number of Malaysian vulnerabilities that deserve more attention: external debt levels that in recent years have risen to close to 40 percent of gross domestic product; a higher public debt ratio than India; the biggest short-term capital flows among the 13 major emerging markets Oxford tracks, including Indonesia; and a shrinking current-account surplus.

This last point is still somewhat of a positive. As the mini-crises in developing nations last year demonstrated, a balance-of-payments surplus is a very good thing to have. Also, Malaysia’s use of so-called macroprudential policies has succeeded in preventing huge property bubbles of the kind afflicting Singapore and Hong Kong. But Malaysia’s current-account surplus is dwindling, from 16 percent of GDP in 2008 to 3.7 percent last year. And household debt is, to use Fowler’s words, “worryingly high” at more than 80 percent of GDP compared to less than 60 percent in 2008.

What really concerns Oxford, and myself, is the complacency factor in Putrajaya. Malaysia is effectively a one-party state, having effectively been ruled by the same party for six decades. Its 40-year-old, pro-Malay affirmative-action program chips away at the country’s competitiveness more and more each passing year. The scheme, which disenfranchises Malaysia’s Chinese and Indian minorities, is a productivity and innovation killer. It also has a corrupting influence on the political and business culture.

“A climate of entitlement amongst the Malay community limits entrepreneurialism and vested interests within the United Malays National Organization still resist change,” Fowler argues.

The need for change is becoming acute, though, as China’s dominance grows and neighbors like the Philippines get their acts together. Indians just elected the party of reform-minded Narendra Modi and Indonesians will soon choose a successor for Susilo Bambang Yudhoyono in a contest that’s all about reducing corruption and improving governmental efficiency. And Malaysia? Well, Prime Minister Najib Razak’s lackluster party is clinging to power. Meanwhile, opposition leader Anwar Ibrahim may soon be in jail again on sodomy charges many see as politically motivated.

The government’s handling of Malaysian Air Flight 370 said it all. Its deer-in-the-headlights response to the plane’s disappearance was the product of an insular political culture. The trouble is, that insularity is holding back a resource-rich economy that should be among Asia’s superstars, not its weakest links.

  1. #1 by Bigjoe on Friday, 6 June 2014 - 8:58 am

    Its still a stretch to say Malaysia is Asia’s weakest link BUT it certaintly heading that direction.

    If you look around the region, fundamental wise, they are moving up and ahead. Whether its governance, education, infrastructure, trade & technology, they are doing the right things even though behind. Even Thailand with its current unrest – the military rule is a far cry from the last one and its determined to outperform even the civilian rule.

    Unlike everyone else, fundamentally, we have not changed. What we have is a further iteration of the Mahathir’s formula – feed the economy, pander the right, make excuses. Change is largely cosmetic, a public relation exercise, excuses.

    Malaysia has not just one elephant in the room but several. The top of it is the NEP, Corruption and Religo-politics. All three are long term problems we now know for certain addictions encouraged over the years and comes with all the problems of all addictions.

    As these addiction problems become bigger as its ignored and kept being fed, the dysfunctionality only get worst and productivity, investments, opportunities get dragged lower and lower eventually negative and then too much, when institutions and social capital over-spend and broken, the road back will be much longer and much harder.

  2. #2 by Justice Ipsofacto on Friday, 6 June 2014 - 9:29 am

    And what is the greatest of all the problems afflicting malaysia?

    Ans: Umno’s “denial-mode”.

    Umno will just deny all of the above and in fact would even go as far as to proclaim that we the best in the world.

  3. #3 by boh-liao on Friday, 6 June 2014 - 2:47 pm

    A lot of rakyat oredi KNEW dat
    We need an outsider 2 REMIND us of our SAD situation

  4. #4 by yhsiew on Friday, 6 June 2014 - 5:03 pm

    Even Cambodia’s broadband speed at 5.9 mb/s is slightly faster than ours – this shows how far the country has regressed under the NEP and crony capitalism.

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