Security, trading and investment update for Malaysia

07 January 2020

Security trading and investment update for MalaysiaMalaysia will face a number of security, investment and trading challenges in the coming months. In this article we provide a detailed forward-looking assessment of developments in the country.

In 2020, Malaysia should continue to offer firms a large and diversified economy with a sizeable domestic market.

The business-friendly administration of Prime Minister Mahathir Mohamad will continue to enjoy a parliamentary majority, but a slowdown in global growth could present challenges to Malaysia’s export-driven economy.

Security Environment

In 2020, Malaysia is expected to continue to offer foreign investors a stable security environment. Protests are infrequent, union-sanctioned, and typically peaceful, minimizing the risk of business disruption. However, protest risks may increase in the 12-month outlook if further wrongdoing and corruption is uncovered in the 1 Malaysia Development Berhad (1MDB) scandal.

Security trading and investment update for MalaysiaThe United States Department of Justice (DOJ) claims US$4.5 billion was siphoned from 1MDB — the Malaysian state investment fund — and laundered in multiple foreign jurisdictions between 2009 and 2014. Anti-corruption protests would likely draw hundreds of protesters and involve peaceful rallies outside the Sultan Abdul Samad Building in Kuala Lumpur. In 2017 anti-corruption protests lasted more than two months.

However, the removal of former president Najib Razak, who was a central target for the protest movement, means that protests are unlikely to attract similar numbers of mass support.

Generally, President Mohamad enjoys popular support, given his role in uncovering corruption under the previous administration.

Trading Environment

Malaysia is taking advantage of the US-China trade dispute by capturing market share from Chinese exporters facing US tariffs.

Since goods exported to the US from Malaysia do not face additional tariffs, Malaysia is ideally placed to attract technology companies targeting the US market.

The coastal state of Penang is home to Malaysia’s electrical and electronics industry and its two industrial zones have the advantage of a well-established, consistent ecosystem of suppliers and customers. Malaysia also boasts cheaper labor than regional rivals such as Singapore.

FDI into Penang’s manufacturing industry reached RM12 billion in the first nine months of 2019, a 445% year-on-year increase, in a clear indication of its comparative advantage in the sector.

US companies, such as chipmaker Micron Technology and iPhone supplier Jabil Inc., are building factories in Penang. Micron has pledged to invest US$358 million in Malaysia over the next five years.

In terms of total investment flows, between June 2018 and July 2019, FDI inflows into Malaysia increased by more than 66%, reaching a record high of US$25.5 billion.

As a result, GDP growth in 2020 is set to increase to 4.8% from 4.5% in 2019, as strong private consumption supports an acceleration of FDI into the mid- to high-value technology segment.

Exports of electronics (30% of total exports) are likely to remain a key driver of long-term growth in line with the government’s plans to move up the technology value chain.

However, with a ‘phase one’ deal between the US and China expected to be finalized in early 2020, tariffs on US$120 billion worth of Chinese goods are likely to be removed and Malaysia will possibly lose some of the trade gains it has secured over the past year.

However, the US is expected to maintain 25% tariffs on approximately half of all Chinese imports, worth about US$250 billion. This should ensure continued interest in Malaysia as a destination for foreign investment.

As an export-dependent country, where exports make up approximately 75% of GDP, the goods trade balance remains fundamental to Malaysia’s continued macroeconomic stability.

An expected economic slowdown in Singapore and China, Malaysia’s two largest export destinations, poses downside risks to Malaysia’s current account balance.

Malaysia has previously shown vulnerability to capital outflows during periods of risk off sentiment in global markets.

However, Malaysia’s resilience to external shocks has gone up as increased FDI now comprises a greater share of the country’s international liabilities, whilst bonds and other forms of securities have decreased.

Investment Environment

Pricing Outlook MalaysiaMalaysia’s operating environment has become more challenging in the wake of the 1MDB corruption scandal.

Contract reviews and contract renegotiation will be a risk for foreign investors who agreed contracts under the previous administration.

Mohamed, who was elected in May 2018, has attempted to renegotiate infrastructure projects, including three China-backed Belt and Road Initiative projects that were suspended in June 2018.

In April 2019, the Malaysian government stated that one of the projects, the East Coast Rail Link, would be resumed on renegotiated terms.

In October 2019, the Malaysian government also renegotiated the terms of a railway project that would connect the southern state of Johor with Singapore.

The successful renegotiation of the two projects demonstrates the government’s willingness to continue with plans, providing that it can secure favorable financing terms.

5 Key Takeaways

  • Protest risks may increase in the 12-month outlook, if further wrongdoing and corruption is uncovered in the 1 Malaysia Development Berhad (1MDB) scandal.
  • Goods exported to the US from Malaysia do not face additional tariffs, leaving Malaysia ideally placed to attract technology companies targeting the US market.
  • Foreign direct investment into Penang’s manufacturing industry reached RM12 billion in the first nine months of 2019.
  • An expected economic slowdown in Malaysia’s two largest export destinations – Singapore and China – poses downside risks to Malaysia’s current account balance.
  • Contractual agreement repudiation risk has increased as Malaysia has renegotiated several Belt and Road Initiative (BRI) projects over the past 12 months.

The monthly Risk Outlook is supported by our proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Vietnam, Senegal, Colombia and Egypt and all of which have been the subject of recent enquiries from our client base.

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  • Eleanor SmithEleanor Smith

    Eleanor Smith is a Senior Political Risk Analyst within Marsh JLT Specialty’s Credit Specialties team. At Marsh JLT Specialty, Eleanor analyses developments in political risks, and advises clients on their effect in a range of sectors. Eleanor is also responsible for delivery of World Risk Review, JLT’s country risk ratings platform, to clients and prospects.


    Eleanor has a first-class degree in History with Spanish from UCL, and a Masters in International Public Policy from the same institution. With experience in a range of sectors, including diplomatic missions and not-for-profit, Eleanor can help clients understand their risk exposure.

    If you would like to talk about any of the issues raised in this article, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)20 8108 9544.

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