Malaysia: Risk ratings

The following is Malaysia's risk ratings.
Economist Intelligence Unit
OVERALL ASSESSMENT: The political situation is expected to remain in a flux in 2009-10 as the ruling Barisan Nasional coalition and the opposition alliance, Pakatan Rakyat, attempt to increase their representation in Parliament and individual state legislatures. The PR won an unprecedented number of parliamentary seats and hopes to attract enough BN legislators to its camp to engineer a change of government. Terrorism poses a threat, with Jemaah Islamiah cells operating throughout Southeast Asia. Jemaah Islamiah is a militant Islamist group. The government appears keen to create a less opaque business environment. The economy is expected to contract in 2009. Capital controls have been almost totally dismantled, but could be re-imposed in the event of another financial crisis. The ringgit is expected to depreciate against the US dollar in 2009 but the managed exchange-rate system will remain in place in 2009-10.
SECURITY RISK: The situation in southern Thailand remains unsettled, while relations with Indonesia remain strained. A dispute over offshore territorial rights remains unresolved, and Malaysia’s policy towards illegal workers from Indonesia is also a bilateral issue. Within Malaysia, the government can use the Internal Security Act, which allows indefinite detention without trial, against terrorist suspects, although this has been used mainly to neutralise government opponents. In December 2007 five people, thought to be the organisers behind the Hindraf (Hindu Rights Action Force) protest in November, were detained under the act. In September 2008 an anti-government blogger, a journalist and an opposition member of parliament were arrested under the ISA. Divisions between the moderate and conservative faces of Islam are likely to become more apparent. Nevertheless violent crime, kidnapping and extortion are still rare.
POLITICAL STABILITY RISK: The political situation is expected to remain in flux as the leader of the opposition PR alliance, Datuk Seri Anwar Ibrahim, continues with his strategy to persuade ruling BN legislators to switch to the opposition camp to engineer a change in government. The BN won the March 2008 general election, but its majority was cut from two-thirds at the last Parliament to a simple majority. The PR is actively seeking the co-operation of 29 or more BN legislators in its efforts to form a new government, but Anwar faces a number of obstacles before realising his political ambitions. A forthcoming trial over a sodomy allegation made by a former aide could derail Anwar’s plans to seize power from the BN. At the same time that Anwar is trying to court BN legislators, Umno, the dominant party in the BN, has been trying to persuade members of the PR to join its ranks.
LEGAL & REGULATORY RISK: During the long tenure of the last prime minister, Tun Dr Mahathir Mohamad, the independence of the judiciary was often brought into question. This was evident in the conduct of politically sensitive law suits, but also in business litigation when it touched on government policy or interests. The prime minister, Datuk Seri Abdullah Ahmad Badawi, has promised a more open and accountable society, and pledged that major public contracts would go to open tender — a major advance, if it is fully implemented. The risk that the government will expropriate foreign businesses is small. Litigation can be subject to long delays. The government displays a genuine desire to promote competition, but this is not always reflected in political reality, where favouritism continues — and Abdullah, and his successor, Datuk Seri Najib Razak, will find it difficult to do away with cronyism. Private property rights are generally well protected, although protection of intellectual property rights is not comprehensive.
FOREIGN TRADE & PAYMENTS RISK: Financial flows on the current and capital accounts are free of significant restrictions. The Malaysian authorities do, however, fear the disruptive influence that future speculative flows of capital could have on Malaysian financial markets and the economy. Should another financial crisis threaten, they will be ready to re-impose the capital controls implemented following the Asian financial crisis in 1997-98 (but since almost totally removed). Special tariffs are used to protect some sectors of the economy (e.g. the automotive sector) but they are not numerous and have been reduced to meet the targets set by the Asean Free Trade Area (AFTA). In November 2007, Malaysia signed a free-trade agreement with Pakistan.
LABOUR MARKET RISK: Malaysia suffers from a more or less permanent shortage of some sort of domestic skilled labour. Future controversy may centre on the government’s policies towards foreign workers, rather than domestic ones. The government will continue to try to discourage illegal immigration. Malaysia suffered an acute labour shortage in 2005, following the departure of some 400,000 illegal immigrants. Prolonged bouts of labour shortages might spark some radical changes in labour policy. The degree of unionisation is low and the government does not allow unions to be organised on an industry or national basis, which greatly limits the scope for collective bargaining. Instead, there are many in-house unions, especially in the electronics industry, which are influential when the economy is strong and labour is in short supply.
FINANCIAL RISK: Bank Negara Malaysia (the central bank) abandoned a fixed exchange-rate system in favour of a managed float against a trade-weighted basket of currencies in July 2005. Given the huge importance of exports to the Malaysian economy, the BNM is likely to maintain the current exchange-rate system until such a time as the authorities consider the economy to be sufficiently diversified. The capital market is being reformed under a 10-year plan, which aims to speed up the development of the corporate bond market. Owing to strong capital positions and ample liquidity, the Malaysian banking sector should withstand the fallout from the global financial crisis. Moreover, since the 1997-98 financial crisis, the authorities have reorganised and strengthened the financial system, clearing out non-performing loans in addition to tighter regulatory rules and supervision.INFRASTRUCTURE RISK: Corporations are unlikely to be hampered by serious deficiencies in infrastructure. Malaysia has made a major effort to expand and modernise its port facilities in recent years, in part to divert traffic from Singapore; domestic ports handle about 90 per cent of Malaysia’s international trade. Malaysia has a fairly extensive road system; some of the major links are toll roads. Kuala Lumpur International Airport, completed in 1998, has considerable spare capacity. The electricity utilities are planning large investments to guard against blackouts. The Multimedia Super Corridor, Malaysia’s attempt to leap-frog economic development and match Silicon Valley, has been designed on an ambitious scale, but may not meet expectations. Internet use and telephone lines per inhabitant are still relatively low, but the government is very ambitious to promote the development of the information and communication technology sector.