Activity continued to slow in 2016 but growth is expected to improve slightly in 2017. Oil and gas exports should feel the benefits of the slight rise in prices, oil in particular. These will however remain low, thwarting any return to the growth rate recorded in 2014. The country also exports high value-added manufactured products. The depressed state of global demand however is likely to continue weighing on this segment with other exports suffering from lower levels of demand in China and the slowing of the US economy. Household consumption, despite the scale of indebtedness, is expected to remain strong, with unemployment and inflation under control. Poorer households will continue to benefit from significant social transfer and monetary policy is likely to remain relaxed. The stabilization of the Ringgit and lower food prices should help control price rises. In addition, despite the budget consolidation efforts, infrastructure spending is expected to remain high and the impact of the economic transformation program will continue to be positive in terms of private and public investment, and specifically the construction of a high-speed rail link between Singapore and Kuala Lumpur. Finally, tourism related sectors are likely to continue feeling the negative repercussions of the two inflight catastrophes involving Malaysian Airlines in 2014, as well as the worsening security situation in Borneo. The government is nevertheless set to continue with its plan to boost tourism and turn Kuala Lumpur into a hub for the airline sector.

Budget consolidation remains one of the government’s priority objectives. In 2017, the reduction in the budget deficit is likely to continue. Despite weak oil and gas prices and the cuts to corporation taxes which have eaten into its revenues, the government is aiming to boost its resources by reducing current expenditure, the additional revenue from the VAT introduced in 2015 and a rationalization of administrative spending. The rebalancing of the budget balance should enable a reduction in the level of public debt which will however still be high. The Malaysian state is also exposed through contingent commitments that could amount to 15% of GDP. In addition, the current account surplus is likely to shrink slightly because of a worsening in foreign trade, reflecting the depressed state of global trade and weak raw material prices. The high level of foreign exchange reserves (almost 7 months’ imports) means that Malaysia has the capacity to withstand sudden capital outflows if the Ringgit suffers severe downwards pressures in the context of global financial turbulence or the scandals surrounding the state-owned investment fund, 1MDB, and extending to the Prime Minister. The slow rate at which the US Federal Reserve is tightening monetary policy is helping hold capital outflows in check. Finally, the banking sector remains adequately capitalized and liquid. The high level of household debt and the exposure of its banks to foreign assets do however represent risks.

Despite the victory of the Prime Minister’s Barisan Nasional (BN) party, the general elections in May 2013 confirmed the reordering of the political scene and the rise of the opposition as first indicated in the 2008 elections. The legitimacy of the Prime Minister, Najib Razak, was however confirmed by his victory during the party’s internal elections in October 2013. In addition, the opposition was weakened by an internal crisis around the appointment of the Chief Minister of Selangor State and the sentencing of its leader, Anwar Ibrahim, to a five-year jail term on sex related charges. Members of the party are calling for the Prime Minister’s resignation and he has dismissed his deputy as well as the country’s Attorney General, both implicated in the inquiry. He also carried out a ministerial reshuffle in June 2016 to bring in his most trusted supporters in the party. Despite this scandal, Najib Razak’s coalition is not likely to be confronted by a unified opposition in the 2018 elections as it has splintered since the imprisoning of its leader. Since this conviction, the opposition has struggled to reunite and is unable to take advantage of the fragility of the governing coalition. The BN in fact managed to win a number of partial parliamentary elections in June 2016. Finally, governance should continue improving: the government seems to have decided to make the country even more attractive for investors.