MOST LIKELY REGIMES AND THEIR PROBABILITIES
18-Month: UMNO-led Coalition 70% (60%)
Five-Year: UMNO-led Coalition 45%

 

FORECASTS OF RISK TO INTERNATIONAL BUSINESS
Turmoil Financial Transfer Direct Investment Export

Market

18-Month: Moderate B+ B+ A-
Five-Year: Low A- (A) A- (B+) A-

( ) Indicates change in rating.            *  Indicates forecast of a new regime.

 

KEY ECONOMIC FORECASTS
Years Real GDP Growth % Inflation % Current

Account ($bn)

2009-2013(AVG) 4.3 1.8 24.69
2014(F) 5.0 3.4 16.75
2015-2019(F) 5.3 3.5 24.60

Fiscal Measures Will Fuel Discontent

Prime Minister Najib Razak overcame two electoral hurdles in 2013, first by leading the governing BN coalition to victory at a general election held in May, and then by fending off a challenge to his leadership of UMNO at a party conference in October.  That said, the BN’s reduced majority means that political stability is far from assured, particularly as the government has initiated a deficit-reduction program that is sure to be unpopular.

Under the circumstances, Najib will focus his attention on appeasing the country’s ethnic Malay majority, which is the bedrock of UMNO’s electoral base.  In that vein, the government will prioritize ensuring the access of Malays to jobs and housing, and, perhaps even more troublesome from the standpoint of inter-ethnic relations, making concessions to groups pushing for a more explicit role for Islam in political and legal affairs.

The potential for such pandering to ethnic and religious chauvinism to affect the broader policy climate is underscored by the announcement in early 2014 of a ban on foreign workers in fast-food restaurants.  The restrictions will mainly affect Indian immigrants.

The government has set a goal of reining in the chronic large budget deficits that have pushed the total public-sector debt burden above 50% of GDP, among the highest in the region.  The 2014 budget includes a raft of spending cuts, particularly on subsidies, and tax increases designed to hold the public-sector deficit to 3.5% of GDP this year, the first step toward eliminating the shortfall entirely by 2020.

The government’s willingness to tackle the task of dismantling expensive subsidies programs has helped to ease market anxiety, but average citizens are starting to feel the pinch, with negative implications for private consumption.  Consequently, real GDP growth is forecast to fall short of the official target of 5.5% in 2014, with downside risks predominating owing to the lingering threat of setbacks for the global recovery.

The external debt has increased, reaching an estimated 37.6% of GDP in 2013.  Although that figure is hardly alarming, the total public-sector debt burden has more than doubled over the last five years, and a lack of transparency with regard to the government’s contingent liabilities is a source of uncertainty.  An ample supply of foreign exchange reserves and the sizeable current account surplus represent a buffer against near-term debt troubles, but the vulnerability of the economy to external shocks makes it impossible to rule out repayment difficulties.

Economic Forecasts for the Three Alternative Regimes

 

UMNO-led Coalition PR Coalition Broad Coalition
  Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

2014 5.0 3.4 16.75 3.1 4.5 11.90 3.8 3.9 14.30
2015-2019 5.3 3.5 24.60 4.0 4.1 15.60 4.5 3.7 20.80

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