3 Nov 2017
Malaysia: Market Profile
Major Economic Indicators
- Malaysia’s economy expanded by 4.2% in 2016, slowing from 5% in 2015. The IMF expects GDP growth at around 5.4% in 2017.
- Malaysian consumer prices recorded a 2.1% growth in 2016. The central bank lowered the policy rate by 0.25% to 3% in July 2016.
- In 2016, Malaysia attracted an FDI inflow of RM47.2 billion (about US$11.4 billion), up from RM39.4 billion (US$10.1 billion) in 2015, with investments mostly from Hong Kong, the US, Singapore, Japan and the Chinese mainland.
- In the first eight months of 2017, Malaysia’s exports expanded by 14.3% YOY while imports increased by 15% YOY in the same period.
- Hong Kong's exports to Malaysia increased by 4.9% YOY to US$2.7 billion in the first nine months of 2017, while imports expanded 14.3% YOY to US$9.8 billion during the same period.
Current Economic Situation
Malaysia’s GDP growth slowed to 4.2% in 2016 from 5% in 2015, with the services and manufacturing sectors growing by, respectively, 5.6% and 4.4%. The construction sector experienced a stronger growth rate of 7.4% in 2016. The IMF expects the Malaysian economy to grow by 5.4% in 2017 amid firmer private spending and oil price stability. Yet, the IMF cautioned in the Article IV Consultation on Malaysia, released in April 2017, that risks to the economic outlook are tilted to the downside, citing heightened global financial stress and associated capital flows as external threats, while domestically public, corporate and household debt levels remain high, thereby limiting policy space to respond to shocks.
Concerns about US monetary policy tightening and the slowdown of the Chinese economy have dealt a serious blow to the currencies of many emerging economies. After a short-lived rebound in the first half of 2016, the Malaysian ringgit (RM) edged down to revisit the 2015 low of RM4.5 to US$ in early 2017, only to recover modestly to around RM4.3 to US$ in June of 2017.
Malaysian consumer prices recorded 2.1% growth in 2016, led by price increases in energy, fuels and food and non-alcoholic beverage. In the face of quickening inflation and a weakening RM, the Bank Negara (BN), the country’s central bank, lowered its overnight policy rate by 0.25% to 3% in its July 2016 meeting. Meanwhile, the employment market deteriorated somewhat in 2016, with the jobless rate edging up to 3.5% from 3.1% in 2015.
In 2016, Malaysia’s exports dropped by 4.5% to US$189.8 billion while imports fell by 3.8% to US$168.8 billion. In the first eight months of 2017, Malaysia’s exports expanded by 14.3% year-on-year (YOY) while imports increased by 15% YOY in the same period. Major Malaysian exports include electronics and electrical products (E&E), palm oil and palm oil-based products and refined petroleum products. Major export markets include Singapore, China, the US, EU and Japan. Malaysia’s export performance is gradually improving with signs of stabilising oil and commodity prices.
Main imports to Malaysia were intermediate goods and capital goods, including electronics, machinery and petroleum products. Major import sources included China, Singapore, EU, Japan, and the US. Despite the decline in exports, Malaysia continued to post a trade surplus in 2016 as imports slowed by an extent similar to exports.
The Economic Transformation Programme (ETP) launched in 2010 targets 12 National Key Economic Areas (NKEA) seen as having the greatest potential to boost overall economic growth, including palm oil cultivation, tourism, financial services and electronics industries. The ETP is a comprehensive economic plan to propel Malaysia's economy to the rank of high income economies (with a per capita income of at least US$15,000) by 2020. The implementation of ETP is still on track, which is further supported by the Eleventh Malaysia Plan (11MP) announced in May 2015, with the 11MP consisting of initiatives for deployment in the last five years before the 2020 deadline for achieving high-income status for Malaysia.
Export-dependent Malaysia is keen to attract FDI and promote high-value manufacturing. Investment incentives including corporate income tax exemption and tax allowance are provided in such industries as advanced electronics, medical devices, bio-technologies and green technologies. More information on investment guidelines and incentives can be found at the website of Malaysian Investment Development Authority (MIDA).
In 2016, Malaysia attracted an FDI inflow of RM47.2 billion (about US$11.4 billion), up from RM39.4 billion (US$10.1 billion) in 2015. The bulk of inward FDI came from the Hong Kong, the US, Singapore, Japan and the Chinese mainland.
China was Malaysia’s biggest manufacturing FDI source in 2016, mostly investing in steel, non-metallic mineral and solar industries. Hong Kong is Malaysia’s fourth-largest foreign investors in manufacturing projects in terms of FDI stock, spanning E&E, basic metal, fabricated metal, garment and textile, wood and related products. In recent years Hong Kong has also been expanding its investment in Malaysia to the services sector.
As of 2016, Hong Kong’s cumulative FDI in Malaysia stood at US$10.7 billion, while that of the Chinese mainland reached about US$2.3 billion. Hong Kong’s cumulative FDI in Malaysia had increased significantly by US$3.5 billion from 2015 to 2016.
In 2013, China and Malaysia jointly developed the Malaysia-China Kuantan Industrial Park (CMKIP) on the east coast of Peninsular Malaysia. The Malaysian government, apart from providing the infrastructure support to CMKIP, has recently approved a special incentive package for all park investors, including 100% income tax exemption for up to 15 years.
China and Malaysia broke ground in August 2017 on a US$13 billion rail project linking Peninsular Malaysia's east and west, the largest such project in the country and a major infrastructure push under China’s Belt and Road Initiative. This planned 688-km East Coast Rail Link (ECRL) will connect the South China Sea at the Thai border in the east with the Straits of Malacca in the west.
Malaysia is a member of the World Trade Organization (WTO), and it adopts a liberal trade regime. Companies are allowed to trade freely without special restrictions.
Import tariffs, where applicable, are mostly imposed on an ad valorem basis. The average applied duty rate was 6.1% in 2014. For non-agricultural products, import duty ranges between 0%-68%, and about 77% of the non-agricultural imports were duty-free. Raw materials, machinery and essential foodstuffs are generally non-dutiable or subject to duties at lower rates. The trade regime has been progressively liberalised to encourage integration at the regional and global level.
Malaysia has abolished import tariffs on a wide range of items, including raw materials, components, equipment and machinery that are directly used in manufacturing process.
ASEAN Economic Community
Further, as Malaysia is a member of ASEAN, the country is committed to the ASEAN Common Effective Preferential Tariffs (CEPT) scheme, under which all industrial products traded within ASEAN are subject to import duties of 0-5% only. At present, Malaysia has already eliminated duties on over 95% of its tariff lines to other ASEAN countries. In 2015 Malaysia adopts the rotational chair of ASEAN, at end of the same year the ASEAN Economic Community was established.
Free Trade Agreements
Malaysia has continued to participate in various free trade arrangements (FTAs). Bilateral FTAs include those forged with Australia, Pakistan, Chile, India, New Zealand, Turkey and the EU. Lower import duties are applied to imports originated from the trading partners under different arrangements.
At the regional level, Malaysia under the auspice of ASEAN has concluded free trade agreements with China (i.e. ACFTA or CAFTA), Korea, Japan, Australia, New Zealand and India. Several regional FTAs are still under negotiations, including Regional Comprehensive Economic Partnership (RCEP, which includes 10 ASEAN nations, Australia, China, Japan, Korea, India and New Zealand), Trade Preferential System-Organisation of Islamic Conference (TPS-OIC) and Developing Eight (D-8) Preferential Tariff Agreement (PTA).
Malaysia is among the four ASEAN member countries participating in the Trans-Pacific Partnership (TPP), a trade agreement signed among 12 Pacific Rim countries  in February 2016. With US President Trump resolved to pull the US out of the TPP, the remaining TPP nations have decided to press ahead to pursue a free trade arrangement without the US.
Malaysia was Hong Kong’s tenth largest trading partner in 2016, yet ranking fourth among ASEAN countries in its trade with Hong Kong. In September 2017, ASEAN and Hong Kong concluded the negotiation on a FTA and a related Investment Agreement, which are expected to be signed in November this year.
In April 2012, Hong Kong and Malaysia reached a Comprehensive Double Taxation Agreement, which came into force in December 2012.
Hong Kong’s Trade with Malaysia
Hong Kong's exports to Malaysia increased 4.9% YOY to US$2.7 billion in the first nine months of 2017. Major export items included telecom equipment & parts (US$594 million, 22% share, -3.3% YOY), semi-conductors, electronic valves & tubes (US$378 million, 13.9% share, +3.2% YOY), electrical apparatus for electrical circuits (US$294 million, 10.8% share, +7.3% YOY), and electric power machinery & parts (US$157 million, 5.8% share, +4.4% YOY).
On the other hand, Hong Kong's imports from Malaysia increased 14.3% YOY to US$9.8 billion in the first nine months of 2017. Major imports included semi-conductors, electronic valves & tubes (US$6.4 billion, 65.1% share, +16% YOY), telecom equipment & parts (US$504 million, 5.1% share, +15.1% YOY), parts and accessories of office machines (US395 million, 4% share, +10.3% YOY) and computers (US$337 million, 3.4% share, -14% YOY).
Malaysia’s Involvement in Hong Kong Economy
According to the Census & Statistics Department of Hong Kong, Malaysian companies had set up six regional headquarters, 22 regional offices, and 52 local offices as of June 2017.
In the first nine months of 2017, a total of 343,922 Malaysian visitors came to Hong Kong, down 2.9% from the same period in 2016.
More information on the Belt and Road countries’ economic and investment environment, tax and other subjects that are important in considering investment and doing business are available in The Belt and Road Initiative: Country Business Guides.
 These 12 countries include: Australia, Brunei Darussalam, Chile, Japan, Malaysia, Peru, Singapore, the US, Vietnam, Mexico, Canada and New Zealand.