The country of Malaysia has a very peculiar geography: half of the country occupies the Southern part of the Malay Peninsula, whereas the other part is located on the North side of the island of Borneo.
Roughly 80% of the population lives on the peninsular side of the country with more than 7 million people in Kuala Lumpur alone. Malaysia was part of the British Empire, became independent in 1957 with the establishment of the Federation of Malaysia when Singapore, Sarawak and Sabah joined. The current state was formed in 1963 with the breakup of Singapore, then in 1965 Malaysia started a period of transformation and shifted from a simple exporter of raw materials into an industrial powerhouse.
In this guide, we will look at the five opportunities and the five risks of doing business in Malaysia.
BUSINESS OPPORTUNITIES
First opportunity: growing middle-income market
The first opportunity is the market: Malaysia has been growing at more than 5% for the last ten years even if it did not start from a low point; in fact, the GDP per capita in Malaysia is $29,000, but the population keeps growing at 1.34% per year. Although Malaysia is a middle-sized market of 31 million people, the median age is 29 which compares so favorably with neighboring countries like Vietnam and Indonesia where it is 31 and Thailand where it is 38.
Source: Department of Statistics, Malaysia
Second opportunity: easiness of doing business
The second opportunity in Malaysia is its investment environment: the country ranks 15 in the World Bank’s report easiness of doing business and even if it is still far away from Singapore, which always ranks around 1 or 2 every year, you can get a very favorable investment environment in Malaysia at a much cheaper price than Singapore: the cost of living, the rent, everything is cheaper and people speak English; while it is not an official language, English is compulsory in primary, secondary school, it is still used at university and in business.
Source: Expatistan
Third opportunity: abundance of natural resources
The third opportunity in Malaysia is the abundance of natural resources, especially oil and palm oil.
The famous Petronas Towers in Kuala Lumpur actually received their name from Petronas, Malaysia’s energy company and one of the largest oil manufacturers in the world.
The government receives around 25% of its revenues from the exportation of oil. This money has helped developing the country as it is nowadays, especially its infrastructure and real estate which is our fourth opportunity in Malaysia.
Fourth opportunity: infrastructures and real estate
Malaysia spends more than 25% of its GDP every year in fixed capital; I mention here a mega-project, the Iskandar project which is taking place in the southern part of the peninsula in the region of Johor Bahru. The project started in 2006 and should be completed by 2025; the idea is to integrate the economy of Singapore and its financial and technological expertise into the economy of Malaysia and to create a favorable environment for technology entrepreneurs and companies wanting to relocate there, to achieve some sort of «Shenzhen of Southeast Asia».
Fifth opportunity: open attitude to trade
The fifth opportunity is the open attitude to trade that Malaysia has: it is part of the ASEAN community, became part of the ASEAN Economic Community in 2015, it was a signatory country of the trans-pacific partnership and now of the new trans-pacific partnership.
Malaysia is also a signatory country of a multilateral free trade agreement between the ASEAN nations and China, South Korea, Japan, Australia, New Zealand, called RCEP, that just created the largest trading bloc in the world.
While Malaysia hosts several exhibitions and trade fairs every year, many Malaysian businesses use B2B portals to find business partners worldwide.
Hence, it is not difficult to trade with this country.
BUSINESS RISKS
First risk: corruption
Coming to the risks the first one is the level of corruption: Malaysia ranks 61 out of 180 countries which stands among the best Southeast Asia, however, it ranked 50 in 2014. This walking backwards when it comes to corruption in Malaysia may not be seen well from an investor’s perspective, especially if Malaysia wants to become a technological hub.
Source: Transparency International
Second risk: exposure to international trade shocks
The second risk is that Malaysia is exposed to international trade shocks: more than 70% of Malaysia’s GDP is derived from exports, so the country is exposed to a global slowdown or a slowdown in one of its main trading partners like Europe, China, India, the United States.
Third risk: dependency on oil and palm oil
The third risk is the dependency on oil and palm oil. Commodity prices are cyclical, therefore whenever they crash Malaysia gets negatively affected, at least in the short term. The problem nowadays is that oil and palm oil pose a long-term risk: in the case of oil it is clear now that the world is gonna change towards a cleaner way to produce electricity, and with palm oil, especially in developed countries, the attitude towards this commodity by consumers has been so negative that food producers are starting to exclude the use of this ingredient in their formulas.
Any significant long term reduction in the usage of these two commodities would have a dramatic negative impact on Malaysia, affective both GDP growth and public finances.
Source: BP Energy Outlook
Fourth risk: volatile currency
In fact, the fourth risk is a direct consequence of being exposed to oil and it is the currency: the Malaysian Ringgit appreciated until 2014 when oil prices were rising but then when they crashed in 2015 the national currency lost more than 30% of its value. It later stabilized and quite recovered since that time, but not that much. If Malaysia wants to become a developed economy needs to break the loop between its currency and oil prices, a vicious circle that affects many oil-exporting economies.
Source: xe.com
Fifth risk: introduction of new taxes
The fifth risk is again another consequence of being exposed to oil and gas and the energy transition. In fact, the government needs to substitute the revenues that it gets from the exportation of oil with fiscal revenues, which means either cutting subsidies or raising taxes, both having a negative effect on the domestic market. The government chose to introduce a 6% VAT in 2015 which is nothing compared with European standards but it gives an idea of the direction where Malaysia is going in the long term: it is most likely that taxes will be raised over time, which of course, at least when they are implemented, will have a negative impact on the domestic market.
Source: World Bank
This was our general analysis of Malaysia. Of course, if you had the opportunity to work there and to carry on business and you found new opportunities or new risks and we forgot to mention please write them in the comments below.
Overall we are very bullish on Malaysia especially because of its market: young people, an economy that is becoming high-income developed economy; even if it has some risks like corruption and dependency on oil and gas, we think that the country is really committed to transitioning to a high-income economy and that the rewards outweigh the risks when doing business in Malaysia.
Other info about Malaysia in our Country Data page: Malaysia
Globartis Research
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