Malaysia: Prospects Depend on Fiscal Discipline, Investor Confidence
about 2.75–3.5 percent) during 2012–15. In recent years, the average interest rate hovered around 3–3.5 percent, which could be the “normal” rate for BNM. Meanwhile, if international capital flows back into Malaysia, thus increasing liquidity in the market, BNM will gradually remove the excess liquidity by raising the reserve requirement in the medium term. We expect that inflation in Malaysia will continue to be benign, but it would experience spikes if the government reviews food and energy subsidies, leading to price adjustments. Although the government continues to maintain a price ceiling on a list of consumer goods—such as fuel, sugar, flour, rice, cooking oil, condensed milk, and bread—it reviews the price ceilings regularly. The government has announced early in 2010, its intention to cut the subsidy on electricity generation by gas to 0 from 70 percent over 15 years. Were this removal or adjustment of the price ceilings to happen, it would create a one-off inflation rate spike. FDI inflows volumes are likely to slow down as Malaysia focuses more on attracting a different kind of FDI, more knowledge driven and less capital intensive. The downward trend in FDI may be further accentuated unless a large-scale liberalization of Malaysia’s protected services sector lures in a new generation of FDI. In February 2010, the government announced the liberalization of 17 services subsectors. This wave of liberalization included ending the requirement for 30 percent Bumiputera participation in the 17 services subsectors.8 The government has also committed to extending the list of services subsectors to be liberalized, but the list is still awaited. In order to tap the regional markets, Malaysian companies will continue to invest abroad in areas of competitive advantage. These would include but not be limited to palm oil, oil and gas, financial services, and communications. Such investments would allow companies over the medium term, to grow and become regional and global champions. The ringgit can be expected to appreciate, loosely following the Chinese renminbi in the medium term. However, it is likely to be driven rather by commodity trade and portfolio capital inflows in the short run. Although the ringgit’s short-term prospects are only minimally affected by the renminbi, the Chinese currency’s long-term appreciation
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