Malaysia Economy

Malaysia Economy

Subchapters:

  • Basic data
  • Public finances and the state budget
  • Banking system
  • Tax system

Basic data

According to cheeroutdoor.com, Malaysia is the second largest export market in Southeast Asia and our largest trading partner in the ASEAN countries. Malaysia’s economy withstood the coronavirus pandemic in 2020 with a 5.6% drop in GDP, then returned to a growth trajectory in 2021 when the economy grew just above 3%. The next outlook is quite optimistic and, depending on the sources, is around 5% per year. In recent years, the rate of inflation has remained at low values, in 2020 consumer prices even fell, however this number was affected by the negative effects of the coronavirus pandemic. Relatively low unemployment and inflation under control are among the positive factors of the Malaysian economy. The level of public debt has an increasing tendency, the balance of the trade balance has been in surplus for a long time.

Regarding the structure of the economy, services accounted for 57.5% of the gross domestic product, manufacturing industry for 24.8%, agriculture for 6.7%, mining industry for 6.4%, and construction industry for 3.4%. The current risk is primarily a decline in investment and thus a decline in economic growth. Household indebtedness stands at 87.5% of GDP, totaling 1.27 billion ringgit, of which half is home loans (55.9%), personal loans (14.2%) and car loans (12, 3%). Malaysia’s economy is based not only on the extraction and export of oil, natural gas and palm oil, but also has developed sectors with higher added value – the automotive, electrical and chemical industries. Other prospective fields include construction, agriculture, mining and the food industry.

Pointer 2019 2020 2021 2022 2023
GDP growth (%) 4.3 -5.6 3.1 4.5 4.3
GDP/population (USD/PPP) 29,620.60 27,910.00 29,300.00 31,510.00 33,280.0
Inflation (%) 0.7 -1.1 2.5 2.8 1.7
Unemployment (%) 3.3 4.5 4.6 4.3 4
Export of goods (billion USD) 238.2 221.3 289 303.4 317.2
Import of goods (billion USD) 205 187.4 236.7 250.7 264.1
Trade Balance (Billion USD) 29.8 33.1 39 39.1 39.3
Industrial production (% change) 2.3 -4.2 7.2 5.2 3.2
Population (millions) 32 32.4 32.5 33.2 33.6
Competitiveness 22/63 27/63 ON ON ON
OECD export risk 02.VII 02.VII 02.VII ON ON

Source: EIU, OECD, IMD

Public finance and state budget

Public finance 2021
State budget balance (% of GDP) -6.5
Public debt (% of GDP) 63.4
Current account balance (billion USD) 13.9
Taxes 2022
AFTER 24%
F.O 0-30%
VAT 5-10%

In October 2021, the Malaysian government approved the country’s highest ever budget with a total allocation of MYR 33billion (i.e. USD 80.07 billion). In 2021, Malaysia managed a budget of MYR 322.54 billion, a decrease of MYR 9.56 billion. According to Finance Minister Tengku Zafrul bin Tengku Abdul Aziz, the largest item is administrative costs (MYR 23billion), and the budget calculates MYR 7billion (an increase of 21.9%) for science and research, 23 billion MYR is dedicated to the so-called covid fund (estimated to end in 2023) and MYR 2 billion is allocated for unexpected expenses. Likewise, revenues to the state budget are expected to increase by MYR 13 billion to MYR 234 billion (compared to MYR 221 billion).

Malaysian state budgets need to be seen and interpreted within the framework of the government’s long-term and medium-term strategies. Since the 1990s, the defining strategy has been Vision 2020, which aimed to place Malaysia among the developed nations by 2020. In 2016, the government began the preparation of a new strategy, TN 50 (Transformasi Nasional – national transformation), which has as one of its main objectives to place the Malaysian economy among the 20 most developed in the world by 2050. The above-mentioned strategies are followed by medium-term plans: the 12th Malaysia Plan (12th MP) for the years 2021-2025. Goals of the 12th MP: 1) GDP growth by 5.5% per year, 2) increase GNP to the level of USD 13,204, 3) increase the share of employee compensation in GDP to the level of 40%, 4) increase the average monthly household income to USD 2,300, 5) increase labor productivity growth from 1.1% to 3.6%, 6) in accordance with the outputs of the Paris Agreement, reduce greenhouse gas production by 45% by 2030 compared to 2005. or 7) increase the share of small and medium-sized enterprises in Malaysia’s GDP to 45%. To achieve these goals, strategic initiatives have been introduced including measures to expand the middle class, increase accessibility to higher education, increase the construction of socially affordable housing, strengthen technical and apprenticeship education, retraining programs, nature conservation, infrastructure strengthening and others.

Banking system

The banking system consists of commercial (business) banks and investment banks and other financial institutions (mainly Islamic and international Islamic banking). In addition, there are so-called development financial institutions in Malaysia that provide financing to certain strategic sectors of the economy. There are 27 commercial banks, 11 investment banks and 16 Islamic banks (many banks offer both conventional and Islamic banking services) in Malaysia. On the financial market, there are other financial institutions for intermediation of payment (and credit) relations, which, due to the pressures on household indebtedness, are now to a large extent also regulated by the Central Bank of Malaysia (AEON Credit Service, Malaysia Building Society Berhad, Diners Club, Synergy Cards).. There are 21 licensed non-life insurance companies in Malaysia. The last major regulation of the banking sector took place in 2013 with the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA). The main purpose of this legislation was, among other things, to specify the rules for the operation of entities on the financial market, to ensure greater compatibility of Islamic banking with Sharia law and, under certain conditions (to prevent serious risks), the possibility of the Central Bank to subject entities on the non-bank financial services market to regulation and supervision. Commercial banks are the main players in the banking system. Of the total number of 27, 19 have foreign ownership. In addition, there are 16 Islamic banking licenses in the country (of which 6 are foreign). 6 of the domestic banks operate in a total of 22 countries through their branches, joint ventures or equity participation. In the opposite direction, approximately 14 other foreign banks maintain their presence in Malaysia through representative offices. These offices do not carry out regular banking activities, but they ensure cooperation and exchange of information with their counterparts in Malaysia regarding common business interests. Malaysia also has several Development Finance Institutions (DFIs) that complement banking institutions in providing finance for sectors such as agriculture (agribank), infrastructure, transport and logistics (development bank), manufacturing for export and SMEs (SME bank).

Tax system

On 04/01/2015, the Goods and Services Tax (GST Act 762 (2014)) came into force in Malaysia. Since August 8, 2018, under the government of Dr. Mahathir introduced the new SST and SST 2.0 tax, which was introduced on 1 September 2018. In this tax system, selected items are subject to a 5% or 10% tax, while services are subject to a 6% tax. Personal income tax is subject to deductibles (for children, spouses, disability, etc.) ranging from RM1000 – RM10,000. Zakat, fitrah or other charges based on Islam can be deducted from the tax, but also an amount of RM3000 for the purchase of a computer, for example. Corporation Tax – A company is considered tax resident if it is managed from Malaysia. For the purposes of tax laws, the place of management is defined as the place where the management of the company meets. The income of resident companies is taxed at a rate of 24%. SMEs whose paid-up capital is less than RMmillion are taxed as follows: 1) income up to RM500,000 at 18% and 2) income above RM500,000 at 24%. When calculating the tax base, companies can deduct part of the costs associated with the purchase of capital goods and durable goods from the amount of income. Non-resident companies that are tax domiciled in any of the countries with which Malaysia has a double taxation treaty may be subject to lower tax rates. In the case of the Czech Republic, the rate of income tax is 12% or 0%. In general, the purpose of tax breaks is to support companies doing business in areas where the state has the greatest interest. From a sectoral point of view, the center of gravity of tax incentives is provided in the sectors of manufacturing industry, agriculture, industry (food industry, logistics and others), biotechnology or when establishing a regional company center. The latest government initiatives are aimed at supporting Industry 4.0. These are tax breaks or incentives for the purchase of machines and automation of operations that meet the criteria of modern robotization.

Malaysia Economy