Outlook for 2011-15

• Political stability in Malaysia will come under moderate threat during the next five years, not because of any major shift in the balance of power, but rather because of internal strife within the two main political alliances.
• The Economist Intelligence Unit expects the governing Barisan Nasional (BN) coalition to call an early election-most likely in 2012, a year before its current term ends.
• Fiscal policy will be tightened gradually during the forecast period as the government strives to balance its budget by 2020. Monetary policy will also become tighter as domestic demand strengthens.
• The economy is expected to resume a fairly stable growth path in 2011-15, following a mild domestic recession in 2009 and a strong rebound in 2010. Real GDP growth will average 5.3% a year in the forecast period.
• The rate of inflation will accelerate to 3.2% in 2011 and will then average 3.6% a year in 2012-15. The government plans to rationalise the country's extensive subsidy schemes, and this will push up consumer prices.
• Despite the relatively rapid pace of growth in merchandise imports compared with that in exports, Malaysia will continue to run substantial trade and current-account surpluses in the forecast period.

Monthly review

• Following weeks of speculation the chief minister of Sarawak state, Taib Mahmud, announced the dissolution of the state assembly in March, paving the way for state elections that are likely to be held in the next month or so.
• Members of the BN secured convincing victories at two state by-elections in March. The coalition has won four by-election contests simultaneously since November 2010.
• In March Bank Negara Malaysia (the central bank) announced its intention to raise the statutory reserve requirement ratio from 1% to 2%, with effect from April 1st.
• The construction of a rare-earth metals processing plant in Pahang state attracted much attention in Malaysia and abroad in March. The facility will be operated by an Australian mining company, Lynas.
• The latest balance-of-payments figures published by the official data office, the Department of Statistics, show a slight deterioration in the current-account position in 2010 compared with 2009.
• Monthly trade data from the government showed both merchandise exports and industrial output growing at a sluggish pace in January.

Political stability will come under moderate threat during the next five years, not because of any major shift in the balance of power, but rather because of internal strife within both the governing Barisan Nasional (BN) coalition and the main opposition Pakatan Rakyat (PR) alliance. The BN, which is tightly controlled by its largest component party, the United Malays National Organisation (UMNO), is set to remain in government during the forecast period, during which there will be a general election. (The next election must be held by April 2013 but is likely to happen sooner, most likely in 2012.) Although the March 2008 general election revealed that UMNO could no longer count on the strong support of the majority of Malays, the PR still does not offer a sufficiently credible, stable alternative to the BN.

The BN's success in remaining in a position of strength will depend largely on whether it manages to keep its power base intact in Sabah and Sarawak. BN legislators from the two states, which are located on the island of Borneo, make up more than one-third of the BN's total of 137 members of parliament (MPs). The BN's Borneo power base is likely to be severely tested at the Sarawak state election, which is expected to be held in the next month or so. Unresolved issues, such as illegal foreign immigration to Sabah, may cause the BN parties based in Borneo, or individual MPs from the island, to defect to the opposition in Malaysia's national parliament, or use the threat of defection to secure greater influence within the coalition in the run-up to the next general election.

Although voters in the rural heartland of peninsular Malaysia continue to support UMNO, there have been suggestions that the party has lost the support of a significant number of educated, liberal middle-class Malays. This shift in support may have intensified as Internet news sites and blogs have exposed government corruption and the political intrigues of individual government members. The more conservative Malays have also been voicing concerns about the government's plan to reform policies that favour bumiputera (ethnic Malays and other indigenous peoples), believing that the special rights accorded them in the constitution could be rescinded. However, the results of recent by-elections point to a slight shift in non-Malay sentiment in favour of the BN, suggesting that the government's plans to reform bumiputera policies has increased its appeal among ethnic minorities.

UMNO's internal leadership elections, which have been postponed until 2012, could be a source of instability, particularly if an early general election is called this year and the party fails to secure a resounding victory. Under such circumstances, the credibility of the prime minister, Najib Razak, would be undermined, placing his position as president of the party-and hence his role as head of government-at risk. This in turn could halt, or even reverse, Mr Najib's programme of economic reforms. The most likely contender to become UMNO's next leader is the deputy prime minister, Muhyiddin Yassin.

The leader of the PR, Anwar Ibrahim, a former deputy prime minister, is likely to be convicted on a charge of sodomy in the coming months. Mr Anwar claims that the case against him is politically motivated. Without him, the ties that unite the disparate parties making up the PR-the reformist, multicultural Parti Keadilan Rakyat (PKR), the conservative, Islamist Parti Islam se-Malaysia and the left-of-centre, predominantly ethnic-Chinese Democratic Action Party-are likely to fray, while the process of choosing a new PR spokesman could deepen divisions within Mr Anwar's PKR as well as between the opposition coalition's member parties.

The Economist Intelligence Unit expects the next general election to take place ahead of schedule. Traditionally, the BN has preferred to call elections around a year before the end of its term in office, which means that the next election could be held in early 2012. We believe that Mr Najib will set a general poll date after the Sarawak state election, which is the main political event before the next national poll. The Sarawak state assembly has been dissolved and a date for state elections is expected to be announced within days. Although the BN has performed well at recent by-elections-winning four simultaneously since November 2010-the results of the Sarawak election will provide a better indication of the level of public support for the government and its reform plans. Furthermore, political considerations at state assembly level in several of Malaysia's other states, particularly those controlled by the opposition, may influence the timing of the next general election.

Whenever it takes place, the next election will see the cash-strapped opposition PR alliance pitted against the BN's well-oiled political machine. The BN appears to be in a favourable position to win, although how wide its margin of victory will be remains unclear. Mr Najib has worked hard at presenting the image of a politician who is committed to economic reform, and the government's "1 Malaysia" slogan appears to have found favour among the country's ethnic-Chinese and Indian people, the majority of whom voted for the opposition PR in the 2008 general election. Mr Najib's reform plans may irk conservative Malays, some of whom have joined Perkasa, a recently formed organisation that champions Malay supremacy. However, they are unlikely to vote for the opposition, as they do not trust the PR to uphold the rights of ethnic Malays. Perkasa has been silent so far about whether it intends to field candidates at the next election, suggesting that it may be content to operate as a pressure group that has an influential role through its endorsement of certain candidates.

The opposition alliance is in a more difficult position, and faces a number of challenges. In addition to the PR having less money than the ruling BN, its appeal could be undermined by a newly formed civil rights group, the Malaysian Civil Society Movement (MCSM), and by the recently founded Parti Kesejahteraan Insan Tanah Air (KITA, People's Welfare Party), led by Zaid Ibrahim, who resigned from the PKR in 2010. Both groups have declared their intention to field candidates at the next general election. The PR currently has 76 parliamentary seats, and it is possible that at least one-half of these could be challenged by either the MCSM, KITA or both. This could split the PKR's support base.

Relations with Singapore have become closer in recent years, and during the forecast period we expect this trend to continue, particularly in the area of economic ties. The governments of Malaysia and Singapore no longer bicker constantly over minor issues, although a degree of racially tinged wariness persists. China will become an increasingly important trading partner in the next five years. The Malaysian government's apprehension about China's rise and growing economic influence is mixed with ambivalence towards the ethnic-Chinese members of its own population and an awareness of the need to attract investment. As Malaysia's economic dependence on China grows, uneasiness in Malaysia about Chinese power in South-east Asia is expected to increase. Malaysia is also keen to strengthen relations with India. The two countries anticipate bilateral trade to accelerate following the signing of a free-trade agreement in February.

During the next five years the government's policy agenda will centre on a host of initiatives aimed at raising income levels and attempting to turn Malaysia into a high-income country by 2020. Under the Government Transformation Programme, the BN has outlined six key initiatives, which include tackling corruption, improving education and upgrading basic rural infrastructure. In addition, the Economic Transformation Programme identifies 12 national key economic areas (NKEAs) that are to be prioritised. The government considers the NKEAs, which include tourism and palm oil cultivation, to be the sectors with the greatest potential to boost overall economic growth. The Tenth Malaysia Plan (10MP), a spending plan for 2011-15, will support the implementation of these programmes. Specific issues on the reform agenda for the next few years include the phasing out of price controls and subsidies, in a process that is widely considered necessary to create a more competitive domestic economy. The government will also forge ahead with changes to the bumiputera positive-discrimination policies. It has already relaxed a requirement that formerly obliged companies to offer minority equity stakes to bumiputera. The government hopes that further reforms in this area will attract greater inflows of foreign direct investment (FDI), as it believes that FDI has the potential to again become a major engine of economic growth in the next five years. However, it is unlikely to dismantle affirmative-action policies altogether, for fear of alienating its Malay support base.

The government will make only slow progress in bringing its finances close to balance during the next five years. In its budget plans for 2011, the government is targeting a deficit equivalent to 5.4% of GDP. This would represent only a small improvement compared with the estimated shortfall of 5.5% of GDP in 2010. We expect the government to be fairly successful in adhering to its budget plans for 2011, which feature an increase in spending of just 2.8% relative to estimated total expenditure in 2010. Although in the forecast period the government intends to rationalise its subsidies programme (subsidies are currently provided for food and fuel, among other goods and services), in 2011 it will continue to spend heavily on goods and services. Debt-servicing costs will also rise and are expected to account for around 10% of total operating expenditure in 2011. The budget will remain in deficit in the remainder of the forecast period. However, assuming that the government reduces its operating expenditure and that it has some success in increasing revenue by expanding the tax base, the deficit will shrink to 3.8% of GDP in 2015. A widening of the tax base is expected to be achieved through the introduction (most likely in 2012) of a goods and services tax (GST), although implementation of the tax is likely to be hampered by opposition from households and businesses. Further moves to alter the subsidy structure could also prove unpopular.

During the early part of the forecast period Bank Negara Malaysia (BNM, the central bank) will proceed with the normalisation of monetary policy by pushing up its main policy interest rate, the overnight policy rate (OPR). BNM has raised the OPR three times since March 2010, by a total of 75 basis points, bringing the rate to 2.75%, having previously cut it to a record low in response to the dramatic downturn in the Malaysian economy that occurred in 2009. However, the recent sharp appreciation of the local currency, the ringgit, and signs of slower economic growth suggest that the central bank will not move aggressively on interest rates in the coming quarters. As BNM does not expect inflation to rise to problematic levels in 2011, we do not expect the OPR to be raised this year to a level higher than the rate of 3.5% at which it stood during 2007 and much of 2008. Nevertheless, as the pace of domestic demand growth quickens in 2012-15 relative to the level it is expected to reach in 2011, BNM is likely to push rates higher to contain inflationary pressures.

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The Malaysian economy is expected to move on to a more stable growth path in 2011-15, when we expect real GDP growth to average 5.3% a year. This follows a period of instability, during which the economy contracted by 1.7% in 2009 amid the 2008-09 global economic slowdown before rebounding to growth of 7.2% in 2010. The strong recovery last year was driven partly by the inventory cycle, as the dramatic drawdown of stocks that occurred in 2009 amid the slowdown was followed by rapid restocking in 2010. In the forecast period private consumption and investment will remain the primary drivers of economic growth. An increase in compulsory savings on the part of workers from January 2011 will eat into private disposable incomes, but growth in private consumption will continue to be underpinned by a fairly strong labour market. The positive effect of restocking on real GDP growth is expected to wane in 2011 as the process of inventory accumulation moderates. Despite the government's efforts to consolidate its finances, public spending (which will be guided by the 10MP) will rise by an average rate of 4.2% a year during the next five years. Exports of goods and services are expected to grow by an average of 8.4% a year. However, the contribution of net exports to GDP growth will be marginal or even negative, as imports of goods and services will record similar growth rates.

In supply-side terms, the industrial sector will continue to constitute a sizeable part of the economy, but we expect it to remain smaller than the services sector during the forecast period. Growth in the industrial sector will generally track the rate of expansion in the economy as a whole. The services sector will be the largest and most dynamic part of the economy, as the government channels more resources into the sector in a bid to ensure that Malaysia becomes a high-income nation by 2020. The most dynamic services subsectors will be financial services, wholesale trade, and hotels and restaurants. Growth in financial services will be encouraged by gradual liberalisation. This will help to improve the international competitiveness of Malaysia's financial system, especially in Islamic-banking products, and will make the domestic financial sector more responsive to the needs of both the private and public sectors. The contribution of agriculture (and particularly palm oil production) to the economy will be important: agricultural output growth will assist in raising rural incomes and consumption during the forecast period.

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Owing to higher global prices for crude oil and non-oil commodities, consumer price inflation will accelerate to an average rate of 3.2% in 2011, and price rises will then average 3.6% a year in 2012-15. Government efforts to rationalise the extensive subsidy scheme will exert upward pressure on prices in the forecast period. Another source of inflationary risk will be the new GST, which the government will attempt to introduce early in the period. Disinflationary influences will also be strong, however. The removal of trade barriers and greater regional economic integration will help to maintain a low-inflation environment. As a country that is heavily dependent on international trade, Malaysia will not be able to escape the effects of growing competition and import penetration in its domestic market, especially in the form of a wide range of consumer goods from China. Another factor that will help to keep inflation in check will be the forecast appreciation of the ringgit against the US dollar in 2011-15. Since most imports and exports are denominated in US dollars, imports will consequently become cheaper.

The ringgit has remained strong against the US dollar in recent months. The ringgit, like several other Asian currencies, strengthened during the second half of 2010, mainly owing to a surge in capital inflows, but the currency has also been supported by large surpluses on the trade and current accounts. A positive interest rate differential with the US will persist in the early part of the forecast period, and this will continue to provide support to the ringgit. We therefore expect the currency to strengthen from an average of M$3.22:US$1 in 2010 to M$3:US$1 in 2011 and M$2.91:US$1 in 2012. The ringgit will remain strong during the remainder of the forecast period. BNM has not come under heavy pressure to impose capital controls in order to contain the local currency's appreciation, and the central bank will maintain its current exchange-rate regime, whereby the ringgit is subject to a managed float against a trade-weighted basket of currencies. BNM will continue to stress that it does not attempt to maintain the ringgit at a particular level and intervenes only to minimise volatility and prevent currency misalignments.

During the forecast period Malaysia will continue to post large current-account surpluses, at an average of around 9.2% of GDP. Growth in exports will be underpinned by a recovery in external demand and stronger regional trade. An improvement in external conditions is expected to boost demand in Malaysia for imports of intermediate goods used in the manufacture of exports. Import growth will also be supported by firm domestic demand, but the pace of growth in imports (in value terms) will remain similar to that in exports.

Malaysia will broaden its export range, but the economy will remain highly sensitive to the global electronic-goods cycle. Levels of non-manufactured exports, consisting largely of agricultural commodities (notably palm oil) and minerals (particularly crude petroleum and liquefied natural gas, or LNG), will also continue to be determined by global economic conditions. In addition, there will be a shift in the balance of export destinations and import suppliers in 2011-15. China will remain the fastest-growing economy in the Asia region, creating many opportunities for exporters in Malaysia (and particularly for its ethnic-Chinese minority). As a result, China is likely to overtake Singapore as Malaysia's largest export market during the forecast period, while trade with the US, the EU and Japan will decline in relative importance.

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After weeks of speculation the chief minister of Sarawak state, Taib Mahmud, announced the dissolution of the state assembly on March 21st, paving the way for state elections. The forthcoming poll is seen as a litmus test of the government's economic strategy and the popularity of the prime minister, Najib Razak. The results of the state election will be closely scrutinised by Mr Najib and could provide a clue as to when a possible snap general election will be held. The government's term does not expire until 2013, but it has traditionally preferred to call a general election a year before its term ends. An overwhelming victory for the ruling Barisan Nasional (BN) coalition in Sarawak will intensify speculation of a snap poll later this year.

Having failed to wrest control of state and parliamentary seats from the ruling coalition in recent by-elections, the opposition will do its utmost to win-over the Sarawak electorate. At present the three founding parties of the opposition alliance, Pakatan Rakyat (PR)-Parti Islam se-Malaysia (PAS), the Democratic Action Party (DAP) and Parti Keadilan Rakya (PKR)-are in tough negotiations with smaller political parties based in Sarawak. The Sarawak National Party (SNAP), which joined the state-level PR in April 2010, is aiming to contest for seats previously held by representatives from the ethnic Dayak group (who are members of the BN). Members of SNAP claim that they can better represent the interests of Dayaks, who make up around one-third of the population in Sarawak. One of the main opposition parties, PKR, has expressed a desire to contest 52 of the 71 seats in the state assembly. The largest challenges for the opposition are a lack of funds and selecting candidates with public appeal.

Opposition forces in Sarawak are aware that their electoral success will depend on them forming a satisfactory electoral pact and their ability to appeal to the discontent sections of the Sarawak population, who often complain that their interests at state level are being neglected by the national government and that their religious freedom and limited autonomy, guaranteed under the 1963 Malaysia Agreement, are also being ignored. Popular resentment of Mr Mamud, who has governed the state since 1981, has grown in recent years amid ongoing revelations about his family's wealth, shareholdings and international property empire that have been posted on various Internet sites.

Members of the ruling coalition secured convincing victories at two by-elections that were held on March 6th. Both elections, in Kerdau in Pahang state and Merlimau in Malacca, were for seats in their respective state assemblies. The two constituencies are similar in terms of population and geographical composition and were previously held by members of the BN. Both constituencies are predominantly rural and Malay, with a young population and a mixture of agriculture and forestry-based industries. They are located in areas where infrastructure and basic services have been greatly improved in recent years. Both seats are traditional strongholds of the BN and results of the by-elections showed that the electorate in both constituencies continues to favour the BN. Furthermore, in what appears to be at the expense of the opposition, more people threw their support behind the BN at the recent by-elections than in the 2008 general poll.

The latest developments suggest that the electoral tide may have turned for the BN. While the PR was victorious in a raft of by-elections held in 2008-09, when it managed to either wrest constituencies from the BN or retain hotly contested ones, the ruling coalition's scorecard has improved enormously in recent months, securing four by-election victories simultaneously. The opposition appears to be demoralised. The PAS, which provided the opposition candidates in Kerdau and Merlimau, conducted an uninspired campaign. Yet Chinese backing for the opposition remained surprisingly firm, in no small degree owing to the canvassing by the third coalition partner, the mainly Chinese left-of-centre DAP. In the run-up to the by-election, the main constituent of the BN, the United Malays National Organisation (UMNO) chose to attack the opposition PAS, claiming that the party held extremist views and ready to jettison the interests of Malays in favour of a pact with the DAP. The rural constituencies of Kerdau and Merlimau are relatively different from the electorate in urban centres, where the population is better educated and has better access to uncensored news, and where the PR has found much of its support. Economic prosperity and high consumer confidence are creating a challenging environment for the opposition, which does not seem ready to face a general election.

In March Bank Negara Malaysia (BNM, the central bank) announced its intention to raise the statutory reserve requirement (SRR) ratio from 1% to 2%, with effect from April 1st. The SRR ratio is the share of assets commercial banks are obliged to hold with the central bank. BNM explained that its decision was a pre-emptive measure aimed at mitigating risks to macroeconomic and financial stability. The central bank said that Malaysia had, like other Asian economies, experienced a build-up of liquidity from large capital inflows in the past year or so. BNM was careful to point out that the increase in the SRR ratio was done to specifically manage liquidity and that it should not be interpreted as a further tightening of monetary policy. The central bank has been keen to stress that only changes in the overnight policy rate (OPR) should be taken as an indication of its monetary policy stance.

The latest move can be interpreted as part of the central bank's wider process of normalising monetary policy. The SRR ratio fell to a record low of 1% in February 2009 in the wake of the 2008-09 global financial crisis. In 2008 the ratio fluctuated between 3% and 4%. The latest measure had been anticipated after it was flagged in the January 27th monetary policy statement. Separately, at its policy meeting in March BNM decided to keep the OPR unchanged, at 2.75%, suggesting that the current monetary policy stance would remain supportive of economic growth.

Construction of a processing plant for rare-earth metals in Pahang state attracted much public attention in Malaysia and overseas in March. The facility at Gebeng, near the capital of Pahang state, Kuantan, will be one of the world's largest refineries of rare-earth metals. At present China is the world's biggest supplier of the metals, accounting for around 95% of global supply. Production at the new plant in Malaysia will start in the third quarter of 2011. The output will be strategically important as rare-earth metals are crucial to many high-technology and defence products. In 2010 China temporarily halted exports of rare-earth metals to Japan amid a territorial dispute. The Malaysian plant is being constructed and will be operated by an Australian mining company, Lynas, which will transport rare-earth ore from Western Australia's Mount Weld, claimed by the company to be one of the richest and largest rare-earth-metal deposits in the world. The new facility will benefit from a 12-year tax holiday offered to certain firms locating in the East Coast Economic Region, one of five development corridors announced during the tenure of the previous prime minister, Abdullah Badawi. At current high rare-earth-metal prices, exports could be worth several billion ringgits a year. Malaysia was keen to attract the production facility despite serious environmental concerns about radioactive waste, which typically results from the extraction of rare-earth metals from ore. The chairman of Lynas, Nicholas Curtis, has stated that it would cost four times as much to build and operate such a refinery in Australia.

The construction of the plant is likely to have deepened ties between the governments of Australia and Malaysia, both of which hope to conclude a bilateral free-trade agreement (FTA) in the next year or so. Trade talks between the two countries began in 2005 but were suspended in 2007 when the political emphasis moved to a regional deal between the Association of South-East Asian Nations (ASEAN), of which Malaysia is a founding member, and Australia. The impending FTA between the two countries will formalise long-established economic and diplomatic ties. Australia is Malaysia's 11th-largest trading partner, a supplier of raw materials and education services (ranging from secondary to tertiary), but more importantly, the pursuit of free trade will reinforce Mr Najib's liberal credentials, helping to attract greater foreign investment to the country.

In a progress report on the Economic Transformation Programme (ETP), the prime minister revealed that private investment was likely to exceed the target of M$83bn (US$27.5bn) set by the government for 2011. Mr Najib said that private investment could climb as high as M$127bn this year, made up of ETP projects worth an estimated M$76bn and another M$50.6bn pledged by other local and foreign companies. The M$50.6bn was based on a survey of local and foreign companies, with a relatively poor response rate of 30%. Mr Najib admitted that total investment outlays could be less than M$127bn, but he was confident that the M$83bn target would be met. He also drew attention to the fact that the Tenth Malaysia Plan (10MP), a spending plan for 2011-15, set a private investment target of around M$115bn a year over the period.

At the same briefing Mr Najib announced nine new projects under the ETP, representing some M$2.3bn of new investments. There are 60 projects that have been created under the programme since it began in 2010, with an accumulated monetary value of M$95.1bn, according to Pemandu, the government organisation charged with monitoring the scheme. The most important projects are in wholesale and retail trade, the oil, gas and energy sector, the palm oil industry, the communications sector and the infrastructure sector. The large number of investment plans that have been announced so far by the private sector suggest that Malaysia's investment climate is improving rapidly. More importantly, the projects serve as a reminder to the public of the government's goal of boosting economic activity in 12 areas, known as National Key Economic Areas (NKEA), and the authorities' prowess in policy execution. Mr Najib may be fortunate in terms of the timing of the programme, taking shape as regional economic integration, optimism about economic growth in Asia and growing foreign direct investment (FDI) in the region are making Malaysia an attractive location for both foreign and domestic investors. Progress on removing investment constraints may not be fast enough, but, given the latest trade data on inflows of FDI, foreign investors are beginning to be persuaded by the government's liberalising measures.

The latest balance-of-payments figures published by the official data office, the Department of Statistics, show a slight deterioration in the current account. Although the country continued to record a surplus on the current account of M$90.5bn in 2010, the amount was still less than the surplus of M$112.1bn recorded in 2009. The deterioration partly reflected a weaker income balance, which recorded a shortfall of M$25.2bn, M$10bn wider than the year-earlier period. The widening in the deficit was attributable to net outflows, connected to repatriation of profits and dividends by foreign investors, surging to levels that were last recorded in 2008. The deterioration in the current-account position also reflected a decline in the trade surplus, which fell from M$141.7bn in 2009 to M$136.6bn 2010, as growth in imports of goods consistently outpaced exports. The services account also weakened in 2010. Although Malaysia continued to post a surplus in services, the amount fell from M$4.7bn in 2009 to M$863m (US$270m) in 2010, mainly owing to higher transport costs. The transfers deficit, largely made up of funds remitted by foreign workers working in Malaysia, widened from M$19.6bn in 2009 to M$21.7bn in 2010.

Given the government's policy of stimulating investment, FDI inflows in 2010 have been closely scrutinised by economic observers. Inflows of FDI surged to M$10.5bn in the fourth quarter, the highest level in more than two years. On a cumulative basis, inflows stood at M$27.6bn in 2010, five times the amount recorded in 2009 and nearly M$4bn more than in 2008. However, investment outflows remained high, at M$9bn in the fourth quarter and M$42.6bn in 2010 as a whole, as Malaysia's emerging multinational-including the state-owned oil company, Petronas, financial institutions and manufacturing firms-continued their aggressive expansion abroad.

Monthly trade data from the government showed both merchandise exports and industrial output growing at a sluggish pace in January. Fears of stagnation in industrial output and lower export sales were evident in a quarterly business survey carried out by the Malaysian Institute of Economic Research (MIER). The MIER Business Conditions Index (BSI) fell below the "boom or bust" line of 100 in the fourth quarter of 2010 compared with the previous quarter. Merchandise exports grew by just 3% year on year in January 2011, a slower pace of growth than in the previous month, when exports grew by 4.6%. The small increase in exports was largely owing to rising global prices for petroleum goods. Exports of electrical and electronic products-Malaysia's largest export category-declined by 19% year on year. Merchandise imports, however, continued to grow at a rapid pace, increasing by 13.5% year on year, following an increase of 10.3% in the previous month.

The annual rate of year-on-year growth in manufacturing slowed to 4.5%, compared with 8.2% in December, while total industrial production, including mining and electricity output, expanded by only 1%. Both segments had the slowest rates of growth since November 2009. The strongest year-on-year growth, of 16%, was recorded for non-metallic mineral products, basic metal and fabricated metal products. This category is increasingly benefiting from domestic demand-led investment and a boom in construction.

The consumer price index (CPI) continued to show gains on a monthly and annual basis. The CPI increased by 0.6% month on month in January and by 2.4% from the year-earlier period. The relatively strong increases in January were largely because of higher prices of food and non-alcoholic beverages, accounting for almost one-half the annual rate of change, while more expensive transport, owing to higher fuel prices, accounted for one-quarter of the annual rate of change. Inflationary pressures are building elsewhere. The price index for restaurants and hotels rose by 4.6% year on year, while the index for alcoholic beverages and tobacco increased by 6.4%.

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Total area

330,252 sq km

Population

28.3m (2010 mid-year government estimate)

Main towns

Population in '000 (2009)

Kuala Lumpur (capital): 1,655

Subang Jaya: 1,175

Klang: 1,004

Johor Baru: 868

Ampang Jaya: 724

Climate

Tropical

Weather in Kuala Lumpur (altitude 39 metres)

Hottest months, April and May, 23-33°C (average daily minimum and maximum); coldest month, December, 22-32°C; driest month, July, 99 mm average rainfall; wettest month, April, 292 mm average rainfall

Languages

Malay (the official language); other main languages: Chinese (Min Nan, Hakka, Mandarin and Min Dong), English, Tamil, Iban (in Sarawak), Banjar (in Sabah). There are 140 languages spoken in Malaysia (peninsular Malaysia 40, Sabah 54, Sarawak 46)

Measures

Malaysia uses the metric system, but some British weights and measures are still in use. Local measures include:

1 pikul = 25 gantang = 100 katis = 60.48 kg

1 koyan = 40 pikul = 2.419 tonnes

Currency

Ringgit or Malaysian dollar (M$ or RM); M$1 = 100 sen (cents). Average exchange rate in 2010: M$3.22:US$1

Time

Peninsular Malaysia: 7 hours ahead of GMT; Sabah and Sarawak: 8 hours ahead of GMT

Public holidays

January 1st (New Year's Day); February 3rd-4th (Chinese New Year); February 15th (the Prophet Mohammed's birthday); May 1st-2nd (Labour Day); May 17th (Wesak Day); June 4th (the king's birthday); August 30th-31st (Hari Raya Puasa); August 31st-1st September (National Day); October 26th (Deepavali); November 6th-7th (Hari Raya Qurban); November 27th-28th (Awal Muharam), December 25th (Christmas Day)

Official name

Federation of Malaysia

Form of state

Federated constitutional monarchy

The executive

The king appoints a prime minister and, on the prime minister's advice, the cabinet

Head of state

The yang di-pertuan agong (king or supreme sovereign), elected by and from among the nine hereditary rulers of Malaysia's states. In practice, the post is rotated every five years

National legislature

Bicameral federal parliament. The Senate (Dewan Negara, the upper house) has 70 members-26 elected from the state legislatures and 44 appointed by the king. The House of Representatives (Dewan Rakyat, the lower house) has 222 directly elected members. Senators serve six-year terms and members of the lower house five-year terms

State government

There are state governments in each of Malaysia's 13 states, in nine of which the head of state is a hereditary ruler. Each state has its own constitution, a council of state or cabinet with executive authority and a legislature that deals with matters not reserved for the federal parliament. There are also three federal territories, namely Kuala Lumpur, Labuan and Putrajaya

National elections

March 2008; the next general election is due to be held by April 2013

National government

The Barisan Nasional (BN), the governing 13-party coalition-the main element of which is the United Malays National Organisation (UMNO)-currently holds 137 of the 222 seats in the lower house. The BN has the simple majority that it needs in order to pass legislation but not the two-thirds majority that would enable it to amend the constitution

Main political organisations

Government-the main parties in the BN are UMNO, the Malaysian Chinese Association (MCA), the Malaysian Indian Congress (MIC), Parti Gerakan Rakyat Malaysia (Gerakan), Parti Pesaka Bumiputera Bersatu (PPBB) and the Sarawak United People's Party (SUPP).

Opposition-the three founding parties in the Pakatan Rakyat (PR) alliance are Parti Islam se-Malaysia (PAS), the Democratic Action Party (DAP) and Parti Keadilan Rakyat (PKR)

Prime minister & finance minister: Najib Razak

Deputy prime minister & education minister: Muhyiddin Yassin

Key ministers

Agriculture: Noh Omar

Defence: Ahmad Zahid Hamidi

Domestic trade & consumer affairs: Ismail Sabri Yaakob

Energy, green technology & water: Peter Chin Fah Kui

Foreign affairs: Anifah Aman

Health: Liow Tiong Lai

Home affairs: Hishammuddin Hussein

Housing & local government: Chor Chee Heung

Information: Rais Yatim

International trade & industry: Mustapa Mohamed

Public works: Shaziman Abu Mansor

Science, technology & innovation: Maximus Ongkili

Second finance minister: Ahmad Husni Hanadzlan

Tourism: Ng Yen Yen

Transport: Kong Cho Ha

Central bank governor

Zeti Akhtar Aziz