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 owing to 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 recession in 2009 and a strong rebound in 2010. Real GDP growth will average 5.4% 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 faster pace of growth in merchandise imports than in exports, Malaysia will continue to post substantial trade and current-account surpluses in the forecast period.

Monthly review

• The BN coalition retained control of the Sarawak assembly following a state election there on April 16th. The BN kept its two-thirds majority, albeit by a reduced margin-it lost eight seats to opposition parties.
• The results of the Sarawak poll showed a drop in the BN's share of the vote compared with the 2006 state election and a failure to strengthen its appeal among ethnic Chinese, who make up 29% of the state's population.
• In a bid to bolster its profitability, a local financial services provider, CIMB Bank, raised its base lending rate recently, but then quickly changed its mind following intervention by Bank Negara Malaysia (the central bank).
• The prime minister, Najib Razak, has once again used an Invest Malaysia conference, organised by the local stock exchange, Bursa Malaysia, to reveal initiatives, unveiling details of a second master plan for capital markets.
• Consumer price inflation edged higher in February. The consumer price index was up by 2.9% year on year in that month, following an increase of 2.4% in January.
• The latest sentiment survey points to an improvement in business confidence in the first quarter of this year, but consumer confidence has deteriorated.

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 owing to 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 constituent 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 last general election, in 2008, 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 bases intact in Sabah and Sarawak, on the island of Borneo. BN legislators from the two states make up more than one-third of the BN's total of 137 members of parliament (MPs). The outcome of the recent Sarawak state election, in which the ruling coalition retained its two-thirds majority but lost eight seats to the opposition PR, was not the resounding victory that the BN had hoped for. Unresolved issues, such as illegal foreign immigration to Sabah, may cause the BN parties based in Borneo, or individual MPs from that region, to defect to the opposition in the national parliament or use the threat of such action 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 decline in support may have intensified as Internet news sites and blogs have exposed government corruption and the political intrigues of individual members of the ruling administration. The more conservative Malays have, meanwhile, been voicing concerns about the government's plan to reform policies favouring bumiputera (ethnic Malays and other indigenous peoples), as they believe that the special rights accorded to them in the constitution could be rescinded. Recent by-election victories for the BN raised hopes that the ruling coalition had succeeded in strengthening its appeal to the country's smaller ethnic communities, but the outcome of the Sarawak state election, in which the BN lost six seats to the Chinese-dominated Democratic Action Party (DAP) and another two to Parti Keadilan Rakyat (PKR, a component of the PR), suggests that much work needs to be done in this area before the BN makes a bid to increase its parliamentary majority and win back control of state assemblies that it lost to the opposition coalition in the 2008 elections.

UMNO's internal leadership elections, which have been postponed until 2012, could be a source of political instability in the forecast period, particularly if the party fails to secure a resounding victory at federal and state level in the coming election. Under such circumstances, the credibility of the prime minister, Najib Razak, would be undermined, putting his position as president of UMNO-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 PKR, the conservative, Islamist Parti Islam se-Malaysia and the left-of-centre, predominantly ethnic-Chinese DAP-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 about a year before the end of its current term of office, suggesting that the next election could be held in early 2012. Speculation that the poll will take place this year has been quelled by the outcome of the Sarawak state election, which showed that the BN has yet to win the full support of ethnic minorities-in this case, Chinese voters. The BN will need far higher levels of support than it received in the Sarawak poll if it is to win a two-thirds majority at the next national election and also regain control of the state assemblies that it lost to the opposition in 2008. The support of ethnic Chinese is particularly important in the opposition-controlled states of Selangor and Penang, where they account for 28% and 41% of the population respectively.

Whenever it takes place, the next parliamentary election will see the cash-strapped opposition PR alliance pitted against the BN's well-oiled political machine. The BN is favourably positioned to win the poll, 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, but this attitude has yet to resonate among the country's ethnic-minority population, the majority of which voted for the PR in the 2008 general election.

The opposition alliance, for its part, faces a number of obstacles to its bid to wrest power from the BN. Aside from the fact that the PR has less money than the 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 organisations have declared their intention of fielding 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 the MCSM, the KITA or both, thereby potentially taking votes from the PKR.

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 likely to increase. Malaysia is also keen to strengthen relations with India. The two countries expect growth in trade between them to accelerate, following the signing of a bilateral 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, an 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 in order 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 become a major engine of economic growth again in the next five years. However, the BN 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 adhere fairly successfully 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 subsidy 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 during the remainder of the forecast period. However, based on the assumption that the government reduces operating expenditure and has some success in increasing revenue by expanding the tax base, we forecast that 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%; the bank had previously cut the OPR to a record-low level in response to the dramatic downturn in the Malaysian economy that occurred in 2009. However, the recent sharp appreciation of the country's currency, the ringgit, and signs of slowing economic growth suggest that BNM will not push up interest rates sharply in the coming quarters. As the bank believes that inflation will not 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 rate that it is expected to reach in 2011, BNM is likely to lift interest rates in order 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 5.4% a year. This follows a period of instability: the economy contracted by 1.7% in 2009 during the 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 recession was followed by rapid restocking in 2010. The positive effect of restocking on real GDP growth is expected to wane in 2011 as the rate of inventory accumulation moderates. In the forecast period private consumption and investment will remain the primary drivers of economic growth. An increase in compulsory saving by 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. Despite the government's efforts to consolidate its finances, public spending (which will be guided by the 10MP) will rise by an average of 4.2% a year during the next five years. Exports of goods and services are expected to grow by 8.4% a year on average. However, the contribution of net exports to GDP growth will be marginal, as imports of goods and services will record similar growth rates.

In supply-side terms, the industrial sector will continue to account for a sizeable share 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. The government's efforts to rationalise its extensive subsidy scheme will exert upward pressure on prices in the forecast period. Another source of inflation 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 of the country's 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 Malaysia's 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 further 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 8.7% of GDP. Growth in exports will be underpinned by a continued 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 of export growth.

Malaysia will broaden the range of goods that it exports, but the economy will remain highly sensitive to the global electronic-goods cycle. Levels of non-manufactured exports, which consist 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 Malaysian-based exporters. As a result, China is likely to overtake Singapore as Malaysia's largest overseas market during the forecast period, while trade with the US, the EU and Japan will decline in relative importance.

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The outcome of the Sarawak state election, which was held on April 16th,was disappointing for both the ruling Barisan Nasional (BN) coalition and the opposition coalition, Pakatan Rakyat (PR). The PR won 15 seats in the 71-seat state assembly, roughly double the number that it had secured at the previous state election in 2006. However, this was not enough to deny the BN a two-thirds majority in the assembly. The BN won 55 seats, more than the 47 that it needed for a two-thirds majority, but it lost eight seats to the opposition. Most of its losses were to the ethnic-Chinese-dominated Democratic Action Party (DAP), a component party of the PR. BN strategists will be concerned that the ruling coalition's share of the vote in Sarawak dropped to 55.4%, from 61.8% in 2006.

As the Sarawak election campaign got under way, the huge attendance at opposition rallies suggested that the state might be witnessing a political upheaval similar to that which occurred at the 2008 national election. On that occasion, unprecedented gains by the opposition PR had deprived the ruling BN of the two-thirds majority that it had previously enjoyed for more than four decades. The PR tried to turn the recent state election into a referendum on Sarawak's long-serving chief minister, Taib Mahmud, who has been head of the assembly for the past 30 years. This strategy prompted Najib Razak, Malaysia's prime minister and the leader of the BN at national level, together with cabinet ministers, to take part in campaigning in the run-up to the poll. Mr Najib tackled some of the most urgent controversies highlighted by the opposition, which included attacks on Mr Taib for his unwillingness to step down despite having held his post for three decades. Mr Najib gave reassurances that Mr Taib would leave, and implied that this would happen soon.

At the same time, Mr Najib met Christian leaders to allay concerns about religious intolerance, which have been heightened by the recent decision by the Ministry of Home Affairs to impound two separate consignments of the Bible at Port Klang and Kuching because they made reference to "Allah". The government is still locked in a legal dispute with the Roman Catholic church over the use of the word "Allah" by non-Muslims. The dispute dates back to a High Court ruling in 2009 to the effect that non-Muslims could legitimately use the word "Allah" to describe God. The decision upset Muslims, who form around 60% of Malaysia's population. The National Fatwa Council, a local Islamic organisation, declared that the word Allah was exclusive to Muslims and argued that its use by non-Muslims would confuse the faithful. To date, Islamic enactments in ten states prohibit the use of the word by non-Muslims.

Opposition groups, websites and bloggers have complained that they were subject to censorship in the run-up to the Sarawak election. Opposition websites, such as a popular news site, Malaysiakini, were blocked, and the UK-based Radio Free Sarawak was jammed.

The recent Sarawak election was the most hotly contested in the state in recent history, with a record 213 candidates contesting 71 state assembly seats. The large number of candidates reflected deep divisions and acrimonious negotiations between different sections of the opposition, which greatly reduced its effectiveness in the state. With some difficulty, the PR coalition had divided the seats in the state between its component parties, the Parti Keadilan Rakyat (PKR), the DAP and the Islamist Parti Islam se-Malaysia (PAS). The PKR demanded the majority of the seats and consequently fell out with the fourth member of the opposition coalition in the state, the Sarawak Nasional Party (SNAP). Further reasons for the large number of candidates contesting the election were the emergence of a new force, Parti Cinta Malaysia, which is not affiliated with either the PR or the BN, and the relatively large number of independents deciding to stand. PAS lost all five seats that it contested; its Islamic conservatism holds little appeal for Sarawak's voters, of whom Dayaks make up 30%, ethnic Chinese 29% and Malays only 21%. SNAP, which, given its strong links with the Dayak community, had claimed the right to stand in all Dayak-majority constituencies, failed to win any of the 26 seats that it contested. The most effective campaign was conducted by the left-of-centre DAP, which found the urbanised, coastal constituencies with large ethnic-Chinese populations most receptive to its message. It inflicted serious losses on Sarawak's local Chinese party, the Sarawak United People's Party, which is a BN member. The DAP won a total of 12 seats, while the PKR won three; the two parties together thus took all eight seats that the BN failed to retain. In the 2006 Sarawak poll, the DAP had won six seats and the PKR just one.

The Sarawak state election had been widely touted as a barometer that would be used by the BN to decide on the date of a possible early general election this year. Speculation regarding the possibility of a snap poll has been heightened by recent by-election successes for the BN, but the outcome of the Sarawak contest is likely to prompt BN strategists to err on the side of caution. The BN has set itself an implicit goal of winning a two-thirds majority at the next parliamentary election and also of winning back control over the state assemblies that it lost to the opposition coalition in the 2008 elections. The PR currently controls the state assemblies of Selangor, Penang, Kelantan and Kedah. The BN's failure to win the support of more ethnic-Chinese voters in Sarawak suggests that it will struggle to regain control of the assemblies in Selangor and Penang, in which the Chinese community accounts for some 28% and 40% of the population respectively.

On April 4th Malaysia's second-largest provider of financial services, the CIMB Group, hurriedly reversed an earlier decision to increase its base lending rate by 5 basis points, to 6.35%. One of the group's banking arms, CIMB Bank, was trying to offset the negative impact on its profitability of an increase in the statutory reserve requirement (SSR), which was raised from 1% to 2% on April 1st. The decision to increase the SSR was made on March 11th at a regular monetary policy committee meeting of Bank Negara Malaysia (BNM, the central bank); in an accompanying statement, BNM had been keen to stress that the increase in the SSR should not be used as a benchmark by banks for setting interest rates and that the move should be viewed only as a means of managing liquidity. It added that the increase in the SSR was intended to mitigate risks to macroeconomic and financial stability caused by a build-up of liquidity as a result of large capital inflows. It is widely believed that CIMB was strongly reprimanded by BNM, prompting it to reverse its decision to raise the cost of borrowing after only a single day.

BNM had been quick to start to normalise monetary policy when it raised interest rates by 75 basis points, to 2.75%, in 2010. Since then, the central bank has focused on measures that have no direct effect on interest rates. However, so far these moves have failed to dent loan demand. Total household debt is estimated to have been equivalent to 76% of GDP in 2010. Households account for 55% of bank loans, and of this 49% consist of residential-property loans. Property speculation was partially addressed in November 2010 with the imposition of higher deposit requirements on loans to purchasers of a third or subsequent property. Housing loan applications and approvals weakened in the first two months of 2011, but this may be attributable to seasonal influences. BNM recently tightened credit-card lending rules, raising income requirements and placing limits on the number of cards issued to any one individual. Further measures to control household debt are to be expected in the third quarter of 2011. There will be improved disclosure of loan terms and obligations, as well as tests for suitability of loan applicants and loan affordability, and verification of applicants' income is also likely to be tightened.

BNM appears to have adopted a pragmatic approach to merger and acquisition activity in the banking sector in recent months. The central bank governor, Zeti Akhtar Aziz, stated on April 6th that in the current environment existing market mechanisms should determine the number of banks. There are nine domestic financial services groups in Malaysia at present, and in addition many foreign banks would like to operate in the country or increase their shareholdings in local banks, which are currently limited to stakes of 30%. In June BNM is due to publish a comprehensive financial sector master plan for the next ten years. This will constitute the financial element of the government's drive to make Malaysia a high-income nation. A particular focus of the plan will be the country's development as an international Islamic-finance centre.

In recent years the prime minister has used his speech at Invest Malaysia (an annual conference organised by the local stock exchange, Bursa Malaysia) as a launch pad for important policy initiatives. Mr Najib littered his speech at this year's conference in mid-April with impending changes, all of which were broadly in line with previous announcements.

A second Capital Market Masterplan (CMP) was announced at the conference. The main aim of the plan, known as CMP2, is make effective use of domestic savings to boost capital formation and economic growth. Based on an official assumption of average real GDP growth of 6.5% a year in 2011-20, Malaysia's capital market is forecast to more than double in size, from M$2trn (US$620bn) in 2010 to M$4.5trn by 2020; with greater internationalisation, declared Mr Najib, this might even rise to M$5.8trn by the latter year. The strongest expansion is planned for the Islamic capital market, which is expected to grow from M$1.1trn in 2010 to M$2.9trn by 2020. The investment-management industry is expected to more than double in size, while the derivatives market will also grow substantially. A shorter-term aim of the Securities Commission is to establish a regulatory framework for private pension funds this year. In the third quarter of 2011 several measures will be introduced, including an easing of fundraising regulation, and equity-market dealers will be licensed to trade in the derivatives market.

In an attempt to increase the pool of skilled labour-a vital element of the plan to raise Malaysia's national income-Mr Najib announced a 15% income tax rate for a period of five years as an incentive for Malaysian expatriates, many of whom have earned degrees at overseas universities, to return home. Income tax for residents currently ranges from zero to 26%. At least 1.5m Malaysians are thought to have emigrated since independence, in part owing to pro-Malay positive-discrimination policies. The government will also introduce a new Residence Pass for highly skilled foreign workers, valid for ten years, and will apply residence rules more flexibly.

The conference also received a progress report on the Economic Transformation Programme (ETP), which aims to turn Malaysia into a high-income nation by 2020. Since the publication of the project's road map last October, 60 projects with a value of M$95.4bn (around US$30bn) have been confirmed, out of a total of 131 projects outlined in the ETP with a combined value of M$794.5bn. The projects that have already received the go-ahead will add an estimated M$137.2bn to gross national income, while the ETP as a whole is expected to add M$1.1trn. The impressive list of projects, together with plans to list the core businesses of a number of government-linked companies, have generated considerable interest among portfolio investors. But worries persist that the ETP may be part of a slick marketing campaign by the government, which is taking credit for investments that would have occurred even in the absence of the programme.

In Malaysia, as in many other Asian countries, consumer price inflation is accelerating, largely because of rising global commodity and energy prices. Higher inflation has been especially noticeable since the final months of 2010, although inflation in Malaysia remains moderate compared with the rate of price increases in neighbouring countries. The consumer price index (CPI) rose by 0.4% month on month in December, 0.6% in January and 0.5% in February. The annual rate of inflation, meanwhile, climbed to 2.9% in February, from 2.4% in January and 2.1% in December. There were noticeable price increases in the run-up to the Chinese New Year, which this year fell at the start of February. There was another increase in officially controlled petrol prices on February 1st. Prices for food and non-alcoholic beverages, which have a 30% weighting in the CPI index, rose by 4.7% year on year in February. The price index for restaurants and hotels rose 6.4% year on year, as did that for alcoholic beverages and tobacco. Price increases for non-food items suggest that high global commodity prices are feeding through to other categories within the CPI.

Corporate pessimism regarding export demand and domestic production was largely dispelled in the first quarter of 2011, according to the business conditions index published by the Malaysian Institute of Economic Research (MIER). Three successive quarters of declines meant that the index fell just below 100 points in October-December 2010, but it bounced back strongly in the first quarter of 2011, ending the period at 113.3 points. (A reading below 100 points implies a contraction.) Companies reported a drop in stocks in January-March, but sales and new export orders were up on the previous quarter. Firms now plan to expand production over the next three months.

By contrast, consumers became more cautious in the first quarter of 2011 as concern over rising prices mounted. MIER's consumer sentiment index dropped by nine points to 108.2, its lowest level for six quarters. Sentiment has been positive since the second quarter of 2009. Consumers taking part in the quarterly survey now say that they plan to reduce their spending, as they are less optimistic about their finances and employment prospects.

The latest data from the external and manufacturing sectors paint a mixed picture of the economy's health. The value of merchandise exports surged by 10.7% year on year in February. The increase was largely attributable to a jump in shipments of electronics and electrical products (E&E), which increased by 7.5%, as well as to high global commodity prices. Malaysia is a beneficiary of high global commodity prices, being an important exporter of fuels (particularly liquefied natural gas, or LNG), palm oil and rubber. In 2010 exports of agricultural and mining commodities combined accounted for 20% of total exports, compared with 12% in 2000. Given the recent upward trend in global prices, these categories of goods are likely to account for an even larger share of total exports this year. Despite lower volumes, in February exports of palm oil surged in value terms by 21.9% year on year, while LNG exports jumped by 27%. Malaysia's production of crude oil is slowly declining, with less being exported and more retained for processing. The value of crude petroleum exports dropped by 33% year on year in February, while exports of petroleum products soared by 78.3%.

The export strength of E&E was not evident in production data for February, which showed sectoral output contracting by 3.7% year on year, following a drop of 7.4% in January. The combined value of production in the commodity-based sector of petroleum, chemical, rubber and plastic products is now larger than the value of E&E production. Separately, the sectors that are most closely linked to the current boom in domestic investment and construction are non-metallic mineral products, basic metals and fabricated metal products. The pace of output growth in these three sectors combined quickened to 26.3% year on year in February, from 16.9% in January. In the manufacturing sector as a whole, production was up by 7.9% in February. Along with a fall of 0.7% in mining and near-stagnation in electricity output, this lifted the rate of year-on-year growth in total industrial production in February to 5%, its fastest since September 2010.

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Please see graphic below

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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 governments

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