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 3.1% 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

• The ruling coalition retained the parliamentary seat of Tenang at a by-election on January 30th. The BN candidate, Mohd Azahar Ibrahim, managed to secure 3,707 more votes than his opposition rival.
• Parti Keadilan Rakyat, one of the parties in the opposition Pakatan Rakyat alliance, suffered another defection in January, when N Gobalakrishnan, a member of parliament for Pedang Serai, decided to become an independent.
• Bank Negara Malaysia (the central bank) left the benchmark interest unchanged at 2.75% at its monetary policy meeting in January.
• The effectiveness of central bank and the Ministry of Finance's supervision of capital flows have been called into question following the publication of a report by a US-based financial watchdog, Global Financial Integrity.
• The economy grew by 4.8% year on year in the fourth quarter of 2010. Despite a slight loss of momentum in that quarter, the economy grew by 7.2% in the year as whole—its fastest annual pace of expansion since 2000.
• Business sentiment weakened in the fourth quarter of 2010. By contrast, consumer sentiment continued to strengthen.

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 next Sarawak state election, which must be held by July 2011. 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 two by-elections in November 2010 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 about 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 election date after the Sarawak state election, which must be held by July 2011 and is the main political event before the next national poll. Although the BN has performed well at recent by-elections, 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 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. For one thing, it has less money than the ruling BN. For another, 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 recently resigned from the PKR. 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.

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 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 coming five years 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 is forecast to remain in deficit in 2012-15. 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 that the rate of 3.5% at which it stood during 2007 and much of 2008. Nevertheless, during the remainder of the forecast period, as the pace of domestic demand growth quickens, 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 4.2% a year during the next five years. Exports of goods and services are expected to grow by an average of 8.5% a year. 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 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 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 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.

However, given the uncertain outlook for the global economy, there are risks to the fairly benign forecast for growth in Malaysia in the next five years. Massive macroeconomic stimulus has stabilised the world economy and allowed growth to resume, but global growth will slow in 2011 as the impact of stimulus fades, and there is a risk of a deeper downturn in several major economies.

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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 3.1% 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$3.02:US$1 in 2011 and M$2.98: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 13% 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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The ruling Barisan Nasional (BN) coalition retained the parliamentary seat of Tenang, in the southern state of Johor, in a by-election on January 30th. The BN candidate, Mohd Azahar Ibrahim, managed to secure the seat with 3,707 more votes than the opposition candidate. Although this was a larger margin of victory than that achieved by the previous BN candidate at the 2008 general election, it is considerably less than 8,517-vote win achieved by the BN in the constituency at the 2004 poll, prompting some government strategists to argue against calling the next general election early. Underpinning this view is the fact that the BN's share of the non-Malay vote showed only a modest increase compared with the 2008 election. However, the opposition Pakatan Rakyat (PR) alliance had little success in attracting support from the ethnic-Chinese voting districts in the constituency. Heavy rain and flooding lowered the voter turnout.

The results of the Tenang by-election appear to suggest that the United Malays National Organisation (UMNO), the party that controls the ruling coalition, is rebuilding its support (although it is worth noting that Johor is UMNO's birthplace and stronghold). Tenang is a semi-rural constituency, where Malays account for around 48% of eligible voters, Chinese for 38% and Indians for 12%. It is located in a region that has benefited greatly from high commodity prices, especially for palm oil and rubber. Malay and Indian voters were not receptive to an opposition campaign that stressed concerns about rising inflation and subsidy cuts. Following the election, commentators mentioned the apparent lack of interest in politics in the constituency, which contrasted sharply with the keen involvement evident in urban areas, where the opposition alliance tends to do well.

The fact that that ethnic-Chinese support for the BN did not increase, and may even have declined, was probably the most important outcome of the by-election. It suggests that the Malaysian Chinese Alliance, the second-largest party in the BN, still faces a tough battle to regain the support of Chinese voters, many of whom chose to back the opposition PR in the 2008 general election. Regaining a two-thirds parliamentary majority-an objective that is eagerly pursued by the prime minister, Najib Razak-will remain impossible for the BN without an improvement in support from Chinese voters.

The next test for Malaysia's political parties is a by-election on March 6th in Merlimau, in the state of Malacca. Unlike the contest in February, the forthcoming by-election is for a state assembly seat, which was left vacant following the death of the BN's Mohamad Hidhir Abu Hassan. UMNO should have no difficulty retaining the seat, in a constituency where nearly two-thirds of the electorate are Malay. The opposition candidate will be from the Parti Islam se-Malaysia (PAS), which originally considered declining to contest the seat in order to save resources for the next national election.

The opposition is hoping that in the next general election voters in the eastern states of Sabah and Sarawak will give it sufficient parliamentary seats to secure a parliamentary majority. That likelihood appears to be fading, however, partly because of open divisions within the reformist, multicultural Parti Keadilan Rakyat (PKR, one of the three parties making up the PR alliance), and the actions of the de facto leader of the opposition, Anwar Ibrahim of the PKR. Voters in Sabah and Sarawak have become highly sensitive to interference by mainland politicians, and are much more aware than before of their political leverage and economic power: without the support of members of parliament (MPs) from those two states, the BN government would lack a parliamentary majority. Mr Anwar has upset many local leaders by ignoring their opinions, breaking promises and not respecting local wishes and needs. In the latest development, the PKR branch chief of Sabah state, Pajudin Nordin, left the party on February 5th and joined UMNO, saying that he felt betrayed by Mr Anwar. A former PKR party leader, Jeffrey Kitingan, has formed a new party, the United Borneo Front, with an agenda of political autonomy for Sabah and Sarawak, and is looking for allies. Meanwhile, the Sarawak PKR is being torn apart by factionalism, largely along tribal lines, and is in no position to lead the opposition in the state election, which is to be held by July. Another partner in the opposition PR, the Democratic Action Party (DAP), appears to be better positioned to take advantage of popular resentment of the chief minister of Sarawak, Mahmud Taib, who has ruled the state since 1981.

Since the 2008 general election, the PKR has moved from a position of dominance within the opposition coalition to the role of junior partner, as a result of the decision of a handful of PKR legislators to become independents. On January 30th a contender for the PKR's vice-presidency, N Gobalakrishnan, announced his decision to stand as an independent MP, partly in protest against the PKR leadership elections last year, which he claimed had been rigged. Mr Gobalakrishnan's departure has reduced the number of PKR MPs to 23. This compares with 31 following the 2008 election, and is significantly fewer than the 29 held by the DAP and equals the number held by the PAS.

At the end of January the government announced that it was ready to amend the Printing Presses and Publications Act (PPPA) to include online news sites. Conventional publications need an annually renewable permit, and the government hopes to introduce an amendment to the PPPA in March that would require news websites to secure such a permit too. The Internet had been a relatively uncontrolled source of news after the prime minister at the time, Mahathir Mohamad, pledged not to censor the Internet when the Multimedia Super Corridor (a government-designated zone that aims to promote Malaysia's information technology capabilities) was set up in 1995. Information from the Internet was a major force behind the surge in opposition support in the 2008 general election. The new announcement has alarmed Malaysia's online community. The editor of a popular Internet newspaper, Malaysiakini, stated that the proposed changes in the law would be the final nail in the coffin for press freedom in the country. According to an official at the Ministry of Home Affairs, the amendments are meant to close legal loopholes and make the law more inclusive.

Bank Negara Malaysia (BNM, the central bank) left its benchmark interest rate, the overnight policy rate (OPR), unchanged at 2.75% on January 27th, following a scheduled monetary policy meeting. In a statement that was published after the meeting, the committee said that it considered the present level of the OPR to be consistent with stable economic growth and inflation, and that monetary policy remained accommodative. However, the BNM is becoming increasingly concerned about the impact of large international capital flows, which pose growing risks to macroeconomic and financial stability. The central bank said that so far the build-up of liquidity in the domestic financial system had been manageable. But it also made clear that it was considering tightening reserve requirements and strengthening curbs on bank lending to prevent macroeconomic and financial imbalances.

The BNM's stance has been relatively relaxed recently owing to the fact that inflation has remained moderate and there has been no evidence of excess demand in the economy. Domestic activity is firm, but external demand from advanced economies remains modest. Inflation is picking up, largely because of supply factors, including higher global commodity and food prices, although the appreciation of the ringgit is reducing imported inflation. Monetary growth is not excessive rapid at present, with one of the narrower measures of money supply, M1, expanding by 11.7% year on year in December, and a broader measure, M3, rising by 7% in that month. This compares with increases of 17.8% year on year in M1 and 14% in M3 in the second quarter of 2008, just before the onset of the global financial crisis. Growth in bank lending is firm, with loans outstanding to households increasing by 13.4% year on year in December and loans to businesses up by 9.4%.

The effectiveness of supervision of capital flows by the central bank and the Ministry of Finance was called into question in a recently published report on capital flight from developing countries, which placed Malaysia fifth-highest after China, Russia, Mexico and Saudi Arabia. The report, entitled Illicit Financial Flows from Developing Countries, was published by a US-based watchdog, Global Financial Integrity (GFI). In the document, the institute studies illicit financial flows, proposes ways to curtail illegal crossborder monetary flows and pays special attention to developing countries. The GFI makes the point that in many cases illicit outflows far exceed foreign aid or investment inflows, and that such outflows tend to aggravate poverty and hold back economic development.

Using two economic models-one of which is used by the World Bank to measure changes in external debt, while the other measures discrepancies in the direction of trade statistics published by the IMF-the institute estimates that illicit flows of funds out of Malaysia more than tripled from US$22.2bn in 2000 to US$68.2bn in 2008. This puts Malaysia far ahead of all Asian countries covered by the GFI with the exception of China, which is in highest place in 2008, recording an outflow of US$344.3bn. The GFI admits that it is baffled by Malaysia's massive outflows. One of the report's authors, a former IMF economist, Dev Kar, points to the coincidence of the tripling of illicit outflows with the failure of economic growth to regain momentum after the Asian financial crisis. The GFI's estimates indicate that illicit funds were transferred from Malaysia during this period through export under-invoicing and mispricing of imported goods. Malaysia also lost significant capital through unrecorded transfers using non-trade channels, Mr Kar said. The GFI's report has brought mixed reactions from officials in Malaysia. Mr Najib called on the BNM to comment on the GFI's claims and study the issue of illicit monetary outflows in greater depth, but a deputy finance minister, Donald Lim, cast doubt on the veracity of the report, and queried its timing and the motives of the report's authors.

The economy grew by 4.8% year on year in the fourth quarter of 2010-a much slower pace of growth than in the first half of 2010, when real GDP grew by an average of 9.5% year on year. Despite the slowdown in momentum in the fourth quarter, the economy grew by a rapid 7.2% in 2010 as a whole-its fastest pace of growth since 2000, when real GDP surged by 8.9%.

From the expenditure side, growth in the fourth quarter of 2010 was underpinned by firm private consumption and investment spending, which grew by 6.5% and 9.2% year on year respectively. Investment spending was bolstered by higher outlays in export-oriented industries in the private sector. Government expenditure contracted by 0.3% in the fourth quarter. Quarter-on-quarter comparisons point to a much stronger performance, with investment spending surging by 47.6% in the fourth quarter. The external sector weakened significantly in October-December. Exports of goods and services grew by a meagre 1.5% year on year, following expansion of 6.6% in the third quarter. Imports of goods and services continued to outpace exports, but they too lost considerable growth momentum, expanding by only 3.3% in the fourth quarter, compared with 11% in the third.

GDP data at factor cost pointed to a particularly weak performance in the primary sectors of the economy in the fourth quarter of 2010. Output contracted on a year-on-year basis in both the agricultural and mining sectors. Owing to a significant drop in palm oil production, agricultural output fell by 4.3% year on year, while ongoing declines in crude oil production led to a 1.3% contraction in mining and quarrying. That said, the declines reported in the primary sector were more than offset by strong performances by manufacturing and services, as both these sectors expanded by 6.2% year on year in the fourth quarter.

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Industrial production growth remained sluggish in December 2010. Mining output contracted by 3.4% year on year in the month as oil production continued to fall. Electricity output increased by 2.4% year on year, to record its slowest rate of growth in 16 months. The important manufacturing sector, which accounts for 64% of the industrial production index, performed slightly better, recording an increase of 7.8% year on year in December, up from 7% in November. Total industrial production grew by a sluggish 4.2%, a much slower pace of growth than in November, when it rose by 5.4%. Quarterly comparisons also point to a moderating trend. Manufacturing output grew by 6.4% year on year in the fourth quarter, compared with a gain of 7.2% in the third quarter. Production levels are stagnating: almost no growth in sequential terms has been recorded since the second quarter. In 2010 as a whole, manufacturing production increased by 11%, recovering from its 10% plunge in 2009, but the level of output was no higher in 2010 than in 2008.

Amid sluggish industrial production growth, it was hardly surprising that there was a fall in the business conditions index, published by the Malaysian Institute of Economic Research (MIER). The index slipped from 104.9 in the third quarter to 99.5 in the fourth quarter, just below the "boom or bust" dividing line of 100. Businesses complained that sales had fallen significantly and forecast that export sales would be lower, but nonetheless expected production to be marginally higher-continued stagnation, in other words. None of these fears were apparent in the MIER's consumer sentiment index (CSI). The CSI remained at a high level in the fourth quarter, edging up slightly, to 117.2, from 115.8 in the third quarter. The improvement in the index reflected household optimism and firm demand based on rising incomes, an improving employment outlook and confidence about financial prospects. However, consumers were increasingly concerned about inflation. The strength of consumer confidence was underscored by the release of passenger-car sales data for 2010, which showed a 12.7% jump to a record 543,594 units.

The pessimism of the business community is based on the outlook for exports, which are expected to growth at a slower pace this year than in 2010. Merchandise exports have not yet recovered to their pre-global recession 2008 levels. Export growth weakened steadily during 2010, although, owing to rising global commodity prices relative to 2009, the value of merchandise exports actually grew by 4.6% in December. Weak demand from developed economies has been blamed for the slowdown in export growth. But Malaysia also has a problem with its export structure and competitiveness: its largest export category, the electrical and electronic goods sector continues to lose ground, with electrical products performing particularly weakly. Shipments of electrical and electronic goods fell by 6.8% year on year in December, following growth of 4.3% in November. The second-largest export category in December, accounting for 11.3% of total exports in value terms, was palm oil and palm oil-based products. The value of palm oil exports jumped by 40.3% year on year in December, notwithstanding volume drop of 5.8%.

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Please see graphic below

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Please see graphic below

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