Malaysian Growth: Hampered by Current Economic Policies

Jun.24.10 | About: iShares MSCI (EWM)

Malaysia’s ETF had a stellar 2009 before dropping back slightly this year. It’s climbing its way back and Malaysia’s Prime Minister made an announcement Thursday that reveals an aggressive agenda to keep it that way.

According to James Hookway of The Wall Street Journal, Prime Minister Najib Razak “laid out an aggressive plan to modernize and expand [Malaysia’s] economy and wean it off decades of subsidies and racial-preference laws.”

The goal of the reforms are to make Malaysia “a more competitive destination for foreign investment while doing more to encourage talented Malaysians to stay instead of looking for opportunities in Singapore, Hong Kong, the Middle East and elsewhere.”

Royce Cheah and Razak Ahmad of Reuters reports, “In the blueprint, Najib said the government would reduce its fiscal deficit and gradually phase out subsidies while aiming for average 6% annual economic growth.”

According to Kevin Ong of Xinhuanet, “the private sector now plays a more significant role in driving the nation’s economy forward.” That’s why Prime Minister Najib is proposing $70 billion in new infrastructure spending, much of it in conjunction with the private sector.

But apart from the budget proposal, there were few clues as to how the government would achieve its objectives. Markedly, “the plan avoided thorny issues such as dismantling a four-decade old race-based policy in favour of the politically dominant Malays, a change that analysts say is crucial for Malaysia to compete with other economies.”

In addition, Prime Minister Najib will face tough opposition from ethnic-Malaysian hardliners, reports Hookway.

Currently, the goal of Malaysia’s system of racial preference is to have ethnic-Malaysians make up 30% of the economy. Data shows that ethnic-Malaysians control about 19%.

History doesn’t reflect well on Najib’s team. The “14-month old government had previously U-turned on its decision to raise fuel and electricity prices, and delayed implementation of a goods and services tax after a public outcry.”

Resource-rich Malaysia has a shot at becoming a darling once more. But until it straightens out its problems, growth will be hampered.

  • iShares MSCI Malaysia Index Fund (NYSEARCA:EWM)

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Malaysia ETF, Asia, Emerging Markets

Sumin Kim contributed to this article.

Disclosure: None