Investor Information: MALAYSIA

 

Economy

 

    1. Economic Background:

The economy of Malaysia once relied principally on the production of raw materials for export, particularly petroleum, natural rubber, tin, palm oil and timber. Recently, the manufacturing sector has played an important role in developing the economy. Production and consumption of electronic goods has also gained significance in the economy. The government implemented a number of medium- to long-term development plans, starting with a 20-year economic policy, from 1970 to 1990, which strived for greater economic well-being for ethnic Malays. This was followed by a national development policy in the early 1990s. A third plan provides the general thrust of Malaysia's development strategy for 2001 to 2010.

 

Malaysia is a substantial producer of crude petroleum for export-but its reserves of natural gas are quite large in relation to its crude oil reserves (75 TCF of gas versus three billion barrels of oil in 2001). It produces about 730,000 barrels per day of crude oil and natural gas liquids and exports about 270,000 barrels from that production. Given its declining oil reserve base, Malaysia is likely to be a net oil importer by the end of this decade. But, it has a long way to go before exhausting its very large gas reserves from which is exports some .8 trillion cubic feet per year. Most of the country's exports of gas are in the form of LNG, sent by tanker to Japan, South Korea and Taiwan, but it is expanding its pipeline networks to interconnect with Thailand, with whom it shares substantial gas reserves in the Gulf of Thailand's Joint Development Area.

 

An Asian financial crisis in 1997 hit Malaysia's economy hard, ending almost a decade of eight percent annual GDP growth and exposing the country's external vulnerabilities. As the current account deficits of the booming Asian economies like Thailand, Indonesia and Malaysia began to look unsustainable and inconsistent with the 'soft pegs' of local currencies to the US dollar, market confidence in currencies of the Southeast Asian countries evaporated quickly, resulting in large portfolio outflows and a decline in equity and property values. In reaction, Malaysian authorities launched policy changes designed to insulate domestic monetary policy from external volatility. Measures adopted included currency and capital controls and an exchange rate pegged to the U.S. dollar at R3.8/US$, a substantial devaluation from the ringgit's value in 1996, about R2.5/US$, before the crisis.

 

With capital controls in place, speculative selling of the ringgit became more difficult and costly and National Bank of Malaysia was subsequently able to lower interest rates as it re-established control over its monetary policy. Also, the government established three institutions to speed recovery of the financial system weakened by the Asian crisis. Danaharta, the asset management company, was established to purchase and manage the many nonperforming loans that were left on the books of Malaysian banks following the devaluation of the ringgit and the abrupt cessation of capital inflows into Malaysia. A Corporate Department Restructuring Committee was set up to encourage collective debt workouts between debtors and creditors. The government also promoted the consolidation of financial institutions through domestic mergers of weak institutions with stronger ones; by the end of 2001, substantial progress had been made in this regard and the financial sector was performing better. The government also adopted a number of measures to improve market transparency and corporate governance to restore market confidence and promote capital market development, combating a perception that the economy was shot through with 'crony capitalism.'

 

On June 12, 2001, Malaysia announced the formation of its Third Outline Perspective Plan, or OPP3, for 2001-2010, which lays out policies and direction for development in the first decade of the century. Over the OPP3 period, the focus of Malaysia's economic management is to be the development of a knowledge-based economy - an economy primarily based on technology as the driving force to increase productivity and increase the amount of valued added from its economic activity. Other points of the plan include: growth of manufacturing, services and agriculture sectors, maintenance of low inflation and price stability, achievement of surpluses in the public sector account and maintenance of a reasonable domestic savings as an important resource. Under OPP3, Malaysia's economy is projected to expand by an average of 7.5 percent during the next 10 years, against seven percent achieved under OPP2, which covered 1991-2000. The services sector is targeted for significant growth, to 58 percent of GDP versus the current 52 percent average under OPP2. Manufacturing is expected to continue to be the engine of growth, accounting for 36 percent of the GDP in OPP3 compared to 33 percent. The agricultural sector, while growing more slowly than the economy as a whole, grows by 3.5 percent per year under OPP3, compared to just 0.5 percent per year in OPP2, while its contribution to the GDP at the end of 2010 would decline to 5.9 percent from 8.7 percent at the end of OPP2. Private consumption per capita in current terms is expected to more than double from 6,198 ringgit, or $US1,631, in 2000 to 13,303 ringgit, or $US3,500, in 2010 while private investment is expected to witness a strong growth, rising at 12.7 percent annually in real terms.

 

The long-term outlook for Malaysia is clouded by the political uncertainty over the succession plan for Prime Minister Mahathir and his legacy of relatively authoritarian and state-controlled economic policies. However, it must be said that his government did find a way to bring the Malaysian economy quickly back onto a rapid growth path following the Asian crisis; its recovery economically and politically has been better arguably than in Thailand and certainly better than in Indonesia. Despite its recovery, the economy does remain quite dependent on exports of both petroleum and manufactured IT and electronics goods, making it quite dependent on the health of the world industrial economy. It does not yet have the strength in domestic demand to reduce its vulnerability to external demand shocks like the sharp reduction in global demand for IT products in 2001. So long as it remains dependent as it currently is on export markets for growth, Malaysia will be continually casting a wary eye to its huge exporting neighbor to the north-China, where foreign investment in manufacturing industries continues to flow.

 

    1. Economic Performance:

The real gross domestic product, or GDP, increased just 0.4 percent in 2001 compared to 8.3 percent in 2000 and 6.1 percent in 1999. The inflation rate (based on the GDP deflator) has been a bit volatile in the past three years. After falling marginally in 1999, the price level rose about five percent in 2000 as higher energy prices and booming export markets had their effect, and then declined by 2.4 percent in 2001 as petroleum prices flattened out and rapidly falling global demand reduced the prices of key products and commodities produced by Malaysia. The fiscal deficit more than doubled in 2000 and 2001 from its level in 1999; in 2001, the overall deficit, including development spending by the government, was just over five percent of GDP.

 

World Bank Group Data

                                                                                       

 

1997

2000

2001

GNI, Atlas method (current US$)

99.7 billion

78.5 billion

86.5 billion

GNI per capita, Atlas method (current US$)

4,600.0

3,370.0

3,640.0

GDP (current $)

100.2 billion

89.7 billion

87.5 billion

GDP growth (annual %)

7.3

8.3

0.4

Inflation, GDP deflator (annual %)

3.5

4.7

-2.7

Agriculture, value added (% of GDP)

11.1

8.6

8.4

Industry, value added (% of GDP)

44.6

51.7

49.6

Services, etc., value added (% of GDP)

44.3

39.7

41.9

Exports of goods and services (% of GDP)

93.3

125.5

117.2

Imports of goods and services (% of GDP)

92.4

105.5

98.7

Gross capital formation (% of GDP)

43.0

26.8

24.0

Current revenue, excluding grants (% of GDP)

23.1

..

..

Overall budget balance, including grants (% of GDP)

2.9

..

..

 

 

    1. Balance of Payments:

Since 1998, Malaysia has maintained substantial current account surpluses, a sharp reversal of the trend prior to the Asian crisis of 1997. From the mid-1990s to 1997, Malaysia's current account had been in deficit as its small trade surplus, driven by oil and gas and manufactured exports, but also burgeoning investments of capital goods, was not sufficient to outweigh the country's deficits in international services, net factor income and net transfers. However, with the sudden reversal in foreign investors' interest in the emerging economies of the Southeast Asian region in 1997, Malaysia could no longer afford the high level of investment and importation of capital goods. Imports fell sharply and the trade balance widened significantly so that in 1998, the current account had swung to a surplus of US$9.5 billion from a deficit of US$5.9 billion in 1997. With the much weaker ringgit, Malaysia's terms of trade made its exports much more attractive in global markets and they expanded rapidly in 1999 and 2000, before slowing during the global trade recession of 2001. The trade surplus in 2001 amounted to US$18.4 billion, still almost as large as the US$20.8 billion surplus recorded in 2000. The current account surplus in 2001 was US$7.3 billion, down from US$8.4 billion in 2000 and a record US$12.6 billion in 1999. Malaysia's services and income accounts remain in deficit, but the huge merchandise trade surpluses in can generate appear likely to keep the current account in surplus for the next few years at least.

 

In the financial account, the enormous inflows of foreign money into Malaysia that characterized the boom years of the mid-1990s have stopped and even reversed. Running a current account surplus, Malaysia is earning more foreign currency balances in its current transactions than it is paying out and as these excess earnings of foreign currency are placed on deposit or otherwise invested abroad, Malaysia's financial account has turned negative. Historically, Malaysia received sizable inflows of foreign direct investment. After the Asian crisis, it still does so, but it has also begun to invest some of its own excess earnings of foreign exchange (from the current account surplus) in FDI abroad. Portfolio investment and bank lending and borrowing activity have resulted in net outflows of funds from Malaysia, again a reflection of the placement of excess holdings of foreign currency in banks and investments abroad as well as the repayment of past external debt. The result of the sharp reversal in the current account balance has been strong growth in Malaysia's gross international reserves. As of the first quarter of 2002, the county held reserves of US$16.6 billion, up from just US$6.4 billion in the dark days of 1998 when reserves had been rapidly dissipated defending the ringgit's higher exchange value against the US dollar.

 

Balance of Payments
(Billions of $US)

 

1996

1997

1998

1999

2000

2001

Current Account Balance

-4.461 

-5.935 

9.529 

12.604 E

8.488 E

7.287 E

Goods and Services

1.411 

0.940 

15.895 

19.828 E

18.020 E

16.182 E

Net Investment Income

-4.690 

-5.366 

-3.904 

-5.496 

-7.608 

-6.743 E

Net Current Transfers

-1.182 

-1.509 

-2.462 

-1.728 

-1.924 

-2.152 E

Capital and Financial Account

9.477 

2.198 

-2.550 

-6.619 

-6.276 

-3.894 E

Net Errors and Omissions

-2.502 

-0.137 

3.039 

-1.273 

-3.221 

-2.394 E

Overall Balance

2.514 

-3.875 

10.018 

4.712 E

-1.009 E

0.999 E

Official Reserves Stock

27.009 

20.788 

25.559 

30.588 

29.523 

30.474

Current Account (Percent of GDP)

-4.4% 

-5.9% 

13.2% 

15.9% E

9.4% E

8.3% E

 

 

    1. Import Export Markets:

                                                                                       

 

1997

2000

2001

Trade in goods as a share of GDP (%)

157.5

201.3

..

Trade in goods as a share of goods GDP (%)

282.9

356.5

..

High-technology exports (% of manufactured exports)

49.0

..

..

Net barter terms of trade (1995=100)

96.0

..

..

Foreign direct investment, net inflows in reporting country (current US$)

5.1 billion

1.7 billion

..

Present value of debt (current US$)

..

42.9 billion

..

Total debt service (% of exports of goods and services)

7.4

5.2

..

Short-term debt outstanding (current US$)

14.9 billion

4.6 billion

..

Aid per capita (current US$)

-11.1

1.9

..

 

 

Exports:

$94.4 billion (f.o.b.)

Exports - commodities:

Electronic equipment, petroleum and liquefied natural gas, wood and wood products, palm oil, rubber, textiles, chemicals

Exports - partners:

US 20%, Singapore 17%, Japan 14%, Hong Kong 4.5%, Netherlands 4.5%, China 4%, Thailand 4% (2001 est.)

Imports:

$76.9 billion (f.o.b.)

Imports - commodities:

Electronics, machinery, petroleum products, plastics, vehicles, iron and steel and iron and steel products, chemicals

Imports - partners:

Japan 20%, US 17%, Singapore 13%, Taiwan 5%, China 4%, Germany 4%, Thailand 4% (2001 est.)

 

    1. Stock Market Performance:

Malaysia's market capitalization at the end of the 1990's was $US 145,445 million with 757 listed companies. There is no foreign investment ceiling for listed stocks. Foreign investors must receive approval from the Foreign Investment Committee for in order to acquire more than 5 million ringgits in interest, more than 15 percent of the voting stock of a company, or aggregate foreign investment that exceeds 30 percent of voting power.

 

Foreign Investment

 

The Malaysian government encourages foreign direct investment, particularly in export-oriented manufacturing and high-tech industries, but retains considerable discretionary mauthority in approving individual investment projects. Outside the export sector, in keeping with long-standing public policies designed to increase bumiputra (ethnic Malay) participation in the economy, the Malaysian government encourages or requires joint ventures between Malaysian and foreign companies, limiting foreign equity and employment.

Malaysia actively woos foreign investment in the information technology industry, particularly in the Multimedia Super Corridor (MSC), an ambitious project underway to transform a 15-by-40 kilometer area stretching south from Kuala Lumpur into Asia's version of Silicon Valley. Foreign investors in the MSC receive a host of tax and regulatory exemptions in exchange for a commitment of substantial technology transfer to the local economy. In the services sector, the government promotes foreign investment in information technology, hotel and tourism, research and development, and training. Malaysia does not actively seek foreign investment in financial or professional services or foreign participation in agriculture or construction. Foreign investment is also restricted in the oil and gas industries.

The Malaysian industrial development authority (MIDA) screens all proposals for manufacturing projects in Malaysia, both foreign and domestic. MIDA determines whether each project is consistent with the Second Industrial Master Plan (1996-2005) and government strategic and social policies. Applications for investment in other sectors are handled by the relevant regulatory agency.

Investment regulations are specified in the Promotion of Investments Act of 1986 and the Industrial Coordination Act of 1975. The Securities Commission and the Foreign Investment Committee implement the regulations specified in the Malaysian Code on Takeovers and Mergers. The Foreign Investment Committee also formulates policy guidelines for foreign participation in non-manufacturing sectors.

In 1998, in response to the financial crisis, the Malaysian government relaxed existing restrictions on foreign equity in new manufacturing projects. Foreigners may now hold 100 percent equity in any new manufacturing project for which MIDA approves a license between July 15, 1998, and Dec. 31, 2000, whether export-oriented or not. Foreign equity holders will not be required later to divest or dilute their equity holdings in projects approved during this period.

This relaxed policy applies only to new projects (both green-field and expansion) and is subject to review and amendment after Dec. 31, 2000, after which time the government may return to its previous policy. Previously, foreign ownership in manufacturing firms was generally limited to a 30 percent share. Greater shares, up to 100 percent, are permitted depending on export orientation.

Most existing foreign-owned manufacturing firms are required by their licenses to export a certain percentage of their production. However, these export requirements for existing manufacturing projects have been temporarily relaxed. Between Jan. 1, 1998, and Dec. 31, 2000, any existing manufacturing firm, regardless of the export target specified in its manufacturing license, may apply to the Ministry of International Trade and Industry (MITI) for permission to sell up to 50 percent of its product on the domestic market.

The Malaysian government has also loosened foreign-held equity restrictions in several other industries. Permitted foreign ownership in telecommunications firms increased from 30 percent to 61 percent, though foreign equity should be reduced to 49 percent after five years. Foreigners may now hold a 70 percent stake in shipping companies (up from 49 percent), 49 percent in forwarding agencies (from 30 percent) and 51 percent in insurance companies (from 49 percent).

Malaysia promotes the acquisition of economic assets by bumiputras to create a balance of wealth among races. The government often requires foreign and domestic firms to take on bumiputra partners (usually 30 percent of share capital) and to maintain a workforce that proportionately reflects Malaysia's ethnic composition.

Malaysia offers a number of fiscal incentives to foreign manufacturing investors. Historically these incentives have been linked to performance criteria such as export-percentage requirements, as specified in individual manufacturing licenses. As mentioned above, however, export requirements have recently been relaxed, which will not affect the benefits and incentives that firms receive.

Project approval depends on many factors. MIDA may consider the size of an investment, the export-orientation of production, the percentage of local equity participation, the type of financing (both local and offshore) required, capital/labor ratio, the potential for technological diffusion into the local economy, the ability of existing and planned infrastructure to support the effort, and the existence of a local or foreign market for the output. The criteria are applied in a non-discriminatory manner, except in instances where both a local and foreign firm propose identical projects. All requests are handled on a case-by-case basis.

In an effort to insulate the Malaysian economy from risks posed by volatile short-term capital flows, the government imposed selective capital controls on Sept. 1, 1998, and fixed the exchange rate of the Malaysian ringgit at RM3.8/US$1.0. In September 1999, the government relaxed most of the currency controls imposed on foreign investments in Malaysian securities. It replaced a multi-tiered exit tax with a simplified flat ten percent levy applied to profits taken out of Malaysia regardless of when the investment was made. The government maintains that these current measures will remain in place until the international financial community imposes more strict regulations on international currency trading. While Malaysia's current account remains fully convertible, the measures made the ringgit non-tradable overseas. Foreign portfolio investors may still trade in Malaysian securities and derivatives. However, transactions must be made through authorized brokerage firms.

Following introduction of the selected capital controls, the Malaysian parliament amended the Companies Act to restrict the payment of dividends to an amount not exceeding the after-tax profit of that financial year or the average of the dividends declared for the two years preceding that financial year. The 2000 budget repealed this amendment.

Foreign participation in commercial banking remains restricted, with foreign equity limited to an aggregate 30 percent in any single institution. For virtually all publicly listed companies, only a minority portion of stock is available for trading; the majority is often held by the principal shareholders. Malaysia has maintained a robust privatization program that slowed as a result of the recent economic downturn. Foreign participation is generally welcome at all stages of the program. Foreign firms are able to participate in government-financed research and development programs.

1. Currency Conversion and Transfer Policies

Despite the imposition of selective capital controls, Malaysia's current account remains fully convertible. Importers and exporters have sufficient access to foreign exchange to meet their needs. The Central Bank has shown flexibility in exercising the capital control measures imposed in 1998. Ringgit earned by foreigners in the form of salaries, interest payments and dividends may be converted into foreign currency for repatriation abroad.

All payments to other countries must be made in foreign currency, other than the currency of Israel, Serbia or Montenegro, through authorized foreign exchange dealers. Depending on the size of their monthly receipts, resident exporters and approved operational headquarters are allowed to retain a maximum of US$10 million in export proceeds in foreign currency accounts. Resident and non-resident travelers may carry no more than RM1000 into or out of Malaysia. Residents may not carry out foreign currency more than the equivalent of RM10,000 (US$ 2632). Non-residents may carry out any amount of foreign currency up to the amount they carried in.

2. Expropriation and Compensation

The embassy is not aware of any cases of uncompensated expropriation of foreign-held assets by the Malaysian government. The government's stated policy is that all investors, both foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue would be referred to the Malaysian judicial system, which has proved capable of enforcing property and contractual rights.

3. Dispute Settlement

Malaysia is signatory to the U.N.-sponsored convention on the settlement of investment disputes. The domestic legal system is open and accessible. Past cases of foreign investment disputes, which have been rare, have consistently been handled satisfactorily by existing dispute settlement mechanisms. Many firms chose to include mandatory arbitration clauses in their contracts.

Should local administrative and judicial facilities fail to satisfy claimants, a dispute would be submitted to the International Center for Settlement of Investment Disputes (ICSID) under the aegis of the United Nations. The government has set up the Kuala Lumpur Regional Center for Arbitration under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation and conciliation for trade disputes.
4. Performance Requirements and Incentives

Fiscal incentives granted to both foreign and domestic investors historically have been subject to performance requirements, usually in the form of export targets, local content requirements and technology transfer. Performance requirements are usually written into the individual manufacturing licenses of local and foreign investors. Some performance requirements for existing projects have recently been relaxed.

In general, however, if a firm (foreign or domestic) fails to meet the terms of its license, it risks losing any tax benefits it may have been awarded. In extreme cases, a firm could lose its manufacturing license. The government has stated that, in the long term, it intends gradually to eliminate most of the fiscal incentives now offered to foreign and domestic manufacturing investors.

5. Private Ownership Rights

Foreign-held equity limits have been lifted for new manufacturing projects approved through Dec. 31, 2000, although projects approved before July 1998 are still bound by the equity structure specified in their individual manufacturing licenses, normally 30 percent if production is targeted at the domestic market. Foreign ownership permitted in local fund management companies is 70 percent for companies working with both local and foreign clients and dealing with both institutional and unit trust funds. Forty-nine percent foreign ownership is permitted in brokerage companies.

Malaysia has also temporarily eased equity restrictions on licensed telecommunications companies. Under measures announced in May 1998, foreign ownership in telecommunications companies may rise as high as 61 percent, but must through divestiture or dilution not exceed 49 percent after five years.

Under the Insurance Act of 1996, foreign insurance subsidiaries were required to incorporate their operations locally by June 30, 1998. However, the government has granted individual extensions to this deadline. Foreign shareholding exceeding 49 percent is not permitted unless the Malaysian government approves higher shareholding levels. As part of the 1997 WTO Financial Services Agreement, Malaysia committed itself to allowing existing foreign shareholders of locally incorporated insurance companies to increase their shareholding to 51 percent. New entry by foreign insurance companies is limited to equity participation in locally incorporated insurance companies and aggregate foreign share in such companies may not exceed 30 percent.

Certain financial industries have additional barriers to entry. For example, the government severely restricts establishment in the financial service industry. No new banking or insurance licenses, except for re-insurance firms, are being issued. Foreign firms wishing to enter this market may purchase equity in existing firms. In February 2000, the government approved substantial consolidation of the banking industry into ten "anchor" banks to create stronger, more competitive institutions that might better withstand future fluctuations of the global financial market. Financial institutions are required to complete their merger plans by January 2001.

The Malaysian government maintains broadcast content quotas on both radio and television programming. Eighty percent of television programming must originate from local companies owned by ethnic Malays. However, in practice, local stations have been granted substantial latitude in programming because of a lack of suitable local programming. Radio programming must also consist of 60 percent locally originated content. The Communications and Multimedia Act, which calls on industry groups to establish content standards and could be the basis for modification of existing local content restrictions, transferred responsibility for regulating broadcasting from the minister of information to the Ministry of Energy, Telecommunications, and Multimedia.

Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is the sole province of the parastatal Petroleum Nasional Berhad (Petronas), which is the sole entity with legal title to Malaysian crude oil and gas deposits. Foreign investment is in the form of production sharing contracts (PSC). Ownership of agricultural land is restricted to Malaysian citizens.

Historically, non-export-oriented foreign firms that have negotiated temporary exemptions from general equity limits have been required to restructure within a definite timeframe. A restructuring program may involve taking on new local partners, giving existing local partners a greater equity share, or floating shares on the Kuala Lumpur Stock Exchange (KLSE). In the end, the foreign ownership of most firms producing for the domestic market was to be reduced to 30 percent. However, as mentioned previously, all new manufacturing license applications received through Dec. 31, 2000, are exempt from equity and export conditions and equity restructuring won't be required in the future.

Private entities, both foreign and domestic, have a right to acquire, merge with, and take over business enterprises according to the Foreign Investment Committee (FIC) guidelines of 1974. However, the acquisition or disposal of five percent or more of interests in any local financial institution requires the prior approval of the Minister of Finance.

6. Protection of Property Rights

Malaysia has an effective legal system and adequate legislation to protect private property. Foreigners are permitted to purchase and secure mortgages from financial institutions for property, chattel and real estate in Malaysia with the exception of agricultural land and residential properties valued less than RM250,000 (US$65,800). Individual foreigners are also barred from owning more than 20 percent of the commercial properties in any single development project, though their aggregate commercial holdings are not restricted.

Intellectual Property Rights (IPR) are covered by the Trade Description Act of 1972, the Patent Act of 1983, the Copyright Act of 1987 and the Industrial Designs Act of 1996. Malaysia is a member of the World Intellectual Property Organization (WIPO), the Berne Convention for the Protection of Literary and Artistic Works, and the Paris Convention. Malaysia provides protection to all works (inter alia video tapes, audio material, and computer software) published in Berne Convention countries regardless of when the works were first published in Malaysia.

7. Transparency of Regulatory System

Malaysia has an open system of government, economic and business regulation. For tax purposes, local and foreign enterprises are treated essentially the same. The corporate tax rate is 28 percent, except for the petroleum industry that is taxed at 38 percent.

The Malaysian government restricts the number of expatriate personnel employed by foreign and domestic firms. A new foreign-invested project is allotted a certain number of "key posts," determined by the size of the investment that may be occupied by foreigners in perpetuity. Beyond these automatic allowances, a firm wishing to employ expatriate personnel generally must demonstrate that there is a shortage of qualified Malaysian candidates and that a Malaysian citizen is being trained.

In the past, foreign firms have complained that the procedures for obtaining work permits are time-consuming and burdensome. Due to the acute shortage of professionals, scientists and academicians, Malaysia has made some progress in simplifying permit approval for these categories of foreign personnel. With the present procedure, the foreign investor submits permit applications simultaneously with the project proposal to the relevant ministry. The ministry approves the applications with the project, then forwards them directly to the Immigration Department for immediate issuance of the required documents. Permit-approval bodies now convene more often and have successfully computerized their operations further reducing the processing time.

In addition, the government monitors hiring practices to ensure that all employers strive to meet guidelines designed to ensure a racial balance in employment.

8. Political Violence

Malaysia has experienced little political violence since serious ethnic rioting in 1969. Since 1998, supporters of the reform movement launched by former Deputy Prime Minister Anwar Ibrahim have staged a number of largely peaceful demonstrations. In a few cases, police and demonstrators clashed, but there were no deaths or serious injuries.

9. Corruption and Crime

News reports and anecdotes indicate that corrupt practices exist. Malaysia considers bribery a criminal act and does not permit bribes to be deducted from taxes. The Anti-Corruption Agency (ACA) began operations in 1967. Since June 1997, senior state-level officials have been required to declare their assets to the ACA upon taking office. Foreign businessmen are asked to report any individuals who ask for payment in return for government services. ACA investigations are reported in the newspapers.

Transparency International, a nonprofit organization, ranked Malaysia the 32nd least corrupt in its 1999 survey of 99 countries. Malaysia's score of 5.1 on a scale of zero (corrupt) to 10 (clean) placed it in a tie with Costa Rica, ahead of countries such as south Korea, Thailand, China, the Philippines and Indonesia, though behind others such as Singapore, Hong Kong, Taiwan and most of Western Europe. The Malaysian chapter of Transparency International is the Kuala Lumpur society for transparency and integrity.

10. Labor

Labor market conditions had improved in 1999. At the end of 1999, the Malaysian unemployment rate declined to three percent from 3.2 percent at the end off 1998. As the domestic economic activities began to pick up, the number of job vacancies has exceeded the number of retrenched workers. The regional economic downturn in 1997-1998 has led to retrenchments, which affected mostly Malaysia's substantial foreign workforce. In February 2000, the government lifted the freeze on foreign workers except for some specific jobs. The government imposes a monthly per capita levy on employers of foreign workers: RM125 (US$33) on foreign construction and manufacturing workers and RM30 (US$8) on domestic and agricultural workers.

In recent years wage rates have climbed faster than productivity rates, prompting concerns about Malaysia's future competitiveness. However, the rate of wage increases has slowed to 2.7 percent in 1998 from 10.2 percent in 1997. In 1999, the private sector wage rate rose 5.5 percent. Productivity in Malaysia, while contracting 1.5 percent in 1998, rebounded to 4.4 percent growth in 1999. The National Labor Advisory Council, a tripartite forum, has introduced a set of guidelines for a productivity-linked wage system to facilitate collective negotiations of wage agreements. Malaysia no longer seeks labor-intensive industries and reserves its fiscal incentives for high value-added projects.

Malaysia is a member of the International Labor Organization (ILO). Labor relations in Malaysia are generally non-confrontational. A system of government controls strongly discourages strikes. Some labor disputes are settled through negotiation or arbitration by an industrial court. Once a case is referred to the industrial court, the union and management are barred from further industrial action.

While national unions are proscribed, there are a number of national confederations of unions. Employers and employees share the costs of the Social Security Organization (SOSCO), which covers eight million workers as of December 1999. No welfare programs or government unemployment benefits exist; however, the Employee Provident Fund (EPF) provides retirement benefits for private workers, while civil servants receive pensions.

11. International Investment Agreements

Malaysia has bilateral investment guarantee agreements with 67 economies:

U.S., Germany, Canada, Netherlands, France, Switzerland, Sweden, Belgium, Luxembourg, United Kingdom, Sri Lanka, Romania, Norway, Austria, Finland, Organization of Islamic Conference, Kuwait, ASEAN, Italy, South Korea, People's Republic of China, United Arab Emirates, Denmark, Vietnam, Papua New Guinea, Chile, Laos, Taiwan, Hungary, Poland, Indonesia, Albania, Zimbabwe, Turkmenistan, Namibia, Cambodia, Argentina, Jordan, Bangladesh, Croatia, Bosnia-Herzegovina, Spain, Pakistan, Kyrgyzstan, Mongolia, Uruguay, India, Peru, Kazakhstan, Malawi, the Czech Republic, Guinea, Ghana, Egypt, Botswana, Cuba, Uzbekistan, Macedonia, North Korea, Yemen, Turkey, Lebanon, Burkina Faso, Sudan, Djibouti, Ethiopia, Senegal, and Bahrain.

Malaysia has double taxation treaties with 50 countries:

Singapore, Japan, Sweden, Denmark, Norway, Sri Lanka, United Kingdom, Belgium, Switzerland, France, New Zealand, Canada, India, Germany, Poland, Australia, Thailand, South Korea, Philippines, Pakistan, Romania, Bangladesh, Italy, Finland, People's Republic of China, Netherlands, U.S., Hungary, Austria, Indonesia, Mauritius, Iran, Papua New Guinea, Saudi Arabia, Russia, Sudan, Albania, Zimbabwe, Turkey, Jordan, Mongolia, Vietnam, Malta, United Arab Emirates, Fiji, the Czech Republic, Kuwait, Egypt, Argentina, and Bahrain.

Malaysia's double taxation agreements with the United States, Saudi Arabia, and Argentina are currently limited to air and sea transportation. Discussion between the U.S. and Malaysia about a comprehensive agreement continues.

Malaysia encourages foreign direct investment particularly in export-oriented manufacturing and high-tech industries but retains considerable discretionary authority over the approval of individual investment projects. Especially in the case of investment where production or services are oriented toward the domestic market, this authority has historically been used to restrict foreign equity and to extract favorable technology transfer and joint venture agreements with local partners. In the wake of the economic downturn, however, equity restrictions and export requirements have been loosened to attract investment.

12. Foreign Trade Zones

Malaysia has free zones (FZ's) in which export-oriented manufacturing and warehousing facilities may be established. Raw material, products and equipment may be imported duty-free into these zones with minimum customs formalities. Companies that export not less than 80 percent of their output and depend on imported goods, raw materials and components may be located in these FZ's. Goods sold into the Malaysian economy by companies within the FZ's must pay import duties. In addition to the FZ's, Malaysia permits the establishment of licensed manufacturing warehouses, which give companies greater freedom of location while enjoying privileges similar to operating in a FZ.

Ports, shipping and maritime-related services play an important role in Malaysia since 90 percent of its international trade is sea borne. The government is presently promoting Port Klang (Westport and Northport) as a regional load and transshipment center. In this effort to divert shipping to Malaysian ports, the government has designated Port Klang as a free commercial zone. Other ports with free commercial zone status are Penang Port and Johor Port.

13. Foreign Investment Statistics

The U.S. has consistently been a leading investor in Malaysia. According to the Malaysian Industrial Development Authority, the U.S. was the largest foreign investor in the manufacturing sector with approved projects valued at US$1,641 million in 1998. Japan was second with U.S.$484 million, followed by Taiwan, with US$255 million. The three made up more than 70 percent of total foreign manufacturing investments in Malaysia in 1998. (note: manufacturing investment only; upstream oil and gas investments not included.)

 

Tax Structure and Incentives

For resident and non-resident enterprises, the corporate income is 28 percent. A company is a tax resident in Malaysia if its management and control is exercised in Malaysia. Management and control is normally considered as exercised where the directors meetings are held. Petroleum companies are subject to an income tax rate of 40 percent. For non-resident companies, a withholding tax of 15 percent applies to interest and additional taxes apply to other payments. Tax holidays are available for participation in certain expansion projects, research and development, and other investments.

A company is a tax resident in
Malaysia if its management and control is exercised in Malaysia, that is, if directors' meetings are held in Malaysia. Resident companies pay an income tax of 28 percent on all income. Payments made to non-residents for technical or management services and rental of movable properties are subject to withholding tax at the rate of ten percent.

Tax authorities normally collect taxes within 30 days after the issuance of a notice of assessment. However, companies are required under the compulsory tax payment scheme to pay tax in bimonthly installments for each assessment year commencing from the month of January or February based on an estimate of tax payable. Tax on royalties, rental of movable properties, technical or management service fees and interest received by non-resident companies are collected by means of withholding tax. The withholding tax is payable within one month of crediting the non-resident company. Through 1999, taxes were assessed on the previous fiscal year's income. Starting in 2000, the tax collection system changed to a present-year assessment. The result of the changeover is that no taxes were assessed on income earned in 1999, although taxpayers are permitted to carry forward and write off losses incurred during 1999.

 

Tourist Information

 

Malaysia consists of two parts, Peninsula Malaysia and Borneo. Peninsula Malaysia is the long strip of land, which extends down from Asia, it accounts for about 40% of the area. Borneo is made up of the states of Sabah and Sarawak, which occupy the northern most segment of the island of Borneo.

While visiting Malaysia you should try to get to following:

Taman Negara National Park, which is one of the world's oldest rainforests. It is home to several endangered species and an abundance of exotic plants. Taman Negara National Park is also an excellent place for jungle trekking and mountain climbing.

Kinabalu National Park features a high granite peak that you should climb if you would like a beautiful view of the spectacular surrounding rainforest.

The Perhentian Islands are probably the most beautiful islands in Malaysia, they all have sparkling white-sand beaches and crystal-clear aquamarine water.

Danum Valley is the ultimate rainforest experience. Here you can hear the incredible sounds of hooting gibbons and the deafening insect chonis.

Penang is the west coast's most interesting stopover. It is a historic British settlement that has strong Chinese influences, many colourful temples, good food and a great nightlife

Melaka's Dutch and Portuguese heritage is revealed in the port's interesting blend of architecture.

Sepilok Orang-utan Rehabilitation Centre is one of only four such refuges in the world. These Orang-utans can be hilarious, it is definitely a must see.


The main indigenous tribe is the Iban of Sarawak, who number 395,000. They are largely longhouse dwellers and live along the Rejang and Baram rivers. The Bidayuh (107,000) are concentrated on Sarawak's Skrang River. The Orang Asli (80,000) live in small scattered groups in Peninsular Malaysia. Traditionally nomadic agriculturalists, many have been absorbed into modern Malaysia.

Malaysian music is heavily influenced by Chinese and Islamic forms. The music is based largely around the endang (drum), but includes percussion instruments (some made of shells), flutes, trumpets and gongs. The country has a strong tradition of dance and dance dramas, some of Thai, Indian and Portuguese origin. Other artistic forms include ayang kulit (shadow-puppets), ilat (a stylised martial art) and crafts such as batik, weaving and silver and brasswork.

 


Sources: Country Watch, Central Intelligence Agency: http://www.cia.gov

International Monetary Fund: http://www.imf.org
World Bank: http://www.worldbank.org
Travel: http://www.malaysia.travelmall.com/guide.html
Tourism: http://www.tourism.gov.my/corporate/office/office-local.htm