Spotlight on Malaysia

Robert Hsu, November 08, 2007

Oil prices have made headlines recently, reaching record-setting highs. Much of this rise in prices is due to ever-increasing tension between oil-rich Muslim countries and the West.

That's why I'd like for us to talk about an often-overlooked Asian country that's in a unique position to benefit from both rising commodity prices and increased distrust between the East and West. That country's name? Malaysia.

A Peek into Malaysia's Past

In order to understand the current economic climate in Malaysia, it's important to know a little bit about the country's history. Malaysia is a predominantly Muslim country in Southeast Asia. For many years, it was a British colony. During World War II, the country was briefly ruled by the Japanese. Some years after the war in 1957, the territories on the Malay Peninsula formally declared their independence.

At the time of independence, ethnic Chinese made up 40% of the population on the peninsula. As was (and still is) typical in many Southeast Asian countries, enterprising Chinese dominated the local economy, while most Malays worked as farmers or fishermen.

If you're familiar with either of my advisory services (Asia Edge and China Strategy), you may have heard me talk about the significance of ethnic Chinese living in countries outside of China. Ethnic Chinese living abroad have strong commercial skills, a good work ethic, firm family values and place a big emphasis on education. Because of their ambition and drive, they are a very powerful economic force.

Tension eventually broke out between the Muslim Malays and the ethnic Chinese who were dominating the Malaysian economy. In 1969, a bitter election campaign sparked religious and racial riots. Sadly, more than 800 people were killed in the violence.

As a result of the riots, the Malaysian government (led by a party of Malays) established something called the New Economic Policy (NEP). The NEP was a controversial affirmative action program that tried to decrease the disparity between the Malays and the Chinese minority. In order to make things "more equal," the government established policies that favored the Malays.

The NEP ensured that most jobs in the bureaucracy were reserved for Malays, as were the majority of government contracts. Quotas were set for university admissions, allowing Malays to win admission even if there were better-qualified Chinese applicants. Companies were required to place at least 30% of their shares in Malay hands. Developers were expected to sell a certain percentage of housing and commercial property to Malays, often at a discount -- and so on.

After the riots and the NEP, hundreds of thousands of ethnic Chinese left Malaysia and formed the city-state of Singapore. Starting from scratch and with no natural resources, Chinese-run Singapore managed to achieve one of the greatest economic success stories in modern history, far surpassing Malaysia in terms of growth. I don't talk about Singapore much because there aren't many investment opportunities available there. But if the situation changes, I'll be sure to let you know. (Want to be among the first to hear about opportunities in Singapore? Sign up for Asia Edge today!)

Despite the racial tension in Malaysia, I'm happy to report that no more violence has occurred there. And even though they face many obstacles, more than 5 million ethnic Chinese remain in Malaysia today, controlling most of the wealth in the country.

The Malaysian Economy

Malaysia is rich with natural resources, including tin, rubber and palm oil. These three commodities, along with other raw materials, have greatly contributed to Malaysia's economic growth over the past century.

But recently two other natural resources have begun to contribute significantly to the country's economy. Malaysia is starting to do big business in petroleum and natural gas. In a nutshell, the Malaysian economy is benefiting from the global commodities boom taking place today.

As a major oil and gas exporter, Malaysia has profited from higher global energy prices due to surging demand from China. China is one of the country's biggest trading partners. In fact, Malaysia abandoned the fixed exchange rate in July 2005 for a managed floating system within an hour of China's announcement of the same move. Malaysia views China as the leading trading power in Asia, so it followed China's lead in order to remain competitive with Chinese exports. This managed float has helped Malaysia attract foreign investments.

I believe Malaysia will continue on its current path of economic growth. How strong its economy will ultimately get relies upon its business relationships with key countries like the U.S., Japan, and especially its major trading partner, China. Looking ahead, I expect China's economic emergence to bring a new chapter of growth to the Malaysian economy, particularly if Malaysia's Chinese community builds a bridge to link the two countries economically.

Malaysia is also one of the more successful major Muslim economies. Contributions from Malaysian Chinese and Indian immigrants have strengthened the economy. Having a large population of enterprising Chinese and Indians gives the country a unique advantage over other Muslim economies. And in contrast to many other Muslim countries, Malaysia is relatively open to international commerce. The government is working hard to turn its capital, Kuala Lumpur, into an Islamic financial center.

During the past three years, high oil prices have allowed oil-rich Islamic states to amass unprecedented wealth. It's said that these countries have earned well over $1 trillion from oil exports over the past three years. However, in the post-9/11 world, increasing distrust between the West and Islamic economies has pushed Persian Gulf-based investors to seek alternative places to invest their petrodollars. Malaysia, however, is different -- the secular and multicultural city of Kuala Lumpur is developing a banking and financial services industry to cater to the needs of international Islamic investors. These foreign investments are creating a boom for the Malaysian economy and are strengthening the country's financial services sector.

On the Lookout for Future Opportunities

With crude oil selling for more than $100 a barrel right now, I wanted to let you know about one of Asia's biggest beneficiaries. Unfortunately, there are no Malaysian companies available to us on the major American stock exchanges that we can take advantage of at the moment.

I know it can be frustrating not to have an investment vehicle that allows you to profit from such a promising opportunity in an emerging market, but I wanted to bring your attention to Malaysia so that you will be ready to act when the time is right. My eyes are wide open for ways to play the growth in Malaysia, and when an opportunity arises, my Asia Edge members will be the first to know. If you want to learn more about Asia Edge, click here.