Holding the magician's hat

As emerging countries in Asia really start to take off, Malaysia has the energy and resources to be a real front runner

In a striking example of the law of unintended consequences, the government of Malaysia has had to ban sales of petrol to foreigners within a 50km area inside the country's borders.

The reason is that Malaysia heavily subsidises petrol, diesel and gas (along with 21 basic foodstuffs) for its population of 27 million, in an attempt to maintain the living standards of the country's poorest. But with soaring oil prices, drivers from Thailand in the north and Singapore in the south have been crossing the border to fill their tanks with petrol and diesel much cheaper than they can buy it at home.

So far Malaysia has been able to sustain its massively expensive subsidies on food and fuel, with fuel subsidies alone expected to hit over $16.4bn this year, thanks to its position as one of the baker's dozen of so-called "miracle economies", those countries including Japan, Singapore, South Korea, Brazil, China and Indonesia, all characterised by high economic growth over a short period, all engaged with the global economy and all blessed with high rates of saving and investment, and credible and capable governments.

Between 2003 and 2007 Malaysia's exports rose by almost two thirds in US dollar terms, to $170bn, while the current account surplus more than doubled, to $26bn. Total external debt rose by just five percent over the same period, to $51bn, and the debt-service ratio has dropped from 7.6 percent to 4.8 percent.

Electronics are the country's biggest export, at $37.6bn last year, followed by electrical machinery $13.5bn, chemicals and chemical products $5.6bn, crude oil $5.2bn and palm oil $3.7bn. Malaysia exported 13.8 million tonnes of palm oil last year, half of all world palm oil exports and a quarter of the global oils and fats trade. The United States is the country's biggest customer, at 18.8 percent of total exports, followed by the next-door city-state Singapore at 15.4 percent, Japan at 8.9 percent, China at 7.2 percent and its northern neighbour Thailand at 5.9 percent.

Malaysia's attractions to foreign investors were summed up by Tom Werner, Chief Executive of SunPower, the California-based manufacturer of solar energy panels, which announced at the end of May that it is to build its next solar cell fabrication plant in the country. "Malaysia offers us highly educated workers, a receptive business investment climate and the opportunity to significantly expand our production," Mr Werner said.

Economic growth in Malaysia slowed to 6.5 percent year-on-year in the first quarter of this year, down from 7.3 percent year-on-year growth in the last quarter of 2007, and economists are predicting a further slowdown to 5.5 percent growth in 2009.

However, its position as a net exporter of oil, which helps pay for the subsidies to its own people, means the country is managing to keep inflation down to just three percent year-on-year, much lower than its neighbours such as Indonesia (nine percent inflation), Singapore (6.7 percent) and Thailand (6.2 percent).

Rising commodity prices are a two-edged sword for a country like Malaysia: it has to pay more for imports such as rice, up 250 percent in cost in 2007, but its own raw materials are fetching more on world markets. The price of Malaysian natural rubber, for example, is at an all-time high.

Even so, the Malaysian government, which suffered a nasty shock in national elections in April when the ruling Barisan Nasional coalition lost nearly a quarter of its seats, has announced a series of measures to boost the country's economy should the global situation show a sharp downturn. It is spending $1.24bn to increase food production and lift domestic rice growing from 65 percent of national consumption to 100 percent, while several projects in the government's multi-billion-ringgit five-year development plan are "under review" because of rising costs. At the same time the food and fuel subsidies are also under review,

Islam is the official religion of Malaysia, and more than 60 percent of the country's population are Muslims. The country is looking to position itself as a leader in the field of Islamic banking, based on Sharia law, which outlaws interest-based transactions, and it is home to the Islamic Financial Services Board. Assets under management in the Islamic banking world are expected to more than triple to $1trn in the next five years, from the current $300bn.

Fundamentally, Malaysia's strengths look likely to carry it through any crisis. Manufacturing sales rose 9.6 percent in March from a year earlier, thanks to a strong performance from refined petroleum products, computers and computer peripherals, with 60 percent of industrial sectors reporting rising sales. The number of employees in the manufacturing sector, which accounts for about a third of Malaysia's gross domestic product, rose 0.5 percent to 1.09 million people. Foreign direct investment into Malaysia is expected to grow at least as fast as the 69 percent rise, to $13.7bn, seen last year after efforts to cut red tape and improve government incentives. The magic has not yet gone out of Malaysia's economy.