We recommended that subscribers invest in Malaysia long before the Southeast Asian nation became a fashionable investment destination. Recent data only strengthens our investment case.

Malaysia traditionally has been viewed as a backward economy with a very defensive market. But Prime Minister Najib Razak is widely recognized as someone who can lead Malaysia’s people and economy. The success of his efforts thus far has provided a roadmap to the country’s long-term development, and investors like what they see.

Malaysia has launched an ambitious Economic Transformation Program (ETP) to revitalize the country. The government aims to attract USD444 billion in investments in 131 projects over the next 10 years and to double the country’s per capita standard of living. Thus far USD55 billion worth of investments have been announced, the majority of which are privately funded.

Recent developments demonstrate that the plan is starting to work. Private investments grew by 23 percent to USD16 billion in the first half of the year, 19 percent of which came from the ETP. Furthermore, Malaysia gross foreign direct investment inflows of USD7 billion in the first half exceeded outflows by USD1.1 billion.

These are important achievements. The Malaysian government recently passed a 2012 budget that calls for private investment growth of about 16 percent in 2012, and the ETP appears to have provided incentive for these investments.  

Rising levels of investment are crucial for meeting the government’s other budget goals: raising the compensation for civil service workers, reducing the operating costs for taxi owners and pushing through price cuts at government-sponsored stores.

Exports have also been growing nicely. September exports rose 16.6 percent compared to 10.9 percent in August, supported mainly by commodities (excluding oil) and electronics. In addition, private consumption is also holding up. Loan growth grew 13.3 percent in the third quarter and there has also been a 33 percent increase in housing development.

Consequently, the third-quarter gross domestic product (GDP) figures that will be announced next week should show that Malaysia’s economy grew much stronger than expected, probably by more than 4 percent. This positive momentum should carry over through the end of the year.

That being said, the country’s fiscal deficit stands at 5.6 percent of GDP. Although this is down from the 7 percent recorded in 2009, it remains one of the highest readings in Asia. We may see a slight improvement in the deficit this year, as subsidies will rise while commodity prices remain high. Malaysia’s status as a net exporter of energy and materials means that government revenue should also increase this year. But we don’t expect to see a drastic change in the country’s deficit in 2011. However, next year could see the government’s deficit drop below 5 percent.

Given the country’s relatively strong economic growth, Malaysia’s central bank should hold steady on interest rates, which currently stand at 3 percent. The central bank will announce its decision tomorrow. Malaysian authorities will also seek to control inflation, currently at about 3.4 percent, so as not to undermine the economy’s long-term growth.

In light of the eurozone’s sovereign-debt crisis, investors must remember that increasing levels of private investment have been very positive for the Malaysian stock market. We expect this trend to play out again this time around. The increase in private investment has been focused on Malaysia’s infrastructure sector, which is critical to the country’s economy and growth potential. We maintain our recommendation to buy into Malaysia, particularly during periods of weakness.