Malaysia's economic growth slowed in 2005, with real gross domestic product (GDP) expanding by 5.3 percent, down from 7.1 percent in 2004. The slowdown was largely due to a drop in the rate of growth of the countrys exports, particularly semiconductors and consumer electronics items. Real GDP growth for 2006 is forecast at 5.5 percent.
Malaysia's banking system has been stabilized, after being undermined by a high proportion of nonperforming loans during the Asian financial crisis of 1997-98. The country's banking sector went through a major restructuring in 2000, with many weaker financial institutions being taken over by stronger ones. In order to stimulate the economy, the country's government increased spending sharply in 2001, but in 2003-2004 began to reduce its government budget deficit, though some deficit spending is likely to continue for another several years. With its high current account surplus, equal to about 12 percent of GDP, Malaysia has been reducing its foreign debt, and may become a net creditor around the end of the current decade.
Malaysia has maintained its policy of a fixed exchange rate between the ringgit and the U.S. dollar. The fixed rate was imposed by Prime Minister Mahathir in September 1998 as part of capital controls designed to stem the outflow of short-term capital in the wake of the Asian financial crisis. Malaysia’s currency is considered somewhat undervalued at the present exchange rate of 3.8 ringgits to one U.S. dollar. In 2001, some of the capital controls imposed in 1998, such as the taxes on repatriation of short-term stock market profits by foreign portfolio investors, were relaxed.
Prime Minister Mahathir Muhammad stepped down in October 2003 after over two decades in office. Abdullah Ahmed Badawi, who had previously served as Deputy Prime Minister, succeeded him.
Malaysia contains proven oil reserves of 3.0 billion barrels, down from a peak of 4.3 billion barrels in 1996. Despite this trend toward declining oil reserves, Malaysia's oil production has been rising since 2002 as a result of new offshore development. In 2005, the countrys total oil production averaged 871,000 bbl/d, up from an average of 860,000 bbl/d in 2004. Natural gas liquids production contributed 84,000 bbl/d of that amount in 2005. Malaysias oil demand has been growing at a much slower rate than its economic output, due largely to the conversion of oil-fired power plants to natural gas.
As a result of the long-term trend toward declining oil reserves, Petronas, the state oil and gas company, has embarked on an international exploration and production strategy. Currently, Petronas is invested in oil exploration and production projects in Syria, Turkmenistan, Iran, Pakistan, China, Vietnam, Burma, Algeria, Libya, Tunisia, Sudan, and Angola. Overseas operations now make up nearly one-third of Petronas revenue. The majority of Malaysias oil exports go to markets in Japan, Thailand, South Korea, and Singapore.
Malaysia domestic oil production occurs offshore, primarily near Peninsular Malaysia. Most of the country oil fields contain low sulfur, high quality crude. More than half of the country oil production comes from the Tapis field, which contains a light grade of crude oil with a low sulfur content. Esso Production Malaysia Inc. (EPMI), an affiliate of ExxonMobil Corporation, is the largest crude oil producer in Peninsular Malaysia, accounting for nearly half of Malaysia crude oil production. EPMI operates seven fields near the peninsula, with one-third of its production coming from the Seligi field. The Seligi-F platform, with its 28 wells, is the newest satellite in the Seligi field, located 165 miles off the coast of Terengganu, Peninsular Malaysia. EPMI holds a 78% interest in the project with Petronas Carigali holding the remaining 22%. EPMI began production from the offshore Larut field in Block PM5 in early 2002, which has reached peak production of 140,000 bbl/d, offsetting some of the production declines in more mature fields in recent years.
In other developments, Sabah Shell Petroleum Company, a unit of Royal Dutch/Shell Group, has raised production at the Kinabalu field to 36,000 bbl/d, plus 28 million cubic feet per day (Mmcf/d) of natural gas. Production at Kinabalu, located in the SB-1 block 34 miles off the coast of Labuan, Sabah in east Malaysia, began in December 1997. As operator of the SB-1 block, Shell holds an 80 percent stake in the block, with Petronas holding a 20 percent stake. Shell reported two new discoveries offshore from Sabah in 2004, Gamusut-1 in March and Malikai-1 in September. Gamusut-1 lies in deep waters which are the subject of a territorial dispute with Brunei. Both finds are still under evaluation, but are expected to yield significant reserves. Shell also was awarded exploration rights to Blocks ND6 and ND7 offshore from eastern Sabah in February 2005, in an area disputed by Indonesia. Both countries deployed additional military forces to the area in the spring of 2005, and also have been in negotiations aimed at resolving the dispute.