Malaysia Defence and Security Report Q3 2009

Malaysia's real GDP shrank 6.2% year-on-year (y-o-y) in Q109 after growing 0.1% in the previous quarter, which has bolstered our view that the economy will witness a full-year recession in 2009. The decline in the first quarter was the worst since the Asian Financial Crisis in 1998, proving the country is just as vulnerable to the current global recession as its regional peers such as Singapore and Thailand who also experienced precipitous declines in GDP over the same period. With this in mind, we have lowered our 2009 growth forecast, from 0.5% to -1.9%.

However, although recently released economic data still paint a bleak picture, there have been tentative signs that the economy may be bottoming out, possibly heralding a mild economic recovery by the end of 2009. Indeed, the effects from the announced MYR60bn (US$16.9bn) stimulus and monetary easing should come into play soon.

Malaysia had indicated that a portion of this package would go to the Defence Ministry for additional development projects. Major defence procurements at the start of 2009 included two contracts totalling MYR603mn with two companies supplying parts and components to the Royal Malaysian Navy (RMN) for five years. It was also announced at the start of 2009 that the country's first submarine, a French-made Scorpene-class KD Abdul Rahman, is scheduled for delivery in July 2009. The Sepanggar Naval base, a 190ha naval base project costing MYR636mn, is also scheduled to be completed in July. The submarine will be housed at the new naval base. A second submarine KD Tun Abdul Razak, is expected to arrive at the end of the year.

We continue to expect the Malaysian government to increase defence spending by 4% annually, in real terms, over the coming years. Absolute increases will depend in part on how the country's economy fares in the face of the global financial crisis.

Speaking ahead of the seventh Five Power Defence Arrangements (FPDA) in Kuala Lumpur on June 1, Minister of Defence Dato Seri Dr Ahmad Zahid bin Hamidi said Malaysia would be making a shift in its defence policy in efforts to become an important player in the defence industry.

Ahmad Zahid Hamidi, who chaired the FPDA meeting, told local news agency Bernama that Malaysia had many locally made defence products of high standard that could be marketed worldwide, especially for military use in the Asian region.

He also met with representatives and defence ministers from Brunei, Myanmar, Sri Lanka, Singapore, New Zealand, Australia, Vietnam, Bangladesh, UK and the US at the eighth Shangri-La Dialogue in Singapore in late May.

According to Ahmad Zahid Hamidi, who assumed his post in March 2009, the defence ministry can help the country's economy should the industry be developed with the right marketing strategy. It is able to market local products such as unmanned aerial vehicles (UAV), bullets for various types of firearms, military vehicles and specialist services such as repairing planes. Ahmad Zahid has added the government is ready to form a special purpose vehicle (SPV) to offer financial packages to local companies to expand their businesses from service centres to products manufacturers.

This quarter, we have introduced a significant new aspect to BMI's Defence reports: the City Terrorism Rating (CTR), which assesses the risk of a terrorist attack. The CTR takes into account the overall BMI Terrorism Rating for the country in question. It also incorporates the 'prevalence' of terrorism, which recognises the frequency of attacks, and whether the city is a target for terrorists. The CTR also recognises the 'threat' of terrorism in terms of the likely numbers of victims and the ability of groups to launch sustained campaigns.

In Malaysia we assess the CTR for Kuala Lumpur. The CTR is created via an integration of the state-wide threat, with an evaluation of the city-specific characteristics and level of activity.