h a AMB Country Risk Report August 18, 2015 Our Insight, Your Advantage. Malaysia Country Risk Tier • The Country Risk Tier (CRT) reflects A.M. Best’s assessment of three categories of risk: Economic, Political and Financial System Risk. CRT-3 • Malaysia has moderate levels of economic and political risk and a low level of financial system risk. A.M. Best considers the majority of countries in Southeast Asia to be categorized as CRT-3 or CRT-4. The exceptions are Micronesia and Papua New Guinea, as CRT-5 countries, and Singapore, the sole CRT-1 country. Economic Risk Moderate Low High Very Low • Gross domestic product (GDP) growth is expected to slow from 6.0% in 2014 to a forecasted 4.8% in 2015. Lower growth stems mainly from weaker tax revenues, lower investments and lower export earnings due to the decline in oil price. Growth over the medium term is expected in the 5.0% range. Very High Political Risk Moderate Iceland Greenland Finland Sweden Low High Norway Estonia Isle of Man Very Low Ireland Lithuania Very High Belarus United Kingdom Netherlands Liechtenstein Czech Republic Austria Switzerland France Ukraine Slovakia Luxembourg Jersey Bosnia & Serbia Herzegovina Bulgaria Montenegro Georgia Macedonia Armenia Albania Spain Portugal Gibraltar Tunisia Malta Cyprus Syria Moderate Lebanon North Korea Tajikistan South Korea China Afghanistan Iraq Israel Japan Iran Jordan Low High Algeria Kuwait Libya Mauritania Egypt Saudi Arabia Bhutan Bangladesh U.A.E. Myanmar India Taiwan Northern Mariana Islands Hong Kong Laos Wake Island Macau Mali Chad Niger Eritrea Sudan Very High Thailand Yemen Vietnam Philippines Cambodia Benin Nigeria Ethiopia Equatorial Guinea Sao Tome & Principe Somalia Sri Lanka Central Africa Republic Togo Brunei Gabon Congo Palau Malaysia Singapore Cameroon Uganda Kenya Sumatra Rwanda Dem. Republic Burundi of Congo Seychelles Tanzania azil Malawi Nauru New Guinea Indonesia Namibia Market Outlooks Mauritius Madagascar Botswana Solomon Islands Reunion Australia New Caledonia Swaziland Norfolk Island Lesotho South Africa Tuvalu Vanuatu Mozambique For information on companies followed Papua New Guinea Coral Sea Islands Comoros Zambia Zimbabwe Federated States of Micronesia Borneo East Timor Angola Marshall Islan Guam Dijbouti Burkina Faso Ghana Guinea Sierra Cote d'Ivoire Leone Liberia Nepal Qatar Oman Senegal Guinea-Bissau Pakistan Bahrain Western Sahara Very Low Gambia Uzbekistan Turkmenistan (Occupied by Morocco) Cape Verde s nd la Is Kyrgyzstan Azerbaijan Turkey Greece Monaco ril Ku Russia Financial System Risk Italy Mongolia Romania Croatia Andorra Morocco Kazakhstan Republic of Moldova Hungary Slovenia San Marino Canary Islands Sakhalin Poland Germany Belgium Guernsey Azores Russia Russia Latvia Denmark CRT 1 2 3 4 5 Copyright © 2015 by A.M. Best Company, Inc. All rights reserved. No part of this report may be reproduced, stored in a retrieval system or transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise. 1 New Zealand F AMB Country Risk Report Malaysia Regional Summary: Southeast Asia • Economic growth for the region will vary depending on country specific factors. Gross domestic product growth for the Association of Southeast Asian Nations (ASEAN) as a whole is forecasted at 5.1% for 2015 and 5.3% for 2016. Growth is expected to be driven by exports and an increase in consumer consumption. • Potential external risks for the region in the coming year include the slowdown in the Chinese economy, the normalization of the United States monetary policy, potential exchange rate volatility, lower commodity prices, regional unrest and the potential for increased political instability. • Political changes and social unrest have the potential to affect foreign direct investment inflows and tourism revenues. The region has been attractive due to low labor costs, the prevalence of natural resources and the need for new and improved large-scale infrastructure. Vital Statistics 2014 Nominal GDP Population GDP Per Capita Real GDP Growth Inflation Rate Premiums Written (Life) Premiums Written (Non-Life) Premiums Growth (2013 - 2014) USD bn mil USD % % USD mil USD mil % 326.93 30.3 10,804 6.0 3.1 10,231 5,633 3.4 Regional Comparison Country Risk Tier CRT-3 CRT-4 CRT-4 CRT-1 CRT-3 CRT-4 Malaysia Indonesia Philippines Singapore Thailand Vietnam Source: IMF, Axco, Swiss Re and A.M. Best Economic Growth Economic Risk: Moderate • Despite a fairly well diversified economy, Malaysia remains a significant exporter of hydrocarbons, deriving approximately 15% of its GDP, 30% of government revenues and 15% of its exports from the hydrocarbon sector. 8 Real GDP CPI Inflation 7 6 5 4 • Malaysia should benefit from improving conditions in the United States, one of the country’s largest export markets. The U.S. accounts for about 20% of merchandise exports. A weaker ringgit, the country’s currency, is also expected to boost manufactured exports through increased competitiveness. % 3 2 1 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 -1 -2 Source: IMF World Economic Outlook and A.M. Best • Additional economic growth in 2015 is expected to be led by consumption and growth in private investment in the nonoil sector. 2 AMB Country Risk Report Malaysia Political Risk: Moderate Political Risk Summary • The United Malays National Organization is the dominate political party. However, it lost its two thirds majority vote, first in 2008 and again in 2013, indicating an increasingly more polarized population. Score 1 (best) to 5 (worst) Malaysia World Average International Transactions Policy 5 4 Legal System Monetary Policy • While the government is generally stable, an alleged corruption scandal involving the country’s prime minister has the potential to cause political instability.The prime minister is accused of embezzling hundreds of millions of dollars from the state development fund. 3 2 1 Regional Stability Fiscal Policy 0 Social Stability Business Environment Government Stability Labor Flexibility Source: A.M. Best • Malaysia is a pro-business country with excellent infrastructure and a highly qualified labor pool.The country ranks 18th out of 189 countries in the World Bank’s 2015 Ease of Doing Business Survey. GDP Per Capita and Population for Selected Countries Financial System Risk: Low 60,000 300 GDP Per Capita Population 250 40,000 200 USD Millions 50,000 30,000 150 20,000 100 10,000 50 0 Malaysia Indonesia Source: IMF and A.M. Best Philippines Singapore Thailand • As a result of falling oil revenues, the country has been proactive in mitigating the projected budget shortfall by implementing a goods and services tax and abolishing fuel subsidies. It is estimated that Malaysia spent approximately 20% of its total fiscal budget on subsidies in 2014. Vietnam 0 • The insurance industry in Malaysia is regulated by the central bank, Bank Negara Malaysia. • Malaysia’s financial system is strong and well diversified, with the banks well-capitalized and profitable. However, the financial sector does face potential vulnerabilities with regards to years of rapid credit growth. • Malaysia has a deep domestic bond market which reduces its reliance on external financing. • Asset quality continues to improve, with a non-performing loan ratio of 1.8% compared with 6% at the end of 2007. 3 AMB Country Risk Report Malaysia GUIDE TO BEST’S COUnTry rISk TIErS A.M. Best defines country risk as the risk that country-specific factors could adversely affect the claims-paying ability of an insurer. Country risk is evaluated and factored into all Best’s Credit Ratings. Countries are placed into one of five tiers, ranging from “CRT-1” (Country Risk Tier 1), denoting a stable environment with the least amount of risk, to “CRT-5” (Country Risk Tier 5) for countries that pose the most risk and, therefore, the greatest challenge to an insurer’s financial stability, strength and performance. A.M. Best’s Country Risk Tiers are not credit ratings and are not directly comparable to a sovereign debt rating, which evaluates the ability and willingness of a government to service its debt obligations. Country risk Tiers Country risk Tier Definition CRT-1 Predictable and transparent legal environment, legal system and business infrastructure; sophisticated financial system regulation with deep capital markets; mature insurance industry framework. CRT-2 Predictable and transparent legal environment, legal system and business infrastructure; sufficient financial system regulation; mature insurance industry framework. CRT-3 Developing legal environment, legal system and business environment with developing capital markets; developing insurance regulatory structure. CRT-4 Relatively unpredictable and nontransparent political, legal and business environment with underdeveloped capital markets; partially to fully inadequate regulatory structure. CRT-5 Unpredictable and opaque political, legal and business environment with limited or nonexistent capital markets; low human development and social instability; nascent insurance industry. Country risk reports A.M. Best Country Risk Reports are designed to provide a brief, high-level explanation of some of the key factors that determine a country’s Country Risk Tier assignment. It is not intended to summarize A.M. Best’s opinion on any particular insurance market or the prospects for that market. Categories of risk Country Risk Reports provide scores for three categories of risk for each country. These scores are (1) Very Low; (2) Low; (3) Moderate; (4) High and (5) Very High. Category of risk Definition Economic Risk The likelihood that fundamental weaknesses in a country’s economy will cause adverse developments for an insurer. A.M. Best’s assessment of economic risk evaluates the state of the domestic economy, government finances and international transactions, as well as prospects for growth and stability. Political Risk The likelihood that government or bureaucratic inefficiencies, societal tensions, inadequate legal system or international tensions will cause adverse developments for an insurer. Political risk comprises the stability of the government and society, the effectiveness of international diplomatic relationships, the reliability and integrity of the legal system and of the business infrastructure, the efficiency of the government bureaucracy, and the appropriateness and effectiveness of the government’s economic policies. Financial System Risk Financial system risk (which includes both insurance and non-insurance financial system risk) is the risk that financial volatility may erupt due to inadequate reporting standards, weak banking system or asset markets, and/or poor regulatory structure. In addition, it includes an evaluation of whether the insurance industry’s level of development and public awareness, transparent and effective regulation and reporting standards, and sophisticated regulatory body will contribute to a volatile financial system and compromise the ability of an insurer to pay claims. Political risk Summary To provide additional detail on the political risk in a given domicile the Country Risk Reports include the Political Risk Summary. The Political Risk Summary is a radar chart that displays scores for nine different aspects of political risk scored on a scale of one to five with one being the least amount of risk and five being the highest amount of risk. Category Definition International Transactions Policy Measures the effectiveness of the exchange rate regime and currency management. Monetary Policy Measures the ability of a country to effectively implement monetary policy. Fiscal Policy Measures the ability of a country to effectively implement fiscal policy. Business Environment Measures the overall quality of the business environment and ease of doing business. Labor Flexibility Measures the flexibility of the labor market, including the company’s ability to hire and fire employees. Government Stability Measures the degree of stability in a government. Social Stability Measures the degree of social stability, including human development and political rights. Regional Stability Measures the degree of stability in the region. Legal System Measures the transparency and level of corruption in the legal system. Country risk Tier Disclosure A Country Risk Tier (CRT) is not a credit rating, rather it represents a component of A.M. Best’s Credit Rating Methodology that is applied to all insurers. A CRT is not a recommendation to purchase, hold or terminate any security, insurance policy, contract or any other financial obligation issued by a government, an insurer or other rated issuer, nor does it address the suitability of any particular policy, contract or other financial obligation for a specific purpose or purchaser. Copyright © 2015 by A.M. Best Company, Inc. Version 091714 Copyright © 2015 by A.M. Best Company, Inc. All rights reserved. No part of this report may be reproduced, stored in a retrieval system or transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise. 4