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The dollar’s strength is placing pressure on economies around the world, including in developing Asia. What makes this bout of dollar strength unique is that the stress is not limited to Asia’s developing economies. Asian economies are diverse and the direct financial impact of dollar strength varies. Some regional economies have significant foreign currency debts and limited foreign currency reserves. Unsurprisingly, these economies are in financial trouble. Sri Lanka defaulted on its bonds earlier in the year and is now trying to restructure its external debt. Pakistan has had to seek an emergency financing package from the International Monetary Fund, backstopped with pledges of additional support from both China and the Gulf. Bangladesh has proactively sought out IMF financing in the face of a terms of trade shock. Laos is, in all probability, relying on the continued forbearance of China’s policy banks to manage its unsustainable debt loads. All these countries are struggling to pay for imports of oil and natural gas. A broader set of Asian economies have relatively strong foreign currency balance sheets and are not at risk of immediate financial distress. Many have been able to rely on their local currency bond markets to finance fiscal deficits, limiting their direct financial vulnerability to swings in the dollar. India is in a much stronger position than during the 2013–14 ‘taper’ tantrum. It started 2022 with US$650 billion in foreign reserves, more than double the US$250 billion it held in 2012. The Indian government’s external debt, primarily to the multilateral development banks, only totalled US$125 billion. Thailand’s government started 2022 with over US$250 billion in foreign exchange reserves — or over 50 per cent of its GDP — while owing a bit over US$30 billion to external creditors. Other countries have more subtle strengths. For example, a substantial share of Indonesia’s US$80 billion in international sovereign bonds are denominated in yen. At the same time, balance sheet resilience is not sufficient to insulate a country’s broader economy from the impacts of a strong dollar. Even countries that have little to fear financially worry about the impact of currency weakness on households’ costs of living. There has been little correlation to date between the extent of currency depreciation across the main Asian currencies and the underlying strength of countries’ foreign currency balance sheets. The currencies of advanced Asian economies have actually depreciated more than the currencies of developing Asian economies. Japan — with plenty of reserves, significant foreign assets in its government pension fund and insurance companies that are structurally ‘long’ dollars — has experienced the largest depreciation. Taiwan and South Korea have followed. Meanwhile India, Indonesia, Malaysia and Thailand have experienced smaller depreciations. The reason for this is simple. Up until Japan’s heavy intervention in late September 2022, lower income Asian economies had been more willing to defend their currencies through a combination of rate increases and foreign reserve sales. There are signs that this is changing. Japan intervened heavily in September and October. South Korea is now worried that the won  has become too weak and is seeking to join Japan in obtaining a standing Federal Reserve swap line to meet dollar liquidity needs in its financial sector — potentially freeing up more of its existing reserves for intervention. Even though the dollar is now off its October peak, developing Asian economies continue to face several risks. The first is that certain economies may overestimate their balance sheet strength and sell foreign exchange for longer than is prudent. The basic principle is that temporary shocks can be financed with borrowed or reserve sales while permanent shocks require adjustment. The longer global energy prices remain high and the dollar remains strong, the more difficult it will be for countries to avoid adjustment. The second risk is the possibility of an additional shock from Japan. Japan’s efforts to limit the yen’s depreciation through intervention may fail, as it is harder for Japan to defend its currency through intervention than it is for smaller economies, whose financial markets remain less integrated into global markets. There is the additional risk that yen weakness and imported inflation could lead the Bank of Japan to abandon its policy of ‘yield curve control’ and that the associated rise in long-term Japanese government bond rates could push up interest rates globally. Many emerging economies would likely need to raise their domestic interest rates to avoid importing additional inflation, and to limit popular pressure for fiscal subsidies to offset higher fuel prices. This would be the Asian version of what is now called a reverse currency war. The third risk is a currency shock from China. China has long relied primarily on the signal sent by the People’s Bank of China’s daily fix — the central reference point for daily trading — to manage the yuan with only limited direct intervention by its central bank. To date, the pressure on China appears manageable. News reports suggest that the PBoC has leaned on China’s large state banks to use their balance sheets to help maintain the trading band around the yuan, but there is little evidence of pressure on the central bank’s reserves. However, if its economy remains weak, China may choose to allow more depreciation — both against the dollar and against the currencies of its trading partners to restart its economy. This would be an admission that China’s ability to avoid a prolonged stall through internal demand is limited and that exports are again required for growth. A yuan that is as weak as the yen could easily trigger a race down across the currencies of developing Asia. Many, though not all, developing Asian economies are less vulnerable to a repeat of the 1997 crisis. But few countries will be able to escape the fallout from the dollar’s current strength. A broader overshoot of many currencies that amplifies concentrated pockets of debt difficulties and complicates the fight against inflation globally remains a real risk.

At the end of March, the negotiations that started in June 2021 on the accession of the United Kingdom to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) were successfully concluded, reflecting radical changes in British trade priorities after Brexit. More broadly, this move by London undoubtedly confirms the special importance that the Indo-Pacific region has acquired in the concept of "Global Britain" and in its subsequent relevant updates. The signing ceremony is scheduled for July 2023, for which the trade ministers of the participating countries and the United Kingdom will meet in Auckland (New Zealand). As a result of London's accession, this bloc will surpass the EU in terms of the combined population of its constituent countries. However, unlike the European Union, which the United Kingdom, on the contrary, left, the CPTPP does not have - to the satisfaction of British Eurosceptics - its own court like the EU Court of Justice, or a supranational budget. The union operates as a multinational trade agreement. An important obstacle that hindered reaching an agreement more quickly was London's refusal to weaken national food standards. But in the end, Ottawa (Canada) backed down on calls for London to lift the ban on importing beef with growth hormones. Beijing has also applied for membership in the CPTPP following London (the Chinese application is dated September 16, 2021, but negotiations have not yet begun). However, with London's accession as a full member of the agreement, China's chances of joining the bloc look somewhat weaker, as London is likely to obtain veto power on this issue. It is possible that they will use this veto under the pretext of ensuring higher trade standards within the agreement (including issues related to ecology and food safety). In any case, as It is known, the current British Prime Minister Rishi Sunak refers to China as a "systemic challenge", which London intends to respond to with "dynamic pragmatism." Currently, the CPTPP includes 11 states (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam), none of which are European. These countries collectively account for 13% of global GDP. The new partnership replaced the Trans-Pacific Partnership agreement of 2016 with 12 participants, after former US President Donald Trump withdrew the US from the agreement in 2017. In 2020, the 11 countries of the CPTPP accounted for 8.4% of goods and services exported from the United Kingdom. In turn, 6.8% of imports to the United Kingdom came from these countries. The terms of the Trans-Pacific Partnership eliminate unnecessary barriers to mutual trade of services by opening financial markets and reducing obstacles to cross-border investment, facilitating data exchange, increasing business mobility, and ensuring regulatory transparency. All of this will support the British government's plans to turn the country into a global technology and service hub, strengthen semiconductor and critical mineral supply chains to produce electric vehicles and wind turbines.London already has trade agreements with most members of this trading bloc, but now these relationships can deepen, and 99% of British goods exported to the bloc countries will be subject to zero import tariffs. Tariffs on imports of Peruvian bananas, Vietnamese rice, crab sticks from Singapore, and Malaysian palm oil into the UK will be reduced (this is a controversial issue that has sparked discussion in the UK, as the production of palm oil, as ecologists point out, leads to deforestation of tropical forests). At the same time, according to assessments by the British government itself, joining the CPTPP is expected to add no more than 0.08% per year to the country's economic growth in the long term (while the slowdown in growth due to Brexit is estimated at 4%). Many politicians and trade experts rightfully point out that participation in the Trans-Pacific Partnership is not capable of compensating for the economic losses that the UK is experiencing due to its departure from the EU. Moreover, due to differences in its rules and standards from European regulations, Britain's accession will prevent it from returning to the European Union in case of a change of priorities. In other words, this agreement is like driving an additional wedge into the relationship between London and Brussels, which are just starting to improve. It is worth remembering in this regard that it was Liz Truss, a former trade minister in Boris Johnson's cabinet and one of the main advocates of independence from the EU, who submitted the British application to join the CPTPP. So far, for London, it is not so much a direct economic, but rather a strategic and symbolic acquisition, firstly due to the rapid growth (according to some estimates, up to 65% by 2030) in the number of middle-class consumers in a dynamically developing region, committed to innovation, and secondly, because of the fact that in the foreseeable future, mid-ranking trading powers such as Thailand and South Korea, which have already submitted applications, are planning to join the Trans-Pacific Partnership. Membership in the TPP is becoming more important for Britain due to the unattainability of a large trade agreement with the United States and the crisis in the World Trade Organization, which is currently unable to firmly enforce the rules of global trade. The matter is not limited to trade alone as London's foreign policy is clearly shifting towards the Indo-Pacific region. In this sense, Australia and Japan, concerned about economic pressure from China and its military ambitions, see Great Britain as a natural ally in opposing Beijing. It is assumed that stronger economic ties will lead to the strengthening of geostrategic alliances. Due to the high dependence of countries such as Chile on Beijing, which is the largest trading partner and main investor for Chileans, Britain's participation in the CPTPP, according to London's opinion, will contribute to the establishment of necessary connections that are seen by Britain's partners in the region as an attractive alternative to ties with China.

Only days after Cambodia’s recently elected national assembly endorsed Hun Manet as the country’s new prime minister, the young leader revealed his vision for the next 25 years of economic growth and prosperity. Cambodia is aspiring to become a high-income country by 2050. To make this happen, Manet released his Pentagonal Strategy, centring on the five objectives of sustained economic growth, more and better employment, human capital development, diversification of the economy and increased competitiveness. For those who have been advocating sweeping reforms to Cambodia’s economy, the new strategic objectives comprise all the right catchwords. But it remains uncertain whether the ambitious new strategy will help Cambodia reach its targets. Despite GDP forecasts for 2023 not living up to expectations, the Cambodian government forecasts 6.6 per cent GDP growth in 2024. The Asian Development Bank and International Monetary Fund downgraded their 2023 economic growth projections to 5.3 per cent, down from 5.8 per cent in April 2023, while the World Bank projects 5.4 per cent growth, down from 5.5 per cent in May 2023. The minor adjustments were made in response to global geopolitical tensions and a worldwide economic slowdown, as well as the country’s structural issues, which include limited productivity and competitiveness, a lack of economic diversification and dependence on a small number of external markets. The government’s optimistic growth projection for 2024 is based on the anticipated revival of key sectors including garment manufacturing. Cambodia’s garment sector showed continuing decline throughout 2023 but is expected to surge by around 8 per cent in 2024. For Manet’s pentagonal ambitions to become a reality, Cambodia must diversify its product range, upgrade its production capacity and productivity and process resources at home instead of exporting them. The garment sector is not conducive to such transformations. The sector is already on life support — a tax break is in place for garment factories until the end of 2025 — but a continued reliance on garment manufacturing also exacerbates Cambodia’s economic vulnerability. Primarily a cut, make and trim industry employing low-skilled labour, garment manufacturing relies on the import of raw materials sourced from other Asian countries, predominantly China. It exports to the major economies where Cambodian products enjoy increasingly precarious preferential treatment under the European Union’s Everything But Arms scheme. To move Cambodia beyond being a cheap labour hub, the Pentagonal Strategy outlines a comprehensive makeover of three sectors identified as the engines of future economic growth — agriculture, micro, small and medium-sized enterprises (MSMEs) and tourism. With nearly 70 per cent of Cambodian households depending directly on agriculture, an overhaul of this sector is long overdue. The new strategic objectives bolster agribusiness to better serve Cambodia’s export markets. The turn to ‘smart farming’ advances local processing of Cambodian crops and high-value products instead of high-volume cash crops. Loans have also been made available for agribusiness and are being directed to ‘economic poles’ spread across the country. The transformation of over 500,000 MSMEs in Cambodia is a core agenda under the new strategic plan. MSMEs closely entwined with agribusiness and digitisation will have access to a new loan scheme established in partnership with the private sector and Wing Bank. Efforts will also be made to integrate the informal sector into the formal economy under the National Strategy for Informal Development 2023–2028, encouraging informal businesses to register and receive benefits such as penalty waivers, tax incentives and skills training. Tourism, heavily impacted by the COVID-19 pandemic, is forecasted to bolster GDP as international arrivals, particularly from China, begin to surge. Foreign tourists are returning to Cambodia, with 4.4 million arriving in the first 10 months of 2023. But the rising numbers have not generated the desired income, as most of the arrivals are low-spending visitors from neighbouring countries. Crowds from China are not as anticipated despite major efforts including the new Siem Reap airport operating direct flights to and from a variety of Chinese destinations, the reintroduction of Chinese package tours and the launch of the China Ready program. Efforts to diversify the tourism sector are ongoing, with India and Indonesia identified as likely markets for outbound tourism. The Ministry of Tourism is also implementing a new tourism strategy and action plan with a focus on cultural heritage, coastal and eco-tourism. As the new government pushes economic reforms with vigour, old habits die hard. International attention was recently drawn to a new investigation by Amnesty International into the 2022 evictions of 10,000 families making a living on the premises of the Angkor Archaeological Park. The Angkor Archaeological Park, Cambodia’s biggest tourist attraction and a UNESCO World Heritage site, is pivotal to the new tourism action plan. While the Cambodian government claims these families were squatters causing overdevelopment at the complex, the report revealed that the evicted families were relocated to a remote site lacking infrastructure, jeopardising their livelihoods. Similarly, the voluntary registration of informal businesses under the new development strategy was temporarily suspended due to pushback from small business owners concerned about the regulatory burden imposed by the measure. The economic reforms outlined in the Pentagonal Strategy are long overdue and will have beneficial impacts on Cambodia’s socioeconomic development. But as Cambodia’s new leadership pursues growth, it should consider that even well-intentioned interventions can have detrimental bearings on people’s livelihoods and may be reminiscent of past injustices suffered at the hands of authorities. This article is part of an EAF special feature series on 2023 in review and the year ahead.

한국어로 읽기 Читать на русском Leer en español Gap In Deutsch lesen اقرأ بالعربية Lire en français When U.S. President Biden and Chinese President Xi met in November 2023, Biden remarked that the countries must “ensure that competition does not veer into conflict.” A recent ODI report Hedging belts, de-risking roads: Sinosure’s role in China’s overseas finance illustrates the scale of the competition and reveals how one of China’s less-known institutions – Sinosure – has been giving China the edge. This blog offers some thoughts about how the U.S., through its U.S. International Development Finance Corporation (DFC) can better compete. Competing requires resources, but really not as much as you think Competing credibly requires money, dedicated staff, and creativity. It requires studying the competition. Infrastructure development requires low-cost financing, capacity-building, and getting everyone aligned. As Sinosure has demonstrated again and again, deploying guarantees and insurance – particularly from official financing – can de-risk overseas investment, reducing costs of finance and mobilising commercial investment from the private sector. When it comes to infrastructure, China has a far more robust, albeit imperfect, track record when compared to others. The U.S. and its G7 partners have not been much of a match for China in financing infrastructure worldwide. The G7 could successfully compete with China, and doing so does not have to cost hundreds of billions of dollars. The U.S. Congress, despite its strong desire to counter BRI, has yet to appropriate the resources necessary to compete credibly in a battle of influence against China in developing countries. There’s been plenty of rhetoric, repurposing of existing programs and resources into initiatives like the Partnership for Global Infrastructure and Investment (PGII) and the Global Gateway. Each time the U.S. launches a new overseas economic development initiative, however, it rarely dedicates sufficient resources to help it scale – examples include the Partnership for Growth, Power Africa, Prosper Africa, and PGII. When it was fully funded, Power Africa, which coordinated the efforts of 12 U.S. government agencies, helped 120 power projects in Africa get across the finish line in just a few years, building a strong brand for the U.S. in Africa for economic development for the first time in decades. Then the U.S. cut Power Africa’s budget by 75% because of political shifts. The initiative stalled in its progress on new infrastructure, while still helping 200 million Africans get access to more reliable electricity. PGII, which has no dedicated budget, involves a handful of smart people working hard to deliver on a G7 promise of $600 billion in global infrastructure by 2025. Other than the Lobito Corridor project, it has not been clear to date what PGII is able to deliver at scale in Africa without additional resources. That could be about to change, though. The State Department just requested another $4 billion from Congress to up its game against China, which should help tremendously if that funding is secured to support PGII. Why Sinosure has been such an effective tool for China, despite its low margins BRI has not been particularly innovative, but it’s been steady. Sinosure, along with other Chinese export credit agencies, offers highly favorable terms and longer-term finance – this approach has well suited Global South governments in advancing their development and political objectives. While some projects have been problematic, Chinese creditors have provided the low-cost, patient capital at scale that many countries need for long-term productive infrastructure investment. But as the report shows, this approach has challenged established regimes governing the use of public money (link to blog 2). Sinosure insurance covers non-payment up to 95% of the insured equity or debt for up to 20 years, but most OECD Export Credit Agencies (ECAs) only provide 85% coverage for up to 10 years – though this policy soon will soon change [link to blog 2] Sinosure can work anywhere, except where there’s a live conflict or in cases of repayment arrears. By contrast, the U.S. International Development Finance Corporation (DFC) has a list of over 100 countries where it cannot do business. Sinosure’s premiums max out at 7% of the total debt servicing cost of a project, making it relatively cost-effective. In this aspect, it is surprisingly transparent. DFC’s fees and costs are numerous and opaque, with DFC passing some of its own costs on to its clients. By the end of 2022, Sinosure had provided over $1.3 trillion-worth of insurance on export and investment, with a quarter of this going only to BRI countries. In 2022 alone, it supported a total portfolio of $900 billion through its insurance for over 170,000 clients, of which $80bn went to overseas investment and long-term finance, which mostly supports projects in infrastructure such as power, transportation, construction, telecoms and shipping. It received a total net insurance premium of $1.9 billion and paid out $1.5 billion in insurance claims. Despite its significant payouts, however, Sinosure continues to earn a modest profit of $102 million – not much of a margin, but enough to propel China’s global leadership on trade and infrastructure development.     By contrast, DFC’s current total portfolio-wide exposure is $41 billion, with just over $9.3 billion committed in fiscal year 2023 for 132 transactions – of which only around $3.5bn of this was for guarantees and risk insurance. DFC has many of the same tools available to it as the Chinese government, and DFC is not even legally required to earn a return on its investments. Yet DFC has not made full use of its capital resources and has not deployed its capacity for risk-mitigation finance in the same way. An unleashed DFC could make the U.S. more competitive It’s not too late for the U.S. and others to compete. The U.S. has an opportunity to further change how it conducts business to compete with China, while promoting sustainable development. DFC is starting to flex its competitive muscles with its own insurance product, recently using political risk insurance to support a $1.6 billion debt-for-nature swap in Ecuador and another $500 million debt-for-nature swap in Gabon, which support broader debt relief efforts, as well as channelling money towards climate and conservation goals. Moreover, those deals come at a very low cost to the U.S. government given DFC’s pricing models. DFC is up for reauthorisation in 2025. It has both foreign policy and development mandates. In a previous blog, we laid out 10 recommendations about how DFC could be more effective in achieving its development mandate. Here are 9 recommendations to help DFC be more effective in competing with China and achieving its foreign policy mandate: 1. Spend some money and spend it right All it took for Sinosure’s expansion in the early 2010s was a capital injection of $3 billion. To make its financial institutions just as competitive, the U.S. only needs to commit a few extra billion dollars of appropriated resources per year, just as State Department has proposed, not hundreds of billions. Sinosure, with its somewhat loose investment criteria, still managed to earn over $100 million profit on a $900 billion portfolio in 2022. Even if DFC were to spend $1 billion/year of additional budgetary resources – for the purpose of leveling the playing field with China and providing developing countries with the type of inexpensive financing they need – that could be money well spent for the U.S. taxpayer. That money could cover legal fees that DFC currently passes on to clients. It could be deployed through innovative instruments: to take on some of the currency risk on strategic transactions, to cover first loss on strategic investments, or to provide technical assistance that does not need to get repaid–comparative advantages that Chinese financial institutions still sorely lack. That funding also could be used, simply, to reduce interest rates and fees, at a time when borrowing costs for lower-income countries have risen astronomically. 2. Structure deals to outcompete China Encourage DFC to structure transactions to use its funding to maximize competition with China in a way that promotes a more level playing field. DFC should not crowd out competitively tendered and transparent private sector investment, but where inexpensive or even concessional DFC co-financing might help the private sector out-compete opaque Chinese investment, DFC should be equipped to support those projects. 3. Don’t obsess over returns Even though DFC is not legally required to earn a return on a portfolio-wide basis, most members of Congress expect DFC to be revenue neutral to the U.S. Treasury. If members of Congress would adjust their return expectations even slightly, DFC could significantly advance its development and foreign policy goals. Effective development and foreign policy are not free – especially when competing with China. Even earning back $.95 on the dollar on a portfolio-wide basis would be a significant leverage of 1:20 of appropriated resources to private investment – giving DFC broad flexibility to structure deals that prioritise development impact and foreign policy. 4. Remove DFC’s limits Eliminate ceilings on DFC financing – including the $1 billion transaction limit, the $10 billion annual portfolio limit, and the $60 billion total portfolio exposure. It really doesn’t cost anything to do this. It’s like raising its credit card limit. 5. Let DFC work anywhere when necessary Give DFC the authority to determine the countries where it can do business on a case-by-case basis, depending on what the foreign policy and development priorities are. DFC should be required to continue to prioritize investments in low and lower-middle income countries, but it should have flexibility to respond quickly and selectively anywhere that doing so will credibly advance a compelling U.S. national security interest, such as financing a strategic port or lithium processing. To prevent DFC from sliding into becoming just a national security tool, abandoning its development mandate, DFC should be required to clearly articulate the compelling national security interests of projects and should provide a detailed report to Congress each year on its investments in upper-middle income and high-income countries to explain these interests (even classified, if necessary). 6. Empower DFC to support “nearshoring” DFC can help the U.S. diversify its supply chains and reduce dependencies on China. To encourage companies to move operations out of China and into the Americas (if operating in the U.S. is not commercially viable), give DFC broader authority to support strategic transactions in the region. 7. Make it easier for DFC to support equity investments in strategic infrastructure When DFC takes an equity position in a company or an investment fund, it gets a seat at the ownership table. That allows DFC to drive decisions regarding sourcing of goods and services (i.e., making sure contracts do not always go to Chinese companies). Investing in equity funds that develop and finance a portfolio of infrastructure projects is an effective way for DFC to increase and spread its strategic influence -- except that DFC often struggles to make these types of investments because U.S. legal requirements make DFC a slow and clunky, and hence, an unattractive investment partner. DFC needs flexibility to bypass some of these requirements. 8. Help DFC scale its risk insurance instrument For years, DFC has been hugely innovative in deploying its insurance products to leverage capital from others. DFC used its political risk insurance tool to crowd in private investment in Ukraine, and to catalyze pioneering debt-for-nature swaps worth hundreds of millions of dollars in Ecuador and Belize. But according to recent reports, the U.S. Office of Management and Budget has been threatening to start treating insurance investments like guarantee instruments from a budgeting standpoint. This will make it more expensive for DFC to deploy this tool. If it ain’t broke, why fix it? As we’ve shown, one of the main factors behind China’s competitiveness abroad is through Sinosure’s expansive use of its insurance tool: OMB’s changes will make it more expensive and difficult for the U.S. to scale its own. OMB needs to read the room. We’re not going to suddenly balance the U.S. budget by tinkering with a formula that has worked for decades. Let DFC do more of what it does well. 9. Help speed DFC up Before committing any transaction over $10 million, DFC is required to notify Congress in advance. This “Congressional notification” requirement provides a valuable extra level of oversight to ensure that DFC does not doing anything out-of-whack with Congressional priorities. But the process slows DFC down, when Chinese financiers are known for their speed. Even though DFC only is required to “notify” Congress of its deals, and not seek “approval,” practically and politically speaking nobody wants to run afoul of any one of the 535 members of Congress. Consequently, DFC rarely moves forward on a project until it can resolve the concerns of members of Congress. DFC needs to work with Congress to come up with a reasonable alternative to the Congressional notification process that balances speed with continued close collaboration with Congress. In addition, DFC’s Board can help speed things up by focusing its efforts on high level policy guidance instead of individual transactions. The Board should delegate more decision making on individual deals to DFC’s CEO. It makes no sense for the Secretary of State, who chairs DFC’s Board, to dig into a $20 million investment into a healthcare fund, not to mention the hundreds of State Department staff with little development finance experience who review the documentation before it goes to the Secretary with a recommendation for a vote. U.S. taxpayers probably would prefer to have the State Department focus on resolving the Middle East conflict. From the perspective of many Global South countries, this competition between the G7 countries and China is not inherently bad if it brings them more desperately needed resources and improves the quality of their infrastructure. The U.S. could be more competitive if it empowered its development finance professionals to use DFC’s tools the way they were designed to be used. DFC must be properly resourced with enough people and enough money to allow it to grow its portfolio. While development impact remains the key priority for DFC, delivering for the needs of partner countries is what also will deliver long-term influence. That is how the U.S. can compete – and all at relatively low cost to the U.S. taxpayer.

한국어로 읽기Leer en españolIn Deutsch lesen Gap اقرأ بالعربيةLire en françaisЧитать на русском In recent years, Malaysia has emerged as a strategic economic hub in Southeast Asia. In recent years, Malaysia has become a key node in the global production chains of electronic components, especially in the semiconductor sector. The nation can also rely on abundant natural resources, such as oil and natural gas, of which it is an important exporter. Along with other Southeast Asian countries like Vietnam and Indonesia, Malaysia presents itself as an attractive destination for foreign investors looking to relocate their manufacturing plants. The trend towards de-risking, in the context of the geoeconomic competition between China and the United States, sees multinationals and governments committed to diversifying their supply chains and strengthening domestic production to minimize dependence on Beijing. Malaysia is a dynamic and complex country. Its society is composed of numerous ethnic groups whose diversity sometimes makes it more difficult for the government to satisfy their different interests. This social complexity is also reflected in the intricate state system, which combines a monarchical aspect with a federal system, where citizens elect their representatives at both the state and federal levels. Despite the multiparty system, for over six decades, Malaysia was governed by a single party, the United Malays National Organization (Umno), which dominated the political landscape [1]. However, this continuity was interrupted in 2018, with four different governments taking turns in power due to corruption scandals and internal political struggles: an unprecedented upheaval in Malaysian history, which from independence in 1957 until then had only seen six prime ministers. The establishment of a new administration in November 2022, under the leadership of Anwar Ibrahim, has not brought the hoped-for stability, and tensions remain in the country, risking the exacerbation of internal divisions and undermining the confidence not only of citizens but also of foreign investors. The Malaysian political system between complexity and unusual instability Malaysia is a federal constitutional monarchy, where power is distributed among the monarchy, the federal government led by the prime minister, and the central bicameral parliament, as well as the state governing bodies. The political landscape of the country is characterized by strong multiparty politics, meaning that coalitions rather than a single majority party tend to govern, leading in recent times to the formation of fragile alliances and frequent shifts in alignments among parliamentary groups. Malaysia is composed of thirteen states, nine of which are kingdoms led by a sovereign (or sultan), and three federal territories. Each state has its own constitution, an executive council, and a legislative assembly elected by the citizens. The nine sultans, gathered in the Conference of Rulers, every five years appoint the head of state of Malaysia, or Yang di-Pertuan Agong [2]. The core of the country's democratic life is the central Parliament, composed of 70 members of the Senate (26 members elected by the state assemblies and 44 appointed by the head of state, also on the advice of the prime minister) and 222 members of the House of Representatives (elected every five years during the general elections) [3]. Another element of complexity in the country's structure is the dual legal system: a state system, which has jurisdiction over the entire population, and a Sharia-based system for the Muslim community. In fact, Islam is the state religion, and the majority ethnic group of Malays (also known by the English term ‘Malays’) is constitutionally Muslim; therefore, about two-thirds of the population are subject to Sharia. The Islamic authority has jurisdiction over the Muslim population on religious issues, matters of morality, and family affairs [4]. Despite the complexity of its political system, Malaysia, as mentioned, had a stable government from 1957 to 2018 under the Barisan Nasional (BN) coalition, composed of parties representing ethnic groups and conservatives such as Umno, the Malaysian Chinese Association (MCA), and the Malaysian Indian Congress (MIC). However, in 2018, the BN was defeated by the multi-ethnic opposition coalition Pakatan Harapan (PH), which brings together more progressive and liberal parties [5]. The downfall of the BN government was partly due to an internationally resonant corruption and financial fraud scandal related to the sovereign wealth fund 1 Malaysia Development Berhad (1MDB), involving key figures of the ruling coalition, including then Prime Minister Najib Razak [6]. After Pakatan Harapan's victory in 2018, Mahathir Mohamad, who had previously served as Prime Minister with Umno from 1981 to 2003, returned to office. However, internal conflicts and changes in parliamentary alliances within PH led Mahathir to resign [7]. He was succeeded by Muhyiddin Yassin, one of the parliamentarians who had defected from the PH, leading the newly formed coalition Perikatan Nasional (PN). However, Muhyiddin also lost the majority after 17 months, handing over the reins to seasoned politician Ismail Sabri Yaakob of Umno in August 2021 [8]. Ismail Sabri, leading a government with a fragile majority, was compelled to call for early elections driven internally by his party's push and with the aim of securing a stronger mandate [9]. The succession of these governments through internal political maneuvers in parliament has further eroded public trust in the political class, already damaged by corruption scandals. Moreover, the timing of the political system crisis did not favor government officials, who also had to simultaneously manage the pandemic period and the disastrous economic and social consequences that ensued. In this climate of dissatisfaction and growing political polarization, the 2022 elections resulted in Malaysia's first ‘hung parliament’, where no party managed to secure enough seats to govern outright. The Pakatan Harapan, Anwar's coalition, secured 82 seats out of 222, surpassing the PN – which includes the nationalist Malaysian United Indigenous Party (PPBM) and the conservative Pan-Malaysian Islamic Party (PAS) – which garnered 74 seats [10]. Meanwhile, the BN managed only 30 seats, demonstrating Umno's struggle to rebuild its image after corruption scandals [11]. The Islamic-inspired PAS, however, won the most seats as a single party, with 41. After lengthy negotiations, the head of state tasked PH with forming a unity government, with cooperation from Umno. Anwar, a key opposition figure for decades, succeeded in obtaining the position of prime minister [12]. Since November 2022, Anwar has been leading the country, but political uncertainties have not ceased with the establishment of his government. Anwar is not seen as a leader capable of forcefully imposing his political line, due to the breadth of his coalition which relies on coexistence and compromise among different political factions within the majority, threatening the government's stability. The need to find broad consensus within his coalition has so far prevented Anwar from implementing significant reforms in the country, especially those that could affect the protections guaranteed to the Malay majority. Umno, with which he governs, despite losing some support from the Malaysian electorate in the recent elections, has historically represented the interests of this segment of the population and does not seem inclined to support Anwar's more liberal and inclusive policies [13]. Furthermore, Muhyiddin's PN coalition, and particularly the PAS party, are proving to be formidable opponents for Anwar's unity government, confirming the positive trend of the 2022 elections. This was evident in the recent state elections where PAS reaffirmed its government in three Malaysian states [14]. A more polarized society: socioeconomic tensions intensify. Disillusionment towards traditional political parties has accentuated political, ethnic, and religious fractures in Malaysia, which have long undermined social cohesion and contributed to the persistence of economic inequalities in the country. One of the major challenges for the government is to mitigate economic disparities among ethnicities and promote social harmony in a country where bumiputera or bumiputra (indigenous populations, including the Malay majority, comprising over two-thirds of the total population), Chinese ethnicity (approximately 20%), and Indian ethnicity (around 6%) coexist [15]. Economic differences between indigenous populations and foreign-origin citizens became more pronounced after independence: during this period, the most prosperous economic activities were predominantly controlled by the Chinese community, which was also gaining increasing political prominence. This led to heightened tensions with Malays, culminating in ethnic riots on the streets of Kuala Lumpur in 1969 [16]. To address these disparities, the government has instituted a regime of preferential policies to promote the prosperity and economic empowerment of bumiputera, which have expanded and evolved over the years. For instance, the New Economic Policy (NEP) of 1971 introduced quotas for ethnic representation in public institutions and universities, along with increased support for bumiputera businesses [17]. While these policies have improved the social conditions and historical economic disparities of bumiputera, the regime of ethnic-based affirmative action has also led to economic inefficiencies and social tensions, fostering patronage and clientelism practices by parties seeking political support from the broader Malay population [18]. Another factor of increasing division in the country is the tension between the Muslim majority and religious minorities (Buddhist, Christian, Hindu) [19]. For instance, the strict implementation of Sharia law has often clashed with civil laws, creating tensions among different religious communities. In recent years, there has also been a rise in religious conservatism at the social level, manifested in the strong electoral performance of PAS, a party that advocates for Malay interests and promotes further Islamization of society, absorbing much of Umno's electorate [20]. To counter this phenomenon of Islamic conservatism, known as the "green wave" [21], Anwar's PH politicians leverage the fear that a more Islamized society may erode civil liberties, resonating particularly among more liberal or non-Malay segments of the population. Conversely, the PN seeks support by accusing Anwar and PH of aiming to limit rights and the preferential system that protects Malays [22]. As a consequence of these socio-economic tensions, Malaysian politics has become increasingly fragmented and polarized, with voting reflecting a radicalization of ethnic and religious identities. Balancing the promotion of socio-economic equity among the country's diverse ethnic groups on one hand and building a more competitive and inclusive social fabric on the other, remains a crucial challenge for Malaysia. The country continues to seek policies that effectively address the needs of all citizens regardless of ethnicity or religion. Challenges to Malaysia’s economic development While Malaysia's political and social situation remains uncertain, the country's economic prospects appear more promising, albeit with some challenges. Thanks to targeted industrial development policies and facilitation of foreign investment, the country has transitioned in a few decades from an agriculture-based economy to an industrialized economy. Particularly, the services sector drives the country's economic growth, accounting for approximately 50% of Malaysia's GDP in 2022, followed by the manufacturing sector at about 23% [23]. The mining sector is also pivotal to the country's economy, alongside the extraction of oil and natural gas. Malaysia is rich in commodities such as tin, bauxite, and copper, which help diversify the Malaysian economy. However, oil and natural gas remain among the most valuable natural resources for Kuala Lumpur, enabling Malaysia to be nearly self-sufficient in energy production. Petronas (Petroliam Nasional Berhad), Malaysia's national oil company, is one of the largest players globally in the energy and oil sectors. As a state-owned entity, Petronas significantly contributes to Malaysia's fiscal revenues, in addition to providing employment and training to the population [24]. In this regard, given the centrality of gas and oil in the country's energy mix, one of the challenges Malaysia will face in the coming decades is transitioning towards renewable energy sources [25]. To advance the country's development, the government is outlining measures to transform Malaysia into a leading production hub, while also fostering growth in the domestic industrial ecosystem. This direction is reflected in the New Industrial Master Plan (NIMP) 2030 introduced in September 2023, which aims to boost the nation's manufacturing sector, targeting an annual GDP growth of 6.5% in this sector. Specifically, Kuala Lumpur is focusing on technology with a specific emphasis on the semiconductor sector. As early as the 1970s, Malaysia was an important hub for semiconductor production, but in the subsequent decades, other players such as Samsung from Korea and TSMC from Taiwan took over the sector. However, the recent geopolitical competition between China and the United States has once again made Malaysia an attractive destination for microchip multinationals, with significant investments revitalizing the sector in the country. Currently, Malaysia holds a significant position in the final stages of microchip production — namely ‘packaging’, assembly, and ‘testing’ — with a 13% share of the global market. Recently, several leading companies in the industry have announced new investments in the country [26]. For instance, Intel has announced $7 billion investments in facilities for microchip packaging and testing, while the U.S. giant Nvidia is planning to invest over $4 billion in collaboration with Malaysian company YTL Power International to create infrastructure for artificial intelligence and ‘supercomputing’ [27]. Additionally, the government has announced the ambitious construction of one of the largest ‘integrated circuit design parks’ in Southeast Asia, aiming to transform the country from a critical hub in the final stages of the value chain to a powerhouse in semiconductor design as well [28]. However, competition with other Asian countries such as Vietnam and Indonesia, requires Malaysia to continue investing to attract capital and strengthen the national industrial ecosystem. To this end, on May 28, 2024, Anwar announced the National Semiconductor Strategy, which plans to mobilize approximately $5.3 billion in fiscal support over the next ten years to drive sector growth. Kuala Lumpur aims to mobilize domestic and foreign investments totaling over $100 billion under the new strategy. The government also aims to train more than 60,000 highly skilled engineers to help the country become a leader in the semiconductor supply chain [29]. However, there are additional critical factors for the development of Malaysia's economy, such as its dependence on exports and the presence of multinational corporations and foreign capital, which make the economy vulnerable to external factors. Global demand and fluctuations in international markets can significantly influence Malaysia's economy, as evidenced by the slowdown in GDP growth from 8.7% in 2022 to 3.7% in 2023, primarily due to weaker external demand and a decline in commodity prices. Exports, crucial for the country's economy, declined by 7.8% in 2023, with contractions also seen in Malaysia's key export sectors such as palm oil, petroleum, and electrical and electronic products. The reduced demand for Malaysian products is also attributed to economic uncertainties in major trading partners such as the United States and China – the former dealing with uncertain monetary policy and the latter seeking new stimuli for economic growth while addressing the real estate sector crisis [30]. Malaysia must also be cautious not to overly rely on the presence of foreign companies to drive its economic development. So far, Malaysia, along with other Southeast Asian neighbors like Vietnam and Indonesia, has been among the beneficiaries in the geo-economic competition between China and the United States. Many multinational corporations, especially in the tech sector, have set up manufacturing facilities or initiated partnerships in Malaysia. However, the resurgence of current conflicts and geopolitical tensions could lead to fragmentations along value chains and further relocations. In an increasingly polarized international system, excessively relying on economic development from the presence of foreign firms could become a risky choice. Despite these challenges, the Malaysian economy has benefited from foreign investments and domestic consumption, supported by government subsidies and price controls to contain inflation [31]. Economic growth for 2024 is projected at 4.5%, driven by increasing domestic demand and higher export demand [32].   Conclusion In recent years, Malaysia has emerged as a strategic economic center in Southeast Asia: the country has attracted investors due to its expanding manufacturing sector and has shown remarkable adaptability, becoming a key player in global production chains-especially in the semiconductor sector. To minimize uncertainties related to current global geoeconomic tensions, the country should continue to focus on a more robust and self-sustaining domestic industrial ecosystem. In addition, recent political instability, characterized by frequent changes of government and growing ethnic and religious tensions, is likely to undermine the confidence of investors and the population.  In sum, Malaysia's success will also depend on its ability to balance economic growth with social cohesion, while addressing challenges arising from economic disparities, ethnic tensions, and economic dependence on foreign markets. The performance of inbound foreign direct investment (Ide) in Malaysia.   [1] M.M.N. Nadzri, “The 14th General Election, the Fall of Barisan Nasional, and Political Development in Malaysia, 1957-2018”, Journal of Current Southeast Asian Affairs, vol. 37, n. 3, dicembre 2018, pp. 139-71. [2] ”List of The Yang Di-Pertuan Agong”, The Government of Malaysia’s Official Portal. [3] “Introduction”, Portal Rasmi Parlimen Malaysia – Pengenalan, 10 dicembre 2019. [4] Malaysia 1957 (Rev. 2007) Constitution, Constitute. [5] R.C. Paddock, “Malaysia Opposition, Led by 92-Year-Old, Wins Upset Victory”, The New York Times, 9 maggio 2018; “MalaysiaGE: full results”, The Straits Times, maggio 2018. [6] “Explainer: Malaysia’s ex-PRIMO MINISTRO Najib and the Multi-billion Dollar 1MDB Scandal”, Reuters, 23 agosto 2023; “Goldman Sachs and the 1MDB Scandal”, The Harvard Law School Forum on Corporate Governance, 14 maggio 2019; S. Adam, L. Arnold e Y. Ho, “The Story of Malaysia’s 1MDB, the Scandal That Shook the World of Finance”, Bloomberg, 24 maggio 2018. [7] S. Lemière, “The Never-ending Political Game of Malaysia’s Mahathir Mohamad”, Brookings, 30 ottobre 2020 [8] “The Rise and Fall of Malaysia’s Muhyiddin Yassin”, Reuters, 16 agosto 2021; Y.N. Lee, “Malaysia’s New Prime Minister Has Been Sworn in – but Some Say the Political Crisis Is ‘far From Over’”, CNBC, 3 marzo 2020. [9] A. Ananthalakshmi, R. Latiff e M.M. Chu, “Malaysian PM calls for early polls as ruling party seeks to rise above graft cases”, Reuters, 10 ottobre 2022. [10] A. Ananthalakshmi, R. Latiff e M.M. Chu, “Malaysia Faces Hung Parliament in Tight Election Race”, Reuters, 19 novembre 2022. [11] K. Ganapathy, “‘End of an Era’ for Malaysia’s Barisan Nasional, After Corruption Issues Hurt Candidates at GE15: Analysts”, Channel News Asia, 21 novembre 2022. [12] “Anwar Ibrahim: The Man Who Fulfilled His Goal to Lead Malaysia”, BBC News, 24 novembre 2022. [13] F. Hutchinson, “Malaysian Unity Government’s Power Was Retained but Constrained in 2023”, East Asia Forum, 28 gennaio 2024. [14] R.S. Bedi, “Analysis: Strong State Poll Performance by Perikatan Nasional Boosts Stock for Some PAS Leaders, but Obstacles Lie Ahead”, Channel News Asia, 16 agosto 2023. [15] Bumiputera Statistics 2022, Department of Statistics Malaysia Official Portal. [16] “Malaysia: Majority Supremacy and Ethnic Tensions”, Institute of Peace and Conflict Studies, 1 agosto 2012; N. Bowie, “Fifty Years on, Fateful Race Riots Still Haunt Malaysia”, Asia Times, 29 maggio 2019; “Ethic Tensions Boil Over in Malaysia’s 13 May 1969 Incident”, Association for Diplomatic Studies and Training. [17] K.S. Jomo, Malaysia’s New Economic Policy and ‘National Unity’, Londra, Palgrave Macmillan, 2005, pp. 182-214; H. Lee. “Malaysia’s New Economic Policy: Fifty Years of Polarization and Impasse”, Southeast Asian Studies, vol. 11, n. 2, Agosto 2022; M.A. Khalid e L. Yang, “Income Inequality Among Different Ethnic Groups: The Case of Malaysia”, LSE Business Review, 11 settembre 2019; “2021/36 ‘Malaysia’s New Economic Policy and the 30% Bumiputera Equity Target: Time for a Revisit and a Reset’ by Lee Hwok Aun”,ISEAS-Yusof Ishak Institute, 25 marzo 2021. [18] H.A. Lee. “Perpetual Policy and Its Limited Future as Reforms Stall”, New Mandala, 17 aprile 2018. [19] M. Mohamad e I. Suffian “Malaysia’s 15th General Election: Ethnicity Remains the Key Factor in Voter Preferences”, FULCRUM, 4 aprile 2023. [20] “Buddhism, Islam and Religious Pluralism in South and Southeast Asia”, Pew Research Center, 12 settembre 2023. [21] K. Ostwald e S. Oliver, “Continuity and Change: The Limits of Malaysia’s Green Wave From a Four Arenas Perspective”, ISEAS-Yusof Ishak Institute, 27 ottobre 2023; O.K. Ming. “Debunking the Myths of Malaysia’s ‘Green Wave’ in GE15”, Channel News Asia, 28 giugno 2023. [22] D.A. Paulo, “Malaysia’s ‘Green Wave’: A Threat to the Country’s Politics and Religious Restraint?”, Channel News Asia, 10 giugno 2023. [23] “Manufacturing, value added (% of GDP) – Malaysia”, The World Bank Open Data, “Services, value added (% of GDP) – Malaysia”, The World Bank Open Data. [24] “Petronas’ Role in the Larger Economy”, The Malaysian Reserve, 30 agosto 2019; “Petronas Payout to Malaysia Govt Seen Higher at 55-59 Bln Rgt This Year”, Reuters, 22 luglio 2022. [25] G. Musaeva, “Greening Pains: Can Petronas Make the Leap to Renewables?”, The Diplomat, 15 settembre 2022. [26] T. Cheng e L. Li, “Malaysia Aims for Chip Comeback as Intel, Infineon and More Pile In”, Nikkei Asia, 28 settembre 2023. [27] R. Latiff e F. Potkin, “Nvidia to Partner Malaysia’s YTL Power in $4.3 bln AI Development Project”, Reuters, 8 dicembre 2023. [28] “Malaysia Plans Southeast Asia’s Largest Integrated Circuit Design Park”, Reuters, 22 aprile 2024. [29] N. Goh, “Malaysia to train 60,000 engineers in bid to become chip hub”, Nikkei Asia, 28 maggio 2024; D. Azhar, “Malaysia targets over $100 bln in semiconductor industry investment”, Reuters, 28 maggio 2024. [30] Asian Development Outlook April 2024: Malaysia”, Asian Development Bank, aprile 2024, pp. 218-24. [31] Ibid. [32] Ibid.