Malaysia – A Macroeconomic Analysis
[Name] | Macroeconomics | Dr. Jaydeep Mukherjee
Contents
PAGE 1
Introduction
Malaysia boasts one of south-east Asia's most vibrant economies, the fruit of decades of industrial growth and political stability. Its multi-ethnic, multi-religious society encompasses a majority Muslim population in most of its states and an economically-powerful Chinese community. Consisting of two regions separated by some 640 miles of the South China Sea, Malaysia is a federation of 13 states and three federal territories. Malaysia is an upper-middle income economy with a gross national income of USD 8,770 per capita (2011). It is a highly open economy (exports comprise over 100 percent of GDP) and a leading exporter of electrical appliances, electronic parts and components, palm oil, and natural gas. Malaysia is also externally competitive, ranking 12th (out of 135 economies) in the World Bank 2013? - Doing Business survey. Malaysia has progressed from being a producer of raw materials, such as tin and rubber, in the 1970s to being a diversified economy that grew on average 7.3 percent between 1985 and 1995. After the Asian financial crisis of 1997-1998, Malaysia has continued to post solid growth rates, averaging 5.5 percent per year from 2000 – 2008. Growth was accompanied by a dramatic reduction in poverty, from 12.3 percent in 1984 to 2.3 percent in 2009. However, pockets of poverty exist and income inequality remains high relative to the developed countries Malaysia aspires to emulate. In 2010, Malaysia launched the New Economic Model (NEM), which aims for the country to reach high income status by 2020 while ensuring that growth is also sustainable and inclusive. The NEM envisions economic growth that is primarily driven by the private sector and which moves the Malaysian economy into higher value-added activities in both industry and services. To achieve these goals, Malaysia will need better skills, more competition, a leaner public sector, a better knowledge base, smarter cities, and greater efforts to ensure environmental sustainability.
PESTLE Analysis of Malaysia
Political
Malaysia is a multi-party democracy country. The ruling Barisan Nasional party has been in power over 25 years. (This fact provided the country with a high degree of stability, which is important factor for businesses investing in the country). Corruption does exist in the country. (This fact may become a barrier to foreign businesses as it adds to firms costs and can cause problems). Transparency International ranks Malaysia 47th of 180 countries in its Corruption Perceptions Index.
Economic Malaysia’s main attraction as a location for business is its vibrant economy.
Over the last 10 years, economic growth has averaged 7% per year. This rate of growth has lead to a large increase in consumer incomes and therefore demand, which has attracted retailers such as IKEA, Tesco and Carrefour. Malaysian location makes it ideally placed to engage in international trade. Exports account for 37% of Malaysia’s GDP and the country achieves a healthy current account surplus. PAGE 2
Social
The Malaysian population consists of three main groups: Malay (60%), Chinese (30%) and Indian (10%). This mix of populations gives Malaysia a rich and vibrant culture, and the country is seen as an example of racial harmony as the different populations have existed peacefully together for years. The country is predominately Isl amic in its religion but it’s only the Malay muslims who are bound by Islamic laws; the rest of the population are free to practise their own religions. The mixture of religions in the country gives rise to a large number of religious celebrations - Malaysia has more public holidays than any other country. The cultural differences mean that businesses entering the country will have to adapt their products and business practices to suit the needs of the population.
Technological
The Malaysia is still need to develop its technology to enable it to compete in international markets. In 1996, the govt. initiated the ‘Multimedia Super Corridor’ (MSC), which is a strip of land stretching from the central business district of Kuala Lumpur to the out-of-town Kuala Lumpur International Airport. This corridor hosts more than 360 multinationals, including foreign-owned and home-growth Malaysian companies, all focused on multimedia and communications products. It continue to expand and attract world-leading ICT companies. The high levels of investment in training and education, including the creation of a number of ‘Smart Schools’, and an excellent infrastructure, including a bra nd new town called Cyberjaya. Cyberjaya is a ‘self -contained intelligent city with world-class IT infrastructure’
Legal
The Malaysian legal system is based on British common law, although Islamic law is applied to the Muslim population. The British law element can be seen as an advantage to firms investing in the country as the law will be familiar to them. However, although the legal basis of the system is British, many of the punishments for those who break the law are far harsher - the death penalty and flogging are still widely used. Therefore, investing in a foreign country need to be familiar with the laws there and confident that they will be applied fairly.
Environmental
The rapid development of Malaysia has come with high environmental costs (negative externalities). According to a data from the UN, Malaysia’s deforestation rate is increasing at a faster rate than other tropical country. Since 2000, the country has lost an average of 140,200 hectares – 0.65% of its forest area – per year. Much of the country’s land that was once rainforest is now given over to the production of palm oil, which is used for the processing food we eat and as a source of biofuel. Malaysian environmental impact has been criticised by environmental groups as it has a devastating effect on the habitats of some rare wildlife. Malaysians, and particularly the govt. have little time for these criticisms and see them as evidence of Western hypocrisy over environmental issues. However, Western companies need to be careful that they aren’t seen to be participating in this environmental damage as they may face demonstrations and protests from pressure groups such as Greenpeace and the World Wildlife Fund.
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Macroeconomic indicators for Malaysia – from Past to Future
1. Gross Domestic Product
Malaysia’s economy outperformed expectations to pull off a remarkable GDP growth growth of 7.2% for 2010 to MYR 7.43 558.38 billion, compared with a 6.3 ) contraction of 1.7% in 2009. 5.64 % 5.59 5.17 5.13 5.09 n 4.83 i ( Malaysia’s record high GDP came from 4.3 h t a sharp rebound in its manufacturing w o r g sector, which displayed a growth rate P D of 11.4%. G The 2014 Budget has introduced -1.51 several bold measures to strengthen 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 the management of public finances, Year focusing largely on reducing the overall deficit of the Federal Government account (as a percentage to GDP) to 3.5% in 2014 and 3.0% in 2015. The Malaysian Economy is expected to grow at the stronger pace of between 5% and 5.5% in 2014 on strong Domestic demand and recovery in Exports, according to the economic report released by Ministry of Finance. This compares with the estimated GDP expansion of 4.5% to 5% in 2013. Growth in Construction and services sectors will continue to lead Economic drive in 2014. According MOF, Malaysia Strong fundamentals of Economy will Support the nation’s GDP growth in 2014 Year 2008 2009 2010 2011 2012 2013(F) 2014(F) 2015(F)
GDP growth rate (in %)
4.83
-1.51
7.43
5.13
5.64
4.30
5.09
5.17
2. Inflation Consumer Price Index s 4.47 e c i r p f o d n e t a I P C
2008
3.20
3.00
2.70
2.50
2012
2013
2.12 1.02 2009
2010
2011
Year
2014
On the basis of studies conducted on Malaysia’s Inflation rate and Economic Growth. Conclusion can be drawn that over the past decades, there has been a general non-linear 3.00 relationship between inflation rate and economic growth in Malaysia. However, in the long run inflation has a positive effect on Malaysia’s economic growth if kept under 4% as 2015 suggested by Munir et. Al. Asian Development Bank (ADB) has 2014 ― but at the cost of rising inflation. ADB 2.2 per cent following a revised outlook of gross
predicted that the country’s economy will pick up in predicted that Malaysia’s inflation rate will increase to domestic product (GDP) growth at 5.0 per cent in 2014. Year 2008 2009 2010 2011
2012
2013(F) 2014(F)
2015(F) PAGE 4
CPI growth (in %)
4.47
1.02
2.12
3.20
2.70
2.50
3.25
3.50
3. Balance Of Payments Current Account balance n i ( s 38.91 u l p r u s ) t n o n i l u l o i c c b $ a t n e r 2008 r u C
31.80
33.51 27.00 18.64
2009
2010
2011
2012
6.75
7.08
2013
2014
10.05 2015
Year
The reason for the narrowing of our current account surplus during the second quarter was due to several factors, including lower commodity prices and import of lumpy items such as the purchase of aircraft. Malaysia avoided joining the ‘twin deficit club’ in the second quarter,” in a reference to India and Indonesia, the two countries in Asia with the biggest current account deficits.
The country’s trade surplus remains steady. Malaysia is one of the only countries in Southeast Asia that has a decent current account balance at present. Though many had expected the country to fall into a deficit trap due to poor exports earlier this year, Malaysia narrowly escaped that and is now comfortably in the surplus zone. Malaysia should be able to avert current account deficits over the next two years. Malaysia’s current account should remain in surplus, although narrowing due to stronger import growth to support domestic demand, especially the upturn in the investment cycle amid a moderate recovery in exports.
Year
2008
2009
2010
2011
2012
2013(F)
2014(F)
2015(F)
Current Account Balance(in $billion)
38.91
31.80
27.00
33.51
18.64
6.75
7.08
10.05
4. Unemployment
Unemployment Rate in Malaysia averaged 3.31 Percent from 1998 until 2013, reaching an all-time high of 4.50 Percent in March of 1999 and a record low of 2.70 Percent in August of 2012. In Malaysia, the unemployment rate measures the number of people actively looking for a job as a percentage of the labor force.
Unemployment ) % 3.3 n i ( t n e m y o l p m e n U
3.7 3.3
3.1
3.1
3.1
2.7
The unemployment rate in Malaysia is expected to remain fairly consistent 2008 2009 2010 2011 2012 2013 2014 throughout the next few years. From Year 2011 to 2013, the unemployment rate is expected to see a marginal improvement from year to year. Eventually, unemployment rates will remain at about 3.2 percent from 2013 to 2016. Year
2008
2009
2010
2011
2012
2013(F) 2014(F)
2015(F)
Unemployment (in %)
3.3
3.7
3.3
3.1
2.7
3.1
3.3
3.2
PAGE 5
5. Trade Deficit Trade Deficit ) n o 229.83 i l l i b $ 178.25 n i ( e u l a V
217.46
265.79 229.62
273.50 239.70
277.88 244.96
47.52
36.17
33.80
32.92
2011
2012
2013
2014
264.98 230.98 184.89 143.86
188.98
51.58
41.03
42.00
2008
2009
2010
Year Trade Surplus
Exports(billion)
Imports(billion)
Year
2008
2009
2010
2011
Exports (in billion $)
229.83
184.89 230.98 264.98
Imports (in billion $)
178.25
143.86 188.98
Malaysia, the third-largest economy in Southeast Asia, has been vulnerable to uncertainties in the global financial market and the euro zone debt crisis which has dragged exports and hampered growth. The overall trend of narrowing trade balance should remain a theme for the rest of the year, as domestic demand is still quite robust, and we see exports tail off with lower commodity prices and uncertainties in external demand.
2012
2013(F)
265.79 273.50
217.46 229.62
239.70
2014(F)
2015(F)
277.88
229.83
244.96
178.25
6. Budgetary Deficit Budgetary Deficit ) $ n o i l l i b 214.00 n 189.65 i ( e u l a V 24.36
2008
310.37
331.97
244.05
259.88
220.34 184.06
218.55 189.84
253.46 210.39
267.16 216.18
289.98 229.57
36.28
28.71
43.07
50.98
60.41
66.32
72.10
2009
2010
2011
2012
2013
2014
2015
Malaysia’s proposal to spend 14.13 billion ringgit ($4.41 billion) more than it had aimed to spend this fiscal year has added to the concerns that government isn’t going to narrow the budget gap by as much as originally planned. The government has said it plans to trim the deficit from 4.5% of GDP in 2012 to 4% in 2013 and 3.5% in 2014 before returning to a surplus by 2020.
Year Budgetary Deficit
Government Expenditure
Government Revenue
Year
2008
2009
2010
2011
Exports (in billion $)
229.83
184.89 230.98 264.98
Imports (in billion $)
178.25
143.86 188.98
2012
2013(F)
265.79 273.50
217.46 229.62
239.70
2014(F)
2015(F)
277.88
229.83
244.96
178.25
7. Monetary Policy
PAGE 6
The Malaysian economy is currently being supported by improvements in the export sector and investment activity. However, given consolidation in the public sector and a slowdown in consumption, domestic demand is expected to moderate going forward. Inflation is expected to rise due to input cost factors going forward, although a stable external price environment will temper any increase and moderating domestic demand. The benchmark interest rate in Malaysia was last recorded at 3 percent. Interest Rate in Malaysia is reported by the Central Bank of Malaysia. From 2004 until 2013, Malaysia Interest Rate averaged 2.9 Percent reaching an all-time high of 3.5 Percent in November of 2008 and a record low of 2.0 Percent in February of 2009. In Malaysia, The Central Bank of Malaysia (Bank Negara Malaysia) takes the interest rate decisions. The official interest rate is the Overnight Policy Rate. 8. Exchange Rate
The Malaysian ringgit enjoyed the advantage of a rapidly growing economy before 1997 and was trading ) 3.9 M as a free float currency at around 2.50 R 3.7 n i 3.5 to the U.S. dollar. The East Asian ( $ / t financial crisis brought about changes i 3.3 g 3.1 g which affected most of the East Asian n i R 2.9 economies and even Malaysia had to 2.7 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 arrest the depreciation as it had 1 2 3 4 9 9 9 0 0 0 0 0 0 0 0 0 0 1 0 1 1 1 0 0 9 9 9 0 0 0 0 0 0 0 0 0 0 0 2 0 2 2 2 1 1 1 2 2 2 2 2 2 2 2 2 2 2 reached to lows of 3.80 to the dollar by Year the end of 1997. For the first half of 1998, the currency fluctuated between 3.80 and 4.40 to the dollar, before Bank Negara Malaysia pegged the ringgit to the US dollar in September 1998, maintaining its 3.80 to the dollar value for almost seven years, while remaining floated against other currencies. Ringgit/$
The ringgit lost 50% of its value against the US dollar between 1997 and 1998, and suffered general depreciation against other currencies between December 2001 and January 2005. Between 2005 and 2011 the currency appreciated against the dollar except for the financial crisis period of 2008-2010. In 2011, it reached 3.06 to the dollar, but has been depreciating since then which can be a sign of danger. 9. Fiscal Policy
Following the May parliamentary elections, the Malaysian government led by Prime Minister Najib Tun Razak has begun its long-delayed fiscal reform program to accelerate fiscal consolidation despite a weaker political mandate. The prime minister has announced the implementation of a Goods and Services Tax (GST) in 2015 for the purposes of broadening the tax base and easing the government's reliance on petroleum-related receipts. In addition, subsidy rationalization started in September with an increase in fuel prices, helping to stem the growth of a subsidy bill that has accounted for an increasingly large portion of the government's spending. While the execution of the government's fiscal reform program will be politically and administratively challenging, we expect it to result in narrower fiscal deficits that will stabilize Malaysia's debt dynamics. Malaysia's balance of payments remains healthy, despite a narrowing of its current account surplus over the past two years, continued large outward direct investments by Malaysian corporate and banks, and volatile portfolio flows. And despite the terms of trade shock, resulting in turn from lower prices for PAGE 7
Malaysia's commodity exports, we expects the current account to remain in a structural smaller surplus, thereby helping to sustain favorable financing conditions for the government and the economy at large.
Macroeconomic Issues faced by Malaysia in the immediate future
Issue 1: Persistently high household debt levels An important development in the Malaysian financial sector since the 1997 Asian financial crisis has been the reduction in the banking institutions’ credit exposure to businesses and the greater focus on household financing. The household segment accounted for one third of the banking sector’s total loan exposure before the crisis; it now accounts for more than half. As living standards rose globally, consumer demand for goods increased , and thus easy credit encouraged a shift from saving to spending funded by debt . While rising household debt is in itself not national economic concern, what matters is when it is tracked against the Gross Domestic Product (GDP), known as Household Debt-to-GDP Ratio which has been consistently rising, and is not a good sign. Additionally, Debt Repayment Ratio – the percentage of a househo ld’s income required to repay household debts is at 43.9%, above the recommended level of 30%-40%. BNM maintains that Malaysian household debt is still at a manageable level due to a corresponding expansion in household financial assets, of which high proportions are liquid assets such as cash savings. However, the ratio of household financial assets to household debt has declined from 274.3% in 2008 to 229.6% in 2012, while the liquid financial assets to household debt ratio declined from 175.3% to 148% over the corresponding period. Household Debt (RM Billion)
Key Household Debt Indicators
800
90.00%
700
80.00% 70.00%
600
75.80%
74%
80.50%
60.40%
60.00%
500
50.00%
400 300 200
71.70%
465.2
510.8
588.7
667.8
754.6
39.70%
44.10%
43.10%
45.20%
43.90%
40.00% 30.00% 20.00% 10.00% 0.00%
100
2008
2009
2010
2011
2012
0 2008
2009
2010
2011
2012
Household Debt-to-GDP Ratio
Debt Repayment Ratio
PAGE 8
The
dilemma?
Household’s over-exposure to debt, if not properly contained, can lead to a crisis where the consumer sector will collapse due to colossal amounts of debt. But then again, trying to establish a suitable solution for the precarious level of household indebtedness, harsh measure to curb consumer over-lending could weaken consumer spending substantially.
Increased indebtedness means that the household sector has more exposure to interest rate risks and shocks to household income and house prices. Higher interest rates and the corresponding increases in debt servicing costs, in turn, result in a reduction in disposable income and, hence, consumption. The risks are more significant if households have taken advantage of low borrowing rates to increase the size of their mortgage excessively, as in Malaysia . Malaysia has a property bubble in addition to its credit
bubble.
Policy Implications
PAGE 9
1. First, it restricts the government’s monetary policy . House prices to household incomes in major cities of Malaysia have over-stretched the debt servicing capacity of the average household. Should government increase interest rate, it would add further burden to their debt servicing ability. 2. Growth in personal consumption driven by debt, rather than by income growth, is not sustainable and will be derailed with an increase in interest rates and inflation. 3. Whilst today’s non- performing loan ratio is low at 2.3%, BNM should not take too much comfort in this. This ratio can easily balloon when interest rates rise and growth falters leading to household insolvency. Steps taken by the government:
Reintroducing Real Property Gains Tax for housing disposals within five years of purchase in January 2010 and further raising it in January 2011 A maximum loan-to-value ratio (LTV) of 70% for the purchase of a third residential property. Doubling the minimum price for house purchase by foreigners in January 2012 Higher minimum income requirement of RM 24,000 per annum for individuals for credit card applications. Closer monitoring of non-bank lenders in 2012 A higher capital charge of 100% (previously 75%) during the computation of risk-weighted assets for mortgages where the LTV is 90% or higher.
Recommendations
Smooth, steady changes in the interest policy rate, to reinforce the importance of forward-looking monetary policy. It is essential for policymakers to have timely and frequent data on the household sector, to allow appropriate policy measures to be implemented in a timely manner to contain risks. Normalize the SRR towards the pre-crisis level of 4% from the 2% that became effective from April 1, 2011 (previously 1% since 1Q2009). Start a public housing policy that provides affordable housing, particularly in urban areas, to people below a certain level of income. Tighten mortgage rules to cool the property market by, for example, increasing the minimum down payment; reducing the maximum term of the housing loan, and increasing capital gains tax to discourage speculation. Tighten the rules for car loans by, for example, increasing the deposit and reducing the term of the loan. Implement a first class public transport system to reduce dependence on private transport Stop advertisements for loans and credit cards that are not transparent about the costs involved, thus seducing consumers to sign up for them.
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