Malaysia 2015 - 2010: Macroeconomic issues
Tim Fipps, November 2013
TABLE OF CONTENT
1. Introduction ............................................................. ............................................................................................ ....................................................... ........................ 2
2. Economics ..................................................... .................................................................................... ........................................................... .................................. ...... 2
3. Main macroeconomic issues in Malaysia in the period from 2005 to 2010 ................... 6
4. Summary............................................................... .............................................................................................. ........................................................ .........................17
References ...................................................... .................................................................................... ........................................................... .................................... ....... 20
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1. Introduction After providing a definition of macroeconomics, and explaining macroeconomic objectives, issues and policies, this report describes and analyses main macroeconomic issues in Malaysia for the period from 2005 to 2010.
2. Economics Economics is the study of how we manage our scarce resources. It is about optimizing under constraints on the resources (however, economics does not cover all aspects of human behaviour).
Economics is a science. As characteristic for science, economists develop models, using assumptions of what is deemed important and they deliberately simplify how cause and effect work in some part of the economy. The models are used to understand and analyse economic developments and to make suggestions about policies and to improve economic outcomes. Hence economics is also a study of policies.
2.1. Micro- and macroeconomics Economics can be divided in micro- and macroeconomics, separating out individual behaviour from aggregate behaviour: - Microeconomics is the study of the decisions of individual agents such as individuals, households and firms in specific markets. - Macroeconomics deals with the structure, behaviour and performance of a national or regional economy as a whole (Blaug 1985), how demand and supply of products, services and resources within such system are determined, what are the influencing factors, and how specific events and government policies affect economic conditions of a country or region. Economic conditions refer to variables such as jobs, income, goods and services, price, money, and people's standard of living. 2
For understanding how the whole economy functions and performs, macroeconomists use aggregated indicators such as gross domestic product (GDP), unemployment rates and price indices.
Remark: Gross domestic product (GDP) is the market value of all final goods and services produced in a country during the course of a specified period (typically a year).
2.2. Macroeconomics Macroeconomics studies aggregate demand and supply, harmonized with the study of money. Aggregate output is the total production of an economy in a given period i.e. the total output of goods and services. Aggregate demand is the total amount of goods and services demanded in the economy in a given time period at a defined price level. Aggregate supply is the total amount of goods and services that businesses are willing to provide in a given time period at a certain price level.
Both, aggregate demand and aggregate supply, vary with price level, as displayed in aggregate demand curve and aggregate supply curve. Equilibrium output is obtained where both demand curve and supply curve cross at the same price level. This is where price level and aggregate output are in balance. The output and the general price level in the economy will tend to adjust towards this equilibrium position.
The economic wealth of a country or region is influenced by factors such as natural resources, human resources, technologies, capital stocks, and people's choice of economic system. Another huge influence is exerted by government policies.
2.3. Macroeconomic policies Governments and their bodies have many means at their discretion to have an effect on the economy. 3
The government policies can be differentiated into t wo main groups, monetary policies (financial policies) and fiscal policies.
Monetary policy decides on the supply of money into the economy, and is typically determined by the central bank.
The central bank (also often named reserve bank or monetary authority) is the entity responsible for the monetary policy of a country. The central bank's primary responsibilities are national currency and money supply, with the aim to keep both stable. But central banks have often more duties, such as controlling interest rates, acting as a lender of last resort to the banking sector, and supervising financial institutions so they do not behave recklessly or fraudulently. In many countries, central banks are "independent", that is, they operate under rules designed to prevent political interference. Examples include the U.S. Federal Reserve, the Bank of England, and the European Central Bank. In some other cas es, the central banks act as government agencies (such as Bank Negara Malaysia, BNM).
The instruments of fiscal policy are government expenditure and revenue. When government expenditure such as wages for civil servants, government infrastructure projects or subsidies is higher than government revenue such as taxes and profits of government-owned enterprises, it's called budget deficit; the opposite case is called budget surplus.
Other government policies used to influence the economy are income policies and supply side policies. With income policies, government controls prices and wages. With supply side policies, such as taxes on income or transactions, government controls production.
2.4. Macroeconomic objectives Macroeconomic objectives of governments and central banks include: - full unemployment i.e. those who are able and willing to have a job will also get one;
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- price stability i.e. no rapid changes in price levels, no sudden or steep inflation or deflation; - economic growth i.e. steady increase in real per capita income; and - openness to trade, nationally and internationally, to facilitate exchange of goods and services and access to resources.
Macroeconomic analysis, models and forecasts are used by both governments and large corporations to help in the development and assessment of economic policy and business strategy.
2.5. Issues in macroeconomics The issues in macroeconomic analysis are: - people's standard of living, and the real output of a country or region - typically measured as gross domestic product (GDP) - and how its economy progresses (economic growth); - change of economy, structurally as well as in size (growth, decline), and what influences such change, in particular the effect of government policies; - productivity i.e. output of a single person in the economy (output per employee); - employment and unemployment, the latter being the workforce that wants to work but has no employment; and - price level of goods and services (inflation, deflation, stagflation).
2.6. High discount rates vs hard measures Since macroeconomics is also about government and policies, it is also about politics and politicians. As the latter have elections in their focus, they work with high "discount rates" in making an analogy to net present value (NPV) models. The discount rate tells how important is the future in reference to today. Businesses provide balance sheets, but countries typically do not. The absence of "balance sheets" makes it harder for politicians to take and explain "necessary measures", to look longterm. This results in the great danger of politicians to work on high discount rates.
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After all, macroeconomics is a controversial science: first, it's close to politics (and politics is always about disagreements), and second, it requires some kind of discount rate to figure out what to do about long-term issues, and how to compare long-term issues with short-term issues (which is also a subjective choice), and third, it can help to analyze a lot of things but not everything.
3. Main macroeconomic issues in Malaysia in the period from 2005 to 2010
3.1. Malaysia's economy Malaysia has a market economy, which is relatively open yet state-oriented as government plays a significant role in the economy, through macroeconomic plans in guiding economic activities, and with government-controlled corporations as active players themselves. Substantial natural resources of fossil oil and gas and of palm oil help the country to be more resilient to higher prices of energy and foods on the world market, and allow the government to exert price controls for these items on the domestic market. (Business Times, 2009)
3.2. Malaysia's economy prior to 2005 Since it became independent in 1957, Malaysia's real gross domestic product (GDP) grew by an average of 6.5% per year from 1957 to 2005.
Malaysia was marked from the Asian financial crisis in 1997/8 just as were its neighbor countries. In the aftermath of this crisis, Malaysia's economy recovered along with massive government spending and budget deficits subsequent to the crisis (Athukorala, 2010, Table 2). The controls introduced on currency and financial transactions had been unique measures undertaken by the government to navigate the country out of the crisis, also to make the banks and the whole financial sector more resilient to possible external influences in the future. In addition, in the aftermath of 9/11 in 2001, Malaysia has embarked to become a global center for Islamic banking and finance.
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Fig. 1: Malaysia: Selected economic indicators, 1996-2010 (Athukorala, 2010, Table 2)
Malaysia is blessed with a number of natural resources. At one time, Malaysia was the largest producer of tin, rubber and palm oil in the world. (American University, n.d.)
Once heavily dependent on primary products, Malaysia has developed to become a middleincome country with a multi-sector economy based on manufacturing and services. On this path, Malaysia has become one of the world's largest exporters of electronic and electrical as well as information and communication technology goods and appliances.
International trade plays a large role in Malaysia's economy, not least as it is located at the Straits of Malacca where major shipping lines pass and also owing to its multiracial society. (Najib Razak, 2007)
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For selective investments in specific sectors and to build infrastructure to support these sectors, the Malaysian government uses development plans, called Malaysia Plans, since 1950, i.e. already since British colonial rule (Athukorala, 2010).
3.3. Malaysia's economy in the period 2005 to 2010 At the beginning of the subject period, in year 2005, structure and performance of the Malaysian economy was still influenced by financial policy and measures taken in the aftermath of the Asian financial crisis 1997/8, such as positive balance of trade and accumulation of foreign exchange reserves. However, on 21 July 2005, Malaysia abandoned the fixed exchange rate for the ringgit to allow managed floating.
The value of the Malaysian currency, the ringgit, increased after the government abandoned the fixed exchange rate on 21 July 2005, in favour of a managed floating system. The ringgit started to strengthen and reached 3.18 to the US dollar in March 2008. However, the appreciation of the ringgit was not as strong as hoped and expected, which was claimed on the capital flight that had set in (Athukorala, 2010). With positive current account surplus since the Asian financial crisis, Malaysia increased steadily their foreign exchange reserves, to US D75 billion on 15 July 2005 (just before the peg was removed) to peak at USD125 billion on 31 July 2008, a few months before the global financial crisis commenced in September 2008.
Fig. 2: Malaysia 2003 - 2010: USD-MYR exchange rate (www.tradingeconomics.com) 8
The later part of the subject period from 2005 to 2010 was very much characterized by the effects and the reaction to the global financial crisis that started in September 2008, including the financial policy chosen by the Malaysian government.
The global financial crisis was triggered when the speculative bubble around the U S housing market burst in 2008. This crisis percolated from the US to the rest of the world through capital flows, trade flows, and commodity prices. (Athukorala, 2010)
During the global crisis period, the ringgit depreciated steadily down to 3.7 to the US dollar in 2009, in line with the foreign exchange reserves which dropped to USD88 billion in value on 29 May 2009. But from then on, the ringgit resumed strengthening, to touch 3 US dollar and to stay range-bound between 3 and 3.2 to the US dollar towards the end of 2010. During these times, prices at the Malaysian stock market fell distinctly, s hown by the Kuala Lumpur Composite Index (KLCI), widely considered to be the capital market barometer (Oxford Business Group, 2011): the KLCI fell from above 1500 in early 2008 to below 900 at the end of 2008 where it stagnated until it took off again in April 2009.
Fig. 3: Malaysia 2003 - 2010: KLCI index (www.tradingeconomics.com)
Malaysia responded to the global financial crisis with monetary expansion. Since inflation was low, foreign exchange reserves still high (despite having lost some of their value), and the banking system was sound, Bank Negara (BNM) saw sufficient space for expansionary 9
monetary policy: BNM lowered the overnight policy rate (OPR) from 2.5% in November 2008 to 2.0% in February 2009 - the lowest ever seen in Malaysia’s history. Further, BNM cut the statutory reserve requirement (SRR) for banks from 4% in December 2008 to 1% in March 2009 to facilitate the release of capital to borrowing, and lowered the monthly installment payments on floating interest rate loans to reduce the burden for existing borrowers (Athukorala, 2010). These interest rate cuts served to increase disposable income of borrowers and ultimately to spur domestic consumption. Since US dollar liquidity in the financial system had dried up subsequent to the collapse of Lehman Brothers, BNM also helped exporters to obtain foreign currency loans (Athukorala, 2010).
The currency and the domestic financial markets, however, were absorbing fairly well the disturbances from the global financial crisis, given the strong account of foreign exchange reserves, the healthy banking system, and plenty liquidity in the financial system. (Athukorala, 2010)
On the fiscal front, the Malaysian government also launched two stimulus packages as response to the global financial crisis: first in November 2008, involving direct cash injection of RM7 billion, and a further RM 60 billion package in February 2009. A worrying development of such measures is Malaysia's fiscal health: Its debt-to-GDP ratio has increased to almost 50% in 2009. (Athukorala, 2010)
3.4. Economic growth and living standard in Malaysia 2005 - 2010 GDP was continuously growing in the subject period, in fact since the Asia financial crisis 1997/8, until the global financial crisis finally hit Malaysia in 2008/9. In 2009, the GDP per capita dropped to even below the level before the crisis started. But already in 2010, growth leaped back, and the GDP reached new heights.
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Fig. 4: Malaysia 2005 - 2010: GDP (www.tradingeconomics.com)
Fig. 5: Malaysia 2005 - 2010: GDP per capita (www.tradingeconomics.com)
Interestingly, the growth rate shows considerable variation over the calendar year: growth rate drops in the first and the last quarter of the calendar year, with negative(!) growth rate values in the first quarters of all the years of the observed period, while the growth rates remained still positive in the calendar years' last quarter – except for the last quarter of year 2008. Towards the end of 2008, the global financial crisis reached Malaysia as "external demand collapsed in the fourth quarter, weighing heavily on Malaysia’s externally oriented economy” (Bloomberg, 2009)
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Fig. 6: Malaysia 2005 - 2010: GDP quarterly growth rate (percentage) (www.tradingeconomics.com)
Also government spending sees a strong variation over the calendar year: Each y ear, government spending shows an increase over the calendar year, with a sharp peak in the fourth quarter.
Fig. 7: Malaysia 2005 - 2010: Government spending [MYR million] (www.tradingeconomics.com)
Consumer spending also saw a dip within the subject period 2005 – 2010, as consequence from the global crisis: until 2008, Malaysia consumer spending was continuously growing, but its rise came to a halt in 2009 at quite the same level as the year before. In 2010, 12
consumer spending picked up again with si milar year-to-year increase compared to the 2008 and 2009 levels as seen in the years before the crisis.
Fig. 8: Malaysia 2005 - 2010: Consumer spending [MYR million] (www.tradingeconomics.com)
Corporate tax rate was reduced from 28% in 2006 to 25% in 2009 and kept level in 2010. Personal income tax was kept steady at 28%, until reduction by 1% in the years 2009 and 2010.
Malaysia's performance in trade helped to bring more wealth into the country: Since the Asian crisis 1997/8, Malaysia has run a positive balance of trade, exporting more than importing. This surplus was kept in both high growth periods as well as in crisis years during the observed period.
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Fig. 9: Malaysia 2003 - 2010: Balance of trade (www.tradingeconomics.com)
3.5. Unemployment in Malaysia 2005 – 2010 The number of employed persons increased steadily year-on-year, with bigger leaps in 2006 and 2007 and as well in 2010. The unemployment rate fluctuated between approx. 3% and 4% in the observed period, with no clear trend over this period to break out from this band.
Fig. 10: Malaysia 2003 - 2010: Employed persons (www.tradingeconomics.com)
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Fig. 11: Malaysia 2003 - 2010: Unemployment rate (www.tradingeconomics.com)
The population in Malaysia increased steadily, from over 25 million people in 2005 to over 28 million in 2010.
One reason for the apparently low unemployment rate could be the low productivity levels of workers in Malaysia (Seah, 2013). Malaysia's economy depends on a large number of highly unskilled labour (70%), while still applying a low level of technological development and lacking R&D activities and innovation (Shamsudin Bardan, 2012). V arious industries hire massively low-skilled, especially foreign workers, and continue to depend on them, as they survive by making little investments to stay at the bottom of the technology ladder (Dudley 2013). Some of these massive hirings are remnants of practices in the past when the labour cost advantages helped to keep prices low for export and hence drove growth (Flaaen, Ghani &, Mishra, 2013).
3.6. Inflation in Malaysia 2005 – 2010 According to the Consumer Price Index (CPI), prices increased rather moderately within a 2% to 4% band (year-on-year) in the beginning of the investigated period. But few months into 2008, they were rising sharply to a peak within a couple of weeks. From this peak, they were falling almost as sharp again, within a couple of months, to reach a level in the first months of 2009 that continued the trajectory and increase seen over the years before, as if 15
there was no peak at all.
Fig. 12: Malaysia 2003 - 2010: Consumer price index CPI (www.tradingeconomics.com)
Interestingly, the consumer spending shows considerable variation over the calendar year: In the first quarter of a new year, it will drop below the level of the last quarter of the previous year, then even drop slightly more in the second quarter (except for 2010 when there was a slight increase), to rise sharply with the third quarter. The fourth quarters in the investigated period have seen either a further increase (2005, 2006 and 2007), or a marginal drop (2008, 2009 and 2010). This apparent seasonal behavior is reflected also in the quarterly growth rate of GDP.
House prices in Malaysia increased steadily in the referred period, with quarterly increases in the range of approx. 2% to 5%, with the exception of a rather small increase in 2009 (1% to 2%), which was, however, compensated with the sharp rise in 2010 to 6% to 8% increase.
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Fig. 13: Malaysia 2003 - 2010: House price index (www.tradingeconomics.com)
BNM's command of interest rates and the government's expansionary financial policy in the aftermath of the global financial crisis helped to keep consumer goods, houses and other capital assets accessible and affordable for Malaysian households and companies. The development of the interest rates reflects this guidance: Interest rates in Malaysia were kept low and steady until 2005. However, at the end of 2005, the three month interbank rate started to rise to an approximately 50% higher level within half a year, to stay at almost 4% for the second half of 2006. For 2007 and 2008, this interbank rate dropped slightly to stay steady at 3.6%, until it was dropped sharply to 2% at the beginning of 2009 in response to the crisis. While lingering just above 2% for the rest of 2009, it started to rise over 2010 to reach almost 3% at the year end.
4. Summary Macroeconomics deals with the structure, behaviour and performance of a national or regional economy as a whole, using aggregate variables to analyse demand and supply of products, services and resources within such system.
Policies guide decisions to influence the economy. The main policies applied by governments are monetary policies (exerted typically through and by the country's central bank) and fiscal policies. 17
Typical macroeconomic objectives of governments are full unemployment, price stability, economic growth, and openness to trade.
This report looked at main macroeconomic issues in Malaysia in the period from 2005 to 2010, in particular regarding economic growth and living standard, (un)employment, and inflation.
Malaysia has very much a market economy, which is relatively open yet state-oriented. Entering the subject period in 2005, Malaysia's economy was still marked from the Asian financial crisis in 1997/8, and the measures taken, such as financial controls, improved banking system and trade performance. However, in 2005, Malaysia decided to abandon the fixed exchange rate for the ringgit.
The subject period has seen its own crisis: the global financial crisis that started in September 2008.
In the referred period, economic growth was steady, as seen in the rise of GDP, except for a year-long period after the global financial crisis started. The dip was also seen in the consumer spending.
The government responded to the global financial crisis with monetary expansion and two stimulus packages, and they seemed to have helped Malaysia to rebound within a year.
Interestingly, growth is seen varying considerably over the calendar year: strong in the middle half of the year, and weak in the months around the turn of the year. This behaviour coincides with a similar characteristic in consumer spending.
Unemployment in Malaysia is low, between 3% to 4%. A reason for this apparently low unemployment could be the low productivity levels of workers in Malaysia, and the resilient usage of low technologies in a number of industries.
Prices in Malaysia, according to the development of the CPI, increased within a 2% to 4% band in the subject period, except for 2008, when a sudden surge, however, followed by an 18
almost as sudden drop provided a deviation to the otherwise steady price level increase. House prices showed a similar steady increase as CPI, only with a reduced rise during the global crisis, but recovering within about a year.
All together, Malaysia's economy is in transit from low-income to middle-income status, however, still tainted with legacies such as dependency on natural resources and industries using low-level technology.
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References American University (n.d.). TED Case Studies: Tin mining in Malaysia - Present and future. Washington, DC. Retrieved from http://www1.american.edu/TED/tin.htm
Athukoralam P. (2010, October). Malaysian economy in three cris es. Working Paper No. 2010/12. Canberra: The Australian National University.
Blaug, M. (1985). Economic theory in retrospect . Cambridge, UK: Cambridge University Press.
Bloomberg (2009, February 28). Malaysia 2008 economy worst in s even years. Gulf News. Retrieved from http://gulfnews.com/business/economy/malaysian-growth-slows-to-0-11.55456
Business Times (2009, September 22). Economic numbers bode well for Malaysia.
Dato' Sri Mohd Najib Tun Abd Razak (2007, March 13). The security of the Straits of Malacca and its implications to the Southeast Asia regional security. Retrieved from http://www3.pmo.gov.my/WebNotesApp/tpmmain.nsf/6eb1bf73408d07794825674f0006897f /09ee4377fd049191482572aa00144782?OpenDocument
Dudley, R. (2013, March 5). Productivity: Urgent need to pursue quality growth. The New Straits Times. Retrieved from http://www.nst.com.my/opinion/letters-to-the-
editor/productivity-urgent-need-to-pursue-quality-growth-1.228795?ModPagespeed=noscript
Flaaen, A., Ghani, E. & Mishra, S. (2013, July 22). How to avoid middle-income traps? Evidence from Malaysia. VOX . Retrieved from http://www.voxeu.org/article/how-avoidmiddle-income-traps-evidence-malaysia
Oxford Business Group (2011, January 12). Malaysia: Y ear in review 2010. Retrieved from http://www.oxfordbusinessgroup.com/economic_updates/malaysia-year-review-2010
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Seah, A. (2013, February 26). Unskilled foreign workers s lowing productivity. Human Resources. Retrieved from http://www.humanresourcesonline.net/news/38622
Shamsudin Bardan (2012, September 19). Malaysia's productivity challenge: In what ways can Malaysia increase productivity to remain co mpetitive. Malaysian Employers Federation (MEF). Presented at the Perdana Leadership Foundation CEO Forum 2012, Kuala Lumpur, Malaysia.
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