A BROAD APPROACH

Malaysia 2017 | ECONOMY | REVIEW

Malaysia is living the dream of a diversified economy, with an array of FTAs also boosting growth across all sectors.

Strategic diversification has enabled a healthy current account balance as a percentage of GDP of roughly 15% almost every year since 2010. And meanwhile, formerly high commodity prices slotted in perfectly with a widening range of foreign trade agreements (FTAs) as part of the government's prudent economic actions as defined by the national plan. These have included the ASEAN Economic Community (AEC), the Regional Comprehensive Economic Partnership (RCEP), and ongoing talks with the EU, not to mention the TPP, which adds Canada, Mexico, Peru, and Vietnam to the mix. Notably, the World Bank also acknowledged overall economic fortitude by raising Malaysia's world competitiveness ranking from 20th place in 2014 to 18th in 2015.

Now, as of 2017, the middle-income economy has taken steps to become a cashless one, too, as outlined in our banking chapter. To this may be added its beneficial trade partnerships and the emphasis placed on establishing strategic industrial hubs, not least for the nation's key high-end electronics manufacturing sector. GDP has seen annual growth of over 5% over the past decade with the predictable exception of 2009. Yet due to global headwinds, over 2016 the nation has seen slim demand for its exports of commodities and liquefied natural gas. This prompted the government in January 2016 to cut spending and rethink its 2016 growth forecast of 4-5% to 4-4.5%.

The Forecasts Say...

The IMF's regional representative speaking at the National Economic Outlook Conference 2017-2018 identified accelerated growth in the ASEAN-5 nations of Malaysia, Indonesia, the Philippines, Singapore, and Thailand in 2Q2016 on the strength of consumption and investment, both private and public, offsetting slack export growth. Fund forecasts have acknowledged Malaysia's economic resilience, forecasting 2016 growth of 4.2% (4.5% in 2017) made possible, once again, by diversification, plus a flexible exchange rate and robust private consumption. On the negative side though, consumption boosts imports at a time of lower export revenues, and the government is working all out to limit its 2017 budget deficit to 3%. Yet Malaysia will also continue to suffer from weak commodity prices and decelerating private investment, according to the IMF, which puts its medium-term growth estimate at 4.5-5%.

Money, Money, Money

Once the Asian crisis of 1997 had winded the Malaysian economy, the dented ringgit became pegged to the dollar, with a successful recapitalization program launched to prop up the banking sector. In fact, diversification rather quickly saw the return to a current account surplus, amid robust GDP growth prints, whereupon the currency was re-floated in 2005. A new raft of challenges today has seen the ringgit underperform against all Asian currencies of late, shedding around 7% in early November 2016. Subsequently the central bank (BNM) warned citizens and institutions alike to desist from ringgit trading in the offshore non-deliverable forwards (NDF) market. And then on December 2, the BNM stipulated that 75% of all export earnings be converted into ringgit. Due to external factors, for 3Q2016 the currency shed 3% against the dollar.

Government Budgets Tomorrow

The 2010 New Economic Model (NEM) targeted quality-driven investment and more sustainable remedies to productivity deficits, notably by developing a skilled workforce through greater economic participation. Central to this, too, was a policy geared at developing strategic centers, and moreover, as has for years benefitted Gulf economies, welcoming skilled foreign workers until such time as the local workforce proved sufficient.

Revenue Streams

New alternative revenue sources have been targeted to cut dependence on Petronas, Malaysia's state-owned oil company. By 2014 state revenues derived from oil and gas had slipped a leaden 10ppt from 40% in 2009 to 30% of the total in 2014. Introduction in 2015 of the delayed Goods and Services Tax (GST), a value added tax levied on most transactions in the production process set at 6%, reduced dependency to 19%. The tax replaces a sales-and-service tax of 5-15%, and exported goods and services plus staple foods are exempted.
Tan Sri Dato' Sri Abdul Wahid bin Omar, Former Minister in the Prime Ministers' Department, touched on Malaysia's NEM, which ultimately foresees the achievement of developed nation status by 2020. Accordingly, related efforts are being spearheaded in the Eleventh Malaysia Plan, themed “anchoring growth on people," by the key strategies of inclusiveness, fostering accelerated human capital, green and sustainable growth, and infrastructure investment to enable economic reengineering, as well as in key centers of business and industry, namely by...

...Exploiting the Hub

Infrastructure, both transport and industrial, also plays a catalytic role in economic preparation for the years ahead. For one, the High-Speed Rail (HSR) between Singapore and Kuala Lumpur, at over 330km, boosts interconnectivity, rendering Kuala Lumpur a hub in which industry-specific sub-hubs will pool a skilled workforce. In fact, for 3Q2016, total employment saw a mild net gain of 40,500 jobs, compared to 65,700 in 2Q2016, chiefly due to the services sub-sectors, particularly in the educational, professional, scientific and technical, and commercial sectors. Naturally, transportation also fulfills the government's goal of broader economic inclusion. In another example of this, thanks to the Pan-Borneo Highway in Sabah and Sarawak, as well as roughly 4,500km of rural roads, more Malaysians are able to reap the benefits of economic momentum, while raising national competitiveness. That said, for 3Q2016, public investment growth shrank by 3.8% from 7.5% in 2Q2016.

Datuk Zainal Amanshah, CEO of InvestKL, explained to TBY how the national transformation program has identified Greater Kuala Lumpur as a National Key Economic Area (NKEA), boasting nine Entry Point Projects (EPPs). “Greater KL is EPP number 1, as it contributes 30% of the total revenue, which is expected to grow to 40% by 2020." At of the time of interview, 52 multinational companies had registered, with a target of 100, again by 2020. Furthermore, “Their total committed investment is close to MYR6 billion and about new 7,000 jobs have been added," he concluded.

Fueled by Lateral Thinking

Malaysia accounts for over 40% of global palm oil exports, with over half a million citizens engaged in its production. In fact, agriculture overall employs roughly 13% of the labor force. The country is the world's second-largest producer of palm oil, with roughly 18 million tons of crude palm oil producing 100 million tons of solid biomass, suitable for conversion to bio-ethanol and high protein animal feed, thus requiring lower imports of said products.

3Q2016 in Selected Numbers

The latest BNM data for 3Q2016 reveals economic expansion of 4.3% (2Q2016: 4%), chiefly thanks to sustained expansion in private-sector spending and the contribution of net exports. For the period, growth in industrial production surpassed market expectations due to a welcome showing by the manufacturing and mining sectors, although export growth shrank by 10.4% on reduced energy sales. CPI inflation declined further YoY to 1.3% compared to 1.9% a quarter earlier. Malaysia's reserves position as of October 31, 2016 was at USD97.8 billion, with international reserves deemed more than sufficient to enable international transactions to the tune of 8.4 months of retained imports, thus well above the international threshold of three months. And reserves to cover short-term external debt by 1.2 times proved sufficient to meet external obligations.
The financial system is treated in separate chapters, but suffice it to say here that while it is partially troubled by the potential policy moves and growth prints of key economies, as well as commodity fluctuations, systemic stability is secured. Indeed, as of 3Q2016 well-capitalized local financial institutions boasted combined capital buffers of MYR160.8 billion.

Domestic demand rose 4.7% (2Q2016: 6.3%), as slower growth in public-sector expenditure of 0.3% (2Q2016: 6.9%) dampened sustained growth in private sector activity of 6.0% (2Q2016: 6.1%). Private consumption rose 6.4% (2Q2016: 6.3%), fueled by wage and employment growth, plus the minimum wage hike effective as of July 1, 2016. Meanwhile, private investment climbed 4.7% (2Q2016: 5.6%), predominantly on capital investment in the services and manufacturing sectors. Among the key economic sectors for the quarter, the services sector rose 6.1% (2Q2016: 5.7%) on buoyant private consumption. The manufacturing sector grew 4.2% (2Q2016: 4.1%) mostly due to export-oriented sub-sectors such as chemical-related products and electronics, chiefly semiconductors. The construction sector expanded 7.9% (2Q2016: 8.8%) essentially on activity in the civil engineering sub-sector pertaining to ongoing petrochemical, transport, and utility projects. The mining sector, up 3.6% (2Q2016: 2.6%) had been propped up by increased crude oil production, while in contrast agriculture saw further contraction, shedding 5.9% (2Q2016: -7.9%), as fresh fruit bunch (FFB) yields posted a double-digit decline of 15% YoY.

On the trade front, in 3Q2016, the current account surplus expanded on a greater goods surplus that offset the higher deficit in services and investment income accounts. The quarterly overall balance of payments, on a surplus of MYR14.6 billion, had risen QoQ from MYR8.8 billion. Gross export growth lost 2.3% (2Q2016: 1.6%), while gross import growth lost just 0.1% (2Q2016: 2.8%), on account of minimum wage hikes to MYR1,000/month in Peninsular Malaysia and MYR920/month in Sabah and Sarawak. Nonetheless, since weakness was observed in all key import categories excepting capital goods, Malaysia's trade surplus was virtually unchanged in 3Q2016 at MYR18 billion (2Q2016: MYR17.9 billion)

While not immune to commodity pricing, or indeed other externalities, Malaysia is, nonetheless, on track to benefit from wage and employment growth, which translates into consumption. Meanwhile, at the state level, the pursuit of national goals spells sustained infrastructural investment to spur the diversified manufacturing sector. Growth, in short, is not elusive.