Malaysian Economic Outlook 2015

8/17/2019 Malaysian Economic Outlook 2015

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MALAYSIAN ECONOMIC OUTLOOK

Executive Summary

Introduction

While Malaysia is naturally protected from snowstorms, tornados and hurricanes, having to

deal with only regular rains, floods and sometime landslides, the country grappled with

severe headwinds on economic front last year, following unanticipated global commodity and

currency shocks, financial market turbulence and sudden reversal of capital flows. Most

importantly, the country avoided oily slopes and dark corners, associated with domestic

political upheavals and shocks, affecting both sides of political divide; entrenched social

grievances; heightened racial tensions; and elevated religious and faith insecurities.

Meanwhile, the long-awaited lift-off in the United States US! "ederal "unds #ate ""#! thatfinally occurred on $% &ecember '($) and the inclusion of *hina+s currency, the #enminbi

or uan into the M" basket of S reserve currencies on ( /ovember '($), have to a

certain e0tent reduced the intensity of uncertainty, prevailing in global financial markets last

year. 1hese widely-anticipated episodes have been considered as healthy developments for

the world economy, which was reinforced further by the global consensus on climate change,

culminating in the adoption of United /ations 2lobal 3genda '(( for Sustainable

&evelopment U/23 '((!. 4f greater significance for Malaysia, "itch#atings has affirmed

Malaysia5s 6ong-1erm foreign currency ssuer &efault #ating ! at +3-+ and local

currency at +3+, while interestingly the outlook on the 6ong-1erm s has been

revised to +stable outlook+ from +negative+. Meanwhile, as reported by the 7loomberg,

Moody5s nvestors Service affirmed Malaysia5s 3 sovereign rating, but cut the outlook on

the sovereign rating to +stable+ from +positive+, citing Malaysia5s weakening e0ternal

position. 1he migration of rating outlook to the middle ground by the two sisters of

international rating agencies indicates that the outlook for Malaysian economy remains

favourable. 4n the domestic front, ma8or issues surrounding $M&7 operations have been

successfully resolved and the company reported on $' 9anuary '($% that it was finally +out of

the critical phase+.

1hese favourable developments augur well for the Malaysian economy, although toughchallenges are e0pected to arise along the way this year. 4n the real economy, real 2&:

growth for '($) is estimated to register close to ), a respectable growth considering weak

and uneven global economic recovery, while headline inflation remained benign, averaging

'.$ for '($) as a whole '($, when the country was hit hard by the global economic and

financial crisis. 1he implementation of goods and services ta0 2S1!, effective on $ 3pril

'($) and removal of fuel subsidy system were certainly the right policy actions by the


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2overnment, despite years of delay and decades of deep-rooted subsidy mentality. 1he

implementation of consumption-based 2S1 is certainly a blessing in disguise for the country,

providing strong fiscal safeguard and acting as a built-in stabili?er for the economy.

Successful implementation could also be viewed as reform dividends for the rakyat, which

could possibly be in deep economic troubles, especially with plummeting crude oil prices, asseen in many oil e0porting countries. n fact, the share of oil-related revenue in the total

revenue of the "ederal 2overnment has been reduced significantly by more than half, from

about


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#M.>$; '($


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transition in its structural ad8ustment and reform programs and building up slowly but surely

its soft-international infrastructures. *hina is certainly avoiding knee-8erk reactions, shock

therapy and other cookie-cutter policies as used to be implemented in the past under an

orthodo0 economic policies. n fact, *hina is learning fast, dismantling the circuit breakers

and mending its rookie actions, as seen recently in its stock market interventions.nterestingly, as part of the M" governance reforms and new funding programs, *hina5s

voting right in the M" will rise from .@ to %, reflecting its increasing influence and

rising power. *hina has also embarked on 3sia nfrastructure and nvestment 7ank 37!, a

new multilateral development bank in 3sia, which will be under its domain. 1::3 and #*A:

are another two e0amples of non-cooperative games, using game theory terminology,

pointing to strong competition between the two economic rivals with totally different political

regimes, initial economic conditions and operating standards. *hina is embarking on

regionali?ation, and barring any military conflicts, the sheer si?e and its strength, combined

with +intelligent strategy+ plus +strong technocratic leadership+, neutrality and non-

interference, *hina will most likely emerge stronger and powerful, reasserting its past glory.

/uclear deal and lifting of sanctions in ran will also see that low oil prices will not last that

long, since oil prices are always used as a strategic and bargaining tools and prone to sharp

spikes. Supply disruptions and strategic decision by 4:A* will certainly affect oil production

and global oil supply conditions, in an environment where oil demand is slowly but surely

picking up, moving forward.

n this respect, Malaysia as a trade-oriented and financially-integrated economy, but lacking

in both economic si?e and strength, needs to observe and play the economic and political

game well, so as not to be trampled by these two competing and non-cooperating giants."ollow-the-leader, leaning with the wind, placing more weight on business interests, relying

less on indigenous capability and gambling on the welfare of the society as a whole are

certainly not the first-best-option or +optimal approach+, especially for the country that

aspires to be a developed nation by the year '('(. 1he Malaysian economy has to be

operationally independent, and we need to have a strong policy safeguards, protecting our

institutional sovereignty and its people, national interests and accepted social values and

norms. n this respect, we need to be strong, independent, resilient and agile, while ad8usting

pro-actively and fle0ibly to the so-called +new normal+ in new international economic

landscape, where competition is intense and policy coordination is clearly diminishing. We

have to be creative and innovative, employing +smart strategy+ and with +intelligent

communication+, in dealing with these new realities. We need to not only ad8ust to the new

environment, but also think creatively about solutions, rather than taking an easy way out,

ad8usting passively to adverse circumstances and acting as if +business as usual+. More

importantly, we should not burden future generations with new +economic imperialism+ and

allow for the so-called +economic genocide+, imposed by the rich and powerful nations with

mercantilist tendencies. 3part from enhancing economic efficiency, we need to ensure that

adeCuate attention is given to distributional aspects, environmental concerns and social

issues. More importantly, we need to take into account both market and non-market values, as

opposed to only values from market transactions, derived using economic impact analysis,such as dynamic computable general eCuilibrium model &ynamic *2A!. 3ctual cost-benefit


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analysis *73! captures all non-market benefits, social as well as environmental costs.

"urthermore, we need to take into account welfare changes of all beneficiaries, encompassing

society as a whole, identifying the gainers and losers and more importantly, future

generations.

Meanwhile, as suggested in the previous reports, we need to continue e0amining in-depth all

binding constraints to economic and social development, e0isting distortions and

imperfections in market microstructures, most notably in the labour market and "D market

with its non-internationali?ation of ringgit, rigid administrative rules and thin liCuidity.

:olitical spats and racial rhetoric unfortunately add to the worsening economic and business

conditions, as stabili?ation measures and new policy actions reCuire strong ownership and

support by all stakeholders, irrespective of political affiliations, racial and religious

associations. 1here are certainly social costs and in fact welfare losses to the society as a

whole, associated with delays in structural ad8ustments, lack of openness and transparency,

gap in policy credibility, weak institutions, poor governance and, worst still low ethical andmoral standards. n this respect, there must be a strong guiding hand, good signalling

mechanism and certainly credible policies for market participants to react adeCuately in this

trying times, while e0tensive consultations with relevant stakeholders will ultimately help to

avoid uncertainty and negative perceptions of stakeholders, consumers, investors and rakyat

alike. More importantly, we need to ensure continued happiness and good life for the rakyat

by encouraging greater kindness and showing strong compassion and mercy to others,

especially those with different ethnic backgrounds and religious beliefs. We need to avoid

playing with people5s insecurities by encouraging greater openness, tolerance, social 8ustice

and fairness in the country.

Short-term Issues and Stabilization Measures

#eal 2&: growth moderated to ).$ in the first three Cuarters of '($), declining by one

percentage point from %.$ in the corresponding period of '($


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Meanwhile, labour market conditions remained generally favourable with the unemployment

rate stabilised at .' of the total labour force during the period from 9uly to /ovember

'($), reflecting full employment situation in the country threshold at


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borrowing costs and debt servicing charges, associated with higher interest rates and

strengthening of the US dollar in the global financial markets. Moreover, economic activity in

advanced economies is e0pected to pick up only modestly this year, according to the latest

statement by the M", with the e0ception of currently robust growth in the US and sterling

performance of the UF economy and ndia as well. 1he latter is an emerging tiger in&eveloping 3sia, which is e0pected to register tigerish growth of B.) this year '($)=

B.!, overtaking growth in *hina.

Macroeconomic and inancial !olicies

7ank /egara Malaysia 7/M! again decided to maintain the 4vernight :olicy #ate 4:#! at

.') in its latest Monetary :olicy *ommittee M:*! statement, released on '$ 9anuary

'($%. 1his was actually the tenth time the 4:# remained unchanged since 7/M raised the

4:# more than one and half year ago on $( 9uly '($


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+psychological threshold+ of US&$(( billion end-&ecember '($


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With these two ma8or episodes, involving two largest economies in the world, combined with

global economic events, which are still unfolding, such as declining commodity prices, rising

eCuity market volatility, increasing pressure for competitive devaluation and growing

indebtedness in many nations, global growth outlook is e0pected to remain weak and uneven

this year. Moreover, there is a high probability of an intensification of factors that draggeddown the global economy, estimated at .$ last year '($


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structural ad8ustment and reform programs. 2rowth in ndia surpassed *hina5s growth last

year, registering B. '($


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tandem with an ongoing structural reform programs in *hina, moving steadily to a more

market-based economic system. *hina5s continued growth slowdown this year, the lowest

since $>>( .@!, is unfortunately driving downward growth in other emerging market and

developing economies, especially e0porters of raw materials, such as oil, metals, minerals

and other commodities. 7ra?il, #ussia, Malaysia and even developed economies like3ustralia and *anada will be affected, although with a varying degrees.

ndia5s economy has certainly outperformed other emerging market and developing

economies last year, registering growth of well above B, which was . percentage points

higher than the average for the group. 2rowth in ndia is estimated at B. in '($) by the

M", the same growth rate as e0perienced in '($


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fighting in emen and escalating tensions between Saudi 3rabia and ran, the two bedrocks

of Sunnis and Shiites. Migrant refugee crisis in Aurope and nuclear politics in /orth Forea

could also be added as downside risks, together with military tensions between the US and

*hina in the South *hina sea.

Medium-term risks include near stagnation in advanced economies and conseCuently below-

target inflation rates, as seen in the US, Auro 3rea and 9apan in recent months. 6ow potential

output growth, faster-than-e0pected growth slowdown or +hard landing+ in *hina will affect

economic performance of resource-based economies and commodity e0porters, including

high-income nations and, most worryingly low-income developing economies in 3frica as

well as &eveloping 3sia. 6ooking from longer-term perspective, low fi0ed capital formation

and aging population are e0pected to lower potential output growth in advanced economies,

such as 9apan. 1he fourth industrial revolution in the years ahead could potentially result in

declining labour force participation rate, especially among females in the advanced

economies as well as in AMAs.

4n the domestic front, near-term risks are e0pected to originate mostly from the e0ternal

front, associated with *hina5s growth slowdown and its financial market turbulence. 1he US

"ed ne0t move and uncertainty about rate increases would affect the volatility in the global

financial markets, especially interest rate sensitive bond markets, as the e0pected slower

monetary tightening cycle has been priced in by the markets. Meanwhile, domestic-oriented

risks include rising cost of living; elevated foreign e0change market pressures; and continued

portfolio investment outflows, associated with e0pected higher interest rates in key advanced

economies, particularly in the US.

3part from abrupt tightening of financing conditions on the monetary front, tough +belt-

tightening+ fiscal policy actions and knee-8erk reactions, associated with revised '($%

7udget, are e0pected to elevate downside risks, hitting hard on private consumption

e0penditure, which is already on a moderating pace. Meanwhile, weak performance of

private investment, which is presently being tested with rising production costs, declining

revenue, lower profitability real return to capital! and less hirings, could possibly turn for

worse, especially with higher-than-e0pected borrowing costs and uncertain investment-

ad8ustment costs. Gouseholds, producers, e0porters, importers and retailers are ad8usting to

higher import prices and rising debt service charges, following significant depreciation of the

ringgit. 3s such, sharper-than-e0pected ringgit depreciation and sharply lower commodity

e0port prices would elevate e0isting pressures and represent new round of threats and vicious

cycles. 3s reported in the previous reports, rising household debt and "ederal 2overnment

debt crossing the legal limit of )) could pose serious downside risks and economic threats

in the medium and long-term. 3dditionally, +off-budget+ e0penditures and +contingent

liabilities+ could e0ert pressure on fiscal sustainability and Malaysian sovereign credit

ratings.

Lon)-Term Issues and !olic* #irections


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6ooking ahead, Malaysia needs to ad8ust Cuickly to the new normal in the world economy,

especially with monetary policy normali?ation from ?ero lower bound E67! in the US.

1here is also growth realignment in *hina, the world5s second largest economy. Window of

opportunity is getting less over time, as the world economy is moving out of post-crisis easy

monetary conditions, starting in early this year and moving towards a more sustainableeconomic growth and social development in the years ahead. 1he :aris 3greement on

*limate *hange added to the need for climate change initiatives in the country, focussing on

sustainable production and consumption.

Medium and long-term structural ad8ustment and reform programs must continue to be the

key priority of economic policy, supported by appropriate short-term stabili?ation measures

and macro-prudential arrangements. 3ccommodative monetary policy is certainly not an

option in the coming months, less so with massive fiscal stimulus package, as fiscal space is

being constrained by lower oil revenue and rakyat is being sCuee?ed hard by consumption-

based 2oods and Services 1a0 2S1!. 1a0 incentives and financial support for privateinvestment, which is on a moderating path, are urgently needed to boost business confidence

and enhance potential output growth of the economy. While downward ad8ustment in public

consumption is certainly reCuired as part of an ongoing fiscal consolidation process, public

investment in key infrastructure pro8ects and human capital development remain necessary in

order to remove infrastructure bottlenecks in the economy, such as traffic congestion and

freCuent supply cuts in basic utilities, but also to ensure ready pool of healthy and skilled

workers in the medium and long-term.

4n the supply side, new long-term measures need to be undertaken to further enhance totalfactor productivity 1":! and improve nation5s long-term competitiveness. 1hese include

removing structural impediments and binding constraints to sustainable growth, reducing

further market imperfections and distortions that inhibit the growth process, especially in the

product, services and labour markets. Anergy market also needs to be improved with greater

competition. While we certainly need to lower barriers to entry in the labour market by

encouraging greater female labour force participation rate and by the elderly, greater efforts

need to undertake to lower the cost of doing business and facilitate entry of new

entrepreneurs and young talents in product and services markets. 2reater focus needs to be

given on adoption of new technologies, research and development #J&!, innovation and

greater power of new ideas, through upgrading of skills and reducing out-migration of talents.

Malaysian Economic Outlook 2015

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