malaysia – a macroeconomic analysis
TRANSCRIPT
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[Name] | Macroeconomics | Dr. Jaydeep Mukherjee
Malaysia A Macroeconomic Analysis
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Contents
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Introduction
Malaysia boasts one of south-east Asia's most vibrant economies, the fruit of decades of industrial growth an
political stability. Its multi-ethnic, multi-religious society encompasses a majority Muslim population in most of it
states and an economically-powerful Chinese community. Consisting of two regions separated by some 640 mile
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
highly open economy (exports comprise over 100 percent of GDP) and a leading exporter of electrical appliance
electronic parts and components, palm oil, and natural gas. Malaysia is also externally competitive, ranking 12t
(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
diversified economy that grew on average 7.3 percent between 1985 and 1995. After the Asian financial crisis o
1997-1998, Malaysia has continued to post solid growth rates, averaging 5.5 percent per year from 2000 200
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 Malays
aspires to emulate.
In 2010, Malaysia launched the New Economic Model (NEM), which aims for the country to reach high incomstatus by 2020 while ensuring that growth is also sustainable and inclusive. The NEM envisions economic growt
that is primarily driven by the private sector and which moves the Malaysian economy into higher value-adde
activities in both industry and services. To achieve these goals, Malaysia will need better skills, more competition,
leaner public sector, a better knowledge base, smarter cities, and greater efforts to ensure environmenta
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 tofirms costs and can cause problems).
Transparency International ranks Malaysia 47th of 180 countries in its Corruption Perceptions Index.Economic
Malaysias 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 Malaysias GDP and the country achieves a healthy current account surplus.
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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 Islamic in its religion but its only the Malay muslims who are bound byIslamic 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 hasmore public holidays than any other country.
The cultural differences mean that businesses entering the country will have to adapt their products andbusiness 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 Malaysiancompanies, 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 brand new town called Cyberjaya.
Cyberjaya is a self-contained intelligent city with world-class IT infrastructureLegal
The Malaysian legal system is based on British common law, although Islamic law is applied to the Muslimpopulation.
The British law element can be seen as an advantage to firms investing in the country as the law will befamiliar to them.
However, although the legal basis of the system is British, many of the punishments for those who breakthe 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 wibe applied fairly.
Environmental
The rapid development of Malaysia has come with high environmental costs (negative externalities). According to a data from the UN, Malaysias deforestation rate is increasing at a faster ratethan 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 countrys 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 effecton the habitats of some rare wildlife.
Malaysians, and particularly the govt. have little time for these criticisms and see them as evidence ofWestern hypocrisy over environmental issues. However, Western companies need to be careful that they arent seen to be participating in this
environmental damage as they may face demonstrations and protests from pressure groups such asGreenpeace and the World Wildlife Fund.
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Macroeconomic indicators for Malaysia from Past to Future
1. Gross Domestic ProductMalaysias economy outperforme
expectations to pull off a remarkablgrowth of 7.2% for 2010 to MY
558.38 billion, compared with
contraction of 1.7% in 200
Malaysias record high GDP came from
a sharp rebound in its manufacturin
sector, which displayed a growth rat
of 11.4%.
The 2014 Budget has introduce
several bold measures to strengthe
the management of public finance
focusing largely on reducing thoverall deficit of the Federa
Government account (as a percentage to GDP) to 3.5% in 2014 and 3.0% in 2015. The Malaysian Econom
is expected to grow at the stronger pace of between 5% and 5.5% in 2014 on strong Domestic demand an
recovery in Exports, according to the economic report released by Ministry of Finance. This compares wit
the estimated GDP expansion of 4.5% to 5% in 2013. Growth in Construction and services sectors wi
continue to lead Economic drive in 2014. According MOF, Malaysia Strong fundamentals of Economy wi
Support the nations 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. InflationOn the basis of studies conducted o
Malaysias Inflation rate an
Economic Growth. Conclusion can b
drawn that over the past decade
there has been a general non-linea
relationship between inflation rat
and economic growth in Malaysi
However, in the long run inflation ha
a positive effect on Malaysia
economic growth if kept under 4% a
suggested by Munir et. Al.
Asian Development Bank (ADB) ha
predicted that the countrys economy will pick up in 2014 but at the cost of rising inflation. AD
predicted that Malaysias inflation rate will increase to 2.2 per cent following a revised outlook of gros
domestic product (GDP) growth at 5.0 per cent in 2014.
Year 2008 2009 2010 2011 2012 2013(F) 2014(F) 2015(F)
5.596.3
4.83
-1.51
7.43
5.135.64
4.35.09 5.17
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
GDPgrowth(in
%)
Year
GDP growth
4.47
1.02
2.12
3.202.70 2.50
3.00 3.00
2008 2009 2010 2011 2012 2013 2014 2015
CPIa
ten
do
fprices
Year
Consumer Price Index
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CPI growth (in %) 4.47 1.02 2.12 3.20 2.70 2.50 3.25 3.50
3. Balance Of PaymentsThe reason for the narrowing of ou
current account surplus during th
second quarter was due to sever
factors, including lower commoditprices and import of lumpy items suc
as the purchase of aircraft. Malays
avoided joining the twin deficit club
in the second quarter, in a referenc
to India and Indonesia, the tw
countries in Asia with the bigge
current account deficits.
The countrys trade surplus remains steady. Malaysia is one of the only countries in Southeast Asia that ha
a decent current account balance at present. Though many had expected the country to fall into a defic
trap due to poor exports earlier this year, Malaysia narrowly escaped that and is now comfortably in thsurplus zone. Malaysia should be able to avert current account deficits over the next two years. Malaysia
current account should remain in surplus, although narrowing due to stronger import growth to suppor
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 AccountBalance(in $billion) 38.91 31.80 27.00 33.51 18.64 6.75 7.08 10.05
4. UnemploymentUnemployment Rate in Malaysi
averaged 3.31 Percent from 1998 unt
2013, reaching an all-time high of 4.5
Percent in March of 1999 and a recor
low of 2.70 Percent in August of 201
In Malaysia, the unemployment rat
measures the number of people active
looking for a job as a percentage of th
labor force.
The unemployment rate in Malaysia
expected to remain fairly consisten
throughout the next few years. From
2011 to 2013, the unemployment rat
is expected to see a marginal improvement from year to year. Eventually, unemployment rates will remai
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 3.2 3.3
38.9131.80
27.00
33.51
18.64
6.75 7.0810.05
2008 2009 2010 2011 2012 2013 2014 2015
Currentaccountsurp
lus
(in
$billion
)
Year
Current Account balance
3.33.7
3.33.1
2.73.1 3.1
2008 2009 2010 2011 2012 2013 2014
Unemp
loyment(in%)
Year
Unemployment
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5. Trade DeficitMalaysia, the third-largest economy i
Southeast Asia, has been vulnerable t
uncertainties in the global financi
market and the euro zone debt criswhich has dragged exports an
hampered growth. The overall trend o
narrowing trade balance should remai
a theme for the rest of the year, a
domestic demand is still quite robus
and we see exports tail off with lowe
commodity prices and uncertainties i
external demand.
Year 2008 2009 2010 2011 2012 2013(F) 2014(F) 2015(F)
Exports (in billion $) 229.83 184.89 230.98 264.98 265.79 273.50 277.88 229.83
Imports (in billion $) 178.25 143.86 188.98 217.46 229.62 239.70 244.96 178.25
6. Budgetary Deficit
Malaysias proposal to spend 14.1
billion ringgit ($4.41 billion) more tha
it had aimed to spend this fiscal yeahas added to the concerns tha
government isnt going to narrow th
budget gap by as much as originall
planned. The government has said
plans to trim the deficit from 4.5% o
GDP in 2012 to 4% in 2013 and 3.5% i
2014 before returning to a surplus b
2020.
Year 2008 2009 2010 2011 2012 2013(F) 2014(F) 2015(F)
Exports (in billion $) 229.83 184.89 230.98 264.98 265.79 273.50 277.88 229.83
Imports (in billion $) 178.25 143.86 188.98 217.46 229.62 239.70 244.96 178.25
7. Monetary Policy
51.58 41.03 42.00 47.52 36.17 33.80 32.92
229.83
184.89
230.98
264.98 265.79 273.50 277.88
178.25143.86
188.98217.46 229.62 239.70 244.96
2008 2009 2010 2011 2012 2013 2014
Va
lue
(in$billion
)
Year
Trade Deficit
Trade Surplus Exports(billion) Imports(billion)
24.36 36.28 28.71 43.07 50.98 60.41 66.32 72.10
214.00 220.34 218.55253.46 267.16
289.98 310.37 331.97
189.65 184.06 189.84210.39 216.18 229.57
244.05 259.88
2008 2009 2010 2011 2012 2013 2014 2015
Va
lue
(in
billion
$)
Year
Budgetary Deficit
Budgetary Deficit Government Expenditure
Government Revenue
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The Malaysian economy is currently being supported by improvements in the export sector and investmen
activity. However, given consolidation in the public sector and a slowdown in consumption, domesti
demand is expected to moderate going forward. Inflation is expected to rise due to input cost factors goin
forward, although a stable external price environment will temper any increase and moderating domesti
demand.
The benchmark interest rate in Malaysia was last recorded at 3 percent. Interest Rate in Malaysia i
reported by the Central Bank of Malaysia. From 2004 until 2013, Malaysia Interest Rate averaged 2.
Percent reaching an all-time high of 3.5 Percent in November of 2008 and a record low of 2.0 Percent iFebruary of 2009. In Malaysia, The Central Bank of Malaysia (Bank Negara Malaysia) takes the interest rat
decisions. The official interest rate is the Overnight Policy Rate.
8. Exchange RateThe Malaysian ringgit enjoyed th
advantage of a rapidly growin
economy before 1997 and was tradin
as a free float currency at around 2.5
to the U.S. dollar. The East Asia
financial crisis brought about change
which affected most of the East Asia
economies and even Malaysia had t
arrest the depreciation as it ha
reached to lows of 3.80 to the dollar b
the end of 1997. For the first half o
1998, the currency fluctuated betwee
3.80 and 4.40 to the dollar, before Bank Negara Malaysia pegged the ringgit to the US dollar in Septembe
1998, maintaining its 3.80 to the dollar value for almost seven years, while remaining floated against othe
currencies.
The ringgit lost 50% of its value against the US dollar between 1997 and 1998, and suffered generadepreciation against other currencies between December 2001 and January 2005. Between 2005 and 201
the currency appreciated against the dollar except for the financial crisis period of 2008-2010. In 2011,
reached 3.06 to the dollar, but has been depreciating since then which can be a sign of danger.
9. Fiscal PolicyFollowing the May parliamentary elections, the Malaysian government led by Prime Minister Najib Tu
Razak has begun its long-delayed fiscal reform program to accelerate fiscal consolidation despite a weake
political mandate. The prime minister has announced the implementation of a Goods and Services Ta
(GST) in 2015 for the purposes of broadening the tax base and easing the government's reliance o
petroleum-related receipts. In addition, subsidy rationalization started in September with an increase ifuel prices, helping to stem the growth of a subsidy bill that has accounted for an increasingly large portio
of the government's spending. While the execution of the government's fiscal reform program will b
politically and administratively challenging, we expect it to result in narrower fiscal deficits that wi
stabilize Malaysia's debt dynamics.
Malaysia's balance of payments remains healthy, despite a narrowing of its current account surplus ove
the past two years, continued large outward direct investments by Malaysian corporate and banks, an
volatile portfolio flows. And despite the terms of trade shock, resulting in turn from lower prices fo
2.7
2.93.1
3.3
3.5
3.7
3.9
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Ringg
it/$(inRM)
Year
Ringgit/$
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Malaysia's commodity exports, we expects the current account to remain in a structural smaller surplu
thereby helping to sustain favorable financing conditions for the government and the economy at large.
Macroeconomic Issues faced by Malaysia in the immediate future
An important development in the Malaysian financial sector since the 1997 Asian financial crisis has been th
reduction in the banking institutions credit exposure to businesses and the greater focus on household financin
The household segment accounted for one third of the banking sectors total loan exposure beforethe crisis; it now
accounts for more than half.
As living standards rose globally, consumer demand for goods increased, and thus easy creditencouraged
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 agains
the Gross Domestic Product (GDP), known as Household Debt-to-GDP Ratiowhich has been consistently risinand is not a good sign.
Additionally, Debt Repayment Ratiothe percentage of a households income required to repay household deb
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 i
household financial assets, of which high proportions are liquid assets such as cash savings. However, the ratio o
household financial assets to household debt has declinedfrom 274.3% in 2008 to 229.6% in 2012, while th
liquid financial assets to household debt ratio declinedfrom 175.3% to 148% over the corresponding period.
465.2 510.8588.7
667.8754.6
0
100
200
300
400
500
600
700
800
2008 2009 2010 2011 2012
Household Debt (RM Billion)
60.40%
71.70% 74%75.80%
80.50%
39.70%43.10% 44.10% 45.20% 43.90%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
2008 2009 2010 2011 2012
Key Household Debt Indicators
Household Debt-to-GDP Ratio Debt Repayment Ratio
Issue 1: Persistently high household debt levels
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The
dilemma?
Households over-exposure to debt, if not properly contained, can lead to a crisis where the consumer sector wi
collapse due to colossal amounts of debt. But then again, trying to establish a suitable solution for the precariou
level of household indebtedness, harsh measure to curb consumer over-lending could weaken consumer spendin
substantially.
Increased indebtedness means that the household sector has more exposure to interest rate risksand shocks t
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 th
size of their mortgage excessively, as in Malaysia. Malaysia has a property bubble in addition to its cred
bubble.
Policy Implications
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1. First, it restricts the governments monetary policy. House prices to household incomes in major citieof Malaysia have over-stretched the debt servicing capacity of the average household. Should governmen
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 wibe derailed with an increase in interest rates and inflation.
3. Whilst todays non- performing loan ratio is low at 2.3%, BNM should not take too much comfort in thisThis 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 201and 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 application
Closer monitoring of non-bank lenders in 2012
A higher capital charge of 100% (previously 75%) during the computation of risk-weighted assets fomortgages where the LTV is 90% or higher.
Recommendations
Smooth, steady changes in the interest policy rate, to reinforce the importance of forward-lookinmonetary policy.
It is essential for policymakers to have timely and frequent data on the household sector, to allowappropriate 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, 201(previously 1% since 1Q2009).
Start a public housing policy that provides affordable housing, particularly in urban areas, to people beloa certain level of income. Tighten mortgage rules to cool the property market by, for example, increasin
the minimum down payment; reducing the maximum term of the housing loan, and increasing capital gaintax to discourage speculation.
Tighten the rules for car loans by, for example, increasing the deposit and reducing the term of the loanImplement 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, thuseducing consumers to sign up for them.