24 September 2018

Restructuring of Malaysia’s economy Post-GE14

International Factors and Perspectives Impacting Malaysia’s 2019 Economic Outlook

Yeah Kim Leng

Professor of EconomicsSunway University Business School

Global economic outlook, key drivers and risks

Malaysia’s economic restructuring post-GE14

Economic prospects and challenges in 2019

2

OUTLINE

Global economic outlook, key drivers and risks

3

4

Global growth cycle

Source: IMF World Economic Outlook April 2018; trend growth – own computation based on HP filter

Actual, forecasted and trend global GDP growth

1982, 0.6%

1988, 4.7%

1993, 2.1%

1998, 2.6% 2001, 2.5%

2004, 5.4%

2007, 5.6%

2009, -0.2%

2010, 5.4%

2016, 3.2%

2018f, 3.9%

3.9% 3.6%

4.5%

3.8% 3.7%

-1%

0%

1%

2%

3%

4%

5%

6%

% annual change, constant

prices

World GDP growth (actual) Trend growth Growth forecast (2018-23)

5

Smaller deviation from trend growth

Source: Actual or forecasted growth minus trend growth in previous chart

Current cycle (2010-17) shows smaller deviation from trend

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

De

via

tio

n f

rom

tre

nd

(%

pp

t)

Pre-GFC over-consumption in advanced economies

2008-09 GFC

6

Global outlook remains positive

Source: HIS Markit, 10 September 2018

Leading indicators point to sustained growth in 4Q2018-2Q2019 but momentum easing

7

Asia’s leading indicators easing

Source: Markit

:Asia

8

Global factors supporting growth

Global trade pickupSynchronised growth (less in 2018 and 2019)

Stronger investment in advanced economies

Resource availability (energy, raw materials)

Accommodative monetary policies

Benign inflation

Low unemployment Rising income despite depressed wages

Increased wealth due to higher asset prices

Fundamental factors

Wider factors

9

What could derail world growth?

Emerging markets

crisis

Chinese growth

disruption

US-China trade war

Financial markets

meltdown

Over aggressive monetary policies

Upside risksRising employment

Real income growth

Strong consumer sentiments

Downside risksUS-China trade war

Volatile financial market

Aggressive policy tightening

10

Structural challenges to growth

Mega-trends:

Structural challenges

Aging population

Productivity slowdown

Rising income inequality

Job losses in digital economy

Global warming

Resource depletion

Large scale immigration

Anti globalisation

11

Malaysia’s economic restructuring post-GE14

Sound macroeconomic policies•Prudent fiscal and monetary policies

•Growth-friendly financial market development policies

Strong institutions and rule of law•Efficient public sector and low regulatory burden

•Effective legal systems; enforcement of contracts & rights

Investment in education and human capital development

•Key to productivity improvements and technological innovations

Open and competitive markets• Increased specialisation, efficient resource utilisation

• Diffusion of knowledge and technology

Confidence in government macroeconomic management promotes growth

Good quality governance and low government burden leads to higher growth

Skilled human capital key to productivity and innovation-led growth

Efficient resource allocation and utilisation results in better growth

Getting macro policies right

12

Domestic re-balancing

Shift from consumption-led to investment-driven economy;

from government- dependent to private sector-led economy

Search for new markets

Business expansion opportunities via the Asean Economic

Community (AEC), TPPA and other bilateral and inter-regional

trade and investment flows

Structural reforms, upgrading and transformation

Raise economic efficiency, productivity, competitiveness

and higher governance standards through digital transformation and IR4.0.

Economic restructuring thrusts

13

14

Policy focus and priorities

Short term (1-3 years)

• Reduce tax burden on consumers

• Consolidate government spending

• Increase allocation and support for improving people’s welfare (B40)

• Dismantle monopolies, deregulate and enhance market competition

Medium term (3-5 years)

• Rationalise need, timing and sequencing of large projects

• Raise minimum wage and skilled wages

• Reduce regulatory burden, including rent-seeking

• Increase efficiency and effectiveness of government spending

Long term (>5 years)

• Higher innovation rather than input driven growth

• More competitive and efficient economy with lower regulatory burden

• More secure and attractive environment for investors due to institutional reforms

• More focussed role of GLCs in the economy

Key policy expectations

15

•Smaller government in keeping with budget & debt constraints

•Higher social allocation in line with election mandate

•Stronger focus on tax & government administrative efficiencyFiscal environment

•Open tender/competitive bidding

•Spreading procurement contracts to a larger base

Government procurement

•Review relevance and performance (no political appointees)

•Reduced government role in production economy (Privatisation 2.0)Role of GLCs

•Emphasis on private sector-led growth

•Dismantling monopolies/oligopolies

•Promoting market competition and efficiencyIndustrial policy

•Pursuit of regional trade agreements to widen markets

•Balanced trade focus among key trading partners

•Continue open market policyTrade policy

16

Private investment rising but still below desired level

Source: Department of Statistics Malaysia

Private

investment,

18.2

Public investment, 7.7

Total investment, 25.9

35.0

23.7

0

5

10

15

20

25

30

35

40

45

50

Sh

are

of

GD

P (

%)

Private investment share-to-GDP trending up but total investment is still about 10 percentage points below pre-Asian Financial Crisis as well as those in other countries

Average annual real private investment growth must hit above 10%

per annum

National target: Achieve private

investment level of 20-25% of GDP

Post-AFC

17

Investment below ‘dynamic level’

Source: World Bank’s World Development Indicators

-3.4

-1.4

2.1

2.5

2.7

3.1

4.4

4.7

5.6

6.9

8.3

16.7

Thailand

Australia

Germany

Japan

Singapore

European Union

Indonesia

Malaysia

Korea, Rep.

China

Vietnam

Philippines

19.8

20.0

22.6

23.8

24.6

25.9

26.0

27.1

29.7

32.4

43.8

Euro area

Germany

Philippines

Vietnam

Thailand

Malaysia

Australia

Singapore

Korea, Rep.

Indonesia

China

INVESTMENT LEVEL: Gross fixed capital formation as a % of GDP of selected countries, average for 2013-17

INVESTMENT GROWTH: Average annual gross capital formation growth rate of selected countries (2013-17)

Slower than fast growing economies while higher than the more advanced economies except for South Korea where investment is stronger

Higher investment level in China, Indonesia, South Korea, Singapore and Australia while Vietnam and Philippines will catch up soon with their high investment growth rates

18

FDI tapering off in Malaysia while rising in other ASEAN countries

Source: World Bank’s World Development Indicators

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Indonesia -0.6 1.9 8.3 4.9 6.9 9.3 4.9 13.8 19.2 19.1 18.8 21.8 16.6 3.9 23.1

Malaysia 2.5 4.6 4.1 6.1 8.6 7.2 1.5 9.1 12.2 9.2 12.1 10.9 10.1 11.3 9.5

Philippines 0.5 0.7 1.9 2.9 2.8 1.5 2.0 1.3 2.0 2.4 2.3 5.3 4.4 6.9 9.5

Singapore 16.4 22.3 17.7 37.5 42.6 11.8 18.5 57.5 40.0 59.8 57.5 73.5 62.7 77.5 62.0

Thailand 5.2 5.9 8.0 8.2 9.2 8.1 5.4 14.6 1.4 9.1 15.5 4.8 5.6 2.1 7.6

Viet Nam 1.5 1.6 2.0 2.4 7.0 9.6 7.6 8.0 7.5 8.4 8.9 9.2 11.8 12.6 14.1

Indonesia, 23.1

Malaysia, 9.5

Philippines, 9.5

Singapore, 62.0

Thailand, 7.6

Viet Nam, 14.1

-10

0

10

20

30

40

50

60

70

80

USD

bn

Singapore a haven for high value FDI while Indonesia and Vietnam have overtaken Malaysia with Philippines fast catching up.

National target: Raise FDI to USD15 bn

annually

19

Export growth needs a boost

Source: World Bank’s World Development Indicators

Double digit growth in Vietnam and Philippines while Australia and Germany recorded higher export growth than Malaysia.

1.0

1.6

1.6

3.3

4.0

4.3

6.3

12.7

13.7

Thailand

Korea, Rep.

Indonesia

Singapore

Malaysia

Germany

Australia

Philippines

Vietnam

Average annual export growth in % (2014-17)

National target: Average annual

export growth of 6-8% over the next 5 years

•Trade and market liberaliza-tion

•Cross-border invest-ments

•Regional blocs

Policy environment

•ICT advancement

•Logistics

•Infrastruc-ture

Technological environment

•Market access

•Opportunities for new business models

• Higher innovation

• Rising competition and volatility in business cycles

Globalised business

environment

Common market under AEC; RCEP

Lower cost of market penetration and delivery channels

Greater specialization and

competitive intensity

Firms have to focus on technology and business environment

20

Technology and market forces driving denser global supply chains and regional production networks but these could be reshaped by changes in trade policies

More industries facing productivity and cost pressures

21

30

45 4252

77

62 6555

2015 2016 2017 2018 (Jan-Apr)

No

. o

f in

du

strie

s

More industries with negative labourproductivity growth

Negative Positive

33 3727 26

74 7080 81

2015 2016 2017 2018 (Jan-Apr)

Larger number of industries with positive

average wage per employee growth

Negative Positive

61

46 4331

46

61 6476

0

20

40

60

80

2015 2016 2017 2018 (Jan-Apr)

No

; of

ind

ust

ries

Rising number of industr ies with

increasing unit labour cost

Negative Positive

Productivity, wage and unit

labour cost changes based on

107 manufacturing industries

Source: Computations based on DOSM Monthly Manufacturing Surveys

Economic prospects and challenges in 2019

22

23

Changes to baseline GDP forecasts

GDP component 2018 2019

Baseline GDP forecast 5.7% 5.3%

• Private consumption +1.1% +0.1%

• Public consumption -0.4% -0.1%

• Private investment -0.3% -0.1%

• Government investment -0.4% -0.1%

• Exports 1.0% -0.1%

• Imports -0.3% -0.2%

• Net exports -0.7% -0.1%

Revised GDP forecast 4.9% 5.1%

Source: Own forecasts and computations

Note: Total may not tally due to rounding

Aggregate domestic demand sustained by private consumption with support from export demand

24

GDP growth of 4.5-5.5% in 2018 &19

5.9

4.54.7

5.9

5.2

5.5

6.0

5.0

4.2

5.9

4.95.1

2014 2015 2016 2017 2018F 2019F

Malaysia's GDP growth forecast for 2018 and 2019

Low High Baseline

Malaysia’s short term growth outlook remains positive with GDP growth slightly below 5% in 2018 and above 5% in 2019

Source: Own forecasts and computations

25

Budget 2019 to provide clarity

Source: MOF 31st May Press Statement; 2019 forecasts

Fiscal impact of new government policies/promises

2018 2019

REVENUE IMPACT

Zero-rating GST -21.0 -44.0

Increase in corporate taxes due to higher global oil prices 5.4 ?

Higher dividends from GLCs 5.0 ?

Proceeds from SST 4.0 30.0

Net Revenue Impact -6.6 -14.0

EXPENDITURE IMPACT

Hari Raya Special Assistance -0.7

Petrol price stabilization program -3.0 ?

Expenditure rationalisation exercise 10.0 ?

Net Expenditure Impact 6.3

Nett effect on the overall budget -0.3 -14.0

% of GDP -0.02 -0.90

GDP (RM billion, current prices) 1,453.4 1,548.9

Source: BNM Monthly Statistical Bulletin; f = own forecasts 26

Growth forecast by expenditure

3.1 3.2 3.7 3.4 3.5

1.10.7

1.6

1.4 1.6

5.0

4.2

5.9

4.9 5.1

-1

0

1

2

3

4

5

6

7

2015 2016 2017 2018f 2019f

An

nu

al c

ha

ng

e %

, %

pp

t

Net exports Private consumption Public consumption

Private investment Public investment Gross Domestic Product (GDP)

Private consumption and private investment to drive growth in 2018 and 2019

Source: BNM Monthly Statistical Bulletin; f = own forecasts27

GDP growth forecast by industry

1.11.0

1.41.2 1.3

2.83.1

3.4

3.0 3.1

5.0

4.2

5.9

4.9 5.1

-1

0

1

2

3

4

5

6

7

2015 2016 2017 2018f 2019f

An

nu

al c

ha

ng

e %

Agriculture Mining Manufacturing Construction Services Real GDP

Manufacturing and services to drive growth in 2018 and 2019

Inflation forecasts for 2018 and 2019

28

CPI inflation projected to dip below trend in 2018 and rise slightly above trend in 2019

Source: BNM Monthly Statistical Bulletin; forecasts - own

5.4

2017, 3.7Baseline, 2018f,

1.8

Baseline, 2019f,

3.0

2.3

0

1

2

3

4

5

6

An

nu

al c

ha

ng

e %

Baseline Low case High case

World oil price

SST (rate & coverage)

Weak ringgit

Demand-pull pressures

GST removal

Fuel subsidy

Ringgit appreciation

Supply increase/ capacity expansion

Current account surplus to continue

29Source: BNM Monthly Statistical Bulletin, own forecast

Current account surplus to remain stable and unlikely to narrow further due to cancellation or postponement of mega infrastructure projects

10.411.2

5.4

3.64.5

3.12.5 3.1 3.0 3.0

-2

0

2

4

6

8

10

12

-40

-20

0

20

40

60

80

100

120

140

160

CA

as

a %

of

GN

I

RM

bill

ion

Goods Services Primary income Secondary income CA balance (% of GNI)

30

Enhancing sovereign credit quality

Source: Ministry of Finance, Malaysia; own computations

Room to increase direct government debt while paring down more expensive indirect liabilities

47.5 48.0 49.9 51.4 51.2 52.6 51.2 49.5

2.0 2.0 1.7 1.6 1.5 1.9 1.5 1.2

9.1 11.4 13.6 13.9 13.7 15.2 15.6 13.8

0

20

40

60

2010 2011 2012 2013 2014 2015 2016 2017

% o

f G

DP

Federal government debt

Domestic currency Foreign currency Foreign holdings of RM debt

-4.6

-6.7

-5.3

-4.7-4.3

-3.8-3.4 -3.2 -3.1 -3.0

-2.8 -2.8

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F

Fiscal deficit as a % of GDP

Continue to shrink fiscal deficit when private sector is able to pick up slack

30.5 32.334.8 35.8

33.8

8.3 8.7 10.0 10.8 10.5

10.3 11.2 12.6 13.1 13.2

0

10

20

30

40

2014 2015 2016 2017 2018B

% o

f re

ve

nu

e

Emoluments Retirement charges

Debt service charges Subsidies and social assistance

Reduce debt servicing burden through debt restructuring and asset sale

Trend 1990s, 1.58 Trend pre-GFC,

1.22 Trend post-GFC,

1.01

-4

-3

-2

-1

0

1

2

3

4

5

GD

P e

last

icity o

f g

ov

t

spe

nd

ing

Enhance government spending efficiency

31

32

Concluding remarks

▪ Global growth has become less synchronised with increased downside risks.

▪ US growth momentum will taper off as Trump’s fiscal stimulus (tax cuts and deregulation) wind down and twin deficits (fiscal and current account), strong dollar and tariff war weigh on the economy.

▪ Emerging markets facing capital flow reversals due to rising US interest rate, tighter global liquidity, slowing export demand resulting in sharp currency depreciation and rising sovereign default risks but contagion will likely be contained especially for economies with stronger fundamentals.

33

Concluding remarks (cont’d)

▪ Malaysia’s growth trajectory to remain stable at 4.5-5.5% in 2018 and 2019 despite fiscal restructuring and consolidation due to sustained private sector and export demand.

▪ Key to improvement in future growth prospects lies in supporting private investment given the anticipated rise in investor confidence in response to tangible institutional reforms and economic restructuring to enhance competitiveness, reduce corruption and leakages and strengthen public finance.

▪ Firms need to drive industry upgrading through technological advancements and innovations specific to each industry needs and competitive dynamics.

34

Thank you

Sunway University Business School

Tel : +603 7491 8622Fax : +603 5635 8633H/P : +6012 3787866Email : klyeah@sunway.edu.myWebsite : www.sunway.edu.my/university