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Malaysia
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This information was last updated on 18 APR 2013, 12:29 AM EDT (4:29 GMT)
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recovery. Nonetheless, growth of almost 5.0% in 2013 is widely anticipated; our recently upgraded forecast remains on the lower end of consensus. Policy settings are expected to remain largely unchanged, as fiscal largesse remains a feature of the policy landscape and particularly so in an electoral year. On the monetary policy side, the thriving economy suggests there is little need for further rate cuts, even though the inflation environment remains benign. We see Bank Negara Malaysia on hold through the rest of this year. Economic Growth Indicators 2010 Real GDP (% change) Real Consumer Spending (% change) Real Government Consumption (% change) Real Fixed Capital Formation (% change) Real Exports of Goods and Services (% change) Real Imports of Goods and Services (% change) Nominal GDP (US$ bil.) Nominal GDP Per Capita (US$) 7.2 6.6 2.9 10.4 11.3 15.6 2011 5.1 7.1 16.1 6.5 4.2 6.2 2012 5.6 7.7 5.0 19.9 0.1 4.5 303.5 2013 4.9 6.6 4.5 5.7 3.6 4.4 325.4 2014 5.2 6.2 3.9 4.1 6.2 5.8 350.3 2015 5.8 6.7 3.9 4.6 6.5 6.2 383.7 2016 4.6 5.5 4.0 5.8 4.2 5.0 416.0 2017 4.8 5.3 3.8 4.5 3.9 4.5 452.1
246.8 287.9
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank. Download this table in Microsoft Excel format
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Export demand moderated in 2011, but domestic demand remained resilient. The economy grew 5.1% in 2011, driven primarily by domestic consumption and investment. Most impressively, private consumption rose 6.9%somewhat surprising given elevated levels of consumer credit as well as disruptions to car imports as a result of natural disasters in Japan and Thailand. Other indicators, however, such as employment, income, and prices, were supportive of consumer confidence and spending. Government spending surged 23.6% y/y in the fourth quarter, reaching a new record high. Although public spending is relatively low in relation to overall GDP, this extremely high growth rate turned the sector into a sizeable contributor to GDP growth during the period. Investment spending rose a respectable 6.0%. The 2010 recovery exceeded early expectations. GDP grew an impressive 7.2% in 2010, marking the best performance in a decade. Although exports did recover handsomely, growing by 9.8%, robust import growth meant that net exports were not as powerful a growth driver as domestic demand. Indeed, private consumption gained 6.6%a far cry from the meager 0.7% expansion in 2009. Real fixed investment rose 9.4% in 2010, more than offsetting the 5.6% contraction recorded in 2009. Both public and private investments contributed to this good performance. Inventories, however, were truly central to the 2010 growth picturejust as we had predicted. Having experienced unprecedented inventory shedding in 2009, Malaysia's economic performance was lifted handsomely by inventory rebuilding in 2010.
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Consumers spend happily despite high debt levels. Although not a particularly large country in absolute population, Malaysia's relatively high per-capita income makes it an attractive target for retailers. Its per-capita income is more than six times higher than India's, three times higher than Indonesia's, and about twice as high as that of Thailand and China. In addition, those consumers have a relatively high propensity to consume, as evidenced by the fact that with one exception in 2010, the rate of growth in private consumption has exceeded total GDP growth each and every year over the past decade. This has resulted in a gradual rise in household consumptions share in GDP from 45% in 2003 to 49% in 2012.
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Unemployment peaked in the first quarter of 2009. The sharp decline in export demand at the end of 2008 has forced companies to aggressively cut costs and inevitably pushed unemployment rates higher. The impact was not really seen until early 2009, when the unemployment rate jumped to 4.0% from 3.1% in the fourth quarter of 2008, mostly because the speed of the downturn took many firms by surprise. In addition, regulatory requirements also slowed the implementation of planned personnel cuts, as companies operating in Malaysia must inform the government of any planned layoffs one month in advance. Nevertheless, the unemployment rate fell back to 3.5% by end-2009. Labor shortages represent a long-term growth constraint. The quality of available labor is generally high, relative to the current manufacturing base, centered on labor-intensive light manufacturing. However, Malaysia's labor costs have risen relatively sharply, undermining cost competitiveness in labor-intensive industries in relation to major emerging markets, notably China. The market remains relatively rigid, bound by a significant level of regulation supporting positive discrimination towards bumiputras and high welfare commitments. Malaysia's relatively small workforceabout 10.5 million workersis evenly distributed across sectors, with 37% engaged in manufacturing and construction, 28% in local trade and tourism, 16% in agriculture, 10% in services, and the remainder in government. Nevertheless, Malaysia suffers from a relatively serious shortage of domestic labor in various sectors, including electronics, but also agriculture, which has been exacerbated by official campaigns to rid the country of thousands of illegal foreign workers. The government has thus sought to address the problem through a variety of policies in the education sector (see below), as well as diversifying the workforce by relying on some sources of foreign labor. As a result of fairly tight labor-market conditions, unemployment rates have historically been very low.
Inflation: Outlook
Inflation has bottomed but remains a nonissue. Headline consumer price inflation has steadily retreated in 2012 but looks to have now bottomed. Nonetheless, weak external demand and soft commodity prices suggest there will be little upward pressure on prices in coming months. We anticipate average inflation of 2.0% in 2013, up slightly from 1.7% in 2012. Inflation Indicators 2010 Consumer Price Index (% change) Wholesale-Producer Price Index (% change) 1.7 5.6 2011 3.2 9.0 2012 1.7 0.0 2013 2.0 -1.6 2014 2.9 4.2 2015 3.6 5.6 2016 3.6 5.1 2017 3.5 4.7
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank. Download this table in Microsoft Excel format
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Disinflation intensified in 2012. Favorable base effects, tame global commodity prices, and easing food prices allowed Malaysia's consumer price inflation to decelerate notably in 2012. Having started the year at 2.7% year-on-year (y/y), the CPI rate declined to 1.4% y/y by July and to 1.2% y/y by December 2012, for an annual average of 1.7%. Food prices in particular played a key role in facilitating this trend: having started 2012 at 4.8% y/y, food inflation had eased to 2.0% y/y during NovemberDecember. Malaysia has a long tradition of price stability. It has historically enjoyed a benign inflation environment, thanks in part to its stable exchange-rate regime and good macroeconomic policies. Indeed, inflation rates have historically been more typical of a developed economy than of a developing one, having averaged just 2.9% during 19882007. Over the span of these two decades, inflation surpassed 5.0% only oncein 1998following a substantial depreciation of the ringgit. Between 2000 and 2007, annual inflation rates moderated further to an average of just 2.0% a year.
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.
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Monetary Policy Indicators 2010 Policy Interest Rate (%, end of period) Short-term Interest Rate (%, end of period) Long-term Interest Rate (%, end of period) 2.75 2.60 3.98 2011 3.00 2.92 3.88 2012 3.00 3.04 3.52 2013 3.00 3.10 3.46 2014 3.25 3.27 3.67 2015 3.50 3.50 4.00 2016 3.72 3.88 3.82 2017 3.91 4.20 4.38
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank. Download this table in Microsoft Excel format
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tax breaks. Finally, the package aims to support household disposable income through tax relief on interest payments on mortgages, up to MYR10,000 per year over three years, while farmers and fishermen are eligible for subsidized loans. The stimulus package, coupled with declining tax revenues, pushed the fiscal deficit to 7.0% of GDP in 2009.
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank. Download this table in Microsoft Excel format
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2010another strong month for industrial production and tradeexports and imports were up 50.7% and 60.5% from a year earlier, respectively. Nevertheless, March marked the cyclical peak as far as annual growth rates were concerned. With base effects becoming less favorable, the rate of expansion in exports slowed considerably over the second half of 2010. For the year as a whole, nominal merchandise exports grew 26.3%, while imports rose 33.0%. Foreign trade activity continued to expand steadily over the course of 2011, but more difficult base comparisons and a loss of momentum in external demand meant that by the end of 2011, annual growth rates for both exports and imports were down to single digits.
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Despite significant success, challenges remain. The country's developmental strategies were very successful at attracting foreign investment and boosting growth. In the 1990s, GDP growth averaged 8.3%one of the highest rates in the world. Nevertheless, some aspects of the programs were less successful, particularly the government's effort to lift the economic status of the Malay community. Former Prime Minister Mahathir, a long-term supporter of the idea, expressed disappointment over the program's performance when leaving power several years ago. He suggested that the program had had unintended consequences, one of which was to foster an attitude of dependency on government support, rather than a true entrepreneurial spirit among the Malays. Decades of positive discrimination have also bolstered an attitude of ethnic superiority among the Malay population, which has, at times, resulted in policy decisions that were, in fact, detrimental to growth.
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Gradual liberalization improves competitiveness. Restrictions that forced foreign banks to raise at least 50% of their credit from domestic banks have been lifted in a bid to boost overseas participation, while interest rates were liberalized in April 2004 to generate greater competition. Under the new system, banks are now allowed to set their own base lending rates (BLRs), guided by a new unified benchmark rate, the overnight policy rate (OPR).
2013 Percent Change (Real terms) 2.1 1.5 5.3 4.4 4.4 6.8 4.4 6.0 1.8 5.0
Percent Share of GDP (Nominal terms) 12.1 9.2 8.1 6.9 6.8 4.8 3.7 3.1 2.9 2.7 60.2
36.4 27.6 24.4 20.7 20.6 14.5 11.1 9.2 8.7 8.1 181.3
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re-exported following additional processing. Crude oil and natural gas exports are similarly matched by imports of refined petroleum products. Other major exports include various commodities such as wood and wood products, palm oil, and rubber. Malaysia: Major Trading Partners, 2011 EXPORTS Country China Singapore Japan United States Thailand Hong Kong India South Korea Australia Indonesia
Source: IMF, Direction of Trade
IMPORTS Billions of USD 29.9 28.8 26.1 18.9 11.7 10.2 9.2 8.4 8.2 6.8 Percent Share 13.1 12.7 11.5 8.3 5.2 4.5 4.1 3.7 3.6 3.0 Country China Singapore Japan United States Indonesia Thailand South Korea Germany Hong Kong Australia Billions of USD 24.7 24.1 21.4 18.1 11.5 11.3 7.6 7.2 4.4 4.2 Percent Share 13.2 12.8 11.4 9.7 6.1 6.0 4.0 3.8 2.4 2.2
Malaysia: Major Trading Partners, 2000 EXPORTS Country United States Singapore Japan Hong Kong Netherlands Thailand South Korea United Kingdom China Germany
Source: IMF, Direction of Trade
IMPORTS Billions of USD 20.2 18.1 12.8 4.4 4.1 3.6 3.2 3.0 3.0 2.5 Percent Share 20.5 18.4 13.0 4.5 4.2 3.6 3.3 3.1 3.1 2.5 Country Japan United States Singapore South Korea China Thailand Germany Indonesia Hong Kong Philippines Billions of USD 17.3 13.7 11.8 3.7 3.2 3.2 2.4 2.3 2.3 2.0 Percent Share 21.1 16.6 14.3 4.5 3.9 3.9 3.0 2.8 2.8 2.4
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edge of technological progress. An interesting development in recent years has been the rising value of outward FDI from Malaysia, suggesting that an increasing number of Malaysian businesses are themselves looking to outsource production elsewhere in Asia. At the moment, it appears that Malaysia's development strategy over the medium term will focus more on developing a world-class service industry, such as Islamic finance (in which it has already developed a world-class reputation) to offset its gradual loss of competitiveness in manufacturing. Ethnic and religious tensions are risks to internal stability. Political risk has been low for the past 20 years, but since the 2008 elections, which resulted in unprecedented gains for the opposition forces, we have seen more instability in the political arena. Although a more vibrant democracy is a positive factor in the long run, there are near-term concerns about the direction of macroeconomic policymaking. Indeed, a significant problem with Malaysia's investment environment, and one that poses risks to its long-term economic performance, relates to the sensitivity of ethnic relations. Malaysia has adopted an affirmative action policy in favor of the Malay majority. In practice, this policy has given rise to vested interests and has obscured the commercial rationale behind key economic transactions. The neglect of commercial considerations in favor of the political ideas of ethnic-Malay empowerment in business has reduced the overall efficiency of the Malaysian economy. The highly centralized government system has fostered unhealthily close relations between political and corporate circles, with charges of corruption, cronyism, and opacity commonly leveled at the operational environment.
Simona Mocuta
Economic
2. Malaysian industrial output shrinks in February, weakness probably exacerbated by seasonal effects
12 APR 2013
Economic
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Economic
5. Malaysian inflation inches higher in February as food prices hit year high
21 MAR 2013
Economic
Economic
Economic - Country
9. Upside surprises continue across ASEAN with better-than-expected Malaysian Q4 GDP numbers
21 FEB 2013
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