Download Malaysia On staying resilient

Economic Insight
2016/22|25 March 2016
Malaysia: On staying resilient
Growth and drivers
CHART 1: GDP (AT CONSTANT 2005 PRICES)
Annual change (%)

8.0
Bank Negara Malaysia (BNM) projects Malaysia to grow by 4.0%
7.5
to 4.5% in 2016, in line with the government’s revised forecast,
7.0
from 4.0%-5.0% projected earlier. This would be in line with
6.5
the 4.3% we are projecting for this year. All sectors are
6.0
5.5
expected to contribute to growth except agriculture. The
5.0
economy is moderating mainly because of slower domestic
4.5
demand. The moderation in domestic demand would be due to
4.0
the high price environment in the economy on account of the
3.5
ongoing subsidy rationalisation, implementation of goods and
3.0
2010
2011
2012
2013
2014
2015
2016f
services tax (GST) and imported inflation due to weak ringgit.
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
The deteriorating consumer sentiment is largely due to the
uncertainty in the labour market that has affected consumption.
CHART 2: CONSUMER PRICE INDEX
In 2015 growth was recorded at a respectable 5.0%, despite
the tough environment last year.
Annual change (%)
4.0

3.5
Nevertheless, growth in 2016 is still expected to be anchored by
3.0
domestic demand. For 2016, BNM projects the private sector
2.5
consumption to pace slower to 4.3% yoy from 5.1% yoy in
2.0
2015. Households are expected to continue making expenditure
1.5
adjustments due to the higher cost of living.
1.0

0.5
However, several government measures such as reduction in
employees’ EPF contribution by 3%, higher Bantuan Rakyat
0.0
2011
2012
2013
2014
2015
1Malaysia (BR1M) and additional tax relief of RM2,000 for those
2016f
earning below RM8,000 would hopefully partially offset the
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
adverse effect on private consumers expenditure in 2016. On
the other hand, according to the survey by the Malaysian’s
CHART 3: BALANCE OF PAYMENTS (RM BILLION)
Employers Federation (MEF), employers expect a salary
increment to average around 5.5% in 2016 (2015:5.7%) which
100
would also further support private consumption in 2016.
80
60

40
private investment growth is projected to grow by 5.5% yoy in
20
2016 from 6.0% yoy. The environment of continued low
0
Q1
-20
Meanwhile, given the continued environment of uncertainty,
Q2
Q3
2011
Q4
Q1
Q2
Q3
Q4
2012
Q1
Q2
Q3
2013
Q4
Q1
Q2
Q3
2014
Q4
Q1
Q2
Q3
2015
Q4
commodity prices would affect capital expenditure in the
upstream mining sector, particularly investment related to
activity involving marginal oil fields. Nonetheless, private sector
-40
capital spending will be supported by the implementation of
-60
Current Account
Financial Account
Source: Department of Statistics, Malaysia
Reserves Assets
ongoing and new investment projects, particularly in the
manufacturing and services sectors.
DISCLAIMER: This report is for information purposes only. We have based the data and information in these reports from sources we believe to be reliable. However, we do not guarantee
as to the accuracy or completeness of the information provided. Any recommendation or opinion that is provided in this document, if any, does not have regard to the investment objective
and particular needs of any specific addressee. No parts of this publication may be reproduced or redistributed in any form or any means without a prior written permission of the publisher.
Bumiputera Development | Development Gap | Human Capital | Macroeconomics & Markets | Technology & Innovation

CHART 4: INTERNATIONAL RESERVES POSITION (BILLION
USD)
Public consumption growth is expected to moderate to 2.0%
yoy in 2016 from 4.3% yoy in 2015, reflecting mainly the
300
lower
250
government’s commitment to more prudent spending under
spending
on
supplies
and
services
given
the
200
the current uncertain environment. During the recalibrated
150
Budget 2016 announcement, the government stated that
they will cut about RM4 billion in operating expenditure and
100
while providing a guideline to every government entity on the
50
spending cuts.
Malaysia
Indonesia
Jan-16
Feb-16
Dec-15
Oct-15
Philippines
Nov-15
Sep-15
Jul-15
Aug-15
Jun-15
Apr-15
Thailand
May-15
Mar-15
Feb-15
Jan-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Jan-14
Feb-14
0

Singapore
source: Bank Negara Malaysia and Bloomberg
Public investment is projected to turn around to register a
positive growth of 1.1% from negative last year. Investment
on projects that have high impact on the economy such as
CHART 5: RM PER UNIT OF US DOLLAR (END PERIOD)
MRT and high speed rail will not be cut but the cash flow for
4.5
the project will be managed more efficiently according to
4.3
MOF in February’s meeting.
4.1
3.9

3.7
Exports in services is seen to be one of the main contributors
3.5
to growth as government starts to promote tourism by
3.3
introducing e-Visa to tourists from certain countries and
3.1
Feb-16
Nov-15
Aug-15
May-15
Feb-15
Nov-14
Aug-14
May-14
Feb-14
Nov-13
Aug-13
Feb-13
Aug-12
May-13
diversification
Nov-12
hand, E&E exports are likely to benefit from progressive
2.5
Feb-12
easier Visa application by tourists from China. On the other
2.7
May-12
2.9
170
Steady
demand
for
growth. However, Malaysia would need to upgrade its value-
187.0
176.3
182.4
add for this sector to stay competitive in the long run.
182.9

Meanwhile, the current account surplus is expected to remain
1-2% of GNI, still a positive to avoid a twin deficit situation.
150
The narrowing current account would be due to the weak
130
commodity prices.
110
90
sector.
such as mobile devices would likely bolster E&E export
CHART 6: HOUSEHOLD SECTOR: KEY RATIOS (%)
166.7
the
semiconductors for a wide range of applications in industries
Source: Bank Negara Malaysia
190
in
76.1
80.5
86.1
86.8
89.1
Financial system health
70
50
2011
2012
Debt-to-GDP
2013
2014
2015
Financial asset-to-GDP

government’s forecast of 2.5% to 3.5% for 2016. This augurs
Source: Bank Negara Malaysia Annual Report 2015
well with our projection of 2.5% to 3% for 2016. Subsidy
TABLE 1: REAL GDP BY EXPENDITURE (2010=100)
Domestic Demand
Private sector expenditure
Consumption
Investment
Public sector expenditure
Consumption
Investment
Net Exports of Goods and Services
Exports
Imports
Real GDP
Source: Bank Negara Malaysia Annual Report 2015
The inflation target by the BNM is also in line with the
2015p
2016f
Annual change (%)
5.1
4.3
6.1
5.2
6.0
5.1
6.4
5.5
2.1
1.6
4.3
2.0
-1.0
1.1
-3.7
1.1
0.7
3.2
1.3
3.4
5.0
4.0-4.5
rationalisation on flour, the expected increase in toll for PLUS
highways and hikes in electricity tariff effective early this year
are among contributing factors to the higher target of
inflation. On the contrary, the drop in oil prices and other
commodities such as rubber are the factors mitigating the
cost-push inflation from accelerating further. BNM opines that
inflation would have peaked in 1Q16 and would moderate
from there onwards. Inflation in 2015 registered a benign
2.1%.

On account of sustained growth and softer inflation outlook
during the rest of the year, we believe that BNM would likely
DISCLAIMER: This report is for information purposes only. We have based the data and information in these reports from sources we believe to be reliable. However, we do not guarantee
as to the accuracy or completeness of the information provided. Any recommendation or opinion that is provided in this document, if any, does not have regard to the investment objective
and particular needs of any specific addressee. No parts of this publication may be reproduced or redistributed in any form or any means without a prior written permission of the publisher.
Bumiputera Development | Development Gap | Human Capital | Macroeconomics & Markets | Technology & Innovation
maintain the Overnight Policy Rate at 3.25% for most
part of 2016. We expect the new governor to continue
from manufacturing to services towards achieving
with BNM’s on-going policies in spite of the speculation
sustainable growth.
on the replacement for BNM governor.

In terms of financial stability, as the loan-to-deposit ratio

against US dollar, the international reserves have
reflects a possible liquidity problem in the system, BNM
increased by USD 0.8 billion as at 15 Mar’16 to USD 96.1
had cut the statutory reserve requirement (SRR) from
compared to 31 Dec’15. This could be the sign that BNM
4% to 3.5% in Jan’16 to maintain ample liquidity in the
intervened less in the
system. The cut would have injected RM6.1 billion into
could also mean an increase in BNM’s income.
in the system. Liquidity now can also be obtained from
longer solely reliant on deposits only. Hence the
importance

of
loans-to-deposit
ratio
is
now
less
foreign exchange market.
Nevertheless, an increase in the international reserves
the system, which is equivalent to 0.3% of total deposits
the capital market such as the sukuk market and is no
Despite the general trend of depreciation in ringgit
Concluding remarks

Going forward, the projected growth of 4.0%-4.5% for
compared to previously in measuring liquidity. We opine
2016 is achievable given the supportive fiscal and
that on improving investors’ sentiment due to the
monetary policies put in place thus far. The close
possible marginal rise in crude oil prices and less
monitoring of financial system by BNM has helped the
domestic issue noises, capital inflows would return and
economy
increase the liquidity in the system.
environment.
The level of household debt-to-GDP ratio was elevated to
89.1% in 2015 from 86.8 in 2014. Looking at this
number alone, this is a major concern for both for
consumers and the financial system. However, the data

to
stay
resilient
amid
the
challenging
Given the already accommodative interest rate and
sufficient liquidity in the system, we think the fiscal
policy put in place by MOF in the Recalibrated Budget
2016 will support the growth target this year.
shows that financial assets held by households stood at
182.9% to GDP in 2015 compared to 182.4% in 2014.
Also, the aggregate household liquid financial asset-todebt ratio remains resilient at 1.4 times.
Trend in ringgit

The uptrend in the Malaysian ringgit had indeed been
encouraging. Thus far, the domestic currency had
breached below the RM4.00 per dollar psychological
mark. On average, compared between two quarters,
ringgit had appreciated by 1.4% against dollar with
RM4.28 average in 4Q15 and RM4.22 in 1Q16. However,
BNM still sees continued volatility in the ringgit arising
from the uncertainty in the global environment outlook.
Hence, we maintain our forecast for ringgit to stabilise in
2Q16 from 1Q16. Currently our fundamental value for
the ringgit in 2016 averages at RM4.25 per dollar.

We see a limited upside to the ringgit reflecting our
projection of limited rise in crude oil prices due to supply
glut and sluggish growth in demand for crude oil prices.
We are wary of the supply from Iran and of China’s drop
in demand for commodities as it rebalances its economy
DISCLAIMER: This report is for information purposes only. We have based the data and information in these reports from sources we believe to be reliable. However, we do not guarantee
as to the accuracy or completeness of the information provided. Any recommendation or opinion that is provided in this document, if any, does not have regard to the investment objective
and particular needs of any specific addressee. No parts of this publication may be reproduced or redistributed in any form or any means without a prior written permission of the publisher.
Bumiputera Development | Development Gap | Human Capital | Macroeconomics & Markets | Technology & Innovation