Briefing Notes for the Launch in Kuala Lumpur, 17 May 2010
- With exports accounting for more than 80% of GDP, and an export product mix (heavy reliance on electronics, machineries and machineries) that is highly sensitive to income, Malaysia has been particularly vulnerable to trade shocks emanating from the global financial crisis.
- Thus, given the collapse in world external demand, the Malaysian export sector took a hit and the economy contracted in 2009 by -1.7% after growing by around 4% - 6% in the years preceding the crisis.
- A turnaround was recorded in the last quarter of 2009, however, with the economy expanding by 4.5 % (as compared to the last quarter in 2008). It should be noted that the rate, which is rather high, is influenced by the low base from which the growth rate is calculated. It is therefore still a “rebound” rather than a full “recovery”.
- To offset the drop in external demand in 2009, the authorities launched two fiscal stimulus packages, and the monetary authorities responded by easing bank reserve requirements and pushing down policy interest rates.
- Exports, after falling by double digits since the last quarter of 2008, have started to climb at a rate close to 10% in the fourth quarter of 2009 riding on the back of improving global conditions and increases in energy prices, for which Malaysia is an exporter. Investment also started to recover in the fourth quarter.
- Because imports fell more sharply than exports, in the wake of the global crisis, the current account continued to remain positive. As exports begins to recover as a result of an improved world demand, and as imports increase even faster, on the basis of a reviving economy, there will be a dent in the current account in the fourth quarter.
Fiscal and Monetary Policies: aggressively expansionary policies aligned with policy responses of the rest of the world
- Malaysia launched an aggressive fiscal stimulus package amounting to more than 9 % of GDP in 2009. Spread over two tranches, the aforementioned package combined small-scale infrastructure projects such as upgrading roads, hospitals and schools with investments in strategic infrastructure such as broadband.
- Due to the surge in public spending the budget deficit widened in 2009. Thus, the challenge confronting fiscal authorities is how to cut spending in a way that does not jeopardize the economic recovery.
- The outlook on inflation record in Malaysia as of now does not seem problematic. Inflation in January 2010 was 1.07%, a rate that does not suggest overheating in the economy.
- Nevertheless, on 4 March, the monetary authorities raised interest rates by 25 basis points (from 2% to 2.25%), making it one of the first economies to reign in an expansive monetary policy. However, this is regarded as a fairly mild tightening that is not expected to threaten economic recovery, and seems to have been driven by a recognition that interest rates being kept “too low for too long” in an attempt to boost domestic demand, may fuel inflation.
- Non-performing loans as a percentage of total commercial loans continue to be low, barely 2% (as of November 2009), indicating relative resiliency of the banking sector to the global crisis.
- Malaysia is expected to grow by at least 5% in 2010, driven by domestic consumption and exports.
- Malaysia, like other Southeast Asian economies, is faced with the challenge of crafting an exit strategy from the stimulus that does not derail recovery and at the same time starts to unwind fiscal deficits that built up during the crisis.
- The task confronting policymakers is how to promote investments in the private sector (on the expenditure side of the economy) and to expand the services sector (on the supply side).
- The government has embarked on a number of measures to attract foreign direct investments (FDI).
- The role of China as Malaysia’s trading partner looms large in the years ahead. It is a key destination market for Malaysia and increasingly one of the biggest source of imports.