Malaysia
Date: 10 May 2012
The event will be held in Kuala Lumpur , Malaysia , with the participation of distinguished participants from academia, government, civil society, international organizations, and the press. The list of well known participants making opening remarks, presentations and commenting on the publication includes:
Mohamed Ariff
Professor
International Centre for Education in Islamic Finance (ICEIF)
Oliver Paddison
Economic Affairs Officer
Macroeconomic Policy and Development Division
United Nations Economic and Social Commission for Asia and the Pacific
Country briefing note <download pdf file>
Economic growth helped by strong private consumption and commodity exports
• Malaysia 's highly open economy moderated to a still robust 5.1% growth in 2011, from 7.2% in 2010.
• With strong international linkages, the impacts of supply chain disruptions in Japan and Thailand and a deteriorating global outlook were felt in export and manufacturing figures. In particular, electrical and electronics exports declined markedly. However, export growth in palm oil, natural gas and crude oil contributed significantly to growth.
• The Government laid out reform and transformation initiatives to boost competitiveness and achieve high-income status by 2020, including major public infrastructure projects.
• In 2012, Malaysia is expected to grow by a slower 4.5% due to weaker external demand.
Inflation mild and not a major concern
• Inflation in Malaysia remained among the lowest in the subregion, despite accelerating from 1.7% in 2010 to 3.2% in 2011.
• Changes in the administered price of fuel in 2011 contributed to higher transport costs, but a wide range of subsidies remain, keeping prices low.
Fiscal health not improving; subsidy and revenue reforms needed
• Fiscal deficit remained at around 5.6% of GDP in 2011, after declining from 7% in 2009 to 5.6% in 2010. This was largely due to wide-ranging subsidies on the expenditure side and delayed introduction of the Goods and Services Tax (GST, a form of value-added tax) on the revenue side, which remains heavily reliant on oil revenues.
• There have been some reforms also. Service tax was raised and broadened and a property gains tax introduced, while subsidies on energy and sugar were reduced slightly in 2010. Subsidies still accounted for around 4% of GDP.
• Debt to GDP ratio increased to 53.5% in 2011. Subsidy and revenue reforms are important to implement large infrastructure projects planned under the Economic Transformation Programme, including a mass rapid transit rail system in the capital.
Policy interest rate steady but other monetary tools employed
• In response to the strong recovery in 2010, Malaysia raised its policy interest rate by 75 basis points between March and July, to 2.75%. In 2011, policy rate was raised once in May, to 3% -- still slightly lower than the pre-crisis level.
• Unlike other major economies in the subregion, which lowered rates in the second half of 2011 and early 2012, Malaysia decided to keep the policy rate steady. This was possible because domestic private consumption and commodities exports were stronger than expected.
• However, reserve requirements and other monetary tools were employed to support growth while addressing inflationary pressure. In response to speculation in property markets, the central bank imposed a 70% loan-to-value ratio on individual borrowers with more than two housing loans.
Current account surplus narrowing but FDI inflows increasing
• Electrical and electronics exports declined by 5.4%, but strong export growth in palm oil, natural gas and crude oil resulted in overall merchandise exports growing by 14.5% to $227.5 billion in 2011.
• Current account surplus has been narrowing in recent years, moving from around 17% of GDP before and during the 2009 financial crisis to 11.5% in 2010 and 10% in 2011, as imports have grown faster than exports.
• With prolonged weak external demand from traditional markets in developed countries, it is a relief to know that South-East Asia's export base has diversified over the past decade, with a higher share of exports now going to regional markets in Asia . For instance, the share of euro zone and United States markets declined from 32% in 2000 to around 20% in 2010. This same period, however, also saw the deepening of regional supply chains, with a rising share of intermediate goods exports. ESCAP analysis shows that the subregion's export dependency on traditional markets remains quite high, once such re-exported goods are considered.
• Foreign direct investment into Malaysia grew by 537% in 2010 and 28% in 2011, when it received $11.6 billion, the highest in the subregion after Singapore and Indonesia .
• The Malaysian ringgit gained 7.9% against the US dollar in 2010 but lost 2.9% in 2011. During the first quarter of 2012, however, the currency strengthened again, appreciating 3.4% against the US dollar.
Income inequality calls for inclusive policies across the board
• Income inequality remains a major challenge as Malaysia seeks to achieve high-income status by the end of this decade. The Government is planning to boost low-income household spending through cash transfers, but more comprehensive measures and inclusive policies across the board are needed. A priority area could be reducing educational disparities and wage level differences within different regions of the country. Moreover, social protection programmes could be better targeted, with a stronger focus on poverty reduction. In addition to policy changes, a restructuring of public expenditure would be needed to finance inclusive policies, inter alia by phasing out poorly targeted subsidies.
Policy brief: Living with high commodity prices <download pdf file>