Country briefing note <download pdf file>
Economic growth is driven by robust domestic demand
- Despite its high trade exposure, Malaysia maintained a solid economic growth rate of 5.6% in 2012, up slightly from 5.1% in 2011. Domestic demand expanded robustly, offsetting poor export performance.
- Private consumption growth accelerated on buoyant job markets, low inflation and government initiatives, such as civil servant salary hikes and one-off cash assistance to lower-income households.
- Similarly, fixed investment growth surged to a multi-year high pace on public infrastructure spending and firm private investment benefiting from the ongoing structural reform agenda to achieve high-income country status by 2020 (Vision 2020).
- In contrast, the export of goods and services decreased from mid-2012, but much more modestly than the magnitude recorded during the peak of the global financial crisis in late 2008 and early 2009.
- Output growth is projected to slow slightly to 5.0% in 2013. The introduction of minimum wages, higher remuneration for civil servants, modest inflation and government schemes to support household incomes should continue to propel consumer confidence and spending. Impressive, above-trend fixed investment growth recorded in 2012 could be sustained depending on the progress made on the reform agenda.
Inflation softens despite changes in administrative prices
- Average annual inflation rate declined from 3.2% in 2011 to 1.7% in 2012.
- Under a government effort to rationalize fuel price subsidies, the price of premium petrol was adjusted upwards by about 11% in September 2012. However, the inflation impact has been quite modest.
- The nationwide introduction of minimum wages in January 2013, and in July for smaller business enterprises, could add to price pressures, and so as the possible introduction of a goods and services tax. Given the moderate core inflation, however, these pressures are likely to be manageable.
Fiscal policy is supporting poor families and technological acquisition
- Fiscal deficit as a share of GDP declined from 5.5% in 2011 to 4.8% in 2012. The Government has been pushing for efficient revenue collection and value for money for spending programmes.
- Cash assistance was furnished to low-income families and book vouchers to students.
- The Government announced in July 2012 a new strategic fund to facilitate technology acquisition by local firms and fiscal incentives that help Malaysian companies to acquire foreign companies to gain frontier technology.
Monetary authority keeps interest rate steady
- Unlike most peers in the subregion, Malaysia left unchanged its policy interest rate since May 2011 on resilient domestic demand, but the current level of 3% is still lower than the pre-crisis level of 3.5%. Asset price build-ups in certain sectors have been dealt with by using macroprudential measures rather than changes in the policy rate.
Current account surplus narrows; the currency strengthens
- While the export of goods slowed, import growth was relatively more resilient in 2012 primarily on a surge in fixed investment and continued inventory accumulation. Thus, current account surplus was trimmed from 11% of GDP in 2011 to 6.4% in 2012.
- Foreign direct investment inflows remained strong in 2012, at around $10 billion, although not as strong as $12 billion recorded in 2011.
- Portfolio inflows trended upwards in the third quarter. The currency strengthened through the second half of 2012 on the back of strong capital inflows.
Sustainable development challenges
- Environmental sustainability has received greater attention. Malaysia adopted its National Green Technology Policy to improve energy efficiency and environmental conservation and promote the use of technology. The Government is furnishing a 2% interest subsidy and 60% guarantee to eligible companies. Carbon footprint labels and green procurement are also being emphasized. To monitor the impact, indicators, such as the number of green jobs, the contribution of green businesses to GDP, greenhouse gas emission by strategic sectors and spending on green technology research and development, will be used.