Malaysia

Briefing Notes for the Launch in Kuala Lumpur, April 2007

GDP Growth performance and prospects

Economic growth was reported at 5.6/5.9 per cent in 2006 up from 5.3 per cent a year earlier. ESCAP forecasts the economy to grow by 5.7 per cent this year boosted by higher investment and government spending, to offset a slowdown in exports from within the electronics sector. The Malaysian central bank is targeting 6.0 per cent growth for 2007.
The Budget spending together with lower corporate taxes is set to boost investment and construction as exports slow.
Exports are expected to moderate to a growth of 8.2 per cent from the 10.3 per cent rise in 2006. Private forecasters expect global semi-conductor sales growth to ease to 9.2 per cent from 10.4 per cent in 2006.
Domestic demand, through the additional budget spending will play a key role in the economy over the year. It is expected that economic growth will further moderate in the first half but will pick-up over the latter months.
ESCAP has expressed concerns over domestic demand's declining contribution to economic growth and had called for further government spending particularly on infrastructure that would promote private investments. Excess capacity may also lead to slower private investment growth.

Inflation and Monetary policy developments

Inflation was higher at 3.6 per cent in 2006 from 3.0 per cent a year earlier due to higher oil prices. But lower international oil and commodity prices, ``moderate'' wage pressures, and currency appreciation helped contain inflationary pressures. In 2007 inflation is forecast to ease to 3.2 per cent. The central bank was also watching possible higher food prices in the first quarter after severe flooding in Johor State put upward pressure on prices.
Overall an easier inflation outlook led to the central bank leaving benchmark interest rates steady in late 2006. Money supply growth slightly eased slightly in 2006 to 13.2 per cent from 15.4 per cent in 2005.

Fiscal Policy developments

The government reported a 31 per cent increase in development spending for 2007, focused on a 200 billion ringgit (US$57 billion), five year development budget under the Ninth Malaysia Plan.
Higher revenue from petroleum taxes and income from the state oil company, Petroliam Nasional Bhd, is geared to cutting budget deficit to an eight-year-low of 3.4 per cent of GDP. Fiscal deficit eased to 3.7 per cent of GDP in 2006 from 3.8 per cent in 2005.
Total government revenues expected to climb 12 per cent to 134.8 billion ringgit in 2007, with oil-related revenues accounting for 53.7 billion ringgit or 40 per cent of total revenues.
Malaysia spent 16 billion ringgit in oil subsidy payments and taxes forgone to keep retail fuel prices down. Spending on oil subsidies expected to rise to 19 billion ringgit in 2007.
Government is also looking to implement a goods and services tax over the next two to three years to diversify tax revenue base.

Trade performance

Total trade amounted to 1,069.7 billion ringgit from 967.7 billion ringgit in 2005, up 10.3 per cent.
Export growth was 10.53 per cent in 2006, from 11.0 per cent in 2005. Exports rose to 589 billion ringgit from 534 billion ringgit a year earlier, an increase of 10.34 per cent. Imports were higher at 480.7 billion ringgit from 434 billion ringgit, a rise of 10.77 per cent. Malaysian merchandise imports had risen from an 8.5 per cent rise in 2005.
Rising demand for digital music players and mobile phones with video playing capability and to access the Internet lifted electronics exports. Exports of goods and services were also positive. But there were mixed signals over future trend. Also lower crude prices cut value of oil exports.
Exports were softer in growth in early 2007, due to slowing U.S. economic growth and soft demand for Asian electronics. The U.S. market accounts around 20 per cent of Malaysia's exports.
In early 2007, sales to the U.S. market fell 16 per cent in January from December on lower electronics and palm oil exports. Over the same period, shipments of electrical and electronics goods, that make-up about 50 per cent of exports, fell 12 per cent in January.

Capital flows, external debt and exchange rates

Overall, financial sector has been robust, strengthened by on-going reforms, and private domestic credit was "kept manageable".
The Malaysian ringgit, moved in line with other regional currencies in appreciating against the U.S. dollar through 2006, and rose a further 2.2 per cent in early 20007.
Since the first quarter of 2006 vulnerability to currency crisis has declined as the real appreciation was limited and foreign exchange adequacy ratio improved. 2006 was also the first full year of trading for the ringgit as a managed float since Prime Minister Abdullah Badawi ended the currency's seven year peg in July 2005.
The ringgit is expected to further appreciate after the central bank relaxed foreign exchange rules as part of efforts to attract more overseas investors to Malaysia. Central bank has also said it is not targeting the currency but preferring "orderly movement, reflecting the underlying fundamentals".
The ringgit reached a nine year high of 3.4515 in trading in late March. The central bank currently prevents trading the ringgit in offshore markets. This restriction may be eased later this year.
Malaysia's external debt also declined over 2006, to 179.4 billion ringgit from 197.7 billion ringgit in 2005 with the external debt service ratio falling to 4.7 per cent from 5.4 per cent in the previous year.
Balance of payment surplus in 2006 came in at 25.3 billion ringgits, up by 86.0 per cent from 13.6 billion ringgits in 2005. The current account surplus was up 23.6 per cent to 93.6 billion ringgits in 2006 from 75.7 billion ringgits.
Net outflow in the financial account climbed to 43.5 billion ringgits from 37.0 billion ringgits in 2005. International reserves of the Bank Negara Malaysia stood fell by 25.3 billion ringgits compared to an increase of 13.6 billion ringgits in 2005.

Key policy issues and responses

Outlook remains cautiously positive. In early months of 2007 export growth remained cautiously positive due to overseas buying of Asia-manufactured electronics.
Government is also looking to policy responses in light of competitive challenge from China and India. Business sector has also called on government to boost fiscal spending and an easier monetary policy stance.
Government measures to boost business climate have included abolishing some property taxes, liberalizing trade in ringgit and ringgit-based assets. New incentives also aimed at drawing investors to a special southern economic zone. Foreign direct investment in 2005 fell to 15 billion ringgit from 17.6 billion ringgit in 2004.∞