i

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

Malaysias
Economic Outlook
2009-2020

February 2009

DISCLOSURE AND UPDATE: The forecasts and outlook contained in this report are based on the prevailing
assumptions and circumstances at the time of the report. Although the forecasts are intended to hold for the duration of
a year, subsequent events may cause these assumptions to change and necessitate adjustments to the viewpoints and
expectations in light of the altered circumstances. Any such change will be issued by RAM Holdings Berhad in the form
of a commentary or an update.
Copyright 2009 by RAM Holdings Berhad
Published by RAM Holdings Berhad. Reproduction or transmission in any form is prohibited except by permission from
RAM Holdings Berhad.

ii

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

HIGHLIGHTS
Economic Performance in 2008
Economic growth eased to 4.6% in 2008 after the 6th consecutive year of above 5%
growth
Malaysias economic growth moderated to 4.6% in 2008, from 6.3% the previous year, as
the effects of the global financial crisis hit our shores in the final quarter of last year. The
modest growth achieved despite the recession in industrialised economies has raised the
countrys gross national income to RM509 billion in constant 2000 prices and RM713 billion
in current prices. With the continued expansion, the countrys real per capita income rose
3.4% to an estimated RM18,349 as at end-2008.
Towards the end of 2008, price pressures from the oil- and commodities-induced inflation
shock had eased considerably while unemployment and wages remained comparatively
low and stable. This was despite the fast-weakening global economy, buffeted by the
global financial turmoil that had been triggered by the meltdown in the American subprime mortgage market. Meanwhile, Malaysias current-account balance remained firmly in
surplus while external reserves stabilised at RM317 billion, enough to finance 7.6 months
of imports.
Domestic demand remained the principal driver of the economy last year, recording an
estimated annual growth of 6.1% - slower than the 8.3% of 2007. Consumption growth,
which surpassed the pace of investment, moderated in 2008, but remained resilient due to
the stable employment trend, consumers sustained purchasing power, high government
spending and ample consumption credit.
Export and import activities (in terms of volume) decelerated sharply in 4Q 2008, falling
considerably below trend growth following a plunge in exports and weakening domestic
demand. Exports of goods and services eased further to 1.5% from 4.2% in the previous
year while imports slowed correspondingly to 2.2% from 5.4%.
All sectors, with the exception of mining, recorded positive growth, led by the services
sector, which clocked in at 7.3% while manufacturing slowed further to 1.3% from 3.1%
in the previous year. The agriculture sector expanded by 3.8%, a clip faster than the 2.2%
achieved in the previous year.
Consumer prices - as measured by the Consumer Price Index - went up 5.4% (2007:
+2.0%), mainly driven by the effects of price shocks in relation to fuel and food
commodities, as well as upward adjustments in the controlled prices of several goods and
services.
On a trade-weighted basis, the Ringgits nominal effective exchange rate depreciated 1%
while the real effective exchange rate remained flat. In general, the ringgits weakness,
especially in 2H 2008, had been caused by an outflow of short-term capital. The latter had
been sparked by the sell-off in financial markets by foreign investors following the global
financial turmoil and deleveraging process triggered by the meltdown of the United States
sub-prime mortgage and derivatives market.

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

Outlook for 2009 and 2010

Malaysian economy forecast to grow 0.9% in 2009 on expectations that global
demand will stabilise in the second half of the year, and stage a modest recovery to
3.8% in 2010
For a quick assessment of the global demand contractions impact on Malaysias GDP
growth, an external-demand indicator has been derived from Malaysias exports and
weighted by the importing countries GDP. Three scenarios of expected GDP growth for
Malaysias major trading partners have been simulated, with the base-line forecast
premised on the International Monetary Funds (IMFs) latest available projections on
these economies.
Based on the baseline scenario, Malaysias real GDP is projected to record marginally
positive growth of 0.9% in 2009, picking up to 3.8% in 2010. Dwindling export demand,
which is expected to contract 5.0% this year, is seen to pose the most significant
downside risk to both the resilience of domestic demand and the overall buoyancy of the
economy.
The global economic slump will have negative knock-on effects on domestic demand,
which is projected to post a weaker growth of 3.7% this year, down from 6.1% in 2008.
This is supported by increased government spending and fiscal as well as monetary
stimulus measures - including aggressive reduction of interest rates - to arrest the decline
in domestic demand as consumer and investor confidence wanes in the face of the
uncertain depth and duration of the global downturn.
Given the downward pressure that unemployment will exert on private consumption, it is
expected to deliver a weak increase of only 2.5% this year. On the other hand, public
consumption should be at the forefront, rising 4.5% and making up somewhat for the
shortfall in private-sector activities.
Investment activity is also likely to remain sluggish, edging up an estimated 0.5% in
2009. The public sector is seen to be instrumental in ensuring sufficient investment
activity through planned infrastructure projects and other fiscal pump-priming initiatives;
it is projected to record a robust 10.1% expansion this year.
Meanwhile, Malaysias export growth is forecast to decline 5% in 2009, before staging a
0.5% recovery in 2010 due to the low-base effect. Gross merchandise exports and imports
are projected to contract by 20% and 18%; thereby maintaining the trade balance at a
high level RM100 billion. The predominant factors underpinning our forecast are dismal
external demand, which is expected to remain challenging as Malaysias major trading
partners try to navigate through the recession before staging a modest recovery in 2010
as the aggressive monetary and fiscal stimulus packages that are being mounted across
most countries gain traction towards the end of this year.
The manufacturing and construction sectors will face challenging prospects this year; they
are expected to post declines of 5.5% and 0.5%, respectively. Meanwhile, the services
sector will remain the primary driving force for domestic demand; it is expected to chalk
up a modest 3.8% growth in 2009 underscored by the resilient performance of the
communications and financial-services sub-sectors.
The rate of domestic inflation is expected to ease to between 1.5% and 2.0% in 2009.
Bank Negara Malaysia is envisaged to cut its benchmark interest rate to around 1.25%
this year.
Gross issuance of private debt securities is estimated to come in at RM25 billion in 2009,
with foreign issuers expected to continue tapping the Ringgit bond market for financing
arbitrage opportunities.

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

More Malaysian Government Securities (MGS) are expected to be issued in 2009 to fund
the Governments various stimulus packages which are expected to push the countrys
fiscal deficit to 5.5-6.0% of GDP in 2009. The larger issuance is not anticipated to have
significant crowding-out effects on the demand for high-quality PDS, despite the flight to
quality phenomenon that characterises the behaviour of financial markets during periods
of economic uncertainty.
Base-line medium-to-long-term GDP growth forecast revised lower to average of
4.5% for 2009-2020 period
While a weak recovery is expected towards the end of 2009, it will be several years (up to
5 years, according to a recent study on countries hit by the combined credit and housing
market crises) before trend growth can resume in countries entangled in the current
turbulence. It will therefore be challenging for export-oriented developing countries to
sustain their traditional growth performance in the face of more feeble demand from the
industrialised economies.
Our revised medium-to-long-term GDP growth forecast for Malaysia takes into
consideration the weak global demand that is likely to persist for several years. Average
annual growth until 2020 has been revised downwards to 4.5%, or 1.2 percentage points
lower than our projection in the last Economic Outlook publication.
Total consumption is projected to increase 5.3% per annum between 2011 and 2015,
easing to 4.6% for the 2016-2020 period. This translates into an average annual increase
of 4.5% for the entire 2009-2020 span. A faster pace of growth in private consumption
and investment is expected from 2011 onwards, after 2 consecutive years of more
generous government spending to mitigate the effects of the global slump in 2009 and
2010.
Our base-line scenario assumes an increasingly larger share of GDP for private
investment, from an average of 11.3% in 2010 to 15.0% in 2020; we had previously
projected 13.0% and 15.3%, respectively.
The services sector is likely to expand at an average pace of 5.6% annually between 2011
and 2015 (6.3% previously) while the manufacturing sectors growth has been revised
from 5.4% to 5.0%.
The contribution of capital investment to output growth is projected to rise marginally to
1.4% during the 2009-2020 period, on account of a higher investment rate. Labours
contribution is expected to ease to 2.1% as the country gradually shifts to an economy
driven by higher wages and skills.

Key Risks and Challenges

Short term
The depth and duration of the slump in global demand remain the key short-term risks to
our growth forecast for 2009 and 2010. A persistent decline in exports will push up the
number of distressed companies, cutbacks in domestic spending and increased lay-offs.
This will in turn further dampen domestic demand and put the brakes on economic
activity.
Our prognosis of a second-half recovery for both the global and domestic economies,
albeit a gradual and weak one, is premised on the simultaneous and effective roll-out of
fiscal and monetary stimulus packages across the crisis-hit industrialised economies, as
well as those seeking to mitigate the effects of the global downturn.

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

Malaysias commodity-based industries will face more challenging times due to weak
demand and low prices over the next 1 to 2 years. A slowdown in investment activities in
the commodity-based industries is inevitable against the backdrop of a global recession.
Malaysias relatively sound financial system is supported by a high rate of domestic
savings as well as a current-account surplus, healthy foreign reserves and a moderate
debt level. As such, sustaining consumer and investor confidence will be crucial towards
averting a recession and positioning for a more rapid recovery when global economic
conditions normalise.
Medium to long term
The continuous liberalisation of the services sector and the easing of equity conditions for
both domestic and foreign investors across all sectors of the economy are expected to
enhance Malaysias attractiveness as a platform to serve the common market, arising from
the creation of the Asean Economic Community by 2015.
Malaysian and other export-oriented Asian countries need to re-examine their growth
strategies as they can no longer rely on Western economies over-consumption to drive
their exports.
The challenge in the coming years is to stoke domestic demand and undertake the
necessary shift in the structure of the production economy, to focus on domestic demand.
More importantly, Malaysia and other highly open Asian countries will have to accelerate
intra-Asian trade and investment.

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

CONTENTS
HIGHLIGHTS .................................................................................................................... 1
Contents ........................................................................................................................... 5
I)

REVIEW OF ECONOMIC PERFORMANCE IN 2008 ............................................. 6

A) Demand Performance ........................................................................................ 7
B) Sectoral GDP Performance ............................................................................... 8
C) External Sector and Trade Performance ......................................................... 10
D) Price, Monetary and Capital Market Trends .................................................... 12

II)

IMPACT

OF

THE

GLOBAL

FINANCIAL

CRISIS

AND

ECONOMIC

DOWNTURN.......................................................................................................... 14
A) Recession in Industrialised Economies ........................................................... 14
B) Impact of External Demand Shock on the Malaysian Economy ...................... 15
III)

MALAYSIAS SHORT TERM GROWTH PROSPECTS ........................................ 17

A) Outlook for 2009 and 2010 .............................................................................. 17
B) External Sector Outlook ................................................................................... 22
C) Prices and Monetary Conditions ...................................................................... 22
D) Outlook on Private Sector Financing and Bond Market ................................... 23

IV) UPDATE

ON

MALAYSIAS

MEDIUM-TO-LONG-TERM

GROWTH

FORECASTS ......................................................................................................... 24
A) Forecasts of Annual GDP Growth and Structural Change ............................... 24
V)

KEY CHALLENGES AND RISKS .......................................................................... 28

A) Short term ........................................................................................................ 28
B) Medium-to-long-term ........................................................................................ 29

VI) CONCLUDING OBSERVATIONS ......................................................................... 30

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

I)

REVIEW OF ECONOMIC PERFORMANCE IN 2008

After the 6th consecutive year of above 5% growth, Malaysias
economic expansion eased to 4.6% in 2008

Malaysia experienced
robust economic growth
in first 3 quarters of
2008, followed by sharp
deceleration in final
quarter

Malaysias economic growth moderated to 4.6% in 2008, from 6.3%

the previous year, as the effects of the global financial crisis reached
our shores in the final quarter. The sharp slowdown to 0.1% in 4Q
2008 resulted in the full-year performance dipping below 5.0% after
six consecutive years of above 5% expansion. The more modest pace
last year has closed the negative output gap that had been evident
since 2002 (Figure 1).
As at end-2008, the countrys gross national income reached an
estimated RM713 billion in current prices, or RM509 billion in constant
2000 prices. With the continued expansion, per capita income rose
3.4% to an estimated RM18,349 in constant 2000 prices or RM25,703
in current prices for the year.

Figure 1: Growth in 2008 eased below trend level

12.0
10.0

ActualGDPgrowth

8.0

Annualchange%

6.0

TrendGDPgrowth

2007:6.3%
2008a:4.6%
2008t:5.2%

4.0
2.0
0.0
2.0
4.0
6.0
8.0

Source: Trend estimated using Hodrick-Prescott filter

Malaysias fundamentals
remain intact and
inflationary pressures
have eased

Going into a turbulent 2009, when most industrialised economies have

already slipped into recession since the second or third quarter of
2008, Malaysias macroeconomic fundamentals have remained intact
despite a sharp fall in exports.
Meanwhile, price pressures from the oil- and commodities-induced
inflation shock have eased considerably while unemployment and
wages have been kept relatively low and stable. The countrys currentaccount balance has remained firmly in surplus and external reserves
have stabilised at RM317 billion, enough to finance 7.6 months of
imports. Despite an uptick in the fiscal deficit to an estimated 4.8% as
at end-2008, overall Federal Government indebtedness stayed
manageable at less than 40% of GDP.

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

A)

Demand Performance

Domestic demand moderated in 2008, especially in the second

half
Real GDP growth clocked
in at 4.6% for 2008 due
to a sharp drop in
exports and slowdown in
private investment in
final quarter

Malaysia delivered a commendable overall growth performance in

2008, despite the uncertain business environment amid the
unravelling of the global financial crisis following the collapse of
several iconic financial institutions in the US and Europe. Kicking off
the year with 7.4% growth in the first quarter, moderation set in after
that - most notably in the third quarter, when the effects of recordhigh inflation and a slowing external market began materialising;
growth slowed to 4.7%. Meanwhile, growth in the final quarter
declined sharply, signalling increasing downside risks vis-a-vis a weak
external market and mounting uncertainty amongst private-sector
players. The full year 4.6% growth achieved in 2008 is lower than the
6.3% of 2007 and also a shade below RAMs forecast of 5.0%.

Domestic demand
stayed resilient, and
made up for diminishing
exports

Domestic demand remained the chief driver of the economy in 2008,

charting a rise of 6.1% (2007: 8.3%). As in previous years,
consumption growth surpassed that of investment, although it eased
to 9.1% from 9.9% in the previous year. Notably, the 8.4% increase in
private consumption was lower than the previous years 10.8%, and
also less than the 11.6% for public consumption, which was markedly
higher than trend performance as the government stepped up
spending to counter the external slowdown.
The key factors that contributed to the resilience of consumption
expenditure include the following:

Public investment offset

the drop in private
investment activities
7

Stable employment trend, with the unemployment rate

estimated to remain steady at around 3.5%, i.e. just above
the previous years 3.2%.

Sustained purchasing power due to the abatement

inflationary pressures towards the final quarter of the year.

Higher government spending under the expansionary Budget

2008.

Strong demand for consumer durables like passenger cars,

which rose at an average rate of 22.0% up until 4Q 2008.
Although car sales subsequently declined through the
remaining quarters, they still ended the year with an overall
13.9% increase.

Consumption credit and loans extended by the banking system

stayed stable after the spike at the beginning of the year, with
growth hovering around 8.8%.

Imports of consumption goods also remained resilient

throughout 2008, posting an increase despite a slowdown in
imports of investment goods.

of

Meanwhile, overall investment activity dipped well below the 9.6%

trend growth, registering at 1.1% for the year. In the last few years,
public investment has overtaken private investment with the
implementation of 9th Malaysia Plan (9MP) projects and introduction

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

of the various economic corridors in Malaysia. Premised on this, publicsector investments growth of 11.6% helped offset the estimated 8.1%
decline in private investment.
Pronounced slowdown in
exports in 4Q 2008

Unlike the domestic components of aggregate demand, which

exhibited a consistent decline in growth in 2008, the trend for exports
and imports was more volatile. A notable deceleration in both export
and import volumes occurred in 4Q 2008, falling considerably below
trend growth. Exports of goods and services eased further to 1.5%
from 4.2% in the previous year while imports slowed correspondingly
to 2.2% from 5.4%. Despite the slowdown in trade volume, the
external trade balance showed a surplus of RM142 billion, equivalent
to a 41.5% y-o-y surge due to the high commodity prices during the
first three quarters of the year. Both exports and imports expanded in
nominal terms by 9.6% and 3.3%, respectively. This pattern was
accentuated by, inter alia, the following factors:

B)
Services sector - best
performer once again

Persistently elevated fuel prices for a considerable part of the

year which had subsequently boosted export receipts.

Steady demand for key export items, such as Electrical and

Electronics (E&E) products, for most of the year. Although
there was a marked slowdown in demand for electronic
components like semiconductors towards the end of the year,
electrical exports seemed to perform better than their
electronic counterparts, with consumer and industrial electrical
products advancing at respective averages of 34.2% and 9.5%
for the first three quarters.

Increasing prominence of agricultural exports due to more

robust worldwide demand for fuels such as palm oil and
liquefied natural gas (LNG). After E&E exports, LNG and palm
oil contributed 9.9% and 5.6%, respectively, to the countrys
total export value.

Sectoral GDP Performance

All sectors with the exception of mining achieved positive growth, led
by the services sector, which expanded by 7.3% for 2008 - albeit
moderating from 9.7% in the previous year.
Manufacturing growth slowed further to 1.3% from 3.1% in the
previous year. The performance in 2008 is considerably lower than the
average of 6.8% achieved over the last 5 years. Among the
contributing factors are the continuing weakness of the global
electronics and electrical (E&E) industry and cooling external and
domestic demand especially towards the final quarter. Still, the sector
managed a marginal 0.9% growth for the entire year.

Moderate level of mining

and quarrying activities

Mining and quarrying activities, meanwhile, were rather dismal, with

signs of contraction from the second quarter onwards; growth
contracted by 0.8% for the year. The services sectors growth
continued dominating the supply side, maintaining a credible pace
throughout the year on the back of strong financial-services
development as well as wholesale and retail trading activities. This
sector grew at 7.3%, slightly slower than the 8-year peak of 9.7%
achieved in 2007. On the supply side, the services sector has become
the key driver of growth, contributing 3.9 percentage points to GDP

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

growth in 2008; its relative resilience has enabled the domestic

economy to deliver a commendable performance.
Resilient agricultural
sector attained 3.8%
growth

The agriculture sector was another strong performer in 2008,

expanding by 3.8%, a clip faster than the 2.2% achieved in the
previous year. However, this sectors contribution to GDP has been
marginal for some time (around 0.3 percentage points in 2008). Its
significance could increase with the rise in global and domestic
demand for food and other commodities.

Performance of
construction sector
stayed above trend, but
activity moderated
towards end of year

The construction sector stayed quite stable following its recovery in

2007; it expanded 2.1% in 2008 - above the 5-year average of 0.7%.
The increase in residential and commercial building launches in 2008
reflected the positive impetus for this sector while price pressures that
were evident in the first half eased considerably following the
retracement in raw-material prices in the third and fourth quarters of
the year. However, mounting uncertainty among consumers and
businesses hampered momentum in the fourth quarter, partially
negating the positive effects of lower building costs for construction
firms. In the meantime government infrastructure and development
projects that focused on infrastructure upgrading had also helped
maintain this sectors growth.
Sharp fall in manufacturing output

Steep drop in industrial

production by year-end,
reflecting adverse
implications of weakening
external demand

The overall Industrial Production Index (IPI) declined from a

promising 7.5% growth at the start of 2008 to a 15.6% contraction by
year-end. Although all major sectors had contributed to the slide, the
notable about-turn in manufacturing output in the fourth quarter, with
an 18.4% contraction in December alone, had accentuated this trend.
The overall IPI only inched up 0.3% y-o-y as a result.
Elsewhere, mining activity had also declined - a pattern that began in
the third quarter and which led to a 5.5% contraction in the final
quarter of 2008. No significant extra capacity for the oil and gas sector
came on-stream last year, which also limited the sectors expansion to
some extent.

Figure 2: IPI Performance across sectors

15
10

PercentChange

5
0
Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

5
10
15
20
Mining

Electricity

Source: BNM and RAM Economic Research

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

Manufacturing

Alldivisions

Dec

Output of export-oriented
goods fell most rapidly;
and contributed the most
to the decline in IPI

As the global financial crisis started spilling over into the real economy,
manufactured exports bore the brunt of the slump in external demand;
the subsequent drop in output levels indicated signs of decline. Exportoriented industries output, in particular, had plunged rapidly - a trend
that became prevalent for industries that had yet to experience any
contraction in exports, such as wood products.

C)
Increased openness of
economy rendered it
more susceptible to
global downturn

Exports of manufactured
goods first to feel
demand slowdown

External Sector and Trade Performance

As growth in several developing countries in the region began

decelerating, especially in the second half of 2008, the openness of
these economies had revealed their vulnerability to the global slump.
While export performance deteriorated, jobs - particularly in
manufacturing industries - also suffered. Domestic demand was not
resilient enough to withstand the negative shock of weakening export
demand.
With an export-to-GDP ratio of 120%, Malaysia is vulnerable to a
slump in global demand, especially in the first 2 quarters of 2008. The
signs of a marked retardation in exports had started manifesting then,
even though the effects seem to be lagging behind our regional trade
partners that are also export-reliant. E&E products make up the bulk
of Malaysias manufactured exports. In 2008, over 50% of the value of
our manufactured exports can be attributed to E&E products.

Figure 3: Relative export performance of E&E sub-sectors

60
50

PercentChange

40
30
20
10
0
Q108

10

Q208

Q308

20
30
Semiconductors

Electronicequipment&parts

Consumerelectricalproducts

Industrial&commercialelectricalproducts

Electricalindustrialmachinery&equipment

Householdelectricalappliances

ElectronicsIPI

ElectricalsIPI

Source: BNM and RAM Economic Research

Agricultural exports
gaining prominence in
international markets

10

Besides manufactured exports, agricultural products are also gaining

prominence in international markets. Palm oil has been a main export
item to regions like the Middle East and ASEAN. Furthermore, Malaysia
accounts for over 60% of the worlds exports. As such, the volume of
exports stayed consistently healthy in 2008, although the value has

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

diminished since its peak in July - in line with the falling world palm-oil
prices since last March. As demand for palm oil is believed to be
reasonably resilient, export volumes should not drop too significantly.
However, the price of the commodity is not expected to revisit the
highs of early 2008.
Export destinations higher proportion to Asian region
ASEAN remains integral
market for Malaysian
exports

Asia remains the principal market for our exports; the importance of
the ASEAN region has become increasingly evident, accounting for
over a quarter of our total export value in 2008. Singapore made up
the bulk of export demand from the ASEAN region (around 14%); this
is indicative of the weakness in our export performance towards the
end of 2008, as the island state fell into recession. Exports to other
ASEAN countries like Indonesia and the Philippines were also sizeable,
but are unlikely to compensate for the drop attributed to Singapores
waning demand.
Meanwhile, Japan and China are the main markets within the larger
Asian region, accounting for a respective 9.7% and 10.7% of our
exports. Likewise, exports from these markets had been adversely
affected by the downward pressure on GDP, as global demand had
been depressed by the contagion effects of the decelerating economies
of the developed nations.

Figure 4: Malaysias main export destinations

OtherCountries
16%

EuropeanUnion
11%

UnitedStates
12%

OtherAsian
Countries
35%

Source: BNM and RAM Economic Research

11

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

ASEANRegion
26%

D)

Price, Monetary and Capital-Market Trends

Headline inflation at 5.4% in 2008 on cost-push and demandside pressures

CPI hit high of 5.4% in
2008, against 2.0% in
2007

In 2008, the CPI rose 5.4% (2007: 2.0%). A significant driver of the
uptrend had been food and fuel supply shocks. This had pushed up
food prices throughout the world, translating into an 8.9% spike in the
food and beverages (F&B) sub-index - its highest level since 1998.
Similarly, record crude-oil prices had forced an administrative increase
in petrol prices in Malaysia, which had subsequently filtered through to
the cost of transportation services (among other items), which posted
an 8.9% increase in 2008 (2007: 2.9%).
Figure 5: Real GDP growth and potential output

Source: Bank Negara Malaysia, RAM Economic Research

Core CPI also increased

to 2.1% in 2008

Inflation had also been driven by demand-side pressures. The

Malaysian economy is estimated to have expanded more than its noninflationary potential between 2H 2007 and 1H 2008. This had not only
driven up prices of F&B and transportation, but also the core CPI,
which went up steadily from 0.7% in June 2007 to its current stable
level of 2.1%.
Figure 6: CPI and core CPI

Source: Bank Negara Malaysia, RAM Economic Research

12

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

Ringgit depreciated following acute outflow of portfolio funds

Ringgit depreciated
against currencies of
major trading partners

The ringgit exhibited a depreciating bias against the currencies of our

major trading partners in 2008. While it had appreciated against the
euro - thanks to a rally in 2H 2008 - the local currency had
depreciated against the Japanese yen, the Singapore dollar and the US
dollar.

Figure 7: Cross-exchange-rate index with selected major

trading partners

Source: CEIC

Outflow of short-term
assets in 2H 2008

On a trade-weighted basis, the Ringgits nominal effective exchange

rate depreciated 1% while its real effective exchange rate remained
flat last year. The overall weaknesses in the Ringgit, especially in 2H
2008, had no doubt been sparked by an outflow of short-term assets
against the backdrop of persistent political uncertainty as well as the
global equities sell-off. This is reflected in our balance of payments,
which showed net outflows of RM24 billion and RM56 billion,
respectively, in the second and third quarters of 2008.
Figure 8: Indices for nominal and real effective exchange
rates

Source: Bank of International Settlements

13

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

II) IMPACT OF THE GLOBAL FINANCIAL CRISIS

AND ECONOMIC DOWNTURN
A) Recession in Industrialised Economies
Marked deterioration in global economy
IMF projects world GDP
to be lifted by marginal
0.5%

Global economic conditions deteriorated markedly in 2008, with global

GDP expected to ease to levels not experienced since the Second
World War. Such had been the depth and speed of deterioration that
forecasts were continuously downgraded throughout the year by the
International Monetary Fund (IMF) (Figure 9). Indeed, projected
global GDP growth for 2009 was downgraded from 3.8% to 0.5%. This
owed to a significant downward revision for advanced economies, from
1.3% to -2.0%, with that for emerging & developing economies also
sliding from 6.6% to 3.3%.
Figure 9: Downward revisions in the IMFs GDP growth
forecasts for 2009

Source: IMF World Economic Outlook (April 2008, November 2008,

January 2009)

Several of Malaysias
main trading partners
descended into recession

Extensive stimulus
packages and easing
monetary policies to stave
off deep, protracted
recession
14

The deep recessions that industrialised economies have fallen into

currently show no signs of abating. The American economy clawed
back with a modest 1.3% growth in 2008 after respective
contractions of 0.5% and 3.8% the third and fourth quarters, as the
contagion effects from the financial crisis and the faltering housing
market continued to seep into the real economy. Personal consumption
- the driver of American economic growth - contributed negatively as
personal wealth had been squeezed by mounting job losses and falling
house prices, which tumbled 23% from their previous peak in July
2006. Meanwhile, the European Union (EU), Japan and Singapore,
i.e. Malaysias other major trading partners, also descended into
recession following the financial market turbulence and high
commodity prices in the first half of 2008.
Meanwhile, the recessions in industrialised economies have persisted
despite aggressive fiscal stimulus packages and their central banks
proactive measures to improve access to liquidity via aggressive
interest-rate cuts, the creation of lending facilities and direct equity

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

injections into financial institutions. Given the severity of the crisis and
the seeming ineffectiveness of the stimulus efforts to date, the IMFs
projection of an early recovery in world GDP growth to 3.0% in 2010
appears to be somewhat optimistic.

Figure 10: World output growth projections

10.0

Emerging &developingeconomies
8.0

Percentchange

6.0

World

4.0
2.0
0.0

Advancedeconomies

2.0
4.0

Source: IMFs World Economic Outlook Update, January 2009

B) Impact of External Demand Shock on the

Malaysian Economy
Malaysia expected to post
0.9% GDP growth under
demand-forecasting model

To facilitate a quick assessment of the impact of global demand

contraction on Malaysias GDP growth, an external-demand indicator
has been constructed. This has been derived from Malaysias export
mix and weighted by the importing countrys GDP. Together, the 17
importing countries accounted for more than 85% of Malaysias
exports.
The results of the GDP forecasting model, with external demand as
one of the main determinants, are shown in Table 1.1 Three scenarios
of projected GDP growth for Malaysias major trading partners had
been simulated, with the base-line forecast premised on the IMFs
latest available projections for our major trading partners.
The pessimistic case posits a worse-than-expected performance by
Malaysias trading partners, by up to half the base-line growth rates.

An autoregressive distributed lag (ARDL) model was fitted to the external demand indicator, together with 2 price
variables, i.e. the real effective exchange rate and the average lending rate, and a wealth indicator as proxied by the
Kuala Lumpur Composite Index.

15

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

Table 1: Malaysias GDP growth forecast for 2009 under

different scenarios

Trading partners
Singapore
Thailand
Indonesia
Philippines
Japan
China R.O.C
Hong Kong
China Taipei
South Korea
India
Australia
United States
United Kingdom
Germany
Netherlands
France
Italy

Export
weights

Optimistic
case

Base-line
case

Pessimistic
case

0.17
0.06
0.03
0.02
0.11
0.10
0.05
0.03
0.04
0.04
0.04
0.18
0.02
0.03
0.05
0.01
0.01

1.5
2.5
6.3
4.4
-0.7
9.4
2.6
2.1
3.8
7.5
1.9
-0.4
-0.7
-0.6
-0.5
-0.5
-0.5

1.2
2.0
5.0
3.5
-2.6
7.5
2.1
1.7
3.0
6.0
1.5
-1.6
-2.8
-2.5
-2.0
-1.9
-2.1

0.6
1.0
2.5
1.8
-3.9
3.8
1.1
0.9
1.5
3.0
0.8
-2.4
-4.2
-3.8
-3.0
-2.9
-3.2

2.1

0.9

-0.8

Malaysia's GDP
growth forecast
for 2009

Under the base-line scenario, the Malaysian economy is projected to

expand 0.9% this year. Should the economic situations of our trading
partners take a turn for the worse, the domestic economy is projected
to contract by an estimated 0.8% in 2009.
It should be noted that these projections do not take into
consideration the effects of the Governments fiscal stimulus packages,
which are estimated to amount to 2%-3% of GDP.

16

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

III) MALAYSIAS SHORT-TERM GROWTH PROSPECTS

A)

Outlook for 2009 and 2010

Malaysian economic growth projected to decelerate to 0.9% in

2009, before recovering to 3.8% in 2010
Under the base-line scenario, Malaysias real GDP is projected to
record a marginal growth of 0.9% in 2009, compared to the
moderately robust 4.6% attained in 2008. Dwindling export demand,
which is expected to contract 5.0% this year, is seen to pose the most
significant downside risk to both the resilience of domestic demand
and overall buoyancy of the economy.

Table 2: GDP growth forecast by expenditure components at

constant prices
(annual change %, constant 2000 prices)

2005

2006

2007

2008e

2009f

2010f

Real GDP

5.3

5.8

6.3

4.6

0.9

3.8

Domestic Demand

5.5

7.5

8.3

6.1

3.7

4.7

8.5

6.1

9.9

9.1

2.9

4.4

Private

9.1

6.5

10.8

8.4

2.5

4.1

Public

6.5

4.9

6.6

11.6

4.5

5.5

Investment

5.0

7.9

9.6

1.1

5.6

5.2

Private

3.3

7.5

9.8

-8.1

0.5

2.6

Public

6.8

8.4

14.3

5.9

10.1

7.2

Exports

8.3

7.0

4.2

1.5

-5.0

0.5

Imports

8.9

8.5

5.4

2.2

-3.5

0.9

Consumption

Net Trade

Note: Bank Negara Malaysia; e = estimate; f = projections by RAM Economics

Research

Domestic demand
Consumption and
investment
activities to remain
weak

Growth in domestic demand is seen to moderate to 3.7% in 2009,

from 6.1% last year. The weaker performance is attributable to the
anticipated sluggishness of private consumption and investment
activities. However, both these components should pick up towards the
end of the year, leading into 2010 on a more upbeat note. Domestic
demand is envisaged to improve next year, with a modest 4.7%
increase.
Uncertainty vis-a-vis the speed at which aggregate demand can
stabilise in many of the developed economies, along with unease over

17

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

the adverse implications that the chaotic external environment will

have on job security, has dented both consumer and investor
sentiments.
Resilient consumption
Consumption may
be limited by threat
of unemployment

With the threat of decelerating exports, real GDP growth in 2009 will
depend much on the resilience of domestic demand. However, the
effects of rising unemployment on the publics expectations and the
ensuing uncertainties may undermine the capacity of domestic
demand to spur economic growth.
Export-driven industries had suffered the most substantial job cuts
between November 2007 and November 2008. This indicates that the
slowdown, triggered by weakening external demand, will induce even
more redundancies this year.
Short of actual unemployment, the threat to job security is one of the
main psychological effects within a decelerating economy,
subsequently leading to a collapse in consumption. As such, rising
unemployment is highly correlated to the intensity of private
consumption patterns. The number of job losses this year is projected
to increase the countrys unemployment rate to about 4.0%-4.5%.
Given the perceptible downward pressure that unemployment bears on
private consumption, the latter is expected only edge up 2.5% in
2009. Public consumption should feature more prominently this year,
increasing 4.5% and compensating somewhat for the slower pace of
private consumption.

Investment trends
Investment
activities to be
bolstered by publicsector involvement

Postponed purchases of investment goods signal that firms are

expecting a slowdown, and are thus less willing to invest during
uncertain times. Monetary policy has yet to have largely noticeable
effects on private investment, which is likely to remain sluggish with
an estimated meagre 0.5% growth in 2009. Much like the private
sector, the public sector is also perceived as being instrumental in
ensuring sufficient investment activity in the economy. Public
investment is envisaged to surpass its private counterpart through
planned infrastructure projects and other fiscal pump-priming
initiatives, with a robust 10.1% expansion projected this year.
Going into 2010, investment activities are still expected to remain
relatively sluggish. Nonetheless, private investment is expected to
rebound slightly with a 2.6% growth while the pace of the public
sector is projected to ease to 7.2%.
Public-sector spending fiscal stimulus package and impact on
fiscal deficit

Efficiently
implemented fiscal
pump-priming
activities
imperative to
economy in 2009

18

Both consumption and investment activities are seen to be firmly

supported by government expenditure on projects and other stimulus
measures,
such
as
human
capital
advancement
schemes.
Consequently, this crucial fiscal push will help boost overall domestic
demand; public consumption is expected to record a 4.5% growth
while public investment should clock up a very robust 10.1% this year.
Public-sector backing is a vital component for the economy vis-a-vis
avoiding a recession and for GDP growth to stay positive in 2009,
albeit marginal.

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

The RM7 billion stimulus package announced in November 2008 has

been structured around infrastructure projects and repair works for
existing transportation links; it also incorporates human-capital
development.
A second stimulus package is expected to be announced in early
March, which should contain more business-friendly schemes and
plans to support consumer demand amid the downturn. The second
stimulus package is expected to range between RM10-15 billion. The
goal of job creation will be imperative to the types of projects and
incentives in the packages offered, to offset the significant number of
layoffs expected for manufacturing industries as the year progresses.
This will in turn assist in addressing the problem of widespread
unemployment and urban poverty.
The timely implementation of projects and policy schemes is
imperative to ensure reasonable growth prospects for the domestic
economy. The fiscal deficit could reach a moderately high level of 6%
of GDP in 2009, compared to last years estimate of 4.5%-5.0%. Given
the sharp contraction in global demand and the need for most
countries to boost growth via aggressive fiscal and monetary policies,
the one-off spike in this ratio is not expected to result in a downgrade
of the countrys sovereign rating. Financing of the deficit should stem
from domestic sources, especially through the issuance of MGS which
is projected to rise to between RM80-90 billion.
External demand
Manufactured
goods to lead
export downturn

The onset of a global downturn is expected to send both exports and

imports into the red, with respective contractions of 5.0% and 3.5% in
2009.
Manufactured exports will lead the decline in export performance; this
segment has already shown a marked slump in industrial output since
3Q 2008. In terms of value, E&E products constitute the bulk of our
manufactured exports. In 2008, over half the value of Malaysias
manufactured exports can be attributed to this category; other major
exports were responsible for less than 10% each. Exports of
electronics, in particular, had been the most adversely affected by
weakening external demand; these items are anticipated to maintain a
downward trend. Meanwhile, consumer-oriented products will show a
more pronounced decline in the coming quarters, similar to industrialbased products, which have already fallen.
The other major export categories had maintained modest growth
rates. Even so, their performance is also expected to waver on the
back of dwindling global demand for industrial-based products. As our
major exports tend to attract derived demand, a slowdown is expected
in the first half of 2009, in line with the pattern traced by E&E
products.
Conversely, the deceleration in demand for investment goods is
anticipated to lead to a decline in imports, taking into account the
slower pace of industrial activities within the overall economy.
The performance of manufactured exports is expected to improve
slightly in the near term - with a turnaround in external demand and
the projected appreciation of the ringgit against the currencies of our
major trading partners towards the end of the year. Nonetheless, the
better showing by exports and imports is likely to be muted, with a
slight recovery 0.5% and 0.9%, respectively, forecast in 2010.

19

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

Table 3: GDP growth forecast by industry

2005
Agriculture
Mining
Manufacturing
Construction
Services
Real GDP

2.6
-0.4
5.2
-1.5
7.2
5.3

2006
5.4
-2.7
7.1
-0.6
7.3
5.8

2007
2.2
3.3
3.1
4.6
9.7
6.3

2008e

2009f

3.8
-0.8
1.3
2.1
7.3
4.6

3.1
1.2
-5.5
-0.5
3.8
0.9

20010f
2.5
0.8
2.8
1.5
5.2
3.8

Note: e = estimate; f = forecasts by RAM Economics Research

Services sector to continue spearheading growth

Services sector to
remain resilient
through uncertain
times

Unlike last years sector-based performance where all sectors recorded

positive growth, some are set to experience contractions in the coming
year - with all of them registering slower growth.
The manufacturing and construction sectors, in particular, will face the
most difficulties in the coming year. These sectors are anticipated to
experience respective declines of 5.5% and 0.5%. Manufacturing
output has been falling rapidly, especially in the final quarter of 2008.
This trend is anticipated to continue at a similar pace in the first half of
2009, leading to a significant output contraction.
The construction industry, on the other hand, is expected to endure a
tough environment with weak private-sector demand across the board,
causing construction activity to slow accordingly. Despite the
challenging year ahead for these sectors, they are all expected to
bounce back with positive growth in 2010.
The services sector will remain the primary stimulant for sectoral
growth in 2009, with an expected growth of 3.8%.
The wholesale and retail trade and transport and storage sub-sectors
will experience the most deterioration in growth this year, with
significantly slower momentum. Given the anticipated reduction in the
level of general consumption and consumers inclination to reduce
spending on discretionary items, wholesale and retail trade will weaken
markedly. With less industrial and retail activities, logistics (as
represented by the transport and storage sub-sector) will also take a
back seat this year.
However, the services sub-sectors that are expected to remain
resilient this year are communications as well as finance and
insurance; these are envisaged to expand 4.8% and 4.1%,
respectively. These sub-sectors have maintained steady growth and
development in the past 5 years, and are believed to be fundamentally
sound and strong enough to weather the difficult economic climate.

20

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

Table 4: Growth forecasts for services sub-sectors

Annual change %
Electricity, Gas & Water
Wholesale & Retail Trade
Accommodation & Restaurant
Transport & Storage
Communication
Finance & Insurance
Real Estates & Business
Services
Government Services
Other Services
Total services

2005
5.7
9.2
6.4
4.9
7.3
6.3

2006
5.6
7.0
6.0
5.3
7.1
7.6

11.4
7.5
4.3
7.2

10.1
10.3
4.8
7.3

3.1
11.4
2.3
3.6
3.7
10.0

3.1
11.5
2.3
3.6
3.7
10.2

3.0
12.2
2.4
3.7
3.7
10.7

4.6
6.8
5.8
51.2

4.7
7.0
5.7
52.0

5.3
6.9
5.7
53.6

Electricity, Gas & Water

Wholesale & Retail Trade
Accommodation & Restaurant
Transport & Storage
Communication
Finance & Insurance
Real Estates & Business
Services
Government Services
Other Services
Total services

2007
3.9
12.5
10.8
10.0
7.0
11.1

2008e
2.3
10.1
6.4
7.1
7.2
8.2

2009f
1.8
2.9
3.9
3.2
4.8
4.1

2010f
3.2
6.8
5.6
3.8
5.1
4.9

0.5
8.5
2.8
3.8

2.2
7.9
3.3
5.2

2.9
12.8
2.4
3.8
3.8
11.0

3.0
13.1
2.5
3.9
4.0
11.4

3.0
13.1
2.5
3.9
4.0
11.4

5.1
7.3
5.7
55.0

5.1
7.8
5.8
56.5

5.1
7.8
5.8
56.5

18.2
1.2
4.5
10.2
5.0
5.0
9.7
7.3
Share of GDP %

Source: Bank Negara Malaysia Monthly Statistical Bulletin; f = forecasts by RAM

Economics Research

21

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

B)

External-Sector Outlook

External demand conditions expected to worsen in 1H 2009,

with gradual but fragile recovery towards second half as effects
of strong doses of fiscal and monetary stimuli kick in
Gross exports and imports
projected to contract
sharply but trade balance
will likely remain at a
healthy level of RM 100
billion

Malaysias exports of goods and services are forecast to post a 5%

contraction in 2009, before staging a 0.5% recovery in 2010 given the
low-base effect. Slumping global demand and falling prices are
projected to reduce gross merchandise exports by 20% and
corresponding gross imports by 18%.
The corresponding fall in
imports will enable the countrys trade balance to be maintained at
RM103 billion, down from 2008s RM142 billion. The predominant
factors underpinning our forecast are the dismal external demand
conditions, which are expected to remain challenging as Malaysias
major trading partners wade through their recessions in 2009 before a
modest recovery in 2010.
Commodity prices, particularly crude oil, are also expected to fall in
tandem with more lethargic global demand. With oil prices already
having back-tracked to under USD40/barrel from a peak of over
USD140 in July 2008, and certain to remain below its average price
last year, Malaysias exports will no doubt experience a corresponding
decline in export revenue vis-a-vis crude oil.

Ringgit to resume modest appreciation in 2009

Current account anticipated
to retain surplus, providing
support for ringgit

Despite falling exports, Malaysias current account is still expected to

remain in surplus at an estimated 10% of GDP in 2009 (2008:
estimated 13%). This surplus is expected to provide fundamental
support for the ringgit, which we opine should gradually appreciate 1%
on a nominal trade-weighted basis in 2009. Furthermore, as the
political risk premium has now dissipated, the pace of short-term
outflows seen in 2008 should moderate, thus improving Malaysias
financial accounts and acting as a positive for the ringgit.

C)

Prices and Monetary Conditions

Bank Negara Malaysia expected to cut interest rates further to

support economy in absence of price pressures

22

Expected disinflation in
coming year, with overall
inflation seen to ease to
1.5%-2.0% in 2009

Previous drivers of inflation are set to become the catalysts of

disinflation in 2009. As global economic conditions continue
deteriorating, demand for commodities is expected to moderate too,
thus easing commodity prices. Moreover, domestic demand-driven
price pressures have already started subsiding; Malaysias GDP growth
in 2H 2008 is estimated to have dipped below its potential level, a
trend that is set to continue in tandem with our base-line forecast of
0.9% GDP growth for 2009. Given these considerations, inflation is
expected to ease to between 1.5% and 2.0% in 2009.

OPR expected to dip to

1.25% by year-end in light
of increasing downside risks
to growth

As inflationary pressures started to recede and growth risks

heightened, Bank Negara Malaysia began easing interest rates in 4Q
2008, first by 25 bps and then another 125bps, to its current level of
2.0%. In 2009, we expect monetary policy to remain accommodative
vis-a-vis the worsening economic outlook, with OPR expected to dip to
1.25% by year-end.

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

D)

Outlook on Private-Sector Financing and

Bond Market

Lower levels of investment

activity and higher
financing costs to constrain
PDS issuance

RM25 billion of PDS issuances expected in 2009 amid weak

investment outlook

Gross PDS issuance forecast

at RM25 billion in 2009, with
ongoing interest from foreign
issuers

Meanwhile, all sectors exhibited slower issuance activity, except for

the construction industry and the finance, insurance, real estate and
business services sector. Issuances from the construction sector
advanced 13% to RM5.9 billion in 2008; those from the finance,
insurance, real estate and business services sector surged 35% to
RM32.5 billion.

New PDS issuances amounted to RM49.7 billion in 2008, some 28%

less than the previous year. This had been caused by an estimated
8.1% contraction of private investments and heftier financing costs,
both of which had crimped credit demand. Indeed, the deteriorating
outlook had pushed up financing costs by an estimated 40 bps for
AAA-rated papers and 80 bps for AA-rated issues in 2008.

Looking ahead, we envisage a further contraction in primary-market

activity in 2009, with RM25 billion of gross PDS issuance. Our bearish
expectations are underpinned by a sharp drop in private investments.
Nonetheless, foreign issuers are anticipated to continue tapping the
ringgit bond market for financing arbitrage opportunities. As more
MGS get issued in 2009 to fund the Governments various stimulus
packages, we do not expect the higher issuance amount to have
significant crowding-out effects on the demand for high-quality PDS,
despite the flight to quality phenomenon that characterises the
behaviour of financial markets during periods of economic uncertainty.

23

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

IV) UPDATE ON MALAYSIAS MEDIUM-TO-LONG-TERM

GROWTH FORECASTS
A)
Global downturn set
to test resilience of
Malaysian economy
and future growth
direction

Forecasts of Annual GDP Growth and

Structural Change

While a weak recovery is expected towards the end of 2009, it will be

several years - up to 5 years, according to a recent study on countries
hit by the twin credit and housing-market crises - before the crisis-hit
countries can resume their historical growth patterns. It will therefore
be challenging for export-oriented developing countries to sustain their
traditional growth performance in the face of slower demand from
their industrialised counterparts. Our revised medium-to-long-term
GDP growth forecast for Malaysia takes into consideration the weak
global demand that is likely to persist for several years.
The average annual growth for 2009 to 2020 has been revised
downwards to 4.5%, or 1.2 percentage points lower than that
projected in the last Economic Outlook publication.
Our demand-side growth projections are shown in Table 5. The
medium-to-long-term average annual growth rate has been revised to
5.3% (from 5.7% for the 2011-2015 period) and 4.6% (from 5.5% for
the 2016-2020 period).

Table 5: Base-line forecasts of Malaysias medium-to-longterm GDP growth by expenditure

Share to GDP (%)

Average annual growth (%)

2009-10f

2011-15f

2016-20f

2009-20f

2010f

2015f

2020f

2.4
4.1

5.3
5.8

4.6
4.7

4.5
5.0

100.0
90.2

100.0
92.2

100.0
92.7

3.7

5.4

4.5

4.7

67.0

67.4

67.1

Private

3.3

5.7

4.9

5.0

52.8

53.8

54.7

Public

5.0

4.5

2.6

3.8

14.2

13.6

12.4

Investment

5.2

5.8

5.2

5.4

24.8

25.3

26.1

Private

1.6

7.8

8.1

6.9

11.3

12.7

15.0

Public

8.7

3.9

1.9

3.9

13.5

12.6

11.1

Exports

-2.3

4.5

4.4

3.3

109.2

104.9

104.3

Imports

-1.3

4.8

4.6

3.7

99.4

97.0

97.1

Real GDP
Domestic Demand
Consumption

Net Trade

Source: RAM Economics Research

Note: f = forecast by RAM Economics Research

24

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

Domestic demand, sustained by rising private consumption and

investment, will continue underpinning medium-to-long-term
growth
Domestic demand
projected to rise with
more robust
consumption and
private investment

Overall consumption is projected to expand 5.4% annually between

2011 and 2015, before easing to 4.5% during the 2016-2020 period,
thus yielding an average annual increase of 4.7% for the entire 20092020 span. A faster pace of growth in private consumption and
investment is projected from 2011 onwards, after 2 consecutive years
of more generous government spending to mitigate the effects of the
global slump in 2009 and 2010.
The potential to boost consumption is supported by the countrys
relatively high savings rate. With the projected rise in consumption,
Malaysias national savings rate is expected to ease from 38% of GDP
in 2007 to 34% by 2010, and further to 32% by 2015.
Earlier expected sharper increase in investment rate derailed
by global financial turmoil

Investment
performance key to
Malaysias mediumto-long-term growth
prospects

As noted in the previous Economic Outlook, the Malaysian economy

could achieve at least another 0.5%-1.0% growth if the investment
level is raised to 30% of GDP, from the 24%-25% projected currently.
The base-line scenario assumes a rising share for private investment,
from an average of 11.3% of GDP in 2010 to 15.0% in 2020, slightly
lower than the respective 13.0% and 15.3% previously.
Given the virtual parity between GDP growth and the rate of
investment, the latter will be a key indicator in our monitoring of
Malaysias medium-to-long-term growth prospects. The current large
savings-investment gap of about 15%-16% of GDP is anticipated to
gradually narrow to less than 10% by 2015.
Services sector to continue leading medium-to-long-term
growth as export-oriented manufacturing decelerates
The services sector is envisaged to expand at an average rate of 5.6%
annually between 2011 and 2015 (6.3% in the previous Economic
Outlook) while the manufacturing sectors growth has been revised
from 5.4% to 5.0%.

Table 6: Projected medium-to-long-term GDP growth by

industry

2009-10f
Agriculture
Mining
Manufacturing
Construction
Services
Real GDP

Average annual growth (%)

2011-15f
2016-20f
2009-20f

2.8
1.0
-1.4
0.5
4.5
2.4

4.2
3.5
5.0
2.4
5.6
5.3

Source: RAM Economics Research

25

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

3.4
2.6
3.4
3.0
5.5
4.6

3.6
2.7
3.3
2.3
5.5
4.5

Share to GDP (%)

2010

2015

2020

7.7
7.9
26.9
2.9
57.3
100.0

7.3
7.3
26.6
2.5
58.3
100.0

6.9
6.7
25.2
2.3
61.1
100.0

There is no change in the projected share of the services sector to

GDP, which is expected to rise steadily from 56.2% in 2010 to 61% by
2020. Meanwhile, the projected share of agriculture has been revised
upwards to 7.7% in 2010 (from 7.0%) and 6.9% in 2020 (from 5.8%),
on account of the manufacturing slowdown and rising global demand
for commodities, where Malaysia has a comparative advantage in
production.
A breakdown of the projected growth rates of the services sector by
major industry groups is shown in Table 7.
Table 7: Projected medium-to-long-term growth of service
industries
Average annual growth (%)
2009-10f
2011-15f
2016-20f
2009-20f
Electricity, gas & water
Wholesale & retail trade
Accommodation & restaurant
Transport & storage
Communication
Finance & insurance
Real estate & business services
Government services
Other services
Total services

2.5
4.9
4.8
3.5
5.0
4.5
1.4
8.2
3.1
4.5

3.9
6.2
5.9
5.9
6.5
5.3
6.4
4.6
5.0
5.6

3.5
6.2
5.4
5.9
6.3
5.9
6.3
2.3
6.3
5.5

3.5
6.0
5.5
5.5
6.2
5.4
5.5
4.2
5.2
5.5

Share to GDP (%)

2010f 2015f 2020f
3.0
13.5
2.5
3.9
4.0
11.6
5.0
8.1
5.8
57.3

2.8
14.1
2.6
4.0
4.3
11.6
5.3
7.9
5.7
58.3

Source: RAM Economics Research

Productivity growth projection

Labour still key
contributor of growth
for Malaysia

A decomposition of Malaysias sources of growth shows that labour has

emerged as the leading contributor of output growth in the 2000-2008
period (Table 8). The contribution of total factor productivity (TFP)
eased to 2.1 percentage points in this period, from 3.0 percentage
points during the pre-Asian financial crisis growth phase from 1991 to
1997.
The contribution of capital investment to output growth is projected to
rise marginally to 1.4 percentage points during the 2009-2020 period,
on account of a higher investment rate; labours contribution is
expected to ease to 2.1 percentage points as the economy gradually
shifts to a higher-wage and skill-driven production structure.
A successful transformation to a productivity-driven economy has the
potential of lifting the countrys long-term growth by 1-2 percentage
points to the 5.3%-6.3% level.
Key imperatives to achieving stronger productivity-led growth include
the following:

26

Speedy implementation of a comprehensive human-capitaldevelopment policy that includes focus on skills upgrading;
attracting overseas talent, including Malaysians working
abroad; targeted as well as further easing of recruitment of
skilled foreign workers across all sectors of the economy.

Fiscal and financial incentives to speed up technological

upgrading.

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

2.6
15.3
2.7
4.3
4.7
12.4
5.7
7.1
6.2
61.1

Facilitation of wage increases across all skill categories, to

accelerate the shift to higher-value-added and productivitydriven industries.

Table 8: Actual and projected sources of growth

Period
1991-1997
2000-2008
2009-2020

% point contribution to GDP

growth
Capital
Labour
TFP
Total
3.3
2.6
3.0
8.9
1.2
2.1
2.1
5.4
1.4
1.2
1.8
4.3

% share of total
Capital
Labour
TFP
37.3%
29.0%
33.7%
22.2%
39.5%
38.3%
31.9%
27.8%
40.3%

TFP: Total factor productivity; computed using Gollop-Jorgenson translog function

27

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

V)

KEY CHALLENGES AND RISKS

A)

Short term

Key short-term risks include the depth and duration of the export
slump, the impact on SMEs in the supply chain, the efficacy of fiscal
stimulus packages, and the decline in commodity prices.
Coping with export demand shock
Global demand slump
remains Malaysias
key short-term
economic risk

The contraction in Malaysias gross exports that began in October 2008

is likely to continue through the first half of 2009. The depth and
duration of the slump in global demand remains the key short-term
risk to our growth forecasts for 2009 and 2010. A sustained decline in
exports will lead to a rise in the number of distressed firms, cutbacks
in domestic spending and lay-offs; this will in turn further depress
domestic demand and result in a further slowdown in economic
activities. The most severely affected will be the E&E industries, which
account for close to 50% of Malaysias gross exports. The SMEs in the
E&E supply chain will face severe pressures if the global demand
contraction is prolonged.
Efficacy of fiscal stimulus packages

Collective
implementation of
various stimulus
policies vital to avoid
protracted downturn

Our prognosis of a second-half recovery of both the global and

domestic economies, albeit a gradual and weak one, is premised on
the simultaneous and effective roll-out of fiscal and monetary stimulus
packages across the crisis-hit industrialised countries, as well as those
seeking to mitigate the effects of the global slump. A stabilisation in
world demand contraction is necessary for investor and consumer
confidence to recover from the unprecedented lows experienced in
many countries.
On a more positive note, there is upside to our short-term growth
forecast, especially with speedy implementation of effective fiscal and
monetary stimulus packages throughout the world.
Dampening effects of low commodity prices

Commodities-based
firms will face more
uncertain operating
environment and
outlook

28

While net resource-importing Asian economies will benefit from low

commodity prices, Malaysias commodities-based industries will face
more challenging times due to weak demand and low prices in the
next 1 to 2 years. Nonetheless, no systemic distress is anticipated as
the robust demand and elevated prices of the last several years have
strengthened the balance sheets of most medium-sized and large
players. Even so, a slowdown in investment activities in the
commodities-based industries is inevitable in the face of a global
downturn. On another note, mergers and acquisitions could increase
as weaker firms exit or consolidate.

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

B)

Medium to long term

The medium-tolong-term risks and challenges elaborated on in the

previous Economic Outlook still prevail, albeit with progress in several
areas. The key challenges highlighted in the previous publication
include constraints vis-a-vis skilled labour, dependence on fossil fuels,
unsustainable price control-subsidy regimes, the attractiveness of the
countrys investment climate, and the international competitiveness of
Malaysian industries.
Signs of progress in policy responses
Apt and efficiently
implemented policy
initiatives integral to
long-term economic
development

There is now greater awareness among both the Government and the
private sector that there is an urgent need to reduce reliance on
unskilled foreign workers. The global export slump presents an
opportunity to downsize labour-intensive industries and upgrade the
skills of Malaysian workers through redeployment and training.
Likewise, the bursting of the oil and non-oil commodity price bubbles
in October 2008 provides an opportunity to address the oil-price
subsidy, which has clearly become unsustainable and is indicative of
unproductive use of scarce resources.
The continuation of market-determined prices for consumers in the
face of future oil-price increases will be important towards addressing
the economy-wide issues relating to resource misallocation and market
distortion caused by price controls and subsidies. More critically, as the
country approaches 2015 when it is expected to become a net
importer of crude oil - a clear policy and strategy for sustainable
energy development and utilisation is needed to guide our path to
industrialisation.
The structural reforms that have been or are being implemented in
tackling the global downturn also show evidence of policy progress visa-vis facing the longer-term challenges posed by intensifying global
competition for trade and investment. Continued liberalisation of the
services sector and the easing of equity requirements for both
domestic and foreign investors across all sectors of the economy are
expected to enhance Malaysias attractiveness as a platform to serve
the common market, arising from the creation of the Asean Economic
Community by 2015.
Key risk and challenge arising from new global economic
landscape

Countries need to
employ new
strategies to adapt to
changing global
economic
environment

The recovery of the major industrialised economies from the current

recession is expected to be gradual and uneven, due to the
convergence of housing, credit and financial woes in many of the
affected countries.
Export-oriented Asian countries would therefore need to re-examine
their growth strategies, as they can no longer rely on the Western
economies over-consumption to drive their exports.
Besides adapting to a slower pace of external demand, the threat of
protectionism looms as governments face increasing pressures to curb
imports and overseas investments - to protect their own industries
from job losses and capital outflows.
The collective stimulation of domestic demand in individual Asian
countries and the acceleration of intra-regional trade and investment

29

Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009

will be the major forces shaping the growth prospects of Asian

countries in general, and that of Malaysia in particular, in the coming
years.

VI) CONCLUDING OBSERVATIONS

This year will be even more challenging than anticipated by our last
Economic Outlook. The speed at which the global economy, especially
the industrialised countries, has devolved into a recession has taken
many policy makers, analysts and observers - including those in the
multilateral agencies such as the IMF - by surprise.
While the myth of the global economy having decoupled from the
American economy has now been debunked to some extent, it remains
to be seen how the other large emerging economies - particularly
China, India, Brazil and Russia - and export-based small economies
can cope with the simultaneous recessions in the major industrialised
economies. It is clear now that the global economy had been
expanding above its sustainable level due to over-consumption in the
industrialised countries.
The challenge in the coming years is to stoke domestic demand, make
optimal use of the countrys excess savings, and undertake the
necessary shift in the structure of the production economy, to focus on
domestic demand and, more importantly, for Malaysia and other highly
open Asian countries to accelerate intra-Asian trade and investment.

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Malaysias Economic Outlook 2009 - 2020 Annual Review February 2009