1 ECONOMIC MANAGEMENT

AND PROSPECTS

• Overview
• Outlook
• Opportunities and Challenges
Feature Article 1.1 –­ Total Factor Productivity in
Malaysia
• Strategic Initiatives –­ 2020 Budget
Feature Article 1.2 –­ Structural Changes in
Malaysia’s Economy: An Input-Output Analysis
Feature Article 1.3 –­ Productivity-Linked Wage
System in Malaysia
Feature Article 1.4 – Malaysia in 2030
• Conclusion
• References

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2 Economic Outlook 2020

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1 ECONOMIC MANAGEMENT
AND PROSPECTS
Overview The Vision sets a new economic direction
to spearhead a sustainable, high technology

U nveiling several policies and strategies since and inclusive growth as well as ensuring a
helming the administration of the new fair and equitable distribution of wealth to
Malaysia, the Government has set the scene narrow the socioeconomic gaps. Embedded in
for Malaysia to regain its status as an Asian the Vision are efforts to provide a conducive
Tiger. Topping the list are efforts in adopting and supportive environment for businesses to
the principles of competency, accountability and prosper as well as to address the rising cost of
transparency (CAT) across the whole spectrum living to improve the well-being of the people.
of the Government. Various initiatives have
been implemented to institute reforms and Various efforts have been made to elevate
improvement across the board, enabling the people’s purchasing power. On 1 September 2018,
nation to regain the trust and confidence of the Sales Tax and Service Tax (SST) was enforced
the people. The reform agenda has restored while on 1 January 2019, the minimum wage
Malaysia’s image globally. was standardised at RM1,100 nationwide. These
measures were aimed at benefitting the people,
With uncertainties spilling across the world particularly the B40 households. To provide
economy, global growth which decelerated better and broader coverage of social safety net
from its peak in mid-2018, is expected to for the people, the Government implemented
be modest in 2019 and improve slightly in programmes such as the Employees Provident
2020. Despite the challenging environment, Fund Contribution Scheme for Housewives
Malaysia’s economy grew 4.7% in the first half (i-Suri) which received a positive response from
of 2019. This is a commendable achievement, the people. Other measures to assist the B40
considering the significant challenges in group include the introduction of MySalam on
addressing various inherited issues which limit 2 4 Ja n u a r y 2 0 1 9 . Th i s s ch e m e a i m s at
the ability of the Government to implement p r ov i d i n g a f f o r d ab l e p u b l i c h e a l t h c a r e
initiatives effectively in driving the economy. protection. Furthermore, the Cost of Living
The resilient growth is a testament of strong Ai d ( BSH) wa s i mproved t o benefit the
fundamentals and diversified structure of the needy.
domestic economy. The progress is reinforced
with positive reviews by various international The Government also launched the National
bodies on the performance of the Malaysian Anti-Corruption Plan 2019 – 2023 on 29 January
economy. Of significance, in August 2019, Fitch 2019. The plan inculcates good governance,
Solutions revised Malaysia’s growth forecast integrity and zero-tolerance towards corruption
upwards for 2019 from 4.2% to 4.6%, following among all Malaysians. These initiatives augur
a stronger-than-expected performance in the well for Malaysia in its efforts to become a
first half. developed and dignified nation.

In addition to the uncertainty in the global

environment, among the most critical challenges Outlook
faced by the Government in managing the
economy is the changing demand of the Global Economy
industries as well as various stakeholders
and compounded by the nation’s substantial The global economy is expected to grow at a
debt and liabilities. Despite these challenges, slower pace of 3.2% in 2019 before improving
the Government aspires to fulfil its promises to 3.5% in 2020 (IMF, 2019). The growth will
to the people through various initiatives, mainly be supported by stronger performance
including the Shared Prosperity Vision 2030. in emerging market and developing economies

Economic Outlook 2020 3

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(EMDEs) which is expected to increase from 4.1% the US and China and improve to 3.7% in 2020
in 2019 to 4.7% in 2020. Meanwhile, growth backed by robust GDP growth in EMDEs (IMF,
in advanced economies is forecast to rise at a 2019). Meanwhile, global FDIs are expected to
slower pace from 1.9% in 2019 to 1.7% in 2020. rise 15% to USD1.5 trillion in 2019, mainly due
to higher cross-border merger and acquisitions
Among advanced economies, the US is expected and greenfield investment.
to record robust growth in 2019 before slowing
down in 2020 due to the winding down of Domestic Economy
fiscal stimulus as well as on-going inward-
looking trade policies. Growth in the euro The prospect of the Malaysian economy
area is expected to moderate in 2019 due to remains robust amid increasing uncertainties
weaker industrial production and is projected in the external environment. Real GDP is
to grow marginally in 2020 as industrial expected to grow by 4.7% in 2019 and 4.8% in
activities regain momentum. Meanwhile, in 2020. The growth is underpinned by resilient
the UK, the uncertainty caused by Brexit domestic demand, particularly household
continues to impact business confidence spending following stable labour market and
and domestic demand. However, growth in low inflation. Meanwhile, private investment
2020 is expected to stabilise after Brexit on is expected to grow at a slower pace in
31 October 2019. Japan’s growth in 2019 is 2019 and gain traction in 2020 following the
anticipated to pick up slightly, supported resumption of infrastructure projects coupled
by private consumption and investment with ongoing capital spending in the services
while in 2020 it is projected to moderate and manufacturing sectors. Favourable private
following higher consumption tax and sluggish sector expenditure activity will offset the impact
exports. of lower public expenditure in 2019. However,
economic growth is expected to rebound in
EMDEs is projected to grow at 4.1% in 2019, 2020 with improvement in public corporations’
mainly due to slower external demand and capital outlays.
investment following the impact of tariffs. In
2020, growth in major EMDEs is expected to O n t h e s u p p ly s i d e , t h e s e r v i c e s a n d
further improve by 4.7% after recovering from manufacturing sectors will continue to be
the effect of financial market pressures. China’s the main contributors to economic growth.
GDP is expected to grow at a slower pace of The services sector, driven by the activities
6.2% in 2019 and moderate further to 6% in of the wholesale and retail trade, information
2020, mainly due to structural slowdown and and communications, as well as finance and
escalation of trade tensions. Meanwhile, India’s insurance sub-sectors, is projected to remain
economy is projected to remain robust at 7% in firm backed by robust household spending. The
2019 and increase marginally to 7.2% in 2020 manufacturing sector is expected to grow at a
attributed to strong domestic demand amid slower pace in 2019 due to E&E downcycle and
fiscal stimulus and structural reforms. ASEAN is anticipated to pick up in 2020, supported by
economy is forecast to grow by 4.9% in 2019 better semiconductor outlook, especially during
and 5% in 2020 primarily due to robust domestic the second half of the year. The agriculture
demand. ASEAN is also expected to benefit from sector is projected to expand following higher
China’s domestic market and rising per capita production of crude palm oil (CPO) and natural
income through its exports and investment. rubber, while the mining sector is expected to
increase supported by higher production of
Global inflation is anticipated to be sustained natural gas. Similarly, the construction sector
at 3.6% for both 2019 and 2020. Inflation in is anticipated to improve attributed to activities
advanced economies is expected to be at 1.6% in civil engineering.
in 2019 and 2% in 2020. Meanwhile, inflation
in EMDEs is projected at 4.8% in 2019 and In 2019, exports are expected to expand
4.7% in 2020 due to slower wage growth. World moderately in line with the slowdown in global
trade growth is expected to moderate to 2.5% economic and trade performance. However,
in 2019 amid deepening trade tensions between the forecast for 2020 shows a gradual pick up

4 Economic Outlook 2020

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attributed to the projected recovery in global are other issues of concern. Realising this,
trade activities. The current account surplus the Government will intensify its efforts to
in 2019 is projected to widen following the address the concerns of the people as well as
increase in the net exports of goods and reinvigorate the economy.
services. In 2020, the current account surplus
is expected to narrow underpinned by rising Affordable Housing
imports coupled with widening deficits in
services and income accounts. Home ownership, particularly affordable
housing remains the central concern among
Monetary and Financial households. Many find it challenging to own
Developments affordable houses. In the first half of 2019, a
total of 32,810 residential units valued over
Accommodative monetary policy stance will RM19.8 billion remained unsold (NAPIC, 2019).
continue to support economic growth in an The mismatch is mainly due to property prices
environment of low inflation and stable financial rising faster than household income. Khazanah
conditions. Money and foreign exchange Research Institute (2019) reports that from 2012
markets, as well as intermediation activities, to 2014, the median house price increased by
are expected to remain vibrant and anchor 23.5%,1 from RM175,000 to RM280,000, while
monetary operations. The banking sector the median household income grew at a slower
is expected to remain robust and orderly, rate of 11.7%.
supported by ample liquidity and strong capital
buffers. Meanwhile, the capital market will be Environmental Degradation
resilient, driven by well-developed infrastructure
and instruments. However, external factors While economic development is instrumental
which include the US-China trade tension, in enhancing the well-being of the people,
uncertainty over the pace of global growth and environmental protection is equally important.
the volatility in the global financial markets Issues such as climate change, environmental
may weigh on banking and capital market degradation and over-reliance on non-renewable
performance. energy resources continue to be a concern.
Currently, Malaysia is only ranked eighth
among 13 greenest Asia-Pacific countries
Opportunities and Challenges (ValueChampion, 2019). Malaysia performed
poorly in three dimensions, namely plastic waste
As a small and open economy, Malaysia faces management (11th), carbon dioxide emissions
various challenges. Global concerns such as (10th) and electricity production from renewable
heightened trade tension and uncertainty over resources (10th). In terms of renewable energy,
the Brexit continue to persist. Locally, lack Malaysia has yet to leverage its natural assets
of access to affordable housing, worsening as it currently produces merely 0.7% of its
environmental condition and insufficient energy from renewable sources compared to
employment opportunities among graduates Japan at 7.8%.
are some of the concerns. Other issues
include the slow progress of Bumiputera Employment Opportunities
participation in various programmes and
the need for quality healthcare services. In A l t h o u g h M a l ay s i a c o n t i n u e s t o r e c o r d
terms of industry, volatility of smallholders’ full employment, several issues remain.
earnings, lack of dynamism in the tourism These include the mismatch between labour
industry and slow adoption of technology demand and supply, persistent unemployment
continue to drag the nation’s economic among youth and fresh graduates as well as
progress. Besides, poor connectivity, the gradual underemployment of skilled workforce. Besides,
transition of E&E industries to high value-added the economy still relies on low-skilled foreign
activities and inability to secure financing workers, particularly in the manufacturing

1
Compound Annual Growth Rate.

Economic Outlook 2020 5

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sector that hires 35.4% of total foreign workers, further increase the healthcare cost. This not
followed by construction (21.5%) and services only leads to increasing public expenditure
(15.5%) sectors. This condition results in a but also impacts the economy.
disadvantage to domestic job seekers. At the
same time, the hiring of expatriates, particularly Smallholders
those in Category III with income between
RM3,000 and RM4,999, denies employment In 2018, smallholders accounted for approximately
opportunities for fresh Malaysian graduates 99% of 784,230 players in the commodity sector.
in the skilled job category. However, the prolonged low commodity prices
affect the livelihood of smallholders negatively.
Bumiputera Economic Development In the first eight months of 2019, the average
price of rubber was RM5.85 per kilogram (kg),
Despite various programmes implemented higher than in 2018 (January-August: RM5.51)
for the economic development of Bumiputera, but significantly lower than the average price
the involvement of the community still lacks of RM7.51 during the same period in 2017.
in various aspects. By and large, Bumiputera Meanwhile, the average price of palm oil during
entrepreneurs face financial constraints that the first eight months of 2019 was RM1,992
limit their investment potential in businesses. per tonne, much lower than the average price
Furthermore, the mean monthly household in 2018 (RM2,362).
income of Bumiputera in 2016 was RM6,267,
lower than the Chinese Malaysians (RM8,750) Furthermore, demand for palm oil products is
and Indian Malaysians (RM7,150) (DOSM, 2017). affected by negative campaigns in developed
Meanwhile, Bumiputera graduates experience countries, particularly the EU, thus posing
difficulties in securing suitable jobs due to downside risk to the industry. In terms of
several factors, including poor interpersonal rubber production, even though smallholders
skills and lack of English proficiency. In cultivate more than 90% of total plantation
addition, there is a mismatch between the areas, the average yield per hectare is 9%
skills required by industries and qualification lower than estates. The underperformance is
attained by Bumiputera graduates. Concurrently, mainly due to lack of access to high-quality
Bumiputera’s participation in skilled and planting materials and knowledge on best
professional occupations, particularly at the pre- and post-harvesting practices.
decision-making and managerial levels remains
low. Tourism Industry
Quality Healthcare The tourism industry is one of the primary
drivers of economic growth, accounting for 15.2%
Provision of quality healthcare services is one of GDP in 2018. Malaysia was ranked 15th in
of the main priorities of the Government. The terms of tourist arrivals and 21st among 50
main challenge in achieving this objective is the countries in terms of tourism receipts (UNWTO,
escalating cost of healthcare vis-à-vis constraint 2019). Although tourism receipts improved by
on Government finance. In 2018, Malaysia 2.4% between 2017 and 2018, statistics from
recorded the second-highest healthcare inflation Tourism Malaysia indicates a declining trend
in Asia after Viet Nam (Marsh & McLennan, in tourist arrivals in Malaysia since 2017. The
2019). Besides, the Auditor General’s Report Travel & Tourism Competitiveness Report 2019
2018 highlights that only 58.7% to 74.5% of highlights that Malaysia has dropped three
patients were treated in less than four to six places to 29th position in 2018 compared to
hours in the Emergency and Trauma Department 26th in 2017 (WEF, 2019). While Malaysia is
in public hospitals. Furthermore, Malaysia has blessed with beautiful and unique natural
the highest rate of diabetics in Asia and one assets, multiracial and cultural diversity as
of the highest in the world (IDF, 2017). The well as a variety of food and entertainment,
changing pattern of diseases, including those the tourism industry has yet to achieve its
related to lifestyle and ageing population will true potential.

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Adoption of Technology are the main factors hindering the adoption of

technology. In addition, a conducive environment
Technological development is evolving rapidly, is necessary for automation and the adoption
thus requiring nations to adapt to the changing of creative content, smart manufacturing and
trends. However, the adoption of technology, the Internet of Things (IoT), the essential
particularly among SMEs remains low in elements of IR 4.0. Lack of technology-related
Malaysia. Low level of research, inadequate content in the school curriculum further
access to the talent pool, and lack of capital for hampers the development of talent for future
strategic planning and technological utilisation jobs.

Feature Article 1.1

Total Factor Productivity in Malaysia

Introduction

Growth theory postulates that three elements contribute to the production of goods and services,
namely labour, capital and Total Factor Productivity (TFP). TFP, also known as multifactor
productivity or Solow residual, includes all other factors affecting growth that is not explained
by labour and capital (Solow, 1957). Several approaches have been employed by researchers to
understand TFP. These approaches range from the perspective that changes in technology are
pivotal, where better technology such as computerisation or automation improves productivity.
Others view externalities such as governance and weather conditions may also influence TFP. Yet,
some regard changes in the composition of production and the adoption of low-cost production
methods as essential factors. As researchers continue to explore the role of TFP in promoting
economic growth, there is a need to examine the main determinants of TFP in Malaysia.

During the period between 1990 and 1997, capital accumulation and labour drove economic
growth in Malaysia with a negative contribution from TFP. After the 1997 Asian financial crisis,
the Government has undertaken several measures to enhance TFP in addition to boosting
investment and improving labour force participation rate. Despite these efforts, the two input
factors still led growth, with TFP contributing only 1.1% from 2010 to 2018.

Depending solely on capital accumulation is insufficient to support long-term economic growth.

TFP was the main driving force for many countries transitioning into advanced and high-income
economies. Therefore, it is imperative to boost TFP as the primary source of growth. Moreover,
TFP-led growth will ensure more equitable and sustainable growth as capital and labour are
subject to diminishing returns and market volatility.

The factors affecting TFP are varied and often indefinite due to its nature as a residual. Kim &
Loayza (2019) have identified five main determinants for TFP growth, namely innovation, education,
market efficiency, physical infrastructure, and institutional infrastructure. The study utilised
various development indicators to construct indices for the determinants of TFP. The findings
highlight that for OECD countries, market efficiency contributes the most while for developing
countries, education is the main contributor to TFP. This article investigates the determinants
of TFP in Malaysia and identifies the significant factors contributing to TFP.

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Figure 1.1.1. Malaysia’s Average Growth Contribution Figure 1.1.2. Average Growth Contribution for Japan,
1990—2018 South Korea and Singapore Before Achieving
% High-Income Status
15 %
Labour 10
1.0 Labour
Capital Stock
12 Capital Stock 0.7
TFP
9.2 Real GDP (% annual change) 8 TFP
9 2.2
2.8

6 5.4 6
12.5 4.8 0.6
1.2 2.7
0.6
3 2.5 3.1 2.5
4
1.7 1.1 5.8
0
2 3.9
-4.4
-3 2.9

0
-6 Japan South Korea Singapore
1990-1997 2000-2009 2010-2018
1969-1978 1986-1995 1981-1983
Source: Ministry of Finance, Malaysia (estimates). Source: Ministry of Finance, Malaysia (estimates).

Determinants of TFP in Malaysia

Innovation

Innovation, which is the process of translating an idea or invention into goods or services that
creates value, is one of the most cited factors that contribute to TFP. The implementation of
Science, Technology and Innovation (STI) Policy in 2013 is one of the programmes to promote
innovation in Malaysia. Furthermore, the Government’s initiative to embrace IR 4.0 is expected
to enhance innovation in the country. Innovation indicators such as the public and private
expenditure on research and development (R&D), the number of patent applications by residents
and non-residents and the number of publications in scientific and technological journals indicate
the level of innovation in the country. From 2008 to 2017, public and private expenditure on R&D
and the number of publications in scientific and technological journals showed an increasing
trend. Meanwhile, the total number of patents registered also experienced a similar pattern but
declined after 2015.

Figure 1.1.3. Indicators for Innovation

2008—2017
Units % GDP Units
10,000 1.5 32,000
Patents registered- Non-Residents Research and development expenditure
1.4 Scientific and technical journal articles 28,000
8,000 Patents registered- Residents
1.3 (right scale) 24,000
6,000 1.2 20,000
1.1 16,000
4,000 1.0 12,000
0.9 8,000
2,000
0.8 4,000
0 0.7 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: World Bank.

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Education

Endogenous growth theory suggests that investment in human capital, mainly education is one
of the significant contributors to economic growth. In 2019, the education subsector received
the highest allocation accounting for 20.4% of the total budget. This allocation signifies the
Government’s commitment to enhancing human capital. Indicators such as expenditure on
education, PISA score, 1 secondary school enrolment rate and percentage of the population
with tertiary education are often used to reflect the development of human capital. Overall, all
indicators showed an improving trend over an extended period.

Figure 1.1.4. Indicators for Education

2008—2017
RM billions units % %
280 445 90 46
Public education spending School enrollment, secondary
PISA score (right scale) 440 88 School enrollment, tertiary (right scale) 44
260
435 86 42
240 430
84 40
425
220 82 38
420
415 80 36
200
410 78 34
180 405 76 32
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Ministry of Finance, Malaysia; Organisation for Economic Co-operation and Development and World Bank.

Market Efficiency

Market efficiency reflects the optimal allocation of resources across sectors and firms. The
Government is committed towards market reforms as it revamps and rectifies mismanagement
practices to ensure better transparency and accountability. The reform will enhance business
confidence and reduce the cost of doing business. Indicators often applied to gauge market
efficiency are the Financial Development Index,2 World Bank Doing Business Index3 and female
labour force participation rate.4 Generally, the indicators improved between 2008 and 2017 with
a slight disruption in Financial Development Index between 2015 and 2016 due to lower stock
market activities.

Figure 1.1.5. Indicators for Market Efficiency

2008—2017
Index Index % of female working age population
69 80 52
Financial Development Index Female labour force participation rate
67 Doing Business Index 50
(right scale) 75
65 48
70
63 46
65
61 44

59 60 42
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: International Monetary Fund and World Bank.

1
Programme for International Student Assessment.
2
Financial Development Index summarises how developed financial institutions and financial markets are in terms of depth, access and efficiency
(IMF).
3
World Bank Doing Business Index presents quantitative indicators on business regulation and the protection of property rights.
4
Barro (2001) found that the incorporation of female workers in the labour market has the potential to increase TFP.

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Physical Infrastructure

Physical infrastructure is an essential element in a nation’s development. Improved connectivity

through the utilisation of highways and railroads reduces travelling time, increases productivity
and enhances the quality of life. However, coverage and quality of physical infrastructure are
also crucial for assessing its effectiveness. Examples of proxies used to measure physical
infrastructures are fixed and mobile telephone subscriptions, length of paved roads as well as
electricity production. These indicators displayed improving trends with some variation in fixed
and mobile telephone subscriptions.

Figure 1.1.6. Indicators for Physical Infrastructure

2008—2017
x 1,000 km million kilowatt-hours per 100 people per 100 people
250 180,000 22 170
Length of paved roads Fixed telephone subscriptions
230 Electricity production 170,000 21 Mobile cellular subscriptions (right scale) 160
210 (right scale) 160,000 20 150
190 150,000 19 140
170 140,000 18 130
150 130,000 17 120
130 120,000 16 110
110 110,000 15 100
90 100,000 14 90
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Department of Statistics; Ministry of Finance, Malaysia and World Bank.

Institutional Infrastructure

Institutional infrastructure refers to the role of the Government in safeguarding efficient usage
of resources and quality public service delivery to ensure efficiency and optimality for long-term
economic growth. Towards this end, the Government has introduced several reforms including
improvement on the election process and Election Commission. The Government has also launched
the National Anti-Corruption Plan 2019-2023 as one of the initiatives to combat corruption. The
World Bank’s Worldwide Governance Indicators (WGI) is a proxy for institutional infrastructure.
WGI consists of six indicators, namely voice and accountability, control of corruption, government
effectiveness, political stability and absence of violence, regulatory quality and the rule of law. Over
an extended period, all indicators continued to improve but recorded opposite trends since 2015.

Figure 1.1.7. Indicators for Institutional Infrastructure

2008—2017
Index
1.8 Government effectiveness
Rule of law
Regulatory quality
1.5 Political stability and absence of violence
Control of corruption
1.2 Voice and accountability

0.9

0.6

0.3

0.0

-0.3

-0.6
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: World Bank.

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Analysis

Using the Dominance Analysis,5 this article estimates the strength of the relationship between
TFP and its determinants. Indices were constructed to represent each of the five determinants
by combining the relevant indicators using the interaction effect.6 The results indicate that
the highest contributor among the determinants to the variance in TFP growth is innovation,
followed by market efficiency, education, physical infrastructure and institutional infrastructure.
The findings resonate well with the Government’s efforts in encouraging innovation, promoting
market efficiency, strengthening the nation’s education system, improving infrastructure and
enhancing institutional effectiveness and transparency.

Table 1.1.1. Contribution of Each Determinant of TFP in Malaysia

Determinants Contribution7
Innovation 0.2934
Market Efficiency 0.2591
Education 0.2333
Physical Infrastructure 0.2016
Institutional Infrastructure 0.0126
Source: Ministry of Finance, Malaysia (estimates).

Conclusion

TFP is a vital factor for sustaining long-term economic growth. Of significance, this study
indicates that innovation has the highest impact on TFP, followed by market efficiency, education,
physical infrastructure and institutional infrastructure. Accordingly, the Government will continue
to formulate and implement appropriate policies based on these priorities to further improve
Malaysia’s TFP growth to realise the nation’s Shared Prosperity Vision 2030.

5
Dominance Analysis is a method used to compare the relative importance of predictors in multiple regression (Azen & Budescu, 2006).
6
An interaction effect is the simultaneous effect of two or more independent variables on at least one dependent variable in which their joint
effect is significantly greater (or significantly less) than the sum of the parts (Lavrakas, 2008).
7
Decomposition of the total explained variance of the TFP growth requires total contribution to be equal to unity.

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Logistics Performance employment (SME Corp., 2018). However, access

to financing continues to be a challenge for
As a trading nation, the efficiency of the SMEs and start-ups. This is mainly attributable
transport and logistics industry is vital in to inadequate cash flows to meet repayment
Malaysia’s aspiration to attain higher productivity obligations, complex application processes,
and faster economic growth through better insufficient collateral and documentation, as
connectivity. However, Malaysia’s performance well as high risk related to business ventures.
in the logistics industry has deteriorated, as More than 70% of SMEs’ financing needs are
indicated by the decline in the ranking of the sourced internally or from personal savings,
Logistics Performance Index (LPI) (World Bank, and only about 30% is obtained from banks,
2018). According to the LPI, Malaysia’s ranking development finance and microcredit institutions.
fell to 41st in 2018 from 32nd in 2016. The Essentially, the growth and development of
main reasons for the decline include inefficiency SMEs critically depend on their ability to
of customs clearance, lack of quality in the secure finance for business operations and
trade and transport-related infrastructure as expansion.
well as low ability in tracking and tracing
consignments. In contrast, regional peers such
as Thailand and Viet Nam improved to 32nd Strategic Initiatives – 2020
and 39th positions in 2018 from 45th and 64th Budget
in 2016, respectively.
Global growth is expected to improve marginally
E&E Industry from 3.2% in 2019 to 3.5% in 2020. Despite
the anticipated improvement, risks are tilted
In 2018, E&E remained as one of the key to the downside premised on unresolved
industries in the economy, contributing 28.3% to trade tensions, policy uncertainties and
the manufacturing sector with more than 550,000 disinflationary pressures. Against this backdrop,
employments. It was also the most significant strategic initiatives in 2020 are targeted at
contributor to exports, earning RM381.5 billion mitigating the impact of external risks on
or 38% of total exports. Currently, the rising domestic economy. Towards this end, the
cost of doing business is one of the issues faced 2020 Budget will focus on several areas
by the E&E industry. Despite several initiatives including economic opportunities, human capital,
taken to minimise and simplify procedures, inclusivity, and public institutions and public
bureaucracy at various levels of Government finances.
still remains a problem. These factors influence
companies in their investment and expansion The Government is committed to make Malaysia
decisions. Another concern in the E&E industry an attractive destination for high technology
is the disruption of business models following and high value-added industries. The Budget
rapid changes in technology, amplified by the proposes several measures to catalyse the
lack of a supportive ecosystem and regulatory economy through an improved public private
framework. partnership (PPP), extensive access to SME
financing and incentivising faster adoption of
Access to Financing IR 4.0. Businesses are expected to benefit from
the Government’s efforts in facilitating the ease
About 98.5% of registered business of doing business and leveraging opportunities
establishments in Malaysia comprised SMEs, i n n ew p r i o r i t y a r e a s , i n c l u d i n g g r e e n
accounting for 37.1% of GDP and 66% of total growth.

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Feature Article 1.2

Structural Changes in Malaysia’s Economy: An Input-Output Analysis

Introduction

Since independence, Malaysia has evolved from a low to an upper-middle-income economy

after successfully implementing various growth models along the way. During the early years
of the post-independence period, the economy was heavily dependent on primary commodities
with agriculture as the largest sector. The Government started the industrialisation phase in
the early 1970s to reduce dependency on commodities and diversify the economy to enhance
income and wealth generation. Concerted efforts were taken to promote and accelerate the
expansion of the manufacturing sector. This signalled the structural shift from agriculture to a
manufacturing-based economy.

The economy was further transformed from assembly-intensive manufacturing to an integrated

manufacturing and related services with the implementation of the Second Industrial Master
Plan 1996 – 2005 (IMP2). The roll-out of the Third Industrial Master Plan 2006 – 2020 (IMP3) sets
the path towards the evolution of the economy into higher value-added and technology-driven
manufacturing and services sectors. While moving towards the Shared Prosperity Vision 2030,
Malaysia needs to continuously reformulate its growth strategies by taking into consideration the
development of industries. Based on the input-output table,1 this article examines the changes
in Malaysia’s economic structure in terms of output, value-added, taxes and subsidies.

Changes in Economic Structure

The input-output table provides comprehensive information on the structure of the economy,
particularly on the total value of goods and services produced by different industries. At the
same time, it provides information on the goods and services that are consumed as intermediate
consumption by industries, final consumption and exports. Comparison of the input-output table
of different years provides information on the structural changes in the economy.

Output

The value of gross output generated by the economy rose from RM1.6 trillion in 2005 to RM2.1
trillion in 2010 and subsequently to RM2.8 trillion in 2015 with a growth2 of 5.3% and 5.9%,
respectively. In 2005, the manufacturing sector was the most significant contributor to national
output, generating 56.1% of gross output followed by services and mining sectors with a share
of 30.4% and 5.9%, respectively. However, the services sector experienced a faster growth rate of
11.6% per annum with its share expanding from 30.4% in 2005 to 40.7% in 2010, in line with the
Government’s continued focus on liberalising the services sector in the Ninth Malaysia Plan (9MP).
In contrast, with a marginal growth of only 0.1% during the period, the manufacturing output
share declined from 56.1% to 43.6%. Other sectors experiencing changes include construction with
the percentage increasing from 3.8% to 4.4% while agriculture, fishery and forestry expanding
from 3.7% to 6.1%. Meanwhile, mining and quarrying moderated from 5.9% to 5.2%.

1
Input-Output Table 2005, 2010 and 2015.
2
Compound Annual Growth Rate (CAGR).

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Table 1.2.1. Output by Sector 2005, 2010 and 2015

2005 2010 2015

Sector Output Share Output Share CAGR Output Share CAGR
(RM million) (%) (RM million) (%) (2005 - 2010) (RM million) (%) (2010 - 2015)
(%) (%)

Manufacturing 899,165 56.1 905,133 43.6 0.1 1,164,768 42.2 5.2

Mining and Quarrying 95,410 5.9 107,549 5.2 2.4 130,226 4.7 3.9

Construction 61,070 3.8 91,362 4.4 8.4 181,342 6.6 14.7

Agriculture, Fishery and Forestry 60,000 3.7 126,651 6.1 16.1 131,600 4.8 0.8

Services 488,262 30.4 843,476 40.7 11.6 1,154,495 41.8 6.5

Transportation & Storage and 119,451 7.4 165,051 8.0 6.7 229,013 8.3 6.8
Information & Communication

Government Services 79,327 4.9 111,936 5.4 7.1 175,616 6.4 9.4

Wholesale and Retail Trade 77,493 4.8 199,972 9.6 20.9 302,031 10.9 8.6

Finance and Insurance 74,330 4.6 145,528 7.0 14.4 120,404 4.4 -3.7

Business & Private Services 43,055 2.7 87,844 4.2 15.3 124,121 4.5 7.2

Utilities 35,149 2.2 47,319 2.3 6.1 64,846 2.3 6.5

Real Estate and Ownership of 31,847 2.0 38,145 1.8 3.7 58,317 2.1 8.9
Dwellings

Accommodation and Food & 27,610 1.7 47,681 2.3 11.5 80,148 2.9 10.9
Beverages

Total Output 1,603,907 100.0 2,074,171 100.0 5.3 2,762,431 100.0 5.9

Note: Total may not add up due to rounding.

Source: Department of Statistics, Malaysia.

Manufacturing remained the most significant sector with a growth of 5.2%, albeit declining
share from 43.6% in 2010 to 42.2% in 2015. However, with a growth of 6.5%, the services sector
increased its share to 41.8% from 40.7%. Likewise, the construction sector grew by 14.7% with its
share rising from 4.4% to 6.6%. While the growth of agriculture, fishery and forestry as well as
mining and quarrying rose by 0.8% and 3.9%, its share declined to 4.8% and 4.7%, respectively.

Value-Added by Sector

In addition to output, an analysis by value-added helps to determine the sectors that are driving
the economy. The value-added is the difference between total output and production costs. As
such, value-added measurement provides a more accurate analysis of the economic contribution
of a particular sector as compared to an output analysis.

The total value-added in the economy increased from RM509.3 billion in 2005 to RM805.2 billion
in 2010 and continued to grow to RM1.1 trillion in 2015 with a growth of 9.6% and 7%, respectively.
Services, the most significant contributor with a share of 45.7% in 2005, grew to 52.9% in 2010.
The sector recorded a rapid growth of 12.9% per annum driven mainly by wholesale & retail
trade (16.2%), government services (15.8%) and business and private services (15.6%) sub-sectors.
Meanwhile, the manufacturing value-added grew at only 4.1% per annum, with its share declining
from 29.8% in 2005 to 23% in 2010. During the period, agriculture, fishery and forestry sector
surpassed the performances of all other sectors with a growth of 16.3% and share expanding
from 7.1% in 2005 to 9.6% in 2010. At the same time, the mining and quarrying sector grew at
4% per annum, and its share declining from 14.4% to 11.1%.

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Table 1.2.2. Value-Added by Sector 2005, 2010 and 2015

2005 2010 2015

Value- Share Value- Share CAGR Value- Share CAGR
Sector
added (%) added (%) (2005 - 2010) added (%) (2010 - 2015)
(RM million) (RM million) (%) (RM million) (%)

Manufacturing 151,544 29.8 184,881 23.0 4.1 247,195 21.9 6.0

Mining and Quarrying 73,224 14.4 89,211 11.1 4.0 102,218 9.1 2.8
Agriculture, Fishery and Forestry 36,156 7.1 77,038 9.6 16.3 97,462 8.6 4.8
Construction 15,810 3.1 27,996 3.5 12.1 52,836 4.7 13.5
Services 232,537 45.7 426,035 52.9 12.9 628,422 55.7 8.1
Wholesale and Retail Trade 53,172 10.4 112,409 14.0 16.2 179,602 15.9 9.8
Government Services 33,823 6.6 70,496 8.8 15.8 99,483 8.8 7.1
Business & Private Services 22,042 4.3 45,601 5.7 15.6 63,228 5.6 6.8
Finance and Insurance 37,820 7.4 73,827 9.2 14.3 75,571 6.7 0.5
Transportation & Storage and 40,585 8.0 58,011 7.2 7.4 101,273 9.0 11.8
Information & Communication
Real Estate and Ownership of 20,439 4.0 24,339 3.0 3.6 43,401 3.8 12.3
Dwellings
Utilities 13,865 2.7 21,716 2.7 9.4 31,688 2.8 7.9
Accommodation and Food & 10,791 2.1 19,636 2.4 12.7 34,176 3.0 11.7
Beverages
Total Value-Added 509,272 100.0 805,163 100.0 9.6 1,128,133 100.0 7.0

Note: Total may not add up due to rounding.

Source: Department of Statistics, Malaysia.

The services sector continued to grow steadily by 8.1% in 2015, with its share expanding to
55.7% from 52.9% in 2010. In contrast, during the same period, the manufacturing sector grew
by 6% with its share declining to 21.9% from 23%. Mining and quarrying sector grew by 2.8%
in 2015 while agriculture, fishery and forestry rose by 4.8%. However, the share for both sectors
declined from 11.1% to 9.1% and 9.6% to 8.6%, respectively. At the same time, the construction
sector grew at 13.5% with its share increasing from 3.5% to 4.7%.

Value-Added by Industry

In terms of industry, out of RM509.3 billion produced in 2005, crude oil and natural gas accounted
for 14% of value-added followed by wholesale & retail trade, repair of motor vehicles and
motorcycles (10.4%) and computers, peripheral, office equipment and machinery (4.6%). The other
top ten industries were monetary intermediation (3.8%), telecommunications (3.3%), electronic
components and boards (3.1%), education (2.8%), insurance/takaful and pension funding (2.8%), oil
palm (2.7%) and ownership dwellings (2.1%). The top ten industries accounted for RM252.6 billion
or 49.6% of value-added.

In 2010, wholesale & retail trade, repair of motor vehicles and motorcycles industry emerged
as the new driver of the economy, growing at 16.2% with a share of 14% of total value-added.
Other top ten industries were crude oil and natural gas (2.9%; 10.2%); oil palm (27.3%; 5.7%);
monetary intermediation (11.8%; 4.2%); education (15%; 3.5%); electronic components and boards
(6.3%; 2.7%); and telecommunications (1.6%; 2.3%). In the meantime, public administration was
a new entrant in the top ten in 2010, rising from 15th position to fifth. The industry recorded a
growth of 25.7% with a share of 3.6%. Other industries that performed well in terms of value-added
were communication equipment and consumer electronics (75.5%; 3.6%) followed by coke and

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refined petroleum products (36.7%; 2.8%). In 2010, the top ten industries accounted for 52.6% of
value-added and grew at 10.7% per annum. However, computers, peripheral, office equipment
and machinery industry which was among the top ten industries in 2005 showed a negative
growth of 21.8% in 2010 and was ranked at 29th position.

Table 1.2.3. Value-Added by Industry 2005, 2010 and 2015

2005 2010 2015

Industry Value- Rank Share Value- Rank CAGR Share Value- Rank CAGR Share
Added (%) Added (2005 - 2010) (%) Added (2010 - 2015) (%)
(RM million) (RM million) (%) (RM million) (%)

Crude Oil and Natural Gas 71,472 1 14.0 82,351 2 2.9 10.2 98,121 2 3.6 8.7

Wholesale & Retail Trade, 53,172 2 10.4 112,409 1 16.2 14.0 179,602 1 9.8 15.9
Repair of Motor Vehicles and
Motorcycles

Computers, Peripheral, Office 23,239 3 4.6 6,781 29 -21.8 0.8 5,762 42 -3.2 0.5
Equipment and Machinery

Monetary Intermediation 19,537 4 3.8 34,136 4 11.8 4.2 44,834 3 5.6 4.0

Telecommunications 17,024 5 3.3 18,403 10 1.6 2.3 36,876 6 14.9 3.3

Electronic Components and 15,810 6 3.1 21,485 9 6.3 2.7 28,701 9 6.0 2.5
Boards

Education 14,094 7 2.8 28,392 7 15.0 3.5 44,560 4 9.4 3.9

Insurance/Takaful and 14,069 8 2.8 17,058 11 3.9 2.1 14,626 21 -3.0 1.3
Pension Funding

Oil Palm 13,631 9 2.7 45,493 3 27.3 5.7 38,164 5 -3.5 3.4

Ownership Dwellings 10,508 10 2.1 16,034 12 8.8 2.0 26,099 11 10.2 2.3

Public Administration 9,270 15 1.8 29,078 5 25.7 3.6 34,313 7 3.4 3.0

Communication Equipment 1,729 57 0.3 28,762 6 75.5 3.6 17,267 16 -9.7 1.5
and Consumer Electronics

Coke and Refined Petroleum 4,753 27 0.9 22,727 8 36.7 2.8 32,678 8 7.5 2.9
Products

Food and Beverages 6,351 23 1.2 15,202 14 19.1 1.9 26,755 10 12.0 2.4

Total Value-Added 252,556 49.6 423,236 10.7 52.6 564,604 6.1 50.0
(Top 10 Industries)

Total Value-Added All 509,272 100.0 805,163 9.6 100.0 1,128,133 7.0 100.0
Industries

Note: Total may not add up due to rounding.

Source: Department of Statistics, Malaysia.

The wholesale & retail trade, repair of motor vehicles and motorcycles industry continued to be
the leading contributor to the economy in 2015 growing at 9.8% with a share of 15.9% of total
value-added, followed by crude oil and natural gas (3.6%; 8.7%). Other top ten industries that
recorded positive performance include monetary intermediation (5.6%; 4%); education (9.4%; 3.9%);
telecommunications (14.9%; 3.3%); public administration (3.4%; 3%); coke and refined petroleum
products (7.5%; 2.9%); electronic components and boards (6%; 2.5%); and food & beverages (12%; 2.4%).
On the contrary, oil palm which was among the top ten industries in 2010 declined both in
terms of growth and share (-3.5%; 3.4%) followed by communication equipment and consumer
electronics (-9.7%; 1.5%).

Tax Collection

Total tax collected amounted to RM29.9 billion in 2005 and increased further to RM32.6 billion
and RM52.9 billion in 2010 and 2015, respectively. Motor vehicles, trailers and semi-trailers
contributed the highest taxes in 2005 amounting to RM10.4 billion or 34.7% of total taxes.
This was followed by arts, entertainment and recreation (RM7.5 billion; 25%); tobacco products

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(RM2.6 billion; 8.8%); coke and refined petroleum products (RM1.5 billion; 5.1%); other private
services (RM1.4 billion; 4.5%); spirits, wines and liquors (RM1.3 billion; 4.4%); crude oil and natural
gas (RM871.9 million; 2.9%); public administration (RM771.7 million; 2.6%); weapons, ammunition
and special purpose machinery (RM487.2 million; 1.6%); and wiring devices, electric lighting
equipment and other electrical (RM269.7 million; 0.9%). The top ten commodities contributed
to 90.5% of the total taxes collected in 2005.

In 2010, taxes on motor vehicles, trailers and semi-trailers remained the largest contributor
with a growth of 2.3% and share of 35.6%. Other top ten commodities were coke and refined
petroleum products (28.9%; 16.5%); tobacco products (3.9%; 9.7%); spirits, wines and liquors
(2%; 4.4%); forestry and logging (113.7%; 3.7%); and weapons, ammunition and special purpose
machinery (10.3%; 2.4%). Following the enhancement and reclassification of 2010 input-output
table, commodities, namely telecommunications, accommodation, professional and other financial
services contributed RM3.9 billion or 12.1% of total taxes collected. The top ten commodities
contributed RM27.6 billion or 84.5% of total taxes. Apart from reclassification, the Government’s
policy on promoting arts, entertainment and recreation resulted in a significant decline in taxes
collected from this commodity from RM7.5 billion in 2005 (25%) to RM0.08 billion (0.2%) in 2010.

Table 1.2.4. Tax by Commodity 2005, 2010 and 2015

2005 2010 2015

Commodity Tax Rank Share Tax Rank CAGR Share Tax Rank CAGR Share
(RM ‘000) (%) (RM ‘000) (2005 - 2010) (%) (RM ‘000) (2010 - 2015) (%)
(%) (%)
Motor Vehicles, Trailers and 10,386,674 1 34.7 11,626,024 1 2.3 35.6 13,160,869 1 2.5 24.9
Semi trailers
Arts, Entertainment and 7,487,775 2 25.0 77,757 34 -59.9 0.2 125,104 57 10.0 0.2
Recreation
Tobacco Products 2,620,918 3 8.8 3,171,232 3 3.9 9.7 5,170,116 2 10.3 9.8
Coke and Refined Petroleum 1,513,383 4 5.1 5,379,850 2 28.9 16.5 3,807,480 3 -6.7 7.2
Products
Other Private Services 1,360,142 5 4.5 16,188 48 -58.8 0.1 158,677 53 57.9 0.3
Spirits, Wines and Liquors 1,302,637 6 4.4 1,441,159 5 2.0 4.4 2,734,805 4 13.7 5.2
Crude Oil and Natural Gas 871,873 7 2.9 - - - - 1,810,983 6 - 3.4
Public Administration 771,717 8 2.6 - - - - - - - -
Weapons, Ammunition and 487,220 9 1.6 793,798 9 10.3 2.4 428,551 21 -11.6 0.8
Special Purpose Machinery
Wiring Devices, Electric Lighting 269,686 10 0.9 - - - - 27,382 89 - 0.1
Equipment and Other Electrical
Telecommunications 2,326 43 0.0 1,931,808 4 283.6 5.9 1,434,360 7 -5.8 2.7
Forestry and Logging 27,221 32 0.1 1,212,111 6 113.7 3.7 115,807 60 -37.5 0.2
Accommodation - - - 853,508 7 - 2.6 1,131,767 9 5.8 2.1
Professional - - - 800,023 8 - 2.5 2,502,372 5 25.6 4.7
Other Financial Services 15,382 37 0.1 351,174 10 86.9 1.1 387,912 26 2.0 0.7
Other General Purpose Machinery 55 55 0.0 - - - - 1,251,504 8 - 2.4
Insurance/Takaful and Pension - - - 333,855 13 - 1.0 1,037,296 10 25.4 2.0
Funding
Total Tax 27,072,026 90.5 27,560,687 0.3 84.5 34,041,552 4.3 64.3
(Top 10 Commodities)
Total Tax from All Commodities 29,923,882 100.0 32,612,514 1.7 100.0 52,904,089 10.2 100.0

Note: Total may not add up due to rounding.

Source: Department of Statistics, Malaysia.

Motor vehicles, trailers and semi-trailers continued to be the main contributor to tax
collection in 2015 with a growth of 2.5% and a share of 24.9%, followed by tobacco products
(10.3%; 9.8%). Other commodities contributing to tax collection include spirits, wines and liquors
(13.7%; 5.2%); professional (25.6%; 4.7%); accommodation (5.8%; 2.1%); crude oil and natural gas

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with a share of 3.4%; other general purpose machinery (2.4%); as well as insurance/takaful and
pension funding (2%). Notably, coke and refined petroleum products and telecommunications
which were ranked second and fourth in 2010 declined to third and seventh position in 2015,
respectively. However, forestry and logging, which was ranked among the top ten in 2010,
declined to 60th position with its growth declining by 37.5% and its share reducing to 0.2%.

Subsidy

The Government provides subsidies for six commodities, namely coke and refined petroleum
products; vegetable & animal oils and fats (cooking oil); confectionery (sugar); grain mill products,
starches and starch products (wheat flour); paddy; as well as fertilisers and nitrogen compounds.
In 2005, out of RM11.6 billion total subsidies, coke and refined petroleum products received the
most, amounting to RM11 billion or 94.6% of total subsidies followed by paddy (RM448 million;
3.9%); and fertilisers & nitrogen compounds (RM178 million; 1.5%). In 2010, total subsidies
increased to RM12.4 billion with coke and refined petroleum products remaining as the largest
recipient amounting to RM9.6 billion or 77.7% of the total subsidy. This was followed by vegetable
& animal oils and fats (RM828 million; 6.7%); confectionery (RM708.5 million; 5.7%); paddy
(RM444.6 million; 3.6%); fertilisers & nitrogen compounds (RM397.4 million; 3.2%); and grain
mill products, starches and starch products (RM375.9 million; 3%).

In line with the subsidy rationalisation policy implemented in 2013, the subsidy for all products
were reduced in 2015 except for vegetable & animal oils and fats (RM949.4 million; 16.5%); grain mill
products, starches and starch products (RM687.2 million; 11.9%); and paddy (RM565.3 million; 9.8%).
However, subsidy for coke and petroleum products reduced to RM3.2 billion following lower global
oil prices beginning in 2014 while subsidies for fertilisers and nitrogen compounds contracted
to RM388.7 million. The subsidy for sugar (confectionery) was discontinued in 2014 to promote
a healthier diet for the people.

Table 1.2.5. Subsidy by Commodity 2005, 2010 and 2015

2005 2010 2015

Subsidy Share Subsidy Share CAGR Subsidy Share CAGR
Commodity (RM million) (%) (RM million) (%) (2005 - 2010) (RM million) (%) (2010 - 2015)
(%) (%)

Coke and Refined 10,984 94.6 9,605.1 77.7 -2.6 3,175 55.1 -19.9
Petroleum Products
Vegetable & Animal Oils - - 828 6.7 - 949.4 16.5 2.8
and Fats
Confectionery - - 708.5 5.7 - - - -
Paddy 448 3.9 444.6 3.6 -0.2 565.3 9.8 4.9
Grain Mill Products, - - 375.9 3.0 - 687.2 11.9 12.8
Starches and Starch
Products
Fertilisers and Nitrogen 178 1.5 397.4 3.2 17.4 388.7 6.7 -0.4
Compounds
Total Subsidy 11,610 100.0 12,359.6 100.0 1.3 5,765.6 100.0 -14.1
Note: Total may not add up due to rounding.
Source: Department of Statistics and Ministry of Finance, Malaysia.

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Conclusion

This study analysed the structural change in the economy based on output, value-added,
taxes and subsidies. The study revealed that in 2005, manufacturing was the most significant
economic sector. However, in 2010 and subsequently in 2015, the services sector emerged as a
significant contributor to the economy. In terms of value-added, in 2005 crude oil and natural
gas was the primary industry, while in 2010 the wholesale & retail trade, repair of motor
vehicles and motorcycles surpassed crude oil and natural gas as the leading industry with the
trend continuing in 2015.

In terms of tax collection, motor vehicles, trailers and semi-trailers remained the largest contributor
throughout the period. From 2005 to 2015, taxes from tobacco products and spirits, wines and
liquors continued to increase. However, following efforts to encourage the development of the
industry, taxes from arts, entertainment and recreation declined significantly.

In terms of subsidy, as a result of the subsidy rationalisation policy, the total amount of
Government’s subsidies has been reduced. However, coke and refined petroleum products
continued to be heavily subsidised albeit at a decreasing level. Subsidies on other products were
provided on a targeted basis to meet social and developmental objectives.

E n t r e p r e n e u r s h i p p l ay s a v i t a l ro l e i n Efforts will be channelled towards raising the

harnessing economic opportunities. In July people’s income through various initiatives,
2019, the Government launched the National i n c l u d i n g p ro d u c t iv i t y e n h a n c e m e n t by
E n t r e p r e n e u r s h i p Po l i c y 2 0 3 0 t ow a r d s focusing on human capital development,
shaping Malaysia as an entrepreneurial particularly reskilling and upskilling. Realising
state. In line with this objective, several the importance of education in preparing the
s t rat e g i e s w i l l b e f o r mu l at e d t o c r e at e next generation, the Government will focus on
an atmosphere where the public sector, equipping Malaysians with skills, knowledge
private sector, professionals and people and ability to meet industry requirements.
can collaborate effectively. Furthermore, In the 2020 Budget, the Government will
the 2020 Budget will introduce initiatives allocate funds among others, for food and
to improve and streamline administrative cash assistance for students from low-income
regulations, procedures and systems as families. In terms of tertiary education, the
well as public service delivery to support curriculum will be enriched while the industry
entrepreneurship. internship programmes will be revised to
enhance graduate employability.

Feature Article 1.3

Productivity-Linked Wage System in Malaysia

Introduction

Productivity is an important factor that enhances economic competitiveness and promotes

investment in a country. As such, many countries encourage firms to offer a remuneration
package that links pay to performance as a means of incentivising higher productivity among
employees. This approach leads to progressive wage management that provides a win-win solution
to employers and employees as well as the country in general. By making wages more flexible
and competitive, employees may look forward to higher bonuses and better incentives in good
times. Whereas in bad times, companies may be able to manage their cost and stay viable by

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adjusting wages swiftly without having to resort to taking extreme cost-cutting measures such
as retrenchment. Various studies indicate that the implementation of a performance-based pay
system will enhance productivity as well as align wage growth with productivity growth.

The Malaysian Government has emphasised on the importance of performance-based pay system
to enhance competitiveness and increase the welfare of employees. In 1996, the Government
introduced the Productivity-Linked Wage System (PLWS) and issued new guidelines on wage
reforms to establish a closer link between wages and productivity. Since then, several policies
have been introduced to encourage further the private sector to raise wages that correspond with
productivity increase. These policies were highlighted under various policy documents such as
the Third Outline Perspective Plan, Third Industrial Master Plan, five-year development plans,
and the yearly budget announcements. Meanwhile, the provision of law related to PLWS was
specified in the Industrial Relations Act 1967. The World Bank (2011) also echoed the spirit of
this provision by concluding that firms which have adopted PLWS are expected to benefit more
and would also invest in other forms of management technology tools.

How Does PLWS Work?

PLWS comprises fixed and variable components. The fixed component consists of basic salary,
annual salary increment and contractual bonus, whereas the variable component is based on
employees’ productivity. Both components are then mapped onto three PLWS models, namely,
Productivity, Profitability and Combined Models. Other elements in the variable component
include piece-rate system, attendance incentives, service charge and skills allowance.

Table 1.3.1. Models for the Productivity-Linked Wage System

Productivity Model Profitability Model Combined Model

· Basic wage · This model is a
Fixed · Annual increment combination of the
· Contractual bonus productivity and
Component

profitability model
· Wage incentive · Bonus payment based
· Annual salary on the profit of the
increment company
Variable · Productivity payment · Wage incentive that
that is based on will be paid when profit
employee’s and exceeds a predetermined
company’s performance threshold
Source: Ministry of Human Resources, Malaysia.

How Effective is PLWS?

In the Malaysian context, various studies have been undertaken, which highlight the benefits
of implementing PLWS. APEC (2008) reports that linking remuneration to productivity and
performance is crucial among SMEs as it ensures a win-win situation for both employers and
employees. The impact on productivity and performance are manifolds, ranging from intangible
aspects of motivation and morale-boosting to tangible aspects of cost reduction.

World Bank (2011) observes that the implementation of PLWS is relatively widespread throughout
the country. It was estimated that around 80% of firms 1 link employee compensation with
performance. The study also found that firms implementing PLWS have a high proportion of
tertiary-educated workers and was mainly among large firms. The high incidence of performance-

1
A sample of 200 firms from the manufacturing and services sectors.

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linked pay practices was also supported by annual surveys conducted by the Malaysian Employers
Federation (MEF)2 which states that more than 80% of firms surveyed pay variable bonuses to
their executive and non-executive staff.

Workers’ motivation was examined in a different study by the Ministry of Human Resources
(MOHR) in 2013.3 The study showed that by implementing PLWS, workers were found to be
more motivated and had higher job satisfaction. Furthermore, firms’ profitability increased by
10%, productivity (15%) and wages (10%). In line with these studies, Universiti Putra Malaysia
(2015)4 also found that employees perceived that the incentive package under the PLWS was
fair. The findings also indicate that employees were generally satisfied with career prospects
and working conditions. Moreover, the implementation of PLWS also promoted greater loyalty
towards the organisation.

Various efforts were undertaken by MOHR and Malaysia Productivity Corporation (MPC) to intensify
the adoption of PLWS. These include training, workshops, seminars, briefings, consultancies,
showcases of best practices and PLWS Awards programme. Furthermore, to facilitate companies
to adopt the system, MPC has established an online portal called the WayUp that consists of
various electronic assessment tools such as easy Business Excellence (ezBE), electronic Productivity
Gain Measurement (ePGM), electronic Benchmark (e-Benchmark) and productivity toolkit (Prokit)
to assess and monitor the status of productivity for participating companies. These tools analyse
the strengths and weaknesses of each company and provide key solutions for implementation.

What are the Challenges in Implementing PLWS?

Despite positive findings from various studies, PLWS adoption rate remains low. The slow take-
up rate was contributed by several factors, including unawareness on the benefits of PLWS and
assistance provided by the Government in adopting PLWS. Furthermore, resistance from trade
unions and high implementation cost also contributed to the slow adoption.

Table 1.3.2. Employers Adopting and Employees Benefiting from PLWS

2016 2017 2018 2019 (June)

Employers Employees Employers Employees Employers Employees Employers Employees

Agriculture 4,081 387,018 4,283 413,372 4,412 429,133 4,501 447,355

Manufacturing 10,664 1,266,447 10,958 1,332,691 11,219 1,392,155 11,391 1,433,183

Construction 5,418 152,918 5,486 156,813 5,612 167,170 5,680 177,687

Services 59,537 1,762,457 60,582 1,857,167 62,177 2,038,715 63,063 2,223,991

Others 907 50,476 1,117 76,426 1,502 146,274 1,612 157,782

Total 80,607 3,619,316 82,426 3,836,469 84,922 4,173,447 86,247 4,439,998

Source: Ministry of Human Resources, Malaysia.

Findings from the National Employment Return (NER) Survey and the Department of Industrial
Relations,5 MOHR indicates that as of 30 June 2019, only 86,247 employers have implemented PLWS
which benefited 4.4 million employees. The services sector contributed the highest participation
of employers at 73.1%, followed by manufacturing (13.2%), construction (6.6%) and agriculture
(5.2%) sectors. The participation is still low, especially among SMEs.6

2
There are about 5,000 firms registered with MEF.
3
A sample of 300 firms participated in the study.
4
530 employees responded to the survey by Universiti Putra Malaysia.
5
Based on 102,517 employers participation in NER Survey and industrial visits by Department of Industrial Relations, MOHR.
6
In line with the findings from studies by World Bank, MOHR and Universiti Putra Malaysia.

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 CHAPTER 1 ECONOMIC MANAGEMENT AND PROSPECTS

Regardless of the benefits of paying wages based on performance, there are also some downsides.
Ogbonnaya et al. (2017) reported that employees under the performance-based pay system might be
stressed to the degree that supersedes the benefits of the system. Under this condition, employees
are more likely to feel that they are being encouraged to work too hard, which decreases their
job satisfaction. Ultimately, the stress could lower their productivity and bring about the exact
opposite effect than what was intended. The study also highlights that employees working under
the performance-based pay system may be inclined only to undertake activities that are being
measured in their performance appraisal. Furthermore, the World Bank (2011) argues that the
mandatory implementation of PLWS could result in a higher overall unemployment rate and
higher employment in the informal sector. In particular, low skilled employees who are less likely
to benefit from PLWS may be demotivated to work and hence opt to join the informal sector.

How to Improve the Adoption of PLWS?

Concerted efforts will be continued to widen the implementation of PLWS to ensure that wages
correlate with productivity level. In this context, collaboration between various parties is crucial
for its smooth implementation. The Human Resources Development Corporation (HRDC) will
continue to focus on upskilling and reskilling programmes and expand the coverage of sectors
to enable more employees to be trained. These training programmes aim to create skilled
employees with higher productivity resulting in higher wages.

Effective promotions and campaigns should be initiated by government agencies with the help of
industry players to promote success stories of PLWS. In this scenario, all agencies dealing with
the private sector should be responsible for encouraging and promoting companies to implement
PLWS through targeted outreach programmes. Furthermore, employers and employees, as well as
trade unions, should be engaged and encouraged to attend courses or dialogue sessions related
to PLWS to enhance their awareness for better implementation.

A comprehensive study on the implementation of PLWS could be conducted to further analyse

the adoption of the system across sectors, states, firm size and employment categories. In
addition, the study could propose measures to enhance transparency between employers and
employees. Furthermore, awareness among trade unions should also be raised to increase the
acceptance of PLWS among employees.

Conclusion

Overall, the implementation of PLWS is expected to benefit both employers and employees. The
system would ensure that both employers and employees obtain a fair share of the gains from
productivity or performance improvement. It also provides a more flexible wage structure that
can withstand economic uncertainties as well as ensure job stability and reduce the likelihood of
retrenchment during down-cycles. Hence, synergies between the private sector and Government
agencies should be strengthened to ensure industries reap the benefits from the implementation
of PLWS, to enhance firms’ competitiveness and support the country’s aspiration in achieving
the Shared Prosperity Vision 2030.

The Government will work to ensure all be encouraged to provide greater accessibility
segments of the society benefit from the for first time home buyers by introducing
nation’s economic prosperity regardless of m o r e f l e x i b l e a n d i n n ovat ive f i n a n c i n g
gender, ethnicity, socio-economic level and s ch e m e s . I n a d d i t i o n , e x i s t i n g h o u s i n g
geographic location. In enhancing access financing schemes will be reviewed to offer
to affordable homes, the Government will sustainable housing solutions for low and
consolidate and strengthen various existing middle-income households to own affordable
housing programmes. Financial institutions will homes.

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 CHAPTER 1 ECONOMIC MANAGEMENT AND PROSPECTS

To further elevate healthcare quality, the governance, enhancing public service delivery,
Government will strengthen its services by optimising resource allocation as well as
providing a comfortable environment for the improving debt and liabilities management.
people while receiving treatment in public The establishment of the Debt Management
hospitals and clinics. An allocation will be Office (DMO) exemplifies the Government’s
provided to upgrade healthcare infrastructure, determination in ensuring effective and efficient
as well as enhance the capacity and capability fiscal management.
of healthcare personnel. Concurrently, the
Government will promote a healthy lifestyle The Government will improve its taxation
and extend preventive care programmes system by reducing the tax gap, minimising
nationwide. tax leakages, exploring new sources of revenue
and enhancing tax administration. At the
While pursuing inclusive growth, the Government same time, procedures related to business
c o n t i n u e s t o e m p h a s i s e o n s u s t a i n ab l e operations will be streamlined. These measures
development. Several environmental crises will not only improve the Government’s
happened in 2019 that not only negatively financial position but also strengthen public
affected the environment but also the health service delivery to fulfil expectations of the
and livelihood of the people. To address this, people.
the 2020 Budget encompasses strategies,
programmes and activities to raise awareness, Overall, these strategic initiatives are in line
improve engagement at all levels of stakeholders with the Shared Prosperity Vision 2030, which
and strengthen enforcement on environmental focuses on increasing people’s purchasing
protection. power as well as reducing income inequality
and regional disparity. This sets Malaysia on a
The Government will continue to give the sustainable growth trajectory where enterprises
public sector special attention as part of its thrive in a business-friendly environment while
institutional reform. The 2020 Budget will the people live in a harmonious, stable and
strengthen the public sector through various prosperous society. This is the commitment of
measures including upholding integrity and the Government to the people.

Feature Article 1.4

Malaysia in 2030

Introduction

The world is in the middle of a dramatic transition, and the most critical transformation is the
shift in both economic and political power. Smith (2015) argues that the planet is transforming
human population, economics, energy and resource demand, climate change as well as other
factors vital to global civilisation and ecosystem. Hence, an understanding of global population
trends and anticipating the emerging demographic changes are crucial in encountering future
challenges.

Although 2030 is eleven years away, clear megatrends1 are shaping the world, presenting
both challenges and opportunities. The current global economy is facing a confluence of risks,
including an escalation of trade disputes, an abrupt tightening of global financial conditions
and intensifying climate risks, which could disrupt economic activities and jeopardise long-term
development prospects. In this regard, the formulation of action plans to achieve the objectives
of the Shared Prosperity Vision 2030 requires an understanding of how the world and the nation
would look like in 2030.

1
A shift in behaviour or attitude that has global impact and crosses multiple industries.

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 CHAPTER 1 ECONOMIC MANAGEMENT AND PROSPECTS

The Four Global Forces

Smith (2015) argues that four global forces are shaping the world today, namely demography,
natural resources, globalisation and climate change. The four forces are expected to have similar
effects on Malaysia. These effects are elucidated further in the following subtopics.

Demography

In terms of demography, one of the global concerns is the increasing population vis-à-vis the
availability of natural resources. World population is projected to increase by 0.9%2 to 8.5 billion
in 2030 from 7.7 billion people in 2019. At the same time, Asia’s population will rise by 0.6%2
to 4.9 billion people in 2030 from 4.4 billion in 2019 (United Nations, 2019).

The population in Malaysia is expected to increase by 1.4%2 from 32.6 million in 2019 to 38.1
million in 2030 (DOSM, 2019). Furthermore, as Malaysia approaches an ageing nation status
by 2030, it is projected that 15% of the population will be over 60 years old compared to 10%
in 2019. The National Population and Family Development Board (LPPKN) envisages three main
challenges of an ageing population, namely inadequate saving by the elderly, poor health
condition and the state of loneliness.

Natural Resources

As the world’s population continues to rise, the demand for the depleting natural resources will
continue to increase. For example, the existing world oil reserve is expected to run out in 42
years, given the current production rates and so do other non-renewable natural resources. In
Malaysia, the reserves for oil and gas are expected to last approximately ten more years (British
Petroleum, 2019). Similarly, Malaysia’s freshwater is also projected to run low in the future. In
2010, the Ministry of Water, Land and Natural Resources conducted a study on National Water
Resources in Malaysia with projections until 2050. The research has identified 12 main issues3
affecting the sustainability of Malaysia’s water resources.

Figure 1.4.1. Population by Selected Areas Figure 1.4.2. Malaysia’s Population Pyramid, 2030
1950—2030 Age Group
1.9 75+ 2.1
Population (billion) 19.8
1.5 70-74 1.5
18.3
9 million million
2.0 65-69 1.8
World
8 Asia 2.3 60-64 2.2
South-Eastern Asia 2.7 55-59 2.5
7 3.3 50-54 2.7
4.2 45-49 3.5
6
4.2 40-44 3.8
5 3.9 35-39 3.7
3.7 30-34 3.5
4 3.8 3.5
25-29
3 3.6 20-24 3.3
3.8 15-19 3.6
2 3.7 10-14 3.5
3.7 5-9 3.5
1 3.6 3.4
0-4
0 5 4 3 2 1 0 0 1 2 3 4 5
1950 1960 1970 1980 1990 2000 2010 2020 2030 Percentage (%)

Source: United Nations (2019), World Population Prospects 2019. Source: Department of Statistics, Malaysia.

2
Compound Annual Growth Rate from 2015 – 2030.
3
The 12 main issues are inefficient governance structure and ineffective enforcement; water pollution and deterioration in river water quality; unsustainable industry
and lack of long-term resilience; increase in demand for safe and reliable services; limited resource recovery initiatives; competition for water resources across
sectors; reactive approach in addressing disaster; research, development, commercialisation and innovation in the stage of infancy; less water ownership among
the public; changes in land use due to rapid urbanisation and industrialisation; low optimisation of floodwater; and inadequate quantity of reliable water resources.

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Table 1.4.1. Malaysia Natural Resources, 2018

Resources Reserves R/P life-index Reserves (indicated) Key Uses

(indicated) years Projections 2030
(metric tonnes) (metric tonnes)
Coal 449,000,000 169 417,000,000 Energy
Iron Ore 24,369,069 7 – Energy
Bauxite (Aluminium) 80,739,998 11 73,000,000 Many
Tin 893,820 231 840,000 Plating, electronic,
construction,
industrial
Gold 97 33 60 Jewellery, industrial,
investment
Source: Department of Mineral and Geoscience Malaysia.

Figure 1.4.3. World Primary Energy Demand Figure 1.4.4. World Primary Energy Demand by Region
Billion TOE4 Billion TOE4
20 20
Oil OECD
Gas China
Coal India
Renewable, hydro, nuclear Other Asia
15 15 Africa
Other

10 10

5 5

0 0
1995 2000 2010 2017 2020 2030 1980 1990 2000 2010 2020 2030
Source: BP Energy Outlook 2017 – 2030, 2019 Edition. Source: BP Energy Outlook 2017 – 2030, 2019 Edition.

Globalisation

Globalisation has enabled a gradual change in economic power. In 2000, advanced economies
generated 57% of global output, measured by Purchasing Power Parity (PPP).5 By 2024, according
to IMF forecasts, the share will fall to 37%. Meanwhile, China’s share will jump to 21% from 7%,
and the rest of emerging Asia will account for 39% of global output, compared to 15% for the EU
and 14% for the US. By 2030, China’s GDP at PPP is projected to increase to USD38 trillion, thus
retaining its position as the largest economy, followed by the US and India. Notably, Indonesia
is projected to improve to fifth position at USD5.4 trillion in 2030. At the same time, Malaysia is
expected to rise from 27th to 25th position. In this regard, the relative position of countries in
terms of performance depends on various factors such as the emergence of an inward-looking
policy which may result in a slowdown or even reversal of globalisation (Wolf, 2019).

4
Tonne of oil equivalent (TOE) is a unit of energy, defined as the amount of energy released by burning one tonne of crude oil.
5
PPP estimates of GDP adjust for price level differences across countries, providing a better measure of the volume of goods and services produced by an economy
as compared to GDP at current market exchange rates, which is a measure of value.

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 CHAPTER 1 ECONOMIC MANAGEMENT AND PROSPECTS

Table 1.4.2. Projected Rankings of Economies Based on GDP at PPPs

(in Constant 2016, USD billion)

2016 Rankings 2030 Rankings

GDP PPP
Projected
Rankings Country GDP at PPP Country
GDP at PPP
1 China 21,269 China 38,008
2 United States 18,562 United States 23,475
3 India 8,721 India 19,511
4 Japan 4,932 Japan 5,606
5 Germany 3,979 Indonesia 5,424
6 Russia 3,745 Russia 4,736
7 Brazil 3,135 Germany 4,707
8 Indonesia 3,028 Brazil 4,439
9 United Kingdom 2,788 Mexico 3,661
10 France 2,737 United Kingdom 3,638
11 Mexico 2,307 France 3,377
12 Italy 2,221 Turkey 2,996
13 South Korea 1,929 Saudi Arabia 2,755
14 Turkey 1,906 South Korea 2,651
15 Saudi Arabia 1,731 Italy 2,541
16 Spain 1,690 Iran 2,354
17 Canada 1,674 Spain 2,159
18 Iran 1,459 Canada 2,141
19 Australia 1,189 Egypt 2,049
20 Thailand 1,161 Pakistan 1,868
21 Eqypt 1,105 Nigeria 1,794
22 Nigeria 1,089 Thailand 1,732
23 Poland 1,052 Australia 1,663
24 Pakistan 988 Philippines 1,615
25 Argentina 879 Malaysia 1,506
26 Netherlands 866 Poland 1,505
27 Malaysia 864 Argentina 1,342
28 Philippines 802 Bangladesh 1,324
29 South Africa 736 Viet Nam 1,303
30 Colombia 690 South Africa 1,148
31 Bangladesh 628 Colombia 1,111
32 Viet Nam 595 Netherlands 1,080
Source: International Monetary Fund for 2016 estimates and PricewaterhouseCoopers projections for 2030.

Climate Change

Currently, the global average surface temperature is trending upward, along with steady measured
growth of greenhouse gas concentration in the atmosphere. The average temperature is rising
consistently in line with the greenhouse effect. Meanwhile, other natural cycle or processes
also known to influence the climate such as volcanic eruptions does not always affect the
average temperature. The impact of climate change on people and their livelihood have been
well documented. For example, a staggering 35,000 people were killed in 2003 when a massive
heatwave spilt across Europe. Besides, lesser waves killed hundreds more in Japan, China, India
and the US in the following summers (Smith, 2015). In the Malaysian context, the nation has
also experienced a warming trend for the past few decades. According to the Ministry of Energy,
Science, Technology, Environment and Climate Change (MESTECC), Malaysia’s annual average

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temperature for Peninsular Malaysia is projected to increase from 0.6oC to 0.9oC, while in Sabah
and Sarawak from 0.8oC to 1.0oC and 0.6oC to 0.8oC by 2030 respectively.6 Climate change is likely
to have a significant impact on development strategies and macroeconomic policies globally,
particularly among the poorer and more vulnerable countries.

Technological Advances as Enablers of Global Forces

As the four global forces pose considerable challenges to the world, technological advancement
can be leveraged to minimise the impact and facilitate the implementation of measures to
address the problems. For example, technological progress in global communications facilitates
businesses to explore new opportunities domestically and across borders. In this regard, other
advanced technologies are also vital in addressing the challenges from changes in demography
and demand for natural resources and energy. Technologies also provide tremendous assistance
to mitigate uncertainties arising from globalisation and climate change.

Smith (2015) argues that technological advances have the potential to mitigate the impact of
the four global forces. For instance, modern healthcare and pharmacology assist older persons
in being healthier and more productive, especially in the developing world. At the same time,
advances in biotech, nanotech and material science encourage the shift from the utilisation of
depleting energy resources such as oil and gas to a higher demand for greener and renewable
natural resources. In terms of addressing climate change, technological advances such as smart
grids, solar panels and geoengineering assist efforts to prevent the worsening of climate change
and lessen its impacts. Smith (2015) further argues that technological advances are pivotal as
they act as both the catalyst for enabling the positive effects or decelerating the consequences
of the four global forces, rather than as an independent force on its own.

Malaysia’s Shared Prosperity Vision 2030

Malaysia’s Shared Prosperity Vision 2030 sets a new economic direction in ensuring prosperity
for all Malaysians. The Vision aims for sustainable development with equitable distribution,
inclusive at every level of the supply chain, ethnicity and region to create a sense of harmony
and political stability among Malaysians. The strategic thrusts of the Vision are as follows:
 business and industrial ecosystem;
 key economic growth activities;
 human capital;
 labour market and compensation of employees;
 social well-being;
 regional inclusion; and
 social capital.

Shared Prosperity Vision 2030 outlines three main objectives. The first objective aims at restructuring
the economy to be progressive, knowledge-based and high-valued with full participation at all
levels of society. This objective can be achieved through robust and sustainable economic growth
and ensuring the prosperity is enjoyed by Malaysians equitably.

The second objective focuses on addressing inequalities at various fronts, including reducing
the gap within the supply chains, between ethnicities as well as bridging regional disparities to
ensure that no one is left behind. The objective requires the development of a learning society,
developing new industries and setting an economy that harmonises the different needs of society.

6
Based on the Malaysia Third National Communication (NC3) and Second Biennial Update Report (BUR2) to fulfil Malaysia’s reporting obligations to the United
Nations Framework Convention on Climate Change (UNFCCC) 2018.

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 CHAPTER 1 ECONOMIC MANAGEMENT AND PROSPECTS

Finally, the third objective of the Vision is to uplift Malaysia to be a united, prosperous and
dignified nation. There is a need to position Malaysia as the axis of Asia’s economic growth
as well as to strengthen democratic institutions. Furthermore, the objective requires efforts to
combat corruption and plug leakages of Government resources, eradicate prejudicial notions,
foster racial unity and ensure sustainable development.

Conclusion

The world is transforming in terms of population growth, demand for natural resources,
globalisation trend and climate change. At the same time, the nation has to be mindful of other
factors shaping the future of the country. In this respect, the Shared Prosperity Vision 2030 sets
the path for Malaysia’s sustainable development with equitable economic distribution, inclusive at
every level of the supply chain, ethnicity and geographical divide, and create a sense of harmony
and political stability among Malaysians. The Vision brings forth ideas and inspiration for all
Malaysians to foster unity without prejudice, celebrating the diversity of races and cultures to
create a united, prosperous and dignified nation.

Conclusion the expansion is expected to be broad-based,

with all sectors registering positive growth.
Supported by strong fundamentals, the
Malaysian economy is expected to remain Despite the anticipated expansion, external
resilient despite global economic uncertainties. uncertainties pose downside risks to the growth
Real GDP is projected to grow by 4.7% in 2019. prospect. To minimise the risks and drive the
In 2020, the economy is expected to remain economy, the Government will implement
steady, with a growth of 4.8% led by domestic measures to harness economic opportunities,
demand. Private sector expenditure will level up human capital, ensure inclusivity
remain the key driver of growth with private and revitalise public institutions and public
consumption and investment rising 6.9% and finances. This will lay the foundation for the
2.1%, respectively. Meanwhile, public sector crystallisation of the objectives of Shared
expenditure is forecast to rebound, following Prosperity Vision 2030 and for Malaysia to
improvement in investment. On the supply side, reemerge as an Asian Tiger.

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World Tourism Organization (UNWTO). (2019).
World Tourism Barometer, 17(2).

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 2 GLOBAL ECONOMIC
OUTLOOK

• Overview
• Global Economy
Feature Article 2.1 – Leveraging Project Funding
from the Standing Committee for Economic and
Commercial Cooperation
Information Box 2.1 – Benefits of Malaysia's
Membership in Multilateral Development Banks
Information Box 2.2 – Asia-Pacific Economic
Cooperation
• Conclusion
• References

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 CHAPTER 2 GLOBAL ECONOMIC OUTLOOK

32 Economic Outlook 2020

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 CHAPTER 2 GLOBAL ECONOMIC OUTLOOK

2 GLOBAL ECONOMIC OUTLOOK

Overview structural reforms. ASEAN is forecast to grow

both in 2019 and 2020, largely attributed to

T he global economy is projected to grow at robust domestic demand. ASEAN is also expected
3.2% in 2019 supported by growth in several to benefit from China’s large domestic market
major countries in the advanced economies. This and increasing per capita income through
growth is then forecast to improve to 3.5% in exports and investment.
2020. Growth in 2020 is expected to be supported
by stronger GDP performance in emerging Global inflation is projected to be at 3.6% in both
market and developing economies (EMDEs). 2019 and 2020. In 2019, inflation in advanced
economies is expected to record 1.6%, while in
Growth in advanced economies is expected EMDEs, it is projected at 4.8%. In 2020, inflation
to ease from 1.9% in 2019 to 1.7% in 2020. in advanced economies is expected to record
The US is expected to register solid growth 2% (2019: 1.6%), while inflation in EMDEs is
in 2019. However, this growth is projected to projected to record 4.7% (2019: 4.8%) following
slow down in 2020 due to the winding down slower wage growth. Meanwhile, world trade
effect of its fiscal stimulus as well as ongoing growth is expected to ease to 2.5% in 2019
restrictive trade policies. Growth in the euro amid deepening trade tensions between the
area is expected to moderate in 2019 due to US and China, and improve to 3.7% in 2020
weaker industrial production and business backed by robust GDP growth in EMDEs. FDI
confidence amid slower external demand. The is anticipated to expand 15% to USD1.5 trillion
euro area economy is projected to pick up in 2019, mainly due to a rise in cross-border
slightly in 2020 as industrial activities regain merger and acquisition (M&A) activities and
momentum. The uncertainties caused by Brexit an increase in greenfield investments.
continues to affect business confidence and
domestic demand in the UK. Nonetheless, The global economy is experiencing a broad-
growth in 2020 is expected to stabilise after based slowdown and risks are tilted to the
Brexit on 31 October 2019. In Japan, marginal downside resulting from unresolved trade
growth is anticipated, supported by private tensions, policy uncertainties and weakening
consumption and investment. In 2020, Japan’s business confidence. The continued escalation
growth is projected to moderate as a result of of trade disputes between the US and China
the consumption tax hike and sluggish exports. may significantly hamper global growth
prospects. Prolonged uncertainties of Brexit and
EMDEs is forecast to grow slower at 4.1% in unfavourable financial conditions may also affect
2019, largely due to easing external demand growth. In addition, existing political instabilities,
and investment following the impact of rising humanitarian crises as well as geopolitical
tariffs. But its growth is anticipated to improve and social tensions, are among the major
4.7% in 2020 as growth in major EMDEs is factors that contribute to the downside risks.
expected to rebound after recovering from the
effect of financial market pressures. China’s
GDP is expected to expand at a slower pace Global Economy
in 2019 and moderate further in 2020, mainly
due to structural slowdown and the escalation The US' economy grew 2.5% in the first half
of trade tensions. Meanwhile, India’s economic of 2019 supported by consumer spending,
growth is projected to be robust in 2019 and which rose by 2.6%, particularly in durable
will expand further in 2020 attributed to strong goods such as motor vehicles and parts. The
domestic demand amid fiscal stimulus and unemployment rate improved slightly to 3.8%

Economic Outlook 2020 33

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 CHAPTER 2 GLOBAL ECONOMIC OUTLOOK

Table 2.1. Real GDP for Selected Economies following additional job gains in professional
2018 – 2020 and business services, health care, transportation
and warehousing. Inflation was registered at
Change
(%) 1.7% following lower energy prices due to
2018 20191 20202 stalling US gasoline and diesel demand.
World Output 3.6 3.2 3.5
In 2019, the US' GDP is projected to expand
Advanced economies 2.2 1.9 1.7
by 2.6%, mainly supported by higher private
United States 2.9 2.6 1.9
consumption and external demand despite
Euro area 1.9 1.3 1.6
escalating trade tensions. Private consumption
Japan 0.8 0.9 0.4 is expected to increase by 4% buoyed by strong
Republic of Korea 2.7 2.6 2.8 job markets as well as rising pay and benefits.
Emerging market and Exports are expected to grow 3.5% backed by
4.5 4.1 4.7
developing economies capital goods and industrial supplies, while
China 6.6 6.2 6.0 import growth are anticipated to soften to
India 6.8 7.0 7.2 1.9% reflecting the adverse effect of tariffs.
ASEAN Meanwhile, capital spending is projected to grow
Singapore 3.1 0.0 - 1.0 1.6 slower at 2.7% due to lower fixed investment,
Thailand 4.1 3.3 3.7 particularly in equipment.
Indonesia 5.2 5.4 - 5.8 5.3 - 5.6
Philippines 6.2 6.4 6.5 On the supply side, the manufacturing sector
Malaysia 4.7 4.7 4.8 is expected to grow at a significant pace of
3.9%, contributed by higher production of
World Trade 3.7 2.5 3.7
wood products, printing and related products
1
Estimate. as well as plastics and rubber products. Retail
2
Forecast. sales are expected to grow 4.3% supported by
Sources: International Monetary Fund and national authorities.
higher e-commerce sales. The unemployment
rate is expected to improve to 3.6% following
expansion in health care and services industries,
Table 2.2. Inflation Rate for Selected Economies while inflation is anticipated to be 2% due to
2018 – 2020 lower energy prices. The US Federal Reserve
Change (Fed) has lowered its target range by 25 basis
(%) points each in July and September 2019
2018 20191 20202 to a range of 1.75% to 2.00% to boost the
World 3.8 3.6 3.6 economy.
Advanced economies 2.0 1.6 2.0
United States 2.4 2.0 2.7 In 2020, the US' growth is projected to
moderate to 1.9% (2019: 2.6%) due to slower
Euro area 1.8 1.3 1.3
domestic demand and waning effects of
Japan 1.0 1.1 1.5 the fiscal stimulus package introduced in
Republic of Korea 1.5 1.4 1.6 2017 – 2018. Private consumption is expected
Emerging market and to slow down at 2.5% (2019: 4%), mainly due
4.8 4.8 4.7
developing economies to the effects of the trade dispute. In addition,
China 2.1 2.2 2.4 capital spending is expected to grow at a
India 3.5 3.9 4.2 slower pace of 2.4% (2019: 2.7%), largely due
ASEAN to slower growth in private investment, which
Singapore 0.4 0.5 - 1.5 1.3 is anticipated to be at 2.9% (2019: 3.1%). The
unemployment rate is expected to improve to
Thailand 1.1 0.7 - 1.2 1.1
3.5% (2019: 3.6%) owing to job gains in low-
Indonesia 3.2 3.1 3.1
paying retail and food service industries, while
Philippines 5.2 2.7 3.0 inflation is expected to be at 2.7% (2019: 2%).
Malaysia 1.0 0.9 2.0 The Fed is also anticipated to cut its federal
fund rate five times in 2020 to achieve its 2%
1
Estimate.
2
Forecast.
inflation target and full employment over the
Sources: International Monetary Fund and national authorities. medium-term.

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 CHAPTER 2 GLOBAL ECONOMIC OUTLOOK

The deepening trade disputes, as well as the offset by the pre-Brexit inventory accumulation
abrupt reversal of the buoyant financial market and stockpiling. The unemployment rate is
conditions, may hamper the country’s economic projected to register 4.1% following job gains
growth in the medium term. Fiscal stimulus in the professional, scientific and technical
introduced in 2017 – 2018 has supported the activities industry. Inflation is anticipated to
economy despite global growth slowdown in be lower at 1.8% due to lower energy prices.
2018. However, this expansion has increased
the US government debt, which will raise the In 2020, the UK’s economic growth is forecast
current levels of debt-to-GDP ratio to 78% of at 1.4% (2019: 1.3%), sustained by planned
GDP for the federal government and 107% of public investment to improve public housing
GDP for general government. and infrastructure until end-2020. Consumer
spending is expected to improve, while business
The UK’s GDP grew 1.5% in the first half of investment will recover slightly. Additionally,
2019 supported by strong domestic demand, the services industry will continue to sustain
particularly in private and public spending. the economy. Inflation is projected to be at 2%
Household consumption grew by 1.9% as (2019: 1.8%), while the unemployment rate is
confidence in jobs, and wage prospects forecast to be at 4.1% (2019: 4.1%).
increased consumer spending. Similarly,
government consumption increased 2.2% due Brexit will pose a risk to growth, especially under
to higher spending in the health, infrastructure a no-deal Brexit. Consequently, the UK’s business
and defence sectors. The unemployment rate investments are expected to remain subdued,
improved slightly to 4%, while inflation eased following lower business confidence until there
to 2% as a result of lower prices of motor fuels, is clarity on the Brexit terms and conditions.
accommodation services as well as electricity, Should a no-deal Brexit occur, food prices may
gas and other fuels. be affected, possibly pushing inflation to further
exceed the 2% inflation target, as approximately
For the year, the UK’s economic growth is 3 0 % o f f o o d i s i m p o r t e d f ro m t h e E U.
forecast to be at 1.3% due to slower private
consumption and investment amid uncertainties The euro area’s economy grew at a slower pace
over the outcome of Brexit in October 2019. of 1.2% in the first half of 2019 as a result
However, this slower growth is expected to be of sluggish industrial production, particularly

Feature Article 2.1

Leveraging Project Funding from the Standing Committee for Economic and
Commercial Cooperation

Introduction

The Standing Committee for Economic and Commercial Cooperation (COMCEC) is one of four
standing committees1 of the Organisation of Islamic Cooperation (OIC), an organisation Malaysia
has been a member of since 1969. COMCEC, which was established in 1981 and became operational
in 1984, oversees and coordinates all OIC economic activities. COMCEC has 57 member countries
and five observer states.

COMCEC’s vision is to build a prosperous Islamic Ummah, based on solidarity and interdependence,
enhanced mobility and good governance. In line with its vision, COMCEC’s mission is to provide
a forum for producing and disseminating knowledge as well as sharing experiences and best
practices. This vision and mission are to ensure mutual benefits as well as further strengthen
cooperation among member countries.

1
Other standing committees are the Standing Committee on Scientific and Technological Cooperation (COMSTECH), Standing Committee for Information and Cultural
Affairs (COMIAC) and Al Quds Committee.

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 CHAPTER 2 GLOBAL ECONOMIC OUTLOOK

The objectives of COMCEC are to:

 address economic challenges of the Islamic Ummah and to contribute to the development
efforts of member countries;
 produce and disseminate knowledge; share experiences and best practices; develop a
common understanding; and approximate policies among member countries in line with
the vision and principles of the COMCEC Strategy;
 serve as the central forum for member countries to discuss international economic and
commercial issues;
 study all possible means of strengthening economic and commercial cooperation among
member countries;
 draw up programmes and submit proposals designed to increase the welfare of member
countries; and
 ensure the overall coordination of the activities of the OIC relating to economic and
commercial cooperation among member countries.

The annual Ministerial Session of the COMCEC convenes in October or November in Istanbul,
Turkey under the chairmanship of the President of the Republic of Turkey. To date, 34 Sessions
have been convened.

COMCEC Strategy

The 4th Extra-ordinary Islamic Summit Conference held on 14 – 15 August 2012 in Mecca,
Kingdom of Saudi Arabia adopted the COMCEC Strategy to meet the growing needs of the
OIC member countries. The Strategy was built on three principles: Enhancing Mobility,
Strengthening Solidarity and Improving Governance. Based on these principles, COMCEC focuses
on six cooperation areas, namely financial cooperation, trade, tourism, agriculture, transport
and communications, as well as poverty alleviation. Among the key features in realising the
successful implementation of the COMCEC Strategy are the formation of a working group (WG)
under each cooperation area and a project cycle management with an identified financial
mechanism.

In the case of Malaysia, the Financial Cooperation WG is represented by the Ministry of Finance.
Other WGs and the respective Ministries representing them are:
 Tra d e W G r e p r e s e n t e d by t h e M i n i s t r y o f I n t e r n at i o n a l Tra d e a n d I n d u s t r y
(MITI);
 Tourism WG represented by the Ministry of Tourism, Arts and Culture;
 Agriculture WG represented by the Ministry of Agriculture and Agro-based Industry;
 Transport and Communications WG represented by the Ministry of Transport; and
 Poverty Alleviation WG represented by the Ministry of Economic Affairs.

MITI has been appointed as the national focal point to oversee the activities of these WGs and
represents Malaysia at the Ministerial Sessions of the COMCEC.

The WG meetings are one of the avenues for COMCEC in achieving its objectives apart from the
project cycle management. Through the WG meetings, member countries will further deliberate
on the themes. These themes are identified by COMCEC according to the respective areas of
cooperation.

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 CHAPTER 2 GLOBAL ECONOMIC OUTLOOK

COMCEC Financial Cooperation Working Group

The overarching strategic objective of the Financial Cooperation Working Group (FCWG) is to
deepen cooperation among member countries, particularly in the financial and capital markets.
This involves regulatory and supervisory, capital flows, governance as well as capacity building
and R&D activities. The themes for the FCWG since its inception in 2013 are as listed in
Table 2.1.1.

Table 2.1.1. Themes in COMCEC FCWG

WG Meetings Meeting Dates Themes

1st FCWG 12 December 2013 Enhancing Capital Flows in the COMCEC Region

2nd FCWG 27 March 2014 Enhancing Financial Inclusion in the COMCEC Member
States

3rd FCWG 16 October 2014 Risk Management in Islamic Financial Instruments

4th FCWG 19 March 2015 Improving Banking Supervisory Mechanisms in the

OIC Member Countries

5th FCWG 15 October 2015 Retail Payment Systems in the OIC Member Countries

6th FCWG 17 – 18 March 2016 Developing Islamic Finance Strategy in the OIC
Member Countries

7th FCWG 20 October 2016 National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member
Countries

8th FCWG 30 March 2017 Improving Public Debt Management in the OIC
Member Countries

9th FCWG 26 October 2017 Diversification of Islamic Financial Instruments

10th FCWG 29 March 2018 Role of Sukuk in Islamic Capital Markets

11th FCWG 25 October 2018 Islamic Fund Management

12th FCWG 28 March 2019 Infrastructure Financing through Islamic Finance in

the OIC Member Countries

13th FCWG 17 October 2019 Improving Takaful Sector in Islamic Countries

Source: Standing Committee for Economic and Commercial Cooperation and compiled by Ministry of Finance, Malaysia.

COMCEC Project Funding and its Benefit to Malaysia

COMCEC seeks to mobilise the institutional and human capacity of member countries through
the COMCEC Project Funding (CPF). The CPF is a financing mechanism introduced by the COMCEC
Coordination Office (CCO) in 2013. The project budget limits, co-finance rates and grant limits
are as in Table 2.1.2.

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 CHAPTER 2 GLOBAL ECONOMIC OUTLOOK

Table 2.1.2. Project Budget Limits, Co-Finance Rates and Grant Limits

Minimum
Project Budget CCO
Co-Finance Rates by
Project Owners Project Types Limits Grant Limits
the Project Owner
(USD) (USD)
(%)

Member Countries Activity-based 250,000 10 225,000

Research 80,000 72,000

OIC Institutions Activity-based 100,000 25 75,000

Research 80,000 60,000

Source: Adapted from COMCEC Project Preparation and Submission Guidelines – 2019 Edition.

During the period of 2014 – 2018, the implementation of 70 training programmes, 35 workshops,
45 study visits, one international conference and 10 research reports were partially funded
through the CPF. For the 2019 implementation period, a total of 24 projects were approved
for financing. For the 2020 implementation period, COMCEC is expected to receive 50 project
applications from project owners and partners alike.

Figure 2.1.1. Roles and Responsibilities

proval
t Ap
jec
ro
P

i
on

iss
ubm
Project S

Project Owner COMCEC Coordination

Project Submission and Office (CCO)
Implementation Programme Management
ct List

Fi n a rting
nc epo
Proje

in eR
m
g

ram

ina l
dF
Prog
Pro

an

tR
jec

g
et

epo ud
rting eB
Programm

Development and Invesment

Bank of Turkey
Project Monitoring and
Financing

Source: Adapted from COMCEC Project Preparation and Submission Guidelines – 2019 Edition.

The roles and responsibilities of parties involved in the COMCEC project selection process are as
reflected in Figure 2.1.1.
Project Owner (PO): The PO, which is the relevant public institution of a member country or an
OIC institution operating in the field of economic and commercial cooperation, is responsible for
project submission to the CCO. If the project application is approved, the PO is responsible for
the management, implementation and reporting of the project by utilising the funds allocated
under the CPF. In addition, the member country must be a member of a respective WG to submit
a project proposal in a certain areas of cooperation.

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CCO: The CCO is responsible for the overall implementation and monitoring of the CPF. The POs
are advised to consult the CCO during the project preparation and submission processes. After
the appraisal phase, the CCO finalises and announces the list of projects eligible for financing,
and conveys the respective list to the Development and Investment Bank of Turkey.

Development and Investment Bank of Turkey: The Bank, which is mainly responsible for providing
financing and monitoring of the projects during the implementation period, signs an operational
and financial contract with the PO. The Bank is also responsible for submitting regular progress
reports to the CCO regarding the status of the projects.

Malaysia has had five projects funded through CPF: three in agriculture, one each in tourism and
financial cooperation. Under the financial cooperation area, the Securities Commission Malaysia
(SC) successfully held “The Islamic Capital Market Capacity Building Programme” in 2015. The
SC was the first entity in Malaysia and within the COMCEC Capital Market Regulators Forum to
have received the project funding since the inception of the funding mechanism in 2013. The
Programme was aimed at promoting awareness, developing and strengthening capacity as well
as identifying issues and gaps to be addressed in enhancing the development of the Islamic
capital market.

Participants from 17 countries took part in the two workshops held under the Programme. The
outcome of discussions and proposals from the workshops were compiled in a report to assist
member countries in policy formulations to develop their respective Islamic capital market
infrastructure. One notable recommendation from the report was to prepare a guideline in
developing a master plan for the Islamic capital market and Syariah governance framework.

Issues, Challenges and Opportunities

Malaysia’s expertise in the area of Islamic finance is highly sought-after by other OIC member
countries, providing opportunities for Malaysia to engage in further capacity building efforts.
Malaysia has predominantly focused on assisting less developed member countries in their
policy development and implementation efforts. In addition to providing leadership in areas of
relative strength, Malaysia should also gain knowledge and experiences of other OIC member
countries as well as other international financial institutions.

Apart from existing activity-based projects, the focus should be given to in-depth research
projects, which could potentially bring benefits to domestic financial sector developments.
Potential research areas for Islamic finance include financial technology or digital finance, social
finance, halal trade, sustainable investment and trade finance. These areas would further entrench
Malaysia’s leadership in global Islamic finance as well as provide business opportunities for
local intermediaries and service providers.

In addition, Malaysian companies can bid to undertake COMCEC projects as consultants for
specific studies that aim to support the development of the six areas of cooperation. For example,
in financial cooperation, the International Shariah Research Academy for Islamic Finance (ISRA)
and RAM Rating Services Berhad have jointly undertaken research projects on the Sukuk market
and Islamic fund industry commissioned by COMCEC to be presented to member countries.
These studies identified issues and challenges in the Sukuk market and Islamic fund industry
and provided recommendations to elevate growth in these financial segments.

Conclusion

The combination of and the interplay between sustainability and financial technology may well
contribute towards a new age of Islamic finance. To this effect, digital technology can facilitate
more inclusive investment solutions, thus achieve positive impact on social and environment
aspects. Moving forward, Malaysia can take greater leadership in COMCEC by leveraging on
the CPF, and this can be further intensified towards bridging the development gap of the OIC
member countries. Likewise, through strengthening these relations, Malaysia can acquire support
to elicit cooperation in other multilateral platforms.

Economic Outlook 2020 39

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in the manufacturing sector. Meanwhile, the In 2019, Germany is anticipated to register

labour market continued to improve with the a slower growth of 0.7% due to weaker
unemployment rate recording 7.7%, mainly manufacturing activities in the auto industry.
supported by recent labour reforms which Auto manufacturers have been suspending
contributed to higher job creation. Inflation production due to delays in obtaining the
was recorded at 1.4%. WLTP certificate of compliance. Additionally,
a possible introduction of new US tariffs on
In 2019, the euro area's economy is projected the EU automotive exports and disruption
to grow moderately at 1.3% as slower global in the supply chain due to uncertainties
demand, due to trade tensions, continues from Brexit are expected to dampen further
to dampen the manufacturing sector and the manufacturing subsector and thus
business confidence. The unemployment rate weigh on growth. The unemployment rate
is expected to improve to 7.7% owing to job is anticipated to register 3.2%, resulting
gains, particularly in the services sector. from a shrinking workforce amid the ageing
Inflation is anticipated to ease to 1.3% due to demographic trend. Inflation is forecast to be
lower energy prices as well as reduced money lower at 1.4% due to falling energy prices.
supply resulting from the end of the European
Central Bank’s (ECB) four-year asset purchase In 2020, growth in Germany is expected to
programme in December 2018. expand 1.7% (2019: 0.7%), supported by a
recovery in the industry sector following a
In 2020, growth in the euro area is forecast more defensive industrial strategy. A new
at 1.6% (2019: 1.3%) as industrial production industrial plan, jointly launched by Germany
is expected to regain momentum, particularly and France in March 2019, indicating greater
in manufacturing and construction activities. support for strategic sectors, more funding for
Similarly, the services sector is projected to innovation and stricter rules on FDI into the EU,
improve, supported by demand from within is expected to support growth in the country’s
Europe amid continuing fiscal easing. The industry sector. In addition, beginning 2020,
unemployment rate is anticipated to improve the government will provide tax incentives of
further to 7.5% (2019: 7.7%) following job EUR1.25 billion to support R&D, amid rapid
creation in the services and construction sectors. innovative development from the US and
Meanwhile, inflation is expected to remain at China, in the auto industry. The unemployment
1.3% (2019: 1.3%), reflecting low energy prices. rate is anticipated to be at 3.1% (2019: 3.2%),
while inflation is forecast to be higher at 1.8%
Risks to the euro area’s economy are tilted (2019: 1.4%), in line with the ECB’s 2% inflation
to the downside. The extended trade tension target.
between the US and China may further weaken
the manufacturing sector and potentially spill Domestic risks revolve around structural
over to other sectors, thus dampening labour challenges in the auto industry and unfavourable
market conditions and private consumption. demographics. Disruptions to the auto industry
Brexit continues to be a major cause of amid impending energy transition as well
uncertainty to the region. as technological and digital revolutions are
expected to undermine Germany’s position
Growth in Germany was slower at 0.4% in the as the leader in innovation. Additionally,
first half of 2019, largely due to weaker industrial unfavourable demographic trends in the
production, particularly in auto manufacturing. form of declining working-age population
The manufacturing subsector contracted 3.6%, will increasingly constrain productivity and
dragged by lower car production following the potential economic growth.
newly implemented Worldwide Harmonised
Light Vehicle Test Procedure (WLTP) as well as France’s economy grew at a slower pace of
weaker demand from China, the US, the euro 1.1% in the first six months of 2019, mainly
area and the UK. The labour market continued due to weaker domestic demand. Household
to improve with the unemployment rate at 3.2%. consumption plummeted 0.4% as prolonged
Inflation was lower at 1.5% owing to lower street protests over economic reforms disrupted
food, alcoholic beverages and tobacco prices. consumers’ weekend shopping. Public spending

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softened 0.7%, reflecting the government’s the EU excessive deficit procedures. On the
commitment to abide by the EU’s 3% fiscal external front, an uncertain Brexit outcome,
deficit limit. Meanwhile, labour market conditions trade tensions and a weaker-than-expected
strengthened with the unemployment rate at growth in the euro area could undermine
8.7% as the government’s reform of vocational exports and business confidence in France.
education and training to foster labour market
participation has begun to bear results. Japan’s economy grew 1.1% in the first half
Inflation was lower at 1.2% due to lower of 2019, driven by domestic demand. Private
prices of energy and manufactured goods. consumption growth was higher at 1% as
consumers rushed to make purchases ahead
France’s growth in 2019 is forecast to moderate of the scheduled sales tax hike in October
to 1.3% due to lower investment and weaker 2019. Private investment, particularly capital
exports. Business investment growth is projected investment, turned around 2.9% as companies
to be slower amid ongoing street protests and increased purchases of machineries in the face
easing industrial activities across the euro of labour shortages. Inflation was recorded at
area. In addition, the uncertain outcome of 0.5%, while the unemployment rate was at 2.4%.
Brexit will dampen investors’ confidence and
continue to hamper the country’s growth In 2019, Japan is expected to record a GDP
prospects. Further escalation of trade tensions growth of 0.9% due to increase in private
between the US and the EU, resulting from the consumption and business investment. Private
EU’s subsidies to Airbus and the potential tax consumption is forecast to be higher with
imposed by France on technology firms, will purchases made in the first nine months
weigh on exports. The unemployment rate is of the year before the sales tax hike. Japan
projected to further improve to 8.6% following approved an economic reform blueprint in
ongoing labour market reforms despite strikes June 2019, confirming the tax hike from 8%
and protests. Inflation is forecast to be lower to 10%. To soften the impact of the tax hike
at 1.2% due to falling energy prices. and stimulate the economy, the government
implemented tax rates reduction for products
In 2020, France is projected to grow 1.4% (2019: including food, free preschool education and
1.3%), largely supported by a recovery in domestic reactionary measures such as point redemption
demand amid structural reforms. Private plans. The government also announced an
consumption is expected to increase, backed increment of the minimum hourly wage to
by ongoing fiscal measures to boost household JPY1,000 from JPY874 to raise the disposable
disposable income. Business investment is income of targeted groups. Inflation is expected
anticipated to recover gradually on account of to be recorded at 1.1% due to a weaker yen.
lower corporate income tax rates. Furthermore, The unemployment rate is anticipated to be
with the introduction of the Action Plan on sustained at 2.4%.
Business Growth and Transformation (PACTE)
in 2019, the business environment is expected GDP growth in Japan is forecast to be lower
to improve through cutting red tape, thus at 0.4% in 2020 (2019: 0.9%) due to sluggish
spurring investment. Labour market conditions private consumption resulting from the sales tax
are expected to continually improve with the hike, despite hosting of the Olympics. Inflation
unemployment rate at 8.3% (2019: 8.6%) as is expected to register 1.5% (2019: 1.1%) with
planned labour reforms will impose stricter the unemployment rate at 2.4% (2019: 2.4%).
conditions on unemployment benefits. Inflation The government’s initial target to achieve a
is expected to be at 1.4% (2019: 1.2%). primary budget surplus by 2020 has been shifted
to 2027 due to the implementation of fiscal
Domestic risks related to prolonged social stimulus and the high cost of supporting the
unrest may delay the government’s reform ageing population. Risks to Japan’s economy
agenda, which will affect the country’s growth include trade tensions between the US and
prospects. Additionally, the government has China, impact of the sales tax hike as well as
limited fiscal space to react to shocks as the fluctuations in the capital market. Subdued wage
country is committed to progress towards growth and underlying weakness in consumer
correcting its deficit level within the three- demand caused by lower purchasing power of
year transition period from 2018 to 2020 under households are highly likely to continue.

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Information Box 2.1

Benefits of Malaysia’s Membership in Multilateral Development Banks

Introduction

A multilateral development bank (MDB) is an international financial institution commissioned

by countries with the aim of encouraging economic development, particularly in poorer nations.
Initially, MDBs were established after World War II to assist in the reconstruction of Europe and
provide mechanisms for international cooperation in managing the global financial system. There
are now more than 20 such institutions worldwide, with the scope and functions ranging from
that of surveillance to active lending. Malaysia is a member of five of these institutions, namely:
 World Bank Group (WBG);
 International Monetary Fund (IMF);
 Asian Development Bank (ADB);
 Islamic Development Bank (IsDB); and
 Asian Infrastructure Investment Bank (AIIB).

MDBs provide an important platform for multilateral cooperation, with the aim of supporting
growth and catalysing development through lending, advisory and capacity building initiatives for
member countries. MDBs have since evolved to prioritise development goals, namely eradicating
extreme poverty and reducing economic inequality. Unlike commercial banks, which aim to
maximise the profits of their shareholders, MDBs provide facilities such as concessional loans
and grants to fund identified projects in areas that promote development in member countries.

Malaysia and MDBs

Malaysia’s active participation in WBG, IMF, ADB, IsDB and AIIB testifies our commitment and
cooperation towards achieving sustainable and balanced growth. Furthermore, engagements with
these MDBs have enabled better policy coordination, subsequently broadening and deepening
economic integration between Malaysia and member countries. A summary of Malaysia’s
participation in these MDBs is as listed in Table 2.1.1.

Table 2.1.1. Summary of Malaysia’s Participation in MDBs

No. Areas WBG IMF ADB IsDB AIIB
1. Membership 7 March 1958 7 March 1958 28 July 1966 7 March 1975 27 March 2017

2. Total Member
189 189 68 57 100
Countries

3. Founding
No No Yes Yes Yes
Member

4. Roles and  Fighting  Ensuring the  Fostering  Fostering  Focusing on

Functions poverty stability of the economic economic infrastructure
international growth and development development
 Promoting
monetary cooperation and social in Asia
shared
system in the Asia progress
prosperity
and Pacific in Muslim
region countries and
communities

(continued)

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Table 2.1.1. Summary of Malaysia’s Participation in MDBs (continued)

No. Areas WBG IMF ADB IsDB AIIB

5. Services  Loans  Financial  Loans  Loans*  Loans
Offered Assistance
 Technical  Technical  Technical  Technical
Assistance  Technical Assistance Assistance* Advice
Support
 Grants  Grants  Grants*  Equity
 Surveillance Investments
 Financing  Equity  Financing
Instruments Investments Instruments*  Guarantees
 Guarantees  Co-Financing  Co-Financing
* in accordance with
 Capacity Syariah principles
Building
 Dispute
Resolution
Sources: World Bank Group, International Monetary Fund, Asian Development Bank, Islamic Development Bank and Asian Infrastructure Investment Bank.

Benefits of Malaysia’s Membership in MDBs

Malaysia has gained tremendously from the financing services provided by the MDBs in the
early years of the nation’s infrastructure, industrial and economic development. As the country’s
capital market became more dynamic and to reduce exposure to foreign exchange risks, Malaysia
has not been borrowing from the MDBs over the past two decades. Nevertheless, the country
continues to benefit from its membership with the MDBs through various facilities.

One of the benefits is the reimbursable advisory services provided by the WBG on a vast range
of areas, including sustainable development, competitiveness and economic management.
Through the WBG’s local presence since 2015, Malaysia has been able to gain direct access
to the WBG’s pool of knowledge and expertise to enhance its capacity as the country moves
towards a developed and high-income economy. The WBG also provides analysis on policy
challenges and recent economic developments of the country through the publication of
the bi-annual Malaysia Economic Monitor (MEM). The MEM published in June 2019 entitled
“Re-energising the Public Service” focuses on the vital role the public service plays, in line with
the Government’s reform agenda.

Membership in the IMF has benefitted the country through annual surveillance activities, mandated
through Article IV of the Articles of Agreement, which involves an assessment of the nation’s
economic and financial developments. IMF also provides technical assistance (TA) in various
areas, including public finance management, debt management and taxation. One of the TAs
undertaken in collaboration with the Ministry of Finance titled “Financial Risks Management
Workshop”, provided an overview of risks to the government budget as well as techniques for
analysing and mechanisms for dealing with these risks.

ADB’s support in Malaysia has been focused on advancing regional cooperation and integration,
catalysing private investments and capacity building. The ADB has targeted specific sectors and
identified thematic priorities to help Malaysia achieve its development agenda through TA and
advisory services. In addition, through the Asian Development Bank Institute, the ADB provides
capacity building programmes to member countries through seminars and workshops on various
development issues in promoting sound monetary and fiscal policies.

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Malaysia’s membership in the IsDB is one of mutual benefit, whereby Malaysia is able to leverage
the IsDB’s network to promote the country’s skills and expertise, particularly in the Halal Industry
and Islamic Finance. The IsDB’s presence in the country is marked by the establishment of the
Regional Office in Kuala Lumpur, which has been in operation since 1994. Malaysia exports its
technical expertise in selected fields through the Reverse Linkage Programme such as capacity
building for palm oil production between Federal Land Development Authority (FELDA) and Sierra
Leone and in rice production in Suriname by MARDI Corporation.

The services offered by the AIIB are focused on the Asian region with an emphasis on
infrastructure projects. As a founding member of AIIB, there is vast potential to collaborate with
the AIIB towards developing the nation. The 2019 AIIB Annual Meeting in Luxembourg, with
the theme of “Cooperation and Connectivity”, reflects the AIIB’s commitment on cooperation
towards a more connected Europe and Asia, mainly through the infrastructure, transport and
energy sectors which Malaysia can capitalise on in the future.

Conclusion

In the early years, Malaysia benefitted from the financing facilities provided by the MDBs, as
the country embarked on developing the nation. Since then, Malaysia has progressed, and now
our participation and engagement with the MDBs has shifted to advisory services and capacity
building initiatives. Malaysia has also leveraged on the strategic partnership with these institutions
to enhance the nation’s capacity through the sharing of knowledge and expertise with member
countries, which is, in turn, essential for the country to realise its vision of transformation
towards becoming a developed and high-income economy.

Malaysia’s involvement in these MDBs is also reflective of the country’s commitment and
concern for international efforts in economic development and cooperation, in line with the
United Nations’ 2030 Development Agenda. It also attests Malaysia’s intention of helping the
least developed countries, in the spirit of South-South cooperation. As ASEAN countries are
also members in most of these MDBs and in the spirit of prosper-thy-neighbour, Malaysia can
further strengthen its presence through the sharing of knowledge and expertise for the mutual
benefit of the region.

Australia’s economy grew modestly at 1.4% 4.8%, while inflation is projected to be at 2%

in the first half of 2019, mainly due to due to lower oil prices as well as government
sustained household consumption. Private policy changes that may affect electricity prices.
spending moderated to 1.4% on account of
reduced expenditure, reflecting weak wages In 2020, Australia’s GDP is estimated to grow by
and high household debts. The unemployment 2.8% (2019: 2.1%) contributed by solid exports
rate improved to 5.2% following a temporary and investment. Exports are expected to pick
increase in part-time employment as a result of up 4.1% (2019: 3.3%) due to recovered growth
the federal election on 18 May 2019. Inflation in iron ore and coal production as well as an
was recorded at 1.6% owing to lower prices of increase in manufactured goods, which include
transport and health care. medicinal and pharmaceutical goods as well
as professional and scientific instruments. In
Australia’s GDP is forecast to grow at a slower addition, service exports are expected to grow
pace of 2.1% in 2019, mainly due to lower at a steady pace, underpinned by overseas
private consumption and weak external demand. student enrolments supported by lower exchange
Private consumption is estimated to be lower rate. Business investment is projected to be
at 2.4% due to higher household debts despite higher at 3.3% (2019: 2.5%) mainly contributed
tax cuts introduced in July 2019. Exports are by both mining and non-mining investment.
anticipated to dampen to 3.3% from lower There are many private infrastructure projects
production of iron ore and coal, which has been in the pipeline, particularly in transport and
affected by the US-China trade conflicts. The electricity. Likewise, investment in machinery,
unemployment rate is expected to improve at equipment and software is also expected to

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grow. The unemployment rate is anticipated to In 2020, Korea’s growth is forecast to be

remain at 4.8% (2019: 4.8%), while inflation is marginally higher at 2.8% (2019: 2.6%) supported
projected to record 2.3% (2019: 2%). by fiscal stimulus measures. The government
introduced an approximately USD6 billion
Downside risks to the Australian economy persist fiscal stimulus in April 2019 aimed at creating
as a result of trade tensions and restrictions to jobs, financing local exporters and supporting
technology transfers which hamper innovations. entrepreneurs. Inflation is anticipated to be at
In addition, house prices have continued to 1.6% (2019: 1.4%), while the unemployment rate
fall for more than a year, leading to weak is forecast to be slightly lower at 3.9% (2019:
residential construction activities that may 4%). Increased uncertainties surrounding trade
affect the labour market. This will significantly dispute with Japan, coupled with slowing external
reduce private consumption, resulting in low demand and the US-China trade tensions, may
business and consumer confidence. pose a threat to Korea’s economy.

The Republic of Korea’s GDP grew at a slower China’s economy recorded a growth of 6.3%
pace of 1.9% during the first half of 2019, in the first half of 2019, mainly contributed
mainly due to sluggish exports and softening by strong private consumption and robust
investment, both affected by global trade investment in fixed assets. Private consumption
tensions. Exports decreased 0.7%, particularly increased by 8.4% as major tax cuts for
due to falling demand for electronics and households introduced in 2018 provided higher
semiconductors amid the US-China trade disposable income for consumers. Investment
tensions. The Bank of Korea reduced its policy in fixed assets registered 5.8%, mainly in hi-
rate by 25 basis points to 1.50% in July 2019 to tech and transportation industries. Exports rose
spur the economy. Inflation was recorded at 0.6% 6.1%, particularly in mechanical and electrical
due to the government’s measures to reduce products. Inflation was registered at 2.2%
prices of health care and telecommunications, with higher fruit and pork prices due to tight
while the unemployment rate was recorded supply. The unemployment rate stood at
at 4%. 3.6%.

Korea’s economy is expected to grow slower at China’s GDP growth is anticipated to moderate to
2.6% in 2019, largely due to weak exports and 6.2% in 2019, partly due to lower investment and
decreased investment. Exports are anticipated escalating trade tensions with the US. Real estate
to be sluggish following the effects of the trade investment is projected to be subdued following
disputes with Japan as well as between the the deterioration in consumer confidence and
US and China. In July 2019, Japan announced measures by the government to restrict demand.
a restriction on exports of three key materials However, infrastructure investment is anticipated
used in semiconductor and display productions to pick up on the back of the increase in quotas
to Korea. This was followed by Japan’s decision of special-purpose bonds and easing of rules
to remove Korea from its list of trusted trade for bond issuance by enterprises and local
partners that would affect supply of materials governments. Likewise, private consumption is
which are important to the manufacturing expected to expand, partly contributed by rising
sector. Investment is expected to decline, disposable income. Reforms in individual income
particularly in the construction sector, due to tax were also carried out, which include
slower residential building activities. However, raising the tax threshold and introducing
private consumption growth is expected to additional deductions, with a total of 99
remain favourable at 2.5%, cushioning the impact million people being exempted from paying
of the slowdown, following the government’s individual income tax. The government lowered
efforts to increase minimum wage by 10.9% the value-added tax (VAT) rates in April 2019
for the low-income group. Inflation is expected with the manufacturing sector benefitting most
to be at 1.4% partly due to lower oil prices. from this tax reduction. Inflation is expected
The unemployment rate is forecast to remain to be at 2.2%, while the unemployment rate
at 4%. stood at 3.8%.

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In 2020, growth in China is expected to moderate The Reserve Bank of India (RBI) reduced its
to 6% (2019: 6.2%) in anticipation of further key policy repo rate four times in February,
escalation of trade tensions. Inflation is expected April, June and August 2019 by a total of
to be at 2.4% (2019: 2.2%), mainly due to higher 85 basis points to 5.40%, the lowest rate
fresh food prices, while the unemployment since 2010. These reductions aim to lower
rate is anticipated to be maintained at 3.8% the marginal cost-based lending rate (MCLR),
(2019: 3.8%). Downside risks to the economy which is supposed to encourage consumers and
are mainly from heightened trade tensions with businesses to take up bank loans to boost the
the US. Other risks include the effect of reining sluggish economy. Despite the RBI’s measures,
in shadow banking on private investment and the commercial banks have yet to fully apply
acceleration in corporate deleveraging. The US the reduced MCLR to benefit the consumers
announcement to implement an additional and businesses.
10% tariff in September 2019 on the remaining
USD300 billion in Chinese imports, previously India’s growth in 2020 is projected to improve
excluded from US duties, may adversely affect 7.2% (2019: 7%) on the back of strong domestic
China’s economy. consumption and higher investment. Fiscal
stimulus, including new income support
During the first half of 2019, India’s GDP growth measures for rural farmers and recent structural
moderated to 5.4%, due to a slowdown in the reforms, is expected to boost further private
agriculture and manufacturing sectors. The consumption. In addition, improved financial
agriculture sector eased 0.9%, largely attributed conditions following the lower cost of borrowing
to subdued harvest in major crops on the are expected to spur investment. Meanwhile,
back of less rainfall, a drop in farm produce trade deficit is expected to widen as exports
prices and flat income growth of farmers for to India’s key destinations, particularly the US
selected over-harvested crops. Likewise, the and China are forecast to weaken.
manufacturing sector recorded a deceleration
of 1.9% due to a decline in the production of India’s economic risks are tilted to the downside.
furniture, paper and paper products as well A higher-than-expected moderation in global
as fabricated metal products. Inflation, as demand and an escalation of trade tensions are
indicated by the wholesale price index, was expected to harm further the country’s exports.
lower at 2.7% due to a decrease in the prices Additionally, uncertainties on the Brexit outcome
of onions, potatoes and fruits. pose a risk to India, which has a Generalised
System of Preferences (GSP) with the EU and
Overall, India’s economy is projected to exports to the UK. A no-deal Brexit could have a
grow favourably at 7% in 2019 led by higher significant impact on its exports in the absence
private consumption and improved investment of a new trade agreement between the UK and
climate attributed to recent policy measures India. The re-escalation of international armed
by the government. Private consumption is conflict between India and Pakistan could also
expected to increase on account of the newly increase uncertainty, dampen confidence and
introduced income support scheme to farmers, weigh on investment. Furthermore, the Goods
higher Minimum Support Prices (MSP) for the and Services Tax (GST) regime is still in the
procurement of food grains by the government, process of being fully established, resulting in
and tax relief for taxpayers earning less than shortfalls in government revenues. Hikes in
INR500,000 annually. These measures are oil prices and shifting weather patterns could
expected to boost household income and spur cause inflationary pressures and subsequently
consumer spending. Investment is expected to hamper the pace of growth.
accelerate with the easing of credit restrictions
on non-banking finance companies and housing ASEAN’s GDP growth moderated in the first half
finance companies, which would encourage of 2019, mainly due to lower external demand.
consumer spending in home properties and Overall, ASEAN-51 economies are expected to
essential items. Inflation is expected to be grow 5% in 2019, supported by improved trade
lower attributed to declining oil and food prices. and investment in public infrastructure. In 2020,

1
ASEAN-5 consists Indonesia, Malaysia, Philippines, Thailand and Viet Nam.

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Information Box 2.2

Asia-Pacific Economic Cooperation

Introduction

The Asia-Pacific Economic Cooperation (APEC) is a regional forum of 21 economies which aims to
create greater prosperity through economic integration by attaining balanced, promoting inclusive,
achieving sustainable, enhancing innovative, and creating secure growth. Before APEC was formally
established in 1989 as a response to the growing interdependence of Asia-Pacific economies
and the advent of regional trade blocs in other parts of the world, the forum was an informal
dialogue among government officials from 12 economies1. Today, the 21 member economies are
home to approximately 2.9 billion people and represent one of the most prosperous economic
regions. The APEC member economies, with their respective GDPs, are as listed in Table 2.2.1.

Table 2.2.1. APEC Economies’ GDP in 2018

Change
Member Economies Date of Accession
(%)
Australia November 1989 2.8
Brunei Darussalam November 1989 -0.2
Canada November 1989 1.8
Indonesia November 1989 5.2
Japan November 1989 0.8
Republic of Korea November 1989 2.7
Malaysia November 1989 4.7
New Zealand November 1989 3.0
Philippines November 1989 6.2
Singapore November 1989 3.2
Thailand November 1989 4.1
United States November 1989 2.9
Chinese Taipei November 1991 2.6
Hong Kong, China November 1991 3.0
People’s Republic of China November 1991 6.6
Mexico November 1993 2.0
Papua New Guinea November 1993 0.3
Chile November 1994 4.0
Peru November 1998 4.0
Russia November 1998 2.3
Viet Nam November 1998 7.1
Sources: Asia-Pacific Economic Cooperation and International Monetary Fund.

In 2017, APEC accounted for 38% of the world’s total population, of which China contributed 18%,
followed by the US and Indonesia, at 4%, respectively. The total GDP of APEC in 2017 stood at
USD48 trillion, accounting for 60% of the global GDP. The combined GDP of the US and China
amounted to 67% of the region’s GDP and 40% of the world’s GDP.

1
Australia, Brunei Darussalam, Canada, Indonesia, Japan, Malaysia, New Zealand, Republic of Korea, Singapore, Thailand, the Philippines and the United States.

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APEC as a Regional Economic and Trade Forum

APEC is a regional economic and trade forum committed to reducing barriers to trade and investment.
There are numerous forums, working group meetings and capacity building programmes held
throughout the year, in which representatives from developing economies have the opportunity
to learn new skills and best practices from other economies. The key objectives of APEC are to:

 strengthen economic and technical cooperation among member economies;

 promote regional economic integration;
 promote free and open trade and investment;
 enhance human security; and
 facilitate good and sustainable business environment.

APEC upholds three basic principles, namely consensus-based decisions, non-binding commitments
and voluntary participation in the initiatives. In addition, APEC formalised the participation of
the private sector and business entities through the APEC Business Advisory Council (ABAC),
established by the APEC Economic Leaders in November 1995. ABAC was formed to provide
recommendations and respond to various requests on business-related issues from the APEC
forums as well as provide a business perspective on specific areas of cooperation.

One of the flagship initiatives of APEC is the Bogor Goals which was adopted in 1994 in Indonesia.
The Bogor Goals aims to help member economies achieve free and open trade and investment
in the Asia-Pacific by 2010 for industrialised economies and by 2020 for developing economies.
Malaysia, as the host of APEC 2020, will work together with the other member economies to
chart the direction and set the tone for the post-2020 vision for APEC as the Bogor Goals reaches
maturity in 2020.

APEC Finance Ministers’ Process

APEC economies meet throughout the year to share experiences and best practices at the
ministerial and senior officials levels in sectors such as trade, agriculture, transportation, health,
communications and finance. The APEC Finance Ministers’ Process (APEC FMP) is a platform to
discuss and exchange views on regional macroeconomic and financial developments as well as
national and regional policy priorities. There are three annual meetings under the APEC FMP
as follows:

 APEC Finance Ministers’ Meeting (APEC FMM);

 APEC Finance and Central Bank Deputies’ Meeting (APEC FCBDM); and
 APEC Senior Finance Officials’ Meeting (APEC SFOM).

In the interest of enhancing cooperation under the APEC FMP, the Philippines introduced the
Cebu Action Plan (CAP) in 2015, a 10-year roadmap to ensure a more financially integrated,
transparent, resilient and connected APEC community anchored on four main pillars:

 Promoting financial integration;

 Advancing fiscal transparency and policy reform;
 Enhancing financial resiliency; and
 Accelerating infrastructure development and financing.

The APEC themes and FMP priority areas are under the purview of the host economy taking
into consideration various factors including issues of interest for the host economy, current
discussions at the global and APEC front, and previous hosts’ priority areas. APEC themes and
FMP priorities identified by host economies from 2015 – 2019 are as listed in Table 2.2.2.

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Table 2.2.2. APEC Themes and FMP Priorities (2015 – 2019)

No. Year Host Economies Themes APEC FMP Priorities

1. 2015 Philippines Building Inclusive Economies, Cebu Action Plan

Building a Better World Promoting Financial Integration

Advancing Fiscal Reforms and

Transparency
Enhancing Financial Resilience

Accelerating Infrastructure

Development and Financing

2. 2016 Peru Strengthening Public Policy Promoting the Development of


for an Integrated and the Public-Private Partnership
Resilient Asia-Pacific Region Knowledge Portal
Strengthening Financial

Inclusion Policies
Enhancing Financial Resilience

Against Disasters

3. 2017 Viet Nam Creating New Dynamism, Long

 Term Investment in
Fostering a Shared Future Infrastructure
Base Erosion and Profit Shifting

Disaster Risk Financing and

Insurance
Financial Inclusion


4. 2018 Papua New Harnessing Inclusive  Accelerating Infrastructure

Guinea Opportunities, Embracing the Development and Financing
Digital Future  Advancing Financial Inclusion
 Fostering International Tax
Cooperation and Transparency
 Disaster Risk Financing and
Insurance

5. 2019 Chile Connecting People, Building  Boosting Integration on Financial

the Future Markets Through Digital
Economy
 Financial Inclusion: Closing the
Gap Through Digitisation
 Financial Management of
Disaster Risks: Mitigation and
Resilience
Source: Asia-Pacific Economic Cooperation.

Conclusion

APEC continues to be a platform for member economies to exchange ideas and best practices. As it is a
voluntary forum, member economies can capitalise on the APEC platform to strengthen their economic
position through collaborative efforts to generate more tangible benefits. Member economies should also
strive to build a resilient and inclusive APEC community, towards sustainable growth by managing disaster
risk and mainstreaming the underprivileged groups amid the rapidly changing economic environment.

In essence, as the Bogor Goals enters its final assessment phase in 2020, member economies should
recalibrate its priorities for the development of a new vision for APEC. The new vision should uphold APEC’s
leading role in promoting integration, connectivity as well as inclusive and sustainable quality growth in
the era of technology and digitalisation aimed at reducing development gaps among member economies.

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ASEAN-5 economies are anticipated to register I n d o n e s i a ’s e c o n o my, r e s u l t i n g i n t h e

a steady growth of 5.3% (2019: 5%) driven by implementation of longer-term reforms to
private consumption, investment and exports. boost manufacturing, improve exports and
The region’s economic growth momentum, create additional jobs.
however, is at risk of being undermined by
increasing trade tensions and unfavourable In the first half of 2019, Thailand’s GDP grew
global financial conditions. at a slower pace of 2.6% due to a slowdown
in public investment and exports. Public
Indonesia’s GDP grew 5.1% in the first half of investment eased 0.6% as the implementation
2019, supported by higher public and private of mega projects at various stages slowed
consumption. Public consumption expanded down due to a delay in the formation of the
6.7% attributed to election spending as well cabinet. Similarly, exports plummeted 6.1%,
as higher emoluments following the Eid bonus mainly in computer parts and components
to civil servants. Household consumption as well as electrical integrated circuits.
growth was sustained at 5.1% contributed by Inflation was recorded at 0.7% owing to lower
higher spending during the Eid celebration. energy prices, while the unemployment rate
Meanwhile, investment grew at a slower pace registered 0.9%.
of 5% due to lower capital goods sales, such
as vehicles and intellectual property products. In 2019, Thailand’s growth is anticipated to ease
In addition, exports contracted 1.8% following 3.3% as a result of weaker private investment
lower commodity prices. Inflation recorded 2.9% and exports. Private investment growth is
following the implementation of the national forecast to ease 3.7% amid political and global
inflation control plan from 2019 to 2022. uncertainties. Similarly, exports are anticipated
to plunge 0.7% particularly in computers and
Overall in 2019, Indonesia’s economy is projected peripherals as well as other rubber products
to expand between 5.4% and 5.8% driven by due to lower global demand, amid rising global
domestic demand. Private consumption growth trade tensions between the US and China.
is expected to remain stable following wage Inflation is estimated to be between 0.7%
gains amid a strong labour market. Public and 1.2%, while the unemployment rate is
investment is anticipated to improve as the expected to be recorded between 1.1% and
government invests more in infrastructure 1.2%.
development including the reconstruction
of post-disaster infrastructure. Additionally, Thailand’s GDP is projected to grow by 3.7%
government expenditure is expected to increase in 2020 (2019: 3.3%) supported by higher
following the one-month bonus payout in July investment and public spending. Both public
for civil servants, which was also extended and private investment growth are anticipated
to retirees. Inflation is forecast at 3.1% amid to accelerate by 7.2% and 5.5%, respectively
the implementation of the national inflation (2019: 3.8%; 3.7%), due to large infrastructure
control plan while the unemployment rate is projects. Public consumption is projected to
anticipated to remain at 5.2%. rise 2.6% (2019: 2.2%) following government
economic stimulus to support farmers and
Indonesia’s GDP is expected to grow between low-income earners. Inflation is anticipated
5.3% and 5.6% in 2020 (2019: 5.4% – 5.8%) to be 1.1% (2019: 0.7% – 1.2%), while the
supported by higher private consumption and unemployment rate is expected to be at 1.5%
investment. Consumer spending is targeted (2019: 1.1% – 1.2%). Thailand could potentially
to grow marginally by 5.2% (2019: 5.1%), benefit from supply chain relocation as a
while investment is forecast to improve 7.5% result of trade protectionism and export
(2019: 7%). However, Indonesia’s exports opportunities in the pork industry, following
are anticipated to be adversely affected due the African swine fever outbreak, particularly
to the trade tensions between the US and in Viet Nam. Despite these potential benefits,
China. Inflation is expected to remain at 3.1% Thailand may face challenges stemming from
(2019: 3.1%). Waning global demand and issues such as technological change and
escalating trade disputes may weigh on ageing society.

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In the first half of 2019, Singapore’s GDP expected to remain at 2% (2019: 2%). Global
growth decelerated to 0.6% due to sluggish financial tightening conditions could weigh on
performance in both the goods and services the country’s growth. In addition, concerns on
producing sectors. Goods producing sector escalating global trade protectionism continue
plummeted 1.1% resulting from a slowdown in to dominate the list of potential downside risks.
the manufacturing subsector following lower
output in the electronics, transport engineering, The Philippines’ economy grew at a slower pace
and precision engineering clusters. Likewise, of 5.6% in the first half of 2019, mainly due
the services producing sector moderated 1.2% to lower government expenditure, investment
due to slower growth in finance and insurance and exports. Government expenditure eased
as well as business services subsectors. 7.2% attributed to delays in the approval of the
Unemployment rate increased marginally to 2019 National Budget and election-related bans
2.2% following lower job vacancies, particularly from 29 March to 12 May 2019. These bans
in the manufacturing subsector. Inflation rose included the appointment of new employees,
to 0.6%, mainly due to higher prices of food, provision of salary increments, construction of
water and tuition fees. public works as well as release, disbursement,
or expenditures of public funds. Investment
Singapore’s growth is projected to moderate fell 0.3% due to lack of investors’ confidence
between 0% and 1% in 2019 due to weaker following trimming of tax incentives. In addition,
growth in the goods and services producing exports decelerated 5.1%, particularly as a result
sectors. The goods producing sector is expected to of lacklustre global trade and economic activity.
contract following a decline in the manufacturing Inflation eased to 3.4% owing to lower food
subsector, particularly in the electronics, prices following the removal of import tariff
transport engineering, and precision engineering for rice. The unemployment rate improved to
clusters. In addition, growth in the services 5.2% following new job creation, particularly
producing sector is anticipated to be slower, in the services sector.
particularly in the wholesale and retail trade,
information and communications, and finance In 2019, the Philippines’ GDP is projected to grow
and insurance subsectors. However, the 6.4% supported by higher private consumption and
construction subsector is expected to improve investment. Private consumption is anticipated to
resulting from higher public expenditure on improve following increased remittances as new
infrastructure projects, including the construction employment opportunities are available abroad
of the 21.5km North-South Corridor. Inflation is for Filipinos including in Germany, Japan and
expected to be between 0.5% and 1.5%, mainly Poland. Public investment is expected to expand
due to an increase in the cost of private road following ongoing construction, particularly in the
transport. Meanwhile, unemployment rate is Manila Subway underground railway project in
anticipated to be lower at 2% attributed to the Metro Manila. Inflation is forecast to be 2.7% due
government’s efforts in providing subsidies for to lower food prices, while the unemployment
training to reduce skill mismatches as well as rate is expected to be 5.5%.
incentives for low-skilled workers to remain
employed. Growth in the Philippines is projected to
improve 6.5% (2019: 6.4%) in 2020 driven by
Singapore’s GDP is projected to grow by 1.6% stronger investment. Investment is expected to
in 2020 (2019: 0% – 1%), spearheaded by the continuously support growth, particularly on
services producing sector. The sector is expected infrastructure such as bridges, expressways,
to regain growth momentum, particularly in ports and railways. Inflation is projected to be
the information and communications as well as 3% (2019: 2.7%) due to higher transport fares,
finance and insurance subsectors. However, the particularly for jeepney service. The Philippines’
manufacturing subsector growth is forecast to economy is expected to face challenges from
further moderate amid slowing global demand risks posed by external factors, including
due to more tariff hikes by the US and China. escalation of trade tensions between the US
Inflation is anticipated to be 1.3% (2019: and China that could contribute to weaker
0.5% – 1.5%), while the unemployment rate is demand for the Philippines’ exports.

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 CHAPTER 2 GLOBAL ECONOMIC OUTLOOK

Conclusion US and China as well as broadening tariff hikes

to other countries which will further hamper
Global growth is expected to remain modest, global demand. Moreover, exposure to financial
supported by solid domestic demand in EMDEs. vulnerabilities due to prolonged low interest rates
Nevertheless, growth in advanced economies may weigh on growth. Additionally, heightening
is expected to ease further, mainly due to the geopolitical tensions, climate change effects
ongoing trade restrictive policies. Downside risks and technological disruptions will adversely
remain a threat to world growth. These include affect the global economy.
the re-escalation of trade tensions between the

52 Economic Outlook 2020

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 CHAPTER 2 GLOBAL ECONOMIC OUTLOOK

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Chapter 2.indd 58 04/10/2019 10:10 PM
 3 MACROECONOMIC
OUTLOOK

• Overview
• Sectoral
Feature Article 3.1 – Tourism: Malaysia’s Comparative
Advantage
Feature Article 3.2 – High-Tech Manufacturing for Future
Growth
Feature Article 3.3 – Boosting Productivity in the Oil Palm
Subsector
• Domestic Demand
Feature Article 3.4 – Malaysia’s Potential Output
• External Sector
• Prices
• Labour Market
• Conclusion
• References

Chapter 3.indd 59 04/10/2019 10:54 PM

 Chapter 3 MACROECONOMIC OUTLOOK

60 Economic Outlook 2020

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 Chapter 3 MACROECONOMIC OUTLOOK

3 MACROECONOMIC OUTLOOK

Overview 2019. Nevertheless, forecast for 2020 indicates

a gradual pick up in the external sector in
The Malaysian economic outlook remains line with the projected improvement in global
resilient with domestic demand anchoring trade activities following the resumption of the
growth. The GDP expansion of 4.7% (y-o-y) in US-China trade talks and recovery in global
the first half of 2019 is expected to continue for demand for electronics. Meanwhile, current
the rest of the year while improving marginally account surplus is anticipated to narrow with
to 4.8% in 2020. Notwithstanding the steady rising imports following an uptick in investment
economic performance, the balance of risks to and industrial activities coupled with widening
outlook remains on the downside as Malaysia has deficits in services and income accounts.
a high degree of openness. Disruption to global
supply chain emanating from the prolonged
trade dispute between major economies, Sectoral
geopolitical tensions, electronics slowdown as
well as volatility in the global financial and Services Sector
commodity markets are anticipated to affect
Malaysia’s growth momentum in the near-term. The services sector expanded 6.3% during the
first half of 2019 benefitting from resilient
Accounting for about 58% of GDP, household domestic demand. In 2019, the sector is
spending will continue to spearhead growth, projected to grow 6.1%, constituting about
supported by a stable labour market and 58% of GDP primarily supported by wholesale
benign inflation. Meanwhile, gross fixed and retail trade; finance and insurance;
capital formation is expected to gain traction information and communication; and food &
in 2020 following revival of strategic projects beverages and accommodation subsectors. The
coupled with on-going capital spending in sector is projected to expand 6.2% in 2020
the services and manufacturing sectors. On with most subsectors expanding at the same
the supply-side, projection of a broad-based momentum, while trade-and manufacturing-
expansion led by the services sector will related services are expected to improve
support growth backed by household spending. marginally.
In addition, the rapid expansion of the digital
economy and the launch of Visit Malaysia
2020 (VM2020) will boost the growth of the Table 3.1. GDP by Sector
2018 – 2020
sector. The manufacturing sector is expected
(At constant 2015 prices)
to perform moderately in subsequent quarters
before gaining momentum in the second half Share Change
of 2020 in line with the anticipated upturn (%) (%)
in the global electronics demand. Meanwhile, 20191 2018 20191 20202
higher production of crude palm oil (CPO) and Services 57.5 6.8 6.1 6.2
natural gas will support the growth of the Manufacturing 22.2 5.0 4.0 4.1
commodity sectors. The construction sector is Mining 7.3 -2.6 0.6 0.3
projected to improve with activities in the civil Agriculture 7.3 0.1 4.3 3.4
engineering segment cushioning the subdued
Construction 4.7 4.2 1.7 3.7
performance of the residential and commercial
GDP 100.0 4.7 4.7 4.8
property segments.
1
Estimate.
Resulting from the softer global demand amid 2
Forecast.
Note: Total may not add up due to rounding and exclusion of import duties
trade and technology tensions, exports are
component.
estimated to record a moderate growth in Source: Department of Statistics and Ministry of Finance, Malaysia.

Economic Outlook 2020 61

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 Chapter 3 MACROECONOMIC OUTLOOK

The wholesale and retail trade subsector remains Fiberisation and Connectivity Plan (NFCP).
the key driver of the services sector. In 2019, This plan focuses on expanding the existing
the subsector is expected to grow 6.8% following fibre optic network, installing submarine
expansion in the retail segment, particularly with cables and developing gigabyte networks in
the increasing number of convenience stores. several locations in state capitals and selected
However, the wholesale segment is projected industrial areas. In addition, the Digital Free
to decline as hypermarkets are reviewing their Trade Zone (DFTZ) which emphasises on the
business model due to high operating costs. growth of the digital economy and cross-border
Meanwhile, the motor vehicles segment is e-commerce activities, including e-fulfilment hub
anticipated to continue to expand with the to enhance exports will continue to support
introduction of new car models, especially during the segment. Meanwhile, the introduction of
the first half of 2019. In 2020, the subsector is the fifth-generation cellular network (5G) is
projected to increase 7% supported by tourism- anticipated to drive the growth of the subsector
related activities and accelerating growth of to 6.9% in 2020. The 5G technology will create
e-commerce utilising the Electronic World Trade a competitive market for home broadband
Platform which is designed to facilitate trade services as well as increase the coverage
by connecting businesses, managing cargo and network quality. This will strengthen
authorisation and assisting customs operations. Malaysia’s capacity to participate in the IR 4.0,
allowing the industry to fully utilise artificial
The finance and insurance subsector is expected intelligence (AI), robotics, virtual reality, big
to grow 4.8% in 2019 driven by finance segment data analytics (BDA), internet of Things (IoT)
mainly attributed to higher growth in FISIM1 and software engineering, leading to higher
and fee-based income amid low-interest rates. digital adoption. In addition, NFCP will provide
Meanwhile, the insurance segment is projected affordable broadband services to support
to grow at a slower pace on account of lower the digital economy, especially to SMEs. In
premiums and higher claims. However, the the meantime, i-Solutions offers a seamless,
segment is expected to benefit primarily from borderless digital connectivity solution for the
higher car sales during the first half of 2019. Malaysian market mainly for the SMEs and MNCs.
In 2020, the subsector is anticipated to expand
5.1%, mainly underpinned by the finance
segment, benefitting from an increase in bank Table 3.2. Services Sector Performance
2018 – 2020
lending and higher fee income in line with the
(At constant 2015 prices)
expansion in economic activities. In addition,
the setting-up of the first virtual bank in the Share Change
third quarter of 2020 to modernise Malaysia’s (%) (%)
banking industry as well as the issuance of 2019¹ 2018 2019¹ 2020²
virtual banking licence guideline is expected Wholesale and retail trade 29.6 8.1 6.8 7.0
to boost further the growth of the subsector. Finance and insurance 11.4 5.7 4.8 5.1
Meanwhile, the insurance segment (including
Information and 10.3 8.3 6.7 6.9
takaful) is projected to expand in tandem communication
with the Government’s target to increase Real estate and business 8.4 7.6 7.6 7.8
the national insurance penetration rate from services
54% in 2019 to 75% in 2020 through greater Transport and storage 6.5 6.4 6.5 6.4
awareness campaigns, particularly to the Food & beverages and 6.1 8.9 9.2 8.9
middle-income group. accommodation
Utilities 4.6 4.9 5.6 4.4
In 2019, the information and communication Other services 8.6 5.5 5.3 5.1
subsector is expected to grow 6.7% attributed Government services 14.5 4.5 4.0 4.0
to telecommunications and computer services. Services 100.0 6.8 6.1 6.2
The communication segment will continue
to spearhead the subsector with various 1
Estimate.
2
Forecast.
Government’s initiatives to enhance broadband Note: Total may not add up due to rounding.
a c c e s s a n d c ove ra g e t h r o u g h N at i o n a l Source: Department of Statistics and Ministry of Finance, Malaysia.

1
Financial Intermediation Services Indirectly Measured.

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 Chapter 3 MACROECONOMIC OUTLOOK

Figure 3.1. Selected Indicators for the Services Sector

Tourist Arrivals and Receipts Distributive Trade Volume Index

(2015 = 100)
RM billion Million Index
120 42 180
Tourist receipts Distributive trade
Tourist arrivals (right scale) Retail trade
100 35 150 Wholesale trade
Motor vehicles
80 28 120

60 21 90

40 14 60

20 7 30

0 0 0
2015 2016 2017 2018 20191 J A J O J A J O J A J
2017 2018 2019

Container Handling and Ship Calls Information and Communication Index

Million Units Index (2015 = 100)
36 60,000 200
TEUs Information and communication
Ship calls (right scale) Computer and information service
30 50,000
160 Telecommunications
Publishing and broadcasting
24 40,000 activities
120
18 30,000
80
12 20,000

40
6 10,000

0 0 0
2015 2016 2017 2018 20191 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2015 2016 2017 2018 2019

Air Passengers and Cargo Electricity Consumption

Million tonne Million Million kilowatt-hours
150 18,000
Air cargo Domestic and public lighting
Passenger traffic (right scale) 15,000 Industrial, commercial and mining
1.2 120

12,000
0.9 90
9,000
0.6 60
6,000

0.3 30
3,000

0.0 0 0
2015 2016 2017 2018 2019 1 J A J O J A J O J A
2017 2018 2019
1
Estimate.
Source: Department of Statistics, Malaysia; Malaysia Airports Holdings Berhad; Malaysia Tourism Promotion Board; Senai International Airport; and seven major ports
(Bintulu, Johor, Klang, Kuantan, Kuching, Pulau Pinang and Tanjung Pelepas).

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The real estate and business services subsector – Pantai Expressway (SPE); Putrajaya – KLIA
is expected to grow 7.6% in 2019 driven by Expressway (MEX II); and West Coast Expressway
demand for professional services, particularly (WCE). The growth will also be contributed
legal, accounting and engineering with the by higher airports and ports services in line
continuation of Mass Rapid Transit Line 2 with the improvement in trade activities.
(MRT2) and Light Rail Transit Line 3 (LRT3) The air transport segment is expected to
projects. On the contrary, the real estate grow driven by exports of E&E products as
segment is projected to moderate in tandem well as a higher volume of international
with the prolonged overhang in residential passengers owing to VM2020. The air transport
and commercial properties. Nevertheless, the segment is also expected to increase with the
introduction of Home Ownership Campaign operationalisation of Kuala Lumpur International
(HOC) to clear overhang units is expected Airport (KLIA) Aeropolis DFTZ Park in June
to cushion the subdued performance of the 2020. Meanwhile, the water transport segment
subsector. In 2020, the subsector is forecast is expected to expand due to the increase
to increase 7.8% supported by higher demand in the number of lines and consolidation of
for construction-related services with the shipping alliances as well as higher exports of
continuation of mega projects such as the East petroleum products with the operationalisation
Coast Rail Link (ECRL) and Bandar Malaysia. of Refinery and Petrochemical Integrated
Furthermore, the enhancement of the eligibility Development (RAPID) in Pengerang.
criteria of the Fund for Affordable Homes in
September 2019 to further assist first-time The food & beverages and accommodation
home buyers is expected to support the growth subsector is projected to record a strong
of the subsector. growth of 9.2% in 2019 mainly supported by
household and tourist spending. In 2020, the
In 2019, the transport and storage subsector is growth is expected to expand by 8.9% following
expected to increase by 6.5% mainly supported increasing tourist arrivals and receipts amid
by the land transport segment, especially VM2020, which targets 30 million tourists
the rail services. The introduction of My100 and RM100 billion receipts. Furthermore, the
unlimited travel pass for 30 days for use on all extended Visa On Arrival (VOA) from seven to 13
rails and bus rapid transit as well as My50 for entry-points nationwide for Chinese and Indian
RapidKL and MRT feeder buses are expected tourists are anticipated to provide additional
to support passenger movements. The offering impetus to the growth of the subsector. The
of special fare of RM1 for a one-way bus trip hosting of Asia-Pacific Economic Cooperation
from KL Sentral Station to Skypark Terminal, (APEC) meetings starting December 2019 until
or vice versa till the end of the year, is also November 2020 and the commencement of a
expected to increase passenger traffic between new outdoor theme park are expected to spur
500 and 600 people daily, from 300 currently. the growth of the subsector.
Meanwhile, the launch of new four-car trains for
RapidKL Monorail in August 2019 is expected The other services subsector is projected to
to increase daily ridership. Likewise, the air grow by 5.3% in 2019 and 5.1% in 2020. This
transport segment is expected to improve is due to strong demand for private education
following the Government’s move to extend the and healthcare services. The number of foreign
15-day visa exemption for tourists from China students is expected to remain favourable
and India till end of 2019. Nevertheless, the attributed to the cost competitiveness of
water transport segment is projected to expand education offered in the country. Meanwhile, the
moderately in line with lower trade activities. private healthcare segment will be supported
by the Malaysia Year of Healthcare Travel 2020
In 2020, the transport and storage subsector is campaign which seeks to reinforce Malaysia
anticipated to grow 6.4% mainly supported by as a reputable and global healthcare travel
land transport segment, attributed to operations destination, especially in the areas of cardiology,
of new highways such as Damansara – Shah oncology, fertility, orthopaedics and cosmetic
Alam Elevated Expressway (DASH); Sungai Besi surgery. The government services subsector is
– Ulu Klang Expressway (SUKE); Setiawangsa projected to sustain at 4% in 2019 and 2020.

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Feature Article 3.1

Tourism: Malaysia’s Comparative Advantage

Introduction

Tourism is one of the major contributors to economic growth and is identified as the main
sources of foreign exchange earnings. In 2018, Gross Value Added of Tourism Industries1 grew
10% to RM220.6 billion, accounting for 15.2% of Malaysia’s GDP. The growth was mainly supported
by retail trade (46.4%); and food and beverage serving services (17.2%) segments. In addition,
the industry provided 3.5 million jobs, constituting 23.5% of total employment in the country
(DOSM, 2019). Meanwhile, in the current account,2 the travel component recorded a net inflow
of RM30 billion in 2018 (DOSM, 2019).

In 2018, Malaysia was ranked first in the Global Muslim Travel Index (CrescentRating, 2019)
and Kuala Lumpur was identified as one of the Top 100 Cities Destinations (Euromonitor
International, 2018). Furthermore, Malaysia was ranked 15th in terms of tourist arrivals and
21st for tourism receipts (UNWTO, 2018). According to Hanafiah & Harun (2010), among factors
attracting tourists to Malaysia include rising middle-income population, particularly in Asia; lower
inflation; and short-haul destinations. The number of tourist arrivals and receipts is expected
to expand following the launch of Visit Malaysia 2020 (VM2020). For 2019, tourist arrivals are
estimated to reach 28.1 million, with total receipts of RM92.2 billion. Given the importance of
the tourism industry to economic growth, this article analyses the comparative advantage of
Malaysia’s tourism industry; highlight issues and challenges; and the way forward.

Comparative Advantage of Tourism Industry

The Revealed Comparative Advantage (RCA)3 index is widely used to analyse the comparative
advantage of industries. Based on this method, Malaysia’s RCA ratio for the tourism industry
has been consistently higher than one between 2013 and 2017, signifying a strong comparative
advantage of the industry. Furthermore, Malaysia’s RCA is higher than China, India, Indonesia,
Japan, Republic of Korea, Singapore and Viet Nam. The highest RCA for Malaysia’s tourism
industry was recorded at 1.50 in 2013 attributed to the Visit Malaysia Year 2014 campaign.
Consequently, the number of tourist arrivals surged to 27.4 million, while receipts rose to RM72
billion in 2014. However, in 2017, the RCA declined to 1.23 while the ratio for Thailand and the
Philippines rose to 3.01 and 1.45, respectively.

Table 3.1.1. Revealed Comparative Advantage Index for Selected Countries

2013 – 2017

Country 2013 2014 2015 2016 2017

Malaysia 1.50 1.49 1.28 1.32 1.23
Thailand 2.73 2.45 2.67 2.73 3.01
Philippines 1.41 1.33 1.35 1.25 1.45
Indonesia 0.86 0.96 1.07 1.10 1.09
India 0.69 0.70 0.76 0.79 0.86
Japan 0.35 0.40 0.53 0.60 0.64
Viet Nam 0.87 0.76 0.64 0.66 0.59
Singapore 0.55 0.53 0.47 0.53 0.52
Republic of Korea 0.46 0.52 0.45 0.51 0.38
China 0.37 0.29 0.29 0.30 0.20
Source: World Integrated Trade Solution.

1
Total gross value added of all establishments in the tourism industry, irrespective of whether their output is provided to visitors and the degree of specialisation of
the production process. A visitor refers to a traveller taking a trip to a main destination outside his/her usual environment, not more than 12 months other than to be
employed by resident entry in the country or place visited.
2
Balance of payments.
3
Is an index used for calculating the relative advantage or disadvantage of a certain country in a certain class of goods and services as evidenced by trade flows. It
is based on the Ricardian comparative advantage concept. According to Balassa (1965), it is expressed as follows: RCAij = (Xij / Xit) / (Xwj / Xwt), where Xij = exports of
tourism product by country i (measured in tourism receipts), Xit = total exports of goods and services by country i, Xwj = world exports of tourism product (measured
in tourism receipts) and Xwt = world total exports of goods and services.

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Figure 3.1.1. Revealed Comparative Advantage for Top 10 Product Groups, 2017
Index
3.0

2.5

2.0

1.5

1.0

0.5

0.0
Vegetable Fuels Machinery Plastic or Tourism Wood Food products Metals Miscellaneous Minerals
and rubber
electronic

Source: World Integrated Trade Solution.

According to 10 product groups, tourism has one of the highest RCA at 1.23, after vegetable
(2.40), fuels (1.79); machinery and electronic (1.62); and plastic or rubber (1.57). This indicates
that Malaysia has a comparative advantage in the tourism product given its well-diversified
culture, abundant nature, established infrastructure and price competitiveness. Accordingly,
accelerating investments to promote further the tourism industry will create significant spill-
over effects on the economy.

Based on an analysis by the Ministry of Finance,4 tourism has the highest investment returns.
An additional of RM1 billion investment in the tourism industry will increase output by RM1.9
billion as compared to ICT (RM1.8 billion), wholesale and retail trade (RM1.6 billion) and business
services (RM1.6 billion) subsectors. Meanwhile, according to a Dynamic Computable General
Equilibrium analysis, a 10% increase in tourist arrivals will contribute to higher GDP by 0.033
percentage points and employment by 0.007 percentage points. At the same time, with greater
inter-sectoral linkages, some industries such as recreation and air transport will benefit indirectly
from the expansion of the tourism industry.

Figure 3.1.2. Macro Result, 2020 Figure 3.1.3. Industries Benefitting from
Tourism, 2020
Baseline deviation
(percentage point)
0.040 1.31
Recreation
0.035

0.030 0.27
Air transport
0.025
0.25
0.020
Other transport1

0.015
0.11
0.010 Non-residential

0.005
0.07
Port and airport
0.000 operation services
Real Employment Consumption Investment Real wages
Baseline deviation
GDP (percentage point)
1
Include travel agent.
Source: Ministry of Finance, Malaysia (estimates). Source: Ministry of Finance, Malaysia (estimates).

4
Input-Output Analysis.

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Issues and Challenges facing Malaysia's

Figure 3.1.4. Malaysia's Tourist Arrivals and Receipts
Tourism Industry
(% growth)
%
In recent years, tourist arrivals have been 25
on a declining trend despite higher receipts Tourist receipts
20 Tourist arrivals
as compared to other regional peers such as
Indonesia, the Philippines, Singapore and Viet 15
Nam. In 2018, tourist arrivals declined 0.4%
to 25.8 million due to a reduction in arrivals 10

from the ASEAN market, particularly Singapore 5

(-14.7%) and Brunei (-16.8%). Malaysia’s tourism
industry is facing several issues and challenges 0

including high dependence on tourist arrivals -5

from Singapore; lack of new tourism products;
limited air routes; and concerns over safety -10 2014 2015 2016 2017 2018
and security.
Source: Ministry of Tourism, Arts and Culture, Malaysia.

Though Singapore is the largest source market, accounting for 41% of tourist arrivals, the
numbers have declined to 10.6 million in 2018 as compared to 12.4 million in 2017, mainly due
to high congestion at the entrance gateway in Johor Bahru. Meanwhile, the closure of major
European routes, especially to Amsterdam and Paris in February 2016 affected tourist arrivals.
Furthermore, the lack of accessibility through air transport and flights with low seating capacity
dampens the industry. As of July 2019, seat capacity by flight to Malaysia was 2.7 million as
compared to Thailand (4.3 million) and Singapore (3.4 million). At the same time, there were
only 68 airlines serving routes to Malaysia; while Thailand and Singapore have 129 and 79,
respectively. Apart from lacking in new tourism products, safety and security issues, particularly
in the East Coast of Sabah have caused tourist arrivals from countries such as Australia, Japan,
the UK and the US to remain subdued (Patrik, 2019).

Figure 3.1.5. Tourist Arrivals for Selected Countries

Million
45
Thailand Indonesia
Malaysia Viet Nam
Singapore Philippines
36

27

18

0
2014 2015 2016 2017 2018

Source: Ministry of Tourism, Arts and Culture, Malaysia.

Way Forward

Recognising the importance of the tourism industry to Malaysia’s socio-economic development,

the Government has once again embarked on VM2020 campaign to attract more tourists to the
country. In line with VM2020, there is a need to increase flight frequencies; air travel rights to
long-and medium-haul countries; and flight seat capacity to bring in more tourists to Malaysia.
Charter flights from the Republic of Korea and the US also need to be upgraded to bring in

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 Chapter 3 MACROECONOMIC OUTLOOK

tourists directly to Kuala Lumpur, Langkawi, Pulau Pinang, Terengganu, Sabah and Sarawak.
Currently, Visa On Arrival (VOA) is given to tourists from China and India with the condition to
enter Malaysia via a third country. Starting 15 July 2019, the VOA facility has been extended
from seven to 13 entry points to facilitate further tourist arrivals from these countries.

The tourism industry needs to move along with digital transformation by emphasising digital
marketing using various social media platforms such as Google and social influencer to remain
competitive. Furthermore, the development of dedicated online platforms and one-stop system
application for Malaysian travel agencies are strategic ways to promote the tourism industry.
Cooperation with short, medium and long-haul market tour operators are highly recommended
to create unique packages and special deals to Malaysia. Establishing Malaysia as a leading
business tourism destination is one of the strategies to attract high-end tourists. In 2018, the
Malaysia Convention & Exhibition Bureau (MyCEB) supported 300 events related to Meetings,
Incentives, Conferences and Exhibitions. In 2020, MyCEB has successfully bid 38 business events
which are expected to attract 32,000 international business tourists and generate income of
RM589 million.

Strategic partnership with online travel agents, airlines, and travel agencies will be intensified
to enhance the promotion of travel packages through Joint International Tourism Development
Programme (JITDP), organised by Tourism Malaysia and Malaysia Airport Holdings Berhad
(MAHB). Through JITDP, Discover Langkawi programme has been implemented in collaboration
with Malaysia Airlines Berhad and MAHB. Cruise tourism also has the potential, particularly in
Langkawi, Melaka and Pulau Pinang that can be home ports for international cruises. Towards
this end, Melaka Gateway could be developed as a cruise tourism hub that could accommodate
four vessels with a capacity of 3,000 to 5,000 passengers per ship in one time. In addition,
Islamic tourism will continue to be developed to attract more tourists from the Middle East to
destinations such as the National Mosque, Kuala Lumpur and Nasyrul Quran Complex, Putrajaya.
In line with the efforts to promote Islamic tourism further, the Government issued the first in
the world Muslim Friendly Hospitality Services standard which recognises Syariah-compliant
accommodation such as in-room prayer facilities, halal-certified restaurants as well as segregated
gymnasiums and swimming pools for women.

Meanwhile, the health tourism industry is growing rapidly, and Malaysia is recognised as one
of the five best in the world (Patient Beyond Borders, 2018). In 2018, the number of healthcare
travellers surged 15% to 1.2 million with revenue increasing 13% to RM1.4 billion, particularly
from China, India and Indonesia. The quality of healthcare system; international qualified
medical professionals and accredited medical facilities; competitive cost; availability of latest
procedures and treatment technologies; as well as accessibility through air and land routes are
the factors contributing to the growth of this industry. In conjunction with the Malaysia Year
of Healthcare Travel 2020 campaign to establish Malaysia as a leading global destination for
healthcare, the Government is targeting total revenue of RM2.2 billion in 2020. This campaign is
targeting several new ASEAN markets and the Middle East, especially in the areas of cardiology,
oncology and fertility.

Conclusion

Many countries in the world, including Malaysia, have identified tourism as one of the main
sources for socio-economic development within the national policies. With an abundance of
natural resources; well-diversified cultural and cuisines; modern infrastructure; and strategic
location, Malaysia has great potential to boost further the tourism industry. In this regard,
various efforts have been undertaken by the Government and media partners to market and
brand Malaysia as one of the most preferred tourist destinations in the region, while promoting
innovative tourism products. The Government has also intensified efforts to improve safety and
security in the country, including measures to curb intrusion and other threats. These efforts
are expected to raise the number of tourist arrivals and receipts, which in turn will increase
business opportunities and income, particularly to SMEs.

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Manufacturing Sector In 2020, the performance of the export-

oriented industries is anticipated to improve
During the first half of 2019, the manufacturing in tandem with the uptick in electronics cycle,
sector expanded by 4.2% mainly supported by especially during the second half of the year.
the domestic-oriented industries. Meanwhile, Manufacturers in Malaysia are also expected
export-oriented industries grew at a slower to benefit from the changes in the global
pace due to modest expansion in the E&E electronics supply chain following the US-China
subsector in line with softer global demand for trade and technology dispute. Furthermore,
electronic products. For the year, the sector is expanding demand for AI, IoT, BDA and 5G
expected to grow 4% with the Manufacturing is anticipated to support the E&E subsector.
Production Index and sales expanding 4.1% and Likewise, production of petrochemicals and
6.1%, respectively, between January and July. oleochemicals is expected to increase with the
In 2020, the manufacturing sector is estimated commencement of RAPID. The domestic-oriented
to grow 4.1% driven by steady improvement industries are expected to be driven by both
in the export-oriented industries coupled with consumer- and construction-related clusters.
sustained expansion in the domestic-oriented
industries. Figure 3.2. Output of Manufacturing Sector
(% change)
In 2019, the E&E subsector, constituting 40.8% of %
export-oriented industries is forecast to expand 10 Industrial Production Index
moderately by 3.6% due to the downturn in the Manufacturing Production Index
semiconductor cycle and the escalating trade 8
war between the US and China. Meanwhile,
petroleum, chemical, rubber and plastic products 6

subsector is projected to grow 3.4% supported

by continued demand for rubber gloves following 4

Ebola outbreak in Africa and rising healthcare

awareness worldwide. The domestic-oriented 2

industries are expected to remain resilient,

0
particularly driven by the consumer-related J A J O J A J O J A J
cluster, including transport equipment as well 2017 2018 2019

as food and beverages. Source: Department of Statistics, Malaysia.

Table 3.3. Manufacturing Production Index

January – July
(2015 = 100)

Share Change
Index
(%) (%)
2018 2019 2018 2019 2018 2019
Export-oriented industries
Petroleum, chemical, rubber and plastic products 29.5 29.3 111.4 115.0 4.2 3.2
Electrical and electronics products 27.9 27.8 118.7 123.1 6.0 3.7
Wood products, furniture, paper products and printing 6.7 6.8 114.1 120.3 4.2 5.4
Textiles, wearing apparel, leather products and footwear 2.0 2.0 118.1 124.3 5.0 5.2
Domestic-oriented industries
Non-metallic mineral products, basic metal and 13.3 13.4 113.7 118.5 5.2 4.2
fabricated metal products
Food, beverages and tobacco 12.5 12.4 112.6 117.2 4.5 4.1
Transport equipment and other manufactures 8.1 8.3 107.8 114.7 5.3 6.4
Manufacturing Production Index 100.0 100.0 113.8 118.4 5.0 4.1

Note: Total may not add up due to rounding.

Source: Department of Statistics, Malaysia.

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Feature Article 3.2

High-Tech Manufacturing for Future Growth

Introduction

The Malaysian manufacturing sector began to grow rapidly since the early 1980s when the
country transitioned from an agricultural to an industry-based economy. Various strategies were
implemented under industrial policies and masterplans to diversify the economy to move up
the value chain and reduce dependency on commodities. As a result, Malaysia’s manufacturing
sector has evolved from the industrial production process to an integrated concept comprising all
levels of production system and business operations. Today, manufacturing is one of the growing
sectors, contributing significantly to the country’s socio-economic development. Therefore, it is
imperative to continuously promote the manufacturing sector, in particular, high-end industries
to ensure sustainable economic growth. Accordingly, this article assesses the contribution of the
manufacturing sector to the Malaysian economy, particularly its inter-sectoral linkages; identifies
issues and challenges; and the way forward.

Contribution of the Manufacturing Sector

Economic Growth

The manufacturing sector, which plays an important role in driving Malaysia’s economic growth
expanded at a rapid pace of 6%1 annually between 2011 and 2018. The share of the manufacturing
sector to GDP rose to 22.4% in 2018 from 8.6% in 1960 (DOSM, 2019). While developing some resource-
based industries such as the palm oil processing and petroleum refinery, Malaysia also developed
various non-resource based industries—notably, E&E, automotive and steel. Today, Malaysia is one
of the leading producers of semiconductors, solar panels and light emitting diode (LED) benefitting
from rising global demand for smartphones, storage devices and embedded technologies such as
integrated circuits and printed circuit boards.

Figure 3.2.1. GDP by Selected Kind of Figure 3.2.2. Manufacturing Sector

Economic Activity (% growth at constant prices)
(% share at constant prices)

% %
100 Agriculture 25
Manufacturing
Services
80 20

60 15

40 10

20 5

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 0

1971-1980 1981-1990 1991-2000 2001-2010 2011-2018
Source: Department of Statistics, Malaysia.

1
Compound Annual Growth Rate (CAGR).

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Employment and Productivity Growth

In 2018, the manufacturing sector employed 2.5 million persons or 16.9% of total employment in
the country. At the same time, the manufacturing sector recorded the highest increase in terms
of wage growth at 10.8%, while the second-highest in labour productivity at RM110,858. Within
the sector, electronic components and communication equipment were the most productive and
value-adding subsectors (MPC, 2018).

Figure 3.2.3. Employment by Sector Figure 3.2.4. Productivity by Sector

(% share) 11MP
Services Agriculture 2016 2017 Target
% Manufacturing Others
100 RM51,289 RM51,988 3.6%
(-4.9%) (1.4%)
90 Agriculture

80 RM1,133,372 RM1,210,832 1.1%

(15.1%) (6.8%)
70
Mining
60
RM106,307 RM110,858 2.6%
50 (3.6%) (4.3%)
Manufacturing
40

30 RM39,298 RM40,242 9.6%

(10.0%) (2.4%)
20 Construction

10 RM69,534 RM73,030 4.1%

(4.2%) (5.0%)
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 Services

Source: Department of Statistics, Malaysia. Source: Malaysia Productivity Corporation.

Foreign Direct Investment

Foreign direct investment (FDI) is an important source for Malaysia’s socio-economic development
(Mohamed et al., 2013). In 2018, net FDI inflows stood at RM32.6 billion, of which 47.4% were
channelled into the manufacturing sector. Meanwhile, in terms of approved foreign investments,
manufacturing sector attracted 72.4% or RM58 billion. Most of the investments were channelled
into E&E, transport equipment as well as petroleum, chemical, rubber and plastic products
(MIDA, 2019).
Figure 3.2.5. Malaysia’s Export Structure
Exports
% E&E Non-E&E Commodities Others
In 2018, manufactured goods accounted for 100
90
more than 80% of total exports. A notable trend 80
has emerged in the export structure, indicating 70
a gradual shift from heavy concentration in 60
50
exports of E&E to non-E&E. This is evident 40
with the higher proportion of non-E&E products 30
of 45.4% to the total exports while the E&E 20
10
accounted for 38% in 2018 as compared to 23.4% 0
and 61.7%, respectively, in 2000 (DOSM, 2019). 2000 2010 2018

Source: Department of Statistics, Malaysia.

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Inter-sectoral Linkages

Being the second-largest contributor to GDP, the manufacturing sector has high inter-sectoral
linkages. Manufacturing output requires various sources of inputs from the economy, creating
backward linkages. Likewise, the output from the manufacturing sector is channelled back to the
sector as well as other sectors resulting in forward linkages. For example, oil palm fresh fruit
bunches (agriculture sector) are used in the production of vegetable oils (manufacturing sector)
which is then sold in shops (services sector). Ministry of Finance (MoF) estimates indicate that
vegetable oils support the growth of other industries as proven by its high backward linkages
of 2.55 points. Similarly, basic metal and petroleum industries are prominent in generating
high spill-over effects on the economy through forward linkages at 2.46 points and 2.36 points,
respectively.

Figure 3.2.6. Forward and Backward Linkages of Top 10 Manufacturing Subsectors

Forward linkages
2.60
Basic metal
2.40
Mining Metal Petroleum
products Motor
2.20

2.00 Chemicals
Other chemicals
1.80
Other manufacturing Vegetable
1.60 oils
1.40
Construction
1.20

1.00
1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.90 2.00 2.10 2.20 2.30 2.40 2.50 2.60
Backward linkages
Source: Ministry of Finance, Malaysia (estimates).

According to the 2015 Input-Output Table (DOSM, 2019), 69 out of 124 industries in the economy
fall under the manufacturing sector. Hence, with high inter-sectoral linkages, an increase in
productivity of these industries, particularly E&E, petroleum refinery and vegetable oils will
contribute significantly to economic growth as reflected by MoF estimates.2 At the same time,
industries such as other machinery equipment; petroleum, coals and chemical; and food &
beverages and tobacco are also expected to benefit from the inter-sectoral linkages.

Table 3.2.1. Implication of a 1% Improvement in Productivity of Selected Subsectors, 2019

Baseline deviation
(percentage point)

Household
Real
Employment disposable Exports Real wages
GDP
income
E&E 0.05 0.02 0.03 0.11 0.01
Petroleum refinery 0.03 0.03 0.02 0.05 0.01
Vegetable oils 0.01 0.02 0.01 0.01 0.01

Source: Ministry of Finance, Malaysia (estimates).

2
Dynamic Computable General Equilibrium Model for the Malaysian economy.

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Figure 3.2.7. Biggest Winners from Productivity Improvement in Selected Subsectors

E&E Petroleum refinery Vegetable oils

Other machinery Petroleum, coals and Food & beverages and

equipment chemical tobacco
Trade and repair Mining Agriculture
Non-metallic Transport
Construction
mineral
Transport Transport Petroleum, coals
and chemical
Transport equipment Hotel and restaurant Finance institutions

Source: Ministry of Finance, Malaysia (estimates).

Issues and Challenges Facing the Manufacturing Sector

Premature deindustrialisation

Malaysia began to deindustrialise3 since 2000, as evidenced by the twin decline in employment
as well as the output share of the manufacturing sector. In addition, less-than-desirable policy
landscape as well as lack of technology upgrading and industry-government coordination, led
to the slow progress of the sector in moving up the value chain. Unlike Republic of Korea
and Taiwan, employment in high value-added segments is low, thus, more likely to result in
premature deindustrialisation (BNM, 2019).

Lack of Innovation and Adoption of Technology

Moving away from labour-intensive manufacturing to sustain increase in productivity and

per capita income requires innovation4 rather than imitation (Aghion & Howitt, 1992). In the
case of Malaysia, despite strong growth and a large improvement in export sophistication,
Total Factor Productivity (TFP) has not grown as much as that of Republic of Korea and
Taiwan as the country relied substantially on MNCs and FDIs for export upgrading and
technological transfer. Furthermore, Malaysian firms were unable to create technology,
which is a prerequisite in innovating and increasing productivity (Cherif & Hasanov,
2015).

Apart from that, Research & Development & Commercialisation & Innovation (R&D&C&I) activities
in the manufacturing industries, particularly among SMEs, are often constrained by inadequate
resources. As a result, most of the R&D&C&I efforts are undertaken by the Government and
MNCs. Although there are a number of R&D activities undertaken by public research institutions,
often findings do not match the industry’s requirements (CEDAR, 2018). Industry players would
instead use existing technology without further enhancement, resulting in lagging technologies
as compared to other Newly Industrialised Economies.5

Low Local Content

Usage of local content is important to help domestic industries in terms of industrial development,
jobs creation, inter-sectoral linkages and value-added activities. Nevertheless, in Malaysia,
the manufacturing sector is highly import-intensive (Abbhirami, 2012), in particular, E&E and
3
Deindustrialisation is a natural stage in economic development as economies start to shift their resources away from manufacturing to services as a result of high
manufacturing productivity growth and increased consumption for services as society becomes wealthier (IMF, 2018).
4
The use of new ideas, methods, processes, and technologies in production.
5
Republic of Korea, Singapore and Taiwan.

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chemical products, partly due to the intense complexity of the global supply chain. Due to low
technological capabilities of local firms, most of the industry players, especially MNCs would
rarely use local supplies to support their operations.

Lack of Skills

Productivity is the key to achieve sustainable growth of industries. Despite entering the era of
IR 4.0, only 30% of the Malaysian workforce is in the skilled category. This is mainly due to
the readily available pool of low-skilled low-cost foreign workers which discourages industrial
improvement and upskilling of the workforce. Unlike Malaysia, economies, namely Australia,
Hong Kong and Singapore, have intentionally planned to attract more skilled migrants to boost
their growth (BNM, 2018). Furthermore, Malaysia faces acute brain drain as reflected by the
World Bank report (2011), which estimates that one in every ten skilled Malaysians opts to work
abroad.

Way Forward

Streamline Incentives under a One-stop Centre

Malaysia has a wide range of tax incentives under various Government entities. Streamlining
these incentives under a one-stop centre will create a more conducive business environment for
investors. For example, MIDA has established an i-Incentives portal that provides information
on investment incentives that covers tax exemptions, grants, soft loans and others. The existing
Incentive Coordination and Collaboration Office (ICCO) could act as a national coordinator for all
investment incentives. The restructuring of ICCO will centralise all the database management
systems to further enhance the coordination and management of Government incentives (MIDA,
2019).

Re-engineering Training and Skills

The rise of digitalisation stemming from IR 4.0 is supplanting many jobs in sectors that were
previously labour-intensive (WEF, 2016). Among the skills required globally in the next decade
are complex problem solving, critical thinking, creativity and people management. Lack of these
skills raise concerns as most of the employment in the country has been concentrating on the
low- and semi-skilled jobs. In this regard, ensuring employability through upskilling, reskilling
and life-long learning is crucial to equip employees with the required skills and knowledge.

Venturing into New Focus Areas

Malaysia’s transformation towards IR 4.0 requires an approach and an ecosystem that optimise
the relationships among people, process and technology (MITI, 2018). Towards this end, there is
a need to focus on new sources of growth such as fifth-generation cellular network (5G), artificial
intelligence (AI), Internet of Things (IoT) and big data analytics (BDA) which are expanding
rapidly. For instance, demand for AI-based semiconductors is expected to be five times the overall
market by 2025 (McKinsey, 2018). Likewise, 5G and electric vehicles are expected to contribute
markedly to the growth of the semiconductor industry. Venturing into these new growth areas
will enable the domestic industry players to move up the value chain.

Developing an Integrated Manufacturing Hub

Currently, there are five economic corridors, more than 200 industrial areas, 13 free industrial
trade zones and 22 halal parks throughout Malaysia (HDC, 2019). Nevertheless, the country
is yet to be considered a comprehensive manufacturing hub with a complete ecosystem for
modern services and advanced industries such as Kunshan and Chongqing in China. Kunshan
has become the key manufacturing base for electronic information products in the world, while
Chongqing has a more diversified industrial structure, including processed food, automobile,

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chemicals, textiles, machinery, and electronics. Likewise, Malaysia needs to leverage its strategic
location and focus on building a complete ecosystem in becoming an integrated manufacturing
hub.

Conclusion

Sustaining growth of the manufacturing sector is imperative to promote further Malaysia’s socio-
economic development. Focusing on high-end manufacturing will lead the industry to move
up the value chain while enhancing its international competitiveness. Nevertheless, the sector
continues to face various issues and challenges including premature deindustrialisation; low
adoption of technology and local content development; as well as skills deficit. In this regard,
various measures can be undertaken such as streamlining incentives under a one-stop incentive
centre; re-engineering training and skills; venturing into new focus areas; and developing an
integrated manufacturing hub. These initiatives are expected to sustain the future growth of
manufacturing sector, especially with the new focus areas, namely AI, BDA and IoT that will
be well-suited to support the high-tech industries.

In the consumer-related cluster, food subsector In 2019, production is expected to record 21

will continue to expand due to higher million tonnes and improve to 22.2 million
demand from households as well as tourists tonnes in 2020. Meanwhile, higher oil extraction
amid VM2020. Outlook for the construction- rate (OER) is estimated at 20.1% in 2019 and
related cluster is expected to rebound with 20.2% in 2020 following better quality of fresh
higher demand for non-metallic mineral fruit bunches (FFB) produced across all states.
products, basic metal and fabricated metal Furthermore, exports of CPO are expected to
products. The higher production will be improve following the downward revision on
supported by the implementation of new import tariff by India and the expectation of
and on-going infrastructure projects such higher demand from other major markets such
as the ECRL, MRT2, LRT3, Klang Valley as China, Singapore and the US. In addition,
Double Tracking 2 (KVDT2) as well as Pan the bilateral trade deal with China is expected
Borneo Highway and Central Spine Road. to increase exports of palm oil by 1.9 million

Agriculture Sector
Table 3.4. Value-added in the Agriculture Sector
The agriculture sector grew strongly by 4.9% 2018 – 2020
during the first half of 2019 and for the year (At constant 2015 prices)
is expected to expand by 4.3%. The favourable
performance of the sector is attributed to a Share Change
(%) (%)
rebound in production of CPO and natural
rubber coupled with higher output of livestock 20192 2018 20192 20203
and other agriculture subsectors. In 2020, Oil palm 39.1 -1.8 7.7 5.5
the sector is forecast to expand 3.4% with Rubber 2.9 -17.6 7.3 4.4
growth largely emanating from higher output Other agriculture¹ 24.8 3.3 3.0 3.1
of plantation, livestock and other agriculture Livestock 15.0 6.7 5.6 5.1
subsectors.
Fishing 11.8 0.5 -1.2 -0.2
Forestry and logging 6.4 -5.5 -3.1 -6.1
Oil palm subsector, the largest contributor
to the agriculture sector is projected to turn Agriculture 100.0 0.1 4.3 3.4
around 7.7% in 2019, before normalising to 5.5% 1
Including paddy, fruits, vegetables, coconut, tobacco, tea, flowers, pepper, cocoa
in 2020. Better performance of the subsector and pineapple.
is mainly driven by an increase in CPO
2
Estimate.
3
Forecast.
production due to favourable weather conditions Note: Total may not add due to rounding.
and expansion in oil palm matured areas. Source: Department of Statistics and Ministry of Finance, Malaysia.

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Table 3.5. Palm Oil: Areas, Yield and Production In ensuring sustainability and competitiveness
2018 – 2020 of the oil palm subsector, the Government has
Change
committed to implement Malaysian Sustainable
(%) Palm Oil (MSPO) certification effective 1 January
2018 20192 20203 2018 20192 20203 2020. The compliance with the certification
Planted areas will diversify the market and elevate the
5,849 5,970 6,000 0.7 2.1 0.5
(‘000 hectares) industry to be globally competitive. In this
Matured areas regard, the Government allocated RM30 million
5,189 5,290 5,370 1.5 1.9 1.5
(‘000 hectares)
in the 2019 Budget to assist smallholders in
Yield 1
obtaining this certification. Moving forward,
(tonnes/ 17.2 17.5 18.0 -4.1 2.0 2.9
hectare) the Government will implement the B20
biodiesel programme which is currently on six
Production
Crude palm oil 19,516 21,000 22,200 -2.0 7.6 5.7 months trial and is expected to boost domestic
(‘000 tonnes) demand for palm oil and contribute to cleaner
environment.
1
Fresh fruit bunches yield.
2
Estimate.
3
Forecast. The rubber subsector is projected to rebound
Source: Malaysian Palm Oil Board and Ministry of Finance, Malaysia.
7.3% in 2019 and expand by 4.4% in 2020.
tonnes (worth RM4.6 billion between 2019 The improvement is expected to be driven by
and 2023), supporting the performance of higher production of natural rubber following
the subsector. Hence, the palm oil stockpile increase in matured areas by 50,000 hectares.
is projected to ease to 2.5 million tonnes in This is partly due to various replanting
2019 and decline further to 2.4 million tonnes programmes as well as high-yielding clone
in 2020. planted in new areas mainly in Sabah and
Sarawak between 2011 and 2015. In addition,
Following the ban on palm-based biodiesel by favourable weather conditions, the continuation
the EU, measures are undertaken to increase of rubber production incentives (IPG), and
palm-based biodiesel for domestic consumption modern tapping technique by smallholders
through the implementation of B10 biodiesel continue to support higher output of natural
programme for the transportation sector and rubber. An allocation of RM100 million for
B7 for the industrial sector. These programmes road maintenance and construction in port
are expected to boost domestic demand for and industrial areas using Cuplump Modified
palm oil while increasing the sustainability Bitumen technology will increase demand for
of energy resources. The implementation of domestic natural rubber, providing additional
the programmes is projected to utilise 761,000
impetus to the growth of the subsector.
tonnes of palm oil annually, which in turn will
further promote local demand for palm oil.
Prospects for rubber subsector in the near-term
are expected to be favourable due to tight supply
During the first quarter of 2019, the price of
conditions in major rubber producing countries.
CPO recorded RM2,015 per tonne with inventory
Wintering season between February and April
recording almost 3 million tonnes. For the year,
the CPO prices are expected to remain subdued 2019 and fungal leaf-fall disease in Indonesia
at RM2,000 per tonne following high stockpile are expected to reduce the supply of natural
coupled with anticipation of low prices for crude rubber in the global market. In addition, market
oil and other vegetable oils such as soybean fundamentals remain steady due to cutbacks in
and rapeseed. Nevertheless, in 2020, the price exports by the International Tripartite Rubber
is expected to increase to RM2,100 per tonne Council (ITRC)2 in March 2019. Under the 6th
with the increase in domestic consumption for Agreed Exports Tonnage Scheme (AETS), the
biodiesel as well as higher demand from major member countries reduced exports of natural
markets amid price competitiveness against rubber by 240,000 tonnes between April and July
other vegetable oils. 2019, with Malaysia cutting back 15,600 tonnes.

2
Consists of Indonesia, Malaysia and Thailand.

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Feature Article 3.3

Boosting Productivity in the Oil Palm Subsector

Introduction

Oil palm was introduced in Malaysia as ornamental plants in 1870 before it was commercialised
in 1917 at Tennamaram Estate, Selangor. As one of the fastest-growing commodities, oil palm is
the most productive oil seed and valuable agricultural output (May, 2012). The cultivation of oil
palm increased rapidly in the early 1960s, under the Government’s agricultural diversification
programme, which was introduced to reduce the country’s economic dependence on rubber and
tin as well as to eradicate poverty for the landless farmers and smallholders (Basiron, 2013).

Since then, oil palm has become an important subsector to the Malaysian economy, accounting
for 37.9% of the agriculture sector and 2.8% of GDP in 2018 (DOSM, 2019). Currently, Malaysia
is the second-largest producer and exporter of palm oil after Indonesia (Kushairi et al., 2019).
About 20 million tonnes of crude palm oil (CPO) is produced yearly while employing about
431,000 workers, including both skilled and low-skilled. It is also one of the industries that have
nearly 100% local content. Exports of palm oil1 recorded RM38.7 billion or 3.9% of total exports.
Major markets were India, China and Pakistan (DOSM, 2019). This article analyses and assesses
the economic implication of enhancing oil palm subsector’s productivity as well as identifies
issues and challenges, and highlights the on-going measures to further promote the subsector.

Figure 3.3.1. Contribution of Oil Palm Subsector Figure 3.3.2. Production and Export of Crude Palm Oil
(At constant prices)
% % Million tonne RM million
6 60 25 80,000
Oil palm/GDP Production Exports (right scale)
Oil palm/agriculture (right scale) Export volume 70,000
5 50
20
60,000
4 40
15 50,000

3 30 40,000
10 30,000
2 20
20,000
5
1 10
10,000

0 0 0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Department of Statistics, Malaysia and Malaysian Palm Oil Board.

Assessing Labour Productivity Growth in the Oil Palm Subsector

Oil palm is significantly more productive than other oil-producing crops (Asian Agri, 2018).
A single hectare of land can produce 3.9 tonnes of palm oil yearly, as compared to 0.8 tonnes
of rapeseed oil, 0.7 tonnes of sunflower oil and 0.5 tonnes of soybean oil. In terms of labour
productivity,2 the oil palm subsector improved markedly by 20.8% to RM129,000 in 2017 from
RM107,000 in 2016. The improvement in productivity was mainly supported by a significant
increase in production of CPO following the post-recovery of the El Niño phenomenon and
higher CPO prices.

1
Include crude palm oil and palm oil other than crude.
2
Assumption: Labour productivity (in RM) is measured as ratio between output of CPO (in RM) and total employment in the oil palm plantation. Data
between 2014 and 2017 are from the Department of Statistics, Malaysia and the Malaysian Palm Oil Board.

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Figure 3.3.3. Productivity of Major Oil Crops, 2018 Figure 3.3.4. Productivity of Oil Palm Subsector

RM %
150,000 60
0.5 Labour productivity in value

125,000 Labour productivity (right scale) 50

Soybean

100,000 40
0.7
Sunflower
75,000 30

0.8 50,000 20

Rapeseed
25,000 10

3.9 0 0

Oil palm1
-25,000 -10
Tonne/hectare 2014 2015 2016 2017
1
Include palm oil and palm kernel oil.
Source: Oil World. Source: Ministry of Finance, Malaysia (estimates).

Issues and Challenges

Despite being one of the highest yielding crops, the oil palm subsector faces various challenges.
These include a shortage of labour, high reliance on foreign workers and acreage limitation.
Furthermore, fluctuating global commodity prices, coupled with protectionist measures imposed
by major markets, affect the performance of the subsector.

Labour Shortage and High Dependency on Foreign Workers

The subsector is highly labour intensive with low adoption of technology and mechanisation,
especially in harvesting and collecting fresh fruit bunches (FFB). It is also heavily dependent
on foreign workers, constituting about 77% of 431,000 workers in the subsector (DOSM, 2019).
Majority are from Indonesia (63%), Nepal (19%), Bangladesh (7%), the Philippines (5%) and
India (4%).3 The high reliance on foreign workers poses a threat to the sustainability and stability
of the industry, especially during harvest seasons.

Limited Land

The oil palm planted area grew significantly between 1960 and 2018 from 55,000 hectares to
5.9 million hectares. Nevertheless, the subsector now faces land limitation for future expansion
due to extensive land use in the past (Shevade et al., 2019). Furthermore, the Government is
committed to capping oil palm planted areas to 6.5 million hectares by 2023 to ensure forest
conservation. As a result, many local companies, especially Government-linked companies, seek
investment in other countries such as Brazil, Indonesia and Papua New Guinea that have an
abundance of affordable land with similar soil and climate.

3
Data between January and June 2018, sourced from Malaysian Palm Oil Board.

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Figure 3.3.5. Oil Palm Planted Areas in Malaysia

Million %
7 12
Planted area (hectare)
6 Planted area (right scale) 10

5 8
4
6
3
4
2
2
1

0 0
1960 1970 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20191 2020 2 2023 3
1
Estimate.
2
Forecast.
3
Limitation of planted areas at 6.5 million hectares.
Source: Malaysian Palm Oil Board and Ministry of Primary Industries, Malaysia.

Import Restrictions Imposed by Major Markets

Globally, the oil palm crop is facing intensified scrutiny from environmental groups and consumers
amid allegations on indiscriminate land clearing for the crop resulting in deforestation, despite
the crop utilising only 0.4% of world agricultural land compared with other agriculture produce.
On 10 June 2019, the EU Parliament passed the Delegated Act to ban the palm oil biofuel
gradually by 2030. This is expected to affect Malaysia’s exports of palm oil biodiesel to the EU in
phases.4 Apart from the ban by the EU, India, which is another major importer increased tariffs
on Malaysian palm oil. In March 2018, India raised the import duty on CPO to 44% from 30%
and refined palm oil to 54% from 40%, the highest level in more than a decade to protect the
country’s rapeseed crop. However, under the Comprehensive Economic Cooperation Agreement
(CECA) India reduced the import duty on CPO to 40% and refined palm oil to 45% in January
2019. Nonetheless, India increased import duty on refined palm oil to 50% in September 2019
for six months to curb imports and boost local refinery industry.

Volatile Palm Oil Prices

Since 2006, commodity prices, including CPO, have been recording high fluctuation mainly due
to uncertainties in the world demand and supply, which dampens its production. Slower global
growth emanating primarily from trade tension reduces demand for commodities, including
palm oil. At the same time, excess supply amid high stock accumulation softens the prices of
CPO. Furthermore, low prices of soybean oil which is a substitution to palm oil, also drag down
the prices of CPO.

Unfavourable weather conditions such as droughts and floods also affect the movement of CPO
prices. For instance, in 2016, the El Niño phenomenon affected the maturation process of FFB
which decreased the yield by 13.9% to 15.9 tonnes per hectare resulting in an overall reduction
of CPO by 13.2% to 17.3 million tonnes. With the decline in the production of CPO, prices surged
to RM2,653 per tonne in 2016 from RM2,154 per tonne in 2015.

4
Exports of palm oil biodiesel to EU worth RM390 million in 2018.

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Figure 3.3.6. Major Vegetable Oil Prices

USD/tonne
1,800 Rapeseed oil
Sunflower oil
1,500 Soybean oil
Crude palm oil

1,200

900

600

300
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Malaysian Palm Oil Board.

Economic Implication of Boosting Productivity in the Oil Palm Subsector

With limited land for agriculture, boosting productivity through the usage of digital technology
and mechanisation will increase palm oil yields. Research indicates that good agricultural
practices and a better production system will increase yields (Zulkifli et al., 2010). Ministry of
Finance’s analysis5 indicates that a 5% increase in the productivity of oil palm subsector will
add 0.1 percentage points to the baseline GDP in 2019. Parallel to this, exports and household
disposable income are expected to increase 0.07 percentage points and 0.06 percentage points,
respectively.

Improvement in oil palm productivity also benefits other industries, including oils and fats which
sources 90.3% of its intermediate input from the oil palm industry. Furthermore, industries
such as flower plants and fertilisers which supply most of its output as an intermediate input
to oil palm industry are expected to benefit from forward and backward linkages. In addition,
consumer-oriented industries such as motor vehicles and restaurants are expected to gain from
rising household demand following improvement in income.

Figure 3.3.7. Impact on Real GDP and Household Figure 3.3.8. Impact on Trade
Income
Baseline deviation Baseline deviation
(percentage point) (percentage point)
0.20 0.20
Real GDP Exports
Household disposable income Imports
0.16 0.16

0.12 0.12

0.08 0.08

0.04 0.04

0.00 0.00
2018 2019 2020 2021 2022 2023 2024 2025 2018 2019 2020 2021 2022 2023 2024 2025
Source: Ministry of Finance, Malaysia (estimates).

5
Dynamic Computable General Equilibrium Model for the Malaysian economy.

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Figure 3.3.9. Measures to Boost the Oil Palm Subsector

Mechanisation
Enhance the usage of mechanisation or tools to ease fieldwork
and improve the efficiency of plantation and labour productivity. Biodiesel programmes
This includes Cantas, Grabber, Motorcycle Trailer, Rhyno and B10 biodiesel programme was launched in December 2018 for the
Beluga. Increasing productivity through mechanical solution transportation sector, while B7 for the industrial sector in July 2019.
is one of the ways to address labour shortages. For instance, These programmes are expected to increase utilisation of CPO by
harvesting with motorised cutter (Cantas) will increase 761,000 tonnes annually.
productivity per worker from 1 tonne FFB per day to 2.2 tonnes
FFB per day (Ismail et al., 2015).

High-impact downstream projects

Funds are allocated for high-impact downstream projects for SMEs
Zero-waste technology (POMEDfree) to develop the oleochemical and biochemical industries while
encouraging the production of high value-added palm-based food
Palm oil millers are encouraged to adopt POMEDfree to counter and health products.
environmental pollution. This will ensure that all effluents produced
will be evaporated to address issues related to the environment.

Love MY Palm Oil campaign

Launched in March 2019, the campaign aims to create awareness
Diversifying markets on the socio-economic importance and nutritional value of palm oil.
Exploring new markets like Kyrgyzstan and Tajikistan as well as It is expected to benefit more than 500,000 smallholders who rely
expanding existing markets such as Benin, Kazakhstan, Libya, on palm oil for their livelihood.
Saudi Arabia, Sri Lanka, Tunisia and Uzbekistan as a long-term
move to promote and sustain the palm oil industry.

Malaysian Sustainable Palm Oil (MSPO)

The implementation of MSPO certification will be mandated on 1 January 2020 to elevate the palm oil industry and comply with international standards
while ensuring sustainable and responsible management of palm oil planting and processing. The certification will allow for high quality and sustainable
palm oil as well as higher income for smallholders. A survey indicated that MSPO certification compliance would increase independent smallholders’
income through higher FFB yield by 19% (MPOB, 2019).

Conclusion

Oil palm is the most productive oilseed crop in the world, particularly in terms of land utilisation.
The industry has grown tremendously, contributing significantly to socio-economic development.
However, there are numerous issues and challenges faced by the subsector, including labour
shortage; acreage limitation; import restriction; high tariff; and highly volatile global commodity
prices. Acknowledging the importance of oil palm subsector to the economy, the Government has
undertaken various measures to boost production and expand the market for palm oil. These
include introducing mechanisation, diversifying export markets, endorsing biodiesel and complying
with international standards. These measures are expected to enhance the competitiveness of
Malaysian palm oil globally while ensuring the sustainability of the industry.

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Table 3.6. Rubber: Areas, Yield and Production segment. Meanwhile, the fishing subsector is
2018 – 2020 expected to decline by 1.2% due to contraction
Change in the production of aquaculture as well
(%) as the lower output of marine fish landing
2018 2019¹ 2020² 2018 2019¹ 2020² affected by the monsoon seasons. In 2020,
Total areas 1,083 1,084 1,085 0.1 0.1 0.1 the subsector is estimated to improve with
(‘000 hectares) marginal contraction of 0.2% due to higher
Smallholdings 1,010 1,011 1,010 0.3 0.1 -0.1 output of aquaculture following the adoption
Estates 73 73 75 -2.2 0.0 2.5 of the latest nano technology.
Yield (kg per hectare)
Smallholdings 1,420 1,388 1,398 -1.4 -2.3 0.7 Mining Sector
Estates 1,550 1,550 1,540 1.0 0.0 -0.6
Total production 603 650 680 -18.5 7.7 4.6
The mining sector rebounded during the first
(‘000 tonnes) six months of 2019 on account of higher
Smallholdings 548 607 635 -20.7 10.7 4.6 output of natural gas. For the year, the output
Estates 55 43 45 12.4 -21.9 4.6 of the sector is projected to turn around 0.6%,
% of world 4.3 4.6 4.7
driven by higher production of natural gas,
production offsetting lower output of crude oil (including
condensates). Among the natural gas fields that
1
Estimate.
2
Forecast.
are expected to increase production include
Note: Total may not add up due to rounding. Anjung, Bakong and Larak in Sarawak. On the
Source: Malaysian Rubber Board.
contrary, production of crude oil is affected by
temporary planned and unplanned shutdowns
This will uphold the price of Standard Malaysian of several fields such as Dulang (Peninsular
Rubber 20 (SMR20) to hover around RM5.70 per Malaysia), Gumusut-Kakap (Sabah) and Baronia
kilogramme (kg) in 2019 and remain stable at (Sarawak).
RM5.50 per kg in 2020.
In 2020, the mining sector is forecast to record
The livestock subsector is estimated to expand a marginal growth of 0.3%, supported by stable
5.6% in 2019 and 5.1% in 2020 due to rising gas production following stronger domestic
demand from both domestic and export markets. demand from the petrochemical industry as
The subsector is expected to be supported by well as rising exports of liquefied natural
poultry and egg segments. Meanwhile, other gas (LNG), particularly to China, Japan and
agriculture subsector is projected to grow 3% Republic of Korea. The subsector is expected
and 3.1% in 2019 and 2020, respectively. This to benefit from the commencement of the
expansion will be supported by the promotion North Malay Basin Full Field Development
of good agricultural practices; enhancement of (FFD - Phase 2) in Peninsular Malaysia as well
cash crops; and integration of crops production as Gorek, Integrated Bokor (Phase 3) and Betty
by leveraging modern farming approaches redevelopment projects in Sarawak. Production
such as hydroponics, aquaponics, fertigation of crude oil is projected to increase moderately
as well as vertical and precision farmings. In supported by projects such as Anggerik FFD
addition, campaigns to promote local fruits in and Zetung FFD in Peninsular Malaysia as
conjunction with VM2020 will further support well as Bayan Oilfield (Phase 2B and 2C) in
the subsector. Sarawak. Moving forward, uncertainties in the
global growth; production cut by Organization
The output of the agrofood segment is expected of the Petroleum Exporting Countries (OPEC)
to grow in line with the Government’s efforts and non-OPEC; oil production by the US; the
to increase self-sufficiency level (SSL). These US-China trade tension; and geopolitical risks,
include an allocation for R&D to improve the particularly in Iran, Iraq, Libya and Venezuela
quality of seeds and productivity of grains and will be among the factors affecting the movement
fruits as well as incentives to automate the of crude oil prices.

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Construction Sector Figure 3.3. Supply Indicators of Residential

Property
Units
The construction sector recorded a marginal ('000)
Units
('000)
increase of 0.4% during the first half of 2019. 6,500 700
For the year, the growth is expected to expand Existing stock
6,000 Incoming supply
1.7% mainly supported by the civil engineering Planned supply
right scale 600
segment, particularly the infrastructure-related 5,500

projects. However, the performance of the sector 5,000 500

will be weighed down by subdued growth of
4,500
the residential and commercial properties. For 400
2020, the construction sector is expected to grow 4,000
further to 3.7% on account of acceleration and 300
3,500
revival of mega projects as well as building
3,000 200
of affordable homes. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2015 2016 2017 2018 2019

Investment in the infrastructure works is Source: National Property Information Centre.

expected to boost the civil engineering segment.
These include ECRL, MRT2, LRT3, Electrified
Double Track Gemas – Johor Bahru, KVDT2,
Central Spine Road, Pan Borneo Highway, and Figure 3.4. Malaysia House Price Index
(% change)
Coastal Highway in Sarawak. Meanwhile, in
%
the petrochemical and power plant segments, 16 Malaysia House Price Index
new projects such as Pengerang Deepwater Kuala Lumpur
Terminals (Phase 3), Baleh Hydroelectric Dam Pulau Pinang
12 Johor
and Sarawak Water Supply Grid Programme Selangor
(Phase 1) are expected to support the growth
8
of this subsector further.

4
The residential subsector is expected to grow
at a slower pace, mainly due to elevating
0
property overhang caused by the mismatch
between supply and demand. However, various
measures undertaken by the Government -4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2015 2016 2017 2018 2019
including the building of 60,000 units per year
of affordable homes within 10 years and the Source: National Property Information Centre.

Figure 3.5. Supply Indicators of Non-Residential Property

Incoming Supply Square meter Occupancy Rate

Units ('000) %
100,000 3,000 86
Shops Office spaces
Industrial Retail spaces right scale
80,000 2,400 84 Office spaces

60,000 1,800 82

Retail spaces
40,000 1,200 80

20,000 600 78

0 0 76
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2015 2016 2017 2018 2019 2015 2016 2017 2018 2019

Source: National Property Information Centre.

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reinvigorating of the National Housing Policy are Table 3.7. GDP by Aggregate Demand
expected to boost the growth of the subsector 2018 – 2020
in 2020. In addition, the enhancement of the (At constant 2015 prices)
Fund for Affordable Homes by Bank Negara Share Change
Malaysia will enable the first-time home (%) (%)
buyers to enjoy lower monthly commitment 20192 2018 20192 20203
up to 20%, which in turn will support the Domestic demand 93.5 5.5 4.0 4.8
subsector. Private expenditure 74.9 7.1 5.6 5.8
Consumption 58.1 8.0 6.8 6.9
The non-residential subsector continues Investment 16.8 4.3 1.5 2.1
to decline in 2019 due to rising property Public expenditure 18.6 0.1 -1.8 0.8
overhang and low incoming supply. In 2020, Consumption 12.1 3.3 2.0 1.5
the performance of the sector is expected to Investment 6.5 -5.0 -8.1 -0.6
External sector1 7.7 11.4 14.5 -2.7
remain subdued following a lack of initiative
Exports 64.3 2.2 -0.4 1.4
on new mega commercial projects. Nonetheless,
Imports 56.7 1.3 -2.1 1.9
the on-going commercial projects such as Bukit
GDP 100.0 4.7 4.7 4.8
Bintang City Centre, KLIA Aeropolis DFTZ Park,
Kwasa Damansara, Malaysia Vision Valley and 1
Goods and non-factor services.
2
Estimate.
Merdeka 118 Tower are anticipated to support 3
Forecast.
the subsector. Note: Total may not add up due to rounding and excluding change in stocks component.
Source: Department of Statistics and Ministry of Finance, Malaysia.

Domestic Demand the near-term following increased approved

investments worth of RM296 billion by MIDA
Notwithstanding heightening external headwinds between 2018 and June 2019. Furthermore, an
following prolonged trade war and geopolitical upward revision of the minimum wage rate, cash
tensions, domestic demand is expected to transfers, income tax refund and lower cost of
spearhead growth, expanding by 4% in 2019 borrowings are expected to provide additional
and 4.8% in 2020. Major underlying factors, impetus to the household spending. In 2020,
including a stable labour market amid low the trend in income and labour market is
prices, are expected to remain intact and expected to continue in line with the sustained
continue to support domestic activities. Private economic activities. In addition, major events
sector expenditure which constitutes about such as the VM2020, APEC meetings and World
80% of domestic demand, will continue to Congress on Information Technology 2020 are
anchor growth at 5.6% and 5.8% in 2019 and expected to support the private consumption
2020, respectively. Meanwhile, public sector activities. Accordingly, consumption spending
expenditure is estimated to decline by 1.8% is expected to record a growth rate of 6.9%
in 2019, weighed down by lower investment in 2020.
spending by public corporations. In 2020, the
public sector expenditure is expected to rebound Private investment is expected to grow at a
0.8% largely driven by acceleration of projects slower pace of 1.5% in 2019, reflecting lower
towards the tail-end of the Eleventh Malaysia external demand and capacity utilisation rate,
Plan coupled with revival of strategic projects. particularly in the export-oriented industries.
In the first half of 2019, investors remained
Private consumption is expected to grow at a cautious as reflected in Business Confidence
moderate pace of 6.8% in 2019 due to base effect Index of 94.3 points, below the 100-threshold
following the removal of Goods and Services points. However, investment is anticipated to
Tax (GST) in the second half of 2018. Household pick-up in the second half of the year, in line
spending will continue to be supported by wage with the Business Tendency Survey which
growth and favourable employment prospects, increased 18.2%. In 2020, investors’ sentiment
especially in the services sector. More job is expected to improve further, especially
opportunities are expected to be created in with the resumption of strategic projects and

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Feature Article 3.4

Malaysia’s Potential Output

Introduction

Potential output is an estimate of the maximum level of sustainable output that the economy can
produce in the medium- to long-term without any pressure on prices. Meanwhile, the output gap
measures the percentage difference between real GDP and potential output, reflecting whether
economic resources are over or underutilised (ECB, 2011). A positive output gap is when real
GDP is above potential output, meaning over utilisation of resources which may cause declining
unemployment and increasing inflation. On the contrary, a negative output gap is when real
GDP is below potential output, implying an underutilisation of economic resources which causes
rising unemployment and declining inflation (Darby & McIntyre, 2018).

Potential output is widely used in formulating fiscal and monetary policies (Hansen
et al., 2019). In the EU, fiscal variables are measured as a percentage of potential
output, and the output gap is central in determining countercyclical fiscal measures to
stimulate the economy. At the same time, estimates of potential output growth are part
of the debt sustainability analysis by the IMF and the EU (Fatás, 2018). Central banks also
consider potential output in formulating monetary policy through interest rate decisions
(Fiedler et al., 2019). The main objective of this article is to report on Malaysia’s estimated
potential output using various methods, thus providing useful insights in designing fiscal policy.

Estimating Potential Output

Potential output and output gap are not directly observable. As such, in this article, three
approaches, namely univariate, multivariate and structural with nine methodologies, were applied
to make the estimations.

Table 3.4.1. Methodologies to Estimate Potential Output

Approach Description Methodology

Univariate Use filters or models to estimate 

Linear trend
trend output based on time series 
Quadratic trend
variables

Hodrick-Prescott (HP) filter

Band Pass filter using Baxter-King (BK) approach

Band Pass filter using Christiano-Fitzgerald (CF) approach

Butterworth filter

Multivariate Use models or specified functions 

Kalman filter
that incorporate other variables
based on economic theory
Structural Use production function that allows 
Production function using Cobb-Douglas
decomposition of output from a 
Production function using constant elasticity of substitution (CES)
factor of input and Total Factor
Productivity contributions
Source: International Monetary Fund, Organisation for Economic Co-operation and Development, and World Bank.

Estimated Potential Output in the Near-term

Based on the nine methodologies, the average potential output between 2018 and 2020 is
estimated in the range of 4.8% – 5% while the output gap is close to zero. This indicates that
the economy is performing close to its potential with stable inflation and employment rates.
Nonetheless, external risks such as slower global growth and trade activities will continue to
weigh on Malaysia’s economic performance.

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Table 3.4.2. Potential Output and Output Gap Estimates

2018 – 2020
(At constant 2015 prices)

Potential Output Output Gap1

Methodology (%) (%)
2018 20192 20203 2018 20192 20203
Univariate
Linear trend 5.0 5.0 5.0 0.1 -0.3 -0.5
Quadratic trend 4.9 4.9 4.9 0.3 0.0 -0.1
HP filter 5.0 5.0 5.1 0.1 -0.3 -0.5
Band Pass filter using BK approach 5.0 4.8 48 0.1 -0.1 -0.1
Band Pass filter using CF approach 5.1 4.8 4.6 -0.3 -0.5 -0.2
Butterworth filter 4.8 4.7 5.1 0.0 -0.1 -0.3
Multivariate
Kalman filter 5.0 4.5 4.9 -0.2 0.0 -0.1
Structural
Production function using Cobb-Douglas 4.9 4.8 4.7 -0.1 -0.2 -0.1
Production function using CES 4.9 4.6 4.9 -0.1 0.0 -0.1
Average 5.0 4.8 4.9 -0.02 -0.2 -0.2
1
Output gap = (Actual output level – Potential output level)
x 100%
Potential output level
² Estimate.
3
Forecast.
Source: Ministry of Finance, Malaysia (estimates).

Trend Analysis of Potential Output

During the period of 2001 – 2005 and 2006 – 2010, the potential output was estimated at an
average of 5.1% and 4.7%, respectively, hovering above the actual output. This was following
the onset of two major economic crises, namely the dot-com bubble burst and the global
financial crisis. Nevertheless, the unemployment rate remained stable in the range of 3.2% –
3.7% during the period of 2001 – 2010 reflecting full employment. In addition, the share of

Figure 3.4.1. Real GDP vs Potential Output Trend

RM billion % of potential output
1,700 2001 – 2005 2006 – 2010 2011 – 2015 2016 – 2020 4
Average Real GDP: 4.8% Average Real GDP: 4.5% Average Real GDP: 5.3% Average Real GDP: 4.9%
Average Potential Output: 5.1% Average Potential Output: 4.7% Average Potential Output: 5.2% Average Potential Output: 5.0% 3
1,500
2
1,300
1

1,100 0

-1
900
Dot-com Output gap (right scale)
Bubble -2
Global
700 Burst Real GDP
Financial
Potential output -3
Crisis
500 -4
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20191 20202
1
Estimate.
2
Forecast.
Source: Department of Statistics and Ministry of Finance, Malaysia (estimates).

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Total Factor Productivity (TFP) increased from 28.3% in 2001 – 2005 to 34.7% in 2006 – 2010.
The improvement corresponded well with the Government’s policy to shift Malaysia from a
capital- to productivity-led economy under the Ninth Malaysia Plan. Despite the economy
operating below its potential output, the inflation rate1 increased from 1.9% in 2001 – 2005 to
2.4% in 2006 – 2010. The increase was due to a surge in global food and energy prices in 2008.

During the period of 2011 – 2015, the actual output grew 5.3% above the potential level of
5.2% driven by technological-intensive investment and a higher number of skilled workers
amid structural changes in the economy. During the period, investments in ICT-related and
machinery and equipment segments expanded approximately 38% contributing one-third of
total investment.Meanwhile, the number of skilled workers increased from 3.3 million in 2010
to 3.6 million in 2015. Correspondingly, the unemployment rate was lower between 2.9% and
3.1% while inflation remained stable at 2.2%.

On the contrary, during the 2016 – 2020 period, the potential output is estimated at 5% with
actual output expanding at 4.9%. This is in line with the expected increase in the unemployment
rate between 3.3% and 3.4% with capital accumulation expanding at a slower pace of 2.2%. The
negative output gap reflects heightening external uncertainties arising from the intensifying
trade war, geopolitical tensions as well as volatility in the global financial and commodity
markets. However, the share of TFP during the period is expected to expand to 39.6% in line
with the targeted increase in the number of skilled and knowledge workers as well as greater
adoption of advanced technologies and automation by industries (MEA, 2018). Meanwhile, the
inflation rate is expected to remain stable at 1.9%, mainly attributed to the measures taken by
the Government to cap the pump prices to ease the burden of the people.

Figure 3.4.2. Unemployment and Inflation Rates Figure 3.4.3. Factors of Production
(% change) (% share)
%
6 Total Factor Productivity
Unemployment Labour
Inflation
5 Capital
%
100
4
80
3
60
2
40
1
20
0
20191
20202

0
2001
2002

2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

2017
2018
2003

2016

2001-2005 2006-2010 2011-2015 2016-20201

1
Estimate.
2 1
Forecast. Forecast.
Source: Department of Statistics and Ministry of Finance, Malaysia (estimates). Source: Ministry of Economic Affairs, Malaysia.

Conclusion

The Government will continue to promote policy measures to raise potential output and achieve
sustainable growth. In this regard, fiscal policy can be targeted on accelerating human capital
development through education and upskilling as well as modernising physical infrastructure
and providing incentives to attract higher value-added private investment. Various measures can
also be applied to enhance the livelihood of the people by delivering quality healthcare and
comprehensive social safety net, which in turn will promote labour productivity and safeguard
the well-being of the people.

1
Inflation rates for the 5-year period are calculated using the Compound Annual Growth Rate (CAGR).

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higher exports, particularly E&E. The payment social sectors. Investment in economic sector
of tax refunds is also anticipated to provide mainly channelled into transportation system;
impetus to private sector activities. Overall, the energy and public utilities; as well as trade and
momentum in private investment is projected industry. Meanwhile, the bulk of expenditure in
to expand 2.1% in 2020. the social sector is channelled into education
and healthcare.
Capital outlays in both years will remain
With sustained economic activities, gross
concentrated in the services and manufacturing
national income (GNI) in current prices is
sectors. The E&E; machinery and equipment; forecast to increase steadily at 5.5% to RM1.5
chemicals and chemical products; and aerospace trillion in 2019. Meanwhile, gross national
industries will remain as the priority within savings (GNS) is anticipated to increase by
the manufacturing sector due to their strong 1.4% to RM377.5 billion. With the level of GNS
inter-linkages. Investments in high value-added continuing to exceed total investment, the
areas such as advanced materials, optics and savings-investment gap is expected to record
photonics, petrochemicals and pharmaceuticals a surplus of 2.9% of GNI in 2019, enabling
are projected to attract more investors. Malaysia to continue to finance its growth,
Meanwhile, in the services sector, investment primarily from domestic sources.
will focus on regional establishments, health
In 2020, GNI is expected to improve further and
tourism, healthcare, ICT services and green
record a growth rate of 5.8% to RM1.6 trillion.
technology. In addition, private investment in GNS is anticipated to expand marginally by
2020 will be concentrated in tourism-related 0.8% to RM380.6 billion. The share of GNS as
industries in conjunction with the hosting of a percentage of GNI remains high at 24.4%,
major international events and VM2020. primarily contributed by the private sector.
Meanwhile, total investment is expected to
In line with the fiscal consolidation path, increase markedly by 5.2% to RM351.6 billion
public consumption is projected to remain and account for 22.6% of GNI. With investment
moderate at 2% in 2019 and 1.5% in 2020. increasing faster than savings, the savings-
Accordingly, the Government is undertaking investment surplus is projected to narrow to
RM29 billion or 1.9% of GNI. Nevertheless, the
rigorous expenditure optimisation exercises
amount remains substantial, providing ample
emphasising on the reduction of wastage and
liquidity to mobilise long-term productive
leakages without compromising public service investment without recourse to external
delivery. Meanwhile, public investment is financing.
projected to decline significantly by 8.1% in
2019, primarily due to lower capital outlays by
public corporations, especially in O&G-related
Figure 3.6. Savings-Investment Gap
industries. However, public corporations’ capital
(% of GNI)
spending, which accounts for about 70% of
% %
total public investment, is expected to improve 35 20
Gross national savings
in 2020. Thus, public investment is projected Total investment1
to record a mild decline of 0.6% in 2020. Savings-investment gap (right scale)

Development of new projects in O&G industries 30 15

such as Kasawari Gas Development, coupled
with on-going projects such as Floating LNG 2
are projected to buoy the public investment 25 10
activities. Furthermore, MRT2, LRT3, LRT line
extension and ECRL as well as Tekai hydroelectric
and Pasir Gudang combined-cycle gas turbine 20 5
power plant projects will continue to underpin
the capital spending in the transport and
utility segments. 15 0
2016 2017 2018 20192 20203
The Government’s development expenditure 1
Including change in stocks.
2
Estimate.
during these two years will remain high and 3
Forecast.
mostly concentrated in the economic and Source: Department of Statistics and Ministry of Finance, Malaysia.

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External Sector Exports of agriculture goods are expected to

rebound 0.2% contributed by continued demand
Exports for palm oil and palm oil-based products as
well as natural rubber. Exports of palm oil are
In 2019, gross exports are estimated to expand projected to expand 1%, benefitting from ECRL
marginally by 0.1%. Exports of manufactured deal with China. Nonetheless, exports of palm
goods, which account for about 84% of total oil to India are anticipated to be affected by the
exports, are estimated to grow 0.7% contributed upward revision of its import duty on refined
by higher exports of non-E&E and E&E palm oil from Malaysia to 50% for six months,
products. Exports of non-E&E are projected to effective September 2019. Receipts from natural
increase albeit marginally by 0.7% contributed rubber are anticipated to moderate 0.2% due
by chemicals and chemical products; optical to compliance with the ITRC agreement to
and scientific equipment; as well as iron and reduce exports between April and July 2019.
steel products. Similarly, receipts from E&E Meanwhile, export earnings from mining goods
products are forecast to expand moderately are estimated to contract 2.8% due to a decline
by 0.6% as a result of the downturn in global in shipments of crude petroleum (-19.6%)
semiconductor cycle. following temporary shutdowns of several fields

Table 3.8. External Trade

2018 – 2020
Change
RM million
(%)
2018 20191 20202 2018 20191 20202
Total trade 1,883,391 1,862,590 1,895,830 6.3 -1.1 1.8
Gross exports 1,003,587 1,004,590 1,014,630 7.3 0.1 1.0
of which:
Manufactured 837,071 842,600 850,460 9.3 0.7 0.9
Agriculture 67,001 67,130 67,570 -14.2 0.2 0.7
Mining 89,907 87,360 88,500 9.9 -2.8 1.3
Gross imports 879,804 858,000 881,200 5.2 -2.5 2.7
of which:
Capital goods 112,453 102,000 106,500 -2.7 -9.3 4.4
Intermediate goods 462,212 473,700 492,000 -3.5 2.5 3.9
Consumption goods 73,031 74,800 76,670 2.8 2.4 2.5
Trade balance 123,783 146,590 133,430 25.7 18.4 -9.0

1
Estimate.
2
Forecast.
Note: Total may not add up due to rounding.
Source: Department of Statistics and Ministry of Finance, Malaysia.

Table 3.9. Gross Exports

January – August
Change Share
RM million
(%) (%)
2018 2019 2018 2019 2018 2019
Manufactured 544,601 548,340 9.0 0.7 83.3 84.3
Agriculture 44,915 43,047 -13.9 -4.2 6.9 6.6
Mining 56,686 54,511 4.9 -3.8 8.7 8.4
Others 1 7,258 4,914 16.4 -32.3 1.1 0.8
Gross exports 653,461 650,812 6.7 -0.4 100.0 100.0

1
Including gold scrap and waste; worn clothing; and special transaction not classified.
Note: Total may not add up due to rounding.
Source: Department of Statistics, Malaysia and Malaysia External Trade Development Corporation.

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Table 3.10. Exports of Manufactured Goods

January – August
Change Share
RM million
(%) (%)
2018 2019 2018 2019 2018 2019
E&E 245,781 247,585 11.4 0.7 45.1 45.2
Non-E&E 298,820 300,755 7.0 0.6 54.9 54.8
Petroleum products 49,258 47,055 2.2 -4.5 9.0 8.6
Chemicals and chemical products 36,752 37,971 18.7 3.3 6.7 6.9
Manufactures  of  metal 30,329 28,035 25.3 -7.6 5.6 5.1
Machinery,  equipment  and  parts 27,547 27,506 0.4 -0.1 5.1 5.0
Optical and scientific equipment 23,543 23,763 12.5 0.9 4.3 4.3
Rubber products 17,449 16,733 -1.3 -4.1 3.2 3.1
Palm  oil-based  manufactured  products 15,249 14,417 -2.3 -5.5 2.8 2.6
Processed  food 12,542 14,020 -4.5 11.8 2.3 2.6
Iron  and  steel  products 9,778 12,405 18.0 26.9 1.8 2.3
Transport  equipment 12,245 11,725 19.6 -4.2 2.2 2.1
Textiles,  apparels  and  footwear 9,912 10,403 -4.4 5.0 1.8 1.9
Wood products 10,361 10,103 -4.5 -2.5 1.9 1.8
Manufactures  of  plastics 9,531 9,902 -1.2 3.9 1.8 1.8
Non-metallic  mineral  products 4,713 5,608 24.0 19.0 0.9 1.0
Jewellery 4,321 4,712 -4.4 9.0 0.8 0.9
Paper  and  pulp  products 3,151 4,066 1.1 29.0 0.6 0.7
Beverages  and  tobacco 2,156 2,274 -23.7 5.5 0.4 0.4
Other manufactures 19,985 20,057 14.8 0.4 3.7 3.7
Exports of manufactured goods 544,601 548,340 9.0 0.7 100.0 100.0

Note: Total may not add up due to rounding.

Source: Department of Statistics, Malaysia and Malaysia External Trade Development Corporation.

in Peninsular Malaysia, Sabah and Sarawak. demand from major markets. Exports of crude
Nevertheless, shipments of LNG are projected petroleum are expected to moderate following
to increase significantly by 7% supported uncertainties in external environment partly
by sustained demand from major markets, due to production cut by OPEC and non-OPEC;
particularly China, Japan and Republic of Korea. shale oil production by the US; and the US-
China trade tension.
In 2020, overall gross exports are expected to
expand 1% benefitting from the anticipated Imports
improvement in global trade activities and the
uptick in the E&E cycle. Accordingly, exports of In 2019, gross imports are expected to contract
manufactured goods are projected to increase 2.5% weighed down by capital goods (-9.3%) in
by 0.9% with exports of E&E expanding 0.8%. line with lower investment activities. Meanwhile,
Meanwhile, exports of non-E&E products are imports of intermediate and consumption
expected to expand 1.1% contributed by higher goods are projected to grow by 2.5% and 2.4%,
demand for chemicals and chemical products; respectively, with continued demand from
machinery, equipment and parts; manufactures industries and households. In 2020, gross
of metal; and petroleum products.
imports are estimated to turnaround 2.7%
in line with higher imports of intermediate,
Agriculture exports are estimated to grow,
capital and consumption goods. Imports of
albeit modestly at 0.7% in 2020 led by demand
intermediate goods, which account for about
for palm oil and palm oil-based products
as well as natural rubber. Likewise, export 55%, are expected to grow 3.9% attributed
earnings from mining goods are projected to expansion in the manufacturing sector,
to increase by 1.3% buoyed by improved particularly E&E as well as petroleum, chemical,
shipments for LNG benefitting from higher rubber and plastic products. Likewise, imports

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 Chapter 3 MACROECONOMIC OUTLOOK

Figure 3.7. Direction of External Trade

January – August 2019
(% share)
Exports Imports

Singapore
Rest of 13.7% Rest of China
the world the world 20.6%
29.1% China 26.6%
13.7%
RM650.8 RM558.3 Singapore
billion billion 10.2%
US Australia
Republic of Korea
9.5% 2.7% US
3.4%
Germany 8.0%
Viet Nam 3.2% Japan
3.5% Indonesia 7.3%
Hong Kong
Taiwan India 4.6% Republic
Japan 6.8%
3.6% 4.1% of Korea Thailand Taiwan
Thailand 6.8%
5.9% 4.6% 5.3% 6.9%

Note: Total may not add up due to rounding.

Source: Department of Statistics, Malaysia and Malaysia External Trade Development Corporation.

Table 3.11. Gross Imports by End Use

January – August
Change Share
RM million
(%) (%)
2018 2019 2018 2019 2018 2019
Capital goods 75,640 65,595 2.6 -13.3 13.0 11.7
Capital goods (except transport equipment) 63,037 59,782 -6.0 -5.2 10.8 10.7
Transport equipment (industrial) 12,603 5,813 90.6 -53.9 2.2 1.0
Intermediate goods 306,989 306,844 -4.6 0.0 52.8 55.0
Food and beverages, primary and processed, mainly for industry 11,762 12,171 -14.6 3.5 2.0 2.2
Fuel and lubricants, primary, processed and others 36,722 39,296 13.5 7.0 6.3 7.0
Industrial supplies, primary, processed and n.e.s.1 141,652 143,446 7.6 1.3 24.4 25.7
Parts and accessories of capital and transport equipment 116,852 111,932 -18.8 -4.2 20.1 20.0
Consumption goods 48,190 48,383 3.4 0.4 8.3 8.7
Food and beverages, primary and processed, mainly for 19,083 20,061 0.9 5.1 3.3 3.6
household
Transport equipment (non-industrial) 522 689 -22.1 32.1 0.1 0.1
Other consumer goods 28,585 27,632 5.8 -3.3 4.9 4.9
Durables 6,813 6,359 14.9 -6.7 1.2 1.1
Semi-durables 10,158 8,881 3.0 -12.6 1.7 1.6
Non-durables 11,614 12,392 3.6 6.7 2.0 2.2
Others 18,768 24,797 11.7 32.1 3.2 4.4
Re-exports 131,973 112,645 46.0 -14.6 22.7 20.2
Gross imports 581,559 558,263 5.9 -4.0 100.0 100.0

1
Not elsewhere stated.
Note: Total may not add up due to rounding.
Source: Department of Statistics, Malaysia.

of capital goods are projected to increase by Balance of Payments

4.4% in tandem with improving investment
activity in new and on-going projects. Imports of Malaysia’s external sector is expected to remain
consumption goods are expected to expand resilient despite continued uncertainties in
2.5% following higher demand from households the global environment. Overall in 2019, the
and tourists. increase in net exports of goods and services

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 Chapter 3 MACROECONOMIC OUTLOOK

are expected to contribute to the widening mild expansion in the investment activities.
of the current account surplus to RM43.4 However, payments for intellectual property
billion or 2.9% of GNI. The goods account is rights are higher, especially in the automobile
expected to record a higher surplus of RM131 segment.
billion mainly supported by an increase in
exports of manufactured goods coupled with a The deficit in primary income account is expected
significant decline in imports of capital goods to be lower at RM45.3 billion as the decline in
amid moderating investment activities. payments accruing to foreign direct investors in
Malaysia more than offset the income receipts
The deficit in the services account is projected to to Malaysian companies investing abroad.
widen RM21.1 billion following a decline in the The investment income accruing to foreign
travel account surplus, offsetting lower deficit in direct investors is expected to fall to RM82.9
the transport and other services accounts. The billion, reflecting lower profits and dividends.
travel account is expected to register a surplus of This is due to the moderate performance of
RM26.1 billion supported by the growing number the manufacturing sector, particularly in the
of middle-income travellers, especially from Asia. E&E segment. On the contrary, profits and
This is expected to cushion the effects of lower dividends accruing to Malaysian companies
tourist per capita spending and an increase investing abroad are higher at RM48.3 billion,
in the number of residents travelling abroad. reflecting the improvement in earnings from
portfolio investment. The secondary income
The transport account is expected to record a account is expected to continue to record
smaller deficit of RM27.1 billion attributed to outward remittances by foreign workers which
lower payments for freight charges in tandem are expected to remain substantial at RM38.8
with subdued trade activities. Meanwhile, billion supported by an upward revision in the
transport receipts are anticipated to be supported minimum wages. Meanwhile, remittances by
by continued earnings from passenger fares Malaysians working abroad are expected to
as well as maintenance and repair works record RM17.6 billion.
by domestic companies. The deficit in other
services account is projected to narrow RM20 The financial account registered a net outflow
billion following lower payments to imported of RM32.4 billion in the first half of 2019
professional and construction services with the following net outflows of portfolio and other

Table 3.12. Current Account of the Balance of Payments

2018 – 2020
(RM million)
2018 20191 20202
Receipts Payments Net Receipts Payments Net Receipts Payments Net
Balance on goods and services 994,860 893,403 101,456 996,518 886,618 109,900 1,016,872 918,477 98,395
Goods 832,796 713,614 119,182 834,814 703,864 130,951 849,789 726,375 123,414
Services 162,064 179,789 -17,726 161,703 182,754 -21,051 167,083 192,102 -25,019
Transport 20,438 48,009 -27,571 22,101 49,249 -27,148 23,336 51,596 -28,260
Travel 79,173 49,125 30,048 84,386 58,299 26,087 86,142 59,040 27,102
Other services 62,452 82,655 -20,203 64,696 84,685 -19,989 64,835 88,696 -23,861
Primary income 53,479 105,065 -51,586 54,248 99,537 -45,289 54,891 104,874 -49,983
Compensation of employees 6,793 14,447 -7,654 5,998 16,674 -10,675 6,069 17,568 -11,498
Investment income 46,686 90,618 -43,933 48,250 82,864 -34,614 48,822 87,307 -38,485
Secondary income 15,598 34,880 -19,282 17,580 38,782 -21,201 20,197 39,638 -19,441
Balance on current account 1,063,936 1,033,348 30,588 1,068,346 1,024,936 43,410 1,091,961 1,062,989 28,972
% of GNI 2.2 2.9 1.9

1
Estimate.
2
Forecast.
Note: Total may not add up due to rounding.
Source: Department of Statistics and Ministry of Finance, Malaysia.

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 Chapter 3 MACROECONOMIC OUTLOOK

investment components. These outflows have continued dependence on foreign transport

more than offset the net inflow in the direct and trade-related services in line with the
investment of RM8 billion. FDI recorded a improvement in trade activities. Meanwhile,
large net inflow of RM26.1 billion following the exports of transportation services will benefit
divestment of a private healthcare company from the higher exports as the air passenger
and a joint venture in the O&G industry. segment is expected to be supported by tourist
Meanwhile, direct investments abroad were arrivals in response to the VM2020 and APEC
primarily channelled into the transportation meetings.
and storage as well as agriculture, forestry and
fishing subsectors. Other investment account The surplus in the travel account is expected
recorded a net outflow of RM31.6 billion following to be at RM27.1 billion driven by higher
higher repayment of interbank borrowings and tourist arrivals, reinforced by the extension
interbank placements abroad. Similarly, the of entry points for VOA to facilitate travellers
portfolio investment registered a net outflow from China and India, which more than offset
of RM8.1 billion following cautious sentiments residents spending abroad. The deficit in other
among non-resident investors, especially during services account is expected to widen due to
the second quarter of the year. higher imports of construction and professional
services following favourable performance of
M ov i n g f o r wa r d , t h e p ro s p e c t s f o r t h e the civil engineering segment backed by the
current account will be shaped by global and revival of strategic projects.
domestic demand as well as commodity prices.
Accordingly, the current account surplus is The deficit in primary income account is
expected to narrow to RM29 billion or 1.9% of projected to widen to RM50 billion as the
GNI in 2020. The goods surplus is expected to recovery in exports is expected to translate into
narrow to RM123.4 billion with import growth higher repatriations of profits and dividends
outpacing exports. by MNCs operating in Malaysia, particularly
in the E&E and O&G-related industries. The
The services account is projected to record a wider deficit is also due to the net outflows
wider deficit of RM25 billion in 2020, as deficits of compensation to foreign professional skills
in transportation and other services accounts and expertise. Likewise, profits and dividends
are expected to be higher than the surplus accruing to Malaysian companies investing
in the travel account. The deficit in transport abroad are expected to increase on account
account is expected at RM28.3 billion following of improving global economic outlook. Higher
expected outward remittances at RM39.6 billion
will more than offset inward remittances,
Figure 3.8. International Reserves contributing to the continued deficit in the
RM billion Months/Times secondary income account.
600 12
Reserves
Months of retained imports
500 Short-term external debt
right scale 10 Prices
400 8
The Consumer Price Index (CPI) increased
300 6 marginally by 0.5% between January and
August 2019. The low inflation rate was
200 4 mainly attributed to the fixed RON95 and
diesel prices since March 2019 at RM2.08 and
100 2
RM2.18, respectively. As a result, the transport
0 0 group contracted 3.6%, dragging down the
J A J O J A J O J A J overall CPI. Similarly, clothing and footwear
2017 2018 2019
group declined 2.4% during the period. On
As at 13 September 2019, Malaysia’s international reserves amounted to the contrary, the rest of the groups such as
RM428.7 billion or USD103.5 billion sufficient to finance 7.6 months of retained
imports and is 1.1 time total short-term external debt (end-December 2018:
housing, water, electricity, gas and other fuels
RM419.6 billion; USD101.4 billion; 7.4 months; 1.0 time). (1.9%); food and non-alcoholic beverages (1.6%);
Source: Bank Negara Malaysia.

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 Chapter 3 MACROECONOMIC OUTLOOK

Table 3.13. Consumer Price Index

January – August
(2010 = 100)
Contribution to
Change
Weights1 CPI growth
(%)
(percentage points)
2018 2019 2018 2019
Food and non-alcoholic beverages 29.5 2.0 1.6 0.64 0.51
Alcoholic beverages and tobacco 2.4 -0.2 1.6 -0.01 0.05
Clothing and footwear 3.2 -1.5 -2.4 -0.04 -0.06
Housing, water, electricity, gas and other fuels 23.8 2.0 1.9 0.46 0.45
Furnishings, household equipment and routine household maintenance 4.1 0.7 1.3 0.03 0.05
Health 1.9 1.3 0.3 0.03 0.01
Transport 14.6 2.7 -3.6 0.38 -0.51
Communication 4.8 -1.8 0.0 -0.07 0.00
Recreation services and culture 4.8 -0.6 0.6 -0.03 0.03
Education 1.3 1.1 1.3 0.01 0.02
Restaurants and hotels 2.9 1.6 1.2 0.05 0.04
Miscellaneous goods and services 6.7 -0.8 -0.6 -0.05 -0.04
CPI 100.0 1.3 0.5 1.26 0.50

1
Weights based on Household Expenditure Survey 2016.
Note: Total may not add up due to rounding.
Source: Department of Statistics, Malaysia.

Table 3.14. Producer Price Index

January – August
(2010 = 100)
Contribution to PPI
Change
Weights1 growth
(%)
(percentage points)
2018 2019 2018 2019
PPI 100.0 -1.0 -2.0 -1.00 -2.00
Agriculture, forestry and fishing 6.7 -11.4 -10.3 -0.86 -0.67
Mining 7.9 17.8 -3.8 1.17 -0.30
Manufacturing 81.6 -1.9 -1.1 -1.56 -0.93
Electricity and gas supply 3.4 1.1 1.6 0.04 0.06
Water supply 0.3 0.5 -2.1 0.00 -0.01
PPI by stage of processing 100.0 -1.0 -2.0 -1.00 -2.00
Crude materials for further processing 16.4 3.8 -5.7 0.63 -0.98
Intermediate materials, supplies and components 56.1 -2.2 -1.6 -1.22 -0.91
Finished goods 27.5 -2.3 0.2 -0.65 0.05

1
Weights based on Economic Census 2016.
Note: Total may not add up due to rounding.
Source: Department of Statistics, Malaysia.

and alcoholic beverages and tobacco (1.6%) Inflation is projected to expand 2% in 2020,
expanded, contributing to the increase in the mainly due to the expected introduction of
CPI. In 2019, the CPI is estimated to grow 0.9% targeted fuel subsidy. The expansion is also
partly attributed to the imposition of departure expected to be partly attributed to dissipating
levy ranging from RM8 to RM150 commencing base factors and the implementation of
in September. Nonetheless, the introduction departure levy. The inflation outlook will
of the sugar tax in July is expected to have also be subjected to foreign exchange rate
minimal impact on the overall inflation given its movements and uncertainties in the global oil
relatively smaller weightage in the CPI basket. prices due to trade and geopolitical tensions.

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 Chapter 3 MACROECONOMIC OUTLOOK

Figure 3.9. CPI and PPI Trends

(% change)
% Consumer Price Index % % Producer Price Index %
25 25 25 50
CPI PPI
20 20 20 40

15 15 15 30

10 10 10 20

5 5 5 10

0 0 0 0

-5 -5 -5 -10

-10 -10 -10 Manufacturing -20

Transport
Food and non-alcoholic beverages right scale Mining right scale
-15 Housing, water, electricity, gas -15 -15 -30
Agriculture, forestry
and other fuels and fishing
-20 -20 -20 -40
J A J O J A J O J A J J A J O J A J O J A J
2017 2018 2019 2017 2018 2019

Source: Department of Statistics, Malaysia.

The Producer Price Index (PPI) fell 2% between The labour market is anticipated to remain stable
January and August 2019. The PPI was weighed throughout 2019 and 2020. The unemployment
down by a contraction in the agriculture, rate is expected to sustain at 3.3% with more job
forestry and fishing (-10.3%); mining (-3.8%); and opportunities in the economy. Meanwhile, the
manufacturing (-1.1%) sectors. This was due to total employed persons are projected to increase
weaker commodity prices, particularly crude oil to 15.1 million in 2019 and 15.3 million in 2020.
and CPO, which led to lower production cost. For Of the total employment in 2020, about 9.5
the rest of 2019, PPI growth is expected to remain million persons or 62.1% will be recruited in the
within negative territory given lower global services sector, while 16.2% in the manufacturing
input cost. However, the PPI is expected to be sector and 12.2% in the agriculture sector.
higher in 2020 in tandem with diminishing base
effect and normalisation of production activities. As at end-August 2019, the number of registered
foreign workers increased to 2 million. Foreign
workers were mainly from Indonesia (35%),
Labour Market Bangladesh (28.7%) and Nepal (15.7%). The
manufacturing sector employed the highest
The labour market remained stable during number of foreign workers with a share of
the first half of 2019 with total labour force 35.4%, followed by construction (21.5%) and
increasing 2.2% to 15.5 million and resulting in services (15.5%) sectors. The Government
an improved labour force participation rate to continues to undertake initiatives to reduce
68.4% from 67.9%. The unemployment rate stood further the dependency on low-skilled foreign
at 3.3% supported by favourable labour market
conditions including the creation of new jobs. Table 3.15. Labour Market Indicators
Meanwhile, total employed persons increased
2.2% to 15 million with the largest number Change
(‘000)
employed in the services sector accounting (%)
for 63.5% of total employment, followed by H11 20192 20203 H11 20192 20203
manufacturing (16.8%) and agriculture (10.6%) Labour force 15,465.4 15,575.8 15,871.3 2.2 1.9 1.9
sectors. Job vacancies declined 6.9% to 512,504 Employment 14,949.8 15,062.1 15,347.5 2.2 1.9 1.9
while the number of active job seekers contracted Unemployment 515.5 514.0 523.8 (3.3) (3.3) (3.3)
1.4% to 237,600 persons, of which 3.7% were
new registrants. Amid favourable labour market 1
January to June 2019.
conditions, the number of retrenched workers
2
Estimate.
3
Forecast.
remained low at 20,521 persons or 0.1% of Note: Figures in parentheses refer to unemployment rate.
total employment. Source: Department of Statistics and Ministry of Economic Affairs, Malaysia.

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 Chapter 3 MACROECONOMIC OUTLOOK

Table 3.16. Employed Persons by Sector

Share
(‘000)
(%)
H12 20193 20204 H12 20193 20204
Agriculture, forestry and fishing 1,580.4 1,868.5 1,875.8 10.6 12.4 12.2
Mining and quarrying 85.3 81.3 81.5 0.6 0.5 0.5
Manufacturing 2,516.1 2,478.7 2,485.5 16.8 16.5 16.2
Construction 1,273.1 1,362.7 1,379.9 8.5 9.0 9.0
Services 9,494.9 9,270.9 9,524.8 63.5 61.6 62.1
Total1 14,949.8 15,062.1 15,347.5 100.0 100.0 100.0

1
Total includes ‘Activities of extraterritorial organisations and bodies’.
2
January to June 2019.
3
Estimate.
4
Forecast.
Source: Department of Statistics and Ministry of Economic Affairs, Malaysia.

workers. As such, on 2 January 2019, a new Conclusion

extension levy rate for foreign workers who have
served for 10 years or more in the agriculture Malaysia’s growth momentum in 2019 and 2020
and plantation sectors was implemented. The is expected to remain steady backed by strong
measure is expected to enable these sectors fundamentals and diversified economic structure
to move up the value chain while maintaining despite heightening external uncertainties.
the ratio of low-skilled foreign workers below Domestic demand will anchor growth with
15% of total employment. Meanwhile, the
the external sector expanding moderately
number of expatriates increased by 12.1%
against the backdrop of a challenging global
to 122,192. The majority of expatriates were
environment. Household spending will continue
from India (22.7%), followed by China (20.2%)
to be driven by stable labour market conditions
and Japan (6.9%). The expatriates were mainly
and benign inflation, while investment activity
employed in the services (52.9%), information
will be supported by capacity expansion in the
technology (31.6%) and manufacturing (5.9%)
services and manufacturing sectors.
sectors.

Labour productivity increased to RM91,793 or While the economy is expected to remain

2.5% during the first half of 2019. Following resilient, the risks to the outlook still on the
various strategies outlined under the Malaysia downside, arising mainly from moderating
Productivity Blueprint as well as efforts to global growth and trade activities as well
improve and enhance the adoption of the as volatility in the financial and commodity
Productivity-Linked Wage System (PLWS) among markets. Moving forward, various measures will
employers, labour productivity is expected to be undertaken in sustaining growth momentum
increase 2.6% to RM94,400 throughout the year. and ensuring people’s well-being. These include
The services sector is projected to record the the revival of strategic projects and moving up
highest increase of 3.2%, followed by construction the value chain through 5G technology and IR
(2.4%) and manufacturing (2.3%) sectors. In 4.0. In addition, efforts to promote industries
2020, labour productivity is projected to reach that have comparative advantages such as
RM97,000 or expanding at 2.8% due to the growth tourism and commodity-related downstream
in services (3.7%), followed by construction activities are expected to support growth in
(3.4%) and manufacturing (2.6%) sectors. the near-term.

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Malaysia Palm Oil Board. (2018). Monthly FFB
Yield July-December 2017 & 2016. Retrieved
Hanafiah, M. H. M., & Harun, M. F. M. (2010).
from https://cutt.ly/lwKTRUT
Tourism Demand In Malaysia: A Cross-Sectional
Pool Time-Series Analysis. International Journal
Malaysia Productivity Corporation. (2018).
of Trade, Economics and Finance,  1(1), 80-83.
Productivity Report 2017/2018. Petaling Jaya.

Hansen, N. J. H., Mongardini, J., & Zhang, F. (2019).

May, C. Y. (2012). Malaysia: Economic Transformation
Labor Market Slack and the Output Gap: The Case
Advances In Oil Palm Industry.  American Oil
of Korea (No. 19/167). International Monetary
Chemists’ Society (AOCS).
Fund. Retrieved from https://www.imf.org/
en/Publications/WP/Issues/2019/08/02/Labor-
McKinsey&Company. (2018). Artificial Intelligence
Market-Slack-and-the-Output-Gap-The-Case-
Hardware: New Opportunities for Semiconductors
of-Korea-48519
Companies. Retrieved from https://www.
mckinsey.com/~/media/McKinsey/Industries/
International Monetary Fund. (2018). Rethinking
Semiconductors
Development Policy: Deindustrialisation,
Servicification and Structural Transformation.
Ministry of Economic Affairs. (2018). Mid-Term
Retrieved from https://www.imf.org/en/
Review of Eleventh Malaysia Plan. Kuala Lumpur.
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Rethinking-Development-Policy-
Ministry of International Trade and Industry,
Deindustrialisation-Servication-and-
(2018). Industry 4WRD: National Policy on
Structural-46253
Industry 4.0. Kuala Lumpur.

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Ministry of Tourism, Arts and Culture. (2019). United Nation World Trade Organization. (2018).
Tourist Arrivals and Receipts to Malaysia 2018. UNWTO Tourism Highlights: 2018 Edition.
Retrieved from https://www.tourism.gov.my Retrieved from https://www.e-unwto.org ›
doi › pdf
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(2013). Impact on Foreign Direct Investment United Nation World Trade Organization. (2019).
& Domestic Investment on Economic Growth World Tourism Barometer and Statistical Annex,
of Malaysia. Malaysian Journal of Economic May 2019. Retrieved from https://www.e-unwto.
Studies, 50(1), 21-35. org › doi › pdf › wtobarometereng.2019.17.1.1

Patients Beyond Borders. (2018). Healthy World Bank. (2018). Global Economic Prospects,
Travel Media. Retrieved from https://www. January 2018, 73. Retrieved from https://
patientsbeyondborders.com/media openknowledge.worldbank.org/bitstream/
handle/10986/28932/9781464811630.pdf
Patrik, T. (2019). Security Fears Turn Away Tourists
From Sabah’s East Coast. Free Malaysia Today. World Bank. (2011). Malaysia Economic Monitor:
Retrieved from https://freemalaysiatoday.com/ Brain Drain. Bangkok.
category/nation/2019/07/19/security-fears-
turn-away-tourists-from-sabahs-east-coast/ World Economic Forum. (2016). The Future of
Jobs: Employment, Skills and Workforce Strategy
Rodyu, S., & Wetprasit, P. (2018). An Analysis of For The Fourth Industrial Revolution. Global
the Comparative Advantage of Thai Tourism Challenge Insight Report, World Economic
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ASEAN+ 6 Countries. European Journal of
Business and Management, 10(21), 160-182. Zulkifli, H., Halimah, M., Chan, K.W., Choo, Y.M.
& Mohd Basri, W. (2010). Life Cycle Assessment
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Chapter 3.indd 100 04/10/2019 10:54 PM
 4 MONETARY AND FINANCIAL
DEVELOPMENTS

• Overview
• Monetary Developments
• Financial Sector Developments
Feature Article 4.1 – Digital Assets
Feature Article 4.2 – The Potential of Islamic FinTech
in Malaysia
• Conclusion
• References

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4 MONETARY AND FINANCIAL

DEVELOPMENTS
Overview The average interest rate on savings deposit
of commercial banks was reduced further to
Monetary and financial conditions are expected 1.00% as at end-July 2019. Similarly, the interest
to remain accommodative and supportive of rates on 1-month to 12-month fixed deposits
economic growth. Monetary operations will ranged between 2.83% and 3.10%.
be supported by vibrant money and foreign
exchange markets as well as intermediation Monetary aggregates continued to expand during
activities. The banking sector is expected to the first seven months of 2019. M1 grew 4.5%
remain robust and orderly underpinned by to RM429.6 billion as at end-July 2019 following
ample liquidity and strong capital buffers. higher demand deposit which edged up 4.6%.
Meanwhile, the capital market is anticipated Likewise, M3 grew 4.9% to RM1,913.3 billion
to be resilient, driven by well-developed contributed by claims from the private sector. In
infrastructure and instruments. Nevertheless, the near term, the money supply is expected to
external factors which include the lingering be supported by the extension of credit to the
US-China trade tensions, concerns over the private sector in the form of loans and securities.
pace of world growth as well as volatile global Figure 4.1. Monetary Aggregates
financial markets may influence financial and (% change)
capital market performance. %
12
10 M1
8
Monetary Developments 6 M3
4

Monetary Policy 2
0
-2 1
M J S D M J S D M J J
Th e m o n e t a r y p o l i c y i n 2 0 1 9 r e m a i n s 2017 2018 2019
accommodative and supportive of growth amid 1
End-July 2019.
Source: Bank Negara Malaysia.
stable prices. The Overnight Policy Rate (OPR),
which was kept unchanged at 3.25% since Table 4.1. Factors Affecting M3
January 2018 was reduced by 25 basis points January – July
(bps) to 3.00% in May 2019. The reduction of
Change
OPR was made by taking into consideration of (RM billion)
the downside risks on growth from heightened 2018 2019
uncertainties in the global environment, trade M3 87.0 18.8
tensions and extended weaknesses in the Net claims on Government 13.1 -10.9
prices of commodity. Meanwhile, with ample Claims on Government 39.2 18.3
Less: Government deposits 26.2 29.2
liquidity in the financial system, the Statutory
Claims on private sector 104.8 37.9
Reserve Requirement (SRR) was held steady at
Loans 78.7 26.8
3.50% of eligible liabilities. Securities 26.1 11.1
Net foreign assets1 10.9 10.9
The interest rate in the banking system was Bank Negara Malaysia 8.3 10.8
lowered in tandem with the OPR adjustment Banking system 2.6 0.1
in May 2019. The weighted base rate (BR) of Other influences -41.7 -19.1

commercial banks stood at 3.68% while average 1

Includes exchange rate revaluation losses/gains.
Note: Total may not add up due to rounding.
lending rate (ALR) at 4.82% as at end-July 2019.
Source: Bank Negara Malaysia.

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 CHAPTER 4 MONETARY AND FINANCIAL DEVELOPMENTS

Figure 4.2. Performance of Ringgit against Borrowing to businesses expanded with total
Selected Currencies disbursements increasing 0.4% to RM446.3
(% change) billion, representing about 63% of total loans
End-2018 – End-August 2019 disbursed. Loan applications by businesses
100 Korean won declined 0.7% to RM203.6 billion between January
Australian dollar and July 2019. The bulk of loans were channelled
Pound sterling into manufacturing (31.8%); wholesale and
Chinese renminbi retail trade, restaurants and hotels (29.4%) and
Euro construction (11.4%) sectors. Meanwhile, total
Singapore dollar loans outstanding to businesses increased by
US dollar 2.5% to RM610.2 billion, accounting for 35.3%
100 Philippine peso of total loans outstanding. For the rest of the
100 Indonesian rupiah year and 2020, the banking system is expected
100 Japanese yen to remain sound, operating with strong capital
100 Thai baht and liquidity buffers.
-9 -6 -3 0 3 6 9

Source: Bank Negara Malaysia.

Lending to households continued to grow with
loan approvals increasing 3.7% to RM128.1 billion
and disbursements expanding 1.4% to RM199.8
In line with major regional currencies, the
billion. Loans disbursed to the household
ringgit appreciated against the US dollar during
sector were mainly for consumption credit
the first quarter of 2019. The strengthening of
(49.8%). This was followed by the purchase of
ringgit reflected strong risk-appetite following
residential properties (24.8%) and passenger cars
improved market sentiment supported by
(10.9%). As at end-July 2019, total household
the Fed’s dovish stance on the interest rate
loans outstanding grew 4.7% amounting to
hike, which led to increased investment in
RM1,007.4 billion, which accounts for 58.3%
regional financial markets. Nevertheless, from
of total loans outstanding in the banking
May onwards, the ringgit trended downwards
system.
attributed to escalating global trade tensions
between the US and China as well as investors’
concern over the possibility of FTSE Russell
removing Malaysian bonds from the World Table 4.2. Banking System: Loan Indicators
Government Bonds Index (WGBI). January – July
RM billion Change
As at end-August 2019, the ringgit and other (%)
regional currencies depreciated within the 2018 2019 2018 2019
range of 1.7% to 8.3% against the US dollar.
Total1
However, the ringgit performed better against
Loans applications 510.0 500.9 6.8 -1.8
the euro, Chinese renminbi, pound sterling,
Australian dollar and Korean won. Moving Loans approvals 224.9 238.0 6.0 5.8
forward, Malaysia’s resilient economy is likely Loans disbursements 685.3 704.8 7.1 2.8
to support the movement of ringgit amid a Loans outstanding2 1,663.4 1,728.8 7.4 3.9
challenging global outlook. of which:
Businesses

Financial Sector Developments Loans applications 205.0 203.6 8.5 -0.7

Loans approvals 89.9 92.5 3.4 2.9
Banking System Performance Loans disbursements 444.4 446.3 6.7 0.4
Loans outstanding2 595.1 610.2 4.9 2.5
During the first seven months of 2019, Households
activities in the banking system remained Loans applications 284.3 278.8 4.9 -1.9
resilient. Loan approvals and disbursements
Loans approvals 123.4 128.1 7.4 3.7
expanded 5.8% and 2.8% to RM238 billion and
RM704.8 billion, respectively. Nevertheless, loan Loans disbursements 197.0 199.8 11.6 1.4
applications declined 1.8% to RM500.9 billion. Loans outstanding2 962.1 1,007.4 8.9 4.7
Meanwhile, total loans outstanding expanded 1
Includes foreign entities, other domestic entities, Government and others.
3.9% to RM1,728.8 billion as at end-July 2
As at end-period.
2019. Note: Total may not add up due to rounding.
Source: Bank Negara Malaysia.

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 CHAPTER 4 MONETARY AND FINANCIAL DEVELOPMENTS

Table 4.3. Banking System: Loans Outstanding and employment growth. Consequently, the
by Sector household debt level is expected to remain
(End-July) manageable in 2019 and 2020.

Share The banking system’s capacity to absorb

RM billion
(%) losses remains robust supported by strong
2018 2019 2018 2019 capital position. As at end-July 2019, Common
Equity Tier 1 Capital, Tier 1 Capital, and total
Businesses 595.1 610.2 35.8 35.3 capital ratios stood at 13.9%, 14.6% and 17.9%,
Selected sectors respectively. The levels were well above the
Primary agriculture 34.3 34.4 2.1 2.0 Basel III minimum regulatory levels of 4.5%,
Mining and quarrying 9.3 7.7 0.6 0.4 6% and 8% of risk-weighted assets, respectively.
Manufacturing1 107.1 114.7 6.4 6.6 Furthermore, excess total capital buffer 1
Electricity, gas and 12.1 12.7 0.7 0.7 remained high at RM111.4 billion.
water supply
Wholesale and retail 118.5 126.7 7.1 7.3
trade, restaurants In the first seven months of 2019, the banking
and hotels system recorded a higher pre-tax profit of
Construction 84.7 91.2 5.1 5.3 RM23.2 billion despite a challenging operating
Real estate 115.6 113.0 7.0 6.5 environment. The interest-/finance-related
Transport, storage and 36.8 36.9 2.2 2.1 activities contributed approximately 65.3% of
communication gross income. Meanwhile, returns on assets
Finance, insurance and 53.6 48.8 3.2 2.8 and equity remained steady at 1.4% and 12.6%,
business activities respectively.
Households 962.1 1,007.4 57.8 58.3
of which: Loan quality of the banking system remained
Purchase of residential 517.8 556.3 31.1 32.2 sound throughout the period with stable net
properties
impaired loans ratio of 1% as at end-July 2019.
Purchase of non- 79.9 80.1 4.8 4.6
residential properties Meanwhile, the banking system loan loss
Purchase of passenger 146.3 145.1 8.8 8.4 coverage ratio (including regulatory reserves)
cars stood at 126.4%. The Liquidity Coverage Ratio
Consumption credit 129.5 133.5 7.8 7.7 (LCR) of the banking system stood at 155% well
of which: above the 100% minimum requirement. Despite
Credit cards 37.2 38.3 2.2 2.2 external challenges which include slower global
Personal use 92.4 95.1 5.6 5.5 economic growth due to trade and geopolitical
Purchase of securities 64.9 68.9 3.9 4.0 tensions, the outlook for the domestic financial
Others 23.8 23.5 1.4 1.4 system is expected to remain positive. This
Other sectors 106.3 111.2 6.4 6.4 is supported by a deep and liquid financial
Total 1,663.4 1,728.8 100.0 100.0 market as well as robust financial institutions.
The outlook is also premised on confidence
1
Including agro-based. in the system following reforms undertaken
Note: Total may not add up due to rounding.
Source: Bank Negara Malaysia. during the Asian and global financial crises
as well as evolving business models to meet
market expectations.
The overall household debt increased slightly Figure 4.3. Banking System: Impaired Loans and
to RM1,216.7 billion, accounting for 82.2% of Net Impaired Loans Ratio
GDP as at end-June 2019. Nevertheless, the debt (End-period)
level has been moderating since 2015 following RM billion %
macro-prudential measures and financial literacy 36 4
Impaired loans
programmes introduced to rein in household 27
Net impaired loans ratio (right scale)
3
debt levels. The bulk of debt comprises loans
for the purchase of residential properties 18 2
(54.2%), followed by personal use (14.1%) and
9 1
passenger cars (12.9%). Total household financial
assets remain strong at RM2,627.6 billion with 0 M J S D M J S D M J S D M J S D M J J1 0
the debt servicing capacity of households 2015 2016 2017 2018 2019
remained intact, supported by stable income 1
End-July 2019.
Source: Bank Negara Malaysia.

1
Excess total capital refers to the total capital above the Bank's regulatory minima, which also includes the capital conservation buffer requirement (2.5% of
risk-weighted assets) and bank-specific higher minimum requirements.

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Feature Article 4.1

Digital Assets

Introduction

Decentralised digital currencies and digital tokens (digital assets) are built on a distributed ledger
network, using a combination of cryptography and economic theory to verify transactions and
control the supply of the assets. The first workable digital asset, the Bitcoin, was first proposed
by Satoshi Nakamoto in 2008 as a strictly peer-to-peer electronic payment system together with
a solution to the problem of double-spending1 in a digital transaction. There are now more
than 700 digital assets available in the market since the creation of Bitcoin, where the early
use of digital assets was aimed at creating digital money. Nevertheless, different digital tokens
have been created for other broader uses beyond financial services. However, Bitcoin remains
the most widely known and used digital asset. Meanwhile, the total market capitalisation of
digital assets experienced tremendous growth in 2018, peaking at USD818 billion2 but has since
moderated to USD263 billion3 in 2019.

Simultaneously, a new type of alternative fundraising avenue known as initial coin offerings
(ICOs), has been developed. Through ICOs, companies can issue their own digital tokens and
offer them to investors where these ICOs are typically utilised by start-up companies where
entrepreneurs need to raise funds to kickstart projects and businesses. Despite stemming from a
new group of enthusiasts, digital assets are increasingly gaining awareness and interest within
the broader public and businesses. Therefore, it is essential to understand the features, benefits
and risks posed by digital assets.

Figure 4.1.1. Top Ten Digital Currencies by Market Capitalisation

Monero

Bitcoin SV

EOS

Tether

Binance Coin

Litecoin

Bitcoin Cash

XRP

Ethereum

Bitcoin

0 50,000 100,000 150,000 200,000 250,000

(USD million)
Source: CryptoCompare.

1
Double-spending is a potential flaw in which the same single digital token can be spent more than once.
2
As at 8 January 2018.
3
As at 23 September 2019.

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 CHAPTER 4 MONETARY AND FINANCIAL DEVELOPMENTS

Figure 4.1.2. How Do Digital Assets Work?

Processing Method

The requested Validation A verified

transaction is transaction
Someone requests a broadcast to P2P The network of nodes can involve
transaction network consisting of validates the transaction and cryptocurrency,
computers, known as the user’s status using known contracts,
nodes algorithms records, or other
information

The new block is then added to the existing Once verified the transaction
The transaction is blockchain, in a way that is permanent and is combined with other
complete unalterable transactions to create a new
block of data for the ledger
Source: Yusuf, 2019.

Figure 4.1.3. Benefits and Risks of Digital Assets

Benefits

Seamless Accessible to Alternative Evolving

transactional anyone on the fundraising and traditional assets
capabilities Internet investments Traditional assets
Users can conduct Digital assets are Provide an additional can now be
real-time transactions inclusive and can efficient avenue digitalised, while still
(e.g. remittances) 24/7 be used by any for early-stage maintaining its unique
without being limited Internet user without fundraising via an characteristics and
by geographical having to rely on an offering of digital be easily exchanged
borders, while also intermediary and can tokens to a global transparently (e.g.
cutting out the be transacted even in investor audience, a equities settlement
middlemen, thereby very small amounts new alternative asset and property
reducing costs class for investors tokenisation)

Risks

Financial Integrity and Market Confidence Monetary and Financial Stability

• Money laundering and terrorism financing due to anonymity of (if digital assets are widely used for real economic
transactions activities)
• Investors exposed to high price volatility • Large substitution of Ringgit for transactions affects
monetary policy effectiveness (akin to dollarisation)
• Cybersecurity risks and consumer exploitation (e.g. Ponzi
schemes and scams) • Lack of issuance discipline can affect price stability and
undermine trust in the monetary system
• ICOs are statistically high risk: 71% without a working
prototype/product and 10% of ICO funds were lost/stolen • Affects the bank’s lending function through competition
(EY, 2018) for deposits
• Rapid withdrawals may trigger bank runs and loss of
confidence in the financial system

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 CHAPTER 4 MONETARY AND FINANCIAL DEVELOPMENTS

Digital Assets in the Malaysian Context

In response to the rapid development of digital assets globally, governments and regulators have
adopted different stances and measures towards the potential risks arising from activities involving
these assets. The Financial Action Task Force (FATF) has published guidance to all member
countries including Malaysia and virtual asset service providers in June 2019 to understand
their anti-money laundering and counter-terrorist financing obligations and effectively implement
the FATF’s requirements as they apply to this sector. From Malaysia’s perspective, the financial
regulators, namely Bank Negara Malaysia (BNM) and the Securities Commission Malaysia (SC)
have been collaborating closely to proactively respond to this emerging sector and exploring
ways to facilitate innovation in the local market while ensuring that necessary safeguards are
in place. As such, BNM and SC have issued multiple warning statements to the general public
when dealing with digital assets and have taken the necessary regulatory action against any
suspicious or unlawful behaviour since 2017.

In terms of formal regulations, BNM has in February 2018 amended its Anti-Money Laundering
and Counter Financing of Terrorism (AML/CFT) Regulations to include a new Sector 6 for digital
assets which sets out the AML/CFT requirements for digital asset service providers in Malaysia.
In January 2019, the Capital Markets and Services (Prescription of Securities) (Digital Currency
and Digital Token) Order 2019 came into force which prescribes any digital assets, when being
offered as a form of investment or used as a method of fundraising, as securities in Malaysia.
The SC has subsequently amended its Guidelines on Recognised Markets to include regulatory
requirements for digital asset exchanges (DAX) and had registered three DAX operators under
these guidelines in May 2019. These DAX operators have been given nine months to be fully
compliant and operational and are now the only legitimate venues for digital asset trading in
Malaysia. Finally, the SC had also published a public consultation paper on ICOs, with a view
to introducing formal guidelines in the near future. While regulatory developments are ongoing,
there have been significant experiments/pilot projects being conducted locally on the application
of distributed ledger technologies within the broader economy. These include the SC’s Project
Castor on unlisted and over the counter markets; BNM’s efforts with nine banks on trade finance
applications; Bursa Malaysia’s pilot project on Securities Borrowing and Lending (SBL); as well as
the Ministry of Education’s efforts to set up a consortium of universities to record and validate
university certificates on a distributed ledger.

Conclusion

Despite digital assets having garnered significant attention due to its potential disruption on
the financial system, it is important to note that it is still a nascent and emerging sector where
global and domestic adoption rates have not reached widespread adoption. There have been
recent steps taken by some large and prominent companies in key sectors to adopt some form
of digital currencies in their operations. Although the impact of these projects has yet to be felt
more widely, depending on the outcome of its usage, digital assets may well emerge as a part
of the wider economy or recede into the background as a novelty. Towards this end, authorities
around the world will continue to closely monitor the development of this sector in order to
formulate blueprints to address issues and challenges surrounding digital assets.

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 CHAPTER 4 MONETARY AND FINANCIAL DEVELOPMENTS

Capital Market Performance Table 4.5. New Issuance of Corporate Bonds

by Sector
January – July
During the first seven months of 2019, gross
funds raised in the capital market increased RM million Share
27.8% to RM167.9 billion mainly due to higher (%)
fundraising activity in the private sector, which 2018 2019 2018 2019
grew significantly by 47% to RM89.2 billion.
Agriculture, forestry 83.6 50.0 0.1 0.1
Gross funds raised by the private sector through and fishing
domestic equity market edged up drastically
Manufacturing 1,490.0 670.0 2.5 0.8
from RM0.9 billion to RM5 billion, of which
initial public offerings (IPOs) rose from RM0.6 Construction 3,977.9 1,724.3 6.7 2.0
billion to RM1.6 billion while rights issuances Electricity, gas and 8,057.1 4,600.0 13.5 5.5
increased from RM0.3 billion to RM3.5 billion. water
This was driven by Malaysia’s position as an Transport, storage and 1,415.0 32.0 2.4 0.0
attractive investment destination among local communication
and foreign investors. Finance, insurance, 41,080.3 70,263.5 68.7 83.5
real estate and
business services
Table 4.4. Funds Raised in the Capital Market
January – July Government and other 3,277.8 5,354.9 5.5 6.4
services
RM million
Wholesale and retail 407.0 1,477.5 0.7 1.8
2018 2019 trade, restaurant and
Public Sector hotels
Government securities Total 59,788.7 84,172.1 100.0 100.0
Malaysian Government Securities 35,423.6 38,797.1
Note: Includes corporate bonds issued by Cagamas and non-resident corporations.
Malaysian Government Investment 35,246.2 39,853.7
Total may not add up due to rounding.
Issues Source: Bank Negara Malaysia.
New issues of debt securities 70,669.9 78,650.8
Less: Redemptions 25,970.7 26,093.4
Funds raised through new corporate bond
Net funds raised by the public 44,699.1 52,557.3
sector issuances increased 40.8% to RM84.2 billion
Private Sector   during the same period. The increase was
Shares /Warrants
1 reflected through higher new issuances of
Initial Public Offers 571.8 1,570.0
medium-term notes, accounting for 92.8% of
total corporate bonds. The bulk of funds were
Rights Issues 324.7 3,466.7
raised by finance, insurance, real estate, and
Warrants - -
business services sector, accounting for 83.5%
New issues of shares/warrants 896.4 5,036.8
of new corporate bond issuances. The funds
Debt securities2
were mainly used to finance infrastructure
Straight bonds 2,470.0 3,090.0
projects, business activities and working
Convertible bonds - -
capital. In the near term, fundraising in
Islamic bonds 724.6 2,944.3
the capital market is expected to remain
Medium-term notes 56,594.1 78,137.8
robust in 2020 driven by various strategic
New issues of debt securities 59,788.7 84,172.1
projects.
Less: Redemptions 24,835.6 41,630.0
Net issues of debt securities 34,953.1 42,542.1
Similarly, gross funds raised by the public
Net funds raised by the private 35,849.5 47,578.8
sector increased by 11.3% to RM78.7 billion
sector
during the first seven months of 2019. The
Total net funds raised 80,548.6 100,136.2
issuance of Malaysian Government Securities
1
Excludes funds raised by the exercise of Employee Share Option Scheme, ( M G S ) e x p a n d e d R M 3 8 . 8 b i l l i o n , wh i l e
Transferable Subscription Rights, Warrants and Irredeemable Convertible Unsecured
Loan Stocks. Malaysian Government Investment Issues
2
Excludes short-term papers in conventional and Islamic principles. (MGII) increased RM39.9 billion. The increase
Note: Total may not add up due to rounding.
Source: Bank Negara Malaysia. was due to continued buying interest among

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 CHAPTER 4 MONETARY AND FINANCIAL DEVELOPMENTS

local institutional and foreign investors in As at end-July 2019, yields of MGS and corporate
Government securities. As at end-July 2019, bonds have declined across the entire maturity
foreign holdings of MGS and MGII stood at spectrum and rating bands in line with global
38.3% and 4.4%, respectively. The improved bonds. The downward trend was caused by
foreign investors’ appetite for local bonds was stronger foreign investors’ risk appetite for
spurred by the hunt for yield amid dovish Malaysian fixed-income securities. This was
sentiment. driven by active yield hunting following the
OPR cut by BNM and dovish stance taken
Figure 4.4. Malaysian Government Securities by the Fed. Between January and July 2019,
Indicative Yields the 1-year, 3-year, 5-year, and 10-year MGS
(End-period)
yields declined within the range of 29 and 49
%
5.0 10-year 3-year bps. In the corporate bond market, yields on
4.5 5-year 1-year the 5-year AAA-rated, AA-rated and A-rated
4.0
securities dropped between 51 and 79 bps,
3.5
following investors shifting to safe-haven
3.0
assets.
2.5
2.0
M J S D M J S D M J S D M J S D M J J1
2015 2016 2017 2018 2019 The FTSE Bursa Malaysia Kuala Lumpur
Composite Index (FBM KLCI) along with major
1
End-July 2019.
Source: Bank Negara Malaysia. regional bourses began the year on a soft note
amid bearish sentiment following heightened
Figure 4.5. Share of Foreign Holdings in Total trade tensions and global monetary tightening.
MGS Outstanding In the first week of January 2019, the local
(End-period)
bourse faced minor correction before picking
RM billion % up in the third week of 2019. The positive
440 60
Total MGS outstanding trend continued reaching a year-to-date high
400 Share of foreign holdings (right scale) 54
of 1,730.68 points on 21 February 2019. The
360 48 upward trend was mainly supported by positive
320 42 market sentiment following the resumption
of trade talks.
280 36

240 30
M J S D M J S D M J J1 Nevertheless, during the first quarter of 2019,
2017 2018 2019
the local bourse remained subdued following
1
End-July 2019.
Source: Bank Negara Malaysia. concerns over increased uncertainties in the
global economic environment, particularly
China’s slower growth and lower-than-estimated
Figure 4.6. 5-Year Corporate Bond Yields
(End-period) 2018 fourth-quarter domestic corporate earnings.
The trend continued in the second and third
%
13 week of April due to Norway’s decision to drop
11 BBB Malaysia from its fixed-income benchmark
9 list, the downward revision of global growth
7 A
by the IMF and the possibility of Malaysian
5 AA
bonds being downgraded by FTSE Russell.
3 AAA
M J S D M J S D M J S D M J S D M J J1 However, as at end-April 2019, the FBM KLCI
2015 2016 2017 2018 2019 closed 1,642.29 points following improved
1
End-July 2019.
Source: Bank Negara Malaysia.

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 CHAPTER 4 MONETARY AND FINANCIAL DEVELOPMENTS

investors’ sentiment as a result of revival of Figure 4.8. Performance of Selected Stock Markets
(% change)
projects such as East Coast Rail Link (ECRL)
End-2018 — End-August 2019
and Bandar Malaysia. US (Nasdaq)
China (Shanghai)
US (Dow Jones)
Viet Nam
Beginning May, the equity market started to UK
decline to reach 1,598.32 points during the third Philippines
Thailand
week of the month mainly due to concerns over India
Japan
the breakdown in trade negotiations between Indonesia
Singapore
the US-China which led to the outflow of foreign Hong Kong
Republic of Korea
funds. However, the FBM KLCI rebounded in Malaysia
the final week of May and throughout June -6 -3 0 3 6 9 12 15 18 21
Source: Bloomberg.
2019. The upward trend was attributed to
among others, the anticipated rate cut by
the Fed in July as well as the resumption of Table 4.6. Bursa Malaysia: Selected Indicators
trade talks between the US-China. However, (End-August)
the FBM KLCI retreated to 1,612.14 points as 2018 2019
at end-August, due to slower world growth Indices
forecast by IMF and intensified US-China trade FBM KLCI 1,819.66 1,612.14
tensions. FBM EMAS 12,719.42 11,348.50
FBM 100 12,526.43 11,190.63
As at end-August, the market capitalisation
FBM SCAP 14,453.18 12,876.98
decreased 9.4% to RM1,690.3 billion, while
total volume declined 5.2% to 444.3 billion FBM ACE 5,283.71 4,488.20

units. Likewise, total market transacted value Total turnover1

decreased by 20.5% to RM361.2 billion. However, Volume (million units) 468,760.02 444,344.95
market velocity sustained at 28.8%, while Value (RM million) 454,233.15 361,163.09
market volatility was at 21.9%. Meanwhile, Average daily turnover 1

foreign holdings based on market capitalisation

Volume (million units) 2,875.83 2,742.87
in the local bourse stood at 23% as at end-
Value (RM million) 2,786.71 2,229.40
August 2019. The domestic equity market is
expected to remain resilient in 2020 on account Market capitalisation (RM billion) 1,865.84 1,690.26

of strong macroeconomic fundamentals, ample Total number of listed companies

domestic liquidity and well-developed capital Main Market 781 773
market instruments. ACE Market 121 126
LEAP Market 8 24
Figure 4.7. Performance of Bursa Malaysia
Market liquidity
Billion Points
250 Total transaction (units) 2,000 Turnover value/market 24.3 21.4
Value of transaction (RM) capitalisation (%)
200 composite index1 1,900
(right scale) Market concentration
150 1,800
100 1,700 10 highest capitalised stocks/ 34.5 34.1
market capitalisation (%)
50 1,600
0 1
Based on market transactions and direct business transactions between
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 A2 1,500 January and August.
2015 2016 2017 2018 2019
Source: Bursa Malaysia.
1
As at end-period.
2
End-August 2019.
Source: Bursa Malaysia.

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 CHAPTER 4 MONETARY AND FINANCIAL DEVELOPMENTS

Key Capital Market Measures

Several measures were undertaken in the first eight months of 2019 to enhance
liquidity and efficiency in the capital market. These measures include the following:

14-Jan 29-Apr
8-Jan

Expansion of Trading Features by Regulate Offering and Trading of Launched T+2 Settlement Cycle
Bursa Malaysia Digital Assets Aligns clearing and settlement
Enables investors to execute a Establishes criteria for determining fit processes with major global
greater variety of trading strategies and properness of issuers and exchanges to improve operational
such as Market Order at Pre-Closing, exchange operators, disclosure efficiency, strengthen market’s
On-Open Order, On-Close Order, standards and best practices in price competitiveness and reduce
Iceberg Order and discovery, trading rules as well as systemic risk.
One-Cancel-Other Order. These will client asset protection.
promote more profitable and
sustainable trading in the equities
market.

17-May 14-May 6-May

New Equity Crowdfunding, Guiding Principles to Enhance Blockchain-Powered Securities

Peer-to-Peer Financing Business Continuity Practices for Borrowing and Lending (SBL)
Operators, and Property Capital Market Entities Proof-of-Concept
Crowdfunding Framework Ensures timely continuity of critical Explores opportunities offered by
Provides an alternative source of services and fulfilment of business blockchain technology to develop
capital for SMEs to fund business obligations in the event of disruptions. greater transparency and address
expansion, finance working capital other operational challenges
and meet other financial associated with the SBL market.
requirements. Meanwhile, property
crowdfunding serves as an
alternative source of financing,
specifically tailored for first-time
homebuyers.

11-June 18-June 5-July

Launching of Bursa Anywhere, Joint Statement by Securities Cross Border Cooperation

ASEAN’s First Mobile Depository Commission Malaysia (SC) and between Malaysia and China
eServices Application Bursa Malaysia Capital Markets
Ensures access to a wide range of Continues to facilitate a market-friendly Facilitates closer collaboration with
central depository services anywhere ecosystem and to remain committed Chinese capital markets which will
and anytime. The first-of-its-kind to ensuring capital market growth to mutually benefit both economies
mobile depository services in ASEAN support the economic needs of specifically on greater cross-border
and second in Asia, after Taiwan. Malaysia. connectivity, exchange of technical
expertise and human capital
development.
23-July 22-July
14-Aug

Revamping and Liberalising of National Strategy for Financial National Anti-Corruption Plan
Derivatives Market Rules and Literacy 2019 – 2023 by Financial (NACP) 2019 – 2023
Directives by Bursa Malaysia Education Network Strengthens standards of
Reduces the cost of doing business Sets out priorities and actionable corporate governance to combat
and improves services, while plans to equip Malaysians with corruption, misconduct and fraud.
strengthening governance relevant knowledge to enable
framework and providing better informed financial decision making
protection for investors. and nurture a financially disciplined
community.

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 CHAPTER 4 MONETARY AND FINANCIAL DEVELOPMENTS

Islamic Banking and Capital Market Table 4.7. Islamic Banking: Key Indicators1
(End-July)
Performance
RM billion Change
Islamic banking industry exhibited sustained (%)
growth with total assets valued at RM977 2018 2019 2018 2019
billion 2 and market share at 32.9% as at Assets 725.8 806.5 17.8 11.1
end-July 2019. Meanwhile, the total Islamic Financing 549.8 594.8 18.8 8.2
financing outstanding increased further by Primary agriculture 15.2 16.4 0.1 8.1
12.9% to RM716 billion. The growth is primarily Mining and quarrying 5.1 3.5 -7.8 -30.8
contributed by household sector financing, Manufacturing2 23.0 27.3 3.5 18.4
which increased by 17.1% to RM449 billion Electricity, gas and 2.7 3.4 50.9 26.4
mainly for purchase of residential properties. water supply
The significant increase was partly due to Wholesale and retail 23.7 27.4 16.3 15.4
trade, restaurants and
rising demand and on-going initiatives and
hotels
promotions by various stakeholders.
Construction 33.9 35.0 57.3 3.2
Real estate 26.5 28.4 13.0 7.1
For the rest of 2019, the Islamic banking sector
Transport, storage and 16.3 17.3 -10.1 5.7
is expected to maintain its stable outlook in communication
parallel with the conventional banking sector. 33.5 -6.2 -5.9
Finance, insurance and 35.6
This is supported by the sustained demand business activities
for Islamic banking products and services as Education, health and 21.2 20.2 -0.5 -4.5
well as the implementation of Value-Based others
Intermediation by BNM. In 2020, the market Households 331.7 367.3 23.4 10.7
share for the local Islamic banking industry is Others 14.9 15.1 134.2 1.9
expected to reach 40% of total banking assets. Liabilities 673.2 748.6 17.8 11.2
Deposits and Investment 537.3 610.3 19.4 13.6
Malaysia continues to be the leader in the Account
Islamic Capital Market (ICM) with Islamic equity Investment 0.8 0.7 -15.3 -16.1
and sukuk issuances being among the largest Savings 40.9 44.2 6.2 8.1
in the world. The domestic equity portion of Demand 74.4 82.7 4.9 11.2
ICM, valued at RM1,081.1 billion, accounts Investment account 76.0 80.6 1.1 6.0
for 62.7% of total market capitalisation as at Others 421.2 482.6 24.0 14.6
end-July 2019. Meanwhile, sukuk issuances
amounted to RM148.9 billion, accounting 1
Excluding DFIs.
2
Including agro-based.
for 60.9% of total bonds issued. In terms Note: Total may not add up due to rounding.
of sukuk outstanding, it stood at 61.6% or Source: Bank Negara Malaysia.
RM922.8 billion of total bonds outstanding.
As at end-July 2019, Malaysia accounts for the The average daily trading value (ADV) of
largest share of global sukuk outstanding at Shariah-compliant securities amounted to
48.8%. RM1.3 billion from the total ADV valued at
RM2 billion, indicating that Shariah-compliant
As a leading exchange in emerging markets, indices exceed conventional indices. In addition,
Bursa Malaysia offers a variety of Shariah- five individuals and two new companies were
compliant securities products. These Shariah- approved by the SC as registered Shariah
compliant securities are listed on the Main and advisors for ICM products and services during
ACE markets. As at end-July 2019, a total of the same period. Currently, 69 Shariah advisors
699 of the 924 listed companies was Shariah- comprising 49 individuals and 20 companies are
compliant with the list being updated twice supporting the initiative towards strengthening
a year. trade in Shariah-compliant products.

2
Includes Development Financial Institutions (DFIs).

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 CHAPTER 4 MONETARY AND FINANCIAL DEVELOPMENTS

Figure 4.9. Global Sukuk Outstanding by Country

(% share)

Qatar Qatar
Others1 4.1% Others1
4.0%
10.4% 10.6%
Indonesia Indonesia
7.5% 7.1%

United Arab United Arab

Emirates End-2018 Emirates End-July 2019 Malaysia
Malaysia
8.3% 8.2% 48.8%
50.4%

Saudi Arabia Saudi Arabia

19.4% 21.2%

1
Others includes Bahrain, Bangladesh, Brunei, Gambia, Hong Kong, Ivory Coast, Jordan, Kuwait, Luxembourg, Maldives, Mauritius, Nigeria, Oman, Pakistan, Senegal, Singapore,
South Africa, Turkey, the UK and the US.
Note: Total may not add up due to rounding.
Source: Malaysia International Islamic Financial Centre.

The ICM is expected to play a crucial role in development of Sustainable Development Goals
Malaysia’s capital market driven by growing (SDGs) agenda. In line with this aspiration,
demand for Shariah-compliant instruments. Malaysia is putting forth recommendations
In addition, continuous innovation will ensure to further accelerate the development of
that Malaysia remains as the global leader in Sustainable and Responsible Investment (SRI)
ICM. This is due to ICM being identified as instrument to support green taxonomy for the
one of the financing channels to support the capital market.

Feature Article 4.2

The Potential of Islamic FinTech in Malaysia

Introduction

Technology has been a key part of the financial services market worldwide for decades.
Financial technology (FinTech) driven by IR 4.0 is exponentially enhancing 20th-century financial
services, operations, business models and customer engagement (IFR, 2018). FinTech entities
are not financial institutions but utilise FinTech in providing financial services such as lending,
investment, payment, risk management, data analytics and wealth management (GIFR, 2017).
Some of the activities include mobile payments, money transfer, trading platforms, crowdfunding
and Peer-to-Peer (P2P) financing. In the context of Islamic FinTech, all these activities must
be Shariah-compliant. According to Thomson Reuters (2018), the Islamic finance industry has
ample opportunities, with assets expecting to reach USD3.9 trillion by 2023. However, the
Islamic FinTech in Malaysia is still at the infancy stage with substantial room for growth.

Opportunities and Challenges

The advent of FinTech makes Islamic finance more competitive and attractive to customers as
it provides choices which are more aligned to individual needs. It also attracts more customers
by providing a wider range of products and services at a lower cost in a more efficient manner.

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 CHAPTER 4 MONETARY AND FINANCIAL DEVELOPMENTS

Furthermore, users benefit from superior customer experience as Islamic FinTech leverages
the internet, mobile devices, social media integration, big data analytics (BDA) and artificial
intelligence (AI). For SMEs, FinTech also enables Musharakah1 and Mudharabah2 based equity
financing to be effectively performed via crowdfunding and P2P platforms.

Following the proliferation of FinTech in Islamic finance, traditional Islamic finance institutions
(IFIs) face increasing competition. The IFIs have to reduce financing profit margins and service
fees to remain competitive. In addition, broader options available for customers to invest through
online P2P and crowdfunding marketplace may result in less deposit and investment portfolio.

Recent Developments in Islamic FinTech

At the beginning of the Islamic FinTech era in Malaysia, the crowdfunding platform was the first
to be introduced to the marketplace. In 2016, significant progress in Islamic FinTech was achieved.
This includes the introduction of Investment Account Platform (IAP), Islamic Crowdfunding,
Islamic FinTech Alliance (IFT Alliance), Islamic P2P financing and Islamic Robo-Advisor.

Investment Account Platform

IAP is the first online bank-intermediated FinTech platform backed by six IFIs. It was established
to facilitate the matching of investments with viable ventures or projects which require funding
and serves as a central marketplace to finance SMEs. As of August 2019, IAP has listed 12 deals
for various business purposes valued at RM184 million by its sponsoring IFIs.

Islamic Crowdfunding

Generally, crowdfunding is an alternative source of capital, particularly for start-ups and SMEs
to finance business expansion, working capital and meet other financial requirements. However,
Islamic crowdfunding is not only meant for businesses such as equity or P2P financing, but also
for donation drives and as reward-based crowdfunding. In May 2019, Securities Commission
Malaysia (SC) registered three new Equity Crowdfunding (ECF) companies, with one of it being
an Islamic ECF platform operator which provides services such as real estate and Sadaqah.3

Islamic FinTech Alliance

In April 2016, the IFT Alliance was launched in Kuala Lumpur involving eight Islamic crowdfunding
platform operators worldwide. The founding members offer various services such as lending money
to entrepreneurs, investment opportunities, education funding and real estate crowdfunding.
The IFT Alliance aims to ensure safety and trust by establishing, promoting and enforcing
shared standards for Islamic finance. It also develops, expands and improves innovative ideas
in accordance with Shariah and social impact elements. Furthermore, it works with regulators
and stakeholders to build and support a dynamic ecosystem through interfacing and providing
industry insights.

Shariah-Compliant Peer-to-Peer Crowdfunding

In 2016, SC licensed the world’s first Shariah-compliant P2P to one of the six P2P registered
companies. This initiative aims to complement the growing global awareness of Islamic finance
with technology to ensure seamless transactions between funding businesses and making returns

1
A joint enterprise in which all partners share the profit or loss according to the agreed ratio.
2
The investor (called Rabbul Mal) provides the capital while the entrepreneur (Mudarib) provides the expertise and specialisation.
3
Covering waqf and zakat as well as scholarships for higher education.

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 CHAPTER 4 MONETARY AND FINANCIAL DEVELOPMENTS

on investment. Furthermore, with the P2P, SMEs are expected to have greater access to funding
while investors have an alternative channel to earn higher returns on their investments.

Islamic Robo-Advisor

Shariah-compliant robo-advisor services known as Algebra was introduced in July 2017 in Kuala
Lumpur as the world’s first Islamic robo-advisor. The online system provides automated portfolio
management advice to clients. The Algebra manages asset portfolios by matching individual risk
appetites against stock indices by using algorithms. Robo-advisor offers a more transparent,
convenient and low-cost alternative to human financial advisors.

Way forward

Malaysia maintains a leading position as the most developed Islamic financial market globally
(Thomson Reuters, 2017). However, in terms of Islamic FinTech, Malaysia has to step-up efforts
to strengthen its position. At this point, several initiatives are being implemented to accelerate
the growth of Islamic FinTech in the country.

Malaysia has issued a FinTech Regulatory Sandbox guideline as a reference document. The
framework aims to provide an environment that is conducive for the deployment of financial
technology to foster innovations in financial services that can contribute to the growth and
development of the financial sector. It also enables innovation of both Islamic and conventional
FinTech to be deployed and tested in a live environment, within specified parameters and time
frame. Other supportive elements in the broader FinTech ecosystem are also available for FinTech
players in Islamic finance to leverage such as the Financial Technology Enable Group (FTEG),
Alliance of FinTech Community (aFINity) and the Global Islamic FinTech Hub.

Furthermore, Malaysia Digital Economy Corporation (MDEC) introduced the Islamic Digital Economy
(IDE) Guide to assist Islamic digital players by providing opportunities to scale up capacity
and increase demand for their products and services. Known as Mi’yar, the guide serves as a
reference for start-ups, venture capital and supporting ecosystem players, wishing to explore
and understand various IDE components. These include, among others, Islamic venture capital,
business operation as well as product and services in Shariah-compliant or Halal perspective.
The players that adhere to Mi'yar will be listed as IDE-compliant and recognised as Islamic-
centric goods and services providers.

Conclusion

There is enormous growth potential for Islamic FinTech in Malaysia despite being in its infancy
stage. The growth is supported by raising awareness among stakeholders and strong demand
from customers as well as the facilitative regulatory environment in key Islamic financial
markets. By embracing and embarking on Shariah-compliant digital innovations, new and greater
opportunities will be available for industry players. Therefore, industry players need to play
an aggressive role in accelerating digital innovations. Ultimately, by leveraging Islamic FinTech,
Malaysia’s aspiration of becoming a global Islamic Financial hub can be achieved through wide-
ranging Shariah-compliant products and services offered to cater to the rapidly evolving market
and customer demand.

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 CHAPTER 4 MONETARY AND FINANCIAL DEVELOPMENTS

Conclusion which include trade conflicts, volatility in global

financial markets and geopolitical unrest may
Monetary policy is expected to continue to inhibit capital market and financial performance.
support economic growth and ensure price Given these factors, efforts will be intensified
stability. Meanwhile, the financial market is towards strengthening the financial market by
anticipated to be vibrant, supported by steady allowing greater innovation and adoption of
domestic economic activities and the revival of alternative financing channels driven by the
strategic projects. Nevertheless, external factors advancement in digital technology.

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