1
Malaysia, Navigating the New Normal
Fraziali Ismail
Bank Negara Malaysia
CIMB 9th Annual Malaysia Corporate Day 2017
5 January 2017
2
Key areas
Part 1: Global Economic Overview and Outlook Part 2: Domestic Economic Development and Prospects Part 3: Addressing Challenges
3
Signs of improvement in global economy, but downside risks remain…
Source: Markit Economics
Uncertainties surrounding
MP adjustments
Policy changes in the US
(easing of taxes)
Uncertainties surrounding
post-Brexit era
Downside risks Upside risks
Purchasing Manager’s Index (PMI) in US, Euro
area and PR China
Risks to global growth
Gradual increase in manufacturing PMI in several
large economies..
…but downside risks to global growth remain
Protectionist policy in the
US
Sharper PR China
slowdown
48
49
50
51
52
53
54
55
56
57
58
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
Oct-
16
No
v-1
6
Euro area PR China US
<50=contractionary
Index
4
Source: IMF World Economic Outlook (October 2016)
…and global economic environment remains challenging
Global and regional growth Global growth and trade
5.3
4.4
3.3
8.3
7.4
3.1
-3
-1
1
3
5
7
9
2005-07 2010-2012 2013-2016f
GDP Trade Volume
Moderate and uneven growth in global
economy
International trade activity to remain
subdued
Annual change
(%)
Annual change
(%)
Source: IMF World Economic Outlook (October 2016)
-4
-2
0
2
4
6
8
10
12
2005 2007 2009 2011 2013 2015 2017f
Adv. economies
Asia
Other EMEs
Global GDP
5
Evolution of the “new normal”
2011
2012
2013
2014
2015
Oct-16 WEO
3.0
3.5
4.0
4.5
5.0
5.5
2010 2012 2014 2016f 2018f 2020f
IMF's Global Economic Outlook
yoy, %
Source: International Monetary Fund (IMF), national authority, various research houses
-2
-1
0
1
2
3
4
5
6
7
2006 2008 2010 2012 2014 2016
Swiss National Bank
European Central Bank
Bank of Japan
Federal Reserve
Bank of England
Key Policy Rates of Selected
Advanced Economies
Rate, %
Low global growth Unconventional policies Impending megatrends
Divide
Rich
Poor Increasing inequality
Disruptive technologies
Intensifying globalisation
Ageing society
Rising indebtedness
6
Malaysia: Multiple shocks weighing on growth
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
7.1
4.3
2.7
3.2
0.6
0
1
2
3
4
5
6
7
8
PH ID MY KR TH SG
2Q 2016 3Q 2016
Annual change (%)
Real GDP growth of selected countries
5.0
• Global commodity price shocks
• Prolonged ringgit depreciation
• GST implementation
• Domestic price adjustments
• Moderation in PR China’s economic growth
The economy has been affected by both external and domestic shocks since end-2014
7
L
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
f forecast
• Growth mainly driven by private
domestic demand
• The external sector to provide some
support to growth
• Downside risks to growth remain amid
greater uncertainty on both the global
and domestic fronts
-2
0
2
4
6
8
2008 2010 2012 2014 2016f
5.0
Annual change (%)
Real GDP Growth
4.5 5.0
4.0 4.0
The Malaysian economy to expand around 4 - 5% in 2017
2017f
8
'16f '17f
4
5
6
7
8
9
1Q 14 4Q 14 3Q 15 2Q 16
Private consumption to remain supported by continued employment and wage growth
LT average
(‘90-’15: 6.6%)
Real private consumption
Annual change (%)
14.2
13.8
13.9
14.0
14.1
14.2
14.3
3Q 14 1Q 15 3Q 15 1Q 16 3Q 16
Employment in the Labour Force
Million Persons
Employment
+41k jobs
Wage growth in the manufacturing and
wholesale and retail services sectors
Annual change (%)
Source: Economic Report 2016/17, Department of Statistics, Malaysia
Improvement in
household spending…
… and wage growth …supported by continued
employment growth…
f forecast
6.1
6.3
4.2
5.1
3
4
5
6
7
3Q 14 1Q 15 3Q 15 1Q 16 3Q 16p
p Preliminary
Private sector wages
9
'16f '17f
0
4
8
12
16
1Q 14 4Q 14 3Q 15 2Q 16
Private (65%)
Private investment to continue to expand, but will trend below long-term average
Source: Economic Report 2016/17, Department of Statistics, Malaysia, Bank Negara Malaysia
f forecast
Continued modest growth of
capital spending…
…supported by investment in the manufacturing and
services sectors
Annual change (%)
16
6 3
26
49
Services
Manufacturing
Mining
Construction Agriculture
Public
(35%)
Real private investment Private investment by sector (2015)
LT average
(‘90-’15: 8.4%)
• Transport and storage: Oil and gas storage
terminals, seaports and aircrafts
• Telecommunication: 4G/LTE network expansion
• Electrical and electronics (E&E)
• Resource-based industries
Services
Mfg
5.3
5.8
10
Real GDP
Annual change (%)
% share
of GDP
(2015) 2016f 2017f
Services 53.5 5.6 5.7
Manufacturing 23.0 4.0 4.1
Mining 9.0 1.1 1.4
Agriculture 8.9 -3.3 1.5
Construction 4.4 8.7 8.3
Real GDP 100.01 4.2 4.6
Continued expansion across all economic sectors in 2017
• Services
- Supported by consumption- and
trade-related sub-sectors
• Manufacturing
- Continued growth supported by improving
global demand
• Mining
- Higher oil and gas production
• Agriculture
- Improvement in CPO production as weather
conditions normalise
• Construction
- Driven mainly by activity in the civil engineering
sub-sector
1 Numbers do not add up due to rounding and exclusion of import duties
Source: Economic Report 2016/17
f forecast
Services and manufacturing sectors to underpin growth
11
Headline inflation to range between 2 – 3% in 2017
• For 2016, inflation is expected to average at the
lower end of the 2.0 – 2.5% forecast range.
• Going into 2017, inflation is expected to average
higher but to remain within the 2 – 3% range,
driven mainly by higher domestic fuel prices
amid weak exchange rate.
• Inflationary pressures will be mitigated by
continued low global energy and commodity
prices, subdued global inflation and moderate
domestic demand.
Source: Economic Report 2016/17 and Department of Statistics, Malaysia
2.1
0
1
2
3
4
5
6
2009 2010 2011 2012 2013 2014 2015 2016f2017f
Annual change (%)
Inflation forecast
3.0
2.0
Historical avg.
(1991-2014) = 3%
f forecast
12
External sector to provide some support to growth
Source: Ministry of Finance forecast
2.7
3.4
-20
-15
-10
-5
0
5
10
15
20
25
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6f
201
7f
Gross Exports Gross Imports
Exports and imports growth to improve
in 2017, albeit at a modest pace
• Exports to be supported by a
turnaround in commodity exports and
continued demand for E&E products
• Imports to continue to expand, driven
mainly by capital imports for
infrastructure projects
Annual change (%)
13
Fiscal consolidation is expected to remain on course
Fiscal deficit for 2017 is targeted
to improve to 3.0% of GDP
underpinned by
Decline in expenditures following
optimisation measures
Revenue gains supported by higher
corporate income tax and oil-related
receipts
1
2
-4.6
-6.7
-5.3 -4.7
-4.3 -3.8
-3.4 -3.2 -3.1 -3.0
-8
-7
-6
-5
-4
-3
-2
-1
0
-80
-70
-60
-50
-40
-30
-20
-10
0
2008 2009 2010 2011 2012 2013 2014 2015 2016e2017b
% of GDP RM billion
Federal Government Fiscal Balance
RM billion% of GDP (RHS)
1. 2016e : Latest estimate reflecting MOF E-report released in October
2. 2017B : Target fiscal deficit as announced during 2017 Budget Speech
Source: Ministry of Finance, Malaysia
14
Malaysia has shown the ability to manage effects of episodes of financial shocks
Malaysia has experienced episodes of capital
outflows before
Source: BNM ; Note: 1 Latest NR portfolio flows data up to 3 Jan 2017; 2 Reserves data up to 15 Dec 2016
• Malaysia’s ability to absorb the volatility of these flows
and the effects on financial market is supported by
– Greater exchange rate flexibility and international
reserve buffers
– Well-developed financial markets and resilient banking
system
– Exchange rate adjustments avoids overadjustment in
domestic demand and prices
– Intervention operations are to smoothen movements in
the foreign exchange rate and ensure efficient
functioning of the market
• These have supported the orderly functioning
of the foreign exchange market
-39.3
-19.1
-27.21 -28.5
-5.5
-35.62
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
GFC(Mar'08-Mar'09)
Taper tantrum(22 May-
28 Aug'13)
Current(1 Sep'14 -3 Jan'17)
USD billion
NR Portfolio Flows
Change in Reserves
NR Portfolio Flows, Reserves and Ringgit Performance
(-12.6)
(-9.7)
(-29.8) (% Change in MYR/USD)
15
Source: Bank Negara Malaysia
International reserves remain ample with manageable external debt
8.3
1.2
0
2
4
6
8
10
12
0
20
40
60
80
100
120
140
160
1991 1994 1997 2000 2003 2006 2009 2012 As at15
Dec2016
USD bil Net International Reserves
Net International Reserves
Retained import cover (months) (RHS)
Reserves/ST ext debt (times) (RHS)
15 Dec 2016:
USD96.4 bil
1997:
USD21.7 bil
Times
Reserves have increased five-fold since
the Asian Financial Crisis
Short-term
38.6%
No immediate
repayment
requirements
By Tenure
Long-term
61.4%
External debt is mostly long-term with
manageable foreign-currency exposure
Foreign
Currency
62.0% Ringgit
38.0% Not affected
by valuation
Largely
hedged and
backed by
external
assets
By Currency Composition
16
Narrowing current
account surplus
Commercial
property glut
Emerging vulnerabilities pose downside risks to growth
Household
indebtedness
High household
debt-to-GDP
Households more
susceptible to shocks
Higher capital imports for
infrastructure projects
Investor perception and
volatile capital flows
Oversupply of office and
retail spaces
Lower rentals, capital
gains, balance sheet
Current Challenges
17
Reining in high household indebtedness
Current Challenges
Raise household income
• Participation in sharing economy
• Higher women participation in the workforce
Accelerate fin. edu. & debt management
• Financial literacy programme & campaign
• Debt management programme
Concerted and coordinated efforts to reduce household debt
• A vibrant housing rental market with
sufficient safeguards
• Efficient and reliable public transport
system
• Effective price monitoring and
enforcement
Macroprudential policies Reduce the need to incur higher debt
• Responsible lending guidelines
18
Current Challenges
Narrowing current account surplus is a reflection of higher investments
17.6
1.0-1.5
0.5-1.5
-12
-8
-4
0
4
8
12
16
20
24
-100
-50
0
50
100
150
200
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6f
201
7f
Goods Services
Primary income Secondary income
% of GNI (RHS)
Current Account Balance RM bil % of GNI
Current account surplus to narrow
amid persistent services and income deficits
15
20
25
30
35
40
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
Current Account Surplus Investment/GDP Savings/GDP
% of GDP
Moderating
savings
Rising
investment
20
16
f
20
17
f
Higher investments amid moderating savings
in recent years
19
Oversupply of commercial properties in Malaysia’s major cities
* For office and retail space, regional average refers to the simple average for Shanghai, Jakarta, Bangkok, HK and Singapore (2Q 2015)
Source: NAPIC, JLW, Colliers International, JLL, Staff estimates
5.7 5.9
8.1
0
3
6
9
KlangValley
Png JB
5.5
3.9 3.7
0
1
2
3
4
5
6
Png KlangValley
JB
20.4
16.3
10.8
0
4
8
12
16
20
24
KlangValley
Msia Otherstates
2.8
4.9
0
2
4
6
2001-15 2016-17
Office: Vacancy Rate and Incoming Supply
% sqft
per capita
Office Vacancy Rates (2015) Total Incoming Supply per
year in Klang Valley
Regional average*
Existing Prime Retail
Space (2015)
Projection of prime
retail space (2018)
Retail: Current Stock & Projections of Prime Space
mn
sgft
Regional average*
sqft
per capita
Oversupply of office and retail spaces in major cities
Current Challenges
20
Malaysia to weather the economic challenges
Growth to remain anchored by domestic demand
- Economic diversification and strong fundamentals
- Accommodative monetary policy that is supportive of economic activity
- Pro-growth and targeted policy measures
Trade balance to remain in surplus, albeit narrower
Inflation to remain low at 2 – 3%
Malaysia will continue to be confronted with medium- and long-term challenges
- Continued economic reforms are necessary to anchor future resilience
1
2
3
5
Policies to tackle immediate and long-term challenge 4
21
55.5 97.4
11.8
16.1
0
10
20
0
50
100
150
1998 2015
Size of Bond Market
Capital Ratio* (RHS)
Macroeconomic fundamentals remain supportive of growth
60.4
69.2
50
60
70
80
2010 2011 2012 2013 2014 2015
% share
3.3
3.1
2.5
3.0
3.5
4.0
2010 2011 2012 2013 2014 2015
%
1.7
3.2
2.1
0
4
8
2010 2011 2012 2013 2014 2015
Annual
change (%)
Steady growth path High private sector
participation in the economy
Low and stable
inflation environment
Stable labour market conditions
Deeper markets and
strong financial buffers
6.0 5.0
0
4
8
12
2010 2011 2012 2013 2014 2015
Current account balance
reflects strong investment
11.3 11.9
2.0
0
10
20
30
2010 2011 2012 2013 2014 2015
Annual
change (%)
% of GNI
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Current account balance Inflation
GDP Private expenditure / GDP Unemployment rate
% of nominal GDP
Size of Bond Market
and Banking Capital Ratio
%
* Capital ratio in ‘98 refers to the risk-weighted capital ratio; Ratio in 2014 refers to total capital ratio, reported based on Basel III
Capital Adequacy Framework adopted since January 2013.
6/1/2017 22
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