Catalog

	Table of Contents
p. 20 of 68 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia Cambodia Indonesia Lao People's Democratic Republic Malaysia Myanmar Philippines Singapore Thailand Viet Nam South Asia Central Asia The Pacific III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia

---

Malaysia

The economy saw a recovery in 2002, led by strong consumption demand and a recovery in exports, though it is still performing below capacity. Whether the economy will realize its full potential will depend on both global economic recovery and domestic policy response to the need to diversify industry and export products, raise labor productivity, and upgrade technology.

Macroeconomic Assessment

A moderate economic recovery took hold in 2002, after low growth of only 0.4% in the previous year. At 4.2%, GDP growth represents a notable achievement given the many uncertainties and challenges on the global front that dampened both global trade and domestic investor confidence. Growth was driven by public and private consumption, which in turn was boosted by a series of fiscal measures. The economy began to show some signs of a rebound in the first quarter of the year when it grew by 1.1% year on year. The pace of the recovery accelerated further in the second quarter and the second half of the year, when growth averaged over 5% year on year.

On the production side, manufacturing and services played a lead role in strengthening output growth in 2002. After a sharp decline of 6.2% in 2001, manufacturing output grew by 4.1% in 2002, boosted largely by resilience of consumption demand and a turnaround in manufacturing exports. The growth of export-oriented industrial production gained strength through the year whereas domestic-oriented industrial production slowed. Overall, industrial production was still in the process of recovery in 2002, and it may be some time before it resumes more rapid growth. Electronics outperformed other subsectors and recorded the highest growth, followed by chemicals and vehicles. Agriculture, which accounted for about 8% of GDP, continued with low growth of 0.3% in 2002. Palm oil production registered lower yields, but good weather conditions led to increases in the production of rubber and cocoa. The services sector sustained its strong performance, recording robust growth of 4.5%. Construction maintained its 2001 growth rate of 2.3%. A greater number of government investment projects and of civil engineering activities contributed to the subsector's performance.

Since the Asian financial crisis that began in 1997, the Government has maintained a fiscal pump-priming policy to boost domestic demand, aimed at preventing recession and keeping unemployment down, in the wake of volatility and uncertainty in the global economy. In 2001 and 2002, the Government continued its expansionary fiscal policies to stimulate investment and production (Figure 2.9). Reflecting this, public consumption (accounting for about one fourth of total consumption) grew by 17.6% and 13.8% in 2001 and 2002, respectively, while private consumption increased by lower rates of 2.8% and 4.2% over the same period.

The growth rate of gross fixed capital formation for the whole of 2002 was 0.2%, after a contraction of 2.8% in 2001; it pushed into positive territory in the third quarter of 2002 after continued declines over the previous four quarters. Public investment, which accounted for 58.0% of gross fixed capital formation in 2001, continued to provide the major impetus, growing by 5.0% in 2002, though this was much lower than in the previous 2 years. Private investment, which decreased by nearly 22% in 2001, remained subdued, though Bank Negara Malaysia maintained an accommodative monetary policy and the Government increased its development expenditures. Uncertainty regarding the international political and economic outlook appears to have forestalled a resurgence in investment by the private sector.

On the external front, both exports and imports rebounded in 2002. Thanks to a significant recovery of major items such as palm oil, semiconductors, textiles, chemicals, and furniture in the latter half of the year, annual merchandise exports grew by 6.1% in 2002, compared with a fall of 10.6% in the previous year. Exports to ASEAN countries, PRC, and US increased, while markets in the EU and Japan remained weak.

Imports rose beginning in the second quarter of 2002 as domestic demand and component inputs for exports began to pick up. Import growth was led by intermediate and consumption goods, reflecting improved manufacturing activities and growing personal consumption. For the whole of 2002, imports rose by 8.1%, after a contraction of 10.3% in 2001.

Reflecting these developments, the trade account recorded a surplus of $18.1 billion in 2002, lower than in 2001. Increases in the services deficit and income outflows from direct investments, coupled with a lower trade account surplus, resulted in a decrease in the current account surplus from $7.3 billion in 2001 to $7.2 billion in 2002. Applications for FDI have rebounded, implying that investor confidence may be gradually recovering. In 2002, FDI applications for manufacturing projects were up by 13.7% compared with the previous year. The top three applicants during the period, based on investment value, were Germany, UK, and US. Malaysia's reserve position strengthened in 2002 due to sustained current account surpluses and continued inflows of FDI. Net international reserves rose to $34.6 billion from $30.8 billion in 2001.

Monetary policy was accommodative in 2002. Ample liquidity was available and interest rates remained low in the financial markets. As a result, bank lending to the business sector remained strong. Major recipients of loans were manufacturing, wholesale and retail trade, construction, insurance, and businesses. Small businesses benefited significantly from bank lending: loans below RM100,000 rose by 17.8% from a decline of 15.7% in 2001. Loans to consumers also picked up sharply as housing and car loans increased rapidly. The commercial bank lending rate of 6.39% remained the same as in 2001.

The health of the banking sector continued to improve, with the NPL ratio on a 6-month classification basis falling to about 7%. With the economy operating below its long-term potential and with excess capacity, the CPI rose by only 1.8%, despite the accommodative monetary policy stance.

The unemployment rate was 3.6% in 2001 and declined to 3.5% in 2002. The foreign exchange rate remained fixed at RM3.8 to the US dollar, and, following the dollar down, depreciated generally against other major currencies.

The 2002 federal government budget accorded priority to supporting economic growth, while aiming at improved fiscal consolidation by targeting a lower deficit of 4.7% of GDP, compared with a 5.5% outturn in 2001. The deficit outturn for 2002 is estimated at 5.6%. To stimulate private sector activities, the budget included many important tax measures, including a reduction in personal income tax rates, lower import duties on certain intermediate goods, adjustments in investment allowances and depreciation, and changes to tax holiday coverage for enterprises.

Policy Developments

Although the focus of fiscal policy in 2002 was on boosting domestic demand in the short term, it also aimed at enhancing long-term industrial competitiveness and labor productivity through spending on infrastructure development and education, and training for human resources development. Public sector consumption and investment expenditures are estimated to have contributed 1.4 percentage points to overall GDP growth in 2002, or nearly a third of the total.

The 2003 budget aspires to fiscal consolidation in line with the government goal of achieving a balanced budget by the end of the Eighth Malaysia Plan (2001-2005). The target budget deficit in 2003 is 3.9% of GDP, based on projections of an improved economic outlook both domestically and globally. To support the private sector as the engine of economic growth, the budget increases expenditures for education and training, labor productivity improvement, R&D and technology, SMEs, and services in the areas of agriculture, finance, and computer software. Fiscal deficits have not come down much in the last 2 years and efforts need to be made to lower them further. The rate is much higher than in other economies in the region affected by the financial crisis.

Reflecting the sustained fiscal deficits, government debt had risen to 47.2% of GDP at the end of 2002. The Government should be able to rationalize fiscal expenditures and augment tax revenue collections to manage and reduce the debt, and needs to lower the fiscal deficit and the debt level within a reasonable time. However, assuming that global economic recovery takes place gradually, fiscal pump priming will remain a tool in the hands of the Government to boost consumption demand and, to a lesser extent, physical investment and construction activities in 2003-2004. It is widely expected that the Government will announce another major stimulus package in the first half of 2003, covering a range of initiatives aimed at raising government spending and encouraging private investment and consumption. The package may include an increase in construction projects on a modest scale to ensure rapid completion, a cut in the employee's contribution to the Employees' Provident Fund by 1-2 percentage points, a cut in the income tax rate, and greater support for SMEs and for attracting FDI. Therefore, the Government's attempt to pursue simultaneously the two goals of growth stimulation and fiscal stabilization is a major challenge.

Bank Negara Malaysia is likely to continue its accommodative monetary policy to support private sector activities but without creating substantial inflationary pressures, given the large amount of underutilized industrial capacity. The banking sector is generally strong and NPLs are no longer a key financial issue. Consequently, the central bank will be able to conduct a more flexible monetary policy in the future. Since Malaysia is a small, open economy, the Government has to take steps to minimize any deflationary pressure arising from an external shock that causes a slowdown in external demand globally. This reinforces the likelihood that Bank Negara Malaysia will favor an accommodative monetary policy over the next 2 years.

Outlook for 2003-2004

The economy, which has relied heavily on domestic demand over the last several years, will see external demand playing an increasingly important role in 2003-2004 since OECD economies are likely to grow faster than in 2002. Private investment is also expected to improve further as confidence builds and demand continues to strengthen. In view of this, economic growth in the forecast period should be more balanced, with significant contributions from consumption, investment, and exports. On the supply side, manufacturing, which experienced a modest recovery in 2002, is expected to be the main engine of economic growth, with the services sector continuing to play an important role.

Private consumption is projected to expand by 5.6% and 6.5% in 2003 and 2004, respectively, boosted by rising disposable incomes, continued accommodative monetary and fiscal policies, and improving consumer confidence. The growth rate of public consumption may fall to about 6%, reflecting the government policy stance to focus its expenditures on physical investment and construction activities, rather than on direct government consumption. Private investment is likely to improve further at a moderate rate of 5.3% in 2003, accelerating to 8.5% in 2004, while FDI will contribute to the growth of private investment over 2003-2004.

On the external front, merchandise exports are projected to grow by 8.1% in 2003 and by 10.2% in 2004 as a result of improving external market conditions for electronics, chemicals, and some agricultural products such as palm oil and rubber. Reflecting the growing consumption demand and recovering private investment, imports are expected to increase by 8.8% and 11.3% over the forecast period. Taking all these developments into account, GDP growth is forecast at 4.3% in 2003 and 5.1% in 2004. Manufacturing and services, which together account for about 85% of total GDP, will likely grow by 6-7% and 3-4%, respectively, in this period.

Inflation is projected to remain low, at its current level of about 2%, over the next 2-3 years, because of excess industrial capacity and low import prices. The unemployment rate should decline to 3.4% and to 3.1% in 2003 and 2004, respectively, due to higher GDP growth and improving business confidence in the private sector. The current account surplus is projected to decrease, primarily because of the expected higher growth in merchandise imports, which will exceed the increased rate of merchandise exports in this period. The current account surplus is forecast to drop to 6.3% and 5.7% of GDP in 2003 and 2004, respectively.

However, several downside risks are present that may adversely affect the economy and undermine the above projections. They include the effects of the conflict in Iraq, the outbreak of SARS in the region, and any further delay in the recovery of the US and Japanese economies and consequent weak electronics demand.

Back Lao People's Democratic Republic	Next Myanmar