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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