MALAYSIAN ECONOMIC OUTLOOK

Executive Summary
Introduction
While Malaysia is naturally protected from snowstorms, tornados and hurricanes, having to
deal with only regular rains, floods and sometime landslides, the country grappled with
severe headwinds on economic front last year, following unanticipated global commodity and
currency shocks, financial market turbulence and sudden reversal of capital flows. Most
importantly, the country avoided oily slopes and dark corners, associated with domestic
political upheavals and shocks, affecting both sides of political divide; entrenched social
grievances; heightened racial tensions; and elevated religious and faith insecurities.
Meanwhile, the long-awaited lift-off in the United States (US) Federal Funds Rate (FFR) that
finally occurred on 16 December 2015 and the inclusion of China"s currency, the Renminbi
or Yuan into the IMF basket of SDR reserve currencies on 30 November 2015, have to a
certain extent reduced the intensity of uncertainty, prevailing in global financial markets last
year. These widely-anticipated episodes have been considered as healthy developments for
the world economy, which was reinforced further by the global consensus on climate change,
culminating in the adoption of United Nations Global Agenda 2030 for Sustainable
Development (UNGA 2030). Of greater significance for Malaysia, FitchRatings has affirmed
Malaysia's Long-Term foreign currency Issuer Default Rating (IDR) at "A-" and local
currency IDR at "A", while interestingly the outlook on the Long-Term IDRs has been
revised to "stable outlook" from "negative". Meanwhile, as reported by the Bloomberg,
Moody's Investors Service affirmed Malaysia's A3 sovereign rating, but cut the outlook on
the sovereign rating to "stable" from "positive", citing Malaysia's weakening external
position. The migration of rating outlook to the middle ground by the two sisters of
international rating agencies indicates that the outlook for Malaysian economy remains
favourable. On the domestic front, major issues surrounding 1MDB operations have been
successfully resolved and the company reported on 12 January 2016 that it was finally "out of
the critical phase".
These favourable developments augur well for the Malaysian economy, although tough
challenges are expected to arise along the way this year. On the real economy, real GDP
growth for 2015 is estimated to register close to 5%, a respectable growth considering weak
and uneven global economic recovery, while headline inflation remained benign, averaging
2.1% for 2015 as a whole (2014: 3.2%), which is only 0.1 percentage point above the price
stability inflation target of many central banks in advanced economies. Meanwhile, fiscal
deficit of the Federal Government financial position improved considerably, estimated to
register 3.2% of GDP in 2015, which is a significant achievement compared to the ratio of
6.5% of GDP recorded in 2009, when the country was hit hard by the global economic and
financial crisis. The implementation of goods and services tax (GST), effective on 1 April
2015 and removal of fuel subsidy system were certainly the right policy actions by the

Government, despite years of delay and decades of deep-rooted subsidy mentality. The
implementation of consumption-based GST is certainly a blessing in disguise for the country,
providing strong fiscal safeguard and acting as a built-in stabilizer for the economy.
Successful implementation could also be viewed as reform dividends for the rakyat, which
could possibly be in deep economic troubles, especially with plummeting crude oil prices, as
seen in many oil exporting countries. In fact, the share of oil-related revenue in the total
revenue of the Federal Government has been reduced significantly by more than half, from
about 40% in 2009 to an estimated 18% last year.
The rosy picture, as described above is not all beautiful or picture perfect, in fact both
blemishes and dark spots can be found. For example, labour market conditions, while
remained generally favourable in the first eleven months of 2015, are showing signs of
weakening, especially with rising number of retrenchments, stagnating job vacancies and
higher labour force participation rate (LFPR), although overall unemployment rate remained
well below the 4% threshold of full employment (November 2015: 3.2%, October 2015:
3.1%). More worryingly, youth and graduate unemployment is becoming a source of social
concern, triggered by increasing participation rate of the young and educated workforce, in an
environment where there is increasing fragility and sluggishness in business and economic
prospects. On the external front, there are certainly many warning signals or red flags,
reflected by continuing net portfolio investment outflows, narrowing of net current account
surplus of the balance of payments (NCAB), significant depreciation of the ringgit exchange
rate, and declining net international reserves. In this connection, Malaysia must act fast,
taking appropriate actions to protect the currently vibrant economy and ensure the well-being
of the rakyat. We certainly need to be vigilant, pro-active and forward-looking, especially on
external economic and financial developments. Economic pressures are building up and
tough challenges are looming on the horizon, as seen in the falling crude oil prices as well as
global stock markets sell-off, which started from the first trading day of the year and lasted
until recent weeks. Competitive devaluation of currencies are rearing their ugly heads again,
pointing to diminishing international policy coordination. Therefore, maintaining financial
stability and improving investors' confidence need to be the key priority of the Government.
Investors and rakyat as a whole are watching very closely new moves and policy actions by
the Government, as things are getting worse by the day, since the beginning of this year.
Moreover, official growth forecasts, released during presentation of the 2016 Budget in
Parliament on 23 October 2015 indicated that the overall growth of the Malaysian economy is
expected to moderate to between 4% and 5% this year (2015est: 4.9%). This growth forecast
stands below the potential output growth of the Malaysian economy, estimated at about 5.5%
per annum, pointing to lower investment efficiency and to a certain degree deterioration in
the country's third factor growth, namely total factor productivity (TFP). This important
component refers to the power of new ideas, entrepreneurship, creativity and innovativeness
in tackling new challenges, apart from adding raw labour and technology-embodied capital.
Most importantly, rakyat should not be asked to fend for themselves. They need strong and
supportive guiding hands. Surprisingly, official forecast indicates that ringgit exchange rate is
expected to remain stable at the average level of RM4.20 per US dollar this year (2015:

RM3.91; 2014: RM3.27; 2013: RM3.15 per US dollar), pointing to continued undervaluation
or misalignment of the ringgit exchange rate in terms of its fair value or "fundamental
equilibrium exchange rate". This forecast unfortunately points to higher "risk premium" in
the country, somewhat pessimistic, as if moving along with conditional forecasts by vestedinterest groups, like FX market strategists and speculators.
Realities in the FX market, however, indicate that exchange rate movements are driven by a
combination of dynamic forces, encompassing not just short-term speculative activities,
changes in market sentiments, unverified news, perceptions and unanticipated events, but also
possibly rookie actions and misplaced interventions by the authorities, together with longestablished distortions and imperfections in market microstructures. These speculative and
technical factors amplify the short-term movements, reinforced further by current as well as
expected future directions of the economy, as recently seen in China. As such, policy makers
need to be pro-active and forward looking, avoiding being influenced too much by FX
asymmetric and idiosyncratic behaviour and its non-linear tendencies. Greater efforts are
needed in improving and nurturing economic agents' sentiments, investors' confidence and
reversing their negative perceptions about the good management of the macro economy and
political situation in the country. These actions include removing the distortions and
imperfections in the medium and long-term term and strengthening further domestic
macroeconomic fundamentals in the immediate and near-term, by implementing appropriate
fine-tuning actions and macroeconomic stabilization measures without any further delays.
The easy way out is just leaning with the wind or letting things sort out over time, as the
external sector is slowly but surely picking up in the medium and long-term, as the bottoms
would certainly be reached, especially for crude oil prices. Meanwhile, major uncertainties in
the global economy are also being gradually removed, although policy coordination seems to
be diminishing at the global level. These included the recent lift-off in the US interest rates,
an adoption of market-based approach in China's financial and capital markets, the
strengthening of Yen and Euro currencies as against the US dollar in recent weeks and
continuing easy monetary policy in the Euro Area, Japan and other advanced economies. As
such, the US dollar would not be on the upside for a long period, without inviting serious
economic repercussions on the US economy. Moreover, looking from a long-term
perspective, US dollar on trade-weighted basis has been on the declining path, except in
recent years.
In trying to understand these developments, Olympic games offer a better guidance with its
strict rules, level playing fields and most importantly, its unifying force and strong
coordination among competing nations. Size and strength matter in international economic
and politics, as displayed by the two economic giants, namely the US and China, the world's
first and second largest economies. Unlike in sports, these two countries are certainly
competing in the global economic and political arena, taking calculated risks and adopting
"intelligent strategy". They are building up their military power and flexing their muscles
militarily, as seen recently in the South China sea and above DMZ in the Korean Peninsular.
Meanwhile, China is learning by doing, emphasizing on gradualism by allowing for a smooth

transition in its structural adjustment and reform programs and building up slowly but surely
its soft-international infrastructures. China is certainly avoiding knee-jerk reactions, shock
therapy and other cookie-cutter policies as used to be implemented in the past under an
orthodox economic policies. In fact, China is learning fast, dismantling the circuit breakers
and mending its rookie actions, as seen recently in its stock market interventions.
Interestingly, as part of the IMF governance reforms and new funding programs, China's
voting right in the IMF will rise from 3.8% to 6%, reflecting its increasing influence and
rising power. China has also embarked on Asia Infrastructure and Investment Bank (AIIB), a
new multilateral development bank in Asia, which will be under its domain. TPPA and RCEP
are another two examples of non-cooperative games, using game theory terminology,
pointing to strong competition between the two economic rivals with totally different political
regimes, initial economic conditions and operating standards. China is embarking on
regionalization, and barring any military conflicts, the sheer size and its strength, combined
with "intelligent strategy" plus "strong technocratic leadership", neutrality and noninterference, China will most likely emerge stronger and powerful, reasserting its past glory.
Nuclear deal and lifting of sanctions in Iran will also see that low oil prices will not last that
long, since oil prices are always used as a strategic and bargaining tools and prone to sharp
spikes. Supply disruptions and strategic decision by OPEC will certainly affect oil production
and global oil supply conditions, in an environment where oil demand is slowly but surely
picking up, moving forward.
In this respect, Malaysia as a trade-oriented and financially-integrated economy, but lacking
in both economic size and strength, needs to observe and play the economic and political
game well, so as not to be trampled by these two competing and non-cooperating giants.
Follow-the-leader, leaning with the wind, placing more weight on business interests, relying
less on indigenous capability and gambling on the welfare of the society as a whole are
certainly not the first-best-option or "optimal approach", especially for the country that
aspires to be a developed nation by the year 2020. The Malaysian economy has to be
operationally independent, and we need to have a strong policy safeguards, protecting our
institutional sovereignty and its people, national interests and accepted social values and
norms. In this respect, we need to be strong, independent, resilient and agile, while adjusting
pro-actively and flexibly to the so-called "new normal" in new international economic
landscape, where competition is intense and policy coordination is clearly diminishing. We
have to be creative and innovative, employing "smart strategy" and with "intelligent
communication", in dealing with these new realities. We need to not only adjust to the new
environment, but also think creatively about solutions, rather than taking an easy way out,
adjusting passively to adverse circumstances and acting as if "business as usual". More
importantly, we should not burden future generations with new "economic imperialism" and
allow for the so-called "economic genocide", imposed by the rich and powerful nations with
mercantilist tendencies. Apart from enhancing economic efficiency, we need to ensure that
adequate attention is given to distributional aspects, environmental concerns and social
issues. More importantly, we need to take into account both market and non-market values, as
opposed to only values from market transactions, derived using economic impact analysis,
such as dynamic computable general equilibrium model (Dynamic CGE). Actual cost-benefit

analysis (CBA) captures all non-market benefits, social as well as environmental costs.
Furthermore, we need to take into account welfare changes of all beneficiaries, encompassing
society as a whole, identifying the gainers and losers and more importantly, future
generations.
Meanwhile, as suggested in the previous reports, we need to continue examining in-depth all
binding constraints to economic and social development, existing distortions and
imperfections in market microstructures, most notably in the labour market and FX market
with its non-internationalization of ringgit, rigid administrative rules and thin liquidity.
Political spats and racial rhetoric unfortunately add to the worsening economic and business
conditions, as stabilization measures and new policy actions require strong ownership and
support by all stakeholders, irrespective of political affiliations, racial and religious
associations. There are certainly social costs and in fact welfare losses to the society as a
whole, associated with delays in structural adjustments, lack of openness and transparency,
gap in policy credibility, weak institutions, poor governance and, worst still low ethical and
moral standards. In this respect, there must be a strong guiding hand, good signalling
mechanism and certainly credible policies for market participants to react adequately in this
trying times, while extensive consultations with relevant stakeholders will ultimately help to
avoid uncertainty and negative perceptions of stakeholders, consumers, investors and rakyat
alike. More importantly, we need to ensure continued happiness and good life for the rakyat
by encouraging greater kindness and showing strong compassion and mercy to others,
especially those with different ethnic backgrounds and religious beliefs. We need to avoid
playing with people's insecurities by encouraging greater openness, tolerance, social justice
and fairness in the country.
Short-term Issues and Stabilization Measures
Real GDP growth moderated to 5.1% in the first three quarters of 2015, declining by one
percentage point from 6.1% in the corresponding period of 2014. Meanwhile, net current
account of the balance of payments (NCAB) also moderated, registering a smaller surplus of
about RM22.6 billion in the first three quarters of 2015 (January-September 2014: RM41.7
billion), pointing to a reduction by almost 50% compared to the amount in the corresponding
period of 2014. The marked improvement in trade balance position, as seen in recent quarter
could be traced back to significant depreciation of the ringgit exchange rate, supported by
continued strong expansion in the US economy and also recovery in both the Euro Area and
Japan. Despite these transitory improvements, the slowdown in China's economic growth,
which is now Malaysia's largest trade partner and also falling prices of commodity exports,
especially for crude oil, are expected to weigh heavily on the position of NCAB in the
coming quarters. As such, the possibility of "twin-deficit", as predicted earlier could possibly
be extended well beyond 2016, leaving only fiscal deficit of the Federal Government, which
is expected to deteriorate considerably (2015: 3.2% of GDP, 2016est: 3.1% of GDP), if
appropriate actions are not being implemented.

Meanwhile, labour market conditions remained generally favourable with the unemployment
rate stabilised at 3.2% of the total labour force during the period from July to November
2015, reflecting full employment situation in the country (threshold at 4%). In addition,
headline inflation, which registered the peak at 3.3% in July 2015, decelerated markedly to
2.7% in December 2015, on account of continued decline in transport charges, brought about
by downward adjustments in fuel end-user prices and also partly helped by lower non-food
prices. Headline inflation for 2015 as a whole, remained low at 2.1%, markedly lower
compared to 3.2% in 2014. Apart from weather conditions that affected supply of food items,
demand conditions remained generally stable, as measured by contribution of core inflation
(excludes food, transport and energy prices), which averaged about 1.7 percentage points last
year. Cost push from significant ringgit depreciation and demand-pull by low energy prices
could possibly see that inflation is on the uptrend this year. Tough fiscal actions could also
push consumer prices to higher levels.
Looking ahead, Malaysia remains susceptible to both anticipated as well as unanticipated
external developments, especially in the asset markets. These include continuing net outflows
in portfolio investment, especially from debt securities and equities, declining prices of
commodity exports and rising volatility and uncertainty in global financial markets. Termsof-trade (TOT) continued to register losses in the last four quarters, exacerbated by declining
commodity export prices and, most worryingly continued depreciation in the ringgit
exchange rates. Moreover, import price index has been showing an uptrend in the last five
years, pointing to the fact that ringgit has been depreciating for a long time, but took a turn
for the worse in recent months. In fact, bilateral ringgit exchange rate with the US dollar has
been depreciating all the way in the last six years with rising volatility and finally breaking to
register sharply lower value since September 2014 until very recently. Sadly for Malaysians,
the ringgit has been allowed to cross the psychological threshold of RM3.80 per USD on 6
July 2015, and touched its lowest external value in the last 17 years at RM4.4725 per USD on
29 September 2015 and hovering at about RM4.37 per US dollar in recent weeks.
Meanwhile, domestic interest rates, external borrowing costs and external debt services are
all trending up, despite unchanged OPR at 3.25% in the recent MPC meeting on 21 January
2016. Further hike in the Fed funds rate in the United States (US) is expected to exert
pressure on domestic policy rate, as the US dollar is expected to continue its strengthening
pace in the coming months. While there is still divergence in monetary policy stance between
the US with the rest of the world (ROW), particularly with the ECB and Bank of Japan,
among others, Bank of England is expected to raise its policy rate sooner than later, with its
strong economic recovery and the transmission of monetary policy contagion is already being
felt in Latin American countries, South Africa and other countries that have strong financial
linkages with the US economy, of which Malaysia is included.
The year 2016 will certainly be a very challenging year for the Malaysian economy, as
downside risks on the external front have increased, while global growth forecasts have been
revised downwards by both the IMF and World Bank. Oil-exporting and commoditydependent economies, encompassing both developing as well as developed countries, will be
adversely affected not just by plunging commodity export prices, but also by rising

borrowing costs and debt servicing charges, associated with higher interest rates and
strengthening of the US dollar in the global financial markets. Moreover, economic activity in
advanced economies is expected to pick up only modestly this year, according to the latest
statement by the IMF, with the exception of currently robust growth in the US and sterling
performance of the UK economy and India as well. The latter is an emerging tiger in
Developing Asia, which is expected to register tigerish growth of 7.5% this year (2015:
7.3%), overtaking growth in China.
Macroeconomic and Financial Policies
Bank Negara Malaysia (BNM) again decided to maintain the Overnight Policy Rate (OPR) at
3.25% in its latest Monetary Policy Committee (MPC) statement, released on 21 January
2016. This was actually the tenth time the OPR remained unchanged since BNM raised the
OPR more than one and half year ago on 10 July 2014. The MPC decision was undeniably
behind the curve and certainly not forward looking and proactive as practiced in the past. The
US Federal Reserve Bank (Fed) decisively raised the new target range for the Fed Funds Rate
(FFR) at 0.25% to 0.5%, a quarter percent up from zero to 0.25%, which was the first hike in
nearly a decade since 2006. The Fed's unanimous decision taken on 16 December 2015 was
based on solid deliberations during the FOMC's two-day meeting, putting greater emphasis
on gradual adjustment in the stance of monetary policy this year. The FFR will be adjusted on
a stepwise basis, reaching the upper ceiling of the target range at 1.5% by the end of 2016.
While the recent Fed hike in FFR was widely anticipated and already priced-in by financial
markets, the adjustments in the coming meetings will still pose uncertainty, as part of
monetary policy rituals follow-the-leader by other central banks, although with a time lag.
While domestic interest rates remained generally low, growth in broad monetary aggregates
weakened considerably, especially in recent months. The tight liquidity situation could
potentially push interest rates to higher levels, especially with monetary policy contagion,
coming from planned increases in the US FFR this year. There was a marked reduction in
broad money supply, as the net foreign assets (NFA) continued its downwards trend, resulting
in tight domestic liquidity situation in the country, although domestic credit (DC) remained
generally favourable. While the tightening of liquidity condition was not reflected in the
sharp upside movements of key interest rates, in view of stable interest rate environment both
at home as well as abroad, ringgit exchange rate unfortunately took the brunt of adjustment,
depreciating markedly against the currencies of most of Malaysia's major trading partners.
Meanwhile, BNM ceased to be active in conducting foreign exchange interventions (FXI) to
influence the level of exchange rate, as ringgit exchange rates have stabilised in recent
months, after losing its value by whooping 20% against the US dollar in 2015. Strong FX
interventions, especially during the months of August and September last year also saw that
the net international reserves of BNM declined substantially to USD93.3 billion as at 30
September 2015, and stabilised at USD95.1 billion as at 15 January 2016.
Looking from a longer term perspective, net international reserves continued its downward
trend, registering USD95.1 billion as at 15 January 2016, well below the so-called

"psychological threshold" of USD100 billion (end-December 2014: USD116.0 billion; endDec 2013: USD134.9 billion). Fortunately, the ratio of international reserves to short-term
external debt stood at 1.1 times, marginally above the standard international threshold of 1, as
short-term debt also changes with financial market developments. While both direct and
portfolio investment positions have improved in the third quarter of 2015, "other
investments" continued to register substantial net outflows (deficit). The turnaround was on
account of rising acquisition of foreign assets, classified under direct investment, especially
debt instruments as well as equity and investment fund shares abroad, as part of international
diversification by Malaysian firms and high net worth individuals. They were essentially
protecting their assets from ravages of plunging ringgit, taking out their money and
accumulating assets overseas in an unprecedented manner. This explained why Malaysia
suddenly turned into a net creditor under IIP within just a short span of time, running
essentially three months from July to September 2015. While foreign investors were ditching
Malaysian equities and debt securities and reallocating their portfolio back towards dollardenominated assets, Malaysian firms and high net worth individuals were also busy acquiring
assets overseas, as if escaping from difficult and trying times as experienced earlier during
global economic and financial crisis in 2008/2009. Strong exchange market pressure, as
experienced in the third quarter of 2015 could possibly explain this phenomenon, turning into
one-way flows as opposed to two-way flows, envisaged by the authorities.
Global Economic Developments and Prospects
The global economy started the year 2016 with global equity selloff, triggered by circuit
breakers that tripped in the Shanghai and Shenzhen equity markets. While China's slowdown
has been translated into dramatic movements in its equity prices and Yuan exchange rate
movements, the strengthening of the US economy provides a new locomotive engine for the
global economy, as reflected by modest recovery in the Euro Area and Japan. Despite that,
monetary policy normalization in the US, which has been hailed as an important event in the
history of monetary economics has its own repercussions on the global economy, although
the lift-off in the FFR was essentially a healthy development. The expected higher interest
rates in the US, though at a measured pace and gradual, and continuing strong US dollar
could well see that borrowing and debt servicing costs for many highly-indebted nations will
be on the rise, exerting significant pressure on both Government finances and corporate
balance sheets. Monetary policy contagion is also a new source of concern and could possibly
be unavoidable, as central banks in Latin America, such as Chile, Columbia and Peru as well
as South Africa have already raised their policy rates. As such, the US Fed next move and the
pace of its normalization is very critical, because higher interest rate and a stronger dollar in
an environment of weak global demand hurts US firms and exporters, which in the final
analysis hire less workers, pushing unemployment rate back to above 5%. For emerging
market and developing economies, financial volatilities and economic vulnerabilities are
expected to persist, more so if there are "surprises" that would contribute to tightening of
global financial conditions, reversal of capital flows and continuing depreciation in their
currencies.

With these two major episodes, involving two largest economies in the world, combined with
global economic events, which are still unfolding, such as declining commodity prices, rising
equity market volatility, increasing pressure for competitive devaluation and growing
indebtedness in many nations, global growth outlook is expected to remain weak and uneven
this year. Moreover, there is a high probability of an intensification of factors that dragged
down the global economy, estimated at 3.1% last year (2014: 3.4%). Of greater significance,
WTI crude oil prices, which have declined by about 70% since January 2014, touched the
lowest in 13 years (December 2003) at USD28.32 per barrel on 20 January 2016. Ms
Christine Lagarde of the IMF, in her recent statement on 8 January 2016 in Yaounde, Africa
has indicated that the global growth, which was modest and uneven last year, will most likely
remains fragile this year. She elaborated on this by mentioning three significant transitions in
the global economy, firstly the increased divergence in monetary policy in major advanced
economies; secondly, the unfolding events in China; and lastly the turn in the commodity
super cycle. While the first two transitions are somewhat anticipated, the latter is certainly
relevant for emerging market and developing economies, especially commodity exporters,
such as Malaysia.
The World Bank in its latest publication Global Economic Prospects, 2016, released on 30
December 2015, cuts global growth projections by 0.4 percentage point for 2016 and 0.2
percentage point for 2017 from its June 2015 projections to 3.6% and 3.8%, respectively. The
World Bank mentioned about substantial downside risks, including sharper-than-expected
slowdown in key emerging market and developing economies (EMEs), a rise in financial
market volatility and a substantial decrease in capital flows. Currency pressures and
borrowing costs are expected to rise, following monetary policy normalization in the US,
while geopolitical tensions are also on the rise, especially with diplomatic disputes between
Saudi Arabia and Iran and nuclear politics in the Korea Peninsular.
Despite the gloomy outlook for the world economy this year, recovery in advanced
economies is holding well, albeit at a moderate pace, especially in the Euro Area and Japan,
while economic activity is expected to remain robust in the US and UK as well. Meanwhile,
emerging market economies (EMEs) and low-income developing countries are facing severe
economic and financial difficulties, following China's growth slowdown and expectation of
higher interest rates in the US. Declining commodity prices and strengthening of the US
dollar have resulted in weakening growth in many EMEs, especially commodity exporters
and resource-based economies. There are also el-Nino effects, combined with heightened
geopolitical tensions, especially in the Middle East.
Looking ahead, medium-term prospects for the global economy remain on bumpy road,
especially with continuing low productivity growth, particularly in EMEs, population aging
in advanced economies, such as Japan and long-delayed structural adjustment and reform
measures to address high public sector and household debts, low percentage share of private
investment to GDP and low female labour force participation rate, among others. India is
certainly an exception, benefitting a lot from low crude oil prices, while pursuing seriously its

structural adjustment and reform programs. Growth in India surpassed China's growth last
year, registering 7.3% (2014: 7.3%) and expected to register 7.5% this year.
The International Monetary Fund (IMF) in its latest World Economic Outlook Update (WEO
Update, January 2016), released on 19 January 2016, revised downward the 2016 annual
growth estimate for the world economy to 3.4% (2015: 3.1%), representing 0.2 percentage
point lower than October 2015 WEO estimate of 3.6%. The IMF also revised downward the
global growth forecast for 2017 to 3.6%, down by 0.2 percentage point, pointing to only
modest recovery for the global economy in 2017. Meanwhile, growth in advanced economies
is expected to be on the uptrend, growing slightly higher by 2.1% in 2016 (2015: 1.9%; 2014:
1.8%; 2013: 1.1%), but slightly lower when compared to October 2015 WEO forecast of
2.2%. Growth rate in 2017 is projected to remain unchanged at 2.1%, reflecting a downward
revision of 0.1 percentage point. Similarly, growth in emerging market and developing
economies as a group is projected to improve modestly to 4.3% this year (2015: 4.0%; 2014:
4.6%; 2013: 5%), which is also 0.2 percentage point less than earlier forecast at 4.5%. While
growth is expected to be on the uptrend, registering 4.7% in 2017, it is a downward revision
by 0.2 percentage point from the previous forecast, indicating moderate pace of expansion,
especially in countries currently in economic distress, notably Brazil and Russia.
While the US economy continued to register robust growth, moving away confidently from
the worst recession experienced in recent years, the pace of expansion in the Euro Area
remained weak, in fact showing sign of weakening in recent quarters. Moreover, risks to
recovery seem to be on the rise, as inflation rate is stubbornly low. The IMF in its January
2016 WEO Update lowered the growth forecast for the Euro Area at 1.7% in 2016 (2015:
1.5%; 2014: 0.9%), representing 0.1 percentage point reduction from October 2015 WEO
forecast, while forecast for 2017 has been maintained 1.7%, as before. Apart from severe
short-term headwinds, especially with declining exports to China, Japan is undeniably facing
a lot of economic challenges, especially long-term structural issues, such as shrinking labour
force, low productivity growth and low potential output growth. Related to these
developments, Japan's growth forecast for 2016 has been maintained by the IMF (WEO
Update, January 2016), projecting growth of 1.0% in 2016 (2015: 0.6%; 2014: 0%), which is
the same as in October 2015 WEO. Growth is expected to be supported by fiscal stimulus,
continuing lower oil prices, accommodative monetary policy and rising wages. Meanwhile
growth forecast for 2017 has been similarly revised to 0.3%, marking a downward revision
from previous forecast of 0.4%, on account of weaker external environment and moderating
private consumption spending.
Meanwhile, China is transiting gradually to a new growth model, relying more this time
around on human resources rather than raw inputs, like natural resources and capital. Growth
of the China's economy is estimated to record nearly 7% last year, according to recent
statement by Chinese Premier Li Keqiang. This growth estimate is somewhat close to 6.9%
growth predicted for 2015 (2014: 7.3%, 2013: 7.7%) by the IMF. The IMF projected growth
to slow down further to 6.3% this year, which was the same growth forecast as in October
2015 WEO as well as in WEO Update in July 2015. These growth forecasts seemed to be in

tandem with an ongoing structural reform programs in China, moving steadily to a more
market-based economic system. China's continued growth slowdown this year, the lowest
since 1990 (3.8%), is unfortunately driving downward growth in other emerging market and
developing economies, especially exporters of raw materials, such as oil, metals, minerals
and other commodities. Brazil, Russia, Malaysia and even developed economies like
Australia and Canada will be affected, although with a varying degrees.
India's economy has certainly outperformed other emerging market and developing
economies last year, registering growth of well above 7%, which was 3.3 percentage points
higher than the average for the group. Growth in India is estimated at 7.3% in 2015 by the
IMF, the same growth rate as experienced in 2014. The IMF maintained India's growth
forecasts for 2016 and 2017 at 7.5% in its latest January 2016 WEO Update. India has
overtaken China's growth rate last year and certainly this year, especially with China's growth
continued to slow down. Meanwhile, in Latin America and the Caribbean, Brazil another
BRIC country, is expected to remain in recession this year (2015: -3.8%, 2016: -3.5%),
sharing similar economic difficulties with Russia (2015: -3.7%, 2016: -1.0%), due largely to
lower commodity export prices.
ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand and Vietnam) is projected to grow at
4.8% in 2016 and 5.1% in 2017 (IMF WEO Update, January 2016), pointing to downward
revisions of 0.1 percentage point and 0.2 percentage point, respectively as compared to
forecasts in October 2015 WEO. Meanwhile, inflationary pressure is moderating across
ASEAN-5, underpinned by falling commodity prices, especially crude oil, although
currencies of these countries simultaneously depreciated against the US dollar, although at
varying degrees. WTI crude oil plunged to the lowest in 13 years at USD28.32 per barrel on
20 January 2016 (26 January 2015:USD45.06). Looking back, on 20 January 2015 the
Malaysian Government decided to restructure the 2015 Budget, unveiled in October 2014,
cutting operating expenditure for 2015 by RM5.5 billion and setting slightly higher fiscal
deficit target at 3.2% of GDP, as against earlier target of 3.0% in 2015. The same thing will
be repeated on 28 January this week, whereby the 2016 Budget will be revised by the
Government, involving recalibration of expenditure, spending cuts and studying of
privatisation projects, according latest news reports.
Downside Risks
There are warming signs that the world economic outlook is worsening especially in recent
months. Crude oil prices, declined markedly by about 50% last year, averaging about
USD50.92 per barrel (2014: USD95.25 per barrel). Most worryingly, crude oil prices remain
on the downtrend, touching a 13 year low of USD28.32 per barrel on 20 January 2016. There
are also heightened volatility and uncertainty in the global financial markets, especially with
equity market interventions by the Chinese authorities early this year. Global risk aversion is
undeniably on the rise, especially with worsening near-term global economic prospects.
Geopolitical factors have certainly added to worsening economic conditions, especially with
continued fighting in the Middle East, intensified airstrikes by Russia in Syria, continued

fighting in Yemen and escalating tensions between Saudi Arabia and Iran, the two bedrocks
of Sunnis and Shiites. Migrant refugee crisis in Europe and nuclear politics in North Korea
could also be added as downside risks, together with military tensions between the US and
China in the South China sea.
Medium-term risks include near stagnation in advanced economies and consequently belowtarget inflation rates, as seen in the US, Euro Area and Japan in recent months. Low potential
output growth, faster-than-expected growth slowdown or "hard landing" in China will affect
economic performance of resource-based economies and commodity exporters, including
high-income nations and, most worryingly low-income developing economies in Africa as
well as Developing Asia. Looking from longer-term perspective, low fixed capital formation
and aging population are expected to lower potential output growth in advanced economies,
such as Japan. The fourth industrial revolution in the years ahead could potentially result in
declining labour force participation rate, especially among females in the advanced
economies as well as in EMEs.
On the domestic front, near-term risks are expected to originate mostly from the external
front, associated with China's growth slowdown and its financial market turbulence. The US
Fed next move and uncertainty about rate increases would affect the volatility in the global
financial markets, especially interest rate sensitive bond markets, as the expected slower
monetary tightening cycle has been priced in by the markets. Meanwhile, domestic-oriented
risks include rising cost of living; elevated foreign exchange market pressures; and continued
portfolio investment outflows, associated with expected higher interest rates in key advanced
economies, particularly in the US.
Apart from abrupt tightening of financing conditions on the monetary front, tough "belttightening" fiscal policy actions and knee-jerk reactions, associated with revised 2016
Budget, are expected to elevate downside risks, hitting hard on private consumption
expenditure, which is already on a moderating pace. Meanwhile, weak performance of
private investment, which is presently being tested with rising production costs, declining
revenue, lower profitability (real return to capital) and less hirings, could possibly turn for
worse, especially with higher-than-expected borrowing costs and uncertain investmentadjustment costs. Households, producers, exporters, importers and retailers are adjusting to
higher import prices and rising debt service charges, following significant depreciation of the
ringgit. As such, sharper-than-expected ringgit depreciation and sharply lower commodity
export prices would elevate existing pressures and represent new round of threats and vicious
cycles. As reported in the previous reports, rising household debt and Federal Government
debt crossing the legal limit of 55% could pose serious downside risks and economic threats
in the medium and long-term. Additionally, "off-budget" expenditures and "contingent
liabilities" could exert pressure on fiscal sustainability and Malaysian sovereign credit
ratings.
Long-Term Issues and Policy Directions

Looking ahead, Malaysia needs to adjust quickly to the new normal in the world economy,
especially with monetary policy normalization from zero lower bound (ZLB) in the US.
There is also growth realignment in China, the world's second largest economy. Window of
opportunity is getting less over time, as the world economy is moving out of post-crisis easy
monetary conditions, starting in early this year and moving towards a more sustainable
economic growth and social development in the years ahead. The Paris Agreement on
Climate Change added to the need for climate change initiatives in the country, focussing on
sustainable production and consumption.
Medium and long-term structural adjustment and reform programs must continue to be the
key priority of economic policy, supported by appropriate short-term stabilization measures
and macro-prudential arrangements. Accommodative monetary policy is certainly not an
option in the coming months, less so with massive fiscal stimulus package, as fiscal space is
being constrained by lower oil revenue and rakyat is being squeezed hard by consumptionbased Goods and Services Tax (GST). Tax incentives and financial support for private
investment, which is on a moderating path, are urgently needed to boost business confidence
and enhance potential output growth of the economy. While downward adjustment in public
consumption is certainly required as part of an ongoing fiscal consolidation process, public
investment in key infrastructure projects and human capital development remain necessary in
order to remove infrastructure bottlenecks in the economy, such as traffic congestion and
frequent supply cuts in basic utilities, but also to ensure ready pool of healthy and skilled
workers in the medium and long-term.
On the supply side, new long-term measures need to be undertaken to further enhance total
factor productivity (TFP) and improve nation's long-term competitiveness. These include
removing structural impediments and binding constraints to sustainable growth, reducing
further market imperfections and distortions that inhibit the growth process, especially in the
product, services and labour markets. Energy market also needs to be improved with greater
competition. While we certainly need to lower barriers to entry in the labour market by
encouraging greater female labour force participation rate and by the elderly, greater efforts
need to undertake to lower the cost of doing business and facilitate entry of new
entrepreneurs and young talents in product and services markets. Greater focus needs to be
given on adoption of new technologies, research and development (R&D), innovation and
greater power of new ideas, through upgrading of skills and reducing out-migration of talents.