MalaysianInstituteofEconomicResearch

INSTITUTPENYELIDIKANEKONOMIMALAYSIA(149064U)

MALAYSIANECONOMICOUTLOOK
ExecutiveSummaryIntroduction
Thisyearstartedwithaglimmerhopeofglobaleconomicrecoveryafterthelacklustreperformance
oflastyear.Economiesaregatheringthebrokenpiecesandtryingtoputtheirhouseinorder
preparingatrajectoryforbetterrecoverythisyear.Alleconomiesintheworldarewatchingeach
other'smoveswithfullofhope,asthedegreesofdependencyamongtheworldeconomiesare
higherthanever.Allinall,thisyearisexpectedtobeabetteryearwithallthenumbersarepointing
toastrongerfootingrecovery.Themomentumisexpectedtocontinueuntilnextyear.
Thecollapseinoilpricesinmid2014hasshapedtheperformancesofworldeconomyforlastyear.
Thesupplyglutisblamedtobethecause,andsubsequentdevelopmentofaslowdownofmany
economiesfurtherreinforcedlacklustreperformancesoftheworldeconomy.Thecausesofanoil
oversupplyarestilllingeringwithoutanyclearcountermeasurestakenbybiggerproducers,
particularlyfromOPEC.AmongthecausesofproductionglutarecomingfromAmericanshale
production,Iranianproductionafterthesanctionliftoffandthemiddleeastblackmarketparticularly
fromIraqandLibya.Toexacerbatetheproblem,someoilproducingcountriesarepumpingmore
volumetocompensateforthedropinprices.
Followingthehistoricaltrend,oilpriceisnegativelycorrelatedwiththevalueofUSdollar(USD).
Amongothers,thecorrelationisduetothefactthatoiltradingisdenominatedinUSDandUSisthe
biggestworldnetoilimporter.Thetrendcontinues,USDappreciatedagainstallworldcurrencies.
Meanwhile,thesurgeinUSdomesticdemandamiditsrobusteconomicgrowthfurtherincreasethe
upwardpressureonUSD.RobustUSeconomicgrowthleadstotheexpectationforatightmonetary
policytocome.Therefore,theFederalReserve(Fed)'sinterestratenormalizationisinthebackdrop
ofworldeconomies.Ontheotherhand,weakeconomicgrowthofJapanandeuroareatriggered
theircentralbankstofavouraneasymonetarypolicy.Thismonetarypolicydivergenceamongmajor
economiesinfluencedworldcapitalflowsinfavouroftheUS.
Atthesametime,theperformancesofemergingeconomies,particularlyChina,areweak.China's
economyisheavilydrivenbyexternaldemand,andcurrentlyunderpressureforrebalancingitby
improvingitsdomesticdemand.China'sNationalPeople'sCongress,whichconcludedonMarch16
targetinglowergrowthof6.5percentthisyearasstatedbyPrimeMinisterLiKeqiangas'arelatively
painlesscurethatavoidshardchoicesbetweenspurringgrowthandrestructuring'.
Suchglobaleconomicdevelopmentcoupledwithpocketsofnoneconomicgeopoliticalfactors
influencingglobaltradeandcapitalflows.ForMalaysia,externaldemandwasweaklastyearandis
expectedtocontinuetobeweakthisyear.China'sslowergrowthisnotforthcomingtotheMalaysia's

externalfronttoaddtothealreadylacklustreeurozoneperformancesandtheUSFederalReserves'
slowingdownpolicy.Malaysia'snetexportsdeclinedby3.7%lastyear.Inevitably,domesticdemand
wastheengineofgrowthfor2015.Nevertheless,lastyear'sdomesticdemandwasmoderated,grew
by5.1%ascomparedto5.9%ayearbefore.HencerealGDPgrowthwasmoderatedto5.0%in
2015ascomparedto6.0%in2014.
Themoderationindomesticdemand,however,kepttheinflationratein2015belowthelongrun
averageof3.0%,despitehighinflationaryexpectationduetoringgitdepreciation.Netcapitaloutflows
coupledwithslowerdemandforMalaysianexports,astheworldeconomyweakened,pusheddown
thevalueofringgit.RinggithasremaineddepreciatedsinceSeptember2014untilnow,byashighas
about20%atonepoint.Althoughringgitisshowingasignofrecovery,itisnotexpectedtogettothe
precrisisratesoonoratleasttothepsychologicalthresholdofRM3.80perUSD,theratethatwas
peggedontheSeptember2,1998duringtheAsianfinancialcrisisin1997/98.Privateconsumption
weakenedasliquidityintheeconomydeclinedfromRM269.9billionattheendof2014toRM205.1
billionattheendoflastyear,householddebtsrisingandinflationaryexpectationwashigh.
Movingforward,domesticdemandisexpectedtocontinuetobetheengineofgrowthforthe
Malaysianeconomyforthisyearamidstillsomewhatsluggishglobaleconomy.Weakcommodity
pricesremainsasastumblingblockforthegrowthofdevelopingeconomies,whichinturn,slows
downthedevelopedeconomies,hencetheIMFhasreviseditsglobalgrowthprojectionfor2016
downwardby0.2percentagepointfromearlierprojection.Nevertheless,thegrowthof3.2%isstill
marginallyabovelastyear'sgrowthof3.1%.ThegrowthmomentumwillbepickingupandIMFglobal
growthprojectionfor2017ishigherat3.5%.AccordingtoIMF'sWorldEconomicOutlook,April2016
worldtradevolumesgrewby2.8%lastyearandisexpectedtogrowstrongerat3.1%thisyearand
3.8%in2017.Consequently,Malaysia'snetexportsisexpectedtoimprovebygrowingat1.2%this
year(2015:3.7%).
Althoughstilldrivingtheeconomy,thedomesticdemandisexpectedtomoderatefurtherthisyear.
Thesurgeinprivateandpublicinvestmentismuchneededtooffsetthedwindlingbothprivateand
publicconsumption.Domesticdemandisexpectedtogrowby4.5%slowerthanlastyearwiththe
growthof5.1%,underpinnedbyprivateinvestmentgrowthof5.6%andprivateconsumptiongrowth
of5.2%.Privateconsumptionisexpectedtogrowmoderatelyascomparedtolastyeargrowthof
6.0%.Thegrowthinprivateinvestment,however,isstillbelowlastyear'srateof6.4%.Thepublic
sector'sinvestmentisexpectedtopickuptheshortcomingbygrowingat1.4%,aturnaroundfroma
negativegrowthof1.0%lastyear.
Malaysia'srealGDPisexpectedtogrowmoderatelyat4.2%thisyear.Growthwillbedrivenlargely
byprivatesectorexpenditures,particularlyoninvestmentintheenvironmentoftighterliquidity
condition.BNMisexpectedtomanagetheliquidityfavouringbusinesses.Publicsectorexpenditureis
projectedtobeinfluencedbycontinuingfiscalconsolidationprocessasthedepressedoilpricesis
expectedtopersist.
Asfor2017,realGDPgrowthisexpectedtoedgeupmoderately,registeringagrowthofbetween4.5
5.5%.Domesticdemandcontinuestobetheengineofgrowthbygrowingat5.0%.However,the

exportdemandisexpectedtoimprovefurthergrowingat3.0%ayear.Currentaccountbalanceis
expectedtodeterioratethisyearestimatedtobe1.8%ofGNI,butitwillreboundin2017asexport
demandimprovefurther.

Postedbysuzyat02:57PMonApril21,2016

MALAYSIANECONOMICOUTLOOK
ExecutiveSummaryIntroduction
WhileMalaysiaisnaturallyprotectedfromsnowstorms,tornadosandhurricanes,havingtodealwith
onlyregularrains,floodsandsometimelandslides,thecountrygrappledwithsevereheadwindson
economicfrontlastyear,followingunanticipatedglobalcommodityandcurrencyshocks,financial
marketturbulenceandsuddenreversalofcapitalflows.Mostimportantly,thecountryavoidedoily
slopesanddarkcorners,associatedwithdomesticpoliticalupheavalsandshocks,affectingboth
sidesofpoliticaldivideentrenchedsocialgrievancesheightenedracialtensionsandelevated
religiousandfaithinsecurities.Meanwhile,thelongawaitedliftoffintheUnitedStates(US)Federal
FundsRate(FFR)thatfinallyoccurredon16December2015andtheinclusionofChina"scurrency,
theRenminbiorYuanintotheIMFbasketofSDRreservecurrencieson30November2015,haveto
acertainextentreducedtheintensityofuncertainty,prevailinginglobalfinancialmarketslastyear.
Thesewidelyanticipatedepisodeshavebeenconsideredashealthydevelopmentsfortheworld
economy,whichwasreinforcedfurtherbytheglobalconsensusonclimatechange,culminatinginthe
adoptionofUnitedNationsGlobalAgenda2030forSustainableDevelopment(UNGA2030).Of
greatersignificanceforMalaysia,FitchRatingshasaffirmedMalaysia'sLongTermforeigncurrency
IssuerDefaultRating(IDR)at"A"andlocalcurrencyIDRat"A",whileinterestinglytheoutlookonthe
LongTermIDRshasbeenrevisedto"stableoutlook"from"negative".Meanwhile,asreportedbythe
Bloomberg,Moody'sInvestorsServiceaffirmedMalaysia'sA3sovereignrating,butcuttheoutlookon
thesovereignratingto"stable"from"positive",citingMalaysia'sweakeningexternalposition.The
migrationofratingoutlooktothemiddlegroundbythetwosistersofinternationalratingagencies
indicatesthattheoutlookforMalaysianeconomyremainsfavourable.Onthedomesticfront,major
issuessurrounding1MDBoperationshavebeensuccessfullyresolvedandthecompanyreportedon
12January2016thatitwasfinally"outofthecriticalphase".
ThesefavourabledevelopmentsaugurwellfortheMalaysianeconomy,althoughtoughchallenges
areexpectedtoarisealongthewaythisyear.Ontherealeconomy,realGDPgrowthfor2015is
estimatedtoregistercloseto5%,arespectablegrowthconsideringweakandunevenglobal
economicrecovery,whileheadlineinflationremainedbenign,averaging2.1%for2015asawhole
(2014:3.2%),whichisonly0.1percentagepointabovethepricestabilityinflationtargetofmany
centralbanksinadvancedeconomies.Meanwhile,fiscaldeficitoftheFederalGovernmentfinancial
positionimprovedconsiderably,estimatedtoregister3.2%ofGDPin2015,whichisasignificant
achievementcomparedtotheratioof6.5%ofGDPrecordedin2009,whenthecountrywashithard
bytheglobaleconomicandfinancialcrisis.Theimplementationofgoodsandservicestax(GST),
effectiveon1April2015andremovaloffuelsubsidysystemwerecertainlytherightpolicyactionsby

theGovernment,despiteyearsofdelayanddecadesofdeeprootedsubsidymentality.The
implementationofconsumptionbasedGSTiscertainlyablessingindisguiseforthecountry,
providingstrongfiscalsafeguardandactingasabuiltinstabilizerfortheeconomy.Successful
implementationcouldalsobeviewedasreformdividendsfortherakyat,whichcouldpossiblybein
deepeconomictroubles,especiallywithplummetingcrudeoilprices,asseeninmanyoilexporting
countries.Infact,theshareofoilrelatedrevenueinthetotalrevenueoftheFederalGovernmenthas
beenreducedsignificantlybymorethanhalf,fromabout40%in2009toanestimated18%lastyear.
Therosypicture,asdescribedaboveisnotallbeautifulorpictureperfect,infactbothblemishesand
darkspotscanbefound.Forexample,labourmarketconditions,whileremainedgenerally
favourableinthefirstelevenmonthsof2015,areshowingsignsofweakening,especiallywithrising
numberofretrenchments,stagnatingjobvacanciesandhigherlabourforceparticipationrate(LFPR),
althoughoverallunemploymentrateremainedwellbelowthe4%thresholdoffullemployment
(November2015:3.2%,October2015:3.1%).Moreworryingly,youthandgraduateunemploymentis
becomingasourceofsocialconcern,triggeredbyincreasingparticipationrateoftheyoungand
educatedworkforce,inanenvironmentwherethereisincreasingfragilityandsluggishnessin
businessandeconomicprospects.Ontheexternalfront,therearecertainlymanywarningsignalsor
redflags,reflectedbycontinuingnetportfolioinvestmentoutflows,narrowingofnetcurrentaccount
surplusofthebalanceofpayments(NCAB),significantdepreciationoftheringgitexchangerate,and
decliningnetinternationalreserves.Inthisconnection,Malaysiamustactfast,takingappropriate
actionstoprotectthecurrentlyvibranteconomyandensurethewellbeingoftherakyat.Wecertainly
needtobevigilant,proactiveandforwardlooking,especiallyonexternaleconomicandfinancial
developments.Economicpressuresarebuildingupandtoughchallengesareloomingonthe
horizon,asseeninthefallingcrudeoilpricesaswellasglobalstockmarketsselloff,whichstarted
fromthefirsttradingdayoftheyearandlasteduntilrecentweeks.Competitivedevaluationof
currenciesarerearingtheiruglyheadsagain,pointingtodiminishinginternationalpolicycoordination.
Therefore,maintainingfinancialstabilityandimprovinginvestors'confidenceneedtobethekey
priorityoftheGovernment.
Investorsandrakyatasawholearewatchingverycloselynewmovesandpolicyactionsbythe
Government,asthingsaregettingworsebytheday,sincethebeginningofthisyear.Moreover,
officialgrowthforecasts,releasedduringpresentationofthe2016BudgetinParliamenton23
October2015indicatedthattheoverallgrowthoftheMalaysianeconomyisexpectedtomoderateto
between4%and5%thisyear(2015est:4.9%).Thisgrowthforecaststandsbelowthepotential
outputgrowthoftheMalaysianeconomy,estimatedatabout5.5%perannum,pointingtolower
investmentefficiencyandtoacertaindegreedeteriorationinthecountry'sthirdfactorgrowth,namely
totalfactorproductivity(TFP).Thisimportantcomponentreferstothepowerofnewideas,
entrepreneurship,creativityandinnovativenessintacklingnewchallenges,apartfromaddingraw
labourandtechnologyembodiedcapital.Mostimportantly,rakyatshouldnotbeaskedtofendfor
themselves.Theyneedstrongandsupportiveguidinghands.Surprisingly,officialforecastindicates
thatringgitexchangerateisexpectedtoremainstableattheaveragelevelofRM4.20perUSdollar
thisyear(2015:RM3.912014:RM3.272013:RM3.15perUSdollar),pointingtocontinued
undervaluationormisalignmentoftheringgitexchangerateintermsofitsfairvalueor"fundamental

equilibriumexchangerate".Thisforecastunfortunatelypointstohigher"riskpremium"inthecountry,
somewhatpessimistic,asifmovingalongwithconditionalforecastsbyvestedinterestgroups,likeFX
marketstrategistsandspeculators.
RealitiesintheFXmarket,however,indicatethatexchangeratemovementsaredrivenbya
combinationofdynamicforces,encompassingnotjustshorttermspeculativeactivities,changesin
marketsentiments,unverifiednews,perceptionsandunanticipatedevents,butalsopossiblyrookie
actionsandmisplacedinterventionsbytheauthorities,togetherwithlongestablisheddistortionsand
imperfectionsinmarketmicrostructures.Thesespeculativeandtechnicalfactorsamplifytheshort
termmovements,reinforcedfurtherbycurrentaswellasexpectedfuturedirectionsoftheeconomy,
asrecentlyseeninChina.Assuch,policymakersneedtobeproactiveandforwardlooking,
avoidingbeinginfluencedtoomuchbyFXasymmetricandidiosyncraticbehaviouranditsnonlinear
tendencies.Greatereffortsareneededinimprovingandnurturingeconomicagents'sentiments,
investors'confidenceandreversingtheirnegativeperceptionsaboutthegoodmanagementofthe
macroeconomyandpoliticalsituationinthecountry.Theseactionsincluderemovingthedistortions
andimperfectionsinthemediumandlongtermtermandstrengtheningfurtherdomestic
macroeconomicfundamentalsintheimmediateandnearterm,byimplementingappropriatefine
tuningactionsandmacroeconomicstabilizationmeasureswithoutanyfurtherdelays.
Theeasywayoutisjustleaningwiththewindorlettingthingssortoutovertime,astheexternal
sectorisslowlybutsurelypickingupinthemediumandlongterm,asthebottomswouldcertainlybe
reached,especiallyforcrudeoilprices.Meanwhile,majoruncertaintiesintheglobaleconomyare
alsobeinggraduallyremoved,althoughpolicycoordinationseemstobediminishingattheglobal
level.TheseincludedtherecentliftoffintheUSinterestrates,anadoptionofmarketbased
approachinChina'sfinancialandcapitalmarkets,thestrengtheningofYenandEurocurrenciesas
againsttheUSdollarinrecentweeksandcontinuingeasymonetarypolicyintheEuroArea,Japan
andotheradvancedeconomies.Assuch,theUSdollarwouldnotbeontheupsideforalongperiod,
withoutinvitingseriouseconomicrepercussionsontheUSeconomy.Moreover,lookingfromalong
termperspective,USdollarontradeweightedbasishasbeenonthedecliningpath,exceptinrecent
years.
Intryingtounderstandthesedevelopments,Olympicgamesofferabetterguidancewithitsstrict
rules,levelplayingfieldsandmostimportantly,itsunifyingforceandstrongcoordinationamong
competingnations.Sizeandstrengthmatterininternationaleconomicandpolitics,asdisplayedby
thetwoeconomicgiants,namelytheUSandChina,theworld'sfirstandsecondlargesteconomies.
Unlikeinsports,thesetwocountriesarecertainlycompetingintheglobaleconomicandpolitical
arena,takingcalculatedrisksandadopting"intelligentstrategy".Theyarebuildinguptheirmilitary
powerandflexingtheirmusclesmilitarily,asseenrecentlyintheSouthChinaseaandaboveDMZin
theKoreanPeninsular.Meanwhile,Chinaislearningbydoing,emphasizingongradualismby
allowingforasmoothtransitioninitsstructuraladjustmentandreformprogramsandbuildingup
slowlybutsurelyitssoftinternationalinfrastructures.Chinaiscertainlyavoidingkneejerkreactions,
shocktherapyandothercookiecutterpoliciesasusedtobeimplementedinthepastunderan
orthodoxeconomicpolicies.Infact,Chinaislearningfast,dismantlingthecircuitbreakersand

mendingitsrookieactions,asseenrecentlyinitsstockmarketinterventions.Interestingly,aspartof
theIMFgovernancereformsandnewfundingprograms,China'svotingrightintheIMFwillrisefrom
3.8%to6%,reflectingitsincreasinginfluenceandrisingpower.ChinahasalsoembarkedonAsia
InfrastructureandInvestmentBank(AIIB),anewmultilateraldevelopmentbankinAsia,whichwillbe
underitsdomain.TPPAandRCEPareanothertwoexamplesofnoncooperativegames,usinggame
theoryterminology,pointingtostrongcompetitionbetweenthetwoeconomicrivalswithtotally
differentpoliticalregimes,initialeconomicconditionsandoperatingstandards.Chinaisembarkingon
regionalization,andbarringanymilitaryconflicts,thesheersizeanditsstrength,combinedwith
"intelligentstrategy"plus"strongtechnocraticleadership",neutralityandnoninterference,Chinawill
mostlikelyemergestrongerandpowerful,reassertingitspastglory.Nucleardealandliftingof
sanctionsinIranwillalsoseethatlowoilpriceswillnotlastthatlong,sinceoilpricesarealwaysused
asastrategicandbargainingtoolsandpronetosharpspikes.Supplydisruptionsandstrategic
decisionbyOPECwillcertainlyaffectoilproductionandglobaloilsupplyconditions,inan
environmentwhereoildemandisslowlybutsurelypickingup,movingforward.
Inthisrespect,Malaysiaasatradeorientedandfinanciallyintegratedeconomy,butlackinginboth
economicsizeandstrength,needstoobserveandplaytheeconomicandpoliticalgamewell,soas
nottobetrampledbythesetwocompetingandnoncooperatinggiants.Followtheleader,leaning
withthewind,placingmoreweightonbusinessinterests,relyinglessonindigenouscapabilityand
gamblingonthewelfareofthesocietyasawholearecertainlynotthefirstbestoptionor"optimal
approach",especiallyforthecountrythataspirestobeadevelopednationbytheyear2020.The
Malaysianeconomyhastobeoperationallyindependent,andweneedtohaveastrongpolicy
safeguards,protectingourinstitutionalsovereigntyanditspeople,nationalinterestsandaccepted
socialvaluesandnorms.Inthisrespect,weneedtobestrong,independent,resilientandagile,while
adjustingproactivelyandflexiblytothesocalled"newnormal"innewinternationaleconomic
landscape,wherecompetitionisintenseandpolicycoordinationisclearlydiminishing.Wehavetobe
creativeandinnovative,employing"smartstrategy"andwith"intelligentcommunication",indealing
withthesenewrealities.Weneedtonotonlyadjusttothenewenvironment,butalsothinkcreatively
aboutsolutions,ratherthantakinganeasywayout,adjustingpassivelytoadversecircumstances
andactingasif"businessasusual".Moreimportantly,weshouldnotburdenfuturegenerationswith
new"economicimperialism"andallowforthesocalled"economicgenocide",imposedbytherich
andpowerfulnationswithmercantilisttendencies.Apartfromenhancingeconomicefficiency,we
needtoensurethatadequateattentionisgiventodistributionalaspects,environmentalconcernsand
socialissues.Moreimportantly,weneedtotakeintoaccountbothmarketandnonmarketvalues,as
opposedtoonlyvaluesfrommarkettransactions,derivedusingeconomicimpactanalysis,suchas
dynamiccomputablegeneralequilibriummodel(DynamicCGE).Actualcostbenefitanalysis(CBA)
capturesallnonmarketbenefits,socialaswellasenvironmentalcosts.Furthermore,weneedto
takeintoaccountwelfarechangesofallbeneficiaries,encompassingsocietyasawhole,identifying
thegainersandlosersandmoreimportantly,futuregenerations.
Meanwhile,assuggestedinthepreviousreports,weneedtocontinueexaminingindepthallbinding
constraintstoeconomicandsocialdevelopment,existingdistortionsandimperfectionsinmarket
microstructures,mostnotablyinthelabourmarketandFXmarketwithitsnoninternationalizationof

ringgit,rigidadministrativerulesandthinliquidity.Politicalspatsandracialrhetoricunfortunatelyadd
totheworseningeconomicandbusinessconditions,asstabilizationmeasuresandnewpolicyactions
requirestrongownershipandsupportbyallstakeholders,irrespectiveofpoliticalaffiliations,racial
andreligiousassociations.Therearecertainlysocialcostsandinfactwelfarelossestothesocietyas
awhole,associatedwithdelaysinstructuraladjustments,lackofopennessandtransparency,gapin
policycredibility,weakinstitutions,poorgovernanceand,worststilllowethicalandmoralstandards.
Inthisrespect,theremustbeastrongguidinghand,goodsignallingmechanismandcertainly
crediblepoliciesformarketparticipantstoreactadequatelyinthistryingtimes,whileextensive
consultationswithrelevantstakeholderswillultimatelyhelptoavoiduncertaintyandnegative
perceptionsofstakeholders,consumers,investorsandrakyatalike.Moreimportantly,weneedto
ensurecontinuedhappinessandgoodlifefortherakyatbyencouraginggreaterkindnessand
showingstrongcompassionandmercytoothers,especiallythosewithdifferentethnicbackgrounds
andreligiousbeliefs.Weneedtoavoidplayingwithpeople'sinsecuritiesbyencouraginggreater
openness,tolerance,socialjusticeandfairnessinthecountry.
ShorttermIssuesandStabilizationMeasures
RealGDPgrowthmoderatedto5.1%inthefirstthreequartersof2015,decliningbyonepercentage
pointfrom6.1%inthecorrespondingperiodof2014.Meanwhile,netcurrentaccountofthebalance
ofpayments(NCAB)alsomoderated,registeringasmallersurplusofaboutRM22.6billioninthefirst
threequartersof2015(JanuarySeptember2014:RM41.7billion),pointingtoareductionbyalmost
50%comparedtotheamountinthecorrespondingperiodof2014.Themarkedimprovementin
tradebalanceposition,asseeninrecentquartercouldbetracedbacktosignificantdepreciationof
theringgitexchangerate,supportedbycontinuedstrongexpansionintheUSeconomyandalso
recoveryinboththeEuroAreaandJapan.Despitethesetransitoryimprovements,theslowdownin
China'seconomicgrowth,whichisnowMalaysia'slargesttradepartnerandalsofallingpricesof
commodityexports,especiallyforcrudeoil,areexpectedtoweighheavilyonthepositionofNCABin
thecomingquarters.Assuch,thepossibilityof"twindeficit",aspredictedearliercouldpossiblybe
extendedwellbeyond2016,leavingonlyfiscaldeficitoftheFederalGovernment,whichisexpected
todeteriorateconsiderably(2015:3.2%ofGDP,2016est:3.1%ofGDP),ifappropriateactionsare
notbeingimplemented.
Meanwhile,labourmarketconditionsremainedgenerallyfavourablewiththeunemploymentrate
stabilisedat3.2%ofthetotallabourforceduringtheperiodfromJulytoNovember2015,reflecting
fullemploymentsituationinthecountry(thresholdat4%).Inaddition,headlineinflation,which
registeredthepeakat3.3%inJuly2015,deceleratedmarkedlyto2.7%inDecember2015,on
accountofcontinueddeclineintransportcharges,broughtaboutbydownwardadjustmentsinfuel
enduserpricesandalsopartlyhelpedbylowernonfoodprices.Headlineinflationfor2015asa
whole,remainedlowat2.1%,markedlylowercomparedto3.2%in2014.Apartfromweather
conditionsthataffectedsupplyoffooditems,demandconditionsremainedgenerallystable,as
measuredbycontributionofcoreinflation(excludesfood,transportandenergyprices),which
averagedabout1.7percentagepointslastyear.Costpushfromsignificantringgitdepreciationand
demandpullbylowenergypricescouldpossiblyseethatinflationisontheuptrendthisyear.Tough
fiscalactionscouldalsopushconsumerpricestohigherlevels.

Lookingahead,Malaysiaremainssusceptibletobothanticipatedaswellasunanticipatedexternal
developments,especiallyintheassetmarkets.Theseincludecontinuingnetoutflowsinportfolio
investment,especiallyfromdebtsecuritiesandequities,decliningpricesofcommodityexportsand
risingvolatilityanduncertaintyinglobalfinancialmarkets.Termsoftrade(TOT)continuedtoregister
lossesinthelastfourquarters,exacerbatedbydecliningcommodityexportpricesand,most
worryinglycontinueddepreciationintheringgitexchangerates.Moreover,importpriceindexhas
beenshowinganuptrendinthelastfiveyears,pointingtothefactthatringgithasbeendepreciating
foralongtime,buttookaturnfortheworseinrecentmonths.Infact,bilateralringgitexchangerate
withtheUSdollarhasbeendepreciatingallthewayinthelastsixyearswithrisingvolatilityandfinally
breakingtoregistersharplylowervaluesinceSeptember2014untilveryrecently.Sadlyfor
Malaysians,theringgithasbeenallowedtocrossthepsychologicalthresholdofRM3.80perUSDon
6July2015,andtoucheditslowestexternalvalueinthelast17yearsatRM4.4725perUSDon29
September2015andhoveringataboutRM4.37perUSdollarinrecentweeks.Meanwhile,domestic
interestrates,externalborrowingcostsandexternaldebtservicesarealltrendingup,despite
unchangedOPRat3.25%intherecentMPCmeetingon21January2016.FurtherhikeintheFed
fundsrateintheUnitedStates(US)isexpectedtoexertpressureondomesticpolicyrate,astheUS
dollarisexpectedtocontinueitsstrengtheningpaceinthecomingmonths.Whilethereisstill
divergenceinmonetarypolicystancebetweentheUSwiththerestoftheworld(ROW),particularly
withtheECBandBankofJapan,amongothers,BankofEnglandisexpectedtoraiseitspolicyrate
soonerthanlater,withitsstrongeconomicrecoveryandthetransmissionofmonetarypolicy
contagionisalreadybeingfeltinLatinAmericancountries,SouthAfricaandothercountriesthathave
strongfinanciallinkageswiththeUSeconomy,ofwhichMalaysiaisincluded.
Theyear2016willcertainlybeaverychallengingyearfortheMalaysianeconomy,asdownsiderisks
ontheexternalfronthaveincreased,whileglobalgrowthforecastshavebeenreviseddownwardsby
boththeIMFandWorldBank.Oilexportingandcommoditydependenteconomies,encompassing
bothdevelopingaswellasdevelopedcountries,willbeadverselyaffectednotjustbyplunging
commodityexportprices,butalsobyrisingborrowingcostsanddebtservicingcharges,associated
withhigherinterestratesandstrengtheningoftheUSdollarintheglobalfinancialmarkets.
Moreover,economicactivityinadvancedeconomiesisexpectedtopickuponlymodestlythisyear,
accordingtothelateststatementbytheIMF,withtheexceptionofcurrentlyrobustgrowthintheUS
andsterlingperformanceoftheUKeconomyandIndiaaswell.Thelatterisanemergingtigerin
DevelopingAsia,whichisexpectedtoregistertigerishgrowthof7.5%thisyear(2015:7.3%),
overtakinggrowthinChina.
MacroeconomicandFinancialPolicies
BankNegaraMalaysia(BNM)againdecidedtomaintaintheOvernightPolicyRate(OPR)at3.25%in
itslatestMonetaryPolicyCommittee(MPC)statement,releasedon21January2016.Thiswas
actuallythetenthtimetheOPRremainedunchangedsinceBNMraisedtheOPRmorethanoneand
halfyearagoon10July2014.TheMPCdecisionwasundeniablybehindthecurveandcertainlynot
forwardlookingandproactiveaspracticedinthepast.TheUSFederalReserveBank(Fed)
decisivelyraisedthenewtargetrangefortheFedFundsRate(FFR)at0.25%to0.5%,aquarter
percentupfromzeroto0.25%,whichwasthefirsthikeinnearlyadecadesince2006.TheFed's

unanimousdecisiontakenon16December2015wasbasedonsoliddeliberationsduringthe
FOMC'stwodaymeeting,puttinggreateremphasisongradualadjustmentinthestanceofmonetary
policythisyear.TheFFRwillbeadjustedonastepwisebasis,reachingtheupperceilingofthetarget
rangeat1.5%bytheendof2016.WhiletherecentFedhikeinFFRwaswidelyanticipatedand
alreadypricedinbyfinancialmarkets,theadjustmentsinthecomingmeetingswillstillpose
uncertainty,aspartofmonetarypolicyritualsfollowtheleaderbyothercentralbanks,althoughwith
atimelag.
Whiledomesticinterestratesremainedgenerallylow,growthinbroadmonetaryaggregates
weakenedconsiderably,especiallyinrecentmonths.Thetightliquiditysituationcouldpotentiallypush
interestratestohigherlevels,especiallywithmonetarypolicycontagion,comingfromplanned
increasesintheUSFFRthisyear.Therewasamarkedreductioninbroadmoneysupply,asthenet
foreignassets(NFA)continueditsdownwardstrend,resultingintightdomesticliquiditysituationin
thecountry,althoughdomesticcredit(DC)remainedgenerallyfavourable.Whilethetighteningof
liquidityconditionwasnotreflectedinthesharpupsidemovementsofkeyinterestrates,inviewof
stableinterestrateenvironmentbothathomeaswellasabroad,ringgitexchangerateunfortunately
tookthebruntofadjustment,depreciatingmarkedlyagainstthecurrenciesofmostofMalaysia's
majortradingpartners.Meanwhile,BNMceasedtobeactiveinconductingforeignexchange
interventions(FXI)toinfluencethelevelofexchangerate,asringgitexchangerateshavestabilised
inrecentmonths,afterlosingitsvaluebywhooping20%againsttheUSdollarin2015.StrongFX
interventions,especiallyduringthemonthsofAugustandSeptemberlastyearalsosawthatthenet
internationalreservesofBNMdeclinedsubstantiallytoUSD93.3billionasat30September2015,and
stabilisedatUSD95.1billionasat15January2016.
Lookingfromalongertermperspective,netinternationalreservescontinueditsdownwardtrend,
registeringUSD95.1billionasat15January2016,wellbelowthesocalled"psychologicalthreshold"
ofUSD100billion(endDecember2014:USD116.0billionendDec2013:USD134.9billion).
Fortunately,theratioofinternationalreservestoshorttermexternaldebtstoodat1.1times,
marginallyabovethestandardinternationalthresholdof1,asshorttermdebtalsochangeswith
financialmarketdevelopments.Whilebothdirectandportfolioinvestmentpositionshaveimprovedin
thethirdquarterof2015,"otherinvestments"continuedtoregistersubstantialnetoutflows(deficit).
Theturnaroundwasonaccountofrisingacquisitionofforeignassets,classifiedunderdirect
investment,especiallydebtinstrumentsaswellasequityandinvestmentfundsharesabroad,aspart
ofinternationaldiversificationbyMalaysianfirmsandhighnetworthindividuals.Theywere
essentiallyprotectingtheirassetsfromravagesofplungingringgit,takingouttheirmoneyand
accumulatingassetsoverseasinanunprecedentedmanner.ThisexplainedwhyMalaysiasuddenly
turnedintoanetcreditorunderIIPwithinjustashortspanoftime,runningessentiallythreemonths
fromJulytoSeptember2015.WhileforeigninvestorswereditchingMalaysianequitiesanddebt
securitiesandreallocatingtheirportfoliobacktowardsdollardenominatedassets,Malaysianfirms
andhighnetworthindividualswerealsobusyacquiringassetsoverseas,asifescapingfromdifficult
andtryingtimesasexperiencedearlierduringglobaleconomicandfinancialcrisisin2008/2009.
Strongexchangemarketpressure,asexperiencedinthethirdquarterof2015couldpossiblyexplain
thisphenomenon,turningintoonewayflowsasopposedtotwowayflows,envisagedbythe

authorities.
GlobalEconomicDevelopmentsandProspects
Theglobaleconomystartedtheyear2016withglobalequityselloff,triggeredbycircuitbreakersthat
trippedintheShanghaiandShenzhenequitymarkets.WhileChina'sslowdownhasbeentranslated
intodramaticmovementsinitsequitypricesandYuanexchangeratemovements,thestrengthening
oftheUSeconomyprovidesanewlocomotiveenginefortheglobaleconomy,asreflectedbymodest
recoveryintheEuroAreaandJapan.Despitethat,monetarypolicynormalizationintheUS,which
hasbeenhailedasanimportanteventinthehistoryofmonetaryeconomicshasitsown
repercussionsontheglobaleconomy,althoughtheliftoffintheFFRwasessentiallyahealthy
development.TheexpectedhigherinterestratesintheUS,thoughatameasuredpaceandgradual,
andcontinuingstrongUSdollarcouldwellseethatborrowinganddebtservicingcostsformany
highlyindebtednationswillbeontherise,exertingsignificantpressureonbothGovernmentfinances
andcorporatebalancesheets.Monetarypolicycontagionisalsoanewsourceofconcernandcould
possiblybeunavoidable,ascentralbanksinLatinAmerica,suchasChile,ColumbiaandPeruaswell
asSouthAfricahavealreadyraisedtheirpolicyrates.Assuch,theUSFednextmoveandthepace
ofitsnormalizationisverycritical,becausehigherinterestrateandastrongerdollarinan
environmentofweakglobaldemandhurtsUSfirmsandexporters,whichinthefinalanalysishireless
workers,pushingunemploymentratebacktoabove5%.Foremergingmarketanddeveloping
economies,financialvolatilitiesandeconomicvulnerabilitiesareexpectedtopersist,moresoifthere
are"surprises"thatwouldcontributetotighteningofglobalfinancialconditions,reversalofcapital
flowsandcontinuingdepreciationintheircurrencies.
Withthesetwomajorepisodes,involvingtwolargesteconomiesintheworld,combinedwithglobal
economicevents,whicharestillunfolding,suchasdecliningcommodityprices,risingequitymarket
volatility,increasingpressureforcompetitivedevaluationandgrowingindebtednessinmanynations,
globalgrowthoutlookisexpectedtoremainweakanduneventhisyear.Moreover,thereisahigh
probabilityofanintensificationoffactorsthatdraggeddowntheglobaleconomy,estimatedat3.1%
lastyear(2014:3.4%).Ofgreatersignificance,WTIcrudeoilprices,whichhavedeclinedbyabout
70%sinceJanuary2014,touchedthelowestin13years(December2003)atUSD28.32perbarrel
on20January2016.MsChristineLagardeoftheIMF,inherrecentstatementon8January2016in
Yaounde,Africahasindicatedthattheglobalgrowth,whichwasmodestandunevenlastyear,will
mostlikelyremainsfragilethisyear.Sheelaboratedonthisbymentioningthreesignificanttransitions
intheglobaleconomy,firstlytheincreaseddivergenceinmonetarypolicyinmajoradvanced
economiessecondly,theunfoldingeventsinChinaandlastlytheturninthecommoditysupercycle.
Whilethefirsttwotransitionsaresomewhatanticipated,thelatteriscertainlyrelevantforemerging
marketanddevelopingeconomies,especiallycommodityexporters,suchasMalaysia.
TheWorldBankinitslatestpublicationGlobalEconomicProspects,2016,releasedon30December
2015,cutsglobalgrowthprojectionsby0.4percentagepointfor2016and0.2percentagepointfor
2017fromitsJune2015projectionsto3.6%and3.8%,respectively.TheWorldBankmentioned
aboutsubstantialdownsiderisks,includingsharperthanexpectedslowdowninkeyemergingmarket
anddevelopingeconomies(EMEs),ariseinfinancialmarketvolatilityandasubstantialdecreasein

capitalflows.Currencypressuresandborrowingcostsareexpectedtorise,followingmonetarypolicy
normalizationintheUS,whilegeopoliticaltensionsarealsoontherise,especiallywithdiplomatic
disputesbetweenSaudiArabiaandIranandnuclearpoliticsintheKoreaPeninsular.
Despitethegloomyoutlookfortheworldeconomythisyear,recoveryinadvancedeconomiesis
holdingwell,albeitatamoderatepace,especiallyintheEuroAreaandJapan,whileeconomic
activityisexpectedtoremainrobustintheUSandUKaswell.Meanwhile,emergingmarket
economies(EMEs)andlowincomedevelopingcountriesarefacingsevereeconomicandfinancial
difficulties,followingChina'sgrowthslowdownandexpectationofhigherinterestratesintheUS.
DecliningcommoditypricesandstrengtheningoftheUSdollarhaveresultedinweakeninggrowthin
manyEMEs,especiallycommodityexportersandresourcebasedeconomies.TherearealsoelNino
effects,combinedwithheightenedgeopoliticaltensions,especiallyintheMiddleEast.
Lookingahead,mediumtermprospectsfortheglobaleconomyremainonbumpyroad,especially
withcontinuinglowproductivitygrowth,particularlyinEMEs,populationaginginadvanced
economies,suchasJapanandlongdelayedstructuraladjustmentandreformmeasurestoaddress
highpublicsectorandhouseholddebts,lowpercentageshareofprivateinvestmenttoGDPandlow
femalelabourforceparticipationrate,amongothers.Indiaiscertainlyanexception,benefittingalot
fromlowcrudeoilprices,whilepursuingseriouslyitsstructuraladjustmentandreformprograms.
GrowthinIndiasurpassedChina'sgrowthlastyear,registering7.3%(2014:7.3%)andexpectedto
register7.5%thisyear.
TheInternationalMonetaryFund(IMF)initslatestWorldEconomicOutlookUpdate(WEOUpdate,
January2016),releasedon19January2016,reviseddownwardthe2016annualgrowthestimate
fortheworldeconomyto3.4%(2015:3.1%),representing0.2percentagepointlowerthanOctober
2015WEOestimateof3.6%.TheIMFalsoreviseddownwardtheglobalgrowthforecastfor2017to
3.6%,downby0.2percentagepoint,pointingtoonlymodestrecoveryfortheglobaleconomyin
2017.Meanwhile,growthinadvancedeconomiesisexpectedtobeontheuptrend,growingslightly
higherby2.1%in2016(2015:1.9%2014:1.8%2013:1.1%),butslightlylowerwhencomparedto
October2015WEOforecastof2.2%.Growthratein2017isprojectedtoremainunchangedat2.1%,
reflectingadownwardrevisionof0.1percentagepoint.Similarly,growthinemergingmarketand
developingeconomiesasagroupisprojectedtoimprovemodestlyto4.3%thisyear(2015:4.0%
2014:4.6%2013:5%),whichisalso0.2percentagepointlessthanearlierforecastat4.5%.While
growthisexpectedtobeontheuptrend,registering4.7%in2017,itisadownwardrevisionby0.2
percentagepointfromthepreviousforecast,indicatingmoderatepaceofexpansion,especiallyin
countriescurrentlyineconomicdistress,notablyBrazilandRussia.
WhiletheUSeconomycontinuedtoregisterrobustgrowth,movingawayconfidentlyfromtheworst
recessionexperiencedinrecentyears,thepaceofexpansionintheEuroArearemainedweak,in
factshowingsignofweakeninginrecentquarters.Moreover,riskstorecoveryseemtobeonthe
rise,asinflationrateisstubbornlylow.TheIMFinitsJanuary2016WEOUpdateloweredthegrowth
forecastfortheEuroAreaat1.7%in2016(2015:1.5%2014:0.9%),representing0.1percentage
pointreductionfromOctober2015WEOforecast,whileforecastfor2017hasbeenmaintained1.7%,

asbefore.Apartfromsevereshorttermheadwinds,especiallywithdecliningexportstoChina,Japan
isundeniablyfacingalotofeconomicchallenges,especiallylongtermstructuralissues,suchas
shrinkinglabourforce,lowproductivitygrowthandlowpotentialoutputgrowth.Relatedtothese
developments,Japan'sgrowthforecastfor2016hasbeenmaintainedbytheIMF(WEOUpdate,
January2016),projectinggrowthof1.0%in2016(2015:0.6%2014:0%),whichisthesameasin
October2015WEO.Growthisexpectedtobesupportedbyfiscalstimulus,continuingloweroil
prices,accommodativemonetarypolicyandrisingwages.Meanwhilegrowthforecastfor2017has
beensimilarlyrevisedto0.3%,markingadownwardrevisionfrompreviousforecastof0.4%,on
accountofweakerexternalenvironmentandmoderatingprivateconsumptionspending.
Meanwhile,Chinaistransitinggraduallytoanewgrowthmodel,relyingmorethistimearoundon
humanresourcesratherthanrawinputs,likenaturalresourcesandcapital.GrowthoftheChina's
economyisestimatedtorecordnearly7%lastyear,accordingtorecentstatementbyChinese
PremierLiKeqiang.Thisgrowthestimateissomewhatcloseto6.9%growthpredictedfor2015
(2014:7.3%,2013:7.7%)bytheIMF.TheIMFprojectedgrowthtoslowdownfurtherto6.3%this
year,whichwasthesamegrowthforecastasinOctober2015WEOaswellasinWEOUpdateinJuly
2015.Thesegrowthforecastsseemedtobeintandemwithanongoingstructuralreformprogramsin
China,movingsteadilytoamoremarketbasedeconomicsystem.China'scontinuedgrowth
slowdownthisyear,thelowestsince1990(3.8%),isunfortunatelydrivingdownwardgrowthinother
emergingmarketanddevelopingeconomies,especiallyexportersofrawmaterials,suchasoil,
metals,mineralsandothercommodities.Brazil,Russia,Malaysiaandevendevelopedeconomies
likeAustraliaandCanadawillbeaffected,althoughwithavaryingdegrees.
India'seconomyhascertainlyoutperformedotheremergingmarketanddevelopingeconomieslast
year,registeringgrowthofwellabove7%,whichwas3.3percentagepointshigherthantheaverage
forthegroup.GrowthinIndiaisestimatedat7.3%in2015bytheIMF,thesamegrowthrateas
experiencedin2014.TheIMFmaintainedIndia'sgrowthforecastsfor2016and2017at7.5%inits
latestJanuary2016WEOUpdate.IndiahasovertakenChina'sgrowthratelastyearandcertainlythis
year,especiallywithChina'sgrowthcontinuedtoslowdown.Meanwhile,inLatinAmericaandthe
Caribbean,BrazilanotherBRICcountry,isexpectedtoremaininrecessionthisyear(2015:3.8%,
2016:3.5%),sharingsimilareconomicdifficultieswithRussia(2015:3.7%,2016:1.0%),due
largelytolowercommodityexportprices.
ASEAN5(Indonesia,Malaysia,Philippines,ThailandandVietnam)isprojectedtogrowat4.8%in
2016and5.1%in2017(IMFWEOUpdate,January2016),pointingtodownwardrevisionsof0.1
percentagepointand0.2percentagepoint,respectivelyascomparedtoforecastsinOctober2015
WEO.Meanwhile,inflationarypressureismoderatingacrossASEAN5,underpinnedbyfalling
commodityprices,especiallycrudeoil,althoughcurrenciesofthesecountriessimultaneously
depreciatedagainsttheUSdollar,althoughatvaryingdegrees.WTIcrudeoilplungedtothelowest
in13yearsatUSD28.32perbarrelon20January2016(26January2015:USD45.06).Lookingback,
on20January2015theMalaysianGovernmentdecidedtorestructurethe2015Budget,unveiledin
October2014,cuttingoperatingexpenditurefor2015byRM5.5billionandsettingslightlyhigher
fiscaldeficittargetat3.2%ofGDP,asagainstearliertargetof3.0%in2015.Thesamethingwillbe

repeatedon28Januarythisweek,wherebythe2016BudgetwillberevisedbytheGovernment,
involvingrecalibrationofexpenditure,spendingcutsandstudyingofprivatisationprojects,according
latestnewsreports.
DownsideRisks
Therearewarmingsignsthattheworldeconomicoutlookisworseningespeciallyinrecentmonths.
Crudeoilprices,declinedmarkedlybyabout50%lastyear,averagingaboutUSD50.92perbarrel
(2014:USD95.25perbarrel).Mostworryingly,crudeoilpricesremainonthedowntrend,touchinga
13yearlowofUSD28.32perbarrelon20January2016.Therearealsoheightenedvolatilityand
uncertaintyintheglobalfinancialmarkets,especiallywithequitymarketinterventionsbytheChinese
authoritiesearlythisyear.Globalriskaversionisundeniablyontherise,especiallywithworsening
neartermglobaleconomicprospects.Geopoliticalfactorshavecertainlyaddedtoworsening
economicconditions,especiallywithcontinuedfightingintheMiddleEast,intensifiedairstrikesby
RussiainSyria,continuedfightinginYemenandescalatingtensionsbetweenSaudiArabiaandIran,
thetwobedrocksofSunnisandShiites.MigrantrefugeecrisisinEuropeandnuclearpoliticsinNorth
Koreacouldalsobeaddedasdownsiderisks,togetherwithmilitarytensionsbetweentheUSand
ChinaintheSouthChinasea.
Mediumtermrisksincludenearstagnationinadvancedeconomiesandconsequentlybelowtarget
inflationrates,asseenintheUS,EuroAreaandJapaninrecentmonths.Lowpotentialoutput
growth,fasterthanexpectedgrowthslowdownor"hardlanding"inChinawillaffecteconomic
performanceofresourcebasedeconomiesandcommodityexporters,includinghighincomenations
and,mostworryinglylowincomedevelopingeconomiesinAfricaaswellasDevelopingAsia.Looking
fromlongertermperspective,lowfixedcapitalformationandagingpopulationareexpectedtolower
potentialoutputgrowthinadvancedeconomies,suchasJapan.Thefourthindustrialrevolutioninthe
yearsaheadcouldpotentiallyresultindeclininglabourforceparticipationrate,especiallyamong
femalesintheadvancedeconomiesaswellasinEMEs.
Onthedomesticfront,neartermrisksareexpectedtooriginatemostlyfromtheexternalfront,
associatedwithChina'sgrowthslowdownanditsfinancialmarketturbulence.TheUSFednextmove
anduncertaintyaboutrateincreaseswouldaffectthevolatilityintheglobalfinancialmarkets,
especiallyinterestratesensitivebondmarkets,astheexpectedslowermonetarytighteningcyclehas
beenpricedinbythemarkets.Meanwhile,domesticorientedrisksincluderisingcostofliving
elevatedforeignexchangemarketpressuresandcontinuedportfolioinvestmentoutflows,associated
withexpectedhigherinterestratesinkeyadvancedeconomies,particularlyintheUS.
Apartfromabrupttighteningoffinancingconditionsonthemonetaryfront,tough"belttightening"
fiscalpolicyactionsandkneejerkreactions,associatedwithrevised2016Budget,areexpectedto
elevatedownsiderisks,hittinghardonprivateconsumptionexpenditure,whichisalreadyona
moderatingpace.Meanwhile,weakperformanceofprivateinvestment,whichispresentlybeing
testedwithrisingproductioncosts,decliningrevenue,lowerprofitability(realreturntocapital)and
lesshirings,couldpossiblyturnforworse,especiallywithhigherthanexpectedborrowingcostsand
uncertaininvestmentadjustmentcosts.Households,producers,exporters,importersandretailers

areadjustingtohigherimportpricesandrisingdebtservicecharges,followingsignificant
depreciationoftheringgit.Assuch,sharperthanexpectedringgitdepreciationandsharplylower
commodityexportpriceswouldelevateexistingpressuresandrepresentnewroundofthreatsand
viciouscycles.Asreportedinthepreviousreports,risinghouseholddebtandFederalGovernment
debtcrossingthelegallimitof55%couldposeseriousdownsiderisksandeconomicthreatsinthe
mediumandlongterm.Additionally,"offbudget"expendituresand"contingentliabilities"couldexert
pressureonfiscalsustainabilityandMalaysiansovereigncreditratings.
LongTermIssuesandPolicyDirections
Lookingahead,Malaysianeedstoadjustquicklytothenewnormalintheworldeconomy,especially
withmonetarypolicynormalizationfromzerolowerbound(ZLB)intheUS.Thereisalsogrowth
realignmentinChina,theworld'ssecondlargesteconomy.Windowofopportunityisgettinglessover
time,astheworldeconomyismovingoutofpostcrisiseasymonetaryconditions,startinginearly
thisyearandmovingtowardsamoresustainableeconomicgrowthandsocialdevelopmentinthe
yearsahead.TheParisAgreementonClimateChangeaddedtotheneedforclimatechange
initiativesinthecountry,focussingonsustainableproductionandconsumption.
Mediumandlongtermstructuraladjustmentandreformprogramsmustcontinuetobethekey
priorityofeconomicpolicy,supportedbyappropriateshorttermstabilizationmeasuresandmacro
prudentialarrangements.Accommodativemonetarypolicyiscertainlynotanoptioninthecoming
months,lesssowithmassivefiscalstimuluspackage,asfiscalspaceisbeingconstrainedbyloweroil
revenueandrakyatisbeingsqueezedhardbyconsumptionbasedGoodsandServicesTax(GST).
Taxincentivesandfinancialsupportforprivateinvestment,whichisonamoderatingpath,are
urgentlyneededtoboostbusinessconfidenceandenhancepotentialoutputgrowthoftheeconomy.
Whiledownwardadjustmentinpublicconsumptioniscertainlyrequiredaspartofanongoingfiscal
consolidationprocess,publicinvestmentinkeyinfrastructureprojectsandhumancapital
developmentremainnecessaryinordertoremoveinfrastructurebottlenecksintheeconomy,suchas
trafficcongestionandfrequentsupplycutsinbasicutilities,butalsotoensurereadypoolofhealthy
andskilledworkersinthemediumandlongterm.
Onthesupplyside,newlongtermmeasuresneedtobeundertakentofurtherenhancetotalfactor
productivity(TFP)andimprovenation'slongtermcompetitiveness.Theseincluderemoving
structuralimpedimentsandbindingconstraintstosustainablegrowth,reducingfurthermarket
imperfectionsanddistortionsthatinhibitthegrowthprocess,especiallyintheproduct,servicesand
labourmarkets.Energymarketalsoneedstobeimprovedwithgreatercompetition.Whilewe
certainlyneedtolowerbarrierstoentryinthelabourmarketbyencouraginggreaterfemalelabour
forceparticipationrateandbytheelderly,greatereffortsneedtoundertakentolowerthecostof
doingbusinessandfacilitateentryofnewentrepreneursandyoungtalentsinproductandservices
markets.Greaterfocusneedstobegivenonadoptionofnewtechnologies,researchand
development(R&D),innovationandgreaterpowerofnewideas,throughupgradingofskillsand
reducingoutmigrationoftalents.

Postedbysuzyat01:20PMonJanuary27,2016
Monday,May23,2016
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