Malaysia: Encouraging signs amid challenges

Malaysia: Encouraging signs amid challenges

Malaysia: Encouraging signs amid challenges

Asia Pacific Economic Outlook, April 2014

Malaysia’s economy ended 2013 on a positive note, with GDP growth accelerating in the fourth quarter. Policymakers, however, face two key concerns: high household debt and a potential housing bubble.

Malaysian-market-at-nightMalaysia’s economy ended 2013 on a positive note, with GDP growth accelerating in the fourth quarter. An exports recovery is underway, which is expected to consolidate as economic growth in the United States and Europe picks up in 2014–15. Rising exports have also aided external balances; this and improving public finances will please investors and rating agencies. Policymakers, however, face two key concerns: high household debt and a potential housing bubble. Although the government and Bank Negara (BN) have taken steps to tackle these issues, doing so without destabilizing the banking sector and the wider economy will be a challenge.

Growth picked up in Q4 2013

The economy grew 5.1 percent year over year in Q4 2013, maintaining its positive momentum from Q3 when GDP growth was 5.0 percent. This momentum pushed up annual growth in 2013 to 4.7 percent, a figure that appeared unlikely in the first half of the year when growth averaged 4.2 percent. Growth in Q4 was driven primarily by strong private sector activity and rising exports. Real exports grew 2.9 percent, up from 1.7 percent in Q3, while growth in private sector investments rose to 16.5 percent from 15.2 percent during this period. The drag on growth in Q4 came from slowing government spending due to a fiscal consolidation drive. Public consumption growth slowed, while public investment fell 2.7 percent in the quarter. Consumer spending growth also eased, albeit moderately to 7.3 percent. In the short term, the sector faces headwinds from high household debt, rising inflation, and lower nominal wage growth.

Exports and manufacturing on their way up

Arguably, the best news for the economy is reviving exports. In December 2013, exports rose for the sixth consecutive month, with strong contributions from electronics and petroleum. Prospects for palm oil, another key export item, are improving as well. Palm oil prices, which had sunk to a three-year low in July 2013, have gone up 28 percent since then. With economic growth set to pick up in the West, exports (in real terms) from Malaysia are expected to grow 3.5–4.0 percent this year, up from less than 1 percent in 2013. Reviving exports have also aided industries, especially manufacturing. For example, manufacturing grew 6.7 percent in December 2013—a 13-month high—which in turn pushed industrial output up by 4.8 percent (despite a dip in crude oil extraction). Manufacturing is expected to strengthen further over 2014–15, thereby enabling industrial growth of 5.5–6.0 percent in this period.

Household debt is currently about 86 percent of GDP, up from 50 percent in 2008.

Worries ahead for consumers

As exports dipped during the global downturn of 2008–09, Malaysia’s policymakers started focusing on alternative growth avenues. Household consumption was one such area, and policymakers sought to boost it through a host of measures, including low interest rates. Consequently, consumer credit shot up post 2008, which in turn pushed up consumer indebtedness. For example, household debt is currently about 86 percent of GDP, up from 50 percent in 2008. Predictably, this deterioration in household finances poses risks, both for consumers and banks. Consumers also face lower wage gains this year as businesses respond to rising costs (courtesy minimum wages and subsidy cuts). Probably the only positive for consumers this year is the government’s decision to defer a consumption tax of 6 percent to 2015. However, this deferment will not be enough to push personal consumption growth above 6.5 percent in 2014.

Policymakers step in to counter housing boom

Malaysia’s housing sector has been on a roll since 2008, aided by cheap credit and relaxed foreign ownership rules. Since 2009, house prices have soared 47 percent, way above the 29 percent rise during 2000–08, a longer time period. However, as consumer finances deteriorate and supply increases, the boom risks turning into a bubble. Worried by this, both BN and the government have stepped in. While the latter has hiked property sales taxes and foreign investment limits, BN has tried to curb mortgages. These measures appear to be having an impact. In December 2013, housing loan applications fell 27 percent, while in Q4 2013 growth in house prices appears to have eased. Policymakers will, however, be wary of taking action too fast as that would affect both households and banks. There are also concerns that the current measures will hit the middle class disproportionately, especially first-time home buyers.

BN not likely to raise rates by more than 25 basis points

In January 2014, inflation touched a 27-month high of 3.4 percent. Price pressures have been edging up, primarily due to subsidy cuts and hence hikes in regulated prices of commodities such as sugar (14 percent), fuel (11 percent), and electricity (15 percent). The Malaysian ringgit’s decline against the US dollar—7 percent in 2013 and another 1 percent this year—in response to the US Federal Reserve’s tapering of quantitative easing has also aided inflation. Ideally, BN would have liked to counter rising inflation and a weakening currency through a rate hike. However, this would raise debt-servicing costs for households already burdened with high debt. This in turn could push up loan defaults, thereby denting banking sector health and the wider economy. So BN will likely wait until the second half of the year before tightening monetary policy, and any rate hike will not likely be higher than 25 basis points.

Challenges in fiscal consolidation

In July 2013, Fitch put Malaysia on negative outlook, in response to a declining trade surplus, a persistent fiscal deficit, and slowinggrowth.1 Luckily, things have improved since then: Growth has gone up, the trade surplus has increased, and fiscal consolidation is underway. Fitch has appreciated this improvement, even as another rating major, Moody’s, went a step ahead and raised its outlook to positive in November 2013.2 However, the government is not out of the woods yet. First, rising discontent could force the government to delay tough measures. The generalized sales tax has already been postponed by a year to 2015. Second, the government is yet to tackle its large bill of public sector salaries. Finally, fiscal tightening amid popular resentment could result in undesirable cuts in segments such as public investment. The government has to find a way to sustain critical projects. A good example here is the $444 billion public-private investment program aimed at converting Malaysia into a developed economy by 2020.

Growth expected to remain healthy in 2014–15

Despite the above challenges, Malaysia’s economy looks on course to post 5.0–5.5 percent growth during 2014–15. This year, the economy will also benefit from the Visit Malaysia Year 2014 campaign, which is expected to boost tourism. In the medium to long term, favorable demographics, increasing competitiveness, and growing trade and investment links will keep the economy strong.


View all endnotes
  1. Reuters, “Fitch revises Malaysia’s outlook to negative; affirms IDRs at ‘A-’ /‘A,’” July 30, 2013,
  2. Moody’s Investors Service, “Moody’s changes outlook for Malaysia’s A3 rating to positive from stable,” November 20, 2013,–PR_286966.


Akrur Barua

Akrur Barua is an economist and a manager at Deloitte Research, Deloitte Services LP.

Asia Pacific Economic Outlook, April 2014: Malaysia
Cover Image by Jessica McCourt (Cover), Stephanie Dalton Cowan (India)