The first quarter has been good for Malaysia despite concerns over political unrest, struggling exports, a potential credit bubble, and high government debt. No change is likely in the next quarter.
Malaysia maintained status quo in Q1 2013. Not only was the country’s 56-year-old government re-elected for another five-year term, signaling policy stability, the economy also expanded in the 5–6 percent range, as it has on an average since 2011. However, amid the several positives for Malaysia, there are a few pockets of concern. On the political front, the opposition is calling for nationwide protests against alleged election irregularities, even as the Malaysian economy faces struggling exports and a potential credit bubble.
Real GDP grew 5.6 percent year over year in Q1 2013, boosted by higher domestic demand, even as real exports declined an estimated 1 percent. In fact, private consumption, which accounts for nearly 50 percent of the GDP, has been a major driver of the Malaysian economy for the past eight quarters, with growth significantly exceeding exports. Exports in Q1 2013 were limited by falling sales of vegetable oils and manufactured goods, which together constitute more than 60 percent of Malaysia’s total exports. Sales of electronics and electrical goods were particularly hit. Geographically, while the country’s exports to the slowdown-affected markets of the European Union and United States suffered, sales to the ASEAN Free Trade Area (AFTA) increased in double digits. The AFTA now accounts for nearly 30 percent of Malaysia’s exports, up from 27 percent in 2012. For Q2 2013, GDP will likely continue expanding in the 5–6 percent range, supported by robust domestic demand.
The industrial production index for Malaysia registered a 0.2 percent year-over-year decline in Q1 2013, due to lackluster performance by the manufacturing and mining sectors. While business closure for the Lunar New Year celebrations suppresses output in the first quarter of each year, this year was particularly impacted by export challenges. However, the outlook for the rest of 2013 appears encouraging, with positive consumer and business sentiment. Even as local consumption will likely remain upbeat, exports could demonstrate a slight uptick in the second half. In addition, the growing economy is forecast to attract higher foreign direct investment (FDI) this year in various sectors, including electrical and electronics, real estate, aerospace, solar energy, and medical services. Low rates of inflation (below 2 percent) also ensure lower risk to investment returns. The government expects FDI of $12 billion in 2013, compared to nearly $10 billion in the last year.
In fact, private consumption, which accounts for nearly 50 percent of the GDP, has been a major driver of the Malaysian economy for the past eight quarters, with growth significantly exceeding exports.
However, a lingering concern in the Malaysian economy is the level of debt fueling domestic demand. Household loans and liabilities rose 13 percent year over year in Q1 2013 and are estimated at more than 150 percent of the personal disposable income. Loans and liabilities are expected to continue their double-digit rise in Q2 2013, with no increase likely in the benchmark interest rate, which has remained at 3 percent since Q3 2011. With nearly half the household debt incurred to buy houses, the economy is vulnerable to any sudden slump in home prices, which have risen an average 9.5 percent year over year for the past eight quarters.
Government debt is also at the highest level in 19 years, at 54 percent of the GDP, with the increase likely to fund the government’s expenditure on infrastructure projects and subsidies. Higher expenses resulted in a fiscal deficit of 3.9 percent in Q1 2013. In order to improve its budget balance, the government plans to introduce new goods and service tax this year, as well as rationalize subsidies. In addition, the government plans to divest nearly 30 state-owned enterprises.
Overall, the first quarter has been fairly positive for the Malaysian economy, registering steady growth despite external headwinds. The coming quarter will likely be similar, with domestic demand driving the economy but exports remaining a challenge and high levels of household debt posing a persistent risk.