Malaysia: Clouds on the horizon

Malaysia: Clouds on the horizon

Malaysia: Clouds on the horizon

Asia Pacific Economic Outlook, November 2013

Malaysia’s economy has continued to expand steadily, but at a far slower pace than in the past three years.


In the second quarter of 2013, Malaysia’s economy continued to expand steadily, but at a far slower pace than in the past three years. The economy is impeded by slowing investments as well as tepid exports, with a persistent fiscal deficit compounding problems. While the government has begun to take a few measures to remedy the deficit, fundamental tax reforms are yet to be enacted. Due to these challenges, the country’s growth forecast for the full year has been lowered, even as rating agency Fitch has changed its outlook for Malaysia’s sovereign credit rating to “negative” from “stable.”

Exports and investments hold back growth

Malaysia’s real GDP expanded 4.3 percent year over year in Q2 2013, improving upon the 4.1 percent of Q1 2013. Growth was driven by an 8 percent increase in domestic consumption expenditure, which in turn was aided by populist measures, such as wage hikes for civil servants, ahead of the May elections. However, Q2 2013 economic performance fell short of the 5.6 percent GDP growth registered in the same period last year. The loss of pace over the past year is due to a sharp slowdown in fixed capital formation and a marked decline in exports. Fixed-capital formation growth skidded to 6 percent year over year in Q2 2013 from an astounding 26.2 percent in Q2 2012, as development expenditure by the government fell. Furthermore, exports shrank 5.2 percent, compared with 1.6 percent growth in the previous year, because of declining international demand, especially from China, Japan, United States, and European Union (together approximately 46 percent of total exports). Weaker export performance has weighed on the index of industrial production, which grew 3.7 percent year over year in Q2 2013, down from 4.9 percent a year ago.

The Bank Negara Malaysia (BNM) now projects GDP growth of 4.5–5.0 percent for the full year, lower than the previous target of 5–6 percent and the average annual growth rate of 6.1 percent achieved in the past three years. The economy is expected to be constrained largely by exports, which are estimated to increase only about 1 percent for the entire year. Slowing fixed investments, especially by the government, will also have an impact.

Worrisome current account and fiscal balance

Malaysia’s struggling exports are not just impeding growth; they are also denting the country’s current account balance. As imports have increased steadily to fulfill growing domestic demand and exports have lost steam, the country’s current account surplus has suffered. For example, in 2012 the surplus as a share of GDP fell to 6.1 percent, the lowest in 15 years. With the trade situation not expected to improve significantly this year, the surplus is expected to shrink further to 4.9 percent in 2013. Adding to the burden of Malaysia’s import bill is the country’s weakening currency. Following the US Federal Reserve’s May 2013 indication that it was gradually withdrawing its quantitative easing program, currencies across emerging markets, including Malaysia’s, have been adversely affected. The Malaysian ringgit has depreciated nearly 6 percent since May. The BNM, however, has not intervened aggressively and could continue relying on its ample foreign exchange reserves (nearly eight months’ import cover) to counter any sharp fluctuations in the ringgit.

Meanwhile, Malaysia’s fiscal health is another concern. Malaysia’s public debt, standing at an 18-year high of 53.3 percent of GDP in 2012, is expected to rise further this year. Furthermore, the country faces a persistent budget deficit (4.5 percent of GDP in 2012), aggravated by years of subsidies and delays in reforms for expanding the tax base. Addressing the deficit has acquired urgency since July 2013, when credit rating agency Fitch lowered its outlook on Malaysian sovereign credit to “negative” from “stable,” due largely to the country’s fiscal health.

Malaysia’s public debt, standing at an 18-year high of 53.3 percent of GDP in 2012, is expected to rise further this year.

Steps to bolster fiscal health

With a view to narrow the budget gap, in September 2013 the government partially cut subsidies on petrol and diesel after more than two years. The cuts are expected to save approximately 3.3 billion ringgit a year: Malaysia spent nearly 24 billion ringgit, or 2.5 percent of its GDP, on fuel subsidies in 2012. In addition, the government may include a goods and services tax in its 2014 budget plan, which is to be proposed in October. This tax aims to increase the tax base and boost revenue, but has seen delays in implementation since 2011. Also, the government may defer some infrastructure spending this year to curb fiscal deficit. However, cuts in subsidies and infrastructure spending may have an adverse impact on growth in the short term by denting consumption and investment, the two pillars that have supported the economy in the face of waning exports.

Fine balancing act for the BNM

The Malaysian economy is currently facing several conflicting pressures, which require the BNM to take a balanced approach. Even though growth prospects may benefit from monetary easing, such a policy could strain the already struggling ringgit and worsen the country’s spiraling household debt. Household debt currently exceeds 83 percent of GDP, up from nearly 76 percent in 2010. To accommodate these various factors, the BNM has maintained its benchmark interest rate at 3 percent and is unlikely to hike the rate in the short term, especially with low inflation (under 2 percent). At the same time, the central bank established regulations in July to rein in household debt. The regulations include limiting the maximum duration for personal loans to 10 years and property loans to 35 years, as well as banning preapproved personal finance products.


Navya Kumar

Navya Kumar is an assistant manager at Deloitte Research, Deloitte Services LP.

Asia Pacific Economic Outlook, November 2013: Malaysia
Cover Image by Jessica McCourt