Malaysia braced for austerity challenge

While rising domestic demand in Malaysia helped reassure investors after last summer’s regional downturn, concerns remain that the country is displaying an over-reliance on high domestic consumption levels to prop up growth.

According to the World Bank’s latest projections, Malaysia is expected to achieve 4.3% GDP growth in 2013, despite substantial capital outflows and a nearly 10% depreciation in the ringgit during the second half of the year.

Domestic demand’s key role

The significant contribution that strong domestic demand has made to Malaysia’s economic resilience is widely acknowledged, with officials, including Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, the central bank, highlighting its impact.

“The domestic sector has been solid and the anchor to drive our growth during this more challenging period,” Zeti told Bloomberg in November. “Global trade slowed down very significantly [in 2013], and of course, that affected us because of the openness of our economy. But had we not rebalanced our economy, we would have had 1-2% growth.”

In the same month, Bank Negara Malaysia announced domestic demand grew 8.3% year-on-year in the third quarter of 2013.

High household debt

In December ratings agency Standard & Poor’s, said increasing levels of household debt in Malaysia, which now exceed 80% of GDP, would be “problematic” if the country’s growth rate slowed. The agency had cut its credit outlook for four Malaysian lenders in the preceding weeks over concerns stemming from a rise in home prices and consumer leverage.

Just two weeks earlier, Nancy Shukri, the minister in the prime minister’s department, said that 16,306 people, or an average of 60 Malaysians daily, had been declared bankrupt in the first nine months of 2013.

Malaysia has one of the highest ratios of household debt to disposable income in the world, with its current level of 140% outstripping even that of the US (123%).

In a move to slow consumer credit growth, in July the central bank introduced certain restrictions on lending, including a ten-year ceiling on personal loans, a maximum tenure of 35 years on property mortgages and a ban on pre-approved personal finance products.

However, conditions may not be as dire as some have made them out to be. As Zeti pointed out in September, less than 2% of household loans were non-performing as of that time.

Effect of new budget

While national efforts to rein in spending are taking shape, they follow a wave of populist interventions, including wage hikes for civil servants introduced ahead of last May’s elections, which almost certainly boosted domestic consumption.

However, Malaysia has been more generally moving to tighten its fiscal position. Under the 2014 budget introduced in October, the government will reduce certain subsidies this year and introduce a new goods and services tax (GST) in 2015. Everyday goods and services will be subjected to a 6% levy, although basic food items and some methods of transport are to be exempt.

International critics have urged Malaysia to break the cyclical nature of spending patterns, suggesting that a new strategy would improve investor sentiment in the long term.

“The new government elected in May must consolidate its credibility by meeting its commitments to reduce the public debt without reneging on its electoral promises,” wrote BNP Paribas in an October analysis. “The prime minister also said the 2014 budget would be marked by austerity … [But] these measures … will only stabilise the public debt ratio at best, without reducing it.”

Public debt stands at around 54% of GDP. According to Douglas McWilliams, economic advisor to the Institute of Chartered Accountants in England and Wales, keeping this figure under 60% is important in terms of maintaining investor confidence and, with reforms in place, is an attainable goal.

“The fast growth is helping taxation revenues and government’s budgetary consolidation, particularly on subsidies but also GST, which means Malaysia’s debt ratio will be below 60%,” he told the local media in December.

The national drive to slow lending to consumers and keep government spending in check has been given a largely positive reception. However, accelerating initiatives and increasing their impact may well help the country in its efforts to attract investors and allay their concerns.

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Malaysia braced for austerity challenge

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Malaysia braced for austerity challenge

While rising domestic demand in Malaysia helped reassure investors after last summer’s regional downturn, concerns remain that the country is displaying an over-reliance on high domestic consumption levels to prop up growth.

According to the World Bank’s latest projections, Malaysia is expected to achieve 4.3% GDP growth in 2013, despite substantial capital outflows and a nearly 10% depreciation in the ringgit during the second half of the year.

Domestic demand’s key role

The significant contribution that strong domestic demand has made to Malaysia’s economic resilience is widely acknowledged, with officials, including Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, the central bank, highlighting its impact.

“The domestic sector has been solid and the anchor to drive our growth during this more challenging period,” Zeti told Bloomberg in November. “Global trade slowed down very significantly [in 2013], and of course, that affected us because of the openness of our economy. But had we not rebalanced our economy, we would have had 1-2% growth.”

In the same month, Bank Negara Malaysia announced domestic demand grew 8.3% year-on-year in the third quarter of 2013.

High household debt

In December ratings agency Standard & Poor’s, said increasing levels of household debt in Malaysia, which now exceed 80% of GDP, would be “problematic” if the country’s growth rate slowed. The agency had cut its credit outlook for four Malaysian lenders in the preceding weeks over concerns stemming from a rise in home prices and consumer leverage.

Just two weeks earlier, Nancy Shukri, the minister in the prime minister’s department, said that 16,306 people, or an average of 60 Malaysians daily, had been declared bankrupt in the first nine months of 2013.

Malaysia has one of the highest ratios of household debt to disposable income in the world, with its current level of 140% outstripping even that of the US (123%).

In a move to slow consumer credit growth, in July the central bank introduced certain restrictions on lending, including a ten-year ceiling on personal loans, a maximum tenure of 35 years on property mortgages and a ban on pre-approved personal finance products.

However, conditions may not be as dire as some have made them out to be. As Zeti pointed out in September, less than 2% of household loans were non-performing as of that time.

Effect of new budget

While national efforts to rein in spending are taking shape, they follow a wave of populist interventions, including wage hikes for civil servants introduced ahead of last May’s elections, which almost certainly boosted domestic consumption.

However, Malaysia has been more generally moving to tighten its fiscal position. Under the 2014 budget introduced in October, the government will reduce certain subsidies this year and introduce a new goods and services tax (GST) in 2015. Everyday goods and services will be subjected to a 6% levy, although basic food items and some methods of transport are to be exempt.

International critics have urged Malaysia to break the cyclical nature of spending patterns, suggesting that a new strategy would improve investor sentiment in the long term.

“The new government elected in May must consolidate its credibility by meeting its commitments to reduce the public debt without reneging on its electoral promises,” wrote BNP Paribas in an October analysis. “The prime minister also said the 2014 budget would be marked by austerity … [But] these measures … will only stabilise the public debt ratio at best, without reducing it.”

Public debt stands at around 54% of GDP. According to Douglas McWilliams, economic advisor to the Institute of Chartered Accountants in England and Wales, keeping this figure under 60% is important in terms of maintaining investor confidence and, with reforms in place, is an attainable goal.

“The fast growth is helping taxation revenues and government’s budgetary consolidation, particularly on subsidies but also GST, which means Malaysia’s debt ratio will be below 60%,” he told the local media in December.

The national drive to slow lending to consumers and keep government spending in check has been given a largely positive reception. However, accelerating initiatives and increasing their impact may well help the country in its efforts to attract investors and allay their concerns.

Follow Oxford Business Group on Facebook, Google+ and Twitter for all the latest Economic News Updates. Or register to receive updates via email.

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Malaysia braced for austerity challenge

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Malaysia: Year in Review 2012

It has been another year of good growth for Malaysia, even as the international economic climate has been uncertain. Strong domestic demand, government investment, greater diversification and regional resilience have all played their part.

GDP growth is expected to hit 5% this year or possibly exceed it, according to several analyses. The economy has been supported by higher incomes and accommodative monetary policy, as well as by government spending. Malaysia has been pushing ahead with its Economic Transformation Programme (ETP), which seeks to lift the country to its long-term target of achieving middle-income status by 2020.

To this end, the ETP entails large-scale investments in infrastructure, health and education, as well as interlinked efforts to push key sectors further up the value chain, in order to reduce Malaysia’s reliance on raw material exports and increase skill and income levels.

After talks between Malaysia and Singapore in January, the two countries agreed to strengthen transportation links to benefit bilateral trade and the construction sector. Progress has been made on a $9.7bn mass-transit railway system linking Malaysia’s southern Johor state and Singapore, which is part of a new line that will cut travel times from Kuala Lumpur to Singapore from six hours to 90 minutes.

In May, the international business press reported that AECOM Technology had been awarded the $42m contract for the design and engineering study for the Malaysia-Singapore Rapid Transit System (RTS) link by the relevant Singaporean and Malaysian authorities.

Infrastructure development also entails the expansion, upgrading and diversification of Malaysia’s power-generation capacity. In May, Peter Chin Fah Kui, the minister of energy, green technology and water, announced that Malaysia would increase the proportion of electricity it generated from coal to 44%, up from 30%, and lower the share derived from gas to 46% from 60%.

The government’s desire to lower dependency on gas supply was informed by rising gas prices, and a desire not to pass them on to customers, as well as by a connected gas supply shock in 2011. In May, the government confirmed plans to invest $3bn through state power firm Tenaga Nasional to construct two new hydropower plants and two new coal-fired stations, with a total of more than 2500 MW of installed capacity.

Meanwhile, further generation capacity is needed to support the demands of Malaysia’s manufacturing sector, which has performed well in 2012. Industrial production rose by 4.9% in the first nine months of 2012, according to official data. Manufacturing output rose by 5.2% year-on-year, while the other segments included in industrial production – mining and electricity – grew by 5.9%.

Growth came despite the uncertain global economic climate, which was affected by the eurozone crisis, the US’s debt problems and slowdowns in major emerging markets. However, strong domestic demand has helped manufacturers offset slower exports.

Together, manufacturing and mining contribute 35% of GDP, so the expansion of industry has been key to the economy’s good performance in 2012. Next year seems likely to see similarly healthy levels of GDP growth, as both upside and downside risks from 2012 are likely to continue into 2013. On one hand, the Malaysian economy should continue to benefit from its realignment towards domestic demand, supported by an expected maintenance of low-interest rate policy and the further roll-out of the ETP. The development of value-added industries, as well as service sectors such as tourism, should also help the economy.

On the other hand, Malaysia cannot be immune from international events. A significant worsening in the eurozone, the US, or a “hard landing” slowdown in China would undoubtedly have an impact. The Malaysian general election, due by June 2013, may also create an element of political uncertainty, though it is also spurring government spending. The economy, particularly government finances, remains sensitive to fluctuations in commodity prices, including that of oil.

Observers are split on whether there will be a slowdown, or if the economy can accelerate further. The UK’s Institute of Chartered Accountants in England and Wales sees a drop to 3.8%, and international investment bank Nomura expects a fall to 4.3% from 5.3% in 2012. Manokaran Mottain, the chief economist at Kuala Lumpur-based Alliance Investment Bank, forecasts a slight fall to 5% from the 5.2% he expects this year. The independent Malaysian Institute of Economic Research, however, forecasts a pick-up from 5.1% to 5.6%.

Policy-makers will be keeping a keen eye on the international environment, as Malaysia cannot go it alone. However, next year should see the developed and diversified future economy envisaged by the ETP move closer.

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Malaysia: Year in Review 2012

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Malaysia: Easing business practices

Malaysia has been one of the big movers in the latest World Bank survey on the ease of doing business, moving up six rungs on the international ladder to be ranked 12th overall. However, making it easier to obtain construction permits and start a business, two areas signalled out for improvement, will help the country achieve its goal of breaking into the top 10.

The annual study aims to provide an objective measure of business regulations for local firms and give an indication of the progress in facilitating private sector development. In the 2013 edition, released on October 23, Malaysia further consolidated its reputation for economic reform, building on its performance in 2011 when it moved from 23rd to 18th place. The improvement in the rankings puts Malaysia behind only Singapore, Hong Kong and South Korea in Asia, and ahead of regional heavyweights Japan and China.

The survey, titled “Doing Business 2013”, saw Malaysia improve its competitiveness in a number of areas, including registering property and trading across borders. The country continues to be ranked first globally in terms of gaining access to credit, and it also won accolades for the judicial network protecting investors, where it came in fourth among the 185 countries surveyed.

Recognition of the strong performance will help to further promote development and investment, said Annette Dixon, the country director for Malaysia at the World Bank. “This will help the private sector drive growth, particularly if Malaysia can build on its success by continuing to tackle long-term challenges, such as improving the quality of education,” Dixon said in a statement accompanying the release of the report.

According to Yeah Kim Leng, the group chief economist at RAM Holdings, a financial research firm, the improved business environment will help maintain Malaysia’s high profile as a prime investment destination. “It enhances business sentiment and confidence,” he said on October 24. “If the improvement is sustained, what we will likely see is an increase in business dynamism and a higher level of business activity.”

Mustapa Mohamed, the minister of international trade and industry, said that the findings of the study confirmed Malaysia’s competitiveness as an economy, and reflected the successful implementation by the government to improve the business environment, making it conducive for sustained economic growth. The next step, according to the minister, is putting in place further reforms that should move Malaysia even higher up the rankings. He did acknowledge, however, that the task would be a difficult one, given the competitive nature of the global economy.

“Our objective is to achieve a top-10 position in the World Bank’s rankings. Getting there will strengthen our position as a destination of choice for local and foreign investors,” Mustapa said. “This is with new competitors constantly emerging and economic uncertainties globally. It is apparent that more needs to be done in the shortest time possible if we are to stay ahead.”

While the study very much stressed the positives, it also detailed a few areas of improvement that will have to be dealt with before Malaysia can break into the higher rankings. Despite the government making it easier to obtain construction permits, it still placed only 96th overall in this category. There is also room for improvement in the ease of starting a business, in which was Malaysia ranked 54th this year.

Two state agencies, the Special Taskforce to Facilitate Business (Pemudah) and the Performance Management Delivery Unit (Pemandu), have been tasked with addressing these issues, as well as developing strategies to promote best bureaucratic and administrative practices, with Pemudah in particular working closely with the private sector to cut red tape.

In an opinion piece carried by The Malay Mail on October 26, Ramon Navaratnam, the chairman of the Centre of Public Policy Studies, an independent think tank within the Asian Strategy and Leadership Institute, said the World Bank study did not cover issues such as public services or the non-business sectors of society. Improvements in the provision of services in areas such as health, education and social welfare also need to be addressed when considering the state of the economy.

“The best way forward is for the public sector to adopt further best practices, forced by global competition to perform more competitively all the time or face the prospects of losing its profits and business opportunities for growth,” he said.

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Malaysia: Easing business practices

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Malaysia: Going for green

Malaysia has announced plans to boost its automotive sector through the production of electric cars, hoping to both develop a lucrative export trade while actively combating carbon emissions at home. The industry will face competition, however, from other countries in the region whose green automotive initiatives are more developed.

At present, there are 11 completely electric vehicles on Malaysia’s roads, according to government figures. Hybrid cars – which use both conventional fuel and an alternative power source for their engines – are more popular, with around 8000 hybrid vehicles currently on the roads.

This is set to change, however, with the government planning to announce a major policy shift that will promote the production and domestic use of electric vehicles. The highly anticipated revision of the National Automotive Policy (NAP), the government’s long-term plan for the industry, will introduce several new reforms and regulations.

Since late 2011, the Malaysian government has been promoting the establishment of a local electric vehicle manufacturing capacity. Both the government and industry lobby groups believe such a move will help broaden the base of the sector.

According to projections from the Malaysia Automotive Institute (MAI), reforms to the industry, coupled with higher local and international demand, will see the sector’s contribution to the economy triple by 2020. In a statement issued in early May, the MAI said it expected the industry’s share of GDP to rise from the present rate of 2.4% to 6.8%, largely due to an increased focus on the production of electric and other energy-efficient vehicles. This growth would be underpinned by a higher level of foreign direct investment and government efforts to encourage original equipment manufacturers (OEMs) to set up operations in Malaysia.

“Meeting vehicle standards for energy-efficient vehicles in Malaysia means bringing new technologies into the country,” Madani Sahari, the CEO of the MAI, told OBG. “As a result, OEMs are being targeted. Before this happens, however, the sector must be liberalised by allowing both local and foreign OEMs to qualify for manufacturing licences, which is expected to happen with the pending second revision of the NAP.”

While there is the potential for Malaysia to break into the regional and international market with a locally produced electric car, it will face stiff competition from both China and Thailand, which have established automotive sectors that include electric car production plants.

With this in mind, Malaysian officials are aware of the need to develop a domestic market for electric cars and their hybrid counterparts. In early May, Mustapa Mohamed, the minister of international trade and industry, announced that the government would offer incentives to Malaysians to buy electric or hybrid vehicles. While there is already a 100% import duty exemption for electric or hybrid cars below 2200 cu centimetres, the minister said additional measures would be enacted to promote the use of electric vehicles.

“We will continue to introduce incentives to accelerate the move towards zero-emission mobility,” Mustapa said. “Our goal is to increase the number of hybrid and electric cars on our roads by 10% by 2020. By then, we hope to be living in a much cleaner and greener environment.”

The government is also encouraging private firms to put in place the necessary infrastructure for these vehicles to operate. On May 29, Peter Chin, the minister of energy, green technology and water, said his department was developing regulations and standards for firms that plan to set up charging stations for electric vehicles. Such measures are needed to create an environment that would generate an interest in the use of alternatively powered cars.

“Until we have charging stations, we are not ready. Once the infrastructure is up, then people will be tempted to buy electric vehicles,” Chin said. “If we want to make it commercial, certain infrastructure must be in place, such as credit card facilities for consumers to pay for charging services.”

The minister also said that an electric vehicle infrastructure plan to enable pilot demonstration projects would be a part of the new NAP.

Local and international manufacturers are likely to wait until the latest version of the NAP is released before making any decisions on whether or not to tap into the electric vehicle sector. However, Malaysia-based vehicle producer Proton and Japan-based Nissan and Mitsubishi are all running trials of battery-powered cars in the country to raise awareness of the plug-in option and test their viability.

If Malaysia is to achieve its ambitious target of cutting emissions by 40%, it will need to move quickly to generate industry interest and acceptance of the new product among the public.

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Malaysia: Going for green

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