Flash Notes Malaysia: Turning 60 – Then and Now

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Wednesday, 30 August 2017 Flash Notes Malaysia: Turning 60 – Then And Now

Malaysia’s economy has evolved from a low-income agriculture based economy with GNI per capita1 of US$240 in 1962 to an upper middle-income manufacturing and services driven economy with US$9,850 GNI per capita in 2016.

Malaysia has entered its next growth frontier underpinned by a new economic model that leverages on its core strengths. - diversified economic structure, good infrastructure, supportive financial system, positive demographics, social and political stability, and strong geographic ties in the region.

As the external environment poses increasing challenges in the form of global policy uncertainty, protectionist sentiment, and geopolitical threats, Malaysia’s ability to face up to unpredictability lies in pursuing forward-looking adjustments that ensure sound macroeconomic management, market openness and liberalisation, drive new opportunities for growth, focus on innovation and technology, greater transparency and governance, fiscal and debt sustainability, human capital development, economic inclusion and social cohesion.

Much of Malaysia’s early transformation is attributed to strategic vision, bold policy decisions, and ability to mobilise support from both public and private sectors. This involved experimental economic policy making and industrial promotion.

Malaysia’s Transformative Years Since Independence: 1. First Phase (1957- 1970) Post-independence, the country’s mainstays were rubber and tin production as well as entrepôt trade centered in Penang and Malacca. Businesses were small-scale, localized, and predominantly family-based2. Given the volatility of commodity prices, there was a strategic focus to diversify production and incomes away from tin and rubber. This paved the way for early diversification within agriculture (from rubber into palm oil and other crops) and diversification away from primary into secondary industries particularly manufacturing.

2. Second Phase (1971- 1990) A new phase of growth centered on the rise of construction and manufacturing with focus on equitable distribution defined the 1970s. Economic development was based on three long-term policies – the New Economic Policy (NEP), the National Development Policy (NDP), and National Vision Policy (NVP). Despite the shocks from oil crises (1973-74 and 1978-79) and global slowdown in electronics and primary commodities (1985-86), average growth in this period was 8.9%. The focus was on four manufacturing industries namely rubber, palm oil products, electronics and electrical products, and transport and automobile industries. Export-oriented manufacturing gained momentum and foreign direct investment promoted3. Privatisation initiatives took off and together with the development of the Multimedia Super Corridor (MSC)4 in 1990s were considered instrumental in achieving rapid industrialization.

3. Third Phase (1991- 2007) Growth was challenged by the Asian Financial Crisis and period of exchange controls, with real GDP growth average of 6.4% in this period. Vision 2020 was introduced in 1991 which set the goal for Malaysia to be a self-sufficient industrialized nation by 2020. Malaysia embarked to seek out new growth areas and push towards higher-value added and knowledge-based industries amid erosion in Malaysia’s comparative advantage in labor costs and labor-intensive manufacturing. The launch of MSC in 1996 laid the foundation for Malaysia to expand the services sector including ICT. To attract foreign companies into the MSC, both hard and soft infrastructure was packaged with a conducive legal and regulatory environment. Companies with MSC status were granted favorable incentives in exchange for technology and knowledge transfer.

1 GNI per capita Atlas Method current prices in USD 2 Working Paper 27, Economic Growth and Development in Malaysia: Policy Making and Leadership, World Bank 3 Introduction of Investment Incentives Act of 1968, Free Trade Zone Act of 1971, Promotion of Incentives Act of 1986 4 Launched on February 1996 to accelerate objectives to modernize Malaysia and achieve Vision 2020

Flash Notes Wednesday, 30 August 2017 1 Page 4. Fourth Phase (2008- present) The global crisis (2008-09) posed challenges in driving the country’s transformation into a high income nation. As such, the New Economic Model (NEM) was unveiled in 2010 to address concerns that the country was stuck in a middle-income trap with sub-par growth potential, and lack of private sector dynamism. The goals of the NEM aim to achieve high-income status, inclusiveness with equitable distribution of wealth, and sustainability both financially and environmentally. The three key pillars to reinvent Malaysia under the NEM model are 1Malaysia, the Government Transformation Programme (GTP), and the Economic Transformation Programme (ETP). The NEM redefined the government’s role as an enabler of growth while the private sector would be re-energised to be the prime growth driver. Malaysia managed to avert the destabilizing effects from oil price slump (started end-2014) owing to major fiscal reforms implemented over the years. Current focus has shifted to development of the fourth industrial revolution (Industry 4.0) to promote high-technology industries and minimize dependency on manpower. This includes sectors involved in automation, digitalization, robotic development, and big data.

5. Future (2021- 2050) The government unveiled its economic plan for the next 30 years known as Transformasi Nasional 2050 (TN50) last year. TN50 formulates the post-2020 vision based on a bottom-up approach and shaped by citizen engagements. The aim is to make Malaysia the 20th ranked country in terms of economic development, social advancement and innovation.

Malaysia’s Economic Timeline

(1957-1970) (1971-1983) (1984-1990) (1991-2000) (2001-2010) (2010-2020) First Phase of High Growth With Industrialisation Prosperity and Towards National Economic Independence Equity Period Adversity Integrity and Transformation Competitiveness Programme (ETP)

60 12,000 Global Financial Crisis 50 10,000 Asian 40 Financial Crisis 8,000

30 6,000

20 4,000

10 2,000

0 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 GDP per capita (current US$)(RHS) Incidence of Poverty (%)

Source: EPU, OECD, World Bank, UOB Global Economics & Markets Research Note: The Incidence of Poverty have been linearly interpolated for missing years

Evolving Focus Of Economic Development Since Independence

Reliance Growth of Focus on FDI, Growing emphasis Focus on moving on primary manufacturing and heavy industries on information and up global value industries and domestic production and electrical and communication chains, services , and mining electronics sectors technology innovation

1957 1970 1980 1990 2000 2010

% 60 53.5 Share in GDP (%) 50 38.6 40 35.3

30 21.1 23 17.8 20

0 Primary commodities Manufacturing Services 1980 2015

Source: DOSM, UOB Global Economics & Markets Research

Flash Notes Wednesday, 30 August 2017 2 Page GDP per capita As Proportion Of OECD Average Falling Income Inequality

% Gini 100 0.6 90 80 70 0.5 60 50 40 0.4 30 20 10 0 0.3 1970 1981 1992 2003 2014 1970 1981 1992 2003 2014 Malaysia Korea Thailand Philippines Malaysia OECD

Source: OECD, UOB Global Economics & Markets Research Source: OECD, UOB Global Economics & Markets Research

Malaysia’s Economic Resilience Through Crises Periods ETP Drives Private Investments

% contribution to GDP % chg % of total 40 Asian Global Oil Rout 17 investments Financial Crisis Financial Crisis GST 80 30 7.2% 12 5.0% 5.1% 70 20 60 10 7 Private 50 0 2 40 -10 -3 30 -20 Public 20 -30 -8 2010: New Economic Model and Economic 10 Transformation Program (ETP) 1990 1999 2008 1Q 2017 launched to re-energize private investments Private consumption Public consumption 0 Public Investment Private Investment Net exports Real GDP (RHS) 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Source: DOSM, CEIC, UOB Global Economics & Markets Research Source: CEIC, UOB Global Economics & Markets Research

Current Inflation Relatively Benign Fiscal Consolidation In Focus During Next Phase Of Growth

% change MYR bn % 20 10 4 1st Oil 2nd Oil Economic 3rd Oil 18 2 Price Price Expansion Price 0 16 shock shock Shock 0 14 -10 -2 12 -4 10 -20 -6 8 -30 6 -8 4 -40 -10 2 -12 -50 0 -14 -2 -60 -16 1960 1967 1974 1981 1988 1995 2002 2009 2016 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 Inflation, consumer prices (annual %) Fiscal balance % of GDP (RHS)

Source: World Bank, CEIC, MOF, UOB Global Economics & Markets Research Source: CEIC, MOF, UOB Global Economics & Markets Research

Flash Notes Wednesday, 30 August 2017 3 P a g e Burden Of High Public Debt … … And Contingent Liabilities

MYR bn % MYR bn % 700 100 210 20

600 180 80 15 500 150

400 60 120 10 300 40 90 60 200 5 20 100 30

0 0 0 0 1980 1986 1992 1998 2004 2010 2016 1985 1991 1997 2003 2009 2015 Domestic debt Government guaranteed loans - domestic External debt Government guaranteed loans - external Total government debt - % of GDP (RHS) % of GDP (RHS)

Source: CEIC, MOF, UOB Global Economics & Markets Research Source: AGD Malaysia, CEIC, UOB Global Economics & Markets Research

Past Growth Was Capital Intensive, Focus Of Future Growth On Growing Leverage Driving Productivity Through Labor And Technology

% of GDP % growth 100 88 6.0 90 5.1 5.1 4.7 4.7 80 5.0 70 4.0 4.2 60 52 50 43 3.0 38 39 40 35 2.0 30 20 1.0 10 0.0 0 1996-2000 2001-2005 2006-2010 2011-2013 2012-2016 Government Corporate Household 2000 2016 Labour Capital Technology GDP

Source: BNM, ADB Asia Bonds Online, UOB Global Economics & Markets Research Note: Government and corporate debt based on size of local currency bond market Source: Malaysia Productivity Report, UOB Global Economics & Markets Research

Malaysia’s Policies Has To Prepare For Ageing Population In Future

Median age 60

0 Recent Publications 1950 1965 1980 1995 2010 2025 2040 2055 2070 2085 2100 28 Aug US Jackson Hole Symposium: When You Say Nothing At All Malaysia Singapore Thailand High-income countries 25 Aug Singapore: July Manufacturing Leaps Again On Electronics Performance Source: Ourworldindata.org, UOB Global Economics & Markets Research 23 Aug FX Strategy: Just How Oversold Is The USD? 23 Aug Thailand: July Exports Continue To Grow By 10.5% Despite The Strong Baht 23 Aug Singapore: Slightly Higher Core Inflation In July, Still Not A Major Nudge For MAS To Shift in October

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