STATUTORY REQUIREMENTS

In accordance with section 13 of the Central Bank of Malaysia Act 2009, Bank Negara Malaysia hereby publishes and has transmitted to the Minister of Finance a copy of this Annual Report together with a copy of its Financial Statements for the year ended 31 December 2010, which have been examined and certified by the Auditor-General. The Financial Statements will also be published in the Gazette.

For the purposes of section 115 of the Development Financial Institutions Act 2002, the annual report on the administration of the Development Financial Institutions Act 2002 and other related matters for the year ended 2010 is incorporated in Bank Negara Malaysia’s Financial Stability and Payment Systems Report 2010 which forms an integral part of this Annual Report 2010.

Zeti Akhtar Aziz Chairman Board of Directors

23 March 2011

reappointed asmembersoftheBoardDirectorseffective 1March2011) (Datuk OhSiewNam,Tan SriDatukAmarHajiBujangbinMohd.NorandDato’N.Sadasivanwere (Encik ChinKwaiYoong wasappointedasmemberoftheBoardDirectorseffective1March2010) Encik ChinKwaiYoong P.S.M., P.J.N., S.S.A.P., D.J.B.S.,J.S.M.,S.M.J.,P.M.P., K.M.N.,A.M.N. Tan SriDato’SeriDr. SulaimanbinMahbob D.P.M.P., J.S.M.,K.M.N. Dato’ N.Sadasivan P.S.M., D.A.,P.N.B.S., J.S.M.,J.B.S.,A.M.N.,P.B.J., P.P.D.(Emas) Tan SriDatukAmarHajiBujangbinMohd.Nor P.J.N. Datuk OhSiewNam P.S.M., S.P.S.K., S.S.A.P., S.P.D.K., D.P.S.K., S.M.W., A.M.N. Tan SriDato’Dr. Wan AbdulAzizbinWan Abdullah Deputy Governor Puan NorShamsiahbintiMohdYunus Deputy Governor D.P.M.S. Dato’ MuhammadbinIbrahim Deputy Governor D.P.M.S., D.I.M.P., D.P.M.P. Dato’ MohdRazifbinAbdKadir andChairman Governor D.K. (Johor),P.S.M., S.S.A.P., S.U.M.W., D.P.M.J. Tan SriDato’Dr. ZetiAkhtarAziz BOARD OFDIRECTORS

3 ANNUAL REPORT BOARD OF DIRECTORS BOARD OF DIRECTORS ANNUAL REPORT 4 Governor Tan Sri Dr. Zeti Akhtar Aziz

Deputy Governor Dato’ Mohd Razif bin Abd. Kadir Deputy Governor Dato’ Muhammad bin Ibrahim Deputy Governor Nor Shamsiah binti Mohd Yunus

Special Advisor Dato’ Ooi Sang Kuang

Project Advisor Dato’ Mohd Nor bin Mashor

Secretary to the Board Abu Hassan Alshari bin Yahaya

Assistant Governor Dr. Sukhdave Singh Assistant Governor Bakarudin bin Ishak Assistant Governor Norzila binti Abdul Aziz Assistant Governor Jessica Chew Cheng Lian Assistant Governor Donald Joshua Jaganathan Assistant Governor Abu Hassan Alshari bin Yahaya Assistant Governor Marzunisham bin Omar

Director Governor’s Office Suhaimi bin Ali Strategic Communications Abu Hassan Alshari bin Yahaya Risk Management Chung Chee Leong Special Investigation — Financial Intelligence Wan Mohd Nazri bin Wan Osman Internal Audit Tan Nyat Chuan Economics Economics Fraziali bin Ismail Monetary Assessment and Strategy Dr. Norhana binti Endut International Nazrul Hisyam bin Mohd Noh Regulation Financial Sector Development S. Abd. Rasheed bin S. Abd Ghafur Islamic Banking and Takaful Ahmad Hizzad bin Baharuddin Financial Surveillance Madelena binti Mohamed Prudential Financial Policy Mohd Zabidi bin Md Nor Development Finance and Enterprise Kamari Zaman bin Juhari Consumer and Market Conduct Koid Swee Lian Money Business Services* — Supervision Financial Conglomerates Supervision Che Zakiah binti Che Din Insurance and Takaful Supervision Yap Lai Kuen Banking Supervision Marina binti Abdul Kahar

Regulation and Supervision Administration Unit Nor Aslaini binti Mohd Nasir

Payment Systems Policy Cheah Kim Ling

Investment and Operations Investment Operations and Financial Markets Adnan Zaylani bin Mohamad Zahid Foreign Exchange Administration Wan Hanisah binti Wan Ibrahim Currency Management and Operations Ramli bin Saad Corporate Resources Strategic Human Capital Mohd. Adhari bin Belal Din Finance — Legal Jeremy Lee Eng Huat Strategic Management Tunku Alizakri bin Raja Muhammad Alias Human Capital Development Centre Arlina binti Ariff Corporate Services Azmi bin Abd Hamid IT Services Alizah binti Ali Statistical Services Toh Hock Chai Central Banking Services — LINK and Regional Offices — Security Mior Mohd Zain bin Mior Mohd Tahir Property Management Services — Sasana and Lanai Kijang Management Office Lim Foo Thai Bank Negara Malaysia Museum and Art Gallery Muhammad Fawzy bin Ahmad HR Services Unit —

MIFC Promotion Unit Shariffuddin bin Khalid

Chief Representative London Representative Office Mohamad Ali Iqbal bin Abdul Khalid New York Representative Office Khairuzin bin Mohd Arif

Branch Manager Johor Bahru Kamalullail bin Ramli Kuching Ishak bin Musa Shah Alam Mohd. Khir bin Hashim Kuala Terengganu Azizan bin Mohd Ali Kota Kinabalu Ahmad bin Abd Rahim Pulau Pinang Rosnani binti Mahamad Zain

* To be established later

Contents

GOVERNOR’S STATEMENT

EXECUTIVE SUMMARY

ECONOMIC DEVELOPMENTS IN 2010 11 The International Economic Environment 15 The Malaysian Economy 18 Domestic Demand Conditions 20 White Box: The Growth and Evolution of Consumer Spending in Malaysia 24 White Box: Growth and Changing Trends of Private Investment in Malaysia 30 Sectoral Review 35 External Sector 44 Labour Market Developments 46 Price Developments 50 White Box: Determinants of Inflation in Malaysia 54 White Box: Rise of Economic Integration in East Asia: The Malaysian Perspective 59 White Box: Liberalisation of Foreign Exhange Administration (FEA) to Strengthen Malaysia’s Linkage with Regional and Global Economies

MONETARY AND FINANCIAL CONDITIONS 65 International Monetary and Financial Conditions 68 Domestic Monetary and Financial Conditions 74 Financing of the Economy 76 White Box: The Impact of Exchange Rate Appreciation on Malaysian Trade

MONETARY POLICY IN 2010 81 Monetary Policy 84 Monetary Operations 87 White Box: Financial Imbalances and the Role of Monetary Policy

OUTLOOK AND POLICY IN 2011 91 International Economic Outlook 93 Malaysian Economy 95 White Box: Potential Output of the Malaysian Economy 104 Monetary Policy 105 Fiscal Policy GOVERNANCE, COMMUNICATIONS AND ORGANISATIONAL DEVELOPMENT 109 Governance 111 White Box: Operationalisation of the Central Bank of Malaysia Act 2009 118 Communications 120 Organisational Development 124 White Box: Corporate Social Responsibility 129 Organisation Structure

ANNUAL FINANCIAL STATEMENTS 136 Statement of Financial Position as at 31 December 2010 137 Income Statement for the Year Ended 31 December 2010 138 Notes to the Financial Statements

ANNEX GOVERNOR’S STATEMENT

The world economy improved significantly in 2010. Particularly strong growth was recorded in the emerging economies with this trend being most pronounced in the Asian region. Generally this growth has been underpinned by strong domestic demand and the recovery in world trade. While the global growth momentum slowed in the second half of the year, economic growth in 2011 is expected to continue although at a more moderate pace. The slower world trade, and the implementation of policies to avoid risks to sustainable growth, have placed most emerging economies on a more steady growth path. The most pressing challenge for the world economy in 2010 has therefore been to promote a self-sustaining growth that is accompanied by job creation and macroeconomic stability.

In Malaysia, the economy expanded by 7.2% in 2010, with encouraging trends in private economic activity and continued improvements in employment conditions. Despite the more moderate global growth in 2011, Malaysia has the potential to sustain its underlying trend of steady economic growth. This will continue to be supported by sound macroeconomic fundamentals, continued access to financing in an environment of ample liquidity and a resilient financial sector. As a highly open economy, Malaysia will continue to be affected by the spillover effects of global developments. These will include the effects of developments and policies being pursued by the advanced economies, the geopolitical tensions in the Middle East and more recently, the tragic developments in Japan. Twelve years hence from the Asian financial crisis, Malaysia has built its capacity to cope with such challenges. The strengthening of our economic structure and the financial system, the enhancement of institutional arrangements and the improvement in our macroeconomic fundamentals have increased the resilience of our economy.

Two further global developments, the sharply higher global commodity and energy prices and the massive shifts in global liquidity, could also affect global growth prospects. These developments have been affected by supply disruptions due to geopolitical developments, weather conditions and the search for yield among investors in a low interest rate environment. The concern arising from these trends is that the higher commodity and energy prices could translate into higher inflation which in turn could unhinge inflationary expectations. In addition, the shifts in liquidity to emerging economies are also creating undue volatility in financial markets and excess liquidity conditions that could result in the formation of asset bubbles and other financial imbalances.

Despite the developments in the commodity markets, the consensus view at this stage is that economic activity would only be discernibly affected if the energy and commodity prices remained elevated for an extended period of time. The presence of stockpiles, better inventory management, the more efficient use of energy, and the better-anchored inflation expectations, all point to greater resilience to price shocks compared to the 1970s and 1980s. Nevertheless, different countries will be affected differently. Developing and emerging economies are likely to be more adversely affected given the greater weight of food and fuel in their consumption baskets. Commodity exporters will be less affected compared to commodity importers. The strength of the pass-through to domestic prices will also depend on factors such as domestic supply constraints, the efficiency of domestic distribution channels, the existence of subsidies and the fiscal capacity of governments to reduce the burden of higher prices.

In Malaysia, inflation was contained at 1.7% in 2010. The significant increases in global energy and commodity prices are expected however to translate into higher domestic food and fuel prices. In addressing this trend, Malaysia has adopted a more comprehensive approach that includes the implementation of a more gradual subsidy rationalisation, providing income support to the lower income groups, increasing food production and increasing efficiency in its distribution, and promoting greater energy efficiency by households and the industry. For monetary policy, this risk will need to be monitored and managed while taking into account that the consequent reduction in discretionary spending arising from the erosion of real income will also have a dampening effect on growth.

In early 2010, the Bank undertook steps to normalise the overnight policy rate, raising it in three steps to 2.75% as keeping interest rates too low for too long would result in its own risks that would undermine future growth. As we entered 2011, the risk of more modest growth remains, while the risk of higher inflation also needs to be managed. In this environment, monetary policy in 2011 has the flexibility to remain accommodative, although the degree of accommodation may need to be adjusted to ensure that economic growth in the medium term will not be damaged by higher inflation. Of importance is that the economy continues to remain on its current growth trajectory of a steady growth.

Managing the excess liquidity and its potential consequent effects on leverage, in particular by the household sector and also on the formation of bubbles in the asset markets has prompted a further strengthening of governance process to address these issues. A joint policy meeting of the Monetary Policy Committee and the Financial Stability Committee is periodically convened to deliberate on the appropriate policy responses in the event that these issues are raised in the respective committees. This is to ensure that policies will be consistent and coordinated. Also important is that there will not be over reliance on one set of measures that will result in over-adjustments.

A notable development in the current environment is the rising trend of household indebtedness and its potential to become an area of concern. While household indebtedness has increased, it has continued to be well-supported by strong financial buffers at the aggregate level. Income growth, the high rate of savings and the favourable employment conditions have supported the debt servicing capacity of households. Nevertheless, to avoid this becoming a risk, a comprehensive series of policies have been introduced during the course of the year. These include prudential policies applied in the residential property sector, new credit card measures and strengthened requirements for banks to adopt prudent and responsible lending practices. This was reinforced by increased financial education programmes including support arrangements to promote responsible borrowing by households. These pre-emptive measures, outcomes of the joint meetings, also aim to strengthen the resilience of the household sector. A further policy challenge relates to the more volatile capital flows into the country. As with a number of other countries in the Asian region, Malaysia received large short-term capital flows since the second half of 2009. Overall, the capital flows have been manageable and have been well intermediated by the financial system. While the ringgit exchange rate has become more volatile against the major currencies, the foreign exchange market has remained orderly and the impact of these flows on domestic monetary conditions has not been destabilising. In addition, the substantial increase in liquidity in the banking system arising from these short-term flows has to a large extent been sterilised. The Bank also has at its disposal the instruments necessary to ensure that this excess liquidity does not lead to excessive risks in the financial system and the economy.

As part of the ongoing organisational development of the Bank, several advancements were achieved during the year. In particular, this included the operationalisation of the Central Bank of Malaysia Act 2009. In providing greater clarity of our mandate, the Act has significantly enhanced the role of the Board in providing its oversight on the operations of the Bank. In addition, the greater powers that the Act accords to the Bank is also accompanied by a more robust framework for governance and greater accountability. In addition to the existing Board Audit Committee, the Board Governance Committee and the Board Risk Committee were introduced during the year.

A further initiative in organisational development is the further strengthening of the performance-based culture at the Bank. This has continued to be a central pillar in the Bank’s management of its staff and the remuneration and promotion framework. The Bank has also continued to build its human capital and strengthen its talent pipeline. In line with the demand for skills and specialised knowledge in this evolving economic and financial environment, the Bank has introduced specialist ladders and new job families for professionals that are supported by extensive tailored programmes to better equip our talent. Investment in technology was also a prime focus in 2010 with the further expansion and modernisation of the ICT infrastructure, including the operationalisation of the Bank’s new Data Centre and the upgrading of our Recovery Centre.

The global financial and economic crisis and the challenges it has posed in the areas of the Bank’s responsibilities have placed significant demands on our resources. On behalf of the Board I wish to express our appreciation and gratitude to all the staff of the Bank who have worked with great dedication and commitment to ensure that the Bank continues to serve the interest of the nation and to protect the longterm well-being of all citizens of this country. I am also grateful for the support and guidance of the Board of Directors, who are an integral part of the governance at the Bank. The Bank will continue to strive to achieve the highest standards of excellence in performing our responsibilities.

Zeti Akhtar Aziz Governor 23 March 2011

EXECUTIVE SUMMARY

1 ANNUAL REPORT 2010 EXECUTIVE SUMMARY EXECUTIVE SUMMARY ANNUAL REPORT 2010 2 -0.5%). Privateconsumption expandedat demand expandedstrongly by6.3%(2009: year asawhole,theoverall aggregate domestic Domestic demandconditions were robust. Forthe the diminishingbaseeffect. in tandemwiththeslowdownglobaltradeand subsequently moderatedinthesecondhalf-year some extent,thelowbaseeffect. However, it underpinned bystrong regional demandandto rebounded strongly inthefirsthalfofyear, demand public sectordeliverysystem.External enhance thecountry’s infrastructure andthe the implementationofprogrammes tofurther to supportthedomesticeconomythrough activity. Meanwhile,thepublicsectorcontinued demand, withstrong expansioninprivatesector Growth wasdrivenmainlybyrobust domestic growth in2010withanexpansionof7.2%. economy experiencedastrong resumption of in2009,theMalaysian After thedownturn The MalaysianEconomyin2010 risk managementandtalentdevelopment. through enhancementsinstrategicmanagement, Bank tostrengthenandcapacity itsgovernance also highlightstheorganizationalchangesin the keychallengesgoingforward. Thereport global economicandfinanciallandscapes backdrop ofon-goingdevelopmentsinthe of theprospects fortheeconomyagainst Bank duringtheyear, aswellanassessment Malaysian economyandpoliciespursuedbythe detailed analysesofthedevelopmentsin with theregion. TheAnnualReportprovides in domesticactivityandgreater integration growth path,underpinnedbyastrong expansion environment, theMalaysianeconomyresumed its and risinginflationarypressures. Amidstthis increasing challengesfrom volatilecapitalflows rapid resumption ofeconomic growth, butfaced emerging economies,however, experienceda large swingsinglobalfinancialmarkets.The weaknesses intheadvancedeconomiesand uncertain, weigheddownbycontinuedstructural environmentinternational remained highly the secondhalfof2009.Nevertheless, economic recovery, whichhadbegunin The year2010sawacontinuationinglobal EXECUTIVE SUMMARY a f aster driven by higher growth in all sub-sectors. With driven byhighergrowth inallsub-sectors.With sector expandedby7.9%in thefirsthalf-year percentage pointstotheoverallGDPgrowth. The largest contributortogrowth, contributing3.9 expanded by6.8%(2009:2.6%) andwasthe a strong performancein2010.Theservicessector On thesupplyside,alleconomicsectorsregistered the civilservice. improved salaryschemeforselectedsegmentsof emoluments washigher, inpartbecauseofthe expenditure. Nevertheless,expenditure on spending programmes andreduced non-essential reprioritised and servicesastheGovernment attributable mainlytolowerspendingonsupplies consumption moderatedto0.1%(2009:3.1%), healthcare services.Meanwhile,growth inpublic enhancing theprovision ofpubliceducationand and urbanpublictransportionaswell mainly towards improving ruralinfrastructure year. Developmentexpenditure waschannelled amounting toRM5billioninthefirsthalfof the continuationofsecondstimuluspackage increased by5.5%(2009:8%),partlyreflecting to growth duringtheyear. Publicinvestment The publicsectorcontinuedtoprovide support rose by11%in2010. 16.2%, whilesalesofconstruction-related materials indicators. Importofcapitalgoodsincreased by reflected intheimprovement ofmajorinvestment The strong performanceofinvestmentactivitywas conditions andimprovementsdemand. inexternal sectors followingfavourabledomesticeconomic -17.2%). Capitalspendingexpandedacross all a double-digitgrowth of13.8%in2010(2009: Private investmentrebounded strongly toregister consumption goods. passenger carsales,retail sales andimportsof of majorconsumptionindicatorssuchas spending wasreflected inthe strong performance supported consumerspending.Robust an accommodativemonetaryenvironment also the ruralareas. Continued access tocredit amid supported increased spending byhouseholdsin incomes. Higherpricesofcrudepalmoilandrubber labour marketconditionsandthesteadyincrease in rate of6.6%(2009:0.7%),supportedbybetter

3 ANNUAL REPORT 2010 The mining sector increased by 0.2% (2009: by 0.2% sector increased The mining of natural production by higher -3.8%) supported importers major from higher demand gas to meet as well as the first and Taiwan, such as Japan Crude oil output, exports to PR China. full-year of to lower continued to decline due mainly however, and the the maturing oil fields from production oil fields for maintenance.shutdown of several in market improved Conditions in the labour higher in lower retrenchments, 2010 as reflected and gains in employment. Thenumber of vacancies declined to 3.2% of the labourunemployment rate in growth stronger (2009: 3.7%), following force to the 2009: 0.4%), compared employment (1.8%; (1.3%; 2009: 0.8%). in the labour force growth during the year driven by supply Inflation increased higher food and commodity factors arising from prices. prices and adjustments to administered Headline low. overall inflation remained However, by the annual percentage inflation, as measured averagedchange in the Consumer Price Index (CPI), core 1.7% in 2010 (2009: 0.6%). Meanwhile, inflation, an indicator of the demand-driven on prices, moderated to 1.5% in 2010 pressures (2009: 2.7%). in external resilient position remained Malaysia’s account 2010, underpinned by a sizeable current financialsurplus and lower net outflows in the demandaccount. The acceleration of domestic of gross growth impetus for the strong provided of gross imports which outpaced the growth surplus.exports, leading to a slightly smaller trade a small surplus, The services account recorded tourism as from supported by higher receipts well as computer and IT services. Meanwhile, the lower net outflows in the financial account the higher inflows of portfolio largely reflected investment (FDI) direct investment and foreign in both global and domestic given the improvement economic conditions. expanded by 15.6% in 2010 (2009: exports Gross in the first growth stronger -16.5%), with relatively demand regional by strong supported half-year, of the and to a certain extent, the low base effect however, momentum, The growth year. previous moderated in the second half, weighed down by exports, namely in manufactured the slower growth (E&E). and electrical products exports of electronics Commodity exports, on the other hand, remained the year and expanded by throughout resilient 26.9% (2009: -28.2%), supported by robust the slowdown in externalthe slowdown affected demand which services and manufacturing-related the trade- in the moderated to 5.8% growth sub-sectors, in domestic The sustained expansion second half. continued to nevertheless, consumption activity, dependent sub-sectors that are benefit the services particularly the wholesaleon domestic demand, sub-sectors. trade; and communication and retail strongly sector rebounded The manufacturing -9.4%), of 11.4% (2009: a growth to register the first in growth strong driven largely by the and with expansion in both the export- half-year, industries. In the export- domestic-oriented and of the electronics growth oriented industries, (E&E) cluster was underpinned electrical products of global corporate IT investments by the revival and higher consumer spending on electronics cluster was in of the primary-related while growth of the external line with the recovery environment. in the domestic-oriented industries Robust growth domestic was supported mainly by strong of the The pace of growth consumption activity. due year-end moderated towards however, sector, to slower external the diminishing demand and base effect. by 5.2% in 2010 The construction sector grew was supported mainly (2009: 5.8%). Growth the reflecting sub-sector, by the non-residential and the properties construction of commercial of public buildings. The upgrading and repair to expandcivil engineering sub-sector continued in the implementation further progress reflecting Construction activity in projects. of infrastructure sub-sector declined, as fewer units the residential launched by were properties of new residential developers, especially in the early part of 2010. by 6% on Meanwhile, house prices increased quarters an annual basis during the first three of 2010, almost twice the size of the average 3.4% during 2000-09. of increase and sector (including forestry The agriculture fishing) expanded by 1.7% (2009: 0.4%). The was sustained, while the of food crops production declined at a slower of industrial crops production picked up because of pace as rubber production higher prices. Global agricultural commodity prices significantly during the year following increased demand amid constrained supply due stronger to adverse weather conditions. Prices of crude considerably during the year palm oil increased high on 30 while rubber prices closed at record December 2010.

EXECUTIVE SUMMARY ANNUAL REPORT 2010 4 extraordinary monetarystimulusundertakenin part of2010wasontheneed tonormalisethe the focusofmonetarypolicy duringtheearly therecovery becoming moreWith entrenched, in 2010 Domestic MonetaryandFinancial Conditions goods andservicesexports. reserves 24.2% ofinternational and10.7% relatively small,accountingforonly10.6%ofGNI, borrowings. debtremained Theshort-termexternal primarily tohighernon-bankprivatesector outstanding increased toRM79.4billion,attributed During theyear, debt theshort-termexternal new USdollarbenchmarkforMalaysiancorporates. global Islamicfinancialhubaswelltoestablisha issuance wasaimedatpromoting Malaysiaasa billion 5-yearglobalsukukinMay2010.The primarily becauseoftheissuanceUSD1.25 recorded loans, anetdrawdownofexternal bonds. Incontrast,theFederalGovernment loans,includingthematurityofseveral of external sector, theNFPEsalsoregistered anetrepayment loans bytheprivatesector. thepublic Within term debtduetothenetrepayment ofexternal This reflected thedeclineinmedium-andlong- or equivalentto30.2%ofGNIattheend2010. Malaysia’s debtdeclinedtoRM226.3billion external Bank remain usableandunencumbered. reserves debt.Theinternational heldbythe external retained importsandis4.3timestheshort-term which isadequatetofinance8.1monthsof RM338.6 billion(equivalenttoUSD109.8billion), February 2011,thereserves levelamountedto residents, moderatedduringtheyear. Asat28 trade credits andplacementofdepositabroad by other investmentoutflows,whichlargelyreflected tap profitable opportunities overseas.However, also rose asMalaysiancompanies continuedto to higherinflowsofFDI.Direct investmentabroad as wellmore favourable investmentclimateled economic conditionsandcorporateprofitability, and higherinterest rates.The improving global as expectationsforstronger regional currencies trend giventheprospects forstrong growth aswell Net portfolioinflowsincreased inlinewithregional outflow ofRM21.9billion(2009:-RM80.2billion). The financialaccountrecorded asmallernet robust domesticdemand. reflecting thepick-upinmanufacturing activityand with expansionacross allmajor importcategories, Gross importsgrew by21.7%(2009:-16.3%), regional demandandhigh commodityprices. Japanese yen. and poundsterling,butdepreciated againstthe ringgit appreciated againsttheUSdollar, euro heightened uncertainties.For theyearasawhole, developments inIreland inNovemberwhichinduced the sovereign debtcrisisinEurope inMayandthe of portfolioflowreversals, especiallyfollowing was generallyorderly, itwaspunctuated byepisodes these factors.Whiletheappreciation oftheringgit the furtherliberalizationmeasures were among initiatives totransformtheMalaysianeconomyand of theringgit.Theannouncementseveralkey for suchinflowsandthefurtherstrengthening factors specifictoMalaysiathatprovided impetus portfolio inflowstotheregion, there were also inflows. Apartfrom commonfactorsthatattracted by thecurrent accountsurplusandnetportfolio The ringgitappreciated duringtheyear, driven arising from reversal oftheseflows. reserves international servedtomitigatetherisks better intermediated,whilethehealthylevelof of thefinancialsystemallowedthesefundstobe conditions wascontained.Thedepthandresilience of theexcessliquidityondomesticmonetary sterilisation operationsensured thattheimpact exchange ratemovementsremained orderly, while economy andfinancialsystem.Theringgit of theinflowscreating imbalancesinthedomestic signs have beenmanageablewithnodiscernible challenges in2010.ForMalaysia,theseinflows flows toemergingeconomiesalsoposedpolicy The largerandmorefinancial volatileinternational line withtheimprovements intheeconomy. were generallynotexcessiveandcontinuedtobein showed thatgrowth inoverallassetpricesandcredit assessments carriedoutthroughout theyear On theriskofabuild-upfinancialimbalances, remained lowat1.7%for the yearasawhole. robust throughout 2010.Meanwhile,inflation with growth inprivatesector financingremaining conditions remained supportive ofeconomicactivity still belowthealready lowpre-crisis levels,financing supportive ofgrowth. Asthe borrowing costswere Monetary policyremained accommodative and each timeinMarch, Mayand July2010. OPR was,thus,graduallyraisedby25basispoints disintermediation andexcessivecredit growth. The agents, leadingtothemispricingofrisks,financial and create distortedincentives foreconomic period couldgiverisetofinancialimbalances Policy Rate(OPR)atalowlevelforsustained 2009. Itwasrecognised that leavingtheOvernight

5 ANNUAL REPORT 2010 EXECUTIVE SUMMARY On the supply side, all economic sectors are expected sectors are side, all economic On the supply mainly by the in 2011, supported to expand The servicesof domestic demand. growth continued to grow expected sectors are and manufacturing statistical pace given the high moderate at a more the expansion being driven bybase of 2010 with sub-sectors. Trade- domestic demand dependent manufacturing services and export-oriented related slower growth, will record industries, however, moderation in externalin line with the expected and in the agriculture growth demand. Meanwhile, benefiting strengthen, to mining sectors is projected in the the expected turnaround from respectively commodity amid high of industrial crops production output of natural gas followingprices and the higher progress the opening of two new gas fields. Further and new projects projects of on-going infrastructure will provide due for implementation under the ETP the impetus for the construction sector. is account surplus On the external the current front, to amount to RM100.7 billion or 12.5% projected a higher trade surplus of GNI in 2011, reflecting The trade and sustained services account surplus. from surplus is expected to emanate primarily commodity exports supported by higher robust from prices and sustained demand, particularly Meanwhile, the surplus in the services the region. the from account will be driven by higher receipts in tourist travel account with the expected increase amid active the region, arrivals, especially from access to the campaigns and increased promotional On the the low-cost airline carriers. country through investment inflows direct financial account, foreign given the favourable expected to increase are economic outlook, better corporate earnings, rising business confidence, further improvements wide- in global FDI flows and the Government’s Direct ranging economic transformation projects. large is expected to remain investment abroad as companies continue to seek new markets and business opportunities abroad. of the Malaysian economy growth The projected is based on the expectation of moderate growth in advanced economies and a return to more rates by the Asian economies. normal growth risks to the growth remain Nevertheless, there which include sharper than expected projection deterioration in external conditions, significant volatility in capital flows given the continued uncertainty in international markets and higher supply- than anticipated inflation emanating from driven factors. The domestic equity market rose steadily in early steadily rose equity market The domestic following in May underwent a correction 2010 but however, The market, in Europe. developments along half of the year in the second rebounded strong market conditions, global with improved and positive governmentcorporate performance the FBM KLCI For the year as a whole, measures. by 19.3% (2009 :45.2%). rose in the banking system were Liquidity conditions sector liquidity 2010. Private ample throughout in line with real pace, expanded at a measured of foreign and the resumption economic recovery operations of the Centralinflows. The sterilisation was that there instrumental in ensuring Bank were while sufficient liquidity to support the economy, in misallocation of not being excessive to result financial resources. supportive of Financing conditions remained access to financing, The ready economic activity. and ample low cost of borrowing relatively the liquidity in the financial system supported both the private and demand for financing from the private public sectors. Net financing raised by the banking system and the sector through 8.4%) capital market expanded by 11.3% (2009: both the business and demand from with strong household sectors. in 2011 Outlook for the Malaysian Economy to grow The Malaysian economy is projected is likely to improve by 5–6% in 2011. Growth growth during the course of the year with better The year. performance in the second half of the momentum will be underpinned by strong growth from domestic demand, emanating primarily Private consumption will be private sector activity. supported by favourable labour market conditions, higher disposable incomes, sustained consumer access to financing. confidence and ready strong, Private investment is expected to remain supported by capital spending by the domestic- oriented industries given the high levels of capacity utilisation and positive business confidence, as well as the implementation of key initiatives announced by the Government under the Economic (ETP). Meanwhile, the Programme Transformation supportive of growth, public sector will remain in the with higher capital spending projected second half of 2011. This is mainly resulting and implementation of new projects the from to promote the acceleration of on-going projects private sector activity.

EXECUTIVE SUMMARY ANNUAL REPORT 2010 6 2.00%, effective 1April2011. Requirement (SRR)ratiowasraisedfrom 1.00%to excess build-upofliquidity, theStatutory Reserve a pre-emptive measure to managetheriskofan occur withinspecificsegments ofthemarket.As behaviour andassetpriceescalationwere to measures maybedeployedifexcessiverisk-taking instruments suchasmacro-prudential lending elevated commodityprices.Additionaltargeted high globalliquidity, volatilecapitalflowsand the build-upoffinancialimbalancesarisingfrom growth whilemanagingtherisksofinflationand Monetary policywillcontinuetofacilitateeconomic private sectorfinancing. private sectorinvestmentandenhancingsources of projects, identificationofhigh-impactprojects for development implementation ofGovernment the public-privatepartnershipinitiativesin Budget tofacilitateprivatesectoractivityinclude Among themeasures announcedinthe2011 infrastructure andthepublicsectordeliverysystem. to strengthen privateinvestmentandenhance economy. Thiswillbeachievedthrough measures towards becomingadevelopedandhigh-income will begeared towards preparing thenation managing theriskstoinflation.Fiscalpolicy the sustainablegrowth oftheeconomywhile environment, thefocusofpolicyistosupport Under thischallengingglobaleconomic Economic andMonetaryManagementin2011 economic activity. of theyearinlinewithsustainedexpansion possible upward pressure onpricesinthelatterpart signs thatdomesticdemandfactorscouldresult in and energyprices.There are alsosomeincipient by thesignificantincreases inglobalcommodity in 2011toaverageat2.5–3.5%,drivenprimarily Headline inflationisexpectedtoincrease further 3.2% ofthelabourforce in 2011. The unemploymentrateisprojected toremain at consumer-related andconstruction-related clusters. will remain firm,supported bytheexpansionin export-oriented industries,gainsinemployment sector, despiteamore moderategrowth inthe communication sub-sectors.Inthemanufacturing the distributivetrade,financeandinsurance, will beledbytheservicessector, particularlyin in thedomestic-orientedsectors.Jobcreation in employmentstemmingprimarilyfrom growth positive in2011,withthecontinuedexpansion Labour marketconditionsare expectedtoremain year 2010. forthe a dividendofRM2billionto the Government 31 December2010.BankNegara Malaysiadeclared profit ofRM6.2billionforthefinancialyearended Malaysia amountedtoRM390.2 billionwithanet remained strong in2010.Total assetsofBankNegara as auditedandcertifiedbytheAuditorGeneral, The financialpositionofBankNegaraMalaysia, Statements for2010 Bank NegaraMalaysia’s AuditedFinancial building, Islamicfinanceandfinancialinclusion economies intheareas ofinstitutionalcapacity agencies toothercentralbanksfrom developing be involvedintechnicalcollaborationwithexternal cooperation,theBankcontinuesto and international As partofthecontinuouseffort toenhanceregional income economy. achieve theeconomictransformationintoahigh greater clarityontheBank’s role inthedriveto expectations, theBankwillcontinuetoprovide environment alongwiththehighshareholders financial inclusion.Inanincreasing challenging decisions, accesstofinancing,financialliteracyand and financialsystemtheBank’s monetarypolicy understanding ofdevelopmentsintheeconomy include strategicengagementstoenhancebetter through variouschannelsandinitiatives.These outreach andengagementwithitsstakeholders The Bankcontinuestopromote communication more effective utilisationofresources. and torealign resources where necessarytoensure Business Plantoassessprogress towards objectives also undertookastrategicreview ofits2009-2011 Business ContinuityManagement(BCM).TheBank objectives. Efforts were alsoundertakentostrengthen risks thatmayaffect theachievement ofBank’s management culture andpre-emptively managing implemented, aimedatpromoting astrong risk Bank. Duringtheyear, severalinitiativeswere being a more robust riskmanagementprocess inthe function ofensuringaneffectiveand governance Committee were formedto undertaketheoversight Board Committeeandthe Governance Risk the CBA,twonewBoard committees, namelythe of amore robust framework.Under governance Act 2009(CBA)whichallowsfordevelopment the operationalisationofCentralBankMalaysia effective Animportantdevelopmentwas governance. organisational developmentandpromoting more During 2010,theBankcontinuedwithitseffort in Organisational DevelopmentandGovernance

7 ANNUAL REPORT 2010 EXECUTIVE SUMMARY EXECUTIVE SUMMARY ANNUAL REPORT 2010 8 59 54 50 46 44 35 30 24 20 18 15 11 White Box: Liberalisation ofForeignExhangeAdministration (FEA)toStrengthen WhiteBox: WhiteBox:RiseofEconomicIntegrationinEastAsia: TheMalaysianPerspective WhiteBox:DeterminantsofInfl Price LabourMarketDevelopments Developments External Sector WhiteBox:GrowthandChangingTrends ofPrivate InvestmentinMalaysia Sectoral Review WhiteBox:TheGrowthandEvolutionofConsumerSpendinginMalaysia DomesticDemand Conditions TheMalaysianEconomy EconomicEnvironment TheInternational Malaysia’s Linkage withRegionalandGlobal Economies ECONOMIC DEVELOPMENTSIN2010 ationinMalaysia

9 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 10 ENVIRONMENT THE INTERNATIONAL ECONOMIC ECONOMIC DEVELOPMENTSIN2010 global growth in2010. economies contributedmore thantwothirds of structural issues.Ofsignifi cance,theemerging economies continuedtofacecrisis-inducedand emerging marketeconomies,whiletheadvanced was ledbystrong economicactivityinthe these temporaryfactorswaned.Globalgrowth momentum tapered off inthesecondhalfas support aswellthelowbaseeffect, butthe due toinventoryrestocking, continuedpolicy recovery acceleratedinthe fi rsthalfoftheyear contraction inthesecondhalfof2009.The exiting from thesharpestpost-war economic continued, albeitatanunevenpace,after In 2010,theglobaleconomicrecovery emerging marketeconomies continued in2010,ledbythe The globaleconomicrecovery most Asianeconomiescontinued tosustaina growth performanceinthefi rsthalfoftheyear, restocking. Afterregistering anexceptional regional tradeandtoacertainextent,inventory domestic demandactivity, rapidexpansion inintra- Growth intheseeconomieswasboostedbyrobust recovery, particularlyinthefi rsthalf of theyear. Asia, ontheotherhand,experiencedaverystrong countries. Theemergingeconomies,notablyin on consumerandbusinesssentimentsinthese several advancedeconomiesweighedfurther of impendingfi scalausteritymeasures in crisis intheeuro area andtheannouncements balance sheets.Theescalationofsovereign debt effects ofthefi nancialcrisisonprivatesector economies remained modestduetolingering Domestic demandconditionsintheadvanced moderated towards thelatterpartof2010. restocking. Thepaceofrecovery, however, as theongoingfi scalstimulusandinventory half oftheyearwassupportedbyfactorssuch In theadvancedeconomies,recovery inthefi rst emergency liquiditytoeuro area banks.However, its SecuritiesMarketProgramme andtoprovide to purchase eurobondsthrough government Central Bank(ECB)announced severalmeasures diffi culties.Onthesameday, theEuropean assist euro area countries thatwere ineconomic European FinancialStabilityFacilityon9Mayto safety netwhichincludedthe€440billion the creation ofa€ fi nancialmarkets,theEU-IMFalsoannounced bailout packagetoGreece on2May. To calmthe In response, theEU-IMFextendeda€ the contagionrisktoothereuro area economies. funding crisisinGreece inlateAprilheightened July andNovember. Theescalationofgovernment debt crisisintheeuro area, particularlyinApril, by periodicvolatilityassociatedwiththesovereign fiInternational nancialconditionswere affected and fi nancialstability. impact ofthecapitalfl owsonmacroeconomic to adoptwide-rangingmeasures tomitigatethe economies, prompting themonetaryauthorities on assetpricesandexchangeratesinthese intensifi ed.Thisexertedupward pressure capital fl owsintotheemergingeconomies liquidity from quantitativeeasingmeasures, differentials, andthelargeinjectionsofglobal a result ofthewideninginterest rateandgrowth a bettergrowth outlookandrisinginfl ation.As to normalisetheirmonetarypolicyinresponse to contrast, manyemergingeconomieshavestarted measures tostimulateeconomicgrowth. In policy byintroducing furtherquantitativeeasing continued topursueexpansionarymonetary year. Intheadvancedeconomies,authorities asset pricesandexchangeratesduringthe signifi cantimplicationsonglobalcapital fl ows, in theadvancedandemergingeconomieshad the consequentdifferences inpolicyresponses The divergenceinthegrowth performanceand particular foodprices. arising from increasing commodityprices,in infl ationarypressures towards thesecondhalf effect. TheAsianeconomies alsofacedrising demandandthedissipatinglowbase in external moderate pace,duetotheslower improvement fi rm recovery inthesecondhalf,butatamore 750 billiontemporaryfi nancial 110 billion

11 ANNUAL REPORT 2010

This was , real GDP expanded GDP expanded , real agency debt at the end of the agency debt at the end of the ecession prompted the Fed to the Fed to ecession prompted billion United States (US) United States In the with about in 2010 (2009: -2.6%), by 2.8% inventory coming from growth 50% of the two years of inventory following restocking, in early 2008. Domestic drawdown beginning with private modest, demand remained (2009: -1.2%), at 1.8% consumption growing in personal savings supported by a drawdown trillion in net worth and a gain of USD3.2 However, the buoyant equity markets. from by a weak constrained households were with average monthly in the job market recovery which could not of 78,000, a pace job creation of unemployment. the rate meaningfully reduce elevated rate remained Thus, the unemployment of long-term at 9.4% at end-year with the share of total unemployment rising further to 44.3% conditions unemployment. The labour market on house pressure also exerted downward investment remaining prices, with residential in sluggish. In contrast, business investment expanded strongly equipment and software accelerated by 15.1% (2009: -15.3%) as firms of obsolete machinery after the replacement the postponing their investment plans during financial crisis. of a gradual improvement Against the backdrop year, in the economy in the first half of the in and with the normalisation of conditions (the the financial markets, the Federal Reserve several Fed) allowed the automatic expiry of that were quantitative easing programmes during the crisis. While the federal introduced the funds rate was maintained at 0 - 0.25%, to Fed raised the discount rate by 25 bps to normalise 0.75% on 18 February in an effort lending facilities. In addition, the Fed ended for USD1.25 trillion programmes the purchase agency mortgage-backed securities and USD175 as the economy showed However, first quarter. signs of slowing in the second half of the year, the Fed announced on 10 August that it would keep its holdings of securities constant by maturing securities from the proceeds reinvesting securities. Heightened Treasury in longer-term and deflationary pressures risks arising from concerns growing over the possibility of a double-dip r of quantitative easing a second round introduce The amounting to USD600 billion on 3 November. of US Treasuries involves the purchase measure USD75 billion a month, by by approximately the end of second quarter of 2011. e ation (%) Infl 2009 2010 e Real GDP 9.2 10.3 -0.7 3.3 7.0 8.6 2.1 9.4 Growth (%) Growth -0.8 8.3 1.3-2.7 2.3 6.8 0.5 2.4 2009 2010 85 billion bailout package for package for 85 billion bailout 2 November aimed at restructuring restructuring November aimed at € 1 with emerging markets being buoyed by with emerging markets being buoyed 3 ation refers to composite price index ation refers to wholesale price index ation refers Table 1.1 Table Republic of China Estimate Newly industrialised economies Infl Infl India Philippines 1.1 7.3 3.2 3.8 Asian NIEs Indonesia 4.5 6.1 4.8 5.1 East Asia 5.4 9.2 0.3 3.2 Thailand -2.3 7.8 -0.9 3.3 United Kingdom -4.9 1.3 2.2 3.3 Malaysia -1.7 7.2 0.6 1.7 Singapore Hong Kong SAR -0.8 14.5 0.6 2.8 Euro area Euro -4.1 1.7 0.3 1.6 ASEAN-4 1.1 6.9 2.3 3.8 Chinese Taipei -1.9 10.8 -0.9 1.0 Japan -6.3 3.9 -1.4 -0.7 KoreaThe People's 0.2 6.1 2.8 2.9 World GrowthWorld TradeWorld Advanced Economies -0.6 United States -10.7 5.0 12.0 -2.6 - - 2.8 - -0.4 - 1.6 e InternationalSource: Monetary Fund, National Authorities and Bank Negara Malaysia estimates persistent concernspersistent the banking on the health of the following over area the euro sector in July. test by the ECB in a stress months triggered under pressure markets came Global financial uncertainty over following again in November led ability to raise funds. This eventually Ireland’s to an EU-IMF 1 2 3 World Economy: Key Economic Indicators Economy: World Ireland on 28 Ireland the Irish banking system and safeguarding its and safeguarding the Irish banking system the episodic fiscal position. Notwithstanding financial markets, global area in the euro stress favourable to register financial markets continued Most major and the year. performance during positive equity markets recorded regional second consecutive for the double-digit growth year, market, large capital inflows. In the global bond able to raise funds large corporate issuers were cheaply given the low long-term yields.

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 12 modest, inline withweakconsumersentiment subdued. Privateconsumption growth was while domesticdemandcontinued toremain was mainlycontributedby inventoryrestocking expanded by1.3%(2009: -4.9%),butgrowth In the through holdingsofsovereign papers. ease fundingstrainsgiventhebanks’exposure short-term fundstothebankingsector of itsliquidityfacilitiestoextendunlimited euro area. TheECBalsoreintroduced several andprivatesector bondsinthegovernment Securities MarketProgramme topurchase both easing inMaythrough theintroduction ofthe Greek crisisprompted furtherquantitative throughout theyear. Theoutbreak ofthe an accommodativemonetarypolicystance raise funding,theECBdecidedtomaintain the abilityofperipheraleconomiesto financial marketuncertaintysurrounding the euro membercountriesandthepersistent In viewofthedivergenceingrowth among recessionary pressures ontheseeconomies. and fallinghousepricescontinuedtoexert unemployment, fragilebankingsectors the publicsector. Furthermore, highstructural in consumerconfidenceamidlargelayoffs in measures andtheconsequentdeterioration down bytheimpositionoffiscalausterity in theperipheraleconomieswasweighed industries. Incontrast,domesticdemand a largeexpansionofjobsintheexport-oriented spillover effect onprivateconsumptionthrough the double-digitexportgrowth hadpositive real GDPexpandedby3.6%(2009:-4.7%)as domestic demandconditions.InGermany, the peripheraleconomiesexperiencedweak core economies,inparticularGermany, while due tothestrong export-led growth inthe economies. Therecovery was uneven,largely of sovereign debtproblems intheperipheral by 1.7%(2009:-4.1%)amidperiodicepisodes In the and investmenttaxallowanceincentives. of theexpiringtaxcuts,unemploymentbenefits, 2011-2012. Thepackageincludestheextension bulk ofthemeasures will be implementedin tax relief package(5.9%of GDP),inwhichthe alsounveiledaUSD858billionUS government consumption andinvestment.InDecember, the and increase thewealtheffect inorder tospur equity pricesinorder tolower mortgagerates the loweringoflong-termyieldsandincrease in aimed ateasingfinancialconditionsthrough UnitedKingdom(UK) euro area , real GDPexpandedmodestly , real GDP economy. Asar with inventoryrestocking intheglobal activity ledbyPRChina,and demandassociated benefiting from strong intra-regional trade in exportsformostregional economies, further reinforced bythe double-digitexpansion to financing.Thegrowth momentumwas labour marketconditionsandcontinuedaccess household andbusinesssentiments,favourable domestic demandwasanchored byimproving as wellthelowbaseeffect. Thestrength in inventory restocking intheadvancedeconomies robust domesticdemand,intra-regional trade, strong inthefirsthalfofyear, drivenby In the andcorporatebonds. government ¥5 trillionassetpurchase programme topurchase range of0-0.1%from 0.1%andestablisheda callrateinOctober toa reduced theovernight continued toweighontherecovery, theBOJ strong yen andweakeningoftheUSeconomy lending facilityto¥30trillioninAugust.Asthe half oftheyear, theBOJfurtherexpanded the recovery begantolosemomentuminthesecond with theinitialamountof¥10trillion.As facility wasfirstintroduced inDecember2009 financial institutionsatlowerinterest rates.The in March, inorder toprovide more loansto its six-monthlendingfacilityto¥20trillion prompted theBankofJapan(BOJ)toexpand domestic economy, coupledwithastrong yen, export-led recovery, thedeflationthreat inthe and electricalappliances.Notwithstandingthe form ofsubsidiesforenvironment-friendly cars -1.9%), posted amodestgrowth of1.9%(2009: semiconductors from Asia.Privateconsumption, following strong demandforvehiclesand registered itsfastestexpansionin30years production. Inthefirsthalf oftheyear, exports double-digit growth inexports andindustrial by 3.9%in2010(2009:-6.3%),supported The programme at£200billion. and maintainedthesizeofitsassetpurchase to keepthepolicyrateunchangedat0.5% inflation, theBankofEngland(BOE)decided recovery andmarkedlystronger headline balancing betweenthefragilityofeconomic low demandandtightcredit conditions.In constrained byanoverhangofspare capacity, the nextfouryears.Privateinvestmentwas austerity amountingto5.6%ofGDPover following theannouncementofplannedfiscal Japanese Asian region supported byfiscalstimulusinthe economyrebounded strongly esult, Singapore, Chinese , growth wasexceptionally

13 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 1 was characterised by the was characterised by the Korea Thailand PR China Indonesia Philippines oduced in the Region to Manage Manage to Region in the oduced Chinese Taipei Limit capital inflows Prudential & liquidity measures Encourage capital outflows Administrative measures Chart 1.2 Hong Kong SAR & Singapore Real estate measures Measures Intr Flows Capital 1 Source: National authorities debt instruments and the income derived, debt instruments and the income derived, and in some cases, limits on the holdings. also adopted were measures Macroprudential to limit the domestic banking institutions’ As large volatility. currency to foreign exposure capital inflows also contributed to speculative several estate sector, activity in the domestic real lending authorities tightened the mortgage and imposed stamp duties or requirements levies to curb the speculative activity. Global inflation apparent divergence in inflation trends between between divergence in inflation trends apparent economies. In the the advanced and regional utilisation advanced economies, low resource in rates and weak domestic demand resulted as these a subdued inflationary environment on a path of gradual and economies treaded Although headline inflation uneven recovery. in the advanced economies picked up in the second half of the year due to rising energy low in the US, inflation remained prices, core the and Japan, generally reflecting area euro negative output gaps in these economies. There concerns also were on the risk of deflation in with the former brought area, the US and euro The growth. on by weaker-than-expected experienced economies, however, regional arising mainly from rising inflationary pressures higher commodity prices. Prices of metals, beyond peaks recorded crude oil and food rose Global food prices, in the second quarter. subdued in the first half of which remained sharply in the latter part of increased the year, demand from the year attributable to stronger 175 India (6.50%) 125 (2.50%) Thailand 100 Korea (3.00%) 75 (2.75%) Malaysia 75 (6.06%) PR China 37.5 Taipei Chinese (1.625%) 25 (6.75%)

Indonesia 0

80 60 40 20

Chart 1.1 200 180 160 140 120 100 (Basis points) (Basis Taipei, PR China and Thailand recorded strong strong PR China and Thailand recorded Taipei, in the first half double-digit economic growth economies, in most regional Growth of the year. the latter began to moderate towards however, pace of part of the year following the slower in externalimprovement demand, reduced activity and waning low inventory restocking Nevertheless, domestic demand, base effect. to particularly private consumption, continued support to overall providing resilient, remain favourable growth Amid relatively growth. coupled with rising inflationary prospects, commodity associated with increasing pressures region prices, several central banks in the to levels began to normalise their policy rates economic consistent with the prevailing Korea, conditions. Malaysia, Chinese Taipei, their Thailand, PR China and Indonesia increased benchmark policy rates by cumulative hikes of between 25 and 125 basis points since 2010. Bank of China (PBOC) In PR China, the People’s ratio eight requirement also raised the reserve times to 19.5% and imposed a quota on new bank lending to manage inflationary pressures growth. and limit credit The pace of monetary policy normalisation in was complicated by the however, the region, large capital inflows experienced by several economies, exacerbated by further regional quantitative easing in the advanced economies. Several monetary authorities such as those in Hong Kong SAR Thailand, Indonesia, Korea, and PR China, used a number of instruments of capital inflows on to mitigate the effects domestic asset prices and exchange rates. include the imposition of levies These measures holdings of domestic and taxes on the foreign Note: Current policy rates in parentheses, as at mid-March 2011 Note: Current policy rates in parentheses, Source: National authorities Cumulative Movements of Policy Rates since 2010 Movements of Policy Cumulative

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 14 100 150 200 250 300 350 the USdollarsupportedby optimismoverthe regional currencies alsoappreciated against by theBOJinSeptember. Similarly, most The yenremained firminspiteofinterventions risk aversionintheglobal financial markets. safe havencurrency amidheightenedinvestor of ¥80inOctober, benefitingfrom itsrole asa against theUSdollartoreach a15-yearhigh process. Theyencontinuedtostrengthen UK willhaveasignificanteffect onitsrecovery to expectationsthatthefiscalausterityin dollar alsogainedonthepoundsterlingdue against thedollarsinceMarch 2006.TheUS euro plungedbelowUSD1.20,itslowestlevel banking sectorintheeuro area inJune,the overthe healthoftheFollowing concerns of sovereign debtcrisisintheeuro area. the euro duemainlytoperiodicoutbreaks Fed. However, thedollarstrengthened against in theUSandquantitativeeasingby attributable tothenascenteconomicrecovery pound sterling.Thebroad dollarweaknesswas most majorcurrencies excepttheeuro andthe dollar depreciated duringtheyearagainst In the property markets. channelled intodomesticequity, bondand bubbles, giventhattheseflowswere mainly overtheformationofassetraised concerns capital inflowsintotheAsianregion havealso larger share offoodandenergy. Thesignificant economies astheirconsumptionbasketshavea intheemergingmarketparticularly aconcern The impactofrisingcommoditypriceswas conditions indifferent partsoftheworld. the emergingmarketsandadverseweather Source: InternationalMonetaryFund Indices ofPrimaryCommodityPrices Index (Jan'05=100) 50 0

Feb-05 Chart 1.3 foreign exchangemarkets

Feb-06 Metals

Feb-07 Food

Feb-08 Crude oil

Feb-09 , theUS

Feb-10

Feb-11 of theyear, underpinnedbystrong regional demand rebounded strongly inthefirsthalf and thepublicsectordelivery system.External programmes tofurtherenhanceinfrastructure the yearthrough theimplementationof supporting thedomestic sector continuedtoplayacrucialrole in improvement demand.Thepublic inexternal domestic economicconditionsamidstan and servicessectors,followingfavourable sectors, particularlythemanufacturing,mining the expansionofcapitalspendingacross all a double-digitgrowth in2010,reflecting investment rebounded strongly toregister after asharpcontractionin2009,private and lowerunemploymentrate.Additionally, growth ofemployment,lowerretrenchments market conditionswasreflected inthestronger access tocredit. Theimprovement inlabour more optimisticconsumersandcontinued market conditions,asteadyincrease inincome, underpinned bytheimprovement inlabour consumption expandedfirmlyduringtheyear, private sectoractivity. Inparticular, private robust domesticdemand;andprimarilyby in 2009.Growth wasdrivenmainlyby expansion of7.2%followingthedownturn a strong resumption ofgrowth, recording an In 2010,the THE MALAYSIAN ECONOMY their respective monetaryauthorities. record highsfollowingtighteningmeasures by dollar andNewTaiwan dollaralsoreached flexibility ofitsexchangerate.TheSingapore 17-year highasPRChinamovedtoincrease the a to rose yuan the while year the during largest appreciation against theUSdollar regional currencies, theringgitrecorded the currencies againsttheUSdollar. Among resulted inatemporaryweakening ofregional over sovereign debtinthe euro area. This markets whenthere were renewed concerns reduced theirexposure intheemerging in thesecondandfourthquarters,asinvestors trend, however, wasinterruptedsporadically in theemergingmarkets.Theappreciating appetite forhigher-yielding financialassets advanced economiesandtheincreased investor inflows, followingthequantitativeeasingin partly aresult ofthesurge inshort-termcapital strengthening ofregional currencies wasalso region vis-à-vistheadvanced economies.The relatively brightergrowth prospects forthe Malaysian economyexperienced economy during

15 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 6 f 2011 p et date and the gain/loss 7.06.1 -2.7 5.2 7.8 2.5 7.4 5.1 5.4 0.6 1.7 2.5 ~ 3.5 4.7 -1.7 7.26.8 ~ 6.0 5.0 -0.5 6.3 6.7 10.3 -7.1 5.6 - 2008 2009 2010 317.4 331.3 328.6 - 3 Malaysia - Key Economic Indicators Malaysia shery 4.3 0.4 1.7 3.4 (USD) 7,812 6,764 8,140 9,204 1 2 2 2 4 5 ected accordingly in the Bank’s account in the Bank’s ected accordingly Table 1.2 Table has been refl Beginning 2007, real GDP has been rebased to 2000 prices, from 1987 prices previously to 2000 prices, from GDP has been rebased Beginning 2007, real Exclude stocks into ringgit at rates of exchange ruling on the balance she have been revalued currencies All assets and liabilities in foreign 2005=100 previously to the new base year 2010=100, from the Consumer Price Index has been revised 2011, from Effective 2000=100 previously to the new base year 2005=100, from Price Index has been revised the Producer 2010, from Effective Based on average USD exchange rate for the period of January-February 2011 Preliminary Forecast Bank Negara Malaysia international net reserves, (as % of GNI) 18.1 17.5 12.2 12.5 Real aggregate demand Real aggregate Current transfers, netCurrent account balanceCurrent 129.5 -17.5 112.1 -19.6 90.5 -21.7 100.7 -20.2 (RM billion) 493.2 496.5 517.2 546.0 Income, net (as % of GNI) -23.7 -3.3 -14.6 -2.3 -25.2 -3.4 -23.7 -2.9 Real GNI 2.1 0.7 4.2 5.6 (as % of GNI) … 0.7 0.1 … (RM billion) 717.2 665.0 740.7 806.1 Services balance 0.2 4.7 0.9 0.2 Nominal GNI 14.2 -7.3 11.4 8.8 Imports (f.o.b.) 493.8 412.3 503.3 530.5 Services 7.4 2.6 6.8 5.9 Exports (f.o.b.) 664.3 554.1 639.8 674.8 Construction 4.2 5.8 5.2 5.4 BALANCE OF PAYMENTS (RM billion) BALANCE OF PAYMENTS Goods balance 170.6 141.7 136.6 144.3 Manufacturing 1.3 -9.4 11.4 5.7 Per Capita Income (RM) 26,041 23,841 26,219 28,175 Public expenditure national savings (as % of GNI)Gross 38.0 31.7 34.2 34.1 Mining and quarrying -2.4 -3.8 0.2 2.0 Unemployment (as % of labour force)Unemployment (as % of 3.3 3.7 3.2 3.2 Investment Investment 1.0 0.5 -17.2 8.0 13.8 5.5 9.7 2.7 Agriculture, forestry and fi forestry Agriculture, Employment (million persons) 11.6 11.6 11.8 12.1 Consumption Consumption 8.5 10.7PPI (2005=100) 0.7 3.1 6.6 0.1 6.9 7.2 (RM billion)Private expenditure 530.2 521.1 558.4 587.8 Labour force (million persons)Labour force 12.0 12.1 12.2 12.5 NATIONAL PRODUCT (% change) NATIONAL Real GDP at 2000 prices 1 2 3 4 5 6 (in months of retained imports) (in months of retained PRICES (% change) CPI (2005=100) Real wage per employee in the manufacturing sector -4.8 7.6 1.9 9.7 6.4 8.6 - - Population (million persons) 27.5 27.9 28.3 28.6 p f ... negligible Note: Numbers may not necessarily add up due to rounding

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 16 Refertoend-year * p 6 5 4 3 2 1 226.3 -43.3 -5.6 233.1 -7.4 51.3 151.6 -47.4 112.3 -7.0 236.3 -6.8 157.1 49.0 -35.6 111.3 -4.8 2010 -5.6 153.5 41.9 124.4 159.7 2009 Total debt(RMbillion) EXTERNAL DEBT Public sectoroverallbalance(%ofGDP) 158.6 Public sectornetdevelopmentexpenditure 2008 Overall balance(%ofGDP) Overall balance Net developmentexpenditure Operating expenditure Revenue 159.8 FEDERAL GOVERNMENTFINANCE(RMbillion) Malaysia -FinancialandMonetaryIndicators oe upyM 40831. . 3511.7 23.5 9.8 17.9 % 8.3 RMbillion 14.0 % RMbillion % RMbillion M1 Money Supply MONEY ANDBANKING Debt serviceratio(%ofexportsgoodsandservices) vrih oiyRt OR .520 2.75 2.00 3.25 2010 2009 Commercial banks 2008 Interbank rates PolicyRate(OPR) Overnight INTEREST RATES (AVERAGE RATES ASAT END-YEAR) Financing-deposit ratio XHNERTS20 092010 2.60 2009 3.39 2.85 2.05 2008 3.79 2.12 3.39 2.99 2.89 Movement ofRinggit(end-period) EXCHANGE RATES securities(5-year)* Malaysian Government securities(1-year)* Malaysian Government Treasury bill(3-month) Loan-deposit ratio(endofyear) akn ytmdpst 0. 199. . 797.3 77.9 9.3 90.7 11.9 103.4 Banking systemdeposits Banking systemloans Financial Centre (LabuanIBFC)asresidents Preliminary Ringgit waspeggedatRM3.80=USD1on 2September1998andshiftedtoamanagedfl Refers totheratioofloansandholdingsPDSbybankingsystemdeposits ofthebankingsystem Exclude fi Includes loanssoldtoCagamas Excludes currency anddepositsheldbynon-residents withresident bankinginstitutions Effective from thefi eim n ogtr et166154146.9 155.4 156.6 Short-term debt Medium- andlong-termdebt oa et26657.6 7.5 6.5 6.4 2.6 2.5 Medium- andlong-termdebt Total debt -ot .020 2.73 2.74 2.00 2.03 3.30 3.04 Fixed Deposit3-month 1-month hneaantSR-. . 13.1 0.2 1.00 6.27 -2.7 0.86 5.51 1.40 6.48 Change againstUSD Change againstSDR Base lendingrate(BLR) Savings deposit Table 1.3 nancialinstitutiontransaction 1 39. 198. . 127.0 71.2 9.2 85.4 11.9 99.1 M3 2 rst quarter of 2008, the external debtdataofMalaysia hasbeenredefi rstquarterof2008,theexternal 12-month 3 4, 5 6 4 hnei 08Cag n20 Changein2010 Changein2009 Change in2008 231. 70789. 12.7 99.8 7.8 57.0 12.8 82.3 977. 79.4 77.8 79.7 .025 2.97 2.50 3.50 451211.1 1.2 -4.5 588. 87.7 81.3 84.6 77.9 85.8 77.7 %% %% %% %% oatagainstabasketofcurrencies on21July2005 nedtotreatBusinessand entitiesinLabuanInternational p

17 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 ned ned ows ows ected the ected the ows, which ows, which cit widened due to cit widened due to ecting largely the higher ecting largely the higher recorded a strong growth growth a strong recorded ts accruing to foreign direct direct ts accruing to foreign ows partly offset the higher outfl ows partly offset nancial account recorded a smaller net a smaller net nancial account recorded nancial account recorded a lower net lower net a recorded nancial account ow. The smaller current account surplus account surplus smaller current The ow. ow in 2010, refl ected the lower trade surplus as imports ected the lower trade surplus as imports and placements of ected mostly trade credits ation, which is an indicator of demand- ation, which ow of portfolio investment and foreign rationalisation programme announced in May. in May. announced programme rationalisation of externalThe impact factors on domestic in 2010, and confi modest more prices were refl food items. This to selected of wheat in global prices increase substantial and cornin due to adverse weather conditions countries. Core key wheat and corn producing infl at a more on prices rose driven pressures in 2010 (2009: 2.7%). modest pace of 1.5% resilient external remained position Malaysia’s surplus remained account in 2010. The current while 2009, from sizeable, but narrowed the fi outfl refl to the strong accelerated in response growth domestic demand during the year and of exports. In addition, outpaced the growth the income account defi the higher profi investors in Malaysia, while the services in surplus, albeit by a smaller account remained arrivals. amount, supported by higher tourist The fi outfl infl in investment following the improvement direct conditions. both global and domestic economic These infl as Malaysian investment abroad of direct companies continued to tap opportunities Other investment outfl abroad. refl moderated during by residents, deposits abroad and After adjusting for the errors the year. omissions, net international declined by reserves RM2.6 billion to RM328.6 billion, equivalent to USD106.5 billion, as at 31 December 2010. DOMESTIC DEMAND CONDITIONS Domestic demand of 6.3% in 2010 (2009: -0.5%). Despite the moderation in the global economy in the demand conditions domestic second half-year, driven the year, throughout robust remained Private consumption by private sector activity. at a faster pace, while private increased to record strongly investment rebounded The public sector a double-digit growth. in supporting continued to play a crucial role the domestic economy during the year through to further the implementation of programmes t in in

ted from the strengthening the strengthening ted from some extent, the low base effect. the low base effect. some extent, ation in 2010. During the year, ation in 2010. During the year, ation averaged 1.7% in 2010 ation averaged 1.7% in 2010 supply side, all economic sectors supply side, all economic sectors rst half-year but growth moderated moderated rst half-year but growth

rmly, with the electronics and electrical cluster and electrical cluster electronics with the rmly, nanced by the second stimulus package. On the In 2010, the Malaysian economy Malaysian economy In 2010, the resumption strong experienced a an expansion recording in growth, the downturnof 7.2% following in 2009 performance in 2010, in strong registered domestic demand and line with the robust in exports. The services sector rebound dependent on domestic the sub-sectors that are recovered demand. The manufacturing sector fi and domestic-oriented industries registering rates. The pace of growth, double-digit growth due to year-end moderated towards however, slower external demand and the diminishing the commodity sectors Similarly, base effect. pace in 2010, supported expanded at a stronger of natural gas and by sustained high production The construction sector moderated food crops. in the second due partly to the slower growth half-year following the completion of projects fi Headline infl (2009: 0.6%), driven by supply factors arising food and commodity prices and higher from prices. Domestic adjustments to administered dominant more relatively supply factors were in driving infl adjustments to a series of upward were there diesel, LPG prices of RON95 petrol, the retail subsidy the Government’s as part of and sugar, demand and to demand in the momentum softened growth the However, the moderation in tandem with second half-year, base effect. trade and a diminishing in global particular, benefi particular, in in the second half following the slowdown trade- and external the demand, which affected services sub-sectors. manufacturing-related in Nevertheless, the sustained expansion benefi domestic consumption, continued to of both domestic and external demand, and of both domestic and external demand, and as the largest contributor to growth. remained higher growth All services sub-sectors recorded in the fi

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 18 Real Domestic Demand Aggregates Domestic Demand Real monthly gross incomeofFELDAhouseholds in by householdsintheruralareas. Theaverage palm oilandrubbersupported higherexpenditure 2010 (2009:4.3%),whilestronger pricesofcrude average privatesectorsalary increased by4.5%in lower retrenchments and lowunemployment.The conditions were refl incomes. Themore favourablelabourmarket market conditionsandthesteadyincrease in spending activitywassupportedbybetterlabour communications andrecreation. Consumer spending onitemssuchasfoodawayfrom home, had ledtoasignifi MIER ConsumerSentimentsIndexduringtheyear, consumer confi imports ofconsumptiongoods.Improved such aspassengercarsales,retail salesand performance ofmajorconsumptionindicators, (2009: 0.7%).Thiswasrefl Private consumption improvement demand inexternal private sectoractivityamidan driven bystrong expansionin Robust domesticdemand, delivery system. enhance infrastructure and -10 Annual change(%) Source : p 10 15 20 -5 Preliminary 0 5 Chart 1.4 0320 0520 0720 092010 2009 2008 2007 2006 2005 2004 2003 Department ofStatistics,Malaysiaand Real privateconsumption Real aggregatedomesticdemand(excl.stocks) Real privateinvestment(RHS) Real publicexpenditure dence,asrefl cantincrease indiscretionary ectedinhigherjobvacancies, expanded fi ectedinthestrong ectedinthehigher the publicsector Bank NegaraMalaysia rmlyby6.6% Annual change(%) p -25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 50 GNI per Capita GNI per RM '000 was refl The str global economiccrisis. deferred duetotheuncertaintiesarisingfrom the also resumed investmentactivitythathadbeen demand.Inaddition, businesses in external domestic economicconditionsandimprovement mining andservicessectors,followingfavourable all sectors,particularlyinthemanufacturing, (2009: -17.2%).Capitalspendingexpandedacross register adouble-digitgrowth of13.8%in2010 Private investment declining to2.3%asatend-2010(2009:3.1%). non-performing loansratioforhousehold high individualdepositsofRM407.8billionand of 41.9%totalfi sheet remained sound,withalowhouseholddebt end-2010 (2009:76%).Thehouseholdbalance debt remained stableat75.9%ofGDPas by 11.1%in2010.Nevertheless,thehousehold with loansdisbursedtohouseholdsincreasing the year. Householdcredit expandedfurther, environment remained accommodativeduring continued accesstocredit asthemonetary Consumer spendingwasalsosupportedby consumption spending. servants, furtherprovided additionalimpetusfor as theone-timespecialcashpaymenttocivil and selectedgroups ofcivilservants,aswell such asthesalaryincrements forbankemployees 2010 (2009:RM1,812).Otherdevelopments onaverage,RM3,071permonthin earned, (2009: RM2,457),whiletherubbersmallholders the palmoilschemerose toRM3,236permonth investment indicators. Importsofcapital goods -10 Source : p 10 15 20 25 30 -5 Preliminary 0 5 Chart 1.5 0320 0520 0720 092010 2009 2008 2007 2006 2005 2004 2003 Department ofStatistics,Malaysiaand Nominal privateNominal growth consumption (RHS) GNINominal per capita growth (RHS) Nominal GNINominal per capita (LHS) ong performanceofinvestment activity ectedintheimprovement ofmajor nancialasset(2009:42.1%), rebounded strongly to Bank NegaraMalaysia Annual change(%) p -10 -5 0 5 10 15 20 25 30

19 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 ve during the period of 2000-2009, 2 % of total household consumption 2000 2009 2000-09 In tandem with the robust growth of private of growth robust In tandem with the in the clear shifts were consumption, there consumption over thecomposition of private analyses and explains thelast decade. This article changing patterns of private consumption by main 2009, and between 2000 and groups expenditure concludes with insights on private consumption moving forward. trends Changing Patterns of Consumption Expenditure Based on the data of household consumption by purpose expenditure on food and non-alcoholic beverages expenditure forformed the largest component, accounting This about 23% of total household expenditure. on housing and was followed by expenditures and hotels; and utilities; transport; restaurants fi miscellaneous goods and services. These largest components of consumption expenditure spending.accounted for 75.6% of total household

46 56 54 52 50 48 44 42 40 2010

% of GDP

2008 2006

2004

2002 2000

, which exceeded the 4.8% average growth of real gross domestic product domestic product gross of real 4.8% average growth , which exceeded the

1

1998 1996 The Growth and Evolution of Consumer Spending in Malaysia Spending Evolution of Consumer and The Growth

1990 - 2010: 6.5% 1994

Average private consumption, 1992

Private consumption/GDP (RHS) Private consumption GDP 1990 Table 1 Table Chart 1 Follows the domestic concept of consumption expenditure where it measures purchases of goods and services by all purchases it measures where Follows the domestic concept of consumption expenditure household spending. households in Malaysia. The analysis on consumption patterns to nominal in this article refers 8 6 4 2 0 -2 -4 -6 -8 information on private consumption for 2010 is not available at the time of publication of this article. Detailed 18 16 14 12 10 Household Consumption by Purpose (GDP), and contributed more than two thirds of total GDP growth. As a result, the share of real private of real the share As a result, of total GDP growth. than two thirds more (GDP), and contributed 2009. 43.8% in 2000 to 53.5% in steadily from increased consumption in GDP -10 -12 Source: Department of Statistics, Malaysia Real annual growth, % Source: Department of Statistics, Malaysia Source: 1 2 Introduction Private consumption is increasingly becoming an important component of the Malaysian economy. It was Malaysian economy. component of the an important becoming is increasingly Private consumption average of 7.4% during at an annual decade, increasing in this recent growth the main driver of economic the period of 2000-2009 Food and non-alcoholic beveragesAlcoholic, beverages and tobaccoClothing and footwear gas and fuels electricity, Housing, water, Furnishings, and maintenance household equipment HealthTransportCommunication and cultureRecreation 5.9Education 24.1Restaurants and hotelsMiscellaneous goods and services 21.7 2.2 5.2 21.8 16.7 3.5 2.3 5.4 23.0 18.9 2.4 2.1 11.6 4.3 4.9 12.6 2.1 5.8 2.7 12.7 4.9 1.5 7.4 13.1 2.1 9.7 12.8 4.5 1.6 13.4 6.3 2.0 7.5 1.5 Private Consumption and GDP Private Consumption

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 20 26.5% of total household expenditure in 2000 to 34.7% in 2009 (Chart 2). 26.5% oftotalhouseholdexpenditure in2000to34.7%2009(Chart2). insurance andotherservices.Theshare ofthesefourcomponentsincome-sensitivespendingrose from strong, followedbytheexpenditure onmiscellaneousgoodsandservicessuchaspersonalcare, fi items (suchasrestaurants and hotels,communicationaswellrecreation andculture) wasparticularly (2000=100) Index Prices ofConsumptionExpenditure Household ConsumptionofDiscretionaryItems on discretionary Two haveemergedsince2000.First,theshare clearshiftsinconsumerspendingpatterns ofexpenditure 6 5 4 3 Source: DepartmentofStatistics,Malaysia 100 105 110 115 120 125 Source: DepartmentofStatistics,Malaysia Thedecliningtrend intheratioislargelyanominal development.Inreal terms, theshare ofexpenditure ondurable Consistofitemswhichare tangibleandcanbedivided intosub-groups such asdurable,semi-durableandnon-durable Comprisesofessentialcategories,suchasfoodconsumption athome,clothing,rent andutilities. Spendingonnon-essentialgoodsandservices,whichtypically canbepostponedandoftenconsistsofluxuryitems. 80 85 90 95 Furnishings, household categories. and semi-durablegoodshasrisen graduallysince2000,indicatinganincrease inthevolumepurchased underboth furniture, householdappliancesand consumerelectronics. Durable goodsusuallyhavelonger lifespanandcostsubstantiallymore thansemi-durablegoods.Durablegoodsinclude goods. Durableandsemi-durable goodscanbeusedrepeatedly andhaveanexpectedlifetimeofmore thanoneyear. Chart 2 Chart 3 Communication goods &services

2000 equipment and Miscellaneous CPI Durables Semi-durables maintenance Restaurants Recreation & culture

2001 & hotels 3

2002 itemshasincreased relative tospendingonbasicnecessities 02468101214

2003 2000-04 2005-09 % oftotalhouseholdconsumption 2004

2005

2006

2007

2008

2009 on durableandsemi-durablegoodsdecreased durable goods.Together, theshare ofexpenditure the declinesinexpenditure ondurableandsemi- goods declinedgradually, accountedformainlyby on servicesrose, theshare ofhouseholdspendingon and otherintermediaries.Astheratioofspending and insuranceintermediaries,education,healthcare services rendered byrestaurants andhotels,fi 2009. Expenditure onservicesincludesspendingfor total householdspendingin2000toalmost50% expenditure onservicesincreased from 46.2%of consumption ofgoods.Accordingly, theshare of 10% annually, compared tothe8.4%growth of household consumptionofservicesgrew byabout expenditure ongoods Second, consumptionofserviceshasoutpaced fell from 21.7%in2000to16.7% in2009. average householdspendingonhousingandutilities from 24.1%in2000to21.8% in2009.Similarly, the as ashare oftotalhousehold expenditure decreased and housingutilities.Spendingonfooditems of expenditure onfoodandnon-alcoholic beverages, 2002, attributablemostlytothedeclineinshares on basicnecessitieshasdeclinedgraduallysince In contrast,theproportion of householdexpenditure stable at 38% in 2009. stable at38%in2009. of totalhouseholdspendingin2000,remained spending onnon-durables,whichconstituted38.7% spending in2000to2.4%2009.Consumer footwear decreased from 3.5%oftotalhousehold As aresult, theshare ofexpenditure onclothingand and footwearcategorydeclinedby1.6%annually. during theperiodof2000-2009,priceclothing the overallconsumerprices(Chart3).Forexample, durable andsemi-durablegoodsincomparisonwith 2009, refl 15.1% oftotalexpenditure in2000to12.5% ecting mainly the lower price levels of both ecting mainlythelowerpricelevelsofboth 4 . Expenditure ondiscretionary 5 . Between 2000 and 2009, . Between2000and2009, nancial, nancial, nancial nancial 6 from from

21 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 uence Ireland Ireland US US Australia Australia ected several factors ected several Germany Japan Japan Germany Singapore UK UK Singapore Hong Kong SAR Hong Kong SAR Nominal GDP per capita (USD) Nominal GDP per capita (USD) Korea Korea grew at an annual rate of 14% during 2004-2009 to account for 180% of during 2004-2009 to account for at an annual rate of 14% grew 7 Malaysia Thailand nancial assets Indonesia Thailand Malaysia Philippines India uence consumers’ preferences and decision-making. The main factor is the growing affl factor is the growing The main and decision-making. preferences uence consumers’ India 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 Chart 4 Chart 5 5

55 50 45 40 35 30 25 20 15 10

80 75 70 65 60 55 50 45 40

Employees Provident Fund contributions and net asset value of unit trust funds for the period of 2003-2009. Employees Provident % of total nominal consumption nominal total of % % of total nominal consumption nominal total of % holdings of equity, Consists of deposits held in the banking system, total assets of life insurance funds, household direct Source: IMF, Eurostat and National Statistical Offices GDP in 2009 (2004: 167% of GDP). GDP in 2009 (2004: which indicate observed in other countries, spending trends consistent with consumer are These trends to decline while that on on basic necessities tends of expenditure the share that as income rises, of economies, the proportion the lower level of income in developing Given services tends to increase. and lower in high income food is usually higher in developing economies on household expenditure on of expenditure typically have a higher share 4). In contrast, advanced economies economies (Chart economies (Chart 5). to developing services relative 7 These two changing patterns of household spending over this recent decade refl changing patternsThese two this recent spending over of household that infl of wealth. and accumulation disposable income the steady rise in supported by of Malaysians, with mean monthly by 6.8% annually, GDP increased per capita 2004 and 2009, nominal Between to RM4,025 in 2009. Similarly, RM3,249 in 2004 by 4.4% annually from household income rising gross household fi Source: IMF, Eurostat and National Statistical Offices Consumer Spending on Food Items Consumer Spending on Services

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 22 would normallyhaveahigherproportion ofspending higherincomelevelscompared toruralhouseholds,householdsintheurbanareaspopulation. With on non-essentialgoodsandservices.Thisisfurthersupportedbytheincreasing urbanisation Younger people,whogenerallyhaveahighermarginalpropensity toconsume,tendspendmore 10 9 8 given therelatively youngand largeworking-agepopulation towards increased consumptionofnon-essentials.ThedemographiccharacteristicsMalaysians, Three otherfactorsalsocontributed tothelastdecade’s growth andevolutionofconsumerspending developments. rising incomeandwealth,favourabledemographic,greater fi pre-requisites tosupportsustainablegrowth inprivateconsumptionare already inplace,namely private consumptionwillcontinuetoplayasignifi the Malaysianeconomymovingforward. Asthesources ofgrowth shifttowards domesticdemand, The sustainabilityofprivateconsumptiongrowth isanimportantaspectofthetransformation Conclusion available technologicalinnovations. by thecountry’s relatively youngandeducatedpopulationthatexpeditedtheadoptionofnewly equipment. Furthermore, thestrong demandfortechnology-related goodsandserviceswassupported services, mobilecommunicationequipmentanddatacabletelevisionservicesaudiovisual have encouragedconsumerspendingintechnology-related goodsandservices,suchasinternet the increasing share ofexpenditure oncommunicationandrecreation. Technological innovations In addition,technologicaldevelopmentshaveaffected trends inconsumerspending,asevidentfrom and thenon-performingloansratioofhouseholdsectorcontinuedtotrend downwards. continued tobeintact.Householdfi GDP isrelatively high,overallhouseholdbalancesheetremained soundanddebtrepayment capacity andthemaintenanceoftransportequipment.Althoughratiohousehold debtto furnishings passenger carare closelylinkedtospendingonhousingandtransport-related items,whichinclude loans isindirectly translatedintohigherconsumerspendingaspurchases ofresidential properties and residential property andpassengercarincreased by13.4%annually. Thestrong performanceofthese annually between2000and2009.Similarly, totalloansdisbursedtohouseholdsforpurchases of personal uses,credit card spendingandthepurchase ofconsumerdurablegoods,expandedby20.5% from 46%in2000to76% in2009.Credit disbursedforconsumption,whichconsistsofloans 2000-2009, householddebtgrew atanannualrateof13.5%.Householddebt-to-GDPratioincreased fi discretionary expenditure, particularlythatondurablegoods,thepurchase ofwhich isgenerally access tocredit forhouseholds. Inparticular, greater accesstocredit allowsindividualstofund The fi Increased fi be higherinurbanareas. for servicessuchasfi Theurbanpopulationincreased from 62%oftotalpopulationin2000to63.3%2009. 68%ofthetotalpopulationfallin15 –64agegroup. nancedmore through borrowing ascompared toothertypesofconsumption.Duringtheperiod Based ontheHouseholdExpenditure Survey2004/05,households livinginurbanareas spent 1.8timesmore than households in ruralareas. nancialsectorplaysanintegralrole insupportingprivateconsumptionbyfacilitatinggreater nancialdeepeningandinclusionalsoinfl nancial,recreation andentertainment,where thedemandandsupplytend to nancialassetswere more thantwotimesoftotalhouseholddebt cantrole incontributingtoeconomicgrowth. The uenced changes in consumer spending patterns. uencedchangesinconsumerspendingpatterns. 10 ondiscretionary items.This isespeciallytrue 8 nancialdeepeningandtechnological provide supportforincome growth. 9 ofthe

23 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 80 60 40 20 0 -20 -40 -60 -80 % nancial crisis led to tonancial services. This development not only contributes Growth and Changing Trends of Private Investment in Malaysia of Private Investment Trends and Changing Growth Real GDP Real private investment (share of GDP; RHS) Real private investment (growth; RHS) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e dence. Progress, however, was interrupted by the 2001 bursting of the Tech Bubble, and the negative was interrupted by the 2001 bursting of the Tech however, dence. Progress, Chart 1 5 0 -5 15 10 Annual change (%) e Estimate and Bank Negara Malaysia Malaysia Statistics, of Department Source: -10 -15 economic growth in the short term, but more importantly, lays the foundation for future growth of the growth for future lays the foundation importantly, in the short term, but more economic growth Malaysian economy. rate of 6.7% per annum in growth an average recorded decade, private investment has Over the recent tracking the overall performance of the economy (Chart 1). After2000-2010, with its performance closely business in 2000 amid improving activity began to recover the 1997/98 Asian Financial Crisis, investment confi and peaked at two years. Private investment subsequently recovered impact on capital spending lasted for the global fi the end of the decade, towards rate of 46.5% in 2004. However, a growth investment had weakened considerably during this in the domestic economy in 2009. Private a recession period. Introduction It ensures economy. of the Malaysian and development growth in the role has an important Investment development future capacity for the productive and expansion of the country’s continuous enhancement sector capital private role, has an important overall supportive While the public sector of the economy. performance of the various sectors inand raise the capital stock to drive the spending is key to replenish of private investment expenditure changing trends and growth This article describes the the economy. of on the medium-term trends and concludes with a brief outlook decade, recent in Malaysia over the spending.private sector capital the Recent Decade Developments over of private capital in 2010. The resumption growth strong to register rebounded Private investment mining and services sectors. Given sectors, particularly in the manufacturing, all across spending is evident investment, economic outlook and new governmentthe positive medium-term initiatives to promote and domestic both foreign with contributions from in private investment is expected to continue growth be driven by capital spending in new will increasingly investment activity investors. Of importance, strong energy and fi such as renewable areas, growth Private Investment and GDP (2000=100)

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 24 stable (Table 1). net infl havealsocontributedtothelower particularly lowlabourcostcountriessuchasPRChinaandVietnam intensive, highervalue-addedactivity. Furthermore, highercompetitionforFDIfrom emergingeconomies, nature ofinvestment.Agrowing share oftheseinvestmentshavebeenchannelled intolesscapital- is more moderatecompared withthe1990s(averageof6.4%GDP),duemainlytochanging Over therecent decade,Malaysia attractednetFDIinfl investment, predominantly ininfrastructure. Thistrend isnotsustainableinthe long run. in the1990s,especiallyperiodleadingtoAsianFinancialCrisis,there were periodsofveryhigh private investmentistheemergenceoflesscapital-intensivenewgrowth areas intheservicessector. Also, with theaverageshare of22.9% during1990-1999.Akeyexplanatoryfactorforthelowerlevelof In termsofshare, throughout therecent decade,privateinvestmentaveraged11% ofreal GDP, compared different sectorsoftheeconomy. expenditure hasbeenchannelledintohighervalue-added, technologically-intensiveprojects across the increasing diversityintheinvestmentspendingacross thevariouseconomicsectors. Second,more capital Two distinct changescanbeobservedfrom theinvestmenttrends intherecent decade. First,there is Changing Trends ofPrivateInvestment meet thehigherqualitystandards andmore advancedrequirements bythelargercorporations. total investment,giventheconstantneedtoupgrade equipment,technologyandlabourskills,to expansion bytheSMEsthatsupplyparts,componentsand related serviceshavealso contributedtowards competitive suppliesoflandandlabour, aswelltogainaccessintobiggermarkets.Moreover, capacity developed thenecessaryexpertisetoexpandintootherregional economiestotake advantageofmore demand fortheirproducts andservices.Someofthesecompanieshavegrown largeenoughandhave to thecapacityexpansionactivityoflargedomestic-and export-oriented enterprisestofulfi private capitalspending,particularlyintheservices,agriculture andconstructionsectors. Thisislargelydue Despite thesignifi foreign partners. exploration, production anddevelopmentactivityremained high,drivenmainlybyPETRONASandits liberalisation effortsIntheoilandgassector, undertakenbytheGovernment. capitalspendingfor This isparticularlyevidentinthefi recipient ofthenetinfl manufacturing, services,andoilgassectors.Whilethemanufacturingsectorremains themajor In termsofsectoraldistribution,netFDIinfl (equivalent toUSD12,898in2000USD24,4352010). per workerinthemanufacturingsectorhasincreased from RM49,013in2000toRM78,7072010 Malaysia hassteadilyclimbedupthevaluechainwithimproved productivity levels.Thereal value-added technology andskillsindevelopinglocalfi e D oGPrto643.0 6.4 Source: DepartmentofStatistics, Malaysia Net FDItototalprivate Net FDItoGDPratio Average NetFDIInfl investment ratio Table 1 ows. Nonetheless,theaverage share offoreign investmenttototalprivate hasremained cance offoreign investors,domesticinvestmentstillconstitutethelargershare oftotal ow ows, theservicessectorhasbeenasignifi 9019 2000-2010 1990-1999 nancial servicesandwholesaleretail tradesub-sectors,following 7028.5 27.0 % share rms andhumancapital.Particularly, inthemanufacturingsector, ows during2000-2010were channelledmainlyintothe ow averaging 3% of GDP per annum, which ow averaging3%ofGDPper annum,which FDI can also lead to the transfer of knowledge, FDI canalsoleadtothetransferofknowledge, medium enterprises(SMEs).More importantly, large MNCs,whichhasbenefi of vendorsbysupplyingpartsandservicestothe opportunities forlocalfi creation andcapitalformation.Italsoprovided direct benefi multinational corporations(MNCs)hasprovided Malaysian economy. Thelargepresence of to thegrowth andtransformation ofthe Foreign investmenthascontributed signifi cant benefi ts in the form of employment ts intheformofemployment ciary offoreign investment. rms toperformtherole ted the small and ted thesmalland l thegrowing cantly cantly

25 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 cantly activity 54.7% 6.6% 4.4% ed. In particular, the share of the share ed. In particular, elds. Also, the share of investment in elds. Also, the share 30.7% 3.6% Manufacturing Services 3.2% 64% , had underlined strategies to further deepen and widen the 1 6.1% 2000 2010e Agriculture Mining Construction 25.5% 1.1% ows, as more foreign investment has been channelled into the services sector. These include These include been channelled into the services sector. investment has foreign ows, as more cant, shares of other sub-sectors have also risen. The average share of approved investment in the investment in the of approved of other sub-sectors have also risen. The average share cant, shares nancial services, shared services and outsourcing (SSO), communication and wholesale and retail and wholesale and retail (SSO), communication and outsourcing services nancial services, shared Chart 2 Industrial Master Plans (1996-2020), as well as the Eighth and Ninth Malaysia Plans (2000-2010). and Third Second e Estimate Private Investment by Sector Private Investment Source: Bank Negara Malaysia 1 In addition, the shares of investment in the mining and construction sectors have also increased. and construction sectors have also increased. of investment in the mining In addition, the shares of oil and natural driven mainly by the exploration and production Investment in the mining sector was viability of capital-intensive the as high and rising crude oil prices increased gas resources, including the exploration and development of deepwater oilfi including the exploration and development at levels well below those observed in the 1990s, when large the construction sector has risen, but In the early 2000s, investment in the construction sector was under way. were projects infrastructure postponed and cancelled during and were projects and infrastructure as selected construction lower, of some of these the subsequent revival immediately after the 1997/98 Asian Financial Crisis. However, the mid-2000s to enhance and highways from and the construction of new privatised roads projects, of capital spending in the domestic transportation network connectivity had led to the rising share construction sector. the largest it remains of investment in the manufacturing sector is lower, Although the share to be underpinned by the contributor to overall investment. Capital spending in the sector continues (E&E) industries. The MNCs, particularly in the electrical and electronics of foreign large presence Government, as indicated in the medium- and long-term plans formulated for Malaysian economic decade development covering the recent The sectoral distribution of investment has become more diversifi more investment has become distribution of The sectoral in 2000 private investment 64% of total declined from has generally sector investment manufacturing increased investment has of services sector the share On the other hand, in 2010 (Chart 2). to 54.7% trends in tandem with the 2010. This is also 2000 to 30.7% in investment in 25.5% of private from in FDI fl the fi development of key services sub- and growth Government the trade sub-sectors. policies promoting contributed signifi policies, have liberalisation and pro-competition through sectors, especially in the services sector. higher capital spending towards country’s industrial base. This was to be achieved through attracting and promoting investment in new attracting and promoting industrial base. This was to be achieved through country’s although the E&E sub-sector remains and targeted industrial clusters. Under this strategy, areas growth signifi

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 26 Source: MalaysianIndustrial DevelopmentAuthority(MIDA)and Industries Approved ManufacturingInvestmentbySelected arctdmtl424.5 16.1 4.2 4.6 8.7 6.0 4.2 26.7 4.0 3.1 Fabricatedmetal 4.4 16.8 Non-metallicmineralproducts 28.7 Iron andsteel 1.5 12.4 1.4 7.8 Construction-related cluster 32.3 Others(e.g.medicalsupplies) 13.9 39.1 2.0 2.2 Food 5.7 Transport equipment 30.7 Consumer-related cluster 8.6 11.8 Domestic-oriented industries 7.9 E&Ecluster 12.9 32.2 Others(e.g.rubberproducts) 11.3 Textiles 36.9 60.9 Paperproducts 5.5 Petroleum products 69.3 Chemicals&chemicalproducts Primary-related cluster Export-oriented industries report alsopointedoutthatthetopthree economies(India,PRChinaandMalaysia) havemaintained report, Malaysiaisrankedasoneofthetopthree locationsforoutsourcing businessesintheworld.The and regional offi The SSOindustryhasattracted investmentfrom global MNCsandlargefi the traditionalmanufacturingsector. have highervalue-addedandhenceprovide high-skilledemploymentopportunities incomparisonwith and employmentrequirement toencourageinvestment.Althoughlesscapital-intensive,theseindustries the servicessector, byoffering attractive incentivepackagesandliberalpoliciesonequityparticipation Beyond themanufacturingsector, hasalsoaggressively theGovernment promoted thedevelopmentof investment inMalaysiafollowingrapidgrowth indemandandtechnologicaladvancements. machinery andequipment,aswellmedicalinstruments anddeviceshasalsoattractedgrowing Japan, ChineseTaipei, andGermany. Moreover, themanufacture ofhighervalue-added,specialised Malaysia issettobecomeamongthelargestsolarcellproducers intheworld,together withPRChina, and chemicalproducts aswellnon-metallicmineralproducts sub-sectors.Whenfullyoperational, sub-sectors involvedintheproduction chainofphotovoltaicsolarcells,namelytheE&E,chemicals major investmentfromfi severalinternational In particular, therenewable energyindustry, mostnotablyinthesolarindustrycluster, hasattracted Table 2 Ministry of International TradeMinistry ofInternational &Industry cesinMalaysia.Inthelatest 2011AT Kearney’s GlobalServicesLocationIndex(GSLI) 0020 2005-2010 2000-2004 % share oftotal rms.Thiscontributedtohighercapitalspendinginthe medical devicesindustries. machinery andequipmentaswellthe energy, high-endelectronic products, decade. Theindustriesincludetherenewable increased, especiallyinthesecondhalfof capital spendinginselectedindustrieshas the developmentofselectednewgrowth areas, Following theGovernment’s efforts topromote project). compared with1990-1999(132personsper decade (95personsperproject in2000-2010) in themanufacturingsectorduringpast lower averageemploymentperproject approved time, labour-intensity hasdeclined,asshownby projects, animprovement of27.1%.Atthesame in 2000amongtheapproved manufacturing RM484,767 in2010compared withRM381,450 capital investmentperemployee(CIPE)of sector haveexpanded,asindicatedbyhigher Capital-intensive projects in themanufacturing higher value-addedandhightechnology private investment,namelyrisinginvestmentinto This developmentrefl construction-related cluster. well asdomestic-orientedindustriessuchthe products, scientifi end ofthedecadewere chemicals andchemical have attractedmore capital spendingtowards the Other industriesinthemanufacturingsectorthat amount, from 32.3%during 2000-2004(Table 2). E&E industrieshasdropped to28.7%ofthetotal c and medical instruments, as candmedicalinstruments,as rms to establish international rmstoestablishinternational ectsthesecondkeytrend in activity.

27 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 ows nancial services, ed key economic activity. activity. nance. Further the fi activity in ed in seven out of the 12 National Key ed in seven out of the 12 National Key nancial institutions and service providers. and service providers. nancial institutions nancial services industry has also expanded nancial services industry ows will likely intensify further, particularly from the emerging from particularly further, ows will likely intensify ected by services sub-sectors being identifi which complements the broader marketing campaigns for identifi marketing campaigns which complements the broader activity, activity, cantly in the last few years, partly due to the rapid development of Islamic fi years, partly due to the rapid development cantly in the last few nancial sector, including the issuances of new licenses to fi including the issuances nancial sector, support to investment was provided through policies to further strengthen and liberalise the domestic and liberalise policies to further strengthen through was provided support to investment fi Forward The Way is expected to continue into the decade recent in private investment in the The positive developments of higher FDI fl to the resumption in the world economy will also lead next decade. Improvements fl Although competition for FDI globally. attractiveness given Malaysia’s to Malaysia is likely to remain investment economies, foreign regional aggressive (ETP), more Programme Economic Transformation and competitiveness. As outlined in the and This includes revamping and implemented. being proposed to attract investment are efforts Development Authority (MIDA) to include targeted of the Malaysian Industrial expanding the role outreach for about 30% of total private investment investment is still expected to account Overall, foreign areas. in the coming decade. continue to be channelled into diverse sectors of the economy. In addition, capital spending will likely growing indicating its expected to be higher, investment in the services sector are In particular, importance as refl industries and tourism-related healthcare, trade, education, business services, wholesale and retail high technology sub-sectors producing selected sector, communication services. In the manufacturing equipments and as well as precision light emitting diodes (LEDs), energy, equipment such as renewable investment in the oil and investment. Furthermore, also expected to attract higher medical devices are exploration and extraction driven by continued gas sector is expected to increase, attractive incentive policies, pro-growth combination of given the appropriate Going forward, as a vibrant external private investment is as well environment, packages and liberalisation measures, a and transformation of Malaysia towards for the growth expected to become an important catalyst high-income, high value-added economy. Economic Areas (NKEAs) in the ETP. These include higher value-added (NKEAs) in the ETP. Economic Areas signifi their positions as the most attractive locations since the GSLI was introduced in 2003, due mainly to in 2003, due introduced since the GSLI was locations as the most attractive their positions and improving has to keep developing Malaysia regard, In this pools and cost advantages. deep talent and attractive competitive to remain in order infrastructure, relevant as well as other these factors, internationalamong the investor community. in the fi investment industry, In addition to the SSO

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 28 in thewholesaleandretail tradesub-sector. well astheestablishmentofnewretail outlets infrastructure inthecommunicationindustry, as expansion andupgradingofthebroadband reflecting mainlytheongoingcapacity the servicessectoralsoincreased significantly, and explorationactivity. Investmentactivityin gas investmentinupstream production facilities capital spendingwashigher, mainlyforoiland sectors alsogrew in2010.Intheminingsector, expansion activities.Capitalspendinginother increased needforfirmstoundertakecapacity at end-2010(end-2009:73%),leadingtoan a highercapacityutilisationrateof80%as to meettherecovery indemandresulted in exports recovered. Higherproduction activity strongly in2010asdemandformanufactured Investment inthemanufacturingsectorrose confidence threshold forthe mostof2010. Index (BCI)remained above the100-point significance, theMIERBusinessConditions Ofinitiatives announcedbytheGovernment. economic environment as wellasseveralkey climate followingimprovements intheglobal reflecting themore favourableinvestment to RM89.2billion(2009:RM70.8billion), investment activity. Gross FDIinflowsrose -73.8%), provided further supportforprivate issued fornewactivities(2010:54.7%,2009: 2009: -3.4%)andprivatedebtsecurities loans disbursedtobusinesses(2010:9.8%, financing conditions,asindicatedbythehigher increased by11%.Moreover, accommodative while salesofconstruction-related materials recorded astrong growth of16.2%in2010, S T -15 -10 Source: DepartmentofStatistics,Malaysiaand BankNegaraMalaysia % change 10 15 20 25 -5 0 5 otal Nominal Investment and Manufacturing Investment and Nominal otal ector CapacityUtilisation Chart 1.6 1Q Q3 Q1Q 4Q 3Q 2Q 2006 Q3 Q1Q 4Q 3Q 2Q 2007 Investment Q3 Q1Q 4Q 3Q 2Q 2008 Q3 Q1Q 4Q 3Q 2Q (RHS) Utilisation Capacity 2009 Q3 4Q 3Q 2Q 2010 55 60 65 70 75 80 85 % 2009: RM112.1billionor16.9% ofGNI). of RM90.5billion(equivalent to12.2%ofGNI, resulting inalowersavings-investment surplus investment spendingbythe privatesector, the increase inGNSwasoffset bystronger billion (equivalentto34.2% ofGNI).However, increased markedlyby20.4%toRM253.6 year. Overall, operating surplusesoftheNFPEsduring 2009: 9.8%),attributablemainlytothelower to RM54.2billion(equivalent7.3%ofGNI, billion). Incontrast,publicsectorsavingsdeclined to RM821.8billionin2010(2009:RM772.9 deposits heldbyhouseholdsandbusinessesrose corporate sectorbalancesheets.Banking (2009: 21.9%),reflecting soundhouseholdand billion (equivalentto26.9%ofGNI)in2010 Private sectorsavingsincreased toRM199.4 selected segmentsofthecivilservice. following theimproved salaryschemefor expenditure onemolumentswashigher non-essential expenditures. Nevertheless, reprioritise spendingprogrammes andreduce is inlinewiththeGovernment’s initiativeto lower spendingonsuppliesandservices.This 2010 (2009:3.1%),attributablelargelyto Public consumption broadband infrastructure. evident from thefurtherdevelopmentof spending inthecommunicationsectorwasalso transmission anddistributionnetwork.Capital generation projects andtheenhancementof sector waschannelledtowards newpower facilities. Additionally, investmentintheutilities and expandingtherailairtransport the transportationsectorwasonupgrading and gasexplorationactivity, whilefocusin sector reflected theongoing upstream oil sectors. Capitalspendinginthemining transportation, utilitiesandcommunication public investmentin2010,mainlythemining, enterprises provided significant supportto Investment bythenon-financialpublic education andhealthcare services. well asenhancingtheprovision ofpublic infrastructure andurban publictransportas channelled mainlytowards improving rural of theyear. Developmentexpenditure was amounting toRM5billioninthefirsthalf continuation ofthesecondstimuluspackage 2010 (2009:8%),supportedpartlybythe Public investment gross nationalsavings(GNS) increased by5.5%in moderatedto0.1%in

29 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010

p

(%) nance nance cance. cance. Share to GDP Share 2009 2010 transport transport p t the services t the services communication sub-sector grew by by sub-sector grew (%) 2009 2010 Annual change ted from higher loan higher loan ted from wholesale and retail trade wholesale and retail sub-sector turned around to sub-sector turned to around nance and insurance fi services 2.4 7.8 5.4 5.5 restaurant 2.8 5.0 2.5 2.4 Table 1.4 Table Finance and insurance 5.1 6.1 11.7 11.6 Real estate and business Transport and storageTransport -2.8 6.9 3.8 3.8 Communication 6.0 8.5 4.1 4.2 Wholesale and retail tradeWholesale and retail 1.2 7.9 13.3 13.4 Accommodation and Utilities 0.4 8.2 3.0 3.0 Government services 2.0 6.5 7.6 7.6 Other services 4.4 4.0 6.1 5.9 Preliminary

manufacturing-related services sub-sectors. The The services sub-sectors. manufacturing-related activity, expansion in domestic consumption nevertheless, continued to benefi dependent on domestic sub-sectors that are and retail demand, particularly the wholesale trade; and communication sub-sectors. The net of increased 6.1% (2009: 5.1%) as a result fee-based incomes in the fi and interest segment, which benefi the vibrant capital market during and growth income the rise in premium In addition, the year. in the insurance segment lent further support The to growth. of 7.9% growth a stronger sub-sector registered (2009: 1.2%), supported by higher household consumption spending, including for durable goods such as motor vehicles. The and storage of 6.9% (2009: -2.8%), growth a register in trade activity and following improvements in passenger travel. However, growth robust in the off the sub-sector tapered in growth second half, as international trade slowed. performance of the The robust sub-sector in 2010 is of notable signifi p Services Sector Performance at Constant Performance Services Sector 2000 prices Note: Numbers may not necessarily add up due to rounding of Statistics, Malaysia Department Source: Services 2.6 6.8 57.6 57.4 Intermediate services 3.4 7.0 25.1 25.1 Final services 2.0 6.6 32.5 32.3 e ted from the ted from benefi ecting the moderation sector expanded by Gross Capital Formation Private Savings Public Savings registered a higher growth of a higher growth registered rst half of the year, driven by driven by rst half of the year, Gross National Savings Savings-Investment Gap services sector Chart 1.7 2003 2004 2005 2006 2007 2008 2009 2010 80 60 40 20 nance and insurance; wholesale and retail trade; trade; nance and insurance; wholesale and retail rmly, with the electronics and electrical and electrical electronics with the rmly, Estimate Source: Department of Statistics, Malaysia Department Source: Ministry of Finance, Malaysia Bank Negara Malaysia Robust growth in all services in all services Robust growth sub-sectors The growth 6.8% in 2010 (2009: 2.6%), with robust sub-sectors, amid the strengthening all across of both domestic and external demand. The services sector was the largest contributor to points to 3.9 percentage contributing growth, The overall GDP growth. 7.9% in the fi in all sub-sectors, particularly the higher growth fi communication; and transport and storage sub- moderated sectors. In the second half, growth to the slowdown in to 5.8%, in response external the trade- and demand which affected SECTORAL REVIEW strong All economic sectors registered performance in 2010, in line with robust in exports. domestic demand and the rebound the manufacturing sector recovered In particular, fi cluster and domestic-oriented products rates. growth double-digit industries registering Meanwhile, the services sector in external statistical demand and the diminishing was Nevertheless, overall growth base effect. activity in the sustained by continued robust domestic-oriented sectors. strengthening of domestic demand over the year. of domestic demand over the year. strengthening moderated in the in all sectors, however, Growth refl second half of the year, e Gross National Savings and Savings-Investment Gap Savings and Savings-Investment Gross National RM billion 280 260 240 220 200 180 160 140 120 100

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 30 Government’s targetof50%. at end-2010(end-2009:31.7%), surpassingthe penetration ratestoodat55.6% ofhouseholdsas demand forbroadband services.The broadband among low-incomehouseholds, ledtohigher connectivity, particularly intheruralareas and as thevariousinitiativestoboostbroadband consumer preference fordataservicesaswell subscription packages. affordability ofbothmobiledevicesanddata quarter. Growth wasspurred bytheincreased registering consistentlyhighgrowth inevery The sub-sectorgrew by8.5%(2009:6%), Penetration rate: 2 1 Selected IndicatorsfortheServicesSector Finance &InsuranceandReal Wholesale &RetailTrade and Utilities Transport &Storageand ore DepartmentofStatistics,Malaysia;MalaysiaTourism Promotion Source: p o ouain ofpopulation ofhousehold Peiiay Preliminary - Broadband Bursa Malaysia turnover (volume) Bursa Malaysiaturnover Insurance premiums Loans outstandinginthe Estate &BusinessServices Total salesofmotorvehicles Tourist arrivals Consumption credit disbursed Accommodation &Restaurant Electricity production index Airport passengertraffi Total containerhandledat Port Communication SMS traffi Air cargohandled - Fixedline - Cellularphone Table 1.5 banking system Klang andPTP(TEUs) omsin n akNgr aasa Commission; andBankNegaraMalaysia. Services SdnBhd;MalaysianCommunicationsandMultimedia Bhd; MalaysiaAirportsHoldingsBerhad;SenaiAirportTerminal Berhad; PortKlangAuthority;PelabuhanTanjung PelepasSdn Board; MalaysianAutomotive Association;BursaMalaysia c2. 8.3 22.1 c 1 1 2 c Furthermore, increased 0. 117.6 106.2 Annual change(%) 1. 14.2 -13.7 092010 2009 062.1 60.6 12.6 13.2 4042.5 55.6 44.0 31.7 2112.8 -2.1 1815.6 -1.8 . 10.6 12.7 9.1 7.8 3.9 7.2 8.8 0.8 . 12.2 6.9 % p a E&E Cluster:Value-added,Production,Sales - - - Production, SalesandExports Manufacturing Sector:Value-added, nulcag % Annualchange(%) Annual change(%) base effect. demandandthediminishing due toslowerexternal of growth, however, moderatedtowards year-end export- anddomestic-orientedindustries.Thepace fi in 2010,drivenlargelybythestrong growth inthe The positive in2010,drivenbythestrong rebound inthe Growth intheexport-orientedindustryturned sector Strong recovery inthemanufacturing Source: DepartmentofStatistics,Malaysia Source: DepartmentofStatistics,Malaysia -40 -30 -20 -10 Annual change(%) 10 15 20 20 15 10 10 20 30 40 -5 rst half of the year with expansion in both the rst halfoftheyearwith expansioninboththe 0 5 nd Exports 0 Chart 1.9 Chart 1.8 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q manufacturing sector VA 0720 092010 2009 2008 2007 Sales (RHS) VA (LHS) 0720 092010 2009 2008 2007 Production Exports (RHS) Production (LHS) Sales rebounded strongly Exports -40 -30 -20 -10 0 10 20 30 40

31 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 .

1.5 8.8 -11.4 18.9 -10.0 11.1 2009 2010 Annual change (%) 1 was driven by robust was driven by robust , growth was in line with, growth ElectronicsElectrical productsChemicals and chemical products -18.8 productsPetroleum -24.6Rubber products 47.4 processingOff-estate 3.2 -0.8 -2.1 -3.0 -1.7 -2.4 equipmentTransport Food, beverage & tobacco -2.3 20.8 11.5 products -12.4 productsConstruction-related 29.7 Fabricated metal products -18.1 21.9 -1.1 15.0 Electronics & electrical Electronics clusterproducts of which: clusterPrimary-related of which: -22.8 17.4 -3.5 5.7 clusterConsumer-related of which: -1.2 cluster Construction-related 13.4 of which: Table 1.6 Table Domestic-oriented industries -5.7 15.6 Export-oriented industries -11.1 9.7 (2005=100) 2000 prices) -9.4 11.4 Production data are based on the new Industrial Production Index based on the new Industrial Production data are Production Exports -12.3 13.0 Source: Department of Statistics, Malaysia Source: 1 Value-added (RM million at Value-added Overall Manufacturing Production Performance of the Manufacturing Sector The E&E output growth was underpinned by the was underpinned growth The E&E output and higher IT investments of global corporate revival in resulting spending on electronics, consumer and audio-visual for semiconductors higher demand first half of 2010. In the particularly in the products, cluster primary-related particularly in the external environment, the recovery demand. Expansion in the regional robust from by the chemicals andcluster was driven primarily industries.rubber products by 15.6% industry grew The domestic-oriented mainly by strong (2009: -5.7%), supported electronics and electrical products (E&E) cluster products and electrical electronics in the Output activity. domestic consumption cluster consumer-related 30 20 10 0 -10 -20 -30 -40 Annual change (%) Annual change Exports of non E&E product (RHS) Sales (RHS) Sales Sales Production (LHS) Production Production 2007 2008 2009 2010 2007 2008 2009 2010 2007 2008 2009 2010 VA VA VA (LHS) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Chart 1.11 Chart 1.12 Chart 1.10 0 5 0 0 -5 40 30 20 10 15 10 40 30 20 10 Annual change (%) Annual change (%) Annual change Source: Department of Statistics, Malaysia -10 -20 -30 Source: Department of Statistics, Malaysia Source: Department of Statistics, Malaysia -10 -15 -20 Annual change (%) -10 -20 -30 -40 Primary-related Cluster: Value-added, Primary-related Sales and Exports Production, Construction-related Cluster: Value-added, Production and Sales Consumer-related Cluster: Value-added, Production and Sales

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 32 palm oil spurred tappingactivity. Theproduction of by 9.6%to939,241tonnesashigherprices in registered aslowerdeclineduetotherebound fi production offoodcrops suchaslivestock, in 2010,supportedbysustainedgrowth inthe sector The agriculture, forestry andfi tapered off. second halfmoderatedasthestimulusmeasures products industries.Nevertheless, growth inthe the iron andsteelnon-metallic mineral stimulus measures. Themajor benefi and implementationoftheGovernment‘s continued constructionactivityintheeconomy construction-related cluster the food,beverageandtobaccoindustry. The the year given thestrong demandfor vehiclesthroughout growth inthetransportequipment industry au de 041.7 0.4 Value added Value AddedandProduction Agriculture Sector: 2 1 eateto eeiaySrie,Mlyi Department ofAgriculture, Malaysia Department ofVeterinary Services, Malaysia Department ofFisheries,Malaysia Forestry Departments(Peninsular Malaysia,SabahandSarawak) Malaysian RubberBoard Malaysian PalmOilBoard DepartmentofStatistics,Malaysia Source: p JnNv21 Jan-Nov ReferstoPeninsularMalaysiaonly 2010 shandfruits.Theindustrialcrops production rlmnr Preliminary nutilcos-. -2.6 -4.6 Industrial crops odcos727.0 7.2 Food crops natural rubber Table 1.7 Production ofwhich: Production ofwhich: ris068.3 -17.6 0.6 3.1 Fruits Vegetables a os-. -2.2 9.6 -8.7 -3.3 -20.1 -1.0 Saw logs Rubber Crude palmoil oo en 3. -13.8 -35.1 Cocoa beans ih1. 2.7 Livestock Fish 12.2 aasa oo or Malaysian CocoaBoard expanded atastronger pace of1.7% and thesustainedperformancein , however, declinedfurtherby3.3% 1 production, whichincreased 092010 2009 Annual change(%) . 2.4 7.6 shing benefi ciarieswere (agriculture) tedfrom crude p 2 Department ofStatistics,Malaysia Source: PETRONAS p Mining Sector:Value AddedandProduction Production Value added to 1.61milliontonnesasatend-2010. conditions. Palmoilstockswere lowerby28.1% 17 milliontonnesamidunfavourableweather to by 4.4%to6,065millionstandard cubicfeet 0.2% in2010.Outputof per tonne). tonne bytheendof2010(end-2009:RM2,571 considerably duringtheyeartoreach RM3,770per Similarly, pricesofcrudepalmoilalsoincreased at RM15.01perkg(end-2009:RM9.58kg). 2010. On30December2010,rubberpricesclosed in Aprilandrecorded newhighssinceOctober exceeded thehistoricalhighofRM10.71perkg adverse weatherconditions.Rubberprices economies, whilesupplywasconstrainedby stronger demand,particularly from theemerging prices increased signifi prices in2010.Globalagriculturalcommodity The agriculture sectorbenefi production offoodcrops agriculture sectorduetohigh Better performanceinthe Value-added ofthe production production offset lowercrudeoil marginally ashighernaturalgas The miningsectorexpanded Preliminary of which: Table 1.8 Natural gas Crude oilandcondensates mining sector cantlyintheyearfollowing natural gas tedfrom higher 092010 2009 380.2 -3.8 164.4 -3.5 -1.6 -4.5 Annual change(%) increased by increased p

33 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 0 1 p 50 40 30 20 10 -10 -20 -30 -16.8 57.8 22.1 10.9 1H '09 2H '09 1H '10 2H '10 Price Supply indicators Demand indicators Annual change (%) rst three quarters of 2010, almost rst three (NAPIC) and Ministry of Housing and Local Government Bank Negara Malaysia Federal Government Development Expenditure (RHS) Federal Government Development Private Investment (RHS) Construction Sector (LHS) 2004 2005 2006 2007 2008 2009 2010 Chart 1.13 Table 1.10 Table Value (RM million)Value -14.3 17.1 30.7 13.6 Volume -10.4 5.7 12.6 2.6 Loan applications 11.1 54.9 40.6 18.0 Loan approvals 0.3 44.2 31.5 10.7 Loan applications -31.4 36.5 63.9 76.5 Loan approvals -38.2 4.2 42.2 61.9 Jul-Sep 2010 Preliminary

7 6 5 4 3 2 1 0 Value-add Growth in Construction Sector Sector in Construction Growth Value-add Federal Government in versus Growth Investment and Private Expenditure Development and Source: Department of Statistics, Malaysia, Ministry of Finance 1 Demand and Supply Indicators of the Residential Demand and Supply Indicators of the Market Property p Source: Information Centre Property Bank Negara Malaysia, National Residential property Residential property transactions Finance for purchase of Finance for purchase property residential New launches -21.1 55.6 8.8 -25.8 New sales and advertising permits Housing approvals -23.7 66.7 11.1 36.5 Loans for construction Malaysian House Price Index 1.6 3.5 5.9 6.2 House prices, as measured by the Malaysian House House prices, as measured by 6% on an annual Price Index (MHPI), increased basis during the fi of 3.4% during doubling the average increase -1 -2 Annual change (%) Annual change (%) p 1 crude safeguard safeguard elds (with to 22 24 36 38 sub-sector 5.52 5.80 2009 2010 ce and ce 14.66 14.76 As at 1 January sub-sector averaged 635,890 non-residential non-residential rst full-year of exports residential introduced in 1980 introduced expanded by 5.2% in civil engineering elds and the shutdown of several oil elds and the shutdown of several oil ecting the construction of commercial 2010 was the fi construction sector Table 1.9 Table the exploitation of the national oil reserves by postponing the oil reserves the exploitation of the national of major oil fi the production development and control or more). 400 million barrels of reserves Reserves (billion barrels) Reserve/Production (year) Reserve/Production Reserves (billion barrels of oil equivalent) Reserves (billion barrels Reserve/Production (year) Reserve/Production Preliminary elds for maintenance. The production of elds for maintenance. The production the second stimulus package. Growth nanced by The National Depletion Policy was p The sub-sector, refl sub-sector, particularly purpose-built offi properties, of and the upgrading and repair space, retail public buildings. The 2010 (2009: 5.8%), with some moderation in the second half, due partly to the completion of projects fi was supported mainly by the continued to grow amid continued progress in the amid continued progress continued to grow such projects, implementation of infrastructure as the construction of the new Low Cost Carrier (LCCT), Second Penang Bridge, double- Terminal and several highways. However, track rail project construction activity in the declined, with fewer units of new residential being launched by developers, particularly properties in the early part of 2010. Moderate growth in the in the Moderate growth construction sector per day, as as per day, to PR China and there was higher demand from was higher demand from to PR China and there Chinese the major importers such as Japan and crude oil output continued to However, Taipei. the from decline due mainly to lower production maturing oil fi fi oil (including condensates) per day in 2010, lower by 3.5% compared barrels to 2009. Source: PETRONAS Source: 1 Malaysia: Crude Oil and Natural Gas Reserves Crude Oil and Natural Malaysia: Crude oil (including condensates) Natural gas

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 34 and ITservices.However, theincomeaccountdefi by higherreceipts from tourismaswellcomputer services accountrecorded asmallsurplus,supported export growth, butnevertheless,remained large.The trade surplusnarrowed asimport growth outpaced and alowernetoutfl underpinned byasizeablecurrent accountsurplus Malaysia’s position remained external resilient in2010, Balance ofPayments EXTERNAL SECTOR moderated towards end-year. 10% onanannualbasisbutthepaceofgrowth in theKlangValley, hadincreased bymore than residential properties inspecifi environment. Bythemiddle oftheyear, pricesof sentiments andtheaccommodativefi growth inhouseholdincomes, improving consumer in largepartbyhigherdemand,duetocontinued 2000-2009. Thestrong increase inpriceswasdriven vrl aac 38-2.6 13.8 328.6 331.3 reserves,Bank NegaraMalaysiainternational net Overall balance rosadoisos-79-71.0 -21.9 -17.9 -80.2 Errors andomissions Balance oncapitalandfi Financial account Capital account aac ncretacut68456312174564090.5 694.0 784.5 112.1 586.3 698.4 Balance oncurrent account urn rnfr . 33-96182. -21.7 23.5 1.8 -19.6 23.3 3.7 Current transfers noe3. 40-463. 34-25.2 63.4 38.1 -14.6 54.0 39.3 Income aac ngosadsrie 5. 0. 4. 4. 0. 137.4 607.1 744.5 146.4 508.9 655.3 Balance ongoodsandservices evcs1139. . 0. 0. 0.9 103.8 104.7 4.7 96.6 101.3 Services Source: DepartmentofStatistics,Malaysia Note: Numbersmaynotnecessarilyadd upduetorounding p Balance ofPayments od 5. 1. 4. 3. 0. 136.6 503.3 639.8 141.7 412.3 554.1 Goods Preliminary S ilo qiaet9. 106.5 96.7 USD billionequivalent te netet-81-51.1 -0.8 44.9 -15.0 -58.1 2.5 -1.7 -22.9 of which: Other investment Financial derivatives Portfolio investment Direct investment % ofGNI rd con 5. 3. 118.4 434.9 553.3 Trade account Table 1.11 oeg xhnervlaingi + rls - 10.7 Foreign exchangerevaluationgain(+)orloss(-) ow inthefi nnilacut 8. -22.1 -80.4 nancial accounts tm+-Nt+-Net - + Net - + Item c locations, particularly c locations,particularly nancial account. The nancial account.The nancing nancing cit cit residents, moderatedduring theyear. trade credits andplacements ofdepositsabroad by Other investmentoutfl to tapopportunitiesintheregional andothermarkets. abroad increased asMalaysiancompaniescontinued economic conditions.Outfl given theimprovement inboth globalanddomestic the higherinfl in thefi direct investmentinMalaysia. Thelowernetoutfl widened duemainlytothehigherprofi 3.3% ofMalaysia’s totaltrade.Afteradjustingfor amounted toRM38.4billion.Thisrepresented the cumulativeforeign exchangerevaluation loss During theyear, errors andomissionsexcluding remained resilient in2010 Malaysia’s position external 092010 2009 nancial account were largely attributable to nancial accountwere largelyattributableto ows of portfolio investments and FDI ows ofportfolioinvestmentsandFDI 7512.2 17.5 02-0.2 -0.2 RM billion ows, which mainly comprise ows, whichmainlycomprise 3. 2. 110.2 529.2 639.4 ows of direct investment ows ofdirect investment ts of foreign ts offoreign p -32.6 ows ows

35 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 p (%) 2009 2010 Annual change year. However, the the However, year. -17.1 20.0 1 expanded by 26.1% in expanded by 26.1% ts and dividends accruing to to ts and dividends accruing gross exports gross SemiconductorsElectronic equipment and parts -18.8 12.2 3.4 5.3 half, underpinned by strong regional regional by strong half, underpinned Palm oil Rubber -20.9 25.4 -45.0 106.5 Crude oil and condensatesLNG -41.8 21.3 -24.8 22.1 Electronics -8.6 8.6 Electrical products Resource-based products -16.2 13.3 of which: of which: of which: rst ts and dividends accruing to foreign direct direct to foreign ts and dividends accruing cit in the income account widened as higher as higher income account widened cit in the Table 1.12 Table furniture and parts, rubber products, petroleum products, chemicals products, petroleum furniture and parts, rubber products, and non-metallic mineral products and chemical products Commodities Agriculture -28.2 26.9 -21.8 30.8 Minerals -33.1 23.4 Manufactures -12.3 13.0 Preliminary Preliminary wood products, to food, beverages and tobacco products, Refers p Malaysia Department of Statistics, Malaysia and Bank Negara Source: 1 Gross Exports Gross Gross exportsGross -16.5 15.6 year, albeit by a smaller amount. The surplus was The surplus was by a smaller amount. albeit year, and higher tourist arrivals by robust supported IT services. The computer and from receipts defi profi than offset in Malaysia more investors operating in profi the increase investing abroad. Malaysian companies to RM1.17 exports and imports amounted Total the levels GNI), approaching trillion (157.8% of trillion). the crisis (2008: RM1.18 before reached in regional growth In line with the robust countries, the fi low demand and to a certain extent, the previous of the base effect momentum moderated in the second growth of half, weighed down by the slower growth the strong exports, which offset manufactured in commodity exports. The performance growth 140 120 100 80 60 40 20 0 RM billion cit of RM2.6 billion. surplus narrowed to surplus narrowed nance 8.1 months of retained nance 8.1 months of retained during the year as global economic 2008 2009 2010 Balance on services and income Goods imports Goods exports Balance on current account (RHS) current account account current ecting the lower trade surplus ecting the lower trade surplus Chart 1.14 0 800 600 400 200 -200 -400 -600 RM billion Source: Department of Statistics, Malaysia RM90.5 billion or 12.2% of GNI in 2010 (2009: activity RM112.1 billion or 17.5% of GNI). Trade recovered Current Account Current The particularly among regional conditions improved, countries. Nonetheless, the acceleration of an impetus domestic demand also provided imports which in gross growth for the strong exports, leading in gross outpaced the growth to a smaller trade surplus. The services account a surplus for the fourth consecutive recorded Current account surplus narrowed, account surplus narrowed, Current refl of imports outpaced as the growth exports Consequently, the net international of reserves Consequently, RM328.6 Bank Negara Malaysia amounted to as at 31 billion, equivalent to USD106.5 billion, the December 2010. As at 28 February 2011, at a comfortably high level of remained reserves billion), RM338.6 billion (equivalent to USD109.8 adequate to fi imports and cover 4.3 times of the short-term external remain reserves external debt. Malaysia’s usable and unencumbered. the errors and omissions, the overall balance of and omissions, the overall balance the errors a small defi payments recorded Current Account

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 36 and Non-E&EProducts Export PerformanceofElectronics&Electrical(E&E) Source: DepartmentofStatistics,MalaysiaandBankNegara products inthefirsthalfofyear. E&Eexports, 2010, withstrong growth recorded across major Manufactured exports and highcommodityprices. the year, supportedbyrobust regional demand the otherhand,remained resilient throughout second halfoftheyear. Commodityexports,on products (E&E),whichmoderatedtowards the demandforelectronicsexternal andelectrical of manufactured exportsmainlyreflected the -30 -20 -10 Annual change(%) p oa 3. 565922. 110.2 21.7 639.415.6 529.2 Total Direction Trade ofExternal 1 Source: DepartmentofStatistics,Malaysia Note: Numbersmaynotnecessarilyadd upduetorounding p 10 20 30 40 Singapore, Thailand,Indonesia,Philippines,Brunei DarussalamandVietnam Preliminary 0 Preliminary ntdSae 10065. 584.7 15.8 56.3 0.6 61.0 United States of which: uoenUin(U 6. 455. . 14.5 6.7 54.2 14.5 68.7 European Union(EU) eetdNrhEs sacutis1751. 3. 9625.9 19.6 131.6 19.7 157.5 Selected NorthEastAsiacountries Selected ASEANcountries etAi 23401. 763.4 27.6 18.9 4.0 22.3 West Asia aa 632. 652. -0.3 22.6 66.5 21.8 Japan 66.3 ni 102. . . 13.0 1.4 8.0 23.3 21.0 India Chart 1.15 Table 1.13 h epesRpbi fCia8. 996. . 14.2 9.5 66.4 19.9 80.6 The People'sRepublicofChina ogKn A 251. 271. 19.9 17.3 12.7 12.8 32.5 Hong KongSAR hns api2. 992. 90-3.6 29.0 23.8 39.9 20.2 Chinese Taipei oe 421. 874. -4.5 42.6 28.7 14.7 Korea 24.2 Q2 Q4 Q2 Q4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q Manufactured exports 2009 expanded by 13% in expandedby13%in 1 E&E Non-E&E Products 2010 RM billion 6. 391263. 17.9 30.9 142.6 13.9 160.6 p xot mot Trade balance Imports Exports Annual change (%) Commodity ExportPerformance scientific equipment. petroleum andrubberproducts, andoptical resource-based products suchaschemicals, to besupportedbyfirmregional demandfor eased inthesecondhalfofyear, butcontinued Similarly, therobust growth ofnon-E&Eexports demand ledtothesofteningofelectronics exports. latter halfoftheyear, themoderationinregional in theglobalelectronics industry. Movingintothe the firsthalf,benefitingfrom inventoryrestocking particularly semiconductors,rose significantlyin Source: DepartmentofStatistics,MalaysiaandBankNegara Annual change(%) p -60 -40 -20 20 40 60 80 Preliminary 0 Chart 1.16 Q2 Q4 Q2 Q4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q Commodity exports RM billion 2010 2009 p Annual change Agriculture (%) 2010 p Minerals RM billion

37 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 travel p p million million RM billion Net + - Net 2009 2010 Annual change (%) -2.7 10.1 -5.9 16.2 35.1 32.2 10.5 17.1 2009 2010 -16.3 21.7 -21.6-36.0 22.1 34.1 Table 1.15 Table Compensation of employeesInvestment income -1.5 3.6 5.6 -13.1 -2.1 34.6 57.7 -23.2 TransportationTravelOther servicesGovernment transactions n.i.e. -0.6 0.3 -17.0 15.1 0.8 38.2 -0.5 -10.4 -23.0 31.9 32.7 39.5 57.4 -7.6 25.4 32.0 Preliminary computer and IT services. The surplus in the in the computer and IT services. The surplus travel account was sustained as the improvement to spurin global economic conditions continued tourist arrivals. In 2010, tourist arrivals greater totalled 24.6 million visitors (2009: 23.6 the visitors), with Asian countries providing of largest number of visitors. The expansion % of GNI -2.3 -3.4 % of GNIIncome Account 0.7 -14.6 38.1 63.4 0.1 -25.2 n.i.e. Not included elsewhere p Note: Numbers may not necessarily add up due to rounding Department of Statistics, Malaysia Source: Services and Income Accounts Services Account 4.7 104.7 103.8 0.9 remained positive, albeit positive, albeit remained turned around to register turned to register around ed grew by 21.7%, with expansion 21.7%, with expansion by grew services account Table 1.14 Table Food and beverages, mainly for household consumptionFood and beverages, mainly Consumer goods, n.e.s. 7.8 9.1 -9.1 10.0 Food and beverages, mainly for industryFood and beverages, mainly Industrial supplies, n.e.s.Fuel and lubricants capital goods (except transport equipment)Parts and accessories of -19.0 19.6 -16.8 22.6 -21.8 24.5 Capital goods (except transport equipment)Capital goods (except transport equipment Transport -8.2 16.1 Preliminary p Department of Statistics, Malaysia Source: n.e.s. Not elsewhere specifi n.e.s. Not elsewhere Imports by End-Use Imports by Gross Imports Gross Re-exports Consumption goods Intermediate goods Capital goods Commodity exports of 26.9%, buoyed by firm regional a growth commodity prices. Of demand and stronger exports sustained robust significance, agriculture supported by the year, rates throughout growth rubber and rising prices of crude palm oil, natural While mineral the region. continued demand from expansion in the first strong exports also recorded moderated in the pace of growth half of the year, volume of the second half as the decline in export than offset crude oil in the fourth quarter more higher oil prices. the gains from imports Gross across all major import categories. Intermediate major import categories. Intermediate all across by 22.1%, led by imports of imports grew industrial supplies, fuel and lubricants, in tandem with the pick-up in manufacturing activity. Capital imports surged by 16.2%, as imports of substantially in consonance machineries increased of domestic investment activity. with the revival Likewise, imports of consumption goods expanded by 10.1%, driven mainly by imports of positive consumer food and beverages, reflecting spending. The pace of expansion in capital and despite strong consumption imports remained moderating slightly in the second half of the year. The by a smaller amount, supported by strong by a smaller amount, supported by strong from tourism activity and higher receipts

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 38 investment abroad. Inparticular, foreign direct fromthe higherearnings portfolioanddirect investors inMalaysia,whichmore thanoffset accruing toportfolioandforeign direct reflected RM25.2 billionor3.4%ofGNI.Thislargely The sustained receipts from passengerandcargofares. of imports,higherfreight paymentsexceededthe deficit widenedas,inlinewiththeacceleration services. Meanwhile,thetransportationaccount mainly tohigherreceipts from computerandIT The deficitinotherservicesaccountdeclineddue cost carrierswere themaincontributingfactors. routes andtheincrease offlightfrequencies bylow Direct InvestmentIncome 10 20 30 40 50 60 Source: DepartmentofStatistics,Malaysia Tourist ArrivalsandTourismReceipts ors riasi ilo ReceiptsinRMbillion Tourist arrivalsinmillion Source: MalaysiaTourismPromotionBoardandDepartmentofStatistics, p RM billion p 10 15 20 25 30 0

0 5 Preliminary Preliminary Chart 1.18 Chart 1.17 0020 0220 0420 0620 0820 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 income account Tourist arrivals 0620 0820 2010 2009 2008 2007 2006 Income accruingtoforeigninvestorsinvesting inMalaysia Income accruingtoMalaysiancompaniesinvesting abroad Reinvested earningsofforeigninvestors the higherprofits anddividends deficit widenedto Tourism receipts(RHS) p p 0 10 20 30 40 50 60 iaca eiaie . -0.8 44.9 2.5 -1.7 Financial Derivatives Portfolio Investment te netet-81-51.1 -58.1 Other Investment Balance ofPayments:FinancialAccount ietIvsmn 2. -15.0 -21.9 -22.9 -80.2 Direct Investment Financial Account Source: DepartmentofStatistics,MalaysiaandBankNegara Note: Numbersmaynotnecessarilyadd upduetorounding p and NFPEs 1 into long-termdebtsecurities.Despitethelarger markets, withthebulkoffundsflowingmainly channelled intoboththeequityanddebtsecurities The inflowsofforeign portfoliofundswere recorded amuchlargernetinflowofRM44.9 For theyearasawhole, abroad byresidents, moderatedduringtheyear. reflected tradecredits andplacementofdeposit regions. Otherinvestmentoutflows,whichlargely continued totapprofitable opportunitiesinother abroad (DIA)rose asMalaysiancompanies investment (FDI).Similarly, direct investment profitability ledtohigherinflowsofforeign direct global economicconditionsandcorporate foreign capitalintotheregion. Theimproving ledtofurtherinflowsof rates, whichinturn stronger regional currencies andhigherinterest economies. There were alsoexpectationsfor the prospects forstrong growth ofregional a trend of largescaleportfolioinflowsintoMalaysia, -RM80.2 billion).Ofsignificancewasthereturn smaller netoutflowofRM21.9billion(2009: In 2010,thefinancialaccountrecorded a Financial Account manufactured products andcrudeminerals. due toimproved exportperformance inboth gas sectorsrecorded significantlyhigherprofits investments inthemanufacturingandoil Preliminary Excludes bondsandnotesraisedabroad bytheFederalGovernment rvt etr-46-51.4 -64.6 Private sector nMlyi . 27.6 5.0 Offi In Malaysia bod-79-42.6 -27.9 Abroad Table 1.16 akNgr aasa660.0 6.6 Bank NegaraMalaysia FE . 0.6 0.5 NFPEs eea oenet-. -0.4 -0.6 Federal Government cialsector experienced across theregion, given 1 portfolio investment portfolioinvestment 092010 2009 . 0.2 6.6 RM billion billion. p

39 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 sector, sector, ows of ows of ows were channelled ows were cantly higher amount cantly higher amount ows of FDI increased ows of FDI increased ning and petroleum- ciaries during the year. In In ciaries during the year. insurance sub- nance and cantly in sustaining investors’ cantly in sustaining investors’ tandem with the global economic the global economic tandem with ows due largely to loan repayments ows due largely to loan repayments cantly to RM27.6 billion or 3.7% of GNI. cantly to RM27.6 billion or 3.7% of dence in the Malaysian economy. dence in the Malaysian economy. tability contributed to the larger infl to the tability contributed in 2010 in in 2010 in in domestic Amid improvements recovery. corporate conditions, higher economic profi FDI into the country during the year. This was was This during the year. FDI into the country the signifi evident through for investments by existing of earnings retained (MNCs) in Malaysia. In multinational companies Governmentaddition, several new initiatives, (EPPs) under the Projects notably the Entry Point (ETP) which Programme Economic Transformation for the private business opportunities provided empowerment and The sector to drive growth. MIDA to negotiate directly corporatisation of decision undertake real-time with investors and to is expected making on investments proposals contribute signifi confi in Positive investor sentiments to investing Malaysia was further buoyed by improvements rankings for competitiveness in the country’s and ease of doing business in the reports by the International for released Institute Management Development (IMD), UNCTAD This, together Bank, respectively. and the World of the Government with the continued efforts in the to further liberalise investment policies have helped manufacturing and services sectors FDI into Malaysia during the to attract more After taking into account the adjustments year. for outfl companies and to a certain extent, to parent of working capital by some oil and repatriation gas companies, net infl signifi The FDI in Malaysia continued to be broad-based. services (30.2% manufacturing (60.2% share), sectors oil and gas (8.9% share) and share) main benefi the were FDI was mainly into the manufacturing sector, the E&E industries, largely by existing MNCs, for upgrading equipment and technology in a higher value added activities and move towards also were sophistication. There product greater investments undertaken by companies in the subsequently boosted the which solar industry, expansion of the solar value chain in Malaysia. Other investments in the manufacturing sector refi in petroleum were industry which continued to products related sizeable. remain FDI infl In the services sector, primarily into the fi p ed nancial nancial ected ected ows. The ows. nancial crisis ows and allows Direct investment abroad (DIA) Other investment ows in the ows in the increased further to further to increased ows. The more diversifi ows. The more ows of portfolio ows of portfolio ows such that orderly fi ows such that orderly FDI ows of ows have not created economic and ows have not created Balance on financial account financial on Balance Foreign direct investmentForeign (FDI) investment Portfolio 2006 2007 2008 2009 2010 ows, the level of foreign holdings in these asset holdings in these asset ows, the level of foreign Chart 1.19 60 20 Preliminary -20 -60 nancial account largely refl 100 nancial markets have been able to absorb the nancial sector, the stronger and resilient fi and resilient the stronger nancial sector, nancial imbalances. Importantly, Malaysia has nancial imbalances. Importantly, p Source: Department of Statistics, Malaysia and Bank Negara Malaysia Malaysia Statistics, of Department Source: -100 -140 institutions as well as the deeper and broader institutions as well as the deeper and broader fi volatility in capital fl fi The availability of a wide markets was preserved. range of monetary instruments has allowed for sterilisation of excess liquidity in the effective these capital infl system arising from infl Gross RM89.2 billion, accounting for 12% of GNI investment and foreign investment and foreign investment direct the higher infl These infl fi the policy capacity to manage these infl monitoring and surveillance of a robust presence time information on near real system has provided of these infl the size and nature for early detection of any emerging risks inherent to these short-term fl The lower net outfl fi infl below the pre-fi markets remained levels of 2008/09. Financial Account RM billion

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 40 Foreign DirectInvestment(FDI) 100 Source: DepartmentofStatistics,Malaysia p RM billion and economies, particularlytheUnitedStates,Japan FDI inflowsin2010were mainlytheadvanced and production activities.Majorcontributorsof gas sectorwere mainlyforextractionoperations and electronic products. Investmentsintheoiland distributive companiesrelated totelecommunication and retail sub-sectorwasundertakenmainlyby reinvested TheFDIinthewholesale earnings. by foreign financialinstitutions,mainlythrough finance andinsurancesub-sectorwere undertaken Of significance,thebulkofinvestmentsin followed bythewholesaleandretail sub-sector. Source: DepartmentofStatistics,Malaysia p Note: *Referstoagricultureandconstruction sectors -80 -60 -40 -20 Gross FDI Inflows by Sector 20 40 60 80 Preliminary Preliminary 0 Chart 1.20 Chart 1.21 Netherlands. Gross FDIinflows Net FDI Gross FDIoutflows Financial Services 11.8% 2008 2010 Non-financial services p : RM89.2billion 18.4% 092010 2009 Others* 0.7% Manufacturing 60.2% Oil andgas 8.9% p integrated agribusinessmodel,particularly sector reflected primarilyreinvestments inthe Investment abroad inthemanufacturing as welldownstream processing activities. the explorationandproduction (E&P)businesses driven byMalaysianoilcompanies,primarilyin In theoilandgassector, theDIAcontinuedtobe healthcare, leisure andentertainmentsub-sectors. services sectorreflected strategicinvestmentsin scale. A and toremain competitiveonaregional further taphighgrowth marketsintheregion, existing operationsabroad inaneffort to companies whichwere institutions, utilitiesandtelecommunications sector were ledmainlybydomesticfinancial share) sectors.Investments intheservices and gas(19%share) and manufacturing (11% channelled intotheservices(67%share), oil The DIAbyMalaysiancompanieswaslargely RM42.6 billionor5.8%ofGNI. loans bysubsidiariesabroad, netDIAamountedto which waslargelyattributabletorepayments of loans. Aftertakingaccountthegross inflows, andlargerextensionofinter-companyearnings, by higheroutflowsofequitycapital,retained and expansionintonewbusinesses,asevidenced Malaysian companiesintheirexistingoperations outflows reflected thecontinued investmentby accounting for9.2%ofGNI.ThelargerDIA companies increased toRM67.9 billion, In 2010,gross outflowsof 100 Direct InvestmentAbroad(DIA) RM billion Source: DepartmentofStatistics,Malaysia p -80 -60 -40 -20 20 40 60 80 Preliminary 0 Chart 1.22 Gross DIAinflows Net DIA Gross DIAoutflows significant partofinvestmentsinthe 2008 expanding their 092010 2009 DIA byMalaysian p

41 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010

SDRs ows of ows of and the rst six rst six ows, particularly ows, particularly uenced by uenced by ow of funds being ow of funds being culties. Notwithstanding a ows of FDI and ows of FDI and ows of portfolio investment and ows of portfolio investment and cation of portfolio infl ecting improved economic prospects economic prospects ecting improved reserve position with the IMF reserve ected in the gradual appreciation of the of the ected in the gradual appreciation ows, however, were partly offset by direct by direct partly offset were ows, however, Rights (SDR). In 2010, net international reserves In 2010, net internationalRights (SDR). reserves equivalent to to RM328.6 billion, amounted December 2010. billion, as at 31 USD106.5 International reserves amounted amounted International reserves in 2010, to RM328.6 billion by continued supported mainly account as current surplus in the well as infl portfolio investment the international reserves During the year, account largely supported by the current were trade surplus following the surplus in the commodity and strong account arising from exports. The movement of manufactured year the international during the reserves was also to a large extent infl larger infl FDI, refl investor sentiments. These and strengthened infl as well as net outfl investment abroad other investments. changes, reserves Excluding the revaluation stable in the fi relatively remained months, with the net infl refl reserves ringgit. In the second half-year, following the a modest increase registered intensifi For the year as a whole, quarter. in the third was however offset of reserves the increase exchange foreign by the cumulative unrealised loss of RM32.6 billion arising from revaluation of the ringgit against most the strengthening major currencies. a participating member in the Malaysia remains Under Plan of the IMF. Financial Transactions to resources this plan, a member will provide member countries that face short-term balance of payments diffi transaction by a member of currency purchase Plan, country under the Financial Transactions the international held in the form of reserves declined in 2010 mainly due to the exchange ows ows 19% ows ows 11% ows ows Oil and gas Manufacturing ected the ected the 3% Others* held by Bank held by Bank cial sector. Despite Despite cial sector. : RM67.9 billion p cial sector recorded a a cial sector recorded recorded a smaller net a smaller net recorded 2010 eceived more trade credit as foreign as foreign trade credit eceived more ows in the offi 32% 35% ow as external loan drawdown by the Financial Services nancial public enterprises (NFPEs) more nancial public enterprises (NFPEs) more international reserves Non-financial services ow of RM51.1 billion in 2010 due to a a ow of RM51.1 billion in 2010 due to Chart 1.23 Preliminary nancing improved as the global economic as the global economic nancing improved Note: *Refers to agriculture and construction sectors p Gross DIA Outflows by Sector Gross DIA Source: Department of Statistics, Malaysia were lower on account of lower net trade lower on account of lower net trade were in 2009, Malaysian exporters Unlike credits. while Malaysian extended less trade credit importers r importers and exporters’ access to trade fi gained traction. The higher outfl recovery in the banking sector largely refl liquidity management strategy of the banks. Meanwhile, the offi small infl non-fi the external by the than offset loan repayments Federal Government. International Reserves The Negara Malaysia comprise holdings of gold position exchange, the reserve and foreign with the IMF and holdings of Special Drawing relating to palm oil, which captures the entire the entire to palm oil, which captures relating value chain of the agricultural commodity Most of DIA during the year were processing. particularly in ASEAN, the within the region, (NIEs) Asian Newly Industrialised Economies were Asian economies. There and the West by Malaysian also sizeable investments abroad notably companies in the advanced economies, Australia and United Kingdom. Other investment outfl moderation in the private sector outfl by higher net placements of deposits abroad private sector outfl the banking sector, and net infl

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 42 Reserves/Short-term Months ofretained USD million Net International Less International Gross Net International Reserves Net International D odns7292 6425 -836.7 6,442.5 7,279.2 Gold andforeign IMF reserve SDR holdings Negara Malaysiaalsodoes notengagein banks andotherfi organisations,other centralbanks,international unconditional credit linesprovided byorto loans withembeddedoptions andnoundrawn, unencumbered. There are noforeign currency reserves heldbytheBankare usableand debt. Theinternational the short-termexternal months ofretained importsandis4.3times USD109.8 billion),adequatetofi amounted toRM338.6billion(equivalent As at28February2011,thereserves level the portfolioremain akeyinvestmentstrategy. assets toenhancetherisk-adjustedreturnsof Further diversifi funding capacityofsomeEuropean sovereigns. abouttherisk followingheightenedconcerns increased emphasisandcautiononsovereign adapted accordingly. Inparticular, there was strategy andriskmanagementpracticeswere global liquidityfl Given themultifacetedchallengeofshifting ringgit againstSDR. revaluation 1 ore akNgr aasa Source: BankNegaraMalaysia Note: Numbersmaynotnecessarilyaddupduetorounding Exchange’ to‘OtherAssets’ofBankNegaraMalaysia ‘Other Foreign Currency ClaimsonResidents’isreclassifi mot 9.78.6 -2.5 21.4 debt external -2,627.6 328,649.1 imports 23.9 331,276.7 equivalent Reserves liabilities Malaysia external eevs31306 2,7. -2,630.1 328,670.5 331,300.6 Reserves oiin ,1. ,5. -62.3 1,453.5 1,515.8 exchange position Table 1.17 BankNegara 1 loss followingtheappreciation of

tms 42 4.1 4.2 (times) cation ofcurrency holdings and ows, thereserves portfolio nancial institutions.Bank 32556 30745 -1,731.1 320,774.5 322,505.6 668116582 9,830.1 96,688.1 106,518.2 0921 2010 2010 2009 sa n Change As atend RM million nance 8.1 nance edfrom ‘GoldandForeign Net International International Net refl or 30.2%ofGNI(2009:RM233.1 billion).This declined toRM226.3billion (orUSD72.6billion), As atend-2010,Malaysia’s debt totalexternal low at30.2%ofGNI Malaysia’s debtremained external Source: Bank Negara Malaysia Negara Bank Source: servicing obligationsofthecountry. debt level,thestructure ofthedebt,anddebt- debt monitoringsystemthatcoverstheoverall by acomprehensive, well-functioningandrobust nation’s debtiscontinuouslysupported external emphasis istoensure thatthemanagementof safeguarding monetaryandfi companies, associateorsistercompanies.In subsidiaries, branches,ultimateholdingorparent same corporategroup whichincludesforeign to source foreign currency borrowing withinthe fi mobility ofcapitaltoenhancemanagement fl environment toenhancecompetitivenessand is geared towards creating afacilitativebusiness high incomeeconomy. Thestrategyinessence, Malaysian economytoahigh-valueaddedand landscape andongoingtransformationofthe had progressed amidtheshiftingglobalfi Malaysia’s debtmanagementstrategy external Debt External currency markets. ringgit-related optionsactivityintheforeign 200 240 280 320 360 RM billion RM nancialresources, resident companiesare free exibilityoftheeconomy. To facilitategreater Chart 1.24 ectedthedeclineinmedium- andlong- 2009 D Reserves/Short-term external debt (RHS) Retained import cover (RHS) Net international reserves, billion RM (LHS) FMAMJJ JASONDJ Reserves (end-month) 2010 nancialstability, the As at 28Feb2011: RM338.6 billion 8.1 months nancial 4.3 times Months/Times 2011 F 10 12 0 2 4 6 8

43 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 ected the larger expanded by 1.8%, cantly larger repayments cantly lower. In addition, cantly lower. declined to RM63.6 billion declined to RM63.6 short-term external debt employment nance and business services (15,900 private sector ected in lower retrenchments, higher higher ected in lower retrenchments, (2009: RM70 billion). This largely refl (2009: RM70 billion). in the retail, of debt by companies repayments mining sectors.communications and the During the year, billion (2009: to RM79.4 outstanding increased primarily to higherRM77.8 billion), attributed The bulk of non-bank private sector borrowings. by thethe short-term debt continued to be held while short-term banking sector (85.6% share) external private sector, debt of the non-bank and overdraft credits comprising mainly revolving As at end-2010, the low. facilities, remained small, short-term external relatively debt remained ofaccounting for only 10.6% of GNI, 24.2% ofinternational and 10.7% of exports reserves goods and services. the amount was signifi the amount large, of external remained loans the repayment as bonds as well the maturity of several following the year. throughout loan repayments continued following signifi Similarly, debt the medium- and long-term during the year, of the LABOUR MARKET DEVELOPMENTS LABOUR MARKET DEVELOPMENTS in 2010, Labour market conditions improved as refl number of vacancies and gains in employment. 3.2% of the The unemployment rate declined to (2009: 3.7%), following stronger labour force in employment (1.8%; 2009: 0.4%), growth in the labour force to the growth compared (1.3%; 2009: 0.8%). Labour market conditions improved amid better economic performance During the year, equivalent to a net addition of 204,400 jobs. of the major source The services sector remained employment, with net addition of 96,800 jobs, Job accounting for 47% of total job creation. the services sector was driven mainly in creation by new jobs in distributive trade and restaurants (47,600 jobs), fi jobs), and transport, storage and communication (8,000 jobs) sub-sectors. The manufacturing sector gains in employment of 102,400 jobs, recorded the net job losses in 2009 following reversing p USD billion USD 2009 2010 rst market rst billion issued a p RM , the fi billion 6.5 7.6 RM 77.8 79.4 22.5 25.5 23.5 24.2 sukuk 2009 2010 billion and tonancial hub declined to RM66.6 medium- and long-term medium- and long-term NFPEs

Federal Government capital investments,nance their issuance was aimed at promoting issuance was aimed at promoting , the improvement was also due was also due , the improvement 1 sukuk reserves As % of total debtAs % of net international 33.4 35.1 Table 1.18 Table banking institutions Medium- and long-termShort-term 155.4 146.9 44.9 47.1 Total debtTotal Medium- and long-term debt 23.7 19.7 35.6 30.4 Preliminary with resident and deposits held by non-residents Excludes currency p of Finance, Malaysia and Bank Negara Malaysia Ministry Source: 1 Total debtTotal 233.1 226.3 67.4 72.6 Outstanding ExternalOutstanding Debt As % of GNI debt Total 35.1 30.2 Medium- and long-term debt 23.4 19.6 Debt service ratio (%) As % of exports of goods and services term debt. The appreciation of the ringgit against of the ringgit against term debt. The appreciation during the year also contributed major currencies to the moderation in the overall external debt level. In the case of external debt USD1.25 billion 5-year global to the net repayment position of the private position of the private to the net repayment external Malaysia’s As at end-year, sector. continued to be skewed towards debt profile with medium- and a longer maturity structure long-term debt accounting for 64.9% of total external debt. In May 2010, the Malaysia as a global Islamic fi loan raised in the international capital market since 2002. The establish a new US dollar benchmark for Malaysian the outstanding corporates. As at end-year, external debt of the Federal Government to rose RM16.7 billion (2009: RM13.8 billion), as higher repayments offset than more borrowings gross gains during the year. and exchange revaluation External debt of the billion in 2010 (2009: RM71.6 billion). Although the NFPEs continued to drawdown long-term external loans, mainly to fi

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 44 jobs and 1.3 million or 11% in low-skill jobs. jobs and1.3millionor11%inlow-skilljobs. in high-skilljobs,7.2millionor61%mid-skill 2010, 3.4millionor28%oftotalemploymentwas low-skill jobshaddeclined(-1%).Asattheendof the mid-skill(1.6%)category, whilethenumberof been growing atafasterpace(3.2%)compared to Of significance,thenumberofhigh-skilljobshad while thelow-skillcategoryrecorded joblosses. and thehigh-skill(51%or104,600)category, created were inthemid-skill(55%or112,300) In termsof in themanufacturingsector. accounted forabouttwo-thirds oftotaljobcreation related industries.TheE&Esectorinparticular, strong labourdemandintheE&Eandconsumer- Unemployment rate ernhet pros 5301,3 4032,6 7,085 25,064 24,033 14,035 15,360 Retrenchments (persons) Labour force Employment Real labourproductivity growth nulcag % . . . . 1.3 1.8 0.8 0.4 1.6 1.6 2.0 2.1 2.2 2.4 Annualchange(%) Annualchange(%) Selected LabourMarketIndicators 2 1 MinistryofHumanResources Economic PlanningUnit Source: BankNegaraMalaysia e Output andEmployment Source: EconomicPlanningUnitandDepartmentofStatistics,Malaysia e Annual change(%) -2 -1 Estimates Estimate 0 1 2 3 4 5 6 7 8 Based onestimatesbyBankNegaraMalaysia Based onestimatesbyEconomicPlanning Unit Chart 1.25 Table 1.19 Table 1. 0620 0820 2010 2009 2008 2007 2006 Real GDP Employment 1 1 (00pros 11901,9. 15651,2. 11,824.9 11,620.5 11,576.5 11,398.0 11,159.0 (‘000persons) (00pros 1,4. 17511,6. 201112,216.8 12,061.1 11,967.5 11,775.1 11,544.5 (‘000persons) skill levels 1 ( flbu oc)333233373.2 3.7 3.3 3.2 3.3 (%oflabourforce) , the bulk of the jobs , thebulkofjobs 2 () . . . 215.8 -2.1 3.1 4.2 3.3 (%) Unemployment rate(RHS) Labour force As %oflabourforce e 0620 0820 2010 2009 2008 2007 2006 2.8 3.0 3.2 3.4 3.6 3.8 Source: MinistryofHumanResources Retrenchments inSelectedSectors Number ofworkers in themanufacturing(39%oftotalpositions) attributable tohighernumberofjobopenings positions (2009:1.5millionpositions), JobsMalaysia Portalincreased to1.8million demand. in external persons) reflecting thevastimprovement substantially lower(390persons;2009:9,337 remained resilient, asretrenchments were first quarter. TheE&Esub-sectorinparticular, by theclosure andsaleofacompanyinthe the agriculture sector, whichwasaffected improvement inretrenchments, exceptfor manufacturing sector. Allsectorsrecorded mainly tosignificantlyfewerlayoffs inthe persons (2009:25,064persons),due Retrenchments 10,000 15,000 20,000 25,000 30,000 5,000 Chart 1.26 0 oa ernhet auatrn Services Manufacturing Total retrenchments 0620 0820 2010 2009 2008 2007 2006 declinedby72%to7,085 Vacancies postedon e

45 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010

and

meat

and , transport and transport vegetables Headline Inflation clothing and footwear categories, which averaged food and non-alcoholic beverages 2008 2009 2010 Core Inflation J F MAM J J A S OND J FMAM J J A S OND J FMAM J J A S OND Chart 1.28 8 6 4 2 0 -2 -4 10 Annual growth (%) Source: Department of Statistics, Malaysia and Bank Negara Malaysia PRICE DEVELOPMENTS prices Consumer annual by the inflation, as measured Headline Price Index change in the Consumer percentage in 2010 (2009: 0.6%). The(CPI), averaged 1.7% year was driven in inflation during the increase higher food and from by supply factors arising adjustments to administered commodity prices and inflation was belowprices. The actual headline range of 2.0 – 2.5% partly forecast the Bank’s and between the actual due to the difference - both in terms of timing expected adjustments subsidy the Government’s and magnitude of an inflation, Core rationalisation programme. on indicator of the demand-driven pressures modest pace of 1.5% in at a more prices, rose 2010 (2009: 2.7%). the were The main contributors to inflation in 2010 food and non-alcoholic beverages sub-categories. Inflation in the a substantial turnaround category registered -9.4% in 2009 to 1.6% in 2010 due to from in inflation during higher fuel prices. The increase in the year was mitigated by further declines the prices for the communication categories, which together comprised 59.2% of thecategories, which together comprised 59.2% in domestic prices during the year. overall increase Inflation in the of category averaged 2.4% mainly on account in the higher price increases chocolate and confectionery jam, honey, sugar, (2009: -0.9% and -1.4% and -0.2% respectively based was no broad There -0.5% respectively). all CPI sub-groups in inflation across increase Consumer Price Inflation

salary Mining Manufacturing e 2010 total positions) sectors. sectors. total positions) , as measured by real by real , as measured Construction Agriculture 2009 Services 2008 Whole economy Chart 1.27 8 6 4 2 0 Estimate -2 -4 -6 -8 10 increment in the private sector was 4.5% in the private sector was 4.5% increment of (2009: 4.3%), with an average increment and non- 3.8% and 5.5% in the manufacturing In addition, manufacturing sectors respectively. received both executives and non-executives of 4.3% and 4.4%, higher salary increments (2009: 4.1% and 3.5%). respectively and services (29% of and services sector in the manufacturing Hiring activity year, in the first half strong was particularly in both the export- by the expansion supported industries. and domestic-oriented workers foreign registered 2010, total In in Malaysia declined by (including expatriates) workers (2009: 1.9 million). 5.6% to 1.8 million line with the Government’s The decline was in on the dependency to further reduce effort workers Foreign workers. low-skilled foreign of employment in accounted for 15.5% (2009: 16.5%) and were Malaysia in 2010 in the manufacturing, mainly employed sectors. construction and agriculture Labour productivity by strongly grew value-added per worker, of the negative growth 5.8%, reversing was underpinned 2.1% in 2009. Growth in the growth productivity by the strong (5%) manufacturing (9.5%) and services supported were sectors. Gains in productivity by higher investment in capital, greater high-skilled workers and participation from technical training skills-upgrading through from by the Government and the schemes provided to a survey conducted According private sector. by Bank Negara Malaysia, the average e Source: Department of Statistics, Malaysia and Bank Negara Malaysia Annual change (%) Labour Productivity Trends

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 46 retail pricesofRON95 announced inMay. Upward adjustmentstothe part ofthesubsidyrationalisationprogramme there were aseriesofpriceadjustmentsas dominant indrivinginflation.Duringtheyear, Domestic supplyfactorswere relatively more other itemsintheCPI. and fuelwere nottransmittedmore broadly to This suggeststhatthehigherpricesoffood than 2%in2010compared to45%in2008. components recorded aninflationrateofless during theyear. Approximately 70%ofCPI Contribution toInflation Source: BankNegaraMalaysia Note: Othersreferto ua prk)14 .51.90.043 0.013 0.001 13.79 5.71 2.94 1.65 1.85 1.75 1.45 1.75 1.70 Sugar (perkg) LPG (perkg) Diesel (perlitre) iaets(rmu 0pc)93 00 .30.020 7.53 0.007 0.085 10.00 2.44 2.78 9.30 2.10 1.85 2.05 Cigarettes (premium 20-pack) 1.80 RON97 (perlitre) RON95 (perlitre) Price Adjustmentsin2010 Source: BankNegaraMalaysia Chart 1.29 Table 1.20 Food andNon-AlcoholicBeverages Alcoholic BeveragesandTobacco maintenance; restaurantandhotels; recreation servicesandculture;furnishings;householdequipmentroutine Housing, Water,Electricity, Gas andOtherFuels communication; clothingandfootwear;health;education; Item Transport TOTAL Others petrol, diesel, 2- 2 1 0 -1 -2 and miscellaneous goodsandservices percentage points rvospie(M e rc R)Percentage change(%) Newprice(RM) Previous price(RM) 002009 2010 LPG and .021 05 0.003 10.53 2.10 1.90 .519 51 0.022 0.001 0.001 15.15 0.004 0.003 2.70 0.015 2.86 1.90 6.98 2.38 1.90 2.70 1.80 1.65 2.30 2.15 1.85 1.90 1.75 2.15 2.10 1.85 supply duetoadverseweatherconditionsand to changesinadministered result ofanincrease inexciseduties.Inaddition Prices forpremium cigarettes havealsorisenasa increased byatotalof25sen/ As aresult, thepriceofRON97petrol mechanism. by globalmarketforces underamanagedfloat that thepriceofRON97petrol wastobedetermined and kerosene. In included theincrease inpricesofRON97petrol notable adjustmentsinretail pricesin2010 points toheadlineinflationin2010.Other sugar contributedapproximately 0.18percentage Specified Threshold Percentage ofCPIComponentsAbove Source: BankNegaraMalaysia 100% 20% 40% 60% 80% 0% Chart 1.30 * Headline inflation inflation >4% 2< inflation<3% 0720 092010 2009 2008 2007 . . . 1.7 0.6 5.4 2.0 **** July, announced theGovernment 3< inflation<4% inflation prices, disruptionsin equal or less than2% less equal or litre duringtheyear. (percentage points) headline infl Impact on2010 ation

47 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 2009 2008 2010 Producer Price Inflation Mineral fuels, lubricants etc Crude materials, inedible etc J F MAM J J A S OND J FMAM J J A S OND J FMAM J J A S OND Chart 1.32 5 65 50 35 20 Annual growth (%) Producer Price Inflation Source: Department of Statistics, Malaysia The movement in global crude oil prices also oil prices also in global crude The movement it inflation as impact on domestic had a minimal of USD75 within the range contained remained and 2009 and between September per barrel USD85 the reflected stability 2010. This relative September amidst rising oil demandadequacy of oil supplies in emerging market recovery following the economic global 2010, however, November economies. From sharply as investors to increase crude oil prices began commodities due to their portfolio into rebalanced and dollar depreciation of further US the perception higher global liquidity. experienced by countries The higher inflation imports of Malaysia’s key sources that are in domestic also contributed to the increase Import partners from inflation during the year. higher the emerging economies experienced food inflation mainly on account of higher and energy prices and stronger-than-expected price in domestic demand. The upward recovery the emerging economies, however, from pressures muted inflationary by more partly offset were the advanced economies. Most from pressures advanced economies experienced subdued sustained demand conditions, slack capacity, and high unemployment and weak consumer business confidence. External price pressures also mitigated in part by the ringgit were in 2010. appreciation prices Producer by the price inflation, as measured Producer in 2010 in line Price Index (PPI) rose Producer in global commodity prices. with the increase 5.6% The annual change in the PPI averaged with a decline of during the year compared -10 -25 -40 300 250 200 150 100 50 0 Index (2005=100) sub-category increased on average by on average increased sub-category 2008 2009 2010 FAO Food Price Index (RHS) FAO Cereals Price Index (RHS) World Crude Oil Price Index (RHS) Headline Inflation (LHS) J F MAMJ J A S ONDJ F MAMJ J A S ONDJ F MAMJ J A S OND Chart 1.31 8 6 4 2 0 -2 -4 2. The FAO Food Price Index consists of a weighted average of 55 food commodities considered by FAO specialists as representing the international prices of food 10 Note: 1. FAO stands for Food and Agricultural Organisation of the United Nations. labour shortages also led to higher domestic higher domestic also led to labour shortages Prices in the for food. prices, particularly vegetables (2009: 1.0%). 7.8% in 2010 the other hand, were Demand factors, on in 2010. Consumer somewhat subdued the year while stable during sentiments were below its potential. remained economic output rate during albeit at a stable increased, Wages in wages coincided The increase the year. amidst in productivity increase with a stronger and investment. This led rising employment gap, of the wages-productivity to a narrowing of a limited support to the view providing impact on inflation. second round years, the impact of to previous Compared more external prices were factors on domestic modest in 2010 and confined to selected and meat. This food items, specifically cereals in global the substantial increase reflected prices of wheat and corn,particularly towards due to adverse the second half of the year, corn weather conditions in key wheat and of countries. The higher global price producing of poultry corn in prices also led to an increase feed, which in turnthe price of poultry raised in Malaysia. Headline Inflation and World Commodity Prices Headline Inflation and World Commodity Source: FAO and Bloomberg Annual growth (%)

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 48 -10.4%), reflecting theeffects ofhigherglobal components increased to7.7%in2010(2009: the year. Theannualgrowth ofthePPIforlocal imported componentsofthePPIrose during In termsofcomposition,boththelocaland in 2010(2009:0.1%). at amuchmore moderatepace,averaging1.6% non-commodity related producer pricesincreased of 15.4%in2010(2009:-20.0%).Meanwhile, related componentssawasignificantincrease -7.1% in2009. Overall, the PPIforcommodity- crude palmoilduringtheyear. the riseinpricesofcrudepetroleum and 22.4% respectively (2009:-22.0,-11.8)reflecting inedible mineral fuels,lubricantsetc products ofthePPI.Inparticular, pricesforthe the yearsawhigherpricesforcommodity-related The increase inglobalcommoditypricesduring 1.4% in2010compared to0.5%in2009. imported products alsoregistered anincrease of commodity prices.Meanwhile,thePPIfor sub-categoriesrose by12.8%and . and crude materials,

49 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 ) have 1 010=100 =100 2005=100 2 2000 =100 ation in Malaysia 1994 =100 ation in Malaysia is the administered price mechanism. ation in Malaysia is the administered 1990 =100 rst group comprises of items listed under the Price Control comprises of items listed under the Price Control rst group 1980 ation Food Transport and communication Gross rent, fuel and power Others Determinants of Infl Determinants Chart 1 1967=100 cant impact on the cost of living for the low and middle-income group. cant impact on the cost of living for the low and middle-income group. 0 90 80 70 60 50 40 30 20 10 % 100 Source : Department of Statistics, Malaysia CPI Weights ation, and concludes on the future challenges in managing domestic challenges in managing domestic on the future ation, and concludes ation changes over time with the evolution of the structure of the economy, the of the economy, the structure the evolution of over time with ation changes ation in Malaysia and how these determinants have evolved, the key supply and demand forces the key supply and demand forces how these determinants have evolved, ation in Malaysia and ation. represents the average pattern of purchases made by a particular population group across both urban and rural areas. The CPI both urban and rural areas. across the average pattern made by a particular population group of purchases represents to 4 zones for Peninsular Malaysia (i.e. northern,is calculated according middle, southern and eastern) and combined with expenditure by regional the Malaysia index. The Malaysia index is a composite index, weighted Sabah and Sarawak to produce indices. regional weights of the three a basket of goods and services that time in the cost of purchasing the change across Consumer Price Index (CPI) measures The Introduction of infl The drivers article looks at the structural determinants agents and economic cycles. This behaviour of economic of infl infl driving periods of high of Infl Structural Determinants being agriculture- rapid evolution from the Malaysian economy has witnessed Since independence, and As the economy developed and then to being service-based. based to manufacturing-driven patterns Index (CPI that underlie the Consumer Price household expenditure incomes grew, infl 1 A key feature affecting the transmission of infl affecting A key feature the Government prices for these goods. Examples of these Act (1946), where determines the retail Government for approval items which require are The second group items would be fuel and sugar. With and public transport fares. the changes to be made on their prices, for example electricity tariff price mechanism in place, the impact of supply shocks and external price developments administered and less immediate. on domestic prices is less direct Currently, price administered items constitute 29.3% of the CPI basket. In general, there are two are 29.3% of the CPI basket. In general, there items constitute price administered Currently, items. The fi types of price administered The prices of some essential goods are administered by the Government administered as changes in prices of The prices of some essential goods are these goods will have a signifi also evolved. In the early 1960s, a large portion of household expenditure was allocated to food and was allocated to food and expenditure early 1960s, a large portion of household also evolved. In the advanced and average in the CPI basket. As the economy the item had a higher weight consequently, while that on housing, on food has decreased, of expenditure the proportion income increased, transport and communication has risen.

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 50 2 *Classifi Fuels&lubricants Gas Sugar Oils Evaporated/condensedmilk Freshmeat products Bread&bakery Flour&othercerealgrains Rice A. episodes ofhighinfl region. Thelowinfl Historically, atalong-termaverageof2.9%,infl Infl was signifi below averagedomesticinfl infl emerging marketeconomies(EMEs)alsocontributedtolowerinfl inventories andallowedareduction incosts.Theshiftofproduction tolowcostcentres inthe advances incomputertechnologyandcommunicationshaveimproved themanagementofbusiness improved thecapacityof economytoabsorbshocksoutputandinfl the 2000-2008period.Changesineconomicinstitutions,technologyandbusinesspracticeshave whereby averageinfl abroad. Globalinfl Being asmallandhighlyopeneconomy, domesticinfl Fuelisrefl 1970s and1980s:Globaloil priceshocksandsurgingfoodprices ation in turn translatedintolowerimportedinfl ationinturn and 1979respectively. Theglobaloilshocksresulted indomesticretail fuel in supply. Globaloilpricesrose sharplyduetotheEgypt-Israeli War andIranian Revolutionin1973 The 1970sand1980ssawsignifi ation Determinants duringPeriodsofHighInfl Table 1 cationisbasedon4digitleveloftheCPI Price Control Act,retail pricedetermined ectedinthe cantlybelowthelong-termaverageof2.9%(1960–2010). by theGovernment ationmoderatedtohistoricallylowlevelsduringthephaseof“great moderation” ationenvironment overthecourseof50years,however, waspunctuatedbyfour ation,thatisinthemid-1970s,early1980s,1990sand late-2000s. transport andcommunication ationgloballyfellfrom 15.4% duringthe1990-1999period,to3.9% Non-food Items Food ation.Domesticinfl cantincreases inglobalenergyandfoodpricesdueto disruptions Price administered goods* category. ationbetween2000and2004averaged1.5%which ationinMalaysiahasbeenoneofthelowest ationforMalaysiaandcoincidedwithaperiodof ationhasalsobeeninfl Othertransportcharges Passengertransport-sea Passengertransport-air Passengertransport-road Passengertransport-rail Postalservices Telephone andtelegraphequipment Telephone andtelegraphservices Electricity Water supply Tobacco Cigarettes,cigarsetc Spirits&liquors Wines Beer ation Housing, water, electricity, gasandotherfuels Items where anychangesinprices ationglobally. Theloweringofglobal Alcoholic beverages&tobacco require approval Government Transport services Communication ation.Forexample, uencedbydevelopments Items 2 pricesrisingby9.3%

51 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010

2010

2008

2006

2004

2002 ation 2000

fruits and

1998 ation to

1996 and 1994

ation rate of 4.4% 1992 1990

category. Food supply Food supply category.

1988 communication and Transport Others 1986

food 1984

1982

1980 1978

ows 1976

1974

1972 1970 rice, bread and other cereals

Food Gross rent,Gross fuel and power Chart 3 1968 5 0 -5 20 15 10 Annual growth, % Annual growth, CPI by Category Bank Negara Malaysia Source: ation, particularly in the

80 60 40 20 0 120 100

2008 2005

C

ows, led to increased net wealth and hence, supported net wealth and hence, ows, led to increased sub-categories increased throughout the 1990s. Infl throughout sub-categories increased Third oil 2002 ecting rising cost pressures arising from higher import prices arising from ecting rising cost pressures price shock

ection of weak distribution linkages, a reduction in land for a reduction ection of weak distribution linkages, category was also higher as bus and taxi fares as well as postal category was also higher as bus and taxi fares Annual growth, % Annual growth, 1999

meat 1996 ation surged to double digit rates of 26.2% and 11.4% in both ation surged to double digit rates of

category of the CPI recording a 13-year record infl a 13-year record category of the CPI recording B ve price administered items, namely cooking oil (5% increase), items, namely cooking oil (5% increase), ve price administered 1993 and cant increase in prices of cant increase

Economic expansion 1990

sh 1987 our (20% increase), sugar (21% increase) and milk (6% increase). and milk (6% increase). sugar (21% increase) our (20% increase),

World Inflation (LHS) 1984 CPI basket, which was as high as 47% ed by the high weight of food in the

communication

1981

A 1978

Second oil price shock and

1975 A 1972

subcategories. As a result, there was a broad-based increase in domestic infl in domestic increase was a broad-based there subcategories. As a result, First oil 1969

price shock 1966

transport 1963 fruits and vegetables, fi gross rent, fuel and power

EMEs Inflation (RHS) Malaysia Inflation (LHS)

ation during the 1990s remained above 3%, with the exception of 1997 and 1999. Price above 3%, ation during the 1990s remained ation peaked at 5.3% in 1998, refl 1960 Malaysia historical Malaysia historical average = 2.9% was constrained by adverse weather conditions, continued shortage of cultivated land, adjustments was constrained by adverse weather conditions, continued shortage of cultivated prices by the Government, utilisation. Prices of in administered labour shortages and high capacity the Infl factors. During this period, driven by both demand and supply broad-based, were increases income and employment growth. robust following domestic demand was particularly resilient, in domestic growth supported by strong and equity, in the prices of property Substantial increases amid large capital infl liquidity and credit (KLSE) main index surged to a The Kuala Lumpur Stock Exchange domestic economic activity. 1994 while the Malaysia House Price Index (MHPI) increased historical high of 1,314 points in early of 25.5% in 1991. high increase by an average of 7.6% per annum during the decade with a record leading to persistently, rates increased market, average rental of the buoyant property As a result the vegetables respectively. 17.3% and 9.7% in 1974 and 1981 in the increased. charges were Infl the end of 1997 and due by 28.3% against the US dollar towards as the ringgit depreciated the Governmentto cyclical shortage of essential food items. Owing to the higher import cost, the ceiling prices of fi increased fl chicken (5% increase), in the late 1960s. Food price infl cultivation amidst urban development and industrialisation as well as adverse weather conditions. cultivation amidst urban development The impact was amplifi years mainly due to the signifi in 1998. Domestic supply factors also contributed to infl and 7.9% in 1974 and 1981, respectively. Global food prices rose strongly due to shortages of due to shortages strongly Global food prices rose and 7.9% in 1974 and 1981, respectively. This was a refl food supplies globally. Chart 2 5 0 -5 Source: Department of Statistics, Malaysia and International Monetary Fund (IMF) Source: Department of Statistics, Malaysia and International Monetary 35 30 25 20 15 10 Episodes of High Inflation Episodes % Annual growth, B. 1990s : Period of robust domestic demand and large capital infl 1990s : Period of robust domestic demand and large capital B.

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 52 infl shocksoccurringtodayhave increasinglysame domesticandexternal different implications for These factorssuggestthatthe taskofmanaginginfl and foodcontinuetoriseas aresult ofpopulationgrowth, rapidurbanisationand supplyconstraints. shocks couldbecomemore persistentandmaynolonger betransitoryasglobaldemandforresources global commodityprices,as thepricemechanismgraduallybecomesmore marketdriven.Supply the reduction ofsubsidies.Domesticinfl policiessuchas theintroductionGovernment ofGoods andServicesTax (GST),minimumwagesand of householdexpenditure willalsochange.Theinfl economy. AsMalaysiatransitionstoahighvalue-addandhigherincomeeconomy, thecomposition Going forward, thedriversofinfl Future Challenges fi ThesharpriseinglobalcommoditypricesandtheconsequentstrainonGovernment At thesametime,globalsupplyofcommoditieswasstrained.Limitedlandallocatedfor C. 2000 –current:Morepersistentincreasesinglobalcommodityprices has alsobeenrevised upwards. rose toa10-yearhighof8.8%.Otherthanfuelandsubsidisedfooditems,theelectricity tariff fuel products. In2008,fuelpricesincreased byanaveragerateof14.5%whilefoodinfl due tothesignifi to abroad-based increase inglobalcommodityprices. disruptions tooilsupplyalsoplayedarole inthesurgeofglobalcrudeoilprices.Alltheseeventsled further exacerbatedweatherrelatedover foodshortages.Geopoliticaldevelopmentsandconcerns agriculture asfoodproducing countriesshiftedtheirfocustoindustrialisation.Globalwarming ationwhentheyoccurinthe future. became fi commodity marketsalsoexertedupward pressures onglobalcommoditypricesascommodities population ofAsia.Inadditiontoreal demand,demandfrom increased speculativeactivityinthe countries andincreasing demandforamore varieddietacross theexpandingmiddle-class became more industrialised.Foodpricesrose onincreasing useofbiofuelsindeveloped emerging marketeconomiessuchastheBRIC(Brazil,Russia,IndiaandPRChina)countries was underpinnedbybothsupplyanddemandfactors.Demandforcommoditiesincreased as contrast tothesupplyshocksof1970sand1980s,increase inglobalcommodityprices factors,inparticular,mainly byexternal duetohigherglobalcommodityandfoodprices.In reaching apeakof8.5%inJuly2008.Thehigherinfl that characterisedthe1990sdissipated.Infl In theearly2000s,infl nancialised amidstexcessgloballiquidity. cant subsidycostresulted inaseriesofupward adjustmentsinthepricesof ation moderatedtoverylowlevelsasthedemand andsupplypressures Inflation andPrivateConsumption Source: DepartmentofStatistics,Malaysia Annual growth,% 10 12 14 16 18 20 0 2 4 6 8 Chart 4

ationwillcontinuetoevolveinlinewithstructuralchanges inthe 1971 1973

Private Consumption(RHS) Headline Inflation(LHS) 1975 1977 ationmaybemore affectedforces, byexternal especially 1979 1981 1983

ation inMalaysia,however, beganrisingin2005, 1985 1987 ationprocess couldalsochangeasaresult of ationwouldbecomemore challengingasthe 1989 1991 1993 ation duringthisperiodwasdriven 1995 1997 1999 2001

2003 Annual growth,% 2005

2007 2009 -15 -10 -5 0 5 10 15 nances ation

53 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 , 2 Gross Exports cation cation 2010 cantly, and and cantly, East Asia Advanced economies 2009 have strengthened signifi have strengthened 1 Growth of Malaysia's Exports to Major Trading Partners 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 0 Chart 2 50 40 30 20 10 -10 -20 -30 -40 Annual change (%) Source : Department of Statistics, Malaysia Improvements in Export Performance Post Improvements in Export Performance Global Financial Crisis were Led by Exports to East Asia nancial crisis, it has provided crucial support to the region’s crucial support to the region’s it has provided nancial crisis, cantly from the rising level of regional economic integration, through through economic integration, level of regional the rising cantly from ts signifi

Rise of Economic Integration in East Asia: The Malaysian Perspective in East Asia: Integration Rise of Economic 1980 2000 2010 East Asia Advanced economies ROW* Malaysia’s Gross Exports: Composition of Trade Partners Chart 1 0 East Asia refers to PR China, Hong Kong SAR, Chinese Taipei, Korea, Singapore, Thailand, Indonesia and the Philippines. Singapore, Korea, to PR China, Hong Kong SAR, Chinese Taipei, East Asia refers and Japan area to the US, euro Advanced economies refer 60 50 40 30 20 10 while regional demand accounted for only 29.7% of gross exports. Following the intensifi of gross demand accounted for only 29.7% while regional main export market for Malaysia, accounting the of trade integration, East Asia is currently of the advanced economies is lower the market share for 47.7% of exports in 2010, while top the emergence of East Asia as Malaysia’s at 30.1% of exports (Chart 1). Of importance, exports to boost demand for Malaysia’s for the region export market illustrates the potential export growth crisis. Malaysia’s global financial the recent from as evidenced by the rebound to export growth by the strong to 6.6% in the fourth quarter of 2009, supported recovered East Asia of 25.1% (Chart 2). Introduction in East Asia linkages intra-regional decade, recent Over this both the trade and investment channels. both the trade and integration Trade to the advanced economies exports was channelled than half of Malaysia’s In the 1980s, more more recently during the global fi recently more led by the vertical integration of integration in East Asia has been Economic recovery. robust facilities manufacturing companies (MNC) seek lower-cost chains as multinational production local policy initiatives in foreign and capitalise on supportive beyond national boundaries importance networks, the growing production in shared to the rising trend countries. In addition integration in the region. further economic in East Asia has also spurred of domestic demand within the region of demand for goods to economies sources not only additional This provides most open economies in East Asia, opportunities. As one of the but also vast investment Malaysia benefi *ROW refers to Rest of the World of Statistics, Malaysia Department Source: Share of Exports to East Asia have Increased at Share of Exports to East Asia have Increased the Expense of the Advanced Economies Share of gross exports (%) 1. 2.

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 54 such asPRChina,Singapore andThailand. that theimportsoffinalgoods are alsoincreasingly beingsourced from regional countries, mainly ofmotorvehicles,optical andscientificinstrumentsaswelljewellery. Itisnoteworthy 2010, importsoffinalgoodsaccountedfor29.9% gross imports(2000:21.9%), consisting the years(Chart6).Thishasbeenmatchedbyanincrease intheimportsof final goods.In Although thebulkofimportscontinuetobeintermediate goods,itsshare has diminishedover parts andcomponentsare from EastAsia,compared to44.8%adecadeago. to 12.6%overthesameperiod(1980:22.9%).Inaddition, 52.6%ofMalaysia’s importsof in 2010from 24.3%in1980(Chart5).Incontrast,themarketshare forJapanalmosthalved reflected bytheriseinMalaysia’s importsfrom theregional countriesto50.2% oftotalimports goods are sourced from theregion insteadofthe traditionalmarkets,particularlyJapan.Thisis sources. Theintegrationofproductiontrend, networkshasledtoadiscernable where more Malaysia’s changingexportstructure hasalsobeencomplementedbyadiversificationinimport demand forMalaysia’s exports. only provides effective diversificationofMalaysia’s exportdestinations,italsocreates higher rate of13.3%,supportedmainlybyfirmregional demand.Thus,regional integrationnot Since 1990,theexportsofcommodity-basedproducts haveexpandedatanannualaverage economic activityfrom extractingcrudecommoditiestomanufacturingdownstream products. chemicals andchemicalproducts (Chart4).Thistrend reflects thesteadyshiftinMalaysia’s seen asignificantincrease intheexportsofcommodity-basedmanufactured goods,particularly accounting for48.1%oftotalexportstoEastAsia(Chart3).Inaddition,Malaysiahasalso parts andcomponentscomprisethebulkofMalaysia’s manufactured exportstotheregion, assembly hubforelectronic andelectrical(E&E)products, semiconductorsaswellcomputer compared toonly18.9%in1980.Intandemwiththeregion’s role astheproduction and in theexportsofmanufactured goods,whichaccountedfor72.1%ofgross exportsin2010, the partsandcomponentsofmanufactured goods.Thishasprovided impetustotheexpansion theregional productionWithin network,Malaysiaispositionedasaproducer andassemblerof of Malaysia'sExportstoEastAsia Manufactured ExportsAccountfortheBulk Source :DepartmentofStatistics,Malaysia E&E products Chart 3 48.1% Malaysia’s ExportstoEastAsiabyProducts Commodity-based products 18.2% 2010 (RM281billion) Others 1.9% Consumer-related products Commodities Construction-related 14.5% 11.8% products 5.5% Share ofgrossexports(%) 10 15 20 25 30 35 40 45 Consumer-Related Products Manufactured Goodsexcept Export ShareIncreasedforAllMajor Source :MATRADEandDepartmentofStatistics,Malaysia 0 5 Chart 4 Manufactured ExportsasaShareofMalaysia’sGross & rdcsCommodity - E&E products 1990 based products 2010 related products Construction - Construction related products Consumer-

55 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 6% Others 8.9% Mining ows from the regional ows from Malaysia in 2009ows to 43.1% Manufacturing 2008 - 2010 (RM56.8 billion) Cumulative Net FDI Flows by Sector 2000 2005 2010 Final goods Intermediate goods Share of Malaysia's Gross Imports by Type of Goods Share of Malaysia's Gross Imports 42.2% Chart 8 Chart 6 Finance & Insurance Source : Department of Statistics, Malaysia 90 80 70 60 50 40 30 20 10 FDI Flows are Mainly Channelled into the FDI Flows are Manufacturing and Services Sectors Source: Department of Statistics, Malaysia Share of Final Goods Imports has been Increasing Goods Imports Share of Final Years in Recent Share of gross imports (%) the temporary decline in 2009 givenows. Following ows, investments from the regional countries are also channelled countries are the regional from ows, investments Other East Asian countries 6.2% Singapore 11.4% ROW* insurance sectors (Chart 8). nance and ows into Malaysia resumed in 2010, amounting to RM27.6 billion. Malaysia resumed ows into ows). Among the regional countries, Singapore is the main investor in Malaysia countries, Singapore the regional ows). Among Japan

11.3% economies 17.7% Eas t A s ia US 6.8% 2008 - 2010 (RM56.8 billion) Others 35.6% Cumulative Net FDI Flows by Country ows continue to be mainly sourced from the advanced economies, FDI fl from to be mainly sourced ows continue 1980 2000 2010 East Asia Advanced Share of Malaysia’s Gross Imports by Major Markets Share of Malaysia’s Gross Imports ting from the vertical integration of Asia’s production networks, Malaysia has also been receiving production integration of Asia’s the vertical ting from Chart 5 Chart 7 0 28.6% 60 50 40 30 20 10 Euro area Source: Department of Statistics, Malaysia Main Investor in Malaysia Among Regional Countries, Singapore is the mainly to the manufacturing and the fi (Chart 7), with investments totalling RM46.2 billion as at end-2009 (51.4% of total FDI stock from the billion as at end-2009 (51.4% of total FDI stock from (Chart 7), with investments totalling RM46.2 of overall FDI fl Similar to the trend region). the global economic downturn, FDI fl While FDI fl 30% of total FDI fl years, accounting for almost in recent countries have increased (2003: 10.1% of total FDI fl a steady rise in foreign direct investment (FDI) infl direct a steady rise in foreign *ROW refers to Rest of the World of Statistics, Malaysia Department Source: Investment integration is the expansion of investment opportunities within the region.Another key development in East Asia Benefi Share of gross imports (%) Imports are Increasingly Being Sourced from Increasingly Being Imports are East Asia

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 56 rise ininvestmentsbythetelecommunication andfi continues toaccountforthe largestshare ofMalaysia’s investmentabroad, there hasbeenasignifi and tappingthevastopportunities inthefastgrowing regional economies.While the oilandgassector and gassectors.However, inrecent years,DIAhasfocusedon gaininggreater accessto naturalresources companies, particularlyintheagriculture DIA wasundertakenmainly by Government-linked andtheoil The rangeofactivitiesDIAbyMalaysiancompanieshas alsowidenedinrecent years. Intheearly1990s, ASEAN countries(Chart9). Of signifi by Malaysiancompanieshasbeenincreasing since2005,andreached ahighofRM50.2billionin2008. regional integrationandtheexpansioninregional economicactivity. Netdirect investmentabroad (DIA) Malaysian companieshavealsobeenactivelycapitalisingontheopportunitiesarisingfrom thedeepening economic conditions. expected toincrease, giventhemore favourableinvestmentclimateaswelltheimprovement inglobal access tothevastinvestmentopportunitiesinMalaysia.Goingforward, FDIinfl and corporatisingtheMalaysianInvestmentDevelopmentAuthority(MIDA)tofacilitateforeign investors’ measures includecustomising incentivesforhigh-impactinvestments,introducing administrativereforms, high value-addedsectors,inlinewithMalaysia’s visionforprivatesector-driven economicgrowth. These In recenthasalsoundertakenvariousinitiativestopromote years,theMalaysian Government FDIsinto on thedomesticeconomy, thereby contributingtoalargerimpactondomesticemploymentandincome. Although investmentsintotheservicessectorsare ofsmallervalue,theygenerallycreate ahighermultiplier intensive buthigh-skilledservicessector, suchasfi equipment. Alargeshare of thenewinvestmentshavealsobeenchannelledintolesscapital of newFDIsingrowth areas, suchasrenewable energy, aerospace, pharmaceuticalandmedical high qualitydesignstomoveupthevaluechain.Inaddition,Malaysiahasreceived asizeableamount activities. Ofsignifi regard, foreign investmentsreceived inrecent yearshaveshiftedtowards highervalue-addedeconomic –hasaffectedand Vietnam Malaysia’s competitiveadvantageinlabour-intensive industries.Inthis FDIs. Inparticular, theemergenceoflower-cost competitorsintheregion -notablyPRChina,Indonesia Strong economicgrowth andregional integrationinEastAsiaalsointensifi Asia AccountsforAlmostHalfof Malaysia’s DIAOutflows Australia Source: DepartmentofStatistics,Malaysia 12.6% United Kingdom Chart 9 33.2% Others 5.2% cance, a large share of DIA by Malaysian companies has been channelled to Asia, particularly the cance, alargeshare ofDIAbyMalaysiancompanies hasbeenchannelledtoAsia,particularlythe Cumulative NetDIAFlowsbyCountry Euro Area 2008 -2010(RM120.8billion) 6.2% cance,existingMNCsare spurred toreinvest innewproduction technologyand 42.9% Asia

Singapore Indonesia Other Asiancountries Northeast Asiancountries 14.8% 18.3% 6.9% 2.9% nancial andinsurancesectors,mainlythrough mergers nancialservicesandshared servicesoperations. is intheServicesSector A LargeShare ofMalaysia's InvestmentAbroad Source :DepartmentofStatistics,Malaysia Chart 10 Financial & insurance & Financial Mining 31.7% services 37.1% Cumulative NetDIAFlowsbySector 2008 -2010(RM120.8billion) escompetitioninattracting ows into Malaysia are ows intoMalaysiaare Other services 17.6% Construction 1.2% Manufacturing Agriculture 3.3% 9.1% cant cant

57 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 ts the ts Investment income t the domestic economy through the development of more the development of more economy through t the domestic Malaysia's DIA Flows and Investment Income Malaysia's DIA Net DIA outflows 2002 2004 2006 2008 2010 to Malaysian companiests and dividends into Malaysia. Income accrued Chart 11 nal demand, the East Asian market has become an increasingly important an increasingly nal demand, the East Asian market has become 0 60 50 40 30 20 10 -10 Higher Investment Income Arising from DIA Income Arising Higher Investment Source: Department of Statistics, Malaysia RM billion benefi rms will also rms. With increasing intra-regional trade and investment, the economic ties within rms. With intra-regional increasing ows of profi cation of regional integration in East Asia has resulted in a broader trading base for Malaysia trading in a broader integration in East Asia has resulted cation of regional and acquisitions (Chart 10). The direct investment by Malaysian companies contributes towards creating creating by Malaysian companies contributes towards investment and acquisitions (Chart 10). The direct while at the same time establishes economies and employment opportunities in the regional growth The expansion of DIA also benefi between these economies and Malaysia. relationships stronger Malaysian economy by developing more competitive and globalised Malaysian companies, as well as competitive Malaysian economy by developing more generating higher infl investing abroad doubled to RM11.9 billion in 2006, and has continued to increase since, rising to RM18.6 and has continued to increase doubled to RM11.9 billion in 2006, investing abroad billion in 2010 (Chart 11). Conclusion The intensifi trading partner and a major main Malaysia’s is currently East Asia in terms of both markets and products. Although the advanced economies will and commodities. products consumer of both manufactured of fi an important source remain its investment perspective, Malaysia has strengthened of external the From source demand for Malaysia. higher value- In addition to receiving ventures. various investment countries through ties with regional overseas the increasing transition into a high income economy, added FDIs that will spur Malaysia’s investments by Malaysian fi competitive domestic fi will be further strengthened. the region

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 58 i) Enhanceriskmanagement (ii) Promotetradeofgoodsandservicesusinglocalcurrencies international forsettlement (i) In 2010,MalaysiahasfurtherliberaliseditsFEArulesaimedtowards achievingthefollowingobjectives: investments Liberalisation ofFEArulestoenhancecompetitivenessandpromote cross border tradeand rapidly globalisedeconomicandfi liberalisation were implemented toenhancethecompetitivenessofMalaysianeconomyina enhances thecompetitivenessandfl to ensure adequateprudential safeguards whilecreating aconducivebusiness environment that that promote monetaryand fi liberalised itsforeign exchange administrationrulesbasedonabalancedandsequencedapproach linkageswiththeglobalandregionalits international economies.Thecountryhasprogressively sustained ventures intonew areas ofcompetitiveadvantage.Malaysiahascontinuouslyheightened Malaysia, economicfl demand andsustainedrecovery ininvestmentshaveunderpinnedtheregion’s performance.For Over thisrecent fi totalamountpaid orreceived inthepreceding 12months. 1 rvosy eiet eefe ohdeo niiaoybssfrteipr repr fgosadsrie nyu ote Previously, residents were free tohedgeonanticipatorybasisfortheimportorexportofgoods andservicesonlyuptothe applicable toanticipatoryhedging oncurrent account transactionswasabolished. facilitating residents tohedgetheirforeign currency risksinrelation totrade,theremaining limit fl The expansionofintra-regional tradeamidstchallengingbusinessenvironment alsocallsfor currency trade. forsettlementofinternational to betradedontheChinaForeign ExchangeTrade Systemwillfurtherenhancetheuseoflocal and eliminatingcurrency conversioncosts.Atthesametime,PRChina’s decisiontoallowringgit their tradeingoodsandservices,thereby facilitatingbettermanagementofcurrency mismatch exporters andimporterswere givenadditionalchoicetodeterminethecurrency ofsettlementfor for goodsandservicesinringgitadditiontoforeign currency. theliberalisation,resident With Consistent withthisdevelopment,fl respective localcurrencies. to providetradeinthecountries’ optionsforexportersandimporterstosettleinternational arrangement wasentered intobetweenMalaysiaandthePeople’s RepublicofChina(PRChina) Being Malaysia’s largesttradingpartnerat12.6%oftotaltrade,acosteffective bilateral region topromote theuseoflocalcurrency forthesettlementoftradeingoodsandservices. currency conversioncosts,strategicinitiativeshavebeenundertakenbyseveralcountriesinthe In furtherpromoting intra-regional tradethrough minimisingexchangeraterisksandeliminating particular, hasremained robust asrefl to 32%in1995.Malaysia’s inter-linkages withtheglobaleconomyandAsianregion, in regional tradeinAsiahasincreased toanaverageof50%theregion’s totaltradeascompared critical factortotheregion’s rapidrecovery from therecent globalfi Asia’s diversifi exiblepoliciestosupportmore effective riskmanagementoftradetransactionsbyresidents. In Liberalisation ofForeign ExchangeAdministration(FEA)toStrengthen veyears,strong growth inintra-regional tradesupportedbyresilient domestic cationoftheexportmarketstowards increased intra-regional tradehasbeena Malaysia’s LinkageswithRegionalandGlobalEconomies exibilityhasallowedtheeconomytoadaptchangingenvironment and nancialstability. Malaysiahasalwaysmaintainedthebalanced need nancialenvironment. exibilityoftheeconomy. Duringthisdecade,aseriesofFEA exibility was granted for the settlement of international trade exibilitywasgrantedforthesettlementofinternational ectedthrough theincrease intotaltradeby18.3%2010. nancialcrisis.Today, intra- 1

59 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 exibility exible ows which cant catalyst st 1 Easiest exible FEA nancial resources through greater greater through nancial resources exible regulatory framework which framework exible regulatory nancial exposures as it will have direct as it will have direct nancial exposures nancing from companies within their corporate companies within their corporate nancing from nancial assets and liabilities at fair value which would at fair value which and liabilities nancial assets nancing nancing within a corporate group which includes parent which includes parent group nancing within a corporate cantly improved by 11 notches from 13th place (considered as as 13th place (considered by 11 notches from cantly improved 13th 11th 7th 3rd 2nd 2005-06 2006-07 2007-08 2008-09 2009-10 FEA’s ranking on ease of doing business in Malaysia ranking on ease of doing FEA’s ciency for companies to manage their fi ciency for companies nancial statements. nancial statements. th 15 Most problematic administration Foreign exchange Foreign exibility in sourcing of foreign currency fi currency of foreign exibility in sourcing promotes greater effi greater promotes The abolition is timely given the implementation of the Financial Reporting Standard 139 in 139 in Reporting Standard of the Financial the implementation is timely given The abolition fi report companies to requiring January 2010 their fi in assessing the discipline of companies enhance their fi impact on for the internationalisation and energising the private sector preconditions One of the necessary is a fl frontiers productive the expansion of their through capital mobility. capital mobility. greater accorded companies were resident environment, a competitive enabling In providing fl branch as well as associate or sister subsidiary, foreign ultimate holding company, company, fl in 2008, whereby This is a further extension of the liberalisation undertaken company. fi companies to access was granted for resident group, but only within the context of a parent–subsidiary relationship. relationship. but only within the context of a parent–subsidiary group, 2010 has also seen the upgrading of Malaysia into the Advanced Emerging market status from market status from 2010 has also seen the upgrading of Malaysia into the Advanced Emerging collaborative efforts from Secondary Emerging market status in the FTSE Global Equity Index arising assessment criteria which includes fl authorities to comply with FTSE’s amongst the relevant regulatory environment on cross border capital mobility. Malaysia’s upgrading is a signifi upgrading Malaysia’s capital mobility. border on cross environment regulatory enlarging the market capitalisation of the FTSE Bursa Malaysia KLCI. towards in a dynamic global landscape Policy approach of volatile capital fl potential effects global liquidity shifts and the increased Amid greater faced with the challenge of policy makers are one country to another, rapidly transmitted from policy framework. and effective developing a comprehensive implementation of a fl towards has been directed In Malaysia, the policy approach the sector economic activities and enhancing the development of real framework that promotes (iii) Facilitate accessibility to competitive fi (iii) Facilitate accessibility most problematic) in 2005/2006 to 2nd place (least problematic) in 2009/2010. (least problematic) in 2005/2006 to 2nd place most problematic) Impact of liberalisation rules has contributed to a conducive liberalisation of the FEA The continuous and progressive into Malaysia increased investments direct investment. For 2010, foreign direct for foreign environment RM5 billion in 2009. to RM27.6 billion from on ease of ranking since 2005, FEA’s liberalisation of the FEA rules undertaken Given the progressive doing business in Malaysia has signifi Source: Global Competitveness Report, World Economic Forum 2009/2010 Global Competitveness Report, World Source:

ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 60 volatile capitalinfl domestic fi Details ofprudentialFEAmeasures canbeobtainedfrom http://www.bnm.gov.my/fxadmin. regional economies. approach thatwillbepursuedtowards strategicallyenhancingMalaysia’s linkageswithglobaland by acomprehensive andwellfunctioningsurveillancemechanismwillcontinuetobethepolicy Malaysia’s economicdevelopment.Progressive liberalisationwithadequatesafeguards andsupported fundamental objectiveofachievingafi the risksandglobalchallengeswillbeundertakeninaholisticapproach, integraltothe innovation willdrivethecountry’s economictransformation.Theliberalisationwilltakeintoaccount of theFEAwillprovide anenablingenvironment inwhichhighproductivity, competitivenessand a highvalue-added,income,sustainableandinclusiveeconomyby2020.Policyliberalisation Malaysia’s regulatory frameworkwillbecontinuouslyreviewed tosupportthecountry’s transitioninto Conclusion Asean EconomicCommunity. for theregion through theWorking Group onCapitalAccountLiberalisationundertheambitof of commoninterest, including thecurrent platformforcollaborationoncapitalaccountliberalisation existing intra-regional groupings andnetworkstoforgegreater cooperationand collaborationinareas the region asaninvestment destinationwhilstacceleratingintra-regional trade.Asiaisleveragingon cooperation isnotonlytopreserve regional fi Regional cooperationcontinuestobeaccorded signifi surveillance toavoidthebuild-upofexcessiverisksineconomy. volatility andgreater mobility ofcapitaltothisregion, there isaneedforgreater vigilanceandrigorous thecurrent environmentframework supportedbystrongWith ofheightened corporategovernance. intermediate theinfl nancialmarket.Thisapproach hasfacilitatedtheeconomytomanageimpactof owsthrough increased two-wayfl owsandoutfl owsthrough enhancedrisk managementandsurveillance nancialsectorwhichsupportsanddrivesthenextphaseof nancialstabilitybutalsotoenhancetheprospects of owsandrobust fi cantpriority. Thestrengthening ofregional nancialsystemtoeffectively

61 ANNUAL REPORT 2010 ECONOMIC DEVELOPMENTS IN 2010 ECONOMIC DEVELOPMENTS IN 2010 ANNUAL REPORT 2010 62 76 74 68 65 WhiteBox:TheImpactofExchangeRateAppreciationonMalaysianTrade FinancingoftheEconomy DomesticMonetaryandFinancialConditions MonetaryandFinancialConditions International MONETARY ANDFINANCIALCONDITIONS

63 ANNUAL REPORT 2010 MONETARY AND FINANCIAL CONDITIONS MONETARY AND FINANCIAL CONDITIONS ANNUAL REPORT 2010 64 raised itsdiscount rateby25basispoints to expectations. InFebruary, theUS FederalReserve economies during4Q2009 outperformedprior GDP growth intheUSandseveralemerging andeconomicactivity.corporate earnings monetary conditionsandpositive dataon on theuptrend, supportedbyaccommodative end of2009.Globalfinancialmarketswere economic andfinancialconditionstowards the building ontheimprovement ininternational The year2010startedonapositivenote, emerging economies sharp increase incapitalflowsinto the search foryield,leadingtoa Surge ingloballiquidityamplified markets andtheeconomymore generally. capital inflowsposedforthedomesticfinancial measures tomanagetherisksthatlarge emerging economieshaveimplementedvarious into emergingeconomies.Asaresult, several situation, leadingtoasurgeofcapitalflows easing, compoundedtheexcessgloballiquidity monetary system,arisingfrom thismonetary injection offundsintotheinternational economic recovery. However, thesizeable easy monetaryconditionstostrengthen the the advancedeconomiescontinuedtomaintain markets startedtoimprove aspolicymakersin emerging economies.ByAugust2010,financial growth prospects forbothadvancedand sovereign debtcrisisinEurope andweaker a periodofturbulenceamidtheescalating however, globalfinancialmarketsentered economic conditions.Inthesecondquarter, building ontheimprovement ininternational continued theappreciating trend from 2009, in bothadvancedandemergingeconomies phases. Inthefirstquarter, financialmarkets and financialconditionsbroadly followedthree monetary In 2010,developmentsininternational FINANCIAL CONDITIONS INTERNATIONAL MONETARY AND MONETARY ANDFINANCIALCONDITIONS economic recession prompted severalemerging outlook andthedissipation ofthethreat ofan Hong KongSARandSingapore. Thefavourable property markets,asinthecaseofPRChina, increases incertainassetmarkets,notablythe in theformofrapidandsubstantial price started toexhibitincipientsignsofoverheating points in1Q2010.Someemergingeconomies JP MorganEMBIspread decliningby33basis spreads inemergingmarketsnarrowed, withthe to thestrong rebound inequitymarkets,credit countries outpacedpre-crisis levels.Inaddition financial sectors.Outputgrowth inseveralAsian signs ofimprovement inboththereal and In contrast,emergingeconomiesshowedfirm sentiment ongrowth prospects intheEurozone. in financialmarketsanddampeninginvestor countries begantoemerge,creating uncertainty fiscal positionsofseveralperipheralEuropean overtheand policysupport.Second,concerns temporary factorssuchasinventoryrestocking far from entrenched, beingdrivenmainlyby issues inadvancedeconomies.First,growth was became clearthatthere were stillunresolved Despite tentativesignsofrecovery, itsoon the globalfinancialcrisis. liquidity measures implementedearlierduring step towards unwindingtheextraordinary 0.75%, amoveseenbythemarketsasfirst 100 105 110 115 120 Selected EquityMarketIndices Index Source: Bloomberg 85 90 95 Chart 2.1 (Dec 2009=100) JFMAMJ JASOND Phase 1 Phase 2 Phase 3 Phase 2 Phase 1 Phase 2010 Emerging Market Emerging Asia MSCI World MSCI S&P 500

65 ANNUAL REPORT 2010 . The MSCI Emerging Asia and Emerging . The MSCI Emerging Asia and Emerging 1 440 billion European Financial Stability Facility Facility Financial Stability European 440 billion (EPFR) Global Portfolio Fund Research Emerging Source: 1 series of measures such as the creation of the such as the creation measures series of € of Eurozone purchases the ECB’s (EFSF) and government debt securities. and private of the EFSF, the announcement Following started to stabilise. Yields financial conditions began to bonds sovereign on almost all euro decline in April. of the second quarter, the end In the US, towards was losing signs that the recovery were there the uncertainty and volatility traction, adding to Given the developments of financial markets. and the unfavourable area in the euro the weaker growth and unemployment figures of a double-dip in the US, the threat prospects in advanced economies became more recession of the the reregulation Additionally, pronounced. financial institutions after the crisis prompted to less a shift in investors’ portfolio allocations while equity prices risky assets. Consequently, declined, bond yields in major developed markets fell. of the financial markets the recovery Similarly, by in emerging economies was punctuated from heightened investor risk aversion arising The developments in the advanced economies. compounded by the risk of weaker were effects as for emerging economies in 2H 2010 growth by the slower negatively affected exports were of the advanced economies. prospects growth was also expected to growth PR China’s Equity moderate due to its policy tightening. emerging markets, for example, outflows from and June totalled USD1.6 billion during May 2010 Market indices fell by 5.9% and 9.1%, Market indices fell by 5.9% and 9.1%, during the period. This shift in respectively, funds was followed by a decline in the yield by 85 basis points for the 10 year US Treasuries by 11.6%. while gold prices rose By August 2010, financial conditions in the advanced economies began to show signs of coincided with This improvement improvement. expectations that some central banks growing would ease monetary policy further to address concerns and sustainability about the strength This expectation was later of economic recovery. the Bank of Japan and the Federal when realised Reserve announced additional quantitative financial asset through easing (QE) measures 380 360 340 320 300 280 260 240 220 Basis points Germany 2010 2010 Greece JP Morgan EMBI Spread (RHS) Spain ncluding PR China, India, Brazil, ncluding PR China, India, Brazil, Ireland JP Morgan EMBI JFMAMJJASOND MMJASOND J FMAMJJ Chart 2.3 Chart 2.2 0 800 600 400 200 560 550 540 530 520 510 500 490 480 470 460 Source: Bloomberg Source: Basis points 5-year Credit Default Swaps (CDS) 1200 1000 Malaysia and Vietnam to begin the process of of Malaysia and Vietnam process to begin the normalising domestic monetary conditions. global By the second quarter of 2010, however, a period of financial markets began to encounter advanced turbulence. Financial conditions in the debt economies deteriorated. The sovereign which had surfaced earlier area, crisis in the euro Despite worsened considerably. in the year, to calm markets, concerns over earlier measures the fiscal solvency of a number of peripheral prompting countries re-emerged, European debt ratings of downgrades on the sovereign investor these economies and further affecting default the credit confidence. Consequently, of these peripheral countries swap spreads widened significantly. stabilise the financial markets and improve To policymakers embarked on a European liquidity, economies i Index Emerging Market Bond Index (EMBI) and Market Bond Index Emerging Spreads EMBI Bond Source: Bloomberg

MONETARY AND FINANCIAL CONDITIONS ANNUAL REPORT 2010 66 Source: Bloomberg 200 Index (Dec2009=100) 100 120 140 160 180 220 over thepossibleformationofassetprice in capitalinfl the domesticfi emerging markets.Thebuild-upofliquidityin currency appreciations addedtotheinterest in growth prospects andexpectationsoffurther between AugustandDecember2010.Better by 10.6%,10.0%,and9.2%respectively Dollar, appreciated strongly againsttheUSD South AfricanRandandNewTaiwanese currencies, inparticulartheChileanPeso, economies. Asaresult, emergingmarket portfolio investmentfl for yieldalsoledtoasharpincrease inforeign The surgeofgloballiquidityandthesearch December 2010. with oilpricesreaching USD91perbarrel in uptrend incommodityprices alsoaccelerated, sovereign debtcrisisfallout earlierintheyear. The signifi 2 markets, asproxied bythe VIXindex 19.9%. Volatility inthefi December 2010,theS&P500indexrose by and commoditymarkets.BetweenAugust the search foryieldsledto asteadyriseinfi levels ofinterest ratesinthe advancedeconomies, the globalmarketsa fi improved investorconfi and betteremploymentprospects. Thesefactors evidenced bytheincrease in privateconsumption economic conditionswere startingtoimprove as respectively. There were alsovisiblesignsthat purchases ofUSD60billion andUSD600billion Measures ofVolatility nancialmarkettradingactivityglobally. With 60 40 80 volatility overthe next30dayperiod. options. Itrepresents themarketexpectationofstock VIX isameasure ofimpliedvolatilityS&P500stock Chart 2.4 JFMAMJJASOND cantlyandreturnedtolevelspriorthe MOVE (Bondmarketvolatility) VIX (Equitymarketvolatility) ows, however, raisedconcerns nancial systemfrom thesurge wash withliquidity, amidlow ows intoemerging denceandrevived nancialandcommodity 2010 2 , dropped nancial 100 110 120 130 140 150 160 stability inemerging economies. a policychallengetofi shifts incapitalfl economies islikelytopersist. Rapidandsizeable stances betweentheadvanced andemerging economic recovery andthedivergentmonetary the advancedeconomies.The unevenpaceof fragility of from theEU-IMF, highlightingthecontinued 2010, Ireland soughtafi much dependentonpolicysupport.InNovember end of2010,fi in economicandfi It isneverthelessevidentthatdespitetherecovery economic andfi countries andregions giventhedifferences inthe rate adjustmentswould,however, differ across future. Thepace,timingandmagnitudeofpolicy others indicatingtheintentiontodosoin began toraisepolicyinterest rates,withseveral Bank ofChina,andtheReserveIndia monetary conditions.BankIndonesia,thePeople’s banks toresume theprocess ofnormalisation emerging economies, Together withthefavourableoutlookforgrowth in intensifi and theincrease inglobalfoodpricesledto the to emerge.Therapidriseincommodityprices Towards yearend,stronger signsofinfl liberalising outfl reserves thatbanksare required tohold,and taxing infl and property markets.Thesemeasures included large capitalfl measures toavoidunduerisksrelated tothe South Korea andBrazilintroduced policy economies, suchasIndonesia,ChineseTaipei, bubbles inemergingeconomies.Some Commodity Prices Index (Dec2009=100) Source: Bloomberg 80 90 Chart 2.5 JFMAMJ JASOND Gold cationofsupplydriveninfl ows, increasing theforeign exchange economic andfi Copper ows intotheirdomesticfi nancialconditionswere stillvery nancial conditions. nancialconditions. ows. owswillcontinuetopose nancialconditionstowards the Oil nancialandmonetary this prompted somecentral 2010 nancialrescue package nancialconditionsin Wheat ationpressures. CRB CommodityIndex ationbegan nancial

67 ANNUAL REPORT 2010 MONETARY AND FINANCIAL CONDITIONS D 1 RM JASON Index of Selected Regional Currencies Against the USD DJ FMAM2009 J 2010 Chart 2.7 95 90 Regional currencies: Chinese renminbi, Indonesian rupiah, Korean won, Philippine peso, Singapore dollar, New Taiwanese dollar and Thai baht. Each currency carries equal weight

Exchange Rate of the Malaysian Ringgit (RM) Exchange Rate of the Malaysian Ringgit and Selected Regional Currencies Against the US Dollar Index (Dec 2009 = 100) monetary authorities in the advanced economies. advanced economies. authorities in the monetary the from “pull” factors also strong were There and prospects recovery stronger due to the region appreciation. currency of further the expectations common to broadly factors were These two were there countries. For Malaysia, all regional First, the Government’s also specific factors. the New Economic Model announcement of Program Transformation (NEM), the Economic key initiatives to transform (ETP) and several other into a high income nation the Malaysian economy positively by investors. received by 2020 has been further and the GDP growth Second, strong administration exchange liberalisation of foreign the impetus for also provided rules during the year of the ringgit. further strengthening of the ringgit and other trend The appreciating was punctuated by a number currencies regional global arising mainly from of episodes of reversals debt and developments such as the sovereign Heightened banking system concerns Europe. in such developments, coupled uncertainties from liquidity with the rapid and sizeable shifts in global the advanced economies into emerging from in volatility remaining market economies resulted currencies elevated for ringgit and other regional significant of the more Two during the year. debt the sovereign were episodes of reversals and the banking system in May, crisis in Europe These events concerns in November. in Ireland Note: An increase in the index represents an appreciation of the ringgit or of selected regional currencies against the US dollar Source: Bank Negara Malaysia 115 110 105 100 1 20.6 Annual change, % 15.0 11.1 8.5 7.6 6.0 5.4 2.3 0.9 0.4 3 3 6 9 12151821 -30 -2.1 Chart 2.6 IDR JPY PHP EUR THB GBP USD SGD CNY TWD Summary of Malaysian Ringgit Performance Against Major and Regional Currencies in 2010 KRW The surge in portfolio inflows was driven by a The surge in portfolio inflows was driven The combination of “pull” and “push” factors. was the year dominant “push” factor throughout rate low interest the expectation of a prolonged in the advanced economies, which environment higher of investors towards diverted the interest yielding assets in emerging market economies. liquidity This was accentuated by the sizeable by unconventional asset purchases injection from The ringgit appreciated during the during the The ringgit appreciated year amidst volatile global financial conditions DOMESTIC MONETARY AND MONETARY DOMESTIC CONDITIONS FINANCIAL Rate Exchange in As during the year. The ringgit strengthened of the trend years, the underlying the previous to be driven by the positive ringgit continued Ringgit developments, net trade balance. heavily influenced by significant were however, portfolio investments arising two-way flows of a combination of external and domestic from inflows during portfolio gross factors. The large large gross by the partially offset the year were in net inflows resulting portfolio outflows, For 2010 as a whole, the of RM44.9 billion. by 11.1% against the US ringgit appreciated to a peak of 3.0833 per US reaching dollar, dollar on 4 November. Note: (+) indicates an appreciation of the ringgit against foreign currency Source: Bank Negara Malaysia

MONETARY AND FINANCIAL CONDITIONS ANNUAL REPORT 2010 68 and deraileconomicrecovery. prolonged conflictcoulddisruptfinancialmarkets investors withdrew thata fundsamidconcerns the persistenttensioninKorean peninsula as currencies. Thewonwasespeciallyaffected by led tovariationsinperformancebetweenregional regional currencies, factorsspecifictoeachcountry Although theringgitmovedinlinewithother regional currencies, theringgitbroadly appreciated. inEurope.and bankingsystemconcerns Against apparent throughout 2010amidstsovereign debt Japanese yen(-2.1%).Theeuro’s weaknesswas pound sterling(15%),butweakenedagainstthe strengthened againsttheeuro (20.6%)and Against othermajorcurrencies, theringgit economy inthelongrun unsustainable andwillharmthe as atoolforcompetitivenessis Relying ontheexchangerate economic recovery. regional financialmarkets and theoverallpaceof aboutpossibledisruptionsinthe raised concerns tensions intheKorean peninsula inNovemberalso throughout theyearandheightened geopolitical to tightenmonetaryandcredit conditions region, measures introduced byseveralcountries May andNovemberrespectively. the Within Malaysia ofRM5.2billionandRM5in coincided withnetportfoliooutflowsfrom Source: BankNegaraMalaysia againstthecurrency Note: Anincreaseintheindexindicatesanappreciation ofringgit 100 105 110 115 120 125 130 Against MajorCurrencies Exchange RateoftheMalaysianRinggit(RM) Index (Dec2009=100) 90 95 Chart 2.8 092010 2009 JFMAMJDJ JASOND JPY USD GBP EUR 2.00% on1March 2010to2.71%on9July2010. interbank Following theOPRincrease, theovernight below pre-crisis levelsin2010 imbalances, buthasremained to prevent theriskoffinancial Interest rateswere normalised support domesticdemandandeconomicrecovery. increases intheOPR,theyare stillatlevelsthat such, althoughretail lendingratesrose following demand duringtheglobalfinancialcrisis.As OPR undertakenin2008/09tosupportdomestic This washalfofthe150basispointscutin OPR adjustmentsfortheyearto75basispoints. basis pointseachtime,bringingthecumulative raised on4March, 13Mayand8July, by25 process. PolicyRate(OPR)was TheOvernight imbalances thatcouldunderminetherecovery conditions toprevent theriskoffinancial to theBank’s decisiontonormalisemonetary Interest ratesrose in2010from historiclowsdue Interest rates,bondyieldsandequityprices objective oftheBank. in theringgitexchangerateisanimportantpolicy market conditionsthatavoidsexcessivevolatility protectionism. Therefore, orderly foreign exchange distortions, causesimbalancesandleadtotrade the economyinlong-termasitmightcreate is veryriskyandunsustainablewillharm Using exchangerateasatoolforcompetitiveness to copewithtimeswhenthesituationreverses. competitiveness andbuildthenecessarybuffers seize theopportunitytofurtherimprove their benefiting from thestrengthened currency should even toventure intoother opportunities. Those to becomemore efficientand competitiveor Those adverselyaffected may needtore-strategise firms mayneedtotakethisintoconsideration. global currency volatilityis likely toremain elevated, Exchange RateAppreciationonMalaysiaTrade’ particular currency ( by changesintheringgitexchangerateagainstany economic agentsare likely to beaffected differently open nature oftheMalaysian economy, different and theeconomy. Giventhediverseandhighly have adverseimplicationsontheexportssector ringgit andthevolatilityofexchangerateswould There were thatthestrength someconcerns ofthe rate inthemoneymarketrose from see white box ‘The Impact of see whitebox‘TheImpactof ). As ). As

69 ANNUAL REPORT 2010 MONETARY AND FINANCIAL CONDITIONS 6.27 5.05 2010 (ALR) on new (ALR) on new ALR BLR 2008 2009 MJSDMJSDMJSD Chart 2.11 % 7.0 6.5 6.0 5.5 5.0 4.5 ommercial Banks' Lending Ratesommercial (at end-period)

Reflecting the high pass-through of the OPR of the OPR Reflecting the high pass-through rates, banks hikes to money market interest lending rates to retail by increasing responded households and businesses. The benchmark by the average lending rate, as measured banks, base lending rate (BLR) of commercial by 76 basis points to 6.27%, as at increased BLR was end-July 2010. The adjustment in the their respective with all banks increasing prompt, BLRs within 6 days of the OPR adjustments. also lending rates on new loans were Accordingly, This was evidenced by the 78 basis points revised. in average lending rates increase 4.91% at end-February to from loans approved, in lending 5.69% at end-August. The increase pronounced rates on new loans was more which registered in the household sector, with the higher lending rates for all purposes, ranging between cards, exception of credit 63–95 basis points. Businesses also incurred post normalisation. higher cost of borrowing was of the increase the magnitude However, as some businesses benefited modest more and lower risk worthiness credit improved from as economic conditions continued to premiums in 2010. improve Nevertheless, the cost of financing to businesses supportive of and households remained in the increase Despite economic activity. lending rates remained retail rates, interest nominal retail levels. Specifically, below pre-crisis on average lending rates to businesses remained levels, as at 61 basis points below pre-crisis lending rates to end-December 2010. Similarly, levels by lower than pre-crisis households were 38 basis points. Source: Bank Malaysia Negara C

02 Sept ’10 Sept 02

19 Aug ’10 Aug 19

05 Aug ‘10 Aug 05

22 Jul ‘10 Jul 22 08 Jul ‘10 Jul 08

2010

July MPC ’10 Jun 24

10 Jun ’10 Jun 10 Real ALR Real 1-month FD

27 May ‘10 May 27 13 May ‘10 May 13

3 month 2 month 1 month

29 Apr ‘10 Apr 29

15 Apr ‘10 Apr 15

01 Apr ’10 Apr 01 18 Mar ‘10 Mar 18

2009 04 Mar ‘10 Mar 04 18 Feb ‘10 Feb 18

March MPC May MPC Sept MPC

04 Feb ‘10 Feb 04 21 Jan ‘10 Jan 21 12 month KLIBOR - OPR 9 month 6 month

J F MAMJ J AS OND J F MAMJ J AS OND 07 Jan ‘10 Jan 07 Chart 2.10 Chart 2.9 8 7 6 5 4 3 2 1 0 % Source: Bank Negara Malaysia Interbank rates of other tenures also increased. also increased. Interbank rates of other tenures in line with market expectations KLIBOR rates rose between the spread rates. Notably, of higher interest in anticipation KLIBOR rates and the OPR increased May and July at the March, rate increases of interest andMonetary Policy Committee (MPC) meetings, stable prior to the September MPC relatively were paused meeting when Bank Negara Malaysia the rate. This reflected raising the policy interest level of clear signal by the MPC that the prevailing the OPR was appropriate. in the As intended by the MPC, the increase deposit rates being revised in retail OPR resulted rates on fixed deposits increased Interest upwards. by between 47-77 basis points. Given the modest inflation in 2010, depositors earned positive real the year. returns on their savings throughout Source: Bloomberg 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Spread, % -1 -2 -3 KLIBOR – OPR Spread KLIBOR – Real Deposit and Lending Rates

MONETARY AND FINANCIAL CONDITIONS ANNUAL REPORT 2010 70 for theyeardeclinedby40and25basispoints Overall, yieldsonthe5-yearand10-yearMGS outstanding bondsatend-December2010. billion in2009,accountingfor15.6%oftotal in 2010rose toRM121billionfrom RM69 Non-resident holdingsofdomesticbonds benign inflationaryexpectations. search foryield,demandwasalsosupportedby to expectationsforringgitappreciation andthe MGS, the increase intheOPRonstrong demandfor contrast, long-termyieldsdeclinedin2010despite basis pointsfrom with yieldsonthe1-yearMGSincreasing by74 rates. Thepass-through wasalmostone-for-one, similar tothemoneymarketandretail lending response tothenormalisationofOPR, maturities (1-yearandbelow)increased in divergent trends. Yields onbondsofshorter as theshort-termandlong-termyieldsshowed Securities (MGS)yieldcurveflattenedin2010, The benchmarkMalaysianGovernment Source: BankNegaraMalaysia (3-month movingaverage) ALR onNewLoansApproved MGS Yieldsin2010 4.0 4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0 % 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Source: BankNegaraMalaysia % Chart 2.13 Chart 2.12 AJJA NJFMM SOND AS MAMJ J F ONDJ AS MAMJ J F J JFMAMJJASOND especially from non-residents. Inaddition 2009 Businesses Households Overall January toend-July2010.By OPR: +25bps +25bps +25 bps 2010 10-year 5-year 3-year 1-year Non-residents in2010 O MGS BenchmarkYieldCurve 100 120 140 RM billion MGS yields. corporate bondyieldsare benchmarkedagainst overall borrowing costsinthedebtmarket,as respectively. Thiscontributedtoreducing the Source: BankNegaraMalaysia on expectations of higher Government borrowingson expectationsofhigherGovernment there wasaclearupward driftinlong-termyields Although yieldswere lowerbytheendofyear, MGS yields benchmarked againstlong-term as corporatebondswere reduced borrowing costs flattened in2010andhelped The benchmarkyieldcurve Source: RENTAS,BankNegaraMalaysia 1.5 2.0 2.5 3.0 3.5 4.0 4.5 % 20 40 60 80 0 utstanding DebtSecuritiesHeldby Chart 2.15 Chart 2.14 AJJA OND AS J MAMJ F J 12345678910 hr-emLong-term Short-term Years tomaturity December '10 December '09 % oftotaloutstanding(RHS) June '10 0 2 4 6 8 10 12 14 16 18 %

71 ANNUAL REPORT 2010 MONETARY AND FINANCIAL CONDITIONS 20 19 18 17 16 15 14 KLCI Number of shares,% Singapore 2010 Thailand Philippines Subsequently, the benchmark FTSE Subsequently, Malaysia Indonesia Non-resident Holdings (RHS) JMM JASOND DJFMAMJ DJ FMAMJJASOND 2009 2010 2009 Chart 2.18 Chart 2.17 90 80 hares Held by Non-residents in the KLCI 150 140 130 120 110 100 Index Index (Dec 2009 = 100) Source: Bursa Malaysia 1600 1500 1400 1300 1200 1100 1000 The FBM KLCI recorded significant significant recorded The FBM KLCI corporate stronger gains amidst economic growth earnings, robust inflows and portfolio steadily in market rose The domestic equity corporate by stronger early 2010, supported and portfolio growth earnings, economic robust markets, inflows. Similar to other regional inflows given Malaysia experienced greater By May, trajectory. attractive growth its more global market sentiments were however, considerably by the developments in affected Europe. also helped ensure a conducive environment for a conducive environment ensure also helped in 2010. debt financing Source: Bloomberg S Regional Indices % 8.0 7.5 7.0 6.5 6.0 5.5 AAA (LHS) A (RHS) AA (LHS) MGS (LHS) JFMAMJJASOND Chart 2.16 5-year MGS and 5-year PDS Yields in 2010 In the private debt securities (PDS) market, In the private debt securities (PDS) market, as PDS yields are kept low, financing costs were MGS typically benchmarked against long-term generally unchanged yields. While PDS yields were in the in the first half of 2010, yields declined in decrease second half of the year in line with the AA rated benchmark yields. The 5-year AAA and while A papers both declined by 17 basis points, rated papers declined by 14 basis points. to improve Sentiment in the PDS market continued of the domestic economy, in line with the strength liquidity conditions. as evidenced by the improved to RM89.3 in the PDS market increased Turnover In RM59.9 billion in 2009. billion in 2010, from actions addition, the number of negative ratings in 170 from declined substantially to 106 in 2010 conditions in the PDS market 2009. The improved Cost of PDS financing remained remained Cost of PDS financing declined following low as yields prospects positive sentiment on the for the economy in 2011 following the announcement of Budget of Budget the announcement in 2011 following time, rising global At the same 2011 in October. to higher commodity expectations due inflationary higher yields. From contributed to the prices also the 2010, yields on to end-December 15 October of 37 basis an increase 10-year MGS recorded hand, short-term yields points. On the other 2011 by the Budget largely unaffected were lower maturity risk the announcement, reflecting debt securities. associated with short-term % 5.5 5.0 4.5 4.0 3.5 3.0 Source: Bank Negara Malaysia

MONETARY AND FINANCIAL CONDITIONS ANNUAL REPORT 2010 72 KLCI andBursaMalaysiaSectoralIndices 100 105 110 115 120 125 130 dampen privatesectorliquidity expansion. upward adjustmentsinretail lendingratesdidnot Notably, thenormalisationofOPR andconsequent economic recovery andresumption offoreign inflows. expanded atameasured pace,inlinewithreal ample throughout 2010.Theprivatesectorliquidity Liquidity conditionsinthebankingsystemwere Liquidity andMonetaryAggregates (2009: 45.2%). market. In2010,theFBMKLCIrose by19.3% companies, alsoprovided additionalimpetustothe Khazanah NasionalBerhadshareholdings inmajor liquidity inthelocalindex,suchasdivestmentof initiativestoincrease Government thevelocityand Transformation Programme (ETP) projects. Several from theannouncementofseveralmajorEconomic prices, whileconstruction-related stocksbenefited of plantationcompaniesduetohighercommodity strong sectoralperformances,withrisingearnings Reserve. Equitypriceswere furtherboostedby round ofquantitativeeasingbytheUSFederal and theeventualimplementationofasecond including Malaysia,wasamplifiedbyexpectations search forhigherreturnsinemergingeconomies, rules announcedinAugust.Meanwhile,the liberalisation oftheforeign exchangeadministration ringgit, amidstapositivereception tothefurther This wasdrivenmainlybyexpectationsofafirmer supported byincreased non-resident purchases. of theyearasglobalmarketconditionsstabilised, The FBMKLCIresumed itsriseinthesecondhalf regional markets. (FBM KLCI)underwentacorrection, asdidother Bursa Source: Bloomberg Index (Dec2009=100) 90 95 092010 2009 Chart 2.19 JFMAMJDJ JASOND Malaysia KualaLumpurCompositeIndex Industrials KLCI Plantations Construction Finance B C Source: BankNegaraMalaysia Source: BankNegaraMalaysia 10 11 12 13 institutions withsurplusliquidityalsoimpliedthat Negara Malaysia.Thelargenumberofbanking liquidity withnetplacementsoffundsBank All banksoperatedfrom apositionofsurplus prevailed atboththemarketandinstitutionlevels. In thebankingsystem,ampleliquidityconditions “net otherinfluences”. (BNMNs). Thiswasreflected inthemoderationof the purchases ofBankNegaraMonetaryNotes withdrawals ofdepositsbytheprivatesectorfor in M3,however, waspartiallymitigatedby the higherforeign capitalinflows.Theexpansion Private sectorliquidityalsoincreased asaresult of banking systemtobusinessesandhouseholds. broad moneywashighercredit extensionbythe The mainfactorunderpinningtheexpansionin between 7.0%and9.3%throughout theyear. money (M3),expandedatameasured paceof Private sectorliquidity, asmeasured bybroad Annual growth(%) -15 -10 3 4 5 6 7 8 9 10 15 20 % -5 road Money,M3 ontribution toM3Growth 0 5 JFMAMJ JASONDJFMAMJ JASOND Chart 2.20 Chart 2.21 JFMAMJJASONDJFMAMJJASOND Net otherinfluences Net externaloperations 092010 2009 092010 2009 Claims onprivatesector Net claimsonGovernment M3: 7.0%

73 ANNUAL REPORT 2010 MONETARY AND FINANCIAL CONDITIONS

8 6 14 12 10 12 11 10 9 8 7 6 5 (%) Annual growth Annual

Annual growth, (%) sectors. finance, insurance 2009 2010 2009 2010 BusinessesTotal growth (RHS) Households Others PDS Banking system loans Total net financing growth (RHS) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2Q 4Q 1Q 1Q 2Q 3Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 4Q 3Q 2Q 4Q 1Q 3Q 2Q 1Q electricity, gas and water supply gas and water electricity, Chart 2.23 Chart 2.24 5 otal Net Financing to the Private Sector to the Private otal Net Financing 5 0 hrough Banking System Loans and PDS System Loans hrough Banking -5 -5 45 35 25 15 Loans Outstanding by Customers Quarterly changeQuarterly 35 30 25 20 15 10 Source: Bank Negara Malaysia stabilised at 10% as economic activity moderated For the year as second half of the year. the toward a whole, net financing raised by the private sector banking system and the capital market the through expanded by 11.3% (2009: 8.4%). In terms of sectors, the expansion in financing during the year both the demand from with strong was broad-based business and household sectors. financing to the business sector improved, Total 8.4% in 2010 (2009: 6.3%), with by growing financing extended mainly to the and business services; manufacturing, real estate; wholesale, retail, restaurants and hotels (WRRH) and Banking system loans to businesses expanded by 9.4% in 2010 (2009: 3%). The buoyant demand for financing by businesses was underpinned Source: Bank Negara Malaysia Quarterly change (RM billion) (RM billion) (RM T t BNM Debt securities Direct Borrowing and Wadiah Acceptance 2009 2010 Others Repo JFMAMJJASONDJFMAMJJASOND Chart 2.22 Outstanding Liquidity Placed with BNM Liquidity Placed Outstanding (at end-period) Source: Bank Negara Malaysia Growth of private sector financing, which has been of Growth since the second half of 2009, picked on an uptrend was in up speed in the first half of 2010. The trend recorded economic recovery tandem with the strong subsequently during the period. Financing growth Financing expanded by 11.3% in 2010 driven by the economic supported by and recovery accommodative financing conditions FINANCING OF THE ECONOMY conducive In 2010, financing conditions remained The easy access and supportive of economic activity. and low cost of borrowing to financing, relatively ample liquidity in the financial system supported the both the private and demand for financing from public sectors. the Malaysian banking system had a low reliance low reliance the Malaysian banking system had a on wholesale funding. in theBank Negara Malaysia conducted operations surplusinterbank money market to manage the inflows of liquidity in the Large foreign liquidity. sterilised by the Bank second half of the year were conditions. to avoid overly expansionary liquidity the use of a wide This was achieved through Bank’s range of monetary instruments in the borrowing, sterilisation operations, including direct and the issuance of BNMNs. repos RM billion 360 330 300 270 240 210 180 150 120

MONETARY AND FINANCIAL CONDITIONS ANNUAL REPORT 2010 74 0 1 2 3 4 5 6 Source: BankNegaraMalaysia Note: Thehigherloansin4Qreflectedborrowing forthesubscriptionoftwonew RM billion specific locationsoftheresidential property market. the excessiveinvestmentandspeculativeactivityin by aborrower. Themeasure aimedatmoderating subsequent housefinancingfacilitiestakenout loan-to-value (LTV) ratioapplicabletothethird and Bank announcedtheimplementationofamaximum supported bypent-updemand.InNovember, the the attractiveinterest rates,thehigherdemandwas and risingwages.Forproperty loans,inadditionto households, becauseofstableemploymentprospects was drivenbythesteadyincrease inincomesof growth inconsumptionexpenditure, whichinturn expansion inhouseholdloansreflected thestrong passenger cars,personalloans and non-residentialproperties loans beingextendedforthe further by13.4%in2010(2009:9.8%),withmore Meanwhile, loanstothehouseholdsectorincreased production demand. amidstweaker external second halfoftheyear. Thisreflected mainlyslower loans, especiallyforworkingcapitalpurposes,inthe however, showedamoderationinitsdemandfor the secondhalfof2010.The sector wasafurthercatalysttofinancingactivityin in the expansion activity, especiallymergerandacquisitions in 2010(2009:-10.8%and-4.1%).Corporate vehicles the investment purposesalsoexpanded,inparticular, for rate of11%(2009:-1.4%).Loansdisbursedfor purpose ofworkingcapital,increasing atanannual demand ledtomore loans being disbursedforthe business activityresulting from higherdomestic by improved salesandinvestment.Theincreased Approved forthePurchaseofSecurities Loan ApplicationsandALRonNewLoans Chart 2.25 Q2 Q4 Q Q 3Q4Q 2Q 4Q1Q 3Q 1Q 2Q IPO listedinend-2010 purchase ofnon-residentialproperty Purchase ofsecurities Purchase finance, insurance and business services finance, insuranceandbusinessservices , increasing by50.5%and 48.8%respectively 092010 2009 ALR (RHS) purchase of residential purchase ofresidential manufacturing ; and purchase of securities, purchase ofsecurities, credit cards and sector, transport transport . The . The 3.0 3.5 4.0 4.5 5.0 5.5 % 10 15 20 25 RM billion Note :DataexcludesCagamasbondsandissuances bynon-residents improved marketsentiments. large initialpublicofferings (IPOs)inlinewith The largerfundsraisedreflected issuancesofseveral amounted toRM32.1billion(2009:RM26billion). sector. Thefundsraisedintheequitymarket were dominatedlargelybyfirmsinthefinancial billion (2009:RM8.7billion).ThePDSissuances to financenewinvestmentsincreased toRM13.5 RM52.1 billion;2009:RM58.6 the totalnewissuanceswere lowerin2010(2010: In theprivatedebtsecurities(PDS)market,although higher lendingrates. moderated inthesecondhalfofyeargiven interest rates.Thedemandforpersonalloansalso subsequently followingthenormalisationin Amanah SahamBumiputra(ASB),itmoderated of securities,mainlytofinancethepurchase of loans extendedtoindividualsforthepurchase 3.1%). Whilethere wasan initialincrease in loans (NPL)wasalsolowat2.3%(end-2009: end-2010. Theratioofnon-performinghousehold increased from 150.9%atend-2009to153.9% levels. Householdliquidfinancialassettodebtratio to absorbadverseshocks,despitethegrowth indebt supported bytheimproved capacityofhouseholds indebtedness remained ata prudentlevel.Thiswas being excessive.Theoveralllevelofhousehold 2010, there waslimitedevidence ofcredit growth Notwithstanding thestrong financinggrowth in car modelsandotherattractiveoffers fornewcarbuyers. supported bytheintroduction ofseveralnewpopular borrowings atrelatively lowerrates.Thiswasfurther also continuedtoincrease as householdslocked-in Loan applicationsforthepurchase ofpassengercars Gross PDSIssuedbySector Source: BankNegaraMalaysia 0 5 Chart 2.26 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Transport Finance 092010 2009 other services Government and Others billion), fundsraised Construction

75 ANNUAL REPORT 2010 MONETARY AND FINANCIAL CONDITIONS

l Hedge l

positive

ra

u Nat cant impact on is a better gauge 2 rms that rely more more rms that rely Manufacturing to Total Output Total to Construction Share of Imported Input Services nal product domestically will gain nal product Mining 10 20 30 40 50 60 70 80 90 100 negative Agriculture 90 80 70 60 50 40 30 20 10 100 economy (RM1.6 trillion)

2 Bubble represents sector’s output relative to total output of the Chart 2

to Total Output Output Total to Share of Exported Output Exported of Share rms are price-takers in the international rms are markets. Notes : 1 Derived from the 2005 input-output table Source : Bank Negara Malaysia Relative importance of exports and imports sectorby Imports Low Exports, High Imports High Exports, High Imports the economy

Appreciation beneficial to Natural Hedge Natural of total trade. In this regard, the real effective exchange rate (REER) exchange effective the real regard, of total trade. In this The Impact of Exchange Rate Appreciation on Malaysian Trade on Malaysian Appreciation of Exchange Rate The Impact 1 ation rates. rms that source their inputs from abroad but supply the fi abroad their inputs from rms that source t margins. This is especially the case if these fi Low Imports Low Exports, Low Imports High Exports, impacts the economy Appreciation adversely Chart 1 Exports differences in infl differences nal consumption. Due to such production linkages, there is a strong co-movement between exports and co-movement is a strong linkages, there nal consumption. Due to such production at December 2010 As major trading partners, adjusted for of Malaysia’s to the weighted average of the ringgit against the currencies Refers In 2010, the ringgit appreciated by 11.1% against the US dollar. Given that the US dollar is a key Given that the dollar. against the US by 11.1% ringgit appreciated In 2010, the how the appreciation this box article discusses and investment, to conduct trade used globally currency and fourth largest trade partner United States is Malaysia’s The economy. would impact the Malaysian accounts for 10% 1 2 from a strong ringgit. a strong from to total output, the sector appears large contribution basis, given the manufacturing sector’s On a relative export-oriented. As Malaysia is part of the global than 50% of the sector is as more to be most affected materials and import raw and processed manufacturers Malaysia’s manufacturing network, a majority of or exporting them to another destination for further processing turn before them into intermediate goods fi of Malaysia’s overall competitiveness as it takes into account changes in Malaysia’s competitiveness vis- competitiveness Malaysia’s as it takes into account changes in overall competitiveness of Malaysia’s the REER By this measure, and not just the United States. major trading partners à-vis all of Malaysia’s has allowed the appreciation of 5.9% in 2010. The moderate REER moderate rate by a more appreciated rate. ringgit exchange absorb and adjust to the stronger economy to better on trade of ringgit appreciation The sectoral impact in both those of international importers and exporters, results trade, which includes both The very nature export- Generally, or depreciates. appreciates when a currency advantaged and disadvantaged who are by an exchangedependent sectors in competitive international markets tend to be adversely affected the decline in their exports depends on whether The extent of the impact, however, rate appreciation. fi the ringgit appreciates, by cheaper imported inputs. When can be offset proceeds signifi in ringgit) will face a more their inputs locally (i.e. pay but source on export revenue their profi In contrast, fi Source : Bank Negara Malaysia Gainers and losers of exchange rate appreciation

MONETARY AND FINANCIAL CONDITIONS ANNUAL REPORT 2010 76 3 covered 177companies regular surveystocompileviewsfrom variousindustryplayers.Inasurveyconductedin4Q2010that To assesstheoverallimpactofringgitappreciation ontheeconomy, BankNegaraMalaysiaconducts inforeignand exporttheirservicesinternationally currency. Multinational Corporations(MNCs)inMalaysia.TheseMNCsmostlysource inputsdomesticallyinringgit industry, asshared servicesandoutsourcing mostlyinvolveexportsofservices,drivenmainlybythe on exports.Thepositiveimpact,however, ispartlyoffset bytheadverseeffects onthebusinessservices sector willbenefi The overallimpactontheservicessectorisbroadly balanced.Themajorityofindustriesintheservices helped constructionfi lower costofimportedinputs,togetherwithstronger demandforproperties indomesticmarkets,has All ofitsoutputispricedandconsumeddomestically, withsome oftheinputssourced from abroad. The The constructionsector, ontheotherhand,standstogain most giventhatitisdomestic-oriented. manufacturing fi alone. Thecloseco-movementbetweenexportsandimportsalsobroadly servesasanaturalhedgefor makestrademoreimports, whichinturn responsive toglobaldemandratherthanringgitperformance and capitalwouldfacilitatefi in profi challenges,comeopportunities.Whileringgitappreciation couldresultWith insomefi Implications forbusinesses margins arisingfrom furtherringgitappreciation. favourable orneutral.Nevertheless,about35%ofrespondents indicatedanadverseimpactontheirprofi expected tobebroadly contained.Themajorityofrespondents suggestedthattheimpactwouldbeeither The surveyalsoshowedthatshouldtheringgitappreciate further, theimpactonindustryplayersare favourable impactontheirprofi appreciation wouldhavesomeadverseimpactontheirprofi signifi Source: BankNegaraMalaysia Quarterly sectoralsurvey4Q2010:Impactofringgitappreciation onprofit margins Manufacturing(109),Non-fi Chart 3 cant impactontheirprofi 10 15 20 25 30 35 40 % 0 5 tability, itdoesopenupothergrowth opportunities.Inparticular, cheapercostsofimportedinputs aorbeNurlUnfavourable Neutral Favourable Impact onprofitmarginsthusfar rms, thereby limitingtheoverallimpactofexchangeratemovements. t from anexchangerateappreciation giventhehighimportcontentandlimited reliance rms toregister stronger operatingsurplusduringtheyear. 3 , 38%oftherespondents indicatedthattheappreciation didnothavea nancialservices(43),Construction (25) rms’ transformationfrom labourtocapitalintensiveproduction, whichcould t margins.Another34%oftherespondents indicatedthattheringgit t margins. t margins,while28%indicatedamore % 10 15 20 25 30 35 40 0 5 aorbeNurlUnfavourable Neutral Favourable Impact iftheringgitappreciatesfurther rms facing a decline rms facingadecline t

77 ANNUAL REPORT 2010 MONETARY AND FINANCIAL CONDITIONS ting rms to rms tability. Increased productivity would encourage fi would encourage productivity Increased tability. ourish. This would eventually facilitate the reorientation of the Malaysian economy of the Malaysian the reorientation eventually facilitate ourish. This would rm productivity and ultimately profi and ultimately rm productivity enhance fi pay higher wages and promote a more vibrant labour market with a larger pool of highly skilled workers. a larger pool of labour market with vibrant a more wages and promote pay higher for non- opportunities in turn,Higher wages more and open up domestic consumption would empower to fl tradable sectors demand. one that is driven mainly by domestic towards being trade-dependent from are whether the strategies being pursued businesses should evaluate In the medium to long-term, should adversely affected In the short-term, those circumstances. to changing sustainable and robust or even They may also need to re-strategise exposure. currency hedge their foreign undertake steps to those benefi in nature, transitory As exchange rate movements are into other opportunities. venture their but should instead improve or weaker ringgit, on either a stronger and rely should not be complacent the situation reverses. challenging times when cope with the more operations further to Conclusion impact on the broad While the various sectors differently. impacted ringgit appreciation The recent For a adversely affected. some sectors that were were positive, there economic sector was either neutral or trade in 2010 accounting for 157.8% of GNI, such an outcomehighly open economy like Malaysia, with makes exchange rate volatility unavoidable. the uncertain external environment is expected. In this regard, as the underlying economic would continue to strengthen Subject to global conditions, the ringgit market conditions and focus on maintaining orderly The Bank will fundamentals continue to improve. economic fundamentals. Businesses, on their part, must beensuring that the ringgit is aligned with prices, if that such changes in relative taking into account to adapt to the changing environment, prepared comparative advantage into out of sectors with declining resources a signal for a shift in real sustained, are advantage. comparative new opportunities with strong sectors offering

MONETARY AND FINANCIAL CONDITIONS ANNUAL REPORT 2010 78 87 84 81 White Box: Financial Imbalances and the Role of Monetary Policy WhiteBox:FinancialImbalancesandtheRoleofMonetary Monetary Operations Monetary Policy MONETARY POLICYIN2010

79 ANNUAL REPORT 2010 MONETARY POLICY IN 2010 MONETARY POLICY IN 2010 ANNUAL REPORT 2010 80 Outlook forRealGDPGrowthin2010 economies andfinancialsystems. the more resilient fundamentalsrelating totheir significantly thantheadvancedeconomiesgiven including Malaysia,wasexpectedtoimprove more performance oftheemergingmarketeconomies, Economic Outlook(WEO).Meanwhile,economic IMF initsJanuary2010updateoftheWorld to the2010globalgrowth forecast bythe was reflected bythesignificantupward revision beginning topickup.Thechangeinoutlook and thehousingmarkets.World tradewasalso evident from retail sales,consumerconfidence, the inventorycycle.Signsofimprovement were rebound in inmanufacturingandanupturn receding. Globalgrowth wasbeingledbya were signallingthattheglobalrecession was At thebeginningofyear, economicindicators up offinancialimbalances. conditions were appropriate toprevent thebuild- and growth, whileensuring thatmonetary towardsand turned balancingtheriskstoinflation need toavertafundamentaleconomicdownturn, of monetarypolicyin2010shiftedawayfrom the improvement inthedomestic economy, thefocus rebound inprivateinvestment. Intandemwiththe robust expansioninprivate consumptionanda resumption ofgrowth in2010,drivenbya The Malaysianeconomyexperiencedastrong MONETARY POLICY MONETARY POLICYIN2010 10 **Newly IndustrialisedEconomies *Indonesia, Malaysia,Philippines,Thailandand Vietnam Annual growth(%) Source: IMF,WEOOctober2009,January,April, JulyandOctober2010 -8 -6 -4 -2 0 2 4 6 8 Chart 3.1 Oct ‘09 SJpnEuro Japan US Jan ‘10 Area Apr ‘10 sa *NE* World NIEs** Asean 5* Jul ‘10 Oct ‘10 to financialimbalances andcreate distorted Rate (OPR)atsuchalowlevel couldgiverise part oftheyear. Policy LeavingtheOvernight Policy Committee(MPC)during theearly in 2009becamethefocus of theMonetary the extraordinary monetarystimulusundertaken Against thisbackdrop, theneedtonormalise spread second-round effects. unless theyledtosignsofpersistentandwide would notwarranttightermonetaryconditions programme. Thesesupply-sidefactors,however, undertaken underthesubsidyrationalisation adjustments toadministered pricesthatwere as globaldemandimproved andtheexpected namely theincrease inglobalcommodityprices more likelytooriginatefrom supply-sidefactors, remain relatively modest.Therisktoinflationwas pressures oninflation,however, were expectedto recovery indemandconditions.Demandrelated induced inflationlaterintheyear, inlinewiththe suggested thepotentialemergenceofdemand Measures ofcore inflationanddemandindicators gradually butremain lowthroughout theyear. Meanwhile, inflationwasexpectedtorise during theearlypartofyear became thefocusofMPC extraordinary monetarystimulus outlook, theneedtonormalise theimprovement ineconomicWith external demand. external consumption, andfurtherimprovements in domestic demand,particularlyprivate with growth beingsupported bystrengthening to expandfurtherduringthecourseof2010, gaining strength. Theeconomy wasexpected assessment thattheeconomicrecovery was and labourmarketconditionsreaffirmed the production, financingactivity, trade external Positive developmentsinmanufacturing grow againsincethefourth quarterof2009. suggested thattheeconomyhadstartedto In thedomesticeconomy, economicindicators

81 ANNUAL REPORT 2010 nvestments in risky in risky nvestments OPR gradually by 25 basis OPR gradually by 25 basis 8 Jul 2010 2.75 (+ 25 bps) 2 Sep 2010 2.75 4 Mar 2010 2.25 (+ 25 bps) 26 Jan 2010 2.00 12 Nov 2010 2.75 13 May 2010 2.50 (+ 25 bps) Table 3.1 Table MPS Publication Dates OPR MPC Meeting Dates and OPR Decisions when combined with unchecked financial financial with unchecked when combined led to large i innovation, following In essence, the products. financial with regard the main considerations are policy. of monetary to the normalisation must be adjusted First, monetary policy build-up of to avoid the pre-emptively rates Raising interest financial imbalances. have already when financial imbalances economy would not be permeated into the policy stance Second, the monetary effective. given that the needed to be recalibrated was no of a fundamental recession threat amount The extraordinary longer present. in 2009 was provided of monetary stimulus no longer warranted as indicators showed led by entrenched becoming more growth of private sector demand. growth the strong Notwithstanding this need to normalise that monetary rates, it was recognised interest accommodative policy needed to remain to support the ongoing economic recovery. to Policy adjustments would also be gradual transition by financial facilitate an orderly Taking institutions and market participants. the MPC into account these considerations, normalised the on 4 points at each of the MPC meetings 13 May and 8 July 2010. The money March, in an to the OPR increases market responded with adjustments to money manner, orderly then transmitted to market rates, which were lending rates. the retail with all Retail lending rates adjusted quickly, (BLR) banks raising their base lending rates of each within 6 days of the announcement Nevertheless, with borrowing OPR increase. (See white box on box on (See white GDP 2009 2010 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Inflation . Ignoring such risks could lead to lead to such risks could . Ignoring Q1 Chart 3.2 8 6 4 2 0 -2 -4 -6 -8 Source: Bank Negara Malaysia Annual growth (%) incentives for economic agents, leading to the leading to the for economic agents, incentives disintermediation of risks, financial mispricing growth credit and excessive economy broader on the undesirable effects imbalances unravel in a when such financial The policy focus, hence, was manner. disorderly and pace for timing to assess the appropriate normalisation. of monetary policy the process With of economy still at a nascent stage the challenge was in ensuring that the recovery, not disrupt the rates would raising interest sector demand in driving sustainability of private economic growth. Incipient signs of the economic recovery allayed this concern. being firmly entrenched to 2009, it was clear that the Compared conditions under which interest extraordinary no longer prevailed. reduced rates were looking indicators suggested stronger Forward ahead, while engagements economic recovery more with key industry players revealed This the economy. confident sentiments toward 2010 when assessment was affirmed in February stronger the numbers for 4Q 2009 showed a performance of 4.4%. growth rates The MPC was mindful that if interest for a continued to be held at very low levels financial sustained period, they could lead to imbalances. This was a key lesson from the experience of the industrial countries global financial at the heart of the recent period of low interest crisis. A prolonged rates discouraged savings, led to excessive overinvestment in housing, and borrowing, ‘Financial Imbalances and the Role of Monetary the Role of Monetary Imbalances and ‘Financial Policy’) GDP and Inflation 12 10

MONETARY POLICY IN 2010 ANNUAL REPORT 2010 82 Lending RateofCommercialBanks Base LendingRateandAverage Source: BankNegaraMalaysia ** March2009-February2010 * January2008-October2008 4.5 5.0 5.5 6.0 6.5 7.0 7.5 to businessesremained onaverage61basis nominal retail lendingratesonnewloans activity. conditions remained supportiveofeconomic costs stillbelowpre-crisis levels,financing Source: Bank Negara Malaysia 10 11 12 13 14 on NewLoansforVariousPeriods Average NominalLendingRates % % 4 5 6 7 8 9 Chart 3.4 Chart 3.3 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 ‘10 ‘09 ‘08 ‘07 ‘06 ‘05 ‘04 ‘03 ‘02 ‘01 ‘00 ‘99 ‘98 ‘97 ‘96 ‘95 ‘94 ‘93 ‘92 ‘91 ‘90 December 2010 Crisis period** Pre-crisis period* L uiessHueod Overall Households Businesses BLR Specifically, asatend-December2010, 45bps 61bps 38bps ALR 5.05% BLR 6.27% 50bps 1 crisis levelsoverthesameperiod. households were 38basis pointslowerthanpre- Furthermore, thepolicy-inducedslowdownin the earlierpolicystimulus had beguntofade. activity from thebuild-upofinventoriesand slowed asthetemporaryboosttoeconomic In addition,growth intheadvancedeconomies sustainability oftheglobaleconomicrecovery. advanced economiesraiseduncertaintiesonthe impending fiscalausteritymeasures inseveral euro area aswelltheannouncementsof escalation ofthesovereign debtcrisisinthe global growth arisingfrom severalfactors.The There were, nevertheless,downsiderisksto low inflationandconducivecredit conditions. labour marketconditions,positivesentiments, by domesticdemandfollowingfavourable economic growth continuedtobesupported sector.performance intheexternal Domestic continued toexpandinspiteoftheslower half oftheyear, theMalaysianeconomy growth andinflationprospects. Inthesecond its assessmentofthemedium-termeconomic 2.75% tobeappropriate andconsistentwith points, theMPCconsidered theOPRlevelof Following thecumulativeincrease of75basis indebtedness remained ataprudentlevel. with fundamentalsandtheoveralllevelofhousehold financing, credit growth wasjudgedtobeinline sentiments. stable labourmarketconditionsandpositive growth inconsumptionexpenditure following loans alsoexpandedinlinewiththestrong investment activityimproved. Household during theyearimproved asretail salesand throughout 2010.Loansextended tobusinesses private sectorfinancingremained robust and ampleliquidityinthefinancialsystem, Reflecting thereasonable borrowing cost economic activity conditions remained supportive of below pre-crisis levels,financing theborrowing costsstillWith points belowpre-crisis levels OvertheperiodJanuary2008toOctober whenthe 5.67% respectively. businesses andhouseholdswere onaverage6.01%and OPR wasstillat3.5%,thelending ratesonnewloansfor Notwithstanding thestrong trends in 1 . Lendingratesto

83 ANNUAL REPORT 2010 MONETARY POLICY IN 2010 financial flows. Sustained divergence in growth in growth flows. Sustained divergence financial emerging developed and between prospects financial inflows led to continuous economies economies and market into the emerging on their currencies. pressure upward created by further This was further compounded advanced economies. monetary easing in policy among the on currency Differences heightened tensions in the G20 nations also several In response, exchange market. foreign by economies responded emerging market manage the to better imposing measures flows. Different in capital significant increase threshold had different countries, however, and exchange rate levels to capital flows and varying capacity to manage appreciation so far them. The inflows into Malaysia have been manageable and with no discernible imbalances in signs of the inflows creating system. the domestic economy and financial ringgit Amidst the large capital inflows, the orderly, exchange rate movements remained that while sterilisation operations ensured domestic the impact of the excess liquidity on Having monetary conditions was contained. range of instruments for monetary a broad the efficiency of operations helped increase depth domestic liquidity management. The of the financial system together and resilience with the healthy level of international reserves from also served to mitigate the risks arising of these flows. reversal OPERATIONS MONETARY Overall conditions in the domestic money stable in 2010. Focus was market were to ensuring that the normalisation of accorded monetary policy was being transmitted to the money market rates in an efficient and orderly conditions remained Money market manner. financial institutions adjusted as orderly in the rates to the increases their interest May and July 2010. The Bank OPR in March, maintained the average overnight interbank rate (AOIR) within the corridor of ± 25 basis points of the OPR. During the period 2 – 4 close to the AOIR traded lower, 2010, March This reflected the floor rate of the corridor. for market participants’ exceptional interest overnight placements with the Bank ahead of MPC meeting. Subsequent to this the March episode, the AOIR traded within a wider range quarter in line with market up until the third in the OPR. expectations for further increases . 2 (NAPIC) Information Centre National Property Source: 2 PR China to achieve a more sustainable growth growth sustainable to achieve a more PR China intra- affect medium term could over the trade. regional price inflation, the consumer to With regard higher during the second half index (CPI) edged was moderate despite This increase of the year. prices, to administered the series of adjustments account of supply factors. and was mainly on the lower imported inflation At the same time, in the advanced modest growth more from ringgit helped to stronger economies and the inflation. For on the pressures mitigate some of low at inflation remained the year as a whole, an average of 1.7%. The risk of a build-up of financial imbalances the year. continued to be evaluated throughout in asset prices Assessments showed that growth generally not excessive and were and credit in continued to be in line with the improvements limited evidence were First, there the economy. The of overvaluation in the equity market. did not deviate magnitude of the KLCI increase Moreover, its underlying trend. too far from gains, even though equities posted healthy borrowings funded through equity purchases Second, evidence of excessive credit low. were was also limited. The ratio of loan to growth was neither excessive to its trend GDP relative property Third, nor persistently above trend. price inflation at the national level remained 2009, of 1.5% in modest with an annual increase to the 2000-2008 average of 3.6% compared However, there were concerns were of speculative there However, market in selected activity in the property The number of locations in the urban areas. transactions and house prices in these locations was also a rise There experienced faster growth. to individuals for multiple in financing provided In this instance, targeted macro- unit purchases. judged to be more were prudential measures such concerns. to address The appropriate speculative activity policy intent was to reduce this end, the Bank in market. To in the property November 2010 announced the implementation ratio of 70% of a maximum loan-to-value (LTV) and subsequent house applicable to the third financing facilities taken out by a borrower. Another development that posed challenges to the conduct of monetary policy during the year volatile international was the larger and more

MONETARY POLICY IN 2010 ANNUAL REPORT 2010 84 Source: Bank Negara Malaysia Breakdown ofOutstandingMonetaryPolicyInstruments Source :BankNegaraMalaysia uncollateralised borrowings remained the became more diversifiedin2010.Although The compositionofmonetaryinstruments (2009: RM251.8billion). RM299.2 billionasatend-December2010 surplus liquidityincreased significantlyto in 2010.Fortheyearasawhole,aggregate economies, registered netportfolioinflows Malaysia, alongwithotheremergingmarket surplus liquidityintheinterbankmarket. for monetaryoperationswastomanagethe the domesticfinancialmarkets,akeychallenge theresumption ofportfolioinflowsintoWith OPR andInterbankrates 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 % Chart 3.7 Chart 3.5 JFMAMJJASOND Commodity Murabahah OPR 1 month Placement (CMP) Acceptance Wadiah BNMN 1% 16% 9% BNMN-i Overnight 1 week 3% 2010 Repo 7% Celing rateofthecorridorforOPR Others 10% Floor rateofthecorridorforOPR 2009 54% Market Borrowing Direct Money Source :BankNegaraMalaysia share ofIslamicmonetaryinstrumentswas a weekin2009totwice2010.The BNMN andBNMN-iwasincreased from once Hence, thefrequency ofissuancesforthe investors, particularlynon-resident investors. been strong demandforthesesecuritiesby were increasingly usedin2010asthere had and BNMN-iforIslamicmoneymarkets) Monetary Notes(BNMNforconventional 37.3%, 2009:20.2%).BankNegaraMalaysia based monetarypolicyinstruments(2010: there wasasizableincrease towards securities- of outstandingmonetarypolicyinstruments), main instrumentused(accountingfor62.7% Bank NegaraMalaysia Outstanding LiquidityPlacedwith RM billion 100 150 200 250 300 350 50 0 Chart 3.6 JFMAMJJASOND BNMN-i 10% Placement (CMP) Commodity Murabahah Borrowing Direct MoneyMarket Wadiah Acceptance Commodity Murabahah BNMN 23% Placement (CMP) Others 16% 1% 2010 Acceptance Wadiah 2010 11% BNMN-i BNMN Repo Repo 5% 34% Market Borrowing Direct Money Others

85 ANNUAL REPORT 2010 MONETARY POLICY IN 2010 maturity range for uncollateralised borrowings. borrowings. for uncollateralised maturity range management more made liquidity The initiative institutions financial providing efficient by excess ringgit funds their to offer the option would This profile. to their liabilities’ according by liquidity management enhance the Bank’s with the liquidity forecast matching the Bank’s liquidity requirements. financial institution’s of monetary operations Another enhancement of Commodity Murabahah was the automation Automated transactions in the Fully Programme This system (FAST). System for Issuing/Tendering and bilateral caters for both auction/tender Commodity Murabahah. The transactions of the purchase enables the of FAST system configuration of and sale of commodities, auto generation murabahah contracts and digital signature. With instruments, to Islamic monetary respect new instruments that the Bank will introduce structural variations of the BNMN-i issuances are (deferred in 2011, namely the Bai Bithaman Ajil based on a payment) and Istithmar (investment These combination of Murabahah and Ijarah). would appeal to a wider base new structures with of investors given the stricter compliance jurisdictions. In of different Shariah requirements an Islamic line with the vision of Malaysia being the Bank would continue Financial Centre, monetary to develop new and flexible Islamic widely acceptable amongst instruments that are global investors. 3 instruments as at as at instruments borrowings with a predetermined maturity within 1 week with a predetermined borrowings term to 2 months. Normal maturities for money market 1 week, 2 weeks, 3 weeks and 1 month. tenders are to uncollateralised market term tender refers Money which would allow flexibility in determining the which would allow flexibility in determining 3 23.9% of total monetary 23.9% of Islamic through Liquidity absorbed end-2010. growth in line with the increased instruments and stood at in the system of total liquidity billion). (2009: RM58.9 RM71.6 billion of monetary profile In terms of the maturity maturity was extended instruments, the average (2009: 27 days). This was to 40 days in 2010 to the last few compared a change in strategy was on a shorter average years when the focus can that liquidity to ensure maturity structure in the event of large and be swiftly unwound the significantly more sudden outflows given financial markets. in the volatile environment rates, extending In a period of rising interest allows for more the maturity of borrowings sterilisation operations as surplus cost effective over a liquidity is locked-in at a lower rate longer period. several the Bank introduced During the year, of monetary instruments changes to the features One of the efficiency. operational to increase (RMA), initiatives was the Range Maturity Auction tender a variation to the money market term

MONETARY POLICY IN 2010 ANNUAL REPORT 2010 86 monetary policy. Asthefi a wellfunctioningandresilient fi low borrowing costscouldalsopromote excessiveleveragebyhouseholdsandbusinesses.Second, deposits towards speculativeinvestmentsinriskierassetsasearch ofhigheryields.Substantially term. Forexample,lowornegativereal returnsondepositscouldencourageshiftsfrom lowrisk create incentivesforsaversandborrowers thatare detrimentaltotheeconomyovermedium agents tosaveandborrow. Interest ratesthatare kepttoolowforaprolonged periodwould policy affects theinter-temporal allocationofresources whichunderlietheincentivesforeconomic loose monetarypolicyforaprolonged periodcanbeattheroot offi There hasalwaysbeenaclose linkbetweenmonetarypolicyandfi appropriately alignedtomitigate theriskstoinfl period. Inthisregard, theBankismindfulofneedtoensure thestanceof monetary policyis distortions tendtosurfacewheninterest ratesare expectedtoremain verylow foraprolonged substantially from fundamentals andincreased riskstothestabilityoffi of risks,excessiveyieldseekingactivities,overinvestmentincertainmarkets,assetpricesthatdepart Financial imbalancescanmanifestintheformofanunhealthybuild-upleverage,under-pricing the economicrecovery and haveadverseconsequencesonpricestabilityandeconomicgrowth. unchecked, thesubsequentunwindingoffi monetary conditionstomanagetheriskoffi and theeconomywasataninitialstageofrecovery, theOPRwasadjustedupwards tonormalise In 2010,theOPRwasraisedbyatotalof75basispoints.Althoughinfl normalisation isanexample ofthisapproach. in theabsenceofriskstoinfl itself. Thisapproach hasresulted inpolicyactionwhenmonetaryadjustment wasmadeeven takes intoaccounttheunderlying causeofassetpriceinfl making, withtheviewofensuringmacroeconomic stabilityoverthemediumterm. Monetarypolicy information onthedevelopmentsincredit andassetmarketsinitsmonetary policy decision growth overthetypicalmonetarypolicyhorizonof6-8quarters.TheBanktakes intoconsideration In formulatingmonetarypolicy, theBankdoesnotonlyfocusnarrowly onmanaginginfl policy stimulustothebroader economy. fi centre ofthecrisiswere substantiallyeasedtosupporttheeconomicactivity, thedysfunctional recession sincetheGreat Depression. Whilemonetarypoliciesintheadvancedeconomiesat and thecontractioninprivatesectoreconomicactivity subsequently resulted inthe worstglobal fi period ofverylowinterest rates.Theunravellingoffi fi The recent globalfi Consequently, economicactivitycouldsloworevencontract. and businessesfacediffi would deteriorate.Consumption andinvestmentactivitieswouldbeadverselyaffected ashouseholds a contractionineconomicactivity. Forexample,intheeventthatassetbubblesburst,values implications formacroeconomic stability, whereby adisorderly correction ofimbalancesmayleadto evenundersuchaneasymonetarypolicyenvironment.downturns Third, fi fi that are exposedtobadassetsanddelinquentborrowers wouldbeimpaired.theseweak Inturn, nancialinstitutionsandmarketswere notabletotransmittheunprecedentedly largemonetary nancialinstitutionsandmarketdisruptionsglobally. Failures ofthefi nancialstability. Thecrisiswasaculminationoffi nancialinstitutionswillnotbeabletoexpandlendingactivitysupporteconomicduring nancialcrisisexemplifi Financial ImbalancesandtheRoleofMonetaryPolicy cultiesinsecuringfi nancialimbalancesunravel,thebalancesheetsoffi ationwithinthemonetary policy horizon.Therecent monetary policy nancialsystemisnecessaryfortheeffective transmissionof esclearlythecloselinkbetweenmonetarypolicyand nancialimbalancescouldunderminethesustainabilityof nancingduetodeteriorationinthevalueofcollateral. nancialimbalances.IntheBank’s assessment,ifleft ationandgrowth. nancialimbalancesaccumulatedoveraprolonged nancialimbalancesledtothecollapseof ationratherthantheasset price infl nancialstability. First,extremely nancialimbalances.Monetary nancialintermediationprocess ationremained benign nancialimbalanceshave nancialsystem.These nancialinstitutions ationand ation

87 ANNUAL REPORT 2010 MONETARY POLICY IN 2010 uence on the if risks emerge 1 ation and growth, ation and growth, nancial imbalances on cantly overvalued would not be effective be effective would not cantly overvalued nancial imbalances due to its infl nancial imbalances takes into account takes into nancial imbalances scal measures such as the upward revision of the of revision upward such as the scal measures nancial imbalances could unnecessarily increase the cost increase nancial imbalances could unnecessarily nancial imbalances. During the episode of asset price bubbles in During the episode of asset price bubbles nancial imbalances. ate housing prices in 2009 and 2010. nancial imbalances. To rely only on interest rates may in fact result in an over in fact result rates may only on interest rely To nancial imbalances. c sectors of the economy. Malaysia has a long history of relying on a broad array of policy on a broad a long history of relying Malaysia has c sectors of the economy. cacy of monetary policy itself. Hence, in addition to balancing the risks to infl cacy of monetary policy itself. Hence, The Asian experience also suggests that macro-prudential tools are likely to be an integral part of the tightening in monetary likely to be an integral part of the tightening tools are The Asian experience also suggests that macro-prudential nancial imbalances. it is important to ensure that the stance of monetary policy is appropriate to prevent the build-up of to prevent policy is appropriate that the stance of monetary it is important to ensure fi behaviour of economic agents, and the need to obviate the consequences of fi behaviour of economic agents, and the the effi In conclusion, monetary policy is relevant in addressing fi in addressing In conclusion, monetary policy is relevant 1 several important caveats. First, monetary policy must be pre-emptive in order to be effective. be effective. to order in must be pre-emptive monetary policy caveats. First, several important signifi already are when asset prices rates Raising interest have by would asset prices increases gains from as the expected speculative activity in deterring on its own would not be effective costs. Second, monetary policy the borrowing then far exceeded such fi in addressing may be a There manner. in a holistic policies need to be considered adjustment. Macroeconomic measures targeted macro-prudential monetary policy with more need to complement The use of interest rate policy to manage the risks of fi rate policy to manage interest The use of and Singapore continues. For example, PR China, Hong Kong SAR, Korea conditions as the economic recovery and credit to defl announced various measures of borrowing at the expense of broader economic growth. economic growth. at the expense of broader of borrowing in specifi the risks of fi instruments in managing measures Bank implemented prudential credit addition to monetary tightening, the the mid-1990s, in non-owner occupied properties. of selected loan-to-value ratio for the purchase such as lowering the by fi also complemented were These measures a blunt tool. Merely monetary policy is between 15-20%. Third, gains tax to property graduated real fi to prevent rate aggressively raising interest

MONETARY POLICY IN 2010 ANNUAL REPORT 2010 88 105 104 95 93 91 WhiteBox:PotentialOutputoftheMalaysianEconomy Malaysian EconomicOutlook International Economy Fiscal Policy Monetary Policy OUTLOOK ANDPOLICYIN2011

89 ANNUAL REPORT 2010 OUTLOOK AND POLICY IN 2011 OUTLOOK AND POLICY IN 2011 ANNUAL REPORT 2010 90 liquidity. Asthemonetary policynormalisation that havecontributedtoa surge inglobal easing measures intheadvancedeconomies further accentuatedbythe seriesofquantitative emerging marketeconomies. Thistrend hasbeen capital flowsfrom theadvancedeconomiesto economies followingtheshiftinglobalshort-term brought aboutnewchallengestotheemerging recent period,changinggrowth dynamicshave economies asthenewgrowth centres. Inthe highlighting thegrowing importanceofemerging growth inrecent years(1990s:one-third), have contributedmore thantwothirds ofglobal account foraboutathird ofglobalGDP, they economies. Whiletheemergingeconomies is increasingly dependentontheemerging the post-crisisperiodisthatglobalgrowth An emergingfeature oftheglobaleconomyin markets andfavourablefinancingconditions. and businesssentiments,improving labour remain robust, underpinnedbypositiveconsumer domestic economicactivityintheseeconomieswill line withthemoderationinglobaleconomy, for theregion willimprove ataslowerpacein the baseeffectdemand dissipates.Whileexternal to apaceclosertheirlong-termaveragesas growth althoughthemomentumwillmoderate economies are expectedtocontinueleadglobal above-trend growth intheprevious year, theAsian to sustaineconomicactivity. Afterexperiencing sector demandmaynotbesufficientlystrong thatgrowth concerns inprivate governments’ stimulus intheUSandJapan,underscoring economies willbesupportedbyrecent policy To someextent,growth prospects intheadvanced fiscal positionsandconstrainedcredit conditions. problems related tohighunemployment,weak for theformer. Theseeffects includestructural global financialcrisisonthepotentialgrowth path economies, reflects thecontinuing impactofthe the advancedeconomiesandemergingmarket divergence ingrowth performance between growth likelytobemore moderate.Thecontinued recovery in2011withthe overall economic experience atwo-speedanduneveneconomic As in2010,theglobaleconomyisexpectedto OUTLOOK INTERNATIONAL ECONOMIC OUTLOOK ANDPOLICYIN2011 sustain growth inthese demand, robust privatesectoractivitywilllikely amid aslowerpaceofimprovement inexternal as GermanyandFranceisprojected tomoderate this year. Whilegrowth inthecore economiessuch to continuealbeitatanuneven andmodestpace In the increasing thenetworthofhouseholds. higher equitypricesthatwillcontributetowards personal incomes,longerworkinghoursandthe a gradualimprovement inthejobmarket,rising consumption isalsoexpectedtobesupportedby on privatesectordemand,theunderlying the anticipatedpositiveimpactofthesemeasures bonds duringthefirsthalfof2011.Inadditionto purchase ofUSD600billionworthTreasury round ofquantitativeeasinginvolvingtheFed’s policy wouldalsobereinforced bythesecond investment incentives.Theexpansionaryfiscal tax payroll holidayandthecontinuationof of unemploymentbenefits,andaone-year relief forallincomelevels,aone-yearextension 2010, whichincludeatwo-yearextensionoftax package (5.9%ofGDP)announcedinDecember implementation ofaUSD858billiontaxrelief particularly consumption,willbeboostedbythe private consumption.Privatesectordemand, monetary conditions,andagradualrevival in by anewround offiscalpolicystimulus,easy expansion ineconomicactivity, underpinned In the commodity prices. inflationary pressures arisingfrom highglobal while concurrently addressing theemerging around howbesttomanagethecapitalflows authorities, thechallengesin2011willrevolve emerging economies.Fortheregional monetary create greater volatilityinfinancialpricesthe response toglobaldevelopments isalsolikelyto time, thetendencyoftheseflowstoreverse in and assetpricesintheseeconomies.Atthesame significant upward pressure onexchangerates inflows intoemergingeconomiesoftenalsoexert These largeandpersistentshort-termcapital the advancedandemergingeconomies. widening ofinterest ratedifferential between expected tocontinue,itwillcontributethe or tighteningintheemergingeconomiesis euro area US , theprospects are foracontinued , theeconomicgrowth isexpected economies. In contrast, the contrast, the

91 ANNUAL REPORT 2010 14.5 series series Asian 10.8 10.3 9.6 8.6 8.4 7.8 7.2 7.3 6.8 f 6.2 6.1 6.1 5 ~ 6 2011 4.7 4.5 4.5 4.5 4.4 4.0 e in 2011. Of significance, global Of significance, global in 2011. 2010 is expected to return to a more normal to a more is expected to return Annual change (%) 0 2 4 6 8 10121416 India Korea Thailand Malaysia PR China Indonesia Singapore Philippines Chart 4.2 Forecast Chinese Taipei Estimate Source: International Monetary Fund and National Authorities e f The prospects of a gradual growth in the gradual growth of a The prospects with a more economies coupled advanced economies the emerging demand from moderate in the pace of expansion expected to slow are global trade driven by the to be increasingly trade will continue particularly Asia. In Asia, the emerging economies, patternchanging global trade will influence the investment pattern as multinational global foreign to resources likely to redirect companies are rapidly in the fast expand their operations in Asia trade economies. Intra-regional growing the robust benefiting from strong, would remain in the region. domestic demand in the recovery After an exceptionally strong in the economic growth year, previous economies driven pace in 2011. The expansion will be mainly of domestic demand while by sustained strength a slower to register external demand is projected in line with the moderation pace of improvement in the advanced economies. External demand by the anticipated slower may also be affected in the Chinese economy following a growth tightening measures of monetary and credit by the authorities to achieve a introduced momentum. sustainable overall growth more continue Nevertheless, domestic demand will in the region. to be a key driver of growth robust, Private consumption is expected to remain Hong Kong SAR Regional Economies: Real GDP Growth 2.0 United 1.3 Kingdom , the 1.5 area 1.7 Japan 1.6 Japan Euro 3.9 3.0 States United 2.8 f 2011 7.1 trade World 12.0 , economic expansion is expected to , economic expansion e 4.4 UK 2010 World 5.0 growth Chart 4.1 Estimate

8.0 6.0 4.0 2.0 0.0 Forecast e f Source: International Monetary Fund and National Authorities Annual change (%) 14.0 12.0 10.0 growth prospects for the peripheral economies the peripheral economies for prospects growth as weak remain and Ireland such as Greece impinged by demand will be further domestic high unemployment, measures, fiscal austerity conditions. tight credit systems and fragile financial the continued uncertainties Furthermore, in the debt problems the sovereign surrounding weigh on consumer and business will area euro activity. economic restraining sentiments, further In the remain modest as fiscal austerity measures weigh weigh measures modest as fiscal austerity remain in exports The improvements on domestic activity. likely to continue, are and industrial production pound sterling. Amid an supported by a weak private pressures, of rising inflationary environment by weak consumption is likely to be constrained conditions tight credit job growth, income and real and low consumer confidence. For export-dependent economy will continue to be export-dependent economy will continue the Asian region, supported by demand from is export growth particularly PR China. However, base effect expected to slow during the year as the yen takes dissipates and the impact of a strong in domestic demand recovery The fragile effect. ¥5 trillion will to some extent be supported by the 2010, stimulus package unveiled in November welfare programmes, which includes job creation businesses spending and schemes to help small Nonetheless, domestic and the construction sector. by continued deflation demand will be affected yen. amid a strong World Growth, World Trade and Growth in World Growth, World Trade and Growth Major Advanced Economies (2010-2011)

OUTLOOK AND POLICY IN 2011 ANNUAL REPORT 2010 92 private sector demandtodriveoverallgrowth. conditions, highlightingthe risktotheabilityof weak housingmarketand constrained credit problems intheformofhighunemployment, economies continuetoface persistentstructural withdrawal ofpolicystimulus, theadvanced costs. Notwithstandingtheriskofearly borrowingpotential spikesininternational refinancing andthe needsofgovernments economies, particularlyinviewoflarge on thepaceoffiscalexpansioninadvanced euro area couldhavesignificantimplications regarding thesovereign debtproblems inthe of theseeconomies.Thelingeringuncertainty fiscal deficitsandincreasingdebt government overlargestimulus amidheightenedconcerns US andJapan,continuetobedrivenbypolicy the advancedeconomies,particularlyin downside riskstogrowth remain. Growth in Despite improving globalgrowth prospects, risk totheinflationoutlook. asset markets,thereby reinforcing theupside may exertupward pressures onpricesinthe inflows intotheemergingmarkets,however, of theinflationarypressures. Significantcapital appreciation ofcurrencies hasmitigatedsome commodity markets.Insomeeconomies,the conditions andspeculativeactivityinthe from emergingeconomies,adverseweather on anupward trend, duetostrong demand prices. Commoditypricesare expectedtobe and theimpactofrisingglobalcommodity duetobuoyantdomesticdemand,concern inflationary pressures willremain agrowing economies. Fortheemergingeconomies, appreciating currencies ofkeyemergingmarket of importsresulting from higherinflationand be furtherexacerbatedthrough therisingcosts economies. Theseinflationarypressures could higher headlineinflationintheseadvanced that highercommoditypriceswillleadto conditions. Nevertheless,there istherisk underutilised capacitiesandmoderatedemand economies, reflecting the economies’ expected toremain subdued intheadvanced emerging economies.Underlyinginflationis continue todivergebetweentheadvancedand Global inflationary also lendsupporttoinvestmentactivities. projects plannedinseveralregional economieswill credit conditions.Largeinfrastructure development better employmentprospects, andfavourable supported bybuoyantconsumersentiments, trends are expectedto higher jobcreation inthedomestic-oriented anticipated toimprove, particularlywith confidence. Theemployment situationis disposable incomesandsustained consumer favourable labourmarket conditions, higher Private consumptionwillbe supportedby a robust expansioninprivatesectoractivity. strong growth momentum,drivenmainlyby Domestic demandisexpectedtomaintaina Asian region. surplus onsustainedcommodityexportstothe aroundturn tobepositiveamidalargertrade the growth contributionofnetexportswould demand isexpectedtomoderatein2011, expansion indomesticdemand.Whilstexternal 5–6% in2011,supportedmainlybycontinued pr Malaysian is economy Following thestrong performancein2010,the MALAYSIAN ECONOMY manage therisksassociatedwiththeseflows. restrictions oncapitalinflowsinorder to regulations, administrativemeasures and policytoolssuchasmacroprudentialalternative authorities inemergingeconomiestorely on has encouragedanumberofmonetary The consequentmonetarypolicydilemma spending, thereby affecting economicgrowth. incomes andcauseadeclineindiscretionary erode thepurchasing powerofhousehold the riskthatrisingfoodandfuelpricescould Adding tothemonetarypolicyuncertaintyis more capitalflowsintotheseeconomies. attractmonetary stance.Thiscouldinturn fuels inflationarypressures, totightentheir and incaseswhere domestic aggregate demand greater needtonormalise monetaryconditions, escalating commodityprices,resulting inthe rising inflationarypressures associatedwith In addition,emergingeconomiesare facing of pricebubblesinthedomesticassetmarkets. create financialinstabilitythrough theformation monetary policybutalsohavethepotentialto complicate thenormalisationortighteningof These largeandvolatileflowsnotonly to continueflowemergingeconomies. liquidity, significantcapitalinflowsare expected and emergingeconomiesamidampleglobal divergence ingrowth between theadvanced their growth momentum. Given thecontinuing with adifferent setofchallengestosustain Conversely, emergingeconomiesare dealing ojected togrow at

93 ANNUAL REPORT 2010 OUTLOOK AND POLICY IN 2011 benefiting from the expected turnaround in in expected turnaround the from benefiting amid high commodity production crop industrial gas output following higher natural prices, and fields. Further of two new gas the opening and projects in on-going infrastructure progress under due for implementation new projects will Programme the Economic Transformation construction sector. the impetus for the provide Headline inflation is expected to average and will continue to be 2.5 – 3.5% in 2011, Global commodity driven by supply factors. to rise on account of prices is expected due to adverse weather disruptions in supply developments, conditions, geopolitical demand speculative activities and the strong while emerging economies. Domestically, from prices further adjustments to administered expected in 2011, these adjustments are are to contain expected to be gradual. This will help its overall impact on inflation. Meanwhile, demand on domestic prices from the pressure factors is expected to be modest. surplus, On the external the larger trade front, account together with the sustained services to a wider surplus, is anticipated to contribute account surplus (12.5% of GNI) in 2011. current expected to expand at a exports are Gross a moderate pace, mainly on account of more slower high statistical base in 2010 and the exports, in tandem in manufactured growth moderation of global growth. with the projected expected to are Commodity exports, however, supported by higher growth, robust register the from prices and firm demand, particularly imports is in gross Meanwhile, growth region. to moderate significantly following a projected slowdown in the imports of intermediate goods, in modest growth consistent with the more a larger exports. Consequently, manufactured in 2011. The trade surplus will be recorded a services account will continue to register the from small surplus, driven by higher receipts travel account, while the income account deficit due mainly to higher will be slightly smaller, earnings by Malaysian companies investing and of profits lower repatriation and abroad companies in Malaysia. dividends by foreign inflows of For the financial account, gross investment will likely increase direct foreign further amid the favourable economic outlook, better corporate earnings and positive business in global confidence. Continued improvement FDI flows, together with the Government’s in the primary sector is projected to strengthen, to strengthen, in the primary sector is projected All economic sectors are projected to expand to expand projected All economic sectors are the firmly in 2011, supported mainly by of domestic demand. The continued growth expected are services and manufacturing sectors given moderate pace to expand, albeit at a more the high statistical base of 2010. The services the largest contributor to sector will remain driven by the domestic demand- growth, oriented sub-sectors, particularly wholesale trade, finance and insurance, and and retail communication. The trade- and manufacturing- expected are however, sub-sectors, related moderate pace, in line at a more to grow with the expected moderation in external is also demand. A similar moderation in growth anticipated for the export-oriented industries In particular, in the manufacturing sector. the E&E cluster will experience a slower in 2010. rebound the strong following growth in the domestic-oriented Nevertheless, growth support to industries will continue to provide In addition, growth the manufacturing sector. The Malaysian economy is The Malaysian economy is at 5 – 6% to grow projected by in 2011, supported mainly continued expansion in domestic demand manufacturing and services sectors. The sectors. The and services manufacturing private in for further increases expectation high commodity and continued sector salaries households. In raise incomes of prices will will also provide access to credit addition, spending in 2011. Private support to household and strong to remain investment is expected This will be to growth. contribute favourably spending by the domestic- supported by capital given the high levels of oriented industries and positive business capacity utilisation as the implementation of confidence, as well by the Government key initiatives announced Programme. Transformation under the Economic sector will remain Meanwhile, the public with higher capital supportive of growth, in the second half of 2011. spending projected This is attributable mainly to the implementation and the acceleration of ongoing of new projects private sector activity. to promote projects

OUTLOOK AND POLICY IN 2011 ANNUAL REPORT 2010 94 capacity oftheeconomy. Thisleadstotheoutputgap a sharperdecline,refl While potentialoutputtendstobelowerduringrecessions, actualoutput,however, usuallywitnesses primarily causedbyslowergrowth inthelabourforce. to slowingcapitalaccumulationandTFP, whilethesubsequentmoderationinpotentialoutputwas the caseofMalaysianeconomy, theinitialslowdowninpotential outputgrowth wasduemainly in capitalaccumulationandthenegativeeffects onlabour. Inmostcases,TFPwouldalsodecline. economic crisesusuallyleadtolowerpotentialoutputgrowth intheshorttermduetoaslowdown and continuedproductivity improvements. trend ofabout5%,supportedbyafurtherexpansioninthecapitalstock,growing labourforce sustained growth oftheeconomy. Potentialoutputgrowth isexpectedtoreturnitsmedium-term Malaysia’s outputgapisprojected tonarrowslightlypositivein2011giventhe furtherandturn -0.7% from -2.6%in2009astheeconomicrecovery gathered strength. narrows. Thiswasobservedin2010,whichtheoutputgapofMalaysianeconomynarrowed to during aperiodofeconomicslowdown.Astheeconomyrecovers, thenegativeoutputgapgradually 1 2 4.2% in2007and2008-2009respectively. Thisisconsistentwithothercountryexperiences Potential outputoftheMalaysianeconomyexpandedby4%in2010,moderatingfrom 5.3%and arising from improvements intheutilisationoffactorinputs. the labourforce, aswell totalfactorproductivity (TFP)growth. TFPcaptures productivity increases output isprimarilydeterminedbytheexpansionandnon-infl on availableproductive inputs, theleveloftechnologyanditsoveralleffi capacity ofaneconomy. Itprovides anindicationofthesustainablegrowth pathofaneconomybased Potential outputisthenon-infl e Actual RealGDPandPotentialOutput 9319 . . . . 0.1 4.1 4.5 6.4 6.5 1993-1999 The outputgapisthedifference between thelevelsofactualandpotentialoutputgapismeasured asapercentage Agoodreview ofthiscanbefoundinFurceri, D.andA.Mourougane (2009),“TheEffect ofFinancialCrisesonPotential Estimate indicates thereverse. of potentialoutput.Apositiveoutput gapindicatesthatactualoutputisabovepotentialoutput,while anegativeoutputgap Output: NewEmpiricalEvidencefrom OECDCountries”, Publishing. doi:10.1787/224126122024 2010 Period 09-. . 5626-2.6 0.3 1.9 2.6 0.8 1.3 0.7 2.5 -5.6 0.2 2.1 0.7 0.6 9.4 -0.7 1.0 7.5 -1.0 4.2 3.6 4.2 5.0 1.9 5.3 3.6 -1.7 5.7 2.8 4.7 5.0 0.6 6.5 5.4 2009 5.8 5.9 2008 5.3 4.1 2007 6.8 2006 5.8 2005 5.4 2004 2003 2002 010546-. . -2.1 1.5 -2.1 4.6 0.5 2001 0089482. . 0.5 4.4 25.7 4.8 8.9 2000 Table 1 e Actual Real GDP . . . . -0.7 2.5 9.4 4.0 7.2 Annual change(%) Potential Output ectingarelatively greater slowdowninoveralldemandvis-à-vistheproductive Potential OutputoftheMalaysianEconomy netetLabour Investment ationarylevelofoutputthatisconsistentwiththeaggregate productive potential output) Output (% of Gap OECD EconomicsDepartmentWorking Papers 100 120 140 160 f Source :DepartmentofStatistics,MalaysiaandBankNegaraestimates Actual andPotentialGDP 2 RM billion 20 40 60 80 becomingnegative,indicatingspare capacity Forecast 0 9119 9519 9920 0320 0720 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 Chart 1 Output gap(RHS) ationaryutilisationofphysicalcapitaland Asian Financial Crisis ciency. Thegrowth inpotential Actual Output(LHS) (LHS) Potential Output Global Financial , No.699,OECD Crisis 1 , inwhich % ofpotential f -10 -5 0 5 10 15 20 25

95 ANNUAL REPORT 2010 OUTLOOK AND POLICY IN 2011 will be the main will be the main the favourable labour market conditions, rising conditions, rising labour market the favourable consumer income and sustained disposable will continue Private investment confidence. half of in the second especially to be strong, outlook for by the favourable 2011, spurred industries and the overall domestic-oriented The public sector positive business conditions. importance, Of supportive of growth. will remain will be underpinned by the public investment outlined in the Tenth projects implementation of as well as higher capital Malaysia Plan (10MP) spending by the NFPEs. Private consumption contributor to domestic demand growth The in 2011, with an expansion of 6.9%. expansion in consumer spending is strong market attributable to the favourable labour and conditions, higher disposable income a more sustained consumer confidence. Amid in external gains moderate growth demand, by in employment will be mainly supported expansion in domestic- the continued strong sectors. oriented manufacturing and services to remain The unemployment rate is projected in 2011. stable at 3.2% of the labour force employment In addition to the improved will also situation, higher household incomes be underpinned by the expectation of further in private sector salaries by an increases average of 4.8% in 2011 and the continued high commodity prices, with the latter having a significant positive impact on the incomes of rural households. Household spending will also be supported by While the ratio of continued access to credit. high at household debt to GDP was relatively 75.9% as at end-2010, the overall household sound. In particular, balance sheet has remained the ratio of debt to financial assets remained unchanged at a level of 41.9% as at relatively all types across end-2010. Loan repayments high, with remained of household borrowings to disbursements of the ratio of repayments household loans averaging at 85% in 2010 Strong expansion of domestic expansion of domestic Strong demand in 2011, driven by private sector activity robust wide-ranging economic transformation economic transformation wide-ranging of FDI into higher inflows will support projects, by Malaysian abroad investment Direct Malaysia. large as remain is anticipated to companies to seek new markets and companies continue abroad. business opportunities mainly by domestic will be driven While growth externaldemand in 2011, demand will remain the total trade in goods important given that for 176% of GDP in and services accounted – 6% is based of 5 projection 2010. The growth in the of moderate growth on the expectation and a return to more advanced economies rates by the Asian economies. normal growth downside risks to remains Nonetheless, there domestic Notwithstanding robust global growth. demand, a rapid deterioration in external spill conditions could have significant adverse on the overall economy through over effects the investment and employment channels, overall sentiments. Second, whilst also affecting to remain volatility in capital flows will continue including a policy challenge for the region, economies, Malaysia. In line with the regional large inflows of Malaysia has been receiving half portfolio investments since the second effectively of 2009. Malaysia has managed to strength intermediate these flows given the the wide and depth of the financial system and to the range of monetary instruments available the case, Central Bank. While this is currently needs to be vigilance on the potential there flows risk of massive shifts in global liquidity markets in that could overwhelm the financial Malaysia. the emerging economies, including significant volatility in two-way Going forward, flows can be expected given the continued uncertainties in the international financial markets and the shifting global financial higher-than-anticipated landscape. Third, downside risks to inflation would also present Given the expectation for projection. the growth private consumption to contribute significantly in expected increases sharper-than to growth, would pose a food and fuel prices in particular, momentum in 2011. risk to the GDP growth Domestic Demand Conditions a to register Domestic demand is projected of 6.7% in 2011, driven by expansion strong private In particular, sector activity. private robust consumption is expected to continue to be a supported mainly by main contributor to growth

OUTLOOK AND POLICY IN 2011 ANNUAL REPORT 2010 96 Real GDP and Private Consumption Private GDP and Real 10 12 Domestic Demand Iprs 47281. 2.8 3.0 13.8 10.5 2.8 2.7 -0.9 14.7 4.9 9.8 0.3 1.0 Real Gross Domestic 0.6 Imports 2.7 0.0 Exports 1.0 7.2 5.5 Net exportsof 3.7 1.4 Change instocks 0.1 9.7 3.6 Investment 6.9 Consumption 13.8 Publicsector 6.6 Investment Consumption Privatesector Source: DepartmentofStatistics, MalaysiaandBankNegara Note: Figures maynotnecessarily addupduetorounding f p trend downwards, from 7.1%asatend-2006 ratio ofthehouseholdsectorcontinuedto (2006-09: 87%).Thenon-performingloans 1 Real GDPbyExpenditure (2000=100) Source: DepartmentofStatistics,Malaysiaand BankNegaraMalaysia f p Annual growth(%) -4 -2 Forecast 0 2 4 6 8 Preliminary Preliminary Forecast rdc GP . .~. . 5.0~6.0 7.2 5.0~6.0 7.2 Product (GDP) goods andservices Excluding stocks Chart 4.3 Table 4.1 expenditure expenditure 0320 0520 0720 092010 2009 2008 2007 2006 2005 2004 2003 Real GDPgrowth Private consumptiongrowth Private consumption(RHS) 1 2010 2. . 330.2 -3.3 2.3 -24.2 Annual change . . . 1.3 0.6 5.1 4.7 2.5 6.0 4.9 7.4 5.6 6.7 7.8 6.3 p (%) 2011 f 2010 (percentage point) real GDPgrowth Contribution to p p (2000 prices) 2011 2011 RM billion f f 120 160 200 240 280 320 360 Proportion ofGDP(%) industry is also expected to undertake higher industry isalsoexpectedtoundertakehigher establishment ofnewoutlets.Thefinancialservices firms haveindicatedexpansionplansthrough the services. Inthewholesaleandretail tradeindustry, anticipation ofhigherdemandforbroadband infrastructure andnetworks,drivenbythe to enhanceandexpandthepresent broadband Communication serviceproviders are expected to improve theprovision ofexistingservices. consumption aswellongoinginitiatives oriented firms,intandemwithhigherdomestic to increase further, especiallyamongdomestic- In theservicessector, capitalspendingisprojected positively towards privateinvestmentgrowth. higher FDIintoMalaysia,willalsocontribute improvement inglobalFDIandconsequently, confidence andoutlook.Inaddition,theoverall are alsoexpectedtoweigh favourablyonbusiness in2010 initiatives announcedbytheGovernment strengthening ofdomestic demand.Important positive businessconfidence,inlinewiththe High investmentactivitywillbesustainedby the services,manufacturingandminingsectors. spending inalleconomicsectors,particularly growth of9.7%in2011,supported bycapital Private investment consumption inthenearterm. will continuetobesupportiveofhousehold at theaggregate level,financing conditions debt repayment capacitycontinuing tobeintact household balancesheetremaining soundand theoverall to 2.3%asatend-2010.With Source: BankNegaraMalaysia Household DebtIndicators 50 55 60 65 70 75 80 Chart 4.4 0320 0520 0720 092010 2009 2008 2007 2006 2005 2004 2003 Household debt (% of GDP) (% debt Household Household Loan - Household Deposit Ratio (RHS) Ratio Deposit - Household Loan Household isexpectedtoregister a Ratio 0.7 0.8 0.9 1.0 1.1 1.2 1.3

97 ANNUAL REPORT 2010 OUTLOOK AND POLICY IN 2011 is expected to remain is expected to remain services is in line with Government’s new new in line with Government’s services is the to ensure under the 10MP commitment and of quality public services delivery effective of public assets. maintenance proper Public investment with an in 2011 supportive of growth This is on account of expansion of 2.7%. higher Government capital spending driven the ETP and planned under by new projects 9MP programmes. 10MP as well as ongoing a large proportion sector, In the economics will be utilised of development expenditure improve basic rural infrastructure, to provide public transport as well connectivity in urban as to fund water supply and electrification is also made Substantial provision projects. promote to trade and industry sub-sector to activity. higher domestic private investment given sub-sectors are Education and healthcare to support priority in the social services sector to and the development of a skilled workforce healthcare. of affordable enhance provision Investment by the non-financial public to rise, enterprises (NFPE) is also expected further support to public investment providing in the oil and in 2011. Capital expenditure largely gas sector will be the main contributor, activities for the on account of upstream deepwater development of marginal fields and capital expenditure explorations. Additionally, will be in the transport and utility sub-sectors and the focused on rail and airport expansion construction of new power plants respectively. on the high speed broadband Expenditure is expected to make up the bulk of the project investment in the communication sub-sector. Sectoral Outlook All economic sectors are projected to expand in All economic sectors are projected to expand in 2011, to be supported mainly by the continued growth of domestic economic activity. From the high base of 2010, the services and manufacturing sectors are expected to expand at a more moderate pace in 2011, underpinned by the favourable growth in the domestic- dependent sub-sectors. Trade-related services and export-oriented manufacturing industries, however, will record slower growth, in line with the expected moderation in external demand. Growth in the primary sector is projected to strengthen, benefiting from the expected turnaround in the production of industrial crops amid high commodity prices, as well as higher is projected to increase to increase is projected capital expenditure, following the establishment of following the establishment capital expenditure, business licensees and by foreign new operations institutions. by current expansion in the investment activities In addition, storage sector will be transportation and development of oil and supported by the facilities, as storage and terminal gas-related and air in port infrastructure well as expansion the expectation of higher transportation, given and additional air routes. passenger demand in the manufacturing sector Capital spending by reflected as resilient, is expected to remain investment projects approved the higher level of were in the sector in 2010. Higher investments and products for the E&E, petroleum approved segments. In particular, basic metal products is investment spending in the E&E segment in the manufacturers attributable to foreign energy as well of renewable area new growth disk drive components. Furthermore, as hard high capacity utilisation rates will continue capacity expansion activity by to promote in the manufacturing firms in general, especially domestic-oriented industries. to Investment in other sectors is expected In the mining further improvements. register investment is anticipated to increase, sector, supported by the expansion and upgrading facilities, development of existing production few for new discoveries in the past expenditure in the years, as well as exploration activities addition, deepwater and marginal oil fields. In project new tax incentives that have improved will provide viability in the oil and gas industry further impetus to exploration activity in the capital construction sector, In the mining sector. on account spending is also expected to increase of the implementation of new and ongoing projects. infrastructure the will reinforce Public sector expenditure expansion of domestic demand in 2011, public capital spending with higher particularly, This in the second half of the year. projected is attributable mainly to the implementation and acceleration of ongoing of new projects private sector activity. to promote projects Public consumption by 7.2% in 2011, due to higher expenditure on emoluments and supplies and services. Of importance, the expansion in supplies and

OUTLOOK AND POLICY IN 2011 ANNUAL REPORT 2010 98 particularly fromthehigh-incomecountries. expected tobenefitfromhighertouristarrivals, stores andhypermarkets.Thesub-sectorisalso conditions aswelltheexpansionofnewretail consumption amidfavourablelabourmarket performance, supportedbyhigherprivate is expectedtocontinueregisterarobust The wholesaleandretailtradesub-sector moderate pace. sub-sectors areexpectedtogrowatamore demand, thetrade-andmanufacturing-related communication. Reflectingtheslowerexternal and retailtrade,financeinsurance, on domesticdemandsuchaswholesale be drivenbysub-sectorsthataredependent sectors areexpectedtoexpandfurther, growth rateof5.9%(2010:6.8%).Allsub- contributor togrowthin2011,withaprojected The mainly bydomesticdemand 2011, tobesupported all economicsectorsin Steady expansionacross impetus fortheconstructionsector. Transformation Programme(ETP)willprovidethe due forimplementationundertheEconomic going infrastructureprojectsandnew output ofnaturalgas.Furtherprogresson- evcs685.9 6.8 5.4 5.7 5.2 3.4 11.4 2.0 5.0~6.0 1.7 0.2 7.2 Real Gross DomesticProduct (GDP) Services Construction Manufacturing Mining &quarrying Agriculture Source: DepartmentofStatistics,Malaysia f p Real GDPbySector(2000=100) Forecast Preliminary Table 4.2 services Bank NegaraMalaysia sectorwillremainthelargest Annual change(%) 2010 p 2011 f and light-emitting diodes(LED)manufacturing, of investmentsinnewareas, suchassolarcell within theregion.Inaddition, implementation communications segments, particularlyfrom by demandforproductsin the consumerand but theclusterwillcontinue tobesupported with thetrendinworldsemiconductorsales, The anticipatedslowergrowthwillbeinline slower growthafterthesharpreboundin2010. In particular,theE&Eclusterwillexperiencea environment ofmoremoderateexternaldemand. the export-orientedindustries,intandemwithan base in2010.Slowerexpansionisexpected at amoremodestpacein2011giventhehigh The to growth. domestic airlineswouldprovidefurthersupport low-cost segmentandaggressiveexpansionby tourism activities.Competitiveairfaresinthe higher touristarrivalsandincreaseddomestic passenger-related segment,inlinewithprojected would bepartlyoffsetbytheresiliencein expected moderationincargo-relatedservices In thetransportandstorage the slowergrowthoutlookofexternaldemand. projected tobemoremoderate,reflectiveof Growth inthetrade-relatedsub-sectorsis broadband servicesintheruralareas. by theGovernmenttopromoteadoptionof broadband servicesandcontinuousinitiatives of high-speedbroadband(HSBB),wireless will befurthersupportedbywiderroll-out competition amongserviceproviders.Growth a proliferationofnewdevicesandintensified popularity andaffordabilityofsmartphonesamid data isexpectedtobenefitfromtherising the non-voicesegment,asdemandformobile telecommunication industrywouldbedrivenby sub-sector isexpectedtoremainrobust.The Similarly, outlookforthecommunication public awarenessonfinancialplanning. with risingdisposableincomeandimproved emanate mainlyfromthelifesegment,inline the insurancesegment,growthisexpectedto the fee-basedincomeofbankinginstitutions.In market activitywouldcontributefavourablyto activity. Theanticipatedincreaseincapital consumer spendingandbusinessexpansion would continuetogrowintandemwithhigher mainly bythefinancesegment,asbanklending sector isexpectedtoremainstrong,driven Growth inthe manufacturing

finance andinsurancesub- sectorisprojectedtogrow

sub-sector, the

99 ANNUAL REPORT 2010 OUTLOOK AND POLICY IN 2011 such as the construction of the Second Penang the Second Penang construction of such as the oil LCCT, and rail networks, Bridge, double-track the civil engineering in Sabah, and gas terminal by the will also be supported sub-sector new major projects such as implementation of power plants in Terengganu the construction of LRT as the Klang Valley and Sabah as well sub-sector will be extension. The non-residential construction of purpose- driven by the on-going space and the public sector built office and retail building and upgrading of expenditure on the and clinics, while the continued schools, hospitals demand and favourable growth in housing will support growth in the financing environment residential sub-sector. Balance of Payments surplus On the external front, the current account billion or is expected to increase to RM100.7 prices 12.5% of GNI in 2011. Higher commodity to drive and firm domestic demand will continue respectively, growth in gross exports and imports The contributing to a bigger trade surplus. a small services account is expected to register from surplus on account of higher receipts account, the travel account. On the financial likely to foreign direct investment inflows are abroad increase further while direct investment to remain by Malaysian companies is projected in the large as the economic outlook, particularly region, remains favourable. by 5.4%, Gross exports are expected to expand previous a moderation from the high base in the to year. Manufactured exports are projected register more modest growth as E&E exports are expected to expand at a moderate pace in tandem with the slower growth of the global electronics industry. Given their relative strength in the computer segment, Malaysian producers are likely to reap limited benefits from the upgrade in the global electronics, driven by smartphones, tablets and other consumer electronic gadgets. Nonetheless, continued regional demand for audio-visuals, such as flat panel televisions and Blu-ray disc players/recorders will continue to support the sustained growth in exports of electrical products. In the non-E&E product segment, the increase in exports is expected to be driven by sustained regional demand for resource- based products, particularly chemicals, petroleum and rubber and higher commodity prices. Commodity exports are expected to continue to sector is expected sector is expected sector is expected to record sector is expected to record construction sector is projected to expand by sector is projected to expand by agriculture mining is expected to benefit the cluster. Growth in the the Growth in to benefit the cluster. is expected continue to be driven cluster will primary-related and off-estate demand for chemical by global within the region. particularly from products, products industry is In addition, the rubber favourably, supported by expected to perform as well as automotive- the demand for gloves related rubber products. industries Growth in the domestic-oriented support to the will continue to provide The consumer-related manufacturing sector. to move in tandem with cluster is expected of private consumption, the continued growth food- and transport-related particularly in the cluster will industries. The construction-related in be supported by the expected improvement In addition, construction activity during the year. will continue infrastructure projects in the region to benefit the production of steel products. The to a a higher growth of 3.4% in 2011 due crops. turnaround in the production of industrial in the Palm oil output is projected to recover an expected second half of the year in line with during normalisation of weather conditions amid the period. Similarly, high rubber prices demand low global stocks and strong global activity will continue to encourage tapping during the year. Growth of the agriculture sustained sector will also be supported by the with the high production of food crops in line the sector, Government’s efforts to invigorate value- including measures to promote high added agriculture activities. The 2% reflecting higher natural gas output with the opening of two new gas fields in offshore Terengganu and Sarawak. However, crude oil production is expected to decline further due to scheduled maintenance and the implementation of the Reservoir Management Plan to sustain long-term production. Growth in the to improve to 5.4% in 2011 (2010: 5.2%), supported by expansion across all sub-sectors. In particular, the civil engineering sub-sector is expected to benefit from the implementation of projects under various Government initiatives. Apart from further progress on on-going projects

OUTLOOK AND POLICY IN 2011 ANNUAL REPORT 2010 100 technology and createhigherskills.FDIin the likely togeneratehighvalue-added, utilisehigh as wellnon-metallicmineral productsthatare including petrochemicals,basic metalproducts in industriessuchasE&E,petroleum products shows thatthebulkofinvestments willbe foreign investmentinthemanufacturingsector technologies. DatafromMIDAonapproved investments innewgrowthareasandemerging by MNCsforcapacityexpansionandnew FDI willbeintheformofbothreinvestment oil andgassectors.Inthemanufacturingsector, into themanufacturing,servicesaswell broad basedwithflowsbeingchannelledmainly Malaysia. ThehigherFDIisexpectedtoremain lend additionalsupporttoinflowsofFDIinto ranging economictransformationprojectswill global FDIflowsandtheGovernment’swide- business confidence.Furtherimprovementsin outlook, bettercorporateearningsandrising further in2011giventhefavourableeconomic direct investment(FDI)areexpectedtoincrease On thefinancialaccount,grossinflowsofforeign affected bytheexpectedmoderationinexports. outlook intheregion,whilelatterwillbe commodity pricesandfavourableeconomic former isexpectedtobesupportedbystronger dividends byMNCsoperatinginMalaysia.The abroad andlowerrepatriationofprofits earnings byMalaysiancompaniesinvesting to beslightlysmallerduemainlyhigher In theincomeaccount,deficitislikely access through thelow-costairlinecarriers. active promotionalcampaignsandincreased the regionareprojectedtoincreaseamidst account astouristarrivals,particularlyfrom driven byhigherreceiptsfromthetravel registering asmallsurplusofRM0.2billion, The servicesaccountisexpectedtocontinue the strengtheningofprivateinvestment. expansion ofdomesticprivateconsumptionand grow atsustainedrates,supportedbytheresilient consumption andcapitalimportsareexpectedto in manufacturedexports.Nonetheless,both down inlinewiththemoremodestgrowth to 5.7%asimportsofintermediategoodsslow Growth ingrossimportsisprojectedtomoderate from theregion. and firmdemandforcommodities,particularly register robustgrowth,supportedbyhigherprices vrl aac -2.6 -71.0 Overall balance of which: Errors andomissions Balance ofPayments Source: DepartmentofStatistics, MalaysiaandBankNegara Note: Numbersmaynotnecessarilyaddupduetorounding f p od 136.6144.3 Goods fGI1. 12.5 12.2 -21.9 -0.2 -23.7 -25.2 -20.2 -21.7 0.90.2 100.7 Balance oncapitalandfi 90.5 Financial account Capital account % ofGNI 144.6 Balance oncurrent account 137.4 Current transfers Income Balance ongoodsandservices Services Gross imports Gross exports Trade balance External TradeExternal Source: DepartmentofStatistics,Malaysiaand BankNegaraMalaysia f p Forecast Forecast Preliminary accounts Preliminary oeg xhne eauto os-32.6 Foreign exchangerevaluationloss rd con 1. 114.6 110.2 Trade account of which: of which: Table 4.3 Table 4.4 Consumption goods Intermediate goods Capital goods mot %ana hne 17 5.7 5.4 21.7 15.6 Imports (%annualchange) Exports (%annualchange) Minerals Agriculture Manufactured nancial 6. 21382.45.3 22.1 363.2 5.7 559.6 529.2 21.7 4.4 507.9 486.7 13.0 5.4 674.2 639.4 15.6 1. 69146 4.0 110.2 -6.9 114.6 billion 282. 7. 8.0 78.6 72.8 23.4 12.4 78.5 69.9 30.8 461. 75 8.4 37.5 10.3 34.6 10.1 84.3 76.4 16.2 RM 2010 change Annual p (%) 2010 -22.1 billion RM billion RM p

2011 2011 change Annual f (%) f

101 ANNUAL REPORT 2010 OUTLOOK AND POLICY IN 2011 underpin expectations of higher wages and wages and expectations of higher underpin supporting of households, income growth activity and private consumption sentiments a survey conducted year. Based on during the most firms in the by Bank Negara Malaysia, services and manufacturing, non-financial are optimistic on the construction sectors and expect further outlook for employment The overall average salary increases in salaries. sector is expected to be increment in the private with an average increment 4.8% (2010: 4.5%), in the manufacturing and of 3.1% and 5.5% sectors, respectively. non-manufacturing Inflation Outlook Headline inflation is expected to average Headline inflation is expected to average to be2.5 – 3.5% in 2011. Inflation will continue higherdriven by supply factors, especially from toglobal commodity prices and further adjustments will prices. Demand pressures domestic administered inbe modest in line with the gradual improvements range reflects domestic demand. The wider forecast uncertainty in the external domesticgreater and particularly on global food and energyenvironment, of adjustmentsprices, and the timing and magnitude prices by the Government.to administered Headline inflation is expected to Headline inflation is expected driven mainly by supply increase, factors On the supply side, global commodity prices are on account of disruptionsexpected to increase in supply due to adverse weather conditions, geopolitical developments, speculative activities emerging economies. For demand from and strong crude oil, the IMF WEO update in January 2011 to an average of USD90 prices to increase projected in 2010). in 2011 (USD79.5 per barrel per barrel was similar to the survey ofThe IMF projection by Bloomberg in early Februaryanalysts’ forecasts of close2011, which showed a median projection advanced As demand from to USD90 per barrel. low throughout economies is expected to remain 2011, the underlying demand for crude oil is mainly economies. Supply of crude oil, on emerging from adequate forthe other hand, is expected to remain 2011, the International In February Energy the year. capacity production Agency (IEA) estimated the spare oil and gas sector will continue to be supported to be supported sector will continue oil and gas as demand as well and increasing by rising prices to the sector. government incentives increased of the services further liberalisation Following in the services sector is likely sector in 2009, FDI financial and non-financial to flow into both the Although the amount of services sub-sectors. in the service sector could be foreign investments compared to the investments relatively small when sector, these investments in the manufacturing higher employment are expected to generate managerial, professional opportunities in the in line with Government’s and technical levels, a quality workforce and objective of creating higher income economy. Direct investment abroad (DIA) by Malaysian large in companies is anticipated to remain new 2011 as companies continue to seek abroad. markets and business opportunities The large DIA is expected to be channelled as well as mainly into the services, oil and gas regional and manufacturing sectors, focusing on of the other emerging economies. While most DIA continues to be led by Government-linked expected companies, the private sector is also to continue to invest abroad by venturing into areas of their expertise and seeking and opportunities in existing and new regions Malaysian markets. This will continue to benefit companies through greater competitiveness and arising from having better market access to greater economies of scale, thus, leading of a greater potential for higher repatriation abroad profits and dividends from investments over the medium term. Labour Market Outlook Labour market conditions are expected to remain positive in 2011, with the continued expansion in employment stemming primarily from growth in the domestic-oriented sectors. Job creation will be led by the services sector, particularly in the distributive trade, finance and insurance, and communication sub- sectors. In the manufacturing sector, despite a more moderate growth in the export- oriented industries, gains in employment will be sustained, supported by the expansion in the consumer-related and construction-related clusters. The unemployment rate is projected to remain at 3.2% of the labour force in 2011. The positive employment outlook will

OUTLOOK AND POLICY IN 2011 ANNUAL REPORT 2010 102 higher costsforimportedinputs andconsumer wouldresultmarket economies.Thisin turn in see sustainedpricepressures inemerging However, strong domesticdemand willlikely inflationary pressures from thesecountries. economies would,tosomeextent,soften from lowconsumptionspendinginadvanced slack capacityandsubdueddemandpressures expected tobehigherin2011.Prevailing Malaysia’s keyimportsource countriesis On thewhole,averageinflationamong prices ofcommodities,especiallycrudeoil. could exertfurtherupward pressures onglobal the MiddleEastandNorthAfricaregion, which the evolutionofgeopoliticaldevelopmentsin prices further. Anothersource ofuncertaintyis economies couldalsocontributetodriveup Better thanexpectedgrowth intheadvanced commodities pricesandincrease theirvolatility. interest ratesglobally. Thiscoulddriveupglobal higher returnsamidstexcessliquidityandlow intensify, asinvestorscontinuetosearch for Speculative demandforcommoditiescouldalso are administered bytheGovernment. that manyofthefooditemsinCPIbasket transmitted todomesticpriceswithalaggiven 2011 asmovementsinglobalfoodpricesare global foodpricesin2010wouldalsobefelt of 2011.ForMalaysia,theimpacthigher when reserves increase bythesecondhalf crops are expectedtobemore thanadequate temporary giventhatsuppliesofmajorfood rapid paceofincrease infood priceswillbe representing pricesoffood. theinternational 55foodcommodities considered byFAO specialistsas 1 (FAO Agriculture Organisationof theUnitedNation’s November 2010editionoftheFoodand exert furtherupward pressure onprices.The factors andadverseweatherconditionswould Continued disruptionsinsupplyfrom seasonal economies suchasChina,In rising incomes,especiallyinemergingmarket elevated amidstrobust economic growth and remain highasdemandpressures remain Global foodpricesin2011are expectedto during thepeakofoilpriceshockin2008. per day, compared toonly2.3millionbarrels perday Countries (OPEC)toamount4.7millionbarrels of theOrganisationPetroleum Exporting The FAO FoodPriceIndex consistsofaweightedaverage 1 ) FoodOutlookanticipatedthattherecent dia andIndonesia. -40 -20 to domesticinflation. However, excessive pricepressuresthe transmissionofexternal Thus far, theappreciation hashelpedtosoften nominal effective exchangeratesince2010. on pricesistheappreciation oftheringgit’s A factorthathasattenuated theupsidepressure sector.negative developmentsintheexternal price increases willalsobebalancedbythepotential are expectedtobemodest.Moreover, theoverall pressure on Economy white boxonPotentialOutputoftheMalaysian slightly positivein2011( pace, andcouldturn output gapwillbenarrowing, albeitatameasured households andbusinesses.Consequently, the the consumptionandinvestmentactivitiesof monetary conditionswillcontinuetosupport in privateconsumption,andthefavourable and businesssentiments,steadyincrease Increases inwages,improvements inconsumer with thesteadyincrease indomesticdemand. factors isexpectedtobemoderateandinline The pressure ondomesticpricesfrom demand contain theoverallimpactoninflation. are expectedtobegradual,andthiswillhelp adjustments. However, thepriceadjustments depend onthetimingandmagnitudeofthese for 2011.Theimpactonoverallinflationwill to thepricesofadministered itemsisexpected rationalisation programme, aseriesof Domestically, subsidy aspartoftheGovernment pressure ondomesticinflation. goods from theseeconomies,andexertadditional CPI andFAOFoodPriceIndex Food andNon-AlcoholicBeverages Source: DepartmentofStatisticsMalaysiaandFAO Annual growth,% 20 40 60 0 Chart 4.5 JF M A M JJ A S O N D J F M A M J JA S O N D J F M A M JJ A S O N D Food andNon-AlcoholicBeveragesCPI(RHS) FAO FoodPriceIndex(LHS) 0820 2010 2009 2008 ). Whilethiscouldcreate upward prices, theextentofsuchpricepressures adjustments Annual growth,% See 0 2 4 6 8 10 12 14

103 ANNUAL REPORT 2010 OUTLOOK AND POLICY IN 2011 extent, speculative activity driven by ample driven by ample activity extent, speculative of the and the financialisation global liquidity lead to higher markets. This will commodity that is little prices. While there domestic these “first- policy can do about monetary be accorded vigilance needs to effects, round” become such price pressures to assess whether by domestic reinforced and are entrenched the degree circumstances, factors. Under these may need to of monetary accommodation inflation does not that be adjusted to ensure undermine economic to levels that will increase welfare. economic activity and erode interest in real also result Rising inflation may the rates becoming negative. Apart from returns positive real importance of providing interest on savings to depositors, low real taking rates could encourage excessive risk the disintermediation of funds behaviour, risky safe assets, like deposits, into more from for higher yields, and investments in a search potentially spur the build-up of excessive imbalances leverage. Such developments create growth that could undermine the long-term unwind, potential of the economy when they In this regard, manner. usually in a disorderly remain the stance of monetary policy should to avoid the build-up of financial appropriate the extent that such excessive imbalances. To escalations risk taking behaviour or asset price market, occur within specific segments of the macro- other targeted instruments such as can be deployed to prudential measures such concerns.address Capital flows would pose another challenge to the management of monetary policy in 2011. Large shifts in global liquidity have resulted in significant capital flows into emerging into the Asian economies, and in particular, to their large size, these inflows Due region. sharp movements have the potential to create in the exchange rate. Such sharp movements within a short period of time would be Decision detrimental to economic activity. of making by businesses in an environment pricing of such uncertainty about the future goods and services as well as investments becomes highly challenging. Excessive flows can also lead to a sharp escalation in domestic asset prices, which, when these flows reverse, can then collapse, which will in turn create Such flows need negative wealth effects. and management. monitoring careful The Malaysian economy is expected to grow The Malaysian economy is expected to grow rates growth at 5 – 6% in 2011. The projected with the fundamentals of the consistent are Given the weaker external Malaysian economy. demand, domestic private demand will have in driving economic growth. an important role Both private consumption and investment are momentum expected to maintain their growth supported by an accommodative policy a risk to this outlook is However, environment. in the inflation rate. the increase higher in 2011, Inflation is expected to trend driven mainly by commodity and energy sharply due to prices which have increased multiple external factors such as changes in global demand, adverse weather conditions, geopolitical developments, and, to a certain Monetary policy will support Monetary policy will support of the sustainable growth the risks economy while managing to inflation Monetary policy in 2011 is expected to operate in Monetary policy in characterised complex environment an increasingly global economic growth, by continued uneven and volatile capital flows, high global liquidity, to 2010, elevated commodity prices. Compared when monetary policy focused on preventing the risk of financial imbalances and sustaining the upside risks to inflation economic growth, visible in 2011. have become increasingly support Monetary policy will thus continue to of the economy while the sustainable growth will managing the risks to inflation. Emphasis policy also be placed on ensuring that monetary to avoid the build-up of appropriate remains financial imbalances. MONETARY POLICY MONETARY strengthening of the exchange rate can also can also the exchange rate of strengthening the exchange rate misalignment of lead to a in which would fundamentals against economic turn overall implications on the have negative in adjustments and orderly Gradual economy. is important to allow for the the exchange rate to take place in the adjustments corresponding economy. real

OUTLOOK AND POLICY IN 2011 ANNUAL REPORT 2010 104 income economy, iscommitted the Government is keytotransformingMalaysia intoahigh- Acknowledging thathuman capital development agencies. sector andGovernment in order tofacilitatetransactionsbetweentheprivate measures toenhanceefficientpublicdeliverysystem market andventure capitalindustry. There are also financing, includingmeasures torevitalise thecapital measures toenhancethesources ofprivatesector Rapid Transit Third, (MRT). theimplementationof FinancialDistrict (KLIFD)andMass International private sectorinvestment,suchasKualaLumpur high-impact developmentprojects tofurtherattract sector funding.Second,theidentificationofseveral developmentprojects Government through private initiatives asakeymechanismtoimplement First, theestablishmentofpublic-privatepartnership Budget outlined,amongothers,three keyinitiatives. In facilitatingprivatesectoractivities,the2011 private investmentandboostdomesticdemand. Budget focusesonmeasures toreinvigorate Economic Areas (NKEAs).Inparticular, the2011 Result Areas (NKRAs)andthe12NationalKey 10th MalaysiaPlan(10MP),6NationalKey are guidedbythestrategiesoutlinedin level ofprivatesectoractivity. Thesemeasures on measures thatfacilitateandenableahigher high-income economybycontinuingtofocus transforming thenationintoadevelopedand Fiscal policyin2011isgeared towards FISCAL POLICY emanating from capitalflows. ability tobepre-emptive in banks intheregion alsoenhancestheBank’s reverse. Fifth,closercooperation and financialstabilityifcapitalflowswere to Bank hasthebuffers topreserve macroeconomic reserveslevel ofinternational alsomeanthatthe Fourth, thestronger fundamentals andahealthy better surveillanceandinformationsystems. its monetaryoperationsandaugmentedby supported byawiderrangeofinstrumentsfor liquidity hasalsoimproved significantly, Third, theBank’s abilitytomanagedomestic exchange ratetoadjustchangingconditions. has accorded thenecessary flexibilityforthe capital flows.Second,themanagedfloatregime financial systemhashelpedtointermediatethe flows. First,themore diversified anddeveloped now hasgreater latitudein managingcapital Compared toprevious episodes,Malaysia managing the risks managing therisks among central B p measures were theintroduction oftheIndustrial of educationatalllevels.Amongtheannounced training programs andstrengthening thequality attract, motivateandretain talent,intensifying capital. Thisisachievedthrough measures to to developingandeffectively managinghuman -80 -60 -40 -20 Federal Government Fiscal Balance and Debt 1 Source: MinistryofFinance Note: Numbersmaynotaddupduetorounding B p epniue 284. . -6.8 3.9 6.6 0.6 3.7 49.2 165.8 52.8 -1.0 Overall balance 159.7 212.0 Loan recoveries 204.4 expenditure Total expenditure Revenue Sources offi Federal Government Finance Federal Government % ofGDP Debt as Source: MinistryofFinance 20 40 60 80 Apositive(+)signindicatesadrawdownintheaccumulated P lmnry eliminar Pr Budget Preliminary Budget 0 realisable assets adjustments % ofGDP 7.4 -3.5 162.8 151.6 Gross development Operating expenditure e xenlbroig37- 3.7 - Realisable assets borrowing 36.5 Net external Net domesticborrowing Chart 4.6 Table 4.5 59 79 90 10 30 50 70 910 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 oetcdb External debt Domestic debt nancing: 1 and 2010 4. -45.5 -43.3 56-5.4 -5.6 Mblin%change RM billion . - 3.1 . 0.7 1.5 p Overall balance (RHS)Overall balance 2011 B 2010 Overall balanceas -7.0 p -5.6 53.1% % ofGDP 2011 p -5.4 11 B B -8 -6 -4 -2 0 2 4 6 8

105 ANNUAL REPORT 2010 OUTLOOK AND POLICY IN 2011 policy economy while encouraging the private sector to the private sector while encouraging economy revenue Meanwhile, driver of growth. be the main higher in 2011 on is expected to be collection performance and sustained economic account of in the service increase prices. An higher commodity well as other measures 5% to 6%, as tax rate from of the tax system, to the enhancement related In terms of collection. revenue will also increase financing, the Government will continue to tap advantage of the lowthe domestic market,taking liquidity. cost and ample borrowing the Federal GovernmentIn the medium term, further, to narrow fiscal deficit is expected commitment Government’s consistent with the next five to a phased consolidation over the to Measures years, as outlined in the 10MP. and high- transform the nation into a developed expected to enhance future income economy are support thus providing of the economy, growth finances. for the Government its to strengthen the challenge for fiscal Going forward, on further consolidation of the fiscal deficit centres whileand maintaining a sustainable debt path, in the economy. playing a prudent facilitative role Skills Enhancement Programme and 1Malaysia Programme Skills Enhancement The Government will also Programme. Training Council as Consultation National Wage establish a to ensureplatform for wage determination the main In with productivity. that commensurate fair wages economic growth, inclusive and equitable promoting importancethe Government has also accorded Malaysians, of in enhancing the welfare to efforts groups. the disadvantaged particularly those from allocations continue to be Hence, budgetary to eradicate resources providing towards directed assist the poor and and urban poverty, hardcore ownership, home by increasing vulnerable groups safety net and expanding enhancing the social public health facilities. For 2011, the Federal Government is expected a lower fiscal deficit of 5.4% of GDP to record during (2010: 5.6% of GDP). Fiscal expenditure to be higher by 3.7% at the year is projected due to theRM212 billion (2010: RM204.4 billion) under Government initiatives and projects reform the 9th and 10th Malaysia Plan. Nevertheless, will be contained as the the rising expenditure in the role Government its direct gradually reduces

OUTLOOK AND POLICY IN 2011 ANNUAL REPORT 2010 106 129 124 120 118 111 109 Organisation WhiteBox:CorporateSocialResponsibility Structure Organisational Development Communications WhiteBox:OperationalisationoftheCentralBankMalaysiaAct2009 Governance GOVERNANCE, COMMUNICATIONS AND ORGANISATIONAL DEVELOPMENT

107 ANNUAL REPORT 2010 GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ANNUAL REPORT 2010 108 GOVERNANCE, COMMUNICATIONS ANDORGANISATIONAL DEVELOPMENT Board, theBoard Committeesandtheindividual mechanism toevaluatetheperformanceof further enhancedbyincorporatinganappraisal processCommittee. Thegovernance was Committee andFinancialStabilityExecutive the MonetaryPolicyCommittee,ShariahAdvisory Bank, aswelltheappointmentofmembers relating tothebudgetandoperatingplanof recommendations totheBoard onvariousissues convened fivemeetingsin2010,madeseveral The BoardCommittee,whichhad Governance of MalaysiaAct2009´. See whitebox`OperationalisationofCentralBank Board Committeesare non-executiveDirectors. Audit Committee,themembersofthesenew established in2010.SimilartotheexistingBoard Committee andtheBoard RiskCommittee,were Board committees,theBoard Governance function. Asprovided forintheAct,twonew a furtherstrengthening oftheBoard’s oversight of amore robustframework,with governance A keyaspectoftheActisinstitutionalisation GOVERNANCE communications andtalentdevelopment. of strategicmanagement,risk capacity andcapability, includingintheareas continued tobeonstrengthening organisational responsibilities according toitsmandates,focus ensure theBankeffectively dischargesitsroles and by enhancingaccountabilityandtransparency. To further strengthenedframework thegovernance and autonomyaccorded to theBank,Actalso thenecessarypowers 25 November2009.With Act 2009(Act),whichcameintoforce on operationalisation ofCentralBankMalaysia The year2010wasthefirstof Board Audit Committee BNM GovernanceFramework Board Governance Board ofDirectors Committee framework. TheBoard provides strategicdirection structuregovernance oftheriskmanagement (BRC) havetheoveralloversightfunctionin The Board andtheBoard RiskCommittee The BoardandRiskCommittee robust framework. riskmanagementgovernance their complementaryroles are linkedthrough a of risksisoverseenbyseveralcommitteesand objectives oftheorganisation.Themanagement different typesofriskswhilemeetingthestrategic aims toensure effective managementofthe structureThe riskgovernance withintheBank Risk ManagementGovernance Risk Management were implementedsatisfactorily. In thisregard, allmaterialauditrecommendations enhanced toremain effective inmitigatingkeyrisks. the Bank’s control internal systemiscontinuously be taken,andprovided oversightinensuringthat auditfindingsandremedial the internal actionsto the Board AuditCommitteehaddeliberatedon and riskmanagementmeasures. Duringtheyear, on theBank’s controls,process internal governance ensure anindependentandobjectiveassessment AuditDepartment,to and activitiesoftheInternal deliberated onmatterspertainingtothefunctions which hadfourmeetingsin2010,reviewed and frameworks. TheBoard Audit Committee, including theOperationalandFinancialRisk new EnterpriseRiskManagementFramework, risk managementattheBankandapproved the meetings duringtheyeartodeliberateonoverall The Board RiskCommittee convenedthree roles andresponsibilities. board membersineffectively dischargingtheir Committee Board Risk

109 ANNUAL REPORT 2010

ovides independent assurance and ovides independent assurance and within all areas in the Bank where clarity is given clarity is given the Bank where in areas within all in accountabilities and responsibility to the role, in mechanisms control as well as decision-making, governancethe risk management practices. to the line refers The first line of defence for responsible are departments which mitigating and reporting identifying, assessing, of business. This areas risks within their own the line departments need to essentially means fully understanding and are have the strategic risks undertaken and are conversant with the that the appropriate accountable for ensuring in place. are mitigating controls The second line of defence is the Risk has Management Department function which to the both the oversight and advisory roles line departments. This second line actively done challenges the assessments and initiatives risk by line departments by engaging with risks into owners and consolidating Bank-wide various risk types. `Risk The risk management function also includes transversal Policy Owners´, who manage specific the Bank, for example people across risks shared risk. Risk risk, information security risk and legal in key management for international reserves, and operations is also of market, credit areas Risk Management by the Treasury monitored and section of the Investment Operations line of Financial Market Department. The third to the internal defence refers audit function which pr the risk verification of efficacy in implementing management frameworks. Enhancing Risk Management practices, tools and methodologies lines of defence concept In line with the three the risk management and to strengthen Bank adopts both the top-down the culture, in classifying and bottom-up approaches classes of risks, identifying the different the those accountable for those risks across organisation and enabling mitigation actions communicated. The top-down to be effectively emphasises the strategic risks and approach overall performance and allows the Bank’s assessment of organisational risks that have of the significant impact on the reputation a provides Bank. The bottom-up approach platform for risk issues at the departmental level and to be identified and managed accordingly

concept is three lines of defence lines three strongly emphasised in the new frameworks to emphasised strongly risk management practices institutionalise effective The on the risk management of the Bank and ensures the Bank and ensures management of on the risk risks and has in identifies its key that the Bank systems and resources appropriate place the BRC, comprised of these risks. The to manage supports of the Bank, directors non-executive oversight in independent in providing the Board risks. In addition, the Risk the management of to BRC. directly reports Management Department Committee, Risk Management Management Committee Operational Risk Management Committee and Financial Risk Risk Management The objectives of the risk strategic to address are Committee (RMC) management of risks issues, to oversee the in and to drive the risk management culture that all significant risks the Bank. RMC ensures adequately managed and mitigated and are risk management practices are that appropriate operations. The RMC is embedded in the Bank’s the supported by two sub-committees, namely (ORMC) Operational Risk Management Committee and Financial Risk Management Committee the (FRMC), which assist the RMC in identifying Bank and operational and financial risks to the adequately managed. ensuring that the risks are framework Enhancing the Risk Management the rapidly evolving landscape, the address To Enterprise Bank in 2010 enhanced the current in place Risk Management framework by putting risk management practical and robust a proactive, framework, comprising of the new Operational Risk Risk Management (ORM) and Financial respective Management (FRM) frameworks. The to efforts frameworks leverage on the existing within risk management culture a strong nurture practical and the Bank by further promoting management practices. The ORM risk robust framework outlines the overall management of operational risks in the Bank, by promoting operational risk management sound and effective and practices to manage the possible procedures of events which may adversely affect, occurrence among others, the achievement of the Bank’s mandates and objectives. The FRM framework outlines the multiple aspects of financial risk management within the context of the Bank and places emphasis on timely identification and management of the financial risks. effective The three lines of defence

GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ANNUAL REPORT 2010 110 are asfollows: been appointedtakingintoaccounttheneedformixed competencies.Membersofthecommittees committees are drawnfrom amongindividualswiththerelevant expertiseandexperiencehave practices through theestablishmentandoperationalisationofseveralcommittees. Membersofthese Pursuant totheprovisions frameworkand oftheAct,Bankhasenhanceditsgovernance Establishment ofNewCommittees with theresults beingpresented attheMPCmeetings. Policy Statement.MPCmembersmayalsorequest forspecifi there isdeliberationofissuesanddecisionmakingbytheMPCaswellpreparation oftheMonetary accurate andtimelyanalysisonmonetarypolicyissues.Thisisfollowedbyasecondsessionwhere members are apprisedofthelatesteconomic,monetaryandfi time forpresentations, discussionsanddeliberationsdecisionmaking.Inthefi Each MPCmeetingisheldoveraperiodoftwodaysandcomprisessessionstoensure suffi policy deliberationanddecisionmakingprocess, theprocedures fortheMPChavebeenenhanced. year inaccordance withtheschedulepublishedbyBank.To ensure effi and accords itautonomyintheformulationofmonetarypolicy. TheMPChasmetsixtimesduringthe policies fortheconductofmonetarypolicyoperations.ThenewActinstitutionalisesthisCommittee The MonetaryPolicyCommittee(MPC)wasintroduced in2002toformulatemonetarypolicyand Monetary Stability national interest. In givingeffect toitsobjectsandincarryingoutfunctions,theBankshallhavedueregard tothe actasfi (ix) promote anexchangerateregime consistentwiththefundamentalsofeconomy;and (viii) holdandmanagetheforeign reserves ofMalaysia; (vii) promote asound,progressive andinclusivefi (vi) exercise oversightoverpayments systems; (v) provide oversightoverthemoneyandforeign exchangemarkets; (iv) regulate andsupervisefi (iii) issue currency inMalaysia; (ii) formulate andconductmonetarypolicyinMalaysia; (i) has alsoprovided forthefollowing primaryfunctionsoftheBank: stability andfi The Mandates oftheBank more robustframework andpractices. governance new Act,theBank’s institutionalcapabilityhasbeenfurtherreinforced through theintroduction ofa conducive tothesustainablegrowth oftheMalaysianeconomy. Inlinewiththerequirements ofthe autonomy toeffectively fulfi into force on25November 2009.ThenewActprovides theBankwithnecessarypowersand of MalaysiaAct1958tothenewCentralBank2009(Act)whencame The Bankunderwentasmoothtransitionfrom thelegislativeframeworkunderCentralBank Introduction raison d’être nancialadviser, bankerandfi nancialstabilityconducivetothesustainablegrowth oftheMalaysianeconomy. TheAct fortheBankisexpressly provided initsprincipalobjectivesofpromoting monetary Operationalisation oftheCentralBankMalaysiaAct2009 llitsmandatesofpromoting monetarystabilityandfi nancialinstitutionswhichare subjecttothelawsenforced bytheBank; nancial agent of the Government. nancialagentoftheGovernment. nancialsystem; cresearch oranalysistobeundertaken nancialdevelopmentsandrelevant, cientandrobust monetary nancialstability rstsession,MPC cient

111 ANNUAL REPORT 2010 GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ed ed nancial nancial nancial institutions c recommendations to to c recommendations nancial institutions abroad; abroad; nancial institutions nancial stability. issue orders to entities not regulated by regulated to entities not issue orders supervisory authority; the Bank or other to: extend liquidity assistance by the Bank; not regulated entities (i) or branches of Malaysian subsidiaries (ii) fi fi capital support to a provide institution  nancial business and issue rulings; for the purpose of averting or reducing risks for the purpose of averting or reducing to fi y y y Decide on proposed actions by the actions by the proposed Decide on Bank to: Ascertain the Islamic law for Islamic fi Advise the Bank on Shariah issues to the activities or transactions relating of the Bank; Advise any Islamic fi or any other person on Islamic fi business pursuant to any written law; from Issue rulings pursuant to a request the courts or arbitrator. ƒ ƒ ƒ ƒ ƒ nancial stability arrangements and decision making process nancial stability functions. The Financial Stability Policy Committee (FSPC) continues continues nancial stability functions. The Financial Stability Policy Committee (FSPC) Shariah Advisory Council Key Responsibilities nancial stability. The FSPC is also responsible for (i) making specifi The FSPC is also responsible nancial stability. c actions to resolve problems within individual institutions as required to address identifi to address within individual institutions as required problems c actions to resolve Financial Stability Executive Committee Stability Executive Financial Key Responsibilities Tan Sri Dr. Zeti Akhtar Aziz (Governor) Sri Dr. Tan bin Ibrahim (Deputy Governor)Dato’ Muhammad Abdul Aziz bin Wan Wan Sri Dato’ Sri Dr. Tan Abdullah Sabourin Encik Jean Pierre Dato’ Johan Raslan Ngee Encik Philip Koh Tong Dr. Mohd Daud Bakar (Chairman) Dr. Abdul Halim Ismail (Deputy Chairman) Dato’ Dr. Abdul Hamid Haji Mohamad Tun Sri Datuk Sheikh Ghazali Abdul Rahman Tan Ahmad Sahibus Samahah Dato’ Haji Hassan Haji M. Anwar Ibrahim Dr. Ashraf Md. Hashim Dr. Prof. Engku Rabiah Adawiah Engku Ali Madya Dr. Prof. Mohamad Akram Laldin Madya Dr. Prof. Aznan Hassan Dr. Rusni Hassan Dr. nancial stability mandate under the Act. These include: the Executive Committee on the appropriate intervention and resolution actions in accordance with with actions in accordance intervention and resolution the Executive Committee on the appropriate actions as commissioned Section 38 of the Act; and (ii) monitoring the implementation of approved In carrying out its functions under the Act, the aforementioned committees are guided by their guided by committees are In carrying out its functions under the Act, the aforementioned and responsibilities or by-laws which set out the practices, functions, roles terms of reference respective and accountability of the committee members in decision making. Financial Stability the constitution of the Financial Stability Executive Committee (Executive Committee), Apart from framework pursuant to its the Bank had undertaken several initiatives to put in place an operational fi Strengthened internal fi its internal institutional and governance effective to ensure The Bank has reinforced arrangements execution of its fi to internal for monitoring and averting risks high-level forum responsible to serve as the Bank’s or impose prudential measures doing so, the FSPC may implement macro In systemic stability. specifi risks to fi

GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ANNUAL REPORT 2010 112 macroeconomic andmonetaryconditions.Forthispurpose, that ensures effective coordination offi economic growth. Inthisregard, theBankhasintroducedorganisationalprocess aninternal interdependent, effi monetary policyandmacroeconomic conditions.Giventhatmonetaryandfi as aneffective transmission mechanism,continuedfi While theeffective conduct ofmonetarypolicypresupposes astableandhealthyfi achieving itsfi processes andserveasaperformance managementtooltomonitortheBank’s overalleffectiveness in This frameworkwillalsocontributetowards strengthening theBank’s and governance internal the Bank’s mandateforfi prudential, micro prudential andcrisismanagementpoliciestosupporttheeffective performanceof framework aimsinparticular, topromote greater focus,coverageandcoherence betweenmacro coordination betweenkey policy areas withintheBankforfi existing policystructures and analysestocapture theinterlinkages,trade-offs and necessary In addition,theBankisalsodevelopingasystemicstabilityframeworkthatwillfurtherenhance member institutiontoMalaysiaDepositInsuranceCorporation(MDIC)forresolution. Malaysia DepositInsuranceCorporationAct2011andmayissueanotifi by theExecutiveCommittee.TheFSPCisalsoaccountablefordecisionstoinvokeSection98of forum todeliberatemacro prudentialpoliciesthathave instruments tradedinthese markets.Thiswillincludeacomprehensive review of current arrangements market andthefor the derivativesrelated tothe currencies, securitiesand otherfi The Bankiscurrently fi regulation, supervisionandmarketconductsurveillance inthesemarkets. fi exchange marketortheforderivativesrelated tothecurrencies, securitiesandother developing, ormaintainingorderly conditionsortheintegrityof,moneymarket, theforeign the Banktoissuerules,codes,standards, principlesorguidelinesforthepurposes ofregulating, monetary policyfunctionsandfi The orderly functioningofandconfi Oversight ofmoneyandforeignexchangemarket effective monitoringandsupervisionofregionally activefi in thedomesticfi Suruhanjaya KoperasiMalaysia(SKM)inviewofthegrowing signifi to establishnewmemorandumsofunderstandingwithotherregulatory agenciessuchasthe structures andframeworksthatare consistentwithcurrent legislation.Work isalsounderway facilitate thetimelyidentifi of understandingwiththeseagenciesparticularlyintheareas ofsurveillanceandsupervisionto Securities Commission(SC)andMDIConaregular basisandiscurrently reviewing itsmemorandums with thesupervisoryauthorities.TheBankengagesotherregulatory authoritiessuchasthe provision alsoempowerstheBank,where necessary, toobtainorshare anyinformationordocument other supervisoryauthoritiesandco-ordinate fi of the In cognisanceoftheimportancetimelyinformationfl Co-operation withothersupervisoryauthorities the policyresponses tothedevelopmentsinhouseholdsectorandproperty market. these mutuallyreinforcing mandates.In2010,thejointforummetoncetodeliberateanddecideon forum provides fortheBanktoeffectively managecomplexinteractionsandpolicytrade-offs between nancialinstrumentstradedinthesemarkets.Theoversight responsibility oftheBank wouldinclude Act empowerstheBankasauthorityforfi nancialstabilitymandate. nanciallandscapeaswellwithsupervisoryauthorities intheregion tosupport the cientimplementationofpoliciesinbothareas are criticaltowards sustainable nalisingtheregulatory scopeforthemoneymarket, foreign exchange nancialstability. cationofpre-emptive responses tosystemicriskwithinclearaccountability nancialstability. Accordingly, Section43(1)oftheActempowers denceinthemoneyandforeign exchangemarketiscriticalfor nancialstabilitypoliciesthatmayhavewiderimpacton nancialstabilitymeasures withthesame.Further, the nancialstabilitytoenterintoarrangementswith nancialstabilityrequires effective andsound ows andcoordinated policyresponses, Section40 broader implicationsforthe nancialinstitutions. nancialstability. Thesystemicstability the Bankhas canceofthecooperativeindustry cationofnon-viabilitya established ajointMPC-FSPC nancialstabilityare highly nancialsystem economy. nancial This joint

113 ANNUAL REPORT 2010 GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT cacy of the lender of last resort cacy of the lender of last resort

nancial instruments in the money market which are within money market which are nancial instruments in the exibility accorded to the Bank under the Act to provide under the Act to provide to the Bank exibility accorded dence, orderly and transparent dealings in the markets. dealings in the transparent and dence, orderly for participation in these markets, the administration and enforcement of relevant regulations and regulations relevant of and enforcement the administration in these markets, for participation organisations in of self-regulating and the role to market participants conduct applicable codes of confi promoting oversight of the supervisory authorities. the supervision and for provision of liquidity assistance Enhanced framework fl support the enhanced powers and To or market liquidity shocks institutional assistance, for the purpose of preventing emergency liquidity Assistance (ELA) framework existing Emergency Liquidity the Bank’s systemic stability, threatening from enhanced under the Act. This with the new requirements and aligned is being strengthened ensuring continued effi of ELA is aimed at framework for the provision internal of viability arrangements for the coordination function of the Bank (including strengthened commensurate operational, support) and ensures liquidity assessments of institutions requiring governance mechanisms. and accountability Committees and the Board of Directors Board for the responsible of the Bank remains of Directors the Board Under the new legislative framework, the performance of the Bank and keeps under constant review oversight over the management of the convened twelve meetings the Board 2010, Throughout to its mandated roles. Bank in giving effect the Bank’s including approving business and affairs deliberate on various aspects of the Bank’s to Committees of the Bank. for the MPC and the Board budget and operating plan, the by-laws Committees. Board is assisted by three of Directors the Board In carrying out its oversight function, members and non-executive Board independent Committee is composed of three Each Board The Chairman of the Board by the Board. as approved and is governed by-laws by its respective Committees. The Board Board the respective a member of Committees is appointed from as follows: Committees are The Bank and SC are also in the process of reviewing the existing Memorandum of Understanding to the existing Memorandum of of reviewing the process also in The Bank and SC are and collaborative clear responsibilities arrangements to provide others, joint-regulation incorporate, among of derivatives or fi regulation mechanisms for the

GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ANNUAL REPORT 2010 114 Encik ChinKwaiYoong Tan SriDato’SeriDr. SulaimanbinMahbob; (Chairman); Tan SriDatukAmarHajiBujangbinMohd.Nor Dato’ N.Sadasivan Tan SriDatukAmarHajiBujangbinMohd.Nor; Datuk OhSiewNam(Chairman); Tan SriDato’SeriDr. SulaimanbinMahbob Datuk OhSiewNam; Dato’ N.Sadasivan(Chairman); or oenneCmiteKeyResponsibilities Board Committee Governance or ui omte KeyResponsibilities Board AuditCommittee or ikCmiteKey Responsibilities Board RiskCommittee ƒ ƒ ƒ ƒ ƒ ƒ the Bank. budget andoperatingplanof Examine andrecommend the Advisory Council(SAC); Committee andtheShariah such astheMPC,Executive various importantcommittees Recommend membersto Board; make recommendations to the mandates oftheBankand Periodic review ofthe Bank; ofthe practices ofgovernance recommend theprinciples and Review theeffectiveness of and regulatory requirements. as compliancewithlegaland auditfunctionaswell internal the performanceof controlthe internal systems, the Bank,effectiveness of and fi of theintegrityaccounts Assist theBoard initsoversight risks oftheBank. management oftheenterprise oversight onthereview and Assist theBoard inthe nancialstatementsof

115 ANNUAL REPORT 2010 GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ve times to deliberate on ve times nancial loss, disruption to operations, failure failure nancial loss, disruption to operations, nancial stability to best serve the Malaysian nancial stability to best serve the Malaysian nancial reporting, internal control environment and compliance environment internal control nancial reporting, ndings and recommends actions to be taken by the Management to ensure their timely be taken by the Management to ensure actions to ndings and recommends cation. In addition, the BAC reviews the National Audit Department’s audit reports, including their audit reports, the National Audit Department’s the BAC reviews cation. In addition, ndings and any remedial action to be taken by the Bank. ndings and any remedial rectifi the management of in 2010 to review meetings Risk Committee (BRC) convened three The Board including risks of fi the enterprise risks faced by the Bank Since its establishment, the Board Governance met fi Committee (BGC) Board the Since its establishment, concerningvarious issues governance recommendations The BGC had made within the Bank. practices and the the Executive Committee well as members of MPC members as of the for the appointment budget and to the Bank’s issues relating on recommendations BGC had also made SAC. The evaluate the performance of the Board, well as an appraisal mechanism to operating plan as and roles their respective members in discharging individual board Committees and the Board functions. year to assist the Board the (BAC) convened four meetings throughout Audit Committee The Board fi Bank’s oversight on the in providing oversees the Internal The BAC Department of the Bank Audit requirements. with legal and regulatory the The BAC also reviews requirements. scope of work and resource its audit plans, and approves internal fi audit fi to the give a negative perception risks that could objectives or other residual to attain the Bank’s the new Operational Risk and recommended the BRC had reviewed In this regard, reputation. Bank’s of Directors’ Management (FRM) frameworks for the Board Management (ORM) and Financial Risk in November Directors of Board by the approved The ORM and FRM frameworks were approval. is part of the overall The development of both frameworks 2010 and January 2011 respectively. framework which is aimed to further Enterprise Risk Management enhancement to the Bank’s taking into account new in the management of risks facing the Bank, approach the Bank’s strengthen challenges in central banking. Conclusion Bank under the Act together with the strengthened the powers vested with the Moving forward, and the Bank is well positioned to discharge the roles governance that framework ensures monetary stability and fi of preserving responsibilities economy in the years ahead.

GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ANNUAL REPORT 2010 116 performing itsfunctions. risks are adequatelymanagedduringthecourseof its riskmanagementcapabilities toensure that remains committedtocontinuallystrengthening rapidly changingoperating landscape. TheBank unforeseen challengesgiventheunpredictable and Bank iswellprepared forboththeforeseen and Risk managementpracticesensure thatthe Risk Managementoutlook in handlingcrisissituations. part oftheefforts toenhancetheBank’s readiness timeframe fornotificationofCombinedLiveRunsas the CrisisManagementTeam hasapproved ashorter testing fortheBankandfinancialsector. Inaddition, and collaboration,developindustry-wideBCM It alsoaimstoenhanceindustry-widecoordination implementing properandprocesses. governance integrated BCMframeworkwhichincludes Group whichisresponsible fordevelopingan 2010 istheestablishmentofBCMWorking for BusinessContinuityManagement(BCM)in business disruptions.Oneofthekeyinitiatives readiness andresponse capabilitiestoaddress Bankcontinuesitsefforts tostrengthenThe its Management readiness Strengthening BusinessContinuity process.governance have alsobeenformulatedtostrengthen the controls, clearescalationprocedures onriskevents part ofthecontinuousimprovement inthecurrent common understandingofriskterminologies.As the enhancedrisk quality. Dataconsistencyisalsoimproved with analysis andensures betterandup-to-datedata all levelsoftheBank.Thesystemfacilitatesrisk well astoembedtheriskmanagementculture at repository, toclarifyriskaccountabilitylines,as to enablethemaintenanceofaBank-widerisk 2010 viatheadoptionofeRCSA,asystembuilt Enhancements totheRCSAwere introduced in identification andmanagementofrisksintheBank. of facilitatedprofiling ofrisks toensure systematic managing theirownrisks.Itisanongoingeffort premise thatdepartments are responsible for risks withindepartments,andisbasedonthe for managingrisks,particularlyoperational methodology. RCSAisacomprehensive technique such astheRiskContr tools tofacilitatethemanagementofrisks, The Bankalsoapplieseffective riskmanagement the day-to-dayoperationalrisksinBank. of to ensure thatSeniorManagement iskeptaware taxonomy inplacetobuilda ol SelfAssessment (RCSA) Department. Reviewsare concurrently conducted Senior Managementandthe RiskManagement which are escalatedtotheappropriate levelof issues raisedbasedontheir significanceandrisk, priority ratingsare alsoprovided forspecificaudit control environment ofthe areas reviewed. Audit is assignedbasedontheassessmentof audits tobeconducted.Anoverallauditrating determining thefrequency andcoverageof Bank aswelltheriskcontrol functionsin significant activitiesandcore processes ofthe framework incorporatesaholisticreview of The Bank’s auditing riskbasedinternal activities andcore processes oftheBank. the riskcontrol functionsinthesignificant reviewing andassessing keyissuesandconcerns, in identifyingandevaluatinginherent risks, the RiskandStrategicManagementdepartments for eachauditassignment,IADcollaborateswith comprehensive androbust auditplanningexercise business oroperationalresponsibilities. To ensure business activitiesanddoesnotassumeany the BACandisindependentfrom theBank’s controlinternal systems.IADreports directly to objective assessmentofthestateBank’s objectives byproviding anindependentand Board AuditCommittee(BAC)inmeetingits AuditDepartment(IAD)assiststhe The Internal ControlsInternal its credibility duringtimesoftrials. stability duringthegoodtimesbutalsosafeguard framework willnotonlysupporttheBank’s challenges. Astrong androbust riskmanagement capability tofacerisksandwithstandanyfuture Bank iswellequippedwiththerightcapacityand controls andBCMplanning.Thiswillensure the evolve itsriskmanagementpractices,internal Moving forward, theBank willalsocontinueto knowledge fairsandotherengagements. for alldepartments,participationinBank-wide culture through efforts likeworkshopsconducted well asenhancementstotheriskmanagement of KeyRiskIndicatorsandIncidentReporting,as risk managementtoolsthrough thedevelopment strategic goalsare met,further enhancementof planning andresource planninginensuring link riskassessmentoutcomeswithstrategic risks facedbytheBank,collaborativeefforts to strengthening theassessment ofreputational risk managementapproach, whichincludes currently underwaytofurther enhancethe In linewiththis,severalplannedinitiativesare

117 ANNUAL REPORT 2010 GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT

th mitigate potential risks of financial financial potential risks of mitigate on monetary policy. The Bank’s decision to The Bank’s policy. on monetary the early part of the the policy rate in normalise year to imbalances and ensuring sustainable growth growth and ensuring sustainable imbalances mainly and explained was communicated Statements that the Monetary Policy through of the Monetary Policy is issued after each with This is reinforced Committee meeting. analysts the industry, engagements with communication efforts and economists. The understanding that during focused on ensuring monetary policy this period of normalisation, and that the thrust accommodative remained financial imbalances of policy was to avoid emergence and destabilising and the potential These communication on the economy. effects adjustments in orderly activities have resulted in the in the money market, lending rates by understanding economy as well as greater the the stakeholders of the rationale behind monetary policies. Bank’s sector Strength and role of the financial communications initiatives During the year, that continued to focus on the measures of continued resilience taken to ensure were that the and to ensure the financial sector, and efficient sector continues its effective intermediation function in the economy. Communications on the various measures concernsto address about household also undertaken. indebtedness were to Islamic finance, wide coverage With regard was given to developments in the sector. Further communications and promotional carried out under the Malaysia activities were International (MIFC) Islamic Financial Centre position as the initiative to solidify Malaysia’s leading International Islamic Financial Centre. of focus included the value Other areas of Islamic finance in contributing propositions relevance to financial stability and its growing in the global financial system. These efforts the MIFC brand. helped to strengthen The Malaysian financial sector achieved a higher Economic Forum ranking when the World ranked the sector five notches higher to 17 position in its financial development index, the position in its financial development index, the highest ranking among emerging economies. in building As part of the continuous efforts confidence in the financial system, deposit increased insurance limits for banks were on clusters of line departments that are involved that are of line departments on clusters as the Bank as well of process core in a specific a that undertake of line departments on clusters that risks, ensure to significant activity, common in line departments between relevant spanning in inherent and major risks that are processes core departments, are line across significant activities updates regular IAD provides adequately assessed. assessments to the BAC and the of its findings and In addition, Jabatan Audit Senior Management. Department) provides Negara (National Audit on the conduct and audit its periodic oversight coverage of IAD. COMMUNICATIONS communications initiatives in 2010 The Bank’s including the focused on several key areas and economic outlook, monetary stability Strategic financial sector soundness and resilience. initiated with the Government, engagements were analysts and the media, financial industry, the of industries from economists, representatives sectors of the economy and the public. These real various carried out through engagements were meetings, channels, including media conferences, the It has increased dialogues and roadshows. in promoting role understanding of the Bank’s economic stability that is important for macro ensuring the soundness and sustainable growth, of the financial system while developing resilience and efficient financial sector. an effective providing Annual Report – key platform for and assessment on the economic outlook of the facilitating better understanding the developments and policies that affect economy and financial sector carried out during the Engagement sessions were of the 2009 Annual Report and the presentation Financial Stability and Payment Systems Report, the Throughout held in the early part of the year. engagements with the Bank had continuous year, services, the manufacturing, from representatives construction and mining industries, to gain insights into the issues facing these industries, and to obtain their views on their industries’ performance and outlook. These engagements the Bank with valuable insights on issues provided key sectors of the economy and the affecting for the Malaysian economy. overall prospects Monetary policy communications The Monetary Policy Statement was the main medium of conveying the decisions taken

GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ANNUAL REPORT 2010 118 be animportantagendafor theBank,delivery advisory servicestothepublic continuingto theoutreach of financialeducationand With specific industries. engagements betweenbanking institutionsand also undertakenbytheBankinfacilitating in variousstates.Continuousefforts were organised byABMwithbusinessorganisations and alsoparticipatedinengagementsessions latest developmentsonSMEaccesstofinancing, business associationsandchambers,providing In addition,theBankhelddialogueswithvarious importance intheirdailylives. to practiseprudentfinancialmanagementandits the generalpublic,teachersandstudents,onhow SMEs andmicro enterprises,aswelleducating and workshops,promoting bankingservicesfor about 100roadshows, withexhibitions,seminars Simpanan Nasional.Thesewere supportedby SMECorpandBank and LocalGovernment, strategic tie-upswiththeDepartmentofHousing promoting micro financingnationwidethrough trained in2011.Efforts were alsoundertakenin associations andbusinesschamberswouldbe that approximately 60trainersfrom 15SME advisory servicestotheirmembers.Itisenvisaged Help Desksattheirrespective offices,andprovide training personneltomanagetheSMEFinancing associations andbusinesschambersnationwidein Malaysia (SMECorp)engagedwithSME Guarantee CorporationandSME the AssociationofBanksinMalaysia(ABM),Credit and employment.TheBank,incollaborationwith sector’s importanceinsupportingeconomicgrowth to improve accesstoSMEfinancing,giventhis increased communicationefforts were undertaken Arising from theBank’s broader developmentalrole, financial literacy. awareness onfinancingas wellaspromoting as partoftheBank’s initiativeinincreasing with thevariousstakeholderswere undertaken During theyear, continuousengagementefforts communication outreachwithstakeholders Continuously extendingtheBank’s recoursed toevenonce. guarantee schemeexpired withoutitbeing Of importancewasthattheblanketdeposit strengthening consumerprotection further. insurance andtakafulpolicyholders,thereby The protection systemwas alsoextendedto to RM250,000effective 31December2010. than 2,100customers,free ofcharge,in assistedmoreinstitutions. TheFMB,inturn, repay theiroutstandingloanstofinancial be putinplacetoassistdistressed borrowers provided personaliseddebtrepayment plansto debt managementprogram. Theprogramme than halfofthembeingfurtherassistedviaits 30,000 customersnationwide,withmore year, AKPK counseledatotalofmore than Mediation Bureau (FMB)services.Duringthe were complementedbyAKPKandtheFinancial The Bank’s efforts inengaging withthepublic provided withimproved services. issues toensure customersare fairlytreated and on complainthandlingsandconsumerrelated were heldwithindividualfinancialinstitutions standard ofservicetothepublic.Various dialogues and insurancesectorsonwaystoprovide ahigher The Bankalsoregularly engagedwiththebanking of 15.6%over2009. its servicesreached 293,388in2010,anincrease and AdvisoryUnit),thenumberofcasesseeking BNMTELELINK andtheComplaintsManagement Integrated ContactCenter(comprisingBNMLINK, As aresult ofthegreater awareness ontheBank’s more resilient householdsector. better protection forfinancialconsumersanda their finances,contributingtowards promoting is toempowerthisgroup toeffectively manage Debt January 2011,drivenbyCredit Counsellingand Anda´ (POWER!)Programme waslaunchedin new borrowers, the`PengurusanWang Ringgit financial managementforyoungindividualsand In promoting financialliteracyandsound deposits takingschemes. and interest suchasfinancial scamsandillegal and mobilephonesonmattersofpublicconcern Bank alsocommunicatedalertsthrough media constituencies andmembers.Duringtheyear, the disseminating usefulfinancialinformationtotheir chambers andassociationsbypublicising with MembersofParliamentandbusiness financial literacywere enabled through working matters. Otherefforts bythe Bankinenhancing information andeducatingthepubliconfinancial with consumerassociationsindisseminating time, theBankformedstrategiccollaborations beginning withthestateofSelangor. Forthefirst of mobilecounterservicesinsmallertowns, channels were expandedthrough theintroduction Management Agency(AKPK).Theobjective

119 ANNUAL REPORT 2010 GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT stakeholders. During the year, the Bank During the year, stakeholders. with values by embarking shared its core reinforced The programmes. of engagement on a series in the was incorporated value theme shared Dinner and Annual Fair, Knowledge Bank’s the Bank in conjunction with events organised at participants the Cup, providing World 2010 FIFA understanding of the experience and a common values. shared Bank’s challenges for the Communications 2011 Year is operating environment Moving ahead, the leading to higher challenging, expected to remain in role on the Bank’s expectations of stakeholders the economy and financial system. it will be of uncertainty, Against the background in provide necessary for the Bank to continue to on a timely manner its views and perspectives inflation and other the outlook of the economy, important monetary and financial developments. undertaken Communication initiatives will also be further clarity on the new Financial in providing the Sector Blueprint, particularly in highlighting of the financial sector facilitative and driver roles economic transformation in supporting Malaysia’s economy. into a high income, high value-added In line with the need to extend the outreach remote of LINK services to people in rural and Mobile LINK services will be introduced areas, in June 2011. Strategic tie-ups with consumer to associations will also be further strengthened in enhancing financial capability facilitate efforts financial inclusion of consumers, promoting the public confidence in the and strengthening will continue Efforts financial services industry. to roadshows at organising more to be directed enhance public understanding on financial matters their financial capability. improving and thereby With the online communication landscape changing radically and with society imposing for online content, the Bank will demands greater its delivery channels such as including also broaden mobile devices and leveraging on access through the advances in communication technology. DEVELOPMENT ORGANISATIONAL Strategy Focus and Orientation The Bank continued to deliver its mandates in a in 2010. Through environment challenging more the strategic management process, a robust resolving their banking and insurance matters insurance matters their banking and resolving The services financial service providers. with their to agencies have continued by these provided and informed the public to be more facilitate financial situation. of their have better control of formulation process As part of the policy and party bodily injury third the proposed the Bank conducted a series death cover, with the relevant of engagement sessions was there this, from stakeholders. Arising the and buy-in towards constructive feedback holistic new to formulate a more efforts Bank’s to including measures motor cover framework process. the overall claims settlement improve Increased accessibility to online communications With the technology revolutionising the communications channels such as through importance of online media, the Bank growing outreach greater in providing continued its efforts its website. Following the to the public through of new in 2009 and the introduction revamp provides content segments, the website now regulatory, better information on the Bank’s supervisory and developmental functions. number of increased were Reflecting this, there views; unique visitors, website visits and page million with over 2 million visitors (+31%), 5.4 million website visits (+26%) and about 13.8 page views (+7%). to The Monthly Statistical Bulletin was revised website, providing a new format on the Bank’s with updates on the monetary and its readers concise manner. financial conditions in a more into social media The Bank has also ventured for channels, such as Facebook and Twitter, These new interactivity. stakeholder greater the Bank’s channels, have helped increase website visits and paved the way for greater to stakeholders. outreach in Continued engagement with staff enhancing performance Fostering team work and collaboration among assumed major significance in the Bank’s has staff internal to engage communication programmes, and and motivate them in driving productivity emphasis excellence. The Bank places strong on its value system as it is fundamental to the smooth operations of the Bank, the professional and their interaction conduct of its staff

GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ANNUAL REPORT 2010 120 investment inbuildingthe leadership pipeline capability. TheBankcontinuedits long term strengthening theBank’s capacityand internal creating ahealthytalentpipelineisfocusedon for theBank.Thehumancapital strategyof continued toremain oneofthetoppriorities human capitalmanagementframework, Talent management,anchored onanintegrated Building aHighPerformanceWorkforce value-added nation. aspirations tobecomeahighincome, growth aswellactacatalystforMalaysia’s the financialsystemwillcontinuetosupport of theFinancialSectorBlueprinttoensure that on issuesaffecting thesuccessfulimplementation platform forin-depthdiscussionandengagement value-added economy. TheSMCalsoprovided a that willsupportMalaysia’s transitiontoahigh upon understandingthefuture financialsystem Conference (SMC)for2010wasanchored Sector Blueprint,theSeniorManagement In linewiththedevelopmentofnewFinancial resource planning. as wellas,audit,technologyandhuman strategic andfinancialmanagementfunctions, Bank, viagreater collaborationamongtherisk, key planningandbudgetingprocesses ofthe prioritisation ofactivitieswere achievedinthe During theyear, greater alignmentand with theintegrationofriskassessmentprocesses. management process willbefurtherenhanced these outcomes.Therobustness ofthestrategic and keyissuesaffecting theachievementof of theBank’s strategicoutcomes,actionplans half-yearly assessmentreport ontheprogress Management wasprovided withacomprehensive risks andchallengesfacedbytheBank.Senior key activities,aswelltoidentifyandaddress achievement oftheBank’s outcomes,toprioritise discussion bymanagementinevaluatingthe and instrumentalplatformtofacilitatefocused the review process hasprovided animportant the Ba strategic planning,implementationandreview of management process in2010 whichencompassed The Bankcompletedafullcycleofthestrategic Achieving Bank’s strategicoutcomes addressing current andfuture challenges. effective capacityandcapability buildingin communicated across the organisation, enabling Bank’s strategicobjectivesandoutcomeswere nk’s BusinessPlan2009-2011.Specifically, motivation andretention. accorded recognition topromote continued the Bank’s needs,individual aspirationsare also that successionmanagement ultimatelyserves healthy organisationalclimate. Whileensuring strengthen leadershipcapabilitiesandcreate a enhance job-fitformissioncriticalpositions, and focusedleadershipdevelopment,will robust profiling process followed byfeedback development ofitstalent.Astructured and Bank continuestoinvestintheprofiling and succession poolremains healthyandready, the In ensuringthattheBank’s leadership Continuous buildingoftalentpipeline and attitudesthatreflect theBank’s values. developed fortheseroles toimbuebehaviours a newBehaviouralCompetencyModelwasalso and Career Progression Framework.Inaddition, introduction oftheNon-ExecutiveJobBands and knowledgeatthediplomalevelwith that require certificationoftechnicalskills The Bankinitiatedthestreamlining ofroles Fortifying theorganisationalstructure foster highengagementintheBank. serve theparticipantswellinfuture yearsand programme setsasolidfoundationthatwill peers andcolleaguesfrom across theBank.This as wellfostertightworkingrelationships with understanding ofthefunctionswithinBank the talentwasabletohaveagreater exec successful completionoffourbatchesnew Programme forCentralBankerswiththe momentum through theNewExecutives skills andtherightattitudeforsuccessgained Empowering fresh talentwiththeknowledge, which wasbothmarketdrivenandinnovative. the Bankundertookadynamicrewards strategy pool oftheseprofessionals are readily available, financial sectoratlarge.To ensure thathealthy leadership of important foundationtosupportthethought professionals inthesekeyknowledge areas isan Spec operationalisation oftheRiskandActuarial A majormilestonein2010wasthe potential forgreater responsibility. as wellattractinghighcalibertalentwiththe talents through itsLeadership Profiling Centre matching ofroles andfunctions ofexisting by ensuringarobust process ofreviewing and utives in2010.Through thisprogramme, ialist Laddersinitiative.Thegroup of the entire Bankaswellthe

121 ANNUAL REPORT 2010 GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT a more competent workforce. At the end At the end workforce. competent a more increased strength the total staff of 2010, with compared by 0.9% to 2,734 marginally to mainly due at end 2009. Attrition, 2,709 as to remain continued and resignation retirement ratio of executive The stable at four percent. also stable and was to non-executive staff close to 3:2. remained Future orientation for human ahead of the curve remain To and strategies, the Bank capital imperatives of streamlining has begun the process practices with human capital management of its Knowledge and merger the proposed Learning Committee into the Human Capital provide Management Committee. This would on focused concerted effort impetus for more on the business-centric responses providing most valued asset, its people. Bank’s plans also include empowering future The Bank’s to take ownership of their personal staff them by providing development and growth known as a document, with a comprehensive which will Development Advisor Manual (DA), The contain a wealth of developmental options. DA is the cornerstone that will enrich individual as self directed of Bank staff development efforts learners and will also enhance and elevate the learning and development interventions based on their target levels in the for all staff Bank will Behavioural Competency Model. The information comprehensive also be introducing HR portal. opportunities on the Bank’s on career career Being better informed on the various would be in a position to be paths, Bank staff choices within in their career proactive more further would create the Bank. This feature opportunities for on-line learning, as the Bank leverages on the IT platform to enable learning `anytime, anywhere´ solutions. and motivating staff Attracting, retaining strategy would be a dynamic rewards through another focus in 2011. This is to make certain practices remain rewards that the Bank’s and competitive. While the Bank keeps relevant with the general market salary annually abreast practices, periodic remuneration and trends undertaken are adjustments and salary revisions financial compensation appropriate to ensure for the value of jobs which will change over to changes in the Bank’s time in response business requirements. While the Bank places importance in the Bank places importance While the a significant staff, of its existing development the are talent future to the Bank’s feeder pool high caliber students In 2010, 84 scholars. Bank’s and to pursue pre-university scholarships received of studies in various fields programmes first degree functions. to central banking relevant which are positively to conviction to contribute The Bank’s through to be realised nation-building continued granted Award, the Kijang Emas Scholarship in the exemplary results only to students with (Malaysian Certificate Sijil Pelajaran Malaysia For 2010, five of Education) examination. granted the nation were top students in the and given the liberty to embark on any award learningfield of studies with top notch higher in the world. In the spirit institutions anywhere these students are of service to the country, to return to Malaysia upon completion required Since its of their studies to serve the nation. scholarship inauguration in 2005, this prestigious to 32 top students who had has been awarded taken a range of learning such as disciplines actuarial law, medicine, engineering, economics, architecture, science, genetics, biochemistry, psychology and accounting. facing assist talented students that were To 20 financial difficulties, the Bank awarded scholarships under its `Scholarship Award to such for Secondary Schools´ programme, in the students who had exemplary results Secondary Penilaian Menengah Rendah (Lower Assessment) examination. The scholarships their enable these students to continue pursuing a potential secondary education and also create talents for the Bank. future of source Managing the performance curve Being a performance-driven organisation, the Bank continuously raises performance in its drive for excellence. While standards top performing talent is incentivised through the Bank also took steps rewards, differentiated who have difficulty manage staff to effectively a Performance in work performance through with collective Programme Improvement line departments. accountability from strength Staff While departments in the Bank took steps to their functions and roles, rationalise and re-align was made to optimise the combined every effort and processes improved impact of technology,

GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ANNUAL REPORT 2010 122 rich and an enabling environment for learning and rich andanenablingenvironment and forlearning As partoftheBank’s strategy tocreate aknowledge and knowledgesharing seeking Building anenablingenvironment forlearning in 2010. developmental needsincreased more than100% of `on-demand´customisedsolutionstoaddress solutions.Asaresult,learning theoverallnumber towards increasing theavailabilityofcustomised business units,efforts continuedtobedirected with focusonpositiveimpactperformanceof the developmentalneedsofknowledgeworkers, To meetthedemandsforsolutionsthatsatisfy the workplace. bankers whocanachieveseamlesstransitionto competence andtoproduce `ready-now´ central Bank’s newhires programme toreduce thetimeto addition, attentionwasalsogiventothedesignof programmes tofurtherenhancestaff engagement.In and mentoringattheworkplaceaswellorganising developmental needswhileemphasisingcoaching greater selfawareness ofleadershipstrengths and within theBankwasfurtheraugmentedthrough Blueprint. Thequalityandcapacityofleadershiptalent towards improving theLeadershipDevelopment healthy talentpipeline,theBankfocuseditsefforts In complementingtheBank’s efforts toensure amore at 12%ofthetotalstaff salary(10%in2009). increase investmentfor2010,whichstood oflearning developing itsworkforce andthiswasreflected bythe Bank’s workforce. TheBankremains supportiveof in acceleratingthetimetocompetenceof formed thebasisfordevelopmentalinterventions LKNA exercise wascarriedoutin2010andthis knowledge needsanalyses(LKNA).Amore structured the comprehensiveness of the Bank’s and learning results, furtherrefinements were madetoenhance In ensuringgreater alignment tothebusiness Greater alignmenttoachievebusinessresults greater andgrowth. learning and buildinganenablingenvironment tonurture and knowledgemanagementtothebusinessneeds thrusts, namely, enhancingthealignmentoflearning the Bank’s workforce. Thisinvolvedtwomainstrategic undertaken tofurtherenhancethedevelopmentof perform effectively. In2010,concertedefforts were right talentwiththenecessarycompetenciesto face challenges,emphasisisgiventonurturingthe In ensuringtheBankremains wellpositionedto andKnowledgeManagement Learning Developing theBank’s Workforce through from Asia,CentraltheAfricancontinent the Banktoengagewithcentral bankers sharing activitiescreated opportunitiesfor The significantincrease insuchknowledge development oftheMalaysian financialsystem. systems thathavecontributed tothesuccessful agenciestostudy thestrategiesand international requests from othercentralbanksand In 2010,theBankreceived atotalof112 Agencies External Technical CooperationProgrammes with the workplace. through theconceptofbringingclassroom to the nextyearwillbecentred onreal-time learning for talentdevelopment.Muchofthefocus commitment toproviding anenablingenvironment Moving forward, theBankwillremain steadfastinits 60 graduatessinceitscommencementin2008. IIUM. Asofend-2010,theprogramme hasproduced Islamic Law(CIL)programme organisedjointlywith Islamic UniversityMalaysia(IIUM)foritsCertificatein Bank alsoreceived recognition bytheInternational knowledge initiativesandflagshipprogrammes. The and as subjectmatterexpertsinvariouslearning by theiractiveparticipationasteacherswell and sponsorhumancapitaldevelopmentinitiatives The leadershipoftheBankcontinuedtochampion and SettlementSystems(CPSS). Monetary Fund(IMF)andCommitteeonPayment as theToronto LeadershipCentre, International both withinaswelloutsidethecountrysuch enhanced collaborationwithstrategicpartners positive trend provided theimpetusformore ProgrammesLearning wasevidentin2010.This organisations, higherdemandforBNM’s Flagship anddomestic management bybothinternational leadership intheareaandknowledge oflearning in 2010.Apartfrom being benchmarkedfor in itsroleandgrowth tocatapultthelearning The Bankwasrecognised as aCentre ofExcellence culturelearning amongsttheBankstaff. to promote knowledgeseeking andself-directed K-Fair continuedtobeoneofthemainplatforms to receive strong participationrates.Theannual Central BankingTea Talks series,whichcontinued Conversations withSeniorManagement(CoSM)and engagement withSeniorManagementviaeventslike such astheannualknowledgefair(K-Fair)and were implementedthrough multiplechannels, andknowledgemanagementenvironment learning growth, furtherinitiativesto strengthen theBank’s

123 ANNUAL REPORT 2010 GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ng t the underprivileged and less

after the trip. nancial management nancial literacy and healthcare. The spirit of nancial literacy and healthcare. ooding). Corporate Social Responsibility Corporate oods and landslides in 2010. The BNM Volunteers also worked with the landslides in 2010. The BNM Volunteers oods and nancial awareness to the communities in Sri Pantai and Prima Selayang in 2011. to the communities nancial awareness

with the Non-Governmentalnancing. It is conducted monthly in collaboration Organisation (NGO) investments, debt management, budgeting andnancial knowledge such as savings, expenses, Corporate Social Responsibility (CSR) has always been an integral part of the Bank’s mandates. Over of the Bank’s been an integral part (CSR) has always Social Responsibility Corporate Malaysia special the Bank Negara initiatives, including out various CSR the Bank has carried the years, aimed Graduates Programme in support of young artist and the initiatives scholarship programme, 2008, the Bank Negara Malaysia Volunteers of unemployed graduates. In at enhancing employability to undertake staff an avenue for the Bank’s established to provide was Volunteers´ Association or `BNM segments of the community. initiatives for targeted outreach 1. BNM Volunteers social activities, to pursue meaningful was to enable staff BNM Volunteers Establishment of the leadership skills, develop balance of work and life and in the process, striking the delicate indirectly set about in their the volunteers With the motto `Make A Difference´, character. boost morale and build such as the hard-core of disadvantaged communities, the advancement to contribute towards efforts have suffered disabled, senior citizens, and those who the underprivileged women and children, poor, hands-on volunteer community service through calamities, misfortune due to health or environmental and monetary contributions. projects in 2010 to benefi planned and executed A wide range of activities were on fi general awareness fortunate, as well as to increase but also to family members and friends. The Bank’s to staff, volunteerism at the Bank is not limited by identifying and assisting the in the programme branches nationwide also actively participated headquarters in Kuala the Bank’s inaccessible from otherwise unknown and underprivileged in areas are: group embarked by the BNM Volunteers Some of the programmes Lumpur. Financial Literacy Programme of the community on basic educate small groups (FLP) is designed to Financial Literacy Programme fi microfi is mainly consisting of single mothers. BNM Volunteers Generasi Gemilang, targeting poor households sessions on Personal Financial Management prior to the shopping session, an evaluation was made by thesessions on Personal Financial Management to gauge participants’ understanding of fi BNM Volunteers LET’S BRING ‘EM FOOD! free Islam (PERTIWI) to provide collaborated with Pertubuhan Tindakan Wanita BNM Volunteers basis. on a regular healthy meals and clean drinking water to various destitute inner city communities helped to of six to eight BNM Volunteers food, groups In addition to donating money to provide by PERTIWI every Friday evening for a period of 12 weeks. The food was distribute food prepared in Chow Kit, near Dayabumi and Masjid India. via the `food van´ to designated areas delivered of Natural Disasters Contribution and Donation for Victims have also assisted in channeling donations to help victims of natural disasters during BNM Volunteers Museum and Art Gallery to reproduce initiatives involved collaboration with BNM’s One of the the year. the sale were `Huruf´ from series to be sold as limited edition prints. Proceeds Ahmad Zakii Anwar’s collected and distributed donations for the contributed to the Haiti Earthquake Fund. BNM Volunteers by fl people of Pakistan affected during the year to contribute aid to victims of natural disasters in South East Asian Malaysian Red Crescent Philippines (typhoons andcountries such as Indonesia (volcano eruptions and tsunami), Myanmar and cyclones) and Thailand and Vietnam (fl As part of an extension of the FLP programme during the month of Ramadan in 2010, BNM Volunteers during the month of Ramadan in 2010, BNM Volunteers As part of an extension of the FLP programme Sri Pantai for a shopping trip at a local hypermarket. Each familyaccompanied participating families of household items. As participants have had four briefi food, clothing and was given RM150 to purchase planning to further spread fi planning to further spread

GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ANNUAL REPORT 2010 124 The Bankoffers fi Kijang EmasScholarship Assessment) examination. income familieswhohaveexcelledintheirPeperiksaan MenengahRendah(PMR),(LowerSecondary level tonurture criticaltalentsofthenation,andatsecondarylevel,inaidstudents from low requirements, BankNegaraMalaysiaalsoawards specialKijangEmasscholarshipsatthetertiary In additiontotheBank’s annualscholarshipsawarded tooutstandingstudentsthatmeettheBank’s 3. BankNegaraMalaysiaSpecialScholarshipProgrammes additional 200unemployedgraduates. employers. ThesuccessofGP500ledtheBanktocontinuewiththisprogramme in2011foran the companiestheywere attachedwithorwere abletosecure permanentpositionswithother After more thanayearintotheprogramme, 432outofthe500graduateswere absorbedby motivation were alsoprovided. and entrepreneurship. Inaddition,interventionsrelated toself-enhancement,counselingand customised developmentprogrammes focusedonenhancinganalyticalskills,communication the programme andinaneffort tostrengthen theirskills,theBankorganised,structured and provide developmentopportunitiestothegraduatesthrough attachmentprogrammes. Throughout Companies nationwide,through theirrespective associations,havecollaboratedwiththeBankto job-training withreputable employersinvariousindustriesforadurationofonetotwoyears. Enhancement oftheemployabilitygraduatesisdonethrough skillsimprovement andon-the- Bank toenhancetheemployabilityof500unemployedgraduatesfrom underprivilegedfamilies. The GraduatesProgramme 500orbetterknownas`GP500´ isaprogramme conductedbythe 2. GraduatesProgramme by peoplelivingwithHIV. provide thestaff withawareness ofHIV/AIDSandtohelpreduce thestigmaanddiscriminationfaced A talkbythePresident ofMalaysianAIDSCouncil,DatukMohd.ZamanKhanwasorganisedto for theBank’s staffabouttheHIV+communityinMalaysiaandhowtheycanbesupported. tolearn Bank’s HumanCapitalDevelopmentCentre andTheMalaysianAIDSCouncil,setupanexhibition In conjunctionwiththeBank’s KnowledgeFair2010,theBNMVolunteers incollaborationwith the HIV/AIDS Awareness relationships created. the visitasvolunteerskeptintouchwithchildren vialettersandnotestobuilduponthe made thevisitverymeaningfulforallthoseinvolved.Thespecialexperiencecontinuedbeyond provided individualattention tothechildren assignedtothemandthisbondingexperience Kebajikan EhsanAshShakurinRawang,toTheLostWorld ofTambun inApril 2010.Eachvolunteer 36 BNMVolunteers organisedanoutingwith 50underprivilegedchildren from Pertubuhan Fun Visit tothe‘LostWorld ofTambun’ withUnderprivilegedChildren orphanage inPuchong. fun andinteractiveway. Thissuccessfultuitionprogramme iscurrently beingexpandedtoanother for thesechildren. Theobjective ofthisprogramme istoprovide extraclassesto thechildren ina Ruman OpahinKlang.Inaddition,donationswere raisedtobuyreadingkits materialsandlearning A group ofBNMVolunteers provided fortnightlytuitiononMathematicsandEnglishtoorphans at Tuition ProgrammeatRumahOpah economics, from A-LevelstoPhDprogrammes. awarded to32topstudents,pursuingvariousfi critical talentforthenation. Sinceitsinaugurationin2005,thisprestigious scholarshiphasbeen of Education)achieverstopursue studiesinfi veprestigious awards annuallytotopSijilPelajaranMalaysia(Malaysian Certifi eldsoftheirchoiceaspart oftheeffort tonurture eldsofstudiessuchasmedicine, engineeringand cate

125 ANNUAL REPORT 2010 GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT nancial industry. nancial exibility of creating large or intimate spaces to suit any exhibition. exibility of creating Secondary School Awards Secondary in the PMR who have excelled Form 4 students annually to selected offered are 20 awards A total of them to way to encourage as a lower income groups from is given to those This award examinations. the Kijang Emas of became a recipient this scheme One student from academic pursuits. excel in their Bank scholarships to pursue A-Level the while four others have successfully secured Scholarship in 2010 since 2010. programmes Artists Malaysian of Young 4. Initiatives in Support Malaysian art. In the early days of in the development of has had a major role Since 1962, the Bank the Bank by individual artists. Now, to the Bank offered were collection, the works of art the Bank’s the supporting and auction houses, thereby artists, galleries from works directly systematically procures in every sector of the art market. its active participation industry through entire dedicated and requires art market is still very small support is crucial as the Malaysian The Bank’s such contributions. The opening of a world class art galleryinvestments by organisations able to make collections, will further support this nascent part of the Bank’s by the Bank in 2011, housing a major of upcoming works. The new art gallery covers a total a new venue for exhibitions sector and provide with the fl metres of 2,010 square area in 2004, held an the Kijang Awards the Bank through in artistic production, high standards promote To superior works to be in Malaysia to gear themselves to create open art competition to encourage artists Museum has also Money the Bank’s permanent collection. Since 2006, growing included in the Bank’s organised the `Art young and upcoming artists to the fi Invitation´ that introduces

GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ANNUAL REPORT 2010 126 communities, financialeducation, marketconduct and servicesthatcaterforthe underserved new formsofmicro financialinstitutions,products The dialoguesfocusedontopical issues,including and newmodelsofmicrofinance were shared. took partindialogueswhere countryexperiences than 100participantsfrom eightAfricancountries and theAllianceforFinancialInclusion(AFI).More Uganda, incollaborationwiththeBankofUganda CooperationAgency,International aswellin in KualaLumpur, incollaborationwithJapan its FinancialInclusionAdvisers(FIA)programmes to improve their are underservedtobeableusefinancialservices inclusive financialsystemstoenablethosewho contribute totheglobalagendaofbuildingmore policymakers andpractitionersofmicrofinance isto objective ofsupportingcapacitybuildingfor building isinthearea offinancialinclusion.The capacity The otheremphasisofinternational the rapidlygrowing Islamicfinanceindustry. competent regulators andprofessionals required by to theenhancementofqualityandquantity dialogues heldduringtheyearaimedtocontribute the rangeofemergingsolutions.Theseminarsand challenges pertinenttoIslamicfinancegloballyand aspects oftheIslamicfinancialservicesindustry, the initiative. Theprogramme focusedonvarious technicalassistance toGovernment Government under theauspicesofMTCP, aspartof a for officialsoftheNationalBankKyrgyzRepublic Financial InstitutionswasalsoconductedinBishkek Regulatory andSupervisoryFrameworkforIslamic in KualaLumpurandJordan. Aworkshopon programmes onIslamicfinancewere organised Islamic DevelopmentBankwhere capacitybuilding such astheon-goingcollaborationwith regulators (114participantsfrom 36countries) capacity buildingprogrammes tofinancial In thearea ofIslamicfinance,theBankprovided Regulators andCentralBankingCourses. Intermediate IslamicFinanceCourseforFinancial included BankingSupervisionFoundationCourse, Technical CooperationProgramme (MTCP)which sponsoredauspices oftheGovernment Malaysian programmes learning underthe of international The Bankalsocontinuedtooffer awiderange organisational development. development andmicrofinance, aswell being Islamicfinance,financialstability, SME were covered, withareas ofgreatest interest and theMiddle-East.Abroad rangeoftopics livelihood. The Bank conducted and critical operations had laid the foundation and criticaloperationshadlaid thefoundation The completionoftherelocation ofICTservices infrastructure services. for high-performance,reliable andsecured network infrastructure isthefirstinMalaysia,anddesigned The implementationofthistriangularnetwork Data Centre, aswelltheRecoveryCentre. connect theBank’s systemsresiding intheHQ, with high-performancenetworklinksthatseamlessly a leading-edgeandhighlysecure facilityequipped is theoperationalisationofnewDataCentre, Spearheading theinfrastructure expansioneffort stakeholders. andexternal to bothinternal continuity practices,inorder todeliveroptimumvalue information assets,whileensuringstrong business optimise theuseoftechnologyandsecure itscritical the Bankcontinuedtoembarkoninitiatives dependence ofkeybusinessoperationsonICT, the Bank’s desired outcomes.Acknowledgingthe strategic initiativesupportingtheachievementof and technologysolutionswasrecognised asa implementation ofefficientandresilient infrastructure facilities tosupportandsustainitsoperations.The Communications Technology (ICT)infrastructure and oftheBank’sand modernisation Informationand year2010witnessedthefurtherexpansion The and Performance Supporting BusinessProductivity Technology Infrastructure Expansionin face ofglobalisationandregional integration. central banksfrom developingeconomiesinthe building collaborativerelationships withother knowledge oncentralbankingpracticesand continue tostress theimportanceofsharing Bank’s technicalcooperationwill international agencies during2010.Movingforward, the Understanding withseveralcentralbanksand bilateral basisbyenteringintoMemorandumof to expanditstechnicalcooperationona TheBankalsocontinued bank modernisation. management, riskmanagementandcentral talent building, focusingongovernance, in organisationaldevelopmentandcapacity inclusion, theBankalsoconductedprogrammes Apart from Islamicfinance andfinancial initiative ledbytheAFI. important subjectoffinancialinclusiondata,an this, theBankalsohostedaworkshopon more inclusivefinancialsystems. Inrelation to market playersinshapingthedevelopmentof agencies,regulatorsbetween Government and as welltheneedforgreater coordination

127 ANNUAL REPORT 2010 GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT market trading were facilitated via system system facilitated via were market trading Securities on the Scripless enhancements Operations System. The Treasury Depository to support the was enhanced System (TERAS) and management operations reserve expanding operational efficiency. to improve is continuously the Bank Moving forward, of emerging technologies exploring the use usage of ICT, increased in encouraging the the dissemination especially in facilitating of information. With the adoption of new imperative that adequate technologies, it is and controls surveillance security measures, new security address be put in place to and reviews frequent concerns. In this regard, and of ICT security controls strengthening of being conducted as part risk mitigation are ICT and the Bank’s to safeguard the process together with information assets. These efforts, the modernisation infrastructure of the ICT meeting the towards geared in the Bank, are state of objective of ensuring a heightened as well as being in alignment ICT-readiness with the overall business continuity management at the Bank. for the Bank to continue the transformation of its to continue the for the Bank `on-demand´ towards infrastructure technology business address that can effectively capabilities dynamic and particularly the requirements, crucial in the implementations time-critical business outcomes. Theachievement of specific to ICT environment establishment of a `virtualised´ needs for additional andbetter support business power and networkingoptimised space, computing initiative is one example of an ongoing requirements, ICT with the business.to support and align Recovery the Bank’s of The existing infrastructure to support high- was further upgraded Centre to system resiliency, availability and enhanced maintain the capacity of the ICT infrastructure to be on par with the Data Centre. at the centre for critical applications supporting These are of cheque-clearing, business operations in the area payments and settlement, and treasury. agenda in supporting the Bank’s Towards financial market development and reserve enabling management operations, two major also developed and completed solutions were in the year 2010. The issuance of Sukuk bond retail 1Malaysia and the establishment of

GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ANNUAL REPORT 2010 128 BANK NEGARA MALAYSIA Organisation Structure

BOARD OF DIRECTORS

GOVERNOR

Tan Sri Dr. Zeti Akhtar Aziz Board Audit Committee Board Governance Committee Board Risk Committee

Secretary to the Board Secretary to the Committee Secretary to the Committee Abu Hassan Alshari bin Yahaya Secretary to the Committee

Tan Nyat Chuan Donald Joshua Jaganathan Chung Chee Leong Governor's Office

Internal Audit Suhaimi bin Ali Tan Nyat Chuan

Strategic Communications Abu Hassan Alshari bin Yahaya

SPECIAL ADVISOR DEPUTY GOVERNOR DEPUTY GOVERNOR DEPUTY GOVERNOR Dato' Ooi Sang Kuang Dato’ Muhammad bin Ibrahim Dato' Mohd Razif bin Abd. Kadir Nor Shamsiah binti Mohd Yunus

Project Advisor MIFC Promotion Unit Risk Management Dato’ Mohd Nor bin Mashor Shariffuddin bin Khalid Chung Chee Leong

Special Investigation

Financial Intelligence

Wan Mohd Nazri bin Wan Osman

ASSISTANT GOVERNOR ASSISTANT GOVERNOR ASSISTANT GOVERNOR ASSISTANT GOVERNOR ASSISTANT GOVERNOR ASSISTANT GOVERNOR ASSISTANT GOVERNOR Dr. Sukhdave Singh Norzila binti Abdul Aziz Abu Hassan Alshari bin Yahaya Marzunisham bin Omar Bakarudin bin Ishak Jessica Chew Cheng Lian Donald Joshua Jaganathan

Economics Investment Operations and Financial Markets Finance Strategic Human Capital Financial Sector Development Financial Surveillance Financial Conglomerates Supervision Fraziali bin Ismail Adnan Zaylani bin Mohamad Zahid Mohd. Adhari bin Belal Din S. Abd. Rasheed bin S. Abd. Ghafur Madelena binti Mohamed Che Zakiah binti Che Din

Monetary Assessment and Strategy Foreign Exchange Administration Corporate Services Strategic Management Islamic Banking and Takaful Prudential Financial Policy Insurance and Takaful Supervision

Dr. Norhana binti Endut Wan Hanisah binti Wan Ibrahim Azmi bin Abd Hamid Tunku Alizakri bin Raja Muhammad Alias Ahmad Hizzad bin Baharuddin Mohd Zabidi bin Md Nor Yap Lai Kuen

International Currency Management and Operations LINK and Regional Offices Human Capital Development Centre Development Finance and Enterprise Consumer and Market Conduct Banking Supervision

Nazrul Hisyam bin Mohd Noh Ramli bin Saad Arlina binti Ariff Kamari Zaman bin Juhari Koid Swee Lian Marina binti Abdul Kahar

Statistical Services Legal Security IT Services Payment Systems Policy Money Business Services*

Toh Hock Chai Jeremy Lee Eng Huat Mior Mohd Zain bin Mior Mohd Tahir Alizah binti Ali Cheah Kim Ling

Central Banking Services Property Management Services HR Services Unit Regulation and Supervision Administration

Nor Aslaini binti Mohd Nasir

SLK Management Office Lim Foo Thai

Bank Negara Malaysia Museum and Art Gallery Muhammad Fawzy bin Ahmad

As at 1 March 2011 * To be established later

129 ANNUAL REPORT 2010 GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT GOVERNANCE, COMMUNICATIONS & ORGANISATIONAL DEVELOPMENT ANNUAL REPORT 2010 130 138 137 136 NotestotheFinancialStatements IncomeStatementfortheYear Ended31December2010 StatementofFinancialPositionasat31December2010 ANNUAL FINANCIALSTATEMENTS

131 ANNUAL REPORT 2010 ANNUAL FINANCIAL STATEMENTS ANNUAL FINANCIAL STATEMENTS ANNUAL REPORT 2010 132 9 MARCH2011 PUTRAJAYA MALAYSIA AUDITOR GENERAL (TAN SRIDATO’ SETIAHAJIAMBRIN BINBUANG) the approved accountingstandards. Malaysia asat31December2010andoftheresults ofitsoperationsfortheyearendedinaccordance with In myopinion,thefi reasonable basisformyopinion. as wellevaluatingtheoverallpresentation ofthefi also includesassessmentoftheaccountingprinciplesused,signifi examining onatestbasis,evidencesupportingtheamountsanddisclosures inthefi assurance thatthefi standards onauditing.Thosestandards require anauditbeplannedandperformedtoobtainreasonable The audithasbeencarriedoutinaccordance withtheAuditAct1957andinconformityapproved express anopiniononthesefi These fi I haveauditedthefi ANNUAL FINANCIALSTATEMENTS nancialstatementsare theresponsibility ofthemanagement.Myresponsibility istoauditand nancialstatementsofBankNegaraMalaysiafortheyearended31December2010. nancialstatementsgiveatrueandfairviewofthefi nancialstatementsare free ofmaterialmisstatementoromission.Theauditincludes FOR THEYEARENDED31DECEMBER2010 CERTIFICATE OFTHEAUDITORGENERAL ON THEFINANCIALSTATEMENTS OF nancialstatements. BANK NEGARAMALAYSIA nancialstatements.Ibelievethattheauditprovides a cantestimatesmadebythemanagement nancialpositionofBankNegara nancialstatements.It

133 ANNUAL REPORT 2010 ANNUAL FINANCIAL STATEMENTS DIRECTOR 8 MARCH 2011 OH SIEW NAM KUALA LUMPUR KUALA LUMPUR On behalf of the Board, STATEMENT BY CHAIRMAN BY STATEMENT AND ONE OF THE DIRECTORS OF THE AND ONE CHAIRMAN 8 MARCH 2011 KUALA LUMPUR ZETI AKHTAR AZIZ ZETI AKHTAR On behalf of the Board, We, Zeti Akhtar Aziz and Oh Siew Nam, being the Chairman and one of the Directors of Bank Negara of Bank Negara and one of the Directors Siew Nam, being the Chairman Zeti Akhtar Aziz and Oh We, drawn up so as to statements are the financial in the opinion of the Board, state that Malaysia, do hereby and of Malaysia as at 31 December 2010 of Bank Negara view of the state of affairs give a true and fair the year ended on that date. of operations for the results

ANNUAL FINANCIAL STATEMENTS ANNUAL REPORT 2010 134 hs8Mrh21. ) this 8March 2011. ) by theabovenamedatKualaLumpur) Subscribed andsolemnlydeclared be trueandbyvirtueoftheprovisions oftheStatutoryDeclarationsAct,1960. knowledge andbelief,correct andImakethissolemndeclarationconscientiouslybelievingthesameto Negara Malaysia,dosolemnlyandsincerely declare thatthefinancialstatements,are tothebestofmy I, MuhammadbinIbrahim,beingtheofficerprimarilyresponsible forthefinancialmanagementofBank FOR THEFINANCIALMANAGEMENTOFBANKNEGARAMALAYSIA DECLARATION BYTHEOFFICERPRIMARILY RESPONSIBLE Before me,

135 ANNUAL REPORT 2010 ANNUAL FINANCIAL STATEMENTS RM RM 2010 2009

Note Federal Government 14,226,350,050 18,641,169,858 Others 8 3,663,691,712 1,270,868,081 Total AssetsTotal 390,171,791,360 362,977,702,692 Total LiabilitiesTotal 370,457,548,001 314,885,023,978 Total CapitalTotal 19,714,243,359 48,092,678,714 Total Liabilities and CapitalTotal 390,171,791,360 362,977,702,692 ASSETS ExchangeGold and Foreign International Monetary Fund Reserve Position Drawing RightsHoldings of Special Malaysian Government Papers InstitutionsDeposits with Financial Loans and Advances 1,453,521,555 Other Assets 3 1,515,842,594 320,774,448,194 4 5 6,442,516,703 322,505,629,648 40,583,035,000 2,285,433,098 7,279,175,067 9,373,175,000 2,683,093,250 6 11,837,444,956 7 12,407,481,804 6,795,391,854 7,213,305,329 Notes on the following pages form part of these financial statements. LIABILITIES AND CAPITAL in CirculationCurrency Deposits by: Financial Institutions 170,732,428,628 181,535,107,206 55,787,812,628 51,138,567,538 Bank Negara Malaysia Bank Negara 2010 as at 31 December of Financial Position Statement Bank Negara PapersAllocation of Special Drawing RightsOther Liabilities 9 6,396,555,926 7,231,066,765 100,376,801,291 10 33,357,434,443 19,273,907,766 21,710,810,087 Paid-up CapitalGeneral Reserve Fund Other Reserves 12 11 13,643,961,478 13 100,000,000 13,478,068,329 5,970,281,881 100,000,000 34,514,610,385

ANNUAL FINANCIAL STATEMENTS ANNUAL REPORT 2010 136 Notes onthefollowingpagesformpartofthesefinancialstatements. e rfi ,6,9,4 7,669,863,825 6,165,893,149 7,669,863,825 1,501,414,643 4,168,449,182 2,000,000,000 6,165,893,149 165,893,149 4,000,000,000 2,156,652,790 2,000,000,000 17 1,312,532,045 1,071,025,015 1,085,627,775 873,712,705 438,819,340 Net Profit Amount PayabletoFederalGovernment 15 16 Transfer toGeneralReserveFund Transfer toOtherReserves Appropriation ofNetProfit: Net Profit Total Expenditure Development Expenditure Recurring Expenditure Less: Total Income Income StatementfortheYear Ended31December2010 Bank NegaraMalaysia Note 14 7,478,425,194 9,826,516,615 002009 2010 MRM RM

137 ANNUAL REPORT 2010 ANNUAL FINANCIAL STATEMENTS primary economic environment in which the Bank operates. primary economic environment during currencies in foreign on the balance sheet date. Transactions of exchange prevailing on the the year have been translated into ringgit Malaysia at rates of exchange prevailing value dates. in Other Reserves. recognised Malaysia Act 2009 and applicable Malaysian Financial Reporting Standards (FRS). Section Financial Reporting Standards Malaysia Act 2009 and applicable Malaysian its that the Bank, in preparing 2009 provides 10 of the Central Bank of Malaysia Act to the extent that it is, in the accounting standards financial statements, shall comply with objects and functions of to the regard to do so, having opinion of the Bank, appropriate for the formulation and conduct its responsibilities the Bank. The Bank, having considered in some to differ, is of the opinion that, it is appropriate monetary policy, of effective the Malaysian FRS. aspects, from and assumptions that affect management to use certain estimates Malaysian FRS requires of contingent assets and and disclosure amounts of assets and liabilities the reported amounts of income statements, and the reported liabilities at the date of the financial based on the are Although these estimates and expenses during the financial year. could differ events and actions, the actual results best knowledge of current management’s estimates. those from (b) into ringgit Malaysia at rates have been revalued currencies Assets and liabilities in foreign (c) changes in the exchange rates are gains or losses arising from revaluation The unrealised (a) of the using ringgit Malaysia, the currency The financial statements have been prepared (a) with the Central Bank of in accordance financial statements have been prepared These (b) of the with the requirements of the financial statements in conformity The preparation accrual basis. Translation Currency Foreign of Financial Statements Basis of Preparation Base and Accrual Accounting Measurement 2.3 2.1 cost basis of accounting and on an on the historical prepared The financial statements have been 2.2 the sustainable growth of the Malaysian economy. In this regard, the Bank’s primary functions are as functions are primary the Bank’s In this regard, Malaysian economy. of the the sustainable growth follows: Bank; both of the financial years presented, consistently applied to These accounting policies are below. unless otherwise stated. of the Bank Principal Activities Policies Accounting 1. stability conducive to monetary stability and financial to promote of the Bank are The principal objects (a) in Malaysia; and conduct monetary policy to formulate (b) in Malaysia; to issue currency (c) by the to the laws enforced subject are financial institutions which and supervise to regulate (d) exchange markets; over money and foreign oversight to provide (e) over payment systems; oversight to exercise (f) and inclusive financial system; a sound, progressive to promote (g) Malaysia; of reserves to hold and manage the foreign (h) with the fundamentals of the economy; and consistent an exchange rate regime to promote (i) 2. banker and financial agent of the Government. to act as financial adviser, set out are of these financial statements principal accounting policies applied in the preparation The Notes to the Financial Statements - 31 December 2010 - 31 December Statements to the Financial Notes

ANNUAL FINANCIAL STATEMENTS ANNUAL REPORT 2010 138 R RM RM 322,505,629,648 RM 320,774,448,194 RM 4. 3. Malaysian Government Papers MalaysianGovernment GoldandForeign Exchange 2254308 2,683,093,250 - 2,285,433,098 10,000 2,683,093,250 2,285,423,098 14,655,589,658 277,872,235,367 3,765,861,668 Sukuk 1Malaysia2010 Securities 13,631,359,440 Malaysian Government 275,379,932,314 6,767,913,697 Others 24,995,242,743 MonetaryFund(IMF) International Settlements(BIS)and BankforInternational Balances withOtherCentralBanks, Foreign Deposits Foreign Securities 26,211,942,955 Thenet profit ofthe Bankisappropriated inaccordance withsection7ofthe CentralBankof 2.7 Thecapital expenditure incurred onfixedassetsare writtendowntonominal valueorwrittenoff 2.6 Theamountborrowed underrepurchase agreements isreported under`OtherLiabilities´. 2.5 Securitiesandinvestmentsare statedmainlyatcostandprovisions havebeenmadefor 2.4 Malaysian government papers referdebtinstruments. Malaysian government toholdingsofGovernment Net Profit Repurchase andReverse-Repurchase Agreements SecuritiesandInvestments Fixed Assets Malaysia Act2009andonlyrealised gainsare madeavailablefordividenddistribution. completely intheyearofacquisition. basis, respectively. repurchase agreements isrecognised asinterest expenseandinterest incomeonastraight-line difference betweentheamountreceived andamountpaidunderrepurchase andreverse- The amountlentunderreverse-repurchase agreements isreported under`OtherAssets´.The losses arisingfrom changes inmarketpricesare recognised inOtherReserves. identified asAvailable For Sale are statedatfairvalueandtheunrealised revaluation gainsor diminution invalueasat31December2010.Designatedfinancialinstrumentswhichhavebeen (d) The International ReservescomprisingGoldandForeignMonetary TheInternational Exchange, (d) RM328,670.5 millionequivalenttoUSD106,525.1million. Fund ReservePositionandHoldingsofSpecialDrawingRightsat31December2010was 2010 2009 2010 2009

139 ANNUAL REPORT 2010 ANNUAL FINANCIAL STATEMENTS . 1 . 1 2010 2009 . 1 Exchange Rate Fluctuation Reserve the gains or losses arising from exchange revaluation established to meet unrealised A reserve fluctuations of exchange rates against ringgit Malaysia. Revaluation Reserve investment established to deal with the movements in the market values of the Bank’s A reserve value. at fair For Sale portfolios and measured portfolios which have been designated as Available 48(1) and section 100 of the Central Bank of Malaysia Act 2009 of the Central Bank of Malaysia 48(1) and section 100 under section 75(i) and section 100 of the Central Bank of Malaysia Act 2009 Bank of Malaysia 100 of the Central 75(i) and section under section the IMF. The allocation represents a dormant liability of the Bank to the IMF, against which assets are against which assets are a dormant liability of the Bank to the IMF, The allocation represents the IMF. equivalent The net cumulative allocation of SDR was RM6,396,555,926 the IMF. in SDR from received to SDR1,346,143,721. As at 1 January Net Profit from Transfer As at 31 December 165,893,149 13,478,068,329 13,643,961,478 1,501,414,643 11,976,653,686 13,478,068,329 under various schemes such as Fund for Small and Medium Industries and New Entrepreneur Fund Industries and New Entrepreneur such as Fund for Small and Medium under various schemes establishments. The of small and medium business and development growth aimed at promoting 100 of the Central under section 49 and section mainly provided advances are extensions of these 2009 Bank of Malaysia Act Other Liabilities Other Capital Paid-up General Reserve Fund Reserves Other Pursuant to section 100 of the Central Bank of Malaysia Act 2009, transactions or arrangements made under the Central Bank of Pursuant to section 100 of the Central Bank of Malaysia Act 2009, transactions or arrangements deemed to have been made under the Central Bank of Malaysia Act 2009. Malaysia Act 1958 are Other Assets Other Financial Institutions Deposits with Deposits by Others Allocation of Special Drawing Rights and Advances Loans 7. under section acquired and bonds of RM6,270,261,038 investments in shares Other assets include 1 5. institutions the Bank with financial placed by comprise deposits financial institutions Deposits with agreements. repurchase Other liabilities include mainly placements by financial institutions under the 11. The paid-up capital of RM100 million is owned by the Government of Malaysia. 12. comprise: Other reserves (a) (b) 8. public authorities. A substantial part of these deposits comprises deposits from 9. to to their subscription allocated Special Drawing Rights (SDR) in proportion IMF member countries are 10. 13. RM RM 6. by the Bank to the participating institutions comprise mainly advances extended Loans and advances

ANNUAL FINANCIAL STATEMENTS ANNUAL REPORT 2010 140 18. Thistransfer ismadeinaccordance withsection7oftheCentralBankMalaysiaAct2009. 17. Developmentexpenditure are expensesincurred mainlytofinancedevelopmentalandlongterm 16. Recurringexpenditure are expensesincurred inthemanagementandadministrationofday-to-day 15. Total incomecomprisesrevenue from foreign reserves managementwhichincludesinterest and 14. (c) ContingenciesandCommitments Transfer toOtherReserves Development Expenditure Recurring Expenditure Total Income projects undertakenbythe Bankthatare inlinewithitsprincipalobjectsandfunctions. operations oftheBank. and themonetarypolicycost. dividends, non-treasury income andisstatedatnetofamortisation/accretion ofpremiums/discounts (c) (b) (a) Total commitmentsasat31December2010comprisethefollowing: 18.2 Total contingentassetsasat31December2010amountedto RM1,300,000,000.These 18.1

circumstances whichare notwithinthereasonable control oftheBank. A reserve establishedtoprovide forfuture lossesresulting from unfavorableexternal Contingency Reserve Commitments contributions willbereturnedtotheBankwhenCentres becomeself-sufficientinthefuture. and financialservicesmanagedbyICLIFINCEIF. Itisprovided intheTrust Deedsthatthetotal finance activitiesrelated totraining,research anddevelopmentofhumanresource onbanking Trust Centre FundandInternational forEducationinIslamicFinance(INCEIF)Trust Fundto comprise theBank’s Centre totalcontributionstoInternational forLeadershipinFinance(ICLIF) Contingent Assets New ArrangementstoBorrow byIMF Membership withIMF Shareholding inBIS the IMF. However, forthefinancialyearended31December2010,there wasnocallontheNABby credit arrangementamountedtoSDR340,000,000(equivalentRM1,615,599,420). monetary system.Asat31December2010,theBank’s totalcommitmentundertheNAB of financingtotheIMFforpurposesafeguarding thestabilityofinternational arrangements betweentheIMFanditsmembercountries toprovide supplementary source The BankhasparticipatedintheNewArrangementsto Borrow (NAB),asetofcredit the uncalledportionandSDRrateasatbalancesheet date. shares heldbytheBankinBIS.Theamountisbasedonnominalvalue(SDR5,000) of An amountofRM57,377,538whichrepresents theuncalledportionof3,220units Articles ofAgreement. in SDRorotherconvertiblecurrencies, theamountofMalaysia’s quotaintheIMFunder An amountofRM5,620,898,121whichrepresents theobligationofBanktopayinfull,

141 ANNUAL REPORT 2010 ANNUAL FINANCIAL STATEMENTS

Chiang Mai Initiative Multilateralisation Arrangement Chiang Mai Initiative Multilateralisation The Bank has participated in the multilateral ASEAN Swap Arrangement (ASA) together with (ASA) together Swap Arrangement the multilateral ASEAN has participated in The Bank currency foreign short-term to provide and monetary authorities central banks other ASEAN 31 difficulties. As at of payments countries with balance to member liquidity support amounted drawdown and eligible maximum total commitment 2010, the Bank’s December USD600 million (equivalent to RM1.9 (equivalent to RM925.7 million) and to USD300 million was no 2010, there the financial year ended 31 December for However, billion) respectively. any member country. under ASA from for liquidity support request On 7 January 2009 and 2 April 2010, the Bank renewed the Bilateral Swap Arrangement the Bilateral and 2 April 2010, the Bank renewed On 7 January 2009 under Bank of China respectively and the People’s Bank of Korea with the (BSA) agreements and eligible commitment Bank’s As at 31 December 2010, the the Chiang Mai Initiative. (equivalent to RM4.6 respectively under each BSA is USD1.5 billion maximum drawdown to activate the no request was there year ended 31 December 2010, billion). For the financial BSAs. Mai Initiative Multilateralisation (CMIM) The Bank has participated in the Chiang member countries facing balance of financial support to ASEAN+3 arrangement to provide date of the CMIM Agreement The effective payments and short-term liquidity difficulties. member countries facing balance of 2010. Under the CMIM arrangement, is 24 March can obtain financial support in United States payments and short-term liquidity constraints As at 31 local currencies. respective swap arrangements against their dollars through USD4.6 billion drawdown are total commitment and eligible December 2010, the Bank’s billion (equivalent to RM35.1 billion) respectively. (equivalent to RM14 billion) and USD11.4 for liquidity support was no request 2010, there For the financial year ended 31 December any member country. from ASEAN Swap Arrangement ASEAN Swap Bilateral Swap Arrangement Market Risk movements in market prices financial position to adverse of the Bank’s Market risk is the exposure management of market risk is governed exchange rates. The rates and foreign such as interest the long-term reflects which of Directors by the Board by the benchmark policy approved Board the Withininvestment objectives and acceptable risk-return profile. the benchmark policy, the benchmark. investments that deviate from allows `active risk´ to be taken through of Directors testing limit. Sensitivity analysis and stress a `tracking error´ through This `active risk´ is controlled due to unexpected is also undertaken to assess potential mark-to-market losses on the reserves fluctuations and volatility in the market.

(d) (d) (e) (e) (f) reserves and to ensure that the following risks are contained within acceptable levels: contained within that the following risks are and to ensure reserves Financial Risk Management management of and investment risks in the Reserve Management Committee oversees treasury The 19. (a)

ANNUAL FINANCIAL STATEMENTS ANNUAL REPORT 2010 142 TheBank isexemptedfrom paymentofincometaxandsupplementaryassetoutinthe 20. (c) (b) Income Tax Income Tax (Exemption)(No.7)Order 1989. effective implementationof riskcontrols andlimits. operations. Operationalriskismitigatedthrough astrong androbustframework governance inadequate controls andprocedures, eventsthatimpede gapsinskill-setsandadverseexternal Operational riskintreasuryprocess, operationsistheriskoffinanciallossduetofailedinternal Operational Risk assessment ofcredit exposures ensures theobjectiveofcapitalpreservation ismet. are investedonlywithhigh credit qualitycounterpartiesorissuers.Thepoliciesandcontinuous in placealsostrengthens the Bank’s operationalefficiencyinthisarea andensures thereserves swap marketthataddsaforward lookingcredit assessmentonissuers.Havingsuchaframework the Bank.Theimplementationofthisframeworkincludesratingimpliedfrom thecredit default framework approved bythe Board ofDirectorsthepermissibleinvestmentuniverse governs fails toperformitscontractualobligationtheBank.Acomprehensive rating-basedcredit risk The credit riskonreserves istheriskthatacounterparty, eitherfinancialinstitutionsorissuers, Credit Risk

143 ANNUAL REPORT 2010 ANNUAL FINANCIAL STATEMENTS ANNUAL FINANCIAL STATEMENTS ANNUAL REPORT 2010 144 ANNEX

P 1 ANNUAL REPORT 2010 ANNEX ANNEX ANNUAL REPORT 2010 P 2 A 2 iacn fteEooy P25 P24 P21 P24 P23 P22 P19 P18 P18 P20 FinancingoftheEconomy A.29 HousingLoansApproved A.28 HousingLoansOutstanding A.27 HousingCredit Institutions A.26 MovementsoftheRinggit A.25 Interest Rates(%) A.24 MoneySupply:AnnualChangeandGrowth Rates A.23 Broad Money(M3) A.22 Producer PriceIndex A.21 ConsumerPriceIndex A.20 A 3 atAi:KyEooi niaos P28 East Asia:KeyEconomicIndicators A.32 A 3 MajorAdvanced Economies:KeyEconomicIndicators A.31 EconomicIndicators Selected International Public Finance P7 P4 P6 P3 P5 Monetary andFinancialIndicators P2 Sector External PrivateInvestmentIndicators P1 A.7 PrivateConsumptionIndicators A.6 LabourMarket:SelectedIndicators A.5 Savings-InvestmentGap A.4 GNIbyDemandAggregates A.3 Growth inManufacturingProduction (2005=100) A.2 Gross DomesticProduct byKindofEconomicActivityinConstant2000Prices A.1 National Accounts Key EconomicandFinancialStatistics CONTENTS A 1 xenlDb n etSriig P17 P16 P16 P15 P14 P8 P11 P13 P 13 P12 P14 DebtandServicing External A.19 PrincipalExportMarketsforLNG A.18 PrincipalExportMarketsforCrudeOil A.17 PrincipalExportMarketsforRubber A.16 PrincipalExportMarketsforPalmOil A.15 PrincipalExportMarketsforChemicalsandChemicalProducts A.14 PrincipalExportMarketsforElectricalProducts A.13 PrincipalExportMarketsforElectronics A.12 PrincipalMarketsforManufactured Exports A.11 ExportsofPrimaryCommodities Gross Exports A.10 A.9 BalanceofPayments A.8 A 3 osldtdPbi etrFnne P26 ConsolidatedPublicSectorFinance A.30

P27 P 10

ANNUAL REPORT 2010 ANNEX

evcs741. . . . 5.9 6.8 5.7 3.4 2.6 11.4 2.0 1.7 7.4 -9.4 0.2 0.4 10.2 1.3 -3.8 4.3 7.4 2.8 -2.4 1.3 6.7 2.0 5.2 -1.0 Less: UndistributedFISIM Services Construction Manufacturing Mining andquarrying Agriculture GDP atpurchasers’ prices Plus: Importduties D tprhsr’pie . . . 17725.0~6.0 7.2 -1.7 4.7 6.5 5.8 GDP atpurchasers’ prices Plus: Importduties evcs 2709 2246 2255 3013 3059 339,319 19,195 320,559 18,220 300,153 42,066 17,321 292,555 163,493 40,680 41,161 272,406 16,366 154,621 39,992 247,099 40,338 138,809 15,707 39,828 153,171 40,246 14,639 151,257 38,177 41,831 147,154 37,701 42,881 42,030 Less: UndistributedFISIM Services Construction Manufacturing Mining andquarrying Agriculture Source: DepartmentofStatistics, MalaysiaandBankNegara f p rs oetcPoutb ido cnmcAtvt tCntn 00Pie Gross DomesticProduct byKindofEconomicActivity atConstant2000Prices 2 1 Forecast Preliminary Numbers maynotnecessarilyaddupduetorounding Financial intermediationservicesindirectly measured Table A.1 1 1 2 4556 5631 5011 5105 5832 587,822 558,382 521,095 530,181 506,341 475,526 1,8 967 2,1 182 2,9 24,629 23,099 21,872 20,410 19,607 18,385 1. . 39-. . 2.2 9.6 -5.8 23.9 4.4 -12.1 0620 0820 2010 2009 2008 2007 2006 527 551 689 645 704 7,217 7,064 6,445 6,839 5,521 5,287 03734258525.4 5.2 5.8 4.2 7.3 -0.3 . . . . . 6.6 5.6 7.2 4.1 6.7 3.6 Annual change(%) RM million p 2011 f

P 1 ANNUAL REPORT 2010 ANNEX -10.6 Index Annual change (%) 2007 2008 2009 2010 2008 2009 2010 110.4 101.7 129.1 115.4 -7.9 27.0 non-ferrous metal 122.9 119.3 91.5 110.9 -2.9 -23.3 21.1 Table A.2 Table Electronics 119.9 113.4 85.5 88.2 -5.4 -24.6 3.2 Electrical products 96.2 97.1 78.9 116.3 0.9 -18.8 47.4 Non-metallic mineral products 105.3 114.9 99.3 121.7 9.1 -13.6 22.6 Basic iron & steel and Source: Department of Statistics, Malaysia Department Source: Growth in Manufacturing Production (2005=100) Production in Manufacturing Growth Export-oriented industries 111.2 109.9 97.7 107.2 -1.2 -11.1 9.7 Electronics and electrical products cluster and electrical products Electronics 111.8 107.8 83.2 97.7 -3.6 -22.8 17.4 Primary-related clusterPrimary-related 110.7 111.2 107.4 113.5 0.4 -3.5 5.7 Chemicals and chemical productsChemicals and chemical 111.4 107.6 105.8 117.9 -3.5 -1.7 11.5 Petroleum productsPetroleum 110.8 117.4 116.5 113.7 5.9 -0.8 -2.4 Textiles, wearing apparel and footwear apparel wearing Textiles, 100.3 100.3 80.4 83.8 0.0 -19.8 4.2 Wood and wood productsWood 95.7 91.2 76.0 84.9 -4.7 -16.6 11.7 Rubber products 122.5 128.2 124.3 150.2 4.7 -3.0 20.8 Off-estate processingOff-estate 105.1 115.0 112.6 110.0 9.4 -2.1 -2.3 Paper products 140.8 120.6 114.0 125.8 -14.4 -5.5 10.4 Domestic-oriented industries 112.5 121.5 114.6 132.5 8.0 -5.7 15.6 Construction-related clusterConstruction-related 121.6 126.9 112.4 133.7 4.3 -11.4 18.9 Construction-related productsConstruction-related 113.2 116.9 95.8 116.8 3.2 -18.1 21.9 Fabricated metal products 137.8 146.2 144.6 166.3 6.1 -1.1 15.0 Consumer-related clusterConsumer-related 105.9 117.6 116.1 131.6 11.0 -1.2 13.4 Food products 114.5 125.8 129.8 133.8 9.9 3.2 3.1 Transport equipmentTransport 94.3 116.4 102.0 132.3 23.4 -12.4 29.7 Beverages 114.2 117.2 114.5 150.4 2.6 -2.3 31.4 Tobacco productsTobacco 99.0 93.5 87.5 88.2 -5.6 -6.4 0.9 Others Total 111.4 112.2 101.0 112.2 0.7 -10.0 11.1

ANNEX ANNUAL REPORT 2010 P 2 Change instocks netet167016711760 1,9 2,6 128,890 121,467 110,997 117,610 116,751 106,750 Investment osmto 9,8 2,4 4,0 3351 3215 397,986 372,105 353,541 349,404 320,644 292,280 Consumption N 5,8 8,1 9,9 4651 5726545,973 517,246 496,531 493,192 482,819 455,784 806,140 740,717 GNI 665,047 717,200 628,065 557,146 GNI Change instocks e atrpyet bod-972-352-698-455-116-41,850 -41,136 -24,565 -36,988 -23,522 -19,742 Net factorpaymentsabroad -23,653 -25,249 -14,640 -23,707 -13,984 -17,295 Net factorpaymentsabroad D tprhsr’pie 7,2 0,4 3,8 5105 5832 587,822 558,382 521,095 530,181 506,341 475,526 GDP atpurchasers’ prices 829,793 765,966 679,687 740,907 642,049 574,441 GDP atpurchasers’ prices netet192318331464 3,2 5,3 167,699 154,237 136,824 144,634 138,393 119,213 Investment mot fgosadsrie 1,4 4,9 5,1 4861 5068 576,270 560,648 488,691 557,114 545,099 514,544 Imports ofgoodsandservices 639,201 607,061 508,927 594,655 574,172 539,443 Imports ofgoodsandservices xot fgosadsrie 9,8 1,1 2,0 5957 6438 631,222 614,358 559,537 624,605 614,815 590,784 Exports ofgoodsandservices 783,751 744,497 655,336 765,370 706,382 669,505 Exports ofgoodsandservices Source: DepartmentofStatistics,MalaysiaandBankNegara f p osmto 2,8 7,3 2,4 4482 4546 510,952 465,406 434,812 427,243 371,436 326,889 Consumption GNI byDemandAggregates 1 ulcivsmn 1225,3 417 856 6,5 63,394 61,752 58,506 54,197 53,938 51,212 Public investment rvt netet5,3 2836,1 5,9 975 65,496 59,715 52,492 63,413 62,813 55,538 Private investment ulccnupin6,3 5317,0 7,6 475 80,097 74,715 74,669 72,406 65,381 61,332 Public consumption rvt osmto 3,4 5,6 7,9 2882 2730 317,890 297,390 278,872 276,998 255,263 230,948 Private consumption ulcivsmn 7046,1 484 160 7,2 80,810 77,325 71,670 64,834 61,816 57,074 Public investment rvt netet6,3 6577,0 6,5 692 86,889 76,912 65,155 79,801 76,577 62,139 Private investment ulccnupin6,0 8369,3 9,1 711 105,481 97,131 95,918 92,531 78,396 68,609 Public consumption rvt osmto 5,8 9,4 3,1 3884 3825 405,471 368,275 338,894 334,712 293,040 258,280 Private consumption Forecast Preliminary Includes statisticaldiscrepancy Table A.3 1 1 0620 0820 2010 2009 2008 2007 2006 1721 165-8388876,592 8,887 -38,358 -1,685 10 -1,722 5 70-,2 1,8 1125,993 11,102 -14,289 -4,324 -770 257 at Constant2000Prices at Current Prices (RM million) (RM million) p 2011 f

P 3 ANNUAL REPORT 2010 ANNEX p RM million 2006 2007 2008 2009 2010 cit/surplus 69,876 60,165 113,467 118,648 113,632 cit/surplus 26,152 42,025 16,045 -6,508 -23,121 Table A.4 Table (as % of GNI) 17.2 16.3 18.1 16.9 12.2 (as % of GNI) 38.3 38.3 38.0 31.7 34.2 (as % of GNI) 21.1 22.0 19.9 14.8 22.0 Preliminary Balance on current accountBalance on current 96,028 102,190 129,513 112,139 90,511 Gross national savings national Gross 213,519 240,593 272,462 210,606 253,635 Gross domestic capital formationGross 117,491 138,403 142,949 98,466 163,124 Defi Private savings 130,293 136,752 191,583 145,445 199,431 Private gross domestic capital formation domestic capital Private gross 60,417 76,587 78,116 26,797 85,799 Defi Public savings 83,226 103,841 80,879 65,161 54,204 Public gross domestic capital formation domestic capital Public gross 57,074 61,816 64,834 71,669 77,325 p of Statistics, Malaysia and Bank Negara Malaysia Department Source: Savings-Investment Gap Savings-Investment

ANNEX ANNUAL REPORT 2010 P 4 Source: EconomicPlanningUnitandMinistryofHumanResources (IV) (III) (II) (I) 2 1 e Labour Market:SelectedIndicators Employment byIndustry Unemployment rate oa ernhet 1,6 405 1,6 504 7,085 25,064 16,469 14,035 15,360 Total retrenchments Retrenchments byIndustry oa mlyet1,5. 13801,7. 1,0. 11,824.9 11,609.1 11,576.5 11,398.0 11,159.0 Total employment oa aace 8465 8512 10890 ,4,4 1,787,221 1,546,347 1,058,980 825,182 834,675 Total vacancies Vacancies ReportedbyIndustry ReferstoestimatesbyEconomicPlanningUnit Referstovacanciesreported byemployersthrough theJobsMalaysiaportal(formerlyknownasElectronic LabourExchange,ELX). rm21 nad,rfr oeetiiy a,wtr ta n i odtoigspl From 2010onwards, refers toelectricity, gas,water, steamandairconditioningsupply Estimates rm21 nad,rfr owoeaeadrti rd,acmoainadfo evcs From 2010onwards, refers towholesaleandretail trade,accommodationandfoodservices rm21 nad,rfr otasot trg,ifrainadcmuiain From 2010onwards, refers tofi From 2010onwards, refers totransport, storage,informationandcommunication osrcin 0 9 9 0 262 2,073 6,355 503 30 4,769 199 78 3,854 3,458 17,850 5,477 291 89 11,014 603 9,970 61 8,890 78 Services Construction Manufacturing Mining andquarrying Agriculture, hunting,forestry andfi evcs 5,0 0,9 4,6 5767512,503 507,627 346,763 2,517 250,820 204,599 111,622 154,902 693,711 1,377 107,421 695,418 117,217 1,450 327,798 129,586 275,155 348,302 1,163 861 Services Construction Manufacturing Mining andquarrying Others notelsewhere classifi Agriculture, hunting,forestry andfi osrcin752773784 6. 768.4 6,311.7 6,112.2 760.8 42.2 6,046.1 758.4 3,312.3 42.6 5,911.4 3,302.0 5,741.7 757.3 42.8 3,338.2 755.2 3,296.6 42.9 3,227.2 42.6 Services Construction Manufacturing Mining andquarrying Agriculture, forestry, livestockandfi Table A.5 lcrct,gsadwtrspl 5 7 16 0 156 208 269 77 643 2,204 859 773 5 662 441 322 65 1,429 581 1,521 2,052 1,929 Community, activities social andpersonalservice 2,327 Financial intermediation,realestate,rentingand Transport, storage andcommunication Wholesale andretailtrade,hotelsrestaurants Electricity, gas andwatersupply Electricity, gasandwatersupply te evcs110011161256 ,4. 1,260.9 1,242.5 1,215.6 1,249.5 1,286.2 1,181.6 1,150.0 1,263.5 1,225.6 1,152.5 Other services Government services Financial intermediation,realestate,rentingand Wholesale andretailtrade,hotelsrestaurants Finance, insurance, real estate and business services Finance, insurance,realestateandbusinessservices Transport, storageandcommunication Wholesale andretailtrade,hotelsrestaurants 150,562 161,771 93,182 62,422 46,251 Community, activities social andpersonalservice Public administration,defenceandcompulsory Transport, storageandcommunication Electricity, gasandwatersupply uiessrie 8 6 ,0 ,2 934 1,923 1,008 761 983 business services business services oilscrt 359 1,8 112 61820,414 16,128 11,132 11,287 3,539 social security 2 ( flbu oc)33 . . . 3.2 3.7 3.3 3.2 3.3 (%oflabourforce) (IV) nancialintermediation,real estate,professional, scientifi 2 (‘000 persons) ed 1 (I) (I) sey 1 5 9 7 866 278 398 255 312 shery sey 8,0 2,5 7,4 2033327,670 230,303 275,548 226,759 188,104 shery sey132413981309 ,9. 1,390.3 1,391.5 1,390.9 1,389.8 1,392.4 shery (III) (III) (II) (II) (IV)

2,4 025 1581 4,0 168,067 148,001 125,821 147,303 50,235 162,270 26,642 99,317 66,600 67,956 ,3. ,5. 1943 1964 2,184.8 1,996.4 1,984.3 1,957.7 1,930.4 0 0 0 289 12,920 0620 0820 2010 2009 2008 2007 2006 827 1,7 524 50017,888 8,269 15,090 4,367 15,264 2,047 12,578 8,287 1,477 2,227 6. 8. 1. 814.7 811.9 789.7 767.5 4. 6. 632 650 683.5 675.0 673.2 660.0 646.4 509. 7697.4 97.6 96.8 95.0 c,technical,administrativeandsupport services (number ofpositions/persons)

832.5 100.1 e

P 5 ANNUAL REPORT 2010 ANNEX 2010 1Q 2Q 3Q 4Q Year 2009 (RM billion) 68.1 18.6 18.8 19.5 21.1 78.0 1 Annual change (%) 19.7 11.4 19.9 9.2 10.2 12.5 Annual change (%) -7.4 14.5 30.1 12.7 9.0 16.3 Table A.6 Table Annual change (%) 6.2 16.4 14.8 12.9 14.0 14.0 Annual change (%) -2.3 22.0 16.6 2.4 8.5 11.8 CPO (RM/tonne) 2,257 2,562 2,529 2,642 3,276 2,752 Annual change (%) -2.7 18.5 13.3 3.2 6.9 10.1 Crude oil (USD/barrel) 62.0 79.0 78.0 76.3 85.2 79.6 Sales tax (RM billion) 7.0 1.7 2.1 2.0 2.3 8.0 Rubber (sen/kg) 643.0 1,025.0 975.0 979.0 1,300.1 1,070.0 Service tax (RM billion) 3.3 0.8 1.0 1.0 1.1 3.9 Annual change (%) 9.8 12.0 12.6 11.5 11.7 11.7 Consumption credit (excl. passenger cars) Consumption credit Retail trade, restaurants and hotels Retail trade, restaurants spending only Resident Private Consumption Indicators Private Consumption Sales of passenger cars ('000 units) Sales of passenger cars 486.1 133.1 138.8 136.5 135.1 543.6 MIER Consumer Sentiment Index - 114.2 110.4 115.8 117.2 - FBM KLCI 1,272.8 1,320.6 1,314.0 1,463.5 1,518.9 1,518.9 Imports of consumption goods (RM billion)Imports of consumption 31.4 8.3 8.6 8.5 9.1 34.6 Commodity prices Tax collection collection Tax Narrow Money (M1) Money Narrow Loans disbursed by banking system MRA retail sales (Annual change in %)MRA retail 0.8 7.9 5.8 9.8 8.5 8.4 Credit card turnover spending card Credit 1

ANNEX ANNUAL REPORT 2010 P 6 Private InvestmentIndicators MSC-Status Companies MIER BusinessConditionsSurvey Initial PublicOfferings (Bursa Malaysia) Private DebtSecurities(excludingCagamas) 76.4 21.6 19.6 61.6 Loans disbursedbybankingsystem 18.9 16.8 16.3 15.6 65.8 14.9 14.4 Approvals byMITI(Manufacturingsector) 50.6 Imports ofcapitalgoods(RMbillion) Sales ofcommercial vehicles(‘000units) o fcmais243 45 8218 78 1.5 56 - 0.3 54 - 0.6 82.9 30 82.2 0.3 99.5 19.8 284 82.0 104.9 0.4 14.5 81.7 119.6 2.2 1.1 - 124.0 52.1 - 2.9 18.3 1.2 14.4 Approved investment(RMbillion) 14.7 12.2 No. ofcompanies 49.4 4.7 911 50.6 52.6 Capacity UtilisationRate 58.6 223 Business ConditionsIndex 47.4 61.2 44.4 231 38.8 16.2 23.7 Total fundsraised(RMbillion) 23.3 284 76.3 9.4 60.5 7.9 21.8 39.5 173 32.4 21.1 Total fundsraised(RMbillion) 7.5 16.4 67.6 766 26.5 5.8 17.4 9.7 Construction sector 25.9 32.6 Manufacturing sector -5.9 29.5 Reinvestments (%share) -0.2 New investment(%share) Capital investment(RMbillion) No. ofprojects Annual change(%) Annual change(%) Table A.7 e ciiis872422711813.5 1.8 7.1 5.5 2.2 -2.4 2.4 12.0 14.9 7.0 8.7 5.4 6.8 14.1 11.8 2.4 5.8 21.3 3.2 16.6 10.4 2.5 -15.2 10.5 New activities Annual change(%) Annual change(%) Local oeg 213342551. 29.5 16.4 5.5 4.2 3.3 22.1 Foreign 2009 Q2 Q4 Year 4Q 3Q 2Q 1Q 2010

P 7 ANNUAL REPORT 2010 ANNEX 170,552 143,209 earnings under trade data et date and the gain/loss RM million 8.4 7.6 -5,597 -5,824 2007 2008 301 660 -359 126 702 -576 + - Net + - Net 33,717 47,079 -13,362 35,509 58,486 -22,977 605,175 475,687 129,488 664,325 493,773 604,300 502,045 102,255 663,014 519,804 2 cit -) cit 45,296 -18,250 4 nancial accounts nancial -39,140 -114,342 3 Item ected accordingly in the Bank’s account in the Bank’s ected accordingly cial sector -5,787 852 1 Foreign exchange revaluation exchange revaluation Foreign gain (+) / loss (-) AbroadIn MalaysiaOffi Private sector -38,892 29,545 -42,203 -50,192 24,134 -8,918 retained imports retained RM millionUSD millionReserves as months of 335,695 101,338 317,445 91,530 Trade account Trade Transportation 24,548 37,581 -13,032 22,495 37,895 -15,401 Compensation of employees 5,350 5,973 -622 4,421 5,152 -731 of which: % of GNI investmentDirect Portfolio investmentFinancial derivativesOther investment 16.3 -9,348 18,548 -164 -47,991 -26,058 18.1 -82,171 -2,206 -8,066 Travel 48,278 19,226 29,052 50,961 22,446 28,515 Investment income Other services 28,079 41,018 -12,939 27,463 39,839 -12,376 Government transactions n.i.e. Table A.8 Table All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance she have been revalued currencies All assets and liabilities in foreign Adjusted for valuation and coverage to the balance of payments basis. Imports include military goods which are not included in are Adjusted for valuation and coverage to the balance of payments basis. Imports include military goods which military and diplomatic establishments Include transactions of foreign The counterpart of these earnings investment companies. is shown as reinvested Include undistributed earnings direct of foreign international net reserves, Preliminary Forecast 4 1 2 3 Balance of Payments Balance of Goods Account Investment” in the Financial “Direct has been refl p f n.i.e. Note: Not included elsewhere Numbers may not necessarily add up due to rounding Source: Department of Statistics, Malaysia and Bank Negara Malaysia Balance on goods and servicesBalance on goods and 706,382 574,173 132,209 765,370 594,655 170,715 Current transfers Current 1,348 17,383 -16,035 1,410 18,905 -17,495 Services 101,207 98,485 2,722 101,045 100,882 163 Income 39,068 53,052 -13,984 39,930 63,638 -23,707 Balance on current accountBalance on current 746,798 644,607 102,190 806,710 677,197 129,513 Overall balance (surplus + / defi Bank Negara Malaysia Errors and omissions and Errors -17,754 -33,421 Capital accountFinancial accountBalance on capital and fi -38,954 -186 -118,501 4,159

ANNEX ANNUAL REPORT 2010 P 8 5,6 1,2 4,4 3,4 0,7 3,7 7,7 3,5 144,321 530,452 674,774 136,575 503,270 639,844 141,745 412,322 554,067 5,9 3,4 1,5 3,2 2,9 1,3 7,3 5,8 114,649 559,585 674,234 110,234 529,195 639,428 118,355 434,940 553,295 0,7 666464146313718318981878230 108,748 108,978 863 103,791 104,653 4,664 96,606 101,270 5,3 0,2 4,0 4,9 0,6 3,3 8,5 3,0 144,551 639,201 783,751 137,437 607,061 744,498 146,409 508,927 655,336 9,9 8,5 1,3 8,6 9,5 05182937226100,697 722,236 822,933 90,511 693,958 784,469 112,139 586,258 698,398 5583,5 1,3 5173,5 2,3 7504,5 -23,320 40,850 17,530 -23,034 38,150 15,117 -17,034 32,551 15,518 5592,8 2745,9 5313,3 9492,8 33,521 25,888 59,409 32,037 25,361 57,398 32,704 22,886 55,589 0054,1 1,9 1893,1 7663,5 125-9,407 41,265 31,858 -7,636 39,515 31,879 -10,399 40,414 30,015 9375,8 1,3 8136,7 2,4 7726,3 -23,653 61,435 37,782 -25,249 63,373 38,123 -14,639 53,986 39,347 5334,1 1,4 4515,4 2,7 3725,3 -21,963 55,735 33,772 -23,171 57,742 34,571 -13,148 48,511 35,363 e e Net - + Net - + Net - + ,8 ,7 141352561-,7 ,1 ,0 -1,690 5,700 4,010 -2,078 5,631 3,552 -1,491 5,475 3,984 ,1 335-9611882,2 2,7 ,0 160-20,200 21,600 1,400 -21,677 23,524 1,848 -19,631 23,345 3,714 4 5 672075-0 8 4 -566 746 181 -506 765 260 -607 755 148 092010 2009 3,7 328,649 331,277 1,3 -71,035 -22,103 -51,359 -51,122 -42,632 -14,983 -17,938 -21,918 -80,370 -64,620 -58,064 -27,948 -22,908 -80,208 668106,518 -2,628 -32,641 96,688 13,831 10,697 16944,942 -1,689 ,5 237 -755 27,649 6,556 2,453 5,040 11-185 -161 751. 12.5 12.2 17.5 . 8.6 9.7 RM million p 2011 f

P 9 ANNUAL REPORT 2010 ANNEX p 10.9 11.4 12.0 15.1 15.3 30.4 42.4 76.1 100.0 2010 p 2009 2010 p RM million Annual change (%) % share 8,112 4,460 9,210 -45.0 106.5 1.4 9,751 7,978 8,385 -18.2 5.1 1.3 3,490 3,125 3,546 -10.5 13.5 0.6 15,640 10,307 10,061 -34.1 -2.4 1.6 45,951 36,345 45,571 -20.9 25.4 7.1 68,301 53,429 69,905 -21.8 30.8 41,475 31,195 38,099 -24.8 22.1 6.0 43,582 25,360 30,765 -41.8 21.3 4.8 88,164 58,984 72,787 -33.1 23.4 12,426 12,125 15,455 -2.4 27.5 2.4 10,911 9,375 9,654 -14.1 3.0 1.5 15,032 13,095 18,332 -12.9 40.0 2.9 31,111 21,939 29,217 -29.5 33.2 4.6 29,066 22,644 26,199 -22.1 15.7 4.1 40,723 34,161 41,674 -16.1 22.0 6.5 24,729 21,905 24,942 -11.4 13.9 3.9 32,807 23,986 22,513 -26.9 -6.1 3.5 19,873 18,794 25,807 -5.4 37.3 4.0 80,899 67,809 76,808 -16.2 13.3 89,938 92,972 97,856 3.4 5.3 2008 2009 2010 663,014 553,295 639,428 -16.5 15.6 106,085 86,115 96,587 -18.8 12.2 196,023 179,087 194,443 -8.6 8.6 276,923 246,897 271,251 -10.8 9.9 490,908 430,575 486,675 -12.3 13.0 Total c equipment ed natural gas (LNG) Household electrical appliances Electrical industrial machinery and equipment Industrial & commercial electrical products Industrial & commercial Consumer electrical products Consumer electrical Electronic equipment & parts Electronic equipment Semiconductors Electrical machinery & appliances Electrical machinery Electronics Table A.9 Table Rubber Palm oil Liquefi Crude oil and condensates Rubber products Wood products Wood Textiles, clothing and footwear Textiles, Optical and scientifi Petroleum products Petroleum Manufactures of metal Manufactures Chemicals & chemical products Electronics, electrical machinery and appliances electrical machinery Electronics, Preliminary Others of which: Agriculture of which: Minerals of which: Manufactures Manufactures p Department of Statistics, Malaysia and Bank Negara Malaysia Source: Gross Exports Gross

ANNEX ANNUAL REPORT 2010 P 10 p Source: DepartmentofStatistics,Malaysia Commodity exports(RMmillion) Exports ofPrimaryCommodities

Preliminary Table A.10

iea xot (Mmlin 8145,8 277-3123.4 -33.1 72,787 58,984 88,164 Mineral exports(RMmillion) giutr xot (Mmlin 8315,2 995-1830.8 -21.8 69,905 53,429 68,301 Agriculture exports(RMmillion) of which: of which: Tin Liquefi Crude oilandcondensates Cocoa beans Sawn timber Saw logs Rubber oil Palm kernel Palm oil ednaturalgas(LNG) R ilo)168107204-8398.9 47.3 -38.3 35.1 -17.0 2,084 -25.7 33.7 1,047 61,831 16.2 22.1 22.9 45,771 1,698 -21.5 61,598 5.1 -24.8 27.6 1,635 38,099 -4.2 1,406 31,195 21.3 31.9 41,475 23,309 1,791 -0.2 22,185 -41.8 -43.8 30,765 23,164 76.51 -2.1 25,360 58.00 43,582 16,382 103.27 (RM million) 16,412 (RM/tonne) 16,763 (‘000 tonnes) (RM million) (RM/tonne) (‘000 tonnes) (RM million) (USD/barrel) (‘000 tonnes) R ilo)6 3 7 1. 109.7 116.7 64.8 273 27.3 88.4 130 15.0 23.7 11,534 1.0 60 9,063 14.4 -18.6 7,879 -10.4 3,141 7.6 5.5 35.5 12.8 1.1 3,110 1,650 -1.7 3,819 -39.9 -3.6 1,842 1,904 2,142 4.3 488 1,688 1,360 2,031 106.5 28.1 1.9 482 2,809 61.2 2,066 -45.0 -23.2 4,392 9,210 (RM million) -28.4 901 500 (RM/tonne) 4,211 1,022 4,460 64.5 (‘000 tonnes) 64.0 703 0.3 4,131 634 8,112 -31.4 -56.4 2,771 (RM million) 916 57.4 886 2,689 (RM/cubic metre) 1,684 1,030 (‘000 cubicmetres) 1,639 18.5 25.4 2,454 1,028 3,758 5.8 -27.5 (RM million) -20.9 653 2,649 (RM/cubic metre) 45,571 9.1 (‘000 cubicmetres) 2,236 36,345 45,951 17,201 3,085 (RM million) 16,256 (sen/kilogramme) 14,894 (‘000 tonnes) (RM million) (RM/tonne) (‘000 tonnes) (RM million) (RM/tonne) (‘000 tonnes) 5,6 1,1 4,9 2. 26.9 -28.2 142,692 112,413 156,466 0820 2010 2009 2008 oueadvleAnnualchange(%) Volume andvalue p 092010 2009 p

P 11 ANNUAL REPORT 2010 ANNEX p 2006 2007 2008 2009 2010 p RM million % share 2006 2007 2008 2009 2010 Total 473,432 473,695 490,908 430,575 486,675 100.0 100.0 100.0 100.0 100.0 Country Table A.11 Table Singapore 81,359 78,490 84,904 70,359 78,493 17.2 16.6 17.3 16.3 16.1 Thailand 24,624 24,991 25,643 24,073 28,148 5.2 5.3 5.2 5.6 5.8 Indonesia 10,677 12,574 16,319 13,074 15,653 2.3 2.7 3.3 3.0 3.2 Philippines 6,135 6,564 6,202 5,211 6,975 1.3 1.4 1.3 1.2 1.4 Brunei Darussalam 971 1,190 1,356 1,463 1,345 0.2 0.3 0.3 0.3 0.3 Netherlands 17,787 19,060 18,605 15,178 16,335 3.8 4.0 3.8 3.5 3.4 Germany 11,158 13,393 13,574 13,716 15,409 2.4 2.8 2.8 3.2 3.2 United Kingdom 10,117 9,219 8,587 6,657 6,803 2.1 1.9 1.7 1.5 1.4 Others 26,093 25,299 22,295 16,914 19,621 5.5 5.3 4.5 3.9 4.0 Preliminary p Department of Statistics, Malaysia Source: Principal Markets for Manufactured Exports for Manufactured Principal Markets Selected ASEAN countries 123,766 123,809 134,424 114,180 130,613 26.1 26.1 27.4 26.5 26.8 The People’s Republic of China Republic The People’s 32,015 38,009 44,396 51,169 60,993 6.8 8.0 9.0 11.9 12.5 European UnionEuropean 65,155 66,971 63,061 52,465 58,168 13.8 14.1 12.8 12.2 12.0 United States 106,009 90,102 76,633 56,653 55,586 22.4 19.0 15.6 13.2 11.4 Japan 33,294 32,574 35,944 30,177 35,560 7.0 6.9 7.3 7.0 7.3 Hong Kong SAR 28,147 26,690 26,942 28,026 31,479 5.9 5.6 5.5 6.5 6.5 Middle East 16,008 18,815 23,342 20,688 21,298 3.4 4.0 4.8 4.8 4.4 Australia 11,287 12,081 14,794 13,736 13,155 2.4 2.6 3.0 3.2 2.7 Chinese Taipei 10,838 11,724 10,529 10,074 13,330 2.3 2.5 2.1 2.3 2.7 Korea 10,381 10,732 10,294 9,592 12,316 2.2 2.3 2.1 2.2 2.5 India 7,258 9,172 10,119 8,050 11,512 1.5 1.9 2.1 1.9 2.4 Latin American countries 6,072 7,156 9,172 7,358 9,064 1.3 1.5 1.9 1.7 1.9 Canada 3,535 2,971 2,964 2,620 2,978 0.7 0.6 0.6 0.6 0.6 Rest of the World 19,666 22,888 28,296 25,787 30,624 4.2 4.8 5.8 6.0 6.3

ANNEX ANNUAL REPORT 2010 P 12 tes1,9 2511,4 2421,4 501. 911. 20.6 18.4 19.1 17.0 15.0 15,842 12,452 15,443 12,561 11,892 Others 14.6 12.9 14.6 15.0 14.9 28,376 23,118 28,551 31,991 32,914 Others ogKn A ,2 ,8 ,1 ,7 ,7 . . . . 4.3 4.4 4.2 4.4 4.3 3,279 2,976 3,410 3,287 3,420 Hong KongSAR 2.2 1.8 1.8 1.9 1.9 4,357 3,299 3,621 4,110 4,283 Korea hiad260274263260347343833384.5 3.8 3.3 3.8 3.4 3,427 2,600 2,693 2,784 2,670 Thailand 3.2 3.2 2.3 2.5 2.4 6,242 5,697 4,517 5,357 5,268 Chinese Taipei eulco hn ,9 ,5 ,2 ,4 ,7 . . . . 5.2 4.6 4.7 4.8 3.9 3,973 3,146 3,824 3,555 3,092 RepublicofChina The People's 4.3 4.3 3.4 3.1 2.3 8,421 7,657 6,588 6,618 5,136 Germany utai ,9 ,2 ,0 ,1 ,8 . . . . 5.6 6.1 4.5 3.4 2.3 4,288 4,117 3,600 2,522 1,797 Australia 4.8 5.2 4.8 4.7 4.4 9,339 9,248 9,356 9,954 9,681 Thailand ideEs ,5 ,9 ,3 ,9 ,8 . . . . 8.4 7.5 7.0 5.9 4.2 6,481 5,090 5,634 4,393 3,355 Middle East 5.1 5.3 5.2 5.3 5.2 9,923 9,561 10,211 11,244 11,462 Japan igpr 4711,8 0888198461. 481. 2011.0 12.0 13.4 14.8 18.5 8,476 8,169 10,838 10,983 14,701 Singapore 5.3 5.3 5.7 6.3 6.0 10,264 9,462 11,225 13,535 13,386 Netherlands aa ,9 ,3 ,6 ,4 ,5 . . . 0212.0 10.2 9.0 8.0 7.7 9,252 6,946 7,269 5,936 6,090 Japan 11.6 11.2 8.9 8.2 8.5 22,624 20,106 17,434 17,524 18,729 Hong KongSAR uoenUin1,3 2241,6 ,4 ,8 671. 651. 12.1 13.8 16.5 16.5 16.7 9,283 9,344 13,364 12,214 13,235 European Union 12.7 15.7 22.1 26.4 30.8 24,605 28,060 43,365 56,406 68,237 United States ntdSae 9051,5 4851,7 2562. 131. 9116.3 19.1 18.3 21.3 24.0 12,506 12,970 14,825 15,759 19,025 United States 16.5 15.7 17.3 16.1 15.9 32,027 28,045 33,859 34,326 35,115 Singapore The People’s Republic Source: DepartmentofStatistics,Malaysia p Principal ExportMarketsforElectricalProducts Principal ExportMarketsforElectronics p Source: DepartmentofStatistics, Malaysia Preliminary

Preliminary of China Table A.13 Table A.12 Country Country oa 9277,9 0896,0 688100100100100100.0 100.0 100.0 100.0 100.0 76,808 67,809 80,899 73,993 79,277 Total oa 2,0 1,0 9,2 7,8 9,4 0. 0. 0. 0. 100.0 100.0 100.0 100.0 100.0 194,443 179,087 196,023 213,704 221,508 Total 7272,4 7283,3 825781. 391. 19.7 19.5 13.9 10.6 7.8 38,265 34,833 27,298 22,640 17,297 0620 0820 2010 2009 2008 2007 2006 0620 0820 2010 2009 2008 2007 2006 Mmlin%share RM million Mmlin%share RM million p p 0620 0820 2010 2009 2008 2007 2006 0620 0820 2010 2009 2008 2007 2006 p p

P 13 ANNUAL REPORT 2010 ANNEX p p 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 p p ‘000 tonnes % share RM million % share 3,105 3,064 3,304 4,025 4,092 22.0 22.8 22.2 24.8 23.8 2006 2007 2008 2009 2010 8,834 11,001 12,576 10,250 12,317 26.2 29.6 30.9 30.0 29.6 2006 2007 2008 2009 2010 Total 14,142 13,412 14,894 16,256 17,201 100.0 100.0 100.0 100.0 100.0 Total 33,725 37,159 40,723 34,161 41,674 100.0 100.0 100.0 100.0 100.0 Country Country Table A.14 Table Table A.15 Table Netherlands 1,703 1,527 1,333 1,117 1,153 12.0 11.4 8.9 6.9 6.7 Italy 165 126 165 151 181 1.2 0.9 1.1 0.9 1.1 Germany 190 30 105 154 165 1.3 0.2 0.7 0.9 1.0 Sweden 220 134 85 54 116 1.6 1.0 0.6 0.3 0.7 Others 308 280 323 219 204 2.2 2.1 2.2 1.3 1.2 Preliminary

Preliminary Source: Department of Statistics, Malaysia Department Source: p Principal Export Markets for Chemicals and Chemical Products Chemicals and Chemical Markets for Principal Export The People's Republic of China 4,432 5,009 5,076 5,359 6,833 13.1 13.5 12.5 15.7 16.4 Indonesia 2,646 2,902 3,969 3,074 4,014 7.8 7.8 9.7 9.0 9.6 Singapore 3,084 3,329 3,714 3,299 3,757 9.1 9.0 9.1 9.7 9.0 Thailand 3,168 3,389 3,658 2,774 3,301 9.4 9.1 9.0 8.1 7.9 Japan 3,132 2,866 3,104 2,290 3,106 9.3 7.7 7.6 6.7 7.5 India 1,797 1,874 2,194 2,011 2,490 5.3 5.0 5.4 5.9 6.0 Hong Kong SAR 2,388 2,004 1,965 1,528 1,603 7.1 5.4 4.8 4.5 3.8 Chinese Taipei 1,416 1,723 1,607 1,158 1,483 4.2 4.6 3.9 3.4 3.6 Korea 1,555 1,550 1,293 1,237 1,433 4.6 4.2 3.2 3.6 3.4 United States 1,274 1,512 1,567 1,181 1,339 3.8 4.1 3.8 3.5 3.2 Others Principal Export Markets for Palm Oil p Department of Statistics, Malaysia Source: The People’s Republic of China 3,532 3,786 3,808 4,059 3,759 25.0 28.2 25.6 25.0 21.9 Pakistan 855 1,062 1,291 1,764 2,165 6.0 7.9 8.7 10.9 12.6 Middle East 1,324 1,212 1,257 1,364 1,868 9.4 9.0 8.4 8.4 10.9 European UnionEuropean 2,586 2,097 2,010 1,694 1,819 18.3 15.6 13.5 10.4 10.6 India 657 515 925 1,263 1,157 4.6 3.8 6.2 7.8 6.7 United States 696 516 1,078 866 982 4.9 3.8 7.2 5.3 5.7 Japan 498 516 530 528 542 3.5 3.8 3.6 3.2 3.2 Korea 207Korea 225 199 299 354 1.5 1.7 1.3 1.8 2.1 Bangladesh 413 170 254 113 183 2.9 1.3 1.7 0.7 1.1 Chinese Taipei 148 129 128 155 151 1.0 1.0 0.9 1.0 0.9 Australia 121 121 113 126 129 0.9 0.9 0.8 0.8 0.7 Others

ANNEX ANNUAL REPORT 2010 P 14 Principal ExportMarketsforRubber Source: DepartmentofStatistics, Malaysia p eulco hn 0 7 0 7 4 413. 293. 38.4 38.7 32.9 36.4 34.1 346 272 301 371 406 RepublicofChina The People’s uoenUin 1 9 7 6 3 662. 052. 26.0 23.6 30.5 28.9 26.6 234 166 279 294 316 European Union ideEs 7 46 46 . . . . 7.1 7.7 7.5 5.3 6.0 64 54 69 54 71 Middle East oe 76 24 9566056675.4 6.7 5.6 6.0 5.6 49 47 52 61 67 Korea ntdSae 45 32 0545258404.4 4.0 5.8 5.2 5.4 40 28 53 53 64 United States rzl3 83 32 . . . . 3.0 3.3 3.8 3.8 2.7 27 23 35 38 32 Brazil aaa1 91 . . . . 1.0 1.3 1.4 1.9 1.3 9 9 12 19 15 Canada Others Ttl118100967391100100100100100.0 100.0 100.0 100.0 100.0 901 703 916 1,020 1,188 Total Preliminary Table A.16 Country emn 4 3 2 2171. 331. 1613.0 11.6 13.5 13.3 12.1 117 82 123 136 144 Germany rne4 33 82 . . . . 2.4 2.6 3.5 4.3 3.4 22 18 32 43 41 France ehrad 11 11 7181623273.0 2.7 2.3 1.6 1.8 27 19 21 17 21 Netherlands tl 22 791 . . . . 1.4 1.3 1.9 1.9 1.9 13 9 17 20 22 Italy ntdKndm1 61 1151518111.3 1.1 1.8 1.5 1.5 11 8 17 16 18 United Kingdom pi 1 Spain tes5 46 63 . . . . 4.3 3.7 6.7 5.3 5.0 39 26 61 54 59 Others rn4 74 23 . . . . 4.3 4.5 4.4 2.7 3.8 38 32 40 27 45 Iran uky2 12 72 . . . . 2.2 2.4 2.3 2.1 1.7 20 17 21 21 20 Turkey Others 0620 0820 2010 2009 2008 2007 2006 1 2 1 0 3 831. 251. 14.6 14.6 12.5 12.7 18.3 132 103 114 129 218 198460.90.90.80.60.7 657650.50.50.80.80.6 00tne %share ‘000 tonnes p 0620 0820 2010 2009 2008 2007 2006 p

P 15 ANNUAL REPORT 2010 ANNEX p p 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 p p ‘000 tonnes % share ‘000 tonnes % share 2006 2007 2008 2009 2010 119 72 31 1,194 1,488 0.6 0.3 0.1 5.4 6.4 2006 2007 2008 2009 2010 12,170 13,238 13,350 12,877 14,041 57.3 57.8 57.6 58.0 60.2 Total 16,875 16,880 16,763 16,412 16,382 100.0 100.0 100.0 100.0 100.0 Total 21,234 22,904 23,164 22,185 23,309 100.0 100.0 100.0 100.0 100.0 Country Table A.17 Table Table A.18 Table Preliminary Preliminary p of Statistics, Malaysia Department Source: Principal Export Markets for Crude Oil Markets for Principal Export AustraliaIndiaThailandThe People's Republic of ChinaSingaporeKorea 2,269Philippines 3,331 3,272Indonesia 4,417 2,528 79 3,321Japan 926 3,908 1,435 5,464 240 3,890 1,579New Zealand 987 13.4 2,872 2,767 1,285 837United States 2,292 2,256 1,607 751 1,429 19.7Others 2,497 1,387 26.2 15.0 1,433 19.5 469 471 1,428 1,545 23.2 1,547 0.5 20.2 8.5 609 872 1,356 943 2,038 23.2 33.4 424 1,289 1.4 9.4 759 5.5 877 7.6 17.5 2,098 282 381 16.9 5.0 561 929 14.0 5.8 9.5 744 46 13.8 356 894 1,214 8.7 8.5 14.9 4.5 9.2 165 214 491 2.8 8.5 9.2 8.7 12.1 2.9 371 544 5.2 13 8.1 5.8 7.7 3.7 160 2.5 12.8 4.5 5.3 1.7 5 2.3 4.5 3.4 5.7 160 0.3 2.1 5.5 7.2 1.0 1.3 2.9 2.3 3.3 0.1 1.0 0.0 1.0 Country p Department of Statistics, Malaysia Source: Principal Export Markets for LNG Japan Korea 5,626 6,069 6,541 5,659 4,917 26.5 26.5 28.2 25.5 21.1 Chinese Taipei 3,319 3,524 3,242 2,455 2,862 15.6 15.4 14.0 11.1 12.3 Others

ANNEX ANNUAL REPORT 2010 P 16 External DebtandServicing External Medium- andlong-termdebt: oa xenldb: 8,0 8,4 3,1 3,3 226,297 233,136 236,311 187,445 184,505 Total debt: external oa xenldb UDmlin 5,3 607 6,1 745 72,568 67,445 67,417 56,027 51,736 Total debt (USDmillion) external neetpyet 3,8 652 1,6 256 56,430 42,546 19,968 26,562 32,086 interest payment) Total servicing(includingshort-term ofwhich: Ttldb . . . . 7.6 6.5 2.6 3.8 4.8 Total debt goodsandservices) Debt serviceratio(%ofexports Source: MinistryofFinance,MalaysiaandBankNegara Note: Numbersmaynotnecessarilyadd upduetorounding p 2 1 Short-term debt: Preliminary and FinancialCentre (LabuanIBFC)asresidents Effective from thefi Excludes currency anddepositsheldbynon-residents withresident bankinginstitutions Table A.19 rs orwn 2,2 384 2,2 618 52,982 36,198 26,428 23,844 28,620 Gross borrowing Annualchange(%) %GNI eamn n rpyet 859 2,9 329 3,8 50,898 36,380 13,279 25,699 28,539 Repayment andprepayment Medium- andlong-termdebt e orwn 1-,5 319-8 2,084 -183 13,149 -1,855 81 Net borrowing eim n ogtr et453425647.5 6.4 2.5 3.4 4.5 Medium- andlong-termdebt usadn et 4,0 3,7 5,2 5,7 146,901 155,375 156,622 132,978 141,704 Outstanding debt usadn et 280 5,6 969 7,6 79,396 77,760 79,689 54,468 42,800 Outstanding debt urnycmoiin( hr) 0. 0. 0. 0. 100.0 100.0 100.0 100.0 100.0 Currency composition(% share) Non-bank privatesector Federal Government NFPEs Private sector Federal Government eamn ecuigpeamn) 370 1,0 329 3,8 50,898 36,380 13,279 19,105 23,760 Repayment (excludingprepayment) NFPEs neetpyet ,8 ,2 ,3 ,9 5,069 5,696 5,532 5,126 6,389 Interest payment Private sector Federal Government Federal Government NFPEs NFPEs Private sector Private sector Federal Government NFPEs Private sector Banking sector US dollar Japanese yen Others Private sector NFPEs Federal Government Private sector NFPEs Federal Government rst quarter of 2008, the external debtdataofMalaysiahasbeenredefi rstquarterof2008,theexternal 1 2,1 214 7,4 909 67,968 69,029 72,042 42,134 28,812 1,8 234 767 870 11,428 8,730 7,647 12,334 13,988 1,0 ,0 ,5 790 4,076 17,900 5,952 1,706 10,909 1,7 160 2,0 786 44,411 17,846 20,004 21,650 16,877 1,1 ,3 ,6 ,2 3,455 8,128 2,069 5,035 11,311 1,9 ,4 ,6 ,2 3,455 8,128 2,069 7,840 13,197 1,5 305 1,6 155 46,612 21,515 10,265 13,055 11,453 2,0 962 2,1 376 16,745 13,786 20,316 19,602 25,005 5,7 184 6,4 160 66,591 71,600 63,146 41,854 50,378 6,2 151 7,6 990 63,565 69,990 73,160 71,521 66,322 0620 08 092010 2009 2008² 2007 2006 304-,1 44-,8 3,664 -6,286 -474 -4,314 -3,054 228-,3 ,8 ,7 620 9,772 3,884 -6,134 -2,288 388 483 96 677 831 6,737 946 4,803 3,888 388 483 96 677 831 46,612 21,515 6,737 10,265 946 9,267 4,803 8,561 3,888 132 148 184 172 1,250 658 3,161 1,762 3,025 909 1,884 2,493 1,155 1,418 2,282 1,426 1,372 3,511 1,506 ,2 ,9 ,4 369-2,201 -3,669 9,740 8,594 5,424 8. 12 7. 27 65.9 72.7 76.6 81.2 81.9 1. 06 93 84 8.8 8.4 9.3 10.6 10.7 84 49 42 41 4,495 451 472 489 834 312. 293. 30.2 35.1 32.9 29.8 33.1 67162. 13-3.0 -1.3 26.1 1.6 -6.7 74 . 42 1. 25.4 18.9 14.2 8.3 7.4 . . . . 0.2 1.2 0.3 0.9 0.8 . . . . 0.9 1.7 0.6 1.0 2.2 . . . . 6.4 3.6 1.6 1.5 1.5

nedtotreat Business entitiesinLabuanInternational RM million p

P 17 ANNUAL REPORT 2010 ANNEX (%) (%) 2010 2010 Annual change Annual change (%) (%) 2009 2009 Annual change Annual change (%) (%) 2008 2008 Annual change Annual change (%) (%) 2007 2007 Annual change Annual change (%) (%) Weights Weights Weights Weights (2005=100) (2005=100) household maintenance 4.3 1.1 3.0 2.9 0.7 Table A.20 Table Table A.21 Table Food and non-alcoholic beveragesFood and non-alcoholic 31.4 3.0 8.8 4.1 2.4 Alcoholic beverages and tobaccoAlcoholic beverages 1.9 7.8 7.3 6.1 4.0 Clothing and footwear 3.1 -1.4 -0.5 -0.9 -1.4 Housing, water, electricity, gas and other fuels gas electricity, Housing, water, 21.4 1.3 1.6 1.4 1.1 Furnishing,household equipment and routine Health 1.4 1.6 2.2 2.3 1.6 Transport 15.9 2.3 8.8 -9.4 1.6 Communication 5.1 -1.2 -0.6 -0.5 -0.2 Recreation services and cultureRecreation 4.6 1.4 1.8 1.5 1.6 Education 1.9 1.8 2.3 2.4 1.7 Restaurants and hotels 3.0 3.7 6.6 2.9 2.0 Miscellaneous goods and services 6.0 1.0 3.3 3.8 2.7 Food 5.4 8.5 12.3 0.3 2.6 Beverages and tobacco 0.9 0.8 1.4 1.7 -0.5 Crude materials, inedible 5.4 21.9 11.5 -11.8 22.4 Mineral fuels, lubricants etc. 17.4 4.0 34.5 -22.0 12.8 Animal and vegetable oils and fats 4.2 43.0 24.5 -19.5 17.9 Chemicals 7.0 3.1 7.3 -7.5 3.0 Manufactured goods Manufactured 10.9 2.7 6.7 -0.5 1.8 Machinery and transport equipment 42.9 1.8 0.7 1.5 1.2 Miscellaneous manufactured articlesMiscellaneous manufactured 5.4 1.4 1.7 1.5 0.6 Miscellaneous transactions and commodities 0.5 6.2 12.4 -6.2 12.2 Source: Department of Statistics, Malaysia Department Source: Consumer Price Index Consumer Total 100.0 2.0 5.4 0.6 1.7 of which: Source: Department of Statistics, Malaysia Source: Producer Price Index Producer Total 100.0 5.5 10.3 -7.1 5.6 of which: Local Production 65.6 7.1 13.3 -10.4 7.7 Import 34.4 2.4 4.0 0.5 1.4

ANNEX ANNUAL REPORT 2010 P 18 3 2 1 Bnigs se 7572,9 3,2 5191,1 49,630 19,413 15,119 -33,720 26,597 27,587 Banking system 176,798 18,616 14,707 11,093 24,247 11,705 Demand deposits Currency incirculation Broad money(M3) Other infl 864,487 48,805 67,717 83,856 45,444 72,427 Broad quasi-money ie eois3,4 0712,6 3372,9 481,822 28,493 23,347 27,969 10,701 31,940 Fixeddeposits aig eois5158737761,5 ,7 104,943 2,675 10,050 7,786 8,703 5,195 Savingsdeposits Is1,2 1,7 4 853-,6 19,682 -2,862 -8,583 144 -15,279 14,321 NIDs eo 1,9 7,6 30688651,711 655 898 -3,046 -72,366 11,799 Repos oeg urnydpst ,1 ,7 6691,8 ,3 56,021 1,432 15,283 16,649 1,570 3,218 Foreigncurrencydeposits te eois59612163,5 6711,1 200,308 18,412 26,721 34,356 112,116 5,956 Otherdeposits liso oenet164-9 3623,1 316102,870 49,097 -3,116 -8,119 35,919 25,808 33,652 33,649 -490 -641 1,614 8,317 ClaimsonGovernment Net claimsonGovernment Factors Affecting M3 es Gvrmn eois-,0 5 01050353,773 970,892 96,215 5,003 50,957 10,110 94,229 3 53,407 34,714 151 -6,703 Claims onprivatesector Less:Governmentdeposits Las3,7 0967,0 6419,0 863,031 92,000 46,481 76,903 50,926 36,779 Loans Scrte 2052411,2 ,7 ,1 107,861 4,215 4,476 17,326 2,481 -2,065 Securities e oeg ses5,4 116-1952,6 760371,883 17,620 22,462 -51,985 71,166 52,745 Net foreign assets BankNegaraMalaysia Broad Money(M3) Includesexchangerate revaluation loss/gain Excludesholdingsbybankingsystem Excludesinterplacementsamongbankinginstitutions Table A.22 une 839-1462,3 1,8 3,5 -302,902 -34,050 -13,789 23,235 -51,496 -8,309 uences 1 2 3 5184,6 1,6 ,4 173322,253 -1,793 7,343 -18,265 44,569 25,158 1,088,969 71,666 85,439 99,127 72,436 87,467 0620 0820 002010 2010 2009 2008 2007 2006 ,3 ,4 ,7 ,1 ,4 47,685 4,246 3,015 4,178 2,746 3,335 nulcag Asatend Annual change RM million

P 19 ANNUAL REPORT 2010 ANNEX % RM million houses. Excludes ate sector placed % nance companies and merchant nance companies and merchant RM million % RM million % nance companies, merchant banks/investment banks and discount nance companies, merchant RM million nance companies by commercial banks nance companies by commercial % 2006 2007 2008 2009 2010 RM nance companies, merchant banks/investment banks and discount houses nance companies, merchant nance companies, negotiable instruments of deposits (NIDs) with fi nance companies, negotiable instruments of deposits 13,688 14.5 24,913 23.1 9,86314,855 7.4 10.4 19,221 12.2 89,308 18.0 41,552 7.1 92,51468,044 14.7 9.4 47,357 6.0 87,467 13.0 72,436 9.5 99,12785,439 11.9 9.2 71,666 7.0 17,029 13.7 27,640 19.6 14,04017,869 8.3 9.8 23,467 11.7 million -18,871 -36.7 3,244-7,427 9.9 -20.7 -475 -1.7 842 3.0 ected the absorption of fi 2 xed deposits, negotiable instruments of deposits (NIDs), repos and foreign currency deposits of the private sector currency and foreign repos xed deposits, negotiable instruments of deposits (NIDs), 3,4 xed deposits and repos of the private sector placed with fi xed deposits and repos 5 1 institutions Comprising savings and fi Comprising fi The large decline since 2004 refl of the priv banks and Islamic banks and deposits placed with commercial Comprising M1 plus other deposits of the private sector Comprising currency in circulation and demand deposits of the private sector and demand deposits of the private in circulation Comprising currency Table A.23 Table banks and Islamic banks and Islamic banks and Islamic Money Supply: Annual Change and Growth Rates and Growth Annual Change Money Supply: M1 Deposits with other banking M3 Other deposits with commercial Other deposits with commercial Demand deposits with Demand deposits with banks commercial with other banking institutions, namely the fi banks and Islamic banks placed with commercial houses. Also includes savings deposits with fi banks/investment banks and call deposits with discount deposits placed with merchant currency banks/investment banks, foreign interplacements among the banking institutions 2 3 4 5 1 Currency in circulationCurrency 3,342 11.1 2,728 8.1 4,178 11.5 3,015 7.5 4,246 9.8

ANNEX ANNUAL REPORT 2010 P 20 Table A.24 Interest Rates (%) As at end-year As at end-month in 2010 2004 2005 2006 2007 2008 2009 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Overnight interbank 2.70 2.72 3.38 3.50 3.48 2.12 2.00 2.00 2.14 2.20 2.33 2.46 2.63 2.71 2.71 2.74 2.73 2.73 1-week interbank 2.74 2.75 3.42 3.52 3.50 2.14 2.02 2.02 2.23 2.27 2.41 2.52 2.71 2.77 2.77 2.76 2.76 2.76 1-month interbank 2.86 2.84 3.54 3.54 3.53 2.18 2.08 2.07 2.32 2.37 2.52 2.58 2.76 2.82 2.81 2.81 2.79 2.79

Commercial banks Fixed deposit: 3 month 3.00 3.02 3.19 3.15 3.04 2.03 2.03 2.03 2.28 2.28 2.50 2.51 2.73 2.73 2.73 2.73 2.74 2.74 12 month 3.70 3.70 3.73 3.70 3.50 2.50 2.50 2.50 2.67 2.67 2.81 2.82 2.95 2.95 2.95 2.96 2.96 2.97 Savings deposit 1.58 1.41 1.48 1.44 1.40 0.86 0.86 0.80 0.86 0.86 0.93 0.95 0.99 1.02 1.02 1.02 1.00 1.00 Base lending rate (BLR) 5.98 6.20 6.72 6.72 6.48 5.51 5.51 5.51 5.76 5.76 6.02 6.02 6.27 6.27 6.27 6.27 6.27 6.27

Treasury bills (91 days) 2.40 2.50 3.23 3.43 3.39 2.05 1.95 2.26 2.14 2.47 2.63 2.66 2.77 2.88 2.86 2.86 2.87 2.83 Government securities (1 year) 2.24 3.30 3.55 3.53 2.89 2.12 2.26 2.59 2.58 2.58 2.70 2.79 2.86 2.87 2.90 2.93 2.87 2.85 Government securities (5 years) 3.64 3.73 3.70 3.78 3.00 3.79 3.76 3.84 3.75 3.62 3.59 3.53 3.41 3.38 3.25 3.43 3.28 3.39

Private Debt Securities AAA 3-years 3.72 3.95 4.01 4.07 4.17 3.72 3.72 3.76 3.77 3.80 3.81 3.76 3.65 3.60 3.61 3.64 3.63 3.63 5-years 4.39 4.38 4.24 4.28 4.48 4.32 4.28 4.29 4.33 4.30 4.28 4.24 4.12 4.09 4.07 4.11 4.09 4.07

AA 3-years 4.27 4.36 4.38 4.39 4.95 4.50 4.53 4.57 4.59 4.55 4.54 4.43 4.34 4.29 4.31 4.36 4.35 4.34 5-years 5.00 4.81 4.71 4.64 5.31 5.07 5.09 5.09 5.10 5.05 5.00 4.92 4.79 4.74 4.75 4.79 4.76 4.75

A 3-years 5.82 5.94 5.91 6.06 6.90 6.80 6.94 6.95 6.95 7.02 7.09 7.06 6.96 6.91 6.93 6.96 6.87 6.90 5-years 6.66 6.70 6.53 6.51 7.43 7.57 7.63 7.62 7.62 7.65 7.70 7.67 7.58 7.54 7.58 7.57 7.52 7.53

BBB 3-years 9.77 9.44 9.57 9.71 10.32 10.18 10.32 10.28 10.30 10.33 10.41 10.34 10.30 10.26 10.28 10.36 10.40 10.40 5-years 10.81 10.41 10.51 10.72 11.36 11.32 11.47 11.39 11.47 11.48 11.50 11.46 11.42 11.36 11.43 11.48 11.44 11.43

BB & below 3-years 11.91 11.97 12.06 11.92 12.68 12.58 12.77 12.78 12.73 12.73 12.77 12.77 12.76 12.69 12.74 12.87 12.76 12.78 5-years 13.10 13.04 13.13 13.16 13.86 14.02 14.23 14.23 14.33 14.35 14.44 14.44 14.42 14.25 14.38 14.45 14.46 14.51

P 21 ANNUAL REPORT 2010 ANNEX 21 Jul.’05 - and the RM/US dollar rate Annual change (%)Annual change (%) Change 2009 2010 1 oat against a basket of currencies End-Dec. Dec. 2010 2 2005 2009 2010 RM to one unit of foreign currency unit of foreign RM to one 21 Jul. xed exchange rate against the US dollar to a managed fl xed exchange rate against the US dollar to a managed Table A.25 Table US dollar rates are the average of buying and selling rates at noon in the Kuala Lumpur Interbank Foreign Exchange Market the average of buying and selling rates at noon in the Kuala Lumpur Interbank Foreign US dollar rates are a fi Ringgit shifted from Movements of the Ringgit Movements SDR 5.5049 5.3487 4.7273 0.2 13.1 16.4 US dollar 3.8000 3.4245 3.0835 1.2 11.1 23.2 Singapore dollarSingapore 2.2570 2.4401 2.3859 -1.4 2.3 -5.4 100 Japanese yen 3.3745 3.7076 3.7869 3.4 -2.1 -10.9 Pound sterling 6.6270 5.5001 4.7817 -9.1 15.0 38.6 Swiss franc 2.9588 3.3084 3.2720 -1.1 1.1 -9.6 Euro 4.6212 4.9191 4.0804 -0.9 20.6 13.3 100 Thai baht 9.0681 10.271 10.227 -3.2 0.4 -11.3 100 Indonesian rupiah 0.0386 0.0364 0.0344 -13.1 6.0 12.4 100 Korean won100 Korean 0.3665 0.2937 0.2707 -6.4 8.5 35.4 100 Philippine peso 6.8131 7.4196 7.0400 -1.9 5.4 -3.2 Chinese renminbi 0.4591 0.5016 0.4662 1.2 7.6 -1.5 1 against the US dollar currencies rates of these rates derived from cross other than US dollar are currencies Rates for foreign 2

ANNEX ANNUAL REPORT 2010 P 22 Nasional Bank Simpanan Berhad Mortgage Finance Housing Borneo Society Berhad Malaysia Building Malaysia Berhad Bank KerjasamaRakyat Corporation Sabah Credit Commercial banks 3 2 1 Division Treasury HousingLoans Housing Credit Institutions Source: BankNegaraMalaysiaandvarioushousingcredit institutions IncludesIslamicbanks ExcludesIslamicbanks 12-monthaveragelendingrate Table A.26 establishment Year of 94To promote andmobilise 1974 98To provide housing 1958 90To beaconsumerdriven 1950 Aco-operativesociety 1954 95To upliftthesocial 1955 90To provide housingloans 1970 3.6 - thrift andsavings to inculcatethehabitof from smallsaversand savings particularly Government employees Government and SarawakState loans mainlytoSabah customers creation foritsvalued wealth management activities leadingto and deposittaking offering property lending fi Syariah principles facilities according to and provides banking which collectsdeposits credit easy accestofi through theprovision of of MalaysiansinSabah economic development to Government employees to Government nancialinstitution Objective nancial .582 .5~82 1 1 6.75 ~8.25 6.75~8.25 .764 .470 233 32 7.04~7.08 6.37~6.41 . . . . 111 11 3.0~7.5 3.0 ~7.5 new housingloans(%) 0921 092010 2009 2010 2009 3.8 6.5 4.0 Lending ratefor 1,2 1 1 1 4.0 6.9 4.0 5.9 1,2 1 1 1 4,086 No. ofbranches 2 127 122 7 384 375 22 3 4,108 3

P 23 ANNUAL REPORT 2010 ANNEX p p % share 2009 2010 2009 2010 p p (%) Annual change 2009 2010 2009 2010 p p RM million RM million Annual change (%) % share 2009 2010 60,707 80,327 4.8 32.3 85.0 87.7 2009 2010 210,017 226,930 9.3 8.1 84.0 85.0 Total 69,253 87,977 1.6 27.0 100.0 100.0 Total 250,111 267,091 7.4 6.8 100.0 100.0 1 1 Table A.27 Table Table A.28 Table Preliminary Preliminary Includes Islamic banks Includes Islamic banks Housing Loans Outstanding Housing Loans Commercial banks Commercial p institutions Bank Negara Malaysia and various housing credit Source: 1 Treasury Housing Loans DivisionTreasury 26,716 27,042 -2.5 1.2 10.7 10.1 Bank Kerjasama Rakyat Malaysia BerhadBank Kerjasama Rakyat 4,189 3,837 -5.2 -8.4 1.7 1.4 Malaysia Building Society BerhadMalaysia Building Society 5,274 5,331 2.6 1.1 2.1 2.0 Borneo Mortgage Finance Berhad Housing 717 682 -3.4 -4.8 0.3 0.3 Bank Simpanan Nasional 3,034 3,128 2.7 3.1 1.2 1.2 Sabah Credit Corporation Sabah Credit 163 141 -9.0 -13.1 0.1 0.1 Housing Loans Approved Treasury Housing Loans DivisionTreasury Bank Kerjasama Rakyat Malaysia BerhadMalaysia Building Society BerhadBorneo Berhad Housing Mortgage Finance 115 5,920Bank Simpanan Nasional 6,254 59 Corporation Sabah Credit 60 1,650 -21.9 -61.4 396 37 5.7 -48.5 -11.7 5.4 11.1 0.4 -37.3 -76.0 798 8.5 0.2 0.1 4 900 2.3 11.7 0.1 2.4 3 12.8 -67.2 -37.0 1.0 1.2 … … p … Negligible institutions Bank Negara Malaysia and various housing credit Source: 1 Commercial banks Commercial

ANNEX ANNUAL REPORT 2010 P 24 Development FinancialInstitutions(DFIs) Loan External External Loan External oeg ietIvsmn 1,1 - 99,797 8,058 10,511 57,965 2,971 Foreign Direct Investment Financing External 33,774 Banking Institutions 5,040 Financial Intermediaries Net ChangeinFinancing(2010) Foreign Direct Investment Financing External oa 8,9 205 4,2 6,8 194,892 62,980 44,922 2,005 86,990 26,045 Total Equity Market Ttl 875 50 564 4,8 204,587 40,189 65,664 -520 98,735 32,139 Total Equity Market Other DomesticIntermediaries Bond Market Capital Market Development FinancialInstitutions(DFIs) By fi Bond Market Capital Market Other DomesticIntermediaries Banking Institutions Financial Intermediaries Net ChangeinFinancing(2009) Financing oftheEconomy 7 6 5 4 3 2 1 External fi External Basedonthenew classifi securities.DataexcludesCaga Referstochanges inoutstandingofprivatedebtsecurities(PDS)andallMalaysianGovernment Otherdomestic intermediariesincludeinsurancecompanies,EmployeesProvident Fund(EPF),housingcredit institutions,leasi undertheDevelopmentFinancialInstitutionsAct,2002 ReferstoDFIs governed Adjustedtoincludereclassifi Businesses includenon-bankfi Table A.29 (Labuan IBFC)asresidents, effective from fi corporate sector issuances bynon-residents. PDSincludesirredeemable convertibleunsecured loanstocks(ICULS)andmediumtermnotes(MTN)iss companies andtheTreasury HousingLoanDivision nancingtype/institution nancing of Government includesfi nancingofGovernment 5 5 6,7 6,7 Bycustomer cation of external debt,whichhasbeenredefi cationofexternal cationofSMEstolargecorporation nancialinstitutions,domesticnon-businessentitiesandforeign entities 4 4 rstquarterof2008 nancingtonon-fi 3 3 2,5 199 77,427 51,969 - - 25,458 2,7 7 859 905 68,015 9,085 38,559 570 20,371 -2,087 078 422 54,970 34,222 20,748 377 201-5,818 -2,091 -3,727 626 -4 -676 7,039 -744 2,179 6,266 5,897 151 -1326 7,373 -11 -3,480 1,591 3,698 oa ofwhich:SMEs Total nancialpublicenterprises(NFPEs) Businesses nedtotreatBusinessandFinancialCentre entritiesinLabuanInternational 1

5,040 ------

2 oshlsGovernment Households RM million

- - - 1 96-161 - 1,926

- 32,139 -

- - - - -

ng andfactoring mas bondsand ued bythe Financing 26,045 11,071 12,936 10,511 Total 1,917 5,590

P 25 ANNUAL REPORT 2010 ANNEX f 2011 p -7.4 -8.2 -56.7 -68.8 RM billion -5.6 -6.8 -41.7 -46.4 9.4 1.5 96.3 124.444.7 111.3 50.5 112.3 54.5 121.1 55.2 54.8 110.7 128.3 134.0130.1 131.1 119.4 138.5 101.2 92.1 90.6 2007 2008 2009 2010 3 nancial public enterprises (NFPEs) 2 4 1 Table A.30 Table Preliminary Forecast Adjusted for transfers and net lendings within public sector Adjusted for transfers and net lendings within Comprises Federal Government, state and local governments and statutory bodies Refers to 30 NFPEs from 2004 onwards Refers to 30 NFPEs from

Excludes transfers within general GovernmentExcludes transfers within p f Note: Numbers may not add up due to rounding Ministry of Finance and non-fi Source: 3 4 1 2 Consolidated Public Sector Finance Consolidated Revenue % growth balanceCurrent 8.6 15.9 105.8 4.4 82.7 64.9 -2.1 55.5 5.7 52.4 % growth NFPEs 11.3 29.1 51.6 -10.5 73.8 0.9 56.8 7.9 57.1 66.4 Operating expenditure % of GDP 135.0 165.0 170.3 167.7 16.5 176.8 11.2 9.5 7.2 6.2 General Government Overall balance % growthNet development expenditure 14.7 22.2 3.2 -1.5 5.5 % of GDP Current surplus of NFPEs Current

ANNEX ANNUAL REPORT 2010 P 26 Uie tts-. 27-. 1. 1. -9.7 -11.1 -12.9 -6.7 -2.7 -2.0 UnitedStates Source: International MonetaryFundandNationalAuthorities International Source: f e 1 Major AdvancedEconomies:KeyEconomicIndicators Jpn-. 24-. 1. 96-8.9 -9.6 -10.2 -4.1 -2.4 -4.0 Japan Uie tts272000-. . 3.0 2.8 -2.6 0.0 2.0 2.7 UnitedStates REAL GDP Er ra-. 06-. 63-. -5.1 -6.5 -6.3 -1.9 -0.6 -1.3 Euro area Jpn2024-. 63391.6 3.9 -6.3 -1.2 2.4 2.0 Japan Gray-. . . 31-. -3.7 -4.5 -3.1 0.0 0.2 -1.6 Germany Er ra312904-. . 1.5 1.7 -4.1 0.4 2.9 3.1 Euro area Uie igo 26-. 49-03-02-8.1 -10.2 -10.3 -4.9 -2.7 -2.6 UnitedKingdom Gray342710-. . 2.2 3.6 -4.7 1.0 2.7 3.4 Germany Uie igo . . 01-. . 2.0 1.3 -4.9 -0.1 2.7 2.8 UnitedKingdom Uie tts322938-. . 1.0 1.6 -0.4 3.8 2.9 3.2 UnitedStates INFLATION Jpn030014-. 07-0.3 -0.7 -1.4 1.4 0.0 0.3 Japan Er ra22213303161.5 1.6 0.3 3.3 2.1 2.2 Euro area Gray18232802121.4 1.2 0.2 2.8 2.3 1.8 Germany Uie tts46465893969.6 9.6 2.5 9.3 3.3 5.8 2.2 4.6 3.6 4.6 2.3 2.3 UnitedStates UNEMPLOYMENT UnitedKingdom Jpn41384051515.0 5.1 5.1 4.0 3.8 4.1 Japan Er ra847575941. 10.0 10.0 9.4 7.5 7.5 8.4 Euro area Gray98847375687.1 6.8 7.5 7.3 8.4 9.8 Germany Uie tts-. 51-. 27-. -2.6 -3.2 7.4 -2.7 7.8 -4.7 7.6 -5.1 5.7 -6.0 5.3 5.5 UnitedStates CURRENT ACCOUNTBALANCE UnitedKingdom Jpn39483228312.3 3.1 2.8 3.2 4.8 3.9 Japan Er ra0404-. 04020.5 0.2 -0.4 -0.7 0.4 0.4 Euro area Gray65766749615.8 6.1 4.9 6.7 7.6 6.5 Germany Uie igo 34-. 16-. 22-2.0 -2.2 -1.1 -1.6 -2.6 -3.4 UnitedKingdom FISCAL BALANCE Forecast Estimate fi Refers togeneralgovernment Table A.31 1 scalbalance 0620 0820 2010 2009 2008 2007 2006 Annual change(%) % oflabourforce % ofGDP e 2011 f

P 27 ANNUAL REPORT 2010 ANNEX f 2011 e % of GDP % of GDP Annual change (%) Annual change Annual change (%) 2.0 2.0 4.3 0.5 2.4 3.0 -3.3 -3.2 -4.8 -7.0 -5.6 -5.4 2006 2007 2008 2009 2010 scal balance scal balance 1 2 3 The People’s Republic of ChinaThe People’s -0.7 0.9 -0.4 -3.0 -2.9 -1.9 Thailand 2.2 0.2 0.1 -3.2 -2.7 -2.3 Malaysia 3.6 2.0 5.4 0.6 1.7 2.5~3.5 Korea 2.4 4.2 1.7 0.04 1.4 2.0 The People’s Republic of China Republic The People’s 12.7 14.2 9.6 9.2 10.3 9.6 Indonesia 0.3 -1.2 -0.1 -1.6 -1.5 -1.7 Thailand 4.6 2.2 5.5 -0.9 3.3 2.8 Chinese Taipei -1.6 -1.4 -2.4 -5.8 -3.8 -2.5 Korea 5.2 5.1 2.3 0.2 6.1 4.5 Philippines -1.4 -1.5 -1.3 -3.9 -3.9 -3.5 Indonesia 13.1 6.3 9.8 4.8 5.1 5.5 Singapore 5.3 10.0 5.3 -0.8 2.4 1.5 Chinese Taipei 5.4 6.0 0.7 -1.9 10.8 4.4 Philippines 6.2 2.8 9.3 3.2 3.8 4 Hong Kong SAR 4.3 8.1 0.1 1.6 1.6 1.8 Singapore 8.7 8.8 1.5 -0.8 14.5 4.5 The People’s Republic of ChinaThe People’s 9.3 10.6 9.6 6.0 4.7 5.1 Malaysia Hong Kong SAR 7.0 6.4 2.3 -2.7 6.8 4.7 Korea 0.6 0.6 -0.6 5.1 2.6 2.9 Malaysia 5.8 6.5 4.7 -1.7 7.2 5~6 Chinese Taipei 7.0 8.9 6.8 11.3 10.0 9.5 Thailand 5.1 5.0 2.5 -2.3 7.8 4.0 Singapore 24.2 26.7 18.5 17.8 20.5 18.4 Indonesia 5.5 6.3 6.0 4.5 6.1 6.2 Hong Kong SAR 12.1 12.3 13.6 8.7 8.3 8.3 Philippines 5.3 7.1 3.7 1.1 7.3 4.5 Malaysia 16.7 16.0 17.5 17.1 11.8 12.2 The People’s Republic of ChinaThe People’s 1.5 4.8 5.9 -0.7 3.3 2.7 Thailand 1.1 6.3 0.6 7.7 3.5 2.5 Korea 2.2 2.5 4.7 2.8 2.9 3.4 Indonesia 3.0 2.5 0.1 1.9 0.9 0.1 Chinese Taipei 0.6 1.8 3.5 -0.9 1.0 1.5 Philippines 4.5 4.9 2.2 5.3 4.1 3.4 Singapore 1.0 2.1 6.6 0.6 2.8 2.4 Hong Kong SAR Table A.32 Table Refers to central government fi Refers to composite price index Refers to general government fi Estimates Forecast

3 1 2 Regional Countries East Asia: Key Economic Indicators East Asia: f International estimates Monetary Fund, National Authorities and Bank Negara Malaysia Source: e REAL GDP Regional Countries CURRENT ACCOUNT BALANCE Regional Countries Regional Countries FISCAL BALANCE INFLATION

ANNEX ANNUAL REPORT 2010 P 28