Malaysia - Asia Pacific Economic Outlook

Improving growth prospects, particularly across Asia, have brightened the outlook for the Malaysian economy.

The global economic turmoil hurt Malaysia’s exports in 2011, but the economy nevertheless managed to expand by 5.1 percent — a faster pace than many of its regional peers. The economy was primarily bolstered by private consumption while government spending during the second half of the year also provided an additional push.

The government’s Economic Transformation Program (ETP) further helped in driving the country’s growth rates. Therefore, resilient demand and a steady level of foreign investment in the face of global adversities have reinforced the strength of the Malaysian economy.

Going forward, this momentum will likely be maintained as strong domestic demand continues to buoy economic growth. In fact, according to latest statistics, exports may also lend a helping hand after all.

In February, Malaysia’s exports accelerated 14.5 percent year-over-year, up from 0.4 percent a month ago. While annual growth could have been exaggerated due to a favorable, low base effect of the Chinese New Year, seasonally adjusted figures also show that exports in February increased 16.9 percent from a month ago.

The country’s mainstay export industry — electronic and electrical equipment — saw its exports rise by 7.8 percent year-over-year in February. Energy exports, especially those of crude and palm oil also performed well.

Crude oil exports, which accounted for the 6.2 percent of the total export basket, surged 54.4 percent year-over-year in February. Palm oil, on the other hand, saw an 8.8 percent increase in value and a 25.4 percent increase in volume. In recent months,

Malaysian palm oil has benefited from an expected increase in demand in the wake of higher soybean-oil prices after droughts destroyed South America’s soybean crop.

Although prospects of Malaysia’s exports have improved slightly, recovery will depend largely on economic growth in its main markets: Singapore, China, Australia, and Japan.

Analogous to the export sector, local manufacturing bounced back in the early months of 2012. Industrial production (IP) expanded 7.5 percent year-over-year in February, compared to 0.3 percent growth recorded during the previous month. Although IP growth in February can partially be attributed to the reopening of Chinese factories after the Lunar New Year celebrations, production will likely sustain an upward trajectory in the months to come.

Positive purchasing manager’s indices (PMI) across Asia suggest that the manufacturing glut may have bottomed out. While Chinese manufacturing eased recently, Singapore — Malaysia’s top export destination — has experienced continuous PMI expansion in the past few months.

Thus, a gradual turnaround in global demand and strong consumer demand from Asia itself are expected to support the region’s largely interlinked manufacturing industries.

While exports and manufacturing have surprised economists on the upside, it is believed that domestic demand will continue to drive the economy in 2012.

Since the onset of the Eurozone crisis, many Asian governments took preemptive steps to shield their economies from a global downturn. In this respect, Malaysia’s Economic Transformation Program (ETP) has played a key role in not only boosting domestic demand but also improving the country’s attractiveness to foreign investors.

The ETP, which aims to bolster Malaysia’s economic status as a “high income” country by 2020, surpassed its targets for 2011 by a considerable margin.

The biggest boon came from private sector investment, which increased by 19.4 percent year-over-year to RM94 billion while foreign direct investments (FDI) were up 12.3 percent year-overyear to RM32.9 billion. Further upgrades in Malaysia’s international rankings such as Doing Business and Global Competiveness are also indicative of the ETP’s success.

While exports and manufacturing have surprised economists on the upside, it is believed that domestic demand will continue to drive the economy in 2012.

Improving labor market conditions coupled with a low inflationary environment will likely spur discretionary spending in the first half of the year. In fact, the government announced a minimum wage level in the range of RM800–900 for private employees, which could further strengthen their purchasing power.

The actual implementation and impact of this policy is yet to be ascertained as small-scale businesses have protested that a rise in wage level could potentially eat into their profit margin.

Nevertheless, strong private sector investment and additional elections spending by the government will likely sustain domestic demand this year.

With a resilient domestic demand and a slightly improved outlook for exports, 2012 should be smooth sailing for the Malaysian economy. Consensus estimate suggest that the economy will likely expand by around 4.7 percent this year.

However, headwinds from extreme contractions in the West and a hard landing for China could potentially cloud Malaysia’s otherwise-favorable outlook.

Asia Pacific Economic Outlook

Deloitte

Business & Investment Opportunities 
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