Malaysia 2015 - 2010: Macroeconomic issues

Tim Fipps, November 2013

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TABLE OF CONTENT

1. Introduction .................................................................................................................... 2 

2. Economics ...................................................................................................................... 2 

3. Main macroeconomic issues in Malaysia in the period from 2005 to 2010 ................... 6 

4. Summary ....................................................................................................................... 17 

References ........................................................................................................................ 20 

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1. Introduction

After providing a definition of macroeconomics, and explaining macroeconomic objectives,

issues and policies, this report describes and analyses main macroeconomic issues in

Malaysia for the period from 2005 to 2010.

2. Economics

Economics is the study of how we manage our scarce resources. It is about optimizing under

constraints on the resources (however, economics does not cover all aspects of human

behaviour).

Economics is a science. As characteristic for science, economists develop models, using

assumptions of what is deemed important and they deliberately simplify how cause and effect

work in some part of the economy. The models are used to understand and analyse economic

developments and to make suggestions about policies and to improve economic outcomes.

Hence economics is also a study of policies.

2.1. Micro- and macroeconomics

Economics can be divided in micro- and macroeconomics, separating out individual

behaviour from aggregate behaviour:

- Microeconomics is the study of the decisions of individual agents such as individuals,

households and firms in specific markets.

- Macroeconomics deals with the structure, behaviour and performance of a national or

regional economy as a whole (Blaug 1985), how demand and supply of products, services

and resources within such system are determined, what are the influencing factors, and how

specific events and government policies affect economic conditions of a country or region.

Economic conditions refer to variables such as jobs, income, goods and services, price,

money, and people's standard of living.

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For understanding how the whole economy functions and performs, macroeconomists use

aggregated indicators such as gross domestic product (GDP), unemployment rates and price

indices.

Remark: Gross domestic product (GDP) is the market value of all final goods and services

produced in a country during the course of a specified period (typically a year).

2.2. Macroeconomics

Macroeconomics studies aggregate demand and supply, harmonized with the study of money.

Aggregate output is the total production of an economy in a given period i.e. the total output

of goods and services.

Aggregate demand is the total amount of goods and services demanded in the economy in a

given time period at a defined price level.

Aggregate supply is the total amount of goods and services that businesses are willing to

provide in a given time period at a certain price level.

Both, aggregate demand and aggregate supply, vary with price level, as displayed in

aggregate demand curve and aggregate supply curve. Equilibrium output is obtained where

both demand curve and supply curve cross at the same price level. This is where price level

and aggregate output are in balance.

The output and the general price level in the economy will tend to adjust towards this

equilibrium position.

The economic wealth of a country or region is influenced by factors such as natural

resources, human resources, technologies, capital stocks, and people's choice of economic

system. Another huge influence is exerted by government policies.

2.3. Macroeconomic policies

Governments and their bodies have many means at their discretion to have an effect on the

economy.

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The government policies can be differentiated into two main groups, monetary policies

(financial policies) and fiscal policies.

Monetary policy decides on the supply of money into the economy, and is typically

determined by the central bank.

The central bank (also often named reserve bank or monetary authority) is the entity

responsible for the monetary policy of a country. The central bank's primary responsibilities

are national currency and money supply, with the aim to keep both stable. But central banks

have often more duties, such as controlling interest rates, acting as a lender of last resort to

the banking sector, and supervising financial institutions so they do not behave recklessly or

fraudulently.

In many countries, central banks are "independent", that is, they operate under rules designed

to prevent political interference. Examples include the U.S. Federal Reserve, the Bank of

England, and the European Central Bank. In some other cases, the central banks act as

government agencies (such as Bank Negara Malaysia, BNM).

The instruments of fiscal policy are government expenditure and revenue.

When government expenditure such as wages for civil servants, government infrastructure

projects or subsidies is higher than government revenue such as taxes and profits of

government-owned enterprises, it's called budget deficit; the opposite case is called budget

surplus.

Other government policies used to influence the economy are income policies and supply

side policies.

With income policies, government controls prices and wages.

With supply side policies, such as taxes on income or transactions, government controls

production.

2.4. Macroeconomic objectives

Macroeconomic objectives of governments and central banks include:

- full unemployment i.e. those who are able and willing to have a job will also get one;

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- price stability i.e. no rapid changes in price levels, no sudden or steep inflation or

deflation;

- economic growth i.e. steady increase in real per capita income; and

- openness to trade, nationally and internationally, to facilitate exchange of goods and

services and access to resources.

Macroeconomic analysis, models and forecasts are used by both governments and large

corporations to help in the development and assessment of economic policy and business

strategy.

2.5. Issues in macroeconomics

The issues in macroeconomic analysis are:

- people's standard of living, and the real output of a country or region - typically

measured as gross domestic product (GDP) - and how its economy progresses (economic

growth);

- change of economy, structurally as well as in size (growth, decline), and what

influences such change, in particular the effect of government policies;

- productivity i.e. output of a single person in the economy (output per employee);

- employment and unemployment, the latter being the workforce that wants to work but

has no employment; and

- price level of goods and services (inflation, deflation, stagflation).

2.6. High discount rates vs hard measures

Since macroeconomics is also about government and policies, it is also about politics and

politicians. As the latter have elections in their focus, they work with high "discount rates" -

in making an analogy to net present value (NPV) models. The discount rate tells how

important is the future in reference to today.

Businesses provide balance sheets, but countries typically do not. The absence of "balance

sheets" makes it harder for politicians to take and explain "necessary measures", to look long-

term. This results in the great danger of politicians to work on high discount rates.

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After all, macroeconomics is a controversial science: first, it's close to politics (and politics is

always about disagreements), and second, it requires some kind of discount rate to figure out

what to do about long-term issues, and how to compare long-term issues with short-term

issues (which is also a subjective choice), and third, it can help to analyze a lot of things but

not everything.

3. Main macroeconomic issues in Malaysia in the period from 2005 to 2010

3.1. Malaysia's economy

Malaysia has a market economy, which is relatively open yet state-oriented as government

plays a significant role in the economy, through macroeconomic plans in guiding economic

activities, and with government-controlled corporations as active players themselves.

Substantial natural resources of fossil oil and gas and of palm oil help the country to be more

resilient to higher prices of energy and foods on the world market, and allow the government

to exert price controls for these items on the domestic market. (Business Times, 2009)

3.2. Malaysia's economy prior to 2005

Since it became independent in 1957, Malaysia's real gross domestic product (GDP) grew by

an average of 6.5% per year from 1957 to 2005.

Malaysia was marked from the Asian financial crisis in 1997/8 just as were its neighbor

countries. In the aftermath of this crisis, Malaysia's economy recovered along with massive

government spending and budget deficits subsequent to the crisis (Athukorala, 2010, Table

2). The controls introduced on currency and financial transactions had been unique measures

undertaken by the government to navigate the country out of the crisis, also to make the

banks and the whole financial sector more resilient to possible external influences in the

future.

In addition, in the aftermath of 9/11 in 2001, Malaysia has embarked to become a global

center for Islamic banking and finance.

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Fig. 1: Malaysia: Selected economic indicators, 1996-2010 (Athukorala, 2010, Table 2)

Malaysia is blessed with a number of natural resources. At one time, Malaysia was the largest

producer of tin, rubber and palm oil in the world. (American University, n.d.)

Once heavily dependent on primary products, Malaysia has developed to become a middle-

income country with a multi-sector economy based on manufacturing and services. On this

path, Malaysia has become one of the world's largest exporters of electronic and electrical as

well as information and communication technology goods and appliances.

International trade plays a large role in Malaysia's economy, not least as it is located at the

Straits of Malacca where major shipping lines pass and also owing to its multiracial society.

(Najib Razak, 2007)

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For selective investments in specific sectors and to build infrastructure to support these

sectors, the Malaysian government uses development plans, called Malaysia Plans, since

1950, i.e. already since British colonial rule (Athukorala, 2010).

3.3. Malaysia's economy in the period 2005 to 2010

At the beginning of the subject period, in year 2005, structure and performance of the

Malaysian economy was still influenced by financial policy and measures taken in the

aftermath of the Asian financial crisis 1997/8, such as positive balance of trade and

accumulation of foreign exchange reserves. However, on 21 July 2005, Malaysia abandoned

the fixed exchange rate for the ringgit to allow managed floating.

The value of the Malaysian currency, the ringgit, increased after the government abandoned

the fixed exchange rate on 21 July 2005, in favour of a managed floating system. The ringgit

started to strengthen and reached 3.18 to the US dollar in March 2008. However, the

appreciation of the ringgit was not as strong as hoped and expected, which was claimed on

the capital flight that had set in (Athukorala, 2010).

With positive current account surplus since the Asian financial crisis, Malaysia increased

steadily their foreign exchange reserves, to USD75 billion on 15 July 2005 (just before the

peg was removed) to peak at USD125 billion on 31 July 2008, a few months before the

global financial crisis commenced in September 2008.

Fig. 2: Malaysia 2003 - 2010: USD-MYR exchange rate (www.tradingeconomics.com)

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The later part of the subject period from 2005 to 2010 was very much characterized by the

effects and the reaction to the global financial crisis that started in September 2008, including

the financial policy chosen by the Malaysian government.

The global financial crisis was triggered when the speculative bubble around the US housing

market burst in 2008. This crisis percolated from the US to the rest of the world through

capital flows, trade flows, and commodity prices. (Athukorala, 2010)

During the global crisis period, the ringgit depreciated steadily down to 3.7 to the US dollar

in 2009, in line with the foreign exchange reserves which dropped to USD88 billion in value

on 29 May 2009. But from then on, the ringgit resumed strengthening, to touch 3 US dollar

and to stay range-bound between 3 and 3.2 to the US dollar towards the end of 2010.

During these times, prices at the Malaysian stock market fell distinctly, shown by the Kuala

Lumpur Composite Index (KLCI), widely considered to be the capital market barometer

(Oxford Business Group, 2011): the KLCI fell from above 1500 in early 2008 to below 900

at the end of 2008 where it stagnated until it took off again in April 2009.

Fig. 3: Malaysia 2003 - 2010: KLCI index (www.tradingeconomics.com)

Malaysia responded to the global financial crisis with monetary expansion. Since inflation

was low, foreign exchange reserves still high (despite having lost some of their value), and

the banking system was sound, Bank Negara (BNM) saw sufficient space for expansionary

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monetary policy: BNM lowered the overnight policy rate (OPR) from 2.5% in November

2008 to 2.0% in February 2009 - the lowest ever seen in Malaysia’s history. Further, BNM

cut the statutory reserve requirement (SRR) for banks from 4% in December 2008 to 1% in

March 2009 to facilitate the release of capital to borrowing, and lowered the monthly

installment payments on floating interest rate loans to reduce the burden for existing

borrowers (Athukorala, 2010). These interest rate cuts served to increase disposable income

of borrowers and ultimately to spur domestic consumption.

Since US dollar liquidity in the financial system had dried up subsequent to the collapse of

Lehman Brothers, BNM also helped exporters to obtain foreign currency loans (Athukorala,

2010).

The currency and the domestic financial markets, however, were absorbing fairly well the

disturbances from the global financial crisis, given the strong account of foreign exchange

reserves, the healthy banking system, and plenty liquidity in the financial system.

(Athukorala, 2010)

On the fiscal front, the Malaysian government also launched two stimulus packages as

response to the global financial crisis: first in November 2008, involving direct cash injection

of RM7 billion, and a further RM 60 billion package in February 2009.

A worrying development of such measures is Malaysia's fiscal health: Its debt-to-GDP ratio

has increased to almost 50% in 2009. (Athukorala, 2010)

3.4. Economic growth and living standard in Malaysia 2005 - 2010

GDP was continuously growing in the subject period, in fact since the Asia financial crisis

1997/8, until the global financial crisis finally hit Malaysia in 2008/9. In 2009, the GDP per

capita dropped to even below the level before the crisis started. But already in 2010, growth

leaped back, and the GDP reached new heights.

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Fig. 4: Malaysia 2005 - 2010: GDP (www.tradingeconomics.com)

Fig. 5: Malaysia 2005 - 2010: GDP per capita (www.tradingeconomics.com)

Interestingly, the growth rate shows considerable variation over the calendar year: growth

rate drops in the first and the last quarter of the calendar year, with negative(!) growth rate

values in the first quarters of all the years of the observed period, while the growth rates

remained still positive in the calendar years' last quarter – except for the last quarter of year

2008.

Towards the end of 2008, the global financial crisis reached Malaysia as "external demand

collapsed in the fourth quarter, weighing heavily on Malaysia’s externally oriented economy”

(Bloomberg, 2009)

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Fig. 6: Malaysia 2005 - 2010: GDP quarterly growth rate (percentage)

(www.tradingeconomics.com)

Also government spending sees a strong variation over the calendar year: Each year,

government spending shows an increase over the calendar year, with a sharp peak in the

fourth quarter.

Fig. 7: Malaysia 2005 - 2010: Government spending [MYR million]

(www.tradingeconomics.com)

Consumer spending also saw a dip within the subject period 2005 – 2010, as consequence

from the global crisis: until 2008, Malaysia consumer spending was continuously growing,

but its rise came to a halt in 2009 at quite the same level as the year before. In 2010,

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consumer spending picked up again with similar year-to-year increase compared to the 2008

and 2009 levels as seen in the years before the crisis.

Fig. 8: Malaysia 2005 - 2010: Consumer spending [MYR million]

(www.tradingeconomics.com)

Corporate tax rate was reduced from 28% in 2006 to 25% in 2009 and kept level in 2010.

Personal income tax was kept steady at 28%, until reduction by 1% in the years 2009 and

2010.

Malaysia's performance in trade helped to bring more wealth into the country: Since the

Asian crisis 1997/8, Malaysia has run a positive balance of trade, exporting more than

importing. This surplus was kept in both high growth periods as well as in crisis years during

the observed period.

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Fig. 9: Malaysia 2003 - 2010: Balance of trade (www.tradingeconomics.com)

3.5. Unemployment in Malaysia 2005 – 2010

The number of employed persons increased steadily year-on-year, with bigger leaps in 2006

and 2007 and as well in 2010.

The unemployment rate fluctuated between approx. 3% and 4% in the observed period, with

no clear trend over this period to break out from this band.

Fig. 10: Malaysia 2003 - 2010: Employed persons (www.tradingeconomics.com)

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Fig. 11: Malaysia 2003 - 2010: Unemployment rate (www.tradingeconomics.com)

The population in Malaysia increased steadily, from over 25 million people in 2005 to over

28 million in 2010.

One reason for the apparently low unemployment rate could be the low productivity levels of

workers in Malaysia (Seah, 2013). Malaysia's economy depends on a large number of highly

unskilled labour (70%), while still applying a low level of technological development and

lacking R&D activities and innovation (Shamsudin Bardan, 2012). Various industries hire

massively low-skilled, especially foreign workers, and continue to depend on them, as they

survive by making little investments to stay at the bottom of the technology ladder (Dudley

2013).

Some of these massive hirings are remnants of practices in the past when the labour cost

advantages helped to keep prices low for export and hence drove growth (Flaaen, Ghani &,

Mishra, 2013).

3.6. Inflation in Malaysia 2005 – 2010

According to the Consumer Price Index (CPI), prices increased rather moderately within a

2% to 4% band (year-on-year) in the beginning of the investigated period. But few months

into 2008, they were rising sharply to a peak within a couple of weeks. From this peak, they

were falling almost as sharp again, within a couple of months, to reach a level in the first

months of 2009 that continued the trajectory and increase seen over the years before, as if

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there was no peak at all.

Fig. 12: Malaysia 2003 - 2010: Consumer price index CPI (www.tradingeconomics.com)

Interestingly, the consumer spending shows considerable variation over the calendar year: In

the first quarter of a new year, it will drop below the level of the last quarter of the previous

year, then even drop slightly more in the second quarter (except for 2010 when there was a

slight increase), to rise sharply with the third quarter. The fourth quarters in the investigated

period have seen either a further increase (2005, 2006 and 2007), or a marginal drop (2008,

2009 and 2010).

This apparent seasonal behavior is reflected also in the quarterly growth rate of GDP.

House prices in Malaysia increased steadily in the referred period, with quarterly increases in

the range of approx. 2% to 5%, with the exception of a rather small increase in 2009 (1% to

2%), which was, however, compensated with the sharp rise in 2010 to 6% to 8% increase.

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Fig. 13: Malaysia 2003 - 2010: House price index (www.tradingeconomics.com)

BNM's command of interest rates and the government's expansionary financial policy in the

aftermath of the global financial crisis helped to keep consumer goods, houses and other

capital assets accessible and affordable for Malaysian households and companies.

The development of the interest rates reflects this guidance: Interest rates in Malaysia were

kept low and steady until 2005. However, at the end of 2005, the three month interbank rate

started to rise to an approximately 50% higher level within half a year, to stay at almost 4%

for the second half of 2006. For 2007 and 2008, this interbank rate dropped slightly to stay

steady at 3.6%, until it was dropped sharply to 2% at the beginning of 2009 in response to the

crisis. While lingering just above 2% for the rest of 2009, it started to rise over 2010 to reach

almost 3% at the year end.

4. Summary

Macroeconomics deals with the structure, behaviour and performance of a national or

regional economy as a whole, using aggregate variables to analyse demand and supply of

products, services and resources within such system.

Policies guide decisions to influence the economy. The main policies applied by governments

are monetary policies (exerted typically through and by the country's central bank) and fiscal

policies.

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Typical macroeconomic objectives of governments are full unemployment, price stability,

economic growth, and openness to trade.

This report looked at main macroeconomic issues in Malaysia in the period from 2005 to

2010, in particular regarding economic growth and living standard, (un)employment, and

inflation.

Malaysia has very much a market economy, which is relatively open yet state-oriented.

Entering the subject period in 2005, Malaysia's economy was still marked from the Asian

financial crisis in 1997/8, and the measures taken, such as financial controls, improved

banking system and trade performance.

However, in 2005, Malaysia decided to abandon the fixed exchange rate for the ringgit.

The subject period has seen its own crisis: the global financial crisis that started in September

2008.

In the referred period, economic growth was steady, as seen in the rise of GDP, except for a

year-long period after the global financial crisis started. The dip was also seen in the

consumer spending.

The government responded to the global financial crisis with monetary expansion and two

stimulus packages, and they seemed to have helped Malaysia to rebound within a year.

Interestingly, growth is seen varying considerably over the calendar year: strong in the

middle half of the year, and weak in the months around the turn of the year. This behaviour

coincides with a similar characteristic in consumer spending.

Unemployment in Malaysia is low, between 3% to 4%. A reason for this apparently low

unemployment could be the low productivity levels of workers in Malaysia, and the resilient

usage of low technologies in a number of industries.

Prices in Malaysia, according to the development of the CPI, increased within a 2% to 4%

band in the subject period, except for 2008, when a sudden surge, however, followed by an

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almost as sudden drop provided a deviation to the otherwise steady price level increase.

House prices showed a similar steady increase as CPI, only with a reduced rise during the

global crisis, but recovering within about a year.

All together, Malaysia's economy is in transit from low-income to middle-income status,

however, still tainted with legacies such as dependency on natural resources and industries

using low-level technology.

< ... >

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References

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Washington, DC. Retrieved from http://www1.american.edu/TED/tin.htm

Athukoralam P. (2010, October). Malaysian economy in three crises. Working Paper No.

2010/12. Canberra: The Australian National University.

Blaug, M. (1985). Economic theory in retrospect. Cambridge, UK: Cambridge University

Press.

Bloomberg (2009, February 28). Malaysia 2008 economy worst in seven years. Gulf News.

Retrieved from http://gulfnews.com/business/economy/malaysian-growth-slows-to-0-1-

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Business Times (2009, September 22). Economic numbers bode well for Malaysia.

Dato' Sri Mohd Najib Tun Abd Razak (2007, March 13). The security of the Straits of

Malacca and its implications to the Southeast Asia regional security. Retrieved from

http://www3.pmo.gov.my/WebNotesApp/tpmmain.nsf/6eb1bf73408d07794825674f0006897f

/09ee4377fd049191482572aa00144782?OpenDocument

Dudley, R. (2013, March 5). Productivity: Urgent need to pursue quality growth. The New

Straits Times. Retrieved from http://www.nst.com.my/opinion/letters-to-the-

editor/productivity-urgent-need-to-pursue-quality-growth-1.228795?ModPagespeed=noscript

Flaaen, A., Ghani, E. & Mishra, S. (2013, July 22). How to avoid middle-income traps?

Evidence from Malaysia. VOX. Retrieved from http://www.voxeu.org/article/how-avoid-

middle-income-traps-evidence-malaysia

Oxford Business Group (2011, January 12). Malaysia: Year in review 2010. Retrieved from

http://www.oxfordbusinessgroup.com/economic_updates/malaysia-year-review-2010

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Seah, A. (2013, February 26). Unskilled foreign workers slowing productivity. Human

Resources. Retrieved from http://www.humanresourcesonline.net/news/38622

Shamsudin Bardan (2012, September 19). Malaysia's productivity challenge: In what ways

can Malaysia increase productivity to remain competitive. Malaysian Employers Federation

(MEF). Presented at the Perdana Leadership Foundation CEO Forum 2012, Kuala Lumpur,

Malaysia.