Malaysia Economic Monitor Leveraging Trade Agreements 30 June 2016 Rafael Muñoz Moreno, Senior Economist 1
Contents RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK External environment Domestic economic developments Outlook LEVERAGING TRADE AGREEMENTS Trade contribution to development New trade agreements opportunities (and challenges) Domestic reforms leveraging on trade agreements 2
Sluggish global economic growth… Annual GDP growth, percent 7.0 Current estimate (June 2016) 6.0 Previous estimate (January 2016) 5.0 4.0 3.0 2.0 1.0 0.0 Emerging Market and World Advanced Economies East Asia and Pacific Developing Economies Source : World Bank DECPG – Global Economic Prospects (June 2016). 3
…and low commodity prices Commodity Prices Indices Index 140 130 120 110 100 90 80 70 60 50 40 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Energy Non-energy Source : World Bank Commodity Price Data (Pink Sheet). 4
The current account surplus narrowed further… Balances, percent of GDP (last four quarters ) Current Transfers Primary and Secondary Income 20.0 Services Balance Goods Balance Current Account 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 Source : CEIC, DOSM, World Bank staff calculations. 5
…as commodity surplus declined Balances , percent of GDP (last four quarters) 15.0 Commodity Balance 13.0 Non-Commodity CA Balance 11.0 9.0 7.0 5.0 3.0 1.0 -1.0 -3.0 -5.0 Source : CEIC, DOSM, World Bank staff calculations. 6
Fiscal consolidation continues despite lower oil- related revenues Balances of the Federal Government, percent of GDP 0.0 -1.0 -2.0 -3.0 -3.1 -3.2 -3.4 -4.0 -3.8 -4.3 -4.6 -4.7 -5.0 -5.3 -6.0 -6.7 -7.0 2008 2009 2010 2011 2012 2013 2014 2015 2016f Source : CEIC, MoF , World Bank staff calculations. 7
Growth remains resilient supported by private consumption Contribution to GDP, y/y 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 Private consumption Fixed investment Change in inventories -6.0 Government Net exports Real GDP -8.0 Source : CEIC, DOSM, World Bank staff calculations. 8
Banking system’s health remains strong Net impaired loans to total loans (percent) 1.5 1.5 1.4 1.4 1.3 1.3 1.2 1.2 1.1 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Source : Bank Negara Malaysia (BNM). 9
Household’s loan growth continues to moderate Loans outstanding (banking system) y/y change of 12-mth moving averages, percent 18.0 Passenger cars Residential property Personal use Credit cards 16.0 Total, Households 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Source : BNM, World Bank staff calculations. 10
Portfolio inflows have returned… Percent of GDP (last four quarters) Direct Investment Abroad Direct Investment in Malaysia Foreigners Residents 15.0 Other Financial Account 10.0 5.0 0.0 -5.0 -10.0 -15.0 -20.0 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 Source : CEIC, World Bank staff calculations. 11
… helping to increase international reserves Reserves, USD millions 180,000 Official Reserves Asset Other Foreign Currency Assets Net Forward Position 170,000 160,000 150,000 140,000 130,000 120,000 110,000 100,000 90,000 80,000 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Source : CEIC, World Bank staff calculations. 12
Sluggish global economic growth Commodity prices depressed Weak global trade 13
Global trade is expected to remain weak World Trade and Malaysia’s Export Growth Annual growth 20 15 10 MYS: 7.6 World: 7.5 5 3.4 2.0 0 0.6 0.2 -5 Malaysia Exports World Trade Volumes -10 2002-2007 av -15 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016f 2017f 2018f Source : CEIC, World Bank DECPG, World Bank staff calculations. 14
Growth is expected to moderate in 2016 Change from last year, percent 8.0 7.0 6.0 4.7 4.4 4.5 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 Source : CEIC, DOSM, World Bank staff projections. 15
Current account surplus projected to narrow further Current account balance, percent of GDP 18.0 17.1 15.5 16.0 14.0 12.9 12.0 10.9 10.1 10.0 8.0 6.0 5.2 4.4 3.5 4.0 3.0 2.4 2.1 2.0 0.0 Source : CEIC, DOSM, World Bank staff projections. 16
Transforming urban transport Leveraging Trade Agreements 17
Malaysia is a very open economy Trade, percent of GDP 160 138.5 140 120 100 80 73.7 59.2 54.8 60 48.2 40 20 0 Malaysia Malaysia World EAP LAC 1972 2014 Source: World Development Indicators 2016 18
Every USD1 million of gross exports supported 22.3 jobs and wage growth Total Wages supported by Malaysia’s exports, USD billion 1995 -2011 60 54 50 40 30 20 13.2 10 0 1995 2011 Source: LACEX, World Bank staff calculations 19
Trade openness has diversified exports… Gross exports, billion US$ 300.0 Agricultural raw materials Food (incl. CPO) 250.0 Fuels Chemicals 200.0 Ores & Metals Other manufactures Manufactures 150.0 100.0 50.0 0.0 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: World Bank team calculation based on WITS, SITC rev 2. 20
…and boosted outward investment Net FDI outflows, percent of GDP 7.0 6.1 6.0 5.4 4.8 5.0 4.1 4.0 3.1 3.0 1.8 2.0 0.8 1.0 0.0 Average Average Average 2011 2012 2013 2014 1980s 1990s 2000s Source: World Development Indicators 2016 21
Free Trade Agreements are part of Malaysia’s development strategy Malaysia has signed 14 FTAs and 13 are already active Source: Adapted from ASEAN Integration Center https://aric.adb.org/fta-country 22
“ N ew generation” trade agreements have more coverage to promote competition Coverage of Malaysia’s Free Trade Agreement Year Agreement Competition Standards & IPR Services Investment Government signed TBT procurement 1992 ASEAN FTA 0 1 0 0 0 0 2005 Malaysia-Japan 1 1 1 1 1 0 2006 Malaysia-D8 0 1 0 0 0 0 Countries 2007 Malaysia-Pakistan 0 1 0 1 1 0 2009 Malaysia- New 1 1 1 1 1 0 Zealand 2010 Malaysia-Chile 0 1 0 0 1 0 2011 Malaysia-India 0 1 0 1 1 0 2015 Trans-Pacific 1 1 1 1 1 1 Partnership Source : Adapted from Dür, A., Baccini L., and Elsig M. (2014) Note : 0: not covered in the agreement, 1: covered in the agreement 23
Improved regulations and trade facilitation can increase the expected gains of new FTAs Change in Malaysia GDP, imports and exports, percent compared to the baseline by 2030 6.7 no spillovers positive spillovers GDP 8.0 18.0 Imports 20.5 17.7 Exports 20.1 0 5 10 15 20 25 Percent Source: Petri and Plummer (2016) 24
Securing further tariff reduction can benefit Malaysia’s exports Average US MFN tariff and share of US market in total Malaysia’s exports , 5 digit SITC product 100 80 60 40 20 0 0 10 20 30 Simple average US MFN tariff Source: UN Trains database, World Bank staff calculations Note: products are 5 digit SITC classification. Blue circles are products that have MFN tariff up to 5 percent 25
Eliminating non-tariff barriers abroad can benefit Malaysia Estimated ad-valorem equivalent of Non Tariff Measures, percent 18 AVE for SPS/TBT Measures 16 AVE for Non-SPS/Non-TBT Measures 14 12 10 8 6 4 2 0 AUS CAN CHL JPN MEX MYS NZL PER SGP USA VNM Source: Kee and Nicita (2016, forthcoming) 26
Trade Agreements are also an opportunity to accelerate domestic reforms Services Investment Policies Competition Policies SMEs 27
Services Investment Policies Competition Policies SMEs 28
Services contribution to exports is below other peer countries Contribution of services as inputs Share of inputs going into to other services sectors manufacturing Services Manufacturing 80 80 60 60 Share 40 40 20 20 0 0 MYS CAN JPN KOR MEX SGP TWN USA VNM MYS CAN JPN KOR MEX SGP TWN USA VNM Direct value added Inputs into services Direct value added Inputs from services Inputs into manufacturing Inputs into primary production Inputs from manufacturing Inputs from primary production Source: OECD-WTO TiVA database (2015), World Bank staff calculations 29
Services in Malaysia are still relatively more restricted to foreign providers Restrictions for foreign investors across economic activities in Malaysia Source: (Molinuevo & Saez, 2014), World Bank staff calculations 30
Trade agreements alone may be not enough to liberalize services Source: WBG team 31
Some policy options Strengthening coordination mechanism to implement the Services Blueprint Review cross cutting constraining policies (i.e. “nationality or residency”) Facilitate movement of business professionals 32
Services Investment Policies Competition Policies SMEs 33
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