Malaysia, Navigating the New Normal CIMB 9 th Annual Malaysia - - PowerPoint PPT Presentation

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Malaysia, Navigating the New Normal

Fraziali Ismail Bank Negara Malaysia

CIMB 9th Annual Malaysia Corporate Day 2017 5 January 2017

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Key areas

Part 1: Global Economic Overview and Outlook Part 2: Domestic Economic Development and Prospects Part 3: Addressing Challenges

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Signs of improvement in global economy, but downside risks remain…

Source: Markit Economics

Uncertainties surrounding MP adjustments Policy changes in the US (easing of taxes) Uncertainties surrounding post-Brexit era Downside risks Upside risks

Purchasing Manager’s Index (PMI) in US, Euro area and PR China Risks to global growth

Gradual increase in manufacturing PMI in several large economies.. …but downside risks to global growth remain

Protectionist policy in the US Sharper PR China slowdown 48 49 50 51 52 53 54 55 56 57 58

4Q 13 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 Oct-16 Nov-16

Euro area PR China US <50=contractionary Index

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Source: IMF World Economic Outlook (October 2016)

…and global economic environment remains challenging

Global and regional growth Global growth and trade

5.3 4.4 3.3 8.3 7.4 3.1

• 3
• 1

1 3 5 7 9 2005-07 2010-2012 2013-2016f

GDP Trade Volume

Moderate and uneven growth in global economy International trade activity to remain subdued

Annual change (%) Annual change (%)

Source: IMF World Economic Outlook (October 2016)

• 4
• 2

2 4 6 8 10 12 2005 2007 2009 2011 2013 2015 2017f

• Adv. economies

Asia Other EMEs Global GDP

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Evolution of the “new normal”

2011 2012 2013 2014 2015 Oct-16 WEO 3.0 3.5 4.0 4.5 5.0 5.5 2010 2012 2014 2016f 2018f 2020f

IMF's Global Economic Outlook

yoy, % Source: International Monetary Fund (IMF), national authority, various research houses

• 2
• 1

1 2 3 4 5 6 7 2006 2008 2010 2012 2014 2016

Swiss National Bank European Central Bank Bank of Japan Federal Reserve Bank of England

Key Policy Rates of Selected Advanced Economies

Rate, %

Low global growth Unconventional policies Impending megatrends

Divide

Rich Poor

Increasing inequality Disruptive technologies Intensifying globalisation Ageing society Rising indebtedness

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Malaysia: Multiple shocks weighing on growth

Source: Department of Statistics, Malaysia and Bank Negara Malaysia

7.1 4.3 2.7 3.2 0.6 1 2 3 4 5 6 7 8 PH ID MY KR TH SG 2Q 2016 3Q 2016 Annual change (%) Real GDP growth of selected countries 5.0

• Global commodity price shocks
• Prolonged ringgit depreciation
• GST implementation
• Domestic price adjustments
• Moderation in PR China’s economic growth

The economy has been affected by both external and domestic shocks since end-2014

7 L

Source: Department of Statistics, Malaysia and Bank Negara Malaysia f forecast

• Growth mainly driven by private

domestic demand

• The external sector to provide some

support to growth

• Downside risks to growth remain amid

greater uncertainty on both the global and domestic fronts

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2 4 6 8 2008 2010 2012 2014 2016f

5.0

Annual change (%) Real GDP Growth

4.5 5.0 4.0 4.0

The Malaysian economy to expand around 4 - 5% in 2017

2017f

8 '16f '17f 4 5 6 7 8 9 1Q 14 4Q 14 3Q 15 2Q 16

Private consumption to remain supported by continued employment and wage growth

LT average (‘90-’15: 6.6%) Real private consumption Annual change (%) 14.2 13.8 13.9 14.0 14.1 14.2 14.3 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16 Employment in the Labour Force Million Persons Employment +41k jobs Wage growth in the manufacturing and wholesale and retail services sectors Annual change (%)

Source: Economic Report 2016/17, Department of Statistics, Malaysia

Improvement in household spending… … and wage growth …supported by continued employment growth…

f forecast

6.1 6.3

4.2 5.1 3 4 5 6 7 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16p

p Preliminary

Private sector wages

9 '16f '17f 4 8 12 16 1Q 14 4Q 14 3Q 15 2Q 16 Private (65%)

Private investment to continue to expand, but will trend below long-term average

Source: Economic Report 2016/17, Department of Statistics, Malaysia, Bank Negara Malaysia f forecast

Continued modest growth of capital spending… …supported by investment in the manufacturing and services sectors

Annual change (%) 16 6 3 26 49 Services Manufacturing Mining Construction Agriculture Public (35%) Real private investment Private investment by sector (2015) LT average (‘90-’15: 8.4%)

• Transport and storage: Oil and gas storage

terminals, seaports and aircrafts

• Telecommunication: 4G/LTE network expansion
• Electrical and electronics (E&E)
• Resource-based industries

Services Mfg

5.3 5.8

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Real GDP Annual change (%) % share

• f GDP

(2015) 2016f 2017f Services 53.5 5.6 5.7 Manufacturing 23.0 4.0 4.1 Mining 9.0 1.1 1.4 Agriculture 8.9

• 3.3

1.5 Construction 4.4 8.7 8.3

Real GDP

100.01 4.2 4.6

Continued expansion across all economic sectors in 2017

• Services
• Supported by consumption- and

trade-related sub-sectors

• Manufacturing
• Continued growth supported by improving

global demand

• Mining
• Higher oil and gas production
• Agriculture
• Improvement in CPO production as weather

conditions normalise

• Construction
• Driven mainly by activity in the civil engineering

sub-sector

1 Numbers do not add up due to rounding and exclusion of import duties

Source: Economic Report 2016/17

f forecast

Services and manufacturing sectors to underpin growth

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Headline inflation to range between 2 – 3% in 2017

• For 2016, inflation is expected to average at the

lower end of the 2.0 – 2.5% forecast range.

• Going into 2017, inflation is expected to average

higher but to remain within the 2 – 3% range, driven mainly by higher domestic fuel prices amid weak exchange rate.

• Inflationary pressures will be mitigated by

continued low global energy and commodity prices, subdued global inflation and moderate domestic demand.

Source: Economic Report 2016/17 and Department of Statistics, Malaysia

2.1 1 2 3 4 5 6 2009 2010 2011 2012 2013 2014 2015 2016f2017f Annual change (%) Inflation forecast 3.0 2.0 Historical avg. (1991-2014) = 3%

f forecast

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External sector to provide some support to growth

Source: Ministry of Finance forecast

2.7

3.4

• 20
• 15
• 10
• 5

5 10 15 20 25 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016f 2017f Gross Exports Gross Imports

Exports and imports growth to improve in 2017, albeit at a modest pace

• Exports to be supported by a

turnaround in commodity exports and continued demand for E&E products

• Imports to continue to expand, driven

mainly by capital imports for infrastructure projects

Annual change (%)

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Fiscal consolidation is expected to remain on course

Fiscal deficit for 2017 is targeted to improve to 3.0% of GDP underpinned by

Decline in expenditures following

• ptimisation measures

Revenue gains supported by higher corporate income tax and oil-related receipts 1 2

• 4.6
• 6.7
• 5.3
• 4.7
• 4.3
• 3.8
• 3.4
• 3.2
• 3.1
• 3.0
• 8
• 7
• 6
• 5
• 4
• 3
• 2
• 1
• 80
• 70
• 60
• 50
• 40
• 30
• 20
• 10

2008 2009 2010 2011 2012 2013 2014 2015 2016e2017b % of GDP RM billion

Federal Government Fiscal Balance

RM billion % of GDP (RHS)

• 1. 2016e : Latest estimate reflecting MOF E-report released in October
• 2. 2017B : Target fiscal deficit as announced during 2017 Budget Speech

Source: Ministry of Finance, Malaysia

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Malaysia has shown the ability to manage effects of episodes of financial shocks

Malaysia has experienced episodes of capital

• utflows before

Source: BNM ; Note: 1 Latest NR portfolio flows data up to 3 Jan 2017; 2 Reserves data up to 15 Dec 2016

• Malaysia’s ability to absorb the volatility of these flows

and the effects on financial market is supported by – Greater exchange rate flexibility and international reserve buffers – Well-developed financial markets and resilient banking system – Exchange rate adjustments avoids overadjustment in domestic demand and prices – Intervention operations are to smoothen movements in the foreign exchange rate and ensure efficient functioning of the market

• These have supported the orderly functioning
• f the foreign exchange market
• 39.3
• 19.1
• 27.21
• 28.5
• 5.5
• 35.62
• 45
• 40
• 35
• 30
• 25
• 20
• 15
• 10
• 5

GFC (Mar'08- Mar'09) Taper tantrum (22 May- 28 Aug'13) Current (1 Sep'14 - 3 Jan'17)

USD billion

NR Portfolio Flows Change in Reserves

NR Portfolio Flows, Reserves and Ringgit Performance

(-12.6) (-9.7) (-29.8)

(% Change in MYR/USD)

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Source: Bank Negara Malaysia

International reserves remain ample with manageable external debt

8.3 1.2 2 4 6 8 10 12 20 40 60 80 100 120 140 160 1991 1994 1997 2000 2003 2006 2009 2012 As at 15 Dec 2016 USD bil

Net International Reserves

Net International Reserves Retained import cover (months) (RHS) Reserves/ST ext debt (times) (RHS) 15 Dec 2016: USD96.4 bil 1997: USD21.7 bil Times

Reserves have increased five-fold since the Asian Financial Crisis

Short-term 38.6% No immediate repayment requirements By Tenure Long-term 61.4%

External debt is mostly long-term with manageable foreign-currency exposure

Foreign Currency 62.0% Ringgit 38.0% Not affected by valuation Largely hedged and backed by external assets By Currency Composition

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Narrowing current account surplus Commercial property glut

Emerging vulnerabilities pose downside risks to growth

Household indebtedness High household debt-to-GDP Households more susceptible to shocks Higher capital imports for infrastructure projects Investor perception and volatile capital flows Oversupply of office and retail spaces Lower rentals, capital gains, balance sheet

Current Challenges

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Reining in high household indebtedness

Current Challenges

Raise household income

• Participation in sharing economy
• Higher women participation in the workforce

Accelerate fin. edu. & debt management

• Financial literacy programme & campaign
• Debt management programme

Concerted and coordinated efforts to reduce household debt

• A vibrant housing rental market with

sufficient safeguards

• Efficient and reliable public transport

system

• Effective price monitoring and

enforcement Macroprudential policies Reduce the need to incur higher debt

• Responsible lending guidelines

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Current Challenges

Narrowing current account surplus is a reflection of higher investments

17.6 1.0-1.5 0.5-1.5

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• 8
• 4

4 8 12 16 20 24

• 100
• 50

50 100 150 200 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016f 2017f Goods Services Primary income Secondary income % of GNI (RHS) Current Account Balance RM bil % of GNI

Current account surplus to narrow amid persistent services and income deficits

15 20 25 30 35 40 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Current Account Surplus Investment/GDP Savings/GDP % of GDP

Moderating savings Rising investment

2016f 2017f

Higher investments amid moderating savings in recent years

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Oversupply of commercial properties in Malaysia’s major cities

* For office and retail space, regional average refers to the simple average for Shanghai, Jakarta, Bangkok, HK and Singapore (2Q 2015) Source: NAPIC, JLW, Colliers International, JLL, Staff estimates

5.7 5.9 8.1 3 6 9

Klang Valley Png JB

5.5 3.9 3.7 1 2 3 4 5 6 Png Klang Valley JB 20.4 16.3 10.8 4 8 12 16 20 24 Klang Valley Msia Other states 2.8 4.9 2 4 6 2001-15 2016-17 Office: Vacancy Rate and Incoming Supply

% sqft per capita Office Vacancy Rates (2015) Total Incoming Supply per year in Klang Valley

Regional average*

Existing Prime Retail Space (2015) Projection of prime retail space (2018)

Retail: Current Stock & Projections of Prime Space

mn sgft

Regional average*

sqft per capita

Oversupply of office and retail spaces in major cities

Current Challenges

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Malaysia to weather the economic challenges

Growth to remain anchored by domestic demand

• Economic diversification and strong fundamentals
• Accommodative monetary policy that is supportive of economic activity
• Pro-growth and targeted policy measures

Trade balance to remain in surplus, albeit narrower Inflation to remain low at 2 – 3% Malaysia will continue to be confronted with medium- and long-term challenges

• Continued economic reforms are necessary to anchor future resilience

1 2 3 5 Policies to tackle immediate and long-term challenge 4

21 55.5 97.4 11.8 16.1 10 20 50 100 150 1998 2015

Size of Bond Market Capital Ratio* (RHS)

Macroeconomic fundamentals remain supportive of growth

60.4 69.2 50 60 70 80 2010 2011 2012 2013 2014 2015 % share 3.3 3.1 2.5 3.0 3.5 4.0 2010 2011 2012 2013 2014 2015 % 1.7 3.2 2.1 4 8 2010 2011 2012 2013 2014 2015 Annual change (%)

Steady growth path High private sector participation in the economy Low and stable inflation environment Stable labour market conditions Deeper markets and strong financial buffers

6.0 5.0 4 8 12 2010 2011 2012 2013 2014 2015

Current account balance reflects strong investment

11.3 11.9 2.0 10 20 30 2010 2011 2012 2013 2014 2015 Annual change (%) % of GNI

Source: Department of Statistics, Malaysia and Bank Negara Malaysia

Current account balance Inflation GDP Private expenditure / GDP Unemployment rate % of nominal GDP Size of Bond Market and Banking Capital Ratio %

* Capital ratio in ‘98 refers to the risk-weighted capital ratio; Ratio in 2014 refers to total capital ratio, reported based on Basel III Capital Adequacy Framework adopted since January 2013.

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