ECONOMIC DEVELOPMENTS IN 2015

ECONOMIC DEVELOPMENTS IN 2015

11 The International Economic Environment

15 Box Article: Recent Slowdown in Global Trade: Cyclical Bane or Structural Shift?
19 The Malaysian Economy
33 Box Article: Assessing Demand-Supply Conditions in the Malaysian Property Market
44 External Sector
60 Inflation Developments
64 Box Article: Inflation and the Cost of Living
70 Box Article: The Impact of Exchange Rate Depreciation on Inflation in Malaysia
ANNUAL REPORT 2015
9
ECONOMIC DEVELOPMENTS IN 2015 ANNUAL REPORT 2015 10
ECONOMIC DEVELOPMENTS IN 2015

THE INTERNATIONAL ECONOMIC growth and 3.8% for global trade. As the year
ENVIRONMENT progressed, however, it became apparent that
the global economy continued to underperform.
In 2015, the global economic and financial In some large emerging economies, underlying
environment was shaped by three major domestic constraints, including high indebtedness,
developments. First, global commodity prices fell outweighed the benefits to domestic demand from
sharply to post-crisis lows. This had significant low commodity prices. This was compounded
repercussions for the growth prospects of both the by heightened volatility in the financial markets,
commodity-exporting and commodity-importing which dampened consumer, business and investor
economies, as well as the inflation outcomes in sentiments. The improvement in major advanced
these economies. Second, international financial economies remained modest, weighed down by
markets experienced heightened volatility driven the lingering legacies of the financial crisis, which
by policy shifts in major economies, speculative included the high private sector indebtedness,
activity, heightened risk aversion, and the drastic strained fiscal positions and slack in the labour
fall in the prices of oil and other key commodities. markets. As a result, the global growth outlook
Third, global growth moderated. The modest was successively revised downwards throughout
improvements in the advanced economies were the year. In addition, the growth of global trade
insufficient to offset the moderation in growth saw a particularly large downward revision,
in emerging economies. Emerging economies, registering its slowest pace of expansion in the
nevertheless, remained the key contributor to post-crisis period.
global growth with a share of 73%. Against a
backdrop of diverse uncertainties arising from In the US, economic activity gained further
elevated concerns over growth, inflation and traction, driven mainly by an improvement
external spillovers, the policy outlook became in the labour and housing markets. Of
more challenging during the year. Policymakers significance, the economy produced more than
in many economies also faced fiscal constraints, 200,000 new jobs on average each month.
resulting in continued overdependence on The unemployment rate fell to 5%, the lowest
monetary policy to support growth. This was rate since 2008. In the housing market, sales,
particularly the case in some of the advanced new construction and prices also trended
economies, where the policy rates have become higher. These developments supported the
negative. As a consequence, monetary policy improvement in household balance sheets.
decisions and measures became a huge driving The decline in gasoline prices to an average of
factor in the financial markets.
Chart 1.1

IMF's Global Economic Outlook

Global growth moderated amid
Annual change (%)
heightened international financial 5.5
Successive
downward

market volatility 5.0

2011
revisions

4.5 2012
ANNUAL REPORT 2015

Global growth moderated 4.0

2013
2014
The global economy entered 2015 with Oct-15 WEO

expectations for a better recovery in growth, 3.5

supported partly by optimism over the positive

3.0
impact of lower oil prices on demand in 2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f 2020f
the oil-importing countries. Of note, the
f Forecast
International Monetary Fund (IMF) began Source: International Monetary Fund (IMF)
the year with a forecast of 3.5% for global
11
 USD2.42 per gallon (2014: USD3.36 per gallon) of the economy and the implementation of
also provided additional impetus to consumption. structural reforms resulted in slowing activity in
ECONOMIC DEVELOPMENTS IN 2015

Notwithstanding the weakness in the commodity- sectors with excess capacity. The economy faced
related sectors, investment activity was sustained stronger headwinds arising from weak external
by spending in the services sector which accounts demand and higher financial market uncertainty,
for almost three-quarters of total investment. particularly in the second half of the year. Notably,
Given the gradual strengthening of economic periodic episodes of sharp corrections in the
fundamentals, the Federal Reserve (Fed) signalled Chinese equity markets, with unexpected spillovers
the imminent start of interest rate normalisation from policy measures and adjustments, combined
throughout the year. Finally in December, the Fed with heightened concerns over the global growth
raised its Federal Funds Rate (FFR) for the first time prospects, triggered a sharp increase in global risk
since 2006, temporarily removing some uncertainty aversion that pushed the CBOE Volatility Index (VIX)
from global financial markets. to a four-year high in August. Nevertheless, the
impact of economic rebalancing efforts and
In PR China, growth remained on a moderating weaker sentiments on PR China’s overall growth
trend in 2015 as the continued rebalancing were partly offset by the announcement of
pro-growth measures during the year, amid
Table 1.1 sustained consumer spending and a continued
expansion of the services sector.
World Economy: Key Economic Indicators
Real GDP Growth Inflation In Europe, growth improved at a modest pace
(Annual change, %) (Annual change, %) during the year due to unresolved structural
2014 2015e 2014 2015e constraints. Growth in the UK economy was
World Growth 3.4 3.1 - - supported mainly by a steady improvement
World Trade 3.4 2.6 - -
in private consumption. Nonetheless, while
unemployment fell to its lowest level in almost
Advanced ten years, wage growth remained subdued. On
Economies
the other hand, investment activity moderated.
United States 2.4 2.4 1.6 0.1 In particular, the recovery in the housing
Japan 0.0 0.5 2.8 0.8 market slowed following robust growth in the
Euro area 0.9 1.6 0.4 0.0 previous two years. The euro area experienced
United Kingdom 2.9 2.2 1.5 0.0 a more pronounced economic recovery in 2015,
Emerging Asia1 6.2 5.8 2.5 1.8 supported by both domestic demand and exports.
Notably, private consumption rose in all the core
Other Advanced
euro area economies, supported by a gradual
Asian Economies 3.4 2.0 1.6 0.5
improvement in labour market conditions, low
Korea 3.3 2.6 1.3 0.7
oil prices and favourable credit conditions.
Chinese Taipei 3.9 0.7 1.2 -0.3 Nevertheless, the pace of growth remained
Singapore 3.3 2.0 1.0 -0.5 uneven and some smaller euro area economies
Hong Kong SAR 2.6 2.4 4.4 3.0 experienced negative growth. Furthermore,
The People's the region continued to suffer from bouts of
Republic of China 7.3 6.9 2.0 1.4 heightened volatility arising from unresolved
ASEAN-4 4.5 4.6 4.7 3.6 sovereign debt concerns in Greece. In the second
Malaysia 6.0 5.0 3.2 2.1 quarter of the year, investor concerns were
Thailand 0.8 2.8 1.9 -0.9
reignited by a disagreement between international
creditors and the ruling Greek government over
Indonesia 5.0 4.8 6.4 6.4
structural reforms, raising the prospect of a Greek
ANNUAL REPORT 2015

Philippines 6.1 5.8 4.2 1.4

debt default. The situation escalated in late June
India2 7.2 7.6 6.6 4.9 when the Greek government introduced capital
1
Emerging Asia refers to Chinese Taipei, Hong Kong SAR, Indonesia, controls and announced a referendum over the
Korea, Malaysia, Philippines, PR China, Singapore and Thailand bailout conditions. Investor sentiments improved
2
For India, GDP data is presented on a fiscal year basis
e Estimate subsequently following the announcement of a
third bailout programme in mid-July. Nevertheless,
Source: International Monetary Fund, National Authorities and
Bank Negara Malaysia estimates most of the volatility experienced during this
period was concentrated in the financial markets.
12
In contrast, the Japanese economy registered to persistent oversupply concerns in the global
only a modest rebound in 2015, following markets. These concerns intensified further

ECONOMIC DEVELOPMENTS IN 2015

stagnation in growth the preceding year. Despite in the second half of the year following the
the continued implementation of monetary successful conclusion of the Iranian nuclear deal,
easing measures, both private consumption and the commitment of the Organisation of the
investment activity remained subdued. Export Petroleum Exporting Countries (OPEC) to not cut
growth was also weighed down by slower the existing production levels, and the worsening
demand from Asian economies, amid moderating sentiments over global growth prospects of several
economic activity in the region. large emerging economies. Consequently, crude
oil prices fell to a twelve-year low of USD36 per
Economic activity in the emerging economies barrel towards the end of the year.
moderated for the fifth consecutive year, reflecting
both external and domestic headwinds. The Prices of non-oil commodities also moderated
slowdown in global trade amid weakening external during the year. In particular, the prices of base
demand and sentiments affected the emerging metals, such as iron ore, copper and zinc, declined
economies, especially those with high trade significantly, weighed down mainly by slowing
openness. This was compounded by stronger demand from PR China and an increase in supply
headwinds arising from the increased volatility of from new mines. In addition, food prices also
capital flows and the consequent pressure of local moderated as favourable weather conditions
currencies against the US dollar. For the commodity supported the production of several agricultural
exporters, the significant decline in global products, including sugar, coffee and soybeans
commodity prices resulted in a deterioration of in Latin and North America. The decline in food
the trade and fiscal positions of these economies. prices was exacerbated by rising inventory due to
Country-specific developments, including political softer global demand.
uncertainty in several economies in Latin America
and the escalation of conflicts in the Middle East In the advanced economies, inflationary pressures
and Russia weighed on growth in these economies. weakened in 2015, weighed down mainly by
For several large emerging economies, growth was lower energy prices. Of significance, several major
affected by structural reforms, including energy, economies experienced episodes of near-zero
tax and price reforms, intended to improve fiscal or negative headline inflation during the year.
positions and enhance economic competitiveness. Core inflation rates, which exclude food and
energy prices, remained relatively subdued,
Amid the highly challenging external environment, amid moderate demand and wage growth.
growth in the rest of Asia also moderated during Similarly, inflation in most Asian economies
the year. While domestic demand remained the also weakened alongside the decline in
key driver of growth in the region, weak export commodity prices and moderating economic
performance weighed on the pace of economic growth. However, headline inflation rose in
expansion. To address the slowing growth Indonesia, reflecting mainly an increase in fuel
momentum, policymakers in several economies pump prices, following the implementation of
in the region lowered policy rates and introduced measures to rationalise fuel subsidies.
fiscal stimulus measures, which provided some
support to economic activity. Chart 1.2

More subdued global inflation Indices of Primary Commodity Prices

Global inflationary pressures moderated in 2015, Index (Jan '05 = 100)
250
reflecting the lower global commodity prices and
subdued global demand conditions. 200
ANNUAL REPORT 2015

150
Crude oil prices declined sharply to an average
100
of USD541 per barrel in 2015 (2014: USD99 per
barrel). Higher production by major oil-producing 50

economies and shale oil producers in the US, 0

amid moderating global demand, contributed Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

Food Metals Crude oil

Source: International Monetary Fund (IMF)

1
Based on global Brent crude oil 1-month futures price.
13
 More accommodative global policy stance In PR China, the People’s Bank of China (PBoC)
In response to the increasingly challenging lowered the benchmark lending rate and reserve
ECONOMIC DEVELOPMENTS IN 2015

external environment and moderating domestic requirement ratio by 125 and 250 basis points to
economic activity, the overall global policy stance 4.35% and 17.50%, respectively, to help reduce
became more accommodative in most regions. the funding costs for financial institutions, and
In the advanced economies, the uneven growth thereby the financing costs of the corporate
momentum between economies resulted in a sector. Concurrently, the PBoC also continued
divergence in the direction of monetary policy. to undertake financial reforms, including the
While the US raised interest rates for the first time implementation of deposit insurance, the
in nine years, the euro area and Japan increased removal of ceiling rates on deposits and the
monetary stimulus through their respective asset introduction of a more market-oriented exchange
purchase programmes and negative interest rates. rate framework. To support economic growth,
In Asia, several economies reduced key policy Chinese policymakers announced targeted fiscal
rates and introduced targeted fiscal measures to measures during the year. These included tax
support growth. Additionally, policymakers in the reductions on consumer goods and automobiles,
region continued to advance structural reforms preferential tax policies for SMEs, lower
to strengthen macroeconomic fundamentals and restrictions on the property market and additional
enhance medium-term growth sustainability. funding for infrastructure investments.

The divergence in monetary policy stance Policies in Asia were shaped by domestic
between the advanced economies became concerns amid a more challenging external
more apparent in 2015. In the US, supported by environment, with several central banks in the
growing indications of improving labour market region lowering key policy rates. Given more
conditions, the Fed began to communicate subdued inflationary pressures, Bank Indonesia,
its intention to begin normalising monetary the Bank of Thailand and the Reserve Bank of
policy during the year. Nevertheless, the Federal India reduced their key policy rates by 50, 50
Open Market Committee (FOMC) maintained and 125 basis points, respectively. Similarly, in
its FFR in the first three quarters, highlighting Singapore, the Monetary Authority of Singapore
concerns over the impact of global economic and reduced the slope of the S$ nominal effective
financial developments on growth and inflation. exchange rate policy band in January and
However, with lower financial market volatility October. Amid moderating domestic demand
and improvements in US economic activity in and weak exports, central banks in Korea and
the fourth quarter, the FOMC increased the FFR Chinese Taipei also lowered their key policy
target range by 25 basis points to 0.25 – 0.50% rates by 50 and 25 basis points, respectively.
in December. In contrast, amid subdued inflation, In contrast, following the Fed’s decision to
the European Central Bank (ECB) continued to increase the FFR, the Hong Kong Monetary
implement an asset purchase programme of Authority increased the Base Rate by 25 basis
EUR60 billion per month, which is forecasted to points in December.
remain until March 2017. In addition, the interest
rate on the deposit facility was lowered by 10 In addition to monetary easing, a number of
basis points to -0.3% towards the end of the year. Asian economies, including Chinese Taipei,
In Japan, the Bank of Japan (BoJ) continued with Thailand, Indonesia and Korea, announced fiscal
its annual asset purchases of JPY80 trillion amid measures to support domestic economic activity.
disinflation concerns. To encourage a decline in These measures were in the areas of providing
long-term interest rates, the BoJ supplemented financing support for small businesses, higher
these purchases by extending the maturity of public investment and rebates to encourage
current Japanese government bond purchases to purchases of durable consumer goods. To further
ANNUAL REPORT 2015

7–12 years (previous: 7–10 years) from January strengthen macroeconomic fundamentals
2016 onwards and increased the purchases of and enhance medium-term growth prospects,
exchange-traded funds and real estate investment Asian policymakers also continued with the
trusts. Across other advanced economies, central implementation of structural reforms. In
banks in Australia, Canada, Denmark, New particular, policymakers in the region introduced
Zealand, Norway and Sweden also reduced key measures to accelerate infrastructure investment,
policy rates following higher downside risks to deregulate labour markets, improve the ease of
inflation and growth. doing business and promote entrepreneurship.
14
 Recent Slowdown in Global Trade: Cyclical Bane or Structural Shift?

ECONOMIC DEVELOPMENTS IN 2015

Introduction
Global trade growth experienced a sharp deceleration in 2015, registering its slowest pace of
expansion since the 2008 Global Financial Crisis (GFC) (Chart 1). The underperformance of global
trade compared to global economic activity is, however, not a recent phenomenon. Global trade
elasticity, calculated as the ratio of world trade growth to GDP growth, has been on a declining trend
even prior to the GFC (Chart 2), suggesting that the recent trend of subdued growth in global demand
only partly explains the modest trade performance in recent years. Several structural shifts could be
contributing to a change in the dynamics between global trade and global growth. This article aims
to provide possible explanations regarding the cyclical and structural factors that may be weighing on
global trade growth and the potential impact of these trends on Asia.

Chart 1 Chart 2

Global Trade in 2015 Expanded at its Slowest Trade Elasticity Has Been on a Declining Trend in
Pace Since the Crisis the Recent Decade
Annual change (%) Annual change (%) Trade elasticity (ratio)
15 10 3.0

8
10
6 2.5
1990-2000
4 Average: 2.1
5
2.0
2

0 0
1.5
-2 2002-07
1983-89
-5 Average: 1.4 Average: 1.6
-4
1.0
-6 2011-15
-10 Average: 1.0
-8 0.5

-15 -10

0.0
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015e

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015e
World trade volume World real GDP (RHS)

e Estimates e Estimates

Source: International Monetary Fund (IMF) Source: International Monetary Fund (IMF)

Cyclical and Structural Factors

Persistent economic weakness, particularly in several of the major advanced economies is likely to be
the key factor in explaining the modest performance of world trade after the GFC.

In the pre-GFC period, the advanced economies collectively accounted for almost two-thirds of
total global imports (Chart 3) and almost 60% of global import growth. However, the sharp growth
contraction and the impairment of the financial systems experienced by these economies during the
crisis resulted in a protracted compression in demand, which constrained the pace of expansion in
ANNUAL REPORT 2015

global trade (Chart 4).

In particular, the weak recovery in investment growth has major implications for global trade activity
given that investment goods typically have higher import content relative to consumption goods
(Constantinescu et al., 2015). In the advanced economies, while consumer spending has been on
a recovering trend, investment growth has remained weak. In Europe, domestic demand has been
further weakened by the implementation of fiscal austerity measures and weak investor sentiments
amid prolonged concerns surrounding the European sovereign debt crisis.
15
 Chart 3 Chart 4
ECONOMIC DEVELOPMENTS IN 2015

Pre-GFC, Advanced Regions Had a Higher Share Post-GFC Import Demand From the Advanced
of Global Trade Economies Has Remained Weak
% share Contribution to growth (percentage points)
100 3 3 4 25
3 3 3
90 7 7 9 20
80 18 16 15 15
70
60 10
28 28
50 33 5
40 0
30
-5
20 42 42 36
10 -10
0 -15
2005

2007

2014
-20
-25

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014
Europe Asia North America

Others Commonwealth of South and Central America Europe Asia North America Others World (annual
Independent States change, %)
Source: World Trade Organization (WTO) Source: World Trade Organization (WTO)

It should be highlighted that despite persistent demand weakness in the advanced economies, global
trade activity in the post-GFC period did not experience a collapse. A key supporting factor of global
trade growth was the recovery in trade in the emerging economies (Marinov and Marinova, 2013),
amid a strong growth rebound in these economies in the period immediately after the crisis. Between
2010 - 2011, the emerging economies accounted for almost four-fifths of global GDP growth.
More recently, however, global trade is facing stronger headwinds. In 2015, several large emerging
economies experienced a moderation in growth due to a confluence of factors. This included the
significant decline in commodity prices, on-going structural reform measures and country-specific
factors, which weighed on both the domestic and external demand of these economies. Heightened
uncertainty during the year, arising from policy shifts and financial market adjustments in several major
economies also adversely affected global sentiments, contributing to a further weakness in global
trade, which continued to grow but only at a modest pace.

Beyond these cyclical weaknesses, there are also structural factors at play, in particular the diminishing
impact of major catalytic factors that were important drivers of the high global trade growth observed
in the 1990s and early 2000s. First, the proliferation of global value chains (GVCs) catalysed a
rapid increase in global trade of intermediate goods (WTO, 2011). This was in part spurred by the
information and communication technology (ICT) revolution, which greatly reduced the cost of
managing, transacting and coordinating production across borders (WTO, 2011). As a result, firms
were better able to leverage on the comparative advantages of different countries through outsourcing
and dispersing the different stages of production internationally.

Second, major trade liberalisation breakthroughs, including the formation of the European Union (EU)1
and the World Trade Organisation (WTO) resulted in the lowering of tariffs and regulatory barriers.
This provided further impetus to the expansion of GVCs. For Europe, the more liberalised trade
environment between the EU members has contributed to a tripling of intra-European trade from
ANNUAL REPORT 2015

EUR800 billion in 1992 to EUR2.9 trillion in 2014.

Third, the accession of PR China into the WTO in 2001 marked a major shift in the global trade
landscape. The opening up of the Chinese economy facilitated a rapid expansion of its manufacturing

1
The European Union (EU) was formed in 1992 upon the signing of the Maastricht Treaty. To date, the EU has 28 member
states with Croatia being the latest addition to the union in 2013.
16
sector amid large inflows of foreign direct investment. The offshoring phenomenon accelerated as
firms became better at maximising the economies of scale offered by the GVCs. This was further

ECONOMIC DEVELOPMENTS IN 2015

supported by low production costs in the host country as they became increasingly adept in
manufacturing processes. Subsequently, PR China’s share of world merchandise exports to global trade
more than doubled, from 5.8% in 2003 to 12.7% in 2014.

It is hypothesised that the catalytic effects of these factors may have peaked, resulting in a lower
elasticity of global trade with respect to global growth. Of late, there are signs of an emerging trend
towards more onshoring or re-shoring of manufacturing activity. Anecdotal evidence suggests that
multi-national corporations are increasingly relocating production back to the US and Europe2.

Asia’s Experience
In the past few decades, given its long history of global orientation and trade openness, Asia has
benefitted tremendously from the rapid expansion of international trade activity. The diversity of
resources in the region enabled each economy to specialise at different stages of both regional and
global production networks3. This inherent strength of the region was further reinforced by the close
geographical proximity of Asian economies to fast-growing PR China amid continued deepening of
trade linkages with the Chinese economy (Chart 5). Intra-regional trade rose from 32% of total trade
in 1990 to 43% in 2007, while Asia’s merchandise trade grew at an annual average rate of 8.9% in
1990 - 2000 and 16.3% in 2002 - 2007.

As with the advanced economies, trade activity in Asia was adversely affected during the GFC.
Nevertheless, the Asian economies experienced a swift rebound in demand in the few years following
the GFC. The strong economic recovery could be attributed in part to increasing trade within the Asian
region and between Asia and the other emerging economies that also registered favourable growth
following the crisis. For example, Asia’s trade with Latin America, the Middle East and Africa increased
from 12% in 2007 to 15% of its total trade in 2014. Nevertheless, most recently, a confluence of
headwinds, including the persistent demand weakness in the advanced economies, as well as structural
factors, such as maturing GVCs, have contributed to a continued moderation in trade growth in the region.

Furthermore, PR China’s economic transition is posing an additional challenge for Asian economies, in
particular for the exporters of raw materials and intermediate goods. The slowdown in PR China’s final
demand will affect the export performance of its trade partners. Additionally, PR China’s structural
transformation process amid increasingly competitive domestic firms have led to import substitution
of some of the parts and components that are usually sourced from other economies, including
from those in Asia (Kee and Tang, 2015). This is evidenced by the moderation in PR China’s imports of
intermediate goods from a pre-crisis average growth of 26.5% to just 3.5% from 2012 to 2014 (Chart 6).

Asia’s Prospects
With the effect of past trends diminishing, the future direction of global trade will depend on the
interplay between the various ongoing and emerging structural shifts in the global economy and trade
landscape. These include PR China’s economic transition towards a more consumption-based growth,
a rising middle income population in the emerging economies and new multilateral trade agreements.
To successfully adapt to this fast evolving environment requires agility. This in turns necessitates economies to
have strong institutions, sufficient policy flexibility as well as diversified sources of trade and growth.
ANNUAL REPORT 2015

Following the Asian Financial Crisis, policymakers in Asia undertook wide-ranging structural reforms
to strengthen economic resilience and improve their growth prospects. In particular, policymakers

2
A BCG survey of senior US-based manufacturing executives showed that more manufacturers are planning to add production
capacity in the US, compared to any other country. The share of manufacturers that are in the process of reshoring producton
back to the US is also increasing (Boston Consulting Group, 2015).
3
The varying stages of development among the Asian nations enable each of them to take advantage of its distinctiveness to
develop a supportive ecosystem, as explained by the ``flying geese model” (Kojima, 2000).
17
 Chart 5 Chart 6
ECONOMIC DEVELOPMENTS IN 2015

PR China’s Importance as a Source of Final Demand PR China’s Imports of Intermediate Goods

for Asia Has Increased Have Declined
% of GDP Annual change (%)
14
50
12
10 40
8
6 30
4
2 20
0
10
Chinese Taipei

Malaysia

Singapore

Korea

Thailand

Indonesia
Hong Kong
SAR

-10
2005 2014
-20
Note: 2014 final demand for the region estimated based on 2011 figures available

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014
on OECD TiVA

Source: OECD Trade in Value Added (TiVA) - October 2015 database and
Bank Negara Malaysia estimates Source: UN COMTRADE

embarked on efforts to develop a vibrant manufacturing base, to move up the value chain and
to improve efficiency and competitiveness. At the same time, measures were also implemented
to strengthen domestic demand in the region, including increasing labour market flexibility and
enhancing social safety nets.

Conclusion
This article puts forth cyclical and structural factors that have caused the global trade growth and the
intensity of trade to decline in recent years. At this point, with the global economy still undergoing
some critical transitions, it is difficult to conclude whether these trends in global trade will continue.
Nevertheless, it is imperative for economies to continuously embark on policy initiatives geared
towards enhancing their competitiveness, in order to benefit from the more globalised world and to
position the economy to confront the increasingly challenging global environment.

References
Boston Consulting Group. (2015). `U.S. Is Now the Preferred Location for New Factory Capacity to
Serve U.S. Market as Interest in Reshoring Stays Strong´. Accessed on 16 February 2016 at http://www.
bcg.com/news/press/10december2015-2015-manufacturing-survey.aspx

Constantinescu, C., Mattoo, A. and Ruta, M. (2015). `The Global Trade Slowdown: Cyclical or
Structural?´ IMF Working Paper, No. 15/6. International Monetary Fund, Washington D.C.

Kee, H.L., and Tang H. (2015). `Domestic Value Added in Exports: Theory and Firm Evidence from
China´. Policy Research Working Paper WPS 7491. The World Bank Group, Washington, D.C.

Kojima, K. (2000). `The ``Flying Geese´´ Model of Asian Economic Development: Origin, Theoretical
Extensions, and Regional Policy Implications´. Journal of Asian Economics 11 (2000) 375–40.
ANNUAL REPORT 2015

Marinov, M. and Marinova, S. (2013). `The Global Crisis and the World: The Cases of Emerging and
Developed Economies´. Emerging Economies and Firms in the Global Crisis. Palgrave Macmillan UK.

World Trade Organisation (2011). `Trade Patterns and Global Value Chains in East Asia: From Trade in
Goods to Trade in Tasks´. WTO, Geneva, Switzerland.
18
 Chart 1.3 concerns about the rising cost of living and weak
sentiments, household spending was supported

ECONOMIC DEVELOPMENTS IN 2015

Cumulative Movements of Policy Rates by continued income growth and stable labour
(January 2015 - January 2016) market conditions. This was further supported by
Basis points an increase in targeted Government transfers to
40
+25
low- and middle-income households, as well as
20
0
the boost to disposable incomes from the lower
-20 fuel prices during the year.
-40 -25
-60
-50 -50 -50
-80
-100
-120 Despite the challenging economic
-140 -125 -125
Hong Kong Chinese Indonesia
(0.75%) Taipei (7.25%)
Korea
(1.50%)
Thailand
(1.50%)
India
(6.75%)
PR China
(4.35%)
environment, the Malaysian
(1.625%)

Note: Current policy rates as at end January 2016 in parentheses

economy registered a growth of
Source: National Authorities 5.0% in 2015

The range of policy measures employed during Private investment growth was slower as capital
the year underscored the challenge faced by expenditure was affected by the moderation
policymakers in striking a balance between in domestic and global growth, and cautious
addressing short-term risks and long-term growth business sentiments. While the low oil prices
challenges. Policy formulation and implementation affected upstream mining investment, the continued
were further complicated by volatile capital flows progress of ongoing and new investment projects in
and pressures in the foreign exchange markets. the services and manufacturing sectors, especially in
The fact that policy space in many countries was the export-oriented industries, provided support to
more constrained following the strong measures the overall investment performance.
rolled out in the immediate aftermath of the
global financial crisis in 2008-2009 also added Despite the challenging conditions, the public sector
to some uncertainty in the financial markets. continued to provide support to growth while
Combined with the on-going imbalances in many remaining committed to the steady reduction in fiscal
major economies, the operating environment in deficit. Measures by the Government to freeze new
2015 remained challenging, and this is likely to hiring and cut costs to reduce discretionary spending
weigh on prospects for 2016. contributed to the sustained growth in public
consumption in 2015. Public investment improved
THE MALAYSIAN ECONOMY to register a smaller contraction because of higher
capital spending by both the public corporations and
Overview the Federal Government. Growth was underpinned
Despite the challenging economic environment by ongoing as well as new projects.
in 2015, the Malaysian economy grew by 5.0%
(2014: 6.0%), supported by the continued On the supply side, all major economic sectors
expansion of domestic demand. Growth of registered more moderate growth, with the exception
domestic demand was stronger during the of the mining sector. The moderation reflected the
early part of the year, partly reflecting the slower expansion in industries related to domestic
frontloading of consumption spending prior to demand. However, export-oriented manufacturing
the implementation of the Goods and Services and trade-related services industries benefited from
ANNUAL REPORT 2015

Tax (GST) in April 2015. In the second half of the the modest improvement in external trade, especially
year, as growth in domestic demand moderated, a with the major advanced economies.
modest improvement in external demand provided
additional impetus to economic growth. The external sector remained resilient in 2015.
In the first half of the year, the external trade
Domestic demand was primarily driven by the performance was largely weighed down by the
private sector. Private consumption continued to decline in commodity prices and the sluggish
expand, albeit at a more moderate pace. Despite demand for commodities and commodity-related
19
 Table 1.2
ECONOMIC DEVELOPMENTS IN 2015

Malaysia - Key Economic Indicators

2013 2014 2015p 2016f
Population (million persons) 30.2 30.6 31.0 31.4
Labour force (million persons) 13.6 14.0 14.2 14.6
Employment (million persons) 13.2 13.5 13.8 14.1
Unemployment (as % of labour force) 3.1 2.9 3.2 3.3 ~ 3.5
Per Capita Income (RM) 32,596 34,945 36,285 37,930
(USD) 10,345 10,677 9,291 8,821
NATIONAL PRODUCT (% change)
Real GDP at 2010 prices1 4.7 6.0 5.0 4.0 ~ 4.5
(RM billion) 955.3 1,012.5 1,062.6 1,106.1
Agriculture, forestry and fishery 1.9 2.1 1.0 -0.3
Mining and quarrying 1.2 3.3 4.7 3.5
Manufacturing 3.4 6.2 4.9 4.1
Construction 10.8 11.8 8.2 7.9
Services 6.0 6.5 5.1 4.4
Nominal GNI 5.3 8.6 5.2 5.9
(RM billion) 984.8 1,069.3 1,124.7 1,191.0
Real GNI 5.2 6.0 6.8 3.8
(RM billion) 916.9 971.9 1,038.1 1,077.7
Real aggregate domestic demand2 7.3 5.9 5.1 4.3
Private expenditure 8.5 7.9 6.1 5.2
Consumption 7.2 7.0 6.0 5.1
Investment 12.8 11.0 6.4 5.5
Public expenditure 4.1 0.4 2.1 1.6
Consumption 5.9 4.4 4.3 2.0
Investment 1.9 -4.7 -1.0 1.1
Gross national savings (as % of GNI) 30.4 30.3 28.8 28.3
BALANCE OF PAYMENTS (RM billion)
Goods balance 96.6 113.4 108.9 99.5
Exports 637.7 679.9 685.8 707.6
Imports 541.1 566.5 576.9 608.1
Services balance -9.6 -11.2 -20.5 -19.2
Primary income, net -34.0 -37.3 -32.2 -38.0
Secondary income, net -17.5 -17.6 -22.2 -23.1
Current account balance 35.5 47.3 34.0 19.1
(as % of GNI) 3.6 4.4 3.0 1.0 ~ 2.0
Bank Negara Malaysia international reserves, net3 441.9 405.3 409.1 -
(in months of retained imports) 9.5 8.3 8.4 -
PRICES (% change)
CPI (2010=100)4 2.1 3.2 2.1 2.5 ~ 3.5
PPI (2010=100)5 -1.7 1.4 -4.8 -
Real wage per employee in the manufacturing sector 5.8 1.5 3.7 -
1
Beginning 2015, real GDP has been rebased to 2010 prices, from 2005 prices previously
ANNUAL REPORT 2015

2
Exclude stocks
3
All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance sheet date and the gain/loss has
been reflected accordingly in the Bank’s account
4
Effective 2011, the Consumer Price Index has been revised to the new base year 2010=100, from 2005=100 previously
5
Effective 2015, the Producer Price Index has been revised to the new base year 2010=100, from 2005=100 previously
6
Based on average USD exchange rate for the period of January-February 2016
p Preliminary
f Forecast
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
20
 Table 1.3

ECONOMIC DEVELOPMENTS IN 2015

Malaysia - Financial and Monetary Indicators
FEDERAL GOVERNMENT FINANCE (RM billion) 2013 2014 2015p

Revenue 213.4 220.6 219.1

Operating expenditure 211.3 219.6 217.0
Net development expenditure 40.7 38.5 39.3
Overall balance -38.6 -37.4 -37.2
Overall balance (% of GDP) -3.8 -3.4 -3.2
Public sector net development expenditure 139.4 154.6 161.5
Public sector overall balance (% of GDP) -4.6 -6.0 -8.6

EXTERNAL DEBT 1

Total debt (RM billion) 696.6 747.5 833.7

Medium- and long-term debt 357.7 384.3 481.9
Short-term debt 338.8 363.2 351.9
Debt service ratio (% of exports of goods and services)
2

Total debt 18.4 19.1 22.6

Medium- and long-term debt 18.3 18.9 22.4

Change in 2013 Change in 2014 Change in 2015

MONEY AND BANKING
RM billion % RM billion % RM billion %
Money supply M1 37.8 13.0 18.8 5.7 14.0 4.1
M3 107.5 7.9 101.5 7.0 41.5 2.7
Banking system deposits 116.9 8.3 116.4 7.6 29.5 1.8
Banking system loans 3
117.7 10.6 114.1 9.3 105.4 7.9
Loan to deposit ratio (%, end of year)4 84.8 86.7 88.7
Loan to fund ratio (%, end of year)4,5 80.7 82.1 83.0
Loan to fund and equity ratio (%, end of year)4,5,6 73.3 74.1 74.6

INTEREST RATES (%, AS AT END-YEAR) 2013 2014 2015

Overnight Policy Rate (OPR) 3.00 3.25 3.25
Interbank rates (1-month) 3.20 3.38 3.45
Commercial banks
Fixed deposit 3-month 2.97 3.13 3.13
12-month 3.15 3.31 3.31
Savings deposit 0.99 1.07 1.04
Base rate (BR) - - 3.86
Base lending rate (BLR) 6.53 6.79 6.79
Treasury bill (3-month) 3.00 3.42 2.74
Malaysian Government Securities (1-year)7 3.03 3.48 2.59
Malaysian Government Securities (5-year)7 3.66 3.84 3.47

EXCHANGE RATES (AS AT END-YEAR) 2013 2014 2015

Movement of Ringgit (%)
Change against SDR -7.3 -0.7 -15.1
ANNUAL REPORT 2015

Change against USD -6.8 -6.1 -18.6

1
As defined effective from the first quarter of 2014. For more information, please refer to the box article titled `The Redefinition of External Debt´ in the
Quarterly Bulletin on Economic and Financial Developments in the Malaysian Economy in the First Quarter of 2014
2
Includes prepayment of medium- and long-term debt
3
Includes loans sold to Cagamas
4
Deposits exclude deposits accepted from banking institutions. Loans exclude loans sold to Cagamas and loans extended to banking institutions.
Beginning July 2015, loans exclude financing funded by Islamic Investment Accounts
5
Funds comprise deposits and all debt instruments (including subordinated debt, debt certificates/sukuk issued, commercial paper and structured notes)
6
Equity comprise ordinary and preferred shares, share premium and retained earnings
7
Refers to data from FAST, Bank Negara Malaysia
p Preliminary
Source: Ministry of Finance, Malaysia and Bank Negara Malaysia
21
 Table 1.4 Table 1.5
Real GDP by Expenditure (2010=100) Real GDP by Kind of Economic Activity (2010=100)
ECONOMIC DEVELOPMENTS IN 2015

2015p 2014 2015p 2014 2015p 2015p 2014 2015p 2014 2015p
% of Annual change Contribution to
GDP (%) growth (ppt) % of Annual change Contribution to
Domestic Demand1 91.6 5.9 5.1 5.4 4.6 GDP (%) growth (ppt)1
Private sector Services 53.5 6.5 5.1 3.5 2.8
69.2 7.9 6.1 5.3 4.2
expenditure
Manufacturing 23.0 6.2 4.9 1.4 1.1
Consumption 52.4 7.0 6.0 3.6 3.1
Investment 16.9 11.0 6.4 1.8 1.1 Mining and quarrying 8.9 3.3 4.7 0.3 0.4
Agriculture 8.8 2.1 1.0 0.2 0.1
Public sector
22.4 0.4 2.1 0.1 0.5
expenditure Construction 4.4 11.8 8.2 0.5 0.3
Consumption 13.5 4.4 4.3 0.6 0.6 Real Gross Domestic
Investment 8.9 -4.7 -1.0 -0.5 -0.1 Product (GDP) 100.01 6.0 5.0 6.0 5.0
Gross Fixed Capital 1
Figures may not necessarily add up due to rounding and exclusion
Formation 25.8 4.8 3.7 1.3 1.0
of import duties component
Change in Stocks -0.6 0.6 p Preliminary
Source: Department of Statistics, Malaysia
Net Exports of
Goods and Services 8.6 12.8 -3.7 1.1 -0.3
Exports 73.0 5.1 0.7 3.9 0.5
countries’ experiences in implementing GST,
Imports 64.4 4.2 1.3 2.8 0.8
households frontloaded purchases prior to the
Real Gross Domestic
Product (GDP) 100.0 6.0 5.0 6.0 5.0 commencement of the tax in the first quarter
of 2015, particularly in the transport, food and
1
Excluding stocks beverages, and communication categories.
p Preliminary
From the second quarter onwards, private
Note: Figures may not necessarily add up due to rounding consumption growth moderated as households
Source: Department of Statistics, Malaysia
adjusted to the new tax. Upward adjustments
to administered prices, including cigarettes, toll
manufactured products. In the second half rates and public transport fares also contributed
of the year, external trade improved due to a to the moderation in spending. In addition,
rebound in export growth arising from higher weaker sentiments due to greater uncertainty
demand for manufactured products and in the global and domestic environment, and
commodities, and the positive valuation effect the ringgit depreciation, further weighed down
from the ringgit depreciation. For the whole private consumption growth during the second
year, the trade surplus was higher, supported by half of the year.
both manufactured and commodity products.

Domestic demand remained the main source Private consumption expanded at

of growth
Domestic demand remained the key driver a more moderate pace
of growth, but its growth moderated to 5.1%
during the year (2014: 5.9%). The slower
performance reflected the moderation in Notwithstanding these developments,
growth of private sector activity, particularly households received some support from higher
in the second half of the year. Public sector disposable income through targeted Government
expenditure, meanwhile, improved marginally measures to the low- and middle-income
following a smaller contraction in public households. This included the higher amount
investment.
ANNUAL REPORT 2015

of Bantuan Rakyat 1Malaysia (BR1M) cash

transfers, the reduction in individual income
Private consumption growth moderated to tax rates for the 2015 assessment year by one
6.0% in 2015 (2014: 7.0%), as households to three percentage points and savings derived
adjusted their spending due to the increasing from the lower fuel prices during the year.
cost of living, arising from fiscal reform Additionally, developments in the labour market
measures such as the implementation of GST continued to remain supportive of wage growth
and administrative price adjustments, and and private consumption. Average nominal
the depreciation in ringgit. Similar to other wage growth in the manufacturing sector
22

1
 Impact of Goods and Services Tax on Private Consumption in Malaysia

ECONOMIC DEVELOPMENTS IN 2015

Introduction
On 1 April 2015, the Goods and Services Tax (GST) was introduced at a standard rate of 6%. While
the GST represents a key component of the Government’s long-term fiscal reform initiatives, a
combination of adverse economic developments and shocks after the introduction of the GST has
impacted household spending pattern. Similar to the experiences in other countries, the major impact
of GST was on the change in behaviour of households towards consumption spending in the period
before and after the implementation of the GST.

Frontloading of consumption spending pre-GST implementation

Prior to the implementation of GST1, it was observed that households brought forward their
purchases of goods in anticipation of higher prices post the tax introduction. In particular, households
frontloaded purchases of durable items such as passenger cars, furniture and electrical appliances.
Notably, the uncertainty over the impact of GST on car prices led to a marked increase in car sales,
particularly in March 2015 (Chart 1). Households also frontloaded purchases of basic necessities, such
as food and beverages and household items. This was reflected in the higher growth of 10.5% in the
retail trade index during the first quarter of 2015 (Chart 2). Most retailers, particularly supermarkets,
experienced a substantial increase in sales during the last few weeks leading up to the introduction of
the GST.

Chart 1 Chart 2

Surge in Car Sales in March 2015 was Followed by Higher Growth of Index of Retail Trade and Its
a Decline in April 2015 Sub-component in 1Q 2015, before Moderating
in 2Q-3Q 2015
Annual change (%)
Pre-GST Post-GST Annual change (%)
20 Pre-GST Post-GST
14.0 20

10 15
2007-2015: 5.4%

0 10
2009 - 2015: 6.2%
5
-10
0
-20
-5
1Q-13

2Q-13

3Q-13

4Q-13

1Q-14

2Q-14

3Q-14

1Q-15

2Q-15

3Q-15
4Q-14

-30
Apr-15

Jul-15
Mar-15
Jan-15

Jun-15
Oct-14

Feb-15

Sep-15
Dec-14
Nov-14

Aug-15
May-15

Overall index of retail trade Sales of food, beverages & tobacco

Sales of other household equipment
Source: Malaysian Automotive Association (MAA) Source: Department of Statistics, Malaysia

The surge in household spending was also reflected in other consumption indicators. In February -
March 2015, credit card spending increased significantly by 21.8%, while narrow money (M1) rose
by 9% (Chart 3). On aggregate, private consumption expanded strongly by 8.8% in the first quarter
of 2015, significantly higher than its long-run average growth of 6.7% (1990-2014). This was similar
to the experiences in Japan and Singapore, whereby the frontloading of purchases prior to the GST
implementation boosted private consumption growth above its long-term average by two to four
ANNUAL REPORT 2015

percentage points.

As expected, the surge in consumption expenditure during the period leading up to the GST
introduction was only temporary. As with the experiences of other economies2 that introduced a

1
GST replaces the Sales and Services Tax in Malaysia to enhance the efficiency and effectiveness of the existing taxation system.
2
Following the introduction of GST, Australia (2000) and New Zealand (1986), for example, experienced a temporary boost in
private consumption pre-GST implementation followed by a decline in retail sales during the quarter of GST implementation.
23
 Chart 3 Chart 4
ECONOMIC DEVELOPMENTS IN 2015

Strong Growth in Credit Card Spending and Moderation in Consumption Growth

Narrow Money before Moderating Post-GST Post-GST Implementation
Annual change (%)
Annual change (%) Pre-GST Post-GST Annual change (%) Pre-GST Post-GST
35 12 12
2007-2015: 11.0%
30 10
10
25
8
20 8
6 1990-2014: 6.7%
15
2007-2015: 10.2% 4 6
10
5 2
4
0 0
Oct-14

Nov-14

Dec-14

Jan-15

Feb-15

Mar-15

Apr -15

May-15

Jun-15

Jul-15

Aug -15

Sep -15
2

1Q-14

2Q-14

3Q-14

4Q-14

1Q-15

2Q-15

3Q-15

4Q-15
Credit card spend ing M1 (RHS)

Source: Bank Negara Malaysia Source: Department of Statistics, Malaysia

new consumption tax, private consumption growth in Malaysia moderated during the quarter of
implementation (Chart 4; 2Q 2015: 6.4%). Households adjusted to the rise in prices by changing their
consumption patterns, particularly by cutting down on discretionary spending. Retail trade experienced
a broad-based moderation across most consumer goods, particularly household equipment, food,
beverages and tobacco. Credit card spending and M1 also registered lower growth rates of 0.6% and
8.4%, respectively, during April – May 2015. Similarly, after the accelerated growth of 14% in March 2015,
passenger car sales contracted by 10.8% in 2Q 2015 compared with the same period in the previous year.

New shocks prolonging the period of adjustment post-GST

The macroeconomic environment in which the GST is introduced is a key factor in explaining the
duration of the ensuing period of adjustment in household spending. In economies that introduced
consumption tax during stable economic growth conditions, household spending typically turned
around after about three to six months. In New Zealand, amid firm economic conditions, retail sales
declined during the quarter of GST implementation, before rebounding in the subsequent quarter.
Similarly, consumption growth began to improve six months after the GST was implemented in
Australia during a period of sustained economic growth in the late 1990s. Countries that introduced
the GST during more volatile economic conditions, however, have tended to experience a more
prolonged period of adjustment in consumer spending3.

In the case of Malaysia, the period after the introduction of the GST saw new shocks that complicated
the adjustment process. Most of these shocks were exogenous, particularly the decline in commodity
prices, weakening of the ringgit, and were precipitated by external events unforeseen during the
period prior to the implementation of the GST. These factors were compounded by several factors
including, the upward revision of administered prices in the period after the implementation of the
GST, culminating in an increase in the cost of living and a steady decline in consumer confidence. As
expected, household spending moderated in second quarter of 2015 to 6.4% and reached a trough of
4.1% in the third quarter, before recovering to 4.9% in the fourth quarter of the year.
ANNUAL REPORT 2015

It should be noted that when the Government first announced the planned implementation of GST
back in October 2013, it also proposed a package of measures designed to help households and
businesses to cope with the transition. For households, these included the reduction of individual
income tax rates by one to three percentage points and the disbursement of higher cash transfers to
low- and middle-income households. Additionally, the exclusion of essential goods and services from
3
In Canada, when the GST was introduced during an economic recession in January 1991, private consumption growth
registered three consecutive quarters of contraction before recovering.
24
the GST helped to alleviate some of the burden of adjustments faced by households, particularly the
lower income groups. Subsequently, in October 2015, the Government proposed for an increase in

ECONOMIC DEVELOPMENTS IN 2015

the national minimum wage and civil servants’ salaries effective July 2016. Following a new round of
shocks to the economy, the Government implemented additional measures in early 2016 to support
household consumption. These measures included providing employees with the option to temporarily
lower their EPF contribution rate by three percentage points to increase their disposable income.

Conclusion
The introduction of GST in Malaysia led to a temporary change in household spending patterns, and
the adjustment process is still continuing at the time of writing. As expected, consumption spending
was frontloaded in anticipation of higher prices after the introduction of the GST. The post-GST period
has seen a downward adjustment in consumer spending. This period of adjustment could be more
prolonged than earlier anticipated, following additional exogenous shocks to the economy in the form
of a more subdued global growth environment, a fall in commodity prices and a depreciation of the
ringgit exchange rate. These shocks had cumulatively resulted in increased uncertainty and affected
business and household sentiments. Nevertheless, looking ahead, the impact of GST is expected to
decline, as continued income growth and stable job market conditions provide fundamental support
to household spending. Supporting measures by the Government would also provide some impetus
to consumption activity. It is envisaged that private consumption will continue to grow in the near to
medium term, albeit at a more moderate rate compared to the average growth of 7.1% for the past
five years.

References
Reserve Bank of Australia. (2000). `Box A: Transitional Effects on Demand of the GST: the Canadian,
Japanese and New Zealand Experience´. Semi-Annual Statement on Monetary Policy.

The Treasury of the Australian Government. (2003). `Preliminary assessment of the impact of The New
Tax System´. Economic Roundup Autumn 2003.

Statistics New Zealand. (2010). `How GST Affected Retail Sales in the 1980s´.

ANNUAL REPORT 2015

25
 Softening Labour Market Conditions
ECONOMIC DEVELOPMENTS IN 2015

The labour market remained broadly stable in 2015, as the continued expansion across all economic
sectors sustained the demand for labour. The unemployment rate edged higher to 3.2% (2014: 2.9%),
as more cautious business sentiments led to softer employment prospects towards the second half of the
year (Table 1). The labour force participation rate was stable at 67.6% (2014: 67.5%).

Table 1
Selected Labour Market Indicators
2011 2012 2013 2014 2015p
Employment (‘000 persons) 12,284 12,723 13,210 13,532 13,759
Labour force (‘000 persons) 12,676 13,120 13,635 13,932 14,215
Unemployment rate (% of labour force) 3.1 3.0 3.1 2.9 3.2
Layoffs (persons) 12,689 20,031 14,465 12,406 21,7131
Foreign workers (‘000 persons) 1,573 1,572 2,250 2,073 2,135
p Preliminary
1
Constitutes workers affected by retrenchments and voluntary separation scheme (VSS) offerings in the January-October 2015 period and
including layoffs arising from the national airline’s corporate restructuring

Source: Department of Statistics, Malaysia; Ministry of Human Resources; Ministry of Home Affairs; and Bank Negara Malaysia estimates

The number of workers laid off totalled 21,713 persons, or approximately 0.2% of total employment.
Most of the layoffs (retrenchments and voluntary separation scheme (VSS) offerings) in 2015 were mainly
attributable to the decline in global oil prices and reorientation of multinational firms’ business strategies.
These layoffs were conducted on a global and regional scale, particularly among oil and gas companies and
manufacturers in the E&E sub-sector. Among domestic companies, the national airline implemented a large
corporate transformation exercise, while financial services firms took steps to enhance their operational
efficiency, in line with global trends in the financial services industry.

Total employment continued to expand to 13.8 million workers (2014: 13.5 million workers). The net
addition of 226,000 jobs came mainly from the services sector (223,000 jobs), particularly in the distributive
trade, education, and human health and social work sub-sectors. The construction sector registered net
employment gains of 54,000 jobs, while employment growth in the oil and gas sector remained steady (net
gain of 19,000 jobs), despite large scale-backs during the year (Chart 1). In terms of skill levels, employment
gains were mainly concentrated in the high-skilled occupations, reflecting a continued shift of the Malaysian
economy towards becoming a higher value-added economy (Chart 2). However, demand for low-value

Chart 1 Chart 2

Net Employment Gains1 by Sectors, 2013-2015 Employment Growth by Skill Levels, 2011-2015
'000 jobs Cumulative increase in employment, since 1Q 2011
333 314 ('000 persons)
350
223
2,000
200

150 1,500

100 80 1,000
51 54
50
6 19 500
0
-3
ANNUAL REPORT 2015

-13 -18 0
-50 -44
Manufacturing Mining Construction Services -500
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2013 2014 2015p
2011 2012 2013 2014 2015p
p Preliminary
Low-skilled Mid-skilled High-skilled Total
1
Net employment gains are the difference between employment level in a
given year compared to the previous year p Preliminary
Source: Department of Statistics, Malaysia and Bank Negara Malaysia estimates Source: Department of Statistics, Malaysia and Bank Negara Malaysia estimates
26
 production and low-skilled workers remained high, as evidenced by the number of registered

ECONOMIC DEVELOPMENTS IN 2015

foreign workers, which increased to 2.14 million workers (2014: 2.07 million workers). The
agriculture and construction sectors registered the highest dependence on foreign labour.

Labour productivity, as measured by real value-added per worker, grew by 3.2% (2014: 3.5%),
driven mainly by productivity increases in the manufacturing sector (7.0%; 2014: 3.8%). Labour
productivity growth in the construction and services sectors, however, were modest at 3.6% and
2.4%, respectively (2014: 13.4% and 2.5%).

was stable at 5.9% (2014: 4.7%), underpinned and ongoing projects in the manufacturing and
by strong wage growth in the export-oriented services sectors.
sectors, while the growth of wages in the
domestic-oriented sectors remained modest.
Overall investment activity
Public consumption recorded a sustained growth
of 4.3% in 2015 (2014: 4.4%). Spending on moderated due to slower growth in
emoluments was lower, partly attributable to
the freezing of new hiring for selected positions
private sector capital expenditure
and the absence of bonus payments to civil
servants. Continued efforts to rationalise and
optimise Government expenditure resulted in lower Investment in the manufacturing sector (24%
discretionary spending, particularly on supply of share of private investment) expanded further,
other materials and rental payments. Nevertheless, supported mainly by the export-oriented industries
total spending on supplies and services was higher which benefited from the continued demand
during the year, supported by maintenance and of manufactured exports. The manufacturing
minor repair work, and communication and utilities. investment approved by MIDA in 2015 remained
high at RM74.7 billion (2014: RM71.9 billion),
Gross fixed capital formation (GFCF) with projects mainly in the petrochemical, natural
expanded by 3.7% in 2015 (2014: 4.8%), due gas and E&E sub-sectors.
mainly to slower private sector investment. The
environment of low and volatile oil prices had In the services sector (51% share of private
affected investment in the upstream mining investment), investment was underpinned by
sector, resulting in oil and gas firms revising their capital expenditure in the distributive trade,
capital expenditure plans during the year. By type transport and storage, and tourism-related
of assets, investment in structures registered a sub-sectors. This was reflected in the rapid
lower growth of 6.9% (2014: 9.9%) mainly due pace of development within the regional
to the slower pace of construction activity in both corridors, such as the Iskandar region (i.e. oil
the residential and non-residential sub-sectors. and gas terminals, and healthcare services).
Growth in machinery and equipment expenditure Investment in telecommunication services was
remained in contraction (-0.3%; 2014: -0.5%) supported by the ongoing network expansion
with spending being mainly on transport, office and infrastructure upgrades nationwide for
and telecommunication equipment. the rollout of 4G/LTE networks by major
telecommunication service providers. Dwellings
Private investment registered a slower growth of investment, however, registered a modest
6.4% (2014: 11.0%), weighed down partly by the expansion in line with the slower residential
construction activity.
ANNUAL REPORT 2015

moderation in domestic demand conditions and

weak business sentiments. While investment for
new oil and gas explorations moderated in 2015, Public investment registered negative growth in
investment in downstream activities remained the first half of 2015 following the near completion
steady as reflected by further capacity expansion in of several large projects that were undertaken by
the petrochemical manufacturing and oil storage the public corporations. However, public investment
facilities. The overall investment performance turned around to register a positive growth in the
continued to be supported by the progress of new second half of the year due to higher spending on
(continued on page 44)
27
 Investment in the Export-Oriented Industries in Malaysia
ECONOMIC DEVELOPMENTS IN 2015

Introduction
Over the past decade, Malaysia has successfully attracted large amounts of investment into the
export-oriented industries, producing not only a wide range of products but also integrating Malaysia
into the global supply chain. Investment in the export sector has been a key success factor in ensuring
that Malaysia’s manufactured exports remain competitive in a changing global environment and that
the Malaysian economy progressively moves towards high value-added activity. This article looks at the
major trends of investments in the export-oriented industries in Malaysia.

Overview of export-oriented industries in the economy

Investment in Malaysia is concentrated in the manufacturing and services sectors (75% of gross fixed
capital formation (GFCF)). Total investment comprises of investment in both the export-oriented and
domestic-oriented activities.

Chart 1 provides the export orientation of different sectors within the economy. Broadly, the
agriculture, mining and manufacturing sectors are mostly export-oriented, while the construction and
services sectors are largely domestic-oriented. Within the manufacturing sector, the export-oriented
industries include those involved in the production of electronic and electrical (E&E), petroleum,
chemical, rubber, plastic, fabricated metal, iron and steel products. In the services sector, whilst most
of the economic activity is related to supporting domestic activity, the logistics, information and
communication, as well as distributive trade industries (particularly wholesale trade), also cater to the
export sector.

Chart 1

Export Orientation of Selected Industries in Malaysia

Sector/industry Share of value-added used directly or
(% share of GDP, 2015) indirectly for exports or domestically1

Exports Domestic

Manufacturing (23.0%) 74%

E&E-related products 96%

Primary-related products
2
69%

Construction-related products 68%

Services (53.5%) 41%

Wholesale and retail trade 64%

Transport, storage and communication 54%

Mining (8.9%) 78%

Agriculture (8.8%) 61%

Construction (4.4%) 13%

ANNUAL REPORT 2015

0% 50% 100%

Note:
1
Calculated based on the proportion of an industry’s value-added that is exported using the 2010 Input-Output table. If more than 50% of an industry’s
value-added is exported, it is classified as export-oriented; otherwise it is classified as domestic-oriented.
2
Primary-related products refer to textiles, wood, petroleum, chemical, rubber and plastic products, while construction-related products refer to non-metallic,
basic metal and fabricated metal products.

Source: Department of Statistics, Malaysia and Bank Negara Malaysia estimates

28
2
Investment trends for the export-oriented industries
Overall, investments in the export-oriented industries account for an estimated amount of 59% of

ECONOMIC DEVELOPMENTS IN 2015

total GFCF in 2014 (see Chart 2). In the manufacturing sector, investments in the export-oriented
industries constitute 87% of total manufacturing investment and 16% of GFCF. These export-oriented
manufacturing activities are key to ensuring that Malaysia remains firmly plugged into the supply chain
of high value-added products such as solar components and the semiconductors that are used in the
automotive, consumer electronics and cloud computing businesses.

In the services sector, investments in the export-oriented industries represent 35% of services
investment and 20% of total GFCF. These investments include, among others, capital spending for the
expansion of port facilities, upgrading of logistics equipment and warehousing facilities, as well as the
construction of oil and gas storage terminals.

Chart 2

Percentage Share of GFCF by Economic Activity, 2014

Agriculture Mining
3.4% 20.2%

Wholesale and retail trade, 4.6% E&E-related

Services Export-oriented Manufacturing 6.9%
Transport, storage, information 20.0% 59.1% 15.5% Primary-related
and communication 6.9%
15.4% Construction-related, 1.7%
Domestic-oriented
40.9%
Manufacturing
2.3%
Construction
Services 1.7%
36.9%

Source: Department of Statistics, Malaysia and Bank Negara Malaysia estimates

While the growth of investment in the mining sector has been moderating, investments in the export-
oriented manufacturing and services industries have recorded strong growth, averaging above 8%
from 2011 to 2014 (see Table 1). For the manufacturing sector, investment was driven mainly by
capital expenditure in the primary-related and E&E sub-sectors (2011-2014 average growth: 13.6%
and 5.6%, respectively). During the same period, investment in the export-oriented services sector was

Table 1
Growth of GFCF in the Manufacturing and
Services Sectors
Average growth
Sectors and sub-sectors
(2011-2014)
Manufacturing 8.3
E&E-related 5.6
Primary-related 13.6
Construction-related -1.8
ANNUAL REPORT 2015

Services 8.0
Wholesale and retail trade 9.5
Transport and communication 11.1
Overall GFCF 9.6
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
estimates
29
3
 undertaken mainly by the transport and communications sub-sectors (2011-2014 average growth:
11.1%) to build new infrastructure and upgrade existing equipment.
ECONOMIC DEVELOPMENTS IN 2015

Continued focus on promoting investment in the export-oriented industries

Continuous efforts by the Government in promoting investment in various export-oriented industries,
such as aerospace, E&E, medical equipment and renewable energy, have contributed towards
significant progress in these strategic areas. The success of these efforts can be seen in the increase
of investments approved in the export-oriented manufacturing industries, mainly in the E&E,
petroleum and petrochemical sub-sectors (see Chart 3). This includes investment by manufacturers of
semiconductors, solar panels, aircraft components and petrochemical-based products such as resins,
polymers and construction chemicals.

Chart 3

Investment Approvals for the Export-oriented

Manufacturing Sector
RM billion
70
43.6 28.9 38.5 59.6 61.6
60
10.4
17.5
50 2.6
8.9
40 4.3
14.8
13.4 11.1
30 1.2
9.6 3.3
20 39.7
20.1 2.8 9.8
4.0 26.7
10
12.5 12.0
7.6
0
2011 2012 2013 2014 2015

Petroleum, natural gas and chemical E&E-related products

products
Machinery and equipment Other exports

Source: Malaysian Investment Development Authority (MIDA) and

Bank Negara Malaysia estimates

Similarly, in the services sector, further progress has been made in successfully attracting investments
to logistic services and in establishing Malaysia as a global and regional operations hub for large
multinational corporations (MNCs). In 2014, 234 global corporations were approved to set up
operation in Malaysia, with another 224 approvals in 20151.

Investment strategically dispersed across regions

In the 1980s and 1990s, investment in the export-oriented industries was mainly concentrated in
industrial areas located within the Klang Valley, Penang and Johor. However, following strategic
measures such as the promotion of regional growth corridors, these export-oriented investment
projects are increasingly more geographically dispersed across the nation (see Table 2). These corridors
have attracted key investment projects in niche areas and helped to further boost Malaysia’s exports. For
instance, the Northern Corridor Economic Region (NCER) has attracted several large MNCs producing
higher value-added products such as medical devices and semiconductors for sensors. Similarly, the
ANNUAL REPORT 2015

Iskandar region has attracted investments in E&E manufacturing, as well as in oil and gas storage facilities.

Conclusion
Despite the challenges faced by the global economy, ongoing multi-year investments in the
export-oriented industries are expected to continue. In particular, investment by industries in the
advanced manufacturing and modern services sectors, including manufacturers of automotive sensors

1
Source: Malaysian Investment Development Authority (MIDA)
30
4
 Table 2

ECONOMIC DEVELOPMENTS IN 2015

Export-oriented Manufacturing Focus Across Regional Corridors
Corridor Areas of focus Examples of products
• Medical devices
Northern Corridor Economic Region (NCER) E&E and biotechnology • Automotive sensors
• Oleochemicals

• Metal products
East Coast Economic Region (ECER) Heavy industry and automotive
• Automotive components

• Petrochemical products
Iskandar Malaysia Downstream oil and gas
• Oil and gas refinery

• Aluminium and glass products

Sarawak Corridor of Renewable Energy (SCORE) Resource-based products
• Steel products

Sabah Development Corridor (SDC) Resource-based products • Palm oil products

Source: Regional Corridor Authorities

and medical devices, and advanced logistic services, are expected to progress further. These industries
would also benefit from the modest growth in the global economy. This sustained investment will
enable the manufacturing and services sectors to move up higher on the value chain and ensure that
Malaysia’s exports remain globally competitive.

ANNUAL REPORT 2015

31
5
 Moderate Growth in Major Economic Sectors
ECONOMIC DEVELOPMENTS IN 2015

On the supply side, all major economic sectors registered a more moderate pace of growth in 2015,
attributable mainly to the slower domestic demand. However, growth in external demand, particularly from
the advanced economies, had benefited the export-oriented manufacturing industries and trade-related
services sub-sectors.

The services sector expanded at a more moderate Chart 1

pace of 5.1% in 2015 (2014: 6.5%). Growth
was weighed down by a moderation in the Real GDP by Economic Activity
consumption-related sub-sectors and a contraction Contribution to growth (percentage points)

in the finance and insurance sub-sector. Growth in 6

the consumption-related sub-sectors, particularly the

5
retail and motor vehicles segments, moderated in
line with the slower growth in household spending. 4
The finance and insurance sub-sector registered a
small contraction, due mainly to lower fee-based 3
income caused mainly by the weaker capital market
activity; and lower insurance premium growth 2

during the year. In contrast, the information and

communication sub-sector remained robust, 1

driven by strong demand for data communication

0
services. Growth was further supported by better
performance of the wholesale segment and the -1
transportation & storage sub-sector, which benefited 2011 2012 2013 2014 2015p

from the improvement in trade-related activity. Services Manufacturing Agriculture

Mining and quarrying Construction

The manufacturing sector expanded by 4.9% in
2015 (2014: 6.2%), attributable mainly to the p Preliminary

continued strength of the export-oriented industries. Source: Department of Statistics, Malaysia

The performance of the export-oriented industries

was primarily driven by strong production growth
in the E&E cluster, particularly in the consumer-based electrical segment and selected semiconductor
components. Growth was further supported by the primary-related cluster due mainly to sustained
regional demand for chemical products. The domestic-oriented industries, however, moderated mainly as
a result of slower growth in the consumer-related cluster.

The construction sector grew at a moderate pace in 2015 (8.2%; 2014: 11.8%), due mainly to the
slower growth in the residential sub-sector. Construction activity in the residential sub-sector was
affected by fewer property launches during the year. Nonetheless, growth in the civil engineering
sub-sector picked up, reflecting the progress of existing infrastructure projects as well as the
commencement of a large petrochemical project in Johor. Growth in the construction sector was also
supported by the non-residential sub-sector, which was underpinned by projects in both the industrial
and commercial property segments.

In the agriculture sector, growth moderated to 1.0% (2014: 2.1%) due to lower crude palm oil (CPO)
ANNUAL REPORT 2015

output following unfavourable weather conditions. This includes excessive rains in the first quarter
of 2015, causing floods in the east coast of Peninsular Malaysia, and the strong haze and El Nino
weather phenomenon in the second half of the year, which led to lower yields.

The mining sector recorded a higher growth of 4.7% (2014: 3.3%) as a result of higher production
of crude oil (654,200 barrels per day, the highest since 2010). This was driven by new output from
the large Gumusut Kakap deepwater oilfield at offshore Sabah, which commenced operations in the
fourth quarter of 2014.
32
 Assessing Demand-Supply Conditions in the Malaysian Property Market

ECONOMIC DEVELOPMENTS IN 2015

Introduction
The Malaysian property market is characterised by unevenness across its sub-segments in recent times, with
demand outstripping supply in the housing market, while the office and retail markets are experiencing
oversupply. The rapid increase in house prices, particularly in the major urban centres, has been attributable
partly to a shortfall in supply. The shortage is particularly evident in the supply of affordable housing. This has
increasingly priced out more urban Malaysian households from the housing market. In contrast, the increase
in the construction of office buildings and retail malls, particularly in major cities, has raised the
potential of overbuilding of commercial properties that could adversely impact the real estate market.
This article identifies the current demand-supply dynamics and the outlook in three property segments
in Malaysia – housing, office and retail, with a focus on the key states1 (Kuala Lumpur, Selangor, Johor
and Pulau Pinang) and seeks to highlight lessons from the experiences of other countries.

Shortage of supply in the affordable housing market

Since 2005, Malaysia’s housing stock has increased by 35%. Despite this substantial growth, the shortage
of housing supply at the national level has persisted. The gap between the housing stock and the number
of households widened to 2.5 million units in 2015 from 2.1 million units in 20052 (Chart 1). The worsening
shortfall in housing supply reflected the mismatch between the pace of growth in the supply of new
houses and the net increase in the number of households3, particularly in the past five years. Between 2005
and 2008, the number of new houses completed averaged 166,876 units annually, while the number of
households increased by about 117,250, implying a surplus supply of housing units of about 49,626 units
per year. Over the past five years, however, the annual completion of houses has declined considerably
to 80,089 units, far below the 166,000 average net increase in the number of households annually4. This
suggests an average shortage of 85,911 housing units per year between 2011 and 2015 (Chart 2).

Chart 1 Chart 2

Widening Housing Supply Shortfall over the …as New Housing Supply was Unable to Match
past Decade… Increase in Number of Households over the
past Five Years
Million '000
7.4
8 200
Number of households 167 166
5.7
150
6 117
4.9
3.7 100 80
4
Housing stock 50
50
2
0
2005-2008 avg. 2011-2015 avg.
0 -50
-86

-2 -100

-2.1 Housing supply gap* -2.5 Net increase in number of households Completion of new houses
-4
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Housing supply gap*

*Housing supply gap = Housing stock – Outstanding number of households OR Completion of new houses – Net increase in number of households
A negative figure suggests a shortfall in housing supply
Source: National Property Information Centre, CEIC and Bank Negara Malaysia estimates
ANNUAL REPORT 2015

1
Key states refer to the major employment centres in Malaysia.
2
The estimate assumes that all households are looking to own and are able to afford a house. Currently, there are about
two houses for every three households, suggesting some accommodation sharing among households, which underpins the
demand for house ownership.
3
This refers to the increase in the number of households at one point in time versus another point in time (i.e. new household
formation minus household dissolution through one or two heads of households joining into a single household and/or
through the death of a single-person head of household).
4
The lower house-building activity reflects partly lower property launches and sales by developers.
33
 The shortage in housing supply has been particularly acute in the affordable housing category. In
2014, half of Malaysian households earned a monthly income of RM4,585 and below. According to
ECONOMIC DEVELOPMENTS IN 2015

the ``Median Multiple´´ methodology developed by Demographia International and recommended by

the World Bank and the United Nations to evaluate urban housing markets, a house is considered
affordable if a household can finance it with less than three times its annual household income
(house price-to-income ratio of 3.0 and below). This suggests that houses priced up to RM165,060
are considered affordable to a median Malaysian household. However, only 21% of new housing
launches in Malaysia were priced below RM250,000 in 2014. In contrast, the data points to an
oversupply of higher-end properties5 priced above RM500,000. Although property launches in this
price category accounts for 36% of total new launches in Malaysia, these houses are only within the
reach of 5.4% of the population according to the same methodology6 (Chart 3). While affordable
housing initiatives by the Federal and State Governments, Syarikat Perumahan Negara Berhad (SPNB)
and Perumahan Rakyat 1Malaysia (PR1MA) have gathered some momentum, the current level of
house-building in the affordable housing segment has not been sufficient to meet the demand.
Nonetheless, a substantial amount of affordable housing units built by these initiatives are currently
under various stages of construction.

The imbalance between demand and supply, particularly in the affordable housing segment,
has contributed to a rapid increase in house prices7. This has compounded housing affordability
issues, particularly for the low- and middle-income population. Between 2009 and 2014,
average house prices in Malaysia rose by 7.9% in CAGR8 terms, exceeding the growth in average
household income of 7.3% over the same period. This contrasts sharply with the period in 2004
to 2007 when incomes were rising more than the growth of house prices (Chart 4). With an
uneven pace of growth between house prices and income, the affordability of houses across
the key states in Malaysia has progressively declined. Houses in Malaysia, on aggregate, were

Chart 3 Chart 4

Since 2010, New Launches in Malaysia Have Been House Prices Have Grown at a Faster Pace than
Increasingly Skewed towards Houses Priced Income Levels
above RM500,000 CAGR, %
'000 units 10
100
7.9
8 7.3
75
36%
6
50 9% 24%
19% 4
34% 43% 3.2
25 2.5
72%
42% 2
21%
0
2008 2011 2014 0
2004-2007 2009-2014
Less than RM250,000 RM250,000 - RM500,000
Average house prices Average household income
Above RM500,000
Source: National Property Information Centre and Department of Statistics, Malaysia
Source: National Property Information Centre Household Income and Basic Amenities Survey Reports
ANNUAL REPORT 2015

5
The oversupply of higher-end residential property is evident particularly in some areas in the key states and in selected
property segments (i.e. luxury condominiums).
6
Houses priced from RM540,000 are considered affordable for households earning at least RM15,000 a month (5.4% of
Malaysia’s total population in 2014).
7
Another contributing factor to the rapid increase in house prices over the past few years was the use of marketing tools
by developers and low real property gains tax (RPGT) rates. For example, the Developer Interest-Bearing Scheme (DIBS) not
only artificially inflated property prices, but also encouraged speculators to enter the property market with very small capital
outlays. In November 2013, DIBS was prohibited by Bank Negara Malaysia, along with the introduction of more punitive RPGT
rates by the Government.
8
The Compound Annual Growth Rate (CAGR) is the average annual growth rate over a specified period of time.
34
considered seriously unaffordable in 2014 (house price-to-income ratio of 4.4) according to the
``Median Multiple´´ methodology. In the key states, houses were severely unaffordable in Kuala

ECONOMIC DEVELOPMENTS IN 2015

Lumpur and Pulau Pinang, while those in Johor and Selangor were seriously unaffordable and
moderately unaffordable, respectively (Table 1).

The gap between actual house prices and the levels that are considered affordable to the
majority of Malaysian households requires comprehensive resolution. In 2014, the median house
price prevailing in the market was RM242,000, which was RM76,940 more than what would be
an affordable price for a median household9. Amongst the key states, the gap was most severe
in Kuala Lumpur at RM215,680 (Chart 5). In the major urban employment centres in these key
states, the situation is even more acute (Chart 6).

Table 1
House Prices are Severely Unaffordable in Kuala Lumpur and Pulau Pinang
House Price-to-Income Ratio
Location
2012 2014 House Price-to-Income
Rating
Ratio
Kuala Lumpur 4.9 5.4

Pulau Pinang 4.1 5.2 Severely Unaffordable 5.1 & Above

Johor 3.7 4.2 Seriously Unaffordable 4.1 to 5.0

Selangor 3.6 4.0 Moderately Unaffordable 3.1 to 4.0

Malaysia 4.0 4.4 Affordable 3.0 & Below

Source: Department of Statistics, Malaysia Household Income and Basic Amenities Survey Reports, National Property Information Centre and
12th Annual Demographia International Housing Affordability Survey 2016

Chart 5 Chart 6

House Prices in Key States are beyond the Reach …and Even More so in the Key Urban
of Most Malaysians in 2014… Employment Centres
RM '000 RM '000
700 700
560 600
600 600
490 470
500 500
335
400 400
242 300 295
260
300 300

200 200
274
165 224 187 169 274 233
100 165 274 224 187 169 100 198 173
173
0 0
Malaysia Kuala Lumpur Selangor Johor Pulau Pinang Kuala Lumpur City Petaling Johor Bahru Georgetown
(4,585) (7,620) (6,214) (5,197) (4,702) [7,620] [6,484] [5,497] [4,792]

Ideal median house prices Actual median house prices Ideal median house prices Actual city* median house prices
ANNUAL REPORT 2015

Note: Figures in parentheses ( ) refer to each state’s median household monthly income in 2014
Figures in square brackets [ ] refer to the state’s urban median household monthly income in 2014, used as a proxy to the median household income in each urban city

*The cities in each state are based upon the delineation of (i) District: Petaling (Shah Alam, Subang Jaya and Petaling Jaya) in Selangor and Johor Bahru in Johor;
(ii) Mukim: Kuala Lumpur Town Centre in Kuala Lumpur and Georgetown in Pulau Pinang

Source: Department of Statistics, Malaysia, National Property Information Centre and Bank Negara Malaysia estimates

9
Houses priced up to a maximum of three times the annual median household income is considered affordable (RM165,060).
35
 Information Box: Housing Loan Affordability
ECONOMIC DEVELOPMENTS IN 2015

The assessment of housing affordability can alternatively be measured by the households’ ability to
service mortgage loans using their income. The debt-to-income measure, which has been increasingly
adopted by a number of countries with high household debt levels, establishes an upper limit to
a household’s total loan in relation to its disposable income10. In this approach, we compare the
maximum loan11 amount that a bank can extend to a median household against the actual median
house prices. The results concur with our findings using the ``Median Multiple´´ approach.

A median household in Kuala Lumpur and Penang has insufficient capacity to service a mortgage
loan based on the median house prices in these areas (Chart A). In the key urban employment
centres, that capacity is even less (Chart B).

Chart A Chart B

House Prices in Kuala Lumpur and Penang are Even More Severe Situation in the Key Urban
Unaffordable to a Median Household Employment Centres
RM '000 RM '000

700 700
560 600
600 600
490
470
500 500

400 335
400
300 295
242 260
300 300

200 404 200

342 404 356
261 293 267 308 272
100 100

0 0
Malaysia Kuala Lumpur Selangor Johor Pulau Pinang Kuala Lumpur City Petaling Johor Bahru Georgetown
(4,585) (7,620) (6,214) (5,197) (4,702) [7,620] [6,484] [5,497] [4,792]

Max. affordables house prices Actual median house prices Max. affordables house prices Actual city* median house prices

Note: Figures in parentheses ( ) refer to each state’s median household monthly income in 2014
Figures in square brackets [ ] refer to the state’s urban median household monthly income in 2014, used as a proxy to the median household income in each urban city

* The cities in each state are based upon the delineation of (i) District: Petaling (Shah Alam, Subang Jaya and Petaling Jaya) in Selangor and Johor Bahru in Johor,
(ii) Mukim: Kuala Lumpur Town Centre in Kuala Lumpur and Georgetown in Pulau Pinang

Source: Department of Statistics, Malaysia, National Property Information Centre and Bank Negara Malaysia estimates

Moving forward, a substantial increase in the supply of affordable housing is necessary. An estimated
202,571 new houses12 will be required annually between 2016 and 2020 to match the estimated
growth in households during this period, approximately 2.5 times the number of houses built annually
ANNUAL REPORT 2015

10
Alfelt, Gustav, et.al. (2015). There is no general definition of how a debt-to-income limit should be designed and its effects
can vary depending on its construction. For example, a debt-to-income limit can be introduced to either target individual
households or the banks’ lending stock. Furthermore, the definition of debt and income may differ across countries.
11
The loan size is based on 30% housing debt service ratio* (using income net of statutory deductions), 35-year loan tenure,
housing loan-to-value ratio of 90% and lending rate of 5%.
12
The estimate reflects a continuation of historical trends in terms of household formation and the capacity of households to
exercise choice in owning a house. Net household growth is thus assumed to continue to expand at its long-term average
(between 2005 and 2015) of 2.6% annually between 2016 and 2020.
* Most young buyers tend to be indebted with existing debt obligations (i.e. car loan, outstanding credit card repayments),
implying a lesser amount of disposable income that can be allocated for a housing loan.
36
in the previous five years (Chart 7). The shrinking size of households13, combined with continued

2015
growth in incomes and population, as well as rapid urbanisation, are expected to remain as important

IN 2015
drivers of the overall demand for houses, especially in the major urban areas. Consistent with the

DEVELOPMENTS IN
underlying demand, especially in the major urban and employment centres, it is crucial to formulate a

ECONOMIC DEVELOPMENTS
holistic planning and implementation system to provide sufficient quality housing that is affordable for
the low- and middle-income households.

Chart 7

The Supply of New Houses Need to Increase by

about 200,000 Units Annually within these Five

ECONOMIC
Years to Match the Estimated Growth
in Households
'000
250
203 203
200
167 166
150
117
100 80

50

0
Avg. 2005-2008 Avg. 2011-2015e Avg. 2016f-2020f
Net increase in number of households Completion of new houses
e Estimate
f Forecast
Source: National Property Information Centre, CEIC and Bank Negara Malaysia
estimates

Overbuilding in the commercial property market

While the housing market has been confronted with the issue of supply shortage, there are risks of
oversupply in the office and retail space market, particularly in the major Malaysian cities.

Office segment
One of the measures of a commercial property’s health is the vacancy rate, or how much
commercial space is unused, where a higher rate commonly indicates that supply exceeds
demand. In 2015, the Klang Valley recorded a vacancy rate of 20.4% for its office space.
This stands in stark contrast to the regional average of 6.6% and the national level of 16.3%
(Chart 8). In tandem with the high level of vacancy rate in the Klang Valley, monthly rentals of
prime office space in Kuala Lumpur is the lowest amongst regional cities, at only USD2.60 per
square foot (Chart 9). Despite the low monthly rentals, some recently completed Grade A office
buildings in Kuala Lumpur have not achieved satisfactory occupancy rates. Savills Research, in its
May 2015 Property Market Overview Report, found that several Grade A office buildings which
were completed between 2011 and 2014 have only managed to record occupancy rates of
between 50% to 75%.

Over the next few years, the significant incoming supply of large projects could aggravate the
oversupply situation in the Klang Valley office segment. According to the 4Q 2015 Quarterly
Property Market Report by Jones Lang Wootton, a total of 63 new office buildings are scheduled to
2015
REPORT 2015

be completed in the Klang Valley over the next three years, where an average of 4.9 million square
feet of new office space will be added to the market each year. This is significantly higher than
ANNUAL REPORT

the historical average of 2.8 million square feet of new office space added to the market annually
between 2001 and 2015 (Chart 10).
ANNUAL

13
In 1970, there was an average of 5.5 people per household. By 2020, the average is projected to be four people per
household. Hence, the number of households will increase at a faster rate compared to population growth.
(Source: Khazanah Research Institute, Making Housing Affordable, 2015).
37
 Chart 8 Chart 9
ECONOMIC DEVELOPMENTS IN 2015

Vacancy Rate in Klang Valley is Substantially Higher …and Monthly Rental is the Lowest amongst
Compared to National and Regional Averages… Regional Cities

% USD/sqft, June 2015

30 20 19.8

25 16
Klang Valley 20.4
12 11.6
20 10.6
16.3 Regional average: 8.1
8.5 8.4
8
15
Malaysia 10.8 5.8
4.7 4.6 3.6 3.0 2.6
Other states 4
10
0
5
Regional average*: 6.6

Hong Kong

Beijing

Singapore

Shanghai

Seoul

Taipei

Ho Chi Minh City

Jakarta

Hanoi

Manila

Kuala Lumpur
0

-5

-10
1991 1995 1999 2003 2007 2011 2015

Note: *Regional average refers to simple average for Shanghai, Beijing,

Bangkok, Hong Kong and Singapore in 2Q 2015

Source: National Property Information Centre and Colliers International Source: Savills Research

Chart 10

Klang Valley Office Supply to Increase Significantly between 2016 and 2018
Mn sqft %
5.5 Avg. (1991-2000): 5.3 mn sqft 30

5.0 Avg.(2016f-2018f): 4.9 mn sqft

25
4.5 1998: 2001:
20.1% 25.3% 20
4.0 2015:
20.4% 15
3.5
10
3.0
1997: 5
2.5 Avg. (2001-2015): 2.8 mn sqft
5.1%
2.0 0
2016f

2017f

2018f
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

New supply* (LHS) Vacancy Rate (RHS)

f Forecast

*New supply in 2016-2018 does not include Tun Razak Exchange, Bukit Bintang City Centre and Bandar Malaysia

Source: National Property Information Centre, Jones Lang Wootton and Bank Negara Malaysia estimates

Retail segment
Signs of oversupply are also emerging in the retail segment in the major Malaysian urban areas, particularly
ANNUAL REPORT 2015

in Pulau Pinang, Johor and the Klang Valley. Although the vacancy rates in some of these areas have been
improving in recent years, the vacancy rates of between 12.4% in the Klang Valley to 28.2% in Pulau
Pinang remain relatively higher compared to other regional economies (Chart 11). The high vacancy rate is
symptomatic of a mismatch between the demand and supply for shopping malls in Malaysia’s major cities.
As an illustration, Johor Bahru, Pulau Pinang and the Klang Valley have amongst the lowest household
income and population levels compared to other regional cities (Chart 12). However, the prime retail space
per capita in these Malaysian cities is notably higher than in the more populous regional cities such as
Shanghai and Beijing, and also those with higher incomes, such as Singapore and Hong Kong (Chart 13).
38
 Chart 11

ECONOMIC DEVELOPMENTS IN 2015

Retail Vacancy Rates Have Moderated in Some Major Urban Areas in Malaysia, but They Remain
Relatively Higher than in Other Regional Cities
% %, 2015
45
30 28.2
40 25.2
Johor Penang
35 25
28.2
30 20
25
Malaysia 25.2 15
20 12.4
15 17.6
10 8.7
Klang Valley 7.2 Regional avg.*: 6.4
10
12.4 5
5 4.9 4.7
0 0

Pulau Pinang

Johor

Klang Valley

Shanghai

Singapore

Beijing

Bangkok
2001

2003

2005

2007

2009

2011

2013

2015
*Regional average refers to 2014 data

Source: National Property Information Centre Source: National Property Information Centre, Jones Lang LaSalle and Singapore
Urban Redevelopment Authority (URA)

Chart 12 Chart 13

Income and Population Levels of Malaysia’s Major …but Prime Retail Space per Capita are amongst
Urban Areas Trail that of Most Regional Cities… the Highest in Asia
Mean household income (2014), USD Sqft per capita, 2015
9000
Singapore 6
8000 5.5

7000 5 4.6
6000 3.9 3.9
4 3.7 3.6
5000 2 3 Regional avg.*: 3.2
Hong Kong 3 Shanghai
Beijing
4000 3
2.4
3000
Johor Bahru Klang Valley 2 1.6
2000
1
P. Pinang Bangkok 1
1000

0 0
0 5 10 15 20 25 Pulau Singapore Klang Bangkok Johor Hong Shanghai Beijing
Pinang Valley Bahru** Kong
Million persons

Note: 1 2013 data * Refers to simple average for Bangkok, Beijing, Hong Kong, Shanghai and Singapore
2
Median household income for economically active households ** Includes Mukim Bandar Johor Bahru, Plentong and Tebrau
3
Disposable income for urban households
Data for regional cities refer to 2Q 2015
Household income data (in local currency) for each city is converted using average
exchange rate in 2014 with the exception of Bangkok (2013)
Source: Jones Lang Wootton, Jones Lang LaSalle, Department of Statistics, Malaysia,
Source: Department of Statistics, Malaysia, Regional Authorities, Haver and Newsflows World Atlas and Bank Negara Malaysia estimates
ANNUAL REPORT 2015

Data sourced from the National Property Information Centre (NAPIC) shows that there are
currently 55 shopping malls under construction in Malaysia, with 35 of these in the Klang Valley,
Pulau Pinang and Johor. In 2016 to 2018, an additional 30.9 million square feet of retail space will be
completed in these locations, equivalent to about 40% of existing retail space. By 2018, prime retail space
per capita in the Klang Valley and Johor Bahru is projected to increase by about 43% and 119% respectively
from their already relatively high levels (Chart 14). The emergence of more new shopping malls is
likely to increase competition for tenants, resulting in higher vacancy rates, lower rentals and
increased risk of dilapidation.
39
 Chart 14
ECONOMIC DEVELOPMENTS IN 2015

Prime Retail Space per Capita to Increase Further

by 2018

Sqft per capita

10
8.1
8

5.9 5.7
5.5
6

3.9 3.7
4

0
Pulau Pinang Klang Valley Johor Bahru*

2015 2018f Regional average (2Q 2015)

Note: Population in Pulau Pinang, Klang Valley and Johor Bahru for 2018 is
extrapolated using the average population growth in Malaysia between
2011 and 2015

f Forecast
* Includes Mukim Bandar Johor Bahru, Plentong and Tebrau

Source: Jones Lang Wootton, Department of Statistics, Malaysia and

Bank Negara Malaysia estimates

Oversupply of commercial space may have potential spillover impact on other sectors in
the economy
The currently challenging economic conditions could pose additional risks to the demand for
commercial space. In the office segment, a prolonged period of low global oil prices would
dampen the demand for office space of the oil and gas sector. In the Klang Valley, the oil and
gas sector is the largest private sector office-occupier, filling up about 16% of total office space
(Jones Lang Wootton, 2015). In the retail segment, the ability of retailers to attract footfall and
consumer spending could become more challenging amid weaker consumer sentiments.

The implications of a significant rise in vacancy rates could extend beyond the commercial
property sector, with likely spillovers to other sectors of the economy (Chart 15). A sharp increase
in vacancy rates may result in tighter cash-flow conditions amongst developers, which are
typically owners of commercial properties. This could have adverse consequences for other sub-
sectors within the construction sector and other related industries14. Further weakness in these
related sectors could potentially affect employment prospects, impacting the ability of some
households to service their loans.

In several countries, the disorderly unravelling of commercial property booms had resulted in
considerable bank loan losses. In the early 1990s, Sweden, Finland, Norway and Japan experienced
ANNUAL REPORT 2015

an abrupt and severe unwinding of commercial property booms. This had resulted in severe spillovers
on other economic sectors in these economies, leading to a decline in economic activity. During the
2008/09 Global Financial Crisis, commercial property was also a major driver of loan losses in Australia,
France, Ireland and New Zealand, despite generally accounting for a much smaller share of banks’
loan books compared to residential property. This was attributable to a sharper pace of contraction in
commercial property prices compared to house prices (Matua, 2015).

14
These include production-related construction materials and construction-related services.
40
 Chart 15

ECONOMIC DEVELOPMENTS IN 2015

Impact of Commercial Space Oversupply may
Spill Over to Other Sectors
1

Developers

4 2
5
Households Construction
Banks sector

Other related
industries

Policy experiences in other countries

The demand and supply imbalances in both the housing and commercial property markets are not
unique to Malaysia. Many other countries have been confronted with similar issues. Their experiences
provide valuable lessons in managing the dynamics of demand and supply in the property sector.

Housing market
In Korea and Singapore, the establishment of a single entity focussed on affordable housing
matters resulted in an alleviation of the mismatch between housing demand and supply. The
entities in these countries, the Land and Housing Corporation in Korea, as well as the Housing
and Development Board (HDB) in Singapore, are responsible for spearheading, centralising
and coordinating national and state initiatives related to affordable housing. The consolidation
of the various affordable housing entities under one agency had not only allowed for more
effective resource planning in these countries, but had also lowered development costs through
economies of scale.

Singapore had also successfully reduced its overall construction costs with an extensive adoption
of the Industrialised Building Systems (IBS)15 in its public housing projects. The use of IBS in
about 80% of all the HDB buildings had resulted in labour cost savings of more than 45%
compared to conventional methods16. The construction period of HDB buildings had also been
significantly reduced, with improvement in the quality of buildings given lower labour intensity
and construction standardisation.

In other countries, the rental market is generally accorded equal priority in national housing policies,
serving as an important alternative to homeownership. This is evident particularly in countries with
unaffordable house price levels17 (Chart 16). In Switzerland, Germany and Australia, the vibrant private
rental markets have contributed towards ensuring sufficient supply of houses to meet the needs of
ANNUAL REPORT 2015

households with diverse income levels and preferences, as well as the shifting demographics. With
changing social preferences in a highly globalised world, renting offers households the flexibility and
mobility to move for career and education opportunities.

15
IBS is a construction process that utilises techniques, products, components or building systems that involve prefabricated
components and on-site installation.
16
Thanoon, Waleed., et al. (2003).
17
House price-to-income ratio of more than 3.0.
41
 Chart 16
ECONOMIC
ECONOMIC DEVELOPMENTS

Countries with Unaffordable House Prices Generally Have a Strong Focus on the Rental Market
2
House Price-to-Income (HPI) Ratio1 Renters (% of Households)
8 19.0 16.8 60 56
DEVELOPMENTS IN

16.7
7 49 48
50
HPI of >3 is considered Average of selected
6 5.6 economies: 37%
5.2 unaffordable 38 37
5.0 40 35
5
4.4 31 31 31
4 3.9 3.9 30
3.5 24
2.8
3
20
2 11
IN 2015

10
1
2015

0 0

US
Japan

Canada
Ireland
Germany

Australia
US

Hong Kong
Switzerland
Japan

Malaysia**
Canada

Ireland

New Zealand
Australia

Singapore***
Germany*

Malaysia
Hong Kong

Singapore
Switzerland

New Zealand

Note:
1
Data as at 3Q 2015, with the exception of Switzerland (2012) and Germany (2013)
2
2014 data, with the exception of Canada (2011), Japan, New Zealand, Singapore and Switzerland (2013)

* Median house price in Germany refers to the median price of single-family houses in Frankfurt, with a built-up of 150 square metres
** For Malaysia, the figure includes households living in quarters
***The high homeownership rate in Singapore reflects the dominance of public housing. About 80% of its population lives in Housing Development Board (HDB) units,
where 95% are owner occupiers (Phang, 2010)

Source:12th Annual Demographia International Housing Affordability Survey 2016, National Property Information Centre, Department of Statistics, Malaysia,
National Authorities, Global Property Guide and Trading Economics

Commercial property market

Timely and prudent measures could be undertaken to promote the sustainable development of the
commercial property sector. The implementation of large projects could be staggered, in tandem with the
prevailing and future demand for office and retail space.

In addition, the experience in lower Manhattan in New York City has highlighted the benefits of converting
old commercial buildings to facilitate a better utilisation of land within the city centre. Between 1995 and
2014, more than 17 million square feet of old commercial buildings were converted into a multitude of other
uses, including rental residential units, hotels and restaurants18.While the initial momentum of the conversion
was underpinned by the city’s financial incentive programmes19, conversions continued vigorously despite the
expiration of the incentives in 2006. These programmes had not only helped to revitalise the city, but also
supported the emergence of a residential community within the area. The local authority had also geared
its efforts towards reducing the vacancy rates of its office space by providing incentive programmes for
businesses to relocate to lower Manhattan20. Reflecting the success of these incentives, the occupancy rates
of office space had improved, with a more diverse tenant base, transitioning from its traditional pool of
financial, insurance and real estate companies towards those in the media, technology, non-profit and
education sectors (CBRE, 2014). Commercial to residential property conversions were also successfully
implemented in some areas in London, Toronto, Tokyo and Sydney. In these areas, the rising demand for
environmentally-friendly buildings, urban policy, office obsolescence and a tight housing market were the
most important drivers of the conversion exercises (Remøy and Wilkinson, 2015).
ANNUAL
ANNUAL REPORT

18
CBRE Global Research and Consulting (2014).
19
The redevelopments were initially aided by financial incentive programmes. The 421G programme, which was introduced in
1995, provided tax incentives to encourage developers to convert office buildings constructed before 1975 into residential
REPORT 2015

properties. While some of these residential projects were targeted to the affluent community, the Lower Manhattan
Development Corporation had also allocated over USD50 million to develop affordable housing in the area. This programme
was stopped in 2006, as it had effectively revitalised lower Manhattan (Mechanic, 2012).
2015

20
These programmes include the Commercial Rent Tax Special Reduction, the Lower Manhattan Relocation Employment
Assistance Programme (LM-REAP) and the Lower Manhattan Energy Programme (LMEP).
42
Conclusion
Malaysia is experiencing an undersupply of affordable houses particularly in the major urban areas, but

ECONOMIC DEVELOPMENTS IN 2015

an oversupply of office and retail space in several major cities and towns. Both of these trends, if left
unchecked, may lead to deeper imbalances in the property market, with negative spillovers to other parts of
the economy. A comprehensive and carefully-designed national planning policy is needed for the property
market and will help to support the Government’s aim of delivering more housing, whilst also managing the
oversupply of commercial properties. The conversion and repurposing of underutilised surplus commercial
space should be a part of that overall strategy, with the cost being borne by property owners rather than
taxpayers.

In the housing market, ensuring that the low- and middle-income households have access to quality
affordable housing involves not only commitment from the Government, but also the support of the private
sector. The experiences of other countries illustrate that constructing more public housing forms only a part
of the solution. There is a need for the consolidation of multiple providers of affordable housing across
the state and national levels and an equal focus on the rental market. In addition, macroprudential and
fiscal measures that are in place, such as the loan-to-value (LTV) measures, Responsible Lending Guideline,
higher real property gains taxes (RPGT) and the prohibition of Developer Interest-Bearing Scheme (DIBS),
remain instrumental towards maintaining the long-term sustainability of the property market and mitigating
potential risks to financial stability.

References
Alfelt, Gustav, Björn Lagerwall and Dilan Ölcer. (2015). `An analysis of the debt-to-income limit as a
policy measure´. Sveriges Riksbank Economic Commentaries, No. 8.

CBRE Global Research and Consulting. (2014). `Downtown Manhattan: A market transformed´.
Research Note, January 2014.

Jones Lang Wootton. (2015). The Quarterly Subscribers’ Forum, Kuala Lumpur.

Khazanah Research Institute. (2015). `Making Housing Affordable´. Kuala Lumpur: Khazanah
Research Institute.

Kragh-Sørensen, Kasper and Haakon Selheim. (2014). `What do banks lose money on during crises?´
Norges Bank Staff Memo, No.3.

Matua, Te. (2015). `Commercial property and financial stability´. Reserve Bank of New Zealand Bulletin,
78 (2).

Mechanic, Marc. (2012). `The future of lower Manhattan´. Lehigh University, Pennsylvania.

Phang, Sock-Yong. (2010). `Lessons from Singapore’s Central Provident Fund´. 4th Global Conference
on Housing Finance in Emerging Markets, World Bank, Washington DC.

Remøy, Hilde and Sara Wilkinson. (2015). `Adaptive reuse of offices´. 22nd Annual European Real
Estate Society (ERES) Conference, Istanbul.
ANNUAL REPORT 2015

Thanoon, Waleed, Lee Wah Peng, Mohd Razali Abdul Kadir, Mohd Saleh Jaafar and Mohd Sapuan
Salit. (2003). `The essential characteristics of industrialised building systems´. International Conference
on Industrialised Building Systems, Kuala Lumpur.
43
 fixed assets by both the public corporations and Table 1.6
the Federal Government. As a result, public
Balance of Payments1
ECONOMIC DEVELOPMENTS IN 2015

investment improved during the year, but

remained in contraction (-1.0%; 2014: -4.7%). 2013 2014 2015p
Item (Net)
The bulk of development expenditure by the RM billion
Federal Government was channelled into the Goods 96.6 113.4 108.9
economic sectors to enhance the productive Services -9.6 -11.2 -20.5
capacity and competitiveness of the economy. Primary Income -34.0 -37.3 -32.2
Of significance, the key projects revolved Secondary Income -17.5 -17.6 -22.2
around developing transportation infrastructure Current account balance 35.5 47.3 34.0
(such as construction and upgrading of roads % of GNI 3.6 4.4 3.0
and railways) and upgrading of facilities to Capital account 0.0 0.3 -1.2
spur trade and industry, particularly in the Financial account -20.2 -81.6 -53.3
regional economic corridors. Capital spending Direct investment -6.3 -18.5 0.2
in the social services sector was also prioritised Portfolio investment -3.0 -38.5 -28.2
to enhance and improve essential services, Financial derivatives -0.3 -1.0 -0.5
including better education and housing Other investment -10.7 -23.6 -24.9
services. Despite the challenging environment, Errors and omissions (E&O)2 -0.6 -2.5 24.1
public corporations continued to undertake % of total trade 0.0 -0.2 1.6
capital spending to expand and diversify their of which:
business activities, particularly in the oil and Foreign exchange revaluation
gain (+) or loss (-) 18.6 7.6 57.3
gas, transportation and utilities sub-sectors,
thus providing support to the overall economy. Overall balance 14.6 -36.5 3.7
Bank Negara Malaysia
international reserves, net 441.9 405.3 409.1
EXTERNAL SECTOR USD billion equivalent 134.9 115.9 95.3

In 2015, Malaysia’s external sector remained 1

The data is compiled in accordance with the Sixth Edition of Balance
of Payments and International Investment Position Manual (BPM6) by
resilient despite the environment of greater the International Monetary Fund (IMF)
uncertainty in the global economy. The current 2
Includes unrealised foreign exchange revaluation gains/losses on
account surplus narrowed amid larger deficits in international reserves
p Preliminary
the services and secondary income accounts, but Note: Numbers may not necessarily add up due to rounding
was supported by a still sizeable trade surplus. The Source: Department of Statistics, Malaysia and Bank Negara Malaysia
level of international reserves remained sufficient to
meet short-term external obligations, thus providing
Slower regional growth also contributed to
ample buffers against external vulnerabilities.
lower exports of petroleum products. Given the
diversity of Malaysia’s exports, the weak export
performance of commodities was partially
Amidst a challenging global mitigated by higher exports of E&E and non-
environment, Malaysia’s external resource based manufactured products. Of
significance, E&E demand from the US and EU
position remained resilient in 2015 was strong, mainly for semiconductors for green
technology and data processing equipments.
Exports of semiconductors were partially lifted
Broadly, the external trade exhibited diverging by the acceleration of solar-related demand in
trends between the first half and the second the US as the solar tax incentive was initially set
half of 2015. In the first half of the year, further to expire in late 2016. Continued demand for
ANNUAL REPORT 2015

declines in commodity prices and sluggish machinery, appliances and parts, manufacture of
demand for commodities and commodity- metal as well as iron and steel products, from both
related manufactured products resulted in a advanced and regional countries also contributed
contraction of 3.1% in Malaysia’s gross exports. positively to overall export performance.
In particular, LNG demand from Japan was
weak due to warmer-than-average weather, Gross imports also declined in the first half
while rubber demand from China was affected of the year (1H 2015: -2.6%). Imports of
by the slowdown in domestic consumption. intermediate goods, which accounted for 58.2%
44
of gross imports, were weighed down mainly by the export destination for Malaysia, exports to ASEAN
sharp decline in fuel-related inputs following lower economies, which accounted for about one-third of

ECONOMIC DEVELOPMENTS IN 2015

demand for resource-based manufactured exports. Malaysia’s total exports, provided further resilience
Imports of capital goods, particularly machinery and against weak global demand.
equipment, were lower in tandem with the more
moderate pace of investment activity in the Malaysian Import growth was also relatively higher in the
economy. Consumption imports, however, registered second half of the year (2H 2015: 3.2%), supported
strong growth due largely to inelastic demand for by higher imports of capital goods, particularly
imported food and beverages, and consumer goods electrical machinery, telecommunication equipment,
such as medicines, cosmetic and personal care, as and rail coaches. Consumption imports remained
well as clothing and textiles. strong, particularly for food and beverages, garments
and footwear. Imports for re-export, particularly
In the second half of the year, export growth metal products, also picked up during this period.
rebounded to 6.8%, due to higher demand for Intermediate imports, however, were affected by
manufactured products and commodities, and the lower imports of industrial supplies, particularly nickel,
positive valuation effect from the ringgit depreciation. copper and stainless steel, as manufacturers drew
The strong growth of E&E exports was primarily down their inventories of these inputs.
supported by higher demand from the US and
Singapore for semiconductor devices and electrical Chart 1.4
machinery, in line with the launch of a series of
Export Performance
new electronic products. The continued growth
Annual change (%), contribution to growth (percentage points)
of the regional economies and strong re-export
20
activity supported the performance of non-E&E
manufactured exports and commodities such as 15
petroleum products, timber and timber-related
10
products, palm oil and palm-related products,
as well as rubber and rubber products. Despite 5
an improvement in demand, commodity exports
continued to decline due to falling prices. While 0

the advanced economies remained an important -5

Table 1.7 -10

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
External Trade 2013 2014 2015

Share 2013 2014 2015p E&E Non E&E Commodities Exports (annual change, %)
2015
(%) Annual change (%) Source: Department of Statistics, Malaysia
Gross exports 100.0 2.5 6.3 1.9
Manufactures 80.2 5.1 7.1 6.5 Chart 1.5
Electronics and
electrical (E&E) 35.6 2.5 8.1 8.5 Import Performance
Non-E&E 44.6 7.1 6.4 5.0 Annual change (%), contribution to growth (percentage points)
15
Commodities 19.2 -4.6 3.9 -13.4
10
Minerals 10.6 3.7 6.2 -20.6
5
Agriculture 8.6 -14.4 0.5 -2.7
0
Gross imports 100.0 6.9 5.3 0.4
ANNUAL REPORT 2015

-5
Intermediate goods 58.2 4.3 7.6 -2.3
-10
Capital goods 14.0 2.2 -2.4 0.0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Consumption goods 9.1 8.8 5.7 24.1 2013 2014 2015

Capital goods Intermediate goods Consumption goods

Trade balance (RM billion) - 71.3 82.5 94.6
Re-exports & Imports (annual change, %)
p Preliminary dual-use goods

Source: Department of Statistics, Malaysia and Bank Negara Malaysia Source: Department of Statistics, Malaysia
45
 For the year 2015, growth of exports and imports savings-investment (S-I) surplus during the
moderated to 1.9% and 0.4%, respectively year. Gross national savings (GNS) grew by 0.1%
ECONOMIC DEVELOPMENTS IN 2015

(2014: 6.3% and 5.3%, respectively). As the (2014: 8.1%) to 28.8% of GNI (2014: 30.3%),
slowdown in imports outpaced the moderation in while total gross capital formation expanded
exports, the trade surplus was higher at RM94.6 at a faster pace of 4.9% (2014: 4.7%). The
billion (2014: RM82.5 billion). The sizeable trade slower growth in GNS was attributable to both a
surplus emanated from both manufactured and bigger decline in public savings (-28.7%; 2014:
commodity products. Commodities continued -5.9%) and a more moderate growth in private
to contribute to the trade surplus, as lower sector savings (11.2%: 2014: 14.7%). This was
commodity exports were also accompanied due mainly to the lower operating surplus of
by a decline in commodity-related imports, companies in the commodity-related sectors. On
while exports of CPO and LNG have minimal the other hand, public gross capital formation
corresponding imports. turned around to register a positive growth of
1.9% during the year (2014: -3.2%). Together
The services account registered a larger deficit with the decline in public sector savings, this
due mainly to lower net receipts from the travel resulted in a widening of the public S-I deficit to
account and higher net payments for other -RM39.7 billion (2014: -RM13.1 billion). Private
imported services for trade and investment-related gross capital formation, however, expanded at a
activity. Tourism receipts fell in 2015 as tourist slower pace of 7.5% (2014: 10.1%) arising from
arrivals into Malaysia were lower, while there was
an increase in outbound travel. During the year, Chart 1.7
there was a larger deficit in the secondary income
account due to larger outward remittances by Current Account Balance
foreign workers. The deficit in the primary income RM billion % of GNI

account narrowed as the decline in payments 200 20

accrued to foreign direct investors in Malaysia had 160 16

more than offset the decline in income receipts 120 12
accrued to Malaysian companies investing abroad.
80 8

40 4
With the trade surplus exceeding the deficits in
the services and income accounts, the current 0 0

account balance remained in surplus, although -40 -4

the amount was smaller at RM34.0 billion or -80 -8
3.0% of GNI (2014: RM47.3 billion, 4.4% 2008 2009 2010 2011 2012 2013 2014 2015

of GNI). This was reflected in the narrower Goods Services

Primary income Secondary income

Chart 1.6
Current account balance, % of GNI (RHS)
Trade Balance by Commodities
Source: Department of Statistics, Malaysia
RM billion
150

100 Chart 1.8

Gross National Savings and Savings-Investment Gap

50
RM billion
350
0 Gross National Savings
300
ANNUAL REPORT 2015

250
-50 Gross Capital Formation
2010 2011 2012 2013 2014 2015 Private
200
Savings
Manufactures Petroleum products 150
Public Savings
100
Crude petroleum Liquefied natural gas (LNG)
50
Savings-Investment Gap
Palm oil Others 0
2010 2011 2012 2013 2014 2015p
Trade balance p Preliminary

Source: Department of Statistics, Malaysia Source: Department of Statistics, Malaysia and Ministry of Finance, Malaysia
46
 ASEAN has Provided Positive Support to Malaysia’s Trade, Despite Weak Global Demand

ECONOMIC DEVELOPMENTS IN 2015

Steady increase in exports to ASEAN over the ..driven by stronger expansion into emerging
past decade.. ASEAN markets..

Chart 1 Chart 2

Malaysia's Exports by Trading Partners % Share of Total Exports to ASEAN

47.6 2000 2015
G3
29.0
26.5 Vietnam 1.8 7.9
ASEAN
28.1
Myanmar 0.9 1.4
PR 3.1
China 13.0 Cambodia 0.3 0.4
Rest
of the 22.8
29.8 Lao PDR 0.01 0.03
world
0 10 20 30 40 50
% share of total gross exports ASEAN-6
97.0 90.2
(excluding Malaysia)
2015 2000

..and diversification into higher value-added Malaysia’s imports from ASEAN were also higher in
products, and increasingly for final regional demand the recent period..

Chart 3 Chart 4

Malaysia's Exports to ASEAN by Products Malaysia's Imports by Trading Partners

% share of total exports to ASEAN 48.7
G3
100 26.0
Commodities
24.1
80 ASEAN
26.6
Non E&E PR
60 4.0
(e.g. Petroleum and chemical products, China
processed food, transport equipment) 18.9
Rest
40 of the 23.3
world 28.5
20 0 10 20 30 40 50
E&E
% share of total gross imports
0
2000 2003 2006 2009 2012 2015 2015 2000

..and increasingly catered to Malaysia’s final Continued positive support from ASEAN despite
demand weak global demand following the 2008 crisis

Chart 5 Chart 6

Malaysia's Imports from ASEAN by Type of Goods Malaysia's Total Trade with Selected Asian
% Trading Partners
100 Annual change (%),
20.2 contribution to growth (percentage points)
28.2
80 10
8
60 6
4
40 79.8 71.8 2
0
20
ANNUAL REPORT 2015

-2
2011 2012 2013 2014 2015
0
2000 2015 ASEAN PR China Chinese Taipei Korea

Intermediate goods Final demand Hong Kong Total trade (annual change, %)

Note: G3 refers to the United States, Euro and Japan

ASEAN-6 refers to Brunei Darussalam, Indonesia, Malaysia, Philippines, Thailand and Singapore

Source: Department of Statistics, Malaysia and Bank Negara Malaysia estimates

47
 the moderation in domestic demand and the reflected foreign direct investment (FDI) which
more cautious business sentiments. As private amounted to RM39.5 billion, mainly in the form
ECONOMIC DEVELOPMENTS IN 2015

savings increased at a faster pace than capital of equity capital injections and drawdown of
formation, the private sector S-I gap registered intercompany loans, while earnings retained
a larger surplus of RM73.7 billion in 2015 for the purpose of reinvestments were
(2014: RM60.4 billion). sustained. The bulk of the FDI inflows went
into the manufacturing sector, primarily in the
Significant two-way capital flows E&E industries and for the acquisition of assets
Against the backdrop of continued uncertainty in the petrochemical-related industries. Despite
in global financial markets, the external sector lower crude oil prices, FDI into the mining
experienced significant two-way cross-border capital sector remained sizeable, reflecting mainly
flows for most of 2015. There were significant the injection of working capital to support
outflows of foreign portfolio funds during the year. on-going upstream exploration and extraction
Conversely, Malaysia continued to receive a steady activities in oil and gas fields located offshore
inflow of foreign direct investments. Malaysian from Sabah and Sarawak. The remainder of FDI
companies and resident investors also continued comprised mainly investment in the services
to expand their international presence and acquire sector, particularly in the finance and insurance
portfolio assets abroad, albeit at a slower pace. The and information and communication sub-
other investments account recorded a higher net sectors. In terms of source countries, these FDI
outflow due mainly to higher outflows by the private flows originated mostly from the advanced
sector. Overall, the financial account recorded a net economies, particularly Japan, the United States
outflow of RM53.3 billion (2014: net outflows of and Singapore.
RM81.6 billion).
On the assets side, outward direct investment
Despite greater headwinds to the global registered a lower net outflow of RM37.4 billion, or
economy, Malaysia remained a competitive 3.3% of GNI (2014: net outflow of RM53.1 billion
destination for foreign entities and or 5.0% of GNI). The lower outflows primarily
multinational corporations to invest in and reflected a moderation in direct investment
expand their productive capacity. On the abroad (DIA) by Malaysian companies which
liabilities side, inward direct investment registered amounted to RM39.3 billion during the year.
a net inflow of RM37.6 billion, equivalent to 3.3% The moderation in DIA was attributed mainly
of GNI (2014: net inflow of RM34.6 billion, or to lower injections of equity capital amid
3.3% of GNI). A large proportion of the inflow continued extension of inter-company loans to

Chart 1.9 Chart 1.10

Net Foreign Direct Investment by Sectors1 Net Direct Investment Abroad by Sectors1
Others2 Others2
Non-financial services 2.8% 10.5%
8.2%
-
Financial services Mining
Non-financial services
11.4% 32.8%
13.3%

2015p 2015p
RM39.5 billion RM39.3 billion

Mining
62.2%
ANNUAL REPORT 2015

Financial services
14.0%

Manufacturing
44.8%

1
Foreign direct investment as defined according to the 5th Edition of the Balance 1
Direct investment abroad as defined according to the 5th Edition of the Balance
of Payments Manual (BPM5) by the International Monetary Fund (IMF) of Payments Manual (BPM5) by the International Monetary Fund (IMF)
2
Refers to agriculture and construction sectors 2
Refers to agriculture, construction and manufacturing sectors
p Preliminary p Preliminary

Source: Department of Statistics, Malaysia Source: Department of Statistics, Malaysia

48
 Malaysia-ASEAN Investment Flows Continue

ECONOMIC DEVELOPMENTS IN 2015

FDI flows from ASEAN accounted for about a Malaysia’s DIA flows to ASEAN has been
quarter of total FDI inflows into Malaysia moderating in recent years

Chart 1 Chart 2

Foreign Direct Investment1 in Malaysia Direct Investment Abroad2 by Malaysian Companies

RM billion RM billion
40 60
35 50
30
25 40
20 30
15 20
10
5 10
- -
(5) 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015

FDI from ROW FDI from ASEAN DIA to ROW DIA to ASEAN

FDI from ASEAN is mostly undertaken by DIA to ASEAN is more diversified, mainly to
subsidiaries of MNCs located in Singapore Singapore, Indonesia and Thailand

Chart 3 Chart 4

ASEAN Direct Investment Position in Malaysia Malaysia's Direct Investment Position in ASEAN
by Country by Country
RM billion Rest of ASEAN RM billion Rest of ASEAN
2.8% Singapore 10.5% Singapore
600 97.2% 700 48.2%
507.6 588.4 Thailand
500 600
21.2% 9.1%
500 29.6%
400
ASEAN FDI as at 400 DIA to ASEAN
300 255.0 4Q 2015p: as at 4Q 2015p:
300
200 18.1% RM107.7 billion 231.8 RM174.1 billion
200 32.7%
(21.2% of (29.6% of
100 100
FDI stock) DIA stock)
0 0
2008 4Q 2015p Indonesia
2008 4Q 2015p 32.3%
FDI from ROW FDI from ASEAN DIA to ROW DIA to ASEAN

FDI from ASEAN is channeled mainly into Bulk of DIA to ASEAN is in the services sector,
manufacturing and financial services particularly financial services

Chart 5 Chart 6

ASEAN Direct Investment Position in Malaysia Malaysia's Direct Investment Position in ASEAN
by Sector1 by Sector2
Non-financial Others Agriculture
3
Mining
services 1.5% Others4
7.3% 11.5%
13.5% 16.3%
Manufacturing
7.3%
Financial ASEAN FDI as at Non-financial DIA to ASEAN
services 4Q 2015p: services as at 4Q 2015p:
22.5% RM107.7 billion 16.6% RM174.1 billion
Manufacturing
55.2% Financial
services
48.2%
ANNUAL REPORT 2015

Note: ROW refers to rest of the world

1
Foreign Direct Investment as defined according to the 5th Edition of the Balance of Payments Manual (BPM5) by the International Monetary Fund (IMF)
2
Direct Investment Abroad as defined according to the 5th Edition of the Balance of Payments Manual (BPM5) by the International Monetary Fund (IMF)
3
Refers to construction and mining sectors
4
Refers to agriculture and construction sectors

p Preliminary
Source: Department of Statistics, Malaysia
49
 subsidiaries abroad. The bulk of DIA continued portfolio assets, resulting in net outflows
to be channelled into the mining sector. These amounting to RM29.1 billion during the first three
ECONOMIC DEVELOPMENTS IN 2015

investments reflected mainly the extension of quarters of the year.

long-term loans by the national oil company to
an affiliated company to facilitate the strategic During the period, the liquidation of equities
acquisition of oil and gas-related assets in by non-residents resulted in a decline in foreign
Western Asia, along with continued investments participation to a 23.0% share of total equity market
in production activities in Central Asia. DIA in the capitalisation in September 2015. There was a small
services sector was also sizeable, particularly for net inflow into debt securities in the first half of the
the continued expansion of finance and insurance year, as the redemption of Bank Negara Monetary
and information and communication operations in Notes (BNMNs) upon maturity were mostly offset
the Asian region. by purchases of Malaysian Government Securities
(MGS) and the issuances of offshore debt securities
Short-term capital flow movements continued by a public corporation in the oil and gas sector as
to be adversely impacted by the global financial well as the issuance of the 10-year and 30-year sukuk
markets conditions, which had been volatile by the Malaysian Government. In the third quarter,
since the third quarter of 2014. For non-resident however, debt securities recorded a large outflow,
portfolio investments, there was a significant attributed mainly to the maturing of some MGS
degree of volatility throughout the year, as and several foreign currency denominated corporate
uncertainties over the timing and pace of bonds issued by the public corporations. As a
monetary policy normalisation in the US led result, non-resident holdings fell to 21.5% of total
to a significant rebalancing of exposures by outstanding public debt securities in September
international investors, resulting in broad-based 2015. However, investor sentiment improved
outflows from emerging market economies, slightly towards the end of the year, as the Fed’s
including Malaysia. A significant amount of the decision to raise interest rates removed some
volatility was also related to the building-up and uncertainty from the global financial markets. As
unwinding of speculative positions in the domestic such, there was a net inflow of portfolio funds in
and off-shore markets. Declining commodity the fourth quarter, mainly into purchases of MGS.
prices and slower growth in EMEs also proved to For the year as a whole, portfolio investments by
be a trigger for outflows. Global risk aversion was non-residents registered a net outflow of RM19.0
further exacerbated by periodic bouts of intense billion (2014: net outflow of RM10.4 billion). As at
volatility, triggered by concerns over the Greek end-2015, foreign participation in the equity market
debt crisis in July and the overreaction towards PR stood at 22.3%, while non-resident holdings of
China’s stock market correction in August. As a overall public debt instruments stood at 22.1%
consequence of these developments, non-resident (end-2014: 24.1% and 23.0% respectively).
investors pared down their holdings of Malaysian
Net outflows of portfolio investment by
Chart 1.11 residents moderated to RM9.2 billion during the
year (2014: net outflow of RM28.1 billion). These
Portfolio Investments investments mostly represented the diversification
RM billion strategy of domestic institutional investors, fund
100 managers and financial institutions to acquire
80 financial assets abroad in order to enhance returns
60 and provide a steady dividend stream to their
40 members and shareholders. At the same time, there
20 were also some redemptions of offshore foreign
0 currency debt securities holdings by the domestic
ANNUAL REPORT 2015

-20 financial institutions and corporates, particularly in

-40 the second half of the year. Collectively, resident
-60
2009 2010 2011 2012 2013 2014 2015p
and non-resident portfolio investment recorded a
net outflow of RM28.2 billion in 2015 (2014: net
Non-resident Resident Net portfolio investment
outflow of RM38.5 billion).
p Preliminary

Source: Department of Statistics, Malaysia The other investment account registered higher
net outflows of RM24.9 billion for the year as a
50
whole (2014: net outflows of RM23.6 billion), and portfolio investment abroad in 2015. These
due mainly to net outflows in the banking and outflows have more than offset the current

ECONOMIC DEVELOPMENTS IN 2015

non-bank private sector (2015: RM23.0 billion; account surplus and sustained inflows of foreign
2014: RM21.6 billion net outflows). In the direct investment during the year.
banking sector, the net outflows were caused
mainly by Malaysian banks extending loans to The progressive liberalisation of foreign exchange
foreign financial institutions abroad. At the same administration rules over the years has promoted
time, maturing deposits of non-resident financial greater two-way capital flows and has contributed
institutions with the domestic banking system, to the deepening of the domestic financial
more than offset the amount of maturing deposits markets. This has also resulted in a greater
held by Malaysian banks with foreign financial decentralisation of international reserves, as
institutions abroad. These interbank transactions, reflected in the increasing acquisition of assets
which varied in both magnitude and direction abroad by Malaysian entities. As at 31 December
every quarter, underscored the strategies of 2015, the international reserves accounted for
individual banking institutions in managing their about 25% of Malaysia’s total external assets,
own foreign exchange liquidity exposures. It also with the remaining 75% owned by banks and
reflects the growing regional presence of domestic corporations. The availability of external assets
banks. Net outflows recorded by the non-bank enables these entities to meet their external
private sector moderated, reflecting mainly the debt obligations without creating a claim on
lower net extension of trade credits by Malaysian the international reserves. The wide range of
exporters to their trading partners in line with monetary policy instruments, and the exchange
the slower growth in exports. The public sector rate flexibility, has also enabled the economy
recorded net outflows of RM1.9 billion (2014: to reduce its reliance on the Bank’s international
net outflows of RM2 billion) as the repayment reserves in managing external pressures.
of external borrowings had more than offset the
drawdown of new loans, particularly by the At as 29 February 2016, the reserves were at
public corporations. RM410.5 billion (equivalent to USD95.6 billion).
The international reserves remain ample to
In 2015, the overall balance of payments facilitate international transactions and are
registered a surplus of RM3.7 billion (2014: sufficient to finance 8.3 months of retained
deficit of RM36.5 billion). Errors and Omissions imports and are 1.2 times the short-term
(E&O) amounted to +RM24.1 billion or +1.6% external debt.
of total trade, mostly reflecting foreign exchange
revaluation gains on international reserves. Manageable external debt
Excluding revaluation gains, the E&O stood at Malaysia’s external debt stood at RM833.7 billion,
-RM33.2 billion or -2.3% of total trade. equivalent to USD192.2 billion or 72.1% of GDP
as at end-2015 (end-2014: RM747.5 billion,
The international reserves of Bank Negara equivalent to USD211.8 billion or 67.5% of GDP).
Malaysia amounted to RM409.1 billion (equivalent The external debt profile remains healthy as more
to USD95.3 billion) as at end-2015 compared to than half was of medium- to long-term tenure
RM405.3 billion (equivalent to USD115.9 billion) (57.8%). By currency, about 36% of the external
as at end-2014. On account of the quarterly debt is denominated in ringgit, mainly in the
adjustment for foreign exchange revaluation form of non-resident holdings of domestic debt
changes, the reserves level in ringgit terms securities and deposits.
had increased due to the weakening of ringgit
against most currencies, especially during the first As at end-2015, offshore borrowing remained
three quarters of 2015. However, underscoring low, accounting for about half of the total external
ANNUAL REPORT 2015

the diversified composition of foreign currency debt and only 40.1% of GDP (Asian Financial
reserve assets, the reserves level in USD terms had Crisis (AFC): 60.0% of GDP). The composition of
correspondingly declined, amid the strengthening the offshore borrowing has also changed. While
of USD against most other currencies during the non-bank private corporations were the main
same period. In general, the lower international borrower during the AFC, their share has declined
reserves in USD terms reflect the relatively higher in recent years as more have sought financing
outflows of non-resident portfolio investment and from the more developed domestic financial
continued, albeit lower, resident direct investment markets. A large share of offshore borrowing
51
 Chart 1.12 Table 1.8
ECONOMIC DEVELOPMENTS IN 2015

Outstanding External Debt (end-period) Outstanding External Debt

RM billion 2014 2015
900
833.7 RM billion
800 Offshore borrowing1 371.1 463.6
747.5
696.6
700
USD billion equivalent 105.2 106.9
602.1 Medium- and long-term 211.4 285.9
600
537.5 Public sector 93.1 128.3
500
434.3 Private sector 118.3 157.6
400 Short-term 159.7 177.7
300 NR holdings of dom. debt securities 223.3 211.3
200 Medium- and long-term 162.4 184.1
Short-term 60.9 27.2
100
NR deposits 87.7 81.6
0
2010 2011 2012 2013 2014 2015 Others2 65.5 77.2
Offshore borrowing (comprising mainly Non-resident holdings of Medium- and long-term 10.5 11.9
foreign currency loans raised, and bond domestic debt securities Short-term 55.0 65.3
and notes issued offshore)
Total external debt 747.5 833.7
Other debt liabilities1
USD billion equivalent 211.8 192.2
Includes non-resident deposits, trade credits, IMF allocation of SDRs and miscellaneous.
1

External Debt (Redefined)

Source: Ministry of Finance, Malaysia and Bank Negara Malaysia
Total debt/GDP (%) 67.5 72.1
Short-term debt /Total debt (%)
3
48.6 42.2
is now accounted for by banks arising from Reserves/Short-term debt3 (times) 1.1 1.25
their greater regionalisation, whereby offshore
Debt service ratio (% of exports of
subsidiaries and branches of domestic banks goods and services) 19.1 22.6
increasingly placed funds with their head offices
External Debt (Previous definition)
in Malaysia under centralised foreign currency
Total debt/GDP (%) 33.5 40.1
liquidity management operations.
Short-term debt4/Total debt (%) 43.0 38.3
Reserves/Short-term debt4 (times) 2.5 2.35
Offshore borrowing, denominated largely in
foreign currency, remained manageable. In Debt service ratio (% of exports of
goods and services) 11.3 15.6
particular, banks and corporations accounted for
about 75% of Malaysia’s external financial assets2 Equivalent to the external debt as previously defined, comprised
1

mainly foreign currency loans raised, and bond and notes issued
as at end-2015, which are available to meet their offshore
external obligations. Their external exposure is 2
Comprise trade credits, IMF allocation of SDRs and miscellaneous
3
Short-term offshore borrowing, NR holdings of short-term
also generally hedged, either naturally through domestic debt securities, NR deposits, short-term trade credits and
foreign currency earnings, or through the use of miscellaneous
4
Equivalent to short-term offshore borrowing
financial instruments. Furthermore, the offshore 5
Based on international reserves as at 29 February 2016
borrowing is used mainly to finance the expansion Note: NR refers to non-residents
of productive capacity and for better management Source: Ministry of Finance, Malaysia and Bank Negara Malaysia
of financial resources within corporate groups. In
the case of intercompany loans, these borrowings (end-2014: RM371.1 billion). Excluding the foreign
are generally on concessionary terms with flexible exchange revaluation changes, offshore borrowing
repayment schedule. increased at a more moderate pace of 4.0% during
the year, contributing two percentage points to the
ANNUAL REPORT 2015

External debt increased by 11.5% in 2015, attributed overall increase in the external debt. This reflects,
mainly to the valuation effects from the depreciation in particular, the net drawdown of intercompany
of the ringgit against most currencies during the first borrowing by several private corporations in the
three quarters of the year. The ringgit depreciation oil and gas sector. The net drawdown of offshore
affected mainly offshore borrowing, which increased borrowing by the public corporations during the
by RM92.6 billion or 24.9% to RM463.6 billion year was attributed largely to the new issuances of
international debt securities as well as sukuk by an
2
Malaysia’s international investment position. oil and gas company in the first quarter of 2015.
52
 Chart 1.13

ECONOMIC DEVELOPMENTS IN 2015

Offshore Borrowing Remained Low Relative to the Level During the Asian Financial Crisis

Federal Government Federal Government

8.8% 4.6%
Non-bank
26.7%
Public corporations
23.0%

Public corporations
Non-bank End-1998 End-2015
30.1%
48.3% RM170.0 billion RM463.6 billion
60.0% of GDP 40.1% of GDP

Bank
Bank
12.7%
45.6%
Source: Bank Negara Malaysia

The Federal Government issued 10-year and 30-year Chart 1.14

sukuk amounting to USD1.5 billion. Part of the
proceeds were used to redeem the USD1.25 billion Higher External Debt in 2015 Attributed Largely
1Malaysia Sukuk Global that matured during the to Revaluation Changes
second quarter of 2015. Of note, the outstanding %, percentage points

offshore borrowing by the Federal Government 15

+11.5% increase in total external debt 0.1 Federal Government

remained low at 4.6% of total offshore borrowing +2.0 Offshore borrowing

0.9 Public corporations
and 1.9% of GDP. On the other hand, banks
registered a net repayment of offshore borrowing 10

during the year, reflecting net repayment of interbank Revaluation

+13.0 changes
borrowing, which more than offset the issuances of 5
medium- and long-term debt securities. 1.3 Non-bank

NR holdings of domestic
Non-resident holdings of domestic debt 0
-1.6 debt securities
securities declined by RM11.9 billion or 5.3% -1.9 NR deposits
-0.4 Bank

to RM211.3 billion, particularly in the first three

-5
quarters of the year (end-2014: RM223.3 billion).
Source: Bank Negara Malaysia
The liquidation of domestic debt securities was
largely confined to Bank Negara Monetary Notes
(BNMNs), which offset the acquisition of Malaysian
Government Securities by non-residents during the Chart 1.15
year. The lower holdings of BNMNs was also partly
NR Holdings of Domestic Debt Securities Indicative
due to fewer and smaller monetary operations
of Degree of Contribution to External Debt
undertaken by the Bank to absorb liquidity during
% of GDP
the year. To some extent, in response to the
18
reduction in liquidity arising from the short-term 16
15.2 NR holdings of Government domestic
debt securities (as at end-September 2015), except for
capital outflows, the Bank had stopped new 14
Malaysia (end-December 2015)
ANNUAL REPORT 2015

issuances of BNMNs and allowed the instruments 12

to mature in the first half of 2015. The Bank 10
8.4
8
re-issued BNMNs in the latter half of 2015 when 5.3 4.9
6
the short-term capital outflows began to stabilise 4
in late August and registered net inflows in the 2
fourth quarter. As at end-2015, non-resident 0
Malaysia Thailand South Korea Indonesia
holdings of BNMNs increased but remained low at
RM23.7 billion or 11.2% of non-resident holdings Source: ADB Asian Bond Monitor database and Bank Negara Malaysia

of domestic debt securities.

53
 Deciphering Short-term External Debt
ECONOMIC DEVELOPMENTS IN 2015

Short-term external debt (STED) stood at RM351.9 billion, being equivalent to 30.4% of GDP as at
end-2015 (end-2009: RM166.3 billion or 23.3% of GDP), and accounting for 42.2% of the total
external debt (end-2009: 42.8%). The upward trend in short-term external debt between 2009 and
end-June 2014 reflected mainly the larger non-resident (NR) holdings of short-term domestic debt
securities and deposits. Between July 2014 and end-2015, short-term external debt rose because of
the valuation effects of the weaker ringgit exchange rate against most currencies. Measured against
the international reserves, the reserves coverage of the short-term external debt declined to 1.2 times
as at end-2015 (end-2009: 2.0 times).

Chart 1 Chart 2

Short-term External Debt Contribution to the Increase in Short-term

External Debt
RM billion times
400 2.5 RM billion
200
350 24.9
2.0
300 150

250 1.5
100
200 169.5 5.5
150 1.0
50
65.5
100
0.5
50 0
-4.0
0 0.0 -66.12
2009 2010 2011 2012 2013 2014 2015 -50
Total increase: +190.3 +4.9
Interbank borrowing NR deposits Trade credits
-100
2009-June 2014 July 2014-end-2015
NR holdings of short-term Intercompany Others Net borrowing (+)/ Valuation effects Other factors1
domestic debt securities loans
repayment (-)

Reserves/Short-term 1
Include price changes especially on domestic debt securities held by non-residents,
External Debt (RHS) and other adjustments associated mainly with data classification, coverage
and updates
2
Mainly liquidation of NR holdings of short-term domestic debt securities
Source: Bank Negara Malaysia
Source: Bank Negara Malaysia

Chart 3 Chart 4

Growth1 of Short-term External Debt by Reserves Coverage of Short-term External Debt1

Component, 2009-1H 2014 in Selected Countries
CAGR, % Times
45
42.3 3.5
40 2.9 3.1
3.0
35
2.4
2.5
30

25 2.0

20 19.6
1.5
Overall: 15.8 1.2
15
11.3 14.9 12.4 1.0
ANNUAL REPORT 2015

10
0.4
4.0 0.5
0.2
5
0.0
0
Singapore Hong Kong Malaysia Indonesia Thailand South
Interbank borrowing NR deposits Trade credits Korea

NR holdings of short-term Intercompany loans Others

1
As at end of 3Q 2015, except for Malaysia (4Q 2015)
domestic debt securities
1
Compounded annual growth rate (CAGR) Source: Haver Analytics, Department of Statistics, Singapore and
Bank Negara Malaysia
Source: Bank Negara Malaysia
54

1
 Despite the increase, short-term external debt remains manageable. This assessment is based on
key characteristics of the external liabilities and the borrowers. Borrowers, especially banks and

ECONOMIC DEVELOPMENTS IN 2015

corporations, have the servicing capacity to meet their debt obligations. Over the years, Malaysian
entities have acquired assets abroad amid the progressive liberalisation of the country’s foreign
exchange administration rules. Domestic corporations1 and banks accounted for 75% of Malaysia’s
RM1.7 trillion in external financial assets2 as at end-2015. In particular, corporate short-term external
assets3 amounting to RM174.5 billion exceeded the short-term external debt of RM77.5 billion owed
by corporates. For the banks, their short-term external debt (RM247.3 billion) was partially covered by
their short-term external assets (RM87.5 billion).

The accumulation of external assets by banks and corporations represents the decentralisation of
international reserves, which is also evident in the growing foreign currency deposits in the domestic
banking system. About two-third of these deposits is accounted by business enterprises, whose foreign
currency deposits has increased at a compounded annual growth rate of 23.0% during 2007-2015 to
RM90.4 billion as at end-2015. Consequently, not all of the short-term external debt obligations create
claims on the international reserves.

Chart 5 Chart 6

Malaysia's International Investment Position The Sizeable External Assets of Malaysia's Banks
RM billion RM billion
and Corporations Underscore their Debt
Servicing Capacity
2,000 200
External assets, excluding reserves,
1,500 150 % as a share of countries’ total external assets
80
1,000 100 72.1
500 50 70

0 0 60

-500 -50 50
-1,000 -100
40
-1,500 -150
30
-2,000 -200
2001 2003 2005 2007 2009 2011 2013 2015 20
2010 2011 2012 2013 2014

Assets excluding international reserves International reserves Malaysia South Korea Thailand

Total liabilities Net IIP (RHS)

Indonesia Phillippines

Source: Department of Statistics, Malaysia Source: Haver Analytics and Department of Statistics, Malaysia

The adverse effects of exchange rate changes on the short-term external debt are also largely
contained. About 25% of the short-term external debt is denominated in ringgit and therefore is not
affected by the valuation changes. Of the remaining external debt that is denominated in foreign
currency, which is largely hedged, about 70% is held by banks.

Banking sector accounted for the largest share of short-term external debt
The banking sector accounted for about 70% of the short-term external debt. This debt is mainly
ANNUAL REPORT 2015

in the form of interbank borrowings and NR deposits in the domestic banking institutions. To a
much lesser extent, the banks’ short-term external debt also includes other short-term external debt
comprising short-term loans from offshore banks and miscellaneous payables4.

1
Including public corporations.
2
Malaysia’s international investment position.
3
Trade credits, deposits placed abroad, intercompany loan and other short-term assets.
4
Include, among others, insurance claims yet to be disbursed and interest payable on bonds and deposits.
55
2
 Chart 7
ECONOMIC DEVELOPMENTS IN 2015

Components of Short-term External Debt

(% share, end-2015)

BNM NR holdings
of domestic debt securities
7.7%
Intercompany loans
4.2%

Trade credits
15.3%

Non-bank
corporations Interbank
borrowing
45.8%

Other
3.7%

Banking
Institutions

NR deposits
23.2%

Source: Bank Negara Malaysia.

Non-bank corporations constitute the second largest owners of short-term external debt (22%), mainly
in the form of trade credits and intercompany loans. Non-resident controlled companies accounted for
about 78.7% of the non-bank corporations’ short-term external debt. Bank Negara Malaysia is the country’s
third largest owner of short-term external debt due to the high non-resident ownership of Bank Negara
Monetary Notes (BNMNs). The remaining and relatively smaller holdings of short-term domestic debt
securities by non-residents are concentrated in the Government’s Treasury Bills.

Borrowers’ debt servicing capacity has shown resilience to exchange rate shocks
(a) Banking sector – Prudent and active management of liquidity and foreign exchange risks
Interbank borrowing and the placements of funds by foreign entities constitute short-term debt
liabilities of the domestic banking institutions. Partly, this reflects the banks’ intragroup liquidity
management operations which involve the centralised pooling of excess liquidity across the various
overseas banking operations. There are also placements of deposits from foreign parent entities
in the locally incorporated foreign banks. For banks in Labuan5, which accounted for about 40%
of total interbank borrowing and NR deposits placements, their debt reflects mainly borrowing by
non-resident controlled banks from intra-group entities operating in the regional financial centres,
namely in Hong Kong and Singapore. The risks associated with these placements and borrowings
are prudently managed through the banks’ liquidity management practices. These include, but
are not limited to, internal limits on funding and maturity mismatches and the establishment of
contingent funding lines with parent banks to absorb foreign currency funding shocks. Of great
significance, the risk of maturity mismatch is contained given that the banks’ short-term external
assets have grown in tandem with the growth in their short-term external debt.
ANNUAL REPORT 2015

In addition to foreign currency assets, banks are prudently managing the foreign exchange risks
of their debt. This was evident in the banks’ low net open positions relative to total capital, which
incorporates foreign exchange exposures across all tenures (short- and long-term) and sources
(domestic and abroad).

5
Effective from the first quarter of 2008, entities in Labuan International Business and Financial Centre (Labuan IBFC) have
been treated as residents, instead of as non-residents previously, in the compilation of external debt.
56

3
 Chart 8

ECONOMIC DEVELOPMENTS IN 2015

Banking System Foreign Exchange Net Open Position
% of total capital
8

4
M J S D M J S D M J S D M J S D

2012 2013 2014 2015

Source: Bank Negara Malaysia

(b) Non-bank corporations – availability of export earnings, flexible and concessionary intercompany
loans and hedged external exposures
Trade credits and intercompany loans constitute the bulk of non-bank corporations’ short-term
external debt. As with any trade-related activity, trade credit liabilities arise from the deferred
settlement of outstanding invoices. These trade credits were normally granted by foreign trade
partners to importers with sound financial standing and low credit risk. As bulk of imports are
intermediate goods for the production of goods for export, a majority of companies with trade
credits have foreign currency export earnings. Available data shows that export earnings of 60%
of these companies exceed their respective trade credits. In addition, about half of the remaining
companies have export earnings that partially offset their trade credits.

Chart 9

Trade Credit Liabilities vs. Gross Imports

RM billion RM billion
250 800
700
200
600

150 500
400
100 300
200
50
100
0 0
2009 2010 2011 2012 2013 2014 2015

Trade credits, non-related companies

Trade credits, intra-group companies

Gross imports (RHS)

Source: Department of Statistics, Malaysia, MATRADE and Bank Negara Malaysia

ANNUAL REPORT 2015

Intercompany loans comprise offshore borrowing by foreign multinational corporations

(MNCs) from their parent companies and, to a lesser extent by local companies (approximately
20% of total intercompany loans) from their subsidiaries abroad. BNM has liberalised rules
governing these loans since 2008 such that they are no longer subjected to any approval
requirements. This has allowed for the more flexible management of financial resources within
corporate groups.
57
4
 Chart 10
ECONOMIC DEVELOPMENTS IN 2015

Distribution of Short-term Intercompany Loans by Activity, end-2015

15.8% 7.2%
22.8% 18.4%
6.1%

5.5%

Foreign MNCs: 15.5% Local companies:

RM11.7 billion RM3.2 billion

15.9%
6.0%
42.9%
43.8%

Manufacturing Finance and Wholesale and retail trade, Agriculture, Forestry

Insurance/Takaful repair of motor vehicles and Fishing
and motorcycles

Construction Information and Others

Communication

Source: Bank Negara Malaysia

Based on a recent BNM survey, a significant proportion of intercompany loans are provided on
flexible and concessionary terms. These include, in particular, no fixed repayment schedules
and zero or low interest rates that are much lower than the prevailing market rates. These
flexibilities and concessionary terms enable corporations to meet their debt obligations
without much difficulty.

The foreign currency external debt obligations of corporations are largely hedged, either
naturally through foreign currency earnings or through financial instruments, thereby limiting
any potential adverse impact from the weaker ringgit on their debt servicing capacity.

(c) BNMNs – An instrument to manage liquidity

BNMNs were introduced in 2006 as an instrument for BNM to manage liquidity in both the
conventional and Islamic financial markets. The main objective of BNMNs is to increase the
efficiency of absorbing excess liquidity from the financial system during period of capital
inflows. Subsequently, BNMNs can be unwound during periods of capital outflows, re-
injecting the liquidity and thus limiting the changes in liquidity conditions within the domestic
financial markets.

NR holdings of BNMNs fell from a peak of RM85.7 billion as at end-August 2014 to RM14.0 billion
in mid-August 2015. As at end-2015, NR holdings of BNMNs had again increased but moderately
to RM23.7 billion. Partly in response to the reduction in liquidity arising from the short-term capital
outflows, the Bank had stopped new issuances and allowed the instruments to mature in the first
ANNUAL REPORT 2015

half of 2015. Only in the latter half of 2015 did the Bank re-issue BNMNs when capital flows began
to stabilise in late August 2015. In addition to BNMNs, the Bank is well-equipped with a host of
monetary policy instruments to manage domestic liquidity.

Conclusion
Malaysia’s short-term external debt is manageable. Malaysian entities have increasingly acquired assets
abroad over the years amid the progressive liberalisation of the foreign exchange administration rules.
58

5
 Given the level of external assets and foreign currency earnings, the external debt obligations of these
corporations and banks do not create claims on the Central Bank’s international reserves. Furthermore,

ECONOMIC DEVELOPMENTS IN 2015

flexible and concessionary intercompany loans enhance the capacity to repay these loans by non-bank
corporations while banks actively manage their liquidity and foreign exchange risks. In conclusion,
while Malaysia is not immune to global developments, prudent management of external debt will
continue to ensure that Malaysia’s short-term external debt remains manageable and that it does not
undermine the economy’s resilience against adverse exchange rate shocks.

ANNUAL REPORT 2015

59
6
 Non-resident deposits declined to RM81.6 billion exchange markets, particularly in times of
(2014: RM87.7 billion), reflecting maturity of deposits higher outflows.
ECONOMIC DEVELOPMENTS IN 2015

placed with the domestic banking institutions.

Overall, Malaysia’s external debt remains Malaysia has demonstrated its

manageable. The profile of Malaysia’s external
debt remains healthy with more than half
ability to withstand external
being skewed towards the medium- to long- shocks by drawing on its economic
term tenures. Risks from foreign exchange
fluctuations were largely contained as adaptability, financial buffers and
about 36% of the external debt is ringgit-
denominated while the foreign currency-
robust policy frameworks that have
denominated debt is largely hedged. Debt been built over the years
service ratio remained low at 22.6% in 2015
(2014: 19.1%). International reserves are
adequate to meet short-term external debt Importantly, despite the challenges posed by the drop
obligations with a coverage of 1.2 times (see in commodity prices and financial markets volatility,
also the White Box on Deciphering Short-term Malaysia’s core fundamentals have remained sound,
External Debt). It is important to note that not enabling the economy to confront domestic and
all short-term external debt creates a claim on external challenges during the year. The flexibility
reserves given the export earnings and external of the exchange rate allowed the ringgit to adjust
assets of borrowers. appropriately to the changes in external conditions,
acting as an absorber of shocks arising from the
Resilience against external shocks turbulent global financial markets. At the same time,
Being a highly open economy with substantial the international reserves have acted as a buffer by
linkages to the global economy and financial preventing excessive volatility of the exchange rate
markets, Malaysia is certainly not insulated from and ensuring the smooth functioning of financial
the heightened uncertainty and risks emanating markets during periods of large short-term capital
from external developments. However, Malaysia flows. It is these factors, together with continued
has demonstrated its ability to withstand surpluses in the current account, the manageable
external shocks experienced during the year by level of external debt, and the diversified domestic
drawing on its economic adaptability and the economic structure, that have accorded the country
safeguards provided by financial buffers and with the capacity to weather external shocks.
robust policy frameworks that have been built
over the course of many years. INFLATION DEVELOPMENTS
Despite considerable volatility of capital flows, Headline inflation, as measured by the annual
the impact on domestic financial markets was percentage change in the Consumer Price Index
not significant, allowing them to function (CPI), declined to 2.1% in 2015 (2014: 3.2%).
uninterrupted and to maintain effective Headline inflation was, however, relatively
financial intermediation to support the real more volatile in 2015. It declined sharply at
economy. Malaysia’s deep and diversified the beginning of the year to a low of 0.1% in
domestic financial markets together with a February but increased in the second quarter to
strong and resilient financial sector were able to peak at 3.3% in July before moderating slightly
accommodate and smoothly intermediate the thereafter. The volatility in headline inflation
large volumes of capital flows. The presence largely reflected a series of adjustments in
of domestic institutional investors was pivotal domestic fuel prices. For the year as a whole,
ANNUAL REPORT 2015

in providing sustained demand for domestic the lower headline inflation was largely due
financial assets as foreign investors rebalanced to the impact of the lower global energy and
their exposures. In addition, the Bank’s commodity prices, which more than offset the
monetary operations and the judicious use of effects from a weaker ringgit exchange rate,
several policy instruments helped to ensure the the implementation of GST, and several upward
availability of sufficient liquidity to support the adjustments in administered prices made
orderly functioning of the money and foreign towards the end of the year.
60
 Chart 1.16 While headline inflation was lower in 2015, price
increases during the year were more pervasive.

ECONOMIC DEVELOPMENTS IN 2015

Consumer Price Inflation The share of items in the CPI basket with inflation
Annual growth (%) above 4%, increased to 32% in the second quarter
4.0 following the implementation of GST (11% in the
3.5 first quarter). It continued to increase further to
3.0 41% in the second half of the year as some firms
2.5 that had initially absorbed the GST started to pass
2.0 on the GST to consumers. This was compounded by
1.5 the continued weakening of the ringgit and higher
1.0 prices of fresh food items. Items with inflation
0.5 above 4% were mainly food items, alcoholic
0.0 beverages, and personal care and health products.
J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D
However, as these items account for less than
2013 2014 2015
50% of the weights of the CPI basket, the higher
Headline Inflation Core Inflation
inflation was offset by lower inflation in other items
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
such as fuel, utilities, and clothing and footwear.
Notwithstanding this development in headline
inflation, to the extent that different households
Chart 1.17 would have different consumption baskets, the rate
of inflation experienced would be different across
Contribution to Headline Inflation
by Components different income groups and locations (See Box
Percentage points
Article on Inflation and the Cost of Living).
5.0
In terms of categories, the decline in inflation
4.0
during the year was due mainly to lower inflation
3.0
in the transport and housing, water, electricity, gas
2.0 and other fuels categories. The transport category
1.0 registered a negative inflation of -4.5% in 2015
0.0 (2014: 4.9%) due to the decline in domestic fuel
-1.0
prices. The average prices of RON97 petrol, RON95
petrol and diesel were lower at RM2.33, RM1.98
-2.0
J F MA M J J A S O N D J F MA M J J A S O N D J F MA M J J A S O N D and RM1.92 per litre, respectively, in 2015 (2014:
2013 2014 2015
RM2.78, RM2.15 and RM2.05 per litre, respectively).
Core inflation Price-volatile items Fuel Domestic fuel prices were lower due to the lower

Other GST Headline inflation

price-administered
items Chart 1.18

Source: Department of Statistics, Malaysia and Bank Negara Malaysia Percentage of CPI Items Registering Different
Inflation Ranges
80%
Notwithstanding the volatility in headline 60%
inflation, core inflation3 was stable averaging
40%
2.3% during the year (2014: 2.3%). The stability
20%
of core inflation reflected the moderate
0%
domestic demand conditions, the absence
20%
of excessive wage pressures, and the benign
ANNUAL REPORT 2015

40%
global inflation environment.
60%

80%
3
Core inflation attempts to measure the underlying inflation J F M A M J J A S O N D
rate. For Malaysia, core inflation is computed by excluding 2015
price-volatile and price-administered items whose price
Inflation ≤ 0 0 < Inflation ≤ 2 2 < Inflation ≤ 4
movements are more likely to be affected by temporary
shocks and volatile supply factors rather than persistent
4 < Inflation ≤ 6 Inflation > 6
changes in underlying factors affecting demand and supply
conditions. In addition, core inflation also excludes the Source: Department of Statistics, Malaysia and Bank Negara Malaysia
estimated direct impact of GST.
61
 Chart 1.19 Table 1.9
Inflation by Categories
ECONOMIC DEVELOPMENTS IN 2015

Contribution to Inflation by Categories

(Pre- and Post-GST Implementation)
Transport 1Q 2Q - 4Q
2015 2015
Clothing and footwear
(Pre-GST) (Post-GST)
Education
Categories
Average inflation
Health
(%)
Recreation services and culture
Food and non-alcoholic beverages 2.5 4.0
Communication
Alcoholic beverages and tobacco 10.6 14.4
Furnishings, household equipment
and routine household maintenance Clothing and footwear -0.3 0.8
Restaurants and hotels Housing, water, electricity, gas and
other fuels 2.1 2.5
Miscellaneous goods and services
Furnishings, household equipment and
Alcoholic beverages and tobacco routine household maintenance 0.3 3.5
Housing, water, electricity, Health 3.4 4.8
gas and other fuels
Transport -7.6 -3.5
Food and non-alcoholic beverages
Communication -0.9 2.9
Total Recreation services and culture 0.6 2.1
Education 2.1 2.5
-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
Percentage points
Restaurants and hotels 3.1 4.6
Miscellaneous goods and services 1.6 5.0
2014 2015
Total 0.7 2.6
Source: Department of Statistics, Malaysia and Bank Negara Malaysia Source: Department of Statistics, Malaysia and Bank Negara Malaysia

global oil prices, which more than offset the consumer goods and services. The price increases
impact of the weaker ringgit on imported were especially notable in the furnishings,
refined fuels for domestic usage. Inflation in the household equipment and routine household
housing, water, electricity, gas and other fuels maintenance, communication and miscellaneous
category was also lower at 2.5% (2014: 3.4%) goods and services categories. While the price
due to the downward revisions in electricity increases were broad-based across most CPI
tariffs in the first quarter of 2015. categories, the overall impact was still contained
as GST contributed only 0.7 percentage point
The implementation of GST at 6% on 1 April 2015 to headline inflation in 2015. This was lower
led to higher inflation for most categories of than the initial estimate of 1.0 percentage point.
The lower-than-expected impact was partly due
Chart 1.20 to the absorption of GST by some firms at the
initial stage of implementation. In addition, the
Domestic Fuel Prices in 2015
spillover effects from GST were small amidst
RM per litre
active enforcement of the Price Control and
2.60
2.50
Anti-Profiteering Act 2011 by the Government to
2.40 ensure that price increases were not excessive.
2.30
2.20
2.10
Inflation during the year was also influenced
2.00 by the shortages in the supplies of fresh food
ANNUAL REPORT 2015

1.90 amid adverse weather conditions, particularly

1.80
1.70
in the second half of the year. Prices of fresh
1.60 vegetables rose by 7.7% during the year (2014:
J F M A M J J A S O N D
1.6%) as irregular weather and prolonged haze
2015
conditions affected the quality and yields of
RON97 Petrol RON95 Petrol Diesel
crops. Towards the end of the year, upward
Source: Ministry of Domestic Trade, Co-operatives and Consumerism, adjustments in several administered prices such
and Bank Negara Malaysia
as toll charges, railway fares and cigarette prices
62
 Table 1.10 Chart 1.21
Adjustments in Administered Prices in 2015

ECONOMIC DEVELOPMENTS IN 2015

Exchange Rate, Global Commodity Prices,
Quantum Imported CPI and PPI
Date Items of Adjustment Annual growth (%) Annual growth (%)
RM % 30 6
20 4
Average of 10 2
1 March 2015 Electricity -1 sen/kWh for -3.1 0
0
households -10
-2
-20
+RM0.30/pack
29 June 2015 Cigarettes 2.2 -30 -4
of 20 -6
-40
Average increase of -50 -8
J F MA M J J A S O N D J F MA M J J A S O N D J F MA M J J A S O N D
15 October 2015 Toll charges 40% affecting 18
2013 2014 2015
intracity highways
NEER against import partners Global commodity prices
+RM3.20/pack
4 November 2015 Cigarettes 23.2
of 20 Imported CPI (RHS) PPI (RHS)

Note: The nominal effective exchange rate (NEER) against import partners is
KTM railway calculated based on the weighted average of the bilateral exchange rates
+4 sen/km 36.4 against Malaysia’s top 15 import partners. A positive figure indicates a
charges
depreciation in ringgit against Malaysia’s main import partners relative to
2 December 2015 the year before.
Average increase of
LRT and Monorail Source: Department of Statistics, Malaysia, International Monetary Fund (IMF),
10% depending on
railway charges Bloomberg and Bank Negara Malaysia
length of commute

also contributed to the inflationary pressures. production of selected crops and overall low energy
However, given that most of these adjustments costs. Notwithstanding the weaker ringgit, the
were implemented towards the end of the year, the lower global commodity prices had led to an overall
impact on overall inflation for 2015 was small. reduction in the costs of inputs for local producers.
Prices of both raw and intermediate materials faced
During the year, the ringgit depreciated by 16.6% by producers, for example, declined by 15.6% and
against the currencies of Malaysia’s major import 3.4%5, respectively during the year (2014: -1.0%
partners. However, despite the depreciation, the and 2.6% respectively), resulting in the Producer Price
impact on domestic inflation, both through the Index (PPI) declining by 4.8% in 2015 (2014: 1.4%).
direct and indirect channels, was modest. Through The impact of the weaker ringgit through the indirect
the direct channel, the weaker ringgit resulted in an channel was also contained by the small share of
increase in the prices of imported finished goods. imported intermediate inputs in the producers’ cost
Excluding fuel, imported CPI increased by a higher structure6 (See Box Article on The Impact of Exchange
rate of 3.0% in 2015 (2014: 0.9%). This was driven Rate Depreciation on Inflation in Malaysia).
mainly by higher prices of imported food items,
which rose by 5.7% (2014: 2.4%). However, the Domestically, the more moderate domestic
impact on overall inflation was contained as these demand pressure due to the slower expansion of
imported goods only constitute a small share of the private consumption and the absence of excessive
CPI basket at 7.2%. wage growth, has also helped contain inflationary
pressures during the year. Firms’ production
The indirect impact of the weaker ringgit through capacity remained more than sufficient to meet
imports of raw and intermediate inputs was also the increase in consumer demand, as reflected
modest, being offset by the much larger decline by the relatively stable capacity utilisation rate of
in global commodity prices. The IMF Primary 77% in 2015 (2014: 79%) in the manufacturing
Commodity Price Index fell by a double-digit rate of sector. Information from the Bank’s surveys also
35.3% in 2015. The decline in prices was registered indicated that firms were hesitant to fully pass on
ANNUAL REPORT 2015

across most types of commodities due mainly to the higher cost pressures to consumers given the
ample supplies amidst the weak global demand. environment of weaker demand.
Global food prices were lower as reflected by the
decline of 17.1% in the IMF Food Price Index4 5
Bank Negara Malaysia estimates. These prices incorporate
(2014: -4.1%) due mainly to the record high both prices of imported and locally sourced raw and
intermediate materials.
6
Based on estimation from the Input-Output Tables 2010
4
The IMF Food Price Index includes the price index of cereal, for Malaysia, about 20% of the gross output is imported
vegetable oils, meat, seafood, sugar, bananas and oranges. intermediate inputs.
63

1
 Inflation and the Cost of Living
ECONOMIC DEVELOPMENTS IN 2015

ECONOMIC DEVELOPMENTS IN 2015

This article briefly highlights the differences between Consumer Price Index (CPI) inflation and the cost
of living. It also presents analyses of the differences in inflation rates across various income groups and across
states in Malaysia, and an assessment of the growth in income and expenditure of Malaysian households,
using data from the 2014 Household Income and Basic Amenities Survey (HIS/BA), the 2014
Household Expenditure Survey (HES) and the disaggregated state-level CPI data.

I. Differences between CPI inflation and the cost of living

The inflation rate, as measured by the change in the Consumer Price Index (CPI), reflects
the average rate of increase in the price of a basket of goods and services. The CPI is constructed by
assuming that there is a single basket of goods and services which represents the consumption basket
of all households in the country1. Prices of goods and services that are used to construct the CPI are
the average prices collected from retail outlets across the country. Thus, the CPI captures the average
increase in prices with the assumption of homogeneity of spending patterns across households and
holding the quantity and quality of the goods and services in the consumption basket as constant.
As the CPI reflects average prices in the economy, it provides a good measure of the changes in the
overall price level of goods and services in the economy. As such, it is a relevant and useful indicator
for the conduct of macroeconomic policies, such as monetary policy, that aim to affect the broader economy.

The cost of living, on the other hand, refers to the amount of expenditure on goods and services
incurred by households, including their financial obligations, to maintain a certain standard of living2.
This spending or cost of living is determined by both household spending patterns and the prices faced
by households. Spending patterns differ across households as the patterns are primarily influenced
by household income, demography, family structure and area of residence3. Price changes faced by
households, in turn, vary by geographical factors.

As the CPI masks the heterogeneity in household spending patterns and the variations in
price changes of goods and services faced by households, the inflation rate is considered as
an approximation of the rate of increase in the cost of living. To the extent that the dispersion
in spending patterns and variation in price changes are insignificant, the CPI is a reasonable
gauge of the cost of living. In a situation where the dispersion in spending patterns and price
changes are large, the inflation rate could be a weak approximation of the rate of increase in
the cost of living. In this regard, the CPI could understate or overstate the cost of living for some
segments of households4. Given the heterogeneity in spending patterns and significant variations
in the prices of goods and services, a more meaningful analysis of the cost of living requires
assessing changes in spending patterns and costs across the various household categories and
geographical locations. The most common dimension is to assess the changes in the cost of living
over time, across different income groups and across states or regions in a country.

II. An analysis of the cost of living using household surveys and disaggregated CPI data
Using data from the Household Income and Basic Amenities Survey (HIS/BA) and the Household
Expenditure Survey (HES)5 for 2009 and 2014; as well as the disaggregated state-level6 CPI data, this

1
The composition of goods and services in the CPI basket and their respective weights are determined based on the aggregate
household expenditure patterns obtained from a nationwide expenditure survey. In Malaysia, the CPI basket is revised every
ANNUAL REPORT 2015
ANNUAL REPORT 2015

five years based on the Household Expenditure Survey as per international practice. The latest CPI weights, based on the 2014
survey, were released in January 2016.
2
The standard of living measures the quality of life or the level of material prosperity enjoyed by individuals.
3
Other factors could include education level and ethnicity.
4
Empirical studies show that the CPI can also at times overstate the cost of living because of substitution bias. Due to the fixed
CPI basket, it may not capture the substitution to cheaper goods and services, which could effectively lead to a decline in cost
of living, despite higher prices.
5
Both the HIS/BA and the HES are carried out using a personal interview approach, covering urban and rural areas for all states.
The surveys are carried out by probability sampling that represents all households in Malaysia.
6
CPI by states is published by the Department of Statistics, Malaysia, with data series available since 2011.
64
 study analyses the cost of living for different groups of households in Malaysia. The HIS/BA is conducted
every two to three years to collect statistics pertaining to the pattern of income distribution of Malaysian
ECONOMIC DEVELOPMENTS IN 2015

ECONOMIC DEVELOPMENTS IN 2015

households. The HES is conducted once every five years to collect comprehensive information on the
level and pattern of consumption expenditure of households.

Chart 1 shows the differences in spending patterns across different income groups for households
in Malaysia based on the most recent HES survey. The lower income groups allocate more of their
expenditure to food, and less to transport, healthcare, education and discretionary spending compared
to the higher income groups. Households in highly urbanised states7,8 such as Kuala Lumpur and
Selangor spend more on housing, whereas households in the less urbanised states9 such as Pahang
and Kelantan spend more on food.

Chart 1

Household Consumption Basket by Income Groups and States

100%

80%

60%

40%

20%

0%
Bottom 20 21-40 41-60 61-80 Top 20 Highly Semi- Less
urbanised urbanised urbanised
states states states
By income group By state

Food and non-alcoholic beverages Housing, water, electricity, gas and other fuels Transport Health and Education Discretionary spending*

*Discretionary spending includes spending on alcoholic beverages and tobacco,clothing and footwear, furnishings, household equipment and routine household
maintenance, communication, recreation services and culture, restaurants and hotels and miscellaneous goods and services.

Note: 1. The highly urbanised states have urbanisation level of above 70%, semi-urbanised states between 55% to 69% and less urbanised states below 55%.
2. Expenditure in the food and non-alcoholic beverages category includes expenditure for food away from home.

Source: 2014 Household Expenditure Survey, 2010 Population and Housing Census of Malaysia (Census 2010) and Bank Negara Malaysia estimates

Prices may also vary significantly across different locations. Differences in prices reflect mainly variations
in distribution, labour and rental costs, and relative demand and supply conditions. For example, based
on the state-level CPI data published by the Department of Statistics Malaysia, rental rates in the
more highly urbanised states are typically higher and increase at a faster rate than the less urbanised
states. Similarly, price increases particularly in the food and non-alcoholic beverages, restaurants and
hotels, education and recreation services and culture categories are also generally higher in the highly
urbanised states. As a result, highly urbanised states such as Kuala Lumpur, Johor, Pulau Pinang and
Selangor registered higher inflation rates (Table 1).

Household inflation rates for 2015 are derived by combining the information obtained from spending
patterns across income groups and the price changes across states (Table 2). The findings show that
ANNUAL REPORT 2015
ANNUAL REPORT 2015

inflation rates do vary across households and can be materially different from the national average.

7
Highly urbanised states are states that register urbanisation levels of above 70%. The level of urbanisation is computed in the
2010 Population and Housing Census of Malaysia (Census 2010). These states include Kuala Lumpur, Selangor and Putrajaya,
Pulau Pinang, Melaka and Johor.
8
For the purpose of this article, the definition of states refers to the 13 states and three federal territories, as categorised in the
HIS and HES.
9
The less urbanised states are states that register urbanisation levels of below 55%. These states include Sabah, Sarawak,
Pahang and Kelantan.
65
 Table 1
ECONOMIC DEVELOPMENTS IN 2015

ECONOMIC DEVELOPMENTS IN 2015

Inflation by States based on Level of Urbanisation in 2015
Highly urbanised Semi-urbanised Less urbanised
states states states
Average inflation (%)
Total 2.5 1.8 1.4
Food and non-alcoholic beverages 4.2 3.2 3.0
Alcoholic beverages and tobacco 13.4 14.1 13.6
Clothing and footwear 0.6 -0.1 0.1
Housing, water, electricity, gas and other fuels 3.5 2.8 0.3
Furnishings, household equipment
and routine household maintenance 3.1 2.9 2.3
Health 4.9 4.0 4.2
Transport -4.8 -4.9 -4.1
Communication 1.9 2.5 2.3
Recreation services and culture 1.8 0.9 1.0
Education 3.4 2.6 2.2
Restaurants and hotels 4.6 3.3 3.6
Miscellaneous goods and services 4.3 4.1 4.1
Source: Department of Statistics, Malaysia, and Bank Negara Malaysia estimates

• Higher inflation rates in the highly urbanised states. The national average inflation rate was
generally lower than inflation rates of households in highly urbanised states such as Kuala Lumpur,
Selangor and Putrajaya, Pulau Pinang and Johor in 2015. Households in these states account for
43% of the total population of Malaysia. The national average inflation rate was higher than
the inflation rates experienced by households in some semi- and less urbanised states, namely
Perak, Kedah, Perlis, Sabah and Sarawak. Households in these states account for 36% of the total
Malaysian population.

• Higher inflation rates for the lower income groups across most states in Malaysia. Households
in the bottom 20% of the income group experienced inflation rates that were 0.12 to 1.10 percentage
points higher than households in the top 20% of the income group. For highly urbanised states,
the differentials were higher, averaging 0.6 percentage point (0.4 percentage point for the less
urbanised states). As the lower income groups spend a larger share of their expenditure on food, they
experienced higher inflation due to the higher food inflation in 2015 (3.6%, 2014: 3.3%). The lower
income groups also benefitted less from the decline in domestic fuel prices during the year given the
lower share of expenditure on fuel. Thus, the lower income households living in highly urbanised states
tend to experience the largest increase in their cost of living10.

The change in the cost of living was also assessed using the actual household expenditure data from the
2014 HES. Based on this analysis, aggregate household expenditure, including for financial obligations11,
rose at a compounded annual growth rate (CAGR) of 8.5% during the period 2010 - 2014. The higher
expenditure growth relative to the CAGR of CPI of 2.6% for the same period suggests that growth in
ANNUAL REPORT 2015
ANNUAL REPORT 2015

expenditure was not only driven by higher prices, but also by an increase in the volume of consumption
of goods and services. The strong growth in expenditure was observed across all income groups
(Chart 2). Aggregate discretionary spending, in particular, rose strongly by 9.0% (Chart 4), contributed
mainly by higher spending on restaurants and hotels, recreational services and communication (Chart 5).

10
This finding holds for the period 2011-2015.
11
Financial obligations include transfer payments such as contribution to the Employee Provident Fund (EPF) and income tax
payments; as well as the repayment of loans.
66

1
 Table 2
ECONOMIC DEVELOPMENTS IN 2015

ECONOMIC DEVELOPMENTS IN 2015

CPI Inflation by States and Income Groups in 2015 (Annual change,%)
Income percentile
Bottom 20 21-40 41-60 61-80 Top 20 Total

MALAYSIA 2.1

Kuala Lumpur 3.01 2.87 2.78 2.74 2.73 2.78

Selangor & Putrajaya 2.70 2.51 2.38 2.33 2.16 2.34

Highly
urbanised Pulau Pinang 2.72 2.56 2.50 2.46 2.30 2.45
states
Melaka 2.57 2.23 2.31 1.76 1.47 1.92

Johor 3.14 2.92 2.95 2.86 2.49 2.78

Inflation
Negeri Sembilan 2.77 2.62 2.56 2.26 1.92 2.30 tends to
be higher
Semi- Perak 2.06 1.95 1.80 1.77 1.60 1.77
for more
urbanised
urbanised
states Kedah & Perlis 2.25 1.93 1.83 1.62 1.29 1.65
states
Terengganu 2.04 2.00 1.98 1.97 1.60 1.85

Sabah & Labuan 1.08 0.97 0.96 0.82 0.80 0.88

Less Sarawak 1.54 1.48 1.47 1.43 1.42 1.45

urbanised
states Pahang 2.23 2.03 2.00 1.68 1.64 1.83

Kelantan 2.33 2.08 1.98 1.90 1.69 1.91

Inflation tends to be higher for lower income groups

Inflation higher than national average by 0.2
Inflation within the national average by +/- 0.2
Inflation lower than national average by 0.2

Note: 1. The highly urbanised states have urbanisation level of above 70%, semi-urbanised states between 55% to 69% and
less urbanised states below 55%.
2. While the urbanisation level is high in Labuan, its inflation rate is reported together with Sabah as the expenditure patterns and prices
of goods and services in the two states are similiar.
3. Household inflation rates are derived based on the share of household expenditure by category obtained from the 2014 Household
Expenditiure Survey and the disaggregated state-level inflation rates.
Source: 2014 Household Expenditure Survey, Department of Statistics, Malaysia and Bank Negara Malaysia estimates

The growth in aggregate expenditure was accompanied by an increase in aggregate household

income, which increased by a CAGR of 8.8% during the same period. On average, the level of income
exceeded that of expenditure for all income groups, allowing households to save a portion of their
income (Chart 3). However, a more detailed analysis of the disaggregated data from the 2014 HIS/BA
and 2014 HES reveals the following:

• Dissaver households. There are households, mainly from the lower income groups, that spend more
than their income.
ANNUAL REPORT 2015
ANNUAL REPORT 2015

• The bottom 40% of households12. Financial obligations of these households, including loan
repayments, have registered relatively strong growth. Consequently, these households, who only have
a relatively small amount of savings13, are vulnerable to both income and price shocks.

12
The bottom 40% of households are households which fall under the bottom 40% of the nation’s income distribution, which
is below RM3,649 based on the 2014 HIS/BA.
13
About 28% of the bottom 40% of households do not save on a monthly basis, while 11% of them save RM100 or less a month.
67
 Chart 2 Chart 3
ECONOMIC DEVELOPMENTS IN 2015

ECONOMIC DEVELOPMENTS IN 2015

Growth in Average Household Income and Average Household Income and Expenditure*
Expenditure* RM per month
CAGR (%) 14,000
12.0 12,000

10.0 10000

8.0 8,000

6.0 6,000

4.0 4,000

2.0 2,000

0.0 0
Total Bottom 21-40 41-60 61-80 Top 20 Total Bottom 20 21-40 41-60 61-80 Top 20
20
Income percentile Income percentile

Income Expenditure* Income Expenditure*

*Including financial obligations *Including financial obligations

Source: 2014 and 2009 Household Income and Basic Amenities Survey, 2014 and Source: 2014 Household Income and Basic Amenities Survey, 2014
2009 Household Expenditure Survey, and Bank Negara Malaysia estimates Household Expenditure Survey, and Bank Negara Malaysia estimates

Chart 4 Chart 5

Growth in Average Household Expenditure by Type Contribution to Growth in Discretionary Spending

CAGR (%)
16.0
Miscellaneous goods Alcoholic beverages Clothing and
and services and tobacco footwear
14.0 8% 9%
14%

12.0
Furnishings,
household
10.0
equipment and
routine
8.0 household
maintenance
6.0 9%

4.0 Restaurants
and hotels Communication
2.0 36% 10%

0.0
Total Bottom 21-40 41-60 61-80 Top 20 Recreational services and culture
20 14%
Income percentile

Necessities Discretionary Financial obligations

Source: 2014 and 2009 Household Expenditure Survey and Bank Negara Malaysia Source: 2009 and 2014 Household Expenditure Survey and Bank Negara Malaysia
estimates estimates

• Households earning fixed incomes, including pensioners. While aggregate income grew at an
average of 8.8%, there are segments of the total population who experienced a much lower or no
income growth.
ANNUAL REPORT 2015
ANNUAL REPORT 2015

The analysis has shown that the inflation rates experienced by households vary due to differences in
spending patterns and price changes. In particular, households in the lower income groups living in
highly urbanised states experienced higher inflation. At the aggregated level, the rise in the cost of
living, on average, has been accompanied by a commensurate increase in income. At a disaggregated
level, however, analysis of both income and expenditure data shows that there are segments of the
society that are vulnerable to the increase in the cost of living, and these are households who dissaved;
the bottom 40% of households; and households earning fixed incomes.
68
 Conclusion
In addressing the issue of the rising cost of living, the policy approach must be multi-dimensional,
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including measures to address the challenges of urbanisation such as housing and connectivity,
improving financial education and awareness, and enhancing productivity and income. Of importance,
greater efforts would need to be directed at increasing the productivity level of Malaysians through the
adoption of modern technology and increasing the skills of workers through access to better education
and training. This would enable Malaysians to move up the value chain towards higher value-added
jobs to achieve higher income and hence, afford a higher standard of living.

References
Boskin M J, E R Dulberger, R J Gordon, Z Griliches, D W Jorgensen (1998). `Consumer Prices, the
Consumer Price Index, and the Cost of Living´, Journal of Economic Perspectives, Vol 12, No 1.

Department of Statistics, Malaysia (2014). `Household Expenditure Survey´.

Department of Statistics, Malaysia (2014). `Household Income and Basic Amenities Survey´.

Department of Statistics, Malaysia (2009). `Household Expenditure Survey´.

Department of Statistics, Malaysia (2009). `Household Income and Basic Amenities Survey´.

Jacobs D, Perera D, Williams T (2014). `Inflation and the Cost of Living´, Reserve Bank of Australia
Bulletin (March Quarter).

Phillips B, J Li, M Taylor (2012). `Prices These Days! The Cost of Living in Australia´, AMP.NATSEM
Income and Wealth Report, Issue 31, May, Sydney, AMP.

Schultze C, Mackie C (Eds.) (2002). `At What Price?: Conceptualizing and Measuring Cost-of-Living
and Price Indexes, Panel on Conceptual, Measurement, and Other Statistical Issues in Developing
Cost-of-Living Indexes´, Committee on National Statistics, Division of Behavioral and Social Sciences
and Education, National Research Council, National Academy Press, Washington D.C.

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69
 The Impact of Exchange Rate Depreciation on Inflation in Malaysia
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Introduction
The persistent depreciation of the ringgit since September 2014 has raised concerns about the risk
of higher inflation in Malaysia. In general, large and persistent exchange rate depreciation in a small
and open economy would entail higher domestic inflation as imports become more expensive. The
Malaysian experience in the past two decades, however, has shown that episodes of persistent
exchange rate depreciation may not always result in significantly higher inflation (Chart 1). The
outcome is also dependent on other developments affecting the economy. This is highlighted by the
experience that while the ringgit depreciation in the period 1997-1998 resulted in high inflation, the
more recent depreciation episode has instead coincided with periods of low inflation.

This article is divided into two parts. The first part presents findings from estimations of the exchange
rate pass-through (ERPT) to inflation in Malaysia and the second part provides insights on why inflation
could be high in certain episodes of exchange rate depreciation but low in others.

Chart 1

Exchange Rate and Inflation

Annual change (%) Annual change (%)
10 50

Headline inflation

8 RM/USD (RHS) 40
NEER against import partners (RHS)

6 30

4 20

2 10

0 0

-2 -10

-4 -20
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Note: The nominal effective exchange rate (NEER) against import partners is calculated based on the weighted average of the bilateral exchange rates against
Malaysia’s top 15 import partners. A positive figure indicates a depreciation in the ringgit against Malaysia’s main import partners relative to the year before.

Source: Department of Statistics, Malaysia, Bloomberg and Bank Negara Malaysia

A. Exchange rate pass-through to inflation in Malaysia

ERPT to inflation refers to how much domestic prices change in response to changes in the nominal
exchange rate. The transmission from the exchange rate to inflation occurs through two main
channels. First is the direct channel via imported finished goods in the CPI basket and second is the
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indirect channel via imported inputs in the production chain (Diagram 1)1.

(i) Direct channel. Fluctuations in the exchange rate directly impact prices of imported finished goods.
The depreciation of the ringgit, against the currencies of Malaysia’s import partners, increases the
costs of importing finished goods from these economies.

1
In this article, CPI refers to the Consumer Price Index, CPI-Import is the imported finished goods component of CPI excluding
fuel, PPI is Producer Price Index, PPI-Import is the imported component of PPI, and PPI-Local is the domestic component of PPI.
70
 (ii) Indirect channel. Exchange rate movements affect input costs of firms that use imported inputs
in the production of local goods and services. These imported inputs could be in the form of raw
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materials like wood and wheat, or in the form of intermediate inputs like fabric and metal rods.

In addition, prices of goods and services that are affected by movements of the exchange rate, through
either one or both of the channels, could have spillover effects on prices of other goods and services in
the CPI. This can consequently lead to a general increase in prices2.

Diagram 1

Transmission Channels from Exchange Rate to Inflation in Malaysia

direct
Fuel products in CPI

• 8.7% of CPI
• Depends on global oil prices and ER

direct
Imported finished goods
Exchange rate in CPI CPI
(ER) Inflation

Spillover effects
to other prices
• 7.2% of CPI
• Depends on global inflation and ER

indirect
Local finished goods and
Imported inputs in PPI
services in CPI

• 20% of production cost

• Depends on global commodity prices and ER

Source: Department of Statistics, Malaysia and Bank Negara Malaysia

The conceptual relationship between exchange rate movements and inflation is illustrated in Chart 2
where depreciation has an inflationary impact while appreciation has a disinflationary impact. The impact
of changes in the exchange rate on inflation can differ in strength between periods of appreciation
and depreciation3. This asymmetry arises because firms typically react more to pass on the increases in
the cost of imports to consumer prices following an exchange rate depreciation but firms tend to be
less responsive when there is a reduction in costs due to an exchange rate appreciation. In addition,
should exchange rate depreciation exceed a certain threshold, firms can change their behaviour
significantly, resulting in a larger impact on inflation.

Using historical data over the last two decades, a scatter plot shows a weak positive relationship
between the exchange rate4 and inflation (Chart 3). This suggests that changes in the exchange rate
may have a small impact on domestic inflation. Applying standard methodologies from the literature,
the ERPT was empirically estimated5 using the nominal effective exchange rate (NEER) with quarterly
data from 1995 to 2015. The results are summarised as follows:

2
Changes in the exchange rate could also affect domestic inflation indirectly through the substitution effect. If the exchange
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rate depreciation makes imported goods more expensive, consumers may switch to domestic products and this can exert
upward pressures on prices of domestically produced goods. In addition, the depreciation could also lead to higher demand
for exports and result in stronger aggregate demand that can create inflationary pressures.
3
Pricing strategies of firms tend to be different during periods of depreciation and appreciation, which will determine the
asymmetric effects of exchange rate pass-through to inflation. Inflationary impact during depreciation tends to be larger in
size compared to the disinflationary impact during appreciation.
4
Unless otherwise stated, the exchange rate in this article refers to the nominal effective exchange rate (NEER).
5
The empirical specification follows a linear Phillips curve equation, which controls for lagged inflation, global commodity
prices and the output gap. The estimations are carried out using the NEER and results are robust for the nominal bilateral
exchange rate (RM/USD).
71
 Chart 2 Chart 3
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Conceptual Relationship between Exchange Scatter Plot of Exchange Rate Changes and Inflation
Rate Changes and Inflation NEER,
Annual change (%)
Change in
exchange rate 35
ERPT
threshold
30
Stronger
inflationary 25
impact above
Depreciation

Depreciation
Some threshold 20
inflationary
impact from 15
depreciation Inflation
10
Appreciation

High inflation 5
Some
disinflationary 0
0 1 2 3 4 5 6 7

Appreciation
impact from
appreciation -5

-10
Core inflation,
Annual change (%)
-15

Source: Bank Negara Malaysia Source: Department of Statistics, Malaysia, Bloomberg and Bank Negara Malaysia

Chart 4 Chart 5

Import Content of CPI Items and Their Price Exchange Rate Changes and Inflation
Sensitivity to Exchange Rate Changes NEER,
Sensitivity (%) Annual change (%)
0.30
8

0.25
6
Depreciation

0.20
4

0.15 2

0.10 0
1 2 3 4 5 6 7
0.05 -2 Core inflation,
Appreciation

Annual change (%)

0.00 -4
0 20 40 60 80 100
Import content (%)
-6
Note: Sensitivity refers to the degree of ERPT for the individual CPI items at the
4-digit level. -8

Source: Department of Statistics, Malaysia, Bloomberg and Bank Negara Malaysia Source: Department of Statistics, Malaysia, Bloomberg and Bank Negara Malaysia
estimates estimates

(i) Exchange rate pass-through to core inflation is low. A 10% depreciation in the exchange rate is
associated with an increase in core inflation between 0.2% and 0.6%6. Over time, the degree of ERPT
has remained low and relatively stable7.

(ii) Analysis of disaggregated CPI data shows no significant positive relationship between
import content and sensitivity8 to the exchange rate. Conventional wisdom suggests that prices
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of items with higher import content would be more sensitive to exchange rate changes compared

6
The range refers to short-run ERPT. Variations in the estimates of pass-through arise from different specifications of the
estimating equation (e.g. number of lags for inflation, number of lags for exchange rate and the number of control variables,
such as demand conditions, and their lags).
7
The ERPT remained stable when comparing two sample periods, 1995-2002 against 2003-2015. Mihaljek and Klau (2008)
also conclude that the ERPT in Malaysia has been low and stable when comparing two sample periods, 1994-2000 against
1994-2006.
8
Sensitivity refers to the degree of ERPT for the individual CPI items at the 4-digit level.
72
 to items with lower import content. The scatter plot (Chart 4), however, shows that this relationship
is weak9. Examining the individual items of the CPI basket shows that most goods and services

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have moderate import content10 and estimations of the ERPT for these items indicate that a 10%
depreciation is associated with higher inflation of at most 3%.

(iii) Analysis by stage of processing using disaggregated PPI data suggests that exchange rate
pass-through via the indirect channel is also low and incomplete. The ERPT is estimated at two
different stages of the production chain, which begins at the firm level and ends at the consumer
level (Diagram 2). At the first stage of the production chain, the ERPT to input costs is estimated to be
low and incomplete, whereby a 10% change in the exchange rate is associated with a 1.3% change
in the costs of imported raw and intermediate inputs. At the second stage, the pass-through from
input prices to consumer prices is even smaller, whereby a 10% increase in input prices leads to an
increase in prices of consumer goods by only 0.4%.

Diagram 2

Exchange Rate, Global Commodity Prices and Prices Along the Production Chain
Strong pass-through (STAGE 1) Weak pass-through (STAGE 2)

Firms’ cost structure

Exchange rate
Rental & machinery
(9.3%) Prices of imported raw Firms’ market structure
and intermediate
materials Imported inputs, which
(0.6%) is 22% of total cost Consumer goods, at Consumer goods,
Global commodity producer level at retail level
prices (1.3%) (2.6%)
(–32.2%) Local inputs, which is
44% of total cost

Prices of local raw and

Local commodity intermediate materials Labour costs
prices (-9.1%)
(-21.6%)
Fixed costs

Note: Numbers in the parenthesis () represent the average of the annual change in the variables during the depreciation episode between October 2014 and December 2015.
For local commodity prices, data is from October 2014 to September 2015.

Source: Department of Statistics, Malaysia, International Monetary Fund (IMF), Bloomberg and Bank Negara Malaysia estimates

(iv) Exchange rate depreciation and appreciation have asymmetric impact on inflation. It is
important to note that estimations of the ERPT capture both periods of depreciation and appreciation.
Studies, however, have shown that the size of the impact on inflation tends to be larger during periods of
depreciation compared to periods of appreciation. The asymmetric relationship between exchange
rate changes and inflation (as conceptually illustrated in Chart 2) is also observed in the Malaysian
data (Chart 5)11. Empirical estimations to distinguish ERPT during depreciation and appreciation episodes
in Malaysia show that ERPT is indeed larger during periods of depreciation.

(v) Lack of robust evidence to suggest threshold effects between exchange rate depreciation
and inflation. Firms tend to absorb the initial increase in costs if they view the depreciation as small
or transitory. As the exchange rate depreciation becomes prolonged and exceeds a certain threshold,
firms may change their price-setting behaviour. At this stage, price sensitivity to the exchange rate
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depreciation may also increase disproportionately. In the case of Malaysia, however, threshold effects are
not conclusively observed. Evidence of threshold effects would indicate that as the size of the exchange
rate depreciation becomes larger, inflation would also increase at a much faster pace and to some extent

9
This follows from Forbes (2015). In addition, Choudhri and Hakura (2006) and Aron, MacDonald and Muellbauer (2014) find
no significant link between ERPT and openness (import-to-GDP ratio, import dependence and number of importers).
10
Source: Input-Output Tables 2010 for Malaysia. Most items in the CPI basket have import content less than 40%.
11
The data fits a logarithmic trendline as the rising rate of change in the exchange rate coincides with higher inflation.
73
 Chart 6 Chart 7
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Average Inflation for Different Magnitudes of Contribution to Fuel Inflation
Exchange Rate Changes Percentage point
4
Core inflation,
Average annual change (%) 3
2
4.0
1
3.5
0
3.0 -1

2.5 -2
-3
2.0
-4
1.5
-5
1.0 J F M A M J J A S O N D J F M A M J J A S O N D
2014 2015
0.5

0.0 Reduction in subsidy Exchange rate

<0 0-2 2-4 4-6 >6
NEER,
Annual change (%) Global oil price Fuel inflation

Source: Department of Statistics, Malaysia, Bloomberg and Source: Ministry of Domestic Trade, Co-operatives and Consumerism,
Bank Negara Malaysia estimates Department of Statistics, Malaysia, Bloomberg and Bank Negara Malaysia
estimates

non-linearly. Chart 6 shows that core inflation in Malaysia remained stable, averaging close to 2% when
the exchange rate depreciation was below 6%. As the exchange rate depreciation exceeded 6%, core
inflation edged up to average at 3.6%. This, however, was driven mainly by data in the period 1997-
1998. Although this observation may seemingly indicate some threshold effects, empirical estimations12
suggest that the results are not statistically significant. This could be primarily due to the fact that from
the sample data, Malaysia has limited experience of both high inflation and large exchange
rate depreciation.

In summary, the degree of ERPT has remained relatively low in Malaysia. This is consistent with a previous
study13 by the Bank in 2011 and general findings for Malaysia in the literature. The low ERPT can be
attributed to the following factors:

• Presence of administered-price policies. About 17.5% of the items in the CPI basket are subject to
administered-price policies14. The Government also implements other measures to ensure price increases
are not excessive. These measures include the issuance of more import permits to increase food supplies
during periods of shortages, price reduction campaigns and the enforcement of the Price Control and
Anti-Profiteering Act 2011.
– This for example has resulted in low sensitivity of fuel inflation to global oil prices and the exchange
rate. Prior to December 2014, domestic fuel prices were classified as one of the price-administered
items. While fuel for domestic consumption is primarily imported from abroad, their prices were not
sensitive to changes in global oil prices and the exchange rate due to the presence of fuel subsidies.
This contained the ERPT to inflation. It is, however, important to note that since the removal of the fuel
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12
Estimations are based on threshold regressions from Hansen (1999 and 2000) where the Phillips curve equation is estimated
for a series of exchange rate changes that could reflect potential threshold effects.
13
See Box Article on ``Impact of Ringgit Appreciation on Import Prices and Inflation´´ in BNM Annual Report 2011.
14
The pricing mechanisms of administered items in the CPI are mainly governed by the Price Control and Anti-Profiteering Act
2011, which replaced the Price Control Act 1946. In general, there are two types of price-administered items in the CPI. The
first comprises items where the Government determines the retail prices for these goods. Examples include flour and cooking oil,
which are also subsidised by the Government. The second comprises items that require Government approval for changes to
be made on their prices. Examples include cigarettes, electricity tariffs and public transport fares. With the administered-price
mechanisms in place, the impact of shocks on domestic prices is smaller, less direct and less immediate.
74
 subsidies and the implementation of the managed-float pricing mechanism for fuel prices in December
2014, movements in both global oil prices and the exchange rate have had a more direct and faster
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impact on domestic fuel prices (Chart 7)15.

• Limited import content. Imported finished goods captured in CPI-Import have a low share in the
consumption basket of the average household (7.2%). From the supply side, based on the Input-Output
Tables 2010 for Malaysia, intermediate imported inputs account for about 20% of total gross output
and PPI-Import accounts for 33% of the total PPI basket. Hence, the limited dependency on imports
contributes, in part, to the low ERPT to domestic prices.

• Pricing-to-market. Price-setting behaviour of firms is greatly influenced by global and domestic market
structures. These factors include the degree of competition, product differentiation and substitutability,
and the strategic reactions of other firms. Increased competition, due to greater globalisation and
liberalisation of markets, has generally increased the elasticity of demand and supply and, in turn,
lowered the pricing power of firms. Hence, in response to higher costs amid exchange rate depreciation,
firms tend to absorb the higher costs by varying their profit margins or improving cost management
by increasing efficiency or switching to cheaper substitutes. In assessing the impact of these factors,
anecdotal evidence in Malaysia suggests that firms tend to typically wait for at least six months to assess
the strength of demand before reviewing their prices, and either adjust their profit margins or pass on
the higher costs. However, some retailers, notably importers of finished goods, tend to fully pass on the
higher costs to consumer prices if there are no local substitutes.

B. Inflation developments in Malaysia during episodes of depreciation

Given the low ERPT, expectations are for exchange rate depreciation to have limited impact on
inflation. However, past episodes of depreciation have seen different outcomes for inflation.
Over the last two decades, Malaysia experienced two episodes of persistent ringgit depreciation.
These periods were: (i) April 1997 - December 1998 during the Asian Financial Crisis (AFC); and
(ii) October 2014 - December 2015 during the period of a sustained drop in global commodity prices
and strengthening of the US dollar. Table 1 and Chart 1 both show that inflation surged during the
first episode but remained relatively subdued in the second episode following the depreciation of
the ringgit.

Analysing the stylised facts recorded during these episodes highlights that the final overall impact on inflation
has to be assessed with consideration to other important factors beyond the ERPT. These factors include the
trajectory of the exchange rate depreciation, and other determinants of inflation such as global commodity
prices and domestic demand conditions. In the Malaysian experience, these other factors are certainly pivotal
in determining the inflationary impact on the economy, which can be clearly contrasted between these
depreciation episodes. In particular, during these two episodes there were some ERPT but the mitigating
factors in the current episode, namely the prolonged decline in global commodity prices, played a more
significant role in containing the overall impact on inflation.

April 1997 - December 1998: Sharp ringgit depreciation caused a spike in import costs and led
to an acceleration in inflation
During this period, the NEER depreciated by an average of 13.1%16. The depreciation trajectory was
sudden and steep amid large and sharp fluctuations in the exchange rate. Globally, commodity prices
were also on a declining trend, but at a more modest pace compared to the more recent period. While
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domestic demand conditions weakened as the economy contracted sharply following the adverse
impact from the AFC, there was notable evidence of demand-driven inflationary pressures at the onset

15
The net impact on inflation would, however, depend on the magnitude and direction of the changes in both global oil prices
and the exchange rate. See Chart 7.
16
Between April 1997 and December 1998, the NEER had depreciated by 31.9%. The depreciation of 13.1% refers to the
average of annual change in the NEER on a monthly basis, which is used as a like-for-like comparison against inflation.
Inflation is also measured in a similar manner.
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 Table 1
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Selected Economic Indicators during the Two Exchange Rate Depreciation Episodes
Episode 1 Episode 2
Average of annual change during the period, %1
(Apr 1997 – Dec 1998) (Oct 2014 – Dec 2015)
Headline CPI 4.1 2.2
Core CPI2 4.4 2.3
CPI-Import 5.7 2.5
PPI 7.4 -4.3
PPI-Local 7.5 -6.7
PPI-Import 6.7 0.7
Output gap3 -0.1 0.3
Real GDP -1.0 5.1
NEER against import partners4 13.1 9.3
RM/US Dollar 21.2 13.9
IMF Primary Commodity Price Index -14.4 -32.2
Brent oil price -24.2 -43.5
Global CPI5 4.5 1.1
RON95 petrol price, RM/litre 1.06 2.04
Diesel price, RM/litre 0.65 1.98

1
With the exception of output gap, petrol and diesel prices, all other indicators refer to average of the annual change during the period. Output
gap captures the average deviation of actual output from potential output during the period. Prices for RON95 petrol and diesel refer to the
average prices during the period.
2
Core CPI inflation attempts to measure the underlying inflation. It is computed by excluding price-volatile and price-administered items whose
price movements are more likely affected by temporary shocks and volatile supply factors rather than persistent changes in underlying factors
affecting demand and supply conditions. In addition, core inflation also excludes the estimated direct impact of GST.
3
Output gap captures the percentage deviation of actual output from potential output, which is an estimate of the highest level of output that
an economy is capable of producing in a non-inflationary environment.
4
The nominal effective exchange rate (NEER) against import partners is calculated based on the weighted average of the bilateral exchange rates
against Malaysia’s top 15 import partners. A positive figure indicates a depreciation in the ringgit against Malaysia’s import partners relative
to the year before.
5
Global CPI inflation refers to the aggregate inflation of Malaysia’s top 15 import partners, weighted by the share of imports from these economies.

Source: Ministry of Domestic Trade, Co-operatives and Consumerism, Department of Statistics, Malaysia, International Monetary Fund (IMF),
Bloomberg and Bank Negara Malaysia estimates

of the crisis. In particular, there was a large positive output gap that was reflected in labour market
tightness, strong import growth and supply bottlenecks17. Together with the sharp ringgit depreciation,
the domestic developments created a substantial spike in the cost of imports over a short interval of
time and these were quickly passed on to consumer prices. Specifically, these factors precipitated the
marked increase in the prices of imported finished goods (CPI-Import), which accelerated by 9.1% in
1998 (1997: 1.8%) and prices of imported inputs (PPI-Import), which surged by 9.3% (1997: 2.8%).
The quick and sharp rise in the cost of imports also showed that the moderate decline in commodity prices
was insufficient to offset the inflationary impact from the large and sharp ringgit depreciation. As a result,
headline inflation increased significantly from 2.1% in July 1997 to peak at 6.2% in June 1998 (averaging
5.3% in 1998). Both headline and core inflation remained persistently above 4% throughout 1998.

October 2014 - December 2015: Persistent ringgit depreciation mitigated by downtrend in

commodity prices
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In comparison to the AFC, the current depreciation episode differs in two ways: the magnitude of the
depreciation was relatively more modest, as the NEER depreciated by an average of 9.3%18 during the
period, and the depreciation trajectory was in fact more gradual and persistent with smaller fluctuations

17
See BNM Annual Report 1997 and 1998 for details.
18
Between October 2014 and December 2015, the NEER had depreciated by 20.5%. The depreciation of 9.3% refers
to the average of annual change in the exchange rate on a monthly basis, which is used as a like-for-like comparison
against inflation. Inflation is also measured in a similar manner.
76
 in the exchange rate. The depreciation did cause CPI-Import19 to increase by 3.0% in 2015 but the overall
impact on inflation was offset by the drop in fuel prices of 9.0%. Of importance, the large decline of
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32.2%20 in global commodity prices during the period played a significant role in mitigating the impact
of exchange rate depreciation on inflation. This is reflected by the decline in PPI by 4.8% in 2015 and
only a small increase in PPI-Import by 0.7%. The mitigating effects from the prolonged downtrend in
global commodity prices were also evident in the developments of the other price indices along the
production chain (Diagram 2). Prices of imported raw and intermediate materials only increased by
0.6% during this episode following the ringgit depreciation, while prices of local raw and intermediate
materials recorded a large decline of 9.1%. In addition, domestic demand conditions remained
moderate with no signs of demand-driven inflationary pressures. Overall, headline inflation remained
modest at 2.1% in 2015 while core inflation remained relatively stable at 2.3%.

Conclusion
Analyses of data in the past two decades suggest that the exchange rate pass-through to inflation
has generally been low in Malaysia. The low degree of pass-through is due mainly to the prevalence
of administered prices in the CPI, moderate dependency on imported goods and pricing-to-market
by firms. While the pass-through is generally low, the 1997-1998 experience shows that exchange
rate depreciation can be accompanied by substantial changes in inflation. In the more recent period,
however, inflationary pressures have remained moderate despite the persistent depreciation. This is
mainly on account of the offsetting impact from the large decline in global oil and commodity prices.

Going forward, the changing economic landscape following reforms towards more market-based pricing
could change the inflation dynamics in Malaysia. Since 2010, there has been a gradual removal of subsidies
from key necessities including food items, fuel products and utilities. Of note are the adjustments that have
impacted the price-setting behaviour of firms, namely the minimum wage policy in 2013 and market-based
pricing mechanism for fuel products in 2014. These changes could lead to greater flexibility of domestic
prices, which in turn could make firms more responsive not only to changes in the exchange rate but also to
global prices.

References
Aron, J., MacDonald, R., and Muellbauer, J. (2014). `Exchange rate pass-through in developing and
emerging markets: A survey of conceptual, methodological and policy issues, and selected empirical
findings´. Journal of Development Studies, 50(1), pp. 101-143.

Bank Negara Malaysia Annual Report 1997.

Bank Negara Malaysia Annual Report 1998.

Bank Negara Malaysia (2012). `Propagation of global commodity prices to inflation in Malaysia´. 2011
Annual Report Box Article.

Bank Negara Malaysia (2012). `Impact of ringgit appreciation on import prices and inflation´. 2011
Annual Report Box Article.

Caselli, F. and Roitman, A. (2016). `Non-linear exchange rate pass-through in emerging markets´. IMF
Working Paper No. 16/1.
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Choudhri, E. and Hakura, D. (2006). `Exchange rate pass-through to domestic prices: Does the
inflationary environment matter?´ Journal of International Money and Finance, 25 (4), pp. 614–639.

19
In the breakdown for CPI-Import, prices of food and non-food components rose from 2.0% and -0.8% respectively in
December 2014 to reach 7.5% and 1.5% in December 2015.
20
Represents average annual change during the period for the IMF Primary Commodity Price Index.
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 Forbes, K. (2015). `Much ado about something important: How do exchange rate movements affect
inflation?´ Speech at the 47th Money, Macro and Finance Research Group Annual Conference, Cardiff, UK.
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Frankel, J., Parsley, D., and Wei, SJ. (2012). `Slow pass-through around the world: A new import for
developing countries?´ Open Economies Review, 23 (2), pp. 213–251.

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Hansen, B. (1999). `Threshold effects in non-dynamic panels: Estimation, testing, and inference´. Journal of
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Hansen, B. (2000). `Sample splitting and threshold estimation´. Econometrica, 68(3), pp. 575-603.

Ito, T. and Sato, K. (2008). `Exchange rate changes and inflation in post-crisis Asian economies:
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Mihaljek, D. and Klau, M. (2008). `Exchange rate pass-through in emerging market economies: What
has changed and why?´ BIS Papers No. 35.

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