Public investment will be a critical growth driver in Malaysia over the next couple of years under the Ninth Malaysia Plan (9MP), with investments in major flagship projects likely to act as growth catalysts.
In South Johor’s Iskandar Development Region (IDR), investors from the Middle East are expanding their presence. In September 2007, four investor consortia from the UAE, Kuwait and Jordan announced property development projects totalling RM4.1bn in the IDR. The projects includes leisure facilities, parks, housing and a financial centre.
According to The Star (30 August, 2007), a separate consortium of investment
companies and banks from Qatar, Saudi Arabia, Kuwait, Bahrain and the UAE plans to invest at least RM5bn in oil & gas, Islamic banking and property developments. Other similar investments will likely be prompted by the incentives announced by the
Iskandar Regional Development Authority (IRDA), including the exemption of land sale and corporate taxes.
In July 2007, the master plan for the North Corridor Economic Region (NCER) was released, with an emphasis on agriculture, food processing, electronics manufacturing, tourism and logistics, and a total estimated investment of RM177bn over the next 17 years. This was followed by the launch of the East Corridor Economic Region (ECER) plan in October 2007. This plan includes 227 projects with an estimated investment of RM112bn over the next 12 years. Some 39% of the total investment will be allocated to infrastructure, with the core of the investment going to agro-business and tourism.
Financing will stem from the private sector (20%) and private finance initiatives (27%).
Overall, the initiative aims to create 560,000 jobs. In addition, the 9MP and 10MP (2010-15F) include the Sarawak Regional Corridor Development (Recorda), which will focus on energy sector development.
Compared with South Johor where manufacturers have already built a presence, there seems to be greater scepticism over the success of the NCER, ECER and Recorda initiatives, owing to their weaker logistics. Even the IDR faces the challenge of attracting investment in its still-weak service sector. Considering the fiscal
requirements, we believe that the success of these initiatives will largely depend on commitment from a wider range of investors, not only those from the Middle East.
Commitment from a wider variety of stakeholders is key for the success of Malaysia’s major development projects
Economics | Malaysia Takayuki Urade
Our view now, versus three months ago
On growing concern about a slowdown in the US economy, we have reduced our real GDP growth forecast for 2008F. We have also raised our 2008F and 2009F forecasts for CPI inflation and the RM:US$ exchange rate to incorporate stronger-than-expected inflationary pressure, and the likely policy response by Bank Negara Malaysia (BNM).
Summary
In 3Q07, Malaysia’s economy expanded by 6.7% y-y, on robust domestic demand.
Private consumption was underpinned by a rise in public-sector wages, consumer credit growth and the income effect of higher commodity prices. Investment is also showing solid growth, reflecting the acceleration of project execution under the 9MP.
As for the external sector, electronics showed signs of recovery in 4Q07, on top of the solid performance of commodities, particularly crude palm oil (CPO) and liquefied natural gas (LNG). Domestic demand is likely to remain the main driver during 2008-09F, while the external sector is still vulnerable to a slowing US economy. We reduce our real GDP growth forecast for 2008F to reflect the growing possibility of a slowdown in the US, while keeping our 2009F forecast unchanged.
Higher food prices, the end of the base effect from the fuel price cut in February 2007, and a possible reduction in fuel subsidies signal rising inflationary pressure. The most likely response of BNM, in our view, would be to allow appreciation of the ringgit.
Considering its confidence in the domestic economy, BNM is likely to leave the overnight policy rate (OPR) unchanged, at least for 1H08F. Thus, we have raised our CPI inflation forecast for 2008F, and our forex assumptions for 2008F and 2009F, while maintaining our forecast range for the OPR for 2008F and 2009F.
Real economy developments and directions
In 3Q07, real GDP grew by a healthy 6.7% y-y, despite the global uncertainty triggered by the US sub-prime issue. Based on this, the government’s full-year target of 6.0%
growth for 2007 seems feasible.
The main growth drivers were again private consumption and construction. Private consumption was up 14.0% y-y in 3Q07, underpinned by: 1) large-scale public servant salary increases in July 2007; 2) robust consumer credit, which has continued to grow by more than 15% over the past several months; and 3) the effect of buoyant
commodity prices on income, especially in rural areas. Investment growth was also firm (+13.5% y-y), reflecting acceleration of project execution under the 9MP.
As for the external sector, the recovery in exports was weak in 3Q07, but started to pick up in 4Q07. Overall export growth accelerated to 19.6% y-y in the first two months of 4Q07, from 1.2% y-y in 3Q07. Commodities, especially CPO and LNG, were the biggest contributors, and electronics improved from a 0.5% y-y decline in 3Q07 to an increase of 4.1% y-y in 4Q07.
Domestic demand is likely to remain the key driver for 2008F and 2009F, with public investment a major contributor. Public expenditure under the 9MP looks set to accelerate: 4,853 of the 5,904 projects (worth a total of about RM44bn) outlined in the 9MP are scheduled to be executed in 2008F. The effect of the salary hikes for public servants on private consumption should last through 2Q08F, we estimate adding 0.5pp a year to GDP growth. We note, however, that increased stock market volatility may dampen consumer sentiment.
While we still look for a recovery in electronics exports in 1H08F, we believe the pace and extent of the recovery would be affected by any slowdown in the US economy.
While commodities are likely to sustain overall export growth in the short term, the growth is likely to decelerate in 2H08-2009F, when we expect prices to moderate.
To fold in the net effect of the above-mentioned factors, we lower our real GDP growth forecast to 5.4% (from 5.9%) for 2008F, while maintaining our 2009F forecast of 5.2%.
Lower real GDP growth, higher CPI inflation, and a stronger ringgit
Growth sustained by domestic demand
GDP growth forecast for 2008F reduced to 5.4%, from 5.9%
Economics | Malaysia Takayuki Urade
Fiscal policy
Given the less expansionary 2008F budget announced last September, the fiscal position of Malaysia’s government should improve and move toward the 9MP fiscal deficit-to-GDP ratio target of 3.4% in 2010F. Some major factors that may affect the overall fiscal position are: 1) a reduction in fuel subsidies, which is under discussion and likely to be introduced after the Lower House election; 2) any delay in the
execution of the budget for large-scale projects under the 9MP; and 3) the possibility of excess outlay due to weaker-than-expected participation by the private sector.
Monetary policy and interest rates
Prices have been relatively stable in Malaysia, thanks to the base effect of the fuel price reduction at the end of February last year. However, this effect comes off in March 2008, and if this is joined by a cut in fuel subsidies, as mentioned above, there is likely to be greater upward pressure on the CPI. Also, recent increases in food prices pushed CPI inflation up from below 2.0% y-y in 1H07 to 2.4% y-y in December 2007 — almost 60% of the increase is attributable to food and beverages.
As the source of the inflation is largely in import prices, BNM is more likely to deal with it through exchange rate policy than interest rate policy. Considering its confidence in the domestic economy, BNM is likely to leave the OPR at 3.5%, at least for 1H08F.
While BNM has an option to cut the OPR in the case of a weaker-than-expected recovery in exports, or raise it in the case of overheated domestic demand, we see no immediate need for the central bank to act.
We maintain our forecast range for the OPR at 3.25-3.75% for 2008F and end-2009F. Meanwhile, we raise our 2008F CPI forecast to 3.5%, from 2.9%, and leave our 2009F number at 2.7%.
Forex policy and outlook
Considering the inflationary pressure, and the current policy direction — characterised by: 1) accepting certain levels of capital inflows and outflows; and 2) diversifying the economy away from heavy dependence on electronics — it is highly likely that BNM will allow the ringgit to appreciate against the US dollar throughout 2008F and even into 2009F. We expect monetary policy to focus on ways to dampen inflationary pressure, yet minimise the negative impact on exports, particularly in the electronics sector which has just started to recover.
Incorporating these factors, we shift the range of our exchange rate forecasts from RM3.20-3.40:US$1 to RM3.10-3.30:US$1 for end-2008F, and from RM3.15-3.35:US$1 to RM3.00-3.20:US$1 for end-2009F.
Risks
The possibility of a recession in the US and a slowdown in global demand for electronics exports poses the greatest risk for the Malaysian economy, in our view.
Moreover, weak oil demand accompanied by a steep price increase would affect both demand (by increasing inflationary pressure) and supply (by reducing demand for the export sector). We also note the potential risks that waning private consumption and sharp ringgit appreciation would pose on the export sector.
Fiscal position should improve under the 9MP
Greater inflationary pressure ahead due to fuel price subsidies and rising food prices
Our forecast range revised to RM3.10-3.30:US$1 for end-2008F, RM3.00-3.20:US$1 for end-2009F
A US recession, oil demand and price, ringgit appreciation, and private consumption present risks to our forecasts
Economics | Malaysia Takayuki Urade