Malaysia
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
05 Feb 1998
eISBN:
9781451828245
Language:
English
Keywords:
ISCR; CR; private sector; U.S. dollar; financial institution; capital account; debt service; current account; first quarter
Download PDF (3.9 MB)

This paper highlights that growth in Malaysia accelerated in 1994–95, underpinned by strong domestic and external demand. Exports of goods and services accelerated in 1994, owing to strong overseas demand and expanded production capacity, particularly in the electronics and electrical products industries. Private fixed capital formation grew by more than 25 percent per year (in real terms), in response to lower corporate tax rates, an increase in the reinvestment allowance, the decline in interest rates during 1994 and early 1995, and strong demand.

Abstract

This paper highlights that growth in Malaysia accelerated in 1994–95, underpinned by strong domestic and external demand. Exports of goods and services accelerated in 1994, owing to strong overseas demand and expanded production capacity, particularly in the electronics and electrical products industries. Private fixed capital formation grew by more than 25 percent per year (in real terms), in response to lower corporate tax rates, an increase in the reinvestment allowance, the decline in interest rates during 1994 and early 1995, and strong demand.

I. Real Sector

A. National Accounts

1. Growth accelerated in 1994–95, underpinned by strong domestic and external demand (Table 1). Exports of goods and services accelerated in 1994, owing to strong overseas demand and expanded production capacity, particularly in the electronics and electrical products industries. Private fixed capital formation grew by over 25 percent per year (in real terms), in response to lower corporate tax rates, an increase in the reinvestment allowance, the decline in interest rates during 1994 and early 1995, and strong demand. The bulk of spending was in the manufacturing and services sectors, especially the electronics and electrical products industries. Investment spending was also very high on oil and gas projects in 1994 (in line with expansion programs), and in the construction sector in 1995 (led by high outlays on residential and commercial property development and large privatized projects1). Public investment spending—driven by capacity expansion and modernization programs undertaken by the nonfinancial public enterprises (NFPEs), and by federal government outlays for infrastructure and human resource development—grew less rapidly in 1994–95, following high growth rates of NFPE outlays earlier in the Sixth Malaysia Plan period (1990–95). Private consumption spending was robust, fueled by rising disposable incomes and likely wealth effects from the impressive performance of the stock market during 1992–93.

Table 1.

Malaysia: Expenditure on Gross Domestic Product in 1978 Prices, 1992-96

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Source: Data provided by the Malaysian authorities.

Annual change as a percent of GDP.

2. Growth moderated in 1996, owing mainly to a slowdown in exports and private investment spending (Table 1). The marked deceleration in export growth reflected several factors, including weaker external demand (particularly for electronics); the real appreciation of the ringgit; greater competition from lower-cost producers (particularly for electrical machinery); and lower agricultural prices. Slower growth in private investment spending was led by more moderate investment in the services sector (following the completion of expansion programs by the Malaysian Airline System and the independent power producers in 1995) and in the construction sector (owing primarily to slower spending on large privatized projects). Outlays by oil and gas companies also declined following the completion of expansion programs in 1992–95. However, investment in the manufacturing sector remained strong, continuing to rise by about 16 percent in real terms. Public investment spending accelerated slightly, owing to strong spending by the NFPEs to expand and upgrade power generation and distribution facilities, and increased momentum on a number of infrastructure projects. Private consumption spending moderated slightly, owing to a combination of lower earnings by commodities producers, firmer interest rates, and measures introduced in late 1995 to encourage saving.2 Public consumption spending slowed markedly, owing mainly to weaker growth in emoluments after the 1995 salary revision,3 and also to lower spending on supplies, services, and defense.

B. Sectoral Developments

3. Growth of manufacturing output fell slightly in 1996, although it continued to increase as a share of GDP (Table 3). Much of the slowdown was concentrated in export-oriented industries (where growth declined from 15¼ percent in 1995 to 8 percent in 1996), particularly electronics and electrical products. However, production in domestic-oriented industries strengthened to almost 17 percent, from 12¾ percent in 1995, owing to strong domestic demand for construction-related materials and chemicals and chemical products, as well as increased capacity in the chemicals industry.

Table 2.

Malaysia: Expenditure on Gross Domestic Product in Current Prices, 1992-96

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Source: Data provided by the Malaysian authorities.

Annual change as a percent of GDP.

Table 3.

Malaysia: Gross Domestic Product by Sector of Origin in 1978 Prices, 1992-96

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Source: Data provided by the Malaysian authorities.

Finance, insurance, real estate, and business services.

Community, social and personal services, private nonprofit services to households and domestic services of households, less imputed bank service changes and plus import duties.

4. Growth in the construction sector, although strong at 13 percent, was lower than in the previous two years. This was primarily due to a moderation in the growth of residential and nonresidential construction, partly in response to the anti-speculation measures introduced in October 1995.4 Growth in the civil engineering subsector also slowed somewhat, as increased construction value of road, rail, port and airport projects was more than offset by lower construction value of private power plants, following the completion of expansion programs in 1995.

5. Agricultural production improved in 1996, owing largely to increased output of palm oil, which, in turn, was due to an increase in matured areas and higher oil extraction rates. The 7 percent volume growth (Table 5) was somewhat offset, however, by lower palm oil prices. Production of rubber continued to decline, given labor shortages and the conversion of rubber land to more lucrative crops. Production of saw logs was also on a declining trend, in line with the government’s policy of sustainable forest management.

Table 4.

Malaysia: Composition of Investment and Saving, 1992-96

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Source: Data provided by the Malaysian authorities.
Table 5.

Malaysia: Production of Major Primary Products, 1992-96

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Source: Data provided by the Malaysian authorities.

1995 and 1996 production is under the purview of the Ministry of Agriculture.

6. Mining sector output grew more slowly in 1996, reflecting a slower increase in the production of crude oil in compliance with the national depletion policy. Production of liquefied natural gas (LNG) was significantly higher, owing to strong regional demand and increased capacity. The value of tin production continued to decelerate, owing to the depletion of high grade ores and lower tin prices.

7. The services sector grew by over 7 percent, about the same as in 1995. Stronger growth in the finance and insurance industries—following from strong loan growth, higher revenue from other banking services, and higher premium collections—was offset by slower growth in other subsectors. The electricity, gas and water, and transport, storage and communications industries were adversely affected by the export slowdown, while the wholesale and retail trade subsector saw increased competition arising from rapid expansion of outlets and shopping malls.

C. Saving and Investment

8. The decline in the saving/investment gap to 5¼ percent of GDP in 1996 primarily reflected a narrowing of the private saving/investment gap (Table 4). Gross national saving rose to 36 percent of GDP, from about 35 percent of GDP in 1995, as private saving increased in response to strong corporate profitability, higher real interest rates, and pro-saving measures implemented in late 1995 (see above). In addition, gross domestic investment declined by 2 percentage points to 41 percent of GDP from the previous year. This reflected the moderation in private investment spending, which was foreshadowed by the completion of a number of major projects, discussed above, and by a decline in the value of manufacturing investment approvals in 1995 (Table 7). During 1996, manufacturing investment approvals rebounded significantly.

Table 6.

Industrial Production Index, 1992-97

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Source: Data provided by the Malaysian authorities.
Table 7.

Malaysia: Total Proposed Capital Investment in Approved Manufacturing Projects, 1992-96 1/

(In millions of ringgit)

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Source: Data provided by the Malaysian authorities.

Includes equity and loans.

D. The Labor Market

9. Conditions in the labor market remained tight in 1996. Total employment increased by 3½ percent in 1996, down from 4 percent in 1995 (Table 9), and the unemployment rate eased to 2⅔ percent. As in earlier years, a large portion of the increase in the labor force was absorbed by the manufacturing, construction, and some service sectors, while agricultural employment declined.

Table 8

Malaysia: Ongoing and Planned Investment in Infrastructure--Main Projects, 1992-2000

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Preliminary estimates.

Table 9.

Malaysia: Labor Market Developments, 1992-96

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Sources: Data provided by the Malaysian authorities.

Finance, insurance, real estate, and business services.

Includes hotels and restaurants, and other services.

10. Owing to inadequate supply of labor, the government has allowed controlled importation of foreign workers in recent years.5 The bulk of foreign workers have been employed in the manufacturing and service sectors, where skilled labor is scarce, and in the plantation and construction sectors, where unskilled workers are in short supply. Although the government’s policy on recruitment of expatriates remains liberal, the policy of employing unskilled foreign workers in general was tightened in 1996, reflecting the authorities’ desire to promote more sophisticated industries and increasing concerns over the social implications arising from the employment of a large number of foreign workers.6

11. For the economy as a whole, average labor productivity, measured as real GDP per worker, increased at a slower pace in 1996. It rose by about 4¾ percent, compared with over 6 percent in 1994 and 5 percent in 1995. Labor productivity growth in agriculture slowed from 12 percent in 1995 to about 6 percent in 1996, reflecting, in part, lower production of forestry products in line with the government’s policy of sustainable forestry management, and lower output of rubber and palm oil, owing to surplus stocks in the market. Productivity in the manufacturing sector also grew more slowly in 1996, particularly in the electrical and electronics industries, in part, owing to the slowdown in external demand.

12. While economy-wide wage data are not available, real wage growth exceeded improvements in real labor productivity in the manufacturing sector, leading to a large increase in unit labor costs in 1996.7 While the slowdown in productivity gains and the corresponding rise in unit labor cost partly reflects cyclical factors, there is concern over an erosion of international competitiveness, owing to rapid wage increases. As a result, the Guidelines on Wage Reform System were adopted in August 1996 by the National Labor Advisory Council, which comprises representatives of employers, employees, and the government, with the objective of establishing a closer link between wages and productivity growth. Under the Guidelines, wages will consist of a fixed component (mainly the basic wage) and an additional component in the form of variable payments. Changes in the basic wage would reflect factors such as changes in the cost of living, while the variable component would be based on productivity improvements and performance of the individual, work group, or organization.

E. Prices

13. Inflation has remained low and stable in recent years, despite strong domestic demand pressures. Consumer price inflation was 3½ percent in 1996, unchanged from the previous year, and moderated to 3 percent during the first quarter of 1997 (Table 13). Relatively high food price increases in recent years8 were to some extent offset by low import prices, particularly for clothing and footwear, as a result of low inflation in partner countries, the appreciation of the ringgit in effective terms, and the abolition of import duties on a wide range of items in the 1996 Budget.

Table 10.

Malaysia: Registered Unemployed by Occupation, 1992-96

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Source: Data provided by the Malaysian authorities.
Table 11.

Malaysia: Average Wage Rates in Selected Sectors, 1992-96 1/

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Source: Data provided by the Malaysian authorities.

For supervised personnel.

No survey was done in 1994, and 1996 survey data are still being processed.

1995 percentage changes are over 1993 levels.

Table 12.

Malaysia: Average Domestic Prices and Taxes on Energy-Related Products, 1992-97

(Cents per liter; unless otherwise indicated)

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Source: Data provided by the Malaysian authorities.

Effective January 1, 1995, there are only two grades of petrol available at petrol stations, i.e., leaded petrol (RON 97).

Duties on kerosene and fuel oil were abolished on October 10, 1994.

Prices of fuel oil and natural gas (liquefied) are not available.

Table 13.

Malaysia: Consumer Price Index, 1992-97 1/

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Source: Data provided by the Malaysian authorities.

New weights apply in 1995. Figures for 1991-95 have been revised based on 1994 base year.