Malaysia

However, assuming that the government reduces its operating expenditure and that it has some success in increasing revenue by expanding the tax base, the deficit will shrink to 3.8% of GDP in 2015. A widening of the tax base is expected to be achieved through the introduction (most likely in 2012) of a goods and services tax (GST), although implementation of the tax is likely to be hampered by opposition from households and businesses. Further moves to alter the subsidy structure could also prove unpopular. Monetary policy During the early part of the forecast period Bank Negara Malaysia (BNM, the central bank) will proceed with the normalisation of monetary policy by pushing up its main policy interest rate, the overnight policy rate (OPR). BNM has raised the OPR three times since March 2010, by a total of 75 basis points, bringing the rate to 2.75%, having previously cut it to a record low in response to the dramatic downturn in the Malaysian economy that occurred in 2009. However, the recent sharp appreciation of the local currency, the ringgit, and signs of slower economic growth suggest that the central bank will not move aggressively on interest rates in the coming quarters. As BNM does not expect inflation to rise to problematic levels in 2011, we do not expect the OPR to be raised this year to a level higher that the rate of 3.5% at which it stood during 2007 and much of 2008. Nevertheless, during the remainder of the forecast period, as the pace of domestic demand growth quickens, BNM is likely to push rates higher to contain inflationary pressures.

Economic forecast
International assumptions
Economic growth (%) US GDP OECD GDP World GDP World trade Inflation indicators (%) US CPI OECD CPI Manufactures (measured in US$) Oil (Brent; US$/b) Non-oil commodities (measured in US$) Financial variables US$ 3-month commercial paper rate (av; %) 3-month money market rate (av; %) 2010 2.9 2.9 3.8 12.7 1.6 1.4 3.3 79.6 24.5 2011 2.7 2.3 3.1 6.6 1.9 1.6 1.9 90.0 24.9 2012 2.2 2.1 3.0 6.4 2.3 1.8 0.0 82.3 -9.4 2013 2.4 2.3 3.1 6.6 2.5 2.0 1.4 78.3 -8.8 2014 2.3 2.3 3.0 6.6 2.8 2.1 1.2 75.5 0.4 2015 2.3 2.0 3.0 5.8 2.8 2.3 1.7 76.0 0.2

0.3 0.2

0.3 0.3

0.7 0.9

2.2 1.4

4.1 2.0

5.1 2.3

Economic growth

The Malaysian economy is expected to move on to a more stable growth path in 2011-15, when we expect real GDP growth to average 5.3% a year. This follows a period of instability, during which the economy contracted by 1.7% in 2009 amid the 2008-09 global economic slowdown before rebounding to growth of 7.2% in 2010. The strong recovery last year was driven partly by the inventory cycle, as the dramatic drawdown of stocks that occurred in 2009 amid the slowdown was followed by rapid restocking in 2010. In the forecast period

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private consumption and investment will remain the primary drivers of economic growth. An increase in compulsory savings on the part of workers from January 2011 will eat into private disposable incomes, but growth in private consumption will continue to be underpinned by a fairly strong labour market. The positive effect of restocking on real GDP growth is expected to wane in 2011 as the process of inventory accumulation moderates. Despite the government's efforts to consolidate its finances, public spending (which will be guided by the 10MP) will rise by an average 4.2% a year during the next five years. Exports of goods and services are expected to grow by an average of 8.5% a year. However, the contribution of net exports to GDP growth will be marginal, as imports of goods and services will record similar growth rates. In supply-side terms, the services sector will be the largest and most dynamic part of the economy, as the government channels more resources into the sector in a bid to ensure that Malaysia becomes a high-income nation by 2020. The industrial sector will continue to constitute a sizeable part of the economy, but we expect it to remain smaller than the services sector during the forecast period. Growth in the industrial sector will generally track the rate of expansion in the economy as a whole. The most dynamic services subsectors will be financial services, wholesale trade, and hotels and restaurants. Growth in financial services will be encouraged by gradual liberalisation. This will help to improve the international competitiveness of Malaysia's financial system, especially in Islamic-banking products, and will make the domestic financial sector more responsive to the needs of both the private and public sectors. The contribution of agriculture (and particularly palm oil production) to the economy will be important: agricultural output growth will assist in raising rural incomes and consumption during the forecast period. However, given the uncertain outlook for the global economy, there are risks to the fairly benign forecast for growth in Malaysia in the next five years. Massive macroeconomic stimulus has stabilised the world economy and allowed growth to resume, but global growth will slow in 2011 as the impact of stimulus fades, and there is a risk of a deeper downturn in several major economies.
Economic growth
% GDP Private consumption Government consumption Gross fixed investment Exports of goods & services Imports of goods & services Domestic demand Agriculture Industry Services 2010 a 7.2 6.6 0.1 9.4 9.8 14.7 12.1 1.7 7.9 c 7.2 2011 b 4.8 6.3 6.1 6.5 7.3 6.7 3.9 2.3 4.0 5.7 2012 b 5.4 6.0 3.7 6.1 8.7 9.3 5.7 2.5 4.2 6.6 2013 b 5.4 5.7 4.2 6.8 8.6 9.2 5.7 2.6 4.4 6.3 2014 b 5.4 5.9 3.9 7.0 8.8 9.5 5.8 2.8 4.5 6.2 2015 b 5.6 6.1 3.3 7.2 9.1 9.7 6.0 2.5 4.5 6.7

a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.

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Inflation

Owing to higher global prices for crude oil and non-oil commodities, consumer price inflation will accelerate to an average rate of 3.1% in 2011, and price rises will then average 3.6% a year in 2012-15. Government efforts to rationalise the extensive subsidy scheme will exert upward pressure on prices in the forecast period. Another source of inflationary risk will be the new GST, which the government will attempt to introduce early in the period. Disinflationary influences will also be strong, however. The removal of trade barriers and greater regional economic integration will help to maintain a low-inflation environment. As a country that is heavily dependent on international trade, Malaysia will not be able to escape the effects of growing competition and import penetration in its domestic market, especially in the form of a wide range of consumer goods from China. Another factor that will help to keep inflation in check will be the forecast appreciation of the ringgit against the US dollar in 2011-15. Since most imports and exports are denominated in US dollars, imports will consequently become cheaper. The ringgit has remained strong against the US dollar in recent months. The ringgit, like several other Asian currencies, strengthened during the second half of 2010, mainly owing to a surge in capital inflows, but the currency has also been supported by large surpluses on the trade and current accounts. A positive interest rate differential with the US will persist in the early part of the forecast period, and this will continue to provide support to the ringgit. We therefore expect the currency to strengthen from an average of M$3.22:US$1 in 2010 to M$3.02:US$1 in 2011 and M$2.98:US$1 in 2012. The ringgit will remain strong during the remainder of the forecast period. BNM has not come under heavy pressure to impose capital controls in order to contain the local currency's appreciation, and the central bank will maintain its current exchange-rate regime, whereby the ringgit is subject to a managed float against a tradeweighted basket of currencies. BNM will continue to stress that it does not attempt to maintain the ringgit at a particular level and intervenes only to minimise volatility and prevent currency misalignments. During the forecast period Malaysia will continue to post large current-account surpluses, at an average of around 13% of GDP. Growth in exports will be underpinned by a recovery in external demand and stronger regional trade. An improvement in external conditions is expected to boost demand in Malaysia for imports of intermediate goods used in the manufacture of exports. Import growth will also be supported by firm domestic demand, but the pace of growth in imports (in value terms) will remain similar to that in exports. Malaysia will broaden its export range, but the economy will remain highly sensitive to the global electronic-goods cycle. Levels of non-manufactured exports, consisting largely of agricultural commodities (notably palm oil) and minerals (particularly crude petroleum and liquefied natural gas, or LNG), will also continue to be determined by global economic conditions. In addition, there will be a shift in the balance of export destinations and import suppliers in 2011-15. China will remain the fastest-growing economy in the Asia region, creating many opportunities for exporters in Malaysia (and particularly for its ethnic-Chinese minority). As a result, China is likely to overtake Singapore as

Exchange rates

External sector

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Malaysia

Malaysia's largest export market during the forecast period, while trade with the US, the EU and Japan will decline in relative importance.
Forecast summary
(% unless otherwise indicated) 2010 a 2011 b 2012 b 2013 b 2014 b 2015 b Real GDP growth 7.2 4.8 5.4 5.4 5.4 5.6 Industrial production growth 7.5 4.3 5.2 5.0 5.7 5.5 Gross agricultural production growth 1.7 2.3 2.5 2.6 2.8 2.5 Unemployment rate (av) 3.5 c 3.3 3.2 3.2 3.1 2.8 Consumer price inflation (av) 1.7 3.1 3.3 3.4 3.8 3.9 Consumer price inflation (end-period) 2.1 3.5 3.3 3.6 3.8 3.8 Base lending rate 5.1 5.6 6.0 6.1 6.4 6.4 Central government balance (% of GDP) -5.5 c -5.5 -4.7 -4.4 -4.0 -3.8 Exports of goods fob (US$ bn) 197.3 c 225.4 242.8 265.7 294.6 320.9 Imports of goods fob (US$ bn) -155.2 c -173.6 -193.8 -214.1 -233.7 -251.9 Current-account balance (US$ bn) 28.2 c 38.6 35.9 39.0 48.6 58.0 Current-account balance (% of GDP) 11.9 c 13.9 11.8 11.6 13.1 13.9 External debt (end-period; US$ bn) 62.1 c 65.1 68.2 71.6 74.3 76.8 Exchange rate M$:US$ (av) 3.22 3.02 2.98 2.95 2.92 2.89 Exchange rate M$:US$ (end-period) 3.08 3.01 3.00 2.93 2.94 2.91 Exchange rate M$:100 (av) 3.67 3.68 3.68 3.64 3.55 3.46 Exchange rate M$: (end-period) 4.16 3.64 3.57 3.43 3.42 3.42
a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.

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