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Malaysia Economic Monitor Summary - June 2018

Core Content

The Malaysia Economic Monitor (MEM) for June 2018 provides an overview of recent economic developments and the outlook for the country's economy, with a special focus on the digital economy. The report highlights Malaysia's strong economic fundamentals, the impact of the recent political transition, and the opportunities for deeper reforms to support sustainable and inclusive growth.

Main Points

Recent Economic Developments

• Regional Growth: Regional economies strengthened in Q1 2018, with a regional growth rate of 6.6 percent, driven by global manufacturing activity and higher commodity prices.
• Malaysia's Growth: Malaysia's economy grew at 5.4 percent in Q1 2018, with household spending and net trade being key contributors. However, private investment and public expenditure growth were subdued.
• Private Consumption: Private consumption remained the primary growth driver, expanding at 6.9 percent, supported by stable employment, consumer sentiment, and government income support measures.
• Private Investment: Private investment growth softened to 0.5 percent, due to uncertainties ahead of the general elections.
• Public Expenditure: Public consumption and investment growth were relatively flat, with public investment expenditure declining by 1.0 percent.
• Trade and Current Account: Gross exports grew by 5.8 percent, while gross imports contracted by 0.8 percent. The current account surplus widened to 4.4 percent of GDP.
• Inflation: Inflation moderated in the first five months of 2018, with the May 2018 rate at 1.8 percent. The decline was mainly due to falling global oil prices and stable food supplies.
• Wage Growth: A widening gap in wage growth between manufacturing and services sectors was observed, with manufacturing wages increasing by 13.9 percent versus 3.5 percent in services.
• Unemployment: Youth unemployment remained elevated, with rates for 15-19 year-olds and 20-24 year-olds being close to five and three times the overall unemployment rate.
• Monetary Policy: The Central Bank of Malaysia increased the Overnight Policy Rate (OPR) to 3.25 percent in January 2018, signaling a normalization of monetary accommodation.
• Financial Conditions: Domestic financial conditions remained broadly stable, with net financing growth supported by corporate bond issuances.
• Government Debt: Federal Government debt as a share of GDP decreased to 50.8 percent by end-2017, but guaranteed debt increased to 17.6 percent, reflecting fiscal commitments.

Economic Outlook

• Global Growth: The global growth rate is projected to be 3.1 percent in 2018, then decline slightly to 2.9 percent in 2020 due to slowing in advanced economies.
• Malaysia's Growth: Malaysia is forecast to grow at 5.4 percent in 2018, supported by stronger household consumption. Public consumption is expected to grow at a slower rate due to spending rationalization.
• Investment Outlook: Gross fixed capital formation is expected to grow more modestly than previously anticipated, due to reduced private investment and deferred government spending.
• External Sector: The external sector is expected to benefit from global investment and manufacturing activity, but growth is likely to moderate in the coming years.
• Inflation Outlook: The headline inflation rate is expected to be lower than previously anticipated, with underlying inflation broadly contained.
• Fiscal Reforms: The government is committed to achieving a 2.8 percent deficit target for 2018 and has introduced fiscal measures to lower living costs, including the switch from GST to SST and adjustments to the fuel pricing mechanism.
• Policy Challenges: The new government's policies, while aimed at lowering living costs, could constrain fiscal space without adequate compensatory measures. There is also uncertainty around large infrastructure projects and their fiscal implications.

Key Information

Digital Economy Potential

• The digital economy is seen as a critical driver for Malaysia's transition to a high-income and developed economy.
• Digital Adoption: Malaysia has high levels of digital adoption among its citizens and government, with over 80 percent of the population having digital access.
• Business Adoption: Business adoption of digital technologies lags behind international peers, with only 62 percent of business establishments connected to the internet and 28 percent having a web presence.
• Digital Adoption Index (DAI): Malaysia has limited international bandwidth and fewer secure servers compared to other countries, indicating a need for improvement.
• Sectoral Productivity: Technology adoption is strongly correlated with productivity, especially in manufacturing and mining.
• SMEs: Only about 20 percent of SMEs use the internet for business operations.
• Barriers to Adoption: Slow internet speeds and lack of affordable broadband plans are the main barriers to digital adoption.
• Fixed Broadband: Malaysia's fixed broadband adoption is low, with only about 8 percent of establishments using fiber optic services, compared to 99% in Singapore, 85% in South Korea, and 60% in Japan.
• Cost of Broadband: Malaysian consumers pay significantly more for high-speed broadband, with Malaysia ranking 74 out of 167 countries for fixed broadband and 64 out of 118 for fiber broadband.
• Market Concentration: The fixed broadband market is highly concentrated, with Telekom Malaysia (TM) holding about 92% of the market share.
• Policy Recommendations: To improve digital connectivity, Malaysia should focus on increasing the quality and affordability of fixed broadband services and fostering a competitive market.

Conclusion

The Malaysia Economic Monitor underscores the importance of digital transformation in driving Malaysia's future growth. While the country has made progress in digital adoption, significant challenges remain, particularly in business adoption and affordability of broadband services. The new government's policies offer an opportunity to strengthen the economy and promote inclusive growth, but careful management is required to avoid introducing new risks. The report calls for structural reforms, improved fiscal sustainability, and a renewed social contract to ensure growth works for everyone.