Professional Documents
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• PP 7767/09/2010(025354)
10 June 2010
Malaysia
Economic Highlights
Whilst driving domestic demand is important, the domestic market is just not big enough,
in our view, to sustain a robust economic growth, implying that it would be a challenge for
the Government to achieve the 6.0% per annum real GDP growth target set under the plan.
As it stands, Malaysia has not been able to achieve the economic growth target set in the
last three Malaysia plans due to economic crises and poor execution of the measures
proposed in promoting private investment.
The gross development expenditure will be kept at RM230bn in the 10MP, the same level as
in the 9MP, in line with the Government’s efforts to contain its budget deficit. As a result,
the budget deficit will likely narrow to 2.8% of GDP or RM33.4bn in the final year of the 10MP
in 2015, from a deficit of 5.3% of GDP or RM40.3bn estimated for 2010. This will help to
improve the Government’s debt level to 49.9% of GDP in 2015 but it will likely cap the
Government’s spending going forward.
The services sector will likely be the key driver in the economy, suggesting that greater
emphasis will likely be focussed on promoting growth in the sector. As a result, the share
of the services sector will rise to 61.1% of GDP in 2015, from 58% estimated for 2010. The
manufacturing sector will complement the services sector but growth will be less robust, as
it would remain challenging for Malaysia to attract investment into the sector.
The Tenth Malaysia Plan (10MP), which covers the period 2011-2015, represents the The 10MP highlighted a
first five-year blueprint of the country’s ambition to transform itself into a high need to restructure the
income nation by 2020. In this respect, the Government highlighted that it needs economy through the
to restructure the economy through the various transformation programmes launched various transformation
recently. These initiatives include the Government Transformation Programme (GTP) programmes
launched in January and the New Economic Model (NEM) to transform the economy
unveiled in March this year.
Towards this end, the focus of the 10MP will be on shifting the economy to a high The focus of the 10MP will
value-added and high income economy, via an increase in productivity. As a be on shifting the economy
result, total factor productivity (TFP) is projected to contribute 38.5% or 2.3% to a high value-added and
of the target real GDP growth in the 10MP, compared with 34.7% or 1.5% in the 9MP high income economy, via
(see Table 1). This will be achieved through higher levels of input from human an increase in productivity
capital, adoption of new technologies and development of entrepreneurship to drive
innovation and creativity. Nonetheless, this is not going to be an easy task given
the lack of skilled manpower in the country and we believe a drop in the country’s
education standard will likely be a stumbling block. Efficiency of capital is expected
to improve further with increasing efficiency in the production process and productive
utilisation of assets. Consequently, the contribution of capital to GDP growth is
expected to rise to 37.5% or 2.3% in the 10MP, higher than 34.5% or 1.4% recorded
in the 9MP. Labour’s contribution to GDP growth is projected to reduce to 24.0% or
1.4% in the 10MP, from 30.8% or 1.3% in the 9MP.
Table 1
Contribution Of Factors Of Production,
2001 - 2015
Factor Achieved
% of % % of % % of %
contribution of contribution of contribution of
to GDP GDP to GDP GDP to GDP GDP
Malaysia will also focus its economic growth efforts on National Key Economic Areas To focus on the 12 NKEA to
(NKEA), i.e. oil & gas; palm oil & related products; financial services; wholesale & generate economic growth
retail; tourism; information & communications technology; education; electrical & during the plan
electronics; business services; private healthcare; agriculture; and Greater Kuala
Lumpur.
At the same time, to reduce the vulnerability of the country to external shock, an An important strategy
important strategy under the plan will be to promote domestic demand to become under the plan will be to
a major driver of growth. This will be done through energising the private sector promote domestic demand
as stated in one of the Strategic Reform Initiatives (SRIs) under the New Economic to become a major driver
Model (NEM). As a result, the 10MP sought to create an enabling environment which of growth
encourages productivity, competitiveness and innovation.
Whilst domestic demand is important and more stable in generating growth for the The 6.0% target will be
country’s economy, we believe we should give greater emphasis to promote export challenging to achieve, as
markets which is far bigger. The Government expects real exports to grow by 7.2% domestic market is just not
a year during the plan, compared with +1.8% in the 9MP. This is because the big enough to sustain a
domestic market is just not big enough, in our view, to sustain a robust robust economic growth
economic growth, implying that it would be a challenge for the Government to
achieve the 6.0% per annum real GDP growth target set under the plan (see
Table 2). The 6.0% growth target is also slightly lower than the NEM’s target of an
average growth of 6.2% during the period.
Table 2
Macroeconomic Achievements & Targets
As it stands, Malaysia has not been able to achieve the economic growth Malaysia has not been able
targets set in the last three Malaysia plans. Whilst the various economic crises to achieve the economic
such as the 1997/98 Asian currency crisis, the dotcom bubble in 2001 and the global growth targets set in the
credit crisis originating from the US subprime credit in 2008/09 (see Table 3) were last three Malaysia plans
blamed, the failure to execute its plans to drive private investment was also a major due to the various
factor, in our view. As it stands, private investment only grew by a modest 1.2%
economic crises and poor
a year in the 8MP (2001-05) and it is estimated to inch up moderately by 2.0% a
execution of policies
year in the 9MP (2006-10), after recording a contraction of around 5.0% a year in
proposed
the 7MP (1996-2000) (see Chart 1). The performance paled in comparison to the
strong double-digit growth of 13.4% and 20.2% a year in private investment in the
5MP and 6MP, respectively. As a result, its share of GDP fell from a high of 36.3%
in 1997 to a low of 8.2% in 2002, before rising to 10.1% in 2009.
Given the challenges in executing the various initiatives under the 10MP and the We are of the view that a
existence of global imbalances, we are of the view that a more reasonable more reasonable real GDP
real GDP growth target for the Malaysian economy for the 10MP could be growth target for the
in the region of 4.5-5.5% p.a. As it stands, the country’s real GDP growth has Malaysian economy for the
been on a downward trend after reaching a peak of 9.5% a year in the 6MP. It 10MP could be in the region
weakened sharply by almost half to +5.0% a year in the 7MP and further to +4.7%
of 4.5-5.5%
a year in the 8MP and +4.2% a year estimated for the 9MP (see Chart 2) along with
the poor performance in private investment. If not because of more expansionary
fiscal policy and the introduction of economic stimulus packages to cushion the
economy from various crises, real GDP growth achieved could be even lower in the
last three Malaysia plans. Despite the increase in Government spending during this
Table 3
Comparison Between Target And Actual On Real GDP Growth And Development Expenditure
Allocation
5MP 5.0 6.9 40.1 35.9 -10.4 Malaysia shifted its strategy to
(1986-1990) promote foreign direct investment
(FDI) and liberalised its manufacturing
sector.
6MP 7.5 9.5 55.0 54.7 -0.5 The country benefited from substantial
(1991-1995) inflow of FDI and privatisation
programme.
7MP 8.0 5.0 67.5 99.0 46.7 Regional currency crisis caused
(1996-2000) a severe recession in the country’s
economy in 1998. Efforts were
directed to strengthen domestic
demand through an expansionary of
fiscal policy.
8MP 7.5 4.7 110.0 170.0 54.5 The bursting of the dotcom bubble
(2001-2005) severly impacted the country’s
electronic exports and real GDP in
2001. The Government
introduced three economic stimulus
packages totalling RM14.6bn and
increased its spending by an
additional RM60bn.
9MP 6.0 4.2 200.0 223.0 11.5 The country’s economy in 2009 was
(2006-2010) impacted by the severe global
recession as a result of the global
credit crisis originated from the US
subprime credit crisis.
Chart 1 Chart 2
Malaysia Failed To Drive Private Investment Malaysia's Real GDP Growth Losing
In The Last 15 years Momentum
10.0
25
9.0
20 8.0
Average per year (%)
7.0
Average a year (%)
15
6.0
10
5.0
5 4.0
3.0
0
2.0
5MP 6MP 7MP 8MP 9MP
-5 1.0
0.0
-10
5MP 6MP 7MP 8MP 9MP
Although Malaysia’s global competitive ranking in 2010 as assessed by the highly We view the target to grow
regarded Swiss-based Institute for Management Development (IMD) has jumped private investment by
from 18th to 10th, an unprecedented result, we believe it will remain a significant 12.8% a year as
challenge for the country to drive private investment due to keen competition for optimistic, as it will remain
foreign direct investment (FDI) and rising outward direct investment by local investors. a significant challenge for
As a result, we view the Government’s target to grow private investment by the country to drive
12.8% a year as ambitious and optimistic. A key component of the growth will
private investment due to
be from FDI, according to the Government. Priority will be given to improve the
keen competition
business environment, including measures to further liberalise the economy, in order
to promote private investment. On its part, the Government will strengthen the
ongoing GTP to streamline bureaucratic process and reduce the costs of doing
business. Statutory and regulatory reviews will be undertaken to promote
entrepreneurship and improve risk-taking profiles of the private sector.
Having said that, we believe the initiatives put in place by the Government could help We believe the initiatives
Malaysia gain some headway in stimulating private investment even though the put in place by the
improvement will unlikely be significant. Recall that in a move to promote private Government could still help
investment, the Government has liberalised 27 services sub-sectors on 22 April Malaysia gain some
2009. It had also repealed the Foreign Investment Committee (FIC) guidelines and headway in stimulating
relaxed the 30% Bumiputera equity participation at the point of initial public offer private investment
(IPO) on 30 June 2009. In addition, the Government’s relationship with Singapore
has improved lately that could help generate some investment activities in the
Iskandar region, in our view. Also, the implementation of the Public-Private Partnership
(3P) and the Private Finance Initiative (PFI) is expected to generate some RM62.7bn
of investment in the country. Among the large projects to be implemented under
the 3P includes seven toll highways, five Universiti Teknologi Mara branch campuses,
redevelopment of Angkasapuri Complex Kuala Lumpur as media city, Integrated
Transport Terminal in Gombak and privatisation of Penang Port Sdn Bhd.
While these changes together with the initiatives under the GTP and NEM are helpful The Government expects
and encouraging, Malaysia needs to do more and show to investors that it would consumer spending to help
continue to do it right and deliver what it has promised in order to bring back deliver growth but we
investors’ confidence. The enormous challenges in pushing private investment and believe we should not push
a slowdown in spending by the Government in order to reduce its deficit suggests too hard on consumer
that consumer spending will likely remain as a key driver of the country’s economic spending
growth. As a result, the Government expects consumer spending to grow at a
faster pace of 7.7% a year in the 10MP, compared with +6.5% estimated for
the 9MP. Consequently, its share will rise to 58% of GDP in 2015, from 53.6%
estimated for 2010, making Malaysia’s share almost comparable to Japan (58.5%)
and higher than Thailand (51.3%) and Singapore (39.4%). Indeed, a pick-up in
consumer spending has led to an increase in household debt, which rose from 63.9%
of GDP in 2008 to 76.6% in 2009. The sharp jump was due partly to the effect of
a lower denominator as GDP contracted in 2009. Although Bank Negara was not
alarmed by the sharp rise in household borrowings, we believe we should not push
too hard on consumer spending to drive the country’s economic growth.
On its part, the Government’s gross development expenditure will be kept at The gross development
RM230bn in the 10MP, the same level as in the 9MP, in line with the Government’s expenditure will be kept at
efforts to contain its budget deficit. Of which, an amount of RM20bn or around RM230bn in the 10MP, the
8.7% will be used as the PFI Facilitation Fund. We understand that one of the same level as in the 9MP,
purposes of the PFI Facilitation Fund is to make certain projects viable for in line with the
implementation. Also, it could serve as tipping-off for private projects to take off Government’s efforts to
and will generate at least RM62.7bn of private investment under the 3P procurement
contain its budget deficit
model. Under the 3P procurement model, the public sector will be the main purchaser
of the output. This implies that the Government will have to lease and pay rent for
those output and services. Whilst there is no doubt the move could help the
Growth of public
Without additional allocation for development expenditure, growth of public investment
investment is projected to
is projected to moderate to 5.0% a year in the 10MP, from +6.2% estimated for the
moderate, while
9MP. Public consumption, on the other hand, is envisaged to remain stable at 4.8%
a year in the 10MP, the same rate of increase as in the 9MP. consumption to remain
stable in the 10MP
The capping of the Government’s gross development expenditure, however, will help The Government’s budget
to narrow its budget deficit to 2.8% of GDP or RM33.4bn in the final year deficit will narrow to 2.8%
of the 10MP in 2015, from a deficit of 5.3% of GDP or RM40.3bn estimated for of GDP in 2015, from a
2010 (see Table 4). This will be aided by a slowdown in the Government’s operating deficit of 5.3% estimated
expenditure, which is projected to slow down to +6.8% a year in the 10MP versus for 2010
+8.6% estimated for the 9MP. The slowdown will be reflected in slower increases
in emolument, pensions & gratuities, grants & transfers and other expenditure as
well as a 3.1% a year decline in subsidies. This suggests that the Government will
likely cut its subsidies gradually during the plan that could exert some pressure
on inflation. These are, however, likely to be mitigated by a pick-up in expenditure
on supplies & services. The Government’s revenue is also projected to increase at
a slower pace of 6.1% a year during the plan, compared with +8.6% estimated for
the 9MP. This will be attributed to a slowdown in direct taxes and non-tax revenue.
These will, however, be mitigated by a pick-up in indirect taxes, as the Government
will likely implement the Goods & Services Tax (GST) during the plan to broaden its
tax base. A smaller budget deficit projected will help bring down the Government’s
debt level to 49.9% of GDP in 2015, from an estimate of 52.9% in 2010. Despite
The Government will likely
its moderation, the debt level remains not low, which will likely cap the Government’s
cut its subsidies gradually
spending going forward. Meanwhile, the Government expects crude oil price to
during the plan
average US$90/barrel in the 10MP, about 10% higher than an average of
US$81.6/barrel estimated for the 9MP.
Table 4
Federal Government & Consolidated Public Sector Accounts
RM billion % p.a
2010 2015 9MP 10MP
Federal Government
-Revenue 160.9 216.7 8.6 6.1
-Operating exp. 1
147.5 204.6 8.6 6.8
-Gross Dev.exp. 54.2 46.5
-Net Dev.exp. 53.7 45.5
-Overall balance -40.3 -33.4
(% of GDP) -5.3 -2.8
Public Sector
-Revenue 123.0 183.1 - -
-Operating exp. 166.0 216.7 - -
-Development exp. 115.5 142.4 - -
-Overall balance -14.7 12.7
(% of GDP) -1.9 1.1
1
: Includes tranfer to Development Fund
Source: EPU
On the supply side, the services sector will likely be the key driver in the economy The services sector will
and its growth of 7.2% a year projected for the 10MP will outpace that of the real likely be the key driver in
GDP growth during the period and faster than +6.8% a year estimated for the 9MP the economy and its
(see Table 5). This suggests that greater emphasis will be focussed on promoting growth will outpace that of
growth in the services sector. As it stands, the Government already liberalised 27
the real GDP growth
services sub-sectors as part of its efforts to draw in investors into these sectors and
we expect the Government to do more as the country moves forward. As a result,
the share of the services sector will rise to 61.1% of GDP in 2015, from 58%
estimated for 2010. According to the Government, growth in the services sector
during the 10MP will be driven by the expansion in intermediate services such as
finance & business services and transport, storage & communications sub-sectors.
Towards this end, Bank Negara Malaysia has issued few new banking and investment
licenses to foreign investors. It remains to be seen whether these foreign players
could eventually bring in more business from abroad to broaden and deepen the
country’s banking industry. These will likely be aided by a pick-up in final services
such as wholesale & retail and accommodation & restaurants in line with stronger
consumer spending projected during the period.
Table 5
GDP By Sector (In Real Terms) , 2006-2015
Growth Structure
(% p.a) (% to GDP)
9MP 10MP '05 ‘10 ‘15
Source: EPU
Similarly, the manufacturing sector is envisaged to grow at a faster pace of 5.7% The manufacturing sector
per annum under the 10MP, compared with +1.3% a year estimated for the 9MP, in is projected to grow at a
line with a recovery in exports and stronger domestic demand. Stronger growth will faster pace during the plan
be contributed by higher value add in the E&E sub-sector. The fact that growth in
the sector is envisaged to be less robust than that of the services sector suggests
that it would remain challenging for Malaysia to attract investment into the sector.
Consequently, its share of GDP is projected to drop to 26.3% in 2015, from an
estimate of 26.7% in 2010.
In the same vein, the agriculture sector is projected to experience a stronger Agriculture output will inch
growth of 3.3% a year in the 10MP, compared with +3.0% a year estimated for the up as well
9MP, implying that the sector would continue to be promoted by the Government as
one of the main engines of growth.
Also, the mining value add is projected to bounce back to expand by 1.1% a year The mining output is
in the 10MP, from a contraction of -0.5% a year in the 9MP. Growth will likely be projected to recover
driven by a pick-up in demand for LNG, while crude oil production will remain
modest, in line with the Government’s conservation policy.
THE TENTH MALAYSIA PLAN 7 2011-2015
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The construction sector, however, is projected to grow at a slower pace of 3.7% Construction sector,
a year in the 10MP, compared with +4.4% a year estimated for the 9MP, as activities however, will slow down, in
during the 9MP was boosted by the two economic stimulus packages implemented line with a stagnant
by the Government in late 2008 and early 2009. The slowdown is also in line with government spending
a slower increase in public sector investment, as the Government will maintain its
development expenditure unchanged during the plan. Meanwhile, the Government
expects the 3P and the PFI procurement models to help generate construction
activities worth RM62.7bn in the 10MP. This will help to take up some slack and
contribute to growth in the civil engineering segment, as the Government keeps its
development expenditure unchanged.
The 10MP is silent on inflation forecast. Nonetheless, by gradually removing subsidies, Inflation rate will likely rise
particularly fuel and power tariff during the 10MP, and pushing for stronger consumer but unemployment rate to
spending, we expect inflation rate to rise to an average rate of around 3.0- improve
3.5% a year in the 10MP, from +2.7% estimated for the 9MP. The labour supply
is anticipated to increase by 2.2% per annum in the 10MP to reach 13.65 million by
end-2015, compared with +1.6% in the 9MP. Given that the economy is projected
to expand by around 6.0% during the plan and the Government expects employment
to grow by 2.4% a year, the unemployment rate is projected to ease to 3.1%
in 2015, from 3.6% estimated for 2010.
The current account surplus in the balance of payments is projected to The current account
narrow to 10.5% of GNI by the final year of the 10MP in 2015, from a surplus of surplus in the balance of
14.6% of GNI estimated for 2010 (see Table 6). Despite smaller, at more than 10% payments is projected to
of GNI, the current account surplus in 2015 remains sizeable and will likely contribute narrow to 10.5% of GNI in
to a build-up in foreign exchange reserves and fuel domestic liquidity. Indeed, a 2015, from a surplus of
sustained large current account surplus implies that the country’s gross national
14.6% of GNI estimated
savings rate will remain high as well. As a result, the savings rate is projected to
for 2010
average around 33.7% of GNI in 2015, albeit smaller compared with 35.6% of GNI
estimated for 2010. In absolute terms, the current account surplus, however, is
projected to widen to RM121.7bn by the final year of the 10MP in 2015, from a
surplus of RM109.2bn in 2010. This is due mainly to a larger surplus in the
merchandise account, which is projected to increase to RM169.3bn in 2015, from
RM145.0bn estimated for 2010. The widening services account surplus during the
year will also help. These will, however, be offset partially by a larger deficit in the
income account, as multinational companies send more money back home, and the
increase in current transfers due to repatriation of foreign workers’ remittances. The
latter indicates that Malaysia will still rely on foreign workers to generate economic
output in the near future.
Table 6
On a positive note, 52 “high-impact” projects worth RM62.7bn to be implemented via RM62.7bn privatisation/
privatisation or the public-private partnership (PPP) model are “under consideration” PPP projects, backed by
comprising, among others: RM20bn “facilitation fund”
◆ Seven toll highways worth RM19bn including the West Coast Expressway (potential
beneficiaries: Kumpulan Europlus and IJM), Guthrie-Damansara Expressway,
Sungai Juru Expressway and Paroi-Senawang-KLIA Expressway;
◆ Two coal-fired power plants worth RM7bn (potential beneficiaries: Zelan and
Mudajaya);
Also, a RM20bn “facilitation fund” will be established to “bridge the viability gap for
private sector investment in projects with high strategic value to the nation and
multiplier effects”. Among the projects currently under consideration are: (1) Senai
Hi-Tech Park in Iskandar, Johor; (2) The raw water supply project for industrial
complex in Tanjong Langsat, Johor; (3) Land reclamation in Westport, Port Klang;
and (4) Malaysia Truly Asia Centre in KL.
Realising the importance of investing in transportation infrastructure to stimulate Rail projects in the spot
economic activities as well as to ease worsening traffic congestion (that reduces light
productivity), several major rail projects have been earmarked to be implemented
under the 10MP comprising: (1) “The expansion of light rail transit (LRT) coverage
in KL” (We take it as referring to the Ampang and Kelana Jaya light rail transit (LRT)
line extension as well as the new Cheras – Kota Damansara LRT line); (2) Gemas
– Johor Bahru double-tracking; and (3) A new 150-km mass rapid transit (MRT)
system covering a 20km radius around KL with 2m passenger-trips per day (see
Table 7 for details of the projects).
Table 7
Table 8
Contractors Pre-qualified For Ampang & Kelana Jaya LRT Line
Extension Project
Source: Prasarana
Like all previous Malaysia Plans, the key to the success of the 10MP is not so much Execution is key
a grand plan or a long list of ambitious mega projects, but execution. On the heels
of disappointment from a few false starts to the Ampang and Kelana Jaya LRT line
extension project, we believe the market will want to see the real action before a
re-rating of the construction sector can take place this time around.
Building Materials
We believe the higher-than-expected gross development expenditure will lift domestic Cement sub-sector – good
cement consumption as well as cement producers’ pricing power (on the back of for demand and pricing
higher demand). However, we believe higher margins arising from increased demand power
and better selling prices would be partly mitigated by higher energy cost, in particular,
thermal coal and electricity. We are keeping our numbers unchanged for now,
pending further clarifications from the cement producers.
While the higher-than-expected gross development expenditure would boost domestic Steel sub-sector – good
steel consumption, we believe the impact is likely to be muted, as fortunes of the for domestic demand, but
steel players are tied largely to the demand-supply balance in the region. We are may not help much in
keeping to our stance that the near-term earnings prospects of the steel sub-sector boosting earnings
are weak on the back of: (1) Increased concerns on overcapacity in China arising
from mounting steel output and weak near-term steel consumption, which may
prompt steel producers in China to dump steel products in the international market
at cheap prices; and (2) Heightened risk on a sharper-than-expected slowdown in
global economy, which may affect global steel consumption, hence weighing down
on steel prices. Maintain Underweight.
Chart 3
Water Services Industry Reform Roadmap
Source: 10MP
to improve the quality of water and reduce losses in water supply. It was also
mentioned that RM369m out of the entire RM1.1bn would be allocated in the first two
years of the plan. While it is unknown as to the exact amount that will be allocated
for pipe replacement activities, we believe this will benefit all pipe makers including
YLI and Engtex (ductile iron), Jaks Resources (mild steel), as well as Hiap Teck and
Choo Bee (bare steel that is the feedstock for mild steel), given the absence of
sizeable pipe replacement activities, resulting in poor demand for pipes over the past
few years.
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