MALAYSIA Making Ends Meet ECONOMIC MONITOR DECEMBER 2019 CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific http://bit.ly/WB_blogsMY Table of Contents Summary 2 PART ONE Recent economic developments 5 Economic outlook 8 PART TWO Making ends meet 39 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 1 Summary Malaysia’s economy is continuing to see growth, but the pace of expansion has moderated Growth slowed to 4.4 percent in Q3 2019, as subdued global Increased progressivity in the personal income tax framework and an conditions and heightened uncertainty continued to weigh on the expansion of current tax measures could enable the government to economy. Investment and trade activity was softer than expected both increase revenues and improve redistribution. during the quarter, and indicators suggest overall business sentiment remains muted. Malaysia’s weakening trade and investment activity, amid challenging external conditions, underscores the need to In 2020, Malaysia’s economy is projected to expand at a improve private sector confidence and strengthen investment relatively moderate pace, amid continued uncertainty and competitiveness. With sluggish global demand and increased external headwinds. The GDP growth rate is projected to reach protectionist tendencies among the major economies, a sustained 4.5 percent in 2020. Investment is expected to improve but remain commitment to deepening regional integration and addressing trade subdued over the near term, with both the public and private sectors barriers is vital to preserve a vibrant trading environment and build adopting a cautious stance towards capital spending. Similarly, the investors’ confidence. It is also important to strengthen Malaysia’s softness in export growth is likely to persist into next year, mirroring competitiveness in attracting quality investments and to maximize the continuing subdued global growth. the gains from tax expenditures with better targeting of investments towards economic upgrading, high-value job creation and inclusive Short-term policies should focus on measures to boost resilience growth. and protect the vulnerable. Federal debt has increased, and government revenue as a share of GDP is expected to decline In the medium-term, structural reforms should focus on measures further next year. In the context of a more uncertain economic to address critical gaps in human capital formation, to facilitate environment, it is vital for Malaysia to preserve fiscal space to enable economic opportunities for women, and to enhance opportunities it to mitigate the impact of any negative shocks to the economy. for the private sector. To facilitate enhanced human capital 2 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 Summary development, deeper reforms are required to improve the quality of learning through the provision of better pre-school services and improved in-school assessments, and to reduce childhood stunting with multi-pronged solutions. Facilitating equal access to economic opportunities for women would also yield significant gains in the long term. Policies to raise the incomes and economic security of lower- income segments of the population could be sharpened to ensure continuous improvement of well-being for all Malaysians. The Malaysia Economic Monitor (MEM) consists of two parts. Part 1 presents a review of recent economic developments and a macroeconomic outlook. Part 2 focuses on a selected special topic that is key to Malaysia’s medium-term development prospects and the achievement of shared prosperity. In this edition, the focus of the special topic is on the cost of living, or making ends meet. At present, there is a large gap between key macroeconomic indicators related to growth, income and inflation, and citizens’ perceptions regarding the cost of living. Despite consistently low rates of inflation, concerns are frequently raised regarding this issue, which featured prominently as a campaign issue during the 2018 election campaign. A number of recent policy measures, including the abolition of the Goods and Services Tax and its replacement with the Sales and Services Tax and the reinstatement of fuel price subsidies, have been implemented in direct response to citizens’ concerns regarding the cost of living. Sustainably addressing these concerns will require a mixture of short-term measures to alleviate hardships among lower-income households, as well as medium- to long-term structural reforms to help lift real incomes. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 3 PART ONE Recent Economic Developments and Outlook 4 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Recent economic developments While Malaysia’s economy is continuing to expand, the growth With weak global demand, the decline in export demand deepened. rate has decelerated to 4.4 percent in Q3 2019 (Q2 2019: 4.9 Against the backdrop of subdued global growth and ongoing trade percent). Private consumption remained the largest contributor to tensions, exports of goods and services shrank by 1.4 percent in Q3 output growth, expanding at a slower, but still robust rate of 7.0 2019 (Q2 2019: 0.1 percent). Exports of manufactured goods declined, percent in Q3 2019 (Q2 2019: 7.8 percent). Household spending led by a considerable fall in electric and electronic exports. While there was supported by moderate inflation and continued private sector is evidence that Malaysia has gained market share in China and the employment and wage growth. US among tariff-affected products, these gains have been offset by weakening demand for exports in aggregate. Further, commodities Gross fixed capital formation contracted for the third consecutive exports declined due to a large contraction in petroleum exports, as quarter, owing to weaker-than-expected business investment some oil fields were temporarily closed for maintenance. growth and continued contraction in public investment. Private investment growth slowed to 0.3 percent in Q3 2019 (Q2 2019: 1.8 Imports of goods and services recorded negative growth for percent), largely due to subdued trade activity and muted business the third consecutive quarter. The decline in goods and services sentiment. Public investment contracted for the eighth consecutive imports deepened in Q3 2019 to -3.3 percent (Q2 2019: -2.1 percent). quarter to 14.1 percent in Q3 2019 (Q2 2019: -9.0 percent). Consistent with the decline in gross capital formation, imports of capital goods dropped by 15.4 percent in Q3 2019, led by a fall in On the supply side, growth in key sectors (services, manufacturing machinery and transport equipment imports. The current account and agriculture) moderated, with contractions in the mining and surplus narrowed to 3 percent of GDP in Q3 2019 (Q2 2019: 3.8 construction sectors. Services grew at the rate of 5.9 percent in Q3 percent) due to a larger income deficit. 2019, down from 6.1 percent in Q2 2019. After a moderate rebound in Q2 2019, manufacturing output growth decelerated to 3.6 percent In Q3 2019, the headline inflation rate increased to 1.3 percent in Q3 2019. The rebound in mining and quarrying was not sustained. (Q2 2019: 0.7 percent), reflecting the dissipating impact of the Output shrank by 4.3 percent in Q3 2019, compared to growth of 2.9 GST zeroization last year. During the period, the contribution of percent in Q2 2019. transport costs to headline inflation was negative owing to the decline MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 5 PART ONE - Recent Economic Developments and Outlook in the RON97 petrol price amid lower average global oil prices. In Q3 collections. The higher revenue collection is, however, offset by 2019, the core inflation rate remained stable at 1.5 percent (Q2 2019: higher operating expenditures which are estimated to expand to 17.3 1.6 percent). percent of GDP, exceeding its initial estimate of 17.0 percent of GDP. This is partly due to higher spending on fuel subsidies following the delay in the implementation of the targeted fuel subsidy program. It is important to strengthen Meanwhile, development expenditure is projected to decline marginally from the initial estimate of 3.6 percent of GDP to 3.5 Malaysia’s competitiveness percent following the revision and re-timing of several infrastructure in attracting quality projects. investments. Federal government debt in proportion to GDP increased to 52.7 percent in Q2 2019 (2018: 51.2 percent), with risks remaining manageable. Exposure to currency risk is limited, with ringgit- Financial soundness indicators show that the banking system denominated securities constituting of 96.3 percent of federal remains resilient. Financial institutions continue to record sound levels government debt (2018: 97.1 percent). Rollover risk is also limited of profitability, and the gross impairment ratio has remained stable. The with the debt structure skewed towards longer-tenured issuances. overall level of household debt increased slightly to 82.4 percent of Domestic institutional investors remain the largest holders of GDP as of end-September 2019 (end-June 2019: 82.2 percent). government debt, accounting for 66.8 percent of total outstanding debt (2018: 66.7 percent) with non-resident holdings relatively The recent performance of the domestic financial markets has stable at 22.1 percent (2018: 22.7 percent). Debt service charges are been mixed. Non-resident inflows have contributed to the decline expected to reach 14.1 percent of federal government revenue in of Malaysian Government Securities yields. The ringgit broadly 2019 (2018: 13.1 percent). weakened against the US dollar, in line with most regional currencies. Federal government debt and liabilities was also higher at 77.1 The government is expected to meet its fiscal deficit target of 3.4 percent of GDP in Q2 2019 (2018: 75.4 percent). The slight increase percent of GDP in 2019. Federal government revenue is expected compared to 2018 was mainly due to an increase in committed to reach 17.4 percent of GDP, slightly higher than the initial estimate guarantees, with their value increasing from 9.2 percent of GDP in of 17.1 percent, mainly attributed to an increase in estimated SST 2018 to 10.4 percent as of Q2 2019. 6 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Malaysia’s Budget 2020 represents a prudent balance between contribute the largest share of indirect tax, are expected to stand at the competing needs of preserving fiscal sustainability while also 1.8 percent of GDP (2019e: 1.8 percent. Petroleum-related revenue effectively responding to challenging external conditions. The as a share of federal government revenue is expected to decline to government’s fiscal consolidation will continue in 2020, albeit with 20.7 percent in 2020 (2019e: 21.7 percent) due to projected lower a revised fiscal deficit target of 3.2 percent of GDP, from the original crude oil prices. target of 3.0 percent. Total government expenditure is expected to remain at 18.4 percent of GDP in 2020. The civil service wage bill, In Budget 2020, the government has announced a number of which is expected to account for 36.9 percent of total government measures to diversify its revenue base and to achieve greater expenditure (2019e: 38.9 percent), continues to dominate OE. progressivity in its tax framework. This includes a proposal for a new income tax band for taxable income in excess of RM2 million, to be taxed at 30 per cent, which is a 2-percentage point increase Increased progressivity in the from the current rate of 28 per cent. The proposed increase would affect approximately 2,000 top income earners in the country. In tax framework could enable addition, the government also announced the extension of SST to the government to both cover imported digital services, to take effect in January 2020. increase revenues and improve redistribution. Federal government revenue is expected to decline further in 2020 to 15.2 percent of GDP (2019e: 15.4 percent). Tax revenue is expected to remain stable at 11.8 percent of GDP. Of this tax revenue, the largest proportion will be derived from direct tax (75.1 percent of total tax revenue). Corporate and personal income tax are expected to remain relatively stable, at 4.7 percent and 2.3 percent of GDP respectively. Indirect tax collection is also expected to remain constant, at 2.9 percent of GDP. Proceeds from the SST, which MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 7 PART ONE - Recent Economic Developments and Outlook Economic outlook Malaysia’s economic activity is projected to grow at a relatively moderate pace in 2020 amid increased headwinds. The forecast for Malaysia’s GDP growth in 2020 is revised down slightly to 4.5 percent (2019f: 4.6 percent), largely due to weaker-than-anticipated investment and export growth in Q3 2019. Private consumption is projected to expand at a still robust rate of 6.5 percent next year (2019f: 7.1 percent), underpinned by stable labor market conditions, relatively benign inflation, and continued support from government measures. In the public sector, the planned rationalization of government operating expenditure will continue to weigh on the contribution from government consumption, which is projected to grow at 1.8 percent in 2020 (2019f: 1.7 percent). Gross fixed capital formation is expected to improve but remain subdued over the near term, with both the public and private sectors continuing to adopt a cautious stance regarding capital spending. Overall investment activity is projected to expand at 1.4 percent next year (2019f: -1.8 percent), 0.3 percentage points lower than in the previous forecast. The downward revision largely reflects weaker-than-expected private investment activity in Q3 2019, as subdued trade prospects and increased uncertainty weighed markedly on business confidence and investment intentions. Public investment is likely to continue its contraction over the near term, albeit at a lesser extent following increased planned investments by public corporations in the transport and mining sectors. Inventory 8 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook destocking begun in Q1 2018 is expected to normalize and provide the current trade tensions between the US and China could further modest support to growth over the forecast period. contribute to growing uncertainty and dampen investment activity. Moreover, deepening of the slowdown in the major economies, Export growth is likely to remain soft into next year, reflecting as well as a sharper-than-expected deceleration in China could subdued global investment and trade activity. Malaysia’s export lead to deterioration in export and growth prospects. Further, an growth is projected to remain modest at 0.5 percent next year unexpected drop in commodity prices could affect growth and lead (2019f: -0.2 percent) in the context of challenging global economic to further fiscal pressures in Malaysia. conditions and prolonged trade-related uncertainty. This is expected to be partially offset by a recovery in mining exports from unforeseen On the domestic economic front, risks to growth primarily supply disruptions in recent quarters. Similarly, import growth is emanate from factors related to prolonged uncertainty among projected to pick up modestly at 0.4 percent in 2020 (2019f: -1.8 investors and delayed recovery in commodity-related sectors. percent), as growth of intermediate and capital exports regains Investment growth has been subdued over the recent quarters, some momentum with slight improvements in export and investment weighed down by lower capital spending. Indicators of business activity. The current account surplus is projected to narrow to around sentiment suggest the level of confidence in the economy remains 3.0 percent of GDP in 2020, with a more moderate trade surplus in low. While uncertainty regarding the global economic outlook would goods continuing to offset the persistent deficits in services and have an impact on Malaysia’s economy, similar uncertainty regarding income accounts. the domestic economy and political developments could exacerbate cautious sentiment, further dampening private investment. Headline inflation is projected to increase modestly in 2020 as the effects of policy-related factors dissipate. Consumer Elevated government debt and liabilities, the continuing decline price inflation is projected to average higher in the range of 1.5-2.0 in government revenue, coupled with increased locked-in percent next year (2019f: 0.7 percent), mainly reflecting the lapse in expenditures, will constrain fiscal policy space. Given the more the effects of consumption tax policy changes in 2018. Additionally, uncertain economic environment, preserving fiscal space is important the reintroduction of the float pricing mechanism for RON95 petrol to mitigate the impact of any negative shock to the economy. General and diesel in January 2020 is expected to result in modest increases government revenue in proportion of GDP is expected to decline in transportation costs at the prevailing global oil prices. further to 17.9 percent in 2020, which is well below its regional and aspirational comparators, and Malaysia significantly under-collects in Various downside risks in the global economy could have key revenue areas including personal income and consumption taxes. spillover effects on Malaysia’s economy. Further escalation of Moreover, increased locked-in expenditures such as the wage bill MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 9 PART ONE - Recent Economic Developments and Outlook and debt servicing costs have put a limit on development and social also important to strengthen Malaysia’s competitiveness in attracting spending, capping the effectiveness of fiscal policy as a redistributive quality investments and to improve targeting and the return on tax tool for shared prosperity. expenditures so as to maximize the gains from investments towards economic upgrading, high-value job creation and inclusive growth. Increased progressivity in the personal income tax framework and an expansion of current tax measures could enable the government to increase revenues and to improve redistribution. Facilitating equal access The government has taken a step in the right direction when it proposed a new top income tax band in Budget 2020. Nonetheless, to economic opportunities more could be done on this end, including raising the tax bracket for women would also yield for the other higher income bands, and reviewing the tax reliefs and exemptions applied. In addition, the scope of the real property gains significant gains in the tax could be widened by extending the scope of the tax, particularly long term. for owners of multiple properties, and increasing stamp duty on purchases of higher-value properties. These measures could result in significant increases to revenue while having minimal impact on Medium-term structural reforms should focus on addressing lower- and middle-income households. Finally, a gradual lifting of the critical gaps in human capital, facilitating economic opportunities exemptions on selected non-essential items, particularly those not for women and improving private sector opportunities to ensure within the B40 consumption basket, could also facilitate increased sustainable and inclusive growth. Making greater gains in human revenue without jeopardizing the purchasing power of lower-income capital development will require deeper reforms to improve the households. quality of learning through better pre-school services and improved in-school assessments, and to reduce childhood stunting with A more challenging external environment underscores the need multi-pronged solutions. Facilitating equal access to economic to increase trade diversification and strengthen investment opportunities for women would also yield significant gains in the long competitiveness. In an environment of subdued global demand term. Concurrently, policymakers should also sustain reform efforts and increased protectionist tendencies among the major economies, to promote healthy competition, strengthen public procurement and a sustained commitment to deepening regional integration and address distortions in labor and output markets to improve private addressing trade barriers is pivotal to preserve a vibrant trading sector participation in the economy. environment and send confidence-building signals to investors. It is 10 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 11 PART ONE - Recent Economic Developments and Outlook Regional growth has slowed amid subdued global conditions Global growth has remained weak, with subdued trade Regional growth has also slowed amid challenging and investment activity external conditions GDP, y/y, Percentage GDP, y/y, Percentage 5 8 7 4 6 3 5 2 4 1 3 0 2 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Developing EAP Thailand China World Advanced Emerging and Economies Developing Economies Indonesia Vietnam Philippines Source: World Bank Global Economic Prospects Source: World Bank Global Economic Prospects 12 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Malaysia’s economy continues to expand, but at a more moderate pace Malaysia’s rate of economic growth slowed in Q3 ...weighed down by negative investment growth 2019... GDP, y/y, Percentage Contribution to GDP, y/y, Percentage 7 8 6 6 6.1 5.7 5.5 5.6 5 5.3 4 4.8 4.9 4.7 4.5 4.5 4.4 4.5 4.4 2 4 4.3 4.2 0 3 -2 2 -4 1 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 0 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Net Exports Private Consumption Public Consumption GFCF Change in Inventory Real GDP, y/y Source: DOSM Source: World Bank staff calculations based on DOSM data MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 13 PART ONE - Recent Economic Developments and Outlook GDP growth decomposition GDP, y/y, Percentage Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3   2017 2018 2017 2017 2018 2018 2018 2018 2019 2019 2019 GDP 6.1 5.7 5.7 5.3 4.5 4.4 4.7 4.7 4.5 4.9 4.4 Consumption Private Sector 7.1 6.9 6.9 6.6 7.9 8.9 8.4 8.0 7.6 7.8 7.0 Public Sector 4.0 6.9 5.5 0.4 3.1 5.2 4.0 3.3 6.3 0.3 1.0 Gross Fixed Capital Formation 6.6 4.4 6.1 0.4 1.6 2.8 0.6 1.4 -3.5 -0.6 -3.7 Exports of Goods & Services 10.6 5.1 8.7 2.4 2.6 0.7 3.1 2.2 0.1 0.1 -1.4 Imports of Goods & Services 12.2 6.2 10.2 -2.3 3.6 2.0 1.8 1.3 -1.4 -2.1 -3.3 Sectoral Agriculture 3.1 9.3 5.8 3.1 -1.7 -0.8 -0.1 0.1 5.6 4.2 3.7 Mining 2.3 -0.9 0.4 -0.6 -3.4 -5.7 -0.7 -2.6 -2.1 2.9 -4.3 Manufacturing 7.0 5.3 6.0 5.2 4.9 5.0 4.7 5.0 4.1 4.3 3.6 Construction 6.2 5.9 6.7 4.9 4.8 4.7 2.6 4.2 0.3 0.5 -1.5 Services 6.5 6.2 6.2 6.5 6.5 7.3 6.9 6.8 6.4 6.1 5.9 Source: World Bank staff calculations based on DOSM data 14 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Export growth has been affected by weaker global trade Export growth has turned negative amid softening A larger income deficit led to a decline in the current global demand account surplus Contribution to Export Growth, y/y, Percentage Current Account Balance, Percentage of GDP 25 10 20 15 5 10 5 0 0 -5 -5 -10 -10 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 E&E - Semiconductors E&E - Others Exports, y/y Goods Primary & Secondary Income Account Non-E&E Commodities Services Current Account Source: World Bank staff calculations based on BNM and DOSM data Source: World Bank staff calculations based on DOSM data MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 15 PART ONE - Recent Economic Developments and Outlook BOX 1 variations on these approaches can be used to estimate the output Malaysia’s output gap and gap. Ultimately, estimating this gap involves an endeavor to isolate potential growth the cyclical part of output from the trend. Filtering techniques form the foundation for this work, including the use of Hodrick-Prescott and Kalman filters. The multivariate filter model used in this box estimates the output gap based on the Kalman filter. It exploits the information The output gap measures the difference between what an economy available in other measures of capacity, including capacity utilization and is producing and what it could efficiently produce at full capacity unemployment. Given that Malaysia is an open economy, the model is (potential output). As a concept, it is synonymous with the business extended to include a measure of the foreign output. Potential growth cycle—the ups and downs, expansions and contractions, or booms and is estimated using a Cobb-Douglas production function approach in busts that happen over a number of years. This places the output gap which potential growth is decomposed into its inputs (labor, capital and at the heart of macroeconomic policy choices. Arthur Okun referred to total factor productivity). it as “the point of balance between more output and stability” (Okun 1970). Knowing where the output gap is and where it is going empowers Since the nadir of the global recession, when Malaysia’s output monetary policy makers to react appropriately to the inflation that it gap stood at -6.2 percent, this gap has ebbed and flowed around creates. For fiscal policymakers, an understanding that an economy is potential growth (see Figure 5). The output gap has remained range- running above its capacity suggests that additional revenue should be bound since 2011, not deviating by more than 1 percentage point from saved and that expenditure should not be expanded to match revenue zero (when accounting for uncertainty, it was not statistically different growth, as this growth is unlikely to be sustained. By contrast, when from zero). Real GDP growth remained equally bound in the range of 4 downturns occur, an understanding that an economy is running below to 6 percent over much of this period. It slowed during the euro area capacity suggests that there is a need to increase expenditure to crisis in 2013; over the course of 2015 and 2016 as oil prices collapsed support growth. and EMDEs in general experienced slowing growth; and more recently, since the start of 2018, generating negative output gaps. In the third Neither the output gap nor potential growth are directly observable quarter of 2019, the output gap is currently estimated at -1.1 percent of and therefore need to be estimated. Numerous approaches and potential output, from an average of -0.2 percent in 2018. 16 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook FIGURE 5 FIGURE 6 Malaysia’s output gap turned negative in the second ...as asset prices and credit expansion slowed quarter of 2018... Percentage of Potential Output Percentage of Potential Output 3 4 2 2 1 0 -2 0 -4 -1 -6 -2 -8 -3 2005 2007 2009 2011 2013 2015 2017 2019 2010 2012 2014 2016 2018 90 percent 60 percent 30 percent House Prices Shock Foreign Output Gap Commodity Prices Credit Output Gap Source: World Bank staff calculations using Haver Note: Based on estimates from a modified Multivariate Filter model as in World Bank (2018a). A foreign output gap is added to Malaysia’s output gap equation given the open nature of the Source: World Bank staff calculations using Haver economy. Foreign output gap is measured as the export weighted average of Malaysia’s top Note: Recursive decomposition of the output gap equation. Unlike a shock decomposition, ten export destinations between 2016 and 2018. only variables in the output gap equation are decomposed. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 17 PART ONE - Recent Economic Developments and Outlook FIGURE 7 FIGURE 8 Output gaps can vary by method... ...although potential growth has been robust Percentage of Potential Output Percentage 4 10 3 2 8 1 6 0 -1 4 -2 -3 2 -4 -5 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1994 1997 2000 2003 2006 2009 2012 2015 2018 Hamilton UC HP MVF Capital Labor TFP Potential Growth Source: World Bank staff calculations using Haver Note: Hamilton refers to the methodology proposed by Hamilton (2018) —an autoregressive model with p = 4 (number of lags) and h = 8 (horizon). Source: World Bank staff calculations using Haver HP = Hodrick-Prescott Filter, UC = Unobserved Components model, and Note: Potential growth estimates based on production function approach as in World MVF = Multivariate Filter model. See Chapter 3 of World Bank (2018a) for details. Bank (2018a). TFP stands for total factor productivity. 18 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Many drivers affect the output gap. Along with capacity utilization, Commodity price developments have also contributed to inflation, and the unemployment rate (which are used in the multivariate developments in the output gap. Following the rebound from the filter model to identify the output gap), other measures that affect it global recession, strong oil prices resulted in commodity prices directly include credit extension, house price growth, commodity prices contributing positively to the output gap through 2015. The subsequent and the foreign output gap. These can be recursively decomposed to collapse of oil prices saw commodity prices begin to drag on the output identify the drivers of the output gap (see Figure 6). gap, with the contribution reaching a nadir of -0.9 percentage point by mid-2016. Since then, commodity prices have recovered somewhat and In particular, house prices and commodity prices have played a currently are not a significant driver of the output gap. prominent role since 2011. The Malaysian housing market significantly affects the economy, accounting for the majority of the above 80 While the output gap is not directly observable, it can be estimated percent household debt to GDP. Following the 1998 Asian crisis, house using a number of approaches. To establish some degree of prices in Malaysia remained relatively stable, growing by the average confidence in its position, the results from the use of multiple methods annual rate of 1.5 percent in the period from 2000 to 2010. Over this can be compared (see Figure 7). Three alternative filtering techniques period, house prices contributed negatively to the output gap. By 2011, are presented here and although there can be significant differences, however, the housing market had begun to boom, with house price most measures tend to co-move and cluster well. The methods are well growth reaching an average annual rate of close to 9 percent in the correlated, with the weakest correlation between the multivariate filter period from 2011 to 2014. This strong performance, driven in part by model and the approach implemented by Hamilton (2018), at 0.85. demand by non-residents, was reflected in the output gap, with house Three of the four methods presented here suggest that Malaysia has prices contributing to up to 1 percentage point of the gap at the peak had a negative and widening output gap since mid-2018. of the boom in 2013. In response, Malaysian authorities implemented macroprudential measures, with measures to increase the availability Potential growth in Malaysia has declined significantly, from of affordable housing to help dampen the market. House price growth around 9 percent during the pre-Asian crisis period to less than 4 has subsequently slowed, with the rate at 1.5 percent in Q1 2019 on an percent during post-Asian crisis period (1998-2001) (see Figure 8). annual basis. Since 2018, its contribution to the output gap has turned Until recently, it was on an upward trend, reaching an average level of negative. 5.1 percent over the past five years, despite some downturns during MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 19 PART ONE - Recent Economic Developments and Outlook the global financial crisis. Capital stock has been the principal driver of the potential growth in Malaysia, contributing to almost half on average in the period from 1994 to 2018. Despite the recent slowdown in investment growth, especially after 2012, the contribution of capital stock is still robust, standing at 2.6 percentage points in 2018. Total factor productivity growth has remained steady over the past 15 years, with the average annual rate standing at around 1.1 percent. Improvements to education and intensified efforts to increase female labor force participation will be required to boost potential growth into the future. With the deteriorating global economy, risks to Malaysia’s growth prospects are increasing. With Malaysia being both a highly open economy and a commodity exporter, it will not be spared if global conditions worsen and risks materialize. For policy makers to appropriately implement countercyclical monetary and fiscal policy, they must have a good understanding of the demand side of the economy, which is provided by the output gap. Accurate forecasts of the direction of the output gap can ensure that policy is appropriately calibrated. On the supply side of the economy, an understanding of potential growth dynamics and the drivers of potential growth may help policymakers prioritize structural reforms that can ultimately boost long-term growth prospects. On these, the analysis suggests that boosting Malaysia’s human capital, particularly increasing the quality of education and the level of female labor force participation, are likely to have a greater impact on potential growth. 20 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Inflation remains subdued, but base effects have pushed the rate higher Headline inflation was higher in recent months... ...reflecting the lapse in the impact of GST zeroization last year In ation, y/y, Percentage Contribution to In ation, y/y, Percentage 6 6 5 4 4 3 2 2 1 0 0 -2 -1 01/2016 04/2016 07/2016 10/2016 01/2017 04/2017 07/2017 10/2017 01/2018 04/2018 07/2018 10/2018 01/2019 04/2019 07/2019 10/2019 01/2016 04/2016 07/2016 10/2016 01/2017 04/2017 07/2017 10/2017 01/2018 04/2018 07/2018 10/2018 01/2019 04/2019 07/2019 10/2019 Headline In ation Core In ation Others Transport Headline In ation Housing, Water, Electricity, Food and Non-alcoholic Gas & Other Fuels Beverages Source: DOSM Source: World Bank staff calculations based on DOSM data MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 21 PART ONE - Recent Economic Developments and Outlook Conditions in the labor market have remained broadly stable Labor market conditions have remained broadly ...however the unemployment rate among those aged stable... 15-24 years remains high Unemployment Rate, Labor Force Participation Rate, Unemployment Rate, Percentage Percentage Percentage 3.6 70 14.0 12.0 3.4 69 10.0 3.2 68 8.0 6.0 3.0 67 4.0 2.8 66 2.0 2.6 65 0.0 01/2015 05/2015 09/2015 01/2016 05/2016 09/2016 01/2017 05/2017 07/2017 01/2018 05/2018 09/2018 01/2019 05/2019 09/2019 03/2016 06/2016 09/2016 12/2016 03/2017 06/2017 09/2017 12/2017 03/2018 06/2018 09/2018 12/2018 03/2019 Labor Force Participation Rate Unemployment Rate Overall 15-24 25-34 35-44 45-54 Source: DOSM Source: DOSM 22 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Conditions in the financial system remain stable BNM’s Overnight Financial soundness Net financing Policy Rate has indicators indicate growth moderated remained unchanged that Malaysia’s on lower growth of at 3.0 percent since banking system banking loans and May 2019 remains resilient corporate bonds The Statutory Reserve Financial institutions Business loan growth Requirement (SRR) ratio continue to record sound moderated amid was lowered to 3.0 percent levels of profitability, and continued weakness in in November to maintain the gross impairment the real estate sector sufficient liquidity in the ratio has remained stable domestic financial system MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 23 PART ONE - Recent Economic Developments and Outlook The recent performance of the financial markets has been mixed Non-resident inflows contributed to the decline of ...while the ringgit continued to depreciate against the government bond yields... US dollar Non-resident Portfolio Flows, RM Billion MYR/Currency, Rebased to January 2018=100 (Upward Trend Indicates MYR Depreciation) 15 110 10 105 5 100 0 95 -5 90 -10 -15 85 -20 80 06/2017 08/2017 10/2017 12/2017 02/2018 04/2018 06/2018 08/2018 10/2018 12/2018 02/2019 04/2019 06/2019 08/2019 10/2019 03/01/2017 27/02/2017 18/04/2017 13/06/2017 04/08/2017 29/09/2017 21/11/2017 15/01/2018 09/03/2018 30/04/2018 27/06/2018 16/08/2018 12/10/2018 05/12/2018 29/01/2019 25/03/2019 15/05/2019 Equity Corporate Bonds Government Bonds USD EUR GBP IDR and Sukuk and BNM Bills THB VND PHP Source: BNM and Bursa Malaysia Source: World Bank staff calculations based on BNM data 24 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Government is expected to remain on a path towards fiscal consolidation The federal government is expected to meet its fiscal Revenue is slightly higher than initially projected due to deficit target in 2019 an increase in estimated SST collections Percentage of GDP Percentage of GDP, 2019f 0 20 2.0 2.0 -1 15 3.1 3.3 1.4 1.8 -2 10 2.7 2.7 -2.9 -3 -3.1 5 -3.2 -3.4 -3.4 7.6 7.8 -3.8 -3.7 0 -4 -4.3 Initial Revised Direct Taxes Excl. PITA Others SST/GST -5 Petroleum Related One-off Transfer 2012 2013 2014 2015 2016 2017 2018 2019e Source: MOF Source: MOF MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 25 PART ONE - Recent Economic Developments and Outlook Federal government debt and liabilities were higher in Q2 2019 Federal government debt was higher at 52.7 percent ...while committed guarantees increased to 10.4 of GDP... percent of GDP Percentage of GDP Percentage of GDP 70 11 60 10 10.4 53.0 52.7 53.6 52.7 9 50 51.6 51.9 51.2 9.2 50.1 8 40 7 7.5 6 30 5 20 4 3 10 2 0 1 2012 2013 2014 2015 2016 2017 2018 Q2 2019 2017 2018 Q2 2019 Source: MOF Source: MOF 26 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Fiscal consolidation will continue in 2020, albeit with a revised deficit target Government revenue as a share of GDP is expected to The civil service wage bill will continue to dominate decline further next year operational expenditures General Government Revenue6, Percentage of GDP Share of Civil Service Salaries and Pensions to Federal Government Expenditure, Percentage 30 50 45 25 4.4 3.7 40 3.9 20 3.3 3.3 35 2020f: 3.1 3.3 36.9% 2.8 2.7 15 30 25 21.4 20.9 10 19.9 18.9 17.3 16.3 16.1 15.4 15.2 20 5 15 0 10 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020f 2012 2013 2014 2015 2016 2017 2018 2019e 2020f State and Local Governments, Federal Government Statutory Bodies Source: MOF Source: MOF MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 27 PART ONE - Recent Economic Developments and Outlook BOX 4 Policy reforms are more likely to succeed when they are communicated effectively Public policies are not created and adapted in a vacuum. Some are Communications Service (GCS) operates across the civil service to created out of demand while others are delivered out of necessity deliver communications and socialize policies. GCS brings together even if they don’t enjoy public support. Tough reforms are necessary more than 4,000 professionals across 25 ministerial departments, to realize long-term gains, but gaining public support and effective 20 non-ministerial departments and more than 400 agencies and implementation require clear, concerted and careful stakeholder public bodies. It recently published its inaugural Communication management. This is where communications can be a useful tool to Plan for 2018/2019, which coordinates the delivery of 140 integrated facilitate a country’s reform efforts. communication campaigns nationwide. The strategic and deliberate use of communications can help build Government communications units need to engage with many public trust and confidence in institutions, which is vital to ensure different audiences with varying levels of involvement suited for policy success. When the public trusts state institutions, the state has specific periods in the reform process. A recent paper by the IMF, reservoirs of political capital on which it can draw on to propose and entitled Frontiers of Economic Policy Communications, states that in explain difficult reforms that may result in long-term gains, but at the order to be more effective and strategic, “communications need to cost of some short-term difficulties, at least for some key stakeholder be increasingly integrated with operations, drawing on an in-depth groups. understanding of policies and their future path.” Establishing an effective communication system is important for Listening to stakeholders, acknowledging their concerns, and the effective design, promulgation and implementation of policy. A responding to them with action is a core part of the policymaking good example of a government developing an effective communication process. Ultimately, citizens are the principal beneficiaries of reforms. system as a policy tool is in the United Kingdom, where the Government Thus, being attentive to their voices is vital not only to ensure buy- 28 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook in, but also as a source of input and feedback on the actual design and substance of the policy proposals. In this area, the Porto Alegre municipality in Brazil was a forerunner when it pioneered participatory budgeting in the 1990s. Since then, this model has been emulated around the world, with more than 2,700 governments implementing some version of it today. Institutionalizing public participation sends a signal to stakeholders that they are formally involved in the development and policy process. It encourages citizens to engage directly and actively through formal platforms. These channels may include a range of mechanisms to facilitate dialogue such as public consultations, roundtable discussions, town hall meetings, as well as digital means such as social media. Staying connected and being engaged is key to effective policy making. Continued dialogue with stakeholders throughout the formulation and implementation of policy can increase public understanding of the expected policy-trade offs while building public support and trust in institutions along the way (see Figure 30). Without effective communication, it may not be possible to implement essential but difficult reforms, and attempts to do so can lead to undesired political implications. An example of effective communication is the recent natural gas pricing reform in Ukraine. Faced with the need to reform price subsidies for natural gas, the government engaged conducted public MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 29 PART ONE - Recent Economic Developments and Outlook FIGURE 30 A timeline for communicating policy changes INTERNAL Inception of Decide approach Clearance Development Decide and Monitoring & policy proposal (all relevant by decision of detailed plan release final adjustment (lead ministry ministries and makers (relevant policy & comms. (lead ministry) and minister) central agencies) ministries) strategy (meeting with cabinet) Choose and design Research the likely impacts of reform new pricing mechanism Implementation & mitigation measures Awareness-raising Consultations with Consultations Communications Communications communications about stakeholder groups with stakeholder on final policy, on actual impacts, subsidies and the on likely impacts groups on raising awareness adjustments and need for reform reform plan of plan and successes mitigation measures EXTERNAL Source: IISD (2013) - Guidebook to Fuel Subsidy Reform for Policy Makers in Southeast Asia. 30 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook opinion research and focus groups across the country. Citizen feedback benefits of price stability – contributing significantly to the credibility of was used to design compelling messages for an awareness-raising the policy transition. In particular, the authorities used radio advertising campaign, improve consumer knowledge, facilitate public debate, and and billboards to convey powerful messages through formats inspired shape public opinion about the importance of reforms. The campaign by Jamaica’s popular culture, including reggae music. was launched with evidence-based messaging about the need to reform gas price subsidies, efforts to mitigate the impacts of price increases Fundamentally, effective communications campaigns enable especially for poor households, and improvements to national social policymakers to stay engaged with stakeholder groups and the assistance programs. The impact of these efforts was far-reaching: broader public throughout the policy process. The two examples enrollment in assistance programs increased significantly from around above demonstrate that engagement with the public prior to and during 1 million low-income households in 2014 to 6.5 million in 2017, many the implementation of complex and sometimes unpopular reforms is adopted energy efficiency measures, and the government committed essential, particularly when policies result in significant pushback from to continuing the reform process. vested interests. Citizens around the world are increasingly connected, with Gaining public support information more easily shared and disseminated. This has increased for reforms requires clear, the demand for government transparency in all areas, including on economic policy decisions. It has elevated the role of public discourse concerted and careful and public opinion in policymaking, giving citizens greater voice in their stakeholder management. own governance. Policymakers should consider communications as a policy tool that can be used effectively to increase the odds of success for the reforms they propose. In Jamaica, the government implemented a communications strategy to support the transition to full-fledged inflation targeting over the medium term. Prior to the implementation of the measure, the Bank of Jamaica strengthened its communications capacity and conducted public relations campaigns to explain to the public the MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 31 PART ONE - Recent Economic Developments and Outlook Growth in developing EAP is projected to decelerate over the forecast horizon Global economic growth is expected to remain Growth in developing EAP has been revised down amid subdued over the near term increased headwinds GDP, y/y, Percentage GDP, y/y, Percentage 6 Latest Estimates (October 2019) 8 Latest Estimates (October 2019) Previous Estimates (June 2019) Previous Estimates (June 2019) 7 5 6 4 5 3 4 3 2 2 1 1 0 0 2019f 2020f 2021f 2019f 2020f 2021f 2019f 2020f 2021f 2019f 2020f 2021f 2019f 2020f 2021f 2019f 2020f 2021f World Advanced Emerging & Developing Developing EAP Developing Economies Developing EAP excl. China ASEAN Economies Source: World Bank staff projections Source: World Bank staff projections 32 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Malaysia’s economy will continue to grow at a relatively moderate pace Malaysia’s economy is forecast to expand at 4.5 ...with private consumption remaining the main driver percent in 2020... of growth GDP, y/y, Percentage Contribution to GDP, y/y, Percentage 7 8 6 6 5.7 2011-2018 Average 5 5.1 4 4.7 4.6 4 4.4 4.5 4.5 2 3 0 2 1 -2 2015 2016 2017 2018 2019f 2020f 2021f 0 2015 2016 2017 2018 2019f 2020f 2021 Net Exports Private Consumption Public Consumption GFCF Change in Inventory Real GDP, y/y Source: World Bank staff projections Source: World Bank staff projections MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 33 PART ONE - Recent Economic Developments and Outlook Risks to the growth outlook are firmly on the downside amid challenging external conditions External Domestic • Escalation of global trade • Weakness in business tensions confidence and subdued private investment • Uncertainty surrounding economic growth in • Delayed recovery in the major economies mining sector • Volatility in global • Elevated household debt financial and commodity in the context of property markets market excesses 34 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Increased progressivity in the tax framework could increase government revenues and improve redistribution Malaysia’s revenue collection is well below its regional Progressive taxation and social safety nets have helped and aspirational comparators OECD countries to achieve lower income inequality compared to Malaysia General Government Revenue*, Percentage of GDP, 2019f Gini Coef cient 2016 40 40 37 36 0.6 Pre taxes & transfers After taxes & transfers 35 34 31 0.5 30 28 25 25 24 24 0.4 22 20 20 18 0.3 16 15 15 0.2 10 0.1 5 0 0 Canada New Zealand Japan Turkey UMIC Korea, Rep. Chile Vietnam Thailand Philippines Malaysia Lao DPR Indonesia HIC Malaysia Turkey USA Korea, Rep. Australia OECD Canada Netherlands Poland Sweden Czech Rep. UK Source: World Bank staff calculations *Excludes one-off contributions from Petronas in 2019 Source: World Bank staff calculations MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 35 PART ONE - Recent Economic Developments and Outlook A more uncertain economic environment places a higher premium on reforms to boost resilience Increase trade diversification and improve private sector 1 confidence amid less favorable external environment • Deepen regional integration and address the remaining trade barriers to preserve a vibrant trading environment Strengthen competitiveness in attracting quality investments 2 and maximize the returns from tax expenditures • Better targeting of investment promotion, including the focused use of incentives, towards economic upgrading, high-value job creation and inclusive growth • More effective coordination among investment promotion agencies 36 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Structural policies should focus on boosting human capital, facilitating opportunities for women and increasing private sector participation in the economy Address critical Facilitate economic Improve private gaps in human opportunities for sector participation capital women in the economy Improve the quality of Expand the availability Promote healthy learning through better and quality of child and market competition, pre-school services elderly care, enhance strengthen public and improve in-school the protection of procurement and assessments, and reduce informal workers and address distortion childhood stunting with improve support for in labor and output multi-pronged solutions parents markets MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 37 PART TWO Making Ends Meet 38 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet Making ends meet Overall, price increases for most goods and services have been low and stable. The consumer price index shows that Malaysia’s inflation rate has been moderate in recent years. This is especially true for core inflation, which excludes items with more volatile prices (especially Despite Malaysia’s low and stable inflation rate, there has been an energy and food commodities); items with administered prices; and ongoing debate regarding perceived increases to the cost of living the estimated direct impacts of changes in consumption tax policy. in the country. These concerns are frequently expressed in public The year-on-year core inflation rate has consistently been less than policy debates, in the mass media, and in private conversations. The 2.6 percent since mid-2016. issue has featured prominently in public and private discourse for years, dating back at least to the introduction of the GST in April Living costs vary significantly across Malaysia. While the evolution 2015 and the rationalization of the fuel subsidy in December 2014. of prices over time in Malaysia is well measured and documented, And more recently there has been a robust public debate about comparatively little attention is given to the large differences in price whether Malaysia should increase its nationally-defined poverty line. levels across places. Moving around the country it is readily apparent It is particularly noteworthy that these concerns have emerged during that some places are more expensive in general than others. The a period of low inflation, with the headline inflation rate averaging most obvious spatial price differences are in housing, where location around 2 percent since 2015 (except in 2017 when it was 3.8 percent), is an inherently critical component of property values, but there is well below the growth rates for the economy and average nominal also significant spatial price variation across a wide range of common income. goods and services. In this context, the “cost of living” is frequently used as a catch-all Because of spatial price differences, the purchasing power of a term that may reflect wider developments in the economy and their ringgit varies from place to place, which directly impacts the cost impacts on household budgets and well-being. While the discussion of living. It is no secret that Johor, Kuala Lumpur and Selangor are is usually framed as an issue of rising costs of goods and services, for Malaysia’s high-cost environments, and that costs tend to be lower most Malaysians the core issues extend beyond prices. These include in states such as Kedah, Kelantan and Perlis. If household incomes lagging income growth and increasing housing costs, resulting in lower varied across these areas in exactly the same proportion as costs discretionary income. In addition, high indebtedness and inadequate then that would neutralize the effect of spatial price differences on financial savings also feed into the concerns of housing affordability the cost of living. However, incomes do not vary in the same way, and the cost of living for many Malaysians. especially if one looks beyond the averages. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 39 PART TWO - Making Ends Meet Increasing numbers of Malaysians, especially in urban areas, Borrowing provides temporary income support to lower-income feel their income is insufficient to meet the cost of living. Real households. Borrowing provides temporary relief for households household incomes have been consistently increasing over the past to compensate for inadequate income, particularly in the short- two decades, sometimes quite rapidly, yet for many the gains have term. While debt provides opportunities for shifting consumption not kept up with their expectations. In particular, from 2009 to 2014 and making investments, over the long run, it also limits available income growth rates for the B40 were substantially higher than for the discretionary income for households in Malaysia. Lower-income M40 and T20, but more recently (2014–2016) income growth slowed households and population sub-groups have a heavy debt load and for the B40, trailing that of the M40. Feelings of being “left behind” face high debt service ratios. More than 40 percent of borrowers are likely compounded by the fact that absolute income gaps have with monthly household incomes less than RM3,000 spend more consistently increased over time. than 40 percent of their income on debt repayment. Among lower- income borrowers, debt is mostly for motor vehicles and personal Despite rising educational attainment, income growth among financing, thus supporting consumption as opposed to longer-term younger and less educated workers has been sluggish. While investments to build wealth. incomes for all age groups have tended to grow at a faster rate than inflation, the growth in employment earnings in the case of younger Housing affordability in Malaysia has deteriorated over the workers has consistently lagged those of their older counterparts. years. Housing is a basic need, with the cost of meeting this need Employment earnings for those who have only completed secondary usually constituting one of the largest items of household expenditure. education are not only substantially lower than those with higher Various studies using the price-income ratio (PIR) have shown that education, but their real wage growth over time has also been the affordability of housing in Malaysia has deteriorated, such that persistently low. housing is now “severely unaffordable” in several states and “seriously unaffordable” in Malaysia as a whole according to that measure. For Those who feel their incomes are not keeping up with the cost of this report, the World Bank has developed a new housing affordability living often opt to work more to try to make ends meet. This could model that is more detailed than the PIR and better equipped for the mean a non-working household member deciding to start working or analysis of housing affordability across the distributions of incomes a working household member taking on a second or even third job. and house prices. When applied to detailed housing and income data Qualitative research suggests that increases in the number of workers for Kuala Lumpur and Petaling District (as case studies) it is possible per household and the number of people holding multiple jobs is to analyze the income levels and housing price points where housing greater than that indicated by quantitative data. unaffordability is most critical. 40 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet 63 percent in Petaling District lacking access to housing that they can afford. Households in the RM6,000 to RM10,000 income bracket can typically afford to purchase a home in the RM230,000 to RM500,000 price range, but the availability of such homes is very uneven. The market for such homes that are affordable for this income group is much tighter in Petaling District than in Kuala Lumpur, given Petaling’s growing under-supply and increase in prices. Alleviating cost of living pressures demands a mix of short-term measures as well as medium- and long-term structural reforms. Until recently, many of the measures targeted at addressing the cost of living have been relatively ad hoc, fragmented and short-term in nature. Some of the policies that the government has implemented include subsidies, administrative price controls, construction of affordable housing, concessional mortgage financing, and credit counseling. As factors affecting households’ living standards are wide-ranging and tend to overlap to some degree, a more structured approach to address higher living costs and improving well-being among Malaysians can be organized into short-term measures as well as medium- and long-term structural reforms. Short-term measures need to focus on alleviating hardships among lower-income households through deepening of social safety nets, while over the long run, increased coordination across agencies and implementation of structural reforms to foster greater market competition and The lack of affordable housing is particularly severe among accelerate productivity could help lift real incomes for all. households earning less than RM5,000. It is estimated that the number of households in this income group far exceeds the supply of housing affordable to them, with 55 percent in Kuala Lumpur and MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 41 PART TWO - Making Ends Meet Many factors influence the ability of households to make ends meet Consumer price inflation differentials linked 1 to income levels and/or geographic location across Malaysia Inadequate income and sluggish income growth 2 for lower-income households, younger and less educated workers High household indebtedness and declining 3 financial well-being, especially among lower-income households, civil servants and young adults Insufficient access to affordable housing for 4 lower- and middle-income households 42 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet Overall inflation has been low and stable, but consumers perceive that inflation is higher than it really is Inflation has been moderate and stable, especially ...although perceptions of inflation may be higher core inflation... because of frequency and memory biases In ation Rate, y/y, Percentage In ation Rate, y/y, Percentage 6 22 5 18 4 14 3 10 2 6 1 0 2 -1 -2 2016 2017 2018 2019 2016 2017 2018 Headline In ation Core In ation CPI EPI PePI Source: Monthly CPI reports (DOSM) Source: BNM (2019) MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 43 PART TWO - Making Ends Meet Prices vary significantly across Malaysia, impacting the purchasing power of the ringgit and the local cost of living Higher incomes in some urban areas are partly offset by higher prices, with the opposite in most rural areas Estimated Median Gain/Loss in Household Purchasing Power from Spatial Price Differences in 2016, RM per Month 1,000 Perlis Johor Urban Rural Kelantan Kelantan Melaka Terrengganu Perak Perlis Kedah Pahang Selangor 500 Negeri Sembilan Perak Terrengganu Kedah Penang Negeri Sembilan Pahang Melaka Johor Sarawak 0 Sabah Sarawak Penang Labuan Sabah Selangor -500 Labuan -1,000 -1,500 Putrajaya Kuala Lumpur -2,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Median Nominal Gross Household Income in 2016 (RM per Month) Source: World Bank staff calculations using Household Income and Basic Amenities Survey (DOSM) 44 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet Urban Malaysians say their living standards are improving... ...but satisfaction has declined The number of Malaysians in urban areas who have ...yet the number of urban Malaysians who are satisfied reported an improvement in living standards has with their living standards has declined increased... Number of Respondents, Percentage Number of Respondents, Percentage 100 78 9.5 9.5 9.3 12.1 10.4 17.1 80 76 34.9 34.8 35.1 28.6 27.5 32.0 60 74 40 72 54.0 54.1 53.6 56.8 59.4 49.0 70 20 0 68 Total Urban Rural Total Urban Rural 66 2012 2018 2012 2018 Getting better Getting worse The same Don’t know Total Urban Rural Source: Gallup World Poll Source: Gallup World Poll MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 45 PART TWO - Making Ends Meet BOX 6 Income, cost of living, and overall well-being Results from a qualitative study on living standards conducted by the World Bank and University of Malaya in 2019 with B20, B21-40, and M40 18 Bumiputera, Chinese and Indians overwhelmingly support the finding that there is growing dissatisfaction among the urban population. Participants felt that their lives were “not in balance”, because salaries were not keeping up with the cost of living, leading to increased hardship and stress. When asked whether their lives were easier, harder, or the same currently versus 5 years ago, 56 percent of participants across 56 focus groups in the Klang Valley, Terengganu and Sabah said that their lives were harder now compared to 5 years ago.19 “I have experienced a time when I earned RM900 to feed nine children. Now, the salary is not going up. The only thing going up is the cost of living. It is not in balance.” [Klang Valley, Bumiputera, B21-B40] “When I joined ten years ago, my salary was RM500. Now I earn RM2000. It took ten years for me to get here. But the gap between the salary increase and the rise in cost of living is not balanced. I am struggling to even earn this low salary.” [Klang Valley, Indian, B21-B40] “The costs going up is not a problem, but the wages must go up proportionately. This is not happening.” [Klang Valley, Chinese, M40] 18 Income categorization is based on focus group participants’ estimates of their household income and calibrated using net household income from the 2016 HIS, subtracting income components that respondents would not typically include, such as imputed rent and employers’ share of EPF contributions. 19 These data are from participant responses in 56 focus group discussions from Klang Valley, Terengganu and Sabah. They are not representative for all of Malaysia. 46 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet Malaysians of all three main ethnic groups also expressed a common sentiment: while material comforts had improved considerably compared to their parents’ generation, there was not a concomitant increase in overall well-being. This sentiment was most acutely expressed by participants belonging to the M40 income groups, as the quotes below illustrate. “Something that can be provided physically, yes, we children are better off. But something that is about the mind and the soul, we are not better off.” [Klang Valley, Chinese, M40] “In the past, we just lived comfortably by rewarding ourselves with good food for working hard. It was that simple. Now we have different needs and wants. We are suffering.” [Klang Valley, Bumiputera, M40] “In the days of our parents, life was very happy. Even if we had few things and small houses, we were happy. Now, even with a three- storied house, we cannot sleep in peace.” [Klang Valley, Indian, M40] MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 47 PART TWO - Making Ends Meet Growth in real employment income has been sluggish for young workers and those with only secondary education Since 2009, real growth in income for 20-29 year-olds Among those with only secondary education, income with post-secondary education was marginal growth has been modest across all age groups Median Monthly Employment Income with Post-Secondary Education, Median Monthly Employment Income with Secondary Education, Constant RM Constant RM 7,000 7,000 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 2004 2007 2009 2012 2014 2016 2004 2007 2009 2012 2014 2016 20-29 30-39 40-49 50-59 20-29 30-39 40-49 50-59 Source: World Bank staff calculations using Household Income and Basic Amenities Source: World Bank staff calculations using Household Income and Basic Amenities Survey (DOSM) Survey (DOSM) 48 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet The gap in employment earnings has widened between younger and older male workers, but not as much for female workers Younger male workers experience slower income The relationship between age group and employment growth and the gap has widened income is weaker for women Median Monthly Employment Income for Men, Constant RM Median Monthly Employment Income for Women, Constant RM 3,500 3,500 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 500 0 0 2004 2007 2009 2012 2014 2016 2004 2007 2009 2012 2014 2016 20-29 30-39 40-49 50-59 20-29 30-39 40-49 50-59 Source: World Bank staff calculations using Household Income and Basic Amenities Source: World Bank staff calculations using Household Income and Basic Amenities Survey (DOSM) Survey (DOSM) MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 49 PART TWO - Making Ends Meet B40 household income growth was strongest during 2009- 2014, but absolute gaps across income groups have widened From 2009 to 2014, real mean household income The absolute gaps across income groups continued growth was fastest among the B40 to increase, which could contribute to perceptions of being “left behind” Annual Growth in Real Household Income per Capita, Percentage Change in Mean Monthly Income per Capita, Constant RM 15 500 400 10 300 5 200 100 0 0 20 40 60 80 100 0 Percentile of Household Income per Capita 2002-2009 2009-2012 2012-2014 2014-2016 2002-2009 2009-2012 2012-2014 2014-2016 Bottom 40% Middle 40% Top 20% Source: World Bank staff calculations using Household Income and Basic Amenities Source: World Bank staff calculations using Household Income and Basic Amenities Survey (DOSM) Survey (DOSM) 50 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet Borrowing provides an avenue for meeting living costs, but a heavy debt load makes it difficult to save Lower-income borrowers have high debt service ratios, About half of Malaysian working adults lack financial leaving little room for other expenditures or savings resilience, especially the younger generation Share of Borrowers, Percentage Number of Individuals by Age Group, Percentage 100 100 80 60 50 40 20 0 0 20-29 30-39 40-49 50-59 Bottom 20% 2 3 4 Top 20% Age Group Income Quintile Able to pay RM1,000 for emergency DSR <20% DSR 20-40% DSR 40-60% Able to pay medical bills of RM2,500 DSR 60-80% DSR 80-100% Able to cover 3 months' expenses if retrenched Source: BNM Source: AKPK MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 51 PART TWO - Making Ends Meet BOX 8 Debt as a double-edged sword In the joint World Bank-University of Malaya qualitative study, lower-income households described their monthly struggle to service loans. In a common theme across regions and ethnic groups, participants from the B20 and B21-B40 income groups found it difficult to survive on their current incomes, given their commitments on housing, car, and other types of loans. This is consistent with BNM’s data which showed high DSRs among lower-income borrowers, resulting in limitations for household savings and consumption on other items. “At the end of every month, I feel like going insane because always I feel I do not have enough to settle all payments. I need to pay house mortgage, car loan, children’s education and needs, utility bills...water, electricity...after settling all these bills, the balance is almost zero. Then the wait starts for the following month’s salary for the same purpose.” [Klang Valley, Indian, B20] “Definitely you need a loan for everything. For house, for car. For professional people, it may be easy to pay back. But my job is unstable. It is hard for me.” [Klang Valley, Chinese, B20] “By the 20th of the month, we have to scrape the bottom of the barrel while waiting for our pay for the next month.” [Terengganu, Bumiputera, B21-B40] 52 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet Construction of new homes at RM200,000 or less has been very limited, and is a major reason for the shortage of affordable housing Only 18 percent of newly launched units in 2016 were priced below RM200,000, indicating limited supply for lower-income households Composition of Total Housing Units Launched by Price Range, Cumulative Percentage 100 80 60 18% 40 20 0 RM1m Source: National Property Information Center (2016); Ismail et al. (2019) MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 53 PART TWO - Making Ends Meet There are more low- and middle-income households in KL and Petaling District than there are housing units that they can afford There is an under-supply of housing units that cater for ...as well as in the Petaling District in Selangor lower-income households in Kuala Lumpur... Cumulative Number of Housing Units and Households, Thousands Cumulative Number of Housing Units and Households, Thousands 700 700 619 600 600 557 500 500 566 400 457 400 369 360 322 300 300 292 200 200 137 100 86 100 38 50 0 0 1 3 5 7 9 11 13 15 17 19 1 3 5 7 9 11 13 15 17 19 Monthly Income (RM '000) Monthly Income (RM '000) Cumulative Number of Households Cumulative Number of Households Cumulative Housing Units Cumulative Housing Units Source: Urbanmetry, World Bank staff calculations Source: Urbanmetry, World Bank staff calculations 54 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet The wide array of government housing policies has diverse and location-specific impacts on housing supply and affordability Under the Rumah Selangorku scheme, developers The Residensi Wilayah and Rumah Selangorku policies overcompensate by building high-end units to subsidize have partly contributed to the divergent residential for the construction of more affordable units market pricing trends Supply of Housing Units, Thousands Price Index 20 220 208 200 191 15 180 189 10 160 140 5 120 0 100 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 RM1mil Source: Urbanmetry, World Bank staff calculations Source: Urbanmetry, World Bank staff calculations MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 55 56 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet Is it possible to beat the high cost of living? A stronger social safety in the short Low and stable inflation has helped term, and more investment in human contain cost of living increases. capital and productivity-enhancing More spatially-aware policies can technology in the longer term, can help address regional challenges in help raise the incomes of younger making ends meet. and less-educated workers who are currently feeling “left behind”. More nuanced housing policies New measures to increase financial based on detailed information about literacy and consumer protection can housing supply and demand as well help lower-income households and as different locations and price young people manage their finances points can help ensure adequate and avoid unsustainable debt. affordable housing for all Malaysians. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 57 PART TWO - Making Ends Meet Alleviating cost of living pressures demands a mix of short- term measures and medium- and long-term structural reforms Short-term measures to alleviate Medium- and long-term structural reforms to cost of living pressures boost market competition and increase incomes i. Tackling anti-competitive practices in key sectors. i. Fostering competition in production and ii. Reevaluating administrative price controls, distribution in key sectors, by reducing barriers focusing on aligning them with B40 consumption to entry. Increasing patterns. ii. Minimizing distortion of price interventions to prices and large ensure sustainable market supply. geographic iii. Developing and regularly reporting a spatial price index in addition to a cost of living index. iii. Ensuring price measures are time-bound and price range-limited to manage fiscal risks. differences iv. Progressively shifting to protect incomes of low- and middle-income households rather than through price interventions. i. Deepening existing social safety nets: i. Accelerating productivity growth as the basis for • Improving the targeting of Bantuan Sara Hidup boosting earnings potential. by appropriately taking into account household ii. Realigning investment and hiring incentives size and location for eligibility and benefits. towards economic upgrading and high-quality job Inadequate • Increasing the total outlay for core social creation. income among welfare programs. iii. Building human capital through expansion of lower-income • Shifting from fuel subsidies to a targeted early childhood education and promotion of life- households transportation allowance. long learning and upskilling. and younger ii. Enabling greater labor force participation by iv. Consolidating and enhancing the overall social workers parents, both women and men, through improved safety net framework, including the various child care services for B40 families. subsidy programs. iii. Extending living wage and Belanjawanku analysis and providing a framework to inform wage bargaining. 58 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet Short-term measures to alleviate Medium- and long-term structural reforms to cost of living pressures boost market competition and increase incomes i. Raising awareness among citizens on their rights i. Strengthening consumer protection and and responsibilities in personal and household encouraging more responsible behavior by both financial management and to be accountable for banks and non-bank financial institutions. Poor financial their financial decisions. ii. Laying out a time-bound roadmap on the well-being ii. Creating a repository of financial planning tools implementation and regular monitoring and and higher which are available online and in local languages. evaluation of measures in the National Strategy indebtedness for Financial Literacy 2019-2023. among iii. Assessing financial literacy periodically through lower-income regular implementation of standardized measure iii. Increasing financial incentives, including through of financial literacy, in collaboration with the matching contributions and the use of evidence- households private sector. based behavioral interventions to encourage as well as low retirement savings. savings among Malaysians iv. Strengthening the legal and regulatory framework for consumer protection and responsible lending through the Consumer Credit Act. i. Adopting a more precise affordability i. Prioritizing low- to middle-income households in measurement, with respect to location, supply current housing policies and programs. and demand. ii. Ongoing monitoring and analysis of the impact of High degree of housing ii. Harnessing supply-side market data for a more different policies on the housing market. unaffordability accurate representation of housing affordability. iii. Strengthening coordination between ministries, among low- and iii. Strengthening the rental market: agencies as well as state and local governments middle-income • Enacting the Rental Tenancy Act and in designing overall housing policy and planning. households establishing a Tenancy Tribunal. • Developing a rental database and rental affordability indicators. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 59 Download the complete MEM: http://bit.ly/WBGMEM