MALAYSIA ECONOMIC MONITOR DECEMBER 2019 Making Ends Meet CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific http://bit.ly/WB_blogsMY MALAYSIA ECONOMIC MONITOR © 2019 International Bank for Reconstruction and Development / The World Bank Sasana Kijang, 2 Jalan Dato Onn, Kuala Lumpur 50480, Malaysia Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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All queries on rights and licenses should be addressed to World Bank Publications, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. MALAYSIA ECONOMIC MONITOR DECEMBER 2019 Making Ends Meet Acknowledgements This edition of the Malaysia Economic Monitor was prepared by Richard Record (Task Team Leader), Shakira Teh Sharifuddin, Yew Keat Chong, Mahama Samir Bandaogo, Kenneth Simler (Task Team Leader for Part 2), Dao Harrison and Zainab Ali Ahmad. Achim Schmillen, Samuel Fraiberger, Monica Biradavolu, Cristina Constantinescu, Amanina Abdur Rahman, Mei Ling Tan, Wei San Loh, Chancey Lee Pacheco, Franz Ruch, Sinem Celik, Linda Peng, Jorge Guzman, Steven Pennings, Norman Loayza, Young Kim, Sharmila Devadas, Vijayendra Rao, Niaz Asadullah, Urbanmetry, Rekha Reddy, Wei Zhang, Graciela Miralles, Joshua Foong and Clarissa David provided additional contributions. Mara Warwick, Firas Raad, Ndiame Diop and Salman Zaidi provided overall guidance. The team is grateful to Hassan Zaman, Souleymane Coulibaly, Ekaterine Vashakmadze and Ergys Islamaj for their constructive input on the document. This report benefited from productive discussions with staff from the Ministry of Economic Affairs, Bank Negara Malaysia, the Ministry of Finance, the Office of the Prime Minister, the Ministry of Domestic Trade and Consumer Affairs, the participants in a September 2019 workshop on the cost of living and many other government ministries and agencies, all of whom provided valuable information and useful feedback. In particular, the team would like to thank the Strategic Planning and International Cooperation Division of the Ministry of Economic Affairs and the Economics Department of Bank Negara Malaysia for close ongoing collaboration with the World Bank and for the crucial support to the launch of this report. The team would also like to express its gratitude to analysts at several private financial firms and rating institutions, whose participation in a constructive dialogue also informed the analysis. Joshua Foong and Min Hui Lee led external communications and the production and design of the report. Irfan Kortschak provided editing assistance, while Aziaton Ahmad provided administrative support. Kane Chong designed the report and its cover. Photography: Samuel Goh The report is based on information current as of December 2, 2019. Please contact Richard Record (rrecord@worldbank.org), Yew Keat Chong (ychong@worldbank.org) or Shakira Teh Sharifuddin (stehsharifuddin@worldbank.org) if you have any questions, comments or suggestions regarding the Malaysia Economic Monitor. 4 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 Abbreviations Credit Counselling and Debt Management Agency LTGM Long Term Growth Model AKPK (Agensi Kaunseling dan Pengurusan Kredit) M40 Middle 40 percent (of the population) AMI Area Median Income MEM Malaysia Economic Monitor ASEAN Association of Southeast Asian Nations MGS Malaysian Government Securities B40 Bottom 40 percent (of the population) MIER Malaysian Institute of Economic Research BNM Bank Negara Malaysia MOF Ministry of Finance Malaysia BSH Cost of Living Aid (Bantuan Sara Hidup Rakyat) MTFF Medium-Term Fiscal Framework CAGR Compound Annual Growth Rate MTR Mid Term Review CPI Consumer Price Index MVF Multi-Variate Filter Model DE Development Expenditure MyCC Malaysia Competition Commission DFI Development Finance Institution NACCOL National Cost of Living Action Council DMO Debt Management Office NAPIC National Property Information Center DOSM Department of Statistics Malaysia NSLF National Strategy for Financial Literacy DSR Debt Service Ratio OE Operating Expenditure E&E Electrical and Electronics Organization for Economic Cooperation and OECD EAP East Asia and Pacific Development EIS Employment Insurance System OPR Overnight Policy Rate EMDE Emerging Market and Developing Economies PePI Perceived Price Index EPF Employees Provident Fund PFI Private Finance Initiative EPI Everyday Price Index PIR Price Income Ratio FBM KLCI FTSE Bursa Malaysia Index PLI Poverty Line Income FDI Foreign Direct Investment Public Service Housing Scheme (Perumahan Penjawat PPAM Awam Malaysia) FEN Financial Education Network PPP Public Private Partnership FLFP Female Labor Force Participation PPR Public Low-Cost Housing (Projek Perumahan Rakyat) FMR Fair Market Rent 1Malaysia People’s Housing Program (Perumahan GDP Gross Domestic Product PR1MA Rakyat 1Malaysia) GFCF Gross Fixed Capital Formation PSP Petrol Subsidy Program GG Government Guarantee RPGT Real Property Gains Tax GNI Gross National Income Federal Territories Affordable Homes Program RUMAWIP (Rumah Mampu Milik Wilayah Persekutuan) GST Goods and Services Tax SOCSO Social Security Organization GWP Gallup World Poll SPI Spatial Price Index HES Household Expenditure Survey SRR Statutory Reserve Requirement HIS Household Income Survey SST Sales and Services Tax HP Hodrick-Prescott Filter SVDP Special Voluntary Disclosure Program ILO International Labour Organization Social Wellbeing Research Centre, University of IMF International Monetary Fund SWRC Malaya IPI Industrial Production Index T20 Top 20 percent (of the population) KPDNHEP Ministry of Domestic Trade and Consumer Affairs TFP Total Factor Productivity KRI Khazanah Research Institute TRC Tax Reform Committee LCR Liquidity Coverage Ratio UC Unobserved Components Model LFS Labor Force Survey Y/Y Year-on-Year MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 5 6 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 Table of Contents Acknowledgements 4 Abbreviations 5 Summary 8 Recent economic developments 9 Economic outlook 12 Making ends meet 14 PART ONE 19 Recent economic developments 20 Regional growth has slowed amid challenging external conditions 20 Malaysia’s economy continues to expand, but at a more moderate pace 21 Export growth was affected by weaker global trade 26 Inflation remains subdued, but base effects have pushed the rate higher 28 Conditions in the financial system remain stable 33 Government is expected to remain on a path of fiscal consolidation 36 Fiscal policy in 2020 balances the need to preserve fiscal sustainability and support economic growth 39 Economic outlook 44 Growth in developing EAP is projected to decelerate over the forecast horizon 44 Malaysia’s economy will continue to grow at a relatively moderate pace 45 Risks to growth outlook are firmly on the downside amid challenging external conditions 47 Near-term policies should focus on boosting resilience and protecting the vulnerable 48 PART TWO 55 Making ends meet 56 Many factors influence the ability of households to make ends meet 56 Overall, price increases for most goods and services have been low and stable 56 Living costs vary significantly across Malaysia 58 Many Malaysians, especially in urban areas, feel their income is insufficient to raise their living standards 61 Lower-income households’ income growth has slowed considerably in recent years 65 Despite rising educational attainment, income growth among younger workers has been sluggish 66 Borrowing provides temporary income support to lower-income households 71 Beyond housing and car loans, lower-income borrowers tend to use personal finance loans and credit cards to raise living standards 72 Malaysian households, particularly lower-income households, do not have adequate financial savings 78 The availability of affordable housing in Malaysia has deteriorated over the years 80 Access to affordable housing varies significantly by location and household circumstances 82 Government housing policies have diverse impacts on housing supply and affordability 86 Addressing Malaysia’s cost of living challenge 87 Alleviating cost of living pressures demands a mix of short-term measures as well as medium- and long-term structural reforms 88 Short-term measures need to focus on alleviating hardships among lower-income households 89 Over the long run, greater coordination across agencies and implementation of structural reforms could help lift real incomes 91 Appendices 95 References 98 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 7 Summary 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, competitiveness. With sluggish global demand and as subdued global conditions and heightened increased protectionist tendencies among the major uncertainty continued to weigh on the economy. economies, a sustained commitment to deepening Investment and trade activity was softer than expected regional integration and addressing trade barriers is during the quarter, and indicators suggest overall vital to preserve a vibrant trading environment and business sentiment remains muted. build investors’ confidence. It is also important to strengthen Malaysia’s competitiveness in attracting In 2020, Malaysia’s economy is projected to expand quality investments and to maximize the gains from at a relatively moderate pace, amid continued tax expenditures with better targeting of investments uncertainty and external headwinds. The GDP towards economic upgrading, high-value job creation growth rate is projected to reach 4.5 percent in 2020. and inclusive growth. Investment is expected to improve but remain subdued over the near term, with both the public and private In the medium-term, structural reforms should sectors adopting a cautious stance towards capital focus on measures to address critical gaps in spending. Similarly, the softness in export growth is human capital formation, to facilitate economic likely to persist into next year, mirroring the continuing opportunities for women, and to enhance subdued global growth. opportunities for the private sector. To facilitate enhanced human capital development, deeper Short-term policies should focus on measures to reforms are required to improve the quality of learning boost resilience and protect the vulnerable. Federal through the provision of better pre-school services debt has increased, and government revenue as a share and improved in-school assessments, and to reduce of GDP is expected to decline further next year. In the childhood stunting with multi-pronged solutions. context of a more uncertain economic environment, it Facilitating equal access to economic opportunities is vital for Malaysia to preserve fiscal space to enable for women would also yield significant gains in the it to mitigate the impact of any negative shocks to long term. Policies to raise the incomes and economic the economy. Increased progressivity in the personal security of lower-income segments of the population income tax framework and an expansion of current could be sharpened to ensure continuous improvement tax measures could enable the government to both of well-being for all Malaysians. increase revenues and improve redistribution. The Malaysia Economic Monitor (MEM) consists of Malaysia’s weakening trade and investment two parts. Part 1 presents a review of recent economic activity, amid challenging external conditions, developments and a macroeconomic outlook. Part underscores the need to improve private 2 focuses on a selected special topic that is key to sector confidence and strengthen investment Malaysia’s medium-term development prospects and 8 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 Summary the achievement of shared prosperity. In this edition, growth decelerated to 3.6 percent in Q3 2019. The the focus of the special topic is on the cost of living, or rebound in mining and quarrying was not sustained. making ends meet. Output shrank by 4.3 percent in Q3 2019, compared to growth of 2.9 percent in Q2 2019. At present, there is a large gap between key macroeconomic indicators related to growth, With weak global demand, the decline in export income and inflation, and citizens’ perceptions demand deepened. Against the backdrop of subdued regarding the cost of living. Despite consistently global growth and ongoing trade tensions, exports low rates of inflation, concerns are frequently raised of goods and services shrank by 1.4 percent in Q3 regarding this issue, which featured prominently as a 2019 (Q2 2019: 0.1 percent). Exports of manufactured campaign issue during the 2018 election campaign. goods declined, led by a considerable fall in electric A number of recent policy measures, including the and electronic exports. While there is evidence that abolition of the Goods and Services Tax and its Malaysia has gained market share in China and the US replacement with the Sales and Services Tax and among tariff-affected products, these gains have been the reinstatement of fuel price subsidies, have been offset by weakening demand for exports in aggregate. implemented in direct response to citizens’ concerns Further, commodities exports declined due to a large regarding the cost of living. Sustainably addressing contraction in petroleum exports, as some oil fields these concerns will require a mixture of short-term were temporarily closed for maintenance. measures to alleviate hardships among lower-income households, as well as medium- to long-term structural Imports of goods and services recorded negative reforms to help lift real incomes. growth for the third consecutive quarter. The decline in goods and services imports deepened in Q3 2019 to -3.3 percent (Q2 2019: -2.1 percent). Consistent with the decline in gross capital formation, imports of capital goods dropped by 15.4 percent in Q3 2019, led Recent economic by a fall in machinery and transport equipment imports. The current account surplus narrowed to 3 percent of developments GDP in Q3 2019 (Q2 2019: 3.8 percent) due to a larger income deficit. While Malaysia’s economy is continuing to expand, the growth rate has decelerated to 4.4 percent in It is important to Q3 2019 (Q2 2019: 4.9 percent). Private consumption strengthen Malaysia’s remained the largest contributor to output growth, expanding at a slower, but still robust rate of 7.0 percent competitiveness in in Q3 2019 (Q2 2019: 7.8 percent). Household spending attracting quality was supported by moderate inflation and continued private sector employment and wage growth. investments. Gross fixed capital formation contracted for In Q3 2019, the headline inflation rate increased the third consecutive quarter, owing to weaker- to 1.3 percent (Q2 2019: 0.7 percent), reflecting than-expected business investment growth and the dissipating impact of the GST zeroization last continued contraction in public investment. Private year. During the period, the contribution of transport investment growth slowed to 0.3 percent in Q3 2019 (Q2 costs to headline inflation was negative owing to the 2019: 1.8 percent), largely due to subdued trade activity decline in the RON97 petrol price amid lower average and muted business sentiment. Public investment global oil prices. In Q3 2019, the core inflation rate contracted for the eighth consecutive quarter to 14.1 remained stable at 1.5 percent (Q2 2019: 1.6 percent). percent in Q3 2019 (Q2 2019: -9.0 percent). Financial soundness indicators show that the On the supply side, growth in key sectors (services, banking system remains resilient. Financial manufacturing and agriculture) moderated, with institutions continue to record sound levels of contractions in the mining and construction profitability, and the gross impairment ratio has sectors. Services grew at the rate of 5.9 percent in remained stable. The overall level of household debt Q3 2019, down from 6.1 percent in Q2 2019. After a increased slightly to 82.4 percent of GDP as of end- moderate rebound in Q2 2019, manufacturing output September 2019 (end-June 2019: 82.2 percent). MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 9 Summary The recent performance of the domestic financial Malaysia’s Budget 2020 represents a prudent markets has been mixed. Non-resident inflows have balance between the competing needs of preserving contributed to the decline of Malaysian Government fiscal sustainability while also effectively Securities yields. The ringgit broadly weakened against responding to challenging external conditions. The the US dollar, in line with most regional currencies. government’s fiscal consolidation will continue in 2020, albeit with a revised fiscal deficit target of 3.2 percent The government is expected to meet its fiscal of GDP, from the original target of 3.0 percent. Total deficit target of 3.4 percent of GDP in 2019. Federal government expenditure is expected to remain at government revenue is expected to reach 17.4 percent 18.4 percent of GDP in 2020. The civil service wage of GDP, slightly higher than the initial estimate of 17.1 bill, which is expected to account for 36.9 percent of percent, mainly attributed to an increase in estimated total government expenditure (2019e: 38.9 percent), SST collections. The higher revenue collection is, continues to dominate OE. however, offset by higher operating expenditures which are estimated to expand to 17.3 percent of Federal government revenue is expected to decline GDP, exceeding its initial estimate of 17.0 percent further in 2020 to 15.2 percent of GDP (2019e: of GDP. This is partly due to higher spending on fuel 15.4 percent). Tax revenue is expected to remain subsidies following the delay in the implementation stable at 11.8 percent of GDP. Of this tax revenue, the of the targeted fuel subsidy program. Meanwhile, largest proportion will be derived from direct tax (75.1 development expenditure is projected to decline percent of total tax revenue). Corporate and personal marginally from the initial estimate of 3.6 percent of income tax are expected to remain relatively stable, GDP to 3.5 percent following the revision and re-timing at 4.7 percent and 2.3 percent of GDP respectively. of several infrastructure projects. Indirect tax collection is also expected to remain constant, at 2.9 percent of GDP. Proceeds from the SST, which contribute the largest share of indirect tax, Increased progressivity in are expected to stand at 1.8 percent of GDP (2019e: the tax framework could 1.8 percent. Petroleum-related revenue as a share of federal government revenue is expected to decline enable the government to to 20.7 percent in 2020 (2019e: 21.7 percent) due to both increase revenues and projected lower crude oil prices. improve redistribution. In Budget 2020, the government has announced a number of measures to diversify its revenue base and to achieve greater progressivity in its tax Federal government debt in proportion to GDP framework. This includes a proposal for a new income increased to 52.7 percent in Q2 2019 (2018: tax band for taxable income in excess of RM2 million, 51.2 percent), with risks remaining manageable. to be taxed at 30 per cent, which is a 2-percentage Exposure to currency risk is limited, with ringgit- point increase from the current rate of 28 per cent. denominated securities constituting of 96.3 percent The proposed increase would affect approximately of federal government debt (2018: 97.1 percent). 2,000 top income earners in the country. In addition, Rollover risk is also limited with the debt structure the government also announced the extension of SST skewed towards longer-tenured issuances. Domestic to cover imported digital services, to take effect in institutional investors remain the largest holders of January 2020. government debt, accounting for 66.8 percent of total outstanding debt (2018: 66.7 percent) with non- resident holdings relatively stable at 22.1 percent (2018: 22.7 percent). Debt service charges are expected to reach 14.1 percent of federal government revenue in 2019 (2018: 13.1 percent). Federal government debt and liabilities was also higher at 77.1 percent of GDP in Q2 2019 (2018: 75.4 percent). The slight increase compared to 2018 was mainly due to an increase in committed guarantees, with their value increasing from 9.2 percent of GDP in 2018 to 10.4 percent as of Q2 2019. 10 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 11 Summary Economic outlook Headline inflation is projected to increase modestly in 2020 as the effects of policy- related factors dissipate. Consumer price inflation Malaysia’s economic activity is projected to is projected to average higher in the range of 1.5-2.0 grow at a relatively moderate pace in 2020 amid percent next year (2019f: 0.7 percent), mainly reflecting increased headwinds. The forecast for Malaysia’s GDP the lapse in the effects of consumption tax policy growth in 2020 is revised down slightly to 4.5 percent changes in 2018. Additionally, the reintroduction of the (2019f: 4.6 percent), largely due to weaker-than- float pricing mechanism for RON95 petrol and diesel in anticipated investment and export growth in Q3 2019. January 2020 is expected to result in modest increases Private consumption is projected to expand at a still in transportation costs at the prevailing global oil prices. 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 destocking begun in Q1 2018 is expected to normalize and provide modest support to growth over the forecast period. Export growth is likely to remain soft into next Various downside risks in the global economy could year, reflecting subdued global investment and have spillover effects on Malaysia’s economy. trade activity. Malaysia’s export growth is projected Further escalation of the current trade tensions between to remain modest at 0.5 percent next year (2019f: -0.2 the US and China could further contribute to growing percent) in the context of challenging global economic uncertainty and dampen investment activity. Moreover, conditions and prolonged trade-related uncertainty. deepening of the slowdown in the major economies, This is expected to be partially offset by a recovery in as well as a sharper-than-expected deceleration in mining exports from unforeseen supply disruptions in China could lead to deterioration in export and growth recent quarters. Similarly, import growth is projected prospects. Further, an unexpected drop in commodity to pick up modestly at 0.4 percent in 2020 (2019f: -1.8 prices could affect growth and lead to further fiscal percent), as growth of intermediate and capital exports pressures in Malaysia. regains some momentum with slight improvements in export and investment activity. The current account On the domestic economic front, risks to growth surplus is projected to narrow to around 3.0 percent primarily emanate from factors related to of GDP in 2020, with a more moderate trade surplus prolonged uncertainty among investors and in goods continuing to offset the persistent deficits in delayed recovery in commodity-related sectors. services and income accounts. Investment growth has been subdued over the recent 12 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 Summary quarters, weighed down by lower capital spending. trade barriers is pivotal to preserve a vibrant trading Indicators of business sentiment suggest the level environment and send confidence-building signals to of confidence in the economy remains low. While investors. It is also important to strengthen Malaysia’s uncertainty regarding the global economic outlook competitiveness in attracting quality investments and would have an impact on Malaysia’s economy, similar to improve targeting and the return on tax expenditures uncertainty regarding the domestic economy and so as to maximize the gains from investments towards political developments could exacerbate cautious economic upgrading, high-value job creation and sentiment, further dampening private investment. inclusive growth. Elevated government debt and liabilities, the continuing decline in government revenue, coupled with increased locked-in expenditures, Facilitating equal access will constrain fiscal policy space. Given the more to economic opportunities uncertain economic environment, preserving fiscal space is important to mitigate the impact of any negative for women would also yield shock to the economy. General government revenue in significant gains in the proportion of GDP is expected to decline further to 17.9 percent in 2020, which is well below its regional and long term. aspirational comparators, and Malaysia significantly under-collects in key revenue areas including personal income and consumption taxes. Moreover, increased Medium-term structural reforms should focus locked-in expenditures such as the wage bill and debt on addressing critical gaps in human capital, servicing costs have put a limit on development and facilitating economic opportunities for women social spending, capping the effectiveness of fiscal and improving private sector opportunities to policy as a redistributive tool for shared prosperity. ensure sustainable and inclusive growth. Making greater gains in human capital development will require Increased progressivity in the personal income deeper reforms to improve the quality of learning tax framework and an expansion of current through better pre-school services and improved in- tax measures could enable the government to school assessments, and to reduce childhood stunting increase revenues and to improve redistribution. with multi-pronged solutions. Facilitating equal access The government has taken a step in the right direction to economic opportunities for women would also when it proposed a new top income tax band in Budget yield significant gains in the long term. Concurrently, 2020. Nonetheless, more could be done on this end, policymakers should also sustain reform efforts to including raising the tax bracket for the other higher promote healthy competition, strengthen public income bands, and reviewing the tax reliefs and procurement and address distortions in labor and exemptions applied. In addition, the scope of the real output markets to improve private sector participation property gains tax could be widened by extending the in the economy. scope of the tax, particularly 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 lower- and middle-income households. Finally, a gradual lifting of the exemptions on selected non-essential items, particularly those not within the B40 consumption basket, could also facilitate increased revenue without jeopardizing the purchasing power of lower-income households. A more challenging external environment underscores the need to increase trade diversification and strengthen investment competitiveness. In an environment of subdued global demand and increased protectionist tendencies among the major economies, a sustained commitment to deepening regional integration and addressing MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 13 Summary Making ends meet there is also significant spatial price variation across a wide range of common goods and services. Because of spatial price differences, the purchasing Despite Malaysia’s low and stable inflation rate, power of a ringgit varies from place to place, which there has been an ongoing debate regarding directly impacts the cost of living. It is no secret perceived increases to the cost of living in the that Johor, Kuala Lumpur and Selangor are Malaysia’s country. These concerns are frequently expressed in high-cost environments, and that costs tend to be public policy debates, in the mass media, and in private lower in states such as Kedah, Kelantan and Perlis. If conversations. The issue has featured prominently in household incomes varied across these areas in exactly public and private discourse for years, dating back at the same proportion as costs then that would neutralize least to the introduction of the GST in April 2015 and the effect of spatial price differences on the cost of the rationalization of the fuel subsidy in December living. However, incomes do not vary in the same way, 2014. And more recently there has been a robust especially if one looks beyond the averages. public debate about whether Malaysia should increase its nationally-defined poverty line. It is particularly Increasing numbers of Malaysians, especially in noteworthy that these concerns have emerged during urban areas, feel their income is insufficient to a period of low inflation, with the headline inflation rate meet the cost of living. Real household incomes have averaging around 2 percent since 2015 (except in 2017 been consistently increasing over the past two decades, when it was 3.8 percent), well below the growth rates sometimes quite rapidly, yet for many the gains have for the economy and average nominal income. not kept up with their expectations. In particular, from 2009 to 2014 income growth rates for the B40 were In this context, the “cost of living” is frequently substantially higher than for the M40 and T20, but more used as a catch-all term that may reflect wider recently (2014–2016) income growth slowed for the B40, developments in the economy and their impacts trailing that of the M40. Feelings of being “left behind” on household budgets and well-being. While the are likely compounded by the fact that absolute income discussion is usually framed as an issue of rising costs of gaps have consistently increased over time. goods and services, for most Malaysians the core issues extend beyond prices. These include lagging income Despite rising educational attainment, income growth and increasing housing costs, resulting in lower growth among younger and less educated workers discretionary income. In addition, high indebtedness has been sluggish. While incomes for all age groups and inadequate financial savings also feed into the have tended to grow at a faster rate than inflation, the concerns of housing affordability and the cost of living growth in employment earnings in the case of younger for many Malaysians. workers has consistently lagged those of their older counterparts. Employment earnings for those who Overall, price increases for most goods and have only completed secondary education are not only services have been low and stable. The consumer substantially lower than those with higher education, price index shows that Malaysia’s inflation rate has been but their real wage growth over time has also been moderate in recent years. This is especially true for core persistently low. inflation, which excludes items with more volatile prices (especially energy and food commodities); items with Those who feel their incomes are not keeping up administered prices; and the estimated direct impacts with the cost of living often opt to work more to of changes in consumption tax policy. The year-on-year try to make ends meet. This could mean a non- core inflation rate has consistently been less than 2.6 working household member deciding to start working percent since mid-2016. or a working household member taking on a second or even third job. Qualitative research suggests that Living costs vary significantly across Malaysia. increases in the number of workers per household and While the evolution of prices over time in Malaysia is the number of people holding multiple jobs is greater well measured and documented, comparatively little than that indicated by quantitative data. attention is given to the large differences in price levels across places. Moving around the country it is Borrowing provides temporary income support readily apparent that some places are more expensive to lower-income households. Borrowing provides in general than others. The most obvious spatial temporary relief for households to compensate for price differences are in housing, where location is an inadequate income, particularly in the short-term. While inherently critical component of property values, but debt provides opportunities for shifting consumption 14 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 Summary and making investments, over the long run, it also them, with 55 percent in Kuala Lumpur and 63 percent limits available discretionary income for households in in Petaling District lacking access to housing that they Malaysia. Lower-income households and population can afford. Households in the RM6,000 to RM10,000 sub-groups have a heavy debt load and face high income bracket can typically afford to purchase a home debt service ratios. More than 40 percent of borrowers in the RM230,000 to RM500,000 price range, but the with monthly household incomes less than RM3,000 availability of such homes is very uneven. The market for spend more than 40 percent of their income on debt such homes that are affordable for this income group is repayment. Among lower-income borrowers, debt is much tighter in Petaling District than in Kuala Lumpur, mostly for motor vehicles and personal financing, thus given Petaling’s growing under-supply and increase in supporting consumption as opposed to longer-term prices. investments to build wealth. Alleviating cost of living pressures demands a Housing affordability in Malaysia has deteriorated mix of short-term measures as well as medium- over the years. Housing is a basic need, with the cost and long-term structural reforms. Until recently, of meeting this need usually constituting one of the many of the measures targeted at addressing the largest items of household expenditure. Various studies cost of living have been relatively ad hoc, fragmented using the price-income ratio (PIR) have shown that the and short-term in nature. Some of the policies that affordability of housing in Malaysia has deteriorated, the government has implemented include subsidies, such that housing is now “severely unaffordable” in administrative price controls, construction of affordable several states and “seriously unaffordable” in Malaysia housing, concessional mortgage financing, and credit as a whole according to that measure. For this report, the counseling. As factors affecting households’ living World Bank has developed a new housing affordability standards are wide-ranging and tend to overlap to model that is more detailed than the PIR and better some degree, a more structured approach to address equipped for the analysis of housing affordability higher living costs and improving well-being among across the distributions of incomes and house prices. Malaysians can be organized into short-term measures When applied to detailed housing and income data for as well as medium- and long-term structural reforms. Kuala Lumpur and Petaling District (as case studies) it is Short-term measures need to focus on alleviating possible to analyze the income levels and housing price hardships among lower-income households through points where housing unaffordability is most critical. deepening of social safety nets, while over the long run, increased coordination across agencies and The lack of affordable housing is particularly severe implementation of structural reforms to foster greater among households earning less than RM5,000. It is market competition and accelerate productivity could estimated that the number of households in this income help lift real incomes for all. group far exceeds the supply of housing affordable to MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 15 Recent trends in Malaysia’s economy Malaysia’s economic activity has moderated... ...weighed down by negative investment growth GDP, y/y, Percentage Contribution to GDP, y/y, Percentage 7 8 6 6.1 6 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 4 4.3 4.2 2 3 0 -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 Exports have seen negative growth amid ...and the performance of the domestic weak external demand... nancial markets has been mixed Contribution to Export Growth, y/y, Percentage Non-resident Portfolio Flows, RM Billion 15 25 20 10 15 5 10 0 5 -5 0 -10 -5 -15 -10 -20 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 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 E&E - Semiconductors E&E - Others Exports, y/y Equity Corporate Bonds Government Bonds and Sukuk and BNM Bills Non-E&E Commodities Malaysia’s economy is forecast to expand at ...with private consumption remaining the 4.5 percent in 2020... main driver 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 16 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 Making ends meet Higher incomes in some urban areas are Since 2004, real growth in employment partly offset by higher prices, with the income for 20-29 year-olds with post- opposite in most rural areas secondary education has been marginal Median Gain/Loss in Purchasing Power in 2016, RM per Month Median Monthly Employment Income with Post-Secondary Education, Constant RM 1,000 Perlis Urban Rural Kelantan Kelantan Johor 7,000 Perak Melaka Terrengganu Kedah Perlis Pahang Selangor 500 Negeri Sembilan Perak Terrengganu 6,000 Kedah Penang Negeri Sembilan Penang Pahang Melaka Johor Sarawak 0 5,000 Sabah Sarawak Penang Labuan Sabah Selangor -500 Labuan 4,000 3,000 -1,000 2,000 -1,500 Putrajaya Kuala Lumpur 1,000 -2,000 2004 2007 2009 2012 2014 2016 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 20-29 30-39 40-49 50-59 Median Gross Household Monthly Income Lower-income borrowers have high debt About half of Malaysian working adults lack service ratios, leaving little room for financial resilience, especially the younger savings or discretionary expenditures generation Share of Borrowers, Percentage Number of Individuals by Age Group, Percentage 100 100 80 60 50 40 20 0 0 Bottom 20% 2 3 4 Top 20% 20-29 30-39 40-49 50-59 Income Quintile Age Group DSR <20% DSR 20-40% DSR 40-60% Able to pay RM1,000 for emergency DSR 60-80% DSR 80-100% Able to pay medical bills of RM2,500 Able to cover 3 months' expenses if retrenched Lower-income households cannot afford to There is an under-supply of housing units spend as large a percentage of their that cater for lower-income households in income on housing Kuala Lumpur Maximum Affordable Home Value, RM Cumulative Number of Housing Units and Households, Thousands 700 600 1,029,548 557 500 400 457 495,945 322 300 292 297,911 200 134,233 100 86 38 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 1 3 5 7 9 11 13 15 17 19 Monthly Income (RM '000) Monthly Income (RM) Cumulative Number of Households Cumulative Housing Units MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 17 18 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE Recent Economic Developments and Outlook MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 19 PART ONE - Recent Economic Developments and Outlook Recent economic developments Regional growth has slowed amid challenging external conditions Global growth has remained subdued, with trade Growth also decelerated in the East Asia and and manufacturing activity showing continued Pacific (EAP) region, with the rate declining to signs of weakness. The global growth rate is 5.8 percent in Q3 2019 (Q2 2019: 5.9 percent) estimated to have slowed to 2.4 percent1 in Q2 and (see Figure 2). In China, the growth rate slowed to Q3 2019 (Q1 2019: 2.5 percent), with weaker growth 6.0 percent during Q3 2019 (Q2 2019: 6.2 percent), observed in several major economies, including mainly due to a moderation in manufacturing and United States, China and Japan (see Figure 1). Global industrial activity amid trade policy uncertainty. Growth investment and trade activities have remained subdued in the region’s other economies has also moderated in the context of weak global demand and continued in recent quarters, with sluggish global demand and trade policy uncertainty. In response to weakening protracted trade policy uncertainty. The negative activity and generally low inflation, central banks in impact of subdued manufacturing activity and exports advanced economies have loosened monetary policy, on growth has been partly mitigated by still robust contributing to notable declines in global bond yields. private consumption across much of the region and Recent survey indicators suggest that the global import compression. Many countries, including China, economy remains weak but is showing incipient signs have increased monetary and fiscal policy support in of stabilization. response to these less favorable external conditions. FIGURE 1 FIGURE 2 Global growth has remained weak with subdued Regional growth has also slowed amid challenging trade 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 1 Growth rates are measured on a year-on-year basis, unless otherwise stated. 20 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Malaysia’s economy continues to expand, but at a more moderate pace The Malaysian economy expanded at 4.4 percent investment growth slowed to 0.3 percent in Q3 2019 in Q3 2019, moderating from 4.9 percent recorded (Q2 2019: 1.8 percent), weighed down by challenging in Q2 2019 (see Figure 3). Economic growth was external conditions and subdued business confidence. mostly supported by private consumption and net Most key types of investment were affected by the exports due to import compression, contributing a decline in capital expenditure, including investment combined 5.1 percentage points to GDP growth in in structures and in machines and equipment, which Q3 2019 (see Figure 4). The contraction in overall contracted by 2.4 percent (Q2 2019: 1.2 percent) investment, however, continued to weigh on growth and 7.4 percent (Q2 2019: -4.2 percent) respectively during the quarter. during the quarter. The business condition index has remained below 100 (signifying contraction) for the Private consumption remained the largest past 12 months. Meanwhile, public sector investment contributor to output growth. Private consumption contracted further by 14.1 percent in Q3 2019 (Q2 2019: expanded at a lower but still robust rate of 7 percent -9.0 percent), as several major public infrastructure in Q3 2019 (Q2 2019: 7.8 percent), and contributed projects remained under review and those that are 4.1 percentage points to output growth. Household expected to resume have not yet started. consumption spending continued to be supported by moderate inflation and continued private sector On the supply side, there was a broad deceleration employment and wage growth. Public consumption across the services, manufacturing and gained some momentum in Q3 2019, expanding by 1 agriculture sectors, with contractions in mining percent, up from 0.3 percent in Q2 2019. and construction sectors. The growth rate in the services sector moderated further to 5.9 percent in Gross fixed capital formation (GFCF) contracted Q3 2019 (Q2 2019: 6.1 percent), with slower growth for the third consecutive quarter, owing to weaker- observed in most major subsectors. After a moderate than-expected business investment growth and rebound in Q2 2019, manufacturing output declined continued contraction in public investment. Private to 3.6 percent in Q3 2019 (Q2 2019: 4.3 percent), FIGURE 3 FIGURE 4 Malaysia’s economic growth slowed in Q3 2019... ...weighed down by negative investment growth 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 21 PART ONE - Recent Economic Developments and Outlook mainly due to weak global demand, which weighed commercial buildings and residential properties. See heavily on the production of electric and electronic Box 1 for a broader discussion of Malaysia’s potential (E&E) equipment. In the agricultural sector, the growth. strong expansion in rubber, livestock and marine fish production was offset by the continued contraction in Leading economic indicators suggest the forestry and aquaculture output. The robust rebound in Malaysian economy will continue to expand at a mining and quarrying recorded in the previous quarter moderate pace in the near term. Both the consumer was not sustained. Output shrank by 4.3 percent, confidence and business condition indices, from the compared to the 2.9 percent growth recorded in Q2 Malaysian Institute of Economic Research (MIER), have 2019, owing mainly to the unplanned maintenance remained below 100 since Q4 2018, indicating subdued shutdowns of several oil production operations across confidence in the economy. Meanwhile, the Industrial Malaysia. In the construction sector, production Production Index (IPI) has been declining continuously declined by 1.5 percent in Q3 2019 (Q2 2019: 0.5 on a month-to-month basis since May 2019, in line with percent), due to deeper contractions in the residential the broad slowdown in key sectors of production. and nonresidential subsectors amid an oversupply of TABLE 1 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 22 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook BOX 1 Malaysia’s output gap and potential growth The output gap measures the difference between this work, including the use of Hodrick-Prescott and what an economy is producing and what it could Kalman filters. The multivariate filter model used in this efficiently produce at full capacity (potential box estimates the output gap based on the Kalman output). As a concept, it is synonymous with the filter. It exploits the information available in other business cycle—the ups and downs, expansions and measures of capacity, including capacity utilization contractions, or booms and busts that happen over a and unemployment. Given that Malaysia is an open number of years. This places the output gap at the heart economy, the model is extended to include a measure of macroeconomic policy choices. Arthur Okun referred of the foreign output. Potential growth is estimated to it as “the point of balance between more output and using a Cobb-Douglas production function approach stability” (Okun 1970). Knowing where the output gap is in which potential growth is decomposed into its inputs and where it is going empowers monetary policy makers (labor, capital and total factor productivity). to react appropriately to the inflation that it creates. For fiscal policymakers, an understanding that an economy Since the nadir of the global recession, when is running above its capacity suggests that additional Malaysia’s output gap stood at -6.2 percent, revenue should be saved and that expenditure should this gap has ebbed and flowed around potential not be expanded to match revenue growth, as this growth (see Figure 5). The output gap has remained growth is unlikely to be sustained. By contrast, when range-bound since 2011, not deviating by more than downturns occur, an understanding that an economy is 1 percentage point from zero (when accounting for running below capacity suggests that there is a need to uncertainty, it was not statistically different from zero). increase expenditure to support growth. Real GDP growth remained equally bound in the range of 4 to 6 percent over much of this period. It slowed Neither the output gap nor potential growth during the euro area crisis in 2013; over the course are directly observable and therefore need to be of 2015 and 2016 as oil prices collapsed and EMDEs estimated. Numerous approaches and variations in general experienced slowing growth; and more on these approaches can be used to estimate the recently, since the start of 2018, generating negative output gap. Ultimately, estimating this gap involves output gaps. In the third quarter of 2019, the output an endeavor to isolate the cyclical part of output from gap is currently estimated at -1.1 percent of potential the trend. Filtering techniques form the foundation for output, from an average of -0.2 percent in 2018. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 23 PART ONE - Recent Economic Developments and Outlook FIGURE 5 FIGURE 6 Malaysia’s output gap turned negative in the ...as asset prices and credit expansion slowed second 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 Source: World Bank staff calculations using Haver Note: Based on estimates from a modified Multivariate Filter model as in Note: Recursive decomposition of the output gap equation. Unlike a shock World Bank (2018a). A foreign output gap is added to Malaysia’s output decomposition, only variables in the output gap equation are decomposed. gap equation given the open nature of the economy. Foreign output gap is measured as the export weighted average of Malaysia’s top ten export destinations between 2016 and 2018. 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 Source: World Bank staff calculations using Haver Note: Hamilton refers to the methodology proposed by Hamilton (2018) Note: Potential growth estimates based on production function approach as in —an autoregressive model with p = 4 (number of lags) and h = 8 (horizon). World Bank (2018a). TFP stands for total factor productivity. HP = Hodrick-Prescott Filter, UC = Unobserved Components model, and MVF = Multivariate Filter model. See Chapter 3 of World Bank (2018a) for details. 24 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Many drivers affect the output gap. Along with move and cluster well. The methods are well correlated, capacity utilization, inflation, and the unemployment with the weakest correlation between the multivariate rate (which are used in the multivariate filter model to filter model and the approach implemented by Hamilton identify the output gap), other measures that affect it (2018), at 0.85. Three of the four methods presented directly include credit extension, house price growth, here suggest that Malaysia has had a negative and commodity prices and the foreign output gap. These widening output gap since mid-2018. can be recursively decomposed to identify the drivers of the output gap (see Figure 6). Potential growth in Malaysia has declined significantly, from around 9 percent during the pre- In particular, house prices and commodity prices Asian crisis period to less than 4 percent during have played a prominent role since 2011. The post-Asian crisis period (1998-2001) (see Figure Malaysian housing market significantly affects the 8). Until recently, it was on an upward trend, reaching economy, accounting for the majority of the above an average level of 5.1 percent over the past five years, 80 percent household debt to GDP. Following the despite some downturns during the global financial 1998 Asian crisis, house prices in Malaysia remained crisis. Capital stock has been the principal driver of the relatively stable, growing by the average annual rate potential growth in Malaysia, contributing to almost half of 1.5 percent in the period from 2000 to 2010. Over on average in the period from 1994 to 2018. Despite this period, house prices contributed negatively to the the recent slowdown in investment growth, especially output gap. By 2011, however, the housing market had after 2012, the contribution of capital stock is still begun to boom, with house price growth reaching an robust, standing at 2.6 percentage points in 2018. Total average annual rate of close to 9 percent in the period factor productivity growth has remained steady over from 2011 to 2014. This strong performance, driven in the past 15 years, with the average annual rate standing part by demand by non-residents, was reflected in the at around 1.1 percent. Improvements to education output gap, with house prices contributing to up to 1 and intensified efforts to increase female labor force percentage point of the gap at the peak of the boom in participation will be required to boost potential growth 2013. In response, Malaysian authorities implemented into the future. macroprudential measures, with measures to increase the availability of affordable housing to help dampen With the deteriorating global economy, risks to the market. House price growth has subsequently Malaysia’s growth prospects are increasing. With slowed, with the rate at 1.5 percent in Q1 2019 on an Malaysia being both a highly open economy and a annual basis. Since 2018, its contribution to the output commodity exporter, it will not be spared if global gap has turned negative. conditions worsen and risks materialize. For policy makers to appropriately implement countercyclical Commodity price developments have also monetary and fiscal policy, they must have a good contributed to developments in the output gap. understanding of the demand side of the economy, Following the rebound from the global recession, which is provided by the output gap. Accurate forecasts strong oil prices resulted in commodity prices of the direction of the output gap can ensure that contributing positively to the output gap through 2015. policy is appropriately calibrated. On the supply side The subsequent collapse of oil prices saw commodity of the economy, an understanding of potential growth prices begin to drag on the output gap, with the dynamics and the drivers of potential growth may help contribution reaching a nadir of -0.9 percentage point policymakers prioritize structural reforms that can by mid-2016. Since then, commodity prices have ultimately boost long-term growth prospects. On these, recovered somewhat and currently are not a significant the analysis suggests that boosting Malaysia’s human driver of the output gap. capital, particularly increasing the quality of education and the level of female labor force participation, are While the output gap is not directly observable, it likely to have a greater impact on potential growth. can be estimated using a number of approaches. To establish some degree of confidence in its position, the results from the use of multiple methods can be compared (see Figure 7). Three alternative filtering techniques are presented here and although there can be significant differences, most measures tend to co- MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 25 PART ONE - Recent Economic Developments and Outlook Export growth was affected by weaker global trade The decline in export demand continued to deepen contracted during the quarter (Q3 -3.0 percent; Q2 in the context of softening global growth and 2019: 6.8 percent), in line with the weakening demand international trade. With weaker external demand for manufactured exports. and heightened trade policy uncertainty, exports of goods and services shrank by 1.4 percent in Q3 2019 (Q2 The current account surplus narrowed to 3 2019: 0.1 percent). Malaysia’s exports of manufactured percent of GDP in Q3 2019 (Q2 2019: 3.8 goods moderated, owing largely to a significant growth percent), due to increased primary and secondary decline in E&E exports. This was partially offset by a income deficits (see Figure 10). With the decline in surge in the exports of other product groups, including imports of goods outstripping the decline in exports, transport equipment, machinery parts and iron and the trade in goods surplus increased to RM30.8 billion steel products. Meanwhile, commodities exports in Q3 2019 (Q2 2019: RM28.1 billion). After widening in contracted due to a notable decline in petroleum Q2 2019, the deficit in the services account narrowed exports, resulting from the temporary closure of to 0.4 percent of GDP (Q2 2019: -0.9 percent). This several major oil fields for maintenance. While there is smaller deficit is attributable to an increase in tourism continued evidence that Malaysia is picking up some receipts due to a surge in international tourist arrivals. market share in China and the US as a result of tariffs The increase in the deficit of the secondary income imposed by the two countries (see Box 2), any such account was modest (Q3 2019: -1.4 percent; Q2 2019: gains resulting from trade diversion appear to now be -1.3 percent), while the deficit in the primary income offset by a generalized slowdown in global growth and account more than doubled compared to the previous international trade. quarter (Q3 2019; -3.2 percent; Q2 2019: -1.5 percent). This increase in the primary income deficit was largely Imports of goods and services contracted for the due to a decline in investment income from abroad third consecutive quarter. The decline in goods by Malaysian companies, while remittance outflows and services imports intensified in Q3 2019, with the continued to drive the secondary income deficit. There rate sinking to -3.3 percent (Q2 2019: -2.1 percent). was a reduced net outflow in the financial account due Consistent with the further contraction in gross capital to a narrower net outflow in foreign direct investments formation, imports of capital goods registered a steeper (FDI) and a net inflow in financial derivatives and other decline of 15.4 percent (Q2 2019: -8.9 percent), led by investment types. Meanwhile, the net outflow of a decrease in the imports of machinery and transport portfolio investment increased to 7 percent of GDP, equipment. The imports of intermediate goods also compared to a deficit of 2.7 percent in Q2 2019. FIGURE 9 FIGURE 10 Export growth has turned negative amid A larger income deficit led to a decline in the softening global demand current 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 26 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook BOX 2 The impact of US-China trade tensions on Malaysia’s exports With bilateral trade between the US and China FIGURE 11 declining since the implementation of tariffs, Malaysia is experiencing some short-term gains Malaysia’s exports to the US and China of from trade diversion products targeted by tariffs have increased. This Year-on-year change in US and Chinese imports from Malaysia of suggests that Malaysia is deriving some short-term tariff-affected products after tariff implementation, US$ billion benefits from the US-China tensions as a result of trade 2.5 diversion, even if overall demand for Malaysia’s exports China list 4: Crude oil from petroleum is weakening in the content of slowing global growth. 2.0 and bituminous minerals It also points to the underlying competitive strength of China list 3: 1.5 Lique ed natural gas the Malaysian economy. 1.0 U.S. list 2: Processors China list 2: Malaysia’s exports of tariff-affected products and controllers Copper alloy, waste and to the U.S. and China have increased in value scrap 0.5 U.S. list 2: by more than US$2 billion since the tariffs were Semiconductors imposed. An analysis of trade data shows gains in the 0.0 Other China list 3: US market of US$0.25 billion, reflecting an increase by (other) U.S. list 3 0.8 percent in Malaysia’s exports of the affected goods -0.5 and other to the US relative to the pre-tariff period, and gains in the Chinese market of US$2.02 billion, reflecting an -1.0 Change in U.S. imports Change in China imports increase by about 9 percent in Malaysia’s exports of from Malaysia from Malaysia the affected goods to China relative to the pre-tariff period. These statistics are derived from an examination Source: World Bank staff calculations based on US Census and China Customs statistics. of US and Chinese imports from Malaysia of products Note: U.S. (China) list 1 refers to tariffs imposed in July 2018 and covering US$34 billion in imports to the U.S. from China. US (China) list 2 refers to on eight US and Chinese lists of goods affected by tariffs imposed in August 2018 and covering US$16 billion in imports to the tariffs, which the two countries have imposed on each U.S. from China. US (China) list 3 refers to tariffs imposed in September 2018 and covering US$200 billion in imports to the U.S. from China. U.S. (China) list other over this period. Specifically, the imports from 4 refers to tariffs imposed in September 2019. Malaysia for such products in the period following the tariff implementation is compared to imports in the corresponding period a year ago2. US List 1 and US list 4, and those on US List 2 apart from semiconductors and electronic integrated circuits). By Most of the increase in Malaysia’s tariff-affected contrast, the gains in the Chinese market are primarily exports to the U.S. and China has been driven by driven by exports of copper waste and scrap (China the increased exports of few products (see Figure List 2), liquefied natural gas (China List 3) and, based 11). In particular, the increases in Malaysia’s exports on preliminary evidence, crude oil from petroleum of semiconductors and electronic integrated circuits, and bituminous minerals (China List 4). There has also including processors and controllers (on which tariffs been an increase in exports of products on China List were imposed in August 2018) appear to account 1, other products (apart from copper waste and scrap) for the majority of its increased exports to the US on China List 2 and other products (apart from crude market. Malaysia’s exports of products on US List 3 oil) on China List 4. There has been a decline in exports have declined and there was negligible increase in the of other products (apart from liquefied natural gas) on overall exports of other products (including those on China List 3. 2 The analysis compares the effect of tariffs implemented in July, August and September 2018, as well as September 2019. The authors compare August 2018-September 2019 with August 2017-September 2018, for products on US and China lists 1 implemented in July; September 2018-September 2019 with September 2017-September 2018 for products on US and China lists 2 implemented in August; January-September 2019 with January-September 2018, for products on US and China lists 3 implemented in September 2018; and September 2019 with September 2018, for products on US and China lists 4 implemented in September 2019. For list 3, the last quarter of 2018 is excluded due to continued year on year growth of US imports of from China, in anticipation of a tariff hike from 10 percent to 25 percent. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 27 PART ONE - Recent Economic Developments and Outlook TABLE 2 Selected external sector indicators Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2017 2017 2018 2018 2018 2018 2019 2019 2019 Balance of Goods & Services (% of GDP) 7.7 7.1 8.3 5.8 6.4 7.6 8.8 6.6 7.6 Current Account Balance (% of GDP) 3.5 3.0 3.9 0.8 0.9 2.9 4.5 3.8 3.0 Total Exports (% of GDP) 70.7 68.9 68.5 68.5 69.0 69.0 66.3 65.9 65.4 Total Imports (% of GDP) 63.0 61.8 60.2 62.8 62.6 61.4 57.4 59.2 57.7 Net Portfolio Investment (RM billion) -9.9 9.4 -1.5 -37.9 0.8 -5.8 2.1 -10.2 -26.8 Gross Official Reserves (RM billion) 427.8 414.7 416.4 423.4 427.0 419.6 420.3 425.5 431.3 (US$ billion) 101.2 102.4 107.8 104.7 103.0 101.4 103.0 102.7 103.0 Source: World Bank staff calculations based on BNM and DOSM data Inflation remains subdued, but base effects have pushed the rate higher In Q3 2019, the headline inflation rate increased mainly driven by food and non-alcoholic beverages, to 1.3 percent (Q2 2019: 0.6 percent) reflecting together with furnishings, household equipment and the dissipating impact of the GST zeroization routine household maintenance. The contribution of in the period from June to August last year transport costs to headline inflation during the period (see Figure 12). During the period, inflation was was negative, due to lower fuel prices (see Figure 13). FIGURE 12 FIGURE 13 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 28 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook This reflected the decline in the RON97 petrol price rate was estimated at 68.9 percent (Q2 2019: 68.8 in the context of lower average global oil prices percent) and the unemployment rate was unchanged at (average RON97 petrol price per liter Q3 2019: 3.3 percent (see Figure 14). The unemployment rate for RM2.56; Q2 2019: RM2.65). Comparing inflation those aged between 15 to 24 years, however, continues trends across regions, the inflation rate was higher to be high at 10.2 percent during the quarter (Q2 2019: than the national average in more urbanized states 10.4 percent) (see Figure 15). Meanwhile, the female such as Kuala Lumpur, Penang and Selangor. Over labor force participation rate increased marginally, from the period, measures of underlying inflation have 55.8 percent in Q2 2019 to 56 percent in Q3 2019. For remained subdued. In Q3 2019, the core inflation two consecutive quarters, wage growth in the services rate, excluding the direct impact of consumption tax sector (Q3 2019: 4.1 percent; Q2 2019: 4.4 percent) was policy changes, remained stable at 1.5 percent in Q3 higher than wage growth in the manufacturing sector 2019 (Q2 2019: 1.6 percent). (Q3 2019: 3.2 percent; Q2 2019: 3.9 percent). See Box 3 for a discussion of the linkages between inflation and Conditions in the labor market have remained labor markets in Malaysia. broadly stable. In Q3 2019, the labor force participation FIGURE 14 FIGURE 15 Labor market conditions have remained broadly ...however the unemployment rate among those stable... aged 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 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 29 PART ONE - Recent Economic Developments and Outlook BOX 3 Examining the links between inflation and the labor market in Malaysia The Phillips Cur ve describes the trade-off While readily accessible, the headline in economic theor y between inflation and unemployment rate has limitations and flaws as an unemployment. When inflation is high, unemployment indicator for labor market conditions. It is necessary is expected to be low, and vice versa. The intuitive to look beyond the aggregate unemployment rate and assumption behind the Phillips Curve is that when to unpack the information it might contain. To do this, unemployment is low, employers will offer higher we must first understand how the unemployment rate wages to attract scarce labor, potentially leading is computed. Figure 17 prompts us to consider not only to higher inflation. In Malaysia, a cursory glance at the number of unemployed persons, but also the size the relationship defined by Phillips Curve shows two of the labor force (the proportion of the working-age features. Firstly, there are substantial movements in population who are either employed or unemployed). inflation rates that are not associated with movements in the unemployment rate (see Figure 16). Secondly, Beyond the unemployment rate, changes in the there seems to be only limited variability in the labor force participation rate are also an important unemployment rate. This raises the question of measure to assess labor market capacity. There whether the unemployment rate sufficiently measures is evidence that the employment needs of Malaysian labor market capacity, which is required for an effective businesses have been met through the entry of new assessment of the Phillips Curve in Malaysia. participants to the labor force, rather than from the FIGURE 16 FIGURE 17 Relative to inflation, unemployment is remarkedly Computation of the employment rate in Malaysia stable In ation and Unemployment Rates in Malaysia, Percentage Schematic Illustration, 2018 6 Unemployed 0.5 mil Yes 5 Labor Force 4 15.3 mil Working age Available Employed population and 14.8 mil (aged 15-64) 3 looking 22.4 mil for work 2 Outside the 1 No Labor Force 7.1 mil 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Unemployment Unemployment Rate = x 100 Labor Force Unemployment CPI Source: World Bank staff based on DOSM data Source: World Bank staff based on DOSM data 30 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook existing pool of available workers. Figure 18 compares 9.7 percent, but there is risk that many of them could the unemployment rate (the proportion of the labor become discouraged and end up exiting the labor force that is unemployed) and the employment force altogether. rate (the proportion of the working-age population that is employed). In the period from 1983 to 1987, The aggregate unemployment rate also masks the the unemployment rate increased steeply, by 3.6 level of underemployment, which is also a crucial percentage points, while the employment rate declined factor, reflecting the underutilization of the by only 2 percentage points. In this period, an inflow of productive capacity of the employed population. entrants into the labor force found employment, even The underemployed generally refers to workers though the unemployment rate remained elevated. whose jobs are mismatched with their availability to Similarly, the relatively steady unemployment rate after work, education or skill level. For instance, this group 1998, despite the large swing in the employment rate, includes part-time workers who would like full-time meant that most of the movements in the latter were jobs, or degree holders who only manage to find low- due to people joining the labor force and obtaining skilled jobs. A low headline unemployment rate may employment (see Figure 19). Therefore, it is important to hide the fact that a significant portion of the workers monitor the movements in the labor force participation view their employment as “unsatisfactory” in terms of rate, and the factors affecting these movements. For hours, compensation, or use of their skills. As these instance, it is clear that for women, their involvement workers continue to search for additional work hours or in housework and caring for the family constitutes the permanent or more highly skilled jobs, they compete main factor constraining them from entering the labor with the unemployed in the search for employment, thus force (see Box 5). Another group to monitor is the long- potentially exerting downward pressure on wages. In the term unemployed, which is defined by the International case of Malaysia, the Department of Statistics Malaysia Labor Organization (ILO) as the proportion of those (DOSM) defines time-related underemployment in actively searching for employment but unable to find terms of the number of employees working less than it after more than one year. In 2018, the percentage 30 hours a week during the reference week. In the of active long-term unemployed persons is low, at period from 2000 to 2018, such workers accounted FIGURE 18 FIGURE 19 The employment rate has risen steadily during Labor force entry spikes were accompanied by recent years higher employment rates Unemployment Rate, Employment Rate, Annual Change in Labor Force, Percentage Percentage Percentage 8 68 9 8 7 66 7 6 64 6 5 62 5 4 60 4 3 58 3 2 56 2 1 1 54 0 0 52 -1 1982 1984 1986 1988 1990 1993 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1983 1985 1987 1989 1992 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Unemployment Rate Employment Rate Male Female Total Source: World Bank staff based on DOSM data Source: World Bank staff based on DOSM data MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 31 PART ONE - Recent Economic Developments and Outlook for 4.5 percent of the total employed workforce. While a role in adjustments to labor market conditions in not very high, this data could provide a more accurate response to demand shocks. picture of labor market slack and its potential impact on wage and price pressures. In conclusion, relying solely on the headline unemployment rate could lead to the Another weakness of the official unemployment mismeasurement of labor slack, and hence the rate is that it under-calculates total foreign Phillips Curve of an economy. A broader and more workers in Malaysia. The data for unemployment detailed set of labor market statistics may be essential statistics collected by DOSM through the Labor Force to monitor and analyze any potential wage pressures Survey does include both citizens and non-citizens. that may pass-through to inflation. Nevertheless, as However, it only covers persons staying in private living the nuances of the unemployment rate explained in quarters, excluding workers in hostels and dormitories this article show, the starting point to comprehending (where foreign workers in construction sites typically economic relationships variables, including the live). Therefore, the survey would not completely Phillips Curve, is to understand the construction of capture these foreign workers in some key sectors of these variables. Finally, in analyzing the connection the economy. While official statistics by the Ministry between economic variables, it is helpful to remember of Home Affairs report legal foreign workers to be Goodhart’s Law, which warns policy makers against approximately 2 million, World Bank estimates indicate measuring statistical relationships around variables that that total foreign workers amount to approximately are controlled by policies: “Any observed statistical 3 million in 2017. Among these, the number of illegal regularity will tend to collapse once pressure is placed foreign workers is estimated to be 1.2 – 1.5 million upon it for control purposes” (Goodhart, 1989). (World Bank, 2019b). At this high level, they may play 32 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Conditions in the financial system remain stable The Central Bank of Malaysia (Bank Negara recorded sound levels of profitability, with a return Malaysia, BNM) maintained the overnight policy on equity rate of 12.9 percent (end-June 2019: 13.0 rate (OPR) at 3.00 percent, while lowering the percent) for the banking sector as a whole. The banking statutory reserve requirement (SRR) ratio from system’s liquidity levels remain sufficient to support 3.50 percent to 3.00 percent in November. In its financial intermediation, with the banking sector most recent monetary policy statement in November having an average Basel III Liquidity Coverage Ratio 2019, BNM indicated that the domestic economy is (LCR) level at 143.6 percent in excess of the minimum expected to grow at a more moderate pace, with statutory requirement of 100 percent. Meanwhile, the private consumption continuing to be the main driver gross impairment ratio remained stable at 1.6 percent of the economy supported by continued employment (2018: 1.5 percent), reflecting the banking system’s and wage growth. While exports will continue to be sound asset quality. The overall debt servicing capacity affected by slower global demand, this is expected of households and businesses remained steady, to be mitigated by its diversified structure. BNM supported by healthy financial positions. expects the economic growth rate to remain within its projections of 4.3 to 4.8 percent for 2019, with the In Q3 2019, net financing expanded at a more momentum continuing into 2020. Risks continue to tilt moderate pace on lower growth of bank loans and to the downside, mainly stemming from uncertainties corporate bonds. In the banking system, outstanding in global economic and financial conditions and to business loan growth moderated to 1.6 percent in Q3 weaknesses in commodity-related sectors. During the 2019, down from 2.7 percent in the previous quarter. same month, BNM lowered the SRR rate to 3.00 percent The moderation reflected the decline in loan growth to to maintain sufficient liquidity in the domestic financial the real estate sector amid continued weakness in the system, and reiterated that the SRR is not a signal on property sector. The growth of outstanding corporate the stance on monetary policy. bonds declined to 9.0 percent during the quarter (Q2 2019: 10.6 percent), with most issuances in the finance, Financial soundness indicators indicate that insurance, real estate and business services sectors. Malaysia’s banking system remains resilient in Q3 Overall, net financing expanded at a more moderate pace 2019. As at end-September 2019, financial institutions of 4.8 percent (Q2 2019: 5.6 percent) (see Figure 20). In FIGURE 20 FIGURE 21 Net financing moderated on lower growth of Household debt increased marginally to 82.2 bank loans and corporate bonds percent of GDP Contribution to Net Financing Growth, y/y, Percentage Household Debt to GDP, Percentage Household Debt, y/y, Percentage 10 88 14 87 8 12 86 6 85 10 84 8 4 83 6 82 2 4 81 0 2 80 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 79 0 2013 2014 2015 2016 2017 2018 2019H1 Banking System Corporate Total Net Household Debt-to-GDP Annual Change, Household Debt and DFI Loans Bonds Financing Source: BNM Source: BNM MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 33 34 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook the household segment, outstanding loans expanded loan assistance schemes in recent years. However, risks by 4.6 percent (Q2 2019: 4.8 percent) with an increase in to financial stability have remained largely contained, loans disbursed for the purchase of residential property given banks’ low level of exposure to higher-risk and personal use. borrowers, with banks continuing to implement sound lending practices. The overall household debt level increased slightly to 82.4 percent of GDP as at end-September The recent performance of the domestic financial 2019 (end-June 20219: 82.2 percent) (see Figure markets has been mixed (see Figure 22). The FBM 21). The annual growth of household debt increased KLCI declined by 5.3 percent, from 1672 points at the to 5.1 percent in the first half of 2019, with loans for end of June to 1584 points at the end of September. the purchase of residential properties continuing to be This decline was in line with the recent trend in the key driver of debt growth. Growth in household regional equity markets. In the domestic bond market, loans for consumption has remained modest, mainly non-resident inflows contributed to the decline of driven by personal financing extended to civil servants Malaysian Government Securities (MGS) yields. The by development financial institutions (DFIs). Although 3-year, 5-year and 10-year bonds decreased by 19.3, most households continue to be able to comfortably 19.7 and 29.5 basis points between the end of June service their debt, there are indications of increasing and the end of September, respectively. The decision risk in some areas. In particular, a higher incidence of was made for Malaysia to remain in the FTSE World default has been observed among housing borrowers Government Bond Index, which led to an improvement who are more exposed to income variability. While in financial market sentiment at the end of Q3 2019. the share of household debt held by borrowers in The interbank lending rates have remained broadly the lower-income segment (those who earn less than unchanged. During the third quarter, the ringgit RM3,000 per month) has continued to decline over the depreciated against the US dollar by 1.1 percent, in years, the leverage of these borrowers has increased line with most regional currencies except the Thai baht steadily, largely due to increased accessibility to (see Figure 23). housing loans with the introduction of a number of FIGURE 22 FIGURE 23 Non-resident inflows contributed to the decline of ...while the ringgit continued to depreciate the government bond yields... against the 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 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 35 PART ONE - Recent Economic Developments and Outlook Government is expected to remain on a path of fiscal consolidation The government is expected to meet its fiscal In 2019, higher-than-anticipated revenue from deficit target in 2019. The federal government’s the SST is expected to contribute to higher fiscal deficit is estimated to stand at 3.4 percent of GDP federal government revenue collection (see Figure (2018: 3.7 percent), in line with the target established in 25). This is largely driven by a better-than-expected Budget 2019 (see Figure 24). Total government revenue collection in H1 2019 due to demand for four-wheel is expected to reach 17.4 percent of GDP (2018: 16.1 drive and sports utility vehicles, which led to increased percent), slightly higher than the initial estimate of 17.1 sales tax revenues. At the same time, the increased percent. The higher-than-expected revenue collection demand for food and beverages also supported sales is mainly attributable to an increase in estimated tax performance for the year. Overall, indirect tax collections from sales and services tax (SST), the value constitutes about 24.6 percent of total tax revenue of which is expected to reach RM26.8 billion, surpassing (2018: 25.3 percent). In the direct tax segment, the initial estimate of RM22 billion. However, higher- individual and corporate income tax collection was also than-expected revenues are expected to be offset by higher, due to measures implemented under the Special overspending in the area of operating expenditures Voluntary Disclosure Program (SVDP), which resulted (OE), which are expected to reach 17.3 percent of GDP in about 270,000 participants disclosing previously (2018: 16.0 percent), surpassing the initial estimate of undeclared income. This contributed to an additional 17.0 percent of GDP. The increase in the government’s collection of RM6 billion. In addition, stable growth OE is partially due to higher-than-forecast expenditure in wages and corporate earnings also contributed to on fuel subsidies due to the delay in the implementation strong performance in the collection of individual and of the targeted fuel subsidy program, Program Subsidi corporate income taxes. With lower average global Petrol (PSP). Meanwhile, development expenditure (DE) oil prices, the collection of petroleum income tax is is revised down marginally, from the initial estimate of forecast to decline by 10.9 percent in 2019. Meanwhile, 3.6 percent of GDP to 3.5 percent (2018: 3.9 percent), it is estimated that non-tax revenue will increase in 2019, following the revision and re-timing of a number of following an increase in the value of dividends from infrastructure projects. PETRONAS, amounting to RM54 billion, of which RM30 FIGURE 24 FIGURE 25 The federal government is expected to meet its Revenue is slightly higher than initially projected fiscal deficit target in 2019 due to 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 36 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook billion is a one-off special dividend. Excluding the one- Bantuan Sara Hidup (BSH), is estimated to be lower, off special dividend, the share of petroleum-related following the restructuring of the criteria for recipients revenue as a percentage of total government revenue is and revisions to the value of assistance that became expected to decline slightly, from 23.3 percent in 2018 effective in 2019. The increased OE in 2019 was also to 21.7 percent in 2019. due to a one-off allocation for outstanding tax refunds. The government’s wage bill continues to constitute the largest share of OE, with this forecast to increase to 48.2 The higher-than-expected percent3 in 2019 (2018: 45.5 percent) due to salary and pension increments. In addition, debt service charges revenue collection is mainly are also estimated to increase further to 14.1 percent attributable to an increase of federal government revenue in 2019, slightly below the government’s self-imposed limit of 15 percent of in collections from SST. revenue. The government’s DE for 2019 is forecast to be Estimates for the federal government’s OE lower than the original estimate due to the revision for 2019 have been revised upwards to reflect and re-timing of several projects. The economic additional requirements for existing programs. This sector continues to take up the largest share of DE, with upward revision was largely due to the rescheduling the share of this sector amounting to RM28.8 billion, or of the implementation of the government’s targeted 53.7 percent of the total. Expenditures in the economic fuel subsidy program (PSP). The petrol price has sector are mostly allocated to developing public been maintained at RM2.08 per liter for RON95 since transportation infrastructure and improving public March 2019, with this price remaining in effect until utilities. This includes a number of key infrastructure the end of the year, after which the PSP framework projects, including the construction of MRT2 and the will be implemented in January 2020. Additional Pan Borneo Highway, and the upgrading of the Klang allocations have also been provided for expenditure in Valley Double Track project. The DE allocation for the education and health, particularly for food assistance social sector is estimated to account for 28 percent of in boarding schools, school cleaning services, and the total, mostly allocated to constructing new schools, medical supplies. Spending on other social assistance upgrading existing schools and tertiary institutions, and programs, particularly the cash transfer program, expanding teaching hospitals. Overall, at 3.5 percent of FIGURE 26 FIGURE 27 Federal government debt was higher at 52.7 ...while committed guarantees increased to 10.4 percent of GDP in Q2 2019... 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 3 OE excludes the one-off payment of outstanding tax refunds in 2019. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 37 PART ONE - Recent Economic Developments and Outlook GDP, DE in 2019 was low compared to the average level of the Royal Malaysia Police training and living facilities. in the period from 2008 to 2016, which stood at 4.6 These declined slightly to 12.0 percent of GDP as of Q2 percent of GDP. 2019 (2018: 12.8 percent), with no inclusions of additional financing obligations. Meanwhile, debt guaranteed by Federal government debt in proportion to GDP the government (GGs) declined slightly to 18 percent of increased to 52.7 percent in Q2 2019 (2018: 51.2 GDP as of Q2 2019 (2018: 18.4 percent). Government- percent), with risks remaining manageable (see guaranteed disbursements were mainly used to finance Figure 26). Ringgit-denominated securities constitute public infrastructure projects, including the MRT and 96.3 percent of federal government debt (2018: 97.1 the Pan Borneo Highway, and for civil servant housing percent), limiting the exposure to currency risk. Rollover loans. The average maturity period for GGs is seven risk is also limited, with the debt structure continuing years, with minimal currency risks given that more than to skew towards longer-tenured issuances. The average 90 percent of GGs are denominated in ringgit. period of maturity is projected to increase from 7.6 years in 2018 to 8.1 years in 2019, following the increased During the year, the government has implemented issuance of debt securities with tenures of seven years a number of steps to enhance its debt management or more, with a declining share of Treasury bills. As of processes and their orderly implementation. Q2 2019, large domestic institutional investors with First, in May 2019, the government announced the longer-term investment horizons remained the largest establishment of the debt management office (DMO), holders of government debt, accounting for 66.8 which is responsible for monitoring and reviewing percent of total outstanding debt (2018: 66.7 percent). potential risks that may arise from federal government These domestic investors include long-term investors debt, GGs, and other liabilities. Second, the bipartisan such as provident and retirement funds, insurance Special Select Committee on Budget, which was formed companies and financial institutions. The proportion of as part of the government’s efforts to improve the non-resident holdings of government debt remained quality of parliamentary institutions and to ensure the relatively stable, at 22.1 percent (2018: 22.7 percent) of appropriate implementation of checks and balances, total outstanding debt. produced a report in July 2019 that recommended a number of measures to strengthen debt management and to enhance transparency. The report contains a number of recommendations related to GGs, including A gradual process of fiscal setting a statutory or administrative limit on GGs, and consolidation and debt reviewing and assessing the list of GGs to determine the guarantees that would require assistance. Separately, reduction may be needed to an assessment conducted using the IMF’s debt preserve fiscal buffers. sustainability analysis methodology shows that under a baseline scenario, Malaysia’s debt remains sustainable (IMF 2019a). However, the assessment also indicates there is a significant risk related to external financing The total value of federal government debt and needs arising from shocks to selected indicators such liabilities4 was higher at 77.1 percent of GDP in Q2 as real GDP growth, contingent liabilities and combined 2019 (2018: 75.4 percent). The increase compared macro-fiscal shocks. As such, a gradual process of fiscal to 2018 was mainly due to an increase in committed consolidation and debt reduction may be needed to guarantees, with their value increasing from 9.2 percent preserve fiscal buffers against a potential economic of GDP in 2018 to 10.4 percent as of Q2 20195 (see Figure and financial crisis. 27). The government classifies entities as committed guarantees when they receive government allocations or the probability of them requiring financial assistance from the government is high. This could include assistance in the form of working capital and/or partial subsidies for their operations. Other liabilities include those related to public-private partnerships (PPP), private finance initiatives (PFI), and Pembinaan BLT Sdn. Bhd., which was set up to undertake the construction 4 These comprise federal government debt, committed guarantees, 1MDB debt and other liabilities (PPP, PFI and PBLT). 5 Due to an additional commitment of RM20 billion under Urusharta Jamaah Sdn. Bhd. 38 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Fiscal policy in 2020 balances the need to preserve fiscal sustainability and support economic growth Malaysia’s Budget 2020 represents a prudent fiscal deficit at 2.8 percent of GDP on average for the balance between the competing needs of preserving three-year period. fiscal sustainability while also effectively responding to deteriorating external conditions. Total government expenditure is expected to The government’s fiscal consolidation initiative will increase slightly to 18.4 percent of GDP in 2020 continue in 2020, albeit with a revised fiscal deficit (2019e: 18.4 percent). The civil service wage bill, target of 3.2 percent of GDP, from the original target which is expected to account for 36.9 percent of of 3.0 percent. The revision has been driven by the total government expenditure (2019e: 38.9 percent), government’s decision to provide pre-emptive support continues to dominate OE (see Figure 28). The to sustain growth in the context of a less benign government is currently exploring options to develop external environment. An additional allocation of 0.2 a more robust scheme to efficiently manage its pension percent of GDP will be channeled to DE to revitalize obligations. Expenditure on subsidies and social public investment through infrastructure projects services, most of which is allocated to BSH and other including the MRT2 and the Pan Borneo Highway welfare assistance programs, fuel and agriculture projects. Over a longer-term horizon, the government’s subsidies, and toll compensation, is expected to medium-term fiscal framework (MTFF) for 2020-2022 decrease slightly to 8.1 percent of total government are based on assumptions of real GDP growth rates of expenditure (2019e: 8.4 percent). The decline is partly 4.5 to 5 percent (2020f: 4.8 percent) and of crude oil due to the implementation of PSP, which is projected prices at between US$60-65 per barrel. The MTFF also to result in a reduction to fuel subsidies. In addition, projects revenue collections to stand at 15 percent of the amount allocated for BSH in 2020 is expected GDP; total expenditure at 17.8 percent of GDP; and the to be maintained at RM5 billion. In terms of DE, the FIGURE 28 FIGURE 29 The civil service wage bill will continue to Government revenue is expected to decline dominate operational expenditures further next year Share of Civil Service Salaries and Pensions to Federal Government General Government Revenue6, Percentage of GDP Expenditure, Percentage 50 30 45 25 4.4 40 3.7 3.9 20 3.3 35 2020f: 3.3 36.9% 3.1 3.3 2.8 2.7 30 15 25 21.4 20.9 10 19.9 18.9 17.3 16.3 16.1 20 15.4 15.2 5 15 10 0 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 39 PART ONE - Recent Economic Developments and Outlook economic sector, which includes the transport, energy with the average for upper-middle income countries and public utilities subsectors, will continue to receive standing at 28 percent. The continuing decline in the largest share, to support the achievement of the government revenue, combined with increased government’s goal of enhancing economic productivity locked-in expenditures such as the civil servants wage and competitiveness. This includes the construction of bill, will increasingly limits the effectiveness of fiscal key infrastructure projects, the upgrading of schools, policy to counter economic fluctuations, to facilitate and improving broadband infrastructure, especially in redistribution, and to sustain the provision of vital suburban and rural areas. At an aggregate level, the public services. While the recently announced revenue- top three recipients of government expenditure are the enhancing measures contained in Budget 2020 are a Ministry of Education, the Ministry of Health, and the step in the right direction, further efforts are required Ministry of Finance. to boost public sector revenues (see Box 4 for lessons from other countries in communicating fiscal policy reforms). While the recently announced In Budget 2020, the government has announced revenue-enhancing measures a number of measures to enable it to diversify its revenue base and to achieve greater progressivity contained in Budget 2020 in its tax framework. This includes a proposal for are a step in the right a new income tax band for taxable income in excess of RM2 million, to be taxed at 30 per cent, which is a direction, further efforts 2-percentage point increase from the current rate are required to boost public of 28 per cent. The proposed increase would affect approximately 2,000 top income earners in the country. sector revenues. The government also announced the extension of SST to cover imported digital services effective January 2020. In addition, the government indicated that it will Federal government revenue is expected to decline consider implementing measures proposed by the tax further in 2020 to 15.2 percent of GDP (2019e: reform committee (TRC) to widen the tax gap, which 15.4 percent6) (see Figure 29). Tax revenue, which has been narrowed as the result of the implementation accounts for the greatest share of total government of various tax incentives. These measures include a revenue, is expected to remain stable at 11.8 percent review of existing tax incentives, with an exploration of of GDP (2019e: 11.9 percent). Of this tax revenue, the legislation to reduce tax leakages and to identify new largest proportion will be derived from direct tax (75.1 sources of sustainable tax revenue, including possible percent of total tax revenue). Corporate and personal digital and environmental taxes. 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 contribute the largest share of indirect tax, are expected to stand at 1.8 percent of GDP (2019e: 1.8 percent), driven by resilient household spending, increased tourists’ arrivals and by a number of large international events taking place next year. Petroleum- related revenue is expected to decline to 3.1 percent of GDP in 2020 (2019e: 3.3 percent) due to projected lower crude oil prices. From a longer-term perspective, the expected decrease in federal government revenue in 2020 represents a continuation of a downward trend that commenced in 2012. Federal government revenue is estimated to reach 15.2 percent of GDP in 2020, significantly lower than most international comparators, 6 Excludes the one-off special dividend of RM30 billion received from Petronas in 2019. 40 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook TABLE 3 Federal Government financial position   RM billion Percentage of GDP (current prices)   2017 2018 2019e 2020f 2017 2018 2019e 2020f Revenue 220.4 232.9 263.3 244.5 16.3 16.1 17.4 15.2 Direct Taxes 116.0 130.0 135.6 142.7 8.6 9.0 8.9 8.9 Companies Income Tax 64.5 66.5 70.8 75.5 4.8 4.6 4.7 4.7 Petroleum Income Tax 11.8 20.1 17.9 17.5 0.9 1.4 1.2 1.1 Individual income tax 28.9 32.6 35.2 37.4 2.1 2.3 2.3 2.3 Others 10.9 10.9 11.8 12.4 0.8 0.8 0.8 0.8 Indirect Taxes 61.6 44.0 44.4 47.3 4.6 3.0 2.9 2.9 Sales and Service Tax 44.4 25.7 26.8 28.3 3.3 1.8 1.8 1.8 Excise Duties 10.1 10.8 10.5 11.0 0.7 0.7 0.7 0.7 Others 7.2 7.6 7.1 8.0 0.5 0.5 0.5 0.5 Non-Tax Revenue 42.7 58.8 83.3 54.6 3.1 4.1 5.5 3.4 Operating Expenditure 217.7 231.0 262.3 241.0 16.1 16.0 17.3 15.0 Emoluments 77.0 80.0 82.0 82.6 5.7 5.5 5.4 5.1 Retirement Charges 22.8 25.2 26.6 27.1 1.7 1.7 1.8 1.7 Debt Service Charges 27.9 30.5 33.0 34.9 2.1 2.1 2.2 2.2 Supplies and Services 34.7 35.3 30.2 38.5 2.6 2.4 2.0 2.4 Subsidies 22.4 27.5 23.6 24.2 1.7 1.9 1.6 1.5 Others 32.9 32.4 66.9 33.7 2.4 2.2 4.4 2.1 Gross Development Expenditure 44.9 56.1 53.7 56.0 3.3 3.9 3.5 3.5 Economic Services 24.2 36.1 28.8 31.0 1.8 2.5 1.9 1.9 Defense and Security 5.3 4.9 6.7 6.6 0.4 0.3 0.4 0.4 Social Services 12.4 12.9 15.0 15.1 0.9 0.9 1.0 0.9 General Administration 2.9 2.2 3.2 3.4 0.2 0.2 0.2 0.2 Less: Loan Recoveries 1.9 0.8 0.9 0.8 0.1 0.1 0.1 0.0 Net Development Expenditure 43.0 55.3 52.8 55.2 3.2 3.8 3.5 3.4 Overall Surplus / Deficits (-) -40.3 -53.4 -51.8 -51.7 -2.9 -3.7 -3.4 -3.2 Source: World Bank staff calculations based on MOF data MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 41 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 Establishing an effective communication system is a vacuum. Some are created out of demand while important for the effective design, promulgation others are delivered out of necessity even if they don’t and implementation of policy. A good example of a enjoy public support. Tough reforms are necessary to government developing an effective communication realize long-term gains, but gaining public support system as a policy tool is in the United Kingdom, where the and effective implementation require clear, concerted Government Communications Service (GCS) operates and careful stakeholder management. This is where across the civil service to deliver communications and communications can be a useful tool to facilitate a socialize policies. GCS brings together more than country’s reform efforts. 4,000 professionals across 25 ministerial departments, 20 non-ministerial departments and more than 400 The strategic and deliberate use of communications agencies and public bodies. It recently published can help build public trust and confidence in its inaugural Communication Plan for 2018/2019, institutions, which is vital to ensure policy which coordinates the delivery of 140 integrated success. When the public trusts state institutions, the communication campaigns nationwide. state has reservoirs of political capital on which it can draw on to propose and explain difficult reforms that Government communications units need to engage may result in long-term gains, but at the cost of some with many different audiences with varying levels short-term difficulties, at least for some key stakeholder of involvement suited for specific periods in the groups. reform process. A recent paper by the IMF, entitled 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. 42 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Frontiers of Economic Policy Communications, states poor households, and improvements to national social that in order to be more effective and strategic, assistance programs. The impact of these efforts “communications need to be increasingly integrated was far-reaching: enrollment in assistance programs with operations, drawing on an in-depth understanding increased significantly from around 1 million low-income of policies and their future path.” households in 2014 to 6.5 million in 2017, many adopted energy efficiency measures, and the government Listening to stakeholders, acknowledging their committed to continuing the reform process. concerns, and responding to them with action is a core part of the policymaking process. Ultimately, citizens are the principal beneficiaries of reforms. Thus, being attentive to their voices is vital not only to ensure Gaining public support buy-in, but also as a source of input and feedback on the for reforms requires clear, actual design and substance of the policy proposals. In this area, the Porto Alegre municipality in Brazil was a concerted and careful forerunner when it pioneered participatory budgeting stakeholder management. 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. In Jamaica, the government implemented a Institutionalizing public participation sends a communications strategy to support the transition signal to stakeholders that they are formally to full-fledged inflation targeting over the medium involved in the development and policy process. It term. Prior to the implementation of the measure, the encourages citizens to engage directly and actively Bank of Jamaica strengthened its communications through formal platforms. These channels may include capacity and conducted public relations campaigns a range of mechanisms to facilitate dialogue such as to explain to the public the benefits of price stability public consultations, roundtable discussions, town hall – contributing significantly to the credibility of the meetings, as well as digital means such as social media. policy transition. In particular, the authorities used radio advertising and billboards to convey powerful Staying connected and being engaged is key messages through formats inspired by Jamaica’s to effective policy making. Continued dialogue popular culture, including reggae music. with stakeholders throughout the formulation and implementation of policy can increase public Fundamentally, effective communications understanding of the expected policy-trade offs campaigns enable policymakers to stay engaged while building public support and trust in institutions with stakeholder groups and the broader public along the way (see Figure 30). Without effective throughout the policy process. The two examples communication, it may not be possible to implement above demonstrate that engagement with the public essential but difficult reforms, and attempts to do so prior to and during the implementation of complex and can lead to undesired political implications. sometimes unpopular reforms is essential, particularly when policies result in significant pushback from vested An example of effective communication is the interests. recent natural gas pricing reform in Ukraine. Faced with the need to reform price subsidies for natural gas, Citizens around the world are increasingly the government engaged conducted public opinion connected, with information more easily shared research and focus groups across the country. Citizen and disseminated. This has increased the demand feedback was used to design compelling messages for government transparency in all areas, including on for an awareness-raising campaign, improve consumer economic policy decisions. It has elevated the role of knowledge, facilitate public debate, and shape public public discourse and public opinion in policymaking, opinion about the importance of reforms. The campaign giving citizens greater voice in their own governance. was launched with evidence-based messaging about Policymakers should consider communications as a the need to reform gas price subsidies, efforts to policy tool that can be used effectively to increase the mitigate the impacts of price increases especially for odds of success for the reforms they propose. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 43 PART ONE - Recent Economic Developments and Outlook Economic outlook Growth in developing EAP is projected to decelerate over the forecast horizon Global growth is expected to remain subdued over been revised down due to increased headwinds. the near term, before improving moderately over a Regional growth is expected to decelerate to 5.7 longer forecast horizon. Global growth is projected percent in 2020, 0.2 percentage points lower than to expand at 2.5 percent in 2020, 0.2 percentage previously projected, with the downside risks related to points lower than projected in June, reflecting broad- global demand and trade materializing or intensifying based weakness in advanced economies and major (see Figure 32). In China, growth is projected to ease EMDEs (see Figure 31). Global economic conditions to 5.9 percent in 2020, and continue to decline to 5.8 are expected to improve marginally over a longer percent in 2021, reflecting the increasing impact of forecast horizon, with the global growth rate projected structural constraints such as a shrinking labor force and to increase to 2.6 percent in 2021 and to 2.7 percent in subdued productivity growth. Growth in other major 2022. After slowing to 1.4 percent in 2020, growth in economies in the region will also decelerate in 2019, advanced economies is projected to improve slightly although recovery may be expected in following years to 1.5 percent in both 2021 and 2022. Growth in in some of these economies, reflecting country-specific EMDEs is expected to recover over the next two years. conditions. Private consumption is expected to remain This projection is predicated on a rebound in several the primary driver of growth, partially offsetting the large EMDEs, some of which are emerging from deep negative effects of moderating investment and trade recessions or sharp slowdowns but remain fragile. activity in the context of a less supportive external Growth projections for the developing EAP have environment. FIGURE 31 FIGURE 32 Global economic growth is expected to remain Growth in developing EAP has been revised down subdued over the near term amid 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 44 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 projected to grow at a prospects and heightened uncertainty weighing relatively moderate pace over the near term, markedly on business confidence and investment with increased headwinds. In 2020, the forecast for intentions. Public investment is likely to continue to Malaysia’s GDP growth rate is revised down slightly to contract over the near term, in line with the ongoing 4.5 percent (2019f: 4.6 percent), largely due to weaker- fiscal consolidation, although the contraction may be than-anticipated investment and export growth in Q3 limited by the increase in planned investments from 2019 (see Table 4). Private consumption is projected to public corporations in the transport and mining sectors. expand at a lower but still robust rate of 6.5 percent next Inventory destocking begun in Q1 2018 is expected to year (2019f: 7.2 percent), with growth driven by stable normalize and provide modest support to growth over labor market conditions, relatively benign inflation, and the forecast period. continued support from government measures. In the public sector, the planned rationalization of government operating expenditure will continue to weigh on the In 2020, Malaysia’s GDP contribution from government consumption, which is projected to grow at the rate of 1.9 percent in 2020 growth rate is forecast to (2019f: 2.1 percent). be 4.5 percent. Gross fixed capital formation is expected to improve but remain subdued in 2020, with both the Export growth is likely to remain soft into next public and private sectors continuing to adopt a year, reflecting the continuing slowdown in global cautious stance regarding capital spending. Overall investment and trade activity. Malaysia’s export investment activity is projected to expand at 1.4 percent growth is projected to remain modest at 0.5 percent next next year (2019f: -1.8 percent), 0.3 percentage points year (2019f: -0.3 percent), with less supportive global lower than in the previous forecast. The downward economic conditions and prolonged trade-related revision largely reflects weaker-than-expected private policy uncertainty. This is expected to be partially offset investment activity in Q3 2019, with subdued trade by a recovery in mining exports, following unforeseen TABLE 4 GDP growth and contribution to growth Annual Growth, y/y, Percentage Contribution to Annual GDP Growth (Percentage Point) 2018 2019f 2020f 2021f 2018 2019f 2020f 2021f GDP 4.7 4.6 4.5 4.5 Domestic Demand Domestic Demand 4.3 3.9 4.7 5.0 4.0 3.7 4.3 4.6 (including stocks) (including stocks) Private Private 8.0 7.2 6.5 6.3 4.4 4.0 3.7 3.6 Consumption Consumption Public Consumption 3.3 2.1 1.9 1.9 Public Consumption 0.4 0.3 0.2 0.2 Gross Fixed Capital Gross Fixed Capital 1.4 -1.8 1.4 1.7 0.3 -0.4 0.3 0.4 Formation Formation Change in Stocks -1.2 -0.1 0.1 0.3 External Demand External Demand Exports of Goods & Exports of Goods & 2.2 -0.3 0.5 0.7 1.5 -0.2 0.4 0.4 Services Services Imports of Goods & Imports of Goods & 1.3 -1.8 0.4 0.8 0.8 -1.1 0.2 0.5 Services Services Source: World Bank staff calculations and projections MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 45 PART ONE - Recent Economic Developments and Outlook FIGURE 33 FIGURE 34 The sentiment-based forecast of GDP growth is ...reflecting lower below-trend optimism in the converging with the consensus forecast... economic and corporate clusters GDP, 2019f, y/y, Percentage News Sentiment, Z-score 5.0 1 0 4.4% 4.5 4.4% -1 -2 4.0 -3 3.5 -4 12/2018 01/2019 02/2019 03/2019 04/2019 05/2019 06/2019 07/2019 08/2019 09/2019 10/2019 11/2019 12/2018 01/2019 02/2019 03/2019 04/2019 05/2019 06/2019 07/2019 08/2019 09/2019 10/2019 11/2019 Commodity/Financial Market Corporate/Industrial Sentiment-adjusted Forecast Mean Consensus Forecast Economic/Monetary Policy Government Finance Sentiment-adjusted Forecast Range Political/General Trade/External Source: World Bank staff projections Source: World Bank staff calculations supply disruptions in recent quarters. Similarly, import sentiment improved during the second half of the year, growth is projected to increase at the modest rate of supported in part by BNM’s decision to lower the OPR only 0.4 percent in 2020 (2019f: -1.8 percent), with the in May (see Figure 34). growth of intermediate and capital exports regaining some momentum and with slight improvements in Headline inflation is projected to increase modestly export and investment activity. The current account in 2020, with the effects of policy-related factors surplus is projected to narrow to around 3.0 percent dissipating. The average consumer price inflation rate of GDP in 2020, with a more moderate trade surplus is projected to increase to 1.5 - 2.0 percent next year in goods continuing to offset the persistent deficits in (2019f: 0.7 percent), mainly reflecting the dissipating services and income accounts. impact of the consumption tax policy changes implemented in 2018. Additionally, the reintroduction News-based measures of economic sentiment of the float pricing mechanism for RON95 petrol and continue to point to a slightly lower forecast for diesel in January 2020 is expected to result in modest GDP growth than the consensus of professional increases in transportation costs. Underlying inflation forecasters. Complementary news-based measures is expected to be broadly contained into 2020 in the of economic sentiment7 indicate a softer perception of absence of immediate domestic cost pressures. the economic conditions in Malaysia during the course of 2019, with the sentiment-adjusted growth forecast tracking below the consensus forecast throughout the period (see Figure 33). Below-trend optimism was especially notable across trade-related news throughout the year, particularly due to the ongoing trade tensions between the US and China. The overall 7 The news-based sentiment index is derived by the staff of the World Bank through an analysis of the proportion of positive words (“gain”, “improve”, “agreement”, etc.) relative to the proportion of negative words (“concern”, “fear”, “decline”, etc.) present in a vast collection of news articles on Malaysia’s economy. Information derived from media reports has two main advantages compared to official statistics. First, measurements of economic conditions can be calculated in real-time, at a daily frequency. Second, this information enables the measurement of economic forces that might not be easily captured by traditional data sources, providing complementary insight into factors such as the collective sentiment regarding economic prospects. A recent study based on historical data in 25 countries between 1991 and 2017 suggests that including news-based measures of sentiment reduces the forecast errors of GDP growth by 12 percent on average relative to the consensus forecast. 46 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook Risks to growth outlook are firmly on the downside amid challenging external conditions Various downside risks to the global economy on growth. Finally, the moderation in wage growth, could have spillover effects on Malaysia’s economy. particularly in the manufacturing sector, could affect Further escalations to the current trade tensions private consumption. between the US and China could exacerbate growing uncertainty and further dampen trade activity. The impact of increased protectionism on global growth has been magnified by protracted policy uncertainty and The impact of increased a decline in confidence, which in turn has depressed protectionism on global private investment. In the near term, further disruptions to U.S.-China economic ties would result in damage growth has been magnified not only to these two economies, but also to the rest by protracted policy of the world, with its effects propagating through trade, financial, and commodity linkages. Moreover, uncertainty and a decline any further deepening of the slowdown in the major in confidence. economies or a sharper-than-expected deceleration in China could lead to an additional deterioration in export and growth prospects. Conversely, a de- The persistent decline in government revenue, escalation of U.S.-China trade tensions could result in combined with a high proportion of locked-in an earlier-than-expected recovery in export growth. expenditures, will continue to constrain fiscal policy Other risks emanating from the global economy space. The government has introduced a number of relate to potential swings in the commodity markets, new revenue measures intended to diversify its revenue with higher-than-expected increases to energy prices base. The overall impact of these revenue measures, potentially leading to increasing inflationary pressures, however, is expected to be relatively modest. Thus, the and with an unexpected and persistent decline in continued downward trend in the government’s revenue commodity prices potentially affecting growth and collection as a share of GDP and its growing share of leading to further fiscal pressures in Malaysia. locked-in expenditures, including the wage bill and debt servicing costs, could limit the flexibility of fiscal On the domestic front, downside risks to growth adjustment against future macroeconomic shocks. The primarily emanate from factors related to sizable stock of public debt, and increased committed prolonged uncertainty among investors and government guarantees and other liabilities may further delayed recovery in commodity-related sectors. constrain fiscal policy space in the future. In the private Investment growth has been subdued over the recent sector, the relatively high level of household debt in the quarters, weighed down by lower capital spending. context of persistent property market excesses remains Indicators of business sentiment8 suggest the level a source of risk to macro-financial stability, as well as a of confidence in the economy remains low. While potential constraint on household spending. uncertainty regarding the global economic outlook would have an adverse impact on Malaysia’s economy, similar uncertainty regarding the domestic economy and political developments could exacerbate cautious sentiment, further dampening private investment. Sustained weakness in private investment would affect Malaysia’s medium-term growth prospects and depress growth in potential output. Similarly, a prolonged slowdown in the E&E sector and unforeseen disruptions to production in the mining sector could further weigh 8 The Malaysian Institute of Economic Research (MIER) Business Conditions Survey and RAM Business Confidence Index. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 47 PART ONE - Recent Economic Developments and Outlook Near-term policies should focus on boosting resilience and protecting the vulnerable With the continuing downward trend in social spending, limiting the effectiveness of government revenues and with the increase in fiscal policy as a redistributive tool to facilitate locked-in expenditures, there is a critical need the achievement of shared prosperity. Malaysia’s for the government to diversify its revenue base Gini coefficient of market income (before government and to increase its revenue collection through transfers and income tax payments) is lower than the more progressive taxation. In the context of a more average for OECD countries, implying a lower level uncertain economic environment, it is vital for Malaysia of income inequality. However, through progressive to preserve fiscal space to enable it to mitigate taxation and social safety net systems, OECD countries the impact of any negative shocks to the economy. are able to achieve a significant reduction in income Furthermore, societal expectations regarding the inequality and thus a lower Gini coefficient compared provision and quality of public services and facilities to in Malaysia (see Figure 36). are increasing over time. It will become increasingly challenging for the government to meet these Increased progressivity in the current personal expectations. General government revenue as a share income tax framework and an expansion of current of GDP is expected to decline further to 17.9 percent in tax measures could enable the government to 2020 (2019e: 18.2 percent9), well below its regional and increase revenues and to improve redistribution at aspirational comparators (see Figure 35), and Malaysia the same time. The government has taken a step in significantly under-collects in key revenue areas such as the right direction with its proposal in Budget 2020 of personal income and consumption taxes.10 a new income tax band for taxable income in excess of RM2 million, to be taxed at the rate of 30 percent. In addition, increased locked-in expenditures, Nonetheless, additional steps could be taken, including including expenditures on the wage bill and debt measures to increase the tax bracket for the other servicing, have constrained development and higher income bands, and to review the tax reliefs and FIGURE 35 FIGURE 36 Malaysia’s revenue collection is well below its Progressive taxation and social safety nets have regional and aspirational comparators helped 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 Source: World Bank staff calculations *Excludes one-off contributions from Petronas in 2019 9 Excludes the one-off special dividend of RM30 billion received from Petronas in 2019. 10 See World Bank (2019a) Malaysia Economic Monitor “Re-energizing the Public Service”. 48 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook exemptions applied to these higher income bands. In of economic opportunities for women would also yield addition, the scope of the real property gains tax (RPGT) significant gains in the long term (see Box 5). Among could be widened by reducing tax relief to owners the policy priorities to overcome the key constraints of multiple properties, and by increasing stamp duty preventing women from accessing productive jobs in on purchases of higher-value or multiple properties. Malaysia include expanding the availability, quality and These measures could result in significant increases affordability of child and elderly care; enhancing the to revenue while having minimal impact on lower- and protection and productivity of informal workers; and middle-income households. Finally, a gradual lifting of improving support for parents in line with international the SST exemptions and zero-ratings on selected non- legal norms. Concurrently, policymakers should also essential items, particularly those not within the B40 sustain reform efforts to promote healthy market consumption basket, could also facilitate increased competition, strengthen public procurement and revenue without jeopardizing the purchasing power of address distortions in labor and output markets to lower-income households. improve private sector participation in the economy. Weakening trade and investment activity amid a less favorable external environment underscores the need to increase trade diversification and In a more uncertain improve private sector confidence. In an environment economic environment, it of softer global demand and increased protectionist tendencies among the major economies, a sustained is vital for Malaysia to commitment to deepening regional integration preserve fiscal space to (through both the Comprehensive and Progressive Trans Pacific Partnership and the Regional Comprehensive mitigate the impact of Economic Partnership) and addressing the remaining negative shocks to the trade barriers is pivotal to preserve a vibrant trading environment and send confidence-building signals to economy. investors. Further, it is also important to strengthen Malaysia’s Policies to raise the incomes and economic security competitiveness in attracting quality investments of lower-income segments of the population could and to maximize the gains from tax expenditures. be sharpened to ensure continuous improvement This could be achieved through better targeting of in the living standards for all Malaysians. While investment promotion, including the focused use of significant progress has been achieved in sustaining incentives, towards economic upgrading, high-value job income growth and reducing poverty over the recent creation and inclusive growth. A crucial starting point is years, more can be done to address broad citizen to revisit the overarching development objectives and concerns over economic security and the perceptions strategic directions of investment policy, and prioritize of stagnant living standards experienced by lower- efforts towards attracting investment activities that income households against a backdrop of increasing contribute most to these national aspirations. These cost of living. To further advance the government’s efforts should be complemented by more effective inclusive growth agenda, specific and practical policy coordination across the many investment promotion measures could be formulated to tackle the overlapping agencies that operate at the national, subnational and factors that have contributed to such concerns. Among sectoral levels. the dominant factors at play include spatial consumer price inflation differentials, slow wage growth among Medium-term structural reforms should focus the youth, poor financial planning and indebtedness, on addressing critical gaps in human capital, and unaffordable housing, which are explored in more facilitating economies opportunities for women detail in Part 2 of this edition of the MEM. and improving private sector opportunities to ensure sustainable and inclusive growth. Making greater gains in human capital development will require deeper reforms to improve the quality of learning through better pre-school services and improved in- school assessments, and to reduce childhood stunting with multi-pronged solutions. Facilitating equal access MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 49 PART ONE - Recent Economic Developments and Outlook BOX 5 How better economic opportunities for women could boost long-term economic development in Malaysia One of the most promising avenues to facilitate FIGURE 37 Malaysia’s ongoing development involves the Malaysia shows a large gender gap when it comes promotion of economic opportunities for women. to labor force participation World Bank simulations using a general equilibrium Gap in Participation Rates occupational choice model show that if the gaps between men and women in terms of labor force 35 participation and entrepreneurship were closed, 30 Malaysians’ average per capita income could increase 25 by up to 26 percent, or about RM9,400 (Cuberes and Teignier, 2019). 20 15 A complementary tool that can be used to simulate the economic effects of improving women’s labor 10 force participation is the World Bank’s Long- 5 Term Growth Model (LTGM). The LTGM is based on the celebrated Solow-Swan growth model, adapted 0 to developing/emerging market economies. In the Lao PDR Sweden Denmark Vietnam France Germany United Kingdom New Zealand Spain Australia USA Cambodia Ireland Brunei Singapore Thailand Japan Italy Korea, Rep. Malaysia Philippines Indonesia Myanmar model, higher rates of female labor force participation (FLFP) increase the total amount of labor supplied, thus boosting GDP. Historically, the FLFP rate in Malaysia was stable at around 46 percent, before increasing significantly to 55 percent in the period from 2010 Source: World Bank staff calculations based on World Development Indicators. to 2015. However, Malaysia’s FLFP still lags both its Note. Modeled ILO estimates of the labor force participation rate among regional and high-income peers, suggesting that the population ages 15–64 there is room for reforms and measures to increase participation. Within ASEAN, only Myanmar, Indonesia and the Philippines record a larger gap between these rates (see Figure 37). commonly observed as countries make the transition to high income country status, but it can also motivate In the business-as-usual baseline, FLFP is assumed new pro-growth reforms. to be constant at 55 percent, with GDP growth falling from 4.5 percent in 2020 to 2.0 percent Reforms to increase FLFP to the 25th-75th in 2050 (see Figure 38). In part, the decline in the percentiles of high-income economies boosts GDP growth rate is attributable to slowing population average GDP growth in the period from 2020 to growth (about a fifth of the fall). More importantly, 2050 by 0.14-0.36 percentage points (see Figure however, are declining returns on private investment 39).11 The simulation considers weak, moderate, and (which were previously very high) and declining strong FLFP reform scenarios, with FLFP increasing to productivity growth, slowing human capital growth, the 25th, 50th, and 75th percentiles among high income and an aging population. A decline in GDP growth is countries respectively in these scenarios. The length 11 The high-income sample is based on the World Bank definition and includes 39 high income countries in 2018 with a population above 2 million. Baseline assumptions for key parameters and other growth drivers in the LTGM are: (i) a labor share of 50 percent; (ii) an initial capital-to-output ratio of 2.25; (iii) public and private investment of 6 percent and 18 percent of GDP (respectively); (iv) human capital growth declining from 0.6 percent to just under 0.1 percent by 2050; (v) TFP growth declining from 0.9 percent to 0.6 percent by 2050; (viii) population growth declining from 1.3 percent to 0.4 percent by 2050. 50 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook of the adjustment period is based on the historical norms, women are seen as primarily responsible for the experience of high-income countries as they increased provision of care at home. Qualitative evidence from FLFP.12 In the case of weak reform, it takes 27 years to focus group discussions conducted by the World Bank increase FLFP from 55 to 62 percent (FLFP of Croatia and Universiti Kebangsaan Malaysia confirm that caring in 2018). This increases average GDP growth in the for children and the elderly is primarily seen as the period from 2020 to 2050 by 0.14 percentage points, responsibility of women (see World Bank 2019c). relative to the baseline. In the case of moderate reform, it takes 23 years to increase FLFP to 69 percent (Spain Women from the B40 face particularly stark in 2018), which increases average GDP growth by 0.31 barriers to labor force participation, with limited percentage points. In the case of strong reform, it takes access to jobs that pay well and offer benefits, 27 years to increase FLFP to 74 percent (Netherlands social protection, and career prospects. Focus in 2018), which increases average GDP growth by 0.36 group discussions show that women from B40 families, percentage points.13 including those living in urban poor areas such as Projek Perumahan Rakyat (PPR) public housing developments, An increase in Malaysia’s FLFP to the 25th- often struggle to participate in the labor market 75th percentiles of high-income economies will because of a lack of access to affordable, good quality require addressing key constraints on women’s child care. Those in this group that do participate in the participation in the labor force, especially their labor market very often work part-time in informal jobs; involvement in housework and care duties. In 2018, are self-employed; or have their own micro-businesses. 60.2 percent of women who did not participate in the In fact, in the period from 2010 to 2018, the proportion labor force cited housework (which includes care of of women engaged in self-employment increased from children and the elderly) as their main reason for not 11.6 percent to 19.5 percent. While nonstandard forms seeking work. In contrast, only 3.6 percent of inactive of work provide flexibility to care for children and the men cited the same reason for not seeking work. elderly, they usually offer no social protection and little This is mainly because according to prevalent social room for skill development and productivity growth. FIGURE 38 FIGURE 39 Reform scenarios to raise Malaysia’s female labor ...have a major impact on GDP growth over the force participation rate... long term Malaysia’s Female Labor Force Participation Rate Under Different Malaysia’s GDP Long Term Growth Rate Under Different Reform Scenarios, Reform Scenarios, Percentage Percentage 80 Strong Reform 10 Strong Reform Moderate Reform Moderate Reform Weak Reform Weak Reform Baseline Baseline Historical FLFP Historical (3yr moving average) 70 60 5 50 40 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Source: World Bank staff calculations using the LTGM and extensions Source: World Bank staff calculations using the LTGM and extensions 12 Adjustment is assumed to continue linearly at its trend rate after the FLFP target is met. The start year for adjustment is 2018. The length of the adjustment period is based on the distribution of time that high-income countries took from Malaysia’s FLFP rate to the target. 13 The corresponding increase in GDP per capita is smaller than in the simulations by Cuberes and Teignier (2019) because, first, the increase in female labor force participation considered in the LTGM is smaller and, second, the LTGM does not consider an improvement in female entrepreneurship. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 51 PART ONE - Recent Economic Developments and Outlook “I think it’s better to work in our own businesses. We largely benefited women in M40 or T20 families, with have children who still go to school, so it’s difficult to relatively little relevance for women from B40 families work 9 to 5. Our time is limited, so it’s better to work who either are not able to participate in the labor on our own. I run my own small business, making market or who work in informal jobs and, in either case, banana chips and smoked banana [...]. I like to work pay no personal income tax (see Figure 40). on my own.” [Respondent F9, female, age 44, B20 focus group In a tight fiscal environment, it is crucial to prioritize discussion 23] the allocation of public resources to provide child care for B40 families. In this context, providing “I live in [a specific part of a PPR]. We don’t have adequate allocations to establish and maintain child any kindergartens there. [...] So, most of our children care centers in low cost urban housing areas, such don’t go to kindergarten. They usually go straight to as PPR flats, is vital. Additionally, a cost-effective, elementary school. [Even if we had a kindergarten], easy to implement measure may involve making use they would not accept children of the age of 4 or of and enhancing existing public structures such as 5 years. It’s difficult. We don’t even have a tuition schools, libraries and community centers to provide center.” child care. Delivering quality child care for the B40 will [Respondent F2, female, age 36, B20 focus group also require close collaboration between a number of discussion 9] entities, including the Ministry of Women, Family and Community Development; the Ministry of Housing and Existing government policies and programs, Local Government; and state and local governments including the new incentives provisioned under and their agencies. Finally, child care services should the Budget 2020, do not fully cover the child care be gradually extended beyond the current focus on needs of the B40, especially the urban poor. Key children aged from 0 to 6 years to cover children aged government initiatives include the promotion of flexible from 0 to 17 years. forms of work, the establishment of child care centers at workplaces, and the introduction of tax incentives for If implemented correctly, the allocation of women returning to work. These are unquestionably additional public resources to provide child care for important measures and are designed to encourage the B40 is expected to benefit not only women, but women’s labor force participation regardless of their also children and the economy more broadly. First, income level. As such, most of the measures have when children have safe, high quality play and learning FIGURE 40 Mapping of existing government policies and programs B20 B30-40 M40 T20 30% decision- Child and elderly care making positions Social protection Personal tax reliefs for child and elderly care for informal workers Career comeback programs and flexible work arrangements Women directors Skills training, entrepreneurship and financing programs by various ministries and agencies program Gaps Available Source: Authors based on Ministry of Finance budget speeches from 2011 to 2018 and websites of various ministries and agencies. 52 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART ONE - Recent Economic Developments and Outlook environments, they will enjoy better health and learning to provide benefits and social protection and to outcomes. Second, the provision of childcare will give increase the incomes of informal workers. In addition, both fathers and mothers the comfort and peace of in a number of aspects, Malaysia’s legal environment mind to go to work, enabling households to generate lags behind those of its peers in terms of implementing dual incomes and increasing the rate of participation and enforcing laws and regulations related to gender in formal employment (see IFC 2017). Third, employers equality. Similarly, there is room to improve parental are also likely to benefit as it will make it easier for them benefits in line with international legal norms. Finally, to attract and retain workers, reducing persistent labor greater efforts are needed to increase public awareness market shortages. of Government support for working women and of their legal rights and obligations, and to address gender Ultimately, the promotion of economic opportunities norms and attitudes in education and among the for Malaysian women will require the development community at large. of a comprehensive, multisectoral policy approach that addresses child care and other challenges As a means of facilitating the achievement of and constraints in a systematic and mutually shared prosperity, promoting women’s economic reinforcing manner. Addressing the lack of access to empowerment makes business, economic and social quality and affordable care for children and the elderly sense, particularly as Malaysia progresses towards will be vital. In addition, specific policies are needed becoming a highly developed and inclusive nation. Notes. Baseline assumptions for key parameters and other growth drivers in the LTGM are: (i) a labor share of 50 percent; (ii) an initial capital-to-output ratio of 2.25; (iii) public and private investment of 6 percent and 18 percent of GDP (respectively); (iv) human capital growth declining from 0.6 percent to just under 0.1 percent by 2050; (v) TFP growth declining from 0.9 percent to 0.6 percent by 2050; (viii) population growth declining from 1.3 percent to 0.4 percent by 2050. Source for LTGM: Loayza and Pennings (2018), http://www.worldbank.org/LTGM. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 53 54 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO Making Ends Meet MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 55 PART TWO - Making Ends Meet Making ends meet Many factors influence the ability of households to make ends meet Despite Malaysia’s low and stable inflation rate, in lower disposable income and inadequate financial there has been an ongoing debate regarding savings. In addition, increasing home prices also feed perceived increases in the cost of living in the into these concerns. country. These concerns are frequently expressed in public policy debates, in the mass media, and in private The special topic in this edition of the MEM is titled conversations. The issue has featured prominently in Making Ends Meet and aims to comprehensively public and private discourse for years, dating back at examine evidence and perceptions related to the least to the introduction of the GST in April 2015 and cost of living in Malaysia. Using a household-centric the fuel subsidy rationalization in December 2014. And perspective, it identifies four factors that contribute in more recently there has been a robust public debate varying degrees to households’ ability to make ends about whether Malaysia should increase its nationally- meet. While these factors overlap somewhat and are defined poverty line. It is particularly noteworthy that by no means exhaustive, they include the following: (i) these concerns have emerged during a period of low consumer price inflation differentials linked to income inflation, with the headline inflation rate averaging levels and/or geographic location, (ii) inadequate around 2 percent since 2015 (except in 2017 when it income, (iii) declining financial well-being, and (iv) was 3.8 percent), well below the growth rates for the insufficient access to affordable housing. economy and average nominal income. The underlying premise of the analysis is that In this context, the “cost of living” is often used as a the cost of living affects individual households catch-all term that may reflect wider developments differently, depending on a range of factors including in the economy and their impacts on household demographics, location and employment. Organizing budgets and well-being. While the discussion is the analysis along these lines also enables us to usually framed as an issue of rising costs for goods and identify practical policy measures to address economic services, for most Malaysians, the core issues extend hardships related to perceptions regarding the cost of beyond prices. These include lagging income growth living. and increasing levels of household debt, which result Overall, price increases for most goods and services have been low and stable Changes in the consumer price index show that has been running at 3 percent or less (year-on-year) inflation in Malaysia has been moderate in recent since mid-2016, and headline inflation has tracked it years. This is especially true for core inflation, which closely except during 2017, when higher food and fuel excludes items with more volatile prices (especially prices pushed headline inflation into the 3–4 percent energy and food commodities) as well as items with range (see Figure 41). As in most countries, monetary administered prices and the estimated direct impact policy in Malaysia aims to facilitate the achievement of changes in consumption tax policy. Core inflation of low and stable rate of consumer price inflation 56 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet that is compatible with economic growth objectives. based on consumption patterns of households with Bank Negara Malaysia’s Consumer Sentiments Survey monthly incomes less than RM3,000. Second, the CPI indicates that Malaysians do expect prices to increase, focuses on consumption items, and excludes living and that on average their expectations regarding the costs that have a high investment component, such as inflation rate are about 1.5 percentage points higher the cost of buying a house or condominium. Housing than the actual rate (BNM, 2019). prices have risen rapidly in Malaysia, especially during 2013 to 2016, and this is not reflected in the CPI. The The CPI is sometimes criticized as not being contribution of housing to increases in the cost of living an accurate measure of the costs that people is discussed in detail in a subsequent section. face every day. DOSM calculates the CPI following internationally recommended practices, using a The ways that prices change can also lead people reference “basket” of consumer goods and services. to think that inflation is higher than it really is The composition of the basket is determined by the (see Figure 42). Recent analysis by Bank Negara average consumption patterns of Malaysian households Malaysia investigates how subconscious biases may as recorded in the Household Expenditure Survey affect consumers’ inflation perceptions. For example, (HES) and updated regularly. The estimated cost of the “frequency bias” leads people to be more influenced CPI reference basket is calculated each month using by changes in the prices of items that are purchased the average prevailing prices of the items in the basket, frequently, such as fresh food, dining out, highway tolls based on a price survey covering more than 500 items and fuel. Likewise, “memory bias” makes consumers in more than 20,000 locations throughout Malaysia. more inclined to notice, and remember, price increases than price decreases. The Everyday Price Index (EPI) While the CPI may be a valid measure of average examines the magnitude of frequency bias by using trends in consumer prices, it has at least two a reference basket comprising only items purchased inherent limitations as a tool for examining the cost at least once per month (BNM 2019). The Perceived of living. First, the CPI is a summary measure based on Price Index (PePI) goes a step further, using a basket average consumption patterns and average prices, and of those same frequently-purchased items that are in the real price changes that individuals experience will be the EPI, but counting only price increases and excluding higher or lower than that average. For example, lower- price decreases. Frequency bias is relatively small in income households spend a higher share of their family Malaysia, as the EFI closely tracks the standard CPI, budget on food, so they will experience higher inflation especially during 2018. In contrast, the PePI shows that when food prices rise faster than prices of other items. the memory bias that gives disproportionate weight to In recent years these differences have been relatively price increases is large, with the PePI exceeding the CPI small, as shown by the price index that DOSM publishes by 7 to 14 percentage points. FIGURE 41 FIGURE 42 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 57 PART TWO - Making Ends Meet Living costs vary significantly across Malaysia While the evolution of prices over time in Malaysia In many countries, spatial price indices are is well measured and documented, comparatively calculated and published to help both the public little attention is given to the large differences and private sectors incorporate spatial price in price levels across places. Moving around the differences in their decision making. The CPI— country it is readily apparent that some places are more including the state-level CPIs that DOSM has published expensive in general than others, and also that there since 2013—is a temporal price index, that is, one is usually a locally-produced specialty that is unusually that measures the change in the cost of the reference inexpensive. The most obvious spatial price differences consumption basket relative to a fixed point in time, are in housing, but there is also significant spatial price or base period. A spatial price index (SPI) is similar in variation across a wide range of common goods and construction, except that it measures differences in the services, as seen in the examples in Table 5, where it cost of the reference basket across different places at is not unusual for the average price in one state to be the same point in time. At the international level, the almost twice as high as that in another state, with some Purchasing Power Parity estimates of the International interesting patterns. Fresh food items such as spinach Comparison Project are a form of SPI, as are the and coconut milk are least expensive in Kuala Lumpur Purchasing Power Standards produced by Eurostat and relatively expensive in Sabah and Sarawak, while for the member states of the European Union. At the the opposite is true of brinjal and bananas. Services, national and sub-national levels, the US Bureau of such as haircuts, tend to be more expensive in more Economic Analysis publishes an SPI known as Regional urbanized states, with the exception that the most Price Parities, which measure differences in prices across expensive haircuts are in Sabah, one of the more the 50 states, as well as for individual metropolitan rural states. The average price for a 40-inch television areas. Likewise, Statistics Canada produces an SPI for is significantly higher in Sabah and Sarawak than in living costs in 34 communities of Alberta relative to peninsular Malaysia. the provincial capital, Edmonton. The main practical use of these indices is simple and powerful: to convert Because of spatial price differences, the purchasing calculations of nominal income to “real income”, which power of a ringgit varies from place to place, which takes into account spatial differences in living costs, directly impacts the cost of living. It is no secret that and more closely approximates the level of economic Johor, Kuala Lumpur and Selangor are Malaysia’s high- well-being. cost environments, and that costs tend to be lower in states such as Kedah, Kelantan and Perlis. If household Malaysia does not currently report a spatial incomes varied across these areas in exactly the same price index, although spatial aspects are likely to proportion as costs then that would neutralize the effect be incorporated in the cost of living index being of spatial price differences on the cost of living. However, developed under the National Cost of Living Action incomes do not vary in the same way, especially if one Council (NACCOL). Despite the absence of a standard looks beyond the averages. As one example, consider SPI, it is possible to get a rough approximation of how that the income eligibility requirements and the benefits much spatial price differences influence the cost of for BSH are uniform across Malaysia. This implies that in living using a special-purpose SPI that Malaysia already real income (purchasing power) terms, the BSH program has: the Poverty Line Income (PLI). As a form of SPI, the excludes needy people in high-cost areas and includes PLI measures the cost of a fixed basket of goods and less-needy people in low-cost areas. Furthermore, the services in different places at the same point in time. BSH cash benefit buys less in high-cost areas. Similarly, Where the PLI differs from a typical SPI is the composition with a uniform national minimum wage (RM1,100 as of of the reference basket, which is based on the average 2019) a minimum wage earner in high-cost Johor will not consumption of poor people, as opposed to the average be able to achieve the same standard of living as her of the population.15 In Malaysia’s case these are very minimum wage counterpart in Kedah.14 basic goods and services, currently corresponding The 2020 budget speech announced a RM100 increase in the minimum wage for those in major cities. 14 It would be straightforward to calculate an SPI based on the CPI reference basket using currently unpublished aggregate data from the CPI price surveys. These 15 data were not available to use in this report, hence the decision to use the PLI-based SPI as a next-best alternative. 58 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet TABLE 5 Average prices in RM for selected goods and services by state Spinach Coconut Brinjal Golden Men’s 40” LED (kg) milk (kg) (kg) bananas (kg) haircut television Johor 4.13 9.00 6.53 4.30 11.55 1,415.17 Kedah 3.74 11.50 6.08 5.25 8.66 1,457.88 Kelantan 4.29 9.77 5.34 5.10 6.63 1,163.65 Melaka 3.89 10.93 7.32 4.75 10.80 1,344.00 Negeri Sembilan 3.57 9.41 6.80 4.97 9.94 1,299.50 Pahang 3.77 13.17 6.59 4.55 11.22 1,444.00 Perak 3.49 10.41 5.94 4.34 9.61 1,362.67 Perlis 4.80 10.88 5.86 6.00 11.00 1,396.00 Pulau Pinang 3.64 11.05 6.04 5.59 10.55 1,391.18 Sabah 4.27 9.50 4.38 3.15 12.36 1,527.75 Sarawak 6.05 – 7.17 3.21 10.46 1,506.81 Selangor 3.39 10.72 6.40 5.34 12.18 1,352.85 Terengganu 5.27 10.00 5.89 5.68 10.64 1,414.33 WP Kuala Lumpur 3.44 7.22 6.71 5.65 11.34 1,341.50 WP Putrajaya 4.90 12.00 7.89 5.72 12.00 1,298.00 Malaysia 4.23 10.23 6.10 4.33 10.78 1,412.94 Ratio of highest to lowest prices 1.78 1.82 1.80 1.90 1.86 1.31 Source: Consumer Price Index Report, September 2019 (DOSM, 2019) approximately to the consumption patterns of the 6 to a more reasonable living standard than the PLI it poorest 1 percent of the population (for details of the PLI can be said that it takes an income of approximately basket composition see EPU/UNDP, 2007). RM4,300 in rural Sabah reach the same standard of living that RM3,000 will buy in rural Kelantan. In fact, the SPI Even for a very basic consumption basket, the cost derived from the PLIs almost certainly underestimates can vary by almost 70 percent depending on where the size of these differences, because the PLI reference you live in Malaysia. After controlling for household basket has a high proportion of price-controlled items. A composition, the lowest cost of the PLI basket is in basket based on the consumption of average consumers Kelantan, and the highest is in Kuala Lumpur and would have a lower share of expenditure on price- Putrajaya. Table 6 shows the spatial price differences controlled items and therefore higher price variability in different parts of Malaysia for the very basic PLI between high-cost and low-cost areas. basket as a percentage of the PLI in rural Kelantan. As expected, costs in more urbanized states and federal Although household incomes tend to be higher in territories tend to be higher than in more rural states. In high-cost areas, in many places the extra income addition, prices are mostly lower in the northern states is probably not enough to fully offset higher prices. of peninsular Malaysia. Both rural and urban Sabah, and The PLI-based SPI presented here is a sub-optimal to a lesser degree Sarawak, stand out as having high approximation of the price differences faced by prices for basic consumption items, not far below the average consumers across different areas in Malaysia, three Federal Territories and higher than Pulau Pinang and the adoption of a proper SPI would be a welcome and in some cases Selangor. development. However, despite its limitations, the PLI- based SPI can provide an indicative view of how much This implies that because of spatial price spatial price differences are compensated for by spatial differences, substantially higher incomes are price differences in incomes. Nominal household needed to achieve the same standard of living in incomes from the 2016 HIS were converted to real urban areas, Sabah and Sarawak than in other incomes that reflect local purchasing power. Figure 43 areas. If one applies the spatial price indices in Table plots median household income for individual states MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 59 PART TWO - Making Ends Meet TABLE 6 Cost of purchasing the standard PLI consumption basket by state and urban/rural area, as a percentage of the cost in rural Kelantan Urban Rural Johor 131.8% 114.0% Kedah 122.5% 110.6% Kelantan 113.6% 100.0% Melaka 130.1% 115.3% Negeri Sembilan 125.0% 122.0% Pahang 128.0% 115.7% Perak 122.5% 111.4% Perlis 117.4% 110.2% Pulau Pinang 140.7% 125.4% Sabah 148.7% 143.2% Sarawak 139.8% 130.1% Selangor 143.2% 122.0% Terengganu 124.2% 116.9% WP Kuala Lumpur 166.9% – WP Labuan 148.7% 143.2% WP Putrajaya 166.9% – Source: World Bank staff calculations based on PLI values provided by DOSM and Federal Territories against the estimated increase differences into account. The opposite holds for places or decrease in purchasing power when spatial price above the zero line—predominantly rural and lower- differences are taken into account, with urban areas income—where prices are relatively lower and therefore shown in dark blue and rural areas in light blue. In the real household incomes are higher than nominal areas below the zero line—Kuala Lumpur, Putrajaya, incomes. Meanwhile, Sabah and urban Sarawak have Labuan, Sabah, and urban areas of Pulau Pinang, the challenging combination of below-average mean Sarawak, and Selangor—real income is lower than incomes and above-average prices for basic goods and nominal income, meaning that local purchasing power services. is less than one would think before taking spatial price FIGURE 43 Higher incomes in some urban areas are offset substantially by reduced purchasing power because of higher prices, while lower rural incomes get a boost from lower prices 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) 60 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet Many Malaysians, especially in urban areas, feel their income is insufficient to raise their living standards As of 2018, nearly 30 percent of Malaysians felt There is increasing dissatisfaction among the that they did not have enough money for food and urban population with regard to their living 23 percent reported having inadequate money for standards. Between 2012 to 2018, the GWP results shelter. Based on the Gallup World Poll (GWP)16 the show that the number of Malaysians living in urban number of Malaysians who felt that they do not have areas who reported an improvement in their living enough money for food has doubled since 2012 (see standards rose by 5 percentage points, from 54.1 Figure 44). This was more prominent among those to 59.4 percent (see Figure 46). Yet within the same living in urban areas where the poll results more than period, the number of urban Malaysians who are tripled from 8.6 percent to 28.7 percent.17 In rural areas, satisfied with their standard of living declined from those feeling that they do not have enough money for 76.5 percent in 2012 to 69.5 percent in 2018 (see Figure food rose from 18.6 percent to 30 percent. Similarly, 47). There are various ways to interpret these results; the number of urban residents indicating that they did one plausible explanation is that even though urban not have enough money for shelter more than tripled, respondents’ standards of living are improving by their increasing from 7.4 percent to 24.8 percent since own assessments, they are increasingly dissatisfied 2012 (see Figure 45). Although high housing costs are because their standards of living are not improving as typically seen as an urban issue, it is noteworthy that fast as they would like (see Box 6). In contrast, in the 17-18 percent of rural residents reported not having rural areas, while a larger percentage responded that enough money for shelter in 2012 and 2018. living standards have declined, the level of satisfaction with living standards increased from 2012 to 2018. FIGURE 44 FIGURE 45 The percentage of Malaysians who felt that they The percentage of urban residents indicating do not have enough money for food has doubled insufficient money for housing more than tripled since 2012 from 2012-2018 Number of Respondents, Percentage Number of Respondents, Percentage 30 30 25 25 20 20 15 15 10 10 5 5 0 0 2012 2018 2012 2018 Total Urban Rural Total Urban Rural Source: Gallup World Poll Source: Gallup World Poll 16 The Gallup World Poll is conducted periodically in more than 150 countries, interviewing nationally-representative samples using a standard set of core questions, which are sometimes augmented by region-specific questions. The survey collects respondents’ views on a range of social and economic issues, including employment, well-being, affordability of food and shelter, education, law and order, institutions and infrastructure. The GWP has been carried out in Malaysia 11 times from 2006 to 2018. In most of those years the GWP interviewed 1,000 randomly-selected individuals, which is the GWP norm; the only exception was 2014, when 2,000 individuals were interviewed. 17 The GWP constructs food and shelter indices based on the questions “Have there been times in the past 12 months when you did not have enough money to buy food that you or your family needed?” and “Have there been times in the past 12 months when you did not have enough money to provide adequate shelter or housing for you and your family?”. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 61 PART TWO - Making Ends Meet FIGURE 46 FIGURE 47 The number of Malaysians in urban areas who ...yet the number of urban Malaysians who are have reported an improvement in living standards satisfied with their living standards has declined has 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 From 2012 to 2018, both urban and rural from 28.0 percent to 16.2 percent between 2012 and Malaysians have felt growing hardship in their life 2018 (see Figure 48). This was matched by increases of conditions. The GWP asked respondents to assess 9 and 3 percentage points of those who are categorized their current and future life conditions on a scale from as struggling and suffering, respectively. Over the 0 to 10, where 0 is the worst possible life and 10 is the same period, the share of rural respondents who are best possible life. From their answers, respondents are thriving increased slightly from 20.6 to 21.8 percent, but categorized as thriving, struggling or suffering. Based the proportion reported as suffering also rose by 6.4 on the results, the percentage of urban respondents percentage points. who are considered to be thriving dropped sharply, FIGURE 48 The number of urban Malaysians who felt that they are thriving declined sharply from 2012 to 2018 Number of Respondents, Percentage 80 70 60 50 40 30 20 10 0 Urban Rural Urban Rural Urban Rural Thriving Struggling Suffering 2012 2018 Source: Gallup World Poll 62 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet BOX 6 Income, cost of living, and overall well-being Results from a qualitative study on living standards “The costs going up is not a problem, but the conducted by the World Bank and University of wages must go up proportionately. This is not Malaya in 2019 with B20, B21-40, and M4018 happening.” [Klang Valley, Chinese, M40] Bumiputera, Chinese and Indians overwhelmingly support the finding that there is growing Malaysians of all three main ethnic groups also dissatisfaction among the urban population. expressed a common sentiment: while material Participants felt that their lives were “not in balance”, comforts had improved considerably compared because salaries were not keeping up with the cost to their parents’ generation, there was not a of living, leading to increased hardship and stress. concomitant increase in overall well-being. This When asked whether their lives were easier, harder, or sentiment was most acutely expressed by participants the same currently versus 5 years ago, 56 percent of belonging to the M40 income groups, as the quotes participants across 56 focus groups in the Klang Valley, below illustrate. Terengganu and Sabah said that their lives were harder now compared to 5 years ago.19 “Something that can be provided physically, yes, we children are better off. But something that is “I have experienced a time when I earned RM900 about the mind and the soul, we are not better off.” to feed nine children. Now, the salary is not going [Klang Valley, Chinese, M40] up. The only thing going up is the cost of living. It is not in balance.” “In the past, we just lived comfortably by rewarding [Klang Valley, Bumiputera, B21-B40] ourselves with good food for working hard. It was that simple. Now we have different needs and “When I joined ten years ago, my salary was wants. We are suffering.” RM500. Now I earn RM2000. It took ten years [Klang Valley, Bumiputera, M40] for me to get here. But the gap between the salary increase and the rise in cost of living is not “In the days of our parents, life was very happy. balanced. I am struggling to even earn this low Even if we had few things and small houses, we salary.” were happy. Now, even with a three-storied house, [Klang Valley, Indian, B21-B40] we cannot sleep in peace.” [Klang Valley, Indian, 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. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 63 64 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet Lower-income households’ income growth has slowed considerably in recent years Real household incomes have been growing steadily, More recently, however, households’ income with the most rapid increase from 2009 to 2014, growth has slowed considerably for lower-income including exceptionally high growth rates for lower- households. From 2014 to 2016, not only did overall income households. During this period, quantitative household income growth slow to 5.5 percent, but data from the DOSM’s household income surveys (HIS) lower-income households were no longer catching up show that mean and median household incomes have even in relative terms, as income growth rates among consistently grown faster than consumer price inflation. the M40 were slightly higher than those of the B40 After adjusting for inflation, median monthly gross (see Figure 50). To the extent that accelerated income income per household grew from RM3,128 in 2002 growth from 2009 to 2014 for the B40 and M40 shaped to RM5,681 in 2016, an increase of 82 percent in real households’ expectations about future income growth, terms (see Figure 49).20 Growth incidence curves show they may possibly view the slower and less inclusive widely varying patterns of the rate of income growth growth from 2014 to 2016 as a disappointment, which across the income distribution between 2002 to 2016. could in turn affect perceptions about increases in the After low growth of about 2 percent across all income cost of living. groups between 2002 and 2009, annual growth in real mean household income increased sharply to 6.4 In addition, even when income growth rates percent from 2009 to 2012, with rates exceeding 10 were higher among lower-income households, the percent among the bottom 20 percent of the income absolute gaps across income groups continued to distribution (see Figure 50). Growth in real household increase, which could contribute to perceptions of income was even more favorable in 2012–2014, with being “left behind”. It is very common for lower-income annual growth rates of 7.4 and 10.0 percent for mean households’ absolute income gains in currency terms to and median income, respectively, and double-digit be less than that of higher-income households because growth rates for households in the bottom 40 percent of their lower base income, even when the lower- of income distribution. income households’ incomes are growing at a faster FIGURE 49 FIGURE 50 Growth in real household income was favorable in From 2009 to 2014, real mean household income 2012–2014 growth was fastest among the B40 Median Gross Household Income, RM per Person Annual Growth in Real Household Income per Capita, Percentage 6,000 15 5,000 4,000 10 3,000 2,000 5 1,000 0 0 2002 2004 2007 2009 2012 2014 2016 0 20 40 60 80 100 Percentile of Household Income per Capita Income per Household Income per Capita 2002-2009 2009-2012 2012-2014 2014-2016 Source: World Bank staff calculations using Household Income and Basic Source: World Bank staff calculations using Household Income and Basic Amenities Survey (DOSM) Amenities Survey (DOSM) 20 Incomes in this section are adjusted for inflation using the CPI and expressed in constant ringgit as of April 2017, which is the final month of data collection for the 2016–2017 Household Income Survey. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 65 PART TWO - Making Ends Meet relative rate. For example, during 2012 to 2014, mean of being “left behind” even during periods such as 2009 incomes of the B40 were growing at about 13 percent to 2014, when lower-income households were gaining a per year while those of the T20 were growing at around larger share of total income because their incomes were 6 percent. However, because of B40 households’ lower increasing more rapidly than their richer counterparts. initial incomes, this only translated into an average gain Naturally, this perception would likely be amplified, and of RM132 per month for them, compared to RM356 per fully justified, in periods such as 2014 to 2016, when the month among the T20 (see Figure 51). These increases income gap between the B40 and the M40 increased in in absolute income gaps may contribute to perceptions both absolute and relative terms. FIGURE 51 The absolute gaps across income groups continued to increase, which could contribute to perceptions of being “left behind” Change in Mean Monthly Income per Capita, Constant RM 500 400 300 200 100 0 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 Survey (DOSM) Despite rising educational attainment, income growth among younger workers has been sluggish Employment earnings are the main source of over time as women’s labor force participation has been income for those who are 20 to 59 years-old. The increasing in recent years, while men’s participation has majority of Malaysians in this age range report at least remained relatively constant within each age cohort. It some employment income—either from salaries and is also notable that the proportion of those 20–29 years- wages or from self-employment (see Table 7).21 For all old with employment income has been decreasing age groups, men are more likely to have employment slightly over time, which is attributable in large part to income than women, especially for those aged 30 or later entry into the work force as more young Malaysians older. This gender disparity has been declining slightly pursue tertiary education (see Table 8). 21 The analysis presented here uses individual-level income data from the Household Income and Basic Amenities Survey. Employment income includes gross wages and salaries in cash and in kind, as well as allowances, bonuses, and employers’ contributions to EPF and SOCSO. Self-employment income includes marketed output and own-consumption, net of production costs. 66 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet TABLE 7 Percentage of Malaysians with employment income by year and gender Age group (years) Gender 2004 2007 2009 2012 2014 2016 20–29 Men 78.4 77.1 75.9 74.1 71.8 68.9 Women 55.2 53.7 53.4 53.0 51.1 50.6 30–39 Men 96.6 96.5 96.1 95.9 96.1 95.2 Women 49.7 51.0 52.2 58.8 56.8 59.2 40–49 Men 96.7 96.7 96.7 96.7 96.9 95.8 Women 44.4 44.1 43.8 50.0 48.1 51.5 50–59 Men 87.1 86.0 85.3 88.9 88.8 87.8 Women 29.8 29.9 31.5 35.0 33.4 35.1 60–69 Men 64.0 63.4 60.1 63.6 57.2 54.4 Women 18.2 19.5 17.4 18.7 14.9 14.9 Source: World Bank staff calculations using Household Income and Basic Amenities Survey (DOSM) TABLE 8 Percentage of those age 20 to 29 reporting their main activity as student by year and gender 2004 2007 2009 2012 2014 2016 Men 10.0 11.6 10.6 14.4 15.4 16.5 Women 11.0 13.5 12.2 15.9 18.0 18.4 Source: World Bank staff calculations using Household Income and Basic Amenities Survey (DOSM) Younger workers in Malaysia experience slower median employment income is somewhat weaker for income growth than their older counterparts, and women, which could reflect women above 30-years old the gap has widened in recent times. Incomes for all who are more likely to work part-time to balance family age groups have tended to grow faster than inflation, and work commitments (see Figure 53). but the growth in employment earnings for younger workers has consistently lagged those of their older Most of the employment income growth among counterparts. Slower employment income growth is those 20 to 29 years-old is associated with most pronounced among young men. For example, higher educational attainment. That is, to the in 2004 median employment income among men extent that those in the youngest age cohort have aged 20–29 was 70 percent that of their counterparts experienced any employment income growth, it is aged 40–49, and by 2016 that ratio had eroded to 58 largely because a higher proportion of them have percent (see Figure 52). Furthermore, between 2004 tertiary education than was the case previously. Among and 2016 the compound annual growth rates (CAGR) those with post-secondary education, real growth in of median employment income for 20–29 year-old men median employment income was substantial in the and women were 2.1 and 2.6 percent, respectively, 40 to 59 year-old age brackets. Thus, their more rapid compared to 3.8 and 5.0 percent for those 40–49 employment income growth stems from a combination years old. The divergence in employment income by of growing incomes over time for those with post- age groups accelerated after 2009 among both men secondary education plus a higher percentage having and women. The relationship between age group and post-secondary education (see Figure 54). In contrast, MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 67 PART TWO - Making Ends Meet FIGURE 52 FIGURE 53 Younger male workers experience slower income The relationship between age group and growth and the gap has widened employment 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 Source: World Bank staff calculations using Household Income and Basic Amenities Survey (DOSM) Amenities Survey (DOSM) 20-29 year-olds only benefit from the second of those Those who feel their incomes are not keeping up two effects, because employment income growth has with the cost of living often opt to work more to been negligible among those with post-secondary try to make ends meet. This could mean a non- education in this age group.22 The same is true to a working household member deciding to start working lesser extent for 30–39 year-olds with post-secondary or a working household member taking on a second or education, for whom growth in employment earnings even third job. In turn, the additional employment and has been relatively modest. possibly hours worked could impose additional costs, such as child care, transportation, or food away from Among those with only secondary education, home, as well as the stress of trying harder just to keep employment earnings are significantly lower up (see Box 7). According to the HIS, the proportion of for all age groups, with very modest growth over households with multiple people employed increased time. For those with only secondary education, the slightly from 2004 to 2012 and has stayed constant median income of the highest-paid age group (50 to from 2012 to 2016, with 47 percent of households 59 years-old) is RM2,612 as of 2016, which is about having a single earner and 38 percent having two equal to that of the lowest paid age group with post- members working (see Figure 56). Data from the Labor secondary education (see Figure 55). The increase in Force Survey (LFS) shows surprisingly little evidence real employment earnings over time has been slower of people working secondary jobs, in the range of for those with less education, with compound annual only 1 to 2 percent of workers (see Figure 57). This is growth rates ranging from 1.4 percent for 40–49 year- perhaps influenced by the framing of the question in olds to 2.2 percent for 30–39 year-olds. Within each the LFS, which uses the ILO standard reference period age group, median employment income for those of the preceding seven days, which may therefore omit who have completed post-secondary education is at many secondary jobs that are occasional or infrequent. least double that of those who have only completed Qualitative research suggests that secondary jobs and secondary education. The median employment earning multiple workers per household are more prevalent than differences across age groups are much smaller for indicated by quantitive survey data, and are increasing workers with only secondary education than they are over time (see Box 7). for those with more education. 22 This is based on regression analysis in the World Bank’s forthcoming Cost of Living report. 68 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet FIGURE 54 FIGURE 55 Since 2009, real growth in income for 20-29 year- Among those with only secondary education, olds with post-secondary education was marginal income 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 Source: World Bank staff calculations using Household Income and Basic Amenities Survey (DOSM) Amenities Survey (DOSM) FIGURE 56 FIGURE 57 The proportion of households with multiple The proportion of people recorded as working people employed increased slightly from 2004 multiple jobs has been consistently low to 2012 then leveled off Number of Employed People per Household, Percentage Number of People Working a Second Job, Percentage 50 2 40 30 1 20 10 0 0 2004 2007 2009 2012 2014 2016 2010 2011 2012 2013 2014 2015 2016 2017 One Two Three or more Source: World Bank staff calculations using Household Income and Basic Source: World Bank staff calculations using Labor Force Survey (DOSM) Amenities Survey (DOSM) MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 69 PART TWO - Making Ends Meet BOX 7 Getting by with dual income earners and multiple jobs Many low-income Malaysians are only able to A young, unmarried engineer in Terengganu explained make ends meet through multiple jobs. The need how, after paying off his monthly expenses, he was for dual incomes and holding down multiple jobs per left with no savings and had to resort to a second job. earner was discussed in nearly half of all focus groups Moreover, he did not foresee a future in the same conducted in the Klang Valley and Terengganu as company as the yearly increment was negligible. part of the joint World Bank-University of Malaya qualitative study on living standards. “My salary is not that high. After EPF contribution, I earn RM2,300. My car loan is RM600. I need my car “Most of the people in my salary range actually for my job. I pay RM300 for PTPTN loan and RM100 work two jobs. Having two jobs makes it more for medical insurance. After deducting all these secure. I cannot go up. I cannot go down. Yeah, I plus some other expenses, I am left with RM800. am stuck here. I am trapped.” I have no savings. I am single and live with my [Klang Valley, Chinese, M40] parents. I started a second job. I teach electronics, I sell electronic items. Without this second job, I “Doing one job is no longer sufficient financially. would have no disposable income. Even though Even 2-3 jobs can leave a question mark about I work in a good company, my yearly increment whether you have enough to meet basic needs.” is only RM50. If I continue here, I won’t go far.” [Klang Valley, Indian, B20] [Terengganu, Bumiputera, B21-B40] There is no disposable income. Every penny we earn, we know how it will be spent. That is why a lot of us housewives are taking on miscellaneous jobs to support our husbands with extra income. [Klang Valley, Bumiputera, B21-B40] 70 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet Borrowing provides temporary income support to lower-income households Recently, the concept of a “living wage”, which include basic goods required to sustain life, such as is the income level needed to meet a reasonable medical- and education-related consumption, whereas standard of living – beyond what is needed for discretionary consumption comprises “expenditure subsistence 23 – has been introduced in Malaysia. to support lifestyle choices,” including spending on BNM (2018a) estimates the living wage in Kuala durable goods, weddings and festive seasons. Hence, Lumpur, as of 2016, to be RM2,700 for a single adult, individuals and households who don’t earn as much as RM4,500 for a couple without a child and RM6,500 for the living wage need to either reduce expenditures or a couple with two children. The Belanjawanku report increase incomes through additional jobs, borrowing, by EPF and SWRC (2019) is similar in spirit to BNM’s and investment. living wage analysis, providing reference budgets for different types of households and life-cycle stages, Borrowing provides temporary relief for including details about specific living cost categories households to compensate for inadequate and benchmarks for retirees. The Belanjawanku report income, particularly in the short-term. According suggests wage levels in Klang Valley that are close to to the Agensi Kaunseling dan Pengurusan Kredit BNM’s living wage: RM2,490 for a single adult with a (AKPK), 27 28 percent of the 3,540 randomly-selected car, RM4,420 for a couple without a child, and RM6,620 Malaysian working adults surveyed in 2018 had to for a couple with two children. borrow from family and friends to buy essential goods. While borrowing provides opportunities for shifting consumption and making investments, the debt There is a strong correlation obligation also limits discretionary spending as a larger portion of household income is already pre-committed between level of education for monthly loan repayment. Higher levels of household and households earning less debt relative to a few years ago may be seen as a positive development that enables households to than the living wage. use credit to invest in a home or otherwise smooth consumption over the life cycle. However, it also makes it easier for a household to live beyond its means, or Approximately 27 percent of households in to perceive that living costs are escalating faster, than Kuala Lumpur earn less than BNM’s estimated they are because the household has less discretionary living wage, 24 thus limiting their ability to have income after factoring in obligatory loan repayments. a meaningful and dignified life in the society. There is a strong correlation between level of education and households earning less than the living wage. Findings by BNM also show that 73 percent of those earning below the living wage have either secondary, primary, or no education. In contrast, 72 percent of those earning above the living wage have completed tertiary education.25 Furthermore, those involved in low- and middle-skilled jobs are more likely to earn below the living wage, although above the minimum wage. The same applies to married couples with or without children. According to BNM, there are two types of consumption expenditure: necessity and discretionary spending.26 Necessity items 23 Basic needs such as food, clothing, and shelter. Source: BNM (2018a). 24 BNM (2018a). 25 DOSM (2019), “Salaries and Wages Survey Report 2018”. 26 BNM (2018a). 27 Credit Counseling and Debt Management Agency. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 71 PART TWO - Making Ends Meet Beyond housing and car loans, lower-income borrowers tend to use personal finance loans and credit cards to raise living standards Lower-income households and certain segments In addition to housing loans, nearly every of the population have a heavy debt load and household, including a majority of lower-income face a high debt service ratio (DSR). Recent studies households, have car loans (see Figure 60). Housing by BNM and others have highlighted the heavy debt has always been a large part of household debt and load carried by borrowers earning less than RM5,000 is sometimes perceived as a ‘good debt’ as it allows per month, with more than 50 percent of the debt homeowners to enjoy returns on investment and stable channeled for purchases of motor vehicles and personal wealth accumulation over time. Notwithstanding this financing, 28 as opposed to borrowing to build long- development, car loans remain one of the most common term wealth (see Box 8). Similarly, a large share of forms of debt across all age groups, with 45-65 percent debt (45 percent) among civil servants are personal of respondents surveyed by AKPK having car loans (see financing and motor vehicle loans (BNM, 2018c). The Figure 61). Unlike housing loans, motor vehicle loans DSR remains high for borrowers with monthly incomes increase household liabilities without increasing the less than RM 3,000. Approximately 40 percent of household’s long-term assets, and monthly payments lower-income borrowers have DSRs above 40 percent, may comprise up to one-third of income for lower- which leaves them with little discretionary income and income borrowers. High rates of vehicle ownership may saving capacity (see Figure 58).29 Comparing the DSRs also suggest inadequacies in the public transportation between the average borrowers and civil servants, the system, such that Malaysians do not want to rely on latter faces a significantly higher DSR levels, with over public transit for all of their transportation needs. With 50 percent of monthly income used for debt repayment, increasing motor vehicle ownership and car loans, it which is 1.6 times the DSR among average borrowers in costs households at least five times more31 than taking the same income group (see Figure 59).30 public transportation for a daily commute.32 FIGURE 58 FIGURE 59 Lower-income borrowers have high DSRs leaving Civil servants also tend to have significantly little room for other expenditures or savings higher levels of DSR Share of Borrowers, Percentage Debt Service Ratio, Percentage 100 60 50 80 40 60 30 40 20 20 10 0 0 Bottom 20% 2 3 4 Top 20% <3 3-5 5-10 >10 Income Quintile Monthly Income (RM '000) DSR <20% DSR 20-40% DSR 40-60% Civil Servants Malaysia DSR 60-80% DSR 80-100% Source: BNM Source: BNM 28 BNM (2017). 29 BNM (2016). 30 BNM (2018d). 31 Including monthly car loan instalments, insurance, fuel, tolls, and other maintenance fees. Source: World Bank staff calculations. 32 Referring to the RapidKL RM100 monthly unlimited pass for trains and buses. 72 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet BOX 8 Debt as a double-edged sword In the joint World Bank-University of Malaya needs, utility bills...water, electricity...after settling qualitative study, lower-income households all these bills, the balance is almost zero. Then the described their monthly struggle to service loans. wait starts for the following month’s salary for the In a common theme across regions and ethnic groups, same purpose.” participants from the B20 and B21-B40 income [Klang Valley, Indian, B20] groups found it difficult to survive on their current incomes, given their commitments on housing, car, “Definitely you need a loan for everything. For and other types of loans. This is consistent with BNM’s house, for car. For professional people, it may be data which showed high DSRs among lower-income easy to pay back. But my job is unstable. It is hard borrowers, resulting in limitations for household for me.” savings and consumption on other items. [Klang Valley, Chinese, B20] “At the end of every month, I feel like going “By the 20th of the month, we have to scrape the insane because always I feel I do not have enough bottom of the barrel while waiting for our pay for to settle all payments. I need to pay house the next month.” mortgage, car loan, children’s education and [Terengganu, Bumiputera, B21-B40] MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 73 PART TWO - Making Ends Meet FIGURE 60 FIGURE 61 Nearly every household, including a majority of Ownership of car loans cuts across all age groups lower-income households, owns a car Car Owners, Percentage Loan Ownership, Percentage 100 80 80 66.7 60 62.8 60 51.9 40 40 20 20 0 0 2012 2014 2016 20-29 30-39 40-49 50-59 Year Age Group Bottom 20% 2 3 4 Top 20% Car Housing Credit Card Personal Education Source: World Bank staff calculations based on DOSM data Source: AKPK Households with income below the living wage at least one credit card, if not multiple cards from also tend to take on personal financing loans various banks35 and this creates more opportunities for for consumption. Personal financing is widely individuals and households to spend beyond what they used to keep up with “lifestyle” choices, which are earn. considered discretionary consumption33 that provides an improvement in living standards beyond the basic High rates of bankruptcy because of borrowing for items needed for survival. In some ways, lifestyle consumption rather than for wealth accumulation choices would be included in the living wage, enabling are an increasing concern, especially among individuals to participate in meaningful social activities younger borrowers with limited financial and events such as festive seasons. Among AKPK clients knowledge and literacy. Defaults on motor vehicle earning below RM5,000, 32 percent of the personal and personal financing loans constitute almost half of loans were spent on discretionary items, twice as much the total bankruptcy cases (49 percent in 2018), while as was spent on necessity items (see Figure 62). the number of bankrupt borrowers with either personal financing or credit card debts has increased since Apart from personal financing, households find an 2013 (see Figure 63). The number of bankruptcy cases alternative to maintain higher standard of living involving personal financing and credit card debts has through credit cards. It is increasingly easy to get grown by 104 percent and 43 percent, respectively, in credit cards, and households are increasingly turning 2018 compared to 2012. Moreover, there is increasing to credit cards to help make ends meet, and frequently concern for bankruptcy among the 25-34 year-olds (see encountering challeges of overspending and poor debt Figure 64). Approximately 60 percent of the bankrupt management. While an increasing share of household borrowers were millennials between the ages of 25 credit card debt could suggest households using debt and 44 years old. Therefore, millennials’ spending to improve their living standards in the short-term, it beyond their income can be detrimental and lasting if could also indicate that people are spending beyond they continue to lack financial knowledge and money what they can afford. Even with an annual income of management skills (see Box 9 on millennials living RM24,000, individuals can get bank approvals for beyond their means). a credit card.34 It is common for Malaysians to have 33 BNM (2018b) defines discretionary consumption as “expenditure to support lifestyle choices, which include the purchase of durable goods and expenses for weddings and festive seasons” (p. 16). 34 CompareHero.my (2019). 35 A survey by RinggitPlus (2019) found that 58 percent of respondents have one to three credit cards and 12 percent have four or more. 74 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet FIGURE 62 A large share of personal financing loans among AKPK clients is used for discretionary spending Personal Financing Usage, Percentage 100 80 7 60 16 15 40 15 19 70 20 37 38 32 32 0 <3 3-5 5-10 >10 Total Monthly Income (RM '000) Consumption: Discretionary Consumption: Necessity Purchase of Motor Vehicles Others Source: BNM FIGURE 63 FIGURE 64 There has been an increase in bankruptcy cases ...with the number of bankruptcies being the due to personal financing and credit cards... highest among working adult population Number of Bankruptcy Cases, Thousands Number of Bankruptcy Cases, Thousands 16 8 14 7 12 6 10 5 8 4 6 3 4 2 2 1 0 0 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 Motor Vehicle Personal Financing Credit Card 25-34 35-44 45-54 55 and above Source: Malaysian Department of Insolvency Source: Malaysian Department of Insolvency MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 75 PART TWO - Making Ends Meet BOX 9 Millennials’ consumption behavior and financial savvy Millennials have been criticized for “living beyond the same is true within each age cohort. More American their means” in the Finance Matters: Understanding millennials are spending on necessity items – groceries, Gen Y report by the Asian Institute of Finance. utilities, and healthcare – than on discretionary items Milennials, or Gen Ys, form a majority of Malaysians such as traveling and dining out.39 In Malaysia, those who spend well beyond their means, due to “impulse- between ages 25 and 44 in the Household Expenditure buying behavior, easy access to personal loans and Survey40 have been spending similar proportions credit card financing, the want for instant gratification, on food at home and food away from home. Up and seamless online purchasing”.36 About 40 percent to 40 percent of consumption was spent on food of millennials admitted to spending more than they can expenditures among the Gen Y household heads, afford, while 70 percent expressed dissatisfaction with including food at home and food away from home41 in their current income.37 Credit cards are an increasing 2016 (see Figure 65). source of borrowing, which allows for prolonged outstanding balances – and thus rapid build-up of debt Millennials, including in Malaysia, lack financial – since the card holder is only required to settle the knowledge and capacity to help manage their minimum monthly payment after use (BNM, 2018c). Are financial well-being. Across 1,011 respondents to a these short-lived financial behaviors, or could they lead 2015 survey by AIF, Gen Ys between 20-33 years old to serious ramifications such as bankruptcy? said they lack confidence in financial knowledge and ability, 14 percent rated themselves as having poor or very poor financial knowledge and 58 percent said they have average financial knowledge. Furthermore, in 2017, About 40 percent of the Global Finance Literacy Excellence Centre found millennials report spending that only 36 percent of Malaysians between 15-34 years old were financially literate compared to 66 percent more than they can afford, in Singapore and 51 percent in Myanmar.42 About 20 and 70 percent express percent of millennials do not save, citing indebtedness, high cost of living and spending on lifestyle choices as dissatisfaction with their reasons why they do not save.43 Among the millennials current income. who do save, 43 percent do not invest their money at all, while 16 percent invest once every one or two years (Free Malaysia Today, 2019). Most of the spending by millennials is on necessity items such as food and utilities. Millennials, also known as Gen Y, are those born between 1981 and 1996, which means they are between the ages 23 and 38 today.38 Different age cohorts spend differently, and 36 AKPK (2014) and AIF (2015). 37 AIF (2015). 38 Dimock, M. (2019) “Defining generations: Where Millennials end and Generation Z begins”, Washington, DC: Pew Research Center. 39 Based on a Gallup (2016) study on “How Millennials Want to Work and Live”. 40 DOSM (various years). 41 Referring to “restaurants and hotels” in the Household Expenditure Survey, indicating discretionary consumption. 42 Khidhir, S. (2019), “Malaysia’s millennials need help.” 43 Based on RinggitPlus’ 2019 survey, 69 percent of the respondents were 20-39 and the rest 40-60 year-olds. 21 percent of the respondents generally don’t save, either because they are paying off debts (34 percent), essential expenses are too high (29 percent), have no balance at the end of the month (25 percent), or spend too much on discretionary items (12 percent). 76 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet FIGURE 65 Millennials spend mostly on food, whether necessity or discretionary items Share of Spending, Percentage Age 25-34 Age 35-44 20 20 15 15 10 10 5 5 0 0 2009 2014 2016 2009 2014 2016 Food and Non-alcoholic Beverages Food and Non-alcoholic Beverages Recreation Services and Culture Recreation Services and Culture Restaurants and Hotels Restaurants and Hotels Source: World Bank staff calculations based on DOSM data MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 77 PART TWO - Making Ends Meet Malaysian households, particularly lower- income households, do not have adequate financial savings A large share of working adults, especially those “Both my wife and I are working while my children earning below RM4,000, feel under pressure with are in a private pre-school. I want to provide a their current financial position. Based on the AKPK comfortable life for my family. I work part time as survey of financial behavior and well-being,44 in terms of a barber. Yet, I have to think twice about getting a spending, savings, and debt management, almost one- house. I have no savings. Sometimes, I think twice third of the respondents earning below RM4,000 and when I give RM100 to my parents. I have to count one-fifth of those earning RM4,000-RM8,000 had low my money before fueling my car. I struggle to pay scores for their financial behavior. Consequently, they for domestic household expenses. I have second experience lower scores for financial well-being, with thoughts when we are out and try to choose the 58 percent of the lower-income group (below RM4,000) cheaper mamak stand.” and 36 percent of the middle-income group (RM4,000- [Klang Valley, Bumiputera, M40] RM8,000) feeling under pressure or needing attention given their financial position. Individuals’ current savings with the Employee Provident Fund (EPF) indicate that most EPF members do not have sufficient savings for 89 percent of EPF members retirement. Although more than 89 percent of EPF members agree that their EPF savings are insufficient agree that their EPF for retirement, only 38 percent have started planning for savings are insufficient for retirement.46 Moreover, 60 percent of Malaysian adults are not covered by the EPF.47 The reasons for low savings retirement. in EPF accounts are various, but include the low base of starting salaries (on average), and the slow growth of salary during the years of active contribution; ‘leakages’ Financial pressures are being felt by most working before the official withdrawal age for housing, health adults regardless of age group. Financial behavior or education expenditures allowed prior to retirement scores are similar across all age groups, though the older (which is a common design for provident funds); and cohorts, 40-49 and 50-59 year-olds, have slightly better the ‘density of contributions’, which falls below 100 ratings in “good” and “exemplary” financial behavior. percent for many workers meaning that they are not The financial well-being of younger working adults, 20– able to contribute every year. The EPF’s Belanjawanku 29 and 30–39 year-olds, tends to be poorer than older report estimated that an elderly couple living in Klang age cohorts, with 22 percent and 25 percent feeling Valley needs approximately RM3,090 for monthly living under pressure given their financial position, compared expenses. to 19 percent and 12 percent feeling under pressure among the 40-49 and 50-59 year-olds.45 Regardless Malaysia’s household savings rate is low compared of age, the majority of working adults with reasonable to OECD countries and other comparators. The financial behaviors scores still feel under pressure gross household savings rate in Malaysia is 1.5 percent financially. In the World Bank-University of Malaya study of adjusted disposable income48 compared to 7.8 on living standards, a participant in the M40 income percent in the United States and 9.6 percent in Chile in group living in Petaling District explained how he has 2015 (see Figure 66).49 In fact, 37 percent of households to count sen in order to provide a comfortable life for with incomes below RM2,000 said they do not save at his family. all.50 About half of Malaysian households do not have 44 AKPK (2018) surveyed the financial behavior and financial well-being of 3,540 working adults across Malaysia. Financial behavior refers to three key areas in money management—(1) spending, (2) savings, retirement, and investment, and (3) debt management—while financial well-being measures the ability to lead a meaningful, content, and sustainable life without constant financial worries. 45 AKPK (2018). 46 RinggitPlus (2019), “Malaysian Financial Literacy Survey 2019”. 47 Financial Education Network (2019), “National Strategy for Financial Literacy 2019-2023”. 48 DOSM (2015), “Distribution & Use of Income Accounts and Capital Account”. 78 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet FIGURE 66 FIGURE 67 Malaysia has one of the lowest rates of household About half of Malaysian working adults lacks savings financial resilience, especially the younger generation Gross Household Savings, Percentage Number of Individuals by Age Group, Percentage 100 14 9 50 4 0 -1 2009 2010 2011 2012 2013 2014 2015 20-29 30-39 40-49 50-59 Age Group Malaysia Japan Able to pay RM1,000 for emergency Korea, Rep. US Able to pay medical bills of RM2,500 Chile Able to cover 3 months' expenses if retrenched Source: KRI, OECD Source: AKPK sufficient savings to cope with unforseen financial and the potential to increase total pension through shocks such as emergencies, medical bills or job loss an annuity option. The recently launched National (see Figure 67). Among the millennials who save part Strategy for Financial Literacy 2019-2023 formulated by of their income, approximately 60 percent have savings the Financial Education Network (FEN)53 has expanded that amount to three months’ income or less (Vase.ai, public and private financial literacy initiatives which have 2019).51 been previously done at a smaller scale.54 It is hoped that the National Strategy will help raise awareness The current state of financial well-being among among citizens on their rights and responsibilities in Malaysia’s households underscores the importance personal and household financial management and to of financial literacy across income levels and age be accountable for their financial decisions. It is also groups. If households lack financial knowledge and worth noting that financial education is now provided planning, it will be hard for them to sustain their living (at varying levels) by all financial institutions in Malaysia standards after retirement.52 For the 40 year-olds and per consumer protection regulations by Bank Negara older, financial knowledge and the ability to accumulate Malaysia and Securities Commission Malaysia and savings is pertinent to avoid having no choice but to aspects of the financial education has been integrated work beyond retirement age because of financial into the formal curriculum for K–12 by the Ministry of pressure. Retirees also need financial education to Education. ensure sustainable use of their savings over time, preventing them from using up the money few years after retirement (Jomo, 2017). Therefore, financial literacy is required for all income groups and at all stages of life. EPF has begun offering financial planning workshops for its members, including education on extending the years of contribution, retiring later, 49 KRI (2016). 50 RinggitPlus, “Malaysian Financial Literacy Survey 2019”. 51 Vase.ai (2019) survey which includes 1,525 millennials. 52 Other reasons for low pension savings include (i) low base salaries and growth of salaries in the early years of pension contribution, (ii) withdrawals for retirement age for housing, health or education expenditures, and (iii) employees not making the full contributions in some years, which is permitted by EPF. 53 The FEN comprises Bank Negara Malaysia, Securities Commission Malaysia, Ministry of Education, Employees Provident Fund, Perbadanan Insurans Deposit Malaysia, Permodalan Nasional Berhad, and Agensi Kaunseling dan Pengurusan Kredit. 54 See Appendix for a summary of financial literacy initiatives in Malaysia. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 79 PART TWO - Making Ends Meet The availability of affordable housing in Malaysia has deteriorated over the years Housing is a basic need and is one of the largest multiple index, the ratio compares the median house household expenditures. The amount a household price to median household income. A widely-used must pay for housing directly impacts its ability to categorization developed by Demographia (2019) pay for other necessities such as food, education, categorizes housing as “moderately unaffordable” transportation and health. If the cost of housing is (PIR of 3.1 to 4.0), “seriously unaffordable” (PIR of 4.1 too high as compared to a household’s income, the to 5.0) or “severely unaffordable” (PIR of 5.1 higher). household may have no choice but to compromise other By this classification, the median multiple for Malaysia expenditures to remain sheltered. Households that are has exceeded the 3.0 threshold for affordability since unable to afford a safe, adequate and well-located at least 2002, and deteriorating sharply from 2012 to home may have to find alternate accommodation that 2014, when the median multiple increased from 4.0 compromises their health or well-being or forces long to 5.1 (see Figure 68 As of 2016, Malaysia’s median commutes to access livelihoods and basic services. multiple index stood at 5.0, categorizing housing Owning a home also constitutes one of the primary as “seriously unaffordable” in Malaysia overall, and vehicles for wealth accumulation, especially if the “severely unaffordable” for several states such as value of the home appreciates over time. As of 2016, Penang, Kelantan, Negeri Sembilan and Sabah, as Malaysia’s homeownership rate was 76.3 percent illustrated in Figure 69. (including owner-occupied homes with mortgages), higher than many OECD and high-income countries The deterioration of housing affordability, based on (Ismail et al., 2019). the PIR methodology, can be attributed to several factors, including urbanization and unresponsive Various studies55 using the price-income ratio supply. 56 Firstly, rural to urban migration and (PIR) have concluded that housing affordability changes in the country’s main industries have altered in Malaysia has deteriorated, with varying the country’s demographics and increased housing degrees across states. Also known as the median demand, particularly in urban areas.57 Secondly, until FIGURE 68 By one measure, housing in Malaysia has been classified as “unaffordable” since 2002 Price-to-income Ratio 6.0 5.5 5.1 5.0 5.0 4.4 4.4 4.5 4.3 4.1 4.0 4.0 3.5 3.0 2002 2004 2007 2009 2012 2014 2016 Source: Ismail et al. (2019) 55 See, for example, Ismail et al. (2019) and BNM (2017b). 56 See World Bank (2015) for a broader discussion of the urbanization challenges that Malaysia faces, including the relative lack of economic density and urban sprawl of key cities, resulting in urban households in Malaysia spending a higher share of their income on transport relative to in key comparator economies. 57 From 1990 to 2019, the number of households has more than doubled, increasing from 3.6 million to 8 million (Department of Statistics Malaysia, 2019). 80 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet FIGURE 69 Housing affordability varies across states, with four states categorized as “severely unaffordable” Perlis 4.0 Severely Unaffordable Kedah Seriously Unaffordable 4.3 Moderately Unaffordable Pulau Pinang 5.5 Kelantan Terengganu 5.5 5.0 Sabah Perak 5.5 4.6 Pahang 5.0 Selangor Sarawak 4.7 4.0 Kuala Lumpur 4.9 Negeri Sembilan 5.1 Melaka 3.1 Johor 5.0 Source: Ismail et al. (2019) recent years, housing supply was not responsive to this below RM200,000 made up less than 20 percent of the increase in demand, exacerbating increases in housing total units in 2016 (see Figure 70). Finally, wages have prices, especially in economic centers such as Selangor. not increased as rapidly as housing costs have. While Furthermore, new housing built since 2008 has been the cumulative salaries and wages increased by 59 dominated by properties priced at RM250,000 and percent from 2010 to 2018, the cumulative house prices above. As a result, newly launched housing units priced increased by 87 percent.58 FIGURE 70 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) 58 Bank for International Settlement, Department of Statistics Malaysia (DOSM), and National Property Information Center (NAPIC), 2019. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 81 PART TWO - Making Ends Meet Access to affordable housing varies significantly by location and household circumstances While the PIR is one of the most commonly used lenders to determine the maximum mortgage amount measures of housing affordability, it omits for which a household would be eligible to borrow numerous household- and location-specific factors for the purchase of a home. The capacity-to-pay for a that determine affordability. Most notably, the PIR home loan (and the resulting affordable home price) is methodology does not account for the presence and then assessed against the availability of housing supply quality of surrounding infrastructure and amenities, at the relevant affordable price points in Kuala Lumpur relevant costs associated with buying and owning a and Petaling District, as tracked by Urbanmetry.61 property, as well as the availability of housing supply relative to demand. As such, alternative approaches have been developed to address some of weaknesses Lower-income households of the PIR methodology (see Box 10 on alternative methods for assessing housing affordability). In can only afford to devote addition, assessments of housing affordability should a smaller share of their also take into account household-specific factors. Most prominently, lower-income households can typically income to housing because only afford to devote a smaller share of their income to other necessities, such as housing because other necessities, such as food, take up a larger share of the family budget than is the case food, take up a larger share for richer households (see Box 11). of the family budget. To address some of the limitations of the PIR methodology, the World Bank developed a housing Based on the housing affordability model, a affordability model59 that measures households’ household with monthly income of RM5,000 or capacity to pay for a mortgage across different more can afford a home valued up to approximately income levels and compares that to the supply of RM134,000, and a household with income of housing at the affordable price points. The model is RM10,000 or more can afford a home valued up applied in two specific housing markets—Kuala Lumpur to RM500,000. The relatively conservative value of and Petaling District in Selangor state—to analyze housing that may be considered as affordable for the housing affordability. Kuala Lumpur and Petaling District lowest income households (RM5,000 and below) reflects were chosen for comparative analysis because of their the challenge this segment generally faces in accessing similarity in population size and income levels. This housing finance given their low and sometimes volatile permits high-resolution analysis to highlight the areas of income, the high cost of non-housing necessities housing under-supply or over-supply at different price relative to their income, and their small savings buffer points and thus, the severity of housing unaffordability (see Figure 71). Mortgage lenders generally are more for different income levels. The affordability model comfortable in lending to households with incomes uses a market-based approach. The starting point of greater than RM5,000 as there is evidence that this this model is the determination of the capacity to pay, segment is more likely to be able to adjust to adverse which is measured by the DSR60 traditionally used by developments in their financial conditions.62 59 As described in Table 9, the housing affordability measurements used in Australia, Canada and the USA are more precise by assessing the affordability of rental and owner-occupied housing costs using estimated payment capacity by specific geographic areas and income segments. Unfortunately, reliable data on the supply and cost of rental housing in Malaysia is extremely limited, and too limited to include rental housing in the World Bank affordability model developed for this analysis. See Appendix for details on the World Bank’s affordability model. 60 The debt service ratio is the total amount debt repayment obligations (including principal, interest, fees) per month expressed as a percentage of monthly household income. Lenders can pull data on consumers’ existing debt from the Credit Bureau Malaysia report, with the exception of debt obtained via informal lending channels or family networks. 61 Urbanmetry is a big data housing research firm that combines public-sourced data with geo-location information through its proprietary algorithms, satellite imagery, and other tools that allow the measurement of housing affordability against the availability of supply-side data by pricing segments and by micro-market levels. 62 BNM (2019), page 11. 82 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet BOX 10 How is housing affordability assessed elsewhere? Government agencies in many other countries use the proportion of median pre-tax household income alternative measures of housing affordability that needed to pay for mortgage payments, property taxes, provide a more complete picture than the median and utilities based on the prevailing market price of a multiple index. Canada’s Mortgage and Housing home, with the costs differentiated by geographic area Corporation uses a two-stage indicator to identify and type of dwelling. In Australia, the 30:40 standard households in need of housing assistance. Their core identifies a housing burden when a household in the housing need indicator determines need by assessing bottom 40 percent of the income distribution is paying if a house is in adequate condition, suitable in size and if more than 30 percent of its income on housing. The U.S. monthly housing-related costs are more than 30 percent Department of Housing and Urban Development sets a of the household’s pre-tax income. The Royal Bank of benchmark for rental affordability as the ratio between Canada’s Housing Affordability Measure calculates the area Fair Market Rent (see below) to 30 percent of affordability of housing for new buyers by assessing the median household income of a specific area. TABLE 9 Alternative housing affordability measurements/indicators Housing Affordability Index Proponent of Index Description Core Housing Need Canada Mortgage Housing Household is considered in core housing need from Corporation the affordability perspective if (i) rental plus utilities (for renters) or (ii) mortgage plus utilities, property taxes and condo fees (for owners) cost 30 percent or more of the household’s pre-tax income. Estimate number of households in core housing need on an annual basis. Housing Affordability for Royal Bank of Canada Estimates affordability for new buyers by calculating the New Buyers Index proportion of median pre-tax household income needed to service the cost of mortgage payments, property taxes, and utilities based on the prevailing market price for single-family homes and condo apartments, disaggregated by cities or metropolitan areas, as well as for an overall aggregate of housing types in the market. Index is calculated on quarterly basis. 30:40 Standard Australian Housing and Identifies households as being in housing affordability Urban Research Institute stress when the household has an income level in the bottom 40 percent of Australia’s income distribution and is paying more than 30 percent of its income in housing costs. The 30:40 standard recognizes that higher income households can exceed the 30 percent threshold without experiencing financial stress. Rental Affordability U.S. Department of Housing Calculates the Fair Market Rent (FMR) as the 40th Support and Urban Development percentile of gross rents of recent movers in an area and the Area Median Income (AMI). The ratio of the FMR to 30 percent of the AMI is an overall indicator of housing affordability, and as a general principle rent subsidies are equal to the difference between the FMR and 30 percent of that household’s monthly income (adjusted for household composition). Source: World Bank MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 83 PART TWO - Making Ends Meet FIGURE 71 Lower-income households face a relatively more conservative value of affordable housing Maximum Affordable Home Value, RM 1,029,548 495,945 297,911 134,233 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 Monthly Income (RM) Source: BNM, World Bank staff calculations The analysis conducted for Kuala Lumpur and to RM10,000 have moderate difficulty purchasing an Petaling District shows that households with affordable home in line with their incomes. Households monthly incomes less than RM5,000 experience at this income level can afford to purchase homes in the severe housing unaffordability (see Figure 72 range of RM230,000 to RM500,000 and the supply of and Figure 73). Estimation using the World Bank homes in this price range relative to effective demand affordability model indicates that these households varies significantly between Petaling District and Kuala can afford to buy a house costing up to RM134,000. Lumpur. The supply and demand balance in this price The available housing supply at the price range of RM range is also affected by competition from households 134,000 and below is less than the number of households earning more than RM10,000 per month who can afford in the RM3,000-5,000 income bracket, such that an homes costing RM500,000 or more but opt to purchase estimated 56 percent and 63 percent of households in less expensive properties. Finally, housing affordability this income segment in Kuala Lumpur and in Petaling is not an issue for households with income of RM10,000 District experience severe housing unaffordability, or more as there is an ample supply of homes within having no access to housing within their capacity-to-pay. their capacity-to-pay. Meanwhile, households with incomes from RM6,000 FIGURE 72 FIGURE 73 There is an under-supply of housing units that cater ...as well as in the Petaling District in Selangor to 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 84 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet BOX 11 Lack of affordable housing for B20, B21-B40 and M40 households Housing unaffordability was a common concern the house I am living in, she paid for it.” across all regions and ethnic groups in the joint [Klang Valley, Chinese, M40] World Bank-University of Malaya qualitative study. Participants from Klang Valley emphasized the “In Klang it is possible for us to buy a house? Is it price and quality of housing today as compared to possible to buy a house that costs 200,000? Will the past, when their parents could afford decent-sized we get? [Klang Valley, Indian, M40] homes without feeling financially burdened. Over the years, home prices in both urban and rural areas have “We barely have enough to eat, how can we buy a gone up beyond the financial capabilities of lower- and house?” [Terengganu, All participants, B20] middle-income households, as illustrated below. “Our money is not enough to buy a house. In the “My mother was a single parent. She was a civil past, the houses were decent. Now they are smaller servant, a teacher, and was able to afford to buy a and more expensive. Our children don’t live with house on her salary. A nice house. A big house. I us. If they did, we wouldn’t fit! mean, a good corner lot. Too big for us. But no, I [Klang Valley, Bumiputera, B21-B40] cannot afford to buy such a house anymore. Even MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 85 PART TWO - Making Ends Meet Government housing policies have diverse impacts on housing supply and affordability National, state and local governments have been with monthly income of RM15,000 can afford to actively engaged in addressing the affordable purchase higher-priced homes of up to RM1 million but housing needs of the people. In the National Housing sometimes choose the Residensi Wilayah housing at Policy (2018–2025), the government has confirmed its RM300,000 due to its value-for-money and favorable commitment to ensuring sufficient safe and affordable characteristics such as central location and decent housing for its population, and especially those in the home size. Households with incomes from RM6,000 B40 and M40. A review of the public housing schemes to RM10,000 whose ability to pay is in line with the reveals that there is a total of 16 schemes63 both on the Residensi Wilayah home prices are often crowded out supply and demand side. The following assessment of by higher-income households with stronger capacity- two of those government housing programs, Residensi to-pay and better access to mortgage financing. Wilayah (formerly Rumah Mampu Milik Wilayah Hence, the Residensi Wilayah housing scheme could be Persekutuan, RUMAWIP) and Rumah Selangorku,64 more effective in addressing affordable housing needs shows that one way that government policies affect if the eligibility criteria were adjusted to cater to those housing affordability is in the manner that developers with incomes of RM10,000 or less, and if the scheme choose to build new housing at different price points, placed tighter limits on the use of Residensi Wilayah in part in response to these policies. for investment purposes instead of as the recipient’s primary residence. While the Residensi Wilayah scheme has contributed to the supply of housing units to the Kuala Lumpur The Rumah Selangorku scheme exacerbates the market in the price range of RM300,000 and below, under-supply situation in the Petaling District. it also attracts higher-income households to take Under this scheme, 20–50 percent of residential advantage of scheme. Higher-income households units in a new development are required to be priced FIGURE 74 FIGURE 75 Under the Rumah Selangorku scheme, developers The Residensi Wilayah and Rumah Selangorku overcompensate by building high-end units to policies have partly contributed to the divergent subsidize for the construction of more affordable residential market pricing trends units 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 63 These include six schemes on the supply side (Projek Perumahan Rakyat (PPR), Perumahan Penjawat Awam Malaysia (PPAM), MyHome, Perumahan Rakyat 1Malaysia (PR1MA), Rumah Selangorku, and Residensi Wilayah; five on the demand-side (BNM Fund for Affordable Homes, Skim Pinjaman Perumahan, My First Home Scheme, Youth Housing Scheme, and MyDeposit) to support home ownership; and five rental or rent-to-own schemes (PPR Disewa, Rent-to-own PPR, Program Rumah Transit, Skim Smart-Sewa Selangor, and Rent-to-own PR1MA). 64 See Appendix for explanation on Residensi Wilayah and Rumah Selangorku. 86 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet at less than RM250,000 while the remaining units The Residensi Wilayah and Rumah Selangorku policies may be priced at market levels. This has resulted in have contributed to the residential housing market the increasing number of high-end units compared price trends. The housing over-supply in Kuala Lumpur to lower-priced units in 2019, as developers is expected to worsen by 2023, with Residensi Wilayah overcompensate by building high-end units first contributing 17 percent of total incoming housing units. to subsidize the subsequent construction of lower- As a result, the housing over-supply (estimated total end units in the Petaling market65 (see Figure 74). It housing units compared to number of households) has is possible that developers will persist in building already led to a stagnant and slightly declining home more high-end than affordable housing units or shift price trend for Kuala Lumpur as shown in Figure 75. their developments elsewhere if they continue to feel On the other hand, the already-tight housing supply constrained by the Rumah Selangorku policy. Hence, conditions in Petaling are likely exacerbated by the the scheme has created more homes in the higher- Rumah Selangorku policy, which has created more income segment in Petaling District. homes in the higher-income segment and resulted in continued increases in housing prices since 2014. Addressing Malaysia’s cost of living challenge This analysis identifies four main factors Malaysian are affected more by higher-than-average food price households face in trying to make ends meet. These inflation, the impact of inflation is small relative to other include consumer price inflation (especially differentials factors such as spatial differences, lagging income linked to income levels or geographic location), growth, subpar financial well-being and rising housing inadequate income, poor financial well-being, and a costs. shortage of affordable housing. These factors overlap to some degree and are by no means exhaustive. A large proportion of Malaysians feel that their Broadly, the findings show that the cost of living income is insufficient, and the data suggest that affects individual households differently, depending on this is particularly relevant for lower-income various factors including demographics, location and households and younger workers who have employment. This also helps identify practical policy experienced slower income growth in recent years. measures to address economic hardships related to Findings from the GWP show that both urban and rural perceptions of the increasing cost of living. Malaysian households feel growing hardship in their life conditions. Data from the DOSM’s household income The cost of living varies widely by location, most surveys suggest that lower-income households have notably for housing, but also for food, clothing, experienced rapid growth in income between 2009 services and other necessities. It is not unusual for to 2014. However, income growth for this segment has an item to cost almost twice as much in one state as in slowed considerably and the absolute income gaps another. Higher living costs may be offset somewhat, have widened, which could contribute to perceptions but not completely, by higher incomes in that area. of being “left behind.” Meanwhile, despite steadily Recent initiatives such as BNM’s living wage estimation increasing educational attainment, income growth and the Belanjawanku efforts by SWRC and EPF among recent entrants to the labor force has grown represent valuable steps toward recognizing, measuring only marginally over the past decade, especially relative and monitoring the magnitude of spatial differentials in to older age cohorts. Higher income growth rates and prices. This could be supported by taking advantage higher “base” incomes for older workers combine of the price data that are already collected for the CPI to amplify both relative and absolute income gaps to develop an official spatial price index and using it between younger and older Malaysians, which could be to inform public and private decisions, as is done in another tangible measure of comparative well-being. other countries. In contrast, with the notable exception Qualitative research points to significant increases in of housing costs, consumer price inflation (the increase the number of people working multiple jobs and the of prices over time) has not been a major contributor number of household members who work. The available to rising living costs. Although low-income households survey data indicates only modest increases, which may 65 These are housing units priced at RM250,000 and below that have lower expected margins. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 87 PART TWO - Making Ends Meet be an artefact of the survey methodology and warrants The conclusion that housing in Malaysia is seriously further investigation and perhaps additional data unaffordable might be an oversimplification collection. of the reality of the market as low- to middle- income households face a higher degree of housing Certain segments of the population are doing unaffordability. The housing affordability model worse than others in terms of financial well- developed for this analysis has found that housing being, either because of high indebtedness, lack affordability is not linear but changes as households of financial knowledge, or poor financial and have less or more income. Insufficient access to retirement planning. For lower-income households, affordable housing is particularly severe among borrowing provides temporary relief to compensate households earning below RM5,000 in Kuala Lumpur for income shortages in the near-term. Increasing and in Petaling District, with an estimated 55 and 63 shares of debt for credit cards, personal financing, and percent of households, respectively, without access motor vehicle loans indicates the growing use of debt to housing within their capacity-to-pay. Households for consumption rather than for wealth accumulation in the RM6,000 to RM10,000 income bracket can over time. Consequently, lower-income households, as typically afford to purchase a home in the RM230,000 well as civil servants, have committed higher shares of to RM500,000 price range, but availability of such their incomes to debt servicing, further reducing their homes is very uneven. The market for such homes that income available to meet other living costs. In addition, are affordable for this income group is much tighter in most Malaysian households, particularly lower-income Petaling District than in Kuala Lumpur, given Petaling’s households, do not have adequate financial savings growing under-supply and increase in prices. The to cushion economic shocks or provide for their analysis also shows that housing affordability is not retirement. The lack of financial knowledge and literacy an issue for households with incomes greater than is widespread regardless of income and age, and RM10,000 as they have ample choice of homes within contributes to the deterioration of financial well-being their capacity-to-pay. among Malaysians. Alleviating cost of living pressures demands a mix of short-term measures as well as medium- and long-term structural reforms Recognizing the widespread concern about the cost Affairs (KPDNHEP). Various government ministries of living and its impact on Malaysians’ well-being, and agencies are engaged in addressing cost of living the government has taken several policy measures concerns, including the Ministry of Economic Affairs, to improve Malaysians’ living standards. Previously, MOF, KPDNHEP, BNM, DOSM and others. many of the measures designed to address the cost of living were relatively ad hoc, fragmented and short-term NACCOL has played an important role in in nature. Policies implemented by the government addressing various cost of living issues through have included subsidies, administrative price controls, initiatives in food, housing, and transportation construction of affordable housing, concessional sectors. On food, the Festive Season Price Control mortgage financing, and credit counseling. To have a Scheme (Skim Kawalan Harga Musim Perayaan) has more holistic and organized approach to mitigate cost been improved with a longer enforcement period of living pressures, the government has established and additional controlled items during festivities. The the National Cost of Living Action Council (NACCOL), Food Bank Malaysia and Food Bank Siswa programs with the objective of identifying and analyzing a wide- were also established to provide direct food resources ranging of issues and challenges relevant to addressing to low-income households and university students in the cost of living, coming up with policy decisions, and need. On housing, NACCOL has worked with BNM to coordinating implementation strategies across relevant introduce the Fund for Affordable Homes worth RM1 ministries and agencies. NACCOL is chaired by the billion to provide loans for lower-income households to Deputy Prime Minister and the council’s secretariat purchase housing priced at RM300,000 and below, at is the Ministry of Domestic Trade and Consumer a maximum loan term of 40 years and financing rate 88 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet of 3.5 percent. Other initiatives for affordable housing The broad guiding principle for short-term measures include the introduction of Rent-to-Own and Rental should be actions that can be implemented fairly and Saving programs by the Ministry of Housing and quickly within 1-2 years. The objectives for short-term Local Government. On transportation, the Ministry measures should be two-fold: first to provide solutions of Transport has implemented the RM50 and RM100 to alleviate hardships among lower-income households unlimited travel pass for RapidKL users, as well as 20 and increase awareness on these measures and second, percent discount for rail users to encourage public to improve the current set of data and information transport use and reduce the costs of transportation that would help inform policy decisions. Meanwhile, among Malaysians. medium- to long-term policies are those that tend to require strengthening coordination between ministries As factors affecting households’ living standards and agencies, for which the outcomes are observed are wide-ranging and tend to overlap to some over a longer period of time. These should aim to degree, a more structured approach to address address structural reforms and to increase real incomes the cost of living and improve well-being among of low- and middle-income households (see Table 10 Malaysians can be organized into short-term for a summary of policy recommendations). measures and medium- to long-term policies. Short-term measures need to focus on alleviating hardships among lower-income households Continuation of the ongoing reevaluation of price in order to foster competition, especially in production controls for selected commodities is advisable, with and distribution. Similarly, measures to uncover and a view to identifying and resolving the underlying punish abuse of market dominance and anti-competitive causes of undue price increases. Administrative price practices such as illegal price fixing would also help. controls and other measures that limit price increases are relatively blunt instruments that may provide In addition, the reevaluation of price controls should immediate relief but are difficult to sustain in the long be aligned with the B40 consumption patterns to run and run the risk of creating bigger and deeper further reduce the cost of living pressures through challenges. If mechanisms to limit price discovery price controls on frequently purchased items. The become entrenched, producers and traders may creation and timely reporting of an official spatial price withdraw from the market if they cannot make a profit, index (SPI) would help address the current information while enforcement costs for curbing the growth of black gap about the large geographic differences in the cost markets are likely to increase. The analysis in this MEM of living. An SPI that tracks the cost of a given reference has shown that overall price inflation is not currently a basket at different locations in the country will be useful major contributor to the high cost of living in Malaysia. for government policy making as well as for private employers. This would be in addition to a cost of living For those commodities where sharp price increases index that allows the basket composition to vary. are an issue, a focus on enhamcing market competition is appropriate, as in the recent Easing the income shortfalls among low- and examination of supply chains for certain fresh food middle-income households in the near-term could items by the Malaysia Competition Commission entail deepening the existing social safety nets (MyCC). If barriers prevent potential competitors from and extending the living wage analysis. Stylized entering the market, producers or middlemen have simulations by the World Bank66 suggest that while the low incentives to compete on prices and this ultimately design of Bantuan Sara Hidup channels most of the affects consumers. To this end, tackling anticompetitive benefits to the households with the lowest incomes, practices in key sectors is critical. However, this should the depth of the program is quite limited (see Figure be accompanied by measures to lift regulatory barriers 76), resulting in only very modest reductions in income 66 See World Bank (2018b) Malaysia Economic Monitor – Realizing Human Potential. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 89 PART TWO - Making Ends Meet FIGURE 76 FIGURE 77 Malaysia’s social safety net system remains Simulations suggest the Bantuan Sara Hidup relatively underdeveloped in terms of depth could achieve a wider coverage and be more progressive Percentage of Potential Percentage of Per Capita GDP Estimated Percentage of Estimated Percentage of Bene ciaries Population Receiving Bene ts Program Bene ts Received 35 70 100 30 Breadth of Social Assistance (LHS) Depth of Social Assistance (RHS) 30 60 25 80 25 50 20 20 40 60 15 15 30 40 10 10 20 20 5 10 5 0 0 0 0 Poorest 2 3 4 5 6 7 8 9 Richest Mongolia Georgia Indonesia Malaysia Sri Lanka Cambodia Philippines Singapore Pakistan Thailand Armenia Azerbaijan Nepal Vietnam India China Uzbekistan Kyrgyz Republic Korea, Republic Tajikistan Lao PDR Bangladesh Japan Maldives Bhutan 10% 10% Coverage Bene t Incidence Source: Asian Development Bank Source: World Bank staff calculations based on DOSM data poverty and inequality. While BSH’s impact could be financial management and to be accountable for improved foremost by increasing the total outlay and their financial decisions is an important first step benefits, incorporating household size and location into towards improving financial well-being. Generating BSH’s eligibility criteria, in addition to benefit formulas, awareness of financial planning and the role of AKPK, would also enhance its impact. Figure 77 illustrates a providing easier access to resources and tools could stylized simulation of BSH’s performance using the help for financial planning, and coming up with a Household Income and Expenditure Survey data, with standardized measure to gauge financial literacy could 76.6 percent of the program benefits estimated to be help to improve financial knowledge especially among received by B40 households, 20.8 percent by M40 and lower-income households, civil servants, and young less than 3.0 percent by T20. adults. AKPK’s role as the national credit counseling agency providing financial advisory services throughout Short-term measures to strengthen the social different milestones in life, including guidance on safety net could also encompass a replacement student loans, could be more actively disseminated of fuel subsidies by a transportation allowance to the public.67 Official government channels and that is income-targeted but independent of car or social media are effective tools for outreach and motorcycle ownership. This could be complemented communication to all Malaysians on good financial by a strengthening of core social welfare programs practices and behavior. Continuing and strengthening implemented by the Department of Social Welfare, current public and private financial literacy initiatives, perhaps by reallocating resources from programs for example those listed in Appendix 4, is important whose benefits are regressively distributed. Recent especially in reaching vulnerable groups such as single work by BNM on living wages and EPF/SWRC on mothers, people with disabilities, youth and migrant reference budgets should continue to be extended workers. to other regions in Malaysia and utilized as a wage bargaining framework according to specific household Creating a repository of financial planning tools characteristics and locations. which are available online and in local languages could help lower-income households, civil servants Raising awareness among citizens on their rights and young adults make the first step in better and responsibilities in personal and household planning their financial well-being.68 Concurrently, 67 A survey conducted by the Malaysia Financial Planning Corporation suggests that only 55.8 percent of the respondents are aware of the role of AKPK. “Financial Capability and Utilization of Financial Advisory Services in Malaysia” – Report on National Findings 2018 https://mfpc.org.my/wp-content/uploads/2018/04/ CMDFreport2018.pdf 68 At the moment, there are several online tools and apps, including in AKPK’s website, available in English and Bahasa Malaysia. 90 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet assessment of financial literacy levels over time through better affordability measurement and evidence- regular implementation of standardized measure of based housing supply data and analytics. Adopting financial literacy such as BNM’s Financial Capability a more precise housing affordability measurement, as and Inclusion Demand Side Survey could help policy has been done in this study, is useful for identifying makers to identify target groups, prioritize initiatives, the population subgroups and locations that face the and gauge the effectiveness of existing financial biggest housing affordability challenges. This could be literacy program.69 A World Bank meta-analysis of 126 further enhanced by harnessing supply-side data that impact evaluations of financial education initiatives include both existing and incoming housing stocks by notes that more successful interventions depend on price segments, population demographics, size and having higher intensity financial literacy programs and growth pattern, and mortgage market dynamics for a offering financial education at teachable moments, more accurate representation of housing affordability. such as when buying a car or a house (Kaiser and Strengthening the residential rental market could Menkhoff 2018). Bruhn et al. (2014) also highlight the offer a means to alleviate the issue in the short run as importance of having a stable and durable system such households build their balance sheets and increase as the repository, which could provide greater benefits their income. There should be increased support to lower income households, civil servants and young for private and public rental housing development, adults in the long run. Their findings suggest that rent-to-own schemes, and other affordable formal working adults often have little interest and experience housing options for at-risk populations in both urban difficulty in accessing financial literacy interventions and rural areas facing acute housing price pressures. and that the benefits of financial education courses are As such, the enactment of the Rental Tenancy Act minimal for shorter interventions. and the establishment of a Tribunal Act coupled with the development of a rental database and rental In the short-term, policies to address the housing affordability indicators would facilitate current efforts affordability gap could be sharpened through to provide affordable housing for all. Over the long run, greater coordination across agencies and implementation of structural reforms could help lift real incomes In a competitive market economy, prices relay should consider income relief to the most affected valuable information about scarcity, thus price parties, as opposed to broad subsidies or price ceilings policies should respect price signals. Guiding that can be fiscally costly, distort markets and encourage principles for deciding when to intervene when price overconsumption of the item in question. Therefore, spikes occur include the reason for the price spike progressive shifts to protect the incomes of low- and (exogenous supply disruption, anti-competitive middle-income households will be more useful than behavior, etc.), the expected duration of the price persistent price interventions in the long run. increase, and the impact on public well-being. Fostering competition in production and distribution in Over the long term, sustainable household income key sectors, not only for domestic producers but also growth needs to be grounded in accelerating labor with regard to the entry of imported goods, will require productivity, realigning investment and hiring careful investigation and vigilance. Price interventions incentives, and enhancing the overall social safety by the government should be kept to a minimum to net framework. Wage or salary increases solely ensure sustainable market supply in the long run. When indexed to the cost of living or raising minimum wages introducing new price measures, interventions ought to without concomitant labor productivity increases be time-bound and range-limited to manage fiscal risks are not likely to be sustainable and may instead spur over time. Interventions to address increasing prices further consumer price inflation.70 Thus, acceleration 69 OECD has produced a Toolkit for Measuring Financial Literacy and Financial Inclusion, which could be adopted for monitoring financial literacy. https://www. oecd.org/financial/education/2018-INFE-FinLit-Measurement-Toolkit.pdf 70 It is worth noting that minimum wages are a relatively blunt and inefficient way to improve the welfare of low-income households. This is because not all minimum wage workers are in low-income households (and not all workers in low-income households make the minimum wage) and because minimum wages that are set too high can cause unemployment to increase. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 91 PART TWO - Making Ends Meet of productivity growth is needed to sustainably supporting more coordinated and consistent oversight boost Malaysians’ earnings potential in the future. arrangements for credit providers; and (iv) facilitating The realignment of investment and hiring incentives transparent and comparable disclosure of interest rates towards economic upgrading and creation of high- and fees are all promising mechanisms to strengthen quality jobs could also increase incomes for lower- consumer protection. Consumers’ associations have income households and younger workers. offered detailed recommendations for the new act that could be relevant to the prevention of over- Sustainable household income growth requires indebtedness, including taking a broader view of developing and improving human capital, consumer credit to address actors outside their particularly those directly related to employment current regulatory perimeter, such as pawnbrokers, and income outcomes, through the expansion of who are currently licensed under the Housing Ministry, early childhood education and promotion of life- regulating marketing practices (truth in advertising), long learning and upskilling among adult workers. cooling off periods for all types of loans, encouraging Consolidation and enhancement of the various social early loan repayment and prohibiting calculation of assistance and subsidy programs, such as those under interest rates on a flat basis. the purview of the Department of Social Welfare, the Ministry of Domestic Trade and Consumer Affairs and Current housing policies should prioritize low- the Ministry of Agriculture, toward streamlined design and middle-income households and strengthen and implementation can be effective for improving the coordination among various stakeholders to income distribution and protecting the most vulnerable ensure adequate supply of affordable housing. The in Malaysia. National Housing Policy should be finetuned to provide support for households in the low- and middle-income Financial literacy and well-being could be raised groups, through increased focus on research, policy, through clear implementation and regular budget and operational support to address severe monitoring and evaluation of the National unaffordability. This can be complemented by ongoing Strategy for Financial Literacy 2019–2023 monitoring and analysis of the impact of different (NSFL), as well as increased financial incentives policies on the constantly shifting real estate market for savings behavior. Recognizing the large room for so that policy makers can adjust housing policies and improvement in financial literacy among Malaysians, programs as necessary. Policies could improve the the government has launched the NSFL with the aim planning of affordable housing community design of elevating the financial well-being across income with energy-efficient building materials and family- group, age group, gender, and region. It sets out five friendly locations. Housing is an important component priority areas encompassing all stages of the life-cycle. of the urban center, and is intimately intertwined with One way of building upon the NSFL is to lay out a time- transportation networks, social infrastructure such as bound roadmap on the implementation and regular health and education facilities, community services, monitoring and evaluation of measures in the strategy. employment centers and access to markets and To address low savings among Malaysians, evidence- information. As such, integrating housing development based behavioral interventions and financial incentives as part of urban and regional planning should help such as matching pension contributions could ensure the balance of supply and demand of affordable encourage higher retirement savings among lower- housing—either for ownership or rental—to the income households, civil servants, and young adults. targeted population. Thus, there is a need for greater coordination across ministries, agencies as well as state Efforts to increase financial well-being would and local governments in designing overall housing also need to be complemented by measures to policy and planning to ensure an adequate supply strengthen consumer protection and encourage of affordable housing, particularly for the low- and more responsible behavior by both banks and middle-income households. non-bank financial institutions. This would include strengthening of the legal and regulatory framework for consumer protection and responsible lending, as well as ensuring an efficient and humane insolvency system and non-judicial alternatives. Recent announcements by BNM to improve the Consumer Credit Act, including elements such as (i) promoting prudent and responsible lending practices among credit providers; (ii) safeguarding the wellbeing of consumers; (iii) 92 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet TABLE 10 Summary of policy recommendations Medium- and long-term structural Short-term measures to alleviate reforms to boost market competition cost of living pressures and increase incomes i. Tackling anti-competitive practices in i. Fostering competition in production key sectors. and distribution in key sectors, by ii. Reevaluating administrative price reducing barriers to entry. controls, focusing on aligning them with ii. Minimizing distortion of price Increasing B40 consumption patterns. interventions to ensure sustainable prices market supply. and large iii. Developing and regularly reporting a geographic spatial price index in addition to a cost iii. Ensuring price measures are time- of living index. bound and range-limited to manage price 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 • Improving the targeting of Bantuan basis for boosting earnings potential. Sara Hidup by appropriately taking ii. Realigning investment and hiring into account household size and incentives towards economic upgrading location for eligibility and benefits. and high-quality job creation. Inadequate • Increasing the total outlay for core iii. Building human capital through income among social welfare programs. expansion of early childhood education lower-income • Shifting from fuel subsidies to a and promotion of life-long learning and households targeted transportation allowance. upskilling. and younger ii. Enabling greater labor force iv. Consolidating and enhancing the overall workers participation by parents, both women social safety net framework, including and men, through improved child care the various subsidy programs. services for B40 families. iii. Extending living wage and Belanjawanku analysis and providing a framework to inform wage bargaining. i. Raising awareness among citizens i. Strengthening consumer protection and on their rights and responsibilities encouraging more responsible behavior in personal and household financial by both banks and non-bank financial management and to be accountable for institutions. Poor financial their financial decisions. ii. Laying out a time-bound roadmap well-being ii. Creating a repository of financial on the implementation and regular and higher planning tools which are available online monitoring and evaluation of measures indebtedness and in local languages. in the National Strategy for Financial among iii. Assessing financial literacy periodically Literacy 2019-2023. lower-income through regular implementation of iii. Increasing financial incentives, including households standardized measure of financial through matching contributions and as well as low literacy, in collaboration with the private the use of evidence-based behavioral savings among sector. interventions to encourage retirement Malaysians savings. 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 measurement, with respect to location, households in current housing policies supply and demand. and programs. High degree of housing ii. Harnessing supply-side market data ii. Ongoing monitoring and analysis of unaffordability for a more accurate representation of the impact of different policies on the among low- housing affordability. housing market. and middle- iii. Strengthening the rental market: iii. Strengthening coordination between income • Enacting the Rental Tenancy Act and ministries, agencies as well as state and households establishing a Tenancy Tribunal. local governments in designing overall housing policy and planning. • Developing a rental database and rental affordability indicators. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 93 94 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet Appendices Appendix 1: World Bank housing affordability analysis Calculations for World Bank housing capacity-to-pay: percent for higher-income segments. This translates to a DSR range of 27 percent to 43 percent based • Housing Capacity-to-Pay or the Monthly Housing on Gross HH income. This is also comparable Loan Repayment Obligation is calculated as: (Net with the BNM weighted average DSR71 of 34 to HH income x DSR) – Other Debt Obligations. 40 percent for all Malaysian consumers across all income segments. • Net Household Income: Gross HH income less all required deductions for Employees Provident • Other Debt Obligations: Other Debt Obligations Fund (EPF), Social Security Organization (SOSCO), are comprised of personal loan, credit card loan, Employment Insurance System (EIS) and Income Tax motor vehicle loan, securities loan and others. as per the prevalent regulations and guidelines laid To calculate Other Debt Obligations, BNM’s out for the different deductions. composition of household debt by purpose and income group72 was used. For instance, for a • Level of Debt Service Ratio: The level of DSR household with income segment of monthly income applied by the World Bank is aligned with the of RM 3,000, Other Debt Obligations account 65 international DSR benchmarks and is scaled from percent of Total Debt Obligations, thus resulting in a conservative level of DSR on Net Household Housing Loan Repayment Obligations accounting Income for lower-income segments starting at 30 for 35 percent of the Total Debt Obligations. percent to a more liberal level of DSR at a max of 60 Appendix 2: Residensi Wilayah Residensi Wilayah, formerly known as RUMAWIP a total of 80,000 units of affordable homes by the or Rumah Mampu Milik Wilayah Persekutuan, is a year 2020, of which 50,000 units are to be developed government affordable housing scheme that caters in KL, 20,000 units in Putrajaya and 10,000 units in to the people working or living in the three federal Labuan. Residensi Wilayah units are priced at less than territories of Putrajaya, Kuala Lumpur and Labuan. RM300,000 and are only available for first-time home Under the Residensi Wilayah program, developers are buyers with income below RM10,000 per month for allowed a Floor Area Ratio (FAR) above the standard single individuals or RM15,000 per month for married regulated densification level as an incentive to build couples. In addition, the Residensi Wilayah properties affordable housing. By being allowed to build at a are restricted from being sold during the first ten years higher density, developers can offset the loss of selling but can be rented out to others. units at a lower price point. The scheme aims to build 71 Weighted average DSR was calculated by the authors, based on the BNM (2016), Chart 9. 72 BNM (2017), Chart 7. MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 95 PART TWO - Making Ends Meet Appendix 3: Rumah Selangorku The Selangor State Government launched the Rumah first-time home buyers, whereby households with Selangorku scheme in 2014 with the aim of increasing monthly income less than RM3,000 are eligible for Type the supply of housing priced at less than RM250,000. A homes with prices of RM42,000 and households with Under this inclusionary housing policy, 20 to 50 percent income between RM3,000 and RM10,000 are eligible of residential units in a new development are required for Types B, C, and D homes with prices of RM250,000 to be priced at less than RM250,000 while the remaining or less. Buyers must be primary residents for at least units may be priced at market levels. See Table 11 for five years before a resale can take place. more details. Rumah Selangorku is only available for TABLE 11 Requirements for developers to build affordable housing units under the Rumah Selangorku scheme Development zone Provision for Rumah Selangorku based on total development area (Percentage) 2-5 acres 5-10 acres 10-20 acres 20-50 acres >50 acres Zone 1 20% 30% 40% 50% 50% Zone 2 - 20% 40% 40% 50% Zone 3 - - 40% 40% 50% Source: Lembaga Perumahan dan Hartanah Selangor (LPHS) Appendix 4: Summary of financial literacy initiatives in Malaysia Organization Year Programs/Services/Tools Financial Counseling • Offers one-to-one counseling and advice on good financial management habits, including budgeting, money management, and Agensi Kaunseling dan credit-related matters 2006 Pengurusan Kredit Debt Management Programme (DMP) • Offers consultation and personalized debt repayment plan for individuals experiencing financial distress “My Money and Me” Financial Management Workshop • Target groups: youths, civil servants, lower-income households, undergraduates, and employees (special workshops) • Workshop frequency: 80-90 sessions per year, with 200-400 participants per session (full-day workshop) Malaysian Financial 2008 Planning Council • In collaboration with Perbadanan Insurans Deposit Malaysia (PIDM), Federation of Investment Managers Malaysia (FIMM), Lembaga Hasil Dalam Negeri (LHDN), Social Security Organization (SOCSO/ PERKESO), Securities Commission Malaysia (SC), Agensi Kaunseling dan Pengurusan Kredit (AKPK), Permodalan Nasional Berhad (PNB), and Employees Provident Fund (EPF) 96 MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 PART TWO - Making Ends Meet Organization Year Programs/Services/Tools Financial Literacy Programme • Aims to reduce poverty through capacity building and equipping poor Malaysian Care 2010 people with basic financial knowledge – over 800 participants in Klang Valley have undergone training; 100 have started small businesses/ projects “My Finance Coach” • A financial literacy program aimed at improving financial literacy among students and young people through promotion of good money Allianz Malaysia 2012 management habits • Reaching 102 schools and organizations with over 10,000 students in 2017 The Edge Education “Money & Me: Youth Financial Empowerment Programme” Foundation (in • School-based program, emphasis on saving and good spending habits 2014 collaboration with Citi Foundation) • 13 participating schools in Klang Valley “Cha-Ching Live”, “Karnival Cha-Ching”, “Duit Right” Prudential Assurance • For 7-15 year-olds Malaysia (Prudential 2014 • Interactive financial education program for 7-15 year-olds, available Corporation Asia and Prudence Foundation) offline and online (learning activities, TV episodes, and games) • Main focus: “Earn, Save, Spend, and Donate” “InvestSmart” Securities Commission • Focuses on investment education; offers various programs ranging from 2014 Malaysia InvestSmart Fest, SC-in-the-Community, seminars, mobile application, and “Jump2Invest” educational game Online Publications Financial Literacy for 2015 • Provide the latest information on personal finance, economics, and Youths fintech industry for youths. “Karnival Kewangan” • The Financial Carnival has been held in Kuala Lumpur, Kedah, Terengganu, Sabah, and Sarawak, and it offers financial services Bank Negara Malaysia 2017 and advice, financing briefing, as well as entertainment activities for families – children, youths, adults – to learn about effective financial management “Belanjawanku: Malaysian Individual and Family Expenditure Guide” • An expenditure guide that suggests the minimum monthly budget for Employees Provident different households in Klang Valley 2019 Fund Retirement Advisory Service (RAS) Professional Consultation • Provide EPF members with knowledge on sustainable retirement options, as well as conduct awareness programs on retirement planning Online learning platform Agensi Kaunseling dan 2019 • Free online courses such as the “Rumahku” module that guides first- Pengurusan Kredit time home buyers (in English and Malay Languages) Bank Negara Malaysia, Financing Advisory Services (MyKNP – Khidmat Nasihat Pembiayaan) Agensi Kaunseling dan • Offers advice to home buyers and small and medium enterprises (SMEs) Pengurusan Kredit, 2019 and Credit Guarantee that cannot secure financing, while assessing ways to improve their Corp Malaysia eligibility for future financing National Strategy for Financial Literacy 2019-2023 Financial Education • Five-year roadmap to intensify financial education initiatives through 2019 Network (FEN) collaborative and coordinated efforts among public-private agencies and others MALAYSIA ECONOMIC MONITOR | DECEMBER 2019 97 References References AKPK (2014) ‘More Malaysians are spending well beyond their means’, Kuala Lumpur: Agensi Kaunseling dan Pengurusan Kredit. 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