Country

Project:
Malaysia

Group 1, Section C
Kanishka Kumar Singh
Manish Goyal
Mayank Gehlawat
Thalakanti Sriker Reddy
Yatigeet
1|Page

CONTENT OVERVIEW

1. Introduction of the country ………………………………… 2

1.1.About Malaysia………………………………………… 2
1.2.Economic history of Malaysia……………………………
2
2. National income and its analysis…………………………….3
2.1. Real GDP………………………………………………..3
2.2. Nominal GDP…………………………………………....4
2.3. GDP Growth……………………………………………..5
2.4. GDP
Deflator……………………………………………..5
3. Components of National
Income……………………………..6
4. Multipliers……………………………………………………8
5. Savings, Investment and Interest rates
dynamics…………….9
6. Government spending and Fiscal policy……………………11
7. Employment rate, and policies unemployment
……………..13
8. Monetary policy, inflation and its determinants
…………….15
2|Page

9. Analysis of Trade, BOP, exchange rate, foreign

reserve…….18
10. Challenges and conclusion
………………………………...21

1. Introduction
Malaysia is a country located in Southeast Asia. Its capital is Kuala
Lumpur. It has 3 federal territories and 13 states.
It got independent of the United Kingdom in 1957. Since then its GDP
has been growing at around 6.5%. The GDP of the country currently is
$1 trillion while the per capita income is $11,237. The currency is
Ringgit.
It occupies an area of 329,847 sq. km and is the 68 th largest country in
terms of size. It is largely covered by forests (62%) while agricultural
land accounts for 23%. People indigenous to Malaysia are known as
Malaysians and the population is 32 million. It has a large number of
ethnic groups, but the largest amongst them is the Bumiputera (62%).
Official spoken language is Bahasa Malaysia. 134 different languages are
spoken in Malaysia. Official religion is Muslim, and they constitute 61%
of the population. Malaysia has a quite young population. 28% of the
population are children while 17% are in their teens. It is the world’s
44th most populous country.
3|Page

Malaysia has the 3rd largest economy in the whole Southeast Asia. The
country has a highly open market. The country is heavily dependent on
exports. Goods and Service exports were equivalent to 73% of the GDP.
The country is highly urbanized, with 76% of the total population living
in cities.
The country is highly literate with 94.6% literacy rate and
unemployment levels are low (3.4%). The country is part of the United
Nations, as well as, Trans-Pacific Partnership, ASEAN, Commonwealth of
Nations, OIC etc. Malaysia also has visa on arrival access to 164
countries making it the 20th most accepted passport in the world.
4|Page

2. National income and its

analysis
2.1 Real GDP
Real gross domestic product (GDP) is an inflation-adjusted measurement which
reflects the total value of all goods and services produced in an economy in a
specified period and hence, also termed as inflation-corrected GDP. Unlike
nominal GDP. Real GDP can account for the changes in price and hence provide
a more precise estimation of economic growth.

In case of Malaysia, it can be observed that Real GDP has seen a constant
growth over the last 20 years except the year 2015. In 2015, it can be observed
that the GDP took a serious hit because of several factors such as political
turmoil in the country and introduction of GST which reduced the consumer
5|Page

spending. Also there was huge rise in the defaults of personal debts therefore
destabilizing the Malaysian economy.

The country also saw, one of the biggest global economic crisis of 2009 as
evident from the GDP chart. Being hugely dependent on the exports, Malaysia
was highly vulnerable to the crisis that originated in USA.

Real GDP
350000000000.00
300000000000.00
250000000000.00
200000000000.00
150000000000.00
100000000000.00
50000000000.00
0.00
19 8
20 9
20 0
20 1
20 2
20 3
20 4
20 5
20 6
20 7
20 8
20 9
20 0
20 1
20 2
20 3
20 4
20 5
20 6
17
9
9
0
0
0
0
0
0
0
0
0
0
1
1
1
1
1
1
1
19

2.2 Nominal GDP

6|Page

Nominal GDP is GDP calculated at current prices and no adjustment for inflation
is done.

Nominal GDP
400000000000.00
350000000000.00
300000000000.00
250000000000.00
200000000000.00
150000000000.00
100000000000.00
50000000000.00
0.00
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
Nomi na l GDP

2.3 GDP Growth Rate

It can be observed that the growth rate was negative in 2009 for the
reasons mentioned above.

GDP Growth Rate

10
8
6
4
2
0
-2 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7
99 199 200 200 200 200 200 200 200 200 200 200 201 201 201 201 201 201 201 201
1-4
-6
-8
-10

2.3 GDP Deflator

7|Page

It is a measurement of all new and domestically produced goods and

services level of price. It can be calculated by dividing Nominal GDP by
Real GDP.

GDP Deflator
1.15
1.10
1.1 1.08 1.09 1.09
1.07
1.06 1.05
1.05 1.03 1.03 1.04 1.05 1.04
1.02 1.02
1.00 1.01 1.00
1.00
1 0.98

0.95 0.94

0.9

0.85
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
3. Components of National
Income
The national income of Malaysia could be divided among the following
sectors:
 Agriculture
 Mining & Quarrying
 Manufacturing
 Construction
 Services
It is evident that for the previous years, the trend has shown an
increase in the service sector while the agriculture takes the fall.
8|Page

Share in GDP
Agriculture Mining & Quarrying Manufacturing
Construction Services

4.90%
1.80%

23.20%

60.00%

10.10%

Agriculture (% of GDP)
9|Page

Industry (% of GDP)

Services (% of GDP)
The share of service sector in the Malaysian economy has always been
dominant and has been increasing since then. This sector is expected to
contribute majorly in Malaysia’s economy growth. This rise is due to the
increase in the foreign investments in service sector and ease of trading
laws by the government.
The major areas of service in Malaysia comprises of:
 Healthcare travel (health tourism)
 High value tourism activities such as eco-tourism
10 | P a g e

 Green Technology including renewable energy and energy

conservation/efficiency
 Financial services (integrated Islamic finance)
 Creative industries
 ICT such as telecommunication and mobile services
 Waste management (e.g. recycling

4. Multipliers
MPC b 0.67
MPS(1-b) 1-b 0.33
MPM(m) M 0.55
Investment Multiplier 1/1-b 3.03
Tax Multiplier -b/1-b 2.03
Government multiplier 1/1-b 3.03
Export Multiplier 1/1-b 3.03
Import Multiplier -1/1-b+m 1.14

Every time there is an induction of new demand in the market, a

multiplier effect can be observed. This is due to the fact that new
demand leads to new income which in turn causes more spending
hence more income, and so on. Hence it refers to increase in the final
income due to cyclic demand and spending.
From the high Export multiplier, it can be inferred that the economy is
heavily dependent on exports. That is, for every dollar spend on the
exports, the national income will increase by a factor of 3.03
11 | P a g e

5. Savings, Investment and

Interest Rates
Gross Savings is defined as the Total GDP minus consumption
expenditure.

It can be seen that there has been consistent savings in the Malaysian
economy. This saving has helped the country in getting itself out of
major crises of 2009 and 2015 as can be observed by the dip in savings
during that period of time. But immediately after crisis, it can also be
observed that the governments revamp its policies to encourage the
savings hence stabilizing the economy.
12 | P a g e

Investment, as per the economics, is defined as the purchase of

goods not for immediate consumption but for future financial benefits.

The investment in Malaysia has increases from 22% of GDP in 2007 to

26.5% in 2018. Also, the decrease in the investment can be observed
during the financial crisis as mentioned above that the government
encouraged savings over investment for stabilizing the economy. This
policy has worked really well for Malaysian economy.

Real Interest Rates are the inflation adjusted interest rates i.e.
Nominal interest rate minus Inflation rate.

Real Interest rate

13 | P a g e

During the 2009 crisis, it can be seen that the interest rates were hiked
to 11.25% to curb the economy from free fall. The higher rate of
interest led to higher borrowing cost causing decrease in the spending
and demand of goods and services therefor reducing the inflation.
Now the interest rate is well stabilized at 2.5%.

6. Government spending and

Fiscal policy
Government Spending refers to all current expenses paid by the
government for goods and services (including compensation of
employees). It also includes almost all of the costs of National security
but excludes government military expenditures.

As can be observed from the graph the maximum government spending

was in the year 2014($45.05 billion), while the least was spent in 1998
14 | P a g e

($7.05 billion). The value of the Ringgit fell in 1998 due to the

Asian Financial Crisis which restricted the Government spending for that
year. When we consider the allocation of funds from the GDP for
government spending, we observe that 1998 had the lowest allocation
of 9.77%, while 2012 had the highest allocation of 13.84%.
Government Spending in Malaysia is divided between Operating
Expense & Developmental Expense.
15 | P a g e

Shown above is the breakdown of the Total Government Spending in

terms of % share as well as in terms of capital.
Fiscal Policy is the strategy used by the government to adjust the tax
rates as well as control its spending in order to monitor and influence
the economy.
In Malaysia’s case, the Fiscal policy has been designed in such a way, so
that in any given year there in no Operating deficit.
The Global Financial Crisis in 2008 caused massive depletion of FDI
(down from RB51 billion to RB26 billion), reduced exports, fall in price
of commodity exports & loss of investor confidence in the Bursa
Malaysia.
To counter the above slowdown, in 2008, Malaysia launched the
Supplementary Supply Bill to be implemented over the next 2 years.
This package was going to infuse 60 billion ringgits (equivalent to 9% of
the GDP) into the economy. Such an act was unprecedented in the
history of the country.
16 | P a g e

7. Employment rate and policies

unemployment
Barring the GFC period year 2014, it does not appear that there could
be a relation between the two variables. Applicability of Okun’s Law
cannot be ascertained solely based on visual evidence of a line graph.
For that, a scatter plot has been used which has described later in this
report.
These are the depicted rates of unemployment in Malaysia since the
early last decade. The trend is pretty stable and stays within 4 and
above 3, more or less. This is another testament to the fact that
Malaysia one of the robust economies of Asia. The nation has been
witness to great GDP year on year increase and no alarming levels of
joblessness.
Most of the country’s production comes from services sector which
employs huge number of people. As a result, the per capita income is
also on the ascendency.
The only issue that remains is that of high number youth who stay
unemployed. The government has been quick to take note and has
come up with measures for skill training and job generation for the
youth.
Okun’s Law states that a percentage shrinking of GDP will trigger loss of
jobs by two percent. But in case of Malaysia it is negative 1.75 instead
of negative 2. This has been calculated by plotting a scatter graph.

FINDING OKUN’S LAW VALUE USING SCATTER PLOT

17 | P a g e

GDP change has been mapped against UER change in a scatter plot.
Then a trend line was generated whose equation was found to be “y=-
0.5421x+0.0526” where y is the UER change while x is the GDP change.
If y=1 is substituted in this equation, we get x as -1.74.
Hence the modified Okun’s law for Malaysian economy is “For every
one percentage increase in Unemployment rate, the GDP falls by 1.74
percent”.
30%
25%
20%
GDP & UER Change

15%
10%
5% GDP CHANGE
UER CHANGE
0%
-5%998 999 000 001 002 003 004 005 006 007 008 009 010 011 012 013 014 015 016 017
1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
-10%
-15%
Year
18 | P a g e

8. Monetary policy, inflation

and its determinants

The depiction establishes a steady inflation trend for the Malaysian

economy since the beginning of last decade to the present. The
inflation rate in Malaysia remains pretty stable all most all the time
barring moments of abruptness during the GFC. In the recent past, it
has been on the decline. It is expected that the central bank will not
make any changes to the OPR as does not feel alarmed.
Malaysia has been abundantly well off in taming inflation. Apart from
the global crisis, at no other times has the rate been surprising. The
following factors, to some extent, affect the overall inflation rate
1.Demand-pull inflation –demand exceeds supply by a lot triggering
inflation
2.Cost-push inflation – crude prices increase will trickle down to prices
of goods
3.Shrinking currency rate – foreign goods getting expensive, causing
increased demand for domestic items
4.Increasing Salaries- employees earning more naturally will cause
them to spend more.
19 | P a g e

5.Inflation in anticipation – employees would want an increase in their

salaries.

Monetary Policy
The central bank of Malaysia, Bank Negara Malaysia, has three main
monetary policy goals: low inflation, stable exchange rates and
optimum level of OPR (overnight policy rate). The contribution that
these goals make to development and growth is stressed often.

Inflation
Bank Negara Malaysia, the Malaysian central bank is committed to
achieving low inflation. This is evident in the long-term records. The
regulator has been largely successful in achieving its goal.

Exchange Value
The Ringgit has been floating between 3 and 4.5 to the US dollar. The
central bank also strives to keep this in check. The performance of
Ringgit, in the years following the currency peg has been stable. It used
to be traded freely offshore, but now it is now. According to the
Governor of Central Bank, the ringgit shall be internationalized when it
is equipped for such.
Overnight Policy Rate
OPR is the interest rate at which a bank lends to/receives from
investment with another bank. OPR is determined during the Monetary
Policy Committee Meetings that are held throughout the year by the
“Bank Negara Malaysia”. 3.25% is the current rate.

Instruments:

Overnight Policy Rate

20 | P a g e

 OPR is the interest rate/profit rate at which a bank lends to/receives

from investment with another bank
 OPR is determined during the Monetary Policy Committee Meetings
that are held throughout the year by the “Bank Negara Malaysia”.

Base Lending Rate (BLR)

BLR is the base interest rate that banks refer to internally before
deciding how much interest to charge for mortgage loans. 25 basis
points worth of OPR hike increases BLR by 50 basis points at current BLR
levels.

Base Financing Rate (BFR)

A rate determined by Islamic financial institutions based on the cost of
financing to consumers. 25 basis points worth of OPR hike increases BFR
by 50 basis points at current BFR levels.

9. Analysis of Trade, BOP,

exchange rate, foreign reserve
Currency
The only legal tender in Malaysia is the Malaysian ringgit. As of 22 April
2018, the Ringgit is traded at MYR 3.90 at the US dollar.
The ringgit has not been internationalized since September 1998, an
effect due to the 1997 Asian financial crisis in which the central bank
imposed capital controls on the currency, due to speculative short-
selling of the ringgit. As a part of series of capital controls, the currency
was pegged between September 1998 to 21 July 2005 at MYR 3.80 to
the dollar after the value of the ringgit dropped from MYR 2.50 per USD
21 | P a g e

to, at one point, MYR 4.80 per USD. Following the end of the currency
peg, the ringgit appreciated to as high as 3.16 MYR/USD in April 2008.
The ringgit had also enjoyed a period of appreciation against the Hong
Kong dollar (from 0.49 to 0.44 MYR/HKD) and the renminbi (0.46 to
0.45 MYR/CNY) as recently as May 2008. The initial stability of the
ringgit in the late-2000s had led to considerations to reintroduce the
currency to foreign trading after over a decade of being non-
internationalized. The currency's value fell from an average of 3.20
MYR/USD in mid-2014 to around 3.70 MYR/USD by early 2015; with
China being Malaysia's largest trading partner, a Chinese stock market
crash in June 2015 triggered another plunge in value for the ringgit,
which reached levels unseen since 1998 at lows of 4.43 MYR/USD in
September 2015, before stabilizing around 4.10 to 4.20 to the US dollar
soon after; the currency would later plummet and hover below the
1998 lows at 4.40 and 4.50 MYR/USD

External trade

Malaysia Exports by Country (2014) from Harvard Atlas of Economic

Complexity.

In 2013, Malaysia's total external trade totaled US$424 billion, made up

of US$230.7 billion of exports and US$192.9 billion of imports, making
Malaysia the world's 21st largest exporter and the world's 25th largest
importer.
Malaysia's largest trading partner is China. Malaysia has been China's
top trading partner within ASEAN for five years in a row since 2008. The
22 | P a g e

two-way trade volume between China and Malaysia in 2013 reached

$106 billion, making Malaysia China's third-largest trade partner in Asia,
just behind Japan and South Korea and eighth largest overall.
Malaysia is an important trading partner for the United States. In 1999,
two-way bilateral trade between the US and Malaysia totaled US$30.5
billion, with US exports to Malaysia totaling US$9.1 billion and US
imports from Malaysia increasing to US$21.4 billion. Malaysia was the
United States' 10th-largest trading partner and its 12th-largest export
market. During the first half of 2000, US exports totaled US$5 billion,
while US imports from Malaysia reached US$11.6 billion.

CURRENT ACCOUNT
It said the country’s current account performance could be broadly
characterized by two distinct periods over the past 20 years.
It said the first period encompassed the years following the Asian
financial crisis (AFC), when the CA surplus rose and peaked at 17.6% of
GNI in 2008, supported by a widening trade surplus amid sustained
deficits in the services and income accounts.
“During this period, Malaysia’s exports registered robust growth,
supported by strong global demand and rising commodity prices.
Conversely, import growth was more moderate, on account of subdued
investment activity after the AFC,” it said.
The second period was following the global financial crisis of 2008,
when the CA surplus began to narrow.
Export growth slowed due to persisting weakness in global demand and
a sharp decline in commodity prices. Demand for imported goods,
however, improved, supported by stronger domestic demand.
23 | P a g e

FOREIGN RESERVES
The alleged US$39.6 billion loss in international reserves suffered by
Bank Negara Malaysia (BNM) between 2013 and 2015 is an amount that
reflected the decline in international reserves due to outflows of foreign
funds from Malaysia.” These outflows were due to concerns over weak
global growth prospects, anticipation of monetary policy normalization
in the US and the sharp decline in global oil prices," he said in a
statement today.

10. Conclusion
 Malaysia’s near-term economic outlook
remains favorable, reflecting a well-
diversified and open economy that has
successfully weathered the impact of
external shocks.
 The financial system remains well-
functioning and regulated, boasting a well-
capitalized banking system and deep
capital markets.
 Sustained domestic demand, stable labor
force & continued Income growth have
helped anchor the Economic Growth.

Future Outlook
24 | P a g e

 Strong private consumption growth as well

as a solid manufacturing sector point to
improving economy.
 Delays in infrastructure projects, trade
tensions, volatile financial markets might
affect this outlook.
 Government is looking out for wellbeing of
people in the low income bracket (40% of
population) and safeguarding them from
any economic shocks as well as increasing
cost of living.
 Ongoing efforts to push for structural
reforms to enhance public sector
performance and boost the productivity of
public spending.
 Economy expected to grow by 4.7% in
2019 & by 4.5% in 2020.