Economic and Financial Developments in Malaysia
The Malaysian economy expanded at a stronger pace in the second quarter of 2002. Sustained strength in domestic demand and a recovery in exports raised real GDP growth to 3.8 percent on an annual basis, from 1.1 percent in the first quarter.
Consumption spending was broad-based across the country and gained momentum as an important source of growth in the quarter. Private consumption increased at a faster rate of 5.6 percent (1Q: 3 percent). Higher real incomes from the expansionary fiscal operations of the Government, the improvement in export volume and higher commodity prices, low interest rates and the easier access to financing provided a strong stimulus to private consumption.
The important development in this quarter has been the significant income effect from improved export volume and prices.
For the first time since the first quarter of 2001, exports recorded a positive annual growth of 5.3 percent due to the stronger growth in electronic exports and positive terms of trade from higher prices for palm oil, rubber, cocoa and sawn logs. The impact of higher commodity prices on rural income and consumption has been significant. Public consumption was also higher by 15.4 percent on account of the salary adjustment for government employees and added supplies and services associated with the fiscal stimulus.
On the investment front, the decline in total gross fixed capital formation moderated significantly to 2.1 percent in the second quarter (1Q 2002: -8.5 percent). In the private sector, companies continued to utilize the existing capacity to meet the increase in demand, resulting in a higher capacity utilization.
The low interest rate environment and the fiscal incentives have continued to provide support for investment in residential construction. Investment was also sustained in oil and gas; transportation; and retail and wholesale trade. Improvements were also seen in the imports of capital goods and capacity utilization rates. Investment by the public sector was higher, based on the significant increase in development expenditure of 42.5 percent in the second quarter. About one-half of the expenditure was for financing the development of social services, such as education, health and housing.
The services sector continued to provide the main support for GDP expansion. In the second quarter, growth was further strengthened by a recovery in the manufacturing sector. Activity in the manufacturing sector rebounded in the second quarter of 2002 to take the lead, with value added increasing by 5.6 percent (1Q 2002: -2.3 percent), the first positive growth since the first quarter of 2001. The improved performance was attributed to a stronger expansion in output of the domestic -oriented industries, due primarily to an upturn in the electronics industry. With the improved performance, the overall capacity utilization rate in the manufacturing sector increased to 82 percent in the second quarter (79 percent in the first quarter).
The output of the export-oriented industries as a group rebounded to record a positive growth of 5.7 percent (1Q 2002: -5.5 percent), with capacity utilization increasing to 82 percent. The turnaround was more pronounced in the electronics industry. Depleting inventories, improving orders, including higher demand for electronics in the Asia Pacific region saw electronics output and exports rising sharply by 23.5 percent and 16.5 percent respectively (1Q 2002: -0.8 percent and 1.1 percent respectively). The increase in output was strongest in the integrated circuits product segment. This was partly due to the transfer of production lines in Malaysia from the high cost production centers as MNCs undertook corporate consolidation as well as inventory rebuilding.
The construction sector registered a higher growth of 3.4 percent underpinned by underlying demand for affordable houses. Higher Government construction spending on public projects also contributed to higher activities in the sector.
Supported by the overall strengthening of demand conditions, growth in the service sector was sustained at 4.5 percent (1Q: 4.4 percent). Of significance, the finance, insurance, real estate and business services sub-sector expanded by 7.7 percent (1Q: 8.7 percent). The favorable growth in this sector was reflected in higher bank lending, especially for housing and consumer durables, higher demand for insurance products and improved performance in the Kuala Lumpur Stock Exchange. Growth in the utilities sub-sector was also strong, attributed largely to higher demand for electricity from the industrial and commercial users. Stronger growth was recorded in the wholesale and retail trade, hotels and restaurants sub-sector, supported largely by higher consumer spending. The Consumer Price Index (CPI), remained low at 1.9 percent compared to the second quarter of 2001 (1.4 percent in the first quarter).
Reflecting stronger economic activities and external demand, both exports and imports increased by 5.3 percent and 10 percent respectively. The overall trade surplus remained large at RM9.7 billion despite the stronger increase of imports. All broad categories of imports registered positive growth. The increased in imports of intermediate goods by 6.9 percent is indicative of orders beyond the second quarter. These imports were mainly for the export-oriented electronics industry, where imported inputs for this sub-sector increased by 23.5 percent.
Inflows of funds for investment were higher during the quarter. The Cash BOP Reporting System of Bank Negara Malaysia indicated that the gross inflows of FDI in the form of direct equity and inter-company loans amounted to RM3.3 billion in the second quarter. The bulk of the funds were channeled into the oil and financial services sectors. Due to loan repayments by non- resident controlled by companies, FDI on a net basis was RM0.5 billion.
The international reserves of Bank Negara Malaysia increased further to RM129.9 billion (US$34.2 billion) as at 15 August 2002, RM5.4 billion (US41.4 billion) higher than the level as at the end of the first quarter. Reserves growth has been primarily from repatriation of export income and long-term investment inflows, which have more adequately offset the periodic net short-term outflows. Since end-2001, reserves rose by RM12.6 billion or US$3.3 billion. The reserve of RM129.9 billion is adequate to finance 5.6 months or retained imports and is 5.1 times the short-term external debt.
Malaysia's external debt position improved in the second quarter. The total external debt declined to RM176.1 billion (US$46.4 billion) as at end-June compared with RM178.4 billion (US$46.9 billion) at end-March. External debt to GNP ratio improved to 54.4 percent. The improvement was attributable to the decline in both short-term external debt as well as medium and long-term external debt of the private sector, reflecting mainly the prepayments and repayments of loans as part of corporate debt restructuring.
Since the last quarter the Corporate Debt Restructuring Committee (CDRC) has completed an additional four restructuring cases and discharged two cases. Another case is still pending lenders' approval and would be monitored by Danaharta. The closure of CDRC was effective on 15 August 2002, after successfully resolving 47 cases or 98 percent of the number of cases accepted with total debts amounting to RM43.97 billion. The recovery profile of the resolved cases has shown that 83 percent of the recovery proceeds were in the form of cash, redeemable instruments and rescheduled debts.
Prospects for the Malaysian economy remain favorable. In the second half-year, growth is expected to be supported by continued expansion in domestic and external demand. On the domestic front, the composite index of leading indicators registered the eleventh consecutive positive growth in May, suggesting that the Malaysian economy is in its expansion phase.
During the period March to April 2002, four international credit rating agencies, namely Standard and Poor's, Moody's Investors Service, Fitch Ratings and Rating and Investment Inc. revised Malaysia's sovereign ratings outlook from 'stable' to 'positive'. Overall, these agencies attributed the positive revision to the country's strengthening financial sector, accelerated corporate restructuring activity, continuing large current account surplus, robust international reserves and liquidity and broad economic soundness.
On 7 August 2002, Fitch Ratings upgraded Malaysia's long-term foreign and local currency ratings by single notches to 'BBB+" from 'BBB' and 'A' from 'A-", respectively, with a 'stable' ratings outlook. On 20 August 2002, S&P raised Malaysia's long- term foreign and local currency ratings by single notches to 'BBB+' from "BBB' and 'A+' from 'A', respectively, with 'stable' ratings outlook.
(Edited from Bank Negara Malaysia's Second Quarter Report)