Central Bank of Malaysia: Economic and Financial Developments in the Malaysian Economy - 2Q 2017

Transcription

1. The BNM Quarterly Bulletin presents a quarterly review of Malaysia ’s economic, monetary and financial developments. It includes the Bank’s latest assessments on the direction of the economy going forward. The Bulletin also provides insights on current economic and financial issues, including highlights of policy initiatives undertaken by Bank Negara Malaysia in pursuit of its mandates.
3. Contents P4 Key Highlights P7 International Economic Environment P9 Developments in the Malaysian Economy P18 Box Article 1 : Global Value Chains and the Drivers of Exports in Malaysia P21 Monetary and Financial Developments P25 Managing Risks to Financial Stability P33 Box Article 2: Factors Affecting Foreign Investors’ Bondholding in Malaysia P41 The Bank’s Policy Considerations P43 Macroeconomic Outlook Feature Articles P45 Feature Article 1: Outcomes of the Reference Rate Framework: Moving Towards More Efficient and Transparent Practices P51 Feature Article 2: Liberalisation of Motor Insurance Business: Rewarding Good Risk Management P55 Annex
4. Key Highlights on BNM QUARTERLY BULLETIN Economic and Financial Developments in 2Q 2017 Stronger GDP growth of 5 .8% Continued growth in domestic demand and across major economic sectors Real GDP Growth (Annual change) Main driver of GDP Growth in 2Q17 (Annual change) 5.8% +6.0% Supply 5.6% Demand +7.1% Private Consumption Manufacturing +6.3% +7.4% 1Q17 Private Investment 2Q17 Services Decline in inflation due mainly to lower domestic fuel prices Inflation in the transport category was lower Core inflation remained relatively stable Headline and Core Inflation yoy, % 6 Headline Inflation 4 Jun 17 Mar 17 1Q17: RM2.23/litre Dec 16 1Q17: USD54/barrel 0 Sep 16 RM2.07/litre Jun 16 USD50/barrel Mar 16 2Q17: Dec 15 2Q17: Core Inflation 2 Sep 15 RON95 Petrol Jun 15 Crude Oil Prices Financing needs continued to be met with asset quality remaining intact Financing to the private sector continued to improve Overall asset quality in the banking system remained healthy Net Financing Growth* Banking System Loan Quality Ppt contribution, % 10 5 7.5 6.8 % 6.4 6.8 7.0 5.5 4 3 5 2 1 0 0 1Q 16 2Q 16 3Q 16 Corporate Bond 4Q 16 1Q 17 2Q 17 Banking System and DFI Loans Total Net Financing (Annual change, %) 4 *Net financing comprises outstanding banking system and DFIs loans and outstanding corporate bonds. 1Q 2Q 3Q 2015 4Q 1Q 2Q 3Q 2016 4Q 1Q 2Q 2017 Net impaired loans (IL) ratio Gross IL ratio: businesses Gross IL ratio: households Gross IL ratio: SMEs SECOND QUARTER 2017 Source: Department of Statistics, Malaysia and Bank Negara Malaysia unless stated. For more information, visit www.bnm.gov.my
5. Key Highlights on BNM Feature Articles QUARTERLY BULLETIN Outcomes of the Reference Rate Framework : Moving Towards More Efficient and Transparent Practices Implementation of the Reference Rate Framework (RRF) is driven by 3 outcomes 1 Efficient pricing and greater transparency for consumers 2 Consumers ࠮ -SL_PISLYH[LSVHUZHYLWYPJLK\ZPUN[OL)HZL 9H[L)9[OH[]HYPLZ^P[OTHYRL[JVUKP[PVUZ ࠮ *VUZ\TLYZILULMP[HZ loan pricing is more efficient ࠮ )9YLMSLJ[ZM\UKPUNZ[YH[LNPLZHUKTV]LZ ^P[OILUJOTHYRJOVZLUI`-:7Z ࠮ 4VYL[YHUZWHYLUJ`^P[O greater disclosure of loan products 3 Enhance MP transmission ࠮ )L[[LY[YHUZTPZZPVU from policy rate to the real economy Reflect funding strategies of Financial Service Providers (FSPs) KLIBOR RRF Benchmark cost of funds Financial Service Providers (FSPs) Monetary Policy BR Deposits OPR Statutory Reserve Requirement (SRR) ࠮ ,MMLJ[P]LWHZZ[OYV\NO MYVT679[V)9 Liberalisation of Motor Insurance Business: Rewarding Good Risk Management Why liberalise? Under tariff, some policyholders pay more premiums than they should to support riskier drivers and vehicles Subsidise Tariff (fixed pricing) Liberalisation (risk-based pricing) Good and bad drivers pay similar premiums, despite having different risk profiles Equitable pricing ensures good risks are recognised and bad risks incentivised to improve How are premiums calculated? More factors will be taken into account in determining premiums Rating factors used in tariff Pricing enhanced through loadings and/or NCD Broader rating factors • Sum Insured • Cubic Capacity • Insured’s Age • Vehicle Age • Past Claims Record • • • • Vehicle Model Driving Experience Driving Behaviour Security Features What can consumers do? Actions that can be taken to control premiums that you will ultimately pay Maintain vehicle well and adopt good driving behavior and safety measures Purchase motor cover which best suits your needs and risk exposure Shop around for the best coverage SECOND QUARTER 2017 :V\YJL!+LWHY[TLU[VM:[H[PZ[PJZ4HSH`ZPHHUK)HUR5LNHYH4HSH`ZPH\USLZZZ[H[LK-VYTVYLPUMVYTH[PVU]PZP[^^^IUTNV]T` 5
6. 6 SECOND QUARTER 2017
7. International Economic Environment HIGHLIGHTS • Continued recovery in global growth, supported by stronger investment in major economies. • Sustained export growth in the Asian economies following continued strength in global demand. • Improvement in equity market performance amid lower volatility. Annual change (%) 8 6.9 7 5.8 6 5.0 5 4 2.7 3 2 2.1 2.2 2.9 1.7 1Q 17 Singapore Korea Indonesia Malaysia PR China 1 0 UK Second quarter GDP releases showed sustained performance in the advanced economies. In the US and euro area, growth drivers were more balanced as the uptrend in investments continued to complement private consumption. Capital imports rose in tandem with stronger investment to cater to increasing demand and higher capacity utilisation. Domestic demand in PR China lent further support to global demand, as ongoing policy tightening has yet to show signs of feeding into the real economy. These key developments continued to drive global trade. As a result, Asia benefitted from the recovery in global demand amid sustained strength in domestic demand. Chart 1: Real GDP Growth Euro area The global economy continued to expand in the second quarter of 2017. Growth was also becoming more synchronised across the advanced and emerging economies. Indicators such as the manufacturing purchasing managers’ index (PMI) and industrial production expanded at a faster pace, particularly in the advanced economies. Similarly, manufacturing PMIs in Asia have remained above the usual trend observed since the global financial crisis. This indicates that global recovery has become more entrenched. Continued Global Economic Expansion in 2Q 2017 US Global growth continued to expand 2Q 17 Source: National authorities SECOND QUARTER 2017 7
8. BNM QUARTERLY BULLETIN Sustained exports from Asian economies Sustained Export Growth in 2Q 2017 Chart 2 : Export Growth of Selected Asian Economies (in USD terms) During the quarter, global trade continued to show a firmer growth momentum. Trade expanded across product categories and destinations. This suggests that the strength in external demand was more broad-based. Continuous improvements in investment in the advanced economies and sustained demand from PR China arising from infrastructure and property construction provided the impetus to global trade. Annual change (%) 25 20 16.8 15 11.7 10.9 10.2 10 9.1 7.9 5 0.8 1Q 17 Singapore Indonesia PR China C. Taipei Thailand Malaysia Korea 0 2Q 17 Source: Bloomberg Low Volatility in the Financial Markets Chart 3: Chicago Board Options Exchange (CBOE) Volatility (VIX) Key trends in exports during the quarter included a rapid rise in trade for the electrical and electronics (E&E) and commodities sectors. These sectors contributed to higher exports from the Asian economies, many of which are major producers of electronics or commodity-based products. Exports from Korea, Chinese Taipei and Singapore benefitted from higher shipments of semiconductors for use in electronic products. In Korea, exports rose 16.8% in the second quarter of 2017, following six straight months of double-digit growth. This reflected final demand for capital and consumer goods in both the advanced economies and PR China, particularly in the lead-up to flagship smartphone model launches in the second half of 2017. Similarly, exports from Indonesia grew at 7.9% on continued shipments of commodities such as oil and gas, coal, and iron and steel, particularly to PR China. Index 28 Improvement in market indices amid lower volatility 18 Jun 17 Mar 17 Dec 16 Sep 16 Jun 16 8 Most major equity indices improved in the second quarter of 2017, as businesses in the advanced economies continued to record improvements in corporate profits. This was noteworthy given the weakness in earnings seen since 2014. Broad-based growth improvements in many economies around the world also provided tailwinds to global stock markets. Source: Bloomberg Volatility in the global financial markets was lower as developments during the quarter were largely within market expectation. However, there were two episodes of temporary spikes in volatility due to political and geopolitical developments. In April, geopolitical tensions rose following a US military strike on Syria and increasing signs of a deeper conflict with North Korea. In the later part of the quarter, changes in key personnel by the US administration triggered concerns over the future course of US pro-growth regulatory and fiscal policies. 8 SECOND QUARTER 2017
9. Developments in the Malaysian Economy HIGHLIGHTS • The Malaysian economy grew by 5.8% in the second quarter. • Headline inflation declined to 4.0% due mainly to lower domestic fuel prices. • Current account surplus widened to 3.0% of GNI due to a higher goods surplus and smaller deficit in the services and primary income account. The Malaysian economy grew by 5.8% in the second quarter of 2017 The Malaysian economy recorded a stronger growth of 5.8% in the second quarter of 2017 (1Q 2017: 5.6%). Private sector spending continued to be the main driver of growth. On the external front, growth was further supported by the robust expansion in real exports of goods and services (9.6%; 1Q 2017: 9.8%) following strong demand for manufactured and commodity products. Real imports moderated slightly to 10.7% (1Q 2017: 12.9%) following more moderate expansion in investment. On a quarter-on-quarter seasonallyadjusted basis, the economy recorded a growth of 1.3% (1Q 2017: 1.8%). Domestic demand driven by the private sector Domestic demand grew by 5.7% in the second quarter of the year (1Q 2017: 7.7%), supported by continued expansion in both private sector expenditure (7.2%; 1Q 2017: 8.2%) and public sector spending (0.2%; 1Q 2017: 5.8%). Stronger Growth in 2Q 2017 Chart 4: GDP Growth % % 3 7 6 5.6 5 5.8 2 1.8 4 1.3 3 1 2 1 0 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 0 Quarterly change (%), seasonally-adjusted (RHS) Annual change (%) Source: Department of Statistics, Malaysia Private consumption recorded a growth of 7.1% (1Q 2017: 6.6%), supported by the improvement in private sector wages amid continued strength in employment growth. During the quarter, consumer sentiments continued to improve, providing further impetus to household spending. SECOND QUARTER 2017 9
10. BNM QUARTERLY BULLETIN Private Sector Demand Remained the Key Driver of Growth Private investment expanded by 7 .4% in the second quarter (1Q 2017: 12.9%), mainly in the services and manufacturing sectors. In line with the recovery in demand, manufacturers undertook capacity expansions, machinery and equipment (M&E) acquisitions and replacements to cater for new orders. This was evident across both the exportand domestic-oriented manufacturing sub-sectors. In the services sector, investment was supported mainly by expansions in the utilities, healthcare and food & beverage and accommodation sub-sectors. During the quarter, business sentiments continued to improve in tandem with better external and domestic conditions amid lower financial market volatility. Chart 5: Contribution of Expenditure Components to GDP Growth Annual change (%), Contribution to growth (percentage points) 8 7 6 5 4 3 2 1 0 -1 -2 5.6 5.8 4.5 4Q 2016 1Q 2017 Public consumption growth moderated to 3.3% (1Q 2017: 7.5%) following slower growth in the spending on emoluments, and supplies and services. 2Q 2017 Private consumption Public consumption GFCF Net exports Change in stocks Real GDP Public investment declined by 5.0% in the second quarter (1Q 2017: 3.2%). This was attributable to the lower spending on fixed assets by public corporations, which more than offset the higher expenditure by the Federal Government. Source: Department of Statistics, Malaysia Gross Fixed Capital Formation Expanded More Moderately Chart 6: GFCF Growth by Type of Assets Annual change (%) 30 25 20 15 10 5 0 -5 -10 -15 Annual change (%) 10.0 4.1 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 Structures Machinery and equipment Other assets* Gross fixed capital formation (RHS) *Other assets include mineral exploration, research & development and capitalised planting Source: Department of Statistics, Malaysia 10 SECOND QUARTER 2017 15 10 5 0 -5 -10 -15 -20 -25 Gross fixed capital formation (GFCF) expanded at a moderate pace of 4.1% (1Q 2017: 10.0%). This was due to lower growth in private investment and a decline in public sector capital spending. By type of assets, the moderation in machinery and equipment (4.4%; 1Q 2017: 21.8%) and contraction in other type of assets (-3.7%; 1Q 2017: 1.4%) more than offset the improvement in structures investment (5.1%; 1Q 2017: 3.8%).
11. BNM Chart 7 : Growth by Sector Annual change (%) 10 The manufacturing sector growth was driven by both the export- and domestic-oriented industries. The strong performance of electronics and electrical segment, in line with higher global demand for semiconductors, continued to spur the exportoriented industries. The domestic-oriented industries benefitted from the strength in demand for foodrelated products in view of the improved consumer sentiments, and higher production of constructionrelated materials supported by robust construction activity. In the agriculture sector, growth remained firm as crude palm oil yields continued to recover from the negative impact of El Niño. Growth in the construction sector was higher, driven mainly by civil engineering activity in the transportation and power plant segments. 8.3 8 6.3 6.0 5.9 6 4 2 0.2 0 1Q 17 Mining Agriculture Construction The services sector registered higher growth during the quarter. Growth in the wholesale and retail sub-sector improved, driven by higher household spending. The finance and insurance sub-sector also continued to benefit from the improvement in performance of the capital market and insurance segment. In the transportation and storage subsector, growth was principally supported by robust external trade and higher air passenger traffic. Manufacturing On the supply side, all economic sectors continued to expand. Higher Growth Across Most Economic Sectors Services Continued expansion across major economic sectors QUARTERLY BULLETIN 2Q 17 Source: Department of Statistics, Malaysia Higher Contribution to Growth from Services, Manufacturing and Construction Sectors Chart 8: Real GDP by Economic Sector Annual change (%), Contribution to growth (percentage points) 7 5.8 5.6 6 5 4 3 2 1 Growth in the mining sector moderated on lower crude oil production as part of the global initiative to reduce oil supply. The performance of the sector was also affected by lower natural gas production amid a major maintenance shutdown of a large gas field in Sabah. 0 1Q 17 2Q 17 Mining Services Manufacturing Agriculture Construction Real GDP Source: Department of Statistics, Malaysia SECOND QUARTER 2017 11
12. BNM QUARTERLY BULLETIN Lower Inflation Mainly Reflected the Decline in Domestic Fuel Prices Headline inflation declined due to lower transport prices Chart 9 : Headline Inflation Headline inflation1 moderated to 4.0% in the second quarter of 2017 (1Q 2017: 4.3%) due mainly to lower transport inflation of 13.4% (1Q 2017: 16.2%). During the quarter, prices of RON95 petrol averaged RM2.07 per litre, lower than the average of RM2.23 per litre in 1Q 2017. The lower domestic fuel prices were due mainly to the lower global oil prices amid a stronger ringgit exchange rate during the quarter. However, inflation in the food and non-alcoholic beverages category was slightly higher at 4.3% (1Q 2017: 4.2%) reflecting the stronger demand during the festive season. Prices in the meat and fish and seafood sub-categories increased by 4.5% and 7.0%, respectively, during the quarter (1Q 2017: 3.4% and 5.3%, respectively). %, ppt 5.0 4.3 4.0 4.0 3.0 1.3 1.7 3Q 4Q 2.0 1.0 0.0 -1.0 -2.0 1Q 2Q 3Q 4Q 1Q 2Q 2015 1Q 2016 2Q 2017 Others (29.5%) Alcoholic beverages & tobacco (2.9%) Transport (13.6%) Housing, water, electricity, gas & other fuels (23.8%) Food & non-alcholic beverages (30.2%) Headline inflation Inflation during the quarter was not pervasive. The percentage of items in the CPI basket registering inflation of more than 2% remained unchanged at 33%. However, the sustained increase in the prices of food away from home and rental led to the slightly higher core inflation of 2.5% in second quarter of 2017 (1Q 2017: 2.4%). Source: Department of Statistics, Malaysia and BNM estimates Inflation Pervasiveness Remained Broadly Stable Chart 10: Inflation Pervasiveness % of items 100 80 60 Inflation above 2% 40 20 0 20 40 60 Inflation below 2% 80 100 1Q 2Q 3Q 4Q 1Q 2015 0 0< 1 2Q 3Q 4Q 1Q 2016 1< 2 2< 2Q 2017 3 3< 4 >4 Source: Department of Statistics, Malaysia and BNM estimates 1 12 SECOND QUARTER 2017 As measured by the annual change in the Consumer Price Index (CPI).
13. BNM QUARTERLY BULLETIN Labour market showed tentative signs of improvements Steady Unemployment Rate and Improvement in Wage Expansion Labour market conditions showed tentative signs of improvements in the second quarter of 2017 , as the labour force expansion of 56,300 persons was exceeded slightly by stronger net employment gain of 58,900 people. As such, the unemployment rate decreased to 3.4% of the labour force (1Q 2017: 3.5%). The labour force participation rate was sustained at 67.7% of the working age population (1Q 2017: 67.7%). Higher vacancies posted on a major job search website, at 65,478 positions, indicate increased demand for new hires (1Q 2017: 61,760 positions). Chart 11: Labour Market Indicators Private sector wages continued to rise, mainly due to stronger growth in manufacturing wages in the second quarter of 2017 (11.2%; 1Q 2017: 3.2%) and major services sub-sectors (5.4%, 1Q 2017: 5.1%). Wage growth during the quarter was broadbased, supported by both domestic- and exportoriented manufacturing and services industries. External sector performance remained strong Gross exports continued to grow strongly by 20.6% in the second quarter of 2017 (1Q 2017: 21.3%). Robust gross exports growth was broad-based, driven by double-digit growth in manufactured and commodities exports. Higher demand from Malaysia’s key trading partners, particularly PR China, the EU and Japan, supported the strong growth in manufactured exports. E&E remained the key driver of gross exports, registering growth of 22.6%. This was driven by the 25.3% increase in semiconductor exports, which benefitted from strong global demand, particularly for semiconductors used in smartphones and storage devices. Unemployment Rate Private Sector Wages Annual change (%) 4.0 Annual change (%) 7.1 7 3.5 3.5 3.4 6 5 4.5 3.0 4 2.5 3 1Q 2Q 3Q 4Q 1Q 2Q 2016 1Q 2Q 3Q 4Q 1Q 2016 2017 2Q 2017 Source: Department of Statistics, Malaysia Export Growth Supported Mainly by E&E Exports Chart 12: Gross Exports by Products Annual change (%), Contribution to growth (percentage points) 25 21.3 20.6 20 15 10 2.3 5 1.6 2.8 0 -2.3 -5 1Q 2Q 3Q 4Q 2016 1Q 2Q 2017 E&E Commodities Resource-based Others Non-resource based Gross exports (Annual change, %) Source: Department of Statistics, Malaysia SECOND QUARTER 2017 13
14. BNM QUARTERLY BULLETIN Exports was Also Broad-based Across Markets Chart 13 : Gross Exports by Markets Annual change (%), Contribution to growth (percentage points) 25 20.6 21.3 20 15 10 5 2.3 2.8 1.6 0 -2.3 -5 1Q 2Q 3Q 4Q 1Q 2016 2Q 2017 ASEAN US Rest of Asia PR China EU Rest of World Japan Gross exports (Annual change, %) Source: Department of Statistics, Malaysia Strong Imports, Particularly in Intermediate and Imports for Re-exports Chart 14: Gross Imports by Products Annual change (%), Contribution to growth (percentage points) 30 27.7 25 19.1 20 15 10 5 5.0 2.8 0 -5 -10 -0.1 -0.4 1Q 2Q 3Q 4Q 1Q 2016 Intermediate goods Capital goods Consumption goods Gross imports (Annual change, %) Others Source: Department of Statistics, Malaysia 14 2Q 2017 SECOND QUARTER 2017 Non-resource based manufactured exports expanded in the second quarter, largely on account of higher exports of iron and steel products, and manufactures of metals. Resource-based manufactured exports however, moderated due mainly to lower exports of petroleum products, and chemical products. Demand from PR China remained strong amid moderation in demand from the ASEAN region. Commodity exports were supported by higher production of crude oil and CPO, and stronger LNG prices. Gross imports also remained strong, registering growth of 19.1% in the second quarter of 2017 (1Q 2017: 27.7%). Robust growth was underpinned by higher intermediate imports and imports for re-exports, in line with strong manufacturing export performance. Capital imports moderated to 6.9% in second quarter of 2017 from the exceptionally high growth recorded in first quarter of 2017 of 42.0%, on account of the delivery of significant high-value imports. As export growth outpaced import growth during the quarter, the trade surplus increased to RM24.1 billion (1Q 2017: RM18.9 billion).
15. BNM Current account surplus increased The current account surplus widened to RM9 .6 billion in the second quarter of 2017 (1Q 2017: RM5.3 billion) accounting for 3.0% of GNI (1Q 2017: 1.7% of GNI). The higher surplus was due to a larger goods surplus and smaller deficit in the services and primary income account. Larger Goods Surplus and Lower Deficits in the Services and Primary Income Accounts Chart 15: Current Account Balance RM billion % of GNI 3.9 40 The smaller deficit in the primary income account in the second quarter of 2017 (-RM8.2 billion; 1Q 2017: -RM9.9 billion) was largely attributable to higher income generated by Malaysian firms investing abroad (RM12.4 billion; 1Q 2017: RM11.4 billion). Profits accrued to foreign investors in Malaysia were broadly unchanged (RM19.4 billion; 1Q 2017: RM20.0 billion). The deficit in the secondary income account was slightly higher at -RM4.2 billion (1Q 2017: -RM3.9 billion). Outward remittances increase to RM8.7 billion (1Q 2017: RM8.5 billion) while inward remittances slowed to RM4.4 billion (1Q 2017: RM4.6 billion). Financial account recorded net inflows In the second quarter of 2017, the financial account registered a net inflow of RM7.3 billion (1Q 2017: net outflow of RM8.8 billion), attributed mainly to a turnaround in the portfolio investment account (net inflow of RM16.0 billion; 1Q 2017: net outflow of RM31.9 billion). 4.0 3.0 30 2.2 The goods surplus widened to RM27.0 billion in the second quarter of 2017 (1Q 2017: RM25.3 billion) as exports continued its robust pace, while intermediate and capital imports moderated from the first quarter of 2017. The deficit in the services account was lower at RM5.0 billion (1Q 2017: a deficit of RM6.2 billion). The travel account recorded a larger surplus of RM8.3 billion (1Q 2017: RM7.6 billion). During the quarter, construction services exports also increased, reflecting receipts from civil engineering construction projects in Cambodia, India, Qatar and Vietnam. This was partly offset by higher net payments for transportation services, and telecommunications, computer and information services. QUARTERLY BULLETIN 3.0 2.4 20 2.0 1.7 1.1 10 1.0 0 0.0 -10 -1.0 -20 -2.0 -30 -3.0 1Q 2Q 3Q 4Q 1Q 2Q 2016 2017 Secondary income Goods Primary income Services Current account balance (RHS) Source: Department of Statistics, Malaysia Turnaround in Net Portfolio Flows, Mainly by Non-resident Investors Chart 16: Portfolio Investments RM billion 30 20 14.1 10 16.0 0.1 0 -10 -10.6 -20 -19.1 -30 -31.9 -40 1Q 3Q 2Q 2016 Resident Non-Resident 4Q 1Q 2Q 2017 Net Portfolio Investment Source: Department of Statistics, Malaysia Portfolio investment by non-residents recorded a net inflow of RM18.8 billion (1Q 2017: net outflow of RM22.9 billion), due mainly to a resumption in purchases of Malaysian Government Securities (MGS) and higher participation in the equity market. SECOND QUARTER 2017 15
16. BNM QUARTERLY BULLETIN DIA and FDI Channeled Mostly into the Services Sector Chart 17 : Net Direct Investment Flows by Sector % share 100 RM8.3 bn RM15.4 bn 90 25.7% 35.7% 80 70 60 14.4% 50 49.9% 6.9% 40 18.3% 30 20 1.5% 1.7% 10 19.6% 0 23.6% DIA FDI Agriculture Mining Manufacturing Construction Financial Services Non-financial Services Note: Figures may not necessarily add to 100% due to rounding Source: Department of Statistics, Malaysia Lower External Debt in 2Q 2017 Chart 18: Changes in External Debt RM billion 20 Net change1 : -RM19.5 billion 10 positive indicates net borrowing or issuance of debt securities 0 -10 Investor sentiments improved during the quarter, supported by the announcement of initiatives to develop the onshore financial market, stronger ringgit performance, expectations of better corporate earnings outlook and domestic growth prospects. Resident portfolio investment registered a lower net outflow of RM2.8 billion (1Q 2017: net outflow of RM9.0 billion), as the continued net acquisition of equity securities abroad by domestic fund managers was partially offset by net liquidation of debt securities overseas. The direct investment account registered a net outflow of RM7.1 billion (1Q 2017: net inflow of RM8.3 billion), as the accumulation of direct investment assets more than offset the incurrence of direct investment liabilities during the quarter. Direct investment abroad (DIA) by Malaysian companies rose to RM15.4 billion (1Q 2017: net outflow of RM8.7 billion), on account of higher earnings retained for reinvestment and drawdown of intercompany loans by subsidiaries abroad. DIA was channeled mainly into the financial services sub-sector and the mining sector. Foreign direct investment (FDI) decreased to RM8.3 billion (1Q 2017: net inflow of RM17.0 billion), due mainly to lower reinvestment of earnings and injection of equity capital from parent companies. FDI inflows were concentrated in the real estate activities and information and communication sub-sectors, followed by the mining sector. The other investments account recorded a net outflow of RM1.3 billion (1Q 2017: net inflow of RM14.2 billion), due mainly to the maturity of currency and deposits placed by foreign financial institutions in Malaysian banks and the net extension of trade credits by Malaysian exporters. -20 Exchange rate valuation effects Interbank borrowing Intercompany loans Bonds and notes Others2 Loans NR deposits NR holdings of domestic debt securities Changes in individual debt instruments exclude exchange rate valuation effects Comprises trade credits, IMF allocation of SDRs and other debt liabilities Note: NR refers to non-residents 1 2 Source: Ministry of Finance, Malaysia and Bank Negara Malaysia 16 SECOND QUARTER 2017 Following these developments, the overall balance of payments registered a surplus of RM2.7 billion in the second quarter (1Q 2017: a deficit of RM1.8 billion). Errors and omissions, which include the revaluation changes on reserves, amounted to -RM14.3 billion or -3.3% of total trade. Manageable external debt Malaysia’s external debt amounted to RM877.5 billion, equivalent to USD202.3 billion or 66.9% of GDP as at end-June 2017 (end-March 2017: RM897.0 billion or USD200.8 billion). The lower external debt largely reflects the valuation effects following the strengthening of the ringgit against selected major and regional currencies and net repayment of interbank borrowing during the second quarter. There were also net repayment of intercompany loans and redemption of maturing bond and notes by the private sector. These declines were partly offset by an increase in
17. BNM non-resident holdings of domestic debt securities , especially MGS, and a small increase in non-resident deposits. Malaysia’s external debt remains manageable given its currency and maturity profiles, as well as the availability of large external assets. About one-third of total external debt is denominated in ringgit (32.8%), mainly in the form of NR holdings of domestic debt securities and ringgit deposits in domestic banking institutions. As such, these liabilities are not subjected to valuation changes from the fluctuations in the ringgit exchange rate. The remaining external debt of RM589.9 billion (67.2%) is denominated in foreign currency (FC) and most are hedged, either naturally through foreign currency earnings or through the use of financial instruments. The bulk of these obligations are offshore borrowings, raised mainly to expand productive capacity and to better manage financial resources within corporate groups. As at end-June 2017, the offshore borrowing remained low at 39.7% of GDP compared to 60.0% of GDP during the Asian Financial Crisis. QUARTERLY BULLETIN About Half of FC-denominated Debt Subjected to Prudent Liquidity Management Practices and Flexible Terms Chart 19: Breakdown of Foreign Currency-denominated External Debt (% of share) Loans 5.9% Intercompany loans 17.4% Bonds and notes 27.8% Loans 5.9% Others* 11.5% NR deposits 5.5% Interbank borrowings 31.9% Offshore Borrowings *Includes trade credits and miscellaneous, such as insurance claims yet to be disbursed and interest payables on bonds and notes Of the total FC-denominated external debt (inclusive of valuation effects), more than one-third is accounted by interbank borrowing and FC deposits in the domestic banking system, which amounted to RM220.5 billion. This largely reflects the banks’ intragroup liquidity management and placements of deposits from foreign parent entities, which are subjected to prudent liquidity management practices. Among these are internal limits on funding and maturity mismatches. This is then followed by long-term bonds and notes issued offshore which amounted to RM163.9 billion as at end-June 2017, primarily to finance asset acquisitions abroad that will generate future income. The intercompany loans are normally subjected to flexible and concessionary terms, such as no fixed repayment schedule or low interest rate. From a maturity perspective, more than half of the total external debt is skewed towards medium- to long-term tenure (55.9% of total external debt), suggesting limited rollover risks. It is important to note that international reserves is not the only means in which banks and corporations rely on to meet their short-term external obligations, given the export earnings of borrowers and external assets. The latest reserves position of USD99.4 billion as at 31 July 2017 is only about a quarter of total external assets, with the remaining external assets being held by banks and corporations. International reserves is 1.1 times the short-term external debt and is sufficient to finance 7.9 months of retained imports. SECOND QUARTER 2017 17
18. BNM QUARTERLY BULLETIN 1 Box Article Global Value Chains and the Drivers of Exports in Malaysia1 Authors : Lim Ming Han and Tng Boon Hwa HIGHLIGHTS • Malaysia is deeply involved in Global Value Chains (GVCs), specialising in the final stages of the production process (backward linkage). • High GVC participation has reduced the impact of exchange rate movement on Malaysia’s exports. • There should be a stronger policy imperative to spur companies to reduce reliance on a low-cost production strategy to remain competitive. Introduction Malaysia has long maintained a high degree of openness to trade, with a trade to GDP ratio of 128% as at 2016 (world average: 88.5%). This openness facilitated the economy’s deep integration into the Global Value Chain (GVC) as it started developing in earnest during the 1990s. The formation of GVC was motivated by the desire for efficiency gains, and led to stages of production becoming more dispersed across countries. A consequence of GVC participation is a weaker link between exports and the exchange rate2. With trade within GVCs, exports have sizable imported inputs. A larger share of imported inputs reduces the effect of exchange rate movements. For example, an exchange rate depreciation raises the cost of imported inputs, hence limiting the exchange rate related revenue gains from export proceeds. This Box Article identifies the extent of Malaysia’s participation in GVCs, and how this influences the drivers of Malaysia’s export volumes to its determinants – foreign demand, export prices and, in particular, the exchange rate. Malaysia’s participation in the Global Value Chain (GVC) Diagram 1 shows the two main aspects of participation in the GVC. Backward linkages measure the use of imported inputs to produce goods for exports, while forward linkages reflect other economies’ use of Malaysian products as inputs into their exports. Countries with higher forward linkages tend to specialise in the early stages of GVC, and vice versa for those with higher backward linkages. Diagram 1: Conceptual Chart of Malaysia's GVC Participation Backward linkage Import content in Malaysia’s exports 1 2 18 Malaysia’s exports A technical version is forthcoming in the Bank Negara Malaysia Working Paper series. Ahmed et al (2015) and Ollivaud et al (2015). SECOND QUARTER 2017 Forward linkage Malaysian products used in other countries’ exports Final demand from rest of world
19. BNM QUARTERLY BULLETIN To shed light on Malaysia ’s position in the GVC, Chart 1 illustrates the degree of backward and forward linkages for selected countries. Malaysia’s backward linkage, as measured by the high import content of its exports of 43%, is amongst the highest in the region (e.g.: Singapore, Thailand, Chinese Taipei, Philippines, Indonesia and Korea). In comparison, Malaysia’s forward linkages, measured by its products used in other economies’ exports at 18%, is relatively lower. Together, this reflects Malaysia’s specialisation in the end stages of GVCs. Chart 1: Backward and Forward Linkages of Selected Economies (Avg. 2001-2012) Forward linkage Backward linkage Hungary Slovak Republic Ireland Malaysia Czech Republic Singapore Chinese Taipei Korea Thailand China Vietnam Philippines France Italy Germany Switzerland India United Kingdom Indonesia United States Japan Brazil 43% Import content in exports, % 0% 10% 20% 30% 40% Japan Indonesia Chinese Taipei Philippines United States United Kingdom Germany Switzerland Korea Brazil France Italy Singapore Slovak Republic Czech Republic India Malaysia Vietnam Thailand Hungary Ireland PR China 50% 18% Domestic input in other countries' exports, % 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: OECD- WTO: Statistics on Trade Value-Added database, Bank Negara Malaysia The Implications of Malaysia’s role in GVC on Exports To provide an understanding of the role of GVCs in influencing exports, a model of Malaysia’s aggregate exports was estimated3.The 4 drivers of exports considered are external demand, relative export price, the exchange rate and the import content of Malaysia’s exports to capture Malaysia’s backward linkages in the GVC4. The importance of each driver is shown in Chart 2. Broadly, the findings show that external demand is the most important driver, accounting for an average of 29% of export volume growth (Table 1). This is not surprising and reflects the fact that exports are driven predominantly by global demand conditions. Relative export price is also a key factor with an average contribution of 26%. The ringgit exchange rate plays a supporting role, accounting for an average 14% of export volume growth. Chart 3 illustrates how backward linkages reduce the effects of the exchange rate on Malaysia’s exports. The combined exchange rate effect is split into the stand-alone exchange rate effect (dark blue bars) and its interaction with backward linkages within the GVC (red bars). The results show that the exchange rate effect on exports are dampened by up to 45% when accounting for the economy’s high degree of backward linkages. Intuitively, this implies that the increased cost of imported inputs from a depreciated exchange rate reduces the associated revenue gains from higher export proceeds by an average of 45%. 3 4 An error correction model (ECM) was estimated to capture the roles of demand and each price component in driving export volume growth in both the short- and long-run, while also capturing the persistence of the exchange rate movement in the transmission mechanism. This was done using data from 2000 to 2016. External demand is the weighted GDP of Malaysia’s top 30 export partners. Relative export price refers to the ratio of Malaysia’s export price to global export price, and the ringgit exchange rate refers to the USD/MYR exchange rate, which also includes its interaction with backward linkage. Forward linkage is not included as Malaysia’s input used in other countries’ exports is directly captured in the exports data. SECOND QUARTER 2017 19
20. BNM QUARTERLY BULLETIN Table 1 : Chart 2: Drivers of Export Volume Growth Contribution of the Determinants of Export Volume Growth (Average 2005-2016) Contribution to growth (percentage points) Determinants Contribution (%) 30 20 10 0 External Demand 29 Relative Export Price 26 Exhange Rate (USD/MYR) 14 1Q 08 Others 31 Exchange Rate (USD/MYR) -10 -20 -30 -40 (inc. its interaction with backward linkages) 4Q 08 3Q 09 Others Source: Bank Negara Malaysia 2Q 10 1Q 11 4Q 11 3Q 12 2Q 13 External Demand 1Q 14 4Q 14 3Q 15 2Q 16 Export Price Export Volume Source: Bank Negara Malaysia Table 2: Chart 3: Drivers of Export Volume Growth GVC and the Exchange Rate Effect Contribution to growth (percentage points) 30 Determinants 1Q 17 Contribution (ppt) 20 10 0 Exchange rate (A) 4.2 -10 -20 Exchange rate interacted with GVC (B) 1.9 Final exhange rate effect* (C = A - B) 2.3 Offsetting effect (%) (B / A) 45% -30 -40 1Q 08 4Q 08 3Q 09 All Others 2Q 10 1Q 11 4Q 11 2Q 13 Exchange Rate interacted with GVC Final Exchange Rate Effect* Source: Bank Negara Malaysia * The Final Exchange effect (C) is the difference between the Exchange Rate (A) and its interaction with GVC (B). 3Q 12 1Q 14 4Q 14 3Q 15 2Q 16 1Q 17 Exchange Rate (USD/MYR) Export Volume Source: Bank Negara Malaysia Conclusion and Broader Policy Implication Malaysia’s deep integration in the GVC has implications on the drivers of its exports. While external demand remains the most important driver of exports, integration into the GVC has reduced the sensitivity of the exchange rate on exports. The exchange rate contribution has been larger in recent years, in line with depreciation of the ringgit exchange rate. Going forward, exports growth will be supported mainly by foreign demand, as global economic conditions continue to improve and the ringgit exchange rate stabilises. At the broader level, the analysis also illustrates that Malaysia is no longer able to compete on cost. This is evident from the negative contribution from relative export price to exports growth since the Global Financial Crisis (Chart 3). There should therefore be a stronger policy imperative to develop industries which produce niche products that do not rely on a low-cost production strategy to be competitive. References Ollivaud, P., E. Rusticelli and C. Schwellnus (2015), “The Changing Role of the Exchange Rate for Macroeconomic Adjustment”, OECD Economics Department Working Papers, No. 1190, OECD Publishing, Paris. Swarnali Ahmed, Maximiliano Appendino and Michele Ruta (2015), “Global Value Chains and the Exchange Rate Elasticity of Exports”, IMF Working Paper. 20 SECOND QUARTER 2017