MALAYSIA ECONOMIC OUTLOOKGeneral
The Malaysian economy grew by 8 per cent in the second quarter of 2004, the fastest in four years and stronger than market expectations. Growth was broad based, underpinned by strong exports and domestic demand.
The manufacturing and services sectors continued to register strong growth (12 and 7.4 per cent respectively). The agriculture sector grew at a slower pace (3.2 per cent year-on-year in the first half of 2004). Higher production of rubber and other products were offset by a decline in palm oil production. The construction sector contracted by 1.7 per cent in the second quarter of 2004, although construction activity is likely to rebound following an additional 8.5 billion ringgit (A$3.2 billion) allocation by the government for development projects.
Exports and imports continued to expand rapidly, recording an increase of nearly 30 percent year-on-year in July led by manufactured goods and minerals. Export growth was broad based, including in electronics, chemical products and commodities. Import growth reflected sustained production growth, higher domestic demand and investment activities.
Outlook
The Malaysian economy is likely to grow at a more moderate pace in the second half of 2004, in anticipation of slower global growth. The Malaysian Government has forecast growth of 7 per cent in 2004, which is higher than the 6-6.5 per cent which had been widely predicted earlier in 2004. According to the Malaysian Budget announced on 10 September, Malaysia's GDP is expected to grow by a more moderate 6 per cent in 2005.
Private consumption, currently growing at 9.3 per cent, is expected to remain strong in 2004. Although private investment is expected to grow by 14.8 per cent in 2004, the value of foreign direct investment in the manufacturing sector is well below the target set by the government. Malaysia is aware that it cannot compete on the same terms as China and is currently trying to get its manufacturers to move up the value chain.
Inflation and interest rates remain low. The government is likely to remove incrementally subsidies on petroleum products, although the impact on inflation is not expected to be significant. Domestic interest rates are expected to remain low to support continued economic growth, although a series of interest rate increases in the United States may influence monetary policy due to the ringgit peg of RM3.80 to the US Dollar. The market expects the currency peg to hold in the short-term.
Malaysia: GDP and Consumer Prices
(annual per cent change)
Source: DFAT ¨C Malaysia Fact Sheet: September 2004
Economic Policy
The Malaysian Government's 2005 Budget focuses on four strategies: enhancing the effectiveness of government financial management, efficiency and competitiveness; accelerating the shift to a higher value-added economy; developing human capital as a catalyst for growth; and ensuring the well-being of the population by improving their quality of life.
Malaysia has run a fiscal deficit since 1998. The Malaysian Government has successfully implemented consolidation measures that have contributed to the reduction of its fiscal deficit from 5.3 per cent of GDP in 2003 to a projected 3.8 per cent in 2005. The tax system will be restructured to strengthen further the Malaysian Government's financial position with the aim of achieving a balanced budget by 2008.
A Goods and Services Tax will be introduced in 2007 to replace existing sales and services taxes. A number of tax concessions to reduce quality standards compliance costs will be introduced and import duty and sales tax on raw materials and semi-finished goods imported from contract manufacturers overseas will be abolished. Taxes will be increased on cigarettes and liquor.
In an effort to attract more foreign direct investment and strengthen the capital market, the Malaysian Government will relax foreign ownership limits in the stockbroking sector. Five foreign stockbroking firms and five global funds managers will be allowed to operate in Malaysia without local partners and the limit on the number of foreign dealer representatives will be abolished. The Malaysian Government will also allow 100 per cent foreign ownership of venture capital companies.
The 2005 Budget represents a 3 per cent cut in government expenditure, with financing for smaller projects to promote grassroots development rather than big infrastructure projects favoured by the previous government. The economic and budget forecasts appear to be realistic and in line with market expectations.
Source: Tradewatch.dfat.gov.au
