Malaysia strives to boost economy through overhauling growth mode

KUALA LUMPUR, -- Malaysia is striving to take various measures to accelerate economic growth and tide over the current financial crisis by giving high priority to the reform of its economic growth mode.

DECADE-LOW GDP IN Q1

Malaysia's gross domestic product (GDP) shrank by 6.2 percent in the first quarter of 2009 compared with the same period last year, the biggest fall since the fourth quarter of 1998, indicated by statistics from Bank Negara, the central bank. The decline was far beyond market predictions.

Malaysia, an export-driven economy, "suffered on average 20 percent drop from January to April. So, this has triggered the shrinkage of our economy," Second Finance Minister Ahmad Husni Hanadzlah was quoted as saying by Malaysia official news agency Bernama.

To combat recession and revive home economy, the Malaysian authorities have launched two stimulus packages with a total government injection of 67 billion ringgit (about 18.76 billion U.S. dollars), or nearly 9 percent of the country's GDP.

Akhtar Aziz, central bank governor, forecast earlier that despite early signs of recovery, the economic slowdown will remain in the first quarter. Some experts, however, believed that the economy will gradually turn for the better in the second half as the global economy is expected to touch bottom.

Malaysian Prime Minister Datuk Seri Najib Tun Razak predicted earlier the country's economic growth would contract by 4-5 percent this year, worse than a 3.5 percent decline predicted by the International Monetary Fund in early May.

ECONOMIC MODE REFORM UNDER WAY

The Malaysian government is considering restructuring the country's export-dominated economy by adopting a new economic growth mode centered on innovation, creativity and high value additions.

"We need a model which is more relevant to current times. To move to a higher income-based economy, we have to move towards a knowledge- and innovation-based economy where skilled labor is needed," Nor Mohamed, minister in the Prime Minister's Department, was quoted as saying on a brainstorming session with a World Bank experts' team on May 7.

In Prime Minister Najib's words, the new mode will emphasize raising the productivity of workers by innovation and creativity to help them earn higher incomes, Bernama reported, noting that the country's the per capita income has lingered below 10,000 U.S. dollars for long.

This new mode will help Malaysia further improve its economy, elevating the country from its current high-middle income level to high-income level, said Najib.

Nor Mohamed also suggested the new economic model should count on increasing domestic consumption rather than depending on exports.

Azrul Azwar Ahmad Tajudin, an economist at Bank Islam in Kuala Lumpur, also stressed the urgent need for Malaysia to overhaul its economic growth mode by easing dependence on exports and foreign investment.

The new mode, which will be drawn up by an advisory economic council composed of local and foreign experts, is to be issued later this year.

The pending Tenth Malaysia Plan for the period 2011-2015 will be drafted on the basis of the new economic growth mode so as to ensure a smooth and quick economic recovery from the current recession.

REFORM CRUCIAL FOR ECONOMIC RECOVERY

Malaysia's economic growth has fallen short of expectation for a long time. The average GDP growth is expected to reach 6 percent during 2006-2010 but that goal was met only in 2007. The global economic downturn is expected to raise the country's unemployment rate from 3.1 percent last year to 4 percent this year, and dragged down its foreign investment by 50 percent to 26 billion ringgit (some 7.28 billion dollars).

"We will not allow the country to remain as it is but find ways to achieve a quantum leap so that we can be in the high income bracket, " Najib said in an address on May 1.

Yet, Malaysia is trying to take the global economic downturn as an opportunity to revive its sagging economy. The government hopes the economic reform will enable Malaysia to make the most out of the global economic recovery and help it gain the status of a developed nation by 2020.

Once the global demand recovers, Malaysia's exports of electronics, oil and other commodities will pick up. But the country has to overhaul its export-oriented economic mode and give priority to developing service sectors if it wants to reduce dependence on low added value products and ensure long-term stable benefit.

Oil money fuels Malaysia’s economy

IT is black, but it is also gold. Petroleum, or crude oil, is one of nature’s most precious gifts to mankind. Those who strike oil will strike it rich. The commodity is so useful that the world is predominantly powered by it.

Malaysia has been blessed with an abundance of natural resources, all of which have contributed to the country’s development in their own ways.

But it is oil and gas that have, over the years, superseded other resources in becoming the major fuel of economic growth.

A key component of Malaysia’s economy, the oil and gas sector accounts for 30% of the country’s manufacturing income and about 8% of the annual gross domestic product.

Last year, total oil production in the country stood at an estimated 720,000 barrels per day, of which around 550,000 barrels per day were refined for local consumption.

Total production of natural gas last year was around 2.3 trillion cu ft, of which 50% were consumed locally.

And as a net exporter of oil and gas, it is no doubt that Malaysia will benefit from the rising oil prices.

The higher prices will raise the national income, as well as the Government’s revenue.

Crude dependency

The oil and gas sector has been an important contributor to the Government’s coffers since the 1970s. This is evident in the amount of money it has received from Petronas through the years.

According to the national oil company, it has paid the Government a total of RM403.3bil between 1974 and 2008.

Last year alone, Petronas’ payment was RM67.6bil, or 63.1% of its profit for the year.

That amount represented 44% of the Government’s revenues for 2008.

The trend of the Government becoming increasingly dependent on oil revenues can be traced back to the early 2000s, when there was an emergence of a strong and sustained rally of crude oil prices, mainly as a result of the geopolitical tension in the Middle East.

However, economists have pointed out that the growing proportion of oil revenues is worrying.

They believe that high dependency on oil revenues to finance fiscal spending is not a viable long-term option, as it increases the vulnerability of the Government budget, and hence the country’s economy, to fluctuations in the commodity’s prices.

So, fiscal adjustment is needed for the Government to ensure long-term stability of its finances.

There is a need for the Government to seek other sources of revenue through diversification and to focus on increasing its non-resource-based revenues, such as taxes.

Among the potential initiatives are tax reforms and reinvestment of oil money in revenue-generating assets.

Previously, the Government had considered implementing goods and services tax (GST) by 2007, but the plan has since been shelved.

Another issue that the Government has to contend with is the subsidies for fuel and gas. In Malaysia, both oil and gas are subsidised, hence their retail prices are lower than market prices.

While high oil prices are a boon to its kitty, it also means that the Government will have to fork out more to subsidise the public’s consumption of fuel.

The Domestic Trade, Cooperative and Consumerism Ministry has said the Government did not have to pay fuel subsidies as long as crude oil prices were below US$65 per barrel.

But now that the commodity has exceeded that level, it appears that the Government will have to pay subsidies again.

According to the Economic Planning Unit (EPU), the total amount of subsidies borne by the Government between 1997 and 2008 was roughly RM78bil.

The total subsidies last year came to about RM20bil, compared with RM16bil in 2007.

Former deputy director of the Energy Section of the EPU, Dr Pola Singh, who is now an independent energy analyst, says Malaysia is a laggard in removing subsidies.

“An environment where fuel prices are kept artificially low will do more damage than good in the long term,” he explains.

He added that it is necessary for the Government to reduce the level of subsidies gradually for retail prices to reflect market prices and to wean Malaysians off their addiction to cheap fuels even though this will not be a popular move.

“We are generally wasteful when prices are low,” Pola argues.

He cites the example of petrol stations experiencing a significant decline in the demand for fuel when pump prices went up to RM2.70 per litre in July last year.

But following the lowering of pump prices to the current rate of RM1.80 per litre, Malaysian consumers have reverted to their old ways, and their consumption pattern is now back to normal.

Depleting resources

Meanwhile, there is no quick fix to the world’s dependence on oil. As the global economy continues to expand (despite the current hiccups, which it has been suffering over the past one year), demand for oil and natural gas as sources of energy continues to grow.

Reserves are fast depleting, as oil and gas, being non-renewable commodities, are continually being extracted to feed global consumption.

The combination of growing demand and depleting reserves may turn many net oil exporters into oil importers.

In the case of Malaysia, if domestic demand continues to grow at 4% annually and the country’s oil and gas production remains at a flattish 2.7% per year, there is a possibility of the country becoming a net importer within the next 10 years.

Held by Petronas, Malaysia’s total domestic reserves of oil and gas as at Jan 1, 2008, stood at 20.13 billion barrels of oil equivalent, while its total international reserves of oil and gas was at 6.24 billion barrels of oil equivalent.

In 2008, Petronas’ reserve replacement ratio stood at 0.9 times, down from 1.4 times and 1.8 times in 2007 and 2006, respectively.

The ratio is a measurement of new reserves discovered to volume of production. It is an indication of the company’s track record in maintaining a stable reserve of oil and gas.

There are various efforts to find new reserves. It is reported that Petronas spends about RM40bil per year on exploration and development activities, and it has indeed been successful in making discoveries, particularly in the deepwaters of Sabah and Sarawak over the years.

In addition, Petronas has overseas ventures in more than 30 countries now.

This could boost its reserve replacement ratio and provide opportunities for local oil and gas services providers to penetrate international markets via the national oil company, which usually prefers to award contracts to Malaysian companies.

However, the thinking that as long as we continue to invest, we will keep finding new oil reserves and that we may not run out of oil will give rise to a lack of a sense of urgency to devise new strategies for a fallback plan, says Pola.

There are no short cuts to counter the depleting fossil fuel resources, he says, but policymakers and corporations can accelerate initiatives to improve energy conservation and develop renewable energy to reduce consumption of oil and gas.

On the role of consumers, Pola says they can practise voluntary restraint and conservation to reduce pressure on oil demand.

Malaysia Economic Analysis

As per Malaysia economic analysis emerging markets over there have shown to be steady and growth has been fast. Several plans have been implemented to update agrarian economy towards manufacturing industry. Malaysia receives different contribution from various sectors of economy. Contribution of agricultural sector to Malaysia GDP in 2008 was 9.7 percent. There was a contribution of 44.6 percent from industrial sector and 45.7 percent came from service sector in financial year 2008.

Economic analysis in Malaysia reveals that state policy of Malaysia focuses on investment in export industries, which mainly comprise electronics goods, investment in real estate sector, non tradable sectors and capital intensive infrastructure. $15,700 has been estimated as Malaysia GDP per capita in 2008. Malaysia economy, now a developing multi-sector economy was previously a mere raw materials producing one.

Economic analysis at Malaysia states that Malaysia GDP as per purchasing power parity was estimated to be $397.5 billion in 2008. Real growth rate of Malaysia GDP of 2008 was approximately 5.5 percent. GDP as per official exchange for 2008 was $214.7 billion. In financial year 2008, Asian Development Bank (ADB) shows Malaysia GDP to be 5.7 percent.

Economic analysis of Malaysia shows that there is a fiscal expansion in nation that has increased domestic income. Recession in global economy has led to reduction of electronics export. These electronic exports were major revenue earners for Malaysia. Early in 2001, Malaysia had a global growth in economy because of silicon based products.

As per Malaysia economic analysis a good development for their economy has been that value added production for has been taken charge of by Prime Minister Abdullah. Investments were encouraged to be made in high technology industries, medical technology and pharmaceuticals. For financial stability, a number of macroeconomic policies have been implemented.

Economic problem that is faced by this south Asian nation, which is revealed by in depth Malaysia economic analysis, is its dependency entirely on electronic exports. Exports need to be diversified in various other sectors including financial and service sector. Corporate bond market can be established to promote private domestic investments. This way, current account surplus can be curbed because of high foreign investments. Malaysia made huge profits by exporting oil and gas and this has contributed greatly to its economic development.