MALAYSIANECONOMICOUTLOOK

Executive Summary

Introduction
Risk, uncertainty and volatility are the key factors undermining confidence of economic agents, irrespective which
group they belong to, ordinary domestic households, profitmaximizing producers, entrepreneurs, retailers, financial
intermediaries or smart and sophisticated foreign investors in the rest of the world (ROW), with the exception of risk
lovers. Loss of confidence and growing anger over increasing financial difficulties, especially by low income households
and ordinary citizens alike are warning signals of an economic distress. While the warm glow effects, associated with
favourable sovereign credit ratings, which have been upgraded and reaffirmed at "A" with "stable" outlook by Fitch
and S&P, respectively in July 2015 disappeared quickly, new headwinds are on the way and risks remain tilted on the
downside, especially on the international front. These include Greek debt crisis, which is still unfolding and China's
financial market turmoil. These two countries share one common feature, that is a strong presence of Government in
the economy, as indicated by a large number of stateowned enterprises and statecontrolled banks and financial
institutions. They could potentially trigger the worstcasescenario for the global economy.

On the domestic front, there are discernible "dark clouds" hovering over Malaysia's economic landscape, while
political storms are brewing and "dark forces" rearing their ugly heads again, sparked by advances in communication
technology (internet and social media), growing inequality in both income and property ownership, urban poverty and
also racial divide. Economic dark clouds include the rising cost of living; severe misalignment in the value of ringgit
exchange rate, which cannot be simply left to unrestrained FX market forces; elevated Federal Government and
household debts; rising contingent liabilities and significant exposure at default (EAD). While default probability is low
and loss given default manageable, EAD remains substantial, especially with increasing risk of a "multinotch
downgrade" or migration of rating to lower investment grade, as reported by BNP Paribas.

Related to these developments, there is clearly a need for new "optimal policy framework", focussing on shortterm
stabilization measures by putting greater efforts at renewing Government's commitment, restoring market sentiments
and confidence, enhancing policy credibility and protecting Malaysia's good reputation overseas. While current
economic conditions are somewhat different from initial conditions of the Asian financial crisis in 1997/98, we need to
start examining indepth all binding constraints, external shocks, domestic weaknesses as well as strengths to
economic and social development in the country. We need to fully maximize social welfare gains and avoid
deadweight losses, associated with weak institutions, poor governance, entrenched vested interests, pervasive
corruption and lack of openness and transparency, as recently seen in "distressed economies" in the euro area,
developing economies in the US dollar zone and even some "developed economies" in Asia. More importantly, we
need to ensure continued happiness and good life for the rakyat, encouraging greater kindness and compassion and
avoiding to a large extent "tyranny of the majority" and prosperous fools. As noted by the ancient Greek Philosopher
Aeschylus "a prosperous fool is a grievous burden".
Shortterm Issues and Stabilization Measures
Real GDP registered a strong growth of 5.6% in the first quarter of 2015, performing betterthanexpected in an
environment of fragile global recovery and uneven observed growth across country classification and regions.
Meanwhile, net current account of the balance of payments (NCAB) remained in surplus, registering almost RM10
billion in the first quarter of 2015. This helped to alleviate undiminished concerns, especially by foreign rating

agencies, market analysts as well as nonresident investors about the likelihood of "twindeficit" phenomenon, which
could materialize on quarterly basis. While overall unemployment remained at 3.1% of the total labour force in May
this year, indicating full employment situation (4%), consumer price inflation accelerated higher in June 2015,
registering 2.5% (May 2015; 2.1%, April 2015: 1.8% and March 2015: 0.7%), on account of mostly policydriven domestic
costpush factors. These included a cumulative direct and indirect effects of GST implementation, upward
adjustments in fuel enduser prices and also partly higher import prices, following almost acrosstheboard declines in
ringgit exchange rates against Malaysia's major trading partners. Fortunately, pricing behaviour of firms and strong
market competition, especially in the distribution and marketing channels, helped to minimize sharp increases in
domestic consumer prices.
In fact, worries about full passthrough effects from sharply lower ringgit more or less dissipated, as intermediate
producers absorbed higher imported costs, focussing their efforts more on raising productivity, while final producers,
wholesalers, distributors and retailers searched for alternative sources of materials and final products around the
globe, therefore avoiding excessive markups and hikes in consumer prices. Although GST price effects are
unavoidable, as part of the transitional process of taxation reform in the country, firms and traders are dictated more
by competitive market forces, working hard to protect their market shares and willingly accept lower profit margins.
Moreover, traders or retailers are not allowed to increase their net profit margin for any goods or services for 18
months from January 2015 to June 2016, as required under the Price Control and AntiProfiteering Act 2011. This
augurs well for the Malaysian economy, providing a solid window of opportunity in ensuring smooth implementation of
the Goods and Services Tax (GST) in the coming months as well as in the years ahead. Generally, there is a wider
acceptance and public ownership of this important fiscal reform program, except probably the GST initial tax rate,
which many considered excessive to start with. Taxation reform is for the long haul of the economy and not to
increase revenue and reduce deficit, especially in the shortterm. While longterm benefits will far outweigh the
shortterm costs or pains, and the gainers will ultimately be the rakyat in the longterm, there must be a binding
commitment on the part of the Government, not only to raise revenue but also to spend it wisely and in a prudent
manner. The implementation of GST together with removal of decadesold fuel subsidy regime need to be
complemented with strong fiscal discipline and more importantly, good governance on the Government side. There
must also be greater transparency and enhanced public integrity, better and more predictable policies and sustained
reform process, which altogether help in removing aggregate domestic uncertainty and in the final analysis improving
policy credibility and predictability.
As a tradeoriented and financially integrated economy, Malaysia continues to be susceptible to both unanticipated
and anticipated shocks, such as reversals in portfolio flows, fluctuations in the prices of commodities and sharp
volatility in financial assets prices. Commodity terms of trade (CTOT) losses, depreciating ringgit and anticipated
higher interest rates in the United States (US) are negative shocks that will affect adversely Malaysia's currently
favourable domestic macroeconomic fundamentals. The reversal in portfolio investment flows, as seen previously in
the fourth quarter of 2014, accelerated markedly in the second quarter of this year, involving mostly nonresident
portfolio investors, who are still holding significant amount of Malaysian equities (about 24%) as well as Malaysian
Government Securities (MGS, about 47%). These investors are generally smart, rational and forward looking, always
searching for better returns for their portfolio investment around the globe. They are also fickleminded investors
who subscribe to herd mentality, gradually and partially moving out from emerging market economies (EMEs),
including Malaysia by reallocating their portfolio to dollardenominated assets, especially in the US.
They are in fact riding on new optimism, taking advantage of roaring boom of the US economy and betting on the hike
in the US rock bottom interest rates, which could come sooner than expected, despite continued monetary easing in
both developed and emerging market economies. Moreover, global economic prospects remain uncertain, especially
in the euro area and China, the world's second largest economy. Meanwhile, external risks remain tilted on the
downside, especially with an ongoing Greek debt crisis and continued fighting in the MiddleEast. There are also
reports about crossborder conflicts and threats posed by extremist groups in Africa as well as in Asia. These socalled
geopolitical factors affect market sentiments, pushing portfolio investors to look for a safe haven in the US and more
recently Japan, as investors are becoming more riskaverse and also home bias in their international portfolio
diversification.
Looking at the mediumterm macroeconomic perspective, downside risks remain manageable, while strong recovery in
the US economy will hopefully provide a "shot in the arm", sustaining the country's export earnings of goods and

services as well as foreign exchange earnings from tourism activities, following greater number of tourist arrivals.
Generally, markets remain the best allocators of nation's scarce resources, providing unbiased judgements about good
management of the macro economy. As such, misguided government interventions result in market imperfections and
distortions, while weak and uncoordinated policy actions, especially in strategic and important areas create
uncertainty among economic agents and affect policy credibility as well as predictability. There are social costs and in
fact welfare losses to society, associated with lack of openness and transparency, gap in policy credibility, weak
institutions, poor governance and, worst still low ethical and moral values. These are "soft" elements, affecting public
sentiments and investor perceptions and, therefore, need to be managed intelligently and further strengthened.
There must be good signalling mechanism for market participants to react adequately, while "gradualism" and
extensive consultations with key stakeholders will ultimately help to avoid idiosyncratic uncertainty and negative
perceptions of stakeholders, investors and rakyat alike.
Macroeconomic and Financial Policies
BNM through its Monetary Policy Committee (MPC) again anchored the Overnight Policy Rate (OPR) at 3.25% in its
latest MPC statement on 9 July 2015, the sixth time since BNM raised the OPR on 10 July 2014. The decision certainly
provides financial comfort and continued easy monetary conditions for local economic agents, who are presently being
burdened with rising cost of living and declining disposable income, associated with the implementation of GST in
April 2015, upward adjustments in retail fuel pump prices and expectation of more subsidy rationalization actions in
the coming months. These included recent increase in fares for taxis (43%) and 23% for express buses, which seemed
unreasonable and burdensome. The MPC decision was also in line with the US Federal Reserve Bank (Fed) decision to
delay the increase in the Fed Funds Rate from its almost zero percent since December 2008, on account of benign
observed inflation, negative output gap and prevailing longterm structural issues. The Fed Funds Rate is expected to
be raised only in September 2015 and most likely to be delayed to early 2016, as requested earlier by both the IMF as
well as World Bank. Most importantly, the European Central Bank (ECB) and the Bank of Japan are currently
implementing the US Fedinspired quantitative easing and continuing with their accommodative monetary policies.
Advanced countries in the Asian region, such as Australia, New Zealand and Korea have recently reduced their policy
rates to arrest their moderating economies, while India has maintained its current policy rate. Of greater significance,
the Bank of England is expected to delay tightening of its monetary policy, despite registering strong recovery in the
economy. The US neighbour up north, Canada has also eased monetary policy stance.
As such, the MPC decision to maintain the OPR at 3.25% seemed appropriate and relevant in the current
circumstances, as average consumer price inflation remained low at 1.4% in the first six months of 2015, while output
gap is expected to be negative for the year as a whole (socially optimal potential output: 5.5% per annum).
Nonetheless, inflation expectations are seen as gathering momentum, rising almost acrosstheboard in recent
months, on account of policydriven domestic costpush factors, while demandinduced inflation remained largely
benign, as private consumption expenditure is on a moderating path. The uptick in consumer prices, associated with
the GST implementation seemed minimal and well undercontrolled, as seen in June's inflation rate, which edged
upwards by only 2.5% on yearonyear basis (May 2015: 2.1%, April 2015: 1.8%, March 2015: 0.7%). The uptrend in
inflation rate is expected to be a transitory phenomenon, looking like a chisquare probability distribution with higher
degree of freedom (impulse response function), which is expected to quickly decline over time, barring other new or
planned backtoback markup in prices or wages. As such, inflationary pressures associated with domestic costpush
factors, especially GST are expected to be wellcontained, supported to a large extent by a persistently low crude oil
prices (as seen in moderating transport charges) and continued low inflation environment on the international front.
Private sector liquidity or broad money (M3), which bottomedout in August 2014 with a growth of only 4.8%, moved up
steadily to record a strong growth of 7.9% in March 2015, but it took a turn in May and June 2015, decelerating by 5.7%
and 6.0%, respectively. This tightening of monetary condition was partly contributed by a slowdown in quasimoney
(M2), registering only 6.5% in June 2015 (May 2015: 6.2%, April 2015: 7.0%, March 2015: 8.5%). Meanwhile, growth in M1
accelerated to 9.5% in June 2015 (May 2015: 8.7%). The easing of domestic liquidity as seen in the first three months of
2015 seemed to be shortlived, although there was a continued expansion in domestic credit (DC) extended to the
private sector, particularly to businesses. In terms of factors influencing M3 annual growth, the slowdown in recent
months was attributed to an improvement in Government operations, in which net claims on Government declined
substantially on account of rising Government deposits with the banking system. Meanwhile, net foreign assets (NFA)
continued to weaken, exacerbated by declining trend in NFA of the banking system, following persistent outflows of

portfolio investment from both equity and debt securities markets. While the tightening liquidity situation was not
reflected in the movements of key interest rates, in view of presently stable interest rate environment both at home
and abroad, exchange rate clearly took the brunt of adjustment, depreciated markedly against the currencies of most
of Malaysia's major trading partners in May as well as June 2015.
Unfortunately, the ringgit continued its depreciating trend in July and early August 2015, which generally started in
September 2014, as US dollar gained strength on the back of roaring boom for the US economy and expectation of US
monetary policy normalization from practically zero benchmark interest rates. Portfolio outflows by nonresidents are
expected to continue, reducing further net international reserves of BNM, especially with expectations of continuing
flat OPR in the coming months, weakening domestic macroeconomic fundamentals and elevated concerns on high
Federal Government debt and exposure at default (EAD) of Government guaranteed bonds. Deterioration in
commodity terms of trade (CTOT), increasing percentage share of Federal Government debt to GDP, widening of real
interest rate or yield differentials, rising country risk premium and widening credit spreads are the key concerns of
portfolio investors. As such, ringgit will remain under strong exchange market pressures by traders, arbitragers,
hedgers and speculators, as crude oil prices are on the downside (31 July 2015: USD47.12 per barrel). Similarly,
liquefied natural gas (LNG) prices are also on the downside, as both supply and demand conditions turned negative.
The outcomes of the Iran nuclear deal dictate the movements of both crude oil and LNG prices.
While we have successfully diversified our economy away from commoditybased exports, our nominal effective
exchange rate (NEER) tracks closely crude oil prices, as oilrelated revenue account for up to 30% of Federal
Government revenue in recent years. Meanwhile, oilrelated exports accounted for 13.6% of total exports, and
together with LNG (8.4%), another resourcebased commodity export, the share remained significant at 22% in 2014.
Meanwhile, the share of manufactured exports more or less stagnated at about 70% of total export earnings. This was
triggered by the "premature deindustrialization" phenomenon, as the country moved aggressively to unfortunately
low valueadded and low wages services sector (2014: 53.5% of GDP), relying heavily on lowwage foreign workers.
Latest available DOS data show that compensation of employees (COE, labour share) accounted for only 34.3% of
nominal GDP in 2014, while gross operating surplus of firms remained large at 62.6%. Prices of other commoditybased
exports, such as palm oil and rubber are also falling. In the shortterm, persistently low crude oil prices, financial
market frictions, together with existing price stickiness and wage rigidities in the product and labour markets will see
that ringgit continues its undershooting, as predicted decades ago by the economist, Rudi Dornbusch in his celebrated
overshooting exchange rate paper.
The prevailing imperfections in market microstructures, foreign exchange (FX) keyboard and chartbased electronic
trading together with almost instantaneous transactions 24/7 around the globe will also see that ringgit exchange
rates are being influenced stochastically by noneconomic process. These include waves of unanticipated news and
political events that affect investor sentiments and perceptions of market participants. In addition, there are also
herd mentality and behaviour among portfolio investors, including local institutional investors, subscribing to oneway
destabilizing flows, especially in abnormal or difficult times. In terms of fair value or fundamental equilibrium
exchange rate, there is clearly severe misalignment in the value of ringgit, which is being backed by strong
underlying domestic macroeconomic fundamentals. In fact, the ringgit external value is presently being backed by
substantial amount of BNM's unencumbered net international reserves, which remained above the "psychological"
threshold of USD100 billion (or equivalent to about 34% of nominal GDP and 7.9 months of retained imports).
While the ringgit is currently misaligned, in view of its extreme undershooting, it is expected to revert back to its
equilibrium fair value of between RM3.50 to RM3.70 per US dollar in the medium term, as exchange market pressures
subside and the twoway flows return back to the FX markets. This meanreverting process, however, will take a
while longer to materialize as negative surprises keep popping up, affecting market sentiments and investor
perceptions. In this respect, we need to nurture back the confidence of economic agents and FX market participants
as well, encompassing both locals and foreign portfolio investors. Moreover, portfolio flows have been very volatile,
since the global economic and financial crisis in 2008, moving in and out of Malaysian equity and capital markets,
dictated not only by yield differentials, country risk premium and credit spread, but more importantly by US
monetary policy and its associated uncertainty. These included taper tantrum seen in May 2013 and currently the
difficulty of the US Fed in moving out smoothly from its rock bottom interest rate policy environment.
While BNM earlier adopted passive reserve management strategy, allowing ringgit to adjust flexibly through FX
market forces when US dollar was clearly strengthening on the other side, BNM is recently seen as intervening

heavily to arrest further decline in the value of ringgit exchange rate. Despite strong FX interventions (FXI), however,
the ringgit crossed the "psychological" level of RM3.80 per US dollar on 6 July 2015, closing slightly lower at RM3.8070.
In fact, the ringgit was the worst performing currency in Asia on that day, depreciating acrosstheboard against other
major currencies, including the Euro and Japanese Yen as well as with Thai Baht and Vietnamese Dong. Although the
trigger point was clearly the deepening of Greece's debt crisis, that culminated in a "No" votes to tough IMF and ECB
bailout austerity measures, domestic noneconomic factors were also at play that day, depressing further the
external value of ringgit. Meanwhile, the ringgit remained below the "psychological" threshold of RM3.80 in recent
weeks, indicating excess supply of ringgit in the FX markets, as confidence remained weak. Extreme undervaluation of
ringgit, if not stabilized in the medium and longterm, could well see that external debt services, especially by the
private sector get bigger and bigger and import bills get higher as import shares for both home production and
consumption are quite significant. Moreover, import of intermediate and capital goods are closely linked with both
exports and domestic investment. If ringgit depreciation persists, social costs and welfare losses to the society could
far outweigh the benefits of improving export competitiveness and greater number of tourist arrivals in the country.
With a managed floating exchange rate regime, following the dismantling of fixed exchange rate regime in July 2005
and together with free flow of capital, ringgit continues to take the brunt of adjustment, especially with expected
continuing unchanged OPR in the coming months. Meanwhile, fiscal policy remains at a centre stage, especially with
worsening fiscal space, as oil prices remain in doldrums. As such, fiscal affairs need to be managed in a credible and
prudent manner, as increasing Federal Government debt and rising contingent liabilities are the topical concerns of
portfolio investors, FX strategists and sovereign rating agencies and citizenry alike. This is especially so with the
expected decline in oilrelated revenue (2015 est: 29% of total Federal revenue), moderating private spending and
elevated borrowings to finance mega infrastructure projects, as unveiled under the 11MP. Moreover, about 47% of
ringgitdenominated Malaysian Government securities (MGSs) are owed to nonresidents, and tenors are mostly
mediumdated (more than 5 years to 10 years). Meanwhile, borrowings by GLCs and private corporations are mostly in
US currency, but fortunately tenors are mostly medium to longdated.
Although bilateral ringgit and US dollar exchange rate moves in tandem with crude oil prices, based on high
frequency real time data, these transitory relationship is expected to weaken in the medium term. Shortterm
exchange rates move largely with news and expectations, whereby market participants are rational and forward
looking, placing greater weight on unanticipated events. On a positive note, net international reserves position
remained substantial (34% of nominal GDP), providing adequate buffer and "insurance cover", depending on reserve
management strategy of BNM and also external developments. Speculators like to get their fair share of accumulated
reserves, taking calculated risks and profiting from idiosyncratic uncertainty and volatility, associated normally with
macroeconomic mismanagements, weak governance or simply pure mistakes by the authorities. More so, if they have
in their possession relevant information that can materially provide basis for oneway speculative activity, which more
often than not is destabilizing.
Net international reserves continued its downward trend, touching USD100.5 billion as at 15 July 2015 (endDecember
2014: USD116.0 billion; endDec 2013: USD134.9 billion). Fortunately, the ratio of international reserves to shortterm
external debt remained at 1.1 times, marginally above the standard international threshold of 1.0, as shortterm debt
also changes with financial market developments. However, Malaysia international investment position (IIP) continued
to record deficit, totalling RM13.1 billion as at end of 2014 (end2013: RM47.2 billion, end2012: RM17.8 billion),
indicating that Malaysia is a net debtor on international front, running for three years in a row. This unfavourable
position is expected to continue this year, despite smaller deficit of RM1.2 billion registered as at endMarch 2015.
Persistent and significant outflows of portfolio investment in the second quarter of 2015 and possibly in the coming
months could well see that Malaysia again register a net debtor position in 2015.
Global Economic Developments and Prospects
The global economy is clearly on shaky ground this year, caught by increasing indebtedness in a large number of
developed as well as emerging market economies (Malaysia included). There is also uncertainty and enhanced
volatility in the global financial markets. These factors affecting not only presently "distressed economies" like Greece
in the euro area and Puerto Rico in the US dollar zone, but also extending to emerging market economies, such as
Brazil, Russia, India and China (termed as BRICs). The latter is the world's second biggest economy and also global
manufacturing powerhouse, absorbing substantial amount of resourcebased materials from other developing
countries, particularly in Africa, Asia and the MiddleEast.

While Greek economy is relatively small to affect the world economy, economic and political events, associated with
Greek debt crisis could potentially provide a trigger point for negative surprises, affecting not only "stressed
economies" in the euro area, but also other emerging market and developing economies around the globe. China is
currently struggling hard with a slowdown, engineered initially by the authorities as part of the efforts to rebalance
their sources of growth. The authorities have recently intervened to arrest plunging share prices, which remained
out of sync with underlying domestic market fundamentals. The stock market meltdown in China resulted in USD3.2
trillion being wiped out from market capitalisation within a period of only three weeks. As such, a full blown stock
market crash and financial market turmoil in China could possibly trigger much wider effects, not only to the global
financial markets, tightening global liquidity situation, but also affecting the real side of the economy in emerging
market and developing economies as well as advanced countries. Resourcebased economies, such as Australia and
Canada, and many countries in Asia and Africa, will be adversely affected, again Malaysia is included. Moreover, higher
interest rates in the US and stronger US dollar could also see that borrowing and debt servicing costs for many highly
indebted nations will be on the rise, exerting significant pressure on Government finances.
While continuing lower oil prices, easy monetary conditions and roaring boom in the US economy helped to support
global economic recovery, global growth remained uneven, across country grouping as well as regional classification.
The International Monetary Fund (IMF) in its latest World Economic Outlook Update (WEO Update, 9 July 2015),
released on 9 July 2015, revised downward the 2015 annual growth estimate for the world economy to 3.3% (2014:
3.4%), representing 0.2 percentage point lower than April 2015 WEO estimate of 3.5%. Meanwhile, the IMF maintained
the global growth forecast for 2016 at 3.8%, indicating that global economy will somehow strengthen next year.
Growth in advanced economies is expected to be on the uptrend this year, growing slightly lower by 2.1% (2014: 1.8%,
2013: 1.4%), compared to April 2015 WEO forecast of 2.4%, while growth rate in 2016 is projected to be 2.4%, the same
rate as predicted before. Growth in emerging market and developing economies as a group is projected to moderate
slightly to 4.2% this year (2014: 4.6%, 2013: 5%), which is only 0.1 percentage point less than earlier forecast at 4.3%.
However, growth is expected to gain momentum, registering 4.7% in 2016, supported by a rebound in economic
activity, especially in crisisaffected countries.
Recovery in the US economy remains on track, despite temporary setbacks that occurred in the first quarter of 2015
in the form of severe winter conditions and strikes by port workers in the west coast. While growth declined by 0.2%
in the first quarter of 2015, latest estimates indicate that growth has strengthened in the second quarter 2015.
Private consumption expenditure (PCE) as well as private investment continued to be the key drivers of growth,
supported by healthy labour market conditions, strong wage growth, continued easy monetary conditions, lower fuel
pump prices and improving housing market conditions, among others.
There are also positive signs emerging from the euro area with growth prospects improving in recent quarters,
especially with ECB's quantitative easing. Domestic demand is on the rise and fears of deflation dissipated as inflation
is beginning to come back. The IMF in its July 2015 WEO Update maintained the growth forecast for the euro area at
1.5% in 2015, while forecast for 2016 has been revised upward by 0.1 percentage point to 1.7%. While growth forecasts
for major countries, especially Germany and France have been maintained as in April 2015 WEO, projections for Spain
and Italy have been revised upward in both 2015 and 2016, pointing to robust recovery in these previously "stressed
economies", except Greece. Economic and political events are still unfolding in Greece, and these events could have
serious implications to the euro area. Moreover, the euro area is still struggling with high unemployment and high
Government debt. Looking at geopolitical factors, there are still tensions between Russia and Ukraine, while Russia
and the Commonwealth of Independent States (CIS) are facing economic difficulties, especially with continuing lower
oil prices and declining confidence.
Structural reforms are clearly needed in Japan, as Japan is growing at a very slow pace, constrained largely by high
public debt, which stood at 245% of GDP. Abenomics has triggered bubble in asset prices, with the stock markets
closed markedly higher in May 2015, while the real economy remained weak, as growth last year was at 0.1% (2013:
1.6%). Weaker Yen and uncertain economic outlook, especially in China are affecting private consumption expenditure
which remains sluggish. Moreover, growth in real wages is weak. In this connection, Japan's growth forecast for 2015
has been revised downward by the IMF (WEO Update, July 2015), projecting growth of 0.8% in 2015. Meanwhile growth
forecast for 2016 has been maintained at 1.2%, in tandem with favourable growth projections for the majority of
advanced economies.
Meanwhile, China is growing slowly, but more sustainably at 6.8% growth predicted this year (2014: 7.4%, 2013: 7.7%)

and 6.3% in 2016, the same growth forecasts as in April 2015 WEO. These growth projections are in line with enhanced
structural reforms and efforts by the authorities at rebalancing the economy. However, according to the IMF, there
are still difficulties in China's transition to a new growth model, as seen by the recent stock market swings and the
intervention by authorities, resulting in enhanced market volatility and greater uncertainty. Growth in India is on the
uptrend, representing a truly bright spot in Developing Asia. India is benefitting a lot from a persistently low energy
prices, together with its continued reform programs. The IMF maintained India's growth forecasts for 20152016 at 7.5%,
which is clearly on the uptrend (2014: 7.3%, 2013: 6.9%) and overtaking China's slowdown in growth rate in recent
years. Meanwhile, in Latin America and the Caribbean, Brazil another BRIC country, is in deep recession, sharing
similar economic difficulties with Russia, due mainly to lower commodityexport prices. Growth projections for these
two countries have been marked down to 1.5% and 3.4%, respectively in 2015 (2014: 0.1% and 0.6% respectively),
while growth in these two countries are expected to improve, but remain below 1% in 2016. Countries in the Middle
East and parts of Africa are certainly in deep political and economic turmoil, especially in Syria, Iraq and more
recently Yemen.
While world oil production remains on the uptrend, especially with successful conclusion of the Iran nuclear deal,
coupled with expectations of rising interest rates in the US, weak recovery in the euro area and slowdown in China,
commodity price movements will continue to be on downtrend, especially crude oil, while US dollar getting stronger.
Meanwhile, crude oil prices, which declined by almost 50%, rebounded in the second quarter of 2015, supported
partly by higher demand. Nonetheless, crude oil prices are expected to register only small increases this year as well
as in 2016, averaging about USD59 per barrel in 2015 and USD64.22 per barrel in 2016, according to the latest
projections by the IMF. While global oil supply is on the rise, global oil inventories are accumulating, as world oil
demand remains weak, following fragile global recovery. Additionally, geopolitical factors have gained prominence,
especially with continued fighting in the Middle East, sanctions against Russia and its retaliatory actions and also
changes in the political landscape. The latter include political uncertainty and the possibility that pendulum swing to
the extreme left, throwing away tough austerity and reform measures in many "stressed economies" in the euro area.
While distressed economy like Greece accepted its third bailout package, despite "No" votes by the Greek people,
tough austerity measures and less money actually being channelled for real productive purposes, point to continued
vicious cycle with potentially severe economic implications and political repercussions. Sovereign bond yields with
long tenors have already increased by 80 bps in the euro area (excluding Greece) since April 2015, according to the
IMF. Meanwhile, longerterm sovereign bond yields and country risk premiums are also on the rise in emerging market
economies, reflecting increased uncertainty, especially with soonerthanexpected hike in the US interest rates,
altering the term structure of interest rates more to the upside, as term and risk premium on longerterm bonds are
still low, as observed by the IMF.
While global risk, uncertainty and volatility remain about the same as in the previous reports, shortterm risks are
tilted on the downside, especially with recent events in Greece and China, which are still unfolding. The IMF in its
July 2015 WEO Update again mentioned about disruptive asset price shifts and further increase in financial market
volatility as major nearterm risks to the global economy. Meanwhile, financial market turmoil; a further US dollar
appreciation; reemergence of financial stress; financial market turbulence in China and geopolitical tensions in
Ukraine and fighting in the Middle East as key shortterm risks, mentioned earlier in April 2015 WEO. Meanwhile, fiscal
imbalances in the euro area and in many emerging market economies, misalignment of currencies and
mismanagement of fiscal stimulus also remain as shortterm risks. Mediumterm risks include low potential output
growth and secular stagnation in advanced economies and consequently lower potential growth in emerging market
economies. Lower commodity export prices will affect economic performance of resourcebased economies, including
highincome nations and, most worryingly lowincome developing economies in Africa as well as Developing Asia.
Looking from longerterm perspective, aging population is expected to lower labour input in advanced economies,
especially in Japan.
LongTerm Issues and Structural Adjustments
Looking on medium and longterm perspective for economic and social development in the country, the Eleventh
Malaysia Plan (11MP, 2016 2020) was unveiled in Parliament on 21 May 2015. While Malaysia aspires to join the four
Asian tigers, its country classification remains as one of the emerging market economies (EMEs) in Southeast Asia with
an upper middleincome category. With multidimensional goals, the Eleventh Malaysia Plan focuses on enhancing
inclusiveness towards an equitable society and improving wellbeing for all, among others. The adoption of sustainable

consumption and production concept in pursuing green growth strategy for sustainability and resilience is clearly on
the right direction. Meanwhile, the Eleventh Malaysia Plan also giving greater focus on strengthening infrastructure to
support economic expansion, which is clearly necessary to enhance connectivity and easy access for wellbeing of the
rakyat.
With outlook for global economic activity remains uncertain and strong headwinds are expected in the coming years,
especially with recent setbacks, attaining real GDP growth target of 5 to 6% per annum in the next five years is
undisputedly a tough challenge, but the target seems achievable, barring negative surprises. Real GDP grew by an
estimated 5.3% per annum in the Tenth Malaysia Plan (2011 2015), while nominal per capita income in US dollars
stood at USD10,796 in 2014, which is far below the current minimum threshold of USD12,746 under World Bank
classification as a high income country. Moreover, per capita incomes of the "advanced economies" averaged well
above USD35,000 in recent years. Looking on the supply side, longterm structural reforms and adjustment programs
need to be strengthened, focussing more on enhancing total factor productivity (TFP) and improving overall nation's
competitiveness. These include removing structural impediments to sustainable growth, infrastructure bottlenecks,
market imperfections and distortions that inhibit growth process, especially in the product, services and labour
markets. Greater focus needs to be given on adoption of new technologies, research and development (R&D),
innovation and greater power of new ideas, through upgrading of skills and reducing outmigration of talents.

Posted by suzy at02:37 PMon August 04, 2015