Malaysia. Summary. Economic Indicators

Transcription

1 Malaysia Summary Moody s A3 / S&P A- / Fitch A- 1 Economy: Agriculture 9%, Industry 37%, Services 54% Malaysia is a middle-income country with an open, diversified economy. The country s economic fundamentals are solid with high economic growth, low and stable inflation, a comfortable current account surplus, and a relatively flexible exchange rate. The Economic Transformation Program (ETP) has benefited Malaysia s economy and helped boost growth and investment, which is at its highest level since the Asian financial crisis in The ultimate goal of the ETP is to make Malaysia a high-income economy by Malaysia s main challenge stems from high debt levels and potential contingent liabilities. Political noise has increased as a result of a major corruption scandal at an important quasi-sovereign entity, although the current government is expected to remain in power and continue to move forward with the ETP. Market participants are likely to increasingly focus on the next election, which is scheduled to take place before August Despite corruption allegations, the current prime minister, Najib Razak, remains the favorite. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 10,809 11,049 9,559 9,418 9,147 9,060 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of imports) Foreign Reserves (% of GDP) As of November Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Central Bank of Malaysia, Haver Analytics, IMF 49

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency A A- BBB+ BBB BB+ Local Currency BBB- AA- A+ A A- BBB+ BBB BBB- BB BB Moody s S&P Fitch Moody s S&P Fitch As of December Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads 1000 Local Yield Malaysia EMBIGD Malaysia GBI-EM Global Div As of December Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 50

3 Malaysia Strengths High Rates of Economic Growth Malaysia has grown at an average pace of 5.0% over the past 15 years, which is among the highest growth rates in the emerging markets and one of the highest rates among middleincome countries with a similar GDP per capita. 4 The government is seeking to increase growth to 6% in the medium term through different economic programs such as the ETP, which was initiated in 2010 with the objective of helping Malaysia become a high-income economy by As part of this program, the government identified investment projects amounting to US$444 billion, which is close to 200% of GDP, including the construction of a US$11.5 billion mass transit rail system in Kuala Lumpur. Programs like these have helped rebalance the economy from exports toward investment. Indeed, exports as a share of GDP have fallen from a peak of 117% of GDP in the early 2000s to 70% of GDP as of the end of the second quarter of, while private investment has risen from less than 11% of GDP as recently as 2009 to close to 17.5% as of the second quarter of. 6 Total investment (public and private) has reached its highest level since the Asian financial crisis in Friendly Market Conditions Malaysia has relatively business friendly conditions and ranks toward the top across various global indices. Malaysia was ranked 23 out of 190 countries in the World Bank s Ease of Doing Business rankings in. 8 Within the region, only Singapore, Hong Kong, and Taiwan ranked higher, and Malaysia stands at the top among upper middle-income countries. The International Monetary Fund considers Malaysia a leader of free trade in the ASEAN region, 9 but has noted that further progress is needed in improving the lack of skilled labor and increasing female participation. 10 Malaysia s high-quality institutions are also reflected in the authorities ability to control inflationary pressures despite very high growth rates. Inflation has averaged 2.5% over the past decade, among the lowest rates in the emerging markets universe and certainly the lowest among the fast-growing economies. Diversification The government has done an excellent job at diversifying the economy over the past couple of decades. In the 1970s, Malaysia was dependent on commodity exports, but it has diversified into higher value-added products and industries. In addition to being an important exporter of oil, gas, rubber, and palm oil, Malaysia also has a dynamic industrial sector that includes light manufacturing, pharmaceuticals, medical technology, electronics, and a strong financial sector. The government also continues to move forward with its plan to add higher valueadded activities in the industrial and service sectors. 11 Solid External Position Malaysia has a solid external account as a result of a large current account surplus, high international investment, and low external debt levels. Over the past 15 years, the current account surplus has averaged 9.6% of GDP, although it has declined in recent years. The current account surplus fell to close to 2% of GDP in due to a decline in Malaysia s terms of trade, resulting from the decline in commodity prices, which have recently recovered. Foreign reserves are slightly above $100 billion and cover almost 100% short-term debt, which is low compared to similarly rated countries. However, Malaysia s flexible exchange rate helps to compensate for the moderate reserves levels and has helped to adjust to external shocks. 51

4 Lazard Emerging Markets Debt Malaysia also has more than US$55 billion in currency swaps open with the People s Bank of China (PBoC), Bank of Korea, and under the Chiang Mai multilateral initiative. Weaknesses High Deficit and Leverage Levels The current government has done an excellent job at reducing the fiscal deficit, but total debt levels remain high. The fiscal deficit declined from above 5.0% of GDP in 2010 to an estimated deficit of around 3% of GDP in. In 2018, the government is targeting a further reduction in the deficit to 2.8% of GDP despite upcoming elections, which shows the government s commitment to fiscal discipline. The government has passed a series of reforms to offset lower oil revenues while expenditures have remained under control. Debt ratios have improved and are stable at roughly 52% of GDP, still high but below the self-imposed debt limit of 55%. The majority of debt is denominated in local currency. Potential Contingent Liabilities Another key risk is potential liabilities for the state, as some quasi-sovereign entities face financial stress and may potentially need a government bailout. These contingent liabilities amount to 15.2% of GDP. 12 One such entity facing financial stress is 1Malaysia Development Berhad (1MDB), which is under investigation for a corruption scandal. The government has explicitly guaranteed about MYR5.8 billion of 1MDB s total debt of MYR42 billion (about 4% of GDP). Prime Minister Razak has been accused of involvement with 1MDB, although he denied wrongdoing. 13 The market initially feared that protests would result in the removal of the Prime Minister. 14 However, he has consolidated his power and his removal now appears unlikely. International criticism has declined and he has even meet with President Trump despite an ongoing investigation by the US department. 15 Inflation/Monetary Policy Bank Negara Malaysia (BNM) does not operate under a formal inflation-targeting regime. The overnight policy rate is the central bank s main policy instrument among a set of liquidity management tools: reserve requirements, repos, and currency forwards. Inflation has nonetheless been remarkably stable, with average headline inflation at 2.5% since 2006 levels closer to inflation in developed economies than in EM and volatility has been low. Core inflation has been below 2% on average. The 12-month headline CPI printed at a high 4.3% in September. We expect a fall in the 12-month number below 2% in 1Q18 and a reversal to its 2.5% average by end of next year. Stable core CPI just below 2% reveals that the spike in the headline CPI is transitory (food and energy pump prices liberalization) and not a signal of macroeconomic imbalances. The economy has rebounded in towards its 5% potential growth that should be sustained into Services inflation is below 2% and there are no visible pressures from the labor market. The unemployment rate is at 3.5% in line with historical levels and unit labor costs are growing below 2%. BNM has kept its policy rate unchanged at 3% since July With the economy growing at potential without inflationary pressures we expect BNM to follow the policy normalization in core markets and eventually raise rates towards the end of next year. In real terms (defined as the policy rate deflated by the 12-month CPI), the policy rate is at -1.3% (versus a 0.5% long-term average), but should passively increase to +0.5% by 1Q18. If our target for 52

5 Malaysia December 2018 CPI (2.5%) is on the mark, BNM should move its real policy slightly above the long-term average with one or two 25 basis-point hike. Exchange Rate Policy The MYR is a non-deliverable managed floating currency. There is no capital control for nonresidents, but the MYR is not allowed to trade offshore. Post US elections, the BNM tightened its grip on MYR trading. Local entities were not allowed to trade MYR NDF offshore and international investors trading onshore started facing limits for hedging activity. As a result, the derivatives market for MYR has become fairly illiquid. As of September, Malaysia foreign reserves were at US$101 billion. Malaysia's basic balance surplus was at 3.1% of GDP (July ), down from 3.3% a year earlier. Diminished FDI inflows was the driver behind the small deterioration. Malaysia s current account surplus was at 2.7% of GDP (July ) versus 2.1% 12 months ago. Most of the improvement came from a narrower secondary income (transfers). Mineral fuels balance seems to have found a floor with a 6.7% surplus versus 8.3% in 2015 and 12% in The financial account saw a sharp change in its profile. Portfolio outflows stand out at 3.5% of GDP versus 0.7% inflows a year earlier. Most of it came on the back of US elections and BNM response that seems to have alienated some investors. Short-term flows and errors and omissions increased substantially. Despite financial outflows, BNM was able to rebuild reserves. China represents 21% of Malaysia's trade; the European Union, the United States, and Japan represent 12% each. Following the global financial crisis of 2008, the USD-MYR reached a high at 4.50 in January. Over the past 12 months it has traded in a wide range. The MYR real effective exchange rate (REER) is currently 12% cheap versus its 10-year average. Adjusted for unit labor costs the REER is 6% undervalued, in our view. 53

6 Lazard Emerging Markets Debt Inflation 10 USD/MYR Inflation 2010 Reference Rate As of December Source: Bloomberg REER REER Median since Dec 1999 Median last 10 yrs Median last 5 yrs As of December Source: JP Morgan, Lazard 54

7 Malaysia Country Background Size 329,847 KM 2 (67th) Capital Kuala Lumpur Population 30.9 Million Religion Muslim 61.3%, Buddhist 19.8%, Christian 9.2%, Hindu 6.3%, Other 3.4% Median Age 28.5 Years Literacy Rate 94.6% Independence 31 August 1957 Political System Federal Parliamentary Constitutional Monarchy Government Leadership Prime Minister Najib Razak Next Election August 2018 Legislative Branch Bicameral Parliament Economy Agriculture 8.7%, Industry 37.0%, Services 54.4% Labor Force Agriculture 11.0%, Industry 36.0%, Services 53.0% Merchandise Exports Semiconductors and Electronic Equipment, Palm Oil, Petroleum and Liquefied Natural Gas, Wood and Wood Products, Rubber, Textiles, Chemicals, Solar Panels Export Partners Singapore 14.7%, China 12.6%, United States 10.3%, Japan 8.1%, Thailand 5.7%, Hong Kong 4.8%, India 4.1% Currency Malaysian Ringgit (MYR) As of November Source: CIA 55

8 Lazard Emerging Markets Debt Country Timeline 1998 Prime Minister Mahathir Mohamad sacks his deputy and presumed successor, Anwar Ibrahim, on charges of sexual misconduct, against the background of differences between the two men over economic policy; Ibrahim arrested Dozens arrested during worst ethnic clashes in decades between Malays and ethnic Indians. Demonstrations against the Internal Security Act following the detention without trial of supporters of Anwar Ibrahim. Malaysia, Singapore resolve long-standing disputes, agree to build a new bridge and tunnel Prime Minister Abdullah Badawi wins landslide general election victory. Former deputy PM Anwar Ibrahim freed after court overturns his sodomy conviction. Scores of Malaysians die in Asian tsunami disaster. Malaysia delays planned deportations of many thousands of illegal immigrants, most of them from Indonesia Prime Minister Abdullah Ahmad Badawi s National Front coalition suffers its worst election result in decades, losing its two-thirds parliamentary majority and control of five state assemblies. Opposition leader Anwar Ibrahim is arrested over allegations of sodomy, in a move that exacerbates political tensions Malaysian Airlines flight MH17 travelling from Amsterdam to Kuala Lumpur crashes in eastern Ukraine, close to the border with Russia, with the loss of all 298 people on board. The two sides in the Ukrainian conflict accuse each other of shooting the plane down. The incident and its aftermath spark international outrage and condemnation Opposition Pan-Malaysian Islamic Party (PAS) seeks parliament s approval to expand hudud laws, a strict Islamic penal code which permits punishments such as flogging, stoning and public execution, in the northeastern state of Kelantan. Police arrest opposition politician Nurul Izzah Anwar, the eldest daughter of jailed opposition leader Anwar Ibrahim, for alleged sedition over a speech she made in parliament Anti-Corruption Commission announces appeal after attorney general clears Prime Minister Najib Razak of wrongdoing in financial scandal over Saudi funds. Source: BBC 56

9 Malaysia Notes 1 As of December. 2 Harnessing natural resources (English), World Bank, Malaysia Economic Monitor, June 2013, documents.worldbank.org/curated/en/2013/06/ /malaysia-economic-monitor-harnessing-naturalresources. 3 Fitch Affirms Malaysia at A-;Outlook Stable, 17 August, 4 Haver Analytics, World Economic Outlook Database International Monetary Fund, accessed on 2 December 2013, 5 Malaysia: 2012 Article IV Consultation, IMF Country Report No. 13/51, February 2013, external/pubs/ft/scr/2013/cr1351.pdf. 6 As of September, Source: Haver Analytics. 7 As of September, Source: Haver Analytics. 8 Economy Rankings, Doing Business, accessed 3 October, 9 Malaysia: 2016 Article IV Consultation, IMF Country Report No. 16/110, May 2016, external/pubs/ft/scr/2016/cr16110.pdf 10 Malaysia: 2014 Article IV Consultation, International Monetary Fund, IMF Country Report No. 14/80, March 2014, 11 Malaysia Overview, World Bank, accessed on 2 December 2013, malaysia/overview. 12 Malaysia: 2016 Article IV Consultation, IMF Country Report No. 16/110, May 2016, external/pubs/ft/scr/2016/cr16110.pdf 13 Chandran, Nyshka, Only a 1MDB smoking gun can topple Najib, CNBC, 12 July 2015, accessed on 14 December 2015, Wright, Tom, and Simon Clark, Investigators Believe Money Flowed to Malaysian Leader Najib s Accounts Amid 1MDB Probe, The Wall Street Journal, 2 July 2015, accessed on 14 December 2015, wsj.com/articles/sb ; and Wright, Tom and Simon Clark, Malaysia s Najib Razak Played Key Role at Troubled 1MDB Investment Fund, The Wall Street Journal, 15 October 2015, accessed on 14 December 2015, 14 Fernandez, Celine, and James Hookway, Thousands Protest Against Malaysia s Najib Razak, The Wall Street Journal, 30 August 2015, accessed on 14 December 2015, 15 Trump Welcomes Najib Razak, the Malaysian Leader, as President, and Owner of a Fine Hole New York Times 12 September 57

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