By Stephanie Jacob
Domestic demand and an improvement in its external trade performance helped the Malaysian economy record stronger gross domestic product growth of 6% compared to the 4.7% seen in 2013, said Bank Negara Malaysia’s (BNM) in 2015 Annual Report released today.
Along with continued strong domestic demand, net exports also contributed positively to growth after seven years of negative contribution. This was driven by the recovery in advanced economies and sustained demand from regional economies, said BNM’s report.
In an accompanying statement, BNM Governor Zeti Akhtar Aziz said “economic restructuring and financial sector reforms undertaken during this recent decade have well positioned Malaysia to manage the external challenges experienced during the year.”
While the export sector remains an important facet of the Malaysian economy, the governor noted that “domestic demand has now become the key driver of growth, anchored by strong private sector activity.”
Private consumption grew by 7.1% in 2014 supported by favourable income growth, stable labour market conditions and targeted government transfers such as the Bantuan Rakyat 1Malaysia which helped dampen the effects of the higher cost of living which came as a result of subsidies removals.
Meanwhile private investment grew by 11%, mainly driven by the services and manufacturing sectors.
In its report, BNM also sought to clarify what it called myths about the growth of private investment.
It said that a common misconception is that investments by commercially run public enterprises such as Petronas and investments into public infrastructure projects like the MRT are classified as private investments. However BNM said these types of investments are classified as public investments alongside other investments by the general government under the System of National Accounts 2008.
Furthermore it said the idea that most private investment was in the property sector was inaccurate, as investment into residential property only accounted for 17% of private investment in 2014. While the share of broad property (consisting of residential, office and commercial spaces) has remained at 18% of total investment since 2005.
BNM also refuted the idea that capital spending was concentrated in the oil and gas industry. It said the mining sector which largely consists of the upstream oil and gas industry only accounted for 16% of private investment and about 19% of gross fixed capital formation (GFCF) in 2014. <put Real Private Investment by Sector chart here>
It also said the bulk of private investment continues to be undertaken by Malaysian companies and be funded domestically via the banking system, internally generated funds and the capital markets. In 2014, foreign direct investment only accounted for 19% of private investment, and this has declined from around 35% in 2007.
Public consumption grew at a slower pace of 4.4% in line with the a more moderate increase in government expenditure. This was in line with expenditure rationalisation initiative announced back in 2013, said the report.
Public investment contracted by 4.9% as the federal government’s development expenditure and capital spending by public enterprises declined. According to the report, the lower capital spending was due to the completion or near completion of several major projects.
BNM said all economic sectors recorded higher growth rates in 2014. Overall the services sector remained the largest contributor to growth, expanding by 6.3% in 2014 versus 5.9% in 2013. While the manufacturing sector in particular benefitted from the recovery in the advanced economies and continued demand from regional economies.
Malaysia’s current account surplus widened to RM49.5 billion or 4.8% of gross national income (GNI) from the RM39.9 billion or 4.2% GNI seen in 2013. While the financial account registered a net outflow of RM76.5 billion in 2014.
BNM said it was a year of two halves for non-resident portfolio investments flows, as the first three quarters of 2014 saw inflows of RM11 billion, mainly into the debt securities market.
The last quarter of 2014 however saw investor sentiment turn negative over weakening global growth prospects amid a possible increase in interest rates and the rapid decline in all prices. During this period there was a net outflow of RM20.6 billion mainly from Bank Negara Monetary Notes. For the year as a whole, non-resident portfolio investments recorded a net outflow of RM9.6 billion.
Despite the large swings in portfolio flows, BNM said “the impact on domestic financial markets was cushioned by the deep and diversified financial markets and continued demand from domestic institutional investors.” Furthermore the high level of international reserves also served as buffer to prevent excessive fluctuations in the exchange rate, it added.
Malaysia’s external debt in 2014 amounted to RM744.7 billion or 69.6% of gross domestic product (GDP). According to the report, slightly more than half the debt is comprised of medium to long term maturities.
At the end of 2014, BNM’s international reserves stood at RM405.3 billion. As at Feb 27, 2015 international reserves stood at RM386 billion, which is sufficient to finance 7.9 months of retained imports and is sufficient to finance 1.1 times the short term external debt.
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