MALAYSIA ECONOMIC MONITOR JUNE 2018 Navigating Change CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific blogs.worldbank.org/category/ countries/malaysia MALAYSIA ECONOMIC MONITOR JUNE 2018 Navigating Change Acknowledgements This edition of the Malaysia Economic Monitor was prepared by Richard Record (task team leader), Yew Keat Chong, Shakira Teh Sharifuddin and Punithaa Kylasapathy. Bradley Larson, Siddhartha Raja, Smita Kuriakose, Samuel Fraiberger, Anton Prokopyev, Jonathan Leigh Pemberton, Glenn-Marie Lange, Esther Naikal, Kenneth Simler, Jeevakumar Govindasamy, Achim Schmillen, Wei San Loh and Kershia Tan Wei provided additional contributions. Mara Warwick, Faris Hadad-Zervos and Deepak Mishra provided overall guidance. The team is grateful to Sudhir Shetty, Shabih Ali Mohib, Birgit Hansl, Firas Raad, Ndiame Diop and Ekaterine Vashakmadze for their constructive input. This report benefited from productive discussions with staff from the Economic Planning Unit at the Ministry of Economic Affairs, Bank Negara Malaysia, the Ministry of Finance, the Ministry of Communications and Multimedia and many other government ministries and agencies, all of whom provided valuable information and useful feedback. In particular, the team would like to thank the International Cooperation Section of the Economic Planning Unit and the Economics Department of Bank Negara Malaysia for close ongoing collaboration with the World Bank and for the crucial support to the launch of this report. The team would like to express its gratitude to analysts at several private financial firms and rating institutions, whose participation in a constructive dialogue also informed the analysis. This edition of the MEM was prepared in close partnership with the Malaysia Digital Economic Corporation. The team is grateful to management and staff for engaging in extensive discussions and providing significant written contributions to the report. Cover Image: Getty Images Photography: Samuel Goh Joshua Foong and Min Hui Lee led external communications and the production and design of the report. Irfan Kortschak provided editing assistance, while Aziaton Ahmad provided administrative support. Kane Chong designed the report and its cover. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. The report is based on information current as of June 20, 2018. Enquiries Please contact Richard Record (rrecord@worldbank.org), Yew Keat Chong (ychong@worldbank.org) or Shakira Teh Sharifuddin (stehsharifuddin@worldbank.org) if you have any questions or comments regarding the Malaysia Economic Monitor. 2 MALAYSIA ECONOMIC MONITOR | JUNE 2018 Abbreviations AI Artificial Intelligence MDEC Malaysia Digital Economy Corporation ASEAN Association of Southeast Asian Nations MDH Malaysia Digital Hub B40 Bottom 40 percent (of the population) MEM Malaysia Economic Monitor BDA Big Data Analytics MGS Malaysian Government Securities BNM Bank Negara Malaysia MOF Ministry of Finance BR1M 1Malaysia Peoples Aid (Bantuan Rakyat 1Malaysia) MRT3 Mass Rapid Transit Line 3 CPI Consumer Price Index MSAP Mandatory Standard on Access Pricing DAI Digital Adoption Index MTEP Malaysia Tech Entrepreneur Program DOSM Department of Statistics Malaysia NeSR National eCommerce Strategic Roadmap DFI Development Financial Institution NFPC Non-financial Public Corporation DFTZ Digital Free Trade Zone NPL Non-Performing Loan DTAP Digital Transformation Acceleration Program Organization for Economic Cooperation and OECD Development DTL Digital Transformation Lab OPR Overnight Policy Rate E&E Electrical and Electronics PPP Public Private Partnership EAP East Asia and Pacific Q/Q Quarter-on-Quarter ECRL East-Coast Rail Link SAAR Seasonally Adjusted Annual Rate EMDE Emerging Market and Developing Economies SME Small and Medium Sized Enterprise EPF Employees Provident Fund SUBB Sub-urban Broad-band FDI Foreign Direct Investment SST Sales and Services Tax FMM Federation of Malaysian Manufacturers T20 Top 20 percent (of the population) GDP Gross Domestic Product TM Telekom Malaysia GLC Government-linked Company TVET Technical and Vocational Education and Training GNI Gross National Income Y/Y Year-on-Year GST Goods and Services Tax HSBB High-speed Broad-band HSR Kuala Lumpur-Singapore High-speed Rail ICT Information Communications Technology IMF International Monetary Fund IoT Internet of Things IPI Industrial Production Index ITU International Telecommunication Union LCR Liquidity Coverage Ratio LNG Liquefied Natural Gas M40 Middle 40 percent (of the population) MaGIC Malaysian Global Innovation and Creativity Centre Malaysian Communications and Multimedia MCMC Commission MALAYSIA ECONOMIC MONITOR | JUNE 2018 3 Table of Contents Acknowledgements 2 Abbreviations 3 Summary 6 Recent economic developments 7 Economic outlook 8 Unlocking the potential of the digital economy 10 PART ONE 15 Recent economic developments 16 Regional economies have continued to strengthen despite moderating growth in advanced economies 16 Malaysia’s economy grew at a more measured pace than in previous expansions 17 The current account surplus has widened due to an increase in net trade 19 Domestic inflationary pressures have eased in recent months 21 Conditions in the financial system have remained broadly stable 26 Federal Government debt as a share of GDP has trended downwards, but guaranteed debt has increased 28 Economic outlook 30 Regional economic growth is expected to remain robust through 2018 30 Malaysia’s near-term economic growth is expected to remain strong 31 Implementation of the election mandate will require careful management of potential risks 36 Supportive conditions offer an opportunity to undertake deeper reforms for sustained and more inclusive growth 37 PART TWO 41 Unlocking the potential of the digital economy 42 Key building blocks need to be in place for Malaysia to achieve its digital economy ambitions 42 Malaysia’s overall digital adoption is high, but business adoption lags behind peers 43 Malaysia’s fixed broadband adoption is low, mainly due to high costs 46 The ecosystem is supportive of digital entrepreneurship, though challenges exist 49 A competitive broadband market is key to improving connectivity and achieving higher business adoption 52 As Malaysia transitions into a high-income economy, it should continue its efforts to unlock the potential of the digital economy 54 Appendix 57 Highlights from Malaysia’s digital economy development initiatives 57 References 60 MALAYSIA ECONOMIC MONITOR | JUNE 2018 5 Summary Summary Malaysia’s near-term growth outlook remains strong, with sound economic fundamentals The historic outcome of Malaysia’s recent elections Bold reforms that respond to the election mandate provides an unprecedented opportunity for change. to sustain growth and increase inclusiveness would The country’s 14th General Elections which took place be consistent with Malaysia’s aspirations to become on May 9, 2018, in the context of widespread citizen a high-income society. Priority areas for structural concern regarding the degree to which the proceeds reforms could include: raising the productivity level; of economic growth have been shared across the strengthening the provision of social assistance for low- Malaysian society and a call for increased government income households; and facilitating the achievement of accountability, have resulted in the nation’s first change inclusive growth, through policies that level the playing in government since its independence in 1957. The new field in access to services and economic opportunities government’s emerging economic policy framework is (including measures to increase women’s labor force strongly guided by its election manifesto Buku Harapan, participation). In addition, reforms could also look which responds to these popular sentiments. at ways to increase the effectiveness of pro-inclusion spending programs, mobilize resources through more Heightened uncertainty amid the political progressive taxation, and adapt to the realities of an transition exacerbated the ongoing turbulence ageing population. in the financial markets arising from external factors. In the period between the elections and end-May, Malaysia’s 5- and 10-year sovereign spreads Malaysia has a window against US Treasuries increased by 24 and 27 basis of opportunity to deepen points respectively, while the stock market fell by three percent. Meanwhile, RM19 billion of foreign capital reforms and make growth was withdrawn from the domestic financial markets in work for everyone May as post-election market turbulence coincided with heightened investor uncertainty about the emerging The Malaysia Economic Monitor consists of two markets asset class. However, since then volatility in the parts. Part 1 presents a review of recent economic financial markets has been largely driven by external developments and a macroeconomic outlook. Part factors amid increased global trade tensions, as the 2 focuses on a selected special topic that is key to uncertainty surrounding the political transition has Malaysia’s development prospects, particularly as the gradually reduced. country moves forward on its path towards becoming a high-income and developed nation. In this edition, the Malaysia’s economic fundamentals remain sound. focus of the special topic is on the digital economy. As a highly open trade-oriented economy situated at the center of the world’s fastest growing region, Malaysia Unlocking the potential of the digital economy will continues to benefit from strong global demand for be key to ensuring Malaysia’s successful transition its exports. Malaysia’s underlying economic strengths, to a high-income and developed economy. The including a diversified economic structure, a strong adoption of digital technologies across the public and external position, robust institutions, and significant private sectors, and in both manufacturing and services natural resources and human capital endowments, will be essential to enable the growth in productivity remain unchanged. that Malaysia needs for broad-based improvements to living standards. 6 MALAYSIA ECONOMIC MONITOR | JUNE 2018 Summary Recent economic cycle. By contrast, resource- and non-resource-based manufactured exports increased at a slower rate during developments the quarter. Following four consecutive quarters of double-digit growth in 2017, gross imports contracted by 0.8 percent in Q1 2018. This reflects slower growth of Regional economies continued to strengthen in Q1 manufacturing activity and lower capital imports. With 2018, while global growth has eased. During this an increase in net trade, the current account surplus quarter, the regional growth rate is estimated to have widened to 4.4 percent of GDP in Q1 2018. increased to 6.6 percent, bolstered by the ongoing upturn in global manufacturing activity and higher Inflation has moderated in the first five months commodity prices. of 2018, with the rate in May 2018 standing at 1.8 percent. The overall decline largely reflects the The Malaysian economy expanded at a more dissipating impact of previous increases in global oil moderate rate of 5.4 percent in Q1 2018. Real GDP prices on domestic fuel inflation. The inflation rate for growth during the quarter was primarily driven by the food and non-alcoholic beverages has also eased, due continued strength of household spending and notably to relatively stable fresh food supplies amid favorable higher net trade, amid subdued expansion of private weather conditions. investment and lower public expenditure. Growth was partially offset by relatively sizable inventory drawdowns While the underlying inflation rate has eased, there of services and manufactured products. remain concerns regarding the buildup of cost of living pressures over recent years. The inflationary Private consumption remained the primary impact has been particularly pronounced for lower- contributor to Malaysia’s economic growth, income households, which spend a relatively high expanding strongly at a rate of 6.9 percent in Q1 proportion of their income on food items, for which the 2018. The sustained growth of household spending buildup of price increases has been most significant. occurred in the context of stable employment These pressures have been compounded by increased conditions and consumer sentiment, and was further housing costs due to a structural shortfall of affordable supported by a range of government income support housing at the lower end of the property market. measures. Labor market conditions have remained generally Private investment growth has softened to 0.5 stable, with sustained growth in private sector percent during the quarter, despite the continued employment and wages. The unemployment rate supportive global and domestic economic declined slightly to 3.3 percent towards the end of environment. Relatively modest levels of capital Q1 2018, with the continued expansion in the labor expenditure were observed across both export- and force being broadly offset by continued employment domestic-oriented sectors, amid uncertainties in the growth. During Q1 2018, private sector wage growth run-up to the general elections. was sustained at 6.6 percent, slightly higher than the rate recorded in Q4 2017. Public expenditure growth was relatively flat in Q1 2018 due to lower public consumption growth and However, there is a widening gap in wage growth investment spending. Growth in public consumption between manufacturing and services sectors. decelerated to 0.4 percent during the quarter. Public Wages in manufacturing increased by the average rate investment expenditure growth contracted by 1.0 of 13.9 percent in Q1 2018, compared to 3.5 percent in percent over the same period. This was the result of services. lower capital outlays, mainly by public corporations, with a number of multi-year infrastructure projects Youth unemployment has also remained elevated. nearing completion. In 2017, youth unemployment rates amongst 15- 19 year-olds and 20-24 year-olds were close to five Malaysia’s gross exports expanded at a relatively and three times higher respectively than the overall modest pace of 5.8 percent in Q1 2018. The recent unemployment rate. performance of exports has been driven largely by sustained external demand for E&E exports. Growth in In January 2018, the Central Bank of Malaysia semiconductor exports accelerated during the quarter, normalized the degree of monetary accommodation consistent with an upturn in the global technology by increasing the OPR to 3.25 percent. This decision MALAYSIA ECONOMIC MONITOR | JUNE 2018 7 Summary was based on an assessment that the domestic economy was on a firm growth path and that the conditions that necessitated the previous rate reduction in 2016 had Economic outlook significantly improved. The cyclical upswing in global growth is expected Domestic financial conditions have remained to continue in the near term. The global growth rate broadly stable. Net financing growth remained stable is projected to reach 3.1 percent in 2018, followed by in Q1 2018, supported by a sustained high level of a slight decline over the next two years to 2.9 percent corporate bond issuances, amid relatively modest in 2020 due to a gradual slowdown in the advanced expansion of banking system and DFI loans. economies. Conversely, growth in the emerging market and developing economies is expected to continue to The financial markets recorded significant non- increase, from 4.5 percent in 2018 to an average of 4.7 resident portfolio outflows in May 2018. Cautious percent in 2019-2020. sentiment arising from both global factors and heightened uncertainty amid the political transition contributed to portfolio outflows in the domestic equity and bond markets. Throughout this period, volatility in the yields for MGS temporarily increased and peaked during the elections. Meanwhile, the sovereign spreads against US Treasuries widened post-elections; however, this trend has since gradually reversed and the spread has begun to stabilize. Reflecting the trend in outflows, the ringgit depreciated by 2.2 percent relative to the US dollar to RM4.01 in the period from May 1 to June 20. Federal Government debt as a share of GDP has trended downwards, but the size of guaranteed debt has increased. Federal Government debt stood at 50.8 percent of GDP as of end-2017, two percentage points lower than in the previous year. Conversely, statutory guarantees increased to 17.6 percent of GDP in 2017, from 15.2 percent in 2016. The steady expansion of contingent liabilities since 2009 has been driven largely by increased loan guarantees to support the implementation of large-scale infrastructure projects by NFPCs. The Federal Government also has additional long-term fiscal commitments arising from a range of PPP arrangements, totalling 14.9 percent of GDP in 2017. The government has introduced several fiscal policy changes in response to its election mandate to lower living costs, and has committed to achieving Malaysia’s economy is forecast to grow at the rate the 2.8 percent federal deficit target set for 2018. of 5.4 percent in 2018, underpinned by stronger Among the major announcements made include the growth of household consumption. The stronger near- change of Malaysia’s consumption tax system from term outlook for household spending primarily reflects GST back to SST, and the adjustment to the fuel pricing the additional impetus from the new policy measures mechanism. The government has also indicated that put forth by the government, including the temporary it will reassess the government debt to GDP ratio by suspension of the consumption tax. Meanwhile, public including guaranteed debt of selected entities which consumption is projected to expand at a lower rate than are unable to service their obligations, and fiscal previously anticipated, primarily reflecting the planned commitments in connection to PPPs. It also intends to rationalization of non-essential operating spending. review selected large infrastructure projects with a view to safeguard longer-term fiscal sustainability. Gross fixed capital formation is expected to grow at a more modest rate than previously anticipated. The revision mainly reflects the softer-than-expected 8 MALAYSIA ECONOMIC MONITOR | JUNE 2018 Summary private investment activity in Q1 2018, as well as sentiment and the escalation of trade tensions which expectations of contraction and deferment of the could have a dampening effect on global trade and existing and future large-scale capital expenditure investment flows. undertaken by the government and public corporations. Malaysia is entering into a new period that offers The external sector will continue to benefit from an opportunity to strengthen structural reforms the cyclical rebound in global investment and and to accelerate its convergence with high-income manufacturing activity into the near future. While economies. Policymakers should look to measures that the robust growth of Malaysia’s exports is expected to address labor market constraints and distortions in continue in 2018, the growth rate is likely to moderate, output markets; to improve the quality of education and due partly to a higher base effect. It is projected that training; to deepen regional trade integration and to growth will gradually decelerate over the coming years, improve trade facilitation; to build innovation capacity; as the global environment becomes less supportive. and to unlock the potential of the digital economy as a future driver of growth. The new environment also The headline inflation rate is projected to be lower creates opportunities for deeper reforms to strengthen in 2018 than previously anticipated. This reflects the institutions and governance. lower-than-expected inflationary pressures in H1 2018, a much weaker pass-through of the higher global oil Fiscal reforms should take advantage of the prices on domestic fuel costs with the recent adjustment cyclical upswing to strengthen Malaysia’s of the fuel pricing mechanism, as well as the expected resilience against future shocks. Ensuring longer- overall price decline in consumption goods following term fiscal sustainability in the new fiscal setting would the replacement of GST with SST, and the temporary necessitate a deeper wave of structural reforms to suspension of the consumption tax between June and diversify sources of fiscal revenue, rationalize non- August 2018. Underlying inflation is also expected to essential operating outlays, restructure some of be broadly contained over the near-term in the absence the large-scale infrastructure projects, and improve of immediate domestic cost pressures. spending efficiency. While Malaysia is on track to achieve its transition from an upper middle-income economy to a high- income economy, it is important to be aware of Malaysia’s economy is the broader aspects of development not captured forecast to grow at the by GDP growth. These include both the distribution of economic gains across geographical regions and rate of 5.4 percent in 2018, segments of the population, and the wider dimensions underpinned by stronger of societal wellbeing, including health, education and environmental sustainability. growth of household consumption Important policy measures resulting from the government’s election mandate to lower living costs will need to be managed carefully to ensure A renewed social contract is essential for promoting they do not bring additional risks to the economy. upward economic mobility and security, and the The change of the consumption tax system from GST broader development of society commensurate back to SST, and the adjustment to the fuel pricing with high-income country status. Increasing upward mechanism, in the absence of adequate compensatory economic mobility will require steps to eliminate measures, would constrain the existing fiscal policy existing disparities in access to jobs and services, as space. The reassessment of several planned large- well as improving the quality of jobs available. Enhanced scale infrastructure projects also raises uncertainty on economic security will depend on more effective social the outlook for both public and private investment. A assistance for low-income households, and a stronger swift finalization of the government’s economic policy system of social insurance to increase resilience to package would minimize the potential impacts on idiosyncratic shocks. Policies to strengthen institutions private sector confidence especially in the short term. for inclusive growth include leveling the playing field in access to services and economic opportunities, As a highly open economy, Malaysia will continue increasing the effectiveness of pro-inclusion spending to face significant external risks. These include the programs, mobilizing resources through progressive risks associated with heightened global financial market taxation, and adapting to the realities of an ageing volatility as well as the increasingly intense protectionist population. MALAYSIA ECONOMIC MONITOR | JUNE 2018 9 Summary Unlocking the adoption and the level of sectorial productivity, with manufacturing and mining in particular having higher potential of the levels of adoption. The size of a firm is also a significant determining factor with only about 20 percent of SMEs in Malaysia using the internet for business operations. digital economy The two major barriers to digital adoption cited by businesses are slow internet connections and lack of affordable broadband plans. In a survey Broadly, the digital economy promotes growth conducted by MDEC and the FMM, more than 50 through three channels. First, it promotes inclusion percent of manufacturing firms listed lack of access and expands markets by reducing transaction costs, to the internet and slow internet speeds as the most thereby enabling businesses to reach segments of the significant constraint to utilizing digital technologies. market that may not have been served. Second, digital technologies boost efficiency, enabling businesses In terms of the level of adoption of fixed broadband to provide faster services, that are cheaper and more services, Malaysia lags behind other countries convenient. Third, these technologies can significantly with a similar level of economic development, with reduce the cost of economic and social transactions limited usage of fiber optic broadband services. for households, businesses and government, thereby Available data indicates that only about eight percent promoting innovation. of Malaysian establishments use fiber broadband services, with a slow growth rate. By comparison, Malaysia does well in terms of the level of digital the rate of adoption of these services in Singapore, adoption by people and government. Malaysia’s Republic of Korea and Japan stands at 99 percent, 85 citizens are among the most digitally connected in the percent and 60 percent respectively. world. The proportion of its population with digital access increased from around 51 percent in 2006 to more than 80 percent at present. The level of digital The proportion of adoption by Malaysia’s government is also high. The government has invested heavily in digital technologies Malaysia’s population with to modernize and digitize its systems and processes, digital access increased including electronic tax filing and digital identification systems. from around 51 percent in 2006 to more than However, Malaysia lags behind international peers in terms of digital adoption by businesses. 80 percent at present Despite recent growth, only 62 percent of business establishments are connected to the internet and Malaysian consumers pay considerably more for only 28 percent have some form of web presence. In high-speed broadband access than consumers in addition, the Digital Adoption Index, which measures other countries. In terms of price per Mbps, Malaysia the use of digital technologies by various agents in an ranks 74 out of 167 countries for fixed broadband economy, shows that Malaysia has limited international services and 64 out of 118 for fiber broadband services. bandwidth and a smaller number of secure servers. This places it behind regional comparators such as In general, in terms of the level of digital adoption by Vietnam and countries with similar levels of economic businesses, Malaysia’s performance is more comparable development such as Mexico and Turkey. to that of a lower middle-income country. The high cost of fixed broadband internet services There are also significant regional disparities is partly driven by limited competition. Malaysia’s between highly urbanized states and the rest of fixed broadband market is concentrated relative to other the country when it comes to the level of digital countries, and much more concentrated than is the case adoption by businesses. In general, industrialized for mobile services. TM, the leading fixed broadband and/or urbanized states have relatively high levels of service provider, constitutes about 92 percent of the adoption. This is partly due to the lower connection costs fixed broadband market share, significantly higher than in urban areas, with higher population densities driving the leading firms in other countries. costs down, and to various government initiatives such as the Multimedia Super Corridor. There is also a strong Malaysia can look beyond doubling its internet positive correlation between the level of technology speed to achieving gigabit-level of connectivity, 10 MALAYSIA ECONOMIC MONITOR | JUNE 2018 Summary similar to many advanced economies. In the global Malaysia has made significant efforts to context, Malaysia’s plans to develop its broadband establish the right ecosystem to foster digital up to 100 Mbps+ are unlikely to make the country entrepreneurship. A range of institutions have been significantly more competitive, given that many established to attract investments, provide incentives, advanced economies are already planning for gigabit facilitate financing, and offer training and opportunities networks. Access to fixed broadband services is a to start-up firms. Malaysia has also pioneered the steps in prerequisite for the widespread adoption of innovative promoting inclusivity through digital entrepreneurship technologies (especially more advanced applications programs such as eUsahawan and eRezeki, which are such as data analytics, the internet of things and programs for the B40 and M40 income groups to take artificial intelligence), not just by businesses, but also to advantage of potential business opportunities created support improved public service delivery and growing by the gig or sharing economy. demand of households. For Malaysia to successfully achieve high-income Moving forward, to improve digital connectivity, and developed country status, it will be important Malaysia may consider adopting policies with to unlock the potential created by the digital two main objectives: (i) improving the quality and economy. Malaysia successfully achieved middle- affordability of fixed broadband services; and income status through a model of economic growth (ii) increasing coverage of ultra-fast broadband that was mainly driven by factor accumulation. With networks. To achieve these objectives, the government this model generating diminishing returns and with should strive to increase the level of competition in the intensifying need to achieve higher levels of the fixed broadband market by better enforcing the productivity, it is crucial for Malaysia to adopt digital current regulatory framework to provide all operators technologies to achieve this increased productivity and with access to cable landing stations and by opening up drive the country’s digital transformation. the market across all levels of the telecom and internet supply chain. MALAYSIA ECONOMIC MONITOR | JUNE 2018 11 Recent economic developments and outlook Malaysia’s economy grew at a more ...with private consumption remaining moderate pace in Q1 2018... the main contributor to growth GDP, y/y, Percentage Contribution to GDP, y/y, Percentage 8 7 6.2 6 5.9 5.8 5.9 6 5.6 5.4 4 5.0 5 4.8 4.7 4.5 4.3 2 4.1 4.0 4 0 3 -2 2 -4 1 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 0 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Net Exports Private Consumption Public Consumption GFCF Change in Inventory Real GDP,y/y The current account surplus has widened due Cautious sentiment arising from global factors to an increase in net trade and the political transition has contributed to portfolio out ows Balances, Percentage of GDP Non-resident Portfolio Flows, RM Billion 15 20 10 10 GE14 5 May 2018 0 0 -5 -10 -10 -20 06/2017 07/2017 08/2017 09/2017 10/2017 11/2017 12/2017 01/2018 02/2018 03/2018 04/2018 05/2018 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Primary & Secondary Services Goods Equity Corporate Bonds Government Bonds Income Account and Sukuk and BNM Bills Malaysia’s economy is forecast to grow at ...and is expected to pass the high-income 5.4 percent in 2018... country threshold between 2020 and 2024 GDP, y/y, Percentage Three Scenarios for When GNI Per Capita Will Pass the High-Income Threshold GNI Per Capita, World Bank Atlas Methodology (US$) 7 18000 6.0 5.9 High Baseline 6 5.4 5.1 5.1 4.8 16000 5 4.2 Low High income threshold: 4 14000 US$12,055 as of July 1, 2018 3 12000 2 10000 1 0 8000 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2014 2015 2016 2017 2018f 2019f 2020f 12 MALAYSIA ECONOMIC MONITOR | JUNE 2018 Unlocking the potential of the digital economy Malaysians are among the most digitally ...mainly through mobile networks connected in the world... Individuals Using the Internet (% of Population) Mobile Broadband Subscriptions (Per 100 People), 3G+4G 200% 200% 180% 180% 160% 160% 140% 140% 120% Malaysia 120% 100% 100% Malaysia 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 0 5,000 10,000 15,000 20,000 0 5,000 10,000 15,000 20,000 GNI Per Capita (US$) GNI Per Capita (US$) However, digital adoption by businesses …and the rate of fixed/fiber broadband trails behind international peers… connections is low, limiting deep digital adoption Digital Adoption Index, Business Sub-index Fiber Optic Broadband Subscriptions (% of All Households) ASEAN OECD 100% SG, 99% 1 KR, 85% 80% SGP .8 CN, 73% JPN KOR Index Score 60% JP, 60% .6 BN, 54% Malaysia = 0.55 40% .4 VN, 32% NZ, 23% .2 20% AU, 14% High MY, 8% Income 0 0% PH, 1% 12,055 2012 2013 2014 2015 2016 2017 GNI Per Capita (US$) Fixed/fiber broadband adoption is low ...and this is partly driven by due to poor affordability of services... market concentration Average Price of Fixed Broadband Services (USD/Mbps, Log Scale) Share of Subscribers for Fixed Broadband Services, June 2017 10,000 1,000 Subscribers (June 2017) 100 Telekom Malaysia (92.2%) MY JP NZ AU Maxis (6.2%) 10 webe (0.9%) YTL Communications (0.2%) 1 Other Players (0.5%) 0.1 PH KR HK SG 0.01 0 10,000 20,000 30,000 40,000 50,000 60,000 GNI Per Capita (US$) MALAYSIA ECONOMIC MONITOR | JUNE 2018 13 PART ONE Recent Economic Developments and Outlook MALAYSIA ECONOMIC MONITOR | JUNE 2018 15 PART ONE - Recent Economic Developments and Outlook Recent economic developments Regional economies have continued to strengthen despite moderating growth in advanced economies Global growth remains robust, despite having In 2018, growth across the Developing East Asia eased in recent months, with manufacturing and Pacific (EAP) economies has remained firm. activity and trade having shown signs of softening In Q1 2018, the regional growth rate is estimated to (see Figure 1). In aggregate, the global GDP growth have increased to 6.6 percent (Q4 2017: 6.5 percent), rate is estimated to have moderated slightly to 3.2 with broad-based growth observed in most major percent in Q1 2018 (Q4 2017: 3.3 percent). Despite economies (see Figure 2). Exports have continued to recent signs of moderation, growth in major advanced expand, benefitting from the ongoing recovery in economies remains above potential. Among emerging global investment, stronger intra-regional trade and market and developing economies (EMDEs), the investment integration, and higher commodity prices. recovery in commodity exporters has continued, Domestically, private consumption continues to be with activity in commodity importers remaining firm. supported by improved consumer confidence and Trade and manufacturing activity have shown signs household wealth, amid moderate inflation. With the of moderation, global financing conditions have exception of China, investment expenditure across tightened amid the ongoing withdrawal of monetary the region has remained strong, supported by higher policy accommodation across advanced economies, business confidence, improved earnings and continued while oil prices have trended considerably higher than capital inflows.  previously anticipated.  FIGURE 1 FIGURE 2 Global growth has eased in Q1 2018... ...while regional economies have continued to strengthen GDP, y/y, Percentage GDP, y/y, Percentage 5 8 7 4 6 5 3 4 2 3 2 1 1 0 0 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 World Advanced Emerging and China Indonesia Philippines Economies Developing Economies Thailand Vietnam Source: World Bank Global Economic Monitor Source: World Bank Global Economic Monitor 16 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART ONE - Recent Economic Developments and Outlook Malaysia’s economy grew at a more measured pace than in previous expansions Following several quarters of better-than-expected growth moderated during the quarter, expanding at growth, Malaysia’s economy expanded at a a subdued rate of 0.5 percent (Q4 2017: 9.2 percent). more moderate pace in Q1 2018 at 5.4 percent Capital expenditure stood at relatively modest levels (Q4 2017: 5.9 percent) (see Figure 3). Real GDP in both export- and domestic-oriented sectors, amid growth during the quarter was primarily driven by the uncertainties in the run-up to the Malaysia’s general continued strength of household spending and notably elections which were held in May 2018. At a sectoral higher net trade, amid subdued growth of private level, private investment expenditure was largely investment and lower public expenditure (see Figure 4). concentrated in the services sectors, especially in the This was partially offset by a relatively sizable negative healthcare and education subsectors. contribution to growth from increased inventory drawdowns of services and manufactured products. Public expenditure growth was relatively flat in Q1 2018 on account of lower public consumption Private consumption has remained the primary growth and a further decline in government contributor to Malaysia’s economic growth, investment spending. Growth in public consumption with sustained strong expansion observed in decelerated to 0.4 percent during the quarter (Q4 2017: Q1 2018 at the rate of 6.9 percent (Q4 2017: 6.8 percent), due largely to reduced expenditure on 7.0 percent). This growth occurred in the context of supplies and services, including maintenance charges. steady increases in employment and wage growth, Public investment expenditure growth contracted with consumer confidence remaining stable. Strong further by 1.0 percent over the same period (Q4 2017: household expenditure was also supported by a range -1.4 percent), as a result of reduced capital outlays of government measures to increase the disposable mainly by public corporations, with a number of multi- incomes of low- and medium-income households, year infrastructure projects nearing completion. including reductions in personal income taxation, and continued social transfers. On the supply side, most major economic sectors continued to expand in Q1 2018. The services sector, Private investment growth has softened despite which accounted for 54.8 percent of GDP, grew at a the continued supportive global and domestic marginally higher rate of 6.5 percent during the quarter economic environment. Private sector investment (Q4 2017: 6.2 percent), reflecting the accelerated FIGURE 3 FIGURE 4 Malaysia’s economy grew at a more measured ...with private consumption remaining the main pace in Q1 2018... contributor to growth GDP, y/y, Percentage Contribution to GDP, y/y, Percentage 8 7 6.2 5.9 5.8 5.9 6 5.6 6 5.4 5.0 5 4.8 4.7 4.5 4 4.3 4.1 4.0 4 2 3 0 2 1 -2 0 -4 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Net Exports Private Consumption Public Consumption GFCF Change in Inventory Real GDP,y/y Source: DOSM Source: World Bank staff calculations based on DOSM data MALAYSIA ECONOMIC MONITOR | JUNE 2018 17 PART ONE - Recent Economic Developments and Outlook expansion of activities in the finance and insurance subsectors, and information and communication Following several quarters subsectors. The manufacturing sector also continued to of better-than-expected expand in Q1 2018 at the rate of 5.3 percent (Q4 2017: 5.4 percent), supported by stronger output growth in the growth, Malaysia’s economy electrical and electronics (E&Es), petroleum, chemical, expanded at a more rubber and plastic products. Meanwhile, growth in the construction sector continued to decelerate to 4.9 moderate pace in Q1 2018 percent during the quarter (Q4 2017: 5.9 percent), amid persistent excesses in both residential and commercial electricity output rose 5.8 percent (March: 4.4 percent). property markets. Growth in the agriculture sector The index of wholesale and retail sales also recorded also softened in Q1 2018, with the rate standing at 2.8 a larger increase in April at 6.5 percent (March: 5.8 percent (Q4 2017: 10.7 percent), due mainly to a decline percent), mainly supported by wholesale trade. Survey- in rubber production amid weaker rubber prices during based indicators have provided mixed signals on growth the quarter. in H2 2018. The Malaysia composite leading index, a measure of the overall economic performance in the Recent economic indicators suggest that the months ahead, indicates that the economy will continue growth momentum is expected to continue, at least to grow, albeit at a moderated momentum in March in the near term. The Industrial Production Index (IPI) at 0.8 percent (February: 1.1 percent). Similarly, the increased at a faster pace in April at 4.6 percent (March: Malaysian Institute of Economic Research’s Consumer 3.1 percent), supported by growth across the Sentiment and Business Conditions Index in Q1 2018 manufacturing and electricity sectors. Manufacturing point towards continued economic expansion in the output  recorded an increase of  5.3 percent (March: near term, though at a more moderate pace compared 4.1 percent), on sustained strong sales in E&Es, while to in 2017. TABLE 1 GDP growth decomposition GDP, y/y, Percentage Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2016 2017 2016 2016 2016 2016 2017 2017 2017 2017 2018 GDP 4.1 4.0 4.3 4.5 4.2 5.6 5.8 6.2 5.9 5.9 5.4 Consumption Private Sector 5.2 6.2 6.3 6.1 6.0 6.7 7.1 7.2 7.0 7.0 6.9 Public Sector 2.7 5.4 2.1 -4.3 0.9 7.5 3.3 3.9 6.8 5.4 0.4 Gross Fixed Capital Formation 0.1 6.1 2.0 2.4 2.7 10.0 4.1 6.7 4.3 6.2 0.1 Exports of Goods & Services 1.0 2.1 -0.2 2.4 1.3 9.8 9.4 11.8 6.7 9.4 3.7 Imports of Goods & Services 2.3 2.6 -1.6 1.9 1.3 13.0 10.4 13.3 7.3 10.9 -2.0 Sectoral Agriculture -3.9 -7.9 -6.2 -2.5 -5.2 8.4 5.9 4.1 10.7 7.2 2.8 Mining -1.3 2.1 2.8 4.9 2.1 1.4 0.1 3.0 -0.3 1.0 0.1 Manufacturing 4.6 4.2 4.3 4.7 4.4 5.6 6.0 7.0 5.4 6.0 5.3 Construction 8.0 8.9 7.9 5.1 7.4 6.6 8.3 6.1 5.9 6.7 4.9 Services 5.2 5.8 6.2 5.6 5.7 5.8 6.3 6.5 6.2 6.2 6.5 Source: World Bank staff calculations based on DOSM data 18 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART ONE - Recent Economic Developments and Outlook The current account surplus has widened due to an increase in net trade Malaysia’s gross exports expanded at a relatively in Q1 2018 (Q4 2017: 8.9 percent), in the context of a modest pace of 5.8 percent in Q1 2018 (Q4 2017: slowing external demand for manufactured exports. 12.4 percent). The recent growth of Malaysia’s The decline in capital imports during the quarter also exports has been driven largely by sustained external contributed to the contraction of gross imports, due to demand for E&E exports, which accounted for almost the high base in Q1 2017, which was driven largely by three-quarters of the total gross export growth over the delivery of a number of high-value items, including the period (see Figure 5). In particular, growth of aircraft and oil and gas vessels. semiconductor exports accelerated to 29.6 percent in Q1 2018 (Q4 2017: 24.4 percent), driven by an upturn in In tandem with an increase in net trade, the the global technology cycle. Exports of resource- and current account surplus widened to 4.4 percent of non-resource-based manufactured products increased GDP in Q1 2018 (Q4 2017: 4.0 percent) (see Figure a little during the quarter, supported by continued 6). During the quarter, Malaysia’s net trade of goods regional demand for chemical and metal products. increased to RM35.7 billion (Q4 2017: RM34.1 billion), as Meanwhile, growth of commodity exports contracted the moderated export growth was accompanied by a in Q1 2018, weighed down by a decline in the volume of contraction in imports. There was a smaller deficit in the liquefied natural gas (LNG) exports and by lower prices services account at -RM5.8 billion in Q1 2018 (Q4 2017: of rubber and crude palm oil exports. -7.0 billion), with the decline due to lower net payments for construction services. Meanwhile, the deficit in the After four consecutive quarters of double-digit primary income account widened to -RM10.2 billion growth in 2017, gross imports contracted by 0.8 in Q1 2018 (Q4 2017: -RM8.4 billion), due primarily percent in Q1 2018, due to a lower growth in the to lower income accrued to domestic firms investing manufacturing sector and a decline in capital abroad. The secondary income account deficit declined imports (Q4 2017: 14.4 percent). Imports of marginally, standing at -RM4.7 billion (Q4 2017: -RM4.8 intermediate goods, which constituted 57.1 percent billion), with continued sizable outward remittances of total imports in 2017, contracted by 10.5 percent from foreign workers. FIGURE 5 FIGURE 6 Much of the strength in export growth has been ...along with a contraction in imports, contributing driven by continued demand for E&E exports... to a larger current account surplus Annual Change, Contribution to Growth, Percentage Balances, Percentage of GDP 25 15 20 10 15 5 10 5 0 0 -5 -5 -10 -10 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 E&E Commodities Non E&E Exports, y/y Primary & Secondary Services Goods Current Account Income Account Source: World Bank staff calculations based on BNM and DOSM data Source: World Bank staff calculations based on DOSM data MALAYSIA ECONOMIC MONITOR | JUNE 2018 19 PART ONE - Recent Economic Developments and Outlook Exports grew at a robust pace in April, increasing and value. Imports also rose, at 9.1 percent (March: -9.6 by 14.0 percent (March: 2.2 percent). The jump percent) due mainly to higher imports of capital goods. was driven by E&E exports, which constitute about 38 Meanwhile, imports of intermediate and consumer percent of total exports. In addition, the increase was goods declined during the same period. Overall, a supported by stronger commodity exports particularly trade surplus of RM13.1 billion was recorded for April petroleum exports, which saw increases in both volume 2018, a marked growth of 50.9 percent. TABLE 2 Selected external sector indicators Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2016 2016 2016 2016 2017 2017 2017 2017 2018 Balance of Goods & Services (% of GDP) 6.1 5.4 7.4 8.0 5.8 6.4 7.8 7.6 8.7 Current Account Balance (% of GDP) 2.2 1.0 2.5 3.9 1.5 2.7 3.7 3.9 4.4 Total Exports (% of GDP) 67.7 66.8 67.1 69.4 71.2 71.2 72.3 70.9 70.1 Total Imports (% of GDP) 61.6 61.3 59.8 61.4 65.4 64.8 64.5 63.3 61.4 Net Portfolio Investment (RM billion) 15.7 0.1 -9.8 -20.1 -32.4 17.5 -9.1 11.6 -2.6 Gross Official Reserves (RM billion) 381.6 390.4 405.0 423.9 422.2 424.8 427.7 414.7 416.4 (US$ billion) 97.0 97.2 97.7 94.5 95.4 98.9 101.2 102.4 107.8 Source: World Bank staff calculations based on BNM and DOSM data 20 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART ONE - Recent Economic Developments and Outlook Domestic inflationary pressures have eased in recent months The CPI inflation has moderated in the first five among urban low-income households, who are also months of 2018, standing at 1.8 percent in May experiencing elevated housing costs due to a structural 2018, (Q1 2018: 1.8 percent) (see Figure 7). The shortfall of affordable housing at the lower end of the overall decline largely reflects the dissipating impact property market. of previous increases in global oil prices on domestic fuel inflation (see Figure 8). The inflation rate for food Labor market conditions have remained generally and non-alcoholic beverages also decelerated in stable, with sustained growth in private sector recent months, partly due to relatively stable fresh employment and wages. The unemployment rate food supplies amid favorable weather conditions. The declined slightly to 3.3 percent towards the end of Q1 inflation rate for the housing and utilities category also 2018 (Q4 2017: 3.4 percent), with continued expansion moderated during the period, with relatively subdued in the labor force being broadly offset by sustained rent growth. employment growth (see Figure 9). The labor force participation rate remained stable at 68.2 percent of While the underlying inflation rate has eased, there the working age population at the end of Q1 2018. (Q4 remain concerns regarding the buildup of cost of 2017: 68.0 percent). During this quarter, private sector living pressures. The buildup of inflationary pressures wage growth3 stood at 6.6 percent, slightly higher than over the past years has had a disproportionate effect the rate of 6.3 percent recorded in Q4 2017 (see Figure on lower-income households, who spend a higher 10). At the sectoral level, the disparity in wage growth proportion of their income on food items1, for which the between the manufacturing and the services sectors buildup of price increases has been most significant2 has widened, with wages increasing at a rate of 13.9 (see Box 1 on the disconnect between low rates of percent on average (Q4 2017: 9.4 percent) in the case inflation and widespread concerns about the cost of the former compared to 3.5 percent (Q4 2017: 5.0 of living in Malaysia). The adverse impact of higher percent) of the latter. cumulative inflation has been more pronounced FIGURE 7 FIGURE 8 Headline inflation has moderated in recent ...due largely to lower growth in transport prices months... In ation, y/y, Percentage Contribution to Growth, y/y, Percentage 6 6 5 4 4 2 3 2 0 1 -2 0 01/2016 03/2016 05/2016 07/2016 09/2016 11/2016 01/2017 03/2017 05/2017 07/2017 09/2017 11/2017 01/2018 03/2018 05/2018 01/2016 03/2016 05/2016 07/2016 09/2016 11/2016 01/2017 03/2017 05/2017 07/2017 09/2017 11/2017 01/2018 03/2018 05/2018 Headline In ation Core In ation Others Housing, Water, Electricity, Headline Inflation Gas & Other Fuels Transport Food and Non-alcoholic Beverages Source: DOSM Source: World Bank staff calculations based on DOSM data 1 Malaysian households in the lowest-income deciles spend close to 40 percent of their expenditure on food, compared to about 25 percent among the highest- income households. Source: Report on Household Expenditure Survey 2016, DOSM. 2 From January 2010 to May 2018, the cumulative increases in consumer prices were 33 percent for food and non- alcoholic beverages, 19 percent for transport, 19 percent for housing and utilities, and 12 percent for others (excluding alcoholic beverages and tobacco). Source: World Bank staff calculations based on DOSM data. 3 Private sector wage is derived from the salaries and wages data published by DOSM in the Monthly Manufacturing Statistics and Quarterly Services Statistics. It covers 64 percent of total employment. MALAYSIA ECONOMIC MONITOR | JUNE 2018 21 PART ONE - Recent Economic Developments and Outlook FIGURE 9 FIGURE 10 Labor market conditions have remained broadly ...with a widening gap in average wage growth stable... between the manufacturing and the services sectors Unemployment Rate, Percentage Labour Force Patricipation Rate Wage Growth, y/y, Percentage 3.6 70.0 14 69.5 12 3.4 69.0 68.5 10 3.2 68.0 8 67.5 6 3.0 67.0 66.5 4 2.8 66.0 2 65.5 0 2.6 65.0 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2017 Q3-2017 Q4-2017 Q1-2018 07/2015 07/2016 07/2017 01/2015 04/2015 01/2016 04/2016 01/2017 04/2017 01/2018 10/2015 10/2016 10/2017 Overall Manufacturing Major Services Subsectors Labor Force Participation Rate Unemployment Rate Source: DOSM Source: BNM and DOSM In 2017, the youth unemployment rates remained rural and urban areas, amongst men and women, and elevated at 15.4 percent amongst 15–19 year-olds for all ethnic groups. In 2017, unemployment was also and 9.6 percent amongst those 20–24 years old relatively high among those with tertiary education (see Figure 11). In 2016, the corresponding rates were (4.2 percent), compared to those with only secondary 15.9 and 9.1 percent respectively. The unemployment education (3.4 percent), primary education (1.8 percent), rates in these age groups are relatively high in both or no formal education (2.8 percent) (see Figure 12). FIGURE 11 FIGURE 12 Unemployment is especially high among 15-24 ...and is highest among those with higher year-olds... education Unemployment Rate, Percentage Unemployment Rate, Percentage 20 5 18 Tertiary 15 - 19 years-old 16 4 Secondary 14 12 3 20 - 24 years-old 10 No formal education 8 2 6 Primary Overall (15 - 64 years-old) 4 1 2 0 0 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 Source: DOSM Source: DOSM 22 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART ONE - Recent Economic Developments and Outlook BOX 1 What explains the disconnect between low rates of inflation and widespread concerns about the cost of living in Malaysia? Concerns and complaints about the increasing cost Furthermore, perceptions of changes in the cost of living of living have been common in Malaysian public are usually influenced by the extent to which inflation is discourse over the past two to three years. Over the matched by income changes. same period, the CPI inflation rate has been relatively low, standing at the average annual rate of 2.7 percent Rising prices of necessities, especially food, have in the period from January 2015 to May 2018. What negatively affected the well-being of low-income explains this apparent disconnect between economic households in recent years. Poorer households spend statistics and popular perception? A large part of the a larger portion of their household budgets on food explanation could be that the inflation experienced and other necessary items. In Malaysia, food and non- by some population groups deviates significantly from alcoholic beverages (including food away from home) the CPI, which is a weighted average of all prices in the represent 28.7 percent of household consumption economy4. Such deviations are attributable to differences expenditure in aggregate, but the corresponding budget in the combinations of goods and services consumed share among households earning less than RM3,000 by households, or spatial differences in prices, or both. per month is much higher at 38.5 percent. Since 2010, 4 Because the CPI is weighted according to total consumer spending in the economy it gives greater weight to households with higher consumption spending. 24 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART ONE - Recent Economic Developments and Outlook FIGURE 13 FIGURE 14 Food prices have increased more rapidly than ...and consumer prices have risen faster in urban other expenditure categories... areas Cumulative Change in Consumer Prices, July 2010 to May 2018 Consumer Price Index, January 2015 to May 2018 Percentage 2010=100 40 Urban Rural 125 33 Urban 35 30 120 25 25 Rural 20 20 18 17 115 16 15 12 10 10 110 5 0 105 Food and Housing and Transport Others* 2015 2016 2017 2018 non-alcoholic Utilities beverages Source: DOSM Source: DOSM *Excludes alcoholic beverages and tobacco prices of food and non-alcoholic beverages have been income growth, with the mean and median incomes rising faster than any other major category of household growing faster than inflation for the bottom 40 percent expenditure (see Figure 13). Consumers tend to be more (B40), middle 40 percent (M40), and top 20 percent aware of price changes for items purchased frequently, (T20) of the income distribution. However, behind those so the fact of food price increases exceeding the overall averages there are households whose incomes are not CPI is magnified in consumers’ perceptions because they keeping pace with inflation, or who resort to second see it on a daily basis at grocery stores and markets. or third jobs to keep up with increasing living costs. Assuring opportunities for all to develop their capacities Urban households experience higher inflation than and find more productive and remunerative employment the rest of the population. As seen in Figure 14, since will help counter the impact of rising living costs. 2015 the urban CPI has consistently outpaced the rural CPI. Low-income CPIs (that is, CPIs based on expenditure For those left behind in the job market, better patterns of households with incomes less than RM3,000) designed social protection systems can also help to are not published separately for urban and rural areas. alleviate the rising cost of living. For example, as the Nevertheless, it is possible to conclude that low-income government moves to replace BR1M with the new Cost of urban households have been hit extra hard by rising Living Aid program, several design improvements merit food prices because food makes up 36 percent of their attention. One potential reform is to differentiate income expenditure and urban food prices have been rising eligibility criteria and benefit levels by the living costs faster. Furthermore, costs of housing, which forms the faced by households in high-cost versus low-cost areas. second largest component in households’ expenditure, Cash assistance programs could also be more equitable have been deemed “seriously unaffordable”5 in recent and efficient by taking household demographics into years, thus further exacerbating the cost of living for account. Preliminary analysis by the World Bank indicates urban low-income households. that incorporating the number of household members in the eligibility criteria could improve targeting efficiency Concerns about the rising cost of living are also by as much as 25 percent compared to BR1M’s criterion linked to changes in household incomes. The most of income per household regardless of the household’s recent household income data show broad-based size. 5 BNM (2017) 2017 Third Quarterly Bulletin, Kuala Lumpur: Bank Negara Malaysia. MALAYSIA ECONOMIC MONITOR | JUNE 2018 25 PART ONE - Recent Economic Developments and Outlook Conditions in the financial system have remained broadly stable In January 2018, the Central Bank of Malaysia with all banks registering capital ratios well in excess of normalized the degree of monetary policy the statutory minimum as of Q1 2018. The overall quality accommodation by increasing the Overnight Policy of the banking system’s assets continued to be sound Rate (OPR) to 3.25 percent. This decision was during the quarter, as evidenced by the low levels of based on an assessment that the domestic economy both delinquencies and impaired loans. Liquidity in the was on a firm growth path and that the conditions banking system has remained adequate, with all banking that necessitated the previous OPR reduction in 2016 institutions recording Basel III Liquidity Coverage Ratio had significantly improved. The increased rate was (LCR) levels above the minimum statutory requirement intended to preserve the sustainability of growth and of 90 percent. to prevent the buildup of risks from interest rates being too low for a prolonged period. In 2018, Bank Negara Net financing growth remained stable in Q1 2018, Malaysia (BNM) expects Malaysia’s economy to expand supported by sustained high level of corporate at a rate within the range of 5.5 to 6.0 percent, with bond issuances (see Figure 15). Corporate financing growth driven by sustained private sector demand and through the bond markets sustained a double-digit positive spillovers from the external sector. Meanwhile, growth rate of 14.2 percent in Q1 2018 (Q4 2017: 15.4 domestic inflationary pressures are projected to ease percent). This strong growth reflects sustained strong over this period, mainly due to a smaller contribution corporate bond issuances to finance private sector from global cost factors. infrastructure projects and working capital needs. Meanwhile, the banking system and development Financial soundness indicators showed that the financial institutions’ (DFIs) outstanding business banking system remains resilient. During Q1 2018, loans continued to expand at a relatively slow pace the banking sector’s pre-tax profits were broadly of 1.3 percent during the quarter, compared to in the sustained at RM9 billion (Q4 2017: RM10 billion). previous years (Q4 2017: 1.3 percent), reflecting in part Domestic financial institutions remain well-capitalized, increased business repayments amid improvement in FIGURE 15 FIGURE 16 Net financing growth was sustained by continued ...amid a relatively modest pace of expansion in strong corporate bond issuances... banking system and DFI loans Contribution to Net Financing Growth, y/y, Percentage Outstanding Loans, y/y, Percentage 10 12 10 8 8 6 6 4 4 2 2 0 0 01/2016 03/2016 05/2016 07/2016 09/2016 11/2016 01/2017 03/2017 05/2017 07/2017 09/2017 11/2017 01/2018 03/2018 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Corporate Banking System Total Net Total Loans Household Loans Business Loans Bonds and DFI Loans Financing Source: BNM Source: BNM 26 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART ONE - Recent Economic Developments and Outlook corporate profitability (see Figure 16). The growth rate elections. Meanwhile, the sovereign spreads against US of outstanding household loans increased marginally to Treasuries widened post-elections; however, this trend 5.2 percent in Q1 2018 (Q4 2017: 4.9 percent), driven has since reversed and the spread has now stabilized. largely by residential property loans. Interbank rates remained broadly stable, signaling that the overall conditions in the financial markets were In the financial markets, cautious sentiment stable with minimal signs of tightening in liquidity. arising from global factors as well as the political transition has contributed to portfolio outflows and heightened volatility in the domestic equity and Financial soundness indicators bond markets. Non-resident investors have reduced showed that the banking their exposure in the equity market with outflows amounting to RM5.6 billion in May 2018. During the system remains resilient same period, the FBM KLCI declined by 3.9 percent, driven by global factors as well as cautious sentiment The ringgit depreciated relative to the US dollar, following the election outcomes and the review of reflecting the trend in outflows (see Figure 18). selected mega projects including the Kuala Lumpur- In the period from May 1 to June 20, the ringgit Singapore High Speed Rail (HSR). In the domestic bond depreciated by 2.2 percent relative to the US dollar market, gradual outflows by non-resident investors to RM4.01. In addition to external factors, the trend began prior to the elections as investors waited for towards depreciation was also due to increased greater clarity on the government’s policy directions. concerns among investors regarding Malaysia’s fiscal In May, non-resident outflows in the bond market outlook and sovereign credit rating. However, the amounted to RM13 billion. Throughout this period, ringgit appreciated against the UK pound sterling volatility in the Malaysian Government Securities (MGS) (2.4 percent) and the euro (2.5 percent) over the same yields temporarily increased and peaked during the period. FIGURE 17 FIGURE 18 Cautious sentiment arising from global factors ...contributing to the depreciation of the ringgit and the political transition has contributed to against the US dollar portfolio outflows... Non-resident Portfolio Flows, RM billion MYR/Currency, Rebaseed to Jan 2018=100 (Upward trend indicates MYR depreciation) 15 104 General Elections, May 2018 10 102 5 100 0 98 -5 96 -10 94 General Elections, -15 May 2018 92 -20 90 10/2017 02/01/2018 11/01/2018 22/01/2018 02/02/2018 13/02/2018 23/02/2018 06/03/2018 15/03/2018 26/03/2018 04/04/2018 13/04/2018 24/042018 04/05/2018 18/05/2018 30/05/2018 08/06/2018 12/2017 06/2017 08/2017 11/2017 05/2018 07/2017 02/2018 01/2018 04/2018 03/2018 09/2017 Equity Corporate Bonds Government Bonds USD GBP EUR THB IDR PHP and Sukuk and BNM Bills Source: BNM and Bursa Malaysia Source: World Bank staff calculations based on BNM data MALAYSIA ECONOMIC MONITOR | JUNE 2018 27 PART ONE - Recent Economic Developments and Outlook Federal Government debt as a share of GDP has trended downwards, but guaranteed debt has increased Federal Government debt as a share of GDP has In contrast, debt guaranteed by the Federal trended downwards through 2017, with risks Government has increased due to a number of appearing manageable given the structure of public publicly guaranteed infrastructure investments. debt. As a proportion of GDP, Federal Government Total statutory guarantees stood at RM238.0 billion or debt stood at 50.8 percent as of end-2017 (Q3 2017: 17.6 percent of GDP as of end-2017, up from RM187.3 50.8 percent), two percentage points lower than in the billion or 15.2 percent of GDP in 2016 (see Figure 20). previous year (see Figure 19). 97.7 percent of the Federal The steady expansion of fiscal contingent liabilities Government’s financial liabilities are denominated in since 2009 has been driven largely by increased loan ringgit, thus limiting its exposure to valuation changes guarantees to support the implementation of large- from exchange rate movements. The debt structure scale infrastructure projects by non-financial public also remains skewed towards medium- to long-term corporations (NFPCs). Realization of these relatively maturities, with 68.8 percent of outstanding issuances sizable guarantees could result in an unexpected having a remaining maturity period of more than three strain on public finances and lead to higher sovereign years as of Q4 2017, thereby reducing rollover risks. In financing costs. The Federal Government also has addition, the presence of large domestic institutional additional long-term fiscal commitments arising from a investors, collectively holding almost two-thirds of total range of public-private partnership (PPP) arrangements, government issuances, continues to provide underlying totaling RM201.4 billion or 14.9 percent of GDP as of support for the government securities, mitigating risks Q4 2017, mostly to support increased infrastructure associated with shifting demand from foreign investors, investment without immediate budgetary impact which accounted for 28 percent of the total government to the government. While the risks associated with borrowing as of Q4 2017. the aggregate burden of these fiscal commitments FIGURE 19 FIGURE 20 The Federal Government debt as a share of GDP ...but guaranteed debt has increased has trended downwards... Percentage of GDP Percentage of GDP 70 25 60 53.0 54.5 51.6 52.7 52.7 20 50.8 17.6 50 15.4 15.5 15.3 15.2 14.7 15 40 30 10 20 5 10 0 0 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 Source: BNM Source: BNM 28 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART ONE - Recent Economic Developments and Outlook appear contained at the current juncture, continued Sales and Services (SST) system6. The government has vigilance and transparent, orderly management of also adjusted the fuel pricing mechanism to insulate commitments will be important to anchor market domestic RON95 gasoline and diesel prices against expectations regarding Malaysia’s longer-term public global oil price movements7. The resultant revenue debt sustainability. shortfall and increased subsidy outlays for the year are expected to be compensated with higher oil- The government has introduced several fiscal related revenues from the recovery of global oil prices, policy changes in response to its election mandate further spending restraint and increased contributions to lower living costs, and has committed to from government entities, particularly in the form of achieving the 2.8 percent federal deficit target dividends. In addition, the government has indicated set for 2018. Among the major announcements that it will reassess the overall Federal Government made include the change of Malaysia’s consumption debt and liabilities including the guarantees that have tax system from the Goods and Services Tax (GST), materialized, and the future fiscal commitments under which had been effective in diversifying the revenue PPP arrangements. It also intends to review several base away from petroleum-related sources since the large-scale infrastructure projects with a view to 2014 oil-price slump, back to the previous single-stage safeguard longer-term fiscal sustainability. 6 GST has been zero-rated since June 1, 2018, and will be replaced with SST effective September 1, 2018. 7 Effective June 7, 2018, the prices per liter of RON95 petrol and diesel are fixed at RM2.20 and RM2.18 respectively, while the price of RON97 is floated on a weekly basis. MALAYSIA ECONOMIC MONITOR | JUNE 2018 29 PART ONE - Recent Economic Developments and Outlook Economic outlook Regional economic growth is expected to remain robust through 2018 The cyclical upswing in global growth is expected to Growth in the region is projected to remain solid continue in 2018. The global growth rate is projected in the near term. China’s economy is likely to expand to reach 3.1 percent in 2018, followed by a slight decline at a more moderate pace in the coming years, with its over the next two years to 2.9 percent in 2020 due to a growth rates projected to decline from 6.5 percent gradual slowdown in advanced economies (see Figure in 2018 to 6.2 percent in 2020, as it continues to 21). As labor market slack diminishes and monetary rebalance. Average annual growth rates for the rest of policy accommodation gradually unwinds, growth the region are expected to peak at 5.4 percent in 2018, in advanced economies is expected to track closer then to moderate slightly to 5.3 percent over the next to subdued potential growth rates, which remains two years as the cyclical rebound matures (see Figure constrained by aging populations and weak productivity 22). Domestic demand will remain the primary driver trends. Conversely, growth in EMDEs is expected of growth in the region, reflecting continued favorable to continue to increase, from 4.5 percent in 2018 to prospects for the growth of private consumption 4.7 percent in 2019-2020. This acceleration primarily and investment amid improved confidence. Barring reflects a continued, but maturing, cyclical rebound major external shocks, trade flows are also projected in commodity exporting nations, with the impacts to remain robust in 2018, following which they are of the earlier commodity price collapse gradually expected to soften as the global environment becomes dissipating. Global trade is projected to remain firm in less supportive. 2018, gradually declining thereafter, consistent with the anticipated deceleration in capital expenditure across advanced economies and China. FIGURE 21 FIGURE 22 Robust global growth is likely to continue into ...with a favorable outlook expected for the 2018... region GDP, y/y, Percentage Latest Estimates (June 2018) GDP, y/y, Percentage Latest Estimates (June 2018) Previous Estimates (April 2018) Previous Estimates (April 2018) 6 8 7 5 6 4 5 3 4 3 2 2 1 1 0 0 2018f 2019f 2020f 2018f 2019f 2020f 2018f 2019f 2020f 2018f 2019f 2020f 2018f 2019f 2020f 2018f 2019f 2020f World Advanced Emerging & Developing EAP Developing EAP Developing Economies Developing excl. China ASEAN Economies Source: World Bank staff projections Source: World Bank staff projections 30 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART ONE - Recent Economic Developments and Outlook Malaysia’s near-term economic growth is expected to remain strong Malaysia’s economy is forecast to grow at the rate of 5.4 percent in 2018, underpinned by stronger Private consumption, the growth of household consumption (see Table 3) 8 . primary driver of Malaysia’s Private consumption, currently the primary driver of Malaysia’s growth, is forecast to accelerate at the rate growth, is forecast to of 7.0 percent in 2018, 0.3 percentage points above the accelerate in 2018 April forecast (2017: 7.0 percent). The stronger near- term outlook for household spending primarily reflects Gross fixed capital formation is expected to the additional impetus from the new policy measures expand at a more modest pace, with lower private put forth by the government, including a 3-month and public capital expenditure than previously suspension of the consumption tax during the transition projected. The growth forecast of gross fixed capital from GST to SST, and one-off payouts to civil servants formation has been revised down to 4.3 percent in and pensioners.9 Meanwhile, public consumption is 2018 and 4.1 percent in 2019 (2017: 6.2 percent). This projected to expand at a lower rate than previously revision mainly reflects the softer-than-expected anticipated, at 1.6 percent in 2018 (2017: 5.4 percent), investment activity in Q1 2018 as well as expectations of in line with the planned rationalization in government contraction and deferment of several current and future operating expenditure, including spending on non- capital expenditure undertaken by the government and essential services.10 public corporations. TABLE 3 GDP growth and contribution to growth Growth Rates Contribution to GDP Growth (y/y, Percentage) (Percentage Point) 2017 2018f 2019f 2020f 2017 2018f 2019f 2020f GDP 5.9 5.4 5.1 4.8 Domestic Demand (including stocks) 6.6 5.5 5.1 4.8 6.1 5.1 4.7 4.5 Final Consumption 6.7 6.0 5.5 5.2 4.4 4.0 3.7 3.5 Private Sector 7.0 7.0 6.4 6.1 3.7 3.8 3.5 3.4 Public Sector 5.4 1.6 1.3 1.1 0.7 0.2 0.2 0.1 Gross Fixed Capital Formation 6.2 4.3 4.1 3.8 1.6 1.1 1.0 1.0 Change in Stocks 0.1 0.0 0.0 0.0 Exports of Goods & Services 9.4 6.7 6.4 6.0 6.6 4.8 4.7 4.5 Imports of Goods & Services 10.9 7.0 6.6 6.1 -6.8 -4.5 -4.3 -4.1 Source: World Bank staff calculations and projections 8 The forecast assumes no changes to monetary policy over the forecast period. 9 A special payout of RM700 million to civil servants and pensioners was announced on June 9, 2018. 10 Include professional and consulting services, refurbishments, events and promotional activities, as well as ICT systems upgrading. MALAYSIA ECONOMIC MONITOR | JUNE 2018 31 PART ONE - Recent Economic Developments and Outlook The external sector will continue to benefit from the cyclical rebound in global investment and The external sector will manufacturing activity into the near future. While continue to benefit from the solid growth of Malaysia’s exports is expected to continue in 2018, the growth rate is likely to moderate, the cyclical rebound in due partly to a higher base effect. It is projected global investment and that export growth will gradually decelerate over the coming years, as the global environment becomes manufacturing activity less supportive. Import growth is projected to remain into the near future strong in 2018, due to the continued demand for manufactured exports and high levels of private sector expenditure. The current account surplus is projected sentiment developed by the staff of the World Bank’s to remain broadly stable at around 3.0 percent of GDP Big Data program11 indicates a more cautious sentiment in 2018, with the sustained trade surplus of goods over over Malaysia’s near-term macroeconomic prospects the forecast horizon continuing to be weighed down following the general elections, with the forecast by the persistent deficits in the services and income of Malaysia’s GDP growth in 2018 being lower than accounts. the consensus forecast (see Figure 23). Below-trend optimism was observed across the commodity and News-based measures of economic sentiment financial markets, economic as well as corporate and show a downward shift in optimism over near-term industrial clusters, while the sentiment associated economic prospects following the general elections. with the political news category has not deviated A complementary news-based measure of economic significantly from its historical averages (see Figure 24). FIGURE 23 FIGURE 24 Sentiment-based forecasts have been tracking ...largely reflecting below-trend optimism in the below the consensus forecast since the general commodity and financial markets, economic, elections... corporate and industrial clusters GDP, 2018f, y/y, Percentage News Sentiment, Z-score 6.5 1.5 1.0 6.0 0.5 0 5.5 -0.5 -1.0 5.0 -1.5 -2.0 4.5 01/2018 02/2018 03/2018 04/2018 05/2018 06/2018 01/2018 02/2018 03/2018 04/2018 05/2018 06/2018 Sentiment-adjusted Consensus Commodity/Financial Corporate/Industrial Economic Political/General Source: World Bank staff projections Source: World Bank staff calculations 11 The news-based sentiment index is derived through an analysis of the proportion of positive words (“gain”, “improve”, “agreement”, etc.) relative to the proportion of negative words (“concern”, “fear”, “decline”, etc.) present in a vast collection of news articles on Malaysia’s economy. Information derived from media reports has two main advantages compared to official statistics. First, measurements of economic conditions can be calculated in real-time, at a daily frequency. Second, this information enables the measurement of economic forces that might not be easily captured by traditional data sources, providing complementary insight into factors such as the collective sentiment regarding economic prospects. A recent study based on historical data in 25 countries between 1991 and 2017 suggests that including news-based measures of sentiment reduces the forecast errors of GDP growth by 12 percent on average relative to the consensus forecast. 32 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART ONE - Recent Economic Developments and Outlook Headline inflation is projected to be more subdued US$12,055 that the World Bank currently sets to define in 2018 than previously anticipated. This reflects high-income country status (see Figure 25)12. The latest mainly the weaker-than-expected inflationary pressures World Bank staff projections13 suggest that Malaysia’s in H1 2018, a much lower pass-through of the higher GNI per capita is likely to exceed the defined threshold global oil prices on domestic fuel inflation with the at some point in the period from 2020 to 2024. adjustment of the fuel pricing mechanism, as well as the overall decline in the price of consumption goods As Malaysia moves closer towards achieving high- following the replacement of GST with SST and the income country status, it is important to be aware temporary suspension of the consumption tax between of the broader aspects of development that are June and August 2018. Underlying inflation is also not captured by GDP growth. These include the expected to be broadly contained over the near term distribution of economic gains across geographical in the absence of immediate domestic cost pressures, regions and segments of the population, and the wider though it is expected to increase gradually over the dimensions of societal wellbeing, including health, forecast horizon, consistent with the narrowing degree education and environmental sustainability (see Box of spare capacity in the economy. 2 on measuring the changing wealth in Malaysia). Moreover, Malaysia is converging to the high-income Taking a longer-term perspective, Malaysia is threshold at a relatively slow pace (with slower growth on track to achieve its transition from an upper in per capita income) than key comparator countries middle-income economy to a high-income economy that have successfully made the transition in recent within the next two to six years. Malaysia’s gross decades (see Figure 26). national income (GNI) per capita stood at US$9,650 in 2017, or US$2,405 below the threshold level of FIGURE 25 FIGURE 26 Malaysia is expected to pass the high-income ...although at a slower pace of convergence country threshold within the next 2 to 6 years... relative to high-income comparators Three Scenarios for When GNI Per Capita Will Pass the Average Growth Rate of GNI Per Capita, 10-Year Period Prior to Achieving High-income Threshold High-income Country Status, World Bank Atlas Methodology (US$) GNI Per Capita, World Bank Atlas Methodology (US$) 18 18,000 High Baseline 15.4 16 14.7 14 16,000 12 11.1 10.9 Low 10 14,000 8 High income threshold: 6 12,000 US$12,055 as 3.8 of July 1, 2018 4 2 10,000 0 Korea, Rep. (1984 - 1993) Singapore (1974 - 1983) Uruguay (2003 - 2012) Poland (1999 - 2008) Malaysia (2008 - 2017) 8,000 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Source: World Bank staff projections Source: World Bank staff calculations 12 In calculating GNI in US dollar terms, the World Bank uses the Atlas conversion factor instead of simple exchange rates. The Atlas conversion factor for any given year is the average of a country’s exchange rate for the year and its exchange rates for the two preceding years, adjusted for the difference between the rate of domestic inflation and international inflation. The purpose of the adjustment is to lessen the effect of exchange rate variability in the cross-country comparison of national incomes. 13 The simulations are based on World Bank staff forecasts of future GDP growth, as well as assumptions for, among other things, the ringgit exchange rate and the high-income country threshold. MALAYSIA ECONOMIC MONITOR | JUNE 2018 33 PART ONE - Recent Economic Developments and Outlook BOX 2 Measuring the changing wealth of Malaysia National income and well-being are underpinned considerably, from US$2.7 trillion to US$7.2 trillion, by a country’s assets or wealth, which comprises with per capita wealth almost doubling from around produced capital, natural capital, human capital, US$130,000 to US$240,000 over this period (see Figure and net foreign assets. Sustained long-term 27). Much of the increase in wealth was driven by the economic growth requires investment and management rapid accumulation of its human capital assets, which of this broad portfolio of assets. While a country’s gross more than doubled to US$181,000 per capita, or 76 national income, or GNI, provides an important measure percent of the total wealth, by 2014, primarily reflecting of its income and production, it does not reflect changes the significant investment gains from education over the in the economy’s underlying asset base and the flows past decades. In contrast, produced capital16 increased of income that an asset generates over its lifetime. For only modestly, from US$22,000 to US$30,000 per capita, instance, it does not reflect depreciation and depletion over the same period, and natural capital17 declined of assets; whether investment and accumulation of slightly in the early 2000s before recovering to its earlier wealth are keeping pace with population growth; or per capita level of US$29,000 in 2014. whether the mix of assets is consistent with a country’s development goals. To measure these impacts, Relative to highly economically developed countries, economic performance is best evaluated by assessing Malaysia has a notably low share of produced the growth of both income and wealth, to provide a capital wealth. Given that a country’s level of economic more complete picture of a nation’s economic progress development is strongly related to the composition of and its long-term well-being.14 its national wealth, it is useful to examine the differences in the wealth composition of Malaysia and high-income Malaysia’s total wealth has almost tripled over the economies, particularly as Malaysia is expected to past two decades, driven largely by the significant achieve high-income status within the coming years. As growth of human capital assets.15 In the period Table 4 shows, the accumulation of wealth among the from 1995 to 2014, Malaysia’s total wealth expanded OECD countries has been accompanied by an increasing 14 Measuring national wealth and changes in wealth is part of an ongoing effort by the World Bank to monitor the long-term economic well-being of nations. Its latest report, The Changing Wealth of Nations 2018, provides wealth accounts for 141 countries for the period 1995 to 2014. 15 The present value of earnings of the labor force, which factors in not only the number of years of schooling completed by workers, but also the earnings gains associated with schooling (which implicitly factors in the quality of school learning) and how long workers can work (which implicitly accounts for health conditions through life expectancy, among others). 16 The discounted sum of value of the rents generated by machinery, buildings, equipment, as well as residential and non-residential urban land. 17 The discounted value of earnings from energy and minerals, agricultural land, forests and terrestrial protected areas. 34 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART ONE - Recent Economic Developments and Outlook concentration of assets in human and produced capital, resource rents into strengthening non-resource totalling 98 percent of the aggregate wealth in 2014. capital are crucial to ensuring sustainable Significantly, produced capital alone constitutes more development. In particular, Malaysia’s abundance of than one-quarter of the average total wealth among renewable resources could produce enormous benefits these countries. By contrast, Malaysia has a relatively in the long term if managed sustainably. This would small proportion of produced capital, at 13 percent of involve transforming resource rents into other forms of its total wealth, partly compensated by a higher share productive assets, such as produced and human capital, of natural capital at 12 percent (OECD average: three with these assets serving as the main source of future percent), with its relative abundance of renewable wealth. Achieving this requires a combination of sound resources, such as agricultural land and forests. macroeconomic policies, strong institutions and good governance to promote efficient resource extraction and For resource-rich countries such as Malaysia, careful to ensure that rents are reinvested to generate long-term management of natural assets and investment of gains. FIGURE 27 While Malaysia has significant natural resources, the majority of the country’s wealth lies in its stock of human capital 150% 300,000 Total Wealth Per Cpapita (constant 2014 US$) 100% Produced Capital Share of Total Wealth 200,000 Natural Capital - Renewable Natural Capital - Nonrenewable 50% Human Capital Net Foreign Assets 100,000 Total Wealth Per Capita 0% 1995 2000 2005 2010 2014 -50% 0 Source: World Bank staff calculations TABLE 4 Wealth per capita in Malaysia compares well with regional averages, but lags behind high-income comparators % of % of Upper % of High % of Wealth per capita, East Asia Malaysia total total middle total income: total constant 2014 US$ & Pacific wealth wealth income wealth OECD wealth Total Wealth 239,203 100% 140,042 100% 112,798 100% 708,389 100% Produced Capital 29,989 13% 39,185 28% 28,527 25% 195,929 28% Natural Capital 28,657 12% 14,739 11% 18,960 17% 19,525 3% Renewables 20,763 9% 9,872 7% 12,337 11% 11,514 2% Nonrenewable 7,894 3% 4,868 3% 6,623 6% 8,011 1% Human Capital 180,729 76% 84,334 60% 65,742 58% 498,399 70% Net Foreign Assets -173 0% 1,784 1% -432 0% -5,464 -1% Source: World Bank staff calculations MALAYSIA ECONOMIC MONITOR | JUNE 2018 35 PART ONE - Recent Economic Developments and Outlook Implementation of the election mandate will require careful management of potential risks The change of the consumption tax system from the government’s medium-term development priorities GST back to SST, and the adjustment to the fuel and plans, could create additional uncertainty on the pricing mechanism, in the absence of adequate direction of public investments going forward, and thus compensatory measures, would constrain the on its overall contribution to growth. existing fiscal policy space. While the change of the consumption tax system from GST back to SST may Other notable risks include the relatively high levels partially alleviate the cost of living pressures experienced of private and public-sector debt. In particular, the by its citizens, the absence of adequate compensatory relatively high level of household debt in the context of revenue measures would result in appreciable narrowing persistent property market excesses remains a source of the government’s revenue base18, and greater of risk to macro-financial stability as well as acting as reliance on less stable direct taxation and oil-related a strain on household spending, which warrants close revenue. This in turn could increase the tendency for monitoring. Concurrently, the overall public debt stock fiscal procyclicality and constrain the flexibility of fiscal has remained relatively high due to the continued adjustment against future macroeconomic shocks. The accumulation of fiscal deficits, and fiscal commitments adjustment to the fuel pricing mechanism in its current from public private partnerships (PPPs). Addressing the form would compound the immediate fiscal strains, with stock of public-sector debt will require careful trade- the benefits being enjoyed disproportionately by the offs, including expenditure consolidation and a review higher-income segments of the population who tend to of new sources of revenue. consume a larger amount of fuel.19 As a highly open economy, Malaysia will also continue to face substantial risks relating to Addressing the stock of uncertainty in the external environment. In public-sector debt will particular, the possibility of financial market disruptions has increased amid shifting monetary policy require careful trade- expectations in advanced economies, which could offs, including expenditure spread across emerging economies including Malaysia, through heightened financial market volatility, reversals consolidation and a review in capital flows, and pressures on exchange rates. of new sources of revenue Another key source of risk relates to the increasingly intense protectionist tendencies and trade tensions in some major economies. Should these escalate or The cancellation and reassessment of several lead to a loss of confidence, there would likely be a planned large infrastructure projects raises dampening effect on global trade and investment uncertainty on the outlook for both public and flows. Such an escalation would have a disproportionate private investments. In response to the need to adverse impact on Malaysia, given its high level of reduce expenditures given the reduced fiscal revenue integration with the global economy and financial outlook, the government has indicated that it will markets, and its dependence on global value chains review selected existing large-scale projects and assess as a source of growth. On the other hand, a higher- their feasibility. These include the HSR and the East- than-expected upturn of growth in major economies, Coast Rail Link (ECRL) projects. In addition, certain further strengthening of global commodity prices and projects such as the Mass Rapid Transit Line 3 (MRT3) greater stability in the Korean peninsula represent the have also been canceled. The ongoing assessment of main upside risks, in turn could spur a stronger-than- these large-scale projects, pending announcements on anticipated expansion in Malaysia’s exports. 18 GST constituted 19.8 percent on average of the total Federal Government revenue between 2016 and 2017, compared to SST at 7.5 percent between 2010 and 2014. 19 The government, however, has indicated in its election manifesto that it intends to move towards a more targeted petrol subsidy mechanism for the lower-income groups. 36 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART ONE - Recent Economic Developments and Outlook Supportive conditions offer an opportunity to undertake deeper reforms for sustained and more inclusive growth Malaysia is entering into a new period that offers efficiency of development spending. Concurrently, the an opportunity to undertake bold structural reforms need to strengthen fiscal buffers should be carefully that will facilitate the achievement of sustained long- balanced against other important considerations, term growth. As Malaysia converges with high-income including providing adequate social safety nets and and developed economies, incremental growth will sustaining growth-enhancing investments. depend less on factor accumulation, which had facilitated growth in the past, and more on raising the level of A renewed social contract is essential to promote productivity to sustain higher potential growth. Thus, upward economic mobility and security and to it is crucial to intensify the reform agenda to tackle key facilitate the broader development of Malaysian structural constraints to productivity growth and boost society. Ensuring that people have greater opportunities longer-term growth prospects20. Policymakers should to improve their lives and access to mechanisms that prioritize measures to address labor market constraints help protect those gains from economic shocks are and distortions in output markets; to improve the quality essential in achieving inclusive growth. Policies need of education and training; to deepen regional trade to be formulated to address lower- and middle-income integration and to improve trade facilitation; to build Malaysians’ growing aspirations and demand for quality innovation capacity and to raise the competitiveness of affordable housing and public services, while narrowing SMEs; and to unlock the potential of the digital economy existing disparities in social and economic development. as a future driver of growth. The new environment has also Complementary policies are needed to mitigate ex ante created opportunities for deeper reforms to strengthen exposure to risks and to enhance ex post capacity to institutions and governance, including enhancing public cope with adverse shocks (see Box 3 on building a better institutions, lifting public sector efficiency, confronting social protection system in Malaysia). corruption, improving transparency and citizen engagement. These reforms are crucial to support and An agenda for inclusive growth and development sustain Malaysia’s development path. in Malaysia could consist of three pillars: fostering economic mobility; providing greater economic Ensuring longer-term fiscal sustainability in the security; and strengthening the institutions required new fiscal setting would necessitate introducing for inclusive growth. Increasing upward economic measures to diversify sources of fiscal revenue, mobility will require measures to eliminate existing rationalize non-essential operating outlays and disparities in access to jobs and services and to improve improve spending efficiency. It is important to ensure the quality of available jobs, especially for those who that the size and pace of fiscal adjustment is in line with have invested in acquiring the skills needed in the the present cyclical conditions, in order to strengthen modern work force. Enhanced economic security will fiscal space and thereby to prepare for future adverse depend on a more effective provision of social assistance shocks. Priority reforms on the revenue front should for low-income households, a stronger system of social center on broadening the SST base, expanding the insurance (for example, employment insurance, health coverage of personal income tax, reviewing the care, pensions) to increase resilience to idiosyncratic existing tax incentives, and strengthening overall tax shocks, and country-level schemes to manage large administration and compliance. Consideration could systemic shocks. To facilitate the achievement of also be given to ensure that the SST framework reflects inclusive growth, policies should be formulated to level the scale of transactions and profits being generated by the playing field in access to services and economic Malaysia’s digital economy. On the expenditure side, opportunities (including measures to increase women’s reform efforts should aim at containing the relatively labor force participation), to increase the effectiveness of sizeable cost of civil service salaries and pension outlays, pro-inclusion spending programs, to mobilize resources further rationalizing discretionary spending, untargeted through progressive taxation, and to adapt to the subsidies and transfers, restructuring some of the large- realities of an ageing population. scale infrastructure projects, as well as improving the World Bank (2018) ‘Productivity Unplugged: The Challenges of Malaysia’s Transition into a High-income Country’, The Malaysian Development Experience Series, 20 Washington, DC: The World Bank. MALAYSIA ECONOMIC MONITOR | JUNE 2018 37 PART ONE - Recent Economic Developments and Outlook BOX 3 Building a better social protection system in Malaysia There is a widespread desire to improve the opportunities (the opportunity function). Increasingly, ability of Malaysia’s social protection system to a well-performing social protection system is seen as a strengthen resilience, equity and opportunity for tool not only of social policy but also an important part the poorest. This desire is motivated by several factors, of wider economic policy. including rising costs of living for lower and middle-class Malaysians, demographic and social change, and the While some progress has been made in recent objective to leave no one behind as Malaysia continues years, several challenges limit the performance its development. Social protection systems generally of Malaysia’s social protection system. These include: (i) the provision of social assistance programs to challenges include a lack of coherence and fragmentation protect the poorest and most vulnerable from poverty of institutions, policies and delivery systems; variable and loss of human capital (the equity function); (ii) targeting mechanisms; and the failure to leverage programs to promote resilience of households in the the potential for strengthening productive economic face of diverse shocks such as health events and death, outcomes and addressing impending demographic and unemployment, disasters, or lack of savings in old age structural change. Currently, Malaysia’s tax and transfer (the resilience function); and (iii) programs which support system overall achieves very limited redistribution, and sustained movement out of poverty through building thus impacts inequality much less than those in OECD human capital and seizing productive employment countries. 38 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART ONE - Recent Economic Developments and Outlook Social protection in Malaysia has the potential to be more effective and efficient if it can achieve a more coherent system at the policy and delivery levels. Social protection in Malaysia’s social protection system has the potential to play a more active policy role, stimulating savings Malaysia has the potential for growth and ageing, supporting a more efficient to be more effective and labor market, and managing economic and household level risks. Social assistance could also shift to a more efficient if it can achieve a productive policy promoting sustainable graduation more coherent system at from social assistance where possible, while continuing to protect the truly poor and vulnerable. There could the policy and delivery levels also be greater coherence and strategic vision in social protection policy and program development, including through the development of a national Social Protection have been initiated to consolidate beneficiary lists from Masterplan. e-kasih, e-bantuan and BR1M, there is also significant potential to take integration of management information There is significant potential for better outcomes systems to a deeper level of inter-operability. from the proposed Cost of Living Aid as compared to Bantuan Rakyat 1Malaysia or 1Malaysia People’s For pensions and old-age savings, Malaysia faces a Aid (BR1M). BR1M did not fully realize its potential dual agenda of improving the adequacy of financial to achieve better socio-economic impacts given the protection for those already contributing to the significant level of spending. Cost of Living Aid as Employees Provident Fund (EPF) while expanding compared to BR1M could be strengthened by improving coverage to reach the roughly 40 percent of the the targeting methodology; increasing the transparency labor force currently outside the EPF net. As the of the budgeting and spending process; and better country ages rapidly over coming decades, ensuring accounting for household location, size and composition. fuller coverage with adequate benefits becomes even Cost of Living Aid also has potential to leverage goals more vital. A first step would be covering more of the such as higher old-age savings and incentives for elderly through supplemental approaches, including: workers to formalize. Beyond Cost of Living Aid, core (i) considering a non-contributory pension for those safety net and active labor programs are underfunded without pensions or adequate EPF accumulations; and in Malaysia, despite having some of the best targeting (ii) higher matching subsidies for EPF contributions for outcomes. Their potential expansion would need to be low-income workers to incentivize higher participation accompanied by a systematic emphasis on productive in the EPF. For those with EPF accounts, the minimum social assistance to minimize welfare dependency for age for withdrawals of savings could be further increased those who are able to work. over time. Changes to early withdrawal rules to improve adequacy of payouts at retirement and merging the The social protection system could be more effective civil service pension scheme into the EPF for new civil by reducing fragmentation of social assistance servants (with an occupational supplement) could also programs, consolidating around flagship programs be considered. and improving and standardizing the delivery, targeting and data management mechanisms. Recent decades have seen major reforms of Opportunities for consolidation of fragmented social institutions, policies and delivery systems globally, assistance programs could be explored with a focus and these provide valuable lessons for Malaysia. on protecting those who are most vulnerable. Front- For instance, globally, there has been a trend towards end service delivery also has major potential to be consolidation of social assistance programs into consolidated in order to improve efficiency. In addition, fewer flagship national programs, and of fragmented Malaysia could move towards a more standardized and information systems towards inter-operable “social commonly implemented targeting system to promote registries” which provide the informational base upon a consistent approach in terms of the unit of targeting which many public programs can draw from as they and program eligibility thresholds. While some steps determine eligibility. MALAYSIA ECONOMIC MONITOR | JUNE 2018 39 PART TWO Unlocking the Potential of the Digital Economy MALAYSIA ECONOMIC MONITOR | JUNE 2018 41 PART TWO - Unlocking the Potential of the Digital Economy Unlocking the potential of the digital economy Key building blocks need to be in place for Malaysia to achieve its digital economy ambitions In broad terms, the digital economy promotes While Malaysia has already taken a number of development and growth through three channels significant steps towards embracing the digital (see Figure 28). First, it promotes inclusion and economy, for it to generate the optimal benefits, it expands markets by reducing transaction costs and must address a number of key challenges. The country thereby enabling businesses to provide services to has made significant progress towards expanding segments of the market that might previously not access to basic Internet services, with almost 80 percent have been viable. Second, digital technologies boost of the population having internet access by the end of efficiency, enabling businesses to provide faster 2016, ahead of most of its regional peers and on par services, that are cheaper and more convenient. Third, with many advanced economies. Nonetheless, several these technologies can significantly reduce the cost key challenges need to be addressed. In particular, the of economic and social transactions for households, level of adoption by businesses remains relatively low businesses and government, thereby promoting compared to international comparators, with cost and innovation. quality issues acting as constraints. Moreover, Malaysia also lags behind comparator countries with similar Harnessing the opportunities created by the income levels in terms of the level of adoption of fixed emergence of the digital economy could help broadband services. Businesses often identify concerns Malaysia achieve sustainable growth and greater related to the cost and quality of internet services as inclusivity. In the past, Malaysia’s economic growth the key constraints on the increased use of digital tools. has been largely driven by factor accumulation and the transformation of factors of production from lower to This edition of the Malaysia Economic Monitor higher productivity activities. With this model of growth attempts to analyze the extent to which Malaysia generating diminishing returns, it is now essential for is prepared to leverage the opportunities created by Malaysia to harness the opportunities created by the the emergence of the digital economy. Specifically, emergence of the digital economy, and to adopt digital it broadly analyzes two important pillars of the digital technologies to drive productivity growth. Moving economy, these being the level of digital adoption forward, Malaysia’s next challenge is to ensure that by economic agents and the current state of digital it continues to create the necessary environment to connectivity infrastructure. The chapter identifies the enable the country to reap all of the potential benefits areas where Malaysia is performing well and where offered by the emergence of the digital economy. To improvements could be made. Amongst other issues, do this, it must establish the appropriate infrastructure, it identifies constraints related to the high costs of fixed bring a critical mass of individuals and businesses broadband connections and the challenges that need online, ensure that its workforce is equipped with the to be addressed in order to improve businesses’ digital appropriate skills to leverage the digital economy, and adoption. formulate the appropriate policies to drive the digital transformation. 42 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART TWO - Unlocking the Potential of the Digital Economy FIGURE 28 Digital technologies promote development and growth through three main channels Digital Technologies Search & Automation & Scale Economies & Information Coordination Platforms Inclusion Efficiency Innovation Source: World Bank, World Development Report 2016 – Digital Dividends Malaysia’s overall digital adoption is high, but business adoption lags behind peers At an aggregate level, the level of adoption of as Germany, Republic of Korea and Singapore. Most digital technologies in Malaysia is high. The World Malaysians are connected to the internet through Bank’s Digital Adoption Index (DAI), 21 which measures mobile networks, with Malaysia’s mobile broadband countries’ level of digital adoption across three penetration rate being one of the highest in the region, dimensions (people, government and businesses), ahead of many OECD countries (see Figure 30).23 The shows that Malaysia’s overall level of digital adoption level of adoption by Malaysia’s government is also high, is higher than any other country in the region with comparable with many high-income economies. The the exception of Singapore. The level of adoption government has invested heavily in digital technologies in Malaysia is equal to that of many high-income to modernize and digitize its systems, and processes, economies, with Malaysia scoring higher than roughly such as the implementation of the electronic tax filing one-third of OECD countries. and digital identification systems.24 The DAI indicates that Malaysia does well in However, Malaysia lags behind international peers terms of the level of digital adoption by people in terms of digital adoption by businesses (see and government. Malaysia’s citizens are among the Figure 31). Despite recent growth, only 62 percent of most digitally connected in the world, with the country business establishments are connected to the internet, having made great progress in terms of closing gaps while only 46 percent have access to fixed broadband to access to basic Internet services in recent years. The services, with only 28 percent having some form of proportion of its population with digital access had web presence as of 2015.25 By comparison, in the EU, increased from around 51 percent in 2006 to almost 96 percent of businesses have Internet connections, 80 percent 22 by the end of 2016 (see Figure 29), similar 95 percent have access to broadband services, and to the levels recorded by advanced economies such 75 percent have a web presence. In addition, the DAI 21 The DAI is a worldwide index that measures countries’ digital adoption across three dimensions of the economy: people, government, and business. The DAI covers 180 countries on a 0–1 scale, and emphasizes the “supply-side” of digital adoption—rather than technology use or perceptions of utility—to maximize coverage and simplify theoretical linkages. The people sub-index measures the extent and quality of individuals’ connection to the digital world; The government sub-index measures the adoption of core administrative systems to automate and streamline government activities and digital identification systems and online public services that allow the government to better serve the public. And the business sub-index measures the quality of digital infrastructure needed for e-commerce and other business functions. 22 ITU ICT Facts and Figures 2017. 23 141 percent as at 2016 – ITU ICT Facts and Figures 2016. 24 141 percent as at 2016 – ITU ICT Facts and Figures 2016. 25 Economic Census 2016 reported 74.6% internet access for fixed broadband services. However, Malaysia’s definition of fixed broadband at 650kbps or more is low by international standards. Source: Department of Statistics Malaysia (DOSM), Economic Census 2016: Usage of ICT by Businesses and e-Commerce, November 2017. MALAYSIA ECONOMIC MONITOR | JUNE 2018 43 PART TWO - Unlocking the Potential of the Digital Economy FIGURE 29 FIGURE 30 Individuals access to the internet is high in ...and largely through mobile networks Malaysia... Individuals Using the Internet (% of Population) Mobile Broadband Subscriptions (Per 100 People), 3G+4G 200% 200% 180% 180% 160% 160% 140% 140% 120% Malaysia 120% 100% 100% Malaysia 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 0 5,000 10,000 15,000 20,000 0 5,000 10,000 15,000 20,000 GNI Per Capita (US$) GNI Per Capita (US$) Source: ITU, World Bank, TeleGeography (2016-2017) Source: ITU, World Bank, TeleGeography (2016-2017) FIGURE 31 FIGURE 32 Digital adoption by businesses in Malaysia trails ...and current adoption is limited to internet international peers... banking and communication Digital Adoption Index, Business Sub-index Percent of Business Establishments ASEAN OECD 100 1 80 SGP .8 JPN 60 KOR Index Score .6 40 Malaysia = 0.55 20 .4 0 E-mail Internet Banking Get info on goods/services Post information or message Get info from government Voice over IP Interact with government Other (undefined) uses Recruit staff Provide customer service Other financial services Deliver products online Train staff .2 High Income 0 12,055 GNI Per Capita (US$) Total Agriculture Construction Manufacturing Mining and Quarrying Services Source: Department of Statistics Malaysia (DOSM), Business Establishments Source: Department of Statistics Malaysia (DOSM), Business Establishments Survey 2017 Survey 2017 44 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART TWO - Unlocking the Potential of the Digital Economy for businesses also shows that Malaysia has more lack of access to the internet and slow internet speed limited international bandwidth and a smaller number as the most significant constraints to utilizing digital of secure servers. In general, in terms of the level of technologies.28 In addition, the market lacks broadband digital adoption by businesses, Malaysia’s performance plans that adequately meet the needs and budgets of is roughly average for a lower middle-income country. businesses, particularly SMEs. Until recently, Malaysia’s fixed broadband services have been focused either on Currently, Malaysian businesses use digital enterprise businesses, with these services being too services mainly only to establish a web presence, to expensive for the vast majority of small enterprises, conduct business communications, and to conduct or on mass-market services, with these services not banking transactions, with comparatively few offering the degree of reliability necessary for advanced engaging in e-commerce. The most common use of business purposes. the internet by businesses is to send and receive emails, to conduct Internet banking transactions, and to obtain information from other businesses and the government The level of digital adoption (see Figure 32).26 Firms that engage in e-commerce are usually bigger firms with greater assets, more in Malaysia is equal to employees and higher revenues. The use of the internet that of many high-income for more sophisticated, innovative functions such as big data and artificial intelligence remains relatively low. economies, with Malaysia scoring higher than roughly There are also significant regional disparities between highly urbanized states and the rest of one-third of OECD countries the country when it comes to the level of digital adoption by businesses. In general, industrialized and/ or urbanized states such as Penang, Melaka, Selangor, In the future, the adoption of digital services by the Kuala Lumpur and Johor have relatively higher levels of private sector may be constrained if businesses are adoption. This is partly due to the lower connection costs not able to fully utilize digital technologies. Efforts in urban areas, with higher population densities driving to promote e-commerce may not achieve their full costs down, and also to various government campaigns potential if firms are not able to use digital technologies and initiatives in a number of states to promote access that underpin digital operations. Thus, providing high such as the Multimedia Super Corridor in Selangor. quality internet services is crucial for businesses, as There is also a strong positive correlation between the high intensity use of productivity-boosting digital level of adoption and the level of sectorial productivity, services tends to consume more bandwidth. Without with manufacturing and mining in particular having access to high-speed broadband connections, the higher levels of adoption. In states where the services widespread use and development of more advanced sector has a relatively high level of productivity, applications such as data analytics, Internet of Things businesses are also more likely to be connected. The (IoT) and artificial intelligence is unlikely. The lack of size of a firm is also a significant determining factor, with high quality and affordable broadband services may the level of digital adoption by smaller firms remaining result in Malaysian firms foregoing opportunities for limited, as only about 20 percent of SMEs in Malaysia growth, productivity gains and innovation. use the internet for business operations.27 The two major barriers to digital adoption cited by businesses are quality and affordability – slow internet connection and lack of affordable broadband plans. In a survey conducted by the MDEC and the Federation of Malaysian Manufacturers (FMM), more than 50 percent of manufacturing firms listed 26 Department of Statistics Malaysia (DOSM), Economic Census 2016: Usage of ICT by Businesses and e-Commerce, November 2017. 27 SME Corp, 2015. 28 MDEC and FMM 2016, “The Adoption of ICT among FMM members”. MALAYSIA ECONOMIC MONITOR | JUNE 2018 45 PART TWO - Unlocking the Potential of the Digital Economy Malaysia’s fixed broadband adoption is low, mainly due to high costs Malaysia has made significant progress only about eight percent of Malaysian households use towards establishing the foundations for digital fiber broadband services, with a slow growth rate. By connectivity and closing the gaps in basic internet comparison, the rate of adoption of these services access. By 2016, almost 80 percent of Malaysians had in Singapore, Republic of Korea and Japan stands at access to the internet, a level comparable to that in 99 percent, 85 percent and 60 percent respectively many advanced economies, including Australia, Japan (see Figure 33).30 A major constraint on higher levels and Republic of Korea. In Malaysia, the expansion of of adoption in Malaysia is the high cost of these access to the Internet is largely the result of the uptake services (see Figure 34). The cost of these services of mobile services, which is the preferred means of remains high despite Malaysia having had one of accessing the Internet. In Q1 2017, Malaysia’s mobile the highest per capita levels of private investment in broadband subscribers for 3G and 4G networks has telecommunications in the region since 2010.31 reached 118 percent of the total population, with this high proportion largely attributable to the widespread Malaysian consumers pay considerably more for deployment of affordable smartphones and the high-speed broadband access than consumers in expansion of 3G/4G networks.29 other countries. While Malaysia has made significant progress in terms of facilitating affordable access to However, when it comes to the level of adoption mobile internet services,32 the cost of access to high- of fixed broadband services, Malaysia lags behind speed broadband services is relatively high compared other countries at a similar level of economic to other countries. In terms of price per Mbps, Malaysia development, with limited use of fiber optic ranks 74 out of 167 countries for fixed broadband broadband services. Available data indicates that services and 64 out of 118 for fiber broadband FIGURE 33 FIGURE 34 Fiber broadband growth in Malaysia significantly ...partly due to the unaffordability of the services lags behind regional comparators... Fiber Optic Broadband Subscriptions (% of All Households) Average Price of Fixed Broadband Services (USD/Mbps, Log Scale) 100% SG, 99% 10,000 KR, 85% 80% 1,000 CN, 73% 100 60% JP, 60% MY JP NZ AU BN, 54% 10 40% 1 VN, 32% NZ, 23% 0.1 20% AU, 14% PH KR HK SG MY, 8% 0.01 0 10,000 20,000 30,000 40,000 50,000 60,000 0% PH, 1% 2012 2013 2014 2015 2016 2017 GNI Per Capita (US$) Source: TeleGeography 2017 Source: TeleGeography 2017 29 Based on calculation using the total subscription of 3G, 4G and LTE subscribers. 30 TeleGeography, 2017. 31 World Bank Private Participation in Infrastructure Database 2017. 32 Malaysia ranks fourth in the Affordability Drivers Index by the Alliance for Affordable Internet. 46 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART TWO - Unlocking the Potential of the Digital Economy FIGURE 35 High fixed broadband prices are, in part, driven by limited market competition MALAYSIA REPUBLIC OF KOREA JAPAN Subscribers (June 2017) Subscribers (June 2017) Subscribers (June 2017) Telekom Malaysia (92.2%) KT Corp (42.2%) UQ Communications (29.7%) Maxis (6.2%) SK Broadband (25.0%) NTT (24.7%) webe (0.9%) LG Uplus (17.4%) Softbank BB (7.3%) YTL Communications (0.2%) Other Players (15.4%) KDDI (4.8%) Other Players (0.5%) NTT DOCOMO (4.4%) Other Players (29.1%) Source: TeleGeography 2017 services.33 This places it behind regional comparators private investment by the network rollout operations. such as Vietnam and countries at a similar level of Third, Malaysia also pays a higher IP transit prices34 than economic development such as Mexico and Turkey. is the case in other countries, and this is subsequently passed on to retail consumers of broadband services. The high cost of fixed broadband internet services is partly driven by limited competition in the fixed Malaysia also performs relatively poorly in terms broadband market. Relative to other countries, of the quality of its broadband services. In February Malaysia’s fixed broadband market is much more 2018, Malaysia’s average download speed was ranked concentrated than is the case for mobile services in 63rd out of 130 countries, with an average download Malaysia (see Figure 35). In Malaysia, Telekom Malaysia speed of 22.56 Mbps. This is significantly lower than (TM), the leading fixed broadband service provider, as regional comparators such as Singapore, which ranked a significantly larger market share than the leading firms in top place (161.53 Mbps) and Republic of Korea, in other countries. The limited competition contributes which came in third (129.64 Mbps). Countries at similar to the higher fixed broadband prices in three ways. levels of economic development as Malaysia also have First, while TM is the major incumbent of cable landing significantly faster download speeds. For example, stations in Malaysia, rather than allowing for co-location Hungary has an average download speed of 90.94 of its stations with other operators, it instead provides Mbps, while Thailand has an average speed of 41.35 point-of-access connection outside the stations and Mbps.35 charges a higher fee, which translates to a higher cost of broadband rollout. Second, given TM’s extensive Malaysia should look beyond doubling its internet broadband networks, it has been awarded exclusive speed and aspire to achieve gigabit-level of memorandums of understanding with the government connectivity, similar to advanced economies. In the to deploy the high-speed broadband (HSBB) and global context, Malaysia’s plans to develop its HSBB and sub-urban broadband (SUBB) plans, without contest. SUBB36 are unlikely to make Malaysia significantly more This eventually eliminates the possibility of attracting competitive, given that many advanced economies 33 TeleGeography, 2017, World Bank staff calculations 34 The service of allowing traffic from another network to cross or “transit” the provider’s network, usually used to connect an internet service provider to the rest of the Internet, (https://www.telstraglobal.com/insights/blogs/blog/peering-vs-transit). 35 Speedtest Global Index, February 2018 (http://www.speedtest.net/global-index) 36 The HSBB is designed to deliver up to 100 Mbps for areas deployed with Fibre-to-Home broadband, while the SUBB is designed to deliver up to 20 Mbps through copper line upgrades MALAYSIA ECONOMIC MONITOR | JUNE 2018 47 PART TWO - Unlocking the Potential of the Digital Economy FIGURE 36 Different arrangements for infrastructure development across states may be driving up costs and delaying network rollout State government arrangements for telecom infrastructure development as at November 2017 [% are total of broadband penetration (mobile and xed)] Closed market: Telco infra building dominated by an exclusive partner of the state government Open market: Telco free to roll out network Perlis 71% Streamlined market: Telco infra building dominated by SBCs but telcos still free to roll out network Kedah 72% Kelantan 66% Sabah 56% Penang 114% Terengganu 72% Labuan 61% Perak 89% Selangor 124% Pahang 75% Kuala Lumpur 200% Putrajaya 70% Negeri Sembilan 112% Sarawak 94% Melaka 90% Johor 138% Source: MCMC, stakeholder interviews are already planning for gigabit networks. Republic of the network. In some states, land planning and of Korea, for example, has already implemented the use arrangements slow down or increase the costs Giga-Internet Pilot project, with plans to commercialize of network roll out, posing additional challenge to 10 Gbps broadband services by 2020, 37 while Sweden network operators. Many states appoint a third- aims to provide broadband access at a minimum speed party entity to function as the intermediary between of 1 Gbps by 2025.38 telecommunication providers and local councils. However, these state-backed companies often have Regional disparities in terms of both the level of exclusive rights to build or manage infrastructure used access to broadband services and their quality are by telecommunications networks. As a result, states also significant. For example, in Kuala Lumpur, the with exclusive partners for network deployment and broadband penetration rate stood at 200 percent in where telecommunication operators are not free to Q1 2017. By contrast, the corresponding rate in Sabah build networks tend to have lower penetration rate. stood at 56 percent, significantly below the national average of 104 percent (see Figure 36).39 Similarly, Moving forward, to improve digital connectivity, there is also significant disparities in average download Malaysia should consider adopting policies with speeds, with the lowest speeds in the East Malaysian two main objectives: (i) improving the quality and states of Sabah and Sarawak. With these disparities, affordability of fixed broadband services; and (ii) Malaysians in different regions have widely varying increasing the coverage of ultra-fast broadband experiences with digital services, creating disparities in networks. To achieve these objectives, the government the abilities of people in different regions to seize the should consider three broad strategies. First, it should opportunities made available by the new technology. strive to increase the level of competition in the fixed broadband market. In the short term, this could be At the state level, poorly implemented arrange- achieved by enforcing the current regulatory framework ments for the development of infrastructure may to provide all operators with access to cable landing result in increased costs and delays to the rollout stations. In the medium-term, this could be achieved 37 Korea Internet & Security Agency, https://www.kisa.or.kr/jsp/common/downloadAction.jsp?bno=263&dno=3...2 38 Government Offices of Sweden (http://www.government.se/496173/contentassets/afe9f1cfeaac4e39abcdd3b82d9bee5d/sweden-completely-connected-by- 2025-eng.pdf) 39 Malaysian Communications and Multimedia Commission (MCMC), 2017. 48 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART TWO - Unlocking the Potential of the Digital Economy by opening up the market across all levels of the value bidding process to involve a wider range of private chain. Second, the government should strive to attract companies and investors. Third, it should implement increased private capital to execute public programs, measures to expand coverage and to narrow the which would also facilitate the achievement of the first digital gap between states by ensuring the more strategy, making the fixed broadband market more effective development of infrastructure deployment competitive. This could include opening programs such through improved planning and coordination with state as the HSBB and SUBB by implementing a competitive governments and local councils. The ecosystem is supportive of digital entrepreneurship, though challenges exist Malaysia has made significant efforts to establish the right ecosystem to foster digital entrepreneurship. A range of institutions, including the Malaysian Digital Economy Corporation (MDEC), the Malaysian Global Innovation and Creativity Centre (MaGIC) and Cradle, have been established to attract investments, provide incentives, facilitate financing and offer training and opportunities to start-up firms. Malaysia’s funding ecosystem functions relatively well in terms of supporting firms at the early entrepreneurial stages. The government’s efforts and those of these institutions, coupled with relatively high levels of digital connectivity and the high-profile success of businesses such as K-fit and Iflix, have played a role in encouraging Malaysians to become entrepreneurs. Malaysia has also pioneered steps to promote inclusivity through digital entrepreneurship programs such as eUsahawan and eRezeki, which is a program intended to enable the B40 and M40 income groups to take advantage of potential business opportunities created by the gig or sharing economy (see Box 4). For digital entrepreneurship to fully realize its potential, several challenges, including the low level of adoption of digital payments, will need to be addressed. Establishing an environment of confidence and trust is essential to build a vibrant e-commerce environment. This can be achieved through a number of means including establishing a secure and seamless e-payment infrastructure, improving data accessibility and strengthening cybersecurity risk policies and laws. Additionally, the government should continue to build on its various initiatives to develop human capital, including working with the private sector to ensure graduates have the appropriate skills needed to capitalize opportunities in digital entrepreneurship.40 40 #mydigitalmaker was launched in August 2016, with this initiative consisting of two strategies: the full integration of STEM education in the national school curriculum, and the provision of co-curricular and extra-curricular activities related to the digital ecosystem for youth. MALAYSIA ECONOMIC MONITOR | JUNE 2018 49 PART TWO - Unlocking the Potential of the Digital Economy BOX 4 Fostering digital inclusivity through Malaysia’s eRezeki and eUsahawan programs In 2015, the eRezeki and eUsahawan initiatives were eRezeki functions as an intermediary platform to link up launched to facilitate the greater involvement participants with tasks/work aggregated from local and of key communities such as youth, micro-SMEs, international platforms through an open Application digital entrepreneurs and the B40 communities Public Interface (API). Going forward, the global in the digital economy. The objective of the eRezeki online workforce program, which is an offshoot of the initiative is to provide opportunities to members of B40 eRezeki program, has been introduced to prepare the communities to earn additional income by leveraging country’s workforce to respond to the global trend digital technologies. The eUsahawan initiative is a digital towards the increased use of independent contractors entrepreneurship program intended to mainstream or freelancers. digital entrepreneurship education amongst emerging and current micro-entrepreneurs through a community- The eUsahawan program’s key focus area is on centric approach. improving educational services, particularly related to digital entrepreneurship, with a lack of The eRezeki initiative has three major strategies. skills in this area being identified as one of the The first strategy is to identify and establish most significant causes for Malaysia’s digital collaboration between local and international digital divide. Through the program, a structured digital platforms to secure and channel various tasks/work entrepreneurship curriculum is being rolled out that could be performed by Malaysian workers. The through public tertiary education institutions, including tasks/work can fall into three categories: simple technical and vocational education and training digital micro-tasks, digitally-enabled tasks, and digital (TVET) colleges and institutions of higher learning, work. The second strategy is to conduct outreach to and through entrepreneur development agencies. The targeted communities to profile and match them to initiative targets students and micro-entrepreneurs. It suitable tasks/work. The participants collaborate with covers key digital technology trends that are re-shaping on-boarded partners’ platforms to start performing businesses today, including social media marketing, actual tasks/work and thereby to earn income. Third, mobile commerce, analytics, e-payment and digital TABLE 5 eUsahawan has reached a growing number of people in Malaysia   Additional Sales Generation Number of People Trained Number Reporting Sales (RM million) 2015 2016 2017 2015 2016 2017 2015 2016 2017 Total 3,108 51,203 102,269 2,441 16,233 41,425 3.7 48.2 175.2 Source: MDEC 50 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART TWO - Unlocking the Potential of the Digital Economy advertising. By establishing and facilitating a structured additional sales, with the value of these sales totaling curriculum, the impact of eUsahawan is intended more than RM 320 million over a period of 3-6 months. to facilitate sustainable reach to wider segments of To date, more than 2,800 participants have on-boarded society. various eCommerce platforms (see Table 5). A network of educational institutions and strategic More recently, eUsahawan has extended its efforts partners has been established to strengthen the to integrate its curriculum with the Prisons eUsahawan ecosystem. The eUsahawan curriculum41 is Department. As a result, the program is now being integrated into the official curriculum of 19 educational deployed at the Henry Gurney Schools and Sekolah institutions, with lecturers at these institutions being Integriti (schools for young offenders and juvenile trained as eUsahawan trainers and enabled to teach delinquents). In addition, the program has also both enrolled students and micro-entrepreneurs. been extended to parolees to help facilitate their eUsahawan collaborates with 63 strategic partners to reintegration into society. A pilot is being conducted scale up initiatives such as advisory services, outreach with the Malaysian Association for the Blind to teach efforts, on-boarding, trainer mobilization, training visually-impaired individuals how they can leverage implementation and training facilities. digital platforms to establish or expand business activities. Since 2015, more than 160,000 students and micro-entrepreneurs have passed through the eUsahawan program. Out of these, approximately 30 percent of participants have reported generating 41 The eUsahawan ‘Digital Entrepreneurship’ modules have received accreditation by the Office of Qualifications and Examinations Regulation, United Kingdom. MALAYSIA ECONOMIC MONITOR | JUNE 2018 51 PART TWO - Unlocking the Potential of the Digital Economy A competitive broadband market is key to improving connectivity and achieving higher business adoption To improve the quality and affordability of fixed Measures to increase public investment in the broadband, lowering the barriers for entry is execution of public programs could also facilitate crucial. To achieve this, strong support should be increased competitiveness in the broadband provided to the Malaysian Communications and market. In the short term, measures to achieve this Multimedia Commission (MCMC) to implement the could include opening programs such as the HSBB existing regulatory framework and to remedy the and SUBB, which have currently been awarded to TM, effects of the dominance of TM. In the short term, to competitive bidding by private investors. Over the these measures should involve enforcing the current long term, consideration could be given to reforming regulatory framework to allow alternative operators the regulatory framework to create a level playing equal access to cable landing stations and to regulate field, with TM competing directly with privately-owned the upstream markets for IP transit prices, which could networks on equal terms. increase competitiveness in the fixed broadband market. The government has taken steps in this direction by implementing the Mandatory Standard on Access Lowering the barriers for Pricing (MSAP), which stipulates the ceiling wholesale entry is crucial to improve prices that can be charged by service providers for the facilities and services used by recent telco operators.42 the quality and affordability Over the long-term, regulations should be enhanced to of fixed broadband improve the performance of the national and last-mile43 network markets to facilitate increased competition in the fixed broadband market. The government could also give consideration to ensuring that its new framework for the SST Bridging the digital gap between the states and fully reflects the scale of transactions and profits improving the quality of access requires measures being generated by Malaysia’s digital economy. to address the fragmented landscape that While it is important that the domestic fiscal framework governs broadband deployment at the state level. encourages the development of a vibrant digital At present, states where the ability of a wide range economy, it is equally important that Malaysia secures of telecommunication operators to build networks its fair share of tax revenue from the profits generated is constrained tend to have lower levels of fixed by providers of digital goods and services that are broadband penetration. To address this, the use of based outside the country. Effectively and efficiently fiber networks owned by entities such as the Tenaga taxing digital transactions is a challenge facing most Nasional Berhad (TNB) could be authorized by enabling countries, involving a balancing act between raising them to resell their excess capacity. Also, expanding revenue while allowing the growth of this increasingly the applicability of the Uniform Building By-Laws44 important segment of economic activity (see Box 5). to treat broadband as a utility could help to address differences in regulations related to deploying network infrastructure across states. In addition to standardizing processors, addressing the fragmentation would also mean streamlining the pricing of permits for wireless towers and allowing rights of way across all states, which would enable higher levels of investments by alternative network operators. 42 At present, the relevant parties are in the final stage of discussion and the process is expected to conclude by July- August 2018, following which fixed broadband prices are expected to decline. 43 Last-mile technology is the telecommunications infrastructure at the local/ neighborhood level that carries signals from the broad telecommunication backbone to and from the home or business (https://searchnetworking.techtarget.com/definition/last-mile-technology) 44 Malaysia has the Uniform Building By-Laws 1984, which is enforced by the local authorities and applicable to all building types constructed in the local authorities’ areas. Under the By-Laws, the Federal Government administers all building regulations whilst local authorities enforce them through their internal technical departments namely planning, building and engineering. (http://www.mpc.gov.my/wp-content/uploads/2016/04/Chapter-4.pdf) 52 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART TWO - Unlocking the Potential of the Digital Economy BOX 5 Current global view on taxing the digital economy The rapid growth in the size of the digital economy taxes directly from the foreign suppliers of digital worldwide has coincided with an increased focus services. on tax compliance by international business. With countries around the world struggling to come While there is general agreement on indirect tax to terms with the costs of the recent financial crisis, on the digital economy, discussions on income tax many governments are seeking to determine whether are still under way. There are diverging views on international businesses have been really paying their BEPS’ conclusion on income tax, which concluded that fair share in taxes. In the usual tax setting, profits existing concepts of how value is created and taxed did seemed to end up in places where they were subject not need fundamental reform. Some countries argue to no, or very little, taxation. Furthermore, some large that some digital business models rely fundamentally digital corporations, such as Google and Facebook, on value that is created by the users. For example, appeared to be paying very little tax, despite having a social media platforms rely on user-supplied content significant presence in certain markets. to attract and retain users of the platform. This in turn determines the ability of the platform provider Responding to these issues, the OECD/G20 to generate revenues, such as from advertising. This launched the Base Erosion and Profit Shifting concept of “user generated value” is attracting support (BEPS) initiative in 2015. This project resulted in 15 from a number of countries, particularly in Europe. actions designed to modernize international tax rules, However, it will be quite some time before international which had not kept pace with recent developments to consensus can be achieved. This will involve agreeing the manner in which international businesses operate. not just on the principle but on the basis for quantifying These 15 actions include measures intended to prevent user generated value for tax purposes. The Task Force online retailers from exploiting tax rules that enabled on the Digital Economy, which was created as part of the them to shelter their profits. Simultaneously, work on BEPS project, is continuing to work on these issues. In indirect taxes (VAT/GST) has been conducted to ensure the meantime, countries are contemplating, or actually that consumption taxes are collected when taxable introducing, taxes that target digital businesses, services are supplied digitally cross-border. In lieu of including taxes on their gross revenues and levies on this, several countries are now collecting consumption payments for digital advertising services. MALAYSIA ECONOMIC MONITOR | JUNE 2018 53 PART TWO - Unlocking the Potential of the Digital Economy As Malaysia transitions into a high-income economy, it should continue its efforts to unlock the potential of the digital economy Around the world, digital technologies have high-income economies, reflected by the significant spread rapidly and transformed the manner investment it has made in modernizing and digitizing in which business, work and service delivery is its systems and processes. However, there is scope being conducted. The digital economy promotes to improve the availability of data sources to support development and generates dividends by promoting better evidence based policy-making (see Box 6). innovation, reducing transaction costs, boosting efficiency and productivity, making services cheaper, and enhancing inclusion by providing access to The government has made previously excluded segments of the market to a wide considerable efforts to range of services. Across the world, many countries are strategizing and putting in place various efforts and provide basic internet access plans to capitalize the potential returns to be generated to its citizens, with the from embracing the digital economy. proportion of the population For Malaysia to successfully achieve high-income connected to the internet country status, it is vital that it continues to implement efforts to unlock the potential created reaching the levels recorded by the emergence of the digital economy. Malaysia in many developed countries successfully achieved middle income status through a model of economic growth that was mainly driven by large factor accumulation. With this model generating Nonetheless, the gains from the digital economy diminishing returns and with the intensifying need will not accrue automatically, and challenges to achieve higher levels productivity, it is crucial for remain. The level of digital adoption by Malaysian Malaysia to adopt digital technologies to achieve this businesses lags behind international peers and is increased productivity. Moving forward, Malaysia’s next more comparable to that in lower middle-income challenge is to ensure that efforts to establish a solid countries. There is also a marked disparity in the level basis to enable the country to fully reap the benefits of adoption by businesses between regions and sectors of the digital economy are sustained. This includes and between firms of different sizes. This is largely measures to ensure high levels of digital adoption by due to the relatively high cost and low quality of fixed a full range of economic agents, including businesses. broadband internet services. To address this, increasing It also requires the development of the proper the competitiveness of the fixed broadband Internet infrastructure and market for high speed connectivity, services market is crucial. In addition, developing an preparing the workforce with the right skills to leverage environment of confidence and trust is essential to the digital economy and implementing the right policies build a vibrant e-commerce ecosystem. Concurrently, to drive the country’s digital transformation. equal attention should also be given to the analog components of digital economy, namely, rules, skills One of Malaysia’s major achievements is the high and institutions (see Box 7). Malaysia should continue rates of digital adoption by its people and by the to implement measures to address these challenges if government. The government has made considerable it is to unlock the full potential of the digital economy efforts to provide basic internet access to its citizens, and thereby to achieve its aspirations of becoming a with the proportion of the population connected to high-income economy. the internet (mostly through mobile networks) reaching the levels recorded in many developed countries. In addition, the government has also has achieved a high level of digital adoption, comparable with many 54 MALAYSIA ECONOMIC MONITOR | JUNE 2018 PART TWO - Unlocking the Potential of the Digital Economy BOX 6 The importance of open data for evidence-based policymaking The world is experiencing a data revolution, as inadequate flow of data could constrain the continued governments, private companies and others race to growth of the digital economy. benefit from the exponential growth in digital data. The proliferation of networked digital devices – coupled As the digital economy gains prominence worldwide, with rapid advances in mobile telecommunications, improving the open data environment will be critical cheap storage, processing power, and data mining for to achieve its developed nation aspirations. methods – has sparked exponential growth in the Open data is a framework under which government- supply and demand of data. The International Data held data are made publicly available in formats that Corporation estimates that “the digital universe” is can easily be read and used, while still preserving the doubling in size every two years, and is set to reach 44 confidentiality of personal information. Open data is a zettabytes (that is, 44 trillion gigabytes, or the number tool for transparency, accountability, and innovation. 44 followed by 21 zeroes) by the year 2020. Public and Research shows that data openness is highly correlated private entities need to adapt and innovate to capture with national income, as well as the volume and quality the enhanced information benefits of the digital of scholarly research conducted in a country.45 As of revolution or risk being left behind. 2016, Malaysia’s ranking in the Open Data Barometer, a global measure of how countries are publishing and Data, and the information derived from data, using open data, was 53 among 115 countries studied, impact development through various channels: lower than most advanced economies and many improving policy making and public service regional economies. Achieving open data in Malaysia delivery, empowering homegrown research, and is possible, but it will require further refinement of enabling private sector economic growth. The legislation, policies, and perhaps most importantly, the increased availability of more and better data is mindset surrounding data dissemination. creating opportunities for policymakers, researchers, companies, and citizen groups to make better, timelier, A more coordinated, integrated, and open data and more informed decisions, enhance accountability, ecosystem, with clearly defined roles among and increase economic growth. The public sector is institutions, is imperative to support Malaysia’s increasingly using data to formulate, monitor, and development. Many developed economies have evaluate policies as well as to improve public service shown that creating a conducive environment for data delivery. Academia and the wider research community sharing leverages the growing opportunities that policy are gathering and analyzing data, often in real time, analysis, service delivery or the digital economy offer. that were previously unavailable, to uncover new policy Also, it opens new opportunities for collaboration and socioeconomic insights. The private sector is using within the public and private sectors, and among them data for product development, market analysis, and and the research community. Malaysia’s current data evidence-based decision making or assessment. system consists of almost 100 entities and requires stronger coordination to optimize data collection, Enhanced data are both an input and a result of management and dissemination. Hence, a broader the digital economy. Data collection, management, ecosystem approach is needed to create a data system and dissemination are evolving rapidly, streaming into that is built for open collaboration by government, the a digital economy in today’s world, which is expected private sector, researchers, and the public. In such a to add US$1.4 trillion into the global economy by 2020. system – like those found in most OECD countries and For instance, data from the publicly-funded and freely other advanced economies – sharing of aggregated available global positioning system supports markets and disaggregated data is systematic, routine, and for geospatial data and services worth US$56 billion institutionalized as a standard practice of government in 2013 in the United States alone. Malaysia, where operations. Data flow reliably, and securely, like the digital economy is estimated to be 18 percent of electricity from an outlet, helping countries fully reap GDP, is no exception to this symbiotic relationship. Data the potential benefits of the data revolution. are also the fuel that runs the digital economy, and an 45 Chuah, L. L. and N. Loayza (2017) ‘Open Data: Differences and Implications across Countries.’ World Bank Research Policy Note No. 7, The World Bank: Kuala Lumpur. MALAYSIA ECONOMIC MONITOR | JUNE 2018 55 PART TWO - Unlocking the Potential of the Digital Economy BOX 7 Embracing the digital economy also means getting the analog components right Despite the rapid growth of digital technologies, this flow of information from the internet, unaccountable has not been fully translated into digital dividends. governments could impede service delivery, leading Given that nearly 60 percent of the world’s population to greater control rather than greater empowerment still remain unconnected, many people are still unable and inclusion among citizens. As such, while ensuring to participate in the digital economy. There are also that the internet is accessible and affordable remains persistent disparities in terms of digital access between a priority, maximizing digital dividends requires an gender, geography, age and income dimensions within understanding of how technology interacts with these each country. In addition, as the adoption of digital ‘analog complements’ of digital investments. technologies increases, many economies are now faced with increasingly polarized labor markets and widening As countries continue to define their digital inequality. In part, this is due to technology replacing strategies, equal emphasis should be given to routine jobs, which forces many workers to compete strengthening these analog complements. The for low paying jobs. This is exacerbated by the absence quality of countries’ analog complements is correlated of accountable institutions and a failure to establish with income, with policies changing as countries a competitive business environment, which in turn progress towards digital transformation. In countries creates an uneven playing field, favoring only the better where internet use is still limited, the focus should be on educated and well-connected. increasing access to digital technologies and promoting digital literacy. As countries transition to higher income Risks and concerns related to the adoption of levels, the focus should shift towards formulating digital technologies surface when the main ‘analog effective competition regulation and enforcement and complements’ (i.e. rules, skills and institutions) are augmenting workers’ skills. Developed countries should missing or inadequate (see Figure 37). When there find ways to facilitate ‘new economy’ competition, to is an excessive concentration of market power that ensure lifelong learning and to use the internet for most gives rise to monopolies, the use of the internet curtails government functions. Countries that establish strong competition in the market, thus constraining innovation. analog foundations will reap ample digital dividends, It could also result in widening inequality as a result of including increased growth, more jobs and better workers not having the right skills to complement existing services. and future technologies. Furthermore, despite a better FIGURE 37 Digital technologies create benefits and risks Benefits With complements Inclusion Efficiency Innovation Digital Technologies Risks Without complements Concentration Inequality Control Source: World Bank, World Development Report 2016 – Digital Dividends 56 MALAYSIA ECONOMIC MONITOR | JUNE 2018 Appendix Appendix Highlights from Malaysia’s digital economy development initiatives The Malaysia Digital Economy Corporation (MDEC), measurable outcomes including: as the driver of the nation’s digital economy, has built • Increased productivity fundamental components to spur the tech industry, • Reduced dependency on foreign labor to grow local tech companies, to accelerate digital economy ecosystems and to promote digital inclusivity. • New sources of growth To date, Malaysia has attracted digital investments of a Companies going through DTAP are expected to value in excess of RM320 billion from around the world incorporate emerging technologies such as IoT, data exceeding, with the creation of 167,000 new high-value analytics, machine learning, and artificial intelligence jobs and the emergence of a domestic ICT industry into their business to achieve competitiveness with worth over RM40 billion. The bulk of these FDI came global players, and to align with Industry 4.0. from developed economies, including the US, UK, Germany and Japan. B Growing the startup Beyond attracting investments, MDEC, as a key agency in the overall digital economy ecosystem, has also ecosystem implemented a number of wide-ranging initiatives to The Malaysian startup ecosystem has undergone align the digital economy towards Industry 4.0, to grow considerable development since 2013, with a marked the start-up ecosystem, and to shape enablers such as increase in investment in startups. Recognizing the data analytics, creative content, and cybersecurity. contribution of the digital economy to the country’s GDP, the government declared 2017 as the year of the Internet Economy to amplify and accelerate the start- A Aligning the digital up ecosystem. economy to Industry 4.0 In 2017, MDEC launched the Malaysia Digital Hub (MDH) To help accelerate Malaysia’s digital transformation, to support and further grow the startup ecosystem. MDEC has introduced the Digital Transformation MDH aims to address potential gaps, especially in the Acceleration Program (DTAP). DTAP is supported by an areas of funding, market access, talent, and technology. outcome matching grant, which is a partnership with It brings together ecosystem players such as startups, Malaysia Investment Development Authority. investors, talent builders and corporate partners to the community through collaboration with co-working DTAP was established to enable Malaysian companies spaces. Co-working spaces with these necessary to kick-start their digital transformation. The program is ecosystem partnerships will be granted the MDH supported by Digital Transformation Labs (DTL), which status. At present, there are five co-working spaces with consists of a group of global experts that play a critical MDH status. role in providing a structured approach and in advising on the use of suitable technologies. Currently, five DTLs The Malaysia Tech Entrepreneur Program (MTEP) was have been identified: Bosch, Deloitte, Digital McKinsey, introduced to attract technical talent and aspiring Rainmaking Innovation and Roland Berger. Each DTLs entrepreneurs from around the globe to Malaysia has its own unique characters and strengths. to establish start-ups and to expand their business into the Southeast Asia region. Taking advantage of DTAP is complemented by an outcome-based matching Malaysia’s geographical location in the region, MTEP grant and taxation benefits. The grant could assist provides eligible and deserving budding entrepreneurs companies to tap into the expertise of the DTLs; to the opportunity to obtain a one-year or five-year address key concerns; and to adopt digital technologies entrepreneurs’ visa to kick-start their businesses in to exploit opportunities in the digital arena. All projects Malaysia. So far, 41 entrepreneurs across 22 countries, applying for support from the DTAP must have clear including the US, UK and Japan, are MTEP beneficiaries. MALAYSIA ECONOMIC MONITOR | JUNE 2018 57 Appendix C Building data analytics D Harnessing local creativity capabilities for the digital economy In 2014, Big Data Analytics (BDA) was identified as a The Malaysian government has identified the creative new source of growth for Malaysia with the launch of content industry as a key economic driver. The the National Big Data Analytics Initiative. In 2017, the Malaysian creative content sector contributed RM9.55 Initiative was expanded to become the National Data billion, and represented 6.4 percent of GDP in 2015, Economy Initiative to cover data technologies such as with Malaysia having exported RM6.8 billion worth of IoT and AI in addition to BDA. creative content.46 The implementation of this initiative commenced with The creative content industry includes the animation, the development of a Data Economy Framework, games, visual effects, new media and infrastructure which was intended to establish Malaysia as a regional platforms sectors. In the period from 2013 to 2017, BDA and IoT hub by spurring demands in all sectors, these sectors grew by six percent, generating RM7.9 catalyzing adoption and usage, and building a data billion in revenue. At present, there are more than 372 economy ecosystem. studios in Malaysia directly involved in various stages of development and production, creating 11,150 jobs. The key enabler for Malaysia to build a strong data economy ecosystem is talent in data technologies. The Realizing its vast potential in IP creation and talent ASEAN Data Analytics Exchange, which was established development, Malaysia has chosen animation and in 2017, plays the role of a regional platform to connect games as new focus areas for the digital creative content. the community, enterprises, start-ups, academia and To create vibrant ecosystems for these area, Malaysia working professionals in a central location, and to established the Malaysia Animation and Creative inspire and enable organizations to embrace data Content Centre and Level Up Inc. as accelerators for the technologies. animation and games subsectors respectively. These initiatives provide an integrated support ecosystem The Integrated Strategic Intelligence & Transformation that consists of physical infrastructure, competency and System was established in 2017 to support the capability development programs. public sector’s increased use of BDA. This project is implemented under the Ministry of Communications Malaysia’s animation subsector has achieved global and Multimedia and managed by MDEC, serving as a recognition, with exports to a value of RM132 million in data repository and common analytics platform for the 2017 to more than 120 countries. To date, Malaysia has government to assist ministries and agencies to develop more than 20 homegrown IPs. insights and to shape future policies and initiatives. Malaysia’s games sector has also grown considerably, The introduction of eLadang will accelerate the with exports to a value of RM684 million in 2017, and adoption of data technology in non-IT driven sectors, with 46 percent year-on-year growth. Malaysia aspires targeting both SMEs and large companies. eLadang to build local games capacity and capability that will is a digital agriculture initiative intended to facilitate accelerate IP creation and develop talent for both transformation from traditional farming towards high- local and international projects. At present, Malaysian income digital economy farming professions, by games studios have showcased their capabilities by infusing digital technology (i.e. IoT, BDA and AI) into developing and contributing to the art and design for farming to increase yield and quality, with competitive renowned games such as Final Fantasy, Street Fighter V production costs. and Unchartered 4. 46 http://www.matrade.gov.my/en/about-matrade/media/press-releases/3735-boosting-the-exports-of-malaysia-s-creative-content-through-partnership. 58 MALAYSIA ECONOMIC MONITOR | JUNE 2018 Appendix E Developing cybersecurity F National eCommerce for the digital economy Strategic Roadmap ASEAN’s expenditure on cybersecurity is forecasted to Malaysia’s National eCommerce Council, driven by grow by 15 percent in the period from 2015 to 2025. In the Ministry of International Trade and Industry and this area, Malaysia is amongst the top three performers supported by relevant agencies, was established to amongst ASEAN countries, with these countries drive the implementation of the National eCommerce expected to control a 75 percent market share of Strategic Roadmap (NeSR) and to facilitate the cybersecurity services by 2025. achievement of doubling Malaysia’s eCommerce growth to generate a contribution to GDP in excess of The International Data Corporation forecasts that RM211 billion by 2020. The NeSR outlines the Malaysian Malaysia’s security services market will grow from RM1 government’s intervention in six Thrust Areas, as billion in 2016 to RM2.5 billion by 2021, due to increased follows: opportunities across the region, with the total value of • Accelerate seller adoption of eCommerce the security services market expected to reach RM10 • Increase adoption of eProcurement by businesses billion by 2021. • Lift non-tariff barriers (e-Fulfillment, cross- border, e-Payment, consumer protection) The Asia Cybersecurity Exchange is the first cybersecurity hub in Malaysia to provide a central • Realign existing economic incentives platform for cybersecurity collaboration, innovation • Make strategic investments in select eCommerce and capability-building. Supported by MDEC and player(s) NACSA, the hub has been developed on the basis of • Promote national brands to boost cross-border a public-private partnership model that involves the eCommerce participation of industry and ecosystem players such LE Global Services, premier digital technology institutions of higher learning and regional mentors. G Digital Free-Trade Zone With the rapidly expanding opportunities created by the emerging digital economy and with the rapid The Digital Free Trade Zone (DFTZ) is a strategic growth of the cybersecurity industry, two strategic national initiative intended to revolutionize Malaysia’s initiatives have been identified: enabling market-driven participation in cross border trade. DFTZ was officially innovation to meet demand from digital tech sectors; launched on March 22, 2017 and went live on November and developing critical cybersecurity talent. 3, 2017. The DFTZ has two key objectives. Firstly, the DFTZ will drive exports of Malaysian SMEs by leveraging digital technology to enable them to export. Secondly, the DFTZ seeks to position Malaysia as a Regional Transhipment Hub, enabling it to better serve regional markets. MALAYSIA ECONOMIC MONITOR | JUNE 2018 59 References BNM (2018) ‘Annual Report’, Kuala Lumpur: Bank Negara Malaysia. BNM (2018) ‘Quarterly Bulletin’, Kuala Lumpur: Bank Negara Malaysia. Glenn-Marie Lange, Quentin Wodon and Kevin Carey (2018) The Changing Wealth of Nations 2018: Building a Sustainable Future, Washington, DC: The World Bank. IMF (2018) ‘Malaysia: Article IV Consultation’, Staff Report, IMF Country Report No. 18/61, Washington, DC: International Monetary Fund. World Bank (2016) World Development Report 2016: Digital Dividends, Washington, DC: The World Bank. World Bank (2017) Internet of Things: The New Government to Business Platform, Washington, DC: The World Bank. World Bank (2018a) Global Economic Prospects, January 2018: Broad-based Upturn, but For How Long?, Washington, DC: The World Bank. World Bank (2018b) Global Economic Prospects, June 2018: The Turning of the Tide?, Washington, DC: The World Bank. World Bank (2018c) East Asia and Pacific Economic Update, April 2018: Enhancing Potential, Washington, DC: The World Bank. World Bank (2018d) ‘Productivity Unplugged: The Challenges of Malaysia’s Transition into a High-income Country’, Washington, DC: The World Bank.  World Bank (forthcoming) Malaysia’s Digital Economy – A New Driver of Development, Washington, DC: The World Bank. 60 MALAYSIA ECONOMIC MONITOR | JUNE 2018 CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific blogs.worldbank.org/category/ countries/malaysia