economic highlights : new economic model to chart the country’s development ahead-31/03/2010

8/9/2019 Economic Highlights : New Economic Model To Chart The Countrys Development Ahead-31/03/2010

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Economic Highlights

New Economic Model To Chart The Countrys

Development Ahead

31 March 2010

Page 1 of 10

Peck Boon Soon

(603) 9280 2163

[email protected] read important disclosures at the end of this report.

Malaysia

MARKET

DAT

ELINE

PP

7767/09/2010(025354)

The new economic model (NEM) to transform the country into a high-income nation by 2020 will be driven by eight

Strategic Reform Initiatives (SRIs).

The NEM sets a target to achieve an average economic growth of 6.5% a year over 2011-20. Although

the growth target set is more ambitious than an average growth of 4.3% a year achieved in 2001-09, it has

to be the case in order to encourage people to work harder and to surpass what was achieved in the last nine years.

However, we believe it is not an easy task.

The NEAC vows to adopt a new way of doing things in order to help it to achieve its growth target. However,

not all the approaches are new, in our view. Whilst some of these approaches are not new, they are still relevant,

in our view, and the key of their success still lies with the implementation.

For the NEM to succeed, it highlighted that political leadership must unite to break the logjam of vested

interest and it must overcome the scepticism.

The NEM projects private investment to bounce back and expand by a double-digit rate of 12.2% a year

during the period 2011-20, from a mere +0.3% a year achieved in 2001-09. Whilst the initiatives proposed under

the NEM are certainly helpful to promote private investment, we believe it will still remain a significant challengefor the country to drive private investment going forward.

Malaysia must improve its talent base and reduce the dependent on foreign labour.

The NEM recommends a steady removal of subsidies and price controls, with a rationalisation of tax

incentives.

Affirmative action programmeswill be revamped and it will be built on four principles, i.e. market-friendly,

merit based, transparent and needs based.

The NEM proposed to create an ecosystem for entrepreneurship, promote and environment for innovation and

establish stronger enabling institutions to drive entrepreneurship in the country.

The Government would only act as facilitator, ensuring distortions are not created, putting in place the required

enablers to support high value industries and giving special attention when required for specific sectors in order to

ensure that the private sector can allocate resources more efficiently.

The NEM places strong emphasis on preserving the countrys natural resources and safe-guarding the

interest of future generations.

The NEM has rightly pointed out the weaknesses of the Malaysian economy and mapped out comprehensive policy

measures to guide Malaysia in its next growth path. However, in our view, the key still lies with the execution

and the political will to force through changes.

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Eight Strategic Reform Initiatives Under The New Economic Model

During the Invest Malaysia 2010 Conference, the Prime Minister unveiled the new economic model (NEM) to transform

the country into a high-income nation by 2020. The NEM, to be achieved through an Economic Transformation Programme

(ETP),constitutes a key pillar which will propel Malaysia to be an advanced nation with inclusiveness and sustainability

in line with the goals set forth in Vision 2020. The ETP will be driven by eight Strategic Reform Initiatives (SRIs) which

will form the basis of the relevant policy measures. The eight SRIs are:

i) Reenergising the private sector to drive growth;

ii) Developing quality workforce and reducing dependency on foreign labour;

iii) Creating competitive domestic economy;

iv) Strengthening of the public sector;

v) Transparent and market friendly Affirmative Action;

vi) Building the knowledge base infrastructure;

vii) Enhancing the sources of growth; and

viii) Ensuring sustainability of growth.

A More Ambitious Real GDP Growth Target

The NEM sets a target to achieve an average economic growth of 6.5% a year over 2011-2020 (see Table 1).In the first five years from 2011-15, the NEM aims to achieve an average real GDP growth of 6.2% a year and the growth

is projected to strengthen to 6.9% a year in 2016-2020. The real GDP target sets for the first five years is more

ambitious thanan average of 5.5% a year projected by the Economic Planning Unit (EPU) under the 10 th Malaysia Plan

(10MP) (2011-15), when the figure was first announced in a closed-door briefing for captains of industry. Although the

growth targetset is more ambitious than an average growth of 4.3% a year achieved in 2001-09, it has to be the

case in order to encourage people to work harder and to surpass what was achieved in the last nine years. However,

we believe it is not an easy task given the presence of global imbalances and more and more countries such as China,

Vietnam, India and Indonesia have become attractive hosts for foreign direct investment (FDI). Also, policy measures

have to be well executed in order to ensure the success implementation of the NEM to bring about a more competitive

and higher income economy. Under the NEM, the Government aims to push the GNP per capita to US$17,725 by 2020,

from the current level of US$7,558 in 2010.

At the same time, the National Economic Advisory Council (NEAC) vows to adopt a new way of doing things in order

to help it to achieve its growth target. These elements of the new and bold approaches (see Table 2) are inter-related

and linked. However, not all the approaches such as growth through productivity, private sector-led growth, cluster

economic activities and retain skilled workers are new, in our view. These approaches have been adopted in the last

few Malaysia economic plans, but the results left much to be desired, partly because of greater competition for FDI from

other emerging economies, the lack of skilled labour and less business friendly public delivery system. Take for example

the approach of promoting private sector-led growth. Although the Government has been pushing for the private sector

Average annual

growth rate (%) % share

2011-15 2016-20 2011-2020 2010 2020

GDP 6.2 6.9 6.5

Consumption: 6.1 7.8 6.7 67.9 70.6

Private 6.7 8.6 7.7 54.7 60.7

Public 3.1 3.9 3.5 13.3 9.9

Total investment 8.9 8.4 8.6 23.3 28.3Private 13.2 11.2 12.2 10.6 17.8

Public 4.6 4.5 4.6 12.6 10.5

Goods & services:

Exports 8.2 8.2 8.2 101.5 118.1

Imports 8.3 9.3 8.8 93.3 115.3

Source: NEM & RHBRI

Table 1Real GDP By Expenditure 2010-2020 (2000=100)


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Page 3 of 10

to take over the driver seat, the

performance remained lacklustre. As

a result, the role of state participation

in the economy has become more

dominant. Similarly, Malaysia has

been pushing for total factor

productivity (TFP) to drive growth for

sometime. Although we had seen

some improvement towards this endunder the Second Outline Perspective

Plan (OPP2), 1991-2000, it has not

been able to achieve it under the

Third Outline Perspective Plan

(OPP3), 2001-10 (see Table 3), due

to various challenges such as keener

competition for FDI, the countrys in

ability to retain and attract talent and

a drop in the countrys education

standards. Whilst some of these

approaches are not new, they are

still relevant, in our view, and thekey of their success still lies

with the implementation.

Also, for the NEM to succeed, it

highlighted that political

leadership must unite to break

the logjam of vested interest and

it must overcome the scepticism and

convince the people that the country

is embarking on a path that will

improve their lives and those of

generations to come.

Table 2Approach To Economic Development:

The Old Versus NEM

Source: NEM

Re-energising The Private Sector To Drive Growth

The NEM expects the private sector demand to drive the countrys economic growth. Within the private sector, the NEM

projects private investment to bounce back and expand by a double-digit rate of 12.2% a year during the

period 2011-20, from a mere +0.3% a year achieved in 2001-09. The NEM outlined six initiatives (see Table 4) in amove to almost double private investments share to 17.8% of GDP by 2020, from a low of 9.4% in 2009. Private

investment has remained lacklustre for a long period, falling to an average of around 11% of GDP a year in the last

decade (2000-09), compared with an average of 29% a year (1990-97) before the 1997/98 Asian currency crisis.

Although the Government intended to raise the share of private investment to 24.4% of GDP by 2010, from 13.4% in

OPP 1 OPP 2 OPP 3 Target Achieved

1971-1990 1991-2000 2001-2010 2001-2007(e)

Contribution % of total Contribution % of total Contribution % of total Contribution % of total

GDP 6.7 100.0 7.0 100.0 7.5 100.0 5.1 100.0

Labour 2.4 36.1 1.7 24.3 1.6 20.9 1.6 31.9

Capital 3.4 50.9 3.5 50.2 2.7 36.6 1.9 37.5

TFP 0.9 13.0 1.8 25.2 3.2 42.5 1.6 30.6

Source: OPP3 & RHBRIs estimates (e)

Table 3Contributions Of Factors Of Production


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2000, through various initiatives

under the Third Outline Perspective

Plan (OPP3), 2001-10, it has not

been able to do so. Whilst the

initiatives proposed under the

NEM are certainly helpful to

promote private investment, we

believe it will still remain a

significant challenge for thecountry to drive private

investment and hence economic

growth, as more and more countries

such as China, Vietnam, India and

Indonesia have become attractive

hosts for FDI. In addition, local

investors have moved up the

learning curve and become more

confidence to invest abroad in search

for better returns, as indicated by a

sharp rise in direct investment

abroad, which rose from a low ofRM5.2bn in 2003 to a high of

RM50.2bn in 2008, before easing to

RM30.5bn in 2009. Earlier, in a move

to promote private investment, the

Government has also liberalised 27

services sub-sectors on 22 April

2009. It had also repealed the

Foreign Investment Committee (FIC)

guidelines and relaxed the 30%

Bumiputera equity participation at the

point of initial public offer (IPO) on

30 June 2009. Whilst these changes are helpful in promoting private investment, much remains to be done before we

can expect significant transformation of the economy to exploit new sources of growth.

Meanwhile, the NEM projected that private consumption will grow by 7.7% a year during theperiod, faster than

+6.7% a year achieved in 2001-09. Indeed, the Government has been pushing private consumption to drive the countrys

economic growth since the 8th Malaysia Plan (8MP) (2001-05). As a result, private consumption as a share of GDP has

risen to a high of 53.7% in 2009, from 43.8% in 2000, and is projected to reach around 58% in 2015. Similarly, the

share of household debt rose from 63.9% of GDP in 2008 to 76.6% in 2009. The sharp jump was due partly to the

effect of a lower denominator as GDP contracted in 2009. Bank Negara, however, was not alarmed by the sharp rise

in household borrowings given that asset quality of household loans remained sound and it has set up a debt negotiation

agency, Credit Counselling and Debt Management Agency, to help borrowers to deal with late payments and financial

difficulties. At the same time, it believes banks themselves should have the capability and capacity to manage risks

associated with household debts, and they could easily check borrowers borrowing status before granting them any new

loans through a data system set up by the Bank Negara that captured all outstanding loans. Still, the above development

suggests that there could be a limitation going forward for the Government to continue promoting private consumption.

On the external front, the NEAC projects real exports to grow at a faster pace of 8.8% a year during the period,

compared with +3.1% in 2001-09. The projection appears reasonable but there could be some downside risk to the

projection given that the global imbalance has yet to be resolved and risk of rising protectionism remains.

Developing Quality Workforce And Reducing Dependency On Foreign Labour

The NEM highlighted that Malaysia must improve its talent base and it cannot miss the opportunity to put its most

valuable resource to work. Therefore, Malaysia must remove barriers preventing its brightest people from gaining skills,

while enticing these gifted people to remain within its borders. In the same vein, a quality education system, which

nurtures skilled, inquisitive, and innovative workers to continuously drive productivity forward, is the foundation of

sustained economic growth. Indeed, the NEM highlighted that in 2007, 80% of Malaysias workforce received

education only up to Sijil Pelajaran Malaysia, while 75% of the labour force is low-skilled (see Chart 1).

Table 4Firing Up The Private Sector

Source: NEM

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Chart 1Highly-Skilled And Low-Skilled Labour (2007,%)

Source: NEM

7 5

5 1

6 7 6 5

2 5

4 9

3 3 3 5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

M a la ys ia S in g ap o r e T a iw an K o r e a

Highly-skilled

Low-skilled

Page 5 of 10

Shortage of skilled labour, together with

complaints about inadequate creativity and

English proficiency are among the top

obstacles faced by companies. Hence, to

help the country develops its human

resources and reduce the dependent

on foreign labour, the NEM proposed the

following initiatives (see Table 5).

Creating Competitive Domestic

Economy

A large proportion of the Governments

financial resources are being allocated to

subsidies, which accounted for

22.9% of total operating

expenditure in 2008 and the amount

is estimated at around 15.3% in

2009. This is a heavy burden to

the Government and contributes

partly to rising fiscal deficit. Thelarge government outlay on

subsidies, mostly funded by

petroleum proceeds, is also not

sustainable in the long run. At the

same time, it distorts market pricing

of essential goods and services in

Malaysia. The NEM, therefore,

recommends a steady removal

of subsidies and price controls

(see Table 6), with a rationalisation

of tax incentives. Savings from

the removal of subsidies are

proposed to be used to fund a

social safety net scheme targeted

at beneficiaries from poor

households and vulnerable groups.

This savings can also be applied to

a Transformation Fund to help firms

displaced by the reforms to adjust

to the new market environment.

We view these proposals positively,

as price controls and subsidies will

distort price signals, resulting in

inefficient use of valuable

resources, overconsumption and

waste as well as making businesses

complacent. At the same time,

removing subsidies and price

controls can reduce operating

expenditures over time and help

the Government to improve its

fiscal deficits. However, the

removal of subsidies, however,

should be done over time in order

to reduce its impact on the

economy. Indeed, we believe it is

probably the right time for the

Government to consider

reducing the fuel subsidy from

Source: NEM

Table 5Inspiring The Workforce To Draw Out Their Best


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Table 6Vibrant Markets And Greater Choices

Source: NEM

Table 7A Lean And Customer-Focussed Government

Source: NEM

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the current 30 sen/litre to 20 sen/

litre and allow it to fluctuate according

to international crude oil prices even

though the restructuring of fuel

subsidy has been scrapped.

Strengthening Of The Public

Sector

The NEM highlighted that public

institutions must be re-engineered

and they must not duplicate functions

better provided by the private sector.

Instead, public institutions should seek

to undertake those tasks that the

private sector cannot perform. As a

result, the NEM projects the share of

public investment to drop to 10.5%

of GDP in 2020, from 12.6% in 2010,

while growth will be maintained at an

average of 4.6% a year during theperiod, compared with +4.4% a year

achieved in 2001-09. The delivery

of government services must be

efficient and effective, using a

whole of government approach to

facilitate the operations of the private

sector. At the same time, fiscal

management must be strengthened

to include greater transparency and

to provide the right incentives, while

the Governments revenue base must

be diversif ied and expenditure

streamlined to foster better utilisation

of revenue. Towards this end, the

NEM proposed a number of measures

(see Table 7). Among them, the

proposal to widen the tax base via

the introduction of the goods and

services tax (GST) is worth noting.

The NEM highlighted that one of the

aims of the tax reform is to enable

the Government to lower the rates of

personal and corporate taxes, which

will incentivise individuals and firms

to increase their income and profits.

The Government initially planned to

table the GST for the second reading

in Parliament in March, but has since

delayed it, as it indicated that it needs

to ensure the people have a clear

picture of the tax prior to its

introduction.


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Transparent And Market Friendly

Affirmative Action

A key component of inclusiveness is

the fostering of equal and fair

economic opportunities. In this

respect, affirmative action

programmes and institutions will

continue in the NEM. However, it willbe revamped to remove the rent

seeking and market distorting

features, which have blemished the

effectiveness of the programme, and

to be in line with views of the main

stakeholders (see Table 8). The

renewed affirmative action policy will

consider all ethnic groups fairly and

equally as long as they are in the

low income 40% of households. In

this regard, an Equal Opportunities

Commission will be established toensure fairness and address undue

discrimination when occasional

abuses by dominant groups are

encountered.

According to the Prime Minister, the

renewed affirmative action policy will

be built on four principles, i.e.

market-friendly, merit based,

transparent and needs based.

The Prime Minister said that one

important consideration will be

developing a competitive and

transparent tender process, with set

and clear rules for the whole

Bumiputera community, made of both Malay and other indigenous groups. This is set out as a common-sense enhancement

of our policies for a new economic reality and where Inclusiveness is a key component in our new economic model. In

practice, the Prime Minister is of the view that the approach will mean greater support for the Bumiputera, a greater

support based on needs, not race. In addition, in assessing the results, fair distribution must encompass the whole

spectrum of measuring wealth such as equity ownership, other financial and non-financial assets, and access to wealth

creating opportunities such as long-term concessions and contracts. Even in measuring ownership, it should go beyond

equity to include other properties, business assets such as retail, landed properties, commercial building, intellectual

property and other services as well as managerial positions. A valuable example would be the redevelopment of

Kampung Baru, a holistic opportunity of wealth creation and value enhancement that goes deeper and well beyond equity

ownership, the Prime Minister said. Unlike the National Vision Policy (NPV) under the OPP3, which clearly stated that

one of its targets is to achieve effective Bumiputera participation and equity ownership of at least 30% by 2010, the NEM

is silent on the quota.

Table 8Escaping Low Income

Source: NEM


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Building The Knowledge Base

Infrastructure

Economic transformation in the

industrial, agricultural and services

sectors is a process requiring

continuous innovation and

productivity growth with significant

technological advancement andentrepreneurial drive. The adoption

of processes in line with best

practices and international standards

wil l improve the chances for

Malaysian firms to succeed in the

global market place. Hence, the NEM

proposed to create an ecosystem

for entrepreneurship, promote

an environment for innovation

and establish stronger enabling

institutions (see Table 9). We

believe this is important to driveentrepreneurship in the country, as

anecdotal evidences suggest that

there is lack of entrepreneurship

among Malaysian businesses and

many are thinking of early retirement

rather than continue to strive to help

the nation to scale greater heights.

Enhancing Sources Of Growth

The old way of doing thing has been

for Government to identify the

sources of growth and then provide

the incentives to drive the growth

sectors/ industries. This was the case

in developing commodities and later

the manufacturing sector, in particular

the electronics sub-sector. In the late 1980s and over the following two decades, selected services sectors were identified

as having export potential and again, the Government introduced incentive schemes (e.g. financial and tax breaks) to

promote growth in these sectors (e.g. education, tourism and shipping).

The new approach under the NEM would be to strengthen overall competitive capacity of the private sector, identify criteria

that will make sectors/industries as important sources of growth and remove the barriers for private sector to drive

sectors/industries with high growth potential (see Table 10). The Government would only act as facilitator, ensuring

distortions are not created, putting in place the required enablers to support high value industries and giving special

attention when required for specific sectors in order to ensure that the private sector can allocate resources more

efficiently.

In developing further sectors and industries which can lead growth, the NEAC believes that Malaysia must harness its

natural endowment, sectors with comparative advantage, and industries where Malaysia has developed early mover

advantages as the main sources of high value added growth with spillover effects into new areas of activities.

Table 9Innovating Today For A Better Tomorrow

Source: NEM


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Ensuring Sustainability Of

Growth

The NEM places strong emphasis

on preserving the countrys

natural resources and safe-

guarding the interest of future

generations. While progress and

development are all important, theGovernment must not overlook the

value of careful usage of its natural

resources by applying appropriate

pricing, regulatory and strategic

policies to manage non-renewable

resources sustainability. Also, a

green economy platform policy for

development must be set by the

Government. At the same time,

greater efforts are needed to put

in place pollution mitigation

practices, enforce clean air andwater standards, as well as

maximise the stewardship of the

countrys scare natural resources.

Fiscal discipline is needed for sound

and sustainable public finances in

order to maintain macroeconomic

balance and facilitate financial

stability.

A Great Model, But TheKey Still

Lies With The Execution

As a whole, the NEM has rightly

pointed out the weaknesses of the

Malaysian economy and mapped

out comprehensive policy measures

to guide Malaysia in its next growth

path. However, in our view, the

key still lies with the execution

and the political will to force

through changes. The weak

execution was reflected in the

implementation of the NVP under

the OPP3. The NVP has touched

on, among others, to develop a

knowledge-based economy as a

strategic move to raise value add

of all economic sectors and

optimising the brain power of the

nation, strengthening human

resource development to produce

competent, productive and

knowledgeable workforce,

strengthening the sources of growth

and enhancing competitiveness to

meet the challenges of globalisation

and liberalisation. We believe some

Table 10Finding The Economic Sweet Sports

Source: NEM


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OPP 2 OPP 3 Target Achieved

1991-2000 2001-2010 2001-2009

GDP 7.0 7.5 4.3

Consumption: 5.5 7.1 7.0

Private 5.5 7.4 6.7

Public 5.5 5.9 8.4

Total investment 6.0 8.1 2.4

Private 2.9 12.7 0.3

Public 10.5 0.9 4.4

Goods & services:

Exports 12.4 7.1 3.1

Imports 11.4 7.0 3.5

Source: OPP3 & RHBRI

Table 11Real GDP By Expenditure

OPP 2 OPP 3 Target Achieved NEM

1991-2000 2001-2010 2001-2009 (2000=100)

GDP 7.0 7.5 4.3 6.5

Agri culture 0.5 3.5 3.0 2.8

Mining 3.4 -2.7 0.9 1.1

Manufacturing 10.4 8.3 2.7 5.8

Construction 6.4 6.6 1.9 3.5

Services 8.3 8.4 6.1 8.0

Source: NEM, OPP3 & RHBRI

Table 12Real GDP By Industrial Origin

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IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB

Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances

as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to

be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the

RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation

to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and

no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons

may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial

circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors.

RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the

advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investors individual circumstances

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This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by,

and may not reflect information known to, professionals in other business areas of the Connected Persons, including investment banking

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The research analysts, economists or research associates principally responsible for the preparation of this research report have received

compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and

firm revenues.

of the policy thrusts outlined in the OPP3

were forward looking and are probably still

relevant today. However, it was not an

easy task to execute and the country is

estimated to achieve a growth of only 4.3%

a year during the period, compared with

the target of 7.5% set under the OPP3 (see

Tables 11 & 12). Meanwhile, the NEM could

still be fined tune after a robust andthorough consultation with various groups.

economic highlights : new economic model to chart the country’s development ahead-31/03/2010

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