the bnm quarterly bulletin presents a quarterly … bnm quarterly bulletin presents a quarterly...

The BNM Quarterly Bulletin presents a quarterly review of Malaysia’s economic, monetary and financial developments. It includes the Bank’s latest assessments on the direction of the economy going forward. The Bulletin also provides insights on current economic and financial issues, including highlights of policy initiatives undertaken by Bank Negara Malaysia in pursuit of its mandates.

P4 Key Highlights

P7 International Economic Environment

P9 Developments in the Malaysian Economy

P19 BoxArticle1:ProfileofMalaysia’sExternalDebt

P25 Monetary and Financial Developments

P29 The Bank’s Policy Considerations

P31 Macroeconomic Outlook

P35 BoxArticle2:EscalatingTradeTensionsandPotential SpilloverstoMalaysia

P41 Annex

Contents

Key Highlights on Economic and Financial Developments in 3Q 2018Sustained economic growth of 4.4% despite global headwindsContinued expansion in domestic demand amid commodity supply shocksReal GDP Growth

2Q 2018

0.3

0

2

4

3

2

1

0

yoy,% qoq sa,%4.5 4.4

1.6

3Q 2018 Annual Growth (LHS)Quarter-on-Quarter Growth, seasonally-adjusted

1.3

0.5

1.5 1.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

3Q 2017 4Q 2017 1Q 2018 2Q 2018 3Q 2018

yoy, % Headline and Core Inflation1

Headline inflation Core inflation

1Core inflation excludes the estimated direct impact of consumption tax policy changes

Lower inflation during the quarter mainly reflected the impact from the GST zerorisation

Headline inflation declined in the third quarter of 2018

-2

-1

0

1

2

2Q 2018 3Q 2018

Net impact of consumption tax policy changes Other price-administered items Fuel Price-volatile items Core inflation Headline inflation

Percentage points, %

The SST implementation had a limited impacton inflation during the quarter

Contribution to Headline Inflation by CPI Components

Box ArticlesFurther escalation in trade tensions to have more significant impact on growth prospects

Ringgit-denominated external debt lowers exposure to foreign currency risk, while medium- to long-term external debt reduces rollover riskImpact Estimates of Trade Protectionism Measures

Annual ppt. impact

Malaysia GDP

Baseline

World Trade

World Growth

-0.3 -0.8

-0.4 -1.1

Baseline + Future downside

-0.3 to -0.5 -1.3 to -1.5

74.3

66.2

2016 3Q 2018

External debt to GDP (% share)

• External debt declined to 66.2% of GDP as at end-3Q 2018

External debt by currency and original maturity (% share)

By currency By original maturity

Medium to long term

54.0%

Short term 46.0%

• About one-third of external debt is denominated in ringgit

• More than half of external debt is medium- to long-term, limiting rollover risk

Source: Department of Statistics Malaysia, Bank Negara Malaysia unless stated otherwiseFor more information, visit www.bnm.gov.my

Robust household spending 3Q18: 9.0%

Higher private investment to meet positive growth prospects3Q18: 6.9%

Lingering effects of supply shocks in agriculture and mining sectors

Foreign currencies

69.4%

Ringgit 30.6%

5

BNM QUARTERLY BULLETIN

THIRD QUARTER 2018

Key Highlights on Economic and Financial Developments in 3Q 2018Sustained economic growth of 4.4% despite global headwindsContinued expansion in domestic demand amid commodity supply shocksReal GDP Growth

2Q 2018

0.3

0

2

4

3

2

1

0

yoy,% qoq sa,%4.5 4.4

1.6

3Q 2018 Annual Growth (LHS)Quarter-on-Quarter Growth, seasonally-adjusted

1.3

0.5

1.5 1.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

3Q 2017 4Q 2017 1Q 2018 2Q 2018 3Q 2018

yoy, % Headline and Core Inflation1

Headline inflation Core inflation

1Core inflation excludes the estimated direct impact of consumption tax policy changes

Lower inflation during the quarter mainly reflected the impact from the GST zerorisation

Headline inflation declined in the third quarter of 2018

-2

-1

0

1

2

2Q 2018 3Q 2018

Net impact of consumption tax policy changes Other price-administered items Fuel Price-volatile items Core inflation Headline inflation

Percentage points, %

The SST implementation had a limited impacton inflation during the quarter

Contribution to Headline Inflation by CPI Components

Box ArticlesFurther escalation in trade tensions to have more significant impact on growth prospects

Ringgit-denominated external debt lowers exposure to foreign currency risk, while medium- to long-term external debt reduces rollover riskImpact Estimates of Trade Protectionism Measures

Annual ppt. impact

Malaysia GDP

Baseline

World Trade

World Growth

-0.3 -0.8

-0.4 -1.1

Baseline + Future downside

-0.3 to -0.5 -1.3 to -1.5

74.3

66.2

2016 3Q 2018

External debt to GDP (% share)

• External debt declined to 66.2% of GDP as at end-3Q 2018

External debt by currency and original maturity (% share)

By currency By original maturity

Medium to long term

54.0%

Short term 46.0%

• About one-third of external debt is denominated in ringgit

• More than half of external debt is medium- to long-term, limiting rollover risk

Source: Department of Statistics Malaysia, Bank Negara Malaysia unless stated otherwiseFor more information, visit www.bnm.gov.my

Robust household spending 3Q18: 9.0%

Higher private investment to meet positive growth prospects3Q18: 6.9%

Lingering effects of supply shocks in agriculture and mining sectors

Foreign currencies

69.4%

Ringgit 30.6%

6


THIRD QUARTER 2018

7THIRD QUARTER 2018

Global economy grew at a more moderate pace

The global economy continued to expand, but at a more moderate pace in the third quarter of 2018. While the US and UK GDP accelerated, most emerging economies recorded more moderate growth.

In the advanced economies, labour markets remained supportive of private consumption, as unemployment rates continued to decline amid a steady increase in wage growth. These developments contributed to rising inflationary pressures as reflected by the gradual increase in Consumer Price Indices. Investment activity, however, moderated in the euro area, while in the US, business spending was lifted by the 2017 tax reforms.

Growth in the Asian region trended lower. PR China recorded slower growth, as continued policy driven credit tightening weighed on investment, particularly local government spending on infrastructure. Nevertheless, domestic demand in other Asian economies remained resilient, in part aided by ongoing policy support and higher infrastructure spending.

• Global economy moderated in the third quarter of 2018.• Slower export growth in most regional economies.• Financial market volatility remained elevated, while trade tensions escalated.

HIGHLIGHTS

International Economic Environment

Global economic activity moderated in 3Q 2018

Chart 1: GDP Growth

2Q 18 3Q 18

3.0

1.7 1.5

6.5 6.1

5.2 4.4

2.6 2.3 2.0

0

1

2

3

4

5

6

7

8

US

Euro

are

a

UK

PR C

hina

Philip

pine

s

Indo

nesi

a

Mal

aysi

a

Sing

apor

e

C. T

aipe

i

Kore

a

Annual change (%)

Source: National authorities

Aktiviti ekonomi global menurun pada S3 2018

Rajah 1: Pertumbuhan KDNK

S2 18 S3 18

3.0

1.7 1.5

6.5 6.1

5.2 4.4

2.6 2.3 2.0

0

1

2

3

4

5

6

7

8 Perubahan tahunan (%)

Sumber: Pihak berkuasa negara

AS

Kaw

asan

eur

o

UK

RR C

hina

Filip

ina

Indo

nesi

a

Mal

aysi

a

Sing

apur

a

C. T

aipe

i

Kore

a

8


THIRD QUARTER 2018

Export growth moderated

Most regional economies recorded slower export growth in the third quarter of 2018. This reflects lower demand from major economies, such as the euro area and PR China. Of significance, demand for E&E products, which had driven shipments from Korea and Chinese Taipei in previous periods, have moderated.

Indicators suggest that the impact of the recent trade actions have started to materialise. The Purchasing Managers Index in several economies recorded slowdowns in the new orders and confidence sub-indices. Increasingly, firms noted that prolonged trade tensions would adversely affect input costs and threaten to disrupt their supply chain operations. Trade disruptions are likely to exacerbate the moderating growth momentum currently experienced by most economies.

Higher volatility in the financial markets

Financial market volatility re-emerged in October, as 10-year US Treasury yields rose to its highest level since 2011. This was attributable partly to adjustments in market expectations for a stronger US economy. Most emerging market economies recorded large capital outflows resulting in downward pressure on emerging market currencies and equities. In particular, financial conditions in Turkey and Argentina deteriorated rapidly, exacerbated by vulnerabilities in their domestic economies.

Heightened trade tensions also contributed to the elevated volatility in the third quarter of 2018. In September, the US implemented an additional 10% tariff on USD200 billion worth of imports from PR China and announced that the additional tariff will be raised to 25% in January 2019. This sparked retaliation from PR China which raised its tariff on USD60bn of US imports by 5-10%.

In the commodities market, Brent crude oil price rose slightly to an average of USD76 per barrel in 3Q 2018 (2Q 2018: USD75). During the quarter, OPEC’s pledge to ease oil output cuts caused prices to moderate. Towards the end of the quarter, however, Brent crude oil price increased sharply, as reports of declining oil exports from Iran ahead of the imposition of sanctions by the US triggered heightened concerns over tighter supply conditions in the global oil market.

Modest export performance in 3Q 2018

Chart 2: Export Growth of Selected Economies(in USD terms)

Source: Bloomberg

11.6 9.5

8.7 8.3 7.2

3.0 3.0 1.7

0 2 4 6 8

10 12 14 16 18 20

PR C

hina

Mal

aysi

a

Hon

g Ko

ng

Indo

nesi

a

Sing

apor

e

Thai

land

C. T

aipe

i

Kore

a

2Q 18 3Q 18

Annual change (%)

Prestasi eksport lebih rendah pada S3 2018

Rajah 2: Pertumbuhan KDNK (dalam AS Dolar)

Sumber: Bloomberg

11.6 9.5

8.7 8.3 7.2

3.0 3.0 1.7

0 2 4 6 8

10 12 14 16 18 20

RR C

hina

Mal

aysi

a

Hon

g Ko

ng

Indo

nesi

a

Sing

apur

a

Thai

land

C. T

aipe

i

Kore

a

S2 18 S3 18

Perubahan tahunan (%)

Higher volatility in the financial markets

Chart 3: Chicago Board Options Exchange (CBOE) Volatility Index (VIX)

8

13

18

23

28

33

38

43

Jan-

17

Apr-1

7

Jul-1

7

Oct

-17

Jan-

18

Apr-1

8

Jul-1

8

Oct

-18

Index

Source: Bloomberg

Volatiliti pasaran kewangan lebih tinggi

Rajah 3: Index Ketidaktentuan (VIX) Chicago Board Options Exchange (CBOE)

8

13

18

23

28

33

38

43

Jan-

17

Apr-1

7

Jul-1

7

Okt

-17

Jan-

18

Apr-1

8

Jul-1

8

Okt

-18

Indeks

Sumber: Bloomberg

9THIRD QUARTER 2018

• The Malaysian economy expanded by 4.4% in the third quarter.• Headline and core inflation declined to 0.5% and 1.4%, respectively.• Current account surplus was sustained at RM3.8bn in the third quarter.

HIGHLIGHTS

Developments in the Malaysian Economy

The Malaysian economy registered a growth of 4.4%

The Malaysian economy recorded a sustained growth of 4.4% in the third quarter of 2018 (2Q 2018: 4.5%), supported by expansion in domestic demand amid a decline in net exports growth. Private sector expenditure remained the key driver of growth, expanding at a faster pace of 8.5% (2Q 2018: 7.5%), while public sector expenditure turned around to register a positive growth of 1.1% (2Q 2018: -1.4%). On a quarter-on-quarter seasonally-adjusted basis, the economy grew by 1.6% (2Q 2018: 0.3%). Domestic demand continued to be driven by the private sector

Domestic demand expanded at a faster pace during the quarter (6.9%; 2Q 2018: 5.6%), driven by private sector activity. Private consumption growth accelerated to 9.0% (2Q 2018: 8.0%). Household spending was boosted in July and August 2018, following the zerorisation of the Goods and Services Tax (GST) rate1, particularly on durable goods such as motor vehicles and furnishings, as well as food and beverages. Continued expansion in income and employment provided key support to household spending.

1 The reduction in the GST rate from 6% to 0% beginning 1 June 2018 to 31 August 2018. The Sales and Services Tax (SST) was implemented beginning 1 September 2018.

Sustained growth in 3Q 2018

Chart 4: Real GDP Growth

0.3

1.6

4.5 4.4

0

1

2

3

4

5

6

7

3Q 17 4Q 17 1Q 18 2Q 18 3Q 18 0

1

2

3

4

Quarterly change (%), seasonally-adjusted (RHS) Annual change (%)

%

Source: Department of Statistics Malaysia

%

Pertumbuhan kekal mampan pada S3 2018

Rajah 4: Pertumbuhan KDNK benar

0.3

1.6

4.5 4.4

0

1

2

3

4

5

6

7

S3 17 S4 17 S1 18 S2 18 S3 18 0

1

2

3

4

Perubahan suku tahunan (%), terlaras secara bermusim (skala kanan)Perubahan tahunan (%)

%

Sumber: Jabatan Perangkaan Malaysia

%

10


THIRD QUARTER 2018

Private investment growth edged higher to 6.9% (2Q 2018: 6.1%), underpinned mainly by capital spending in the manufacturing and services sectors. During the quarter, firms further expanded their capacity through increased machinery and equipment spending to cater to positive demand.

Public consumption grew at a faster pace (5.2%; 2Q 2018: 3.1%). This was attributable to a higher spending on supplies and services, which more than offset the moderation in emoluments growth.

Public investment registered a smaller decline during the quarter (-5.5%; 2Q 2018: -9.8%), due to improvements in General Government capital spending. However, capital spending by public corporations was lower as some projects were near completion.

Gross fixed capital formation (GFCF) increased at a faster pace of 3.2% (2Q 2018: 2.2%), supported by continued private sector capital spending. By type of assets, capital spending on machinery and equipment was higher at 5.9% (2Q 2018: 3.6%). Investment in other types of assets turned around to register a marginal positive growth of 0.1% (2Q 2018: -2.9%). Investment in structures grew at a moderate pace of 1.8% (2Q 2018: 2.1%), due mainly to continued weak investments in residential property.

Private activity supported growth

Chart 5: Contribution of Expenditure Components toReal GDP Growth


5.9 5.4

4.5 4.4

-4

-2

0

2

4

6

8

4Q 2017 1Q 2018 2Q 2018 3Q 2018

Change in stocks Public consumption Private consumption GFCF Net exports Real GDP

Annual change (%), Contribution to growth (percentage points)

Pertumbuhan disokong aktiviti sektor swasta

Rajah 5: Sumbangan Komponen Perbelanjaan kepadaPertumbuhan KDNK Benar


5.9 5.4

4.5 4.4

-4

-2

0

2

4

6

8

S4 2017 S1 2018 S2 2018 S3 2018

Perubahan stok Penggunaan awam Penggunaan swastaPMTK Eksport bersih KDNK benar

Perubahan tahunan (%), Sumbangan kepada pertumbuhan(mata peratusan)

Further improvement in gross fixed capital formation

Chart 6: GFCF Growth by Type of Assets

2.2 3.2

-25

-15

-5

5

15

-10

0

10

20

3Q 17 4Q 17 1Q 18 2Q 18 3Q 18

Structures Machinery and equipment Other assets* Gross fixed capital formation (RHS)

Annual change (%)

*Other assets include mineral exploration, research & development andcapitalised planting.


Annual change (%)

Pembentukan modal tetap kasar terus bertambah baik

Rajah 6: Pertumbuhan PMTK mengikut Jenis Aset

2.2 3.2

-25

-15

-5

5

15

-10

0

10

20

S3 17 S4 17 S1 18 S2 18 S3 18


* Aset-aset lain termasuk penerokaan mineral, penyelidikan & pembangunan dan penanaman modal.



Struktur Jentera dan kelengkapan Aset-aset lain* Pembentukan modal tetap kasar (skala kanan)

11


THIRD QUARTER 2018

Slower growth in commodity-related sectors offset by faster expansion in other sectors

On the sectoral front, growth was mainly affected by lingering commodity-specific supply shocks. Nevertheless, the impact on overall growth was mitigated by expansions in the other economic sectors, mainly the services, manufacturing and construction sectors which account for 82% of the economy.

Growth in the mining sector contracted further as natural gas production continued to be affected by unplanned supply outages and pipeline repairs in East Malaysian facilities. Meanwhile, agriculture sector growth remained weak due to the protracted recovery in crude palm oil production from adverse weather and production constraints in the previous quarter.

Growth in the services sector rose further during the quarter, driven mainly by the wholesale and retail trade sub-sector on account of higher consumer spending during the tax holiday period. The finance and insurance sub-sector also benefitted from the zerorisation of GST as seen in higher consumer loans disbursements and insurance premium payments, particularly in the motor vehicle segment. Growth in the transport and storage sub-sector improved, supported by higher air passenger traffic. The information and communications sub-sector continued to expand, amid continued demand for data communication services.

During the quarter, the manufacturing sector registered sustained growth, as improvements in the E&E and consumer-related clusters offset softer growth in primary-related output. Faster expansion in the E&E and consumer-related cluster was accounted by higher production of consumer-based electronics, household appliances, passenger cars and auto parts, following higher spending on durable goods during the tax holiday period. Manufacture of construction-related materials was sustained in line with activity in the construction sector. Primary-related output growth, however, slowed further during the quarter, weighed by lower output of natural feedstocks such as crude palm oil and natural gas. The construction sector registered sustained growth in the third quarter. Despite the on-going review of several mega projects, construction activity in the civil engineering sub-sector remained supportive of growth, underpinned by steady progress in existing transportation, petrochemical and power plant projects. Growth in the non-residential sub-sector improved slightly, while growth in the residential sub-sector remained weak amidst the high number of unsold residential properties.

Faster expansions in other sectors, slower growth in commodity-related sectors Chart 7: Growth by Sector

7.2 5.0

-1.4 -4.6

4.6

-6 -4 -2 0 2 4 6 8

10

Serv

ices

M

anuf

actu

ring

Agric

ultu

re

Min

ing

Con

stru

ctio

n

2Q 2018 3Q 2018

Annual change (%)


Sektor lain meningkat dengan lebih pantas manakala pertumbuhan sektor berkaitan komoditi adalah lebihperlahan Rajah 7: Pertumbuhan Mengikut Sektor

7.2 5.0

-1.4 -4.6

4.6

-6 -4 -2 0 2 4 6 8

10

Perk

hidm

atan

Pe

rkila

ngan

Pe

rtani

an

Pe

rlom

bong

an

Pem

bina

an

S2 2018 S3 2018



Services and manufacturing sectors remainedthe key drivers of growth Chart 8: Real GDP by Economic Sector

4.5 4.4

-1 0 1 2 3 4 5 6

2Q 2018 3Q 2018

Services Manufacturing Agriculture Mining Construction Real GDP



Sektor perkhidmatan dan perkilangan kekal sebagai pemacu utama pertumbuhan Rajah 8: KDNK Benar Mengikut Sektor Ekonomi

4.5 4.4

-1 0 1 2 3 4 5 6

S2 2018 S3 2018

Perkhidmatan Perkilangan PertanianPerlombongan Pembinaan KDNK benar

Perubahan tahunan (%), Sumbangan kepada pertumbuhan (mata peratusan)


12


THIRD QUARTER 2018

Lower inflation during the quarter mainly reflected the GST zerorisation

Headline inflation, as measured by the annual percentage change in the Consumer Price Index (CPI), declined to 0.5% in 3Q 2018 (2Q 2018: 1.3%).

The lower inflation mainly reflected the impact from the GST zerorisation. By category, the impact was broad-based and particularly evident for communication services and recreational and cultural services. The percentage of items in the CPI basket that had an inflation of more than 2% declined to 9% in the third quarter (2Q 2018: 18%). This was despite the implementation of the Sales and Services Tax (SST) beginning 1 September 2018. With the small average price increase for SST-taxable items in September, the SST impact on inflation during the quarter has been limited.

Core inflation, excluding the impact of consumption tax policy changes, moderated slightly to 1.4% (2Q 2018: 1.5%). Demand-driven inflationary pressures in the economy remained contained in the absence of excessive wage pressure and some degree of spare capacity in the capital stock.

The decline in inflation was mainly due to the impactfrom the GST zerorisation

Chart 9: Contribution to Headline Inflation by Components

Source: Department of Statistics Malaysia and Bank Negara Malaysia estimates

Net impact of consumption tax policy changes Other price-administered items Fuel Price-volatile items (e.g. fresh food items) Core inflation (ppt)

Headline inflation (%) Core inflation (%)

Penurunan inflasi adalah disebabkan terutamanya oleh kesan daripada pelaksanaan GST pada kadar sifar

Rajah 9: Sumbangan kepada Inflasi Keseluruhan mengikut Komponen

Sumber: Jabatan Perangkaan Malaysia dan anggaran Bank Negara Malaysia

Kesan bersih daripada perubahan pada dasar cukai penggunaan Barangan lain yang harganya ditadbir Bahan api Barangan yang harganya tidak menentu (contohnya makanan segar) Inflasi teras (mata peratusan)

Inflasi keseluruhan (%) Inflasi teras (%)

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2016 2017 2018

%, percentage points

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

S1 S2 S3 S4 S1 S2 S3 S4 S1 S2 S32016 2017 2018

%, mata peratusan

Inflation pervasiveness continued to decline in 3Q 2018

Chart 10: Inflation Pervasiveness

Source: Department of Statistics Malaysia and Bank Negara Malaysia estimates

Rebakan inflasi terus menurun pada S3 2018

Rajah 10: Rebakan Inflasi


100

80

60

40

20

0

20

40

60

80

100

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

2016 2017 2018

Percentage of items (%)

Inflation above 2%

Inflation at 2% and below

100

80

60

40

20

0

20

40

60

80

100

S1 S2 S3 S4 S1 S2 S3 S4 S1 S2 S3

2016 2017 2018

Peratusan daripada jumlah barangan (%)

Inflasi lebih daripada 2%

Inflasi pada 2% atau kurang

1< ∏ ≤ 20 < ∏ ≤ 1 2 < ∏ ≤ 3 3 < ∏ ≤ 4 ∏ > 4∏ ≤ 0

1< ∏ ≤ 20 < ∏ ≤ 1 2 < ∏ ≤ 3 3 < ∏ ≤ 4 ∏ > 4∏ ≤ 0

13


THIRD QUARTER 2018

Positive labour market conditions

Labour market conditions remained supportive of economic activity. Although the unemployment rate edged higher in the third quarter (3.4%; 2Q 2018: 3.3%), this was mainly on account of higher labour force participation (68.5%; 2Q 2018: 68.4%) which offset improvements in employment growth (2.6%; 2Q 2018: 2.4%). Stronger net employment gains were recorded in the services and manufacturing sectors in the third quarter.

Private sector wages registered sustained growth of 5.7% (2Q 2018: 5.7%). This was driven mainly by higher wage growth in the services sector 3.9% (2Q 2018: 3.7%), supported by the wholesale and retail trade sub-sector. The manufacturing sector registered slower wage growth (9.6%; 2Q 2018: 10.1%), weighed by the more moderate wage growth in the domestic-oriented industries (6.1%; 2Q 2018: 8.6%). Nonetheless, wages in the export-oriented sub-sectors grew at a faster pace (10.9%; 2Q 2018: 10.6%), supported by continued growth in the E&E segment.

Marginal increase in unemployment rate

Chart 11: Unemployment rate

3.3 3.4

2.5

3.0

3.5

4.0

1Q 2Q 3Q 4Q 1Q 2Q 3Q

2017 2018

% of labour force


Kadar pengangguran meningkat sedikit

Rajah 11: Kadar pengangguran

3.3 3.4

2.5

3.0

3.5

4.0

S1 S2 S3 S4 S1 S2 S3

2017 2018

% tenaga buruh


Sustained private sector wage growth

Chart 12: Private sector wages

5.7 5.7

3

4

5

6

7

8 Annual change (%)

1Q 2Q 3Q 4Q 1Q 2Q 3Q 2017 2018

* Private sector wages is derived from the salaries and wages data published in the Monthly Manufacturing Statistics and Quarterly Services Statistics by the Department of Statistics, Malaysia (DOSM). It covers 62% of total employment.

Source: Department of Statistics Malaysia and BNM estimates

Upah sektor swasta mencatat pertumbuhan mampan

Rajah 12: Upah sektor swasta

5.7 5.7

3

4

5

6

7

8 Perubahan tahunan (%)

S1 S2 S3 S4 S1 S2 S32017 2018

* Upah sektor swasta diperoleh daripada data gaji dan upah yang diterbitkan dalam Perangkaan Pembuatan Bulanan dan Perangkaan Perkhidmatan Suku Tahunan oleh Jabatan Perangkaan Malaysia (DOSM). Sektor ini meliputi 62% daripada jumlah guna tenaga.


14


THIRD QUARTER 2018

Moderation in exports and imports

In the third quarter of 2018, gross exports expanded by 5.2% (2Q 2018: 8.3%), supported mainly by manufactured exports. Domestic exports2 declined by -0.2% (2Q 2018: 0.2%) due to the contraction in commodity exports. The trade surplus stood at RM25.2 billion (2Q 2018: RM27.1 billion).

Manufactured exports grew by 7.4% (2Q 2018: 10.7%), supported by higher E&E exports (10.7%; 2Q 2018: 9.8%), with continued demand from major trading partners, particularly in the Asian region. Of significance, growth of semiconductor exports remained robust at 24.2% (2Q 2018: 21.0%), reflecting continued expansion in the global technology cycle. However, non-E&E exports moderated, particularly in petroleum products, and manufactures of metal and transport equipment. Commodities exports registered a smaller contraction of -3.0% (2Q 2018: -3.8%) as the continued decline in crude palm oil exports was partly offset by the stronger growth in mineral exports (9.3%; 2Q 2018: 8.1%), particularly in crude petroleum exports.

Gross imports growth moderated to 6.3% during the quarter (2Q 2018: 8.5%) following a deceleration in capital imports and lower imports for re-exports. Consumption imports rebounded to 5.5% (2Q 2018: -2.8%) due to the surge in domestic spending during the tax holiday period and a smaller contraction in intermediate imports.

2 Domestic exports is defined as gross exports excluding re-export activity.

5.2

5.2

E&E remained the key driver of exports Chart 13: Gross Exports by ProductsAnnual change (%), Contribution to growth (percentage points)


21.6 20.5 21.8

12.3

5.5 8.3

-5

0

5

10

15

20

25

1Q 2Q 3Q 4Q 1Q 2Q 3Q

2017 2018

Others Commodities Non-resource based

Resource-based E&E Gross exports (% yoy)

E&E kekal sebagai pemacu utama eksport Rajah 13: Eksport Kasar Mengikut KeluaranPerubahan tahunan (%), sumbangan kepada pertumbuhan(mata peratusan)


21.6 20.5 21.8

12.3

5.5 8.3

-5

0

5

10

15

20

25

S1 S2 S3 S4 S1 S2 S3

2017 2018

Lain-lainKomoditiBukan berasaskan sumber

Berasaskan sumberE&E Eksport kasar (perubahan tahunan, %)

5.2

5.2

Continued growth in exports to most major markets Chart 14: Gross Exports by MarketsAnnual change (%), Contribution to growth (percentage points)


21.6 20.5 21.8

12.3

5.5

8.3

-5

0

5

10

15

20

25

1Q 2Q 3Q 4Q 1Q 2Q 3Q

2017 2018

Rest of World Rest of Asia EU Japan

US China ASEAN Gross exports (% yoy)

Pertumbuhan yang berterusan dalam eksport ke kebanyakan pasaran utama Rajah 14: Eksport Kasar Mengikut PasaranPerubahan tahunan (%), sumbangan kepada pertumbuhan(mata peratusan)


21.6 20.5 21.8

12.3

5.5

8.3

-5

0

5

10

15

20

25

S1 S2 S3 S4 S1 S2 S3

2017 2018

Negara-negara lainNegara-negara Asia lainEU Jepun

ASChina ASEAN Eksport kasar (perubahan tahunan, %)

15


THIRD QUARTER 2018

Imports moderated on account of slower capital goodsand re-export activity Chart 15: Gross Imports by Products

Others Consumption goods Intermediate goods Capital goods Gross imports (% yoy)



Import menjadi sederhana disebabkan pertumbuhanbarangan modal dan aktiviti eksport semula yang lebihperlahan Rajah 15: Import Kasar Mengikut Keluaran

Lain-lainBarangan penggunaanBarangan pengantaraBarangan modalImport kasar (perubahan tahunan, %)

Perubahan tahunan (%), sumbangan kepada pertumbuhan(mata peratusan)


27.6

18.1 19.6

14.4

-0.7

8.5 6.3

-10

-5

0

5

10

15

20

25

30

1Q 2Q 3Q 4Q 1Q 2Q 3Q

2017 2018

27.6

18.1 19.6

14.4

-0.7

8.5 6.3

-10

-5

0

5

10

15

20

25

30

S1 S2 S3 S4 S1 S2 S3

2017 2018

1.1

Current account surplus sustained Chart 16: Current account balance

1.5

2.7

3.8 4.0 4.5

1.2

-3

-2

-1

0

1

2

3

4

5

-30

-20

-10

0

10

20

30

40

1Q 2Q 3Q 4Q 1Q 2Q 3Q 2017 2018

Goods Services Primary income Secondary income Current account balance (RHS)

RM billion


% of GNI

1.1 1.5

2.7

3.8 4.0 4.5

1.2

-3

-2

-1

0

1

2

3

4

5

-30

-20

-10

0

10

20

30

40

S1 S2 S3 S4 S1 S2 S32017 2018

RM bilion % daripada PNK

Imbangan akaun semasa berterusan Rajah 16: Imbangan akaun semasa


Barangan Perkhidmatan Pendapatan primer Pendapatan sekunder Imbangan akaun semasa (skala kanan)

Sustained current account surplus

The current account surplus was broadly sustained at RM3.8 billion in the third quarter of 2018 (2Q 2018: RM3.9 billion), or 1.1% of GNI (2Q 2018: 1.2% of GNI). This was due a higher goods surplus3 and lower services deficit, amid a larger deficit in the primary income account.

The goods surplus increased to RM26.6 billion (2Q 2018: RM26.1 billion), owing to higher E&E exports. The deficit in the services account narrowed to RM3.3 billion (2Q 2018: -RM6.2 billion). This was attributable mainly to a larger surplus in the travel account (RM8.0 billion; 2Q 2018: RM6.6 billion) due to higher tourist arrivals and lower construction services deficit (-RM1.3 billion; 2Q 2018: -RM3.2 billion) following the cancellation and deferment of selected major projects.

The primary income account recorded a larger deficit of RM15.0 billion (2Q 2018: -RM11.2 billion) as profits earned by foreign investors in Malaysia continued to outpace that of Malaysian firms investing abroad (RM16.3 billion; 2Q 2018: RM13.8 billion), particularly in the mining and manufacturing sectors. Of note, 26.4% of the profits earned by the foreign investors were reinvested (2Q 2018: 10.7%). The secondary income account recorded a sustained deficit of RM4.5 billion (2Q 2018:-RM4.7 billion), reflecting continued outward remittances by foreign workers.

16


THIRD QUARTER 2018

Financial account recorded a small net inflow

In the third quarter of 2018, the financial account registered a small net inflow of RM0.2 billion (2Q 2018: net inflow of RM9.2 billion). Net inflows in portfolio and direct investment were partially offset by net outflows in other investments.

The direct investment account registered a marginal net inflow of RM0.06 billion (2Q 2018: net outflow of RM0.7 billion). During the quarter, foreign direct investments (FDI) registered a larger net inflow of RM3.9 billion (2Q 2018: net inflow of RM2.8 billion). FDI inflows were mainly channeled into the manufacturing and mining sectors. Meanwhile direct investments abroad (DIA) by Malaysian companies recorded a higher outflow of RM3.9 billion (2Q 2018: net outflow of RM3.6 billion). DIA outflows were channeled mainly into the services sector, particularly the financial services sub-sector.

The portfolio investment account registered a net inflow of RM0.6 billion, a significant turnaround from a net outflow of RM38.3 billion in 2Q 2018. This reflected the net liquidation of residents’ portfolio investment holdings abroad (3Q 2018: net inflow of RM4.3 billion; 2Q 2018: net outflow of RM1.0 billion). Portfolio investment by non-residents recorded a smaller outflow of RM3.6 billion (2Q 2018: net outflow RM37.2 billion) following the net liquidation of non-resident holdings of ringgit-denominated domestic debt securities. This took place amid significant financial market volatility globally.

The other investment account recorded a net outflow of RM0.8 billion (2Q 2018: net inflow of RM48.4 billion). The banking sector’s reduction of their interbank placements abroad was offset by a net outflow from the non-bank private sector, particularly deposits. Net errors and omissions amounted to -RM7.4 billion, or -1.5% of total trade. The international reserves of Bank Negara Malaysia amounted to USD103.0 billion as at end-September 2018, compared to USD104.6 billion as at end-June 2018.

Marginal net inflows in the direct investment account Chart 17: Net Direct Investment Flows by Sector

Agriculture Mining Manufacturing Construction Financial services Non-financial services

Note: For DIA, positive values refer to net outflows while negative values refer to net inflows

Source: Department of Statistics Malaysia and Bank Negara Malaysia

Aliran masuk bersih yang sedikit dalam akaun pelaburan langsung Rajah 17: Aliran Pelaburan Langsung BersihMengikut Sektor

Pertanian PerlombonganPerkilangan PembinaanPerkhidmatan kewangan Perkhidmatan bukan kewangan

Nota: Bagi DIA, angka positif merujuk kepada aliran keluar bersih manakala angka negatif merujuk kepada aliran masuk bersih

Sumber: Jabatan Perangkaan Malaysia dan Bank Negara Malaysia

0.2 1.2 0.6

1.9

-0.6

2.8

0.2

0.8 0.5

-1

0

1

2

3

4

5

DIA FDI

RM billion RM3.9 bn RM3.9 bn

0.2 1.2 0.6

1.9

-0.6

2.8

0.2

0.8 0.5

-1

0

1

2

3

4

5

DIA FDI

RM bilion RM3.9 bn RM3.9 bn

Resident Non-Resident Net Portfolio Investment

Net inflow in portfolio investment accountattributable to residents Chart 18: Portfolio Investments

Source: Department of Statistics Malaysia and Bank Negara Malaysia

Pemastautin Bukan pemastautin Pelaburan portfolio bersih

Aliran masuk bersih dalam akaun pelaburan portfolio disebabkan oleh pelabur pemastautin Rajah 18: Pelaburan portfolio

Sumber: Jabatan Perangkaan Malaysia dan Bank Negara Malaysia

-38.3

0.6

-50

-40

-30

-20

-10

0

10

20

30

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2016 2017 2018

RM billion

-38.3

0.6

-50

-40

-30

-20

-10

0

10

20

30

S1 S2 S3 S4 S1 S2 S3 S4 S1 S2 S32016 2017 2018

RM bilion

17


THIRD QUARTER 2018

Manageable external debt

Malaysia’s external debt stood at RM947.9 billion or 66.2% of GDP as at end-September 2018 (end-June: RM936.5 billion or 65.4% of GDP). The higher external debt reflects largely the revaluation adjustment from the lower ringgit against major and regional currencies in the third quarter of 2018 and an increase in non-resident (NR) deposits in the domestic banking system. These were partly offset by some repayment of interbank borrowing.

Malaysia’s external debt remains manageable given its currency and maturity profiles, and the availability of large external assets. Close to one-third of external debt is denominated in ringgit (30.6%; end-June: 31.2%), mainly in the form of NR holdings of domestic debt securities (63.4% share) and in ringgit deposits (17.7% share) in domestic banking institutions. As such, these liabilities are not subjected to valuation changes from the fluctuations in the ringgit exchange rate.

The remaining external debt of RM657.9 billion or 69.4% of total external debt is denominated in foreign currency (FC), the bulk of which comprises offshore borrowings. As at end-September 2018, offshore borrowing declined to RM584.9 billion or 40.9% of GDP (end-June: RM586.5 billion or 41% of GDP), much lower compared to 60% of GDP during the Asian Financial Crisis in 1997-98. The corporate sector accounted for slightly more than half of FC-denominated external debt. Of which, about three-quarters were hedged, either naturally through FC-denominated revenue streams or financially-hedged with onshore banks.

Of the total FC-denominated external debt (inclusive of valuation effects), 38.1% (or amounting to RM250.4 billion) represents interbank borrowings and FC deposits in the domestic banking system. 76.2% of interbank borrowings are intra-group borrowings. The interbank borrowings largely reflect banks’ centralised liquidity and funding management practices. Notably, banks’ FC-denominated external debt remained stable during the quarter as reduced interbank borrowings was offset by increases in debt issuances abroad and non-resident deposits. Banks remained vigilant and proactive in managing their funding and liquidity risks. Foreign-currency risk, measured in net open position of FC denominated exposures stood at 5.3% of banks’ total capital. Of this, USD net open position was low at 3.4% of banks’ total capital.

Chart 19: Changes in External debtNet change1: +RM11.4 billion

Higher external debt in 3Q 2018

Hutang luar negeri lebih tinggi pada S3 2018

positive indicates net borrowing or issuance of debt securities

1 Changes in individual debt instruments exclude exchange rate valuation effects 2 Comprises trade credits, IMF allocation of SDRs and other debt liabilitiesNote: NR refers to non-residents

Source: Ministry of Finance, Malaysia and Bank Negara Malaysia

Rajah 19: Perubahan dalam Hutang Luar NegeriPerubahan bersih1: +RM11.4 bilion

1 Perubahan setiap instrumen hutang tidak termasuk kesan penilaian semula kadar pertukaran

2 Terdiri daripada kredit perdagangan, peruntukan SDR IMF dan liabiliti hutang lain

Sumber: Kementerian Kewangan Malaysia dan Bank Negara Malaysia

-16.3

-1.2

0.1 0.9 2.4 3.5 8.3

13.7

-30 -20 -10

0 10 20 30

Interbank borrowing NR holdings of domestic debt securities Intercompany loans Bond and notes Loans Others2

NR deposits Exchange rate valuation effects

RM billion

positif menunjukkan peminjaman atau terbitan sekuriti hutang bersih

-16.3

-1.2

0.1 0.9 2.4 3.5 8.3

13.7

-30 -20 -10

0 10 20 30 RM billion

Peminjaman antara bank Pemegangan sekuriti hutang domestik oleh bukan pemastautin Pinjaman antara syarikat Bon dan nota Pinjaman Lain-lain2

Deposit bukan pemastautin Kesan penilaian kadar pertukaran

Chart 20: Breakdown of Foreign Currency-denominatedExternal Debt (% share)

FC-denominated debt subjected to prudent liquiditymanagement practices and hedging requirements

Source: Ministry of Finance, Malaysia and Bank Negara Malaysia

*Includes trade credits and miscellaneous, such as insurance claims yet to be disbursed and interest payables on bonds and notes

NR deposits 6.6%

Others*10.3%

Loans13.9%

Intercompany loans

15.1%

Bonds and notes 22.7% Interbank borrowing

31.4%

Offshore Borrowings

Rajah 20: Butiran Hutang dalam DenominasiMata Wang Asing Luar Negeri (% keseluruhan)

Hutang dalam denominasi mata wang asing tertaklukkepada keperluan amalan pengurusan mudah tunai danperlindungan nilai yang berhemat

Lain-lain*10.3%

Pinjaman 13.9%

Pinjaman antara syarikat

15.1%

Bon dan nota22.7% Peminjaman

antara bank31.4%

PeminjamanLuar Pesisir

Depositbukan

pemaustatin 6.6%

*Termasuk kredit perdagangan dan pelbagai, seperti tuntutan insurans yang belum dikeluarkan and faedah kena dibayar untuk bon dan nota

Sumber: Kementerian Kewangan, Malaysia dan Bank Negara Malaysia

18


THIRD QUARTER 2018

Long-term bonds and notes issued offshore stood at RM149.3 billion as at end-September 2018, accounting for 22.7% of total FC-denominated external debt. These were mainly by non-financial corporations and channeled primarily to finance asset acquisitions abroad. Intercompany loans (RM99.0 billion or 15.1% of FC-denominated external debt) are typically on flexible and concessionary terms, such as no fixed repayment schedule or low interest rate. Close to 70% of intercompany loans were obtained by non-resident controlled companies (MNCs) from parents or affiliates abroad.

From a maturity perspective, more than half of the total external debt is skewed towards medium- to long-term tenure (54.0% of total external debt; end-June: 52.0%), suggesting limited rollover risks. Short-term external debt accounts for the remaining 46% of external debt. Of which, 36.1% is accounted by stable intragroup placements among banks, thus less susceptible to sudden withdrawal. About another 13% is accounted by trade credits, largely backed by export earnings and are self-liquidating. 4% are intercompany loans, which are typically on flexible and concessionary terms (For more granular breakdown of external debt, please refer to the Box Article on ‘Profile of Malaysia’s External Debt’).

As at 31 October 2018, international reserves stood at USD101.7 billion. The reserves position is sufficient to finance 7.5 months of retained imports and is 1.0 time the short-term external debt.

Reserves are not the only means for banks and corporations to meet their external obligations. The progressive liberalisation of foreign exchange administration rules has resulted in greater decentralisation of reserves. In particular, banks and corporations hold three-quarters of Malaysia’s external assets (as at end-3Q 2018: RM1.3 trillion). These external assets can be drawn upon to meet banks’ and corporations’ external debt obligations (RM752.4 billion), without creating a claim on international reserves. The adequate level of international reserves, together with the availability of substantial foreign currency and external assets by banks and corporations, and a flexible exchange rate, will continue to serve as important policy buffers against potential external shocks.

19


THIRD QUARTER 2018


1THIRD QUARTER 2018

• Malaysia’s total external debt has declined to 66.2% of GDP as at end-3Q 2018 from a peak of 74.3% of GDP as at end-2016. The bulk of the external debt is by corporations and banks.

• Foreign currency-denominated external debt stood at 46.0% of GDP as at end-3Q 2018, compared to the highest level of 60.0% of GDP during the 1997 Asian Financial Crisis. Of note, Government’s foreign-currency denominated external debt is very low (1.2% of GDP).

• While risks surrounding external fi nancing conditions have increased, risks to Malaysia’s external debt, including short-term external debt, remain manageable. This is anchored by a favourable external debt profi le and borrowers’ resilient repayment capacity.

• Refl ecting the progressive liberalisation of Malaysia’s foreign exchange administration rules and the decentralisation of international reserves, Malaysian entities have accumulated signifi cant external assets abroad.

- Of signifi cance, Malaysia’s non-reserve external assets have doubled from RM622 billion as at end-2010 to RM1.3 trillion as at end-3Q 2018. Domestic corporations and banks now hold about three-quarters of Malaysia’s RM1.7 trillion external assets.

- This accumulation has contributed to Malaysia having a net foreign currency asset position. This provides a defence against sharp exchange rate depreciation.

- Crucially, these assets can be drawn upon to meet borrowers’ external debt obligations without creating a claim on Bank Negara Malaysia’s international reserves.

HIGHLIGHTS

Profi le of Malaysia’s External DebtAuthor: Ahmad Faisal Rozimi, CFABox

Article

1Box Article

20


THIRD QUARTER 2018


2 THIRD QUARTER 2018

Medium and long-term

Short-term

74.3

65.0 66.2

55 57 59 61 63 65 67 69 71 73 75

0100200300400500600700800900

1,000

2014 2015 2016 2017 3Q 2018

74.3

65.0 66.2

55 57 59 61 63 65 67 69 71 73 75

0100200300400500600700800900

1,000

2014 2015 2016 2017 S3 2018

% of GDP (RHS)

Carta 1: Hutang Luar Negeri mengikut Kematangan (RM bilion)

Jangka sederhana dan panjang

Jangka pendek % daripada KDNK (RHS)

Hutang luar negeri menurun selepas mencatat paras tertinggi pada 74.3% daripada KDNK pada akhir tahun 2016. Lebih separuh daripada hutang luar negeri matang dalam tempoh jangka sederhana hingga panjang, mengehadkan risiko pelanjutan

Chart 1: External Debt by Maturity (RM billion)

External debt has declined after peaking at 74.3% of GDP at end-2016. More than half of external debt is skewed towards medium to long-term tenure, limiting rollover risk

Source: Bank Negara Malaysia Sumber: Bank Negara Malaysia

RM billion % of GDP RM bilion % daripada KDNK

Chart 2: External Debt by Institution (RM billion)

Banks

Bank Negara Malaysia

Public corporations

Private corporations

Federal Government

Carta 2: Hutang Luar Negeri mengikut Institusi (RM bilion)

External debt growth has slowed substantially since 2016 Pertumbuhan hutang luar negeri lebih perlahan

dengan ketara sejak tahun 2016

353

276

12 184

123

0 100 200 300 400 500 600 700 800 900

1,000

2014 2015 2016 2017 3Q 2018

Source: Bank Negara Malaysia

RM billionGrowth: 22.3% Growth: 3.7%

Institusi perbankan

Bank Negara Malaysia

Syarikat awam

Syarikat swasta

Kerajaan Persekutuan

353

276

12 184

123

0 100 200 300 400 500 600 700 800 900

1,000

2014 2015 2016 2017 S3 2018

Sumber: Bank Negara Malaysia

RM bilionPertumbuhan: 22.3% Pertumbuhan: 3.7%

Foreign currency-denominated external debt stood at 46% of GDP, of which about three quarters are subject to BNM’s prudential requirements and approval framework1


Chart 4: Breakdown of Foreign Currency-denominated External Debt (% share)

Interbank borrowings

31.4%

Bond and notes 22.7%

Loans13.9%

Intercompany loans 15.1%

Others*10.3%

NR deposits

6.6%

Banks:Subject to BNM's prudential requirements on liquidity and funding risk management43.3%

Corporations: Subject to BNM’s corporate external debt approval framework31.3%

1 Banks' exposure (43.3% share of foreign currency-denominated external debt) in the form of interbank borrowings, NR deposits and debt issuances are subject to prudential requirements on liquidity and funding risk management while corporations (31.3% share of foreign currency-denominated external debt) are subject to an approval framework to ascertain that external borrowings are utilised for productive purposes and that they are supported by foreign currency earnings or sufficiently hedged.

* Includes trade credits and miscellaneous, such as insurance claims yet to be disbursed and interest payables on bonds and notes.

Hutang luar negeri dalam denominasi mata wang asing berjumlah 46% daripada KDNK, di mana kira-kira tiga suku tertakluk kepada keperluan kehematan dan rangka kerja kelulusan BNM1


Rajah 4: Butiran Hutang dalam Denominasi Mata Wang Asing Luar Negeri (% bahagian)

Peminjaman antara bank

31.4%

Bon dan nota

22.7%

Pinjaman13.9%

Pinjaman antarasyarikat15.1%

Lain-lain*10.3%

Deposit bukan pemastautin

6.6%

Banks:Tertakluk kepada keperluan berhemat mengenai kecairan dan pengurusan risiko pendanaan BNM 43.3%

Syarikat: Tertakluk kepada rangka kerja kelulusanhutang korporat BNM31.3%

1

* Termasuk kredit perdagangan dan pelbagai, seperti tuntutan insurans yang belum dikeluarkan dan faedah belum bayar untuk bon dan nota.

Dedahan institusi perbankan daripada (43.3% hutang luar negeri dalam mata wang asing) adalah dalam bentuk peminjaman antara bank, deposit bukan pemastautin dan terbitan hutang adalah tertakluk kepada keperluan kehematan terhadap kecairan dan pengurusan risiko pendanaan sementara syarikat (31.3% daripada hutang luar negeri dalam denominasi mata wang asing) adalah tertakluk kepada rangka kerja kelulusan untuk memastikan bahawa pinjaman luar negeri digunakan untuk tujuan produktif dan disokong oleh pendapatan mata wang asing atau cukup dilindungi.

Note: NR refers to non-residents

About a third of external debt is denominated in ringgit, lowering the exposure to currency fluctuations


Chart 3: External Debt by Currency (% share)

CNY3.3% JPY

2.0%SGD2.0%

MYR30.6%

USD55.9%

Others6.2%

CNY3.3% JPY

2.0%SGD2.0%

MYR30.6%

USD55.9%

Lain-lain6.2%

Kira-kira satu pertiga daripada hutang luar negeri adalah dalam denominasi ringgit yang mengurangkan dedahan kepada turun naik nilai mata wang


Rajah 3: Hutang Luar Negeri Mengikut Mata Wang (% bahagian)

21


THIRD QUARTER 2018


3THIRD QUARTER 2018


1

Ciri-ciri Utama Hutang Luar Negeri


22.2%NR holdings of

domestic debt securities

19.4%

Bonds and notes

15.8%

Intercompany loans13.9%

Loans9.7%

NR deposits10.0%

Trade credits6.2% Others2.7%

Banks’ external debt and corporates’ foreign currency borrowings are subject to BNM’s prudential and external debt approval framework, respectively while intercompany loans are typically on flexible and concessionary terms

Chart 5: External Debt by Instruments

Peminjaman antara bank dan simpanan bukan permastautin (32% bahagian)

Tertakluk kepada pengurusan kecairan berhemat termasuk had pendanaan dan ketiadaan kematangan

2 Pinjaman antara syarikat(14% bahagian)Fleksibel dan pada kadar konsesi

3 Kredit perdagangan (6% bahagian)Disokong oleh pendapatan eksport yang berfungsi sebagai alat lindung nilai semula jadi terhadap kejutan kadar pertukaran

4 Bon dan nota dan pinjaman sederhana hingga panjang (22% bahagian)

Terutamanya untuk pelaburan di luar negara yang akan meningkatkan pendapatan mata wang asing masa hadapan yang meningkatkan kapasiti pembayaran balik dan lindung nilai terhadap turun naik kadar pertukaran


Peminjamanantara bank

22.2%

Pemegangan sekuriti hutang domestik bukan permastautin

19.4%

Bon dan nota

15.8%

Pinjamanantara

syarikat 13.9%

Pinjaman9.7%

Deposit bukan permastautin

10.0% Kreditperdagangan

6.2%

Lain-lain2.7%

Pinjaman luar negeri dan hutang luar negeri bank-bank adalah tertakluk kepada rangka kerja hutang berhemat dan eksternal BNM, manakala pinjaman antara syarikat biasanya pada terma-terma fleksibel dan konsesi

Rajah 5: Hutang Luar Negeri mengikut Instrumen

1

Key Characteristics of External Debt

Interbank borrowings and NR deposits (32% share)

Subject to prudent liquidity management includinglimits on funding and maturity mismatches

2 Intercompany loans (14% share)Flexible and on concessionary terms

3 Trade credits (6% share)Backed by export earnings which serve as a natural hedging tool against exchange rate shocks

4 Bonds and notes and medium to long term loans(22% share)

Mainly for investment abroad that will raise future foreign-currency income which enhances repayment capacity and hedges against exchange rate fluctuations


Chart 6: Short-term External Debt by Institution (% share)


Rajah 6: Hutang Luar Negeri Mengikut Institusi(% bahagian)

Banks71.0%

Private corporations

26.8%

Bank NegaraMalaysia

0.9%

Bank NegaraMalaysia

0.9%

Federal Government

1.1%

Public corporations

0.2%

Institusiperbankan

71.0%

Syarikatswasta26.8%

Kerajaan Persekutuan

1.1%

Syarikat awam 0.2%


Chart 7: Short-term External Debt by Instrument (% share)

Rajah 7: Hutang Luar Negeri Mengikut Instrumen(% keseluruhan)

Interbank borrowings (intragroup)

36.1%

NR deposits 21.8%

Trade credits 12.5%

Intercompanyloans 4.4%

Loans7.6%

Others 5.4%


(non intragroup) 12.2%


Peminjamanantara bank (intragroup)

36.1%

Deposit bukan

permastautin 21.8%

Kredit perdagangan

12.5%

Pinjamanantara syarikat

4.4% Pinjaman7.6%

Lain-lain5.4%

Pinjaman antara bank

(bukan intragroup) 12.2%

About70%ofshort-termexternaldebtisheldbybankinginstitutions,reflectingprimarilysizeablepresenceofforeignbanksinthedomesticeconomyandstrongregionalfootprintofMalaysianbanks

22


THIRD QUARTER 2018



Banking institutions hold substantial external assets, including liquid instruments which can be drawn upon to meet their external debt obligations


Chart 8: Banks’ External Assets (% share)

2 Consist of equity investments and retained earnings held in subsidiaries and branches abroad. This is attributable to domestic banking groups which have a strong regional presence.

Deposits and interbank placements

25.3%

Bonds and notes10.1%

Money market instruments

4.6%

Loans41.4%

Capital funds2 13.4%

Derivatives3.3%

Equity securities

0.7%

Others 1.2%

Liquid assets of banks

40.0%

Banks’ External Assets: RM276 billion

Institusi perbankan memegang aset luar negeri yang besar, termasuk instrumen mudah tunai yang boleh digunakan untuk memenuhi tuntutan hutang luar negeri mereka


Rajah 8: Aset Luar Negeri Institusi Perbankan (% bahagian)

2 Terdiri daripada pelaburan ekuiti dan pendapatan terkumpul yang dipegang dalam anak-anak syarikat dan cawangan di luar negara. Ini berpunca daripada kumpulan perbankan domestik yang mempunyai operasi serantau yang kukuh.

Deposit dan penempatan

antara bank 25.3%

Bon dan nota 10.1%

Instrumenpasaran wang

4.6%

Pinjaman41.4%

Danamodal213.4%

Derivatif3.3%

Sekuritiekuiti0.7%

Lain-lain 1.2%

Aset mudah tunaiinstitusi perbankan

40.0%

Aset Luar Negeri Institusi Perbankan: RM276 bilion

8.5

6.7 6.1

5.7 4.7

6.1 6.3 6.1 5.3

Chart 9: Banks’ Net Foreign Currency Open Position3 (% of banks' capital)

Banks’ net foreign currency open position remains small relative to banks’ total capital

3 Refers to the aggregated sum of the net short or long foreign currency positions accross all currencies for banks

3 Merujuk kepada jumlah terkumpul kedudukan bersih mata wang asing untuk semua mata wang oleh institusi perbankan


0

2

4

6

8

10 % of banks’ capital % daripada jumlah modal bank

2010

2011

2012

2013

2014

2015

2016

2017

3Q 2

018

8.5

6.7 6.1

5.7 4.7

6.1 6.3 6.1 5.3

Rajah 9: Kedudukan Terbuka Bersih Mata Wang Asing Institusi Perbankan3 (% modal bank)

Kedudukan terbuka bersih mata wang asing institusi perbankan kekal kecil berbanding jumlah modal

0

2

4

6

8

10

2010

2011

2012

2013

2014

2015

2016

2017

S3 2

018


Chart 10: External Assets (RM billion)

Malaysia’s non-reserve external assets doubled from RM622 billion as at end-2010 to RM1.3 trillion as at end-3Q 2018

Source: Bank Negara Malaysia and Department of Statistics Malaysia

329 427

622

1,272

0 200 400 600 800

1,000 1,200 1,400 1,600 1,800 2,000 RM billion RM bilion

2010 2011 2012 2013 2014 2015 2016 2017 3Q 2018

951

1,699

Banks' and corporations' external assets

BNM's international reserves

Rajah 10: Aset Luar Negeri (RM bilion)

Aset luar negeri bukan rizab Malaysia meningkat dua kali ganda daripada RM622 bilion pada akhir tahun 2010 kepada RM1.3 trilion pada akhir S3 2018

Sumber: Bank Negara Malaysia and Department of Statistics Malaysia

329 427

622

1,264

0 200 400 600 800

1,000 1,200 1,400 1,600 1,800 2,000

2010 2011 2012 2013 2014 2015 2016 2017 S3 2018

951

1,690

Aset luar negeri bank dan korporat

Rizab antarabangsa BNM

Chart 11: Share of External Assets excluding Reserves to Total External Assets (% share)

Three quarters of Malaysia’s RM1.7 trillion external assets are accounted for by domestic corporations and banks

4 External asset position as at end-3Q 2018 for Malaysia and as at end-2Q 2018 for other countries.

Source: Bank Negara Malaysia and Haver Analytics

75 73 64

56 54

0

10

20

30

40

50

60

70

80

Malaysia Korea Indonesia Thailand Philippines

Rajah 11: Bahagian Aset Luar Negeri tidak termasuk Rizab kepada Jumlah Aset Luar Negeri (% bahagian)

Tiga perempat daripada aset luar negeri Malaysia bernilai RM1.7 trilion dipegang oleh syarikat dan institusi perbankan domestik

4 Kedudukan aset luar negeri pada akhir S3 2018 untuk Malaysia dan pada akhir S2 2018 untuk negara-negara lain.


75 73 64

56 54

0 10 20 30 40 50 60 70 80

Malaysia Korea Indonesia Thailand Filipina

% of total external assets4 % daripada jumlah aset luar negeri4

23


THIRD QUARTER 2018


5THIRD QUARTER 2018

Malaysia’s foreign currency external assets far exceed its foreign currency external liabilities, thus mitigating the impact of ringgit depreciation i.e. bigger increase in external assets than external liabilities when ringgit depreciates

Source: Bank Negara Malaysia and Department of Statistics Malaysia

Chart 12: International Investment Position (IIP) by Currency as at end-3Q 2018 (RM bil)

97

1,0476

1,6025

764

External assets External liabilities

Ringgit Foreign currencies

Aset luaran mata wang asing Malaysia jauh melebihi liabiliti luaran mata wang asing, dengan itu mengurangkan impak susut nilai ringgit iaitu peningkatan dalam aset luar berbanding dengan liabiliti luar apabila ringgit menyusut nilai

Rajah 12: Kedudukan Pelaburan Antarabangsa mengikut Mata Wang pada akhir S3 2018 (RM bil)

96

1,0476

1,5945

764

External assets External liabilities

5 Includes mainly direct and portfolio investments abroad.6 Comprises non-resident holdings of domestic debt securities and placement of deposits in the domestic banking system, as well as holdings of equity securities in the form of foreign direct and portfolio investments.


Ringgit Foreign currencies

5 Termasuk terutamanya pelaburan langsung dan portfolio di luar negeri. 6 Merangkumi pegangan bukan sekuriti hutang domestik dan penempatan deposit dalam sistem perbankan domestik, serta pemegangan sekuriti ekuiti dalam bentuk pelaburan langsung dan portfolio asing.

Table 1: Malaysia’s Net Foreign Currency External Debt Position (excluding international reserves)

Excluding international reserves, Malaysia has a small net foreign currency external debt liability position7. This further underscores that servicing the external debt obligations will not create a claim on the international reserves

7 The difference between Malaysia’s foreign currency-denominated external debt liabilities (liability side, i.e. borrowings by Malaysian residents from non-residents) and foreign currency-denominated external debt assets (asset side, i.e. lending from Malaysian residents to non-residents).


Jadual 1: Kedudukan Hutang Luar Negari Mata Wang Asing Bersih Malaysia

Tidak termasuk rizab antarabangsa, Malaysia mempunyai kedudukan liabiliti hutang luar negeri mata wang asing bersih7 yang kecil. Ini seterusnya menggariskan bahawa khidmat bayaran hutang luar negeri tidak akan menimbulkan tuntutan ke atas rizab antarabangsa

7 Termasuk terutamanya pelaburan langsung dan portfolio di luar negeri.


Hutang Luar Negara Mata Wang asing

Asset Liabiliti Bersih

(RM bilion)

Deposit 74.4 43.5 30.9

Bon dan nota 91.3 149.3 -58.0

Peminjaman antara bank 62.5 206.9 -144.4

Pinjaman antara syarikat 214.5 99.0 117.2

Kredit perdagangan 77.9 53.8 24.1

Pinjaman 107.1 91.5 14.1

Pemegangan sekuriti hutang domestik bukan pemastautin

0 0 0

Lain-lain 13.5 13.7 -0.2

Jumlah 641.4 657.9 -16.5

% daripada KDNK 44.8 46.0 -1.2

Foreign-Currency External Debt

Assets Liabilities Net

(RM billion)

Deposit placements 74.4 43.5 30.9

Bond and notes 91.3 149.3 -58.0

Interbank lending/borrowings 62.5 206.9 -144.4

Intercompany loans 214.5 99.0 115.5

Trade credits 77.9 53.8 24.1

Loans 107.1 91.5 15.6

NR holdings of domestic debt securities

0.0 0.0 0.0

Others 13.6 13.7 -0.1

Total 641.4 657.9 -16.5

% of GDP 44.8 46.0 -1.2

24


THIRD QUARTER 2018

25THIRD QUARTER 2018

• The ringgit depreciated along with most regional currencies amid non-resident portfolio outflows and continued strength in the US dollar.

HIGHLIGHTS

Monetary and Financial Developments

The ringgit depreciated against the US dollar in the third quarter

In line with most regional currencies, the ringgit depreciated against the US dollar in the third quarter of 2018 as external uncertainties continue to drive non-resident portfolio outflows amid a strengthening US dollar. The continued strength in the US dollar was supported by positive US economic data and outlook. Investor sentiments were also negatively affected by rising trade tensions and concerns over contagion risk from vulnerable emerging market economies. Going forward, the ringgit will continue to be influenced by external uncertainties as well as the trajectory of the US dollar.

-5.4

-3.8

-3.5

-2.5

-1.3

-0.2

0.1

0.8

2.5

-8 -6 -4 -2 0 2 4

INR

CNY

IDR

MYR

PHP

SGD

TWD

KRW

THB

% change Source: Bank Negara Malaysia

Chart 21: Summary of Performance of Regional Currencies Against the US Dollar (1 July - 28 September 2018)

Most regional currencies depreciated against the US dollar

-5.4

-3.8

-3.5

-2.5

-1.3

-0.2

0.1

0.8

2.5

-8 -6 -4 -2 0 2 4

INR

CNY

IDR

MYR

PHP

SGD

TWD

KRW

THB

% perubahanSumber: Bank Negara Malaysia

Rajah 21: Ringkasan Prestasi Mata Wang Serantau Berbanding dengan Dolar AS (1 Julai - 28 September 2018)

Kebanyakan mata wang serantau menyusut nilai berbanding dengan dolar AS

26


THIRD QUARTER 2018

Government bond yields trended lower due to continued demand by domestic institutional investors

Domestic bond yields declined across tenures during the third quarter largely due to sustained demand by domestic institutional investors. This was mainly driven by expectations of supportive economic conditions and greater policy clarity by the Government. In September, however, the trend temporarily reversed, as heightened risk aversion in global financial markets led to further non-resident outflows from regional bond markets, including Malaysia. Total non-resident outflows from the domestic Government bond market during the quarter amounted to RM2.4 billion3. Overall, the 3-year, 5-year and 10-year MGS yields declined by 3.1, 8.6 and 12.9 basis points, respectively during the quarter.

FBM KLCI increased in the third quarter driven by positive domestic sentiments

The FBM KLCI recovered strongly in the third quarter, increasing by 6.0% to close at 1,793.2 points as at end-September (end-June 2018: 1,691.5 points). The improved performance during the period was mainly due to active buying from domestic institutional investors, driven by improved clarity on the status of major infrastructure projects, higher crude oil prices and positive earnings results in selected large-cap companies. Externally, however, investor sentiments continued to be affected by lingering downside risks, resulting in non-resident outflows of RM1.7 billion during the period4.

Mar '18

Jun '18

3 year:-3.1 bps

10 year:-12.9 bps

Sep '18

3.0

3.2

3.4

3.6

3.8

4.0

4.2

1 2 3 4 5 6 7 8 9 10 Years to maturity

%

MGS yield curve shifted downwards during the third quarter

Chart 22: Trend in MGS Yields


5 year:-8.6 bps

Mac '18

Jun '18

3 tahun: -3.1mata asas

10 tahun: -12.9 mata asas

Sep '18

3.0

3.2

3.4

3.6

3.8

4.0

4.2

1 2 3 4 5 6 7 8 9 10 Tahun hingga matang

%

Keluk kadar hasil Sekuriti Kerajaan Malaysia menurun pada suku ketiga

Rajah 22: Trend Kadar Hasil Sekuriti Kerajaan Malaysia


5 tahun: -8.6mata asas

-0.9

-0.4

0.7

1.2

3.1

6.0

10.1

-10.1

-4.6

-4.9

-9.9

-6.3

-9.2

-10.2

-15 -10 -5 0 5 10 15

PR China

Singapore

Korea

Philippines

Indonesia

Malaysia

Thailand

% qoq

Chart 23: Performance of Regional Equity Markets

2Q 2018 3Q 2018

Source: Bloomberg

Domestic equity market improved during the third quarter

-0.9

-0.4

0.7

1.2

3.1

6.0

10.1

-10.1

-4.6

-4.9

-9.9

-6.3

-9.2

-10.2

-15 -10 -5 0 5 10 15

RR China

Singapura

Korea

Filipina

Indonesia

Malaysia

Thailand

% sttb

Rajah 23: Prestasi Pasaran Ekuiti Serantau

S2 2018 S3 2018

Sumber: Bloomberg

Pasaran ekuiti domestik meningkat pada suku ketiga

3 Source: Bank Negara Malaysia4 Source: Bursa Malaysia

27


THIRD QUARTER 2018

Higher real interest rates during the quarter amid lower inflation

Nominal interest rates in the wholesale and retail markets were stable throughout the third quarter. With the 3-month KLIBOR unchanged at 3.69%, interbank rates across other maturities were also broadly stable. In the retail market, both the weighted average base rate (BR) and the weighted average lending rate (ALR) on outstanding loans were stable at 3.90% (2Q 2018: 3.89%) and 5.41% (2Q 2018: 5.43%), respectively.

Against moderating inflation, real fixed deposit (FD) rates continued to increase in the third quarter. In particular, the real 12-month FD rate increased to 3.03% from 2.53% in the second quarter.

Liquidity conditions remained sufficient to facilitate financial intermediation

Liquidity conditions In the banking system remained sufficient at both the institutional and system-wide levels. The level of surplus liquidity placed with the Bank remained relatively stable during the quarter, reflecting the moderation of net outflows. At the institutional level, most banks continued to maintain surplus liquidity positions.

Chart 24: Real Fixed Deposit Rates (by Maturity), as at End-period

Real deposit rates increased, reflecting lower inflation

-3

-2

-1

0

1

2

3

4

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

2016 2017 2018

3M Fixed Deposit (FD) 12M Fixed Deposit (FD)

%


Rajah 24: Kadar Deposit Tetap Benar (mengikut Kematangan), pada Akhir Tempoh

Kadar deposit benar meningkat, mencerminkaninflasi yang lebih rendah

-3

-2

-1

0

1

2

3

4

S1 S2 S3 S4 S1 S2 S3 S4 S1 S2 S3

2016 2017 2018

Deposit Tetap (FD) 3 Bulan Deposit Tetap (FD) 12 Bulan

%


60

100

140

180

220

S4 1

6

S1 1

7

S2 1

7

S3 1

7

S4 1

7

S1 1

8

S2 1

8

S3 1

8

Lain-lainSRR RepoSekuriti Hutang BNMPeminjaman Pasaran Wang (tidak termasuk repo)

RM bilion


Rajah 25: Mudah Tunai Ringgit Terkumpul diBank Negara Malaysia, pada Akhir Tempoh

Lebihan mudah tunai ringgit terkumpul di Bankkekal stabil

60

100

140

180

220

4Q 1

6

1Q 1

7

2Q 1

7

3Q 1

7

4Q 1

7

1Q 1

8

2Q 1

8

3Q 1

8

Others SRR Repos BNM Debt Securities Money Market Borrowings (excluding repos)

RM billion


Chart 25: Outstanding Ringgit Liquidity Placed with Bank Negara Malaysia, as at End-period

Outstanding surplus ringgit liquidity placedwith the Bank remained stable

28


THIRD QUARTER 2018

Net financing increased during the quarter

The annual growth of net financing increased to 6.5% in the third quarter (2Q 2018: 6.3%), mainly reflecting the higher growth in outstanding loans5 of 5.1% during the quarter (2Q 2018: 4.4%). Net outstanding issuances of corporate bonds6 continued to expand at a double-digit rate of 10.8% (2Q 2018: 12.4%) despite some moderation due to the high base for the same period in previous year. During the quarter, corporate bonds were mainly issued to finance capital expenditure and operating expenses. Total outstanding business loans increased by 3.6% (2Q 2018: 2.2%), driven mainly by the construction; wholesale and retail trade, restaurants and hotels; and manufacturing sectors. Despite the lower outstanding loan growth for SMEs of 2.4% (2Q 2018: 4.6%), the amount of loans disbursed to SMEs was higher during the quarter (RM77.2 billion; 2Q 2018: RM73.4 billion). The growth of outstanding household loans increased to 5.5% during the period (2Q 2018: 5.3%), driven partly by higher growth of loans for the purchase of passenger cars, amid stronger car sales following the zerorisation of the GST rate.

5 Loans extended by both banking system and development financial institutions (DFIs).

6 Corporate bonds exclude issuances by Cagamas and non-residents.

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2016 2017 2018

Banking System and DFI Loans Corporate Bonds* Total Net Financing

Annual growth (%), ppt

Net financing growth driven by growth of loansand corporate bonds

Chart 26: Contribution to Net Financing Growth


Note: Net financing comprises outstanding banking system and DFI loans, and outstanding corporate bonds *Excludes issuances by Cagamas and non-residents

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

S1 S2 S3 S4 S1 S2 S3 S4 S1 S2 S32016 2017 2018

Pinjaman Sistem Perbankan dan IKPBon Korporat*Jumlah Pembiayaan Bersih

Pertumbuhan tahunan (%), mata peratusan

Pertumbuhan pembiayaan bersih didorong olehpertumbuhan pinjaman dan bon korporat

Rajah 26: Sumbangan kepada Pertumbuhan Pembiayaan Bersih


Nota: Pembiayaan bersih terdiri daripada pinjaman sistem perbankan dan IKP terkumpul, dan bon korporat terkumpul *Tidak termasuk terbitan oleh Cagamas dan bukan pemastautin


The OPR remained accommodative

The Monetary Policy Committee (MPC) kept the Overnight Policy Rate (OPR) unchanged at 3.25% at the July, September and November 2018 meetings. At this level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity.

The Malaysian economy is expected to remain on a steady growth path, with private consumption the main driver of growth, investment activity sustained and exports providing an additional lift to growth, albeit to a lesser extent. Underlying economic factors are providing continued support to domestic economic growth, including low unemployment and a surplus in the current account of the balance of payments.

Headline inflation is expected to increase going forward, primarily due to higher projected global oil prices and the prospective floating of fuel prices. Underlying inflation, which excludes the impact of consumption tax policy changes, is expected to remain contained in the absence of strong demand pressures.

Risks to the global growth outlook remain tilted to the downside, which could cause headwinds to the domestic economy. These include any further escalation in trade tensions; and spillover effects to emerging economies in an environment of greater volatility in the international financial markets and

• The MPC maintained the Overnight Policy Rate at 3.25% in July, September and November, assessing that the current monetary policy stance remains supportive of economic activity.

HIGHLIGHTS

The Bank’sPolicy Considerations

a faster pace of monetary policy normalisation in the advanced economies. Domestically, risks remain from prolonged weakness in the mining and agriculture sectors.

In line with regional economies, the domestic financial markets continue to experience non-resident portfolio outflows due to global developments. Nevertheless, the financial markets remain orderly with domestic monetary and financial conditions supportive of economic growth. Exchange rate flexibility plays an important role as a shock absorber for the domestic economy. The financial sector is sound, with financial institutions operating with strong capital and liquidity buffers. Monetary operations will continue to ensure sufficient liquidity to support the orderly functioning of money and foreign exchange markets and intermediation activity.

Other policy highlights in the third quarter of 2018

Given advancements in technology, coupled with the pace of product innovation by financial institutions, the Bank has issued an exposure draft on Risk Management in Technology. The exposure draft provides a foundation for the development of an effective technology risk management programme, necessary for assessing and mitigating risks identified within technology systems. It is aimed at enabling financial institutions to better manage technology risks and enhance technology resiliency.

30


THIRD QUARTER 2018

The Bank further refined the proposals on Outsourcing taking into consideration feedback received during the first round of consultation in 2017. Given material changes in the requirements, the Bank had issued a second exposure draft on Outsourcing in September 2018 for a one-month consultation period. The feedback received is currently being assessed, the outcomes of which will be incorporated in the final document, which is expected to be issued by end-2018.

The Bank has issued 3 consultative documents to facilitate the practical adoption of Value-based Intermediation (VBI). The Implementation Guide for VBI provides examples of banking practices that illustrate the underpinning thrusts of VBI and highlights key implementation challenges together with potential solutions. The VBI Financing and Investment Impact Assessment Framework (VBIAF)7 aims to facilitate the implementation of

an impact-based risk management system for assessing financing and investment activities of Islamic banking institutions in line with their respective VBI commitment. Meanwhile, the VBI Scorecard8 covers key assessment components and the proposed measurement methodology for assessing the performance of Islamic banking institutions advancing the VBI agenda.

The Bank has extended the observation period for the Net Stable Funding Ratio (NSFR) reporting by one year to 31 December 2019. During the extended observation period, the Bank will conduct further assessments to validate the maturity and robustness of liquidity and funding practices of banks. At present, all banks maintain adequate liquidity buffers against short-term liquidity stress, with most banks already reporting NSFR levels above the minimum 100% based on observation data.

7 The paper is jointly developed with the World Bank and INCEIF.8 The paper is jointly developed with the Global Alliance for Banking on Values.


• Global economy to grow at a more moderate pace in the fourth quarter of 2018. In 2019, global growth is expected to remain sustained.

• The Malaysian economy will continue to remain on a steady growth path in 2018.• Headline inflation is expected to increase going forward primarily due to higher

projected global oil prices and the prospective floating of fuel prices.

HIGHLIGHTS

Macroeconomic Outlook

Moderating global growth momentum in the fourth quarter of 2018, with sustained performance in 2019

The global growth momentum is projected to moderate in the fourth quarter of the year amidst intensifying trade tensions and tightening financial conditions among several emerging market economies. Going forward, the global economy is expected to expand at a sustained pace in 2019.

The global expansion will remain supported mainly by the advanced economies, particularly the US. Growth in selected emerging market economies (EMEs) will be weighed by slower trade activity amid steady domestic demand. Country-specific vulnerabilities and tighter domestic financial conditions will also weigh on growth prospects of several EMEs.

In advanced economies, strong labour conditions will support private consumption. In the US, the effects from expansionary fiscal policies that were introduced in 2017 and 2018 will continue to support robust business spending for the rest of the year, but is expected to wane in 2019. Meanwhile, investment activity in the euro area is expected to moderate, amid a normalisation in construction-related investments.

Global AdvancedEconomies

EmergingMarket Economies

2016 2017 2018f

3.7

2.3

4.7

3.7 3.7

2.4 2.1

4.7 4.7

0

1

2

3

4

5 Annual change (%)

3.7

2.3

4.7

3.7 3.7

2.4 2.1

4.7 4.7

0

1

2

3

4

5 Pertumbuhan tahunan (%)

Sustained global growth in 2019

Chart 27: GDP Growth

Source: IMF World Economic Outlook (October 2018)

2019f

2019r

Global EkonomiMaju

EkonomiPesat Membangun

2016 2017 2018r

Pertumbuhan global dijangka terus berkembang pada tahun 2019

Rajah 27: Pertumbuhan KDNK

Sumber: Prospek Ekonomi Dunia Tabung Kewangan Antarabangsa (IMF) (Oktober 2018)

32


THIRD QUARTER 2018

Growth in the Asian region is expected to moderate further. Of significance, growth in PR China is expected to be slower, reflecting ongoing structural reforms in the country. The continued normalisation of the global trade cycle as well as higher tariffs on its exports to the US will weigh on China’s exports. In some Asian economies, expansionary fiscal measures are anticipated to stimulate higher infrastructure spending and employment.

Going forward, downside risks to global growth remain elevated. Further escalation of trade tensions will likely be detrimental to global growth and trade. Latest developments suggest that trade tensions are likely to persist in the coming quarters, following the announcement by the US administration of a further tariff hike to 25% from 10% on USD200bn of imports from PR China effective from January 2019. A further increase in tariff on USD267bn of products from PR China has also been proposed, if PR China retaliates.

Downside risks also arise from the ongoing monetary policy normalisation among the advanced economies, particularly the US. Amid rising inflationary pressures, a faster-than-expected pace of interest rate increase could accelerate capital outflows from emerging economies, posing further risk to the global outlook. Given the heightened downside risks, the international financial markets are expected to continue experiencing bouts of volatility going forward.

33


THIRD QUARTER 2018

The Malaysian economy to remain on a steady growth path in 2018

Despite the heightened global trade tensions and tighter financial conditions, Malaysia’s economy continued to register a sustained growth in the third quarter.

For the remainder of the year, growth is expected to improve and benefit from the gradual recovery in commodity production. On the external front, higher commodity production would provide support to improvements in commodity exports. However, domestic demand is projected to expand at a more moderate pace, attributed to slower private sector spending. Going into 2019, growth prospects for the Malaysian economy are expected to remain driven by private sector activity amid the continued rationalisation of public sector expenditure, particularly public investment by public corporations. Exports are likely to moderate but would be supported by demand from major trade partners and the gradual recovery in commodities exports.

Risks to growth remain tilted to the downside. These stem mainly from a more persistent-than-expected supply disruption in the commodity sector and a potential escalation of trade tensions between the US and PR China.

While headline inflation is expected to be low in 2018, it is projected to increase going forward primarily due to higher projected global oil prices and the prospective floating of fuel prices

The annual average headline inflation is expected to be low in 2018, mainly reflecting the impact from the GST zerorisation and the stable domestic fuel prices. Going forward, headline inflation is expected to increase mainly due to higher projected global oil prices and the floating of fuel prices in 2Q 2019. While the impact of the consumption tax policy will contribute to higher headline inflation in 2019, it will lapse towards the end of 2019.

Underlying inflation, which excludes the impact of consumption tax policy changes, is expected to remain contained in the absence of strong demand pressures.

132.9 116.3

107.5 108.8

0

20

40

60

80

100

120

140

Consumer Sentiments Index Business Conditions Index

4Q 2017 1Q 2018 2Q 2018 3Q 2018

Points

Continued expansion in sentiment indicators in 3Q 2018

Chart 28: MIER Consumer Sentiments and BusinessConditions Index

Optimism threshold = 100 points

Source: Malaysian Institute of Economic Research (MIER)

132.9 116.3

107.5 108.8

0

20

40

60

80

100

120

140

Indeks Sentimen Pengguna Indeks Keadaan Perniagaan

S4 2017 S1 2018 S2 2018 S3 2018

Mata

Penunjuk sentimen terus meningkat pada S3 2018

Rajah 28: Indeks Sentimen Pengguna dan KeadaanPerniagaan MIER

Had keyakinan = 100 mata

Sumber: Institut Penyelidikan Ekonomi Malaysia (MIER)

34


THIRD QUARTER 2018

35


THIRD QUARTER 2018


1THIRD QUARTER 2018

• The recent implementation of higher tariff s by the US on an additional USD200 bn of imports from PR China has raised concerns about how escalating trade tensions will aff ect global growth and trade.

• These trade actions pose risks to growth, but might provide redirection opportunities to Malaysia, most notably, in the manufacturing sector.

• Malaysia must continue to take a pragmatic stance on open trade policies by widening its trade relationships and ensuring that domestic policies continue to support economic growth.

HIGHLIGHTS

Escalating Trade Tensions and Potential Spillovers to MalaysiaAuthors: Muhamad Aizuddin, Lim Boon Seong, Daryl Yong, Chang Wen Huei, Rantai ak Naga, Ooi Kiesha, Catharine Kho

Box Article

2

Trade tensions between the US and PR China, which began in the fi rst quarter of 2018 have escalated, with the US implementating higher tariff s on USD200 bn of imports from PR China on September 2018. The US’ intention to undertake further trade actions on PR China and other major economies, and its spillover eff ects to the rest of the world must be carefully considered, especially amid the ongoing moderation in global growth prospects. This box article provides an updated assessment of the potential eff ects of escalating trade actions on the global economy and Malaysia (refer to BNM Quarterly Bulletin 1Q 2018 Box Article on ‘Trade Disputes: Implications for Trade and Investments’).

Previous Trade Actions

Trade actions by the US began in early 2018, when the US imposed blanket tariff s of 30%, 25% and 10% on solar panel, steel and aluminium imports, respectively. Since then, the products and countries aff ected have broadened, and the quantum of goods subject to higher US tariff s have increased. In June, the US allowed exemptions on steel and aluminium tariff s that were previously granted to its major allies, including Canada, Mexico and the EU, to lapse. This resulted in retaliation by the aff ected countries, who raised their tariff s on US imports. In July, the US implemented its Section 301 tariff s mainly on tech-related imports from PR China worth USD50 bn.

Latest Development

Most recently, on 24 September 2018, the US implemented higher tariff s on more than 5,700 products from PR China worth USD200 bn. The aff ected items are subject to 10% higher tariff s, which would be further raised to 25% on 1 January 2019. The US also indicated it was considering imposing tariff s on an additional USD267 billion of imports if PR China retaliates. PR China retaliatied by raising tariff s on USD60 bn imports from the US by 5-10%. The tariff s by PR China are expected to be increased to 5-25% in 2019.

In May 2018, the US also announced a proposal to raise tariff s on all automobile imports. This proposal was strongly opposed by the US’ major trading partners, particularly the EU. Despite subsequent dialogue between the US and EU to put these tariff increases on hold, trade tensions have the potential to reignite unpredictably until a formal trade pact is established. A consolidated list of past and potential trade actions is summarised in Table 1.

Box Article

36


THIRD QUARTER 2018



Impact on the Global Economy

The impact of these trade actions on global GDP and trade is analysed through trade and investment channels (refer to BNM Quarterly Bulletin 1Q 2018 Box Article on ‘Trade Disputes: Implications for Trade and Investments’ for details of the methodology).

The trade actions that have already been implemented (Stages 1, 2 and 3 in Table 1) are estimated to lead to a reduction in annual global growth of 0.3 ppt1 (Figure 1). The largest portion of the impact is expected to manifest in 2019 given the timeline of the tariff implementation. This reduction is due mainly to the recent implementation of tariff s on USD200 bn worth of goods by the US, and PR China’s subsequent retaliation.

Table 1: Details of Trade Actions

Trade Actions US PR China Other Major Economies

Currently ImplementedStage 1Jan. – Mar. 2018

Blanket tariffs • Solar panels (+30%)• Steel (+25%)• Aluminium (+10%)

Retaliation (Canada, Mexico and the EU)1

• +10 to 25% on USD3-13 bn worth of US imports

Stage 2Mar. – Jul. 2018

Targeted tariffs• +25% on USD50 bn

worth of PR China imports

Retaliation• 25% on USD50 bn

worth of US imports

Stage 3Jul. – Sep. 2018



Retaliation• +5 to 10% on USD60

bn worth of US imports

Expected to be ImplementedStage 3 Jan. 2019



Retaliation2

• +5 to 25% on USD60bn worth of US imports

Potential EscalationAll remaining bilateral trade between the US and PR China

Targeted tariffs• Remaining PR

China imports worth USD267bn

Retaliation• Remaining US imports

worth USD150bn

Blanket tariff on automobiles and parts

Blanket tariffs• Automobiles and parts

Retaliation (rest of the world)• Automobile and parts

imports from the US

1 Implementation of retaliatory tariffs when the US’ steel and aluminium tariff exemptions to allies lapsed on June 20182 Based on announcement on August 2018

Source: US Trade Representative Offi ce, PR China Ministry of Commerce, Newsfl ow, BNM estimates

1 The impact to global growth in 2018 and 2019 are -0.02 ppt and -0.26 ppt, respectively.

37


THIRD QUARTER 2018


3THIRD QUARTER 2018

Given potential for further escalation in trade tensions following recent announcements of more tariff s by the US, the impact of two downside risk scenarios to global growth and trade is estimated:1) +25% higher tariff s by the US on remaining imports from PR China worth USD267 bn, and retaliation

by PR China2; and2) Blanket tariff s on automobiles and parts by the US, and subsequent retaliation by the aff ected countries

The downside risks to global growth and trade will be more severe if trade tensions intensify further. In the scenario of an escalation of tariff s that encompass all remaining trade between the US and PR China, global growth and trade is estimated to be lower by an additional 0.2 ppt and 0.3 ppt annually (Figure 1). If this is compounded by a blanket tariff on all automobile imports by the US, global growth and trade is projected to be lower by a total of 0.8 ppt and 1.1 ppt, respectively. This would rank as one of the major shocks to the global economy in the past two decades (Figure 2).

2 As the value of PR China’s total imports from the US (USD150 bn) is less than the value of the US’ total imports from PR China (USD505 bn), trade retaliation by PR China is assumed to be implemented through adjusting its tariff rate to match the impact of the US’ trade actions against it.

Figure 2: Long-Term Global GDP and Trade Growth

2.9 3.7

4.0 2.9

-15

-10

-5

0

5

10

15

-1

0

1

2

3

4

5

6

7

World growth World trade (RHS)

Annual change (%)

Source: IMF World Economic Outlook (October 2018), BNM estimates

Annual change (%)AsianFinancialCrisis

Aftermath of Dot-com

Bubble

Global Financial

Crisis

1990

19

91

1992

19

93

1994

19

95

1996

19

97

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

20

17

2018

f20

19f

Potential Impact

of Trade Actions

Figure 1: Impact Estimates of Trade Actions on Global Growth and Trade

Source: BNM estimates

-0.2 -0.3

-0.2

-0.3 -0.3

-0.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

Global growth Global trade

Downside: Blanket Auto Tariffs

Downside: +25% on remaining trade with PR China

Baseline: +25% on USD200bn

Baseline: +25% on USD50bn

Baseline: Tariffs on Aluminium, Steel and Solar Panels

-0.5

-0.3 -0.4

-0.7 -0.8

-1.1

Ppt. Contribution

38


THIRD QUARTER 2018



Impact to the Malaysian Economy

As a small open economy, Malaysia will inevitably be aff ected by the escalating global trade tensions. The impact of trade tensions to the economy can be assessd via the trade, income and investment channels. With total trade amounting to 131% of GDP3, Malaysia would be primarily aff ected via the trade channel.

Malaysia’s exports are expected to be aff ected directly via lower demand from aff ected countries and indirectly via slower production in the global value chain. Trade protectionism measures implemented since the beginning of this year are expected to weigh down on gross exports by 0.6 – 1.0 ppt. This mainly refl ects the lower fi nal demand from PR China, the US and the EU, which account for 38.4% of Malaysia’s fi nal export demand. If trade tensions intensify further, the downside risk to export growth will be more severe. In the event that both downside risks materialise, the total impact to Malaysia’s exports growth could be a reduction of as much as 1.8 – 2.7 ppt.

Weaker trade activity would also incur some spillovers on Malaysia’s domestic economy. In particular, this is expected to weigh on private sector spending mainly through the income and investment channels. For workers, especially those in the export-oriented industries, the moderation in export growth is expected to adversely aff ect employment and income, in turn, lowering household spending. Lower export orders and proceeds would also have a negative bearing on fi rms’ profi tability. As a result, fi rms’ need and ability to invest in capacity expansions are constrained, reducing private investment activity for the year.

Taken altogether, in its current form, trade tensions are expected to weigh down Malaysia’s GDP in 2019 by 0.3 – 0.5 ppt (Figure 3). However, the overall impact on growth could be as large as a reduction of 1.3 – 1.5 ppt should both downside risks materialise. It is also important to note that rising trade hostilities could increase volatility in the global and domestic fi nancial markets, thereby posing additional headwinds to growth.

Potential gains for Malaysia from trade substitution opportunities

There could, however, be some potential off setting eff ects. Several regional countries stand to benefi t from potential trade diversion from PR China. These include Malaysia, Thailand, Indonesia and Vietnam. Collectively, the potential diversion of US’ imports away from PR China to other countries is estimated to amount up to USD140 billion4. While there is potential for higher exports for individual countries, this would not fully off set the impact of lower global growth on trade activities.

3 In 20174 Estimated using US’ import demand elasticities for the tariff ed items to be imposed on Chinese products. The elasticities used are based on the methodology

developed by Kee, Niccita & Olarreaga (2008), “Import Demand Elasticities and Trade Distortions”. Products with higher elasticities imply larger possibility of diversion from PR China subject upon several conditions (e.g. other countries’ capacity to absorb the higher demand).

Figure 3: Impact Estimates of Trade Tensions on Malaysia's GDP Growth

Downside: +25% on remaining trade with PR China and Blanket auto tariffs

Baseline: Tariffs on aluminium, steel and solar panels, +25% on USD50bn and +25% on USD200bn

-1.8

-1.4

-1.0

-0.6

-0.2

Malaysia GDP Growth

Total Impact

Ppt. contribution

Source: BNM estimates

-0.9 to -1.1

-0.3 to -0.5

-1.3 to -1.5

39


THIRD QUARTER 2018


5THIRD QUARTER 2018

From this amount, it is estimated that Malaysia could potentially gain from trade substitution up to USD970 million5. This includes products in which Malaysia already has meaningful presence in the US (defi ned as Malaysia’s exports that account for at least 5% of US’ import market share), coupled with the ability to ramp up production capacity. The products that Malaysia would likely gain from are mostly in the E&E industry, such as electrical machines, electronic integrated circuits and semiconductors for solar panels cells (Figure 4).

Materialisation of trade diversion could reduce the negative impact of trade tensions on Malaysia’s gross export growth in 2019 by about 0.1 – 0.4 ppt. This, in turn, would benefi t private sector spending, thereby potentially mitigating the moderation in domestic demand and GDP growth.

5 The trade diversion to Malaysia has been adjusted for constraints on capacity utilisation in the manufacturing sector.6 Conducted by the BNM Regional Economic Surveillance team.

Figure 4: Malaysia’s Exports to the US: Potential Gain from Trade Substitution

Source: ITC Trade Map, Global Trade Atlas, BNM Estimates

Communication equip.

Integrated circuit (IC)

Photosensitive devicesPrintersOther ICs

Rubber gloves

Data storage devices

Wood furniture

Telco equip.

Vacuum cleanersADP machines

TransistorsAmplifiers Organic chemicals

-

50

100

150

200

250

300

0% 10% 20% 30% 40% 50% 60%

Pote

ntia

l inc

reas

e in

exp

orts

val

ue(U

SD m

illio

n)

Malaysia's share of US' imports by product

Note: Bubble size reflects potential value of gain. For clarity, chart only illustrates US import products in which at least 5% of those imports are sourced from Malaysia.

Anecdotal evidence from fi rms

Overall, the impact of bilateral trade tensions on Malaysia’s export performance is largely dependent on the substitutability of the aff ected products, manufacturing capacity constraints and Malaysian fi rms’ value proposition. Insights from BNM’s industrial engagement6 has confi rmed that several local companies in the E&E industry has benefi tted from an increase in orders from the US as companies switch orders from PR China to Malaysia to avoid the high tariff on Chinese imports.

Manufacturing capacity constraints, however, could limit the potential substitution gains for companies. Production constraints could lead to orders for other export markets to be re-routed to diff erent production centres within the global value chain. This has been reported by several local subsidiaries of multinational fi rms that have only experienced marginal increase in export volume despite trade diversion.

On the other hand, fi rms aff ected by the blanket tariff s have reported neutral to mildly negative impact. Some local manufacturers of steel products have stopped exporting to the US following the US’ blanket tariff on import of steel products. Meanwhile, manufacturers of solar panels and components have indicated that the US’ blanket tariff on solar panels has not aff ected their exports and production volumes, given the strong demand.

40


THIRD QUARTER 2018



Conclusion and Policy Strategies

An expansion of the coverage of tariff ed products and further retaliation could amplify current trade tensions into a global trade war, in which there will be no winners given the strong trade interlinkages among countries in the current global landscape. Economies aff ected by the trade actions will not only face weaker growth prospects through lower trade, but also heightened volatility in the fi nancial markets, which will further exacerbate the impact of trade tensions on growth.

In this prevailing environment of heightened global uncertainty, decisive and timely policy strategies are crucial to ensure that Malaysia remains resilient and well-positioned to benefi t and mitigate risks from its trade openness. First, structural reforms to improve the fl exibility of economic agents to respond to external shocks should continue to be implemented. This includes promoting high value-added industries, diversifying our export products and markets, enhancing labour market fl exibility and attracting quality investments that would raise overall economic complexity and create high-value jobs.

Second, Malaysia’s position in the global value chain should be re-examined in order to capitalise on opportunities to expand and strengthen our role in the ecosystem. Third, Malaysia must continue to proactively pursue multilateral and bilateral trade pacts with other economies. Importantly, these policy strategies will contribute towards enhancing the resilience and future-readiness of the Malaysian economy.

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