Last Updated : 27 Mar 2013
Source By : www.bnm.gov.my
In 2012, global economic growth moderated amid a
more challenging environment compared to 2011. In the advanced
economies, growth was uneven, with the US experiencing a fragile
recovery and the euro area remaining in recession. The weakened economic
conditions in the advanced economies affected international trade,
which in turn affected domestic economic activity in the emerging
economies. Weaker global growth prospects, coupled with the ongoing
fiscal uncertainties in the advanced economies also contributed to
sustained volatility in the international financial markets.
Nonetheless, market sentiments improved towards the latter part of the
year following stronger commitments and important steps taken by
authorities in resolving the European sovereign debt crisis.
Despite the weak external environment, the Malaysian economy performed
better than expected, delivering faster and higher quality growth. The
Annual Report provides an analysis of the developments in the Malaysian
economy and the policies pursued by the Bank during the year. It also
provides an assessment of the prospects of the Malaysian economy amidst
the ongoing developments in the global economic and financial landscape
and the key challenges going forward.
The Malaysian Economy in 2012
The Malaysian economy performed better than expected in 2012, recording a
strong growth of 5.6%. The overall growth performance was driven by
higher growth in domestic demand, which outweighed the negative impact
from the weak external environment. Domestic demand recorded the highest
rate of expansion over the recent decade, underpinned by higher
consumption and investment spending. Despite the uncertainties in the
external environment, domestic consumer confidence picked up amidst
positive income growth, continued strength in the labour market, the low
inflation environment and supportive financing conditions.
Investment activity was a key driver of the domestic economy during the
year, with increased capital spending by both the private and public
sectors. Private investment was particularly robust, recording a
double-digit growth of 22%. The share of private investment rose to
15.5% of GDP in 2012, the highest since 1998. This was led by strong
capital spending in the consumer-related services sectors,
domestic-oriented manufacturing sectors and the implementation of major
infrastructure projects. Public investment also registered a strong
growth of 17.1%, driven by higher capital spending by public
enterprises. In addition, the strong investment performance was also
attributed to the commencement and progress of several infrastructure
projects, including those under the Economic Transformation Programme
(ETP), and the steady improvement in the investment climate.
Private consumption registered a firm growth of 7.7% in 2012. The strong
performance was attributed to favourable income growth, Government
transfers to low- and middle-income households, and supportive financing
conditions. In the public sector, public consumption recorded a
moderate growth of 5% amidst continued fiscal consolidation efforts
during the year.
On the supply side, all economic sectors continued to expand in 2012.
The construction sector benefited from the strong expansion in
investment activity, registering its highest pace of growth since 1995.
While the growth of export-oriented activities was dampened by the
slowdown in external demand, the growth of domestic-related activities,
particularly in the services and manufacturing sectors, was supported by
the strong performance of domestic demand.
Labour market conditions remained stable in 2012 with continued gains in
employment, observed mostly in the services and agriculture sectors.
However, total retrenchments increased due mainly to higher layoffs in
the manufacturing sector. During the year, the unemployment rate
declined marginally to 3%.
Headline inflation, as measured by the annual percentage change in the
Consumer Price Index (CPI), averaged 1.6% in 2012 (2011: 3.2%).
Inflation was lower than expected, on account of the slower rate of
price increases in the food and non-alcoholic beverages and transport
categories. Food items, which have been the main drivers of inflation in
recent years, registered more moderate price increases following modest
external price pressures and significant improvements in domestic food
supplies. The magnitude of the adjustments to administered prices was
also lower than in the previous year. Core inflation, an indicator of
demand-driven price pressures, moderated to 2.4% in 2012 (2011: 2.7%).
Malaysia’s external position remained resilient in 2012 despite the
challenging external environment. The overall balance of payments
remained strong as the current account surplus was more than adequate to
meet the net outflows in the financial account. Reflecting the cyclical
and structural adjustments taking place in both the global and domestic
economy, the current account surplus was lower at RM60 billion in 2012
(2011: RM97.1 billion) due mainly to a smaller goods surplus and larger
deficits in the services and income accounts. The moderation in the
goods surplus was a result of robust import growth, following the
improvement in domestic demand, amid lower export growth caused by the
weak external demand and lower commodity prices. The services account
registered a larger deficit due to higher payments for imported
transportation services and lower net travel receipts, while the larger
net income payment reflected the higher income accrued to foreign
companies operating in Malaysia.
On the financial account, Malaysia continued to experience two-way
capital flows, with foreign inflows attracted by the resilient growth
prospects. Despite significant global uncertainties, foreign direct
investment (FDI) inflows were sustained and remained broad-based, with
significant inflows into high-growth areas, such as the oil and gas
sector and the communication services sub-sector. Some of the funds were
also channelled into projects under the ETP. Direct investment abroad
(DIA), were largely undertaken by companies in the services and oil and
gas sectors, and continued to be channelled into the regional economies,
reflecting the deepening economic integration in Asia.
Malaysia’s external debt declined to RM252.8 billion (USD81.7 billion)
as at end-2012 (2011: RM257.4 billion), equivalent to 28% of GNI (2011:
30% of GNI). During the year, the medium- and long-term external debt of
the private sector increased. This, however, was largely offset by the
net repayment of public sector medium- and long-term external debt and
the net repayment of short-term interbank borrowings. The appreciation
of the ringgit against some of the major currencies during the year also
contributed to the lower value of external debt in ringgit terms.
Overall, Malaysia’s external debt profile continued to be skewed towards
a longer maturity structure, with medium- and long-term debt accounting
for 63.2% of total external debt. The external debt continues to be
well supported by the country’s strong economic fundamentals.
Net international reserves increased by RM3.9 billion to RM427.2 billion
(equivalent to USD139.7 billion), as at 31 December 2012. As at 28
February 2013, the reserves level amounted to RM429 billion (equivalent
to USD140.3 billion), which is adequate to finance 9.5 months of
retained imports and is 4.6 times the short-term external debt. The
international reserves held by the Bank remain usable and unencumbered.
Economic and Monetary Management in 2012
Monetary policy in 2012 was focused on managing the downside risks to
growth amid moderating inflation. Although the Malaysian economy
remained on a steady growth path and inflation was on a downward trend,
the high degree of global economic and financial uncertainty remained a
risk to the Malaysian economy’s growth prospects. In balancing the risks
to inflation and growth of the economy, the Monetary Policy Committee
(MPC) considered the prevailing Overnight Policy Rate (OPR) level to be
appropriate, and kept the policy rate unchanged at 3.00% throughout
2012.
Strong loan demand throughout the year, while warranting close
monitoring, was not a concern as total loan growth was supported mainly
by lending to businesses, with lending primarily supporting expansion of
the domestic-oriented industries and the ETP-related projects. While
there were concerns over the potential risk of excessive indebtedness of
the household sector, the risk was assessed to be confined to specific
household segments. As such, the MPC was of the view that a change in
monetary policy stance was not appropriate. These trends were also being
addressed by macroprudential measures and the guidelines issued on
responsible financing practices that was introduced at the beginning of
the year to promote prudent and responsible lending and borrowing
behaviour. Nevertheless, the MPC continued to assess developments in
household credit to ensure the risk of household indebtedness becoming
excessive remained contained.
Monetary policy was also confronted with the challenge of sustained
large and volatile portfolio flows throughout the year. There continued
to be large global surplus liquidity in search of higher yields, which
were attracted to the emerging economies, including Malaysia, given the
relatively stronger fundamentals. The developments in the advanced
economies and the rapid changes in sentiments in the global financial
markets further contributed to the volatility of portfolio flows. For
the most part, the financial system was able to effectively intermediate
these flows without generating substantial distortions in domestic
financial markets and monetary conditions. This reflected the cumulative
policy efforts by the Bank to deepen and increase the resilience of the
Malaysian financial system over the recent decade.
The performance of the ringgit during the year was influenced by the
global and regional developments amid periods of heightened volatility
in the global financial markets. From January to early March of 2012,
the ringgit strengthened due to portfolio inflows, supported by the
continued underlying strength of the Malaysian economy amid the positive
growth prospects of Asia and the prolonged low interest rate
environment in the advanced economies. The appreciating trend of the
ringgit reversed temporarily between March and June, as renewed
uncertainties over the situation in key economic regions led to concerns
over the prospects for global and regional economic growth and prompted
the unwinding of the holdings of financial assets in the region by
investors. The depreciation trend, however, was brief as portfolio
inflows resumed towards the second half of the year, attracted by the
strong performance of the domestic economy. The ringgit ended the year
at RM3.0583 against the US dollar, thus recording a year-on-year
appreciation of 3.9%.
During the year, the yields of Malaysian Government Securities (MGS)
were largely influenced by a combination of external and domestic
factors. Despite renewed concerns over the European sovereign debt
crisis, firm demand from non-residents kept yields low. However, strong
domestic fundamentals and increased supply of government bonds exerted
some upward pressure on yields. The domestic private debt securities
market (PDS) registered high growth amid ample liquidity and strong
demand for financing to support infrastructure-related projects,
including those under the ETP. The FTSE Bursa Malaysia Kuala Lumpur
Composite Index (FBM KLCI) advanced by 10.3% to close at 1,689 points in
2012 (2011: 0.8%). The positive performance was driven mainly by the
favourable outlook for the domestic economy.
Liquidity conditions in the banking system remained ample throughout
2012. Private sector liquidity continued to expand, mainly on account of
favourable credit conditions and continued inflows of foreign funds.
Liquidity conditions in the interbank money market were more stable
compared to 2011, reflecting more balanced two-way flows from trade and
investment activity. Sterilisation operations by Bank Negara Malaysia
were conducted to prevent the build-up of liquidity that could give rise
to financial imbalances.
Financing conditions remained supportive of economic activity. The
strength in financing growth during the year was attributable mainly to
business financing. Demand for loans by households, while still
remaining relatively strong, moderated. Net financing through the
banking system and the capital market expanded at an annual rate of
12.4% (2011: 12.5%).
Outlook for the Malaysian Economy in 2013
The Malaysian economy is expected to remain on a steady growth path,
with an expansion of 5 – 6% in 2013. Economic activity will be anchored
by the continued resilience of domestic demand, and supported by a
gradual improvement in the external sector. Private investment is
expected to remain robust, driven by capacity expansion by the
domestic-oriented firms and the continued implementation of projects
with long gestation periods. Investments by the external-oriented
businesses is also expected to be higher amid the gradual improvement in
external demand, while private consumption is projected to grow at a
more moderate rate in the second half of the year, although it will
continue to be well supported by sustained income growth and positive
labour market conditions. Government spending is expected to record a
lower growth given the ongoing consolidation of the Government’s fiscal
position and as the role of the private sector gains greater
significance. In line with the more favourable external sector, gross
exports are projected to record a higher growth in 2013 supported by the
export of manufactured products. Gross imports are expected to
moderate, in tandem with the projected trend in domestic demand.
Overall, this is expected to result in a lower negative contribution to
real GDP from net exports. As import growth continues to outpace export
growth amid the continued deficit in the income account and in current
transfers, the current account surplus, while still remaining
significant is expected to narrow further in 2013.
On the supply side, all major economic sectors are expected to record
continued expansion in 2013. The services and manufacturing sectors are
expected to be the key contributors to overall growth, driven by the
continued resilience of domestic demand and supported by higher
international trade activity. Growth in the construction sector is
projected to remain strong, supported by the implementation of major
infrastructure projects. In the commodities sector, the growth of
agriculture is expected to improve due to the higher output of crude
palm oil and food commodities while the mining sector is expected to
strengthen following the higher production of natural gas, crude oil and
condensates.
Headline inflation is expected to average 2 – 3% in 2013. This inflation
projection takes into account the expected higher global prices of
selected food commodities and the adjustments to domestic administered
prices. Demand-driven price pressures are expected to be moderate. The
wider forecast range reflects the greater uncertainty in the external
and domestic environment.
Overall, the growth prospects of the Malaysian economy will continue to
be underpinned by the strength of its fundamentals. Of importance,
labour market conditions will remain favourable, with the unemployment
rate projected to remain low at 3.1% of the labour force in 2013. In
addition, the financial system continues to demonstrate resilience
against the challenging external environment, with financial
intermediation expected to continue to provide strong support to
domestic economic activity. The introduction of macroprudential and
other policy measures have helped to manage the risks from the increase
in household indebtedness. Malaysia’s favourable external position is to
remain intact, with international reserves at healthy levels and a low
external debt that is within prudent limits
Given the challenging external environment, there, however, remain risks
to the economic outlook. The potential re-emergence of instability in
the euro area and slower growth in Malaysia’s major trading partners
would affect the Malaysian economy. While pressures from global
commodity prices have receded, upside risks from non-fundamental
factors, such as adverse weather conditions and geopolitical
developments, could push commodity prices higher and adversely affect
the growth prospects of economies that are major trading partners of
Malaysia. Potential upside to the domestic economy could emerge if the
recovery in the advanced economies turns out to be better than expected.
Economic and Monetary Management in 2013
Under this challenging global economic environment, the focus of
policies by the Bank will be on supporting sustainable growth of the
Malaysian economy while mitigating the risks arising from the global
environment, including possible shocks to inflation.
Monetary policy in 2013 will focus on addressing potential risks to
inflation and growth. The MPC considered the prevailing level of the OPR
and the current monetary policy stance to be appropriate for the
inflation and growth outlook. In addition to domestic conditions, the
MPC will continue to carefully assess the global economic and financial
developments and their implications on the overall outlook for inflation
and growth of the Malaysian economy.
Fiscal policy in 2013 will continue to focus on sustaining the growth
momentum of the domestic economy and facilitating the long-term
transformation of the economy, while ensuring the sustainability of
public finances. The 2013 Budget placed emphasis on ensuring the
efficient use of fiscal resources, achieving inclusive growth and
strengthening fiscal management, all within the path of a sustained and
gradual fiscal consolidation plan.
Bank Negara Malaysia's Audited Financial Statement for 2012
The financial position of Bank Negara Malaysia, as audited and certified
by the Auditor General, remained strong in 2012. The total assets of
Bank Negara Malaysia amounted to RM476.3 billion, with a net profit of
RM5.6 billion for the financial year ended 31 December 2012. Bank Negara
Malaysia declared a dividend of RM1.5 billion to the Government for the
year 2012.
Bank Negara Malaysia
20 March 2013
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