Despite volatile capital flows and a mixed outlook on the global front, the Malaysian economy continued to perform favourably during the course of 2014. The country recorded Gross Domestic Product (“GDP”) growth of 6.0% in 2014 after delivering 4.7% expansion the previous year. This was mainly supported by a massive 19.7% growth in net exports. Rising demand from developed countries such as the United States (“US”), the European Union (“EU”) and Japan contributed to a large increase in export growth, a sign that Malaysia is benefitting from the recovery of key economies. However, domestic growth was modest due to the ongoing fiscal consolidation exercise which has resulted in moderated public sector spending. Similarly, weaker business sentiments following volatility in the financial and foreign exchange market reduced private investment growth down to 11.0%. Nonetheless, consumer spending was fairly resilient with private consumption posting a stable growth of 7.1% owing to stability in the labour market and continued household income growth.
On the supply side, all economic activities reported stronger growth compared to the previous year. Services sector, which accounted for 55% of Malaysia’s GDP, grew by 6.3% attributed to activities in wholesale & retail trade, transport & storage and finance. All services sub-sectors recorded higher growth during the year. Meanwhile, the manufacturing sector was mainly sustained by export-oriented industries, such as the production of electrical and electronics goods. The construction sector was boosted by the implementation of infrastructure projects as well as the construction of residential and non-residential buildings. Growth in the sector remained at a double digit pace of 11.6%. In the same vein, higher production in crude oil and condensates products led to the strong rebound in mining industry output which rose to 3.1% from 0.7% previously. Meanwhile, agricultural output increased by 2.6%, aided by industrial and food crops.
The heightened growth environment set the stage for the government to address several macroeconomic imbalances. A notable development was the introduction of the managed float system in order to determine domestic petrol fuel prices. Earlier, there had been an increase in electricity tariff in January and a gas price hike for commercial users was announced in mid 2014. The result was tangible. The government’s fiscal deficit fell further to 3.5% of GDP in 2014 from 3.9% previously. In addition, strong economic growth provided the necessary backdrop for the central bank to further normalise the policy rate. To this end, Bank Negara Malaysia (“BNM”) raised the Overnight Policy Rate (“OPR”) by 25 basis points to 3.25% in July last year. Apart from that, Malaysia’s current account surplus balance widened to RM49.5 billion or 4.8% of Gross National Income (“GNI”) in 2014 from RM39.9 billion or 4.2% of GNI recorded in the previous year; signalling a higher savings and investment gap in the economy.
Nevertheless, the Malaysian ringgit was heavily penalised despite the country’s sound economic fundamentals. The possible normalisation of US monetary policy in 2015 has been widely factored in by global investors. This is in view of the country’s sustained economic recovery, particularly in the US labour market space. Additionally, concerns over lower oil prices to oil-exporting countries have been exacerbated by the Organisation of the Petroleum Exporting Countries (“OPEC”) members’ decision to maintain its production quota at 30 million barrels per day in November 2014. This espouses the view that the supply glut in the oil market will likely to continue as OPEC is seen to be taking steps to protect its market share in the global oil market. Such notions have caused outflows of capital to become more apparent in Asian economies as prospect of higher returns in developed economies have become more prevalent. And Malaysia is obviously no exception.
The Malaysian currency has lost its value against the US dollar by 6.3% during the course of 2014 as some of the foreign funds exited the Malaysian financial market. Foreign institutions have generally become a net seller in 2014 at RM6.6 billion as opposed to a net buyer of RM3.0 billion in the preceding year. As a result, the FBM KLCI index fell by 5.7% as at end December last year, to close at 1,761.25. Similarly, foreign funds were offloading ringgit denominated debts holdings. The share of foreign ownership in Malaysian Government Securities (“MGS”) slid to 44.1% at the end of 2014 from a high of 48.4% in July. Consequently, bond yields were higher with the 3- and 10-year MGS yield rising by 31 and 2 basis points at the end of last year to reach 3.64% and 4.15% respectively.
Amidst such volatility, the Islamic finance industry demonstrated a high degree of resilience. Total Islamic banking assets maintained double digit growth of 12.4% to register RM487.1 billion in 2014. The share to total banking system asset also rose to 22.2%, suggesting the increased standing of Islamic banks as financial intermediaries in the Malaysian economy. This was reflected in financing assets growth of 18.4% to RM336.1 billion, which surpassed the 9.3% growth for the whole banking industry. There appears to be more placements for Islamic deposits with growth registering 14.8% or RM401.0 billion as at end 2014; largely supported by current and savings account (“CASA”) which posted 10.1% growth during the year. The Islamic capital market also flourished during 2014 with new issuance of Sukuk rising to RM8.8 billion – an increase of 11.3% from the previous year. Issuances were mainly dominated by financial institutions as they commenced fulfilling Basel III requirement. Against such a backdrop, the operating environment should be earnings-accretive for Bank Islam as the stable employment market bodes well with our financing portfolio composition. Additionally, the anticipation of sustained increase in private investment activities would mean there are pockets of opportunities for the Bank to widen its presence in the commercial and corporate space.
Going forward, the economic landscape is expected to remain challenging as prospects for global demand is mixed. On one hand, the US economic recovery has been ongoing with unemployment rate steadily scaling down while the number of jobs created is soaring. Combined with lower oil prices, household spending in the largest economy is anticipated to be supportive to global growth. However the situations in other developed economies are less positive as they grapple to fend off deflationary pressures. The European region has been plagued by falling prices with the Harmonise Index of Consumer Prices (“HICP”) declining for three consecutive months between December 2014 and February 2015. In addition, the fall in property prices in China amidst rising non-performing loans is likely to temper growth in the immediate terms as policy makers seek to rebalance the Mainland’s engine of growth. As a result, a slew of monetary easing measures were introduced by major central banks across the globe; most notably in Europe, where negative interest rate and quantitative easing (“QE”) measures were announced in late 2014 in a bid to resuscitate demand while avoiding the threat of a deflationary spiral. In the meantime, China, India, Indonesia and Singapore have now switched to a more accommodative monetary stance as lower oil prices have allowed them to reduce policy rates to support the economy.
Back home, on 20 January 2015, the Malaysian government has revised its Budget 2015 allocation since fiscal deficits as percentage of GDP in 2015 is projected to reach 3.2% from the previous estimate of 3.0%. The revision came as oil prices are likely to remain low. Such an announcement is deemed to be timely and realistic since the government is committed to reduce the budget gap, albeit more gradually, while sustaining economic growth. Therefore, the economy is poised to grow between 4.5% and 5.5% in 2015 underpinned by continued resilience in domestic activities and the external sector.