Economic
and Financial Developments in Malaysia in the Second
Quarter of 2012
Malaysia recorded
higher growth in the second quarter
The global economic environment remained challenging
in the second quarter, amidst heightened vulnerabilities in several key
economies. Growth in the major advanced economies was weighed down by policy
and domestic structural concerns. In Asia, economic activity was affected by
weaker external demand. In spite of this challenging environment, the Malaysian
economy recorded a higher growth of 5.4% (1Q 12: 4.9%), driven by stronger
domestic demand, which rose by 13.8% (1Q 12: 9.7%). This was supported by robust
growth in the expenditure of both the private and public sectors, while net
exports moderated further due to weaker exports and higher imports. On the
supply side, most major economic sectors continued to expand, led by the
services, manufacturing and construction sectors.
Gross fixed
capital formation recorded a stronger growth of 26.1% (1Q 12: 16.1%), amidst
increased capital spending by both the private and public sectors. Private
investment strengthened further, supported by investment in the domestic-oriented
services sub-sectors, oil and gas and manufacturing industries. Expansion in
public investment was driven by non-financial public enterprises’ capital
spending in the transportation, oil and gas and utilities sectors, as well as
the Federal Government’s development spending on transportation, trade and
industry, public utilities and education.
Growth of
private consumption registered a strong growth of 8.8% (1Q 12: 7.4%), supported
by firm labour market conditions, robust income growth and improved consumer
sentiment. In addition, Government initiatives such as financial assistance to
the lower income households and FELDA settlers, as well as increases in the
salaries and pensions of civil servants also supported the increase in
spending. Public consumption increased by 9.4% (1Q 12: 7.3%), led by higher
spending on emoluments and supplies and services.
On the supply side, most economic sectors expanded
further. This was supported by domestic-driven activity in the services sector,
namely communication, real estate and business services, and the finance and
insurance sub-sectors. The manufacturing sector was driven by higher growth in
the export-oriented industries and a continued expansion of the
domestic-oriented industries. The construction sector recorded a strong
double-digit growth for the second consecutive quarter amidst increased
activities in the civil engineering sub-sector. The mining sector expansion
reflected the higher output of crude oil, while the agriculture sector recorded
a contraction due to lower crude palm oil production.
The headline inflation rate, as measured by the annual
change in the Consumer Price Index (CPI), moderated to 1.7% in the second
quarter (1Q 12: 2.3%). Inflation in the food
and non-alcoholic beverages category moderated amid a decline in the prices
of meat and vegetables.
In the external sector, the current account
surplus narrowed in the second quarter to RM9.6 billion, equivalent to 4.4% of GNI. The lower surplus was due mainly to the lower goods surplus, largely as
a result of higher expansion of gross imports amid moderating growth in gross
exports.
The financial account recorded a turnaround with inflows
of RM5.4
billion during the quarter (1Q 12: -RM10.3 billion), as net inflows in other investment and FDI
rose, which offset the net outflow of non-resident portfolio funds. FDI
was sustained at RM6.1 billion (1Q 12: +RM7.5 billion), supported by inflows of
equity capital and higher extensions of inter-company loans to multinational
companies operating in Malaysia. Direct investment abroad by Malaysian
companies moderated to RM2.5 billion in the second quarter (1Q 12:
-RM16.9 billion), reflecting a lower outflow of equity capital and intercompany
loans, and net repatriated earnings by Malaysian companies operating abroad.
With surpluses in both the current and financial accounts, the overall balance
of payments turned around to record a surplus of RM12.7 billion in the second
quarter (1Q 12: -RM7.2 billion).
The international reserves of Bank Negara Malaysia
increased to RM428.8 billion (equivalent to USD134.2 billion) as at 29 June
2012. This reserve level has taken into account the quarterly adjustment for
foreign exchange revaluation gains, following the strengthening of currencies
against the ringgit during the period. As at 31 July
2012, the reserves position amounted to RM429.6 billion (equivalent to USD134.5
billion), sufficient to finance 9.5 months of
retained imports and is 3.9 times the short-term external debt.
Monetary policy remained supportive of economic activity
The Overnight Policy Rate (OPR) was left unchanged at
3.00% during the second quarter of 2012. At the prevailing level of the OPR,
monetary conditions continue to be supportive of economic activity.
Reflecting the
unchanged OPR, the average interbank rates of all maturities were relatively
stable. In terms of retail interest rates, the average quoted fixed deposit
(FD) rates of commercial banks were relatively unchanged during the quarter.
The average base lending rate (BLR) of commercial banks remained unchanged at
6.53%, while the weighted average lending rate (ALR) on loans outstanding
remained stable, standing at 5.60% as at end-June 2012 (end-March 2012: 5.62%).
In the second
quarter, total gross financing raised by the private sector through the banking
system and the capital market increased to RM280.6 billion (1Q 12: RM259.9
billion). The higher gross financing was attributable mainly to the increase in
loan disbursements to businesses and initial public offerings (IPOs) during the
quarter. On a net basis, banking system loans and PDS outstanding expanded at
an annual growth rate of 13.0% as at end-June 2012 (1Q 12: 13.3%).
Net funds
raised in the capital market amounted to RM27.6 billion during the quarter (1Q
12: RM43.5 billion), mostly by the private sector. Funds raised from the equity
market increased significantly to RM12.1 billion (1Q 12: RM1.3 billion), due to
a large initial public offering in June. After adjusting for redemptions, net
funds raised by the private sector amounted to RM22.6 billion. In the public
sector, net funds raised during the quarter amounted to RM5.0 billion (1Q 12:
RM13.7 billion).
The monetary
aggregates grew at a moderate pace during the second quarter. M1, or narrow
money, increased by RM3.5 billion. On an annual basis, M1 expanded by 9.9% as
at end-June (end-March 2012: 13.2%). M3, or broad money, grew by 12.8% annually
as at end-June 2012 (end-March 2012: 15.0%). The moderate expansion in M3 was
attributable to higher Government fundraising activities and net portfolio
outflows during the quarter.
The ringgit
depreciated by 3.8% against the US dollar in the second quarter, along with
most other regional currencies. Renewed uncertainties over the European
sovereign debt crisis and its impact on the prospects for regional and global
economic growth prompted some investors to reduce holdings of emerging market
assets. Against other major currencies, the ringgit depreciated against the
pound sterling (-1.6%) and the Japanese yen (-7.0%), while strengthening
against the euro (2.0%). Against the other regional currencies, the ringgit
depreciated in the range of between 0.7% and 5.4%.
During the
period 1 July to 13 August 2012, the ringgit appreciated against the euro
(4.7%), US dollar (2.3%), pound sterling (1.9%) and Japanese yen (0.9%).
The ringgit also appreciated against regional
currencies, strengthening against the Korean won, Thai baht, Philippine peso,
Indonesian rupiah and Chinese renminbi by between 0.6% and 2.3%. The ringgit
remained unchanged against the Singapore dollar.
Domestic financial stability is sustained
Financial stability remained intact throughout the
second quarter of 2012, underpinned by strong capitalisation of financial
institutions and orderly financial market conditions. Financial markets
continued to demonstrate strong capacity to withstand external shocks and
volatility arising from the escalation of sovereign risk in the Euro area.
The banking sector remained resilient during the
quarter, amid sustained profitability and ample liquidity. Capitalisation of
the banking sector remained stable with the core capital ratio and
risk-weighted capital ratio at 12.9% and 14.7% respectively. Similarly, the
insurance sector remained resilient with a strong capital adequacy ratio of
216.7%.
Recovery to continue at a modest pace but downside risks will
remain
The global economic recovery
continued in the second quarter, albeit at a more modest pace. Going forward,
the global economy faces increasing downside risks emanating from the
developments in several major economies. Policy uncertainty surrounding the
European sovereign debt crisis and fiscal issues in the US are expected to
weigh on market sentiments and growth prospects.
For the
Malaysian economy, the strong support provided by domestic
demand,
underpinned by activities in both the private and public sectors have
ensured higher
growth amidst the challenging global environment. This trend
is expected to
be sustained going forward, although downside risks emanating
from external
developments remain.
Source: Bank
Negara Malaysia
