publication July 2, 2018

Malaysia Economic Monitor: Navigating Change

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Malaysia’s near-term growth is projected to remain strong with sound economic fundamentals.

  • The Malaysian economy expanded at a measured pace of 5.4 percent in the first quarter of 2018, from 5.9% in the fourth quarter of 2017. In 2018, GDP growth rate is expected to remain strong at 5.4%.
  • Household spending remained the primary driver of Malaysia’s economic growth. It is projected to strengthen over the year due to new policy measures, including temporary suspension of the consumption tax.
  • Exports expanded at a relatively modest pace, driven largely by sustained global demand for Malaysia’s electrical and electronics exports. This demand is expected to continue in the near future.
  • Headline inflation has moderated, largely reflecting the decline in impact of global oil prices on domestic fuel inflation, and is projected to be lower in 2018 than was previously anticipated.
  • The government has introduced several policy changes in line with its election mandate, and this needs to be managed carefully to minimize additional risks to the economy.

The change in government following the May 9th polls offers opportunities to further strengthen structural reforms towards sustained and more inclusive growth.  

  • Ongoing turbulence within the financial markets was worsened by the uncertainty surrounding the political transition. This has since subsided as the government continues to set out its policy framework.
  • Bold reforms responding to the election mandate to sustain growth and increase inclusiveness would be consistent with Malaysia’s aspirations to become a high-income and developed nation.
  • While Malaysia remains on track to transition to a high-income and developed nation within the next two to six years, it is important to be aware of the broader aspects of development that are not captured by GDP growth.
  • Moving forward, working towards sustained and inclusive growth is key for Malaysia. Policymakers need to look to measures that promote upward economic mobility and security, in particular for the bottom 40% of the population.

Key building blocks need to be in place for Malaysia to achieve its digital economy ambitions. The level of digital adoption by people and government is high, but the country lags behind international peers in terms of digital adoption by businesses.

  • The level of digital adoption by businesses in Malaysia is average for a lower middle-income economy. Only 62 percent of businesses are connected to the internet, 46 percent have access to fixed broadband services, and 18 percent have some form of web presence.
  • The Digital Adoption Index for businesses also shows that Malaysia has more limited international bandwidth and a smaller number of secure servers.
  • Businesses cite that the two major barriers to digital adoption are slow internet connections and a lack of affordable broadband plans.
  • High-speed broadband access rates are much higher in Malaysia relative to other countries. Malaysia ranks 74 out of 167 countries for fixed broadband services, and 64 out of 118 for fiber broadband services, behind neighboring Vietnam and countries with similar levels of economic development, such as Mexico and Turkey.
  • Malaysia should look beyond doubling its internet speed to achieve gigabit-level of connectivity like advanced economies.
  • Access to fixed broadband services is needed for the widespread adoption of innovative technologies, improving public service delivery, and supporting the growing demand of households.

Unlocking the potential of the digital economy is key to ensuring Malaysia’s successful transition to a high-income economy.

  • Moving forward, Malaysia should consider adopting policies with two main objectives:
    - Improved quality and affordability of fixed broadband services;
    - Increased coverage of ultra-fast broadband networks.
  • To achieve these objectives, the government should strive to increase competition in the fixed broadband market.
    - Better enforcement of the current regulatory framework could provide all operators with access to cable landing stations.
    - Encouraging competition by opening the market across all levels of the telecom and internet supply chain.
  • For Malaysia to increase productivity outcomes in the private sector and drive the country’s digital transformation, it is crucial for the country to improve its level of digital adoption and connectivity.