Macroeconomic Analysis of Malaysia’s Economic

Running head: MACROECONOMICS
Macroeconomic Analysis of Malaysia’s Economic and Financial Market Performance
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MACROECONOMICS 1
Introduction
Malaysia is the third biggest economy of the Southeast Asia, preceded by Indonesia and
Thailand and it is also the 35th biggest economy of the world. The economy has diversified from
agricultural economy to the one focused on service and manufacturing and the growth was
attained from high level of exports of electronic parts and components and electrical appliances.
Malaysian economy is one of the most open economies of the world1. In the past five years, the
country has experienced GDP growth, although the GDP growth rate has been fluctuating.
According to Nambiar (2020), the economy experienced GDP growth since 2015, however, in
2019, the Malaysian economy has experienced state of suspension and the growth rate was down
from that of 2018. The stock market performance was also poor in 2019 as compared to 2018
due to uncertainties in the global trade uncertainties, such as, US-China trade war2. This report
will provide an overview of the economic and financial market performance of Malaysia since
2015 to 2019 by analyzing the macroeconomic factors that influence the economy and will
predict the 2020 performance.
Analysis of macroeconomic factors
According to World Bank (2020), it has been observed that between 2015 and 2019, the
GDP of Malaysia in current USD has increased from $301.35 billion to $365.30 billion (Figure
1). However, the growth rate is not significantly high, rather it was much slower and fluctuating
(Figure 2).
1 Wong, Kum Yeen, Joon Huang Chuah, and Chris Hope. "As an emerging economy, should Malaysia adopt carbon
taxation?." Energy & Environment 30, no. 1 (2019): 91-108.
2 Nambiar, S. 2020. "What’S Next For Malaysia’S Meandering Economy In 2020?". Thediplomat.Com.
https://thediplomat.com/2020/01/whats-next-for-malaysias-meandering-economy-in-2020/.

2MACROECONOMICS
2015 2016 2017 2018 2019
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
301.35 301.26 318.96
358.58 365.30
Malaysia GDP (current US$, in billion),
2015-2019
Figure 1: Malaysia GDP (current US$, in billion), 2015-2019
(Source: World Bank 2020)
The annual GDP growth rate fell slightly in 2016 and increased sharply in 2017. However, the
growth rate declined in 2018 and further in 2019.
2015 2016 2017 2018 2019
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
5.09
4.45
5.74
4.74 4.40
Malaysia GDP Growth (Annual %), 2015-
2019
Figure 2: Malaysia GDP Growth (Annual %), 2015-2019
(Source: Tradingeconomics.com (a) 2020)
The rate of unemployment over the period of 2015 to 2019 reflects the changes in the
growth rate of GDP in Malaysia. In the years that have higher GDP growth rate, the

3MACROECONOMICS
unemployment rate was mostly lower, and it is higher when the GDP growth rate was lower
(Figure 3). For instance, 2019 experienced a stagnating and lower GDP growth and the
unemployment rate was higher compared to 20183.
2015 2016 2017 2018 2019
2.9
3
3.1
3.2
3.3
3.4
3.5
3.1
3.4 3.4
3.3
3.4
Malaysia Unemployment, total (% of total
labor force) (national estimate), 2015-2019
Figure 3: Malaysia Unemployment, total (% of total labor force), 2015-2019
(Source: World Bank 2020)
Inflation rate showed a very fluctuating trend over the period of 2015 to 2019. It reached
highest in 2017 at 3.87% while it dropped sharply in 2018 to 0.88% and increased slightly to
1.02% in 2019 (Figure 4). This indicates a recovery for the economy as rise in inflation implies
growing demand in the economy. Extreme fall in the price level indicates slower economic
growth, lack of demand and shortage of disposable income and lower production level and
hence, it is not desired in the economies4.
3 Tradingeconomics.com (a). 2020. "Malaysia GDP Annual Growth Rate | 2000-2019 Data | 2020-2022 Forecast |
Calendar". Tradingeconomics.Com. https://tradingeconomics.com/malaysia/gdp-growth-annual.
4 Goodwin, Neva, Jonathan M. Harris, Julie A. Nelson, Brian Roach, and Mariano Torras. Macroeconomics in
context. Routledge, 2015.

4MACROECONOMICS
2015 2016 2017 2018 2019
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
2.10 2.09
3.87
0.88 1.02
Malaysia Inflation, consumer prices (annual
%), 2015-2019
Figure 4: Malaysia Inflation, consumer prices (Annual %), 2015-2019
(Source: World Bank 2020)
Other than the above mentioned major macroeconomic indicators, there are some more
indexes that reflect the economic performance of a nation. For instance, GDP per capita indicates
the purchasing power of people in a country and in Malaysia, it is seen to be increasing from
2015 to 2019. Although the purchasing power of people fell in 2016, compared to 2015, which is
aligned with the GDP and GDP annual growth rate. Similar trend has been observed in 2018-19
(Figure 5). However, the inflation rate has been highly volatile in Malaysia over the period under
consideration. This had influence on the aggregate demand and supply in the domestic economy,
which also affected the employment level.

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2015 2016 2017 2018 2019
9000
9500
10000
10500
11000
11500
9,955.24 9,817.74
10,254.23
11,373.23
11,198.19
Malaysia GDP per capita (current US$),
2015-2019
Figure 5: Malaysia GDP per capita (current US$), 2015-2019
(Source: World Bank 2020)
Interest rates are determined by the central bank of an economy to control the money
supply in the economy. When the economy needs stimulation, the central bank cuts interest rate
for encouraging people to spend more and that increases aggregate demand, resulting in higher
production5. As seen in case of Malaysia, there has been a very sharp rise in the real interest rate
in 2018 from that in 2017, and it again went down in 2019.
5 Fontana, Giuseppe, and Mark Setterfield, eds. Macroeconomic theory and macroeconomic pedagogy. Springer,
2016.

6MACROECONOMICS
2015 2016 2017 2018 2019
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
3.33
2.84
0.78
4.19
0.76
Malaysia Real interest rate (%), 2015-2019
Figure 6: Malaysia Real interest rate (%), 2015-2019
(Source: World Bank 2020)
Interest rate has direct influence on the investment and expenditure in the economy.
Interest rates were higher in 2015 and that went down in 2016. It fell sharply in 2017. The central
bank in Malaysia raised the interest rate in 2018, which was meant to encourage the investors to
invest more, however, that lowered the inflation in the economy to the lowest at 0.88%, and
economic growth also slowed down. Thus, to stimulate the economy further, the central bank
again lowered the real interest rate in 2019.

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Analysis of the Macro Economy of Malaysia
Between 2015 and 2019, Malaysia had quite fluctuating business confidence index
scores, and it gained an optimistic opinion during the financial year of 2017-20186. During this
period, inflation went very low, and real interest rate, which is inflation adjusted interest rate
increased significantly. GDP per capita increased and unemployment fell. These indicate a
progress in the Malaysian economy during this period.
Figure 7: Business Confidence in Malaysia, 2015-2019
(Source: Tradingeconomics.com (b) 2020)
Malaysian economy is highly dependent on the export sector. Between 2015 and 2018,
the trends of imports and exports have been similar and parallel, exports being higher than
imports. The trend in exports and imports followed the GDP growth in the economy. For all
these years, Malaysia experienced a trade surplus, which indicated economic progress (Figure 7).
6 Tradingeconomics.com (b). 2020. "Malaysia Business Confidence | 1998-2019 Data | 2020-2022 Forecast |
Calendar". Tradingeconomics.Com. https://tradingeconomics.com/malaysia/business-confidence.

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2015 2016 2017 2018
54.00
56.00
58.00
60.00
62.00
64.00
66.00
68.00
70.00
72.00 69.45
66.78
70.05
68.76
61.92
60.12
63.17
61.75
Malaysia exports and imports (% of GDP),
2015-2018
Exports of goods and services (% of GDP)
Imports of goods and services (% of GDP)
Figure 8: Exports and imports of Malaysia (% of GDP), 2015-2019
(Source: World Bank 2020)
The Malaysian government uses interest rate targeting in their monetary policy. It has a
floating exchange rate system. The instrument for monetary policy is the Overnight Policy Rate
(OPR). The Bank Negara Malaysia, the central bank of Malaysia, has been using the
discretionary monetary policy for achieving various objectives, which included faster economic
growth and full employment. However, the outcome of such a monetary policy included
increased inflation volatility, which influenced the exchange rates and real interest rates and also
increased volatility of the aggregate production of the economy. The government aimed for low
and stable inflation and a stable liquidity in the economy through the monetary policy. The sharp
fall in inflation in 2018 occurred to the dissipating effect of the increase in global oil price and
increase in the supplies of fresh food due to favorable weather and that increased the market
supply of food7. As per the trend of economic events, Malaysia experienced a lower rise in the
7 OECD. 2019. OECD Economic Surveys |Malaysia | July 2019. Ebook. OECD.
http://www.oecd.org/economy/surveys/Malaysia-2019-OECD-economic-survey-overview.pdf.

9MACROECONOMICS
prices due to low global commodity prices and slower global economic growth in 2019
compared to the extreme low prices in 2018 and the labor market experienced a slight increase in
the employment rate due to some job creation8.
Fiscal policy of the Malaysian government in the period between 2015 and 2019 focused
on structural reforms, fiscal consolidation, fiscal sustainability, building a consistent and larger
revenue base, and to improve transparency of the budget process9. It has been mentioned by
Bank Negara Malaysia that the fiscal policies undertaken by the government was aimed at
restoring fiscal sustainability, increase revenue collection, to address the dependency of revenues
majorly on revenue mix, and volatility of revenue due to oil related factors. GST was abolished
but that raised overall expenditure of the government especially due to benefits like education,
healthcare and pension. Measures of inclusive growth were taken for improving conditions of
low income households10.
Thus, it can be said that Malaysia has experienced quite fluctuating economic growth and
performance since 2015, however, it was stagnating in 2019. The aggregate demand in the
economy fell resulting in fall in expenditure and money supply in the economy. The trade
performance was also weaker in 2019.
The banking sector of the country and the capital markets have been through a series of
rapid expansion over the past few years. The health of the banking industry has an immense role
8 Bnm.gov.my. 2020. "Monetary Policy Statement". Bnm.Gov.My. https://www.bnm.gov.my/index.php?
ch=en_press&pg=en_press&ac=4878&lang=en.
9 Lee, Siew-Peng, and Yan-Ling Ng. "Public debt and economic growth in Malaysia." Asian Economic and
Financial Review 5, no. 1 (2015): 119-126.
10 Bnm.gov.my. 2019. "Outlook and Policy in 2019". Bnm.Gov.My.
https://www.bnm.gov.my/files/publication/ar/en/2018/cp04.pdf.

10MACROECONOMICS
to play in the analysis of the economy. As the capital adequacy ratio is greater than the normal
requirements and NPA for the country is low. The economy which had been following the policy
of fixed exchange rate regime was changed to a floating rate regime after the Asian crisis. Thus
this enabled the currency to be freely traded in the international markets providing competitive
strength to the international trade of the country which has an immense impact on the economy11.
The government has also provided control over the prices of goods and services, to keep
their prices at low levels. Thus all this subsidies are met out of the government funds which
creates a charge on the economic balance-sheet of the country. Thus the deficits which arise due
to the subsidies needs to be met by the taxes which is charged in the economy. Thus the tax
regime which is followed in the country is a flat tax regime. The resident and the non-residents
are taxed at a flat rate on the income which is sourced in Malaysia. Thus the government
spending is met by the taxes which is charged in the country12.
The international trade is an important aspect for an economy to grow and has a greater
impact on the macro-economic condition of a country. The competitiveness of the trade of
Malaysia is high which enables the country to compete with the developed countries. As per the
various theories the country has been attracting trade opportunity by implementing policy which
would boost the trade growth of the country. The FDI are investing in the manufacturing sector
of the country which has an immense role to play in the growth of the Malaysian economy.
The level of international debt for the country has been at 53%, where the 23% is related
to the debt raised by the government and the remaining from the various industry. The debt to
11
12 Maji, Ibrahim Kabiru, Mohd Yusof Saari, Muzafar Shah Habibullah, and Chakrin Utit. "Measuring the economic
impacts of recent oil price shocks on oil-dependent economy: evidence from Malaysia." Policy Studies 38, no. 4
(2017): 375-391.

11MACROECONOMICS
GDP ratio for the company is high which needs to be controlled by the government of Malaysia.
The country has maintained a current account surplus which can act as a buffer from the external
shocks from the global trade operations13.
Thus the various theories related to finance and economic highlight superior management
in the Malaysian economy. The economy has been increasing at a faster rate due to efficient
banking system, stable government policy and good international trade relations maintained by
the country.
Financial Market performance
The financial markets of Malaysia are highly developed and trade and deal in all type of
securities. It has an active stock market which has the name of Bursa Malaysia and all the listed
companies of Malaysia are available on this exchange. It also has an active bond markets and
forex markets which caters the financing options for the Malaysian companies14. In the recent
turmoil in the markets due to high trading volume in the Forex Market, volatility was created in
the forex. However, the stock market remained unaffected by the increase in volatility in the
markets. This was due to the availability of high liquidity and strong policies implemented by the
government and the exchange15.
The Forex and the money market were in continuous demand for liquidity since most of
the forwards and Swaps were being traded vigorously in the market. The commodities which are
13 Selvachandran, Ganeshsree, Madhumangal Pal, Tahani A. Abdusalam Alhawari, and Abdul Razak Salleh.
"Interval-valued complex fuzzy sets and its application to the malaysian economy." International Journal of Fuzzy
System Applications (IJFSA) 7, no. 1 (2018): 22-31
14 Malek, N.H.A. 2019. "Malaysian Financial Markets Still Strong". The Malaysian Reserve.
https://themalaysianreserve.com/2019/04/24/malaysian-financial-markets-still-strong/.
15 Crouch, H., 2019. Government and society in Malaysia. Cornell University Press.

12MACROECONOMICS
essential in nature are priced and controlled by the government. This is to ensure that the price of
essential remain low for the people of Malaysia.
Conclusion: Prediction for 2020 performance
Going by the trend of GDP growth, monetary and fiscal policies, and market demand, it
has been predicted by Malaysian Rating Corp Bhd (MARC) that in 2020, the GDP growth rate
would go down to around 4.3%, less than the estimated 4.8%. The US-China trade war is
weakening the global trade condition, and Malaysia’s export sector is also affected. Labor
market is expected to remain stable and private consumption growth is expected to be around
6.5%. Inflation is expected to be around 1.2% to 1.7%. Ringgit may face devaluation due to
slower growth of GDP.
As per the implemented financial theories the country of Malaysia has a strong financial
framework. The banking and the capital markets of the country are developed and are
implementing policy which enable the country to have a stable framework. The economic
balance sheet of the country has a small level of current account surplus which enables the
country to be resilient to external shocks. The Debt to GDP ratio of the country, however is of
concern as it needs to be reduced to lower levels for the country to progress.

13MACROECONOMICS
References
Bnm.gov.my. 2019. "Outlook and Policy in 2019". Bnm.Gov.My.
https://www.bnm.gov.my/files/publication/ar/en/2018/cp04.pdf.
Bnm.gov.my. 2020. "Monetary Policy Statement". Bnm.Gov.My.
https://www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=4878&lang=en.
Crouch, H., 2019. Government and society in Malaysia. Cornell University Press.
data.oecd.org. 2020. "Leading Indicators - Business Confidence Index (BCI) - OECD Data".
Theoecd. https://data.oecd.org/leadind/business-confidence-index-bci.htm.
Fontana, Giuseppe, and Mark Setterfield, eds. Macroeconomic theory and macroeconomic
pedagogy. Springer, 2016.
Goodwin, Neva, Jonathan M. Harris, Julie A. Nelson, Brian Roach, and Mariano
Torras. Macroeconomics in context. Routledge, 2015.
Jomo, Kwame Sundaram. Growth and structural change in the Malaysian economy. Springer,
2016.
Lee, Siew-Peng, and Yan-Ling Ng. "Public debt and economic growth in Malaysia." Asian
Economic and Financial Review 5, no. 1 (2015): 119-126.
Maji, Ibrahim Kabiru, Mohd Yusof Saari, Muzafar Shah Habibullah, and Chakrin Utit.
"Measuring the economic impacts of recent oil price shocks on oil-dependent economy: evidence
from Malaysia." Policy Studies 38, no. 4 (2017): 375-391.

14MACROECONOMICS
Malek, N.H.A. 2019. "Malaysian Financial Markets Still Strong". The Malaysian Reserve.
https://themalaysianreserve.com/2019/04/24/malaysian-financial-markets-still-strong/.
Nambiar, S. 2020. "What’S Next For Malaysia’S Meandering Economy In 2020?".
Thediplomat.Com. https://thediplomat.com/2020/01/whats-next-for-malaysias-meandering-
economy-in-2020/.
OECD. 2019. OECD Economic Surveys |Malaysia | July 2019. Ebook. OECD.
http://www.oecd.org/economy/surveys/Malaysia-2019-OECD-economic-survey-overview.pdf.
Selvachandran, Ganeshsree, Madhumangal Pal, Tahani A. Abdusalam Alhawari, and Abdul
Razak Salleh. "Interval-valued complex fuzzy sets and its application to the malaysian
economy." International Journal of Fuzzy System Applications (IJFSA) 7, no. 1 (2018): 22-31.
Tradingeconomics.com (a). 2020. "Malaysia GDP Annual Growth Rate | 2000-2019 Data | 2020-
2022 Forecast | Calendar". Tradingeconomics.Com. https://tradingeconomics.com/malaysia/gdp-
growth-annual.
Tradingeconomics.com (b). 2020. "Malaysia Business Confidence | 1998-2019 Data | 2020-2022
Forecast | Calendar". Tradingeconomics.Com. https://tradingeconomics.com/malaysia/business-
confidence.
Wong, Kum Yeen, Joon Huang Chuah, and Chris Hope. "As an emerging economy, should
Malaysia adopt carbon taxation?." Energy & Environment 30, no. 1 (2019): 91-108.
World Bank. 2020. "World Bank Open Data | Data". Data.Worldbank.Org.
https://data.worldbank.org/.