Statutory Requirements

In accordance with section 13 of the Central Bank of Malaysia Act 2009, Bank Negara Malaysia hereby
publishes and has transmitted to the Minister of Finance a copy of this Annual Report together with a
copy of its Financial Statements for the year ended 31 December 2009, which have been examined and
certified by the Auditor-General. The Financial Statements will also be published in the Gazette.
For the purposes of section 115 of the Development Financial Institutions Act 2002, the annual report
on the administration of the Development Financial Institutions Act 2002 and other related matters for
the year ended 2009 is incorporated in Bank Negara Malaysia’s Financial Stability and Payment Systems
Report 2009 which forms an integral part of this Annual Report 2009.


Zeti Akhtar Aziz
Chairman
24 March 2010 Board of Directors
Tan Sri Dato’ Sri Dr. Zeti Akhtar Aziz
D.K. (Johor), P.S.M., S.S.A.P., S.U.M.W., D.P.M.J.
Governor and Chairman
Dato’ Ooi Sang Kuang
D.M.P.N.
Deputy Governor
Dato’ Zamani bin Abdul Ghani
D.P.S.K., D.M.S.M., D.S.M., K.M.N.
Deputy Governor
Dato’ Mohd Razif bin Abd Kadir
D.P.M.S., D.I.M.P., D.P.M.P.
Deputy Governor
Tan Sri Datuk Seri Dr. Wan Abdul Aziz bin Wan Abdullah
P.S.M., S.P.S.K., S.S.A.P., S.P.D.K., D.P.S.K., S.M.W., A.M.N.
Datuk Oh Siew Nam
P.J.N.
Tan Sri Datuk Amar Haji Bujang bin Mohd. Nor
P.S.M., D.A., P.N.B.S., J.S.M., J.B.S., A.M.N., P.B.J., P.P.D.(Emas)
Dato’ N. Sadasivan
D.P.M.P., J.S.M., K.M.N.
Tan Sri Dato’ Seri Mohd Hassan Marican
P.S.M., S.S.D.K., S.U.M.W., S.P.M.T., D.S.M.T., P.N.B.S., A.M.K.
Tan Sri Dr. Sulaiman bin Mahbob
P.S.M., P.J.N., S.S.A.P., D.J.B.S., J.S.M., S.M.J., P.M.P., K.M.N., A.M.N.
(Tan Sri Dr. Sulaiman Mahbob was appointed as member of the Board of Directors effective
25 November 2009)

Board of Directors
Governor Tan Sri Dr. Zeti Akhtar Aziz

Deputy Governor Dato’ Ooi Sang Kuang
Deputy Governor Dato’ Zamani bin Abdul Ghani
Deputy Governor Dato’ Mohd Razif bin Abd. Kadir

Secretary to the Board Dato’ Mohd Nor bin Mashor

Assistant Governor Dato’ Muhammad bin Ibrahim
Assistant Governor Nor Shamsiah binti Mohd Yunus
Assistant Governor Dato’ Mohd Nor bin Mashor
Assistant Governor Gopala Krishnan Sundaram
Assistant Governor Dr. Sukhdave Singh
Assistant Governor Bakarudin bin Ishak
Assistant Governor Norzila binti Abdul Aziz

Director
Governor’s Office Suhaimi bin Ali
Corporate Communications Abu Hassan Alshari bin Yahaya
Strategic Management Donald Joshua Jaganathan
Special Investigation Sani bin Ab. Hamid
Financial Intelligence Wan Mohd Nazri bin Wan Osman
Internal Audit Tan Nyat Chuan
Economics
Economics Marzunisham bin Omar
Monetary Assessment and Strategy Fraziali bin Ismail
International Nazrul Hisyam bin Mohd Noh
Regulation
Prudential Financial Policy Jessica Chew Cheng Lian
Financial Sector Development S. Abd. Rasheed bin S. Abd Ghafur
Financial Surveillance Madelena binti Mohamed
Islamic Banking and Takaful Ahmad Hizzad bin Baharuddin
Development Finance and Enterprise Kamari Zaman bin Juhari
Consumer and Market Conduct Koid Swee Lian
Supervision
Financial Conglomerates Supervision Che Zakiah binti Che Din
Insurance and Takaful Supervision Yap Lai Kuen
Banking Supervision Marina binti Abdul Kahar

Regulation and Supervision Administration Unit Siti Ramlah binti Ahmad

Payment Systems Policy Cheah Kim Ling

Investment and Operations
Investment Operations and Financial Markets Adnan Zaylani bin Mohamad Zahid
Currency Management and Operations Ramli bin Saad
Foreign Exchange Administration Wan Hanisah binti Wan Ibrahim
Corporate Resources
Human Resource Management Mohd. Adhari bin Belal Din
Finance Rafiza binti Ghazali
Legal Jeremy Lee Eng Huat
Human Capital Development Centre Arlina binti Ariff
Risk Management Chung Chee Leong
Corporate Services Azmi bin Abd Hamid
IT Services Alizah binti Ali
Statistical Services Toh Hock Chai
Central Banking Services V. Vijayaledchumy
Property and Services Zulkifli bin Abd Rahman
Security Mior Mohd Zain bin Mior Mohd Tahir
Bank Negara Malaysia Museum and Art Gallery Muhammad Fawzy bin Ahmad
Sasana and Lanai Kijang Management Office Lim Foo Thai

MIFC Promotion Unit Shariffuddin bin Khalid

Chief Representative
London Representative Office Azman bin Mat Ali
New York Representative Office Mohamad Ali Iqbal bin Abdul Khalid

Branch Manager
Johor Bahru Kamalullail bin Ramli
Kuching Ishak bin Musa
Shah Alam Mohd. Khir bin Hashim
Kuala Terengganu Azizan bin Mohd Ali
Kota Kinabalu Ahmad bin Abd Rahim
Pulau Pinang Rosnani binti Mahamad Zain

Governor Tan Sri Dr. Zeti Akhtar Aziz
Deputy Governor Dato’ Ooi Sang Kuang
Deputy Governor Dato’ Zamani bin Abdul Ghani
Deputy Governor Dato’ Mohd Razif bin Abd. Kadir
Secretary to the Board Dato’ Mohd Nor bin Mashor
Assistant Governor Dato’ Mohamad Daud bin Hj. Dol Moin
Assistant Governor Dato’ Muhammad bin Ibrahim
Assistant Governor Nor Shamsiah binti Mohd Yunus
Assistant Governor Dato’ Mohd Nor bin Mashor
Assistant Governor Lillian Leong Bee Lian
Assistant Governor Gopala Krishnan Sundaram
Assistant Governor Dr. Sukhdave Singh
Director
Governor’s Office Suhaimi bin Ali
Corporate Communications Abu Hassan Alshari bin Yahaya
Statistical Services Chew Siew Kheam
Special Investigation Sani bin Ab. Hamid
Internal Audit Tan Nyat Chuan
Financial Intelligence Wan Mohd Nazri bin Wan Osman @ Wan Abdullah
Economics
Monetary Assessment and Strategy Fraziali bin Ismail
Economics Marzunisham bin Omar
International Ismail bin Alowi
Regulation
Islamic Banking and Takaful Ahmad Hizzad bin Baharuddin
Financial Sector Development S. Abd. Rasheed bin S. Abd Ghafur
Development Finance and Enterprise Kamari Zaman bin Juhari
MIFC Promotion Unit Shariffuddin bin Khalid
Prudential Financial Policy Jessica Chew Cheng Lian
Financial Surveillance Madelena binti Mohamed
Consumer and Market Conduct Koid Swee Lian
Supervision
Banking Supervision Chung Chee Leong
Financial Conglomerates Supervision Che Zakiah binti Che Din
Insurance and Takaful Supervision Yap Lai Kuen
Payment Systems Policy Cheah Kim Ling
DFI Supervision Mahdi bin Mohd. Ariffin
Investment and Operations
Investment Operations and Financial Market Norzila binti Abdul Aziz
Currency Management and Operation Ramli bin Saad
Foreign Exchange Administration Wan Hanisah binti Wan Ibrahim
Organisation Services
Human Resource Management Mohd. Adhari bin Belal Din
Legal Jeremy Lee Eng Huat
Human Capital Development Centre Arlina binti Ariff
Corporate Services Dato' Mohd Nor bin Mashor
Strategic Management Donald Joshua Jaganathan
Central Banking Services V. Vijayaledchumy
Finance Abdul Aziz bin Abdul Manaf
IT Services Alizah binti Ali
Property and Services Zulkifli bin Abd Rahman
Security Mior Mohd Zain bin Mior Mohd Tahir
Risk Management Santhini a/p Chandrapal
Sasana and Lanai Kijang Management Office Lim Foo Thai
Head of Unit
Regulation and Supervision Administration Siti Ramlah binti Ahmad
Chief Representative
London Representative Office Azman bin Mat Ali
New York Representative Office Mohamad Ali Iqbal bin Abdul Khalid
Branch Manager
Johor Bahru Kamalullail bin Ramli
Kuching Ishak bin Musa
Shah Alam Mohd. Khir bin Hashim
Kuala Terengganu Azizan bin Mohd Ali
Kota Kinabalu Ahmad bin Abd Rahim
Pulau Pinang Rosnani binti Mahamad Zain
Annex
5
Contents
Governor’s Statement
Economic Developments in 2009
3 The International Economic Environment in 2009
7 The Malaysian Economy in 2009
11 Domestic Demand Conditions in 2009
12 White Box: How Did the Recent Global Recession Affect the Malaysian Economy?
17 Sectoral Review
22 White Box: Remaining Competitive: Issues in Enhancing Productivity, Energy Efficiency and
Innovation in the Manufacturing Sector
30 External Sector
36 White Box: Nature and Trends of Capital Flows in Malaysia
45 Labour Market Developments
48 Price Developments

Monetary and Financial Conditions
53 Overview
53 International Monetary and Financial Conditions
56 Domestic Monetary and Financial Conditions
64 Financing of the Economy
Monetary Policy in 2009
71 Overview
71 Monetary Policy in 2009
74 Monetary Operations in 2009
77 White Box: Monetary Policy Process under the Central Bank of Malaysia Act 2009

Outlook and Policy
81 International Economic Outlook in 2010
83 Malaysian Economy in 2010
84 White Box: Potential Output of the Malaysian Economy
92 Monetary Policy in 2010
93 Fiscal Policy in 2010
96 White Box: Transitioning into a High Income Economy: Policy Considerations
Governance, Communications and Organisational Development
103 Overview
104 Governance
105 White Box: The Central Bank of Malaysia Act 2009
111 Communications
113 Organisational Development
119 Organisation Structure

Annual Financial Statements
126 Balance Sheet as at 31 December 2009
127 Income Statement for the Year Ended 31 December 2009
128 Notes to the Financial Statements
Annex
6
While the world economy experienced the worst effects of the global financial crisis in the first
half of 2009, most economies experienced a recovery in the second half of the year. The swift
and concerted policy actions implemented across the world were instrumental in avoiding a
deep, fundamental depression of the global economy.
As a highly open economy, the Malaysian economy was significantly affected by the collapse
in world trade which started in the second half of 2008. The deterioration in the external
sector had by early 2009 spilled-over to deeply affect domestic demand. The significant and
swift domestic policy responses, had together with Malaysia’s strong economic fundamentals,
brought about an economic recovery in the second half of the year. The robust financial sector
also provided crucial support for the domestic economy. Overall, the Malaysian economy in
2009 contracted by 1.7%, performing significantly better than expected.

While downside risks to growth remain in the advanced economies, emerging economies
in general, and Asia in particular, have shown a higher degree of resilience and have better
prospects for a sustained recovery. Asia is expected to continue to lead the global recovery as
the sources of growth become more broad-based. Domestic demand is expected to strengthen
with better employment conditions and uninterrupted credit flows. Investment is expected to
rebound with the planned investment in infrastructure and the recovery in external demand. Of
importance is the growth in intra-regional trade through the sustained expansion in domestic
demand within the region. This trend will not only mutually reinforce growth in the region but
will also contribute towards the rebalancing of global growth.
The positive growth of 4.5% for the Malaysian economy in the fourth quarter of 2009 is
expected to improve further in 2010. The Malaysian economy is projected to expand by
4.5-5.5% in 2010, underpinned by strengthening domestic demand and supported by the
improving external environment. Growth is expected to be increasingly driven by private
sector activity. Private consumption will benefit from further improvements in the labour
market, rising disposable incomes and improved consumer confidence. Additionally, private
investment is expected to recover in 2010, in line with the strengthening of global trade
and increasing domestic demand. While inflation is expected to rise with the recovery in
global economic activity, the upward trend in global commodity prices, and some revisions in
administered prices by the Government, inflation is nevertheless expected to remain at modest
levels during the year.
With clear signs of an economic recovery, steps have been taken to normalise interest rates.
The extraordinary conditions under which the interest rates were reduced, now no longer
prevail. Maintaining an extremely low interest rate environment for an extended period of
time could result in disintermediation, financial imbalances and the underpricing of risks. Such
developments would undermine the recovery in the economy. Despite the move to normalise
interest rates, the overall stance of monetary policy will continue to remain accommodative to
provide support to domestic economic activity.
Governor’s Statement
Over the medium term, the more competitive global environment creates urgency for Malaysia to
transition to a high value-added, high-income economy. Given that private sector-led economic
activity is the main driver of growth in such an economy, Malaysia is putting in place wide ranging
strategies in its ongoing transformation process to provide an enabling environment in which high
productivity, competitiveness and innovation are key elements in the e-economy. The economy
can no longer rely on the accumulation of factors of production to remain competitive. Three key
areas of priority are to have a high quality workforce, to develop competition-driven markets and to
strengthen further our existing institutional and physical infrastructure. Through the development of
an enabling and competitive economic environment, Malaysia will be well positioned to benefit from
the new opportunities and to deal with the potential challenges in this post crisis era.
In a highly uncertain environment, regional cooperation has continued to serve as a vital anchor
in maintaining regional macroeconomic and financial stability, developing regional financial
infrastructure and promoting regional integration. The year 2009 marked a key milestone with the
multilateralisation of the Chiang Mai Initiative (CMI) liquidity support mechanism to allow for the
effective pooling and drawdown of liquidity support among member countries. Concerted steps
were also taken to further enhance the integrated crisis management and resolution mechanism put
in place by the Monetary and Financial Stability Committee of the Executives’ Meeting of East Asia-
Pacific (EMEAP) Central Banks grouping. In addition, efforts to further develop the regional bond
markets and to accelerate the pace of financial integration to support economic development in the
region will continue to be a focal component of regional cooperation.
Regional collaboration with other central banks and supervisory agencies of emerging economies
was also expanded and strengthened during the year. This collaboration covered a wide range
of areas, including organisational development and capacity building to increase Central Bank
effectiveness. It also included programmes that were organised to share knowledge and information
with other regulators in the area of financial inclusion, microfinance and Islamic Finance. Several
of the programmes have also been conducted in collaboration with international development
agencies including the Islamic Development Bank, the Consultative Group to Assist the Poor and the
International Finance Corporation. The Bank’s international technical cooperation has focussed on
the sharing of knowledge on central banking practices and building collaborative relationships with
other central bankers from emerging economies.
Amid the changing global financial landscape and continued transformation of the Malaysian
economy, the Central Bank of Malaysia Act 2009, which came into force on 25 November 2009,
places the Bank on a new legal foundation. The Act is the culmination of a 2-year review by the
Bank of central banking legislation, taking into account the complexities of the economic and
financial environment in Malaysia as well as global trends. It mandates the Bank to promote
monetary stability and financial stability conducive to the sustainable growth of the Malaysian
economy, and institutionalises the policy autonomy enjoyed by the Bank during the 50 years of its
existence. With greater clarity and focus in the mandates of the Bank and the powers necessary
to achieve these mandates, the accountability framework and governance structure have been
considerably enhanced. This has been achieved by institutionalising the best practices that had been
adopted for some years now by the Bank.
As part of the organisational transformation to become more strategy-focused and performance-
driven, the Bank commenced the implementation of the 3-year Business Plan that has been
developed in 2009. This is supported by the increased organisation-wide clarity of the strategic
results and enhanced cross-functional collaboration required to deliver these results. Rigorous
strategy reviews continue to be conducted to evaluate the overall performance and raise the
effectiveness of the Bank in performing its mandates. In addition, in ensuring that the Bank has
access to the best technical and analytical skills, significant investment has been allocated towards
building a high performance workforce that includes enhanced formal training and changes to
work practices. Leadership development was also accorded emphasis to ensure a continuous
strengthening of the leadership pipeline. In addition, more emphasis was given to project based
and collaborative work processes, which have also broadened and improved the skills and
competencies of staff in core areas of the Bank’s work. A structured and robust talent assessment
process has also been put in place and is accompanied by a more dynamic and differentiated
reward system to ensure that the incentives are appropriately aligned.
Finally, I wish to express my appreciation to my colleagues and all staff of Bank Negara Malaysia
for their dedication and perseverance in performing their responsibilities to fulfil our mandates
in the most challenging of conditions in 2009. I would also like to thank the Board of Directors
for their unwavering support to the Bank. Under the new Central Bank Act, the Board and the
various Board committees have a significantly enhanced role in the governance of the Central
Bank. We wish to record our deep appreciation to a valued board member, Tan Sri Dato’ Seri
Mohd Hassan Marican, for his contribution to the Board. He is retiring following the completion
of his term. At the same time, I wish to welcome Tan Sri Dr. Sulaiman Mahbob to the Board and
Encik Chin Kwai Yoong who will be joining the Board in 2010. The Bank, going forward, will
continue to persevere in discharging our responsibilities and to rise to the challenges, upholding
the trust that has been placed in us.
Zeti Akhtar Aziz
Governor
24 March 2010
Economic Developments in 2009
1
The International Economic Environment
The Malaysian Economy in 2009
Domestic Demand Conditions in 2009
White Box: How Did the Recent Global Recession Affect
the Malaysian Economy?
Sectoral Review
White Box: Remaining Competitive: Issues in Enhancing Productivity,
Energy Efficiency and Innovation in the Manufacturing Sector
External Sector
White Box: Nature and Trends of Capital Flows in Malaysia
Labour Market Developments
Price Developments
3
7
11
12
17
22
30
36
45
48
Economic Developments in 2009
Annual Report 2009
2
3
Economic Developments in 2009
THE INTERNATIONAL ECONOMIC
ENVIRONMENT IN 2009
In the first half of 2009, the global economy
experienced the sharpest contraction since the
Second World War, with countries accounting
for more than 60% of world output mired in a
synchronised recession. The full impact of the
2008 international financial crisis on the real
economy was felt in the first quarter of 2009,
where a large number of economies experienced
significant contractions in real GDP. In the
advanced economies, the financial crisis and the
ensuing credit crunch led to a sharp decline in
private sector demand. Household consumption
was curtailed, affected by a combination of
factors including deteriorating employment
prospects, falling house prices and difficulties in
obtaining access to credit. Similarly, businesses
cut their production sharply while inventories
were drawn down to abnormally low levels amid
weak demand and tight credit conditions. The
international production and trade network
unravelled, sending shocks to the emerging
economies. The Asian economies, particularly
those with a higher degree of trade openness,
were affected by the collapse in world trade that
resulted from the sudden plunge in demand
from the advanced economies, leading to
double-digit declines in exports and production.
The deterioration in the trade-related sectors
subsequently impacted the rest of the economy
as household and business confidence were
adversely affected.
The global economy
experienced the sharpest
contraction of the post-war
period in the first half of 2009
before entering into a gradual
but uneven recovery in the
second half of the year
The severe global financial crisis and the sharp
global recession that ensued led to unprecedented
policy responses by governments and monetary
authorities across the world. Governments
introduced large fiscal stimuli, ranging between
1 – 12% of GDP, while central banks aggressively
eased monetary policy as interest rates were
reduced to record lows. In the major advanced
economies, quantitative easing and financial
support measures were also introduced, primarily
to provide liquidity to financial markets and to
restore stability in their financial systems.
The extraordinary policy responses contributed
to the stabilisation of the financial markets and
provided some support to the real economy. Of
importance, the large fiscal spending and the
restoration of normal functioning of financial
markets arrested the sharp deterioration in
economic activity. As a result, economic activity
in most economies began to stabilise by the
middle of the year and countries started to
gradually emerge from the recession in the
second half of 2009.
Economic recovery, however, remained fragile and
uneven. The fragility of the recovery was evident
as the growth experienced by most countries
in the second half of 2009 continued to rely
heavily on the fiscal support. In the advanced
economies, high unemployment, ongoing
deleveraging by the private sector and weak
financial systems, continued to weigh on private
sector activity. Economic recovery was, however,
more pronounced in the emerging economies,
particularly in Asia, where domestic demand was
supported by sizeable fiscal stimuli and reinforced
by the uninterrupted access to financing to the
private sector. The recovery of intra-regional trade
also provided support to growth.
The crisis in the international financial markets
reached its peak in the first quarter of 2009
following the fallout from the failure of the US
investment bank, Lehman Brothers, in the fourth
quarter of 2008. Further losses revealed by major
global financial institutions and uncertainty over
the solvency of these large institutions amid
heightened concern over systemic failure in a
number of financial markets caused a flight
to safer assets, including cash. As a result, the
securitised debt markets froze, market liquidity
dried up and global equity markets declined
sharply to multi-year lows by March 2009. The
extraordinary policy measures, including near zero
interest rates, quantitative easing, and measures
Annual Report 2009
4
to ease liquidity and credit conditions that were
taken in the major advanced economies,
were important in alleviating the stress in the
international financial markets, hence enabling
the cost of financing to decline gradually.
By the second quarter, credit spreads began to
narrow and equity prices gradually recovered,
as risk appetite improved. Interbank markets
started to function again, followed by
stabilisation in short-term money markets in
response to central banks’ aggressive liquidity
injection into the financial system. However,
the improvement in the interbank markets
did not translate into higher lending to the
private sector in the advanced economies,
largely reflecting the continued weakness of the
financial institutions.
In the United States (US), real GDP contracted
sharply by an annualised rate of 6.4% in the
first quarter of 2009, its biggest contraction in
29 years. The decline in GDP was largely due to
the contraction in fixed investment and large
inventory drawdown as businesses responded
to the significant drop in overall demand since
late 2008 by cutting production aggressively.
In response, the US government unveiled a
USD787 billion fiscal stimulus in February 2009,
consisting mainly of tax rebates to households
and businesses and infrastructure spending. On
the monetary front, with the federal funds rate
reduced to near zero since December 2008, the
Federal Reserve (Fed), US Treasury and the FDIC
implemented quantitative measures in the form
of recapitalisation of banks, guarantees for banks’
debt, purchases of illiquid and impaired assets held
by the financial institutions, particularly mortgage-
backed securities and other securities backed by
consumer loans, to thaw the frozen credit markets
and restore market functioning.
The Fed introduced programmes to purchase
USD1.25 trillion of agency mortgage-backed
securities, USD175 billion of agency debt and
USD300 billion of US treasury securities with
the objective of lowering the interest burden for
financially-constrained home mortgage borrowers.
The extraordinary measures caused the Fed’s
balance sheet to expand by 150% to reach
USD2.2 trillion, underlining the heavy reliance of
the financial system on the central bank’s support.
The Fed’s move to assist the housing market was
further supported by the fiscal stimulus in the form
of tax credits for home buyers, boosting demand
for housing. The policy responses stabilised the
housing and financial markets, as well as the
overall economic conditions by the second quarter
of the year. The containment of systemic risk,
restoration of functioning of financial markets
and large fiscal stimulus contributed to gradual
recovery in the equity market from its lows in
March, together with the stabilising of house
prices since June helped to bring about positive
wealth gain of about USD5.7 trillion for the US
households from the second until the fourth
quarter. The increase in wealth restored part of the
wealth loss of USD17.5 trillion experienced during
the period mid-2007 to the first quarter of 2009.
By the third quarter, consumption grew as
households also benefited from tax incentives for
the purchase of automobiles. After declining at
Table 1.1
World Economy: Key Economic Indicators
Real GDP
Growth (%)
Inflation (%)
2008 2009e 2008 2009e
World Growth 3.0 -0.8 - -
World Trade 2.8 -12.3 - -
Major Advanced
Economies
United States 0.4 -2.4 3.8 -0.4
Japan -1.2 -5.2 1.4 -1.4
Euro area 0.6 -4.1 3.3 0.3
United Kingdom 0.5 -5.0 3.6 2.2
East Asia 6.9 5.1 5.9 0.3
Asian NIEs
1
1.7 -0.9 4.5 1.2
Korea 2.2 0.2 4.7 2.8
Chinese Taipei 0.7 -1.9 3.5 -0.9
Singapore 1.4 -2.0 6.6 0.6
Hong Kong SAR
2
2.1 -2.7 4.3 0.5
The People's Republic
of China
9.6 8.7 5.9 -0.7
ASEAN 4.6 1.1 7.7 2.4
Malaysia 4.6 -1.7 5.4 0.6
Thailand 2.5 -2.3 5.5 -0.9
Indonesia 6.0 4.5 9.9 4.8
Philippines 3.8 0.9 9.3 3.3
India
3
7.4 6.5 9.1 2.1
1
Newly industrialised economies
2
Inflation refers to composite price index
3
Inflation refers to wholesale price index
e Estimate
Source: International Monetary Fund, National Authorities and
Bank Negara Malaysia estimates
Economic Developments in 2009
5
a slower annualised rate of 0.7% in the second
quarter, GDP expanded at an annualised rate of
2.4% in the second half of 2009. The recovery in
the US in the second half of the year was driven
by the growth in private consumption, residential
fixed investment and government spending.
Nevertheless, the pace of recovery remained slow
and highly dependent on policy support. In spite
of the weak recovery in the second half, overall
private consumption continued to be constrained
by rising job losses. The US economy had lost a
total of 8.4 million jobs between end-2007 and
end-2009 and the unemployment rate reached
10% in December 2009. Furthermore, many
households continued to reduce their debt as
falling house prices had eroded a large part of
their wealth. For the year as a whole, the US
economy declined by 2.4%.
The other advanced economies mirrored the
US’s growth path closely throughout the year.
In the euro area, growth contracted sharply by
2.5% quarter-on-quarter in the first quarter, its
largest decline since the data was first recorded,
due mainly to the large contraction in exports
and fixed investment. The deteriorating external
environment also spilled into weaker domestic
demand following the higher unemployment,
tight credit conditions and falling house prices.
After reducing the interest rates by 150 basis
points to 2.5% in 2008, the European Central
Bank (ECB) continued to lower its refinancing rate
by a further 150 basis points to 1% by May 2009.
The central bank also embarked on a €60 billion
covered bond purchase to inject liquidity in the
financial system and stimulate lending activity in
the euro area.
While the fiscal stimulus in the euro area was
relatively smaller than the US, a larger part
of euro area’s fiscal support came through
‘automatic stabilisers’, particularly in terms of
unemployment and health care benefits. Coupled
with tax incentives for employers to retain labour,
unemployment in the euro area did not rise as
much as the US. Fiscal measures were also directed
at boosting consumption through tax rebates,
especially on automobiles as well as infrastructure
spending. This had enabled a gradual revival in
consumer and business confidence, allowing
the euro area to turn around to register a small
positive GDP growth on a quarter-on-quarter
basis in the third and fourth quarters, led by
Germany and France. For the year as a whole, the
euro area contracted by 4.1%. Nevertheless, the
recovery in the euro area was uneven as countries
including Spain and Greece remained in recession
given the severity of the housing crisis and high
unemployment. The euro area was also affected by
structural unemployment and the worsening fiscal
positions in several euro economies, giving rise to
concerns on the sustainability of fiscal stimulus in
supporting growth.
Meanwhile, in the United Kingdom (UK), the
economy recorded six consecutive quarter-on-
quarter declines, its longest decline on record,
up to the third quarter of 2009. This was due
mainly to the persistent weakness in domestic
demand following rising unemployment, tight
credit and negative home equity from significantly
lower house prices. Meanwhile, fixed investment
declined sharply in view of falling demand,
difficulty in getting financing and lower capacity
utilisation. The bleak outlook of the economy
prompted the Bank of England (BOE) to reduce
the base lending rate further by 150 basis points
in early 2009 to 0.5% by March 2009, its historical
low. At the same time, the BOE introduced a
£200 billion plan to purchase corporate bonds
and government gilts to inject liquidity into
the economy and ease the credit crunch. A
fiscal stimulus was also implemented to bolster
consumption through tax rebates and automobile
incentives. These measures began to yield some
results, with the UK economy recording a small
positive growth in the fourth quarter of 2009.
However, for the year as a whole, the UK economy
contracted by 5%. The UK economy is confronted
with a continued weak labour market and a
deteriorating fiscal position.
In Japan, real GDP contracted at an annualised
rate of 13.7% in the first quarter, its largest
post-war decline, due mainly to the double-digit
declines in exports and fixed investment. The
contraction in trade spilled into domestic demand,
resulting in weak private consumption amid
persistent deflation. While the Bank of Japan (BOJ)
kept its overnight rate at 0.1%, the central bank
first implemented quantitative easing through
the monthly purchase of government bonds and
later, a ¥10 trillion credit program for commercial
lenders to inject liquidity into the financial system
and to ease the deflationary pressure. Fiscal
stimulus was also introduced to support private
consumption through tax rebates. Benefiting from
the close trade linkages with Asia, particularly
Annual Report 2009
6
PR China, Japan’s real GDP expanded quarter-on-
quarter in the second quarter as exports to Asia
increased. In 2009, PR China overtook the US to
become Japan’s largest trading partner. Meanwhile,
domestic demand remained weak, lagging the
recovery in external demand. For the year as a
whole, Japan recorded a contraction of 5.2%.
In the Asian region, growth performance was
adversely affected by the deterioration in the
export sector, especially in the first quarter. The
more open economies, particularly the newly
industrialised Asian economies, experienced
deeper recessions while other regional economies
with larger domestic markets such as PR China,
Indonesia and the Philippines experienced a
moderation in growth. Growth was further
affected by large inventory drawdowns as firms
sharply reduced production and postponed
investment plans, resulting in abnormally low
level of inventories. As a result, labour market
conditions also weakened, with unemployment
rising in most countries, thus affecting consumer
confidence and spending.
In response to the large contractionary external
demand, regional central banks reduced their
interest rates during the year by between 75
and 275 basis points and adopted liquidity
and guarantee measures to support the overall
growth prospects. Aggressive fiscal spending
plans, ranging from 1% to 12% of GDP, were
unveiled to bolster domestic demand through a
combination of tax rebates, direct cash handouts
and infrastructure spending. In some countries,
tax incentives were also given to firms to retain
their workers. These policy measures had an
important role in restoring consumer and business
confidence, and stabilising labour market
conditions. In addition to the policy support,
strong banking institutions and thus the continued
financial intermediation, and the relatively healthy
financial position of the private sector facilitated
a faster recovery in the domestic demand in
the region, while stronger intra-regional trade
provided an additional impetus to growth. As
a result, most regional economies started to
experience positive quarter-on-quarter growth
in the second quarter, ahead of the advanced
economies. The recovery in the Asian economies
gathered further momentum in the second
half of the year as global economic conditions
gradually improved. PR China, in particular, which
introduced the largest fiscal stimulus package of
11.9% of GDP, recorded 10.7% growth in the
fourth quarter of 2009, its strongest growth since
the first quarter of 2008.
On the global inflation front, many advanced
and regional economies had experienced technical
deflation since the early part of the year due to
lower commodity prices and the weak demand
conditions. While the headline inflation was
influenced by the high base in 2008, core inflation
remained positive for most economies, suggesting
that the threat of actual deflation had been
minimal. Following the gradual recovery in the
regional economies from the second quarter and
by the advanced economies in the third quarter,
commodity prices began to rise steadily with
oil prices reaching close to USD80 per barrel by
year-end. Consumer prices in most economies
started to edge higher, reflecting the trend in
commodity prices although demand pressure
remained subdued. While consumer price inflation
Chart 1.1
Cumulative Movements of Policy Rates
since 2009
Note: Current policy rates in parentheses, as at mid-March 2010
Source: National Authorities
-275
-150 -150 -150 -150
-100
-75
-300
-250
-200
-150
-100
-50
0
Indonesia
(6.5%)
United
Kingdom
(0.5%)
Euro area
(1.0%)
Thailand
(1.25%)
Philippines
(4.0%)
Korea
(2.0%)
Chinese
Taipei
(1.25%)
(
B
a
s
i
s

p
o
i
n
t
s
)
Chart 1.2
Fiscal Stimulus in Selected Economies
1
Of which, direct fiscal injection is USD5.9 billion or 3.3% of GDP
2
Amount spent under the European Economic Recovery Plan
Note: As at mid-March 2010
Source: International Monetary Fund, National Authorities, World Bank and
Bank Negara Malaysia estimates
Indonesia
United Kingdom
Euro area
2
Philippines
Thailand
Hong Kong SAR
Korea
United States
Japan
Chinese Taipei
11.9
9.9
7.9
5.8
5.8
5.5
5.4
4.8
4.3
2.7
1.8
1.3
1.3
0 2 4 6 8 10 12 14
Singapore
Malaysia
1
PR China
% of GDP
Economic Developments in 2009
7
its strongest level in 14 years due to the higher
repatriation of income from investments abroad.
This trend reversed by December when the yen
weakened following the decision of the Bank of
Japan to expand quantitative easing. In the Asian
region, most regional currencies appreciated
against the US dollar following improved
sentiments driven by the faster pace of recovery
in the region vis-à-vis the advanced economies.
Among regional currencies, the rupiah recorded
the strongest appreciation due to the resilient
economic conditions and more favourable
political climate.
THE MALAYSIAN ECONOMY IN 2009
The Malaysian economy contracted by 1.7%
in 2009, a year when the global economy
experienced its deepest downturn in modern
history. The domestic economy experienced the
full impact of the global recession in the first
quarter, declining by 6.2%, marking the first year-
on-year contraction in real GDP since the third
quarter of 2001. The collapse in global demand
and world trade led to double-digit declines in
Malaysia’s exports and industrial production. Given
the high degree of openness of the economy,
the deterioration in external demand affected
employment, income and overall business and
consumer sentiment, causing private consumption
and private investment activities to decline in
the first quarter of the year. Growth during the
quarter was also affected by large drawdowns of
inventory, particularly in the manufacturing and
commodity sectors.
Despite a sharp contraction
in the first quarter, the
Malaysian economy contracted
moderately by 1.7% in 2009 as
recovery strengthened in the
second half of the year
However, the accelerated implementation of
fiscal stimulus measures, the aggressive easing
of monetary policy and the comprehensive
measures introduced to ensure continued access
to financing contributed to stabilisation in the
domestic economy in the second quarter and
subsequent recovery in the second half of the
year. In addition to higher public spending, the
Index (Jan '03 = 100)
Chart 1.3
Indices of Primary Commodity Prices
Source : International Monetary Fund
0
50
100
150
200
250
300
350
400
450
M
a
r


0
4
O
c
t


0
4
M
a
y


0
5
D
e
c


0
5
J
u
l


0
6
F
e
b


0
7
S
e
p


0
7
A
p
r


0
8
N
o
v


0
8
J
u
n


0
9
J
a
n


1
0
Metals
Crude Oil
Food
was benign throughout the year, rising equity
and property prices in several economies raised
concerns on asset price inflation. In response,
several regional economies undertook measures
to curb the formation of asset bubbles, either
through imposing administrative measures in the
property market or on short-term capital flows.
In the foreign exchange markets, the US dollar
started the year on a strong note, appreciating
against most major currencies in the first two
months. The dollar strength was attributed to the
portfolio flows into dollar-denominated assets,
reflecting investor risk aversion amid deteriorating
global growth prospects and ongoing weakness in
global financial markets. The dollar also benefited
from the waning confidence in the euro following
concerns over European banks’ exposure to the
Eastern European economies. However, as the
global equity markets began to recover from their
multi-year lows in March, the US dollar started to
weaken following the improvement in investor risk
appetite that caused a shift out of low-yielding
dollar-denominated assets to higher yielding assets
denominated in other currencies. As a result, the
other major currencies outperformed the dollar
throughout most of the year. The performance of
the euro and the pound sterling were strongest at
about mid-2009, following expectations of a faster
pace of recovery in these economies as compared
to the US. However, lagging performance of the
UK economy in the latter half of the year led to a
slight weakening of the pound sterling. Towards
the end of the year, both the euro and the pound
sterling depreciated considerably due to concerns
over the deteriorating fiscal positions in the two
economies. Meanwhile, the yen appreciated to
Annual Report 2009
8
Table 1.2: Malaysia - Key Economic Indicators
2007 2008 2009p 2010f
Population (million persons) 27.2 27.7 28.3 28.9
Labour force (million persons) 11.8 12.0 12.1 12.2
Employment (million persons) 11.4 11.6 11.6 11.8
Unemployment (as % of labour force) 3.2 3.3 3.7 3.6
Per Capita Income (RM) 23,033 25,784 23,381 25,180
(USD) 6,700 7,737 6,634 7,416
6
NATIONAL PRODUCT (% change)
Real GDP at 2000 prices
1
6.2 4.6 -1.7 4.5 ~ 5.5
(RM billion) 504.9 528.3 519.2 543.4
Agriculture, forestry and fishery 1.4 4.0 0.4 3.1
Mining and quarrying 2.0 -0.8 -3.8 2.5
Manufacturing 3.1 1.3 -9.3 6.5
Construction 4.7 2.1 5.7 3.7
Services 9.6 7.2 2.6 4.9
Nominal GNI 12.3 14.2 -7.4 10.0
(RM billion) 625.9 715.0 661.8 727.7
Real GNI 5.9 2.0 1.2 3.6
(RM billion) 481.8 491.5 497.4 515.3
Real aggregate demand
2
9.6 6.8 -0.4 3.2
Private expenditure
2
10.7 7.0 -3.4 3.3
Consumption 10.4 8.5 0.8 3.8
Investment 11.8 0.8 -21.8 0.7
Public expenditure
2
6.8 6.3 7.7 2.7
Consumption 6.5 10.9 3.7 -2.7
Investment 7.1 0.7 12.9 9.3
Gross national savings (as % of GNI) 38.2 37.9 31.3 35.2
BALANCE OF PAYMENTS (RM billion)
Goods balance 127.7 170.6 141.5 141.6
Exports (f.o.b.) 605.9 664.3 554.2 615.2
Imports (f.o.b.) 478.2 493.8 412.7 473.7
Services balance 2.4 0.2 3.2 -0.7
(as % of GNI) 0.4 ... 0.5 -0.1
Income, net -13.9 -23.7 -12.6 -19.9
(as % of GNI) -2.2 -3.3 -1.9 -2.7
Current transfers, net -15.7 -17.5 -19.4 -17.1
Current account balance 100.4 129.5 112.7 103.8
(as % of GNI) 16.0 18.1 17.0 14.3
Bank Negara Malaysia international reserves, net
3
335.7 317.4 331.3
(in months of retained imports) 8.4 7.6 9.7
PRICES (% change)
CPI (2005=100)
4
2.0 5.4 0.6 2.0 ~ 2.5
PPI (2005=100)
5
5.5 10.3 -7.1
Real wage per employee in the manufacturing sector 2.7 -4.8 1.9 n.a
1
Beginning 2007, real GDP has been rebased to 2000 prices, from 1987 prices previously
2
Exclude stocks
3
All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance sheet date and the gain/loss
has been reflected accordingly in the Bank’s account
4
Effective
:
from 2006, the Consumer Price Index has been revised to the new base year 2005=100, from 2000=100 previously
5
Effective
:
from 2010, the Producer Price Index has been revised to the new base year 2005=100, from 2000=100 previously
6
Based on average USD exchange rate for the period of January-February 2010
p Preliminary
f Forecast
Note: Numbers may not necessarily add up due to rounding
Economic Developments in 2009
9
1
Effective from the first quarter of 2008, the external debt data of Malaysia has been redefined to treat entities in Labuan International Business and
Financial Centre (Labuan IBFC) as residents
2
Excludes currency and deposits held by non-residents with resident banking institutions
3
Includes loans sold to Cagamas
4
Exclude financial institution transaction
5
Refers to the ratio of loans and holdings of PDS by the banking system to deposits of the banking system
6
Ringgit was pegged at RM3.80=USD1 on 2 September 1998 and shifted to a managed float against a basket of currencies on 21 July 2005
p Preliminary
* Refer to end-year
Table 1.3 Malaysia - Financial and Monetary Indicators
FEDERAL GOVERNMENT FINANCE (RM billion) 2007 2008 2009p
Revenue 139.9 159.8 158.6
Operating expenditure 123.1 153.5 157.1
Net development expenditure 37.5 41.9 49.0
Overall balance -20.7 -35.6 -47.4
Overall balance (% of GDP) -3.2 -4.8 -7.0
Public sector net development expenditure 96.3 124.4 118.0
Public sector overall balance (% of GDP) 1.5 -5.6 -3.8
EXTERNAL DEBT
1
Total debt (RM billion) 187.4 236.1 233.9
Medium- and long-term debt 133.0 156.5 156.0
Short-term debt
2
54.5 79.6 78.0
Debt service ratio (% of exports of goods and services)
Total debt 3.8 2.6 6.5
Medium- and long-term debt 3.4 2.5 6.4
MONEY AND BANKING Change in 2007 Change in 2008 Change in 2009
RM billion % RM billion % RM billion %
Money Supply M1 27.6 19.6 14.0 8.3 17.9 9.8
M3 72.4 9.5 99.1 11.9 85.1 9.1
Banking system deposits 56.5 7.0 103.4 11.9 90.7 9.3
Banking system loans
3
51.2 8.6 82.3 12.8 56.9 7.8
Loan-deposit ratio (end of year)
4
76.2 77.7 77.9
Financing-deposit ratio
4, 5
85.1 85.8 84.6
INTEREST RATES (AVERAGE RATES AS AT END-YEAR) 2007 2008 2009
% % %
Overnight Policy Rate (OPR) 3.50 3.25 2.00
Interbank rates
1-month 3.54 3.30 2.06
Commercial banks
Fixed Deposit 3-month 3.15 3.04 2.03
12-month 3.70 3.50 2.50
Savings deposit 1.44 1.40 0.87
Base lending rate (BLR) 6.72 6.48 5.51
Treasury bill (3-month) 3.43 3.39 2.05
Malaysian Government securities (1-year)* 3.53 2.89 2.12
Malaysian Government securities (5-year)* 3.78 2.99 3.79
EXCHANGE RATES 2007 2008 2009
Movement of Ringgit (end-period) % % %
Change against SDR 1.7 -2.7 0.2
Change against USD
6
6.8 -4.5 1.2
Annual Report 2009
10
policy measures also helped to revive private
sector sentiment, which, together with improving
labour market conditions, led to an expansion
in private consumption in the second half of
the year. Signs also emerged to indicate that
private investment activity had begun to stabilise
towards the end of the year. Moreover, external
demand provided further impetus to growth as
the global economy, particularly the regional
economies, gradually recovered. As a result,
the Malaysian economy resumed its growth
momentum in the fourth quarter, growing by
4.5%, with strengthened domestic and external
demand contributing to growth.
On the supply side, growth in the first quarter
was particularly affected by a sharp decline in the
manufacturing sector, while other sectors, except
construction, also contracted. The manufacturing
sector, particularly the export-oriented industries,
was severely affected by the significant
deterioration in external demand. Nevertheless,
the manufacturing sector gradually improved and
recorded positive growth in the fourth quarter,
in tandem with the recovery in external demand.
Meanwhile, the services sector recorded a
marginal decline in the first quarter due mainly to
contractions in the sub-sectors which are related
to manufacturing and trade activities. In line
with the improvement in domestic demand, the
performance of the services sector had gradually
improved since the second quarter, with growth
coming from the services sub-sectors that are
dependent on domestic economic activity as well
as finance and capital market-related activities.
Nonetheless, growth of the construction sector
had remained positive throughout the period due
primarily to the implementation of construction-
related projects under the Ninth Malaysia Plan
(9MP) and the fiscal stimulus measures.

Labour market conditions weakened considerably
in the first quarter as firms in the manufacturing
sector reduced their operations, particularly in the
first two months of the year. Total retrenchments
increased to a seven-year high of 25,064 persons
in 2009, with one-half the workers being
retrenched in the first quarter. Labour market
conditions began to stabilise in the second
quarter and improved thereafter as retrenchments
declined and firms started to hire new workers.
The quicker-than-expected recovery in the labour
market following improvements in both global
and domestic economic conditions, resulted in a
lower unemployment rate of 3.7% of the labour
force, compared to the earlier forecast of 4.5%.
Despite the challenging economic environment
and declining productivity growth in 2009,
employers in the private sector had continued to
grant salary increments, albeit at a moderate rate
of 3.4% (2008: 5.1%).
Headline inflation averaged 0.6% in 2009 (2008:
5.4%) as inflationary pressures in Malaysia
moderated substantially, in line with global and
domestic developments. Weak global demand
conditions, particularly in the first quarter
of 2009 led to a significant drop in global
commodity prices, especially crude oil prices.
As a result, several countries experienced lower
inflationary pressures during the year. Inflation
in the advanced economies recorded a steep
decline, while inflation in emerging market
economies also saw a decline in 2009, with the
most notable deceleration recorded by China
(2009: -0.7%; 2008: +5.9%). The decline in
global fuel and commodity prices and the lower
inflation in Malaysia’s major trading partners in
turn contributed to lower domestic inflation. The
cumulative reductions in domestic retail petrol
prices in the second half of 2008 contributed
significantly to the moderating trend of domestic
inflation in 2009.
Malaysia’s external position remained strong
in 2009 despite the extremely weak external
environment. The current account continued to
record a large surplus during the year, supported
by a sizeable trade surplus and improvements
in the services account. Although gross exports
deteriorated significantly in 2009, particularly
in the first half of the year, the trade surplus
remained large as lower demand for exports
was also accompanied by a decline in imports.
The services account registered a significant
surplus in 2009 following higher travel receipts
from sustained regional travel activity, as well
as an improvement in the other services deficit.
Meanwhile, the financial account recorded lower
net outflows in 2009, reflecting largely the
significant moderation in portfolio outflows in the
first half of the year and net inflows in the second
half of the year. Both net inflows of foreign direct
investment and outflows of direct investment
abroad also moderated amid the weak economic
conditions, whereas other investment outflows,
which largely consist of trade credits, increased
during the year. As large current account surplus
Economic Developments in 2009
11
more than offset the net outflows in the financial
account, the overall balance of payments recorded
a surplus in 2009, contributing to a further
increase of RM13.9 billion in net international
reserves to RM331.3 billion (or USD$96.7 billion)
as at 31 December 2009.
The Malaysian economy, which was significantly
affected by the developments in the global
economy in the first quarter of 2009, recovered
rapidly to register positive growth in the fourth
quarter. In addition to the improvement in
external demand, the domestic economy was
supported by the accelerated implementation
of fiscal stimulus measures, the accommodative
monetary environment and continued access to
financing. The rapid and comprehensive policy
responses, which also helped to restore consumer
and business sentiments, had an important role in
sustaining domestic demand, which was the main
factor supporting economic activities throughout
the period. In addition, the domestic financial
system remained strong despite the challenging
international financial environment, effectively
performing its financial intermediation function
and facilitating the recovery in domestic demand.
Overall, the continued strength in both economic
and financial fundamentals, as reflected by the
resilience in domestic demand, high international
reserves position, low external debt, sustained
high rate of savings and strong banking sector, has
placed the Malaysian economy in a better position
to grow further going forward.
DOMESTIC DEMAND CONDITIONS IN 2009
Domestic demand contracted by 2.9% in the
first quarter, the first contraction since the third
quarter of 2001, as households and businesses
turned more cautious amid a significant
deterioration in external demand, weaker labour
market conditions and an overall decline in
private sector sentiment. Despite the persistence
of weak external demand, domestic demand
conditions began to stabilise in the second
quarter due to higher public sector spending
following the implementation of fiscal stimulus
measures to support the economy and expansion
in private consumption.
The public sector had an important role in
mitigating the impact of the global recession
on the domestic economy through active
implementation of two stimulus packages
throughout the year. The strong public sector
spending, together with an accommodative
monetary policy, the continued access to
financing, improvements in labour market
conditions and a gradual recovery in external
demand contributed to an expansion in domestic
demand activity in the second half of the year. An
increase in private consumption was supported
by the rebound in consumer sentiment, stable
employment prospects, low inflation and
favourable financing conditions. Although private
investment activity remained weak throughout
2009, there were signs of stabilisation towards
the end of the year as global economic conditions
and external demand started to improve. As a
result, domestic demand turned around to record
a positive growth of 1.7% in the second half of
2009, bringing the overall growth in aggregate
domestic demand for the year to a marginal
decline of 0.4% (2008: +6.8%).
Domestic demand, which
contracted in the first quarter,
recovered in the second half
of 2009 as conditions in the
labour market and external
sector improved
Private consumption recorded a marginal
growth of 0.8% in 2009, marking its slowest
expansion since the Asian Financial Crisis. In the
early part of the year, household spending was
-10
-5
0
5
10
15
20
2002 2003 2004 2005 2006 2007 2008 2009
Annual change (%)
Chart 1.4
Real Domestic Demand Aggregates
Real aggregate domestic demand (excl. stocks)
Real private consumption
Real public expenditure
Real private investment (RHS)
Annual change (%)
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
50
12
Annual Report 2009
How Did the Recent Global Recession Affect the Malaysian Economy?
Introduction
The problems in the US financial system arising from the deteriorating quality of sub-prime assets that
started in mid-2007, escalated into a major and severe global financial crisis in the second half of 2008.
In particular, the failure of a number of large US and global financial institutions in September 2008
generated widespread fear of a systemic disruption across global financial markets which in turn had led
to the “freezing” of the interbank and credit markets in many financial centres around the world. Despite
the unprecedented large and aggressive financial measures taken by the authorities, the crisis intensified
as prices of a large number of classes of financial assets collapsed resulting in a huge negative income and
wealth effect. This, together with a widespread loss of confidence, led to a synchronised recession among
the advanced economies in the second half of 2008, which deepened further in the first quarter of 2009
(Chart 1). Following the implementation of large fiscal and monetary policy stimulus, the global economy
showed signs of stabilisation in the second quarter, and subsequently, gradually recovered towards the end
of 2009. Nevertheless, the recovery of the global economy has been uneven, with growth still weak in the
advanced economies and stronger in the emerging economies.
Chart 1
Advanced Economies in a Synchronised
Recession by End-2008
Source: Haver Analytics
-10
-8
-6
-4
-2
0
2
4
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
2001 2002 2003 2004 2005 2006 2007 2008 2009
Real GDP growth
(Seasonally adjusted; Annual change (%))
US UK Japan Euro area
The Effects of the Global Recession on Malaysia
The global financial crisis and the deleveraging activities in the advanced economies led to disposal of
assets world wide, including in the region, which caused sharp declines in the regional equity and bond
markets. There was a large reversal in short-term capital flows, especially in the second half of 2008 as
these funds were remitted back to the US. This sharp reversal of funds flows was, however, well absorbed
by the domestic financial markets, given the ample liquidity in the financial system and the sound
banking system. The strong reserves position of the country also acted as a buffer for US dollar liquidity
and exchange rate movements during this turbulent period. In addition, the broad-based financial sector
reforms and capacity building measures that have been undertaken following the Asian financial crisis had
increased the financial sector’s resilience to withstand the financial turmoil. The exposure of the domestic
banking system to the sub-prime assets was also limited.
The sharp recession in the advanced economies
had a significant spillover effect on Asian
regional economies through the finance and
trade interlinkages. The global deleveraging
process had also, towards the end of 2008,
triggered large outflows from the region, of
short-term portfolio funds and a sharp decline in
bank financing, causing the substantial declines
in equity and debt markets, slowing foreign
direct investments and weakening of regional
currencies against the US dollar. However, the
underlying fundamental strength of the regional
economies and a sound financial sector in the
region enabled the regional economies to cope
with these adverse developments relatively well
without disruptions in the intermediation process
by the domestic financial systems. The collapse in
global trade led to severe declines in the region’s
exports and industrial production, causing the
more open economies in the region to experience
an economic contraction, while other economies
experienced sharp deceleration in growth in the
fourth quarter of 2008.
Economic Developments in 2009
13
The Malaysian banking system was on a strong foundations when the global financial crisis erupted. The
level of capitalisation of the Malaysian banking system remained high, with a risk-weighted capital ratio of
14.7% at end-December 2009 (end-2008: 12.6%), while the net non-performing loan ratio was low at
1.8% (end-2008: 2.2%). The strong capitalisation and ample liquidity in the banking system had ensured
that the intermediation function remained uninterrupted, as reflected in the continued expansion of loans
outstanding to businesses and households throughout 2009. Total business loans outstanding expanded
by 2.6% in 2009 (end-2008: 13.2%) while household loans outstanding expanded at a sustained high rate
of 9.8% as at end-2009 (end-2008: 9.7%).
As Malaysia is a highly open economy, the impact of the global recession was felt strongly in the
external trade-related sectors. The recession in the advanced economies started to impact the Malaysian
economy in the fourth quarter of 2008. Exports and manufacturing production declined by 7.4% and
11.1% respectively (Chart 2), and private investment activity was dampened by the deteriorating business
conditions. However, the resilience of domestic demand, particularly private consumption, provided support
to the economy, preventing it from contracting in the fourth quarter of 2008 (real GDP growth: 0.1%).
Chart 2
Collapse in World Trade Led to Sharp Contractions
in Malaysia's Gross Exports and Manufacturing
Production
Source: Haver Analytics; Department of Statistics, Malaysia
-40
-30
-20
-10
0
10
20
30
40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Annual change (%)
World trade
Malaysia's gross exports
Malaysia's manufacturing IPI
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
Chart 3
Export-oriented Manufacturing Sector was the
Worst Affected
Source: Department of Statistics, Malaysia
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
-10.0
-5.0
5.0
0.0
10.0
2008
-6.0
-3.0
0.0
3.0
6.0
2009
Annual change (%)
Contribution to real growth
(percentage point)
Services Real GDP (RHS)
Agric. & Mining Manufacturing Construction
Malaysia experienced the full impact of the global crisis in the first quarter of 2009, as the deepening
recession in the advanced economies intensified the impact of a rapid decline in global demand on trade,
production and investment activities in the domestic economy. As the advanced and some emerging
economies slide into a recession in the first quarter of 2009, world trade declined sharply by 28.6%
(4Q 08: -7.4%), and in turn, affected exports from the region, including from Malaysia. Malaysia’s
gross exports declined by 20% during the quarter (4Q 08: -7.4%), resulting in subsequent reductions
in production, particularly in the manufacturing sector (Chart 3). In response to the significantly lower
exports and production activity, firms undertook measures to reduce the cost of labour by enforcing
a freeze on new hiring, initiating pay-cuts, reducing overtime work and laying off some workers.
Retrenchments increased to 12,590 persons in the first quarter, compared with a quarterly average of
3,873 persons during the 2005-2008 period, affecting mainly workers from the manufacturing sector. The
unemployment rate increased to 4% in the first quarter (4Q 08: 3.1%).
Although the income of households in the other sectors that were not directly exposed to external
demand remained relatively unaffected, their spending behaviour was affected by the weak sentiment
following the overall weaker economic conditions and uncertainties over their income outlook and job
14
Annual Report 2009
security. This resulted in a marginal decline in private consumption spending by 0.7%. Total investment
also weakened significantly (-10.8%), following the sharper contraction in private investment spending,
as capacity expansion activity was affected by the considerable decline in external demand, lower-than-
normal capacity utilisation and deteriorating business confidence. As a result, aggregate domestic demand
declined by 2.9% and the economy contracted sharply by 6.2% in the first quarter of 2009 (Chart 4),
the first contraction since the third quarter of 2001. A large inventory drawdown during the quarter,
particularly in the manufacturing and commodity sectors, further contributed to the decline in growth.
Chart 4
External Weakness Led To Broad-based Domestic
Weakness in the Economy by the First Quarter
of 2009
-10.0
-5.0
0.0
5.0
10.0
-20.0
-10.0
0.0
10.0
20.0
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2007 2008 2009
Annual change (%) Annual change (%)
Real aggregate domestic demand (excl. stocks)
Real exports of goods and services
Real GDP (RHS)
Source: Department of Statistics, Malaysia
second quarter of 2009, and subsequently recovered to record a positive growth of 1.7% in the second
half of the year. Of significance is the improvement in private consumption, which recovered to post a
growth of 0.5% in the second quarter, before strengthening further to 1.7% in the fourth quarter.
On the external front, the stabilisation and subsequent gradual recovery in the global economy since the
middle of the year provided further support to the Malaysian economy. In particular, the strong recovery
in the regional economies, especially PR China, benefited Malaysia, with exports to the region starting
to improve in the second half of the year. In particular, Malaysia’s exports to PR China turned around to
record positive annual growth rates from as early as August. The recovery in exports became more broad-
based towards the end of the year, as exports to several advanced economies also began to recover.
External demand contributed positively to growth by the fourth quarter of 2009.
Conclusion
The Malaysian economy, given its high degree of openness, was affected by the global recession which
set in during the third quarter of 2008 and continued into the first quarter of 2009. With the stabilisation
of the global financial markets and the subsequent recovery in the economies of the advanced countries,
the rapid policy responses on both the fiscal and monetary fronts had an important role in sustaining
domestic demand throughout this period. Malaysia’s sound economic fundamentals, strong financial
system and the implementation of comprehensive policy support measures prevented the economy
from slipping into a severe and prolonged period of negative growth. The strong economic and
financial foundations provided the basis for a rapid recovery. The strength and stability of the domestic
financial system throughout this period ensured that financing continued uninterrupted and enabled
the private sector to obtain access to credit. Coupled with the healthy private sector financial position,
this facilitated a fast recovery in domestic demand once the global financial crisis was contained and the
global economic and financial conditions stabilised. These fundamentals enhance the prospects for a
stronger recovery going forward.
Policy Response and the Recovery of the
Malaysian Economy
In response to the global crisis, the Government
introduced several policy measures to mitigate
the adverse impact of the global downturn, and
to prevent the economy from slipping into a
fundamental economic recession (Table 1). These
measures centred around three broad areas,
namely, fiscal policy (two stimulus packages
amounting to RM67 billion or 9.9% of GDP were
unveiled), monetary easing (the Overnight Policy
Rate was reduced by a total of 150 basis points
to 2.00%) and reinforced by comprehensive
measures to ensure continued access to finance.
The implementation of these measures not only
provided direct support to domestic activity, but
equally important, led to a revival in business
and consumer sentiments. As a result, domestic
demand registered a slower decline of 2.2% in the
Economic Developments in 2009
15
Table 1: Policy Responses to Mitigate Economic Downturn
Policy Responses Measures
Two Economic Stimulus
Packages of RM67 billion
(direct fiscal injection: RM22
billion), with a primary focus
on supporting domestic
demand as well as mitigating
the impact of the global
downturn on the affected
segments of the economy
First package (RM7 billion)
• Construction, upgrade, repair and maintenance of facilities
• Construction of low and medium cost houses
• Human capital development programmes
• Accelerated improvement to telecommunication services
• Assistance to Private Sector
Second package (RM60 billion)
• Reducing unemployment and increasing employment opportunities
• Easing people’s burden, in particular, the vulnerable groups
• Assisting the private sector in facing the crisis
• Building capacity for the future
Monetary stimulus to reduce
the cost of intermediation
Reduced Overnight Policy Rate by 150 basis points between
November 2008 and February 2009 to 2.0%
Reduced Statutory Reserve Requirement by 300 basis points to 1.0%
Comprehensive measures
to ensure continued access
to financing as well as to
minimise the impact of the
economic downturn on
specific affected sectors
Ensure continued access to financing
• Financing and guarantee schemes for SMEs and businesses
• Establishment of Financial Guarantee Institution (Danajamin
Nasional Bhd)
Restructuring and Rescheduling of Credit Facilities
• Flexibilities to restructure and reschedule loans to deal pre-
emptively with borrowers
• Enhanced Corporate Debt Restructuring Committee and expanded
Small Debt Resolution Scheme
Pre-emptive measures to sustain confidence in financial sector
• Full guarantee of all deposits until end-2010
• BNM’s liquidity facility was extended to insurance and takaful
operators
Avenues for borrowers to seek assistance & redress
• Integrated Contact Centre: BNMLINK, BNMTELELINK, Complaints
Management and Advisory Unit
• Expanded outreach of Credit Counselling & Debt Management
Agency
• ABMConnect Toll Free Channel
• Complaint units at financial institutions
• Financial Mediation Bureau
• Small Debt Restructuring Committee
Other Measures Voluntary reduction of EPF employees’ contribution by 3 percentage
points from 11% to 8% in 2009 and 2010
Allow purchase of commercial properties above RM500,000 by
foreigners for own use without FIC approval
Increase vehicle loan eligibility for civil servants
Annual Report 2009
16
affected by high retrenchments and a decline in
real wages that had begun towards the end of
2008. Weak consumer spending was reflected in
major consumption indicators such as the sales
of new passenger cars, loan disbursements to
households and imports of consumption goods.
The MIER Consumer Sentiments Index (CSI)
remained below the 100-point threshold (1Q 09:
78.9 points), indicating a pessimistic outlook on
employment prospects and income expectations
by households. As a result, private consumption
declined by 0.7% in the first quarter.

Private consumption improved gradually from
the second quarter onwards, before recording
a higher growth of 1.7% in the fourth quarter.
Improvements in labour market conditions, higher
commodity prices and earlier than expected
recovery in the manufacturing sector had lent
support to consumer spending. Also, an early
monetary policy response and the implementation
of two fiscal stimulus packages helped to
revive consumer confidence, as reflected by
the improvement in the MIER CSI to above the
100-point threshold since the second quarter of
2009. Moreover, favourable financing conditions
offered additional support to consumer spending
as consumers continued to enjoy access to credit
in an environment of low interest rates. Of
significance, household credit continued to expand
during the year with loan disbursed to households
increasing strongly by 17.3% (2008: 8.9%).
Despite the economic slowdown, household
balance sheets remained sound, with the
household debt to financial assets ratio remaining
low at 40.6% (2008: 42.6%) and non-performing
loan ratio for household loans declining further to
3.1% at the end of 2009 (2008: 4.1%).
Reflecting the full impact of the global
economic downturn in 2009, private
investment declined significantly by 21.8%
during the year (2008: 0.8%). The decline
in capital spending activity that began at
the end of 2008 had continued to worsen
as the year progressed. Businesses deferred
or cancelled investment decisions given
deteriorating external demand and a more
cautious outlook on domestic economic
conditions. The sluggish private sector capital
spending was also reflected in the marked
decline of major investment indicators.
Imports of capital goods recorded a decline
of 5.9%, while sales of construction-related
materials declined significantly by 26.1%.
Disbursement of loans to businesses and the
issuance of private debt securities for new
activity also slowed down during this period,
reflecting weaker demand for business
financing. Meanwhile, gross inflows of FDI
moderated to RM31.6 billion, as foreign
investors were affected by the less favourable
global economic environment. These
indicators, however, gradually improved
towards the end of 2009, as global economic
conditions began to recover.
Investment in the manufacturing sector was
the most affected by the extremely weak
global economic conditions. The sharp
decline in manufactured exports had led to a
significant slowdown in production activity, in
turn resulting in lower capacity utilisation. In
the first quarter of 2009, the MIER capacity
utilisation rate declined to 72%, reducing
the need for firms to embark on additional
capacity expansion. However, the capacity
utilisation rate improved markedly to 81.4%
in the fourth quarter, in line with the better
performance of the manufacturing sector.
Capital spending programmes in the other
sectors of the economy continued in 2009,
albeit at a smaller scale compared to the
previous year. Capital expenditure in the
oil and gas sector, mainly for upstream
production facilities and exploration activity,
remained sizeable. Investment in the services
sector was also sustained, reflecting the
ongoing capacity expansion and upgrading
exercise in the transportation, utilities and
telecommunication sub-sectors, as well as
the opening of new retail outlets.

Chart 1.5
GNI per Capita
-10
-5
0
5
10
15
20
25
30
2002 2003 2004 2005 2006 2007 2008 2009
RM '000
-10
-5
0
5
10
15
20
25
30
Annual change (%)
Nominal GNI per capita (LHS)
Nominal GNI per capita growth (RHS)
Nominal private consumption growth (RHS)
Economic Developments in 2009
17
Public investment expanded strongly in 2009,
recording a double-digit growth of 12.9% (2008:
0.7%) following the introduction of the two
economic stimulus packages to mitigate the impact
of the global economic downturn. In the economic
sector, expenditure was aimed mainly at developing
the rural and agriculture sector, improving the
transport system, enhancing public utilities
and upgrading industrial infrastructure. Capital
spending in the social services sector continued to
be targeted at improving the provision of essential
services, namely education, healthcare and housing.
Of importance, high impact projects outlined in the
first stimulus package had been fully implemented,
while about 64% of the allocated development
expenditure in the second package had been
implemented in 2009.
Capital spending activity by the non-financial
public enterprises (NFPEs) had also supported
the strong expansion in public sector investment
in 2009. Investment by the NFPEs was largely
concentrated in the mining, transportation,
utilities and communication sectors. In the mining
sector, capital expenditure in the upstream oil
and gas segment remained high, while the
increased capital spending in the transportation
sector was attributable to capacity expansion
undertaken by both the rail and air transport
companies. Additional capital spending was
also evident in the power utility segment due to
continuous upgrading and improvement of the
power generation, transmission and distribution
systems. Meanwhile, capital spending in the
communication sector was mainly focused on
the development of the broadband infrastructure
facility under the High Speed Broadband initiative.
Public consumption increased by 3.7% in 2009
(2008: 10.9%), largely on the account of higher
expenditure on emoluments, partly as a result
of the higher emoluments incurred under the
Government’s initiative to fill up almost 50,000
vacancies in the public sector. Expenditure for
supplies and services remained large due to the
enhancement of the public sector’s administrative
machinery and delivery system as well as the
maintenance of buildings and fixtures.
Public sector savings increased to RM92.3 billion
or 13.9% of gross national income (GNI) in 2009
(2008: RM80.9 billion or 11.3%) following larger
operating surpluses of the NFPEs. Private sector
savings, however, declined to RM114.9 billion or
17.4% of GNI (2008: RM189.9 billion or 26.6%),
reflecting the sustained household consumption
spending amid the decline in income growth. In
total, gross national savings (GNS) declined for
the first time since 2001 by 23.5% to RM207.2
billion. Nevertheless, the decline in GNS was largely
offset by a contraction in private sector investment,
which led to a slightly lower savings-investment
surplus of RM112.7 billion or 17% of GNI in 2009
(2008: RM129.5 billion or 18.1%).
SECTORAL REVIEW
Overall, 2009 was a challenging year for most
economic sectors in the Malaysian economy. In
the first quarter, amid the worsening global and
domestic economic environment, all sectors,
except construction, registered negative growth.
In particular, the external demand-dependent
sub-sectors were significantly affected, with an
unprecedented rate of contraction in the electronics
Chart 1.6
Total Nominal Investment and Manufacturing
Sector Capacity Utilisation
2005 2006 2007 2008 2009
1Q 2Q 3Q 4Q1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q1Q 2Q 3Q 4Q
Investment
Capacity
Utilisation
1
(RHS)
65
70
75
80
85
-15
-10
-5
0
5
10
15
20
25
%
% change
1
Source: Malaysian Institute of Economic Research (MIER)
Chart 1.7
Gross National Savings and Savings-Investment
Gap
0
25
50
75
100
125
150
175
200
225
250
275
2002 2003 2004 2005 2006 2007 2008 2009e
RM billion
Savings-Investment Gap
Public Savings
Private Savings
Gross National Savings
Gross Capital Formation
e Estimate
Annual Report 2009
18
and electrical products cluster of the manufacturing
sector and sharp contractions in trade-related
services sub-sectors. In addition, spill-over
weaknesses from the external sector to domestic
demand, as well as lower commodity prices, also
resulted in weak performance across most of the
other sub-sectors.
Conditions began to improve in the second quarter,
underpinned by the concerted and timely domestic
policy support and stabilising external environment.
The implementation of the two fiscal stimulus
packages and the accommodative monetary
policy environment cushioned the weakness
in external demand and contributed towards
improving consumer and business sentiments in
the domestic-oriented sectors. Of significance, the
construction sector registered positive growth in all
four quarters, benefiting mainly from the projects
under the 9MP and the fiscal stimulus packages.
The pace of improvements gathered momentum in
the third quarter, with smaller rates of decline in the
manufacturing, agriculture and mining sectors. By
the fourth quarter, growth resumed in all sectors,
except mining, as domestic demand strengthened
and external conditions improved further.
Services Sector
The services sector expanded by 2.6% in 2009
(2008: 7.2%), providing support to the Malaysian
economy during the global economic crisis.
Consequently, the sector’s share to GDP increased
further to 57.4% from 55.0% in 2008. The sector
benefited from the resilient domestic demand,
which was supported by the fiscal stimulus and an
accommodative monetary policy. After registering
a marginal decline of 0.2% in the first quarter of
2009, the services sector turned around to record
an expansion of 1.6% in the second quarter, and
continued its positive growth path to expand by
4.3% in the second half of 2009 (1H 2009: 0.8%).
While most services sub-sectors followed the same
growth trend, those that are largely dependent
on trade and manufacturing activities, namely
transport and storage; and utilities, recovered at a
slower pace.
The services sector provided
support to the overall economy
in 2009
The finance and insurance sub-sector recorded a
moderate growth of 4.4% (2008: 7.7%), reflecting
the subdued performance of domestic demand
especially in the first half of the year. In the finance
segment, total loans approved and disbursed by
the banking industry declined by 12.2% and 3.7%
respectively in the first half of the year, as demand
for financing moderated in tandem with lower
economic activity. As a result, net interest income
Table 1.4
Services Sector Performance at Constant 2000 prices
2008 2009p 2008 2009p
Annual change (%) Share to GDP (%)
Services 7.2 2.6 55.0 57.4
Intermediate services 6.0 3.0 23.8 25.0
Finance and insurance 7.7 4.4 11.0 11.7
Real estate and business services 1.5 2.1 5.1 5.3
Transport and storage 6.1 -2.8 3.8 3.8
Communication 7.3 6.0 3.9 4.2
Final services 8.3 2.2 31.2 32.4
Wholesale and retail trade 9.8 1.2 12.8 13.2
Accommodation and restaurant 7.3 2.7 2.4 2.5
Utilities 2.1 0.4 2.9 3.0
Government services 11.1 3.0 7.4 7.7
Other services 5.2 4.4 5.7 6.0
p

Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia
Economic Developments in 2009
19
of the banking system recorded a lower growth.
Meanwhile, fee-based income declined in the first
quarter, due mainly to a drop in fees related to
capital market activity. However, conditions in the
finance segment improved during the second half-
year, as economic recovery gathered momentum.
Loan indicators registered marked improvements,
while net interest income recorded better growth
and fee-based income increased significantly
by 18% following higher turnover in the equity
market. In the insurance industry, growth was more
moderate, as both the life and general business
segments were affected by the weak economic
activity and the decline in motor vehicle sales in the
first half. However, both segments improved in the
second half, in tandem with the economic recovery.
The wholesale and retail trade sub-sector was
affected by weak private consumption, especially in
the first half of the year. The sub-sector contracted
by 1.7% in the first quarter, due to lower wholesale
activity, cautious consumer spending and the
contraction in motor vehicle sales. As consumer
sentiments subsequently improved amid better
domestic economic and labour market conditions,
the sub-sector turned around to register a marginal
growth in the second quarter before gradually
strengthening in the second half of the year. For
the year as a whole, the sub-sector grew by 1.2%
(2008: 9.8%).
Similarly, the real estate and business services
sub-sector registered a decline of 6.7% in the first
quarter but recovered subsequently to expand
by 2.1% for the year as a whole (2008: 1.5%).
Affected by weak business sentiments at the
beginning of the year, the sub-sector improved in
the second half of 2009, benefiting from higher
real estate and capital market-related activities
as domestic demand strengthened. In 2009, the
Kuala Lumpur Composite Index rallied 45.2%, to
close the year at 1,272.8 (end-2008: 876.8).
Both the accommodation and restaurant and
other services sub-sectors recorded lower growth
Chart 1.8
Performance of the Finance and Insurance
Sub-sector vis-à-vis Related Indicators
Value added of finance and insurance sub-sector in real terms (RHS)
Insurance premiums
p Preliminary
Source: Department of Statistics, Malaysia; Bank Negara Malaysia
Annual growth (%) Annual growth (%)
Net interest income in the banking system
Fee income in the banking system
0
2
4
6
8
10
12
0
5
10
15
20
25
30
35
40
2005 2006 2007 2008 2009p
Table 1.5
Selected Indicators for the Services Sector
2008 2009p
Annual change (%)
Utilities
Electricity production index 1.2 0.8
Wholesale & Retail Trade and
Accommodation & Restaurant
Consumption credit disbursed 10.8 14.0
Tourist arrivals 5.1 7.2
Total sales of motor vehicles 12.5 -2.1
Finance & Insurance and Real
Estate & Business Services
Loans outstanding in the
banking system 12.8 7.8
Insurance premiums 2.9 9.1
Bursa Malaysia turnover (volume) -59.8 60.6
Transport & Storage and
Communication
Total container handled at Port
Klang and PTP (TEUs)
7.7 -1.8
Airport passenger traffic 5.9 6.9
Air cargo handled -6.7 -13.7
SMS traffic 28.7 22.1
%
Penetration rate:
- Broadband
1
21.1 31.7
- Cellular phone
2
98.9 106.2
- Fixed line
1
44.9 44.0
1
of household
2
of population
p Preliminary
Source: Department of Statistics, Malaysia; Malaysia Tourism Promotion
Board; Malaysian Automotive Association; Bursa Malaysia
Berhad; Port Klang Authority; Pelabuhan Tanjung Pelepas Sdn
Bhd; Malaysia Airports Holdings Berhad; Senai Airport Terminal
Services Sdn Bhd; Malaysian Communications and Multimedia
Commission; and Bank Negara Malaysia.
Annual Report 2009
20
rates of 2.7% and 4.4% respectively in 2009
(2008: 7.3% and 5.2% respectively). Growth in
the accommodation and restaurants sub-sector
remained weak in the first half of the year, in
tandem with sluggish private consumption activity.
Growth improved in the second half, supported by
better consumer sentiments and a rise in regional
travel, following the expansion of new routes by
airlines and various tourism promotional activities
organised during the year. Meanwhile, growth in
the other services sub-sector was affected mainly
by softer demand for private education and private
healthcare during the year. In addition, the global
economic slowdown had affected the number
of foreign students and foreign patients seeking
education and healthcare services in the country.
The communication sub-sector was only
marginally affected by the economic slowdown,
registering a strong growth of 6% (2008: 7.3%).
Growth was supported by continued demand
for cellular and broadband services arising from
competitive pricing by service providers as well as
the aggressive rollout of broadband services. The
year also saw extensive promotions by both the
fixed and wireless broadband players to attract
new subscribers. In addition, the availability
of affordable smart phones and Wi-fi-enabled
devices in the market also boosted demand for
data services. These positive developments were
reflected in the increase in both the cellular
penetration rate (end-2009: 106.2%; end-2008:
98.9%) and broadband penetration rate (end-
2009: 31.7%; end-2008: 21.1%).
In contrast, the utilities sub-sector registered a
marginal growth of 0.4% compared to a 2.1%
growth in 2008 as it was affected by lower
demand for electricity during the year. In the first
half of the year, growth declined by 4.6%, in line
with the sharp drop in manufacturing activity.
The sub-sector returned to positive growth in the
third quarter before expanding strongly in the
fourth quarter. The improvement in the utilities
sub-sector was reflective of the gradual recovery
in electricity demand from industrial users, and
the steady increase in demand from household
and commercial users.
Meanwhile, the transport and storage sub-
sector was the worst performing services
sub-sector, with three consecutive quarters of
contraction before turning around to record a
positive growth in the fourth quarter. Performance
was affected by the decline in global trade and
local manufacturing activity, which resulted
in lower demand for shipping, haulage, ports
and other trade-related services. However, the
performance of the sub-sector gradually improved
in the second half, in line with the improvement in
trade and manufacturing activity. This was further
supported by the steady increase in passenger
travel, benefiting from improvements in consumer
sentiments and the aggressive discounts offered
by both full-service and low-cost carriers. For the
year as a whole, the sub-sector declined by 2.8%
(2008: 6.1%).
Manufacturing Sector
The manufacturing sector faced a challenging
start in 2009, as the sharp decline in exports at
end-2008 worsened further. The contraction
in the sector stabilised in the second quarter of
2009 and conditions became more favourable
towards the year-end, with production recording a
positive growth in the fourth quarter of 2009, after
experiencing four consecutive quarters of declines.
Manufacturing sector
contracted significantly in the
first quarter, but conditions
gradually improved from
second quarter onwards
In the export-oriented industry, the electronics
and electrical products (E&E) cluster was
the worst affected by the global downturn,
Source: Department of Statistics, Malaysia
Chart 1.9
Manufacturing Sector: Value-added, Production,
Exports and Sales
-30
-20
-10
0
10
20
1Q 2Q 3Q 4Q
2006 2007 2008 2009
VA Production Export Sales
Annual change (%)
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Economic Developments in 2009
21
declining by 22.8% in 2009. Production
fell sharply by 35.4% in the first quarter,
following a significant drop in global demand.
Manufacturers across the global E&E supply
chain reacted by cutting back production
and drawing down from inventory, adversely
affecting the semiconductor segment. Similarly,
broad contraction in global demand also led to
substantial declines in the computer and parts
and electrical product segments. In particular,
lower output of computer and parts was due to
corporations delaying investment in equipment
and software, while the electrical products
segment was influenced by lower consumer
spending. However, the decline in output
moderated from the second quarter onwards,
especially for semiconductors and electrical
products, supported by an improvement in
regional demand and inventory replenishment
activity. In the region, the implementation of
economic stimulus measures partially helped
to boost demand for final electronic products.
The E&E cluster performed better in the fourth
quarter to record a marginal expansion, driven
by higher consumer spending on electronics
such as netbooks, smartphones and flat panel
televisions, during the festive season, both in
the advanced and regional economies.
The primary-related cluster recorded similar
trends to the E&E cluster, but fared better due to
support emanating from the domestic consumer
market and regional demand. Of significance,
the sharp fall in the chemical products industry
in the first quarter was due to lower demand
for plastic parts and components used in the
E&E and automotive industries. Meanwhile,
production of the off-estate processing industry
was affected by unfavourable commodity prices,
providing less incentive to process off-estate
products. The cluster performed better from
the second quarter onwards, led by the chemical
products industry as demand for plastic parts
and components picked up with the improving
E&E and household goods segments. The
rubber products industry turned positive in
the third quarter, driven by increasing demand
for hygiene and medical products due to the
Influenza A (H1N1) pandemic, while movements
in commodity prices in the second half of the
year contributed positively to the production
in the petroleum and off-estate processing
industries. By the fourth quarter of 2009, the
cluster turned around to grow by 6.7%, led by
Chart 1.10
E&E Cluster : Value-added, Production, Exports
and Sales
Source: Department of Statistics, Malaysia
-40
-30
-20
-10
0
10
20
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2006 2007 2008 2009
VA Production Exports Sales
Annual change (%)
Annual change (%)
Chart 1.11
Production and Exports of Semiconductors
Source: Department of Statistics, Malaysia
Semiconductor Industry Association (SIA)
Annual change (%)
Worldwide sales of semiconductor (LHS)
Production of semiconductor (RHS)
Exports of semiconductor (RHS)
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2006 2007 2008 2009
-40
-30
-20
-10
0
10
20
30
-60
-45
-30
-15
0
15
30
45
Source: Department of Statistics, Malaysia
Annual change (%)
Chart 1.12
Primary-related Cluster: Value-added, Production,
Exports and Sales
Annual change (%)
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2006 2007 2008 2009
VA (LHS)
Production (LHS)
Sales (RHS)
Exports of non E&E product (RHS)
-20
-15
-10
-5
0
5
10
15
-40
-30
-20
-10
0
10
20
30
22
Annual Report 2009
Remaining Competitive: Issues in Enhancing Productivity, Energy
Efficiency and Innovation in the Manufacturing Sector
Introduction
As Malaysia advances towards becoming a high value-added economy, productivity, energy efficiency
and innovation will increasingly gain importance for the economy to remain competitive and to move
up the value-added chain. The manufacturing sector is no exception, where the reliance on cost
competitiveness will not be sustainable in the longer term. This article discusses the various efforts
undertaken and constraints faced by Malaysian manufacturers in enhancing productivity, energy
efficiency and innovation amidst an increasingly challenging global environment. The analysis draws
on the BNM Biennial Manufacturing Survey 2008
1
.
Productivity
Improving the skills of the workforce and increasing automation in the existing production lines
are the most common strategies adopted by manufacturers in enhancing productivity. Upskilling
is vital as about 80% of the manufacturing workforce is low to mid-skilled, and less than half of
the workers have received formal training. Training and retraining opportunities focus mainly on
improving technical skills, with about half of the training budget allocated for this. To enhance
automation, manufacturers continue to face several impediments, particularly in terms of the high
cost of machinery and equipment as well as an insufficient scale of production to justify extensive
automation. In addition, the presence of easily available and relatively cheap low-skilled workers
potentially further hinders the adoption of greater automation, as the survey result indicates that
about 60% of the jobs currently undertaken by low-skilled foreign workers can to some extent,
be replaced by automation (Chart 1). Manufacturers also highlight the importance of Government
incentives in supporting automation, identifying the Human Resource Development Fund (HRDF)
training fund, exemption on import duty and tax for machinery, and Reinvestment Allowance as the
three most effective measures (Chart 2).

1
The BNM Biennial Manufacturing Survey 2008 was conducted in December 2008, covering 301 manufacturing companies in 17 industries,
categorised into four clusters: electronics and electrical products (E&E): 90 companies; primary-related: 119 companies; consumer-related: 47
companies and construction-related: 45 companies. The response rate was at 56% at the close of the survey on 30 April 2009.
Share of workforce by skill in 2008 Can the reliance on low-skilled migrant workers
be reduced through greater automation?
Chart 1
Large presence of low cost, low-skilled workers potentially hinders greater adoption of automation
High-skilled
20%
No
38%
Yes, to some extent
57%
Yes, totally
5%
Mid-skilled
28%
Low-skilled (foreign)
10%
Low-skilled (local)
42%
Economic Developments in 2009
23
Innovation
Innovation, proxied by the extent of research and development (R&D) activity, is fundamental
for manufacturers to move up the value chain. About 57% of the manufacturing firms surveyed
undertook R&D activity in 2008. A major constraint to greater R&D activity that has been identified
by manufacturers is the quality of the workforce. At present, only about 20% of the manufacturing
workforce consists of high-skilled labour, while manufacturers face difficulties in the hiring of
high and semi-skilled workers, to the extent that there is currently a critical shortage of engineers,
technicians, supervisors and quality control experts. This situation is expected to remain for at least
the next three years (Chart 3). Meanwhile, only about 10% of the respondents that undertook
R&D activity in 2008 utilised the available Government incentives, citing heavy administrative
burdens as discouraging application (Chart 4). Most respondents suggested that easing the
application process and the eligibility criteria for the Government incentives would enhance
accessibility to these incentives.
Chart 2
Exemption on import duty and tax on machinery and Reinvestment Allowance are effective
in encouraging automation
Have the following measures encouraged the adoption of automation and mechanisation?
Technology Acquisition Fund
Industrial Adjustment Allowance
Pioneer Status
Investment Tax Allowance
Reinvestment Allowance
Exemption on import duty and tax for machinery
HRDF Training Fund
% of respondents
81 6
7
7
14
17
20
21 69
63
48
42
19
13
13
80
74
44
35
17
10
0% 20% 40% 60% 80% 100%
Yes No Not Relevant
Chart 3
Difficulties faced in hiring skilled workers with critical shortages of engineers and technicians
Supervisor
8%
Quality
control
7%
Operator
7%
Machinist
6%
R&D
5%
Manager
4%
Technician
11%
Engineer
22%
Others
30%
26
31
59
41
74
69
41
59
0% 25% 50% 75% 100%
Skilled (non-production)
Skilled (production)
Semi-skilled
Unskilled
Yes
Skill shortages faced by manufacturers Are difficulties faced in hiring labour with the following skill levels?
% of respondents
No
24
Annual Report 2009
Energy Efficiency
Given the high energy consumption in the manufacturing sector and the rise in utility costs since 2005,
energy efficiency (EE) constitutes an important component of enhancing the overall efficiency of the sector.
However, despite the importance of energy management and due, in part, to different levels of awareness
of the benefits of EE, less than 30% of the firms surveyed have a full-time energy manager, while only about
40% have conducted an energy audit since 2005. Furthermore, less than 20% of the respondents had
utilised the various Government incentives available for EE. The key challenges reported to be faced in the
adoption of EE include the unwillingness to incur additional costs from the significant capital outlays to adopt
EE, especially given uncertain potential returns, and the lack of trained human capital and information specific
to EE (Chart 5).
Chart 4
Heavy administrative burdens discourage application for Government incentives on R&D
How accessible are the Government incentives for R&D?
Least difficult Not so difficult Somewhat difficult Difficult Most difficult
% of respondents
0% 20% 40% 60% 80% 100%
Others
Reimbursement period
Application process
Application criteria
38
13
8
5
25
4
5
6
15
33
29
13
54
17
20
19
15
42
41
Chart 5
Significant barriers exist against the adoption of energy efficiency
What are the main barriers hampering the adoption of energy efficiency?
% of respondents
Not willing to
incur high
cost/risk of EE
transactions
Lack of trained
industry &
financial sector
personnel on
energy
management
Limited access
to information
& performance
benchmarks
for EE
technology
Inadequate
local energy
support
services
Limited
awareness of
EE techniques
& its benefits
Lack of
financiers that
are prepared to
finance EE
investment &
appropriate
funding
mechanisms
Limited access
to EE tech &
equipment
Affordable
energy prices
Don't see
measurable
benefit from
EE investment
Others
0
5
10
15
20
25
30
35
40
45
Conclusion
The Malaysian manufacturing sector has, in varying degrees, employed strategies, such as upskilling,
increasing automation, undertaking R&D activities and conducting energy audits, to enhance productivity,
improve energy efficiency and strengthen innovation, so as to remain competitive in an increasingly
challenging global environment. However, there remain challenges and constraints in these endeavours that
need to be promptly addressed for the successful movement up the value chain. Of significance are the issues
of human capital, high initial investment costs and administrative burden in gaining access to the incentives
and funding programmes.
Economic Developments in 2009
25
higher demand for chemical, rubber and off-
estate processing products.
In the domestic-oriented industry, performance in
the first quarter was affected by the weak labour
market conditions and dampened consumer
spending. As domestic conditions improved
from the second quarter onwards, production
also recovered gradually to register a positive
growth in the fourth quarter. The consumer-
related cluster was negatively affected by
the large decline in the transport equipment
industry, in line with the sharp decline in new
motor vehicle sales. Nonetheless, the food,
beverages and tobacco industry provided some
support to the cluster, due to sustained demand
for food products. Output dipped slightly in the
first quarter, before recovering from the second
quarter onwards to grow by 7.7% in the fourth
quarter, reflecting the improvement in domestic
private consumption.
Performance of the construction-related
manufacturing cluster mirrored both external
and domestic demand, registering a sharp
contraction in the first quarter, particularly
in production of iron and steel due to slower
domestic civil engineering activity and lower
regional demand. The cluster, however,
gradually improved from the second quarter
onwards to record a positive growth in the
fourth quarter. The improvement in the cluster
reflected the strong pick up in the domestic
construction activity, as the implementation of
stimulus measures gathered momentum.

Source: Department of Statistics, Malaysia
-25
-15
-5
5
15
25
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2006 2007 2008 2009
VA Production Sales
Chart 1.13
Consumer-related Cluster: Value-added,
Production and Sales
Annual change (%)
Chart 1.14
Construction-related Cluster: Value-added,
Production and Sales
Source: Department of Statistics, Malaysia
-40
-20
0
20
40
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2006 2007 2008 2009
VA Production Sales
Annual change (%)
Table 1.6
Performance of the Manufacturing Sector
2008 2009
Annual change (%)
Value-added (RM million at
2000 prices) 1.3 -9.3
Manufacturing Production
1
0.7 -10.0
Export-oriented industries -1.2 -11.1
Electronics & electrical
products cluster -3.6 -22.8
of which:
Electronics -5.4 -24.6
Electrical products 0.9 -18.8
Primary-related cluster 0.4 -3.5
of which:
Chemicals and chemical
products -3.5 -1.7
Petroleum products 5.9 -0.8
Rubber products 4.7 -3.0
Off-estate processing 9.4 -2.1
Domestic-oriented industries 8.0 -5.7
Consumer-related cluster 11.0 -1.2
of which:
Transport equipment 23.4 -12.4
Food, beverage & tobacco
products
7.4 1.5
Construction-related cluster 4.3 -11.4
of which:
Construction-related products 3.2 -18.1
Fabricated metal products 6.1 -1.1
Exports 3.8 -12.5
1
Production data are based on the new Industrial Production Index
(2005=100)
Source: Department of Statistics, Malaysia
Annual Report 2009
26
Agriculture Sector
The agriculture, forestry and fishing (agriculture)
sector grew at a slower pace of 0.4% in 2009
due to lower production of industrial crops.
However, higher output of key food-related
industries such as fisheries and livestock provided
support to the sector.
The agriculture sector
recorded marginal growth
due to lower production of
industrial crops
The production of crude palm oil declined by
1% to 17.6 million tonnes in 2009, due to the
biological yield down-cycle, unfavourable weather
conditions and replanting activity. Consequently,
average national fresh fruit bunches (FFB) yield per
hectare declined by 4.9% to 19.2 tonnes. Yields in
Sabah and Sarawak, which accounted for 42% of
total production, registered sharp drops of 8.1%
and 5.7% respectively, due mainly to the heavy
rainfall in East Malaysia in early 2009. Despite
weaker production, palm oil stocks were higher
by 12.2% at 2.24 million tonnes at the end of
2009, due to weaker global demand. As a result,
the average CPO price fell by 19.2% to RM2,245
per tonne in 2009 (2008: RM2,778 per tonne).
Natural rubber production contracted by
20.2% to 0.86 million tonnes in 2009 due to
weather-related factors, weak prices in the early
part of the year, as well as the implementation
of a programme to curb exports by the three
major rubber producing countries. As prices
plunged sharply towards the end of 2008,
Malaysia, Thailand and Indonesia agreed to cut
Table 1.7
Agriculture Sector:
Value Added and Production

2008 2009p
Annual change (%)
Value added 4.0 0.4
Industrial crops 2.9 -4.6
Production of which:
Crude palm oil 12.1 -1.0
Rubber -10.6 -20.2
Saw logs -8.9 -10.9
2
Cocoa beans -20.5 -35.1
Food crops 5.6 7.2
Production of which:
Fish 5.2 6.7
Livestock
1
4.3 7.6
Vegetables 11.9 3.1
Fruits 3.2 0.6
1
Refers to Peninsular Malaysia only
2
Jan-Nov 2009
p Preliminary
Source: Department of Statistics, Malaysia
Malaysian Palm Oil Board
Malaysian Rubber Board
Forestry Departments (Peninsular Malaysia, Sabah and Sarawak)
Malaysian Cocoa Board
Fisheries Department, Malaysia
Veterinary Services Department, Malaysia
Department of Agriculture, Malaysia
Chart 1.15
Oil Palm: Area, Production and Yield
0
5
10
15
20
25
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2004 2005 2006 2007 2008 2009p
Tonne Hectare
Production in million tonnes (RHS)
Mature area in '000 hectares (LHS)
Yield of FFB in tonnes per mature hectare (RHS)
p Preliminary
Source: Malaysian Palm Oil Board (MPOB)
Chart 1.16
Palm Oil Price and Stocks
Source: Malaysian Palm Oil Board (MPOB)
1,000
1,250
1,500
1,750
2,000
2,250
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2005 2006 2007 2008 2009
Stocks ('000 tonne) Price (RM/tonne)
CPO local delivery price
Stocks
Economic Developments in 2009
27
exports of natural rubber by 700,000 tonnes
in 2009. In addition, low prices in early 2009
discouraged tapping activity, especially amongst
price-sensitive smallholders. The drop in output
was further compounded by the frequent
occurences of heavy rainfall at the end of the
year, which further disrupted tapping activity. As
such, rubber prices more than doubled by the
end of 2009 to 958 sen per kg.

Mining Sector
Value-added of the mining sector contracted
by 3.8% in 2009, largely reflecting the lower
output of crude oil and natural gas, following
lower external demand and the shutdown of
several oil and gas facilities during the year for
maintenance purposes.
Production of crude oil (including condensates)
averaged 659,845 barrels per day (bpd) in 2009,
lower by 4.4% compared to 2008. In abiding to
the production limits set by the National Depletion
Policy, production in Peninsular Malaysia declined
by 11.7% and accounted for 45% of total output
of crude oil of the country. However, production
in Sabah increased by 20%, supported by output
from the deepwater oil field in Kikeh.
The mining sector contracted
further due to lower output of
both crude oil and natural gas

Output of natural gas contracted by 4% to 5,667
million standard cubic feet per day due to lower
Source: Malaysian Rubber Board (MRB) and Department of Statistics, Malaysia
Chart 1.17
Natural Rubber: Production, Prices and Yield
500
750
1,000
1,250
1,500
200
300
400
500
600
700
800
900
2004 2005 2006 2007 2008 2009p
'000 tonne or kg
Production in million tonnes (RHS)
SMR 20 prices in sen per kg (LHS)
Average yield in kg per tapped hectare (RHS)
p Preliminary
sen
Table 1.8
Mining Sector: Value Added and Production
2008 2009p
Annual change (%)
Value added -0.8 -3.8
Production
of which:
Crude oil and condensates 1.1 -4.4
Natural gas 0.3 -4.0
p Preliminary
Source: PETRONAS
Department of Statistics, Malaysia
Chart 1.18
Production of Crude Oil and Condensates
Crude oil Condensates
0
200,000
400,000
600,000
800,000
2005 2006 2007 2008 2009p
p Preliminary
Barrels per day (bpd)
Source: PETRONAS
Table 1.9
Malaysia: Crude Oil and Natural Gas Reserves
1
As at 1 January
2008 2009p
Crude oil (including condensates)
Reserves (billion barrels) 5.46 5.52
Reserve/Production (year) 22 22
Natural gas
Reserves (billion barrels of oil equivalent) 14.67 14.66
Reserve/Production (year) 36 36
1
The National Depletion Policy was introduced in 1980 to safeguard
the exploitation of the national oil reserves by postponing the
development and control the production of major oil fields (with
reserves of 400 million barrels or more).
p Preliminary
Source: PETRONAS
Annual Report 2009
28
demand for liquefied natural gas (LNG) from
major importers. Nonetheless, support for LNG
demand emerged in the fourth quarter with the
commencement of the long-term contract for
Petronas exports to China from October 2009.
The output from Sarawak, which accounted
for the bulk of the country’s LNG production,
declined by 4.7%.
Oil reserves in the country increased to 5.52
billion barrels or a lifespan of 22 years at current
production levels. Meanwhile, natural gas reserves
were at 14.66 billion barrels of oil equivalent,
which are sufficient to cover 36 years of gas
output at current production levels.

Construction Sector
The construction sector recorded a stronger
growth of 5.7% in 2009 with improved
performance across all sub-sectors. Growth picked
up progressively throughout the year due primarily
to the implementation of the construction-
related activities under the 9MP and the fiscal
stimulus packages. The performance of the sector
improved significantly in the second half of the
year, growing by 8.5% compared to 2.9% in the
first half of the year. Meanwhile, stable costs of
construction materials provided a further boost to
activities in the sector.
The construction sector
recorded stronger growth in
2009
In the civil engineering sub-sector, growth
was bolstered by the continued implementation
of projects associated with the 9MP as well as
those under the stimulus packages. This was
evident from the 15.6% increase in the Federal
Government development expenditure to RM49.5
billion, partly to upgrade existing infrastructure.
Growth in the non-residential sub-sector was
robust, driven mainly by stimulus spending on the
upgrading, repairing and maintenance of public
buildings, as well as the on-going construction of
commercial buildings. Incoming supply of office
space in the Klang Valley was 6.4 million square
feet at end-2009 (end-2008: 7.6 million square
feet). Demand for office space in the Klang Valley
was driven mainly by the relocation of existing
tenants into new office buildings while new take-
up was modest. As such, the occupancy rate in the
area eased marginally to 82% in 2009 (2008: 84%).
Rental rates generally remained stable during the
year as incentives such as longer rent-free periods
and free furnishing sustained the demand.
On retail space, fewer shopping complexes were
constructed nationwide in 2009 following the
considerable supply of large shopping centres that
became available during 2007-2008. The 26 newly
constructed shopping complexes were mainly
neighbourhood malls catering to nearby residential
Chart 1.19
Value-add Growth in Construction Sector versus
Growth in Federal Government Development
Expenditure and Private Investment
Source: Department of Statistics, Malaysia and Accountant General's Department
Construction Sector (LHS)
Federal Government Development Expenditure (RHS)
Private investment (RHS)
2004 2005 2006 2007 2008 2009
Annual change (%)
-2
-1
0
1
2
3
4
5
6
7
-30
-20
-10
0
10
20
30
40
50
Annual change (%)
Chart 1.20
Incoming Supply and Occupancy Rate of Retail
Space in Malaysia and Kuala Lumpur
(as at end period)
75
77
79
81
83
85
87
2005 2006 2007 2008 2009p
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Incoming supply - Malaysia (RHS)
Incoming supply - Kuala Lumpur (RHS)
Occupancy rate, % - Malaysia (LHS)
Occupancy rate, % - Kuala Lumpur (LHS)
Source: National Property Information Centre (NAPIC),
Valuation and Property Services Department
p Preliminary
Occupancy rate (%) Incoming supply
(’000 sq.m)
Economic Developments in 2009
29
areas. As at the end of 2009, the stock level
of retail space rose to 10 million square metres
(2008: 9.4 million square metres). Rental rates
remained stable in prime centres, but softened
slightly in other areas. Similar to the office market,
landlords provided various incentives to attract
tenants, in turn maintaining the occupancy rate at
81.8% (2008: 81.4%).
Performance in the residential segment was
relatively mixed during the year. In the first
quarter, demand for properties weakened due
to uncertainty about the global and domestic
economic outlook. Demand, however, started
picking up in the second quarter as developers
introduced attractive financing packages
while borrowing costs were lowered following
Chart 1.21
Incoming Supply and Occupancy Rate of
Purpose-Built Office Space in
Malaysia and Kuala Lumpur (as at end period)
Occupancy rate (%)
Incoming supply
('000 sq.m)
Source: National Property Information Centre (NAPIC),
Valuation and Property Services Department
p Preliminary
Incoming supply - Malaysia (RHS)
Occupancy rate, % - Malaysia (LHS)
Incoming supply - Kuala Lumpur (RHS)
Occupancy rate, % - Kuala Lumpur (LHS)
80
81
82
83
84
85
2005 2006 2007 2008 2009p
0
500
1,000
1,500
2,000
2,500
Table 1.10
Demand and Supply Indicators of the Residential
Property Market
1H '08 2H '08 1H '09 2H '09p
Annual change (%)
Demand indicators
Residential property
transactions
Value (RM million) 35.5 -3.0 -14.3 17.1
Volume 20.7 -1.2 -10.4 5.7
Finance for purchase of
residential property
Loan applications 43.4 9.1 11.1 50.6
Loan approvals 42.3 3.4 0.3 44.1
Supply indicators
New launches 25.0 -23.0 -29.6 17.7
New sales and advertising
permits 2.0 -38.6 -16.8 57.8
Housing approvals 19.0 -52.6 -23.7 66.7
Loans for construction
Loan applications 19.3 -33.2 -31.4 36.5
Loan approvals 20.5 -19.8 -38.2 4.2
p Preliminary
Source: Bank Negara Malaysia, National Property Information Centre
(NAPIC), Valuation and Property Services Department and
Ministry of Housing and Local Government
Table 1.11
Overhang of Residential Property in Malaysia by Price Range
Residential Price Range
Units Share (%) Units Share (%)
As at end-2008 As at end-2009p
RM50,000 or less 3,602 13.8 2,946 13.0
RM50,001 - RM100,000 7,491 28.8 6,920 30.6
RM100,001 - RM150,000 4,045 15.5 3,550 15.7
RM150,001 - RM200,000 3,786 14.6 3,419 15.1
RM200,001 - RM250,000 2,119 8.1 1,947 8.6
RM250,001 - RM500,000 3,888 14.9 3,225 14.3
RM500,001 - RM1,000,000 993 3.8 481 2.1
More than RM1,000,000 105 0.4 104 0.5
Total 26,029 100 22,592 100
p Preliminary
Source: National Property Information Centre (NAPIC), Valuation and Property Services Department
Annual Report 2009
30
reductions in the OPR by a total of 150 basis
points between November 2008 and February
2009. Between the second and fourth quarter of
2009, loan applications and approvals increased at
an annual rate of 39.8% and 32.6% respectively,
with relatively stronger growth in loans for the
purchase of properties priced above RM250,000.
With respect to the public sector, there was
also an increase in the construction of low- and
medium-cost houses as allocated under the
stimulus packages.
For the whole year, the volume of residential
property transactions contracted by 2.3%, while
the value of property transactions rose by 1.3%
to RM41.8 billion. Reflecting the overall cautious
sentiments of property developers, the number of
new launches declined by 15.8%. Given the lower
incoming supply and the gradual improvement in
demand, the property overhang declined by 13.2%
to 22,592 units.

EXTERNAL SECTOR
Balance of Payments
Malaysia’s external position remained strong in
2009. The overall balance of payments turned
around to record a surplus as the continued large
surplus in the current account more than offset
the lower net outflows in the financial account.
Despite the sharp contraction in external demand,
the surplus in the current account was supported
by a sizeable trade surplus, as lower demand
for exports induced a corresponding decline in
imports. Meanwhile, sustained regional travel
activity resulted in improvements in the services
account. The lower net outflows in the financial
account largely reflected the significant moderation
in portfolio outflows in the first half and the net
inflows in the second half of the year. Both net
inflows of foreign direct investment and outflows
of direct investment abroad also moderated with
the weak economic conditions. Other investment
Table 1.12
Balance of Payments
2008 2009p
Item + - Net + - Net
RM billion
Goods 664.3 493.8 170.6 554.2 412.7 141.5
Trade account 663.5 521.6 141.9 553.3 434.9 118.4
Services 101.0 100.9 0.2 99.1 95.9 3.2
Balance on goods and services 765.4 594.7 170.7 653.3 508.6 144.7
Income 39.9 63.6 -23.7 40.5 53.1 -12.6
Current transfers 1.4 18.9 -17.5 3.7 23.1 -19.4
Balance on current account 806.7 677.2 129.5 697.5 584.8 112.7
% of GNI 18.1 17.0
Capital account 0.6 -0.2
Financial account -118.5 -82.9
Direct investment -26.1 -24.9
Portfolio investment -84.4 0.8
Other investment -8.1 -58.9
Balance on capital and financial accounts -117.9 -83.1
Errors and omissions -29.9 -15.8
of which:
Foreign exchange revaluation gain (+) or loss (-) -5.8 10.7
Overall balance 18.3 13.8
Bank Negara Malaysia international reserves, net
USD billion equivalent
317.4
91.5
331.3
96.7
p Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Economic Developments in 2009
31
Table 1.13
Gross Exports
2008 2009p
Annual change
(%)
Gross exports 9.8 -16.6
Manufactures 3.8 -12.5
of which:
Electronics -8.3 -8.6
Semiconductors -7.1 3.5
Electronic equipment and parts -9.3 -18.8
Electrical products 9.9 -16.6
Resource-based products
1
20.9 -17.4
Commodities 36.0 -27.6
Agriculture 29.7 -21.6
of which:
Palm oil 43.5 -20.9
Rubber 10.6 -45.0
Minerals 41.4 -32.2
of which:
Crude oil and condensates 33.0 -42.0
LNG 51.2 -23.4
1
Refers to food, beverages and tobacco products, wood products,
furniture and parts, rubber products, petroleum products, chemicals
and chemical products and non-metallic mineral products
p Preliminary
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
outflows, which largely reflected trade credits,
increased during the year. After taking into account
the foreign exchange revaluation gains arising from
the strengthening of major currencies against the
ringgit, the net international reserves increased
by RM13.8 billion to RM331.3 billion (or US$96.7
billion) as at 31 December 2009. As at 25 February
2010, reserves amounted to RM331.8 billion (or
USD96.8 billion). This level of reserves is adequate
to finance 10 months of retained imports and is 4.3
times the short-term external debt.
Malaysia’s external position
remained strong despite the
weak external environment

Current Account
The current account recorded a marginally
smaller surplus of RM112.7 billion or 17.0% of
GNI (2008: RM129.5 billion or 18.1% of GNI).
Despite the sharp contraction in external trade, the
trade surplus remained sizeable as the decline in
intermediate imports largely offset the contraction
in exports. A larger inflow of tourism receipts,
particularly from Asia, contributed to a higher
surplus in the services account, while the narrowing
of the income account deficit was attributed mainly
to lower profits and dividends accruing to the
MNCs operating in the manufacturing sector.
Current account surplus
remained large, supported by
a sizeable trade surplus and an
improvement in the services
account

For the year as a whole, gross exports
contracted by 16.6% (2008: +9.8%). Gross
exports closely mirrored the developments in
the global economy. The export contraction
in the first half was exacerbated by the sharp
adjustment in inventories by final producers in
the importing countries. In addition, the decline
in commodity prices also affected exports
performance given that commodity and resource-
based exports accounted for 39.4% of gross
exports. In tandem with the gradual improvement
in the global economy, particularly the regional
economies, exports started to stabilise in the
third quarter, before picking up momentum to
register a positive growth of 5.1% in the fourth
quarter. Inventory replenishment and a rebound
Chart 1.22
Current Account
-100
0
100
200
300
400
500
600
700
2007 2008 2009p
RM billion
-20
0
20
40
60
80
100
120
140
RM billion
Goods exports
Goods imports
Balance on services and income
Balance on current account (RHS)
Source: Department of Statistics, Malaysia
p Preliminary
Annual Report 2009
32
in commodity prices lent further support to export
recovery. All segments of exports, except for
exports of minerals, registered positive growth in
the fourth quarter.
Manufactured exports contracted by 12.5%
in 2009, with all major segments recording
negative growth. Exports of E&E declined by
11%, largely reflecting the sharp contraction in
exports in the first half year, following the decline
in demand from both advanced and regional
countries. Exports recovered in the second half,
amid improvements in the global economic
conditions, led by stronger growth in the regional
economies. The impetus for the recovery was
driven by exports of electronics, particularly
semiconductors. Exports of semiconductors
constituted half of electronic exports, with
regional markets accounting for 74% of
semiconductor exports. Of significance, PR China
and Hong Kong SAR emerged as the largest
export destinations for semiconductors with a
share of 44%, with the demand coming primarily
from the production of netbooks and smart
phones. This development was underpinned by
the pivotal role played by PR China in the regional
production network. Consequently, Malaysia
benefited from PR China’s demand for parts and
components, both for re-exports to advanced
economies and increasingly, for its domestic
demand. Demand for electronic equipment and
parts by advanced countries, however, remained
subdued due to lower spending on information
technology by corporations.
Exports of non-E&E declined by 14.4% in 2009,
with the decline being more pronounced in the
first half of the year. The sharp fall in commodity
prices contributed to a substantial drop in
resource-based exports, which accounted for
57.4% of non-E&E exports. These included rubber
products, chemicals and chemicals products, and
petroleum products. However, the improvement in
regional demand and the rebound in commodity
prices in the second half led to the recovery
in non-E&E exports, which recorded a positive
growth in the fourth quarter.
Commodity exports contracted by 27.6%,
attributed to weaker demand and lower prices.
Both agriculture and mineral exports declined
Chart 1.23
Direction of Semiconductor Exports in 2009
G-3
23.9%
Rest of World
2%
Regional economies
74.1%
Other regional
economies
41.1%
PR China &
Hong Kong SAR
58.9%
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Note: G-3 refers to the US, Japan and Euro Area
Chart 1.24
Export Performance of Electronics & Electrical
(E&E) and Resource-Based Industries
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p Preliminary
-30
-20
-10
0
10
20
30
40
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Manufactured exports E&E Resource-based products
2008
Annual change %
2009p
Economic Developments in 2009
33
significantly in the first half, where rubber, crude
petroleum and LNG experienced lower prices and
export volumes. Meanwhile, the higher export
volume of crude palm oil was unable to cushion
the fall in prices. The contraction in export receipts
eased in the second half on the back of improved
commodity prices and some recovery in volume
demand, particularly from the region, following
the improvement in the economic conditions.
Gross imports declined by 16.6% (2008:
+3.8%), with contractions in all major categories
of imports. Imports of intermediate goods
declined by 21.6%. In the first half year, the
weak external demand for E&E exports led
to the curtailment of intermediate imports,
particularly imports of parts and accessories for
capital goods. In tandem with the decline in
non-E&E exports, imports of fuels and lubricants,
as well as industrial supplies such as chemicals
and metals were also lower. In the second half,
consonant with improvements in exports, imports
for intermediate goods recovered and recorded
positive growth in the fourth quarter.
Imports of capital goods contracted by 5.9%,
reflecting lower domestic private investment
spending. In the first half year, imports of
agricultural, construction, mining and
manufacturing equipment contracted significantly,
following deterioration in domestic demand
conditions and business confidence. Weak
external demand and lower capacity utilisation
had affected capacity expansion particularly in
the manufacturing sector. However, imports of
telecommunication equipment remained strong,
reflecting investment for wireless networks,
following the accelerated migration to mobile
services as well as the expansion in the coverage
of broadband services. In the second half year,
the contraction in capital imports moderated,
with imports of office machines recording positive
growth in tandem with capacity expansion.
Chart 1.25
Commodity Export Performance
-60
-40
-20
0
20
40
60
80
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Commodity exports Agriculture Minerals
2008
Source: Department of Statistics Malaysia and Bank Negara Malaysia
Annual change (%)
2009 p
p Preliminary
Table 1.14
Imports by End-Use
2008 2009p
Annual change (%)
Capital goods ... -5.9
Capital goods (except transport equipment) 2.2 -8.2
Transport equipment -13.6 10.5
Intermediate goods 5.7 -21.6
Food and beverages, mainly for industry 30.0 -16.8
Industrial supplies, n.e.s. 9.7 -21.8
Fuel and lubricants 32.0 -36.0
Parts and accessories of capital goods (except transport equipment) -5.0 -19.0
Consumption goods 11.8 -2.7
Food and beverages, mainly for household consumption 21.4 7.8
Consumer goods, n.e.s. 5.5 -9.1
Re-exports -6.5 24.0
Gross Imports 3.8 -16.6
n.e.s. Not elsewhere specified
p Preliminary
... Negligible
Source: Department of Statistics, Malaysia
Annual Report 2009
34
Consumption imports also declined, albeit, at
a more moderate rate of 2.7% as consumers
were more cautious in their spending on
imported consumer durables and semi-durables.
Nevertheless, imports of food and beverages for
household consumption continued to increase.
Growth in consumption imports resumed in the
fourth quarter in tandem with the strengthening
of private consumption.
With the earlier and stronger rebound in economic
activity in the Asian economies, exports to the
region began to recover as early as the third
quarter and strengthened further in the fourth
quarter. The greater role by Asia in supporting
the recovery in global trade resulted in a shift in
Malaysia’s trade pattern. The share of exports to
the region increased to 49.3% (2008: 45.7%),
with the share to PR China increasing to 12.2%
(2008: 9.5%). The share of exports to advanced
economies including the US, EU and Japan,
declined to 31.6% in 2009 (2008: 34.6%).

In 2009, the services account recorded the third
consecutive year of surplus, the largest recorded
surplus of RM3.2 billion (0.5% of GNI). The surplus
stemmed from higher travel receipts, as well as an
improvement in the other services deficit.
Despite the economic downturn and outbreak
of influenza A (H1N1), tourist arrivals expanded
strongly by 7.2% to 23.6 million visitors (2008:
5.1%, 22.1 million visitors), where most of the
tourists were from Asia. Malaysia benefited from
the increase in tourist arrivals spurred by the
growing number of middle income travelers from
Asia. In addition, the expansion of short and
medium-haul leisure travel was further facilitated
by the low cost carriers.
The other services account recorded a lower
deficit of RM10.7 billion, as a result of mainly
lower net outflows for construction services, as
well as royalties and licence fees. In addition,
net inflows from computer and IT services also
improved, attributable to the higher shared
services outsourcing (SSO) activities by foreign
financial institutions and IT companies in Malaysia.
Regional economies emerged as one of the major
markets for Malaysia’s export of software and IT
support services, earnings of which accounted
for about 40% of total receipts. Growth was
further supported by regional IT centres for the oil
and gas industry. Net payments for professional
services, however, increased reflecting imported
consultancy services by the financial and
manufacturing sectors.
Table 1.15
Direction of External Trade
2009p
Exports Imports Trade balance
RM billion
Annual change
(%)
RM billion
Annual change
(%)
RM billion
Total 553.3 -16.6 434.9 -16.6 118.4
of which:
United States 60.6 -26.8 48.6 -13.9 11.9
European Union (EU) 60.0 -19.9 50.8 -17.7 9.2
Selected ASEAN countries
1
141.0 -16.8 109.0 -13.4 32.1
Selected North East Asia countries 131.6 -1.5 110.1 -15.2 21.6
The People's Republic of China 67.2 6.4 60.7 -9.3 6.6
Hong Kong SAR 28.8 1.9 10.8 -20.8 18.0
Chinese Taipei 14.4 -11.1 18.5 -26.4 -4.0
Korea 21.1 -18.5 20.1 -16.9 1.0
West Asia 21.4 -18.0 14.8 -41.0 6.6
Japan 54.4 -24.2 54.3 -16.6 0.1
India 17.0 -31.3 7.9 -23.6 9.1
1
Singapore, Thailand, Indonesia, Philippines, Brunei Darussalam and Vietnam
p Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia
Economic Developments in 2009
35
For the year, the transportation account recorded
a larger deficit of RM 17.1 billion as lower
earnings from passenger fares and cargo offset
the lower freight payments due to the declining
volume of trade. The global economic downturn
inevitably led to lower passenger traffic against
the backdrop of excess capacity and greater
competition within the travel industry. The decline
in earnings from passenger fares moderated in the
second half year following the upturn in regional
travel demand amidst reductions in capacity.
The income account deficit narrowed to RM12.6
billion or 1.9% of GNI, reflecting mainly lower
profits and dividends accruing to foreign direct
investors in Malaysia, particularly in the E&E
sector. This was due to the weak performance
of manufacturing sector in the first half of the
year. Meanwhile, profits and dividends accruing
to Malaysian companies investing abroad were
higher, reflecting the improvement in earnings
from commodities.

Financial Account
In 2009, the financial account recorded a lower
net outflow of RM82.9 billion (2008: -RM118.5
billion). Of significance, net portfolio outflows
moderated sharply in 2009 as the large reversal
of short-term capital flows experienced since
the second half of 2008 turned to net inflows
in the second half of 2009, following improved
global and domestic economic conditions.
Meanwhile, both foreign direct investment
and direct investment abroad by Malaysian
companies moderated, particularly in the first
half of 2009, due to the sharp deterioration in
global economic conditions. Outflows in the
other investment category were higher as a
result of the continued extension of trade credits
by Malaysian exporters and the placement of
deposits abroad by residents.
For the year as a whole, portfolio investment
recorded a small net inflow of RM0.8 billion. In the
first half, portfolio outflows moderated to RM22.1
billion (2H 2008: -RM88.5 billion) as deleveraging
by international investors subsided. Subsequently,
this outflow turned around to register a net inflow
of RM22.9 billion in the second half of the year,
Chart 1.26
Tourist Arrivals and Tourism Receipts
0
5
10
15
20
25
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009e
0
10
20
30
40
50
60
Tourist arrivals Tourism receipts (RHS)
e Estimate
Source: Malaysia Tourism Promotion Board and Department of Statistics, Malaysia
Tourist arrivals in million Receipts in RM billion
Table 1.16
Services and Income Accounts
2008 2009p
RM billion
Net + - Net
Services Account 0.2 99.1 95.9 3.2
% of GNI ... 0.5
Transportation -15.4 14.9 32.0 -17.1
Travel 28.5 54.2 22.6 31.6
Other services -12.4 29.8 40.5 -10.7
Government transactions n.i.e. -0.6 0.1 0.7 -0.6
Income Account -23.7 40.5 53.1 -12.6
% of GNI -3.3 -1.9
Compensation of employees -0.7 4.0 5.4 -1.4
Investment income -23.0 36.5 47.7 -11.2
n.i.e. Not included elsewhere
p Preliminary
... Negligible
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Chart 1.27
Direct Investment Income
0
10
20
30
40
50
2005 2006 2007 2008 2009p
RM billion
Income accruing to Malaysian companies investing abroad
Income accruing to foreign investors investing in Malaysia
Reinvested earnings of foreign investors
Source: Department of Statistics, Malaysia
p Preliminary
36
Annual Report 2009
Nature and Trends of Capital Flows in Malaysia
Malaysia is one of the most open economies in the world. Throughout its development, Malaysia has
been highly integrated with the global economy and international financial system, resulting in not
only significant trade expansion, but also large investment flows. For more than a century, Malaysia has
received foreign direct investment, which has been an important contributor to the country’s economic
development. As the Malaysian economy evolves to become more developed, the nature of the capital
flows has changed responding to the changing conditions prevailing in the country. Two distinct
developments have emerged in the recent years. First, short-term capital flows have become more
prominent in the Malaysian financial system, in tandem with the global surge in this form of capital flows.
Short-term flows, in particular, portfolio flows, have risen in volume and their volatility has been increasing,
with potentially destabilising effects on exchange rates, the financial markets and the real economy.
Second, a more recent development has been the large increase in investment abroad by Malaysian
companies in search of new growth opportunities and markets.
Chart 1
Trends of Net Capital Flows in Malaysia
-140
-120
-100
-80
-60
-40
-20
0
20
40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009p
RM billion
Direct investment abroad Foreign direct investment
Portfolio investment Other investment
Financial account
p Preliminary
Source: Department of Statistics, Malaysia
p Preliminary
Source: Department of Statistics Malaysia
Equity capital
Reinvested earnings
Other capital
Net FDI
-10
-5
0
5
10
15
20
25
30
35
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009p
Chart 2
Net FDI Flows
RM billion
Foreign Direct Investment
Foreign direct investment (FDI) is an important contributor to the growth and the transformation of
the Malaysian economy, particularly in establishing new industries, enhancing production capacity,
employment, trade and technological capability. Malaysia has attracted a steady inflow of net FDI in the
recent decade, averaging 3% of GDP per annum with a peak of 4.5% of GDP in 2007. However, relatively
lower FDI inflows were recorded in 2001 and 2009, similar to the global trend, following the collapse of
the technology bubble and the global financial crisis respectively.
In absolute volume, Malaysia recorded RM152 billion in net FDI inflows during the period of 2000-2009,
higher than the RM134 billion received during the period of 1990-1999. However, as a share of GDP,
the net inflows of FDI were lower during the period of 2000-2009 (3% of GDP) compared to the period
of 1990-1999 (6.3% of GDP). This moderation was mainly attributed to two reasons. Firstly, the FDI
inflows into Malaysia in this recent decade have increasingly been channelled into the higher value-added
services sector, namely the financial services and shared services operations. The scale of the investments
in these sub-sectors are less and are also less capital-intensive compared to the manufacturing sector,
thus involving lower amounts. More importantly, however, is the value-add and contribution to growth
of this lower amount of FDI is higher as these sub-sectors are more skill-intensive and have higher labour
productivity. Secondly, the rising competition for FDI in the region from new emerging market economies
such as PR China, India and Vietnam as well as established investment centres, namely Singapore and
Hong Kong SAR. While global net FDI flows into the region have more than doubled during the period
Economic Developments in 2009
37
of 2000-2009 (USD1.4 trillion; 1990-1999: USD0.6 trillion), Malaysia’s share of the regional FDI flows has
declined as a major part of these flows went to PR China.
In terms of the sectoral distribution, inflows of FDI into Malaysia are relatively broad-based. While
FDI inflows continue to be underpinned by the large and long-standing presence of MNCs in the
manufacturing sector and investments in the oil and gas sector, the period 2000-2009 saw the rising
importance of FDI into the services sector, with the share of FDI in this sector more than doubling to 37%
of the total FDI flows (1990-1999: 15%). FDI in the services sector is well diversified, with investment being
channelled to the financial services, shared services and outsourcing, communications, transportation,
hotels and wholesale and retail trade sub-sectors. A significant development is the sizable increase in FDI in
the financial sector, including Islamic finance. It is estimated that net FDI inflows into this sector amounted
to RM41.6 billion over the recent 10-year period following the liberalisation that has been undertaken
in this sector. In the oil and gas sector, investment in upstream activity continued to be significant as
PETRONAS and its foreign partners continued to be actively engaged in exploration, production and the
development of oil and natural gas resources in the country. Additionally, the manufacturing sector in
Malaysia continues to be successful in attracting FDI in new growth areas such as renewable energy and
medical equipment.
Direct Investment Abroad
An important development in recent years has been the sharp increase in direct investment abroad (DIA)
by Malaysian companies, averaging 3.5% of GDP per annum between 2000 and 2009, and peaking
at 6.8% of GDP in 2008. Cumulatively, net DIA amounted to RM182 billion over this period, with
78% occurring between 2006 and 2009. The increasing trend of DIA reflects the growing presence of
Malaysian companies abroad, especially in the Asian region. Similar to other global companies, the factors
driving Malaysian companies to invest abroad include expanding markets for their products, gaining access
to more competitive supply of land and labour, expanding into rapidly growing industries, acquiring brands
and technology, and taking advantage of the comparative advantage of host countries. In particular, given
the relatively small domestic market, regional and global expansions allow Malaysian companies to achieve
greater economies of scale by tapping into new and larger markets. Generally, Malaysian companies which
invested abroad have also enhanced their domestic operations by expanding capacity and moving up
Chart 3
Cumulative Net FDI Flows by Sector
Manufacturing
63%
Note: Others mainly consist of the agriculture and construction sectors
Source: Department of Statistics, Malaysia
Manufacturing
41%
Oil and gas
17%
Others
5%
Services
15%
Oil and gas
17%
Others
5%
Services
37%
1990-1999 (RM134 billion) 2000-2009 (RM152 billion)
38
Annual Report 2009
the production value chain in order to establish an integrated supply chain management with their
overseas subsidiaries. This has increased their overall efficiency and enabled them to better compete
in the global market. Therefore, the rising investment abroad by Malaysian companies, over a medium
term, will benefit the country through having more competitive and globalised Malaysian companies,
through greater job opportunities for Malaysians, higher dividends for shareholders, and higher
inflows from profit repatriation.
The scope of DIA by Malaysian companies has also broadened over the years. In the earlier years,
investments were undertaken mainly by PETRONAS and Government-linked plantation companies, to
explore the potential for further natural resources such as oil and gas as well as to increase the available
land for plantation activity. This has, however, changed in recent years, with investments, mainly in the
services sector, being undertaken by both the Government-linked companies and private companies,
particularly in the financial services, telecommunication, utilities and business services sub-sectors. Most
of the investments were undertaken in the region, particularly in ASEAN, the Asian Newly Industrialised
Economies (NIEs), PR China and West Asian economies.
Chart 4
Net DIA Flows
-60
-50
-40
-30
-20
-10
0
10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009p
RM billion
Equity capital
Reinvested earnings
Other capital
Net DIA
p Preliminary
Source: Department of Statistics, Malaysia
Chart 5
Cumulative Net DIA Flows by Sector
Manufacturing
7%
Source: Department of Statistics, Malaysia
Others
28%
Services
49%
Oil and gas
7%
Construction
4%
Agriculture
5%
Manufacturing
8%
Others
3%
Services
70%
Oil and gas
10%
Construction
2%
Agriculture
7%
1995-1999 (RM32 billion) 2000-2009 (RM182 billion)
Economic Developments in 2009
39
Portfolio Investment Flows
A key development since the early nineties has been the surge in portfolio flows to Malaysia. At its peak
in 2008, total gross portfolio inflows and outflows in absolute terms were 23 times higher than in 2000.
In addition, a distinct characteristic of the portfolio flows in recent years has been the increased volatility of
the flows. Since 2004, there have been several episodes of large inflows and outflows of portfolio funds
in response to the developments in global financial markets as well as changes in domestic economic
conditions. Of significance, between 2004 and the first half of 2008, Malaysia experienced net portfolio
inflows of RM54 billion. These inflows were mainly driven by Malaysia’s strong economic fundamentals
as well as the prospects of better corporate outlook as the economy recovered strongly following the
aftermath of the Asian financial crisis. In addition, the rapid development of the domestic bond market
has also attracted sizeable inflows of foreign portfolio investment into the debt securities market. The
emergence of debt securities as an asset class for foreign investors alongside the equities has resulted in an
increasingly diversified composition of portfolio investment flows in Malaysia.
The build-up of inflows of speculative funds in 2005 was due to the expectations for the appreciation of
the ringgit which was floated on 21 July 2005. The surge of portfolio inflows since 2005 was interrupted
by several external market developments which led to episodes of reversals in flows by foreign investors.
Among others, the deteriorating global inflation outlook in 2006, the Shanghai stock market correction
in February 2007 and the heightened global market uncertainty following the US sub-prime mortgage
problem in July-August 2007 had subsequently led to outflows of foreign funds. Of significance was the
massive deleveraging activities by foreign financial institutions following the global financial crisis in the
second half of 2008 that triggered large-scale liquidation of portfolio funds by international investors,
which affected emerging markets across the board including Malaysia. These reversals culminated in
a net portfolio outflow of RM111 billion between the second half of 2008 and the first half of 2009.
Nevertheless, inflows of foreign portfolio funds resumed in the second half of 2009 amid stronger growth
prospects in the region as well as further normalisation of conditions in the international financial markets.
This subsequently led to an improvement in investors’ risk appetite for financial assets in the emerging
markets, including Malaysia.
While the magnitude of the recent reversals were larger than the net outflows recorded during the
height of the Asian financial crisis, the impact on the domestic economy was limited given Malaysia’s
well-developed financial system. In particular, the development of the debt market allowed for the
diversification of the composition of portfolio flows into Malaysia. As such, the reversals of the flows did
not cause a significant disruption in any particular asset market. In addition, the depth of the domestic
financial market also provided greater liquidity and price sensitivity to changes in financial conditions,
-90
-70
-50
-30
-10
10
30
50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009p
Equity securities
Debt securities
Net portfolio investment
p preliminary
Source: Department of Statistics Malaysia
Chart 6
Net Portfolio Flows
RM billion
40
Annual Report 2009
facilitating more effective monetary operations to sterilise the impact of large capital flows. The strong
international reserves position has been able to accommodate these outflows of funds without affecting
overall domestic liquidity or interrupting the normal functioning of the foreign exchange and domestic
money markets. Given these conditions, Malaysia has not only been able to withstand large shifts in funds
but has also managed to ride out the recent period of turbulence in international financial markets without
serious disruptions to the domestic economy.
Meanwhile, portfolio outflows due to residents investing abroad have been steadily growing over the
years, averaging about 3.9% of GDP during the period of 2000-2009 and were mainly in the form of
equity securities. The liberalisation of the foreign exchange administration rules since 2005 has also
allowed for greater flexibility for residents to invest abroad. The increase in external portfolio assets
resemblance similar trends in other parts of the region, especially among the Asian NIEs in which the build-
up in external portfolio assets at the international level has become increasingly significant.
Other Investment
In addition to portfolio investment, other investment comprising mainly net external loans undertaken
by the official and private sectors, net placements of deposits by the banking institutions as well as trade
credit extension, have consistently recorded net outflows, averaging 5.6% of GDP over the recent ten
years. The net external loan repayments by both the official and private sectors have contributed to
these outflows. Another component of other investment includes activities by the banking institutions in
managing their liquidity. This reflected mainly placement of deposits abroad and inter-bank borrowings.
These flows in the banking sector have in part been responsive to interest rate and liquidity movements.
The non-bank private sector experienced an outflow during this period, due mainly to extension of trade
credits by Malaysian exporters and repayments of trade credits by Malaysian importers. These flows
have been fairly volatile and large, and they were mainly driven by financing requirements and business
decisions of the non-bank private sector.
Chart 7
Movement of International Reserves
0
50
100
150
200
250
300
350
400
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009p
RM billion
-150
-100
-50
0
50
100
150
RM billion
Net international reserves
Current Account (RHS)
Financial Account (RHS)
p Preliminary
Source: Department of Statistics Malaysia
International Reserves
The changes in net international reserves over this recent decade have been shaped by developments in
both the current and financial accounts of the balance of payments, particularly movements in portfolio
investments. With current account surplus exceeding financial account deficits, there was a build-up of
external reserves from 2001-2003. The large inflows of portfolio funds from 2004 up to the first half
of 2005 coupled with the continued surplus in the current account resulted in a significant increase of
international reserves from RM168 billion (USD44.2 billion) as at end-2003 to RM297.1 billion (USD78.2
billion) as at end-July 2005. While a significant amount of these inflows were attracted to the investment
opportunities provided by the deepening Malaysian capital market, there were also significant speculative
Economic Developments in 2009
41
portfolio inflows over this period in anticipation of the ringgit exchange rate realignment. These
speculative inflows reversed in the second half of 2005 after the ringgit was floated in July 2005 and
reserves stabilised at RM265.2 billion (USD70.2 billion) as at end-2005.
In 2007 and the first half of 2008, Malaysia again received substantial capital inflows, particularly portfolio
funds. These large capital inflows coupled with the current account surplus, resulted in a significant
appreciation of the exchange rate and an increase in the international reserves which peaked in June 2008
at RM410.9 billion (USD125.8 billion). The significant deleveraging activities following the intensification
of the global financial crisis led to a large reversal of portfolio flows of RM111 billion between the second
half of 2008 to the first half of 2009, resulting in a substantial decline in the international reserves to
RM322.9 billion (USD91.5 billion) as at end-June 2009. The decline in reserves during this period is less
than the net portfolio outflow as Malaysia continued to record a current account surplus during this
period. The portfolio inflows resumed since the second half of 2009. The external reserves as at end-2009
amounted to RM331.3 billion (USD96.7 billion). This reserves position was sufficient to finance 9.7 months
of retained imports and is 4.3 times of the short-term external debt. As at 25 February 2010, the net
international reserves was amounted at RM331.8 billion (USD96.8 billion).

Conclusion
This review of developments in capital flows in Malaysia over the recent ten years has brought to the
forefront several important policy considerations for Malaysia moving forward. First, investments abroad by
Malaysian companies can be expected to continue to remain sizeable in the future and this development
is in response to the changing structure and competition in the region and in the global economy.
The changing composition of capital flows would contribute to Malaysia’s long-term competitiveness,
economic transformation and growth. Second, competition for FDI will continue to intensify, going
forward. Malaysia has shifted gear to attract FDIs in the high value-added activities and those that will
bring in new technology, required to support Malaysia’s transition into a high income economy.
The third, is the challenge with respect to managing the increasingly volatile nature of short-term capital
flows. The strategy adopted is to further deepen and broaden the domestic financial system to cope
with and manage the volatile capital flows without resulting in disruptions and instability in the domestic
financial markets. Malaysia has also consistently maintained vigilance over developments in capital flows
through close surveillance and assessments of the risks associated with these flows. Maintaining Malaysia’s
strong macroeconomic fundamentals and a sound and strong banking system will provide the flexibility
for the country to intermediate volatile capital flows while maintaining financial stability and promoting
growth in the domestic economy.
Annual Report 2009
42
going mainly into long-term debt securities. The
inflows took place following further normalisation
in the international financial markets and stronger
growth prospects in Asia, which led to the
improvement in investors’ risk appetite.
The financial account recorded
a lower net outflow following
the return of portfolio funds
in the second half of the year
Gross inflows of foreign direct investment (FDI)
moderated to RM31.6 billion (or 4.8% of GNI) in
2009. This largely reflected the significantly lower
amount of earnings retained for investments by
existing multinational corporations (MNCs) due
to lower profits during the year. In addition, a
significant share of the profits was also repatriated
to home countries. Rising excess capacity amid the
falling export demand and uncertainty in the global
economic outlook further discouraged inflows
of FDI during the year. After taking into account
the adjustments for outflows due largely to loan
repayments to parent companies, net inflows of FDI
amounted to RM5.7 billion or 0.9% of GNI.
The FDI continued to be broad-based, with inflows
mainly into the manufacturing (47% share),
services (28%) and oil and gas (25%) sectors. In
the manufacturing sector, the bulk of FDI was in
the E&E sub-sector, largely undertaken by MNCs
for the upgrading of equipment and technology.
There were also sizeable investments in the
petroleum refining and petroleum-related industry,
as well as in the solar energy industry. FDI in the
services sector was channelled primarily into
the finance and insurance, as well as wholesale
and retail trade sub-sectors. Investment in the
oil and gas sector reflected on-going extraction
operations and production activities undertaken by
MNCs jointly with PETRONAS.
Direct investment abroad (DIA) by Malaysian
companies was also affected by global
developments. However, DIA continued to
remain sizeable. For the year as a whole, net DIA
amounted to RM30.5 billion and was mainly
channelled into the services (46%), oil and gas
(38%), and manufacturing sectors (6%). Although
investments in terms of equity and inter-company
loans were lower, reinvested earnings more
than doubled in 2009. This largely reflected the
continued investment by Malaysian companies in
their existing operations.
In the services sector, DIA was mainly undertaken
through increased participation in existing
operations abroad, particularly in the Asian
region. Of significance, the domestic banking
and telecommunication players have strategised
to realign their operations on a regional scale
to remain competitive. The investment in the oil
and gas sector mainly reflected the continued
expansion into global markets by PETRONAS to
improve returns and to diversify geographical
risks. During the year, PETRONAS invested in a gas
processing plant in Turkmenistan, an LNG project
in Australia and other existing projects in Asia,
Africa and Central Asia. Meanwhile, investments
in the manufacturing sector were primarily in
the form of reinvestments into upstream and
downstream activities related to palm oil.
The other investment account recorded a
higher net outflow as outflows in the private
sector more than offset inflows in the official
sector. The private sector outflows reflected the
net placement of deposits abroad by residents
and the extension of trade credits by Malaysian
exporters. During the year, trade credits extended
by Malaysian exporters were higher than the
trade credits received by Malaysian importers, as
Table 1.17
Balance of Payments: Financial Account
2008 2009p
RM billion
Financial Account -118.5 -82.9
Direct Investment -26.1 -24.9
Abroad -50.2 -30.5
In Malaysia 24.1 5.7
Portfolio Investment -84.4 0.8
Other Investment -8.1 -58.9
Official sector
1
0.8 4.1
Federal Government -0.5 -0.6
NFPEs 1.3 -1.9
Bank Negara Malaysia 0.0 6.6
Private sector -8.9 -63.0
1
Excludes bonds and notes raised abroad by the Federal Government
and NFPEs
p Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Economic Developments in 2009
43
Table 1.18
Net International Reserves
As at end Change
2008 2009 2009
RM million
SDR holdings 786.4 7,279.2 6,492.8
IMF reserve
position 1,127.1 1,515.8 388.7
Gold and foreign
exchange
1
315,554.2 322,505.6 6,951.4
Gross
International
Reserves 317,467.7 331,300.6 13,832.9
Less Bank Negara
Malaysia
external
liabilities 22.5 23.9 1.4
Net International
Reserves 317,445.3 331,276.7 13,831.4
USD million
equivalent 91,529.5 96,688.1 5,158.6
Months of retained
imports 7.6 9.7
Reserves/Short-
term external
debt
2
(times) 4.0 4.3
1
‘Other Foreign Currency Claims on Residents’ is reclassified from ‘Gold and
Foreign Exchange’ to ‘Other Assets’ of Bank Negara Malaysia
2
With effect from end-March 2008, the short-term external debt refers to the
external debt under the new definition, with offshore entities in Labuan IBFC
being treated as residents
Note : Numbers may not necessarily add up due to rounding
Source: Bank Negara Malaysia
foreign exporters experienced constraints in trade
financing as a result of the global financial crisis.
Meanwhile, the net inflows of the official sector
were due mainly to the special allocation of IMF’s
Special Drawing Rights (SDR) to Bank Negara
Malaysia, which was partially offset by external
loan repayments by the Federal Government and
the Non-Financial Public Enterprises (NFPEs).
International Reserves
The international reserves held by Bank Negara
Malaysia comprise the holdings of gold and
foreign exchange holdings, the reserve position
with the IMF and the holdings of Special
Drawing Rights (SDR). In 2009, net international
reserves increased by RM13.8 billion to RM331.3
billion (equivalent to USD96.7 billion) as at 31
December 2009.
International reserves
increased by RM13.8 billion
to RM331.3 billion in 2009,
supported mainly by the
continued surplus in the
current account
For the year as whole, the increase in international
reserves was largely supported by the continued
surplus in the current account. Foreign exchange
inflows arising from export proceeds and FDI were
more than able to cover the external obligations
arising from external loans and imports as well as
net outflows arising from both DIA and portfolio
investments. The movements of the international
reserves during the year were to a large extent
influenced by developments in portfolio flows.
In the first half of the year, the moderation of
deleveraging activities by international investors
led to small gains in the net international reserves
as portfolio outflows subsided. Net international
reserves position subsequently increased
moderately in the second half with the revival of
investor sentiments and the return of net foreign
portfolio inflows. Meanwhile, the cumulative
foreign exchange revaluation gain amounted to
RM10.7 billion, reflecting the strengthening of
major currencies against the ringgit, particularly in
the first three quarters of 2009.
Malaysia is a participating member in the Financial
Transactions Plan of the IMF which makes
resources available to member countries facing
short-term balance of payments difficulties. The
increase in reserve position with the IMF in
2009 reflected mainly net purchases of currencies
by various member countries under the Financial
Transactions Plan. Meanwhile, the significant
increase in international reserves held in the form
of SDRs was attributed mainly to an additional
allocation of SDRs to Malaysia by the IMF in
a move to strengthen the financial safety net
available to member countries during the financial
crisis in 2009.

For the first few months of 2009, the global
financial markets remained in turmoil. Central
banks and governments implemented large scale
and unprecedented measures to arrest the crisis.
The functioning of global financial system was
impaired by the failure of some financial markets.
Market volatility was large, and at times were
extreme. Credit markets were frozen while large
Annual Report 2009
44
financial institutions in distress were rescued by
governments. At the end of the first quarter,
governments in major advanced economies had
announced a wide range of unprecedented fiscal
and monetary measures to stabilise the financial
system. Aggressive monetary accommodation
brought down policy rates to historical lows
and unconventional quantitative measures were
introduced to ease liquidity and restart financial
intermediation. Subsequently, the volatility
subsided and financial conditions stabilised. This
was then followed by a strong recovery of the
equity market. For the remaining part of the year,
major equity and commodity markets rebounded,
benefiting from the abundance of liquidity while
credit spreads tightened considerably. Investment
flows returned to riskier assets and emerging
markets were the best performing asset class for
the year.
During the course of the year, the reserves
management strategy shifted towards anticipating
the financial and economic recovery. Investment
duration and asset allocation were managed in
anticipation of an expected rise in bond yields due
to the record debt supply as well as rising long-
term inflationary risk from the unprecedented
fiscal and monetary expansions. Diversification
into other currencies and asset markets resumed,
capitalizing on improving financial market
conditions, which led to a strengthening of non-
US dollar currencies and credit markets in general.
Throughout the crisis and the ensuing recovery,
risk management practices remained robust
and were continually reviewed, particularly in
managing elevated operational and credit risks.
As at 25 February 2010, the reserves level
amounted to RM331.8 billion (equivalent to
USD 96.8 billion), which is adequate to finance
10 months of retained imports and is 4.3 times
the short-term external debt. The international
reserves held by the Bank are usable and
unencumbered. There are no foreign currency
loans with embedded options and no undrawn,
unconditional credit lines provided by or to other
central banks, international organisations, banks
and other financial institutions. Bank Negara
Malaysia also does not engage in ringgit related
options activity in the foreign currency markets.
External Debt
Malaysia continues to undertake a prudent yet
pragmatic external debt management strategy
which facilitates diversification of external
borrowings by the private and public sectors
while instituting prudential measures to minimise
risks associated with large external obligations
and debt servicing ability. In promoting monetary
and financial stability as well as in safeguarding
the balance of payments position, the country’s
external debt management is supported by a
comprehensive surveillance and debt monitoring
system which enables early detection of emerging
risks and vulnerabilities arising from the country’s
overall external debt exposure.
Malaysia’s external debt
remained low at 35.3% of GNI
As at the end of 2009, Malaysia’s total external
debt moderated to RM233.9 billion (or USD67.7
billion), or equivalent to 35.3% of GNI. During
the year, the medium- and long-term external
debt declined due to net repayments by both the
Federal Government and the private sector, which
more than offset the larger net drawdown by the
NFPEs. The appreciation of the ringgit against the
US dollar also contributed to the decline in the
overall external debt.
The Federal Government debt registered a
larger net repayment of RM6.3 billion in 2009,
due primarily to the maturity of the Global
Bond (1999). For the sixth consecutive year, no
market loan was raised from the international
Chart 1.28
Net International Reserves (end-month)
200
240
280
320
D J F M A M J J A S O N D
RM billion
0
2
4
6
8
10
Months/Times
Net international reserves, RM billion (LHS)
Retained import cover (RHS)
Reserves/Short-term external debt (RHS)
With effect from end-March 2008, the short-term external debt refers to
the external debt under the new definition, with offshore entities in Labuan
IBFC being treated as residents
Source: Bank Negara Malaysia
Note :
2008 2009
Economic Developments in 2009
45
capital market as the Federal Government
maintained its practice of sourcing its funding
requirements from non-inflationary domestic
sources. Meanwhile, the higher external debt
of the NFPEs (end-2009: RM71.6 billion; end-
2008: RM63.1 billion) was due mainly to the
issuance of a USD4.5 billion two-tranche bond by
PETRONAS in August 2009, to finance its future
capital expenditures. Excluding this transaction,
the NFPEs registered a net repayment of their
external debt following the maturity of several
large bonds as well as reduced borrowings for
capital expenditure and expansion abroad.
Similarly, the private sector registered a net
repayment of RM3.3 billion in 2009, due mainly
to larger repayments of debt by companies
in the manufacturing and oil and gas sectors.
Meanwhile, loan drawdowns also declined as
investment expansion plans slowed down.

During the year, the short-term external debt
outstanding declined to RM78 billion as inter-
bank borrowings arising from treasury operations
moderated. The short-term external debt
accounted for only 11.8% of GNI, 23.5% of
international reserves and 11.9% of exports of
goods and services. The bulk of the short-term
debt continued to be held by the banking sector
(88.5%). Short-term external debt of the non-
bank private sector, comprising mainly of revolving
credits and overdraft facilities, remained low.
LABOUR MARKET DEVELOPMENTS
The labour market was adversely affected by the
significant deterioration in the global economy in
the early part of the year. In response to the sharp
decline in export orders and weakening domestic
demand, firms particularly in the trade-related
sectors reduced operations, particularly in the first
two months of the year.
Weak labour market
conditions in the early part
of 2009 but conditions had
steadily improved
According to a survey conducted by Bank Negara
Malaysia, various measures were undertaken by
companies to reduce costs, of which imposing a
hiring freeze and reducing the training budget
were the most common. Firms also stated that
retrenchment was generally implemented as a last
resort, only after all other cost-cutting measures
had been exhausted. For the year as a whole,
total retrenchments increased to a seven-year
high of 25,064 persons, with one-half of these
retrenchments occurring in the first quarter.
Table 1.19
Outstanding External Debt
2008 2009p 2008 2009p
RM
billion
RM
billion
USD
billion
USD
billion
Total debt 236.1 233.9 67.4 67.7
Medium- and long-term 156.5 156.0 44.6 45.1
Short-term
1
79.6 78.0 22.7 22.6
As % of total debt 33.7 33.3 33.7 33.3
As % of net international
reserves 25.1 23.5 25.1 23.5
As % of GNI
Total debt 33.0 35.3
Medium- and long-term debt 21.9 23.6
As % of exports of goods
and services
Total debt 30.9 35.8
Medium- and long-term debt 20.5 23.9
Debt service ratio (%)

2.6 6.5
1
Excludes currency and deposits held by non-residents with resident
banking institutions
p Preliminary
Source: Ministry of Finance, Malaysia and Bank Negara Malaysia
Chart 1.29
Various Measures to Reduce Labour Costs
by Companies
What were the measures implemented by companies during the crisis?
Source: Annual Survey, Bank Negara Malaysia
Hiring freeze
Reduce training budget
No salary increment
Reduce working hours /
temporary lay offs
Retrenchments
Pay cut 7%
20%
0 5 10 15 20 25 30 35 40
20%
21%
30%
35%
% of respondents
Annual Report 2009
46
Labour market conditions began to stabilise in
the second quarter and improved thereafter,
in tandem with the overall improvement in
global and domestic economic conditions. The
implementation of expansionary fiscal policy and
accommodative monetary policy domestically
had contributed to a rebound in business and
consumer sentiments, and together with a gradual
improvement in the global economic conditions,
led to a significant decline in retrenchments and a
revival in hiring activity by firms from the second
quarter onwards. The quicker-than-expected
improvements in labour market conditions in
turn resulted in a lower unemployment rate
of 3.7% of the labour force, compared to the
earlier forecast of 4.5%. Despite the challenging
economic environment and declining productivity
growth, employers in the private sector continued
to grant salary increments, although the quantum
moderated to 3.4% (2008: 5.1%).
Total retrenchments in 2009 were significantly
higher than in the previous year, with the highest
number of retrenched workers being recorded
in the first quarter of the year (12,590 persons).
Workers in the manufacturing sector were the
worst affected (78% of total retrenchments in the
first quarter), particularly in the E&E cluster (45%
of total retrenchments) following the sharp drop in
export orders. The number of retrenched workers,
Table 1.20
Selected Labour Market Indicators
2005 2006 2007 2008 2009e
Employment
1
('000 persons)

10,892.8 11,159.0 11,398.0 11,576.5 11,609.1
Annual change (%) 4.1 2.4 2.1 1.6 0.3
Labour force
1
('000 persons) 11,290.5 11,544.5 11,775.1 11,967.5 12,061.1
Annual change (%) 4.1 2.2 2.0 1.6 0.8
Retrenchments (persons) 16,109 15,360 14,035 16,469 25,064
Annual change (%) -19.3 -4.6 -8.6 17.3 52.2
Unemployment rate
1
(% of labour force) 3.5 3.3 3.2 3.3 3.7
Real labour productivity growth
2
(%) 1.2 3.3 4.0 3.0 -2.0
1
Based on estimates by Economic Planning Unit
2
Based on estimates by Bank Negara Malaysia
e Estimate
Source: Bank Negara Malaysia
Economic Planning Unit
Ministry of Human Resources
Chart 1.30
Output and Employment
e Estimate
Source: Economic Planning Unit
Department of Statistics, Malaysia
-2
-1
0
1
2
3
4
5
6
7
8
2005 2006 2007 2008 2009e
2.8
2.9
3.0
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
Employment Labour force
Real GDP Unemployment rate (RHS)
Annual change (%) As % of labour force
Chart 1.31
Retrenchment in Selected Sectors
0
5,000
10,000
15,000
20,000
25,000
30,000
2006 2007 2008 2009
Total retrenchments Manufacturing
Services
Number of workers
Source: Ministry of Human Resources
Economic Developments in 2009
47
however, declined significantly from the second
quarter onwards (7,470 persons) and by the third
quarter, normalised to pre-crisis level. Overall,
total retrenchments increased by 52% to 25,064
persons in 2009 (2008: 16,469 persons), of which
71% were from the manufacturing sector and
25% were from the services sector.
Recruitment activity also ceased in the first quarter
amidst heightened uncertainty about the business
outlook. Total vacancies posted during the first
quarter amounted to about 222,000 positions,
a decline of 16% from the preceding period.
However, business sentiments began to improve
subsequently, which translated into higher job
offerings in the second half of the year, particularly
in the services, manufacturing and construction
sectors. For the year as a whole, the cumulative
number of vacancies rose to 1.5 million positions
(2008: 1.1 million positions), with most positions
being offered in the manufacturing and services
sectors, particularly in the distributive trade,
financial intermediation, and community, social
and personal services sub-sectors.
The improving economic conditions in the
second half of the year and the various measures
undertaken by the Government helped to support
overall employment conditions, which recorded
a marginal increase of 0.3% (2008: 1.6%).
The increase in employment was mainly in the
services sector, as well as in the construction and
agriculture sectors. In contrast, the manufacturing
sector recorded a net decline in employment,
reflecting largely the freeze in new hiring and
the higher number of retrenchments. In order to
mitigate the impact of the global recession on
employment, the Government introduced several
measures, including filling about 50,000 vacant
positions in the professional and support group
levels in the public sector, while another 100,000
individuals were provided with on-the-job training
and were put in temporary job placements with
various Government agencies, government-linked
companies (GLCs) and private companies. These
included more training places provided under the
Special Training and Re-Training Programmes,
industrial and technical skills training courses
managed by various states’ skills training centres
as well as on-the-job training and job placements
in the financial sector and GLCs. In addition,
the Government also assisted firms to lower
labour costs by reducing the Human Resource
Development Fund levy and providing a double-tax
deduction to companies that hired retrenched
workers. A total of 22 new JobsMalaysia Centres
were set up and 109 existing centres were
upgraded to provide job-placement assistance,
career counseling and information on training
opportunities to unemployed workers.
In 2009, the total number of registered foreign
workers (migrant workers and expatriates)
declined by 23% to 1.62 million workers, of
which 98% were the low-skilled migrant workers.
Total migrant workers declined by 23% to 1.59
million (2008: 2.06 million) due to retrenchment
and early termination of work contracts by
employers. In addition, the Government also
imposed stricter rules on the hiring of migrant
workers, including a freeze on the hiring of
new migrant workers in the manufacturing and
services sectors, a prohibition of the practice
of deducting levy payments from the wages of
new migrant workers thereby increasing the
cost of hiring, and a freeze on the issuance of
new licenses for labour outsourcing companies.
Foreign expatriates employed in the country
declined by 13% to 32,138 persons.
Labour productivity, as measured by real value-
added per worker, was also affected by the weak
economic performance during the year. Labour
productivity growth contracted by 2.0% in 2009
(2008: +3.0%) due mainly to a sharp decline in
labour productivity in the manufacturing sector,
as production fell in response to the significant
deterioration in external demand in the early part
of the year. Despite the challenging economic
environment and lower productivity, employers
in the private sector continued to grant salary
Chart 1.32
Labour Productivity Trends
Source: Bank Negara Malaysia
Department of Statistics, Malaysia
e Estimate
-9
-7
-5
-3
-1
1
3
5
7
9
Whole
economy
Services Construction Agriculture Mining Manufacturing
2007 2008 2009e
Annual change (%)
Annual Report 2009
48
increments, albeit at a moderate rate. According
to the survey conducted by Bank Negara
Malaysia, average salary increments in the private
sector moderated to 3.4% (2008: 5.1%), with
both the executives and non-executives receiving
a lower salary increment of 3.2% and 3.7%
respectively (2008: 4.9% and 5.1%).
PRICE DEVELOPMENTS
Consumer Prices
In line with global and domestic developments,
inflationary pressures in Malaysia moderated
substantially during the year. Headline inflation,
as measured by the annual percentage change
in the Consumer Price Index (CPI), averaged
0.6% in 2009 (2008: 5.4%). The marked
decline in headline inflation during the year was
driven by supply-related factors and subdued
demand conditions. Meanwhile, core inflation,
an indicator of the demand-driven pressure on
prices, moderated to 2.7% in 2009 (2008: 4%).
Inflation in 2009 was influenced by both external
and domestic factors. Externally, the economic
weakness that emerged in the second half of
2008 had led to disinflationary pressures in both
the major and emerging market economies. This
impact was particularly evident in the first quarter
of 2009. Two major forces responsible for these
disinflationary pressures were the significant drop
in global commodity prices, especially for crude
oil, and the increasing slack in the economy as
the global recession deepened.
After reaching its historical peak at USD147.27
per barrel in July 2008, oil prices plummeted by
more than 60% in January 2009 (USD41.68 per
barrel). The sharp reversal had a direct impact
on inflation through lower retail fuel prices
across the globe. Lower energy costs and lower
prices for a wide-range of oil-related inputs also
allowed producers to decrease their prices.
In an environment of tighter credit conditions,
rising unemployment and deteriorating consumer
and business confidence, households and
businesses restrained their spending activities
and contributed to the weak global demand
conditions, particularly during the early part of
the year. As a result, many countries experienced
lower inflationary pressures during the year.
Inflation in the advanced economies recorded
a steep decline. The annual inflation rate in
the US dropped to levels that were not seen
since the late 1940s, while annual inflation in
the euro area declined to its lowest levels since
the inception of the European Union. Similarly,
inflation in emerging market economies also saw
a decline in 2009 with considerable deceleration
evident in PR China, where the inflation rate
decreased from 5.9% in 2008 to -0.7% in 2009.
On the domestic front, Malaysia’s position as
a highly trade-oriented economy meant that
external developments had a sizeable impact
on the domestic economy. The decline in global
fuel and commodity prices, and the deflationary
conditions experienced by Malaysia’s top trading
partners, contributed to lower domestic inflation.
Most significantly, the cumulative reductions in
the retail petrol prices in the second half of 2008
contributed significantly to the moderating trend
of domestic inflation. The effect was particularly
J J J F M M A A S O N D J J J F M M A A S O N D J J J F M M A A S O N D
Chart 1.33
Consumer Price Inflation
Headline Inflation Core Inflation
-3
-1
1
3
5
7
9
Annual growth (%)
2007 2008 2009
Note: 1. FAO stands for Food and Agricultural Organisation of the United Nations.
2. The FAO Food Price Index consists of a weighted average of 55 food
commodities considered by FAO specialists as representing the
international prices of food.
3. FAO Food Price Index and World Crude Oil Price Index were re-based
using 2005 average as the base year.
Headline Inflation (LHS)
FAO World Food Price Index (RHS)
World Crude Oil Price Index (RHS)
Chart 1.34
Headline Inflation and World Commodity Prices
% Index (2005=100)
2007 2008 2009
J F M M J J A S O N D A J F M M J J A S O N D A J F M M J A S D A O J N 50
100
150
200
250
-4
-2
0
2
4
6
8
10
Economic Developments in 2009
49
significant in July 2009, as the high base effect
accounted for a 19.9% drop in the transport
category, which contributed to a 3.2 percentage
point fall in inflation.
The impact on headline inflation was sizeable,
with the annual rate of price level falling by
-2.4% in July, its lowest rate since August 1986.
The CPI for food and non-alcoholic beverages
also moderated to an average of 4.1% during
the year (2008: 8.8%). This mainly reflected the
receding effect of global supply constraints. In
particular, the CPI sub-category for rice, bread
and other cereals moved into negative territory in
June 2009 following the significant fall in global
grain prices from the second half of 2008. As
most of these base effects began to dissipate
towards the end of the year, the headline
inflation gradually recovered and started to turn
positive again. Meanwhile, prices for other CPI
categories remained relatively stable, with an
average increase of 1.5% in 2009 (2008: 2.3%).
Another important factor affecting headline
inflation during the year was the imposition of
an additional excise duty of 1 sen per cigarette
in October, which resulted in higher CPI for the
alcoholic beverages and tobacco category.
A key concern during the year was the risk
of deflation. Given the base effect of high
inflation in 2008 and the rapid disinflation,
many countries registered negative inflation
rates in 2009. As a result of the extensive scale
of the global financial crisis that triggered a
global recession, and the large uncertainties
surrounding the prospects for resolution of
the financial crisis and its impact on the real
economy, some countries in the region faced
the risk of a more prolonged and deeper
deflation. By definition, deflation is a situation
of a persistent and broad-based decline in
the general price level. When such conditions
prevail and result in entrenched deflationary
expectations, the reinforcing postponement
of consumption, falling asset prices and
rising real debt burdens could drive the real
economy into a more severe and protracted
recession. The IMF World Economic Outlook
in October 2009 reported that the deflation
vulnerability indicator, which combines a range
of macroeconomic indicators such as core
inflation, output gap, house and equity prices
as well as credit and broad money growth,
pointed to an increased risk of deflation in
a number of major and emerging market
countries. However, the very strong policy
responses both on the fiscal and monetary
fronts succeeded in mitigating such an
outcome. Concerns over deflation abated in
the second half of 2009 as the financial crisis
stabilised and global economic conditions
began to show signs of improvement on the
back of large and aggressive fiscal stimulus.
For Malaysia, although headline inflation
was negative between June and November
2009, deflation was mostly a statistical
development and there was no evidence of
deflationary pressures being embedded in the
economy. Although core inflation moderated,
it continued to remain positive throughout
the year. Consumer and business confidence
also remained resilient, underpinned by the
significant policy measures undertaken by the
Government and the Bank. More importantly,
while demand conditions were relatively
subdued during the year, they remained
sufficiently strong to mitigate the risk of a
protracted deflation.
Producer Prices
Producer price inflation, as measured by the
Producer Price Index
1
(PPI), declined in 2009
amidst the broad decline in commodity prices.
The annual change in the PPI averaged -7.1%
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D
2007 2008 2009
Chart 1.35
Contribution to Inflation
Annual growth (%)
-4
-2
0
2
4
6
8
10
Others
Food and Non-Alcoholic Beverages
Headline Inflation
Note: Others refer to communication, clothing and footwear, health, education,
recreation services and culture, furnishings, household equipment and
routine maintainence, alcoholic beverages and tobacco, restaurant and
hotels, miscellaneous goods and services and housing, water, electricity,
gas and other fuels
Transport
1
Effective from 2010, the Producer Price Index (PPI) has been
revised to the new base year 2005=100, from 2000=100
previously.
Annual Report 2009
50
in 2009 compared with an increase of 10.3%
in 2008. The annual change in the PPI followed
a moderating trend in the first half of the year
and reached its lowest rate for the year at
-13% in July. This was largely consistent with
the sharp decline of 32.5% in the commodity
components of the PPI over the same period.
Since then, PPI inflation has been increasing
moderately, reflecting a mild rebound in
global commodity prices. Overall, the PPI for
commodity-related components recorded a
decline of 19.8% in 2009 (2008: 26.6%).
Meanwhile, non-commodity related producer
prices declined at a relatively slower average
annual rate of 2.5% in 2009 (2008: 5.8%).
In terms of composition, both the local and
imported components of the PPI declined during
the year. The annual growth of the PPI for local
components fell to -10.4% in 2009 (2008:
13.3%), reflecting a broad-based decline across
its sub-groups. Meanwhile, the weak global
demand conditions and lower commodity prices
were also reflected in the lower PPI for imported
products, which declined by an average of 0.5%
in 2009 (2008: 4%).
Monetary and Financial Conditions
51
Overview
International Monetary and Financial Conditions
Domestic Monetary and Financial Conditions
Financing of the Economy

53
53
56
64
Monetary and Financial Conditions
Annual Report 2009
52
53
Monetary and Financial Conditions
OVERVIEW
Following the widespread fallout from the US sub-
prime crisis and the collapse of Lehman Brothers
in September 2008, global monetary and financial
conditions deteriorated in the first quarter of 2009.
In the advanced economies, the crisis reached its
peak in March 2009 and contributed to the worst
global recession since World War II. Economic and
financial conditions only stabilised in the second
half of 2009 following unprecedented large scale
interventions by the authorities in the advanced
economies to support their financial system and
revive the economy. Emerging economies were
also adversely affected given the significant
financial and economic linkages with the advanced
economies. However, prompt fiscal and monetary
stimulus mitigated the impact of the external
shocks on the emerging economies.
As with many regional economies, Malaysia
was adversely affected by the large contraction
in external demand and the sharp decline
in domestic financial asset prices as the
worldwide deleveraging by investors caused
large outflows of portfolio funds. Nevertheless,
the implementation of two fiscal stimulus
programmes, together with the easing
of monetary policy, provided support for
domestic demand. Additional measures to
facilitate access to financing ensured that
the environment was supportive of domestic
consumption and investment. Meanwhile, the
existence of a strong financial sector continued
to support financial intermediation and
reinforced the expansionary fiscal and monetary
influences on domestic demand.
INTERNATIONAL MONETARY AND FINANCIAL
CONDITIONS
Developments in international monetary and
financial conditions in 2009 broadly followed
three distinct phases. The first quarter of the
year was characterised by turbulent financial
market conditions amidst a severe global
recession. This was followed by the stabilisation
phase in the second and third quarters of the
year, as the unprecedented scale of policy
measures undertaken earlier in the year began
to take effect. By the fourth quarter, economic
and financial conditions stabilised and the
expansionary impact of large fiscal and monetary
stimulus led to a revival of growth.
After a tumultuous first
quarter, the global monetary
and financial conditions
stabilised by mid-year and
improved following the
large scale fiscal support and
unprecedented monetary
stimulus in the advanced
economies
In early 2009, monetary and financial conditions
continued to deteriorate in the aftermath of the
collapse of Lehman Brothers and the continued
fallout from the excessive leverage in the US financial
system. The broad-based loss of confidence arising
from the Lehman episode led to heightened risk
aversion which continued into the first two months
of 2009. In many countries, liquidity conditions
tightened amid significant sell downs and volatilities
in the equity and bond markets.
Chart 2.1
Measures of Volatility*
Index (Dec 2008 = 100)
40
60
80
100
120
140
160
D J F M A M J J A S O N D
2009 2008
Source: Bloomberg
VIX (Equity market volatility)
MOVE (Bond market volatility)
*Chicago Board of Exchange (CBOE) Implied Volatility Index (VIX)
and Merrill Lynch Option Volatility Estimate (MOVE)
Annual Report 2009
54
Financial conditions were particularly dire in the
advanced economies. In the first two months
of the year, the S&P 500 equity index declined
by 21.1% while the 3-month LIBOR less OIS
spread, which measures the level of liquidity and
credit risk in the interbank market, continued
to remain elevated at levels indicating failures
of financial intermediation. The dysfunctioning
interbank markets severely impaired the financial
intermediation process which in turn disrupted
credit flows to the broader economy. This had
significant repercussion on economic activity. The
real sector plunged into a deep recession amid
contracting consumption, investment and trade
activity. Most advanced economies experienced a
sharp contraction in economic activity in the first
quarter, with the growth outlook being very bleak.
The IMF’s forecast for growth in 2009 for advanced
economies was downgraded from 0.5% in October
2008 to -2% in January 2009. Key economic
indicators, including industrial production and
labour market conditions continued to deteriorate
significantly and at a faster pace. The strong
feedback loops between the real and financial
sector meant that weaknesses in economic activity
further intensified financial sector dislocations and
vice versa.

The intensity of the problems in the financial
and real sectors prompted a wide range of
government interventions. These interventions
were designed to restore the functioning of
the financial and financial institutions, and to
provide support to the real economy. To stabilise
financial conditions, various conventional
and unorthodox measures were implemented
including government guarantees, purchases of
private sector assets, recapitalisation programmes
and quantitative easing. This was strongly
reinforced by sizeable fiscal stimulus programmes
of between 1% to 6% of GDP by authorities in
advanced economies, and monetary policy easing
to provide support to growth. These policies,
however, took some time to gain traction given the
severity of the financial conditions.
Meanwhile, despite minimal direct exposure to
the sub-prime crisis and to the problems in the
derivatives markets, financial markets in emerging
economies were also significantly impacted given
the financial inter-linkages with the major financial
markets. The MSCI Emerging Index declined
by 14.1% year-to-date in February as global
deleveraging caused foreign investors to dispose
their assets in emerging economies. As these funds
were remitted back to the US, it resulted in large
capital outflows causing the currencies of some
emerging economies to depreciate by an average of
8.8% against the US dollar during the period.
Growth in open emerging economies was also
impacted by the contraction in global trade
following the collapse in external demand from
advanced economies. Export growth for Hong
Kong, Singapore and Malaysia fell by 21.1%,
20.7% and 15.7% year-on-year respectively at the
end of the first quarter. In addition, the contraction
in trade was intensified by a shortage of dollar
liquidity in international financial markets, which
affected trade financing.
Policy responses by authorities in emerging
economies were rapid and generally aimed
at mitigating the impact of the crisis from the
advanced economies. The measures involved a
combination of monetary and fiscal measures that
included lowering interest rates to sub-normal low
levels, improving access to financing and large
fiscal spending. The strong overall initial conditions
of emerging market economies as a group, their
sound banking systems and fiscal flexibility, placed
emerging economies in a better position to institute
decisive and strong counter-cyclical measures in
response to the crisis.
By the second quarter, there were visible signs of
stabilisation in the financial markets coupled by
some improvements in business and consumer
sentiments. In the advanced economies, financial
conditions began to show improvements as a
result of the wide range of measures initiated by
Chart 2.2
Selected Equity Market Indices
Index (Dec 2008 = 100)
Source: Bloomberg
70
90
110
130
150
170
190
D J F M A M J J A S O N D
Emerging Economies
Emerging Asia
MSCI World
2008 2009
S&P 500
Monetary and Financial Conditions
55
Chart 2.3
Money Market Spreads*
Source: Bloomberg
* 3-month LIBOR less 3-month Overnight Index Swap (OIS)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
D J F M A M J J A S O N D
%
2008 2009
United Kingdom
Euro area
Australia
US
the authorities. Interbank money market spreads
declined considerably from the second quarter
onwards, indicating that the additional liquidity
provided to the financial markets were taking effect.
The 3-month LIBOR less OIS spreads declined from
an average of 101 basis points in the first quarter of
2009 to an average of 23 basis points in the third
quarter of 2009.

The health of major financial institutions also
improved as indicated by the positive results from
the bank-wide stress tests to ascertain the solvency
of financial institutions. The decline in credit default
swaps of major banks in the US by almost one-
third was a testament to the renewed confidence
in the financial institutions. As conditions improved,
financial markets rose steadily albeit at a cautious
pace. Between March and May 2009, the S&P
500 index rose by 25.2%, recovering all of the
losses incurred since the beginning of 2009. In the
third quarter, volatility in the financial markets as
proxied by the VIX index, dropped significantly
and returned to levels prior to the collapse of
Lehman Brothers.

Though the measures had a positive effect on
reducing stress in the financial markets and
restoring the functioning of the markets, the
underlying economic conditions in the advanced
economies remained weak. Credit to the broader
economy was still constrained as both lenders and
borrowers remained cautious. Lending standards in
major advanced economies remained tight. While
key economic indicators were at depressed levels,
there were however incipient signs that economic
conditions were deteriorating at a slower pace.
Nevertheless, as economic and financial conditions
improved, questions lingered on the sustainability
of the recovery given that the financial system
remained impaired.

Emerging economies, in contrast, had shown
firm indications of economic recovery by the
second quarter of 2009. With stronger initial
conditions and reinforced by comprehensive fiscal
and monetary responses, emerging economies
were able to recover at a faster pace. Given the
strong signs of economic recovery, investors’ risk
appetites for emerging market financial assets
rose. Equity markets in emerging economies rallied
by an average of 61.6% compared to 36.2% in
the advanced economies.
Chart 2.4
US Banks 5-year Credit Default Swaps (CDS)
0
100
200
300
400
500
600
700
D J F M A M J J A S O N D
Index
Source: Bloomberg
2009 2008
Goldman Sachs
Bank of America
Citigroup
JPMorgan
Chart 2.5
Bank Lending Conditions for Business
*

-40
-20
0
20
40
60
80
100
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
%
-20
-15
-10
-5
0
5
Diffusion index
(reversed)
Tightening
2003 2004 2005 2006 2007 2008 2009
*
Based on Senior Loan Officer Survey conducted in selected countries
Source: Central Banks' Websites
Japan (RHS) Euro area US
Annual Report 2009
56
By the fourth quarter of the year, economic
and financial conditions in both advanced and
emerging economies showed visible and firm signs
of recovery. This improved investor confidence and
revived financial market trading activities globally.
With the world awash with liquidity amid record-
low interest rates globally, the search for yields led
to a sharp increase in foreign portfolio inflows into
emerging markets. As a result, emerging market
currencies, in particular the Indonesian rupiah,
Brazilian real and Korean won appreciated strongly
by 17.7%, 33.0% and 10.0% respectively in
2009. Better recovery prospects and expectations
of further currency appreciation also added to the
interest towards emerging markets.
The surge in capital inflows, coupled with the
uptrend in commodity and property prices, begun
to raise concerns over the possible formation of
asset price bubbles in emerging economies. Some
emerging economies such as Brazil and Taiwan
imposed restrictions on capital inflows to avoid
undue volatility in the financial markets and to
mitigate the impact on monetary conditions.
These restrictions included a tax on flows into
equity and fixed-income securities, as well as a
ban on foreign investors placing their money in
time deposits.

By the end of the year, stronger signs of recovery
had emerged. This prompted discussions among
policymakers on the need to review the policy
stance. The exceptionally low interest rate
environment implemented when the risk of a
fundamental economic downturn was high needed
to be realigned to avoid the risk of the build-up
of financial imbalances. Thus, whilst remaining
accommodative, a number of central banks
including the Reserve Bank of Australia began to
raise policy rates, with several others stated the
intent to do so in the near future. The pace, timing
and magnitude of policy rate adjustments would,
however, differ across countries and regions given
the disparities in economic and financial conditions
across countries.
DOMESTIC MONETARY AND FINANCIAL
CONDITIONS
The domestic monetary and financial conditions
continued to remain favourable and supportive of
economic activity in 2009 despite being subjected
to adverse economic and financial shocks in the
aftermath of the global financial crisis. Prompt
policy response and the resilience of the banking
sector and capital market ensured that the financial
intermediation process functioned effectively and
smoothly. Domestic conditions improved markedly
towards year-end with firm indications of a
sustainable recovery.
Exchange Rate
The ringgit performance during the year reflected
the volatile developments in international financial
markets. Early in the year, the ringgit and regional
currencies faced intense depreciation pressure as
the global financial and economic crisis were in
full force. Nevertheless, the sell down of financial
assets across the world eased by March 2009
following emerging signs of stabilisation in the
international financial markets and in global
economic activity.
Chart 2.6
Emerging Market Bond Index (EMBI) and
Bond Spreads EMBI
350
370
390
410
430
450
470
490
D J F M A M J J A S O N D
Index Basis points
0
100
200
300
400
500
600
700
800
JP Morgan EMBI JP Morgan EMBI Spread (RHS)
2009 2008
Source: Bloomberg
Chart 2.7
Emerging Market Currencies against the US Dollar
90
95
100
105
110
115
120
125
130
135
140
D J F M A M J J A S O N D
Index (Dec 2008 = 100)
2008 2009
Source: Bloomberg
Indonesia
Taiwan
Brazil
India
Emerging market
currencies appreciated
against US Dollar
Monetary and Financial Conditions
57
The ringgit continued its depreciating trend
into early-2009 as the full impact of the global
financial crisis enveloped the global economy.
Against the background of heightened market
risk and as investors continued to deleverage
to reduce their level of borrowings, assets in
emerging economies were sold off. During this
stressed financial environment, investor preference
also shifted to holding cash to preserve capital.
The consequent reversal of portfolio investments
and the surge in the demand for US dollar as
these funds were remitted to the US generated
significant depreciation of currencies in the
regional economies. The ringgit weakened to
RM3.7255 against the US dollar on 2 March
2009, the lowest level since February 2006. The
depreciation was, however, partly mitigated by
the continued net trade surplus, which provided
underlying support for the demand for ringgit. The
strong international reserve position also instilled
greater market confidence on the ability of Bank
Negara Malaysia to maintain orderly market
conditions despite the volatile global environment.
Despite the volatile global
financial market conditions,
the movement of the ringgit
remained orderly and had an
important role in absorbing
external shocks to the
domestic economy

The downward trend of the ringgit subsequently
reversed in March 2009, following a confluence
of external and domestic factors. The large
scale expansionary measures undertaken by
policymakers to arrest the global economic slide
were instrumental in restoring confidence and
stabilising global financial market conditions.
These measures served to lift investor sentiment
and risk appetite, and shifted their focus to the
better outlook in the regional economies. The
sound financial systems and stronger economic
fundamentals amongst emerging economies
point to prospects for an earlier and stronger
recovery. These conditions attracted large
portfolio flows into emerging markets and raised
the demand for regional currencies including
the ringgit. The ringgit also benefited from
positive market reaction to the second stimulus
package announced on 10 March. In addition,
the accelerated implementation of the fiscal
stimulus measures, the accommodative monetary
conditions, the resilient financial system and
the continued access to financing have further
supported positive investor sentiments towards
the domestic financial markets. Consequently,
net portfolio inflows increased by RM13.3 billion
in the second half of the year and the ringgit
strengthened to RM3.3475 against the US dollar
on 15 October, an appreciation of 11.3% from its
lowest level recorded in early March 2009.
The ringgit, however, fluctuated within a broad
downward trend from mid-October 2009 until
the end of the year, amid greater market volatility
arising from heightened and volatile global risk
aversion. The imposition of capital controls in
Brazil and Taiwan fuelled concerns that other
central banks in the region could also move in the
same policy direction, which dampened investors’
risk appetite for regional markets. Market
sentiments were also affected by concerns about
the potential systemic impact of the debt crisis in
Dubai and the sovereign debt issue in Greece. On
balance, the ringgit ended the year at RM3.4245
against the US dollar, 1.2% stronger compared to
the level at end-2008.
Against other major currencies, the ringgit
appreciated against the Japanese yen (3.4%).
The yen was particularly vulnerable to swings in
carry trade activity. The ringgit ended the year
marginally weaker against the euro (-0.9%) and
more significantly against the pound sterling
(-9.1%). To a large extent, the appreciation in
Chart 2.8
Exchange Rate of the Malaysian Ringgit (RM)
Against Major Currencies
Index (Dec 2008 = 100)
EUR
USD
GBP
JPY
80
85
90
95
100
105
110
115
D J F M A M J J A S O N D
2008 2009
Note: An increase in the index indicates an appreciation
of ringgit against the currency
Source: Bank Negara Malaysia
Annual Report 2009
58
the pound sterling was a correction from the
significant depreciation of the currency against
most international currencies in 2008, after
the UK economy was severely affected by the
financial crisis.
In 2009, the ringgit was broadly weaker against
regional currencies with this trend reversing
in early 2010. Intra-regional exchange rate
performance was differentiated by country-
specific factors. In particular, the Korean won and
the Indonesian rupiah strengthened significantly
against most currencies, following positive market
sentiments. Strong domestic demand contributed
to Indonesia’s relatively better economic
performance. It also partly reflected recovery
in both the Indonesian rupiah and Korean won
from the large depreciation experienced in 2008.
Between September 2008 and February 2009,
the Indonesian rupiah and the Korean won
had depreciated against the ringgit by 20.3%
and 28.3% respectively. This provided greater
appreciation potential for these currencies
relative to other regional currencies when the
global conditions improved.
The ringgit depreciated by 1% in Real Effective
Exchange Rate (REER) terms during the year. The
REER refers to the weighted average of the ringgit
against the currencies of Malaysia’s major trading
partners, adjusted for differences in inflation rates.
By and large, the depreciation of the REER during
the year was due mainly to the broad depreciation
of the Nominal Effective Exchange Rate (NEER),
which also declined by 1% during the same
period. Malaysia’s prices relative to the major
trading partners remained stable, as the pace of
changes in prices of goods and services across
countries decelerated in an almost synchronised
manner amidst global disinflationary pressures.
The intensification of two-way movements of
capital flows into emerging economies in an
environment of an uncertain recovery of the
global economy raised concerns of the potential
risks to the trade sectors of these economies. In
addition, strong financial inflows could become
destabilising with the potential for a sudden
reversal of these flows. To Malaysia’s advantage,
the country’s capacity and resilience in managing
these sizeable and volatile financial flows had
been fortified in a number of ways. First, our
economic fundamentals have remained healthy
and the financial markets were more diversified
and developed. This has enhanced the ability of
the financial system to absorb capital inflows and
outflows, thereby minimising disruptions while
ensuring that the capital flows can be effectively
intermediated. Second, the managed float
regime accorded the necessary flexibility for the
ringgit to adjust to changing conditions. Since
exiting from the fixed exchange rate regime, the
managed float regime has served the economy
well by providing a good balance between
flexibility and stability. Third, the ability to manage
domestic liquidity has also improved significantly,
supported by a wider range of instruments to
conduct monetary operations and having in place
1
Regional currencies: Chinese renminbi, Indonesian rupiah, Korean won,
Philippine peso, Singapore dollar, New Taiwanese dollar and Thai baht.
Each currency is of equal weight.
Source: Bank Negara Malaysia
Chart 2.9
Exchange Rate of the Malaysian Ringgit (RM) and
Selected Regional Currencies Against the US Dollar
RM
90
95
100
105
110
J D
2008
F M A M J J A S O N D
Index (Dec 2008 = 100)
Index of Selected Regional
Currencies against the USD
1
2009
Note: An increase in the index represents an appreciation of the ringgit or
of selected regional currencies against the US dollar.
Chart 2.10
Summary of Malaysian Ringgit Performance
Against Major and Regional Currencies in 2009
Note: (+) indicates an appreciation of the ringgit against foreign currency
Source: Bank Negara Malaysia
3.4
-15 -13 -11 -9 -7 -5 -3 -1 1 3 5
IDR
GBP
KRW
THB
PHP
SGD
EUR
TWD
USD
CNY
JPY
Annual change, %
1.2
1.2
-0.8
-0.9
-1.4
-1.9
-3.2
-6.4
-9.1
-13.2
Monetary and Financial Conditions
59
better surveillance and information system. This
ability to manage liquidity effectively meant that
financial flows have limited impact on financial
intermediation and the level of economic activity,
including reducing the risk of the build-up of large
imbalances in the economy.
Interest Rates, Bond Yields and Equity Prices
Interest rates in 2009 were lowered substantially
to support a highly accommodative monetary
policy. The thrust of monetary policy during the
year was focused on mitigating the impact of
the economic and financial crisis on domestic
demand. In addition to the 25 basis points
reduction in November 2008, the Overnight
Policy Rate (OPR) was lowered by 75 basis points
in January 2009, and a further 50 basis points
in February 2009. To expedite the transmission
of the policy rate reductions to retail rates, the
Statutory Reserve Requirement (SRR) was also
concurrently reduced from 4% to 1%. The
monetary policy measures were transmitted
quickly by the domestic financial system and had
a material impact on the economy.
Sound financial institutions
and stable liquidity
conditions facilitated a rapid
pass-through of the OPR
reductions into lending rates
Following Bank Negara Malaysia’s decision to
reduce the OPR, the overnight interbank rate
in the money market decreased from 3.25%
on 1 January 2009 to 2.00% on 25 February
with concurrent reductions in the interbank
rates of other maturities. The high degree
of pass-through from the OPR to the money
market rates was supported by stable liquidity
conditions in the interbank market. The sound
financial institutions also underpinned orderly
trading in the market, with little signs of market
disruptions despite the volatile conditions in
the global financial market. Accordingly, money
market rates were stable and at historical lows
during the year.
Reflecting the high pass-through of the OPR
reduction to the money market interest rates,
banks responded by lowering retail lending rates
to households and businesses. The benchmark
lending rate, as measured by the average base
lending rate (BLR) of commercial banks, was
reduced by 121 basis points, from 6.72% to
5.51%, by end-2009. This lowered the interest
cost on variable rate loans pegged to the BLR,
increasing the disposable income of borrowers.
The adjustment in the BLR was transmitted
quickly, with all banks lowering their respective
BLRs within two weeks of the OPR adjustments.
New borrowers also benefited from the low
interest rate environment, as lending rates on
new loans to both businesses and households
were reduced. This was evidenced by the 127
basis points decline in the average lending rate
(ALR) on new loans approved, from 6.17% in
October 2008 to 4.90% in December 2009.
Chart 2.11
Money Market Rates
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
3.5
%
2009
Source: Bank Negara Malaysia and Bloomberg
OPR: -75 bps
OPR: -50 bps
J F M A M J J A S O N D
KLIBOR 6-month 1-month interbank Overnight interbank rate
Chart 2.12
Commercial Banks' Lending Rates (at end-period)
4.5
5.0
5.5
6.0
6.5
7.0
J F M A M J J A S O N D J F M A M J J A S O N D
%
BLR
ALR
2008 2009
Source: Bank Negara Malaysia
Annual Report 2009
60
The reduction in lending rates on new loans
was broad based, with loans to all sectors of the
economy registering lower interest rates after the
OPR was reduced. With the re-pricing of new and
existing loans, the ALR on loans outstanding stood
at a historic low of 4.83% as at end-2009. The
low interest rate environment, in turn, provided a
supporting environment to financing activity.

Deposit rates were also adjusted downwards.
Nevertheless, fixed deposit (FD) rates were
supported by the floor imposed by Bank Negara
Malaysia. As a result, the interest rates on FDs with
tenures between 1 to 12 months ranged from
2.00% to 2.50%, at end-2009. Towards the middle
of the year, depositors also received a positive real
rate of return as inflation turned negative.
Sovereign bond yields rose initially due to
concerns on the large increase in the issuances
of Government securities, but remained generally
stable for the major part of the year as economic
conditions improved amid a benign inflation
outlook. Trading activity was mainly focused
on the shorter end of the market, reflecting
investors’ cautious sentiments.
MGS yields were stable for
most part of 2009
Yields on Malaysian Government Securities
(MGS) were initially on a declining trend in
early 2009 due to heightened risk aversion
among investors as the outlook for the global
economy deteriorated. The reduction in the
OPR on 21 January added further impetus
to the downward trend in MGS yields, amid
expectations that inflation was moderating.
The declining trend, nevertheless, reversed
following the Government’s announcement to
introduce a second stimulus package. Market
soon became anxious about the size of the
stimulus and the potential additional issuances
of Government securities. As these concerns
mounted, MGS yields rose markedly, particularly
those for the longer maturities. The 5-year and
10-year MGS increased by 106 and 116 basis
Chart 2.13
ALR on New Loans Approved
(3-month moving average)
4.0
4.5
5.0
5.5
6.0
6.5
J F M A M J J A S O N D J F M A M J J A S O N D
%
Source: Bank Negara Malaysia
Overall
Businesses
2009 2008
OPR: -25 bps
-75 bps
-50 bps
Households
Chart 2.14
Commercial Banks' Fixed Deposit Rates
Source: Bank Negara Malaysia
Min Max
Month
3.50
3.01
3.04
3.14
3.11
2.50
2.04
2.03
2.00
2.05
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
3.5
1 3 6 9 12
Dec ‘08
Dec ‘09
%
Chart 2.15
Real Deposit and Lending Rates
Source: Bank Negara Malaysia
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
J F M A M J J A S O N D J F M A M J J A S O N D
%
Real 1-month FD
Real ALR
2009 2008
Monetary and Financial Conditions
61
points respectively between end-January to mid-
March. The reduction in the OPR in February
provided only a temporary downward effect, as
MGS yields continued to rise on concerns over the
potential large size of new Government borrowings.
MGS yields fell by end-March as such anxieties
dissipated following the release of a revised
auction calendar for Government securities.
Investors, nevertheless, remained broadly
cautious given the continued uncertainty on the
macroeconomic outlook and tended to focus on
securities of shorter maturities. This led to the
reduction of liquidity at the longer end of the
MGS yield curve, thus exerting upward pressure
on long-term yields. In turn, following the stronger
interest in the shorter-tenure MGS, the 1 and
3-year MGS yields rose only marginally by 15 and
6 basis points respectively between end-March
and end-June, resulting in a further steepening of
the slope of the yield curve.
By end-June, market sentiments began to improve
amid investors’ easing concerns over the larger
supply of Government securities. The upward
pressure on long-term yields also began to ease.
MGS yields across all maturities became more
stable thereafter and through most of the second
half of 2009. Towards year-end, MGS yields
trended slightly higher on firmer expectations of
an economic recovery driven by news of better
economic data on trade and industrial production.
In December, the 3-year MGS yields recorded an
increase of 26 basis points following the issuance
of the new 3.5-year MGS, which replaced the
previous 3-year MGS as the new benchmark. The
higher yields mainly reflected the slightly longer
maturity of the new benchmark.
PDS yields affected by risk
aversion
In the private debt securities (PDS) markets, yields
were mainly affected by investors’ increased
risk aversion. Factors such as investor concerns
over credit conditions significantly influenced
the yields of lower-rated PDS. Concerns over
deteriorating credit conditions were amplified
by the rising number of negative rating
actions, especially in the first half of 2009. The
heightened risk aversion led to a low level of
Chart 2.16
MGS Yields
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
J F M A M J J A S O N D
%
Anticipation of
second fiscal
stimulus plan
Release of revised
auction calendar 10-year
5-year
3-year
1-year
2009
Source: Bank Negara Malaysia
Chart 2.17
MGS Benchmark Yield Curve
1.5
2.0
2.5
3.0
3.5
4.0
4.5
%
March ‘09
June ‘09
Years to maturity
Source: Bank Negara Malaysia
1 2 3 4 5 6 7 8 9 10
December ‘08
Chart 2.18
MGS and PDS Yields (5-year)
Source: Bank Negara Malaysia
J F M A M J J A S O N D
%
2009
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
A
AA
AAA
MGS
Annual Report 2009
62
liquidity in the PDS market, which pushed the
yields of lower-rated PDS higher.
Mirroring the trend in the MGS market,
liquidity in the PDS market improved as
sentiments became better towards end-July. The
establishment of Danajamin Nasional Berhad, a
financial guarantee institution that provides credit
guarantees to selected issuers, also contributed
to the improved sentiments in the bond market.
Lower-rated PDS yields, however, registered only
a marginal improvement towards the end of the
year due to lingering credit concerns.
Credit spreads for PDS narrowed in 2009. This
may initially have seemed counter-intuitive in an
economic downturn. Nevertheless, further analysis
revealed that earlier in the year, credit spreads
narrowed following higher MGS yields, as markets
anticipated more issuances by the Government.
Subsequently, relative stability returned to both
the PDS and sovereign markets as the economic
and financial outlook improved. Credit spreads
were generally stable in the second half of the
year. For the year as a whole, credit spreads for
higher-rated securities (5-year) fell by between 96
to 104 basis points.
Firmer signs of economic
improvement spurred the
equity market
In the early part of the year, the domestic
equity market experienced bouts of volatility
amid highly challenging domestic and global
conditions. Subsequently, from the second
quarter, equity markets around the world
including Malaysia staged a strong rebound
from the depressed levels in early 2009 as
investors turned opportunistic amid highly
accommodative monetary conditions and
stabilising financial markets. Risk appetite
improved further on the improving outlook for
economic revival as the fiscal stimulus began to
support economic activity.
The domestic equity market experienced
significant volatility in the early part of the year
amid heightened uncertainties in the global
Chart 2.20
Corporate Credit Spread Against MGS (5-year)
Source: Bank Negara Malaysia
0.2
1.0
1.8
2.6
3.4
4.2
5.0
J F M A M J J A S O N D
%
AAA
AA
A
2009
Chart 2.19
Turnover of Corporate Debt Securities
Source: Bank Negara Malaysia
RM billion
2.0
4.0
6.0
8.0
J F M A M J J A S O N D
2009
Chart 2.21
KLCI and Bursa Malaysia Sectoral Indices
80
90
100
110
120
130
140
150
160
170
D J F M A M J J A S O N D
KLCI Construction Finance
Industrials Plantations
Source: Bloomberg
Index (Dec 2008 = 100)
2008 2009
Monetary and Financial Conditions
63
financial markets. The benchmark FTSE Bursa
Malaysia Kuala Lumpur Composite Index (FBM
KLCI) reached a low of 838.4 points on 12 March
but began rising, albeit modestly, from end-
March 2009. This was supported by the rise in
commodity prices which boosted the plantation
and oil and gas-related stocks. In addition,
domestic participation increased as market
sentiment began to improve.
In the second half of 2009, regional equity
markets including Bursa Malaysia was lifted
further by the reallocation of global funds to
emerging markets, including Asia, on optimism
for a stronger pace of economic recovery.
Equity prices were further boosted by improving
corporate earnings outlook. The announcement
by the Government of the liberalisation of the
services and financial sectors and efforts to
increase liquidity of the stock market by Bursa
Malaysia also provided additional impetus to the
market. For the year as a whole, the FBM KLCI
rose by 45.2% (2008: -39.3%).
Liquidity and Monetary Aggregates
Liquidity conditions were ample throughout 2009
and supportive of economic activity. Private sector
liquidity was affected by global and domestic credit
conditions. This was largely due to the deleveraging
activities of international financial institutions, which
caused the outflow of funds from Malaysia. As
such, private sector liquidity, as measured by broad
money, exhibited two distinct stages in 2009.
Between January and May, lending by banks to
businesses and households moderated, reflecting
the slowdown in economic activity that affected
the demand for credit. The impact of slower credit
growth on broad money was compounded by
the contractionary impact of net foreign outflows
Chart 2.22
Regional Indices
Source: Bloomberg
Malaysia Thailand Singapore
Indonesia Philippines
Index (Dec 2008 = 100)
70
90
110
130
150
170
190
D J F M A M J J A S O N D
2009 2008
Chart 2.23
Broad Money, M3
Annual growth (%)
Source: Bank Negara Malaysia
4
6
8
10
12
14
D J F M A M J J A S O N D
2008 2009
1st Phase 2nd Phase
Table 2.1
Broad Money, M3
Change (RM billion)
2009
1H 2H
M3 18.6 66.5
Currency in circulation 0.5 2.6
Demand Deposits 1.7 13.0
Broad Quasi-Money 16.5 51.0
Fixed deposits 17.5 5.7
Savings deposits 5.7 4.4
NIDs -1.2 -7.6
Repos 0.0 0.9
FX deposits 1.2 14.1
Other deposits -6.7 33.5
Determinants of M3
Net claims on Government 11.5 14.2
Claims on the private sector 10.8 40.7
Loans 12.3 34.7
Securities -1.5 6.0
Net foreign assets* -0.4 12.1
Bank Negara Malaysia* -6.0 2.7
Banking system 5.6 9.4
Other influences -3.3 -0.5
* Pre-revaluation of the international reserves
Source: Bank Negara Malaysia
Annual Report 2009
64
on domestic liquidity. These factors, however,
were partially mitigated by the Government fiscal
spending which supported broad money growth
throughout the year. The expansion in broad
money moderated in the first half of the year,
growing at an annual pace of 5.7% in June.
Subsequently, the broad money trend reversed to
grow at a faster annual pace. The turnaround in
broad money reflected the improvement in the
domestic and external economic and financial
environment. Financing by the banking system
to the private sector picked up, reflecting the
recovery in economic activity and was supported
by the low interest rate environment. In addition,
broad money also expanded in the second half of
the year due to net foreign inflows. Broad money
ended the year with a higher rate of growth of
9.2% in December.
Bank Negara Malaysia conducted monetary
operations in the domestic money market to
ensure liquidity in the banking system remained
ample. Compared to 2008, however, liquidity
conditions in the interbank money market in
2009 were far more benign. Outflows of liquidity
following foreign selling of domestic assets, which
continued from 2008 into the first quarter of 2009,
were offset by the release of liquidity absorbed by
Bank Negara Malaysia. In this respect, the large
interbank placements with the Bank acted as a
liquidity buffer for the banking system. For the
remainder of the year, liquidity in the interbank
market was ample and relatively stable.
While the size of the surplus liquidity was reduced
by foreign portfolio outflows, banking system
liquidity, nonetheless, remained in surplus. This was
evident from the loan-deposit ratio, which ranged
between 77.7 in January and 77.9 in December.
At the institution level, all banks operated from a
position of surplus liquidity with net placements
of funds with the Bank. The large number of
institutions with surplus liquidity was one of the
factors underpinning the resilience of the banking
system as a whole.
Bank Negara Malaysia also reduced the level of
required reserves that banks hold against eligible
liabilities from 4% to 1%. While this move
increased the liquidity available to banks, Bank
Negara Malaysia’s main motivation for cutting the
SRR was to reduce the cost of intermediation in
the banking system. As a result, banks were able
to pass on a larger share of the OPR reduction
through reductions in their retail lending rates.
FINANCING OF THE ECONOMY
Financing conditions in 2009 remained conducive
and supportive of economic activity. The sound
banking system and functioning capital markets,
coupled with historically low interest rates and
ample liquidity, ensured that financing activity
continued to expand.
Growth of private sector financing was slower
in the early part of the year in tandem with the
general weakness in the economy. Financing,
nevertheless, gained momentum towards the
second half of the year, supported by lower
lending rates and extensive measures put in place
to ensure continued access to funds for all sectors
of the economy. In addition, the resumption
Chart 2.24
Outstanding Liquidity Placed with
Bank Negara Malaysia (at end-period)
0
50
100
150
200
250
300
350
400
450
Direct Borrowing and Wadiah Acceptances BNM Debt Securities
Repo Others
Source: Bank Negara Malaysia
RM billion
D J F
2007 2008 2009
M A M J J A S O N D J F M A M J J A S O N D
Chart 2.25
Total Net Financing to the Private Sector through
Banking System Loans and PDS
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2008 2009
Annual growth (%)
5
7
9
11
13
15
5
10
15
20
25
30
35
Quarterly change (RM billion)
Source: Bank Negara Malaysia
PDS
Banking system loans
Total net financing growth (RHS)
Monetary and Financial Conditions
65
of growth in the fourth quarter of the year
contributed to increased demand for financing.
For the year as a whole, net financing to the
private sector raised through banking system loans
and PDS rose by 8.5% (2008: 12.7%).
The lower cost of borrowing
and continued availability
of financing supported the
financing requirements of
businesses and households
During the year, higher loans extended to the
household sector were underpinned by both the
lower cost of borrowings and the availability of
financing in a competitive environment. From the
demand side, the lower interest rates provided
the opportunity for households to refinance loans
contracted earlier at higher rates, including housing,
personal and credit card loans. For new housing
loans, demand was also augmented by measures
announced by the Government in the first and
second stimulus packages to promote home
ownership. These measures included a 50% stamp
duty exemption extended to loan agreements for
the purchase of houses up to RM250,000, as well
as tax relief of up to RM10,000 a year for three
years on interest paid on housing loans. Towards the
second half of the year, households’ financing were
further supported by improvement in consumer
sentiments and labour market conditions.
From the supply side perspective, banking
institutions placed greater focus on the lending
to households as economic slowdown clouded
the outlook for businesses. Many banks offered
more attractive packages for the refinancing of
housing loans and promoted transfers of credit
card balances. Banks also lowered rates on
newly approved personal loans to an average of
6.31% (2008: 7.72%). As such, notwithstanding
the moderation in economic activity, household
loans outstanding rose by 9.8% in 2009 (2008:
9.7%), accounting for a higher share of total
loans outstanding at 55.1% (end-2008: 54.1%).
More loans were extended for the purchase
of residential and non-residential properties,
personal use, purchase of passenger cars and
purchase of securities.
Loans extended to individuals for the purchase of
securities expanded at a faster pace of 24.5%. This
trend was in tandem with the rally in the stock
market. However, the overall volume of loans
Chart 2.26
Loans Outstanding by Customers
6
7
8
9
10
11
12
13
14
15
-5
5
10
15
20
25
30
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2008 2009
Annual growth (%) Quarterly change (RM billion)
Businesses
Source: Bank Negara Malaysia
Households Others
Total loan growth (RHS)
0
Chart 2.27
Households: Loan Applications and ALR
on New Loans Approved*
4.0
4.4
4.8
5.2
5.6
6.0
-
20
40
60
80
100
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2008 2009
%
RM billion
* Exclude credit cards
Source: Bank Negara Malaysia
Loan applications
ALR on new loans approved (RHS)
Chart 2.28
Households: Loans Outstanding for the Purchase
of Securities and KLCI Index
5
10
15
20
25
30
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2008 2009
800
900
1,000
1,100
1,200
1,300
Index Annual growth (%)
Loans outstanding
Source: Bank Negara Malaysia and Bloomberg
KLCI (RHS)
Annual Report 2009
66
Chart 2.29
Businesses: Net Financing through Banking
System Loans and PDS
0
2
4
6
8
10
12
14
16
18
20
-5
0
5
10
15
20
25
30
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2008 2009
Annual growth (%) Quarterly change (RM billion)
PDS
Banking system loans
Total business net financing growth (RHS)
Source : Bank Negara Malaysia
Chart 2.30
Businesses : Loan Indicators
80
85
90
95
100
105
110
115
15
35
45
55
65
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2008 2009
RM billion RM billion
Disbursements (RHS)
Source: Bank Negara Malaysia
Repayments (RHS)
25
Applications (LHS) Approvals (LHS)
for the purchase of securities remained small,
accounting for only 4.8% of household loans and
2.6% of total loans at end-2009.
Notwithstanding the increase in debt, the household
sector’s balance sheet improved as evidenced by
the decline in household debt to liquid financial
asset ratio. The ratio of non-performing households’
loans over loans outstanding also remained low
at 3.1% (end-2008: 4.1%). To ease the loan
repayment burden of households, the banking
institutions actively undertook debt restructuring
and rescheduling. In addition, the Government
announced in March 2009 a one-year moratorium
on housing loans for retrenched workers.
In contrast to the household sector, the growth
in financing to the business sector was more
moderate. Net financing extended to the business
sector through the banking system and the PDS
market increased by 6.3% (2008: 12.9%). The
slowdown in global and domestic demand clearly
affected business profitability. Consequently, some
businesses scaled down their operational capacity
and postponed their expansion plans, reducing
their demand for financing for their working
capital requirements and investment activities. As
such, loan applications from the business sector
contracted by 2.8% in 2009 (2008
1
: +0.8%).
For a brief period in the early part of the year,
some businesses faced difficulty in accessing
financing from the banking system and the capital
market. This reflected the more cautious stance by
both banks and investors in the PDS market due to
the perception of the increased risk of borrowers
due to the weaker economic conditions.
Recognising that access to financing is paramount
to support the recovery process, the authorities
intensified efforts to ensure the continued flow of
financing to all segments of the economy. Towards
this end, several measures were introduced by Bank
Negara Malaysia and the Government, including
the setting up of several special funds for the SMEs
and the establishment of Danajamin Nasional
Berhad to provide financial guarantees for the
issuances of private debt securities and Sukuk by
those companies assessed to be viable. The Bank
continued to initiate active dialogues between
the private sector and banking institutions to
understand the development in the international
and domestic environment. Avenues to seek
help and redress established by the Bank and the
Association of Banks in Malaysia (ABM)
2
also had a
major role in enabling businesses and individuals to
address enquiries relating to banking services and
credit issues.
These measures yielded positive results. Financing
conditions for the business sector improved from
the second quarter onwards. In the third quarter,
loans outstanding to businesses registered a
quarterly expansion after three consecutive quarters
of contraction. Higher loans were disbursed to
1
The growth rate for 2008 excluded one large loan extended
in 2007 for a privatisation activity
2
Bank Negara Malaysia established the enhanced Integrated
Contact Centre comprising BNM Link and BNM Telelink that
includes the Complaints Management and Advisory section
in July 2008. The Association of Banks in Malaysia (ABM)
in collaboration with banking institutions also set up the
ABMConnect Toll Free Channel in December 2008.
Monetary and Financial Conditions
67
the manufacturing, construction, wholesale and
retail trade, restaurants and hotels as well as the
agriculture sectors. In the capital market, improved
market sentiments also contributed to higher
liquidity in both the PDS and equity markets.
The developed capital market provided a more
diversified source of financing for the larger
businesses. In 2009, fund-raising activity in the
capital market was particularly active, accounting
for 82.5% of total net financing raised by the
business sector (including issuances of equity)
Chart 2.31
Gross PDS Issued by Purpose
0
2
4
6
8
10
12
14
16
18
20
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2008 2009
RM billion
New activity
Merger & Acquisition
Refinancing
Others*
*Others include financing for working capital, equity investments and
general business activities.
Note: Data excludes Cagamas bonds and issuances by non-residents.
Source: Bank Negara Malaysia
(2008: 37.9%). In the PDS market, gross issuances
increased by 30.9% in 2009, coming mainly from
large government-linked companies and financial
institutions. The bulk of the PDS issued during the
year were to fund working capital requirements,
refinance debt and for equity investments.
Meanwhile, funds raised in the equity market
amounted to RM26 billion (2008: RM5.5 billion).
The significantly larger funds raised reflected
issuances of several large rights issues and initial
public offerings (IPOs).
For the SMEs and micro enterprises, financing was
primarily sourced from the banking institutions and
development finance institutions (DFIs). In 2009,
loans outstanding to the SMEs contracted slightly.
This mainly reflected the exclusion of a number
of companies from the SMEs classification as they
have grown beyond the definition of SME. Without
such exclusion, SMEs loans outstanding would
have increased by 5.1% in 2009. As at end-2009,
SMEs loans outstanding accounted for 39.6% of
total business loans of the banking system and
development finance institutions.
Financing to SMEs was augmented by special
funds established by the Bank and the
Government. During the year, there were a total of
three new funds set up to facilitate SMEs’ access
to financing. Firstly, the SME Assistance Guarantee
Scheme (SAGS) was established in February 2009
with an allocation of RM2 billion to provide access
to financing for viable SMEs that were adversely
impacted by the economic slowdown. The fund
was fully utilised and closed to applications in
September 2009 after benefiting more than
9,000 SMEs from various sectors. Meanwhile,
the Working Capital Guarantee Scheme (WCGS)
and the Industry Restructuring Loan Guarantee
Scheme (IRLGS) were both established in March
2009, with an allocation of RM5 billion each.
Subsequently, in September 2009, due to the
overwhelming response from borrowers, the
Government reallocated RM2 billion from the
IRLGS to WCGS. The WCGS, which was closed for
new applications in October 2009, has benefited
5,329 companies. As at 4 March 2010, a total
of RM5.4 billion in loans had been disbursed to
4,339 companies under this scheme. The IRLGS
will continue to remain open until end-2010 or
until the fund has been fully utilised, whichever
earlier. As at 4 March 2010, 190 companies have
benefited from this scheme with RM815 million
worth of loans being approved.
Chart 2.32
SMEs Loans Outstanding*
Quarterly change Annual growth (RHS)
Annual growth (%) Quarterly change (RM billion)
0
2
4
6
8
10
12
-3
-2
-1
0
1
2
3
4
5
6
7
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2008 2009
Source: Bank Negara Malaysia
* Adjusted to include the reclassification of SMEs to large corporations
Annual Report 2009
68
Table 2.2
Special Funds for SMEs Administered by Bank Negara Malaysia
RM million %
Allocations Approvals Disbursements
Loans
Outstanding
Utilisation
Rate
1
As at end-2009
Special Funds
Fund For Food
2
1,300.0 1,727.9 1,707.1 175.7 75.4
3

New Entrepreneurs Fund 2 2,850.0 3,741.6 3,507.4 2,181.8 89.6
Fund for Small and Medium Industries

2 6,750.0 12,813.8 12,017.4 4,823.8 91.9
Bumiputera Entrepreneurs Project Fund
4
300.0 946.7 903.4 54.6 82.4
Micro Enterprise Fund 200.0 79.6 71.2 66.9 38.9
Bumiputera Entrepreneurs Project Fund - Islamic 300.0 12.6 0.3 0.3 4.2
Total 11,700.0 19,322.2 18,206.8 7,303.1 87.6
Financial Assistance and Guarantee Schemes
SME Assistance and Modernisation Facilities
5
1,200.0 1,076.0 975.6 779.9
SME Assistance Guarantee Scheme
6
2,000.0 1,889.0 1,218.7 1,093.6
Working Capital Guarantee Scheme
7, 8
7,000.0 7,000.0 5,127.9 1,379.9
Industry Restructuring Loan Guarantee Scheme
7
3,000.0 779.7 210.6 46.3
Total 13,200.0 10,744.7 7,532.8 3,299.7
Change during the year
Special Funds
Fund For Food
2
- -2.5 0.1 -80.0
New Entrepreneurs Fund

2 - 197.1 155.9 -80.1
Fund for Small and Medium Industries

2 - 880.0 1,123.8 -148.4
Bumiputera Entrepreneurs Project Fund
4
- 46.8 89.2 -24.9
Micro Enterprise Fund - 75.4 68.9 64.5
Bumiputera Entrepreneurs Project Fund - Islamic 300.0 12.6 0.3 0.3
Total 300.0 1,209.4 1,438.1 -268.6
Financial Assistance and Guarantee Schemes
SME Assistance and Modernisation Facilities
5
- - 734.6 564.1
SME Assistance Guarantee Scheme
6
2,000.0 1,889.0 1,218.7 1,093.6
Working Capital Guarantee Scheme
7, 8
7,000.0 7,000.0 5,127.9 1,379.9
Industry Restructuring Loan Guarantee Scheme
7
3,000.0 779.7 210.6 46.3
Total 12,000.0 9,668.7 7,291.8 3,083.9
1
Ratio of approvals over allocations and repayments.
2
Exclude funds allocated by the Government under the Ninth Malaysia Plan.
3
Exclude repayments of RM541 million that has been converted into Agrobank’s equity.
4
Closed and replaced by the Bumiputera Entrepreneurs Project Fund - Islamic in July 2009.
5
Schemes were established in August 2008 and has been closed down in February 2009.
6
Scheme was established in February 2009 and was closed in end December 2009. The total approved amount is RM2 billion after accounting for
applications that were processed after the closing date.
7
Schemes are administered by Syarikat Jaminan Pembiayaan Perniagaan Berhad (SJPP), a special purpose vehicle managed by Prokhas Sdn Bhd. Both
SJPP and Prokhas are a wholly owned company of Minister of Finance Incorporated.
8
Scheme was closed in October 2009 as the limit has been met.
Source: Bank Negara Malaysia

Monetary Policy in 2009
69
Monetary Policy in 2009
Overview
Monetary Policy in 2009
Monetary Operations in 2009
White Box: Monetary Policy Process under
the Central Bank of Malaysia Act 2009
71
71
74
77
Annual Report 2009
70
71
Monetary Policy in 2009
OVERVIEW
In 2009, monetary policy was confronted with
heightened risk to growth arising from the global
economic and financial crisis. The economy was
severely affected by the steep decline in exports
and private investment activity, as global demand
contracted. Growth of the Malaysian economy
turned negative for three quarters, with growth
in the first quarter contracting markedly by
6.2%. Comprehensive policy measures were
implemented by Bank Negara Malaysia and
the Government to cushion the impact of the
global recession on the domestic economy. The
resilient financial system and the well-functioning
monetary transmission process meant that
Malaysia did not need to resort to unconventional
measures, such as quantitative easing and the
initiatives to address conditions of financial stress.
Nevertheless, the severity of the crisis necessitated
extraordinary responses in terms of the scope
and size of monetary and fiscal policy measures.
Cumulatively, these measures succeeded in
containing the severity of the impact of the
external developments. By the fourth quarter
in 2009, the domestic economy had improved
significantly and was on a path of firm recovery.
MONETARY POLICY IN 2009
Over the years, Bank Negara Malaysia has
maintained a pre-emptive approach to monetary
policy. Earlier in 2008, inflation was on the rise
due to the sharp and significant increase in food
and energy prices. The OPR, however, was left
unchanged. The assessment of the Bank was
that the food and energy price increases were
largely supply driven. Raising interest rates under
these conditions would have a limited impact
in containing inflation. Importantly, it was also
assessed that the Asian economies would also
be affected by the spillover effects of the crisis,
given the strong trade links with the developed
economies. In addition, given the high percentage
of food and energy in total consumption, higher
prices in these categories would be contractionary
on growth. While there were considerable
uncertainties, the balance of risks was that growth
would slow in the twelve-month period beginning
mid 2008. This was the main consideration in
the decision to maintain interest rates despite
assertions that the Bank should have tightened
monetary policy. Subsequently, as the global
economy contracted, the Bank’s decision to
maintain interest rates was not only justified, but
also enabled the initial monetary conditions to be
appropriately positioned to provide support to the
domestic economy.
The magnitude of the
reductions in OPR and SRR
were aimed at providing
a highly accommodative
monetary environment to
prevent a fundamental
economic downturn
By early 2009, it was apparent that the Malaysian
economy faced a severe threat of a fundamental
slowdown arising from significant deterioration
in global conditions. While domestic demand
conditions were relatively sound, the severe collapse
in exports, and the depressed economic outlook
for several of Malaysia’s major trade partners
meant that significant policy support would be
needed to prevent the economy from entering
a deep and prolonged recession. With inflation
decelerating, Bank Negara Malaysia frontloaded
the interest rate cuts to cushion the economy from
a rapidly weakening global economy. The Bank
reduced its Overnight Policy Rate (OPR) by a total
of 150 basis points between November 2008 and
February 2009 to 2.00 percent. To ensure greater
transmission from the policy rate to retail lending
rates, the statutory reserve requirement (SRR) was
also concurrently reduced by 300 basis points.
Measures were also taken to ensure that existing
borrowers benefited from the reduction in interest
rate, by ensuring that monthly installments on
floating rate loans were immediately reduced
instead of the alternative of shortening of the
repayment period. This was necessary to ensure
that the reductions in interest rates led to an
increase in borrowers’ disposable income, which
could then feed into higher domestic consumption.
As variable rate loans account for a large portion of
total loans in Malaysia, the increase in disposable
income from lower interest costs was positive on
consumption spending.
Annual Report 2009
72
With the OPR reduced to historic lows in February,
the Bank left the policy rate unchanged for the
rest of the year. In the Bank’s assessment, the
accumulated monetary policy measures were
sufficient to provide support to domestic demand.
Unlike countries at the epicenter of the global
financial crisis, the domestic banking system was
in a sound and robust position, with strong capital
buffers. The strong financial system and well-
functioning monetary transmission process was
effective in delivering the impact of the monetary
policy stimulus to the economy. Within two weeks
of the last OPR adjustment in February 2009,
the base lending rate (BLR) of commercial banks
adjusted downwards by a cumulative 121 basis
points, while new loans were also re-priced lower
across the business and household sectors. As
a result, the average lending rate (ALR) on new
loans had declined to historic lows in 2009.
A key question for the Bank’s Monetary Policy
Committee (MPC) was whether further reductions
in interest rates would be beneficial in the context
of a high savings country like Malaysia. In addition
to questions about the effectiveness of further
interest rate cuts, the potential risks also had
to be considered. Lower borrowing costs alone
would not be a key factor in supporting demand,
especially in an environment where confidence
and sentiments were adversely affected by the
severely weak global outlook. In economies in
which the threat of deflation was significant,
policymakers lowered interest rates to near zero.
Bank Negara Malaysia decided against such
extreme measures as there was no indication
of deflationary pressures in the economy. While
inflation turned negative in June 2009, this was
mostly a statistical development resulting from
the high base inflation in 2008. In addition, low
returns for depositors and maintaining negative
real interest rates for a prolonged period could
have a series of negative implications. It could also
create distortions that have adverse effects on
the economy over the long-term. Sustained low
interest rates could lead to a search for yields that
may lead to the excessive rise of asset prices.
The easing of monetary policy
were complemented by other
measures designed to reach
specific sectors of the economy
In a crisis situation, interest rate cuts by
themselves are not sufficient. Several
complementary measures were also introduced
to reach specific sectors of the economy. Hence,
in addition to easing interest rates, the Bank also
introduced a number of targeted measures to
ensure continued access to financing, temporary
extension of safety net, safeguarding the value
of wealth and real income of depositors and
cushioning highly vulnerable borrowers from the
full impact of the crisis.
The Bank and the Government set up various
special funds to ensure that viable small and
medium-enterprise (SME) businesses that have
been affected by the global financial crisis would
Chart 3.1
Overnight Policy Rate
2.00%
1.75%
2.25%
1.5
2.0
2.5
3.0
3.5
4.0
%
2008 2009
Ceiling rate for the corridor of the OPR
Floor rate for the corridor
of the OPR
Overnight Policy Rate (OPR)
Source: Bank Negara Malaysia
Jun Sep Dec Mar Jun Sep
Dec
Chart 3.2
Base Lending Rate and Average Lending Rate
of Commercial Banks
5.51%
BLR
4.83%
ALR
4.5
5.0
5.5
6.0
6.5
7.0
M
a
r


0
8
J
u
n


0
8
Source: Bank Negara Malaysia
S
e
p


0
8
D
e
c


0
8
M
a
r


0
9
J
u
n


0
9
S
e
p


0
9
D
e
c


0
9
%
Monetary Policy in 2009
73
continue to have access to financing. Consistent
with the economic transformation objective, the
Industry Restructuring Loan Guarantee Scheme
was set up to assist viable enterprises in upgrading
their business operations, with a long-term view of
increasing efficiency and building future capacity.
Danajamin Nasional Berhad was also established
to provide financial guarantee insurance for
investment grade companies to raise funds from
the bond market.
Various dialogues between the private sector
and banking institutions were initiated to allow
impediments to be recognised and addressed
and thus ensure the flow of credit. This alleviated
concerns that lenders would be reluctant to extend
credit or demand higher risk premiums. Avenues
for individuals and businesses to seek help on credit
issues were also established. This included the
enhanced Integrated Contact Centre comprising
BNMLINK and BNMTELELINK that includes the
Complaints Management and Advisory Unit.
In December 2008, the ABMConnect Toll Free
Channel was set up by the Association of Banks in
Malaysia (ABM), which represented a collaboration
with banking institutions, to serve as a ready
platform for general enquiries relating to banking
and credit issues.
The reduction in cost of borrowing and measures
undertaken to ensure undisrupted credit flows
to the economy were successful in sustaining
financing activity. Although financing growth
slowed in the early part of the year, credit flows
had continued despite the prevailing recessionary
conditions in the domestic and external sector of
the economy. There was continued flow of credit
to finance domestic demand, for both businesses
and households. As measures implemented
by the Bank began to take effect, demand for
bank loans picked up from the second quarter
onwards, matched by a corresponding increase
in loan approvals. In the capital market, funds
raised by the private sector increased significantly,
exceeding the amount raised in 2008. Given
these positive developments, financing growth
rebounded in the third quarter from its lowest
level of 7.1% in August 2009, to register a
growth rate of 8.5% by end-2009.
With the collapse of prominent financial institutions
in advanced economies, and to avoid contagion
to the domestic banking system, the Bank and
the Ministry of Finance, announced the pre-
emptive measure of the blanket deposit guarantee
until December 2010. In addition, Bank Negara
Malaysia’s liquidity facility was extended to all
insurance companies and takaful operators.
The blanket deposit guarantee was part of a
coordinated regional response to the crisis, with
both Singapore and Hong Kong also announcing
the same measure simultaneously. Extending
access to the liquidity facility to insurers was a
precautionary move following the run on AIG in
parts of the region following developments in the
United States. The fact that the facility remains
unutilised was an indication that the measure was
successful in instilling confidence and mitigating
contagion risk.
The aftermath of the Lehman Brothers collapse
also witnessed a major global shortage of US dollar
liquidity as investor risk aversion resulted in a pull
back of funds and marked increase in deleveraging
activites. This affected the ability of banks around
the world to extend US dollar loans for trade
activities. To facilitate international trade, the Bank
provided an arrangement for firms involved in
international trade by guaranteeing the availability
of dollar for trade purposes.
Measures to stabilise economic activity were
facilitated by orderly movements in the ringgit.
Movements in ringgit throughout the year were
driven mainly by external factors including global
deleveraging in the first quarter, followed by
renewed interest of international investors toward
emerging market assets from the second quarter
onwards. After depreciating in the first quarter,
ringgit recorded a broad upward trend, reaching its
Chart 3.3
Loan Applications
30
35
40
45
50
55
J F M A M J J A S O N D J F M A M J J A S O N D
RM billion
Pre OPR* Cut Post OPR Cut
2008 2009
30
35
40
45
50
55
Source: Bank Negara Malaysia
*Overnight Policy Rate
Annual Report 2009
74
2009 peak against the US dollar at RM3.3475 on
15 October, an increase of 11.3% from its lowest
level of RM3.7255 recorded in March. Ringgit
adjustments and conditions in the domestic foreign
exchange market remained orderly and did not
adversely impact trade activity during the year.
As Malaysia is an economy with a high savings
rate, and with a high level of the financialisation
of these savings, it was recognised that low
interest rates would reduce returns on deposits
to a large segment of the economy. In order to
support savers, the Bank issued Merdeka Savings
Bond amounting to RM2 billion specifically
targeted for segments of savers that depend
on income from deposits for their livelihood.
In addition, the Government issued a Sukuk
Simpanan Rakyat worth RM5 billion that was also
targeted at households.
A key lesson from the 1997/98 Asian Financial Crisis
is the need for comprehensive and coordinated
policy measures. A coordinated policy response
allows for a larger and more effective impact on
the economy by ensuring that the different policies
reinforce each other. Accordingly, in managing
the current crisis there had been a collective and
coordinated response from Bank Negara Malaysia
and the entire Government machinery.
The Malaysian Government responded promptly
to the global economic crisis, announcing a
fiscal stimulus package totaling RM7 billion on
4 November 2008 to support private spending.
As the global economic outlook worsened, the
Government unveiled a second stimulus package on
10 March 2009, this time amounting to RM60 billion
to provide adequate support for economic activity.
Balancing between the need to be decisive and
bold, and the need to maintain fiscal prudence, only
RM15 billion of the second stimulus package involved
direct fiscal injection, with the remainder in the form
of government guarantees, equity investment by
Khazanah Nasional Berhad, private finance initiatives
and tax incentives. The large size of the overall
stimulus packages, which together amounted to
9.6% of GDP, was considered necessary to spur
businesses and households at a time of heightened
uncertainty. At the same time, the limited fiscal outlay
was to ensure the long-term sustainability of the
Government’s fiscal position.
The outcome of policy measures implemented in
concert was seen in the second half of 2009 as
clear signs emerged that the impact of the crisis was
contained. By the second half of 2009, indicators
including industrial production, financing trends,
external trade and conditions in the labour market,
pointed towards broad-based stabilisation and
improvements in the domestic economy. Business and
consumer sentiments, which began to turn around
in the second quarter, also improved further. The
economy improved in the second half of the year, as
the pace of contraction declined to -1.2% in the third
quarter. By the fourth quarter, the economy expanded
by 4.5%. GDP growth for the year registered a more
modest decrease of 1.7% compared to the earlier
projection of -4 to -5%, amid a low inflation of 0.6%.
MONETARY OPERATIONS IN 2009
Conditions in the domestic money market were
generally stable in 2009. The Malaysian money
market continued to operate under a surplus
liquidity environment, with aggregate surplus
liquidity declining only slightly from RM261 billion
as at end-2008, to RM252 billion as at end-2009.
The tumultuous external events proved to have a
limited impact on domestic money markets. The
money market continued to function smoothly and
experienced minimal volatility.
During the year, the average overnight interbank rate
(AOIR) was stable and closely tracked the OPR despite
the higher uncertainty and general market volatility
earlier during the year. The Bank continued to use a
wide range of monetary instruments for managing
monetary operations and maintained the AOIR within
the policy corridor of ± 25 bps.
GDP
Inflation
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
M
a
r

0
8
J
u
n

0
8
S
e
p

0
8
D
e
c

0
8
M
a
r

0
9
J
u
n

0
9
S
e
p

0
9
D
e
c

0
9
Chart 3.4
GDP and Inflation
Annual Growth (%)
Source: Bank Negara Malaysia
Monetary Policy in 2009
75
In early 2009, the domestic money market
continued to be affected by the deleveraging
activity of international financial institutions.
Short-term portfolio outflows were recorded in
the first quarter, as foreign investors reduced
their holdings of domestic assets. This caused
domestic liquidity to contract slightly, with the
surplus liquidity placed by the banking system
with Bank Negara Malaysia decreasing from
RM261 billion to RM256 billion, between
December 2008 and March 2009.
To compensate for the outflows following
foreign selling of domestic assets, Bank
Negara Malaysia released some of the excess
liquidity kept with the Bank. In this respect,
the large net interbank placements with the
Bank acted as a liquidity buffer for the banking
system. While the size of the surplus liquidity
was reduced by the outflows, liquidity in the
banking system, nonetheless, remained in
surplus. This was evidenced by the loan-deposit
ratio of the banking system remaining at
modest levels, ranging from 72.2% in January
to 77.5% in March 2009. At the institution
level, all banks operated from a position of
surplus liquidity. The ample liquidity condition
was also supported by Bank Negara Malaysia’s
decision to reduce the required reserves that
banks hold against eligible liabilities from
4% to 1%. While the main motivation for
reducing the SRR was to bring down the cost of
intermediation, lowering the SRR also increased
the liquidity available to banks.
Interest rates in the interbank market remained
orderly. The average overnight interbank rate (AOIR)
traded within a narrow range of 1 basis point
above and below the OPR. Following the reduction
in the OPR on the 21 of January to 2.50%, the
AOIR decreased and stabilised at a lower range of
2.49% - 2.51% during the period 22 January – 24
February. With the further reduction in the OPR
on 24 February to 2.00%, the AOIR decreased
accordingly and stabilised at the lower range of
1.99% - 2.01%.
From the second quarter onwards, the global
economic and financial environment began to
improve. Investors’ risk appetites for financial assets
from emerging economies increased and led to net
portfolio inflows into emerging markets, including
Malaysia. Conditions in the money market during
this period returned to normal. Monetary operations
of the Bank were focused on draining surplus
liquidity in the banking system by utilising various
monetary instruments.
In terms of monetary instruments, uncollateralised
direct borrowings and Al-Wadiah acceptances
remained as the main monetary instruments,
sterilising 70% of the surplus liquidity in the banking
system. While the maturities of the borrowings
through direct borrowings and Al-Wadiah
acceptances ranged from overnight up to 3 months,
their average borrowing maturities were shorter,
ranging between 7 to 25 days. The share of direct
borrowings increased from 47% in 2008 to 54% in
2009, following the reduction in the level of the SRR.
Source: Bank Negara Malaysia
0
50
100
150
200
250
300
RM billion
Islamic
Conventional
J F M A M J J A S O N D
2009
Chart 3.5
Outstanding Liquidity Placed with
Bank Negara Malaysia
(RM252 billion, as at 31 Dec 2009)
Chart 3.6
OPR and Interbank rates
Source: Bank Negara Malaysia
OPR Overnight
1-month 1-week
%
J F M A M J J A S O N D
2009
3.70
3.50
3.30
3.10
2.90
2.70
2.50
2.30
2.10
1.90
1.70
1.50
Ceiling rate of the corridor for the OPR
Floor rate of the corridor for the OPR
Annual Report 2009
76
Bank Negara Monetary Notes (BNMN for
conventional and BNMN-i for Islamic money
markets) were also utilised significantly,
accounting for 12% of total monetary
instruments. The BNMN/BNMN-i remains an
important instrument for the Bank as a steady
issuance of the papers helps to promote
secondary market liquidity. In addition, BNMN/
BNMN-i provides a cost effective means of
sterilising excess liquidity. BNMN/BNMN-i yields
sometimes traded below OPR, especially during
periods of expectations for interest rates cut as
Chart 3.7
Breakdown of Outstanding Monetary Policy Instruments
Uncollateralised
Direct
Borrowing 47%
Uncollateralised
Direct
Borrowing 54%
Wadiah Acceptances 15%
Wadiah Acceptances 16%
Commodity Murabahah
Placement (CMP) 2%
Commodity Murabahah
Placement (CMP) 1%
Repo 8%
Repo 7%
BNMN 13%
BNMN 9%
BNMN-i 3%
BNMN-i 3%
Others 12%
Others 10%

Source: Bank Negara Malaysia
2008 2009
was the case during the first quarter of 2009,
and due to the higher demand for short-term
securities from non-resident investors in the
subsequent quarters.
In 2009, conventional monetary operations
accounted for 77% of the total operations, while
Islamic monetary operations accounted for the
remaining 23%. The scale of Islamic monetary
operations was in line with the size of the Islamic
banking system in Malaysia which has increased
to 19.6% of total assets of the banking system
as at end-2009 (17.4% as at end-2008).
The Bank also undertook measures to improve
operational efficiency in the money market.
On 2 July 2009, the Bank introduced a BNMN
based on the Murabahah concept (BNMN-
Murabahah), to gradually replace the issuance
of BNMN-i based on Bai Al-Inah concept.
Issuance of BNMN-Murabahah is based on a
widely accepted murabahah contract, which
essentially is a certificate of indebtedness arising
from a deferred mark-up sale transaction of an
asset, normally commodities (e.g. crude palm
oil). As murabahah is an acceptable concept
by both resident and non-resident investors,
it has expanded the investor base and has
consequently encouraged the secondary market
in the Islamic money market.
J F M A M J J A S O N D
2009
Chart 3.8
BNMN Yields and OPR
OPR 3-month BNMN 6-month BNMN
Source: Bank Negara Malaysia
1.50
1.70
1.90
2.10
2.30
2.50
2.70
2.90
3.10
3.30
3.50
%
Monetary Policy in 2009
77
Monetary Policy Process under the Central Bank of Malaysia Act 2009
The Central Bank of Malaysia Act 2009 (``the Act´´), which came into force on 25 November 2009,
formally institutionalises the monetary policy formulation procedures that have been established
since the beginning of the decade.
The Act stipulates that monetary policy shall be autonomously formulated and implemented
by Bank Negara Malaysia (``the Bank´´). The objective of monetary policy is also articulated with
greater clarity – “In promoting monetary stability, the Bank shall pursue a monetary policy which
serves the interests of the country with the primary objective of maintaining price stability giving
due regard to the developments in the economy.”
1

The Act also formally and legally recognises the Monetary Policy Committee (MPC) as the
body responsible for formulating monetary policy and the policies for the conduct of monetary
operations. The MPC consists of 7 to 11 members, with the Governor being the Chairman of the
Committee. The Governor and Deputy Governors remain as members of the MPC for so long as
they hold office. Members, other than the Governor and the Deputy Governors, are appointed by
the Bank’s Board of Directors from amongst senior officials at the Bank with relevant expertise, on
the recommendation of the Board Governance Committee. Meanwhile, the Board Governance
Committee may recommend external members to the Minister of Finance for their appointment to
the MPC. The appointment term of the members is 3 years, and the eligibility for reappointment
is subject to the assessment of the members’ performance by the Board Governance Committee.
The Act also provides extensive safeguards in terms of membership of the MPC. Members of the
MPC must be persons of probity, competence and sound judgment with relevant expertise and
experience. The governance of the MPC meetings and the accountability of the members are
guided by the MPC by-laws, which have been approved by the Board of Directors of the Bank.
The current MPC members are:
Tan Sri Dr. Zeti Akhtar Aziz (Governor)
Dato’ Ooi Sang Kuang (Deputy Governor)
Dato’ Zamani bin Abdul Ghani (Deputy Governor)
Dato’ Mohd Razif bin Abd. Kadir (Deputy Governor)
Dato’ Muhammad bin Ibrahim (Assistant Governor)
Puan Nor Shamsiah binti Mohd Yunus (Assistant Governor)
Dr. Sukhdave Singh (Assistant Governor)
Puan Norzila Abdul Aziz (Assistant Governor)
The MPC is required to hold six regularly scheduled meetings during a year, and additional
meetings may be convened if necessary.
2
At the MPC meetings, members review economic
and financial conditions and assess the risks to achieve the long-run goals of price stability and
sustainable economic growth, before deliberating and reaching the decision on the appropriate
stance of monetary policy. The Committee adopts a collegial approach to decision-making.
Therefore, the Governor, as Chairman, has a crucial role in leading the discussion and deliberation
process, as well as in building a consensus decision amongst members. A Monetary Policy
Statement
3
is released after each MPC meeting to announce the monetary policy decision. The
MPS also provides an assessment of the prospects for the economy and inflation, as well as other
issues relevant to the policy decision.
1
Section 22 (1) of the Central Bank of Malaysia Act of 2009
2
The schedule for the six meetings is published together with the final Monetary Policy Statement of the preceding year.
3
The Monetary Policy Statement can be found on the Bank’s website at www.bnm.gov.my
Annual Report 2009
78
Outlook and Policy
79
Outlook and Policy
International Economic Outlook in 2010
Malaysian Economy in 2010
White Box: Potential Output of the Malaysian Economy
Monetary Policy in 2010
Fiscal Policy in 2010
White Box: Transitioning into a High Income Economy:
Policy Considerations
81
83
84
92
93
96
80
Annual Report 2009
81
Outlook and Policy
INTERNATIONAL ECONOMIC OUTLOOK
IN 2010
Recovery in the global economy, which
commenced in the second half of 2009, is
expected to remain gradual and uneven in 2010
as economies emerge from the worst post-
World War II recession. The strength and pace
of the recovery will vary considerably across
the economies, depending on the extent of
the region-specific structural problems in the
aftermath of the global financial crisis. The
advanced economies are expected to record
modest growth in 2010 given the prevailing high
unemployment, the ongoing deleveraging process
and the weak financial systems that continue
to restrain lending activity to the real sector.
The Asian economies are, however, expected to
continue to lead the global recovery as sources of
growth become broad-based, supported by the
further strengthening of both domestic demand
and external demand, amid improved intra-
regional trade, especially with PR China.
Recovery in the global
economy is expected to
remain gradual and uneven
in 2010, with the Asian
economies leading growth
A distinct feature of the ongoing global recovery
process, particularly in the advanced economies,
is the pervasiveness of the policy support put
in place since early last year. The sustainability
of recovery in the advanced economies is still
dependent on the stimulus and the restoration
of financial intermediation in the credit market.
However, some of the quantitative easing is
expected to be withdrawn beginning early
2010. As the fiscal stimulus wears off towards
year-end, the sustainability of the recovery
in the advanced economies will need to rely
on the resumption of private sector activity.
However, given the likelihood of persistently
high unemployment, weak private sector
balance sheets and fragile financial systems, the
prospect is for a very gradual recovery in private
sector demand, which will in turn affect the
pace of economic recovery.
Notwithstanding the continued improving
conditions in the international financial markets,
credit conditions particularly in the advanced
economies are likely to remain restrictive due
to constraints faced by the financial institutions
as they continue to grapple with weak balance
sheets, tighter capital standards and regulatory
changes from the ongoing reforms in the financial
system. Hence, bank lending to the economy, in
particular to households and small businesses, is
likely to remain weak. On the international front,
given the less promising prospects in advanced
economies and improving investors’ risk appetite
for high-yielding assets, the magnitude and
direction of capital flows to emerging economies
with better prospects would result in more volatile
capital flows to such economies.
In the US, the prospect is for a continued
but gradual recovery in economic activity,
underpinned by the considerable policy stimuli
and gradual revival in private sector demand.
The fiscal stimulus, which supported growth
strongly in 2009, will provide further impetus to
growth this year, especially through tax benefits
and infrastructure spending. More than half of
the USD787 billion fiscal stimulus package is
targeted to be spent in 2010. There will, however,
be a gradual withdrawal of monetary stimulus
following the expiry of several of the Federal
Reserve’s liquidity and asset purchase programmes
starting early this year. Nonetheless, the net
impact of these policies on the recovery process
is expected to remain positive, especially through
their influence on private sector demand. Private
consumption is expected to expand, albeit at a
modest pace, following the positive wealth effect
from the rise in equity markets and stabilising
house prices. Households are also expected to
gain from tax benefits for the housing sector.
Private consumption will, however, be constrained
by continued weakness in the labour market
and persistently tight credit conditions. Similarly,
private investment is also expected to record
anaemic growth during the year due to prevailing
excess capacity and very low utilisation rates.
Residential investment is expected to be supported
by ongoing government policies in the form of
lower mortgage rates and tax credit relief. Overall,
the US recovery process will continue to be driven
by policy stimulus amidst a very gradual recovery
in private sector demand.
82
Annual Report 2009
economies, will support the resumption of global
trade in 2010. Notably, the composition of global
trade will shift from the advanced economies
to the emerging economies, particularly Asia,
as domestic demand in the region strengthens
further. The changing pattern of global trade is
likely to shift the global flows of foreign direct
investment, as multinational companies become
more region-specific in managing their global
production and investment networks to take
advantage of the favourable growth prospects in
the emerging economies.
In line with the anticipated improvements in the
global economy and trade, the Asian economies
are poised for a more robust growth in 2010. As
a major anchor of growth for the region in 2009,
PR China is expected to continue to support
intra-regional trade through the sustained
expansion of its domestic demand. Besides
the continued broad-based improvements
in external demand for the region, domestic
demand conditions in the regional economies
are also expected to strengthen further. Private
consumption is likely to be bolstered by better
employment prospects, while private investment
can be expected to rebound in view of higher
capacity utilisation. This will be further reinforced
by the continued implementation of fiscal
stimulus packages, especially in the area of
infrastructure spending.
Economic activity in the euro area is projected to
improve in 2010 but growth will remain modest
and below potential. While fiscal stimulus will
be less expansionary and fiscal consolidation in a
number of countries in the euro area is expected
to commence, it will still be a factor driving some
growth. At the same time, private sector demand
is expected to show a gradual recovery, but
remain restrained by a challenging environment of
persistent high unemployment and weak financial
sectors. Meanwhile, in the UK, economic recovery
will be supported by the monetary stimulus as well
as external demand following the depreciation
of the pound sterling. Nonetheless, domestic
demand will remain weak due to the restrictive
credit conditions and planned fiscal consolidation.
For Japan, an economy that is highly dependent
on trade, the recovery in exports, especially to the
Asian region, in particular PR China, is expected
to remain the key driver of economic growth
in 2010. However, the recovery is expected to
be modest, with domestic demand likely to be
constrained by weak labour market conditions
and subdued capital expenditure plans. Moreover,
deflation is expected to persist in the economy,
further weighing down on domestic demand,
in particular private consumption. Given this
scenario, monetary and fiscal policies are expected
to remain expansionary to support growth.
The gradual recovery in the advanced economies,
coupled with strong demand from the emerging
Chart 4.1
World Growth, World Trade and Growth in Major
Advanced Economies (2009-2010)
-0.8
-12.3
-2.4
-5.2
-5.0
3.9
6.0
2.7
1.7
1.0
1.3
-4.1
-15.0
-10.0
-5.0
0.0
5.0
10.0
World
growth
World
trade
United
States
Japan Euro
area
United
Kingdom
Annual change (%)
2009e 2010f
e Estimate
f Forecast
Source: International Monetary Fund and National Authorities
Chart 4.2
Regional Economies: Real GDP Growth
e Estimate
f Forecast
Source: International Monetary Fund and National Authorities
PR China
India
Korea
Hong Kong SAR
Chinese Taipei
Singapore
Thailand
Philippines
Indonesia
Malaysia
Annual change (%)
-2.3
-1.9
-2.7
-1.7
-2.0
0.9
0.2
4.5
6.5
8.7
4.0~5.0
4.5~6.5
7.7
10.0
2.6~3.6
3.5~4.5
4.6
4.7
5.5~6.0
-4 -2 0 2 4 6 8 10 12
2009e 2010f
4.5~5.5
Outlook and Policy
83
1
IMF World Economic Outlook Update, January 2010
Global inflation is expected to rise in 2010
in tandem with the recovery of the global
economy and higher commodity prices. Prices
of oil and other commodities are expected to
be higher, but not to the levels seen in early
2008, reflecting more underlying real demand
conditions, particularly in the emerging
economies. To some extent, the anticipated
rise in commodity prices will also be driven by
market expectations of a recovery in global
demand as well as the excess liquidity in the
global financial system. However, further
increases in the prices of commodities are
likely to be limited by the availability of spare
capacity in the production of most commodities
and in some cases by large stock of inventories.
Headline inflation in the advanced economies is
expected to rise to 1.3% in 2010 from a record
low of 0.1% in 2009. Meanwhile, inflation
in emerging and developing economies is
expected to rise to 6.2% in 2010 from 5.2%
in 2009
1
. Against this backdrop, these central
banks are expected to gradually exit from the
very low interest rate regime in addition to the
reversal of quantitative easing in the advanced
economies. The speed at which central banks
will exit will take into consideration a broad
range of factors, ranging from conditions for
the sustainability of recovery and the outlook
for inflation.
Several downside risks remain in the outlook
of the global economy. The timing and
magnitude of the withdrawal of the stimulus
measures could pose considerable risk to
the growth and inflation outlook. If there
was a significant premature withdrawal of
these measures, it could increase the risk of
a double-dip recession, particularly in the
advanced economies. If the measures are,
however, withdrawn too late, this could
lead to financial imbalances and heightened
inflationary pressures, and in some cases,
unsustainable asset price inflation. Another
major risk is the fiscal health of the advanced
economies that have embarked on large fiscal
stimuli and financial rescue packages. This is
reflected in increasing concerns on sovereign
risk, particularly in Europe. If these economies
are unable to outline a clear strategy to
return to a sustainable fiscal position,
markets would impose high risk premiums on
these economies, resulting in sharper fiscal
consolidations that could harm the recovery
process. The advanced economies also continue
to face significant challenges from their fragile
financial system and structural unemployment.
In the case of emerging economies, the positive
growth differentials could attract large capital
inflows and pose complications in the conduct
of monetary policy and managing exchange
rate volatilities.
MALAYSIAN ECONOMY IN 2010
The Malaysian economy is projected to grow
by 4.5% to 5.5% in 2010, underpinned by
strengthening domestic demand and an improving
external environment. While the public sector
will remain supportive, growth is expected to be
driven by greater private sector activity and robust
external demand from the regional countries. The
underlying strong macroeconomic fundamentals,
the healthy private sector financial position and
the strong financial system will provide support
to a private sector-led recovery. A supportive
monetary environment, including continued access
to competitive financing will remain in place to
foster recovery in the private sector activity.
Real GDP is expected to
expand by 4.5% to 5.5%
in 2010, supported by
strengthening domestic
demand and an improving
external environment
The main contribution to growth in 2010
would come from the expected strengthening
in domestic demand, driven mainly by the
private sector. Favourable domestic conditions,
including the improvements in the labour
market, rising disposable incomes and sustained
consumer confidence, will support the further
expansion in private consumption. In line with
strengthening external demand and increasing
domestic activity, private investment is expected
to gradually recover in 2010. In addition, higher
capital spending by the NFPEs and the accelerated
implementation of the remaining projects
under the second stimulus package, will further
reinforce domestic demand. The recovery in the
84
Annual Report 2009
Potential Output of the Malaysian Economy
Potential output is the trend level of output that is consistent with the aggregate productive
capacity of an economy. It traces the sustainable growth path of the economy and is primarily
determined by the expansion and non-inflationary utilisation of the available physical capital and
labour force, as well as total factor productivity (TFP) growth. TFP growth captures productivity
increases arising from improvements in the utilisation of factor inputs due to technological progress
and overall economic efficiency. The output gap is the difference between the levels of actual
output and potential output. It is a measure of the cyclical deviation from the non-inflationary trend
of output, and thus provides an assessment of the position of an economy in the economic cycle.

Amidst a challenging global environment, the latest estimates indicate that the growth rate of
potential output of the Malaysian economy moderated to 2.5% in 2009, the slowest pace since the
Asian financial crisis. This was mainly due to the decline in investment activity and moderation of
TFP growth, consistent with the experience during previous economic downturns. Given a sharper
decline in actual gross domestic output (GDP), the output gap
1
was a negative 1.4% of potential
1
The output gap is the difference between the levels of actual and potential output and the gap is measured as a percentage of potential
output. A positive output gap indicates that actual output is above potential output, while a negative output gap indicates the reverse.
Table 1
Actual Real GDP and Potential Output
Period
Actual Potential Investment Labour Gap
Annual change (%)
% of
potential
output
1993-1999 6.5 6.5 4.3 4.1 0.1
2000 8.9 4.2 26.0 4.4 1.1
2001 0.5 4.6 -2.1 1.5 -1.6
2002 5.3 4.0 0.6 1.9 -0.6
2003 5.8 6.1 2.8 3.6 -0.4
2004 6.8 5.5 3.6 1.0 0.4
2005 5.3 5.0 5.0 0.6 0.8
2006 5.8 5.6 7.5 2.1 1.0
2007 6.2 5.2 9.6 2.5 2.1
2008 4.6 4.0 0.8 1.3 0.7
2009e -1.7 2.5 -5.5 2.7 -1.4
e Estimate
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
estimates
Chart 1
Actual and Potential GDP
e Estimate
f Forecast
RM billion
Output gap (RHS)
Actual Output (LHS)
Potential Output (LHS)
% of potential
-10
-5
0
5
10
15
20
25
0
20
40
60
80
100
120
140
1991 1993 1995 1997 1999 2001 2006 2005 2007 2009e 2011f
0.0
1.0
3.0
4.0
5.0
6.0
7.0
1992-1999
Labour Capital TFP
% point contribution
2010-2011f 2000-2009e
2.0
-1.0
-2.0
e Estimate
f Forecast
Chart 2
Factor contributions and TFP growth
Shift from a factor-driven to a productivity-driven
economy
output, indicating that the economy was
operating below its potential in 2009.
However, with the expected recovery of the
Malaysian economy going forward, driven by
the strengthening of domestic activity and an
improving external environment, the output
gap is projected to narrow in 2010, and
potential output is expected to return to its
trend growth of about 5% over the medium
term with the expected recovery in investment
and continued improvement in productivity.
Outlook and Policy
85
global economy will provide a further impetus
to growth in 2010, particularly from the more
robust expansion in the regional economies.
Given the relatively large external sector in the
economy, the strengthening of external demand
will have positive spill-over effects on the broader
economy, in terms of employment, production
and overall sentiments, thus supporting greater
private consumption and investment.
From the supply side perspective, most economic
sectors are expected to record better performance
in 2010, supported by strengthening domestic
demand and a further improvement in external
demand. The manufacturing and mining sectors
are expected to record positive growth as external
demand for major products such as electronics,
crude oil and natural gas, recover. The services
sector remains the key contributor to overall GDP
growth, with growth expected to be broad-based.
Both the trade and manufacturing related sub-
sectors and the domestic-oriented sub-sectors are
expected to improve amid the recovery in both
global and domestic demand. The agriculture
sector is also projected to register higher growth
as demand from the major export markets for
industrial crops improves with better economic
prospects in 2010. Meanwhile, the construction
sector is expected to sustain growth, benefiting
from the continued implementation of the
remaining projects under the second stimulus
package and the Ninth Malaysia Plan.
Labour market conditions are projected to improve
further in 2010, with the unemployment rate
expected to decline to 3.6% of the labour force.
Based on a survey conducted by Bank Negara
Malaysia, most firms in the manufacturing,
services and construction sectors plan to increase
employment and provide a higher salary increment
in 2010, in line with the expected recovery in
global and domestic economic activity.
Headline inflation is expected to remain modest
at an average of 2% to 2.5% in 2010. The
price increase reflects the improving economic
conditions and the possible adjustments to the
administered prices following the Government’s
plan to revise the subsidies for petroleum products
as well as to review the existing subsidies on other
essential items.
On the external front, the current account surplus
is projected to be lower at 14.3% of GNI in
2010. The lower current account surplus reflects
the lower trade surplus, higher income account
deficit, sustained current transfer outflows as well
as a small services account deficit. Gross exports
are projected to expand further in 2010, in line
with the stronger external demand and higher
commodity prices. However, the trade surplus is
expected to be lower as higher exports will be
partly offset by the expansion in gross imports, in
tandem with the recovery in the manufacturing
sector and the strengthening of domestic
demand. On the financial account, foreign
direct investment inflows and direct investment
abroad by Malaysian companies are likely to
increase given the improving global and domestic
economic conditions.
The projected growth of the Malaysian economy
of between 4.5% and 5.5% in 2010 is based on
the expectation of a gradual and uneven global
economic recovery. It is recognised that the global
economy is still facing several downside risks.
These risks, mainly in the advanced economies,
include the effect on recovery once fiscal spending
begins to diminish, the still weak and fragile
financial system, the continued de-leveraging
process amongst the private sector and the fiscal
stress in some large advanced economies pose
considerable uncertainties to the outlook for the
global economy. Under these circumstances,
domestic demand will be a key factor in driving
growth in 2010. In this environment, policies
will remain supportive of growth, in particular
to ensure that private sector activity strengthens
further and that the recovery is firmly established.
In addition to ensuring the timely
implementation of projects, the Government has
announced several measures to revive private
investment, including the liberalisation of the
economy, the privatisation of Government-
owned corporations, the provision of
incentives to high growth sectors and further
improvements in the Government’s delivery
system. On the monetary front, monetary policy
will remain accommodative while attention will
continue to focus on ensuring that the private
sector, in particular the small and medium
enterprises, have access to financing. At the
same time, there will be heightened vigilance
to ensure that financial imbalances do not
develop in the economy, which would threaten
macroeconomic stability and the sustainability
of the economic recovery. The strong economic
86
Annual Report 2009
and financial fundamentals of the Malaysian
economy place the domestic economy in a better
position for a stronger recovery as the global
conditions improve further.
Domestic Demand Conditions
Domestic demand is projected to expand
by 3.2% in 2010 as private sector activity
strengthens in line with the resumption of global
economic growth. The private sector is expected
to be the main driver of domestic demand as the
Government consolidates its expenditure in 2010.
Domestic demand will record
higher growth in 2010, driven
mainly by private spending as
the Government consolidates
Favourable domestic conditions, in terms of an
accommodative monetary policy, continued
access to financing and improved labour market
conditions, will help to support the further
expansion of household consumption, while private
sector capital spending is projected to increase
gradually during the year. In addition, higher capital
spending by the NFPEs will provide a further boost
to domestic demand.
Private consumption is projected to increase by
3.8% in 2010. The higher expansion in consumer
spending will be supported largely by improvements
in the labour market, a steady increase in disposable
income and sustained consumer confidence.
Employment prospects will be more favourable
with stronger labour demand in various sectors of
the economy, in line with the recovery in economic
activity. Consequently, the average private sector
salary is expected to increase by 4.1% while the
unemployment rate is projected to be lower at
3.6% of the labour force. The rise in income levels
following the gradual recovery of the export and
manufacturing sectors will benefit almost one
third of the labour force in the domestic economy,
and will support higher consumption spending. In
addition, households in the rural area are expected
to enjoy favourable income growth as commodity
prices are expected to remain firm in 2010.
In view of the recovery in economic activity and
improved labour market conditions, consumer
confidence is likely to be sustained in 2010. Other
factors providing support to private consumption
growth include continued access to credit with
accommodative interest rates and a relatively
low inflation environment. The balance sheet of
households is expected to remain strong as reflected
Table 4.1
Real GDP by Expenditure (2000=100)
2009p 2010f 2009p 2010f
Annual change
(%)
Contribution to
real GDP growth
(percentage point)
Domestic Demand
1
-0.4 3.2 -0.3 2.8
Private sector
expenditure -3.4 3.3 -2.2 2.1
Consumption 0.8 3.8 0.4 2.0
Investment -21.8 0.7 -2.6 0.1
Public sector
expenditure 7.7 2.7 1.9 0.7
Consumption 3.7 -2.7 0.5 -0.4
Investment 12.9 9.3 1.3 1.1
Change in stocks -2.5 4.5
Net exports of
goods and services 8.4 -18.6 1.1 -2.7
Exports -10.1 7.7 -12.0 8.3
Imports -12.5 11.7 -13.1 11.0
Real Gross Domestic
Product (GDP)
-1.7 4.5~5.5 -1.7 4.5~5.5
1
Excluding stocks
p Preliminary
f Forecast
Note: Figures may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
-2
0
2
4
6
8
10
12
14
2002 2003 2004 2005 2006 2007 2008 2009p 2010f
140
160
180
200
220
240
260
280
300
Private consumption (RHS)
Private consumption growth
Real GDP growth
Annual growth (%) RM billion
(2000 prices)
Chart 4.3
Real GDP and Private Consumption
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p Preliminary
f Forecast
Outlook and Policy
87
by the stable debt levels of households and low
level of non-performing loans. In addition, the
continued implementation of projects from the
second economic stimulus package is expected to
also benefit the household sector.
Private investment is expected to register
a marginal growth of 0.7% in 2010. Capital
spending by businesses is likely to expand
gradually from the second half of 2010, in line
with the strengthening of domestic and external
demand amid improving global economic
conditions. The modest recovery in private
investment will be supported by higher activity
from the manufacturing sector. Furthermore,
a faster improvement in capacity utilisation
since the second half of 2009, supported by
the increase in manufacturing production
will encourage firms to embark on capacity
expansion. The rebound in business optimism
due to the improvement in external demand and
increasing domestic economic activity will also
encourage firms to resume investment projects
that have been deferred.
In the services sector, the consumer-oriented
business segments will continue to expand in
view of the higher consumption activity during
the year. Firms in the wholesale and retail
trade industry are projected to expand their
operations through the establishment of new
outlets. Investment in the communications
sector will be higher as companies intensify the
network upgrading exercise to widen broadband
service coverage. Meanwhile, investment in the
transportation sector will be supported mainly by
capacity expansion in air travel services. Capital
spending in the mining sector is also anticipated
to increase, supported by an expansion in
upstream oil and gas production capacity as well
as additional development expenditure for new
discoveries located offshore in Peninsular Malaysia
and Sarawak. In addition, capital expenditure
in the construction sector is likely to benefit
from the ongoing Ninth Malaysia Plan (9MP)
civil engineering projects as well as continued
implementation of the second stimulus package.
Although expenditure on emoluments will be
higher, public consumption is projected to
decline by 2.7% in 2010 as expenditure on
supplies and services is reduced. This is in line with
the Government’s policy to be more efficient in its
spending, without affecting the effective delivery
of Government services.
Public investment is expected to expand by
9.3% in 2010, mainly on account of higher capital
spending by NFPEs. Government development
expenditure during the year will continue to be
channelled towards improving the economic and
social sectors of the economy. Capital outlay in
the economic services sector will mainly be for
providing transport and industrial infrastructure,
improving public utilities and agricultural
productivity as well as for enhancing rural
development. The implementation of various
projects under the 9MP as well as the second
stimulus package will also be accelerated during
the year. Of significance, Government direct
spending consisting of RM5 billion worth of
projects from the second stimulus package will
be implemented in 2010. In the social services
sector, a large proportion of the allocation will be
utilised to improve the provision of essential public
services such as education and health care, and
the development of low-cost housing and quarters
for civil servants.
Besides the large capital expenditure in the
upstream oil and gas sector, higher investment
by NFPEs is projected in the areas of transport,
communication and utilities. Investment in the
communication and utilities sectors will focus
on upgrading the broadband network and
improving power supply respectively. In the
transportation sector, higher capital outlay has
been committed to the implementation of rail
expansion projects in 2010.
50
55
60
65
70
75
80
2002 2003 2004 2005 2006 2007 2008 2009
0.7
0.8
0.9
1.0
1.1
1.2
Chart 4.4
Household Debt Indicators
Proportion of GDP (%) Ratio
Household debt (% of GDP)
Loan - Deposit Ratio (RHS)
Source: Bank Negara Malaysia
88
Annual Report 2009
Sectoral Outlook
Better performance is expected in most economic
sectors as domestic demand strengthens and
external demand continues to improve in 2010.
The manufacturing and mining sectors are
expected to return to growth as external demand
for major products such as electronics, crude
oil and natural gas recovers. The recovery in
external conditions will also raise demand for
trade-related services, contributing favourably
to the services sector. In addition, the revival of
domestic-oriented activity, which has been on a
firm recovery path since the second half of 2009,
will further enhance growth in all sectors. Growth
will be underpinned by strengthening domestic
demand, particularly private consumption,
amidst continued policy support. Furthermore,
the anticipated improvement in labour market
conditions, together with higher business and
consumer confidence, will provide incentives for
private sector activity in the domestic-dependent
sectors. Meanwhile, the construction sector is
expected to sustain its growth, benefiting from
the continued implementation of the various
projects under the second stimulus package and
the Ninth Malaysia Plan.
Broad-based recovery is
expected in 2010 with
improved performance in most
sectors

The services sector is projected to register a
higher growth of 4.9% in 2010, and will remain
the key contributor to overall GDP growth.
Growth will be broad-based, with most sub-
sectors recording better performance compared
to 2009. The trade and manufacturing-related
sub-sectors, which were adversely affected by
the economic downturn in 2009, are expected
to improve, in line with the anticipated recovery
in the global economy. Meanwhile, the more
domestic-oriented sub-sectors are expected to
record higher growth, benefiting mainly from
strengthening domestic demand.
Within the services sector, the finance and
insurance sub-sector is expected to register
higher growth, mainly supported by the finance
segment, which would benefit from increased
bank lending and higher fee income as the
economic recovery gathers momentum. In the
insurance segment, the improvements in salaries
and wages and enhanced financial literacy
would contribute to increased demand for
life insurance products, while the anticipated
increase in the sales of motor vehicles would
benefit the general insurance business.
After being adversely affected by the economic
downturn in 2009, the transport and storage
sub-sector is projected to return to positive
growth in 2010. Growth will emanate from
higher demand for cargo-related transportation
services, following the anticipated improvement
in trade and manufacturing-related activities.
Growth will be further supported by improved
demand in the passenger segment, in line
with the expected higher tourist arrivals and
improvement in domestic tourism activity.
Similarly, the utilities sub-sector, which
weakened considerably in 2009, is expected
to expand favourably in 2010. Growth will be
contributed by increased demand for electricity
from the industrial users, in line with the
improvement in manufacturing activity, as well
as steady demand from the commercial and
household sectors.
The services sub-sectors that are dependent on
domestic consumption, such as the wholesale
and retail trade and accommodation and
restaurant sub-sectors, are projected to
register enhanced growth rates. The anticipated
increase in tourist arrivals will also contribute
favourably to these sub-sectors. Outlook for
the communication sub-sector is also positive,
spurred by increasing demand for mobile data
and broadband services. Intense competition
among the service providers, commercial roll-out
Table 4.2
Real GDP by Sector (2000=100)
2009p 2010f
Annual change (%)
Agriculture 0.4 3.1
Mining & quarrying -3.8 2.5
Manufacturing -9.3 6.5
Construction 5.7 3.7
Services 2.6 4.9
Real Gross Domestic
Product (GDP) -1.7 4.5~5.5
p

Preliminary
f

Forecast
Source: Department of Statistics, Malaysia
Bank Negara Malaysia
Outlook and Policy
89
of the high speed broadband project in selected
urban areas and continued expansion of WiMAX
services will further contribute to the growth of
the sub-sector.
The manufacturing sector is poised for
strong growth in 2010, based on the observed
momentum of recovery since the end of
2009. Broad-based expansion is expected
across all clusters, reflecting improved external
demand and strengthening domestic demand.
The electronics and electrical (E&E) cluster is
projected to turn around with the pick-up in
global demand for electronics, particularly with
the return of corporate IT spending, where
upgrade and replacement of software and
equipment were held back during the global
downturn. Likewise, growth in the primary-
related cluster will be driven by external demand
and higher commodity prices. The chemical
industry is expected to improve in tandem with
the E&E, automotive and household markets,
while demand for hygiene and medical products
will continue to support the rubber products
industry. Meanwhile, the consumer-related
cluster is expected to move in line with the
strengthening of domestic demand, particularly
private consumption. Also, the performance
of the construction-related cluster will be
influenced by anticipated higher domestic
construction activity and infrastructure projects
in the region.
The agriculture sector is expected to register a
higher growth of 3.1% as demand from major
export markets for industrial crops, especially
palm oil and rubber, improves with better
economic prospects in 2010. In addition, the
reduction in import duties on rubber by the
PR of China as of 1 January 2010 will further
boost its demand for the commodity. In
terms of production, higher palm oil output is
expected during the year following the recovery
in yield of fresh fruit bunches and an increase
in planted area ready for production. In the
case of rubber, besides a continuing increase
in productivity from areas replanted with high
yielding clones, higher rubber prices since the
second half of 2009 will continue to encourage
increased tapping.
The mining sector is projected to expand by
2.5%, reflecting higher output of both crude
oil and natural gas following the recovery in
demand. The increase in LNG output will also
partly reflect the first full-year of shipment under
an export contract with PR China.
The construction sector is expected to
maintain a growth of 3.7% in 2010. The civil
engineering segment will be supported by the
continued implementation of projects under the
second stimulus package. Furthermore, apart
from additional progress on projects under
implementation, several other major projects
identified under the Ninth Malaysia Plan are also
expected to take off during the year. Meanwhile,
improved business and consumer sentiments
and continued access to financing will support
expansion in both the residential and non-
residential sub-sectors.
Balance of Payments
On the external front, improvements in exports
and capital inflows, which were evident in the
second half of 2009, are expected to continue
in 2010 as the global economic recovery gathers
strength. The expected stronger external
demand, particularly from the region, and higher
commodity prices is projected to contribute to
a further expansion in gross exports in 2010.
However, the trade surplus is expected to be lower
as imports are projected to expand faster than
exports. While imports of intermediate goods
will increase in tandem with the expansion in
manufactured exports, the stronger recovery in
the domestic economy will also lead to higher
imports of consumption and capital goods.
The lower trade surplus, together with a higher
income account deficit, sustained current transfer
outflows and a small services account deficit, are
expected to lead to a narrowing of the current
account surplus to RM103.8 billion or 14.3% of
GNI in 2010. On the financial account, foreign
direct investment inflows and direct investment
abroad by Malaysian companies are likely to
increase given the improving global and domestic
economic conditions.
Gross exports are projected to recover from a
low base, registering a growth of 11.2% in 2010.
This projection of export growth is based on the
assumption that the global economic recovery
will be gradual, with sluggish growth in the
advanced economies but stronger activity in the
emerging economies, particularly the regional
economies. Export recovery is expected to be
broad-based, as exports will be supported by a
recovery in the manufacturing and commodity
sectors. This broad-based recovery will continue
90
Annual Report 2009
to be led by intra-regional trade and the gradual
pick-up in exports to G-3 economies. The recovery
in manufactured exports is projected to emanate
from both electronics and electrical (E&E) and
non-E&E exports. The stronger growth in the E&E
exports is expected to be in both electronics and
electrical segments, attributable to the continued
strong demand for personal computers, smart
phones and new electronics gadgets, as well
as the expected recovery in IT spending by the
corporate sector. The outlook for commodity and
resource-based manufactured exports is expected
to improve, with the higher commodity prices and
stronger regional demand likely to be sustained.
Exports and capital inflows
are expected to continue
improving in 2010 as the
global economic recovery
gathers strength. The current
account surplus, while still
sizeable, will be reduced,
as imports are expected to
expand faster than exports
With the anticipation of a recovery in exports
and domestic demand, the recovery of gross
imports is expected to be more pronounced,
increasing by 14.6% in 2010. As the bulk
of Malaysia’s gross imports are intermediate
goods, intermediate imports will increase and
contribute the most to the import recovery,
in tandem with the strengthening demand
for manufactured exports. Imports of capital
goods are expected to increase as the corporate
sector gradually revives investment activity and
undertakes new capital investments to increase
production capacities. Imports of consumer
goods are also expected to increase with the
improvement in consumer spending.
The services account is projected to record
a marginal deficit of RM0.7 billion in 2010, as
higher deficits in the transportation and other
services accounts are expected to more than
offset the higher surplus in the travel account.
With global trade, investment and tourism
activities improving, payments for transportation,
construction, communication and professional
services, are also anticipated to increase.
Meanwhile, tourism earnings are expected
to continue to increase with the anticipated
improvements in global and regional tourist
arrivals and well targeted tourism promotional
activities. The income account deficit is
projected to widen to 2.7% of GNI as a recovery
in exports is expected to translate into higher
repatriations of profits and dividends by MNCs
operating in Malaysia, particularly in the E&E
industries as well as the oil and gas sector.
Meanwhile, profits and dividends accruing to
Malaysian companies with investments abroad
are expected to remain large, mainly from the
oil and gas, and services sectors, supported by
higher commodity prices and the improving
regional economic outlook.
On the financial account, gross inflows
of foreign direct investment (FDI) are
anticipated to increase in 2010 amid improving
global growth prospects and corporate
profitability. As global FDI inflows are
expected to recover only moderately in 2010,
the improvement in FDI in Malaysia is thus
projected to be moderate with inflows mainly
into the manufacturing, services and oil and
gas sectors. In the manufacturing sector, the
bulk of the FDI is likely to continue to be in the
form of reinvestment by the MNCs for capacity
expansion in tandem with the recovery in the
E&E industries. In addition, investment is also
expected in the new growth areas such as
renewable energy and medical devices. Higher
FDI flows are also expected in the services
sector, particularly in the financial services sector
following the further liberalisation in April 2009,
which included the issuance of new licenses to
foreign financial institutions, increasing foreign
equity limits and allowing greater operational
flexibility to locally-incorporated foreign
financial institutions. Meanwhile, FDI in the oil
and gas sector will be supported by rising prices
and increasing demand for crude oil as global
activity rises.
Direct investment abroad (DIA) by Malaysian
companies is expected to increase and remain
large in 2010 as companies continue to expand
regionally and globally. The higher DIA is
expected to be channelled mainly into the
services, oil and gas, as well as manufacturing
sectors with the focus being on regional and
other emerging economies. Regional and
global expansion represents opportunities for
Outlook and Policy
91
Table 4.4
External Trade
2009p 2010f
RM
billion
Annual
change
(%)
RM
billion
Annual
change
(%)
Gross exports
of which:
553.3 -16.6 615.1 11.2
Manufactured 430.4 -12.5 474.0 10.1
Agriculture 53.4 -21.6 60.3 12.8
Minerals 59.3 -32.2 70.8 19.4
Gross imports
of which:
434.9 -16.6 498.4 14.6
Capital goods 65.8 -5.9 70.7 7.6
Intermediate goods 297.3 -21.6 348.8 17.3
Consumption goods 31.4 -2.7 33.2 5.7
Trade balance 118.4 -16.6 116.7 -1.4
p Preliminary
f Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Malaysian companies to access a larger consumer
market, to increase their scale of operations, and
to increase their global competitiveness. This
would, over a medium term, benefit the country
through having more competitive and globalised
Malaysian companies, and also increase the
potential for greater income repatriation.
Labour Market Outlook
Conditions in the labour market are expected
to improve further in 2010, in line with the
recovery in global and domestic economic activity.
The improvements in business confidence and
economic activity since the second half of 2009
are expected to gain traction during the year,
and this in turn will underpin recruitment and
salary decisions. Based on a survey conducted
by Bank Negara Malaysia, most firms in the
manufacturing, services and construction sectors
plan to increase employment by about 5% in
2010. With the expected stronger labour demand,
the unemployment rate is projected to decline
to 3.6% of labour force in 2010 (2009: 3.7%).
In addition, about 70% of companies surveyed
indicated that they would unwind the freeze on
salary increases in 2010. Overall, the average
salary increment in the private sector is expected
to be higher by 4.1% in 2010 (2009: 3.4%).
Inflation Outlook
Headline inflation is expected to remain
modest at an average of 2 – 2.5% in 2010.
This projection reflects the improving economic
conditions and takes into account the possible
adjustments to administered prices and subsidy
restructuring by the Government. In the absence
of further price revisions and inflation related
external developments, inflation in Malaysia will
remain contained.
Demand prospects for economic growth in the
region and the global economy have improved.
The cautious attitude of businesses and
households, lingering excess capacity and the
withdrawal of Government stimulus measures,
however, would in varying degrees affect
economic activity across countries. Hence, despite
the expected improvement in economic activity,
demand conditions are not expected to exert
pressure on global inflation in 2010.
Table 4.3
Balance of Payments
2009p 2010f
RM billion
Goods 141.5 141.6
Trade account 118.4 116.7
Exports (% annual change) -16.6 11.2
Imports (% annual change) -16.6 14.6
Services 3.2 -0.7
Balance on goods and services 144.7 140.8
Income -12.6 -19.9
Current transfers -19.4 -17.1
Balance on current account 112.7 103.8
% of GNI 17.0 14.3
Capital account -0.2
Financial account -82.9
Balance on capital and financial
accounts -83.1
Errors and omissions -15.8
of which:
Foreign exchange revaluation gain 10.7
Overall balance 13.8
p Preliminary
f Forecast
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
92
Annual Report 2009
Similarly, demand pressures on domestic prices are
expected to be manageable. Sustained consumer
confidence, the accommodative monetary
conditions and the Government’s stimulus
packages will likely support consumption and
investment activity by households and businesses.
The output gap will narrow as domestic demand
increases. Nevertheless, as output is recovering
from low levels, the impact on price pressures is
likely to be limited.
On the supply side, the improvement in economic
activity since the second half of 2009 is likely to
lead to an upturn in global commodity prices.
The IMF WEO update in January 2010 projected
that crude oil prices could trade higher at around
USD76 per barrel in 2010 (USD62 per barrel in
2009). This increase is significantly less compared
to the sharp increase in July 2008 when oil prices
peaked at USD147 per barrel. Other non-fuel
commodities such as food and metals are broadly
expected to follow similar trends. The December
2009 edition of the Food and Agriculture
Organisation of the United Nation’s (FAO) Food
Outlook maintained that the overall improvement
in the global supply and demand balance would
keep price increases for food commodities at
moderate levels. Rice prices however, are expected
to rise due to lower production amid adverse
weather conditions. The price of sugar is also
expected to remain firm although lower than the
August 2009 peak, as the relatively tight supply
conditions are counterbalanced by recovery in
production and reserve drawdown.
It should be noted that while the underlying
demand for commodities is expected to
remain modest, the environment of prolonged
low interest rates and excess liquidity could
encourage greater speculative activities in
the commodity markets. Consequently, non-
fundamental factors could periodically push
global commodity prices to higher levels.
Producers could face higher and more volatile
input costs. More subdued demand conditions
and above-average inventory levels could
moderate the price increases. Nevertheless, the
ample global liquidity conditions, if prolonged,
would pose heightened risk of higher
commodity prices.
On the domestic front, the Government has
announced its intention to revise the subsidy for
petroleum products. A comprehensive review on
the existing subsidies on other essential items
is also being undertaken. This could generate
some upward adjustment on domestic headline
inflation. However, given that demand conditions
are not expected to exert strong pressures
on consumer prices, the impact is likely to be
transitory and contained. Core inflation is likely
to exhibit a benign trend and is not expected to
be a source for concern.
MONETARY POLICY IN 2010
The global economy entered 2010 on a recovery
mode compared to the height of the global
crisis in early 2009. Global GDP growth picked
up greater momentum in the final quarter
of 2009, underpinned by stronger activity,
particularly in emerging economies. While there
were significant elements of policy support in
driving the expansion in economic activity, there
were also signs of recovery in private demand,
notably in private consumption. The expectation
is for private sector demand to strengthen
further in 2010.
Monetary policy in 2010
will focus on promoting the
sustainability of economic
recovery
The recovery process nevertheless appears to
be uneven across countries, which implies that
the timing and magnitude of the exit from the
extraordinary policy measures implemented
during the crisis may vary across countries.
Emerging economies however, are leading the
recovery process in the world economy. The better
fundamentals of the emerging markets, especially
in Asia, imply that these economies will have an
important role in supporting global demand over
the next few years.
The emerging markets’ better fundamentals
could also make these economies vulnerable
to large scale capital inflows driven by the
combination of low global interest rate, excess
liquidity and the rising appetite for risks and
search for yields. Given the still uncertain
international economic outlook, such capital
flows are likely to react suddenly to shifts in
global developments and changing expectations.
As a consequence, the inflows of funds are
Outlook and Policy
93
equally susceptible to be interrupted by episodes
of reversals. The resulting higher volatility in the
financial markets could complicate policymaking
in the emerging economies where the financial
markets are less developed. The challenges to
intermediating the large and volatile capital
inflows could create financial imbalances and
misallocation of resources while the sudden and
rapid withdrawals of such funds could disrupt
financing and real economic activity. Therefore,
the economic and financial environment will
remain challenging for emerging economies.
Domestically, the Malaysian economy
is expected to strengthen. The ongoing
improvement in consumption and investment
activities will boost domestic demand and
raise national output closer to the productive
potential of the economy. Sustained consumer
confidence and the accommodative monetary
conditions will support consumption and
investment activity by households and
businesses. The Government has announced
plans for a gradual consolidation in its fiscal
position in 2010. Nevertheless, the overall fiscal
policy remains expansionary and will continue
to lend support to the recovery process. External
demand, particularly from regional economies,
will also sustain trade and economic activity.
Accordingly, the prevailing negative output gap
will narrow as domestic demand increases.
Inflation is expected to rise in line with the
recovery in economic activity. Nevertheless,
given that output is recovering from low levels,
the resultant pressure on inflation from the
narrowing output gap is expected to be limited.
Core inflation is likely to exhibit a modest upward
trend and is not expected to be a source for policy
concern. On the supply side, the Government
has announced its intention to undertake a
comprehensive review of the subsidy delivery
system. The restructuring of subsidies and the
reemergence of rising global energy and food
prices could generate some upward pressure on
domestic inflation. However, the assessment is
that the potential impact on consumer prices is
likely to be transitory and manageable.
With the threat of a fundamental recession
having now diminished, the Monetary Policy
Committee (MPC) raised the OPR by 25 basis
points in March 2010 towards normalising
monetary conditions. A very high degree of
monetary stimulus was considered no longer
warranted following the robust recovery and
improved economic outlook. The concern was
that maintaining interest rates at too low a
level over an extended period could encourage
excessive risk taking behaviour, and the
unhealthy build up of leverage. At the same
time, it could also result in disincentives to save,
and lead to disintermediation, causing savers to
move into risky investments. Such developments
can undermine the recovery process, while
reducing the longer term growth potential of the
economy. Thus, while monetary policy remains
accommodative and supportive of the economy,
the normalisation of interest rates is meant to
reflect the improving economic environment and
to prevent financial imbalances from developing
in the economy.
With price pressures expected to be modest
going forward, monetary policy in 2010 will
focus on promoting the sustainability of
economic recovery and ensuring that financing
continues to be available to the private sector at a
reasonable cost. Given the lingering uncertainties
surrounding the future growth path of the
global economy, an accommodative monetary
policy stance will be maintained to support and
strengthen private investment and consumption
demand and thus overall economic growth.
FISCAL POLICY IN 2010
Fiscal policy was significantly expansionary in
2009 to prevent the Malaysian economy from
sliding into a fundamental economic downturn
as the global financial and economic crisis drove
the global economy into a deep recession.
Along with accommodative monetary policy
and pro-active measures to support access to
financing by the private sector, these measures
were successful in mitigating the recessionary
impact of the crisis on the Malaysian economy.
As a result, the economic contraction begun
to stabilise as early as the second quarter of
2009. As the economy continues to recover in
2010, fiscal policy will remain geared towards
preparing the foundation for a stronger recovery
of private sector demand. Key to a sustained
economic recovery is a strong resumption of
private consumption and investment. Thus, fiscal
policy has accorded significant priority towards
enhancing the role of the private sector as the
driver of economic growth.
94
Annual Report 2009
Government efforts to strengthen private
investment and increase the participation of the
private sector in the economy were reflected
in the measures announced in the 2010
Budget. These include privatization initiatives,
and measures that provide a more conducive
business environment. Moreover, to encourage
private sector involvement in the economy,
the Government is also providing incentives to
several high growth sectors. Among the sectors
identified are tourism, information technology
and communication (ICT), finance and Islamic
banking, halal products and green technologies.
To further support growth of private consumption,
the Government has reduced the personal income
tax, and raised individual tax relief to increase the
disposable income of consumers.
In response to the contractionary influences on
the domestic economy as the global economy
slipped into a recession, the Government
implemented a sizeable fiscal stimulus in 2009,
resulting in a higher deficit of 7% of GDP (2008:
4.8% of GDP) and a higher Federal Government
debt of 53.7% of GDP (2008: 41.5% of GDP). For
2010, whilst remaining largely accommodative,
fiscal policy has taken into account the need to
ensure that it will not exert undue strain on the
Government’s finances. Specifically, the large
Government support introduced at the height
of the global economic crisis would be gradually
scaled back.
With a view towards a phased consolidation of the
fiscal position, the 2010 Budget placed emphasis on
measures to improve the effectiveness and efficiency
of the Government’s revenues and expenditures. To
enhance the efficiency of Government expenditures,
the measures that will be implemented and
prioritised include the restructuring of the fuel
subsidy system which accounts for a significant
portion of the Government’s annual outlays as
well as a review of the whole system of subsidies
and price controls. To maintain a sustainable fiscal
position without compromising the overall growth
and development objectives, the Government
will also intensify its public-private partnership
programme for several high impact projects. Some
of these projects include the high speed broadband,
regional development corridors and public
transportation infrastructure projects.
To strengthen its revenue streams, the
Government has undertaken a study on the
feasibility of implementing the goods and
services tax (GST). With the GST, the Government
revenue base will be broadened and thus better
insulated from the adverse cyclical swing in oil
prices. Currently, the revenue base is too narrow,
depending mainly on direct taxes and petroleum-
related revenues. In addition, it is significantly
exposed to the swings in the business cycle
that has a large impact on government finance.
The Government has also announced plans to
review the tax assessment system, especially for
petroleum related activities, which are currently
assessed with a lag of up to a year.
-8
-6
-4
-2
0
2
4
6
8
-80
-60
-40
-20
0
20
40
60
80
95 96 97 99 00 01 02 03 04 05 06 07 08 09p10B
Overall balance as
% of GDP
Debt as
% of GDP
p Preliminary
B Budget
Source: Ministry of Finance
External debt
Overall balance (RHS)
Domestic debt
98
53.7%
-5.6%
-7.0%
Chart 4.5
Federal Government Fiscal Balance and Debt
Table 4.5
Federal Government Finance
RM billion % change
2009p 2010B 2009p 2010B
Revenue 158.6 148.4 -0.7 -6.4
Total expenditure 206.6 189.5 5.2 -8.3
Operating expenditure 157.1 138.3 2.3 -12.0
Gross development
expenditure 49.5 51.2 15.6 3.4
Loan recoveries 0.5 0.6
Overall balance -47.4 -40.5
% of GDP -7.0 -5.6
Sources of financing:
Net domestic borrowing 56.9 -
Net external borrowing -6.3 -
Realisable assets
1
and
adjustments
-3.2 -
1
A positive (+) sign indicates a drawdown in the accumulated
realisable assets
p Preliminary
B Budget
Note: Numbers may not add up due to rounding
Source: Ministry of Finance
Outlook and Policy
95
With the implementation of these measures,
the Federal Government fiscal deficit is expected
to narrow to 5.6% of GDP in 2010. Operating
expenditure will be lower by 12% from RM157
billion in 2009 to RM138 billion. Meanwhile,
development expenditure will remain high
at RM51.2 billion. Most of the development
expenditure will be channeled towards the
economic services and education services sectors.
Given the ample liquidity in the domestic market,
the Government has financed its fiscal deficit
mainly from the domestic bond market. Apart from
raising funds through the issuance of government
securities, the Government will also issue an RM3
billion retail bond known as 1Malaysia Sukuk. The
issuance will also serve as an alternative investment
avenue for Malaysians to receive better returns in
an environment of low domestic interest rates.
96
Annual Report 2009
Transitioning into a High Income Economy: Policy Considerations
From Past to Present: Development of the Malaysian Economy
Malaysia has achieved significant economic progress since attaining Independence in 1957,
developing from a low income to an upper middle income economy over a half-century. Income
per capita has risen by approximately twenty fold in the last four decades, while the incidence
of poverty has been reduced by more than ten fold. Major structural changes have also occurred
in the economy. The predominantly primary commodity-based economy with a heavy reliance
on rubber and tin in the 1960s was transformed by the rise of the manufacturing sector as the
main contributor to growth in the late 1980s, and subsequently, by the services sector becoming
the main driver of growth since 2000. Throughout this development process, Malaysia has
strengthened and deepened its integration with the global economy.
Malaysia is currently confronted with a global economic environment that is changing significantly.
While the global landscape has been gradually shifting in this recent decade, the current global
financial and economic crisis has accelerated this shift. Of significance, two distinct developments
stand out. First, the global economic landscape is increasingly multi-polar with the rising economic
importance of the emerging market economies, especially the economies of Brazil, Russia, India
and PR China (BRIC). Importantly, the significant rise of PR China has changed the dynamics of
growth in Asia. Favourable structural factors in the emerging market economies, including a
large and growing middle class, will support domestic demand and thus the continued growth
of these economies post-crisis. The crisis has, however, revealed several structural weaknesses in
the advanced economies, all of which will limit the growth potential of these economies in the
medium term. Second, the rise of the relatively large emerging market economies, such as the
BRICs, Vietnam and Indonesia, will also intensify competition in the global economy, not only
among businesses, but also among countries in attracting investment and human capital.
In this more challenging environment, strategic initiatives are being taken to strengthen the
flexibility of the Malaysian economy in adapting to the changing circumstances, so as to effectively
benefit from new opportunities while addressing potential challenges. The existing economic
model is being reviewed and policies that support greater competitiveness, a faster pace of
innovation and the elevation to more knowledge-intensive industries are the strategies to transition
Malaysia to a high income economy.
The Future: Characteristics of the High Income Malaysian Economy
A high income country is defined by the World Bank as a country with an income per capita
of more than US$11,905. Therefore, from its current level of US$6,634, Malaysia needs to
approximately double its income per capita to become a high income country. Beyond the level
of income, an assessment of the existing high income countries highlights five key economic
characteristics, namely:
1. Knowledge and innovation-intensive economic activity
A high income economy is knowledge and innovation-driven as opposed to investment-driven.
All sectors of the economy are involved in high value economic activity, where knowledge,
innovation and productivity are central to value creation.
For Malaysia, given the existing strong manufacturing base, movement towards higher value
activity will be driven by the existing industries moving up the value chain. Firms in these
industries will increasingly rely on niche strategies as well as continuous improvements,
higher sophistication and greater specialisation. Some of the potential areas include advanced
electronics, solar panel manufacturing, medical equipment and downstream palm oil. This
movement towards higher value activity will be complemented by the development of
Outlook and Policy
97
the knowledge-intensive services sub-sectors. These modern services include computing,
information and communication technology (ICT), research and development (R&D), health
and education, and entertainment. Alongside these knowledge-intensive services, established
manufacturing-related services, such as logistics, marketing and branding, will also provide
strong support to industrial growth.
In addition, while multinational and large domestic corporations remain important, small and
medium enterprises (SMEs) will form the backbone of the economy. Of significance, a strong
base of highly dynamic, innovative and competitive SMEs will be a critical feature of a high
income Malaysian economy.
2. Competition-driven private sector-led economy
Economic activity in a high income economy is led by the private sector in a competitive
environment. Competition will contribute to the efficient allocation of resources and the
creation of vibrancy and dynamism in economic activity. For markets to function effectively
and efficiently, the absence of market distortions, particularly those that result in inappropriate
price signals, is a necessary precondition. Nevertheless, a strong institutional framework needs
to be in place to address the potential for market failure and to ensure a competitive and fair
business environment.
3. Government as a facilitator of economic growth
As the economy will be private sector-led, the role of the Government has to shift to become
a key facilitator of growth. In this role, the focus of the Government is on providing a
competitive enabling environment for the efficient functioning of the private sector. This will
primarily involve the provision of enabling infrastructures, including public transportation and
modern internet-related infrastructure, as well as the provision of security and basic social
services, such as health and education. In addition, a comprehensive technology and innovation
policy would encourage high value activity and knowledge creation. Close collaboration
between the public and private sectors is necessary to effectively achieve
these objectives.
4. Greater balance between domestic and external demand
Consistent with the ongoing trend, a high income economy needs to have a more balanced
model of development. Whilst competitive advantage in the external sector can remain key,
the domestic sector needs to have a greater role in contributing to growth. First, a higher
and larger middle income group will support even higher and more sophisticated private
consumption. Second, an increase in the quality of private investment will contribute to a more
sustainable growth of high income and high value-added employment. Private investment
will need to increasingly shift away from being predominantly in construction and low value
machinery towards advanced automation and R&D to facilitate movement up the value chain
as well as to support innovation. High productivity, meanwhile, will complement this rise in
capital sophistication to deliver high value products and services.
5. Deeper global and regional integration
Given that the domestic market in Malaysia is small, firms will, as they grow in size and
strength, increasingly integrate with the region and the rest of the world for greater access to
larger markets. Deeper integration with the international markets will encompass both final
demand and the supply of factor inputs. For Malaysia, further integration with the regional
economies and other emerging economies will be a key characteristic of the transition to
becoming a high value-added economy. In particular, the recent rising trend of investment
abroad by Malaysian companies can be expected to continue and over the medium term will
bring increased benefits to Malaysia as new opportunities and markets are gained.
98
Annual Report 2009
Strategies for a Sustainable and Dynamic Malaysian Economy
Despite relatively distinct views as to the characteristics of a high income economy, there is no
consensus on the requirements to successfully become a high income economy. The experiences
of the high income countries do, however, offer some indication that five factors are particularly
important (Figure 1). First is macroeconomic stability, which provides an environment conducive for
high savings and business investment in an environment of reduced uncertainty. Second, market-
driven resource mobility across all markets is essential for the efficient allocation of resources in
the economy. Third, there must exist a strong institutional regime with adequate enforcement,
encompassing, amongst others, an effective regulation of competition, the prevention of market
failures and an effective protection of property rights. Fourth, a culture of innovation needs to
Figure 1
Five Pillars for Sustained Economic Progress
Key Prerequisites
for High, Sustained
Growth
Macroeconomic Stability
Market-Driven Resource Mobility Leadership and Governance
Strong and Effective
Institutional Regime
Culture of Innovation
across Society
be instilled nationwide, with collaborative efforts within and between the private and public
sectors as well as academia. Fifth is that strong leadership and governance must continue to have
an important role, particularly in ensuring stability, developing a competitive environment and
providing the enabling infrastructure.
Although the broad development literature does not provide a single clear recipe for economic
development, experiences do, however, give examples of factors that should be resisted
(Figure 2). Of significance are market distortions that are put in place to artificially sustain cost
competitiveness. Across many developing economies, market distortions have ranged from price
controls and energy subsidies, to the open-ended protection of specific sectors and industries.
While there may be circumstances to justify the temporary adoption of some of these measures,
such policies over a prolonged period of time usually involve high costs.
For Malaysia going forward, established strengths and foundations will provide the support for
continued economic development. To successfully transition into a high value-added economy,
Malaysia has the potential to capitalise on existing comparative advantages and develop deeper
capabilities and expertise. It has been recognised that fundamental reforms will be required in
several areas of the economy. In this regard, three key strategic priorities have been identified,
namely to nurture a quality workforce, foster a competitive environment and develop an efficient
enabling infrastructure.
Outlook and Policy
99
1. Quality workforce with an instilled culture of innovation
A knowledgeable, innovative and entrepreneurial workforce is essential to drive the value
creation necessary in a high income economy. Therefore, world-class education and training are
critical for developing skills and creative talent.
Malaysia is, therefore, embarking on the reform of its education system into one that is capable
of developing human talent equipped with the relevant skills and competencies required to
enhance productivity and economic development. In this regard, strong emphasis is being placed
on strengthening the learning institutions in order to ensure top-quality teaching. Relating to this,
the salary and reward schemes for university lecturers and teachers are currently being improved
to better attract and retain quality educators. In addition, a technical education system is being
enhanced to successfully provide the skilled talents required for the advanced manufacturing
and services sectors. To ensure that quality is continuously upheld, performance of the premiere
polytechnics will be benchmarked against renowned technical institutions, including those in
Germany, Austria and Sweden. There have also been ongoing efforts to engage with the private
sector in ensuring the relevance and effectiveness of the education system in meeting the needs of
the industry.
While reform of the education system is a critical priority, flexibility is being given to draw on the
global flow of talent. In this regard, a series of measures has been undertaken to increase the
flexibility to employ expatriates, while initiatives are being put in place to reduce brain drain.
2. Competition-driven and efficient markets
Sophisticated high value economic activity requires well-functioning market mechanisms, guided
by undistorted price signals, to efficiently allocate the scarce resources. Market distortions would
potentially lead to considerable inefficiencies and wastage, while protectionist policies undermine
the fundamental incentive structure needed for a thriving entrepreneurial society.
Figure 2
Global Experience in Common Constraints to Growth
º Poor compelilion policy and weak regulalion
lo address markel lailures
º Misdirecled spending
º Unsuslainable liscal delicil
º Monelary and linancial inslabilily
º Progress in educalion in lerms ol qualily, exlenl
ol learning and innovalive lhingking
º Price dislorlions.
- Lnergy subsidies
- Arlilicial wage levels
- Lxcessive price conlrols
º Markel dislorlions.
- Open-ended proleclion ol specilic seclors
and induslries
º Neglecl ol environmenlal issues
º Oversized public seclor
º Corruplion
Pillar 1 : Macroeconomic Stability
Pillar 2 : Market-Driven Resource Mobility
Pillar 3: Effective Institutional Regime
Pillar 4: Innovation Discipline across Society
Pillar 5: Leadership & Governance
100
Annual Report 2009
At present, a number of market distortions exist in several areas of the Malaysian economy. These
market distortions are highly intertwined in nature, with the measures in place impacting various
industries and sectors in the economy. Such subsidies heavily burden the Government and divert
resources away from other investment activities. The removal of such distortions should, however,
be gradual and sequenced to avoid disruptions to the economy. Equally important is for the
savings from the removal of the existing broad-based distortions to be reallocated as more targeted
subsidies and direct income transfers to support the low and middle income groups.

3. Extensive and efficient enabling infrastructure
Both traditional and modern infrastructures have a key role in enabling the transition towards a
high value-added economy. As Malaysia already has in place high quality physical infrastructure
including roads, ports and utilities, the focus is now on the development of an efficient public
transportation system, modern internet-related infrastructure and energy efficiency-related
infrastructure, which are important in enabling high value activity and improving overall economic
productivity. In an effort to expand broadband services nationwide, the Government, in partnership
with Telekom Malaysia, has embarked on a RM11.3 billion High Speed Broadband initiative.
As Malaysia adopts these changes, policy implementation needs to take into account three
important considerations. First, policies should be gradual and sequenced in order to allow
businesses and households to adjust to the new environment. Second is the importance of
transparency to allow for public awareness on the new opportunities and constraints. Third,
support needs to be provided to the low income group to minimise the negative impact during the
transition, as well as to enhance the necessary skills and capabilities required to take advantage of
the new opportunities.
Conclusion
The Malaysian economy is currently positioned at a critical juncture of its development and future
progress will be confronted with many challenges. Throughout Malaysia’s development process of
more than 50 years, the economy has exhibited the ability and flexibility to move to new areas of
comparative advantage and to new areas of growth. Similarly, in this current process of transitioning
into a high value-added economy, Malaysia needs to develop new growth areas and adopt a new
economic model for development. With the development of an enabling and competitive economic
environment comprising of a quality workforce and an efficient infrastructure, Malaysia will be ready
with the necessary foundations to take advantage of the emerging and rapidly changing regional and
global trends in order to transition into a high value-added economy.
Governance, Communications and Organisational Development
101
Governance, Communications and
Organisatonal Development
Overview
Governance
White Box: The Central Bank of Malaysia Act 2009
Communications
Organisational Development
Organisation Structure







103
104
105
111
113
119
102
Annual Report 2009
103
Governance, Communications and
Organisational Development
OVERVIEW
Emphasis on governance, communications
and organisational development initiatives in
2009 aimed at strengthening the performance
and effectiveness of the Bank in delivering its
mandate. During the year, focus continued to
be on strengthening organisational capacity and
capability through the further enhancement in
the areas of strategic management, governance,
risk management, communications and talent
management. This is to ensure the Bank remains
effective in discharging its mandate and well
positioned to meet the challenges posed by the
rapidly changing environment.
The communications function of the Bank
continued to have a crucial role in sustaining
stakeholders’ confidence amidst the volatile
environment. Greater strategic engagement with
a wide range of stakeholders has heightened
understanding and awareness of the Bank’s policy
actions and measures. The timely dissemination
of economic and financial information has also
facilitated the public and businesses in making
more informed decisions.
As a strategy-focused organisation, high-level
attention and interventions are continuously
made to enhance the strategic orientation of the
Bank. Of importance in 2009 was the successful
commencement of the Bank’s 3-year Business
Plan. The Plan provides clarity to the organisational
goals and the alignment of the resources of the
Bank towards achieving these objectives. The
implementation of the Plan also facilitated the
evaluation and review of the Bank’s strategies
and performance to ensure the organisation
is outcome-based and continues to achieve its
desired strategic results.
A significant development during the year was the
enactment of the new Central Bank of Malaysia
Act 2009 (CBA) on 25 November 2009. A key
aspect of the CBA is aimed at providing greater
clarity on the Bank’s mandates and to equip the
Bank with enhanced capacity to undertake its
mandate. It also institutionalises a more robust
governance framework that ensures a high level
of accountability and transparency. In line with
this, the Board’s oversight function was further
strengthened through the establishment of two
additional Board committees with specialised
roles and functions to reinforce the checks and
balances, and to contribute towards better
decision-making in the Bank.
Risk management capabilities were also reinforced
further through the enhanced Enterprise Risk
Management (ERM) framework. The framework
embeds risk management considerations in all
areas of strategic importance such as policy
making and key operations of the Bank and allows
a more robust oversight of the organisation’s risks
and controls. This enables solid and informed
decision-making by Management, particularly in
light of the complex and challenging environment
facing central banks today. In addition, efforts
were also undertaken to review both the existing
framework for Financial and Operational Risk
Management, with the view of inculcating a
strong risk management culture by increasingly
empowering the business units to identify and
manage risks within their functional areas.
The focus on talent management is aimed at
ensuring a solid talent pipeline. Ensuring proper
job fit reflects the Bank’s continued commitment
towards building a high performance workforce
that will support the ability of the Bank to
deliver the strategic outcomes. Towards this
end, continued investments were made in the
profiling and development of the talent pool,
while the career growth policies and framework
were reviewed to ensure the Bank’s talent
management strategies remain relevant. This was
complemented by the learning and knowledge
management initiatives to provide continuous
support for talent development. Efforts were
undertaken to ensure better alignment of learning
solutions to the requirements of the Bank through
increased customisation of learning arrangements,
improved flagship programmes and e-learning.
During the year, ICT management remained
focused on the use of technology solutions and
leading-edge infrastructure to enable efficient
operations in a number of business functions.
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Annual Report 2009
As part of the continuous effort to enhance
regional and international cooperation, the
Bank in collaboration with external agencies,
expanded its technical assistance in the areas of
institutional capacity building, financial inclusion
and Islamic Finance.
GOVERNANCE
An essential component of a performance-based
organisation is sound governance. Several key
initiatives were undertaken in 2009 to further
strengthen the Bank’s governance to ensure that
it remains effective and efficient in carrying out
its functions.
Consolidating and enhancing the Bank’s
governance framework
The enactment of the new CBA on 25 November
2009 represented an important part of enhancing
the governance framework of the Bank. It also
strengthened the capacity of the Bank to enhance
financial sector resilience especially in light of
the increasingly challenging business landscape.
Firmly embedded in this new and forward-looking
legislation are the revised corporate governance
framework and processes that have been further
streamlined and strengthened while maintaining
the governance principles of independence,
accountability and transparency.
The CBA takes into consideration the changed
environment within which the Bank is operating,
and provides the enabling legal framework to
address new and emerging risks and challenges.
It enables the Bank to be in a greater state of
readiness to function more effectively. A key
aspect of the CBA is the adoption of a more
holistic approach that provides greater clarity to
the Bank’s mandates and enhances the Bank’s
capacity in performing its functions. It also
reinforces the existing governance practices and
provides the necessary checks and balances to
ensure accountability and sound decision-making.
To ensure the sustained effectiveness of the
Bank in performing its primary functions, the
CBA institutionalises the autonomy of the Bank
in the formulation of monetary policy and
provides greater flexibility in monetary policy
implementation. At the same time, the legislation
of the Monetary Policy Committee (MPC) also
provides the necessary safeguards through the
strengthened governance and accountability
framework, which are important in further
enhancing the quality of decision-making in the
Bank. The operationalisation of the new MPC in
January 2010 comprising committee members
with the required skills profile and competency
mix is aimed at further enhancing the Bank’s
effectiveness in achieving the objective of
monetary stability.
The mandate of promoting financial stability
is also made explicit in the CBA. Oversight of
the Bank’s mandate for financial stability is
provided through the Financial Stability Policy
Committee. The Committee is responsible for
reviewing developments affecting risks to financial
stability and deciding on actions, including
macroprudential policy responses, to address
systemic risks. Deliberations on micro-prudential
measures to emerging risks within individual
financial institutions with broader implications
for financial stability are also consolidated under
the Committee. This allows for more integrated
assessments of appropriate responses to identified
risks, particularly where the actions with respect
to individual institutions will invoke exigent
powers accorded to the Bank under the CBA.
Recommendations by the Bank on actions that
affect institutions that are not regulated by the
Bank, or resolution actions involving financial
institutions that are no longer viable, must be
further approved by an independently constituted
Financial Stability Executive Committee established
under the CBA. The Bank’s public accountability
for financial stability is additionally supported by
the publication of an annual financial stability
report which provides an assessment of risks to
financial stability, actions taken by the Bank to
avert such risks as well as ongoing initiatives to
strengthen the foundations for financial stability.
In strengthening the Board’s oversight on the
management and performance of the Bank,
the new legislation has institutionalised the
establishment of two additional Board committees
and an existing Board committee whose members
comprise non-executive directors of the Bank so as
to ensure independent oversight over the Bank’s
operations. These are the Board Governance
Committee, the Board Risk Committee and the
existing Board Audit Committee. The Board
Governance Committee was established to
review the effectiveness and to recommend the
principles and practices of governance in the Bank,
to nominate members of the MPC and other
Governance, Communications and Organisational Development
105
The Central Bank of Malaysia Act 2009
Introduction
The Central Bank of Malaysia Act 2009 (“the Act”) which came into force on 25 November 2009
heralds a new era for central banking in Malaysia. The Act is a completely new piece of legislation
which replaces the Central Bank of Malaysia Act 1958. The Act modernises the central banking law
of the country and brings greater clarity and focus to the mandates of the Bank and provides the
Bank with the necessary powers and autonomy to continue to undertake its mandates effectively.
Commensurate with these powers and autonomy of the Bank, the governance framework has been
strengthened with the accountability and transparency of the Bank significantly enhanced. Bank
Negara Malaysia, the body corporate which was established under the Central Bank of Malaysia Act
1958, continues as the central bank for Malaysia under the new Act notwithstanding the repeal of the
1958 Act.
Mandates
The Act states the principal objects of the Bank are to promote monetary stability and financial
stability conducive to the sustainable growth of the Malaysian economy. The Act also provides that the
primary functions of the Bank are to:
(a) formulate and conduct monetary policy in Malaysia;
(b) issue currency in Malaysia;
(c) regulate and supervise financial institutions which are subject to the laws enforced by the Bank;
(d) provide oversight over the money and foreign exchange markets;
(e) exercise oversight over payments systems;
(f) promote a sound, progressive and inclusive financial system;
(g) hold and manage the foreign reserves of Malaysia;
(h) promote an exchange rate regime consistent with the fundamentals of the economy; and
(i) act as financial adviser, banker and financial agent of the Government.
In giving effect to the above objects and functions, the Bank is required to have regard to the
national interest.
Monetary stability
The Act institutionalises the existing practices of the Bank for the formulation and implementation
of monetary policy with the establishment of the Monetary Policy Committee (“MPC”). Monetary
independence, which has been enjoyed by the Bank in the 50 years of its existence and which is key
to the effective formulation and implementation of monetary policy, has now been legislated for
in the Act. In promoting monetary stability, the Act requires the Bank to pursue a monetary policy
which serves the interests of the country with the primary objective of maintaining price stability
while giving due regard to the developments in the economy. To ensure the soundness of monetary
policy decisions, the Act incorporates extensive safeguards that include setting the criteria for the
appointment of MPC members, the requirement for the publication of a monetary policy statement
following every MPC meeting and the processes for the decision-making by the MPC. To implement
the decisions of the MPC, the Bank is accorded flexibility to conduct monetary operations through
a broad range of instruments (see box article “Monetary Policy Process under the Central Bank of
Malaysia Act 2009”).
The exchange rate regime will continue to be determined by the Minister of Finance on the
recommendation of the Bank. The Bank will autonomously conduct the foreign exchange operations
to promote the efficient and effective functioning of the exchange rate regime and the foreign
exchange market.
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Annual Report 2009
Financial stability
The duties and powers vested with the Bank under the Act establish the Bank as the financial stability
authority for Malaysia. The Act gives the Bank the necessary powers to minimise the likelihood
and impact of adverse developments that may affect financial stability including the financial
intermediation process, the orderly functioning of the foreign exchange and money markets or public
confidence in the financial system. The Bank continues to act as lender of last resort and may now
additionally extend liquidity assistance to entities not regulated by the Bank but that are regarded as
systemically important.
Expanded powers have been given to the Bank to promote financial stability including the power
to obtain information for the purpose of identifying and monitoring risks to financial stability and
undertake pre-emptive actions. The Act also empowers the Bank to facilitate the resolution of financial
institutions which are in financial stress to ensure swift and orderly resolution, thereby minimising
the impact and costs of the failure of a financial institution to the domestic economy and to preserve
public confidence. Actions that may be taken by the Bank include purchasing capital instruments,
financing the purchase of the business or capital instruments of such institutions, and transferring
to and vesting the business or capital instruments of these institutions in the Bank, another financial
institution or person. The Act further sets out a clear accountability framework for such actions and
where such actions involve the transfer of business or capital instruments, the Act has put in place an
independent valuation process.
Given the increased interconnectedness between the domestic financial system and the global financial
system, the Bank has also been empowered to coordinate with other financial regulatory authorities
on joint efforts in crisis prevention, management and resolution (see box article in Financial Stability
and Payment Systems Report 2009 “Safeguarding Financial Stability under the Central Bank of
Malaysia Act 2009”).
Money and foreign exchange markets
The Act empowers the Bank to have oversight of the money and foreign exchange markets and the
market for derivatives related to currency, securities and other financial instruments that are traded
in these markets, to develop and maintain the orderly conditions and the integrity of these markets.
These markets are core components of the financial system and have significant implications for the
resilience of the financial system. The Bank is empowered to issue rules, codes, standards, principles or
guidelines for these markets. The Bank may also appoint a self-regulatory organisation for the foreign
exchange market and the market for derivatives related to currency, securities and other financial
instruments that are traded in this market.
Financial inclusion
The Act makes an explicit provision for financial inclusion to be incorporated as one of the primary
functions of the Bank. Financial inclusion is vital for creating balanced sustainable economic growth
and provides the opportunity for all segments of the economy to benefit from economic progress.
For this purpose, the Act empowers the Bank to establish funds to provide financing in exigent
circumstances or to any segment of the economy to promote financial inclusion.
Islamic finance
Building on the existing legislative infrastructure for Islamic finance including the Islamic Banking
Act 1983, the Takaful Act 1984 and the Government Funding Act 1983, the Act sets out a legal
framework for the further development of the Islamic financial system in Malaysia. The Act gives due
recognition to the Islamic financial system which operates in parallel with the conventional financial
system and also mandates the Bank together with other agencies in Government to promote Malaysia
as an international Islamic financial centre.
Governance, Communications and Organisational Development
107
Under the Act, the Shariah Advisory Council which was established under the Central Bank of Malaysia
Act 1958 continues to exist with its current members appointed by the Minister of Finance. The Act
provides that new members to the Shariah Advisory Council will henceforth be appointed by the Yang
di-Pertuan Agong in view of the enhanced role of the Shariah Advisory Council. Where a question
concerning a Shariah matter arises in any court proceedings or arbitration relating to Islamic financial
business, the court or arbitrator is required to refer such question to the Shariah Advisory Council for a
ruling. The ruling made by the Shariah Advisory Council is binding.
Management of foreign reserves
The Bank will continue to manage the foreign reserves of Malaysia. The range of assets which the Bank
can hold has been enlarged to include securities and financial instruments including derivatives that are
approved by the Board of Directors. The Bank is required to manage the foreign reserves in accordance
with the policies and guidelines issued by the Board of Directors.
Financial adviser, banker and financial agent to the Government
As in the Central Bank of Malaysia Act 1958, the Bank will continue to act as the financial adviser,
banker and financial agent to the Government. In addition, the Act also provides for the Bank to
advise the Government generally on economic matters that are within the competence and expertise
of the Bank.
International co-operation
The Act empowers the Bank to engage in international co-operation by participating or providing
financial resources in any arrangement or initiative with other central banks, monetary authorities or
international financial institutions to promote monetary, financial or economic co-operation at the
bilateral, regional or international level. The Bank shall also continue under the Act to exercise the rights
and perform the obligations arising from Malaysia’s or the Bank’s membership, as the case may be, in
the International Monetary Fund, Islamic Financial Services Board, Bank for International Settlements
and any other international organisation as provided under federal law.
The Bank, with the approval of the Minister of Finance, is also empowered to issue regulations or
directions to financial institutions to discharge the Government’s international obligations under the
resolutions passed by the United Nations Security Council.
Governance
The Act strengthens the general governance framework of the Bank, in particular, the oversight powers
of the Board of Directors. The Board of Directors is responsible for the general administration of the
affairs and business of the Bank and the approval of the budget and operating plan of the Bank. For the
purposes of carrying out its oversight function under the Act, the Board is empowered to issue by-laws.
The Board in its oversight role is assisted by the Board Governance Committee, Board Audit Committee
and the Board Risk Committee, whose members are non-executive directors.
The Board Governance Committee is responsible for examining and recommending the budget and
operating plan of the Bank to the Board for approval. The Committee will also recommend the persons
to be appointed to the MPC and other Committees of the Bank.
The Board Audit Committee is responsible for assisting the Board in its oversight of the integrity of the
accounts and financial statements of the Bank, the effectiveness of the internal control system, the
performance of the internal audit function and compliance with legal and regulatory requirements.
The Board Risk Committee is responsible for assisting the Board in the oversight on the management of
the enterprise risks of the Bank.
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Annual Report 2009
Under the Act, the Governor and Deputy Governors are answerable to the Board for their actions and
decisions. This is consistent with the Board’s duty to keep under constant review the performance
of the Bank in giving effect to its objects and functions and the use of the resources of the Bank
(for a more detailed discussion of the governance aspect of monetary stability and financial stability
functions of the Bank, see box article “Monetary Policy Process under the Central Bank of Malaysia Act
2009” and box article in Financial Stability and Payment Systems Report 2009 “Safeguarding Financial
Stability under the Central Bank of Malaysia Act 2009”).
Accountability
The Act provides for the accountability of the Bank to the Parliament, the Minister of Finance and the
public in general.
The Bank continues to be accountable to the Parliament and the Public Accounts Committee under
the Houses of Parliament (Privileges and Powers) Act 1952 and the respective Standing Orders of the
Houses of Parliament. The Act also requires for the annual financial statements and report of the Bank
to be laid in the Houses of Parliament within three months from the close of the financial year of the
Bank. If the Houses of Parliament are not in session at that time, the annual financial statements and
report of the Bank have to be laid at the next session of the Houses of Parliament.
The Bank is required to submit to the Minister, the Bank’s statement of assets and liabilities on a
fortnightly basis and its annual financial statements and report within three months from the close of
the financial year.
The Bank is also required to keep the Minister informed of the policies relating to the principal
objects of the Bank. In this respect, a mechanism has been put in place in the Act to resolve
differences between the Minister and the Bank on such policies. In the event the differences are not
resolved, the mechanism provides for the matter to be tabled to the Cabinet for a determination of
the policy to be adopted by the Bank. In the event the differences remain, the matter is to be laid
before the House of Representatives.
The Bank is required to keep the public informed of the monetary policy decisions of the Bank after
every meeting of the MPC by publishing a monetary policy statement which shall include the rationale
for the decision. Additionally, while the Bank is required to publish the statement of assets and
liabilities of the Bank on a fortnightly basis, the annual financial statements and report have to be
published within three months from the close of the financial year.
Conclusion
The Act provides a comprehensive legal foundation for the Bank to ensure monetary stability and
financial stability and to foster a progressive, resilient and inclusive financial system to meet the
challenges of the rapidly changing financial and economic landscape of the 21
st
century.
Governance, Communications and Organisational Development
109
committees and to evaluate the roles of the Board
and Board committees. Another key function of
the Committee is to examine and recommend to
the Board the budget and operating plan of the
Bank for approval. Meanwhile, the Board Risk
Committee assists the Board in the oversight over
the Bank’s management of enterprise risk through
identification, assessment and management of
risks that could affect the performance of the
Bank. The function of the Board Audit Committee
remains to assist the Board in its oversight of the
integrity of the accounts and financial statements
of the Bank, the effectiveness of the Bank’s
internal control system, performance of the
internal audit function, and the Bank’s compliance
with legal and regulatory requirements.
Enhanced internal controls and risk
management
In March 2009, the Board Audit Committee
approved the Bank’s revised Internal Audit
Charter, which defines the purpose, authority and
responsibilities of the Internal Audit Department
(IAD). The charter was revised to better align the
audit activities to support the functions of the
Board Audit Committee and to support IAD’s
adoption of a risk-based auditing framework.
To balance the effectiveness and efficiency of
operations with good risk management practices,
the rationalisation of the management structure
and the strengthening of the coordination
between the risk management and internal audit
functions were also carried out. Amongst the
key initiatives was the transformation of the Risk
Management Department, the conceptualisation
of enterprise risk management approach and the
adoption of a risk-based auditing methodology.
Within the area of procurement management,
efforts were also expended in the review and
rationalisation of the application of risk mitigating
instruments by the Bank. While the objective of
the exercise was aimed at managing the risks
associated with procurement activities in the Bank,
other key considerations included timely delivery
of products and services by vendors and suppliers
as well as ensuring fair business practices.
Governance in external engagements
As financial systems and economies become
increasingly connected, activities that promote the
Bank’s engagements with external organisations
have also been important in achieving the
objectives of the Bank and its key stakeholders.
With the activities being centrally coordinated by
the International, Central Banking Services and
Corporate Services Departments, the collaborative
approaches adopted by the Bank include the
conduct of bilateral meetings, entering into
Memoranda of Understanding (MOU), particularly
in the areas of trade and investments, financial
surveillance and regulations, and the exchange of
information to combat activities relating to money
laundering and terrorism financing.
To further strengthen the governance in
external engagements, the Bank centralised
the management of its involvement in external
committees and organisations. At the same
time, the flow of information from the Bank’s
external engagements to the organisation was
also enhanced through the development of the
Management Insights, a centralised electronic
repository to capture the relevant events and issues
to the Management, with the view of enabling
more robust and informed decision-making.
Risk Management Approach
Risk Management is an integral part in the Bank’s
governance framework to safeguard its reputation
and to ensure the safety and soundness of the
Bank’s assets and operations. Since 2007, the
Bank has adopted an Enterprise Risk Management
(ERM) approach to better manage risks in a multi-
dimensional manner in the achievement of the
key objectives across areas outlined in the Business
Plan and in the strategic initiatives, policy making
and operations of the Bank. The implementation
of ERM contributed significantly to the more
robust oversight, controls and discipline that
drive continuous improvement in the Bank’s risk
management capabilities.
Enhanced risk management governance
structure
Best practices in risk management dictate the need
for constant improvement in the governance and
risk culture at all levels of the organisation. The
Bank undertook periodic review and monitoring
to ensure risks are identified and adequate
controls are in place to mitigate these risks. In
2009, two significant changes took place in the
risk management of the Bank; the establishment
of the Board Risk Committee, and the approval
of the enhanced Financial and Operational Risk
Management frameworks by the Risk Management
Committee (RMC).
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Annual Report 2009
The primary objective of the Board Risk
Committee is to provide oversight on the
management of risks faced by the Bank that
could lead to financial losses, disruptions to
operations, failure to attain objectives or damage
to the Bank’s reputation. The Committee
also oversees the Management’s activities in
identifying, mitigating and managing credit,
market, liquidity, operational, reputation
and other risks while ensuring appropriate
risk management processes are in place and
functioning well.
The risk management function of the Bank is
primarily driven by the RMC, which is chaired
by the Governor. The RMC continues to be the
main forum for focused and regular deliberation
of organisational risks and also ensures effective
risk management within the Bank. Significant risk
issues are raised by two sub-committees under
RMC i.e., Financial Risk Management Committee
(FRMC) and Operational Risk Management
Committee (ORMC). The two sub-committees,
each headed by a designated Deputy Governor,
provide important platforms to assist the RMC in
making informed decisions on both financial and
operational risks.
The Risk Management Department (RMD) is
responsible for developing and maintaining
the risk management framework of the Bank.
This includes the development of policies,
processes, tools and methodologies, as well as
the operationalisation of the Enterprise, Financial
and Operational Risk Management frameworks
and ensuring all elements within the frameworks
are functioning as intended. In addition, RMD
also collaborates with all operating units in
identifying, assessing, measuring and monitoring
their risk exposures. It also gives an independent
assessment of the significant risks from an
enterprise-wide perspective and provides an
evaluation on whether these risks are being
sufficiently managed.
In 2009, the financial risk and operational risk
frameworks were reviewed and enhanced further
to strengthen the existing governance structure
within the Bank. The initiatives are intended
to build a strong risk management culture in
the Bank by empowering line departments to
manage risks within their own functions. To
facilitate this, the Bank adopted a ‘three lines
of defence’ mechanism. The line departments
are the first line of defence in managing the risks
and are responsible for identifying, mitigating and
managing risks within their area of operations.
These units are to ensure that their day-to-day
activities are carried out within the established
risk policies, procedures and limits, and risk issues
are given due consideration. The second line
of defence resides within the risk management
function. This function assumes both the
monitoring and advisory role, actively challenges
assessments by the first line of defence, engages
with risk owners/takers and looks at risk oversight
across all risk types. The third line of defence
resides within the Audit function. This function
provides corporate assurance and verification of
the efficacy in the implementation and overall
validation of the Risk Management Framework.
Managing the Bank’s financial risk
Financial Risk in the Bank is defined as ‘the
risks associated with the Bank’s management
of its financial assets and liabilities, including
the financial sustainability of the current
and future operations which include credit,
market and liquidity risks’. The FRMC focuses
on monitoring, reporting and assessing the
sustainability of financial resources to support the
Bank’s operations, the management of financial
exposures and commitments to external parties. It
also provides an oversight function on key financial
risk management processes. All financial risk
exposures were consolidated and analysed in their
totality in terms of their impact on the balance
sheet and the need for provisioning, if necessary.
In addition, the Bank’s three year projections on
major expenditure items were stress-tested based
on various scenarios and further analysed and
deliberated at the FRMC. Inputs for the stress-test
model include the macroeconomic outlook and
statistical assumptions to anticipate any significant
variations in future expenditure.
Independent treasury risk management
The Treasury Risk Management section (TRMS) of
the Investment Operations and Financial Market
Department is responsible for managing the
risks in international reserves in the key areas of
market, credit and operational risk. These risks are
monitored and managed to be within established
policies and guidelines as approved by the Board of
Directors. TRMS is independent of the investment
activities and provides the necessary checks and
balances through its direct reporting to a dedicated
Deputy Governor.
Governance, Communications and Organisational Development
111
Amidst the highly volatile and uncertain global
financial markets in 2009, the overall credit
exposure of international reserves remained low as
the Bank’s investments were focused on high grade
assets. Investment transactions were conducted
mainly with strong international financial
institutions. For the Bank’s investment portfolio, a
review of the risk-return profile on the approved
asset classes was also conducted in view of the
significant changes in volatility and liquidity for
some of the instruments. This was undertaken to
ensure that the portfolio risk exposure of reserves
remain within the risk tolerance of the Bank.
With the new CBA coming into effect, the
investment guidelines for reserves management
have also been revised to further strengthen
the governance process and enhance its clarity
covering all related reserves management
activities. At the same time, a new performance
attribution model was also implemented to allow
more comprehensive and detailed risk-adjusted
return analysis.
Moving forward, the Bank will continue to
strengthen its risk management framework. Both
the market and credit risk policies will be enhanced
with granular analysis of risk factor and emerging
trends. Further focus will also be placed on the
governance framework to ensure continued
effectiveness of the risk management process and
the independent reporting line of the risk unit
within the TRMS.
Managing the Bank’s operational risk
Operational risk in the Bank is defined as ‘the
risk resulting from inadequate or failed systems,
processes, people and external events leading to
financial losses, reputational damage or inability to
achieve business objectives’. In ensuring operational
risks are well managed and amalgamated in the
day-to-day operations, heads of departments
continue to have direct responsibility in ensuring
that risk management practices are integral in the
daily operations and that all risks are sufficiently
addressed. Key measures at an organisational
level to address operational risks include effective
budgetary controls, a sound procurement
framework and a robust internal audit function that
has a crucial role in monitoring operational risks.
In 2009, ORMC deliberated on significant risk issues
affecting controls, efficiency and effectiveness
of the main levers of the Bank’s operations with
specific focus on people risks and technology risks.
Analysis and discussion on people risks covered a
wide range of issues including on competencies
and skills, manpower, adherence to the code of
conduct and improvements in working conditions.
The discussions on technology risks covered areas
such as infrastructure, vendor management,
security and access management as well as the
relocation to the new data centre in 2009.
Business Continuity Management in enhancing
Bank’s readiness and response capabilities
During the year, much attention was given to the
outbreak of Influenza A (H1N1). This external risk
triggered some concern in mid-2009 given its
implications on business operations as affected
staff were required to observe the quarantine
or ‘work from home’ requirements. In response
to this risk, the Bank activated its Pandemic
Influenza Plan and activated split operations for
three months to minimize the risk of contagion
whereby a number of staff from critical functions
were stationed offsite for the period as a
contingency measure. The Crisis Management
Committee drew up a travel advisory for staff
and monitored closely the severity of the
pandemic on a weekly basis.
The Bank continued to strengthen the readiness
and response capabilities of line departments
to business disruptions. Periodic assessment
of the Bank’s Recovery Centre capacity was
conducted through quarterly live-run exercises.
Assessments were made to evaluate system
readiness and the ability of the staff involved
to respond appropriately to a crisis situation.
Several initiatives were introduced such as the
‘surprise people readiness’ exercise which was
also conducted for all critical departments.
Selected staff were notified to head for the
recovery centre with various modes of transport;
car, taxis and train. To reinforce staff awareness,
RMD organized Desktop Walkthrough Exercises
for critical support departments so as to further
enhance their Business Continuity Plans.
COMMUNICATIONS
Sustaining stakeholders’ confidence in the
challenging environment
The full impact of the global crisis was felt
in 2009 and the Bank played a major role in
ensuring the stability and sustainability of the
economy and the financial system. The Bank
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Annual Report 2009
continuously provided assessments of the global
developments and highlighted their impact on
Malaysia and the policy measures implemented
to keep the business community and the public
well informed.
The Bank increased the frequency of its
communications on its assessment on the nation’s
economy and financial stability and continuously
highlighted the various policy responses to
strengthen public understanding and confidence.
Communication efforts were also centred on the
resilience of the financial system and the various
measures undertaken to ensure continuous access
to financing for businesses and households.
Monetary policy communications – key in
anchoring monetary stability
The monetary policy statements (MPSs) released
after each MPC meeting, contained a description
of the Bank’s assessment of global, regional and
domestic economic and financial developments.
It also provided the basis and considerations in
determining the MPC’s decision. Engagements
with analysts and economists were also carried
out to facilitate greater understanding of the
Bank’s policies and for the Bank to obtain
feedback on issues, providing important
information on areas of potential policy concern.
Greater engagements to sustain confidence
during the period of uncertainty
In addition to MPSs, the Bank’s communications
outreach was expanded, through numerous
engagements with the financial industry and
businesses, the media and analysts as well as
the public at large. These initiatives include
extensive financial education to raise the level of
financial literacy.
The Bank was actively involved in the dissemination
of information on financing and related assistance
to businesses. These included the RM2 billion SME
Assistance Guarantee Scheme for viable SMEs
adversely impacted by the economic slowdown and
the establishment of the SME Credit Bureau towards
ensuring greater access to credit for the SME sector.
The establishment of Danajamin Nasional Berhad
was also highlighted as part of efforts to ensure
the continued flow of credit to businesses through
the provision of financial guarantee insurance to
private debt and Islamic securities issues. Attention
was drawn to the re-commencement of operations
and expanded scope of coverage of Corporate
Debt Restructuring Committee, a voluntary forum
for corporate borrowers and creditors to work out
feasible debt resolutions without having to resort to
legal proceedings.
Schemes supporting microfinance, including
the RM200 million Micro Enterprise Fund (MEF)
established by the Bank were publicised. As at 21
January 2010, the MEF had approved RM84.7
million of financing to 3,886 micro enterprises.
Other initiatives to provide greater access to
financing for local businesses, in particular to SMEs,
include the Working Capital Guarantee Scheme
(WCGS) and Industry Restructuring Financing
Guarantee Scheme (IRFGS) which was part of the
Second Stimulus Package. Although the guarantees
covered RM5 billion of financing under each
scheme, the WCGS was subsequently increased to
RM7 billion (the additional RM2 billion reallocated
from the IRFGS) benefiting 5,327 SMEs. The
communication initiatives aimed at increasing the
awareness of SME products and services.
The Bank carried out and participated actively in
more than 90 road shows, by way of dialogues,
exhibitions and seminars, across the nation to
explain to the public and businesses on the
availability of financing through the various
mechanisms and alerting the public to be vigilant
against various illegal deposit-taking and fraudulent
schemes. It also provided advisory services to
improve financial management and minimise the
impact of the crisis on their businesses.
The Bank expanded its outreach to the public
through three additional walk-in public service
centers (BNMLINK) at branches of Kuala
Terengganu, Kota Kinabalu and Kuching, bringing
the total number of BNMLINK centers nationwide
to six. The public can now also contact the Bank
via SMS services and plans are underway to
operate mobile LINK services in 2010. Reflecting
the greater demand for the services offered by the
Bank’s Integrated Contact Centre (ICC), comprising
BNMLINK, BNMTELELINK and the Complaints
Management and Advisory Unit, the number of
cases handled in 2009 showed a marked increase
of more than 90% to 253,801 cases.
In addition to the ICC, the public also has access
to the Financial Mediation Bureau (FMB) and
the Credit Counseling and Debt Management
Agency (AKPK). While FMB helps mediate disputes
between customers and financial service providers,
Governance, Communications and Organisational Development
113
AKPK provides the public with free financial
counseling and debt management services aimed at
ensuring greater self-reliance in their financial affairs.
In 2009, AKPK and FMB have dealt with 36,848 and
2,438 cases respectively, bringing the total to more
than 39,000 cases.
Further strides in financial industry
liberalisation
As the financial system remained intact despite
the global crisis, the Bank confidently proceeded
with further liberalisation of the financial sector
to advance Malaysia’s linkages with other parts of
the world and to raise the level of performance
of the financial system. Significant emphasis was
placed on greater transparency of the liberalisation
measures, with clear criteria and timelines to ensure
the financial system continues to efficiently transition
into this new phase of development.
Greater understanding on the roles of the
central bank
The year 2009 also marked the 50th Anniversary of
the Bank. Among others, the Bank hosted several
international and regional high level meetings and
conferences for leaders of the central banking and
the financial fraternity to deliberate on current global
and regional economic and financial issues. Several
special supplements discussed the Bank’s role in
shaping the financial landscape and its contributions
to nation building over the past 50 years.
With the coming into force of the new CBA, the
Bank informed its stakeholders, including its staff, on
how the new CBA has positioned the Bank to be in
a greater state of readiness in the more challenging
global environment. Greater clarity of mandates,
enhanced financial stability powers, autonomy and
the robust governance framework encapsulated
in the CBA have set the stage for the Bank to deal
more effectively with emerging risks and challenges.
The numerous briefings in conjunction with the
release of the Annual Report 2008 and the Financial
Stability and Payment Systems Report 2008 were
another important communications channel for
the Bank to engage with key stakeholders. These
briefings served as a valuable platform in creating
a better understanding of various economic and
financial issues, as well as the economic and financial
challenges on the domestic and global fronts.
The Bank’s official website has also been enhanced
to be more informative, comprehensive, structured
and stakeholder-based to cater to the wide
range of users. Reflecting these improvements,
the number of visits to the website have
increased significantly by about 40% to 4.2
million while the hits/pageviews rose by about
25% to more than 12.8 million. Moving forward,
the website will be upgraded to broaden
accessibility and to be equipped with interactivity
and transactional features.
As part of staff engagement efforts, regular
interactions were carried out with staff on the
significance of the Bank’s 3-year Business Plan,
providing line of sight to the Bank’s strategic
focus and the required new work culture. These
initiatives were important in ensuring greater
alignment of staff and their roles in attaining
the objectives of the Bank. Staff engagement
with senior management has been stepped
up with various face-to-face dialogue sessions
on emerging economic and financial sector
issues, in addition to the significant level of
knowledge sharing activities through informal
hi-tea sessions. The creation of a conducive
communications environment has not only
elevated the level of engagement but also
contributed towards building an integrated
internal team in the Bank.
ORGANISATIONAL DEVELOPMENT
Elevating Bank’s Performance through
Strategic Management
As a strategy-focused organisation, the Bank
saw its performance driven orientation becoming
more entrenched in 2009. With a new and
robust strategic management process enabling
the systematic planning and formulation of key
priorities, execution and review of strategies at the
organisational level, the Bank witnessed greater
organisation-wide clarity and understanding of
the Bank’s objectives and goals. This was achieved
through having greater line of sight on the Bank’s
strategic objectives by the staff and a higher
degree of awareness of critical inter-linkages and
inter-dependencies among the different sectors in
the Bank. It has also facilitated efficient utilisation
of resources to support the organisational goals.
In addition, the enhanced integration of the
strategic management and operational planning
processes facilitated better prioritisation of
financial resources to support the Bank’s strategic
objectives as outlined in the Business Plan. These
were important factors in enabling the Bank to
114
Annual Report 2009
deliver its results during the year especially in light
of more complex issues and challenges following
the global financial crisis.
During the year, efforts were directed towards
ensuring the effective implementation of the
Business Plan. Robust mechanisms and processes
were put in place to ensure the identified
priorities, strategies and initiatives were effectively
carried out within the specified timeframes
through key performance indicators (KPIs) and
other monitoring mechanisms that provided useful
feedback on the progress in achieving the Bank’s
priorities. This is reinforced by a structured process
of validation of key strategies and initiatives to
ensure they remain relevant.
In line with this, the Bank conducted its
strategic review of the Business Plan during
the year to evaluate the overall performance
towards achieving its strategic results. The
strategic review process provided a platform
for the management to deliberate and address
both existing and potential issues that have
implications on the achievement of the strategic
results. The performance evaluation is based
on a comprehensive assessment framework
that combines both qualitative and quantitative
outcome-based KPIs. This is also complemented
by the use of proxy and process KPIs in gauging
the achievement of outcomes that are not easily
measurable in quantitative terms.
In ensuring that the Bank continues to remain
effective in delivering its mandate, leadership
development is given priority so as to enhance
appreciation and internalisation of good
governance and to enable the Bank to possess
the necessary attributes to ensure the Bank
is always in a state of readiness to face and
address emerging issues and challenges. Towards
this agenda, during the Senior Management
Conference 2009, a simulation exercise was
conducted to provide leaders of the Bank the
opportunity to experience challenges that the
Bank may face, set within a context of plausible
future events. To successfully address the issues
raised, participants were required to exhibit
desired leadership attributes including having
strategic insight, perseverance, sense of urgency
and ability to manage conflicting issues, effective
stakeholder management and the sense of
collective accountability.
Building a High Performance Workforce
Given the dynamics of the human capital
landscape, talent management continued to be
a prevailing theme for the Bank in 2009. Efforts
to align human capital practices to achieving the
Bank’s strategic objectives were enhanced during
the year. Initiatives as outlined in the Integrated
Human Capital Management framework (IHCM),
the blueprint for the holistic development and
enhancements of the Bank’s human capital
processes, continued to provide the impetus for
talent management imperatives in 2009.
Ensuring job-fit for mission critical positions
A major focus in 2009 was to ensure that critical
positions are held by the competent talents,
where the talents will perform at their best to
achieve the Bank’s mandate and to create a
healthy organisational climate. This entailed the
robust and transparent assessment of talents to
enhance job-fit for mission critical positions as
well as strengthening the talent pool to ensure its
readiness. The Bank continued to invest in both
the profiling and development of its succession
pool in promoting talent readiness, facilitated
by the Leadership Profiling Centre (LPC) that
evaluates the talent pool’s potential for growth via
a structured and robust profiling processes.
As the leadership strength in the Bank is being
tightened and strengthened through more
stringent criteria, coupled with focused leadership
development and feedback, the Bank is also
making concerted efforts to expand and reinforce
its technical leadership capability. Career growth
policies and frameworks were reviewed and
enhanced to ensure the Bank’s talent management
strategies remain relevant. In support of the Bank’s
agenda to build a high performance workforce
amidst the escalating performance standards,
efforts are also being centered on enhancing
clarity on the performance assessment ownership
and processes, and reinforcing the differentiated
reward and recognition structure.
Continuous building of talent pipeline
In addition to the strategic focus on leadership
development, the Bank also continued with
its scholarship programme aimed at nurturing
young potential talent for the nation as well
as deepening its own talent pipeline. The Bank
Negara Malaysia Kijang Emas Scholarship
award, among the most prestigious awards for
Governance, Communications and Organisational Development
115
high potential young talents in the nation, has
continued to inspire the most outstanding Sijil
Pelajaran Malaysia (SPM) achievers nationwide.
Five of the country’s top achievers were accorded
this award in 2009 to pursue their respective
chosen fields of study. These scholars are required,
as part of their contractual obligation, to return to
Malaysia and serve the nation.
In addition to this award, the Bank continued
sponsoring students with high potential to
pursue their pre-university programmes at local
colleges and first degree programmes at foreign
universities in disciplines relevant to central
banking. In 2009, 72 talents were awarded
scholarships to pursue their education at the
pre-university as well as first degree level whilst
20 excellent students at the Penilaian Menengah
Rendah (PMR) level were awarded the Secondary
School Scholarship award as part of the Bank’s
ongoing efforts to hasten early identification of its
talent pool and to provide financial assistance to
students from lower income families.
As part of its nation building efforts, the Bank
also embarked on coordinating a programme
to enhance the employability of graduates by
providing them with attachment opportunities
with participating companies across all economic
sectors. Under ‘Graduates Programme 500’, more
than 500 successful graduates nationwide were
placed, with the assistance of industry players,
with companies for on-the-job training exposures
for a period of two years. The programme includes
development interventions focused on their skills
based on industry feedback.
As a result of the restructuring and realignment
of roles bank-wide, the total staff strength in the
Bank increased by 3.60% to 2,709 as at end 2009
as compared with 2,616 as at end 2008, while the
attrition rate due to retirement and resignation
remained at four percent. The ratio of executive to
non-executive staff remained at 3:2 and concerted
efforts to focus on strengthening and deepening
the professional and technical talent pool will
remain a key agenda for the Bank.
Improving Bank’s Performance through
Learning and Knowledge Management
In 2009, learning and knowledge management
(L&KM) initiatives continued to provide support for
human capital development in the Bank through
improved alignment in meeting the business needs
of line departments, focusing on performance and
business impact. The effectiveness of the L&KM
initiative was further augmented, particularly
with the new role-based organisational structure
adopted by the Human Capital Development
Centre (HCDC). The principle of value creation
for line departments was embedded in the L&KM
initiatives undertaken by HCDC, through the
learning products and services provided.
Designing and implementing learning
solutions that fulfil Bank’s needs
In meeting the demands for development
solutions that meet the requirements of the
knowledge workers in the Bank, efforts were
directed towards obtaining an accurate view of
the development requirements of the Bank staff
at all working levels. Hence, the number of L&KM
demands that had been serviced in the form
of design and implementation of customised
solutions increased significantly in 2009. Apart
from this, overall workforce competencies were
also improved through 129 L&KM bank-wide
events, ensuring positive development gains and
the transfer of knowledge at the workplace.
In designing learning solutions, HCDC focused on
the effectiveness and its impact to the workplace.
A blended learning approach with a combination
of learning methods was emphasised. Besides
attending the typical classroom sessions,
participants underwent a range of learning and
knowledge interventions such as pre-session
readings, viewing of related visual materials,
e-learning solutions and were given opportunities
to apply their new knowledge and skills at the
workplace with coaching from their supervisors.
In addition, various methods and tools were
employed to address specific competency gaps.
These included establishing cross-functional work
teams, communities of practice and peer-assist
groups to enhance collaboration across divisions
and department boundaries, attachments as
well as integrating after-action-reviews and
storytelling into work processes to capture and
share knowledge.
A competency-based core central banking
curriculum was developed based on the Bank’s
competency model. With the curriculum in place,
HCDC was able to design learning solutions that
were customised to the learning needs of the
organisation. During the year, HCDC successfully
tested the robustness of the curriculum through a
116
Annual Report 2009
pilot programme conducted in close collaboration
with subject matter experts from line departments.
As part of ongoing efforts to align learning
solutions to the learning needs of the Bank, focus
also remained centred on enhancing central
banking knowledge within the Bank. Emphasis
was given to improvements in the design and
implementation of flagship programmes. These
programmes included, among others, the Central
Banking Series, Banking Supervision Foundations
Course (BSFC), Insurance Supervision Course (ISC)
and Islamic Finance Course for Finance Regulators
(IFFR). Apart from flagship programmes, the
bank-wide learning programmes also covered a
wide spectrum of knowledge areas to facilitate
the generic and behavioural competencies
requirements for the staff of the Bank. The quality
of these programmes were measured and found to
be satisfactory in meeting the intended objectives.
HCDC also introduced several new learning
programmes in 2009. The BNM Executive
Programme (BNMEP) was conceived and designed
to accelerate the time-to-competence for all new
hires of the Bank. The six-month programme
comprises four main modules including on-
boarding, personal development, fundamentals
of central banking, as well as a four-month
attachment programme. To ensure a healthy
leadership pipeline, the Bank embarked on a
new Leadership Development Blueprint (LDB)
which aims to develop leadership effectiveness,
and transition leaders into different phases of
leadership to ensure a more healthy and ready
leadership pool for the Bank.
Knowledge Management initiatives in
promoting knowledge sharing culture
In 2009, the Knowledge Management Centre
(KMC) continued to provide a comprehensive
range of services and relevant resources in
the form of physical collections and online
information resources. The KMC offered
value-added services such as information
scanning, information alerts and repackaging
of information to meet specific needs of
stakeholders. In fostering collaboration, HCDC
had taken the initiative to introduce and promote
a range of L&KM tools. Tools such as World Café,
Open Space Technology, After Action Review,
Blogs and Wikis were made readily available.
Enhancements to the Learning Management
System (LMS) were made in 2009 in terms
of enriching its content and improving its
infrastructure. E-learning contents were expanded
to provide a broader selection of courses for on-
demand learning while registration for all courses
and events was centralised and captured in LMS.
Similarly, learning programmes offered by HCDC
were uploaded into the LMS for easy access and
reference, and the annual directory of L&KM was
lodged and opened for access by the Bank staff
in LMS. These initiatives formed part of HCDC’s
strategy to inculcate the culture of self-directed
development, by using the LMS as a tool to
manage development, as well as making e-learning
an effective complement to classroom courses.
Guided by the agenda of inculcating a knowledge-
sharing culture within the Bank, new KM events
have been introduced. The ‘Central Banking
Tea Talks’ series were positioned as a series of
sharing sessions held in an informal setting
which encourage learning and sharing between
the speaker and the staff. The series provide a
platform for the Bank’s subject matter experts to
share their knowledge on current issues of interest
with their colleagues within the Bank. In 2009,
five sessions of Tea Talks were held. In addition,
the ‘Conversations with Senior Management’
programme was initiated as a dialogue session
to provide an opportunity for Bank staff at
various levels to exchange views with the Senior
Management of the Bank.
Engagement with the L&KM agents at the line
departments was also an area that was given
attention. Several engagement events were
organised in 2009 such as the Training Managers
(TMs) and Knowledge Management Officers
(KMOs) day, informal session with the KMOs,
L&KM tools hands-on sessions with the TMs and
KMOs as well as establishing a Community of
Practice (CoP) among the TMs and KMOs. These
efforts were aimed at fostering a healthy and
effective working relationship with stakeholders
while at the same time creating higher awareness
of L&KM products and services for adoption of use
at the line departments. Other initiatives by HCDC
in enhancing the knowledge culture included the
Knowledge Fair, the Book Fairs and the ‘Bulan
Bahasa Kebangsaan’ celebration.
Technical Assistance and Collaboration
Programmes with External Agencies
In 2009, the Bank also offered a wide range of
international learning programmes. Programmes
Governance, Communications and Organisational Development
117
offered under the auspices of the Government-
sponsored Malaysian Technical Cooperation
Programme (MTCP) included Banking and
Insurance Supervision courses, Islamic Finance
for Regulators and the Intermediate and
Advanced Central Banking courses. The Bank also
collaborated with the Islamic Development Bank
in organising the popular Fundamentals of Islamic
Finance Course (FIFC) twice during 2009. The
FIFC was attended by central bankers, Ministry
of Finance officials and securities commission
regulators to enhance their knowledge and
skills in Islamic finance operations, Shariah
and regulatory framework towards effective
implementation of a resilient Islamic financial
system. A special workshop in Islamic finance
was organised with BAFIN (The Federal Financial
Supervisory Authority) of Germany where there
is strong interest amongst banking supervisors
to appreciate the features of Islamic finance as
it continues to gain increased interest in the
European financial system.
The Bank also focused on two other areas for
its international technical assistance, namely
institutional capacity building and financial
inclusion. With respect to institutional capacity
building, the programmes included organisational
development and credit bureau for risk
management. With respect to financial inclusion,
the Bank conducted the Financial Inclusion Advisers
programme for microfinance practitioners in
Lusaka, Zambia, and organised a Microfinance
Policymakers Forum for Asian regulators on the
policy challenges posed by branchless banking for
purposes of increasing access to financial services
for the poor and those living in remote areas. A
total of 279 international participants attended the
international programmes conducted during 2009.
In addition, the Bank received 75 ad-hoc requests
for knowledge sharing during 2009, and had the
opportunity to engage with central bankers from
Asia, Central Asia, the African continent and
the Middle-East who visited the Bank to discuss
a broad range of topics covering monetary and
financial system stability, Islamic finance, currency
management, talent management and central
bank modernisation.
The Bank’s initiatives in international technical
cooperation stress the importance of sharing
knowledge on central banking practices, and
building collaborative relationships with other
central bankers from developing economies in
the face of globalisation and regional integration.
ICT Management in Elevating Bank’s
Effectiveness
Information and Communications Technology (ICT)
continued to function as an important enabler to
achieve the Bank’s strategic outcomes, serving as a
key platform in supporting greater organisational
effectiveness and the extension of the Bank’s reach
to its stakeholders.
The Bank’s technology infrastructure has been
enhanced and further expanded to enable
integrated and efficient communication channels
between the Bank and its stakeholders. In this
regard, infrastructure to extend workplace mobility
through accessibility to wireless Internet (Wi-Fi)
in the public areas within the Bank’s premises
has been implemented progressively. On the
external front, the efficiency and responsiveness
of the Bank to the public was further enhanced
by the deployment of Integrated Contact Centre
(ICC) Customer Relationship Management to
all the Bank’s branches. An automated short-
messaging service (SMS) was also implemented to
complement the existing public service channels.
In 2009, the Bank also implemented several
landmark ICT solutions that contributed towards
the achievement of key objectives of the
Bank. One key achievement is the successful
implementation of nationwide image-based
cheque-clearing, resulting in substantial
improvements to the clearing process for the
financial industry. With the advent of eSPICK,
customers and businesses benefited from the
speedier and more efficient cheque clearing
system especially in the timing of the availability
of funds from the deposit of outstation cheques,
cheque conversion facility and the return of
unpaid cheques to payees. Under eSPICK,
outstation as well as local cheques are cleared on
the same day and funds made available as early
as the next business day, compared to between
5 to 8 business days for outstation cheques
previously. Express clearing of cheques is also
available under eSPICK which provides for same
day clearing and availability of funds. The Bank
also augmented the capability of its debt securities
depository in the Real-Time Electronic Transfer
on Funds and Securities (RENTAS) to support
allotment, interest and redemption of foreign
currency denominated bonds, completing the
118
Annual Report 2009
end-to-end ICT infrastructure for primary issuance,
settlement of secondary trading and as depository
of foreign currency denominated bonds. This
ICT infrastructure had facilitated the first foreign
bond issuance and deposit in RENTAS, marking an
important step towards positioning RENTAS as a
regional and international depository.
In its effort to enhance the information
management infrastructure, the Bank has
embarked on initiatives to provide a platform
that is integrated and agile for better data
sourcing, processing, delivery and visibility. The
infrastructure will integrate financial and economic
statistical data that provide comprehensive and
consolidated views of the data. The architecture
will comprise an enterprise data warehouse
supported by centralised metadata repository and
enterprise data model, information dashboard and
a new data submission system using a standard
reporting framework. As part of the initiative, the
Bank implemented a robust infrastructure with the
capacity to enable high-volume credit data analysis
to facilitate better and more timely identification
of emerging risks and vulnerabilities of the
financial institutions and the financial system.
The use of technology solutions and leading-
edge infrastructure has evolved into a strategic
leverage to advance the Bank’s agenda and
aspirations. The journey to operationalise the
new Data Centre in Cyberjaya was commenced
in 2009, with relocation activities progressing as
planned. Upon the migration of the infrastructure
capabilities to the future-state architecture in year
2010, the new Data Centre is now equipped with
technological specifications designed to cater
for future business requirements, with optimum
level of performance, agility and resiliency
aligned with the aim of sustaining continuous
operational excellence for the growing portfolio
of ICT systems in the Bank.
Governance, Communications and Organisational Development
119
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120
Annual Report 2009
Annual Financial Statements
121
Annual Financial Statements
Balance Sheet as at 31 December 2009
Income Statement for the Year Ended 31 December 2009
Notes to the Financial Statements
126
127
128
Annual Report 2009
122
Annual Financial Statements
123
I have audited the financial statements of Bank Negara Malaysia for the year ended 31 December 2009.
These financial statements are the responsibility of the management. My responsibility is to audit and to
express an opinion on these financial statements.
2. The audit has been carried out in accordance with the Audit Act 1957 and in conformity with
approved standards on auditing. Those standards require the audit be planned and performed to obtain
reasonable assurance that the financial statements are free of material misstatement or omission. The
audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial
statements. It also includes assessment of the accounting principles used, significant estimates made by
the management as well as evaluating the overall presentation of the financial statements. I believe that
the audit provides a reasonable basis for my opinion.
3. In my opinion, the financial statements give a true and fair view of the financial position of Bank
Negara Malaysia as at 31 December 2009 and of the results of its operations for the year ended in
accordance with the approved accounting standards.
CERTIFICATE OF THE AUDITOR GENERAL
ON THE FINANCIAL STATEMENTS OF BANK NEGARA MALAYSIA
FOR THE YEAR ENDED 31 DECEMBER 2009
(TAN SRI DATO’ SETIA HAJI AMBRIN BIN BUANG)
AUDITOR GENERAL
MALAYSIA
PUTRAJAYA
12 MARCH 2010
Annual Report 2009
124
We, Zeti Akhtar Aziz and Oh Siew Nam, being the Chairman and one of the Directors of Bank Negara
Malaysia, do hereby state that in the opinion of the Board, the financial statements are drawn up so as to
give a true and fair view of the state of affairs of Bank Negara Malaysia as at 31 December 2009 and of
the results of operations for the year ended on that date.
STATEMENT BY CHAIRMAN
AND ONE OF THE DIRECTORS
On behalf of the Board,
OH SIEW NAM
DIRECTOR
11 MARCH 2010
KUALA LUMPUR
On behalf of the Board,
ZETI AKHTAR AZIZ
CHAIRMAN
11 MARCH 2010
KUALA LUMPUR
Annual Financial Statements
125
I, Rafiza Ghazali, being the officer primarily responsible for the financial management of Bank Negara
Malaysia, do solemnly and sincerely declare that the financial statements, are to the best of my knowledge
and belief, correct and I make this solemn declaration conscientiously believing the same to be true and by
virtue of the provisions of the Statutory Declarations Act, 1960.
Subscribed and solemnly declared )
by the abovenamed at Kuala Lumpur )
this 11 March 2010. )
DECLARATION BY THE OFFICER PRIMARILY RESPONSIBLE
FOR THE FINANCIAL MANAGEMENT OF BANK NEGARA MALAYSIA
Before me,
Annual Report 2009
126
Bank Negara Malaysia
Balance Sheet as at 31 December 2009
2009 2008
RM RM
ASSETS Note
Gold and Foreign Exchange 3 322,505,629,648 315,554,271,994
International Monetary Fund Reserve Position 1,515,842,594 1,127,065,750
Holdings of Special Drawing Rights 7,279,175,067 786,401,257
Malaysian Government Papers 4 2,683,093,250 2,525,239,300
Deposits with Financial Institutions 5 9,373,175,000 4,507,787,500
Loans and Advances 6 12,407,481,804 12,516,545,727
Other Assets 7 7,213,305,329 7,505,008,921
Total Assets 362,977,702,692 344,522,320,449
LIABILITIES AND CAPITAL
Currency in Circulation 51,138,567,538 48,042,855,068
Deposits by: Financial Institutions 181,535,107,206 184,136,298,017
Federal Government 18,641,169,858 11,155,942,757
Others 8 1,270,868,081 373,848,344
Bank Negara Papers 33,357,434,443 43,710,213,247
Allocation of Special Drawing Rights 9 7,231,066,765 742,639,517
Other Liabilities 10 21,710,810,087 24,604,565,308
Total Liabilities 314,885,023,978 312,766,362,258
Paid-up Capital 11 100,000,000 100,000,000
General Reserve Fund 12 13,478,068,329 11,976,653,686
Other Reserves 13 34,514,610,385 19,679,304,505
Total Capital 48,092,678,714 31,755,958,191
Total Liabilities and Capital 362,977,702,692 344,522,320,449
Notes on the following pages form part of these financial statements.
Annual Financial Statements
127
Bank Negara Malaysia
Income Statement for the Year Ended 31 December 2009
2009 2008
RM RM
Note
Total Income 14 9,826,516,615 8,158,398,385

Less:
Recurring Expenditure 15 1,071,025,015 939,599,724
Development Expenditure 16 1,085,627,775 709,518,486
Total Expenditure 2,156,652,790 1,649,118,210
Net Profit 7,669,863,825 6,509,280,175
Profit and Loss Appropriation Statement for the Year Ended 31 December 2009
2009 2008
RM RM
Net Profit 7,669,863,825 6,509,280,175
Transfer to Other Reserves 17 4,168,449,182 3,832,305,418
Transfer to General Reserve Fund 1,501,414,643 1,176,974,757
Amount Payable to Federal Government 2,000,000,000 1,500,000,000
7,669,863,825 6,509,280,175
Notes on the following pages form part of these financial statements.
Annual Report 2009
128
Notes to the Financial Statements - 31 December 2009
1. Principal Activities of the Bank
The principal objects of the Bank are to promote monetary stability and financial stability conducive
to the sustainable growth of the Malaysian economy. In this regard, the Bank’s primary functions are
as follows:
(a) to formulate and conduct monetary policy in Malaysia;
(b) to issue currency in Malaysia;
(c) to regulate and supervise financial institutions which are subject to the laws enforced by the
Bank;
(d) to provide oversight over money and foreign exchange markets;
(e) to exercise oversight over payment systems;
(f) to promote a sound, progressive and inclusive financial system;
(g) to hold and manage the foreign reserves of Malaysia;
(h) to promote an exchange rate regime consistent with the fundamentals of the economy; and
(i) to act as financial adviser, banker and financial agent of the Government.
2. Accounting Policies
The principal accounting policies applied in the preparation of these financial statements are set out
below. These accounting policies are consistently applied to both of the financial years presented,
unless otherwise stated.
2.1 Basis of Preparation of Financial Statements
(a) These financial statements have been prepared in accordance with the Central Bank of
Malaysia Act 2009 and applicable Malaysian Financial Reporting Standards (FRS). Section
10 of the Central Bank of Malaysia Act 2009 provides that the Bank, in preparing its
financial statements, shall comply with accounting standards to the extent that it is, in the
opinion of the Bank, appropriate to do so, having regard to the objects and functions of
the Bank. The Bank, having considered its responsibilities for the formulation and conduct
of effective monetary policy, is of the opinion that, it is appropriate to differ, in some
aspects, from the Malaysian FRS.
(b) The preparation of the financial statements in conformity with the requirements of the
Malaysian FRS requires management to use certain estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of income
and expenses during the financial year. Although these estimates are based on the
management’s best knowledge of current events and actions, the actual results could
differ from those estimates.
2.2 Measurement Base and Accrual Accounting
The financial statements have been prepared on the historical cost basis of accounting, with the
revaluation of financial instruments that are held at fair value through profit and loss and on an
accrual basis.

Annual Financial Statements
129
2.3 Foreign Currency Translation
(a) The financial statements have been prepared using ringgit Malaysia, the currency of the
primary economic environment in which the Bank operates.
(b) Assets and liabilities in foreign currencies have been revalued into ringgit Malaysia at
rates of exchange prevailing on the balance sheet date. Transactions in foreign currencies
during the year have been translated into ringgit Malaysia at rates of exchange prevailing
on the value dates.
(c) The International Reserves comprising Gold and Foreign Exchange, International Monetary
Fund Reserve Position and Holdings of Special Drawing Rights at 31 December 2009 was
RM331,300.6 million equivalent to USD96,695.1 million.
2.4 Securities and Investments
Securities and investments are stated mainly at cost and provisions have been made for
diminution in value as at 31 December 2009.
2.5 Repurchase and Reverse-Repurchase Agreements
The amount borrowed under repurchase agreements is reported under `Other Liabilities´.
The amount lent under reverse-repurchase agreements is reported under `Other Assets´. The
difference between the amount received and amount paid under repurchase and reverse-
repurchase agreements is recognised as interest expense and interest income on a straight-line
basis, respectively.
2.6 Fixed Assets
The capital expenditure incurred on fixed assets are written down to nominal value or written
off completely in the year of acquisition.
2.7 Net Profit
The net profit of the Bank is appropriated in accordance with section 7 of the Central Bank of
Malaysia Act 2009 and only realised gains are made available for dividend distribution.
3. Gold and Foreign Exchange
2009 2008
RM RM
Foreign Securities 277,872,235,367 282,566,246,554
Foreign Deposits 14,655,589,658 10,860,543,730
Balances with Other Central Banks,
Bank for International Settlements (BIS) and
International Monetary Fund (IMF) 3,765,861,668 3,592,893,233
Others 26,211,942,955 18,534,588,477

322,505,629,648 315,554,271,994

Annual Report 2009
130
4. Malaysian Government Papers
2009 2008
RM RM
Malaysian Government Securities 2,683,093,250 2,525,239,300
5. Deposits with Financial Institutions
Deposits with financial institutions comprise deposits placed by the Bank with financial institutions
under section 30(1)(nn) and section 31B of the Central Bank of Malaysia Act 1958 and section 75(i)
of the Central Bank of Malaysia Act 2009
1
.
6. Loans and Advances
Loans and advances comprise mainly advances extended by the Bank to the participating institutions
under section 30(1) of the Central Bank of Malaysia Act 1958
1
.
7. Other Assets
Other assets include investments in shares and bonds of RM6,855,216,924 acquired under section
30(1)(j), section 30(1)(oo)(i) and section 30A(1)(c) of the Central Bank of Malaysia Act 1958 and
section 48(1) of the Central Bank of Malaysia Act 2009
1
.
8. Deposits by Others
A substantial part of these deposits comprises deposits from public authorities.
9. Allocation of Special Drawing Rights
IMF member countries are allocated Special Drawing Rights (SDR) in proportion to their subscription
to the IMF. The allocation represents a dormant liability of the Bank to the IMF, against which assets
are received in SDR from the IMF. Following the 2009 General and Special Allocation of SDR by the
IMF, the Bank’s net cumulative allocation of SDR had increased to RM7,231,066,765 equivalent to
SDR1,346,143,721.
10. Other Liabilities
Other liabilities include mainly placements by financial institutions under the repurchase agreements.
11. Paid-up Capital
The paid-up capital of RM100 million is owned by the Government of Malaysia.
12. General Reserve Fund
2009 2008
RM RM
As at 1 January 11,976,653,686 10,799,678,929
Transfer from Net Profit 1,501,414,643 1,176,974,757

As at 31 December 13,478,068,329 11,976,653,686
1
Pursuant to section 100 of the Central Bank of Malaysia Act 2009, transactions or arrangements made under the Central Bank of
Malaysia Act 1958 are deemed to have been made under the Central Bank of Malaysia Act 2009.
Annual Financial Statements
131

13. Other Reserves
Other reserves comprise the Exchange Rate Fluctuation Reserve, Revaluation Reserve and
Contingency Reserve.
14. Total Income
Total income comprises revenue from foreign reserve management which includes interest and
dividends, non-treasury income and is stated at net of amortisation/accretion of premiums/discounts
and the monetary policy cost.
15. Recurring Expenditure
Recurring expenditure are expenses incurred in the management and administration of the day-to-
day operations of the Bank.
16. Development Expenditure
Development expenditure are expenses incurred mainly to finance developmental and long term
projects undertaken by the Bank that are in line with its principal roles and responsibilities.
17. Transfer to Other Reserves
This transfer is made in accordance with section 7 of the Central Bank of Malaysia Act 2009.
18. Contingencies and Commitments
18.1 Contingent Assets
Total contingent assets as at 31 December 2009 amounted to RM1,300,000,000. These
comprise the Bank’s total contributions to International Centre for Leadership in Finance (ICLIF)
Trust Fund and International Centre for Education in Islamic Finance (INCEIF) Trust Fund to
finance activities related to training, research and development of human resource on banking
and financial services managed by ICLIF and INCEIF. It is provided in the Trust Deeds that the
total contributions will be returned to the Bank when the Centres become self-sufficient in the
future.
18.2 Contingent Liabilities
Total contingent liabilities as at 31 December 2009 amounted to RM6,705,152,257. These
comprise the following:
(a) an amount of RM6,640,289,100 which represents the obligation of the Bank to pay in
full, in SDR or other convertible currencies, the amount of Malaysia’s quota in the IMF
under the Articles of Agreement; and
(b) an amount of RM64,863,157 which represents the uncalled portion of the 3,220 units
of shares held by the Bank in Bank for International Settlements. The amount is based
on the nominal value (SDR5,000) of the uncalled portion and SDR rate as at the balance
sheet date.
Annual Report 2009
132
18.3 Commitments
Total commitments as at 31 December 2009 comprise the following:
(a) New Arrangements to Borrow by IMF
The Bank has participated in the New Arrangements to Borrow (NAB), a set of credit
arrangements between the IMF and its member countries to provide supplementary
source of financing to IMF for the purpose of safeguarding the stability of the
international monetary system. As at 31 December 2009, the Bank’s total commitment
under the NAB credit arrangement amounted to SDR340,000,000 (equivalent to
RM1,826,374,600). However, for the financial year ended 31 December 2009, there was
no call on the NAB by the IMF.

(b) ASEAN Swap Arrangement
The Bank has participated in the multilateral ASEAN Swap Arrangement (ASA) together
with other ASEAN central banks and monetary authorities to provide short-term foreign
currency liquidity support to member countries with balance of payments difficulties. As
at 31 December 2009, the Bank’s total commitment and eligible maximum drawdown
amounted to USD300 million (equivalent to RM1 billion) and USD600 million (equivalent
to RM2.1 billion) respectively. However, for the financial year ended 31 December 2009,
there was no request for liquidity support under ASA from any member country.

(c) Bilateral Swap Arrangement Agreement
On 7 January 2009, the Bank renewed the Bilateral Swap Arrangement (BSA) Agreement
with the Bank of Korea under the Chiang Mai Initiative. Under the BSA agreement, each
central bank can obtain financial support in US dollar up to USD1.5 billion (equivalent to
RM5.1 billion) through swap arrangements against their respective local currencies. For
the financial year ended 31 December 2009, there was no request to activate the BSA.
19. Financial Risk Management
The Reserve Management Committee oversees treasury and investment risks in the management of
reserves and to ensure that the following risks are contained within acceptable levels:
(a) Market Risk
Market risk is the exposure of the Bank’s financial position to adverse movements in market
prices such as interest rates and foreign exchange rates. The management of market risk is
governed by the benchmark policy approved by the Board of Directors which reflects the long-
term investment objectives and acceptable risk-return profile. Within the benchmark policy, the
Board of Directors allows `active risk´ to be taken through investments that deviate from the
benchmark. This `active risk´ is controlled through a `tracking error´ limit. Sensitivity analysis and
stress testing is also undertaken to assess potential mark-to-market losses on the reserves due
to unexpected fluctuations and volatility in the market.
Annual Financial Statements
133
(b) Credit Risk
The credit risk on reserves is the risk that a counter party, either financial institutions or issuers,
fails to perform its contractual obligation to the Bank. A comprehensive rating-based credit risk
framework approved by the Board of Directors governs the permissible investment universe of
the Bank. Having such a framework in place also strengthens the Bank’s operational efficiency
in this area and ensures the reserves are invested only with high credit quality counterparties
or issuers. The policies and continuous assessment of credit exposures ensures the objective of
capital preservation is met.
(c) Operational Risk
Operational risk on treasury operation is the risk of financial loss due to failed internal process,
inadequate controls and procedures, and gaps in skill-sets. Operational risk is mitigated through
a strong and robust governance framework and effective implementation of risk controls and
limits.
20. Income Tax
The Bank is exempted from payment of income tax and supplementary income tax as set out in the
Income Tax (Exemption) (No. 7) Order 1989.
Annual Report 2009
134
Annex
2
Annual Report 2008
Annex
3
Contents
Foreign Exchange Administration Policies P 1

Key Economic and Financial Statistics
National Account
A.1 Gross Domestic Product by Kind of Economic Activity in Constant 2000 Prices P 16
A.2 Growth in Manufacturing Production (2005=100) P 17
A.3 Production of Primary Commodities P 18
A.4 GNI by Demand Aggregates P 19
A.5 Savings-Investment Gap P 20
A.6 Labour Market: Selected Indicators P 21
A.7 Private Consumption Indicators P 22
A.8 Private Investment Indicators P 23
External Sector
A.9 Balance of Payments P 24
A.10 Gross Exports P 26
A.11 Exports of Primary Commodities P 27
A.12 Principal Markets for Manufactured Exports P 28
A.13 Principal Export Markets for Electronics P 29
A.14 Principal Export Markets for Electrical Products P 29
A.15 Principal Export Markets for Chemicals and Chemical Products P 30
A.16 Principal Export Markets for Palm Oil P 31
A.17 Principal Export Markets for Rubber P 32
A.18 Principal Export Markets for Crude Oil P 33
A.19 Principal Export Markets for LNG P 33
A.20 External Debt and Debt Servicing P 34
Monetary and Financial Indicators
A.21 Consumer Price Index P 35
A.22 Producer Price Index P 36
A.23 Broad Money (M3) P 37
A.24 Money Supply: Annual Change and Growth Rates P 38
A.25 Interest Rates (%) P 39
A.26 Movements of the Ringgit P 40
A.27 Housing Credit Institutions P 41
A.28 Housing Loans Outstanding P 42
A.29 Housing Loans Approved P 42
A.30 Financing of the Economy P 43
Public Finance
A.31 Consolidated Public Sector Finance P 44
Selected International Economic Indicators
A.32 Major Advanced Countries: Key Economic Indicators P 45
A.33 East Asia: Key Economic Indicators P 46
4
Annex
P 1
FOREIGN EXCHANGE ADMINISTRATION POLICIES
Malaysia continues to maintain a liberal foreign exchange administration policy. The current foreign
exchange administration rules are prudential measures to promote monetary and financial stability
conducive to the sustainable growth of the economy and safeguarding the balance of payments position
as well as safeguarding against shocks. The rules, however, have been progressively liberalised with
significant liberalisations made in 2005 and 2007 to enhance business efficiency and promote foreign
direct investments.
I. Foreign Exchange Administration Rules Applicable to NON-RESIDENTS
1
FOREIGN DIRECT AND PORTFOLIO INVESTMENTS BY NON-RESIDENTS
Purchase of ringgit assets •
2
Non-residents are free to purchase any ringgit assets including ringgit- •
denominated bonds/sukuk issued by non-residents in Malaysia
Sourcing ringgit for •
settlement of ringgit assets
Settlement for the investment in ringgit assets can be sourced from: •
Non-residents’ own External Accounts
3
;
Sale of foreign currency on spot or forward basis, with licensed
onshore banks
4
or overseas branches appointed by licensed onshore
banks; or
Borrowing obtained from licensed onshore banks, resident companies
5

and individuals
6
to finance real sector activities in Malaysia
Onshore borrowing • Free to borrow any amount in foreign currency from licensed onshore •
banks and licensed International Islamic Banks
Free to borrow in ringgit of any amount from licensed onshore banks, •
resident companies and individuals to finance real sector activities in
Malaysia, including financing the purchase of ringgit assets
Free to borrow any amount for margin financing from resident •
stockbroking companies
Divestment/income from •
investment
Free to repatriate funds from divestment of ringgit assets or profits/ •
dividends arising from the investments
Repatriation, however, must be made in foreign currency •
Hedging • Free to hedge the exposure arising from investment in ringgit assets •
made on or after 1 April 2005 with the licensed onshore banks or
overseas branches appointed by licensed onshore banks

1
Non-resident:
An overseas branch, subsidiary, regional office, sales office or representative office of a resident company; •
Embassies, Consulates, High Commissions, supranational or international organisations; •
A Malaysian citizen who has obtained permanent resident status of a country or territory outside Malaysia and is residing outside •
Malaysia; and
Any other person as may be specified by the Controller of Foreign Exchange to be a non-resident •
2
Ringgit assets include:
Ringgit-denominated securities, private debt securities, Cagamas bonds or notes, Malaysian Government Securities, Treasury •
Bills, shares and warrants;
Derivatives traded on Bursa Malaysia (excluding OTC derivatives and structured products which tantamount to lending or •
borrowing of ringgit between residents and non-residents);
Fixed deposits and negotiable instruments of deposits denominated in ringgit; and •
Immovable properties in Malaysia •
3
External Accounts are ringgit accounts maintained with licensed onshore banks by or for non-residents
4
Licensed onshore banks refer to licensed commercial banks, licensed Islamic banks and licensed investment banks
5
Resident companies include limited partnerships and legal entities other than companies such as co-operatives and charitable
organisations
6
Resident individuals include sole proprietorships, general partnerships and partnerships with general and limited partners
Annual Report 2009
P 2
INVESTMENT IN IMMOVABLE PROPERTIES BY NON-RESIDENTS
Purchase of immovable •
property
Free to purchase residential and commercial properties in Malaysia •
Onshore borrowing • Free to borrow any amount of ringgit or foreign currency to finance •
or refinance the purchase of residential and commercial properties in
Malaysia, except for purchase of land only
LENDING IN RINGGIT AND FOREIGN CURRENCY BY NON-RESIDENTS TO RESIDENTS
Ringgit lending •
By non-resident non-
bank parent companies
7
By other non-resident
non-bank companies or
individuals
Foreign currency lending •
By non-resident non-
bank parent companies
By other non-resident
non-bank companies or
individuals
• Free to lend any amount of ringgit to resident subsidiaries to finance real
sector activities in Malaysia
• Free to lend up to RM1 million in aggregate to resident companies and
individuals for use in Malaysia
• Free to lend any amount in foreign currency to resident subsidiaries in
Malaysia
• Free to lend in foreign currency to a resident provided the resident
borrower’s total foreign currency borrowing does not exceed the
following limits:
• The onus is on the resident borrower to obtain the prior permission of
the Controller of Foreign Exchange for borrowing exceeding the limits
BORROWING BY NON-RESIDENTS FROM RESIDENTS
Foreign currency •
borrowing from licensed
onshore banks and
licensed International
Islamic Banks
Free to borrow any amount of foreign currency from licensed onshore •
banks and licensed International Islamic Banks
Resident individual RM10 million equivalent in aggregate
Resident company RM100 million equivalent in aggregate
on a corporate group basis
7
A non-resident non-bank parent company refers to -
(a) non-resident company with more than 50% shareholding in a resident company; or
(b) the ultimate non-resident parent company (which is not a bank, an investment holding company owned by a bank or a
stockbroking company) of the resident company
Annex
P 3
Foreign currency •
borrowing from resident
non-bank companies or
individuals
Free to obtain foreign currency borrowing from resident non-bank •
companies and individuals as follows:
* Provided the resident lender’s total investment in foreign currency assets, including
lending in foreign currency, does not exceed the limit
Ringgit borrowing from •
licensed onshore banks,
resident non-bank
companies and individuals
Free to obtain ringgit borrowing from licensed onshore banks, resident •
non-bank companies and individuals as follows:
3 By non-resident (other than stockbrocking companies and banks) to:
Finance activities in the real sector in Malaysia; and
Finance or refinance the purchase of residential and commercial
properties in Malaysia
3 By non-resident stockbrocking companies and banks from licensed
onshore banks for settlement of ringgit securities on Bursa Malaysia
and RENTAS due to inadvertent delays on the receipt of funds
3 By non-resident (other than stockbrocking companies and banks) from
licensed onshore banks and resident stockbrocking companies for
margin financing
3 By non-resident individuals from resident insurance companies up to
the cash surrender value of the insurance policies purchased by the
non-residents
ISSUANCE OF RINGGIT AND FOREIGN CURRENCY DENOMINATED BONDS/SUKUK IN MALAYSIA
BY NON-RESIDENTS
Issuance of ringgit •
or foreign currency
denominated bonds/
sukuk
• Multilateral Development Banks, Multilateral Financial Institutions,
foreign sovereign, foreign quasi-sovereign agencies and foreign
multinational companies may issue ringgit or foreign currency
denominated bonds/sukuk in Malaysia
Resident lender Amount
A resident with no
domestic ringgit borrowing
No limit
A resident, with or without
domestic ringgit borrowing,
using own foreign currency
funds maintained onshore
or offshore
No limit
A resident with domestic
ringgit borrowing
*
:
Resident individual
Resident company
Through conversion of ringgit up to:
RM1 million in aggregate per
calendar year
RM50 million in aggregate per
calendar year on a corporate group
basis
Annual Report 2009
P 4
Utilisation of bond/sukuk •
proceeds
• Proceeds from the issuance of bonds/sukuk are allowed to be used
onshore or offshore
• Ringgit-denominated bond/sukuk proceeds to be used offshore have to
be converted into foreign currency with the licensed onshore banks
Hedging • • Issuers to hedge exchange rate and interest/profit rate exposure arising
from the issuance of ringgit-denominated bonds/sukuk with the licensed
onshore banks if the proceeds are to be used offshore
• Non-resident investors of the bonds/sukuk are free to hedge exchange
rate and interest/profit rate exposure with licensed onshore banks
Guidelines for issuance • • Specific details on guidelines for the issuance of ringgit and foreign
currency denominated bonds/sukuk in Malaysia can be obtained at any
of the following web-site addresses:
http://www.mifc.co m
http://www.bnm.gov.my/fxadmin
http://www.sc.com.m y
HEDGING BY NON-RESIDENTS
Hedging of ringgit assets • • Free to hedge with licensed onshore banks, exchange rate and interest/
profit rate exposures arising from investments in ringgit assets purchased
on or after 1 April 2005 as well as ringgit-denominated bonds/sukuk
issued in Malaysia by non-residents
OPENING OF RINGGIT AND FOREIGN CURRENCY ACCOUNTS IN MALAYSIA BY NON-RESIDENTS
Opening of ringgit and •
foreign currency accounts
Free to open: •
Ringgit accounts with licensed onshore banks; and
Foreign currency accounts with licensed onshore banks and licensed
International Islamic Banks
The ringgit accounts maintained by non-residents with licensed onshore •
banks in Malaysia are termed as “External Accounts”
Repatriation/utilisation of •
funds from the ringgit or
foreign currency accounts
External Accounts •
Free to convert ringgit into foreign currency with licensed onshore
banks for repatriation abroad;
Free to pay a resident for any purpose, except for the following:
Payment for the import of goods and services;
Lending in ringgit to residents other than as permitted by the
Controller of Foreign Exchange; and
Payment on behalf of a third party
Free to pay to another non-resident’s External Account for settlement
of ringgit assets
Foreign currency accounts •
Free to repatriate; and
Free to pay a resident for any purpose including for settlement of
goods and services
Annex
P 5
IMPORT AND EXPORT OF RINGGIT AND FOREIGN CURRENCY BY NON-RESIDENT TRAVELLERS
Import and export of •
ringgit notes
Allowed to import or export ringgit notes up to RM1,000 •
Import of foreign currency •
notes and traveller’s
cheques
No limit •
Export of foreign currency •
notes and traveller’s
cheques
Up to the amount brought into Malaysia or USD10,000, whichever is •
higher
Import and export of •
ringgit and foreign
currency exceeding
permitted limits
Application can be made online, using Form 13 which can be obtained •
at http://www.bnm.gov.my/fxadmin, or submitted via written application
to Foreign Exchange Administration Department, Bank Negara Malaysia
II. Foreign Exchange Administration Rules Applicable to RESIDENTS
8
INVESTMENTS IN FOREIGN CURRENCY ASSETS
9
BY RESIDENTS
The current limits for investment in foreign currency assets are applicable only to residents that have
domestic ringgit borrowing and are converting ringgit into foreign currency to invest in foreign currency
assets
8
Resident:
º A cilizen ol Malaysia, excluding a cilizen who has oblained permanenl residenl slalus ol a lerrilory oulside Malaysia and is
residing outside Malaysia;
º A non-cilizen who has oblained permanenl residenl slalus in Malaysia and is ordinarily residing in Malaysia,
º A body corporale incorporaled or eslablished, or regislered wilh or approved by any aulhorily, in Malaysia,
º An unincorporaled body regislered wilh or approved by any aulhorily in Malaysia,
º The Covernmenl or any Slale Covernmenl, or
º Any olher person as may be speciled by lhe Conlroller ol loreign Lxchange lo be a residenl
9
Foreign currency assets include:
º lnveslmenl in loreign currency securilies,
º Loans lo non-residenls,
º loreign currency deposils onshore or ollshore, and
º lnveslmenl in approved loreign currency producls ollered by licensed onshore banks, licensed lnlernalional lslamic 8anks and
any residents permitted by the Controller of Foreign Exchange
Annual Report 2009
P 6
Investment in foreign •
currency assets
No limit for residents without domestic ringgit borrowing •
Residents with domestic ringgit borrowing •
10
are allowed to invest as follows:
Investment in foreign •
currency assets by
resident institutional
investors
Unit trust
management
companies
Fund management
companies
Insurers and
takaful operators
Unit trust management companies: •
Investment of Islamic funds
No limit
Investment of conventional funds
Foreign currency-denominated funds
100% of the net asset value (NAV)
Ringgit-denominated funds
100% of NAV attributed to non-residents and residents without
domestic ringgit borrowing; and
50% of NAV attributed to residents with domestic ringgit borrowing
10
Domestic ringgit borrowing refer to any ringgit advances, loans, trade financing facilities, hire purchase, factoring facilities with recourse,
financial leasing facilities, guarantee for payment of goods, redeemable preference shares or similar facilities in whatever name or form,
except:
º Trade credil lerms exlended by suppliers lor all lypes ol goods and services,
º lorward loreign exchange conlracls enlered inlo wilh licensed onshore banks,
º Perlormance guaranlees and lnancial guaranlees,
º One personal housing loan and one vehicle loan oblained lrom residenls,
º Credil card and charge card lacililies,
º Operalional leasing lacililies,
º lacloring lacililies wilhoul recourse, and
º lnler-company borrowings wilhin a corporale group in Malaysia
11
Resident individuals include sole proprietorships, general partnerships and partnerships with general and limited partners
12
Resident companies include limited partnerships and entities other than companies such as co-operatives and charitable organisations
Resident individuals
11
No limit if funded by own foreign •
currency funds retained onshore or
offshore;
Up to full amount of permitted •
foreign currency borrowing; and
Up to RM1 million in aggregate •
per calendar year if funded from
conversion of ringgit
Resident companies
12
No limit if funded by own foreign •
currency funds retained onshore or
offshore;
No limit if funded from proceeds •
of listing through initial public
offering on:
- Bursa Malaysia; or
- Foreign stock exchanges
Up to the full amount of permitted •
foreign currency borrowing; and
Up to RM50 million equivalent in •
aggregate on a corporate group
basis per calendar year if funded
from conversion of ringgit
Annex
P 7
13
Licensed onshore banks refer to licensed commercial banks, licensed Islamic banks and licensed investment banks
14
Example: (a) Unit trust companies offering foreign currency unit trust funds; and
(b) Bursa Malaysia for trading of foreign currency derivative products such as CPO futures
Fund management companies: •
Funds mandated to be invested in Shariah compliant assets
No limit
Funds mandated to be invested in non-Shariah compliant assets
Foreign currency funds
No limit
Ringgit funds
100% of total funds managed for non-residents and residents
without domestic ringgit borrowing; and
50% of total funds managed for residents with domestic ringgit
borrowing
Insurers and takaful operators, including international currency business unit •
of takaful operators and international takaful operators:
Foreign currency-denominated funds
100% of NAV of foreign currency investment-linked funds offered to
residents and non-residents
Ringgit-denominated funds
100% of NAV of investment-linked funds offered to non-residents
and residents without domestic ringgit borrowing;
50% of NAV of investment-linked funds offered to residents with
domestic ringgit borrowing;
10% of margin of solvency for insurers; and
5% of total assets for takaful operators
Payment for purchase •
of foreign currency
assets
Offshore foreign currency assets: •
Payment must be made in foreign currency
The foreign currency may be sourced from conversion of ringgit with
licensed onshore banks
13
or own foreign currency funds
Onshore foreign currency assets offered by licensed onshore banks, licensed •
International Islamic Banks or entities
14
approved by the Controller of Foreign
Exchange:
Payment may be in foreign currency or in ringgit
Divestment/income •
from investment
in foreign currency
assets
Free to repatriate and convert divestment proceeds or income from •
investment in foreign currency assets into ringgit with licensed onshore banks
Free to retain the proceeds in foreign currency accounts •
Hedging • Free to hedge with licensed onshore banks and licensed International Islamic •
Banks for investment in foreign currency assets based on firm underlying
commitment
Hedging involving ringgit shall only be undertaken with licensed onshore •
banks
Annual Report 2009
P 8
BORROWING IN FOREIGN CURRENCY AND RINGGIT BY RESIDENTS
Foreign currency •
borrowing by:
Resident
individuals
Free to borrow in foreign currency up to the equivalent of RM10 million in •
aggregate from:
Licensed onshore banks;
Licensed International Islamic Banks; and
N on-residents
Trade financing involving export shall only be obtained from licensed onshore •
banks
Allowed to refinance outstanding approved foreign currency borrowing •
Resident
companies
Free to borrow any amount in foreign currency from: •
Non-resident non-bank parent companies
15
;
Other resident companies within the same corporate group
16
in Malaysia;
Licensed onshore banks; and
Lic ensed International Islamic Banks
Free to borrow in foreign currency up to the equivalent of RM100 million in •
aggregate on a corporate group basis:
From non-residents (other than non-resident non-bank parent companies);
and
Through the issuance of foreign currency denominated bonds onshore
and offshore
Free to borrow any amount of foreign currency supplier’s credit from non- •
resident suppliers
Allowed to refinance outstanding approved foreign currency borrowing •
Proceeds from •
offshore listing
Free to borrow from other resident companies within the same corporate •
group in Malaysia, the foreign currency proceeds from the listing on foreign
stock exchanges
Foreign currency •
trade financing
facilities
Free to obtain foreign currency trade financing facilities from: •
Licensed onshore banks; and
Licensed International Islamic Banks (other than trade financing facility
involving export)
Allowed to obtain foreign currency trade financing facilities from offshore up •
to the equivalent of RM5 million in aggregate. The trade financing facilities
are part of the RM100 million limit on foreign currency borrowing from non-
residents
Trade financing facilities for export of goods are to be obtained from licensed •
onshore banks only
Repayment and •
prepayment
Free to repay and prepay approved foreign currency borrowing •
15
Non-resident non-bank parent company refers to -
(a) a non-resident company with more than 50% shareholding in a resident company; or
(b) the ultimate parent company of the resident company, which is not a bank, an investment holding company owned by a bank or a
stockbroking company
16
Corporate group refers to a group of companies with parent-subsidiary relationship in Malaysia
Annex
P 9
Hedging • Free to hedge drawdown and repayment of foreign currency borrowing with •
licensed onshore banks and licensed International Islamic Banks
Hedging involving ringgit shall only be undertaken with licensed onshore •
banks
Ringgit borrowing •
from non-residents
by:
Resident
individuals
Resident
companies
Free to borrow up to RM1 million in aggregate from non-resident non-bank •
companies or individuals for use in Malaysia
Free to borrow any amount in ringgit from their non-resident non-bank •
parent companies to finance real sector activities in Malaysia
Free to borrow up to RM1 million in aggregate from other non-resident non- •
bank companies or individuals for use in Malaysia
LENDING IN RINGGIT BY RESIDENTS
Ringgit lending by: •
Resident non-
bank companies
and individuals
Free to lend any amount in ringgit to non-resident non-bank companies and •
individuals to:
Finance real sector activities in Malaysia; and
Finance or refinance the purchase of residential and commercial properties
in Malaysia
Licensed onshore
banks
Resident
stockbroking
companies
Free to lend any amount in ringgit to: •
Non-resident non-bank companies and individuals (other than stockbroking
companies and banks):
To finance real sector activities in Malaysia;
For margin financing; and
To finance or refinance the purchase of residential and commercial
properties in Malaysia
Non-resident stockbroking companies and banks for settlement of ringgit
securities on Bursa Malaysia and RENTAS due to inadvertent delays on the
receipt of funds
Free to provide margin financing of any amount in ringgit to non-resident •
non-bank companies and individuals for purchase of shares listed on Bursa
Malaysia
Resident
insurance
companies
Free to lend to non-resident individuals in ringgit up to the cash surrender •
value of the insurance policies purchased by the non-residents
Annual Report 2009
P 10
ISSUANCE OF RINGGIT AND FOREIGN CURRENCY DENOMINATED SECURITIES BY RESIDENTS
Issuance of securities •
to non-residents
Free to issue the following ringgit securities registered in Malaysia to non- •
residents:
Ordinary shares, including bonus and rights issues;
Irredeemable preference shares; and
Private debt securities
Prior permission is required for issuance of securities to non-residents other •
than as stated above
Issuance of bonds/ •
sukuk:
Ringgit-
denominated
bonds/sukuk
Free to issue in Malaysia •
Foreign currency-
denominated
bonds/sukuk
Free to issue as long as total foreign currency borrowing, including the bonds/ •
sukuk does not exceed RM100 million equivalent
Utilisation of bond/ •
sukuk proceeds:
Ringgit-
denominated
bonds/sukuk
Foreign currency-
denominated
bonds/sukuk
Free to use onshore •
Free to use for investment in foreign currency assets provided the issuer’s •
total investment does not exceed RM50 million equivalent in aggregate on a
corporate group basis per calendar year
Free to use onshore and offshore •
Guidelines for
issuance
Guidelines for issuance can be obtained at: •
http://www.mifc.co m
http://www.bnm.gov.my/fxadmin
http://www.sc.com.m y
FINANCIAL GUARANTEE
Licensed onshore •
banks
Free to issue any amount of financial guarantees on behalf or in favour of a •
non-resident
Free to obtain any amount of financial guarantees from non-residents •
The above financial guarantees issued or obtained by the licensed onshore •
banks are not required to be registered with the Controller of Foreign
Exchange
Non-bank residents • Free to issue any amount of financial guarantees on behalf or in favour of a •
non-resident
Free to obtain any amount of financial guarantees from non-residents •
Financial guarantees issued or obtained by the non-bank residents are •
required to be registered with the Controller of Foreign Exchange at least
seven working days prior to the issuance or obtaining of financial guarantee,
if the aggregate amount of financial guarantees issued or obtained exceeds
RM50 million equivalent, respectively
Annex
P 11
EXPORT AND IMPORT OF GOODS AND SERVICES BY RESIDENTS
Currency for payment •
of import and export
of goods and services
Payment must be made in foreign currency •
Repatriation of •
proceeds from the
export of goods
Export proceeds must be repatriated to Malaysia in full as per the sales •
contract which must not exceed six months from the date of export
Prior permission is required for residents to: •
Offset export proceeds against payables due to non-residents; or
Receive the export proceeds exceeding six months from the date of export
Retention of foreign •
currency export
proceeds onshore and
offshore
Free to retain in foreign currency accounts maintained with licensed onshore •
banks
Prior permission is required to retain in foreign currency accounts maintained •
with licensed International Islamic Banks or offshore banks
Hedging • Free to hedge with licensed onshore banks and licensed International Islamic •
Banks, payments or receipts for the import or export of goods and services:
Based on firm underlying commitment; or
On anticipatory basis up to the actual total amount paid or received in the
preceding 12 months
Hedging involving ringgit shall only be undertaken with licensed onshore •
banks
OPENING OF FOREIGN CURRENCY ACCOUNTS (FCA) BY RESIDENTS
Opening of FCA • Free to open FCA with licensed onshore banks, licensed International Islamic •
Banks, licensed offshore banks in Labuan and overseas banks
Sources of funds • The FCA can be credited with foreign currency funds sourced: •
From conversion of ringgit with licensed onshore banks:
No limit for residents without domestic ringgit borrowing;
For residents with domestic ringgit borrowing, up to permitted limits
for investment in foreign currency assets. Additional limits for overseas
education and employment purposes as follows:
Up to USD150,000 with licensed onshore banks and licensed -
International Islamic Banks;
Up to USD150,000 with licensed offshore banks in Labuan; and -
Up to USD50,000 with overseas banks -
From other residents for permitted purposes; and
From non-residents for permitted purposes. Export proceeds, however,
must be retained with licensed onshore banks only
Opening of joint FCA • Resident individuals are free to open joint FCAs for any purpose with other •
resident individuals
Resident companies, however, require prior permission to open joint FCAs •
Annual Report 2009
P 12
PAYMENT BETWEEN RESIDENTS
Payment in ringgit • No restriction •
Payment in foreign •
currency
Resident companies with export earnings are free to pay other resident •
companies in foreign currency for settlement of goods and services, sourced
from foreign currency accounts
Resident participants •
17
undertaking commodity murabahah through resident
commodity trading service providers are free to make payment in foreign
currency between resident participants
HEDGING BY RESIDENTS
Hedging of current •
account transactions
Free to hedge with licensed onshore banks and licensed International Islamic •
Banks for payments and receipts for import and export of goods and services:
Based on firm underlying commitment; or
On anticipatory basis provided the amount hedged does not exceed the
total amount paid or received in the preceding 12 months
Hedging involving ringgit shall only be undertaken with licensed onshore •
banks
Hedging of capital •
account transactions
Free to hedge with licensed onshore banks and licensed International Islamic •
Banks based on committed capital inflows or outflows
Residents are also allowed to hedge their existing holdings of foreign currency •
assets
Hedging involving ringgit shall only be undertaken with licensed onshore •
banks
IMPORT AND EXPORT OF RINGGIT AND FOREIGN CURRENCY BY RESIDENT TRAVELLERS
Import and export of •
ringgit notes
Allowed to import or export ringgit notes up to RM1,000 •
Import of foreign •
currency notes and
traveller’s cheques
No limit •
Export of foreign •
currency notes and
traveller’s cheques
Allowed to export foreign currency notes and traveller’s cheques up to an •
equivalent of USD10,000
Import and export of •
ringgit and foreign
currency exceeding
permitted limits
Application can be made online, using Form 13 which can be obtained at •
http://www.bnm.gov.my/fxadmin, or submitted via written application to
Foreign Exchange Administration Department, Bank Negara Malaysia
17
The participants of commodity murabahah comprise financial institutions, companies or individuals, commodity brokers, commodity
suppliers, commodity buyers and commodity trading service providers
Annex
P 13
DEALINGS WITH SPECIFIED PERSONS
Specified Persons • Prior permission is required for residents to deal with the following Specified •
Persons:
Individual or entity as designated pursuant to the United Nation Security
Council Resolution (UNSCR) relating to:
Osama bin Laden and The Taliban
Liberia
Al-Qaida Organisation
Saddam Hussein's immediate family members or senior officials of the
former Iraqi regime and their immediate family members
Iran
Democratic Republic of Congo
Democratic People’s Republic of Korea
Sudan
The State of Israel or their residents;
The authorities of the State of Israel;
The agencies of the State of Israel or its residents; and
Any entity owned by or controlled, directly or indirectly, by the State of
Israel or its resident
RESIDENT COMPANIES ACCORDED SPECIAL STATUS
Multimedia Super •
Corridor Companies
Companies with Multimedia Super Corridor status are exempted from foreign •
exchange administration requirements for transactions undertaken for own
account except dealing in ringgit offshore
Approved Operational •
Headquarters
Free to invest any amount in foreign currency assets to be funded with own •
foreign currency funds or foreign currency borrowing
Free to borrow any amount of foreign currency from licensed onshore banks, •
licensed International Islamic Banks and from any non-residents, provided the
operational headquarters do not on-lend to, or raise the funds on behalf of,
any resident
Free to utilise proceeds of any amount from the issuance of ordinary shares •
through initial public offering on Bursa Malaysia for investment in foreign
currency assets
Free to lend foreign currency sourced from listing of shares on foreign stock •
exchanges to other resident companies within the same corporate group in
Malaysia
Regional Distribution •
Centres and
International
Procurement Centres
Regional Distribution Centres and International Procurement Centres are •
subject to rules applicable to resident companies
Annual Report 2009
P 14
Resident corporations •
approved under the
following framework:
Iskandar
Development
Region
National
Biotechnology
Policy
Free to undertake the following: •
To pay and receive in foreign currency with residents;
To borrow any amount of foreign currency from licensed onshore banks,
licensed International Islamic Banks and non-residents;
To invest any amount in foreign currency assets onshore and offshore; and
To retain export proceeds offshore
Key Economic and
Financial Statistics
Annual Report 2009
P 16
Table A.1
Gross Domestic Product by Kind of Economic Activity at Constant 2000 Prices
2005 2006 2007 2008 2009p 2010f
RM million
Agriculture 35,835 37,701 38,224 39,769 39,929 41,175
Mining and quarrying 42,472 42,030 42,881 42,550 40,926 41,933
Manufacturing 137,940 147,154 151,789 153,744 139,448 148,455
Construction 14,685 14,639 15,332 15,657 16,548 17,157
Services 230,043 247,099 270,903 290,538 297,995 312,565
Less: Undistributed FISIM
1
17,742 18,385 19,730 20,786 22,270 23,728
Plus: Import duties 6,017 5,287 5,521 6,839 6,642 5,824
GDP at purchasers’ prices
2
449,250 475,526 504,919 528,311 519,218 543,380
Annual change (%)
Agriculture 2.6 5.2 1.4 4.0 0.4 3.1
Mining and quarrying -0.4 -1.0 2.0 -0.8 -3.8 2.5
Manufacturing 5.2 6.7 3.1 1.3 -9.3 6.5
Construction -1.5 -0.3 4.7 2.1 5.7 3.7
Services 7.2 7.4 9.6 7.2 2.6 4.9
Less: Undistributed FISIM
1
0.2 3.6 7.3 5.4 7.1 6.5
Plus: Import duties -1.3 -12.1 4.4 23.9 -2.9 -12.3
GDP at purchasers’ prices
2
5.3 5.8 6.2 4.6 -1.7 4.5~5.5
1
Financial intermediation services indirectly measured
2
Numbers may not necessarily add up due to rounding
p Preliminary
f Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Annex
P 17
Table A.2
Growth in Manufacturing Production (2005=100)
2006 2007 2008 2009 2007 2008 2009
Index Annual change (%)
Export-oriented industries 110.0 111.2 109.9 97.7 1.1 -1.2 -11.1
Electrical and electronics products cluster 113.5 111.8 107.8 83.2 -1.5 -3.6 -22.8
Electronics 116.4 119.9 113.4 85.5 3.0 -5.4 -24.6
Electrical products 107.9 96.2 97.1 78.9 -10.8 0.9 -18.8
Primary-related cluster 107.7 110.7 111.2 107.4 2.9 0.4 -3.5
Chemicals and chemical products 107.6 111.4 107.6 105.8 3.6 -3.5 -1.7
Petroleum products 108.2 110.8 117.4 116.5 2.5 5.9 -0.8
Textiles, wearing apparel and footwear 102.2 100.3 100.3 80.4 -1.9 0.0 -19.8
Wood and wood products 97.1 95.7 91.2 76.0 -1.4 -4.7 -16.6
Rubber products 112.7 122.5 128.2 124.3 8.6 4.7 -3.0
Off-estate processing 115.4 105.1 115.0 112.6 -8.9 9.4 -2.1
Paper products 112.4 140.8 120.6 114.0 25.3 -14.4 -5.5
Domestic-oriented industries 105.3 112.5 121.5 114.6 6.8 8.0 -5.7
Construction-related cluster 112.3 121.6 126.9 112.4 8.3 4.3 -11.4
Construction-related products 107.1 113.2 116.9 95.8 5.8 3.2 -18.1
Non-metallic mineral products 105.8 105.3 114.9 99.3 -0.4 9.1 -13.6
Basic iron & steel and
non-ferrous metal 108.6 122.9 119.3 91.5 13.1 -2.9 -23.3
Fabricated metal products 122.4 137.8 146.2 144.6 12.5 6.1 -1.1
Consumer-related cluster 100.2 105.9 117.6 116.1 5.6 11.0 -1.2
Food products 106.4 114.5 125.8 129.8 7.6 9.9 3.2
Transport equipment 95.3 94.3 116.4 102.0 -1.1 23.4 -12.4
Beverages 98.5 114.2 117.2 114.5 15.9 2.6 -2.3
Tobacco products 95.7 99.0 93.5 87.5 3.5 -5.6 -6.4
Others 99.7 110.4 101.7 129.1 10.7 -7.9 27.0
Total 109.1 111.4 112.2 101.0 2.2 0.7 -10.0
Source: Department of Statistics, Malaysia
Annual Report 2009
P 18
Table A.3
Production of Primary Commodities
2005 2006 2007 2008 2009p 2006 2007 2008 2009p
Volume Annual change (%)
Crude palm oil (‘000 tonnes) 14,962 15,881 15,824 17,734 17,565 6.1 -0.4 12.1 -1.0
Rubber (‘000 tonnes) 1,126 1,284 1,200 1,072 856 14.0 -6.6 -10.6 -20.2
Saw logs (‘000 cu. metres) 22,398 21,894 22,052 20,083 16,682
1
-2.3 0.7 -8.9 -10.9
1
Cocoa (‘000 tonnes) 28 32 35 28 18 14.2 10.2 -20.5 -35.1
Crude oil (including condensates)
(‘000 bpd)
704 667 683 688 660 -5.2 2.4 0.8 -4.1
Natural gas (mmscfd) 5,797 5,774 5,884 5,888 5,667 -0.4 1.9 0.1 -3.7
Tin-in-concentrates (‘000 tonnes) 2.9 2.4 2.3 2.6 2.4 -16.1 -4.9 14.3 -7.4
1
January - November 2009
p Preliminary
Source: Malaysian Palm Oil Board
Department of Statistics, Malaysia
Forestry Departments (Peninsular Malaysia, Sabah & Sarawak)
Malaysian Cocoa Board
PETRONAS
Minerals and Geoscience Department, Malaysia
Annex
P 19
Table A.4
GNI by Demand Aggregates
2005 2006 2007 2008 2009p 2010f
at Current Prices
(RM million)
Consumption 298,750 326,889 371,021 426,678 435,207 454,544
Private consumption 234,234 258,280 292,724 334,147 338,767 359,771
Public consumption 64,516 68,609 78,297 92,531 96,440 94,773
Investment 107,185 119,213 138,703 145,041 137,397 149,302
Private investment 53,705 62,139 76,981 80,624 62,547 65,430
Public investment 53,480 57,074 61,721 64,417 74,850 83,872
Change in stocks
1
-2,770 -1,722 5 -3,757 -42,900 2,964
Exports of goods and services 613,694 669,505 707,156 765,370 653,288 717,468
Imports of goods and services 494,414 539,443 577,110 594,655 508,559 576,625
GDP at purchasers’ prices 522,445 574,441 639,776 738,677 674,434 747,654
Net factor payments abroad -23,943 -17,294 -13,893 -23,707 -12,589 -19,918
GNI 498,503 557,147 625,882 714,970 661,845 727,736
at Constant 2000 Prices
(RM million)
Consumption 274,642 292,280 320,313 348,995 353,831 362,430
Private consumption 216,247 230,948 255,014 276,589 278,753 289,380
Public consumption 58,395 61,332 65,299 72,406 75,078 73,050
Investment 99,266 106,750 116,964 117,868 111,356 117,481
Private investment 50,841 55,538 62,101 62,598 48,956 49,299
Public investment 48,425 51,212 54,863 55,270 62,400 68,182
Change in stocks
1
-3,080 257 -4,075 -7,726 -20,939 2,410
Exports of goods and services 554,261 590,784 617,279 625,365 561,904 605,006
Imports of goods and services 475,838 514,544 545,562 556,191 486,934 543,946
GDP at purchasers’ prices 449,250 475,526 504,919 528,311 519,218 543,380
Net factor payments abroad -24,956 -20,517 -23,114 -36,781 -21,798 -28,088
GNI 424,295 455,008 481,806 491,529 497,420 515,292
1
Includes statistical discrepancy
p Preliminary
f Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Annual Report 2009
P 20
Table A.5
Savings-Investment Gap
2005 2006 2007 2008 2009p
RM million
Public gross domestic capital formation 53,480 57,074 61,722 64,417 74,850
Public savings 70,506 83,226 103,841 80,879 92,272
Deficit/surplus 17,026 26,152 42,119 16,462 17,422
Private gross domestic capital formation 50,935 60,417 76,986 76,867 19,647
Private savings 112,275 130,294 135,277 189,918 114,928
Deficit/surplus 61,340 69,877 58,291 113,051 95,281
Gross domestic capital formation 104,415 117,491 138,708 141,284 94,497
(as % of GNI) 20.9 21.1 22.2 19.8 14.3
Gross national savings 182,781 213,520 239,118 270,797 207,200
(as % of GNI) 36.7 38.3 38.2 37.9 31.3
Balance on current account 78,366 96,029 100,410 129,513 112,703
(as % of GNI) 15.7 17.2 16.0 18.1 17.0
p Preliminary
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Annex
P 21
Table A.6
Labour Market: Selected Indicators
2005 2006 2007 2008 2009e
(number of positions/persons)
Vacancies Reported by Industry
1
Agriculture, hunting, forestry and fishery 40,438 188,104 226,759 275,548 230,303
Mining and quarrying 150 861 1,163 1,450 1,377
Manufacturing 112,542 348,302 275,155 327,798 695,418
Construction 48,524 129,586 117,217 107,421 111,622
Services 63,441 154,902 204,599 346,763 507,627
Electricity, gas and water supply 859 2,227 1,477 2,047 4,367
Wholesale and retail trade, hotels and restaurants 23,921 67,956 66,600 99,317 162,270
Transport, storage and communication 3,892 8,287 12,578 15,264 15,090
Financial intermediation, real estate, renting and
business services 13,874 26,642 50,235 125,821 148,001
Public administration, defence and compulsory
social security 2,497 3,539 11,287 11,132 16,128
Community, social and personal service activities 18,398 46,251 62,422 93,182 161,771
Others not elsewhere classified 39,405 12,920 289 0 0
Total vacancies 304,500 834,675 825,182 1,058,980 1,546,347
Retrenchment by Industry
Agriculture, hunting, forestry and fishery 243 312 255 398 278
Mining and quarrying 355 78 61 89 78
Manufacturing 11,802 8,890 9,970 11,014 17,850
Construction 411 603 291 199 503
Services 3,298 5,477 3,458 4,769 6,355
Electricity, gas and water supply 0 65 5 77 156
Wholesale and retail trade, hotels and restaurants 1,294 2,327 1,929 2,052 1,429
Transport, storage and communication 802 1,521 322 773 643
Financial intermediation, real estate, renting and
business services 463 983 761 1,008 1,923
Community, social and personal service activities 739 581 441 859 2,204
Total retrenchments 16,109 15,360 14,035 16,469 25,064
Employment by Industry
2
(‘000 persons)
Agriculture, forestry, livestock and fishery 1,401.3 1,392.4 1,389.8 1,390.9 1,391.5
Mining and quarrying 42.7 42.6 42.9 42.8 42.6
Manufacturing 3,133.2 3,227.2 3,296.6 3,338.2 3,302.0
Construction 759.6 755.2 757.3 758.4 760.8
Services 5,555.9 5,741.7 5,911.4 6,046.1 6,112.2
Electricity, gas and water supply 93.0 95.0 96.8 97.6 97.4
Transport, storage and communication 630.6 646.4 660.0 673.2 675.0
Wholesale and retail trade, hotels and restaurants 1,861.5 1,930.4 1,957.7 1,984.3 1,996.4
Finance, insurance, real estate and business services 734.4 767.5 789.7 811.9 814.7
Government services 1,118.4 1,152.5 1,225.6 1,263.5 1,286.2
Other services 1,118.1 1,150.0 1,181.6 1,215.6 1,242.5
Total employment 10,892.8 11,159.0 11,398.0 11,576.5 11,609.1
Unemployment rate
2
(% of labour force) 3.5 3.3 3.2 3.3 3.7
e Estimates
1
Refers to vacancies reported by employers through the JobsMalaysia portal (formerly known as Electronic Labour Exchange, ELX).
2
Refers to estimates by Economic Planning Unit
Source: Economic Planning Unit and Ministry of Human Resources
Annual Report 2009
P 22
Table A.7
Private Consumption Indicators
2008
2009
1Q 2Q 3Q 4Q Year
Sales of passenger cars (‘000 units) 497.5 109.0 119.1 133.4 124.5 486.1
Annual change (%) 12.3 -9.3 -11.1 -3.5 18.5 -2.3
Imports of consumption goods (RM billion) 32.3 7.0 7.6 8.3 8.5 31.4
Annual change (%) 11.8 -4.3 -8.3 -4.4 6.3 -2.7
Tax collection
Sales tax (RM billion) 7.5 1.4 1.6 1.7 2.3 7.0
Service tax (RM billion) 3.3 0.7 0.9 0.8 1.0 3.3
Narrow Money (M1)
Annual change (%) 8.3 3.5 5.5 6.4 9.8 9.8
Loans disbursed by banking system
Consumption credit (excl. passenger cars)
Annual change (%) 2.2 5.5 14.7 26.1 32.1 19.6
Retail trade, restaurants and hotels
Annual change (%) 24.5 -2.7 -13.9 -14.3 2.9 -7.5
MRA retail sales (Annual change in %) 5.0 -3.3 4.1 0.0 3.0 0.8
Credit card turnover spending
1
(RM billion) 64.2 16.0 16.4 17.3 18.5 68.1
Annual change (%) 15.8 6.0 5.7 3.1 9.7 6.2
MIER Consumer Sentiment Index - 78.9 105.8 105.4 109.6 -
FBM KLCI 876.8 872.6 1,075.2 1,202.1 1,272.8 1,272.8
Commodity prices
CPO (RM/tonne) 2,875 1,927 2,548 2,261 2,292 2,257
Crude oil (USD/barrel) 100 43 60 68 76 62
Rubber (sen/kg) 829 505 564 659 842 643
1
Resident spending only
Annex
P 23
Table A.8
Private Investment Indicators
2008
2009
1Q 2Q 3Q 4Q Year
Sales of commercial vehicles (‘000 units) 50.7 11.1 11.8 13.3 14.4 50.6
Annual change (%) 14.4 5.4 -10.6 -3.8 9.7 -0.2
Imports of capital goods (RM billion) 69.9 14.8 15.0 16.2 19.8 65.8
Annual change (%) 0.0 -7.8 -18.4 -13.2 17.4 -5.9
Approvals by MITI (Manufacturing sector)
No. of projects 919 211 179 178 198 766
Capital investment (RM billion) 62.8 8.0 8.9 4.0 11.9 32.6
Foreign 46.1 3.7 7.4 2.2 8.9 22.1
Local 16.7 4.3 1.5 1.7 3.0 10.5
New investment (% share) 66.9 55.6 82.7 60.6 66.6 67.6
Reinvestments (% share) 33.1 44.4 17.3 39.4 33.4 32.4
Loans disbursed by banking system
Manufacturing sector
Annual change (%) 12.4 -16.6 -22.2 -20.3 -0.2 -15.3
Construction sector
Annual change (%) 6.8 -6.7 4.7 20.0 52.4 16.4
Private Debt Securities (excluding Cagamas)
Total funds raised (RM billion) 49.7 9.3 19.3 13.5 16.4 58.6
New activities 33.3 1.3 0.9 1.9 4.7 8.7
Initial Public Offerings (Bursa Malaysia)
Total funds raised (RM billion) 1.3 0.0 0.2 0.3 11.6 12.2
MIER Business Conditions Survey
Business Conditions Index - 61.1 105.2 113.7 118.8 -
Capacity Utilisation Rate - 72.0 78.2 81.7 81.4 -
MSC-Status Companies
No. of companies 242 55 70 75 84 284
Approved investment (RM billion) 1.8 0.3 0.7 0.6 0.6 2.2
Annual Report 2009
P 24
Table A.9
Balance of Payments
Item
2006 2007
+ - Net + - Net
RM million
Goods
1
590,018 452,726 137,292 605,916 478,243 127,673
Trade account 589,240 478,148 111,092 604,300 502,045 102,255
Services 79,488 86,718 -7,230 101,240 98,867 2,373
Transportation 15,217 34,948 -19,731 24,582 37,755 -13,173
Travel 38,239 15,606 22,633 48,289 19,174 29,115
Other services 25,629 35,322 -9,693 28,068 41,246 -13,178
Government transactions n.i.e.
2
403 842 -440 301 691 -390
Balance on goods and services 669,505 539,443 130,062 707,156 577,110 130,047
Income 31,107 48,401 -17,294 38,840 52,733 -13,893
Compensation of employees 5,007 5,313 -306 5,372 5,972 -600
Investment income
3
26,100 43,088 -16,988 33,468 46,761 -13,294
Current transfers 1,149 17,889 -16,739 1,444 17,187 -15,743
Balance on current account 701,761 605,734 96,029 747,439 647,030 100,410
% of GNI 17.2 16.0
Capital account -264 -95
Financial account -43,182 -37,710
Direct investment 144 -9,142
Abroad -22,086 -38,224
In Malaysia 22,230 29,081
Portfolio investment 12,786 18,355
Other investment -56,112 -46,923
Official sector -8,018 -5,788
Private sector -48,094 -41,135
Balance on capital and financial accounts -43,446 -37,805
Errors and omissions -27,424 -17,309
of which:
Foreign exchange revaluation
gain (+) / loss (-) -6,945 -5,597
Overall balance (surplus + / deficit -) 25,158 45,296
Bank Negara Malaysia
international reserves, net
4
RM million 290,399 335,695
USD million 82,451 101,338
Reserves as months of
retained imports 7.8 8.4
1
Adjusted for valuation and coverage to the balance of payments basis. Imports include military goods which are not included in trade data
2
Include transactions of foreign military and diplomatic establishments
3
Include undistributed earnings of foreign direct investment companies. The counterpart of these earnings is shown as reinvested earnings under
“Direct Investment” in the Financial Account
4
All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance sheet date and the gain/loss
has been reflected accordingly in the Bank’s account
p Preliminary
f Forecast
n.i.e. Not included elsewhere
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Annex
P 25
2008 2009p 2010f
+ - Net + - Net + - Net
RM million
664,325 493,773 170,552 554,215 412,704 141,512 615,245 473,690 141,555
663,494 521,611 141,883 553,295 434,940 118,355 615,058 498,353 116,705
101,045 100,882 163 99,073 95,854 3,219 102,223 102,934 -711
22,495 37,895 -15,401 14,909 31,966 -17,057 16,607 36,292 -19,685
50,961 22,446 28,515 54,213 22,625 31,588 55,439 24,261 31,178
27,463 39,839 -12,376 29,806 40,521 -10,714 30,003 41,666 -11,663
126 702 -576 144 742 -598 175 715 -540
765,370 594,655 170,715 653,288 508,558 144,731 717,468 576,625 140,844
39,930 63,638 -23,707 40,538 53,127 -12,589 40,442 60,361 -19,918
4,421 5,152 -731 4,002 5,387 -1,385 3,850 5,490 -1,640
35,509 58,486 -22,977 36,537 47,740 -11,203 36,592 54,871 -18,278
1,410 18,905 -17,495 3,687 23,127 -19,439 1,390 18,500 -17,110
806,710 677,197 129,513 697,513 584,812 112,703 759,301 655,485 103,815
18.1 17.0 14.3
592 -162
-118,501 -82,948
-26,058 -24,851
-50,192 -30,514
24,134 5,663
-84,377 830
-8,066 -58,927
852 4,099
-8,918 -63,026
-117,909 -83,110
-29,854 -15,762
-5,824 10,697
-18,250 13,831
317,445 331,277
91,529 96,688
7.6 9.7
Annual Report 2009
P 26
Table A.10
Gross Exports
2007 2008 2009p 2008 2009p 2009p
RM million Annual change (%) % share
Manufactures 473,695 491,930 430,575 3.8 -12.5 77.8
of which:
Electronics, electrical machinery and appliances 287,696 277,282 246,897 -3.6 -11.0 44.6
Electronics 213,704 195,933 179,087 -8.3 -8.6 32.4
Semiconductors 96,653 89,819 92,972 -7.1 3.5 16.8
Electronic equipment & parts 117,051 106,114 86,115 -9.3 -18.8 15.6
Electrical machinery & appliances 73,993 81,349 67,809 9.9 -16.6 12.3
Consumer electrical products 16,461 21,388 18,794 29.9 -12.1 3.4
Industrial & commercial electrical products 29,696 31,088 23,986 4.7 -22.8 4.3
Electrical industrial machinery and equipment 24,297 25,382 21,905 4.5 -13.7 4.0
Household electrical appliances 3,538 3,491 3,125 -1.3 -10.5 0.6
Chemicals & chemical products 37,159 40,926 34,161 10.1 -16.5 6.2
Manufactures of metal 26,372 29,257 22,644 10.9 -22.6 4.1
Petroleum products 22,093 31,149 21,939 41.0 -29.6 4.0
Optical and scientific equipment 13,626 14,944 13,095 9.7 -12.4 2.4
Textiles, clothing and footwear 10,631 10,911 9,375 2.6 -14.1 1.7
Wood products 9,736 9,767 7,978 0.3 -18.3 1.4
Rubber products 10,326 12,426 12,125 20.3 -2.4 2.2
Minerals 61,913 87,536 59,317 41.4 -32.2 10.7
of which:
Crude oil and condensates 32,865 43,698 25,360 33.0 -42.0 4.6
Liquefied natural gas (LNG) 26,936 40,732 31,195 51.2 -23.4 5.6
Agriculture 52,491 68,097 53,394 29.7 -21.6 9.7
of which:
Palm oil 32,027 45,955 36,365 43.5 -20.9 6.6
Rubber 7,334 8,112 4,460 10.6 -45.0 0.8
Others 16,201 15,931 10,009 -1.7 -37.2 1.8
Total 604,300 663,494 553,295 9.8 -16.6 100.0
p Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Annex
P 27
Table A.11
Exports of Primary Commodities
2007 2008 2009p 2008 2009p
Volume and value Annual change (%)
Commodity exports (RM million) 114,404 155,634 112,711 36.0 -27.6
Agriculture exports (RM million) 52,491 68,097 53,394 29.7 -21.6
of which:
Palm oil
(‘000 tonnes) 13,412 15,699 16,256 17.1 3.5
(RM/tonne) 2,388 2,927 2,237 22.6 -23.6
(RM million) 32,027 45,955 36,365 43.5 -20.9
Palm kernel oil
(‘000 tonnes) 598 684 1,028 14.3 50.3
(RM/tonne) 2,749 3,792 1,698 38.0 -55.2
(RM million) 1,644 2,592 1,745 57.7 -32.7
Rubber
(‘000 tonnes) 1,020 916 703 -10.2 -23.2
(sen/kilogramme) 719 886 634 23.2 -28.4
(RM million) 7,334 8,112 4,460 10.6 -45.0
Saw logs
(‘000 cubic metres) 4,690 4,368 4,211 -6.9 -3.6
(RM/cubic metre) 457 471 482 3.1 2.5
(RM million) 2,142 2,057 2,031 -4.0 -1.2
Sawn timber
(‘000 cubic metres) 2,831 2,854 1,689 0.8 -40.8
(RM/cubic metre) 1,456 1,211 1,786 -16.9 47.5
(RM million) 4,123 3,455 3,016 -16.2 -12.7
Cocoa beans
(‘000 tonnes) 18.4 7.6 14.4 -58.6 88.5
(RM/tonne) 6,471 7,883 9,064 21.8 15.0
(RM million) 119 60 130 -49.5 116.7
Mineral exports (RM million) 61,913 87,536 59,317 41.4 -32.2
of which:
Crude oil and condensates
(‘000 tonnes) 16,880 16,477 16,413 -2.4 -0.4
(USD/barrel) 74.69 105.31 58.00 41.0 -44.9
(RM million) 32,865 43,698 25,360 33.0 -42.0
Liquefied natural gas (LNG)
(‘000 tonnes) 22,904 22,873 22,186 -0.1 -3.0
(RM/tonne) 1,176 1,781 1,406 51.4 -21.0
(RM million) 26,936 40,732 31,195 51.2 -23.4
Tin
(‘000 tonnes) 16.8 27.5 22.9 63.5 -16.9
(RM/tonne) 47,227 61,675 45,771 30.6 -25.8
(RM million) 795 1,698 1,047 113.5 -38.3
p

Preliminary
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Annual Report 2009
P 28
Table A.12
Principal Markets for Manufactured Exports
Country
2005 2006 2007 2008 2009p 2005 2006 2007 2008 2009p
RM million % share
Selected ASEAN countries 113,081 123,766 123,809 134,858 114,180 26.1 26.1 26.1 27.4 26.5
Singapore 75,507 81,359 78,490 85,286 70,359 17.5 17.2 16.6 17.3 16.3
Thailand 21,639 24,624 24,991 25,664 24,073 5.0 5.2 5.3 5.2 5.6
Indonesia 9,492 10,677 12,574 16,339 13,074 2.2 2.3 2.7 3.3 3.0
Philippines 5,429 6,135 6,564 6,225 5,211 1.3 1.3 1.4 1.3 1.2
Brunei Darussalam 1,014 971 1,190 1,344 1,463 0.2 0.2 0.3 0.3 0.3
United States 100,859 106,009 90,102 76,689 56,653 23.3 22.4 19.0 15.6 13.2
European Union 55,025 65,155 66,971 63,161 52,465 12.7 13.8 14.1 12.8 12.2
Netherlands 14,741 17,787 19,060 18,646 15,178 3.4 3.8 4.0 3.8 3.5
Germany 9,989 11,158 13,393 13,597 13,716 2.3 2.4 2.8 2.8 3.2
United Kingdom 8,721 10,117 9,219 8,620 6,657 2.0 2.1 1.9 1.8 1.5
Others 21,575 26,093 25,299 22,298 16,914 5.0 5.5 5.3 4.5 3.9
The People’s Republic of China 26,086 32,015 38,009 44,494 51,169 6.0 6.8 8.0 9.0 11.9
Japan 32,327 33,294 32,574 36,004 30,177 7.5 7.0 6.9 7.3 7.0
Hong Kong SAR 30,188 28,147 26,690 27,045 28,026 7.0 5.9 5.6 5.5 6.5
Middle East 13,237 16,008 18,815 23,378 20,688 3.1 3.4 4.0 4.8 4.8
Australia 10,854 11,287 12,081 14,808 13,736 2.5 2.4 2.6 3.0 3.2
Chinese Taipei 10,551 10,838 11,724 10,501 10,074 2.4 2.3 2.5 2.1 2.3
Korea 9,564 10,381 10,732 10,304 9,592 2.2 2.2 2.3 2.1 2.2
India 6,532 7,258 9,172 10,129 8,050 1.5 1.5 1.9 2.1 1.9
Latin American countries 4,789 6,072 7,156 9,181 7,358 1.1 1.3 1.5 1.9 1.7
Canada 2,637 3,535 2,971 2,964 2,620 0.6 0.7 0.6 0.6 0.6
Rest of the World 16,801 19,666 22,888 28,413 25,787 3.9 4.2 4.8 5.8 6.0
Total 432,531 473,432 473,695 491,930 430,575 100.0 100.0 100.0 100.0 100.0
p Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Annex
P 29
Table A.13
Principal Export Markets for Electronics
Country
2005 2006 2007 2008 2009p 2005 2006 2007 2008 2009p
RM million % share
The People’s
Republic of China 13,236 17,297 22,640 27,259 34,833 6.3 7.8 10.6 13.9 19.5
United States 64,527 68,237 56,406 43,360 28,060 30.9 30.8 26.4 22.1 15.7
Singapore 35,044 35,115 34,326 33,828 28,045 16.8 15.9 16.1 17.3 15.7
Hong Kong SAR 21,651 18,729 17,524 17,433 20,106 10.4 8.5 8.2 8.9 11.2
Japan 10,319 11,462 11,244 10,171 9,561 4.9 5.2 5.3 5.2 5.3
Netherlands 9,954 13,386 13,535 11,210 9,462 4.8 6.0 6.3 5.7 5.3
Thailand 9,377 9,681 9,954 9,392 9,248 4.5 4.4 4.7 4.8 5.2
Germany 5,153 5,136 6,618 6,587 7,657 2.5 2.3 3.1 3.4 4.3
Chinese Taipei 5,447 5,268 5,357 4,513 5,697 2.6 2.4 2.5 2.3 3.2
Korea 4,210 4,283 4,110 3,612 3,299 2.0 1.9 1.9 1.8 1.8
Others 29,626 32,914 31,991 28,568 23,118 14.2 14.9 15.0 14.6 12.9
Total 208,543 221,508 213,704 195,933 179,087 100.0 100.0 100.0 100.0 100.0
p

Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Table A.14
Principal Export Markets for Electrical Products
Country
2005 2006 2007 2008 2009p 2005 2006 2007 2008 2009p
RM million % share
United States 18,944 19,025 15,759 14,886 12,970 25.5 24.0 21.3 18.3 19.1
European Union 11,045 13,235 12,214 13,451 9,344 14.9 16.7 16.5 16.5 13.8
Singapore 13,119 14,701 10,983 10,988 8,169 17.7 18.5 14.8 13.5 12.0
Japan 7,553 6,090 5,936 7,326 6,946 10.2 7.7 8.0 9.0 10.2
Middle East 2,679 3,355 4,393 5,633 5,090 3.6 4.2 5.9 6.9 7.5
Australia 1,829 1,797 2,522 3,598 4,117 2.5 2.3 3.4 4.4 6.1
The People’s
Republic of China 3,340 3,092 3,555 3,816 3,146 4.5 3.9 4.8 4.7 4.6
Hong Kong SAR 2,940 3,420 3,287 3,425 2,976 4.0 4.3 4.4 4.2 4.4
Thailand 2,557 2,670 2,784 2,705 2,600 3.4 3.4 3.8 3.3 3.8
Others 10,248 11,892 12,561 15,519 12,452 13.8 15.0 17.0 19.1 18.4
Total 74,253 79,277 73,993 81,349 67,809 100.0 100.0 100.0 100.0 100.0
p Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Annual Report 2009
P 30
Table A.15
Principal Export Markets for Chemicals and Chemical Products
Country
2005 2006 2007 2008 2009p 2005 2006 2007 2008 2009p
RM million % share
The People’s
Republic of China 4,322 4,432 5,009 5,140 5,359 13.5 13.1 13.5 12.6 15.7
Singapore 3,129 3,084 3,329 3,720 3,299 9.8 9.1 9.0 9.1 9.7
Indonesia 2,459 2,646 2,902 3,972 3,074 7.7 7.8 7.8 9.7 9.0
Thailand 2,809 3,168 3,389 3,659 2,774 8.8 9.4 9.1 8.9 8.1
Japan 3,199 3,132 2,866 3,221 2,290 10.0 9.3 7.7 7.9 6.7
India 1,678 1,797 1,874 2,195 2,011 5.2 5.3 5.0 5.4 5.9
Hong Kong SAR 2,174 2,388 2,004 1,965 1,528 6.8 7.1 5.4 4.8 4.5
Korea 1,486 1,555 1,550 1,302 1,237 4.6 4.6 4.2 3.2 3.6
United States 1,404 1,274 1,512 1,569 1,181 4.4 3.8 4.1 3.8 3.5
Chinese Taipei 1,319 1,416 1,723 1,610 1,158 4.1 4.2 4.6 3.9 3.4
Others 7,986 8,834 11,001 12,575 10,250 25.0 26.2 29.6 30.7 30.0
Total 31,965 33,725 37,159 40,926 34,161 100.0 100.0 100.0 100.0 100.0
p

Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Annex
P 31
Table A. 16
Principal Export Markets for Palm Oil
Country
2005 2006 2007 2008 2009p 2005 2006 2007 2008 2009p
‘000 tonnes % share
The People’s
Republic of China 2,914 3,532 3,786 3,785 3,672 22.6 25.2 28.2 24.1 22.6
Pakistan 929 855 1,062 1,552 1,829 7.2 6.0 7.9 9.9 11.3
European Union 2,149 2,586 2,097 2,022 1,478 16.7 18.3 15.6 12.9 9.1
Netherlands 1,367 1,703 1,527 1,311 959 10.6 12.0 11.4 8.3 5.9
Germany 180 190 30 101 129 1.4 1.3 0.2 0.6 0.8
Italy 155 165 126 182 135 1.2 1.2 0.9 1.2 0.8
Sweden 103 220 134 103 49 0.8 1.6 1.0 0.7 0.3
Others 345 308 280 325 206 2.7 2.2 2.1 2.1 1.3
Middle East 1,684 1,324 1,212 1,319 1,275 13.0 9.4 9.0 8.4 7.8
India 619 657 515 956 1,175 4.8 4.6 3.8 6.1 7.2
United States 535 696 516 1,234 804 4.1 4.9 3.8 7.9 4.9
Japan 438 498 516 530 494 3.4 3.5 3.8 3.4 3.0
Korea 223 207 225 199 269 1.7 1.5 1.7 1.3 1.7
Chinese Taipei 127 148 129 161 133 1.0 1.0 1.0 1.0 0.8
Australia 107 121 121 113 109 0.8 0.9 0.9 0.7 0.7
Bangladesh 485 413 170 253 84 3.8 2.9 1.3 1.6 0.5
Others 2,692 3,105 3,064 3,576 4,934 20.9 22.0 22.8 22.8 30.3
Total 12,901 14,142 13,412 15,699 16,256 100.0 100.0 100.0 100.0 100.0
p Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Annual Report 2009
P 32
Table A.17
Principal Export Markets for Rubber
Country
2005 2006 2007 2008 2009p 2005 2006 2007 2008 2009p
‘000 tonnes % share
The People’s
Republic of China 386 406 371 301 245 33.5 34.1 36.4 32.8 34.8
European Union 313 316 294 279 151 27.2 26.6 28.9 30.5 21.5
Germany 132 144 136 123 73 11.4 12.1 13.3 13.5 10.4
Netherlands 28 21 17 21 18 2.4 1.8 1.6 2.3 2.5
France 46 41 43 32 17 4.0 3.4 4.3 3.5 2.4
Italy 24 22 20 17 9 2.1 1.9 1.9 1.9 1.2
United Kingdom 21 18 16 17 7 1.8 1.5 1.5 1.8 1.0
Spain 13 11 9 8 4 1.2 0.9 0.9 0.8 0.5
Others 49 59 54 61 24 4.2 5.0 5.3 6.7 3.4
Middle East 74 71 54 69 49 6.5 6.0 5.3 7.5 7.0
Iran 40 45 27 40 29 3.5 3.8 2.7 4.4 4.1
Turkey 24 20 21 21 15 2.1 1.7 2.1 2.3 2.2
Others 10 6 5 7 5 0.8 0.5 0.5 0.8 0.7
Korea 74 67 61 52 43 6.5 5.6 6.0 5.6 6.2
United States 67 64 53 53 26 5.9 5.4 5.2 5.8 3.6
Brazil 31 32 38 35 22 2.7 2.7 3.8 3.9 3.1
Canada 17 15 19 12 8 1.5 1.3 1.9 1.4 1.1
Others 188 218 129 115 161 16.3 18.3 12.7 12.5 22.8
Total 1,151 1,188 1,020 916 703 100.0 100.0 100.0 100.0 100.0
p Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Annex
P 33
Table A.18
Principal Export Markets for Crude Oil
Country
2005 2006 2007 2008 2009p 2005 2006 2007 2008 2009p
‘000 tonnes % share
Australia 3,817 2,269 3,331 3,001 3,081 20.8 13.4 19.7 18.2 18.8
India 3,783 4,417 3,908 3,890 2,887 20.6 26.2 23.2 23.6 17.6
Thailand 3,418 2,528 1,435 1,501 2,753 18.6 15.0 8.5 9.1 16.8
Indonesia 1,431 1,547 2,038 1,289 1,984 7.8 9.2 12.1 7.8 12.1
Singapore 1,638 1,285 1,607 2,732 1,516 8.9 7.6 9.5 16.6 9.2
The People’s
Republic of China 239 79 240 597 1,481 1.3 0.5 1.4 3.6 9.0
Korea 1,436 1,433 1,545 1,314 913 7.8 8.5 9.2 8.0 5.6
Philippines 743 471 872 867 520 4.0 2.8 5.2 5.3 3.2
Japan 808 926 987 751 512 4.4 5.5 5.8 4.6 3.1
United States 314 282 46 165 323 1.7 1.7 0.3 1.0 2.0
New Zealand 299 424 381 356 233 1.6 2.5 2.3 2.2 1.4
Others 464 1,214 491 13 209 2.5 7.2 2.9 0.1 1.3
Total 18,390 16,875 16,880 16,477 16,413 100.0 100.0 100.0 100.0 100.0
p Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Table A.19
Principal Export Markets for LNG
Country
2005 2006 2007 2008 2009p 2005 2006 2007 2008 2009p
‘000 tonnes % share
Japan 13,664 12,170 13,238 14,223 12,993 63.1 57.3 57.8 62.2 58.6
Korea 4,713 5,626 6,069 6,132 5,666 21.8 26.5 26.5 26.8 25.5
Chinese Taipei 3,013 3,319 3,524 2,496 2,460 13.9 15.6 15.4 10.9 11.1
Others 251 119 72 23 1,066 1.2 0.6 0.3 0.1 4.8
Total 21,641 21,234 22,904 22,873 22,186 100.0 100.0 100.0 100.0 100.0
p Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Annual Report 2009
P 34
1
Excludes currency and deposits held by non-residents with resident banking institutions
2
Effective from the first quarter of 2008, the external debt data of Malaysia has been redefined to treat entities in Labuan International Business
and Financial Centre (Labuan IBFC) as residents
p Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Ministry of Finance, Malaysia and Bank Negara Malaysia
Table A.20
External Debt and Debt Servicing
2005 2006 2007 2008
2
2009p
RM million
Medium- and long-term debt:
Gross borrowing 29,162 28,620 23,844 26,641 33,783
Federal Government 651 834 489 472 451
NFPEs 6,431 10,909 1,706 5,952 15,454
Private sector 22,080 16,877 21,650 20,217 17,878
Repayment and prepayment 34,957 28,538 25,699 13,319 36,069
Federal Government 4,153 3,888 4,803 946 6,737
NFPEs 13,911 13,197 7,840 2,068 8,139
Private sector 16,893 11,453 13,055 10,305 21,193
Net borrowing -5,795 81 -1,855 13,322 -2,286
Federal Government -3,502 -3,054 -4,314 -473 -6,286
NFPEs -7,480 -2,288 -6,134 3,884 7,315
Private sector 5,187 5,424 8,594 9,911 -3,315
Outstanding debt 150,746 141,704 132,978 156,546 155,951
Federal Government 30,000 25,005 19,602 20,316 13,786
NFPEs 56,233 50,378 41,854 63,146 71,588
Private sector 64,513 66,322 71,521 73,085 70,576
Currency composition (% share) 100.0 100.0 100.0 100.0 100.0
US dollar 79.6 80.5 80.7 75.6
Japanese yen 11.7 11.4 11.2 12.7
Others 8.7 8.1 8.1 11.7
Short-term debt:
Outstanding debt 46,953 42,800 54,468 79,635 77,966
Banking sector
1
38,871 28,812 42,134 72,043 69,029
Non-bank private sector 8,082 13,988 12,334 7,592 8,937
Total external debt: 197,698 184,505 187,445 236,181 233,917
Total external debt (USD million) 51,790 51,736 56,027 67,380 67,671
% GNI 39.7 33.2 29.8 33.0 35.3
Annual change (%) -1.4 -6.7 1.6 26.0 -1.0
Total servicing (including short-term
interest payment) 32,800 32,086 26,562 20,025 42,165
of which:
Medium- and long-term debt
Repayment (excluding prepayment) 25,471 23,760 19,105 13,290 36,069
Federal Government 4,153 3,888 4,803 946 6,737
NFPEs 10,166 11,311 5,035 2,068 8,139
Private sector 11,152 8,561 9,267 10,276 21,193
Interest payment 6,101 6,389 5,127 5,529 5,622
Federal Government 1,729 1,506 1,426 1,155 909
NFPEs 3,182 3,511 2,282 2,493 2,994
Private sector 1,190 1,372 1,418 1,881 1,720
Debt service ratio (% of exports of
goods and services)
Total debt 5.3 4.8 3.8 2.6 6.5
Medium- and long-term debt 5.1 4.5 3.4 2.5 6.4
Federal Government 1.0 0.8 0.9 0.3 1.2
NFPEs 2.2 2.2 1.0 0.6 1.7
Private sector 2.0 1.5 1.5 1.6 3.5
76.0
11.2
12.8
Annex
P 35
Table A.21
Consumer Price Index
Weights
(%)
(2005=100)
1
2006
Annual
Change
(%)
2007
Annual
Change
(%)
2008
Annual
Change
(%)
2009
Annual
Change
(%)
Total 100.0 3.6 2.0 5.4 0.6
of which:
Food and non-alcoholic beverages 31.4 3.4 3.0 8.8 4.1
Alcoholic beverages and tobacco 1.9 6.9 7.8 7.3 6.1
Clothing and footwear 3.1 -1.3 -1.4 -0.5 -0.9
Housing, water, electricity, gas and other fuels 21.4 1.5 1.3 1.6 1.4
Furnishing, household equipment and routine
household maintenance 4.3 1.1 1.1 3.0 2.9
Health 1.4 2.1 1.6 2.2 2.3
Transport 15.9 11.0 2.3 8.8 -9.4
Communication 5.1 -1.4 -1.2 -0.6 -0.5
Recreation services and culture 4.6 0.7 1.4 1.8 1.5
Education 1.9 1.6 1.8 2.3 2.4
Restaurants and hotels 3.0 3.7 3.7 6.6 2.9
Miscellaneous goods and services 6.0 2.2 1.0 3.3 3.8
1
Effective from 2006, the Consumer Price Index has been revised to the new base year 2005=100, from 2000=100 previously
Source: Department of Statistics, Malaysia
Annual Report 2009
P 36
Table A.22
Producer Price Index
Weights
(%)
(2005=100)
1
2006
Annual
Change
(%)
2007
Annual
Change
(%)
2008
Annual
Change
(%)
2009
Annual
Change
(%)
Total 100.0 3.1 5.5 10.3 -7.1
of which:
Food 5.4 2.8 8.5 12.3 0.3
Beverages and tobacco 0.9 4.1 0.8 1.4 1.7
Crude materials, inedible 5.4 12.1 21.9 11.5 -11.8
Mineral fuels, lubricants etc. 17.4 9.1 4.0 34.5 -22.0
Animal and vegetable oils and fats 4.2 -2.0 43.0 24.5 -19.5
Chemicals 7.0 2.9 3.1 7.3 -7.5
Manufactured goods 10.9 2.3 2.7 6.7 -0.5
Machinery and transport equipment 42.9 0.6 1.8 0.7 1.5
Miscellaneous manufactured articles 5.4 1.4 1.4 1.7 1.5
Miscellaneous transactions and commodities 0.5 3.8 6.2 12.4 -6.2
Local Production 65.6 3.8 7.1 13.3 -10.4
Import 34.4 1.6 2.4 4.0 0.5
1
Effective from 2010, the Producer Price Index has been revised to the new base year 2005=100, from 2000=100 previously
Source: Department of Statistics, Malaysia
Annex
P 37
Table A.23
Broad Money (M3)
Annual change As at end
2005 2006 2007 2008 2009 2009
RM million
Broad money (M3)
1
51,609 87,467 72,436 99,127 85,133 1,016,997
Currency in circulation
2
1,629 3,335 2,746 4,178 3,015 43,439
Demand deposits 8,683 11,705 24,247 11,093 14,707 158,182
Broad quasi-money 41,297 72,427 45,444 83,856 67,411 815,376
Fixed deposits 4,940 31,940 10,701 27,969 23,241 453,223
Savings deposits 1,947 5,195 8,703 7,786 10,050 102,268
NIDs 12,785 14,321 -15,279 144 -8,782 22,344
Repos 17,260 11,799 -72,366 -3,046 898 1,057
Foreign currency deposits 2,467 3,218 1,570 16,649 15,283 54,589
Other deposits 1,898 5,956 112,116 34,356 26,721 181,896
Factors Affecting M3
Net claims on Government -5,204 8,317 -641 33,649 25,730 57,138
Claims on Government -2,152 1,614 -490 33,652 35,903 105,970
Less: Government deposits 3,052 -6,703 151 3 10,173 48,832
Claims on private sector 44,501 34,714 53,407 94,229 51,523 875,243
Loans 44,840 36,779 50,926 76,903 47,051 771,601
Securities -339 -2,065 2,481 17,326 4,473 103,642
Net foreign assets 1,832 52,745 71,166 -51,985 22,363 354,163
Bank Negara Malaysia
3
13,550 25,158 44,569 -18,265 7,343 324,046
Banking system -11,719 27,587 26,597 -33,720 15,020 30,117
Other influences 10,480 -8,309 -51,496 23,235 -14,484 -269,547
1
Excludes interplacements among banking institutions
2
Excludes holdings by banking system
3
Includes exchange rate revaluation loss/gain
Annual Report 2009
P 38
Table A.24
Money Supply: Annual Change and Growth Rates
2005 2006 2007 2008 2009
RM
million
%
RM
million
%
RM
million
%
RM
million
%
RM
million
%
Currency in circulation 1,561 5.5 3,342 11.1 2,728 8.1 4,178 11.5 3,015 7.5
Demand deposits with
commercial banks
and Islamic banks 8,227 9.6 13,688 14.5 24,913 23.1 9,863 7.4 14,854 10.4
M1
1
9,788 8.5 17,029 13.7 27,640 19.6 14,040 8.3 17,869 9.8
Other deposits with commercial
banks and Islamic banks
2
73,923 17.5 89,308 18.0 41,552 7.1 92,514 14.7 67,786 9.4
Deposits with other banking
institutions
3,4
-32,102 -38.4 -18,871 -36.7 3,244 9.9 -7,427 -20.7 -557 -2.0
M3
5
51,609 8.3 87,467 13.0 72,436 9.5 99,127 11.9 85,098 9.1
1
Comprising currency in circulation and demand deposits of the private sector
2
Comprising savings and fixed deposits, negotiable instruments of deposits (NIDs), repos and foreign currency deposits of the private sector
placed with commercial banks and Islamic banks
3
Comprising fixed deposits and repos of the private sector placed with finance companies, merchant banks/investment banks and discount
houses. Also includes savings deposits with finance companies, negotiable instruments of deposits (NIDs) with finance companies and merchant
banks/investment banks, foreign currency deposits placed with merchant banks/investment banks and call deposits with discount houses. Excludes
interplacements among the banking institutions
4
The large decline since 2004 reflected the absorption of finance companies by commercial banks
5
Comprising M1 plus other deposits of the private sector placed with commercial banks and Islamic banks and deposits of the private sector placed
with other banking institutions, namely the finance companies, merchant banks/investment banks and discount houses
Annex
P 39
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Annual Report 2009
P 40
Table A.26
Movements of the Ringgit
RM to one unit of foreign currency
1
Annual change (%) Change (%)
2005 2008 2009
2008 2009
21 Jul.’05 -
Jul.21
2
End-Dec. Dec. 2009
SDR 5.5049 5.3616 5.3487 -2.7 0.2 2.9
US dollar 3.8000 3.4640 3.4245 -4.5 1.2 11.0
Singapore dollar 2.2570 2.4070 2.4401 -4.7 -1.4 -7.5
100 Japanese yen 3.3745 3.8327 3.7076 -22.9 3.4 -9.0
Pound sterling 6.6270 4.9989 5.5001 32.2 -9.1 20.5
Swiss franc 2.9588 3.2715 3.3084 -10.0 -1.1 -10.6
Euro 4.6212 4.8759 4.9191 0.0 -0.9 -6.1
100 Thai baht 9.0681 9.9398 10.271 -1.2 -3.2 -11.7
100 Indonesian rupiah 0.0386 0.0316 0.0364 11.3 -13.1 6.2
100 Korean won 0.3665 0.2750 0.2937 28.4 -6.4 24.8
100 Philippine peso 6.8131 7.2774 7.4196 10.1 -1.9 -8.2
Chinese renminbi 0.4591 0.5076 0.5016 -10.8 1.2 -8.5
1
US dollar rates are the average of buying and selling rates at noon in the Kuala Lumpur Interbank Foreign Exchange Market
Rates for foreign currencies other than US dollar are cross rates derived from rates of these currencies against the US dollar and the RM/US dollar rate
2
Ringgit shifted from a fixed exchange rate against the US dollar to a managed float against a basket of currencies
Annex
P 41
Table A.27
Housing Credit Institutions
Year of
establishment
Objective
Lending rate for
new housing loans (%)
No. of branches
2008 2009 2008 2009
Commercial banks - 4.6
1,2
3.6
1,2
4,018
3
4,086
3
Treasury Housing Loans
Division
1970 To provide housing loans
to Government employees
4.0
1
4.0
1
2 2
Bank Kerjasama Rakyat
Malaysia Berhad
1954 A co-operative society
which collects deposits
and provides banking
facilities according to
Shariah principles
7.3
1
6.5 117 122
Malaysia Building
Society Berhad
1950 To be a consumer driven
financial institution
offering property lending
and deposit taking
activities leading to
wealth management
creation for its valued
customers
5.2
1
5.12
1
30 32
Borneo Housing
Mortgage Finance
Berhad
1958 To provide housing
loans mainly to Sabah
and Sarawak State
Government employees
7.25 ~ 8.25 6.75 ~ 8.25 1 1
Bank Simpanan
Nasional
1974 To promote and mobilise
savings particularly
from small savers and
to inculcate the habit of
thrift and savings
4.8 3.8 374 375
Sabah Credit
Corporation
1955 To uplift the social
economic development
of Malaysians in Sabah
through the provision of
easy access to financial
credit
3.0 ~ 7.5 3.0 ~ 7.5 10 11
1
12-month average lending rate
2
Excludes Islamic banks
3
Includes Islamic banks
Source: Bank Negara Malaysia and various housing credit institutions
Annual Report 2009
P 42
Table A.28
Housing Loans Outstanding
2008 2009p 2008 2009p 2008 2009p
RM million Annual change (%) % share
Commercial banks
1
192,092 210,017 10.2 9.3 82.5 83.8
Treasury Housing Loans Division 27,393 26,716 2.1 -2.5 11.8 10.7
Bank Kerjasama Rakyat Malaysia Berhad 4,417 4,189 17.2 -5.2 1.9 1.7
Malaysia Building Society Berhad 5,141 5,647 16.5 9.8 2.2 2.3
Borneo Housing Mortgage Finance Berhad 742 717 3.6 -3.3 0.3 0.3
Bank Simpanan Nasional 2,887 3,034 9.1 5.1 1.2 1.2
Sabah Credit Corporation 179 163 -5.8 -9.0 0.1 0.1
Total 232,850 250,484 9.4 7.6 100.0 100.0
1
Includes Islamic banks
p Preliminary
… Negligible
Source: Bank Negara Malaysia and various housing credit institutions
Table A.29
Housing Loans Approved
2008 2009p 2008 2009p 2008 2009p
RM million
Annual change
(%)
% share
Commercial banks
1
57,946 70,474 20.3 21.6 84.7 89.2
Treasury Housing Loans Division 7,583 5,919 30.1 -21.9 11.1 7.5
Bank Kerjasama Rakyat Malaysia Berhad 297 115 -48.2 -61.4 0.4 0.1
Malaysia Building Society Berhad 1,566 1,650 -9.4 5.4 2.3 2.1
Borneo Housing Mortgage Finance Berhad 68 60 7.9 -11.7 0.1 0.1
Bank Simpanan Nasional 952 798 17.8 -16.2 1.4 1.0
Sabah Credit Corporation 13 4 -13.3 -67.2 … …
Total 68,424 79,020 19.7 15.5 100.0 100.0
1
Includes Islamic banks
p Preliminary
… Negligible
Source: Bank Negara Malaysia and various housing credit institutions
Annex
P 43
Table A.30
Financing of the Economy
By customer
Businesses
1
Households Government
Total
Financing
By financing type/ institutions
Total of which: SMEs
2
RM million
Net Change in Financing 2008
Financial Intermediaries
Banking Institutions 42,570 10,618 34,820 4,921 82,311
Development Financial Institutions (DFIs)
3
3,087 258 6,573 - 9,659
Other Domestic Intermediaries
4
12,010 (241) 571 - 12,581
Capital Market
Bond Market
5
15,492 - - 33,601 49,094
Equity Market 5,477 - - - 5,477
External Financing
Foreign Direct Investment 24,134 - - - 24,134
External Loan
6,7
14,273 - - 9,298 23,571
Total 117,043 10,635 41,963 47,820 206,827
Net Change in Financing 2009
Financial Intermediaries
Banking Institutions 20,371 5,589 38,559 9,085 68,015
Development Financial Institutions (DFIs)
3
5,897 2,179 7,039 - 12,936
Other Domestic Intermediaries
4
6,266 (744) (676) - 5,590
Capital Market
Bond Market
5
29,626 - - 49,619 79,245
Equity Market 26,045 - - - 26,045
External Financing
Foreign Direct Investment 5,663 - - - 5,663
External Loan
6,7
(1,288) - - 1,914 626
Total 92,581 7,024 44,922 60,618 198,121
1
Businesses include non-bank financial institutions, domestic non-business entities and foreign entities
2
Adjusted to include reclassification of SMEs to large corporations
3
Refers to DFIs governed under the Development Financial Institutions Act, 2002
4
Other domestic intermediaries include insurance companies, Employees Provident Fund (EPF), housing credit institutions, leasing and factoring
companies and the Treasury Housing Loan Division
5
Bond Market refers to outstanding private debt securities (PDS) and all Malaysian Government Securities. Data excludes Cagamas bonds and
issuances by non-residents. PDS includes irredeemable convertible unsecured loan stocks (ICULS) and medium term notes (MTN) issued by the
corporate sector
6
Based on the new classification of external debt, which has been redefined to treat entities in Labuan International Bussiness and Financial Centre
(Labuan IBFC) as residents, effective from first quarter of 2008
7
External financing of Government includes financing to non-financial public enterprises (NFPEs)
Annual Report 2009
P 44
Table A.31
Consolidated Public Sector Finance
2006 2007 2008 2009p 2010f
RM billion
Revenue
1
102.0 110.7 128.4 121.2 115.7
% growth 7.4 8.6 15.9 -5.6 -4.5
Operating expenditure 117.7 135.0 165.0 172.5 157.8
% growth 10.4 14.7 22.2 4.5 -8.5
Current surplus of NFPEs
2
100.7 130.1 119.4 143.4 143.9
Current balance 84.9 105.8 82.7 92.1 101.7
% of GDP 14.8 16.5 11.2 13.7 14.0
Net development expenditure
3
86.5 96.3 124.4 118.0 109.7
% growth 31.0 11.3 29.1 -5.1 -7.1
General Government
4
40.8 44.7 50.5 52.2 55.1
NFPEs 45.7 51.6 73.8 65.8 54.6
Overall balance -1.6 9.4 -41.7 -25.9 -8.0
% of GDP -0.3 1.5 -5.6 -3.8 -1.1
1
Excludes transfers within general Government
2
Refers to 30 NFPEs from 2004 onwards
3
Adjusted for transfers and net lendings within public sector
4
Comprises Federal Government, state and local governments and statutory bodies
p
Preliminary
f
Forecast
Note: Numbers may not add up due to rounding
Source: Ministry of Finance and non-financial public enterprises (NFPEs)
Annex
P 45
Table A.32
Major Advanced Countries: Key Economic Indicators
2005 2006 2007 2008 2009e 2010f
Annual change (%)
REAL GDP
United States 3.1 2.7 2.1 0.4 -2.4 2.7
Japan 1.9 2.0 2.4 -1.2 -5.2 1.7
Euro area 1.7 2.9 2.7 0.6 -4.1 1.0
Germany 0.8 3.2 2.5 1.3 -5.0 1.5
United Kingdom 2.2 2.9 2.6 0.5 -5.0 1.3
INFLATION
United States 3.4 3.2 2.8 3.8 -0.4 1.7
Japan -0.3 0.3 0.0 1.4 -1.4 -0.8
Euro area 2.2 2.2 2.1 3.3 0.3 0.8
Germany 1.9 1.8 2.3 2.8 0.2 0.2
United Kingdom 2.1 2.3 2.3 3.6 2.2 1.5
% of labour force
UNEMPLOYMENT
United States 5.1 4.6 4.6 5.8 9.3 10.1
Japan 4.4 4.1 3.9 4.0 5.1 6.1
Euro area 8.9 8.3 7.4 7.5 9.4 11.7
Germany 10.7 9.8 8.4 7.3 7.5 10.7
United Kingdom 4.8 5.4 5.3 5.6 7.6 9.3
% of GDP
CURRENT ACCOUNT BALANCE
United States -5.9 -6.0 -5.2 -4.9 -2.6 -2.2
Japan 3.6 3.9 4.8 3.2 2.8 2.0
Euro area 0.5 0.4 0.3 -0.7 -0.7 -0.3
Germany 5.1 6.1 7.5 6.4 2.9 3.6
United Kingdom -2.6 -3.3 -2.7 -1.7 -2.0 -1.9
FISCAL BALANCE
1
United States -3.2 -2.2 -2.8 -5.9 -12.5 -10.0
Japan -5.0 -4.0 -2.5 -5.8 -10.5 -10.2
Euro area -2.5 -1.2 -0.6 -1.8 -6.2 -6.6
Germany -3.3 -1.5 -0.5 -0.1 -4.2 -4.6
United Kingdom -3.3 -2.6 -2.6 -5.1 -11.6 -13.2
1
e
f
Refers to general government fiscal balance
Estimate
Forecast
Source: International Monetary Fund and National Authorities
Annual Report 2009
P 46
Table A.33
East Asia: Key Economic Indicators
2005 2006 2007 2008 2009e 2010f
REAL GDP Annual change (%)
Regional Countries
The People’s Republic of China 10.4 11.6 13.0 9.6 8.7 10.0
Korea 4.0 5.2 5.1 2.2 0.2 4.6
Chinese Taipei 4.7 5.4 6.0 0.7 -1.9 4.7
Singapore 7.6 8.7 8.2 1.4 -2.0 4.5~6.5
Hong Kong SAR 7.1 7.0 6.4 2.1 -2.7 4.0~5.0
Malaysia 5.3 5.8 6.2 4.6 -1.7 4.5~5.5
Thailand 4.6 5.1 4.9 2.5 -2.3 3.5~4.5
Indonesia 5.7 5.5 6.3 6.0 4.5 5.5~6.0
Philippines 5.0 5.3 7.1 3.8 0.9 2.6~3.6
Annual change (%)
INFLATION
Regional Countries
The People’s Republic of China 1.8 1.5 4.8 5.9 -0.7 0.6
Korea 2.8 2.2 2.5 4.7 2.8 2.5
Chinese Taipei 2.3 0.6 1.8 3.5 -0.9 1.5
Singapore 0.5 1.0 2.1 6.6 0.6 1.6
Hong Kong SAR
1
1.0 2.0 2.0 4.3 0.5 0.5
Malaysia 3.1 3.6 2.0 5.4 0.6 2.0~2.5
Thailand 4.5 4.7 2.2 5.5 -0.9 2.1
Indonesia 10.5 13.1 6.3 9.9 4.8 6.2
Philippines 7.6 6.3 2.8 9.3 3.3 4.0
% of GDP
CURRENT ACCOUNT BALANCE
Regional Countries
The People’s Republic of China 7.2 9.5 11.0 9.8 7.8 8.6
Korea 1.7 0.6 0.6 -0.7 3.4 2.2
Chinese Taipei 4.9 7.2 8.6 6.4 7.9 8.0
Singapore 22.7 25.4 23.5 14.8 12.6 12.5
Hong Kong SAR 11.4 12.1 13.3 14.2 10.7 10.8
Malaysia 15.0 16.7 15.7 17.5 16.7 13.9
Thailand -4.3 1.1 5.7 -0.1 4.9 2.7
Indonesia 0.1 3.0 2.5 0.1 0.9 0.5
Philippines 2.0 4.5 4.9 2.5 3.2 1.2
% of GDP
FISCAL BALANCE
2
Regional Countries
The People’s Republic of China -1.4 -0.7 0.9 -0.1 -2.0 -2.0
Korea
3
1.8 1.7 3.5 1.2 -2.8 -2.7
Chinese Taipei
3
-0.6 -0.6 -0.2 -0.8 -4.3 -3.3
Singapore
3
7.5 7.5 11.1 6.3 2.5 2.4
Hong Kong SAR
3
1.0 4.1 7.7 0.1 -3.4 -1.5
Malaysia -3.6 -3.3 -3.2 -4.8 -7.0 -5.6
Thailand 0.3 1.2 -2.3 -1.1 -5.6 -3.4
Indonesia -0.2 -1.0 -0.7 -0.6 -1.5 -1.4
Philippines -2.7 -1.0 -0.2 -0.9 -3.7 -3.6
1
Refers to composite price index
2
Refers to central government fiscal balance
3
Refers to general government fiscal balance
e

Estimates
f

Forecast
Source: International Monetary Fund, National Authorities and Bank Negara Malaysia estimates
4
4

Board of Directors
Tan Sri Dato’ Sri Dr. Zeti Akhtar Aziz D.K. (Johor), P.S.M., S.S.A.P., S.U.M.W., D.P.M.J. Governor and Chairman Dato’ Ooi Sang Kuang D.M.P.N. Deputy Governor Dato’ Zamani bin Abdul Ghani D.P.S.K., D.M.S.M., D.S.M., K.M.N. Deputy Governor Dato’ Mohd Razif bin Abd Kadir D.P.M.S., D.I.M.P., D.P.M.P. Deputy Governor Tan Sri Datuk Seri Dr. Wan Abdul Aziz bin Wan Abdullah P.S.M., S.P.S.K., S.S.A.P., S.P.D.K., D.P.S.K., S.M.W., A.M.N. Datuk Oh Siew Nam P.J.N. Tan Sri Datuk Amar Haji Bujang bin Mohd. Nor P.S.M., D.A., P.N.B.S., J.S.M., J.B.S., A.M.N., P.B.J., P.P.D.(Emas) Dato’ N. Sadasivan D.P.M.P., J.S.M., K.M.N. Tan Sri Dato’ Seri Mohd Hassan Marican P.S.M., S.S.D.K., S.U.M.W., S.P.M.T., D.S.M.T., P.N.B.S., A.M.K. Tan Sri Dr. Sulaiman bin Mahbob P.S.M., P.J.N., S.S.A.P., D.J.B.S., J.S.M., S.M.J., P.M.P., K.M.N., A.M.N. (Tan Sri Dr. Sulaiman Mahbob was appointed as member of the Board of Directors effective 25 November 2009)

Governor Deputy Governor Deputy Governor Deputy Governor Secretary to the Board Assistant Governor Assistant Governor Assistant Governor Assistant Governor Assistant Governor Assistant Governor Assistant Governor Director Governor’s Office Corporate Communications Strategic Management Special Investigation Financial Intelligence Internal Audit Economics Economics Monetary Assessment and Strategy International Regulation Prudential Financial Policy Financial Sector Development Financial Surveillance Islamic Banking and Takaful Development Finance and Enterprise Consumer and Market Conduct Supervision Financial Conglomerates Supervision Insurance and Takaful Supervision Banking Supervision Regulation and Supervision Administration Unit Payment Systems Policy Investment and Operations Investment Operations and Financial Markets Currency Management and Operations Foreign Exchange Administration Corporate Resources Human Resource Management Finance Legal Human Capital Development Centre Risk Management Corporate Services IT Services Statistical Services Central Banking Services Property and Services Security Bank Negara Malaysia Museum and Art Gallery Sasana and Lanai Kijang Management Office MIFC Promotion Unit Chief Representative London Representative Office New York Representative Office Branch Manager Johor Bahru Kuching Shah Alam Kuala Terengganu Kota Kinabalu Pulau Pinang

Tan Sri Dr. Zeti Akhtar Aziz Dato’ Ooi Sang Kuang Dato’ Zamani bin Abdul Ghani Dato’ Mohd Razif bin Abd. Kadir Dato’ Mohd Nor bin Mashor Dato’ Muhammad bin Ibrahim Nor Shamsiah binti Mohd Yunus Dato’ Mohd Nor bin Mashor Gopala Krishnan Sundaram Dr. Sukhdave Singh Bakarudin bin Ishak Norzila binti Abdul Aziz Suhaimi bin Ali Abu Hassan Alshari bin Yahaya Donald Joshua Jaganathan Sani bin Ab. Hamid Wan Mohd Nazri bin Wan Osman Tan Nyat Chuan Marzunisham bin Omar Fraziali bin Ismail Nazrul Hisyam bin Mohd Noh Jessica Chew Cheng Lian S. Abd. Rasheed bin S. Abd Ghafur Madelena binti Mohamed Ahmad Hizzad bin Baharuddin Kamari Zaman bin Juhari Koid Swee Lian Che Zakiah binti Che Din Yap Lai Kuen Marina binti Abdul Kahar Siti Ramlah binti Ahmad Cheah Kim Ling Adnan Zaylani bin Mohamad Zahid Ramli bin Saad Wan Hanisah binti Wan Ibrahim Mohd. Adhari bin Belal Din Rafiza binti Ghazali Jeremy Lee Eng Huat Arlina binti Ariff Chung Chee Leong Azmi bin Abd Hamid Alizah binti Ali Toh Hock Chai V. Vijayaledchumy Zulkifli bin Abd Rahman Mior Mohd Zain bin Mior Mohd Tahir Muhammad Fawzy bin Ahmad Lim Foo Thai Shariffuddin bin Khalid Azman bin Mat Ali Mohamad Ali Iqbal bin Abdul Khalid Kamalullail bin Ramli Ishak bin Musa Mohd. Khir bin Hashim Azizan bin Mohd Ali Ahmad bin Abd Rahim Rosnani binti Mahamad Zain

Abd. Sukhdave Singh Suhaimi bin Ali Abu Hassan Alshari bin Yahaya Chew Siew Kheam Sani bin Ab. Vijayaledchumy Abdul Aziz bin Abdul Manaf Alizah binti Ali Zulkifli bin Abd Rahman Mior Mohd Zain bin Mior Mohd Tahir Santhini a/p Chandrapal Lim Foo Thai Siti Ramlah binti Ahmad Azman bin Mat Ali Mohamad Ali Iqbal bin Abdul Khalid Kamalullail bin Ramli Ishak bin Musa Mohd. Hamid Tan Nyat Chuan Wan Mohd Nazri bin Wan Osman @ Wan Abdullah Fraziali bin Ismail Marzunisham bin Omar Ismail bin Alowi Ahmad Hizzad bin Baharuddin S. Rasheed bin S.Governor Deputy Governor Deputy Governor Deputy Governor Secretary to the Board Assistant Governor Assistant Governor Assistant Governor Assistant Governor Assistant Governor Assistant Governor Assistant Governor Director Governor’s Office Corporate Communications Statistical Services Special Investigation Internal Audit Financial Intelligence Economics Monetary Assessment and Strategy Economics International Regulation Islamic Banking and Takaful Financial Sector Development Development Finance and Enterprise MIFC Promotion Unit Prudential Financial Policy Financial Surveillance Consumer and Market Conduct Supervision Banking Supervision Financial Conglomerates Supervision Insurance and Takaful Supervision Payment Systems Policy DFI Supervision Investment and Operations Investment Operations and Financial Market Currency Management and Operation Foreign Exchange Administration Organisation Services Human Resource Management Legal Human Capital Development Centre Corporate Services Strategic Management Central Banking Services Finance IT Services Property and Services Security Risk Management Sasana and Lanai Kijang Management Office Head of Unit Regulation and Supervision Administration Chief Representative London Representative Office New York Representative Office Branch Manager Johor Bahru Kuching Shah Alam Kuala Terengganu Kota Kinabalu Pulau Pinang Tan Sri Dr. Zeti Akhtar Aziz Dato’ Ooi Sang Kuang Dato’ Zamani bin Abdul Ghani Dato’ Mohd Razif bin Abd. Ariffin Norzila binti Abdul Aziz Ramli bin Saad Wan Hanisah binti Wan Ibrahim Mohd. Abd Ghafur Kamari Zaman bin Juhari Shariffuddin bin Khalid Jessica Chew Cheng Lian Madelena binti Mohamed Koid Swee Lian Chung Chee Leong Che Zakiah binti Che Din Yap Lai Kuen Cheah Kim Ling Mahdi bin Mohd. Adhari bin Belal Din Jeremy Lee Eng Huat Arlina binti Ariff Dato' Mohd Nor bin Mashor Donald Joshua Jaganathan V. Kadir Dato’ Mohd Nor bin Mashor Dato’ Mohamad Daud bin Hj. Khir bin Hashim Azizan bin Mohd Ali Ahmad bin Abd Rahim Rosnani binti Mahamad Zain . Dol Moin Dato’ Muhammad bin Ibrahim Nor Shamsiah binti Mohd Yunus Dato’ Mohd Nor bin Mashor Lillian Leong Bee Lian Gopala Krishnan Sundaram Dr.

Communications and Organisational Development 103 Overview 104 Governance 105 White Box: The Central Bank of Malaysia Act 2009 111 Communications 113 Organisational Development 119 Organisation Structure Annual Financial Statements 126 Balance Sheet as at 31 December 2009 127 Income Statement for the Year Ended 31 December 2009 128 Notes to the Financial Statements Annex 5 . Energy Efficiency and Innovation in the Manufacturing Sector 30 External Sector 36 White Box: Nature and Trends of Capital Flows in Malaysia 45 Labour Market Developments 48 Price Developments Monetary and Financial Conditions 53 Overview 53 International Monetary and Financial Conditions 56 Domestic Monetary and Financial Conditions 64 Financing of the Economy Monetary Policy in 2009 71 Overview 71 Monetary Policy in 2009 74 Monetary Operations in 2009 77 White Box: Monetary Policy Process under the Central Bank of Malaysia Act 2009 Outlook and Policy 81 International Economic Outlook in 2010 83 Malaysian Economy in 2010 84 White Box: Potential Output of the Malaysian Economy 92 Monetary Policy in 2010 93 Fiscal Policy in 2010 96 White Box: Transitioning into a High Income Economy: Policy Considerations Governance.Annex Contents Governor’s Statement Economic Developments in 2009 3 The International Economic Environment in 2009 7 The Malaysian Economy in 2009 11 Domestic Demand Conditions in 2009 12 White Box: How Did the Recent Global Recession Affect the Malaysian Economy? 17 Sectoral Review 22 White Box: Remaining Competitive: Issues in Enhancing Productivity.

6 .

7%. the overall stance of monetary policy will continue to remain accommodative to provide support to domestic economic activity. Overall. private investment is expected to recover in 2010. With clear signs of an economic recovery. Private consumption will benefit from further improvements in the labour market. Domestic demand is expected to strengthen with better employment conditions and uninterrupted credit flows. underpinned by strengthening domestic demand and supported by the improving external environment. Additionally. fundamental depression of the global economy. This trend will not only mutually reinforce growth in the region but will also contribute towards the rebalancing of global growth. financial imbalances and the underpricing of risks. brought about an economic recovery in the second half of the year. Despite the move to normalise interest rates. performing significantly better than expected. Maintaining an extremely low interest rate environment for an extended period of time could result in disintermediation. rising disposable incomes and improved consumer confidence.Governor’s Statement While the world economy experienced the worst effects of the global financial crisis in the first half of 2009.5-5. Asia is expected to continue to lead the global recovery as the sources of growth become more broad-based. steps have been taken to normalise interest rates. Investment is expected to rebound with the planned investment in infrastructure and the recovery in external demand. The positive growth of 4. now no longer prevail. The deterioration in the external sector had by early 2009 spilled-over to deeply affect domestic demand. inflation is nevertheless expected to remain at modest levels during the year. Of importance is the growth in intra-regional trade through the sustained expansion in domestic demand within the region. have shown a higher degree of resilience and have better prospects for a sustained recovery. and some revisions in administered prices by the Government. emerging economies in general. . most economies experienced a recovery in the second half of the year. the upward trend in global commodity prices. had together with Malaysia’s strong economic fundamentals. and Asia in particular. the Malaysian economy in 2009 contracted by 1. The swift and concerted policy actions implemented across the world were instrumental in avoiding a deep. The Malaysian economy is projected to expand by 4. The robust financial sector also provided crucial support for the domestic economy. The significant and swift domestic policy responses.5% in 2010. the Malaysian economy was significantly affected by the collapse in world trade which started in the second half of 2008.5% for the Malaysian economy in the fourth quarter of 2009 is expected to improve further in 2010. Growth is expected to be increasingly driven by private sector activity. While inflation is expected to rise with the recovery in global economic activity. While downside risks to growth remain in the advanced economies. As a highly open economy. in line with the strengthening of global trade and increasing domestic demand. The extraordinary conditions under which the interest rates were reduced. Such developments would undermine the recovery in the economy.

the accountability framework and governance structure have been considerably enhanced. taking into account the complexities of the economic and financial environment in Malaysia as well as global trends. The economy can no longer rely on the accumulation of factors of production to remain competitive. With greater clarity and focus in the mandates of the Bank and the powers necessary to achieve these mandates. Through the development of an enabling and competitive economic environment. and institutionalises the policy autonomy enjoyed by the Bank during the 50 years of its existence. The Bank’s international technical cooperation has focussed on the sharing of knowledge on central banking practices and building collaborative relationships with other central bankers from emerging economies. This has been achieved by institutionalising the best practices that had been adopted for some years now by the Bank. Malaysia will be well positioned to benefit from the new opportunities and to deal with the potential challenges in this post crisis era. including organisational development and capacity building to increase Central Bank effectiveness. high-income economy. microfinance and Islamic Finance. places the Bank on a new legal foundation. In addition. Amid the changing global financial landscape and continued transformation of the Malaysian economy. . Malaysia is putting in place wide ranging strategies in its ongoing transformation process to provide an enabling environment in which high productivity. It also included programmes that were organised to share knowledge and information with other regulators in the area of financial inclusion. to develop competition-driven markets and to strengthen further our existing institutional and physical infrastructure. regional cooperation has continued to serve as a vital anchor in maintaining regional macroeconomic and financial stability. This collaboration covered a wide range of areas. Regional collaboration with other central banks and supervisory agencies of emerging economies was also expanded and strengthened during the year. Several of the programmes have also been conducted in collaboration with international development agencies including the Islamic Development Bank. the more competitive global environment creates urgency for Malaysia to transition to a high value-added. the Consultative Group to Assist the Poor and the International Finance Corporation. In a highly uncertain environment. efforts to further develop the regional bond markets and to accelerate the pace of financial integration to support economic development in the region will continue to be a focal component of regional cooperation. developing regional financial infrastructure and promoting regional integration. competitiveness and innovation are key elements in the e-economy. which came into force on 25 November 2009. Concerted steps were also taken to further enhance the integrated crisis management and resolution mechanism put in place by the Monetary and Financial Stability Committee of the Executives’ Meeting of East AsiaPacific (EMEAP) Central Banks grouping. The year 2009 marked a key milestone with the multilateralisation of the Chiang Mai Initiative (CMI) liquidity support mechanism to allow for the effective pooling and drawdown of liquidity support among member countries.Over the medium term. the Central Bank of Malaysia Act 2009. Given that private sector-led economic activity is the main driver of growth in such an economy. It mandates the Bank to promote monetary stability and financial stability conducive to the sustainable growth of the Malaysian economy. The Act is the culmination of a 2-year review by the Bank of central banking legislation. Three key areas of priority are to have a high quality workforce.

As part of the organisational transformation to become more strategy-focused and performancedriven. In addition. Zeti Akhtar Aziz Governor 24 March 2010 . the Board and the various Board committees have a significantly enhanced role in the governance of the Central Bank. upholding the trust that has been placed in us. I would also like to thank the Board of Directors for their unwavering support to the Bank. Tan Sri Dato’ Seri Mohd Hassan Marican. Under the new Central Bank Act. will continue to persevere in discharging our responsibilities and to rise to the challenges. Leadership development was also accorded emphasis to ensure a continuous strengthening of the leadership pipeline. I wish to welcome Tan Sri Dr. A structured and robust talent assessment process has also been put in place and is accompanied by a more dynamic and differentiated reward system to ensure that the incentives are appropriately aligned. going forward. Sulaiman Mahbob to the Board and Encik Chin Kwai Yoong who will be joining the Board in 2010. We wish to record our deep appreciation to a valued board member. which have also broadened and improved the skills and competencies of staff in core areas of the Bank’s work. At the same time. in ensuring that the Bank has access to the best technical and analytical skills. significant investment has been allocated towards building a high performance workforce that includes enhanced formal training and changes to work practices. The Bank. In addition. I wish to express my appreciation to my colleagues and all staff of Bank Negara Malaysia for their dedication and perseverance in performing their responsibilities to fulfil our mandates in the most challenging of conditions in 2009. more emphasis was given to project based and collaborative work processes. He is retiring following the completion of his term. Rigorous strategy reviews continue to be conducted to evaluate the overall performance and raise the effectiveness of the Bank in performing its mandates. the Bank commenced the implementation of the 3-year Business Plan that has been developed in 2009. This is supported by the increased organisation-wide clarity of the strategic results and enhanced cross-functional collaboration required to deliver these results. for his contribution to the Board. Finally.

.

Economic Developments in 2009 Economic Developments in 2009 3 7 11 12 17 22 30 36 45 48 The International Economic Environment The Malaysian Economy in 2009 Domestic Demand Conditions in 2009 White Box: How Did the Recent Global Recession Affect the Malaysian Economy? Sectoral Review White Box: Remaining Competitive: Issues in Enhancing Productivity. Energy Efficiency and Innovation in the Manufacturing Sector External Sector White Box: Nature and Trends of Capital Flows in Malaysia Labour Market Developments Price Developments 1 .

Annual Report 2009 2 .

the securitised debt markets froze. businesses cut their production sharply while inventories were drawn down to abnormally low levels amid weak demand and tight credit conditions. As a result. particularly in Asia. ranging between . Economic recovery. primarily to provide liquidity to financial markets and to restore stability in their financial systems. however. quantitative easing. the global economy experienced the sharpest contraction since the Second World War. The fragility of the recovery was evident as the growth experienced by most countries in the second half of 2009 continued to rely heavily on the fiscal support. while central banks aggressively eased monetary policy as interest rates were reduced to record lows. were affected by the collapse in world trade that resulted from the sudden plunge in demand from the advanced economies. As a result. In the advanced economies. The Asian economies. In the advanced economies. The full impact of the 2008 international financial crisis on the real economy was felt in the first quarter of 2009. In the major advanced economies. continued to weigh on private sector activity. more pronounced in the emerging economies.Economic Developments in 2009 THE INTERNATIONAL ECONOMIC ENVIRONMENT IN 2009 In the first half of 2009. including near zero interest rates. remained fragile and uneven. particularly those with a higher degree of trade openness. The extraordinary policy measures. and measures 3 The global economy experienced the sharpest contraction of the post-war period in the first half of 2009 before entering into a gradual but uneven recovery in the second half of the year The severe global financial crisis and the sharp global recession that ensued led to unprecedented policy responses by governments and monetary authorities across the world. including cash. falling house prices and difficulties in obtaining access to credit. the financial crisis and the ensuing credit crunch led to a sharp decline in private sector demand. 1 – 12% of GDP. sending shocks to the emerging economies. with countries accounting for more than 60% of world output mired in a synchronised recession. Further losses revealed by major global financial institutions and uncertainty over the solvency of these large institutions amid heightened concern over systemic failure in a number of financial markets caused a flight to safer assets. where domestic demand was supported by sizeable fiscal stimuli and reinforced by the uninterrupted access to financing to the private sector. high unemployment. Economic recovery was. the large fiscal spending and the restoration of normal functioning of financial markets arrested the sharp deterioration in economic activity. where a large number of economies experienced significant contractions in real GDP. Of importance. in the fourth quarter of 2008. Governments introduced large fiscal stimuli. however. quantitative easing and financial support measures were also introduced. The deterioration in the trade-related sectors subsequently impacted the rest of the economy as household and business confidence were adversely affected. The crisis in the international financial markets reached its peak in the first quarter of 2009 following the fallout from the failure of the US investment bank. economic activity in most economies began to stabilise by the middle of the year and countries started to gradually emerge from the recession in the second half of 2009. The recovery of intra-regional trade also provided support to growth. Similarly. market liquidity dried up and global equity markets declined sharply to multi-year lows by March 2009. The extraordinary policy responses contributed to the stabilisation of the financial markets and provided some support to the real economy. leading to double-digit declines in exports and production. Lehman Brothers. Household consumption was curtailed. ongoing deleveraging by the private sector and weak financial systems. The international production and trade network unravelled. affected by a combination of factors including deteriorating employment prospects.

3 2.9 6.Annual Report 2009 to ease liquidity and credit conditions that were taken in the major advanced economies.9 0. underlining the heavy reliance of the financial system on the central bank’s support.7 trillion for the US households from the second until the fourth quarter. the Federal Reserve (Fed).6 0.4 -5.3 3.6 4.4 5. consumption grew as households also benefited from tax incentives for the purchase of automobiles. The Fed’s move to assist the housing market was further supported by the fiscal stimulus in the form of tax credits for home buyers. its biggest contraction in 29 years. purchases of illiquid and impaired assets held by the financial institutions.7 -2. By the third quarter. the US government unveiled a USD787 billion fiscal stimulus in February 2009.0 3.6 4.2 0.1 9. followed by stabilisation in short-term money markets in response to central banks’ aggressive liquidity injection into the financial system.2 0. However.6 -0. with the federal funds rate reduced to near zero since December 2008. The Fed introduced programmes to purchase USD1. By the second quarter.7 1. The extraordinary measures caused the Fed’s balance sheet to expand by 150% to reach USD2.2 2.5 0.2 trillion.1 -1.0 -2. were important in alleviating the stress in the international financial markets.3 3.8 7.3 1.4 -1.3 4.7 8. real GDP contracted sharply by an annualised rate of 6.8 0.9 -2.9 0.2 -1.7 1.4 -2. consisting mainly of tax rebates to households and businesses and infrastructure spending.8 1. restoration of functioning of financial markets and large fiscal stimulus contributed to gradual recovery in the equity market from its lows in March.1 The People's Republic of China ASEAN Malaysia Thailand Indonesia Philippines India3 1 2 3 Newly industrialised economies Inflation refers to composite price index Inflation refers to wholesale price index e Estimate Source: International Monetary Fund. The decline in GDP was largely due to the contraction in fixed investment and large inventory drawdown as businesses responded to the significant drop in overall demand since late 2008 by cutting production aggressively.4 3. The containment of systemic risk. In response. The increase in wealth restored part of the wealth loss of USD17.4 0.9 1. largely reflecting the continued weakness of the financial institutions.7 2.4 2.25 trillion of agency mortgage-backed securities.5 9. The policy responses stabilised the housing and financial markets.3 5.5 6. credit spreads began to narrow and equity prices gradually recovered.6 0.5 trillion experienced during the period mid-2007 to the first quarter of 2009. USD175 billion of agency debt and USD300 billion of US treasury securities with the objective of lowering the interest burden for financially-constrained home mortgage borrowers.0 2.6 5.5 6.9 4.2 -4.2 0.5 4. US Treasury and the FDIC implemented quantitative measures in the form of recapitalisation of banks.0 5. particularly mortgagebacked securities and other securities backed by consumer loans. guarantees for banks’ debt.7 2.6 2.5 -0.8 -0.3 9.5 3. boosting demand for housing.1 -0.9 9. After declining at Inflation (%) 2008 2009e - 2009e -0. together with the stabilising of house prices since June helped to bring about positive wealth gain of about USD5.9 7. On the monetary front.4 0.8 -12. as well as the overall economic conditions by the second quarter of the year.4% in the first quarter of 2009.6 4.1 World Economy: Key Economic Indicators Real GDP Growth (%) 2008 World Growth World Trade Major Advanced Economies United States Japan Euro area United Kingdom East Asia Asian NIEs1 Korea Chinese Taipei Singapore Hong Kong SAR 2 In the United States (US). as risk appetite improved.3 2.7 5.1 -0.9 4. Table 1. hence enabling the cost of financing to decline gradually.5 6.8 3. Interbank markets started to function again. to thaw the frozen credit markets and restore market functioning.1 -5.4 -1.7 3. the improvement in the interbank markets did not translate into higher lending to the private sector in the advanced economies. National Authorities and Bank Negara Malaysia estimates 4 .

After reducing the interest rates by 150 basis points to 2. the economy recorded six consecutive quarter-onquarter declines. for the year as a whole. In the euro area. Meanwhile. especially on automobiles as well as infrastructure spending. particularly in terms of unemployment and health care benefits. resulting in weak private consumption amid persistent deflation. For the year as a whole. the euro area contracted by 4. allowing the euro area to turn around to register a small positive GDP growth on a quarter-on-quarter basis in the third and fourth quarters. giving rise to concerns on the sustainability of fiscal stimulus in supporting growth. Fiscal stimulus was also introduced to support private consumption through tax rebates. While the Bank of Japan (BOJ) kept its overnight rate at 0. the recovery in the euro area was uneven as countries including Spain and Greece remained in recession given the severity of the housing crisis and high unemployment. Coupled with tax incentives for employers to retain labour. The US economy had lost a total of 8. particularly 5 .4%.4 million jobs between end-2007 and end-2009 and the unemployment rate reached 10% in December 2009. overall private consumption continued to be constrained by rising job losses. the US economy declined by 2. growth contracted sharply by 2.7% in the second quarter. led by Germany and France. a larger part of euro area’s fiscal support came through ‘automatic stabilisers’. While the fiscal stimulus in the euro area was relatively smaller than the US. many households continued to reduce their debt as falling house prices had eroded a large part of their wealth. tight credit and negative home equity from significantly lower house prices.5% by March 2009. its largest post-war decline.7% in the first quarter. the pace of recovery remained slow and highly dependent on policy support. the BOE introduced a £200 billion plan to purchase corporate bonds and government gilts to inject liquidity into the economy and ease the credit crunch. The contraction in trade spilled into domestic demand. unemployment in the euro area did not rise as much as the US. due mainly to the double-digit declines in exports and fixed investment. Furthermore. In Japan. However. the European Central Bank (ECB) continued to lower its refinancing rate by a further 150 basis points to 1% by May 2009. The recovery in the US in the second half of the year was driven by the growth in private consumption. At the same time. residential fixed investment and government spending. the UK economy contracted by 5%. the central bank first implemented quantitative easing through the monthly purchase of government bonds and later. up to the third quarter of 2009. its longest decline on record. These measures began to yield some results. due mainly to the large contraction in exports and fixed investment. The UK economy is confronted with a continued weak labour market and a deteriorating fiscal position. The central bank also embarked on a €60 billion covered bond purchase to inject liquidity in the financial system and stimulate lending activity in the euro area. In spite of the weak recovery in the second half. difficulty in getting financing and lower capacity utilisation. real GDP contracted at an annualised rate of 13. The deteriorating external environment also spilled into weaker domestic demand following the higher unemployment. A fiscal stimulus was also implemented to bolster consumption through tax rebates and automobile incentives. Nevertheless. GDP expanded at an annualised rate of 2. This was due mainly to the persistent weakness in domestic demand following rising unemployment. in the United Kingdom (UK). its largest decline since the data was first recorded. fixed investment declined sharply in view of falling demand.5% in 2008. Benefiting from the close trade linkages with Asia. The other advanced economies mirrored the US’s growth path closely throughout the year. Meanwhile.5% quarter-on-quarter in the first quarter. a ¥10 trillion credit program for commercial lenders to inject liquidity into the financial system and to ease the deflationary pressure. The euro area was also affected by structural unemployment and the worsening fiscal positions in several euro economies.1%.4% in the second half of 2009. tight credit conditions and falling house prices. with the UK economy recording a small positive growth in the fourth quarter of 2009. Nevertheless. The bleak outlook of the economy prompted the Bank of England (BOE) to reduce the base lending rate further by 150 basis points in early 2009 to 0. Fiscal measures were also directed at boosting consumption through tax rebates. This had enabled a gradual revival in consumer and business confidence.Economic Developments in 2009 a slower annualised rate of 0. For the year as a whole.1%. its historical low.

ahead of the advanced economies. labour market In response to the large contractionary external demand. direct cash handouts and infrastructure spending. which introduced the largest fiscal stimulus package of 11. recorded 10.25%) (4. Meanwhile. most regional economies started to experience positive quarter-on-quarter growth in the second quarter. In the Asian region. These policy measures had an important role in restoring consumer and business confidence. strong banking institutions and thus the continued financial intermediation.9 billion or 3. thus affecting consumer confidence and spending.5 5.0%) (1. As a result. On the global inflation front. many advanced and regional economies had experienced technical deflation since the early part of the year due to lower commodity prices and the weak demand conditions. ranging from 1% to 12% of GDP. PR China overtook the US to become Japan’s largest trading partner.7% growth in the fourth quarter of 2009. in particular. and stabilising labour market conditions. especially in the first quarter.0%) (2. particularly the newly industrialised Asian economies. Japan recorded a contraction of 5. Growth was further affected by large inventory drawdowns as firms sharply reduced production and postponed investment plans. The recovery in the Asian economies gathered further momentum in the second half of the year as global economic conditions gradually improved. suggesting that the threat of actual deflation had been minimal.8 5. National Authorities. while stronger intra-regional trade provided an additional impetus to growth.1 Cumulative Movements of Policy Rates since 2009 Indonesia United Euro area Thailand Philippines Korea (6.0%) (0.3% of GDP 2 Amount spent under the European Economic Recovery Plan Note: As at mid-March 2010 Source: International Monetary Fund. commodity prices began to rise steadily with oil prices reaching close to USD80 per barrel by year-end.9 9. The more open economies.3 2. In addition to the policy support. resulting in abnormally low level of inventories. World Bank and Bank Negara Malaysia estimates PR China. While the headline inflation was influenced by the high base in 2008. While consumer price inflation 6 . experienced deeper recessions while other regional economies with larger domestic markets such as PR China.9% of GDP. Indonesia and the Philippines experienced a moderation in growth. regional central banks reduced their interest rates during the year by between 75 and 275 basis points and adopted liquidity and guarantee measures to support the overall growth prospects. domestic demand remained weak.8 4.5%) 0 (Basis points) -50 -100 -150 -200 -250 -300 -275 -150 -150 -150 -150 -100 -75 conditions also weakened. core inflation remained positive for most economies.8 5.Annual Report 2009 Chart 1. Aggressive fiscal spending plans. In 2009. direct fiscal injection is USD5. Consumer prices in most economies started to edge higher.5%) Kingdom (1.7 1. tax incentives were also given to firms to retain their workers. were unveiled to bolster domestic demand through a combination of tax rebates. reflecting the trend in commodity prices although demand pressure remained subdued. as at mid-March 2010 Source: National Authorities Chart 1. its strongest growth since the first quarter of 2008. For the year as a whole.2%. As a result. with unemployment rising in most countries.25%) Note: Current policy rates in parentheses.2 Fiscal Stimulus in Selected Economies % of GDP PR China Malaysia1 Singapore Chinese Taipei Japan United States Hong Kong SAR Korea Philippines Thailand Euro area2 United Kingdom Indonesia 0 1 11.4 4.8 1. PR China. growth performance was adversely affected by the deterioration in the export sector.3 2 4 6 8 10 12 14 Of which.9 5. In some countries. Chinese Taipei (1. Following the gradual recovery in the regional economies from the second quarter and by the advanced economies in the third quarter. lagging the recovery in external demand. and the relatively healthy financial position of the private sector facilitated a faster recovery in the domestic demand in the region. Japan’s real GDP expanded quarter-onquarter in the second quarter as exports to Asia increased.9 7.3 1.

the rupiah recorded the strongest appreciation due to the resilient economic conditions and more favourable political climate. In addition to higher public spending. both the euro and the pound sterling depreciated considerably due to concerns over the deteriorating fiscal positions in the two economies. the 7 . rising equity and property prices in several economies raised concerns on asset price inflation.7% in 2009 as recovery strengthened in the second half of the year However. Growth during the quarter was also affected by large drawdowns of inventory. In the foreign exchange markets. the Malaysian economy contracted moderately by 1. appreciating against most major currencies in the first two months. lagging performance of the UK economy in the latter half of the year led to a slight weakening of the pound sterling. Among regional currencies. most regional currencies appreciated against the US dollar following improved sentiments driven by the faster pace of recovery in the region vis-à-vis the advanced economies. the US dollar started to weaken following the improvement in investor risk appetite that caused a shift out of low-yielding dollar-denominated assets to higher yielding assets denominated in other currencies. following expectations of a faster pace of recovery in these economies as compared to the US. as the global equity markets began to recover from their multi-year lows in March. The dollar strength was attributed to the portfolio flows into dollar-denominated assets. In the Asian region. As a result. the yen appreciated to Despite a sharp contraction in the first quarter. Source : International Monetary Fund was benign throughout the year. the deterioration in external demand affected employment. the US dollar started the year on a strong note. The dollar also benefited from the waning confidence in the euro following concerns over European banks’ exposure to the Eastern European economies. the aggressive easing of monetary policy and the comprehensive measures introduced to ensure continued access to financing contributed to stabilisation in the domestic economy in the second quarter and subsequent recovery in the second half of the year. either through imposing administrative measures in the property market or on short-term capital flows.7% in 2009. Meanwhile. particularly in the manufacturing and commodity sectors. However. The domestic economy experienced the full impact of the global recession in the first quarter. income and overall business and consumer sentiment. Towards the end of the year. marking the first yearon-year contraction in real GDP since the third quarter of 2001. However. This trend reversed by December when the yen weakened following the decision of the Bank of Japan to expand quantitative easing.3 Indices of Primary Commodity Prices Index (Jan '03 = 100) 450 400 350 300 250 200 150 100 50 0 Mar ‘04 Dec ’05 Oct ’04 May ’05 Feb ’07 Sep ’07 Apr ’08 Nov ’08 Jun ’09 Jan ’10 Jul ’06 Crude Oil Metals Food its strongest level in 14 years due to the higher repatriation of income from investments abroad. The collapse in global demand and world trade led to double-digit declines in Malaysia’s exports and industrial production. causing private consumption and private investment activities to decline in the first quarter of the year. the accelerated implementation of fiscal stimulus measures.2%. In response. declining by 6. a year when the global economy experienced its deepest downturn in modern history. The performance of the euro and the pound sterling were strongest at about mid-2009. reflecting investor risk aversion amid deteriorating global growth prospects and ongoing weakness in global financial markets. the other major currencies outperformed the dollar throughout most of the year.Economic Developments in 2009 Chart 1. THE MALAYSIAN ECONOMY IN 2009 The Malaysian economy contracted by 1. Given the high degree of openness of the economy. several regional economies undertook measures to curb the formation of asset bubbles.

9 -2.033 6.2 3.8 1.180 7.) Imports (f.8 0.3 12.7 23.7 141.3 3.4 0.2 2.6 12.4 112. the Producer Price Index has been revised to the new base year 2005=100.7 -2.6 664.1 317.7 3.o.2 23.3 4.4 -3.3 10.3 2.2 14.o.2 497.b.0 -0.7 3.8 7.3 2.1 1.8 7.3 35.6 -1.7 12.7 2.700 6.0 2.0 8.2 412.9 5.Annual Report 2009 Table 1.5 18.4 -3.4 3.1 2.5 6.7 519.9 2.7 3. net3 (in months of retained imports) PRICES (% change) CPI (2005=100)4 PPI (2005=100)5 Real wage per employee in the manufacturing sector 1 2 127.5 6.5 2.6 3.3 3.1 4.7 9.6 141.0 11.2 504.4 170.3 -4.9 10.4 2.0 331.8 6.Key Economic Indicators 2007 Population (million persons) Labour force (million persons) Employment (million persons) Unemployment (as % of labour force) Per Capita Income (RM) (USD) NATIONAL PRODUCT (% change) Real GDP at 2000 prices1 (RM billion) Agriculture.7 -3.634 2010f 28. net (as % of GNI) Current transfers.1 7. from 2000=100 previously 5 Effective: from 2010. forestry and fishery Mining and quarrying Manufacturing Construction Services Nominal GNI (RM billion) Real GNI (RM billion) Real aggregate demand2 Private expenditure Consumption Investment Public expenditure2 Consumption Investment 2 2008 27.7 10.4166 27.784 7.b.9 -1.2 0. from 1987 prices previously Exclude stocks 3 All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance sheet date and the gain/loss has been reflected accordingly in the Bank’s account 4 Effective: from 2006.9 481.4 11. from 2000=100 previously 6 Based on average USD exchange rate for the period of January-February 2010 p Preliminary f Forecast Note: Numbers may not necessarily add up due to rounding 8 .2 -15.8 -9. net Current account balance (as % of GNI) Bank Negara Malaysia international reserves.5 554.5 n.1 38.9 -19.3 493.0 727..2 .4 10.7 -17.5 129.4 -0..8 3.3 25.6 -7.7 12.9 12.9 31.7 5.0 335.5 0.a Beginning 2007.5 -12.7 37.3 4.5 3.4 0.1 103.7 -0.2 Gross national savings (as % of GNI) BALANCE OF PAYMENTS (RM billion) Goods balance Exports (f.4 661.5 ~ 5.6 25.2 0.8 -21.8 6.5 7.0 3.2 473.7 605.3 -17.8 11. the Consumer Price Index has been revised to the new base year 2005=100.3 625.7 4.7 2.2: Malaysia .4 16.6 10.6 -7.5 543.0 5.0 ~ 2.3 9. -23.8 0.4 7.) Services balance (as % of GNI) Income. real GDP has been rebased to 2000 prices.7 -0.7 17.9 0.2 11.8 6.8 14.0 491.7 100.6 615.3 5.2 4.2 715.8 9.4 -13.6 3.9 -2.1 -19.9 478.737 2009p 28.6 528.381 6.7 9.8 0.8 1.7 8.6 515.4 3.2 11.9 1.1 11.

3 77.9 12.3 7.and long-term debt Short-term debt2 Debt service ratio (% of exports of goods and services) Total debt Medium.05 2.48 3.30 8.7 -4.1 103.3 11.0 99.5 51.2 Savings deposit Base lending rate (BLR) Treasury bill (3-month) Malaysian Government securities (1-year)* Malaysian Government securities (5-year)* EXCHANGE RATES Movement of Ringgit (end-period) Change against SDR Change against USD6 1 Effective from the first quarter of 2008.8 3.25 3.7 6.5 187.7 -3.72 3.1 156.1 37.50 1.0 -47.Economic Developments in 2009 Table 1.Financial and Monetary Indicators FEDERAL GOVERNMENT FINANCE (RM billion) Revenue Operating expenditure Net development expenditure Overall balance Overall balance (% of GDP) Public sector net development expenditure Public sector overall balance (% of GDP) EXTERNAL DEBT1 Total debt (RM billion) Medium.6 157.7 85.5 6.99 2008 % -2.6 2.4 -7.04 3.0 6.89 2.51 2.5 41.2 96.40 6.1 90.9 156.8 124.9 -35.87 5.5 79.8 2009p 158.44 6.1 49.53 3.5 Change in 2008 RM billion % 14.15 3.8 Money Supply M1 M3 Banking system deposits Banking system loans3 Loan-deposit ratio (end of year)4 Financing-deposit ratio4.9 84.0 54.6 72.3 1.6 2008 159.39 2.9 123.0 8.4 Change in 2009 RM billion % 17.43 3.5 -20.4 -5.00 2.8 2008 % 3.6 236.06 9.2 76.70 1.1 9.6 2009 % 2.7 56.6 -4.5 3.3 Malaysia .9 77.8 9.2 85.0 118. the external debt data of Malaysia has been redefined to treat entities in Labuan International Business and Financial Centre (Labuan IBFC) as residents Excludes currency and deposits held by non-residents with resident banking institutions 3 Includes loans sold to Cagamas 4 Exclude financial institution transaction 5 Refers to the ratio of loans and holdings of PDS by the banking system to deposits of the banking system 6 Ringgit was pegged at RM3.03 2.8 233.0 -3.0 78.9 11.1 2007 % 3.4 56.8 3.5 2.6 9.6 2. 5 INTEREST RATES (AVERAGE RATES AS AT END-YEAR) Overnight Policy Rate (OPR) Interbank rates 1-month Commercial banks Fixed Deposit 3-month 12-month 3.50 3.79 2009 % 0.78 2007 % 1.2 1.8 153.4 82.9 85.4 Change in 2007 RM billion % 27.54 19.and long-term debt MONEY AND BANKING 2007 139.50 0.5 7.80=USD1 on 2 September 1998 and shifted to a managed float against a basket of currencies on 21 July 2005 p Preliminary * Refer to end-year 2 9 .4 133.12 3.

9%). together with improving labour market conditions. particularly the export-oriented industries. which. As a result. which largely consist of trade credits.6% in 2009 (2008: 5. Nevertheless.4% (2008: 5. was severely affected by the significant deterioration in external demand. especially crude oil prices.4%) as inflationary pressures in Malaysia moderated substantially. Labour market conditions began to stabilise in the second quarter and improved thereafter as retrenchments declined and firms started to hire new workers. as well as an improvement in the other services deficit. the Malaysian economy resumed its growth momentum in the fourth quarter. the services sector recorded a marginal decline in the first quarter due mainly to contractions in the sub-sectors which are related to manufacturing and trade activities. Both net inflows of foreign direct investment and outflows of direct investment abroad also moderated amid the weak economic conditions. in line with global and domestic developments. the performance of the services sector had gradually improved since the second quarter. As a result. the manufacturing sector gradually improved and recorded positive growth in the fourth quarter. reflecting largely the significant moderation in portfolio outflows in the first half of the year and net inflows in the second half of the year.7% of the labour force. The services account registered a significant surplus in 2009 following higher travel receipts from sustained regional travel activity. with one-half the workers being retrenched in the first quarter.Annual Report 2009 policy measures also helped to revive private sector sentiment. compared to the earlier forecast of 4. The manufacturing sector. in tandem with the recovery in external demand. As large current account surplus 10 . The cumulative reductions in domestic retail petrol prices in the second half of 2008 contributed significantly to the moderating trend of domestic inflation in 2009. the financial account recorded lower net outflows in 2009. increased during the year.1%). led to an expansion in private consumption in the second half of the year. with the most notable deceleration recorded by China (2009: -0. several countries experienced lower inflationary pressures during the year. Despite the challenging economic environment and declining productivity growth in 2009. Moreover. Total retrenchments increased to a seven-year high of 25. albeit at a moderate rate of 3. the trade surplus remained large as lower demand for exports was also accompanied by a decline in imports. particularly in the first quarter of 2009 led to a significant drop in global commodity prices.5%. On the supply side. particularly in the first half of the year. In line with the improvement in domestic demand. also contracted. while other sectors. Malaysia’s external position remained strong in 2009 despite the extremely weak external environment.5%. Nonetheless. gradually recovered.7%. employers in the private sector had continued to grant salary increments. whereas other investment outflows. 2008: +5. Inflation in the advanced economies recorded a steep decline. with growth coming from the services sub-sectors that are dependent on domestic economic activity as well as finance and capital market-related activities. The quicker-than-expected recovery in the labour market following improvements in both global and domestic economic conditions. Signs also emerged to indicate that private investment activity had begun to stabilise towards the end of the year. with strengthened domestic and external demand contributing to growth. external demand provided further impetus to growth as the global economy. while inflation in emerging market economies also saw a decline in 2009. Labour market conditions weakened considerably in the first quarter as firms in the manufacturing sector reduced their operations. Meanwhile. supported by a sizeable trade surplus and improvements in the services account. Meanwhile. particularly the regional economies. Weak global demand conditions. growth of the construction sector had remained positive throughout the period due primarily to the implementation of constructionrelated projects under the Ninth Malaysia Plan (9MP) and the fiscal stimulus measures. except construction. growing by 4. The current account continued to record a large surplus during the year. Headline inflation averaged 0. The decline in global fuel and commodity prices and the lower inflation in Malaysia’s major trading partners in turn contributed to lower domestic inflation. resulted in a lower unemployment rate of 3. particularly in the first two months of the year.064 persons in 2009. growth in the first quarter was particularly affected by a sharp decline in the manufacturing sector. Although gross exports deteriorated significantly in 2009.

Although private investment activity remained weak throughout 2009. household spending was Chart 1. The rapid and comprehensive policy responses. the overall balance of payments recorded a surplus in 2009. stocks) Real private consumption Real public expenditure Real private investment (RHS) 11 . stable employment prospects.4 Real Domestic Demand Aggregates Annual change (%) 20 15 10 5 0 -5 -10 2002 2003 2004 2005 2006 2007 2008 2009 Annual change (%) 50 45 40 35 30 25 20 15 10 5 0 -5 -10 -15 -20 -25 Real aggregate domestic demand (excl. In the early part of the year.7% in the second half of 2009.8%). the continued strength in both economic and financial fundamentals. had an important role in sustaining domestic demand.4% (2008: +6. which also helped to restore consumer and business sentiments. together with an accommodative monetary policy. weaker labour market conditions and an overall decline in private sector sentiment. In addition. domestic demand turned around to record a positive growth of 1. marking its slowest expansion since the Asian Financial Crisis. The strong public sector spending.8% in 2009. bringing the overall growth in aggregate domestic demand for the year to a marginal decline of 0. has placed the Malaysian economy in a better position to grow further going forward. The public sector had an important role in mitigating the impact of the global recession on the domestic economy through active implementation of two stimulus packages throughout the year. low external debt. domestic demand conditions began to stabilise in the second quarter due to higher public sector spending following the implementation of fiscal stimulus measures to support the economy and expansion in private consumption. Domestic demand. sustained high rate of savings and strong banking sector. which was significantly affected by the developments in the global economy in the first quarter of 2009.9% in the first quarter. the domestic financial system remained strong despite the challenging international financial environment. An increase in private consumption was supported by the rebound in consumer sentiment. the first contraction since the third quarter of 2001.7 billion) as at 31 December 2009. The Malaysian economy. the accommodative monetary environment and continued access to financing. as reflected by the resilience in domestic demand. In addition to the improvement in external demand. recovered in the second half of 2009 as conditions in the labour market and external sector improved Private consumption recorded a marginal growth of 0. there were signs of stabilisation towards the end of the year as global economic conditions and external demand started to improve.9 billion in net international reserves to RM331. low inflation and favourable financing conditions. Despite the persistence of weak external demand. the continued access to financing. improvements in labour market conditions and a gradual recovery in external demand contributed to an expansion in domestic demand activity in the second half of the year. contributing to a further increase of RM13.3 billion (or USD$96. which contracted in the first quarter. recovered rapidly to register positive growth in the fourth quarter. as households and businesses turned more cautious amid a significant deterioration in external demand. effectively performing its financial intermediation function and facilitating the recovery in domestic demand. which was the main factor supporting economic activities throughout the period. Overall. the domestic economy was supported by the accelerated implementation of fiscal stimulus measures. high international reserves position. As a result. DOMESTIC DEMAND CONDITIONS IN 2009 Domestic demand contracted by 2.Economic Developments in 2009 more than offset the net outflows in the financial account.

with growth still weak in the advanced economies and stronger in the emerging economies. In particular. slowing foreign direct investments and weakening of regional currencies against the US dollar. The global deleveraging process had also. the crisis intensified as prices of a large number of classes of financial assets collapsed resulting in a huge negative income and wealth effect. causing the substantial declines in equity and debt markets. gradually recovered towards the end of 2009. Following the implementation of large fiscal and monetary policy stimulus. Annual change (%)) 4 2 0 -2 -4 -6 -8 -10 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2001 US 2002 2003 UK 2004 Japan 2005 2006 Euro area 2007 2008 2009 Source: Haver Analytics The sharp recession in the advanced economies had a significant spillover effect on Asian regional economies through the finance and trade interlinkages. the global economy showed signs of stabilisation in the second quarter. the recovery of the global economy has been uneven. however. escalated into a major and severe global financial crisis in the second half of 2008. The Effects of the Global Recession on Malaysia The global financial crisis and the deleveraging activities in the advanced economies led to disposal of assets world wide. led to a synchronised recession among the advanced economies in the second half of 2008. Nevertheless. Chart 1 Advanced Economies in a Synchronised Recession by End-2008 Real GDP growth (Seasonally adjusted. The strong reserves position of the country also acted as a buffer for US dollar liquidity and exchange rate movements during this turbulent period. given the ample liquidity in the financial system and the sound banking system. In addition. including in the region. The exposure of the domestic banking system to the sub-prime assets was also limited. There was a large reversal in short-term capital flows. causing the more open economies in the region to experience an economic contraction. well absorbed by the domestic financial markets.Annual Report 2009 How Did the Recent Global Recession Affect the Malaysian Economy? Introduction The problems in the US financial system arising from the deteriorating quality of sub-prime assets that started in mid-2007. towards the end of 2008. which caused sharp declines in the regional equity and bond markets. This sharp reversal of funds flows was. the underlying fundamental strength of the regional economies and a sound financial sector in the region enabled the regional economies to cope with these adverse developments relatively well without disruptions in the intermediation process by the domestic financial systems. triggered large outflows from the region. 12 . especially in the second half of 2008 as these funds were remitted back to the US. The collapse in global trade led to severe declines in the region’s exports and industrial production. together with a widespread loss of confidence. Despite the unprecedented large and aggressive financial measures taken by the authorities. the broad-based financial sector reforms and capacity building measures that have been undertaken following the Asian financial crisis had increased the financial sector’s resilience to withstand the financial turmoil. of short-term portfolio funds and a sharp decline in bank financing. while other economies experienced sharp deceleration in growth in the fourth quarter of 2008. This. the failure of a number of large US and global financial institutions in September 2008 generated widespread fear of a systemic disruption across global financial markets which in turn had led to the “freezing” of the interbank and credit markets in many financial centres around the world. which deepened further in the first quarter of 2009 (Chart 1). and subsequently. However.

590 persons in the first quarter.0 1Q 2Q 3Q 2008 Agric. provided support to the economy. particularly private consumption.7%). Malaysia Malaysia experienced the full impact of the global crisis in the first quarter of 2009. Exports and manufacturing production declined by 7. Although the income of households in the other sectors that were not directly exposed to external demand remained relatively unaffected. as reflected in the continued expansion of loans outstanding to businesses and households throughout 2009. initiating pay-cuts. production and investment activities in the domestic economy. affecting mainly workers from the manufacturing sector. As Malaysia is a highly open economy.4%). while the net non-performing loan ratio was low at 1. with a risk-weighted capital ratio of 14. particularly in the manufacturing sector (Chart 3). their spending behaviour was affected by the weak sentiment following the overall weaker economic conditions and uncertainties over their income outlook and job 13 .2%). However. Retrenchments increased to 12. reducing overtime work and laying off some workers.8% (end-2008: 2. the resilience of domestic demand. resulting in subsequent reductions in production.8% as at end-2009 (end-2008: 9. Malaysia Source: Department of Statistics. The level of capitalisation of the Malaysian banking system remained high.6% (4Q 08: -7.6% in 2009 (end-2008: 13.1%).7% at end-December 2009 (end-2008: 12.4% and 11.6%). firms undertook measures to reduce the cost of labour by enforcing a freeze on new hiring. including from Malaysia. and in turn. affected exports from the region. The strong capitalisation and ample liquidity in the banking system had ensured that the intermediation function remained uninterrupted.0 0.0 Chart 3 Export-oriented Manufacturing Sector was the Worst Affected Contribution to real growth (percentage point) 6.873 persons during the 2005-2008 period.4%). In response to the significantly lower exports and production activity.0 -5.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 World trade Malaysia's gross exports Malaysia's manufacturing IPI Source: Haver Analytics. The unemployment rate increased to 4% in the first quarter (4Q 08: 3.1%).Economic Developments in 2009 The Malaysian banking system was on a strong foundations when the global financial crisis erupted. compared with a quarterly average of 3. Malaysia’s gross exports declined by 20% during the quarter (4Q 08: -7.0 Annual change (%) 10.1% respectively (Chart 2).0 0. The recession in the advanced economies started to impact the Malaysian economy in the fourth quarter of 2008.0 -3. As the advanced and some emerging economies slide into a recession in the first quarter of 2009. the impact of the global recession was felt strongly in the external trade-related sectors. preventing it from contracting in the fourth quarter of 2008 (real GDP growth: 0. as the deepening recession in the advanced economies intensified the impact of a rapid decline in global demand on trade.2%) while household loans outstanding expanded at a sustained high rate of 9. world trade declined sharply by 28.0 5. & Mining Services Manufacturing Real GDP (RHS) 4Q 1Q 2Q 3Q 2009 Construction 4Q -10. Department of Statistics. Total business loans outstanding expanded by 2. and private investment activity was dampened by the deteriorating business conditions. Chart 2 Collapse in World Trade Led to Sharp Contractions in Malaysia's Gross Exports and Manufacturing Production Annual change (%) 40 30 20 10 0 -10 -20 -30 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q -40 -6.0 3.

following the sharper contraction in private investment spending.0 5. aggregate domestic demand declined by 2. but Source: Department of Statistics.5% in the second quarter. further contributed to the decline in growth. The recovery in exports became more broadbased towards the end of the year. Malaysia’s sound economic fundamentals. led to a revival in business and consumer sentiments. monetary easing (the Overnight Policy -20.0 namely. and subsequently recovered to record a positive growth of 1. especially PR China. In particular. These fundamentals enhance the prospects for a stronger recovery going forward. Real exports of goods and services The implementation of these measures not only Real GDP (RHS) provided direct support to domestic activity. As a result.0 -5. Of significance is the improvement in private consumption.0 measures centred around three broad areas. the rapid policy responses on both the fiscal and monetary fronts had an important role in sustaining domestic demand throughout this period.2% in the second quarter of 2009. Malaysia’s exports to PR China turned around to record positive annual growth rates from as early as August. was affected by the global recession which set in during the third quarter of 2008 and continued into the first quarter of 2009.0 10. before strengthening further to 1. as exports to several advanced economies also began to recover.2% in the first quarter of 2009 (Chart 4). as capacity expansion activity was affected by the considerable decline in external demand. 0. benefited Malaysia. lower-thannormal capacity utilisation and deteriorating business confidence. particularly in the manufacturing and commodity sectors. Total investment also weakened significantly (-10. the stabilisation and subsequent gradual recovery in the global economy since the middle of the year provided further support to the Malaysian economy. this facilitated a fast recovery in domestic demand once the global financial crisis was contained and the global economic and financial conditions stabilised.0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Rate was reduced by a total of 150 basis points 2007 2008 2009 to 2.7% in the fourth quarter. the first contraction since the third quarter of 2001. the strong recovery in the regional economies.7%. Policy Response and the Recovery of the Malaysian Economy In response to the global crisis.0 fundamental economic recession (Table 1). With the stabilisation of the global financial markets and the subsequent recovery in the economies of the advanced countries. domestic demand registered a slower decline of 2.9% of GDP were -10.Annual Report 2009 security. Malaysia equally important.00%) and reinforced by comprehensive Real aggregate domestic demand (excl.0 unveiled). This resulted in a marginal decline in private consumption spending by 0.0 0. Coupled with the healthy private sector financial position. These 10. stocks) measures to ensure continued access to finance. In particular.0 -10. Conclusion The Malaysian economy. with exports to the region starting to improve in the second half of the year. External demand contributed positively to growth by the fourth quarter of 2009. given its high degree of openness. The strong economic and financial foundations provided the basis for a rapid recovery. Chart 4 External Weakness Led To Broad-based Domestic Weakness in the Economy by the First Quarter of 2009 On the external front. As a result.8%). which recovered to post a growth of 0. 14 . A large inventory drawdown during the quarter. fiscal policy (two stimulus packages amounting to RM67 billion or 9. The strength and stability of the domestic financial system throughout this period ensured that financing continued uninterrupted and enabled the private sector to obtain access to credit. and Annual change (%) Annual change (%) to prevent the economy from slipping into a 20.7% in the second half of the year. the Government introduced several policy measures to mitigate the adverse impact of the global downturn. strong financial system and the implementation of comprehensive policy support measures prevented the economy from slipping into a severe and prolonged period of negative growth.9% and the economy contracted sharply by 6.

in particular.000 by foreigners for own use without FIC approval Increase vehicle loan eligibility for civil servants Monetary stimulus to reduce the cost of intermediation 15 .0% Comprehensive measures to ensure continued access to financing as well as to minimise the impact of the economic downturn on specific affected sectors Ensure continued access to financing • Financing and guarantee schemes for SMEs and businesses • Establishment of Financial Guarantee Institution (Danajamin Nasional Bhd) Restructuring and Rescheduling of Credit Facilities • Flexibilities to restructure and reschedule loans to deal preemptively with borrowers • Enhanced Corporate Debt Restructuring Committee and expanded Small Debt Resolution Scheme Pre-emptive measures to sustain confidence in financial sector • Full guarantee of all deposits until end-2010 • BNM’s liquidity facility was extended to insurance and takaful operators Avenues for borrowers to seek assistance & redress • Integrated Contact Centre: BNMLINK. Complaints Management and Advisory Unit • Expanded outreach of Credit Counselling & Debt Management Agency • ABMConnect Toll Free Channel • Complaint units at financial institutions • Financial Mediation Bureau • Small Debt Restructuring Committee Other Measures Voluntary reduction of EPF employees’ contribution by 3 percentage points from 11% to 8% in 2009 and 2010 Allow purchase of commercial properties above RM500.0% Reduced Statutory Reserve Requirement by 300 basis points to 1. with a primary focus on supporting domestic demand as well as mitigating the impact of the global downturn on the affected segments of the economy Measures First package (RM7 billion) • Construction. the vulnerable groups • Assisting the private sector in facing the crisis • Building capacity for the future Reduced Overnight Policy Rate by 150 basis points between November 2008 and February 2009 to 2. upgrade. repair and maintenance of facilities • Construction of low and medium cost houses • Human capital development programmes • Accelerated improvement to telecommunication services • Assistance to Private Sector Second package (RM60 billion) • Reducing unemployment and increasing employment opportunities • Easing people’s burden.Economic Developments in 2009 Table 1: Policy Responses to Mitigate Economic Downturn Policy Responses Two Economic Stimulus Packages of RM67 billion (direct fiscal injection: RM22 billion). BNMTELELINK.

favourable financing conditions offered additional support to consumer spending as consumers continued to enjoy access to credit in an environment of low interest rates. The sharp decline in manufactured exports had led to a significant slowdown in production activity. Of significance. as well as the opening of new retail outlets. loan disbursements to households and imports of consumption goods. Capital spending programmes in the other sectors of the economy continued in 2009. Capital expenditure in the oil and gas sector. utilities and telecommunication sub-sectors.5 GNI per Capita RM '000 30 25 20 15 10 5 0 -5 -10 2002 2003 2004 2005 2006 2007 2008 2009 Annual change (%) 30 25 20 15 10 5 0 -5 -10 Nominal GNI per capita (LHS) Nominal GNI per capita growth (RHS) Nominal private consumption growth (RHS) 16 . an early monetary policy response and the implementation of two fiscal stimulus packages helped to revive consumer confidence. Investment in the services sector was also sustained. gross inflows of FDI moderated to RM31. household credit continued to expand during the year with loan disbursed to households increasing strongly by 17.6%) and non-performing loan ratio for household loans declining further to 3. with the household debt to financial assets ratio remaining low at 40. Reflecting the full impact of the global economic downturn in 2009. mainly for upstream production facilities and exploration activity. as foreign investors were affected by the less favourable global economic environment. The MIER Consumer Sentiments Index (CSI) remained below the 100-point threshold (1Q 09: 78. higher commodity prices and earlier than expected recovery in the manufacturing sector had lent support to consumer spending. household balance sheets remained sound. as reflected by the improvement in the MIER CSI to above the 100-point threshold since the second quarter of 2009.7% in the first quarter.1% at the end of 2009 (2008: 4. private investment declined significantly by 21. reflecting weaker demand for business financing. However. albeit at a smaller scale compared to the previous year.8% during the year (2008: 0. reflecting the ongoing capacity expansion and upgrading exercise in the transportation. As a result. in line with the better performance of the manufacturing sector. In the first quarter of 2009. Chart 1. The decline in capital spending activity that began at the end of 2008 had continued to worsen as the year progressed.7% in the fourth quarter. indicating a pessimistic outlook on employment prospects and income expectations by households. however. gradually improved towards the end of 2009.9%. Disbursement of loans to businesses and the issuance of private debt securities for new activity also slowed down during this period. Investment in the manufacturing sector was the most affected by the extremely weak global economic conditions. Moreover. in turn resulting in lower capacity utilisation.1%. Meanwhile. These indicators. Also. Weak consumer spending was reflected in major consumption indicators such as the sales of new passenger cars.3% (2008: 8.9 points). The sluggish private sector capital spending was also reflected in the marked decline of major investment indicators.8%). before recording a higher growth of 1. as global economic conditions began to recover. the capacity utilisation rate improved markedly to 81.6 billion. while sales of construction-related materials declined significantly by 26.4% in the fourth quarter.6% (2008: 42.1%). private consumption declined by 0. the MIER capacity utilisation rate declined to 72%. remained sizeable.Annual Report 2009 affected by high retrenchments and a decline in real wages that had begun towards the end of 2008. Despite the economic slowdown. Private consumption improved gradually from the second quarter onwards. Businesses deferred or cancelled investment decisions given deteriorating external demand and a more cautious outlook on domestic economic conditions.9%). reducing the need for firms to embark on additional capacity expansion. Improvements in labour market conditions. Imports of capital goods recorded a decline of 5.

9 billion or 26. transmission and distribution systems. 2009 was a challenging year for most economic sectors in the Malaysian economy. registered negative growth.9% of gross national income (GNI) in 2009 (2008: RM80. Additional capital spending was also evident in the power utility segment due to continuous upgrading and improvement of the power generation. all sectors.9 billion or 11. Nevertheless. namely education. Capital spending in the social services sector continued to be targeted at improving the provision of essential services. Investment by the NFPEs was largely concentrated in the mining. amid the worsening global and domestic economic environment. with an unprecedented rate of contraction in the electronics 17 . Meanwhile. improving the transport system.7 Gross National Savings and Savings-Investment Gap RM billion 275 250 225 200 175 150 125 100 75 50 25 0 2002 e Estimate 2003 Gross National Savings 80 Gross Capital Formation Private Savings Public Savings 2004 2005 2006 Savings-Investment Gap 2007 2008 2009e 1 Source: Malaysian Institute of Economic Research (MIER) Public investment expanded strongly in 2009. high impact projects outlined in the first stimulus package had been fully implemented. the external demand-dependent sub-sectors were significantly affected. except construction.6%). Of importance.5 billion or 18. In particular. healthcare and housing. In the first quarter.7%) following the introduction of the two economic stimulus packages to mitigate the impact of the global economic downturn.9 billion or 17.3 billion or 13. Public sector savings increased to RM92. largely on the account of higher expenditure on emoluments. utilities and communication sectors. In the economic sector. which led to a slightly lower savings-investment surplus of RM112. In the mining sector. capital expenditure in the upstream oil and gas segment remained high.4% of GNI (2008: RM189. SECTORAL REVIEW Overall. enhancing public utilities and upgrading industrial infrastructure.9%).3%) following larger operating surpluses of the NFPEs. In total. expenditure was aimed mainly at developing the rural and agriculture sector.000 vacancies in the public sector.7% in 2009 (2008: 10. partly as a result of the higher emoluments incurred under the Government’s initiative to fill up almost 50. capital spending in the communication sector was mainly focused on the development of the broadband infrastructure facility under the High Speed Broadband initiative. recording a double-digit growth of 12.1%).5% to RM207. reflecting the sustained household consumption spending amid the decline in income growth. Expenditure for supplies and services remained large due to the enhancement of the public sector’s administrative machinery and delivery system as well as the maintenance of buildings and fixtures.Economic Developments in 2009 Chart 1. while the increased capital spending in the transportation sector was attributable to capacity expansion undertaken by both the rail and air transport companies. Private sector savings. Capital spending activity by the non-financial public enterprises (NFPEs) had also supported the strong expansion in public sector investment in 2009. while about 64% of the allocated development expenditure in the second package had been implemented in 2009.9% (2008: 0. Public consumption increased by 3. however. the decline in GNS was largely offset by a contraction in private sector investment.7 billion or 17% of GNI in 2009 (2008: RM129. gross national savings (GNS) declined for the first time since 2001 by 23.6 Total Nominal Investment and Manufacturing Sector Capacity Utilisation % change 25 20 15 10 5 0 -5 -10 -15 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2005 2006 2007 2008 2009 65 70 Investment 75 Capacity Utilisation 1 (RHS) % 85 Chart 1. transportation. declined to RM114.2 billion.

The implementation of the two fiscal stimulus packages and the accommodative monetary policy environment cushioned the weakness in external demand and contributed towards improving consumer and business sentiments in the domestic-oriented sectors.4% from 55. net interest income 2009p 2008 2009p Annual change (%) Services Intermediate services Finance and insurance Real estate and business services Transport and storage Communication Final services Wholesale and retail trade Accommodation and restaurant Utilities Government services Other services p Preliminary Note: Numbers may not necessarily add up due to rounding Source: Department of Statistics.4 2. By the fourth quarter. those that are largely dependent on trade and manufacturing activities.0 7. as well as lower commodity prices.8 6.4 13. reflecting the subdued performance of domestic demand especially in the first half of the year.7% respectively in the first half of the year. recovered at a slower pace.8 3.0 5.7 1.Annual Report 2009 and electrical products cluster of the manufacturing sector and sharp contractions in trade-related services sub-sectors.6 3.4 Services Sector Performance at Constant 2000 prices 2008 Consequently. as demand for financing moderated in tandem with lower economic activity.3 3. and utilities.4 5.7 5. except mining.0 4.2% and 3. Of significance.0 11.2%).2 2. the sector’s share to GDP increased further to 57.9 7. which was supported by the fiscal stimulus and an accommodative monetary policy. The services sector provided support to the overall economy in 2009 The finance and insurance sub-sector recorded a moderate growth of 4.1 -2.0 7.5 6.9 31. and continued its positive growth path to expand by 4.2 2.8 7. Services Sector The services sector expanded by 2. In addition. growth resumed in all sectors.0 23.3 9.3% in the second half of 2009 (1H 2009: 0.7%).3 2.1 5.3 8.1 7.4 18 .0 4.2% in the first quarter of 2009.2 6.8 4. After registering a marginal decline of 0.8%).0 2.1 11.7 0.7 57.7 6. also resulted in weak performance across most of the other sub-sectors. Table 1. As a result. the construction sector registered positive growth in all four quarters.4 25.4% (2008: 7. total loans approved and disbursed by the banking industry declined by 12.0% in 2008.2 1. In the finance segment.2 2. The pace of improvements gathered momentum in the third quarter.0 7.4 3.6% in 2009 (2008: 7.6% in the second quarter. as domestic demand strengthened and external conditions improved further.2 12.5 3. namely transport and storage.8 2.2 32.8 11. Conditions began to improve in the second quarter. The sector benefited from the resilient domestic demand. While most services sub-sectors followed the same growth trend. benefiting mainly from the projects under the 9MP and the fiscal stimulus packages.4 2. agriculture and mining sectors. with smaller rates of decline in the manufacturing.1 3. providing support to the Malaysian economy during the global economic crisis. the services sector turned around to record an expansion of 1. spill-over weaknesses from the external sector to domestic demand. underpinned by the concerted and timely domestic policy support and stabilising external environment. Malaysia Share to GDP (%) 55.

For the year as a whole. the sub-sector improved in the second half of 2009.2 0. while net interest income recorded better growth and fee-based income increased significantly by 18% following higher turnover in the equity market. However.7 106. Similarly. Bank Negara Malaysia of the banking system recorded a lower growth.9 -59.8 7.9 of household of population p Preliminary Source: Department of Statistics.5%).8 (end-2008: 876.Cellular phone . As consumer sentiments subsequently improved amid better domestic economic and labour market conditions. Loan indicators registered marked improvements. Affected by weak business sentiments at the beginning of the year.7 22.Broadband1 .9 44.1 12.1 2 31. as both the life and general business segments were affected by the weak economic activity and the decline in motor vehicle sales in the first half.2%.7 % Penetration rate: .Economic Developments in 2009 Chart 1.2 44.Fixed line1 1 2 10.7 5.8 Value added of finance and insurance sub-sector in real terms (RHS) Insurance premiums Net interest income in the banking system Fee income in the banking system p Preliminary Source: Department of Statistics. The sub-sector contracted by 1.8 2.5 14.2% (2008: 9. the real estate and business services sub-sector registered a decline of 6. fee-based income declined in the first quarter. both segments improved in the second half. Malaysian Communications and Multimedia Commission.1 21.8).0 7. especially in the first half of the year. The wholesale and retail trade sub-sector was affected by weak private consumption.2 -2. conditions in the finance segment improved during the second halfyear.8 5. the Kuala Lumpur Composite Index rallied 45. as economic recovery gathered momentum. 19 .6 -1.8 9. Bursa Malaysia Berhad.0 98. Malaysia Airports Holdings Berhad.9 -6.1 12. Port Klang Authority. the sub-sector turned around to register a marginal growth in the second quarter before gradually strengthening in the second half of the year. Meanwhile.8 6.8%).7 28.8 Performance of the Finance and Insurance Sub-sector vis-à-vis Related Indicators Annual growth (%) 40 35 30 25 20 15 10 5 0 2005 2006 2007 2008 2009 p 2 0 8 6 4 Annual growth (%) 12 10 quarter but recovered subsequently to expand by 2. due to lower wholesale activity. the sub-sector grew by 1. In the insurance industry. Both the accommodation and restaurant and other services sub-sectors recorded lower growth Table 1. Malaysia. Pelabuhan Tanjung Pelepas Sdn Bhd.7% in the first Wholesale & Retail Trade and Accommodation & Restaurant Consumption credit disbursed Tourist arrivals Total sales of motor vehicles Finance & Insurance and Real Estate & Business Services Loans outstanding in the banking system Insurance premiums Bursa Malaysia turnover (volume) Transport & Storage and Communication Total container handled at Port Klang and PTP (TEUs) Airport passenger traffic Air cargo handled SMS traffic 7. In 2009.5 Selected Indicators for the Services Sector 2008 2009p Annual change (%) Utilities Electricity production index 1. due mainly to a drop in fees related to capital market activity.1 60. benefiting from higher real estate and capital market-related activities as domestic demand strengthened. to close the year at 1.272. Senai Airport Terminal Services Sdn Bhd. growth was more moderate. cautious consumer spending and the contraction in motor vehicle sales. and Bank Negara Malaysia.9 -13. Malaysian Automotive Association.7% in the first quarter. Malaysia. However.1% for the year as a whole (2008: 1. Malaysia Tourism Promotion Board. in tandem with the economic recovery.

In addition. and the steady increase in demand from household and commercial users. end-2008: 98.7%. The sub-sector returned to positive growth in the third quarter before expanding strongly in the fourth quarter.3% and 5. The communication sub-sector was only marginally affected by the economic slowdown. supported by better consumer sentiments and a rise in regional travel. The contraction in the sector stabilised in the second quarter of 2009 and conditions became more favourable towards the year-end.4% compared to a 2.2%.9%) and broadband penetration rate (end2009: 31.1%). haulage.3%). Manufacturing sector contracted significantly in the first quarter. with production recording a positive growth in the fourth quarter of 2009. the utilities sub-sector registered a marginal growth of 0. the performance of the sub-sector gradually improved in the second half. with three consecutive quarters of contraction before turning around to record a positive growth in the fourth quarter. Growth was supported by continued demand for cellular and broadband services arising from competitive pricing by service providers as well as the aggressive rollout of broadband services. The year also saw extensive promotions by both the fixed and wireless broadband players to attract new subscribers.8% (2008: 6. Exports and Sales Annual change (%) 20 10 0 -10 -20 -30 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2006 VA 2007 Production Export 2008 Sales 2009 Source: Department of Statistics. Growth in the accommodation and restaurants sub-sector remained weak in the first half of the year. ports and other trade-related services. This was further supported by the steady increase in passenger travel. the availability of affordable smart phones and Wi-fi-enabled devices in the market also boosted demand for data services.6%. Meanwhile.7% and 4. in line with the sharp drop in manufacturing activity. Malaysia 20 . Manufacturing Sector The manufacturing sector faced a challenging start in 2009. For the year as a whole. registering a strong growth of 6% (2008: 7.Annual Report 2009 rates of 2. In contrast. the sub-sector declined by 2. Meanwhile. following the expansion of new routes by airlines and various tourism promotional activities organised during the year. growth declined by 4. Chart 1. The improvement in the utilities sub-sector was reflective of the gradual recovery in electricity demand from industrial users. However. growth in the other services sub-sector was affected mainly by softer demand for private education and private healthcare during the year. as the sharp decline in exports at end-2008 worsened further. the global economic slowdown had affected the number of foreign students and foreign patients seeking education and healthcare services in the country. the electronics and electrical products (E&E) cluster was the worst affected by the global downturn. Performance was affected by the decline in global trade and local manufacturing activity. Production. In addition. but conditions gradually improved from second quarter onwards In the export-oriented industry. the transport and storage subsector was the worst performing services sub-sector. In the first half of the year. after experiencing four consecutive quarters of declines. in line with the improvement in trade and manufacturing activity.1% growth in 2008 as it was affected by lower demand for electricity during the year. which resulted in lower demand for shipping. benefiting from improvements in consumer sentiments and the aggressive discounts offered by both full-service and low-cost carriers.2% respectively). in tandem with sluggish private consumption activity.4% respectively in 2009 (2008: 7.9 Manufacturing Sector: Value-added. end-2008: 21.1%). Growth improved in the second half. These positive developments were reflected in the increase in both the cellular penetration rate (end-2009: 106.

By the fourth quarter of 2009. The primary-related cluster recorded similar trends to the E&E cluster. Exports and Sales Chart 1. driven by increasing demand for hygiene and medical products due to the Influenza A (H1N1) pandemic. Production. especially for semiconductors and electrical products.12 Primary-related Cluster: Value-added. the decline in output moderated from the second quarter onwards. Exports and Sales Annual change (%) 20 10 0 -10 -20 -30 -40 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2006 VA Production 2007 Exports 2008 Sales 2009 Source: Department of Statistics. The E&E cluster performed better in the fourth quarter to record a marginal expansion. In the region. The rubber products industry turned positive in the third quarter. supported by an improvement in regional demand and inventory replenishment activity. led by Chart 1. lower output of computer and parts was due to corporations delaying investment in equipment and software. led by the chemical products industry as demand for plastic parts and components picked up with the improving E&E and household goods segments.10 E&E Cluster : Value-added. The cluster performed better from the second quarter onwards. smartphones and flat panel televisions. following a significant drop in global demand.11 Production and Exports of Semiconductors Annual change (%) 30 20 10 0 -10 -20 -30 -40 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2006 2007 2008 2009 Annual change (%) 45 30 15 0 -15 -30 -45 -60 Annual change (%) 15 10 5 0 -5 -10 -15 -20 Annual change (%) 30 20 10 0 -10 -20 -30 -40 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2006 VA (LHS) Production (LHS) Exports of non E&E product (RHS) Sales (RHS) 2007 2008 2009 Worldwide sales of semiconductor (LHS) Production of semiconductor (RHS) Exports of semiconductor (RHS) Source: Department of Statistics. while the electrical products segment was influenced by lower consumer spending.7%. the cluster turned around to grow by 6.8% in 2009. both in the advanced and regional economies. driven by higher consumer spending on electronics such as netbooks. Similarly. Meanwhile. Manufacturers across the global E&E supply chain reacted by cutting back production and drawing down from inventory. while movements in commodity prices in the second half of the year contributed positively to the production in the petroleum and off-estate processing industries. during the festive season.4% in the first quarter. but fared better due to support emanating from the domestic consumer market and regional demand. the implementation of economic stimulus measures partially helped to boost demand for final electronic products. However. Malaysia Semiconductor Industry Association (SIA) Source: Department of Statistics. Of significance. adversely affecting the semiconductor segment. Production.Economic Developments in 2009 declining by 22. In particular. Malaysia 21 . the sharp fall in the chemical products industry in the first quarter was due to lower demand for plastic parts and components used in the E&E and automotive industries. Production fell sharply by 35. providing less incentive to process off-estate products. Malaysia Chart 1. production of the off-estate processing industry was affected by unfavourable commodity prices. broad contraction in global demand also led to substantial declines in the computer and parts and electrical product segments.

Annual Report 2009

Remaining Competitive: Issues in Enhancing Productivity, Energy Efficiency and Innovation in the Manufacturing Sector Introduction As Malaysia advances towards becoming a high value-added economy, productivity, energy efficiency and innovation will increasingly gain importance for the economy to remain competitive and to move up the value-added chain. The manufacturing sector is no exception, where the reliance on cost competitiveness will not be sustainable in the longer term. This article discusses the various efforts undertaken and constraints faced by Malaysian manufacturers in enhancing productivity, energy efficiency and innovation amidst an increasingly challenging global environment. The analysis draws on the BNM Biennial Manufacturing Survey 20081. Productivity Improving the skills of the workforce and increasing automation in the existing production lines are the most common strategies adopted by manufacturers in enhancing productivity. Upskilling is vital as about 80% of the manufacturing workforce is low to mid-skilled, and less than half of the workers have received formal training. Training and retraining opportunities focus mainly on improving technical skills, with about half of the training budget allocated for this. To enhance automation, manufacturers continue to face several impediments, particularly in terms of the high cost of machinery and equipment as well as an insufficient scale of production to justify extensive automation. In addition, the presence of easily available and relatively cheap low-skilled workers potentially further hinders the adoption of greater automation, as the survey result indicates that about 60% of the jobs currently undertaken by low-skilled foreign workers can to some extent, be replaced by automation (Chart 1). Manufacturers also highlight the importance of Government incentives in supporting automation, identifying the Human Resource Development Fund (HRDF) training fund, exemption on import duty and tax for machinery, and Reinvestment Allowance as the three most effective measures (Chart 2).
Chart 1 Large presence of low cost, low-skilled workers potentially hinders greater adoption of automation
Share of workforce by skill in 2008 Can the reliance on low-skilled migrant workers be reduced through greater automation?

High-skilled 20%

Mid-skilled 28%

No 38% Yes, totally 5%

Low-skilled (foreign) 10%

Low-skilled (local) 42%

Yes, to some extent 57%

1

The BNM Biennial Manufacturing Survey 2008 was conducted in December 2008, covering 301 manufacturing companies in 17 industries, categorised into four clusters: electronics and electrical products (E&E): 90 companies; primary-related: 119 companies; consumer-related: 47 companies and construction-related: 45 companies. The response rate was at 56% at the close of the survey on 30 April 2009.

22

Economic Developments in 2009

Chart 2 Exemption on import duty and tax on machinery and Reinvestment Allowance are effective in encouraging automation
Have the following measures encouraged the adoption of automation and mechanisation? HRDF Training Fund Exemption on import duty and tax for machinery Reinvestment Allowance Investment Tax Allowance Pioneer Status Industrial Adjustment Allowance Technology Acquisition Fund 10 0% 17 21 20% 40% % of respondents 60% 35 20 69 80% 100% 44 17 63 81 80 74 14 48 7 42 6 7 19 13 13

Yes

No

Not Relevant

Innovation Innovation, proxied by the extent of research and development (R&D) activity, is fundamental for manufacturers to move up the value chain. About 57% of the manufacturing firms surveyed undertook R&D activity in 2008. A major constraint to greater R&D activity that has been identified by manufacturers is the quality of the workforce. At present, only about 20% of the manufacturing workforce consists of high-skilled labour, while manufacturers face difficulties in the hiring of high and semi-skilled workers, to the extent that there is currently a critical shortage of engineers, technicians, supervisors and quality control experts. This situation is expected to remain for at least the next three years (Chart 3). Meanwhile, only about 10% of the respondents that undertook R&D activity in 2008 utilised the available Government incentives, citing heavy administrative burdens as discouraging application (Chart 4). Most respondents suggested that easing the application process and the eligibility criteria for the Government incentives would enhance accessibility to these incentives.
Chart 3 Difficulties faced in hiring skilled workers with critical shortages of engineers and technicians
Are difficulties faced in hiring labour with the following skill levels? Skill shortages faced by manufacturers Technician 11% Skilled (non-production) 41 59 Engineer 22% 59 41

Supervisor 8% Quality control 7% Operator 7% Machinist 6% R&D 5%

Skilled (production)

Semi-skilled

31

69

Unskilled 0%

26 25% 50%

74 75% 100%

% of respondents Yes No

Others 30%

Manager 4%

23

Annual Report 2009

Chart 4 Heavy administrative burdens discourage application for Government incentives on R&D
How accessible are the Government incentives for R&D? Application criteria Application process Reimbursement period Others 0% 5 8 13 38 20% 40% % of respondents Least difficult Not so difficult Somewhat difficult Difficult Most difficult 4 5 33 15 29 20 17 54 25 60% 6 13 80% 41 42 15 19 100%

Energy Efficiency Given the high energy consumption in the manufacturing sector and the rise in utility costs since 2005, energy efficiency (EE) constitutes an important component of enhancing the overall efficiency of the sector. However, despite the importance of energy management and due, in part, to different levels of awareness of the benefits of EE, less than 30% of the firms surveyed have a full-time energy manager, while only about 40% have conducted an energy audit since 2005. Furthermore, less than 20% of the respondents had utilised the various Government incentives available for EE. The key challenges reported to be faced in the adoption of EE include the unwillingness to incur additional costs from the significant capital outlays to adopt EE, especially given uncertain potential returns, and the lack of trained human capital and information specific to EE (Chart 5).
Chart 5 Significant barriers exist against the adoption of energy efficiency
What are the main barriers hampering the adoption of energy efficiency? % of respondents 45 40 35 30 25 20 15 10 5 0 Not willing to Lack of trained Limited access Inadequate to information local energy incur high industry & cost/risk of EE financial sector & performance support benchmarks services transactions personnel on for EE energy management technology Limited access Affordable Limited Lack of awareness of financiers that to EE tech & energy prices EE techniques are prepared to equipment & its benefits finance EE investment & appropriate funding mechanisms Don't see measurable benefit from EE investment Others

Conclusion The Malaysian manufacturing sector has, in varying degrees, employed strategies, such as upskilling, increasing automation, undertaking R&D activities and conducting energy audits, to enhance productivity, improve energy efficiency and strengthen innovation, so as to remain competitive in an increasingly challenging global environment. However, there remain challenges and constraints in these endeavours that need to be promptly addressed for the successful movement up the value chain. Of significance are the issues of human capital, high initial investment costs and administrative burden in gaining access to the incentives and funding programmes.

24

The cluster.1 -12.0 -11.1 3. Output dipped slightly in the first quarter.8 -18.4 3.8 Consumer-related cluster of which: Transport equipment Food.7 -0.2 -3. Malaysia higher demand for chemical.8 -3.7 -1. however.4 7. Production and Sales Annual change (%) 25 15 5 -5 -15 -25 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2006 VA 2007 Production Sales 2008 2009 Performance of the construction-related manufacturing cluster mirrored both external and domestic demand.5 Source: Department of Statistics. Malaysia Production data are based on the new Industrial Production Index (2005=100) Source: Department of Statistics.4 1. particularly in production of iron and steel due to slower domestic civil engineering activity and lower regional demand.7 -1.3 0. Nonetheless. Table 1.4 -24. As domestic conditions improved from the second quarter onwards.5 Source: Department of Statistics. performance in the first quarter was affected by the weak labour market conditions and dampened consumer spending.1 -1.2 6. as the implementation of stimulus measures gathered momentum. registering a sharp contraction in the first quarter.5 5. production also recovered gradually to register a positive growth in the fourth quarter.4 0.2 -5.7 9. Malaysia 25 . before recovering from the second quarter onwards to grow by 7.13 Consumer-related Cluster: Value-added. the food.1 -22.9 4.5 -11.3 -12.7% in the fourth quarter. reflecting the improvement in domestic private consumption. beverage & tobacco products Construction-related cluster of which: Construction-related products Fabricated metal products Exports 1 23.6 -18. Production and Sales Annual change (%) 40 20 0 -20 -40 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2006 VA Production 2007 Sales 2008 2009 2009 Annual change (%) 1. In the domestic-oriented industry. gradually improved from the second quarter onwards to record a positive growth in the fourth quarter.6 Performance of the Manufacturing Sector 2008 Value-added (RM million at 2000 prices) Manufacturing Production1 Export-oriented industries Electronics & electrical products cluster of which: Electronics Electrical products Primary-related cluster of which: Chemicals and chemical products Petroleum products Rubber products Off-estate processing Domestic-oriented industries -3.8 -3.0 11.6 -9.1 -5. The improvement in the cluster reflected the strong pick up in the domestic construction activity. Chart 1.Economic Developments in 2009 Chart 1.3 -10.4 8. The consumerrelated cluster was negatively affected by the large decline in the transport equipment industry. in line with the sharp decline in new motor vehicle sales.0 -1.0 -2.9 0.14 Construction-related Cluster: Value-added. beverages and tobacco industry provided some support to the cluster. due to sustained demand for food products.4 4. rubber and offestate processing products.

2 tonnes.9% to 19.3 11. higher output of key food-related industries such as fisheries and livestock provided support to the sector.2 6.6 -1.778 per tonne).000 20 Tonne 25 The agriculture sector recorded marginal growth due to lower production of industrial crops The production of crude palm oil declined by 1% to 17. Malaysia 26 . Sabah and Sarawak) Malaysian Cocoa Board Fisheries Department.500 1.500 3.2 4.6 -8. Natural rubber production contracted by 20.7 7.2% to 0.500 1.2% to RM2.6 1.000 2.9 0.6 3. Production and Yield Hectare 4. unfavourable weather conditions and replanting activity.15 Oil Palm: Area.7 Agriculture Sector: Value Added and Production 2008 2009p Annual change (%) Value added Industrial crops Production of which: Crude palm oil Rubber Saw logs Cocoa beans Food crops Production of which: Fish Livestock 1 Chart 1. Malaysia.4% in 2009 due to lower production of industrial crops.1 0.000 10 1.500 4.1 7. due to weaker global demand. forestry and fishing (agriculture) sector grew at a slower pace of 0.250 2. as well as the implementation of a programme to curb exports by the three major rubber producing countries.5 5.000 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2005 2006 2007 2008 2009 Stocks CPO local delivery price Stocks ('000 tonne) 2. However.0 2.000 12.92 -35.2 Source: Malaysian Palm Oil Board (MPOB) 5.2 -10. Despite weaker production.500 3. Consequently. registered sharp drops of 8.24 million tonnes at the end of 2009. Chart 1.86 million tonnes in 2009 due to weather-related factors.000 3.000 3.7% respectively. Malaysia Malaysian Palm Oil Board Malaysian Rubber Board Forestry Departments (Peninsular Malaysia.000 1.500 2. Yields in Sabah and Sarawak.9 -20. which accounted for 42% of 15 2.500 2. due to the biological yield down-cycle. the average CPO price fell by 19.245 per tonne in 2009 (2008: RM2.1% and 5.750 4.4 -4. Malaysia Department of Agriculture. palm oil stocks were higher by 12. weak prices in the early part of the year.2% at 2.250 1. average national fresh fruit bunches (FFB) yield per hectare declined by 4.1 -10.000 500 0 2004 2005 2006 2007 2008 2009p 0 5 Production in million tonnes (RHS) Mature area in '000 hectares (LHS) Yield of FFB in tonnes per mature hectare (RHS) p Preliminary Source: Malaysian Palm Oil Board (MPOB) Table 1.6 Vegetables Fruits 1 total production. As prices plunged sharply towards the end of 2008.500 1.6 million tonnes in 2009. Malaysia Veterinary Services Department.Annual Report 2009 Agriculture Sector The agriculture. due mainly to the heavy rainfall in East Malaysia in early 2009. As a result.000 1.9 3. Thailand and Indonesia agreed to cut Refers to Peninsular Malaysia only 2 Jan-Nov 2009 p Preliminary Source: Department of Statistics.0 -20.16 Palm Oil Price and Stocks Price (RM/tonne) 4.

845 barrels per day (bpd) in 2009.500 Chart 1. Malaysia -0.46 22 5.9 Malaysia: Crude Oil and Natural Gas Reserves1 As at 1 January 2008 Crude oil (including condensates) Reserves (billion barrels) Reserve/Production (year) Natural gas Reserves (billion barrels of oil equivalent) Reserve/Production (year) 14. p Preliminary Source: PETRONAS 27 .66 36 5. following lower external demand and the shutdown of several oil and gas facilities during the year for maintenance purposes.4 -4. low prices in early 2009 discouraged tapping activity.18 Production of Crude Oil and Condensates Barrels per day (bpd) 800. production in Sabah increased by 20%. Table 1. supported by output from the deepwater oil field in Kikeh.67 36 14. Prices and Yield sen 900 800 700 600 1. The drop in output was further compounded by the frequent occurences of heavy rainfall at the end of the year.000 600.8 1.1 0.17 Natural Rubber: Production. Malaysia exports of natural rubber by 700. lower by 4. Mining Sector Value-added of the mining sector contracted by 3. In abiding to the production limits set by the National Depletion Policy. especially amongst price-sensitive smallholders.000 200.000 400.3 -4.8 Mining Sector: Value Added and Production 2008 2009p Production of crude oil (including condensates) averaged 659.7% and accounted for 45% of total output of crude oil of the country. largely reflecting the lower output of crude oil and natural gas.0 1 The National Depletion Policy was introduced in 1980 to safeguard the exploitation of the national oil reserves by postponing the development and control the production of major oil fields (with reserves of 400 million barrels or more). production in Peninsular Malaysia declined by 11. As such.Economic Developments in 2009 Chart 1.000 750 0 2005 Crude oil p Preliminary Source: PETRONAS 2006 Condensates 2007 2008 2009p Production in million tonnes (RHS) SMR 20 prices in sen per kg (LHS) Average yield in kg per tapped hectare (RHS) p Preliminary Source: Malaysian Rubber Board (MRB) and Department of Statistics.000 500 400 300 200 2004 2005 2006 2007 2008 2009p 500 1. The mining sector contracted further due to lower output of both crude oil and natural gas Output of natural gas contracted by 4% to 5. which further disrupted tapping activity.4% compared to 2008.667 million standard cubic feet per day due to lower Table 1.000 tonnes in 2009.8 -3.250 '000 tonne or kg 1.8% in 2009. rubber prices more than doubled by the end of 2009 to 958 sen per kg.52 22 2009p Annual change (%) Value added Production of which: Crude oil and condensates Natural gas p Preliminary Source: PETRONAS Department of Statistics. In addition. However.

% . which are sufficient to cover 36 years of gas output at current production levels. repairing and maintenance of public buildings. the occupancy rate in the 28 81 79 77 75 2005 2006 2007 2008 Incoming supply .20 Incoming Supply and Occupancy Rate of Retail Space in Malaysia and Kuala Lumpur (as at end period) Occupancy rate (%) 87 85 83 Incoming supply (’000 sq.Annual Report 2009 demand for liquefied natural gas (LNG) from major importers.66 billion barrels of oil equivalent. which accounted for the bulk of the country’s LNG production. natural gas reserves were at 14.5% compared to 2. Meanwhile. On retail space.Kuala Lumpur (RHS) Occupancy rate. The 26 newly constructed shopping complexes were mainly neighbourhood malls catering to nearby residential Chart 1. Growth picked up progressively throughout the year due primarily to the implementation of the constructionrelated activities under the 9MP and the fiscal stimulus packages. Meanwhile.6% increase in the Federal Government development expenditure to RM49.m) 2000 1800 1600 1400 1200 1000 800 600 400 200 0 2009p The construction sector recorded stronger growth in 2009 In the civil engineering sub-sector. The output from Sarawak. The performance of the sector improved significantly in the second half of the year. This was evident from the 15. Incoming supply of office space in the Klang Valley was 6.7%. stable costs of construction materials provided a further boost to activities in the sector. as well as the on-going construction of commercial buildings.Malaysia (LHS) Incoming supply . Construction Sector The construction sector recorded a stronger growth of 5. % . Valuation and Property Services Department . As such. Malaysia and Accountant General's Department area eased marginally to 82% in 2009 (2008: 84%). growth was bolstered by the continued implementation of projects associated with the 9MP as well as those under the stimulus packages. declined by 4.Malaysia (RHS) Occupancy rate. driven mainly by stimulus spending on the upgrading. partly to upgrade existing infrastructure. Rental rates generally remained stable during the year as incentives such as longer rent-free periods and free furnishing sustained the demand.9% in the first half of the year. growing by 8. Oil reserves in the country increased to 5. Growth in the non-residential sub-sector was robust.52 billion barrels or a lifespan of 22 years at current production levels. Chart 1. fewer shopping complexes were constructed nationwide in 2009 following the considerable supply of large shopping centres that became available during 2007-2008.5 billion. support for LNG demand emerged in the fourth quarter with the commencement of the long-term contract for Petronas exports to China from October 2009.4 million square feet at end-2009 (end-2008: 7.7% in 2009 with improved performance across all sub-sectors.6 million square feet).Kuala Lumpur (LHS) p Preliminary Source: National Property Information Centre (NAPIC). Nonetheless.19 Value-add Growth in Construction Sector versus Growth in Federal Government Development Expenditure and Private Investment Annual change (%) 7 6 5 4 3 10 2 1 0 -1 -2 2004 2005 2006 2007 2008 2009 0 -10 -20 -30 Annual change (%) 50 40 30 20 Construction Sector (LHS) Federal Government Development Expenditure (RHS) Private investment (RHS) Source: Department of Statistics. Demand for office space in the Klang Valley was driven mainly by the relocation of existing tenants into new office buildings while new takeup was modest.

the stock level of retail space rose to 10 million square metres (2008: 9.0 30.1 5.029 29 .1 35.4 17.500 2. Similar to the office market.4 -38.000 or less RM50.4%).3 2.7 9.7 -3.225 481 104 22.2 36.000 500 0 Table 1. As at the end of 2009.000 1.6 -16.602 7.550 3.6 44.001 .6 -52.Malaysia (LHS) Incoming supply .2 -14.7 17.119 3.4 11.0 2.4 42.8 66.000 RM500.045 3.000.592 13.1 14.Economic Developments in 2009 Chart 1.1 8.5 4.0 19.RM200. In the first quarter.001 .946 6.001 .Kuala Lumpur (RHS) Occupancy rate.947 3.3 -10. demand for properties weakened due Loan applications Loan approvals p Preliminary 19.001 . started picking up in the second quarter as developers introduced attractive financing packages while borrowing costs were lowered following Table 1.1 0. landlords provided various incentives to attract tenants.000 More than RM1.RM250.001 .888 993 105 26.m) 2.5 100 3.6 14.Malaysia (RHS) Occupancy rate.7 Incoming supply .491 4.419 1.7 57.000 RM150.786 2.8 28.3 20. in turn maintaining the occupancy rate at 81.2 -19.5 20.500 1.6 8.4 100 2.001 . Valuation and Property Services Department and Ministry of Housing and Local Government to uncertainty about the global and domestic economic outlook.000 RM100.8 0.000 RM200.000 Total p Preliminary Source: National Property Information Centre (NAPIC). Valuation and Property Services Department areas.8 -23.6 15.0 -38.11 Overhang of Residential Property in Malaysia by Price Range Residential Price Range RM50.5 -33.7 15.920 3.10 Demand and Supply Indicators of the Residential Property Market 1H '08 2H '08 1H '09 2H '09p Annual change (%) Demand indicators Residential property transactions Value (RM million) Volume Finance for purchase of residential property Loan applications Loan approvals 43.0 -1. but softened slightly in other areas.4 million square metres).3 50.RM100. however.8 15.21 Incoming Supply and Occupancy Rate of Purpose-Built Office Space in Malaysia and Kuala Lumpur (as at end period) Occupancy rate (%) 85 84 83 82 81 80 2005 2006 2007 2008 2009p Incoming supply ('000 sq. % .2 Source: Bank Negara Malaysia.9 3.RM500.8 -31.0 -23.1 0. Performance in the residential segment was relatively mixed during the year.5 14.000. Rental rates remained stable in prime centres.8% (2008: 81. % .RM1.1 3.000 RM250.6 -29. Demand. Valuation and Property Services Department Units Share (%) As at end-2008 Units Share (%) As at end-2009p 13.3 Supply indicators New launches New sales and advertising permits Housing approvals Loans for construction 25. National Property Information Centre (NAPIC).RM150.Kuala Lumpur (LHS) p Preliminary Source: National Property Information Centre (NAPIC).

2% to 22.7 493.9 554. For the whole year.592 units.8%.5 10.5 18. sustained regional travel activity resulted in improvements in the services account.8 -58. Reflecting the overall cautious sentiments of property developers.5 412.2 170.4 112.4 -8. Given the lower incoming supply and the gradual improvement in demand.and medium-cost houses as allocated under the stimulus packages. Despite the sharp contraction in external demand.5 3. with relatively stronger growth in loans for the purchase of properties priced above RM250.6 141.4 3.5 129.3 96.1 -84.2 -82.7 17. Both net inflows of foreign direct investment and outflows of direct investment abroad also moderated with the weak economic conditions. there was also an increase in the construction of low.6 53.Annual Report 2009 reductions in the OPR by a total of 150 basis points between November 2008 and February 2009.3 663.6 -19.9 0. as lower demand for exports induced a corresponding decline in imports.6 18.4 806. the surplus in the current account was supported by a sizeable trade surplus.4 39.9 677. Meanwhile.0 -0.1 -15.7 697.8 331.1 0.8 141.9 -83.9 -24.2 553.6 100.1 584.12 Balance of Payments EXTERNAL SECTOR Balance of Payments Malaysia’s external position remained strong in 2009. The lower net outflows in the financial account largely reflected the significant moderation in portfolio outflows in the first half and the net inflows in the second half of the year.1 23.2 170. Other investment 2008 Item + Net RM billion Goods Trade account Services Balance on goods and services Income Current transfers Balance on current account % of GNI Capital account Financial account Direct investment Portfolio investment Other investment Balance on capital and financial accounts Errors and omissions of which: Foreign exchange revaluation gain (+) or loss (-) Overall balance Bank Negara Malaysia international reserves. the property overhang declined by 13.3 99. the volume of residential property transactions contracted by 2. while the value of property transactions rose by 1.9 508.7 13. Table 1.5 118.5 101.0 765.7 -23.6% respectively.4 91.9 0. net USD billion equivalent p Preliminary Note: Numbers may not necessarily add up due to rounding Source: Department of Statistics.3% to RM41.7 434.1 653. With respect to the public sector.000.3%.9 -29.8 521.9 1. loan applications and approvals increased at an annual rate of 39. the number of new launches declined by 15.7 -17.8 -5.7 -12. The overall balance of payments turned around to record a surplus as the continued large surplus in the current account more than offset the lower net outflows in the financial account.2 144.8 18.7 30 .6 -118. Between the second and fourth quarter of 2009.3 40. Malaysia and Bank Negara Malaysia 2009p + Net 664.9 95.8 billion.5 -26.9 594.3 317.1 -117.7 63.8% and 32.

5 billion or 18. supported by a sizeable trade surplus and an improvement in the services account For the year as a whole.7 -8. petroleum products. Despite the sharp contraction in external trade. Malaysia 2008 2009p -20 Malaysia’s external position remained strong despite the weak external environment Current Account The current account recorded a marginally smaller surplus of RM112. contributed to a higher surplus in the services account.8 billion).6 -21.8 3.5 Current account surplus remained large.5 -18. register a positive growth of 5.2 -42. particularly from Asia.0% of GNI (2008: RM129.22 Current Account RM billion 700 600 500 400 300 200 RM billion 140 120 100 80 60 40 20 0 2007 Goods exports Goods imports Balance on services and income Balance on current account (RHS) p Preliminary Source: Department of Statistics. This level of reserves is adequate to finance 10 months of retained imports and is 4.6 -12. Inventory replenishment and a rebound Chart 1. After taking into account the foreign exchange revaluation gains arising from the strengthening of major currencies against the ringgit. the trade surplus remained sizeable as the decline in intermediate imports largely offset the contraction in exports.3 billion (or US$96. increased during the year. which largely reflected trade credits.1 -9. exports started to stabilise in the third quarter.4% of gross exports. chemicals and chemical products and non-metallic mineral products p Preliminary Source: Department of Statistics.1% in the fourth quarter. the net international reserves increased by RM13.4 -20. Gross exports closely mirrored the developments in the global economy.8 billion to RM331. gross exports contracted by 16.9 20. beverages and tobacco products. rubber products. In tandem with the gradual improvement in the global economy.7 billion) as at 31 December 2009. particularly the regional economies.6% (2008: +9. As at 25 February 2010. Malaysia and Bank Negara Malaysia 31 . A larger inflow of tourism receipts. reserves amounted to RM331. 100 0 -100 Table 1.8%). before picking up momentum to Electronics Semiconductors Electronic equipment and parts Electrical products Resource-based products1 Commodities Agriculture of which: Palm oil Rubber Minerals of which: Crude oil and condensates LNG 1 -8.7 billion or 17. furniture and parts.6 43.2 33.4 Refers to food.0 29.8 billion (or USD96.Economic Developments in 2009 outflows.6 3.6 41.1% of GNI).13 Gross Exports 2008 2009p Annual change (%) Gross exports Manufactures of which: 9. In addition.5 10.9 36.3 -7. the decline in commodity prices also affected exports performance given that commodity and resourcebased exports accounted for 39.3 times the short-term external debt.8 -16.0 -23. The export contraction in the first half was exacerbated by the sharp adjustment in inventories by final producers in the importing countries.6 -17.0 51.8 -16. wood products.9 -45. while the narrowing of the income account deficit was attributed mainly to lower profits and dividends accruing to the MNCs operating in the manufacturing sector.0 -32.4 -27.3 9.

The impetus for the recovery was driven by exports of electronics. both for re-exports to advanced economies and increasingly. Both agriculture and mineral exports declined Chart 1.23 Direction of Semiconductor Exports in 2009 G-3 23. Of significance. however. attributed to weaker demand and lower prices. remained subdued due to lower spending on information technology by corporations. Japan and Euro Area Source: Department of Statistics. Consequently.1% Rest of World 2% PR China & Hong Kong SAR 58. with the demand coming primarily from the production of netbooks and smart phones. chemicals and chemicals products. Exports recovered in the second half. except for exports of minerals.4% in 2009. largely reflecting the sharp contraction in exports in the first half year. The sharp fall in commodity prices contributed to a substantial drop in resource-based exports. Manufactured exports contracted by 12. with the decline being more pronounced in the first half of the year. These included rubber products. Malaysia benefited from PR China’s demand for parts and components. Malaysia and Bank Negara Malaysia E&E 3Q 4Q 1Q 2Q 3Q 2009p 4Q Resource-based products . This development was underpinned by the pivotal role played by PR China in the regional production network. However. All segments of exports. PR China and Hong Kong SAR emerged as the largest export destinations for semiconductors with a share of 44%. Commodity exports contracted by 27. and petroleum products. which accounted for 57. the improvement in regional demand and the rebound in commodity prices in the second half led to the recovery in non-E&E exports.24 Export Performance of Electronics & Electrical (E&E) and Resource-Based Industries Annual change % 40 30 20 10 0 -10 -20 -30 1Q 2Q 2008 Manufactured exports p Preliminary Source: Department of Statistics. with all major segments recording negative growth. registered positive growth in the fourth quarter. 32 Exports of non-E&E declined by 14. Demand for electronic equipment and parts by advanced countries.9% Regional economies 74. particularly semiconductors.9% Note: G-3 refers to the US. which recorded a positive growth in the fourth quarter. led by stronger growth in the regional economies.1% Other regional economies 41. amid improvements in the global economic conditions. Exports of semiconductors constituted half of electronic exports.6%.4% of non-E&E exports.5% in 2009. with regional markets accounting for 74% of semiconductor exports. for its domestic demand. following the decline in demand from both advanced and regional countries. Exports of E&E declined by 11%. Malaysia and Bank Negara Malaysia in commodity prices lent further support to export recovery.Annual Report 2009 Chart 1.

Economic Developments in 2009

Chart 1.25 Commodity Export Performance
Annual change (%) 80 60 40 20 0 -20 -40 -60 1Q 2Q 2008 Commodity exports p Preliminary Source: Department of Statistics Malaysia and Bank Negara Malaysia Agriculture 3Q 4Q 1Q 2Q 2009 p Minerals 3Q 4Q

declined by 21.6%. In the first half year, the weak external demand for E&E exports led to the curtailment of intermediate imports, particularly imports of parts and accessories for capital goods. In tandem with the decline in non-E&E exports, imports of fuels and lubricants, as well as industrial supplies such as chemicals and metals were also lower. In the second half, consonant with improvements in exports, imports for intermediate goods recovered and recorded positive growth in the fourth quarter. Imports of capital goods contracted by 5.9%, reflecting lower domestic private investment spending. In the first half year, imports of agricultural, construction, mining and manufacturing equipment contracted significantly, following deterioration in domestic demand conditions and business confidence. Weak external demand and lower capacity utilisation had affected capacity expansion particularly in the manufacturing sector. However, imports of telecommunication equipment remained strong, reflecting investment for wireless networks, following the accelerated migration to mobile services as well as the expansion in the coverage of broadband services. In the second half year, the contraction in capital imports moderated, with imports of office machines recording positive growth in tandem with capacity expansion.

significantly in the first half, where rubber, crude petroleum and LNG experienced lower prices and export volumes. Meanwhile, the higher export volume of crude palm oil was unable to cushion the fall in prices. The contraction in export receipts eased in the second half on the back of improved commodity prices and some recovery in volume demand, particularly from the region, following the improvement in the economic conditions. Gross imports declined by 16.6% (2008: +3.8%), with contractions in all major categories of imports. Imports of intermediate goods
Table 1.14 Imports by End-Use

2008 Capital goods Capital goods (except transport equipment) Transport equipment Intermediate goods Food and beverages, mainly for industry Industrial supplies, n.e.s. Fuel and lubricants Parts and accessories of capital goods (except transport equipment) Consumption goods Food and beverages, mainly for household consumption Consumer goods, n.e.s. Re-exports Gross Imports
n.e.s. Not elsewhere specified p Preliminary ... Negligible Source: Department of Statistics, Malaysia

2009p -5.9 -8.2 10.5 -21.6 -16.8 -21.8 -36.0 -19.0 -2.7 7.8 -9.1 24.0 -16.6

Annual change (%) ... 2.2 -13.6 5.7 30.0 9.7 32.0 -5.0 11.8 21.4 5.5 -6.5 3.8

33

Annual Report 2009

Consumption imports also declined, albeit, at a more moderate rate of 2.7% as consumers were more cautious in their spending on imported consumer durables and semi-durables. Nevertheless, imports of food and beverages for household consumption continued to increase. Growth in consumption imports resumed in the fourth quarter in tandem with the strengthening of private consumption. With the earlier and stronger rebound in economic activity in the Asian economies, exports to the region began to recover as early as the third quarter and strengthened further in the fourth quarter. The greater role by Asia in supporting the recovery in global trade resulted in a shift in Malaysia’s trade pattern. The share of exports to the region increased to 49.3% (2008: 45.7%), with the share to PR China increasing to 12.2% (2008: 9.5%). The share of exports to advanced economies including the US, EU and Japan, declined to 31.6% in 2009 (2008: 34.6%). In 2009, the services account recorded the third consecutive year of surplus, the largest recorded surplus of RM3.2 billion (0.5% of GNI). The surplus stemmed from higher travel receipts, as well as an improvement in the other services deficit.

Despite the economic downturn and outbreak of influenza A (H1N1), tourist arrivals expanded strongly by 7.2% to 23.6 million visitors (2008: 5.1%, 22.1 million visitors), where most of the tourists were from Asia. Malaysia benefited from the increase in tourist arrivals spurred by the growing number of middle income travelers from Asia. In addition, the expansion of short and medium-haul leisure travel was further facilitated by the low cost carriers. The other services account recorded a lower deficit of RM10.7 billion, as a result of mainly lower net outflows for construction services, as well as royalties and licence fees. In addition, net inflows from computer and IT services also improved, attributable to the higher shared services outsourcing (SSO) activities by foreign financial institutions and IT companies in Malaysia. Regional economies emerged as one of the major markets for Malaysia’s export of software and IT support services, earnings of which accounted for about 40% of total receipts. Growth was further supported by regional IT centres for the oil and gas industry. Net payments for professional services, however, increased reflecting imported consultancy services by the financial and manufacturing sectors.

Table 1.15 Direction of External Trade
2009p Exports RM billion Total of which: United States European Union (EU) Selected ASEAN countries
1

Imports RM billion 434.9 Annual change (%) -16.6

Trade balance RM billion 118.4

Annual change (%) -16.6

553.3

60.6 60.0 141.0 131.6 67.2 28.8 14.4 21.1 21.4 54.4 17.0

-26.8 -19.9 -16.8 -1.5 6.4 1.9 -11.1 -18.5 -18.0 -24.2 -31.3

48.6 50.8 109.0 110.1 60.7 10.8 18.5 20.1 14.8 54.3 7.9

-13.9 -17.7 -13.4 -15.2 -9.3 -20.8 -26.4 -16.9 -41.0 -16.6 -23.6

11.9 9.2 32.1 21.6 6.6 18.0 -4.0 1.0 6.6 0.1 9.1

Selected North East Asia countries The People's Republic of China Hong Kong SAR Chinese Taipei Korea West Asia Japan India
1

Singapore, Thailand, Indonesia, Philippines, Brunei Darussalam and Vietnam p Preliminary Note: Numbers may not necessarily add up due to rounding Source: Department of Statistics, Malaysia

34

Economic Developments in 2009

Table 1.16 Services and Income Accounts
2008 2009p RM billion Net Services Account % of GNI 0.2 ... + 99.1 14.9 54.2 29.8 0.1 40.5 4.0 36.5 95.9 Net 3.2 0.5

Chart 1.27 Direct Investment Income
RM billion 50 40 30 20 10 0 2005 2006 2007 2008 2009p

Transportation -15.4 Travel 28.5 Other services -12.4 Government transactions n.i.e. -0.6 Income Account % of GNI Compensation of employees Investment income -23.7 -3.3 -0.7 -23.0

32.0 -17.1 22.6 31.6 40.5 -10.7 0.7 -0.6 53.1 -12.6 -1.9 5.4 -1.4 47.7 -11.2

Income accruing to Malaysian companies investing abroad Income accruing to foreign investors investing in Malaysia Reinvested earnings of foreign investors p Preliminary Source: Department of Statistics, Malaysia

n.i.e. Not included elsewhere p Preliminary ... Negligible Note: Numbers may not necessarily add up due to rounding Source: Department of Statistics, Malaysia and Bank Negara Malaysia

For the year, the transportation account recorded a larger deficit of RM 17.1 billion as lower earnings from passenger fares and cargo offset the lower freight payments due to the declining volume of trade. The global economic downturn inevitably led to lower passenger traffic against the backdrop of excess capacity and greater competition within the travel industry. The decline in earnings from passenger fares moderated in the second half year following the upturn in regional travel demand amidst reductions in capacity. The income account deficit narrowed to RM12.6 billion or 1.9% of GNI, reflecting mainly lower

profits and dividends accruing to foreign direct investors in Malaysia, particularly in the E&E sector. This was due to the weak performance of manufacturing sector in the first half of the year. Meanwhile, profits and dividends accruing to Malaysian companies investing abroad were higher, reflecting the improvement in earnings from commodities. Financial Account In 2009, the financial account recorded a lower net outflow of RM82.9 billion (2008: -RM118.5 billion). Of significance, net portfolio outflows moderated sharply in 2009 as the large reversal of short-term capital flows experienced since the second half of 2008 turned to net inflows in the second half of 2009, following improved global and domestic economic conditions. Meanwhile, both foreign direct investment and direct investment abroad by Malaysian companies moderated, particularly in the first half of 2009, due to the sharp deterioration in global economic conditions. Outflows in the other investment category were higher as a result of the continued extension of trade credits by Malaysian exporters and the placement of deposits abroad by residents. For the year as a whole, portfolio investment recorded a small net inflow of RM0.8 billion. In the first half, portfolio outflows moderated to RM22.1 billion (2H 2008: -RM88.5 billion) as deleveraging by international investors subsided. Subsequently, this outflow turned around to register a net inflow of RM22.9 billion in the second half of the year,
35

Chart 1.26 Tourist Arrivals and Tourism Receipts
Tourist arrivals in million 25 20 15 10 5 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009e Tourist arrivals Tourism receipts (RHS) Receipts in RM billion 60 50 40 30 20 10 0

e Estimate Source: Malaysia Tourism Promotion Board and Department of Statistics, Malaysia

Second. India and Vietnam as well as established investment centres. enhancing production capacity.3% of GDP). is the value-add and contribution to growth of this lower amount of FDI is higher as these sub-sectors are more skill-intensive and have higher labour productivity.5% of GDP in 2007. the nature of the capital flows has changed responding to the changing conditions prevailing in the country. First. This moderation was mainly attributed to two reasons. namely the financial services and shared services operations. however. Secondly. As the Malaysian economy evolves to become more developed. For more than a century. particularly in establishing new industries. higher than the RM134 billion received during the period of 1990-1999. Throughout its development. thus involving lower amounts. following the collapse of the technology bubble and the global financial crisis respectively. However. relatively lower FDI inflows were recorded in 2001 and 2009. portfolio flows. the FDI inflows into Malaysia in this recent decade have increasingly been channelled into the higher value-added services sector. More importantly. Malaysia has received foreign direct investment. Malaysia Source: Department of Statistics Malaysia Foreign Direct Investment Foreign direct investment (FDI) is an important contributor to the growth and the transformation of the Malaysian economy.Annual Report 2009 Nature and Trends of Capital Flows in Malaysia Malaysia is one of the most open economies in the world. employment. namely Singapore and Hong Kong SAR. a more recent development has been the large increase in investment abroad by Malaysian companies in search of new growth opportunities and markets. Chart 1 Trends of Net Capital Flows in Malaysia RM billion 40 20 0 -20 -40 -60 -80 -100 -120 -140 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009p Chart 2 Net FDI Flows RM billion 35 30 25 20 15 10 5 0 -5 -10 2000 Direct investment abroad Portfolio investment Financial account p Preliminary Foreign direct investment Other investment 2001 2002 2003 2004 2005 Net FDI 2006 2007 2008 2009p Equity capital Reinvested earnings p Preliminary Other capital Source: Department of Statistics. but also large investment flows. The scale of the investments in these sub-sectors are less and are also less capital-intensive compared to the manufacturing sector. Two distinct developments have emerged in the recent years. with potentially destabilising effects on exchange rates. Malaysia has been highly integrated with the global economy and international financial system. Firstly. as a share of GDP. averaging 3% of GDP per annum with a peak of 4. short-term capital flows have become more prominent in the Malaysian financial system. Short-term flows. Malaysia recorded RM152 billion in net FDI inflows during the period of 2000-2009. in particular. which has been an important contributor to the country’s economic development. While global net FDI flows into the region have more than doubled during the period 36 . the rising competition for FDI in the region from new emerging market economies such as PR China. similar to the global trend. resulting in not only significant trade expansion. In absolute volume. the net inflows of FDI were lower during the period of 2000-2009 (3% of GDP) compared to the period of 1990-1999 (6. Malaysia has attracted a steady inflow of net FDI in the recent decade. the financial markets and the real economy. trade and technological capability. have risen in volume and their volatility has been increasing. in tandem with the global surge in this form of capital flows. However.

While FDI inflows continue to be underpinned by the large and long-standing presence of MNCs in the manufacturing sector and investments in the oil and gas sector. Malaysia Oil and gas 17% of 2000-2009 (USD1. 1990-1999: USD0.5% of GDP per annum between 2000 and 2009. investment in upstream activity continued to be significant as PETRONAS and its foreign partners continued to be actively engaged in exploration. regional and global expansions allow Malaysian companies to achieve greater economies of scale by tapping into new and larger markets. Generally. A significant development is the sizable increase in FDI in the financial sector. inflows of FDI into Malaysia are relatively broad-based. the manufacturing sector in Malaysia continues to be successful in attracting FDI in new growth areas such as renewable energy and medical equipment. the period 2000-2009 saw the rising importance of FDI into the services sector. FDI in the services sector is well diversified. including Islamic finance. with the share of FDI in this sector more than doubling to 37% of the total FDI flows (1990-1999: 15%). shared services and outsourcing. Malaysia’s share of the regional FDI flows has declined as a major part of these flows went to PR China. Malaysian companies which invested abroad have also enhanced their domestic operations by expanding capacity and moving up 37 . especially in the Asian region. production and the development of oil and natural gas resources in the country.Economic Developments in 2009 Chart 3 Cumulative Net FDI Flows by Sector 1990-1999 (RM134 billion) 2000-2009 (RM152 billion) Services 15% Manufacturing 63% Others 5% Services 37% Others 5% Oil and gas 17% Manufacturing 41% Note: Others mainly consist of the agriculture and construction sectors Source: Department of Statistics.6 billion over the recent 10-year period following the liberalisation that has been undertaken in this sector. and peaking at 6. and taking advantage of the comparative advantage of host countries. transportation.6 trillion). It is estimated that net FDI inflows into this sector amounted to RM41. hotels and wholesale and retail trade sub-sectors. The increasing trend of DIA reflects the growing presence of Malaysian companies abroad. In terms of the sectoral distribution. Additionally. with investment being channelled to the financial services. expanding into rapidly growing industries. net DIA amounted to RM182 billion over this period.4 trillion. averaging 3.8% of GDP in 2008. given the relatively small domestic market. In the oil and gas sector. gaining access to more competitive supply of land and labour. the factors driving Malaysian companies to invest abroad include expanding markets for their products. acquiring brands and technology. Similar to other global companies. with 78% occurring between 2006 and 2009. Direct Investment Abroad An important development in recent years has been the sharp increase in direct investment abroad (DIA) by Malaysian companies. communications. Cumulatively. In particular.

changed in recent years. particularly in ASEAN.Annual Report 2009 Chart 4 Net DIA Flows RM billion 10 0 -10 -20 -30 -40 -50 -60 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009p Equity capital Reinvested earnings p Preliminary Source: Department of Statistics. In the earlier years. the Asian Newly Industrialised Economies (NIEs). Therefore. being undertaken by both the Government-linked companies and private companies. however. The scope of DIA by Malaysian companies has also broadened over the years. with investments. This has. higher dividends for shareholders. This has increased their overall efficiency and enabled them to better compete in the global market. telecommunication. Most of the investments were undertaken in the region. mainly in the services sector. investments were undertaken mainly by PETRONAS and Government-linked plantation companies. utilities and business services sub-sectors. the rising investment abroad by Malaysian companies. Malaysia 38 . Malaysia Other capital Net DIA the production value chain in order to establish an integrated supply chain management with their overseas subsidiaries. to explore the potential for further natural resources such as oil and gas as well as to increase the available land for plantation activity. PR China and West Asian economies. particularly in the financial services. Chart 5 Cumulative Net DIA Flows by Sector 1995-1999 (RM32 billion) 2000-2009 (RM182 billion) Others 3% Agriculture 7% Construction 2% Oil and gas 10% Others 28% Agriculture 5% Services 49% Construction 4% Oil and gas 7% Manufacturing 7% Services 70% Manufacturing 8% Source: Department of Statistics. will benefit the country through having more competitive and globalised Malaysian companies. and higher inflows from profit repatriation. over a medium term. through greater job opportunities for Malaysians.

the deteriorating global inflation outlook in 2006. the development of the debt market allowed for the diversification of the composition of portfolio flows into Malaysia. The build-up of inflows of speculative funds in 2005 was due to the expectations for the appreciation of the ringgit which was floated on 21 July 2005. the Shanghai stock market correction in February 2007 and the heightened global market uncertainty following the US sub-prime mortgage problem in July-August 2007 had subsequently led to outflows of foreign funds. As such. 39 . While the magnitude of the recent reversals were larger than the net outflows recorded during the height of the Asian financial crisis. between 2004 and the first half of 2008. Of significance. the impact on the domestic economy was limited given Malaysia’s well-developed financial system. In addition.Economic Developments in 2009 Chart 6 Net Portfolio Flows RM billion 50 30 10 -10 -30 -50 -70 -90 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009p Equity securities Debt securities p preliminary Net portfolio investment Source: Department of Statistics Malaysia Portfolio Investment Flows A key development since the early nineties has been the surge in portfolio flows to Malaysia. a distinct characteristic of the portfolio flows in recent years has been the increased volatility of the flows. including Malaysia. total gross portfolio inflows and outflows in absolute terms were 23 times higher than in 2000. In addition. Malaysia experienced net portfolio inflows of RM54 billion. In addition. Since 2004. the reversals of the flows did not cause a significant disruption in any particular asset market. The emergence of debt securities as an asset class for foreign investors alongside the equities has resulted in an increasingly diversified composition of portfolio investment flows in Malaysia. These inflows were mainly driven by Malaysia’s strong economic fundamentals as well as the prospects of better corporate outlook as the economy recovered strongly following the aftermath of the Asian financial crisis. The surge of portfolio inflows since 2005 was interrupted by several external market developments which led to episodes of reversals in flows by foreign investors. In particular. Nevertheless. the rapid development of the domestic bond market has also attracted sizeable inflows of foreign portfolio investment into the debt securities market. which affected emerging markets across the board including Malaysia. inflows of foreign portfolio funds resumed in the second half of 2009 amid stronger growth prospects in the region as well as further normalisation of conditions in the international financial markets. Of significance was the massive deleveraging activities by foreign financial institutions following the global financial crisis in the second half of 2008 that triggered large-scale liquidation of portfolio funds by international investors. the depth of the domestic financial market also provided greater liquidity and price sensitivity to changes in financial conditions. This subsequently led to an improvement in investors’ risk appetite for financial assets in the emerging markets. These reversals culminated in a net portfolio outflow of RM111 billion between the second half of 2008 and the first half of 2009. Among others. there have been several episodes of large inflows and outflows of portfolio funds in response to the developments in global financial markets as well as changes in domestic economic conditions. At its peak in 2008.

2 billion) as at end-July 2005.1 billion (USD78. due mainly to extension of trade credits by Malaysian exporters and repayments of trade credits by Malaysian importers. averaging 5.Annual Report 2009 facilitating more effective monetary operations to sterilise the impact of large capital flows. Another component of other investment includes activities by the banking institutions in managing their liquidity. Chart 7 Movement of International Reserves RM billion 400 350 300 250 200 150 100 50 0 2000 2001 RM billion 150 100 50 0 -50 -100 2002 2003 2004 2005 2006 2007 -150 2008 2009p Net international reserves Current Account (RHS) Financial Account (RHS) p Preliminary Source: Department of Statistics Malaysia International Reserves The changes in net international reserves over this recent decade have been shaped by developments in both the current and financial accounts of the balance of payments. portfolio outflows due to residents investing abroad have been steadily growing over the years. The large inflows of portfolio funds from 2004 up to the first half of 2005 coupled with the continued surplus in the current account resulted in a significant increase of international reserves from RM168 billion (USD44. The non-bank private sector experienced an outflow during this period. averaging about 3. net placements of deposits by the banking institutions as well as trade credit extension. The net external loan repayments by both the official and private sectors have contributed to these outflows. Given these conditions. These flows in the banking sector have in part been responsive to interest rate and liquidity movements. While a significant amount of these inflows were attracted to the investment opportunities provided by the deepening Malaysian capital market. With current account surplus exceeding financial account deficits.2 billion) as at end-2003 to RM297. These flows have been fairly volatile and large. The strong international reserves position has been able to accommodate these outflows of funds without affecting overall domestic liquidity or interrupting the normal functioning of the foreign exchange and domestic money markets. Meanwhile. The liberalisation of the foreign exchange administration rules since 2005 has also allowed for greater flexibility for residents to invest abroad. This reflected mainly placement of deposits abroad and inter-bank borrowings. and they were mainly driven by financing requirements and business decisions of the non-bank private sector. other investment comprising mainly net external loans undertaken by the official and private sectors. Malaysia has not only been able to withstand large shifts in funds but has also managed to ride out the recent period of turbulence in international financial markets without serious disruptions to the domestic economy. Other Investment In addition to portfolio investment. there were also significant speculative 40 . particularly movements in portfolio investments. The increase in external portfolio assets resemblance similar trends in other parts of the region.9% of GDP during the period of 2000-2009 and were mainly in the form of equity securities. there was a build-up of external reserves from 2001-2003.6% of GDP over the recent ten years. especially among the Asian NIEs in which the buildup in external portfolio assets at the international level has become increasingly significant. have consistently recorded net outflows.

The strategy adopted is to further deepen and broaden the domestic financial system to cope with and manage the volatile capital flows without resulting in disruptions and instability in the domestic financial markets. investments abroad by Malaysian companies can be expected to continue to remain sizeable in the future and this development is in response to the changing structure and competition in the region and in the global economy.3 times of the short-term external debt. going forward. In 2007 and the first half of 2008. First. is the challenge with respect to managing the increasingly volatile nature of short-term capital flows.2 billion) as at end-2005. Maintaining Malaysia’s strong macroeconomic fundamentals and a sound and strong banking system will provide the flexibility for the country to intermediate volatile capital flows while maintaining financial stability and promoting growth in the domestic economy.3 billion (USD96. The portfolio inflows resumed since the second half of 2009. These large capital inflows coupled with the current account surplus. The third. The significant deleveraging activities following the intensification of the global financial crisis led to a large reversal of portfolio flows of RM111 billion between the second half of 2008 to the first half of 2009. Second.7 billion).8 billion (USD96.9 billion (USD91. Conclusion This review of developments in capital flows in Malaysia over the recent ten years has brought to the forefront several important policy considerations for Malaysia moving forward. particularly portfolio funds.8 billion). Malaysia has shifted gear to attract FDIs in the high value-added activities and those that will bring in new technology. economic transformation and growth. These speculative inflows reversed in the second half of 2005 after the ringgit was floated in July 2005 and reserves stabilised at RM265. competition for FDI will continue to intensify.9 billion (USD125. 41 . resulted in a significant appreciation of the exchange rate and an increase in the international reserves which peaked in June 2008 at RM410. the net international reserves was amounted at RM331.8 billion). This reserves position was sufficient to finance 9. resulting in a substantial decline in the international reserves to RM322. The decline in reserves during this period is less than the net portfolio outflow as Malaysia continued to record a current account surplus during this period. Malaysia has also consistently maintained vigilance over developments in capital flows through close surveillance and assessments of the risks associated with these flows. The external reserves as at end-2009 amounted to RM331. required to support Malaysia’s transition into a high income economy.5 billion) as at end-June 2009.7 months of retained imports and is 4. Malaysia again received substantial capital inflows. As at 25 February 2010. The changing composition of capital flows would contribute to Malaysia’s long-term competitiveness.2 billion (USD70.Economic Developments in 2009 portfolio inflows over this period in anticipation of the ringgit exchange rate realignment.

particularly in the Asian region. After taking into account the adjustments for outflows due largely to loan repayments to parent companies.Annual Report 2009 Table 1.5 billion and was mainly channelled into the services (46%). a significant share of the profits was also repatriated to home countries.9 6.7 billion or 0. net DIA amounted to RM30. DIA was mainly undertaken through increased participation in existing operations abroad. Although investments in terms of equity and inter-company loans were lower. During the year.1 -50.9 -82.6 -1. the domestic banking and telecommunication players have strategised to realign their operations on a regional scale to remain competitive.1 0.5 1.3 0. Investment in the oil and gas sector reflected on-going extraction operations and production activities undertaken by MNCs jointly with PETRONAS. In addition. FDI in the services sector was channelled primarily into the finance and insurance. Of significance. 42 . an LNG project in Australia and other existing projects in Asia. There were also sizeable investments in the petroleum refining and petroleum-related industry. The other investment account recorded a higher net outflow as outflows in the private sector more than offset inflows in the official sector. In the manufacturing sector.1 -84. The inflows took place following further normalisation in the international financial markets and stronger growth prospects in Asia. For the year as a whole. The private sector outflows reflected the net placement of deposits abroad by residents and the extension of trade credits by Malaysian exporters. In the services sector. Direct investment abroad (DIA) by Malaysian companies was also affected by global developments.9 -30.8 -0. trade credits extended by Malaysian exporters were higher than the trade credits received by Malaysian importers.5 -26. This largely reflected the continued investment by Malaysian companies in their existing operations. reinvested earnings more than doubled in 2009. as well as in the solar energy industry.7 0. The investment in the oil and gas sector mainly reflected the continued expansion into global markets by PETRONAS to improve returns and to diversify geographical risks. However.9 4.8 -58. The financial account recorded a lower net outflow following the return of portfolio funds in the second half of the year Gross inflows of foreign direct investment (FDI) moderated to RM31.4 -8. and manufacturing sectors (6%).8% of GNI) in 2009.2 24. oil and gas (38%).5 5. During the year.1 -0.6 -63. DIA continued to remain sizeable.0 -8. with inflows mainly into the manufacturing (47% share).9 -24. This largely reflected the significantly lower amount of earnings retained for investments by existing multinational corporations (MNCs) due to lower profits during the year. PETRONAS invested in a gas processing plant in Turkmenistan. The FDI continued to be broad-based. Malaysia and Bank Negara Malaysia going mainly into long-term debt securities.9% of GNI. Rising excess capacity amid the falling export demand and uncertainty in the global economic outlook further discouraged inflows of FDI during the year.6 billion (or 4. investments in the manufacturing sector were primarily in the form of reinvestments into upstream and downstream activities related to palm oil. largely undertaken by MNCs for the upgrading of equipment and technology. as well as wholesale and retail trade sub-sectors. as Excludes bonds and notes raised abroad by the Federal Government and NFPEs p Preliminary Note: Numbers may not necessarily add up due to rounding Source: Department of Statistics. Meanwhile. the bulk of FDI was in the E&E sub-sector. which led to the improvement in investors’ risk appetite.0 services (28%) and oil and gas (25%) sectors.17 Balance of Payments: Financial Account 2008 2009p RM billion Financial Account Direct Investment Abroad In Malaysia Portfolio Investment Other Investment Official sector1 Federal Government NFPEs Bank Negara Malaysia Private sector 1 -118. net inflows of FDI amounted to RM5. Africa and Central Asia.

18 Net International Reserves As at end 2008 SDR holdings IMF reserve position Gold and foreign exchange1 Gross International Reserves Less Bank Negara Malaysia external liabilities Net International Reserves USD million equivalent Months of retained imports Reserves/Shortterm external debt2 (times) 1 Change 2009 6.688. International Reserves The international reserves held by Bank Negara Malaysia comprise the holdings of gold and foreign exchange holdings.8 billion to RM331.1 9. the short-term external debt refers to the external debt under the new definition. the significant increase in international reserves held in the form of SDRs was attributed mainly to an additional allocation of SDRs to Malaysia by the IMF in a move to strengthen the financial safety net available to member countries during the financial crisis in 2009. In the first half of the year. and at times were extreme.300.8 388.7 billion.445.529.127.5 317. Meanwhile.6 International reserves increased by RM13. Foreign exchange inflows arising from export proceeds and FDI were more than able to cover the external obligations arising from external loans and imports as well as net outflows arising from both DIA and portfolio investments.3 2 ‘Other Foreign Currency Claims on Residents’ is reclassified from ‘Gold and Foreign Exchange’ to ‘Other Assets’ of Bank Negara Malaysia With effect from end-March 2008.7 1. reflecting the strengthening of major currencies against the ringgit. Credit markets were frozen while large 43 .4 13. the global financial markets remained in turmoil. the net inflows of the official sector were due mainly to the special allocation of IMF’s Special Drawing Rights (SDR) to Bank Negara Malaysia.8 billion to RM331.951. In 2009.5 7. the reserve position with the IMF and the holdings of Special Drawing Rights (SDR). The functioning of global financial system was impaired by the failure of some financial markets. the moderation of deleveraging activities by international investors led to small gains in the net international reserves as portfolio outflows subsided. supported mainly by the continued surplus in the current account For the year as whole.492.8 322.4 1. Meanwhile. Malaysia is a participating member in the Financial Transactions Plan of the IMF which makes 4.9 22. net international reserves increased by RM13.4 5. Table 1. For the first few months of 2009.832.2 317.4 2009 RM million 7.0 4. The movements of the international reserves during the year were to a large extent influenced by developments in portfolio flows. particularly in the first three quarters of 2009.554.158. the increase in international reserves was largely supported by the continued surplus in the current account. Market volatility was large. The increase in reserve position with the IMF in 2009 reflected mainly net purchases of currencies by various member countries under the Financial Transactions Plan. the cumulative foreign exchange revaluation gain amounted to RM10.7 billion) as at 31 December 2009. which was partially offset by external loan repayments by the Federal Government and the Non-Financial Public Enterprises (NFPEs).7 6.831.279.515.3 91.467.1 315.276. Meanwhile.7 96.6 13.6 23.3 billion (equivalent to USD96.3 billion in 2009.Economic Developments in 2009 foreign exporters experienced constraints in trade financing as a result of the global financial crisis. with offshore entities in Labuan IBFC being treated as residents Note : Numbers may not necessarily add up due to rounding Source: Bank Negara Malaysia resources available to member countries facing short-term balance of payments difficulties.9 331.505. Central banks and governments implemented large scale and unprecedented measures to arrest the crisis.6 786.7 331.2 1. Net international reserves position subsequently increased moderately in the second half with the revival of investor sentiments and the return of net foreign portfolio inflows.

The international reserves held by the Bank are usable and unencumbered. capitalizing on improving financial market conditions. the reserves management strategy shifted towards anticipating the financial and economic recovery.8 billion). the volatility subsided and financial conditions stabilised. External Debt Malaysia continues to undertake a prudent yet pragmatic external debt management strategy which facilitates diversification of external borrowings by the private and public sectors while instituting prudential measures to minimise risks associated with large external obligations and debt servicing ability. The appreciation of the ringgit against the US dollar also contributed to the decline in the overall external debt. governments in major advanced economies had announced a wide range of unprecedented fiscal and monetary measures to stabilise the financial system.9 billion (or USD67. Throughout the crisis and the ensuing recovery. Investment duration and asset allocation were managed in anticipation of an expected rise in bond yields due to the record debt supply as well as rising longterm inflationary risk from the unprecedented fiscal and monetary expansions. Malaysia’s total external debt moderated to RM233. Subsequently. During the year.3 times the short-term external debt. which led to a strengthening of nonUS dollar currencies and credit markets in general. which is adequate to finance 10 months of retained imports and is 4.3% of GNI.7 billion). During the course of the year. which more than offset the larger net drawdown by the NFPEs. benefiting from the abundance of liquidity while credit spreads tightened considerably.3% of GNI As at the end of 2009. the short-term external debt refers to the external debt under the new definition.28 Net International Reserves (end-month) RM billion 320 Months/Times 10 8 280 6 4 240 2 200 D 2008 J F M A M J J 2009 A S O N D 0 Malaysia’s external debt remained low at 35. particularly in managing elevated operational and credit risks. Investment flows returned to riskier assets and emerging markets were the best performing asset class for the year. For the sixth consecutive year. At the end of the first quarter. unconditional credit lines provided by or to other central banks. For the remaining part of the year. As at 25 February 2010. banks and other financial institutions. Bank Negara Malaysia also does not engage in ringgit related options activity in the foreign currency markets.and long-term external debt declined due to net repayments by both the Federal Government and the private sector. In promoting monetary and financial stability as well as in safeguarding the balance of payments position. The Federal Government debt registered a larger net repayment of RM6.3 billion in 2009. the country’s external debt management is supported by a comprehensive surveillance and debt monitoring system which enables early detection of emerging risks and vulnerabilities arising from the country’s overall external debt exposure. the reserves level amounted to RM331. international organisations. no market loan was raised from the international Net international reserves. the medium. RM billion (LHS) Retained import cover (RHS) Reserves/Short-term external debt (RHS) Note : With effect from end-March 2008. major equity and commodity markets rebounded. There are no foreign currency loans with embedded options and no undrawn. This was then followed by a strong recovery of the equity market. Chart 1. Aggressive monetary accommodation brought down policy rates to historical lows and unconventional quantitative measures were introduced to ease liquidity and restart financial intermediation. risk management practices remained robust and were continually reviewed. with offshore entities in Labuan IBFC being treated as residents Source: Bank Negara Malaysia 44 .Annual Report 2009 financial institutions in distress were rescued by governments. or equivalent to 35. Diversification into other currencies and asset markets resumed. due primarily to the maturity of the Global Bond (1999).8 billion (equivalent to USD 96.

0 79.and long-term Short-term1 As % of total debt As % of net international reserves As % of GNI Total debt Medium.and long-term debt Debt service ratio (%) 1 goods and services.3 billion in 2009.5 67. Similarly.3 23.6 30. due mainly to larger repayments of debt by companies in the manufacturing and oil and gas sectors. particularly in the first two months of the year.3 23. Excluding this transaction.9 20.19 Outstanding External Debt 2008 2009p 2008 2009p RM RM USD USD billion billion billion billion Total debt Medium.5 Weak labour market conditions in the early part of 2009 but conditions had steadily improved According to a survey conducted by Bank Negara Malaysia. Meanwhile. total retrenchments increased to a seven-year high of 25.6 35. Short-term external debt of the nonbank private sector.9 156.0 21. the higher external debt of the NFPEs (end-2009: RM71.5 2. In response to the sharp decline in export orders and weakening domestic demand.6 22. firms particularly in the trade-related sectors reduced operations.5 billion two-tranche bond by PETRONAS in August 2009. comprising mainly of revolving credits and overdraft facilities. to finance its future capital expenditures. Chart 1. the short-term external debt outstanding declined to RM78 billion as interbank borrowings arising from treasury operations moderated.9% of exports of Retrenchments Reduce working hours / temporary lay offs No salary increment 20% 20% 21% 30% Reduce training budget Hiring freeze 0 5 10 15 20 25 30 35% 35 40 % of respondents Source: Annual Survey.3 25. The short-term external debt accounted for only 11.1 billion) was due mainly to the issuance of a USD4.6 billion.7 33. The bulk of the short-term debt continued to be held by the banking sector (88.0 33. Firms also stated that retrenchment was generally implemented as a last resort. loan drawdowns also declined as investment expansion plans slowed down. For the year as a whole.9 35.7 33. During the year.1 233. remained low.8% of GNI. Meanwhile.1 67.5% of international reserves and 11.5 156. various measures were undertaken by companies to reduce costs.6 33. the private sector registered a net repayment of RM3. end2008: RM63.Economic Developments in 2009 Table 1.6 78.064 persons.29 Various Measures to Reduce Labour Costs by Companies What were the measures implemented by companies during the crisis? Pay cut 7% Excludes currency and deposits held by non-residents with resident banking institutions p Preliminary Source: Ministry of Finance.8 23. Bank Negara Malaysia 45 .4 44. LABOUR MARKET DEVELOPMENTS The labour market was adversely affected by the significant deterioration in the global economy in the early part of the year.1 23. the NFPEs registered a net repayment of their external debt following the maturity of several large bonds as well as reduced borrowings for capital expenditure and expansion abroad. of which imposing a hiring freeze and reducing the training budget were the most common. only after all other cost-cutting measures had been exhausted.5%).7 45.5 33.9 6.7 25. with one-half of these retrenchments occurring in the first quarter. 23.and long-term debt As % of exports of goods and services Total debt Medium. Malaysia and Bank Negara Malaysia capital market as the Federal Government maintained its practice of sourcing its funding requirements from non-inflationary domestic sources.1 22. 236.

30 Output and Employment Annual change (%) 8 7 6 5 4 3 2 1 0 -1 -2 2005 Employment Real GDP e Estimate Source: Economic Planning Unit Department of Statistics.109 -19.0 2.0 Employment1 ('000 persons) Annual change (%) Labour force1 ('000 persons) Annual change (%) Retrenchments (persons) Annual change (%) Unemployment rate (% of labour force) Real labour productivity growth (%) 1 2 10.0 14.064 52.590 persons).8 3.5 2.775.7 -2.2 3.5 1.5 4.3 3.6 3.000 0 2006 Total retrenchments Services Source: Ministry of Human Resources 2007 2008 2009 Manufacturing 46 .1 11.2 4.9 3.2 15. Chart 1. although the quantum moderated to 3.159. Total retrenchments in 2009 were significantly higher than in the previous year.1 0.2 1 2 Based on estimates by Economic Planning Unit Based on estimates by Bank Negara Malaysia e Estimate Source: Bank Negara Malaysia Economic Planning Unit Ministry of Human Resources Labour market conditions began to stabilise in the second quarter and improved thereafter.3 3.1%).061. with the highest number of retrenched workers being recorded in the first quarter of the year (12.6 11.2 3. The quicker-than-expected improvements in labour market conditions in turn resulted in a lower unemployment rate of 3.5 1. in tandem with the overall improvement in global and domestic economic conditions.5 3.3 12.6 3.0 2009e 11.4 11.6 3.1 3.7 3.1 0.035 -8.544. The number of retrenched workers.1 16.6 16. Workers in the manufacturing sector were the worst affected (78% of total retrenchments in the first quarter).8 4.3 3.967.000 15.290.8 25.1 11.000 20.Annual Report 2009 Table 1. Despite the challenging economic environment and declining productivity growth.000 5. and together with a gradual improvement in the global economic conditions.5%.000 25.609. The implementation of expansionary fiscal policy and accommodative monetary policy domestically had contributed to a rebound in business and consumer sentiments.1 2.9 2.8 earlier forecast of 4.7% of the labour force.4% (2008: 5.398.892.4 3.0 2.360 -4. led to a significant decline in retrenchments and a revival in hiring activity by firms from the second quarter onwards.5 1.0 2.31 Retrenchment in Selected Sectors Number of workers 30. compared to the Chart 1.3 3.3 2007 11.3 3. particularly in the E&E cluster (45% of total retrenchments) following the sharp drop in export orders.0 2008 11.576. employers in the private sector continued to grant salary increments.000 10.20 Selected Labour Market Indicators 2005 2006 11.469 17. Malaysia 2006 2007 Labour force Unemployment rate (RHS) 2008 2009e As % of labour force 3.

the Government also assisted firms to lower labour costs by reducing the Human Resource Development Fund levy and providing a double-tax deduction to companies that hired retrenched workers. reflecting largely the freeze in new hiring and the higher number of retrenchments.469 persons). with most positions being offered in the manufacturing and services sectors. Total migrant workers declined by 23% to 1. the cumulative number of vacancies rose to 1. while another 100.5 million positions (2008: 1. career counseling and information on training opportunities to unemployed workers. was also affected by the weak economic performance during the year. including a freeze on the hiring of new migrant workers in the manufacturing and services sectors. total retrenchments increased by 52% to 25. as measured by real valueadded per worker. employers in the private sector continued to grant salary Chart 1.62 million workers. Overall. particularly in the services. These included more training places provided under the Special Training and Re-Training Programmes. A total of 22 new JobsMalaysia Centres were set up and 109 existing centres were upgraded to provide job-placement assistance. social and personal services sub-sectors. financial intermediation. However.138 persons. In addition.064 persons in 2009 (2008: 16.06 million) due to retrenchment and early termination of work contracts by employers. business sentiments began to improve subsequently.Economic Developments in 2009 however.0%) due mainly to a sharp decline in labour productivity in the manufacturing sector.000 individuals were provided with on-the-job training and were put in temporary job placements with various Government agencies. the manufacturing sector recorded a net decline in employment. The increase in employment was mainly in the services sector.1 million positions). industrial and technical skills training courses managed by various states’ skills training centres as well as on-the-job training and job placements in the financial sector and GLCs. the Government introduced several measures. manufacturing and construction sectors. normalised to pre-crisis level. Malaysia 2008 Construction Agriculture 2009e Mining Manufacturing 47 . which translated into higher job offerings in the second half of the year. government-linked companies (GLCs) and private companies. Despite the challenging economic environment and lower productivity. and a freeze on the issuance of new licenses for labour outsourcing companies. the total number of registered foreign workers (migrant workers and expatriates) declined by 23% to 1. For the year as a whole.3% (2008: 1.32 Labour Productivity Trends Annual change (%) 9 7 5 3 1 -1 -3 -5 -7 -9 Whole Services economy 2007 e Estimate Source: Bank Negara Malaysia Department of Statistics. the Government also imposed stricter rules on the hiring of migrant workers. Foreign expatriates employed in the country declined by 13% to 32. In addition.000 vacant positions in the professional and support group levels in the public sector.470 persons) and by the third quarter. In 2009. In contrast.000 positions. Recruitment activity also ceased in the first quarter amidst heightened uncertainty about the business outlook. including filling about 50. particularly in the distributive trade.6%). In order to mitigate the impact of the global recession on employment. as well as in the construction and agriculture sectors. a prohibition of the practice of deducting levy payments from the wages of new migrant workers thereby increasing the cost of hiring. Total vacancies posted during the first quarter amounted to about 222. a decline of 16% from the preceding period. of which 71% were from the manufacturing sector and 25% were from the services sector. as production fell in response to the significant deterioration in external demand in the early part of the year. The improving economic conditions in the second half of the year and the various measures undertaken by the Government helped to support overall employment conditions.0% in 2009 (2008: +3. and community. Labour productivity.59 million (2008: 2. which recorded a marginal increase of 0. declined significantly from the second quarter onwards (7. of which 98% were the low-skilled migrant workers. Labour productivity growth contracted by 2.

core inflation. Malaysia’s position as a highly trade-oriented economy meant that external developments had a sizeable impact on the domestic economy. with both the executives and non-executives receiving a lower salary increment of 3.4% (2008: 5.9% and 5. On the domestic front. an indicator of the demand-driven pressure on prices. The marked decline in headline inflation during the year was driven by supply-related factors and subdued demand conditions. Inflation in the advanced economies recorded a steep decline. The sharp reversal had a direct impact Chart 1. the cumulative reductions in the retail petrol prices in the second half of 2008 contributed significantly to the moderating trend of domestic inflation. as measured by the annual percentage change in the Consumer Price Index (CPI). albeit at a moderate rate.4%). Inflation in 2009 was influenced by both external and domestic factors.7% in 2009 (2008: 4%). averaged 0. Meanwhile. average salary increments in the private sector moderated to 3.7% respectively (2008: 4. rising unemployment and deteriorating consumer and business confidence. PRICE DEVELOPMENTS Consumer Prices In line with global and domestic developments. Externally.1%). where the inflation rate decreased from 5. After reaching its historical peak at USD147.34 Headline Inflation and World Commodity Prices % 10 8 6 4 2 0 -2 -4 JFMAMJJASONDJFMAMJJASNODJFMAMJJASOND 2007 2008 2009 Headline Inflation (LHS) FAO World Food Price Index (RHS) World Crude Oil Price Index (RHS) Note: 1. many countries experienced lower inflationary pressures during the year. In an environment of tighter credit conditions. Two major forces responsible for these disinflationary pressures were the significant drop in global commodity prices.27 per barrel in July 2008. 3. This impact was particularly evident in the first quarter of 2009. moderated to 2. The decline in global fuel and commodity prices. especially for crude oil. Similarly. Most significantly. and the deflationary conditions experienced by Malaysia’s top trading partners. As a result. The annual inflation rate in the US dropped to levels that were not seen since the late 1940s.Annual Report 2009 increments.2% and 3.33 Consumer Price Inflation Annual growth (%) 9 7 5 3 1 -1 -3 JFMAMJJASONDJFMAMJJASONDJFMAMJJASON D 2007 2008 2009 Headline Inflation Core Inflation on inflation through lower retail fuel prices across the globe.6% in 2009 (2008: 5. and the increasing slack in the economy as the global recession deepened. According to the survey conducted by Bank Negara Malaysia. households and businesses restrained their spending activities and contributed to the weak global demand conditions. Headline inflation. Lower energy costs and lower prices for a wide-range of oil-related inputs also allowed producers to decrease their prices. particularly during the early part of the year. the economic weakness that emerged in the second half of 2008 had led to disinflationary pressures in both the major and emerging market economies. while annual inflation in the euro area declined to its lowest levels since the inception of the European Union. FAO Food Price Index and World Crude Oil Price Index were re-based using 2005 average as the base year. inflationary pressures in Malaysia moderated substantially during the year. 50 200 150 100 Index (2005=100) 250 48 . FAO stands for Food and Agricultural Organisation of the United Nations.1%).68 per barrel).7% in 2009. inflation in emerging market economies also saw a decline in 2009 with considerable deceleration evident in PR China. The effect was particularly Chart 1. oil prices plummeted by more than 60% in January 2009 (USD41.9% in 2008 to -0. 2. The FAO Food Price Index consists of a weighted average of 55 food commodities considered by FAO specialists as representing the international prices of food. contributed to lower domestic inflation.

the very strong policy responses both on the fiscal and monetary fronts succeeded in mitigating such an outcome. alcoholic beverages and tobacco. the headline inflation gradually recovered and started to turn positive again. Another important factor affecting headline inflation during the year was the imposition of an additional excise duty of 1 sen per cigarette in October. Meanwhile. bread and other cereals moved into negative territory in June 2009 following the significant fall in global grain prices from the second half of 2008. clothing and footwear. they remained sufficiently strong to mitigate the risk of a protracted deflation.35 Contribution to Inflation Annual growth (%) 10 8 6 4 2 0 -2 -4 JFMAMJJASONDJFMAMJJASONDJFMAMJJASOND 2007 2008 2009 global recession.2 percentage point fall in inflation.5% in 2009 (2008: 2. health. falling asset prices and rising real debt burdens could drive the real economy into a more severe and protracted recession. the CPI sub-category for rice. while demand conditions were relatively subdued during the year.Economic Developments in 2009 significant in July 2009. When such conditions prevail and result in entrenched deflationary expectations. gas and other fuels Effective from 2010. However. furnishings. Given the base effect of high inflation in 2008 and the rapid disinflation. with the annual rate of price level falling by -2. pointed to an increased risk of deflation in a number of major and emerging market countries. some countries in the region faced the risk of a more prolonged and deeper deflation.4% in July. restaurant and hotels. recreation services and culture. Concerns over deflation abated in the second half of 2009 as the financial crisis stabilised and global economic conditions began to show signs of improvement on the back of large and aggressive fiscal stimulus. which combines a range of macroeconomic indicators such as core inflation. declined in 2009 amidst the broad decline in commodity prices. deflation is a situation of a persistent and broad-based decline in the general price level. 49 . many countries registered negative inflation rates in 2009.1% 1 Food and Non-Alcoholic Beverages Transport Others Headline Inflation Note: Others refer to communication. miscellaneous goods and services and housing. A key concern during the year was the risk of deflation. Consumer and business confidence also remained resilient. By definition. The annual change in the PPI averaged -7. In particular.9% drop in the transport category.1% during the year (2008: 8. which resulted in higher CPI for the alcoholic beverages and tobacco category. prices for other CPI categories remained relatively stable. The impact on headline inflation was sizeable. As most of these base effects began to dissipate towards the end of the year. as the high base effect accounted for a 19. underpinned by the significant policy measures undertaken by the Government and the Bank. electricity. Producer Prices Producer price inflation. which contributed to a 3. from 2000=100 previously. The CPI for food and non-alcoholic beverages also moderated to an average of 4. As a result of the extensive scale of the global financial crisis that triggered a Chart 1. the reinforcing postponement of consumption. education. its lowest rate since August 1986. Although core inflation moderated. although headline inflation was negative between June and November 2009. output gap. household equipment and routine maintainence. it continued to remain positive throughout the year. and the large uncertainties surrounding the prospects for resolution of the financial crisis and its impact on the real economy. deflation was mostly a statistical development and there was no evidence of deflationary pressures being embedded in the economy.8%). This mainly reflected the receding effect of global supply constraints. the Producer Price Index (PPI) has been revised to the new base year 2005=100.3%). house and equity prices as well as credit and broad money growth. More importantly. The IMF World Economic Outlook in October 2009 reported that the deflation vulnerability indicator. as measured by the Producer Price Index1 (PPI). water. For Malaysia. with an average increase of 1.

both the local and imported components of the PPI declined during the year. Since then.5% in 2009 (2008: 4%). the PPI for commodity-related components recorded a decline of 19. The annual growth of the PPI for local components fell to -10.8% in 2009 (2008: 26. reflecting a mild rebound in global commodity prices. which declined by an average of 0. PPI inflation has been increasing moderately. reflecting a broad-based decline across its sub-groups. 50 .4% in 2009 (2008: 13. Overall. The annual change in the PPI followed a moderating trend in the first half of the year and reached its lowest rate for the year at -13% in July. In terms of composition.3% in 2008.8%).6%).5% in the commodity components of the PPI over the same period. Meanwhile. This was largely consistent with the sharp decline of 32.3%).Annual Report 2009 in 2009 compared with an increase of 10. non-commodity related producer prices declined at a relatively slower average annual rate of 2.5% in 2009 (2008: 5. the weak global demand conditions and lower commodity prices were also reflected in the lower PPI for imported products. Meanwhile.

Monetary and Financial Conditions 53 53 56 64 Overview International Monetary and Financial Conditions Domestic Monetary and Financial Conditions Financing of the Economy Monetary and Financial Conditions 51 .

Annual Report 2009 52 .

the global monetary and financial conditions stabilised by mid-year and improved following the large scale fiscal support and unprecedented monetary stimulus in the advanced economies In early 2009. After a tumultuous first quarter. economic and financial conditions stabilised and the expansionary impact of large fiscal and monetary stimulus led to a revival of growth. the crisis reached its peak in March 2009 and contributed to the worst global recession since World War II. This was followed by the stabilisation phase in the second and third quarters of the year. prompt fiscal and monetary stimulus mitigated the impact of the external shocks on the emerging economies.Monetary and Financial Conditions OVERVIEW Following the widespread fallout from the US subprime crisis and the collapse of Lehman Brothers in September 2008. Meanwhile. the implementation of two fiscal stimulus programmes. Nevertheless. Chart 2. liquidity conditions tightened amid significant sell downs and volatilities in the equity and bond markets. the existence of a strong financial sector continued to support financial intermediation and reinforced the expansionary fiscal and monetary influences on domestic demand. INTERNATIONAL MONETARY AND FINANCIAL CONDITIONS Developments in international monetary and financial conditions in 2009 broadly followed three distinct phases. provided support for domestic demand. As with many regional economies. global monetary and financial conditions deteriorated in the first quarter of 2009. Economic and financial conditions only stabilised in the second half of 2009 following unprecedented large scale interventions by the authorities in the advanced economies to support their financial system and revive the economy. In the advanced economies. Additional measures to facilitate access to financing ensured that the environment was supportive of domestic consumption and investment. The first quarter of the year was characterised by turbulent financial market conditions amidst a severe global recession. The broad-based loss of confidence arising from the Lehman episode led to heightened risk aversion which continued into the first two months of 2009. as the unprecedented scale of policy measures undertaken earlier in the year began to take effect. By the fourth quarter. In many countries. together with the easing of monetary policy. Emerging economies were also adversely affected given the significant financial and economic linkages with the advanced economies. Malaysia was adversely affected by the large contraction in external demand and the sharp decline in domestic financial asset prices as the worldwide deleveraging by investors caused large outflows of portfolio funds. However. monetary and financial conditions continued to deteriorate in the aftermath of the collapse of Lehman Brothers and the continued fallout from the excessive leverage in the US financial system.1 Measures of Volatility* Index (Dec 2008 = 100) 160 140 120 100 80 60 40 D 2008 J F M A M J 2009 VIX (Equity market volatility) MOVE (Bond market volatility) *Chicago Board of Exchange (CBOE) Implied Volatility Index (VIX) and Merrill Lynch Option Volatility Estimate (MOVE) Source: Bloomberg J A S O N D 53 .

7% year-on-year respectively at the end of the first quarter.1%.Annual Report 2009 Financial conditions were particularly dire in the advanced economies. This had significant repercussion on economic activity. their sound banking systems and fiscal flexibility. continued to remain elevated at levels indicating failures of financial intermediation. various conventional and unorthodox measures were implemented including government guarantees. Meanwhile. took some time to gain traction given the severity of the financial conditions. financial conditions began to show improvements as a result of the wide range of measures initiated by Chart 2. These policies. which affected trade financing.7% and 15.1% while the 3-month LIBOR less OIS spread. The real sector plunged into a deep recession amid contracting consumption. placed emerging economies in a better position to institute decisive and strong counter-cyclical measures in response to the crisis.2 Selected Equity Market Indices Index (Dec 2008 = 100) 190 170 150 130 110 90 70 D 2008 Source: Bloomberg J F M A M J J 2009 A S O N D Emerging Asia MSCI World S&P 500 Emerging Economies 54 . The IMF’s forecast for growth in 2009 for advanced economies was downgraded from 0. To stabilise financial conditions. purchases of private sector assets. The MSCI Emerging Index declined by 14. and monetary policy easing to provide support to growth. These interventions were designed to restore the functioning of the financial and financial institutions. investment and trade activity. In the advanced economies. the S&P 500 equity index declined by 21. In the first two months of the year. The strong overall initial conditions of emerging market economies as a group. however. The measures involved a combination of monetary and fiscal measures that included lowering interest rates to sub-normal low levels. recapitalisation programmes and quantitative easing.5% in October 2008 to -2% in January 2009. The intensity of the problems in the financial and real sectors prompted a wide range of government interventions. improving access to financing and large fiscal spending. Export growth for Hong Kong. it resulted in large capital outflows causing the currencies of some emerging economies to depreciate by an average of 8. Policy responses by authorities in emerging economies were rapid and generally aimed at mitigating the impact of the crisis from the advanced economies. Key economic indicators. with the growth outlook being very bleak. The strong feedback loops between the real and financial sector meant that weaknesses in economic activity further intensified financial sector dislocations and vice versa. In addition.8% against the US dollar during the period. As these funds were remitted back to the US. 20. despite minimal direct exposure to the sub-prime crisis and to the problems in the derivatives markets. including industrial production and labour market conditions continued to deteriorate significantly and at a faster pace. This was strongly reinforced by sizeable fiscal stimulus programmes of between 1% to 6% of GDP by authorities in advanced economies. financial markets in emerging economies were also significantly impacted given the financial inter-linkages with the major financial markets. Singapore and Malaysia fell by 21. By the second quarter. which measures the level of liquidity and credit risk in the interbank market.1% year-to-date in February as global deleveraging caused foreign investors to dispose their assets in emerging economies. and to provide support to the real economy. there were visible signs of stabilisation in the financial markets coupled by some improvements in business and consumer sentiments. Growth in open emerging economies was also impacted by the contraction in global trade following the collapse in external demand from advanced economies. the contraction in trade was intensified by a shortage of dollar liquidity in international financial markets. Most advanced economies experienced a sharp contraction in economic activity in the first quarter. The dysfunctioning interbank markets severely impaired the financial intermediation process which in turn disrupted credit flows to the broader economy.

Emerging economies.40 1. The 3-month LIBOR less OIS spreads declined from an average of 101 basis points in the first quarter of 2009 to an average of 23 basis points in the third quarter of 2009.20 0. volatility in the financial markets as proxied by the VIX index. The decline in credit default swaps of major banks in the US by almost onethird was a testament to the renewed confidence in the financial institutions. as economic and financial conditions improved. had shown firm indications of economic recovery by the second quarter of 2009. Lending standards in major advanced economies remained tight. Though the measures had a positive effect on reducing stress in the financial markets and restoring the functioning of the markets.5 Bank Lending Conditions for Business* % 100 80 60 40 20 0 -20 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2003 2004 2005 US 2006 2007 Euro area 2008 2009 Japan (RHS) * * 3-month LIBOR less 3-month Overnight Index Swap (OIS) Source: Bloomberg the authorities.20 1. indicating that the additional liquidity provided to the financial markets were taking effect. Nevertheless.40 0. questions lingered on the sustainability of the recovery given that the financial system remained impaired. The health of major financial institutions also improved as indicated by the positive results from the bank-wide stress tests to ascertain the solvency of financial institutions. dropped significantly and returned to levels prior to the collapse of Lehman Brothers. emerging economies were able to recover at a faster pace.80 0. the underlying economic conditions in the advanced economies remained weak.Monetary and Financial Conditions Chart 2.2%. Interbank money market spreads declined considerably from the second quarter onwards. Equity markets in emerging economies rallied by an average of 61. While key economic indicators were at depressed levels. With stronger initial conditions and reinforced by comprehensive fiscal and monetary responses. As conditions improved. In the third quarter.3 Money Market Spreads* % 1. Given the strong signs of economic recovery. Chart 2. Chart 2. in contrast. recovering all of the losses incurred since the beginning of 2009. the S&P 500 index rose by 25.60 0. investors’ risk appetites for emerging market financial assets rose.60 1.4 US Banks 5-year Credit Default Swaps (CDS) Index 700 600 500 400 300 200 100 0 D 2008 Goldman Sachs Bank of America Source: Bloomberg Citigroup JPMorgan J F M A M J J 2009 A S O N D Diffusion index (reversed) 5 Tightening 0 -5 -10 -15 -20 -40 Based on Senior Loan Officer Survey conducted in selected countries Source: Central Banks' Websites 55 . Between March and May 2009.2% in the advanced economies. there were however incipient signs that economic conditions were deteriorating at a slower pace.6% compared to 36.00 0.80 1. Credit to the broader economy was still constrained as both lenders and borrowers remained cautious.00 D 2008 United Kingdom Euro area J F M A M J J 2009 Australia US A S O N D financial markets rose steadily albeit at a cautious pace.

differ across countries and regions given the disparities in economic and financial conditions across countries. with several others stated the intent to do so in the near future.6 Emerging Market Bond Index (EMBI) and Bond Spreads EMBI Index 490 470 450 430 410 390 370 350 D 2008 J F M A M J J 2009 A S O N D Basis points 800 700 600 500 400 300 200 100 0 to raise concerns over the possible formation of asset price bubbles in emerging economies. emerging market currencies. These restrictions included a tax on flows into equity and fixed-income securities. coupled with the uptrend in commodity and property prices. 33.0% respectively in 2009. The surge in capital inflows. The exceptionally low interest rate environment implemented when the risk of a fundamental economic downturn was high needed to be realigned to avoid the risk of the build-up of financial imbalances. The pace. stronger signs of recovery had emerged. Thus.7 Emerging Market Currencies against the US Dollar Index (Dec 2008 = 100) 140 Emerging market currencies appreciated 135 against US Dollar 130 125 120 115 110 105 100 95 90 D 2008 Source: Bloomberg J F M A M J J 2009 A S O N D India Taiwan Indonesia Brazil 56 . This improved investor confidence and revived financial market trading activities globally. however. This prompted discussions among policymakers on the need to review the policy stance. Domestic conditions improved markedly towards year-end with firm indications of a sustainable recovery. With the world awash with liquidity amid recordlow interest rates globally. whilst remaining accommodative. Prompt policy response and the resilience of the banking sector and capital market ensured that the financial intermediation process functioned effectively and smoothly. As a result. as well as a ban on foreign investors placing their money in time deposits. timing and magnitude of policy rate adjustments would.7%. Exchange Rate The ringgit performance during the year reflected the volatile developments in international financial markets.Annual Report 2009 Chart 2. Early in the year. economic and financial conditions in both advanced and emerging economies showed visible and firm signs of recovery. Nevertheless. a number of central banks including the Reserve Bank of Australia began to raise policy rates. Some emerging economies such as Brazil and Taiwan imposed restrictions on capital inflows to avoid undue volatility in the financial markets and to mitigate the impact on monetary conditions. the search for yields led to a sharp increase in foreign portfolio inflows into emerging markets. Brazilian real and Korean won appreciated strongly by 17. By the end of the year.0% and 10. the ringgit and regional currencies faced intense depreciation pressure as the global financial and economic crisis were in full force. Better recovery prospects and expectations of further currency appreciation also added to the interest towards emerging markets. JP Morgan EMBI Source: Bloomberg JP Morgan EMBI Spread (RHS) By the fourth quarter of the year. in particular the Indonesian rupiah. begun Chart 2. the sell down of financial assets across the world eased by March 2009 following emerging signs of stabilisation in the international financial markets and in global economic activity. DOMESTIC MONETARY AND FINANCIAL CONDITIONS The domestic monetary and financial conditions continued to remain favourable and supportive of economic activity in 2009 despite being subjected to adverse economic and financial shocks in the aftermath of the global financial crisis.

partly mitigated by the continued net trade surplus. following a confluence of external and domestic factors. Market sentiments were also affected by concerns about the potential systemic impact of the debt crisis in Dubai and the sovereign debt issue in Greece. The depreciation was. the resilient financial system and the continued access to financing have further supported positive investor sentiments towards the domestic financial markets. the accommodative monetary conditions. To a large extent. The yen was particularly vulnerable to swings in carry trade activity. an appreciation of 11. investor preference also shifted to holding cash to preserve capital. On balance.8 Exchange Rate of the Malaysian Ringgit (RM) Against Major Currencies Index (Dec 2008 = 100) 115 110 105 100 95 90 85 80 D 2008 J F M A M J 2009 J A S O N D GBP JPY USD EUR Despite the volatile global financial market conditions.7255 against the US dollar on 2 March 2009. The ringgit. The ringgit also benefited from positive market reaction to the second stimulus package announced on 10 March. the accelerated implementation of the fiscal stimulus measures. however. Consequently.Monetary and Financial Conditions The ringgit continued its depreciating trend into early-2009 as the full impact of the global financial crisis enveloped the global economy. the ringgit ended the year at RM3. The strong international reserve position also instilled greater market confidence on the ability of Bank Negara Malaysia to maintain orderly market conditions despite the volatile global environment.1%). The large scale expansionary measures undertaken by policymakers to arrest the global economic slide were instrumental in restoring confidence and stabilising global financial market conditions. 1. the ringgit appreciated against the Japanese yen (3.3475 against the US dollar on 15 October. the lowest level since February 2006.2% stronger compared to the level at end-2008. The ringgit weakened to RM3. The imposition of capital controls in Brazil and Taiwan fuelled concerns that other central banks in the region could also move in the same policy direction. the appreciation in Chart 2. and shifted their focus to the better outlook in the regional economies.9%) and more significantly against the pound sterling (-9.4245 against the US dollar.3% from its lowest level recorded in early March 2009. which provided underlying support for the demand for ringgit. assets in emerging economies were sold off. The sound financial systems and stronger economic fundamentals amongst emerging economies point to prospects for an earlier and stronger recovery. which dampened investors’ risk appetite for regional markets. Against the background of heightened market risk and as investors continued to deleverage to reduce their level of borrowings.3 billion in the second half of the year and the ringgit strengthened to RM3.4%). The consequent reversal of portfolio investments and the surge in the demand for US dollar as these funds were remitted to the US generated significant depreciation of currencies in the regional economies. In addition. net portfolio inflows increased by RM13. however. During this stressed financial environment. These measures served to lift investor sentiment and risk appetite. These conditions attracted large portfolio flows into emerging markets and raised the demand for regional currencies including the ringgit. Note: An increase in the index indicates an appreciation of ringgit against the currency Source: Bank Negara Malaysia 57 . fluctuated within a broad downward trend from mid-October 2009 until the end of the year. amid greater market volatility arising from heightened and volatile global risk aversion. the movement of the ringgit remained orderly and had an important role in absorbing external shocks to the domestic economy The downward trend of the ringgit subsequently reversed in March 2009. The ringgit ended the year marginally weaker against the euro (-0. Against other major currencies.

By and large.2 1. the ringgit was broadly weaker against regional currencies with this trend reversing in early 2010.8 -0. the Indonesian rupiah and the Korean won had depreciated against the ringgit by 20. New Taiwanese dollar and Thai baht. Between September 2008 and February 2009.4 -9. following positive market sentiments. the ability to manage domestic liquidity has also improved significantly. In 2009. supported by a wider range of instruments to conduct monetary operations and having in place 90 D 2008 1 J F M A M J 2009 J A S O N D Regional currencies: Chinese renminbi. Since exiting from the fixed exchange rate regime. the depreciation of the REER during the year was due mainly to the broad depreciation of the Nominal Effective Exchange Rate (NEER). The ringgit depreciated by 1% in Real Effective Exchange Rate (REER) terms during the year. Singapore dollar. The REER refers to the weighted average of the ringgit against the currencies of Malaysia’s major trading partners.3% and 28. The intensification of two-way movements of capital flows into emerging economies in an environment of an uncertain recovery of the global economy raised concerns of the potential risks to the trade sectors of these economies. In particular.3% respectively.9 -3. the country’s capacity and resilience in managing these sizeable and volatile financial flows had been fortified in a number of ways. Each currency is of equal weight. Intra-regional exchange rate performance was differentiated by countryspecific factors. Korean won. % -9 -7 -5 -3 -1 1 3 5 Note: (+) indicates an appreciation of the ringgit against foreign currency Source: Bank Negara Malaysia the pound sterling was a correction from the significant depreciation of the currency against most international currencies in 2008.Annual Report 2009 Chart 2.2 -6. Note: An increase in the index represents an appreciation of the ringgit or of selected regional currencies against the US dollar. Strong domestic demand contributed 58 . Third. the managed float regime has served the economy well by providing a good balance between flexibility and stability. the Korean won and the Indonesian rupiah strengthened significantly against most currencies. strong financial inflows could become destabilising with the potential for a sudden reversal of these flows. thereby minimising disruptions while ensuring that the capital flows can be effectively intermediated.1 Annual change. Indonesian rupiah. First. which also declined by 1% during the same period. To Malaysia’s advantage. our economic fundamentals have remained healthy and the financial markets were more diversified and developed.2 -0.9 Exchange Rate of the Malaysian Ringgit (RM) and Selected Regional Currencies Against the US Dollar Index (Dec 2008 = 100) 110 105 Index of Selected Regional Currencies against the USD1 100 RM 95 to Indonesia’s relatively better economic performance. as the pace of changes in prices of goods and services across countries decelerated in an almost synchronised manner amidst global disinflationary pressures. after the UK economy was severely affected by the financial crisis. Source: Bank Negara Malaysia Chart 2. It also partly reflected recovery in both the Indonesian rupiah and Korean won from the large depreciation experienced in 2008.2 -15 -13 -11 3. Second. In addition. Malaysia’s prices relative to the major trading partners remained stable. Philippine peso.4 -1. the managed float regime accorded the necessary flexibility for the ringgit to adjust to changing conditions. adjusted for differences in inflation rates. This has enhanced the ability of the financial system to absorb capital inflows and outflows.4 1.9 -1.10 Summary of Malaysian Ringgit Performance Against Major and Regional Currencies in 2009 JPY CNY USD TWD EUR SGD PHP THB KRW GBP IDR -13. This provided greater appreciation potential for these currencies relative to other regional currencies when the global conditions improved.

Bond Yields and Equity Prices Interest rates in 2009 were lowered substantially to support a highly accommodative monetary policy. increasing the disposable income of borrowers.90% in December 2009. with little signs of market disruptions despite the volatile conditions in the global financial market.25% on 1 January 2009 to 2. in the money market decreased from 3. by end-2009. money market rates were stable and at historical lows during the year. Reflecting the high pass-through of the OPR reduction to the money market interest rates.9 1.9 2.72% to 5.Monetary and Financial Conditions better surveillance and information system. This ability to manage liquidity effectively meant that financial flows have limited impact on financial intermediation and the level of economic activity. The benchmark lending rate.1 2. with all banks lowering their respective BLRs within two weeks of the OPR adjustments. including reducing the risk of the build-up of large imbalances in the economy. Accordingly. Sound financial institutions and stable liquidity conditions facilitated a rapid pass-through of the OPR reductions into lending rates Following Bank Negara Malaysia’s decision to reduce the OPR.7 2. The monetary policy measures were transmitted quickly by the domestic financial system and had a material impact on the economy. as measured by the average base lending rate (BLR) of commercial banks.5 J Overnight interbank rate F M A M J J A S O N D J F M A M J J A S O N D KLIBOR 6-month 1-month interbank 2008 Source: Bank Negara Malaysia 2009 Source: Bank Negara Malaysia and Bloomberg 59 .5 J F M A M J J 2009 A S O N D OPR: -50 bps OPR: -75 bps Chart 2.17% in October 2008 to 4.11 Money Market Rates % 3. from 6. the Statutory Reserve Requirement (SRR) was also concurrently reduced from 4% to 1%. This was evidenced by the 127 basis points decline in the average lending rate (ALR) on new loans approved.5 3.0 ALR 4. In addition to the 25 basis points reduction in November 2008. The thrust of monetary policy during the year was focused on mitigating the impact of the economic and financial crisis on domestic demand.7 1.00% on 25 February with concurrent reductions in the interbank rates of other maturities. New borrowers also benefited from the low interest rate environment.1 1.0 6.5 5.5 2. was reduced by 121 basis points. from 6. as lending rates on new loans to both businesses and households were reduced. This lowered the interest cost on variable rate loans pegged to the BLR.5 6. Interest Rates. To expedite the transmission of the policy rate reductions to retail rates.12 Commercial Banks' Lending Rates (at end-period) % 7. the overnight interbank rate Chart 2. The sound financial institutions also underpinned orderly trading in the market. The high degree of pass-through from the OPR to the money market rates was supported by stable liquidity conditions in the interbank market.0 BLR 5.3 2. the Overnight Policy Rate (OPR) was lowered by 75 basis points in January 2009.51%.3 3. and a further 50 basis points in February 2009. banks responded by lowering retail lending rates to households and businesses. The adjustment in the BLR was transmitted quickly.

05 Dec ‘09 2.04 3.11 Dec ‘08 3.50 3. MGS yields were stable for most part of 2009 Yields on Malaysian Government Securities (MGS) were initially on a declining trend in early 2009 due to heightened risk aversion among investors as the outlook for the global economy deteriorated.13 ALR on New Loans Approved (3-month moving average) % 6.50%. in turn. Market soon became anxious about the size of the stimulus and the potential additional issuances of Government securities.0 8.15 Real Deposit and Lending Rates % 10. the interest rates on FDs with tenures between 1 to 12 months ranged from 2.01 3.7 2. The 5-year and 10-year MGS increased by 106 and 116 basis Chart 2. but remained generally stable for the major part of the year as economic conditions improved amid a benign inflation outlook.14 3. MGS yields rose markedly.00 1. As a result.50 Source: Bank Negara Malaysia 60 .9 1 3 6 9 12 Month Min Max 2.0 J F M A M J 2008 Source: Bank Negara Malaysia J A S O N D J F M A M J 2009 J A S O N D -8. Nevertheless. provided a supporting environment to financing activity.Annual Report 2009 Chart 2.0 4.5 5.1 2.83% as at end-2009.0 0.14 Commercial Banks' Fixed Deposit Rates % 3.3 2.0 -2.5 Households -6.1 2.0 4. With the re-pricing of new and existing loans.5 OPR: -25 bps -75 bps -50 bps 6. The low interest rate environment.0 6. nevertheless.0 J F M A M J J A S O N D J F M A M J 2009 J A S O N D 2008 Source: Bank Negara Malaysia The reduction in lending rates on new loans was broad based. particularly those for the longer maturities. Trading activity was mainly focused on the shorter end of the market. fixed deposit (FD) rates were supported by the floor imposed by Bank Negara Malaysia. Sovereign bond yields rose initially due to concerns on the large increase in the issuances of Government securities. reversed following the Government’s announcement to introduce a second stimulus package. the ALR on loans outstanding stood at a historic low of 4.0 4. The reduction in the OPR on 21 January added further impetus to the downward trend in MGS yields. The declining trend.00% to 2. reflecting investors’ cautious sentiments. As these concerns mounted. depositors also received a positive real rate of return as inflation turned negative. at end-2009. amid expectations that inflation was moderating.0 Businesses Overall 2.5 2.5 3.03 2. with loans to all sectors of the economy registering lower interest rates after the OPR was reduced.0 Real 1-month FD -4.0 Real ALR 5. Deposit rates were also adjusted downwards. Towards the middle of the year.04 2.0 Chart 2.3 3.9 2.

The reduction in the OPR in February provided only a temporary downward effect. In turn.0 6.5 J F M A M J 2009 Source: Bank Negara Malaysia J A S O N D AA AAA MGS A 61 . 10-year 5-year 3-year Chart 2. This led to the reduction of liquidity at the longer end of the MGS yield curve.5 2. MGS yields fell by end-March as such anxieties dissipated following the release of a revised auction calendar for Government securities.0 2.0 7. The higher yields mainly reflected the slightly longer maturity of the new benchmark.5 4. In December. which replaced the previous 3-year MGS as the new benchmark.5 J F M A M J 2009 Source: Bank Negara Malaysia J A S O N D 1-year interest in the shorter-tenure MGS.0 3. market sentiments began to improve amid investors’ easing concerns over the larger supply of Government securities.0 3. remained broadly cautious given the continued uncertainty on the macroeconomic outlook and tended to focus on securities of shorter maturities. as MGS yields continued to rise on concerns over the potential large size of new Government borrowings.5-year MGS.0 1.5 2. MGS yields trended slightly higher on firmer expectations of an economic recovery driven by news of better economic data on trade and industrial production.5 1 2 3 4 5 6 7 8 9 10 Years to maturity Source: Bank Negara Malaysia June ‘09 March ‘09 December ‘08 By end-June. following the stronger Chart 2.5 6. yields were mainly affected by investors’ increased risk aversion. The upward pressure on long-term yields also began to ease.0 4.18 MGS and PDS Yields (5-year) % 8. the 3-year MGS yields recorded an increase of 26 basis points following the issuance of the new 3.0 1.0 5.5 8.0 2. Factors such as investor concerns over credit conditions significantly influenced the yields of lower-rated PDS.Monetary and Financial Conditions Chart 2. especially in the first half of 2009.5 3. resulting in a further steepening of the slope of the yield curve.5 4.0 2. thus exerting upward pressure on long-term yields.0 4. Concerns over deteriorating credit conditions were amplified by the rising number of negative rating actions.16 MGS Yields Anticipation of % second fiscal stimulus plan Release of revised auction calendar 4. nevertheless.5 5. PDS yields affected by risk aversion In the private debt securities (PDS) markets. Towards year-end.0 3.5 7.17 MGS Benchmark Yield Curve % 4. The heightened risk aversion led to a low level of points respectively between end-January to midMarch.5 5.5 3. MGS yields across all maturities became more stable thereafter and through most of the second half of 2009. the 1 and 3-year MGS yields rose only marginally by 15 and 6 basis points respectively between end-March and end-June.5 3. Investors.

0 4. Subsequently. liquidity in the PDS market improved as sentiments became better towards end-July.2 J F M A M J 2009 Source: Bank Negara Malaysia J A S O N D Chart 2. Chart 2. relative stability returned to both the PDS and sovereign markets as the economic and financial outlook improved.19 Turnover of Corporate Debt Securities RM billion 8. Mirroring the trend in the MGS market. credit spreads narrowed following higher MGS yields. as markets anticipated more issuances by the Government. registered only a marginal improvement towards the end of the year due to lingering credit concerns. credit spreads for higher-rated securities (5-year) fell by between 96 to 104 basis points. however. This may initially have seemed counter-intuitive in an economic downturn. also contributed to the improved sentiments in the bond market. the domestic equity market experienced bouts of volatility amid highly challenging domestic and global conditions.4 2. Credit spreads were generally stable in the second half of the year.8 1. Lower-rated PDS yields.21 KLCI and Bursa Malaysia Sectoral Indices Index (Dec 2008 = 100) 170 160 A 150 140 130 120 110 100 AA AAA 90 80 D 2008 KLCI Industrials Source: Bloomberg J F M A M J 2009 Construction Plantations Finance J A S O N D 62 . equity markets around the world including Malaysia staged a strong rebound from the depressed levels in early 2009 as investors turned opportunistic amid highly accommodative monetary conditions and stabilising financial markets. which pushed the yields of lower-rated PDS higher. Credit spreads for PDS narrowed in 2009. Subsequently. from the second quarter.0 0.20 Corporate Credit Spread Against MGS (5-year) % 5. Risk appetite improved further on the improving outlook for economic revival as the fiscal stimulus began to support economic activity.6 1.0 6.2 3.0 4.0 2. For the year as a whole. a financial guarantee institution that provides credit guarantees to selected issuers. Nevertheless. further analysis revealed that earlier in the year. Firmer signs of economic improvement spurred the equity market In the early part of the year. The establishment of Danajamin Nasional Berhad.0 J F M A M J 2009 Source: Bank Negara Malaysia J A S O N D The domestic equity market experienced significant volatility in the early part of the year amid heightened uncertainties in the global Chart 2.Annual Report 2009 liquidity in the PDS market.

This was supported by the rise in commodity prices which boosted the plantation and oil and gas-related stocks. including Asia. In addition.4 -0. Liquidity and Monetary Aggregates Liquidity conditions were ample throughout 2009 and supportive of economic activity. Equity prices were further boosted by improving corporate earnings outlook.5 5.1 2.5 1.1 Broad Money.4 -7.7 4.5 2. reflecting the slowdown in economic activity that affected the demand for credit. M3 Annual growth (%) 14 1st Phase 12 10 8 6 4 D J 2008 Source: Bank Negara Malaysia F M A M J J 2009 A S O N D 2nd Phase Repos FX deposits Other deposits Determinants of M3 Net claims on Government Claims on the private sector Loans Securities Net foreign assets* Bank Negara Malaysia* Banking system Other influences Source: Bank Negara Malaysia 11.2 0.0 5.7 16.22 Regional Indices Index (Dec 2008 = 100) 190 170 150 130 110 90 70 D 2008 Malaysia Indonesia Source: Bloomberg Thailand Philippines J F M A M J J 2009 Singapore A S O N D services and financial sectors and efforts to increase liquidity of the stock market by Bursa Malaysia also provided additional impetus to the market.23 Broad Money.7 6.2 -6. albeit modestly.4 -6.1 33.7 34. This was largely due to the deleveraging activities of international financial institutions.4 points on 12 March but began rising. Private sector liquidity was affected by global and domestic credit conditions. Between January and May. The impact of slower credit growth on broad money was compounded by the contractionary impact of net foreign outflows Table 2.3 14. As such. which caused the outflow of funds from Malaysia. regional equity markets including Bursa Malaysia was lifted further by the reallocation of global funds to emerging markets.5 10. private sector liquidity.5 * Pre-revaluation of the international reserves 63 . For the year as a whole. M3 Change (RM billion) 2009 1H M3 Currency in circulation Demand Deposits Broad Quasi-Money Fixed deposits Savings deposits NIDs 18. exhibited two distinct stages in 2009.0 12. the FBM KLCI rose by 45.9 14.7 9.2 40. domestic participation increased as market sentiment began to improve.Monetary and Financial Conditions Chart 2. lending by banks to businesses and households moderated.0 1.6 -3.2% (2008: -39.0 51. The announcement by the Government of the liberalisation of the Chart 2.3 -1.6 13.6 0.5 -0.3%). The benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) reached a low of 838.6 0.7 -1. as measured by broad money.0 5.8 12.5 financial markets. on optimism for a stronger pace of economic recovery.7 2H 66. from endMarch 2009.5 17. In the second half of 2009.

Subsequently. Financing. growing at an annual pace of 5. The large number of institutions with surplus liquidity was one of the factors underpinning the resilience of the banking system as a whole. At the institution level. were partially mitigated by the Government fiscal spending which supported broad money growth throughout the year.9 in December. all banks operated from a position of surplus liquidity with net placements of funds with the Bank. nonetheless. the resumption D J 2007 F M A M J J A S O N D J 2008 F M A M J J A S O N D 2009 BNM Debt Securities Direct Borrowing and Wadiah Acceptances Repo Others Source: Bank Negara Malaysia on domestic liquidity. As a result. the large interbank placements with the Bank acted as a liquidity buffer for the banking system. Compared to 2008. liquidity in the interbank market was ample and relatively stable. Financing by the banking system to the private sector picked up. banking system Chart 2. Growth of private sector financing was slower in the early part of the year in tandem with the general weakness in the economy. gained momentum towards the second half of the year.25 Total Net Financing to the Private Sector through Banking System Loans and PDS Quarterly change (RM billion) 35 30 25 20 15 10 5 1Q 2Q 3Q 2008 PDS Banking system loans Total net financing growth (RHS) Source: Bank Negara Malaysia 4Q 1Q 2Q 2009 3Q 4Q Annual growth (%) 15 13 11 9 7 5 64 . In addition. nevertheless. The turnaround in broad money reflected the improvement in the domestic and external economic and financial environment. In this respect. Outflows of liquidity following foreign selling of domestic assets. Broad money ended the year with a higher rate of growth of 9. however. These factors. The expansion in broad money moderated in the first half of the year. broad money also expanded in the second half of the year due to net foreign inflows. were offset by the release of liquidity absorbed by Bank Negara Malaysia. liquidity conditions in the interbank money market in 2009 were far more benign. ensured that financing activity continued to expand. reflecting the recovery in economic activity and was supported by the low interest rate environment. Bank Negara Malaysia’s main motivation for cutting the SRR was to reduce the cost of intermediation in the banking system. supported by lower lending rates and extensive measures put in place to ensure continued access to funds for all sectors of the economy.24 Outstanding Liquidity Placed with Bank Negara Malaysia (at end-period) RM billion 450 400 350 300 250 200 150 100 50 0 liquidity. While this move increased the liquidity available to banks. This was evident from the loan-deposit ratio. the broad money trend reversed to grow at a faster annual pace. banks were able to pass on a larger share of the OPR reduction through reductions in their retail lending rates. In addition.2% in December. The sound banking system and functioning capital markets. While the size of the surplus liquidity was reduced by foreign portfolio outflows. which continued from 2008 into the first quarter of 2009. FINANCING OF THE ECONOMY Financing conditions in 2009 remained conducive and supportive of economic activity.Annual Report 2009 Chart 2. coupled with historically low interest rates and ample liquidity.7 in January and 77. Bank Negara Malaysia conducted monetary operations in the domestic money market to ensure liquidity in the banking system remained ample. which ranged between 77. Bank Negara Malaysia also reduced the level of required reserves that banks hold against eligible liabilities from 4% to 1%.7% in June. remained in surplus. however. For the remainder of the year.

banking institutions placed greater focus on the lending to households as economic slowdown clouded the outlook for businesses.8 4.4 4.1% (end-2008: 54. This trend was in tandem with the rally in the stock market. The lower cost of borrowing and continued availability of financing supported the financing requirements of businesses and households During the year. More loans were extended for the purchase of residential and non-residential properties. the overall volume of loans Chart 2.200 1.5% (2008: 12. demand was also augmented by measures announced by the Government in the first and second stimulus packages to promote home ownership. as well as tax relief of up to RM10.31% (2008: 7.000. the lower interest rates provided the opportunity for households to refinance loans contracted earlier at higher rates. Loans extended to individuals for the purchase of securities expanded at a faster pace of 24. However.300 1. For the year as a whole.0 5.72%). Towards the second half of the year. For new housing loans. personal use.5%. From the supply side perspective.000 900 800 3Q 4Q Loan applications ALR on new loans approved (RHS) * Exclude credit cards Source: Bank Negara Malaysia Source: Bank Negara Malaysia and Bloomberg 65 .8% in 2009 (2008: 9. including housing. These measures included a 50% stamp duty exemption extended to loan agreements for the purchase of houses up to RM250. household loans outstanding rose by 9.7%). As such. purchase of passenger cars and purchase of securities.Monetary and Financial Conditions of growth in the fourth quarter of the year contributed to increased demand for financing.100 1. net financing to the private sector raised through banking system loans and PDS rose by 8.0 80 60 40 20 1Q 2Q 3Q 2008 4Q 1Q 2Q 2009 Chart 2. accounting for a higher share of total loans outstanding at 55.2 4. households’ financing were further supported by improvement in consumer sentiments and labour market conditions. Many banks offered more attractive packages for the refinancing of housing loans and promoted transfers of credit card balances.1%).000 a year for three years on interest paid on housing loans.26 Loans Outstanding by Customers Quarterly change (RM billion) Annual growth (%) 30 25 20 15 10 5 0 -5 1Q 2Q 2008 Businesses Households Others 15 14 13 12 11 10 9 8 7 6 3Q 4Q 1Q 2Q 2009 3Q 4Q Total loan growth (RHS) Source: Bank Negara Malaysia Chart 2.6 5. notwithstanding the moderation in economic activity.27 Households: Loan Applications and ALR on New Loans Approved* RM billion 100 % 6. From the demand side. Banks also lowered rates on newly approved personal loans to an average of 6.28 Households: Loans Outstanding for the Purchase of Securities and KLCI Index Annual growth (%) 30 25 20 15 10 5 1Q 2Q 2008 Loans outstanding KLCI (RHS) 3Q 4Q 1Q 2Q 2009 3Q 4Q Index 1. higher loans extended to the household sector were underpinned by both the lower cost of borrowings and the availability of financing in a competitive environment. personal and credit card loans.7%).

Annual Report 2009

for the purchase of securities remained small, accounting for only 4.8% of household loans and 2.6% of total loans at end-2009. Notwithstanding the increase in debt, the household sector’s balance sheet improved as evidenced by the decline in household debt to liquid financial asset ratio. The ratio of non-performing households’ loans over loans outstanding also remained low at 3.1% (end-2008: 4.1%). To ease the loan repayment burden of households, the banking institutions actively undertook debt restructuring and rescheduling. In addition, the Government announced in March 2009 a one-year moratorium on housing loans for retrenched workers. In contrast to the household sector, the growth in financing to the business sector was more moderate. Net financing extended to the business

sector through the banking system and the PDS market increased by 6.3% (2008: 12.9%). The slowdown in global and domestic demand clearly affected business profitability. Consequently, some businesses scaled down their operational capacity and postponed their expansion plans, reducing their demand for financing for their working capital requirements and investment activities. As such, loan applications from the business sector contracted by 2.8% in 2009 (20081 : +0.8%). For a brief period in the early part of the year, some businesses faced difficulty in accessing financing from the banking system and the capital market. This reflected the more cautious stance by both banks and investors in the PDS market due to the perception of the increased risk of borrowers due to the weaker economic conditions. Recognising that access to financing is paramount to support the recovery process, the authorities intensified efforts to ensure the continued flow of financing to all segments of the economy. Towards this end, several measures were introduced by Bank Negara Malaysia and the Government, including the setting up of several special funds for the SMEs and the establishment of Danajamin Nasional Berhad to provide financial guarantees for the issuances of private debt securities and Sukuk by those companies assessed to be viable. The Bank continued to initiate active dialogues between the private sector and banking institutions to understand the development in the international and domestic environment. Avenues to seek help and redress established by the Bank and the Association of Banks in Malaysia (ABM)2 also had a major role in enabling businesses and individuals to address enquiries relating to banking services and credit issues. These measures yielded positive results. Financing conditions for the business sector improved from the second quarter onwards. In the third quarter, loans outstanding to businesses registered a quarterly expansion after three consecutive quarters of contraction. Higher loans were disbursed to

Chart 2.29 Businesses: Net Financing through Banking System Loans and PDS
Quarterly change (RM billion) 30 25 20 15 10 5 0 -5 Annual growth (%) 20 18 16 14 12 10 8 6 4 2 0

1Q

2Q 2008

3Q

4Q

1Q

2Q 2009

3Q

4Q

PDS Banking system loans Total business net financing growth (RHS) Source : Bank Negara Malaysia

Chart 2.30 Businesses : Loan Indicators
RM billion 65 55 45 35 25 15 1Q 2Q 2008 Applications (LHS) Disbursements (RHS) Source: Bank Negara Malaysia 3Q 4Q 1Q 2Q 2009 Approvals (LHS) Repayments (RHS) 3Q 4Q RM billion 115 110 105 100 95 90 85 80

1

2

The growth rate for 2008 excluded one large loan extended in 2007 for a privatisation activity Bank Negara Malaysia established the enhanced Integrated Contact Centre comprising BNM Link and BNM Telelink that includes the Complaints Management and Advisory section in July 2008. The Association of Banks in Malaysia (ABM) in collaboration with banking institutions also set up the ABMConnect Toll Free Channel in December 2008.

66

Monetary and Financial Conditions

the manufacturing, construction, wholesale and retail trade, restaurants and hotels as well as the agriculture sectors. In the capital market, improved market sentiments also contributed to higher liquidity in both the PDS and equity markets. The developed capital market provided a more diversified source of financing for the larger businesses. In 2009, fund-raising activity in the capital market was particularly active, accounting for 82.5% of total net financing raised by the business sector (including issuances of equity)
Chart 2.31 Gross PDS Issued by Purpose
RM billion 20 18 16 14 12 10 8 6 4 2 0 1Q 2Q 2008 New activity Merger & Acquisition Refinancing Others* 3Q 4Q 1Q 2Q 2009 3Q 4Q

(2008: 37.9%). In the PDS market, gross issuances increased by 30.9% in 2009, coming mainly from large government-linked companies and financial institutions. The bulk of the PDS issued during the year were to fund working capital requirements, refinance debt and for equity investments. Meanwhile, funds raised in the equity market amounted to RM26 billion (2008: RM5.5 billion). The significantly larger funds raised reflected issuances of several large rights issues and initial public offerings (IPOs). For the SMEs and micro enterprises, financing was primarily sourced from the banking institutions and development finance institutions (DFIs). In 2009, loans outstanding to the SMEs contracted slightly. This mainly reflected the exclusion of a number of companies from the SMEs classification as they have grown beyond the definition of SME. Without such exclusion, SMEs loans outstanding would have increased by 5.1% in 2009. As at end-2009, SMEs loans outstanding accounted for 39.6% of total business loans of the banking system and development finance institutions. Financing to SMEs was augmented by special funds established by the Bank and the Government. During the year, there were a total of three new funds set up to facilitate SMEs’ access to financing. Firstly, the SME Assistance Guarantee Scheme (SAGS) was established in February 2009 with an allocation of RM2 billion to provide access to financing for viable SMEs that were adversely impacted by the economic slowdown. The fund was fully utilised and closed to applications in September 2009 after benefiting more than 9,000 SMEs from various sectors. Meanwhile, the Working Capital Guarantee Scheme (WCGS) and the Industry Restructuring Loan Guarantee Scheme (IRLGS) were both established in March 2009, with an allocation of RM5 billion each. Subsequently, in September 2009, due to the overwhelming response from borrowers, the Government reallocated RM2 billion from the IRLGS to WCGS. The WCGS, which was closed for new applications in October 2009, has benefited 5,329 companies. As at 4 March 2010, a total of RM5.4 billion in loans had been disbursed to 4,339 companies under this scheme. The IRLGS will continue to remain open until end-2010 or until the fund has been fully utilised, whichever earlier. As at 4 March 2010, 190 companies have benefited from this scheme with RM815 million worth of loans being approved.

*Others include financing for working capital, equity investments and general business activities. Note: Data excludes Cagamas bonds and issuances by non-residents. Source: Bank Negara Malaysia

Chart 2.32 SMEs Loans Outstanding*
Quarterly change (RM billion) 7 6 5 4 3 2 1 0 -1 -2 -3 1Q 2Q 2008 Annual growth (RHS) Quarterly change 3Q 4Q 1Q 2Q 2009 3Q 4Q 0 Annual growth (%) 12 10 8 6 4 2

* Adjusted to include the reclassification of SMEs to large corporations Source: Bank Negara Malaysia

67

Annual Report 2009

Table 2.2 Special Funds for SMEs Administered by Bank Negara Malaysia
RM million Allocations Approvals Disbursements As at end-2009 Special Funds Fund For Food2 New Entrepreneurs Fund 2 Fund for Small and Medium Industries 2 Bumiputera Entrepreneurs Project Fund4 Micro Enterprise Fund Bumiputera Entrepreneurs Project Fund - Islamic Total Financial Assistance and Guarantee Schemes SME Assistance and Modernisation Facilities5 SME Assistance Guarantee Scheme6 Working Capital Guarantee Scheme7, 8 Industry Restructuring Loan Guarantee Scheme7 Total Special Funds Fund For Food2 New Entrepreneurs Fund 2 Fund for Small and Medium Industries 2 Bumiputera Entrepreneurs Project Fund4 Micro Enterprise Fund Bumiputera Entrepreneurs Project Fund - Islamic Total Financial Assistance and Guarantee Schemes SME Assistance and Modernisation Facilities5 SME Assistance Guarantee Scheme6 Working Capital Guarantee Scheme7, 8 Industry Restructuring Loan Guarantee Scheme7 Total
1 2 3 4 5 6

% Loans Outstanding Utilisation Rate1

1,300.0 2,850.0 6,750.0 300.0 200.0 300.0 11,700.0 1,200.0 2,000.0 7,000.0 3,000.0 13,200.0

1,727.9 3,741.6 12,813.8 946.7 79.6 12.6 19,322.2 1,076.0 1,889.0 7,000.0 779.7 10,744.7

1,707.1 3,507.4 12,017.4 903.4 71.2 0.3 18,206.8 975.6 1,218.7 5,127.9 210.6 7,532.8

175.7 2,181.8 4,823.8 54.6 66.9 0.3 7,303.1 779.9 1,093.6 1,379.9 46.3 3,299.7

75.43 89.6 91.9 82.4 38.9 4.2 87.6

Change during the year 300.0 300.0 2,000.0 7,000.0 3,000.0 12,000.0 -2.5 197.1 880.0 46.8 75.4 12.6 1,209.4 1,889.0 7,000.0 779.7 9,668.7 0.1 155.9 1,123.8 89.2 68.9 0.3 1,438.1 734.6 1,218.7 5,127.9 210.6 7,291.8 -80.0 -80.1 -148.4 -24.9 64.5 0.3 -268.6 564.1 1,093.6 1,379.9 46.3 3,083.9

7

8

Ratio of approvals over allocations and repayments. Exclude funds allocated by the Government under the Ninth Malaysia Plan. Exclude repayments of RM541 million that has been converted into Agrobank’s equity. Closed and replaced by the Bumiputera Entrepreneurs Project Fund - Islamic in July 2009. Schemes were established in August 2008 and has been closed down in February 2009. Scheme was established in February 2009 and was closed in end December 2009. The total approved amount is RM2 billion after accounting for applications that were processed after the closing date. Schemes are administered by Syarikat Jaminan Pembiayaan Perniagaan Berhad (SJPP), a special purpose vehicle managed by Prokhas Sdn Bhd. Both SJPP and Prokhas are a wholly owned company of Minister of Finance Incorporated. Scheme was closed in October 2009 as the limit has been met.

Source: Bank Negara Malaysia

68

Monetary Policy in 2009 Monetary Policy in 2009 71 71 74 77 Overview Monetary Policy in 2009 Monetary Operations in 2009 White Box: Monetary Policy Process under the Central Bank of Malaysia Act 2009 69 .

Annual Report 2009 70 .

the severity of the crisis necessitated extraordinary responses in terms of the scope and size of monetary and fiscal policy measures. Nevertheless. the Bank’s decision to maintain interest rates was not only justified. MONETARY POLICY IN 2009 Over the years. Importantly. the statutory reserve requirement (SRR) was also concurrently reduced by 300 basis points. The magnitude of the reductions in OPR and SRR were aimed at providing a highly accommodative monetary environment to prevent a fundamental economic downturn By early 2009. with growth in the first quarter contracting markedly by 6. The assessment of the Bank was that the food and energy price increases were largely supply driven. To ensure greater transmission from the policy rate to retail lending rates. This was the main consideration in the decision to maintain interest rates despite assertions that the Bank should have tightened monetary policy. Earlier in 2008. Raising interest rates under these conditions would have a limited impact in containing inflation. By the fourth quarter in 2009. The Bank reduced its Overnight Policy Rate (OPR) by a total of 150 basis points between November 2008 and February 2009 to 2. While domestic demand conditions were relatively sound. the increase in disposable income from lower interest costs was positive on consumption spending. such as quantitative easing and the initiatives to address conditions of financial stress. it was also assessed that the Asian economies would also be affected by the spillover effects of the crisis. the balance of risks was that growth would slow in the twelve-month period beginning mid 2008. by ensuring that monthly installments on floating rate loans were immediately reduced instead of the alternative of shortening of the repayment period. these measures succeeded in containing the severity of the impact of the external developments. higher prices in these categories would be contractionary on growth. Cumulatively. the severe collapse in exports. While there were considerable uncertainties. Comprehensive policy measures were implemented by Bank Negara Malaysia and the Government to cushion the impact of the global recession on the domestic economy. given the strong trade links with the developed economies.00 percent. The resilient financial system and the well-functioning monetary transmission process meant that Malaysia did not need to resort to unconventional measures. Bank Negara Malaysia has maintained a pre-emptive approach to monetary policy. Subsequently. which could then feed into higher domestic consumption. but also enabled the initial monetary conditions to be appropriately positioned to provide support to the domestic economy.2%. As variable rate loans account for a large portion of total loans in Malaysia. the domestic economy had improved significantly and was on a path of firm recovery. The OPR. With inflation decelerating. In addition. monetary policy was confronted with heightened risk to growth arising from the global economic and financial crisis. The economy was severely affected by the steep decline in exports and private investment activity. was left unchanged. 71 . Bank Negara Malaysia frontloaded the interest rate cuts to cushion the economy from a rapidly weakening global economy. as global demand contracted. inflation was on the rise due to the sharp and significant increase in food and energy prices. as the global economy contracted. and the depressed economic outlook for several of Malaysia’s major trade partners meant that significant policy support would be needed to prevent the economy from entering a deep and prolonged recession. given the high percentage of food and energy in total consumption. Measures were also taken to ensure that existing borrowers benefited from the reduction in interest rate. Growth of the Malaysian economy turned negative for three quarters. This was necessary to ensure that the reductions in interest rates led to an increase in borrowers’ disposable income.Monetary Policy in 2009 OVERVIEW In 2009. however. it was apparent that the Malaysian economy faced a severe threat of a fundamental slowdown arising from significant deterioration in global conditions.

A key question for the Bank’s Monetary Policy Committee (MPC) was whether further reductions in interest rates would be beneficial in the context of a high savings country like Malaysia. temporary extension of safety net. the average lending rate (ALR) on new loans had declined to historic lows in 2009. policymakers lowered interest rates to near zero. Within two weeks of the last OPR adjustment in February 2009. while new loans were also re-priced lower across the business and household sectors. the accumulated monetary policy measures were sufficient to provide support to domestic demand. Lower borrowing costs alone would not be a key factor in supporting demand.5 3.0 6.5 Overnight Policy Rate (OPR) 2. in addition to easing interest rates.0 BLR 5. the base lending rate (BLR) of commercial banks adjusted downwards by a cumulative 121 basis points. Hence. low returns for depositors and maintaining negative real interest rates for a prolonged period could have a series of negative implications. the Bank also introduced a number of targeted measures to ensure continued access to financing. In addition to questions about the effectiveness of further interest rate cuts. this was mostly a statistical development resulting from the high base inflation in 2008.0 4. The Bank and the Government set up various special funds to ensure that viable small and medium-enterprise (SME) businesses that have been affected by the global financial crisis would .1 Overnight Policy Rate % 4. the Bank left the policy rate unchanged for the rest of the year.5 Chart 3. the domestic banking system was in a sound and robust position. Unlike countries at the epicenter of the global financial crisis. the potential risks also had to be considered.00% 6. safeguarding the value of wealth and real income of depositors and cushioning highly vulnerable borrowers from the full impact of the crisis. In economies in which the threat of deflation was significant.0 Ceiling rate for the corridor of the OPR 3. with strong capital buffers.25% 2. Several complementary measures were also introduced to reach specific sectors of the economy.51% ALR 4. The strong financial system and wellfunctioning monetary transmission process was effective in delivering the impact of the monetary policy stimulus to the economy. It could also create distortions that have adverse effects on the economy over the long-term. In addition.5 Mar ’08 Jun ’08 Sep ’08 Mar ’09 Dec ’08 Dec ’09 Sep ’09 Jun ’09 5. As a result. While inflation turned negative in June 2009.Annual Report 2009 Chart 3. Bank Negara Malaysia decided against such extreme measures as there was no indication 72 of deflationary pressures in the economy.83% 1. interest rate cuts by themselves are not sufficient.2 Base Lending Rate and Average Lending Rate of Commercial Banks % 7. In the Bank’s assessment. Sustained low interest rates could lead to a search for yields that may lead to the excessive rise of asset prices. The easing of monetary policy were complemented by other measures designed to reach specific sectors of the economy In a crisis situation.0 Floor rate for the corridor of the OPR 2. especially in an environment where confidence and sentiments were adversely affected by the severely weak global outlook.75% Sep 2008 Dec Mar Jun 2009 Sep Dec 2.0 1.5 Jun Source: Bank Negara Malaysia Source: Bank Negara Malaysia With the OPR reduced to historic lows in February.5 5.

In addition. In December 2008. the Industry Restructuring Loan Guarantee Scheme was set up to assist viable enterprises in upgrading their business operations. exceeding the amount raised in 2008.1% in August 2009. with both Singapore and Hong Kong also announcing the same measure simultaneously. ringgit recorded a broad upward trend. Movements in ringgit throughout the year were driven mainly by external factors including global deleveraging in the first quarter. Avenues for individuals and businesses to seek help on credit issues were also established. In the capital market. After depreciating in the first quarter. To facilitate international trade. reaching its 73 .3 Loan Applications RM billion 55 Pre OPR* Cut 50 45 40 35 30 J F M A M J J A S O N D J F M A M J J A S O N D 2008 *Overnight Policy Rate Source: Bank Negara Malaysia 2009 Post OPR Cut emptive measure of the blanket deposit guarantee until December 2010. credit flows had continued despite the prevailing recessionary conditions in the domestic and external sector of the economy. Various dialogues between the private sector and banking institutions were initiated to allow impediments to be recognised and addressed and thus ensure the flow of credit. Extending access to the liquidity facility to insurers was a precautionary move following the run on AIG in parts of the region following developments in the United States. This included the enhanced Integrated Contact Centre comprising BNMLINK and BNMTELELINK that includes the Complaints Management and Advisory Unit. demand for bank loans picked up from the second quarter onwards. There was continued flow of credit to finance domestic demand. Bank Negara Malaysia’s liquidity facility was extended to all insurance companies and takaful operators. Danajamin Nasional Berhad was also established to provide financial guarantee insurance for investment grade companies to raise funds from the bond market. The reduction in cost of borrowing and measures undertaken to ensure undisrupted credit flows to the economy were successful in sustaining financing activity. Consistent with the economic transformation objective. which represented a collaboration with banking institutions. The blanket deposit guarantee was part of a coordinated regional response to the crisis. for both businesses and households. This alleviated concerns that lenders would be reluctant to extend credit or demand higher risk premiums.5% by end-2009. The aftermath of the Lehman Brothers collapse also witnessed a major global shortage of US dollar liquidity as investor risk aversion resulted in a pull back of funds and marked increase in deleveraging activites. to serve as a ready platform for general enquiries relating to banking and credit issues. the Bank and the Ministry of Finance. to register a growth rate of 8. Although financing growth slowed in the early part of the year. with a long-term view of increasing efficiency and building future capacity. the ABMConnect Toll Free Channel was set up by the Association of Banks in Malaysia (ABM). the Bank provided an arrangement for firms involved in international trade by guaranteeing the availability of dollar for trade purposes. announced the pre- Chart 3.Monetary Policy in 2009 continue to have access to financing. matched by a corresponding increase in loan approvals. financing growth rebounded in the third quarter from its lowest level of 7. and to avoid contagion to the domestic banking system. funds raised by the private sector increased significantly. The fact that the facility remains unutilised was an indication that the measure was successful in instilling confidence and mitigating contagion risk. This affected the ability of banks around the world to extend US dollar loans for trade activities. Measures to stabilise economic activity were facilitated by orderly movements in the ringgit. followed by renewed interest of international investors toward emerging market assets from the second quarter onwards. Given these positive developments. With the collapse of prominent financial institutions in advanced economies. As measures implemented by the Bank began to take effect.

The outcome of policy measures implemented in concert was seen in the second half of 2009 as clear signs emerged that the impact of the crisis was contained. MONETARY OPERATIONS IN 2009 Conditions in the domestic money market were generally stable in 2009. Balancing between the need to be decisive and bold.0 -2.2% in the third quarter.0 6.0 0. During the year.6%. Business and consumer sentiments. The money market continued to function smoothly and experienced minimal volatility.0 -6. indicators including industrial production. in managing the current crisis there had been a collective and coordinated response from Bank Negara Malaysia and the entire Government machinery. and with a high level of the financialisation of these savings.0 4. amid a low inflation of 0. and the need to maintain fiscal prudence. which began to turn around in the second quarter. Ringgit adjustments and conditions in the domestic foreign exchange market remained orderly and did not adversely impact trade activity during the year.7255 recorded in March. financing trends. In addition. the Government issued a Sukuk Simpanan Rakyat worth RM5 billion that was also targeted at households.6% of GDP. equity investment by Khazanah Nasional Berhad. A coordinated policy response allows for a larger and more effective impact on the economy by ensuring that the different policies reinforce each other. The economy improved in the second half of the year.0 GDP Inflation Source: Bank Negara Malaysia 74 . The Bank continued to use a wide range of monetary instruments for managing monetary operations and maintained the AOIR within the policy corridor of ± 25 bps. with aggregate surplus liquidity declining only slightly from RM261 billion as at end-2008. Chart 3.0 -4. the economy expanded by 4.0 8. the Government unveiled a second stimulus package on 10 March 2009. to RM252 billion as at end-2009. external trade and conditions in the labour market. By the fourth quarter. A key lesson from the 1997/98 Asian Financial Crisis is the need for comprehensive and coordinated policy measures. As Malaysia is an economy with a high savings rate. By the second half of 2009. private finance initiatives and tax incentives. an increase of 11. the average overnight interbank rate (AOIR) was stable and closely tracked the OPR despite the higher uncertainty and general market volatility earlier during the year.7% compared to the earlier projection of -4 to -5%.3475 on 15 October. the limited fiscal outlay was to ensure the long-term sustainability of the Government’s fiscal position. pointed towards broad-based stabilisation and improvements in the domestic economy. it was recognised that low interest rates would reduce returns on deposits to a large segment of the economy. was considered necessary to spur businesses and households at a time of heightened uncertainty.4 GDP and Inflation Annual Growth (%) 10. GDP growth for the year registered a more modest decrease of 1. Accordingly. The large size of the overall stimulus packages.5%.0 Mar‘08 Dec’08 Mar’09 Dec’09 Jun‘08 Sep‘08 Jun’09 Sep’09 -8. this time amounting to RM60 billion to provide adequate support for economic activity.0 2. announcing a fiscal stimulus package totaling RM7 billion on 4 November 2008 to support private spending. also improved further.Annual Report 2009 2009 peak against the US dollar at RM3. which together amounted to 9. only RM15 billion of the second stimulus package involved direct fiscal injection. as the pace of contraction declined to -1. At the same time. The Malaysian Government responded promptly to the global economic crisis. The Malaysian money market continued to operate under a surplus liquidity environment. The tumultuous external events proved to have a limited impact on domestic money markets. In order to support savers. with the remainder in the form of government guarantees. As the global economic outlook worsened.3% from its lowest level of RM3. the Bank issued Merdeka Savings Bond amounting to RM2 billion specifically targeted for segments of savers that depend on income from deposits for their livelihood.

as foreign investors reduced their holdings of domestic assets.49% . Investors’ risk appetites for financial assets from emerging economies increased and led to net portfolio inflows into emerging markets.5% in March 2009.30 2. Interest rates in the interbank market remained orderly.2. ranging between 7 to 25 days. This caused domestic liquidity to contract slightly.50 2.2% in January to 77. Monetary operations of the Bank were focused on draining surplus liquidity in the banking system by utilising various monetary instruments.50%. While the main motivation for reducing the SRR was to bring down the cost of intermediation. With the further reduction in the OPR on 24 February to 2. uncollateralised direct borrowings and Al-Wadiah acceptances remained as the main monetary instruments. the AOIR decreased and stabilised at a lower range of 2. To compensate for the outflows following foreign selling of domestic assets. This was evidenced by the loan-deposit ratio of the banking system remaining at modest levels. sterilising 70% of the surplus liquidity in the banking system.90 1.01%.10 2. From the second quarter onwards.Monetary Policy in 2009 Chart 3.70 1.50 3. nonetheless. between December 2008 and March 2009. the domestic money market continued to be affected by the deleveraging activity of international financial institutions. as at 31 Dec 2009) RM billion 300 250 Islamic 200 150 100 50 0 J F M A M J J A S O N D Chart 3. While the maturities of the borrowings through direct borrowings and Al-Wadiah acceptances ranged from overnight up to 3 months.6 OPR and Interbank rates % 3. including Malaysia. the global economic and financial environment began to improve. Short-term portfolio outflows were recorded in the first quarter. the large net interbank placements with the Bank acted as a liquidity buffer for the banking system. The average overnight interbank rate (AOIR) traded within a narrow range of 1 basis point above and below the OPR.51% during the period 22 January – 24 February. In this respect.2.30 3. following the reduction in the level of the SRR. Bank Negara Malaysia released some of the excess liquidity kept with the Bank. The share of direct borrowings increased from 47% in 2008 to 54% in 2009.90 2. ranging from 72. Following the reduction in the OPR on the 21 of January to 2. 75 . the AOIR decreased accordingly and stabilised at the lower range of 1. liquidity in the banking system.10 1. remained in surplus. with the surplus liquidity placed by the banking system with Bank Negara Malaysia decreasing from RM261 billion to RM256 billion.70 2. At the institution level. Conditions in the money market during this period returned to normal. their average borrowing maturities were shorter. lowering the SRR also increased the liquidity available to banks.50 J F Ceiling rate of the corridor for the OPR Floor rate of the corridor for the OPR Conventional M A M J 2009 J A S O N D OPR 1-week Source: Bank Negara Malaysia Overnight 1-month 2009 Source: Bank Negara Malaysia In early 2009. all banks operated from a position of surplus liquidity.00%. In terms of monetary instruments.99% . While the size of the surplus liquidity was reduced by the outflows. The ample liquidity condition was also supported by Bank Negara Malaysia’s decision to reduce the required reserves that banks hold against eligible liabilities from 4% to 1%.5 Outstanding Liquidity Placed with Bank Negara Malaysia (RM252 billion.70 3.

g.4% as at end-2008).50 3. 3-month BNMN 6-month BNMN Source: Bank Negara Malaysia 76 .50 J F M OPR A M J J 2009 A S O N D was the case during the first quarter of 2009. accounting for 12% of total monetary instruments. On 2 July 2009. The scale of Islamic monetary operations was in line with the size of the Islamic banking system in Malaysia which has increased to 19.70 1. conventional monetary operations accounted for 77% of the total operations. while Islamic monetary operations accounted for the remaining 23%. Issuance of BNMN-Murabahah is based on a widely accepted murabahah contract. it has expanded the investor base and has consequently encouraged the secondary market in the Islamic money market. BNMN/ BNMN-i provides a cost effective means of sterilising excess liquidity. As murabahah is an acceptable concept by both resident and non-resident investors. The Bank also undertook measures to improve operational efficiency in the money market. which essentially is a certificate of indebtedness arising from a deferred mark-up sale transaction of an asset. normally commodities (e. and due to the higher demand for short-term securities from non-resident investors in the subsequent quarters. In 2009.10 1.90 1.30 2. BNMN/BNMN-i yields sometimes traded below OPR.30 3.Annual Report 2009 Chart 3. especially during periods of expectations for interest rates cut as Chart 3. In addition. crude palm oil).8 BNMN Yields and OPR % 3.70 2.10 2. the Bank introduced a BNMN based on the Murabahah concept (BNMNMurabahah).50 2.7 Breakdown of Outstanding Monetary Policy Instruments 2008 Others 12% BNMN-i 3% BNMN-i 3% 2009 Others 10% BNMN 9% Uncollateralised Direct Borrowing 47% Repo 7% Uncollateralised Direct Borrowing 54% BNMN 13% Repo 8% Commodity Murabahah Placement (CMP) 1% Commodity Murabahah Placement (CMP) 2% Wadiah Acceptances 15% Wadiah Acceptances 16% Source: Bank Negara Malaysia Bank Negara Monetary Notes (BNMN for conventional and BNMN-i for Islamic money markets) were also utilised significantly. The BNMN/BNMN-i remains an important instrument for the Bank as a steady issuance of the papers helps to promote secondary market liquidity.90 2. to gradually replace the issuance of BNMN-i based on Bai Al-Inah concept.6% of total assets of the banking system as at end-2009 (17.

as well as in building a consensus decision amongst members. and additional meetings may be convened if necessary. Meanwhile.bnm. Members. and the eligibility for reappointment is subject to the assessment of the members’ performance by the Board Governance Committee. the Bank shall pursue a monetary policy which serves the interests of the country with the primary objective of maintaining price stability giving due regard to the developments in the economy.gov. Therefore. The current MPC members are: Tan Sri Dr.2 At the MPC meetings. The Act also provides extensive safeguards in terms of membership of the MPC. with the Governor being the Chairman of the Committee. Kadir Dato’ Muhammad bin Ibrahim Puan Nor Shamsiah binti Mohd Yunus Dr. 1 2 3 Section 22 (1) of the Central Bank of Malaysia Act of 2009 The schedule for the six meetings is published together with the final Monetary Policy Statement of the preceding year. as Chairman. has a crucial role in leading the discussion and deliberation process.my 77 . as well as other issues relevant to the policy decision. The Act stipulates that monetary policy shall be autonomously formulated and implemented by Bank Negara Malaysia (``the Bank´´). The Committee adopts a collegial approach to decision-making. Zeti Akhtar Aziz Dato’ Ooi Sang Kuang Dato’ Zamani bin Abdul Ghani Dato’ Mohd Razif bin Abd. the Governor. Members of the MPC must be persons of probity. The MPS also provides an assessment of the prospects for the economy and inflation. other than the Governor and the Deputy Governors. The Monetary Policy Statement can be found on the Bank’s website at www. competence and sound judgment with relevant expertise and experience. the Board Governance Committee may recommend external members to the Minister of Finance for their appointment to the MPC. on the recommendation of the Board Governance Committee. which came into force on 25 November 2009. members review economic and financial conditions and assess the risks to achieve the long-run goals of price stability and sustainable economic growth. The MPC consists of 7 to 11 members. The governance of the MPC meetings and the accountability of the members are guided by the MPC by-laws. are appointed by the Bank’s Board of Directors from amongst senior officials at the Bank with relevant expertise. before deliberating and reaching the decision on the appropriate stance of monetary policy. The Governor and Deputy Governors remain as members of the MPC for so long as they hold office. The appointment term of the members is 3 years.”1 The Act also formally and legally recognises the Monetary Policy Committee (MPC) as the body responsible for formulating monetary policy and the policies for the conduct of monetary operations. The objective of monetary policy is also articulated with greater clarity – “In promoting monetary stability. formally institutionalises the monetary policy formulation procedures that have been established since the beginning of the decade. which have been approved by the Board of Directors of the Bank.Monetary Policy in 2009 Monetary Policy Process under the Central Bank of Malaysia Act 2009 The Central Bank of Malaysia Act 2009 (``the Act´´). A Monetary Policy Statement3 is released after each MPC meeting to announce the monetary policy decision. Sukhdave Singh Puan Norzila Abdul Aziz (Governor) (Deputy Governor) (Deputy Governor) (Deputy Governor) (Assistant Governor) (Assistant Governor) (Assistant Governor) (Assistant Governor) The MPC is required to hold six regularly scheduled meetings during a year.

Annual Report 2009 78 .

Outlook and Policy 81 83 84 92 93 96 International Economic Outlook in 2010 Malaysian Economy in 2010 White Box: Potential Output of the Malaysian Economy Monetary Policy in 2010 Fiscal Policy in 2010 White Box: Transitioning into a High Income Economy: Policy Considerations Outlook and Policy 79 .

Annual Report 2009 80 .

the prospect is for a very gradual recovery in private sector demand. with the Asian economies leading growth A distinct feature of the ongoing global recovery process. On the international front. following the positive wealth effect from the rise in equity markets and stabilising house prices. however.Outlook and Policy INTERNATIONAL ECONOMIC OUTLOOK IN 2010 Recovery in the global economy. The Asian economies are. 81 Recovery in the global economy is expected to remain gradual and uneven in 2010. Similarly. private investment is also expected to record anaemic growth during the year due to prevailing excess capacity and very low utilisation rates. As the fiscal stimulus wears off towards year-end. Nonetheless. expected to continue to lead the global recovery as sources of growth become broad-based. is the pervasiveness of the policy support put in place since early last year. the US recovery process will continue to be driven by policy stimulus amidst a very gradual recovery in private sector demand. be a gradual withdrawal of monetary stimulus following the expiry of several of the Federal Reserve’s liquidity and asset purchase programmes starting early this year. weak private sector balance sheets and fragile financial systems. given the less promising prospects in advanced economies and improving investors’ risk appetite for high-yielding assets. in particular to households and small businesses. the net impact of these policies on the recovery process is expected to remain positive. especially through their influence on private sector demand. amid improved intraregional trade. the prospect is for a continued but gradual recovery in economic activity. The fiscal stimulus. underpinned by the considerable policy stimuli and gradual revival in private sector demand. The advanced economies are expected to record modest growth in 2010 given the prevailing high unemployment. Private consumption is expected to expand. the ongoing deleveraging process and the weak financial systems that continue to restrain lending activity to the real sector. especially with PR China. Private consumption will. The strength and pace of the recovery will vary considerably across the economies. bank lending to the economy. is expected to remain gradual and uneven in 2010 as economies emerge from the worst postWorld War II recession. depending on the extent of the region-specific structural problems in the aftermath of the global financial crisis. Residential investment is expected to be supported by ongoing government policies in the form of lower mortgage rates and tax credit relief. There will. More than half of the USD787 billion fiscal stimulus package is targeted to be spent in 2010. tighter capital standards and regulatory changes from the ongoing reforms in the financial system. particularly in the advanced economies. Households are also expected to gain from tax benefits for the housing sector. Overall. especially through tax benefits and infrastructure spending. which supported growth strongly in 2009. some of the quantitative easing is expected to be withdrawn beginning early 2010. . which will in turn affect the pace of economic recovery. albeit at a modest pace. which commenced in the second half of 2009. the magnitude and direction of capital flows to emerging economies with better prospects would result in more volatile capital flows to such economies. will provide further impetus to growth this year. supported by the further strengthening of both domestic demand and external demand. Notwithstanding the continued improving conditions in the international financial markets. the sustainability of the recovery in the advanced economies will need to rely on the resumption of private sector activity. However. be constrained by continued weakness in the labour market and persistently tight credit conditions. is likely to remain weak. Hence. however. The sustainability of recovery in the advanced economies is still dependent on the stimulus and the restoration of financial intermediation in the credit market. credit conditions particularly in the advanced economies are likely to remain restrictive due to constraints faced by the financial institutions as they continue to grapple with weak balance sheets. In the US. given the likelihood of persistently high unemployment. However. however.

coupled with strong demand from the emerging 6. while private investment can be expected to rebound in view of higher capacity utilisation. the composition of global trade will shift from the advanced economies to the emerging economies.7 1.0~5.5~6.8 -2. but remain restrained by a challenging environment of persistent high unemployment and weak financial sectors. the recovery in exports.0 4. In line with the anticipated improvements in the global economy and trade.0 0.0 12 -2. The changing pattern of global trade is likely to shift the global flows of foreign direct investment. Chart 4.5 10 82 . it will still be a factor driving some growth.5 5.7 4.0 0.5~4.0 -5. PR China is expected to continue to support intra-regional trade through the sustained expansion of its domestic demand. Notably. domestic demand conditions in the regional economies are also expected to strengthen further.6~3.6 4. Besides the continued broad-based improvements in external demand for the region. While fiscal stimulus will be less expansionary and fiscal consolidation in a number of countries in the euro area is expected to commence. in the UK.5~6. especially in the area of infrastructure spending.5 2009e e Estimate f Forecast 2010f Source: International Monetary Fund and National Authorities Economic activity in the euro area is projected to improve in 2010 but growth will remain modest and below potential. World Trade and Growth in Major Advanced Economies (2009-2010) Annual change (%) 10.0 World growth World trade United States Japan Euro area United Kingdom -4. deflation is expected to persist in the economy.2 4.0 -1. in particular PR China. with domestic demand likely to be constrained by weak labour market conditions and subdued capital expenditure plans.0 economies. Meanwhile. is expected to remain the key driver of economic growth in 2010. an economy that is highly dependent on trade.7 4. domestic demand will remain weak due to the restrictive credit conditions and planned fiscal consolidation.9 -2. Private consumption is likely to be bolstered by better employment prospects.5 7.1 -5.3 1.0 5. further weighing down on domestic demand.0 -0.7 8. The gradual recovery in the advanced economies. will support the resumption of global trade in 2010. as multinational companies become more region-specific in managing their global production and investment networks to take advantage of the favourable growth prospects in the emerging economies.Annual Report 2009 Chart 4.3 -15.0 -12.7 1. Given this scenario.0 6. At the same time.2 Regional Economies: Real GDP Growth Annual change (%) Philippines Thailand Korea Chinese Taipei Hong Kong SAR Malaysia Indonesia Singapore India PR China -4 2009e e Estimate f Forecast Source: International Monetary Fund and National Authorities -2 0 2010f 2 4 6 8 -2.2 -10. as domestic demand in the region strengthens further.5 4. in particular private consumption. the Asian economies are poised for a more robust growth in 2010.9 2. Nonetheless.0 3. especially to the Asian region. private sector demand is expected to show a gradual recovery. Moreover. This will be further reinforced by the continued implementation of fiscal stimulus packages.7 10. monetary and fiscal policies are expected to remain expansionary to support growth.9 2.3 0.4 -5. However. economic recovery will be supported by the monetary stimulus as well as external demand following the depreciation of the pound sterling.7 -1. the recovery is expected to be modest. For Japan. particularly Asia.1 World Growth.6 3.5~5. As a major anchor of growth for the region in 2009.

In addition. If these economies are unable to outline a clear strategy to return to a sustainable fiscal position. reflecting more underlying real demand conditions. If there was a significant premature withdrawal of these measures. higher capital spending by the NFPEs and the accelerated implementation of the remaining projects under the second stimulus package. January 2010 83 . resulting in sharper fiscal consolidations that could harm the recovery process.Outlook and Policy Global inflation is expected to rise in 2010 in tandem with the recovery of the global economy and higher commodity prices. 1 markets would impose high risk premiums on these economies. driven mainly by the private sector. but not to the levels seen in early 2008. the healthy private sector financial position and the strong financial system will provide support to a private sector-led recovery. ranging from conditions for the sustainability of recovery and the outlook for inflation. particularly in Europe. Favourable domestic conditions. particularly in the emerging economies.5% to 5. While the public sector will remain supportive. The advanced economies also continue to face significant challenges from their fragile financial system and structural unemployment. Against this backdrop. inflation in emerging and developing economies is expected to rise to 6. Real GDP is expected to expand by 4. the anticipated rise in commodity prices will also be driven by market expectations of a recovery in global demand as well as the excess liquidity in the global financial system. Prices of oil and other commodities are expected to be higher. This is reflected in increasing concerns on sovereign risk. underpinned by strengthening domestic demand and an improving external environment.5% in 2010. particularly in the advanced economies. including continued access to competitive financing will remain in place to foster recovery in the private sector activity. it could increase the risk of a double-dip recession. including the improvements in the labour market. however. Another major risk is the fiscal health of the advanced economies that have embarked on large fiscal stimuli and financial rescue packages. and in some cases. Headline inflation in the advanced economies is expected to rise to 1. further increases in the prices of commodities are likely to be limited by the availability of spare capacity in the production of most commodities and in some cases by large stock of inventories. In line with strengthening external demand and increasing domestic activity. will further reinforce domestic demand. unsustainable asset price inflation. growth is expected to be driven by greater private sector activity and robust external demand from the regional countries.2% in 20091. these central banks are expected to gradually exit from the very low interest rate regime in addition to the reversal of quantitative easing in the advanced economies. To some extent.2% in 2010 from 5. will support the further expansion in private consumption.5% in 2010. rising disposable incomes and sustained consumer confidence.3% in 2010 from a record low of 0. However. In the case of emerging economies. supported by strengthening domestic demand and an improving external environment The main contribution to growth in 2010 would come from the expected strengthening in domestic demand.5% to 5. private investment is expected to gradually recover in 2010. Several downside risks remain in the outlook of the global economy. The timing and magnitude of the withdrawal of the stimulus measures could pose considerable risk to the growth and inflation outlook. The underlying strong macroeconomic fundamentals. A supportive monetary environment. the positive growth differentials could attract large capital inflows and pose complications in the conduct of monetary policy and managing exchange rate volatilities. Meanwhile.1% in 2009. If the measures are. The speed at which central banks will exit will take into consideration a broad range of factors. this could lead to financial imbalances and heightened inflationary pressures. withdrawn too late. MALAYSIAN ECONOMY IN 2010 The Malaysian economy is projected to grow by 4. The recovery in the IMF World Economic Outlook Update.

6 2.0 5. Amidst a challenging global environment. the latest estimates indicate that the growth rate of potential output of the Malaysian economy moderated to 2.5 5.7 6. the slowest pace since the Asian financial crisis.5 1. Malaysia and Bank Negara Malaysia estimates 1 The output gap is the difference between the levels of actual and potential output and the gap is measured as a percentage of potential output.2 4.5 4.0 0.4 0.3 2.5% in 2009.0 -1.1 1.5 4.0 -2. Given a sharper decline in actual gross domestic output (GDP).0 4. driven by the strengthening of domestic activity and an improving external environment. TFP growth captures productivity increases arising from improvements in the utilisation of factor inputs due to technological progress and overall economic efficiency.1 2.4% of potential output.0 5. Table 1 Actual Real GDP and Potential Output Actual Potential Investment Labour Period Annual change (%) 6.1 -1.4 0.0 6.0 6. indicating that the economy was operating below its potential in 2009.8 6.6 -0. It traces the sustainable growth path of the economy and is primarily determined by the expansion and non-inflationary utilisation of the available physical capital and labour force.Annual Report 2009 Potential Output of the Malaysian Economy Potential output is the trend level of output that is consistent with the aggregate productive capacity of an economy.0 3.0 0.8 3.4 e Estimate f Forecast Chart 1 Actual and Potential GDP RM billion 140 % of potential 25 20 120 100 80 Actual Output (LHS) 60 40 20 0 1991 1993 1995 1997 1999 2001 2006 2005 2007 2009e 2011f e Estimate f Forecast Output gap (RHS) 15 Potential Output (LHS) 10 5 0 -5 -10 1993-1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009e e Estimate Chart 2 Factor contributions and TFP growth Shift from a factor-driven to a productivity-driven economy % point contribution 7.6 0.1 4. consistent with the experience during previous economic downturns. It is a measure of the cyclical deviation from the non-inflationary trend of output.5 1. However.5 5.8 5. 84 .8 -5.6 -0.8 1.0 2.6 4.6 5.1 0.3 26.0 2.0 2.6 5. A positive output gap indicates that actual output is above potential output.0 7.1 5. the output gap is projected to narrow in 2010. This was mainly due to the decline in investment activity and moderation of TFP growth. and thus provides an assessment of the position of an economy in the economic cycle. with the expected recovery of the Malaysian economy going forward.7 Gap % of potential output 0.6 1.4 1. the output gap1 was a negative 1.9 0.5 8. and potential output is expected to return to its trend growth of about 5% over the medium term with the expected recovery in investment and continued improvement in productivity.3 5. while a negative output gap indicates the reverse.6 -1.1 0.2 4.2 4.7 -1.0 -2.0 1992-1999 Labour Capital TFP 2000-2009e 2010-2011f Source: Department of Statistics.0 1.6 2.8 6.9 3. as well as total factor productivity (TFP) growth. The output gap is the difference between the levels of actual output and potential output.3 5.5 4.5 9.

in tandem with the recovery in the manufacturing sector and the strengthening of domestic demand. production and overall sentiments. in terms of employment. sustained current transfer outflows as well as a small services account deficit. crude oil and natural gas. However. monetary policy will remain accommodative while attention will continue to focus on ensuring that the private sector. policies will remain supportive of growth. the strengthening of external demand will have positive spill-over effects on the broader economy. The services sector remains the key contributor to overall GDP growth. The agriculture sector is also projected to register higher growth as demand from the major export markets for industrial crops improves with better economic prospects in 2010. most economic sectors are expected to record better performance in 2010. thus supporting greater private consumption and investment. in line with the stronger external demand and higher commodity prices. Headline inflation is expected to remain modest at an average of 2% to 2. recover. the construction sector is expected to sustain growth. in particular the small and medium enterprises. include the effect on recovery once fiscal spending begins to diminish. The projected growth of the Malaysian economy of between 4. Gross exports are projected to expand further in 2010. Meanwhile. domestic demand will be a key factor in driving growth in 2010. At the same time. Labour market conditions are projected to improve further in 2010. Given the relatively large external sector in the economy. which would threaten macroeconomic stability and the sustainability of the economic recovery.5% in 2010. mainly in the advanced economies. These risks.6% of the labour force. The lower current account surplus reflects the lower trade surplus. From the supply side perspective. services and construction sectors plan to increase employment and provide a higher salary increment in 2010. The manufacturing and mining sectors are expected to record positive growth as external demand for major products such as electronics. the current account surplus is projected to be lower at 14. supported by strengthening domestic demand and a further improvement in external demand. In this environment. On the financial account. the provision of incentives to high growth sectors and further improvements in the Government’s delivery system. On the external front.3% of GNI in 2010.Outlook and Policy global economy will provide a further impetus to growth in 2010. in particular to ensure that private sector activity strengthens further and that the recovery is firmly established.5% in 2010 is based on the expectation of a gradual and uneven global economic recovery. there will be heightened vigilance to ensure that financial imbalances do not develop in the economy. the continued de-leveraging process amongst the private sector and the fiscal stress in some large advanced economies pose considerable uncertainties to the outlook for the global economy. including the liberalisation of the economy. Both the trade and manufacturing related subsectors and the domestic-oriented sub-sectors are expected to improve amid the recovery in both global and domestic demand. foreign direct investment inflows and direct investment abroad by Malaysian companies are likely to increase given the improving global and domestic economic conditions. In addition to ensuring the timely implementation of projects. have access to financing. The strong economic 85 . benefiting from the continued implementation of the remaining projects under the second stimulus package and the Ninth Malaysia Plan. the Government has announced several measures to revive private investment. particularly from the more robust expansion in the regional economies. in line with the expected recovery in global and domestic economic activity. with the unemployment rate expected to decline to 3. with growth expected to be broad-based. most firms in the manufacturing. the still weak and fragile financial system. Under these circumstances. The price increase reflects the improving economic conditions and the possible adjustments to the administered prices following the Government’s plan to revise the subsidies for petroleum products as well as to review the existing subsidies on other essential items. Based on a survey conducted by Bank Negara Malaysia. the privatisation of Governmentowned corporations. higher income account deficit. It is recognised that the global economy is still facing several downside risks.5% and 5. On the monetary front. the trade surplus is expected to be lower as higher exports will be partly offset by the expansion in gross imports.

consumer confidence is likely to be sustained in 2010.7 9.3 11.8 7.2 3.6 7. Other factors providing support to private consumption growth include continued access to credit with accommodative interest rates and a relatively low inflation environment.5 -2.3 Real GDP and Private Consumption Annual growth (%) RM billion (2000 prices) 300 280 260 240 220 200 180 160 140 2002 2003 2004 2005 2006 2007 2008 2009p 2010f Domestic demand will record higher growth in 2010.1 4.4 1.Annual Report 2009 and financial fundamentals of the Malaysian economy place the domestic economy in a better position for a stronger recovery as the global conditions improve further.7 -0.5~5. a steady increase in disposable income and sustained consumer confidence. driven mainly by private spending as the Government consolidates Favourable domestic conditions. higher capital spending by the NFPEs will provide a further boost to domestic demand.7 3. Malaysia and Bank Negara Malaysia Excluding stocks p Preliminary f Forecast Note: Figures may not necessarily add up due to rounding Source: Department of Statistics.1% while the unemployment rate is projected to be lower at 3. In addition. The balance sheet of households is expected to remain strong as reflected Chart 4.4 0.9 0. while private sector capital spending is projected to increase gradually during the year.7 4.4 -10. households in the rural area are expected to enjoy favourable income growth as commodity prices are expected to remain firm in 2010. in terms of an accommodative monetary policy.5 1.8 -21. The higher expansion in consumer spending will be supported largely by improvements in the labour market.1 -12.0 4. expansion of household consumption.7 12. and will support higher consumption spending.5 Annual change (%) Domestic Demand1 Private sector expenditure Consumption Investment Public sector expenditure Consumption Investment Change in stocks Net exports of goods and services Exports Imports Real Gross Domestic Product (GDP) 1 -0.5~5.8% in 2010. will help to support the further Table 4. In addition. In view of the recovery in economic activity and improved labour market conditions.7 2.2% in 2010 as private sector activity strengthens in line with the resumption of global economic growth.4 -2.8 0.3 -2. The private sector is expected to be the main driver of domestic demand as the Government consolidates its expenditure in 2010.7 -2.6% of the labour force.4 -3.3 14 12 10 8 6 4 2 0 -2 Private consumption (RHS) Private consumption growth Real GDP growth p Preliminary f Forecast Source: Department of Statistics.1 -1. Private consumption is projected to increase by 3.5 8. Malaysia and Bank Negara Malaysia 86 .1 -12.0 -13.7 11. Domestic Demand Conditions Domestic demand is projected to expand by 3.2 0.6 1.0 0.1 0.1 Real GDP by Expenditure (2000=100) 2009p 2010f 2009p 2010f Contribution to real GDP growth (percentage point) -0. in line with the recovery in economic activity.8 2.3 3. the average private sector salary is expected to increase by 4.3 -2.5 1.7 2.7 -18. Employment prospects will be more favourable with stronger labour demand in various sectors of the economy.5 -1. Consequently. continued access to financing and improved labour market conditions. The rise in income levels following the gradual recovery of the export and manufacturing sectors will benefit almost one third of the labour force in the domestic economy.7 8.1 2.9 3.

2 1. capital expenditure in the construction sector is likely to benefit from the ongoing Ninth Malaysia Plan (9MP) civil engineering projects as well as continued implementation of the second stimulus package. In the social services sector. the consumer-oriented business segments will continue to expand in view of the higher consumption activity during the year. The rebound in business optimism due to the improvement in external demand and increasing domestic economic activity will also encourage firms to resume investment projects that have been deferred. communication and utilities. In the services sector.1 transportation sector will be supported mainly by capacity expansion in air travel services. public consumption is projected to decline by 2. Meanwhile. supported by an expansion in upstream oil and gas production capacity as well as additional development expenditure for new discoveries located offshore in Peninsular Malaysia and Sarawak. Of significance. In addition. This is in line with the Government’s policy to be more efficient in its spending. In addition.4 Household Debt Indicators Proportion of GDP (%) 80 75 70 1. Government development expenditure during the year will continue to be channelled towards improving the economic and social sectors of the economy.8 Ratio 1. Capital spending in the mining sector is also anticipated to increase. Public investment is expected to expand by 9. improving public utilities and agricultural productivity as well as for enhancing rural development. mainly on account of higher capital spending by NFPEs. Furthermore. Investment in the communications sector will be higher as companies intensify the network upgrading exercise to widen broadband service coverage. the continued implementation of projects from the second economic stimulus package is expected to also benefit the household sector. The modest recovery in private investment will be supported by higher activity from the manufacturing sector. Although expenditure on emoluments will be higher.7% in 2010. Government direct spending consisting of RM5 billion worth of projects from the second stimulus package will be implemented in 2010. Besides the large capital expenditure in the upstream oil and gas sector. without affecting the effective delivery of Government services. Firms in the wholesale and retail trade industry are projected to expand their operations through the establishment of new outlets. Capital outlay in the economic services sector will mainly be for providing transport and industrial infrastructure. Capital spending by businesses is likely to expand gradually from the second half of 2010. in line with the strengthening of domestic and external demand amid improving global economic conditions. 0. a large proportion of the allocation will be utilised to improve the provision of essential public services such as education and health care.Outlook and Policy Chart 4.9 60 55 50 2002 2003 2004 2005 2006 2007 2008 2009 Household debt (% of GDP) Loan . higher investment by NFPEs is projected in the areas of transport.3% in 2010.7% in 2010 as expenditure on supplies and services is reduced. Private investment is expected to register a marginal growth of 0. supported by the increase in manufacturing production will encourage firms to embark on capacity expansion. investment in the 87 . In the transportation sector. and the development of low-cost housing and quarters for civil servants. Investment in the communication and utilities sectors will focus on upgrading the broadband network and improving power supply respectively.0 65 0.7 by the stable debt levels of households and low level of non-performing loans. a faster improvement in capacity utilisation since the second half of 2009. The implementation of various projects under the 9MP as well as the second stimulus package will also be accelerated during the year. higher capital outlay has been committed to the implementation of rail expansion projects in 2010.Deposit Ratio (RHS) Source: Bank Negara Malaysia 0.

7 2. 88 . Growth will be contributed by increased demand for electricity from the industrial users.5~5.8 -9. is expected to expand favourably in 2010. are projected to register enhanced growth rates. Growth will emanate from higher demand for cargo-related transportation services. as well as steady demand from the commercial and household sectors. Broad-based recovery is expected in 2010 with improved performance in most sectors The services sector is projected to register a higher growth of 4. particularly private consumption. The anticipated increase in tourist arrivals will also contribute favourably to these sub-sectors. which were adversely affected by the economic downturn in 2009. commercial roll-out Sectoral Outlook Better performance is expected in most economic sectors as domestic demand strengthens and external demand continues to improve in 2010. In the insurance segment. Intense competition among the service providers. amidst continued policy support. the revival of domestic-oriented activity. such as the wholesale and retail trade and accommodation and restaurant sub-sectors. the finance and insurance sub-sector is expected to register higher growth. the more domestic-oriented sub-sectors are expected to record higher growth. Malaysia Bank Negara Malaysia 0. Outlook for the communication sub-sector is also positive.5 Growth will be broad-based. the anticipated improvement in labour market conditions.3 5. The services sub-sectors that are dependent on domestic consumption. The manufacturing and mining sectors are expected to return to growth as external demand for major products such as electronics. in line with the improvement in manufacturing activity. will provide incentives for private sector activity in the domestic-dependent sectors. while the anticipated increase in the sales of motor vehicles would benefit the general insurance business.9% in 2010. mainly supported by the finance segment. in line with the expected higher tourist arrivals and improvement in domestic tourism activity. Meanwhile.5 6. crude oil and natural gas recovers. benefiting mainly from strengthening domestic demand. which has been on a firm recovery path since the second half of 2009. with most subsectors recording better performance compared to 2009. are expected to improve.7 4. The recovery in external conditions will also raise demand for trade-related services. Growth will be underpinned by strengthening domestic demand. spurred by increasing demand for mobile data and broadband services.6 -1. in line with the anticipated recovery in the global economy. and will remain the key contributor to overall GDP growth. After being adversely affected by the economic downturn in 2009. Similarly.1 2.4 -3. Furthermore.Annual Report 2009 Table 4. In addition.7 3.9 4. which weakened considerably in 2009. Within the services sector. contributing favourably to the services sector. the utilities sub-sector. together with higher business and consumer confidence. the transport and storage sub-sector is projected to return to positive growth in 2010. which would benefit from increased bank lending and higher fee income as the economic recovery gathers momentum. Meanwhile. The trade and manufacturing-related sub-sectors. the improvements in salaries and wages and enhanced financial literacy would contribute to increased demand for life insurance products. benefiting from the continued implementation of the various projects under the second stimulus package and the Ninth Malaysia Plan. Growth will be further supported by improved demand in the passenger segment.5 3. will further enhance growth in all sectors. following the anticipated improvement in trade and manufacturing-related activities.2 Real GDP by Sector (2000=100) 2009p 2010f Annual change (%) Agriculture Mining & quarrying Manufacturing Construction Services Real Gross Domestic Product (GDP) p Preliminary f Forecast Source: Department of Statistics. the construction sector is expected to sustain its growth.

Broad-based expansion is expected across all clusters. automotive and household markets. This projection of export growth is based on the assumption that the global economic recovery will be gradual. The manufacturing sector is poised for strong growth in 2010. Meanwhile. are expected to lead to a narrowing of the current account surplus to RM103. Meanwhile. improvements in exports and capital inflows. The agriculture sector is expected to register a higher growth of 3. The lower trade surplus. apart from additional progress on projects under implementation.7% in 2010. The increase in LNG output will also partly reflect the first full-year of shipment under an export contract with PR China. Furthermore. Balance of Payments On the external front. reflecting improved external demand and strengthening domestic demand. based on the observed momentum of recovery since the end of 2009. The expected stronger external demand. The electronics and electrical (E&E) cluster is projected to turn around with the pick-up in global demand for electronics. besides a continuing increase in productivity from areas replanted with high yielding clones. The mining sector is projected to expand by 2. as exports will be supported by a recovery in the manufacturing and commodity sectors. The chemical industry is expected to improve in tandem with the E&E. In the case of rubber.1% as demand from major export markets for industrial crops. higher rubber prices since the second half of 2009 will continue to encourage increased tapping. particularly from the region. several other major projects identified under the Ninth Malaysia Plan are also expected to take off during the year. While imports of intermediate goods will increase in tandem with the expansion in manufactured exports. On the financial account.3% of GNI in 2010. growth in the primaryrelated cluster will be driven by external demand and higher commodity prices.2% in 2010. improves with better economic prospects in 2010.5%. particularly the regional economies. Also. together with a higher income account deficit. Export recovery is expected to be broad-based. However. with sluggish growth in the advanced economies but stronger activity in the emerging economies. Likewise. The construction sector is expected to maintain a growth of 3. the reduction in import duties on rubber by the PR of China as of 1 January 2010 will further boost its demand for the commodity. particularly with the return of corporate IT spending. In addition. The civil engineering segment will be supported by the continued implementation of projects under the second stimulus package. sustained current transfer outflows and a small services account deficit. are expected to continue in 2010 as the global economic recovery gathers strength. In terms of production. and higher commodity prices is projected to contribute to a further expansion in gross exports in 2010. registering a growth of 11. foreign direct investment inflows and direct investment abroad by Malaysian companies are likely to increase given the improving global and domestic economic conditions. particularly private consumption. This broad-based recovery will continue 89 . reflecting higher output of both crude oil and natural gas following the recovery in demand. where upgrade and replacement of software and equipment were held back during the global downturn. the consumer-related cluster is expected to move in line with the strengthening of domestic demand. especially palm oil and rubber. higher palm oil output is expected during the year following the recovery in yield of fresh fruit bunches and an increase in planted area ready for production. the performance of the construction-related cluster will be influenced by anticipated higher domestic construction activity and infrastructure projects in the region. Gross exports are projected to recover from a low base. the stronger recovery in the domestic economy will also lead to higher imports of consumption and capital goods. the trade surplus is expected to be lower as imports are projected to expand faster than exports.8 billion or 14.Outlook and Policy of the high speed broadband project in selected urban areas and continued expansion of WiMAX services will further contribute to the growth of the sub-sector. improved business and consumer sentiments and continued access to financing will support expansion in both the residential and nonresidential sub-sectors. which were evident in the second half of 2009. while demand for hygiene and medical products will continue to support the rubber products industry.

The outlook for commodity and resource-based manufactured exports is expected to improve. particularly in the E&E industries as well as the oil and gas sector. Meanwhile. are also anticipated to increase. As global FDI inflows are expected to recover only moderately in 2010. Exports and capital inflows are expected to continue improving in 2010 as the global economic recovery gathers strength. communication and professional services. As the bulk of Malaysia’s gross imports are intermediate goods. 90 Meanwhile. services and oil and gas sectors. With global trade. as well as the expected recovery in IT spending by the corporate sector. as imports are expected to expand faster than exports With the anticipation of a recovery in exports and domestic demand. Meanwhile. increasing foreign equity limits and allowing greater operational flexibility to locally-incorporated foreign financial institutions. investment is also expected in the new growth areas such as renewable energy and medical devices. intermediate imports will increase and contribute the most to the import recovery. The services account is projected to record a marginal deficit of RM0. construction.7% of GNI as a recovery in exports is expected to translate into higher repatriations of profits and dividends by MNCs operating in Malaysia. In addition. On the financial account. in tandem with the strengthening demand for manufactured exports. as well as manufacturing sectors with the focus being on regional and other emerging economies. particularly in the financial services sector following the further liberalisation in April 2009. the improvement in FDI in Malaysia is thus projected to be moderate with inflows mainly into the manufacturing. Higher FDI flows are also expected in the services sector. FDI in the oil and gas sector will be supported by rising prices and increasing demand for crude oil as global activity rises. Direct investment abroad (DIA) by Malaysian companies is expected to increase and remain large in 2010 as companies continue to expand regionally and globally.6% in 2010. as higher deficits in the transportation and other services accounts are expected to more than offset the higher surplus in the travel account.7 billion in 2010. profits and dividends accruing to Malaysian companies with investments abroad are expected to remain large. while still sizeable. the recovery of gross imports is expected to be more pronounced. The higher DIA is expected to be channelled mainly into the services. with the higher commodity prices and stronger regional demand likely to be sustained. Imports of consumer goods are also expected to increase with the improvement in consumer spending. supported by higher commodity prices and the improving regional economic outlook. the bulk of the FDI is likely to continue to be in the form of reinvestment by the MNCs for capacity expansion in tandem with the recovery in the E&E industries. and services sectors. oil and gas. The recovery in manufactured exports is projected to emanate from both electronics and electrical (E&E) and non-E&E exports.Annual Report 2009 to be led by intra-regional trade and the gradual pick-up in exports to G-3 economies. tourism earnings are expected to continue to increase with the anticipated improvements in global and regional tourist arrivals and well targeted tourism promotional activities. The current account surplus. will be reduced. Regional and global expansion represents opportunities for . Imports of capital goods are expected to increase as the corporate sector gradually revives investment activity and undertakes new capital investments to increase production capacities. In the manufacturing sector. The income account deficit is projected to widen to 2. investment and tourism activities improving. mainly from the oil and gas. attributable to the continued strong demand for personal computers. payments for transportation. increasing by 14. gross inflows of foreign direct investment (FDI) are anticipated to increase in 2010 amid improving global growth prospects and corporate profitability. which included the issuance of new licenses to foreign financial institutions. smart phones and new electronics gadgets. The stronger growth in the E&E exports is expected to be in both electronics and electrical segments.

2 10.4 59. Based on a survey conducted by Bank Negara Malaysia. demand conditions are not expected to exert pressure on global inflation in 2010.9 65. Malaysia and Bank Negara Malaysia 2010f RM billion 615.4 RM billion Goods Trade account Exports (% annual change) Imports (% annual change) Services Balance on goods and services Income Current transfers Balance on current account % of GNI Capital account Financial account Balance on capital and financial accounts Errors and omissions of which: Foreign exchange revaluation gain Overall balance 141.6 -32.7 -1.2 116.6 -0. in line with the recovery in global and domestic economic activity. despite the expected improvement in economic activity.5% in 2010.8 14.6 553.1% in 2010 (2009: 3.6 17.4 14.4%).3 70. the average salary increment in the private sector is expected to be higher by 4. The cautious attitude of businesses and households.7 -16.7%).6 116. and this in turn will underpin recruitment and salary decisions.3 430. and also increase the potential for greater income repatriation.3 434. Malaysian companies to access a larger consumer market. In the absence of further price revisions and inflation related external developments. benefit the country through having more competitive and globalised Malaysian companies. over a medium term.6 -5.8 10.4 53.8 -19.8 297. With the expected stronger labour demand.7 11.0 -0.6 -12.7 17.0 60.2 144.6 -19.9 -17. Demand prospects for economic growth in the region and the global economy have improved.6 7. Labour Market Outlook Conditions in the labour market are expected to improve further in 2010.9 -21.4 118.1 12.8 498.6 -16. the unemployment rate is projected to decline 91 .7 -12. This projection reflects the improving economic conditions and takes into account the possible adjustments to administered prices and subsidy restructuring by the Government.7 348.6 3.6 -2. The improvements in business confidence and economic activity since the second half of 2009 are expected to gain traction during the year. Inflation Outlook Headline inflation is expected to remain modest at an average of 2 – 2. and to increase their global competitiveness. about 70% of companies surveyed indicated that they would unwind the freeze on salary increases in 2010.3 5.4 112. to increase their scale of operations.7 Annual change (%) 11.8 19.4 -16. lingering excess capacity and the withdrawal of Government stimulus measures. inflation in Malaysia will remain contained.6% of labour force in 2010 (2009: 3.3 Annual change (%) -16.2 -82. services and construction sectors plan to increase employment by about 5% in 2010.8 p Preliminary f Forecast Source: Department of Statistics.1 103.3 Balance of Payments 2009p 2010f Table 4.1 474.7 140.7 13. Malaysia and Bank Negara Malaysia to 3.2 -16.5 -21.Outlook and Policy Table 4.3 31.5 118.8 33. Hence.4 70.2 14. would in varying degrees affect economic activity across countries. Overall.9 141. This would.1 -15. In addition. most firms in the manufacturing.4 External Trade 2009p RM billion Gross exports of which: Manufactured Agriculture Minerals Gross imports of which: Capital goods Intermediate goods Consumption goods Trade balance -83.4 p Preliminary f Forecast Note: Numbers may not necessarily add up due to rounding Source: Department of Statistics. however.

particularly in emerging economies. Sustained consumer confidence. This could generate some upward adjustment on domestic headline inflation. nonfundamental factors could periodically push global commodity prices to higher levels. the ample global liquidity conditions. the Government has announced its intention to revise the subsidy for petroleum products. The output gap will narrow as domestic demand increases. are expected to rise due to lower production amid adverse weather conditions. The price of sugar is also expected to remain firm although lower than the August 2009 peak. The emerging markets’ better fundamentals could also make these economies vulnerable to large scale capital inflows driven by the combination of low global interest rate. However. While there were significant elements of policy support in driving the expansion in economic activity. given that demand conditions are not expected to exert strong pressures on consumer prices. would pose heightened risk of higher commodity prices. On the supply side. the environment of prolonged low interest rates and excess liquidity could encourage greater speculative activities in the commodity markets. The IMF WEO update in January 2010 projected that crude oil prices could trade higher at around USD76 per barrel in 2010 (USD62 per barrel in 2009). if prolonged. The expectation is for private sector demand to strengthen further in 2010. Consequently. Other non-fuel commodities such as food and metals are broadly expected to follow similar trends. It should be noted that while the underlying demand for commodities is expected to remain modest. there were also signs of recovery in private demand. demand pressures on domestic prices are expected to be manageable. excess liquidity and the rising appetite for risks and search for yields. Core inflation is likely to exhibit a benign trend and is not expected to be a source for concern. Emerging economies however. The December 2009 edition of the Food and Agriculture Organisation of the United Nation’s (FAO) Food Outlook maintained that the overall improvement in the global supply and demand balance would keep price increases for food commodities at moderate levels. such capital flows are likely to react suddenly to shifts in global developments and changing expectations. the impact is likely to be transitory and contained. On the domestic front. As a consequence. Global GDP growth picked up greater momentum in the final quarter of 2009. The better fundamentals of the emerging markets. Nevertheless. the accommodative monetary conditions and the Government’s stimulus packages will likely support consumption and investment activity by households and businesses. which implies that the timing and magnitude of the exit from the extraordinary policy measures implemented during the crisis may vary across countries. Producers could face higher and more volatile input costs. imply that these economies will have an important role in supporting global demand over the next few years. the inflows of funds are 92 . This increase is significantly less compared to the sharp increase in July 2008 when oil prices peaked at USD147 per barrel. Rice prices however. Nevertheless. Given the still uncertain international economic outlook. as the relatively tight supply conditions are counterbalanced by recovery in production and reserve drawdown. underpinned by stronger activity.Annual Report 2009 Similarly. are leading the recovery process in the world economy. More subdued demand conditions and above-average inventory levels could moderate the price increases. MONETARY POLICY IN 2010 The global economy entered 2010 on a recovery mode compared to the height of the global crisis in early 2009. the improvement in economic activity since the second half of 2009 is likely to lead to an upturn in global commodity prices. the impact on price pressures is likely to be limited. notably in private consumption. Monetary policy in 2010 will focus on promoting the sustainability of economic recovery The recovery process nevertheless appears to be uneven across countries. as output is recovering from low levels. A comprehensive review on the existing subsidies on other essential items is also being undertaken. especially in Asia.

the overall fiscal policy remains expansionary and will continue to lend support to the recovery process. particularly from regional economies. the prevailing negative output gap will narrow as domestic demand increases. However. the Malaysian economy is expected to strengthen. The restructuring of subsidies and the reemergence of rising global energy and food prices could generate some upward pressure on domestic inflation. while reducing the longer term growth potential of the economy. The ongoing improvement in consumption and investment activities will boost domestic demand and raise national output closer to the productive potential of the economy. it could also result in disincentives to save. fiscal policy will remain geared towards preparing the foundation for a stronger recovery of private sector demand. Nevertheless. and lead to disintermediation. As the economy continues to recover in 2010. The resulting higher volatility in the financial markets could complicate policymaking in the emerging economies where the financial markets are less developed. given that output is recovering from low levels. the resultant pressure on inflation from the narrowing output gap is expected to be limited. while monetary policy remains accommodative and supportive of the economy. FISCAL POLICY IN 2010 Fiscal policy was significantly expansionary in 2009 to prevent the Malaysian economy from sliding into a fundamental economic downturn as the global financial and economic crisis drove the global economy into a deep recession. the assessment is that the potential impact on consumer prices is likely to be transitory and manageable. Therefore. an accommodative monetary policy stance will be maintained to support and strengthen private investment and consumption demand and thus overall economic growth. With price pressures expected to be modest going forward. Key to a sustained economic recovery is a strong resumption of private consumption and investment. 93 . fiscal policy has accorded significant priority towards enhancing the role of the private sector as the driver of economic growth. the normalisation of interest rates is meant to reflect the improving economic environment and to prevent financial imbalances from developing in the economy. Inflation is expected to rise in line with the recovery in economic activity. Such developments can undermine the recovery process. Accordingly. causing savers to move into risky investments. Nevertheless. the Government has announced its intention to undertake a comprehensive review of the subsidy delivery system. Thus. Along with accommodative monetary policy and pro-active measures to support access to financing by the private sector. the economic and financial environment will remain challenging for emerging economies. Core inflation is likely to exhibit a modest upward trend and is not expected to be a source for policy concern. monetary policy in 2010 will focus on promoting the sustainability of economic recovery and ensuring that financing continues to be available to the private sector at a reasonable cost. will also sustain trade and economic activity. On the supply side. Sustained consumer confidence and the accommodative monetary conditions will support consumption and investment activity by households and businesses. Thus. The concern was that maintaining interest rates at too low a level over an extended period could encourage excessive risk taking behaviour. A very high degree of monetary stimulus was considered no longer warranted following the robust recovery and improved economic outlook. As a result. At the same time. and the unhealthy build up of leverage. these measures were successful in mitigating the recessionary impact of the crisis on the Malaysian economy. The Government has announced plans for a gradual consolidation in its fiscal position in 2010. External demand. Domestically. Given the lingering uncertainties surrounding the future growth path of the global economy.Outlook and Policy equally susceptible to be interrupted by episodes of reversals. the economic contraction begun to stabilise as early as the second quarter of 2009. The challenges to intermediating the large and volatile capital inflows could create financial imbalances and misallocation of resources while the sudden and rapid withdrawals of such funds could disrupt financing and real economic activity. With the threat of a fundamental recession having now diminished. the Monetary Policy Committee (MPC) raised the OPR by 25 basis points in March 2010 towards normalising monetary conditions.

the Government will also intensify its public-private partnership programme for several high impact projects. which are currently assessed with a lag of up to a year.5% of GDP). halal products and green technologies. the Government revenue base will be broadened and thus better insulated from the adverse cyclical swing in oil prices.5 Federal Government Fiscal Balance and Debt % change 2009p 2010B -0.4 -7. To maintain a sustainable fiscal position without compromising the overall growth and development objectives.6 206. With the GST. These include privatization initiatives. Currently. For 2010.7 5. and measures that provide a more conducive business environment.4 Debt as % of GDP 80 60 40 20 0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09p 10B Domestic debt -5. regional development corridors and public transportation infrastructure projects.7% of GDP (2008: 41. Among the sectors identified are tourism. the Government has undertaken a study on the feasibility of implementing the goods and services tax (GST).0 56. To further support growth of private consumption.6 157. resulting in a higher deficit of 7% of GDP (2008: 4.2 148. depending mainly on direct taxes and petroleumrelated revenues. the measures that will be implemented and prioritised include the restructuring of the fuel subsidy system which accounts for a significant portion of the Government’s annual outlays as well as a review of the whole system of subsidies and price controls. especially for petroleum related activities.5 -47. Moreover.4 -8. finance and Islamic banking.6 - -20 -40 -60 -80 p Preliminary B Budget Source: Ministry of Finance A positive (+) sign indicates a drawdown in the accumulated realisable assets p Preliminary B Budget Note: Numbers may not add up due to rounding Source: Ministry of Finance of the global economic crisis would be gradually scaled back.3 15.2 0. the revenue base is too narrow. whilst remaining largely accommodative. fiscal policy has taken into account the need to ensure that it will not exert undue strain on the Government’s finances. it is significantly exposed to the swings in the business cycle that has a large impact on government finance.6 -40.1 49. In response to the contractionary influences on the domestic economy as the global economy slipped into a recession. the Government has reduced the personal income tax. to encourage private sector involvement in the economy.3 -12. the large Government support introduced at the height 94 . Government efforts to strengthen private investment and increase the participation of the private sector in the economy were reflected in the measures announced in the 2010 Budget. Some of these projects include the high speed broadband.8% of GDP) and a higher Federal Government debt of 53.3 51. and raised individual tax relief to increase the disposable income of consumers.Annual Report 2009 Table 4.0 3.3 -3. In addition. With a view towards a phased consolidation of the fiscal position. To enhance the efficiency of Government expenditures.7% 6 4 2 0 -2 -4 -6 -8 158.4 189. the Government implemented a sizeable fiscal stimulus in 2009.6% Overall balance (RHS) -7.6 -6. information technology and communication (ICT).5 0. The Government has also announced plans to review the tax assessment system.5 Federal Government Finance RM billion 2009p 2010B Revenue Total expenditure Operating expenditure Gross development expenditure Loan recoveries Overall balance % of GDP Sources of financing: Net domestic borrowing Net external borrowing Realisable assets1 and adjustments 1 Chart 4.5 138.2 2.9 -6. the Government is also providing incentives to several high growth sectors. the 2010 Budget placed emphasis on measures to improve the effectiveness and efficiency of the Government’s revenues and expenditures. Specifically.0% External debt Overall balance as % of GDP 8 53.5 -5. To strengthen its revenue streams.

Apart from raising funds through the issuance of government securities.6% of GDP in 2010. the Government will also issue an RM3 billion retail bond known as 1Malaysia Sukuk. development expenditure will remain high at RM51. Most of the development expenditure will be channeled towards the economic services and education services sectors. Meanwhile. The issuance will also serve as an alternative investment avenue for Malaysians to receive better returns in an environment of low domestic interest rates. the Government has financed its fiscal deficit mainly from the domestic bond market. 95 .2 billion. Given the ample liquidity in the domestic market. the Federal Government fiscal deficit is expected to narrow to 5. Operating expenditure will be lower by 12% from RM157 billion in 2009 to RM138 billion.Outlook and Policy With the implementation of these measures.

the rise of the relatively large emerging market economies. an assessment of the existing high income countries highlights five key economic characteristics. innovation and productivity are central to value creation. Knowledge and innovation-intensive economic activity A high income economy is knowledge and innovation-driven as opposed to investment-driven. Beyond the level of income. The Future: Characteristics of the High Income Malaysian Economy A high income country is defined by the World Bank as a country with an income per capita of more than US$11. Malaysia needs to approximately double its income per capita to become a high income country. Throughout this development process. The existing economic model is being reviewed and policies that support greater competitiveness. given the existing strong manufacturing base. namely: 1. Malaysia has strengthened and deepened its integration with the global economy. while the incidence of poverty has been reduced by more than ten fold. India and PR China (BRIC). where knowledge. While the global landscape has been gradually shifting in this recent decade. but also among countries in attracting investment and human capital. the significant rise of PR China has changed the dynamics of growth in Asia. Favourable structural factors in the emerging market economies. revealed several structural weaknesses in the advanced economies. a faster pace of innovation and the elevation to more knowledge-intensive industries are the strategies to transition Malaysia to a high income economy. This movement towards higher value activity will be complemented by the development of 96 . the current global financial and economic crisis has accelerated this shift. will also intensify competition in the global economy. not only among businesses. For Malaysia. All sectors of the economy are involved in high value economic activity. and subsequently. Firms in these industries will increasingly rely on niche strategies as well as continuous improvements. medical equipment and downstream palm oil. the global economic landscape is increasingly multi-polar with the rising economic importance of the emerging market economies. Vietnam and Indonesia. The crisis has.Annual Report 2009 Transitioning into a High Income Economy: Policy Considerations From Past to Present: Development of the Malaysian Economy Malaysia has achieved significant economic progress since attaining Independence in 1957. movement towards higher value activity will be driven by the existing industries moving up the value chain. First. Russia. so as to effectively benefit from new opportunities while addressing potential challenges. including a large and growing middle class. In this more challenging environment. Importantly. Income per capita has risen by approximately twenty fold in the last four decades. Malaysia is currently confronted with a global economic environment that is changing significantly. developing from a low income to an upper middle income economy over a half-century. strategic initiatives are being taken to strengthen the flexibility of the Malaysian economy in adapting to the changing circumstances. will support domestic demand and thus the continued growth of these economies post-crisis. two distinct developments stand out. from its current level of US$6. such as the BRICs. Of significance.634. The predominantly primary commodity-based economy with a heavy reliance on rubber and tin in the 1960s was transformed by the rise of the manufacturing sector as the main contributor to growth in the late 1980s. however. higher sophistication and greater specialisation.905. by the services sector becoming the main driver of growth since 2000. solar panel manufacturing. all of which will limit the growth potential of these economies in the medium term. Some of the potential areas include advanced electronics. Therefore. Second. Major structural changes have also occurred in the economy. especially the economies of Brazil.

97 . In addition. further integration with the regional economies and other emerging economies will be a key characteristic of the transition to becoming a high value-added economy. is a necessary precondition. In addition. while multinational and large domestic corporations remain important. Second. an increase in the quality of private investment will contribute to a more sustainable growth of high income and high value-added employment. meanwhile. the recent rising trend of investment abroad by Malaysian companies can be expected to continue and over the medium term will bring increased benefits to Malaysia as new opportunities and markets are gained. information and communication technology (ICT). This will primarily involve the provision of enabling infrastructures. will complement this rise in capital sophistication to deliver high value products and services. Government as a facilitator of economic growth As the economy will be private sector-led. particularly those that result in inappropriate price signals. such as logistics. For Malaysia. Nevertheless. as they grow in size and strength. 5. Greater balance between domestic and external demand Consistent with the ongoing trend. such as health and education. small and medium enterprises (SMEs) will form the backbone of the economy. For markets to function effectively and efficiently. increasingly integrate with the region and the rest of the world for greater access to larger markets. Competition-driven private sector-led economy Economic activity in a high income economy is led by the private sector in a competitive environment. 4. the focus of the Government is on providing a competitive enabling environment for the efficient functioning of the private sector. First. In this role. Whilst competitive advantage in the external sector can remain key. a higher and larger middle income group will support even higher and more sophisticated private consumption. Close collaboration between the public and private sectors is necessary to effectively achieve these objectives.Outlook and Policy the knowledge-intensive services sub-sectors. a comprehensive technology and innovation policy would encourage high value activity and knowledge creation. 3. the domestic sector needs to have a greater role in contributing to growth. a strong institutional framework needs to be in place to address the potential for market failure and to ensure a competitive and fair business environment. 2. In particular. innovative and competitive SMEs will be a critical feature of a high income Malaysian economy. Alongside these knowledge-intensive services. Competition will contribute to the efficient allocation of resources and the creation of vibrancy and dynamism in economic activity. and entertainment. the absence of market distortions. including public transportation and modern internet-related infrastructure. will also provide strong support to industrial growth. a high income economy needs to have a more balanced model of development. as well as the provision of security and basic social services. Deeper global and regional integration Given that the domestic market in Malaysia is small. These modern services include computing. Deeper integration with the international markets will encompass both final demand and the supply of factor inputs. a strong base of highly dynamic. the role of the Government has to shift to become a key facilitator of growth. firms will. Of significance. High productivity. established manufacturing-related services. research and development (R&D). marketing and branding. health and education. Private investment will need to increasingly shift away from being predominantly in construction and low value machinery towards advanced automation and R&D to facilitate movement up the value chain as well as to support innovation.

Second. amongst others. the prevention of market failures and an effective protection of property rights. give examples of factors that should be resisted (Figure 2). Although the broad development literature does not provide a single clear recipe for economic development. a culture of innovation needs to Figure 1 Five Pillars for Sustained Economic Progress Macroeconomic Stability Leadership and Governance Market-Driven Resource Mobility Key Prerequisites for High. however. market distortions have ranged from price controls and energy subsidies.Annual Report 2009 Strategies for a Sustainable and Dynamic Malaysian Economy Despite relatively distinct views as to the characteristics of a high income economy. with collaborative efforts within and between the private and public sectors as well as academia. particularly in ensuring stability. 98 . which provides an environment conducive for high savings and business investment in an environment of reduced uncertainty. foster a competitive environment and develop an efficient enabling infrastructure. It has been recognised that fundamental reforms will be required in several areas of the economy. Sustained Growth Culture of Innovation across Society Strong and Effective Institutional Regime be instilled nationwide. such policies over a prolonged period of time usually involve high costs. an effective regulation of competition. marketdriven resource mobility across all markets is essential for the efficient allocation of resources in the economy. established strengths and foundations will provide the support for continued economic development. Fourth. Malaysia has the potential to capitalise on existing comparative advantages and develop deeper capabilities and expertise. developing a competitive environment and providing the enabling infrastructure. there must exist a strong institutional regime with adequate enforcement. encompassing. three key strategic priorities have been identified. offer some indication that five factors are particularly important (Figure 1). to the open-ended protection of specific sectors and industries. In this regard. To successfully transition into a high value-added economy. Across many developing economies. namely to nurture a quality workforce. While there may be circumstances to justify the temporary adoption of some of these measures. First is macroeconomic stability. For Malaysia going forward. Of significance are market distortions that are put in place to artificially sustain cost competitiveness. experiences do. Third. The experiences of the high income countries do. there is no consensus on the requirements to successfully become a high income economy. however. Fifth is that strong leadership and governance must continue to have an important role.

To ensure that quality is continuously upheld. 2. In this regard. Market distortions would potentially lead to considerable inefficiencies and wastage. a technical education system is being enhanced to successfully provide the skilled talents required for the advanced manufacturing and services sectors. While reform of the education system is a critical priority. guided by undistorted price signals. innovative and entrepreneurial workforce is essential to drive the value creation necessary in a high income economy. strong emphasis is being placed on strengthening the learning institutions in order to ensure top-quality teaching. 99 . performance of the premiere polytechnics will be benchmarked against renowned technical institutions. embarking on the reform of its education system into one that is capable of developing human talent equipped with the relevant skills and competencies required to enhance productivity and economic development. Malaysia is. There have also been ongoing efforts to engage with the private sector in ensuring the relevance and effectiveness of the education system in meeting the needs of the industry. including those in Germany. to efficiently allocate the scarce resources. Therefore. Quality workforce with an instilled culture of innovation A knowledgeable. Austria and Sweden. a series of measures has been undertaken to increase the flexibility to employ expatriates. while protectionist policies undermine the fundamental incentive structure needed for a thriving entrepreneurial society. therefore. In addition. Relating to this. Competition-driven and efficient markets Sophisticated high value economic activity requires well-functioning market mechanisms. world-class education and training are critical for developing skills and creative talent.Outlook and Policy Figure 2 Global Experience in Common Constraints to Growth Pillar 3: Effective Institutional Regime Pillar 1 : Macroeconomic Stability Pillar 4: Innovation Discipline across Society Pillar 2 : Market-Driven Resource Mobility Pillar 5: Leadership & Governance 1. flexibility is being given to draw on the global flow of talent. while initiatives are being put in place to reduce brain drain. the salary and reward schemes for university lecturers and teachers are currently being improved to better attract and retain quality educators. In this regard.

In an effort to expand broadband services nationwide. Third. 3. First. Malaysia needs to develop new growth areas and adopt a new economic model for development. Extensive and efficient enabling infrastructure Both traditional and modern infrastructures have a key role in enabling the transition towards a high value-added economy. with the measures in place impacting various industries and sectors in the economy. These market distortions are highly intertwined in nature. Malaysia will be ready with the necessary foundations to take advantage of the emerging and rapidly changing regional and global trends in order to transition into a high value-added economy. 100 . As Malaysia adopts these changes. however. modern internet-related infrastructure and energy efficiency-related infrastructure. in this current process of transitioning into a high value-added economy. As Malaysia already has in place high quality physical infrastructure including roads. be gradual and sequenced to avoid disruptions to the economy. Throughout Malaysia’s development process of more than 50 years. Similarly. as well as to enhance the necessary skills and capabilities required to take advantage of the new opportunities. Conclusion The Malaysian economy is currently positioned at a critical juncture of its development and future progress will be confronted with many challenges. has embarked on a RM11. Equally important is for the savings from the removal of the existing broad-based distortions to be reallocated as more targeted subsidies and direct income transfers to support the low and middle income groups. in partnership with Telekom Malaysia. support needs to be provided to the low income group to minimise the negative impact during the transition. Such subsidies heavily burden the Government and divert resources away from other investment activities. a number of market distortions exist in several areas of the Malaysian economy. the focus is now on the development of an efficient public transportation system. Second is the importance of transparency to allow for public awareness on the new opportunities and constraints. policies should be gradual and sequenced in order to allow businesses and households to adjust to the new environment. With the development of an enabling and competitive economic environment comprising of a quality workforce and an efficient infrastructure. The removal of such distortions should.Annual Report 2009 At present. policy implementation needs to take into account three important considerations. ports and utilities. which are important in enabling high value activity and improving overall economic productivity.3 billion High Speed Broadband initiative. the economy has exhibited the ability and flexibility to move to new areas of comparative advantage and to new areas of growth. the Government.

Communications and Organisatonal Development 103 104 105 111 113 119 Overview Governance White Box: The Central Bank of Malaysia Act 2009 Communications Organisational Development Organisation Structure 101 .Governance. Communications and Organisational Development Governance.

Annual Report 2009 102 .

the Board’s oversight function was further strengthened through the establishment of two additional Board committees with specialised roles and functions to reinforce the checks and balances. This was complemented by the learning and knowledge management initiatives to provide continuous support for talent development. A key aspect of the CBA is aimed at providing greater clarity on the Bank’s mandates and to equip the Bank with enhanced capacity to undertake its mandate. Risk management capabilities were also reinforced further through the enhanced Enterprise Risk Management (ERM) framework. continued investments were made in the profiling and development of the talent pool. In addition. The framework embeds risk management considerations in all areas of strategic importance such as policy making and key operations of the Bank and allows a more robust oversight of the organisation’s risks and controls. This is to ensure the Bank remains effective in discharging its mandate and well positioned to meet the challenges posed by the rapidly changing environment. communications and talent management. Greater strategic engagement with a wide range of stakeholders has heightened understanding and awareness of the Bank’s policy actions and measures. In line with this. high-level attention and interventions are continuously made to enhance the strategic orientation of the Bank. particularly in light of the complex and challenging environment facing central banks today. The focus on talent management is aimed at ensuring a solid talent pipeline. governance. As a strategy-focused organisation. A significant development during the year was the enactment of the new Central Bank of Malaysia Act 2009 (CBA) on 25 November 2009. The Plan provides clarity to the organisational goals and the alignment of the resources of the Bank towards achieving these objectives. Communications and Organisational Development OVERVIEW Emphasis on governance. It also institutionalises a more robust governance framework that ensures a high level of accountability and transparency. The communications function of the Bank continued to have a crucial role in sustaining stakeholders’ confidence amidst the volatile environment. Towards this end. This enables solid and informed decision-making by Management. ICT management remained focused on the use of technology solutions and leading-edge infrastructure to enable efficient operations in a number of business functions. communications and organisational development initiatives in 2009 aimed at strengthening the performance and effectiveness of the Bank in delivering its mandate. Efforts were undertaken to ensure better alignment of learning solutions to the requirements of the Bank through increased customisation of learning arrangements. The timely dissemination of economic and financial information has also facilitated the public and businesses in making more informed decisions. improved flagship programmes and e-learning. with the view of inculcating a strong risk management culture by increasingly empowering the business units to identify and manage risks within their functional areas. Ensuring proper job fit reflects the Bank’s continued commitment towards building a high performance workforce that will support the ability of the Bank to deliver the strategic outcomes. and to contribute towards better decision-making in the Bank. The implementation of the Plan also facilitated the evaluation and review of the Bank’s strategies and performance to ensure the organisation is outcome-based and continues to achieve its desired strategic results. 103 . During the year. Of importance in 2009 was the successful commencement of the Bank’s 3-year Business Plan. efforts were also undertaken to review both the existing framework for Financial and Operational Risk Management. while the career growth policies and framework were reviewed to ensure the Bank’s talent management strategies remain relevant.Governance. During the year. focus continued to be on strengthening organisational capacity and capability through the further enhancement in the areas of strategic management. risk management.

A key aspect of the CBA is the adoption of a more holistic approach that provides greater clarity to the Bank’s mandates and enhances the Bank’s capacity in performing its functions. including macroprudential policy responses. It also strengthened the capacity of the Bank to enhance financial sector resilience especially in light of the increasingly challenging business landscape. the Bank in collaboration with external agencies. the legislation of the Monetary Policy Committee (MPC) also provides the necessary safeguards through the strengthened governance and accountability framework. In strengthening the Board’s oversight on the management and performance of the Bank. accountability and transparency. Consolidating and enhancing the Bank’s governance framework The enactment of the new CBA on 25 November 2009 represented an important part of enhancing the governance framework of the Bank. Deliberations on micro-prudential measures to emerging risks within individual financial institutions with broader implications for financial stability are also consolidated under the Committee. The Committee is responsible for reviewing developments affecting risks to financial stability and deciding on actions. Several key initiatives were undertaken in 2009 to further strengthen the Bank’s governance to ensure that it remains effective and efficient in carrying out its functions. to nominate members of the MPC and other 104 . actions taken by the Bank to avert such risks as well as ongoing initiatives to strengthen the foundations for financial stability. or resolution actions involving financial institutions that are no longer viable. and provides the enabling legal framework to address new and emerging risks and challenges. The CBA takes into consideration the changed environment within which the Bank is operating. The Bank’s public accountability for financial stability is additionally supported by the publication of an annual financial stability report which provides an assessment of risks to financial stability. It also reinforces the existing governance practices and provides the necessary checks and balances to ensure accountability and sound decision-making. Recommendations by the Bank on actions that affect institutions that are not regulated by the Bank. which are important in further enhancing the quality of decision-making in the Bank. must be further approved by an independently constituted Financial Stability Executive Committee established under the CBA. the Board Risk Committee and the existing Board Audit Committee. The operationalisation of the new MPC in January 2010 comprising committee members with the required skills profile and competency mix is aimed at further enhancing the Bank’s effectiveness in achieving the objective of monetary stability. These are the Board Governance Committee. GOVERNANCE An essential component of a performance-based organisation is sound governance. The Board Governance Committee was established to review the effectiveness and to recommend the principles and practices of governance in the Bank. At the same time. the CBA institutionalises the autonomy of the Bank in the formulation of monetary policy and provides greater flexibility in monetary policy implementation. To ensure the sustained effectiveness of the Bank in performing its primary functions. the new legislation has institutionalised the establishment of two additional Board committees and an existing Board committee whose members comprise non-executive directors of the Bank so as to ensure independent oversight over the Bank’s operations. expanded its technical assistance in the areas of institutional capacity building. to address systemic risks.Annual Report 2009 As part of the continuous effort to enhance regional and international cooperation. Firmly embedded in this new and forward-looking legislation are the revised corporate governance framework and processes that have been further streamlined and strengthened while maintaining the governance principles of independence. This allows for more integrated assessments of appropriate responses to identified risks. Oversight of the Bank’s mandate for financial stability is provided through the Financial Stability Policy Committee. It enables the Bank to be in a greater state of readiness to function more effectively. financial inclusion and Islamic Finance. The mandate of promoting financial stability is also made explicit in the CBA. particularly where the actions with respect to individual institutions will invoke exigent powers accorded to the Bank under the CBA.

In giving effect to the above objects and functions. progressive and inclusive financial system. the body corporate which was established under the Central Bank of Malaysia Act 1958. The Act modernises the central banking law of the country and brings greater clarity and focus to the mandates of the Bank and provides the Bank with the necessary powers and autonomy to continue to undertake its mandates effectively. To ensure the soundness of monetary policy decisions. the Bank is accorded flexibility to conduct monetary operations through a broad range of instruments (see box article “Monetary Policy Process under the Central Bank of Malaysia Act 2009”). (f) promote a sound. the requirement for the publication of a monetary policy statement following every MPC meeting and the processes for the decision-making by the MPC. Communications and Organisational Development The Central Bank of Malaysia Act 2009 Introduction The Central Bank of Malaysia Act 2009 (“the Act”) which came into force on 25 November 2009 heralds a new era for central banking in Malaysia. Monetary stability The Act institutionalises the existing practices of the Bank for the formulation and implementation of monetary policy with the establishment of the Monetary Policy Committee (“MPC”). (d) provide oversight over the money and foreign exchange markets. To implement the decisions of the MPC. (h) promote an exchange rate regime consistent with the fundamentals of the economy. Monetary independence. (b) issue currency in Malaysia. continues as the central bank for Malaysia under the new Act notwithstanding the repeal of the 1958 Act. the Bank is required to have regard to the national interest. In promoting monetary stability. The exchange rate regime will continue to be determined by the Minister of Finance on the recommendation of the Bank. (c) regulate and supervise financial institutions which are subject to the laws enforced by the Bank. banker and financial agent of the Government. (e) exercise oversight over payments systems. (g) hold and manage the foreign reserves of Malaysia. The Act also provides that the primary functions of the Bank are to: (a) formulate and conduct monetary policy in Malaysia. the Act requires the Bank to pursue a monetary policy which serves the interests of the country with the primary objective of maintaining price stability while giving due regard to the developments in the economy. Bank Negara Malaysia. and (i) act as financial adviser. 105 . the Act incorporates extensive safeguards that include setting the criteria for the appointment of MPC members. Commensurate with these powers and autonomy of the Bank. has now been legislated for in the Act. the governance framework has been strengthened with the accountability and transparency of the Bank significantly enhanced. The Bank will autonomously conduct the foreign exchange operations to promote the efficient and effective functioning of the exchange rate regime and the foreign exchange market. Mandates The Act states the principal objects of the Bank are to promote monetary stability and financial stability conducive to the sustainable growth of the Malaysian economy. which has been enjoyed by the Bank in the 50 years of its existence and which is key to the effective formulation and implementation of monetary policy.Governance. The Act is a completely new piece of legislation which replaces the Central Bank of Malaysia Act 1958.

The Bank continues to act as lender of last resort and may now additionally extend liquidity assistance to entities not regulated by the Bank but that are regarded as systemically important. 106 . another financial institution or person. Financial inclusion The Act makes an explicit provision for financial inclusion to be incorporated as one of the primary functions of the Bank. Expanded powers have been given to the Bank to promote financial stability including the power to obtain information for the purpose of identifying and monitoring risks to financial stability and undertake pre-emptive actions. The Bank is empowered to issue rules. the Act empowers the Bank to establish funds to provide financing in exigent circumstances or to any segment of the economy to promote financial inclusion. the Act has put in place an independent valuation process. Actions that may be taken by the Bank include purchasing capital instruments. The Act also empowers the Bank to facilitate the resolution of financial institutions which are in financial stress to ensure swift and orderly resolution. The Act further sets out a clear accountability framework for such actions and where such actions involve the transfer of business or capital instruments. For this purpose. the Bank has also been empowered to coordinate with other financial regulatory authorities on joint efforts in crisis prevention. The Bank may also appoint a self-regulatory organisation for the foreign exchange market and the market for derivatives related to currency. securities and other financial instruments that are traded in this market. financing the purchase of the business or capital instruments of such institutions. The Act gives due recognition to the Islamic financial system which operates in parallel with the conventional financial system and also mandates the Bank together with other agencies in Government to promote Malaysia as an international Islamic financial centre. standards. to develop and maintain the orderly conditions and the integrity of these markets. thereby minimising the impact and costs of the failure of a financial institution to the domestic economy and to preserve public confidence. the orderly functioning of the foreign exchange and money markets or public confidence in the financial system. codes. These markets are core components of the financial system and have significant implications for the resilience of the financial system. the Act sets out a legal framework for the further development of the Islamic financial system in Malaysia. The Act gives the Bank the necessary powers to minimise the likelihood and impact of adverse developments that may affect financial stability including the financial intermediation process. Islamic finance Building on the existing legislative infrastructure for Islamic finance including the Islamic Banking Act 1983.Annual Report 2009 Financial stability The duties and powers vested with the Bank under the Act establish the Bank as the financial stability authority for Malaysia. and transferring to and vesting the business or capital instruments of these institutions in the Bank. the Takaful Act 1984 and the Government Funding Act 1983. Financial inclusion is vital for creating balanced sustainable economic growth and provides the opportunity for all segments of the economy to benefit from economic progress. principles or guidelines for these markets. Money and foreign exchange markets The Act empowers the Bank to have oversight of the money and foreign exchange markets and the market for derivatives related to currency. securities and other financial instruments that are traded in these markets. management and resolution (see box article in Financial Stability and Payment Systems Report 2009 “Safeguarding Financial Stability under the Central Bank of Malaysia Act 2009”). Given the increased interconnectedness between the domestic financial system and the global financial system.

Board Audit Committee and the Board Risk Committee. Bank for International Settlements and any other international organisation as provided under federal law. The Board Governance Committee is responsible for examining and recommending the budget and operating plan of the Bank to the Board for approval. The Act provides that new members to the Shariah Advisory Council will henceforth be appointed by the Yang di-Pertuan Agong in view of the enhanced role of the Shariah Advisory Council. The Board Audit Committee is responsible for assisting the Board in its oversight of the integrity of the accounts and financial statements of the Bank. whose members are non-executive directors. in the International Monetary Fund. monetary authorities or international financial institutions to promote monetary. Where a question concerning a Shariah matter arises in any court proceedings or arbitration relating to Islamic financial business. The Bank shall also continue under the Act to exercise the rights and perform the obligations arising from Malaysia’s or the Bank’s membership. The Board of Directors is responsible for the general administration of the affairs and business of the Bank and the approval of the budget and operating plan of the Bank. Communications and Organisational Development Under the Act. Financial adviser. the Bank will continue to act as the financial adviser. 107 . the oversight powers of the Board of Directors. the court or arbitrator is required to refer such question to the Shariah Advisory Council for a ruling.Governance. in particular. The Bank. banker and financial agent to the Government As in the Central Bank of Malaysia Act 1958. The range of assets which the Bank can hold has been enlarged to include securities and financial instruments including derivatives that are approved by the Board of Directors. the Board is empowered to issue by-laws. the Act also provides for the Bank to advise the Government generally on economic matters that are within the competence and expertise of the Bank. financial or economic co-operation at the bilateral. the Shariah Advisory Council which was established under the Central Bank of Malaysia Act 1958 continues to exist with its current members appointed by the Minister of Finance. For the purposes of carrying out its oversight function under the Act. the effectiveness of the internal control system. The ruling made by the Shariah Advisory Council is binding. is also empowered to issue regulations or directions to financial institutions to discharge the Government’s international obligations under the resolutions passed by the United Nations Security Council. banker and financial agent to the Government. The Committee will also recommend the persons to be appointed to the MPC and other Committees of the Bank. The Board Risk Committee is responsible for assisting the Board in the oversight on the management of the enterprise risks of the Bank. In addition. International co-operation The Act empowers the Bank to engage in international co-operation by participating or providing financial resources in any arrangement or initiative with other central banks. regional or international level. Islamic Financial Services Board. the performance of the internal audit function and compliance with legal and regulatory requirements. The Bank is required to manage the foreign reserves in accordance with the policies and guidelines issued by the Board of Directors. The Board in its oversight role is assisted by the Board Governance Committee. as the case may be. with the approval of the Minister of Finance. Management of foreign reserves The Bank will continue to manage the foreign reserves of Malaysia. Governance The Act strengthens the general governance framework of the Bank.

the Bank’s statement of assets and liabilities on a fortnightly basis and its annual financial statements and report within three months from the close of the financial year. a mechanism has been put in place in the Act to resolve differences between the Minister and the Bank on such policies. The Act also requires for the annual financial statements and report of the Bank to be laid in the Houses of Parliament within three months from the close of the financial year of the Bank. the annual financial statements and report have to be published within three months from the close of the financial year. In this respect. see box article “Monetary Policy Process under the Central Bank of Malaysia Act 2009” and box article in Financial Stability and Payment Systems Report 2009 “Safeguarding Financial Stability under the Central Bank of Malaysia Act 2009”). 108 . The Bank is required to submit to the Minister.Annual Report 2009 Under the Act. while the Bank is required to publish the statement of assets and liabilities of the Bank on a fortnightly basis. The Bank is required to keep the public informed of the monetary policy decisions of the Bank after every meeting of the MPC by publishing a monetary policy statement which shall include the rationale for the decision. Accountability The Act provides for the accountability of the Bank to the Parliament. The Bank continues to be accountable to the Parliament and the Public Accounts Committee under the Houses of Parliament (Privileges and Powers) Act 1952 and the respective Standing Orders of the Houses of Parliament. This is consistent with the Board’s duty to keep under constant review the performance of the Bank in giving effect to its objects and functions and the use of the resources of the Bank (for a more detailed discussion of the governance aspect of monetary stability and financial stability functions of the Bank. Conclusion The Act provides a comprehensive legal foundation for the Bank to ensure monetary stability and financial stability and to foster a progressive. The Bank is also required to keep the Minister informed of the policies relating to the principal objects of the Bank. In the event the differences are not resolved. the Governor and Deputy Governors are answerable to the Board for their actions and decisions. resilient and inclusive financial system to meet the challenges of the rapidly changing financial and economic landscape of the 21st century. In the event the differences remain. the mechanism provides for the matter to be tabled to the Cabinet for a determination of the policy to be adopted by the Bank. If the Houses of Parliament are not in session at that time. Additionally. the annual financial statements and report of the Bank have to be laid at the next session of the Houses of Parliament. the matter is to be laid before the House of Representatives. the Minister of Finance and the public in general.

authority and responsibilities of the Internal Audit Department (IAD). The function of the Board Audit Committee remains to assist the Board in its oversight of the integrity of the accounts and financial statements of the Bank.Governance. the collaborative approaches adopted by the Bank include the conduct of bilateral meetings. While the objective of the exercise was aimed at managing the risks associated with procurement activities in the Bank. the Bank centralised the management of its involvement in external committees and organisations. To balance the effectiveness and efficiency of operations with good risk management practices. Meanwhile. Communications and Organisational Development committees and to evaluate the roles of the Board and Board committees. the establishment of the Board Risk Committee. Central Banking Services and Corporate Services Departments. the Board Risk Committee assists the Board in the oversight over the Bank’s management of enterprise risk through identification. which defines the purpose. Amongst the key initiatives was the transformation of the Risk Management Department. To further strengthen the governance in external engagements. 109 . Within the area of procurement management. Governance in external engagements As financial systems and economies become increasingly connected. assessment and management of risks that could affect the performance of the Bank. Enhanced risk management governance structure Best practices in risk management dictate the need for constant improvement in the governance and risk culture at all levels of the organisation. other key considerations included timely delivery of products and services by vendors and suppliers as well as ensuring fair business practices. The charter was revised to better align the audit activities to support the functions of the Board Audit Committee and to support IAD’s adoption of a risk-based auditing framework. Another key function of the Committee is to examine and recommend to the Board the budget and operating plan of the Bank for approval. the Board Audit Committee approved the Bank’s revised Internal Audit Charter. the effectiveness of the Bank’s internal control system. the conceptualisation of enterprise risk management approach and the adoption of a risk-based auditing methodology. Enhanced internal controls and risk management In March 2009. a centralised electronic repository to capture the relevant events and issues to the Management. particularly in the areas of trade and investments. Risk Management Approach Risk Management is an integral part in the Bank’s governance framework to safeguard its reputation and to ensure the safety and soundness of the Bank’s assets and operations. the flow of information from the Bank’s external engagements to the organisation was also enhanced through the development of the Management Insights. activities that promote the Bank’s engagements with external organisations have also been important in achieving the objectives of the Bank and its key stakeholders. efforts were also expended in the review and rationalisation of the application of risk mitigating instruments by the Bank. In 2009. two significant changes took place in the risk management of the Bank. Since 2007. and the exchange of information to combat activities relating to money laundering and terrorism financing. with the view of enabling more robust and informed decision-making. the rationalisation of the management structure and the strengthening of the coordination between the risk management and internal audit functions were also carried out. The Bank undertook periodic review and monitoring to ensure risks are identified and adequate controls are in place to mitigate these risks. performance of the internal audit function. At the same time. policy making and operations of the Bank. financial surveillance and regulations. and the Bank’s compliance with legal and regulatory requirements. The implementation of ERM contributed significantly to the more robust oversight. the Bank has adopted an Enterprise Risk Management (ERM) approach to better manage risks in a multidimensional manner in the achievement of the key objectives across areas outlined in the Business Plan and in the strategic initiatives. and the approval of the enhanced Financial and Operational Risk Management frameworks by the Risk Management Committee (RMC). controls and discipline that drive continuous improvement in the Bank’s risk management capabilities. entering into Memoranda of Understanding (MOU). With the activities being centrally coordinated by the International.

In 2009. It also gives an independent assessment of the significant risks from an enterprise-wide perspective and provides an evaluation on whether these risks are being sufficiently managed. 110 . reputation and other risks while ensuring appropriate risk management processes are in place and functioning well. In addition. Financial and Operational Risk Management frameworks and ensuring all elements within the frameworks are functioning as intended. Significant risk issues are raised by two sub-committees under RMC i. the Bank adopted a ‘three lines of defence’ mechanism. the management of financial exposures and commitments to external parties. The third line of defence resides within the Audit function. assessing. failure to attain objectives or damage to the Bank’s reputation. All financial risk exposures were consolidated and analysed in their totality in terms of their impact on the balance sheet and the need for provisioning. procedures and limits. The Committee also oversees the Management’s activities in identifying. RMD also collaborates with all operating units in identifying. credit and operational risk. This function provides corporate assurance and verification of the efficacy in the implementation and overall validation of the Risk Management Framework. market and liquidity risks’. engages with risk owners/takers and looks at risk oversight across all risk types. The FRMC focuses on monitoring. provide important platforms to assist the RMC in making informed decisions on both financial and operational risks. if necessary. Inputs for the stress-test model include the macroeconomic outlook and statistical assumptions to anticipate any significant variations in future expenditure. The initiatives are intended to build a strong risk management culture in the Bank by empowering line departments to manage risks within their own functions. These risks are monitored and managed to be within established policies and guidelines as approved by the Board of Directors. Independent treasury risk management The Treasury Risk Management section (TRMS) of the Investment Operations and Financial Market Department is responsible for managing the risks in international reserves in the key areas of market. the Bank’s three year projections on major expenditure items were stress-tested based on various scenarios and further analysed and deliberated at the FRMC. measuring and monitoring their risk exposures. market. as well as the operationalisation of the Enterprise. including the financial sustainability of the current and future operations which include credit. mitigating and managing risks within their area of operations. This includes the development of policies. It also provides an oversight function on key financial risk management processes.. TRMS is independent of the investment activities and provides the necessary checks and balances through its direct reporting to a dedicated Deputy Governor. The Risk Management Department (RMD) is responsible for developing and maintaining the risk management framework of the Bank.Annual Report 2009 The primary objective of the Board Risk Committee is to provide oversight on the management of risks faced by the Bank that could lead to financial losses. The second line of defence resides within the risk management function. each headed by a designated Deputy Governor. which is chaired by the Governor. These units are to ensure that their day-to-day activities are carried out within the established risk policies. This function assumes both the monitoring and advisory role. The RMC continues to be the main forum for focused and regular deliberation of organisational risks and also ensures effective risk management within the Bank.e. Managing the Bank’s financial risk Financial Risk in the Bank is defined as ‘the risks associated with the Bank’s management of its financial assets and liabilities. The risk management function of the Bank is primarily driven by the RMC. Financial Risk Management Committee (FRMC) and Operational Risk Management Committee (ORMC). To facilitate this. and risk issues are given due consideration. operational. actively challenges assessments by the first line of defence. In addition. mitigating and managing credit. The line departments are the first line of defence in managing the risks and are responsible for identifying. The two sub-committees. reporting and assessing the sustainability of financial resources to support the Bank’s operations. tools and methodologies. processes. liquidity. disruptions to operations. the financial risk and operational risk frameworks were reviewed and enhanced further to strengthen the existing governance structure within the Bank.

In 2009. the overall credit exposure of international reserves remained low as the Bank’s investments were focused on high grade assets. Selected staff were notified to head for the recovery centre with various modes of transport. The Bank continued to strengthen the readiness and response capabilities of line departments to business disruptions.Governance. Both the market and credit risk policies will be enhanced with granular analysis of risk factor and emerging trends. car. a review of the risk-return profile on the approved asset classes was also conducted in view of the significant changes in volatility and liquidity for some of the instruments. To reinforce staff awareness. RMD organized Desktop Walkthrough Exercises for critical support departments so as to further enhance their Business Continuity Plans. The discussions on technology risks covered areas such as infrastructure. people and external events leading to financial losses. COMMUNICATIONS Sustaining stakeholders’ confidence in the challenging environment The full impact of the global crisis was felt in 2009 and the Bank played a major role in ensuring the stability and sustainability of the economy and the financial system. security and access management as well as the relocation to the new data centre in 2009. Assessments were made to evaluate system readiness and the ability of the staff involved to respond appropriately to a crisis situation. the Bank activated its Pandemic Influenza Plan and activated split operations for three months to minimize the risk of contagion whereby a number of staff from critical functions were stationed offsite for the period as a contingency measure. Business Continuity Management in enhancing Bank’s readiness and response capabilities During the year. the investment guidelines for reserves management have also been revised to further strengthen the governance process and enhance its clarity covering all related reserves management activities. This external risk triggered some concern in mid-2009 given its implications on business operations as affected staff were required to observe the quarantine or ‘work from home’ requirements. With the new CBA coming into effect. a new performance attribution model was also implemented to allow more comprehensive and detailed risk-adjusted return analysis. reputational damage or inability to achieve business objectives’. a sound procurement framework and a robust internal audit function that has a crucial role in monitoring operational risks. taxis and train. In ensuring operational risks are well managed and amalgamated in the day-to-day operations. The Bank 111 . Key measures at an organisational level to address operational risks include effective budgetary controls. In response to this risk. manpower. Communications and Organisational Development Amidst the highly volatile and uncertain global financial markets in 2009. Managing the Bank’s operational risk Operational risk in the Bank is defined as ‘the risk resulting from inadequate or failed systems. ORMC deliberated on significant risk issues affecting controls. the Bank will continue to strengthen its risk management framework. Investment transactions were conducted mainly with strong international financial institutions. Further focus will also be placed on the governance framework to ensure continued effectiveness of the risk management process and the independent reporting line of the risk unit within the TRMS. processes. Moving forward. adherence to the code of conduct and improvements in working conditions. Analysis and discussion on people risks covered a wide range of issues including on competencies and skills. much attention was given to the outbreak of Influenza A (H1N1). This was undertaken to ensure that the portfolio risk exposure of reserves remain within the risk tolerance of the Bank. At the same time. heads of departments continue to have direct responsibility in ensuring that risk management practices are integral in the daily operations and that all risks are sufficiently addressed. For the Bank’s investment portfolio. Periodic assessment of the Bank’s Recovery Centre capacity was conducted through quarterly live-run exercises. efficiency and effectiveness of the main levers of the Bank’s operations with specific focus on people risks and technology risks. vendor management. Several initiatives were introduced such as the ‘surprise people readiness’ exercise which was also conducted for all critical departments. The Crisis Management Committee drew up a travel advisory for staff and monitored closely the severity of the pandemic on a weekly basis.

The communication initiatives aimed at increasing the awareness of SME products and services. The establishment of Danajamin Nasional Berhad was also highlighted as part of efforts to ensure the continued flow of credit to businesses through the provision of financial guarantee insurance to private debt and Islamic securities issues. include the Working Capital Guarantee Scheme (WCGS) and Industry Restructuring Financing Guarantee Scheme (IRFGS) which was part of the Second Stimulus Package. regional and domestic economic and financial developments. the number of cases handled in 2009 showed a marked increase of more than 90% to 253. in particular to SMEs. It also provided the basis and considerations in determining the MPC’s decision. It also provided advisory services to improve financial management and minimise the impact of the crisis on their businesses. BNMTELELINK and the Complaints Management and Advisory Unit. 112 . In addition to the ICC. a voluntary forum for corporate borrowers and creditors to work out feasible debt resolutions without having to resort to legal proceedings.Annual Report 2009 continuously provided assessments of the global developments and highlighted their impact on Malaysia and the policy measures implemented to keep the business community and the public well informed. the public also has access to the Financial Mediation Bureau (FMB) and the Credit Counseling and Debt Management Agency (AKPK). across the nation to explain to the public and businesses on the availability of financing through the various mechanisms and alerting the public to be vigilant against various illegal deposit-taking and fraudulent schemes. The Bank carried out and participated actively in more than 90 road shows. While FMB helps mediate disputes between customers and financial service providers.801 cases. providing important information on areas of potential policy concern. Although the guarantees covered RM5 billion of financing under each scheme. Engagements with analysts and economists were also carried out to facilitate greater understanding of the Bank’s policies and for the Bank to obtain feedback on issues. contained a description of the Bank’s assessment of global. These initiatives include extensive financial education to raise the level of financial literacy. bringing the total number of BNMLINK centers nationwide to six.327 SMEs. Greater engagements to sustain confidence during the period of uncertainty In addition to MPSs.7 million of financing to 3. Attention was drawn to the re-commencement of operations and expanded scope of coverage of Corporate Debt Restructuring Committee. As at 21 January 2010. The Bank was actively involved in the dissemination of information on financing and related assistance to businesses. Monetary policy communications – key in anchoring monetary stability The monetary policy statements (MPSs) released after each MPC meeting. Reflecting the greater demand for the services offered by the Bank’s Integrated Contact Centre (ICC). including the RM200 million Micro Enterprise Fund (MEF) established by the Bank were publicised. Schemes supporting microfinance. the MEF had approved RM84. The Bank expanded its outreach to the public through three additional walk-in public service centers (BNMLINK) at branches of Kuala Terengganu. The Bank increased the frequency of its communications on its assessment on the nation’s economy and financial stability and continuously highlighted the various policy responses to strengthen public understanding and confidence. Communication efforts were also centred on the resilience of the financial system and the various measures undertaken to ensure continuous access to financing for businesses and households. through numerous engagements with the financial industry and businesses. the Bank’s communications outreach was expanded. Kota Kinabalu and Kuching. exhibitions and seminars. comprising BNMLINK.886 micro enterprises. the WCGS was subsequently increased to RM7 billion (the additional RM2 billion reallocated from the IRFGS) benefiting 5. Other initiatives to provide greater access to financing for local businesses. These included the RM2 billion SME Assistance Guarantee Scheme for viable SMEs adversely impacted by the economic slowdown and the establishment of the SME Credit Bureau towards ensuring greater access to credit for the SME sector. by way of dialogues. The public can now also contact the Bank via SMS services and plans are underway to operate mobile LINK services in 2010. the media and analysts as well as the public at large.

This was achieved through having greater line of sight on the Bank’s strategic objectives by the staff and a higher degree of awareness of critical inter-linkages and inter-dependencies among the different sectors in the Bank. in addition to the significant level of knowledge sharing activities through informal hi-tea sessions.8 million. The creation of a conducive communications environment has not only elevated the level of engagement but also contributed towards building an integrated internal team in the Bank. the Bank confidently proceeded with further liberalisation of the financial sector to advance Malaysia’s linkages with other parts of the world and to raise the level of performance of the financial system. The numerous briefings in conjunction with the release of the Annual Report 2008 and the Financial Stability and Payment Systems Report 2008 were another important communications channel for the Bank to engage with key stakeholders. Greater clarity of mandates. It has also facilitated efficient utilisation of resources to support the organisational goals. Several special supplements discussed the Bank’s role in shaping the financial landscape and its contributions to nation building over the past 50 years. Further strides in financial industry liberalisation As the financial system remained intact despite the global crisis. Among others. Greater understanding on the roles of the central bank The year 2009 also marked the 50th Anniversary of the Bank. Significant emphasis was placed on greater transparency of the liberalisation measures. As part of staff engagement efforts. structured and stakeholder-based to cater to the wide range of users. These briefings served as a valuable platform in creating a better understanding of various economic and financial issues. providing line of sight to the Bank’s strategic focus and the required new work culture. comprehensive.438 cases respectively. ORGANISATIONAL DEVELOPMENT Elevating Bank’s Performance through Strategic Management As a strategy-focused organisation. the website will be upgraded to broaden accessibility and to be equipped with interactivity and transactional features. The Bank’s official website has also been enhanced to be more informative. In 2009. These initiatives were important in ensuring greater alignment of staff and their roles in attaining the objectives of the Bank. as well as the economic and financial challenges on the domestic and global fronts. the enhanced integration of the strategic management and operational planning processes facilitated better prioritisation of financial resources to support the Bank’s strategic objectives as outlined in the Business Plan. Staff engagement with senior management has been stepped up with various face-to-face dialogue sessions on emerging economic and financial sector issues. AKPK and FMB have dealt with 36. regular interactions were carried out with staff on the significance of the Bank’s 3-year Business Plan. the Bank informed its stakeholders. With a new and robust strategic management process enabling the systematic planning and formulation of key priorities. Moving forward. the Bank saw its performance driven orientation becoming more entrenched in 2009. the number of visits to the website have increased significantly by about 40% to 4.Governance. In addition. execution and review of strategies at the organisational level. autonomy and the robust governance framework encapsulated in the CBA have set the stage for the Bank to deal more effectively with emerging risks and challenges. Communications and Organisational Development AKPK provides the public with free financial counseling and debt management services aimed at ensuring greater self-reliance in their financial affairs. with clear criteria and timelines to ensure the financial system continues to efficiently transition into this new phase of development. These were important factors in enabling the Bank to 113 . Reflecting these improvements. enhanced financial stability powers. the Bank hosted several international and regional high level meetings and conferences for leaders of the central banking and the financial fraternity to deliberate on current global and regional economic and financial issues.2 million while the hits/pageviews rose by about 25% to more than 12. bringing the total to more than 39. including its staff.848 and 2. on how the new CBA has positioned the Bank to be in a greater state of readiness in the more challenging global environment. With the coming into force of the new CBA.000 cases. the Bank witnessed greater organisation-wide clarity and understanding of the Bank’s objectives and goals.

The strategic review process provided a platform for the management to deliberate and address both existing and potential issues that have implications on the achievement of the strategic results. Initiatives as outlined in the Integrated Human Capital Management framework (IHCM). and reinforcing the differentiated reward and recognition structure. the Bank conducted its strategic review of the Business Plan during the year to evaluate the overall performance towards achieving its strategic results. The Bank Negara Malaysia Kijang Emas Scholarship award. To successfully address the issues raised. the blueprint for the holistic development and enhancements of the Bank’s human capital processes. the Bank also continued with its scholarship programme aimed at nurturing young potential talent for the nation as well as deepening its own talent pipeline. The Bank continued to invest in both the profiling and development of its succession pool in promoting talent readiness. As the leadership strength in the Bank is being tightened and strengthened through more stringent criteria. Efforts to align human capital practices to achieving the Bank’s strategic objectives were enhanced during the year. during the Senior Management Conference 2009. facilitated by the Leadership Profiling Centre (LPC) that evaluates the talent pool’s potential for growth via a structured and robust profiling processes. sense of urgency and ability to manage conflicting issues. efforts are also being centered on enhancing clarity on the performance assessment ownership and processes. In ensuring that the Bank continues to remain effective in delivering its mandate. continued to provide the impetus for talent management imperatives in 2009. perseverance. set within a context of plausible future events.Annual Report 2009 deliver its results during the year especially in light of more complex issues and challenges following the global financial crisis. talent management continued to be a prevailing theme for the Bank in 2009. Ensuring job-fit for mission critical positions A major focus in 2009 was to ensure that critical positions are held by the competent talents. efforts were directed towards ensuring the effective implementation of the Business Plan. This is also complemented by the use of proxy and process KPIs in gauging the achievement of outcomes that are not easily measurable in quantitative terms. coupled with focused leadership development and feedback. In support of the Bank’s agenda to build a high performance workforce amidst the escalating performance standards. where the talents will perform at their best to achieve the Bank’s mandate and to create a healthy organisational climate. This entailed the robust and transparent assessment of talents to enhance job-fit for mission critical positions as well as strengthening the talent pool to ensure its readiness. a simulation exercise was conducted to provide leaders of the Bank the opportunity to experience challenges that the Bank may face. Career growth policies and frameworks were reviewed and enhanced to ensure the Bank’s talent management strategies remain relevant. Robust mechanisms and processes were put in place to ensure the identified priorities. The performance evaluation is based on a comprehensive assessment framework that combines both qualitative and quantitative outcome-based KPIs. participants were required to exhibit desired leadership attributes including having strategic insight. Continuous building of talent pipeline In addition to the strategic focus on leadership development. Towards this agenda. effective stakeholder management and the sense of collective accountability. leadership development is given priority so as to enhance appreciation and internalisation of good governance and to enable the Bank to possess the necessary attributes to ensure the Bank is always in a state of readiness to face and address emerging issues and challenges. among the most prestigious awards for 114 . In line with this. During the year. This is reinforced by a structured process of validation of key strategies and initiatives to ensure they remain relevant. strategies and initiatives were effectively carried out within the specified timeframes through key performance indicators (KPIs) and other monitoring mechanisms that provided useful feedback on the progress in achieving the Bank’s priorities. the Bank is also making concerted efforts to expand and reinforce its technical leadership capability. Building a High Performance Workforce Given the dynamics of the human capital landscape.

various methods and tools were employed to address specific competency gaps. The programme includes development interventions focused on their skills based on industry feedback. Under ‘Graduates Programme 500’. focusing on performance and business impact. Apart from this. while the attrition rate due to retirement and resignation remained at four percent. In addition to this award. Communications and Organisational Development high potential young talents in the nation. Improving Bank’s Performance through Learning and Knowledge Management In 2009. As a result of the restructuring and realignment of roles bank-wide. particularly with the new role-based organisational structure adopted by the Human Capital Development Centre (HCDC). the Bank also embarked on coordinating a programme to enhance the employability of graduates by providing them with attachment opportunities with participating companies across all economic sectors.60% to 2. e-learning solutions and were given opportunities to apply their new knowledge and skills at the workplace with coaching from their supervisors. HCDC was able to design learning solutions that were customised to the learning needs of the organisation. learning and knowledge management (L&KM) initiatives continued to provide support for human capital development in the Bank through improved alignment in meeting the business needs of line departments. Five of the country’s top achievers were accorded this award in 2009 to pursue their respective chosen fields of study. participants underwent a range of learning and knowledge interventions such as pre-session readings. to return to Malaysia and serve the nation. 72 talents were awarded scholarships to pursue their education at the pre-university as well as first degree level whilst 20 excellent students at the Penilaian Menengah Rendah (PMR) level were awarded the Secondary School Scholarship award as part of the Bank’s ongoing efforts to hasten early identification of its talent pool and to provide financial assistance to students from lower income families. During the year. HCDC successfully tested the robustness of the curriculum through a 115 .616 as at end 2008. the number of L&KM demands that had been serviced in the form of design and implementation of customised solutions increased significantly in 2009. with the assistance of industry players. the Bank continued sponsoring students with high potential to pursue their pre-university programmes at local colleges and first degree programmes at foreign universities in disciplines relevant to central banking. efforts were directed towards obtaining an accurate view of the development requirements of the Bank staff at all working levels.709 as at end 2009 as compared with 2. These included establishing cross-functional work teams. These schol