MALAYSIA ECONOMIC MONITOR DECEMBER 2018 Realizing Human Potential CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific blogs.worldbank.org/category/ countries/malaysia MALAYSIA ECONOMIC MONITOR DECEMBER 2018 Realizing Human Potential Acknowledgements This edition of the Malaysia Economic Monitor was prepared by Richard Record (task team leader), Yew Keat Chong, Shakira Teh Sharifuddin, Harsha Aturupane, Hui Sin Teo, Achim Schmillen and Harry Moroz. Athreya Murugasu, Kenneth Simler, Wan Zainuddin Zaini, Wei San Loh, Samuel Fraiberger, Maryla Maliszewska, Carmen Loo, Cristina Constantinescu, Anton Prokopyev, Adelia Surya Pratiwi, Sharmila Devadas, Paul Gubbins, Amanina Abdur Rahman, Damaris Yarcia and Nurlina Shaharuddin provided additional contributions. Mara Warwick, Firas Raad, Ndiame Diop and Gabriel Demombynes provided overall guidance. The team is grateful to Sudhir Shetty, Mei Ling Tan, Ekaterine Vashakmadze, Ergys Islamaj, Jeevakumar Govindasamy and Kershia Tan for their constructive input. This report benefited from productive discussions with staff from the Economic Planning Unit at the Ministry of Economic Affairs, Bank Negara Malaysia, the Ministry of Finance, the Ministry of Health, the Ministry of Education and many other government ministries and agencies, all of whom provided valuable information and useful feedback. In particular, the team would like to thank the International Cooperation Section of the Economic Planning Unit and the Economics Department of Bank Negara Malaysia for close ongoing collaboration with the World Bank and for the crucial support to the launch of this report. The team would like to express its gratitude to analysts at several private financial firms and rating institutions, whose participation in a constructive dialogue also informed the analysis. Joshua Foong and Min Hui Lee led external communications and the production and design of the report. Irfan Kortschak provided editing assistance, while Aziaton Ahmad provided administrative support. Kane Chong designed the report and its cover. Photography: Samuel Goh The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. The report is based on information current as of December 7, 2018. Enquiries Please contact Richard Record (rrecord@worldbank.org), Yew Keat Chong (ychong@worldbank.org) or Shakira Teh Sharifuddin (stehsharifuddin@worldbank.org) if you have any questions or comments regarding the Malaysia Economic Monitor. 2 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 Abbreviations 1MDB 1 Malaysia Development Berhad M&E Machinery and Equipment 11MP 11 Malaysia Plan th MACC Malaysian Anti-Corruption Commission AERA American Educational Research Association MCH Maternal and Child Health ALMP Active Labor Market Programs MDG Millennium Development Goal APA American Psychological Association MEM Malaysia Economic Monitor ASEAN Association of Southeast Asian Nations MENAP Middle East, North Africa and Pakistan ASR Adult Survival Rate MMR Maternal Mortality Ratio B40 Bottom 40 percent (of the population) MOF Ministry of Finance BNM Bank Negara Malaysia MOH Ministry of Health BR1M 1 Malaysia Peoples Aid (Bantuan Rakyat 1Malaysia) NCD Noncommunicable Disease BSH Cost of Living Aid (Bantuan Sara Hidup Rakyat) NCME National Council on Measurement in Education CPI Consumer Price Index NPCS National Preschool Curriculum Standards Comprehensive and Progressive Agreement for NFA Net Foreign Assets CP-TPP Trans-Pacific Partnership NFPC Non-Financial Public Corporation DFI Development Financial Institution NGO Non-governmental Organization DOSM Department of Statistics Malaysia NHMS National Health and Morbidity Survey E&E Electrical and Electronics NIIP Net International Investment Position EAP East Asia and Pacific NPLs Non-Performing Loans EBA External Balance Assessment Organization for Economic Cooperation and OECD ECCE Early Childhood Care and Education Development EIS Employment Insurance System OPR Overnight Policy Rate EMDE Emerging Market and Developing Economies PISA Programme for International Student Assessment EPF Employees Provident Fund PITA Petroleum Income Tax FDI Foreign Direct Investment PPP Public Private Partnership FBM KLCI FTSE Bursa Malaysia Index Q/Q Quarter-on-Quarter GDP Gross Domestic Product RCEP Regional Comprehensive Economic Partnership GFCF Gross Fixed Capital Formation SAAR Seasonally Adjusted Annual Rate GLC Government-linked Company SABER Systems Approach for Better Education Results GLIC Government-linked Investment Company SME Small and Medium-sized Enterprise GNI Gross National Income SST Sales and Services Tax GST Goods and Services Tax STEM Science, Technology, Engineering and Mathematics HCI Human Capital Index T20 Top 20 percent (of the population) HCP Human Capital Project Trends in International Mathematics and Science TIMSS Study HOTS Higher Order Thinking Skills TPP Trans-Pacific Partnership IHSR Institute of Health Systems Research Malaysia UHC Universal Health Coverage IPH Institute of Public Health Malaysia United Nations International Children's Emergency IHME Institute of Health Metrics and Evaluation UNICEF Fund Retirement Fund Incorporated (Kumpulan Wang WHO World Health Organization KWAP Persaraan) Y/Y Year-on-Year LCR Liquidity Coverage Ratio M40 Middle 40 percent (of the population) MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 3 Table of Contents Acknowledgements 2 Abbreviations 3 Summary 6 Recent economic developments 7 Economic outlook 9 Realizing human potential 10 PART ONE 15 Recent economic developments 16 East Asia’s economies are facing increased headwinds 16 Malaysia’s rate of economic growth has begun to slow 17 The current account surplus has narrowed due to a smaller goods surplus 20 Domestic inflationary pressures have eased further in recent months 24 Conditions in the financial system have remained broadly stable 28 The 2019 budget sets out new directions for Malaysia’s fiscal policy 30 Near-term fiscal consolidation efforts will be primarily driven by expenditure rationalization 33 Economic outlook 37 Growth in East Asia is expected to moderate slightly over the near term 37 Malaysia’s economy is expected to grow at a more moderate pace 38 Risks to Malaysia’s outlook are increasingly weighed to the downside 41 A more uncertain external environment places a higher premium on reforms to boost resilience 44 PART TWO 51 Realizing human potential 52 Investment in human capital is essential for enabling Malaysia’s transition to a high-income and developed economy 52 Malaysia has done well in ensuring access to education, but student learning outcomes fall below potential 54 Malaysia has made strong progress in health outcomes, but child stunting rates and the burden of NCDs remains high 59 Malaysia’s social protection system remains relatively underdeveloped, particularly in terms of depth 64 What can Malaysia do to fully realize its human potential? 66 Improving access and quality of early childhood education to ensure that learners are ready to learn 66 Developing a high-quality assessment system that focuses on learning 71 Making better use of assessment data and integrating assessments into the teaching process 72 Addressing the high level of childhood stunting with multisectoral solutions 74 Expanding social safety nets and linking them to measures to promote human capital formation 75 References 78 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 5 Summary Summary While Malaysia’s economic growth remains resilient, it began to moderate during the course of 2018 Growing risks weigh on the economic outlook. The Malaysia Economic Monitor consists of two On the external front, a slowing global economy, parts. Part 1 presents a review of recent economic rising concerns regarding the impact of US-China developments and a macroeconomic outlook. Part trade tensions and increased volatility in financial and 2 focuses on a selected special topic that is key to commodity markets all weigh on the prospects for Malaysia’s medium-term development prospects. In Malaysia’s economy. On the domestic side, increased this edition, the focus of the special topic is on realizing reliance on oil-related revenue amid heightened human potential. uncertainty around the commodity price forecasts and relatively high levels of private and public debt pose Accelerating human capital development will risks to growth. be critical for enabling Malaysia’s successful transition to a high-income and developed nation. Efforts to sustain growth in the near term have With the advent of digital and other disruptive to be carefully balanced with the need to restore technologies, there has been a significant change fiscal buffers. In the short term, fiscal consolidation in the nature of jobs, with an increasing premium on efforts are expected to be driven primarily by higher-order cognitive skills, such as complex problem- measures to reduce expenditure. However, efforts to solving, socio-behavioral skills, reasoning and self- broaden the tax base, to diversify revenues away from efficacy. Building these skills requires a transformation unstable oil and gas revenues, and to introduce greater in the way that Malaysia nurtures, invests and protects progressivity, will require a multi-year reform agenda. its human capital. Restoring fiscal buffers will be necessary to ensure that Malaysia is better prepared to respond to future According to the World Bank’s new Human Capital macroeconomic shocks. Index, Malaysia ranks 55th out of 157 countries. While Malaysia performs well in some components of The Mid-term Review of the 11th Malaysia Plan the index, it does less well in others. To fully realize and the 2019 budget outline the Pakatan Harapan its human potential, Malaysia will need to make government’s new priorities, with an emphasis further advances in education, health and nutrition, on strengthening governance and improving and social protection outcomes. Key priority areas accountability. The government has also expressed a include enhancing the quality of schooling to improve commitment to reform the role of the state in business to learning outcomes, rethinking nutritional interventions level the playing field and to unlock future productivity to reduce childhood stunting, and providing adequate growth. Reforms to increase the effectiveness of pro- social welfare systems to enable households to invest in inclusion expenditure programs have the potential to human capital formation. achieve greater impact with lesser public resources. 6 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 Summary Recent economic supply outages and pipeline repairs. Similarly, agriculture output declined by 1.4 percent during the developments quarter, due to interruptions to the production of crude palm oil caused by adverse weather and production constraints. The impact of the contraction on these two sectors was offset by the expansion in the services sector, in line with the increased consumer spending Malaysia’s rate of economic growth has begun to during the zero-rated GST period. slow somewhat, with a more moderate expansion at a rate of 4.4 percent in Q3 2018. Strong domestic Export growth eased to 5.1 percent in Q3 2018 demand has continued to provide support to the due to slower manufactured export growth and economy, but growth has been weighed down by a sustained declines in agricultural exports. Much of weaker export performance and continued inventory the growth momentum in Q3 2018 was driven by the drawdowns. relatively sustained growth of semiconductor exports, amid signs in Q3 2018 that Malaysia has gained market Throughout the year, private consumption share in the US following the latter’s imposition of tariffs continued to be the main driver of economic growth, on China. The current account surplus has narrowed with the growth rate increasing to 9.0 percent appreciably since Q1 2018 due to a lower goods surplus in Q3 2018. Most of the increased spending during and a larger deficit on primary income. the quarter was recorded in July and August 2018, following the zeroization of the Goods and Services Tax A slower growth rate was recorded for gross (GST). There was a significant increase in the purchase imports, at 6.3 percent in Q3 2018. This  partly of durable items, as well as food and beverages, with reflected a significant deceleration in capital import households taking advantage of the zero-rated GST growth from the previous quarter, with the rate sinking period. In addition, stable labor market conditions and to 1.1 percent in the quarter. Imports of intermediate steady income growth continued to support private goods, which  accounted for  53 percent of total consumption. imports,  continued to contract amid easing foreign demand for manufactured exports, with the rate Growth in private investment edged up to 6.9 standing at -1.6 percent. percent in Q3 2018 on account of increased capital spending in the manufacturing and services In recent months, domestic inflationary pressures sectors. Capital expenditure growth in these sectors have continued to ease. The headline inflation rate was mainly driven by increased spending in machinery continued to decline in Q3 2018, standing at an average and equipment, which grew at 5.9 percent in Q3 2018. of 0.5 percent. This low average rate mainly reflected Higher private investment also contributed to a higher the impact of changes in the consumption tax policy gross fixed capital formation growth, standing at 3.2 and lower growth in transport prices. percent in Q3 2018. Labor markets have remained stable, with modest Following a contraction in the previous quarter, improvements to labor force participation seen public sector expenditure growth rebounded throughout 2018. In Q3 2018, the labor force to 1.1 percent in Q3 2018, driven mainly by participation rate increased to 68.5 percent, up by public consumption. Higher spending on supplies 0.1 percentage points compared to Q2 2018 and by and services contributed to an increase in public 0.6 percentage points compared to September 2017. consumption, which grew at 5.2 percent. Meanwhile, However, there is a persistent disparity between wage public investment continued to contract in Q3 2018, growth in the manufacturing and services sectors. albeit at a lower rate of -5.5 percent, due to decreased capital outlays following the near completion of several Over the year, conditions in the financial system large infrastructure projects and the deferment and have remained broadly stable. Monetary policy has cancellation of several major public infrastructure remained unchanged since January 2018, with the projects. overnight policy rate held at 3.25 percent. Financial soundness indicators continue to show that the On the supply side, growth continued to be affected banking system remains resilient. In Q3 2018, net by shocks in the commodity-related sectors. In the financing increased, largely driven by increased growth mining sector, growth continued to contract in Q3 in the outstanding loans of the banking system and 2018, at the rate of -4.6 percent, with the production development financial institutions, with the growth rate of natural gas continuing to be affected by unplanned increasing to 5.1 percent. MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 7 Summary Domestic financial markets continue to be obligations, including from PPPs. As of Q2 2018, the affected by heightened risk aversion arising from level of Federal Government debt in proportion to global developments. In November, the decline in the GDP remained unchanged at 50.7 percent, with risks net non-resident portfolio flows amounted to RM5.9 appearing manageable. However, as of end-June 2018, billion. Against the US dollar, the ringgit has tended to debt guaranteed by the Federal Government had depreciate over the year, reflecting the outflows in the increased to 18.1 percent of GDP. Almost half of these bond and equity markets. outstanding loan guarantees were extended to facilitate the implementation of infrastructure investments by The government announced its budget on November non-financial public corporations. By contrast, the 2, 2018, setting out several new fiscal policy value of the Federal Government’s outstanding PPP measures. Through the budget, the government commitments was revised down to 12.9 percent in Q2 revised several key projections to better reflect the 2018 as a result of the cancellation and postponement current economic environment and its fiscal plans of several large-scale transportation projects during for the future. The fiscal deficit target was raised to the period. 3.7 percent of GDP in 2018 amid several fiscal policy changes, before narrowing to 3.4 percent in 2019 and 3.0 percent in 2020. In proportion to GDP, Federal Government revenue is expected to increase marginally to 16.5 percent in 2018. Following the replacement of the GST with the Sales and Services Tax (SST) and the implementation of the 3-month consumption tax holiday from June to August, the collection of consumption-based tax is projected to contract by half, to 1.6 percent of GDP. The revenue shortfall will be partially offset by an increase in petroleum-related proceeds, to 3.6 percent of GDP, amid higher prevailing global oil prices in 2018. The government’s operating expenditure is also projected to trend slightly higher to 16.4 percent of GDP in 2018. The increase is primarily due to larger subsidy outlays expected over the year to facilitate the stabilization of diesel and RON95 petrol prices. Expenditure on debt service charges is also projected to increase, in line with a higher fiscal deficit. In 2018, the government’s development expenditure is estimated to increase to reach 3.8 percent of GDP, reflecting the inclusion of several outlays previously classified as operating expenditure. Over the year, social expenditure, which accounts for about a quarter of the total value of development spending, is projected to increase slightly to 1 percent of GDP, with marginal growth expected across the education, health and housing sectors. Near-term fiscal consolidation efforts will be achieved primarily through measures to rationalize As part of its efforts to increase transparency, expenditure, with the adjusted government the government has adopted a new approach expenditure1 set to decline markedly to 18.1 percent to the disclosure of its overall liabilities and of GDP in 2019. Downward expenditure adjustments commitments. With this new approach, liabilities are expected to be broad-based across most major reporting takes into account Federal Government components of operating and economic development debt, committed government guarantees, and other outlays. 1 Excludes the one-off payment of outstanding income tax and GST refunds in 2019. 8 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 Summary Economic outlook Increased reliance on oil-related revenue poses risks to the government’s fiscal space in the event of a major oil price or supply shock. The government has introduced several new revenue measures in the budget such as taxing foreign service providers and Malaysia’s economy is expected to grow at a on the expenditure side, a more targeted fuel subsidy moderate pace in the near term, expanding by scheme which could alleviate some fiscal strains. 4.7 percent in 2019. Private sector consumption However, the narrowing of the government’s revenue will continue to be the main driver of economic base, and its increased reliance on less stable oil- growth, although growth is projected to moderate related revenue could limit its flexibility to make fiscal to 6.4 percent in 2019. The deceleration will be due adjustments against future macroeconomic shocks. to consumers having frontloaded their spending for durable items during the zero-rated GST period and Other near-term risks relate to the relatively high factoring in the effect of the SST in their spending. levels of private and public-sector debt. In the Nevertheless, household spending will be supported public sector, the government recently disclosed the by stable labor market conditions; the implementation size of committed government guarantees, amounting of the Bantuan Sara Hidup Rakyat (BSH) cash transfer to 8.2 percent of GDP (more than half of all government program; and the one-time repayment of tax refunds. guarantees), which have the possibility of being assumed by the government. With this accumulation of The external sector faces risks associated with both government debt and committed guarantees, the heightened global uncertainty and the possible government’s total liabilities will remain elevated into escalation of trade tensions between the US the near-term future. and China. In addition, export growth is likely to be affected by a weaker global demand and deceleration Malaysia has the opportunity to undertake bold in the global electrical and electronics (E&E) cycle. structural reforms that would strengthen the This is expected to be partially offset by a recovery in foundations for more sustainable and inclusive commodities production and sustained demand from growth. The Mid-term Review of the 11th Malaysia regional trading partners. Plan sets out a series of new goals that would serve to strengthen governance and increase transparency, The headline inflation rate is expected to improve public sector efficiency and foster equitable increase in 2019, driven by higher domestic fuel growth. Over time, the implementation of these prices following the implementation of the float reforms would serve to improve not only the quantity pricing mechanism for fuel beginning in Q2 2019. of economic growth, but also the quality of this growth. In addition, the reintroduction of the SST will also result in higher headline inflation, although its effect is Near-term economic growth will be more dependent expected to taper towards the end of the year. on government measures to boost private investment, with the increasingly challenging With Malaysia’s economy tightly integrated with external environment reducing opportunities the global economy through financial and trade for export-led growth, and with reduced fiscal linkages, increased uncertainty in the external space limiting the scope for public investment-led environment poses downside risks in the near- expansion. Malaysia already has one of the world’s term future. A key source of risk relates to escalating lowest cost business environments, as indicated by the protectionist tendencies and increasing trade tensions World Bank’s Doing Business report, the most recent between the US and China. While there may be short- of which ranked Malaysia in 15th place out of 190 term opportunities for Malaysia to gain US market economies. However, Malaysia continues to experience share as a result of trade and investment diversion gaps in broader measures of competitiveness, including away from China, escalating tensions may result in a major weaknesses in the areas of skills, productivity and decline in global investment confidence. This could human capital. High-level policy statements on leveling have disproportionate negative consequences for the playing field between state enterprises and the highly open economies such as Malaysia. News-based private sector are welcome, signaling the government’s measures of economic sentiment suggest a relatively commitment to boosting investor confidence, pessimistic forecast regarding Malaysia’s growth promoting healthy competition and increasing private compared to professional forecasts. sector participation. MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 9 Summary While immediate fiscal consolidation efforts will be conducted through expenditure rationalization, Realizing human potential over the medium-term Malaysia will also need to boost efforts to mobilize and diversify fiscal revenues. As Malaysia’s average income and societal expectations continue to grow, raising adequate resources to finance the needs of an expanding Human capital – the knowledge, skills, and health middle class will become an increasingly important that people accumulate over their lives – has been priority. Meeting these needs will involve the improved a key factor behind the sustained economic growth provision of basic public services, growth-enhancing and poverty reduction rates of many countries investments and scaling up of social protection in the 20th century, especially in East Asia. With systems, among other measures. To improve revenue rapid technological change, the wealth of nations has collections, the government’s reform efforts should become even more closely tied to the human capital aim to broaden the tax base through new measures; of its people. Automation threatens to eliminate many to reduce unproductive tax expenditures, particularly jobs that previously required only low-level cognitive deductions and incentives; and to strengthen overall skills. The global economy now increasingly places a tax administration and compliance. premium on higher-order cognitive skills – including complex problem-solving, socio-behavioral skills, On the expenditure side, reform efforts should aim reasoning, and self-efficacy. Production processes to contain the relatively sizeable cost of civil service in industry, agriculture and services have all become salaries and pension outlays, to further rationalize highly human capital and technology intensive. Greater discretionary spending and untargeted subsidies, policy focus on human capital is needed to build the as well as to improve the efficiency of development knowledge, competencies, and skills to enable an spending. The administration’s commitment to economy to achieve high rates of inclusive economic strengthening public financial management, including growth in this rapidly evolving context. through measures to improve governance and transparency, is a welcome development. Going Education, health, and social protection play forward, as the potential for incremental fiscal savings complementary roles in the development of human from efficiency-enhancing rationalization diminishes, capital. Among high-income countries, levels of it will become increasingly necessary to focus on educational attainment are closely linked to economic containing the relatively sizable expenditure on civil performance. Similarly, health is critically important to service salaries and pensions, which constitutes a the achievement of high levels of economic growth, growing share of overall public spending. with a healthy population capable of being more productive. Social protection also plays a crucial role in Fostering greater economic inclusiveness begins nurturing human capital. with expanding access to more productive and remunerative employment. This requires interventions The World Bank’s new Human Capital Index (HCI) and investments in health and education throughout is a cross-country metric designed to forecast the life cycle, complemented by policies to increase a country’s human capital. The index tracks the participation in the labor force. A strengthened social future trajectory, from birth to adulthood, of a child protection system is also a necessary complement born today. It quantifies the level of human capital that for those who cannot benefit fully from expanded a child can expect to attain by the end of secondary productive employment. For some people – such school, given the risks of poor health and education at as the elderly, persons with disabilities, and those the time of the child’s birth. encountering transient shocks such as unemployment – employment-based solutions are insufficient. A well- The HCI captures the impact of investments functioning social protection system is needed to keep in children today on productivity and economic them out of poverty and support living with dignity. growth over the long term. According to the HCI, Malaysia scores 0.62. This indicates that children in Malaysia will be only 62 percent as productive as they could be in adulthood compared to optimal outcomes, given the prevailing education and health outcomes in the country. 10 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 Summary Overall, Malaysia ranks 55th out of the 157 December 2019 – will provide an opportunity to assess countries included in the HCI. While Malaysia Malaysia’s learning outcomes relative to international performs well in some components of the HCI, it comparators. performs less well in others. Relative to other countries, Malaysia does well in child survival, expected years Child malnutrition is an important constraint on of schooling, and overall health conditions for adults. learning and human capital development. One in However, Malaysia has room for improvement in the five Malaysian children under five suffer from stunting, areas of child malnutrition and learning outcomes. With a key marker of malnutrition.2 This rate in Malaysia is improvements in these areas, Malaysia could record higher than that of other countries at similar levels of increased levels of productivity. income. There is overwhelming international evidence that malnutrition in early years of life (from conception to Looking to the future, how can Malaysia continue two years of age) is associated with measurable negative to improve its human capital and thus to boost consequences for health, cognition, productivity, and productivity? This report identifies three key priorities: income throughout the course of life. Further analytical (i) enhance learning outcomes; (ii) improve child work is needed to understand the drivers of stunting nutrition; and (iii) provide adequate protection through in Malaysia and to identify the most effective policy social welfare programs to enable households to invest channels to reduce undernutrition. in human capital. Social welfare programs can help households invest in human capital. Programs can be designed According to the World with a mix of mandates and incentives. Many countries Bank’s Human Capital impose some form of condition on beneficiaries of cash transfers if these beneficiaries are not in employment, Index, children in Malaysia education or training but are capable of working. will be only 62 percent as Most frequently, these conditions include job search requirements, a requirement that could be considered productive as they could be in Malaysia. in adulthood BSH has the potential to more actively facilitate human capital development. BSH recipients To enhance learning outcomes, a key measure could benefit from information provided through is to provide universal access to high-quality accompanying measures, to raise parents’ awareness of early childhood care and education to ensure best practices for providing nurturing care, to support that children are “ready for school.” International family members to make better choices, and to increase evidence has shown that the quality of early childhood the use of services provided by other agencies and and preschool education programs is directly linked of new services directly provided by or linked to the with the better development of children’s cognitive and program, including training to further enhance human social skills. Efforts to ensure universal access to early capital formation. childhood care and education have contributed to the remarkable educational performance of countries like Malaysia’s social insurance programs could also Korea and Japan. be more effectively leveraged to support human capital formation. The recent introduction of the Improvements to learning assessment systems Employment Insurance System creates a window of can also improve learning outcomes. The quality of opportunity to allow Malaysian workers to mitigate the an education system can only be accurately determined impacts of jobs loss. by an effective system of educational assessment, which can include classroom-based assessments, national assessments and international assessments. When implemented correctly, specific types of assessment activities may have a positive impact on student learning. The results of the 2018 Programme for International Assessment – which will be released in 2 Child stunting (low height-for-age) is the type of undernutrition of most concern for policy makers. Stunting results from chronic undernutrition and indicates a failure of a child to attain the height expected among healthy children. MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 11 Recent economic developments and outlook Malaysia’s economy continued to grow at a ...with private consumption contributing an moderate pace in Q3 2018... increased share of growth GDP, y/y, Percentage Contribution to GDP, y/y, Percentage 7 8 6 6 6.2 5.9 5.8 5.6 4 5 5.4 4.7 4.5 4.5 2 4 4.3 4.4 4.1 4.0 0 3 -2 2 -4 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 1 0 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Net Exports Private Consumption Public Consumption GFCF Change in Inventory Real GDP, y/y The fiscal deficit is expected to increase ...amid lower consumption-based tax to 3.7 percent in 2018... revenues and a larger fuel subsidy allocation Federal Government Overall Balance, Percentage of GDP Change in Federal Government Revenue and Expenditure Between 2017-2018, Percentage of GDP 0 1.8 One-off Transfer Overall Change -1 1.4 Petroleum 1.0 Related Others -2 0.6 Others Social Salaries & Pensions Direct taxes Subsidies Economic 0.2 excl. PITA -3.0 Debt Charges -3.1 Others -3 -3.2 -0.2 Reclassification -3.4 of Items -3.8 -3.7 -0.6 SST/GST -4 -4.3 -1.0 -1.4 -5 -1.8 2012 2013 2014 2015 2016 2017 2018e Revenue Operating Development Expenditure Expenditure Malaysia’s economy is forecast to grow at ...while sentiment-based forecasts are 4.7 percent in 2019... trending below the market consensus GDP, y/y, Percentage GDP, 2019f, y/y, Percentage 7 6.0 6 5.5 6.0 5.9 5 5.0 5.1 4.6% 4.7 4.7 4.6 4 4.5 4.2 3 4.3% 4.0 2 3.5 01/2018 02/2018 03/2018 04/2018 05/2018 06/2018 07/2018 08/2018 09/2018 10/2018 11/2018 1 0 Consensus Mean Consensus Sentiment-adjusted 2014 2015 2016 2017 2018f 2019f 2020f Forecast Range Forecast Forecast 12 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 Realizing human potential Malaysia’s performance on the human capital index is about as expected compared to other upper middle-income economies... World Bank Human Capital Index and its Components, 2017 Human Capital Index Probability of Survival to Age 5 High Income 0.74 High Income 0.99 Malaysia 0.62 Malaysia 0.99 East Asia and Paci c 0.61 East Asia and Paci c 0.98 Upper Middle Income 0.58 Upper Middle Income 0.98 Lower Middle Income 0.48 Lower Middle Income 0.96 0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0 Expected Years of School Harmonized Test Scores High Income 13.3 High Income 506 Malaysia 12.2 Malaysia 468 East Asia and Paci c 11.9 East Asia and Paci c 451 Upper Middle Income 11.7 Upper Middle Income 428 Lower Middle Income 10.4 Lower Middle Income 391 0 2 4 6 8 10 12 14 0 100 200 300 400 500 Adult Survival Rate Fraction of Children Under 5 Not Stunted High Income 0.92 High Income 0.94 Malaysia 0.88 Upper Middle Income 0.87 East Asia and Paci c 0.87 Malaysia 0.79 Upper Middle Income 0.86 East Asia and Paci c 0.78 Lower Middle Income 0.81 Lower Middle Income 0.73 0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0 ...but performance falls well below ...and the shortfall is especially pronounced Malaysia’s aspirational peers... with regard to educational attainment, with an average learning gap of 3.1 years Human Capital Index Versus GDP per Capita, Selected EAP Countries, 2017 Expected Years of Schooling Versus Learning Adjusted Years of Schooling, 2017 Singapore 0.9 Japan Learning-adjusted Years of Schooling Korea, Rep. 0.8 15 Human Capital Index 0.7 China Vietnam Learning gap 0.6 10 Hong Kong 0.5 SAR, China 0.4 Malaysia 5 Malaysia 0.3 0.2 0 100 1,000 10,000 100,000 0 5 10 15 Log Real GDP Per Capita at PPP Expected Years of Schooling MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 13 PART ONE Recent Economic Developments and Outlook MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 15 PART ONE - Recent Economic Developments and Outlook Recent economic developments East Asia’s economies are facing increased headwinds In 2018, global growth has shown signs of Growth in the developing countries of East Asia moderation amid softening trade and investment and Pacific (EAP) has slowed recently in the activity. In aggregate, global economic growth eased context of a less favorable global environment to 2.9 percent3 in the third quarter (Q2 2018: 3.2 (see Figure 2). Growth in the region has eased to a percent) (see Figure 1). The expansion has also become still-robust 6.4 percent in Q2 2018 and to 6.2 percent less synchronized across countries. While the United in Q3 2018 (Q1 2018: 6.6 percent), with the decline States has maintained solid growth, largely driven by reflecting diminishing support from external demand. fiscal stimulus, a softening pace of growth has been Economic activity in China continued to be driven by observed in other major advanced economies. The domestic demand throughout the year amid resilient deceleration of global industrial production and trade consumption spending, offsetting the effects of easing activity has been more pronounced than had been global demand on export growth. While growth in the expected in an environment of heightened trade policy other large regional economies has also slowed in Q3 uncertainty. The interaction of global trade tensions, 2018, it has remained generally solid, underpinned by monetary policy tightening in advanced economies and strong household consumption. Despite the slowdown, the strengthening of the U.S. dollar have contributed the EAP remains one of the world’s fastest-growing to tighter financing conditions as well as increased regions and has been relatively resilient against recent uncertainty regarding trade and investment flows in bouts of financial market volatility. emerging markets and developing economies (EMDEs). FIGURE 1 FIGURE 2 Global growth has moderated amid softening Growth among regional economies has also trade and investment activity slowed in a context of a less favorable global environment GDP, y/y, Percentage GDP, y/y, Percentage 5 8 7 4 6 3 5 4 2 3 2 1 1 0 0 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 World Advanced Emerging and China Indonesia Philippines Economies Developing Economies Thailand Vietnam Source: World Bank Global Economic Prospects Source: World Bank Global Economic Prospects 3 The default measure of growth is on a year-on-year basis, unless otherwise stated. 16 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook Malaysia’s rate of economic growth has begun to slow In Q3 2018, Malaysia’s economy continued to grow Growth in private investment edged up in Q3 at a moderate pace, at 4.4 percent (Q2 2018: 4.5 2018 on account of increased capital spending percent) (see Figure 3). Domestic demand continued in the manufacturing and services sectors. After to provide support to the economy, with private sector growing at a subdued rate in Q1 2018 (0.5 percent), expenditure growing at a higher rate than in the capital spending in the manufacturing and services previous quarter at 8.5 percent (Q2 2018: 7.5 percent). sectors provided support to private investment in This was primarily due to an acceleration in private Q3 2018, which expanded at 6.9 percent (Q2 2018: consumption (see Figure 4). Nonetheless, overall 6.1 percent). Investment in these sectors were mainly growth was weighed down by a weaker external sector driven by higher spending in machinery and equipment performance and continued inventory drawdowns. (M&E), expanding at 5.9 percent during the quarter (Q2 2018: 3.6 percent). Increased private investment also Private consumption continued to be the main contributed to a higher gross fixed capital formation anchor for the economy, accelerating at a rate of (GFCF) growth of 3.2 percent observed over the period 9.0 percent in Q3 2018 (Q2 2018: 8.0 percent). (Q2 2018: 2.2 percent). The higher spending pattern during the quarter was largely observed in July and August 2018, following There was a small rebound in public sector the zeroization of the GST. In particular, there were expenditure in Q3 2018 at 1.1 percent (Q2 2018: marked increases in the purchase of durable items, -1.4 percent), driven mainly by public consumption. especially motor vehicles, and food and beverages with Higher spending on supplies and services contributed households taking advantage of the GST zeroization. to the increased public consumption, which grew at In addition, stable labor market conditions and steady 5.2 percent (Q2 2018: 3.1 percent). Meanwhile, public income growth continued to provide support to private investment continued to contract in Q3 2018, albeit at a consumption. slower pace at 5.5 percent (Q2 2018: 9.8 percent), due to lower capital outlays by public corporations following FIGURE 3 FIGURE 4 Malaysia’s economy continued to grow at a ...with private consumption contributing an moderate pace in Q3 2018... increased share of growth GDP, y/y, Percentage Contribution to GDP, y/y, Percentage 7 8 6 6.2 6 5.9 5.6 5.8 5 5.4 4 4.7 4.5 4.5 4.4 2 4 4.3 4.1 4.0 0 3 -2 2 -4 1 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 0 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Net Exports Private Consumption Public Consumption GFCF Change in Inventory Real GDP, y/y Source: DOSM Source: World Bank staff calculations based on DOSM data MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 17 PART ONE - Recent Economic Developments and Outlook the near completion of several large infrastructure contraction in these two sectors was offset by growth in projects, and the deferment and cancellation of several other sectors, particularly in the services sector, which major public infrastructure projects. grew by 7.2 percent (Q2 2018: 6.5 percent). This high rate of growth was in line with the increased consumer On the supply side, growth continued to be affected spending during the zero-rated GST period. by supply shocks in the commodity-related sectors (see Table 1). In the mining sector, the contraction in Recent economic indicators suggest that Malaysia’s growth deepened in Q3 2018, with the rate standing at growth momentum will continue to moderate in the -4.6 percent (Q2 2018: -2.2 percent). This was primarily near term. The Malaysia Composite Leading Index, a due to the impact on the natural gas production of measure of the overall economic performance in the unplanned supply outages and pipeline repairs. Similarly, months ahead, indicates that growth will continue to in the agriculture sector, adverse weather and production ease between January and March 2019. Similarly, the constraints had a negative impact on the production of Malaysian Institute of Economic Research’s Business crude palm oil. As a result, the output of the agricultural Conditions and Consumer Sentiment Index in Q3 2018 sector contracted by -1.4 percent in Q3 2018 (Q2 point towards a more moderate pace of economic 2018: -2.5 percent). Nevertheless, the impact of the expansion in the near term. TABLE 1 GDP growth decomposition GDP, y/y, Percentage Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3   2016 2017 2016 2016 2017 2017 2017 2017 2018 2018 2018 GDP 4.3 4.5 4.2 5.6 5.8 6.2 5.9 5.9 5.4 4.5 4.4 Consumption Private Sector 6.3 6.1 6.0 6.7 7.1 7.2 7.0 7.0 6.9 8.0 9.0 Public Sector 2.1 -4.3 0.9 7.5 3.3 3.9 6.8 5.4 0.4 3.1 5.2 Gross Fixed Capital Formation 2.0 2.4 2.7 10.0 4.1 6.7 4.3 6.2 0.1 2.2 3.2 Exports of Goods & Services -0.2 2.4 1.3 9.8 9.4 11.8 6.7 9.4 3.7 2.0 -0.8 Imports of Goods & Services -1.6 1.9 1.3 13.0 10.4 13.3 7.3 10.9 -2.0 2.1 0.1 Sectoral Agriculture -6.2 -2.5 -5.2 8.4 5.9 4.1 10.7 7.2 2.8 -2.5 -1.4 Mining 2.8 4.9 2.1 1.4 0.1 3.0 -0.3 1.0 0.1 -2.2 -4.6 Manufacturing 4.3 4.7 4.4 5.6 6.0 7.0 5.4 6.0 5.3 4.9 5.0 Construction 7.9 5.1 7.4 6.6 8.3 6.1 5.9 6.7 4.9 4.7 4.6 Services 6.2 5.6 5.7 5.8 6.3 6.5 6.2 6.2 6.5 6.5 7.2 Source: World Bank staff calculations based on DOSM data 18 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook The current account surplus has narrowed due to a smaller goods surplus Export growth of goods eased to 5.1 percent in percent). During the quarter, imports of intermediate Q3 2018 (Q2 2018: 8.3 percent) due to slower goods, which constitutes 53 percent of total imports, manufactured export growth and continued continued to contract amid easing foreign demand for declines in agricultural exports (see Figure 5). Much manufactured exports, with the rate standing at -1.6 of the growth momentum in Q3 2018 was driven by the percent (Q2 2018: -4.7 percent). Meanwhile, imports relatively sustained growth of semiconductor exports, of consumption goods rebounded in Q3 2018, with at 24.2 percent (Q2 2018: 21.0 percent), accounting a positive growth rate of 5.5 percent (Q2 2018: -2.8 for 91 percent of the total gross export growth during percent). This rebound occurred in the context of a the quarter. Other electrical and electronics (E&E) as surge in household spending during the period. well as most major non-E&E manufactured exports recorded noticeable declines in growth over the period, The current account surplus has narrowed to -3.9 percent and 4.6 percent respectively (Q2 2017: appreciably since Q1 2018, owing to a lower goods -2.3 and 11.4 percent), amid a less supportive global surplus and a larger deficit on primary income (see environment. The contraction in commodity exports Figure 6). In Q3 2018, current account surplus remained persisted into Q3 2018, with the rate standing at -3.0 at 1.0 percent of GDP (Q2 2018: 1.1 percent). During percent (Q2 2018: -3.8 percent), weighed down mainly the quarter, the goods surplus remained relatively flat by temporary production constraints in the crude palm at RM26.6 billion (Q2 2018: RM26.1 billion) amid easing oil sector. export growth, while the deficit in the services account narrowed to RM3.3 billion (Q2 2018: -RM6.2 billion) on Growth in gross imports also decelerated over account of increased net tourism receipts and lower the quarter, going down to 6.3 percent (Q2 2018: payments for construction services. The slight overall 8.5 percent). This deceleration was partly due to the improvement in the trade account during the period, significant slowdown in capital import growth in Q3 however, was more than offset by the increased 2018, which declined to 1.1 percent (Q2 2018: 11.7 deficit on primary income in Q3 2018. At the end of FIGURE 5 FIGURE 6 Export growth has eased due to slower ...contributing to an appreciable narrowing in the manufactured export growth and a continued current account surplus output decline in agriculture exports... Contribution to Export Growth, y/y, Percentage Current Account Balance, Percentage of GDP 10 20 5 10 0 0 -5 -10 -10 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Commodities Non-E&E E&E - Semiconductors Goods Services E&E - Others Exports, y/y Primary & Secondary Income Account Current Account Source: World Bank staff calculations based on BNM and DOSM data Source: World Bank staff calculations based on DOSM data 20 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook this quarter, the deficit stood at RM15.0 billion (Q2 sustained at RM4.5 billion (Q2 2018: -RM4.7 billion), 2018: RM11.2 billion), with the increase mainly due to reflecting continued sizeable outward remittances by increased net payments related to investment income. foreign workers (see Box 1 for a wider discussion on Meanwhile, the secondary income account deficit was Malaysia’s current account balance). TABLE 2 Selected external sector indicators Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2016 2016 2017 2017 2017 2017 2018 2018 2018 Balance of Goods & Services (% of GDP) 7.4 8.0 5.8 6.4 7.8 7.6 8.7 5.7 6.4 Current Account Balance (% of GDP) 2.5 3.9 1.5 2.7 3.7 3.9 4.4 1.1 1.0 Total Exports (% of GDP) 67.1 69.4 71.2 71.2 72.3 70.9 70.1 69.2 69.6 Total Imports (% of GDP) 59.8 61.4 65.4 64.8 64.5 63.3 61.4 63.5 63.2 Net Portfolio Investment (RM billion) -9.8 -20.1 -32.4 17.5 -9.1 11.6 -2.6 -38.3 0.6 Gross Official Reserves (RM billion) 405.0 424.0 422.2 424.9 427.8 414.7 416.4 423.4 427.0 (US$ billion) 97.7 94.5 95.4 98.9 101.2 102.4 107.8 104.7 103.0 Source: World Bank staff calculations based on BNM and DOSM data MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 21 PART ONE - Recent Economic Developments and Outlook BOX 1 Good or bad? Making sense of the current account balance On the surface, a current account surplus seems in terms of policy settings, a deficit that coincides to have many more positive implications than with relatively large budget deficits, exchange rate a current account deficit, with the latter raising overvaluation (which may be due to interventions that greater fears of illiquidity and insolvency than the prevent the exchange rate from serving as an effective former. However, depending on what drives the shock absorber), and excessive credit growth imply the balance, a deficit may not necessarily be a bad risk of over-consumption and over-investment. thing. Similarly, a surplus does not necessarily imply that all is well in an economy, despite its suggestion of a The results of the IMF’s External Balance stronger net foreign assets (NFA) position. In addition, Assessment (EBA) provide a basis to determine whether in deficit or surplus, the current account the level of excesses in current account balances balance may not in itself be sufficient to indicate and their source. 4 However, the explanatory power of near-term financial vulnerabilities. What matters for the regression model works better for some countries macroeconomic stability is that the external position than others. For some deficit countries (e.g. Brazil, India (including the current account and gross foreign flows and Mexico), estimated norms established a deficit that and stocks) is sustainable, without the risk of drastic was in excess of their actual deficit, given their lower disruptions or the need for sharp policy adjustments in income, higher growth potential, and faster population response to domestic or external shocks. growth, thus resulting in no overall excesses. Though Malaysia’s current account surplus has narrowed since The underlying drivers of current account balances 2010 to 3 percent of GDP in 2017, much of the surplus include economic and demographic characteristics cannot be adequately explained by the EBA model, that imply a benchmark for normal balances. potentially reflecting country-specific factors that Other drivers include the institutional environment contribute to relatively high savings and low levels and government policies that may mitigate or of investment. In terms of identified policy gaps, the exacerbate a departure from the benchmark (see low level of public healthcare spending explained a Devadas and Loayza 2018 for an overview and small portion of the excess saving and current account references). A current account deficit may be an surplus. Product market regulations, which could hinder optimal response, given a country’s fundamentals that investment, also accounted for some of the unexplained cut across its level of income and stage of development, gap. The model also did not explain much of Thailand’s demographics, trade and financial characteristics. Some current account surplus, which stood at 10.6 percent of of these may signal strength, indicating the potential GDP. An excessively tight fiscal stance and high level of for future increases in output. For example, at an early foreign exchange intervention contributed to identified stage of an economy’s development, higher average policy gaps, with the IMF assessment finding that output growth or productivity, faster population the unexplained gap was partially related to political growth (resulting in a higher youth dependency ratio), uncertainty and a temporary tourism boom. Both low terms-of-trade volatility, and financial deepening factors would have led to higher savings. Consistent are associated with higher deficits. A deficit may also be with assessed current account excess surpluses, both an optimal response to cyclical conditions, particularly Malaysia and Thailand showed some signs that their real conditions characterized by a positive output gap and effective exchange rates were undervalued, despite the a negative terms-of-trade shock. On the other hand, fact that these exchange rates had appreciated in 2017. 4 The model-based estimation of excessive current account balances is provided by the sum of policy gaps, which is a normative assessment of actual policies against desirable policies, and an unexplained gap (regression residuals) after accounting for current account ‘norms’ (reflecting fundamentals, the institutional environment, and policies set at desirable levels) and cyclical factors. 22 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook FIGURE 7 Decomposing the sources of current account balances Current Account Balance, Percentage of GDP 12 10 8 6 4 2 0 -2 -4 -6 Argentina Brazil China India Indonesia Malaysia Mexico Poland Russia South Africa Thailand Turkey Cyclical Factors Fiscal Balance Gap Unexplained EBA Norm Other Policy Gaps IMF Staff Adjustment Regression Residual (Reversed Sign) Source: Authors’ illustration based on data from IMF (2018). See IMF (2018) for further details on the External Balance Assessment (EBA). EBA model-based gap = Policy gaps + Unexplained regression residual = Actual current account deficit - Cyclical factors - EBA norm EBA norm comprises fundamentals and desirable policies. Fundamentals include productivity and expected growth, demographics, initial NFA, oil and natural gas net exports, and institutional/political environment. Cyclical factors = output gap and commodity terms of trade gap. Policy gaps = the differences between actual and desirable policies. Fiscal balance gap = the difference between current cyclically adjusted fiscal balance and one desirable in the future at full employment. Other policy gaps are for public expenditure on health (versus benchmark), foreign exchange intervention (against 0, or non-zero if deemed necessary to reach reserves adequacy), the private credit-to-GDP ratio (deviation from detrended value), and capital controls (against cross-country average or own level, whichever is lower). IMF staff adjustment = outside-the-model adjustments for special factors such as high mortality risk (South Africa) and high political uncertainty (Thailand). A negative (positive) value implies a negative (positive) EBA model-based gap. Even if drivers of current account balances can be with high levels of external debt and negative net identified, they remain insufficiently informative positions were hit by large financial outflows and sharp about the immediate risks to financial stability. exchange rate depreciation (Avdjiev, McCauley, and Financial liabilities that are more stable (such as foreign Shin 2016). More than half of Malaysia’s external debt direct investment (FDI)), that foster greater automatic is of medium-to-long-term maturities, limiting rollover risk sharing (such as equity), or that correspond to risk. Foreign-currency denominated debt, which investors with a longer time horizon limits the fallout accounts for two-thirds of external debt, is mainly held from a negative domestic shock and reduces the by banks and corporations and is subject to BNM’s probability of contagion from an external shock (Forbes prudential requirements and external debt approval 2013). For instance, while Argentina and Turkey were framework respectively. Banks also have substantial identified as having large excess current account deficits external assets that can be drawn upon to meet their with some policy gaps, both have been especially short-term external debt obligations (Rozimi 2018). vulnerable in recent times given the high share of short-term foreign liabilities in their net international Perceived vulnerabilities are undoubtedly greater investment positions (NIIPs) (IMF 2018). The balance for deficit countries. Deficits are used to proxy sheets of different sectors also matter. Aggregate reliance on foreign borrowing and exposure to shifts in NFA may hide imbalances across different sectors. For sentiment, especially when foreign exchange reserves example, despite previously having current account are relatively low. Sound policies and institutional surpluses, the Republic of Korea was badly affected features can go a long way to attracting and sustaining during the global financial crisis. Banks and corporates a healthy demand for domestic assets. MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 23 PART ONE - Recent Economic Developments and Outlook Domestic inflationary pressures have eased further in recent months The headline inflation rate eased further in Q3 Measures of underlying inflation have remained 2018, mainly due to the impact of changes in the generally stable. In Q3 2018, the inflation rate for items consumption tax policy (see Figure 8). Consumer other than food and energy, excluding the direct impact Price Index (CPI) inflation has moderated further since of the GST zeroization, remained roughly unchanged June 2018, following the zeroization of the GST on June compared to the previous quarter, at 1.4 percent (Q2 1, 2018, with the average rate for the quarter standing 2018: 1.5 percent). While the overall inflation rate has at 0.5 percent in Q3 2018 (Q2 2018: 1.3 percent). Over temporarily eased over recent months, there remain the period, there were declines in seven out of twelve ongoing concerns regarding the cumulative increase main consumption groups, while the overall inflation in the cost of living pressures over the past years. rate for food and non-alcoholic beverages was relatively In particular, lower-income households (who tend modest, at 0.5 percent (Q2 2018: 1.8 percent) (see to spend a greater proportion of their incomes on Figure 9). This was partially offset by continued price essential items such as food and housing) have been increases in the transportation category, at 3.0 percent disproportionately impacted by the higher relative (Q2 2018: 3.2 percent), due to the base effect from lower increases in food prices and the declining affordability domestic petrol prices in July 2017. Among households of housing in recent years. with monthly incomes of less than RM 3,000, average prices increased by 0.3 percent in the period from Labor markets have remained stable, with September 2017 to September 2018, primarily due to modest improvements in labor force participation increases in housing and utilities (2.0 percent, Q2 2018: throughout 2018 (see Figure 10). In Q3 2018, 1.9 percent). Consumer prices remained subdued at 0.6 the labor force participation rate increased to 68.5 percent in October 2018, despite the reintroduction of percent, up by 0.1 percentage points from Q2 2018 the SST on September 1, 2018. and 0.6 percentage points from Q3 2017. The women’s FIGURE 8 FIGURE 9 CPI inflation has moderated further in recent ...due largely to the zeroization of the GST and months... lower growth in transport prices Inflation, y/y, Percentage Contribution to Inflation, y/y, Percentage 6 6 5 4 4 3 2 2 1 0 0 -2 -1 01/2016 04/2016 07/2016 10/2016 01/2017 04/2017 07/2017 10/2017 01/2018 04/2018 07/2018 10/2018 01/2016 03/2016 05/2016 07/2016 09/2016 11/2016 01/2017 03/2017 05/2017 07/2017 09/2017 11/2017 01/2018 03/2018 05/2018 07/2018 09/2018 Headline Inflation Core Inflation Others Transport Headline Inflation Housing, Water, Electricity, Food and Non-alcoholic Gas & Other Fuels Beverages Source: DOSM Source: World Bank staff calculations based on DOSM data 24 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook labor force participation rate rose from 55.3 percent was less than 3 percent. Private sector wage growth5 was in Q2 2018 to 55.5 percent in Q3 2018. In Q3 2018, broadly sustained at 5.7 percent in Q3 2018 (Q2 2018: the unemployment rate stood at 3.4 percent, a slight 5.7 percent), mainly due to the continued strong wage increase from the 3.3 percent recorded in Q1 2018 and increases in the manufacturing sector, which grew at 9.6 Q2 2018. Unemployment among those aged between percent (Q2 2018: 10.1 percent). This was considerably 15 to 24 years continues to be an area of concern, higher than the average for the service sectors (3.9 increasing from 10.4 percent in Q2 2018 to 11.4 percent percent; Q2 2018: 3.7 percent) (see Figure 11). in Q3 2018. By contrast, for every other age group, it FIGURE 10 FIGURE 11 Labor market conditions have remained broadly ...but there is continued disparity in wage growth stable... between the manufacturing and services sectors Unemployment Rate, Percentage Labor Force Participation Rate Wage, y/y, Percentage 3.6 70 14 12 3.4 69 10 3.2 68 8 3.0 67 6 4 2.8 66 2 2.6 65 0 01/2015 04/2015 07/2015 10/2015 01/2016 04/2016 07/2016 10/2016 01/2017 04/2017 07/2017 10/2017 01/2018 04/2018 07/2018 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Overall Manufacturing Major Services Labor Force Participation Rate Unemployment Rate Subsectors Source: DOSM Source: BNM and DOSM 5 Average wage growth for manufacturing sector and major services subsectors, covering 62 percent of total employment. MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 25 PART ONE - Recent Economic Developments and Outlook BOX 2 Has Malaysia’s economic growth become less inclusive? The Mid-term Review of the 11th Malaysia Plan percent annual income growth is very respectable, and the 2019 National Budget have reaffirmed the change in the pace and especially the pattern of Malaysia’s commitment to becoming a developed Malaysia’s income growth marked a distinct break from and more inclusive nation. These key policy past trends. Although B40 incomes were still increasing, documents emphasize the government’s commitment they were doing so much more slowly. More notably, to improving the wellbeing of the poorest 40 percent B40 incomes were no longer converging with those of of the population (the B40) to ensure that all Malaysians the M40. From 2013 to 2015 there was no significant share in the country’s prosperity. Official statistics change in either the Gini coefficient or the B40’s share point to significant reductions in income inequality of total income. Malaysia’s economic pie was growing and poverty in recent years, yet there is widespread more slowly, and the B40’s share of the pie had stopped sentiment that the B40 have not been receiving their increasing. From this perspective, Malaysia’s income share of the benefits. How can these apparently growth was very inclusive from 2008 through 2013, but contradictory perspectives be reconciled? much less so from 2013 through 2015. In the period from 2008 to 2013, the growth rate in household income per capita was highest among the lowest income households. The growth incidence Malaysia’s income growth curves in Figure 12 depict the inflation-adjusted was very inclusive from average annual growth in income per capita for each percentile of the income distribution6. From 2008 to 2008 through 2013, but 2011, per capita incomes grew at an average of 8–11 much less so from 2013 percent per year among the B40, 6–8 percent among the middle 40 (M40, percentiles 41–80), and 4-6 percent through 2015 among those in the top 20 percent (T20, percentiles 81– 100). The steeper growth incidence curve for 2011–13 indicates an even more favorable income growth for Throughout the period from 2008 to 2015, the lower income households, with income growth rates in absolute gaps in average B40, M40, and T20 the B40 more than double those experienced by the incomes were increasing. For many – especially T20. From 2008 to 2013, average incomes of the B40 non-economists – the absolute gap in incomes is grew by a total of 67 percent, and their share of national more salient, and more important, than proportional income increased from 12.9 to 15.4 percent. The latter measures such as higher B40 income growth rates is consistent with a reduction in the Gini coefficient or declining inequality measures. Figure 13 presents from 0.471 to 0.425. In short, Malaysia’s economic pie the average income increase for each income group, was expanding rapidly, and the B40 were gaining an showing larger absolute gains for higher income groups increasing share of that pie. in each of the three periods. For example, from 2011 to 2013 the B40 average incomes per person per month However, from 2013 to 2015, the income growth increased by RM 113, 179, and 313 for the B40, M40, and rate among the B40 fell sharply to 6 percent, less T20, respectively. That the differences in gains across than half the rate during the period from 2011 to income groups are proportionally smaller than the 2013, and lower than for the M40. Even though 6 income differences that existed in 2011 (as illustrated 6 All statistics reported here are based on household income per capita, weighted by the population size and adjusted for inflation using the CPI. Thus, there are differences from the statistics reported by DOSM, which generally use income per household, weighted by the number of households, and with no adjustment for inflation. Another difference is that whereas DOSM reports statistics based on the year that households are interviewed for the Household Income Survey, these figures use the “income reference year”, which is the year prior to the HIS interview. For example, the HIS 2014 reports incomes earned in 2013. 26 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook FIGURE 12 FIGURE 13 Until 2013, incomes were growing faster for those ...but the absolute gap between those at the at the lower end of the distribution... bottom and those at the top continues to widen Growth Incidence Curves, Annual Growth in Real Household Increase in Mean Monthly Income per Capita, RM Income per Capita, 2008-2015 16 2008-2011 450 2011-2013 400 14 2013-2015 350 12 300 10 250 8 200 6 150 4 100 2 50 0 0 0 10 20 30 40 50 60 70 80 90 100 2008-2011 2011-2013 2013-2015 Percentile of Real Household Income per Capita Bottom 40% Middle 40% Top 20% Source: World Bank staff calculations using Household Income Survey data Source: World Bank staff calculations using Household Income Survey data from DOSM from DOSM in Figure 12) may be of secondary or lesser importance nonmonetary dimensions of wellbeing. The ‘shared to people who see that larger income increments are prosperity premium’ refers to the difference, in going to those who were already better off. From the percentage points, between the income per capita perspective of absolute income differences, one may growth rates of the B40 and the nationwide average. argue that income growth was not inclusive in any of the Both increases to national income and a positive three periods examined. shared prosperity premium are the pillars on which the achievement of inclusive growth is based. In Malaysia, To improve the socio-economic circumstances of there are many pathways to ensure that the B40 the B40 and to foster inclusiveness, the constructs participate in and benefit from the countries ongoing of ‘shared prosperity’ and the ‘shared prosperity growth and development. These include measures to premium’ are useful. One of the World Bank Group’s enhance opportunities to accumulate human capital; to twin goals is to promote shared prosperity around the ensure that human capital can be effectively utilized to world through measures to raise the incomes of the B40 provide gainful employment to all members of society; in every country in a sustainable manner and to facilitate and to establish a more effective social protection the achievement of concomitant improvements in system to increase resilience to negative shocks. MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 27 PART ONE - Recent Economic Developments and Outlook Conditions in the financial system have remained broadly stable Monetary policy has remained unchanged since of profitability, with a return on equity rate of 13.3 January 2018, with the Overnight Policy Rate (OPR) percent (2017: 13 percent) for the banking sector held at 3.25 percent. In its most recent monetary and 15.5 percent (2017: 16 percent) for the insurance policy statement in November 2018, BNM indicated sector. The banking system’s liquidity levels remain that Malaysia’s economy is expected to remain on a sufficient to support financial intermediation, with all steady growth path in 2019, with private consumption banking institutions having Basel III Liquidity Coverage forecast to continue to be the main driver of growth and Ratio (LCR) levels in excess of the minimum statutory investment activity to be sustained. However, economic requirement of 90 percent. In addition, the impairment growth is expected to be constrained by a decrease in and delinquencies level remained low and stable, public sector expenditure. On the external front, while reflecting the banking system’s sound asset quality. BNM expects that growth in exports will continue to The overall debt servicing capacity of households and provide additional support to the economy, although businesses remained steady, supported by healthy at a more moderate pace, it warns that any further financial positions. escalation in global trade tensions poses downside risks to growth. At the same time, BNM expects the headline Net financing increased in Q3 2018, largely driven inflation to increase in 2019 due to higher global oil by accelerated growth in outstanding loans by prices and the floating of domestic fuel prices. At the the banking system and development financial present point, BNM views its monetary policy stance institutions (DFIs), with growth increasing to as accommodative and supportive of economic activity. 5.1 percent (Q2 2018: 4.4 percent). Meanwhile, in the third quarter, growth in outstanding issuances Financial soundness indicators show that the of corporate bonds continued at double-digit rates, banking system remains resilient. As at end-June standing at 10.8 percent (Q2 2018: 12.4 percent) (see 2018, financial institutions recorded sound levels Figure 14). Issuances of corporate bonds were mainly FIGURE 14 FIGURE 15 Net financing rose amid higher loan growth Household loan growth was higher, partly driven by an increase in purchases of vehicles Contribution to Net Financing Growth, y/y, Percentage Outstanding Loans, y/y, Percentage 10 12 10 8 8 6 6 4 4 2 2 0 0 01/2016 04/2016 07/2016 10/2016 01/2017 04/2017 07/2017 10/2017 01/2018 04/2018 07/2018 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Corporate Banking System Total Net Total Loans Business Loans Household Loans Bonds and DFI Loans Financing Source: BNM Source: BNM 28 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook channeled towards financing capital expenditure and monetary policy. In the domestic bond market, yields operating expenses. In the banking system, growth in on Malaysian Government Securities remained broadly outstanding loans for businesses accelerated from the stable during the period, despite initial concerns previous quarter, reaching 3.6 percent (Q2 2018: 2.2 regarding the increase in government disclosed debt percent). Loan growth for both businesses and DFIs and liabilities and widening fiscal deficit for the year. In was driven mainly by the manufacturing, construction, November, the value of non-resident outflows from the wholesale and retail trade, as well as restaurants and domestic bond market stood at RM5.2 billion. Interbank hotels sectors. Meanwhile, the outstanding loan growth rates remained broadly unchanged, with minimal signs rate for the household sector increased slightly over of tightening in liquidity. the quarter, to 5.5 percent (Q2 2018: 5.3 percent) (see Figure 15). This reflected an increase in the purchase of The ringgit continued its depreciating trend passenger cars. relative to the US dollar in November, reflecting outflows from domestic bond and equity markets Domestic financial markets have been affected (see Figure 17). The ringgit depreciated slightly by 0.1 by heightened risk aversion arising from external percent relative to the US dollar in November, standing developments. Non-resident investors have reduced at RM4.19 on November 30. Over this period, the their exposure in the equity market, with the value of ringgit also depreciated against the euro (-0.6 percent), outflows standing at RM0.7 billion in November (see UK pound sterling (-0.7 percent) and most regional Figure 16). During the same period, the FBM KLCI currencies. At end-November, the international declined by 1.8 percent amid a confluence of global reserves stood at US$ 102 billion. The reserve position factors, including concerns regarding an escalation of is sufficient for 7.5 months of retained imports cover the trade tensions between the US and China, declining and is at the ratio of 1.0 to short-term external debt. global oil prices, and the developments in the US FIGURE 16 FIGURE 17 Cautious sentiment arising from a confluence ...contributing to a depreciation of the ringgit of global factors has contributed to portfolio against the US dollar outflows... Non-resident Portfolio Flows, RM Billion MYR/Currency, Rebased to January 2018=100 (Upward Trend Indicates MYR Depreciation) 15 110 10 105 5 100 0 95 -5 90 -10 -15 85 -20 80 03/01/2017 15/02/2017 27/03/2017 08/05/2017 19/06/2017 31/07/2017 12/09/2017 24/10/2017 04/12/2017 15/01/2018 27/02/2018 06/04/2018 22/05/2018 03/07/2018 10/08/2018 26/09/2018 05/11/2018 06/2017 08/2017 10/2017 12/2017 02/2018 04/2018 06/2018 08/2018 10/2018 USD EUR GBP IDR Equity Corporate Bonds Government Bonds and Sukuk and BNM Bills THB VND PHP Source: BNM and Bursa Malaysia Source: World Bank staff calculations based on BNM data MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 29 PART ONE - Recent Economic Developments and Outlook The 2019 budget sets out new directions for Malaysia’s fiscal policy The Pakatan Harapan government announced its to contract by half, to 1.6 percent of GDP (2017: 3.3 first budget on November 2, 2018, with this budget percent) (see Figure 19). The revenue shortfall will be outlining a number of new fiscal policy measures partially offset by larger petroleum-related proceeds, (see Box 3). The government revised several key the value of which will reach 3.6 percent of GDP (2017: projections to better reflect the current economic 2.5 percent), amid higher prevailing global oil prices in environment and to outline its fiscal plans going 2018, relative to the government’s initial projection of forward. The government’s GDP forecast for 2018 was oil prices at US$52 per barrel. The bulk of the increase revised downward from 5.0-5.5 percent to 4.8 percent. in petroleum-related proceeds will be derived from According to government projections, the momentum dividend payments by Petronas amounting to RM26 is expected to continue into 2019, with the economy billion. Tax revenue from non-oil related sources is also projected to grow at 4.9 percent. The government also expected to increase. This is premised on expectations raised its fiscal deficit target for 2018 from 2.8 percent of a larger corporate tax collection, which is projected of GDP to 3.7 percent amid several fiscal policy changes to increase by 9.4 percent (2017: 1.3 percent), and (see Figure 18), before narrowing to 3.4 percent of GDP personal income tax, which is expected to grow by 20.2 in 2019 and 3.0 percent of GDP in 2020. The pace percent (2017: 5.0 percent). In addition, the government of fiscal consolidation is expected to deviate from will receive a one-off contribution of RM4 billion (0.3 past expectations due to a mixture of both increased percent of GDP) from the state-owned Retirement expenditures (including those linked to the clearance of Fund Incorporated (KWAP) to finance the civil servant tax refund arrears) and reduced revenues (temporarily retirement charges during the year. offset by enlarged oil and gas dividend receipts). The government’s operating expenditure is also In 2018, Federal Government revenue in proportion projected to trend marginally higher in 2018 to of GDP is expected to increase marginally reach 16.4 percent of GDP (2017: 16.1 percent). compared to the previous year, to 16.5 percent This is largely due to the increased subsidy outlays (2017: 16.3 percent). Following the replacement of expected over the year, at 2 percent of GDP (2017: the GST with the SST and the 3-month consumption 1.7 percent), to facilitate the stabilization of diesel and tax holiday in the period from June and August, the RON95 petrol prices. Expenditure on pension outlays collection of consumption-based taxes is projected is also expected to grow to 1.8 percent of GDP (2017: FIGURE 18 FIGURE 19 The fiscal deficit is expected to increase to 3.7 ...amid lower consumption-based tax revenues percent in 2018... and a higher fuel subsidy allocation Federal Government Overall Balance, Percentage of GDP Change in Federal Government Revenue and Expenditure between 2017 and 2018e, Percentage of GDP 0 1.8 One-off transfer Overall change -1 1.4 Petroleum 1.0 related Others -2 0.6 Others Salaries & Pensions Social Direct taxes Subsidies Economic 0.2 excl. PITA Debt charges -3.1 -3.0 Others -3 -3.2 -0.2 Reclassification -3.4 of items -3.8 -3.7 -0.6 SST/GST -4 -4.3 -1.0 -1.4 -5 -1.8 2012 2013 2014 2015 2016 2017 2018e Revenue Operating Development Expenditure Expenditure Source: MOF Source: World Bank staff calculations based on MOF data 30 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook BOX 3 What are the key takeaways from the Pakatan Harapan government’s inaugural budget? Budget 2019 is the government’s first budget engaging with relevant stakeholders to develop peer- since it was elected in May 2018. The inaugural to-peer home financing exchange platforms, serving budget highlighted the government’s realignment of as an alternative source of financing for first-time priorities, with an increased emphasis on improving homebuyers. To facilitate the emergence of a more governance and ensuring a more equitable growth entrepreneurial ecosystem, the government announced that benefits all Malaysians. This reaffirms similar the introduction of several financing incentives and messages delivered through the Mid-term Review of measures to support the digital economy, including the the 11th Malaysia Plan. In the context of decelerating allocation of funds totaling RM1 billion to implement global growth and an increasingly challenging global the National Fiberization and Connectivity Plan in 2019. environment, the tabling of the budget also followed a number of announcements related to key policies in The Ministry of Education and the Ministry of the preceding months. In particular, the government Health received the largest funding allocations signaled its intention to reintroduce the SST following under the budget, accounting for 34.5 percent and the removal of the GST and to increase the level of 12.8 percent of the total respectively. Some of the disclosure regarding the stock of government liabilities funds allocated to the education sector will be used to and unpaid tax refunds. In this budget, the challenge improve school infrastructure and to upgrade facilities for the government was to achieve a careful balance in universities and training institutions. Similarly, some between maintaining fiscal prudence and ensuring of the funding allocations for the health sector are to adequate fiscal buffers, while safeguarding growth and be used to build, maintain, and upgrade healthcare improving the welfare of lower income groups. facilities and to procure medical equipment. In the formulation of the budget, the government In the budget, the government reiterated its focused on three main pillars: (i) implementing commitment to welcome productive investments institutional reforms; (ii) preserving socio-economic and to promote greater competition in the economy. well-being; and (iii) fostering an entrepreneurial While acknowledging that GLICs and GLCs play an economy. The budget outlines 12 key strategies to important role in the economy, the government also achieve these goals. To facilitate institutional reforms, recognized that in a number of areas, the sheer scale of the government plans to table the new Government state-owned enterprise activities has caused distortions Procurement Act in 2019 and the Fiscal Responsibility to economic activity and a stifling of competition, Act by 2021, and to establish a debt management resulting in increased costs for consumers. In a recent office. The government has also introduced several high-level statement, the government stated that: “It new revenue measures, such as taxation on imported is not the business of government to be in business.” services by foreign service providers. Underscoring Going forward, the government will review the role its commitment to improving the socio-economic and functions of publicly-owned entities to focus its status of all Malaysians, particularly the B40 group, the expenditure and investments on specific areas in which government announced the introduction of a more the private sector is unable to meet the needs of the targeted BSH cash transfer program, and a targeted public. fuel subsidy mechanism. The government is also MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 31 PART ONE - Recent Economic Developments and Outlook 1.7 percent), while expenditure on debt service charges of government liabilities now takes into account Federal is forecast to reach 2.2 percent (2017: 2.1 percent). Government debt, committed government guarantees These increases are in line with an expanded pensioner and other obligations, including obligations associated base and a higher fiscal deficit. The larger expenses with public-private partnerships (PPP). The inclusion in these areas are expected to be partially offset by of committed contingent liabilities will provide a more a reclassification of several development expenditure comprehensive picture of the longer-term implications items, amounting to 0.5 percent of GDP, from operating of the government’s obligations, consistent with the outlays to development expenses. methodology for the IMF’s Public Sector Debt Statistics. In 2018, the government’s development expenditure Federal Government debt in proportion to GDP is estimated to increase to 3.8 percent of GDP remained unchanged as of Q2 2018, at 50.7 percent (2017: 3.3 percent), reflecting the inclusion of (4Q 2017: 50.7 percent), with risks appearing several expenses previously classified as operating manageable (see Figure 20). Ringgit-denominated expenditure. These reclassified expenses mostly relate papers constituted 97.1 percent of the Federal to public transportation infrastructure developments, Government borrowing as of Q2 2018 (Q4 2017: 96.9 contributing to a noticeable upward revision of the percent), limiting the risks arising from exchange rate economic development expenditure to 2.3 percent fluctuations. The debt structure also continues to skew of GDP during the year (2017: 1.8 percent). Social towards longer-tenured issuances, with the average expenditure, which accounts for about a quarter of the time to maturity projected to increase to 7.6 years in total development spending, is projected to expand 2018 (2017: 7.2 years), thus reducing rollover risks. slightly in 2018 to 1.0 percent of GDP (2017: 0.9 percent), As of Q2 2018, large domestic institutional holders with marginal growth expected across education, health continued to account for more than two-thirds of the and housing sectors. Despite the overall increase, the total outstanding debt, providing underlying support level of development expenditure in proportion to GDP for the government’s borrowing requirements in the has remained relatively low compared to the average context of lower demand from foreign investors. The level of 4.6 percent recorded in the period from 2008 share of ringgit-denominated debt securities held by to 2017. non-residents declined significantly throughout 2018, standing at 23.8 percent in Q2 2018 (Q4 2017: 28.0 As part of its efforts to improve transparency, percent). the government has adopted a new approach to the disclosure of its overall liabilities and By end-June 2018, the value of debt guaranteed commitments. With the new approach, the reporting by the Federal Government had increased to 18.1 FIGURE 20 FIGURE 21 Federal Government debt as a share of GDP has ...but guaranteed debt has increased further remained stable... Federal Government Debt, Percentage of GDP Outstanding Loan Guarantees, Percentage of GDP 70 25 60 20 50 53.0 52.7 54.4 52.7 51.6 50.7 50.7 18.1 17.6 15 40 15.4 15.5 15.3 15.2 14.7 30 10 20 5 10 0 0 2012 2013 2014 2015 2016 2017 Q2-2018 2012 2013 2014 2015 2016 2017 Q2-2018 Source: MOF Source: MOF 32 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook percent of GDP (Q4 2017: 17.6 percent) (see Figure Meanwhile, the Federal Government’s outstanding 21). Almost half of these outstanding loan guarantees PPP commitments were revised down to 12.9 were extended to facilitate the implementation of percent in Q2 2018 (Q4 2017: 19.2 percent), due infrastructure investments by non-financial public to the cancellation and postponement of several corporations (NFPCs), while another one-fifth were large-scale transportation PPP projects during provided to support the government’s tertiary the period. Investments in the social sector, relating education and public servant home financing schemes. mainly to the construction of higher education and Meanwhile, by end-June 2018, the value of committed healthcare facilities, constitute 41 percent of the government guarantees stood at 8.2 percent of GDP. total government PPP commitments, followed by the These committed guarantees include those for the general administration (including the construction provision of financial support in the form of coupons or of government buildings) and economic (building of profit payment at the early stage of project operations transport terminals and maintenance of federal roads) due to insufficient income, especially for rail operators sectors at 29 percent and 28 percent respectively. such as the Mass Rapid Transit. Near-term fiscal consolidation efforts will be primarily driven by expenditure rationalization In 2019, Federal Government revenues are accumulated over the recent years, totaling RM37 billion expected to increase to 17.1 percent of GDP (2018e: (2.4 percent of GDP). Total government expenditure 16.5 percent) (see Figure 22). This increase is mainly is also projected to grow slightly, to 20.5 percent of attributed to the receipt of a special dividend transfer GDP (2018e: 20.3 percent), due to the need to clear of RM30 billion (2.0 percent of GDP) from Petronas. accumulated arrears of GST and income tax refunds The one-off dividend will be allocated towards the (see Figure 23). Over the same period, government clearance of outstanding income tax and GST refunds debt is expected to trend higher to 51.8 percent of FIGURE 22 FIGURE 23 Federal Government revenue as a share of GDP Similarly, Government expenditure as a share GDP is expected to increase in 2019 due to a special is projected to grow on account of a one-off tax transfer from Petronas refund payment Federal Government Revenue, Percentage of GDP Federal Government Gross Expenditure, Percentage of GDP 25 25 23.4 0.9 22.3 2.1 1.0 20.5 20.3 20.6 19.9 19.4 20 18.9 20 2.0 0.8 1.0 17.3 17.1 2.0 0.9 2.4 16.3 16.5 1.8 2.3 1.0 6.0 3.9 1.9 2.5 2.0 15 2.5 3.6 15 3.0 3.3 12.7 11.6 1.6 3.4 10.0 3.3 1.6 9.3 9.5 3.4 1.4 8.1 10 3.3 3.2 10 2.8 2.9 2.7 5 9.0 5 8.7 8.2 7.7 8.1 7.6 7.7 7.7 7.6 7.4 7.5 7.1 0 0 2014 2015 2016 2017 2018e 2019f 2014 2015 2016 2017 2018e 2019f Direct Taxes Excl. PITA Others One-off Transfer Tax Refund Others Salaries and Pensions Petroleum-related SST/ GST Economic Development Social Development Source: World Bank staff calculations based on MOF data Source: World Bank staff calculations based on MOF data MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 33 PART ONE - Recent Economic Developments and Outlook GDP, reflecting the increased costs of deficit financing be lower, at 2.8 percent of GDP (2018e: 2.8 percent), and refinancing of matured government issuances. compared to its level in 2017 (3.1 percent). These projections assume a marginally higher real GDP growth rate of 4.9 percent and average crude oil prices in the range of US$ 60 to 70 per barrel in 2019. Malaysia is projected to Adjusting for the one-off dividend transfer from record one of the lowest Petronas, government revenue in proportion to GDP levels of fiscal revenue in is expected to decline in 2019. Subtracting the one- off dividend transfer from Petronas, the value of Federal proportion to GDP in 2019, Government revenue in proportion to GDP is projected well below the average to decline to 15.1 percent in 2019 (2018e: 16.2 percent after adjusting for the special contribution from KWAP) for middle-income and (see Figure 24). The decline mainly reflects projected advanced economies decreases in revenue contributions from corporate and personal income taxes, consumption-based taxes and dividend payments from the state-owned entities, Over the longer term, general government revenue which are expected to stand at 6.9, 1.4 and 1.9 percent in proportion to GDP has declined steadily since of GDP respectively (2018e: 7.4, 1.6 and 2.3 percent). reaching a peak of 25.8 percent of GDP in 2012 (see Following the replacement of the GST with the SST, Figure 24). In 2019, the adjusted general government the share of consumption-based taxes is expected to revenue7 is expected to stand at 18.0 percent of GDP, decline to 9.4 percent of the adjusted Government almost one-third lower than its level in 2012, with revenue (2017: 20.1 percent), while petroleum-related marked reductions observed across oil-based incomes, income is forecast to increase to 22.0 percent, up from non-oil direct and indirect taxes over a span of seven 15.7 percent in 2017. Meanwhile, in 2019, government years. Relative to international comparators, Malaysia is revenue at the state and local levels is projected to projected to record one of the lowest levels of fiscal FIGURE 24 FIGURE 25 Government revenue7 has been on a steady ...reaching a relatively low level by international downward trend since 2012... comparison General Government Revenue7, Percentage of GDP General Government Revenue7, 2019f, Percentage of GDP 30 40 25.8 24.6 35 +2% 25 23.8 4.4 22.2 3.7 30 3.9 20.5 3.3 19.4 -21% +4% 20 19.3 -6% 3.3 18.0 25 +4% 3.1 2.8 2.8 Change between +2% 15 20 2012 and 2019f: -1% +19% +8% -5% -30% -16% 21.4 15 10 20.9 19.9 -15% 18.9 17.3 16.3 16.2 15.1 10 5 5 0 0 2012 2013 2014 2015 2016 2017 2018e Advanced MENAP Emerging Market & Middle-income Emerging Market & Middle-income (Asia) China Vietnam Thailand Cambodia Philippines Myanmar Malaysia Lao PDR Indonesia 2019f State and Local Governments, Federal Government Statutory Bodies Source: World Bank staff calculations based on MOF data Source: World Bank staff calculations based on IMF and MOF data 7 Excludes the one-off contributions expected from KWAP in 2018 and Petronas in 2019. 34 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook revenue in proportion to GDP in 2019, well below the development-related supplies and services spending average figures for EMDEs (27.5 percent of GDP) and as development expenditure rather than operating advanced economies (36.2 percent of GDP) (see Figure expenses. Noticeable spending reductions are also 25). Malaysia has also recorded one of the steepest expected across economic development outlays (from revenue declines over recent years. This limits the 2.3 percent in 2018 to 1.9 percent in 2019), civil servant government’s scope to respond to future shocks and to salaries (5.7 percent to 5.4 percent) and transfers to provide the public services that Malaysia’s expanding state governments and statutory bodies (1.5 percent to middle class will increasingly expect from the state. 1.3 percent). These cuts notwithstanding, expenditure on civil service salaries and pensions has continued to In the near term, the government will strive to dominate public spending, with the share projected to achieve fiscal consolidation through rigorous increase to 39.1 percent (2018e: 36.9 percent) of the rationalization of expenditure, with the total by 2019 (see Figure 27). adjusted government expenditure8 set to decline considerably to 18.1 percent of GDP in 2019 (2018e: 20.3 percent). Downward adjustments to expenditure are expected to be broad-based across most major components of operating and economic development outlays (see Figure 26). In particular, current government spending on subsidies and on supplies and services are expected to be cut to 1.5 and 1.9 percent of GDP respectively (2018e: 2 and 2.6 percent). These reductions will account for about half of the total gross expenditure cuts, with the cuts reflecting the government’s intention to move towards more targeted programs for petrol subsidies and social assistance, and to reclassify some FIGURE 26 FIGURE 27 Broad-based declines in Federal Government The civil service wage bill continues to dominate operating and economic development outlays are Malaysia’s public spending, with its share expected in 2019 projected to increase further next year Change in Federal Government Expenditure8 between 2018e and 2019f, Share of Civil Service Salaries and Pensions to Federal Percentage of GDP Government Expenditure8, Percentage 2019f: 39.1% 0.5 40 35 0.0 30 Economic Development -0.5 25 Salaries and Pensions 20 -1.0 Subsidies 15 -1.5 10 Supplies and Services Transfer to State 5 -2.0 Governments & Statutory Overall Change: -2.2% 0 Bodies -2.5 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018e Source: World Bank staff calculations based on MOF data Source: World Bank staff calculations based on MOF data 8 Excludes the one-off payment of outstanding income tax and GST refunds in 2019. MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 35 PART ONE - Recent Economic Developments and Outlook TABLE 3 Federal Government financial position   RM billion Percentage of GDP (current prices)   2016 2017 2018e 2019f 2016 2017 2018e 2019f Revenue 212.4 220.4 236.5 261.8 17.3 16.3 16.5 17.1 Direct Taxes 109.6 116.0 113.5 135.1 8.9 8.6 9.3 8.8 Companies Income Tax 63.6 64.5 70.5 70.2 5.2 4.8 4.9 4.6 Petroleum Income Tax 8.4 11.8 16.8 18.1 0.7 0.9 1.2 1.2 Individual income tax 27.6 28.9 34.8 35.0 2.2 2.1 2.4 2.3 Others 10.0 10.9 11.3 11.8 0.8 0.8 0.8 0.8 Indirect Taxes 59.7 61.6 41.2 41.1 4.9 4.6 2.9 2.7 Goods and Services Tax 41.4 44.4 23.1 22.0 3.4 3.3 1.6 1.4 Excise Duties 11.7 10.1 10.7 11.4 1.0 0.7 0.7 0.7 Others 6.6 7.2 7.4 7.7 0.5 0.5 0.5 0.5 Non-Tax Revenue 40.0 39.5 57.9 81.6 3.3 2.9 4.0 5.3 Non-Revenue Receipts 3.1 3.2 3.8 4.0 0.3 0.2 0.3 0.3     Operating Expenditure 210.2 217.7 235.5 259.9 17.1 16.1 16.4 17.0 Emoluments 73.1 77.0 81.3 82.0 5.9 5.7 5.7 5.4 Retirement Charges 21.0 22.8 25.8 26.6 1.7 1.7 1.8 1.7 Debt Service Charges 26.5 27.9 30.9 33.0 2.2 2.1 2.2 2.2 Supplies and Services 30.1 34.7 36.5 29.1 2.4 2.6 2.6 1.9 Subsidies 24.7 22.4 28.1 22.3 2.0 1.7 2.0 1.5 Others 34.8 32.9 32.9 66.9 2.8 2.4 2.3 4.4 Gross Development Expenditure 42.0 44.9 54.9 54.7 3.4 3.3 3.8 3.6 Economic Services 25.1 24.2 33.0 29.2 2.0 1.8 2.3 1.9 Defense and Security 4.8 5.3 5.3 7.1 0.4 0.4 0.4 0.5 Social Services 10.4 12.4 14.5 15.2 0.9 0.9 1.0 1.0 General Administration 1.6 2.9 2.0 3.2 0.1 0.2 0.1 0.2 Less: Loan Recoveries 1.3 1.9 0.6 0.7 0.1 0.1 0.0 0.0 Net Development Expenditure 40.6 43.0 54.3 54.0 3.3 3.2 3.8 3.5 Overall Surplus / Deficits (-) -38.4 -40.3 -53.3 -52.1 -3.1 -3.0 -3.7 -3.4 Source: World Bank staff calculations based on MOF data 36 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook Economic outlook Growth in East Asia is expected to moderate slightly over the near term Global growth is expected to slow over the next down by maturing demographic and productivity two years, reflecting mainly a gradual slowdown trends. in advanced economies. In 2018, the growth rate for advanced economies is projected to moderate slightly In 2019-2020, the growth rate for developing EAP to 2.2 percent (see Figure 28). In 2019-20, it is expected is expected to moderate slightly but to remain to slow further to an average of 1.8 percent, as economic generally solid across the region (see Figure 29). In slack diminishes, monetary-policy accommodation is 2018, China’s rate is projected to slow from 6.5 percent gradually unwound and the effect of US fiscal expansion to an average of 6.2 percent over the next two years as wanes. Over the longer-term forecast horizon, it continues to rebalance its economy, with this forecast advanced economies are expected to move closer to assuming that the negative impact of higher US tariffs their relatively modest long-run potential growth rates, on Chinese exports will be offset by accommodative which remain constrained by aging populations and domestic policy responses. Meanwhile, economic subdued productivity growth. Similarly, EMDE growth activity in the developing ASEAN countries is expected is expected to increase only slightly over 2019-2020, to remain generally robust, with these countries reflecting a projected slowdown in advanced-economy recording an estimated growth of 5.4 percent in growth, easing global trade and investment activity, 2018 and 5.3 percent in 2019-2020. Robust private tightening financing conditions and maturing cyclical consumption will remain the main driver of growth recovery in commodity exporters. Their longer-term among the ASEAN-5 economies, partially offsetting growth drivers are also expected to weaken, weighed the effects from a weaker outlook for external demand. FIGURE 28 FIGURE 29 Global economic growth is expected to moderate Economic activity in developing EAP is expected over the next two years to ease but remain solid across the region GDP, y/y, Percentage GDP, y/y, Percentage Latest Estimates (Oct 2018) Latest Estimates (Oct 2018) 8 6 Previous Estimates (Jun 2018) Previous Estimates (Jun 2018) 7 5 6 4 5 3 4 3 2 2 1 1 0 0 2018f 2019f 2020f 2018f 2019f 2020f 2018f 2019f 2020f 2018f 2019f 2020f 2018f 2019f 2020f 2018f 2019f 2020f World Advanced Emerging & Developing EAP Developing EAP Developing Economies Developing excl. China ASEAN Economies Source: World Bank staff projections Source: World Bank staff projections MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 37 PART ONE - Recent Economic Developments and Outlook Malaysia’s economy is expected to grow at a more moderate pace Malaysia’s economy is expected to grow at a more the commodity-related sectors. However, growing moderate pace in the near term, with the rate uncertainty regarding the external environment could projected to reach 4.7 percent in 2019. Private affect investment decisions, particularly among export- sector consumption will continue to be the main driver oriented firms. Meanwhile, public corporations’ capital of the economy, although growth is projected to expenditure is expected to remain subdued due to moderate to 6.4 percent in 2019 (2018f: 7.2 percent), the government’s ongoing expenditure rationalization as consumers have frontloaded their spending during program, resulting in the scaling down of several the zero-rated GST period and will factor in the effect infrastructure-related projects. of the SST in their spending. Nevertheless, household spending will be buoyed by stable labor market The external sector may be negatively affected conditions, income-supporting measures including by heightened uncertainty surrounding the global the BSH, and the one-time repayment of tax refunds. environment, particularly the possible escalation In addition, targeted fuel and electricity fuel subsidies of trade tensions between the US and China. In for the B40 households could help sustain disposable addition, export growth would likely be affected by incomes among this group. In the public sector, the a slowdown in the global E&E cycle. This is expected government’s expenditure rationalization measures are to be partially offset by a recovery in commodity expected to weigh down on public consumption, which exports and relatively sustained demand from regional is projected to grow at 0.7 percent (2018f: 1.2 percent). trading partners. In 2019, Malaysia’s export growth is projected to remain subdued at 3.0 percent (2018f: 2.8 In 2019, gross fixed capital formation growth is percent). Growth in imports is likely to decelerate, as a expected to increase slightly to reach 2.3 percent less supportive global environment would impact the (2018f: 2.1 percent). The private investment growth imports of intermediate and re-export goods, with a rate is expected to be sustained at 3.2 percent (2018f: decline in GFCF growth potentially resulting in a slower 3.3 percent), due to ongoing expansion in key sectors growth of capital imports. In the context of a more such as manufacturing and a gradual recovery in challenging external environment, the current account TABLE 4 GDP growth and contribution to growth Annual Growth, Contribution to Annual GDP Growth y/y, Percentage (Percentage Point) 2017 2018f 2019f 2020f 2017 2018f 2019f 2020f GDP 5.9 4.7 4.7 4.6 Domestic Demand (including stocks) 6.5 6.0 5.3 5.1 6.0 4.4 4.1 4.0 Final Consumption 6.7 6.0 5.5 5.2 4.4 4.0 3.6 3.5 Private Sector 7.0 7.2 6.4 6.2 3.7 3.8 3.5 3.4 Public Sector 5.4 1.2 0.7 0.4 0.7 0.2 0.1 0.04 Gross Fixed Capital Formation 6.2 2.1 2.3 2.2 1.6 0.5 0.5 0.5 Change in Stocks 0.1 0.0 0.0 0.0 External Demand Exports of Goods & Services 9.4 2.8 3.0 2.9 6.6 2.0 2.6 2.5 Imports of Goods & Services 10.9 2.7 2.6 2.5 -6.8 -1.8 -2.0 -1.9 Source: World Bank staff calculations and projections 38 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook surplus is projected to narrow to around 2.5 percent of addition, the impact of the reintroduction of the SST GDP in 2019, with a trade surplus helping to offset the would also be reflected in higher headline inflation, persistent deficit in services and income accounts. although its effect is expected to taper towards year- end. The underlying inflation rate, which removes News-based measures of economic sentiment the impact of the consumption tax, is expected to point towards a lower forecast of GDP growth remain stable, given minimal demand pressures in the compared to those of professional forecasters. economy. The complementary news-based measures of economic sentiment9 indicate a less optimistic sentiment regarding At a more granular level, the most recent World Malaysia’s near-term macroeconomic prospects Bank estimates indicate that the poverty rate in during 2H 2018, with the sentiment-adjusted forecast Malaysia is expected to continue to decline. Using of Malaysia’s GDP growth in 2019 tracking below the the World Bank’s upper-middle income poverty line of consensus forecast of 4.6 percent in November (see US$5.50/day (2011 PPP), the poverty headcount ratio Figure 30). Below-trend optimism was notable across the is projected to decline to 1.2 percent by 2020. The economic, corporate and industrial categories, while the government continues to emphasize a commitment to public sentiment associated with the financial markets improving the socio-economic status of lower income and political clusters has not deviated significantly from groups. When the Budget 2019 was announced, it its historical averages (see Figure 31). contained a number of measures intended to benefit the B40 and M40 groups. These include the recently In 2019, Malaysia’s headline inflation rate is reviewed and revised cash transfer program, BSH, an expected to increase, due to higher domestic fuel additional increase of the minimum wage to RM1,100, prices following the implementation of the float and the introduction of a nationwide health screening pricing mechanism for fuel beginning Q2 2019. In program and health insurance scheme for the B40. FIGURE 30 FIGURE 31 Sentiment-based forecast of GDP growth in ...reflecting mainly below-trend optimism in the 2019 trended below the consensus forecast in economic and corporate clusters November... GDP, y/y, 2019f, Percentage News Sentiment, Z-score 6.0 1.5 1.0 5.5 0.5 0.0 5.0 -0.5 4.6% -1.0 4.5 -1.5 4.3% -2.0 4.0 -2.5 3.5 -3.0 01/2018 02/2018 03/2018 04/2018 05/2018 06/2018 07/2018 08/2018 09/2018 10/2018 11/2018 01/2018 02/2018 03/2018 04/2018 05/2018 06/2018 07/2018 08/2018 09/2018 10/2018 11/2018 Consensus Mean Consensus Sentiment-adjusted Commodity/ Corporate/ Political/ Economic Forecast Range Forecast Forecast Financial Industrial General Source: World Bank staff projections Source: World Bank staff calculations 9 The news-based sentiment index is derived by the staff of the World Bank through an analysis of the proportion of positive words (“gain”, “improve”, “agreement”, etc.) relative to the proportion of negative words (“concern”, “fear”, “decline”, etc.) present in a vast collection of news articles on Malaysia’s economy. Information derived from media reports has two main advantages compared to official statistics. First, measurements of economic conditions can be calculated in real-time, at a daily frequency. Second, this information enables the measurement of economic forces that might not be easily captured by traditional data sources, providing complementary insight into factors such as the collective sentiment regarding economic prospects. A recent study based on historical data in 25 countries between 1991 and 2017 suggests that including news-based measures of sentiment reduces the forecast errors of GDP growth by 12 percent on average relative to the consensus forecast. MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 39 PART ONE - Recent Economic Developments and Outlook BOX 4 What does the CP-TPP mean for Malaysia? The Comprehensive and Progressive Agreement to 4.4 percent for Vietnam by 2030, with Malaysia’s for Trans-Pacific Partnership (CP-TPP) is a free gains estimated to reach 1.3 percent. The gains are trade agreement negotiated by eleven countries, determined mainly by two factors: (i) a combination of including Malaysia, that will come into force for assumed reduction in tariffs and non-tariff measures six countries in December 2018. The CP-TPP was resulting from the CP-TPP; and (ii) the importance of established following the withdrawal of the United CP-TPP members as trading partners. States from the original Trans-Pacific Partnership, after which the remaining countries continued negotiations Reduced trade barriers would stimulate Malaysia’s and renamed the pact, which became the CP-TPP. The trade with CP-TPP partners. Exports by CP-TPP CP-TPP covers about 14 per cent of global GDP and members are projected to be on average 2.7 percent 16 percent of global trade, with the total population of higher in 2030, with Malaysia’s exports projected to the participating nations coming to about 500 million expand by about 5 percent and imports to expand people. The text of the CP-TPP is broadly the same by about 6 percent. Trade flows of non-members are as the TPP, with some changes to provisions covering projected to decline on average by 0.1 percent due to intellectual property, labor and environment rules, and trade diversion resulting from the preference erosion. investor-state dispute settlement. Even the largest expected decline of exports relative to the baseline would not exceed 0.4 percent. The CP-TPP is expected to have positive effects on trade and income for participating countries, although the magnitude of the impact is expected to be smaller than it would have been under the Malaysia, which has yet TPP. World Bank studies have estimated the economic to ratify the CP-TPP, and distributional impacts of the CP-TPP for member and non-member countries using a global dynamic is expected to reap computable general equilibrium model combined with significant net gains from a microsimulation tool based on household surveys (Maliszewska et al. 2018). The impact of the CP-TPP the agreement, with an is compared to a baseline scenario that assumes no estimated net income gain implementation of the CP-TPP. By 2030, or 12 years after the implementation of the agreement commences, of 1.0 percent by 2030 under conservative assumptions, CP-TPP members’ income is estimated to be on average 0.87 percent higher than in the baseline, with small average losses It is expected that output would expand in most for non-members of 0.03 percent. manufacturing and services subsectors. In the case of Malaysia, the subsectors likely to experience the most Malaysia, which has yet to ratify the CP-TPP, is significant expansion of output include food, beverages, expected to reap significant net gains from the and tobacco; chemicals, rubber and plastics; and agreement, with an estimated net income gain of machinery and equipment. Most services subsectors 1.0 percent by 2030. For developing countries, the would also expand faster than in the baseline. Increases estimated income gains range between 0.13 percent for in output are mostly driven by higher exports. By 2030, Mexico to 2.8 percent for Vietnam. Non-members are Malaysia’s export flows would be US$ 24 billion higher slightly worse off under the CP-TPP due to preference than the baseline. By contrast, without improvements erosion and trade diversion away from CP-TPP markets. in competitiveness of subsectors such as agriculture, In an alternative scenario that allows for productivity natural resources and selected services subsectors, gains resulting from openness, the average gains for their exports to East Asian trading partners, including CP-TPP members range from 0.6 percent for Mexico China, would likely decline. 40 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook Risks to Malaysia’s outlook are increasingly weighed to the downside Given Malaysia’s high degree of integration strains. However, the narrowing of the government’s with the global economy through financial and revenue base and its greater reliance on less stable trade linkages, rising uncertainty in the external direct taxation and oil-related revenue could constrain environment poses downside risks to the economy the flexibility of fiscal adjustment against future in the near term. A key source of risk relates to the macroeconomic shocks. Slower growth, particularly in escalation in protectionist tendencies and trade the context of a deceleration in demand for Malaysia’s tensions between the US and China. While there may exports as global growth slows, would make fiscal be short-term opportunities for Malaysia as a result adjustment more challenging. of trade and investment diversion away from China, escalating tensions may translate into a more general Other near-term risks relate to the relatively high decline in global investment confidence. In turn, this levels of private and public-sector debt. In the would have disproportionate negative consequences public sector, as part of its transparency measures, for highly open economies such as Malaysia, which have the government has disclosed the value of committed a high level of global value-chain integration (see Box 5). government guarantees (which have the possibility of Similarly, on the financial side, a faster-than-expected being assumed by the government), which amounts to pace of monetary normalization in advanced economies 8.2 percent of GDP as of Q2 2018. The accumulation of could result in changes to investor appetite for EMDE the government debt and these committed guarantees assets and heighten financial market volatility, portfolio implies that the government’s total liabilities will outflows and additional pressures on exchange rates in remain elevated into the near-term future. While the EMDEs. stock of public debt appears manageable, an elevated debt level means that there is limited space for a The government’s increasing dependence on oil- counter-cyclical fiscal response if Malaysia’s economy related revenue could potentially exert constraints experiences a major shock. In the private sector, the on fiscal policy space in the event of a major oil relatively high level of household debt in the context of price or supply shock. In its inaugural budget, the persistent property market excesses remains a source government has introduced a number of new revenue of risk to macro-financial stability, as well as acting as measures, including taxes on foreign service providers a constraint on household spending, a situation which and, on the expenditure side, a more targeted fuel warrants close monitoring. subsidy scheme that could alleviate some fiscal MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 41 PART ONE - Recent Economic Developments and Outlook BOX 5 How will the growing US-China trade tensions affect Malaysia? In recent months, there has been an escalation in the tariffs, and indirect exports to the US via value trade tensions between the US and China following chains that are routed through China and therefore are the imposition of a series of tariffs by both parties affected by the tariffs. A clear majority of Malaysia’s on bilateral trade. Tariffs of 25 percent were imposed total export value added is routed directly to the US on US$34 billion of two-way trade in July 2018, followed with 7.74 percent of Malaysia’s value-added exports by tariffs of 25 percent on a further US$16 billion of direct to the US, compared to just 2.45 percent of value- trade in August 2018. Then, the US imposed a further added exports to the US embodied in China’s gross 10 percent tariff on US$200 billion of Chinese imports exports (see Figure 32). However, Malaysia’s indirect in September, with China imposing tariffs ranging exports of electrical and optical equipment are more from 5 to 10 percent on a further US$60 billion of US vulnerable, where the ratio between direct and indirect imports at the same time. Further increases have been exports is more balanced. threatened, including a 25 percent tariff on all products traded between the US and China to be implemented Early indications suggest that Malaysia is gaining in January 2019, although a 90-day pause was later market share in the US at the expense of China, announced at the G20 Summit in November 2018. particularly in electrical equipment. Chinese exports affected by the additional tariffs have already lost sizeable Malaysia has one of the world’s most open US market share, with Malaysia gaining an additional economies and is deeply integrated into global 1.5 percentage points of market share for US imports value chains involving both China and the US, so of electrical equipment during July-September 2018 naturally it is affected by these measures. However, compared to the same period in 2017 (see Figure 33). it is important to distinguish between Malaysia’s direct Smaller gains have also been seen in plastic and rubber exports to the US, which are not directly affected by products, and in optical and photographic equipment. FIGURE 32 FIGURE 33 For Malaysia, most exports to the US are direct, Early indications show that Malaysia is gaining but a significant share of E&E exports to the US market share in the US at China’s expense... are routed via China-centric value chains Direct Value-added Exports of Malaysia to the US vs. Indirect Change in Share of US Imports from China and Malaysia for Value-added Exports of Malaysia to the US (via China) July-September 2018 Compared to July-September 2017, for Tariff-affected Products -4 -3 -2 -1 0 1 2 16 14 Total 14.54 12 Mineral Products 11.81 10 Chemicals 8 7.74 Plastics, Rubbers 6 Stone/Glass 4 Metals 2 2.45 Machinery 0 TOTAL Electrical and Optical Electrical Equipment Equipment Transportation Equipment Share of US in Malaysia's Value Added Exports Optical, Photographic, Cinematographic Malaysia's Value Added from All Sectors, Embodied in China's Gross Exports of a Particular Sector to the US (Share of Malaysia's Exports of Value Added) Malaysia China Source: World Bank staff calculations based on OECD TiVA data Source: World Bank staff calculations based on US Census data 42 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook World Bank modelling scenarios point to significant However, should tensions escalate and result in risks, if the trade tensions escalate further and a slowdown in investment and economic activity, trigger a reduction in investor confidence. Using a the consequences would be severely negative for global trade computable general equilibrium model, Malaysia (see Figure 34 and Figure 35). The model World Bank staff estimated the impact of trade tensions results suggest that in the third scenario of full tariffs and on Malaysia exports and income according to three a decline in the investment to GDP ratio, the negative different scenarios: impact on Malaysia’s export and imports would heavily • Scenario 1: China-US tariff increases on bilateral outweigh any short-term gains from trade diversion as trade as of September 2018 covering US$253 billion a result of tariffs alone. of US imports from China and US$113 billion of Chinese imports from the US; In order to mitigate the risks associated with rising trade tensions, other countries – including • Scenario 2: a 25 percent surcharge on all products Malaysia – should redouble their commitment traded between the US and China; and to an open, rules-based international trade and • Scenario 3: a 25 percent tariff on all products traded investment system. This system is critical to the between the US and China, plus a decline in investor efficient allocation of production and the diffusion of confidence, resulting in a 0.5 percentage points drop technology, having served ASEAN countries well for in the investment to GDP ratio at a global level. many years. Deepening of regional integration, through mechanisms such as the CP-TPP and the Regional Under the first and second scenarios, Malaysia Comprehensive Economic Partnership (RCEP), would would be expected to achieve some net gains in also help to bolster opportunities. Deeper reform terms of exports and income. In fact, the evidence in areas that have tended to see limited coverage so far in terms of the direction of changes in trade and under preferential trade agreements, such as public sectoral impact appears to be consistent with the first procurement, subsidies, state trading companies, non- scenario. The benefits hinge on the extent to which tariff measures and treatment of services trade would Malaysian products are close substitutes to Chinese play a role in enhancing competition and promoting the exports to the US and on how quickly Malaysian deepening of global value chains. exporters can scale up output for exports. FIGURE 34 FIGURE 35 …but if the trade tensions spill over to affect …with exports expected to fall across all major investor confidence, Malaysia would be severely product categories under the scenario of an affected… investment slowdown Change in Share of US Imports from China and Malaysia for Export Deviations from the Baseline for Malaysia in US$ Billions, July-September 2018 Compared to July-September 2017, Three Scenarios for Products Affected by Increased Tariffs Trade and Transport Chemical, Rubber, Plastic Products Machinery and Equipment Scenario 1 Finance and Other Business Services Communication and Business Services Metals Construction Electronic Equipment Scenario 2 Natural Resources/Mining Transport Equipment Other Manufacturing Food, Beverages, Tobacco Social Services Utilities Scenario 3 Agriculture Textiles Wearing Apparel and Leather -10% -8% -6% -4% -2% 0% 2% 4% -40 -30 -20 -10 0 10 20 Output Exports Scenario 1 Scenario 2 Scenario 3 Source: World Bank staff calculations using LINKAGE model and GTAP dataset Source: World Bank staff calculations using LINKAGE model and GTAP dataset MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 43 PART ONE - Recent Economic Developments and Outlook A more uncertain external environment places a higher premium on reforms to boost resilience Malaysia has the opportunity to undertake bold Near-term economic growth will be more structural reforms that would strengthen the dependent on boosting private investment, with a foundations for more sustainable and inclusive more challenging external environment reducing growth. Medium-term plans, as outlined in the Mid-term the opportunities for export-led growth, and with Review of the 11th Malaysia Plan (see Box 6), establish reduced fiscal space resulting in a more limited a set of new goals, the achievement of which would scope for public investment-led expansion. Malaysia serve to strengthen governance and transparency; to already has one of the world’s lowest cost business improve public sector efficiency; and to foster equitable environments, as indicated in the World Bank’s Doing growth. Such reforms will pay dividends over time, Business report, with the latest rankings placing with the potential to improve not just the quantity of Malaysia 15th out of 190 economies. However, Malaysia economic growth, but, just as importantly, the quality continues to experience gaps in broader measures of of this growth. In the short term, Malaysia will need to competitiveness, with major weaknesses in terms of strike a careful balance between safeguarding growth, skills, productivity and human capital (see part two of sustaining private sector confidence, promoting this edition of the Malaysia Economic Monitor). High- fiscal responsibility, managing debt sustainability and level policy statements on leveling the playing field protecting the vulnerable. between state enterprises at the private sector are 44 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook welcome, indicating a commitment to boosting investor reforms over a multi-year period. At the same time, confidence and to promoting healthy competition. the pace and magnitude of these adjustments should While Malaysia’s GLICs and GLCs form an important be carefully  calibrated to manage associated risks to part of the economy, given their market dominance, economic activity in the short term. some of their activities have distorted economic activity and stifled competition, resulting in increased costs for Reforms efforts on the revenue front should focus consumers. With economic growth and job creation on broadening the tax base, reducing unproductive in the coming years expected to be more dependent tax expenditures via deductions and incentives, on the private sector, high-level support for the idea and strengthening overall tax administration and that the public sector should cede space to the private compliance. In this regard, the government has taken sector is an important first step. Similarly, a sustained important steps by establishing the Committee of Tax commitment to multilateral trading though agreements Reform to review the overall tax system and collection, such as the CP-TPP and the RCEP (see Box 4) would both and to streamline existing investment incentives. It has send strong positive signals to investors and buttress also taken the decision to include imported services market access at a time when trade is under pressure. within the scope of the SST, particularly those related to the digital economy, and to raise taxes on property gains. These are timely initiatives that are well-aligned with emerging international practice. However, in the Medium-term plans to coming years, more can be done to diversify fiscal strengthen governance and revenues. This may include expanding the collections of direct taxes (such as personal income and wealth increase transparency will taxes) to raise additional fiscal resources and to increase pay dividends over time overall tax progressivity, as has been practiced in many high-income economies. In particular, there appears to be considerable potential to increase the collection of revenues from personal income taxation, which currently While immediate fiscal consolidation efforts will be accounts for a relatively low value in proportion to GDP implemented mainly through expenditure restraint, compared to high-income economies.10 This could be over the medium-term it will also be necessary to achieved by enhancing tax compliance, rationalizing boost efforts to mobilize revenues in order to expand deductions, and increasing progressivity at the top of fiscal space and to sustainably finance the needs the income distribution. Another efficient means to of Malaysia’s increasingly middle-class society. As increase revenues would be to broaden the coverage Malaysia’s average income and societal expectations of consumption-based taxation, while the associated continue to grow, raising adequate resources to finance distribution concerns could be effectively addressed the needs of its expanding middle-class (including through targeted transfers. Malaysia could also through the improved provision of basic public services, strengthen the effectiveness of its tax administration growth-enhancing investments and social protection through the increased adoption of digital technology systems) will become an increasingly important priority. and through measures to more effectively enforce These needs notwithstanding, government revenues compliance. have declined steadily over the past several years, and is expected to narrow further in the near future, On the expenditure side, reform efforts should with the value of these revenues remaining relatively aim at containing the relatively sizeable cost low in proportion to GDP compared to countries at of civil service salaries and pension outlays, similar levels of economic development. Along with the further rationalizing discretionary spending Malaysian government’s increased dependence on oil- and untargeted subsidies, as well as improving related incomes, the trend towards declining revenues the efficiency of development spending. The new will increasingly  constrain its underlying capacity to administration’s efforts to strengthen public financial implement flexible fiscal policy  to address economic management, including through measures to improve fluctuations, to sustain the provision of vital public governance and to promote transparency, are a services, and to facilitate redistribution through  taxes welcome development. Going forward, as the potential and transfers. Addressing this structural challenge will for incremental fiscal savings from efficiency-enhancing require a recalibration of the  fiscal consolidation mix, rationalization diminishes, it will be necessary to focus with greater focus on implementing revenue-enhancing on containing the relatively high cost of expenditure 10 In 2018, Malaysia’s personal income tax revenue is estimated at 2.4 percent of GDP, significantly lower than the average of eight percent among advanced economies. By contrast, corporate income tax income is projected to be at 4.9 percent on GDP in 2018, compared to the OECD average of three percent. MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 45 PART ONE - Recent Economic Developments and Outlook on civil service salaries and pensions, which constitutes workers, with adequate adult retraining opportunities an increasingly large share of overall public spending. for those made unemployed by changes in technology This would require fundamental reforms to the terms of or market forces. Adult health also matters. Nearly half civil service employment and the compensation system of Malaysian adults are overweight or obese (NHMS (for instance by reviewing the various functions of the 2015), which is strongly linked to noncommunicable government to promote more efficient employment chronic diseases, with adverse impacts on wellbeing, levels, and by strengthening the link between salary productivity, and health budgets. The 2019 budget’s adjustments and employee performance) to ensure tax on sweetened beverages is an initial step to address expenditure on the public wage bill is commensurate this issue and should be augmented by other measures with the provision of services. The government’s to discourage unhealthy diets and sedentary lifestyles. commitment to implementing better-targeted fuel Inclusivity is also enhanced by increased labor force subsidies is also a step in the right direction, although participation, particularly policies to encourage women for effective implementation, it requires appropriate to return to work after starting a family. The 2019 mechanisms to minimize administrative costs and to budget’s provision for increasing the availability of on- prevent leakages of benefits to unintended groups. site child care facilities in government offices will help To contain development expenditure, measures in this regard, and could be strengthened by similar to promote spending efficiency will be required, measures in the private sector, as well as additional particularly in the transportation and education sectors. measures such as greater access to flexible working However, any such measures would have to be carefully arrangements. balanced against the need to sustain growth-enhancing investments and to provide adequate social safety nets. A strengthened social protection system is a necessary complement for those who cannot benefit fully from expanded productive employment. For some people – such as the elderly, persons with As Malaysia’s average disabilities, and those encountering transient shocks income and societal such as unemployment, illness, or a death in the family – employment-based solutions are insufficient. A well- expectations continue to functioning social protection system is needed to keep grow, raising adequate them out of poverty and support living with dignity. The BSH cash transfer program is one component of resources to finance the that system, and its effectiveness may be enhanced needs of the expanding by the decision to adjust program benefits according to the number of children in recipient households. It middle-class will become could be made even more effective by adjusting the an increasingly important program eligibility criteria by the number of children (or household size more generally). With its rapidly aging priority population, it is increasingly important for Malaysia to expand the number of individuals covered by the formal pension system, and encourage adequate pension Fostering greater economic inclusiveness begins savings to ensure that the elderly can live without fear with expanding access to more productive of falling into poverty. and remunerative employment. This requires interventions and investments in health and education throughout the life cycle, complemented by policies to increase participation in the labor force. Stunting affects one in five Malaysian children less than five years-old, with long-term negative consequences for physical and mental development. The crucial period for preventing stunting is the first 1,000 days, from conception until the second birthday. Universal access to high-quality education and training is needed to ensure that all young Malaysians are equipped the cognitive and noncognitive skills to be productive MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 47 PART ONE - Recent Economic Developments and Outlook BOX 6 Malaysia’s new policy priorities - highlights from the Mid-term Review of the 11th Malaysia Plan On October 18, 2018, the government tabled the all levels; to elevate integrity and accountability; to Mid-term Review of the 11th Malaysia Plan (11MP) enforce prudent public finance management; and to with this review outlining updated policy directions enhance public service delivery. for the remaining two years of the plan. The report consists of two distinct parts: Part I, which reviews the Another newly included pillar is “Pursuing performance of the Plan’s six strategic thrusts in 2016 balanced regional development”, which signals and 2017 under the previous government; and Part II, the government’s commitment to reducing which outlines the government’s new policy directions developmental imbalances across states and in six pillars. These newly defined pillars and the order between urban and rural areas. Although the in which they are prioritized reflects the priorities of earlier 11MP outlined measures to further develop the the government: (i) reforming governance towards regional economic corridors, this new pillar contains greater transparency and enhancing efficiency of more comprehensive measures to better spread public service; (ii) enhancing inclusive development socioeconomic benefits across states and to promote and wellbeing; (iii) pursuing balanced regional equitable growth, particularly in less-developed states development; (iv) empowering human capital; (v) such as Sarawak, Sabah, Kedah, Kelantan, Terengganu enhancing environmental sustainability through green and Perlis. The inclusion of this pillar is encouraging, growth; and (vi) strengthening economic growth. signaling the government’s commitment to establishing stronger linkages between urban and rural areas and Overall, the updated policy framework outlined between leading and lagging regions, which will help in Part II covers most of the key policy areas and to boost inclusive economic growth and development highlights the institutional reforms that will be across Malaysia. required to facilitate the fulfilment of Malaysia’s aspirations to achieve sustainable and equitable In addition, the review has an updated framework on growth. The updated policy framework continues to “Empowering human capital.” This pillar on human emphasize some of the themes of the earlier 11MP, capital remains a high priority for the government, including the emphasis on inclusive wellbeing, human as it is crucial for Malaysia’s transition to an capital development and green growth. The key inclusive, high-income economy. This updated pillar difference in the updated framework is the inclusion places emphasis in fostering stronger linkages with of pillars on governance reforms and on balancing industry and academia, enhancing access to quality regional development. education and skills training, reforming the labor market and improving labor efficiency and productivity. The inclusion of the new pillar on “Reforming Skilled individuals contribute significantly to economic governance towards greater transparency and growth through direct channels, such as technology enhancing efficiency of public service” signals the and design innovations, but also indirectly, through government’s commitment and political will to coordination and guidance of the actions of others. The reform the public sector. In the context of concerns transition to a developed economy requires systematic regarding Malaysia’s public finance management and investment in human capital. Recent research shows widespread public dissatisfaction with public service that human capital is a necessary pre-condition to make delivery and political systems, the prominent inclusion other investments work and that the marginal returns of this pillar communicates the government’s strong from investment in human capital are 40 percent higher commitment to addressing these concerns and its than investment in R&D. awareness of the challenges that currently impede reform. Under this pillar, reforms are categorized into On the whole, the review is comprehensive in scope, four priority areas that aim to improve governance at providing useful insights into the government’s 48 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART ONE - Recent Economic Developments and Outlook future social and economic policy directions. It In addition, some of the more ambitious reforms and also contains a candid assessment of the limitations strategies outlined in the review may require more of past policy design and implementation. However, time for completion, beyond the remaining period by its nature, the document focuses on higher level, of the 2018-2020 plan. Given this possible outcome, broad strategic measures, rather than defining specific it would be useful to formulate an assessment of the implementation details. This is understandable, given implementation capacity and risks, and to commit to the the short time frame that the new government had to conduct of an interim review to signal the government’s develop the review. The prioritization of policies and commitment towards the achievement of the reforms programs under each of the pillars and more detailed outlined under the new pillars. The use of intermediate information to guide ministries and agencies are likely to outcome indicators or milestones could also enable be formulated in the coming months, as the government the public to better understand and anticipate how determines more specifically the implementation of the the Plan’s targets will be achieved at various stages of Plan’s reform measures. implementation and to hold institutions to account. TABLE 5 New priorities and emphases for 2018-2020, selected highlights • Enforcement of a two-term limit for the positions of Prime Minister, Chief Minister and Menteri Besar to prevent the abuse of power. PILLAR 1 • Review and streamlining of the role of state-owned enterprises and monopoly entities to promote market Reforming Governance efficiency and healthy competition. Towards Greater • Decentralization of some functions, including public transport, social services and environmental Transparency and protection to empower state governments. Enhancing Efficiency • Lowering of the voting age limit to 18 years and the introduction of a legislation on political financing. of Public Services • Transformation of the MACC into a full independent body, accompanied by a review of the MACC Act 2009, the Witness Protection Act 2009 and the Whistleblower Protection Act 2010 to strengthen anti- corruption legislation. • A target of 200,000 units of affordable houses set to be built through promotion of greater private sector participation, and the establishment of a National Affordable Housing Council to coordinate the PILLAR 2 management of public affordable housing. Enhancing Inclusive • Formulation of a national health policy aimed at increasing human capital capacity and healthcare facilities. Development and • Construction of a new cancer center in the northern region, and a national center for disease control and Wellbeing prevention in Negeri Sembilan to detect, prevent and overcome disease threats. • Formulation of an action plan to increase public awareness on mental health. • Building and upgrading of 1,500 kilometers of rural roads. • Expansion of access to clean and treated water supply for 60,000 additional homes, and extension of electricity supply to 41,160 additional homes. PILLAR 3 • Construction of 300 new telecommunication towers and upgrading of 1,000 existing towers to widen Pursuing Balanced coverage and improve broadband quality. Regional Development • Provision of a fair share of oil and gas revenues to Sabah and Sarawak in accordance with prevailing laws, and the establishment of a Special Cabinet Committee to review and monitor the proper implementation of the Malaysia Agreement 1963. • Standardization of the monthly minimum wage at RM1,050 (subsequently adjusted to RM1,100) nationwide, effective January 1, 2019. PILLAR 4 • Review of labor laws and implementation of a comprehensive Employment Insurance System to enhance Empowering Human workers’ rights. Capital • Review of both the Malaysia Education Blueprints, and replacement of the Universities and University Colleges Act 1971 with an improved legislation towards ensuring academic liberty as well as freedom of speech and association. • Increased gazettement of terrestrial, inland water, coastal and marine protected areas. PILLAR 5 • Increased contribution of renewable energy in electricity generation to reduce dependency on fossil fuels. Enhancing • Integration of disaster risk reduction measures into planning and development to strengthen disaster risk Environmental management capability. Sustainability Through • Development of an integrated system for weather and flood forecasting as well as early warning for flood Green Growth to increase disaster preparedness. • New target to increase SMEs’ contribution to GDP to 41 percent by 2020. • Formulation of a national policy framework for the Fourth Industrial Revolution to promote innovation, PILLAR 6 creativity and competitiveness. Strengthening • Upgrading of existing plants and construction of new plants to improve water supply services to states Economic Growth with low reserve margins. • Construction of new power plants to be undertaken through competitive bidding. Source: Mid-Term Review of the 11th Malaysia Plan (2016-2020) MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 49 PART TWO Realizing Human Potential MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 51 PART TWO - Realizing Human Potential Realizing human potential Investment in human capital is essential for enabling Malaysia’s transition to a high-income and developed economy Human capital – the knowledge, skills, and health better education and health outcomes, breaking the that people accumulate over their lifetime – has intergenerational transmission of poverty that can have been a key factor behind the sustained economic pervasive negative impacts on human capital formation growth and poverty reduction rates of many and poverty reduction. In turn, these result in improved countries in the 20th century, especially in East labor productivity, increased economic growth, and Asia. With rapid technological change, the wealth higher life expectancies. of nations has become even more closely tied to the human capital of its people. Automation threatens to In recognition of the importance of human capital eliminate many jobs that require only low-level cognitive for economic growth, the World Bank has launched skills. The global economy now increasingly places a the Human Capital Project (HCP), through which premium on higher-order cognitive skills – complex the Human Capital Index (HCI) was introduced problem-solving, socio-behavioral skills, reasoning, and in October 2018. The HCI is a metric designed to self-efficacy (World Bank 2018). Production processes forecast a country’s human capital. The index tracks in industry, agriculture and services have all become the future trajectory, from birth to adulthood, of a child highly human capital and technology intensive. Greater born today. It quantifies the level of human capital that policy focus on human capital is needed to build the a child can expect to attain by the end of secondary knowledge, competencies, and skills to enable an school, given the risks of poor health and education economy to achieve high rates of inclusive economic that exist in that country at the time of the child’s growth in this rapidly evolving context. birth. There are three components to the HCI: (i) the proportion of children that survive from birth to school Education, health, and social protection all play age (age five); (ii) the expected years of quality-adjusted vital and complementary roles in the development education, which combines information on the quantity of human capital. Among high-income countries, and quality of schooling; and (iii) two broad measures levels of educational attainment are closely linked to of health: child stunting rates and adult survival rates. economic performance. Similarly, health is critically The HCI provides countries with a mechanism for important to the achievement of high levels of economic understanding the quantity and quality of their human growth, with a healthy population capable of being more capital, thus enabling them to navigate a path forward productive. Social protection also plays a crucial role in to develop this capital. nurturing human capital, particularly but not exclusively in low income contexts. There are strong correlations The HCI captures the impact of investments between education, health and social protection. On in children today on productivity and economic average, well-educated individuals, especially women, growth over the long term. According to the HCI, take better care of the health and nutrition of their Malaysia has an overall value of 0.62. This indicates that families and children. Good nutrition in utero and in children in Malaysia born today will be only 62 percent early childhood are correlated with better educational as productive as they could be in adulthood compared outcomes and higher levels of cognitive performance. to optimal outcomes, given the prevailing education Good social protection systems provide the supportive and health outcomes. eco-system that enable low-income families to achieve 52 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART TWO - Realizing Human Potential FIGURE 36 Malaysia’s performance on the human capital index is about as expected compared to other upper middle-income economies, but falls below high-income comparators World Bank Human Capital Index and its Components, 2017 Human Capital Index Probability of Survival to Age 5 High Income 0.74 High Income 0.99 Malaysia 0.62 Malaysia 0.99 East Asia and Paci c 0.61 East Asia and Paci c 0.98 Upper Middle Income 0.58 Upper Middle Income 0.98 Lower Middle Income 0.48 Lower Middle Income 0.96 0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0 Expected Years of School Harmonized Test Scores High Income 13.3 High Income 506 Malaysia 12.2 Malaysia 468 East Asia and Paci c 11.9 East Asia and Paci c 451 Upper Middle Income 11.7 Upper Middle Income 428 Lower Middle Income 10.4 Lower Middle Income 391 0 2 4 6 8 10 12 14 0 100 200 300 400 500 Adult Survival Rate Fraction of Children Under 5 Not Stunted High Income 0.92 High Income 0.94 Malaysia 0.88 Upper Middle Income 0.87 East Asia and Paci c 0.87 Malaysia 0.79 Upper Middle Income 0.86 East Asia and Paci c 0.78 Lower Middle Income 0.81 Lower Middle Income 0.73 0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0 Overall, Malaysia ranks 55th out of 157 countries For Malaysia to fulfil its aspiration of achieving included in the HCI (see Figure 36, Figure 37 and high-income and developed country status, it will Figure 38). While Malaysia performs well in some need to make further advances in all components components of the HCI, it does less well in others. of human capital: education, health and nutrition, Relative to the other countries included in the index, as well as social protection and jobs. The following Malaysia performs well on the probability of children sections of this report discuss key opportunities for surviving to age five, the expected number of years of policy measures going forward in these three areas. schooling, and the probability of adults surviving to the age of 60 years. It does less well on rates of stunting, learning outcomes and educational attainment when adjusted for quality. MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 53 PART TWO - Realizing Human Potential FIGURE 37 FIGURE 38 The HCI for Malaysia is lower than that of ...and the shortfall is especially pronounced in aspirational peers... terms of educational attainment, with an average learning gap of 3.1 years Human Capital Index Versus GDP per Capita, Selected EAP Countries, 2017 Expected Years of Schooling Versus Learning Adjusted Years of Schooling Singapore 0.9 Japan Korea Learning-adjusted Years of Schooling 0.8 15 Human Capital Index 0.7 China Vietnam Learning gap 0.6 10 Hong Kong 0.5 SAR, China 0.4 Malaysia 5 Malaysia 0.3 0.2 0 100 1,000 10,000 100,000 0 5 10 15 Log Real GDP Per Capita at PPP Expected Years of Schooling Source: World Bank Human Capital Index Source: World Bank Human Capital Index Malaysia has done well in ensuring access to education, but student learning outcomes fall below potential Educational attainment and learning are a key However, there remains room for improvement to driver of economic growth (World Bank 2018a). In enrolment rates at higher levels and for preschool. particular, education has made a central contribution The HCI measures educational performance by to the spectacular economic success of many countries measuring the quality-adjusted expected years of in East Asia (see Box 7). For Malaysia to achieve higher schooling, with one component of this metric being levels of development in the future and to transition the expected years of schooling. The expected years to a high-income economy, improving the quality of of schooling for an individual up to the age of 18 in education will be crucially important. Malaysia is 12.2, significantly lower than the average for high-income countries, which stands at 13.1. Over the past few decades, Malaysia’s education Malaysia’s upper-secondary enrollment rates are lower system has made significant progress in terms than some upper middle-income and lower-middle of increasing enrollment rates. Since the 1990s, the income regional comparators, such as Thailand and government has implemented a series of policy and Indonesia. Top-performing education systems such as institutional reforms covering all levels of education, those of Korea, Hong Kong SAR China, and Japan are from pre-school education to tertiary education. As a all characterized by high upper-secondary enrolment result of these reforms, Malaysia has achieved universal rates. Malaysia’s upper secondary (Form 4 and Form 5) access to primary education and high levels of access enrolment rate currently stands at 85 percent. Also, it to pre-school education and secondary education. has not yet achieved universal coverage for preschool. The net enrolment rate for pre-school education stands at 91 percent. At the secondary level, the gross While Malaysia’s learning outcomes are strong, enrollment rate increased from 88 percent in 2015 to they are significantly lower than the average for 91 percent in 2017. high income countries and standout regional peers. 54 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART TWO - Realizing Human Potential BOX 7 The link between education and East Asia’s extraordinary growth story Over the past half-century, the EAP region has from rural agricultural societies to high-tech knowledge consistently recorded high rates of economic economies. Japan, the Republic of Korea, and growth, driving its transition to high- and middle- Singapore set their education policy goals within a income status. Since 1960, the East Asia and Pacific larger framework that sought to eliminate technology region has sustained high rates of growth, faster for gaps with the world’s most advanced countries. Their longer than any other region in the world. This progress goal was to create domestic capacities to produce has been remarkable, especially among the region’s innovative knowledge and technology that enable them low- and middle-income economies, with economic to compete at the global stage. Long-term increases growth rates at more than twice the world average in in productivity depend on continuously improving and the period from 1960 to 2015 (7.2 versus 3.5 percent). applying new technologies, which in turn increases As recently as 1991, two-thirds of East Asians worked demand for more highly skilled workers. in agriculture, mostly as low-income smallholders. By 2012, that figure had dropped to one third. Average levels of educational attainment increased dramatically to converge with global averages. In 1950, the average adult in EAP had only 1.3 years of schooling – less than half the prevailing world average Investments in education of 2.9 years. By 2010, the average attainment was more paid off at all education than six times higher than it had been at the earlier point and had converged with the world average, which and income levels, not just had increased to eight years. This increase in average for people who worked schooling occurred as the population of the region more than doubled. Average levels of educational attainment in high-tech sectors and have continued to climb, with more and more students industries completing secondary school and proceeding to tertiary studies. Schools today provide twice as many students with more than six times as much instruction. Countries in this region have pursued a broad set Improvements to education raised productivity of complementary policies to accelerate growth, among farmers and facilitated structural with particular emphasis on education. Policy transformation. Investments in education paid off makers have tried to reduce inequality, first by boosting at all education and income levels, not just for people rural incomes and then by promoting educational who worked in high-tech sectors and industries. Rural opportunity and outcomes. Policies have also been dwellers with education, even when limited to a few implemented to improve labor force abilities and years of primary school, consistently outproduced and skills, mostly through increased schooling and through outlearned their less educated neighbors. Poverty rates measures to ensure that education is broadly relevant dropped substantially as jobs and income-earning to current and expected future economic challenges. opportunities grew. As a result, a number of countries rapidly transformed Source: World Bank 2018b MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 55 PART TWO - Realizing Human Potential The HCI measures educational performance in terms of Malaysia has been largely successful in implementing its quality-adjusted years of schooling, with quality being policies to achieve this objective (see Box 8), with pre- measured in terms of harmonized test scores. While school enrolment rates having increased considerably Malaysia’s score of 468 (based on the performance over recent years, although still falling short of the in the 2015 Trends in International Mathematics and government’s target of universal enrolment. As a result Science Study, TIMSS) is above average for upper of various government programs, these rates have middle-income countries, it is lower than the average increased from 77 percent in 2012 to 91 percent at of 508 for high-income countries. Vietnam (519) and present. Malaysia has also established comprehensive the Republic of Korea (563) are among the standout standards to regulate the quality of preschool and to performers in the region. ensure that all children have access to high-quality preschool (Noor and Symaco 2017). While the Education Malaysia’s international test scores have dropped Blueprint identifies measures to improve quality, it is over time, although the most recent results indicate unclear how these standards are enforced. an improvement (see Figure 39). Up until 2011 there were declines in both math and science TIMSS scores Research suggests that, on average, the quality of with improvement in the 2015 cycle. This trajectory is public pre-schools in Malaysia may be lower than in contrast to many of Malaysia’s high-performing East that of private pre-schools. Public pre-schools have Asian counterparts which have shown more consistent higher child-teacher ratios, lower quality teachers, and progress in improving learning, as indicated by their lower quality teaching methodologies (Mustafa and performance on international tests. Results from the Azman 2013) (see Table 6). This is of concern, given that 2018 Program for International Student Assessment the majority of preschools in Malaysia are public, with (PISA) – which will be published in December 2019 – will private pre-schools being generally only accessible to provide the next opportunity to assess the impact of those who can afford the relatively high costs. Malaysia’s education policy efforts. The Malaysia Education Blueprint 2013-2025 Policy and implementation gaps may impact contains a comprehensive strategy to improve the quality of Malaysia’s preschool services. learning outcomes. The Blueprint identifies a Malaysia’s policy framework for preschool education is number of strategies in this regard. These include: (i) encapsulated in its 11th Plan and Education Blueprint benchmarking the learning of languages, mathematics 2013-2025, aiming at universal access to preschool. and science to international standards; (ii) launching a new secondary school curriculum and a revised primary school curriculum; and (iii) revising national examinations and school-based assessments to gradually increase FIGURE 39 the percentage of questions that test higher-order Malaysia’s international test scores in science thinking. To date, the major accomplishments under and math increased in 2015 after dropping in previous years this plan include the implementation of school-based assessments and the integration of higher order TIMSS Score Math Science thinking skills (HOTS) into the curriculum, assessment, pedagogy and co-curricular activities. Efforts have 540 also been made to improve Science, Technology, 520 Engineering and Mathematics (STEM) education through revisions to the existing curriculum in schools. 500 The most successful education systems align all 480 elements towards improving student learning outcomes. Global experience has consistently 460 demonstrated the importance of distinguishing between schooling and learning. It is clear that 440 schooling is not identical to learning: countries that prioritize learning rather than schooling create a 420 more conducive environment for development and 400 progress. As Figure 40 indicates, all the main elements of the system, including teachers, learners, school 1999 2003 2007 2011 2015 management and school inputs, must be aligned to Source: International Association for the Evaluation of Educational facilitate learning. This alignment involves three key Achievement, TIMSS 56 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART TWO - Realizing Human Potential BOX 8 Malaysia’s remarkable success in increasing access to preschool education Over the last decade, Malaysia has achieved a established and quality standards were formulated. In remarkable increase in the enrolment rates for 2003, the National Education Act mandated a national preschool education. The preschool enrolment rate preschool curriculum and the National Preschool has increased from 67 percent in 2009 to 91 percent at Curriculum Standards (NPCS) were developed by the present. This remarkable achievement is a result of the Ministry of Education. The NCPS was revised in 2010, government’s commitment to ensuring that all children with all public and private preschools being mandated in Malaysia have access to preschool education. A to follow the national curriculum and to meet the succession of policies and strategic plans have been established standards. implemented since the 1990s to facilitate increased enrolment in preschool education. These policies and plans have been outlined in instruments including the Education Act 1996, which formally recognized A succession of policies preschool education as part of the school system; the and strategic plans have Government Transformation Program 2009-2012 and 2012-2017; and the Malaysia Education Blueprint 2013- been implemented since 2025, with the latter two instruments outlining priorities the 1990s to facilitate and strategic goals to improve access to preschool education. increased enrolment in preschool education, which These various national strategic instruments have contained a number of key measures to propel has increased from 67 increased access to preschool education, including percent in 2009 to 91 the following: a) promoting the establishment of private preschools through the provision of foundational percent at present grants to about 2,000 private preschools in the period from 2010 to 2015; b) providing private preschool fee assistance for children from low income families, with With Malaysia’s strong progress towards approximately 257,714 children having benefitted from increasing its pre-school enrolment rate, it is this form of his assistance in the period from 2010 to likely to achieve its goal of universal enrolment by now; and c) community outreach programs for districts 2020, thereby meeting the goal established by the with low enrolment rates to increase parental awareness Malaysia Education Blueprint 2013-2025. Malaysia on the importance of early childhood education. As a is now paying increasing attention to ensuring that all result, the number of preschool classes increased from public and private preschools meet quality standards. 38,118 classes in 2009 to 53,920 classes in 2018 (with To this end, the government has mandated that by approximately 70 percent of the additional classes 2020, all preschool teachers must possess a minimum being provided by private preschools). qualification of a diploma in early childhood education. This is a strong step towards improving the quality The government has long recognized the of preschool education, but further steps need to be importance of setting standards for preschools. taken to ensure that all Malaysian children have access In 1996, the National Preschool Curriculum was to high-quality preschool education services. Source: L. Foong et al. (2018) and Mustafa and Azman (2018) MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 57 PART TWO - Realizing Human Potential TABLE 6 Differing characteristics of public and private pre-schools in Malaysia Item Public Preschool Private Preschool • Teacher-centered • Child-centered Teaching and • Drill technique • Classroom conducive for learning Learning • Limited learning materials and facilities • Appropriate learning materials and facilities • Locally trained • Trained locally and abroad Teacher • Lacks professional development • Professional in dealings with parents and Qualification • Some not qualified to be an early childhood children teacher • Mostly highly qualified Teacher-Child 1:25 1:15 Ratio • Emphasizes cognitive development • Emphasizes social and emotional development • Adjustable goals and objectives by the potential • Follows the government goals and objectives of children • Intermediate Language: Malay • Intermediate Language: Malay, English, Chinese Curriculum • Funded by the government and Tamil or mixed languages • Program organized and controlled by the • Run by NGOs or individuals, for profits or welfare government purposes • Enriched programs such as Qur’an recitation, martial arts, ballet, drama, modern dance and art Many options provided; Operation 7 a.m. – 12 p.m. Only one option, 8 a.m. – 12 p.m. Schedule 7 a.m. – 3 p.m. 7 a.m. – 6 p.m. Rules and Government authorities Each private institution authorities Regulations Source: Mustafa and Azman (2013) actions. First, the educational assessment system FIGURE 40 must be given high priority. Without an adequate The main elements of an education system should educational assessment system, there is no means be aligned towards learning of determining the extent to which schools are really working to ensure that students learn. Second, there must be a commitment to acting on the evidence from LE assessments. Without this commitment, real progress RS AR HE towards improving learning outcomes is restricted. AC N ER TE Finally, there must be a concerted effort to ensure that S the actions of all stakeholders in the education process are aligned to ensure that the education system facilitates learning. Technical and political barriers can LEARNING divert schools, teachers and families from a focus on SCHO learning. It is vital that concerted efforts are made to TS overcome these barriers to ensure that the objective of OL PU improving learning outcomes is achieved. M IN N L A AG O EM O ENT SCH Source: World Bank 2017 58 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART TWO - Realizing Human Potential Malaysia has made strong progress in health outcomes, but child stunting rates and the burden of NCDs remains high Over the past half century, Malaysia has achieved Malaysia has also made significant progress remarkable success in improving population health towards Universal Health Coverage (UHC). The outcomes. Life expectancy at birth has improved country fares well in terms of the UHC service coverage steadily from just 59 years in 1960, shortly after index, with a score of 70 out of 100. This compares independence, to 75 years in 2016. Malaysia’s life favorably to the average score for the Southeast Asian expectancy at birth today is comparable to the average region (59) and the global average score (64). Malaysia for upper middle-income countries (also 75 years). only lags slightly behind the average score for East Asia Mortality rates have also declined significantly, with (77) (WHO and World Bank 2017).11 infant mortality rates at 6.7 per 1,000 live births and under-five mortality rates at 7.7 per 1,000 live births. Malaysia’s stunting rate for children under the According to the HCI, 99 out of 100 children born in age of five stands at one in five, which is high for Malaysia survive to age five, with roughly identical the country’s level of GDP per capita. Malaysia’s outcomes for boys and girls. The successful control of National Health and Morbidity Survey (NHMS) 2016 communicable diseases and improvements to Maternal estimated the stunting rate for children in this age and Child Health (MCH) services have contributed to bracket to stand at 20.7 percent (IPH 2016). This is the improvements in terms of these outcomes. considerably higher than the average rate of 7 percent for upper middle-income countries (World Bank 2018). It is also one of the highest rates amongst countries in the same income group (see Figure 41), and is higher FIGURE 41 than some lower-middle- and low-income countries in The proportion of children under five who are Sub-Saharan Africa, such as Ghana (18.8 percent) and not stunted in Malaysia is lower than expected compared to peers Senegal (17.1 percent). In addition, a comparison with NHMS 2006 shows that the rate has actually increased Fraction of Children Under Five not Stunted vs. Log of Real GDP per Capita, since that time, going up from 17.2 percent. PPP Terms, Selected EAP Countries, Most Recent Year Available While stunting is more prevalent in households China Korea, Rep. 100% with lower socioeconomic status, it is also high Thailand among better-off households. Moderate to high rates 90% of stunting are evident in both urban and rural areas, Percentage of Children Not Stunted Japan Vietnam across all states, ethnicities, and income levels. For 80% example, the stunting rate is 17.4 percent for children in households with monthly incomes of RM5,000 or Malaysia 70% more (see Figure 42). Although maternal education is associated with lower levels of stunting, elevated rates 60% of stunting are observed even among children whose mothers have completed higher education (see Figure 50% 43). With Malaysia aspiring to achieve high income status in the coming years, it will need to continue to 40% make strong efforts to address childhood stunting and 100 1,000 10,000 100,000 other health and nutrition outcomes. Further analytical work is needed to understand the drivers of stunting Real GDP per Capita and to identify the most important policy channels to Source: World Development Indicators reduce undernutrition. 11 The UHC service coverage index is a single indicator computed from tracer indicators of coverage of essential services. The index was developed to monitor SDG indicator 3.8.1. The South-eastern Asia region includes Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, Timor-Leste, and Viet Nam. The East Asia region includes China, Democratic People’s Republic of Korea, Japan, Mongolia, and Republic of Korea. Average scores for other regions are: Northern America and Europe (77), whereas sub-Saharan Africa has the lowest index value (42), followed by Southern Asia (53). More information can be found at http://apps.who.int/iris/bitstream/handle/10665/259817/9789241513555-eng.pdf?sequence=1 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 59 PART TWO - Realizing Human Potential Further analytical work improve nutritional status of Malaysian children has not yet been thoroughly studied. is needed to understand the drivers of stunting Malaysia’s Adult Survival Rate (ASR) is comparable to countries with similar income levels. and the most important In the HCI, the ASR serves as a proxy for the overall policy channels to reduce health environment. This metric captures the range of fatal and non-fatal health outcomes that a child born undernutrition today could expect to experience as an adult under current conditions. The ASR for Malaysia estimates that The underlying causes for Malaysia’s high rate 88 percent of 15-year olds will survive until age 60, with of childhood stunting are not fully understood. A the survival rate being higher for women than for men small study in Kelantan (one of the poorest states in (92 percent for women compared to 85 percent for Malaysia and with the highest rate of stunting) found men). While the ASR is comparable to other countries that children in food-insecure households were three at similar levels of income, Malaysia still has significant times more likely to be stunted than children in food- room for improvement. secure households (Ali Naser et al 2014). Despite the low average rate of stunting in Kuala Lumpur, a study National data show that there has been very of households in low-income areas in that city found limited progress in improvements to Malaysia’s that rates of stunting and wasting among children were average adult life expectancy. This reflects the high twice as high as the citywide average. This suggests and increasing burden of noncommunicable diseases that a closer examination of multi-dimensional child (NCD) and the high level of avoidable premature poverty, including in pockets of urban areas, is needed deaths from such diseases (GoM and Harvard 2016). (UNICEF 2018). Other studies have found correlations The government projects that the NCD burden will between socioeconomic variables and anthropometric increase in the future (MOH 2016a). Malaysia is also status of children (Marjan et al 1998, Khambalia et al set to age rapidly over the next two decades, placing 2012), although these studies have had a limited scope, increased pressure on health services to meet the pointing to the need for further research. Similarly, changing health needs of the population. As in other the efficacy of interventions to reduce stunting and to upper middle-income countries, advances in medical FIGURE 42 FIGURE 43 Stunting declines as incomes increase, but ...with a similar pattern emerging with respect to remains high even among the highest-income mother’s education. households... Fraction of Children Under Five Stunted by Monthly Household Income Fraction of Children Under Five Stunted by Mother’s Educational Attainment 30 30 25 25 Percentage of Children Stunted Percentage of Children Stunted 20 20 15 15 10 10 5 5 0 0 Less than 1,000 2,000 3,000 4,000 5,000 None Primary Secondary Higher 1,000 -1,999 -2,999 -3,999 -4,999 or more Household Income (RM per Month) Mother's Education Level Source: MOH, National Health and Morbidity Survey 2016 Source: MOH, National Health and Morbidity Survey 2016 60 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART TWO - Realizing Human Potential technology and increasing demand for health care from that the care provided by public sector health facilities a growing middle class will also contribute to rising is of adequate quality to effectively meet people’s health expenditures. health needs. While the clinical quality of public and private facilities has been found to be comparable, With a shift in Malaysia’s disease burden towards the comprehensiveness and continuity of care in the NCD, its health sector will face new challenges. former have been found to be of lower quality (GoM Having effectively controlled many infectious diseases and Harvard 2016). Many NCDs and chronic conditions in the decades following independence, Malaysia has are better managed in the community, where care is already experienced a shift towards a disease burden closer to home, more appropriate, and often cheaper. consisting mostly of NCDs. In 1990, NCDs already accounted for 60 percent of Malaysia’s burden of disease, with this figure increasing to three-quarters by Increasingly, the service 2016. At this point, lifestyle-related factors (e.g. diet, high blood pressure, and tobacco use) comprising offering and competencies the top risk factors for death and disability in Malaysia of health professionals in (IHME 2018). Almost all adults (98 percent) have at least one risk factor for NCDs, with a large proportion having the public sector will need multiple risk factors. to shift to enable the early At present, while access to health services is broadly detection and effective equal across different income groups, utilization treatment of NCDs and patterns differ significantly across socioeconomic groups. Lower-income households predominantly seek chronic conditions care at public facilities, while higher-income households account for the majority (two-thirds) of visits at private facilities (IHSR 2013). Despite these differences, there is Given Malaysia’s changing health context, a reasonably good physical access to health services for review of the healthcare system is needed to most of the population. improve health outcomes into the future (see Box 9). Stagnating health outcomes are symptomatic of Despite equitable physical access to health services the limits of the current service delivery system and of across socio-economic groups, there are gaps in the current level of health expenditure. Increasingly, service coverage for more advanced services and the service offering and competencies of health specialist care, especially in rural areas, and for professionals in the public sector will need to shift to NCD care at the primary care level. Public clinics, enable the early detection and effective treatment of whose service coverage mostly includes MCH services NCDs and chronic conditions. These illnesses are more and basic curative services, can meet essential health complex to treat than MCH and infectious diseases, needs. Nonetheless, several shortcomings exist, and often involve recurrent costs over long periods. particularly in the distribution and technical capacities If left undetected or untreated, they can lead to of health professionals. Doctors, nurses, and midwives complications which result in higher costs for both the at lower-level primary care facilities typically do not health system and individual patients. have sufficient training to provide NCD screening, counseling, treatment, and referral for the populations they serve (GoM and Harvard 2016). The recruitment and retention of health professionals in rural areas, especially in East Malaysia, also continues to be challenging. Thus, effective access for lower-income households who predominantly use public sector health facilities is, in practice, limited to the scope of services and competencies of health professionals in these settings (Yap et al 2018). With the increasing burden of NCDs, it is important to increase the responsiveness of the public-sector health system to enable it to meet emerging health needs. Equitable access is only achieved to the extent MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 61 PART TWO - Realizing Human Potential BOX 9 Malaysia’s evolving health service delivery system With Malaysia’s wide network of health facilities, total health spending and public spending on health its health service delivery system has served its in Malaysia are considerably lower than the average population well in the years since independence. for upper middle-income countries, which stood at 6.0 One factor that has supported the current effectiveness percent and 3.3 percent respectively (MOH 2017; WHO of Malaysia’s health system is the high level of 2017). government investment to improve access to health facilities over the decades. Since independence, the government has played a strong role in economic and While Malaysia has social development, with high levels of investment in the health sector. Up until the 1980s, to improve achieved good health healthcare facilities, the government implemented an outcomes with a relatively “expansion phase,” with a concomitant increase in the number of health professionals deployed throughout low-cost public sector the country (Savedoff and Smith 2011). During these health system in the past, decades, Malaysia built more than 2000 new clinics, explicitly prioritizing rural areas and MCH services (Yap this system may not be et al 2018; Pathmanathan and Liljestrand 2003; WHO adequate to meet its 2012). By the 1990s, physical access to health services came close to being universal, with around 90 percent future needs. of the population living within 5 kilometers of a health facility, and 81 percent living within 3 kilometers. Despite Malaysia’s relatively low level of public Since the 1980s, private sector healthcare providers expenditure on health, its health financing system have proliferated, in part due to government policies has effectively provided households with protection to encourage private sector investment in the health from the financial risks associated with high sector. These policies have included tax concessions, healthcare costs. Across countries, out-of-pocket exemptions from import duties on medical equipment, expenditure on health is a critical determinant of the direct investment by state development banks, and the level of the household financial burden. As such, a higher creation of corporatized health facilities (Savedoff and level and larger proportion of public spending on health Smith 2011). is associated with greater levels of financial protection (WHO 2017). However, in this regard, Malaysia has Malaysia has achieved good health outcomes and bucked international trends. Despite its relatively low a high level of access to health services given the level of public expenditure and high out-of-pocket level of spending. In 2015, Malaysia’s total expenditure share (38 percent of total health spending in 2015), it on health stood at RM52.6 billion, or RM1,687 per capita has recorded impressive performance in the area of (MOH 2017). Total health expenditure was 4.6 percent financial risk protection. Based on analysis of the most of GDP in 2015, with public expenditure on health recently available data, only 1.4 percent of households standing at 2.2 percent of GDP. In the period from 2000 in Malaysia experience catastrophic health expenditure to 2015, the composition of Malaysia’s health spending (larger than 10 percent of total household expenditure), barely changed, with public expenditure constituting with only 2.5 percent experiencing health expenditures slightly more than half of the total throughout. In this greater than 15 percent of non-food expenditure. same period, total health expenditure has increased out-of-pocket spending in Malaysia is also strongly almost four-fold in nominal terms, or about double in progressive, with expenditure increasing with income inflation-adjusted, per capita terms.12 Nonetheless, and with 60 percent of out-of-pocket expenditure 12 This analysis is limited to a 15-year time series because a consistent record of national health accounts only began in the late 1990s. 62 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART TWO - Realizing Human Potential being incurred by the richest quintile (IHSR 2013). ensuring that public services preferentially serve the Catastrophic health expenditure is also concentrated poor (Rannan-Eliya et al 2016). among the top two quintiles of households, with few lower-income households incurring unaffordable While Malaysia has achieved good health outcomes healthcare costs. with a relatively low-cost public sector health system in the past, this system may not be Malaysia’s integrated system of financing and adequate to meet its future needs. This has significant service provision has enabled it to achieve both implications for financing. Malaysia’s health financing universal access to health services and high levels system has resulted in “implicitly-rationed universalist of financial protection. Given the patterns of health health coverage” (Yap et al 2018). In theory, the public service utilization described above, lower-income health system provides comprehensive coverage and households benefit from government expenditure on effective access to health services, paid for by the public health facilities, where care is provided free-of- public purse. In practice, however, service availability charge. Higher-income households voluntarily choose and readiness are constrained by the adequacy of to use the services of the private sector, thereby public financing and provider capacity.13 13 At the time of writing, the Government of Malaysia had proposed the introduction of a Health Protection Fund scheme for households in the bottom 40 percent income level. The scheme is intended to provide financial coverage for four critical illness and hospitalization income coverage. Further details of the scheme are not yet available. Its effectiveness in improving protection against the financial risks associated with health spending will depend on a range of factors, including the manner in which the scheme will be implemented, service utilization patterns by eligible households, and cost coverage under the scheme relative to total healthcare costs. Reviewing the scheme in the broader health service and financing context would help to better assess its potential efficacy and impact. MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 63 PART TWO - Realizing Human Potential Malaysia’s social protection system remains relatively underdeveloped, particularly in terms of depth By complementing educational, health and with financial strain and deprivation. A comprehensive nutritional interventions, social protection can social safety net may include measures to encourage contribute to poverty reduction and human capital behavioral changes that further enhance human capital development. Social protection programs generally formation. include social assistance programs to protect the poorest and most vulnerable households; social insurance programs to promote household level resilience; and labor programs to support sustained While Bantuan Sara Hidup movement out of poverty (see Figure 44). While labor Rakyat is expected to have programs have the direct objective of building human capital, the indirect but significant impact of social a broad and progressive assistance and social insurance programs on building coverage, the depth of the this capital is often overlooked. program is relatively limited, Social assistance programs can provide households resulting in only a modest with the necessary income support to invest in human capital formation. Social assistance programs effect on overall inequality enable families to spend more on goods and services that are conducive to this development. They can also enable members of households to better utilize their At present, there are a number of social safety net time to facilitate this development. For example, these programs in Malaysia, administered by various programs may enable children to allocate their time to ministries. Malaysia’s social safety net programs learn at school rather than working, or enable parents to include the BSH cash transfer program, which recently provide better care for their children. In addition, social replaced the Bantuan Rakyat 1Malaysia (BR1M) assistance programs can decrease stress levels and program, and a number of core social welfare programs improve the quality of personal interactions between (e.g. Senior Citizen’s Aid, Children’s Aid, and Disabled family members by reducing the pressures associated Workers Allowances) implemented by the Ministry of Women, Family and Community Development. FIGURE 44 Historically, a significant proportion of Malaysia’s A holistic framework for social protection social assistance expenditure has been allocated to the education sector. A number of social assistance programs have been implemented to provide in-kind EQUITY FOR or cash assistance to students in schools or to expand THE POOR educational opportunities by providing scholarships. Protecting against dire poverty and loss As a means of promoting human capital development, of human capital this aspect of Malaysia’s social safety net has been productive. However, recently, there has been a relative shift away from targeted support towards more universal programs, such as the School Student Allowance. This shift suggests that there is a need for greater clarity in balancing assistance based on merit and financial need. RESILIENCE FOR OPPORTUNITY THE VULNERABLE FOR ALL Insuring against Promoting human Compared to other countries in East and South impacts of capital and access to different shocks productive work Asia, Malaysia’s social safety net system remains relatively underdeveloped, particularly in terms of its depth. Malaysia’s core social welfare programs have generally been underfunded, despite having Source: World Bank (2012) 64 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART TWO - Realizing Human Potential better targeted outcomes than many other programs expected to be in excess of 70 percent. Taken together, in the country. The relatively underdeveloped state of without counting administrative expenses, more than Malaysia’s social safety net system becomes apparent 70 percent of the program budget allocated for BSH by comparing the breadth and depth of the social is expected to go to the bottom 40 percent (B40) of assistance it provides to that of many other countries the population according to income per capita, with in East and South Asia. Malaysia performs relatively the balance mostly going to the middle 40 percent well in terms of the breadth of coverage, as measured (M40), with a very small proportion going to the top 20 by the percentage of potential beneficiaries covered percent (T20) (see Figure 46). by the social safety net. However, it lags far behind countries with more developed social safety nets such While BSH is expected to have a broad and as Korea, Singapore and Thailand in terms of depth of progressive coverage, the depth of the program is coverage, as measured by the average expenditures expected to be relatively limited, resulting in only per beneficiary relative to GDP per capita (see Figure a modest effect on overall inequality. The amount 45). This limits the effectiveness of the program. of the BSH benefits is a relatively small increment to household incomes even for the poorest 20 percent. A stylized simulation of the performance of the BSH’s impact on reducing income inequality could BSH cash transfer program using data derived be improved marginally – without increasing the total from the Household Income and Expenditure amount of benefits paid – by improving the targeting Survey shows that the program is expected both formula to account for the number of children in the to achieve a wide coverage and to be progressive. household when determining program eligibility, According to the analysis, BSH coverage rates in the instead of only at the stage of determining benefit poorest decile of households according to their post- levels. To achieve a substantial reduction in inequality transfer income per capita is expected to be in excess the total outlay for benefits would need to be of 90 percent, while in the second poorest decile, it is increased. FIGURE 45 FIGURE 46 Compared to countries in East and South Asia, Simulations suggest the BSH could achieve a wide Malaysia’s social safety net system remains coverage and be progressive relatively underdeveloped in terms of its depth Breadth and Depth of Social Assistance Programs, Estimated Percentage of Population Receiving Benefits14 Selected Countries in East Asia and Pacific 35 70 Depth of Social Assistance Indicator (% of per Capita GDP) 100% Estimated Percentage 30% Breadth of Social Assistance (% of Potential Beneficiaires) Estimated Percentage of Population Receiving Benefits Breadth of Social Assistance (LHS) of Population Receiving Benefits (LHS) Estimated Percentage of Program Benefits Received 90% 30 Depth of Social Assistance (RHS) 60 Estimated Percentage 25% 80% of Program Benefits 25 50 Received (RHS) 70% 20% 20 40 60% 50% 15% 15 30 40% 10% 10 20 30% 20% 5 10 5% 10% 0 0 0% 0% Mongolia Georgia Indonesia Malaysia Sri Lanka Cambodia Philippines Singapore Pakistan Thailand Armenia Azerbaijan Nepal Viet Nam India China Uzbekistan Kyrgyzstan Korea,Rep. Tajikistan Lao PDR Bangladesh Japan Maldives Bhutan Poorest 10% 2 3 4 5 6 7 8 9 Richest 10% Income Deciles (per Capita Post-transfer) Source: ADB 2016 Source: World Bank calculations based on DOSM data 14 Notes: For the simulations, no variable for income from BSH was available in the HIES data set, so it was necessary to approximate the amount of BHS income for each household based on program income eligibility thresholds and benefit amounts. This is an imperfect approximation. It should also be noted that the analysis only considers the benefits side of the equation but does not examine distributional impacts of the revenue side. MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 65 PART TWO - Realizing Human Potential What can Malaysia do to fully realize its human potential? The preceding analysis of key aspects of human key priority areas can be identified: capital development in Malaysia shows that while the country has made remarkable achievements, 1. Learning outcomes in the education sector must it also faces major challenges. Addressing these be enhanced. challenges will facilitate the economic transformation that Malaysia requires to successfully make the transition 2. Nutritional outcomes must be improved to reduce to a high-income and developed country. Malaysia stunting. will need to achieve this transition in the context of a global revolution in technology that is dramatically 3. Social welfare programs must provide adequate transforming jobs and the future of work (see Box 10). protection to enable households to invest in human capital formation. Looking to the future, how can Malaysia continue to improve education, health and nutrition, and Initiatives to address challenges in each of these priority social protection outcomes to contribute to the areas and thereby to promote optimal development are development of human capital and to increased described in the following sections. national productivity? To achieve these goals, three Improving access and quality of early childhood education to ensure that learners are ready to learn A key measure to improving educational with the better development of cognitive and social performance in Malaysia is to provide universal skills by children. The World Bank’s Systems Approach access to high-quality early childhood education to for Better Education Results (SABER) framework ensure that children are “ready for school.” School suggests that there are three important policy levers by readiness at the earliest stages is strongly correlated which a country can monitor and assure quality: (i) data with a student’s educational performance at later availability; (ii) quality standards; and (iii) compliance stages of education. Evidence from high-performing with standards (World Bank 2013). Data-availability countries, including Korea, Japan and Singapore, refers to the capacity of a system to facilitate the indicates that their efforts in providing universal accurate, comprehensive and timely collection of data. access to preschool services to ensure that children This enables more effective policy-making to design are “ready for school” contributed to their remarkable new early childhood education services or to modify educational performance (World Bank 2018b). High- existing ones (World Bank 2013, Naudeau et al, 2011). quality perschool programs have significant benefits Standards for early childhood service delivery are throughout a student’s life cycle (see Box 11). essential to provide guidance and continuity and to guarantee a minimum level of quality for all children. Malaysia can improve the quality of its early Finally, all systems must have mechanisms in place childhood and preschool education programs, with to monitor compliance with established standards. a particular emphasis on improving the monitoring While this may be challenging, the top performing of the quality of these programs. There is strong education systems have developed solid mechanisms evidence to show that the quality of early childhood for monitoring the quality of their early childhood and preschool education programs is directly linked education programs. 66 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART TWO - Realizing Human Potential Improved provision of high-quality early childhood for ages ranging from 3 months to 16 years. As a care and education programs will also enhance result, even though women outperform men in terms women’s access to the labor market and allow of educational attainment (in 2017, gross enrolment in them to make productive use of their human tertiary education was 45.5 percent for women and 38.6 capital. In spite of an increase in recent years, at 55.5 percent for men), they make relatively less productive percent in Q3 2018, Malaysia’s female labor force use of their human capital. As demonstrated by participation rate continues to lag behind the rates in international evidence, further improving access to and most comparator countries. The insufficient availability quality of early childhood care and preschool programs of high quality childcare options is a key factor behind will almost surely have significant positive impacts on women’s decision to stay out of the labor force. The the female labor force participation rate. provision of childcare would need to cover all children MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 67 PART TWO - Realizing Human Potential BOX 10 Technological change and the future of work in Malaysia Recent and emerging technological breakthroughs, While these issues are real, technological change including breakthroughs in the area of artificial also creates the potential for gains in productivity intelligence and robotics, have prompted fears that and welfare. Previous industrial revolutions in which human workers will be replaced by machines and significant economic advancements were made were an era of mass joblessness and even wider income all associated with large increases in productivity. The inequality will ensue. Prior to the opening of borders new technologies being developed today are also to trade, such technological developments were led by likely to improve productivity, which will imply new job and largely confined to advanced economies. However, opportunities that cannot be foreseen today. greater trade linkages and the pervasiveness of the global communication infrastructure mean that Malaysia Complementary policies will be needed across both and other emerging economies are increasingly developed and developing countries to ensure that exposed to these more sophisticated technologies the benefits of disruptive technologies with regard and their potential for disruption. Indeed, Malaysia to jobs are maximized, and the risks are minimized. and other emerging economies are becoming active Maximizing these gains requires policies that facilitate participants in their development, commercialization, labor market flexibility and mobility; that introduce and and adoption. strengthen safety nets and social protection; and that provide strong human capital foundations through the The anxiety surrounding technological change can provision of effective basic education and retraining be ascribed to three broad developments: the large and upskilling programs. number of jobs potentially affected, the falling labor share of income, and the changing nature of work arrangements. Estimates regarding the number FIGURE 47 of jobs exposed to automation technologies vary The “gig economy” is growing in Malaysia significantly. While some suggest that as many as half of all jobs are at risk, including in Malaysia, constraints Share of Own Account Workers in Urban Areas, related to technological diffusion, cost, and norms and Percentage of Total Employment in Malaysia laws that favor humans over machines mean that not all 16% or even most jobs exposed are likely to disappear in this country in the near-term future. The falling labor share 15% of income is a phenomenon that is for now considerably more pronounced in advanced economies. 14% However, new technologies are already creating 13% uncertainty regarding the nature of work arrangements in many different countries. There 12% are already indications that the “gig” economy is starting to challenge the standard employer-employee 11% model in Malaysia. For instance, the share of “own account workers,” who are self-employed but do not 10% have any employees is growing in Malaysia (see Figure 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 47). Even though the flexibility of such new work arrangements may have a number of advantages, such work frequently lacks financial and job security. Source: Murugasu (2018) 68 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART TWO - Realizing Human Potential Educational reform that emphasizes the The first intervention involves embedding more development of both scientific and mathematical practical exposure within post-secondary education abilities and higher-order cognitive skills such as through mandatory apprenticeships for students and complex problem-solving, socio-behavioral skills, frequent secondment of training instructors to industry reasoning and self-efficacy is crucial to develop the actors. The former approach has been implemented in complementary skills that workers need to benefit a relatively limited form through the Ministry of Higher from the evolving technological context and to Education’s 2u2i program (which involves 2 years formal utilize the associated machines and equipment. training on campus + 2 years internship with industry). The Complementing basic education with active labor second type of intervention involves the arrangement market policies, workforce training, and the provision of of more structured internship opportunities, including other opportunities for lifelong learning can encourage with SMEs. Internship programs should include clear workers to stay engaged and to continue to participate learning outcomes and well-defined scopes. This will in evolving labor markets. encourage firms to actively build a sustainable talent pipeline, especially SMEs, which are responsible for The future of work also necessitates more in- around 60 percent of employment in Malaysia, but depth collaboration between industry and learning which tend to lack linkages with training providers. institutions, with this collaboration including, but More in-depth collaborations between industry and not being limited to, the development of curricula learning institutions are also crucial to ensure that the that match the latest industry needs. Two types of education system remains relevant and agile to meet intervention in Malaysia appear particularly promising. evolving labor demands. Source: Chua, Loayza and Schmillen (2018) and Murugasu (2018). MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 69 PART TWO - Realizing Human Potential BOX 11 A life-time of benefits from early childhood education Preschool programs targeting children aged from their cognitive and socioemotional skills, and their 3–6 can foster foundational skills and boost motivation to learn. Rather, young children learn best children’s ability to learn. Children who attend are being encouraged to explore, play and interact preschool have higher attendance rates and better with others. Key elements of programs that have led achievement levels at primary school. Moreover, they to strong preschool outcomes include curriculums that are less likely to repeat, drop out, or need remedial foster crucial pre-academic abilities (emotional security, or special education. Not only does this benefit curiosity, language, self-regulation) through play; the students themselves, it also results in increased professional development and coaching that enables efficiency and reduced costs for the education teachers to effectively implement relevant curriculums; system. Across countries at all income levels, the most and positive, engaging classrooms that promote disadvantaged children benefit to the greatest extent children’s innate drive to learn. For early child education from early childhood education programs of sufficient gains to be sustained, the content, budget, and quality. capacity of providers of preschool programs should be integrated into formal education systems. In addition, Not all early childhood programs are equally the quality of subsequent learning environments in effective. Overly academic and structured primary school is an important determinant of the long- programs for children under five may undermine term effects of preschool programs. Source: World Bank (2017) 70 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART TWO - Realizing Human Potential Developing a high-quality assessment system that focuses on learning A high-quality learning assessment system is effective education systems, such as those of Singapore an essential ingredient to improve Malaysia’s and Finland, found that effective assessment systems learning outcomes. The quality of an education share a number of common characteristics. The system can only be accurately determined by an characteristics of these systems are as follows: effective system of educational assessment, which can include classroom-based assessments, national 1. They demonstrate the importance of assessment assessments and international assessments, amongst for student learning, rather than as a disconnected other methods. The Malaysia Education Blueprint 2013- element of the education system; 2015 has highlighted the need to enhance the quality 2. They provide students and teachers with of assessments to meet international standards. The information regarding what has been learned; Education Blueprint outlines plans to revamp national examinations and school-based assessments to target 3. They are closely aligned with curriculum higher-order thinking skills. Moreover, Malaysia has expectations, performance criteria and learning already taken a significant policy decision to decrease outcomes; the number of national assessments from three to 4. They engage teachers in the assessment two, in order to address the issue of high-stress levels development process; among school students. These are the types of policy changes which are critical to developing a high-quality 5. They engage students in understanding how the learning assessment system. assessment process can improve their learning; 6. They advance higher order thinking skills by using Properly designed assessments can have a a range of instructional and assessment strategies; significant positive impact on student learning. and There is strong evidence to indicate a link between high-quality, formative classroom assessment activities 7. They use open-ended performance tasks and and better student learning outcomes, as measured school-based assessments that give students an by student performance on standardized tests of opportunity to write extensively (Clarke 2012, educational achievement (Clarke 2012, Black and Darling-Hammond and Wentworth 2010). William 1998). A review of high-performing, highly TABLE 7 High performing education systems in East Asia use performance assessments Country Assessment Year Introduced Target Sample Subject Areas China China National Piloted in 2008, Fourth-and eighth- Sample based Chinese, math, Assessment formally rolled grade students science, physical education, art, moral education Japan National Assessment of 2007 Sixth-year primary Alternates Japanese, math, Academic Ability and third-year middle between census science school students and sample Korea Rep. National Diagnostic 2002 Year 3 students Census Reading, writing, Assessment of Basic math Competency 2000, extended Years, 6, 9, and 11 Census Korean language, National Assessment to all students in (assessment in sixth arts, math, social of Educational 2008 grade abolished in studies, science, Achievement 2013) English Source: Liang, Kidwai, and Zhang 2016 for China; Kuramoto and Kolzumi 2015 for Japan; OECD 2014 for the Republic of Korea, World Bank 2018 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 71 PART TWO - Realizing Human Potential In Malaysia, the enabling environment for be considered in any review of assessment quality are assessment should be reviewed to ensure that the reliability and validity. Research suggests that teacher- assessment system is properly aligned with the based assessments have higher validity than external other parts of the education system. The experiences assessments. Teacher-based assessments often allow of top-performing education systems around the world for student achievements that may not be captured in a demonstrate that assessments are most effective final, high-stakes examinations to be measured (OECD when the right assessment tools are used in the right 2018). At the same time, teacher-based assessments are context and for right purposes. They also show that it often perceived as unreliable due to the risk of teacher is important that the education system is sufficiently bias and other factors (OECD 2018). The opposite is flexible to adapt on the basis of the findings from these considered true of external or standardized assessments assessments (World Bank 2018a; Clarke 2012). Top- (OECD 2018). Accordingly, experts agree that a performing systems are characterized by an education strong assessment system requires the appropriate eco-system that is able to identify which assessments balance between school based and national and/or are appropriate and how they are to be utilized. In order international standardized assessments. Most top- for this eco-system to be present, assessments must be performing education systems rely to a greater extent supported by the right policies and frameworks (Clarke on teacher developed/school-based assessments than 2012). In other words, mechanisms should be in place on standardized assessments, although all regularly to ensure that assessment results feed back into the participate in international standardized assessments. policies and practices relating to teachers, students, The use of national standardized assessments varies, school governance and curricula (World Bank 2018a). although many top-performing systems, including those of Japan and Korea, implement national assessments Malaysia must also identify which range of to gauge the learning outcomes of students at various assessments best suit its educational needs. stages of the education system (World Bank 2018a) (see Assessment quality refers to the psychometric quality Table 7). Reviewing a range of school-based, national of the instruments, processes, and procedures used to and international assessments to find the right mix may conduct the assessments (Clarke 2012 from AERA, APA, enable Malaysia to improve its learning outcomes. and NCME, 1999). Two technical issues that need to Making better use of assessment data and integrating assessments into the teaching process To improve learning outcomes in Malaysia, it will for policy makers to improve the quality of education be necessary to develop systems to ensure that (Clarke 2012). The World Bank has substantial assessment data is used effectively. Measures to experience in supporting the implementation and assess learning come in many forms, with different utilization of international assessments (such as PISA), measures serving different purposes for different including in countries such as Hungary and Poland, actors, with these measures including simple classroom both of which are striving to improve learning outcomes based oral assessments to large-scale international and thereby to upskill their workforce. The World Bank’s assessments, amongst other instruments (World assistance includes facilitating the deeper analysis of Bank 2018a). If the various instruments and measures data and exploring the policy implication of the results. complement each other well, they can serve to provide Improving the use of assessment data to inform the input for policy makers to take action to improve teaching and learning processes may facilitate the learning outcomes. The effective use of data requires achievement of Malaysia’s education goals. the establishment of connections between assessment activities and system learning goals, standards, Given that integrating assessments into the curriculum, and pre-and in-service teacher training teaching process is critical for high performance, opportunities (Clarke 2012, Fuhrman and Elmore, 1994; teachers must be properly trained to implement Smith and O’Day, 1991). This is especially important to classroom-based assessments. The available ensure that assessment activities provide useful input evidence indicates that all top performing education 72 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART TWO - Realizing Human Potential systems have systematically linked assessment with implemented in several countries, including Vietnam, teaching processes (World Bank 2018). In these emphasizes teacher observation rather than continuous systems, formative assessments are used to guide the testing. Regardless of which methods are used, to be teaching process as a means by which teachers can effective, teachers must be trained on how to develop, obtain continuous feedback on the what students are implement and use classroom assessments to improve learning. In turn, this is used to guide the instructional instructional quality and learning outcomes. Malaysia’s process. Formative assessments will enable teachers educational system would benefit from a review to to adapt teaching methods to the varying abilities ensure that the assessment process is sufficiently of students in Malaysia. In some countries, more integrated into the teaching process and that teachers innovative methods of classroom assessment are being are trained on how to implement and use assessments developed. For instance, the Escuela Nueva initiative to improve the learning process. MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 73 PART TWO - Realizing Human Potential Addressing the high level of childhood stunting with multisectoral solutions Unless Malaysia’s high rate of childhood stunting the previous plan period (2006-2015). These challenges is addressed effectively, it will continue to act as a include a lack of intersectoral and multi-stakeholder significant constraint on increasing human capital coordination, insufficient funding, human resource and achieving productivity gains in the long run. shortages, and poor monitoring and evaluation systems There is overwhelming evidence that stunting during (MOH 2016b). early childhood limits a child’s physical and cognitive development, with ongoing impacts throughout Addressing these challenges and achieving an that child’s life cycle, including that child’s level of improved understanding of the underlying causes productivity as an adult. of childhood stunting would help to facilitate the effective implementation of the National Plan. Evidence from around the world shows that the key Measures to achieve this could include in-depth analysis determinants of child malnourishment and stunting of existing data to better understand the correlates of are multi-faceted, requiring multisectoral solutions. childhood stunting, as well as qualitative analysis to Immediate determinants include a child’s health status determine the underlying environmental, behavioral, and dietary intake. Underlying determinants are much or cultural factors that contribute to undernutrition broader and more varied, including levels of maternal and stunting. A holistic review of existing interventions education, monetary poverty, maternal nutrition during on nutrition and the development of a multi-pronged, pregnancy, access to and availability of affordable multi-sectoral strategy to tackle stunting, such as was and nutritious foods, access to safe water supply and implemented in Peru (Marini et al 2017), could help to adequate sanitation, parental knowledge and beliefs reduce the rate of stunting in Malaysia. regarding nutrition, caregiver status and dynamics, and marital and employment status of parents (Smith and At a broader level, meeting Malaysia’s evolving Haddad 2000; UNICEF 2018). needs into the future may require different modes to deliver services, which in turn may require While some of these factors may continue to pose increased public investments. Further improvements significant challenges to nutritional outcomes in in health outcomes and effective access to health Malaysia, anecdotal evidence suggests that it has services, including for NCDs and chronic conditions, made notable progress in certain areas. For example, will require a shift in how health services are delivered. Malaysia’s campaign to promote breastfeeding Going forward, the reform agenda will need to focus through a range of initiatives since the 1990s has been on improving equity and quality of care. In order to highlighted and documented in a regional report on maintain a high level of financial protection, the costs nutritional security (ASEAN, UNICEF, WHO 2016). In associated with these emerging health needs will need 2014, Malaysia’s National Nutrition Surveillance study to be financed, in large part, through public sources. In found that Malaysia’s rate of exclusive breastfeeding at turn, this suggests that a review of the level and share six months stood at 44 percent, higher than the average of public financing for health is necessary to continue global rate at the time, which stood at 38 percent. to improve the health status of Malaysia’s population Malaysia’s rate has since increased to 47 percent (IPH and to ensure that the gains achieved in the past will 2016). be sustained. Malaysia’s National Plan of Action for Nutrition (2016-2025) defines a vision to improve nutritional outcomes and to address stunting. The plan focuses on improving food and nutrition security, aiming to improve the availability, accessibility, affordability and utilization of food. This plan builds on a number of successful initiatives, including the initiative to promote breastfeeding, while at the same time acknowledging and seeking to address the challenges identified during 74 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART TWO - Realizing Human Potential Expanding social safety nets and linking them to measures to promote human capital formation An expansion of core social welfare programs could human capital formation. For instance, payments for provide beneficiary households with income support households with members of upper secondary school to enable them to invest in the human capital of age could be made conditional on proof of school their members. Rigorous evidence demonstrates that enrolment and attendance (see education section). social assistance programs can provide households While this would create some additional administrative with the income support to fight poverty and invest in demands, it’s could be an effective tool to deepen the human capital of their members. Income support Malaysia’s human capital base. The exact nature of the can enable families to spend more on human-capital- linkages is a matter for further discussion, but the basic enhancing goods and services; allow a better time- idea is that BSH should have specific objectives that use for learning or nurturing; and increase human and encompass wider socio-economic and human capital social capital accumulation by reducing the pressure of outcomes to justify the significant expenditure on the financial strain and deprivation (see Box 12). program. The expansion of core social welfare programs Malaysia’s social insurance programs could also should integrate the appropriate mixture of be more effectively leveraged to support human mandates and incentives. Most rich countries impose capital formation. The recent introduction of the some form of conditions on beneficiaries of cash Employment Insurance System (EIS) creates a window of transfers if these beneficiaries are not in employment, opportunity to allow Malaysian workers to mitigate the education or training but are capable of working. impacts of jobs loss. At the same time, it will be crucially Most frequently, these conditions include job search important that training interventions and other active requirements, a requirement that could be considered labor market programs envisaged for beneficiaries are in Malaysia. In addition, the range of social welfare implemented in an effective and coordinated fashion benefits and services could be expanded to include so that the EIS can improve the probability that workers specific investments to increase the employability of are reemployed in the short term and strengthen beneficiaries. These approaches should be tailored to human capital formation in the medium and long term. meet the specific needs and context of specific groups. Other social insurance programs, such the Employees For example, urban youth in low-cost public housing Provident Fund (EPF), already provide many Malaysians may benefit from programs that focus on developing with resources that can be invested in human capital. vocational skills, while members of rural indigenous However, the coverage of EPF and the adequacy of communities may need programs that promote its members’ balances continue to be constraints on entrepreneurship and agricultural activities. Social the achievement of this goal. Greater efforts will be welfare delivery systems could also be more closely required to continuously increase them. linked to the delivery of education, health or nutrition interventions. If Malaysia’s social safety net system is strengthened along the lines proposed in this Malaysia’s new BSH Program has the potential to section, it could facilitate the greater development more actively facilitate human capital development. of human capital, particularly within lower income BSH recipients could benefit from information provided households. Inequality and rising costs of living through accompanying measures, such measures to remain a challenge for many low-income households, raise parents’ awareness of best practices for providing who without adequate support may not be able to nurturing care, to support family members to make make sufficient investments in education and other better choices, to increase the use of services provided necessities that enable them to break free from the by other agencies and of new services directly provided poverty cycle. A well-designed and strengthened social by or linked to the program, including training to further safety net is vital to enable Malaysian households to enhance human capital formation. build the human capital of all their members through actions implemented at their early years and continuing BSH payments might also be directly linked throughout their entire life-cycle. to measures that promote the achievement of MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 75 PART TWO - Realizing Human Potential BOX 12 International evidence on the impact of social assistance programs on human capital outcomes Rigorous evidence demonstrates that social Social assistance programs have successfully assistance programs can support poor households facilitated an increase in the uptake of prenatal to build human capital through the entire life- health services and in the diversity of young cycle of their members. Contrary to popular belief, children’s dietary intake, which can improve a comprehensive review (Evans and Popova 2014) children’s health and nutritional outcomes. In a of both conditional and unconditional cash transfer recent review of 156 studies of both conditional and programs in Africa, Asia, and Latin America found no unconditional cash transfer programs in 30 countries, evidence that transfers increase the consumption of Bastagli et al. (2016) reported that nine out of 15 studies alcohol or tobacco. Rather, cash transfers are widely found evidence of increased health service use, while used in all these areas by beneficiary households to seven out of 12 studies found evidence of increased invest in the human capital of their members. To have dietary diversity. Another review that focused on child an optimal positive impact, social assistance programs outcomes (de Walque et al. 2017) found evidence need to effectively reach the poorest households of improvements in prenatal care and increases in and to involve the payment of regular, predictable the presence of skilled birth attendants, of growth transfers of sufficient value. Well-designed programs monitoring, and of children’s food consumption. can also leverage investments from the health and education sectors. For instance, they can increase the There is also evidence that social assistance utilization of health and education services by the most programs have facilitated increased school disadvantaged population and therefore maximize the enrolment and attendance rates amongst children impact of those services (see Figure 48). and adolescents and improved learning outcomes. FIGURE 48 A social assistance theory of change INPUTS OUTPUTS OUTCOMES INCOME SUPPORT Goods: more/better food, water, soap, • Reduced poverty • Cash medicines, books or toys and vulnerability • In-kind • Increased savings • Vouchers Services: more health care, education • Higher ACCOMPANYING Time Use: reduce child labor, allow for more and birthweights MEASURES higher quality caring hours • Lower morbidity • Information Socio-emotional functioning: reduced stress and • Better nutrition • Services depression, greater bandwidth for parenting • Higher enrollment • Nudges • Better grade • Conditions Prevention of risks: diversification of income sources, progression better employment opportunities • Higher completion Parenting: breastfeeding, nutrition education, early rates childhood stimulation • Better test scores • Better cognitive/ Health care: pre-natal, attended deliveries, vaccines, non-cognitive skills weight checks, growth monitoring • Better labor market Education: preschool, primary, secondary Training: outcomes job skills, adult literacy, socio- emotional skills, • Reduced stress entrepreneurship skills and depression 76 MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 PART TWO - Realizing Human Potential Bastagli et al.’s review (2016) also found evidence of increased. Typically, their impacts depend on the positive impacts on school enrolment and attendance economic context, target groups, design elements and rates. The impact on enrolment rates in secondary implementation. ALMPs can produce good results when schools was more significant than for primary schools. they are appropriately designed and effectively target Overall, social assistance programs can have a significant disadvantaged groups of people, helping these groups positive impact on access to education by removing to become more competitive in the labor market. binding financial barriers. A less clear-cut pattern of impacts emerges for learning outcomes (as measured While the most direct effect of social pension by test scores) and cognitive development outcomes, programs is to alleviate poverty and to improve partly because these result from a dynamic interaction shared prosperity, they can also contribute to between biological, social and environmental factors. household human capital investment. Across the Nevertheless, when Bastagli et al. (2016) examined the world, social pension systems are rapidly expanding. overall effect of social assistance programs, they found They can enable older people to gain access to positive impacts on math and language test scores and health care and to increase their well-being (better cognitive development outcomes. health, better mental status, healthy and active aging, decreased disability and mortality, etc.). They can also When cash transfer programs are accompanied offset the cost burden of the medicines on which many by measures such as training programs, these older people depend. Social pensions also provide measures can further enhance human capital resources (money and time available) that can be formation. Training programs might include vocational, invested in the human capital of older people’s family noncognitive skills, and entrepreneurship training. members or productive enterprises. For instance, the Similar programs (with or without cash transfers) are expansion of South Africa’s social pension system led offered through active labor market programs (ALMPs). to an increase in school attendance and to a reduction Over the last decade, the number of experimental in child labor (Edmonds 2006). evaluations of ALMPs in developing countries has Source: World Bank (2018c). MALAYSIA ECONOMIC MONITOR | DECEMBER 2018 77 References References Ali Naser, I., R. Jalil, W. M. Wan Muda, W. 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