Norhana Endut: The Malaysian economy - a value proposition
Keynote address by Ms Norhana Endut, Assistant Governor of the Central Bank of
Malaysia (Bank Negara Malaysia), at the RHB Fixed Income Seminar 2023, Kuala
Lumpur, 8 August 2023.
* * *
A very good afternoon to everyone. Thank you for the kind welcome and upmost thanks
to RHB and the organiser of the RHB Fixed Income Seminar 2023 for the opportunity to
deliver this keynote.
In line with the theme of the seminar, I thought it is opportune for me to speak on three
areas for the keynote. Firstly, I would like to share the central bank's outlook of the
economy which guides the near-term macroeconomic policy of the Bank. Secondly, I
would like to highlight some of the key policy priorities which are critical in shaping the
outlook of the economy in the near to medium term, focusing on the new investment
policy of the country. Thirdly, I would like to elaborate on the policy and progress with
regard to decarbonisation of the Malaysian economy. Hopefully by doing this I will be
able to set the stage for further conversation and discussion in this seminar today.
Part I: Outlook of the economy
Let me start with a near term outlook on the global economy . The strong labour
market conditions and continued recovery in tourism activity globally supported global
demand and with this, we saw continued expansion in global growth. China's reopening
is supportive of the global economy. However, the pace has slowed in recent months,
as evident in indicators such as exports and retail sales.
The global economy is also weighed down by higher interest rates and elevated
inflation, as well as the ongoing shift of consumption from goods to services, which is
resulting in slower global trade in goods. Overall, the International Monetary Fund (IMF)
expects global economic growth to moderate to 3.0% in 2023 and 2024.
Turning to the Malaysian economy . The domestic economy is expected to expand
between 4% and 5% in 2023. Amid external headwinds, growth will be driven by the
expansion in domestic demand. Apart from continued improvement in labour market
conditions which will drive private sector spending, there will be support from higher
tourism activity. Rising tourist arrivals is projected to lift growth in high touch services
sub-sectors, which were more impacted during the pandemic. The growth outlook is
subject to downside risks stemming mainly from weaker-than expected global growth.
The moderation in global growth has begun to affect exports for most countries since
the second half of last year, and this included regional countries such as Korea,
Taiwan, Singapore and Malaysia. Thus, export growth is expected to remain in
contraction over the next few months. However, this trend is expected to trough this
quarter (3Q 2023). The global semiconductor demand is expected to recover towards
end-year driven by improving demand for server and cloud computing and easing in
inventory correction. This will support recovery in the external sector going forward.
Recent indicators affirmed the resilience of the Malaysian economy , with output
growth and various other economic indicators exceeded its pre-pandemic levels. The
labour market has strengthened this year and is expected to remain supportive of
domestic demand. The unemployment rate gradually improved towards pre-pandemic
levels driven by steady employment growth, in tandem with the expansion in economic
activity. On the investment front, existing large infrastructure projects are progressing.
These include transport-related projects such as the ECRL, LRT3 and Pan Borneo
Highway.
For inflation, both headline and core inflation are expected to moderate over the
course of the year. For the year, headline inflation is projected to average closer to the
lower bound of the forecast range of 2.8 - 3.8%. The balance of risk to inflation remains
subject to changes to domestic policy on subsidies and price controls, as well as global
commodity prices and financial market developments.
Having laid down the outlook of the economy, let me now turn to the macroeconomic
policy of the Bank. In the Bank's approach to monetary policy , the Monetary Policy
Committee's decisions have always been guided by our mandate of achieving price
stability and sustainable economic growth in the medium term. Since May last year, as
the economy was no longer in crisis, the Committee gradually adjusted the Bank's
monetary policy to be in line with the health of the economy.
After five OPR adjustments - the OPR was brought back to the pre-pandemic level of
3.00% - essentially withdrawing the monetary stimulus provided during the crisis to
support economic recovery at that time. The higher OPR would also safeguard against
upside risks to inflation and prevent the risk of future financial imbalances. At the recent
July meeting, the MPC have maintained the OPR at 3.00% as the assessment on the
domestic inflation and growth outlook remained broadly within expectations. Although
inflation is expected to trend downwards, it is critical to continue to keep an eye on the
potential risk of core inflation persisting at elevated levels.
The highly uncertain global economic environment experienced throughout the year
have resulted in shifts in investor sentiments resulting in volatility across financial
markets worldwide. Like other emerging market economies, Malaysia's financial
markets and its currency are not spared. The ringgit has faced significant depreciation
pressure, reflecting investors' expectations of further monetary policy tightening in the
US, uncertainty surrounding the banking sector stress in March and more recently the
worsening outlook toward China's growth.
Under a flexible exchange rate regime where movement of the currency is market
determined, it is reasonable for the ringgit to fluctuate from time to time. These allow
adjustments in domestic economy to global economic and financial shocks. In this
regard, the role of Bank Negara essentially focuses on ensuring that these market
adjustments and price discovery remain orderly.
Towards this end, Bank Negara intervenes in the foreign exchange market to stem
currency movements that are deemed excessive.
Beyond managing these highly short-term volatilities, and on a more medium-term
with a view
perspective, the Bank focuses to further develop our financial markets
to improve both accessibility and attractiveness of our markets. Many of the initiatives
are pursued collaboratively with the industry through platforms such as the Financial
Markets Committee and its associated subcommittees and working groups. Our market
outreach efforts include regular engagements, such as the collaborative Financial
Markets Association Malaysia's investor engagement series. These events facilitate the
exchange of valuable information and feedback between market participants and
policymakers.
The Malaysian financial market remains widely accessible and supported by existing
programmes such as the Dynamic Hedging Programme, which has been well received
and recorded steady growth in participation since inception. At the same time, we
continue to focus on transparency of financial market data through initiatives such as
the Financial Markets Investor Portal. As a testament to the domestic market's
accessibility and liquidity, Malaysian bonds are included in major government bond
indices. This supports the bond market by providing a base of stable and long-term
institutional investors.
Part II: Policy priorities
Ladies and gentlemen,
Let me now elaborate on our policy priorities.
There are various policies in place that aim to enhance Malaysia's growth potential and
strengthen industrial competitiveness. In addition, these policies will alleviate cost of
living concerns, build buffer against future shocks, and support Malaysia's transition to
a high-income nation.
Through a 'whole-of-nation' approach, priorities are geared towards attracting high
quality investment to advance economic complexity and create high skilled jobs. Strong
focus is placed on advancing digitalisation, transitioning to a climate-resilient economy,
and building a future-ready workforce, just to name a few. Let me elaborate deeper on
two priorities today, namely quality investments and transition to a climate resilient
economy.
Implementation of the reforms under the New Investment Policy (NIP) is expected to
attract and retain quality investments. The NIP would improve Malaysia's investment
ecosystem and would have ripple effects on the economy including creation of more
high skilled jobs and fostering innovation. The aim of the NIP is to achieve the National
Investment Aspirations (NIA) of increasing economic complexity, creating high value job
opportunities, extending domestic linkages, developing new and existing clusters, and
improving inclusivity.
Under the NIP, strategies include, streamlining investment targeting and promotion
efforts especially towards key strategic sectors, improving incentive packages to be
more agile and dynamic, and strengthening ESG practices. In fact, the New Industrial
Master Plan 2030 (NIMP) which aims to revitalise the industrial sector and drive new
economic growth is expected to be announced by end of this month.
Part III: Greening the economy
Now let me turn to our policies and progress towards decarbonisation and greening
our economy. In July 2023, planet earth experienced the hottest average temperature.
The future is here, climate change is here. Despite emitting less than 1% of global
emissions, Malaysia, being a responsible nation, has pledged to achieve net zero GHG
emission as early as 2050.
At present, the government is focusing on efforts to put in place key building blocks
to ensure an orderly and just transition of the country. These include developing a
national climate legislation, long term sectoral pathways (LT-LEDS), and the Nationally
Determined Contributions (NDC) roadmap that would help manage the transition with
more effective adaptation and mitigation.
As a developing economy that relies heavily on fossil fuel and still at the early phase of
its transition journey, Malaysia requires significant investments and technological
support to decarbonise the economy. For instance, the National Energy Transition
Roadmap Phase 1 which was released recently detailed ten flagship catalyst projects
and initiatives. Such projects require between RM435 billion to RM1.85 trillion by 2050
to transition the energy sector alone. During the transition phase, businesses will need
funding to pivot to new business models that embed sustainability and are climate and
environmentally friendly, recalibrate existing practices and adopt new technology.
Protection to help mitigate possible disruptions during the transformation journey is also
key.
Financial sector as a key enabler
As a bank-based economy, with more than 70% of financing to the private sector in the
form of bank financing, this is where the financial sector, being the epicentre in our
The financial sector has twin roles in supporting
economy, has a key enabling role.
the transition, which are to be climate resilient- greening finance, and as a catalyst and
enabler - financing green.
In greening finance, financial institutions are expected to build their own capability to
strengthen resilience against climate and environmental risks. This entails enhancing
assessment and management of exposures to physical and transition risks, and to step
up on climate risk disclosure that can mitigate risk of greenwashing and enhance
stakeholders' confidence.
In financing green, financial institutions can help build clients' capability to transition
towards greener and more sustainable practices by providing advice or capacity
building, and to develop targeted products and services to finance transition and
adaptation. In essence, it is insufficient for the financial sector to focus largely on
building its resilience to the effects of climate change. Equally important, is for the
financial sector to assist their clients to transition through the products and solutions
that they offer as well as advisory services. Such support is even more critical for the
smaller businesses.
Financial regulators working collaboratively
As such, have been
the Bank together with the Securities Commission Malaysia
focusing efforts to lay down the relevant building blocks for a conducive green finance
ecosystem. These include developing medium term strategies, coherent regulatory and
supervisory expectations and guidance that reflect climate-risk considerations.
For the capital market, frameworks and guidance are aimed to spur SRI-linked funds
and investments. The Bank has also established special funding facilities to catalyse
financial sector responses in supporting transition of business, particularly the SMEs.
The financial regulators, in taking a whole-of-financial sector approach, has formed the
Joint Committee on Climate Change, JC3 which focuses on developing practical tools
to accelerate financial sector readiness in taking on the enabling role. The JC3 focuses
on six areas namely risk management, governance and disclosures, products and
solutions, data requirements, capacity building and most recently, accelerating SMEs
transition. Pilot solutions are also being actively explored to catalyse and scale up
financial sector support especially those involving new financial instruments or new
transition and green projects. With a solid foundation and facilitative frameworks in
place, we are confident that these would help deepen our green finance market with
greater offerings of green financial products and solutions.
Making good progress
I am very pleased to say that the financial sector has been responding very positively
and are committed in supporting the country's transition. Financial institutions have
committed more than RM200 billion in financing for ESG up to 2025. We are observing
increasingly, more transition and sustainability-linked financial products and solutions
being rolled out. While these are certainly positive progress, we are cognizant that we
can't rely solely on the financial sector to fund the country's transition. International
financial and investment community, as well as philanthropic capital providers are key
in helping us fill up the investments and financing gaps and therefore enabling us to
progress smoothly in the transition journey.
Conclusion
The strong economic fundamentals, sound macroeconomic policies, and strategic
economic initiatives and roadmaps which lay the ground for Malaysia to reap the
opportunities of new growth areas including those which are of high value and
sustainable, underscore the value proposition that the Malaysian economy has to offer.
With these in mind, I wish you a productive seminar ahead.
Thank you for your time and attention.