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STATUTORY REQUIREMENTS

In accordance with section 13 of the Central Bank of Malaysia Act 2009, Bank Negara

Malaysia hereby publishes and has transmitted to the Minister of Finance a copy ofthis Annual Report together with a copy of its Financial Statements for the year ended31 December 2012, which have been examined and certified by the Auditor-General.The Financial Statements will also be published in the Gazette.

For the purposes of section 115 of the Development Financial Institutions Act 2002,the annual report on the administration of the Development Financial InstitutionsAct 2002 and other related matters for the year ended 2012 is incorporated in BankNegara Malaysias Financial Stability and Payment Systems Report 2012 which formsan integral part of this Annual Report 2012.

Zeti Akhtar Aziz

Chairman

Board of Directors

20 March 2013

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BOARD OF DIRECTORS

Tan Sri Dato Sri Dr. Zeti Akhtar Aziz

D.K. (Johor), P.S.M., S.S.A.P., S.U.M.W., D.P.M.J.

Governor and Chairman

Dato Muhammad bin Ibrahim

P.J.N., D.P.M.S.

Deputy Governor

Datuk Nor Shamsiah binti Mohd Yunus

P.M.W.

Deputy Governor

Dato Sri Dr. Mohd Irwan Serigar bin Abdullah*

S.S.A.P., D.C.S.M., D.P.S.K., D.I.M.P., S.A.P.

Datuk Oh Siew Nam

P.J.N.

Tan Sri Datuk Amar Haji Bujang bin Mohd. Nor

P.S.M., D.A., P.N.B.S., J.S.M., J.B.S., A.M.N., P.B.J., P.P.D.(Emas)

Dato N. Sadasivan

D.P.M.P., J.S.M., K.M.N.

Tan Sri Dato Seri Dr. Sulaiman bin Mahbob**

P.S.M., P.J.N., S.S.A.P., D.J.B.S., J.S.M., S.M.J., P.M.P., K.M.N., A.M.N.

Encik Chin Kwai Yoong

*Dato Sri Dr. Mohd Irwan Serigar bin Abdullah was appointed as a member of the Board

with effect from 24 August 2012. Tan Sri Dato Sri Dr. Wan Abdul Aziz bin Wan Abdullah

resigned from the Board with effect from 23 August 2012 on completion of his term as

Secretary General to the Treasury.

**Tan Sri Dato Seri Dr. Sulaiman bin Mahbob was reappointed as a member of the Board

effective 16 November 2012.

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4

ANNUALREPORT

BOARDOFD

IRECTORS

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SHARIAH ADVISORY COUNCIL MEMBERS

Dr. Mohd Daud bin Bakar

Chairman

Dato Dr. Abdul Halim bin Ismail

D.S.D.K

Tun Abdul Hamid bin Haji Mohamad

S.S.M, D.U.P.N, S.P.C.M, D.M.P.N, D.P.C.M, K.M.N, P.J.K

Tan Sri Sheikh Ghazali bin Abdul Rahman

P.S.M, P.J.N, D.S.D.K, S.D.K, A.M.N

Y.B. Dato Seri Haji Hassan bin Haji Ahmad

P.M.P, D.S.P.N, P.J.N, D.G.P.N

Dr. Muhammad Anwar Ibrahim

Prof. Dr. Ashraf bin Md. Hashim

Prof. Madya Dr. Mohamad Akram bin Laldin

Prof. Madya Dr. Engku Rabiah Adawiah binti Engku Ali

Prof. Madya Dr. Rusni binti Hassan

Dr. Aznan bin Hasan

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6

ANNUALREPORT

BOARDOFD

IRECTORS

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Governor Tan Sri Dr. Zeti Akhtar Aziz

Deputy Governor Dato Muhammad bin IbrahimDeputy Governor Datuk Nor Shamsiah binti Mohd Yunus

Secretary to the Board Abu Hassan Alshari bin YahayaAssistant Governor Dr. Sukhdave Singh

Assistant Governor Bakarudin bin IshakAssistant Governor Norzila binti Abdul AzizAssistant Governor Jessica Chew Cheng LianAssistant Governor Donald Joshua JaganathanAssistant Governor Abu Hassan Alshari bin YahayaAssistant Governor Marzunisham bin Omar

DirectorGovernors Office Vivienne Leong Sook Leng

Strategic Communications Shariffuddin bin Khalid Internal Audit Tan Nyat ChuanEconomics

Economics Fraziali bin IsmailMonetary Assessment and Strategy Dr. Norhana binti Endut

International Nazrul Hisyam bin Mohd Noh Statistical Services Toh Hock ChaiRegulation

Financial Sector Development Aznan bin Abdul Aziz Islamic Banking and Takaful Wan Mohd Nazri bin Wan Osman

Financial Surveillance Madelena binti Mohamed Prudential Financial Policy Mohd Zabidi bin Md Nor Development Finance and Enterprise Kamari Zaman bin Juhari Payment Systems Policy Cheah Kim Ling Consumer and Market Conduct Suhaimi bin Ali Money Services Business Regulation Shahariah binti OthmanSupervision

Financial Conglomerates Supervision Che Zakiah binti Che Din Insurance and Takaful Supervision Yap Lai Kuen Banking Supervision Marina binti Abdul Kahar Specialist Risk Unit Charles Sandanasamy*

Financial Intelligence and Enforcement Abu Hassan Alshari bin YahayaInvestment and Operations

Investment Operations and Financial Markets Adnan Zaylani bin Mohamad Zahid Foreign Exchange Administration Shamsuddin bin Mohd Mahayidin Currency Management and Operations Azman bin Mat AliOrganisational Development

Strategic and Risk Management Mohd. Adhari bin Belal Din Strategic Human Capital Jennora Bahari Finance Eugene Hon Kah Weng Legal - Human Capital Development Centre Thomas Tan Koon Peng LINK and Regional Offices Arlina binti Ariff IT Services Alizah binti AliMIFC Promotion Unit Nik Mohamed Din bin Nik MusaCentralised Shared Services

General Manager Dato Mohd Nor bin MashorCSS Management Office Myrzela binti Sabtu

Facilities Management Services Azmi bin Abd Hamid Hospitality Services Lim Foo Thai Security Services Mior Mohd Zain bin Mior Mohd Tahir Museum, Art Gallery and KM Centre Services Lucien de GuiseChief Representative

Beijing Representative Office Albert See Choon Kwang London Representative Office Azizul bin Amiludin* New York Representative Office Khairuzin bin Mohd ArifRegional Office

Johor Bahru Raman A/L Krishnan Pulau Pinang Khaw Lay KuanBranch Manager

Kota Kinabalu Ishak bin Musa Kuching Rosnani binti Mahamad Zain Shah Alam Yusoff bin Yahaya Kuala Terengganu Omar bin Moin

* Administrative Head

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Contents

GOVERNORS STATEMENT

EXECUTIVE SUMMARY

ECONOMIC DEVELOPMENTS IN 201211 The International Economic Environment15 The Malaysian Economy24 External Sector

28 Box Article: Current Account Balance in Malaysia: Recent Developments and Outlook34 Box Article: Changing Drivers of Economic Growth in Malaysia40 Price Developments

MONETARY AND FINANCIAL CONDITIONS47 International Monetary and Financial Conditions

50 Domestic Monetary and Financial Conditions51 Box Article: Commodity Price Boom: Is Financialisation a Factor?62 Box Article: Responsiveness of the Malaysian Government Securities Yield Curve to

Movements of Sovereign Bond Yields Abroad68 Financing of the Economy

MONETARY POLICY IN 201273 Monetary Policy76 Monetary Operations79 Box Article: Bank Negara Malaysias Joint Policy Committee

OUTLOOK AND POLICY IN 2013

83 International Economic Outlook85 Box Article: Post Crises Structural Changes in Global Growth Trends91 Malaysian Economy94 Box Article: Potential Output of the Malaysian Economy96 Box Article: Private Investment in Malaysia: Drivers and Sustainability101 Box Article: Variations in Household Propensity to Consume across Income Segments104 Box Article: Potential Impact of the Minimum Wage Policy on the Malaysian Economy109 Monetary Policy110 Fiscal Policy

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GOVERNANCE, ORGANISATIONAL DEVELOPMENTAND COMMUNICATIONS115 Governance

118 Organisational Development120 Box Article: Establishment of Centralised Shared Services Division Towards Enhancing

Services Delivery in the Bank124 Communications127 Organisation Structure

ANNUAL FINANCIAL STATEMENTS134 Statement of Financial Position as at 31 December 2012135 Income Statement for the Year Ended 31 December 2012136 Notes to the Financial Statements

ANNEX

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GOVERNORS STATEMENT

The global economy entered 2013 with improved economic and financial conditions. Theoverall global situation, however, continues to remain challenging. The pace of recoveryprevailing in several of the advanced economies remains constrained by the unresolvedfiscal, financial and structural concerns. While affected by global developments,emerging economies have continued to perform well. Emerging economies in Asia,

in particular, have continued to be resilient, sustained by domestic demand and robust

domestic fundamentals.

The Malaysian economy is expected to continue to remain on a solid and steady growth

trajectory in 2013. The favourable economic performance has benefitted from therestructuring of the economy during the recent decade, the resilience of the financialsector and the potential flexibility of policy. Following the economic restructuring, domesticdemand has increasingly been the driver of growth. The growth has essentially beensustained by the strong private consumption and, more recently, the resurgence of private

investment. The sources of economic growth have also become more diversified andbalanced across economic sectors and across trade partners. Of greater significance is theincreasing role of the private sector in the economy.

Malaysias economic performance has importantly been well-supported by a resilientfinancial sector. Despite the increased volatility experienced in the domestic financialmarkets following developments in the global economy and financial system, domesticfinancial intermediation has continued uninterrupted. A strong banking system anda well-developed domestic bond market have not only provided continued access forfinancing of the economy, but it has served to disperse the concentration of risk in

the financial system. Additionally, the progressive liberalisation and the greater foreignpresence has not only increased competition in the financial system but has contributedto increased two-way capital flows and thus orderly market conditions. Moving forward,the continued financial reforms and development will aim at enhancing financial sectorresilience and ensuring that the financial sector will continue to best serve the economy.

Equally important in supporting the economy is the potential flexibility of the domesticmacroeconomic policies, particularly in an increasingly complex and challengingenvironment. The Bank has always been pragmatic in the design and use of its policies,relying on a comprehensive set of measures to achieve the desired objectives. While

monetary policy remains the main policy lever, other complementary measures such asmacroprudential policies have been relied upon to address risks in specific segments ofthe financial system and the economy, thus broadening the policy space and avoiding anover-reliance on monetary policy. Coordination with fiscal policy has also enhanced theimpact and effectiveness of the policies in influencing the economy.

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While inflation has trended downwards to the lows of 1.3% at the start of 2013, the focus ofmonetary policy during the year will be on managing the risk of rising prices while supportingsustained domestic economic growth. Given the assessment on the domestic and globaleconomic prospective conditions, the expectation is for inflation to remain modest. The Bank

will continue to be forward-looking and take a medium-term perspective given that monetarypolicy is most effective when used pre-emptively. Consideration will also be given towardsavoiding the build-up of financial imbalances that could adversely affect macroeconomicand financial stability over the medium term. Lessons can be drawn from the crisis-riddeneconomies on the consequences of excessive build-ups of household indebtedness which

would eventually have adverse and prolonged effects on consumption, the broader economyand financial stability. While the assessment is that household indebtedness in Malaysia andthe risk to financial stability remains contained, a number of measures have already beenimplemented as a pre-emptive step to prevent it from becoming a problem.

Recent data shows that the growth of credit to households has begun to moderate. Inaddition, the growth of credit to households has been supported by a comprehensive andwell-developed infrastructure to manage the risks. These include a well-functioning creditinformation registry that allows banks to make an informed assessment on the aggregateborrowings and creditworthiness of a borrower, a targeted financial education programme for

new and young borrowers and a well-structured debt resolution and counselling mechanismto facilitate orderly management of potential financial problems among households. Throughthe supervisory assessment, the underwriting and risk management practices of banks has also

been upgraded and become more robust.

As a highly open economy and with an increasingly more liberalised financial system, Malaysiais vulnerable to international shocks. Increased regional and global integration has in particularstrengthened our economic and financial links with other economies in Asia. This has resultedin a greater diversification of the sources and destinations of trade and investment flows.Recent progress towards greater regional financial integration has also allowed for a more

efficient and effective intermediation of funds within the region, improved risk diversificationand provided the needed financing to support the investment activities in the region. Thegreater international and regional integration has brought with it increased challenges,including the risk of contagion from other parts of the world. This has prompted policymakersin the region to work together to pre-empt any incipient risks to the regional financial systems

and economies. This is particularly important in the present circumstances where the region isbeing affected by volatile capital flows.

Among the regional central banks, there is a shared appreciation and strong commitmentfor combined efforts to secure regional macroeconomic and financial stability. Under the

Executives Meeting of East Asia-Pacific Central Banks (EMEAP), there is greater collectiveaction in forming surveillance frameworks for early detection of risks and vulnerabilitiesto the region. Also being put in place is the pre-emptive preparations for an integrated

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framework for crisis management for the region. Reinforcing this is the ASEAN+3 financialinitiatives which have strengthened and expanded the liquidity support mechanisms throughthe Chiang Mai Initiative Multilateralisation (CMIM). It enables a prompt response to anyimpending stress to the balance of payments or to a short-term liquidity position in the

region. The South East Asia Central Banks Research and Training Centre (SEACEN) also has akey role in facilitating greater and more inclusive regional collaboration among the regionalcentral banks. The extensive membership of SEACEN, including the major central banks inthe region, has significantly deepened the collective pool of talent and resources in i ts coreactivities. SEACENs unique regional position has facilitated a number of high-impact capacity

building activities and collaborative research, as well as providing an inclusive platform forrigorous high-level policy discussions on issues of common strategic interest.

From the medium-term perspective, the main challenge for Malaysia is to successfullymanage the transition towards a higher value-added economy, in which growth is private

sector-driven and characterised by greater productivity and innovation, while at the sametime being sustainable and inclusive. Key structural reform initiatives are currently beingundertaken towards achieving this transformation, while taking into consideration thedomestic realities and a more dynamic global environment. In this regard, the role ofmacroeconomic policy will be to ensure stability, and to provide the right incentives for

the private sector to participate in this economic transformation process. As part of thistransformation, the financial sector is envisaged to assume an important role in the efficientintermediation of funds, not only within Malaysia but increasingly also in the region and in

other emerging economies. This will require new financial products and services to meet therequirements of a more knowledge- and innovation-intensive domestic economy and the financial

infrastructure that will support the regional intermediation of funds for productive purposes.

During the year, the Bank has continued to modernise and strengthen its organisationalcapacity. The Bank is now well into the third phase of its organisational transformation, toensure our continued effectiveness and to bring the Bank to the next level of performance.

Key to the transformation is the Banks three-year Business Plan, which provides focusand organisation-wide clarity on the strategic directions of the Bank, as well as a greaterappreciation of the interdependencies of the desired outcomes. This has also strengthenedhorizontal collaboration within the Bank.

The Bank achieved several key milestones during the year. This included the enactmentof the new Financial Services Act 2013 and Islamic Financial Services Act 2013, whichmerged several existing acts to provide a more uniform framework for the regulation ofthe financial sector and to provide the Bank with the necessary powers to act effectivelyin a much more complex financial landscape. Another milestone was the establishment

of a centralised shared services division in the Bank to enhance the productivity and thelevel of professionalism in the delivery of support services to the Bank. There has also beenmore targeted talent development, with an increased focus on leadership development

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throughout the Bank, to ensure the readiness of the Banks succession plan. Finally, the Bankintroduced in 2012 the new currency series for all denominations of its notes and coins,with designs that distinctly reflect Malaysia and incorporating the latest security features andbanknote technology.

The Bank has undergone many changes that have ensured that we remain effective and are ina state of readiness to meet the greater demands and challenges before us. Central to theseefforts is the unwavering dedication and professionalism of the Banks staff. On behalf of theBoard and the management, I wish to express our appreciation to the staff of the Bank for their

commitment to achieving our strategic goals and the economic and financial well-being of ournation. I also thank the Board of Directors for their continued support and guidance. With morechallenges ahead of us, the Bank will continue to strive towards achieving the highest standardsof excellence in fulfilling our responsibilities and upholding the trust that is placed upon us,guided by our vision, resolve, and shared values.

Zeti Akhtar Aziz

Governor

20 March 2013

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EXECUTIVE SUMMARY

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EXECUTIVE SUMMARY

In 2012, global economic growth moderatedamid a more challenging environment comparedto 2011. In the advanced economies, growthwas uneven, with the US experiencing afragile recovery and the euro area remaining inrecession. The weakened economic conditions inthe advanced economies affected internationaltrade, which in turn affected domestic economicactivity in the emerging economies. Weakerglobal growth prospects, coupled with theongoing fiscal uncertainties in the advancedeconomies also contributed to sustainedvolatility in the international financial markets.

Nonetheless, market sentiments improvedtowards the latter part of the year followingstronger commitments and important stepstaken by authorities in resolving the Europeansovereign debt crisis.

Despite the weak external environment, theMalaysian economy performed better thanexpected, delivering faster and higher qualitygrowth. The Annual Report provides an analysisof the developments in the Malaysian economyand the policies pursued by the Bank duringthe year. It also provides an assessment of the

prospects of the Malaysian economy amidst theongoing developments in the global economic andfinancial landscape and the key challenges goingforward. In addition, the report also highlightsthe organisational changes in the Bank to furtherstrengthen its governance and capacity throughenhancements in strategic management, riskmanagement and talent development.

The Malaysian Economy in 2012The Malaysian economy performed better thanexpected in 2012, recording a strong growth of5.6%. The overall growth performance was drivenby higher growth in domestic demand, whichoutweighed the negative impact from the weakexternal environment. Domestic demand recordedthe highest rate of expansion over the recentdecade, underpinned by higher consumption andinvestment spending. Despite the uncertaintiesin the external environment, domestic consumerconfidence picked up amidst positive incomegrowth, continued strength in the labour market,the low inflation environment and supportivefinancing conditions.

Investment activity was a key driver of the domesticeconomy during the year, with increased capitalspending by both the private and public sectors.Private investment was particularly robust, recordinga double-digit growth of 22%. The share of privateinvestment rose to 15.5% of GDP in 2012, thehighest since 1998. This was led by strong capitalspending in the consumer-related services sectors,domestic-oriented manufacturing sectors and theimplementation of major infrastructure projects.Public investment also registered a strong growthof 17.1%, driven by higher capital spendingby public enterprises. In addition, the strong

investment performance was also attributedto the commencement and progress of severalinfrastructure projects, including those under theEconomic Transformation Programme (ETP), andthe steady improvement in the investment climate.

Private consumption registered a firm growthof 7.7% in 2012. The strong performancewas attributed to favourable income growth,Government transfers to low- and middle-incomehouseholds, and supportive financing conditions.In the public sector, public consumption recordeda moderate growth of 5% amidst continued fiscal

consolidation efforts during the year.

On the supply side, all economic sectors continuedto expand in 2012. The construction sectorbenefited from the strong expansion in investmentactivity, registering its highest pace of growthsince 1995. While the growth of export-orientedactivities was dampened by the slowdown inexternal demand, the growth of domestic-related activities, particularly in the services andmanufacturing sectors, was supported by thestrong performance of domestic demand.

Labour market conditions remained stable in 2012with continued gains in employment, observedmostly in the services and agriculture sectors.However, total retrenchments increased duemainly to higher layoffs in the manufacturingsector. During the year, the unemployment ratedeclined marginally to 3%.

Headline inflation, as measured by the annualpercentage change in the Consumer Price Index(CPI), averaged 1.6% in 2012 (2011: 3.2%).

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ANNUALREPORT2012

EXECUTIVES

UMMARY

6

Governments fiscal position and as the role of theprivate sector gains greater significance. In linewith the more favourable external sector, grossexports are projected to record a higher growthin 2013 supported by the export of manufacturedproducts. Gross imports are expected to moderate,

in tandem with the projected trend in domesticdemand. Overall, this is expected to result in alower negative contribution to real GDP from netexports. As import growth continues to outpaceexport growth amid the continued deficit in theincome account and in current transfers, thecurrent account surplus, while still remainingsignificant is expected to narrow further in 2013.

On the supply side, all major economic sectors areexpected to record continued expansion in 2013.The services and manufacturing sectors are expectedto be the key contributors to overall growth, driven

by the continued resilience of domestic demandand supported by higher international trade activity.Growth in the construction sector is projected toremain strong, supported by the implementationof major infrastructure projects. In the commoditiessector, the growth of agriculture is expected toimprove due to the higher output of crude palmoil and food commodities while the mining sectoris expected to strengthen following the higherproduction of natural gas, crude oil and condensates.

Headline inflation is expected to average 2-3% in2013. This inflation projection takes into accountthe expected higher global prices of selected foodcommodities and the adjustments to domesticadministered prices. Demand-driven price pressuresare expected to be moderate. The wider forecastrange reflects the greater uncertainty in the externaland domestic environment.

Overall, the growth prospects of the Malaysianeconomy will continue to be underpinned by thestrength of its fundamentals. Of importance, labourmarket conditions will remain favourable, with theunemployment rate projected to remain low at

3.1% of the labour force in 2013. In addition, thefinancial system continues to demonstrate resilienceagainst the challenging external environment,with financial intermediation expected to continueto provide strong support to domestic economicactivity. The introduction of macroprudential andother policy measures have helped to manage therisks from the increase in household indebtedness.Malaysias favourable external position is to remainintact, with international reserves at healthy levelsand a low external debt that is within prudent limits.

Given the challenging external environment, there,however, remain risks to the economic outlook. Thepotential re-emergence of instability in the euroarea and slower growth in Malaysias major tradingpartners would affect the Malaysian economy.While pressures from global commodity prices

have receded, upside risks from non-fundamentalfactors, such as adverse weather conditions andgeopolitical developments, could push commodityprices higher and adversely affect the growthprospects of economies that are major tradingpartners of Malaysia. Potential upside to thedomestic economy could emerge if the recoveryin the advanced economies turns out to be betterthan expected.

Economic and Monetary Management in 2013Under this challenging global economic environment,the focus of policies by the Government and the

Bank will be on supporting the Malaysian economyto grow at a sustainable level while mitigating therisks arising from the global environment, includingpossible shocks to inflation.

Monetary policy in 2013 will focus on addressingpotential risks to inflation and growth. The MPCconsidered the prevailing level of the OPR and thecurrent monetary policy stance to be appropriatefor the inflation and growth outlook. In additionto domestic conditions, the MPC will continue tocarefully assess the global economic and financialdevelopments and their implications on theoverall outlook for inflation and growth of theMalaysian economy.

Fiscal policy in 2013 will continue to focuson sustaining the growth momentum of thedomestic economy and facilitating the long-termtransformation of the economy, while ensuringthe sustainability of public finances. The 2013Budget placed emphasis on ensuring the efficientuse of fiscal resources, achieving inclusive growthand strengthening fiscal management, allwithin the path of a sustained and gradual fiscal

consolidation plan.

Organisational Development and GovernanceIn 2012, the Bank further reinforced its effortsin organisational development and achievingmore effective governance. During the year, theBoard of Directors met each month to deliberateon various aspects of the Banks operations,including the performance of the Bank ineffecting monetary and financial stability,and matters pertaining to the Banks financial

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ECONOMICDEVELOPMENTSIN2012

1

0

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ECONOMIC DEVELOPMENTS IN 2012

THE INTERNATIONAL ECONOMICENVIRONMENT

In 2012, the international economic landscapebecame more challenging relative to the precedingyear. Global growth experienced a synchronisedmoderation as weakening economic conditions inseveral key economies affected international tradeand subsequently had adverse spillover effectson domestic activity in the emerging economies.The lower global growth prospects, coupled withthe ongoing fiscal uncertainties in the advancedeconomies, cumulatively contributed to sustained

volatility in the financial markets. In the commoditymarkets, with the exception of crude oil pricesthat had remained elevated, the prices of othercommodities were lower on account of weakerglobal demand and more favourable supplyconditions. This subsequently led to more subduedinflationary pressures. In response to the uncertainexternal environment, many countries pursuedfurther monetary easing to support growth.

Global growth experienced a

synchronised moderation amid

heightened downside risks while

inflationary pressures remained

subdued

Moderation in global growthIn 2012, global economic growth moderated,continuing a downtrend that had begun in early2011. Most emerging regions expanded at rates

significantly lower than their pre-crisis averages, asweakness in key economies spilled over to the restof the world.

The growth momentum in the advancedeconomies was uneven. The US continued toexperience an ongoing but fragile recovery,while several other major economies registeredweak growth. The US economic recovery wasmodest, dampened by both domestic and externalweaknesses. Domestically, this reflected mainly

the sluggish conditions in the housing and labourmarkets, continued deleveraging by banks andhouseholds, and increased uncertainty arisingfrom fiscal concerns. Growth in the US was alsoaffected by negative business sentiments and aslowdown in exports attributable largely to theeconomic weakness in Europe. Towards the latterhalf of the year, however, the housing and labourmarkets recorded signs of stabilisation, providingsome support to growth.

The euro area, however, experienced a recessionamid a widespread decline in economic activity

amongst the member economies. The seriesof measures undertaken by the authoritiescontributed to stabilising the financial marketconditions during the year, but they fell short ofproviding a comprehensive resolution to the crisis.Growth in the crisis-affected economies continuedto be weighed down by fiscal austerity measures,high unemployment and impaired financialintermediation. As the year progressed, growthin the core economies also decelerated, albeit toa lesser extent, with Germany recording a slowerexpansion on account of weakening investment,and economic activity in France stagnating

amid anaemic domestic demand. Similarly, theUK economy recorded protracted weakness ingrowth, reflecting the negative impact of ongoingfiscal consolidation and declining exports tothe euro area. In Japan, while growth initiallybenefited from the reconstruction-related demandas the economy gradually recovered from theprevious years natural disaster, the effect taperedoff towards the second half of the year. Thiswas further exacerbated by continued weaknessin the external environment and a slowdownin consumption as the policy support for the

purchase of energy-efficient cars diminished.

In Asia, the moderation in growth which hadbegun in late 2011 continued into the year,reflecting mainly the weakness in external demand.In the Newly Industrialised Economies (NIEs), themoderation intensified towards the middle ofthe year on account of adverse spillover effectsfrom the external sector on domestic demand.In PR China, the growth slowdown was alsoattributable to policy tightening measures that had

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such as Spain and Italy retreated moderatelyfrom their peak. Investor concerns of a sharpslowdown in global growth also receded as keyeconomies started to show signs of stabilisationand modest improvements. This was also reflectedin the resumption of capital flows into emergingeconomies, particularly in the Asian region. Despite

these positive developments, considerable risksremained. In Europe, while there was greaterclarity in key policy initiatives to manage the crisis,uncertainty remained over implementation details.In the US, heightened concerns over the expirationof fiscal stimulus weighed on financial marketstowards the end of the year.

In the foreign exchange market,the currencies ofmost advanced and Asian economies appreciatedagainst the US dollar in 2012. The euro and

World Economy: Key Economic Indicators

Real GDPGrowth (%)

Inflation (%)

2011 2012e 2011 2012e

World Growth 3.9 3.2 - -World Trade 5.9 2.8 - -

Advanced Economies

United States 1.8 2.2 3.2 2.1

Japan -0.6 2.0 -0.3 -0.1

Euro area 1.4 -0.6 2.7 2.5

United Kingdom 0.9 0.2 4.5 2.8

Developing Asia 8.0 6.6 - -

Asian NIEs1 4.0 1.7 3.5 2.6

Korea 3.6 2.0 4.0 2.2

Chinese Taipei 4.1 1.3 1.4 1.9

Singapore 5.2 1.3 5.3 4.6 Hong Kong SAR2 4.9 1.4 5.3 4.1

The People's

Republic of China 9.3 7.8 5.4 2.6

ASEAN-4 4.3 6.2 4.5 3.3

Malaysia 5.1 5.6 3.2 1.6

Thailand 0.1 6.4 3.8 3.0

Indonesia 6.5 6.2 5.4 4.3

Philippines 3.9 6.6 4.8 3.1

India3 7.8 4.0 9.5 7.5

1 Newly Industrialised Economies2 Inflation refers to composite price index3 Inflation refers to wholesale price index; GDP at market prices for the

calendar yeareEstimate

Source: International Monetary Fund, National Authorities andBank Negara Malaysia estimates

Table 1.1 pound sterling strengthened following a generalimprovement in sentiments amid some progresstowards resolving the European sovereign debtcrisis. There were, however, periodic episodesof depreciation of the euro and pound sterlingattributable to policy uncertainties in Greece, fiscal

and banking issues in Spain, as well as releasesof weak economic data. While Asian currenciesdepreciated in the second quarter following greaterconcerns over the strength of global growth, thetrend reversed in the second half of the year assentiments were buoyed by the favourable policyactions of several major central banks to supportgrowth. Unprecedented policy easing measuresundertaken by the Fed, the BOJ, and the ECB ledinvestors to seek higher yielding assets, contributingto the general appreciation of most Asiancurrencies against the dollar. Against this trend,the Indonesian rupiah weakened by 7.3% against

the US dollar due to concerns on the nationsexternal position. While safe haven demanddrove the appreciation of the Japanese yen in thefirst half of 2012, the trend reversed in the latterpart of the year against the backdrop of weakereconomic data and expectations of furthermonetary easing by the BOJ.

Continued volatility in commodity pricesGlobal commodity prices remained volatile in 2012,attributable to both demand and supply factors. Inthe energy market, Brent crude oil price recordedan average of USD112 per barrel (p/b) in 2012,close to the USD111 p/b registered in 2011.However, prices fluctuated throughout the year dueto geopolitical developments in the Middle Eastand growth concerns in key economies. Whileslower global economic activity exerted downwardpressure on crude oil prices, persistent uncertaintiesin global supply conditions kept prices at elevatedlevels. In the first quarter, the potential impositionof sanctions on oil exports from Iran, the fourthlargest oil producer, caused oil prices to reach an11-month high of USD126 p/b. The upward trendreversed in April following talks between Iran

and key global powers, as well as higher OPECoil production. Prices rebounded in July as thenegotiations failed. Towards the end of the year,political tensions in Egypt and other parts of theregion led to heightened uncertainties. On thedemand side, weaker economic data in the US,Europe, and PR China raised concerns of a slowingglobal growth. On the non-energy commoditiesfront, metal prices declined as the slowdown inPR China led to lower demand for iron ore andcopper. Food prices were also lower during the

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year as the weaker global consumption offsettight supply conditions caused by low inventoriesand weather-related reductions in crop yieldsespecially during the second half of the year.

Easing inflationary pressuresIn 2012, global inflationary pressuresmoderated,reversing the upward trendexperienced in the previous year. Two underlyingtrends contributed to this development. Firstly,

the general slack in economic activity followingweaker overall demand contributed to moremuted demand-driven pressures. Secondly, thelower increase in energy prices also had a direct

impact in slowing the rise in consumer prices,particularly in the advanced economies. Whileheadline inflation movements in the US variedin tandem with fluctuations in energy andcommodity prices, core inflation moderatedthroughout the year, indicating the absence ofdemand pressures. In the euro area and the UK,consumer prices continued on a downward trendamid receding energy price pressures. Japansheadline consumer prices (less food) remainedin deflationary mode, reflecting the persistentnegative output gap and broad-based weaknessin prices across all components. Similarly, inflationin Asia was relatively modest, attributable mainlyto the relatively benign increases in food andcommodity prices. Of significance, domesticprices of staple foods in the region, such as rice,stabilised with support from lower global demandand market intervention by several governments.The downward pressures on inflation differedacross economies, reflecting country-specific factorssuch as higher accommodation costs (Singaporeand Hong Kong SAR) and transitory increases in

Chart1.2

Selected Events That Affected the Global Financial Environment in 2012

1000

1050

1100

1150

1200

1250

1300

1350

1400

3-Jan

18-Jan

2-Feb

17-Feb

3-Mar

18-Mar

2-Apr

17-Apr

2-May

17-May

1-Jun

16-Jun

1-Jul

16-Jul

31-Jul

15-Aug

30-Aug

14-Sep

29-Sep

14-Oct

29-Oct

13-Nov

28-Nov

13-Dec

28-Dec

Index

Source: Bloomberg

Euro area leaders agreed on a second

rescue package for Greece worth130 billion

EU leaders agreed to signa new fiscal compact

Greece failed to form a coalition government,raising the risk of Greece leaving the euro area

Spain formally requested

for a euro area loan

1. Federal Reserve extends Operation Twist2. EU leaders signed on a compact for economic growth

ECB President, Mario Draghi, affirmed policymakers'commitment to "do whatever it takes" to preserve the euro

Hurricane Sandy

ECB announced a bond purchase programmecalled Outright Monetary Transactions (OMT)

The Troika agreed on a package of measures to reduceGreek debt by 40 billion (to 124% of GDP) by 2020

Fed announced the change inpolicy framework and extended QE

US fiscal cliffwas averted

MSCI World Index

Chart 1.3

Indices of Primary Commodity Prices

50

100

150

200

250

300

Jan08

Jul

08

Jan09

Jul

09

Jan10

Jul

10

Jan11

Jul

11

Jan12

Jul

12

Jan13

Index (Jan '05 =100)

Source: International Monetary Fund (IMF)

MetalsCrude oil

Food

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Malaysia - Key Economic Indicators

2010 2011 2012p 2013f

Population (million persons) 28.6 29.0 29.3 29.7

Labour force (million persons) 12.3 12.7 13.1 13.5

Employment (million persons) 11.9 12.3 12.7 13.1Unemployment (as % of labour force) 3.3 3.1 3.0 3.1

Per Capita Income (RM) 26,882 29,661 30,809 33,015

(USD) 8,346 9,693 9,974 10,7606

NATIONAL PRODUCT (% change)

Real GDP at 2005 prices1 7.2 5.1 5.6 5.0 ~ 6.0

(RM billion) 674.9 709.3 749.1 789.9

Agriculture, forestry and fishery 2.4 5.9 0.8 4.0

Mining and quarrying -0.4 -5.7 1.4 5.0

Manufacturing 11.9 4.7 4.8 4.9

Construction 6.0 4.6 18.5 15.9

Services 7.2 7.0 6.4 5.5

Nominal GNI 10.0 11.8 5.2 8.5

(RM billion) 768.5 859.1 903.9 981.0Real GNI 4.3 4.9 4.3 6.7

(RM billion) 633.8 664.6 693.5 739.7

Real aggregate domestic demand2 7.0 8.2 10.6 8.1

Private expenditure 8.3 8.2 10.7 9.1

Consumption 6.6 7.1 7.7 7.1

Investment 15.5 12.2 22.0 15.6

Public expenditure 3.8 8.4 10.3 5.4

Consumption 2.9 16.1 5.0 3.6

Investment 5.0 -0.3 17.1 7.5

Gross national savings (as % of GNI) 35.4 35.5 33.0 32.9

BALANCE OF PAYMENTS (RM billion)

Goods balance 134.7 148.1 125.2 102.3

Exports (f.o.b.) 640.0 696.6 702.9 713.1 Imports (f.o.b.) 505.3 548.5 577.7 610.8

Services balance 1.7 -8.0 -13.4 -12.7

(as % of GNI) 0.2 -0.9 -1.5 -1.3

Income, net -26.5 -22.0 -33.7 -27.2

(as % of GNI) -3.4 -2.6 -3.7 -2.8

Current transfers, net -21.8 -21.0 -18.2 -19.6

Current account balance 88.1 97.1 60.0 42.7

(as % of GNI) 11.5 11.3 6.6 4.4

Bank Negara Malaysia international reserves, net3 328.6 423.3 427.2 -

(in months of retained imports) 8.6 9.6 9.5 -

PRICES (% change)

CPI (2010=100)4 1.7 3.2 1.6 2.0 ~ 3.0

PPI (2005=100)5 5.6 9.0 0.1 -Real wage per employee in the manufacturing sector 6.4 0.6 4.6 -

1 Beginning 2012, real GDP has been rebased to 2005 prices, from 2000 prices previously2 Exclude stocks3 All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance sheet date and the gain/loss has

been reflected accordingly in the Banks account4 Effective from 2011, the Consumer Price Index has been revised to the new base year 2010=100, from 2005=100 previously5 Effective from 2010, the Producer Price Index has been revised to the new base year 2005=100, from 2000=100 previously6 Based on average USD exchange rate for the period of January-February 2013

pPreliminaryf Forecast

Note: Numbers may not necessarily add up due to rounding

Table 1.2

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impressive growth rates throughout the year,with broad-based investment activity undertakenby firms across most sectors. Investments inthe oil and gas sector reflected the concertedefforts by both the public and private sectors toincrease oil production through new investments

in deepwater and marginal oil fields. Thecontinued strong growth in private consumptionhad the effect of spurring more investments inthe consumer-related services and manufacturingsectors, while firm regional demand provided strongincentives for investments in the tourism-relatedservices sectors, such as the airline industry, medicaland education services. The conducive financingenvironment in the banking sector and the capitalmarket also supported the financing of thecapital spending. In addition, the commencementand progress of several infrastructure projects,including those under the Economic Transformation

Programme (ETP) such as the MY Rapid Transit, hadalso provided significant positive spillover effectsto activities in the domestic manufacturing andservices sectors. Reflecting these developments,value-added in the construction sector registeredrobust growth in 2012.

The Malaysian economy registered

a better-than-expected growth

of 5.6% in 2012, supported by

stronger domestic demand amid the

weak external environment

Despite the uncertainties in the external environment,consumption activity remained strong during theyear. This was attributable mainly to favourableincome growth, the low inflation environment, andsupportive financing conditions. Household spendingalso received further support from the Governmenttransfers to low and middle-income households.

Although income in the rural areas was affectedby the decline in the prices of rubber and palmoil, this was in part mitigated by the payment ofRM15,000 to the FELDA settlers, which amountedto a total of RM1.7 billion.

The improvement in domestic economic activityduring the year had resulted in sustained stronggrowth in the import of goods and services. Thestrong growth largely reflected the robust importsof capital goods, led by the import of machineries,

telecommunications equipment and passenger

aircrafts. The import of consumption goods alsoexpanded in line with the stronger growth inconsumer spending. The import of services was alsodriven mainly by higher payments for professional

Real GDP by Expenditure (2005=100)

2011 2012p 2011 2012p

Annual change

(%)

Contribution to

growth (ppt)

DomesticDemand1 8.2 10.6 6.9 9.2

Consumption 8.9 7.1 5.4 4.5

Private sector 7.1 7.7 3.5 3.8

Public sector 16.1 5.0 1.9 0.7

Gross Fixed CapitalFormation 6.5 19.9 1.5 4.7

Private sector 12.2 22.0 1.5 3.0

Public sector -0.3 17.1 -0.0 1.7

Change in stocks -0.7 0.3

Net exports ofgoods and services -7.4 -29.4 -1.1 -3.8

Exports 4.2 0.1 4.3 0.1

Imports 6.2 4.5 5.4 3.9

Real Gross DomesticProduct (GDP) 5.1 5.6 5.1 5.6

1 Excluding stockspPreliminary

Source: Department of Statistics, Malaysia

Table 1.4

Real GDP by Sector (2005=100)

2011 2012p 2011 2012p

Annual change(%)

Contributionto growth (ppt)1

Agriculture 5.9 0.8 0.4 0.1

Mining & quarrying -5.7 1.4 -0.6 0.1Manufacturing 4.7 4.8 1.2 1.2

Construction 4.6 18.5 0.1 0.6

Services 7.0 6.4 3.7 3.5

Real Gross DomesticProduct (GDP) 5.1 5.6 5.1 5.6

1 Numbers do not add up due to rounding and exclusion of importduties component

p Preliminary


Table 1.5

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and construction services, given the stronginvestment and construction activities during theyear. Travel payments were also higher, reflectingthe higher number of Malaysians travelling abroadfor leisure.

The export of goods and services moderatedsignificantly amidst weaker external demand fromboth the advanced and regional economies. Thelower growth in gross exports was due mainlyto the weaker demand for crude commoditiesand non-electrical and electronics (E&E) products.In the first half of the year, growth in non-E&E

exports was supported by regional demand. Inthe second half of 2012, however, demand fromthe region for both manufactured and commodityexports declined, following slower growth in themajor regional economies. Of significance, thelower demand for crude palm oil and naturalrubber coincided with the slowdown in growthin PR China and the recession in the euro area.The contraction in the export of commodities wasalso compounded by the lower production ofcrude palm oil and disruptions in the productionof natural gas. The export of E&E, while registeringa marginal improvement, nevertheless, remained

fragile due to the weak investment and consumptiontrends in the advanced economies. The export ofservices improved slightly, mainly on account ofhigher receipts from the provision of computer andinformation and communications technology (ICT)services, and business and professional services byMalaysian companies. Receipts from transportationservices declined sharply, following the moderationin the export of goods and lower tourist arrivals. Theslower growth in tourist arrivals also weighed downon receipts from tourism activities for the year.

The higher growth of imports of goods and servicesrelative to exports led net exports of goods andservices to register a higher contraction in 2012,resulting in a larger negative contribution to overallGDP growth. This was nevertheless more than

offset by the higher contribution from the strongerdomestic demand.Stronger domestic demandDomestic demandregistered a strong expansionof 10.6% in 2012 (2011: 8.2%), and contributedsignificantly to overall GDP growth. This wasattributable to the robust expansion in total grossfixed capital formation and stronger growth inprivate consumption.

Gross fixed capital formation (GFCF)registered a marked expansion of 19.9% in 2012,

underpinned by higher capital spending in both

Chart 1.5

Real GDP by Expenditure

p Preliminary


Contribution to growth (percentage points)

-4

-2

0

2

4

68

10

12

2006 2007 2008 2009 2010 2011 2012p

Private consumption Private investment Publi c consumpt ion

Public investment Net exports Change in stocks

Table 1.6

External Trade & Services Account

2011 2012p

Annual change (%)

Gross exports 9.2 0.6

Manufactures 3.5 3.1

Electronics and electrical (E&E) -3.7 -1.8

Non-E&E 12.7 8.4

Commodities 28.2 -6.7

Agriculture 33.0 -15.3

Minerals 23.8 1.9

Gross imports 8.5 5.9

Capital goods 8.7 20.5

Intermediate goods 5.5 -3.4

Consumption goods 19.0 11.6

Services exports 4.6 6.4

Transportation -1.8 -10.5

Travel 1.9 1.5

Other services 12.8 22.1

Government services n.i.e. 6.2 -17.8

Services imports 14.0 10.5

Transportation 6.2 1.3

Travel 29.0 12.4

Other services 12.2 18.0

Government services n.i.e. 2.6 -13.8

p Preliminary

Source: Department of Statistics, Malaysia and Bank Negara Malaysia

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Continued Expansion across All Economic Sectors

On the supply side, all economic sectors continued to expand in 2012, with significant improvementregistered in the construction sector. The robust growth of the construction sector (see InformationBox: Strong Performance of the Construction Sector) reflected mainly the significant progress in civil

engineering projects. The continued growth in domestic demand, particularly in private sector spending,contributed to growth in domestic-related activities in the services and manufacturing sectors, while theslowdown in external demand affected the performance of trade-related services.The services sector remained the largest growthcontributor (3.5 percentage points of overall GDPgrowth), as sub-sectors catering to the domesticmarket, namely retail and telecommunications,benefited from strong consumer spending.The finance and insurance sub-sector recordedhigher growth, reflecting continued financing,particularly to businesses, coupled with higherfee-based income and stronger growth of earningsfrom insurance premiums. Trade-related services,particularly the wholesale and transportationsub-sectors, moderated in tandem with slowerexternal trade activities.

The manufacturing sector expanded by 4.8%, withboth the export-and domestic-oriented industriesregistering better growth. In the export-orientedindustry, production in the E&E cluster, particularlyin semiconductors, normalised, following themajor disruptions arising from the naturaldisasters in Japan and Thailand in 2011. The

continued demand for chemicals and petroleumproducts, mainly from the region, contributed tothe expansion of output of the primary-relatedcluster. The improvement in the domestic-orientedindustries was due to the better performance ofthe construction- and consumer-related clusters,driven by higher domestic construction activityand robust private consumption.

The agriculture sector recorded a more moderate growth of 0.8% in 2012. CPO output wasaffected by deteriorating weather conditions in the first half of the year, leading to a sharpdecline in yields. This, however, was offset by strong growth in key food commodities, such aslivestock, vegetables and paddy, amid strong domestic demand.

The value-added of the mining sector turned around to record a growth of 1.4%, reflecting therecovery in the production of crude oil and condensates. This was driven mainly by higher outputfrom oil fields located offshore from Peninsular Malaysia and Sabah. The higher oil output wasalso contributed by the commencement of production from marginal and new oil fields. Output ofnatural gas declined marginally, affected by a prolonged shutdown of several facilities in Sarawak formaintenance purposes during the middle of the year.

-4

-2

0

2

4

6

8

Mining & Quarrying

Manufacturing

Agriculture

Services

Construction

p Preliminary


Real GDP by Economic Activity

2008 2009 2010 2011 2012p

Chart 1

Contribution to growth (percentage points)

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the private and public sectors. Higher capitalspending was widespread across the economicsectors, particularly in the services, manufacturingand mining sectors, driven by strong domesticconsumption activity, resilient regional demandand firm crude oil prices. Contributing further

to the strong investment performance wasthe commencement and continued progressof several infrastructure projects, includingthose under the ETP and the regional growthcorridors. The investment performance duringthe year also reflected the steady improvementin the investment climate, following theintroduction of measures to further enhancethe conditions for doing business in Malaysia.

Investment activity accelerated,

supported by strong capitalspending by both the private and

public sectors

Private investmentrecorded a double-digitgrowth of 22%, attributable to capital spendingin the consumer-oriented services sectors,domestic-oriented manufacturing sectors, and theimplementation of major infrastructure projects,particularly in the mining sector. In the services

sector, capital spending was driven by investmentsin the consumer-related sub-sectors, such ascommunications and wholesale and retail trade,and benefited from continued high consumerspending and efforts by firms to upgrade existinginfrastructure and services. Real estate investmentregistered rapid expansion with higher residential andnon-residential construction, following the stronggrowth in property launches between 2010 and2011. Higher capital expenditure was also evident inthe transportation services sub-sector, particularly inthe airline industry, in response to sustained demandfor air travel. Underpinned by firm energy prices and

further supported by tax incentives to encouragethe development of deepwater and marginal oilfields, mining investment increased significantly,with capital spending channelled mainly intooil field development and enhanced outputrecovery from existing fields. In the manufacturingsector, investment was attributable mainly tocapacity expansion by the domestic-orientedfirms, particularly in the consumer-related clusters.Investment by the export-oriented manufacturingfirms reflected the implementation of approved

manufacturing projects in the primary-relatedclusters, and investments in new technologyfor product diversification and in new growthareas, namely medical and telecommunicationsequipment. Investment was also supplemented byinvestments in automation to enhance productivityand upgrade technology to mitigate the impact ofhigh energy prices and labour costs.Public investmentrecorded a strong growth

of 17.1%, driven by higher capital spendingby public enterprises in the oil and gassector, and the transportation, utilities, andtelecommunications services sub-sectors. Majorprojects in the oil and gas sector included theexploration and development of new oil andgas fields, the rejuvenation of existing oil fields,and the construction of the regasificationterminal in Melaka. Construction of the newterminal for low-cost carriers (KLIA2), aircraft fleetmodernisation, the extension of the Light Rail Transitand purchases of equipment to improve urban railservices were the main areas of investment in the

transportation sub-sector. Investment in the utilitiesand telecommunications sub-sectors included thebuilding of power plants and infrastructure tobroaden the coverage of the High-Speed Broadband(HSBB) network. The Federal Governmentsdevelopment expenditure in the economic sectorwas directed mainly to transportation, public utilitiesand trade and industry (particularly to upgradeinfrastructure facilities in industrial areas). In thesocial services sector, investment was focused mainlyon education and health.

Chart 1.6

Growth in Public and Private Investments versusConstruction Sector

-10

-5

0

5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012

Annual change (%)

Construction Sector Public Investment Private Investment


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Strong Performance of the Construction Sector

In 2012, the construction sector recorded arobust growth of 18.5%, the highest since1995 (21.1%), driven mainly by the civil

engineering sub-sector. This reflected the effortsto improve road and rail accessibility, enhanceelectricity generation capacity, and increase oiland gas output in Malaysia. Compared to therapid growth in 1995, existing major projectsare more broad-based in terms of sector andgeographical location, covering areas beyond theKlang Valley (see Table 1). The strong growth wasreflected in higher construction-related financing,manufacturing sales and production activityin 2012 (see Table 2).Growth in the sector was also contributed by

the residential and non-residential sub-sectors.The performance of the residential sub-sectorwas underpinned by the construction ofhigh-end properties in the Klang Valley,Penang and Johor, following robust launchesin 2010 and 2011 (see Table 2). Industrialprojects in the Samalaju Industrial Park,tourism projects in Iskandar, and commercialprojects in the Klang Valley supported growthin the non-residential sub-sector. Constructionof learning and health institutions, such asthe University Teknologi Mara campuses and

National Cancer Institute, also provided furtherimpetus to this sub-sector.

Table 1

List of Selected Key Civil Engineering Projects

Sector Projects Location

Transport

MRT (Sungai BulohKajang) Klang Valley

LRT extension Klang Valley

KLIA2 Klang Valley

Second Penang Bridge Penang

Seremban-GemasDouble Track

Negeri Sembilan

Rural Road Programme Various states

Utilities

Janamanjung Power Plant Perak

Tanjung Bin Power Plant JohorPahang-SelangorRaw Water Transfer1

Pahang & Selangor

Oil & Gas

Melaka LNG RegasificationTerminal

Melaka

Sabah-Sarawak Gas Pipeline Sabah & Sarawak

Sabah Oil and Gas Terminal Sabah

Gumusut-Kakap DeepwaterProject

Sabah

1 Excluding Langat 2 Water Treatment Plant

Source: News flows and Budget 2012

Table 2

Value-added and Selected Indicators for the Construction Sector

Annual change (%) 2008 2009 2010 2011 2012

Value-added 4.4 6.2 6.0 4.6 18.5

Loans disbursed for the construction sector 6.8 16.6 5.5 5.4 20.7

Industrial production

Other articles of concrete, cement and plaster 9.5 -2.7 -7.0 5.5 6.7

Structural non-refractory clay and ceramic -2.1 -14.4 2.7 -4.5 5.1

Manufacturing sales

Forging, pressing, stamping and roll-forming metal 10.6 -22.7 5.6 -0.1 15.6

Treatment and coating of metals and machining1 10.2 57.6 -19.6 -18.4 6.6

Launches of new residential units -3.4 1.3 11.7 7.1 -11.22

1 Includes cleaning, welding and cutting of metal, sandblasting and boring2 1Q-3Q 2012 (preliminary)

Source: Bank Negara Malaysia, Department of Statistics, Malaysia and National Property Information Centre

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Stable Labour Market Conditions

Employment growth was higher at 3.6% (2011: 3.2%), with a net addition of 438,800 jobs. Gains inemployment were registered mostly in the services and agriculture sectors. The unemployment ratedeclined marginally to 3% (2011: 3.1%).

Total retrenchments increased to 11,494 persons from 9,450 in the previous year, due mainly to higherlayoffs in the manufacturing sector (7,616 persons; 2011: 5,635 persons). The agriculture and services

sectors, however, recorded lower retrenchments during the year.

Based on a survey conducted by Bank NegaraMalaysia, average nominal salary in the privatesector increased by 5% in 2012 (2011: 4%), withaverage increments of 3.4% and 5.4% in themanufacturing and non-manufacturing sectorsrespectively (2011: 2.2% and 4.5% respectively).Increments for executives grew at a higher rate of5.2% (2011: 3.7%). Non-executives also receiveda higher increment of 4.7% (2011: 3.9%).

As at end-2012, the number of registered foreignworkers1in Malaysia decreased marginallyto 1,571,589 workers (end-2011: 1,573,061workers). Foreign workers accounted for 12.4%of employment in Malaysia, and were mostlyemployed in the manufacturing (39%), agriculture(29%) and construction (14%) sectors.

Chart 1

0

5,000

10,000

15,000

20,000

25,000

30,000

2008 2009 2010 2011 2012

Services Manufacturing Others

Retrenchment by Sector

Persons

Note: Others refer to the agriculture, mining and construction sectors

Source: Ministry of Human Resources

Table 1.Table 1

Selected Labour Market Indicators

2008 2009 2010 2011 2012

Employment (000 persons) 10,659.2 10,899.0 11,899.5 12,284.4 12,723.2

Labour force (000 persons) 11,028.1 11,315.3 12,303.9 12,675.8 13,119.6

Unemployment rate (% of labour force) 3.3 3.7 3.3 3.1 3.0

Retrenchments (persons) 16,469 25,064 7,085 9,450 11,494

Note: Beginning 2010, employment and labour force data was based on new population estimates and cannot be directly compared toprevious years data

Source: Department of Statistics, Malaysia and Ministry of Human Resources

1Excludes expatriates and foreign workers legalised by the 6P Programme.

Overall, growth of GFCF was broad-based, withhigher growth in both investment in structuresand machinery and equipment (46.5% and 45%share to GFCF respectively). Investment in structuresregistered rapid expansion of 27.2% in 2012(2011: 4.9%), and was evident in all construction

segments, namely civil engineering, residential andnon-residential.

In addition, capital spending in machinery andequipment grew by 15.5% in 2012 (2011: 4.2%),as reflected in the increase in the import of capitalgoods. The import of capital goods expandedby 20.5% in 2012 (2011: 8.7%), supportedby the import of machinery for manufacturing

(2012: 22.3%; 2011: 3.3%), telecommunicationsequipment (2012: 16.4%; 2011: 12.3%), mining

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and construction equipment (2012: 20.5%; 2011:35.2%) and transport equipment (2012: 43.1%;2011: 14.9%).

Despite the more adverse external environment,foreign direct investment continued to register a

sizeable net inflow, albeit to a lesser extent. Theinflows were broad-based, and were channelledinto both the domestic- and export-orientedsectors. During the year, there were also fewermergers and acquisitions of Malaysian companiesby the multi-national corporations, due to theuncertainties in global growth prospects. Ofimportance, there were significant inflows intohigh-growth areas, such as the oil and gas sectorand the communication services sub-sector. Someof the funds were also for projects under the ETP.

Private consumption strengthened,underpinned by income growth,

Government transfers and

supportive financing conditions

Private consumptionregistered a healthygrowth of 7.7% in 2012 (2011: 7.1%). The strongperformance was attributable to three mainfactors. First is the favourable income growth

amid the stable labour market conditions duringthe year. The low unemployment rate (3%;2011: 3.1%) and the high demand for labourhad led to higher nominal wage growth inthe private sector (see information box: StableLabour Market Conditions). Civil servants andpensioners also received higher incomes underthe improved Malaysian Remuneration Scheme(SSM). Nevertheless, income in the rural areasfaced downward pressures as rubber and palmoil prices declined by 29.3% (2011: +30.9%)and 13% (2011: +21.1%) respectively. However,for the FELDA settlers, this was mitigated in part

by the payment of RM15,000, which had beendisbursed in three phases to each FELDA settler,in conjunction with the listing of FELDA GlobalVentures Holdings. This amounted to a total ofRM1.7 billion.

Second, private consumption benefited from theGovernment transfers to low- and middle-incomehouseholds during the year. These included theBantuan Rakyat 1Malaysia (BR1M), Baucar Buku1Malaysia (BB1M) and the schooling assistance for

primary and secondary students. These targetedincome transfers had sizeable effects on aggregateprivate consumption, as the benefiting householdsgenerally have relatively high marginal propensity toconsume (see box article: Variations in HouseholdPropensity to Consume across Income Segments).

Finally, financing conditions remained supportiveof consumer spending in 2012, with the averagelending rate (ALR) on new loans to householdsdeclining to 4.6% (2011: 4.8%). Althoughhouseholds were subjected to stricter criteria forloan applications following the introduction ofthe Guidelines on Responsible Financing that hadcome into effect on 1 January 2012, creditworthyhouseholds continued to have access to financing.Total bank financing to households grew by 11.6%in 2012 (2011: 12.9%).

Public consumptionrecorded a moremoderate increase of 5% in 2012, due mainlyto the significant moderation in expenditureon supplies and services as the Governmentcontinued with its fiscal consolidation efforts.Expenditure on emoluments remained highdue to the higher salary increments and bonuspayments to the civil servants, which alsocontributed to sustaining private consumptionduring the year.

EXTERNAL SECTOR

Malaysias external sector remained resilientamid continued uncertainties and challenges inthe global economic and financial environment.The overall balance of payments (BOP) remainedstrong. The current account surplus was morethan adequate to meet the net outflows in thefinancial account. The level of reserves remainedat comfortable levels, and was more thansufficient to meet the short-term obligationsand provide a buffer against volatile short-termcapital flows.

Lower current account surplus amidst weakexternal demand and strong expansion indomestic activityMalaysias current account surplus was lowerat RM60 billion in 2012 (2011: RM97.1 billion),reflecting the cyclical and structural adjustments thatare taking place in both the global and domesticeconomy. This development can be assessed fromtwo inter-related perspectives namely, in terms ofMalaysias international trade performance, andthe national saving-investment gap.

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Malaysias external sector remained

resilient despite continued

uncertainties and challenges in the

global environment

From the international trade perspective, thelower current account surplus was due mainlyto the lower goods surplus amid larger deficitsin the services and income accounts. In thegoods account, the deceleration in grossexports was due to the weak external demandand lower commodity prices. While demandfor manufactured goods from the advancedeconomies was weak throughout the year, the

Balance of Payments

2011 2012p

Item + - Net + - Net

RM billion

Goods 696.6 548.5 148.1 702.9 577.7 125.2

Services 110.1 118.1 -8.0 117.1 130.5 -13.4

Balance on goods and services 806.7 666.6 140.1 820.0 708.2 111.9

Income 52.4 74.4 -22.0 42.3 76.0 -33.7

Current transfers 4.7 25.6 -21.0 6.9 25.1 -18.2

Balance on current account 863.8 766.7 97.1 869.2 809.2 60.0

% of GNI 11.3 6.6

Capital account -0.2 0.1

Financial account 22.3 -22.5

Direct investment -10.1 -21.9

Abroad -46.7 -51.0

In Malaysia 36.6 29.1Portfolio investment 25.8 59.2

Financial derivatives -0.1 0.9

Other investment 6.6 -60.7

Balance on capital and financial accounts 22.1 -22.5

Errors and omissions -24.5 -33.6

of which:

Foreign exchange revaluation gain (+) or loss (-) 7.6 -7.7

Net E&O as % of total trade -2.6 -2.0

Overall balance 94.7 3.9

Bank Negara Malaysia international reserves, net 423.3 427.2

USD billion equivalent 133.6 139.7

p PreliminaryNote: Numbers may not necessarily add up due to roundingSource: Department of Statistics, Malaysia

Table 1.7

Chart 1.7

Balance of Payments (BOP)

-150

-100

-500

50

100

150

200

2006 2007 2008 2009 2010 2011 2012p

RM billion

Current account balance Foreign d irect investment (FDI )

Direct investment abroad (DIA) Portfolio investment

Other investment Overall balance

p Preliminary


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export of non-E&E products were supported bystrong regional demand, especially in the first halfof the year. However, slower economic growthin the region in the second half of the year led toa moderation in demand for non-E&E productsand commodities. The lower demand for non-E&Eproducts and commodities was further compoundedby the decline in the prices of major commodities,particularly crude palm oil and natural gas. Incontrast, exports of E&E products registered a smallercontraction, arising from the normalisation of E&Eproduction, arising from the supply disruptionfollowing the severe floods in Thailand in 2011.

There was strong growth in the import of capital andconsumption goods following the improvement indomestic demand. In particular, the robust growth in

Chart 1.8

Current Account

-100

-50

0

50

100

150

200

2006 2007 2008 2009 2010 2011 2012p

Goods Income

Services Current transfers

Current account balance

RM billion

Source : Department of Statistics, Malaysia

p Preliminary

domestic investment activity led to a marked increasein the import of machinery, telecommunicationsequipment and passenger aircrafts. The strength inconsumer spending activity saw continued stronggrowth in the import of consumption goods,particularly the import of durable and semi-durableconsumer goods. The import of intermediate goods,which are used mostly as inputs for manufacturedexports, however, registered a contraction.

The services account registered a larger deficit duemainly to the higher deficit in the transportationaccount and lower net receipts from the travelaccount. The larger drag from the transportationaccount reflected the higher payments for importedfreight services, in line with the strong importgrowth. Tourism receipts were lower in 2012

Chart 1.10

Export Performance of Electronics & Electrical (E&E)and Non-E&E Products

-10

-5

0

5

10

15

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Manufactured exports E&E exports Non-E&E exports

2011

Annual change %


2012p

pPreliminary

Chart 1.9

Commodity Export Performance

-30

-15

0

15

30

45

60

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Commodity exports Agriculture Minerals

2011


Annual change (%)

2012p

pPreliminary

Chart 1.11

Imports by Category

Gross Import Intermediate goods

Capital goods Consumption goods


pPreliminary

-10

0

10

20

30

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q2011

Annual change (%)

2012p

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as tourist arrivals into Malaysia grew at a moremoderate pace, reflecting the slower growth in theregional economies.

The larger deficit in the income account reflectedthe higher income accrued to foreign companies

in Malaysia, mainly in the manufacturing andmining sectors, and financial services sub-sector.On the other hand, income accrued to Malaysiancompanies investing abroad was lower in 2012,following the increased global uncertainty andlower commodity prices.

The lower current account surplus also reflectedthe lower surplus of national savings over domesticinvestment spending. Public sector savings increasedby 10.1% to RM71.2 billion or 7.9% of grossnational income (7.5% of gross national income(GNI) in 2011). Meanwhile, private sector savings

declined by 5.3% to RM227.5 billion or 25.2%of GNI in 2012 (2011: RM240.2 billion or 28%).Overall, gross national savings (GNS) declined by 2%to RM298.7 billion in 2012. Nevertheless, the ratio ofGNS to GNI remained high at 33% (2011: 35.5%).Given the decline in GNS and the faster pace ofgrowth in gross domestic investment, the savings-investment surplus declined to RM60 billion or 6.6%of GNI in 2012 (2011: RM97.1 billion or 11.3%).

Continued two-way flows of capitalGiven the excess global liquidity, Malaysiacontinued to experience two-way financial flowsin 2012, with inflows of foreign funds attractedmainly to the countrys resilient growth prospects.These inflows were almost entirely offset by

resident outflows, reflecting the increasing interestand ability on the part of domestic financialinstitutions and companies to expand their globaland regional presence by acquiring foreignassets and diversifying their investments abroad.

Continued inflows of FDI and

portfolio funds amidst higher

outflows of DIA

Foreign direct investment (FDI) continued toregister a sizeable net inflow of RM29.1 billion or3.1% of GDP (2011: RM36.6 billion) in 2012. FDIinflows were mainly in the form of equity capitalinvestment and higher corporate profitability

during the year. Sizeable earnings were retainedby the multi-national corporations for re-investmentwithin the domestic economy. The export-orientedsector and other sectors directly linked to externaldemand, however, experienced a slight moderationin FDI inflows, given the increased uncertaintiessurrounding global growth prospects. Themanufacturing sector, in particular, had beenaffected by the slowdown in global trade, given itsclose integration with the regional supply chainnetwork. FDI into the finance and insurancesub-sector moderated as well, reflecting thevolatility experienced in the global financialmarkets. Nevertheless, inflows into the oil and gassector and the communications sub-sector registeredincreases, following the steady implementation of

Gross National Savings & Savings-Investment Gap

Chart 1.12

pPreliminary

2006 2007 2008 2009 2010 2011 2012p

Source: Department of Statistics, Malaysia Ministry of Finance, Malaysia

0

50

100

150

200

250

300

350

RM billion

Savings-Investment Gap

PublicSavings

PrivateSavings

Gross National Savings

Gross Capital Formation

Chart 1.13

Gross FDI Inflows by Sectors

* Refers to agriculture and construction sectors

p Preliminary


Oil and gas12.8%

Manufacturing58.2%

Financial services8.9%

Non-financial services19.1%

Others*0.9%

2012pRM102.9 billion

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global economy has reduced the demand for Malaysias manufactured and commodity exports(74% and 24% share of gross exports respectively, Chart 3) and this has been further compoundedby lower commodity prices.

Conversely, amid stronger domestic demand, imports have risen steadily since 2009 (Chart 4), duemainly to import of capital and consumption goods (16% and 8% share of gross imports respectively).Reflecting the increase in investment activity by both the public and private sectors, capital importsrose at an average annual rate of 13.8% during 2010-2012. Similarly, import of consumptiongoods increased by an average of 13.4% over the same period, supported by stronger domesticconsumption, and to a smaller extent, the appreciation of the ringgit. Import of intermediate goods(61% of gross imports, Chart 5), on the other hand, recorded a moderation in growth, given that

the bulk of these imports are used as inputs for the production of manufactured exports. Thisclose relationship between manufactured exports and intermediate imports acts as an automaticstabiliser for the current account balance.

Chart 2

Current Account Surplus Narrowed Due Mainly toLower Goods Surplus


Current account balance

-100

-50

0

50

100

150

200

2002 2004 2006 2008 2010 2012

RM billion

Breakdown of Current Account Balance

Income

Services

Current transfers

Commodity goods

Other goods

Chart 3

Exports of Manufactured Goods Account for theBulk of Gross Exports


Note: Numbers may not necessarily add up due to rounding

Gross Exports: RM702.2 billion (2012)

Electronics & electrical

(E&E) goods37%

Non-E&E goods38%

Commodities24%

Other goods2%

Manufacturedgoods74%

Chart 5

Intermediate Imports Account for 61% ofGross Imports


Gross Imports: RM607.4 billion (2012)

Capital goods16%

Intermediate goods61%

Consumption goods8%

Other goods15%

Chart 4

Growth of Imports Has Outpaced Exports inRecent Years


60

80

100

120

140

1Q 2008 1Q 2009 1Q 2010 1Q 2011 1Q 2012

Gross exports

Gross imports

Index 2008 = 100

Exports and Imports vis-a-vis Pre-Crisis Levels

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growth of high value-added exports in the future. In the near term, it is expected that the expansion ininvestment activity will contribute to a further narrowing in the current account surplus.

The high level of savings by the corporate sector and households is attributable to two main factors.First, corporate profits have increased following sustained external demand for resource-based

products, especially prior to the GFC. Second, mandatory contributions to the Employee ProvidentFund, coupled with sustained wage growth, have supported household savings. Going forward, thesavings rate is expected to remain elevated amid firm income growth.

As for the public sector4, the savings-investment gap registered a small surplus, averaging 3.2%of GNI5, in 2003-2008 (Chart 9). This surplus has turned into a deficit since 2009, when publicexpenditure increased significantly following the introduction of the two economic stimulus packagesby the Federal Government to mitigate the impact of the global economic slowdown. The sustainedcapital spending by public enterprises have also contributed to the expansion in public investment.The public sector savings-investment gap widened in 2011 and 2012.

Going forward, given the Governments fiscal consolidation efforts through expenditure rationalisationand improvements in revenue collection, savings of the Federal Government are expected to remain

firm. The operating surpluses of the public enterprises, however, would depend mainly on thestrength of the recovery in the global economy and the resilience of domestic demand.

ConclusionThe recent narrowing of the current account surplus in Malaysia and several other Asian countriesis consistent with the ongoing global rebalancing, underpinned by shifts in the sources of growth inthe regional economies. For Malaysia, resilient domestic demand has supported the strong growth ofimports, in turn outpacing exports which has been weighed down by weak external demand and lowercommodity prices. Similarly, the stronger growth in investment activity and lower savings have resulted ina narrower current account surplus.

Going forward, amid a modest recovery in globalgrowth and the continued expansion in domesticdemand, Malaysias current account surplus canbe expected to narrow in the near term. As ahighly open economy, changes in Malaysiascurrent account, particularly exports, will behighly dependent on factors that are exogenousto the economy. On the domestic front, theongoing fiscal consolidation by the Governmentis expected to improve public savings, whileprivate savings will be a function of the strengthof private consumption. Over the longer term,the ongoing structural changes in the economywill be a key factor in determining the future

path of Malaysias current account balance. Thecontinued investment in new growth areas andhigh value-added industries is expected to furtherdiversify Malaysias exports and enhance its areasof comparative advantage, thereby supportingexport growth and the sustainability of thecurrent account balance.

Chart 9

Public Savings Declined Amid Continued Rise inPublic Investment

Savings-Investment (S-I) Gap of the Public Sector


-40

-20

0

20

40

60

80

100

120

2000 2002 2004 2006 2008 2010 2012

Public sector S-I gap

Public savings Public investment

RM billion

4 Public sector refers to the General Government and public enterprises.5 Public sector registered a deficit of 2.2% of GNI in 2000-2002.

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the ETP projects and continued inflows into theconsumer-related sectors. The diversified profileof the FDI inflows had facilitated to containMalaysias exposure to external risks. While theexport-oriented manufacturing sector continuedto be the largest recipient of FDI (58% of gross

FDI inflows), the mining sector increased its shareof FDI inflows to 13%. The services sector received28% of the gross inflows of FDI in 2012.After a period of significant outflows in thesecond half of 2011, inflows of foreign portfoliofunds resumed in 2012, registering significantlyhigher net inflows during the year (RM59.2 billion;2011: RM25.8 billion). These inflows reflectedmainly higher purchases of debt securities,particularly Bank Negara bills and notes andringgit-denominated Government bonds. Netforeign inflows into equities remained modest.

Notwithstanding the higher net inflows of portfoliofunds, there was a significant degree of volatility inthese flows during the year, particularly in relationto events surrounding the European debt crisis.Market sentiments were also partly affected byeconomic developments in the US and China,amidst uncertainty on the pace of the sluggish USrecovery and the fiscal cliff, and concerns over theeconomic outlook in China. In the first quarter ofthe year, improved market sentiments broughtabout a significant resumption of foreign capitalinflows, particularly into ringgit-denominated debtsecurities. However, in the second quarter of theyear, portfolio investments registered a small netoutflow arising from the liquidation of short-term

debt securities by non-residents, which was inresponse to the deterioration in financial marketsentiments following concerns over the health ofthe Spanish banking system. Nonetheless, portfolioinflows resumed strongly in the second half ofthe year as investor sentiment recovered. BeyondMalaysias favourable growth prospects and soundmacroeconomic and financial conditions, thehigher inflows of portfolio funds were also drivenby investors continued search for higher returnsamidst the expansive global liquidity conditionsfollowing the additional monetary policy easingby the advanced economies. To a lesser extent,expectations for a further appreciation of theregional currencies were also a contributing factorto these capital inflows.It is noteworthy that the non-resident inflows wereoffset by resident outflows through two mainchannels, namely via higher direct investmentabroad (DIA) and outflows from the OtherInvestment account. DIA outflows amounted toRM51 billion in 2012 (2011: -RM46.7 billion),mainly reflecting higher outflows of equity capitaland extensions of loans to subsidiaries abroad.DIA were mainly undertaken by companies inthe services sector (60% of gross DIA outflows),particularly in the finance and insurance, andwholesale and retail trade sub-sectors. Companiesin the oil and gas and manufacturing sectorsalso continued to be large contributors of DIA.Compared to its steady trend in the past, therelatively higher DIA was largely due to a one-offstrategic acquisition of a Canadian-based energy

company by a domestic oil and gas firm. Profitabilityof these investments abroad was sizeable duringthe year given that the bulk of investments wasundertaken in the Asian emerging economies,

Chart 1.14

Portfolio Investment

-100

-80

-60

-40

-200

20

40

60

80

2006 2007 2008 2009 2010 2011 2012p

RM billion

Equi ty Secur it ies Debt secur it ies Net portfol io investment

p Preliminary


Chart 1.15

Gross DIA Outflows by Sectors

* Refers to agriculture and construction sectors

p Preliminary


Oil and gas31.5%

Manufacturing6%

Financial services24%

Non-financial services35.5%

Others*3%

2012pRM90.5 billion

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where economic growth and business activityremains resilient.

Outflows from Other Investment reflected primarilyoutflows arising from continued net extensions oftrade credits. The relatively stronger balance sheet

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