MALAYSIA ECONOMIC MONITOR OCTOBER 2024 Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies CONNECT WITH US @WorldBankMalaysia @WB_AsiaPacific bit.ly/WBMYblogs worldbank.org/malaysia | ifc.org | miga.org MALAYSIA ECONOMIC MONITOR OCTOBER 2024 Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Cover image: bigstockphoto.com Credit for non-WB images: envato.com / unsplash.com Cover design and layout: Kane Chong Sdn Bhd Acknowledgements This edition of the Malaysia Economic Monitor (MEM) was co-led by Chong Yew Keat and Deisigan Shammugam, with the special topic prepared by Anuja Kar with a core team comprising of Andrew Kam Jia Yi, Carlo Bravi (FAO), Illisriyani Ismail, Larry Wong Chee Yoong, and Katrina Brandon. The broader team is comprised of Apurva Sanghi, Fionne Lim Jing Wen, Ririn Salwa Purnamasari, Matthew Dornan, Amanina Abdur Rahman, Alyssa Farha Jasmin, Natalie Fang Ling Cheng, Tatiana Didier, Philbert Tiki Yong, Shahira Zaireen Johan Arief Jothi, Aruhvi Krishnasamy, Douglas Zhihua Zeng, Marco Larizza, Carmen Loo, and Muhammad Faisal Ali Baig. The team is grateful to Irina Schuman, Parmesh Shah, Mario Guadamillas, Nah Yoon Shin, Gonzalo Varela, and Ekaterine Vashakmadze for their constructive input on the document and to Zafer Mustafaoglu, Judith Green, Yasuhiko Matsuda, Lars Moller, and Paavo Eliste for their overall guidance. The MEM consists of two parts. Part 1 presents a review of recent economic developments and a macroeconomic outlook. Part 2 focuses on a selected special topic that is key to Malaysia’s medium- term development prospects and to the achievement of shared prosperity. This report benefited from productive discussions with staff from the Ministry of Economy, the Ministry of Finance, the Ministry of Agriculture and Food Security, Bank Negara Malaysia and several other government ministries and agencies, all of whom provided valuable information and useful feedback. In particular, the team would like to thank the International Cooperation Division of the Ministry of Economy, the International Division of the Ministry of Finance and the Economics and Monetary Policy Department of Bank Negara Malaysia for close ongoing collaboration with the World Bank and for the crucial support to the launch of this report. Jeannette Goon, Dina Murad, and Aizzat Nordin led external communications and Kane Chong led the production and design of the report. Emmilyn Yeoh provided editing assistance, while Minisha Deepu and Arifurrahman Rusman provided administrative support. The report is based on information current as of September 27, 2024. Please contact Apurva Sanghi (World Bank Lead Economist for Malaysia) at asanghi@worldbank.org, Yew Keat Chong (MEM task team leader and World Bank Senior Economist for Malaysia) at ychong@ worldbank.org or Deisigan Shammugam (MEM co-task team leader and World Bank Economist for Malaysia) at dshammugam@worldbank.org for questions, comments, or suggestions regarding the MEM. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 3 Abbreviations 12MP Twelfth Malaysia Plan GHG Greenhouse Gas AE Advanced Economies GIS Geographic Information System AFC Asian Financial Crisis GLC Government-Linked Company AIFF ASEAN Investment Facilitation Framework GLIC Government-Linked Investment Company AR5 IPCC’s Fifth Assessment Report GVA Gross Value Added ASEAN Association of Southeast Asian Nations HES Household Expenditure Survey BNM Bank Negara Malaysia HIC High-Income Countries World Bank Group’s Country Climate and HQLA High-Quality Liquid Assets CCDR Development Report Information and Communication CET1 Common Equity Tier 1 ICT Technology CPI Consumer Price Index IFRS International Financial Reporting Standards CSA Climate-Smart Agriculture IoT Internet of Things DAT Digital Agricultural Technology IPO Initial Public Offering DDI Domestic Direct Investment JS-SEZ Johor-Singapore Special Economic Zone DFS Digital Financial Services JTC Jurong Town Corporation DOA Department of Agriculture KUADP Kenya Unified Agriculture Data Platform DOFM Department of Fisheries Malaysia LCR Liquidity Coverage Ratio DOSM Department of Statistics Malaysia LDR Loan-to-Deposit Ratio E&E Electricals and Electronics LFPR Labor Force Participation Rate EAP East Asia and Pacific LFS Labor Force Survey ECRL East Coast Rail Link M&E Machinery and Equipment Emerging Market and Developing Malaysia Standard Classification of EMDE MASCO Economies Occupations EPF Employees Provident Fund MATs Malaysia Animal Traceability System European Union’s Regulation on MDEC Malaysia Digital Economy Corporation EUDR Deforestation-Free Products MEM Malaysia Economic Monitor FTSE Bursa Malaysia Kuala Lumpur FBMKLCI Composite Index MGII Malaysian Government Investment Issues FDI Foreign Direct Investment MGS Malaysian Government Securities FRA Fiscal Responsibility Act Malaysian Investment Development MIDA Authority GDP Gross Domestic Product MITB Malaysian Islamic Treasury Bills Government-linked Enterprises Activation GEAR-uP and Reform Program MOF Ministry of Finance Malaysia GFCF Gross Fixed Capital Formation 4 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 Abbreviations MOHE Ministry of Higher Education STR Sumbangan Tunai Rahmah MPC Monetary Policy Committee SWS Salaries and Wage Survey MTB Malaysian Treasury Bills TCR Total Capital Ratio MTEF Medium-Term Expenditure Framework TFP Total Factor Productivity MTRS Medium-Term Revenue Strategy TFPG Total Factor Productivity Growth MYR Ringgit Malaysia United Nations Conference on Trade and UNCTAD Development MYSA Malaysian Space Agency U.S. United States NABDP National Agriculture Big Data Platform USD United States Dollar NGO Non-Governmental Organization UST U.S. Treasury OE Operating Expenditure Y/Y Year-on-Year Organization for Economic Co-operation OECD and Development OPR Overnight Policy Rate P2P Peer-to-Peer Public Investment Management PIMA Assessment PITA Petroleum Income Tax PLI Poverty Line Income Agrofood Value Chain Modernization PMRNA Program PPP Public-Private Partnership PSDC Penang Skills Development Center RCA Revealed Comparative Advantage ROA Return on Assets ROE Return on Equity RTS Rapid Transit System SEZ Special Economic Zone SMART SBB SMART Sawah Berskala Besar SMEs Small and Medium-Sized Enterprises SRU Skill-Related Underemployment STPM Sijil Tinggi Persekolahan Malaysia SST Sales and Services Tax MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 5 6 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 Table of Contents Acknowledgements 3 Abbreviations 4 Executive Summary 8 Domestic developments 9 Economic outlook 14 Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies 16 PART ONE 21 Recent Economic Developments 22 The global economy is stabilizing, following several years of negative shocks 22 Developments in the Malaysian Economy 24 Malaysia experienced strong growth amid increased household consumption, investment and trade activity 24 Exports experienced a positive turnaround amidst strengthening external demand 25 The services sector and the manufacturing sector dominate foreign and domestic investments 27 Box 1: Malaysia’s FDI dynamics: Challenges and opportunities 28 Box 2: Special Economic Zones - Key policy lessons from global experience 31 The labor market continues to improve, with notable increases in formal sector wages 32 Box 3: A deep dive into skill-related underemployment 36 Absolute poverty remains a concern 39 Inflation edged higher in recent quarters but remains moderate 39 The Malaysian banking sector has maintained adequate capital and funding positions 41 Bank credit has expanded at a steady pace in 2024 43 Corporate financing through capital markets has remained robust 44 Equity and bond market capitalization reached an all-time high 45 Bond markets continued to attract foreign capital amid outflows in equity markets 48 The federal government undertook efforts to rationalize subsidies in the first half of 2024 50 Box 4: Reforming the public sector remuneration system 52 Higher federal government debt highlights the need for continued fiscal consolidation in Malaysia 55 Box 5: Future-proofing Malaysia’s public finances 56 Economic Outlook 59 Despite improved near-term prospects, the global outlook remains subdued by historical standards 59 Malaysia’s economy is expected to expand at a faster pace in 2024 60 Malaysia’s growth outlook is subject to downside risks 61 PART TWO 63 Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies 64 Transforming potential: The pivotal role of agriculture in Malaysia’s economic growth 65 Navigating key challenges in Malaysia’s agriculture 66 Summary of challenges and their implications 69 Premise of digitalization for agriculture and food systems 70 Transformative impacts of digital technologies on the agrofood system 74 Pathways of implementing DAT: Scaling up pilots and learning from global experiences 81 Box 6: Pilot project of digital solutions for super-intensive white shrimp farming 82 Box 7: Pilot program financial results 83 Learning from global examples 84 Box 8: Bundling in digital agriculture – an example from India 84 Box 9: DAT innovations to optimize private sector investments – experiences from other countries 85 Box 10: Government-supported efforts to expand DAT and create an agritech sector 87 Recommendations for scaling up DAT adoption in Malaysia 88 Annex: Roadmap for enabling conditions for digital transformation (policy action plan) 93 References 96 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 7 Executive Summary Malaysia’s economy is expected to expand at a contributing 11.6 percent to the national GDP and faster pace in 2024. After experiencing weaker-than- employing 1.87 million people in 2023 (approximately expected growth last year, Malaysia’s economy grew 10 percent of the total Malaysian workforce). The strongly in the first half of 2024, driven by robust private Government’s vision strategy outlines three key consumption, increased investment amid higher FDI objectives for the agrofood system: (i) become globally inflows, and improved export performance. In 2024, competitive and innovative; (ii) enhance the wellbeing the economy is forecast to expand by 4.9 percent, an of food producers while providing affordable, nutritious increase of 0.6 percentage points from the previous food; and (iii) reduce the sector’s environmental forecast in April 2024. Inflation is projected to moderate footprint. Addressing the imbalance between food due to softer global commodity prices and weaker- demand and supply, exacerbated by urbanization, is than-anticipated passthrough effects of recent policy crucial. This requires reducing transaction costs and changes. Meanwhile, fiscal space is narrowing, and information asymmetries that affect both farmers’ and rigid spending is expected to rise due to the recently consumers’ decisions. High transaction costs hinder announced salary adjustments. While optimizing farmers’ market access and contribute to information public spending amid ongoing subsidy rationalization gaps. Digital Agricultural Technologies (DATs) offer efforts can free up budgetary resources, enhancing transformative solutions to these challenges by revenue mobilization is vital to restore fiscal space and boosting productivity, creating better jobs (especially sustainably finance Malaysia’s growing spending needs. for youth), and improving access to finance. Effective DAT implementation requires a focus on three strategic To maintain its economic momentum and achieve pillars: investing in public goods (e.g., digital literacy high-income status, Malaysia must transform key and rural connectivity), fostering innovative ecosystems sectors—including agriculture—into sustainable (e.g., data platforms and startup incubators), and engines of growth. The agrofood sector plays a cultivating an enabling environment to incentivize significant role in supporting Malaysia’s economy, private sector development in digital agriculture. 8 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 Executive Summary Domestic FIGURE ES2 Per capita output in Malaysia is now about developments 12 percent above the pre-COVID level, outperforming many ASEAN peers. Evolution of GDP per capita compared to 2019, Percentage Malaysia experienced stronger 30 Q2 growth amid robust household consumption, investment and trade 20 activity 10 Malaysia’s economy saw stronger year-on-year 0 gross domestic product (GDP) growth of 5.9 percent in Q2 2024, up from 4.2 percent in Q1 2024 -10 (Figure ES1). Private consumption grew by 6.0 percent in Q2 2024, supported by favorable labor market -20 conditions and continued government policy support. Investment activity surged, with gross fixed capital -30 China Viet Nam Indonesia Malaysia Cambodia Philippines Lao PDR Thailand Myanmar formation (GFCF) growing by 11.5 percent, largely due to private sector expansion in manufacturing and services. Net exports rebounded, increasing by 3.4 2020 2021 2022 2023 2024 percent, supported by improved international goods trade amid a global technological upswing. Malaysia’s Source: October 2024 World Bank EAP Economic Update GDP per capita is approximately 12 percent above the pre-COVID level, outperforming many ASEAN peers. Growth accelerated across most economic sectors in Malaysia, particularly in construction FIGURE ES1 and agriculture. The construction sector saw robust Malaysia’s economy saw stronger growth amid growth of 17.3 percent in Q2 2024, driven in part by robust household consumption, investment and trade activity increased activity in civil engineering. The agriculture sector rebounded with a 7.2 percent growth in Q2 Contribution to real GDP growth, y/y, Percentage 2024, following a slower first quarter, reflecting improved production in the oil palm and fisheries 30 subsectors. The services sector grew by 5.9 percent, supported by improvements in consumer and business 20 services, while the manufacturing sector expanded by 4.7 percent, benefiting from strong growth in both 10 export- and domestic-oriented industries. In contrast, the mining sector’s growth slowed to 2.7 percent due 0 to production disruptions in the oil and gas sector. -10 Exports experienced a positive turnaround amid -20 strengthening external demand for both electricals and electronics (E&E) and non-E&E exports (Figure -30 ES3). Gross export growth accelerated to 5.8 percent Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 in Q2 2024, driven by a recovery in the technology cycle that boosted E&E exports, along with sustained demand for non-E&E products such as machinery, Private Consumption Public Consumption equipment and parts, as well as optical and scientific GFCF Change in inventories equipment. Gross imports saw strong growth of 15.0 Exports Imports percent in Q2 2024, fueled by higher intermediate Real GDP, y/y imports and strong domestic demand for capital and Source: World Bank staff calculations based on DOSM data consumption goods. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 9 Executive Summary FIGURE ES3 percent in Q2 2024, likely due to higher participation Export growth rebounded in H1 2024, driven by in the labor force. The overall labor force participation improved demand for both E&E and non-E&E rate (LFPR) increased slightly from 70.2 percent to 70.5 exports percent, but the gender gap in participation remained Contribution to export growth, y/y, Percentage unchanged and large at 26.8 percent. Labor market 50 tightness, as reflected in job vacancies per unemployed person, has also increased over the past year. 40 30 FIGURE ES4 20 Labor force participation rate increased while 10 overall unemployment rate declined Unemployment rate, Labor force participation rate, 0 Percentage Percentage -10 6 85 -20 5 80 Q1-2015 Q4-2015 Q3-2016 Q2-2017 Q1-2018 Q4-2018 Q3-2019 Q2-2020 Q1-2021 Q4-2021 Q3-2022 Q2-2023 Q1-2024 75 4 70 3 65 E&E - Semiconductors E&E - Non-semiconductors 2 Non E&E Commodities 60 Exports, y/y 1 55 Source: World Bank staff calculations based on DOSM data  0 50 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Malaysia saw an increase in net foreign direct investment (FDI) inflow in Q2 2024, primarily Unemployment Rate in the services sector. Malaysia also registered a Labor force participation rate (RHS) Labor force participation rate - Male 16.7 percent and 19.1 percent year-on-year increase Labor force participation rate - Female respectively in approved FDIs and DDIs in H1 2024. Source: DOSM While many factors affect FDI (as noted in previous MEMs), efforts to minimize operational restrictions could further help enhance FDI attraction into Malaysia Labor productivity growth has picked up while (see Box 1 on Malaysia’s FDI Dynamics: Challenges and employment growth has slowed. Malaysia’s labor Opportunities). Similarly, the development of the special productivity growth has increased to 3.1 percent in economic zone (SEZ) with Singapore, if successful, could Q2 2024, driven by a significant 16.3 percent boost in generate additional synergies, strengthen networks, the construction sector. However, employment growth and enhance spillovers, driving further investment and slowed across all sectors, with declining overall year- growth opportunities in Malaysia. The SEZ’s success on-year employment growth of 2.1 percent in Q1 2024 will largely depend on the type of incentives provided compared to 3.1 percent in Q1 2023. The services sector and its implementation (see Box 2 on Special Economic experienced the largest decline, with growth falling to Zones - Key Policy Lessons from Global Experience). 2.8 percent from 4.1 percent in the previous year. Skill-related underemployment (SRU) in Malaysia, where individuals with tertiary education work Labor market conditions have broadly in semi-skilled or low-skilled jobs, has grown returned to pre-pandemic levels significantly over time. The SRU rate is highest among younger workers, women, and those from Key labor market indicators have shown lagging states. Factors driving SRU include lack of high- improvement over the recent quarters (Figure ES4). skilled job creation, inefficiencies in job matching, and The national unemployment rate remained steady mismatches between education and industry needs. at 3.3 percent in Q2 2024, similar to pre-pandemic Addressing these challenges requires strategies such as levels. Unemployment is slightly higher for females (3.5 aligning education with industry demands, enhancing percent) than males (3.1 percent), but it has decreased Malaysia’s competitiveness, and supporting lifelong slightly for younger workers. However, the rate for those skill development (see Box 3 on A Deep Dive into Skill- aged 55-64 rose from 1.9 percent in Q2 2023 to 3.3 Related Underemployment). 10 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 Executive Summary While Malaysia has nearly eliminated hardcore FIGURE ES5 poverty, absolute poverty continues to be a concern, Headline inflation edged higher in H1 2024, especially in rural areas and among the Bumiputera primarily driven by policy adjustments impacting population. 6.2 percent of Malaysian households, utilities and transportation prices or nearly half a million households, lived below the Contribution to CPI, y/y, Percentage national average poverty line of RM2,589 per month in 6 2022. Rural poverty, at 12 percent, was notably higher than urban poverty at 4.5 percent. Regional and ethnic 4 disparities are evident, with high absolute poverty rates in Sabah (19.7 percent) and among the Bumiputera (7.9 2 percent) population. Income inequality in Malaysia, with a Gini index of 39 in 2022, is the third highest in 0 the region and remains elevated compared to both transitioning and established high-income countries -2 01/2021 04/2021 07/2021 10/2021 01/2022 04/2022 07/2022 10/2022 01/2023 04/2023 07/2023 10/2023 01/2024 04/2024 (HIC). Others Headline in ation Factors driving skill- Transport Core in ation Housing, water, electricity, gas related underemployment Food and non-alcoholic beverages include lack of high-skilled Source: World Bank staff calculations based on DOSM data job creation, inefficiencies in job matching, and The Malaysian banking sector expanded while remaining well-capitalized. The banking sector mismatches between maintained strong capital buffers and liquidity in H1 education and industry 2024. Deposits grew by 4.9 percent, and the loan-to- deposit ratio (LDR) rose to 86.8 percent. Asset quality needs. improved, with gross impaired loans ratio decreasing to 1.6 percent, the lowest since March 2021. Private sector credit expanded by 6.0 percent to RM2.2 trillion, driven by a 6.2 percent increase in household debt and a 5.6 Inflation edged higher in recent percent rise in business loans, with notable growth in quarters but remains moderate finance, real estate, and retail sectors. Headline inflation increased slightly in H1 2024, Corporate financing through capital markets has reaching 1.9 percent in Q2 2024 (Figure ES5). remained robust. Bond and sukuk markets remained a This rise was driven primarily by policy adjustments stable funding source for the Malaysian government and affecting utilities and transportation, including changes a select set of Malaysian corporates. Corporate bond to water tariffs, higher services taxes for electricity, and issuance was steady, notably in the finance and real diesel subsidy cuts. The extent of price increases also estate sectors. Equity and bond market capitalization broadened, with 49.4 percent of the consumer price reached an all-time high. Bond markets continued to index (CPI) items recording monthly price hikes in Q2 attract foreign capital amid outflows in equity markets. 2024, surpassing the historical average. The central Bond yields remained stable despite global volatility. bank maintained the overnight policy rate (OPR) at 3.00 percent, anticipating higher inflation in H2 2024, partly The Malaysian ringgit has appreciated more than 11 due to the recent rationalization of diesel subsidies. At percent against the U.S. dollar (USD), rebounding this OPR level, the monetary policy stance is deemed from its depreciation in 2023 (Figure ES6). This supportive of the economy. The recent announcement makes the Malaysian ringgit one of the best-performing of salary increases for civil servants may create some currencies in the EAP region this year. Much of this inflationary pressure beginning 2025. However, the appreciation began in July 2024, driven by better- phased implementation over 14 months, combined than-expected economic data in 2Q 2024, the easing with the central bank’s credibility of maintaining price of US monetary policy and coordinated efforts by stability, suggests that the impact on inflation is likely the government and central bank to encourage more to remain contained. foreign exchange inflows. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 11 Executive Summary FIGURE ES6 The federal government is projected to The Malaysian ringgit has been one of best- remain on its fiscal consolidation path performing currencies against the U.S. dollar this year Federal revenue and expenditures increased in Regional currencies against the USD, YTD change, Percentage 2023 amid higher corporate tax collections and subsidy spending. In 2023, total federal government MYR +11.4 -3.9 revenue rose to 17.3 percent of GDP, up from 16.4 THB percent in 2022, primarily due to increased corporate tax collections. Petroleum income tax (PITA) increased SGD slightly to 1.4 percent of GDP, despite lower production IDR and global oil prices. Indirect tax revenue also grew, with the sales and services tax (SST) rising from 1.7 percent CNY to 1.9 percent of GDP, though other indirect taxes PHP decreased. Non-tax revenue fell slightly to 4.7 percent KRW of GDP due to reduced investment income. Federal operating expenditures (OE) also rose to 17.1 percent JPY of GDP, driven by increased spending on subsidies and TWD social assistance, which reached 4.3 percent of GDP— -8 -6 -4 -2 0 2 4 6 8 10 12 higher than the government’s estimate of 3.5 percent. YTD change 2023 change The government expects lower spending on subsidies this year amid ongoing rationalization Source: World Bank staff calculations based on BNM data Note: As of September 27, 2024 efforts. In 2024, the government plans to reduce spending on subsidies and social assistance by RM11.5 billion or 0.6 percent of GDP. This cut follows several A combination of subsidy rationalization measures, including a diesel subsidy overhaul expected to save RM4 billion annually progressive taxes, well- or 0.2 percent of GDP. The rationalization has led to targeted subsidies and fewer signs of smuggling and increased commercial diesel use. The government also adjusted subsidies adequate cash transfers for chicken and electricity for heavy users. While these can collectively benefit efforts are expected to lower overall subsidy spending, low-income groups while achieving the full reduction outlined in Budget 2024 will require subsidy rationalization measures, while improving fiscal space. managing the impact on inflation and vulnerable populations. FIGURE ES7 The share of rigid spending is expected to rise due Total federal revenue increased in 2023 primarily to the government’s announced salary adjustments. due to higher corporate income tax collections Rigid spending, including salaries, pensions, and debt Changes in federal government revenue, Percentage of GDP service charges, has been growing, reaching close to 1.2 60 percent as a share of total operating expenditures this year. Recent salary increases for civil servants 1.0 are expected to add approximately RM10 billion annually, or about 0.5 percent of GDP (See Box 4 on 0.8 Total revenue Reforming the Public Sector Remuneration System). Corporate income tax This rise in emoluments may also lead to higher 0.6 future pension liabilities, underscoring the need for 0.4 Petroleum income tax a defined contribution scheme for new civil servants. Personal income tax Malaysia allocates more fiscal resources to emoluments 0.2 Other direct taxes compared to regional peers, exerting pressure on fiscal Sales and service tax resources for other expenditures amid ongoing fiscal 0 Other indirect taxes consolidation. Non-tax revenue -0.2 Source: World Bank staff calculations based on MOF data  12 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 Executive Summary FIGURE ES8 health. However, some challenges remain, including The share of rigid spending has increased over inef ficiencies in budget execution, fragmented time implementation of development programs, and Rigid expenditures, Percentage of total operating expenditure institutional arrangements involving both federal and 70 state agencies. 58.6 60 54.8 55.3 The higher debt ratio underscores the need for Malaysia to continue with its structural fiscal 50 reforms. In 2023, the debt-to-GDP ratio rose to 64.3 40 percent from 60.2 percent in 2022, driven by persistent fiscal deficits. The overall fiscal deficit stood at 5.0 30 percent of GDP in 2023, with a forecast of 4.3 percent 20 for 2024. Similarly, the primary deficit was 2.5 percent of GDP in 2023 and is expected to improve to 1.8 percent 10 in 2024. 0 FIGURE ES10 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024f Federal government debt increased over the years with a larger share of debt that is binding to Emoluments Pension Debt service charges the current statutory limit Source: World Bank staff calculations based on MOF data Federal government debt, Percentage of GDP Note: The lower share of rigid spending since 2022 reflects an increase in overall operating expenditure, driven mainly by higher spending on fuel 70 subsidies. 65 FRA debt limit FIGURE ES9 60 Malaysia allocates a higher portion of its fiscal 55 Statutory limit spending to emoluments compared to its peer groups 50 Emoluments, Percentage of GDP Emoluments, Share of total expenditures 45 10 26 40 24 35 8 22 30 20 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 6 18 Statutory debt Non-statutory debt 4 16 Source: World Bank staff calculations based on MOF data  14 2 12 0 10 A comprehensive fiscal strategy that enhances Malaysia Regional Aspirational government spending efficiency and revenue mobilization while protecting the poor is crucial for Emoluments as share of total expenditure (RHS) restoring fiscal space in Malaysia. A combination Emoluments as % of GDP of progressive taxes, well-targeted subsidies and Note: Refer to the 2021 World Bank Aiming High: Navigating the Next Stage adequate cash transfers can collectively benefit of Malaysia’s Development for the complete list of peer groups. The figures low-income groups while improving fiscal space to above reflect the average for years 2021-2022. sustainably finance its longer-term spending needs (see Box 5 on Future-Proofing Malaysia’s Public Finances). Federal development expenditures for 2023 and Fiscal reform efforts must be complemented by 2024 are notably higher than those of regional effective policy communication and in-depth, two-way peers but below those seen in aspirational stakeholder engagement to secure broad-based public countries. Much of this spending is allocated to key support for reform. sectors such as transportation, education, defense, and MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 13 Executive Summary Economic outlook conditions, wage growth, and ongoing government support such as the Sumbangan Tunai Rahmah (STR) cash aid. Public consumption is anticipated to grow at 3.9 percent, supported by salary increases for civil Global growth is projected to stabilize at 2.6 percent servants and higher spending on supplies and services. in 2024 despite ongoing geopolitical tensions and high interest rates. Advanced economies are FIGURE ES11 expected to maintain a growth rate of 1.5 percent, Malaysia’s GDP growth is revised upward to 4.9 consistent with 2023. The U.S. is expected to see percent in 2024, following stronger-than-expected moderation in growth as the labor market slows, while growth in Q2 2024 the Euro area and Japan anticipate a modest pickup Real GDP, y/y, Percentage with better domestic conditions. For EMDEs, growth is forecasted to moderate slightly from 4.2 percent in 8 8.9 2023 to 4.0 percent in 2024. Domestic demand in some large EMDEs is expected to slow due to specific factors, 6 although many other economies will see increased 5.8 growth. Global trade is anticipated to recover, with 4 4.4 4.8 4.4 4.9 growth reaching 2.5 percent, driven by a rebound in 3.3 3.6 demand for goods. Global inflation is expected to 2 average at 3.5 percent this year, a slower moderation than previously anticipated due to rising commodity 0 prices. Overall, global growth will remain below its pre- -2 pandemic levels, with a slower pace in economies that make up over 80 percent of the global population. -4 -5.5 In the EAP region, growth is projected to slow -6 from 5.1 percent in 2023 to 4.8 percent in 2024, 2016 2017 2018 2019 2020 2021 2022 2023 2024f primarily due to a slowdown in China. China’s growth Source: World Bank staff projections based on DOSM data is expected to decelerate to 4.8 percent in 2024, as an expected uptick in goods exports and industrial activity supported by the global trade recovery is offset GFCF is projected to grow by 7.4 percent in 2024 by weaker consumption. In contrast, the rest of the EAP (2023: 5.5 percent), a significant revision from the region is forecasted to see growth rise to 4.7 percent, previous forecast of 5.1 percent. This reassessment supported by domestic consumption, goods exports, reflects stronger-than-expected investment activity in and a revival in tourism. Significant growth accelerations both the private and public sectors in H1 2024. Business are anticipated in export-oriented economies like investment will continue to be bolstered by ongoing Thailand and Vietnam. Over the next two years, EAP projects and new investments in manufacturing and region growth is expected to continue moderating, services, while government capital spending will focus reaching 4.2 percent in 2025 and 4.1 percent in 2026, on upgrading infrastructure in transportation, health, as the slowdown in China impacts the region despite and education. Public corporation investments will be modest improvements elsewhere. supported by strategic infrastructure projects such as the East Coast Rail Link (ECRL) and the Pan-Borneo Highway. Malaysia’s economy is expected to expand at a faster pace in 2024 Malaysia’s exports are set to benefit from a rebound in global goods trade following exceptional Malaysia’s economy is expected to grow by 4.9 weakness last year. Malaysia’s exports are expected percent in 2024, up from 3.6 percent in 2023, to recover to 5.9 percent growth in 2024 (2023: -8.1 following a stronger-than-anticipated performance percent), up from the previous forecast of 4.8 percent. in H1 2024 (Figure ES11). This revised forecast is 0.6 This rebound is driven by improved global trade and percentage points or 14 percent higher than previous demand for E&E exports. Additionally, the exports forecasts, reflecting robust growth in consumption, of services will be bolstered by a continued rise in investment, and trade activity. Private consumption is international tourist arrivals from the surrounding region, projected to rise by 5.5 percent this year, up from 4.7 including China. Imports are projected to grow by 6.7 percent in 2023, supported by improved labor market percent, rebounding from a 7.4 percent contraction in 14 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 Executive Summary 2023, reflecting the recovery in exports of goods, high might suffer from a prolonged property downturn, share of intermediate inputs, and continued consumer rising debt and weak sentiment. Any of these risks, if spending and investment. materialized, could significantly impact Malaysia due to its global trade and financial connections. Conversely, Headline consumer price inflation is projected to faster global disinflation or stronger growth in major moderate to around 2 percent in 2024 (2023: 2.5 economies could enhance global growth and trade percent). The projection is 0.5 percentage points lower prospects, with positive spillovers to Malaysia. than the previous baseline forecast, reflecting softer global commodity prices and weaker-than-anticipated On the domestic front, the primary downside pass-through effects of recent policy changes on risks relate to uncertainties over the strength of inflation. household consumption. Potential factors include weaker growth in real disposable income, and the lingering effects of post-pandemic monetary Malaysia’s baseline growth projections policy normalization, which could dampen private face several external and domestic risks consumption more than currently assumed. Supply-side disruptions in commodity production, potentially due On the external front, weaker activity in major to unfavorable weather conditions, could also impede economies could dampen sentiment and trade growth. On the upside, stronger-than-expected private prospects, while rising geopolitical tensions investment and robust trade activities suggest that might lead to volatile commodity prices and domestic economic performance could be more robust trade disruptions. In the EAP region, China’s growth than currently projected. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 15 Executive Summary Farming the Future: Consumer and stakeholder demand drives transformation in agrifood systems and determines climate impact. Food demand is influenced by factors Harvesting Malaysia’s such as population growth, changing dietary patterns, Agricultural Resilience health issues, and trade and globalization. Food supply is related to both domestic production and imports, through Digital Technologies and weather and climate impacts in Malaysia and distant countries can affect supply. Malaysia’s focus on supply stability and price control for key food items in terms Malaysia has made significant strides in modernizing of food security is now outdated. Moving forward, it is its agrofood systems, but further efforts are strategic for Malaysia to reshape and rebalance both essential in transitioning to a high-income country. demand and supply to enhance food security and The agricultural sector needs ambitious reforms and increase climate resilience. The factors involved in such must establish a unique brand supported by a robust a rebalancing are demonstrated in Figure ES12. digital ecosystem. Currently, the agrofood sector faces several challenges, and it needs to boost agricultural productivity, reduce imperfect market competition, FIGURE ES12 expand investments in agricultural research and Key factors in rebalancing demand and supply in development, increase output and resilience for Malaysia’s agrofood system primary producers, and increase adoption rates for Predominant aspects new technologies. Malaysia’s policies have historically Rebalancing factors favored rice production through subsidies and market Demand Supply protections, resulting in an input-based agrofood • Expanded food output model. This model will not meet Malaysia’s stated • Food security policy goal of transitioning toward high-income status. Equity Environmental • Food sovereignty Such a transition will require sustainable and efficient • Balanced food trade agricultural production methods, with expanded (import substitution and export expansion) support for agrofood research, innovation, and value • Climate adaptation and chain upgrades. Recent reports have identified these Efficiency Efficiency mitigation challenges and proposed comprehensive policy • Sustainable use of natural reforms to transform Malaysia’s agrofood sector into an resource engine of sustainable growth and poverty reduction. • Reduced food losses and waste • Gender balance The agriculture sector needs higher productivity, Employment Employment • Efficient energy use efficiency, and resilience to support broader • Increased employment economic growth and importantly, ensure • Reduced urban migration Malaysia’s food security amid growing demand • Carbon finance and increasing climate change impact. Agricultural Export & • Improved nutrition competitiveness productivity in Malaysia is less than other high-income • Enhanced consumer countries, and labor productivity in agriculture lags preference other key economic sectors and other Asian countries. This is reflected in both gender and rural versus urban divides. In 2022, overall labor productivity growth in Digital agricultural technologies (DAT) present a agriculture was 0.7 percent compared with the national transformative opportunity for Malaysia’s agrofood average of 5.4 percent. The Malaysian Productivity sector, promising enhancements in productivity, Corporation (2022) found that labor productivity in efficiency, and sustainability. Global experiences the agrofood sector is similar to the machinery and illustrate how DAT can accelerate information flows, equipment (M&E) sector, but lower than in key sectors reduce information asymmetries and search costs, like electronics, electricals, and chemicals. However, lower barriers to knowledge acquisition, decrease the employment growth rate in the agrofood sector is transaction costs, and expand market size. These still robust at approximately 4.2 percent. Compared to advancements can lead to increased production and other Asian countries (except Singapore), Malaysia had marketing efficiency, economies of scale, and broader the region’s lowest labor productivity growth from 2010 access to productive resources. While there are risks to 2020, according to statistics from Asian Productivity associated with DAT, they can be managed effectively Organization. by properly monitoring DAT implementation. 16 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 Executive Summary The DAT-enabled transformation of the agriculture • Enhancing the regulatory environment for data sector can: privacy and security by ensuring agricultural data is responsibly used and protected. Robust • Increase productivity and efficiency by optimizing data governance frameworks and cybersecurity resource use, streamlining operations, and measures are needed to safeguard sensitive minimizing waste. Technologies such as precision information; farming and AI-driven insights will enable farmers to better manage crops, allocate resources, and • Enhancing integration and coordination through use predictive decision-making to increase yields, effective collaboration between public and private resilience, and reduce costs; sectors, including government agencies, research institutions, and agritech companies; • Enhance export competitiveness by improving quality standards, ensuring product traceability, • Improving capacity building by providing farmers and facilitating access to global markets. This with training and education to effectively use DAT, will strengthen Malaysia’s position in the global including developing digital literacy skills and agricultural market, especially for key export understanding the benefits and uses of various products like palm oil and rubber; technologies. • Improve food security by increasing productivity, Specific actions tailored to the needs of rural efficiency, and resilience. DAT can help bridge the communities are required to ensure the rural gap between food demand and supply, which is economy and agrofood sectors benefit from DAT. crucial given growing populations and rising food These actions, based on the enabling conditions demand; identified in Chapter 2, are categorized under three pillars: • Increase climate resilience and suppor t mitigation and adaptation through a wide range • Invest in public goods that provide sufficient of DAT innovations, such as improved information, resources for successful implementation of digital insurance, support for targeted climate-smart technologies. Strategies include addressing digital agriculture (CSA) activities to optimize resource literacy and knowledge gaps, establishing digital use through smart irrigation systems and precision identification systems, improving rural connectivity, farming techniques, and reduce emissions along and providing necessary infrastructure. value chains; • Invest in an innovation ecosystem to create an • Suppor t social equit y and inclusivit y by environment that fosters innovation and supports empowering smallholder farmers, including the DAT development through strategies that may women, with access to information, resources, and include establishing data platforms, using satellite financial services, that will help reduce urban-rural imagery for monitoring and analysis, creating disparities and promote inclusive growth in the incubators to support digital agriculture startups, agricultural sector. and supporting technical providers’ business development services. A strategic approach that addresses the unique challenges facing Malaysia is needed to realize • Create an enabling environment by detailing clear these benefits , including: and actionable strategies for data governance, privacy, security, and an incentive framework. Such • Bridging the gender and urban-rural digital strategies are crucial for building trust and ensuring divide. This will ensure all farmers benefit from that digital technology use is secure and beneficial DAT and requires investments in infrastructure, for all stakeholders broadband access, and digital literacy programs; Overall, to effectively fund and implement DATs, • Improving scalability and accessibility by making public expenditures should focus on providing public DAT accessible and affordable for diverse farming goods and avoid funding private goods unless clearly communities, particularly smallholders, to ensure justified. Government policies and expenditures DAT is widely adopted. This requires targeted should complement private-sector investments, which socio-economic and policy interventions. are the primary drivers of DAT development. High-value public expenditures include infrastructure investments MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 17 Executive Summary to encourage tech companies to expand into rural government can enhance planning, monitoring, and areas and provide extension services to promote DAT benefit transfers through digital platforms, following adoption among farmers. The Malaysian government open data policies for public data like agricultural needs to develop effective policies to expand digital statistics. Digital platforms for fisheries management ser vice availability, promote DAT adoption, and and GIS technologies for mapping fishing activities are minimize related inequities, supported by a robust also recommended. Incentives for data sharing, such legal and regulator y framework for transparent as recognition and data monetization, will encourage data ownership and privacy rights. Investing in the participation and innovation. Expanding incubators innovation ecosystem is crucial, including creating data and accelerators, implementing innovation challenges, platforms, accessing satellite imagery, identifying and and defining targeted programs for AgTech providers supporting DAT startups, and supporting business will further boost innovation in the sector. development for technical service providers. The 18 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 Recent trends in Malaysia’s economy Growth in Q2 2024 was driven by robust Exports growth rebounded, driven by household spending, increased investment, improved demand for both E&E and and improving export performance non-E&E exports Contribution to real GDP growth, y/y, Percentage Contribution to export growth, y/y, Percentage 50 30 40 20 30 10 20 0 10 -10 0 -20 -10 -30 -20 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Private Consumption Public Consumption E&E - Semiconductors E&E - Non-semiconductors GFCF Change in inventories Non E&E Commodities Exports Imports Exports, y/y Real GDP, y/y Labor force participation rate increased, Headline in ation increased due to policy while unemployment rate declined adjustments impacting utilities and transportation costs Unemployment rate, labor force participation rate (RHS), Percentage CPI, y/y, Percentage 6 85 6 5 80 4 75 4 70 3 2 65 2 60 0 1 55 -2 0 50 01/2021 04/2021 07/2021 10/2021 01/2022 04/2022 07/2022 10/2022 01/2023 04/2023 07/2023 10/2023 01/2024 04/2024 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Others Headline in ation Unemployment Rate Transport Core in ation Labor force participation rate (RHS) Labor force participation rate - Male Housing, water, electricity, gas Labor force participation rate - Female Food and non-alcoholic beverages Global economic growth is expected to Malaysia’s growth is revised upwards stabilize in 2024 following stronger-than-expected activities in H1 2024 Real GDP, y/y, Percentage Contribution to real GDP, y/y, Percentage 6 20 16 5 12 4 8 4.9 4 3 0 -4 2 -8 1 -12 -16 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024f 2023e 2024f 2025f 2023e 2024f 2025f 2023e 2024f 2025f World Advanced Emerging & Private Consumption Public Consumption Economies Developing Economies GFCF Change in Inventory Latest Estimates (June 2024) Exports Imports Previous Estimates (January 2024) Real GDP,y/y MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 19 20 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE Recent Economic Developments and Outlook MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 21 PART ONE - Recent Economic Developments and Outlook Recent Economic Developments The global economy is stabilizing, following several years of negative shocks Despite elevated financing costs and heightened due to a partial rebound in energy prices and a notable geopolitical tensions, global economic activity deceleration in the decline of core inflation. showed signs of stabilization (Figure 1). The global economy grew at a steady rate of 2.5 percent in H1 The EAP region is growing faster than the rest 2024 (2023: 2.6 percent). In advanced economies (AE), of the world but slower than pre-pandemic economic activity grew steadily at 1.5 percent in H1 levels (Figure 2). Overall, the EAP region grew at a 2024 (2023: 1.5 percent). In the U.S., recent data has moderated pace of 4.8 percent in H1 2024 (2023: 5.1 been broadly in line with expectations of a slower percent). Private consumption has sustained growth in growth in H1 2024, although activity in Q2 2024 held most countries, but consumer spending and confidence up better than expected. Services continue to lead the are now less robust. Services exports have helped in recovery in the Euro Area in Q2 2024, while industrial tourism-dependent economies, and public investment production and goods exports have been weak. in Indonesia. But private investment and goods exports Meanwhile, activity in EMDEs stabilized at 4.1 percent remain weak in most countries amidst elevated debt in H1 2024 (2023: 4.2 percent). Trade growth, which had and increased uncertainty. The revival of tourism has stalled last year, is beginning to recover, driven by an boosted services exports in some EAP economies, but uptick in goods trade. Commodity prices have retreated tourist arrivals have only exceeded pre-pandemic levels from their 2022 peaks, and supply-chain pressures have in a few countries. Inflation had been declining across eased, helping to moderate global inflation. However, the EAP region, in response to lower commodity prices, the pace of disinflation has slowed since last year, partly and easing supply constraints. FIGURE 1 FIGURE 2 Global activity showed signs of stabilization in H1 EAP region is growing faster than rest of the 2024 world but slower than pre-pandemic levels GDP, y/y, Percentage GDP, y/y, Percentage 12 8 10 8 6 6 4 2 0 4 -2 -4 -6 2 -8 -10 -12 0 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 -2 EAP China EAP Paci c EMDE Advanced excluding Island excluding Economies World China Countries EAP Advanced Economies Emerging Markets and Developing Economies 2015-19 2020-22 2023 2024f 2025f Source: World Bank Global Economic Prospects Source: World Bank Global Economic Prospects and Haver Analytics 22 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 23 PART ONE - Recent Economic Developments and Outlook Developments in the Malaysian Economy Malaysia experienced strong growth amid increased household consumption, investment and trade activity The Malaysian economy experienced robust year- recorded a strong growth rate of 11.5 percent in Q2 on-year growth of 5.9 percent in Q2 2024 (Q1 2024 (Q1 2024: 9.6 percent), driven by robust private 2024: 4.2 percent), aligning with growth trends in capital spending in the manufacturing and services most regional economies. Malaysia’s strong economic sectors and increased spending on fixed assets by growth was driven by robust household spending, the government and public corporations (Figure 5). investments, as well as improvement in exports (Figure Net export growth for Malaysia also rebounded to 3.4 3). Private consumption picked up by 6.0 percent in Q2 percent (Q1 2024: -24.5 percent), thanks to improving 2024 (Q1 2024: 4.7 percent) supported by improved international goods trade and a global technological labor market conditions and continued government upswing. On a quar ter- on- quar ter seasonally policy support. Meanwhile, public consumption grew adjusted basis, the economy grew by 2.9 percent (Q1 at a more moderate rate of 3.6 percent (Q1 2024: 2024: 1.5 percent). Malaysia’s GDP per capita is now 7.3 percent), driven by government spending on approximately 12 percent above the pre-COVID level, emoluments as well as supplies and services. GFCF outperforming many ASEAN peers. FIGURE 3 FIGURE 4 Growth in Q2 2024 was driven by stronger Per capita output in Malaysia is now about household spending, increased investment 12 percent above the pre-COVID level, activities, and improving export performance outperforming many ASEAN peers Contribution to real GDP growth, y/y, Percentage Evolution of GDP per capita compared to 2019, Percentage 30 30 20 20 10 10 0 -10 0 -20 -10 -30 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 -20 -30 Private Consumption Public Consumption China Viet Nam Indonesia Malaysia Cambodia Philippines Lao PDR Thailand Myanmar GFCF Change in inventories Exports Imports Real GDP, y/y 2020 2021 2022 2023 2024 Source: World Bank staff calculations based on DOSM data Source: October 2024 EAP Economic Update 24 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook On the supply side, there was an acceleration in rebound was driven by increased production in the oil growth across most economic sectors in Q2 2024, palm and fisheries subsector. The services sector grew particularly in the construction and agriculture by 5.9 percent in Q2 2024 (Q1 2024: 4.8 percent) driven sectors (Figure 6). The construction sector experienced by improvement across consumer and business-related a robust growth of 17.3 percent (Q1 2024: 11.9 percent) services, while the manufacturing sector continued thanks to increased activities especially in the civil to expand at 4.7 percent (Q1 2024: 1.9 percent) amid engineering and specialized construction subsectors1. resilient growth in both export-oriented and domestic- Growth in the agriculture sector rebounded to 7.2 oriented industries. Meanwhile, the mining sector percent in Q2 2024 after a moderation in the first quarter experienced a decline in growth of 2.7 percent (Q1 due to slower rubber and food crops production amid 2024: 5.7 percent) due to production disruptions in the adverse weather conditions (Q1 2024: 1.7 percent). The oil and gas subsector. FIGURE 5 FIGURE 6 Expansion in investment activity was mainly driven Most sectors experienced higher growth in Q2 by higher private capital spending 2024 Contribution to GFCF growth, y/y, Percentage GDP growth by sector, y/y, Percentage 20 20 18 15 16 14 10 12 5 10 8 0 6 4 -5 2 -10 0 Services Manufacturing Agriculture Mining Construction -15 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Private invesments Public investments GFCF growth Q1-2024 Q2-2024 Source: World Bank staff calculations based on DOSM data Source: DOSM Exports experienced a positive turnaround amidst strengthening external demand Following contractions in 2023, export growth 7). The rebound in the tech cycle lifted exports of E&E rebounded in Q1 and Q2 2024, driven by stronger products, while the turnaround in commodity exports external demand for both E&E and non-E&E exports, was suppor ted by improving commodity prices. along with rising commodity prices. Year-on-year Meanwhile, gross imports experienced a strong year- growth for gross exports improved to 2.0 percent in Q1 on-year growth of 12.5 percent and 15.0 percent in Q1 2024 and further by 5.8 percent in Q2 2024 (Q4 2023: and Q2 2024 respectively (Q4 2023: 1.3 percent), driven -6.9 percent), primarily due to sustained demand for by higher intermediate imports and robust domestic non-E&E exports such as machinery, equipment and demand for capital and consumption goods.  parts, as well as optical and scientific equipment (Figure 1 Includes demolition, sites preparation, electrical installation, plumbing, heat and air-conditioning installation, building completion and finishing, and other specialized construction activities MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 25 PART ONE - Recent Economic Developments and Outlook FIGURE 7 FIGURE 8 Export growth rebounded in H1 2024, driven by Current account surplus improved in Q1 2024, improved demand for both E&E and non-E&E primarily due to a decrease in primary income exports deficit Contribution to export growth, y/y, Percentage Current account balance, Current account, RM billion Percentage of GDP 50 80 8 40 60 6 30 40 4 20 20 2 10 0 0 0 -20 -2 -10 -40 -4 -20 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Q1-2015 Q4-2015 Q3-2016 Q2-2017 Q1-2018 Q4-2018 Q3-2019 Q2-2020 Q1-2021 Q4-2021 Q3-2022 Q2-2023 Q1-2024 E&E - Semiconductors E&E - Non-semiconductors Secondary income Goods Non E&E Commodities Primary income Current account balance (RHS) Exports, y/y Services Source: World Bank staff calculations based on DOSM data  Source: World Bank staff calculations based on DOSM data The current account surplus narrowed in Q2 2024 services deficit from increased tourism. Meanwhile, the to 0.6 percent of GDP following a sharp rebound narrowing of the current account in the second quarter to 3.5 percent of GDP in Q1 2024 (Q4 2023: 0.2 was driven by a higher primary income deficit offsetting percent) (Figure 16). The rebound of the current the goods surplus and the smaller services deficit. The account in the first quarter was contributed by a narrower goods surplus is sustained by the rebound in exports, primary income deficit, a shift in secondary income while the service deficit continues to narrow with higher into a surplus, expanded goods surplus, and a smaller revenues from travel and transport services. TABLE 1 Current account surplus narrowed in Q2 2024 after experiencing a rebound in Q1 2024 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2021 2021 2021 2021 2022 2022 2022 2022 2023 2023 2023 2023  2024  2024  Balance of Goods & Services 6.8 7.1 8.8 5.9 5.1 7.8 9.7 6.6 4.0 5.0 4.9 5.3 4.2 4.9 (% of GDP) Current Account Balance 3.3 5.2 3.8 1.2 0.9 4.4 6.0 2.4 1.9 1.8 0.2 3.5 0.6 0.1 (% of GDP) Total Exports 70.7 72.6 72.6 72.2 76.8 80.7 77.3 68.7 68.8 67.4 69.5 70.5 71.3 69.5 (% of GDP) Total Imports 64.0 65.5 63.7 66.3 71.7 72.9 67.6 62.1 64.9 62.4 64.5 65.2 67.1 64.5 (% of GDP) Net Portfolio Investment 20.2 -3.9 2.6 -7.6 -16.0 -0.7 -25.8 -29.8 12.9 -13.4 -6.0 -23.7 -21.7 -6.4 (RM billion) Net Official Reserves 461.6 482.5 486.8 485.8 480.1 491.9 503.3 509.9 522.1 517.1 520.8 539.0 537.3 529.7 (RM billion) Net Official Reserves 111.1 115.2 116.9 115.6 109.0 106.1 114.6 115.5 111.4 110.1 113.5 113.8 113.8 111.4 (US$ billion) Source: World Bank Staff calculations based on BNM and DOSM data 26 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook The services sector and the manufacturing sector dominate foreign and domestic investments Net FDI inflow amounted to RM 5.5 billion in Q1 increase in approved FDIs in H1 2024, totaling at RM 74.6 2024 and RM 9.1 billion in Q2 2024, driven by equity billion (H1 2023: RM 63.9 billion) (see Box 1 on Malaysia’s injections and a turnaround in reinvested earnings. FDI Dynamics: Challenges and Oppor tunities). The net FDI inflow in Q1 2024 was primarily directed Meanwhile, approved DDIs increased by 19.1 percent in in the services sector, particularly in information and H1 2024. 82.5 percent of the total approved DDIs were communication services, as well as the mining and also in the services sector, particularly in real estate, quarrying sector (Figure 9). The major sources of inflow and information and communication services (Figure were from Hong Kong SAR, China, followed by the U.S. 10). Domestic investment was supported by a stable and Germany. In Q2 2024, it was mainly channeled into economic environment and other government policies the manufacturing sector. The sources of inflow were including incentives, national initiatives for digital mainly from Japan, Singapore, and Hong Kong SAR. transformation and infrastructure improvement, and Malaysia also registered a 16.7 percent year-on-year policies that support local business growth. FIGURE 9 FIGURE 10 Net FDI inflows were primarily channeled into the Approved DDIs for H1 2024 were also primarily services sector in Q1 2024 and manufacturing in channeled into services (mainly in real estate and Q2 2024 information & communication services) Sector contribution to net FDI in ows, Percentage Sector contribution to approved DDI, Percentage 100 2.8% 14.7% 31.5 Primary Sector Manufacturing 80 29.2 60 31.2 86.2 81.0 99.4 40 78.0 259.8 20 5.2 18.0 0 -27.4 -20 -55.8 -40 34.2% 36.3% Information and Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Real Estate Communications Others Manufacturing Construction Services Source: World Bank staff calculations based on BNM and DOSM data  Source: World Bank staff calculations based on MIDA data  MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 27 PART ONE - Recent Economic Developments and Outlook BOX 1 Malaysia’s FDI dynamics: Challenges and opportunities Malaysia has successfully grown its inward FDI discriminatory screening or approval mechanisms, stock over the last few decades but is facing stiffer restriction on key foreign personnel, and operational competition from regional peers in recent years. restrictions. These restrictions can act as entry barriers or Investment policy reforms starting in the early 1970s additional costs to foreign investors. Based on this index, coupled with a conducive environment for business have Malaysia and Thailand had similar levels of restrictions laid the foundations for attracting foreign investments on FDI, were less restrictive than Indonesia and the into Malaysia.2 Prior to 2000, Malaysia’s FDI inflows and Philippines, but significantly more restrictive relative to stocks as a share of GDP were the highest amongst its Vietnam (Figure 13). The aggressive implementation of ASEAN-5 peers. In the past two decades, however, investment reforms to attract FDI in manufacturing led Thailand and Vietnam have been catching up (Figures to low restrictions in that sector (particularly in E&E). 11 and 12). However, restrictions are substantial in primary and upstream sectors such as distribution, electricity and Restrictions to FDI inflows predominantly affect financial services sectors. Because these restrictions upstream rather than downstream sectors. The FDI limit competition and innovation, imposing them on restrictiveness index developed by the Organization upstream sectors have substantial negative effects on for Economic Co-operation and Development (OECD)3, productivity of downstream sectors that demand inputs measures the extent to which policies restrict FDI from them (Figure 14). inflows in four dimensions: foreign equity restrictions, FIGURE 11 FIGURE 12 Malaysia has successfully grown its inward FDI stock Vietnam has consistently surpassed Malaysia in but is facing stiffer competition in recent years attracting FDI inward flows in the last decade FDI inward stock, Percentage of GDP FDI in ows, USD billion 70 20 Viet Nam 60 Thailand 15 Viet Nam 50 Malaysia 10 Malaysia 40 5 Thailand 30 Philippines 0 20 Indonesia -5 10 0 -10 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 Source: World Bank staff calculations based on United Nation Conference Source: UNCTAD World Investment Report database on Trade and Development (UNCTAD) data 2 Investment policies including the establishment of free trade zones and licensed manufacturing warehouses, provision of generous investment incentives since the 1970s, coupled with an English-speaking, low-cost labor force has helped Malaysia laid the foundation to attract foreign investors. 3 Implementation issues are not addressed and factors such as the degree of transparency or discretion in granting approvals are not taken into account (Source: OECD) 28 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook FIGURE 13 FIGURE 14 Malaysia has room to improve on FDI There are variations across sectors in FDI restrictiveness compared to Vietnam restrictiveness in Malaysia FDI restrictiveness index, 2020 Malaysia FDI restrictiveness by sector, 2020 0.6 United Kingdom Japan 0.5 Singapore 0.4 United States Viet Nam 0.13 0.3 Korea, Rep. 0.2 Australia 0.1 China Malaysia 0.26 0 Manufacturing Business services Primary sector Transport Financial services Telecommunications Distribution Media Electricity Thailand Indonesia Philippines 0 0.1 0.2 0.3 0.4 Source: World Bank staff calculations based on OECD FDI restrictiveness Source: World Bank staff calculations based on OECD FDI restrictiveness index index International experience shows that liberalizing The government’s ongoing efforts in reducing upstream sectors, like logistics or finance, helps operational restrictions could help minimize FDI boost productivity downstream (in manufacturing). restrictiveness, and can be targeted at specific Restrictions on investments in Malaysia’s upstream sectors. For instance, Malaysia recently introduced a sectors can affect supply of goods and services as dedicated visa facilitation service for strategic investors input provision to firms operating in downstream identified by the Malaysian Investment Development manufacturing. Given this input-output linkage, a Authority (MIDA) to facilitate investments into the growing body of empirical research suggests that country. In 2021, the ASEAN Investment Facilitation reducing distortions in these upstream sectors can Framework (AIFF) was adopted by ASEAN members improve productivity growth in downstream sectors. to enhance investment attraction by increasing For instance, Duggan et. al. (2013) finds that relaxing transparency, streamlining administrative procedures, policies towards FDI in the service sector in Indonesia promoting policy alignment, and building the capacity accounted for 8 percent of the observed increase in of investment-related agencies. One of the notable manufacturers’ total factor productivity (TFP) between initiatives by Malaysia was implementing fast-track 1997-2009; Fernandes and Paunov (2012) show that “green” lanes and simplified processes to ease forward linkages from FDI in services explain 7 percent investment. Investment portals and digital platforms of the observed increase in Chile’s manufacturing were also developed for e-payment and acceptance users’ TFP; Arnold et. al. (2016) finds that banking, of electronic documents and certificates (UNCTAD telecommunications, insurance and transport reforms World Investment Report 2023). These efforts can in India all had significant positive effects on the be targeted at Malaysia’s upstream sectors which is productivity of manufacturing firms. Malaysia can learn relatively restrictive to harness productivity gains in the from these experiences and lower FDI restrictiveness downstream. in its upstream sectors to boost productivity in its downstream sectors. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 29 PART ONE - Recent Economic Developments and Outlook Harnessing domestic liquidity to stimulate The development of SEZs, if successful, can be a key investment in Malaysia can provide notable driver of trade and investments into Malaysia. Since benefits by mobilizing substantial financial the 2000s, Malaysia has introduced regional economic resources and aligning investments with national corridors—a new type of special economic zones— development objectives. Recently, the government to boost development in rural areas. Malaysia has introduced Government-linked Enterprises Activation successfully attracted FDIs into these SEZs, focusing on and Reform Program (GEAR-up), a program aimed at higher value-added and technology-intensive industries catalyzing growth in key economic sectors through like E&E, services, and software development. Over DDIs. Six government-linked investment companies the years, Malaysia has also shifted its SEZ strategy (GLICs) have pledged to invest RM120 billion—or towards a comprehensive cluster development model, 6.6 percent of Malaysia’s current GDP—in DDIs creating a framework that supports strategic sectors over the next five years under the program. The while minimizing trade distortions. Greater focus has government can encourage GLICs to prioritize high- been given to developing small and medium-sized quality  investments and innovation, which are crucial enterprises (SMEs). For example, Penang hosts one for Malaysia’s transition to a high-income economy. of the country’s most advanced technology clusters However, policymakers must also be vigilant against in semiconductor-based electronics manufacturing.4 potential market distor tions and establish clear Malaysia will be signing the Johor-Singapore Special parameters to ensure these investments complement, Economic Zone (JS-SEZ) agreement with Singapore in rather than compete with, private firms. While GLICs end of 2024 to foster greater economic connectivity, should remain focused on their core mandates, they enhance cross-border trade, and boost investments must be cautious of potential mission creep, particularly between the two countries. The success of JS-SEZ if new ventures diverge significantly from their current will largely depend on the type of incentives provided operations. Additionally, it is essential to ensure these under the SEZ and how they are being implemented entities possess the necessary technical capabilities to (see Box 2 on Special Economic Zones - Key Policy undertake these investments effectively. Lessons from Global Experience). 4 See “ASEAN Guidelines for Special Economic Zones (SEZs) Development and Collaboration” https://asean.org/wp-content/uploads/2020/12/Adopted- ASEAN-Guidelines-for-Special-Economic-Zone-SEZ-Development-and-Collaboration.pdf 30 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook BOX 2 Special Economic Zones - Key policy lessons from global experience Special Economic Zones (SEZs) have been widely 2021a; World Bank Group, 2021). Government-led used worldwide as tools for industrialization and off-site infrastructure and developer-led on-site attracting FDI. Yet, their success varies significantly. infrastructure are essential for creating a business- Regions like East Asia have seen notable successes, friendly environment. while others, such as Sub-Saharan Africa, continue to struggle. Even within the same country, SEZ outcomes 5. Select strategic locations. The right location is can vary. To ensure effective SEZ development, several crucial. Successful zones like the Shannon Free Zone key lessons from global experiences must be integrated (Ireland) and Jurong Industrial Park (Singapore) from the outset: are situated in areas with excellent connectivity to local, regional, and international markets (Zeng, 1. Develop a predictable legal and regulatory 2021a). Avoid politically driven site selections that framework. Establish a transparent, streamlined compromise business viability. legal structure for SEZs that clearly defines the roles and responsibilities of stakeholders (World Bank 6. Invest in skills development. Support workforce Group, 2021; Zeng, 2022). This framework should training that meets the needs of SEZ businesses. provide certainty and protection for developers and Collaborations like the Penang Skills Development investors, particularly in cross-border zones, like the Center (Malaysia) and Sino-Singapore Suzhou one planned for Johor-Singapore, which require Industrial Park have shown that aligning skills harmonized customs, trade, and labor regulations programs with industry needs can significantly to succeed. improve SEZ productivity and attract investors. 2. Align S EZs with national development 7. Strengthen zone-level governance. Effective SEZ strategies. Integrate SEZ initiatives into the broader governance is key to success. Zones with strong national development plan, ensuring alignment management structures, such as the Jurong Town with overall economic objectives. Successful SEZs, Corporation (Singapore), consistently outperform like the Shenzhen SEZ in China, have been used to others. Governments should leverage private pilot key policy reforms, then adopted nation-wide sector expertise where possible to bring capital (Zeng, 2021b). This ‘lab’ approach helps overcome and specialized know-how, particularly in new SEZ the challenges the political economy, create a more initiatives. liberal business environment, and ensure that SEZs contribute meaningfully to national growth. 8. Adopt eco-industrial principles. Embed sustainable practices into SEZ operations by adopting the Eco- 3. Ensure strong market demand and private sector Industrial Park (EIP) framework (World Bank, 2021b). engagement. Conduct a rigorous market demand Integrating economic, social, and environmental assessment and identify the right sectors based on considerations—as seen in Kalundborg (Denmark)— local competitive advantages. Engaging the private enhances long-term viability and aligns with sector early, either through direct development or the Sustainable Development Goals, attracting public-private partnerships (e.g., Panama Pacifico environmentally conscious investors. SEZ), can enhance operational efficiency and align SEZ development with investor needs. 9. Monitor and adapt for continuous improvement. Establish robust monitoring and evaluation systems 4. Prioritize high-quality infrastructure over from the beginning. The Tanger-Med SEZ (Morocco) fiscal incentives. SEZs should focus on providing illustrates the value of phased development and world-class infrastructure both on-site and off-site continuous assessment, allowing flexibility to adapt rather than offering extensive tax breaks (Zeng, to changes and improve effectiveness over time. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 31 PART ONE - Recent Economic Developments and Outlook The labor market continues to improve, with notable increases in formal sector wages Key labor market indicators have shown Labor market tightness, as reflected in the rate of improvements over the past quarters. The national job vacancies per unemployed person, has increased unemployment rate has remained at 3.3 percent in Q2 over the past year (Figure 17). Since 2019, the labor 2024 (Q1 2024: 3.3 percent), similar to pre-pandemic market tightness indicator has been below one— levels (Figure 15). The unemployment rate is slightly meaning that there are more unemployed persons than higher for females than for males, at 3.5 percent versus there are jobs available. In 2019, the rate stood at 0.4 3.1 percent in Q2 2024. The unemployment rate for and dropped significantly to its lowest at 0.2 during younger cohorts (aged 15-24 and 25-34) has continued the pandemic, due to a large pool of unemployed or to gradually improve in the labor force5, from 10 percent retrenched workers relative to the number of vacancies. (2.2 percent) in Q1 2024 to 9.9 percent (2.1 percent) More recently, it has remained at 0.34 in Q2 2024 in Q2 2024 (Figure 16). However, the unemployment (Q1 2024: 0.34), with 191,442 job vacancies in the rate for the oldest cohort (aged 55-64) has increased labor market and 557,800 unemployed individuals. At in the long term, from 1.9 percent (Q2 2023) to 3.3 0.34, the rate is considerably lower than that of many percent (Q2 2024). This could be partly explained by advanced countries such as the U.S. where the indicator the slight uptick in labor force participation rate of this is close to or above one (MGI 2024). Thus, this does not age group during the same time frame. The overall suggest an unsustainable rate of employment growth, labor force participation rate has also shown moderate coupled with the fact that Malaysia is experiencing improvements, increasing from 70.2 percent in Q1 2024 strong economic growth. In Q2 2024, 55.8 percent of to 70.5 percent in Q2 2024. The gender gap in labor all job vacancies were for semi-skilled jobs, followed force participation rate remains large and unimproved, by 25 percent for high-skilled and 19.1 percent for low- at 26.8 percent in Q2 2024 (Q1 2024: 26.7 percent). skilled jobs6. This trend has been consistent since 2019 FIGURE 15 FIGURE 16 Labor force participation rate increased, while ...however, the unemployment rate for the oldest overall unemployment rate declined... age-group has seen a slight uptick Unemployment rate, Labor force participation rate, Unemployment rate by age group, Percentage Percentage Percentage 6 85 14 5 80 12 75 4 70 10 15-24 3 65 8 2 60 1 55 6 0 50 4 55-64 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 2 25-34 45-54 35-44 Unemployment Rate 0 Labor force participation rate (RHS) Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Labor force participation rate - Male Labor force participation rate - Female Source: DOSM Source: DOSM 5 In Q2 2024, the labor force comprised of 17.2 percent aged 15-24, 33.7 percent aged 25-34, 24.8 percent aged 35-44, 16.4 percent aged 45-54 and 7.9 percent aged 55-64. 6 According to DOSM (2022), occupational categories have been consolidated into three skill levels according to the Malaysia Standard Classification of Occupations (MASCO) 2013, which are: high-skilled workers (Managers, Professionals, and Technicians and Associate Professionals), semi-skilled workers (Clerical Support Workers, Service and Sales Workers, Skilled Agricultural, Forestry, Livestock, and Fishery Workers, Craft and Related Trades Workers, and Plant and Machine Operators and Assemblers) and low-skilled workers (Elementary Occupations). 32 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook (Figure 18). When looking at job vacancy by sector, the challenges in filling up manufacturing jobs. Dissecting manufacturing sector had the most vacancies in Q2 2024 this further by sub-sector of the manufacturing sector at 56.6 percent of all vacancies (relative to 16.4 percent shows a third of the vacancies are in the E&E sub- of total employment), followed by the agriculture sector, followed by the petroleum, chemical, rubber sector (16.6 percent; 9.1 percent of employment) and and plastics sub-sectors at 17.8 percent, and the non- the construction sector (13.6 percent, 8.1 percent of metallic mineral products sub-sector at 13.4 percent employment) (Figure 19). Notably, the manufacturing in Q2 2024 (Figure 20). These findings are aligned sector has consistently held the highest number of with manufacturers’ concerns on talent shortages, vacancies since 2019, indicating ongoing structural particularly for E&E7 industries. FIGURE 17 FIGURE 18 Labor market tightness increased over the past ...with most vacancies in the labor market being year... for semi-skilled jobs Job vacancies per unemployed person Share of job vacancies by skill level, Percentage 0.45 70 0.40 60 0.35 Semi-skilled 50 0.30 0.25 40 0.20 30 Skilled 0.15 20 Low-skilled 0.10 10 0.05 0 0 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Source: DOSM Source: DOSM FIGURE 19 FIGURE 20 More than half of all vacancies are in the ...with the E&E subsector offering a third of all manufacturing sector... vacancies in the manufacturing sector Share of job vacancies by sector, Percentage Share of job vacancies by subsector, manufacturing sector, Q2 2024 70 13% 31% Wood and Electrical, electronic 60 furniture, paper & optical products Manufacturing products & printing 50 40 30 9% Transport equip, other 20 manuf & repair Agriculture Construction 13% 10 Services 3% Food processing, beverages & Textiles and tobacco products leather products 0 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 18% Petroleum, chemical, 13% rubber & plastic Non-metallic products mineral products Source: DOSM Source: DOSM Note: The mining and quarrying sector is excluded due to its relatively small share of workers (0.6 percent of total employment in 2023) 7 The Edge Malaysia (2024). “Manufacturers asks for govt support to boost talent pool”. Retrieved from: https://theedgemalaysia.com/node/710951 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 33 PART ONE - Recent Economic Developments and Outlook Labor productivity growth has picked up and experienced the largest improvement at 3.7 percent employment growth has recovered. Year-on-year employment growth in Q2 2024 (Q1 2024: 2.8 percent). labor productivity growth stood at 3.1 percent in Q2 This is followed by the agriculture and mining sectors, 2024, higher than in the last three quarters. The uptick at 1.1 percent and 0.2 percent (Q1 2024: 0.1 percent in labor productivity growth can be attributed to a large and 0.1 percent) respectively. boost in labor productivity growth in the construction sector, which saw a growth of 16.3 percent in Q2 Median wages for employees in the formal sector8 2024 (Q1 2024: 10.7 percent), while other sectors also are on an upward trajectory. The median wage for experienced positive labor productivity growth in Q2 formal employees was RM2,844 in March 2024 (March 2024 (Figure 21). Meanwhile, year-on-year employment 2023: RM2,600). This reflects strong growth in real growth recovered at 2.8 percent in Q2 2024 (Q1 2024: median wages, which stood at 7.5 percent in March 2.1 percent) following a decline in employment growth 2024, following strong growth in wages in previous in the previous quarters (Figure 22). The services sector months (Figure 23). While both men and women FIGURE 21 Overall labor productivity has improved when compared with previous quarters Labor productivity by sector, y/y, Percentage change 20 15 10 5 0 -5 Agriculture Mining and Manufacturing Construction Services Total quarrying Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Source: DOSM FIGURE 22 Employment growth has been on a downward trajectory but has since recovered Employment growth by sector, y/y, Percentage 4 3 2 1 0 Agriculture Mining and Manufacturing Construction Services Total quarrying Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Source: DOSM 8 Data on wages are retrieved from the Employee Wages Statistics (Formal Sector) Report by DOSM. In the first quarter of 2024, 62.6 percent of citizens who are employees were in the formal sector, excluding public sector workers. Different to the Salaries and Wages Survey reported by DOSM annually, the Employee Wages Statistics use administrative data from sources such as the Employees Provident Fund (EPF) and the Social Security Organization (SOCSO) to produce more up-to-date wages data. 34 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook experienced positive wage growth, the median wage (see Figure 25), with the services sector recording the for men is slightly higher than that for women at RM2,900 highest year-on-year wage growth at 3.6 percent. At and RM2,800 respectively in March 2024. The gender the same time, formal employees in the agriculture gap in median wages has been persistent since at least sector had the lowest median wage at RM2,000, with 2022 (Figure 24).9 Across sectors, the construction and those wages falling as depicted in Figure 26 (March services sectors registered the highest median wages 2024: -0.5 percent). in March 2024, at RM2,964 and RM2,882 respectively FIGURE 23 FIGURE 24 Strong year-on-year real wage growth for all Monthly median wages have been on an upward genders trend since 2022, for both men and women Real median wage growth by gender, y/y, Percentage Monthly median wage by gender, RM 10 3,000 Male All 8 Female 2,800 Female All Male 6 2,600 4 2,400 2 2,200 0 2,000 01/2023 02/2023 03/2023 04/2023 05/2023 06/2023 07/2023 08/2023 09/2023 10/2023 11/2023 12/2023 01/2024 02/2024 03/2024 01/2022 03/2022 05/2022 07/2022 09/2022 11/2022 01/2023 03/2023 05/2023 07/2023 09/2023 11/2023 01/2024 03/2024 Source: DOSM Source: DOSM FIGURE 25 FIGURE 26 Construction and services sectors registered ...while agriculture exhibited negative real wage highest wages in March 2024... growth year-on-year Monthly median wage by sector, RM Real median wage growth by sector, y/y, Percentage 3,500 12 10 3,000 Construction 8 Services Manufacturing 6 2,500 4 Services 2 Manufacturing 2,000 Agriculture Construction 0 Agriculture -2 1,500 -4 1,000 -6 01/2022 03/2022 05/2022 07/2022 09/2022 11/2022 01/2023 03/2023 05/2023 07/2023 09/2023 11/2023 01/2024 03/2024 01/2023 02/2023 03/2023 04/2023 05/2023 06/2023 07/2023 08/2023 09/2023 10/2023 11/2023 12/2023 01/2024 02/2024 03/2024 Source: DOSM Employee Wages Statistics (Formal Sector) Report First Source: DOSM Employee Wages Statistics (Formal Sector) Report First Quarter 2024 Quarter 2024 Note: The mining and quarrying sector is excluded due to exceptionally Note: Real wages are computed with 2010 as the reference year. The mining high median wages accrued to a very small share of workers (0.6 percent of and quarrying sector is excluded due to exceptionally high median wages total employment in 2023) accrued to a very small share of workers (0.6 percent of total employment in 2023) 9 The gender gap in earnings in Malaysia has been long documented. A statistical decomposition suggests that the gender gap in earnings is largely unexplained by sociodemographic productive characteristics such as ethnicity, age, educational attainment, urban-rural location, and sector of employment, suggesting the possibility of discrimination (World Bank 2019). Additionally, there is evidence that the gap in earnings between formal and informally employed women is larger than that for men, with a similar decomposition suggesting that a higher share of the formality premium is unexplained for women, compared to that for men (World Bank 2024). MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 35 PART ONE - Recent Economic Developments and Outlook BOX 3 A deep dive into skill-related underemployment Due to its increasing trend , skill-related Having said that, there has been an increasing trend of underemployment is a major concern for underemployment among degree holders, where 8.6 policymakers. In 2010, the rate of skill-related percent were underemployed in 2010, and eventually underemployment, defined as those with tertiary10 rising to 26.9 percent in 2022. This is significant as education working in semi-skilled or low-skilled jobs, degree holders represented 48.6 percent of the tertiary stood at 27.2 percent. By 2022, this rate reached 37.3 educated workforce in 2022. Similarly, SRU among percent, equivalent to more than two million workers diploma holders has also been on an upward trend, (DOSM, 2024). The situation is not unique to Malaysia. while SRU among STPM holders has improved. By SRU is also observed in other countries, including high- field of study, general programs and services12 exhibit income countries such as Korea, Rep., Australia, United some of the highest SRU rates, at 74.5 percent and 58.7 Kingdom and the U.S. (Figure 27). percent respectively (Figure 29)—though these fields only represent a small proportion of total graduates, The higher the level of education, the lower the at 7.9 percent and 6.0 percent respectively. In contrast, rate of underemployment. Those with Sijil Tinggi fields like health and social services and education Persekolahan Malaysia (STPM)11 and equivalent exhibit the lowest SRU rates, at 13.9 percent and 8.0 qualifications, certificates and diploma have higher percent respectively. This could be due to the public- incidences of SRU compared with degree (and above) sector nature of these fields. For example, medical holders at 55.8 percent, 52.3 percent, 42.3 percent graduates are obliged to complete their compulsory and 26.9 percent respectively in 2022 (Figure 28). housemanship for three years at a public hospital upon FIGURE 27 Skill-related underemployment by selected countries Skill-related underemployment rate, Percentage 50 40 30 20 10 0 Indonesia Korea, Rep. Malaysia Türkiye Australia Chile United States United Kingdom Source: DOSM (2024) and World Bank staff calculations based on ILOSTAT for latest available year Note: The skill-related underemployment rate for other countries is measured as the share of those with post-secondary education and above in low and medium skill occupations (skill level 1 and level 2) 10 Following the Labor Force Survey Report Malaysia (2023) by DOSM, those with tertiary education refers to those with more than a secondary (Form 5) education (post-secondary and above). 11 The Sijil Tinggi Persekolahan Malaysia (STPM) is regarded as being on par with the General Certificate of Education Advanced Level (A-level) qualifications. 12 General programs include broader programs that do not fall into other specified categories, such as personal skills. Those in General Programs typically graduate at the Certificate level. Services programs include programs on travel, tourism and leisure; hotel, restaurant and catering; and sports. 36 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook FIGURE 28 FIGURE 29 The rate of SRU among degree and diploma ...while by field of study, more generic programs holders have increased... had higher levels of SRU by field of study Rate of skills-related underemployment by level of quali cation, Percentage Rate of skills-related underemployment by eld of study and share of graduate output 100 80 60 80 40 60 STPM or eq. Certi cate 20 Diploma 40 0 General programmes Services Agriculture and veterinary Social sciences, business, law Engineering, architecture Sciences, mathematics, computing Humanities and arts Health and social services Education Degree 20 0 Rate of skills-related underemployment 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Share of student output Source: World Bank staff calculations based on LFS 2010-2022 (DOSM)  Source: World Bank staff calculations based on Labor Force Survey (LFS) 2020 Note: Degree includes Bachelor’s degree, Master’s degree, and Doctoral (DOSM) and Ministry of Higher Education (MOHE) (2020) degree Note: Rate of SRU by field of study refers to those in tertiary education (STPM and above). Graduate output refers to the total number of students who had completed pre-university or foundation, professional, certificate, diploma, advanced diploma, Bachelor’s degree, postgraduate diploma, Master’s degree, and Doctor of Philosophy programs graduation. Teachers in public schools are also seen to their skills may not be fully utilized. Women also face be in high demand.13 a higher SRU rate compared with men, at 42.0 percent and 32.5 percent in 2022 respectively. Numbers by Younger individuals, especially women and state show that Kuala Lumpur, Penang and Selangor those from lagging states are more likely to had the lowest SRU rates, whereas lagging states such be underemployed. A closer look at the profile of as Kelantan, Terengganu and Perlis had the highest those who are underemployed shows that the rate SRU rates (Figure 30), indicating limited high-skilled job of SRU is highest for the youngest in the workforce, opportunities in these states. at 63.5 percent for the 15-24 age group in 2022. An increasing share of young graduates are also found There are various factors driving the SRU rate and to be in non-standard forms of employment such as a more detailed understanding of them requires contract work or self-employment, without access to a comprehensive skills assessment of the labor employment protection, leaving them with weaker job market. An underlying reason for the rising SRU is that security, sluggish wage growth and limited upward an insufficient number of high-skilled jobs are being career mobility (KRI 2024). Moreover, the SRU rate is created for tertiary educated workers. Evidence of this negatively correlated with age, and is lower for older is shown in Figure 31, comparing graduate output and age groups (aged 55-64), where the SRU rate stood number of high-skilled job vacancies. Other factors at 21.5 percent. This finding is unsurprising for several include inefficiencies in job matching, a mismatch reasons. Higher levels of education take a longer time in areas of study and the jobs available, reflecting to acquire, which means that older workers are more poor links between industry and higher education likely to hold a degree compared with their younger institutions, or a lack of skills that do not relate to formal counterparts. Similarly, younger people are more education qualifications (KRI 2024, World Bank 2023). likely to be employed in entry level positions, where Rising SRU could also be due to a mismatch between 13 The Star (2024). “Education Ministry has already filled 20,000 teaching positions to address shortages, says Fadhlina”. Retrieved from: https://www.thestar. com.my/news/nation/2024/04/01/education-ministry-has-already-filled-20000-teaching-positions-to-address-shortages-says-fadhlina MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 37 PART ONE - Recent Economic Developments and Outlook FIGURE 30 SRU is higher for lagging states Rate of skills-related underemployment by state, 2022, Percentage 60 50 40 36.9 30 20 10 0 Kelantan Terengganu Perlis Pahang Johor Melaka Kedah Sarawak Sabah Perak Putrajaya Labuan Negeri Sembilan Selangor Pulau Pinang Kuala Lumpur SRU rate Mean SRU rate Source: World Bank staff calculations based on LFS (DOSM)  jobseekers’ preferences of job characteristics such of labor, representing a loss of human capital. Some key as working hours and work location that are currently strategies that could address these challenges include being offered by employers. Understanding the main aligning educational curricula with industry needs, drivers of SRU requires a comprehensive assessment strengthening Malaysia’s competitiveness to attract through a nationwide skills survey of labor supply and quality investments and promote high-skill job creation, demand, as demonstrated in several OECD countries. and providing lifelong skills that will help weather the Nevertheless, the high and increasing prevalence of skill- changing nature of work (World Bank 2021). related underemployment indicates an underutilization FIGURE 31 FIGURE 32 The number of high-skilled jobs available are ...and Malaysia has a lower share of workers in not keeping pace with the number of graduates high-skilled jobs compared with aspirational peers produced... Number of graduates and high-skilled vacancies, 2018-2023 Share of workers in high-skilled occupations, by selected countries, Percentage 350,000 80 300,000 60 250,000 200,000 40 150,000 29.6 100,000 20 50,000 0 0 2018 2019 2020 2021 2022 2023 Singapore Australia France Austria South Korea Malaysia Turkey Thailand Indonesia Viet Nam Graduate output High-skilled vacancies Source: DOSM and MOHE (various years) Source: ILOSTAT for latest available year, DOSM Note: Graduate output refers to the total number of students who had completed pre-university or foundation, professional, certificate, diploma, advanced diploma, Bachelor’s degree, postgraduate diploma, Master’s degree, and Doctor of Philosophy programs. High-skilled vacancies for each year are calculated by taking the average of quarterly data on vacancies 38 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook Absolute poverty remains a concern Malaysia’s hardcore poverty is almost non-existent, Income inequality persists, and current levels but absolute poverty still remains a concern, are still high compared to advanced economies. particularly in rural areas and among the Bumiputera Income inequality, measured by the Gini index based population. Hardcore poverty14 in Malaysia stood at on household gross income, stood at 40.4 percent in a mere 0.2 percent at the national level in 2022, and 2022. While the income gaps across main ethnic groups some states have reached the government’s target of have narrowed in recent years, spatial disparities zero percent. However, about 6.2 percent of Malaysian between the states in East Malaysia and Peninsular households, or approximately 490,000 households, regions persist. Mean incomes across states have not lived below the national average poverty line of RM2,589 converged because average incomes in the richest per month in 2022. Despite declining faster than urban states have grown faster than those in the poorest poverty, rural poverty remained predominant, with 12 states, particularly in Sabah and Sarawak. At the current percent of rural households, compared to 4.5 percent levels, income inequality in Malaysia do not differ of urban households, still having insufficient income to widely from other countries in the region. However, meet minimum living standards in 2022. Furthermore, while Malaysia is close to becoming a high-income the large incidence of absolute poverty in Sabah (19.7 economy, the current level of inequality is still high percent) and among the Bumiputera population (7.9 compared to both transitioned and established high- percent) highlights the significant role that regional and income countries. ethnic income disparities play in poverty dynamics in the country.15 Inflation edged higher in recent quarters but remains moderate Headline inflation edged higher in the last two monthly price increases rose to 44.2 percent and 49.4 quarters, primarily due to policy adjustments, percent in Q1 2024 and Q2 2024 respectively (Q4 2023: though remaining at moderate levels. In Q1 2024 and 36.3 percent). The data for the latest quarter is above Q2 2024, headline inflation rates were 1.7 percent and its historical long-term average of 43.9 percent from 1.9 percent respectively (Q4 2023: 1.6 percent). This 2011 to 2019. The increased inflation pervasiveness modest increase in headline inflation mainly reflects indicates that a broader range of goods and services policy adjustments affecting utilities and transportation are experiencing price increases, albeit at varying items (Figure 33). These adjustments include changes to magnitudes. water tariffs in February, an increase in services tax for high-usage electricity in March, and the rationalization OPR was kept at 3.00 percent, with the central of diesel subsidies in June. However, inflation remained bank anticipating higher inflation in H2 2024. at moderate levels, in line with the levels observed in The Monetary Policy Committee (MPC) maintained other countries in the region (Figure 34). Meanwhile, the policy rate during its meetings in May, July, and core inflation moderated to 1.8 percent in Q1 2024 (Q4 September 2024. The central bank expects inflation 2023: 2.0 percent), primarily due to continued easing to increase in the latter half of the year, partly due in the food and beverages segment. It edged slightly to the recent rationalization of diesel subsidies. The higher to 1.9 percent in Q2 2024, mainly driven by potential for inflation to increase further depends higher inflation in the food-away-from-home segment. on the spillover effects of additional domestic policy measures on subsidies and price controls, as well There were more extensive price increases in as global commodity prices and financial market H1 2024. Inflation pervasiveness16 increased in the conditions. The central bank expects headline and last two quarters as the share of CPI items recording core inflation to average within its previously projected 14 At the national average food poverty line income of RM1,198. Source: Department of Statistics Malaysia, Poverty in Malaysia 2022. 15 Department of Statistics Malaysia, Poverty in Malaysia. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 39 PART ONE - Recent Economic Developments and Outlook FIGURE 33 FIGURE 34 Headline inflation edged higher in H1 2024, Inflation remains contained across regional primarily driven by policy adjustments impacting countries utilities and transportation prices Contribution to CPI, y/y, Percentage CPI, y/y, Percentage 6 10 4 8 6 2 Vietnam 4 0 Philippines Indonesia 2 Malaysia -2 Thailand 01/2021 04/2021 07/2021 10/2021 01/2022 04/2022 07/2022 10/2022 01/2023 04/2023 07/2023 10/2023 01/2024 04/2024 0 -2 Others Headline in ation 01/2021 04/2021 07/2021 10/2021 01/2022 04/2022 07/2022 10/2022 01/2023 04/2023 07/2023 10/2023 01/2024 04/2024 Transport Core in ation Housing, water, electricity, gas Food and non-alcoholic beverages Source: World Bank staff calculations based on DOSM Source: World Bank staff calculations based on DOSM ranges of 2 percent to 3.5 percent and 2 percent to 3 pressure. However, the phased implementation over 14 percent respectively for 2024. At this OPR level, the months, combined with the central bank’s credibility of monetary policy stance is supportive of the economy. maintaining price stability, suggests that the impact on Beyond 2024, the recent announcement of salary inflation will be manageable. increases for civil servants may create some inflationary FIGURE 35 Inflation pervasiveness has increased in recent quarters CPI, y/y, Percentage 60 56 50 51.2 2011–2019 average: 45.6% 49.4 44.2 40 42.7 40.8 36.3 30 20 10 0 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Source: World Bank staff calculations based on DOSM data Note: Second quarter average from 2011-2019: 43.9% 16 Inflation pervasiveness refers to the extent to which inflation is spread throughout the economy. When inflation is pervasive, it means rising prices are not limited to specific items or areas but are affecting a broader range of products and services. 40 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook The Malaysian banking sector has maintained adequate capital and funding positions The Malaysian banking sector has maintained climbed to 155.2 percent as of June 2024 from 154.7 adequate capital buffers. The total capital ratio (TCR) percent in June 2023, remaining well above the and Tier 1 capital ratio remained above the regulatory regulatory requirement of 100 percent. Bank deposits minimum ratio at 17.9 percent and 14.8 percent increased by 4.9 percent year-on-year to RM2,516.7 respectively, as of June 2024 (Figure 36). However, the billion as of June 2024, while the loan-to-deposit ratio ratios are slightly lower than those observed in June rose to 86.8 percent (June 2023: 85.6 percent). Bank 2023 (TCR: 18.8 percent and Tier 1: 15.7 percent).17 holdings of high-quality liquid assets (HQLA) also These changes reflect an increase in risk-weighted increased, reaching RM762.7 billion as of June 2024, assets (RM1,972.7 billion as of June 2024 vs. RM1,858.5 2.5 percent higher than in June 2023. In December billion as of June 2023) that outpaced the increase 2023, Bank Negara Malaysia (BNM) conducted a stress in total capital (up from RM350.0 billion to RM353.8 test assessment covering a three-year horizon up until billion) year-on-year. end of 2026. Results indicated that the banking sector had sufficient capital to absorb losses from various The banking system has also maintained adequate simulated conditions such as elevated interest rate liquidity and funding positions in H1 2024. The environment and inflationary pressures.18 liquidity coverage ratio (LCR) for the banking system FIGURE 36 The Malaysian banking sector has maintained adequate capital positions Capital ratios, Percentage 20 TCR, 17.9% 18 16 Tier 1, 14.8% 14 CET 1, 14.3% 12 10 TCR Minimum Capital Adequacy Ratio, 8% 8 Tier 1 Minimum Capital Adequacy Ratio, 6% 6 4 CET 1 Minimum Capital Adequacy Ratio, 5% 2 12/2019 06/2020 12/2020 06/2021 12/2021 06/2022 12/2022 06/2023 12/2023 06/2024 Source: BNM 17 As defined by BNM: (i) Common Equity Tier 1 (CET1) refers to capital comprising ordinary shares issued by a banking institution, retained earnings, and other reserves; (ii) Tier 1 Capital is the sum of CET1 and Additional Tier 1 Capital which includes instruments that are not included in CET1, is perpetual and can be written down or converted into ordinary shares if the bank encounters financial distress; and (iii) Total Capital is the sum of Tier 1 Capital and Tier 2 Capital which includes instruments that are not included in Tier 1 and have maturities of five years or more. Each capital ratio is the respective capital balance in question scaled by Risk-Weighted Assets. 18 BNM’s stress test results were published in its H2 2023 FSR, under the section “Assessing the Resilience of Financial Institutions.” MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 41 PART ONE - Recent Economic Developments and Outlook Bank asset quality has remained solid. The gross At the same time, the profitability of the banking impaired loans ratio decreased by 11 basis points year- sector has remained broadly stable during the on-year to 1.6 percent at the end of June 2024 (Figure second quarter of 2024. Pre-tax profits in the second 37), registering its lowest level since the end of March quarter of 2024 amounted to RM13.0 billion, higher 2021.19 Malaysia’s gross impaired loans ratio remained than the RM11.0 billion in profits observed during the low compared to regional peers (Table 2). Provisioning same period in 2023. Simultaneously, the return on coverage remained stable. Total provisions stood at equity (ROE) also remained relatively stable at 12.0 RM32.0 billion as of June 2024 versus RM33.1 billion as percent (June 2023: 11.5 percent), and so did the return of June 2023, accounting for 91.7 percent of impaired on assets (ROA) at 1.3 percent (June 2023: 1.3 percent). loans (excluding regulatory reserves). FIGURE 37 Top three sectors and overall impaired loans ratio remained stable20 Gross impaired loans ratio, Percentage 2.4 Wholesale, retail, hospitality, 2.3% 2.2 2.0 1.8 Overall impaired loans ratio, 1.6% 1.6 Financing, insurance, real estate and business 1.4 services, 1.6% 1.2 Households, 1.2% 1.0 12/2020 02/2021 04/2021 06/2021 08/2021 10/2021 12/2021 02/2022 04/2022 06/2022 08/2022 10/2022 12/2022 02/2023 04/2023 06/2023 08/2023 10/2023 12/2023 02/2024 04/2024 06/2024 Source: BNM TABLE 2 Malaysia has among the lowest gross impaired loans ratio in the ASEAN region* Malaysia Thailand Singapore Indonesia Philippines (June 2024) (March 2024) (March 2024) (March 2024) (March 2024) Gross impaired loans ratio (%) 1.6 2.8 1.7 2.0 3.3 Source: BNM, International Monetary Fund (IMF), Haver Analytics, national sources *Figures are based on the latest available data. 19 Malaysia uses the impaired loans classification by the Malaysian equivalent of the International Financial Reporting Standards (IFRS) 9 Financial Instruments. The standard uses a three-stage impairment model based on changes in credit quality. 20 The top 3 sectors by outstanding loans collectively comprise approximately 80 percent of total outstanding loans. 42 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook Bank credit has expanded at a steady pace in 2024 Credit to the private sector has expanded at a steady pace throughout 2024 (Figure 38). 21 Total outstanding loans grew by 6.0 percent, reaching RM2.2 Higher business loan trillion by the end of June 2024 in relative to the same growth rates within the period in 2023. This pace of credit growth is in line with levels witnessed in H1 2024, which is significantly higher banking system were than the average growth observed throughout 2023. observed across the The household sector remained the largest and financing, insurance, fastest-growing borrowing segment. It represented real estate, business 64 percent of the total outstanding loan volume as of June 2024. Household debt grew by 6.2 services sector and the percent year-on-year in June 2024, reaching RM1.4 wholesale, retail, and trillion, amid sustained growth in housing and vehicle loans. 22 However, household loan applications and hospitality sector. disbursements have remained relatively stable over the past 18 months, in contrast to the rapid growth obser ved during 2022 (Figure 39). Outstanding working capital and investment-related loans. Higher business loans accounting for the remaining 36 percent business loan growth rates within the banking system of total credit to the private non-financial sector, grew were observed across the financing, insurance, real 5.6 percent year-on-year as of June 2024. While this estate, and business services sector and the wholesale, was higher than the same period in 2023 (0.6 percent), retail, and hospitality sector, which grew 12.4 percent it was similar to the growth rate observed throughout and 10.5 percent year-on-year respectively, as of June 2024. The increase was supported by growth in both 2024. FIGURE 38 Credit to the private sector has continued to expand at a steady pace in 2024 Annual growth of outstanding loans to households and businesses, Percentage 7 Household Loans, 6.2% 6 Total Outstanding Loans to Household and Businesses, 6.0% 5 Business Loans, 5.6% 4 3 2 1 0 07/2022 08/2022 09/2022 10/2022 11/2022 12/2022 01/2023 02/2023 03/2023 04/2023 05/2023 06/2023 07/2023 08/2023 09/2023 10/2023 11/2023 12/2023 01/2024 02/2024 03/2024 04/2024 05/2024 06/2024 Source: BNM 21 Refers to loans by the banking system, development financial institutions (DFIs), and corporate bonds issued by non-financial corporations (including short- term papers). 22 Household debt includes loans from banks and development financial institutions (DFIs). To note, the household debt-to-GDP ratio stood at 84.2 percent as at Dec 2023 (Source: BNM). MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 43 PART ONE - Recent Economic Developments and Outlook FIGURE 39 Household loan applications and loan disbursements remained relatively stable over the past 18 months Household loan applications and disbursements, RM billion 300 250 200 150 100 50 0 06/2020 09/2020 12/2020 03/2021 06/2021 09/2021 12/2021 03/2022 06/2022 09/2022 12/2022 03/2023 06/2023 09/2023 12/2023 03/2024 06/2024 Loan applications Loan disbursements Source: BNM Corporate financing through capital markets has remained robust Bond and sukuk markets remained a stable funding stood at RM53.0 billion, with corporates issuing a source for the Malaysian government and a select net RM11.6 billion and the government issuing a net set of Malaysian corporates. Capital raising through RM41.4 billion. 23 While the government accounted bond and sukuk markets totaled RM251.7 billion in for the bulk of the new capital raising activity, 100 H1 2024, up from RM216.9 billion during the same Malaysian corporates raised RM52.2 billion in these period in 2023. After factoring in redemptions, markets (Table 3). While the volume of corporate debt total net issuances of bonds and sukuk for H1 2024 issuance was comparable to that observed over the TABLE 3 Capital raising activity in the Malaysian capital markets remained robust Debt (Bond and Sukuk) Fundraising Equity Fundraising Value of funds raised Value of funds raised Number of Number of Period (RM billion) (RM billion) Companies Corporate Number Undertaking Debt Secondary of IPOs Government Corporate IPO Secondary Issuers Issuances Issuances 2021 263.1 114.3 121 2.8 14.3 25 237 2022 281.8 153.3 142 3.5 22.6 32 110 2023 429.2 118.3 149 3.6 5.8 31 134 H1 2024 199.5 52.2 100 2.2 4.2 21 46 Source: BNM, SC, Bursa Malaysia, BIX Malaysia and Bloomberg 23 Source: SC Bond and Sukuk Statistics and Quarterly Reports. 24 Source: SC’s Quarterly Report, 2nd Quarter 2023. 25 Source: Bursa Malaysia H1 2024 Financial Results. 44 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook same period in 2023 (H1 2023: RM52.4 billion), more (LEAP) market. The robustness of IPOs in Malaysia is corporates raised capital in the marketplace (H1 2023: in contrast with trends in the broader Southeast Asian 84 corporates). 24 Among corporates, firms in the region. For instance, Indonesia, Philippines, Singapore, finance, insurance, real estate, and business services Thailand, and Vietnam combined witnessed a 21 percent sectors accounted for 62 percent of the new bond and drop in IPOs and a decline of 59 percent in total capital sukuk issuances in H1 2024, with RM37.2 billion in new raised from IPOs in H1 2024 compared to H1 2023. The issuances. value of equity fundraising by listed corporates has also remained comparable to levels seen in 2023, but well Malaysian corporations have also continued to raise below the peak volumes observed during 2021-2022. equity capital in domestic markets. In H1 2024, there For instance, corporates raised RM4.2 billion during H1 were 21 initial public offerings (IPOs) on Bursa Malaysia 2024, matching the RM4.2 billion for H1 2023. However, (H1 2023: 16), with capital raising totaling RM2.2 billion significantly fewer corporates went to raise equity (H1 2023: RM2.3 billion).25 Out of these IPOs, 16 took in the marketplace, with 46 corporates in H1 2024 in place on the ACE Market, four on the main market, and comparison with 83 corporates in H1 2023. one on the Leading Entrepreneur Accelerator Platform Equity and bond market capitalization reached an all-time high The total stock market capitalization increased by 12.9 percent since the end of 2023 to an all-time Malaysia’s benchmark high of over RM2.0 trillion. Malaysia’s benchmark FTSE Bursa Malaysia FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBMKLCI) outper formed the other key ASEAN Kuala Lumpur Composite markets, with a 9.3 percent gain during H1 2024 Index outperformed (Figure 40). Globally, the MSCI All-Country World Index advanced 10.3 percent during the same period, the other key ASEAN amid the continued recovery trajectory of the global markets. economy, with developed market equities (MSCI World Index: 10.8 percent gain in H1 2024) outperforming their emerging market counterparts (MSCI Emerging Malaysia’s bond and sukuk market capitalization Markets Index: 6.1 percent gain in H1 2024). also expanded in H1 2024. The total outstanding value of bonds and sukuk as of June 2024 stood at T he increase in domestic eq uity market RM2.1 trillion, an increase of 2.6 percent from the capitalization was broad-based. Domestically, 12 out end of 2023 (Figure 42). This growth is comparable to of 13 sectors tracked on Bursa Malaysia registered gains the growth in capitalization in local currency of bond in H1 2024 (Figure 41). The best-performing sectors markets in the Philippines (1.9 percent), but lower than were construction (37.4 percent gain) and utilities (34.9 in Indonesia and Singapore (6.1 percent and 5.4 percent percent gain), both of which are expected to benefit from respectively). The government accounted for more than new orders for data centers.26 Property (25.4 percent half of Malaysia’s total value outstanding debt (RM1.2 gain) followed suit amid indications of improvements in trillion), while corporates accounted for RM848.3 Malaysia’s real estate market. Turnover was also higher billion. 27 As noted above, government issuances in H1 2024, with daily value traded averaging RM3.5 accounted for about 80 percent of the capital-raising billion compared to RM2.1 billion in H1 2023. activity during H1 2024. 26 See for example, https://www.thestar.com.my/business/business-news/2024/04/04/huge-orders-forecast-to-drive-building-industry and https://www. bloomberg.com/news/articles/2024-05-29/ai-buzz-political-calm-woo-foreigners-back-to-malaysian-stocks. 27 Source: BNM and BIX Malaysia. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 45 PART ONE - Recent Economic Developments and Outlook FIGURE 40 Malaysia’s FBMKLCI outperformed other key ASEAN countries in H1 2024 Percentage change since 31 December 2023, as of 30 June 2024 18.3 14.5 10.8 10.3 9.3 8.9 8.9 6.1 5.6 5.4 2.9 2.3 -0.3 -0.6 -0.9 -2.9 -8.1 Japan US (S&P 500) MSCI World Index (Developed Markets) MSCI All-Country World Index Malaysia (FBMKLCI) Hong Kong SAR, China Germany MSCI Emerging Markets Index Korea, Rep. Singapore Australia China (Shanghai) Philippines France Indonesia Thailand UK Source: Bloomberg FIGURE 41 Bursa Malaysia indices and sectors registered broad-based gains in H1 2024 Change in stock indices, Percentage FBM KLCI 9.3 FBM Mid 70 22.1 FTSE Bursa Malaysia Index Series FBM Small Cap 18.0 FBM Fledgling 9.5 FBM ACE 8.5 Construction 37.4 Utilities 34.9 Property 25.4 Technology 20.5 Transport & Logistics 19.0 Energy 16.8 Bursa Malaysia Sector Indices Industrial Products & Services 13.2 Healthcare 12.2 Consumer Products 9.6 Financial Services 7.1 Real Estate Investment Trusts 5.6 Telecommunications & Media 4.6 Plantation -0.4% Source: Bursa Malaysia Note: Percentage change since 31 December 2023, as of 30 June 2024 46 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook FIGURE 42 Malaysia’s debt and equity market capitalization grew to all-time highs Outstanding debt and equity market capitalization, RM billion 4,500 4,000 3,500 1,216 1,175 3,000 968 1,067 2,500 848 773 804 837 2,000 1,500 1,000 2,028 1,789 1,736 1,796 500 0 2021 2022 2023 H1 2024 Equity (Market Capitalization) Govt Bonds and Sukuk (Value Outstanding) Corporate Bonds and Sukuk (Value Outstanding) Source: SC Corporate and sovereign yields remained broadly corporate bonds (Corp-AAA) have been on a modest stable despite volatility in U.S. Treasury (UST) downward trend since 2023 but appear to have markets, while corporate spreads narrowed. Yields stabilized throughout 2024 (June 2024: 4.1 percent). on 10-year Malaysian Government Securities (MGS) Overall, Malaysian bond yields have been detached have remained in a tight range since 2023 and stood from the trend in yields in UST markets, which have at 3.9 percent at the end of June 2024 (end of 2023: been on an upward trend since 2022. 3.7 percent) (Figure 43). Yields on AAA-rated Malaysian FIGURE 43 Malaysian bond yields remained broadly stable despite volatility in 10-year UST yields Bond yields and credit spread, Percentage 6 Fed Funds Effective Rate 5 UST 4 Corp-AAA MGS 3 BNM Overnight Policy Rate 2 1 Spread: Corp-AAA vs MGS 0 03/2021 06/2021 09/2021 12/2021 03/2022 06/2022 09/2022 12/2022 03/2023 06/2023 09/2023 12/2023 03/2024 06/2024 Source: BIX Malaysia, Board of Governors of the Federal Reserve System (US), BNM MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 47 PART ONE - Recent Economic Developments and Outlook Bond markets continued to attract foreign capital amid outflows in equity markets Malaysian capital markets attracted foreign net offset net outflows from the equity market of US$172.6 inflows of US$18.4 million in H1 2024 (Figure 44A). million. The equity outflows of the past months are Inflows into the bond market have been decelerating broadly in line with other regional peers (Figure 44C). since early 2023, but rebounded in Q2 2024, mirroring Foreign ownership of Malaysian equities has declined trends in other key ASEAN countries (Figure 44B). The slightly from 20.7 percent at the end of 2020 to 19.7 first six months of the year registered net inflows into percent in June 2024. Malaysian bonds of US$191.0 million, which helped FIGURE 44A Overall foreign portfolio flows into Malaysia remained in line with comparator ASEAN countries and historical trends Quarterly net purchases of equities and bonds by foreigners, US$ billion 6 5 4 3 Philippines 2 1 Malaysia 0 -1 Thailand -2 Indonesia -3 -4 -5 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 FIGURE 44B FIGURE 44C Bond inflows ticked higher in Q2 2024 Equity flows remained stable in H1 2024 Quarterly net purchases of bonds by foreigners, US$ billion Quarterly net purchases of equities by foreigners, US$ billion 5 4 4 Philippines 3 3 2 2 Malaysia 1 1 Indonesia 0 Thailand 0 Malaysia -1 -2 Philippines -1 Thailand -3 -2 Indonesia -4 -5 -3 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q2-2024 Source: Bloomberg28 28 Philippines Q3 2023 and Q4 2023 bond and total portfolio flows were not reported as data for July 2023 and October 2023 is not readily available. 48 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook Meanwhile, the Malaysian ringgit experienced a improved investor sentiment on the back of better- strong rebound, appreciating 11.4 year-to-date than-expected economic data in 2Q 2024, the easing against the USD percent as of September 27 of US monetary policy, and coordinated initiatives from (Figure 45). This makes the ringgit one of the best the government and BNM with government-linked performing currencies in the region this year, following companies (GLCs) and GLICs to encourage inflows into a depreciation of 3.9 percent in 2023 (Figure 46). Much the foreign exchange market. of the appreciation began in July 2024, largely reflecting FIGURE 45 FIGURE 46 The ringgit appreciated 11.4 percent year-to-date ...making it one of the best performing currencies against the USD in September... in the region this year USD/MYR exchange rate, YTD change, Percentage Regional currencies against the USD, YTD change, Percentage July 19: Release of preliminary Q2 2024 GDP August 2: Release of July 2024 U.S. labor statistics August 16: Release of Q2 2024 GDP estimates September 18: U.S. Federal Reserve rate cut MYR +11.4 -3.9 14 THB 12 10 SGD 8 IDR 6 4 CNY 2 PHP 0 KRW -2 -4 JPY -6 TWD 29/12/2023 19/01/2024 09/02//2024 01/03/2024 22/03/2024 12/04/2024 03/05/2024 24/05/2024 14/06/2024 05/07/2024 26/07/2024 16/08/2024 06/09/2024 27/09/2024 -8 -6 -4 -2 0 2 4 6 8 10 12 YTD change 2023 change Source: World Bank staff calculations based on BNM data Source: World Bank staff calculations based on BNM data Note: YTD as of 27 September 2024 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 49 PART ONE - Recent Economic Developments and Outlook The federal government undertook efforts to rationalize subsidies in the first half of 2024 Total federal government revenue increased in percent), given the lower investment income during the 2023 due to higher tax collections. Actual federal year (2023: 3.1 percent of GDP, 2022: 3.2 percent). government revenue increased to 17.3 percent of GDP in 2023 (2022: 16.4 percent), with higher corporate Federal government operating expenditures tax collection partly attributed to the Prosperity Tax increased in 2023, with higher spending on which generated RM6 billion or 0.3 percent of GDP in subsidies and social assistance. Operating revenue last year29 (Figure 47). Petroleum income tax expenditure increased to 17.1 percent of GDP (2022: also recorded a slight increase to 1.4 percent of GDP 16.3 percent) due to higher spending on subsidies and in 2023 (2022: 1.3 percent) amid the depreciation of social assistance programs. Overall spending on these the ringgit during the year, despite lower global oil programs increased to 4.3 percent of GDP in 2023 (2022: prices and stable productions of petroleum products.30 3.8 percent), mainly due to the delayed implementation Meanwhile, indirect tax collections saw a slight increase, of the targeted fuel subsidy mechanism. This figure with proceeds from SST rising from 1.7 percent of exceeds the government’s estimate of 3.5 percent of GDP in 2022 to 1.9 percent in 2023, partially offset GDP for 2023 as indicated during the tabling of Budget by lower collections from other indirect taxes such as 2024 and its initial budgeted amount of 3.1 percent export and import duties. Non-tax revenue registered (Figure 48). a slight decline in 2023 at 4.7 percent of GDP (2022: 4.8 FIGURE 47 FIGURE 48 Total federal revenue increased in 2023 primarily Actual spending on subsidies and social assistance due to higher corporate income tax collections programs in 2023 exceeded the government’s estimated and budgeted figures Changes in federal government revenue, Percentage of GDP Subsidies and social assistance Subsidies and social assistance programs, RM billion programs, Percentage of GDP 1.2 90 4.5 80 4.0 1.0 70 3.5 Total revenue 60 3.0 0.8 Corporate income tax 50 2.5 0.6 40 2.0 30 1.5 0.4 Petroleum income tax 20 1.0 Personal income tax 0.2 Other direct taxes 10 0.5 Sales and service tax 0 0 0 2022 2023 2023 2023 2024 Other indirect taxes budget estimate actual budget Non-tax revenue -0.2 RM billion % of GDP (RHS) Source: World Bank staff calculations based on MOF data  Source: World Bank staff calculations based on MOF data  Note: Other direct taxes include stamp duties, withholding taxes and real property gains taxes. Other indirect taxes include revenues related to import and export duties, excise taxes, and tourism tax. Non-tax revenues include interest and investment income, receipts from licenses and permits, and petroleum royalties. 29 Higher corporate tax collection is mainly attributed to the Prosperity Tax and strong business activities in the petroleum-related and banking sectors. Under the Prosperity Tax, companies with taxable income exceeding RM 100 million were subject to an additional 9 percent on the corporate tax rate. 30 The exchange rate for MYR/USD was 4.41 in 2022 and 4.59 in 2023 (Source: Bank Negara Malaysia). Malaysia’s daily petroleum and other liquids production remained stable in 2022 and 2023, averaging 603,000 and 597,000 barrels per day, respectively (Source: U.S. Energy Information Administration). During the same period, the global prices for Brent crude oil were USD 100.9 per barrel in 2022 and USD 82.5 per barrel in 2023, indicating an approximately 18 percent annual decline in average oil prices (Source: U.S. Energy Information Administration). 50 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook In 2024, the government anticipates lower could pursue a broader scale of subsidy rationalization, spending on subsidies and social assistance with increased targeted transfers to offset its impact on programs, following the implementation of several inflation and the vulnerable segments of the population. subsidy rationalization initiatives. During the tabling of the Budget 2024, the government announced its The share of rigid operating expenditure is expected plans to cut subsidies and social assistance programs to rise due to the government’s announced salary by RM11.5 billion (0.6 percent of GDP)31 to RM52.8 adjustments. Rigid spending, which includes payments billion (2.7 percent of GDP) in 2024. The government for salaries, pensions, and debt service charges, has has since implemented diesel subsidy rationalization generally been on an upward trend as a share of total that is estimated to generate about RM4 billion in operating expenditures over the years (Figure 49). These annual savings 32 (0.2 percent of GDP). It has shown structural expenditures are likely to increase further, some initial positive impacts in addition to fiscal mainly driven by higher spending on emoluments. The savings. These include reduced signs of smuggling and salary adjustments for civil servants announced recently increased consumption of commercial diesel by the are projected to add roughly RM10 billion annually industrial sector instead of subsidized retail diesel.33 (about 0.5 percent of GDP or 10.5 percent of budgeted Selected sectors have been approved to purchase emoluments in 2024) to emolument (See Box 4 on diesel at subsidized rates to mitigate the impact on Reforming the Public Sector Remuneration System). domestic prices. 34 The government also rationalized In the long term, higher emoluments are expected subsidies for chicken and electricity for heavy domestic to increase future pension liabilities, highlighting the users. 35 However, the government’s plan of scaling need for a defined contribution scheme for newly hired back subsidies to the extent indicated during Budget civil servants - as announced by the government - to 2024 will not be fully realized without some degree of manage such liabilities more effectively.37 rationalization of the RON95 subsidy.36 The government 31 GDP refers to the 2024 forecasted nominal GDP as stated in the 2024 Fiscal Outlook and Federal Government Revenue Estimates (Source: Ministry of Finance). 32 With its implementation on June 10, 2024, the prorated savings are estimated to be approximately RM2.2 billion for 2024 (Source: Ministry of Finance and World Bank staff calculations). 33 Retail diesel sales at petrol stations decreased by 8 million liters, or approximately 30 percent, in the first week following the announcement of the diesel price float compared to the week before. In contrast, commercial diesel sales increased by about 4 million liters during the same period. The MOF suggests that these changes in diesel consumption patterns indicate that some industrial sectors, which should be purchasing diesel at market prices, may have been consuming subsidized retail diesel. Diesel sales at the border also declined by 40 percent (Source: MOF, July 1, 2024). 34 Fishermen will benefit from the lowest diesel rate at RM1.65 per liter, followed by RM1.88 per liter for land public transport under the Subsidized Diesel Control System (SKDS) 1.0, and RM2.15 per liter for eligible logistics vehicles through a fleet card mechanism under SKDS 2.0. Additionally, under the Budi Madani cash assistance scheme, eligible individuals, small farmers, and smallholders with non-luxury diesel-powered vehicles will receive a monthly aid of RM200 (Source: MOF, June 9, 2024). 35 In early 2024, the government removed the rebate for households consuming between 600 kilowatt-hours (kWh) and 1,500 kWh of electricity monthly, translating to a bill of between RM220 and RM707. These households will no longer qualify for the RM0.02 per kWh rebate. In July 2023, the government introduced a surcharge of RM0.10/kWh for domestic consumers using high levels of electricity, exceeding 1500 kWh, which corresponds to a minimum monthly electricity bill of RM708. For commercial users, the surcharges associated with electricity usage were reduced in the second half of 2023 and again in the second half of 2024. 36 To date, the government has announced several subsidy rationalization programs estimated to incur approximately RM7.9 billion (0.4 percentage of GDP) in fiscal savings for 2024. These include the rationalization of the diesel subsidy (RM2.2 billion, 0.11 percentage of GDP), the removal of the chicken subsidy (RM1.2 billion, 0.06 percentage of GDP), and the implementation of a targeted electricity subsidy (RM4.5 billion, 0.23 percentage of GDP) (Source: MOF and World Bank staff calculations) 37 Source: April 2024 Malaysia Economic Monitor: Bending Bamboo Shoots: Strengthening Foundational Skills MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 51 PART ONE - Recent Economic Developments and Outlook BOX 4 Reforming the public sector remuneration system As part of a reform of the public sector remuneration follows: a 15% increase for those in the Implementing, system, all civil servants will have their salaries Management, and Professional groups, and a 7% increased in two phases, starting 1 December increase for the Top Management group (see Table 4). 2024. The salary adjustments are part of a broader job and pay grading reform aimed at addressing long- The salary adjustments are expected to alleviate standing issues of fairness and equity in the civil service. cost-of-living pressures, reduce internal inequities, The revamped Public Service Remuneration System and enhance public sector productivity. Although (Sistem Saraan Perkhidmatan Awam, SPPA) will replace civil servants have received an annual 3% salary increase the Malaysian Remuneration System (Sistem Saraan since 2015, this marks the first comprehensive structural Malaysia, SSM), and revise the salaries for the nation’s review of civil service compensation in 12 years (Stratsea, 1.6 million civil servants. The adjustments will be as 2023). This reform specifically targets weaknesses in TABLE 4 Phases and Scales of Salary Adjustments for Civil Servants Under the SSPA Implementing, Management and Top Management Group Professional Groups Phase 1 (1 December 2024) 8% 4% Phase 2 (1 January 2026) 7% 3% Total increase from both phases 15% 7% Source: PMO, 2024. 52 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook the existing wage policies, ensuring that adjustments Effective measures should be instituted to reward better align with job roles and performance. Therefore, performance while maintaining the aggregate this restructuring is seen as timely and could ease living wage bill. World Bank (2021)38 provides a detailed costs for civil servants while potentially encouraging roadmap for designing effective performance the private sector to follow suit (Tan, 2024). The higher management systems. In addition, performance adjustments for the Implementing, Management, and measurement rules should be established clearly Professional groups, compared to Top Management, and transparently to ensure consistency, remove may also help address internal inequities. Additionally, distortions and motivate workers. the salary hike will benefit teachers and healthcare workers, who have faced challenges due to low salaries 3. Strengthen remuneration oversight: Currently, and heavy workloads (NST, 2023; The Star, 2024). The the Remuneration Division of the Public Service Prime Minister has emphasized that the new system will Depar tment has the mandate to formulate, be performance-based, which could boost productivity implement, and monitor the management of the and efficiency in the civil service. However, details on government’s remuneration system. Its functions how performance will be measured and rewarded are can be strengthened in three ways: still pending. • First, by regularly researching and analyzing A well-designed remuneration system can yield civil service pay and benefits, both on internal positive outcomes within fiscal constraints. With equity and on competitiveness with the over RM10 billion (about 0.5 percent of GDP) allocated private sector. In Ireland, the Public Sector Pay for the salary hikes and Malaysia’s fiscal limitations, it Commission not only reviews public sector is crucial that the new remuneration system is well- wages policies within the local labor market but planned to address civil servants’ needs in a fiscally additionally takes into account the international responsible and sustainable manner. Thus, it is competitiveness of wages, especially for imperative to strengthen the civil service performance internationally traded skill sets. management system and implement a compensation framework that is in line with the future needs of the • Second, the division should be strengthened government. Several measures can be undertaken to to advise on job evaluation and wage systems, achieve this: including, for example, to ensure that base pay is linked to job complexity. When large 1. Ensure the upcoming reform includes a rigorous gaps emerge between the de jure job and review of public sector wage policies: Conduct pay grading structure and the evolving a thorough review of public sector wage policies requirements of jobs, ad hoc allowances usually to identify the drivers of emolument growth, and creep into the system, making wage policies then develop an evidence-based reform roadmap opaquer and weakening the importance of with phased measures to restore equity across base wage in total compensation. Countries occupations within the public service and ensure such as Ireland, Switzerland, and Germany have competitiveness with the private sector. routinely revised the job and pay structures for their civil service, resulting in base wages 2. Strengthen performance management and accounting for 98 percent, 94 percent, and 92 incentives: Ensure that performance management percent, respectively. systems, including evaluations are effectively designed to differentiate between high and low • Third, developing a formal mechanism for per formers. Career advancement and salar y providing periodic cost-of-living adjustments increases should be systematically linked to to salaries that not only accounts for labor performance, and not driven by seniority, tenure, market conditions and realized inflation rates or political pressure. This includes aligning but also government fiscal space to provide organizational and individual goals, using diverse legitimacy to government pay reform while information sources for assessments, and motivating remaining fiscally sustainable. staf f with intrinsic and extrinsic incentives. 38 World Bank. 2021. Performance Management in the Public Administration — Seven Success Factors. EFI Insight-Governance. Washington, DC: World Bank. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 53 PART ONE - Recent Economic Developments and Outlook Malaysia allocates a higher portion of its fiscal transportation, education, defense and security, and resources to emoluments compared to its peers. health sectors (Figure 51). DE has increased in recent Malaysia’s emoluments are comparable to those of years in line with higher allocations as outlined in the regional peers and lower than those of aspirational Malaysia Plans. The recent DE expenditure levels are peer groups when expressed as a percentage of GDP, higher than those of regional peers (3 percent of GDP) in line with the country’s lower fiscal revenue39 (Figure but below to those seen in aspirational countries (5 50). However, when measured as a share of total public percent of GDP)41. Out of the RM415 billion allocated expenditure, Malaysia’s emoluments are higher than under the 12th Malaysia Plan (12MP) for DE, 56 percent those of its peers. Emoluments tend to be rigid due has been utilized within the first three years.42 In to the often-sticky nature of wage bill expenditures. the past, challenges in DE have stemmed from This rigidity could constrain fiscal resources for other inefficiencies in executing allocated budgets, with gaps operating and development expenditures, particularly in budget planning and fragmented implementation amidst fiscal consolidation efforts, unless there are of development programs.43 This fragmentation arises increased efforts to enhance revenue mobilization. in part from Malaysia’s institutional arrangements where various implementing agencies fall under the Federal government development expenditures jurisdiction of either the federal or state governments.44 are higher than those of regional countries but Additionally, the already high debt levels nearing the below to those seen in aspirational countries. Gross debt ceiling may restrict the government’s ability to development expenditure (DE) in 2023 was 4.6 percent increase borrowings to fund further development of GDP40, with the figure forecasted to be 4.6 percent spending (Figure 52). in 2024. More than half of the DE is allocated for the FIGURE 49 FIGURE 50 The share of rigid spending has increased over Malaysia allocates a higher portion of its fiscal time spending to emoluments compared to its peer groups Rigid expenditures, Percentage of total operating expenditure Emoluments, Percentage of GDP Emoluments, Share of total expenditures 70 10 26 60 58.6 24 54.8 55.3 8 22 50 20 6 40 18 30 4 16 20 14 2 10 12 0 0 10 Malaysia Regional Aspirational 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024f Emoluments as share of total expenditure (RHS) Emoluments Pension Debt service charges Emoluments as % of GDP Source: World Bank staff calculations based on MOF data Source: World Bank staff calculations based on MOF data Note: The lower share of rigid spending since 2022 reflects the increase in Note: Refer to the 2021 World Bank Aiming High: Navigating the Next Stage overall operating expenditure, mainly from higher spending on fuel subsidies of Malaysia’s Development for the complete list of peer groups. The figures above reflect the average for years 2021-2022 39 On revenue analysis, please refer to the October 2023 World Bank Malaysia Economic Monitor, “Raising the Tide, Lifting All Boats.” 40 Excluding payments related to the redemption of the 1MDB bond. 41 The figures for regional and aspirational peers reflect the average of 2021 to 2022. 42 The utilization rate of development expenditure under the 11th Malaysia Plan was 55% for the first three years, with an overall utilization rate of 96%. 43 2017 Public Investment Management Assessment (PIMA) exercise conducted by the IMF and the World Bank highlighted that the absence of multi-year budgeting complicates effective capital investment planning for line ministries. 44 Source: Malaysia Voluntary National Review (2021). 54 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook FIGURE 51 FIGURE 52 Transportation, education, defense and security, Federal government debt increased over the and health sectors are the largest recipients of DE years with a larger share of debt that is binding to by sector the current statutory limit Development expenditure, Percentage of GDP Federal government debt, Percentage of GDP 7 70 6 65 FRA debt limit 60 5 Statutory limit 55 4 50 3 45 2 40 1 35 0 30 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024f Transport Education Others Statutory debt Non-statutory debt Defence and security Health Source: World Bank staff calculations based on MOF data  Source: World Bank staff calculations based on MOF data  Note: The 2023 figure excludes payments related to the redemption of the Note: The statutory debt refers to the outstanding amounts for MGS, 1MDB bond amounting to US$3 billion (approximately RM13 billion or 0.7 Malaysian Government Investment Issues (MGII), and Malaysian Islamic percent of GDP) Treasury Bills (MITB) at the end of the corresponding years. These are the only debt instruments that are subject to the latest statutory limit of 65 percent of GDP under the Loan (Local) (Statutory Ceiling for Borrowing) and Government Funding (Statutory Ceiling of Moneys Received) Order 2022 [P.U. (A) 399/2022], effective 1 January 2023. Meanwhile, other debt include offshore borrowings and Malaysian Treasury Bills (MTB) are governed under the External Loans Act 1963 [Act 403] and Treasury Bills (Local) Act 1946 [Act 188], respectively. The Public Finance and Fiscal Responsibility Act 2023 (FRA) stipulates a debt ceiling of 60 percent of GDP, which will become effective in the medium term covering all federal government debt instruments. Higher federal government debt highlights the need for continued fiscal consolidation in Malaysia The federal government debt-to-GDP ratio FIGURE 53 increased in 2023 as deficits continued to add to The government is expected to remain on its the debt stock. The overall fiscal deficit declined fiscal consolidation path  to 5.0 percent of GDP in 2023 (2022: -5.6 percent), Fiscal balances, Percentage of GDP with the forecast for 2024 projected at 4.3 percent 0 of GDP. The primary balance mirrors the trend of -1 the overall fiscal deficit, registering -2.5 percent of Primary -2 balance GDP in 2023 (2022: -3.2 percent), and is forecasted to decline to -1.8 percent of GDP in 2024 (Figure 53). -3 Meanwhile, outstanding federal government debt -4 Overall scal rose to 64.3 percent of GDP in 2023, up from 60.2 -5 balance percent in 2022, as the additions to debt stock from -6 deficits outpaced nominal growth. The higher debt ratio underscores the need for Malaysia to persist with -7 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024f its fiscal consolidation efforts to ensure debt is on a firmer downward trajectory. Source: World Bank staff calculations based on MOF data  MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 55 PART ONE - Recent Economic Developments and Outlook BOX 5 Future-proofing Malaysia’s public finances A forward-looking fiscal strategy is crucial to building broad support for fiscal reforms in Malaysia. Structural fiscal reforms to enhance revenue mobilization and spending efficiency are needed to durably finance Malaysia’s current and future spending needs while improving its fiscal position. However, they are among the most politically difficult reforms the government can undertake, especially if they involve rationalizing entrenched spending and raising broad-based taxes. To build trust and generate broad support for such reforms, the government could consider formulating a longer-term fiscal strategy based on a more forward view of structural fiscal trends. This box provides more detail on this thinking across five key building blocks for a forward-looking fiscal strategy in Malaysia, as presented in Figure 54 below: FIGURE 54 Five key building blocks for a forward-looking fiscal strategy in Malaysia Assessing structural fiscal trends 1 to shape a vision for fiscal reform Establishing the required scale of fiscal reform 2 as the basis for discourse on reform options and trade-offs Formulating the optimal mix of fiscal instruments to enhance spending efficiency and revenue mobilization 3 Medium-term Medium-term Expenditure Framework Revenue Strategy Addressing the distributional impacts of fiscal reform 4 and increasing the progressivity of the fiscal system 5 Enhancing policy communication with a credible fiscal reform narrative 1. Addressing adverse structural headwinds will require more spending… Taking a longer view of public finances can strengthen the case for fiscal reform. Structural headwinds of population aging, slowing productivity growth, changing climate and an increasingly uncertain geopolitical landscape have profound implications for Malaysia’s fiscal trajectory. For example, World Bank projections indicate that Malaysia’s age-related public expenditures will increase by up to 0.8 percent of GDP yearly between 2023 and 2030, and by an additional 0.5 percent of GDP every year by 2035, and adaptation measures to increase flood resilience could cost up to 0.2 percent of annual GDP.45 Significant development spending to enhance both human and physical capital is also essential to boost productivity growth and facilitate Malaysia’s transition to a high-income nation in coming years. Such structural expenditure pressures will continue to grow over time and place significant demands on Malaysia’s public finances in the not-too-distant future, and thus it becomes vital to measure and plan for them as most advanced countries do. 45 World Bank and BNM, 2024, Managing Flood Risks: Leveraging Finance for Business Resilience in Malaysia. 56 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook 2. ...clarifying spending needs can help ascertain the scale of fiscal adjustment The desirability of potential reform options varies considerably depending on the extent of fiscal reform required. Once a funding gap is established, explicit revenue and spending targets (e.g., a certain percentage of GDP by 2030) could be set based on the magnitude of the current and future spending needs. The options for achieving the targets could be made public to better inform policymakers and citizens about the relative merits and trade-offs of different reform options in achieving the targets. This, in turn, could help anchor, rationalize and discipline the process of fiscal reform, promote accountability and good governance of fiscal policymaking, and thereby build trust in the government and foster stability in policy implementation. 3. ...which in turn can better help formulate an optimal mix of fiscal instruments Integrating a forward-looking approach to budget planning and tax reform into the existing Medium-Term Expenditure Framework (MTEF) and the Medium-Term Revenue Strategy (MTRS) can help overcome shortcomings of annual budgeting by achieving budget realism, ensuring spending is driven by medium-term sector strategies, and creating greater fiscal transparency and accountability.46 Similarly, a more forward-looking tax reform roadmap enables the government to have greater clarity of its likely revenues over a meaningful planning period, consistent with structural spending needs to support economic and social development. Taxpayers will have greater certainty on how they will be treated and what the tax implications of their decisions will be. It will also help identify coherent and well-sequenced changes to tax policy, administration, and the legal framework to leverage synergies across the three pillars.47 4. ...but it is equally important to both measure and address the distributional impact of fiscal reform Designing effective compensation mechanisms to offset the impact of fiscal reforms on vulnerable groups requires systematic analysis of the distributional effects of taxes and spending. Regressivity concerns around fiscal reforms are well-recognized in Malaysia and should be addressed with visible, actionable measures. By using a systematic fiscal incidence analysis, different revenue and spending combinations could be assessed for their net distributional effects to inform which option best achieves both development and equity objectives. The government can then consider devising a medium-term plan—with explicit targets and concrete, visible measures—to increase the share of public spending benefiting targeted groups and enhance the progressivity of the overall fiscal system.48 5. ...effective policy communication is key for broad-based public support and buy-in Transparent communications that address stakeholder concerns and highlight the long-term benefits of reform are essential to securing broad-based political support. 49,50 Public acceptance and support for fiscal reform are often driven by the extent to which taxpayers (and citizens more broadly) believe the government is putting public resources to good use and whether the fiscal system is considered fair and equitable. Accordingly, credible and easy-to-understand information on how fiscal systems work and the need for reform is an important component of effective communication.51 Highlighting structural weaknesses of the current fiscal system, realistic long-term benefits of reforms, and planned mitigation measures for the vulnerable through strategic communications can also counteract negative narratives that might otherwise take hold. By considering the biases and other psychological factors that shape decision-making, addressing stakeholder concerns, and correcting misconceptions proactively, these communications can build a broader base of support and help overcome vested interests. 46 World Bank, 2012, What Are MTEFs and What Can They Do?. Washington, DC: The World Bank 47 Breuer, Luis E., Jaime Guajardo, and Tidiane Kinda, eds. 2018. Realizing Indonesia’s Economic Potential. Washington, DC: International Monetary Fund. 48 The net fiscal impact on poorer households from the new taxes and spending would ideally be income increasing, while those in the middle of the distribution might be making new net payments but clearly benefit from new services, with the largest net contributions coming from the richest households. 49 Brys. B. (2011). Making fundamental tax reform happen. OECD Taxation Working Papers, No. 3, OECD Publishing, Paris. 50 Swistak, A., & de la Feria, R. (2024). Designing a Progressive VAT. IMF Working Papers, 2024(078), A001. 51 The International, Ibero-American Foundation for Administration, and Public Policies. Building Tax Culture, Compliance and Citizenship: A Global Source Book on Taxpayer Education: A Global Source Book on Taxpayer Education. OECD Publishing, 2015. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 57 58 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook Economic Outlook Despite improved near-term prospects, the global outlook remains subdued by historical standards  Global growth is projected to stabilize at 2.6 percent slower pace of expansion in economies comprising in 2024 despite ongoing geopolitical tensions and over 80 percent of the global population.  high interest rates (Figure 55). Advanced economies are expected to see aggregate growth remain at 1.5 The EAP region is projected to grow by 4.8 percent percent (2023e: 1.5 percent), though activity in key in 2024, slightly down from 5.1 percent in 2023, economies will continue to diverge. The U.S. is expected with domestic demand driving growth in most to see moderation in growth as the labor market slows, economies (Figure 56). In China, growth is expected while the Euro area and Japan anticipate a modest to slow to 4.8 percent in 2024 (2023: 5.2 percent), as a pickup with better domestic conditions. Growth in softening labor market and hence household incomes EMDEs is forecast to moderate slightly from 4.2 percent is likely to limit consumption while contraction in the in 2023 to 4.0 percent in 2024. While domestic demand property sector dampens investment. In the EAP growth is expected to slow in some large EMDEs due to region excluding China, growth is projected to rise to idiosyncratic factors, it is projected to pick up in many 4.7 percent in 2024 (2023e: 4.3 percent), with larger other economies. Global trade growth is expected to economies such as Indonesia, the Philippines, Thailand, reach 2.5 percent this year (2023e: 0.1 percent), driven and Vietnam, as well as smaller economies like by a rebound in global goods demand. Global inflation Mongolia, Cambodia, and Myanmar, benefiting from is anticipated to moderate more slowly than previously domestic consumption, goods exports, and a revival expected, averaging 3.5 percent this year, due to an in tourism. Over the next two years, growth in the EAP increase in aggregate commodity prices since late region is projected to continue moderating, reaching last year. Despite improvements, global growth over 4.2 percent in 2025 and 4.1 percent in 2026, as further the forecast horizon is expected to be nearly half a slowdown in China offsets modest pickups elsewhere percentage point below its 2010-19 average, with a in the region.  FIGURE 55 FIGURE 56 Global economic growth is expected to stabilize Growth in developing EAP is forecast to slow this in 2024 year GDP, y/y, Percentage GDP, y/y, Percentage 6 8 7 5 6 4 5 3 4 3 2 2 1 1 0 0 2023e 2024f 2025f 2023e 2024f 2025f 2023e 2024f 2025f 2023e 2024f 2025f 2023e 2024f 2025f 2023e 2024f 2025f World Advanced Emerging & Developing EAP Developing EAP China Economies Developing excl. China Economies Latest Estimates (June 2024) Latest Estimates (October 2024) Previous Estimates (January 2024) Previous Estimates (April 2024) Source: World Bank staff projections based on DOSM data Source: World Bank staff projections based on DOSM data MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 59 PART ONE - Recent Economic Developments and Outlook Malaysia’s economy is expected to expand at a faster pace in 2024 Following weaker-than-expected growth in 2023, manufacturing and services sectors. Government Malaysia’s economy is forecast to expand by 4.9 capital spending will focus on upgrading public percent in 2024 (2023: 3.6 percent). This represents infrastructure in transportation, health, and education. an increase of 0.6 percentage points from the earlier Additionally, public corporation investment activity will forecast in April 2024, reflecting stronger-than- be supported by strategic infrastructure projects such expected consumption, as well as increased investment as the ECRL, the Rapid Transit System (RTS) Link, and and trade activities in the first half of 2024 (Figure 58). the Sabah-Sarawak Pan-Borneo Highway. Private consumption is projected to rise by 5.5 percent this year, up from 4.7 percent in 2023 and 0.3 percentage Malaysia’s exports are set to benefit from a rebound points higher than the previous forecast, supported in global goods trade following exceptional weakness by further improvement in labor market conditions last year. After contracting by 8.1 percent in 2023, and wage growth, as well as continued government export growth is projected to recover to 5.9 percent household income support, including the Sumbangan this year, up from the previous forecast of 4.8 percent. Tunai Rahmah cash aid. Meanwhile, public consumption Malaysia’s exports of goods are expected to maintain is projected to grow at 3.9 percent this year, up from strong growth through H2 2024, driven by improved 3.3 percent in 2023. This growth is supported by annual global activity and goods trade, particularly in the salary increments for civil servants and higher spending technology sector. Additionally, the exports of services on supplies and services. will be bolstered by a continued rise in international tourist arrivals from the surrounding region, including GFCF is expected to grow at a faster pace of 7.4 China. Malaysia’s imports are expected to grow by percent in 2024 (2023: 5.5 percent), a significant 6.7 percent this year, marking a sharp rebound from a revision from the previous forecast of 5.1 percent. contraction of 7.4 percent in 2023. This increase is in This reassessment reflects stronger-than-expected line with the recovery of exports of goods, given the investment activity in private and public sectors in high share of intermediate inputs in Malaysia’s imports, H1 2024. Business investment will continue to be as well as continued consumer spending and sustained supported by ongoing multi-year projects and the investment activity. realization of recently approved investments in the FIGURE 57 FIGURE 58 Malaysia’s GDP growth is revised upward to 4.9 ...due to stronger-than-expected consumption, percent in 2024... investment and trade activities in H1 2024 Real GDP, y/y, Percentage Contribution to real GDP, y/y, Percentage 20 8 8.9 16 12 6 5.8 8 4.9 4.8 4.9 4 4 4.4 4.4 3.6 0 3.3 2 -4 -8 0 -12 -16 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024f -2 -4 Private Consumption Public Consumption -5.5 GFCF Change in Inventory -6 Exports Imports 2016 2017 2018 2019 2020 2021 2022 2023 2024f Real GDP,y/y Source: World Bank staff projections based on DOSM data Source: World Bank staff projections based on DOSM data 60 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART ONE - Recent Economic Developments and Outlook Headline consumer price inflation is projected inflation higher. These include potential domestic to moderate to around 2 percent in 2024 (2023: policy adjustments, such as changes to subsidies and 2.5 percent), 0.4 percentage points lower than price controls, which may affect broader price trends. the previous baseline forecast. The revision largely Moreover, volatility in global commodity prices and reflects softer global commodity prices and weaker- shifts in financial markets could also intensify inflationary than-anticipated passthrough effects of recent policy pressures. changes on inflation. However, several risks could drive TABLE 5 Malaysia’s GDP growth is expected to pick up in 2024 Real GDP Growth, y/y, Percentage Contribution to Real GDP Growth, y/y, Percentage point   2021 2022 2023 2024f     2021 2022 2023 2024f GDP 3.3 8.9 3.6 4.9     Domestic Demand Domestic Demand 3.8 9.5 4.7 5.4 3.6 9.0 4.4 5.1 (including stocks) (including stocks) Private Consumption 1.8 11.3 4.7 5.5 Private Consumption 1.1 6.6 2.8 3.3 Public Consumption 5.8 5.1 3.3 3.9 Public Consumption 0.8 0.7 0.4 0.5 Gross Fixed Capital Gross Fixed Capital -0.7 6.8 5.5 7.4 -0.1 1.4 1.1 1.5 Formation Formation External Demand External Demand Exports of Goods Exports of Goods 18.5 14.5 -8.1 5.9 11.4 10.3 -6.0 3.9 & Services & Services Imports of Goods Imports of Goods 21.2 16.0 -7.4 6.7   11.7 10.4 -5.1 4.1 & Services & Services Source: World Bank staff projections based on DOSM data Malaysia’s growth outlook is subject to downside risks Malaysia’s baseline growth projections face several stronger than expected, boosting global growth and external and domestic risks. On the external front, trade prospects. weaker-than-expected activity in advanced economies could depress sentiment and lower trade prospects. On the domestic front, the primary downside risks At the same time, escalating geopolitical tensions concern the strength of household consumption. could cause volatile commodity prices and further Potential factors include slower growth in real disposable trade fragmentation, disrupting trade and investment income and the lingering effects of post-pandemic networks. In the EAP region, China’s growth may monetary policy normalization, which could dampen underperform if a prolonged property sector downturn, private consumption more than currently assumed. rising debt, and weak sentiment hinder private Supply-side disruptions in commodity production, sector activity. Any of these risks could significantly potentially due to unfavorable weather conditions, impact Malaysia due to its global trade and financial could also impede growth. On the upside, stronger- connections. On the upside, faster-than-expected than-expected private investment and robust tourism global disinflation could lead to faster monetary policy activity suggest that domestic economic performance easing, and growth in the major economies could be could be more robust than currently projected. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 61 62 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 63 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies As Malaysia aspires to achieve high-income status, it needs to implement policy reforms to This chapter explores the transform its agriculture sector into a sustainable current state of agriculture growth engine. According to the Government’s Vision in Malaysia and the potential strategy52, Malaysia’s agrofood system aims to achieve three key objectives: (i) become a highly competitive impact of DAT on the and innovative globally; (ii) increase the wellbeing and nation’s food security and inclusivity of food producers while supplying affordable and nutritious food to consumers; and (iii) reduce economic development. environmental footprint of the sector. As Malaysia is gearing up to achieve this vision, addressing the of DAT on the nation’s food security and economic challenge of imbalance between food demand and development. It examines agriculture’s role in the supply remains a critical priority, especially in light of Malaysian economy and the challenges it faces, before changing demand for food driven by urbanization. delving into the potential role of DAT in addressing Addressing this imbalance requires reducing transaction challenges facing the sector. It does so by presenting the costs and information asymmetries that negatively benefits of DAT on increased agricultural productivity, affect farmers’ decisions regarding inputs, land, labor, improvements in labor conditions and wages, enhanced capital, and outputs. It also impacts consumers’ choices equity, strengthened export competitiveness, and about food attributes, including prices, production support for climate adaptation and mitigation efforts. practices, and environmental impacts. High transaction It presents a strategic framework on how to scale up costs are significant barriers in agricultural supply DAT adoption based on international experiences. The chains, often excluding farmers from profitable markets paper concludes with actionable recommendations and contributing to information asymmetry.  to reinforce three foundational pillars: public goods investment, innovation ecosystem development, and Digital agricultural technologies present a the creation of an enabling environment. This approach transformative opportunity for Malaysia’s aims to position Malaysia at the forefront of agricultural agriculture sector, offering solutions to both supply innovation, addressing both supply-side efficiencies and demand challenges while supporting broader and demand-side dynamics to create a more resilient economic growth. This chapter explores the current and productive agriculture sector that can contribute to state of agriculture in Malaysia and the potential impact Malaysia’s economic growth.  52 National Agrofood Policy 2021-2030 (NAP2.0) 64 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies Transforming potential: The pivotal role of agriculture in Malaysia’s economic growth The agrofood sector plays a significant role in Malaysia, as an open economy, relies on exports to supporting Malaysia’s economy, contributing 11.6 drive economic growth and maintain trade balances. percent to the national GDP in 2023. Although the The agriculture sector, which includes key products like agrofood GDP share has declined by 3.9 percent since palm oil, rubber, and the agrofood sector, play a crucial 2010, the sector’s total value added grew by 4.0 percent role in the country’s exports portfolio (Figure 60). over the past decade. The agrofood industry’s average Agriculture has historically been a significant source yearly value added growth is projected at 4.5 percent of foreign exchange earnings, with agricultural raw in 2025 (2019: 3.1 percent), and further at 5.0 percent material exports growing by over 99.0 percent between in 2030. Projections also suggest that the sector will 1974 and 2022. Since 2011, the exports of food items contribute to 4.3 percent of GDP by 2030. About 1.87 specifically have increased by 12.0 percent. Malaysia’s million people were employed in the agriculture sector palm oil exports totaled 17.7 billion USD—31 percent of in 2023, contributing to approximately 10.0 percent global export—in 2022, positioning the country as the of the total Malaysian workforce, a sizeable share of world’s second-largest palm oil exporter. Malaysia’s workforce Food consumption in Malaysia is undergoing a Malaysia’s economy has shifted from resource- significant transition. On one hand, projected based agriculture in the 1960s to manufacturing by population increase from 33.4 million in 2023 to 38.9 the late 1980s (Figure 59). The share of agricultural million by 2030 is expected to increase aggregate GDP declined from 1962 to 2019. Many countries have demand for food. On the other hand, rapid urbanization had a similar shift from agriculture to other sectors as from 75 percent in 2020 to 80 in 2030 accompanied economies mature and diversify. While Malaysia has with income growth is changing consumer preferences done this, increasing food supply and security remain for food. According to Engels Law and Bennet’s Law, as as key objectives. people become wealthier, they tend to spend more on FIGURE 59 Malaysia’s progress towards agricultural transformation Contribution to GDP, Percentage 60 50 40 30 20 10 0 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Agriculture, forestry, and shing, value added (% of GDP) Manufacturing, value added (% of GDP) Industry (including construction), value added (% of GDP) Services, value added (% of GDP) Source: World Development Indicator MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 65 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies FIGURE 60 Agriculture exports (in all food items) are increasing in value yet contribute less than 10.0 percent of Malaysia’s total exports  Agriculture exports in value, USD billions Agriculture exports as share of total exports, Percentage 40 14 12 30 10 8 20 6 4 10 2 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 All Food Items (0+1+22+4) Palm Oil (4222, 4224) All Food Items (Share) Palm Oil (Share) Source: UNCOMTRADE database  Note: All food items include: SITC 0 - Food and live animals, 1 - Beverages and tobacco, 2 - Oil seeds and oleaginous fruits, and 4 - Animal and vegetable oils, fats, and waxes. Classification found here higher-quality and imported foods. This is evidenced and production methods, further influencing food by the Household Expenditure Survey (HES), which demand in Malaysia. Malaysia has also committed to shows that Malaysians are consuming more expensive increasing domestic food production to replace some foods and less rice, opting instead for more meat exports and to support its food processing sector. and other premium products. The 2022 Monthly These factors above collectively highlight the dynamic Household Consumption HES revealed that the largest nature of food consumption patterns in the country and portions of food expenses were allocated to fish and the role of the agriculture sector in supplying safer and seafood (23.5%), meat (14.6%), and vegetables (10.6%), more sustainable food to the population. To achieve among others. Furthermore, younger generations are this, the agrofood system needs to overcome key increasingly concerned about food traceability, safety, challenges outlined in the next section.  Navigating key challenges in Malaysia’s agriculture Malaysia’s agriculture sector faces a number of labor productivity has lagged in other key sectors. In challenges that are preventing it from fulfilling 2022, agriculture labor productivity grew by only 0.7 its growth potential. These challenges affect the percent, significantly lower than Malaysia’s average transitions underway in both food demand and supply, productivity growth of 5.4 percent in other sectors. which requires balancing changing consumption The Asian Productivity Organization reports that labor patterns with increasingly constrained sectoral supply productivity growth in Malaysia was the lowest in the responses. These key challenges are discussed below. region (excluding Singapore) from 2010 to 2020. The Malaysian Productivity Corporation analysis in 2022 Firstly, the agriculture sector is facing low showed that labor productivity in the agrofood sector productivity growth. Current productivity levels are is similar to the machinery and equipment sector, but less than 50 percent of the average for high-income lower than other sectors such as E&E and chemicals. countries, hindering Malaysia’s national economic While the average varies, agriculture had the lowest growth (World Bank 2021a). Except for 2020, agriculture productivity growth among these sectors in 2021 66 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies and ranked third in average productivity growth from to other industries. The decline in value added per 2017 to 2021. The overall labor productivity growth in hour worked, from RM25.2 in 2015 to RM24.8 in 2023 agriculture (0.7 percent) is also significantly lower than (Figure 62) shows potential stagnation or lower worker the average Malaysian growth (5.4 percent) in 2022 efficiency. This trend could directly affect agricultural Figure 61). wages, as wages often correlate with productivity. Sectors like manufacturing and services, with increased The low productivity is driven by a few key value added per hour, might experience wage growth, overlapping challenges. This includes low production reflecting their rising productivity. This divergence efficiency and high production cost affecting farmers could widen wage disparities, worsening income income, lack of diversification to high value-added inequality, especially in rural areas where agriculture is produce and produc t s, unconducive business the main employment source. However, the sector has environment, and threats from natural disasters, pest shown a robust employment growth rate of about 4.2 diseases, unsustainable farming practices, and more. percent.  Apart from the first pandemic year (2020), labor productivity in the agriculture sector has always been Thirdly, Malaysia demonstrates strong performance lower than in other key sectors. in various digital competitiveness indices, but its agriculture sector still falls behind other industries Malaysia’s GDP per worker, a measure of agricultural in using digital solutions. Data on computer and productivity, underperforms in its potential internet usage, as well as web presence (see Figure 63), contribution to the national economy. Between 2011 reveal that agricultural establishments use computers and 2020, the agrofood sector contributed an average significantly less than other sectors. Only 72.0 percent of 6.8 percent to the Malaysian GDP (KPKM 2021) and of them use the internet, compared to 93.0 percent in then increased slightly from 7.2 percent in 2019 to 8.2 manufacturing. Despite having an internet penetration percent in 2020 (World Bank 2022). The manufacturing rate exceeding 90 percent of households—comparable sector contributed an average of 22.3 percent to to high-income nations—Malaysia still struggles with GDP during the same period, while the service sector this significant digital disparity. Poor connectivity provided 51.5 percent on average (WDI 2022). and network coverage in rural areas, along with a lack of digital literacy among smallholder farming Secondly, stagnant agricultural productivity communities, continue to slow the widespread adoption threatens wage growth. Without productivity and use of digital tools in agriculture. Smartphones are improvements, wage growth in agriculture may used to access the internet by over 93.0 percent of remain low, reducing competitiveness compared the population, which could potentially be one of the FIGURE 61 Annual labor productivity Value added per employment by economic activity growth, 2016-2022, Percentage 8 Services 6 Overall labor productivity 4 Manufacturing 2 Agriculture 0 -2 -4 -6 -8 2016 2017 2018 2019 2020 2021 2022 Source: DOSM (2023) MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 67 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies FIGURE 62 Workforce productivity is lower than other sectors, implying higher labor intensity and lower digitalization Value added per hour worked, RM 60 50 40 30 20 10 0 2015 2016 2017 2018 2019 2020 2021f 2022e 2023 Agriculture Manufacturing Construction Services Average Labour productivity Source: DOSM  ways for Malaysia to roll out DAT. Yet the limitations practices because they lack vital information about the faced in agriculture and the rural sector underscore profitability of new technologies. the need for initiatives like the “MyDIGITAL” plan to drive advancements in the sector. Small-scale farmers Finally, climate change poses a significant threat in Malaysia often struggle to adopt new technologies to Malaysia’s agriculture, negatively impacting crop in a financially sustainable manner. Some of the barriers yields, water availability, soil health and increasing include a lack of capital such as access to credit and shocks, especially to smallholders. Among the most savings, and market constraints like weak supply chains. frequent challenges are the increasing incidence and Farmers may also be unwilling to change their farming intensity of extreme weather events, alongside the rise FIGURE 63 Usage of digital tools and platforms as a share of total business establishments operating having internet 2019 Computer Usage (%) 2019 Internet Usage (%) 2019 Web Presence (%) 100 100 100 90 90 90 80 80 80 70 70 70 60 60 60 50 50 50 40 40 40 30 30 30 20 20 20 10 10 10 0 0 0 Total Agriculture Mining & Quarrying Manufacturing Construction Services Total Agriculture Mining & Quarrying Manufacturing Construction Services Total Agriculture Mining & Quarrying Manufacturing Construction Services Food & Beverage Food & Beverage Food & Beverage Source: DOSM 68 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies of crop diseases and pests, and shifts in temperature a direct impact on water-intensive crops such as rice and rainfall patterns.  Warmer temperatures and and oil palm. Unpredictable rainfall can disrupt planting altered precipitation patterns can lead to more schedules and reduce rubber latex yield due to frequent droughts and floods that will disrupt farming increased disease prevalence and waterlogging (IPCC activities. These changes threaten staple crops such 2023). Rising sea levels may cause saltwater intrusion as rice, which rely on predictable weather for optimal in coastal agricultural lands, further reducing arable growth. For example, rising temperatures can reduce land and productivity (IPCC 2023). These challenges rice yields by increasing water evaporation and heat highlight the need for adaptive strategies and resilient stress during the flowering period, which is critical for crop varieties to sustain agricultural productivity in rice production (FAO 2022). Changing rainfall patterns Malaysia (World Bank 2023).  that result in more frequent and severe droughts have Summary of challenges and their implications Malaysia’s domestic food production faces a improving yield and availability (supply) of food. This complex set of interconnected challenges. The would increase food security for the estimated 15.4 scarcity of arable land, exacerbated by urbanization percent that were moderately or severely insecure and industrial development, poses constraints on from 2019-2021. Further, environmental damage, such agricultural expansion. Climate change impacts, as lower soil productivity, is increasing, also lowering including extreme weather events and increasing yield. temperatures are putting pressures on productivity growth. The country’s reliance on food imports affects As the agriculture sector grapples with these both food security and price stability, while productivity challenges, the emergence of DATs has become gaps in key crops struggle to meet growing demand. an opportunity to address the widening gap Balancing increased production with environmental between food supply and demand, when combined sustainability remains a critical concern, particularly with needed policy and institutional reforms. in light of international standards and the competition Addressing these multifaceted challenges requires a for resources between food crops and cash crops like comprehensive approach involving innovation, policy palm oil. support, and widespread implementation of DAT to enhance the resilience and productivity of Malaysia’s Food imports and production are influenced by domestic food production system. As described in the demographic changes, low productivity growth, next section, DAT supports improved productivity by and climate change impacts. Supply declines when better use of inputs and sustainable intensification, so agricultural productivity declines due to weather, that there is less need for agricultural land expansion. It shocks, and climate impacts. Higher production would also builds climate resilience throughout the agrofood lower the inflationary pressure on (real) food prices by system, reducing potential spikes and price shocks. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 69 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies Premise of digitalization for agriculture and food systems DATs’ broad benefits to Malaysia opportunities across the agricultural value chain, from farming and food processing to retail. By enhancing Digital agriculture technologies are already product quality and traceability, DATs can also help transforming the global agrofood system. By meet export standards, including environmental and expanding the use of DATs in Malaysia, agriculture social requirements. can become more profitable for farmers, competitive in global markets, enhance domestic food security, Digital agricultural technologies are key enablers and promote environmental sustainability and climate of growth that will help increase the agricultural resilience. Good governance is crucial for maximizing sector’s productivity, efficiency, and market the benefits of DAT adoption across value chains and is access. The digitalization of agriculture presents necessary for expanding DAT use. DATs offer substantial Malaysia with a valuable opportunity to enhance its advantages across five “E” dimensions: efficiency, agricultural contribution to GDP by improving labor equity, employment, export competitiveness, and productivity, driving wage growth, and increasing environmental sustainability. DATs have the ability to output. Furthermore, it strengthens the sector’s improve efficiency by promoting good agricultural competitiveness by boosting efficiency, cutting costs, practices, increasing yields, reducing production costs, elevating product quality, and opening access to and minimizing food losses. DATs can also enhance global markets. Adopting digital tools such as precision equity by enabling farmers to achieve higher prices, farming, e-commerce platforms, traceability systems, reduce risks, access better marketing opportunities, blockchain for supply chain transparency, digital and increase sales volumes. Environmentally, DATs can lending, and data-driven crop insurance can help help reduce water usage, lower fertilizer and pesticide Malaysia meet international market demands, improve application, decrease greenhouse gas emissions, productivity (supply), and raise quality standards, and minimize food waste. By aligning with Malaysia’s therefore solidifying its global agricultural standing. sustainability goals, particularly in climate adaptation, Technologies such as precision farming, the internet mitigation, and resilience, DATs offer a pathway towards of things (IoT), and AI helps optimize resource use, a more sustainable future for the nation’s agriculture streamline operations, and reduce waste. With AI- sector. driven insights, farmers can make predictive decisions to improve yields and lower costs. Besides enhancing productivity, these innovations will also contribute to The digitalization of higher wages and economic growth by transforming agriculture presents traditional farming into a more efficient and profitable sector. Malaysia with a valuable opportunity to DATs encompass a range of innovations with the potential to transform Malaysia’s agrofood sector. enhance its agricultural By improving productivity and optimizing resource contribution to GDP. use, DATs can increase food supply, improve market access, and enhance export competitiveness. These technologies offer a multitude of benefits, including: DATs can transform agriculture by minimizing environmental impact while enhancing product • Enhanced sustainability and traceability: traceability, value, sustainability, and safety. Global Reducing waste, pollution, and greenhouse examples highlight their ability to accelerate information gas (GHG) emissions while improving product exchange, bridge information gaps, lower search costs, traceability, value, sustainability, and safety. and improve knowledge access. This, in turn, leads to lower transaction costs, more market reach, improved • Improved market access and efficiency: production and marketing efficiency, economies of Optimizing market access, reducing information scale, and better access to resources. While DATs may disparities, and lowering search costs for farmers. present certain risks, careful planning can effectively mitigate these challenges. Moreover, DATs have the • Increased knowledge and productivity: potential to create new, higher-skilled employment Facilitating easier access to knowledge, cutting 70 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies transaction costs, expanding market reach, and adoption varies across regions based on their context, ultimately improving production and marketing including in Malaysia, where DAT and related services efficiency for better economies of scale. are often integrated into national agricultural strategies. • Greater resilience and adaptation to climate These six categories rely on the power of monitoring, change: DAT can support food security by collecting, analyzing, and storing a large amount of increasing agricultural resilience to climate data from a variety of sources (Lytos et al., 2020; impac t s while enhancing mitigation and Osinga et al., 2022). These technologies support data adaptation. collection, analysis, and decision-making, to address socio-economic and environmental factors. Digital DATs offer significant social and equity benefits tools automate data collection, provide stakeholders beyond the economic gains described above. By with aggregated information like market prices for attracting and retaining youths, digitalization can products, trigger alerts for urgent actions such as address the challenges of an aging workforce and extreme weather events or deforestation, and enable urban migration. Moreover, bridging the digital divide continuous monitoring of agricultural factors, such as through DATs empowers women in the food system soil moisture, nutrient levels, weather conditions, and and reduce inequalities across value chains. In essence, plant physiology. Examples include remote sensing DATs pave the way for a more efficient, sustainable, for evapotranspiration, sap flow, and photosynthesis. and globally competitive agricultural landscape. The While there are many examples, the ones below focus following section will delve into how successful DAT on DAT actions that also support sustainability. implementation can deliver these broad benefits. Finally, DAT influences resilient agrofood systems DAT services fall into six broad categories, across five key dimensions, namely efficiency, supported by three foundational pillars. These equity, employment, export, and environment—also categories include data platforms and satellite imagery, known as the “5E’s.” Digital technologies process digital or e-advisory services, precision agriculture, and analyze data to boost production efficiency, fintech (finance and insurance),  e-marketplaces, and support equitable market access, enhance skills for food e-traceability, quality, and safety (see Figure 64). better employment, increase export competitiveness They form critical components of digital transformation through improved agricultural value chain traceability, in the agriculture sector, offering targeted solutions to and provide incentives and tools for environmentally various challenges in the agricultural value chain. DAT sustainable practices.  FIGURE 64 The key categories of DAT and its benefits Food e-traceability, Data platforms, geodata, and quality, and safety satellite imagery Independent, farmer-centric data repository under Digital traceability systems the governance of public authorities to guarantee allowing reliable and cost-effective security, interconnection, and interoperability and traceability of agricultural products 6 1 to avoid misuse of data E-marketplaces Business to business or business to client and client to client platforms connecting demand and supply or agriculture products. 5 Pillars of DATs 2 Digital or e-advisory services A cost-effective way to reach a greater number of farmers High cost-effectiveness and low food waste and Benefits FinTech: both finance and insurance 4 3 Data-driven financial and insurance agricultural Precision agriculture GIS, drone and sensor-based data-driven services. Financial services mainly include digital systems allowing for granular, automated credit scoring and mobile banking operations. and cost-effective farm management Insurance includes weather and yield based systems automated agriculture insurance Source: World Bank MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 71 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies 1 Data platforms, geodata and agricultural extension services and technology transfer satellite imagery to farmers, including the ePengembangan system, Agrisgeoportal, and Geotanaman system. Geotanaman There are many types of data platforms, and ePengembangan are digital advisory services that georeferenced data, and satellite imagery that provide farmers with real-time data. Other Malaysian provide valuable information to DAT. Climate examples that are attracting the interest of younger monitoring and early warning systems, supported farmers are DAT and smart agriculture along the rice by digital technologies, are crucial for climate- and value chain under the SMART Sawah Berskala Besar disaster-resilient agriculture. These systems predict (SMART SBB) initiatives of KPKM. Another standout climatic and environmental stress factors, enabling example is Malaysia’s MyKad digital ID system, which is prompt responses from farmers and stakeholders. used for land registration to greatly reduce fraud. Advanced climate monitoring uses satellite data and other instruments to predict events like droughts, floods, and extreme heat. Digital solutions provide 3 Precision agriculture real-time, tailored forecasts and decision-support systems that integrate various information sources, P recision far ming uses advanced digital including social networks and public weather services. technologies to improve decision-making and These systems deliver targeted warnings and assess resource management in agriculture. Since the risks to enhance agricultural resilience (Nakalembe et 1980s, tools like GPS, robotics, and satellite monitoring al., 2021; Gettelman et al., 2022; Berger et al., 2022; have enhanced input allocation, reduced costs, and Crocetti et al., 2020). The Malaysian Department of minimized environmental impact. Technologies such Agriculture (DOA) and Malaysian Space Agency (MYSA) as GPS-guided tractors, irrigation systems, and data- are collaborating on using satellite imagery for both driven decision-making have improved crop and paddy monitoring (MakGeoPadi) and agriculture water livestock production. Precision farming aims to maximize resources management (MakGeoHidro). efficiency, yield, and product quality while reducing nutrient and pesticide use. This approach integrates technological, socio-economic, and environmental 2 Digital or e-advisory services dimensions to enhance overall farming practices (Barna et al., 2020; Katkani et al., 2022; Sharma and Shivandu Digital and e-advisory services in agriculture 2024). For example, a Vietnamese startup called are technology-driven platforms that provide MimosaTEK delivers precision agriculture solutions to farmers with expert guidance and information rice farmers using large amounts of water and high to enhance productivity and sustainability. These levels of greenhouse gases during paddy production. services use digital tools such as mobile apps, SMS, The company also allows farmers to remotely monitor and online portals to deliver tailored advice on crop and control parts of their farming operations, including management, pest control, weather forecasting, and soil moisture levels, weather conditions, and water use. soil health. By integrating data analytics and machine Sensors collect and send data to the cloud, where it is learning, they offer predictive insights and personalized analyzed to provide real-time recommendations on the recommendations. E-advisory services also support best time to irrigate and the amount of water to apply. knowledge sharing through virtual training sessions, With this technology, farmers can manage irrigation webinars, and community forums. This approach manually or through a mobile application. Statistics empowers farmers with real-time decision-making show that farmers using the MimosaEK service in 2019 support and connects them with agricultural experts used 13.0 to 20.0 percent less water than other farmers and resources to help them improve farm management with conventional techniques. and efficiency. Ethiopia’s e-advisory example is notable for providing smallholder farmers with real-time help. Farmers dial a special number for advisories on good 4 Fintech: Finance and insurance agricultural practices for all major cereal, pulses, and high-value crops. Farmers can register and set Digital credit and lending services can help preferences for the crops they grow, their location, smallholder farmers invest in climate-resistant language, and topics of interest. The hotline has sent inputs, like hybrid seeds, to boost productivity over two million alerts, many of which are on crop and build resilience to climate crises (Mhlanga, diseases. This service also enables direct communication 2022; Hussain et al., 2021). Greater availability of bet ween farmers and local agents. These are digital data on farmers’ activities and expanded digital efforts Malaysia can learn from and expand upon. In service channels will make formal agricultural credit Malaysia, the DOA has developed several systems for more scalable, while aligning loan disbursement and 72 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies repayment with planting and harvest schedules can insurance can be a policy tool for governments to enhance credit impact. Providing credit during the lean encourage agricultural investments. While outcomes of season allows efficient labor allocation and reduces bundling credit with insurance vary, flexible repayment food insecurity. Financial services can be targeted to schedules can assist farmers in facing natural disasters farmers individually, or in specific areas, to encourage or unforeseen events.  investments in eco-friendly practices at lower costs, to reduce environmental damage (Azadi et al., 2021; Barasa et al., 2021). These services are especially 5 Market linkages beneficial for low-income individuals, offering benefits such as payment for ecosystem services, “green loans” Digital platforms that provide market information for solar technology adoption, and access to solar and communication systems are essential for energy microgrids. An Indonesian startup, CrowdE, increasing farm profitability and farmer incomes offers a peer-to-peer (P2P) lending platform and (Mapiye et al., 2023; Hashem et al., 2021; Xie et al., market linkage services, providing farmers with up to 2021). Access to timely and accurate information on IDR 100.0 million backed by crowdsourced investors market conditions, including input and output prices, and distributed to approved farmers via its cashless empowers farmers to make informed production and network. Capital can be used for high-quality inputs, marketing decisions. This enhanced transparency and labor, access to production facilities or to finance other efficiency, facilitated by market information systems, farming needs. CrowdE also connects farmers with social media, and e-commerce platforms, benefit all distributors and agents to sell extra crops. The platform actors along the value chain. Improved communication has distributed IDR 81.0 billion (6.0 million USD) in loans between buyers and sellers further strengthens value to over 17,000 farmers with a 97.0 percent success rate chain efficiency and profitability. Higher incomes for repayment within 90 days. Farmer loans are further enhance the resilience of agricultural actors, enabling enabled by subsidies from state-owned Bank Mandiri them to better withstand climate-related shocks and and other local lenders.  invest in emission-reducing technologies. Moreover, increased efficiency and information access along the Malaysia’s fintech sector has developed faster value chain can reduce food losses, contributing to than other DAT pillars. In 2020, there were 233 greenhouse gas mitigation efforts (Benyam et al., 2021; fintech companies59 playing a pivotal role in financing, Cattaneo et al., 2021). For example, the Kenya Unified especially to micro, small, and medium enterprises. Agriculture Data Platform (KUADP) enables farmers Agrobank is the main public financial institution in and policymakers to make data-driven decisions in the Malaysian agriculture and is promoting digitalization agriculture sector. It supports Kenyan actions to increase especially on input supply and production. There household food resilience, reduce food-insecure are opportunities within the fintech sector to expand households, and protect against environmental and agricultural index insurance, especially as climate fiscal shocks. KUADP merges fragmented data sources change impact increases in frequency and intensity. and provides quality data and analytical capabilities to farmers to support production and increase yields. Agricultural index insurance uses digital data It sets standards and protocols for data sharing and sources, such as automated weather stations access to ensure seamless data exchange, stimulate and remote sensing data, for risk and claims innovation, and enhance farmer support.  assessment. This method is more cost-effective and scalable than traditional insurance, which requires on- E-marketplaces in agriculture are digital platforms site visits to determine premiums and process claims that facilitate efficient transactions between (Benami et al., 2021; Hu et al., 2023). Mobile money farmers, suppliers, and buyers. They offer services networks can deliver insurance services to smallholder such as product listings, secure payment systems, farmers, insuring their operations against climate- and logistics coordination. By connecting multiple related threats like droughts, rising water levels, and stakeholders, these platforms streamline supply disease, which is crucial to alleviate poverty. Weather chains, reduce transaction costs, and enhance market index insurance is an innovative financial product that transparency, giving farmers access to a wider market benefits smallholder farmers by paying out claims for for selling produce, sourcing inputs, and accessing real- damages such as excessive rainfall or drought. Studies time market information. E-marketplaces also support show that farmers with subsidized insurance are more the adoption of digital innovations, such as precision likely to invest in their farms and increase productivity. agriculture tools and blockchain for traceability to While cash or credit can facilitate investments, they ultimately improve productivity and sustainability in the don’t provide protection for weather-related risks. agriculture sector. Indonesia’s TaniHub is an excellent Despite limited commercial demand, weather index example of a digital marketplace app that directly links MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 73 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies crop producers and buyers. TaniHub helps farmers a network of interconnected devices that communicate secure fair prices, provides reliable payment service, and exchange data over the internet. These devices, and reduces costs associated with internal marketing equipped with sensors and software, can collect or sourcing for buyers. Buyers include commodity and transmit data autonomously. In agriculture, IoT buyers that need to supplement procurement monitors environmental conditions and crop health volumes, supermarket chains, and hotels. TaniHub by looking at conditions such as soil moisture and also operates a logistics service, TaniXpress, to collect temperature. This real-time data enables precise and and distribute crops across a network of producers efficient farm management by helping farmers make and buyers. TaniFund is the company’s lending informed decisions, optimize resource use, and improve platform that connects investors with agricultural productivity. DAT enables rapid responses to food safety programs, providing farmers with the capital needed issues, improves quality control, and builds consumer for marketing and selling agricultural produce , as well trust by offering verifiable information on food product as new plantation development. TaniHub has helped origin and handling. DAT also tracks product movement more than 17,000 farmers sell their crops by listing over by providing real-time data on temperature, humidity, 60 kinds of fresh produce to more than 60 institutional and location. Data analytics processes this information buyers. On the input side, Malaysia’s eAGRO is the first to identify potential risks and ensure compliance with online marketplace targeting paddy growers and other safety standards. One notable regional example is smallholders with premium fertilizers, and information Koltiva, an Indonesian agritech company offering and best practices (e-advisory). innovative digital traceability solutions. These solutions enable farmers and other stakeholders to monitor products as they move from farm to market. Koltiva’s 6 Food traceability, quality, and services are crucial for ensuring food safety, adhering safety  to regulatory standards, and enhancing supply chain transparency and accountability. Koltiva’s multi-crop Digital agricultural technologies enhance food platform, KoltiTrace, is used in the cocoa, coffee, and traceability, quality, and safety by utilizing palm industries to provide visibility across the supply advanced tools such as blockchain, IoT sensors, chain, from farm to end consumer. It combines mobile and data analytics. Blockchain technology ensures applications, sensors, and blockchain technologies, transparent and tamper-proof records of every step in to capture supply chain data, and provide real-time the supply chain, from farm to consumer. IoT refers to tracking and monitoring.  Transformative impacts of digital technologies on the agrofood system DATs offer transformative potential for the 1. Digitalization increases agricultural agriculture sector and broader economic output and productivity  development for Malaysia. On a macro level, DAT adoption can enhance a nation’s expor t Technological advancements are key drivers of competitiveness in agricultural products by improving agricultural output and productivity. In Malaysia, quality, consistency, and traceability. As these studies have shown a strong positive correlation technologies integrate into the agricultural value between technological progress and ef ficiency chain, they stimulate innovation in adjacent sectors improvements with increased agricultural output. and contribute to overall economic growth. DATs also Total factor productivity growth (TFPG) measures how enhance climate resilience, mitigation, and adaptation efficiently an economy uses its inputs, such as labor and within the agriculture sector by reducing production capital, to produce output. It reflects improvements in risks and minimizing climate-related losses, thereby production beyond simply increasing input quantities. improving food security and bolstering the resilience of It is also a proxy for technology and efficiency Malaysia’s economy. Collectively, these advancements improvements. For example, Malaysia’s agricultural demonstrate the transformative potential of DAT TFPG has increased from 0.24 in 2020 to 0.32 in 2021 to strengthen the food supply chain by reducing (Figure 65). This growth shows that technological transaction costs and improving information flow. improvements or more efficient resource use enabled 74 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies FIGURE 65 Technology (proxy by TFPG) is a strong driver of agriculture output, along with labor growth. The sector is still low in capital–driven growth (i.e. machines, IoT, etc.)  Growth of factors of production and productivity (2017-2021), Percentage 0.6 0.4 0.2 0 -0.2 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 Growth rate of L TGPG Growth rate of K Linear (Growth rate of L) Source: World bank staff calculations based on DOSM AES (Agriculture 2022) greater agricultural output without increasing inputs the growth rate of e-commerce income in agriculture proportionally. is based on the total income of establishments with e-commerce transactions. The e-commerce sector Technology (TFPG) and labor growth are positively in agriculture demonstrated impressive growth, correlated with agricultural value-added output, increasing by 385.4 percent between 2015 and 2021 highlighting the benefits of technological (765), suggesting that there is demand for e-commerce advancements and effective labor use in boosting in the agriculture sector. However, the absolute income productivity. Yet TFPG and labor growth are negatively value generated by agricultural e-commerce remains correlated with capital growth, highlighting the relatively modest compared to that of manufacturing complexities of integrating new technologies and the and services. Domestic e-commerce income rose need to align capital investments with technological by 458.5 percent, underscoring digitalization’s and labor improvements. Digitalization enhances effectiveness in transforming agricultural industries. productivity by improving resource use and efficiency, The agriculture sector is increasingly adopting digital but its benefits are greatest when capital investments tools like online marketplaces, precision farming are well-supported by training, technology integration, technologies, and mobile platforms for trading and and appropriate labor practices, particularly a skilled disseminating information. These innovations enable and adaptable workforce. Digital skills and training are farmers to reach broader markets, improve efficiency, essential for maximizing the benefits of DAT, as strong and enhance income potential. The substantial growth human capital can effectively capitalize on digital in e-commerce income reflects the sector’s ability to infrastructure and its tools and services. For example, capitalize on digital opportunities, positioning it as a these skills are needed to handle drones used in vital player in the digital economy.  production, support intelligent production control, or leverage “big data” for marketing.  Overall, e-commerce activities in the agriculture sector contribute a small but growing share of Malaysia’s economic output. The gross value added 2. Digitalization can increase labor (GVA) to GDP from agricultural e-commerce increased productivity, leading to higher-quality nearly threefold from RM155.0 million in 2015 to jobs, better income growth and wage RM441.0 million in 2022. Though this is smaller than growth the manufacturing and services sector, the rising information and communications technology (ICT) share DAT can greatly support higher productivity and of GDP (23.2 percent in 2022) suggests digitalization income growth if broadly implemented. For example, benefits for agriculture and the small e-commerce MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 75 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies FIGURE 66 Agriculture has had high domestic e-commerce income growth  E-commerce income, RM million E-commerce growth, Percentage 1000 500 898 458.5% 900 450 800 400 385.4% 720 700 350 600 300 500 250 217.2% 400 200 300 150 200 185 178 100 100 50 0 0 Total market Domestic market International market Agriculture 2015 Agriculture 2021 Growth (%) Source: Malaysia Digital Economy 2023, DOSM  value shows significant untapped potential. Integrating thousand compared to 86.9 thousand females. Despite technologies like online marketplaces and data-driven this imbalance, women are most likely to work in the farming could enhance efficiency, market reach, and crops subsector of agriculture.  Furthermore, women profitability, therefore modernizing the sector and generally earn less than their male counterparts but only boosting economic contributions. in selected sectors. For instance, in the crops sector, females earned an average of RM 16,300 per worker annually in 2022, compared to RM 17,300 per worker for 3. Digitalization can support equity  males. However, in some subsectors, the data suggests that women have higher salaries per worker than men, Equity in agriculture ensures all stakeholders, likely reflecting differing skill requirements and market regardless of size or location, have access to the demands for these jobs. With DAT, the participation benefits of digitalization. Digital tools promote equity rate of women will rise.  by providing smallholder farmers—including women— with critical information on weather, market prices, crop Digitalization in agriculture bridges the urban- management, and best practices. These tools help rural divide by providing farmers in remote areas overcome both urban-rural and gender disparities by with access to essential resources and services. offering equal opportunities to take part in and benefit Digital financial services, such as microfinance, mobile from agricultural activities. For example, precision payments, digital loans, and data-driven insurance, farming technologies help improve resource use, provide access to credit and insurance in remote reduce farmer costs, and increase sustainability, while areas. They enable financial institutions to operate improved market access through platforms connects remotely without direct physical interaction, resulting farmers with buyers, giving them better access to boost in significant savings on transaction costs and the sales and pricing. Digital platforms can empower small potential for expanded outreach. Similarly, remote farmers by expanding access to financial services and training and e-learning platforms allow farmers to providing education and training opportunities through adopt modern techniques and stay competitive.  online platforms and mobile apps. Bridging these divides is crucial for ensuring Malaysia’s agricultural workforce exhibits a that rural farmers can fully benefit from digital significant gender imbalance, with a higher advancements. The 2022 data reveals a continued number of men compared to women. This disparity is digital divide between urban and rural areas in Malaysia, particularly evident in the crops subsector, where men with significant disparities in internet and computer outnumber women by a significant margin of 362.4 access. Urban areas have nearly universal internet usage 76 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies FIGURE 67 The digital divide in urban and rural areas in Malaysia  Individuals using ICT services and equipment by strata 2022, Percentage 97.4 99.1 98.3 99.4 98.3 100 94.5 90 85.7 80.2 80 70 63.1 60 50 40 30 20 10 0 Malaysia Urban Rural Internet Computer Mobile phone Source: DOSM, Malaysia Economy 2023  (98.3 percent) and superior computer access (85.7 4. Digitalization can enhance export percent), compared to 94.5 percent and 63.1 percent competitiveness  in rural areas, respectively. These gaps are particularly concerning for the agriculture sector, where rural areas To enhance export competitiveness, farmers rely heavily on digital tools to improve productivity and and exporters aiming for global trade must gain market access. Enhancing infrastructure, expanding increase production and export volumes, elevate broadband access, and promoting digital literacy in quality, advance product sophistication, prioritize rural areas will help integrate agricultural practices sustainability and comply with traceability with modern technology, fostering inclusive growth requirements. Importing nations are enacting stricter and reducing disparities in agricultural efficiency and and more complex food safety standards across a wider opportunity. Overall, digitalization fosters inclusivity range of products, making compliance increasingly and sustainable development by ensuring equal access difficult. Meeting these standards have shifted from to resources, knowledge, and financial services for all simple border checks to comprehensive oversight farmers, regardless of gender or location. encompassing the entire supply chain, from cultivation and harvesting to processing and transportation. The poor often disproportionally bear the impacts Malaysia is less competitive in exports of the broader of climate-related shocks and DATs offer several food sector (within agricultural exports), except for palm avenues for mitigating these impacts. Access to oil, where it is highly competitive in the global market timely information, such as early warning systems (e.g. (Figure 68). However, EU restrictions could potentially for storms or drought) can increase preparedness. change that. Digital advisories help level the playing field by providing information for sound decision-making and Tracing product origin and monitoring and reporting climate smart technologies to all farmers. Access to on environmental and social standards are rapidly financial services can be instrumental in helping farmers becoming critical within global trade. The European build resilience to climate-related shocks. This is Union’s Regulation on Deforestation-Free Products particularly crucial for those living in poverty who often (EUDR), effective January 1, 2025, exemplifies the lack resources to address the health and economic importance of traceability. This regulation mandates challenges brought about by climate change. Studies that commodities imported into the EU must: 1) be have shown that formal financial services, including legally produced on deforestation-free land; 2) provide insurance, savings, and loans, can significantly aid the the geolocation of the production area; 3) verify that poor in managing unexpected setbacks and maintaining production occurred on land not deforested after stable consumption (Jordan 2021).  December 31, 2020 (through due diligence) and follows MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 77 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies FIGURE 68 RCA between Malaysia’s food items and palm oil Revealed comparative advantage, Score, All Food Items Revealed comparative advantage, Score, Palm Oil 0.20 9 0.18 8 0.16 7 0.14 6 0.12 5 0.10 4 0.08 3 0.06 2 0.04 0.02 1 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 All Food Items (RCA) Palm Oil (RCA) Source: World Bank staff calculations based on UNCOMTRADE database the origin country’s laws; 4) remain separate from other selecting crops suited to local environments, using goods during trade and shipping. Compliance with the irrigation to address water shortages, and adopting EUDR requires a digital traceability system, as paper- conservation techniques to reduce soil erosion and based systems are not possible or acceptable. maintain soil health. Digital technologies play a crucial role in climate-smart farming, aiding both response Export traceability systems provide a wide variety and recovery efforts. In response to extreme weather of benefits to different users. Traceability systems events, such as floods or droughts, emergency can address food safety and quality requirements, measures may be taken, like building flood barriers build consumer confidence and trust, enhance supply or providing emergency feed for livestock. Recovery chain efficiency, manage food safety incidents, prevent efforts focus on restoring farming systems after such fraud, mitigate biosecurity threats, and differentiate events, which may involve accessing insurance or commercial products via verifiable information on credit, repairing infrastructure, or diversifying farming product origin and production practices. practices to minimize future risks (GSMA 2021).  Digital technologies enhance access to reliable 5. Digitalization can support climate weather forecasts, enabling better decision-making adaptation and mitigation in agriculture as climate change increases weather- related risks. These decisions can range from short- Agriculture relies on a strong environmental term actions, like determining the best planting times, fo und ation , and d igita l i z ation s upp or t s to long-term investments in infrastructure. Improved environmental sustainability by promoting eco- weather data can also support the development of friendly practices. Climate-smart agriculture is a better agricultural insurance products, such as index- strategic approach designed to sustainably increase based insurance that compensates farmers during agricultural productivity and incomes, increase climate extreme weather events. In the context of climate- resilience, and reduce or remove greenhouse gas related disaster preparedness, digital early warning emissions (FAO 2021; World Bank 2024). Yet its success systems, advisory services, and mobile payment relies on context-specific practices and processes, and systems can reduce damage and accelerate recovery. DAT can play a crucial role in addressing its diverse Additionally, electronic registries of farmers can challenges. However, adaptation in CSA involves improve the efficiency and targeting of government adjusting farming practices and systems to better disaster relief efforts in rural areas.  handle changing climate conditions. This can include 78 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies Successful and timely adoption of precision agriculture in Malaysia, measured in CO2eq from 2002 agriculture technologies within CSA requires to 2019, revealing distinct patterns for total emissions, addressing the challenges farmers face in adopting methane (CH4), and N2O. The agriculture sector in digital technology and the opportunities these Malaysia contributes significantly to GHG emissions. advancements present. Research indicates that Overall agricultural emissions increased steadily from farmers encounter similar obstacles when adopting 2002, peaked in 2008, followed by fluctuations and digital technologies, which can be categorized a slight decline after 2016. Methane emissions have into technical and non-technical factors. Technical remained relatively stable with only minor fluctuations, challenges include the cost of digital tools and their suggesting consistent livestock populations or effective applications, climate resilience, perceived profitability, methane management practices. the capacity to understand technology, and crop- specific bio-physical characteristics. Non-technical N 2O emissions showed a more pronounced upward barriers are often related to social contexts, such as the trend, especially from 2002 to 2008, driven acceptance of new technologies, the need for updated likely by increased fertilizer use or changes in soil knowledge and skills, issues with digital devices in management. The peak in total emissions around remote areas, poor connectivity, and a lack of technical 2008 aligns closely with the peak in N2O emissions, support and intuitive learning resources.  underscoring the significant role of N2O in driving overall agricultural emissions. The slight decline in N2O Agriculture is the second largest global contributor emissions post-2016 suggests potential improvements to greenhouse gases after electricity and heat in nitrogen use efficiency or changes in agricultural production. In Malaysia, the agriculture sector with practices. 9.921.7 Gg carbon dioxide equivalent (CO2eq) was calculated as one of the lowest contributors of GHGs Digital solutions can reduce greenhouse gas (3.0 percent) in 2019 after energy (78.0 percent), IPPU emissions in several ways: Digital platforms can (10.0 percent), and waste (8.0 percent), although this monitor livestock health, diet, and productivity, to excludes land use and land use changes (ASEAN 2023). enable more efficient feeding practices. This greatly Overall agricultural emissions have increased, largely reduces methane emissions from livestock by optimizing driven by rising nitrous oxide (N2O) emissions from feed conversion and reducing waste. AI and machine increased fertilizer use and shifts in land management. learning can forecast weather patterns, predict disease Figure 69 shows greenhouse gas emissions from outbreaks, and optimize planting schedules, which FIGURE 69 Total agricultural emissions have generally increased over the years, mainly due to rising N2O emissions from increased fertilizer use in Malaysia GHG emissions from agriculture activities, Kilotonnes 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Totals Agriculture Emissions (CO2eq) CO2 emission from N20 - Fertilizers CO2 Emissiosn from Methane - Livestock Source: World Bank Group’s Climate Change and Development Portal (CCDR)  Note: Emissions (CO2eq) (AR5)-IPCC Agriculture refers to total greenhouse gas emissions from agricultural activities, expressed in carbon dioxide equivalent, using methodologies from the IPCC’s Fifth Assessment Report (AR5). CH4 refers to methane and N20 refers to nitrous oxide  MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 79 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies leads to more efficient use of land and resources, and emissions. By integrating digitalization with skilled therefore reducing the carbon footprint of agricultural labor, agriculture can achieve both higher productivity practices. Digital platforms and blockchain technology and a lower carbon footprint.  can also improve supply chain transparency and traceability, by reducing food spoilage and waste. Less More productive labor in agriculture resulting from waste means less GHG emissions from decomposing digitalization contributes to reduced GHG emissions organic material in landfills. through several key practices (Figure 70). Digital tools enable precise resource management, optimizing Digital technologies enhance energy efficiency by the use of water, fertilizers, and pesticides, which in turn enabling machinery maintenance and operations minimizes waste and lowers emissions. Skilled workers, through smart systems, reducing fuel consumption empowered by digital platforms, can more effectively and emissions. Innovations such as solar-powered adopt sustainable practices like crop rotation to reduce irrigation systems guided by digital controls further soil disturbance and chemical use. Digitalization also boost efficiency. In livestock management, digital supports better waste management and reduced tools help improve feeding strategies and manure emissions by making it easier to compost crop residues management, signific antly reducing methane instead of burning them. FIGURE 70 More productive labor in agriculture contributes to mitigation efforts GHG emissions, MtCO2e 14 12 10 8 6 4 2 0 0.05 0.06 0.07 0.08 0.09 0.10 0.11 0.12 0.13 0.14 0.15 Agriculture labor productivity Source: World Bank staff calculations based on emission data from Our World in Data and DOSM AES (Agriculture 2022) 80 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies Pathways of implementing DAT: Scaling up pilots and learning from global experiences To effectively implement DATs, the Malaysian irrigation and drone-based pesticide application in government can pursue two simultaneous durian plantations; (v) intensive shrimp farming. strategies: building DAT pilot programs for selected crops and adapting successful experiences The example of pilot projects in shrimp farming from other countries to the Malaysian context. illustrates how DAT implementation can transform Implementing a series of pilot programs is crucial for baseline operations, leading to significant gathering practical experience and generating valuable productivity gains and rapid cost recovery. This lessons for subsequent DAT rollouts. These initial pilots program is in line with Malaysia’s Agrofood Value can inform public investment decisions and help identify Chain Modernization Program (PMRNA) through the the enabling environment needed for successful DAT Digital AgTech initiative to develop digital farmers, adoption, as discussed in the final section. While address food safety, support food security, and boost distinct, pilot programs and the adaptation of global the country’s digital economic growth. The case study best practices are interconnected strategies that in Box 6 shows how DAT would be used in a super should be pursued in tandem. This approach will intensive white shrimp farming pilot project (see Box 6 enable Malaysia to learn from both its own experiences on Pilot project of digital solutions for super-intensive and international successes, accelerating the effective white shrimp farming).  rollout of DAT across the agricultural sector. An economic and financial analysis demonstrates how these pilot programs can effectively address Scaling pilot projects major supply side constraints. Six pilot projects were analyzed to assess the potential of DATs, considering DAT in Malaysia is financially viable, offers numerous both financial and non-financial drivers. Financial returns benefits, and has the potential for rapid expansion were evaluated using standard cost-benefit analysis for through strategic pilot programs. 53  The feasibility both users/clients and providers (where feasible). DAT and viability of DATs in Malaysia were assessed through costs included development and establishment cost, five case studies, including: (i) digital advisory for paddy deployment cost, user fees and recurrent costs. Benefits production using precision agriculture data, yield for users included increased productivity, higher quality prediction, and yield gap analysis; (ii) fully controlled and farmgate price, increased sale volume, reduced environments for chili cultivation; (iii) drone use for losses, and mortality rates. On the other hand, benefits agrochemical spraying on pineapples; (iv) sensor-based for providers include income from sustainable service 53 Some successful pilots for reference are (i) Plant factory developed by Agroz Group (https://agrozgroup.com/) (ii) Close house system by Leong Hup International (https://www.leonghupinternational.com/) (iii) BoomGrow’s 5G-Connected Vertical Farms (https://boomgrowfarms.com/) and (iv) Smart Tani (https://singularityaerotech.asia/smart-tani/) MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 81 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies BOX 6 Pilot project of digital solutions for super-intensive white shrimp farming Super-intensive shrimp farming is a technology developed based on high-density shrimp farming research conducted by Fisheries Research Institute under Department of Fisheries Malaysia (DOFM) in Gelang Patah (2016-2019). Typically, each hectare of farming area only yields between 10.0 to 15.0 tons of white shrimp, while the super-intensive technology produces up to 40.0 tons in the same area. PILOT DESIGN: MARINE AQUACULTURE FARM PROFILE THE BASELINE SITUATION Land area: 1.2 acres of private ownership IoT System that manages the shrimp farm and adheres to the MyGAP Certification Scheme Facilities: (MS 1998:2007 - Good Aquaculture Practice (GAqP) - Aquaculture a) Tanks 1,000 m2 ® 0.1 ha: 4 units (1 unit under construction) Farm General Guidelines) under DOFM b) Tanks 500 m2 ® 0.05 ha: 2 units (1 unit under construction) c) Tanks 300 m2 @ 0.03 ha: 2 units d) Treatment pond 2,000 m2 ® 0.2 ha: 1 unit Reduction in labor = 1 Cost per worker for night Tank structure: IoT system supervision BRC A10 steel frame, 4 x 4 concrete pillars, 1.0 mm HDPE lining = Estimated Reduction in labor Stocking density: 300-400 super PL per m2 RM30,000 cost = around RM 30,000 Rearing period: 2-3 months per year Survival rate: 70-80% Return on Size: 50-60 shrimps per kg or 16.7-20.0 grams per shrimp investment = 1 year Farmer can Tank size, release rate, and yield: control their a) 1,000 m2 ® 0.1 ha: 300,000-400,000 super PL: 3.0-4.0 MT Production equipment b) 300 m2 @ 0.03 ha: 100,000-120,000 super PL: 1.0-1.8 MT increase remotely (on Production: 15 MT (April-September 2021) = 10-20% and off) & have a real-time Production targets (per cycle): 4 MT (0.05 ha tanks), 8 MT (0.1 ha tanks) updates Number of employees: 14 people Technology: IoT system (trial phase) KEY FEATURES Data Analytics Mobile Operation Notifications Scheduled Reports Interpret and use Allows freedom Add conditional business Deliver PDF or Excel real-time data to drive to work remotely logic to your hardware data clearly, concisely, informed decision making with laptops and with triggered alerts to and regularly across your business smartphones keep operators informed 1 4 IoT controlled Fish Feeder DB Box 2 5 6 IoT controlled FS Online Aerator Dashboard IoT Gateway 3 WIFI/GSM • Data Visualization • Remote Control & Monitoring pH, Dissolved Oxygen, FS Control • Alerts & Notifications Ammonia Sensor Panel • Scheduled Reports Source: Department of Fishery (DOF) Note: This technology is a component of the Smart Aquaculture System, provided to selected industries by the Malaysia Digital Economy Corporation (MDEC) in collaboration with DOFM. 82 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies provision and the potential for expansion and scaling crucial data on these technologies and their enabling up. Box 7 summarizes the financial analysis results conditions, these pilots will inform a scale-up strategy of these pilot programs (see Box 7 on Pilot program grounded in rigorous impact assessment. Furthermore, financial results).  they can help define the necessary institutional framework (spanning multiple factors and sectors), Pilot programs are essential for evaluating digital public-private partnerships, and funding mechanisms technologies in real-world settings and establishing for effective digitalization.  The following section will the necessary conditions for their successful and delve deeper into these critical aspects. widespread adoption nationwide. By generating BOX 7 Pilot program financial results Productivity increases are high across all pilots: paddy (19 percent), durian (25 percent), shrimp (26 percent), chili (63 percent), and poultry (83 percent). While pineapple yield did not increase, mortality rates dropped by 5 percent. Financial rates of return were 20 percent for durian, 28 percent for poultry, and 89 percent for pineapple, while net incremental benefits per cycle were RM1,030 for paddy, RM930,000 for chili, and RM40,000 for shrimp. Initial capital investments were high for durian (RM88,000 per hectare), shrimp (RM84,600 per 1,000m² pond), chili (RM250,000 for a 20,000m² greenhouse), and poultry (RM600,000 for one closed automated house). Paddy and pineapple farming did not need capital investment since DATs are recurring and offer affordable services, with payback periods from one crop cycle for paddy to 15 years for durian. TABLE 6 Analyzing productivity, costs and returns from DATs in six Malaysian cases FIRR (%) or Net Case Productivity Increase Initial Investment Payback Time Incremental Benefit Studies (%) (RM) (years) per cycle (RM) Service cost RM 50 per Paddy 19% RM 1,030 1 crop cycle crop cycle Chilli 65% RM 930,000 RM 500,000 Less than 1 year Pineapple 5% reduced mortality 89% RM 36,000 1 crop cycle Durian 25% 20% RM 8,777,000 15 years Poultry 83% 28% RM 640,000 4 years Shrimp 26% RM 40,000 RM 846,000 1.7 years Source: World Bank, FAO There were positive financial impacts for both DAT users and providers in the six agricultural value chains (paddy, chili, pineapple, durian, fisheries, and poultry) analyzed. Users experienced increased yields and farmgate prices, reduced production costs and risks, improved marketing, and higher sales volumes. Providers benefited from increased commercial profits through service delivery and long-term advantages such as service sustainability and scalability. Sensitivity analysis showed that durian had the most robust financial outcomes against varying model parameters. Paddy showed sensitivity to changes in area and fee assumptions, while chili, despite sensitivity to key parameters like yield and price, maintained overall financial viability. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 83 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies Learning from global examples Malaysia can accelerate DAT development by agrofood value chain, the government could prioritize leveraging existing knowledge and best practices in developing agricultural financial technology, finance, DAT implementation. There is a wealth of information and insurance (FINTECH) and e-advisory services in from other countries that can provide vital lessons and the short term, as these offer broad sectoral benefits be adapted to the Malaysian context. A few of these are alongside other DAT components. Bundling allows one summarized in this section. or more digital services to be included with conventional agricultural products or services. For example, advisory Lessons from other countries expanding DAT services can be provided with agricultural inputs or adoption highlight crucial prerequisites, including finance (see Box 8 Bundling in digital agriculture – an broad support for digital literacy, establishing example from India). digital identification systems, and enabling service providers to “bundle” multiple DAT services. International good practices impart key lessons Developing a reliable farmer registry is essential to enhance e-agriculture by expanding the to support various systems and programs—both coordination between public and private sector agricultural and non-agricultural—including e-extension activity. Malaysia can benefit from international systems, land registration, electronic payment systems, digital agriculture examples by adapting them to local and support mechanism reforms. To bolster the entire needs. This involves using South-South exchange, BOX 8 Bundling in digital agriculture – an example from India DeHaat is a technology-based farmers’ marketplace offering end-to-end services to farmers. The company aims to maximize farmers’ income by bundling accessible and affordable technology-led interventions to address farmers’ agricultural needs. The company plans to servie 2.5 million farmers in 1,800 centers by 2024. It expects to earn US$450 million and claims to have raised US$250 million in venture capital, with US$100 million cash in hand. 60.0 percent of DeHaat’s revenue comes from input suppliers, 35 percent from aggregators and the remaining 5.0 percent from financial institutions. DeHaat digitizes public information from India’s national agriculture extension system and provides this as agro-advisory services to farmers in local languages through mobile apps and call centers. Farmers can go to the DeHaat center to get inputs, trade outputs, soil tests, or apply for a loan. DeHaat centers are the business drivers, establishing the last mile delivery for 1200–1400 farmers in a 3-5 km catchment area. It can take two to three seasons of close communication for farmers to establish trust in DeHaat services. Once trust is established, a “network effect” will happen with more farmers joining the DeHaat platform, creating more business for DeHaat and other value chain actors. All services to farmers are free of charge and DeHaat only charges a fee to other value chain actors such as agro-dealers, agribusiness and aggregators and financial institutions that benefit from the transactions. DeHaat’s major cost centers are (by importance): (a) collection/service centers typically leased out but require storage and warehousing upgrades; (b) human resources to run the supply chains and build business relations with farmers; and (c) technology. Each center typically has enough transactions to break even on its own in two to three years. 84 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies consultations, workshops, and study tours to effectively case studies can provide valuable insights for Malaysia to implement promising technologies. Public policies learn, adapt, and implement digital agriculture policies should encourage a dual approach to digital agricultural tailored to its unique needs. Malaysian experts, both innovation by supporting the adaptation of successful within and outside the government, should evaluate imported models while also fostering the development which examples and models are best suited for the of solutions unique to Malaysia. This approach will country’s needs. Box 9 gives two examples of DAT ensure good governance and sectoral representation. innovations that could potentially be adopted to optimize Key actions include strengthening digital infrastructure private sector investments for the Malaysian context and expanding DAT components to guide decision- (See Box 9 on DAT innovations to optimize private sector making and address short-term priorities. International investments – experiences from other countries).  BOX 9 DAT innovations to optimize private sector investments – experiences from other countries Thailand: End-to end digital agricultural transformation Thailand’s commitment to embracing digitalization has yielded significant results, showcasing the potential for Malaysia to achieve similar success. Its approach highlights the value of a multi-pronged strategy that includes robust digital infrastructure and connectivity, particularly in rural areas, to ensure farmers have access to crucial information, market prices, and weather forecasts. Developing agricultural data platforms, such as the National Agriculture Big Data Platform (NABDP), allows for data- driven decision-making that optimizes crop yields and resource management. Thailand’s investment in agricultural extension services and training also empowers farmers with the knowledge and skills to effectively use digital tools. Finally, Thailand’s collaboration with the private sector, particularly agritech startups, has fostered innovation and brought tailored solutions to the agriculture sector. Malaysia can learn from Thailand’s experience and pave the way for successful digital agricultural transformation. This holds the key to ensuring food security, modernizing farming practices, and improving the welfare of its farming communities.  Indonesia: Revolutionizing the digital financial services (DFS) ecosystem DFS has significantly enhanced financial access for smallholder farmers and other agricultural stakeholders in many countries. Many smallholders lack sufficient funds to invest in their farms, hampering productivity and market connectivity. To enhance DFS in agriculture, a coalition of governments, donors, non- governmental organizations (NGOs), and the private sector must collaborate to build the ecosystem. For instance, CrowdE, an Indonesian startup, offers a P2P lending platform and market linkage services, to provide farmers with up to IDR 100 million in capital, backed by crowdsourced investors and distributed to approved farmers via its cashless network. This capital can be used for high-quality inputs, labor, access to production facilities, or other farming needs. CrowdE also connects farmers with distributors and agents to sell surplus crops. Since its inception, the platform has distributed IDR 81 billion (US$6 million) in loans to over 17,000 farmers, boasting a 97 percent repayment success rate within 90 days and offering two loan repayment options: interest repayment or profit-sharing. Farmer loans are also supported by subsidies from state-owned Bank Mandiri and other local lenders.  MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 85 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies Public sector investments in research and environmental sustainability, employment, and export innovation, and an enabling environment for private competitiveness. sector efforts are extremely important. An enabling environment for private sector coupled with public Implementing DAT pilot demonstration projects, sector investments in research and innovation have coupled with adapting lessons from global significantly contributed to productivity growth in the experiences, offers a strategic pathway to address agricultural sectors of both Thailand and Indonesia Malaysia’s food supply and demand challenges. (Warr, 2023). This substantial impact is reflected in the These pilot projec t s can ser ve as real-world sustained pace of total factor productivity (TFP) growth laboratories, allowing policymakers and stakeholders observed in both countries (Figure 71). Specifically, to assess the effectiveness of various DAT solutions these investments have led to advancements in within the specific context of Malaysia’s agricultural agricultural technologies, improved crop varieties, and landscape. By carefully building on the findings of the enhanced farming practices, which collectively drive proposed pilot projects, Malaysia can determine the higher yields and efficiency. feasibility and speed of scaling up new ventures for different crops across the country. This process will The scale-up process should leverage Malaysia’s generate valuable insights into how DAT can optimize dynamic private sector by fostering public-private resource use, increase yields, and inform necessary partnerships focused on two main objectives: public investments and public-private partnerships. delivering sound and relevant DATs for the food Simultaneously, studying and adapting successful system, and ensuring the necessary public investment DAT innovations from other countries can accelerate and policies are in place to bridge the digital divide Malaysia‘s learning curve, avoid potential pitfalls and and improve incentives for DAT adoption. Johor has adopt best practices. This approach enables the examples of successful public-private partnerships such tailoring of DAT solutions to national needs, addressing as Kulim Plantations’ collaboration with Greenheart supply-side issues such as improving yields and Farms for chili production in a fully controlled reducing crop losses through disease detection, while environment 54 or with Aerodyne for drone-assisted tackling demand-side challenges like improving product pesticide spraying on pineapples. Other countries traceability, expanding market access, and smoothing in the region are actively expanding DAT adoption, seasonal demands. The data and experiences gathered leveraging public support to fuel significant growth in from these pilots can inform evidence-based policies agritech, as shown in Box 10. Malaysia has a valuable and actions (discussed in the next section), guide opportunity to follow suit by embracing a wider larger-scale DAT adoption, and ultimately contribute variety of DATs, including advisory services, financial to a more robust, efficient, and responsive agriculture services, digital marketplaces, and traceability. This sector that better aligns supply with demand in the expansion holds potential to enhance efficiency, equity, Malaysian food system. FIGURE 71 Investments in research and innovation support TFP growth Index in Indonesia and Thailand Index 112 107 Indonesia 102 Thailand 97 92 87 82 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: USDA, World Bank 54 Pesticide free 86 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies BOX 10 Government-supported efforts to expand DAT and create an agritech sector India is leading the region in agritech innovation with over 1,000 agritech startups as of 2022, supported by robust government policies like Startup India and Digital India. The Indian government has introduced initiatives such as the Agritech Accelerator Fund and eNAM (National Agriculture Market), which are critical to the sector’s digital transformation. India’s agritech startups have attracted more than $1.2 billion in venture capital in 2022, with a focus on precision farming, digital platforms, and supply chain optimization. Two key initiatives are the Agritech Accelerator Fund, approved in 2023 to encourage agritech startups and digital solutions​ ; and eNAM, a digital trading platform connecting over 1,000 regulated wholesale markets, to boost transparency and farmer incomes. India’s agritech ecosystem is one of the most advanced globally, driven by strong venture capital inflows and government policies. The country’s vast agricultural base offers enormous potential for scaling agritech solutions.55 Indonesia’s agritech sector is growing rapidly, with strong government backing under initiatives such as Indonesia 4.0. The country is focused on integrating IoT solutions and digital platforms to modernize agriculture. Despite limited data on startup numbers, Indonesia’s large agricultural base makes it well-positioned for further agritech innovation, particularly in digital marketplaces and logistics. One key initiative is Indonesia 4.0, a national initiative designed to promote innovation across industries, including agriculture. Through government-supported projects focused on digital farming, Indonesia 4.0 is driving growth in the sector.​This shows that the Indonesian government’s commitment to DAT provides a strong foundation for Indonesia’s agritech ecosystem to continue developing.56 Thailand’s agritech ecosystem is currently emerging, as outlined by the National Innovation Agency’s (NIA) Agriculture 4.0 policy. The country is fostering innovation through its Thailand AgTech Startup Ecosystem Development White Paper (ASEDWP), which named over 53 agritech startups by 2020. Thailand still faces challenges in attracting investment, especially compared to regional peers like Indonesia and Malaysia. Key initiatives are the National Innovation Agency, which aims to build a robust agritech startup ecosystem, with early investments in farm management software, IoT, and biotechnology; and the ASEDWP, which provides a framework for collaboration and innovation to modernize Thailand’s agriculture through technology. Thailand’s ecosystem is in its early stages but has strong governmental support. The pace of innovation and investment is slower than in neighboring countries, but the foundation for growth is being put into place.57 55 https://www.mckinsey.com/industries/agriculture/our-insights/how-agtech-is-poised-to-transform-india-into-a-farming-powerhouse 56 https://www.mckinsey.com/featured-insights/asia-pacific/ten-ideas-to-unlock-indonesias-growth-after-covid-19 57 https://technode.global/2021/09/10/pioneering-thailands-agtech-startup-ecosystem-towards-agriculture-transformation/ MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 87 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies Recommendations for scaling up DAT adoption in Malaysia Successful implementation of DATs requires incentives to build trust and ensure secure, beneficial addressing foundational issues. For Malaysia to use of digital technology for all stakeholders. The effectively leverage DATs, it must prioritize three key implementation timeline for each pillar will vary. Some pillars: strategic investments in public goods, fostering strategies and investments, particularly those of a more innovative ecosystems, and cultivating an enabling technical nature, can be implemented relatively quickly. environment. Strategic investments in public goods Others, however, will require the involvement of various include implementing actionable strategies that institutions and government agencies and a broad will bridge digital literacy gaps, establishing digital consultation process to progress. identification systems, improving rural connectivity, and providing necessary infrastructure. Fostering To effectively scale up the adoption of DATs, the an innovative ecosystem requires establishing data Malaysian government should undertake two platforms, using satellite imagery for monitoring, simultaneous activities: implementing pilot programs creating incubators for startups, and aiding technical and executing specific actions under the three providers with business development. The third pillar foundational pillars. These activities are interrelated focuses on cultivating an enabling environment. This and should be part of an overall strategy to scale up requires clear strategies and actions that foster data DATs. governance, privacy, security, while also providing 1 Implementing pilot programs Pilot programs are essential for testing and b) Objectives of pilot programs: refining DATs in real-world settings. They provide valuable lessons that can be integrated into subsequent • Test digital technologies: Evaluate the feasibility initiatives, ensuring effective and scalable adoption. and effectiveness of various DATs in real-world The following steps are recommended: agricultural settings. a) Launch pilot projects: • Establish enabling conditions:   Identify and create the necessary conditions for the successful • Digital advisory for paddy production: Utilize adoption of DATs, as outlined in the digitalization precision agriculture data, yield prediction, and strategy pillars. yield gap analysis. • Learn and adapt: Use pilot programs as learning • Controlled environments for chili culti- platforms to refine the scaling-up pathway and vation: Implement fully controlled environments minimize risks. to optimize growth conditions. • Refine institutional framework:   Adjust the • Drone use for agrochemical spraying:  Apply institutional and public-private par tnership drones for efficient agrochemical spraying on frameworks based on evidence from pilot pineapples. programs. • Sensor-based irrigation and drone-based • Fine -tune funding s t rategies:  Develop pesticide application: Use these technologies in funding strategies involving public financial durian plantations. institutions, private funding, international grants, and specialized entities like accelerators and • Intensive shrimp farming:  Implement super- incubators. intensive white shrimp farming to demonstrate significant productivity gains and rapid cost recovery. 88 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies 2 Executing actions under the three foundational pillars Supporting DAT adoption in Malaysia aligns acceleration services; and 3) enhancing the enabling with global trends and underscores the need for environment through data governance and incentive government intervention. This support can be frameworks. This can be done simultaneously with realized through targeted policy measures and public implementing pilot programs so that the results can investments in line with the three foundational pillars of define pathways for scaling digitalization in Malaysia’s DAT outlined in Figure 72 below: 1) investing in public food system. Essential measures include undertaking goods such as rural connectivity, digital literacy, and a multifaceted approach that can meet the different farmer digital identification; 2) improving the innovation elements shown below. ecosystem through data platforms and incubation and FIGURE 72 The DAT scaling up pathway requires appropriate policies, pilots, and strategies Present situation PROPOSE PILOT DIGITIZATION INITIATIVES Develop a clear strategy LESSONS FROM PILOTS Investment Investment Enabling in public in innovation environment goods ecosystems IMPLEMENT DIGITAL TRANSFORMATION Source: World Bank MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 89 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies expand public-private partnerships with private PILLAR Investing in public 1 goods sector champions, including mobile network operators, to improve rural digital coverage. Investing in public goods is fundamental for c) Improve rural connectivity: successfully implementing digital technologies in agriculture. The Malaysian government should focus • Address digital divide: Implement connectivity on the following actions: solutions to address the digital divide caused by market failures such as risk aversion, information a) Enhance digital literacy and knowledge: asymmetries, and limited access to capital and digital skills. • National digital literacy program: Implement a national digital literacy program for farmers and • Policy responses:   Develop effective policy integrate DATs into school curricula, especially in responses to expand digital service availability, rural areas. promote DAT adoption, and minimize related inequities. • Deploy promotional campaigns and training for farmers: Combine incentives, financial inclusion • Legal and regulator y framework:   Ensure and access to capital to support adoption of transparent data ownership and privacy rights climate smart technologies. through a robust legal and regulatory framework. The Ministry of Agriculture and Food Security should • Knowledge exchange:   Foster knowledge play a key role in crafting relevant regulations. exchange between tech companies, farmers, and rural residents by sharing best practices and d) Prioritize public expenditures: experiences with other countries. • Infrastructure investments:   Prioritize public • E n t r e p r e n e u r s h i p p r o g r a m s :   Pr o m ote expenditures on infrastructure that encourage entrepreneurship programs in DATs to encourage tech companies to expand into rural areas and innovation and adoption. provide extension services to promote DAT adoption among farmers. • E-extension services:   Accelerate the shift to e-extension services, focusing on digital • Complement private investments: Government information dissemination and training rural policies and expenditures should complement residents in using digital technologies. E-advisory and leverage private-sector investments, the services, coupled with improved connectivity, primary drivers of DAT development. can be quickly implemented with wide benefits. b) Strengthen digital identification: PILLAR Investing in the • D i g i t i z e l a n d r e c o r d s a n d f a r m e r registries:   Implement digital IDs and direct 2 innovation ecosystem deposits for government payments to farmers. Creating an environment that supports innovation • Blockchain technology:   Utilize blockchain and DAT development is crucial. The Malaysian technology for traceability of seafood, poultry, government should focus on the following actions: and hor ticulture products, integrating with existing systems like the Malaysia Animal a) Establish data platforms and satellite Traceability System (MATs). imagery: • Support systems and regulations:   Foster a • Digital platforms: Establish or strengthen digital conducive environment for DAT providers by platforms to enhance government planning, enhancing rural area connectivity and simplifying monitoring, and benefit transfers, ensuring business registration and licensing for tech foundational data accessibility and promoting startups. data sharing. • Public-private partnerships:   Promote and • Open data policies:   Digitize and make 90 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies government data available to the public, such as • Data-sharing models:   Create data-sharing agricultural statistics and agrochemical data. models that benefit both suppliers and users. • Fisheries management:   Implement digital • Personal Data Protec tion Ac t:   Address platforms for fisheries management, including disadvantages posed by the Personal Data fish stock assessment, catch reporting, and Protection Act to agricultural producers by compliance monitoring. providing adequate recourse in cases of data breaches involving government-held information. • G e o g r a p h ic i n f o r m a t io n s y s te m (G IS ) technologies: Use GIS technologies for mapping and analyzing fishing activities. b) Incentive framework: • Data sharing incentives: Design and set up data • Repurpose input subsidies:  Repurpose input sharing incentives, such as recognition, mutual subsidies to fund DAT initiatives. data access, and data monetization, to encourage participation and innovation. • Integrate DAT solutions: Integrate DAT solutions into climate change strategies. b) Support incubators and accelerators: • Public expenditures: Use public expenditures for infrastructure and knowledge dissemination to • Expand incubators and accelerators:  Expand enhance farmers’ gains from digital technologies. the scope of incubators and accelerators to support agrofood tech startups. • Tailored financial products:  Develop financial products tailored to meet the specific needs of • Innovation challenges:  Implement innovation both users and providers of digital technologies. challenges to boost the supply of relevant digital solutions. c) Coordination across ministries: • Targeted programs:   Define and implement targeted programs tailored to the needs of • Cross-sectoral coordination:   Ensure greater agritech providers to boost innovation. coordination across relevant ministries and agencies to effectively implement DAT solutions. • Agri fintech innovation ecosystem:  Develop an agri fintech innovation ecosystem through • Climate change strategies:  Identify how DAT incubators, accelerators, and venture financing, solutions can support government strategies on building on digital innovation ecosystems, and climate change, maximizing both financial and providing adequate attention to young farmers economic benefits. in Malaysia. By implementing pilot programs and executing actions under the three foundational pillars, PILLAR Creating an enabling 3 environment Malaysia can effectively scale up the adoption of DATs. These efforts will provide crucial data, refine strategies, and establish the necessary conditions for Establishing clear policies on data governance, a successful digital transformation in the agricultural privacy, and security, along with implementing sector. The lessons learned from pilot programs will supporting incentives, is essential for creating guide the national digitalization strategy, ensuring that an enabling environment for DATs. The Malaysian Malaysia’s agriculture sector can achieve significant government should focus on the following actions: productivity gains and contribute to the country’s economic growth. a) Data governance, privacy, and security: • Tr a n s p a r e n c y a n d c o n t r o l:  Implement regulations that mandate transparency in data collection and give individuals control over how their data is used. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 91 92 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies Annex: Roadmap for enabling conditions for digital transformation (policy action plan) 58 PILLAR 1 INVEST IN PUBLIC GOODS DIGITAL LITERACY & DIGITAL RURAL CONNECTIVITY A KNOWLEDGE (7 Actions) B IDENTIFICATION (3 Actions) C FOR DAT (4 Actions) Time to implement 4 years 3 years 1 year Technical difficulty High High Low Magnitude of impact Moderate High High Impact time horizon Medium-to-long-term ≥ 4 years 3 years Implementing ministries and Government-wide regulation, with TWG, MOHE, MOSTI, KPKM, DP* KPKM relevant agencies input from KPKM therein Increase knowledge: Review and revise: 1. Promote a national digital literacy 1. Digitizing land records 1. Infrastructure regulations on program for farmers and other and farmer registry enabling rural area connectivity actors in the food system (mainly to ensure they are not train farmers on digital and 2. Using digital ID and unnecessarily burdensome financial literacy with content direct deposit for all tailored to farmers’ skill levels and government payments to 2. Startup-friendly regulations to access channels) farmers simplify business registration and licensing process for tech 2. In school curricula at a national 3. Blockchain for traceability: start-ups scale and especially in rural areas, This technology can be possibly in partnership with tech used to trace seafood5, 3. Regulations and support companies or via and by using or poultry (integrated with systems to streamline a organizing farmer’s groups the existing Malaysia conducive environment for Animal Traceability digital agriculture providers 3. Of best practices and experiences System and horticulture in DAT by sharing, cooperating, products. 4. Promote and expand PPP use and collaborating with other with private sector champions countries and mobile network operators in view of improving rural digital 4. Of DAT potential via knowledge coverage sharing between tech companies, farmers, and other rural residents, possibly in partnership with tech companies or by using or organizing farmer’s groups 5. Via entrepreneurship programs aimed at DAT for the agrofood sector (mentoring, coaching, finance access) Increase DAT use in extension by: 6. Identifying and accelerating the shift to e-extension, including digital dissemination of information (e.g., weather) 7. Extending outreach programs to disseminate information about digital technologies and train rural residents on their use 58 KPKM and World Bank forthcoming. MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 93 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies PILLAR 2 INVEST IN INNOVATION ECOSYSTEMS DATA PLATFORMS & SATELLITE INCUBATORS, ACCELERATOR FOR A IMAGERY (5 Actions) B TECH PROVIDERS (3 Actions) Time to implement 3 years 2 years Technical difficulty Moderate Medium Magnitude of impact High High Impact time horizon ≥ 4 years ≥ 2 years Implementing ministries and Government-wide regulation, Inter-agency and ministerial working group relevant agencies with input from KPKM with KPKM participation therein 1. Establish (or strengthen existing) digital platforms 1. Expand the scope of incubators and accelerators for planning, monitoring, and benefit transfer to agrofood techs by the government (strengthening access to foundational data and promoting data sharing) 2. Implement innovation challenges to increase the supply of relevant digital solutions 2. Digitize and make government data available (agricultural stats, agrochemical data) based on 3. Define and implement targeted programs for “open data” policies agritech providers 3. Use digital platforms that assist in fisheries management, including fish stock assessment, catch reporting, and compliance monitoring 4. Geographic Information System (GIS) technologies for mapping and analyzing fishing activities 5. Provide data sharing incentives (design and set up data sharing incentives, e.g., recognition, access other’s data, monetize data) 94 MALAYSIA ECONOMIC MONITOR | OCTOBER 2024 PART TWO - Farming the Future: Harvesting Malaysia’s Agricultural Resilience through Digital Technologies PILLAR 3 CREATE ENABLING ENVIRONMENT DATA GOVERNANCE, PRIVACY & INCENTIVE FRAMEWORK A SECURITY (2 actions) B (4 actions) Time to implement 2 years 2 years Technical difficulty High High Magnitude of impact High High Impact time horizon ≥ 4 years ≥ 4 years Implementing ministries and Government-wide Government-wide relevant agencies therein Review and revise: 1. Repurpose input subsidies to fund DAT 1. Regulations on data ownership and privacy, 2. Review government strategy on climate change to ensuring consistency with principles to build user fully incorporate DAT solutions confidence, including: 3. Focus public expenditures on public goods that increase value to farmers from using digital techs • Data collection should be transparent (i.e., (e.g., infrastructure, knowledge dissemination) individuals know if someone is collecting rather than policies that undermine farmers’ their data) incentives to adopt DAT (e.g., input subsidies) • Individuals should know and have a voice in 4. Tailor financial products to the needs of users and how their data is used providers of digital techs • Data-sharing models should work for both data suppliers (individuals) and users (enterprises/ companies) 2. 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