MALAYSIA ECONOMIC MONITOR JUNE 2021 Weathering the Surge CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific http://bit.ly/WB_blogsMY MALAYSIA ECONOMIC MONITOR © 2021 International Bank for Reconstruction and Development / The World Bank Sasana Kijang, 2 Jalan Dato Onn, Kuala Lumpur 50480, Malaysia Some rights reserved 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. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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All queries on rights and licenses should be addressed to World Bank Publications, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. MALAYSIA ECONOMIC MONITOR JUNE 2021 Weathering the Surge Acknowledgements This edition of the Malaysia Economic Monitor was prepared by Shakira Teh Sharifuddin (Task Team Leader), Richard Record, Yew Keat Chong, Mahama Samir Bandaogo, Sheau Yin Goh, Smita Kuriakose (Task Team Leader for Part 2) and Kok Onn Ting. Mohamad Rozani Osman, Hui Sin Teo, Kenneth Simler, Zainab Ali Ahmad, Gerton Rongen, Peter Lanjouw, Samuel Fraiberger, Amanina Abdur Rahman, Alyssa Farha Jasmin, Graciela Murciego, Haris Tiew, Rekha Reddy, R. Uma Rajoo and Victor Steenbergen provided additional contributions. Ndiame Diop, Hassan Zaman, Firas Raad, Lars Moller and Cecile Thioro Niang provided overall guidance. The team is grateful to Ergys Islamaj, Ekaterine T. Vashakmadze, and Souleymane Coulibaly for their constructive input on the document. This report benefited from productive discussions with staff from the Economic Planning Unit, Bank Negara Malaysia, the Ministry of Finance, the Ministry of International Trade and Industry, and many other government ministries and agencies, all of whom provided valuable information and useful feedback. In particular, the team would like to thank the International Cooperation Division of the Economic Planning Unit and the Economics Department of Bank Negara Malaysia for close ongoing collaboration with the World Bank and for the crucial support to the launch of this report. The team would also like to express its gratitude to analysts at several private financial firms and rating institutions, whose participation in a constructive dialogue also informed the analysis. Joshua Foong and Daniel Rajasingam Subramaniam led external communications and the production of the report. Irfan Kortschak provided editing assistance, while Aziaton Ahmad and Ruzita Ahmad provided administrative support. Kane Chong and Francis Sim designed the report and its cover. Cover image: Getty Images Content images: Samuel Goh, Getty Images, bigstockphoto, istockphoto The report is based on information current as of June 18, 2021. Please contact Richard Record (rrecord@worldbank.org), Shakira Teh Sharifuddin (stehsharifuddin@ worldbank.org) or Yew Keat Chong (ychong@worldbank.org) if you have any questions, comments or suggestions regarding the Malaysia Economic Monitor. 4 MALAYSIA ECONOMIC MONITOR | JUNE 2021 Abbreviations ASEAN Association of Southeast Asian Nations LFPR Labor Force Participation Rate B40 Bottom 40 percent (of the population) Inland Revenue Board (Lembaga Hasil Dalam LHDN Negeri Malaysia) BID Brought-in-dead LTGM Long Term Growth Model BNM Bank Negara Malaysia M40 Middle 40 percent (of the population) BPN National Caring Aid (Bantuan Prihatin Nasional) MCO Movement Control Order BPS Business Pulse Survey MEM Malaysia Economic Monitor BSH Cost of Living Aid (Bantuan Sara Hidup Rakyat) MGII Malaysian Government Investment Issues CAGR Compound Annual Growth Rate MGS Malaysian Government Securities CMCO Conditional Movement Control Order MITB Malaysian Islamic Treasury Bills COVID-19 Coronavirus Disease 2019 MNC Multinational Corporations CPI Consumer Price Index MOF Ministry of Finance Malaysia Comprehensive and Progressive Trans-Pacific CPTPP Partnership MPC Monetary Policy Committee DE Development Expenditure MTFF Medium-Term Fiscal Framework DFI Development Finance Institution MTRS Medium-Term Revenue Strategy DOSM Department of Statistics Malaysia MSME Micro, Small and Medium Enterprises E&E Electricals and Electronics NIA National Investment Aspirations EAP East Asia and Pacific NPL Non-performing Loans EMCO Enhanced Movement Control Order OE Operating Expenditure EMDEs Emerging Market and Developing Economies OPR Overnight Policy Rate EPF Employees Provident Fund PMR Product Market Regulations FBM KLCI FTSE Bursa Malaysia Index PPP Public Private Partnership FDI Foreign Direct Investment PPTS Percentage Points FIRE Finance, Insurance and Real Estate Sector R&D Research and Development GDP Gross Domestic Product RCEP Regional Comprehensive Economic Partnership GFCF Gross Fixed Capital Formation RMCO Recovery Movement Control Order GIC Global Investment Competitiveness RPGT Real Property Gains Tax GLC Government Linked Corporation SOEs State Owned Enterprises GNI Gross National Income SMEs Small and Medium Sized Enterprises GST Goods and Services Tax SRR Statutory Reserve Requirement GVCs Global Value Chains SST Sales and Services Tax HIC High-income Countries T20 Top 20 percent (of the population) ILO International Labor Organization TEMCO Temporary Enhanced Movement Control Order IMF International Monetary Fund TFP Total Factor Productivity IPA Investment Promotion Agencies UMIC Upper-middle Income Countries IPI Industrial Production Index WHO World Health Organization LCR Liquidity Coverage Ratio Y/Y Year-on-Year MALAYSIA ECONOMIC MONITOR | JUNE 2021 5 6 MALAYSIA ECONOMIC MONITOR | JUNE 2021 Table of Contents Acknowledgements 4 Abbreviations 5 Summary 8 Recent economic developments 9 Economic outlook 10 Resilient recovery for the private sector 12 PART ONE 19 Recent economic developments 20 Global economic conditions have improved 20 Domestic economic activity continues to be weighed down by the pandemic 21 Exports have expanded strongly, led by robust demand for manufactured goods 23 Unemployment remained elevated despite some signs of recovery in the labor market 26 Malaysia is facing a rapid rise in COVID-19 infections, putting the health system under strain 27 COVID-19 vaccinations are ongoing, but the national level of immunization remains low 29 The financial sector remained stable, despite pressures on credit quality 30 The government has provided additional support to households and firms amid the COVID-19 surge 32 The fiscal deficit widened in 2020 on higher stimulus spending 32 Economic outlook 36 Global growth is projected to improve in 2021, but recovery is expected to be uneven across countries 36 The ongoing pandemic and movement restrictions will continue to affect Malaysia’s economy in the near term 38 Ineffective containment and a slow vaccination rollout would be costly to the economy 39 Short-term measures should focus on saving lives and livelihoods of all Malaysians 41 The current pandemic underscores the importance of undertaking strong reforms 45 PART TWO 51 Resilient recovery for the private sector 52 The pandemic has impacted firms on both the production and demand sides 53 Most firms responded to the pandemic with increased use of digital tools 54 The crisis has exacerbated the productivity gap faced by firms, particularly SMEs 56 Connectivity and integration are key for market development 57 Services sector competition has been hampered by exclusions for foreign investors 62 Skills, technology and innovation are essential for productivity led growth 63 Enabling foundations to expand private investments 70 Mainstreaming sustainability in economic policy is pivotal to increase firm resilience 71 Clear and accessible support measures required to provide private sector relief 71 In the short term, programs need to be recalibrated towards increasing firm efficiency 74 In the medium to long term, there is a need to undertake deep structural reforms 78 References 82 MALAYSIA ECONOMIC MONITOR | JUNE 2021 7 Summary Summary More than a year since its advent, there has been a dramatic resurgence of the COVID-19 pandemic in Malaysia In recent months, there has been a steep increase To curb the spread of the pandemic and to ease in the number of daily new cases and, more the burden on the health system, the government disturbingly, in the number of deaths. While it took has reimposed the movement control order (MCO). almost one year for Malaysia to record its first 100,000 Initially, the terms of the MCO allowed for most cases, the increase in the number of new cases economic sectors to continue to operate. However, with between April to May 2021 alone amounted to more the number of cases remaining high and with no signs of than 100,000. Similarly, while it took about one year abatement, the government subsequently announced a for cumulative deaths to reach 500, the cumulative full lockdown, with only key essential services allowed number of deaths in the first two weeks of June alone to operate. The Ministry of Health has indicated that it was more than 500. Even more worryingly, the number may take between 3-4 months to flatten the curve of of brought-in dead (BID) cases also rose sharply; in the pandemic. May 2021, BID cases accounted for nearly one-third of total deaths. These latest developments will continue to adversely affect Malaysia’s economy in the near The severity of the current wave has raised term. The continuous cycle of “on-and-off” closures concerns regarding the overall capacity of the and re-openings will have negative spillovers on health system. With the number of new cases and the economy. In addition, the number of vulnerable death rates continuing to climb at a rapid rate, the households is likely to increase. A slower-than- health system has been operating at close to its expected rollout of the vaccination program or further maximum capacity, with most intensive care units increases in case numbers and death rates would (ICUs) running at nearly 100 percent capacity. At the further exacerbate this situation. same time, key containment measures, including mass testing and contact tracing, have not been fully The immediate focus should be on effectively or effectively implemented. In addition, the rollout of containing the pandemic and saving lives. Increasing the country’s vaccination program is being affected the capacity for smart containment, including the by delayed vaccine supply and high vaccine hesitancy, adoption of an effective testing and tracing strategy, although there are some signs that the pace has picked is essential to ensure a safe and gradual reopening of up recently. the economy. In parallel, the vaccination rollout must be accelerated, to help slow down the spread of the pandemic. 8 MALAYSIA ECONOMIC MONITOR | JUNE 2021 Summary The government must also protect the welfare of vulnerable groups through adequate financial Recent economic developments support. In particular, it must move to protect those in the bottom 40 percent (B40) income group and those most affected by the movement restrictions. This includes informal workers who are not adequately covered by social safety nets; those who have lost their The Malaysian economy contracted by 0.5 percent jobs, been placed on unpaid leave, or experienced pay in Q1 2021, moderating from the 3.4 percent cuts; and those with limited assets or savings to fall decline in Q4 2020. While negative spillovers from back on. the pandemic continued to weigh on the economy in the first quarter, the impact was cushioned by In the short term, the government’s fiscal policy less restrictive movement restrictions during that should prioritize ensuring the well-being of the period. The strengthening of global trade activity people. It urgently needs additional fiscal space both to also supported improved economic performance, as strengthen the health sector and to provide sustainable did a number of policy measures implemented by the support to vulnerable groups. government through its various stimulus packages. The Malaysia Economic Monitor (MEM) consists of Domestic demand continued to decline but at two parts. Part 1 presents a review of recent economic a slower rate (Q1 2021: -1.0 percent; Q4 2020: developments and a macroeconomic outlook. Part -4.5 percent). Domestic demand benefited from a 2 focuses on a special topic that is key to Malaysia’s deceleration in the decline in private consumption as medium-term development prospects and to the household activity resumed following the easing of achievement of shared prosperity. movement restrictions. Measures such as the Employee Provident Fund (EPF) withdrawal scheme also had The special topic for this edition is on the impact a positive impact on private consumption. Private of COVID-19 on the private sector and how in the investment also increased, driven mainly by higher longer term it can help to re-build the economy. capital expenditure in the manufacturing sector. The COVID-19 pandemic has exposed the gaps and exacerbated the vulnerabilities in Malaysia’s private sector. This is especially the case for small and medium enterprises (SMEs), which have been hard hit by both Increasing the capacity demand and supply shocks. for smart containment, The post-pandemic recovery will need to be largely including the adoption driven by the private sector. The productivity of firms in Malaysia especially the SMEs are found to be of an effective testing underperforming compared to its global peers. In and tracing strategy, is the context of the current uncertain global situation, it is particularly important for Malaysia to make the essential to ensure a safe transition to a productivity led growth model. and gradual reopening of Over the medium term, deep structural reforms are the economy needed to achieve higher rates of more inclusive and sustainable growth. While in the near term, focus will be to weather the surge; to reduce poverty and ensure shared prosperity, growth that creates a greater On the sectoral front, improvement was broad- number of more productive jobs is needed. Economic based, led by the manufacturing sector. This growth transformation through deeper structural changes and was supported by strong global demand for E&E market integration that catalyze business opportunities products and rubber gloves. The services, mining and is needed to create an environment in which workers are construction sectors all contracted at a more moderate able to shift into higher productivity activities, resulting pace than in Q1 2021. in higher incomes as they generate greater returns on their labor and other assets. Malaysia’s exports accelerated in Q1 2021, following stronger global economic activity. Much of the recent export growth momentum mirrored the MALAYSIA ECONOMIC MONITOR | JUNE 2021 9 Summary pick-up in manufacturing sector, on increased global demand for electronics as well as continued strong Economic outlook demand for rubber gloves. The global economy is projected to expand by Headline inflation has trended upwards, partly 5.6 percent in 2021, its strongest post-recession due to higher fuel prices. The uptick in fuel inflation growth rate in 80 years. This recovery, however, is stemmed from a base effect from the same period last uneven and largely reflects sharp rebounds in some year. The normalization of electricity tariffs following major economies, most notably the United States (U.S.), rebates between April and December 2020 also owing to its large fiscal support. Nevertheless, global contributed to the higher headline inflation. GDP is expected to remain 1.9 percent below pre- pandemic projections. Despite initial signs of a gradual recovery in the labor market, the unemployment rate remained elevated. The unemployment rate continued to be driven by relatively high unemployment rates for the 15- 24 age group. Private sector wages registered a smaller contraction in Q1 2021. Meanwhile, underemployment rates remained elevated in Q1 2021. The domestic financial sector remained stable in Q1 2021. During the quarter banks maintained adequate capital and liquidity positions. Nevertheless, overall loan impairment ratio remained stable at 1.6 percent in March 2021 (February 2021: 1.6 percent), despite higher impairments from households amid continued pressure on household income. So far this year, the government has announced three stimulus packages, to mitigate the impact of the pandemic. Collectively, these three packages amount to a value of RM75 billion (5.5 percent of GDP), with the amount of direct fiscal injection standing at 1.2 percent of GDP. The fiscal deficit is expected to increase in 2021. Following the announcement of the three economic stimulus packages, the government now expects The ongoing pandemic and movement restrictions Malaysia’s fiscal deficit to rise to 6 percent of GDP in will affect Malaysia’s economy in the near term. The 2021, higher than the earlier target of 5.4 percent. economy is projected to grow by 4.5 percent in 2021. At the end of 2020, Malaysia’s fiscal deficit stood at This latest projection is 1.5 percentage points lower 6.2 percent of GDP due to sharp revenue losses and than the earlier forecast of 6.0 percent. The revision increased stimulus spending. reflects the slower pathway towards suppression of the pandemic and the slower-than-expected vaccine The government recently withdrew RM5 billion rollout. The trajectory and pace of growth will depend from the National Trust Fund (KWAN) to finance on the duration and severity of movement restrictions, the procurement of COVID-19 vaccines and the containment of the pandemic, and the pace of the related expenses. The withdrawal was made following vaccine rollout. amendments to the National Trust Fund Act 1988, or the Emergency (National Trust Fund) (Amendment) The worsening COVID-19 situation and the Ordinance 2021, published in the Federal Government re-imposition of the MCO is expected to have Gazette in April 2021. This has led to calls for greater considerable impact on private consumption. transparency and accountability over the government’s The movement restrictions coupled with increased use of emergency financing during the COVID-19 crisis. precautionary behavior and subdued wage growth is expected to affect household spending activity (2021f: 4.2 percent; 2020: -4.3 percent). This is especially 10 MALAYSIA ECONOMIC MONITOR | JUNE 2021 Summary so for services-related sectors. Meanwhile, public The pace of the vaccine rollout plan also has to consumption is expected to continue to expand over be accelerated. The government could enact more the near term, albeit at a slower rate. proactive measures, including extending the opening hours of vaccination centers (including on weekends) With recovering global demand, export growth and redeploying volunteers at these centers to reach is likely to gain momentum. Given the acceleration remote areas where access may be more constrained. of advanced nations’ vaccination programs and the In addition, a sustained, effective public communication reopening of their economies, global demand is campaign should be implemented to reduce vaccine expected to continue to recover in the near term. The hesitancy amongst the public. growth rate for Malaysia’s exports of goods and services is projected to rebound to 13.1 percent in 2021 (2020: With movement restrictions expected to remain -8.9 percent) as global demand picks up. Import growth in place, continued financial support is essential. is projected to rise by 13.6 percent (2020: -8.4 percent), As the number of cases remain high and movement with the growth of intermediate and capital imports restriction measures remain in place, additional financial regaining some momentum due to improvements in support for vulnerable groups particularly those in the exports and investment. B40 is still needed to ensure that the welfare of these groups is protected.  It is projected that investment activities will be driven by continued improvement in export-related In the current context, fiscal policy should prioritize activities. Gross fixed capital formation is projected to the welfare of the people over medium-term fiscal rebound to 6.2 percent (2020: -14.5 percent), supported consolidation. It is necessary to create additional fiscal by increased capital expenditure in the private sector. space to strengthen the health system as well as to Increased production in the manufacturing and trade- provide additional financial support for the vulnerable related sectors, particularly in the E&E as well as oil and groups. Given this, it may be necessary to revisit the gas subsectors, will support this growth. debt limit soon. Headline inflation is projected to be higher in 2021. Efforts to rebuild fiscal buffers should remain The average consumer price inflation rate is projected the key policy priority in the medium term. In the to increase to 3.0 percent, (2020: -1.2 percent), mainly case of Malaysia, efforts to increase revenue collection due to the gradual improvement to domestic demand through a more progressive tax framework needs to be and higher fuel prices. accelerated. Measures to improve spending efficiency should also be introduced alongside revenue- The economy faces several downside risks. An enhancing measures. ineffective containment of the outbreak could see Malaysia remain in an ongoing cycle of movement Malaysia also needs to enhance its social controls, posing a further drag on the economy. Further protection system. The crisis has highlighted the delays in Malaysia’s vaccine rollout could also affect importance of a strong social protection system to the planned reopening of the economy. The current provide a guaranteed minimum standard of living for slow pace of Malaysia’s vaccine rollout and any further all and improve the resilience of the vulnerable against delay could also affect a more certain reopening of income shocks, including those resulting from events the economy. In addition, the number of vulnerable such as the COVID-19 pandemic. households could remain elevated and the ongoing domestic political uncertainty could continue to hinder Looking further ahead, structural reforms should the progress of the recovery effort in the near term. be anchored on ensuring that Malaysia’s transition into a high-income country translates to an In the near term, containing the current wave improvement in living standards for all Malaysians. of the COVID-19 pandemic should remain the Productivity growth and private-sector innovation will government’s topmost priority. Protecting the lives be the primary drivers of future growth. Deep structural and health of citizens is vital to lessen strains on the reforms will be needed to remove distortions, encourage health system, ensure a safe resumption of economic innovation, strengthen competition in markets, improve activities and prevent a more protracted downturn. the investment climate, and facilitate deeper regional An effective find-test-trace-isolate-support (FTTIS) integration. These issues and policies are explored in strategy is essential to ensure a safe and gradual greater detail in Part 2 of this edition of the MEM, titled reopening of the economy and an easing of movement Resilient Recovery for the Private Sector. restrictions. MALAYSIA ECONOMIC MONITOR | JUNE 2021 11 Summary Resilient recovery access to finance, which could constrain private sector recovery and future growth. On the upside, a majority of firms continue to respond to the challenges brought for the private on by the pandemic through the increased use of digital tools. However, despite the high proportion of sector firms adopting digital technology, the vast majority of firms are interested in government assistance for the adoption of digital solutions to deal with COVID-19 crisis. The COVID-19 pandemic has exposed the gaps and exacerbated the vulnerabilities in Malaysia’s Uncertain trade and investment prospects have private sector. This is especially the case for SMEs, given Malaysia a renewed sense of urgency which have been hard hit by both demand and supply to strengthen its competitiveness. Beyond shocks. Real time surveys implemented during the the pandemic, Malaysia faces a considerably less crisis, show that Malaysian firms are more vulnerable benign global environment amid heightened policy than their peers, with less cash in hand to withstand uncertainty and shifting patterns of international trade. the crisis. These shocks have exacerbated the issues Additionally, the country also faces the acceleration that the Malaysian private sector faced pre-pandemic. of disruptive technologies that will alter the nature of Malaysian firms especially SMEs lag behind their global comparative advantage. In Malaysia, private investment peers on productivity measures and have lower rates fell by 11.9 percent last year, with FDI contracting by 55 of technology adoption and were less likely to provide percent, a greater decline than in many other regional training and to invest in innovative activity. economies. Even before the current crisis, Malaysia had experienced a decade-long decline in private While the top policy priority will be on saving lives investment growth. Productivity driven growth will rely and livelihoods, it is essential for the government on reversing this secular decline in private investments to focus on increasing the resilience of the private that are an important source of new technology and sector. The sharp increase in the number of COVID-19 firm-level process innovations and improvements in cases and the subsequent re-imposition of the MCO management practices. increases the uncertainty around Malaysia’s economic recovery. The fallout of the pandemic presents considerable fiscal challenges for Malaysia, implying that the post-pandemic recovery will need to be largely To reduce poverty driven by the private sector. and ensure shared To achieve higher rates of more inclusive and prosperity, economic sustainable growth, Malaysia will need to implement growth that creates deep structural reforms. To reduce poverty and ensure shared prosperity, economic growth that creates a greater number of a greater number of more productive jobs is needed. more productive jobs Economic transformation through deeper structural changes and market integration that catalyze business is needed opportunities is needed to create an environment in which workers are able to shift into higher productivity activities. These measures would aim to increase It is necessary to address regulations and productivity led growth and will include encouraging practices that restrict business entry and market firm level innovation, having open and contestable competition. While being generally open to trade markets, improving the business environment and and investment, Malaysia has retained a number of facilitating deeper regional integration through greater exclusions on foreign suppliers in certain key sectors. liberalization of services industry. Similarly, the government has also liberalized foreign participation in the services sector in 2009, but retained The private sector adjusted to the crisis through restrictions in sectors such as transport services, finance various mechanisms. Affected by demand and and professional services. Finally, mainstreaming an supply shocks, firms are adjusting employment and economic growth strategy that incorporates green and are experiencing pressing liquidity constraints. The environmental sustainability will play a positive role in pandemic has also exacerbated issues related to improving private sector competitiveness. 12 MALAYSIA ECONOMIC MONITOR | JUNE 2021 Summary Investments in innovative activity and skilled capabilities and skills, in addition to developing an workforce will be pivotal to productivity led growth enabling framework that provides more efficient and for Malaysia. While great emphasis has been placed inclusive financial services, especially for SMEs are on the enhancement of the quantity of R&D and crucial. innovation in Malaysia, less emphasis has been placed on its quality and its links with industry. Moreover, the In the medium to long term, deep structural gross expenditure on R&D, which is an important gauge reforms are needed to ensure a resilient recovery to an economy’s investment in innovative activities has for the private sector. An early ratification of the declined in 2018. Analyses across three Productivity and Comprehensive and Progressive Agreement of Trans- Investment Climate Surveys for Malaysia have shown Pacific Partnership (CPTPP) and the swift entry into that skills shortages are a major constraint for firms force of the Regional Comprehensive Economic operating in Malaysia. With the trend toward increased Partnership (RCEP) should be prioritized. The digitization and automation in the current context, commitments implied by these agreements could the availability of an adequately skilled workforce has have significant positive impacts in terms of attracting become even more critical. investments, including investments that spur innovation and technological upgrading. Malaysia also needs In the immediate term, clear and accessible to modernize its investment ecosystem to attract support programs will be critical to provide relief to more quality investments, encourage deeper linkages firms. This includes the extension of conditional wage between public research institutions and industry, subsidies, improving predictability of SOP regulations strengthen firms’ technological and skills readiness, and and expediting approvals and disbursements for mainstream environment sustainability into economic existing loans. To facilitate private sector recovery, policy making. These reforms will be critical in ensuring short-term policies to recalibrate existing programs Malaysia’s post pandemic recovery is led by the private towards current firm needs such as increasing digital sector. MALAYSIA ECONOMIC MONITOR | JUNE 2021 13 Recent trends in Malaysia’s economy Malaysia’s economy posted a smaller ...driven by improvements in domestic and contraction in Q1 2021... external demand GDP, y/y, Percentage Contribution to GDP, y/y, Percentage 10 10 5 5 0 0 -5 -5 -10 -10 -15 -20 -15 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 -20 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Net Exports Private Consumption Public Consumption GFCF Change in Inventory Real GDP, y/y Daily COVID-19 cases have been rising at a ...and with a higher number of fatalities faster pace... Number of New Daily Cases Per Million, 7-Day Rolling Average New Daily Deaths Per Million, 7-Day Rolling Average 300 3.5 3.0 250 2.5 200 2.0 150 1.5 100 1.0 50 0.5 0 0.0 01/01/2021 15/01/2021 29/01/2021 12/02/2021 26/02/2021 12/03/2021 26/03/2021 09/04/2021 23/04/2021 07/05/2021 21/05/2021 04/06/2021 18/06/2021 01/01/2021 15/01/2021 29/01/2021 12/02/2021 26/02/2021 12/03/2021 26/03/2021 09/04/2021 23/04/2021 07/05/2021 21/05/2021 04/06/2021 18/06/2021 Malaysia Indonesia Thailand Malaysia Indonesia Thailand Philippines India Philippines India Current momentum in exports is expected to Malaysia’s economy is projected to grow by provide continued support to the economy 4.5 percent in 2021 Contribution to Export Growth, y/y, Percentage GDP, y/y, Percentage 25 8 20 6 15 5.8 5.1 4.8 4 4.4 4.4 4.5 10 5 2 0 0 -5 -2 -10 -15 -4 -5.6 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 -6 -8 E&E - Semiconductors E&E - Others Exports, y/y 2015 2016 2017 2018 2019 2020 2021f Non E&E Commodities 14 MALAYSIA ECONOMIC MONITOR | JUNE 2021 Resilient recovery for the private sector Firms were on the path to recovery at the Even before the pandemic, Malaysia had end of Q3 2020, but this trend has since lower TFP levels than its aspirational and reversed transitional peers Firm Operational Status, Percentage Relative TFP of Comparator Groups to Malaysia, Percentage (2019) 60 50 25 40 0 20 -25 0 Open Partially Temp. Temp. Permanently open closed closed closed -50 (mandated) (own choice) Aspirational Transitional Regional MCO (Mar-Apr) 1st CMCO (May-Aug) Oct 1-15 2nd CMCO (Oct 14-Dec 7) Jan 15-Feb 10 Mean Small (5-19) Medium (20-99) Large (100+) Malaysia has been experiencing a decade- Malaysian rms are less likely to invest in long decline in private investment growth upskilling and innovation Real Private Gross Fixed Capital Formation, y/y, Percentage Share of Firms Investing in Training and R&D, Percentage (2019) 25 50 20 40 15 30 10 20 5 10 0 0 -5 Proportion of Proportion of Proportion of Firms that Provide Firms that Engage Firms that -10 Training to in R&D Introduced New Workers Product in Last 3 Years -15 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Malaysia Regional Transitional Aspirational On the positive side, a majority of rms The topmost priorities for rms continue to responded to the pandemic with increased be improving predictability of SOPs use of digital tools Share Among Firms that Started or Increased Use in Digital Platforms, Most Bene cial Government Policy Improvements, Percentage of Firms Percentage 70 Clarity & predictability of SOP 60 50 Expedite PRIHATIN/PENJANA 40 Simplify wage subsidy scheme 30 Increase use of e-Government 20 Expedite immigration approvals 10 Clarity on foreign labor policy 0 Marketing Sales Payment Methods Business Admin. Supply Chain Mgmt. Production Planning Service Delivery Production Others 0 10 20 30 Oct 1-15 Jan 15-Feb 10 MALAYSIA ECONOMIC MONITOR | JUNE 2021 15 Weathering the Surge: Near-term policy measures Near-term measures should focus toward saving the lives and livelihoods of all Malaysians Accelerating the pace of Revisiting scal rules the vaccine rollout plan to to create additional space Protecting the provide adequate protection for scal support lives and to the population livelihoods of all Malaysians Strengthening capacity for Providing additional targeted smart containment prior assistance to vulnerable to any relaxation of the households and businesses movement control measures Source: World Bank staff elaboration Immediate measures to provide relief to businesses and short-term measures to increase firm efficiency Immediate Short-term (Up to 1 year) Implement clear Extend conditional Improve SOP Recalibrate Develop more and accessible wage subsides regulations programs efficient and inclusive support programs financial services These include having Wage subsidies that Improve the predictability Recalibrate programs to Simplify loan application very clear eligibility have been effective in of SOP regulations and meet the needs of rms for processes and use alternative criteria for rms with limiting layoffs expedite approvals and increased digital capability data for credit decisioning. expedient turnaround in Malaysia disbursements for and greening, especially in Introduce digital nancial on applications made existing loans the case of SMEs services Source: World Bank staff elaboration 16 MALAYSIA ECONOMIC MONITOR | JUNE 2021 MALAYSIA ECONOMIC MONITOR | JUNE 2021 17 18 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE Recent Economic Developments and Outlook MALAYSIA ECONOMIC MONITOR | JUNE 2021 19 PART ONE - Recent Economic Developments and Outlook Recent economic developments Global economic conditions have improved Global economic activity has gained significant The recovery pattern is also expected to be uneven, momentum after marked contraction caused by passing over many poorer countries, and there is the COVID-19 pandemic (see Figure 1). Nevertheless, considerable uncertainty about its sustainability global economic growth remained well below pre- going forward. With their successful vaccination pandemic projections. The pandemic continues to programs, economic performance has also improved weigh on growth in many countries. The epicenter of in the major advanced economies, particularly in the the pandemic has now moved to some emerging market United States, where the recovery is being powered and developing economies (EMDEs), where more by substantial fiscal support. Among the developing transmissible and virulent variants are spreading and economies in the East Asia Pacific region, there has where access to vaccines remains limited. In general, been a general improvement to economic performance, while some advanced economies have recorded albeit with significant variations between countries significant progress with their vaccination programs, (see Figure 2). While growth in China remains strong, the vaccination rates in poorer countries remain low. it has moderated recently, with authorities focusing FIGURE 1 FIGURE 2 Global economic activity has picked up Regional economic activities have also improved, considerably since Q3 2020 but at an uneven pace GDP, y/y, Percentage GDP, y/y, Percentage 6 20 4 15 2 10 0 5 -2 0 -4 -5 -6 -10 -8 -10 -15 -12 -20 Q1-2016 Q3-2016 Q1-2017 Q3-2017 Q1-2018 Q3-2018 Q1-2019 Q3-2019 Q1-2020 Q3-2020 Q1-2021 Q1-2016 Q3-2016 Q1-2017 Q3-2017 Q1-2018 Q3-2018 Q1-2019 Q3-2019 Q1-2020 Q3-2020 Q1-2021 World Advanced Emerging and Developing EAP Thailand China Economies Developing Economies Indonesia Vietnam Philippines Source: World Bank Global Economic Prospects Source: World Bank Global Economic Prospects 20 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook on measures to reduce financial stability risks. Many with industrial production surpassing its pre-pandemic other countries, particularly EMDEs, are experiencing a levels. However, activity in the services-related sectors, subdued recovery, with a resurgence of the COVID-19 especially travel and tourism, remains weak. cases. Global manufacturing activity has expanded, Domestic economic activity continues to be weighed down by the pandemic Malaysia’s economy contracted by 0.5 percent in Q1 2021, moderating from the 3.4 percent While negative spillover decline in the previous quarter (see Figure 3). effects from the pandemic While negative spillover effects from the pandemic continued to weigh on the economy in Q1 2021, these continued to weigh on the effects were cushioned by less restrictive movement economy in Q1 2021, these control measures. Overall activity also benefited from the rebound in major economies and the general effects were cushioned by strengthening in global trade activity. A number of less restrictive movement policies outlined in the government’s stimulus packages also provided crucial support to the economy during control measures the quarter. Nonetheless, while the decline in growth narrowed during the quarter, Malaysia’s economic Domestic demand registered a smaller contraction growth remained below its pre-pandemic levels, of 1.0 percent in Q1 2021 (Q4 2020: -4.5 percent) with the speed and timing of an entrenched recovery (see Figure 4). Domestic demand benefited from remaining uncertain. a relatively smaller decline in private consumption FIGURE 3 FIGURE 4 Malaysia’s economy posted a smaller contraction …driven by improvements in domestic and in Q1 2021… external demand GDP, y/y, Percentage Contribution to GDP, y/y, Percentage 10 10 5 5 0 0 -5 -5 -10 -10 -15 -20 -15 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 -20 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Net Exports Private Consumption Public Consumption GFCF Change in Inventory Real GDP, y/y Source: DOSM Source: World Bank staff calculations based on DOSM data MALAYSIA ECONOMIC MONITOR | JUNE 2021 21 PART ONE - Recent Economic Developments and Outlook compared to the previous quarter (Q1 2021: -1.5 percent), supported by strong global demand for percent; Q4 2020: -3.5 percent). This was largely E&E products and rubber gloves. The output of the driven by a gradual resumption in household activity, agriculture sector also increased (Q1 2021: 0.4 percent; following the easing of movement restrictions in Q4 2020: -1.0 percent) due mainly to higher output February. Measures such as the Employee Provident in other agriculture and livestock sub-sectors. The Fund (EPF) withdrawal scheme also had a positive services, mining and construction sectors all contracted impact on private consumption. Growth in public at a more moderate pace than in Q1 2021, owing to consumption accelerated (Q1 2021: 5.9 percent; Q4 an increase in the range of permissible activities across 2020: 2.4 percent), mainly due to increased expenditure many economic sectors. on emoluments, and supplies and services. Private investment also increased (Q1 2021: 1.3 percent; In April 2021, headline inflation increased to 4.7 Q4 2020: -6.6 percent), driven by increased capital percent (March 2021: 1.7 percent) (see Figure 5). expenditure in the services and manufacturing sectors. The increase in headline inflation was mainly due to fuel Public investment declined at a slower pace than in price increases stemming from a base effect from the the previous quarter (Q1 2021: -18.6 percent; Q4 2020: same period last year (see Figure 6). The normalization -20.4 percent) due to increased expenditures on fixed of electricity tariffs following the ending of rebates in assets. Nonetheless, while significant improvements December 2020 also contributed to the increase in the were recorded in the most recent quarter, the overall headline inflation. Meanwhile, core inflation remained level of domestic demand remained below its pre- constant at 0.7 percent during the quarter. The COVID-19 peak in Q4 2019. Producer Price Index (PPI) of local production recorded a marked increase of 10.6 percent in April 2021 (March On the sectoral front, the improvement was broad- 2021: 6.7 percent). The sharp rise was mainly due to a based, with growth led by the manufacturing low base effect and continued rise in commodity and sector. The manufacturing sector grew at the robust raw material prices. rate of 6.6 percent during the quarter (Q4 2020: 3.0 TABLE 1 GDP growth decomposition GDP, y/y, Percentage Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2018 2019 2020 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020 2020 2021 GDP 5.3 4.8 4.5 4.8 4.8 4.7 5.0 4.5 3.7 4.4 0.7 -17.2 -2.7 -3.4 -5.6 -0.5 Consumption Private Sector 6.6 8.0 8.9 8.4 8.0 7.7 7.8 7.1 8.2 7.7 6.7 -18.5 -2.1 -3.5 -4.3 -1.5 Public Sector 0.4 3.2 5.2 4.2 3.4 6.1 0.0 0.7 1.0 1.8 4.9 2.2 6.8 2.4 3.9 5.9 Gross Fixed Capital 0.2 1.7 2.8 0.6 1.4 -3.4 -0.6 -3.7 -0.7 -2.1 -4.5 -29.0 -11.4 -11.8 -14.5 -3.3 Formation Exports of Goods & 2.3 2.0 0.5 2.9 1.9 0.3 0.6 -1.6 -3.3 -1.0 -7.2 -21.7 -4.9 -2.1 -8.9 11.9 Services Imports of Goods & -2.0 3.7 2.3 2.0 1.5 -1.6 -2.3 -3.3 -2.3 -2.4 -2.7 -19.7 -7.9 -3.3 -8.4 13.0 Services Sectoral Agriculture 3.1 -1.5 -0.7 -0.1 0.1 6.1 4.2 3.7 -5.5 2.0 -8.6 0.9 -0.3 -1.0 -2.2 0.4 Mining -2.4 -1.3 -5.0 -0.1 -2.2 -0.1 2.9 -2.8 -2.5 -0.6 -2.9 -20.8 -7.8 -10.4 -10.6 -5.0 Manufacturing 5.2 4.9 5.0 4.7 5.0 4.1 4.3 3.6 3.0 3.8 1.4 -18.3 3.3 3.0 -2.6 6.6 Construction 4.9 4.8 4.7 2.5 4.2 0.6 1.1 -1.4 1.3 0.4 -7.9 -44.5 -12.4 -13.9 -19.4 -10.4 Services 6.6 6.6 7.3 6.9 6.9 6.5 6.2 5.9 6.2 6.2 3.1 -16.2 -4.0 -4.8 -5.5 -2.3 Source: World Bank staff calculations based on DOSM data 22 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook FIGURE 5 FIGURE 6 Headline inflation turned positive in Q1 2021... ...driven by higher transportation costs on higher fuel prices In ation, y/y, Percentage Contribution to In ation, y/y, Percentage 6 6 5 4 4 3 2 2 1 0 0 -1 -2 -2 -3 -4 01/2018 04/2018 07/2018 10/2018 01/2019 04/2019 07/2019 10/2019 01/2020 04/2020 07/2020 10/2020 01/2021 04/2021 01/2018 04/2018 07/2018 10/2018 01/2019 04/2019 07/2019 10/2019 01/2020 04/2020 07/2020 10/2020 01/2021 04/2021 Headline In ation Core In ation Others Transport Headline In ation Housing, Water, Electricity, Food and Non-alcoholic Gas & Other Fuels Beverages Source: DOSM Source: World Bank staff calculations based on DOSM data Exports have expanded strongly, led by robust demand for manufactured goods Malaysia’s exports accelerated to 18.2 percent in Q1 Intermediate imports also expanded (Q1 2021: 4.6 2021 (Q4 2020: 5.1 percent). This was largely driven percent; Q4 2020: -7.2 percent), reflecting the increased by increased external demand due to stronger global demand for manufactured goods. economic activity and the low base in Q1 2020 when the country first entered into a nationwide lockdown. In Q1 2021, the current account surplus narrowed Much of the recent export growth momentum was to 3.3 percent of GDP (Q4 2020: 4.9 percent). This driven by manufacturing exports, which grew by 21.9 reflects a smaller goods surplus and wider deficit in the percent during the quarter (Q4 2020: 7.6 percent) on the services and secondary income accounts (see Figure back of increased global demand for E&E products and 8). During the quarter, the goods surplus narrowed to rubber gloves (see Figure 7). Export growth was also RM36.6 billion (Q4 2020: RM42.6 billion), with imports supported by a narrower contraction in commodities growing at a faster pace than exports. The services exports (Q1 2021: -5.4 percent, Q4 2020: -7.8 percent), account registered a larger deficit of -RM15 billion (Q4 mainly due to higher LNG prices. 2020: -RM14 billion) due to continued weakness in travel activity and higher payments for foreign transportation Imports also rebounded as the pickup in services and other business services. The deficit in the manufacturing and investment led to increased secondary income account also increased (Q1 2021: demand for capital and intermediate imports. -RM3.6 billion; Q4 2020: -RM2.7 billion), with outflows Malaysia’s gross imports grew by 10.8 percent in from workers’ remittances outpacing receipts. The Q1 2021 (Q4 2020: -4.5 percent), with much of this increased deficit in the secondary income account more increase attributable to the strong growth in capital than offset the narrower deficit in the primary income imports (Q1 2021: 32.7 percent; Q4 2020: -15 percent), account, which stood at -RM5.7 billion in Q1 2021 (Q4 consistent with the recent pickup in investment activity. 2020: -RM7.2 billion). MALAYSIA ECONOMIC MONITOR | JUNE 2021 23 24 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook The financial account rebounded, with a net inflow of investments. The greatest inflow was recorded in the RM16 billion in Q1 2021 (Q4 2020: -RM10.2 billion). Other Investment category, with the value standing at This was driven by net inflows in direct investment, RM13.9 billion (Q4 2020: -RM3.7 billion), mainly due to portfolio investment, financial derivatives and other an increase in interbank borrowings from abroad. FIGURE 7 FIGURE 8 Export growth was led by strong global demand The current account surplus narrowed due to a for E&E products and rubber gloves smaller goods surplus Contribution to Export Growth, y/y, Percentage Current Account Balance, Percentage of GDP 25 10 20 8 15 6 4 10 2 5 0 0 -2 -5 -4 -10 -6 -15 -8 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 E&E - Semiconductors E&E - Others Exports, y/y Primary & Secondary Income Account Goods Non E&E Commodities Services Current Account Source: World Bank staff calculations based on BNM and DOSM data Source: World Bank staff calculations based on DOSM data TABLE 2 Selected external sector indicators Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020 2020 2021 Balance of Goods & 8.0 5.4 6.0 7.4 8.9 6.7 7.4 7.2 5.8 4.5 7.6 7.5 5.8 Services (% of GDP) Current Account 4.3 1.0 0.9 2.8 4.8 4.0 3.5 1.9 2.4 2.5 6.7 4.9 3.3 Balance (% of GDP) Total Exports (% of GDP) 68.4 68.2 68.7 68.9 66.2 65.8 65.2 64.0 60.9 60.8 61.0 62.8 66.3 Total Imports (% of GDP) 60.4 62.8 62.7 61.5 57.4 59.1 57.8 56.8 55.1 56.4 53.4 55.3 60.5 Net Portfolio -3.5 -40.2 0.9 -6.5 6.8 -9.8 -25.8 -3.5 -41.4 20.6 -20.3 -7.1 0.4 Investment (RM billion) Gross Official Reserves 416.4 423.4 427.0 419.6 420.2 425.4 431.3 424.1 440.1 443.1 436.5 432.2 451.1 (RM billion) (US$ billion) 107.8 104.8 103.1 101.4 103.0 102.7 103.0 103.6 102.3 103.5 105.0 107.7 108.5 Source: World Bank staff calculations based on DOSM data MALAYSIA ECONOMIC MONITOR | JUNE 2021 25 PART ONE - Recent Economic Developments and Outlook Unemployment remained elevated despite some signs of recovery in the labor market Despite initial signs of a gradual recovery in the (Manufacturing wage: -0.6 percent; Q4 2020: -3.4 labor market, Malaysia’s unemployment rate percent. Services wage: -3.1 percent; Q4 2020: -4.6 remained elevated. In the first quarter, there were percent). some indications of gradual improvements in the labor market. These improvements were characterized by a lower rate of contraction in employment growth (Q1 Despite signs of recovery, 2021: -0.05 percent; Q4 2020: -0.6 percent) and a the unemployment rate greater increase in the labor force (Q1 2021: 1.4 percent; Q4 2020: 1 percent). Nonetheless, despite these remained elevated at 4.8 signs of recovery, the unemployment rate remained percent during Q1 2021 elevated at 4.8 percent during Q1 2021 (see Figure 9). Underlying the overall unemployment rate is the high rates for the 15-24 age group, which remained elevated Underemployment rates remained high in Q1 2021 at 12.1 percent in Q1 2021, although it declined from (see Figure 10). Skill-related underemployment has risen the 12.8 percent recorded in Q4 2020. Meanwhile, the since the onset of the COVID-19 pandemic and stood unemployment rates for other age groups rose during at 13.1 percent at the end of March 2021. Time-related the period. Due to improvements in the manufacturing underemployment declined to 2.0 percent in Q1 2021, and services sectors, private sector wages contracted down from 2.4 percent in Q4 2020, but nevertheless at a lower rate in Q1 2021 than in the previous quarter remained elevated at above pre-pandemic levels.1 FIGURE 9 FIGURE 10 Unemployment rate remained unchanged during Skill-related underemployment rate continues to Q1 2021 trend upward Unemployment Rate, Labor Force Participation Rate, Percentage Underemployment Rate, Percentage 5.5 70 15 3.0 5.0 4.5 2.5 69 13 4.0 2.0 3.5 68 11 3.0 1.5 2.5 67 9 2.0 1.0 1.5 1.0 66 7 0.5 0.5 0.0 65 5 0 07/2016 11/2016 03/2017 07/2017 11/2017 03/2018 07/2018 11/2018 03/2019 07/2019 11/2019 03/2020 07/2020 11/2020 03/2021 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Labor Force Participation Rate Skill-related underemployment rate Unemployment Rate Time-related underemployment rate (RHS) Source: DOSM Source: DOSM 1 Skill-related underemployment rate is the fraction of the labor force with tertiary qualification who work in semi-skilled or low-skilled jobs. Time-related underemployment rate is the share of the labor force employed for less than 30 hours per week due to the nature of their work or to the insufficient availability of work. 26 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook Malaysia is facing a rapid rise in COVID-19 infections, putting the health system under strain After a gradual decline trend in new daily experts have also expressed concerns regarding COVID-19 cases between February and March, Malaysia’s positivity rate, which stands above the five daily cases have been on the rise again, and at a per cent threshold that is considered to be indicative of much faster pace since mid-April (see Figure 11). inadequate testing.3 The increase in the number of daily cases began in late March, following further relaxations to the movement The severity of the most recent wave of the controls and the re-opening of schools, which together pandemic has placed significant strains on contributed to many outbreaks and clusters linked to Malaysia’s public health system. Most hospitals that workplaces, communities, and educational institutions. manage COVID-19 patients are currently operating In the last week of May, the number of daily new at maximum capacity, with intensive care units (ICUs) infections averaged at 7,000 cases, with a record high in dedicated to treating COVID-19 patients operating the number of daily fatalities (see Figure 12), surpassing at above 90 percent of their capacity. In addition, even India, which was the epicenter of the pandemic the COVID-19 Integrated Quarantine and Treatment earlier during the year. In addition, the pandemic has Centers (PKRCs), which are used to treat and isolate become increasingly widespread, with most districts in asymptomatic and low-risk patients, are also operating the country now falling into the red zone category.2 The close to their limits. The government has implemented health ministry has also expressed concern regarding temporary measures to alleviate the pressure, including the emergence of new variants of concern (VOCs), the establishment of field ICUs at military facilities in which may spread at a faster pace and result in higher selected areas and the opening of additional PKRCs fatality rates than previously identified strains. Health nationwide. FIGURE 11 FIGURE 12 Daily case counts have increased rapidly since Fatality rates have also risen sharply April 2021 Number of New Daily Cases Per Million, 7-Day Rolling Average New Daily Deaths Per Million, 7-Day Rolling Average 300 3.5 3.0 250 2.5 200 2.0 150 1.5 100 1.0 50 0.5 0 0.0 01/01/2021 15/01/2021 29/01/2021 12/02/2021 26/02/2021 12/03/2021 26/03/2021 09/04/2021 23/04/2021 07/05/2021 21/05/2021 04/06/2021 18/06/2021 01/01/2021 15/01/2021 29/01/2021 12/02/2021 26/02/2021 12/03/2021 26/03/2021 09/04/2021 23/04/2021 07/05/2021 21/05/2021 04/06/2021 18/06/2021 Malaysia Indonesia Thailand Malaysia Indonesia Thailand Philippines India Philippines India Source: Oxford University’s Our World in Data Source: Oxford University’s Our World in Data Note: As at 18 June 2021 Note: As at 18 June 2021 2 Red zones are districts that have seen more than 41 new cases within the last 14 days. 3 A high percent positivity rate means that more testing should probably be done, as it suggests high coronavirus infection rates due to high transmission in the community (https://www.jhsph.edu/covid-19/articles/covid-19-testing-understanding-the-percent-positive.html) MALAYSIA ECONOMIC MONITOR | JUNE 2021 27 PART ONE - Recent Economic Developments and Outlook To curb further accelerations in the number The current MCO is set against a greater set of of infections and to ease the pressure on the challenges. The Ministry of Health expects that it health system, the government has reimposed may take between 3-4 months to flatten the curve4, a nationwide movement control order (MCO). In and this is similar to the first MCO implemented back response to the increase in the number of infections in March 2020. Nevertheless, while the previous MCO throughout the country, a nationwide MCO was imposed was successful in bringing the number of new cases on May 12, although most economic sectors continued down to single digits, the current MCO faces greater to be allowed to operate. The restrictions included challenges. First the number of daily cases during the limitations on movement across state lines; prohibitions first MCO was much lower, below 500 and the health on dine-ins and social gatherings; the closure of schools system was not as constrained. The government and a shift back to remote schooling across the country; recently announced the National Recovery Plan (NRP) and a return to work from home arrangements. These which details a four-phased of post-pandemic exit restrictions were further tightened on 25 May, with the strategy and re-opening of the economy, based on a operating hours of businesses further restricted and a certain set of milestones i.e. number of daily new cases, 60 percent staff capacity limit imposed on workplaces. ICUs capacity and vaccination rate. Although the Plan With the number of cases continuing to increase, the provides a structured plan for the phased re-opening government announced a full lockdown on 1 June, with of the economy, it was also suggested that it could be only essential services being allowed to operate. improved by including more detailed strategies to slow down the spread of infections5. 4 “Up to 4 months to flatten the curve” (https://themalaysianreserve.com/2021/05/31/up-to-4-months-to-flatten-the-curve/) 5 “National Recovery Plan lacks clear strategy to flatten Covid-19 curve, says MMA” (https://www.thestar.com.my/news/nation/2021/06/17/national-recovery- plan-lacks-clear-strategy-to-flatten-covid-19-curve-says-mma) 28 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook COVID-19 vaccinations are ongoing, but the national level of immunization remains low While implementation of Malaysia’s National Despite these constraints, the inoculation drive COVID-19 Immunization Program (NIP) 6 is gained some momentum in May and June (see Figure underway, it has been impacted by delayed vaccine 14). This was largely due to the overwhelming positive supply and logistical challenges. While more than response to the opening of a parallel vaccination 14 million people have  registered for the COVID-19 channel that offered the AstraZeneca vaccine through vaccine in Malaysia, only slightly more than 5 million a voluntary opt-in program, contributing to an increase (less than 20 percent of the population) have received in daily vaccination rate.7 In addition, the government at least one dose of a vaccine by mid-June (Figure 13). has also set-up large scale vaccination centers as well as Although Phase 1 of the NIP got off to an encouraging mobile vaccination units in the rural areas. An increase of start, with vaccinations progressing ahead of schedule, vaccine deliveries in May and June has also contributed the progress of Phase 2 has been impacted by delays to an increase in the number of vaccines administered. in vaccine supply. In addition, the vaccination rate has Relatedly, data released by the government show that also been affected by logistical challenges in vaccine average daily vaccinations increased more than sixfold distribution as well as vaccine hesitancy among the from March to June and have surpassed the 200,000 public. The on-going global vaccine shortage has also level for the first time on June 15. The government led to the delay of Phase 3 of the NIP, which was initially has also recently granted conditional approval for scheduled to begin in May. emergency use to the single-dose vaccines CanSino and Johnson & Johnson, and this could contribute to the acceleration of the vaccination program. FIGURE 13 FIGURE 14 Total vaccination rate and registration for Pick-up in vaccination rate in May and June vaccination remains low Number of People Registered and Vaccinated, Million Share of People Who Received at Least One Dose of Vaccine, Percentage 16 Total 14 registration 12 10 8 Govt. target 6 (Aug 2021: 10 million) 4 Vaccination 2 rate 0 02/04/2021 12/04/2021 22/04/2021 02/05/2021 12/05/2021 22/05/2021 01/06/2021 11/06/2021 Completed At least 2 doses 1 dose 0 5 10 15 20 25 30 Malaysia Indonesia Thailand Philippines India Source: The Special Committee on COVID-19 Vaccine Supply (JKJAV) Source: Oxford University’s Our World in Data Note: As at 18 June 2021 Note: As at 18 June 2021 6 The NIP is divided into three phases; phase 1 of the rollout is channeled towards healthcare personnel and essential workers, accounting for about 500,000 individuals, and would run between February to April 2021. Phase 2 includes senior citizens above the age of 60 as well as vulnerable groups with underlying health conditions, comprising about 9.4 million individuals and would take place between April to August 2021, while the third phase would be opened to the general public, running from May 2021 to February 2022 covering about 13.7 million individuals. 7 On 28th May 2021, the government announced that it will no longer run the parallel AstraZeneca vaccination program. Instead it will be re-introduced in the main vaccination program. MALAYSIA ECONOMIC MONITOR | JUNE 2021 29 PART ONE - Recent Economic Developments and Outlook The financial sector remained stable, despite pressures on credit quality Malaysia’s central bank, Bank Negara Malaysia support financial activity, with a coverage ratio of 145 (BNM), maintained the overnight policy rate (OPR) percent in Q1 2021 (Q4 2020: 148 percent), well above at 1.75 percent in H1 2021. The Monetary Policy the minimum statutory requirement of 100 percent.8 Committee (MPC) considers the current monetary Furthermore, banks continued to maintain an adequate policy stance to be appropriate and accommodative, capital buffer, with the tier 1 capital ratio standing at noting a better-than-expected economic performance 14.9 percent at the end of March 2021. Despite higher in the first quarter of 2021. Nevertheless, the MPC also impairments from households amid continued pressure acknowledged that the reimposition of movement on household income, the overall loan impairment ratio restrictions and challenges related to the vaccine rollout was stable at 1.6 percent in March 2021 (February 2021: could dampen near-term growth prospects. Despite 1.6 percent). these constraints, the central bank expects Malaysia’s growth trajectory to improve due to strengthening Household loans expanded faster in Q1 2021, global demand and increased public and private driven by strong growth in loans for the purchase spending. Nonetheless, the MPC expects the balance of residential properties and passenger cars of risks to the economy to remain tilted to the downside. (see Figure 15). Outstanding household loan growth increased to 6 percent in Q1 2021 (Q4 2021: 5.4 Malaysia’s domestic financial sector remained percent), mainly driven by loans for the purchase of stable in Q1 2021, with banks maintaining residential properties and passenger cars. In part, this adequate capital and liquidity positions during the was driven by the tax exemption measures announced quarter. In terms of profitability, the banking sector’s by the government in its economic stimulus packages. overall return on equity stood at 8.5 percent (Q4 2020: Growth in credit card loans declined, suggesting 9.2 percent), with return on assets estimated to stand a decline in overall spending activity during the at 1 percent (Q4 2020: 1.1 percent). Liquid assets pandemic. Outstanding loans to businesses also grew held by the banking system remained adequate to at a more rapid rate in the first quarter (1.6 percent; FIGURE 15 FIGURE 16 Household loans grew on higher purchase of Net financing expanded by 4.7 percent in Q1 passenger cars and residential properties 2021 Loan Growth, y/y, Percentage Contribution to Net Financing Growth, y/y, Percentage 10 10 5 8 0 6 -5 4 -10 2 -15 0 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 01/2017 05/2017 09/2017 01/2018 05/2018 09/2018 01/2019 05/2019 09/2019 01/2020 05/2020 09/2020 01/2021 Purchase of Passenger Cars Credit Card Purchase of Residential Property Household loans Corporate Bonds Total Net Financing Personal Use Banking System and DFI Loans Source: World Bank staff calculations based on BNM data Source: World Bank staff calculations based on BNM data 8 Estimates from Haver Analytics 30 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook Q4 2020: 0.9 percent), due to loans for the purpose of to an increase in non-resident holdings of outstanding working capital. On balance, net financing expanded government bonds (Q1 2021: 25 percent; Q4 2020: by 4.7 percent in Q1 2021 (Q4 2020: 4.4) (see Figure 16). 24.2 percent) (see Figure 17). The yields for 3-year, 5-year, and 10-year Malaysian Government Securities (MGS) increased by 24.4, 54.1 and 61.9 basis points respectively during the quarter. The FBM KLCI declined Outstanding household by 3.3 percent at the end of March 2021, closing at loan growth increased 1573.5 points (end-December: 1627.2 points), largely due to pressure on corporate earnings following the to 6 percent in Q1 2021, resurgence of the pandemic and the reimposition of mainly driven by loans the MCO. In the foreign exchange market, improved US economic prospects led to increased investment flows for the purchase of into US financial assets, consequently strengthening residential properties the US Dollar. As a result, the Malaysian ringgit and other regional currencies depreciated against the US and passenger cars Dollar (see Figure 18). Although capital inflows have continued, increases in yields due to higher expected inflation in the US could lead to a reversal of capital During the first quarter of 2021, Malaysia’s flows in the future. domestic financial markets recorded a mixed performance. Accommodative global liquidity conditions and improved investor sentiments, which was partly supported by the reinstatement of Malaysia in the FTSE World Government Bond Index (WGBI), led FIGURE 17 FIGURE 18 The domestic bond market experienced non- The ringgit and regional currencies depreciated resident portfolio inflows against the US dollar Non-resident Portfolio Flows, RM Billion MYR/Currency, Jan 2017=100 (Upward Trend Indicates MYR Depreciation) 15 115 10 110 5 105 100 0 95 -5 90 -10 85 -15 80 -20 75 -25 24/02/2017 25/05/2017 23/08/2017 23/11/2017 26/02/2018 28/05/2018 24/08/2018 27/11/2018 28/02/2019 29/05/2019 28/08/2019 27/11/2019 25/02/2020 27/05/2020 25/08/2020 23/11/2020 23/02/2021 06/2017 09/2017 12/2017 03/2018 06/2018 09/2018 12/2018 03/2019 06/2019 09/2019 12/2019 03/2020 06/2020 09/2020 12/2020 03/2021 Government Bonds and BNM Bills Equity USD EUR GBP IDR Corporate Bonds and Sukuk THB VND PHP Source: BNM and Bursa Malaysia Source: World Bank staff calculations based on BNM data MALAYSIA ECONOMIC MONITOR | JUNE 2021 31 PART ONE - Recent Economic Developments and Outlook The government has provided additional support to households and firms amid the COVID-19 surge To date, the government has announced three packages included special allocation to the health additional stimulus packages, the PERMAI, sector and measures to support business continuity. PEMERKASA and PEMERKASA+, to mitigate the The government also continued with the disbursement economic impact of the pandemic. Collectively, of the Bantuan Prihatin Nasional cash transfer program these three packages amounted to RM75 billion (5.3 (BPN 2.0), with 460,000 additional recipients to about percent of GDP), including direct fiscal spending of 11 million recipients. RM16 billion (1.1 percent of GDP) (see Figure 19). These The fiscal deficit widened in 2020 on higher stimulus spending At the end of 2020, Malaysia’s fiscal deficit Act 1988, or the Emergency (National Trust Fund) stood at 6.2 percent of GDP, reflecting sharp (Amendment) Ordinance 2021, published in the Federal revenue losses and increased stimulus spending. Government Gazette in April 2021. The government Federal government revenue was estimated to stand stated that it needed to tap into the fund to ensure that at 15.3 percent of GDP in 2020, lower than the figure its 6 percent budget deficit target remains achievable. of 17.2 percent recorded in 2019. Federal government The use of this fund has led to calls for greater expenditure increased slightly to about 22.2 percent of transparency and accountability over the government’s GDP in 2020, up from 21 percent in 2019 (see Figure emergency financing during the COVID-19 crisis. 20). Over the same period, operating and development expenditures combined were estimated to stand The Federal government’s debt increased following at 19.5 percent of GDP, with the COVID-19 Fund a widening of the fiscal deficit in Q1 2021. At the established to provide economic relief and to finance end of March 2021, the federal government’s debt recovery amounting to 2.7 percent of GDP. Following stood at 58.5 percent of GDP. The increase in federal the announcement of the three economic stimulus government debt was driven by a decline in government packages, the government now expects Malaysia’s revenues and an increase in expenditures. One of the fiscal deficit to rise to 6 percent of GDP in 2021, higher measures included in the Temporary Measures for than the earlier target of 5.4 percent. Government Financing (Coronavirus Disease 2019 (COVID-19)) Act 2020, adopted by parliament last year, The government recently withdrew RM5 billion to temporarily increase the limit in domestic debt (MGS, from the National Trust Fund (KWAN)9 to finance MGII, and MITB)10 from 55 percent of GDP to 60 percent. the procurement of COVID-19 vaccines and related Meanwhile, the value of debt guaranteed by the federal expenses. The withdrawal, amounting to almost 25 government had increased to 20.8 percent of GDP by percent of the fund or 0.4 percent of GDP, was made the end of December 2020, up from 18.2 percent of GDP following amendments to the National Trust Fund a year earlier. 9 KWAN was established as the country’s natural resource fund to ensure that future generations will continue to benefit from a stable source of income from the country’s rich but finite wealth of natural resources. It is managed by BNM and to date, its sole contributor is PETRONAS and as at end-2019, the fund amounted RM19.2 billion. 10 MGS: Malaysian Government Securities; MGII: Malaysian Government Investment Issues; MITB: Malaysian Islamic Treasury Bills 32 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook FIGURE 19 FIGURE 20 The bulk of the stimulus packages were non-fiscal Aggregate expenditure rose to 22.2 percent in spending 2020 Amount of Stimulus, RM Billion Federal Government Expenditure, Percent of GDP 45 25 40 35 20 30 15 25 20 10 15 10 5 5 0 0 PERMAI PEMERKASA PEMERKASA+ 2015 2016 2017 2018 2019 2020 Direct scal spending Non- scal measures Operating expenditure Development spending COVID-19 fund Source: MOF and World Bank Staff calculation Source: MOF and World Bank Staff calculation In April 2021, the government issued the world’s million of 30-year Trust Certificates. The Sukuk was first sovereign US Dollar Sustainability Sukuk oversubscribed by a factor of 6.4, indicating investors’ (Islamic bond). The issuance consisted of US$ 800 growing appetite for sustainable debt instruments (see million of 10-year Trust Certificates, and US$ 500 Box 1). MALAYSIA ECONOMIC MONITOR | JUNE 2021 33 PART ONE - Recent Economic Developments and Outlook BOX 1 The Rise of Sovereign Sustainable Bond Issuances A Brief History of Sovereign objectives, with a mix of climate and social agendas, Sustainable Bond Issuances with these bonds often labeled as sustainability bonds. Meanwhile, bonds with a specific marine and ocean In December 2016, the Republic of Poland issued a focus have been labeled as blue bonds. Collectively, EUR 750 million green bond, the first such bond from these thematic green, social, sustainability, and blue a sovereign state, to finance a range of climate-related bonds are often referred to as sustainable bonds. projects. It had been eight years since the first green bond was issued by the World Bank, with this marking The COVID-19 pandemic has created a range of a significant development in the nascent sustainable new challenges, resulting in new developments as bond market that foreshadowed the growing popularity governments strive to deal with the massive global of sovereign sustainable bond issuances. economic and social disruption resulting from the pandemic. As a result, while the value of global social Green bonds serve to channel funds into climate- bond issuances stood around US$ 17 billion in 2019, related projects, while social bonds play a similar role for the response to the pandemic resulted in a dramatic projects with a social agenda. Some projects have dual increase to US$ 141 billion in 2020 (see Figure 21). 34 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook FIGURE 21 Global sustainable debt annual issuance, 2013-2020 Issuance (US$ Billion) 800 732.1 700 600 565.5 Sustainability-linked bonds 500 Sustainability-linked loans Green loans 400 Social bonds 309.3 300 Sustainability bonds 237.9 Green bonds 200 145.8 85.1 100 64.5 26.6 0 2013 2014 2015 2016 2017 2018 2019 2020 Source: Bloomberg NEF, Bloomberg L.P What are governments using and principles, such as those expressed through the the funds for? International Capital Market Association’s (ICMA) Sustainability Bond Guidelines 2018, Green Bond Funds raised through the issuance of sovereign Principles 2018, Social Bond Principles 2020, and the sustainable bonds are earmarked for activities intended ASEAN Sustainability Bond Standards 2018. This to promote sustainability, which are often activities reflects the Malaysian government’s commitment that have long been financed by governments but that to utilize the proceeds of the sukuk issuance only on only now have been segregated and clearly identified eligible projects that are either climate-friendly; have a as having climate, social or sustainability impacts. The clear social agenda; or both.11 World Bank Green Bond Proceeds Management and Reporting guide for public-sector issuers provides Thus, this represents a pool of available funding for key guidance on how this might be achieved. sustainable developmental projects, including projects related to clean transportation, renewable energy, In Poland, the issuance of green bonds has been used energy-efficient green buildings, the sustainable to fund several sectors with a heavy concentration management of living natural resources, access to in clean transportation and sustainable agriculture, essential services such as healthcare and education, while in Thailand, sustainability bond proceeds have affordable basic infrastructure, and employment been allocated to a Mass Rail Transit project (clean generation through support to small and medium transportation, 60 percent) and employment generation enterprises. (COVID-19 response, 40 percent). As demand for sustainable investment assets such as Malaysia’s sustainability sukuk increases worldwide, the How Malaysia could leverage use of such instruments to tap the global and domestic capital markets could attract a wider group of investors sustainable issuances to fund than traditional sukuk or bond issuances. A larger pool development of available investors usually means stronger demand and better pricing, both of which will be essential as Malaysia’s SDG Sukuk Framework, which provides a Malaysia looks forward to a rebound from the pandemic basis for the issuance of the inaugural sustainability crisis and to the achievement of more sustainable sukuk, is aligned with major international guidelines growth into the future. 11 https://www.mof.gov.my/pdf/ekonomi/sustainability/sukuk/ MALAYSIA ECONOMIC MONITOR | JUNE 2021 35 PART ONE - Recent Economic Developments and Outlook Economic outlook Global growth is projected to improve in 2021, but recovery is expected to be uneven across countries The global economy is projected to expand by percent in 2021, 2.1 percentage points higher than the 5.6 percent in 2021, its strongest post-recession projections made in January. This is driven by significant growth rate in 80 years (see Figure 22). Following a 3.5 fiscal and monetary policy support; acceleration in the percent contraction due to the impact of the COVID-19 implementation of vaccination programs in several pandemic in 2020, global economic activity has gained countries; the provision of additional fiscal support in significant momentum. However, this recovery has the US; and the release of sizable pent-up demand. been uneven across countries, largely reflecting sharp rebounds in some major economies, most particularly While growth in the East Asia Pacific region is the U.S., where recovery has been driven by large fiscal projected to improve, it is expected to do so at support programs. Global recovery is expected to an uneven pace across different countries (see continue into 2022, with the growth rate moderating Figure 23). Overall growth in the region is projected to 4.3 percent. Despite this, global GDP is expected to to accelerate to 7.7 percent in 2021, largely reflecting remain at 1.9 percent below pre-pandemic projections. a strong rebound in China. Nevertheless, output in two-thirds of the countries in the region is expected to In advanced economies, progress towards control of remain below pre-pandemic levels at least until 2022. the pandemic has been driven by an acceleration in The pandemic is expected to dampen potential growth the implementation of vaccination programs, which in many economies, especially those that suffered most is expected to unlock significant pent-up demand. from extended outbreaks of COVID-19 and the collapse Growth in advanced economies is forecast to reach 5.4 of global tourism and trade. Major downside risks to FIGURE 22 FIGURE 23 Global GDP is projected to improve in 2021... …with growth in Developing EAP projected to accelerate, but remain uneven across countries GDP, y/y, Percentage GDP, y/y, Percentage 8 8 6 7 6 4 5 2 4 0 3 -2 2 1 -4 0 -6 -1 -8 -2 2020e 2021f 2022f 2020e 2021f 2022f 2020e 2021f 2022f 2020e 2021f 2022f 2020e 2021f 2022f 2020e 2021f 2022f Emerging Market Advanced Developing EAP World and Developing Developing EAP China Economies excl. China Economies Latest Estimates (June 2021) Previous Estimates (January 2021) Latest Estimates (June 2021) Previous Estimates (January 2021) Source: World Bank staff projections Source: World Bank staff projections 36 MALAYSIA ECONOMIC MONITOR | JUNE 2021 MALAYSIA ECONOMIC MONITOR | JUNE 2021 37 PART ONE - Recent Economic Developments and Outlook the region include the possibility of repeated, major levels, raises the possibility of more severe and longer- COVID-19 outbreaks, particularly in the context of the lasting effects from the pandemic, including subdued delayed implementation of vaccination programs. Also, investments. heightened financial stress, amplified by elevated debt The ongoing pandemic and movement restrictions will continue to affect Malaysia’s economy in the near term The current resurgence of the COVID-19 pandemic capital formation is projected to rebound to 5.5 and the reimposition of the MCO is expected to percent (2020: -14.5 percent), supported by increased have a significant impact on private consumption. capital expenditure in the private sector. Increased The ongoing MCOs, increased precautionary behavior, production in the trade-related manufacturing and subdued wage growth are all expected to exert sectors, particularly in the E&E as well as oil and gas negative pressure on private consumption activity. This subsectors, will support this growth. Public investment is especially so for services-related sectors, which will is expected to grow, albeit at a slower rate, supported continue to be particularly impacted by movement by the range of programs implemented through the restrictions. Expansion in consumption will crucially government’s stimulus packages and by the continued depend on the safe reopening of the economy, which implementation of major infrastructure projects (e.g., is likely to be subdued in the near term given the ECRL, MRT2 and Pan-Borneo Highway). severity of the current outbreak. With these factors, in 2021, private consumption growth is expected to reach 4.2 percent (2020: -4.3 percent). Meanwhile, public The ongoing MCOs, consumption is expected to continue to expand over the near term, albeit at a more moderate rate (2021f: increased precautionary 2.0 percent; 2020: 3.9 percent). This growth will be behavior, and subdued supported by ongoing government expenditure on emoluments and on measures to improve public service wage growth are all delivery. expected to exert negative With recovering global demand, export growth pressure on private is likely to gain momentum. Given the acceleration consumption activity of advanced nations’ vaccination programs and the reopening of their economies, global demand is expected to continue to recover in the near term. Against this backdrop, Malaysia’s economy is Assuming there are no new major waves of infections, projected to grow by 4.5 percent in 2021 (see Table the growth rate for exports for goods and services is 4). This latest projection is 1.5 percentage points lower projected to rebound to 13.1 percent in 2021 (2020: than the earlier forecast of 6.0 percent. The revision -8.9 percent) as global demand stabilizes. The recovery reflects the slower-than-expected suppression of the in economic activities in selected countries throughout pandemic and implementation of the vaccine rollout. the region, especially China, will also contribute to Under this baseline scenario, growth can be attributed increases in trade activities. Import growth is projected to a marked rebound from a low base in 2020 and to to rise by 13.6 percent (2020: -8.4 percent), with the continued improvements in exports. growth of intermediate and capital imports regaining some momentum due to improvements in exports and The pace and trajectory of growth will depend on investment. a number of factors. This includes the length and severity of movement restrictions, the effectiveness of In the near term, it is projected that investment pandemic containment measures, and the pace of the activities will be driven by these continuing rollout of the vaccination program. An ongoing cycle of increases in export-related activities. Gross fixed on-and-off closures and re-openings of the economy 38 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook or any further unexpected disruptions or delays to the Headline inflation is projected to increase in 2021, vaccination rollout could exert further negative pressure with the average consumer price inflation rate on growth. Furthermore, an increase in the number of projected to increase to 3.0 percent, (2020: -1.2 vulnerable households could affect consumer spending, percent). This is mainly due to the projected gradual posing additional downside risk to the projection. On improvement to domestic demand and to higher fuel the upside, the effective management of the pandemic prices. Underlying inflation is expected to be broadly and increased vaccination rates could lead to higher- contained into 2021 in the absence of immediate than-projected growth. domestic cost pressures. TABLE 3 GDP growth and contribution to growth Annual Growth, y/y, Percentage Contribution to Annual GDP Growth (Percentage Point)   2020 2021f 2022f 2023f   2020 2021f 2022f 2023f GDP -5.6 4.5 5.0 4.8   Domestic Demand Domestic Demand (including stocks) -5.1 3.9 4.8 4.5 (including stocks) -4.7 3.9 4.9 4.4 Private Consumption -4.3 4.2 6.4 6.0 Private Consumption -2.5 2.5 3.8 3.6 Public Consumption 3.9 2.0 1.2 1.0 Public Consumption 0.5 0.3 0.2 0.1 Gross Fixed Capital Gross Fixed Capital Formation -14.5 5.5 4.2 3.5 Formation -3.3 1.1 0.9 0.7   Change in Stocks 0.7 0.0 0.0 0.0 External Demand External Demand Exports of Goods & Exports of Goods & Services -8.9 13.1 4.9 4.4 Services -5.7 8.1 3.3 3.0 Imports of Goods & Imports of Goods & Services -8.4 13.6 5.3 4.4 Services -4.8 7.5 3.2 2.7 Source: World Bank staff calculations and projections Ineffective containment and a slow vaccination rollout would be costly to the economy A prolonged and ineffective containment of the non-pharmaceutical interventions (NPIs), often coupled pandemic could see the number of cases and with other stringent control measures (e.g. lockdowns) fatalities remain high (see Figure 24). Without have been found to be effective in breaking chains of a proper Find-Test-Trace-Isolate-Support (FTTIS) transmission. Without this, mortality, morbidity, and strategy, reopening the economy will come at the incidence of COVID-19 cases is likely to remain high, risk of another surge in case numbers and precipitate and in turn overburden the health system. another phase of movement restriction. This would have negative spillovers to the economy. Businesses, With the current pace of Malaysia’s vaccine particularly those in the services sectors and SMEs, rollout, any further delays could also affect a safe would operate under more uncertainty, and investment reopening of the economy. To date, the pace of the activities would be deferred. Continuous use of these rollout has been fairly slow, partly due to supply issues, MALAYSIA ECONOMIC MONITOR | JUNE 2021 39 PART ONE - Recent Economic Developments and Outlook although it has picked up recently. The government been placed on unpaid leave, or experienced pay cuts has indicated that the third phase of the NIP may would remain vulnerable unless they are provided with commence later than initially planned due to delays in adequate financial support. receiving supplies. Other factors negatively affecting the implementation of the vaccination campaign Ongoing domestic political uncertainty could include operational issues, such as weaknesses in the continue to affect investment sentiment and online registration system and logistical challenges. In hinder the progress of the recovery. In January addition, vaccine hesitancy among certain segments 2021, the government declared a state of emergency, of the population has also led to a lower number of scheduled to last until August 2021, with the objective of individuals registering for vaccination or failing to turn controlling and flattening the number of daily COVID-19 up at their appointments. Failure to accelerate the cases. Speculation regarding a possible extension to rollout could contribute to prolonged lockdowns and the state of emergency and the future of the current amplify downside risks to the economy. governing coalition have contributed to uncertainty surrounding Malaysia’s political stability and the overall The number of vulnerable households without direction of its economic policies. The suspension of adequate support could increase. While the parliamentary sessions has led to delays in the tabling government has introduced a number of financial of the 12th Malaysia Plan, possibly affecting the process support measures for households, many of them are for Budget 2022. The Conference of Rulers12 have stated either modest or short-term in nature. Furthermore, that there is no need for the Emergency to be extended although most sectors in the economy are permitted past its original end date of August 1 and parliament to operate during the MCO, the gains have been fairly should convene as soon as possible. As domestic debt uneven, accruing mainly to the manufacturing sector. edges closer to the statutory limit, the suspension of This could have a number of negative implications, parliamentary sessions is also constraining discussions particularly for those in lower-income groups, most of related to revisions to the debt limit. If the government whom are employed in the services sectors and SMEs. breaches the limit without a statutory basis, it would Those with few or no assets or savings to fall back on; have negative consequences for the country’s fiscal and informal workers who are not adequately covered by institutional standing. social safety nets; and those who have lost their jobs, FIGURE 24 Ineffective containment and a slow pace of vaccine rollout would be costly to the economy Ineffective cont inment of the p ndemic 1 Ineffective containment of the outbreak could see the number of cases and fatalities remain high, putting a strain on the health system, resulting in an ongoing cycle of movement controls, and casting a further drag on the economy Slow pick-up in v ccine rollout 2 The current slow pace of Malaysia’s vaccine rollout and any further disruption in Malaysia’s vaccine rollout plan could also affect the planned reopening of the economy and overall investors' con dence Hi her number of vulner ble households 3 The movement restrictions would affect those who are employed in the services sectors and SMEs, those with little or no assets or savings, informal workers, those who have lost their jobs, been placed on unpaid leave, or experienced pay cuts Domestic politic l uncert int 4 Ongoing domestic political uncertainty could continue to affect investment sentiment, weaken institutional reforms and hinder the progress of the recovery effort in the near term Source: World Bank staff elaboration 12 The Conference of Rulers is a council comprising the nine rulers of the Malay states, and the governors or Yang di-Pertua Negeri of the other four states. 40 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook Short-term measures should focus on saving lives and livelihoods of all Malaysians In the near term, containing the current wave application.14 This suggests that, minimally, a decisive of the COVID-19 pandemic should remain the and robust FTTIS strategy is what is needed to bring government’s topmost priority. Flattening the down case numbers and mortality in Malaysia today, pandemic curve and thereby preventing further strains and lead to a recovery of economic activity in the near on the health system is vital to ensure a safe resumption future. of economic activities and to prevent a more protracted downturn. Malaysia’s capacity for smart containment should be strengthened prior to any relaxation of the A return to normalcy in economic activity will movement control measures. A premature lifting depend greatly on effectively containing the of movement controls could lead to a resurgence spread of COVID-19. The National Recovery Plan of infections, with potentially far greater negative has outlined several milestones for the safe reopening implications for the economy than those resulting from of the economy which cover the number of new daily the lockdowns.15 An effective FTTIS strategy is essential cases, ICUs capacity and vaccination rates. The Plan, to ensure a safe reopening of the economy and an easing however, did not present a testing target as well as of movement restrictions. Open and comprehensive other measures to contain the spread of the virus. testing policies are positively associated with both Effective containment requires robust surveillance, containment and growth outcomes. World Bank active case detection, testing, contact tracing, and staff estimates suggest that on average, every 1,000 quarantine to reduce the effective reproduction rate of additional tests per positive case is associated with a the virus. The evidence to date suggests that countries one percentage point increase in output growth.16 Until pursuing elimination of COVID-19 are performing a sizeable proportion of the population is vaccinated, better – in terms of outcomes for health, the economy, large-scale, proactive testing and contact tracing and civil liberties – than those trying to suppress the and the effective adoption of non-pharmaceutical virus.13 The control measures for COVID-19 elimination intervention (NPIs) is essential to limit the spread of the are similar to those used for pandemic control, with virus and instill greater confidence in people to engage the main difference in the intensity and timing of their in economic activity (see Box 2). 13 Oliu-Barton, Miquel, et al. “SARS-CoV-2 elimination, not mitigation, creates best outcomes for health, the economy, and civil liberties.” The Lancet (2021); Baker, Michael G., Nick Wilson, and Tony Blakely. “Elimination could be the optimal response strategy for covid-19 and other emerging pandemic diseases.” bmj 371 (2020). 14 Baker MG, Kvalsvig A, Verrall AJ. New Zealand’s COVID-19 elimination strategy. Med J Aust. 2020;213(5):198-200.e1. doi:10.5694/mja2.50735 15 https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)32007-9/fulltext 16 “Lockdowns saved lives but hurt livelihoods; testing saved both” World Bank Group, “Uneven Recovery”, East Asia and the Pacific Economic Update, April 2021. MALAYSIA ECONOMIC MONITOR | JUNE 2021 41 PART ONE - Recent Economic Developments and Outlook BOX 2 The Malaysian Health Sector’s Response to COVID-19 Malaysia’s pre-existing capabilities and its Among NPIs, widespread testing, in particular, is strong public sector health system enabled the critical to adequately monitor and control the spread government to implement a relatively robust of the virus.19 Epidemiological models suggest that response in the early stages of the COVID-19 the true number of infections far outnumber confirmed pandemic. Malaysia has a strong health system that cases. Where the number of confirmed cases is high provides wide access and coverage for essential health relative to the number of tests administered, it is likely services for its population. These foundations enabled that not enough tests are being conducted to properly the government to implement a swift response at the monitor the outbreak.20 Thus, the positivity rate (the early stages of the pandemic. Key response measures proportion of tests that are positive) can be viewed as included the use of primary health care facilities to a proxy for the adequacy of testing. The World Health screen suspected COVID-19 cases (including the Organization (WHO) suggests that a positivity rate establishment of separate care pathways for COVID-19 lower than 10 percent, and ideally lower than 3 percent, and non-COVID-19 cases); the optimization of hospital can be regarded as a benchmark of adequate testing. services by coordinating clinical responses through There are significant variations in the positivity rate the Clinical Preparedness and Response Center; and between countries, ranging from less than 1 percent in the designation of hospitals for specific purposes Australia and some European countries to more than 20 (hospitals were designated as full, hybrid, or non- percent in countries with limited testing capacity. COVID-19 hospitals to maximize capacity for COVID-19 cases while enabling the continuity of other essential Despite a significant increase in Malaysia’s services).17 COVID-19 testing capacity, the level of testing may still be insufficient. Testing capacity had With the number of confirmed cases continuing to increased from 1,000 tests per day in January 2020 rise, Malaysia will need to intensify its efforts to to about 37,000 tests per day by June 2020.21 By implement effective public health interventions. January 2021, national testing capacity was estimated Recent evidence suggests that the effective to stand at around 70,000 per day, with plans by the containment of COVID-19 depends on sustained non- government to increase it to 200,000 per day in pharmaceutical interventions (NPIs), complemented response to the ongoing increase in case numbers. by the widespread implementation of vaccination Malaysia’s positivity rate in mid-May 2021 stood at 6.6 programs. While vaccines have a strong potential to percent, with significant fluctuations over time (ranging constrain the spread of the virus, this impact is unlikely from 0.1 to 16.3 percent in 2020), remaining above the 3 to be felt until late in vaccine deployment. Production percent benchmark for most of Q4-2020 and Q1-2021. and distribution lags mean that many countries, Compared to some comparator countries in the region, including Malaysia, may not achieve herd immunity including Singapore, South Korea, Thailand, Malaysia’s before the end of 2021. In the interim period, NPIs will positive rate is high (see Figure 25), with insufficient be important to reduce case numbers and COVID-19 testing possibly partially explaining the recent surge in related deaths.18 cases. Looking ahead, if case numbers continue to rise, 17 Institute for Health Systems Research. Malaysia Health Sector Response to COVID-19 Pandemic. Selangor MYS: Institute for Health Systems Research, Ministry of Health Malaysia; 2020. 18 World Bank Group, “Uneven Recovery”, East Asia and Pacific Economic Update, April 2021. 19 Other NPIs as lockdowns, stay-at-home orders, restrictions on the use of public transport, and school and workplace closures are important complements the overall containment strategy especially when incidence is high. However, they are also more economically and socially damaging. When incidence is low, countries that have managed a sustained return to normalcy – such as China, New Zealand, and Vietnam – have kept up intensive testing. Source: Rannan-Eliya, Ravindra Prasan, et al. “Increased Intensity of PCR Testing Reduced COVID-19 Transmission Within Countries During The First Pandemic Wave”. Health Affairs (2021): 10- 1377. 20 Dowdy, David and Gypsyamber D’Souza, “COVID-19 Testing: Understanding the “Percent Positive”, August 10, 2020. Johns Hopkins Bloomberg School of Public Health. Accessible at https://www.jhsph.edu/covid-19/articles/covid-19-testing-understanding-the-percent-positive.html. 21 Institute for Health Systems Research. “Universal Health Coverage and COVID-19 Preparedness & Response: Malaysia”. Institute for Health Systems Research, Ministry of Health Malaysia. Accessible at: http://www.ihsr.moh.gov.my/images/publication_material/techreport/wpro-covid_final.pdf. 42 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook FIGURE 25 Malaysia’s testing level may still be insufficient Positivity Rate, Percentage 25 20 15 10 5 0 01/01/2021 08/01/2021 15/01/2021 22/01/2021 29/01/2021 05/02/2021 12/02/2021 19/02/2021 26/02/2021 05/03/2021 12/03/2021 19/03/2021 26/03/2021 02/04/2021 09/04/2021 16/04/2021 23/04/2021 30/04/2021 07/05/2021 14/05/2021 21/05/2021 28/05/2021 04/06/2021 11/06/2021 Malaysia Thailand UK India US Source: Oxford University’s Our World in Data Note: As at 18 June 2021 increased testing may need to be part of the suite of and logistically challenging given worldwide production NPIs used to contain COVID-19. and procurement delays.23 More importantly, the impact of the vaccine in terms of containing the Achieving high coverage rates for Malaysia’s pandemic may be significantly reduced if its severity COVID-19 vaccination program will also be crucial. (measured in terms of the effective reproduction rate of Malaysia’s COVID-19 vaccination program has faced the virus) increases, as is currently the case in Malaysia. a number of implementation challenges, including Thus, an effective vaccination campaign may depend procurement delays and low take-up from eligible just as much on NPIs that have the potential to reduce populations. This has led to a slower-than-expected the spread of COVID-19 while the implementation of rollout. By the end of May 2021, an estimated 3 percent the vaccination program is ongoing.24 of the population had been fully vaccinated (with another 2.3 percent partially vaccinated), lower than in The COVID-19 pandemic has highlighted the Singapore, South Korea, and Indonesia. importance of public health preparedness and, in the longer term, the need to continue investing in A strong COVID-19 vaccination campaign, with health services and systems. Malaysia’s robust health the swift rollout of vaccines and the widespread, system and preparedness to handle health emergencies sustained deployment of NPIs, will increase vaccine enabled it to manage COVID-19 relatively well in the effectiveness. Vaccine effectiveness declines in the early stages of the pandemic. As case numbers continue event of delays during deployment or if other control to climb, it will be important to sustain NPIs (testing, measures are unable to suppress the transmission of restrictions on movement, infection prevent and the virus.22 In Malaysia, there have been calls for the control measures etc.) while rolling out vaccines. In the accelerated implementation of the vaccination program long term, continued investments in the health system to meet the government’s coverage target; to reduce will be critical not just to improve health outcomes but the number of infections and deaths; and to bring also to facilitating a sustained return to normalcy and forward the possibly safe reopening of the country. economic recovery. However, this acceleration may be operationally costly 22 Paltiel, A. David, et al. “Clinical Outcomes Of A COVID-19 Vaccine: Implementation Over Efficacy”. Health Affairs (2021): 10-1377 (2021). 23 World Bank Group, “Uneven Recovery”, East Asia and Pacific Economic Update, April 2021. 24 Paltiel et al 2021. MALAYSIA ECONOMIC MONITOR | JUNE 2021 43 PART ONE - Recent Economic Developments and Outlook Given the current trajectory of the pandemic, bankruptcies among firms. While a range of fiscal and the pace of the vaccine rollout plan needs to be financial support measures have been implemented accelerated to provide adequate protection to a through the various stimulus packages, these measures larger proportion of the population. While the limited are mostly short-term, based on an assumption that supply of vaccines has partially contributed to the slow the pandemic would be successfully contained within rollout, the government has announced several steps, a short period of time. Confronted with the resurgence including the introduction of the use of the AstraZeneca in infections, the provision of additional longer-term vaccine in parallel with the national vaccination financial support for vulnerable groups, particularly program25 and the deployment of private healthcare those in the B40 and for SMEs, is still needed. This providers to implement the program. Nevertheless, is vital to ensure that the welfare of these groups is the government could enact more proactive measures, protected while the pandemic. continues.  including extending the opening hours of vaccination centers (including on weekends) and redeploying In the current context, fiscal policy should prioritize volunteers at these centers to reach remote areas the safeguarding of lives and livelihoods of the where access may be more constrained. In addition, a people over medium-term fiscal consolidation. sustained, effective public communication campaign Revisiting fiscal rules to create additional fiscal space should be implemented to address vaccine hesitancy may be necessary in order to provide continued amongst the public. support to the health system and to vulnerable groups. The Temporary Measures for Reducing the Impact With movement restrictions expected to remain of COVID-19 Act 2020, which included provisions to in force in the near term, additional targeted increase the government’s (domestic) debt limit from 55 social spending is essential to protect vulnerable percent of GDP to 60 percent and which was approved households and businesses. Since the pandemic by parliament last year, was intended to provide the began last year, fiscal policy has been providing support government with additional breathing space and on three fronts – relief, recovery and growth.26 To date, to enable it to mitigate the impact of the pandemic, the bulk of it has gone to relief-type stimulus spending including through the acquisition of much-needed that provides support to the labor market e.g. wage supplies of vaccines. With the debt level potentially subsidy program. However, given the current situation nearing this debt limit, it may be necessary to revisit in Malaysia, larger relief spending is necessary to help this limit to enable the government to access additional smooth household consumption and to avoid mass funds (see Figure 26). FIGURE 26 Near-term measures should focus toward saving the lives and livelihoods of all Malaysians Accelerating the pace of Revisiting scal rules the vaccine rollout plan to to create additional space Protecting the provide adequate protection for scal support lives and to the population livelihoods of all Malaysians Strengthening capacity for Providing additional targeted smart containment prior assistance to vulnerable to any relaxation of the households and businesses movement control measures Source: World Bank staff elaboration 25 On 28th May 2021, the government announced that it will no longer run the parallel AstraZeneca vaccination program. Instead it will be re-introduced in the main vaccination program. 26 World Bank Group, “Uneven Recovery”, East Asia and Pacific Economic Update, April 2021. 44 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook The current pandemic underscores the importance of undertaking strong reforms In the medium term, efforts to rebuild fiscal include moving toward a more standardized targeting buffers through increased revenue collection and system in terms of the unit of targeting, the eligibility enhanced spending efficiency should remain a key thresholds for targeted programs, and the flexibility to policy priority. One of the most critical lessons learned handle programs targeting different segments of the from the current pandemic relates to the importance population (see Box 4). In addition, information systems of having adequate fiscal space to mitigate shocks to within and across social protection agencies could the economy. Countries that entered the crisis with benefit from deeper integration or interoperability. relatively strong fiscal positions were able to channel Front-end service delivery in social protection programs greater financial support over a longer period of could also be consolidated to improve efficiency, client time. These countries were also able to increase the orientation and institutional coordination. capacity of their health systems, including through the implementation of effective containment measures. In these countries, these measures have played a vital role An effective social in mitigating the economic impact of the pandemic. Going forward, for Malaysia, efforts to increase revenue protection system can collection through a more progressive tax framework provide a guaranteed need to be accelerated, with a clear implementation timeline. These measures may include removing minimum standard of living exemptions from consumption taxes on non-essential for all and improve the items; expanding capital gains taxes; and exploring other forms of progressive taxes, including wealth taxes resilience of the vulnerable (see Box 3). Together with these revenue-enhancing against income shocks, measures, measures to improve spending efficiency should also be introduced. including those resulting from events such as the Malaysia also needs to deepen its social protection system to provide at least the minimum level of COVID-19 pandemic protection appropriate to all those in need. The crisis has highlighted the importance of a strong social protection system. An effective social protection Looking further ahead, structural reforms should system can provide a guaranteed minimum standard be anchored on ensuring that Malaysia’s transition of living for all and improve the resilience of the into a high-income country translates to an vulnerable against income shocks, including those improvement in living standards for all Malaysians. resulting from events such as the COVID-19 pandemic. Productivity growth and private-sector innovation will There is significant potential to deepen social be the primary drivers of future growth. Deep structural assistance for the B40 and to achieve better outcomes reforms will be needed to remove distortions, encourage by clarifying and harmonizing the objectives of the innovation, strengthen competition in markets, improve programs implemented by the Department of Social the investment climate, and facilitate deeper regional Welfare (Jabatan Kebajikan Masyarakat, JKM), and integration. These issues and policies are explored in even more so of Bantuan Sara Hidup (BSH)/Bantuan greater detail in Part 2 of this edition of the MEM, titled Prihatin Rakyat (BPR). Resilient Recovery for the Private Sector. In addition, there is potential to improve the delivery of social protection programs by better coordinating targeting approaches, information systems, and front-end service delivery. This may MALAYSIA ECONOMIC MONITOR | JUNE 2021 45 46 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook BOX 3 Exploring Capital Gains Tax and Wealth Tax Countries around the world are currently facing the Wealth taxes are less common and generally take financial consequences of the COVID-19 crisis, and two forms: recurrent taxes on the stock of wealth Malaysia is no exception. With public finances coming and taxes on wealth when it is passed on, by way of under severe pressure during the crisis, there will be a gift or on death. Recurrent wealth taxes are relatively an ongoing need to support economic recovery and costly to administer, with the amount of revenue raised meet spending commitments. It follows that taxation is usually modest. As a result, such taxes have been in going to play a large part in rebuilding public finances. decline, with the number of OECD countries levying This is not just a matter of setting appropriate tax rates them declining from 12 in 1990 to three at present. and allowances, it is also important to get the right On the other hand, inheritance taxes are still levied mix of taxes. Even before the crisis, policy makers in in 24 OECD countries, with a recent OECD report many countries were becoming increasingly concerned highlighting the role they can play in addressing wealth regarding growing wealth inequality. Now, they are inequality and in raising revenue to help address the increasingly focusing on ensuring that those most able impact of COVID-19, amongst other purposes. to do so contribute appropriately to the reconstruction effort. For that reason, many countries are revisiting the manner in which they tax capital and wealth. Comprehensive capital The taxation of capital income and wealth can gains taxes can make a both increase overall revenue and ensure that the burden of taxation is distributed fairly. For example, significant contribution if a worker earns $20,000 and their neighbor sells an to revenue asset for a gain of $20,000, both individuals have the same income. It is not obvious why the worker should pay taxes on their income, but the investor should not. Currently, Malaysia raises only a small amount of Wealthier individuals derive more of their income from revenue from capital taxes. There has been no tax capital gains and investments in any case. If the tax mix on wealth transfers or inheritance in Malaysia since the does not include taxes on capital and wealth, the tax abolition of estate duty in 1991. Neither are capital burden will fall disproportionately on labor and the less gains taxed, with the exception of disposals of real well off. property and shares in real property companies, which are subject to the Real Property Gains Tax (RPGT). The For these reasons, taxes on capital and wealth are tax applies to gains on the sale of private residences, a feature of the tax systems in many countries. which are often exempt from capital gains taxes in Taxes on capital gains are the most common, with over other countries. However, once a property has been 100 countries around the world taxing individuals on owned for five years or more, the tax payable on the capital gains to a greater or lesser extent. In addition to gain is low (5 percent). Overall, RPGT make a very small the direct revenue these taxes raise, they also protect contribution to government revenue (0.6 percent). income tax yield. When capital gains are not taxed, Malaysia has plenty of scope to broaden its tax base individuals have an incentive to choose investments by adopting a more comprehensive CGT and/or a tax that deliver a capital gain over those that provide on wealth, probably in the form of a tax on gifts and income. Comprehensive capital gains taxes can make inheritance. a significant contribution to revenue: in 2018-19, the UK collected £9.5 billion, which is around 5 percent of the income tax collected in that year. MALAYSIA ECONOMIC MONITOR | JUNE 2021 47 PART ONE - Recent Economic Developments and Outlook BOX 4 Trends in Malaysian poverty dynamics: Do regional inequalities trump ethnic disparities? Data from the nationally-representative Household The poverty dynamics study reveals three Income and Expenditure Survey (HIES) confirm important patterns. First, chronic poverty has that Malaysia has achieved a remarkable degree decreased significantly since 2004–2007 for all the of poverty reduction over recent decades. However, main ethnic groups in Malaysia (Bumiputera, Chinese, these surveys are not designed to provide information and Indian). As shown in Figure 27, by the 2014-2016 related to the dynamics of poverty. Are the poor in period, bounds on chronic poverty had fallen to 3-13 Malaysia mostly households that live in poverty over percent for Bumiputera; 0-2 percent for Chinese; and prolonged of time? Or is poverty more of a transitory 1-8 percent for Indian Malaysians. phenomenon, with households moving into and out of poverty from one period to the next? Furthermore, the study shows that absolute differences in chronic poverty rates are greater Data related to the dynamics of poverty are along geographic dimensions than between ethnic important to enable policymakers to design groups. For example, in 2014-2016, an estimated 1-7 effective poverty-reduction policies. For example, percent of those in urban areas experienced chronic if poverty is mostly chronic, policies to relieve poverty, while in rural areas the rate stood at 8-24 constraints, such as investments in infrastructure or percent. In particular, this geographic difference is human capital, may be needed to overcome poverty. greatest when comparing households in urban areas On the other hand, if there is much poverty mobility, social protection measures such as unemployment insurance or safety nets may be more appropriate. In FIGURE 27 addition, the effectiveness of policies and programs Chronic poverty across Malaysia’s main ethnic can vary between locations. Therefore, it is crucial to groups understand the trends in Malaysian poverty dynamics Percentage of the Subgroup Population in Chronic Poverty and to investigate the differences in the dynamics 80 between population subgroups. Like many other countries, Malaysia does not 60 conduct panel surveys on income to follow the same households over several years, with such surveys 40 necessary to measure poverty dynamics directly. In order to overcome this knowledge gap, Deaton (1985), Dang et al. (2014), and others have developed so-called 20 pseudo- or synthetic panels, which attempt to provide information on these dynamics by exploiting specific information in consecutive cross-sectional surveys, 0 2004-2007 2007-2009 2009-2012 2012-2014 2014-2016 such as time-invariant household characteristics. A new study by the World Bank/Rongen et al. (2021) uses these methods to estimate bounds for the relative shares of four poverty mobility transitions in Malaysia: (i) poor in Range Bumiputera Range Chinese Range Indian both periods (chronic poverty); (ii) poor to non-poor; (iii) Source: World Bank staff’s calculations based on DOSM Household Income non-poor to poor; and (iv) non-poor in both periods. Survey data 48 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART ONE - Recent Economic Developments and Outlook of Peninsular Malaysia with households in rural East Malaysia (see Figure 28). It can be observed that in the former group, only 1-5 percent of the population lives The findings show that in chronic poverty, while the figures for the latter group there is a need to shift stand at 16-39 percent. It should be noted that the nature of poverty is also different across these areas. to a new social contract, In East Malaysia, for example, it is not just that a larger from ethnicity-based proportion of the population lives in chronic poverty, but also that a larger proportion of all poor is chronically affirmative action policies poor. Hence, the high level of chronic poverty is not to more inclusive policies just a function of the presence of more overall poverty, but also reflects that there are fewer opportunities to escape poverty. While chronic poverty has declined drastically in There are also notable differences within the the period from 2004 to 2016, a shift in focus Bumiputera group across the country. A clear from ethnicity-based to region-based anti-poverty distinction can be observed between urban and rural policies could be useful and timely. Given the striking Bumiputeras, and between Bumiputeras living in differences in chronic poverty between urban Peninsular Peninsular Malaysia and those living in East Malaysia (see and rural East Malaysia and within the Bumiputera group Figure 29). In 2014-2016, the proportion of Bumiputeras itself, the findings show that the existing affirmative in Peninsular Malaysia who lived in chronic poverty action policies may not be the best solution to reduce stood at between 2-9 percent, while in East Malaysia, remaining chronic poverty among Bumiputeras either. the figure stood at 11-29 percent. This difference is The findings show that there is a need to shift to a new slightly less pronounced when comparing Bumiputeras social contract, from ethnicity-based affirmative action in urban areas to those in rural ones. policies to more inclusive policies. FIGURE 28 FIGURE 29 Differences in regional chronic poverty Regional differences in Bumiputera chronic poverty rates Percentage of the Subgroup Population in Chronic Poverty Percentage of the Subgroup Population in Chronic Poverty 80 80 60 60 40 40 20 20 0 0 2004-2007 2007-2009 2009-2012 2012-2014 2014-2016 2004-2007 2007-2009 2009-2012 2012-2014 2014-2016 Range Urban Peninsular Range Rural East Malaysia Range Peninsular Bumiputera Range East Malaysia Bumiputera Source: World Bank staff’s calculations based on DOSM Household Income Source: World Bank staff’s calculations based on DOSM Household Income Survey data Survey data MALAYSIA ECONOMIC MONITOR | JUNE 2021 49 50 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO Resilient recovery for the private sector MALAYSIA ECONOMIC MONITOR | JUNE 2021 51 PART TWO - Resilient recovery for the private sector Resilient recovery for the private sector The sharp increase in the number of COVID-19 While the top policy priority will continue to be cases and the subsequent re-imposition of the saving lives and livelihoods, it is essential for the MCO increases the uncertainty around Malaysia’s government to focus on increasing the resilience economic recovery. While the effects of the negative of the private sector. In Malaysia, large-scale firm spillovers from the pandemic were cushioned by less support measures such as wage subsidies, moratorium restrictive movement control measures and increases in on loan repayments and temporary credit guarantees manufacturing exports in Q1 2021, the level of activity have been crucial in preserving jobs and limiting mass in the Malaysian economy still remained below pre- bankruptcies since the COVID-19 outbreak. With the pandemic levels. While the economy is expected to pandemic entering its second year, continued firm gradually recover over the coming years, the projected support remains critical as pressure on firms’ balance growth would not be sufficient to undo the pandemic- sheets deepens. Given the large fiscal implications induced output losses until 2022, and output gaps are of these measures, analyzing the effectiveness of the expected to remain negative for an extended period various measures, as well as the regional and sectoral (exceed -3 percent in 2021). Mobility restrictions differences in the crisis’ transmission, could inform within countries and across borders result in higher better implementation and effectiveness of these transactions costs, exacerbating misallocation in the support measures. economy and lowering aggregate productivity growth. The pandemic is also likely to dampen Malaysia’s In the medium to long term, the emphasis will potential growth over the next decade through multiple need to be on facilitating the emergence of a more channels, including through various adverse long-term resilient private sector. In order to achieve this, it is effects on the private sector, especially if this damage important to understand the severity of the impact also affects the more dynamic and productive firms.27 of the shock and its distribution and the adjustment mechanisms adopted by firms, and to design better The fallout of the pandemic has also presented policies that can help smooth the impact of the shock considerable fiscal challenges for Malaysia, implying and support recovery in the medium to long term. In that the post-pandemic recovery will be largely driven the context of the current uncertain global situation, by the private sector. Prior to the crisis, the combined it is particularly important for Malaysia to make the impact of a trend decline in revenue and increased transition to a more innovation-based productivity led committed expenditures as a share of GDP had already growth model. narrowed fiscal space. Increased public spending in response to the pandemic has exacerbated this. With The first section of the analysis will discuss the the passing of the Temporary Measures for Government immediate effects of the pandemic on firms using Financing (Coronavirus Disease 2019 (COVID-19)) Act the data from the COVID-19 Business Pulse Survey 2020, the domestic debt level is expected to approach (BPS). It will be followed by a discussion of factors that the revised statutory limit of 60 percent of GDP. At this will be important in facilitating a more resilient and level, the medium-term objective of fiscal policy will sustainable private sector. The final section proposes need to be on rebuilding fiscal buffers through fiscal policy interventions both in the near term to provide consolidation. This limits the scope for medium-term relief to the private sector, followed by short-term growth impetus from fiscal policy and puts additional measures to recalibrate assistance programs, as well onus on the private sector to lead the growth process as medium- to long-term measures to build a resilient with the role of government policy shifting further private sector. towards facilitating private sector growth. 27 World Bank (2021a). 52 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector The pandemic has impacted firms on both the production and demand sides The COVID-19 pandemic has exposed the gaps compared to only 39 percent of firms in October 2020 and exacerbated the vulnerabilities in Malaysia’s prior to the re-imposition of CMCO (see Figure 31). In private sector. This is especially the case for SMEs, general, small firms continue to experience more severe which have been hard hit by both demand and supply revenue shocks than medium and large firms and the shocks. Two rounds of the BPS were implemented in same goes for non-exporters compared to exporters. Malaysia to measure the various channels of impact of COVID-19 on firms, firm adjustment strategies, Affected by demand and supply shocks, firms and public policy responses. The first round was are adjusting employment and are experiencing implemented in early October 2020 and the second pressing liquidity constraints. Firms are adjusting round was implemented in January to Mid-February employment in response to the pandemic, by reducing 2021 when the country was under MCO 2.0. The working hours and lowering wages (see Figure 32). analysis suggested that the recovery momentum that Malaysian firms are more vulnerable than their peers was evident from the first round of the BPS had been (Indonesia and Vietnam), with less cash in hand to substantially weakened when the second round was withstand a crisis. Liquidity appears to be a pressing implemented. Despite having a large share of firms problem: a median Malaysian firm has only two months operating in January to Mid- February 2021 period (see of cash flow available, while the average firm has 4.9 Figure 30), more firms shifted to operating only partially months cash flow available which is lower than its at 57 percent with only 27 percent operating fully. The regional peer countries (see Figure 33). In addition, 60 situation in early October was the reverse, with 52 percent of firms are either in arrears or at risk of falling percent of firms fully operating and 38 percent of firms into arrears within the next six months. Firms appear to partially opened. More firms reported losses during the be less willing to borrow due to fear of repayment risks, second CMCO (mid Oct- 7 Dec), at 64 percent of firms with sellers also appearing less willing to provide credit. FIGURE 30 FIGURE 31 Firms were on the path to recovery at the end of More firms experienced a decline in sales once the first MCO, but this trend has since reversed the lockdowns were reimposed in October 2020 Firm Operational Status, Percentage Firms’ Change in Sales Relative to Last Year, Percentage 60 80 60 40 40 20 20 0 0 Open Partially Temp. Temp. Permanently Increase Remain about Decrease open closed closed closed the same (mandated) (own choice) MCO (Mar-Apr) 1st CMCO (May-Aug) Oct 1-15 MCO (Mar-Apr) 1st CMCO (May-Aug) Oct 1-15 2nd CMCO (Oct 14-Dec 7) Jan 15-Feb 10 2nd CMCO (Oct 14-Dec 7) Jan 15-Feb 10 Source: Kuriakose et al. (2021) Source: Kuriakose et al. (2021) MALAYSIA ECONOMIC MONITOR | JUNE 2021 53 PART TWO - Resilient recovery for the private sector FIGURE 32 FIGURE 33 Firms continue to adjust employment downwards Average time until expected cash flow shortage Employment Adjustments by Firms, Percentage Average Time until Expected Cash Flow Shortage, Number of Months 80 10 9.48 60 8 40 6 5.85 20 4 4.90 0 2 Hired Adjustments Granted Granted leave Reduced Reduced workers on extensive leave of absence wages hours margin of absence with pay 1st CMCO (May-Aug) Oct 1-15 0 2nd CMCO (Oct 14-Dec 7) Jan 15-Feb 10 Malaysia, Jan/Feb Vietnam, Sep/Oct Indonesia, Oct Source: Kuriakose, Smita; Tran, Trang (2020) Source: Kuriakose et al. (2021) Most firms responded to the pandemic with increased use of digital tools The increased usage of digital platforms came up functions, as firms who adopted or increased use of as the most popular strategy being implemented digital platforms are also more likely to have remote by firms in response to the COVID-19 shocks. work arrangements and introduce new products (see In addition to making employment adjustments and Figure 35). performing supply chain adjustments, a majority of firms continue to respond to the challenges brought on Having described the vulnerability of the private by the pandemic through the increased use of digital sector in the short term, the following section tools. 58 percent of the firms surveyed increased the will describe the conceptual framework for the use of digital platforms in January-February 2021. The discussion that will underpin the analysis and the most common use of digital platforms continues to be recommendations for Malaysia. for customer-facing functions such as marketing and sales functions (see Figure 34). Shopee and Facebook Malaysia trailed peers both in terms of labor are the most popular sales and marketing digital productivity and total factor productivity (TFP) platforms, while Maybank and Touch ’n Go are the even before the crisis, and the gaps are increasing. most popular e-wallet payment systems. There is also While Malaysia continues to experience positive labor significant adoption for more complex functions such productivity growth, its rate of growth remains below as production and supply chain management, which is those of transitional and aspirational groups (see more common among larger firms. Adoption of digital Figure 36).28 Malaysia also has lower TFP levels than tools are not only beneficial for sales and marketing these comparators, and the gaps are wider for small 28 Transitional group: Argentina, Chile, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Panama, Poland, Portugal, Slovak Republic, Slovenia, Trinidad and Tobago, Uruguay. This group consists of countries that achieved high-income status in the last 30 years (1988–2017). As Malaysia’s aspires to become a high- income and developed economy, benchmarking against countries that have successfully made this transition (and escaped the middle-income trap) is a useful approach. Aspirational group: Chile, Czech Republic, Estonia, Greece, Hungary, Israel, Italy, Latvia, Mexico, Poland, Portugal, Slovak Republic, Slovenia, Sweden, Turkey. The aspirational peer group consists of OECD member countries. These countries provide potentially useful insights into the institutional norms against which Malaysia can be compared in the future. Regional group: Cambodia, Indonesia, Lao PDR, Myanmar, Philippines, Thailand, Vietnam 54 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector and medium firms than larger firms, suggesting that are closer to the comparator groups, with TFP levels Malaysia’s relatively low TFP levels are driven by the lower than those in the aspirational group, but higher relatively poor performance of small and medium firms than those in the transitional group. (see Figure 37). The TFP levels of large Malaysian firms FIGURE 34 FIGURE 35 Marketing and sales are the most increased Adopters of digital solutions are also more likely business functions in digital adoption to have remote work arrangements and offer new products Use of Digital Platforms by Business Functions Likelihood of Starting or Increasing Remote Work Arrangement (% of Firms that Started or Increased Use of Digital Platforms) Conditional on Region, Sector, Size Fixed Effects 80 0.55 0.50 0.45 60 0.40 0.35 40 0.30 No increase/no use Started using/increased use of digital platforms of digital platforms 20 Oct 1-15 Jan 15-Feb 10 Likelihood of Introducing Innovative New Products Conditional on Region, Sector, Size Fixed Effects 0 0.35 Business administration Production planning Production Supply chain management Marketing Sales Payment methods Service delivery 0.30 0.25 0.20 Small Medium Large 0.10 No increase/no use Started using/increased use of digital platforms of digital platforms Oct 1-15 Jan 15-Feb 10 Source: Kuriakose, Smita; Tran, Trang (2020) Source: Kuriakose et al. (2021) FIGURE 36 FIGURE 37 Malaysia’s labor productivity has increased Malaysia also has lower TFP levels than its peers, steadily over time but remains short of though relative TFP gaps decrease with firm size transitional and aspirational peers GDP Per Employee, 2010 Constant Dollars Relative TFP of Comparator Groups to Malaysia, Percentage 80,000 50 60,000 25 40,000 0 -25 20,000 -50 0 Malaysia Regional Transitional Aspirational Aspirational Transitional Regional 1991-2000 2001-2010 2011-2017 Mean Small (5-19) Medium (20-99) Large (100+) Source: World Bank (2020) ‘Malaysia – Productivity and Investment Climate Source: World Bank (2020) ‘Malaysia – Productivity and Investment Climate Survey (PICS 3)’ Survey (PICS 3)’ MALAYSIA ECONOMIC MONITOR | JUNE 2021 55 PART TWO - Resilient recovery for the private sector The crisis has exacerbated the productivity gap faced by firms, particularly SMEs Malaysia’s SMEs29 have been underperforming To achieve higher rates of more inclusive and those in peer countries, both in terms of output sustainable productivity growth, Malaysia will and productivity levels. In the manufacturing need to implement deep structural reforms. To sector, although SMEs contribute to around half of all reduce poverty and ensure shared prosperity, growth employment in the sector, they only account for 31 that creates a greater number of more productive percent of output (see Figure 38). In the services sector, jobs is needed. Economic transformation through Malaysian firms’ labor productivity levels lag behind deeper structural changes and market integration that those of its aspirational and transitional comparators catalyze business opportunities are needed to create (see Figure 39). With the tourism and retail sectors an environment in which workers are able to shift having been particularly hard hit by the pandemic, into higher productivity activities, resulting in higher these productivity gaps may have been further incomes as they generate greater returns on their labor exacerbated. Analysis based on the BPS data shows and other assets (see Figure 40). Without accelerated that the pandemic has had an asymmetric impact on economic transformation, the potential to create more sectors and regions. In particular, the food & beverage and better jobs is limited (World Bank, 2019). The Jobs sector experienced higher closure rates, particularly and Economic Transformation framework provides in the Northern states, where vendors largely rely on a lens to discuss improving aggregate productivity travelers from Kuala Lumpur and Selangor to patronize through economic transformation in a manner that their food trails. By contrast, other manufacturing results in a sustainable increase in the number of sectors30 have experienced particularly high closure productive jobs for a greater number of people. rates in East Malaysia. These differences indicate the need for the customization of policies and programs, Firm level productivity growth can be broken enabling the identification of sectors or regions where down into three components. First, productivity more support is needed. improvements can occur when firms upgrade their FIGURE 38 FIGURE 39 Malaysia has a high number of SMEs, but they Malaysia’s labor productivity gap in Services account for a low share of the activity Sector compared to peers Relative Weight of SMEs in Malaysian Manufacturing Sector by Key Distribution of Firm-Level Labor Productivity (2009 US$, Log) Dimensions 12.5 Employment 49% 11.5 10.5 Number of 97% 9.5 establishments 8.5 MVA 32% 7.5 Malaysia Regional Transitional Aspirational Malaysia Regional Transitional Aspirational Malaysia Regional Transitional Aspirational Gross output 31% All Services Retail Other Services SMEs Large rms 25th percentile Median 75th percentile Source: World Bank (2021) ‘Aiming High – Navigating the Next Stage of Source: World Bank (2020) ‘Malaysia – Productivity and Investment Climate Malaysia’s Development’ Survey (PICS 3)’ 29 In this analysis we define SMEs as a firm with less than 100 employees. 30 Other Manufacturing in the BPS is broadly categorized as manufacturing sector excluding Automotive and Electronics sub-sectors. 56 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector FIGURE 40 The Conceptual Jobs and Economic Transformation Framework Better Jobs and Sustainable Economic Transformation Productivity and Innovation Led Growth (between- rm/sector productivity growth and within rm productivity improvements and entry/exit of rms) Connectivity and Integration Skills, Technology and Innovation Increase scale and access to larger markets Raise quality of ef ciency with through trade, foreign direct investments and better skills, technology adoption, open and contestable markets innovation and entrepreneurship Enabling Foundations to Expand Private Investments Macro nancial stability, enabling business environment, sustainability framework, access to infrastructure and nancial sevices, and strong governance and institutions Source: Staff adaptation from World Bank, 2019, Updated JET Framework and Licetti, et al. 2018. internal capabilities through innovation or the adoption transformation. Thus, the government’s initiatives to of new technologies or better management techniques enhance productivity should address all three of these (within-firm component). Second, improvements components (see Figure 40). can occur when resources are reallocated from low-productivity firms to high-productivity firms The next section will assess Malaysia’s performance within or across sectors and industries (between- against some of the salient elements of the firm component). In this case, incumbent firms that Jobs and Economic Transformation framework are more productive can gain market share at the shown in Figure 40. These include (i) connectivity expense of less productive incumbent firms. And third, and integration that will include a discussion on improvements in aggregate productivity can occur competition in the services sector; (ii) skills, technology when less productive existing firms exit the market or and innovation and (iii) enabling foundations to expand industry and new firms that are more productive enter private investments where the discussion will focus on the market (entry-and-exit or selection component).31 two factors namely (a) the access to finance and (b) the Each of these three components has a potential impact sustainability framework. on aggregate productivity growth and economic Connectivity and integration are key for market development Effective trade, competition reform in the services with export-led strategies providing access to larger sector and investment policy reforms boost growth markets that enable economies of scale, increase and productivity. Openness to trade and investments technology transfer, and leverage competition to is vital for the achievement of economic transformation, raise productivity. FDI plays a crucial role in facilitating 31 Cusolito and Maloney. 2018. MALAYSIA ECONOMIC MONITOR | JUNE 2021 57 PART TWO - Resilient recovery for the private sector technology spillovers. Increased FDI flows, especially underperformance may constrain its ability to achieve those involving participation in producer-driven supply its longer-term development aspirations. Productivity chains, increase the adoption of technology. driven growth will rely on reversing this secular decline in private investments that are an important source of Uncertain trade and investment prospects have new technology and firm-level process innovations and given Malaysia a renewed sense of urgency to improvements in management practices. strengthen its competitiveness. Malaysia faces not only a pandemic but also a considerably less benign A comprehensive review of Malaysia’s investment global environment amid heightened policy uncertainty, framework is needed to strengthen the overall shifting patterns of international production and trade effectiveness of investment targeting. In particular, and an acceleration of disruptive technologies that will there is considerable scope to enhance investment alter the nature of comparative advantage. Persistent promotion by addressing the overlapping mandates uncertainty about the post-pandemic landscape among the 32 investment promotion agencies (IPAs) has weighed heavily on business confidence and in Malaysia. This overlap has led to undue competition contributed to a sharp decline in investment globally and amongst IPAs and confusion among investors and, domestically. In Malaysia, private investments fell by 11.9 consequently, the dilution of promotion efforts and percent last year, with FDI contracting by 55 percent, a investor services. There is also a need to enhance greater decline than in many other regional economies Malaysia’s tax incentive policies and administration given its openness to international trade and deep system by strengthening investment targeting and integration within global value chains.32 Even before the addressing the issues relating to the complexity of current crisis, Malaysia had experienced a decade-long administrative procedures, the quality and accessibility decline in private investment growth. There had been of laws and regulations, and bureaucratic discretion concerns that Malaysia’s private investment has been which appear to be among the major obstacles for moderating and underperforming relative to its regional investors in Malaysia (see Box 5). comparators (see Figure 41 and Figure 42), and that this FIGURE 41 FIGURE 42 Malaysia has been experiencing a decade-long ...and its FDI has been underperforming relative decline in private investment growth... to some regional comparators Real Private Gross Fixed Capital Formation, y/y, Percentage FDI In ows, US$ Billion, 2011-2019 25 25 90 20 80 20 15 70 10 60 15 50 5 40 10 0 30 -5 5 20 -10 10 0 0 -15 Malaysia Philippines Thailand Vietnam Indonesia Singapore 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 (RHS) Source: DOSM Source: UNCTAD 32 UNCTAD (2021) Global Investment Trend Monitor. 58 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector BOX 5 Reasons for investing in Malaysia and the effects of COVID-19 on MNCs in East Asia: Evidence from Investor Surveys This box summarizes findings from the 2019 1. The 2019 Global Investment Global Investment Competitiveness (GIC) survey 33 and the February 2021 Multinational Corporations Competitiveness Survey (MNC) Pulse Survey, 34 which together provide critical insights into the actions, motivations, The 2019 GIC Survey suggests that the most and strategies of MNCs. The GIC survey covers important reasons why MNCs invest in Malaysia a large sample of MNCs operating in Malaysia, and are related to its perceived macroeconomic offers insights into pre-COVID-19 investment plans, and political stability, business-friendly legal major reasons for investing in Malaysia, and remaining environment, and skilled labor force (see Figure obstacles. The MNC Pulse Survey, while being more 43). Over 85 percent of respondents mark these as limited in size, is more recent and thus helps to provide ‘important’ or ‘critically important’ factors for their a better understanding of the impact of COVID-19 on decision to invest in Malaysia. It also scores relatively MNCs in East Asia. highly in terms of several other factors, including good FIGURE 43 Major determinants for investing in Malaysia How important were the following factors in your parent company’s decision to invest in the country? Macroeconomic stability and exchange rate 43 44 Political stability and security 47 39 Business-friendly legal and regulatory environment 51 34 Availability of talented and skilled labor force 52 33 Good physical infrastructure 46 35 Low tax rates 32 48 Size and purchasing power of the new market 47 32 Low cost of labor and other production inputs 47 32 Availability to source locally 51 25 Coordination of your company’s supply chain 47 29 Investment protection guarantees 42 29 Ability to export and compete in international markets 31 39 Protection of intellectual property 36 30 Access to endowments (e.g. land, raw materials) 44 19 Availability of local companies and their technology 36 14 0 20 40 60 80 100 Important Critically Important Source: Authors’ calculations using WBG 2019 GIC Survey. Note: restricted to firms in Malaysia only. 33 The 2019 World Bank Group GIC Survey, conducted between June and November 2019, covers more than 2,400 foreign-owned MNE affiliates with operations in 10 middle-income countries (MICs): Brazil, China, India, Indonesia, Malaysia, Mexico, Nigeria, Thailand, Turkey, and Vietnam. 34 The MNC Pulse Survey is a quarterly survey that is administered online and aims to provide insights into the effects of Covid-19 on the business activities of MNCs. The fourth, and latest wave of the survey was administered in February 2021 and comprised of 329 MNC affiliates operating in 37 developing countries, including and manufacturing and services sectors. Due to the limited sample size of Malaysia, the analysis summarizes results for the East Asia region, covering 52 firms in total. Given that the sample size is still relatively small, the results should be interpreted with caution and considered to be indicative. MALAYSIA ECONOMIC MONITOR | JUNE 2021 59 PART TWO - Resilient recovery for the private sector physical infrastructure, low tax rates, the size of local and India (66 percent). market and the cost of labor. It is noteworthy that tax incentives do not feature as a prominent reason. While its investments laws and policies are perceived as a relatively insignificant constraint, However, Malaysia scores relatively low in terms of the overall complexity and quality of Malaysia’s the share of MNCs that plan to expand investment legal and regulatory system appears to weigh on its in the next three years. Only 40 percent of foreign investor performance (see Figure 44). While Malaysia affiliates in Malaysia planned to expand their investment performs well in most areas of its investment laws and over the next three years, which is the third-lowest share policies, a major exception is the cumbersome approval in the survey, ahead of China (17 percent) and Turkey system, with 56 percent of respondents stating that this (35 percent), but way behind Nigeria (about 80 percent) is either a moderate or major obstacle. FIGURE 44 Remaining obstacles for investors in Malaysia To what degree are the following factors an obstacle for your company to operate in the country? Cumbersome approvals to start and operate a business 30 26 Restrictions on prices, production technology, or products 28 16 Investment laws and Limit on amount of permissible foreign investment 22 16 policies Restrictions on hiring and bringing in expatriate staff 23 12 Local content requirements 20 15 Requirements to use local inputs or local staff 20 12 Requirements to foreign investors to invest in R&D 21 10 Minimum investment requirements 19 8 Complexity of administrative procedures 44 17 Quality of laws and regulations 39 20 Government conduct Discretion of the bureaucracy 39 17 Accessibility of laws and regulations 36 15 Capacity of public agencies 40 9 Coordination between public agencies 36 12 0 10 20 30 40 50 60 70 Moderate obstacle Major obstacle Source: Authors’ calculations using WBG 2019 GIC Survey. Note: restricted to firms in Malaysia only. 60 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector 2. The February 2021 supply chains (Javorcik 2020; World Economic Forum). However, other experts suggest that such prescriptions Multinational Corporations oversimplify the problem. The Pulse Survey provides Pulse Survey supporting evidence in favor of the latter camp. When it asked what the company’s foreign parent plans to do The latest MNC Pulse Survey, administered in in the host country in the next one to three years, it February 2021, suggests that while the pandemic finds that MNCs operating in the EAP region are largely has adversely impacted a wide range of productive keeping their investment and sourcing strategies on the inputs for MNCs globally, respondents appear same course, with 96 percent of respondents noting highly positive regarding their recent performance no change in their investment plans and 100 percent in Q1 2021. A majority of the respondents reported noting no change to their input suppliers. that the impact of the pandemic had adversely affected the reliability of their supply chains in the period from The pandemic has resulted in a much greater October to December 2020. However, MNCs appear to focus on the use of new technologies by MNCs be highly optimistic regarding their recent production and a push towards greening supply chains (see performance, providing hope for a relatively rapid Figure 45). The survey data shows that 94 percent of recovery period ahead. This in part reflects the large respondents have increased their use of digital tools stimulus packages directed towards such firms and to manage their supply chains and to conduct work MNCs’ shifting strategies to adjust and recover from the remotely. In addition, 90 percent of respondents have initial supply chain disruptions related to the pandemic. scaled up their deployment of e-commerce solutions. The increased use of automation and robotics is a third The expected rapid recovery from the impact of critical technological trend that has emerged or been the pandemic also means that few companies intensified by the pandemic, with around 77 percent are planning to radically shift their investment or of respondents stating that they had increased their sourcing strategy. The supply chain vulnerabilities use of such tools. Another pre-existing trend, related exposed by COVID-19 have also rekindled the debate to the improved sustainability of production, has also on reshoring, nearshoring, and GVC regionalization. been intensified, with 75 percent of respondents Some expect that MNCs will reshape their GVC acknowledging a push towards greening their supply strategies, with an emphasis on holding higher levels chains. of inventory, diversifying suppliers, and shortening FIGURE 45 Change in the use of technologies due to COVID-19 To what extent have you changed deployment of the following strategies in your host country as a result of the pandemic? Digital tools to manage supply chain and remote work 2 4 94 E-commerce and customer engagement solutions 10 90 Automation and robotics 4 19 77 Increased supply chain sustainability & decarbonization 25 75 0 10 20 30 40 50 60 70 80 90 100 Decreased No change Increased Source: Authors’ calculations using WBG Pulse Survey 4 (Q1 2021). Note: restricted to EAP firms only. MALAYSIA ECONOMIC MONITOR | JUNE 2021 61 PART TWO - Resilient recovery for the private sector Services sector competition has been hampered by exclusions for foreign investors For Malaysian markets to operate more efficiently, developed regional peers, but still behind High it is necessary to address regulations and Income Countries (HIC)s and Upper Middle-Income practices that restrict business entry and market Country (UMIC) peers (see Figure 46). Investments in competition. Market competition is an important Malaysia’s manufacturing sector are highly liberalized. determinant of productivity-led growth. Firms facing Foreign investors can hold 100 per cent of the equity vigorous competition have strong incentives to in all investments in new manufacturing projects, as reduce their costs, to innovate, and to become more well as in investments to expand and diversify existing efficient and productive than their rivals. According to projects. Since 2009, in order to attract higher levels of indicators related to product market regulations (PMR), investment, the government has also liberalized foreign Malaysian markets are characterized by higher levels of participation in the services sector.35 However, there restrictiveness than those in comparator countries, with are continued restrictions in certain specified sectors, the role of the state being a major factor in determining including transport services, finance and professional PMR scores. services. Beyond explicit equity restrictions, foreign suppliers are also subject to different operational While being generally open to trade and investment, restrictions, such as prescribed opening hours for foreign Malaysia has retained a number of exclusions on retailers. These in turn, can affect the competitiveness foreign suppliers in certain key sectors. Malaysia of the users of these inputs (downstream sectors). is relatively more open to FDI than most of its less FIGURE 46 Malaysia is relatively more open to FDI than less developed regional peers, but still behind the HIC and UMIC averages FDI Restrictiveness Index for Malaysia and Selected Asian Countries, 201936 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 Philippines Indonesia Thailand Malaysia China India Singapore Japan HIC average UMIC average Source: OECD FDI Restrictiveness Index, 2019 35 Specifically, 27 service sub-sectors were liberalized on 22 April 2009, with all equity conditions removed. The government then further liberalized an additional 18 service sub-sectors in 2012, allowing for up to 100 per cent foreign equity participation. 36 High income countries include Australia, Austria, Belgium, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Malta, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, and United Kingdom. Upper middle-income countries include Albania, Argentina, Brazil, Bulgaria, Chile, Colombia, Costa Rica, Indonesia, Kazakhstan, Mexico, Peru, Russia, Serbia, South Africa, and Turkey. 62 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector Skills, technology and innovation are essential for productivity led growth Investments in technology, R&D and skills will be While great emphasis has been placed on the critical to enhance productivity. On the upside, enhancement of the quantity of R&D and innovation the pandemic has accelerated the level of digitization in Malaysia, less emphasis has been placed on its among firms in Malaysia, creating an opportunity for quality and its links with industry. Despite Malaysian Malaysian SMEs to bridge the digital divide. As we businesses spending a relatively high amount on R&D saw in the first section, there has been an increased as a percentage of GDP (see Figure 49), compared use of digital solutions by firms as a response to the to comparators in the transitional group, Malaysia’s pandemic in Malaysia (see Figure 47). However, small performance in the area of patenting is lower than that and medium-sized firms’ rate of digital adoption of countries in both the aspirational and transitional continues to lag behind those of large firms (see groups (see Figure 50). Malaysia has had less firms Figure 48). At the aggregate level, most of the digital investing in R&D, providing training, and introducing new adoption is related to sales and marketing functions, products in the last three years compared to its global with a smaller portion of firms using digital solutions peers (see Figure 51). While Malaysia has implemented for more complex business and production functions a number of policies and initiatives to foster R&D and (see Figure 47). This creates an opportunity to expedite commercialization efforts, a number of challenges and the digitization process amongst SMEs by recalibrating obstacles continue to constrain technology transfer and policies to encourage SMEs to engage in the use of commercialization (see Box 6). Public research institutes digital tools to facilitate more complex business and and institutes of higher educations’ research funding production functions. However, a lack of adequate is skewed towards basic research rather than applied access to finance to invest in digital platforms and research (see Figure 52). This lack of adequate attention solutions may act as an obstacle to increased uptake to the quality of R&D and its links with industry implies and usage, especially in the case of SMEs. lost opportunities to make a greater positive impact on economic diversification, industrial development, and growth (see Box 6). FIGURE 47 FIGURE 48 Use of digital platforms by firms has increased as Small and medium sized firms’ digital adoption a response to the pandemic lags behind those of large firms Share Among Firms that Started or Increased Use in Digital Platforms, Share of Firms, Percentage Percentage 70 100 60 50 80 40 30 60 20 40 10 0 Marketing Sales Payment Methods Business Admin. Supply Chain Mgmt. Production Planning Service Delivery Production 20 0 Small Medium Large Source: Kuriakose, Smita; Tran, Trang (2020) Source: Kuriakose, Smita; Tran, Trang (2020) MALAYSIA ECONOMIC MONITOR | JUNE 2021 63 PART TWO - Resilient recovery for the private sector FIGURE 49 FIGURE 50 Firms in Malaysia are investing more in R&D ...but patent applications lags behind transitional compared to the transitional group... group Business Expenditure on R&D as a Percentage of GDP Patent Application, Per Billion PPP$ GDP 1.2 800 1.0 600 0.8 0.6 400 0.4 200 0.2 0 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Malaysia Transitional Aspirational Malaysia Transitional Aspirational Source: World Bank Enterprise Surveys Source: National Survey of Research and Development (R&D) in Malaysia 2020 FIGURE 51 FIGURE 52 Malaysian firms are less likely to invest in Malaysia’s public research organizations have upskilling and innovation been investing more in basic and experimental research Share of Firms Investing in Training and R&D, Percentage, 2019 Research Orientation by Sector, RM Million 50 4,500 4,000 40 3,500 30 3,000 2,500 20 2,000 10 1,500 1,000 0 500 Proportion of Proportion of Proportion of Firms that Provide Firms that Engage Firms that 0 Training to in R&D Introduced New Workers Product in Last Business Government Higher Education 3 Years Enterprises Research Institutes Institutes Malaysia Regional Transitional Aspirational Basic Research Applied Research Experimental Research Source: World Bank Enterprise Surveys Source: National Survey of Research and Development (R&D) in Malaysia 2020 64 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector With the trend toward increased digitization and There is strong evidence to show that firms’ automation in the current context, the availability management practices significantly impact of an adequately skilled workforce has become even their productivity and performance. Differences in more critical. Analyses across the three Productivity management practices have been identified as one of and Investment Climate Surveys (PICS), PICS-1 (2002- the main causes of variations in levels of productivity 03), PICS-2 (2007) and PICS-3 (2019-20) have shown across firms and countries (see Box 7). Studies show that that skills shortages are a major constraint for firms higher levels of productivity are associated with firms operating in Malaysia (World Bank, 2020b). Investments using modern or innovative management practices, in the development of human capital through the rather than traditional practices (Ichniowski et al. provision of training and increased access to new and 1997). In addition, it has been found that the manner in improved skills are an important step toward achieving which a management practice is implemented is more higher levels of productivity at the firm level over the important for productivity than whether the practice long term. Jobs are becoming less manual and more is implemented or not (Black and Lynch 2001). It has analytically and socially demanding. With this increased also been found that higher-performing managers demand for digital skills, critical skills shortages persist are consistently more likely to be deployed by better in the Malaysian economy. Paradoxically, the proportion managed firms (Bertrand and Schoar 2003). Recent of high-skilled workers in priority sectors37 set forth in analysis conducted for Malaysia confirms that firms the Malaysian government’s Industry4WRD strategy in subsectors with workers with a higher educational has decreased in the period from 2009 to 2015, with profile of workers and those with sophisticated a high percentage of workers remaining in the semi- organizational management systems tend to have skilled category. The skills needs associated with the higher levels of productivity. emergence of the Industry 4.0 paradigm have been further compounded by the increase in the levels of digitization and automation triggered by the pandemic. 37 Five priority sectors in Industry4WD Strategy document are E&E, Machinery and Equipment, Chemicals, Aerospace and Medical Devices. MALAYSIA ECONOMIC MONITOR | JUNE 2021 65 PART TWO - Resilient recovery for the private sector BOX 6 Increasing Innovative Capacity to Undertake Technology Commercialization A range of actors play pivotal roles in the innovation the emphasis on science, technology, and innovation as ecosystem, including firms, public research drivers of Malaysia’s economy, with a range of national organizations and universities, with each playing a policies and plans that span across various industries different role in the creation and diffusion of new and sectors. Over the past decade, R&D intensity knowledge. To facilitate diffusion, the ecosystem and (measured in terms of gross expenditure on R&D) has institutional context should encourage knowledge to been on a generally increasing trend, but with overall move between innovation actors, particularly between intensity drastically declining in 2018 (see Figure 53). knowledge creators and users (firms and societies). In Additionally, the number of active research personnel this regard, the government can play an important role in Malaysia has also been declining in all functions in by designing and implementing policies to facilitate recent years (see Figure 54). While Malaysia still has a this knowledge transfer. This relationship between higher overall R&D intensity than regional peers within academia, government and industry is often referred the ASEAN region, it has been consistently lower than to as the triple helix. As innovation as a means to that of innovative economies around the world. achieve higher levels of national competitiveness gains prominence, countries are allocating substantial Increased support for Malaysia’s public research national budgets to finance research activities, organizations (PROs) and universities is crucial including public research sector. Further, governments to revive innovation-driven growth and thereby to worldwide are urged to track and evaluate the impact weather the current global crisis and to facilitate and results of public funding of research, science, and the achievement of Malaysia’s aspirations of technology (Zuniga, 2020). This has led to the focus becoming a high-income nation. The channels through on technology and commercialization of intellectual which technology transfer is facilitated depend on a property as measures of technology transfer. number of factors, including: (i) research capabilities and relevance (orientation); (ii) the institutional setting of research institutions (structure and governance); (iii) the legal and regulatory framework governing public There has been a research institutions and universities (e.g., employment growing emphasis on laws); (iv) supportive intermediary structures and finance availability; and v) firms’ absorptive capacity. the role of innovation With the aim of analyzing the levels of knowledge and as a means to achieve technology transfer in Malaysia, a recent World Bank study, Assessing the Effectiveness of Public Research higher levels of national Institutions: Fostering Knowledge Linkages and competitiveness Transferring Technology in Malaysia, utilized the recent survey on public research institutions, encompassing a multitude of aspects pertaining to knowledge and technology transfers in Malaysia. While Malaysia recognizes the need to embrace an innovation-driven growth model through national The findings of the study are consistent with innovation plans and policies, there has been a a number of persistent key issues affecting decrease in the momentum of progress in recent Malaysia’s innovation ecosystem. While the quality years. The past few decades have seen an increase in of recent institutional-level statistics related to public 66 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector research organizations and university research centers funding, ineffective implementation of incentives, has improved over the past few years, the dynamics and cultural gaps between industry and research, of knowledge transfer and commercialization of all of which affect both research and knowledge research outputs are different. For instance, the and technology transfer. The complex funding propensity to engage in technology transfer activities mechanisms, combined with budgetary pressures, are markedly lower than the propensity to engage in contribute to inconsistency in the flow of funding for knowledge transfer activities. Only a small number of public research institutions, limiting their ability to surveyed institutions have sustained frequent success conduct certain research activities and to transfer in technology transfer and commercialization. With knowledge and technology. Additionally, incentives to multiple actors, including ministries, agencies and encourage technology transfer and commercialization research organizations, and the varying nature of are ineffectively implemented, with career progressions research, the context in which research institutions still being largely driven by scientific publications. operate is highly complex. This situation has led to a Cultural gaps between research institutions and industry lack of coordination to facilitate and encourage research arise due to the differences in expectations between commercialization and the transfer of new knowledge parties resulting in a perceived lack of demand from and technology. industry. Combined with communication obstacles that constrain collaboration and the alignment of interests, Some of the key challenges that fundamentally frictions between the two inhibit effective collaborative affect innovators’ ability to successfully transfer networks and industry-focused research outputs and and commercialize technology include inconsistent innovations. FIGURE 53 FIGURE 54 Gross domestic expenditure on R&D declined The number of active research personnel has also precipitously in 2018 declined across all functions in recent years R&D Expenditure by Sector, R&D Expenditure by GERD, R&D Staff by Functions, 2014-2018 Researchers per 10,000 Percentage of GDP Percentage of GDP Total Count Labor Force 90 1.8 160,000 80.0 74.0 80 1.6 140,000 70.0 60.7 145,740 123,362 70 1.4 120,000 60.0 60 1.2 114,986 58.9 100,000 50.0 108,557 50 1 90,064 80,000 40.0 84,516 40 0.8 60,000 30.0 30 0.6 22,527 20,766 40,000 20.0 17,508 20 0.4 14,657 12,515 12,532 10 0.2 20,000 10.0 0 0 0 0.0 2006 2008 2010 2012 2014 2016 2018 2014 2016 2018 Business Enterprises Public Research Organizations Researcher Technician Support Staff Higher Education Institutes GERD Total R&D Personnel Researchers per 10,000 Labor Force Source: National Survey of Research and Development (R&D) in Malaysia Source: National Survey of Research and Development (R&D) in Malaysia 2019 2019 Source: World Bank. 2020a. MALAYSIA ECONOMIC MONITOR | JUNE 2021 67 PART TWO - Resilient recovery for the private sector BOX 7 Management Practices in Malaysia The management practices of firms have been found productivity and performance. For example, Bloom to have a significant impact on their productivity et al. (2012) find that a one-point increase in a firm’s and performance. Research based on data from the management score according to the WMS is associated World Management Survey (WMS) confirms the positive with an increase of 26 percent in labor productivity; a relationship between management practices and firm 2 percent increase in profitability; a 7 percent increase FIGURE 55 If management practices in Malaysia were to catch up with the US, labor productivity could increase by 13 percent Management Score 5.0 4.5 4.0 3.5 3.32 2.84 3.0 2.5 2.03 2.0 1.5 1.0 United States Japan Germany Sweden Canada Great Britain France Australia Italy Singapore Mexico Poland New Zealand Northern Ireland Malaysia Portugal Republic of Ireland Chile Spain Greece Turkey Argentina Brazil China Vietnam Colombia India Kenya Nigeria Nicaragua Myanmar Zambia Tanzania Ghana Ethiopia Mozambique Source: World Bank staff calculations based on World Management Survey 68 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector in sales; and a 1 percent reduction in bankruptcy or has a formal set of targets, these usually define liquidation (a substantial impact given that the average broad objectives rather than measurable actions bankruptcy rate in the relevant sample is 2.4 percent). with clear time frames. Further, there is no strong link between targets and individual employees’ While the quality of management practices in day-to-day responsibilities. To achieve a score Malaysia’s manufacturing sector is roughly equal above a 3.00, firms would also need to have a good to that of other countries at a similar level of rationale for benchmarking their targets to ensure development, it lags behind those of advanced that these targets are challenging yet achievable. countries such as the United States, Japan, and Germany. Data from the WMS, which reflects four • Talent management: Malaysia’s score of 2.92 dimensions of management practices (operations suggests that the average firm in the country management, performance monitoring, target setting, has somewhat formal systems of appraisal and and talent management) show that while Malaysia’s employee accountability, though these systems overall management score is in line with the country’s may not always be rigorously followed. For a score level of development and close to the median of 3.00 or above, there would need to be more across countries, there is significant room for further transparent and accountable ways of evaluating improvements (see Figure 55). employees, including through a wide array of performance metrics. In addition, all promotions While Malaysia performs relatively well in terms of would need to be based on merit rather than performance monitoring, it performs particularly tenure. poorly in terms of operations management. More specifically, Malaysia’s performance in terms of the Overall management scores vary substantially four dimensions of management practices, measured between firms with different characteristics. on a scale of 1 (practically no structured management Scores are generally higher for larger firms with more practices implemented) to 5 (best practice in industry), than 200 workers. The more technology-intensive can be described as follows: subsectors, such as the chemical and pharmaceutical and computer and electrical subsectors, have relatively • Operations management: Malaysia’s score of higher management scores than do the relatively low- 2.68 implies that some modern processes have technology intensive clothing and apparel subsector. been implemented in the average manufacturing Management scores are also generally higher for older firm in Malaysia. However, they have not yet been firms and for firms located in the most central and fully formalized and are sometimes implemented developed parts of Malaysia. only to catch up with competitors. In comparison, the average manufacturing firm in countries with Increasing Malaysia’s productivity growth through scores above 3.00 implement modern practices to better management practices will require a reach forward-looking business objectives or stay systematic, comprehensive policy approach that ahead of the curve. fosters the different drivers of management practices in a systematic and mutually reinforcing • Performance monitoring: The score of 3.01 way. Realizing productivity gains through improved suggests that the average Malaysian firm has a management practices will necessitate increases in formal performance monitoring process in place, the intensity of competition, reforms to the ownership with a good set of indicators. However, these structure of firms, and investments to enable access to indicators may not be measured as often as they talent through higher quality education and training. could be, resulting in possible inefficiencies. • Target setting: The score of 2.63 implies that while an average manufacturing firm in Malaysia Note: The World Management Survey is an internally standardized quantitative instrument to measure the quality of firms’ management practices across countries and industries. The findings from this survey for Malaysia are internationally comparable and representative for all manufacturing firms in the country with more than 50 employees. Source: World Bank. 2020. MALAYSIA ECONOMIC MONITOR | JUNE 2021 69 PART TWO - Resilient recovery for the private sector Enabling foundations to expand private investments The pandemic has exacerbated issues related to repayments. MSME NPL ratio rose by 0.2 percentage access to finance, which could constrain private points to 3.2 percent in December 2020 after the end sector recovery and future growth. According to a of the blanket moratorium (see Figure 56). The increase survey conducted by BNM in 2018, SMEs rely heavily was most notable in three sectors, namely, finance, on informal sources of funding such as self-financing insurance, real estate (FIRE); wholesale and retail trade (51 percent) and funding from family and friends (17 and construction (see Figure 57). While there are signs percent). However, to the extent that SMEs rely on of economic recovery, many MSME loans have been formal sources of finance, most of them borrow from restructured and the full impact on the quality of the banks. As stated earlier, the BPS survey shows that loan portfolio may not be seen until later in 2021.38 Malaysian firms remain relatively vulnerable compared Banks have continued to set aside additional provisions to their counterparts elsewhere in the region in terms as a precaution against future credit losses. of available cash flow, with repayment risk being the main barrier to accessing finance. An examination of Supported by government measures, the overall the level of non-performing loans (NPLs) for SMEs in lending to MSMEs increased in the past year. The banks’ portfolios may provide insights into the extent MSME portfolio expanded by 9.6 percent in 2020 of this vulnerability. compared to the previous year, with the government and BNM increasing the value of special funds and The impact of the pandemic in terms of the implementing guarantee schemes and other policy level of non-performing loans NPLs is becoming measures to encourage lending. Funds to a value of increasingly apparent, with this level expected RM10 billion allocated to the BNM’s SME Special Relief to increase as the pandemic-related government Facility, which was established with the specific purpose borrower relief programs come to an end. The of assisting SMEs to address cashflow constraints, six-month blanket loan repayment moratorium in were fully utilized, with the beneficiary SMEs primarily place through September 2020 and the subsequent coming from three sectors: wholesale and retail trade targeted repayment assistance initiatives for MSMEs (47.2 percent of total); manufacturing (15.2 percent); have largely obscured the impacts of the pandemic on and construction (9.0 percent).39 FIGURE 56 FIGURE 57 MSME NPLs have been slowly rising across MSME NPLs by sector enterprise sizes Total MSME NPL, Billions NPL by Entity Size, Billions MSME NPL Ratio by Sector, Total MSME NPL Ratio, Percentage Percentage 5 1.2 4.0 12 End of Moratorium 1.0 11 3.0 4 0.8 10 0.6 2.0 9 3 0.4 1.0 8 0.2 2 7 0.0 0.0 01/2019 04/2019 07/2019 10/2019 01/2020 04/2020 07/2020 10/2020 01/2021 6 1 5 MSMEs Impaired Ratio (%) (RHS) 4 0 Primary agriculture 01/2019 05/2019 09/2019 01/2020 05/2020 09/2020 01/2021 Transport, storage and communication Finance, insurance, real estate and business activities Manufacturing (including agro-based) Construction MSME NPL (RM) (LHS) Micro Small Medium Wholesale & retail trade, and restaurants & hotels Source: BNM Financial Inclusion Data Source: BNM Financial Inclusion Data 38 BNM’s Second Half Financial Stability Review noted that MSMEs accounted for 90 percent of total loans approved for rescheduling and restructuring. 39 BNM Annual Report 2020 70 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector Mainstreaming sustainability in economic policy is pivotal to increase firm resilience It is necessary to increase resilience in order connectivity with global value chains that increasingly to enhance the competitiveness of Malaysia’s require all participants in the chain to engage in green industries. Mainstreaming an economic growth and sustainable production processes, and other strategy that incorporates green and environmental synergies between social, environmental, reputational, sustainability may play a positive role in improving and economic benefits.41 competitiveness. This would require well-functioning economic and market structures that enable innovation The next section elaborates the policy and healthy competition between firms.40 The potential recommendations to foster a resilient recovery benefits to be derived through the promotion of for the private sector. These recommendations are sustainable industry processes include improved water organized in terms of what the Government of Malaysia and energy efficiencies and increased operational could implement in the near term to weather the surge cost savings, higher industry asset values, reputational followed by short-term, medium-term and long-term advantages, and greater investments from risk- policy measures that would help Malaysia get back on informed global companies looking for sustainable track on a productivity led innovation growth model as investment opportunities. These investments in it aspires towards attaining high income nation status. improved resilience would also support higher levels of Clear and accessible support measures required to provide private sector relief Clear and accessible support programs that enable wage subsidy appears to be effective in limiting layoffs. firms to reduce expenses in the near term will be key Conditional on firm characteristics, including sales to support relief measures. A vast majority of firms growth and liquidity, having access to wage subsidies were able to access government support programs that significantly reduces the likelihood that firms lay off were introduced in the PRIHATIN and PENJANA plans. workers (by ~8 percent). Conversely, firms’ liquidity In fact, access to government support in Malaysia is (cash flow availability) is significantly correlated with the highest in the region (see Figure 58). However, probability of firing workers with businesses that access by small firms (80 percent) still lag that of large expected cash flow shortages being ~9 percent more (94 percent) and medium firms (93 percent). Measures likely to fire workers relative to those who did not. At that had high take up soon after the first MCO included the sectoral level, most sectors indicated that payment loan deferrals, rent reductions and deferrals, electricity deferral and wage subsidies were the most important discounts and deferrals. Access remained high with type of support. The only exception was the agriculture slight increases among new measures or measures that and mining sector that rated support to adopt health have been extended or accelerated under PERMAI protocol and buy local products campaign as the most and PEMERKASA packages. These included the EPF needed support after payment deferrals. These insights program, tax relief, wage subsidies, hiring incentives as can also lend to support programs that are targeted to shown in Figure 59. It will be critical to ensure that SMEs sectoral needs. are able to access the new support measures during the current lockdown in June 2021. Improving predictability of SOP regulations and expediting approvals and disbursements Conditional wage subsidies have been effective for existing loans would be key to successfully in limiting layoffs in Malaysia and should be implementing the economic recovery plan. Overall, considered an important measure to provide relief the assessment of firms on the government policy to firms. Analyzing the data from the BPS surveys, and programs has been fairly positive. A majority of 40 World Bank. 2020c. 41 World Bank. 2020c. MALAYSIA ECONOMIC MONITOR | JUNE 2021 71 PART TWO - Resilient recovery for the private sector firms surveyed in January 2021, expressed confidence to be improving predictability of the SOP regulations in the way the government is handling the pandemic (see Figure 60) and expediting the approvals and with 57 percent of businesses expressing “very high” disbursements for existing loans and grants under or “quite high” confidence in the government’s overall PRIHATIN and PENJANA (see Figure 60 and Figure 61). handling of the pandemic. Businesses were also asked These would be useful to keep in mind to successfully to state the improvements in government policy implement the economic recovery plan to ensure that implementation that would benefit their businesses firms are able to access the support they need to tide the MOST in the next six months. The top ranked over this crisis. implementation reform priorities for firms continue FIGURE 58 FIGURE 59 Access to government support programs in Access to support measures and their rate of Malaysia is the highest in the region uptake in Malaysia Share of Firms Receiving Government Support, Percentage Share of Firms with Access to Support Policies, Percentage 100 EPF support Electricity deferral or discount Tax relief for Covid expenses Wage subsidies 80 Loan payment deferral e−CAP Tax deferrals/rebates/exemptions 60 Rent deferral or reduction Hiring Incentives FA to implement social dist. Subsidized loans 40 Digitazation grants Access to new credit ICT acc. capital allowance 20 HRDF levy exemption Acc. payment terms from GLCs E−commerce training Penjana Tourism Financing 0 0 10 20 30 Cambodia Vietnam Indonesia Malaysia Jan/Feb Sep/Oct Oct Jan/Feb Oct 1-15 Jan 15-Feb 10 Source: Kuriakose et al. (2021) Source: Kuriakose et al. (2021) FIGURE 60 FIGURE 61 The topmost priorities for firms continue to be The disbursement of PRIHATIN/PENJANA loans improving predictability of SOPs has generally improved over time Most Bene cial Government Policy Improvements, Percentage of Firms Disbursement of PENJANA/PRIHATIN Loans Comparing Mid-Mar to Mid-Oct Versus Mid-Oct to Mid-Dec, Percentage of Firms Clarity & predictability of SOP 40 Expedite PRIHATIN/PENJANA Simplify wage subsidy scheme 30 Increase use of e-Government 20 Expedite immigration approvals Clarity on foreign labor policy 10 Others 0 10 20 30 0 Improved Same as Worse than Not sure/ Oct 1-15 Jan 15-Feb 10 before before Not applicable Source: Kuriakose et al. (2021) Source: Kuriakose et al. (2021) 72 MALAYSIA ECONOMIC MONITOR | JUNE 2021 MALAYSIA ECONOMIC MONITOR | JUNE 2021 73 PART TWO - Resilient recovery for the private sector In the short term, programs need to be recalibrated towards increasing firm efficiency Risks related to the long-term uncertainty could reduce the capabilities of these firms to invest The vast majority of in technologies that improve productivity. Based firms (90 percent or more on the findings of the BPS survey in February 2021, limited access to finance remains the most significant of firms surveyed) are constraint for firms’ investing in digital solutions (see interested in government Figure 62), followed by a lack of information and lack of certainty regarding the benefits to be derived. In fact, assistance for the adoption despite the already high proportion of firms adopting of digital solutions to deal digital technology, the vast majority of firms (90 percent or more of firms surveyed) are interested in government with COVID-19 crisis assistance for the adoption of digital solutions to deal with COVID-19 crisis (see Figure 63). On the regulatory Malaysian government has introduced, implemented, front, firms indicated that digital privacy, consumer and reformed numerous instruments and programs to protection and cybersecurity are the top three barriers support a wide variety of SME activities. A forthcoming for firms to use the internet, social media and digital program efficiency review covering all SME programs 42 platforms. in Malaysia shows that increased efficiency gains could be achieved by decreasing redundancies that exist The crisis creates an opportunity for the due to overlapping mandates between agencies and government to recalibrate its programs to promote programs. With new programs being designed to private sector growth on the basis of the identified expedite the recovery of the private sector, there is an needs of firms (see Figure 64). Over the years, the opportunity to recalibrate program support towards FIGURE 62 FIGURE 63 Finance remains the biggest constraint for not The vast majority of firms are interested in investing in digital solutions among firms government’s assistance for the adoption of digital solutions Reasons for Not Investing in Digital Solutions, Percentage Share of Firms Interested in Digital Support, Percentage 50 100 40 80 30 60 20 40 10 0 20 No No Lack Employees Uncertain Unreliable Other need nancial information missing bene ts internet resources on relevant skills solutions & implementation 0 Oct 1-15 Jan 15-Feb 10 Small Medium Large Source: Kuriakose et al. (2021) Source: Kuriakose et al. (2021) 42 World Bank 2021: Program Efficiency Review of SME Programs in Malaysia, World Bank, forthcoming. 74 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector priority areas, such as through initiatives to build processes and the use of alternative data for credit the digital capabilities of SMEs to increase private decisioning could be leveraged by banks to reduce sector growth and resilience. In these initiatives, the turn-around times for processing SME loans. The the government can play a pivotal role through the introduction of digital financial services could stimulate establishment of close dialogue and partnerships with competition between financial service providers to the private sector to facilitate feedback mechanisms offer lower cost products to the SMEs. The creation that inform policy design and implementation (see of a centralized notice-based collateral registry could Box 8). enable unincorporated MSMEs to pledge movable assets as collateral, effectively widening the provision There is a need to develop an enabling framework of services to previously underserved communities. In that provides more efficient and inclusive financial addition, an expansion to the scope of credit reporting services, particularly for SMEs. Innovations in the data to include alternative data sources could help to area of digital technology create an unprecedented lower the cost of financing and enable the provision opportunity to mitigate the impact of the COVID-19 of better terms for borrowers with scarce credit crisis on SME financing. Simplified loan application information. FIGURE 64 Summary of immediate measures to provide relief and short-term measures to increase firm efficiency Immediate Short-term (Up to 1 year) Implement clear Extend conditional Improve SOP Recalibrate Develop more and accessible wage subsides regulations programs efficient and inclusive support programs financial services These include having Wage subsidies that Improve the predictability Recalibrate programs to Simplify loan application very clear eligibility have been effective in of SOP regulations and meet the needs of rms for processes and use alternative criteria for rms with limiting layoffs expedite approvals and increased digital capability data for credit decisioning. expedient turnaround in Malaysia disbursements for and greening, especially in Introduce digital nancial on applications made existing loans the case of SMEs services Source: World Bank staff elaboration MALAYSIA ECONOMIC MONITOR | JUNE 2021 75 PART TWO - Resilient recovery for the private sector BOX 8 Public-Private Dialogues – Recent Development and Best Practices Private and public sector collaborations can 3. Fostering good governance and transparency in generate numerous benefits. These benefits pertain the policy-making process. not only to private firms and the government but can span towards the whole economy. While it is difficult 4. Serving as a catalyst for innovation and spurring to isolate the impact of public-private dialogues, the innovative activities. existing literature suggests that they promote cross- sectoral reforms that translate directly into macro- To reap these and other benefits, policymakers economic benefits. The main benefits include: should strive to understand and manage the challenges associated with public-private 1. Facilitating the effective implementation of dialogues and partnerships. Overall, this process regulatory reforms and improvements to entails significant transaction costs and is marred by investment climate conditions. asymmetries of information which, if administered poorly, can limit its benefits to a select few entities 2. Increasing the levels of competitiveness by and waste valuable resources. This may result from establishing a favorable environment for monopolization and capture, which could result in business growth, job creation and domestic and rent extraction, undermining potential reforms and international competition. reinforcing the power of vested interest groups and 76 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector existing elites (Pinaud, 2007). Likewise, poor organization of good regulatory practices have made Malaysia’s and governance of private-public dialogues can result in regulatory policy one of the best in the world. Apart ineffective, fragmented and costly operations process, from the general statistics and rankings, PEMUDAH’s with relevant associations not being represented due efforts to facilitate business operations can be seen to uncoordinated efforts that dilute the potentially through numerous initiatives and reforms in a range of positive impacts of the initiative. different sectors, from construction to healthcare. The success of public-private collaborations depends crucially on a few key factors. These PEMUDAH’s efforts factors are: 1) the ability to effectively coordinate the government’s position through one agency with to facilitate business sufficient power to implement its mandate; 2) the operations can be seen importance of a consultative process embedded in public agencies through formal and informal linkages; through numerous and 3) the credibility of the organizations enabling the initiatives and reforms private sector to speak with one voice (Ansu, Booth, Kelsall and Te Velde, 2016). in a range of different sectors, from construction In Malaysia, an example of an effective public- private dialogue and collaboration can be seen to healthcare in the case of PEMUDAH. Pasukan Petugas Khas Pemudahcara Perniagaan (PEMUDAH), the Special Task Force to Facilitate Business, was established to facilitate The case of PEMUDAH provides important lessons closer collaboration between the public and private for public–private dialogue and collaborations sector and thereby to enhance public service delivery elsewhere. PEMUDAH is an institutional innovation of an and to improve the Malaysian business environment. effective PPD. Part of its success lies in its structure and PEMUDAH identifies and addresses regulatory business its ability to influence favorable business reforms. It has or policy issues and formulates solutions that enhance sufficient power to fulfil its mandate and can effectively business activities in line with the national agenda and coordinate the government’s position.. Through good regulatory practices. The work is carried out by PEMUDAH, representatives from both the public and its members, who are heads of federal government private sectors work together and share experiences ministries and departments, accomplished leaders and expertise to champion transformational reform of trade and industry, and members co-opted from bearing significant outcomes and pursue closer key public sector agencies, working in cooperation collaboration between relevant stakeholders through with a wide range of stakeholders, with the Malaysian various technical working groups. Critically important, Productivity Council serving as its Secretariat. Its the private sector enriches PEMUDAH’s resources governance framework and organizational structure through its industrial expertise and experience. effectively cuts across silos, smoothens process implementation and encourages teamwork and The key characteristics of PEMUDAH provide a information sharing. framework for public private collaborative efforts to steer and regulate transformation initiatives PEMUDAH-led initiatives have made Malaysia globally. The case of PEMUDAH is an inspiration an easier place to do business by creating a more for other PPDs that endeavor to foster a healthy investment-friendly business climate. Malaysia has relationship between the public and the private sector experienced steady improvements in its business climate in the pursuit of an improved investment climate. Its for domestic small and medium-sized enterprises over innovative, flexible, adaptive, and multi-stakeholder the years. A total of 24 reforms have been implemented approach serves as an example for other institutions to since the Doing Business 2010 study, highlighting the strengthen the delivery of regulatory reform to enhance country’s ongoing efforts to reduce the gap between private sector competitiveness and productivity. its performance and international good practices. Additionally, the establishment and implementation Source: Adapted from Kuriakose, Smita; Eknath, Varun. 2020. MALAYSIA ECONOMIC MONITOR | JUNE 2021 77 PART TWO - Resilient recovery for the private sector In the medium to long term, there is a need to undertake deep structural reforms Following the substantial liberalization of analysis of the PMR, the government should prioritize Malaysia’s manufacturing sector, the focus measures to build strong domestic services sectors and should be on further liberalizing the services to enhance access to foreign services. These measures sector. In recent years, Malaysia has entered into a will play a key role in improving the competitiveness of number of major regional trade agreements, such as Malaysia’s manufacturing sector into the future. the Comprehensive and Progressive Agreement of Trans-Pacific Partnership (CPTPP) and the Regional There is also a need to modernize Malaysia’s Comprehensive Economic Partnership (RCEP). These investment ecosystem to attract more quality come with deep commitments, including in areas investments to support private sector recovery and such as competition policy, government procurement, long-term growth. The recently announced National investment policies and investors’ protection, Investment Aspirations (NIA) serve as a crucial starting intellectual property rights, and Government-Linked point towards reinvigorating private investment Companies (GLCs). An early ratification of the CPTPP in Malaysia. These well-defined investment policy and the swift entry into force of the RCEP should be goals can then be translated into a list of clear and prioritized (see Figure 65 for summary of medium to objective eligibility criteria to guide the identification long-term measures). A clear timeline and work plan of priority investments and track progress towards the must be established with regards to the next steps achievement of Malaysia’s longer-term development vis-a-vis these agreements. The commitments implied objectives. The tax incentive policy framework could by these agreements could have a significant positive also be enhanced to ensure the better targeting of impact in terms of attracting investment, including investments, guided by the principles of predictability, investment that spurs innovation and technological transparency, accountability and proportionality. Lastly, upgrading. Given the restrictions identified through the Malaysia’s investment promotion framework could be FIGURE 65 In the medium to long term, focus should be on undertaking deep structural reforms 1 2 3 4 5 Trade Investment Industry-Research Skills and Technology Sustainability Agreements Ecosystem Collaboration Readiness • Prioritize the • Translate NIAs into clear • More coordinated • Incentivize rms to • Deepen collaboration early rati cation and objective eligibility approach towards public invest in basic between stakeholders to of the CPTPP criteria R&D and innovative managerial and develop Eco-Industrial and the swift activities organizational practices Parks entry into force • Enhance the investment of the RCEP monitoring and • Implement consistent • Increase the • Provide support to rms evaluation framework monitoring and development of applied especially SMEs to • Further evaluation framework tech skills and structured mainstream Environmental, liberalize the • Reform the tax incentive partnerships for Sustainable, and services sector policy and • Enhance the incentives internship and capstone Governance (ESG) administration system system to facilitate projects standards greater technology • Build a more coherent transfer • Leverage sustainable IPA framework nance instruments Source: World Bank staff elaboration 78 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector made more effective by building a more coherent IPA In line with having a more resilient private framework and strengthening the capacities of the sector, environment sustainability should be agencies involved. mainstreamed into economic policy making. The Malaysian government has introduced the concept of There is a need to encourage deeper linkages Eco-Industrial Parks in its Mid-Term Review of the 11th between public research institutions and industry to Malaysian Plan (2016-2020), with the establishment of increase commercialization of research. 43 While the these parks intended ‘to significantly reduce industrial recently launched 10-10 Malaysian Science, Technology, waste and promote optimization of resources while Innovation and Economy (MySTIE) Framework aims to maximizing economic returns’ (EPU, 2018). The design realign research with industry needs, its appropriate and consequent adoption of the Eco-Industrial Park implementation will be crucial to its success. Policy framework would be an important first step towards makers will need to ensure appropriate resource developing a framework to foster green industrial allocations, with the right institutions established to growth. Through the deployment of specific policy support the drive towards the effective implementation tools, the pivot towards environmental sustainability of policies to encourage innovation, technology will require collaboration between national and adoption and productivity growth. Measures to local governments, public infrastructure operators, improve these processes could include: (i) the better manufacturing firms along multiple supply chains, implementation of incentives systems to facilitate industry associations, industrial park operators, and technology transfer and commercialization of research; financial institutions.44 Consequently, SMEs will need to (ii) streamlined management processes to facilitate be provided with support to mainstream environmental, commercialization activities within public research sustainable, and governance (ESG) standards into institutions; and (iii) strengthening Technology Transfer their production processes to leverage new growth Offices (TTOs) to enable them to support enhanced opportunities through increased participation in GVCs linkages with industries and to facilitate demand-driven in which there is a growing demand for cleaner and research and technology transfer capabilities. greener products. Measures to strengthen firms’ technological Sustainable finance is a key new development that readiness are critically important to ensuring could be leveraged to maximize financial benefits that Malaysia’s firms are globally competitive. for a more resilient private sector. Capital market The programs to support firms’ increased capacity to instruments such as green sukuk and sustainability adopt technology need to be combined with measures sukuk, and their banking sector equivalents such to increase workers’ technological readiness. In as green loans and sustainability-linked loans, are addition, there is a need to improve Malaysian firms’ potentially useful tools that could be used to reach a basic managerial and organizational capabilities and wider and more diverse source of potential investors practices, particularly in the case of SMEs. Realizing and lenders. Incorporating sustainable financial productivity gains through improved management practices into corporate strategy both improves internal practices will necessitate increases in the intensity of governance as well as positions firms to be more competition, reforms to the ownership structure of firms, attractive to increasingly climate-conscious investors and investments to enable access to talent through and clientele. higher quality education and training. Policymakers should emphasize the development of applied tech skills and structured partnerships with industries for internship and capstone projects. 43 World Bank. 2020a 44 World Bank. 2020c MALAYSIA ECONOMIC MONITOR | JUNE 2021 79 PART TWO - Resilient recovery for the private sector TABLE 4 Summary of policy recommendations for creating better jobs and economic transformation Immediate and short-term policies to counter the surge and facilitate a recovery Implement clear and accessible support programs in the near term • These include having very clear eligibility criteria for firms with expedient turn Immediate relief around on applications made. measures to counter the surge Extend conditional wage subsidies that have been effective in limiting layoffs in Malaysia Improve the predictability of SOP regulations and expedite approvals and disbursements for existing loans Recalibrate programs towards firms support informed by the demands of the firms • Use the crisis as an opportunity to recalibrate programs to meet the needs of firms for increased digital capability and greening, especially in the case of SMEs. Short- term policies45 to facilitate private Develop an enabling framework that provides more efficient and inclusive sector recovery financial services, especially for SMEs • Simplify loan application processes and use alternative data for credit decisioning. • Introduce digital financial services to stimulate competition among financial sector operators that can provide product offerings to SMEs. Medium- to long-term policies to increase private sector resilience Prioritize the early ratification of the CPTPP and the swift entry into force of the RCEP • Further liberalize the services sector and prioritize measures to build strong domestic services sectors and enhance access to foreign services. Modernize Malaysia’s investment ecosystem to attract more quality investments (i) Connectivity • Translate NIAs into clear and objective eligibility criteria to guide the and Integration identification of priority investment activities and for granting incentives. • Enhance the investment monitoring and evaluation framework to track progress toward the achievement of objectives defined by the NIAs and to detect inefficient expenditures. • Reform the tax incentive policy and administration system, on the basis of the principles of predictability, transparency, accountability and proportionality. • Build a more coherent IPA framework and strengthen the strategic and operational capacities of the agencies involved. 45 Short-term – Up to 1 year. 80 MALAYSIA ECONOMIC MONITOR | JUNE 2021 PART TWO - Resilient recovery for the private sector Encourage deeper linkages between public research institutions and industry to increase commercialization of research • Adopt a more coordinated approach towards public R&D and innovative activities. • Implement consistent monitoring and evaluation frameworks across public (ii) Skills, research institutions to inform policy making. technology and • Enhance the incentives system to facilitate greater technology transfer and Innovation commercialization of research. Strengthening firms’ technological and skills readiness • Incentivize firms to invest in basic managerial and organizational practices. • Increase the development of applied tech skills and structured partnerships with industries for internship and capstone projects. Mainstream green and environment sustainability into economic policy making • Deepen collaboration between national and local governments, public (iii) Enabling infrastructure operators, manufacturing firms, industry associations, industrial foundations to park operators, and financial institutions to develop Eco-Industrial Parks. expand private • Provide support to firms especially SMEs to mainstream Environmental, investments Sustainable, and Governance (ESG) standards into their production processes. • Leverage sustainable finance instruments to maximize financial benefits for a more sustainable and resilient private sector. 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The Impact of Public Research Institutions through Technology Transfer Activities: A New Survey and Performance Framework. World Bank Technical Papers, forthcoming. 84 MALAYSIA ECONOMIC MONITOR | JUNE 2021 CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific http://bit.ly/WB_blogsMY