Ref. No.

: 03/09/10

EMBARGO: Not for publication or

broadcast before 1800 hours on
Wednesday, 25 March 2009

PRESS RELEASE
Bank Negara Malaysia Annual Report 2008
The Malaysian Economy in 2008
The Malaysian economy registered a growth of 4.6% in 2008, amidst the international
financial turmoil and rapid deterioration in global economic environment. Robust
domestic demand, in particular sustained private consumption and strong public
spending, supported growth during the year. While external demand was strong in the
first half, the sharp deterioration in the global economic conditions and correction in
commodity prices led to significant decline in external demand in the second half of
2008. As a result, growth expanded by 2.4% in the second half-year, compared with
7.1% in the first half of 2008.
During the year, aggregate domestic demand expanded by 6.9%, underpinned by
strong private consumption and public expenditure. High commodity prices, stable
employment and supportive financing environment sustained the strong growth in
private consumption in the first half-year. Support also came from the bonus payment
for the civil servants and cash rebates for fuel subsidy in the second half-year. The
rapidly worsening global economic conditions, however, resulted in a decline in private
investment activity in the second half of the year.

GDP by Expenditure Components (% change)

Domestic Demand 1/
Private sector expenditure
Consumption
Investment
Public sector expenditure
Consumption
Investment
Net exports of goods and services
Exports
Imports
Real GDP
1
Excluding stocks
p Preliminary

2007
9.8
10.6
10.8
9.8

2008p
6.9
7.1
8.4
1.5

7.9
6.6
9.3

6.5
11.6
0.7

-3.8
4.2
5.4
6.3

-3.8
1.5
2.2
4.6

On the supply side, the services sector maintained its robust performance in the first
half of the year, driven by strong demand and the expansion in trade and tourism
activities. The manufacturing sector also expanded, benefiting from strong external
demand from the non-US markets and higher exports of resource-based products.
Meanwhile, growth in the agriculture sector was supported by stronger palm oil
production as well as higher output of fisheries and livestock. In the construction sector,
growth emanated mainly from the civil engineering sub-sector, driven by projects under
the Ninth Malaysia Plan (9MP) as well as those in the oil and gas industry. In the
second half-year, all economic sectors were affected by the global downturn and the
sharp correction in commodity prices. In particular, growth in the manufacturing sector
turned negative due to the significant contraction in the export-oriented industries. The
services sector remained the key driver, although a number of the services sub-sectors
that were related to trade and capital market-related activities were affected.

Real GDP by Sector (2000=100)

Annual change (%)
2007
2008
Agriculture
2.2
3.8
Mining & quarrying
3.3
-0.8
Manufacturing
3.1
1.3
Construction
4.6
2.1
Services
9.7
7.3
4.6
Real GDP
6.3
Source: Department of Statistics, Malaysia
Bank Negara Malaysia

The labour market conditions weakened in the second half of 2008 as businesses,
particularly in the manufacturing sector, turned cautious in the face of the increasingly
uncertain business environment. The unemployment rate increased to 3.7% in 2008.
Headline inflation was higher at 5.4% in 2008, due mainly to the sharp increase in
global food and fuel prices. Inflation peaked at 8.5% in July after retail fuel prices were
adjusted by 40.4% in June. Inflation, however, began to moderate in the fourth quarter
as global commodity prices fell significantly, which led to declines in domestic food and
fuel prices.

Inflation and Unemployment

2007

2008

Inflation (% change)
1
CPI (2005=100)
Core CPI

Unemployment (% of labour force)

2.0
1.8

5.4
4.0

3.2

3.7

The external position continued to remain strong in 2008. During the first half of the
year, this trend was supported by a significantly larger trade surplus arising from
stronger growth in both commodities and resource-based manufacturing exports, as
well as higher tourism receipts and strong inflows of foreign direct investment. While the
current account continued to remain in significant surplus in the second half of the year,
the overall external position recorded a net outflow as the large net outflows in the
financial account more than offset the surplus in the current account. This was caused
mainly by the large reversal of portfolio investment flows arising from the deleveraging
activities by foreign financial institutions following the deterioration of the global financial
crisis.
In 2008, the net international reserves of Bank Negara Malaysia declined by RM18.2
billion to RM317.4 billion (equivalent to USD91.5 billion) as at 31 December 2008. While
the reserves increased substantially in the first half-year due to higher repatriation of
export earnings and significantly larger inflows of portfolio capital as well as foreign
direct investment, the reversal of portfolio capital flows due to the deleveraging activities
by foreign financial institutions led to a decline in reserves in the second half of the year.
As at 13 March 2009, the reserves remained at a comfortably high level of RM314
billion (equivalent to USD90.6 billion), adequate to finance 7.7 months of retained
imports and cover 3.9 times the short-term external debt.
Monetary and Financial Conditions in 2008
In 2008, international financial markets were characterised by increased volatility arising
mainly from the two-fold concern of rising global inflation in the first half of the year and
the deepening global financial crisis in the second half of the year. Nevertheless,
domestic financial markets continued to function normally despite the extreme volatility
in the global financial markets. The ample liquidity situation, minimal direct exposure to
the global financial crisis and a strong banking sector, enabled domestic financial
institutions and markets to perform the intermediation function effectively. Nevertheless,
domestic financial markets were subject to significant volatility created by the large
reversal of capital flows arising from increased global deleveraging in the latter part of
the year.
Monetary policy in 2008 operated in a complex environment characterised by supplydriven inflationary shocks, financial market contagion and decelerating global growth.
From the monetary policy perspective, the risks to growth and inflation in the first half of
the year were relatively balanced. The monetary policy challenge however intensified
significantly when inflation surged following the significant fuel price adjustment in June
with growth prospects being negatively affected by the ensuing deflationary effect on
the economy and by the global financial crisis. Given the magnitude of the increase in
fuel prices, the first round effects on the prices of goods and services were expected to
be large. While there were limitations to what monetary policy could do under these
circumstances, there was the concern that this might fuel inflationary expectations.
4

There were negligible indications that wages were increasing disproportionately or

evidence of second-round effects on inflation. The sharp increase in prices had,
however, eroded the purchasing power of consumers, leading to cutbacks in
discretionary spending. There was also increasing indication that the ongoing financial
turmoil in the advanced economies had become more acute and had begun to
negatively affect global economic activity, posing downside risks to Malaysias external
sector. At the same time, forecasts indicated that the elevated inflation levels were
transitory with inflation expected to moderate significantly in the second half of 2009.
Monetary policy therefore was left unchanged.
Global conditions deteriorated markedly and rapidly towards the end of the year, with
global growth prospects worsening beyond what was earlier anticipated. The Malaysian
economy was negatively impacted by these adverse developments, as reflected in the
rapid slowdown in export performance and industrial production. Although domestic
demand remained resilient, there were clear indications of slower private sector activity.
As inflation pressures abated, the policy focus turned to containing the severity of the
domestic economic slowdown. Monetary policy was significantly adjusted to frontload
the monetary stimulus to ensure that monetary conditions remain accommodative and
supportive of consumption and investment activity. Between November 2008 and
February 2009, the Overnight Policy Rate (OPR) was lowered by 150 basis points and
the Statutory Reserve Requirement (SRR) reduced by 300 basis points.
Retail lending rates in 2008 were already near historical lows due to the low cost of
funds, the ample liquidity situation, as well as intense competition among banks.
Following the OPR reduction in November, the average lending rate declined further to
end the year at a new historic low of 5.86%.

Commercial Banks' Lending Rates (at end-period)

%
6.9
6.7

BLR

6.5
6.48
6.3
ALR
6.1
5.9
5.86
5.7
M

J
S
2005

J
S
2006

Source: Bank Negara Malaysia

J
S
2007

S
2008

Reflecting the continued favourable domestic credit conditions during the year, the
increase in net financing channeled to both the public and private sectors was
sustained at 11.3% (2007: 8.2%). The increased financing to the private sector was
mainly to support private consumption activity and working capital requirements of the
business sector.
The higher bank financing to households was attributed mainly to strong demand for
residential properties and passenger cars, underpinned by rising income from high
commodity prices and various incentives introduced by the Government for the property
sector in 2007. Loans to the business sector were mainly channeled to fund working
capital. Outstanding loans of the overall business sector increased by 13.2% in 2008
(2007: 10.3%). Loans to SMEs, which account for 42.2% of total business loans in
particular expanded at a sustained rate of 9.4% (2007: 9.1%). PDS financing during the
period was used to finance new investment projects, mainly by firms in the services
sector.
Net Financing to the Private Sector

Annual change
(RM billion)

(Banking System Loans and PDS)

120

Annual growth
(%)
14
12

100

10

80

8
60
6
40

20

2004
Loans

2005

2006
PDS

2007

2008

Total net financing (RHS)

Towards year-end, however, the demand for financing slowed due to the moderation in
economic growth and the more cautious outlook of the private sector. Loan applications
by businesses and households declined across most economic sectors in the fourth
quarter. Funds raised through the equity and PDS market also declined. Lower bond
issuances in the PDS market was also due to the higher cost of raising funds as
investors demanded higher risk premiums.

The ringgit exchange rate was influenced by both domestic and external factors. The
strengthening of ringgit in the early part of 2008 reflected positive domestic economic
fundamentals, including the continued positive net trade balance, the sound financial
system, the relatively resilient economic growth outlook as well as Malaysias limited
direct exposure to the global financial crisis. The broad weakness of the US currency
and large inflows of portfolio funds also reinforced the ringgit. Subsequent global
developments, however, led to the broad downward trend in ringgit against the US
dollar. These included the failures of key financial institutions in the developed
economies, which heightened risk aversion and triggered the unwinding of investments
in emerging economies. Between May and December 2008, the ringgit oscillated
around a broad depreciating trend similar to other regional currencies following rapid
change in sentiments in the financial and currency markets. In a volatile and uncertain
global environment, the managed float exchange rate regime gives flexibility for the
ringgit to adjust to global economic and financial developments. At the same time, the
current regime has also accorded a level of stability against the currencies of Malaysias
major trading partners.
R inggit P e rformance against M ajor and
R e gional C urre ncie s in 2008
32.2

GBP

28.4

K RW
IDR

11.3
10.1

P HP
0.0

E UR
-1.2

THB

-3.6

TW D

-4.5

US D

-4.7

SGD
-10.8

CNY
-22.9

JP Y
-30

-20

-10

10

20

30

40

An n u a l ch a n g e , %
Note: (+) indic ates an apprec iation of the ringgit agains t f oreign c urrenc y
Sourc e: Bank Negara Malay s ia

Ringgit bond yields were mainly influenced by inflation expectations and concerns over
the growth outlook. Yields were generally trending upwards in the first half of the year
over concerns of higher domestic inflation, but mitigated by the large inflows of capital
and expectations for a further strengthening of the ringgit. MGS yields, however, began
to decline in the latter part of the year as inflation expectations eased. PDS yields
increased on account of domestic market developments, including the reallocation of
portfolios in favour of sovereign papers. In the equity market, falling commodity prices,
7

increased risk aversion and deleveraging activities by international financial institutions

brought the Kuala Lumpur Composite Index (KLCI) down by 39.3% to 876.8.
Outlook for the Malaysian Economy in 2009
The outlook for the Malaysian economy is affected by the highly uncertain global
economic conditions. The problems in the global financial sector continue to remain,
with losses by the financial institutions projected to increase further. The global
economy continues to be affected by the credit crunch, job losses, declining asset
prices and excess capacity prevailing in most advanced economies, with adverse
repercussions on global trade. With many economies already in recession, the global
economy is not expected to record any growth in 2009 (2008 : 3.4%).
The weak global outlook is likely to have an adverse impact on the growth of the Asian
economies, given the strong trade and investment linkages. Countries with high trade
dependence will be more vulnerable, while foreign direct investment flows will be
curtailed in view of increasing spare capacity and reduced trade financing. Several
regional economies have already felt the impact, as evidenced from the sharp
contraction in exports as well as large decline in industrial production and investment.
The easing of monetary policy and the countercyclical fiscal measures that have been
undertaken by most economies in the region would, however, provide some support to
regional growth in 2009.
The Malaysian economy is expected to experience the full impact of the global
downturn in 2009. In response, several policy measures have been put in place with a
primary focus on supporting domestic demand as well as mitigating the impact of the
global slowdown on the affected segments of the economy. These included two
economic stimulus packages of RM67 billion, amounting to almost 10% of GDP, aimed
at supporting private sector demand, creating employment and training opportunities,
easing the burden of the affected sectors as well as building long-term capacity of the
economy. On the monetary policy front, Bank Negara Malaysia reduced the OPR by
150 basis points since November 2008 to 2.0%, while the SRR by 300 basis points to
1.0%, to reduce the cost of intermediation, including monthly loan repayments.
In addition, several measures have also been introduced to ensure that SMEs and
businesses continue to have access to credit as well as to minimise the impact of the
economic downturn on specific affected sectors. These include the setting up of four
new funds to facilitate access to financing by the small and medium enterprises (SMEs)
and micro enterprises as well as measures by the financial institutions to lessen the
burden on the affected groups through loan restructuring. Under the second economic
stimulus package, two loan guarantee facilities, namely the Working Capital Guarantee
Scheme and Industry Restructuring Loan Guarantee Scheme were established, to
provide working capital and to encourage investment by businesses respectively. In
8

addition, the Financial Guarantee Institution will also be established to provide credit
enhancement to companies that raise funds from the bond market.

Taking into account the prospect for a deepening global downturn and the support to
the economy provided by the policy measures, real GDP performance of the Malaysian
economy in 2009 is projected to be between -1% to 1%. The timely implementation of
the economic stimulus is important to ensure that growth will be in this projected range.
Domestic demand is expected to provide the main support to the economy, with public
spending and private consumption as the main anchors. Public sector expenditure is
projected to increase substantially following the implementation of the economic
stimulus packages. In addition, the policy responses will also provide important support
to household consumption given the anticipated weakness in the labour market and
relatively lower commodity prices. Private investment is expected to slow in an
environment of a more broad-based slowing of economic growth. Given the very weak
global economy, external demand is projected to be contractionary on the economy,
reducing growth in 2009 by an estimated 4 percentage points.

Real GDP by Expenditure (2000=100)

2009f
Annual
Contribution
change
to real GDP
growth
(%)
(percentage
point)
1/
Domestic Demand
2.9
2.6
Private sector expenditure
-0.3
-0.2
Consumption
3.5
1.8
Investment
-17.7
-2.0
Public sector expenditure
Consumption
Investment

11.4
7.3
16.6

2.8
1.0
1.8
1.4

Change in stocks
Net exports of goods and
services
Exports
Imports
Real GDP

-29.7
-16.6
-14.9
-1.0 ~ 1.0
9

-4.0
-19.7
-15.7
-1.0 ~ 1.0

Excluding stocks
f Forecast

On the supply side, sectors that are directly exposed to external demand will be
significantly affected in 2009. Output in the manufacturing sector is expected to decline
due to the contraction in the export-oriented industries as well as weaker support from
the domestic-oriented industries. The services sector will remain the main contributor to
growth, though its growth is likely to moderate given the weaker performance in the
trade-related industries. The agriculture and mining sectors will register negative growth
arising from lower production of palm oil, rubber and crude oil, in part affected by lower
prices. Meanwhile, the construction sector is expected record a stronger growth,
benefiting from the implementation of projects under the two stimulus packages.

Real GDP by Sector (2000=100)

2009f
2008p
Annual change (%)
3.8
-2.0
-0.8
-0.4
1.3
-8.0
2.1
3.0
7.3
4.5
4.6
-1.0 ~ 1.0

Agriculture
Mining & quarrying
Manufacturing
Construction
Services
Real GDP
p
Preliminary
f
Forecast
Source: Department of Statistics, Malaysia
Bank Negara Malaysia

Labour market conditions are expected to weaken further, with the unemployment rate
projected to increase to 4.5% in 2009. While businesses affected by the sharp
deterioration in external demand are likely to continue to implement cost-cutting
measures, including temporary layoffs and retrenchments, measures to increase
employment in the public sector and incentives provided to the private sector to retain
employees will partially offset the overall weak employment prospects.
On the external front, the current account surplus is projected to moderate, but remain
sizeable at 11.5% of GNI in 2009. Although gross exports are expected to decline
substantially due to the significant weakness in external demand and the lower
commodity prices, the trade surplus will remain significant as export contraction will
largely be offset by import compression. The services account is expected to record a
10

deficit in 2009 due to lower travel surplus. On the financial account, gross inflows of
foreign direct investment are anticipated to moderate further in 2009, as multinational
corporations postpone their investment plans until there are clearer signs of recovery in
demand have emerged.
Headline inflation is expected to average between 1.5 2% in 2009, reflecting the
sharp reversal of global commodity prices from their peaks in 2008 and slowing global
inflation. The impact of the downward adjustments in administered prices by the
Government and the expected slowdown of economic activity will also reduce price
pressures.
Consumer Prices
6

Annual change (%)

5
4
3
2
1
0
'05

'06

'07

'08

'09f

The projected economic performance of -1% to 1 % for Malaysia in 2009 is based on

the weaker global conditions expected during the year that will be partially offset by the
implementation of policy measures to support domestic demand. There remains
however, significant uncertainties regarding the global economic outlook. First, the
turmoil in the international financial markets may be more protracted and extend beyond
this year, with problems in the financial sectors in a number of countries remaining
unresolved, thereby further exerting downward contractionary influence on the global
economy. Second, the large stimulus measures that are being implemented by several
countries would take some time to take effect. Thirdly, there is the risk of trade and
financial protectionism. These factors will influence the depth and length of the
recession in the advanced economies and the overall performance of the global
economy.
Economic and Monetary Management in 2009
Despite the massive stimulus efforts and after almost two years into the global financial
crisis, the global economy has yet to see signs of recovery with indicators suggesting
further downside. Under this very difficult global economic environment, the challenge is
11

to provide the necessary and sufficient policy support to the domestic demand in order
to mitigate the impact of the decline in external demand.

The Federal Governments 2009 Budget announced in August 2008 was initially
formulated with the principal objective of further strengthening the nations economic
resilience in the face of rising inflation and increased uncertainties. As the global
economic situation worsened in the fourth quarter of 2008, fiscal policy was directed at
countering the cyclical downturn. The RM7 billion first Economic Stimulus Package
announced on 4 November 2008 is aimed at compensating the shortfall in private sector
demand and reinvigorating private spending. The fund is being spent on small-scale
construction, maintenance of social infrastructure and public amenities and
development projects that included the building of low- and medium-cost houses as well
as measures to boost private consumption. The RM60 billion second Stimulus Package
announced on 10 March 2009 include wide-ranging measures to support domestic
economic activities and strengthen capacity for future growth. Of the total, RM15 billion
would be in the form of fiscal injection, RM25 billion for Guarantee Funds, RM10 billion
for equity investments, RM7 billion for private finance initiative and RM3 billion in the
form of tax incentives.
Although the fiscal deficit is expected to widen from 4.8% of GDP in 2008 to 7.6% of
GDP in 2009, the Government will continue to finance it from non-inflationary domestic
sources, mainly through the issuances of Malaysian Government Securities (MGS) and
Government Investment Issues (GII). In addition, the Government would issue a retail
bond, the Government Savings Bond, amounting to RM5 billion, to finance its
expenditure. With ample liquidity and high domestic savings in the domestic financial
sector, higher public sector spending would not crowd out the availability of financial
resources to the private sector.
With the risk of inflation abating, the focus of monetary policy has shifted firmly towards
supporting economic growth in the context of pronounced weakening of global demand.
As a pre-emptive measure, the Bank has reduced the OPR by 150 basis points
between November 2008 and February 2009 to support economic activity. The SRR
was also lowered to reduce the cost of intermediation and thus encouraged the banks to
pass on the lower interest rates to borrowers.
It is noteworthy that Malaysia is entering this challenging period from a position of
strength with a strengthened banking system and a strong external position. Prudent
policies and the substantial progress in developing and strengthening the domestic
financial system since the Asian Financial Crisis have also contributed to the relative
resilience of the Malaysian financial system. This is important to ensure that the
financial intermediation process is uninterrupted and to facilitate the transmission of
monetary policy.
12

The Bank remains mindful of the need to mitigate the impact of lower interest rate on
the segment of population who depended on income from savings. The Bank also
announced the issuance of the Bon Simpanan Merdeka amounting to RM2 billion on 28
January as an additional savings instrument for Malaysian citizens aged 56 and above.
Meanwhile, the Government has announced the issuance of syariah-compliant Savings
Bonds amounting to RM5 billion for citizens above 21 years old. With a nominal return
of 5.0% per annum, the real return on both these bonds is expected to average above
3.0% in 2009.
The collective impact of monetary and fiscal policies, as well as targeted structural
measures should contribute towards containing the effects of the global economic
downturn on domestic economic activity and provide a firm base for the economy to
return to its medium-term growth path once global economic and financial conditions
stabilise.
Bank Negara Malaysias Audited Financial Statements for 2008
Bank Negara Malaysias financial position and its operations in 2008 have been
examined and certified by the Auditor General. Total assets of the Bank stood at
RM344.5 billion as at end-2008 (end-2007: RM424.9 billion). The Bank registered a net
profit of RM6.5 billion for the financial year ended 31 December 2008 and declared a
dividend of RM1.5 billion to the Government.

Bank Negara Malaysia

25 March 2009

13