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Malaysia is rich in natural resources Composition of Malaysia s national wealth, 2005 19.7 Intangible Capital 13% 8% Subsoil assets 26.0-1.2 55.5 Net Foreign Assets Produced Capital Natural Capital 79% Forestry, incl. Protected Areas Agriculture Source: World Bank, The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium. WORLD BANK 2
Malaysia is a success story in harnessing natural resources for development Human Development Index (2005), vertical axis; Log of subsoil resources per capita (2005), horizontal axis 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 MYS Resource Rich High HDI Mid HDI Low HDI 0.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 Source: World Development Indicators, World Bank staff calculations. WORLD BANK 3
Resource revenues were invested, not consumed Increase in produced capital if Hartwick Rule followed, percent, vertical axis; Total natural resource rents as a share of GDP, 1970-2005 average, percent, horizontal axis 300 250 200 150 100 50 0-50 -100 COG OMN NGA ZAR SAU TTO GAB VEN PNG SLE BDI UZB BRN GNB SYR IRN ECU ARE BHR BOL ZMB AZE DZA CAF NOR EGY KWT MRT CMR GUY CIV ARG ZWE MEX NIC ZAF PER CHL IDN CAN TCD COL MYS PAK TGO TUN URY SWE FIN NER RWA HUN AUS HND SLV GTM BEN BRA BFA GHA MWI UGA PHL IND DNK CRI BGD CHN DOM GMB FJI MDG USA SDN NPL SWZ SEN GBR KEN MLI LKA MAR THA NZL NLD JOR AUT BLZ BWA LSO PAN TUR 0 5 10 15 20 25 30 35 40 45 50 55 Source: World Development Indicators, World Bank staff calculations. WORLD BANK 4
The economy diversified Sectoral shares in GDP, percent 50.0 45.0 40.0 46.3 40.9 45.9 35.0 30.0 25.0 20.0 15.0 Primary Manufacturing Other Industry Services, etc. 29.2 17.9 10.0 5.0 0.0 8.1 4.7 7.0 Source: World Development Indicators WORLD BANK 5
The export basket diversified Sectoral shares in exports, percent 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 52 28 5 Agricultural Raw Materials Ores and metals Manufactures Source: World Development Indicators WORLD BANK 6
No Dutch Disease Real Effective Exchange Rate Index, 2005=100 225 200 175 150 125 100 75 Source: World Development Indicators, World Bank staff calculations WORLD BANK 7
Benefits from growth were widely shared Rural household incomes, RM per month 3,500 3,000 2,500 2,000 Rural Household Incomes Rural Household Incomes: Bottom 40 percent CAGR: 5.9% 1,500 1,000 500 CAGR: 7.1% 0 Source: CEIC, Department of Statistics, Malaysia, World Bank staff calculations WORLD BANK 8
How did Malaysia do it? Malaysia pro-actively diversified the asset-base of the economy Export & GDP diversification = flow Asset diversification = stock (natural resources, human capital, infrastructure, etc.) Both sector-specific and economy-wide policies played a role PETRONAS as an effective resource fund Social policies were supportive of income-gains by low-income households WORLD BANK 9
Higher prices bring new challenges Index, Jan 1960=100, both axes 800 9,000 700 600 500 400 300 200 100 0 Palm Oil Rubber Petroleum (RHS) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Source: World Bank DECPG, World Bank staff calculations WORLD BANK 10
Higher oil prices has made fiscal revenues more commodities-dependent Oil revenues in the Budget as a share of GDP, percent 10.0 9.0 9.2 8.0 7.0 6.0 7.4 5.0 4.0 3.0 2.0 2.8 1.0 0.0 Source: Accountant General s Department WORLD BANK 11
More revenues spent on consumption by the public sector Fiscal dependence on oil revenues has increased sharply since 2000 2010-2012 vs 1990-1994 1995-1999 2000-2004 2005-2009 2010-2012 1990-1994 2000-2004 Emoluments, Pensions and Gratuities 7.6 6.3 6.3 6.5 7.5-0.1 1.2 Fuel Subsidies 0.1 0.1 0.6 1.5 2.1 2.1 1.5 Other Operating Expenditure 12.1 9.7 11.0 11.5 11.0-1.1 0.0 Net Dev elopment Expenditure 5.7 5.8 8.1 5.8 5.4-0.3-2.7 Oil Rev enues 5.2 3.0 4.8 7.8 7.3 2.1 2.5 Non-Oil Rev enues 19.9 18.6 16.2 13.1 13.8-6.1-2.4 Deficit Financing -0.3-0.3-5.0-4.3-4.9-4.6 0.1 Non-Oil Primary Deficit -1.0-0.7-7.3-10.2-10.2-9.2-2.9 All Expenditures 25.4 21.9 26.0 25.2 26.0 0.6 0.1 Source: MoF, CEIC, World Bank staff calculations WORLD BANK 12
and private sector, since investment rate lower even as non-oil revenues declined Percent of GDP 45.0 40.0 35.0 30.0 25.0 GFCF (Private) GFCF (Public) Gross Fixed Capital Formation Adjusted Net Savings 20.0 15.0 10.0 5.0 0.0 Source: World Development Indicators and World Bank staff calculations WORLD BANK 13
Investments picked up in 2011 and 2012, but mostly in commodity sectors NKEA Investments, RM billion Commited investment Targeted investment balance to strike Oil, gas & energy Greater KL/KV Tourism Wholesale & retail E&E Business services Education Healthcare Palm oil & rubber CCI Agriculture Financial services 11.2 21.4% 14.8% 2.9% 5.3% 12.3% 1.6% 44.4% 33.8% 7.4% 0% 4.1% 0 90 180 270 Source: PEMANDU WORLD BANK 14
Higher prices has also made the export basket more commodities-dependent Share of total exports of goods, percent 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Other manufacturing High-tech manufacturing Processed Commodities Raw Commodities 0% Source: CEIC and World Bank staff calculations. WORLD BANK 15
Economic performance became more strongly correlated with commodity prices Change from previous year, percent 100 S&P GSCI (% yoy, LHS) Nominal GDP (% yoy) 25 80 60 40 20 0 20 15 10 5 0 Malaysia Correlation 1992-2002 0.43 2003-2006 0.25 2007-2013 0.80-20 -5-40 -10-60 1Q 92 1Q 94 1Q 96 1Q 98 1Q 00 1Q 02 1Q 04 1Q 06 1Q 08 1Q 10 1Q 12-15 Source: Haver Analytics and World Bank staff calculations. WORLD BANK 16
Competitiveness of E&E appears to have declined Revealed Comparative Advantage Index, -1 to 1 0.60 0.40 0.20 0.00-0.20-0.40-0.60 1997-2001 2002-2006 2007-2011 -0.80 China Japan Malaysia Thailand Vietnam Korea Taiwan Indonesia Phillipines Hong Kong Source: World Bank staff calculations WORLD BANK 17
But the commodities super-cycle could be ending USD Billion 500 400 Crude Oil Exploration & Production Spending 300 200 100 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: CEIC and World Bank staff calculations. WORLD BANK 18
bringing significant risks especially to the fiscal position Federal debt-to-gdp ratio, percent 65.0% 60.0% 95% - 99% 90% - 95% 75% - 90% 55.0% 67% - 75% 50% - 67% 50.0% 33% - 50% 25% - 33% 45.0% 10% - 25% 5% - 10% 1% - 5% 40.0% S1 scenario 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: World Bank Malaysia Economic Monitor November 2011 WORLD BANK 19
RM million What to do? Save more 1. Shift the balance of funds going to KWAN vs. directly to the budget 80,000 60,000 Government revenue from oil and gas Share of KWAN to petroleum revenue to Government (RHS) percent share 8 7 6 5 40,000 20,000 0 CAGR: 10.5% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 4 3 2 1 0 Source: Accountant General s Office, Malaysia This requires raising new revenues through broader tax base (e.g. GST), and/or WORLD BANK 20
Spend less on distorting and environmentallyunfriendly subsidies on fuel Price gap between Malaysia s fuel prices and East Asia and world prices, USD per liter 0.8 0.7 0.6 0.5 Price gap between East Asia and Malaysia Price gap btw World and Malaysia 0.4 0.3 0.2 0.1 0 2000 2002 2004 2006 2008 2009 2010 Source: World Bank WORLD BANK 21
and gas Potential Revenue foregone from gas subsidies, RM billion unless otherwise indicated Cumulativ e FY 2011 % of GDP since 1997 Power Sector 11.6 1.3 108.5 - Tenaga Nasional Bhd 4.9 0.6 46.1 - Independent Power Producers 6.7 0.8 62.4 Non-Power Sector, including industrial, 8.5 1.0 46.4 commercial, residential users and NGV Total 20.1 2.3 154.9 Source: PETRONAS (2012) and World Bank staff calculations WORLD BANK 22
Invest more in R&D PETRONAS: 0.01% (2011) Source: Presentation given by Datuk (Dr) Abdul Rahim Hj Hashim, PETRONAS VP for Research & Technology, December 2008. WORLD BANK 23
and in assets that promote horizontal diversification Promote growth of high value-added, externally-oriented manufacturing and services through structural reform WORLD BANK 24
Improve public investment management to increase effectiveness of public investment Public investment management to convert natural resource revenues into public infrastructure with maximum efficacy Bolstering public investment management capacity is critical to ensure that scaled-up spending will yield the expected growth benefits. Project proposals should be carefully appraised and the capacity for project implementation strengthened, including by improved procurement practices. These reforms should be implemented in the context of wider public financial management reforms that provide a credible mediumterm orientation to the budget (Rajaram et. al. 2010). Introduce rigorous cost-benefit analysis to capital budgeting WORLD BANK 25
Key Messages While recent trends have raised some concerns, Malaysia remains a success story in natural resource management and offers many lessons to other resource-rich countries An evolution to the management of natural resources by PETRONAS: from direct contributions to the budget towards an Increased role for KWAN as a natural resource fund. This can be supported by: Broadening the tax base Replacing fuel subsidies with targeted transfers Reviewing gas pricing Export-orientation and openness key to ensure economy builds competitiveness in both manufacturing and services Rigorous evaluation of policy experiments E.g., rigorous cost-benefit analysis of fiscal incentives across industries WORLD BANK 26