Reading the numbers: The Bank Negara Report 2010

PEM walks you through the forest of figures that the 2010 Bank Negara Report put together. We point out where the trees are to you and discuss their signifi cance.

THE BANK NEGARA REPORT on the economic performance of the nation in 2010 was released in March 2011. To date, SERI is the only Malaysian institution that analyses the central bank’s figures in the format of the four accounts that make up the system of national accounts (SNA) as prescribed by the United Nations.1

Eleven numbers make up the four accounts: 1) consumption; 2) investments; 3) exports; 4) gross domestic product (GDP); 5) net incomes abroad; 6) gross national income (GNI); 7) draw down on stocks; 8) gross national savings; 9) imports; 10) net transfers abroad; and 11) current account balance.

These numbers appear more than once, either on the left side or the right side of the different accounts – the demand and output side of production, the production and consumption side of appropriation, savings and investments from the perspective of accumulation, and outflows and infl ows between Malaysia and the rest of the world.

The 2010 numbers in current (not adjusted for infl ation) dollars are presented in Table 1.

Source: Based on Tables A.1, A.3, A.4, A.8 of the Bank Negara Report 2010.

One way of looking at economic performance is to examine the changes. How each of the 11 numbers relates to one another tells us about economic structure – what the sources of growth and the issues that concern long-term sustainability are. In Table 2, the 2010 numbers are expressed as a percentage of the GNI. The GNI is used as a numeraire, a measurement yardstick from which performance and stability are judged.2 Changes over time are also shown by presenting the numbers for 2009 and the average from 2004 through 2008.

Account 1: Production

From Account 1, we can tell that consumption makes up nearly two-thirds of the GNI, up from a 60% average from 2004 through 2008. On the one hand, this is an indication of a vibrant society – the middle class effect.

For Malaysia, however, there is a small caveat. Household debt has become three-quarters of the GDP. This has at least three implications. First, the monetary policy implication is that it becomes harder to increase interest rates to deal with inflation since the rising interest will deepen the debt burden on households caused by the increase of the interest component. Second, there is an economic growth implication because consumption has been driven by borrowing which cannot be sustained indefinitely and third there is the implication of insolvency when households go bankrupt if they cannot repay their debts and banks become vulnerable to loan defaults. In this connection, policymakers have acted to moderate the situation by restraining borrowings which will mean that the consumption share of the GNI will not be expected to rise. In fact the consumption share has dropped a few points between 2009 and 2010.

The investment share of 21% GNI has not moved at all since 2004. Investing one-fifth of national income is a fair figure by international standards but Malaysia has a national savings rate of one-third of the national income, suggesting that for some strange reason Malaysia has a low capacity to invest domestically despite having the resources to do so.

Finally, the other characteristic feature of Malaysia’s economic structure is that trade (exports plus imports) is two times the GNI (which has fallen to only 180%; the 2004 to 2008 average was 232%). Malaysia is therefore a very open economy. Not as much though when compared to vibrant island economies like Hong Kong and Singapore where total trade is well above three times the GDP. Some advanced economies tend to be driven by internal demand. Total trade is only a quarter of the GDP in Japan and the US. In Australia total trade is half the GDP. Total trade accounts for about two-thirds of China’s GDP. Over the past decade, Malaysia has always registered a trade surplus. The 2010 numbers show that exports remained buoyant but imports in the last couple of years have fallen by a fifth compared to the average between 2004 and 2008.

The openness of Malaysia’s economy suggests that it cannot easily switch to domestic-led growth despite the fact that consumption contributes nearly two-thirds of its GDP. Claims that Malaysia has progressed into the tertiary stage, in which services contribute more to the GDP than manufacturing, have also to be carefully weighted. The value of Malaysian exports, dominated by manufactured goods, is twice that of services. This means that emphasising services has also to be accompanied by strategies to export services as well. Note that in the past, services were regarded as nontradable but today’s technology has given scope for trade in services.

Note: Bold numbers are the latest calculated from the Bank Negara Report 2010. Below them are the 2009 numbers and bracketed numbers are averages from 2004 through 2008. These are reproduced from Penang Economic Monthly, June 2010, p.57.

Account 2: Appropriation

The first thing to note is that for Malaysia, the GDP is smaller than the GNI, but only by a few percentage points. Th e GDP looks at where economic production takes place, the GNI is concerned with by whom. By contrast, the GNI of the Philippines is a tenth more than its GDP. Lack of employment in a country of nearly a hundred million people has resulted in Filipinos looking abroad for their livelihood – as seafarers, musicians, singers, hotel workers and maids.

The important thing about this distinction between GDP and GNI is that per capita income, which is used to distinguish between developed and undeveloped nations, is calculated as GNI divided by population. For Malaysia, the numerator counts only the incomes of Malaysians but the denominator counts everybody in the population. This therefore gives a different complexion to the issue of brain drain and imported labour. Malaysians who earn high incomes by living abroad help contribute to Malaysia’s GNI but low-end foreign labour in Malaysia only ends up diluting Malaysia’s per capita income without adding much to the GDP.

The other issue about Account 2 is that the level of national savings of one-third of the GNI in Malaysia is very substantial by international standards. Net transfers are not production-related cross-border flows of money, i.e. sending pocket money to Malaysian children studying abroad.

Account 3: Accumulation

Stock drawdowns are merely adjustments made between the output and demand side of the GDP, which record total production in the country in one given year. Output in December is not likely to end up on the demand side in the same year and demand in January is not likely to be met with output in the same year.

Thus the stock position will change depending on how much is produced that is not used up in the same year. The left and right sides of Account 3 also tell us that if we ignore stock changes, the difference between domestic investments and national savings will be equal to the current account. In economic textbooks this difference is called the resource gap, when investments go beyond available savings. In Malaysia, the situation is a resource surplus which has long been in the double digits. This is a strange phenomenon suggesting a lack of capacity to invest domestically despite adequate financial resources from gross national savings. It is common knowledge that the country’s propensity to save is att ributed to compulsory contribution to the employees provident fund (EPF).

Account 4: External (rest of the world)

The components of this account have been discussed in the other three. The current account is the goods and services balance which, as mentioned, has been in double digit surplus in Malaysia. It shows, at the end of the year, after production, consumption, investments and trade, whether the accounting ledger is balanced. The nation’s balance of payment is by definition equal to zero and hence surpluses or deficits in the current account must be exactly off set by the balance in the capital account.

The capital and financial accounts

The capital account technically incorporates the financial account as a subset. Bank Negara reports the capital account as it is defined: capital (assets) transfers made by non-nationals entering or leaving the country that are unrelated to economic production. The financial account, on the other hand, pertains to cross-border investments, that is, by Malaysians in direct investments, portfolio, fi nancial derivatives and other investments abroad and by foreign investors in Malaysia. The numbers in Table 3 have been reproduced from the Bank Negara Report 2010.

As mentioned, by definition, a country’s balance of payment is zero. Thus Malaysia’s current account surplus (inflow) of 12% GNI, amounting to RM90.5bil, must be exactly mirrored by a capital outflow to achieve this balance. In contrast, the current account deficit (outfl ow) of the US economy has to be off set by its corresponding inflow in its capital account. This is done by incurring national debt such as selling bonds that are bought by other nations including Malaysia. China buys a lot of American bonds resulting in a popular joke that American monetary policy has been set, not by the US Federal Reserve, but instead in Beijing which decides how many US bonds they want to buy, hence affecting bond prices and in turn, US interest rates.

Foreign direct investments (FDI) into Malaysia in 2010 amounted to RM27.6bil but Malaysia’s direct investments in economies abroad were much higher, at RM42.6bil. Th is is a positive indication. When Malaysia was less developed it depended on FDI from more advanced economies. Now Malaysia is also investing abroad. What is disturbing, however, is that Malaysia received RM44.9bil worth of portfolio investments from abroad in 2010. Short-term foreign investments were 1.6 times more than FDI. It is a mixed signal. On the one hand it helps promote Malaysia’s capital market, but it also makes the country vulnerable to sudden capital flights similar to the 1997 East Asian financial crisis. Another disturbing issue is the other private investments of RM51.3bil, which is 1.2 times more than Malaysia’s direct investments abroad. Little can be told from what exactly “other” private investments are, but it appears that Malaysians are parking their money abroad.

Foreign Exchange (forex) losses of RM32.6bil, resulting from Ringgit appreciation is what Stanford economist, Malcolm McKinnon, referred to as conflicted virtue. Malaysia lends abroad when the Ringgit is cheaper; but with stronger exchange rates, the credit, say in US dollars, owed to Malaysia has a lower valuation in Ringgit terms. It is virtuous to be able to lend money but it is a conflict when exchange rate losses outweigh returns. Errors and omissions of the magnitude of RM38.4bil (42% of the total capital outfl ow) are yet another disturbing issue. This and other less understood components of capital outfl ow from Malaysia such as “other” investments create concerns about how a sizeable portion of the gains from trade has gone off shore, when these could have been invested domestically.

Source: Table A.8 of the Bank Negara Report 2010.

In addition to the RM186mil of the transfer of nonfinancial and non-productive assets by non-national transfers, reported at the top of Table 3, the total capital outflow discussed thus far amounted to RM93.1bil, which is RM2.6bil more than the current account surplus of RM90.5bil. To off set this difference, Malaysia’s foreign reserves had to fall from RM331.3bil to RM328.6bil. The sale of reserve assets provided for the capital infl ow of RM2.6bil needed to cover the shortfall in the capital and financial accounts.


Bank Negara reports that Malaysia’s real (adjusted for inflation) GDP grew by 7.2% in 2010 and forecasts five to six per cent in 2011. Inflation based on the consumer price index (CPI) was 1.7% but the forecast for 2011 is higher, between 2.5% and 3.5%. These numbers are repeated often in discussions about Malaysian economic performance. SERI, however, has traditionally looked at Bank Negara numbers based on the four accounts that make up the system of national accounts in order to study Malaysia’s economy closely.

Consumption is a major contributor to the domestic part of the GDP but high household debt amounting to three-quarters of the GDP creates a downside risk. Malaysia has high savings (a third of the GDP) but over the years, domestic investment has not been able to rise beyond a fifth of the GDP, resulting in a huge current account surplus in the double digits. This implies necessary capital outflows to achieve a zero balance of payments. Nearly half of the total outflow is Malaysia’s direct investment abroad. This is good, because as these investments produce capital returns from Malaysia’s participation in external economies, they form part of Malaysia’s GNI that would add to per capita income levels. Unfortunately, outflows categorised as “other” investments, errors and omissions and forex losses from conflicted virtue are even larger and are less understood.

In 2010, Malaysia’s foreign reserves have fallen, which is not typical of an economy with a current account surplus. The equivalent of reserves in terms of retained imports has fallen from 9.7 months in 2009 to 8.6 months in 2010, which is still considered very robust by international standards.
1 See Penang Economic Monthly, November 2003, March 2004, April 2005, March 2006, March 2007, April 2008, April 2009 and June 2010 (www.seri., html). The United Nations System of National Accounts (1993) is available at http://
2 In French, the word means face value of money applied on a particular good against which other goods can be related, as being cheaper or dearer.

Chan Huan Chiang is a senior research fellow at the Socio- Economic and Environment Research Institute.

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