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OECD Economic Survey OECD Economic Surveys MALAYSIA

MALAYSIA Executive Summary

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• COVID-19 suddenly disrupted Malaysia’s ascending development • Macroeconomic policy should remain supportive • The recovery needs to be more inclusive and greener • Stimulating business dynamism is necessary for a strong recovery

August 2021 AUGUST 2021

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2 . OECD ECONOMIC SURVEY OF MALAYSIA – EXECUTIVE SUMMARY

Main findings Macroeconomic policy and fiscal sustainability • Despite the prospect of a steady economic recovery, the COVID-19 infections are still persistent and risks are mostly tilted to the downside. • While the rise of oil and commodity prices pushes up inflation, core inflation is stable and the recovery is not yet solid. • The government revenue ratio to GDP is low and has declined, while the increase of social spending is necessary to combat poverty. Ensuring a green and inclusive recovery • Employment injury insurance has been expanded to the self-employed in some sectors, but not yet comprehensively. • The self-employed can voluntarily contribute to the pension scheme, the Employees Provident Fund, but the participation rate is low. • Almost no price signalling mechanism exists to reduce carbon emissions, except the Feed-in-Tariff for renewable power. Creating a more dynamic business sector • Despite several important reforms, registering a new business is still burdensome and fragmented. • The process for obtaining the necessary permits and authorisations for a new business is burdensome.

• The insolvency regime may be acting as a disincentive for entrepreneurs.

• The recently introduced measures to simplify the regulatory environment are not universally and systematically implemented across all ministries and agencies. • The appointment of Chief Commissioner of the Malaysian Anti-Corruption Commission is based on Prime Minister’s advice and the tenure is not pre-determined. • Digital uptake is picking up, but remains low among SMEs, particularly e-commerce participation, while the productivity gap between firms that use digital tools and firms that do not use them is large. • Skills development opportunities are scarce for SME workers.

• Subscription of fixed broadband is increasing, but still relatively low.

• Amid the flourishing business of online platforms, new policy challenges have been evolving, such as their abuse of dominant market power. Nevertheless, policy frameworks are underdeveloped. • Both employers and employees consider the lack of skills and equipment, including digital investment, as obstacles to teleworking, and firms in most sectors do not anticipate regular teleworking after the pandemic is over. • The lack of adequate digital infrastructure is considered a major obstacle to teleworking in Malaysia.

OECD ECONOMIC SURVEY OF MALAYSIA – EXECUTIVE SUMMARY . 3

Key recommendations Macroeconomic policy and fiscal sustainability • Keep providing sufficient and targeted support to the affected households and sectors until the recovery is well established. • Prepare a post-COVID19 integrated medium-term fiscal strategy to reduce public debt and contingent liabilities. • Accelerate the vaccination programme by strengthening the partnership with the private sector. • Maintain an accommodative monetary policy, until the recovery is well under way. • Consider the re-introduction of the Goods and Services Tax as part of the medium-term fiscal strategy.

Ensuring a green and inclusive recovery • Expand the coverage of employment injury insurance for the self-employed to more sectors. • Include dependent self-employed workers, in particular platform workers, in the pension scheme under the Employees Provident Fund. • Introduce a carbon tax and gradually rising its rate over time, while mitigating its impacts on vulnerable households. Creating a more dynamic business sector • Enhance the coordination among ministries and agencies by integrating and streamlining the business registration system. • Improve the usability of the existing one-stop-shop mechanisms for business authorisations, by widening the number of participating agencies. • Strengthen the insolvency scheme further, by improving debtors’ access to credit and widening creditors’ participation in the restructuring process. • Ensure adequate and inclusive consultation which fully involves non-business stakeholders, with more systematic adoption of public consultation guidelines. • Establish an appointment procedure of Chief Commissioner of the Malaysian Anti-Corruption Commission that involves the Parliament.

• Provide support programmes to promote the uptake of digital tools, including basic ones, such as computer and the Internet, particularly targeting older SMEs. • Strengthen training programmes of basic digital skills for employers and employees of firms, in particular micro- and small-sized enterprises with less than ten workers. • Implement the Malaysia Digital Economy Blueprint as planned, by reviewing, improving and streamlining all relevant and state legislations and regulations related to digital infrastructure development. • Revise the Competition Act and the Competition Commission Act to provide the competition authorities with oversight of mergers and acquisitions. • Enhance the financial support to firms and workers to help acquire necessary equipment and investment in case they wish to telework but do not have adequate resources to conduct it. • Provide more ICT training opportunities to workers to help them acquire necessary skills to practice teleworking. • Accelerate investment to upgrade digital infrastructure, such as in 5G and fixed broadband.

4 . OECD ECONOMIC SURVEY OF MALAYSIA – EXECUTIVE SUMMARY

COVID-19 suddenly disrupted Malaysia’s ascending development When the pandemic struck, Malaysia was relatively well prepared thanks to past efforts to build a robust policy framework. Over the past decades, Malaysia showed remarkable commitment to improve its economy and address its social challenges. This commitment remains intact as shown by the upcoming 12th Malaysia Plan 2021-2025, a stepped-up pivot on further reforms. Nonetheless, the shock caused by the COVID-19 outbreak has been severe (Table 1). The government was quick to impose strict restrictions aimed at containing the first wave of infections in March 2020, but this resulted in one of the sharpest GDP contractions in the region. After managing the second wave, the third wave of infections in 2021 required renewed strict but targeted restrictions. To avoid large economic damages, sizable fiscal stimulus packages have been introduced and monetary policy has been eased. The economy is projected to return to growth. Strong sales of electronics goods and health gears are boosting exports, and domestic demand benefits from government support. Nevertheless, risks are mostly tilted to the downside, calling for bold macroeconomic policy action in case of need.

Table 1. Growth is expected to rebound steadily 2019

2020

2021

2022

4.4 7.7

-5.6

4.3

6.1

-4.3

3.3

7.5

Exports Imports

-1.0 -2.4

-8.9 -8.4

10.4 10.3

3.5 3.3

Inflation (CPI)

0.7

-1.2

2.7

1.2

-3.4

-6.2

-6.4

-4.7

52.4

62.1

63.4

63.5

3.5

4.2

3.8

4.0

Real GDP Private consumption

Federal government fiscal balance* Federal government gross debt* Current account balance*

Note: * denotes the series are expressed as a percentage of GDP. Source: DOSM, MOF and OECD calculations.

Macroeconomic policy should remain supportive Past prudence has allowed fiscal policy to react boldly. A series of relief packages amounting to more than 35% of GDP has rescued the most affected firms and workers, thus shoring up confidence. Financial support has been well targeted and its implementation has been swift thanks to an established distribution system. An emergency job-retention scheme has mitigated the rise of unemployment. A swift vaccination campaign should help avoid new waves of infections, but new outbreaks caused by virus mutations remain possible. Fiscal policy support should therefore not be withdrawn until the situation is fully under control and the recovery is well established, while public debt needs to be reduced under a medium-term fiscal consolidation strategy after the pandemic with further efforts to enhance revenue. Monetary policy response was prompt and still has ample policy space. Headline inflation is rebounding after a large dive in 2020 caused by the decline in oil prices. Nevertheless, core inflation is forecast to be stable, and monetary policy should be very accommodative amid the prevailing downside risks. Massive moratorium programmes have alleviated financial distress of affected households and businesses. The policies

have been effective, as micro-, small- and medium-sized enterprises account for a significant part of the economy. The rise of non-performing loans has been contained, and financial supervisors consider that capital buffers are sufficient. Nevertheless, the protracted pandemic will force more closures of businesses in severely affected sectors, such as tourism and retail.

INTRODUCTION OECD ECONOMIC SURVEY OF MALAYSIA – EXECUTIVE SUMMARY . 5. 5

The recovery needs to be more inclusive and greener The pandemic has revealed the weakness of social protection in Malaysia. The crisis hit hard the most vulnerable in the labour market, notably women, young people, and lower-skilled workers. Women were particularly exposed because many of them are self-employed (Figure 1), and operate in sectors that have not yet recovered, such as tourism and retail affected by tighter restrictions on business activity. The numerous self-employed workers are not well covered by social protection, despite recent government efforts to expand the coverage to them, which puts them at risk of poverty. Due to the rapid rise of online services, the number of platform workers has increased sharply in Malaysia. Most platform workers, who are generally self-employed, are in a precarious position. The government has expanded the coverage of their social protection, but more could be done. The economic recovery risks triggering a rebound of carbon emissions and other environmental damages. Since the adoption of the Paris Agreement, Malaysia has made steady progress in reducing its carbon emissions intensity, but its absolute volume has increased (Figure 2). Introducing

a carbon tax could help transform the economy to a less carbon-dependent one. After increasing the use of coal, the government now intends to raise the share of electricity produced by renewables to 31% at the latest by 2025. Despite a small size in area, Malaysia is endowed with one of world’s richest forest biodiversity. The government is stepping up its efforts to conserve Malaysia’s invaluable forest, which needs to be implemented urgently. Figure 2. Malaysia needs to become greener

Figure 1. Female employment has increased fast, but jobs are precarious

Source: DOSM, Labour Force Surveys.

Note: GHG emissions include emissions from land use, land use change and forestry, but exclude removals. Source: Ministry of Environment and Water (2020), Malaysia - Third Biennial Update Report to the UNFCCC.

6. OECD ECONOMIC SURVEY OF MALAYSIA – EXECUTIVE SUMMARY

Stimulating business dynamism is necessary for a strong recovery Steering a recovery to a sustained path needs invigorating business activity. Over the past years, reforms were progressively implemented to improve the business climate. The National Policy on Development and Implementation of Regulations has improved the regulatory frameworks, streamlining procedures for business activity. The establishment of competition authorities has levelled the playing field and secured competitive markets in a range of sectors, which should be further strengthened. Nevertheless, regulations and procedures are still restrictive compared with OECD countries (Figure 3). The government can further reduce these restrictions in a range of sectors, such as retail trade. Private firms still face significant administrative burdens, especially new start-ups. Improving insolvency schemes further would also help restore business dynamism. The lack of collaboration between different government bodies is still impairing business dynamism, and regulatory processes could be more transparent. Malaysia has made notable progress in enhancing public integrity and the fight against corruption, including money laundering, and reform momentum should be kept up.

computers (Figure 4). Along with the Blueprint, SMEs, particularly micro-sized firms are in need of further support to their digitalisation, and SME workers could benefit from opportunities to upgrade their digital skills. Further reforms in Figure 4. Digitalisation boosts productivity

Figure 3. Barriers to competition are still high

Source: DOSM, Economic Census 2016 and OECD calculations.

Note: Best/worst represents the OECD best/worst performing country. Source: OECD, Product Market Regulation database and OECD-WBG, Product Market Regulation database.

A number of SMEs, especially micro-sized firms, do not use computers and the Internet. Most SMEs do not make their transactions through e-commerce, which has been a big hurdle during the periods of confinement. As a number of firms have just started to use digital tools, the adoption of an ambitious Malaysia Digital Economy Blueprint (Blueprint) in the middle of the pandemic was timely. Digitalisation boosts business productivity, particularly in SMEs, even with small steps such as the use of personal

OECD ECONOMIC SURVEY OF MALAYSIA – EXECUTIVE INTRODUCTION SUMMARY . 7

the fixed broadband market can help provide higher quality and more affordable services to both businesses and consumers. Together with further trade liberalisation, particularly in the services sector, these efforts will help SMEs expand their business across international borders. The pandemic forced many workers in Malaysia to telework from home on a regular basis. The experience of teleworking did not bring about negative feelings among most workers according to a study conducted for this report. Nevertheless, not many firms anticipate regular teleworking after the pandemic compared with other countries, where most firms that experienced mandatory teleworking regulations now look forward to continuing regular teleworking practices. After the pandemic has subsided, some amount of teleworking will remain a new normal across the globe, as it has proved productive, if appropriately organised. The government can help provide an enabling environment for businesses and workers to pursue teleworking. In Malaysia, the lack of ICT infrastructure is perceived as a major

obstacle (Figure 5), hence digital investment could play an important role. Implementing the Blueprint as planned is crucial for infrastructure development. Figure 5. Digital infrastructure needs to be enhanced

Source: OECD, Telework Survey, Global Forum on Productivity.

OECD Economic Surveys

MALAYSIA

Like many other countries, Malaysia was hit hard by the COVID-19 pandemic starting in early 2020. Its past policy prudence has allowed Malaysia to react swiftly and boldly to the public health and economic crisis. Nevertheless, the crisis revealed the necessity of further reforms that Malaysia needs to pursue in order to achieve more inclusive and high growth after the pandemic. Vulnerable workers have been more affected during the pandemic and many firms have been urged to use digital tools, such as e-commerce and teleworking, for the first time. Going forward, strengthening social protection is of utmost important to improve the well-being of the Malaysian people, including self-employed workers, and prepare for the ageing society. Easing government regulations further is crucial to stimulate business dynamism and restore vigorous growth. Accelerating digitalisation will be key for Malaysian firms to become more productive in the post-pandemic era. Along with its further economic development, Malaysia needs to transform itself into a greener economy. SPECIAL FEATURES: PRODUCT MARKET REGULATION; DIGITALISATION; TELEWORKING

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