Macroeconomic Shocks and Economic Performance in Malaysia: A sectoral analysis

The COVID-19 pandemic, the Russia-Ukraine War, inflation, contractionary U.S. monetary policy, and other shocks have buffeted the world economy. The Malaysian economy is recovering from these shocks. However, the IMF (2022) noted that Malaysia’s recovery has been uneven. This paper investigates how different sectors of the Malaysian economy have fared over the three and a half years since the pandemic began. It also investigates how macroeconomic shocks have impacted different sectors.

To do this, it examines how the pandemic, inflation, contractionary U.S. monetary policy, and other shocks have impacted sectoral stock prices. Finance theory indicates that stock prices are the expected present value of future cash flows. Thus, evidence on how shocks are impacting sectoral stock returns can shed light on how they are impacting sales, earnings, output, and profit in the sector.

The results indicate that inflation, contractionary U.S. monetary policy, and rest of the world economic activity only exert minor effects on sectors of the Malaysian economy. The results also indicate that, three and a half years after the pandemic began, industrial metals such as aluminum are doing well. Banks, after suffering as the pandemic began, are now profitable. Food producers and fruit companies are performing badly. The healthcare and medical supplies sectors gained as the pandemic struck but are now sputtering. Semiconductor and electronic equipment firms also benefited as the pandemic fueled demand for information and communication technology devices by individuals huddled-at-home. Now, however, they are underperforming. The tourism sector is also suffering. Figure 1 shows how the aluminum and fruits & grains sectors have performed since the pandemic began.

These findings have clear policy implications. For instance, government attempts to strengthen the agriculture sector by promoting exports of fruits and halal products are of particular moment. Encouraging medical tourism would also benefit the healthcare and tourism sectors and firms providing related services. In semiconductors, Malaysia should seek to attract foreign direct investment (FDI) and advance from downstream semiconductor chip assembly and packaging towards higher-value added tasks.

The semiconductor sector is of particular interest for Japan and the U.S. Both countries are seeking to friendshore production of key items such as semiconductors. Malaysia is currently mired in low value-added labor-intensive activities such as assembly and packaging. If it could develop a vibrant semiconductor sector, this would help the U.S. and Japan to diversify their semiconductor value chains. Malaysia could strengthen its semiconductor sector by training more engineers, relaxing its affirmative action policies that have deterred foreign investors, recruiting workers from abroad endowed with tacit knowledge, and boosting spending on R&D. Taiwan, where government research institutes, science parks, private firms, and universities work together in close proximity to help disperse technical knowledge across the economy, provides a good model for Malaysia. Japan and the U.S. should encourage Malaysia in these endeavors.

Notes: The blue line represents actual sectoral stock prices and the orange line represents forecasted sectoral stock prices. Forecasted stock prices are obtained from a regression of the sectoral stock returns on 1) the return on the Malaysian stock market, 2) the return on the world stock market, 3) news about Malaysian consumer price index inflation, 4) the change in the log of the ringgit/dollar exchange rate, and 5) the change in the log of the dollar spot price for Dubai crude oil. The regressions are run over February 2001 to February 2020 period. Actual out-of-sample values of the right-hand side variables are then used to forecast stock prices (the orange line) over the March 2020 to June 2023 period.