LAUNCHING OF MALAYSIA ECONOMIC MONITOR GROWTH THROUGH INNOVATION

Assalamualaikum Warahmatullahi Wabarakatuh and good morning.

Let me first welcome everyone to this launching of the second issue of the Malaysia Economic Monitor this morning. The theme of Growth Through Innovation is indeed relevant as Malaysia embarks on the journey to become a high growth and high income economy.

Distinguished Guests,

2. In an increasingly competitive global economy, the ability to leverage on innovation as a key driver of growth will become significantly important in enhancing productivity and competitiveness. As Malaysia transits to a high growth path and high income nation, we need to put in place an enabling environment where productivity and competitiveness and innovation will drive the creation of high value-add activities in the economy.

3. These are strategic elements as we leverage on our strengths to develop new potential sources of growth, particularly in resource, manufacturing and services sectors. In this regard, we are indeed fortunate that we are blessed with new areas of comparative advantage that can be developed to contribute towards higher productivity as well as improvements in the nation’s competitiveness.

4. A key driver of productivity and competitiveness is the nation’s capacity to foster innovation as well as the greater utilization of the state of the art technologies. Indeed, the ability to leverage on leading edge technologies will have to be at the forefront of our innovation-led growth strategy.

5. The transition into an innovation driven economy, however, requires skills, competencies and capabilities to meet the needs of knowledge-intensive and skills based industries. Concerted efforts at enhancing human capital to strengthen technological capability and capacity, however, require greater investments in skills and innovative capabilities. While Malaysia’s investments in education and training have increased by leaps and bounds over the last fifty years, the shortage of highly skilled and quality talents remains apparent.

6. Going forward, we need professionals with the requisite skills and expertise to add to the critical mass of the nation’s talent. Towards this end, a strategic focus in developing our human capital has been on upskilling and deepening the skills of our workforce. There has also been greater collaboration between training institutions as well as institutions of higher education and industries to ensure better response to industry’s requirements for skilled sets.

7. We also realize that enhancing human capital to strengthen technological capability and capacity requires efforts not only to create, but also to attract and retain talent. As competition for talent intensifies in the global market place, the need to retain as well as attract the best skills and talents from abroad will become even more challenging. Towards this end, we will continue to improve the ecosystem for work and living to entice global experts and skilled workers to Malaysia.

8. Apart from ensuring adequacy of skill sets, we also need to strengthen our capabilities in R&D. While government investment in R&D has seen significant increases, our gross R&D expenditure remains relatively low at 0.64 percent of GDP, compared with those of developed nations of between 3-4 percent. In addition, the low number of R&D personnel remains a major challenge in the efforts to enhance knowledge generation and innovation capability. In this respect, we need to put in place a conducive environment to attract knowledgeable human capital for research and innovation activities.

9. In addition to investing in research capabilities, our focus has also been on deriving value from home-grown technological capabilities by increasing the rate of commercialization of R&D. However, more needs to be done. In this context, we will continue to review incentives to encourage the development of a more vibrant venture capital industry, improving access to finance for innovation, and the generation of IPs as well as other support systems for development of entrepreneurs and new ventures.

10. The MEM also touches on the need to focus efforts on selected niches which Malaysia can excel. In this regard, several potential areas have been identified which will enable Malaysia to become a global dominance. These include palm oil down streaming, halal hub, private higher education, health care, Islamic finance, as well as tourism and medical tourism to cater for newly emerging markets.

Distinguished Guests,

11. In terms of the macroeconomic framework, I am pleased to note that the World Bank has upgraded its 2010 growth forecast for the Malaysian economy to 5.7 percent. This upgrade augurs well as it reflects the growing investor confidence as well as improving business sentiment on the Malaysian economy.

12. While growth in the developed economies remain uncertain, Malaysia will benefit from the better prospects of Asia leading the global recovery. In this context, we are confident that the strong growth of 4.5 percent in the fourth quarter of last year will further improve this year. Underpinning this improvement will be a stronger domestic demand as well as a stronger external sector performance.

Distinguished guests,

13. The Malaysia Economic Monitor published by the World Bank provides useful insights to investors, analysts and the business community on the state and potentials of the Malaysian economy. This issue which focuses on growth through innovation underscores Malaysia’s efforts to put a premium on innovation in our mission towards becoming a high income and developed economy.

14. In concluding, I would like to take this opportunity to thank the World Bank team, led by Mr. Philip Schellekens, who has worked diligently to produce this issue of the Malaysian Economic Monitor. I would also like to record our appreciation to all ministries and agencies that have given their full support and cooperation towards the publication of this Report.

15. With this, it gives me great pleasure to officially launch the Malaysia Economic Monitor –Growth Through Innovation.

Thank you.

Wassalamualaikum Warahmatullahi Wabarakatuh.

THE MALAYSIA’S ENERGY SECTOR : IN PURSUIT OF A BETTER FUTURE

Introduction

1. Domestic energy landscape has changed considerably over the years. From being an energy rich country a decade ago, Malaysia is slowly and will soon be joining other countries that have to rely on imports in order to meet domestic demand. Hence, energy security is a crucial issue that needs to be addressed to support the economy towards a higher growth trajectory. A holistic approach addressing the issues of energy supply, demand and pricing needs to be undertaken.

Domestic Energy Resources

2. Prior to 1970, Malaysia imported virtually all its petroleum requirement from other countries. Following the conscious effort by the Government in 1970s to develop the petroleum resources, Malaysia becomes a significant player and net exporter of petroleum products. Major discoveries made in 1970s and 1980s provided the impetus not only to develop our own resources, but also to add value to these resources. Since its inception in 1974, PETRONAS has been entrusted with the orderly development of national petroleum resources. The Petroleum Development Act 1974 (PDA 1974), vested PETRONAS with the entire ownership and exclusive rights of exploring and obtaining petroleum whether onshore or offshore of Malaysia.

3. Since then, massive investments and re-investments have been made to develop Malaysia’s petroleum industry. This includes development of refinery complexes in Melaka, liquefied natural gas (LNG) complex in Bintulu, integrated petroleum and petrochemical complexes in Kertih and Gebeng, petrochemical plants in Labuan, Bintulu and Gurun, as well as integrated development of upstream and downstream gas supply infrastructure throughout Peninsular Malaysia. These deliberate efforts were based on long term planning and not a mere matter of luck.

4. Although blessed with petroleum resources, Malaysia is relatively a small producer in the international arena. Malaysia’s oil reserves of about 5.5 billion barrels are relatively small compared to those in Saudi Arabia (260 billion barrels), Iran (138 billion barrels) and Iraq (115 billion barrels). Likewise for gas, Malaysia’s gas reserves of 88 trillion cubic feet (tcf) are much smaller in comparison with Russia (1,680 tcf), Iran (1,046 tcf) and Qatar (900 tcf).

5. For the longer term, efforts to maintain the present level of oil production of about 660,000 barrels per day could be challenging. Over the years, our geological structure has matured. All major discoveries have already been

developed and in production for more than 30 years. In fact, our oil and gas reserves are now depleting. In the case of gas, our production is declining at the rate of about 10% per annum.

6. In addition, the remaining oil and gas fields are of lower quality due to high carbon dioxide content. The development of these fields will be more challenging due to the physical nature of the fields which are relatively small in size, scattered and faraway from the existing production facilities. Therefore, the cost of developing future resources will be much higher and hence may not be economically feasible. Moving forward, the nation will be increasingly dependent on imported petroleum. In fact, about 25% of gas supplied to domestic market is now being imported.

7. Besides petroleum, Malaysia has some coal deposits, mainly in Sabah and Sarawak. However, due to remoteness and quality factors, only a small percentage of local coal is being mined while a sizeable amount is imported to meet the requirement for power generation. Large hydro resources have also been developed over the years throughout the country but there remains some potential for future development.

8. Renewable sources of energy are also abundant in Malaysia, the significant ones being biomass, biogas and solar. Development of mini and micro hydro still remains potentially attractive in certain parts of the country. Although renewable energy has a promising future, it requires sometimes before its full potential be unleashed. Based on this scenario, Malaysia is projected to be a net importer of energy by 2019.

Demand-Supply Gap

9. As in any developing nation, energy consumption per capita in Malaysia is still low but is expected to expand at a rapid rate in tandem with economic development. In addition, energy intensity with respect to gross domestic products has over the years shown an increasing trend.

10. In terms of source, petroleum products constituted about 54% of energy demand in 2008 followed by natural gas (24%), electricity (18%) and coal and coke (4%), as shown in Chart 1.

11. In terms of demand by sector, the industrial sector dominated the energy use with 43% share, followed by transport (36%), residential & commercial (14%), non-energy use (6%) and agriculture (1%) as shown in Chart 2. In terms of volume, the amount of energy consumed increased by 51.2% from 29,699 kilo tones of oil equivalent (ktoe) in 2000 to 44,901 ktoe in 2008.

12. The transport sector was the main user of energy in 2000. However, in 2008, the industrial sector accounted for 43% of the total energy consumed, surpassing the transport sector at 36%. The main types of energy consumed by the transport sector were petrol and diesel. Whereas for the industrial sector, the main forms of energy used were gas and electricity.

13. Whilst the growing demand for petroleum products by the transport sector was matched by supply, demand for gas by the industrial sector, increased at a much faster pace compared to supply. The situation is especially perturbing in Peninsular Malaysia as more industry players including those producing low value added products, are switching to gas in order to make quick savings from a much cheaper gas price. Should we allow this to continue? And are we being fair to those industries which do not have access to piped gas?

14. Attempt to address the gas supply shortage by means of temporary reallocation of 100 million standard cubic feet per day (mmscfd) of gas from the power sector to the industrial sector in 2009 has only enabled a fraction of the new demand being met. It is projected that an additional 100-200 mmscfd of gas is required every year until 2015 if demand for gas is to be met, as shown in Graph 1.

Moving Forward

15. Energy market in Malaysia is highly distorted. While petroleum products, such as petrol and diesel, are linked to market prices, gas prices and electricity tariffs are regulated by the Government. Energy prices have also been used as a means to extend assistance to selected groups as well as to attract foreign direct investments (FDI). This is untenable. Such practices have also led to non-optimal allocation of resources and a host of other ill effects.

16. For instance, the capping of gas prices below market level has caused a surge in demand for gas, particularly from industries. Although gas prices have been revised twice since 2008, the substantial difference between the regulated prices and ‘market prices’, remained wide. The temporary re-allocation of additional gas (in 2009) from the power sector to the industrial sector saw industries queuing to obtain gas either for expansion of existing operations or starting new ones. By March 2010, the additional gas to the industries has been snatched-up.

17. Efforts to bring additional gas supply from abroad may be challenging and may not be attractive to industry players. How could we attract new gas suppliers – importing at higher market prices and yet selling at subsidized prices? Hence in meeting increasing demand as well as attracting new suppliers, the gas pricing related issues need to be addressed.

18. We have always to remind ourselves that our oil and gas resources are finite and non-replaceable. What we inherited from the earlier generation is also meant for the generation after us as they too have equal rights to these resources.

19. The era of cheap oil and gas is over. We need to accord proper value to our resources. Hence, for the future, gas should be utilized by strategic industries for the purpose of producing high value added products. Our domestic resources are depleting yet we are still selling them at subsidised rates. The nation needs to wean itself from subsidies. The longer we delay the move to market-based pricing, the impact on us at a later stage would be more profound. To entice more gas supplies to Peninsular Malaysia, the gas prices have to transition in such a way that it could incentivise others to import. Indeed, optimal allocation of resources is best left to market forces to determine. Nevertheless, fair competition among industry players needs to be ensured.

20. Assistance to target groups especially low income groups as well as highly promoted industries needs to be extended in other form besides energy prices. A new mechanism should be institutionalised to ensure that only selected target groups receive this assistance. Cash rebates and other fiscal incentives are options that could be considered for this purpose.

Selamat Datang

Selamat datang diucapkan kepada semua yang melayari blog Unit Perancang Ekonomi. Pihak EPU berharap dengan adanya blog ini,ia mampu menambah ruang saluran bagi perhubungan lebih efisyen antara pihak EPU dengan pengguna. Komen dan pendapat anda adalah amat dihargai bagi menjadikan perkhidmatan kami lebih berkualiti.

Unit Perancang Ekonomi adalah agensi utama kerajaan yang bertanggungjawab untuk menyediakan pelan pembangunan Negara. Unit ini telah ditubuhkan pada tahun 1961, di mana ia berkembang dari Sekretariat Ekonomi Jawatankuasa Ekonomi Majlis Eksekutif Persekutuan Malaysia, ialah untuk “memfokuskan pelan pembangunan, perlaksanaan pelan yang berisiko tinggi dan segala bentuk bantuan luar”. Pada tahun itu, Kerajaan juga menubuhkan Jawatankuasa Pembangunan Perancangan Negara, dengan Unit Perancang Ekonomi sebagai sekretariatnya. Sementara Kabinet terus mengekalkan tanggungjawab utama bagi perancangan di negara ini, Jawatankuasa Pembangunan Perancangan Negara telah dipertanggungjawabkan untuk merumuskan, melaksana, menilai kemajuan, dan menyemak pelan-pelan pembangunan. Semenjak penubuhannya hampir 43 tahun lalu, fungsi UPE pada dasarnya tidak berubah meskipun ada fungsi-fungsi tambahan sejajar dengan penekanan ke atas perubahan polisi pembangunan.