Economy of Malaysia

Annual Report 2007 to growing demand from PR China, which has now surpassed the US as Japan’s largest trading partner. These developments more than offset muted consumption growth, which was restrained due to flat nominal wage growth throughout the year. Growth momentum in the euro area also remained favourable in 2007, driven by growth in export demand to emerging regions and higher investment spending. Consumption also contributed to growth, supported by falling unemployment rates which reached the lowest levels since 1999.

Elsewhere in Europe, the economy of the United Kingdom was sustained by strong performance of business and financial services, underpinned by rising employment and positive wage developments. However, some signs of weakening emerged in these economies in late 2007. Japan’s housing investment was significantly affected by tighter building standards. In Europe including the UK, business and consumer confidence indices fell as the US subprime problems triggered tighter credit conditions and the housing markets in several of the economies began to soften.

In contrast to the trends in the developed economies, the strong growth momentum in the Asian region accelerated in 2007 as domestic demand and other growth drivers more than compensated for moderation in external demand due to the adjustment in the global electronics cycle and developments in the US. Domestic demand was buoyant, sustained by favourable labour market conditions, rising commodity prices and increased infrastructure spending. Growth also benefited from growing intra-regional trade, driven in part by strong performance of the PR China economy which expanded strongly by 11.

4%. The Chinese economy was driven not only by sustained high investment growth and strong export performance but further lifted by higher private consumption which was encouraged by positive sentiments from rising equity markets in the first half-year and government measures including the development of rural areas. Elsewhere, India continued its robust expansion in 2007, led mainly by private consumption as strong economic growth contributed to rising income levels. Growth was also driven by investments as high retained corporate earnings boosted private investment.

Meanwhile on the external front in Asia, sustained large current account surpluses and capital flows continued to contribute to higher foreign currency 4 reserves in the regional economies. Notwithstanding this, the slowing US economy and a weaker US dollar had contributed to a narrowing of global imbalances, with US current account deficit reducing to about 5. 7% of GDP. Other contributing factors include the increasing role of domestic demand in emerging economies, and sustained growth in euro area and Japan.

The high growth of the economies in Latin America, the Middle East and emerging Europe also provided a new source of demand for Asia, thus broadening growth away from the major industrial economies. Economic performance of economies within these regions continued at a vigorous pace in 2007, supported mainly by strongly positive economic developments including buoyant commodity prices, healthy domestic demand and robust export performance. The prolonged period of high global growth since 2003 has created pressures on resource utilisation and resulted in the high prices of commodities.

Oil prices have surged to record highs and also contributed to higher food prices due to increasing demand for substitutes to conventional fuels, including renewable energy such as biodiesel and ethanol. Adverse weather conditions have also contributed to rising food prices. Among the precious metals, gold prices rose sharply by 31% to USD 833. 20 an ounce, reflecting the increasing popularity of gold as a hedge against inflation and as an alternative investment against a weakening US dollar.

Recent trends suggest that underlying demand conditions for commodities remain firm, Chart 1. 1 Crude Oil Prices: WTI 1-month USD per barrel 110 100 90 80 70 60 50 40 30 20 Source: Bloomberg 1/7/03 1/9/03 1/11/03 1/1/04 1/3/04 1/5/04 1/7/04 1/9/04 1/11/04 1/1/05 1/3/05 1/5/05 1/7/05 1/9/05 1/11/05 1/1/06 1/3/06 1/5/06 1/7/06 1/9/06 1/11/06 1/1/07 1/3/07 1/5/07 1/7/07 1/9/07 1/11/07 1/1/08 1/3/08 The Malaysian Economy in 2007 especially in fast-growing economic regions. Amid these developments, overall global inflation in 2007 began to rise.

The US economy experienced increased pressure on price inflation, while the euro area continued to record rapid money and credit growth. Meanwhile, several countries in the Asian region faced price pressures from increases in food and fuel prices. In the environment of rising inflationary pressures and generally favourable growth in the first half of 2007, monetary authorities in most major industrial and regional countries maintained a bias towards monetary tightening during this period.

The US Federal Reserve Board (Fed) maintained policy interest rates at slightly above neutral levels throughout the early part of the year. However, the onset of financial market turmoil in August coupled with indications of a more significant deterioration in domestic demand amidst further weakness in the housing market prompted a marked shift towards easing, with the discount rate first being reduced in August followed by the easing of the federal funds rate beginning in September. In total, the Fed thus reduced the fed funds rate by 100 basis points during the last five months of 2007.

Similarly, the Bank of England eased monetary policy in December 2007 to support growth as the impact of financial market turbulence intensified, after tightening in the first three quarters of the year. In the euro area, rising inflation prompted the European Central Bank (ECB) to also tighten in the first half-year to curb inflationary pressures but paused thereafter to assess the impact of volatile financial developments on growth. In the Asian region, PR China, Chinese Taipei, Korea and India also tightened monetary policy to contain inflation.

However, the Philippines, Thailand and Indonesia reduced interest rates during the year to stimulate domestic demand as inflation moderated to within or below the governments’ target ranges. In the financial markets, equity markets especially in the emerging economies were generally buoyant in the first half of 2007. Thus many regional equity markets hit record highs, buoyed by strong capital inflows and optimism over the region’s growth prospects. However, wider strains from the fallout of the US subprime mortgage sector began to intensify in the second half of 2007.

Financial institutions, mainly in the US, undertook write-downs on subprime-related securities, and sought to repair their balance sheets by recapitalisation exercises. Financial institutions in the Asian region, on the other hand, were less affected due to the smaller direct exposure to the subprime-related markets. Nevertheless, rising uncertainty and concern over the problems in the global financial markets and the health of the global economy led to increased volatility in the regional equity markets, especially towards the end of the year.

In the foreign exchange markets, the US dollar broadly depreciated against all major and regional currencies in 2007. Dollar weakness was due mainly to the less favourable interest rate differentials and the relatively stronger performance of the other industrial and emerging market economies relative to the US. In addition to the more favourable growth in the euro area in 2007, the euro currency was also supported against the dollar as the ECB raised interest rates to the highest levels in six years.

Pound sterling also advanced against the dollar especially in the first half-year due to the UK’s stronger economic performance. Meanwhile, the yen appreciated significantly against the dollar in the second half of 2007 due to the unwinding of the yen carry trades in response to increased risk aversion following the subprime crisis. In the Asian region, most regional currencies also appreciated in 2007 against the dollar except for the Indonesian rupiah and Korean won.

Regional currencies strengthened due to direct investments and portfolio inflows into the region and large trade surpluses amid sustained strong economic growth. 5 Chart 1. 2 Major Industrial Countries: Official Interest Rates Rate (%) 7 6 5 4 3 2 1 0 ’99 Japan (Overnight rate) 5. 25 United Kingdom (Base lending rate) Euro area (Repo rate) 4. 00 3. 00 United States (Fed funds rate) 0. 50 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 Source: National authorities Annual Report 2007 Table 1. 2: Malaysia – Key Economic Indicators

2005 Population (million persons) Labour force (million persons) Employment (million persons) Unemployment (as % of labour force) Per Capita Income (RM) (USD) NATIONAL PRODUCT (% change) Real GDP at 2000 prices1 (RM billion) Agriculture, forestry and fishery Mining and quarrying Manufacturing Construction Services Nominal GNI (RM billion) Real GNI (RM billion) Real aggregate demand2 Private expenditure Consumption Investment Public expenditure2 Consumption Investment 2 2006 26. 6 11. 5 11. 2 3. 3 20,841 5,681

2007p 27. 2 11. 8 11. 4 3. 3 23,103 6,721 2008f 27. 7 12. 0 11. 6 3. 2 24,651 7,5967 26. 1 11. 3 10. 9 3. 5 18,966 5,008 5. 0 447. 8 2. 6 -1. 3 5. 3 -1. 8 6. 7 10. 2 495. 5 5. 2 423. 7 7. 3 7. 6 8. 7 3. 3 6. 6 6. 4 6. 8 36. 5 5. 9 474. 4 5. 2 -0. 4 7. 1 -0. 5 7. 2 12. 0 555. 2 7. 1 453. 8 7. 0 7. 0 7. 1 7. 0 6. 8 5. 0 8. 9 38. 2 6. 3 504. 4 2. 2 3. 2 3. 1 4. 6 9. 7 13. 1 627. 8 7. 3 486. 7 10. 5 11. 8 11. 7 12. 3 7. 2 6. 4 8. 0 37. 8 5. 0 – 6. 0 531. 9 3. 4 6. 0 1. 8 5. 5 7. 7 8. 9 683. 6 4. 8 510. 0 5. 6 6.

5 6. 5 6. 3 3. 5 6. 0 0. 5 36. 7 Gross national savings (as % of GNI) BALANCE OF PAYMENTS (RM billion) Goods balance Exports (f. o. b. ) Imports (f. o. b. ) Services balance (as % of GNI) Income, net (as % of GNI) Current transfers, net Current account balance3 (as % of GNI) Bank Negara Malaysia international reserves, net4 (in months of retained imports) PRICES (%change) CPI (2005=100)5 PPI (2000=100)6 Real wage per employee in the manufacturing sector Note: Figures may not necessarily add up due to rounding.

125. 6 537. 0 411. 4 -9. 0 -1. 8 -23. 9 -4. 8 -17. 0 75. 7 15. 3 265. 2 7. 7 134. 6 589. 7 455. 2 -6. 9 -1. 2 -17. 4 -3. 1 -16. 9 93. 4 16. 8 290. 4 7. 8 128. 1 605. 8 477. 7 1. 0 0. 2 -13. 7 -2. 2 -16. 1 99. 3 15. 8 335. 7 8. 4 131. 1 617. 0 485. 9 1. 0 0. 1 -16. 1 -2. 4 -17. 7 98. 3 14. 4 – 3. 0 5. 9 -0. 02 3. 6 5. 1 -1. 4 2. 0 6. 7 1. 9 2. 5 – 3. 0 –

Begining 2007, real GDP has been rebased to 2000 prices, from 1987 prices previously Exclude stocks 3 Figures for the year 2007 are estimates 4 All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance sheet date and the gain/loss has been reflected accordingly in the Bank’s account 5 Effective from 2006, the Consumer Price Index has been revised to the new base year 2005=100, from 2000=100 previously 6 Effective from 2006, the Producer Price Index has been revised to the new base year 2000=100, from 1989=100 previously 7 Based on average USD exchange rate for the period of January-February 2008 p Preliminary 2 1 f Forecast 6 The Malaysian Economy in 2007 Table 1. 3: Malaysia – Financial and Monetary Indicators.

2005 FEDERAL GOVERNMENT FINANCE (RM billion) Revenue Operating expenditure Net development expenditure Overall balance Overall balance (% of GDP) Public sector net development expenditure Public sector overall balance (% of GDP) EXTERNAL DEBT Total debt (RM billion) Medium- and long-term debt Short-term debt1 Debt service ratio (% of exports of goods and services).

Total debt Medium- and long-term debt 106. 3 97. 7 27. 3 -18. 7 -3. 6 66. 1 1. 4 2006 123. 6 107. 7 35. 0 -19. 1 -3. 3 86. 5 -0. 3 2007p 139. 9 123. 1 37. 5 -20. 7 -3. 2 103. 2 -2. 6 197. 7 150. 7 47. 0 184. 5 141. 7 42. 8 187. 4 133. 0 54. 5 5. 4 5. 2 Change in 2005 RM billion % 8. 5 8. 3 11. 1 8. 6 4. 8 4. 5 Change in 2006 RM billion 17. 0 87. 5 119. 3 34. 9 70. 5% 79. 0% % 13. 7 13 17. 2 6. 3 3. 8 3. 4 Change in 2007 RM billion 27. 6 72. 5 56. 5 51. 2 72. 2% 80. 8% % 19. 6 9. 5 7. 0 8. 6 MONEY AND BANKING Money supply M1 M3 9. 8 51. 6 69. 0 44. 2 77. 5% 85. 7%.

Banking system deposits Banking system loans2 Loan-deposit ratio (end of year) Financing-deposit ratio3 INTEREST RATES (AVERAGE RATES AS AT END-YEAR) Overnight Policy Rate (OPR) Interbank rates 1-month Commercial banks Fixed deposit 2005 % 3. 00 2006 % 3. 50 2007 % 3. 50 2. 84 3. 54 3. 56 3-month 12-month Savings deposit Base lending rate (BLR) Treasury bill (3-month) Government securities (1-year) Government securities (5-year) 3. 02 3. 70 1. 41 6. 20 2. 96 3. 30 3. 73 3. 19 3. 73 1. 48 6. 72 3. 23 3. 55 3. 70 3. 15 3. 70 1. 44 6. 72 3. 41 3. 53 3. 78 EXCHANGE RATES Movement of Ringgit (end-period) Change against SDR Change against USD4 1 2 2005 % 8. 9 0. 5 2006 % 1. 8 7. 0 2007 % 1. 7 6.

8 Excludes currency and deposits held by non-residents with resident banking institutions Includes loans sold to Cagamas 3 Adjusted to include holdings of private debt securities 4 Ringgit was pegged at RM3. 80=USD1 on 2 September 1998 and shifted to a managed float against a basket of currencies on 21 July 2005 p Preliminary 7 Annual Report 2007 OVERVIEW The Malaysian economy continued its strong growth momentum, expanding by 6. 3% in 2007. Growth was driven by robust domestic demand despite a weaker external environment which led to moderation in export growth. Private consumption and investment activities expanded strongly during the year.

Private consumption recorded the highest growth rate since 2000, buoyed by rising disposable income following high commodity prices, salary increments in both the public and private sectors, as well as favourable labour market conditions. Strong investment in the manufacturing, services, construction, and oil and gas industries, combined with positive business sentiment, supported expansion in private investment. This was further reinforced by large inflows of foreign direct investment. manufacturing sector, the overall manufacturing sector remained supported by sustained growth in the domestic-oriented and resource-based industries. Labour market conditions strengthened during the year as a result of the strong economic growth.

The economy was effectively at fullemployment, with the unemployment rate remaining low at 3. 3%. During the year, demand for workers increased, while fewer retrenchments were recorded. The firm labour market conditions exerted some upward adjustments in wages, but as labour productivity improved, wage pressure on inflation was contained. The strong economic performance was achieved in an environment of relatively low inflation. Overall, the headline inflation rate increased at a slower pace of 2% in 2007, due mainly to price increases in the food and beverages category. Domestic food prices were largely influenced by higher global food prices, which were underpinned by structural and cyclical factors.

Nevertheless, the pass-through from global prices to domestic prices were to some extent mitigated by the various policy measures undertaken by the authorities, and domestic factors such as the more competitive environment for retailers. Inflation, however, edged higher in the second half of the year as private consumption gathered further momentum while pressures from food and commodity prices also increased. The external position strengthened in 2007 supported mainly by the large trade surplus, which was underpinned by strong growth of commodity exports and continued growth in non-E&E manufactured exports. Also contributing to the improved external position was that net outflows in the financial account moderated. For the first time, the services account recorded a surplus due mainly to higher tourism and transportation receipts.

Reflecting improved economic prospects and investor confidence, inflows of foreign direct investment and portfolio investment were larger. The strong growth performance in 2007 has generated significant economic momentum and the ongoing structural transformation has further strengthened Malaysia’s macroeconomic fundamentals during the year. Resilient household and corporate sectors, strong banking system, The Malaysian economy continued its strong growth momentum, expanding by 6. 3% in 2007. Growth was driven by robust domestic demand despite a weaker external environment The stronger growth achieved reflected the benefits of a more diversified economic base, which has strengthened the economy’s resilience to the external environment.

While the contribution of the manufacturing sector remains substantial, of significance is the shift in the economic structure in the recent few years towards the services sector, which has become the main driver of growth. The services sector led growth in 2007 was supported by domestic demand activities and new growth areas in finance, business services and communications. The turnaround of the construction sector to record positive growth after three consecutive years of contraction, as well as the recovery in the mining sector added further impetus to growth. In contrast, reflecting weaker external demand, the manufacturing sector registered a more moderate growth, affected by the slowdown in the production and exports of electronics and electrical products, especially in the first half of the year.

However, reflecting the relatively broad-based structure of the 8 The Malaysian Economy in 2007 prudent fiscal management, large trade account surplus as well as high international reserves, place the economy in a better position to weather uncertainties in the event of a more pronounced slowdown in global growth and increased volatility in the financial markets. DOMESTIC DEMAND CONDITIONS Domestic demand, especially private sector activities, led economic growth in 2007, in an environment of moderating external demand. Domestic demand grew strongly by 10. 5% in 2007 (2006: 7%), driven mainly by the buoyant expansion in private consumption and investment.

Consumer spending increased further, supported by the steady increase in disposable incomes, firm labour market and favourable financing conditions. Private investment activities remained strong, with higher levels of capital spending in the manufacturing, services and construction sectors as well as upstream oil and gas activities. The public sector, meanwhile, continued to be supportive of growth following implementation of projects and measures to enhance infrastructure and public sector delivery system.

Chart 1. 3 Real Domestic Demand Aggregates Annual change (%) 20 15 10 5 0 -5 -10 2001 2002 2003 2004 2005 2006 2007 Real aggregate domestic demand (excl.stocks) Real private consumption Real public expenditure Real private investment (RHS) Annual change (%) 50 45 40 35 30 25 20 15 10 5 0 -5 -10 -15 -20 -25 upward salary adjustments for civil servants of between 7.

5% to 35% further strengthened consumption in the second half of the year. Positive developments in the labour market such as rising job vacancies and declining retrenchment as well as the strong performance of the equity market further buoyed consumer sentiments. During the year, the low interest rate environment and access to credit provided support for households’ spending. Outstanding loans to households increased by 7. 5% in 2007, driven mainly by loans for purchase of residential property and consumer durables.

There was, however, no evidence of an increase in the vulnerability of household financial positions. The household debt to financial assets ratio was lower at 46. 0% (2006: 49%), while the non-performing Robust domestic demand was driven mainly by strong expansion in private sector activities Private consumption increased at a faster pace of 11. 7% in 2007 (2006: 7. 1%). The robust consumer spending activities was reflected in favourable performance of major consumption indicators, such as imports of consumption goods, loans approved and disbursed for consumption, and credit card spending. Household spending was supported by the steady increase in disposable income and stable labour market conditions.

Higher commodity prices, especially prices of crude palm oil and rubber, have led to rising disposable income of households in rural areas. The average monthly income of FELDA settlers in the palm oil scheme has doubled to RM2,800 per month (2006: RM1,386; 2001: RM700 per month), while rubber smallholders on average earned RM3,495 per month in 2007 (2006: RM3,486; 2001: RM650). In addition, the Chart 1. 4 GNI per Capita RM ‘000 25 20 15 10 5 0 -5 2001 2002 2003 2004 2005 2006 2007 Annual change (%) 25 20 15 10 5 0 -5 Nominal GNI per capita (LHS) Nominal GNI per capita growth (RHS) Nominal private consumption growth (RHS) 9 Annual Report 2007 loan (NPL) ratio for household loans declined to 5. 3% (2006: 7. 1%).

In addition, the NPL ratios for residential property, hire purchase and credit card loans were lower at 7. 2%, 2. 6% and 2. 5% respectively (2006: 8. 8%, 4. 2% and 3. 7% respectively). Private investment expanded further in 2007, recording a higher growth rate of 12. 3% (2006: 7%). Capital spending activities in most economic sectors, particularly manufacturing, services, construction and mining, accelerated further. The MIER’s Business Conditions Index (BCI) which remained above the 100-point threshold level throughout the year, underscored positive business sentiment. In addition, the higher gross FDI inflows of RM46. 1 billion in 2007 (2006: RM37.

3 billion), mainly into the manufacturing, and oil and gas sectors, further reflected favourable investment climate. Healthy financial position of companies due to favourable corporate earnings over several years has also enabled them to fund the bulk of their capital expenditure from internal sources. Private investment activity also continued to be supported by favourable financing conditions. Loans approved and disbursed to businesses as well as private debt securities (PDS) issued for new activities continued to increase during the year. Loans disbursed to businesses increased by 9. 5% while PDS issued for new activities rose to RM31. 8 billion in 2007 (2006: RM21 billion).

Investment in the manufacturing sector was strong during the year, mainly supported by expenditure on new machineries and equipment. Sustained high level of capacity utilisation rate in the sector also underpinned additional capital spending activities. Major indicators such as imports of machineries and loans disbursed to the manufacturing sector indicated positive expansion in manufacturing investment. In 2007, the Ministry of International Trade and Industry approved a total of RM59. 9 billion in 949 manufacturing projects (2006: RM46 billion), mainly for investment in electrical and electronics products, petroleum products and basic metal products industries.

More than half of the approved investments were projects with foreign participation, indicating Malaysia’s attractiveness as an investment destination. Foreign participation continued to be significant in the electronics sector, due largely to well established industry linkages and good infrastructure. In addition, capital investment per employee of the approved projects was higher, supporting a gradual shift towards higher capital-intensive projects. Capital expenditure in the mining sector was driven mainly by robust activity in the upstream oil and gas sector, and reflected in the intensified exploration and production activities in deepwater oil fields.

Investment in the services sector expanded mainly in the transportation sub-sector, attributable to expansion in air transport facilities. Capacity enhancement was also evident in the communications sub-sector due to ongoing network upgrading. Meanwhile, capital spending in the construction sector was supported by strong activities in high-end residential projects and the implementation of the 9MP projects. The Government continued to play a prominent role in supporting and encouraging private sector activities. In Budget 2007, the Government reduced the corporate tax rate by two percentage points over two years, to 27% and 26% in 2007 and 2008 respectively.

This helped reduce further the cost of doing business and accorded companies with greater capacity to expand capital spending. Public investment increased at a sustained rate of 8% in 2007 (2006: 8. 9%). Public development expenditure continued to support growth, with large expenditure channelled into projects to further improve the economic and social services sectors of the economy as well as to reduce rural-urban and regional disparities. In the Chart 1. 5 Investment and Capacity Utilisation % change 24 22 20 18 16 14 12 10 8 6 4 2 0 2004 Capacity Utilisation (RHS) % 84 83 82 81 80 Investment 79 78 77 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2005 2006 2007 Source: Malaysian Institute of Economic Research (MIER) 10 The Malaysian Economy in 2007

economic sector, expenditure was mainly for improving and upgrading both the industrial and public utilities infrastructure, enhancing the transportation system and increasing efficiency in agriculture production. In the social services sector, development expenditure continued to focus on the provision of essential services, namely education, healthcare and housing. Of importance, development expenditure on housing projects and healthcare facilities was accelerated during the year. In addition, the Government’s commitment to develop human capital was evident in high disbursements to strengthen institutions of higher learning. Capital expenditure by the non-financial public enterprises (NFPEs) continued to be high in 2007, attributed largely to exploration and production activities in the upstream oil and gas sector by PETRONAS.

In addition, capacity expansion and upgrading programmes in the transportation, utilities and communication sectors also contributed to the growth in NFPEs’ investment. Tenaga Nasional Berhad continued to spend on improving power generation and transmission systems to cater for rising demand for electricity. Capital spending in the communication sector focussed mainly on improving facilities in the area of broadband services. Meanwhile, investment in the transportation sector was largely for upgrading and capacity expansion exercise by both the port authorities and railway operator. Public consumption increased steadily by 6. 4% in 2007 (2006: 5%), largely on account of stronger growth in emoluments and higher expenditure on supplies and services and defence.

The increase in emoluments expenditure was more pronounced in the second half-year as a result of the upward salary adjustment for civil servants of between 7. 5% and 35%. Meanwhile, the increased expenditure for supplies and services was largely due to continued upgrading of public sector’s administrative machinery and maintenance of buildings and fixtures. In spite of higher public consumption, public sector savings remained high at RM83. 8 billion in 2007 or 13. 3% of GNI, with the main source of increase due to the large operating surpluses of the NFPEs. This increase was attributed to higher cash flows generated as a result of high commodity prices and strong export earnings. Chart 1.

6 Gross National Savings and Savings-Investment Gap RM million 250,000 225,000 200,000 175,000 150,000 125,000 100,000 75,000 50,000 25,000 0 2001 2002 2003 2004 2005 2006 2007 Public Savings Savings-Investment Gap Gross Capital Formation Gross National Savings Private Savings Meanwhile, private sector savings increased to RM153. 4 billion or 24. 4% of GNI in 2007 (23. 2% of GNI in 2006), reflecting healthy household balance sheets. Banking sector deposits held by individuals rose to RM330. 6 billion during the year (2006: RM299. 1 billion). Overall, gross national savings (GNS) increased further by 11. 9% to RM237. 1 billion and the share of GNS remained high at 37. 8% of GNI (2006: 38. 2%).

Despite higher investment by both public and private sector, the strong increase in the GNS led to a larger savings-investment surplus of RM99. 3 billion or 15. 8% of GNI in 2007. SECTORAL REVIEW Growth in 2007 was broad based, reflecting expansion across all key sectors of the economy. The growth was led by the strong performance in the services sector, and supported by the construction and mining sectors. Reflecting the increasing prominence of the services sector as a contributor to growth, the sector which grew by 9. 7%, accounted for five percentage points of the total real GDP growth in 2007. After three years of decline, the construction sector turned around to register a positive growth of 4.

6%, driven mainly by the civil engineering sub-sector which benefited from implementation of projects under the Ninth Malaysia Plan and in the oil and gas sector. The mining sector also recorded an improved performance led by higher production of crude oil following the coming on-stream of the Kikeh oil field. Meanwhile, the manufacturing and agriculture sectors recorded moderate expansion in 2007. The former was tempered by weak performance of export-oriented industries, 11 Annual Report 2007 especially electronics and electrical products, in an environment of subdued external demand, while the latter was weighed down by lower production of crude palm oil and rubber.

Services Sector The services sector has, in recent years, emerged as a key driver of growth in the economy. The sector has been the most important contributor, expanding at an average annual growth rate of 6. 8% between 2003-2007 and exceeding the average real GDP growth of 6%. In the recent two years, growth picked up substantially to above 7%, supported by robust domestic demand and tourism activities. Reflective of strong growth in the sector, total approved investments by MIDA in the services sector increased by 17. 8% to RM65. 4 billion in 2007 (2006: RM55. 5 billion). sectors combined registered an average annual growth rate of 7. 7% over the period 2003-2007.

A notable development has been the prominence of new growth areas in the services sector which are mainly knowledge-intensive activities, such as telecommunications, Islamic finance, shared services and outsourcing (SSO) and IT services. The strong performance of these sub-sectors was due to rising demand and changes in consumer preference in line with improved income levels.

The growth was also supported by policy initiatives to promote these areas. Given these developments, the services sector has developed its own endogenous strength and has become less reliant on the performance of other sectors. The services sector continued on a strong growth momentum in 2007, expanding by 9. 7%, the highest growth rate since 1997. It contributed five percentage points of