The Malaysian economy is expected to strengthen in 2007, despite a more challenging external environment. This optimism is underpinned by continued expansion of private sector activities, complemented by Government’s pragmatic policies and strategies to diversify and promote the new sources of growth. Overall, real GDP growth is envisaged to expand at 6% in 2007 (2006: 5.8%), consistent with the growth targets outlined in the 9MP. Growth will continue to be broad-based with positive contribution from all sectors of the economy. With the encouraging economic prospects, nominal GNP per capita is projected to rise by 7.2% to reach RM21,168 (2006: 9.4%; RM19,739), reflecting improvements in the well-being of the rakyat. In terms of PPP, per capita income is expected to increase by 6.7% to reach USD12,666 (2006: 11.8%; USD11,871).

Consistent with the favourable growth prospects of the economy, aggregate domestic expenditure (excluding change in stocks) in real terms is expected to continue to increase by 7.1% in 2007 (2006: 7.8%), underpinned largely by higher investment spending and sustained consumption. Private sector expenditure, which is envisaged to grow by 7.2% (2006: 7.6%), will continue to support domestic economic activities. On the other hand, public sector expenditure is expected to moderate to 6.7% in 2007 (2006: 8%), supported by Government expenditure as well as capital expenditure of the Non-Financial Public Enterprises (NFPEs), particularly for programmes and projects in infrastructure, human capital and social development. The public sector is therefore projected to contribute a lower 2 percentage points to GDP growth in 2007 (2006: 2.4 percentage points), while the private sector’s contribution remains high at 4.6 percentage points (2006: 4.7 percentage points).

With strengthening business sentiment, private investment expenditure is projected to post strong growth of 10.5%, to account for 13% of GDP (2006: 10.1%; 12.5% of GDP). Continued robust investment is anticipated in the manufacturing and manufacturing-related services sectors following Government’s continuing efforts to promote the deepening and further diversification of the manufacturing sector in the production of high value-added products. Furthermore, as part of measures to encourage DDI, SMEs are also expected to participate actively in domestic economic activities as outlined in the Third Industrial Master Plan (IMP3), 2006-2020.

Investment activities in the agriculture sector are expected to gain momentum in consonance with the Government’s renewed emphasis on revitalising the sector through large-scale mechanisation and modernisation in farm management. Meanwhile, investment in the services sector is expected to further expand capitalising on recent advances in technology, particularly in the telecommunications, banking and finance sector, as well as in trade and logistics. Spurred by the persistently high crude oil prices and expectations of increasing global

demand amidst tight supply, investment activities in the oil and gas industries are expected to further accelerate in 2007. Recent discoveries of oil and gas reserves will also boost investments in the industry.

As consumer confidence is expected to remain buoyant with rising disposable incomes, in part due to higher export earnings and better employment prospects, private consumption expenditure is projected to increase by 6.4% in 2007 (2006: 7.1%). Meanwhile, public consumption is projected to remain firm at 5.4% (2006: 5.5%), following anticipated increases in expenditure for supplies and services as part of ongoing efforts to further improve the Government’s administrative machinery and delivery system. In the medium and long term, these initiatives are expected to further enhance the nation’s productivity and competitiveness, thereby providing impetus to growth. With 9MP underway, the RM44,510 million allocated for development expenditure in 2007 (2006: RM35,814 million) will drive public investment in real terms to increase by 8% (2006: 10.6%). The expected increase will also be supported by capital outlays of NFPEs.

On the supply side, all sectors are projected to record positive growth, led by the manufacturing and services sectors. The manufacturing sector is expected to expand in line with sustained global electronics demand and the continuing strong pace of domestic economic activities. The services sector is forecast to strengthen, benefitting from VMY 2007, which will intensify tourism activities and generate higher earnings, in particular from the wholesale and retail trade, hotels and restaurants sub-sector. Capacity expansion in transport infrastructure, higher investment in communication services industry as well as robust finance and business-related activities will also continue to support the growth momentum in the services sector. Meanwhile, the expansion of the agriculture sector is projected to continue, spurred by favourable commodity prices and Government’s committed and focused efforts to diversify and modernise the sector, particularly the production of food commodities to help reduce the high food import bill. Growth in the construction sector is expected to accelerate, boosted by the implementation of infrastructure projects under the 9MP.

In consonance with growing intra-regional trade and strong domestic economic activities, growth of the manufacturing sector is envisaged to expand by 6.8% (2006: 7.3%). This growth is also supported by new developments and the shift towards technology-driven manufacturing processes amidst greater intensity in R&D activities. The establishment of the electronics cluster in the northern corridor of Peninsular Malaysia, including expansion of Kulim Hi-Tech Park, will meet the growing demand for hi-tech electronics manufacturing activities. Industrial cluster developments in other corridors outlined in the 9MP will further stimulate growth in the manufacturing sector, particularly the development of petrochemicals cluster in the East Coast Development Corridor (ECDC) and the South Johor Economic Region (SJER) as well as POIC in Sabah. Trickle-down effects are expected to benefit industries linked to these developments. They include among others, industries relating to construction, such as iron and steel; cement and concrete as well as chemical and chemical products such as LPG and fertilisers.

The agriculture sector is envisaged to grow by 4.7% in 2007 (2006: 5.3%), largely supported by sustained production of palm oil and higher output of food crops. Expansion in matured areas and improvements in yield as well as higher oil extraction rates are expected to contribute to higher output of palm oil in 2007. Production of rubber is expected to register a moderate increase largely due to increased tapping following higher demand and prices. Food production is envisaged to expand further with the Government’s policy to reduce the food import bill and promote self sufficiency by 2010 through expansion of cultivated areas, utilisation of idle lands and mechanisation of farming methods as well as promotion of good farming practices.

Areas of activity that will boost growth of the agriculture sector include aquaculture, deep sea fishing, seaweed farming, ornamental fish breeding, floriculture as well as herbs cultivation.

The growth of the mining sector is expected to increase strongly by 4.5% in 2007 (2006: 2.4%), due to higher production of crude oil and gas, following capacity expansion in upstream activities. Output of crude oil is projected to be higher by 5.5% (2006: 3%), on account of the expected increase from new oil fields coming on stream in 2007. Production of natural gas is anticipated to grow by 3.3% (2006: 3.5%), supported by higher capacity utilisation of the MLNG2 and MLNG3 plants in Sarawak.

Meanwhile, the construction sector is anticipated to grow at a higher rate of 3.7% in 2007 (2006: 0.7%), spurred by the acceleration in civil-engineering activities, following the implementation of new infrastructure projects under the 9MP. Major projects that are expected to boost growth of the sector include the Pulau Pinang Second Bridge, Pulau Pinang Monorail System as well as the SJER projects. Activities in the residential and non-residential sub-sectors are also envisaged to remain active, supported by sustained demand for housing as well as buoyant business and industrial activities.

In tandem with favourable developments in the economy, the services sector is poised to register a higher growth of 6% in 2007 (2006: 5.7%). Growth will be broad-based, propelled by demand for retail and hospitality services, telecommunications, transport as well as business and financial services. Growth in the tourism sector is expected to emanate from higher tourist arrivals, special promotional activities and programmes in conjunction with VMY 2007. A total of 20.1 million tourist arrivals are expected in 2007 (2006: 17.5 million). Meanwhile, increased bank lending and other financial activities will boost growth of the finance, insurance, real estate and business services sub-sector. The transport, storage and communication sub-sector is forecast to record strong growth from capacity expansion in the transport infrastructure, investment by telecommunication companies as well as higher business and trade-related activities. In addition, significant developments taking place in the vicinity of Port Klang will further stimulate port activities, transport logistics and business-related activities and provide additional impetus to growth in the sub-sector.

Malaysia’s BOP in 2007 is expected to remain robust with the current account recording a substantial surplus for the tenth consecutive year since 1998. The current account balance will be underpinned by a strong surplus amounting to RM145,752 million in the goods account. With sustained global E&E demand and firm commodity prices, exports (f.o.b.) are expected to grow by 9% to RM655,215 million, while imports (f.o.b.) are anticipated to pick up by a further 10% to RM509,463 million. As in previous years, manufactured goods will contribute the highest proportion of total exports with intermediate goods constituting the bulk of total imports.

The services account is expected to record a higher deficit in 2007. In contrast, the deficit in the income account is envisaged to narrow on account of higher repatriation of profits and dividends from Malaysian companies operating overseas. Net outflows in the transfers account, comprising mainly remittances by foreign workers, are envisaged to increase marginally in 2007. The surplus in the goods account will be more than sufficient to offset the net outflow in the services, income and transfers accounts. Consequently, the current account will continue to record a large surplus equivalent to 16.5% of GNP in 2007 (2006: 16.7% of GNP).

In line with the anticipated expansion in domestic economic activities and higher export earnings, GNP in current prices is projected to register a strong growth of 9.4% in 2007 (2006: 11.6%). Taking into account the 9.3% growth in total consumption spending, GNS will increase by 10.3% to reach RM221,544 million in 2007 (2006: 15.2%; RM200,836 million). Thus, the share of GNS as a percentage of GNP will remain high at 38.5% (2006: 38.2%). Although total investment expenditure (including change in stocks) is projected to increase strongly by 12.3% to RM126,825 million to account for 22% of GNP (2006: 14.4%; RM112,962 million; 21.5%), the savings-investment gap in 2007 is expected to remain substantial at RM94,719 million or 16.5% of GNP (2006: RM87,874 million; 16.7%).

Despite a cautious start to the year, and notwithstanding some distinct periods of volatility, the Malaysian equity market ended 2006 on a significantly positive note. Among the factors that contributed to the better performance were renewed foreign inflows into the equity markets, strong corporate earnings, corporate mergers and acquisitions and expectation-driven sentiments following the announcement of the Ninth Malaysia Plan (9MP) infrastructure projects.

Driven by positive macroeconomic fundamentals and foreign investor interest, local equity markets performed well in 2006. After the relatively weak performance in 2005, the KLCI ended 2006 at 1,096.24 points or 21.8% higher compared to end-2005. Although the benchmark index closed the year at its highest Level since 1996, the Malaysian market lagged the other regional markets. The KLCI's performance was weak in the first half of the year but posted stronger gains in second half of the year as foreign investors' interests in the market increased.

There was also significant difference in the performance of the three major domestic indices, with the small-capitalisation MESDAQ recording a better performance relative to the Kuala Lumpur Main Board. On a sectoral basis, the construction and plantation sectors were the strongest performers, each posting gains of 57.5% and 54.2% respectively, for the year.

The KLCI started 2007 on a positive note, supported by inflows of non-resident funds driven by expectations of stronger domestic economic growth, favourable corporate earnings, and stable inflation outlook. The KLCI reached a high of 1,283.47 points on 23 February before the correction at the end of February and early March. As at 7 March 2007, the KLCI stood at 1,156.58 points or 5.50% higher compared to end-2006. Capital flows into the equity market were important in explaining the KLCI's performance in 2006. The nature of capital flows into the equity market differed significantly between the two halves of the year. Despite the weak inflows of capital into the domestic equity market in the first half of the year, anecdotal evidence pointed towards the presence of offshore hedge funds in selected technology stocks, driven by expectations of stronger export performance in the electronics and electrical sector. Since a large proportion of the companies listed on the Second Board and the MESDAQ Market were technology-related companies, greater interest and trading in these markets resulted in significant market volatility. Following the market correction in May, there were large outflows. However, in the second half of the year, rising inflows into the equity market by foreign funds were focused on the bigger capitalisation stocks in the Main Board, which were more liquid and had greater research coverage.