Monday, March 1

Demographic dividends: Malaysia in a sweet spot


KUCHING: A growing population with ideal demographics is building up to be the best thing that could happen for Malaysia on its road towards Vision 2020.

The country’s favourable demographic ratios could unlock a potential source of demand and growth, economists say as Malaysia is currently in a “sweet spot”.

The share of the working-age population is rising and when complemented by higher wages to gross domestic product (GDP), it translates into positive demographic dividends that could last up to two decades.

Measures to enhance income infer that a number of people will enter the middle class and drive consumption, said researchers with CIMB Investment Bank Bhd (CIMB Research).

While other economies like Thailand and Singapore are seeing their demographic tailwinds turning the other way, Malaysia can look forward to a longer period of favourable demographic dividends, it highlighted in its special report released last month.

“Population data show that Malaysia’s working-age share of the population is one of the highest and the population is currently at the most productive stage of the age distribution profile where it bulges at the youth/young adult age group,” it detailed.

“The dependency ratio (child and elderly population to working age population) is projected to drop towards 2020 given a growing workforce, declining birth rates and a moderate rise in old age dependency.” A positive demographic dividend equates to higher income per capita and consumption, explained the research firm, as higher income also accelerates the rise of the middle-income segment, which drives upgrading of the goods and services consumed.

“With a growing workforce and urbanisation, affordable housing and transportation in cities becomes critical,” it said.

“The increase in savings/wealth can be recycled into various assets and investments that will be a boon for finance and insurance.

“The large young population suggests that consumer habits of these age groups have become the key determinants of consumption trends, predominant of which, is the rising demand for electronic gadgets, information technology (IT) and telco services.

“Meanwhile, the rising share of 35 to 54 years age group will become the backbone of support for Malaysia’s household spending in the future.” The demographics are positive but to what extent the dividend can be harnessed depends on job creation, improving education, quality of labour, enhancing productivity, encouraging savings, and providing healthcare and elderly support.

“Fuelling the demographic dividend also mandates balanced and inclusive long-term growth strategies,” CIMB Research added, noting that academic studies echo the need for foresight, planning and political will.

“Demographics have played a prominent role in driving economic growth, particularly in Asia.

However, simply having a large population or high population growth is not a precondition for achieving accelerated GDP growth given the enormous strain on resources.

“A significant determinant is the demographic changes and age distribution of the population.

“A country’s economic performance will be boosted by a larger population of working-age individuals and tends to be depressed when a relatively large part of the population consists of young and elderly dependents.”


Getting there

Population data show that Malaysia’s working-age share of the population is one of the highest relative to its regional counterparts.

The proportion of the working-age population – the group that has a higher propensity to spend – increased from 63.9 per cent in 2002 to 68.5 per cent in 2013, it said.

This compares to Singapore’s 57.6 per cent in 2002 (versus 52.3 per cent in 2013), Indonesia’s 63.3 per cent (versus 63.4 per cent) and the Philippines’ 59 per cent (versus 61.2 per cent).

Thailand still has the highest working-age population of 71.6 per cent. Based on the Department of Statistics projections, the proportion of the working-age group is expected to decline between 2020 and 2030, mainly due to an ageing labour force.

However, it is projected to rise again from 2031 onwards as the proportion of persons aged 20-24 and 45-54 increases.

“This demographic contribution to accelerating economic growth is known as the demographic dividend.

The most important component of the demographic dividend is the resulting boost to per capita income growth.

“This occurs when there is a decline in birth rates and a subsequent change in the age structure of the population.

With fewer births and slower population growth, the country’s dependent population grows smaller in relation to the working-age population.

With fewer dependents to support and an increase in the working-age ratio, there is a window of opportunity for rapid economic growth.

Furthermore, the savings of the working-age group can be channeled into productive investments to elevate potential growth. Studies have showed that the demographic transition can yield a growth dividend of up to two per cent per annum if economic policies and reforms complement the demographic transition.

The (first) dividend period can be quite long, possibly lasting up to five decades or more, but eventually, lower birth rates catch up and reduce the growth rate of the labour force while longer life expectancy rates speed up the growth of the elderly population.

Subsequently, per capita income growth slows and the first dividend turns negative.

A second dividend comes about when a population with a high concentration of working-age individuals face an extended period of retirement and are “incentivicised” to accumulate assets, which contributes to rising national income.

An ageing population that is associated with lower birth rates but higher human capital investments per child can also enhance the quality and productivity of workers.

This has the effect of maintaining or increasing standards of living and extending the dividend phase, although this depends on the policies that allow the elderly to finance their consumption.

Reducing youth unemployment

Population data show that Malaysia is in a sweet spot to seize the demographic dividend.

Malaysia is only at the beginning of the intermediate stage of the first dividend.

Malaysia’s median age is at the most productive stage of the age distribution profile (projected median age of 28.2 in 2015).

The population bulges in the 20-29 years age group (as illustrated by the population pyramid below), suggesting a large youth/young adult population.

Indonesia, the Philippines and India are the other countries that will enjoy a long period of favourable demographics.

Singapore is already seeing a sharp decline in its labour force and Thailand and Vietnam will see a deceleration in their labour forces in the next 10 years.

However, the key to transforming Malaysia’s youth bulge into a demographic dividend is reducing youth unemployment.

The World Bank estimates that Malaysia’s unemployed youth had declined from a peak of 11.6 per cent of the total labour force of those aged 15-24 years in 2009 to 10.2 per cent in 2012.

However, it remains above the long-term average of 10.1 per cent.

The World Bank pointed out that the ratio of youth unemployment to overall unemployment is high at 3.3 times and 60 per cent of all unemployed workers are in this age group.

To enhance the employability of its youth, Malaysia needs to address the skills mismatch and build a functioning feedback mechanism between educational institutions and the industry.

A falling dependency ratio is associated with lower fertility rates and slower population growth amid a growing working-age population.

Declining periods of dependency have positive effects on consumption and investments as the number of working age adults rise faster than that of children and elderly dependents.

As the population starts to age, the dependency ratio rises.

Singapore’s and Thailand’s ratios are expected to rise from as early as 2015 while Malaysia’s dependency ratio is projected to decline up to 2020 and rise thereafter (due to the ageing population) up to 2030 before declining again (due to decreasing child dependency and an increasing working-age group) until 2040.

“Based on projections from the IMF, the overall dependency ratio looks relatively stable up to 2045,” CIMB Research said.

“Therefore, while other economies will see the demographic tailwind turn the other way, Malaysia can look forward to a longer period of favourable dividends.”

Realising the demographic dividend

Demographics is not a destiny but, with foresight, it can alter the parameters of possibility.

The economic outcome of demographic change depends on policy.

Appropriate investments and continued progress through the demographic transition becomes a springboard for economic growth.

How much of the dividends are realised and contribute to growth depend on the implementation of effective government policies, such as quality education, employment practices, timing and level of childbearing, policies that encourage higher female participation in the workforce and that allow young parents to work, healthcare support, tax incentives and disincentives, pension schemes, retirement policies and general support for the elderly.

Much of this helps to elevate the quality and quantity of labour to enhance productivity-driven growth.

“When this happens, the positive demographic dividend that equates to higher income per capita will lead to significant upside for consumer spending while savings/wealth can be recycled into various assets and investments that will be a boon for finance and insurance.

With a growing workforce and urbanisation, affordable housing and transportation in cities become critical.

“The large young population suggest that consumer habits of these age groups have become key determinants of consumption trends, predominant of which is the demand for electronic gadgets, IT and telco services.

Meanwhile, the rising share of 35-54 year age group will become the backbone of support for Malaysia’s household spending in the future.

“The rise of a new middle-income segment and their demand for quality of life lead them to upscale their lifestyles and upgrade the goods and services consumed.

Their spending power is further enhanced by more accessible financing and financial innovations that allow for higher consumer credit.

“Combined with the willingness to pay a little extra for quality, this becomes a force that feeds investments in production, innovation and marketing, which ultimately drives growth.” Moreover, the dividend phase has a positive impact on fiscal balances as tax revenues rise relative to the cost of benefits provided by the government while public funds can be channeled towards upgrading infrastructure.

Public debt should be kept low during the dividend phase as demographic pressure on government finances increases once population ageing starts.

Seizing the dividend

For Malaysia to seize the dividend, the time is now.

Given that Malaysia is currently undertaking structural reform measures to elevate its GNI per capita to US$15,000 by 2020, the potential to yield a high demographic dividend that coincides with higher incomes can be substantial over the next two decades.

However, the opportunity to seize the second dividend is less apparent at this juncture given the current reality where the majority of workers have low personal savings for retirement.

According to the Employees Provident Fund (EPF) annual report for 2013, the average savings for active members in the ages 51 to 55 stood at RM147,057.

More alarming, however, is the fact that 69 per cent of its members aged 54 had less than RM50,000 in savings as at December 31, 2013.

This is considered low when it comes to sustaining a life beyond 15 years after retirement.

The minimum in basic savings that members should have when they reach age 55, as set by the EPF, is RM196,800.

If workers are encouraged to save and accumulate pension funds now, the growth-inducing potential can be realised as the ageing population rises.

As such, with appropriate policies that encourage savings for retirement, higher education expenditure on children or improving healthcare for the elderly, population ageing can have a positive effect on per capita income growth.

Demographic dividend’s sector-by-sector impact  

Air travel volumes will do well when a country is enjoying the demographic dividend as business travel will rise in tandem with, or at a multiple of, the GDP growth of a booming economy and greater personal disposable incomes.

“The winner will be airport traffic, although road and rail traffic (especially high-speed rail) will also benefit,” CIMB Research highlighted.

Airlines will also benefit from the higher traffic volumes following a consumer survey performed by CIMB Research, which uncovered trends like the vast majority of respondents (more than 90 per cent) taking less than 10 flights per year, suggesting that there is a lot of room to expand the overall market.

“The outlook for the aviation sector in Malaysia looks positive as 50 per cent of respondents said that the number of flights they will take in the next three to five years is expected to rise by at least five per cent to more than 30 per cent.

“Predictably, younger respondents aged less than 30 and those in the lower income brackets had the greatest growth potential, with almost 70 per cent of these groups saying that their demand for flights is expected to increase.” On this end, low cost carriers are poised to benefit the most.

“We believe that low-cost carriers are particularly well positioned to benefit from the demographic dividend, simply because the younger population is strongly in favour of travelling with them, with 80 per cent of those aged below 30 preferring budget travel,” it opined.

“As much as 77 per cent of the respondents in our June study said that they were increasingly using budget carriers, against just 23 per cent for full-service carriers.”

CONSUMER: Benefiting the overall sector

Another beneficiary of the demographic dividend is the consumer sector.

A rising working-age population, coinciding with higher income, means that the spending on household items will increase, benefiting the overall consumer sector, be it companies selling necessities or discretionary items.

“While we think that the overall consumer sector will benefit companies that sell premium products will benefit more,” CIMB Research said, reiterating that the young population and emerging Gen Y and Generation Z account for 20.1 per cent of the Malaysia population.

“This group of consumers has a higher propensity to spend and is more focused on lifestyle as compared to the older generations.

This will increase the demand for premium goods.

“Berjaya Food will be the direct beneficiary of this, given its franchise rights for Kenny Rogers Roasters and Starbucks while Nestle and F&N will see the sales of premium products increase, which will help to increase margins as these products usually command better margins.”

TELCO: Two-fold benefits 

Telecomunication players stand to gain in two ways from the demographic dividend: The first is a boom in subscription for mobile services as over the next five years, the current 10-14 years age group, which currently makes up 8.9 per cent of the total population, will gravitate into the 15-19 years age group.

Assuming 80 per cent sign-up for mobile services with an average of 1.5 SIM cards per subscriber, the mobile industry could see a net SIM addition of 3.2 million over 2014 to 2018, estimates CIMB Research.

“This will help boost the total SIM cards in the market from 43 million at end-2013 to potentially 46.2 million by 2018, implying a steady five-year cumulative annual growth rate of 1.4 per cent, driven by the demographic dividend alone,” it said.

Malaysia’s high proportion of the younger age groups in the population, coupled with growing incomes, should also drive greater adoption of smartphones and take-up of mobile data services in the coming years.

According to Nielsen, based on its study of the developed US market, the 18- to 44-years-old age group is the most likely to buy a smartphone, with adoption rates exceeding 80 per cent.

“In terms of the 15- to 44-years-old age group, Malaysia ranks favourably when compared to its regional counterparts, with the highest percentage at 50.7 per cent of the population, followed by Indonesia (49.2 per cent), Thailand (48.8 per cent), the Philippines (48.4 per cent) and Singapore (44 per cent).

“In addition to mobile data services, we believe healthy growth in household formation and rising incomes will also drive demand for high-speed fixed broadband services in Malaysia.”

In conclusion, the telecommunications sector should be a beneficiary of the demographic dividend over the next 5-10 years.

Companies that position their brands and products well to capture the growth in the youth market and the demand for mobile data/fixed broadband services will be the key beneficiaries.

From this perspective, we continue to prefer DiGi for exposure to Malaysia’s telecommunications sector.

Telekom Malaysia, with its ownership of the high-speed broadband (HSBB) network, should benefit from the demand for high-speed fixed broadband but its overall performance will be partly dragged down by the continued decline of its fixed voice business.

Key risks for the sector in realising the demographic dividend are more intense competition and greater-than-expected cannibalisation of legacy voice/SMS services by data services.

PROPERTY: A key beneficiary

CIMB Research believes one of the key beneficiaries of the demographic dividend is the property sector as the typical first-time home purchaser is 25-35 years of age.

As 10.2 per cent of Malaysia’s population is in the 20-24 years age group while 9.5 per cent is in the 15 to 19 years age group, this means that over the next five to 10 years, around 20 per cent of the population will hit the first-time home buying age.


“In terms of numbers, this works out to be six million, which could translate into demand for three million homes (assuming joint purchase by married couples).

“With the annual supply of new homes ranging between 100,000 and 200,000 per annum over the past 10 years, the demand for three million new homes just from the demographic dividend may be difficult to meet.

“In fact, the new supply of completed homes in Malaysia has shrunk significantly to only 78,000 in 2013 versus the peak of 542,000 in 2000.

“Strong demand and weak supply in the coming years will push property prices further up.”

EDUCATION: Growth in international schools and tuition centres

Private higher education is already very competitive and is likely to see some industry consolidation in the near future.

However, on the back of higher anticipated income per capita, CIMB Research expects to see strong student demand for private/international schools and also tuition centres.

There are currently more than 80 international schools  nationwide and we expect more schools to open over the next few years.

“We also see strong demand for vocational training as the authorities focus on developing more skilled workers.

“This helps resolve the issue of student unemployment and also helps develop workers with more industry-specific skills.

“Companies like Prestariang could benefit from the demand for vocational training.

“The company is already training students to be skilled in the oil & gas industry and provides ICT certification for students/employees.”