Lower GDP growth expected for Malaysia in next decade

Political defections of MPs and even whole parties also risk a resurgence of corruption and graft, further weighing on investor confidence


MALAYSIA’S GDP is expected to record lower growth in the next decade compared to the past 10 years, hampered by political uncertainty that will stall reform momentum in the country.

Fitch Solutions Inc forecast the country’s GDP to record a growth of only 3.4% on average in the next 10 years compared to a growth of 6.4% over the past decade, which is also dragged by the likely contraction in 2020 due to the Covid-19 pandemic.

“We at Fitch Solutions see extended political uncertainty during Malaysia’s transition away from one-party rule leading to stalling, even backsliding, reform momentum.

“Combined with less favourable demographics and reduced fiscal space to cushion against future negative shocks to the economy, these factors all spell a much lower growth rate over the coming decade,” it stated in a report dated Sept 25.

Although a successful transition to a more stable multi-party or two-party system in more mature democracies would benefit Malaysia, the uncertainty that lies in the interim would be a negative factor counted against it by potential investors, it added.

This would be “inopportune” for Malaysia due to the fact businesses and countries globally are making plans to move part of their operations out of China to build more diversified and resilient supply chains due to the trade war between China and the US, as well as the pandemic.

“The somewhat chaotic nature of coalition politics during this transitional period in Malaysia, where political defections of MPs and even whole parties have occurred in recent years, also risks a resurgence of corruption and graft, further weighing on investor confidence.

“Heads of coalitions could resort to political patronage to ensure the loyalty of their constituent parties. This could lead to bloated governments with more ministerial positions created for the sake of handing them out to coalition MPs and the appointment of backbench MPs to key positions in government-linked companies (GLCs),” it said.

Fitch Solutions forecast Malaysia’s active population growth to ease to an average of 1% in the next 10 years compared to 2.3% in the last 10.

The slow growth will provide a tailwind to the economy, particularly when compared to Thailand, whose active population is projected to decline over the next decade.

Another factor that is worsening the situation is diminishing fiscal space left for future interventions.

“Public debt level, including debt guaranteed by the government, exceeds 80% of GDP and is growing steadily. The inability of the government to mount a strong response to the Covid-19 pandemic in 2020 indicates this constraint is already a binding one and will likely remain so over the coming decade,” it added.

Singapore Institute of International Affairs senior fellow Oh Ei Sun agreed with much of the report.

He said the country’s public economic sector accounts for up to about 40% of the overall GDP.

Political uncertainties will lead to unclear priorities that lie in all of the public sectors, as well as the various government expenditures.

“If the government changes from one day to another, it is unclear what kind of public expenditure, what kind of public sector performance we can expect.

“For example, successive governments may in turn appoint and dismiss the leaders in some GLCs. So, there are uncertainties there,” he told The Malaysian Reserve yesterday.

He added that there will also be uncertainty in the policies which may be inconsistent due to the political instability that plague the nation.

The private sector would need a clear guidance to run its operations, Oh said, and if policies are unclear, the private sector would not be able to assist in stimulating the economy.

“The solutions to these problems are not new. We need to be more creative and innovative in our economy. We need to make sure our economy is not just a matter of being labour intensive or cheap labour, but we encourage innovation and entrepreneurship,” he said.