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Malaysia’s economic growth to remain under pressure amid global headwinds

A hung Parliament, and continuing political and policy uncertainties will also adversely affect confidence in the country’s growth prospects

by S BIRRUNTHA

MALAYSIA’S economic fundamentals moving forward are projected to be hampered by global headwinds such as inflationary pressures, economic uncertainty and climate change.

According to Sunway University Business School professor and economist Dr Yeah Kim Leng, the current growth expectation is 4% to 5% with risks tilted very much on the downside given the rapid deceleration of the global economy.

He added that should global growth dips below 2% this year, the slowdown will be more pronounced in 2023 which then will result in lower output, trade and investment in the local economy that could reduce GDP growth by one to two percentage points.

As such, Yeah said in the likely absence of external demand and a foreign income boost, Malaysia’s GDP will have to rely on the government and private sector’s spending.

“Given narrowing fiscal space, high household debt levels and tapering off of Covid-19 stimulus spending, the ability to generate GDP growth in excess of 4% in 2023 will be daunting.

“This will be even more challenging if there is widespread risk aversion among consumers and investors, especially when faced with a looming global recession,” he told The Malaysian Reserve (TMR) when contacted recently.

Commenting further, Yeah said a hung Parliament, and continuing political and policy uncertainties will also adversely affect confidence in the country’s growth prospects.

He noted that on the other hand, if the elected government is strong, competent and reform-centric, the country could well experience a growth renaissance catalysed by rising investor confidence.

Other Factors Affecting Economic Growth

Meanwhile, Centre for Market Education (CME) CEO Dr Carmelo Ferlito opined that Malaysia’s economic growth, moving forward, very much depends on the strategy that will be implemented locally, and in geopolitical decisions that will happen internationally.

He also pointed out that the sustained positive growth in 2022 is mainly due to a very low baseline in 2021.

“Malaysia was in lockdown throughout 2020 and 2021, so obviously the economic performances were very bad.

“With the reopening of the economy, it seems that we have stellar performances in terms of economic growth now, but we must remember that the stellar performances were only because of the low baseline of 2021.

“Secondly, the recovery so far is still very much anchored on private consumption and government spending. So, it is a very fragile recovery while private investments are still lagging behind.

“So, we definitely don’t think that the rate of growth in 2023 will be similar to 2022 because the baseline will be higher and of course, an economic slowdown is coming,” he told TMR.

Ferlito added that what is happening in terms of geopolitical level like the war in Ukraine is going to aggravate a situation that was already created internationally and domestically during the lockdown.

He noted that CME has already anticipated an inflation-led economic crisis not just in Malaysia but also worldwide.

Policies Implementation Post-GE15

Looking at Malaysia’s political situation right now, Ferlito said the possible change in the country’s administration during the 15th General Election (GE15) could also hamper economic growth moving for ward.

“How is it going to go with the new government, whether it will eventually affect the economy depends on the decision that the government is going to make.

“It is not a matter of new or old, it is a matter of policy choices.

“For sure, the current government and the previous government have taken a lot of bad economic decisions like freezing the labour force, inter vening more strongly in the economy, making life for international businesses more difficult, intervening with price ceilings, etc,” he added.

On that note, Ferlito urged political parties to reveal their plans for the economy, investment ecosystem and labour market, adding that they should base their GE15 campaigns on content and ideas rather than focus merely on the candidates.

“So far, the discussion is still very much oriented towards the candidates…little has emerged on actual content.

“It is no mystery that the past years have been marked by a deterioration in Malaysia’s ability to nurture domestic and international investments.

“It is, therefore, necessary for political parties to indicate if they believe in the need to rebuild a business-friendly ecosystem by cutting red tape and lifting the government’s heavy hand on the economic system,” he noted.

Additionally, Ferlito also questioned the political parties about their agenda for the labour market and their willingness to embrace market reforms.

He added that as CME had warned in May 2021, wrong choices embraced during the Covid-19 pandemic brought the world to a fragile economic recovery followed by an inflation-led downturn,

which is now aggravated by the geopolitical scenario.

“Will the competing coalitions face the economic wave with more controls and central direction or will they embrace market reforms, particularly by reforming taxation and cutting government spending?” he asked.

Ferlito also stressed that the new government will face challenging times, but with the right approach and brave reforms, the economic system can be supported in its path through the fluctuations that are coming.

Better Economic Footing Ahead

Recently, caretaker Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said Malaysia is on a better economic footing than it was at the height of the Covid-19 outbreak, and the country is on the road to recovery thanks to the nation’s increasing growth momentum.

He added that this was proven by three consecutive quarters of economic growth since the fourth quarter of 2021 (4Q21).

He also pointed to the 8.9% expansion in 2Q22.

“We see all this as a validation of our economic policies and fiscal management since the onset of the pandemic.

“Our bold actions in saving lives and livelihoods, protecting businesses over the past 2.5 years, have enabled us to build greater resilience in the economy to face future challenges, especially the bleak global outlook for 2023,” he noted in the keynote address at the Youth Economic Forum 2022 on Nov 1.

Nevertheless, Tengku Zafrul did not deny that Malaysia was equally vulnerable to global risk factors.

He said these headwinds included a recession caused by monetary policy tightening, Russia’s invasion of Ukraine, and China’s rigorous zero-Covid policy.

He warned that all of this is on top of new issues such as threats to food and energy security, while climate change threatens our basic survival.

As such, Tengku Zafrul said agility, resilience and impact were critical to nation building, and he reiterated the ministry’s 3R strategy (Responsive, Responsible and Reformist) in the country’s economic management.

“Governments must be agile. This means they need to be responsive to the needs of the people and to changes in both the global and domestic operating landscapes.

“This, however, must be complemented by the need to be responsible. Doing the right thing is not always favoured, yet doing it responsibly could build the nation’s resilience.

“Although we are aware that job numbers have improved, issues such as under-employment and youth unemployment must be addressed. This is where reforms come in to create long-term growth that will transcend generations and build social cohesion,” he said.

According to the Finance Ministry (MoF), Malaysia’s economy is expected to grow moderately between 4% to 5% in 2023 compared to the anticipated 6.5% to 7% growth in 2022.

GDP Growth

It noted that GDP growth in 2023 is likely to be supported by strong fundamentals and a diverse economic structure, as well as ongoing policy support to cushion the impact of rising living costs and mitigate downside risks stemming from prolonged geopolitical uncertainties and tightening global financial conditions.

On the GDP growth forecast for 2022, MoF expected a favourable growth momentum in the domestic economy and steady expansion in the external sector, as well as a continued improvement of the labour market conditions.

Previously, in the Budget 2022, the government projected the country’s economy to expand between 5.5% and 6.5% for this year.

The services sector is expected to be the main contributor to 2023 GDP growth and anticipated to grow at 5%, followed by the construction sector (4.7%), manufacturing (3.9%), agriculture (2.3%) and mining (1.1%), according to the MoF’s Economic Outlook 2023 report released recently.

MoF also expects the private sector to remain the key driver of growth, with domestic demand envisaged to further expand by 5.1% in 2023.

“Private sector expenditure is forecast to grow at 5.8% in 2023 with the share of GDP at 76.2%, while public sector expenditure is projected to expand by 2% with the share to GDP at 17%.

“Private consumption is anticipated to grow by 6.3% in 2023, while private investment is projected to grow by 3.7%,” it said. For the external sector, MoF said gross exports are expected to moderate by 2.2% across all sectors in 2023, while gross imports are expected to increase by 0.2% amid global uncertainties.

Meanwhile, MoF also pointed out that the current account balance is expected to record a surplus of RM73 billion or 4.2% of gross national income in 2023, in line with continuous improvement in economic activities.

The ministry forecasts the inflation rate to range between 2.8% and 3.3% in 2023, while the Producer Price Index is expected to moderate on stable global input costs.

Concurring with MoF’s statement, Bank Negara Malaysia governor Tan Sri Nor Shamsiah Mohd Yunus said Malaysia’s economy is no longer in a state of crisis and its economic recovery is well underway, showing strong growth momentum.

She added that the reopening of international borders had continued to lift tourism-related sectors.

“This will have significant spillovers to the rest of the economy given the importance of the services subsectors.

“Also, investment activity and prospects continue to be supported by the realisation of multi-year projects. Similarly, Malaysia’s exports have been recording double-digit growth since the start of 2021 and the orderbooks of our exporters remain healthy.

“These positive developments will continue to provide support for growth in 2023,” she said.

For 2022, the central bank maintains its GDP growth projection at 5.3% to 6.3%.

Nor Shamsiah also projected that the future ahead would be challenging, highly uncertain and unpredictable.

However, she reaffirmed that Malaysia was not in a crisis and that its development trajectory remained favourable.

Not Affected by Global Economic Slowdown

Previously, caretaker Prime Minister Ismail Sabri Yaakob also expressed optimism that the Malaysian economy will not be badly affected compared to other countries although there is a global economic slowdown.

He said his confidence stems from the fact that Malaysia was able to sustain its economic situation after the strong growth shown this year, as well as the positivity shown by foreign direct investment (FDI).

Ismail Sabri noted that for the first half of 2022 (1H22), the FDI registered was RM41.7 billion compared to RM23.3 billion during the Covid-19 pandemic.

He said Malaysia’s economic growth for 2Q22 was the highest in Asean and higher than China, which registered 0.4%, the US (1.6%), South Korea (2.9%), Europe (4%), Singapore (4.4%), Indonesia (5.4%) and the Philippines (7.4%).

He added that a number of indicative economic factors also registered good performance, especially the Purchasing Managers’ Index which exceeded expectations, that is 50.3% and the arrival of tourists which increased to 3.2 million from January to July 2022.

“We believe that although the world economy next year remains uncertain. We are confident that the economic situation in Malaysia will not be affected like other countries.

“Although economic growth is expected to be challenging, it will not be as challenging as situations faced by other countries,” he said.


  • This article first appeared in The Malaysian Reserve weekly print edition
Zukri

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