A mammoth task to maintain economic momentum awaits post-GE15

The immediate priority for the incoming govt is to quickly present a new Cabinet line-up and re-table Budget 2023

MALAYSIA’S new administration faces a mammoth task of strengthening recovery, maintaining economic momentum and stabilising the political environment amid external headwinds which include potential global recessionary in 2023 as predicted by market observers.  

SPI Asset Management managing partner Stephen Innes said Malaysia is between a rock and a hard place, and like most other Asia nations, policymakers were waiting for China’s grand reopening, which could be a massive economic boost. 

China has seen its own economy suffer from a strict zero-Covid policy involving tight border controls, snap lockdowns and mandatory quarantines, which appeared to have no end in sight despite mounting public frustrations.

The Malaysian economy, however, has reaped the rewards of higher commodity prices despite global and China economic headwinds.

“So, the government must stress that the Malaysian economy is well positioned as a keen exporter of commodities and patience is needed until the Chinese economy opens up for business. 

“There will be a mainland consumer frenzy which will boost the Malaysian economy,” Innes told Bernama.

Malaysia’s economy grew by 14.2% in the third quarter this year (3Q22), partly driven by the low base effect due to the strict containment measures in 3Q21.

According to Bank Negara Malaysia (BNM), the full-year 2022 growth is expected to exceed the 7% that was projected earlier given the healthy growth in the first nine months of 2022.

However, the central bank said growth is expected to normalise to 4%-5% going into 2023 amid a more challenging external environment.

In October this year, the International Monetary Fund projected Malaysia would grow 4.4% in 2023, lower than its initial forecast of 4.7% in July, on the back of lower global economic growth of 2.7% next year with a probability that the world economic growth would fall below 2%. 

Ringgit, Interest rate

Bank Islam Malaysia Bhd chief economist Firdaos Rosli said Malaysia’s economic fundamentals remained solid and the present foreign exchange movements were primarily dictated by the divergence in monetary policy stance.

“Although the US dollar/ringgit continues to break new ground, the ringgit’s real effective exchange rate is gradually improving since May 2022.

“The local note is performing relatively better than other major currencies such as the Korean won, the euro and the Japanese yen,” he said.

He said Malaysia is blessed with natural resources and elevated commodity prices, giving the country the required fiscal buffer to cushion supply-side pressures through fiscal intervention.

Furthermore, he said Malaysia’s inflation rate might have peaked in 3Q22 and this would alleviate pressure on the government to intervene as aggressively.

“Besides, Malaysia’s real interest rate is much higher than advanced economies, so we should look at the issue in totality and not just from one perspective alone,” he said.

Firdaos said he believed the Overnight Policy Rate (OPR) hikes were meant to gradually remove the degree of monetary accommodation rather than to tame inflation.

He said the interest rate hike was also an indirect measure of defence against capital flight and the fight against inflation was much better off via fiscal rather than monetary means.

On Nov 3 after the last monetary meeting for the year, BNM announced an increase in the OPR by 25 basis points to 2.75%, the fourth consecutive hike since May this year.

MIDF Research said it expected BNM to front-load its monetary bullets by raising the OPR to pre-pandemic levels of three per cent by January 2023.

In a research note last week, the research house said BNM’s announcement to raise the OPR in its final Monetary Policy Meeting of 2022 was in line with market expectations but remained below pre-pandemic levels.

It said moving into 2023, the focus of BNM’s monetary policy setting would be to ensure a sustainable recovery of Malaysia’s economy.

Political Stability?

The 15th General Election (GE15) is touted as the toughest to predict which coalition would helm the government, mainly because over the past four years, Malaysians have had the experience of being ruled by three different coalition governments, all with a wafer-thin majority and whose achievements were seen by the majority of the rakyat as far from satisfactory.

The GE14 in 2018 was probably a major turning point for the country, following a regime change through the ballot box for the first time in the history of Malaysia. 

Innes said the 2018 elections were about public anger and politicians know that Malaysians have long political memories and would need to placate that angst.

“Political stability” has been a political buzzword of late as political parties are hopeful to be given mandates with higher numbers of votes and also in ensuring Malaysia to always be a destination of choice for foreign investors. 

Malaysia’s foreign direct investment expanded by RM24.1 billion to record RM836.2 billion at the end of 2Q22 compared to RM812.1 billion in 1Q22, with the manufacturing sector remained the largest recipient with a value of RM360 billion or 43.1%.

This was followed by financial activities at 22.7% (RM189.8 billion) while wholesale and retail trade chalked up 6.3% (RM53 billion).

Firdaos said the definition of political stability is highly contested as there were many ways to define this.

“If you ask from the perspective of policy debates and the contestation or divergence of ideas, I think it will continue, if not even higher, thanks to the democratisation of the media.

“But if you ask from the perspective of constant politicking by aspiring and disgruntled politicians and the public, I think this will likely persist after GE15 as well,” he said.

He said the country would undergo another round of election season by the latest of 3Q23 as several states must dissolve within the next six months or so, and the outcome of GE15 would profoundly impact the temperature/mood of next year’s state elections.

“We cannot undo the policy and political white noise,” he said, adding that the immediate priority for the incoming government is to quickly present a new Cabinet line-up and re-table Budget 2023, whether in the present form or otherwise. 

“It would be unwise to overhaul the budget due to time constraints. So, I suspect that there will be minor tweaks to it, if any,” he added.

Meanwhile, Institute for Democracy and Economic Affairs research executive (democracy and governance) Halmie Azrie Abdul Halim said he opined that in an event where a coalition has only a slim majority, it still then needed cooperation from other coalitions to form the government.

Currently, all the coalitions are merely aiming to find a formula to reach the “magic number” of 112 seats for a simple majority from the total of 222 parliamentary seats being contested.

Hence, he said in an event where two coalitions have to work together to form the government, they then needed to ensure political stability for the betterment of the country amid all the external headwinds that are in store for 2023 globally and Malaysia.

Caretaker Health Minister and Barisan Nasional candidate for Sungai Buloh Khairy Jamaluddin Abu Bakar said he also opined that coalitions needed to be flexible in forming the next government in case of a hung parliament, a situation where no single political party of the pre-existing coalition has an absolute majority.

“There is a distinct possibility of a hung parliament that no one will cross the line on their own. So, we have to be open to discussion. A post-electoral alliance or coalition seems to be likely,” he said in an interview with a business radio station on Tuesday.

He said not only that everyone has to come and put their numbers on the table but also look at the shared aspiration as well.

“It is not just something that is instrumental. It has also had to be something that we can live with in terms of shared aspirations, values as well as policy platforms.

“Yes, we must be flexible because we have to form a government and stability is important. We have done very well trying to get out of the pandemic, great 3Q figures as far as the GDP growth is concerned. So, we need to continue the momentum as you know, global headwinds next year will be very, very fierce,” he added. — Bernama / pic TMR FILE