KUALA LUMPUR: Malaysia’s economy went through a roller coaster ride in 2018 as adverse impact from looming challenges were increasingly felt, but thanks to its domestic dynamism, continuity in growth remained, albeit, at a moderate pace.
The country’s economic growth which was earlier forecast to expand between 5.5 and 6.0 per cent, will likely record a growth below 5.0 per cent in 2018 as mounting challenges mainly external, sought to restrain its ascend.
In fact, Bank Negara Malaysia revised the growth target thrice this year, that is, between 5.5 per cent and 6.0 per cent, to 5.0 per cent as announced in the second quarter and to 4.8 per cent when announcing the third quarter growth data in November.
With perseverance, steadfastness and consistencies, investors and fund managers will reward the Malaysian capital market. — Dr Mohd Afzanizam Abdul Rashid, chief economist, Bank Islam Malaysia Bhd
For the record, Malaysia’s quarterly Gross Domestic Product (GDP) growth grew at a resilient pace of 5.4 per cent, 4.5 per cent and 4.4 per cent, respectively, in the first three quarters. For the whole of 2017, the economy expanded 5.9 per cent.
With the accumulative nine-month growth of 4.7 per cent, the country remained among the fastest growing economy in South East Asia amid continued concerns arising from top regular headlines including policy uncertainties after the changes in domestic politics, mounting national debt, the unending United States (US)-China trade war, US interest rates hikes and the Brexit issue.
Looking at all the challenging headlines, the seven-month old Pakatan Harapan government under Prime Minister Tun Dr Mahathir Mohamad, has a arduous task of steering the economy by ensuring domestic spending continued and at the same time, meet fiscal targets, amid a revenue shortfall.
Going into 2019, the new government will manoeuvre the economy, expecting slow growth against a backdrop of high government debt, weak ringgit and sluggish commodity prices especially for palm oil and crude oil, amid the challenging global scenario.
Having said this, most analysts believe the Pakatan Harapan-led (PH) government has made good progress in its economic reform after the surprise 14th General Election power transition, citing the 11th Malaysia Plan (RMK-11) and the 2019 Budget announcement as having shed some light on the new government’s economic direction.
Along with that, the comeback of 93-year old Tun Dr Mahathir Mohamad to helm the country as the seventh Prime Minister also sketched a positive imprint on the economy, as seen in the level of confidence prevailing among the business sector in the new leadership.
Without doubt, he received full support on the ground as he announced sweeping measures to clean up corruption in the country, restore the people’s trust in the government and boost investor and business confidence in Malaysia.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said volatility in financial markets and foreign fund flows following uncertainties with respect to economic policies, has eased to some degree when the 2019 Budget was announced.
Hence, the government’s institutional reform will be the key aspect for the PH government to ensure the economy is able to thrive.
“With perseverance, steadfastness and consistencies, investors and fund managers will reward the Malaysian capital market,” he told Bernama.
As transformation progressed, he said the country would need to brace for more impact arising from possible changes made by the new government, be it policies, revision of mega projects or another scandal revelation.
“So it is kind of the government and the government-related machinery, undergoing a therapy. While it may affect sentiment, clarity in information flow is very critical to steer market confidence. Its an ongoing process,” he said.
Despite these progress, there is also market moving factors such as oil price, global demand, investor sentiment and the current economic cycle that can dent growth as they are beyond the government’s control.
Dr Mohd Afzanizam said there was always the risk as these factors were unpreventable and could affect the trajectory of fiscal deficits as such contingency plans were very critical.
The government, in the 2019 Budget, revised the fiscal deficit target to 3.7 per cent this year, 3.4 per cent in 2019, 3.0 per cent in 2020 and 2.8 per cent in 2021, a move to narrow the government revenue base and reduce its fiscal flexibility.
“In this regard, the utilisation of Petronas’ coffers in the 2019 Budget really set the tone on how the government could achieve its spending plans and deficit targets.
“The announcement of digital tax, slated to be implemented in 2020, is also critical as the Information, Communication and Technology (ICT) sector has made significant contribution to the economy,” he explained.
In 2017, the ICT contribution to GDP amounted to RM247 billion and the figure is expected to grow further in view of the proliferation of digital economy among Malaysians.
Therefore, execution is key in order to ensure the government will have the right window of opportunity to earn more as greater dependence on oil-related revenue can be credit negative in the eyes of the credit rating agencies.
Another positive note is that Malaysia is not a twin-deficit country, hence, the market will be kinder.
“In that sense, the depreciation of the ringgit would not be so severe.In our view, the possibility of a yield curve inversion in US Treasury bonds, warrants close attention as the inverted yield will normally precede as evident in the previous United States recession.
“As the old saying goes: “When the US sneezes, the rest of the world will catch a cold,” he said, adding that this adage about American power is still true.
Therefore, being small and an open economy, Malaysia will always be vulnerable to external shocks.
Overall, the bank is projecting that the GDP growth for 2019 will hover around 4.5 per cent from an estimated growth of 4.8 per cent in 2018.
He also believed that the bias for overnight policy rate, currently at 3.25 per cent, is on the downside but Bank Negara Malaysia is in no hurry to cut the rates in view of external volatility in fund flows.
He said the expected increase in the US Federal Fund Rate could also be one of the considerations aside from the expected increase in domestic inflation following the implementation of the automatic price mechanism for retail fuel prices in the second quarter of 2019. –Bernama
