Last year was somewhat of a challenging one for the Malaysian economy. Political disruptions and economic shocks rocked the nation.
Prime Minister Najib Razak has been strenuously committed to undertaking fiscal reform. He has repeatedly stressed the importance of reducing fiscal deficits.
Mr Razak intends to reduce annual deficits from an estimated 3.2 per cent of GDP in 2015 to a surplus of 0.6 per cent of Malaysia GDP by 2020. Despite difficult circumstances, the government has taken action to achieve a balanced budget by 2020.
Malaysia Goods And Services Tax (GST)
Towards this end, a goods and services (GST)tax of six per cent was introduced on April 1, 2015 amid considerable public dissatisfaction. The private sector, for its part, complained that there was insufficient time to understand the process and be adequately prepared.
The introduction of this tax could not have been better timed. It has helped raise revenues and has saved the government from an otherwise difficult position due to the massive decline in oil prices. Oil remains a crucial source of revenue in Malaysia, contributing almost 30 per cent of government revenue.
The leaner government coffers have sped up the fiscal reform process. There has been a steady roll back of subsidies in recent times, starting with the rise in the electricity tariff in January 2014 and followed by the withdrawal of subsidies for petrol in October 2014. There were also toll hikes on highways in October 2015, with the increase being as high as 100 per cent in many cases.
Undoubtedly there is little place for subsidies in the Malaysian economy. But the timing of these reforms has been inappropriate for the average citizen as the economy is swinging down.
Then again, from the government’s point of view there is little policy space to play around with or time to waste. The government has seen no choice, but to carry out tough economic management — it must be executed now or Malaysia runs the risk of being downgraded by rating agencies.
The sharp downturn in oil prices has disrupted the government’s plans. The weak global economy and the prospect of further interest rate hikes in the US have added to concerns, all of which prompted capital outflows. It is unsurprising that the Malaysian ringgit has taken a dive against the US dollar given these circumstances.
Prime Minister Razak has also had to defend himself against claims that 2.6 billion Malaysian ringgit (about US$625 million*) has been wrongfully transferred to his personal account.
The blow-up of the alleged mismanagement of 1Malaysia Development Berhad (1MDB), a government-linked company that is chaired by the prime minister, added greater uncertainty to the Malaysian economy.
It led to political turmoil within the ruling party, as well as the sacking of the deputy prime minister, a minister and the attorney general. Investor perceptions, quite naturally, took a tumble. This did not add to the strength of the ringgit.
The outlook for 2016 does not look too rosy. The price of oil remains a concern. It has settled below US$30 per barrel. Who knows how far it will fall.
The outlook for the global economy is not bright either. If the US economy does prove to be the one bright star globally,it will only bring darkness to the Malaysian economy – a US economic recovery is likely to be followed by further interest rate hikes in the United States.
China, Malaysia’s top trade partner, is almost surely going to disappoint Malaysia with its growth figures. There are estimates that the Chinese economy may grow at about 6.2 per cent this year, much lower than recent trends.
On top of this, prevalent global risks do not favour the Malaysian economy. The Middle East has more than its share of problems. And global terrorism has taken a sharper form, raising the possibility of an attack within Malaysia.
The Defence Minister Hishammuddin Hussein has confirmed that Malaysian leaders, himself included, are possible targets of the so-called Islamic State (IS).
The domestic political environment is unsettled. Fortunately for Mr Razak the opposition is in disarray. But opposition from within his own party is not likely to desist.
Former prime minister, Mahathir Mohamad, is in no mood to ease up on his attacks. He has discovered the merits of dissent and democracy, and is voicing his firm stance against corruption and the lack of transparency.
Cost of living Up, Affordable Housing Down
Against this background one cannot expect external demand to generate growth. And there are limits to domestically generated demand.
With the government being cash-strapped, the fiscal reform process will pick up speed. In the face of depleting government revenues caused by sinking oil prices, there may be no choice but to raise taxes and reduce subsidies.
The populace has little time to adjust to price increases and rising costs of living may not be fully captured by official consumer price index figures. Such policy changes cannot be more poorly timed, but Malaysia is running out of options.
The cost of living will go up further. And affordable housing will recede further from sight, at least for now.
A country that once experienced consecutive years of high growth will have to be content with more moderate rates. In 2000 Malaysia’s growth rate was 8.9 per cent. In 2016 it is more likely to be around 4.5 per cent (See: Thailand Weakest Asean Economy in 2016 – World Bank).
Despite this, Prime Minister Razak is valiantly soldiering ahead. Hopefully, if nothing else, that will help inject confidence in the Malaysian economy.
This Article was written by Shankaran Nambiar, Malaysian Institute of Economic Research (MIER). This article first appeared on East Asia Forum under a Creative Commons license and is reproduced here with its permission.
- Malaysia: Economy (Asian Development Bank)
- World Bank cuts next year’s growth aim to 4.5% (Nikkei Asian Review)
- MALAYSIA: Expect more economic turbulence in 2016 (Malaysia Chronicle)
*At current exchange rates
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