The Malaysian Fiscal Story unflattering

January 1, 2013

The Malaysian Fiscal Story unflattering despite strong economic growth in 2012

M Ariffby Mohamed Ariff, INCEIF

Surprisingly, the Malaysian economy could grow at a creditable pace in 2012, despite dismal export performance associated with the slow expansion of the US economy and recession and stagnation in Europe.

Malaysia’s quarterly growth rates have been fairly impressive: 4.9 per cent, 5.4 per cent and 5.2 per cent respectively in the first three quarters. The economy needs just 4.1 per cent growth in the fourth quarter of 2012 to garner 5.0 per cent growth for the year as a whole.

So all indications are that Malaysia’s GDP growth will slightly exceed the government’s target of 5.0 per cent growth in 2012. The main growth drivers are domestic consumption and investment, both private and public. Construction and services have been the fastest growing sectors in 2012.

It is noteworthy that inflation has become increasingly tame, decelerating from 2.7 per cent in January to 1.3 per cent in October 2012. The inflation rate for the full year in 2012 is projected to settle at 1.7 per cent. The unemployment situation has been somewhat steady, in the region of 3.0–3.3 per cent. The banking sector stayed healthy and well capitalised with a net impaired loans ratio of just 1.4 per cent. The central bank has kept its overnight policy rate at 3.0 per cent in the face of ample liquidity.

Malaysia continues to register a current account surplus in its balance of payments, although the size of its surplus has been diminishing. International reserves at the end of September stood at US$135.6 billion, providing a retained import cover for 9.4 months, which is more than comfortable.

The Malaysian fiscal story, however, is unflattering, as the country has been continuously running budget deficits since 1998. With elections around the corner, government subsidies and cash handouts have been flying in the face of fiscal discipline, with no attempts made to address much-needed tax reforms that would reduce the current over dependence on oil and gas, which accounts for roughly 40 per cent of government revenue. Government revenue has failed to grow in tandem with GDP growth in recent times, with the ratio of revenue to GDP falling from 33 per cent in 2007 to 24 per cent of GDP in 2011 and to an estimated 22 per cent of GDP in 2012.

All this may have an adverse effect on the country’s international credit ratings, and hence the need to rein in sovereign debt. Government debt has ballooned to MYR 502.4 billion (US$164.6 billion) in the third quarter of 2012, breaching the self-imposed debt ceiling of 55 per cent of GDP. The debt ceiling was raised from 40 per cent to 45 per cent of GDP in April 2008 and lifted further to 55 per cent in July 2009. Malaysia’s debt-to-revenue ratio of about 250 per cent is close to Italy’s 260 per cent.

The near-term outlook for the Malaysian economy is very much dependent on the economic performance of its major trading partners. Export market diversification efforts currently underway may help reduce Malaysia’s vulnerability to external impacts but cannot lessen its exposure to the external world. Likewise, a dynamic domestic economy can contribute to greater resilience but cannot be a substitute for the more lucrative external sector, given the relatively small size of the domestic market. GDP growth in 2013 is forecast to be in the region of 5.5 per cent.

Malaysia, an advanced developing country with an impressive development track record, now caught in the throes of the current global economic slide, needs to escape the middle-income trap before it can join the league of developed nations as envisaged in its Vision 2020. Malaysia needs to reinvent itself to accomplish this goal. To this end, the government has taken a number of strategic reform initiatives to enhance the country’s competitiveness and improve its growth potential. While economic imperatives can explain the government’s reform agenda, the rapidly changing political landscape in the country appears to be the main driver of change.

After 55 years of one-party administration by the ruling coalition, Malaysia has arrived at a new crossroads with a strong opposition effectively offering an alternative government to the Malaysians. For the first time in history, the ruling coalition is facing a formidable opposition. All signs suggest that a two-party system is already in place, regardless of the outcome of the forthcoming elections, which remain too close to call.

Malaysia has finally come of age politically after 55 years of independence. The race-based politics of yester year are giving way to an issues-oriented political process that cuts across racial boundaries. Simply put, it is not going to be business as usual any more in Malaysia — which bodes well for the nation’s future. To be sure, pluralism is Malaysia’s strength, not its weakness.

Mohamed Ariff is Emeritus Professor at the Department of Economics and Governance, Global University of Islamic Finance (INCEIF).

5 thoughts on “The Malaysian Fiscal Story unflattering

  1. I used to have a great deal of respect for Prof Ariff. Sadly, that’s no longer the case. He plays fast and loose with the statistics, which really undermines his credibility.

    Revenue to GDP in Malaysia has never exceeded 30%, much less reach 33% in 2007 (actual: 21% in both 2007 and 2011). The debt to GDP ratio would only breach 55% if you use last year’s GDP as the denominator. Using a moving summation of quarterly GDP (which is the correct way to calculate it), the ratio continues to hover just above 52%.

    The debt to revenue ratio is about right, but he conveniently leaves out the fact that the current ratio is about on Malaysia’s long term historical average (the peak was 454% in 1987). And I don’t understand the comparison with Italy – the structure of the economies and the level of government services is so different that the comparison isn’t meaningful, never mind that Italy operates under monetary strictures we are extremely lucky not to have. He also confuses the 55% self imposed debt limit with the statutory debt limit, which only covers a subset of government debt and not total debt.

    All in all, not a good performance.

  2. If you include the off-balance items, Malaysia debt to GDP is close to 67% – which by itself is NOT dire. What is bad is that 40% of the govt revenue is from limited supply of uncertain price commodity..But what is scarier is the fact of the matter is the govt ran up a debt by over 100% over 4 years.

    We can improve our balance sheet by imposing GST and cutting subsidies. BUT for what purpose? If the govt continue the program they have, its just like paying off your errant children’s credit card bills but NOT cutting the credit card itself..The right thing to do is in fact forcing your children to cut their credit cards, get a job to pay off their bills..

    Its why reform MUST come first, not change in our taxation. The last bit of fiscal reserve cannot be given away to a prodigal govt. It must be kept our EVERYONE will be out on the streets eventually.. All Najib govt has done is keep insisting the credit card bill is not bad – when they are asking us to pay the bills first before they go get a job.. If you are bad parent, I can understand that…

  3. @bigjoe99

    Including off-balance sheet items to the total debt level is as misleading as not including them. The correct procedure is to assign default probability values to government (implicit or explicit) guarantees and this expected loss can be attached to total debt to give a true and fair view of the actual situation.

    Second, oil and gas contribute to both income and expenditure (via petrol and electricity subsidies) – changes in prices will be reflected on both sides.

    Third, from the perspective of the debt to GDP ratio, the increase in debt happened in only one year – 2009. Debt growth is currently below Malaysia’s long term average.

    I want to ask what reforms you are referring to? From a first reading, it appears to be cuts in subsidies, but I’m not sure that’s what you mean.

  4. “After 55 years of one-party administration by the ruling coalition, Malaysia has arrived at a new crossroads with a strong opposition effectively offering an alternative government to the Malaysians”

    After some 50 years nobody has been able to come up with an answer to the question, “Why the chicken crosses the road”..

  5. I can only say that Malaysia is such a lucky country,it is no doubt a country blessed by our creator.PKR will take over soon and makes it a real paradise ,God bless,amen

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