Malaysian Economy: 2016 uneventful but 2017 is not rosy either

January 20, 2017

Malaysian Economy: 2016 uneventful but 2017 is not rosy either

By Dr. Shankaran Nambiar

2016 has been rather eventful for the Malaysian economy. The growth rate — the one big indicator of macroeconomic health — has crumbled. From a past average of 5 per cent in real GDP growth, 2016 is likely to see something like 4.2 per cent.

Related imageLike Tun Dr. Mahathir Mohamad in 1997, Najib Razak can now blame the Jews for Malaysia’s Economic Woes, instead of his inept economic management

What is of more concern is that growth in the country is mostly fuelled by domestic demand, which grew by 6.3 per cent in the second quarter of the year — picking up from the 3.6 per cent growth of the first quarter. Domestic demand has its limits given the small size of the domestic economy and the short duration that domestic demand can push growth for.

By contrast, external demand has taken a thrashing in the past months. Growth in net exports shrank by 3.8 per cent in 2015, sank to negative 12.4 per cent in the first quarter of 2016, and remained dismal in the second quarter at negative 7 per cent.

External demand is unlikely to rise again soon. The Japanese economy is not showing signs of any major pick-up. The Chinese economy is heading for a (hopefully gentle) slowdown, and Europe is unlikely to provide export demand for Malaysia due to Brexit and the fear of its potential successors. Malaysia will have to look to the improving US economy for help in spurring its export numbers.

Image result for Najib Razak--Minister of Finance

Asking Money from taxpayers

But there is also a flip side to the strengthening US economy. The Trump administration may roll-up the TPP, hurting Malaysian trade and investment — both crucial variables for Malaysia’s economy at this juncture. What’s more, the Federal Reserve’s decision to hike up interest rates in December 2016 was not in Malaysia’s favour. The hint that there may be at least three more rate hikes to come in 2017 is not welcome news and raises the threat of the ringgit sliding further against the US dollar.

It is not surprising, therefore, that export growth was at 2.7 per cent in the first quarter of 2016 and dropped to 1.4 per cent in the second quarter. Average export growth for the first eight months of this year has been a mere 0.9 per cent (it was 6.3 per cent in 2014). If this trend persists, the trade balance will likely shrink.

Image result for Malaysia's Corruption

Against this rather stark background, the rationale for Malaysia’s 2017 budget becomes understandable. The budget is primarily targeted at increasing domestic demand. Its measures include RM2.6 billion (approximately US$579 million) more financial aid for the 1Malaysia People’s Aid program and various other programs to increase access to housing — particularly for those in the bottom 40 per cent (B40) of income-earners. There are also incentives for public servants as well as RM50 million (approximately US$11 million) to train 20,000 graduates to enhance their employability.

While these efforts will likely increase domestic demand, their appropriateness is questionable. For instance, the intention of extending financial assistance to the B40 runs against the grain of upholding a market-oriented, subsidy-free economy. Once financial aid is provided it will be difficult to withdraw it. As for graduate employability, the problem should be treated as a structural one, rather than ad hoc and directed at only 20,000 graduates. And the policies for improving access to affordable housing are insufficient given the enormity of the problem.

Nevertheless, it is noteworthy that the government is committed to fiscal discipline and also determined to close the fiscal gap. A widening deficit will be detrimental at this point, although if there had been a good record on this score in earlier years it might have been a convenient tool to reach for.

The rapidly slipping value of the ringgit against the US dollar is another flash point. Although most emerging markets have experienced drops in their respective currencies against the dollar, the ringgit has suffered the biggest relative fall in the region. One reason for this is the perceived decline in good governance. Although the Malaysian authorities have cleared 1MDB of any wrong-doing, continued reporting in international media and the US Department of Justice’s interest on the matter may have put off some foreign investors.

In the face of the falling ringgit, Bank Negara Malaysia (BNM) has reminded market players that the ringgit is still not a fully internationalised currency. BNM has requested that non-resident foreign banks don’t engage in non-deliverable forward-related (NDF) transactions. In restricting NDF trade the central bank is only ‘re-enforcing’ existing rules against offshore trading of the ringgit. But foreign traders have been sceptical of the move.

Another measure to curb the falling ringgit has been to impose the requirement that exporters can only retain up to 25 per cent of export proceeds in a foreign currency, while the remainder must be converted into ringgit. Bank Negara Malaysia has stated that exporters are free to convert currency to meet up to six months of loan obligations not denominated in ringgit, stoutly denying claims that these measures are tantamount to capital controls. Nevertheless, they are interventions in the market and disrupt the decision-making process of exporters.

Image result for Quotes from President Kalam on corruption

2017 may not be rosy for the Malaysian economy. Taking a pessimistic view, the growth forecast could slip to the range of 4–4.2 per cent for the next year. We can take solace in the fact that the fuzzy edges of oncoming negative news can be vaguely seen in the distance and it is easy to count on Malaysia’s seasoned and expert policymakers to manage these predictable shocks.

Dr.Shankaran Nambiar is the author of the recently published book Malaysia in Troubled Times. He is also a senior research fellow at the Malaysian Institute of Economic Research. The views expressed in this article are his own.

This article is part of an EAF special feature series on 2016 in review and the year ahead.

3 thoughts on “Malaysian Economy: 2016 uneventful but 2017 is not rosy either

  1. Under Najib, the Malaysian economy has benefited from externalities, money printing and govt spending. In other words, pretty much the same formula for decades. The big stink of TN50 is its a lie, there is no real ” transformation” and Najib merely an overseer of the policies long created.

    If Najib says Mahathir is making bogeyman of China investments, his bogeyman of DAP is even bigger.

    In other words, both Najib and UMNO IS DISPOSABLE. Neither the fear mongering nor their claim of contribution is real. And since they are thieves they should go to jail rather than in public office.

    Put it another way, can someone who messed up badly stealing billions and stubbornly indulge his family in luxuries at public expense know what ” transformation” is?

    Najib do not believe in Hadi’s PAS agenda personally, but to stay in power to cover his mess and for personal indulgence, he is sending us down path he does not believe. Is someone so reckless and irresponsible even have right and head to talk transformation??

  2. Good politics should mean putting some brakes (mandatory restrictions) on race politics. Once this process takes root a new dawn for the country can be expected to begin.

    Some of the parties like, UMNO, MCA and MIC have a long history of service behind them. They had worked hard and laid the foundation for the creation of a newly independent Malaya. Their collaborative effort with like-minded parties forming a larger alliance (BN) led to the formation of present Malaysia.

    Race parties cannot be wished away but they need to be curbed. How best can this be done?

    Give a 7 year period for them to progressively change their one-race membership to include other races to reach a membership figure of 40% . At the end of the 7 year period, proceed to act, which is to de-register them. They would work like busy bees to comply with the requirements for sure. This framework will in some way contribute to a cleaner and fairer politics.

  3. Add to that the number of Chinese Malaysians leaving Malaysia and they are the ones running most of the businesses in Malaysia and it is obvious why the economy is in decline . Then there is the problem of increased crime , especially in the South , and countries around whose economies are not doing so well either .

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