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There are many worrying signs
Murray Hunt
With the World Bank’s latest forecast warning that growth in most economies will slow significantly in 2024 and 2025, Malaysia must be very cautious as the local economy is directly affected by global events.
As of Q1 2024, there are many warning signs for Malaysia, which are reflected in the country’s official national accounts data. Although GDP grew by 4.2% in Q1 2024, one of the main contributors to this figure was a 7.3% increase in public sector consumption. Private consumption grew by 4.7% and has remained at this stable level since Q2 2023. This is confirmed by the sharp decline in imports since Q1 2023. It is unclear whether the 8% increase in imports in Q1 will continue into 2024. This will be an important indicator.
Demand for services grew by 4.7% in the first quarter of 2024. However, manufacturing has been mired in the doldrums, with little growth over the past nine months, and exports have been falling until the first quarter of 2024.
Malaysia’s FDI in the fourth quarter of 2023 was RM926.3 billion, a modest increase compared to RM914.9 billion in the same period of 2022. Therefore, it remains to be seen whether the government’s aggressive investment program is as effective as claimed. This must also be considered in light of the capital outflow of RM662.8 billion in the fourth quarter of 2023.
Government spending largely drives GDP growth.
Global supply chains will continue to face threats this year, with rising oil prices further increasing transportation costs and pushing up food prices, i.e. supply-side inflation. The ongoing war between Russia and Ukraine, which threatens to expand, a slowing Chinese economy, Europe on the verge of recession and a slowing U.S. economy all dim the outlook for trade and investment in Malaysia.
In a downturn like this, foreign investment could be dampened. In the worst-case scenario, projects like the East Coast Rail Link and Forest City could stall altogether.
Malaysia’s public debt has risen to RM1.2 trillion. The public debt grew by 8.6% in 2023. This figure could increase significantly if the current government continues to run budget deficits. Malaysia cannot continue to run high deficits during the Covid-19 pandemic. The 2024 budget has allocated RM49.8 billion, or 12.6% of total budget expenditure, just to pay interest on the existing debt. The current government must start paying off this inherited debt.
The current high debt level will make it more difficult for the government to improve health care and reform education, both of which are in a state of crisis. The current debt level may also constrain the government’s structural and infrastructure reforms. It will also be more difficult to reduce the overall level of poverty due to budget constraints.
International instability will affect food security as Malaysia still imports 55% of its food needs. The impact of the weaker ringgit on inflation, especially for food, is yet to be fully felt, not to mention potential supply chain constraints.
Bank Negara Malaysia (BNM) has been optimistic that the value of the ringgit is not indicative of Malaysia’s strong fundamentals. Hopefully, this is just a public statement and BNM says something different in its confidential briefing to the Ministry of Finance. If not, then there could be a serious miscalculation.
The rest of this article looks at some of the measures the government might be forced to consider if current forecasts are found to be overly optimistic.
Monetary Policy
Bank Negara Malaysia’s main monetary policy tool is the Overnight Policy Rate (OPR), which directly affects interest rates. Bank Negara must seriously consider cutting interest rates to ease the current financial stress on borrowers and mortgage holders. This will directly affect the financial well-being of many households.
Bank Negara must step in and support the Ringgit. This can be done by promoting the Ringgit, buying the Ringgit. Malaysia’s foreign exchange reserves are relatively low compared to other countries in the region, so Malaysia can significantly increase its gold reserves by increasing local mining and buying gold bars.
Fiscal policy
The budget deficit this year could be between RM91 billion and RM100 billion, depending on tax revenues. Expenditure cuts must be made to prevent the deficit from ballooning, especially if tax revenues fall short of the targets set in the previous year’s budget. The RM90 billion development spending plan could be deferred to better times in the future.
Other areas that must be considered in the medium term are progressive and comprehensive tax reforms to provide fair treatment to the B60 group in society. Malaysia should not become a tax haven for the super-rich.
poor
Many households are still suffering from the impact of the movement control order during the COVID-19 pandemic. If a recession hits Malaysia, it will be devastating. The government can look into how to give cash directly to the B40 group instead of through subsidies.
Employment
Any revival in the manufacturing sector will not benefit Malaysians. The manufacturing sector employs mostly foreign workers. This is where financially challenged Malaysians reside and are in the informal sector. The government must take major initiatives to empower the informal sector by promoting small SMEs. There should be a shift from formal university education to TVET so that marginalized groups can learn a craft and increase their income.
Identity Economics
The focus on the Bumiputera sector, especially big companies and businesses, during the COVID-19 pandemic did not trickle down to the people. There is no reason why similar pro-Bumiputera policies would be different if Malaysia were to fall into a recession. Projects with funding holes only add to public debt. Previous Bumiputera-centric policies were ineffective in providing real benefits to marginalized Bumiputeras. This is why poverty rates have risen nationwide after the COVID-19 pandemic.
productivity
The economy must be deregulated to improve efficiency and productivity. Monopolies must be broken to increase competition and reduce prices. More competition will increase efficiency and force businesses to be more productive. The key to increasing productivity is to increase the value of products. Malaysia must consider nurturing SMEs by building soft and hard infrastructure to create an entrepreneurial economy with an innovative spirit.
Public sector spending
The public sector operating costs in Budget 2024 are RM95.6 billion, accounting for 24.3% of total budget expenditure. A 13% increase in civil servant salaries in December will increase the cost of operating the public service by another RM10 billion.
The efficiency of the civil service must be greatly improved, with a freeze on new recruitment and early retirements offered to reduce staff numbers. Outdated departments and agencies should be closed. Duplication of activities must be stopped.
Each department must prepare its budget using Zero-Based Budgeting (ZBB) and Program-Based Budgeting (PBB) to determine the optimal budget for the civil service.
This will be a major initiative to boost Malaysia’s productivity.
food safety
Malaysia’s food imports are valued at RM71.6 billion in 2023. The way agriculture is organised in Malaysia needs to be radically changed, with a focus on developing smallholder farmers. These groups across the country must be trained and helped to start growing vegetables and daily staples, radically changing the supply chain so that farmers can sell directly to consumers.
corruption
Corruption is a major source of government funds being lost. According to MACC chairman Azam Baki, RM277 billion of public funds have been lost to corruption in the past five years. This is about 30% of government expenditure, directly adding to the budget deficit. The Malaysian Anti-Corruption Commission (MACC) must completely change its strategy of investigating historical cases from the 1990s to investigating ongoing corruption cases in today’s civil service. This will act as a greater deterrent to future corruption.
The biggest risk is that the advisers at the Ministry of Finance believe the optimistic forecasts and become complacent as a result. An emergency supplementary budget should be prepared and submitted to Parliament, with actions to prepare for economic indicators that do not meet the optimistic forecasts. Doing so would also signal to the world that Malaysia is serious about economic management. This might be enough to prevent the ringgit from free-falling further.
Any impending economic downturn would likely force the government to take reform measures.
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