PETALING JAYA: Malaysians will not be harbouring any illusions about 2016 as factors that had impacted the economy this year will continue to plague it in the upcoming year.
Top on the list would be the high cost of living and the impact from the goods and services tax (GST), which was implemented from April.
Independent economist Lee Heng Guie said consumers and businesses were still struggling to adjust to the GST. “The Government will need to address the pace of the subsidy rationalisation. Any more rationalisation should be staggered,” he told StarBiz.
The feeling that costs continue to escalate, not just for consumers but also businesses, has not been helped by the newsflow. Besides the GST, Malaysian consumers and businesses have had to contend with the hike in public transportation fares, natural gas tariff hike for commercial and industrial users as well as higher toll rates for certain major highways in and around the Klang Valley. The drastic rise in cigarette taxes from Nov 4 was felt by smokers and showed up in the November consumer price index (CPI).
Starting from January, heavier users of electricity would have to pay more, as rebates would be cut while the Government continues to mull over a hike in the toll rates of Plus Malaysia Bhd-owned highways. The toll-rate hike would have a wider impact as it would hit people staying outside the Klang Valley.
Both Lee and Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid believe that consumer spending would continue to moderate in the coming months. The lower consumer spending would have a direct impact on the overall economy, since private-sector consumption makes up just over half of the economy last year.
From a peak in the first quarter, private consumption has been steadily falling in tandem with consumer sentiment, with the latest Malaysian Institute of Economic Research index tracking consumer confidence falling to lows seen during the global financial crisis of 2008/2009.
During the crisis then, the economy contracted 1.7% in 2009 before expanding the following year due to a RM60bil stimulus. Next year, while the economy would not contract, it certainly is slowing down. Bank Negara expects the economy to grow by 4.5% to 5.5% next year after growing an estimated 4% to 5% this year.
Afzanizam said consumers were likely to adjust their spending and become more cost-conscious. “Such reaction will have direct implication to actual spending and hence, the overall economy,” he said. Bank Islam sees the economy growing by 4.3% next year compared to an estimated 5% this year. For the first 11 months of the year, inflation has risen by 2% on-year.
Lee said the first-half of 2016 would be especially challenging given that households would be facing new rounds of cost pressures. He expects the official CPI to average between 3% and 3.5%.
“I expect the CPI to hit 4.5% in the first-quarter,” Lee said. He estimates the economy to grow 4% to 4.5%.
Another important factor to figure in the performance of the Malaysian economy would be commodity prices. For Malaysia, crude oil, liquefied natural gas (LNG) and crude palm oil prices would have an impact not just on economic performance but also corporate earnings, the ringgit and the federal budget.
Brent, the global benchmark, have been trading below US$40 a barrel in recent weeks. This would eventually have an impact on LNG prices when contracts are negotiated.
“The oil price will continue to add pressure on the federal deficit target,” Lee pointed out. The Government’s initial deficit target for 2015, based on US$100 oil price, was 3%. This was revised to US$55 and a deficit target of 3.2%. There have been speculation of another revised budget given the drop in crude oil prices. The deficit target for the coming year is 3.1% on oil price of US$48.
“The revision of Budget 2016, if it happens, should not be viewed negatively. And it does make sense to allow some adjustment especially when the prevailing oil prices continue to hover below the assumption made when the budget was tabled in last October.
“The important issue is the level of compromise that the Government is willing to make especially in relation to the deficit target,” Afzanizam said.
He said the Government would have to support the economy by raising public-sector expenditure as businesses would be less willing to invest and consumers to spend during difficult times. Lee said the Government would cut down on operating expenditure (as it did in the Budget 2015 revision) but at least maintain the development expenditure.
The ringgit’s plight would be another factor to watch out for. News reports frequently make reference that it is the worst-performing currency in Asia. Year-to-date, the US dollar has strengthened 22.7% against the ringgit. A combination of weak commodity prices and further US interest-rate hikes would put pressure on the ringgit.
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said in a report that downward pressure would likely remain at least in the first-half of next year. He cites other factors capping the near-term upside of the ringgit being limited prospects for an interest-rate hike (a reflection of weak economic conditions), portfolio capital outflows (in view of tightening policy by other central banks) and a weaker yuan.
However, Nor Zahidi noted that the greenback could weaken, citing the 2004 to 2006 US rate hike in which the market had more or less priced-in the rate hikes and/or a stabilisation of oil prices could help support the ringgit.