The Pakatan Harapan government has just completed its first year in office on May 9, but the “New Malaysia” euphoria has started to fade away, faster than expected.
The deteriorating sentiment is understandable. The Malaysian economy has been slowing down, the benchmark FBM KLCI emerged as the only laggard in Asean year-to-date and the ringgit has continued to weaken since April 2018.
However, despite the bad sentiment, economic pundits think that the government has done fairly well in steering the economy forward over the past 12 months
A recent poll conducted by StarBizWeek among Malaysia’s 10 leading economists rates the Pakatan government’s economic management as “above average”, with an average score of 6.4.
The median score is six.
Among the measures by Pakatan that economists have commended are improved fiscal discipline, stable labour market conditions, stronger approved foreign investments and the renewed push for affordable housing.
Nevertheless, the positive views by the economists do not seem to be reflected on the reality on the ground.
A recent survey by pollster Merdeka Centre found that only 40% of respondents were satisfied with the government’s economic management as of March 11, down from 65% as of July 13, 2018.
However, in comparison, during the Barisan Nasional administration from 2014 up till the 14th General Election (GE14), confidence in the economy had never breached 40% and had hit a low of 14% in August 2015.So, what has really happened over the last one year?
As soon as it took over the national administration, the Pakatan government has embarked on a mission to reduce national debt and introduce institutional reform.
Prime Minister Tun Dr Mahathir Mohamad has voiced his commitment to reduce the federal government debt by RM200bil and to introduce commendable fiscal discipline.
It has also saved a massive RM805.99mil by re-negotiating 121 projects that were offered through direct negotiations and limited tenders previously by the Barisan government.
The cost-savings do not include those from several mega projects such as the Light Rail Transit 3 and the Mass Rapid Transit 2.
Important institutions such as Felda and Muslim pilgrimage fund Tabung Haji that have suffered mismanagement were also given special focus and strategic turnaround plans have been introduced.
According to Alliance Bank chief economist Manokaran Mottain, the government’s move to form the Economic Action Council will respond to economic issues faced by the public.
“This shows that the Pakatan government is already on track in monitoring current economic issues and looking for ways in addressing the issues looking ahead,” he tells StarBizWeek.
The Pakatan government’s reform initiatives have been shrouded by the rising challenges in the domestic economy, which has in turn increased bread-and-butter issues.
The economy grew at a slower pace of 4.7% in 2018, following an exceptionally strong performance of 5.9% in 2017. The lower growth was largely due to one-off factors namely, supply-side shocks and post-election policy uncertainty.
All sectors, apart from services, have seen a slowdown or contraction in 2018 when compared on a year-on-year basis.
However, according to Bank Negara, overall growth has been sustained by resilient private sector spending, amid lower public sector expenditure. As for 2019, the central bank expects the economy to expand within the range of 4.3% to 4.8%.The country’s exports growth in 2018 exceeded expectations despite the US-China trade war and the uncertainties in the global environment. Exports grew by 6.7% year-on-year (y-o-y) in 2018, surpassing the earlier target of 4.4%.
However, in comparison to the year 2017, Malaysia’s exports growth has slowed down significantly from 18.9%.
On the national employment scenario, Affin Hwang Capital Research chief economist Alan Tan commended the government for maintaining healthy labour market conditions despite the challenging business environment.
“Labour market is central to an economy’s success. While the economy has moderated in growth, the government has maintained national unemployment rate at a healthy level supported by good pro-business policies,” Tan tells StarBizWeek.
In 2018, total employment grew by 2.07% or 299,200 jobs, marking a marginal increase from the 2.02% growth in 2017.
A total of 270,000 new jobs were created within eight months after the Pakatan government took over the country’s administration, exceeding the government’s earlier target of 240,000 jobs.
Unemployment rate also improved slightly to 3.3% in 2018, as compared to 3.4% in 2016 and 2017.
However, despite the encouraging labour market conditions, salaries of Malaysian executives and non-executives have grown at a slower pace.
According to the Malaysian Employers Federation’s (MEF) salary survey, the average salary increase for executives in 2018 was lower at 4.88% (5.55% in 2017).
Similarly, it was also lower for the non-executives at 4.88% (5.44% in 2017).However, based on Bank Negara’s figures, wage growth in the manufacturing segment was more favourable in 2018, growing by 10.8% compared with 8.6% in 2017.
“The overall average forecast salary increase for executives in 2019 is 4.86% as compared to 4.88% in 2018, while it was 4.89% in 2019 (4.88% in 2018) for the non-executives,” says MEF president Tan Sri Azman Shah Haron.
In line with its aim to lift purchasing power, the government has raised minimum wage to RM1,100 and standardised it across Peninsular Malaysia as well as Sabah and Sarawak. Pakatan has earlier pledged to increase the minimum wage gradually to RM1,500 by the end of its term.
Meanwhile, business and consumer sentiment, as measured by the Malaysian Institute of Economic Research (MIER), have been declining.Currently, both MIER’s Business Conditions Index and Consumer Sentiment Index have slid below the optimism threshold, on the back of macroeconomic headwinds.
As a result of the weakening sentiment, private investment growth slowed to 4.5% in 2018 from 9.3% in 2017.
In view of the declining sentiment, the Pakatan government has been trying to boost the domestic business activities, particularly among the small and medium enterprises (SMEs), which represent 98.5% of total businesses in Malaysia.
Under Budget 2019, the government has reduced the corporate tax rate to 17% from 18% for SMEs with paid capital below RM2.5mil and businesses with annual taxable income below RM500,000.
According to the Institute for Democracy and Economic Affairs (Ideas) chief executive officer Ali Salman, the Pakatan government has allocated RM18bil for SME development under Budget 2019.
“This will be helpful in increasing the productivity of many micro, small and medium enterprises, which constitute 65% of the Malaysian labour force.
“They also announced abolishing the monopoly of Padiberas Nasional Bhd, which will be eventually helpful for improving the economic welfare,” says Ali.
Last October, the government launched the Industry4wrd policy in order to push greater automation and adoption of artificial intelligence among Malaysian business.
This is aimed to prepare Malaysian businesses in order to meet Industry 4.0 challenges.
The Industry Digitalisation Transformation Fund has been introduced to offer RM3bil worth of loans with an interest subsidy of 2%, which could be used by companies to digitalise and automate their operations.
The government is also trying to increase access to financing for the small and medium enterprises (SMEs).
A new financing guarantee scheme worth RM2bil has been introduced, which will see up to 70% of SME borrowings being guaranteed by the Syarikat Jaminan Pembiayaan Perniagaan Bhd.
As of April 30, the government has also repaid about RM17.1bil of refunds for the goods and services tax (RM9.5bil) and income tax (RM7.6bil), which were unpaid arrears under the Barisan regime.
By returning the cash back into the economy, economists believe it will spur business activities.
Ali also points out that the country’s foreign direct investment (FDI) have continued to remain strong, despite the global economic slowdown.The country achieved a record-breaking approved FDI of RM80.5bil in 2018 as it increased by 48% y-o-y, even as global FDI figures dipped to the lowest levels in a decade.In addition, a total of 81 high-tech FDI projects valued above RM100mil have been approved in 2018.
However, it is worth noting that the country’s domestic direct investment (DDI) continued to fall for the fourth consecutive year in 2018, across the manufacturing, services and primary sectors.
Approved DDI, which represented 60.1% of Malaysia’s overall investments last year, fell 17.1% y-o-y to RM121.2bil.
The ringgit has weakened by 5.3% over the last one year and has emerged among one of the major losers in the region.
One major factor is the elevated selling by foreign investors as they exit the local capital market, on the back of increasing uncertainties.
From May 1, 2018 to April 30, 2019, the country has recorded a net foreign fund outflow of RM18.2bil.
The FBM KLCI has fallen 12.2% since GE14 due to concerns over earnings risks as well as external risks, and has also underperformed key regional indices.
“The market needs better catalysts and it will depend on the government’s ability to create more excitement. For now, suffice to say the excitement is not enough,” says an equity analyst.
Addressing cost of living
According to Socio-Economic Research Centre executive director Lee Heng Guie, the government has undertaken a slew of measures to ease Malaysians’ cost of living issue.
They include the reduction of fixed broadband prices by at least 25% by end-2018, the introduction of RM100 monthly pass for unlimited rides of public transport network Rapid KL, a 20% cut in KTM commuter fare starting Apr 1 and the reform of the cost of living aid or Bantuan Sara Hidup to a more targeted based on income and needs approach.
The National Cost of Living Action Council has also been reactivated and is tasked to look into food, housing, utility bills, transportation, health and education.
“In our view, the government’s approach to help relieve the rising cost of living on low- and middle-income households must be two-pronged: income-based and cost-based. The income-based approach includes redistributive programmes and policies to raise the incomes of the vulnerable group directly through cash transfers, tax breaks, and minimum wage or to raise the poor’s disposable income through programs such as medical healthcare insurance.
“On the cost-based approach, reforming existing industrial policies and regulations that raise the prices of basic goods and services and thereby hurt the low income through higher living costs,” says Lee.The government has also increased its emphasis on the national affordable housing agenda, amid the property glut and rising demand for affordable properties.
In order to encourage home ownership, the government has launched the Home Ownership Campaign from Jan 1 to June 30.
During this period, buyers will receive a minimum 10% discount from developers as well as stamp duty waivers.
However, despite these measures, cost of living continues to be high, while many Malaysians continue to find it hard to purchase homes at affordable prices.
Sunway University Business School economics professor Yeah Kim Leng says that cost of living has not seen much change, despite the removal of the goods and services tax.He adds that food prices have remained high, worsened further by the weakening ringgit.
AmBank Research chief economist Anthony Dass says the Pakatan government would need about two years to sort the business and living cost conundrum, given the ongoing headwinds both domestically and externally.
Economist Tan Sri Ramon Navaratnam urges the government to ease the affirmative action policies and to allow all the races to compete based on meritocracy.
Meanwhile, Bank Islam chief economist Mohd Afzanizam Abdul Rashid says the government must provide more clarity in terms of policy direction.