Malaysia: Navigating a challenging 2020

Lee Heng Guie Speaking at Quarterly Economy Tracker for the First Quarter Ong Soon Hin/The Star Reporter : Ganeshwaran

The Malaysian economy has withstood headwinds to grow by 4.6% in the first nine months of 2019 despite facing many disruptors and uncertainties, particularly a prolonged trade conflicts between the United States and China which had inflicted damage on global economy and trade since 2018.

Nevertheless, growth momentum had moderated from an annual rate of 4.9% in 2Q 2019 to 4.4% in 3Q as domestic demand cooled (to 3.5% in 3Q 2019 from 4.6% in 2Q 2019 and 6.8% in 3Q 2018). Adding to the growth pressure was the continued sluggishness in exports, which had contracted by 1.8% in January-October.

For the full-year of 2019, GDP growth is estimated to increase by 4.6%, which is a shade lower than 4.7% in 2018 but 1.1 percentage lower than 5.7% in 2017.

What’s lies ahead for Malaysia in 2020? Being a small, open and trade-oriented economy (2018: total exports make up 69.3% of total GDP; total trade of 130.2% of total GDP), an uneven state of the global economy and unwarranted volatility in the financial markets do not bode well for Malaysia via trade and financial channels.

The global economy has been dogged by many uncertainties since 2018. Going into 2020, the market and investors will be looking for an inflection point to ascertain whether some stabilisation in global growth is on the horizon, paving the way for a convincing growth recovery.

The inflection points to watch in 2020 are: (i) The signed-off of phase-one partial trade deal between the United States and China should be a positive step to lay the foundation for future negotiations. More importantly, it is hope that more concrete agreements than less will ensue leading to a roll back of other tariffs in stages.

Effective implementation and enforcement are the key. A pause in the escalation would help a slowing US economy bounce back in an election year; (ii) President Trump confronts one dilemma going into the 2020 amid was impeached and will face trial in the US Senate in January; and (iii) Low, zero and minus interest rates have become the new normal.

What if an ultra-dovish monetary stimulus fails to work? The Fed has signalled that policymakers saw no need to boost the economy further anytime soon. Amid the fiscal limitation and high public debt level, fiscal policy has to be reinstated as the main tool for managing business cycles and supporting economic growth had monetary policy reached its limits?

Weighing on cautious global growth estimates of 3.2%-3.3% in 2020 (estimated 3.1% in 2019), the Malaysian economy is expected to grow by 4.5% in 2020.

Domestic demand, especially private consumption will be calling the shots, albeit slower as there remains considerable uncertainty about private investment. Budget 2020’s 4.3% increase in development expenditure to RM56.0bil in 2020 should help to provide partial support to the domestic economy. What matters most is to execute effectively the budget’s programmes and initiatives; and to disburse the funds timely for the implementation of projects.

With highly cautious exports outlook in 2020 (estimated +2.0% growth as against a decline of between 1.0% and 1.5% in 2019) will remain a drag on the domestic economy, household spending should remain the primary driver of Malaysia’s economic growth.

Private consumption is estimated to pace slower to 6.7% in 2020 from estimated 7.2% in 2019, which is normalised towards its long-term growth of 7.0% per annum in 2011-2018. Underpinning private consumption are steady labour market condition (estimated unemployment rate of 3.3%-3.4%) and continued moderate wage growth (5.0%) as well as RM5bil cost of living aid to targeted households and individuals.

One of the biggest challenges facing the Malaysian economy is the fast slowing growth of private investment. The growth rate has been losing steam in recent quarters to 0.9% in the first nine months of 2019 and likely to end the year much lower at 0.8% (4.3% in 2018 and 9.0% in 2017), the slowest pace in nine years after contracting by 7.4% in 2009. For 2020, we expect private investment to remain cautiously weak, growing by 2.2% as investors stay on the sidelines on the broader political development, including the leadership transition isue and policy uncertainties.

Weak growth

Growth in private investment has remained weak primarily due to concerns related to uncertain external environment, challenging domestic business condition, regulatory challenges as well as the lack of policies clarity continue to weigh on investors’ confidence.

It is the domestic private investments that form the bulk of private investment (at least 55% of total), and unless these accelerate, the investment cycle will not see a convincing expansion, hence, exerting downward pressure on the economy.

Further, property overhang in both residential and commercial properties had impacted private investment in these sectors. For several sectors such as telecommunications, pharmaceutical, power, automotive, banking and sharing economy, there have been regulatory changes, including technological and digitalisation disruptions that have impacted or could impact the performance of these sectors.

It is positive that Budget 2020 is making available RM1bil in customised packaged incentives to attract investment from Fortune 500 and global unicorn companies in high technologies, manufacturing, creative and new economic sectors.

Businesses and investors are seeking certainty in the country’s direction, policy and regulations. Reviving investor confidence should be a priority. The economic development policies and benefits of policy interventions aimed at sustaining quality economic growth and reviving investor sentiment need to be clearly spelled out, especially in terms of employment and income generation outcomes.

Inflation expectations up

Inflation expectations will be higher in 2020 as fuelled by a managed floating of fuel prices on a gradual basis which started on Jan 1, a planned upward adjustment in water tariffs nationwide, higher minimum wage as well as higher private medical consultation fees. Headline inflation, as measured by Consumer Price Index (CPI) is estimated to increase by 2.0% in 2020, markedly higher from estimated 0.7% in 2019.

While the economy will get some fiscal spending boost from Budget 2020, but if global growth fails to stabilise or trade conflict uncertainties remain entrenched, monetary policy may need to reinforce and secure growth amid contained inflation expectations.Bank Negara is expected to keep door open to modest monetary easing, probably 25-basis point cut in the overnight policy rate to 2.75% by 1H 2020 if the economy slows materially to say, around 4.0%.

Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.

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