MALAYSIA, like the rest of the world, is heading into a period of economic normalisation.
The economy is getting back on its feet again after two years of massive fiscal and monetary policy support.
Jobless numbers have been dropping and domestic consumption has been recovering.
However, with lingering challenges including the risk of recession and stagflation in advanced economies, it will not be a cakewalk for the Malaysian economy to return to pre-pandemic levels.
After all, many businesses and households are yet to fully recover from the effects of the Covid-19-induced crisis.
Businesses are still grappling with lower-than-desired capacity, labour shortages, surging costs and supply chain disruptions.
The new minimum wage of RM1,500 has further added pressure on cash flow.
Meanwhile, households are still careful about spending, especially on big-ticket items, after many drained out their savings in the last two years.
For a country like Malaysia, where almost 60% of its economy depends on private consumption, a weak domestic demand could delay the recovery.
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Moving forward, the government can no longer pump-prime the economy with cash injections, given its limited fiscal space.
The central bank, on the other hand, has begun scaling back its cheap money strategy amid the threat of rising inflation.
Recently, Bank Negara surprised the market by hiking the overnight policy rate (OPR) by 25 basis points to 2%, up from the record-low level of 1.75%.
The central bank is unlikely to stop tightening its monetary policy, and economists generally anticipate additional rounds of rate hike this year and in 2023.
As Bank Negara raises back its OPR to the pre-pandemic rate, households should brace for increased monthly loan instalments.
Businesses and investors may also need to rethink their expansion plans as cost of borrowings increase.
For now, the interest rate remains well-below the 3% level seen before Covid-19 hit.
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On May 11, Bank Negara said it has begun reducing “the degree of monetary accommodation” with the domestic economy on a firmer footing.
“This will be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability,” it said.
Two days later, Bank Negara announced that the Malaysian economy expanded 5% year-on-year (y-o-y) in the first quarter of 2022 (1Q22).
The improved performance compares to a 0.5% contraction in the gross domestic product (GDP) in the same quarter in 2021 and a growth of 3.6% in the immediate preceding quarter (4Q21).
On a quarter-on-quarter basis, the economy grew 3.9% in 1Q22.
While the GDP in the January-March 2022 period surpassed expectations, Centre for Market Education’s (SME) Carmelo Ferlito says there is no reason to rejoice.
He notes that Malaysia’s private consumption and public consumption grew by 4.4% and 6.7% respectively in 1Q22.
On the other hand, private investments grew by a thin 0.4% and public investments declined by 0.9%.
“This means that the growth is still pulled by expenditures for today, without setting foot into a programme for the future.
“This kind of growth is very fragile and it seems that investors remain in a ‘wait-and-see’ mood. Furthermore, this growth model is by nature inflationary,” he tells StarBizWeek.
Meanwhile, Socio Economic Research Centre Malaysia (SERC) executive director Lee Heng Guie says that Malaysia needs more growth catalysts in the coming quarters.
He points out that many major festivals have already passed and the positive spending effect from the RM40bil Employees Provident Fund or EPF withdrawals is likely to ease off by June.
“This would slow down private consumption, amid rising price pressures,” according to him.
It is noteworthy that the headwinds affecting Malaysia’s recovery, especially on the external front, have intensified over the past several months.
The Russia-Ukraine war, while it has benefited Malaysia in terms of higher commodity prices, has worsened supply chain disruptions and contributed to higher price pressures.
In addition, the monetary tightening, especially in the United States to contain high inflation, could spell trouble for the local economy, states Sunway University economics professor Yeah Kim Leng.
He says that the hike in the US’ interest rate may precipitate a hard landing in the world’s largest economy, which is also Malaysia’s third largest export market.
China’s slowing economy due to lockdowns to contain regional outbreaks is also another major risk to Malaysia’s exports.
Looking ahead, Yeah expects a more challenging external environment for the country.
“However, the favourable factors supporting Malaysia’s growth momentum include the transition to endemicity at the start of the quarter and the positive terms of trade shock to the economy due to high commodity prices.
“Consequently, the strengthening domestic consumption which contributes nearly 60% of GDP, could partially offset a decline in net exports,” he says.
So far this year, Malaysia’s trade performance has been strong, in tandem with the recovery in global demand.
In March 2022, the export and import values once again broke the record for all-time highs at RM131.6bil and RM104.9bil, respectively.
The country’s trade surplus widened by 10.3% y-o-y to RM26.7bil, marking the 23rd consecutive month of trade surplus since May 2020.
Economist Manokaran Mottain opines that if the country’s exports perform stronger than expected in the coming months, it would provide a significant boost to the economy.
He expects the economic growth momentum to pick up in the second half of 2022.
“The recovery in tourism activities and the higher minimum wage will support private consumption.
“But rising price pressures would partially negate the boost from private consumption,” he cautions.
Robust policies needed
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid says that Malaysia’s economic and business landscape will continue to face multiple challenges from abroad and domestically.
“Some are within our control and some aren’t.
“Therefore, it is important to ensure that the economic policies are robust enough to withstand these challenges,” he says.
Mohd Afzanizam, who thinks that the recent OPR hike is justified, says it is important that monetary policy is calibrated in a way that can facilitate economic activities in a more sustainable way.
“By normalising the OPR, it will certainly add more buffer for Bank Negara to respond to future negative shocks.
“We believe it might want to increase another 25 basis points as the growth trajectory is likely to be more sustainable,” he adds.
Manokaran also thinks that another round of a 25-basis-point hike in the OPR would be possible this year.
Amid the economy’s recovery, he says that households will remain cautious about spending, while businesses will be more careful in their capital expenditures due to cost concerns.
Professor Geoffrey Williams of Malaysia University of Science and Technology or MUST, who has been against raising the OPR, says that expansionary credit conditions are necessary to support growth.
Another area of focus should be price stability, he says.
“The government has managed the containment of inflation well up to now, through the control of petrol and other prices, but it was an error to allow the hike of the electric tariffs for the non-residential users in March.
“This is adding perhaps 0.5% to the outlook of inflation in a very critical phase.
“This hike should be reverted to guarantee a low level of inflation, necessary to support the purchasing power of salaries.
“This is possible by redistributing the gains and costs of the increase in oil and gas that the different government-linked companies are experiencing and avoid penalising firms and households,” he adds.
Yeah of Sunway University highlights that Malaysia needs a multi-pronged strategy to face the huge economic weaknesses emanating from abroad and from domestic factors.
“Enhancing productivity at all levels and reducing wastage and inefficiencies are key imperatives to offset the external headwinds.
“To expand domestic demand, the private sector and the government will need to increase spending on consumption and preferably with a greater focus on investment activities.
“Besides infrastructure and human capital upgrading, investment in digitalisation and green growth opportunities could be promoted aggressively,” he says.
Yeah also mentions the importance of high-quality foreign direct investment to put Malaysia in a better position to deal with macroeconomic challenges.
He urges the government to further enhance trade and investment facilitation, including customised incentives and support to address specific requirements of high-value investors.
“Reducing the regulatory and administrative burden would be welcome by existing and new investors, as these will enhance the country’s overall cost competitiveness and economic efficiency,” he says.
Echoing a similar stance, CME’s Ferlito says that it is important to “relaunch private investments” in order to put Malaysia’s recovery on solid ground.
Another policy agenda that is required, according to him, is restoring the national savings capacity by tackling household debt.
“Long-term sustainable growth is based on investments financed by the existence of real savings, and savings are the counterpart of consumption.
“Therefore, the combination for long-term sustainable growth is made of investments and savings, rather than investments and consumption.
“In other words, in order to generate sustainable growth, an increased demand for loanable funds to be destined to investments need to be preceded by an increased thriftiness among consumers,” he says.