In pursuit of growth drivers


Bank Muamalat Malaysia Bhd Chief Economists and Social Finance Mohd Afzanizam Abdul Rashid

PETALING JAYA: Economists are calling for the government to take heed of the recent World Bank’s warning of a long global slowdown to ensure economic sustainability moving forward.

They said corporate Malaysia should embark on relevant policies to strengthen its economy from headwinds and external shocks.

The Wall Street Journal recently quoted the Washington, DC-based global lender’s warning of a “lost decade” ahead for global growth, as the war in Ukraine, the Covid-19 pandemic and high inflation compound existing structural challenges.

The bank said it would take a herculean collective policy effort to restore growth in the next decade to the average of the previous one. It said three main factors are behind the reversal in economic progress – an ageing workforce, weakening investment and slowing productivity. It expects global growth to slow to 1.7% this year.

The International Monetary Fund (IMF) has also shaved 0.1% point off its 2023 and 2024 global growth forecasts to 2.8% and 3% respectively, warning that risks are weighed heavily to the downside”, especially if financial conditions were to worsen significantly.

For Malaysia, IMF’s latest projection of the gross domestic product (GDP) growth of 4.5% in 2023 and 2024 is more pessimistic compared with its forecast in January.

Bank Muamalat Malaysia Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid told StarBiz he was in consensus with the World Bank regarding a “lost decade” ahead for global growth.

The geopolitical events such as war, trade friction and economic sanctions have become more regular.

They had resulted in volatility in the commodities and financial market which would result in higher operating costs and rising uncertainties, he said.

To a large degree, it could shape how Malaysia conducts its business as the country needs to be mindful of the counterparty whether they are not in the sanction list for instance, according to Afzanizam.

In a way, he said this would limit the opportunity and productivity. Ultimately, the global economy would grow at sub-optimal rate.

Malaysian Institute of Economic Research head of research Shankaran Nambiar.Malaysian Institute of Economic Research head of research Shankaran Nambiar.

Economist Shankaran Nambiar said the global economy is undergoing a possible phase of restructuring. Not only had the recent incidents disrupted the factors facilitating growth, some of the key drivers of growth had slowed, he noted.

Nambiar, who is the Malaysian Institute of Economic Research head of research, said if global growth slows down, it would have an impact the country’s growth, not only for the next few years, but possibly for the decade.

UCSI University assistant professor in finance Liew Chee YoongUCSI University assistant professor in finance Liew Chee Yoong

UCSI University Malaysia assistant professor in finance Liew Chee Yoong, who is also a research fellow at the Centre for Market Education, said it is predicted that the world would head into a recession in 2023 as the global high inflation, interest rates environment and debt levels are expected to culminate into a global recession.

As a result, he said the United States, the European Union (EU) and China’s economy are expected to slow down this year.

“Since Malaysia trades internationally and has an open economy, it will definitely be affected by a global recession.

“Whether the global recession will affect the country for the next few years will depend upon how resilient the country’s economy is towards external economic shocks,” he said.

Professor of economics at Sunway University Yeah Kim Leng described the “lost decade” as an appropriate characterisation of diminished global growth prospects due to mankind’s self-inflicted woes.

They include solving the geopolitical conflicts through wars and armed races, propping up economies with massive money creation and ballooning debt, and ignoring the perils of climate change and natural resource limits.

While the global economy has become less favourable, there is a wide variation in growth performance by region and country. Asia, especially East Asia and South-East Asia as well as India are the growth pole, he said.

“East Asia economies led by China are projected by the IMF to maintain growth of around 5% annually over the next few years.

“Asean is not far behind with annual growth expected to be just a shade lower. Malaysia is embarking on sustainable and inclusive growth policies that could raise its potential growth and sustain an average growth of 4% to 5% per annum up to 2025 and higher thereafter with gains from economic restructuring and institutional reforms,”said Yeah, who is also who is one of the appointed finance advisers to Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim.

OCBC Bank chief economist Selena LingOCBC Bank chief economist Selena Ling

OCBC Bank chief economist Selena Ling said there would be some negative spillover impact from these factors.

As an open economy reliant on exports for growth, the slowdown or stagnation in global growth would hurt export prospects for commodities as well as manufacturing goods.

Also the scars from the pandemic and sticky inflation would weigh on household and government balance sheets, altering consumption patterns away from durable items while leaving limited room for authorities to manoeuvre during future crises, she said.

Ling said while the factors described by the World Bank were more pertinent to the G3 economies, they would start to have an impact on Malaysia’s potential growth prospects over the medium-term.

The G3 economies are the United States, EU and Japan.

“A focus on boosting public infrastructure development can set in motion pro cyclical investment momentum, crowding in private sector spending.

“To achieve this in a consistent manner, the authorities will need to focus on creating fiscal space, by raising taxes and rationalising operating expenditures, to allow for greater development spending,” Ling said.

CME CEO Carmelo Ferlito, however, said a sustainable growth model is based on the relationship between savings and investments.

“Only a society that believes in the future, can save resources. Therefore, incentivising savings (via social mobility) should be the first priority,” he said.

Rebuilding an investment attraction vocation with structural reforms, mainly pushing on a full Asean labour market liberalisation and improving the banking framework, would help economies grow.

Yeah said Malaysia should accelerate its human capital development and upgrading encompassing all life stages.

It also needs to harness private sector entrepreneurship, unleash competitive forces and reduce uncertainties in the political and policy environment, he noted.

“The three thrusts are needed to boost capital investment and productivity growth that will simultaneously raise the country’s potential growth.

“With the private sector driving economic growth, the government can focus on developing comprehensive social and environmental safety nets that make the economy shock-proof or at the very least shock-resilient,” Yeah said.

Afzanizam said the government should allocate its resources at the right places.

He said this would mean spending on upgrading the education and healthcare facilities as well as other infrastructure.

“Essentially, the government should spend more on capacity building and areas that can lift productivity. By doing this, it will result in a resilient economy and be able to absorb negative shocks effectively.

“Reforms on taxation, subsidies, market structure and labour are some of the areas that will help the economy to be recession proof,” he said.

Liew said Malaysia should try to aggressively attract the best talent from around the world to work in the country.

The UK, Singapore and Hong Kong are doing that, he said.

He said Malaysia should move higher up in the value chain and its industries should embrace higher levels of technology which are not found in other neighbouring countries.

“The education system also needs a major overhaul so that it can produce highly skillful and knowledgeable graduates. This can create a skillful and knowledgeable workforce in the long run which can attract more high quality foreign investments,” he said.

Also, the country could deepen its economic ties with China, not necessarily through the Belt and Road Initiative, as China is still leading the global economic growth this year.

With strong economic ties, Liew said the country could attract more Chinese foreign investments into its economy.

Nambiar said: “We are struggling to raise our total factor productivity, labour productivity, and quality of human capital. The World Bank report has identified investment growth as a driver for the global economy. We have long been affected by flagging foreign direct investments.

“The country’s challenge is how it can revive its investment attractiveness,” he said.

Malaysia has to look at the drivers of growth, not only at an aggregative level, in addition to bringing about reform at a sectoral or even micro level.

“That means bringing about changes on the factory floor, in classrooms and at universities.

“There must be substantial enhancement of talents, significant research and development and innovation and more university-private sector linkages.

“We also have to do more to improve investment attractiveness and make Malaysia a hub for investment,” Nambiar added.

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