Structural reforms the key to growth


PETALING JAYA: Long-term structural reforms hold the key to global economic sustainability amid the weakening world economy, experts say.

They added that such reforms could complement the conventional economic tools of monetary and fiscal policies to bolster economic growth.

The same scenario also applied to corporate Malaysia, they added, noting that there was little room for fiscal and monetary policies at the moment to stimulate economic growth.

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

For Malaysia, the 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.

In an April 10 report, Reuters quoted the World Bank Group president David Malpass as saying that the lender had revised its 2023 global growth outlook slightly upward to 2% from a January forecast of 1.7%, but the slowdown from stronger 2022 growth would increase debt distress for developing countries.

In February, the World Bank forecast Malaysia’s economy to grow at a “moderate pace” of 4% this year.

Economists generally are forecasting GDP for this year to be between 4% and 5%, similar to Bank Negara’s official estimate.

UCSI University Malaysia assistant professor in finance Liew Chee YoongUCSI University Malaysia assistant professor in finance Liew Chee YoongUCSI University Malaysia assistant professor in finance Liew Chee Yoong, who is also a research fellow at the Centre for Market Education, told StarBiz that most governments around the world were already burdened with high debt levels and this reduced the room for fiscal policy.

According to data from the IMF, the global debt-to-GDP ratio reached a record high of 98% in 2020, up from 84% in 2019.

This increase was largely driven by higher government borrowing to finance pandemic-related stimulus packages and economic support measures.

In addition, he said the high inflationary environment globally reduced the room for monetary policy.

“Central banks around the world have already increased their interest rates to combat inflation and it is projected they will continue to do so in 2023.

“As a result, there is little room for central banks to use monetary policy to stimulate growth, such as by reducing interest rates,” Liew said.

In terms of debt, the government’s debt stood at RM1.08 trillion or 60.4% of GDP in 2022, according to the updates on Economic and Fiscal Outlook and Revenue Estimates 2023. Inclusive of liabilities, Malaysia’s total debt and liabilities exposure was estimated at RM1.44 trillion as of last year.

In addition, he said the current interest rate or the benchmark overnight policy rate (OPR) was at 2.75%, which is projected to go up this year.

With the high debt levels and projection of further interest rate hikes in 2023, Liew said there was also little room for fiscal policy and monetary policy in the country to bolster economic growth.

Malaysia University of Science and Technology professor Geoffrey Williams.Malaysia University of Science and Technology professor Geoffrey Williams.

Malaysia University of Science and Technology economics professor and dean Geoffrey Williams said global inflation had already peaked and is expected to fall this year.

He said oil prices peaked in March last year and have been falling ever since, adding that this would slow global inflation.

As global interest rates should be at or close to their peak, he said there was little that higher interest rates could do now, noting that interest rates should pause and allow inflation to “cure” itself.

Furthermore, Williams said in terms of global growth, whatever fiscal measures that could feasibly be provided soonest had already happened. Therefore, he said anything further would raise concerns about inflation or debt levels.

Malaysia was in a similar position, he said, noting that inflation had clearly peaked and was falling. It will continue to fall through the year, he said.

He said the economy is forecast to follow a normal, sustainable rate of growth. This all means no changes to the OPR are necessary for the rest of the year unless there are shocks.

“Raising the OPR only starts to affect inflation after 24 months. So inflation cannot be reduced this year by raising interest rates. This is another reason why monetary policy should be maintained as it is.

“For the fiscal policy, the revised budget 2023 worth RM386.14bil is the largest federal budget to date. The only issues are whether the leakages and wastage will be reduced. It was a conventional budget designed simply to support domestic demand.

“So again, there are no necessary changes in fiscal or monetary policy and the government should instead focus on long-term policies,” he said.

Liew said structural reforms could complement monetary and fiscal policies to spur the domestic economy.

“The government can undertake structural reforms to improve the efficiency and productivity of their economies. These reforms may include measures such as deregulation, labour market reforms and trade liberalisation.

“It can also support international trade by negotiating trade agreements, reducing trade barriers and promoting exports. This can help to create new markets for businesses and improve access to goods and services.”

Overall, Liew said these strategies could complement monetary and fiscal policies and help to stimulate economic growth in different ways.

“However, the effectiveness of these strategies will depend on the specific context and economic conditions of each country,” Liew said.

Williams said the government should really focus on long-term structural reforms and supply-side policies to free up the market. Subsidy reform is also a priority, he noted.

“Among the structural and supply-side issues are pension and social protection reform, tax reform and privatisation of government-linked companies. Liberalisation of markets is essential to help small and medium enterprises, among others.

“It is also vital to reduce regulatory costs and free up markets to promote domestic investment.

“Besides that, visa systems should be improved to promote foreign direct investment and above all, dealing with the problem in the labour market that is causing low incomes and persistent problems with the cost of living,” Williams said.

Juwai IQI global chief economist Shan SaeedJuwai IQI global chief economist Shan SaeedHowever, Juwai IQI global chief economist Shan Saeed said the amalgamation of monetary and fiscal policies could spur growth and maintain economic stability for the country at the macro level.

He said Malaysia has made effective use of these policies to maintain macro-economic stability in the last five to six years.

“During Covid-19, the government used the amalgamation of fiscal and monetary policies to attain economic confidence and moved ahead faster in opening economies, as compared to many of her neighbours who were struggling to manage the pandemic.

“Striking the right balance between epidemiology and economics was the strategic call from the government to open the economy, to support local businesses and provide relief to the masses despite many headwinds in the exogenous landscape,” he said.

Shan said Malaysia had also maintained the most important variable for growth stability, namely, a stable macroeconomic outlook.

He said this sent signals to the market and global investors that macroeconomic stability provided security for growth, capital and above all safety for investments.

Separately, he said the country’s biggest benefit for 2023 is the reopening of the Chinese economy.

The reopening of China is expected to generate positive spillover effects for many countries, including Malaysia, especially those that depend on exports and tourism from China.

Shan said it would also help ease the supply constraints that have plagued the global economy for the past three years.

On another note, he said he does not foresee the OPR going higher as price inflation remains subdued and monetary policy lever is making an impact in taming inflation.

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