AS Malaysians get ready for the country’s general elections, there is a misconception that the Malaysian economy is not performing.
On the contrary, the World Bank in April upgraded Malaysia’s Gross Domestic Product (GDP) growth forecast for 2018 to 5.4 percent, from 5.2 percent on strong private sector spending and private consumption; the fourth upward revision since April 2017.
Similarly, in line with global recovery and continued expansion in domestic demand, the Malaysian Central Bank’s forecast for 2018 has been revised upwards to between 5.5 to 6 percent, from 5 to 5.5 percent previously.
That trajectory would make Malaysia one of the faster growing middle-income economies in the world.
Malaysia’s growth has consistently been higher than that of Singapore since 2012, more than double that of emerging markets in the Latin American countries and one-third faster than the Middle East, North America emerging markets.
Part of the recovery has been due to rising oil prices as well as rebounding exports of commodities, such as natural gas and palm oil, but not all.
Learning from the past
Such sustained growth is a result of deliberate planning. Malaysia has learnt significantly post the 1997/98 Asian Financial Crisis, basing growth on prudent monetary policies, responsive fiscal policies and strong foreign reserves.
Despite the meltdown in oil prices in 2014/2015, tighter fiscal discipline and anticipatory action have kept Malaysia’s economy adaptive to very complex challenges at the global and regional levels.
In a world with very low real interest rates and high capital flows, as well as rapid technological changes in the global supply chain, steering the Malaysian economy to keep up with the productivity and competitive changes has not been an easy feat.
At the same time, Malaysia has been able to skillfully use its flexible exchange rate policies to absorb shocks and at the same time, provide real income transfers for lower-income families.
Improving fiscal policies
Much has been discussed about Malaysia’s fiscal policies. The IMF’s April 2018 Fiscal Monitor put Malaysia’s general government overall balance (deficit) at 2.9 percent of GDP in 2017; one third below the emerging market average of 4.4 percent deficit.
Achieving this feat at a time when oil prices collapsed was due to the implementation of the broad-based, internationally-accepted tax framework, including the Goods and Services Tax (GST).
— Sumisha Naidu (@SumishaCNA) May 1, 2014
This was a key policy reform that enabled Malaysia to diversify and broaden its revenue streams to ensure that the country will be able to transit into an advanced income status with a broader revenue base.
Populist calls to abolish the GST, toll collections and reintroduce fuel subsidies as called for by certain quarters would have very serious fiscal consequences for years to come.
Managing national debt
Many emerging markets are vulnerable on the debt front. Malaysia’s federal government debt currently stands at RM685 billion (US$174 billion), or 51 percent of GDP, the lowest level since 2012. The standard rule of thumb is for the government debt to GDP ratio to not exceed 60 percent (the level imposed on European Union Maastricht fiscal compact).
The most important point to note is that 96.7 percent of the federal government debts are in ringgit, the domestic currency. The total debt of Malaysian Government Securities (MGS) and Malaysian Government Investment Issues includes liabilities and government guarantees held by statutory bodies and non-financial public corporations (NFPCs), the latter accounting for 18.8 percent of GDP.
Malaysia has a diversified debt profile, with more than 70 percent held by domestic investors such as the pension, insurance and provident funds. Foreigners hold only 28.5 percent of the debt papers.
Thanks to the use of flexible exchange rates, the shocks to the Malaysian system are shared with foreign investors, whose holdings of Malaysian government debt paper has come down from 33.6 percent as at end 2016.
Fiscal reforms have also greatly reduced the government’s debt-to-service ratio to 12.6 percent for 2017, compared with its historical peak of 31.8 percent in 1987.
The country has also pulled its net external investment deficit from half of the GDP during the 1997 financial crisis, to an estimated surplus by 2016.
In reflection of these successes, Moody’s affirmed its A3 credit rating on Malaysia with a ‘Stable’ outlook, taking into consideration the risk of contingent liabilities on government debt.
Stability key to continued reforms
Political stability and continuity in policies have always been key to Malaysia sustaining her economic development.
The bigger challenge ahead is the growing Digital Divide, in which grasping the digital opportunities open up new income and wealth sources, whereas those who do not have access to digital knowledge and technology face increasing threats of being left behind.
Making that transformation will not be easy.
Behind that Digital Divide is the geopolitical divide, which is increasingly manifested in terms of increased protectionism, potential trade wars and bilateral over multilateral trade agreements. That divide has become political, ideological and social.
History has shown that Malaysia is resilient to all the challenges thrown at her. Malaysians will need to make some tough choices and focus on managing the future, rather than getting stuck in the unhelpful policies of the past.
* Dr. Andrew Sheng Len Tao is currently the Chief Adviser to the China Banking Regulatory Commission. He has been a Director of Khazanah Nasional Berhad since 2008. Dr. Sheng is also currently an Adjunct Professor at the University of Malaya and Graduate School of Economics and Management, Tsinghua University, Beijing.
** This is the personal opinion of the writer and does not reflect the views of Asian Correspondent