Home / Tag Archives: country updates 2014

Tag Archives: country updates 2014

The tricky economic tasks facing Najib Razak

Author: Shankaran Nambiar, MIER

After a year of solid achievement on the economic front, Malaysia’s leaders will face difficult circumstances as they implement reform in 2015.

One of the more impressive achievements of the Malaysian government in 2014 was the resolve it demonstrated in trying to balance the budget. Prime Minister Najib Razak inherited a budget situation characterised by a lack of fiscal discipline from previous administrations, and he made a concerted effort to address this problem .

Malaysia army personnel loading food and goods inside a boat in the Kuala Krai district of Kelantan, Malaysia, 28 December 2014. (Photo: AAP)

He has implemented policies that will see a reduction in the fiscal deficit from 3.5 per cent of of GDP in 2014 to 3.0 per cent of GDP in 2015. The government has also rationalised subsidies. It cut petrol and diesel subsidies by about 20 sen (about 6 US cents) per litre on 2 October. Fortuitously, the global price of oil has been falling, lending a fine sense of timing to the subsidy cuts which are best executed when market prices are declining, as they are now.

Equally commendable was the decision to introduce a goods and services tax (GST) in April 2015. The announcement for this plan was also cleverly timed. With the elections safely behind him, and with the 14th general elections not for another five years, Najib can undertake unpopular reforms in 2015, like introducing the GST, and then work to improve his political goodwill in the next few years, with the hope that the GST will be forgotten by the time the elections are due. Timing is again in Najib’s favour, since, although low oil prices will slash government revenue, this will be compensated to some extent by the broad ranging GST revenue collection that will begin in the months to come.

Concerns about public and household debt have haunted Malaysia last year. Household debt currently stands at about 87.1 per cent of GDP and government debt is about 53 per cent of GDP. Government spending needs to be further scrutinised and reviewed, the size of the public sector (a vote bank though it may be) has to be reconsidered, and the worthiness of large projects have to be questioned with the circumspection of a fussy accountant.

There are undeniably many good targets from which to cut. The Auditor-General’s report on government spending in 2013 documents enormous cost blowouts: computers worth RM3,000 (US$850) being procured for RM 8,400 ($2400), facilities costing millions not being used, and a whole plethora of items whose inflated prices suggest gross mismanagement. If the Auditor General’s report is any indication of the extent of public sector mismanagement, then the government should be tackling issues of project management, transparency in procurement and efficiency and productivity in the public sector even before it rolls out the GST.

Inflation rates moderated in the last few months of 2014. Early last year inflation was running at about 3.4 per cent and softened to about 2.7 per cent  towards the end of 2014. Though these rates appear reasonable, actual inflation as it is experienced by the Malaysian people (or felt inflation) is higher; and  public perception of the rising cost of living is, indeed, critical.

At any rate, the official inflation rate can be expected to spike in May 2015 with the introduction of the GST, possibly as high as 4.5 per cent. This is to be expected. International experience suggests a one-time price spike of anything from an additional 1 to 2 per cent following the implementation of the GST. In the case of Malaysia, household spending in 2015 will be constrained both because of limited disposable income and eroded purchasing power due to the GST-induced price hikes.

The external sector does not seem ready to lend any solace. The Malaysian ringgit is taking a beating against the US dollar. Declining confidence in the ringgit, mainly because of the decline in oil prices, could stretch for the next few months. That might do Malaysian exports, particularly those from the electrical and electronics sector, some good.

But there are dark clouds hanging over the markets for Malaysian exports. China, Malaysia’s biggest trade partner, is set for more domestic reforms that are more inward-oriented. The anticipated lower growth rate in China, forecast to be 7 per cent or slightly less, will lower demand from China, which in turn will have an impact on Malaysia’s economy.

The forecast for Japan’s growth next year is not terribly encouraging at 1 per cent and the European Union is expected grow at about the same rate, touching perhaps 1.2 per cent. The IMF has downgraded its global growth forecast for 2015 to 3.8 per cent from 4 per cent. The saving grace will come from stronger US markets. While the improving US market will help Malaysian exports, it will result in higher interest rates in the US, and the resulting interest rate differential will see funds flow out of Malaysia. All these factors in combination could cause the growth rate in Malaysia to weaken, perhaps within the range of 4.8 to 5 per cent.

All of these factors will combine to produce a tough political environment for Najib’s government to navigate as it pursues reform.

The last days of 2014 were tragic. The Air Asia crash followed two other crashes. Then there were the massive floods that have affected several states, displacing more than a 100,000 people and resulting in over 20 lost lives. The cost of compensation, resettlement and redevelopment will be a huge burden on the government, but one that will necessarily have to be borne.

On the external front, Najib will also have to be decisive about the Trans-Pacific Partnership agreement, since little has been done politically to allay fears on the agreement, particularly for the potential losers who would constitute a small but powerful group. Then there is the ASEAN Economic Community agenda and the Regional Comprehensive Economic Partnership agreement which have to be managed while Malaysia holds the chair of ASEAN. The chairmanship will be a demanding task in its own right.

Thus 2015 is set to be a busy year for the Najib government.

Dr Shankaran Nambiar is a Senior Research Fellow at the Malaysian Institute of Economic Research. He is author of the recently published book, “The Malaysian Economy: Rethinking Policies and Purposes” All views in this article are his personal views.

This article is part of an EAF special feature series on 2014 in review and the year ahead.

Read More »

Will falling commodity prices bring down Malaysian growth as well?

Author: Nurhisham Hussein, Malaysia

World oil prices are falling precipitously. For an oil exporter like Malaysia, that’s definitely bad news. Unless the country can diversify its economy, it may find it difficult to navigate its way through the economic challenges it faces on its way to higher income status.

Storm clouds gather over the Patronas Towers in Kuala Lumpur, Malaysia. The recent drop in world oil prices will hurt the exporter. (Photo: AAP).

Of course, the drop in the world price of crude oil, as much as it has hogged the headlines, is just the most visible manifestation of a larger movement. Many commodity prices have been hit over the last six months. While the price of a barrel of Brent Crude has dropped 45 per cent since June 2014, both soybean and iron ore prices have dropped over 25 per cent. Taken from the beginning of the year, the drop in iron ore, at 49 per cent, has actually been steeper than crude oil, at 43 per cent. This is in some portion a reflection of the stronger US dollar, but only partly explains the commodity price collapse. In truth, it could be said that the high commodity prices over the last decade or so was an exceptional break in a longer term trend of declining commodity prices.

It’s well established that commodity prices tend to decline over the long run relative to the prices of manufactured goods. This fact has formed one of the foundations of economic development strategy: to achieve stable, higher incomes, emerging economies need to actively foster the development of secondary and tertiary sectors.

That piece of wisdom has now been underscored with a vengeance. While oil-producing economies have hit the headlines, the impact is being felt across a swath of commodity producers, from Australia (iron ore) to Brazil (soybeans) to Chile (copper). Demand for commodities tends to be inelastic — an increase in supply will lead to large falls in price rather than large increases in volume, meaning lower revenues. For commodity producing economies, changes in the world prices of the commodities they export have immediate consequences for trade balances, GDP growth, and government finances.

Malaysia’s position as a net exporter of oil and gas is a case in point. Malaysia’s exposure to global primary commodity prices remains uncomfortably high, although it is well down from the very high exposure of the 1980s, when agriculture and mining accounted for over a quarter of the Malaysian economy. Efforts to diversify the economy away from the primary sector have been for the most part successful but incomplete.

To take one example, despite a quarter of a century of extracting crude oil, Malaysia still lacks the capacity to refine all the oil it extracts. Malaysia’s palm oil industry, another major export earner, is similarly stuck in mostly upstream production. The relative failure to move downstream into higher value added production, a problem masked by the high prices prevailing over the last decade, leaves Malaysia vulnerable to global price swings in the notoriously volatile commodity markets.

The immediate consideration for Malaysia going into 2015 in this environment is in sustaining growth and maintaining macroeconomic stability. The impact on the oil and gas industry is probably manageable, except for those involved in marginal field production. Given the long gestation period for these kinds of projects, oil companies are understandably conservative in their investment decisions.

A secondary consideration would be the impact on fiscal sustainability. The oil and gas sector directly contributed a third of the government’s revenue in 2013, and an even higher proportion indirectly through corporate taxes on downstream production of commodities like liquefied natural gas (LNG). A decline in oil and gas revenues would also have secondary effects on other sectors, such as transportation and finance.

Under threat is the Malaysian government’s target of cutting the 2015 budget deficit to 3 per cent of GDP, and of maintaining the soft cap on government debt at 55 per cent of GDP. Falling commodity prices could also damage Malaysia’s prospects of achieving high income status by 2020, because of a decline in the growth rate of nominal GDP as well as the depreciation of the ringgit.

There exist longer term threats to Malaysia’s external and internal balance. The LNG market is of far greater importance than crude oil to Malaysia, and here two developments do not augur well: Japan is slowly reviving its nuclear industry (Malaysia currently supplies a fifth of Japan’s LNG demand) and the export potential of US shale gas (natural gas prices in the US are half the equivalent Asian prices). If either or both of these come to pass, it would undercut Malaysia’s export revenues.

Malaysia needs to accelerate the diversification of its economy, either by moving further into downstream production or by fostering a swifter expansion of the manufacturing and services sectors. Another priority must be reducing the dependence on oil and gas revenue in the budget. If Malaysia doesn’t take action to limit its vulnerability to lower commodity prices, it may find 2015 marks the start of a much more difficult economic story.

Nurhisham Hussein is a Malaysian economist.

This article is part of an EAF special feature series on 2014 in review and the year ahead.

Read More »