World Bank sees tough 2014 for Malaysian households

Malaysians winding down for the year-end may already have to start bracing for tough times in 2014, the World Bank says.

According to its Economic Monitor report on the country released on Dec 10, household expenditures will take a hit as the government continues to cut subsidies and other policies.

It said that even with cash aids like the Bantuan Rakyat 1Malaysia (BR1M), households will need to tighten their belts, leading to a dip in private consumption.

It also said that BR1M will cost the government RM7.1 billion, so the actual cut in fuel subsidy is expected to expand from 23 percent today to 28.6 percent in 2014 to meet savings targets.

Happily, however, the World Bank expects inflation to rise “only modestly” in 2014 from 2.3 percent in 2013 to 3.2 percent, due to benign supply conditions such as weak commodity prices.

“Reduced energy subsidies, not only in terms of additional fuel price hikes but also an adjustment of electricity tariffs, may have a knock-on impact on consumer prices, as may the wider introduction of the minimum wage.

“Private consumption may also be negatively affected by possible interest rate hikes and tighter credit markets, with signs of weaker credit expansion already appearing this year,” the report said.

palm oil palm kelapa sawit 201107It added that poor prospects for agriculture commodities will also bring pain to smallholders. This would include the roughly 420,000 smallholders under the Federal Land Development Agency (Felda) scheme.

However, the World Bank said, firm employment and wages as well as higher welfare cash aid like the BR1M can help to ease the pain for households to an extent.

Even then, it said, private consumption growth to slide to 6.5 percent in 2014, a significant dip from 8.4 percent in 2013.

The World Bank expects private consumption to pick up to 7.2 percent in 2015, but this will still be lower than 2012 figures, where private consumption grew by 7.7 percent.

“Growth in government consumption will come in at 6.0 percent in 2013 (largely due to high growth in the second and third quarters) before contracting in 2014 by 0.1 percent,” it said.

Gov’t must watch its spending

It said that while subsidy cuts are an effort to reign-in the deficit, the coffers will be hit by a reduction in oil-related revenue.

There will be a potential boost in corporate and personal taxes, despite tax breaks offered in the Budget, but it will not be enough to truly reel in the deficit.

“Therefore, the reduction in the deficit will need to be achieved through expenditure restraint,” the Economic Monitor report said.

It said the government’s efforts will mean lower development levels, with debt-to-GDP ratio expected to drop from 54.8 percent to 54.3 percent.

“Long-term fiscal sustainability will require continuing on the path of consolidation, while carefully monitoring and managing contingent liabilities and other sources of fiscal risk,” it said.

The debt-to-GDP ratio does not take into account contingent liabilities, which include government-backed bonds and other guaranteed debt by government-linked corporations.

By Aidila Razak