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Saturday, June 4, 2016

Malaysia's economy: how rough will it get?

KUALA LUMPUR - Do you subscribe to the 10-year economic cycle theory?

If it holds true, the global economy could be heading for another recession in the not too distant future after having collapsed in 2008/09 during the US subprime mortgage crisis, wrote The Edge Malaysia in its latest cover story for the week of June 6-June 12. 

In Malaysia, economic indicators of late have been painting a gloomy picture of the outlook for the country. Gross domestic product (GDP) growth has slowed for four consecutive quarters – it hit 4.2% in the first quarter of the year versus 5.6% in 1Q2015.

Private investment, one of the four growth engines of the Malaysian economy, has not been robust, it wrote. It rose only 2.2% in 1Q2016, compared with 11.6% in 1Q2015. Economists, wrote the weekly, attribute the weakness to poor commodity prices and a cautious business sentiment with entrepreneurs unwilling to invest amid global uncertainties.

The bright spot is the recent awarding of several mega projects that would provide some support for growth, though it remains uncertain if these will bring the same multiplier effects as those from other areas of investment during the initial phase of the implementation of Economic Transformation Programme (ETP) projects, UOB economist Julia Goh was quoted as saying in the weekly's report.

"Oil and gas projects are fewer, real estate investments are based on Malaysian Investment Development Authority’s approval and FDI is slower," she added.

Another economist sees a pullback in the private investment space, half of which involves properties, thus posing a risk to the economy.

The fact that local households are grappling with whopping debt is also worrying. Malaysia's household debt is among the highest in Asia at 89.1% of GDP by end-2015.

Meanwhile, the government’s fiscal position is not as strong as it was at the onset of the Asian financial crisis in 1997/98, when the country was last battered heavily. The government continues to fight to narrow its fiscal deficit — which started to widen in the early 2000s — from 3.2% last year. Public debt, which is flirting with a self-imposed ceiling of 55%, is also a concern.

Tumbling commodity prices, which began in 2014, has also slashed the government's oil revenue. As such, the government has been cutting back on expenditure. A tighter budget means the government has less means to stimulate the economy, given its already strained financials.

Outwardly, things are not looking any better either. China remains one of the biggest risks - not just from expected slower growth, but also its debt-restructuring measures and the mistakes it may make. Case in point? The deliberate devaluation of the renminbi which roiled global currency markets last August.

There is also concern about the US Federal Reserve rate hike, which has already driven large amounts of funds out of emerging markets, putting significant pressure on their currencies. The ringgit was no exception.

But if the worst happens, it would only happen if there was a major external shock, according to economists polled by The Edge Malaysia.

“In such a scenario, the region, including Malaysia, will not be spared. This time, it could be more severe because the recovery process could take much longer, given that the advanced economies will need to delve deeper into negative interest rates,” said UOB’s Goh.

Peck concurred, because the domestic components are weakening while the government’s fiscal position is not strong.

“There is high household debt, a limit to pushing consumers to spend, and businesses are weakening. The only component that looks decent is exports but even that seems to be driven by a cheap ringgit rather than an increase in demand,” he said.

However, a local economist believes there are many options available to Bank Negara Malaysia and the government to weather any storm. The reason being that the government’s fiscal constraints are largely self-imposed.

“Despite all the noise, the government’s debt is actually a little below the global average and contingent liabilities, both explicit and implicit, are manageable,” he said.

How much room does the government have to manoeuvre if the worst case scenario takes place? Is it prudent to borrow more for growth if the economy needs more pump-priming, with the current government-debt-to-GDP level at 54.5% of GDP? How bad are things now for Malaysia compared to the indicators back when it faced previous downturns?

By Tan Choe Choe (The Edge)

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