KUALA LUMPUR: Political noise is inevitable and it is no different in an emerging market like Malaysia, a senior World Bank economist said.
In this age of social media, political issues around the world revolve to give rise to noise and volatility before the noise settles.
To Dr Frederico Gil Sander, who has been overseeing the Malaysian portfolio from the World Bank office in Bangkok over the past five years, he has borne witness to plenty of political noise in Malaysia during the period.
He is less perturbed by the level of decibels of the noise created than the engines running the economy.
“Unlike investment bank economists worried about the impact on the currency moves and equities during that period, we are more focused on looking at the hard data to see what is driving the economy,” Sander told Business Times here recently.
The Malaysian economy saw a strong finish to record a 6 per cent gross domestic product growth in 2014. Growth this year, although impacted by weaker external demand, will brace itself from the domestic demand.
But the global shock which emanated from the slump in oil prices did not spare countries like Malaysia which felt it through trade flows, government revenue as well as the country’s balance sheet.
The ringgit was subject to the tumbles and falls in the recent period when the global crude oil prices slumped late last year.
Although there has been a lot of noise on the ground with the weakening ringgit, to Sander, it is the flexible exchange rate which has helped the country and exporters when global demand comes back.
In Part One of an hour-long interview with the Business Times before he left to take up his new posting in New Delhi, Sander shared his observations about policies in place and Malaysia in general.
On the weaker ringgit and current account surplus :
The global oil price shock affected Malaysia, a net hydrocarbon exporter, and share prices got hit for many oil companies while assets of the government (like Petronas) also got hit from the weaker oil prices and that affected the exchange rate. But it is the flexible exchange rate which has been actually a positive feature of the policy mix in the last couple of years.
A weaker ringgit is favourable for exports. Then again, it also sets a signal to those out there wanting to buy a Louis Vuitton bag or imported consumer goods for that matter that you should substitute for something domestic. That helps balance things out and keeps the economy stable. The RM3.80 level (ringgit level when it was pegged at the height of the Asian Financial Crisis) seems to be an obsession as well as the small current account surplus.
I would not be too concerned about that. Malaysia has been enjoying current account surplus for more than a decade – what this means is that the country is saving and you are exporting savings somewhere else. To invest in a productive project like the Mass Rapid Transit (MRT) would mean the current account narrowing or even slipping into a deficit.
On the RM3.80 level (ringgit level when it was pegged at the height of the Asian Financial Crisis) and small current account surplus :
One needs a take on a long term view. If the current account moves into deficit or narrows, we need to see what it is used to finance. Is it for consumption or bubbles in real estate or import rolling stock for MRT or machinery for industries. Those assets will become productive and there will be a pick up in the future when the assets start producing only these investments have a gestation period.
On Fitch Ratings’ discontent with governance issues :
An outside observer concerned with the fiscal risks statement would want to hear from the government rather than third parties. Communication issue is part of the problem. Fiscal risks statements for contingent liabilities concerns not just for 1Malaysia Development Bhd (1MDB) but others like the MRT guarantee.
If the government has to pay for those, it must be transparent and say yes we made a provision that in the medium term fiscal framework, we have made allocations which are not part of the federal government debt so that it does not come as a surprise.
This particular guarantee company is performing well and we have made 10 per cent provision as we assessed the risk to be low. This is part of medium term planning so that it is not caught by surprise come 2017 when a payment is due.
Unfair criticisms? That is democracy and we must live with that. Sometimes it is the noise which helps to raise your game. By listing contingent liabilities and each time we approve one, we must ask if we are comfortable with the analysis. In all, it leads towards improvements in the long term.
* Part Two of the interview will appear on August 22. Sander will touch on Malaysia’s strong investment draw, the Economic Transformation Programme, the Eleventh Malaysia Plan and improvements to the fiscal policy.