In a few days, we will enter the new year, 2016. All forecasts of the global economy indicate slower growth for the year. Malaysia is expected to experience a lower growth of around 4.5 per cent. We are well advised to prepare for that soft landing, so as to minimise the consequences of such moderation.
The challenges of a lower petroleum price, continuously low prices for many commodities, especially palm oil, and a depreciated ringgit, as well as its potential pressure on prices, will pose daunting problems to our national economic managers — Bank Negara Malaysia and the Finance Ministry.
Meanwhile, there will be continued imbalances in the global economy brought about by subdued recovery in Europe, moderation in Chinese economic growth and the high-valued United States dollar. Additionally, political and social tensions in several parts of the world are not helpful to the global economic environment.
The world petroleum price level, expected to be between US$30 and US$40 (RM128 and RM171) per barrel for much of next year; the consequences of shale oil production; and the sustained level of supply from major producing countries, such as Saudi Arabia, Iran and Venezuela, may lead to a more challenging budgetary environment for many nations, including Malaysia.
A local minister recently said development budget allocations would be reviewed if the petroleum price declined further.
Public development expenditure is significant in this country as it promotes and encourages related private sector capital expenditure — otherwise called the multiplier effect of public expenditure, in particular, public infrastructure expenditure, which opens up many new downstream opportunities.
Public sector budgeting has been under stress for some time, owing to the decline in oil revenue and perennial practice of providing subsidies, the legacy of previous administrations. High levels of operating expenses, much of which are obligatory in nature, based on constitutional and legal requirements, as well as political commitments, contribute to the structural rigidity of the annual operating expenditure.
While we have much experience in weathering macroeconomic challenges, such as the crises in 1985/86, 1997/1998 and 2009, the need to prepare for adjustments remains, should the situation not get better. We liberalised, privatised, reduced taxes, pegged our currency and “exported our way out” of economic crises in the past. We have models to address such crises.
Economic crises differ in their causes and sources, thus, demanding different policy treatments. But, these approaches have largely relied on fiscal and monetary policy adjustments to influence aggregate demand and employment levels.
The current economic challenge is brought about by slower global economic growth, drop in commodity prices, especially petroleum, and a strong US dollar that led to the depreciation of many currencies — the ringgit included, albeit more than the others. These take place amid our positive trade balance, low unemployment rate and stable banking system, as well as reasonable interest rates and overall price stability. There is no need to peg our currency.
At this point, however, we have to read the numbers carefully. Our trade balance is narrowing fast, though. The dynamism in the marketplace may get worse and we may be possibly caught in the infamous twin deficit, namely fiscal deficit and deficit in the current account of the balance of payments. If these take place, our currency may get worse.
In this regard, short-term monitoring of the macroeconomy becomes vital, especially in reading short-term trends. While the planners, I am sure, are closely watching the situation, the private sector may have to support policymakers with efforts to enhance productivity and competitiveness, as well greater innovation and creativity, through lots of research and development at the industry and firm levels. We have to create more value-added products and services, which, in sum total, are the net national product or economic growth.
Regarding all this, national savings must be mobilised for national development, in terms of financing investment for both public and private sector projects, thus, enhancing total demand. In this context, we should temporarily restrain from investments abroad, especially by government-linked companies and savings institutions, such as the Employees Provident Fund and Tabung Haji.
With that said, it must also be pointed out that the role of the public sector is still important, as it has done much to support private sector initiatives via tax holidays and concessions, education and training of the labour force, export promotion and research grants, so as to lead to the development of products and processes, as well as intellectual properties and assets. This is essential for wealth creation. However, the fiscal deficit does not warrant the public sector to spend much more. It can do so only by trimming unnecessary expenditure or encouraging more public-private partnership initiatives.
Happy New Year. May Allah bless Malaysia, always.
The writer is chairman of the Malaysian Institute of Economic Research