WHILE there is no doubt that the Malaysian economy is in challenging times, as with the rest of the world, it certainly does show a level of resilience and a promising prospect for the second half of this year and next year.
This can be seen from both the economic facts and sound economic reasoning.
Malaysia’s gross domestic product (GDP) expanded by 4 per cent in the second quarter, and from January to June, the GDP grew at 4.1 per cent. They are within the government’s target for this year’s GDP growth at 4 to 4.5 per cent.
At the just concluded Bank Negara’s Monetary Policy Committee meeting, Bank Negara Governor, Datuk Muhammad Ibrahim, reiterated that the Malaysian economy is on track to achieve this target and remains on a steady growth path not just for this year, but also in 2017.
By any standard, 4 per cent growth rate is healthy, as it is still above average growth level, be it globally or regionally.
The World Bank has just cut the global GDP growth forecast for this year to just around 2 per cent whereas the International Monetary Fund put it at around 3 per cent. Regionally, Thailand and Singapore for example, recorded a second quarter growth rate at 3.5 per cent and 2.2 per cent respectively.
And in the context of the stage of our development, it is both stable and viable, as the growth rate tends to moderate over time as the economy approaches that of a high-income and developed nation status.
A country like Laos, for instance, is still experiencing a high level of GDP growth — at 7.5 per cent last year, and is expected to grow at 7.9 per cent this year. Vietnam and the Philippines, too, post GDP growth figures of more than 6 per cent.
Even China’s GDP growth rate has settled at below 7 per cent.
Malaysia’s growth rate is also sustainable in the sense that it is achieved without compromising our fiscal consolidation agenda as the government is still committed to reduce the fiscal deficit to 3.1 per cent this year from 6.7 per cent in 2009.
The debt level as a ratio of GDP, although still high, has seen a promising reduction recently, where as of June 30, it was at 53.4 per cent, down from 54.5 per cent last year. Even in 2010, Malaysia’s debt to GDP ratio was already ballooning at 53.15 per cent of GDP. But the debt numbers might be lower from 2010 as a new definition in debt reporting was applied since 2014.
It is interesting to note that the government has made a strong signal to commit itself to achieving the Eleventh Malaysia Plan target of a balanced budget by the year 2020. As the federal deficit reduces gradually, the debt to GDP ratio would also follow suit. The components of our debt are also worth mentioning, as more than 97 per cent of it comes from internal sources while the rest derives from external funding. This implies that our national debt is less vulnerable to external shocks.
But essentially, what matters most would be for the government to ensure that it does not exceed the 55 per cent ceiling.
The inflation rate has moderated in the second quarter, after declining to 1.9 per cent from 3.4 per cent in the first quarter. In fact, all the 12 Consumer Price Index categories, which are used to measure inflation, declined. This suggests that the impact of the one-off price increase due to the implementation of the Goods and Services Tax has weaned out.
This eventually will give enough room for Bank Negara to manoeuvre its monetary policy stance in the future.
But I think the highlight of the second quarter data would be the robustness of both the private and public sectors’ activities.
Private consumption and investment have rebounded momentously to 6.3 and 5.6 per cent respectively, compared with 5.3 per cent and 2.2 per cent in the first quarter. Marked improvements were seen in public consumption as well, recording at 6.5 per cent compared with 3.8 per cent in the previous quarter. And astonishingly, public investment has recorded a positive growth of 7.5 per cent from its contraction at 4.5 per cent in the first quarter. These numbers suggest a better prospect for the Malaysian economy moving forward, as the main driver of economic growth will be supported by strong domestic demand, which is led by private as well as public investments.
Even on the supply side of the equation, all sectors recorded
positive growth, except for agriculture, where it was in negative territory since the first quarter of this year.
It appears that the impact of the 1Malaysia Development Bhd issue on the Malaysian economy has bottomed out.
Last year, we saw the free fall of the ringgit against the US dollar and a significant drop in our reserves. Malaysia’s international reserves today is solid at US$97.3 billion, or almost RM400 billion, whereas the ringgit has been stabilising at a range of between RM4 and RM4.05 against the greenback.
Furthermore, there are strong signs that foreign capital has returned to Malaysia, which shows more stability and buoyancy in Malaysia’s bond and equity markets.
It is apparent that the performance of the Malaysian economy in the second half of this year will be much better than the first half. The effect of much of the measures under the 2016 Budget recalibration, the recent cut of the Overnight Policy Rate to 3.00 per cent and the unleashing of the earlier implementation of large-scale public infrastructure projects, such as MRT2, LRT3 and the Pan-Borneo Highway, will give a real boost to the economy in the second half of this year.
The fact that crude oil prices have stabilised at around US$42 per barrel, and are predicted to be above US$50 next year, will be good news for Malaysia, as the target growth rate of Malaysia this year is based on the assumption that crude oil prices would be in the range of between US$30 and US$35 per barrel.
The Malaysian Institute of Economic Research recently forecast that the Malaysian economy would grow at the range of between 4.5 and 5.5 per cent next year.
And, with the upcoming 2017 Budget to be revealed soon, the positive trajectory for Malaysia’s economic growth is expected to continue in a way that is both inclusive and sustainable.
Dr Irwan Shah Zainal Abidin is a senior lecturer at the School of Economics, Finance and Banking, Universiti Utara Malaysia. He can be reached via irwanshah81@yahoo.com