Mohamed Ariff, INCEIF, East Asia Forum
Surprisingly, the Malaysian economy could grow at a creditable pace in 2012, despite dismal export performance associated with the slow expansion of the US economy and recession and stagnation in Europe.
Malaysia’s quarterly growth rates have been fairly impressive: 4.9 per cent, 5.4 per cent and 5.2 per cent respectively in the first three quarters. The economy needs just 4.1 per cent growth in the fourth quarter of 2012 to garner 5.0 per cent growth for the year as a whole. So all indications are that Malaysia’s GDP growth will slightly exceed the government’s target of 5.0 per cent growth in 2012. The main growth drivers are domestic consumption and investment, both private and public. Construction and services have been the fastest growing sectors in 2012.
It is noteworthy that inflation has become increasingly tame, decelerating from 2.7 per cent in January to 1.3 per cent in October 2012. The inflation rate for the full year in 2012 is projected to settle at 1.7 per cent. The unemployment situation has been somewhat steady, in the region of 3.0–3.3 per cent. The banking sector stayed healthy and well capitalised with a net impaired loans ratio of just 1.4 per cent. The central bank has kept its overnight policy rate at 3.0 per cent in the face of ample liquidity. Malaysia continues to register a current account surplus in its balance of payments, although the size of its surplus has been diminishing. International reserves at the end of September stood at US$135.6 billion, providing a retained import cover for 9.4 months, which is more than comfortable.
The Malaysian fiscal story, however, is unflattering, as the country has been continuously running budget deficits since 1998. With elections around the corner, government subsidies and cash handouts have been flying in the face of fiscal discipline, with no attempts made to address much-needed tax reforms that would reduce the current overdependence on oil and gas, which accounts for roughly 40 per cent of government revenue. Government revenue has failed to grow in tandem with GDP growth in recent times, with the ratio of revenue to GDP falling from 33 per cent in 2007 to 24 per cent of GDP in 2011 and to an estimated 22 per cent of GDP in 2012.
All this may have an adverse effect on the country’s international credit ratings, and hence the need to rein in sovereign debt. Government debt has ballooned to MYR 502.4 billion (US$164.6 billion) in the third quarter of 2012, breaching the self-imposed debt ceiling of 55 per cent of GDP. The debt ceiling was raised from 40 per cent to 45 per cent of GDP in April 2008 and lifted further to 55 per cent in July 2009. Malaysia’s debt-to-revenue ratio of about 250 per cent is close to Italy’s 260 per cent.
The near-term outlook for the Malaysian economy is very much dependent on the economic performance of its major trading partners. Export market diversification efforts currently underway may help reduce Malaysia’s vulnerability to external impacts but cannot lessen its exposure to the external world. Likewise, a dynamic domestic economy can contribute to greater resilience but cannot be a substitute for the more lucrative external sector, given the relatively small size of the domestic market. GDP growth in 2013 is forecast to be in the region of 5.5 per cent.