Malaysia on a tightrope to avert Britain’s painful lesson on currency crunch
The Malaysian government should take note of this episode in the UK, as an irrational or over-populist national budget may lead to further downside risk to the local currency, not to mention the political implication that may come with it.
(The Edge) – The sterling’s crunch, invoked by Britain’s mini budget, which initially proposed a tax break for the rich, might have raised concerns among Malaysians, whose government will be tabling the National Budget 2023 on Friday (Oct 7), amid the backdrop of a weakening ringgit.
The British pound depreciated to an all-time low of US$1.0350 against the US dollar on Sept 26, after British Chancellor of the Exchequer Kwasi Kwarteng unveiled the budget on Sept 23. Faced with mounting dissent, Kwarteng reversed a planned tax cut for the highest rate of income tax.
Economists contacted by The Edge hold the view that the Malaysian government should take note of this episode in the UK, as an irrational or over-populist national budget may lead to further downside risk to the local currency, not to mention the political implication that may come with it.
“If there is no reform element [in Malaysia’s Budget 2023], then there will be downside risk to the ringgit,” Socio-Economic Research Centre (SERC) executive director Lee Heng Guie told The Edge.
“This  budget has to be responsible: It must carry a lot of reform, rather than a very election-type of budget – such as populist measures and maintaining a high deficit – which I think investors may be concerned about,” Lee said.
SPI Asset Management managing partner Stephen Innes said that the biggest lesson Malaysia could learn from the UK currency crunch is not to rely on unfunded tax cuts or enormous fiscal expansion beyond energy and good subsidies, “as the market requires a hefty interest rate premium to buy those bonds”.
Nonetheless, he does not expect the Malaysian government to introduce any tax cut in Budget 2023, as real interest rates remain relatively low.
“It will require a hefty hike by Bank Negara Malaysia to make Malaysian Government Securities (MGS) attractive to fund that increase in external debt; so, a tax cut might do more damage than good,” Innes said.
If the government’s commitment to fiscal discipline is clearly conveyed via Budget 2023, UOB senior economist Julia Goh believes that the ringgit weakness is likely to be contained under a supportive growth dynamic next year.
“The fact that the ringgit continues to move alongside other currencies relative to the US dollar, and hovers somewhere in the middle, suggests that domestic fundamentals, such as robust growth drivers, export resilience, current account surplus, FDI inflows, and adequate international reserves, have helped to contain the ringgit weakness,” she said.
Goh forecasts that Malaysia’s GDP growth will be at 6.5% this year, surpassing the official projection of 5.3%-6.3%, before tapering to 4.8% growth in 2023.
Expectation of fiscal consolidation in 2023
“Despite an expected election-friendly budget for 2023, we think that the government will continue to fulfil its commitment to further consolidate its fiscal position,” said UOB’s Goh.
Goh believes that a budget deficit of 4.5% to GDP is achievable in 2023, considering expected higher revenue collection and smaller allocation for containing Covid-19 pandemic, coupled with the continued GDP growth of 4.5%-5.5%.
BIMB Research economist Imran Nurginias concurred with Goh. He expects the government’s subsidy bill to drop to about RM50 billion next year, from an estimated RM80 billion this year.
Having said that, SERC’s Lee said the government needs to provide more commitment than just savings from the subsiding pandemic.
“In the absence of that [Covid-19 fund], the fiscal deficit will be lower. But that doesn’t mean reforms; so, you need to do more than that, in terms of subsidies and leakages in allocations. You may not opt for the GST [Goods and Services Tax], but subsidy is a low hanging fruit to tackle,” Lee said.
While the policymakers can be creative in looking for ways to stimulate unfettered growth of the economy, the government should focus on crafting prudent budgets that have sustainable impact on the financial market, says Sunway University Business School’s Professor of Economics, Dr Yeah Kim Leng.
This is particularly so, given the depreciation of the ringgit, which has declined 11.48% year-to-date to RM4.6450.
Yeah is hopeful that the government, via the Ministry of Finance, will look for ways to support the local unit, in spite of all the exogenous factors that are beating the currency.