Fitch Solutions foresees slower economic growth in next 10 years compounded by political uncertainty, Covid-19

Fitch Solutions said any effort to upgrade the Malaysian economy may be hampered by political uncertainty and stalling reform momentum amid a shift toward populism. — Picture by Hari Anggara

KUALA LUMPUR, Sept 30 — Malaysia’s gross domestic product (GDP) is expected to undergo lower growth in the next decade as compared to the previous one, with political uncertainty and other factors likely to have an undesirable impact.

This was revealed by multinational financial securities company Fitch Solutions Country Risk & Industry Research, which projected that Malaysia’s growth will stand at 3.4 per cent, compared to the previous decade’s projection of 6.4 per cent.

“Having exhausted avenues of growth provided by lower-level industrialisation, Malaysia has to upgrade its economy in order to escape the middle-income trap,” it said in a commentary statement.

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Fitch Solutions said any effort to upgrade the Malaysian economy may be hampered by political uncertainty and stalling reform momentum amid a shift toward populism, which is likely to present serious risks to its success.

“We expect Malaysia’s political landscape to remain fluid and uncertain for much of the next decade following the first-ever election defeat suffered by the long-ruling Barisan Nasional (BN) coalition in 2018.

“With both politicians and electorate alike adjusting to the new reality, we expect power to change hands often, leading to questionable policy continuity and stalled reform momentum. Its potential could clearly be seen during the February 2020 political crisis when the Pakatan Harapan government was deposed after backroom manoeuvres sparked by inter-personal and inter-party rivalries within the four-party coalition,” it said.

Fitch Solutions said this uncertainty in the interim is likely to be a negative factor counted against it by potential investors, which is inopportune as businesses and countries around the world are accelerating plans to move at least part of their operations out of China.

“This is in a bid to build more diversified and resilient supply chains, as an answer to the liabilities of relying too much on China exposed by the US-China Trade War that began in 2018 and the Covid-19 Pandemic in 2020.

“Malaysia would essentially be starting on the back foot against regional competitors, especially Vietnam, in the race to attract foreign direct investment,” it said.

The organisation also said the populist approach taken by politicians in order to shore up their popularity could also lead to a worsening business environment over time as more protectionist measures are implemented.

“The somewhat chaotic nature of coalition politics during this transitional period in Malaysia, where political defections of MPs and even whole parties have occurred in recent years, also risks a resurgence of corruption and graft, further weighing on investor confidence. 

“Heads of coalitions could resort to political patronage to ensure the loyalty of their constituent parties. This could lead to bloated governments with more ministerial positions created for the sake of handing them out to coalition MPs and the appointment of backbench MPs to key positions in government-linked companies,” it said.

Due to this, key reforms that could unlock further growth potential in Malaysia are likely to be put off. Fitch Solutions cited the Bumiputera policies as an example, which it said will likely to continue brain drain where talented non-Malay members of the population seek opportunities overseas.

“Talent is key to the country being able to move up the value chain and escape the middle-income trap and the brain drain, if left unaddressed, would impede any such drive to upgrade the economy. Similarly, the lack of an even playing field in government procurement has also undermined efficiency,” it said.

Other factors contributing to Malaysia’s slower real GDP growth in the coming decade include the slowing of active population growth which is expected to be at 1.0 per cent compared to 2.3 in the last one and the diminishing fiscal space left for future interventions.

“Public debt levels, including debt guaranteed by the government, exceed 80 per cent of GDP and is growing steadily. The inability of the government to mount a strong response to the Covid-19 pandemic in 2020 indicates that this constraint is already a binding one and will likely remain so over the coming decade. 

“Furthermore, populist appeals to the population are likely to include regular cash handouts over the coming years, which would further limit available resources to support the economy during leaner times. This increased vulnerability to negative economic shocks will likely weigh on average growth over the coming decade,” Fitch Solutions said.

Fitch Solutions noted that the Malaysian economy is proceeding along a process of external economic rebalancing, moving away from export-driven growth and more towards domestic private consumption. 

“This rebalancing will act as a drag on overall headline real GDP growth, but at the same time, it will see private consumption growth outperform, creating investment opportunities in catering for the domestic middle class rather than overseas demand. 

“Additionally, a more domestic-focused demand picture will allow the economy to be more resilient to global demand shocks, reducing recession risks. However, this is not to say that we see export growth collapsing,” it said.

The organisation said that in Malaysia’s favour, it has a well balanced mix of exports, not being over-reliant on commodities or a particular manufacturing industry, and also has a diversified export market, despite its heavy reliance on Chinese demand.

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