KUALA LUMPUR, Oct 13 — Malaysia needs to tap into different revenue sources to shore up confidence in its economy and the ringgit, economists said as the global decline in the commodities sector continues to weigh on the country's currency.
As Prime Minister Datuk Seri Najib Razak's administration prepares to unveil its 2016 budget this October 23, observers say Putrajaya needs to realign its revenue targets amid weakening demand for commodities from China, which is facing an economic slowdown after a decade of record growth.
"Malaysia needs a shift in growth sources. Initially we saw a decline in advanced economies and now it's happening in China. These sources are going back to the US and the Eurozone, so that should be helpful," Dr Yeah Kim Leng, dean of the school of business at the Malaysia University of Science and Technology, told Malay Mail Online when contacted.
While Malaysia has progressively diversified its revenue pie over the years, China's rapid economic expansion over the past decade — which Yeah said sent demand and prices for commodities through the roof — spurred the Southeast Asian trading nation to ramp up production in the oil and gas and palm oil sectors.
The dependence on these two sectors, however, has been pinned as among the key factors driving down the value of the ringgit as crude oil and other commodities continue to flounder due to the current global economic malaise.
The ringgit has been the worst performing currency in the region for most of this year, trading at a 17-year low at 4.4080 to the greenback on September 28.
It has since rallied against the US dollar in recent days amid rising crude oil prices and bullish local economic data, according to national newswire Bernama, though it continues to trade at over four ringgit to the dollar.
Moody's senior analyst Christian de Guzman said it was not a bad strategy for Malaysia to leverage on commodities such as liquefied natural gas (LNG) and palm oil when it was in demand.
"In the current environment where that’s not the case, Malaysia has to seek alternative sources for growth," he said in an email.
The domestic front has been positive over the first half of this year, but de Guzman warned that local sentiments have been "somewhat bearish" and would likely affect economic activity for the rest of the year.
Yeah said it is vital that Putrajaya make sure domestic institutions and economic financial conditions remain conducive and supportive of growth heading into 2016, as local consumption accounts for half of Malaysia's GDP.
He added that while the country has buffers in place to shield the local economy from external volatility, the federal government must work towards a speedy resolution of domestic woes such as the 1 alaysia Development Berhad (1MDB) issue, which he says has spooked both local and foreign investors.
"We must assure households and businesses to continue spending for the economy to sustain its growth path," Yeah said.
Despite the challenges, Yeah believes that Malaysia's economic fundamentals are strong enough to stave off most of the external shocks from the sluggish global economy.
"I think 4 to 5 per cent growth is within our capacity," he said.
