KUALA LUMPUR, Oct 21 ― Malaysia will likely survive economic headwinds in 2016 caused by continued uncertainty in the global economy, but the country remains vulnerable to increased pressure on its revenue and imported inflation due to the flagging ringgit, economists said as Putrajaya prepares to present next year’s budget.
Analysts polled by Malay Mail Online agreed that Malaysia has the benefit of strong fundamentals to keep its economy above water but noted that it can expect revenue to stay moderate as commodities remain volatile and China's economy struggles to stave off a slowdown after a decade of record economic growth.
In the short term, Southeast Asia's second most advanced economy may also end up struggling to maintain strict fiscal discipline, as Putrajaya faces a potential scenario where it would be required to step in and ease the strain on consumers facing price hikes tied to the ringgit's poor performance this year.
This piles pressure on Malaysia to find a workable strategy in Budget 2016 ― which will be unveiled by Prime Minister Datuk Seri Najib Razak on October 23 ― that stays true to its intended target of cutting the budget deficit to 3 per cent of gross domestic product (GDP) while allowing room to sustain domestic economic growth.
“The government faces a balancing act between its stated commitment to working towards a balanced budget and providing support to an economy that is facing major headwinds to growth. It remains to be seen which of these the government will prioritize,” Moody's senior analyst Christian de Guzman told Malay Mail Online over email.
Moody's data showed that the April implementation of the GST has helped offset the negative impact of low oil prices on government revenue, which accounted for 28.8 per cent of federal government revenue in direct oil-related receipts in 2014 compared to 39.8 per cent in 2009.
Floundering in a 'commodities bubble'
Yeah Kim Leng, dean of the school of business at the Malaysia University of Science and Technology, noted that Malaysia has done well to develop reliable revenue generators in other sectors such as electronics, manufacturing and construction over the past four decades.
The progressive diversification of Malaysia's revenue pie, however, did not insulate the country from the sharp dive in the value of commodities largely caused by the slowdown in China.
“Because of the rise of China in the last decade, there was a spectacular rise in demand for commodities. We had a commodities bubble,” he said when contacted.
“The rise in commodities over past years was much faster in demand and price compared to other sectors such as manufacturing. Now that that has collapsed, we can expect the share of commodities in Malaysia's GDP to decline in coming years,” Yeah added.
The commodities bubble was illustrated by Malaysia's return to its agricultural and mining roots, with petroleum refining accounting for nearly 19 per cent of manufacturing output followed by palm oil processing (12 per cent ) in 2012 - each bigger than the electronics sector, said Jayant Menon, Asian Development Bank's lead economist for trade and regional cooperation.
Jayant warned that this leaves Malaysia in a situation where it is stuck with capital-intensive sectors that generate few jobs. Citing figures from this year's Annual Survey on Manufacturing Industries, he said petroleum refining employed 14,400 workers compared to nearly 200,000 in electronics.
Agro- and petroleum-processing industries also generate relatively low-productive and low-skilled jobs with low wages, with the largest share of manufacturing workers under both sectors being plant and machine operators who take home an average annual salary of around US$4,000 (RM17,240), he added.
“The continued heavy reliance on commodities leaves Malaysia vulnerable to terms-of-trade shocks from swings in commodity prices,” Jayant said.
Liberalisation the way to go
To deal with the shortfall in commodities revenue, Yeah suggested that Putrajaya look at pursuing further market liberalisation to boost the entry of more new players and enhance competitiveness, particularly with the increased market exposure with the setting up of the Asean Economic Committee this year.
He said this will play a dual role of spurring growth for small and medium enterprises (SME) and providing greater income and employment generating activities to help uplift the country's low-income households in the bottom 40 per cent.
Putrajaya, however, will need to adjust its spending level to take into account the limited degree that the GST will offset the deficit in crude oil revenue, while at the same time strive to achieve a “clear resolution” to current controversies rocking the federal government to allay investors' fears, Yeah said.
Yeah said this must go hand-in-hand with maintaining Malaysia's target of cutting its fiscal deficit to 3 per cent of GDP to rein in skittish sentiments rattled by the ongoing 1Malaysia Development Berhad (1MDB) fiasco, among others.
“This is important because of fragile investor sentiments... we need to shore up fiscal strength to showcase (that) Malaysia's fiscal position continues to improve,” he said.
Moody's de Guzman noted that Malaysia's fiscal consolidation trend is likely to stay on track due to the implementation of the GST and the rationalisation of billion ringgit subsidies over the past two years.
“However, it is yet unclear whether the government will respond sufficiently with regards to spending cuts to maintain that trend given the expected pressure on revenue next year,” he said.
