JANUARY 1 — Earlier last August, the Economic, Real Estate and Entrepreneur Development Committee had anticipated that the trade war between the United States and China would be a brief one, based on the transactional nature of the relationship between the two superpowers, in everything ranging from the international debt market to domestic retails.
The reality of it now however quite the opposite, with the effects on the American economy now patently apparent.
The latest figures from the US Federal Reserve projects a wide-ranging dip in the country’s Gross Domestic Product (GDP), to 2.0 per cent in 2020 from 2.2 per cent registered last year, with it worsening to 1.9 per cent and 1.8 per cent in 2021 and 2022 respectively.
Although early forecasts put the GDP at 2.2 per cent in 2019, independent data compiled from the individual states’ reserve indicate a potentially far lower figure. The state of New York, for example, forecasts a fourth quarter growth rate of just 0.4 per cent, and Atlanta even lower at 0.3 per cent. Both would indicate a stalling economy, with inflation for the overall country trending upwards at 1.9 per cent in 2020, and a projected 2.0 per cent in the two years after.
Besides the generally modest figures, the Fed’s unwillingness to increase rates of late is also telling. Rates are expected to hold in the 1.50 per cent to 1.75 per cent range well into next year, in order to stimulate a faltering economy.
Besides the trade conflict overshadowing every conversation, world markets are also grappling with the potential for other conflicts to escalate as well, including the standoff between the US and Iran, the still uncertain conclusion to trade and political terms post Brexit and the Argentinian sovereign debt crisis, with Buenos Aires now owing the International Monetary Fund some US$57 billion, in shades of the country’s similar difficulties in the late 80’s.
The immediate question that needs to be asked, however, is to what extent the Malaysian economy is capable of absorbing the shocks from such potential developments. Several analysis including that from the Institute of Chartered Accountants in England and Wales (ICAEW) has noted that Malaysia is already being affected by the trade war, and will continue to do so throughout the year.
Based on this it has also forecasted a slowdown in domestic growth to around 4.0 per cent for the year 2020, compared to the government’s official projection of 4.9 per cent. This dovetails with this Committee’s own projections published after the recent Budget, which anticipated that the country’s economic growth for 2019 would be around 4.0 per cent to 4.5 per cent, with a similar figure in the year 2020.
The spill over effects of the US-China trade war notwithstanding, the biggest concern regarding the malaise affecting the Malaysian economy is the lack of any new or fresh strategic impetus from the government to overcome the obvious challenges. This was apparent in the largely predictable 2020 Budget that was presented last year, without any significant steps to transform the country’s economy in light of today’s challenges, much less new ones it might face in the coming 12th Malaysia Plan.
The government has clearly been unable to identify new and specific growth engines that it can develop to drive the Malaysian economy, much less take it above the current turmoil.
In our statement issued on November 1, 2019 we put forth the digital economy as a new key growth engine for the country’s economy, and broached the steps necessary to make it happen. Among this was the need for a specific legal framework to guide, monitor and manage the digital economy, to ensure its development alongside the Government’s objectives towards the nation’s longer-term growth and development.
We also suggested a specific and targeted tax structure for the digital economic sphere, to ensure that the sector’s contributions are neither overlooked nor overtaxed, subsequently impeding its potential growth.
Although the government has facilitated the Digital Service Tax (DST) effective January 1, 2020, in reality, its structure is more a consumption rather than income tax. Therefore, the DST’s 6 per cent tax rate will be placed entirely on the consumer’s shoulders by the service provider, adding to an already significant burden.
A more considered measure perhaps would have seen service providers’ earning being taxed directly instead, as corporations are through the corporate tax structure. As illustrated in the European Union (EU), it is the only way for the Government to collect the tax i.e. a direct income tax.
Finally, a concern that has to be addressed more directly is investor confidence, which has lately been in the doldrums. The consistent outflow registered in the Bursa Malaysia over the last 2 years is symptomatic of a larger dampness. The same overlooked analysis that we presented months ago is now being offered by others e.g. by MIDF Amanah Investment Bank Research (MIDF), who are noting investors’ largely more cautious approach to the Malaysian market, given the lack of concrete, positive leads.
The result is predictable: Net Foreign Outflow (NFO) as of December 27, 2019 stood at RM10.99 billion. The Malaysian Bursa was also Asia’s worst performing bourse, with analysts such as Bloomberg and Samsung Asset Management Co. seeing this continue well into 2020.
It is therefore incumbent on the Government to immediately effect the necessary structural changes to jumpstart — and from there drive — the Malaysian economy forward. It requires holistic rather than short term patching. As a nation driven by trades Malaysia will only prosper with a sustainable ecosystem that takes into account changes and developments both at home and abroad.
* Mazli Noor is the Vice Chairman PAS Central’s Economic, Real Estate and Entrepreneur Development Committee.
* This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.