How is Malaysia confronting its present economic challenges given the recent global turmoil?
By Marc Djandji, CFA
In this article, we are examining some of the economic issues facing Malaysia. The country seeks to embark on its various economic development growth strategies, while trying to come up with solutions to resolve its debt woes. This has been quite a challenging task for Malaysian Prime Minister, NajibRazak as he seeks to outline various plans to boost the economy in Malaysia during the upcoming Budget announcement in Putrajaya, Kuala Lumpur, scheduled for October 25, 2013.
Recently, it was reported that Bloomberg News got an exclusive interview with Prime Minister Najib, which was recorded on October 11, 2013 at Putrajaya. Here Prime Minister Najib was quoted as saying that “We’re very closely monitoring how we manage our macro position as well as our fiscal and debt to make sure that we will not be downgraded.” This statement was made as Malaysia has been facing mounting concerns about its debt issues following a Fitch Ratings decision to cut Malaysia’s credit outlook in July, citing rising debt, and lack of budgetary reform. Malaysia, which has a long-term foreign-currency denominated rating of A- at Fitch, has run a continuous annual budget deficit every year since 1998.
Given this present fiscal situation impacting Malaysia, with the spectre of major credit downgrade by a prominent credit rating agency such as Fitch Ratings, among others, the Malaysian government has embarked on implementing tighter fiscal controls. These include the raising of fuel subsidies, which was regarded as the first since 2010, and delaying some public projects. Malaysia’s debt to total gross domestic product (GDP) ratio stood at 53.3 percent, and was regarded as the second most indebted nation among the 12 Asian markets after Sri Lanka. This is according to data compiled by Bloomberg News. In addition, during the month of September 2013, it was reported that Moody’s Investor Service indicated that the current fiscal deficit, measured as a percentage of overall GDP might exceed Prime Minister Najib’s target of 4.0 percent. The credit ratings agency warned the nation’s government that if its ‘fiscal house’ is not put in order, any new fiscal targets will become ‘increasingly out of reach”, unless further measures are being taken. Moody’s has a debt rating of Malaysia’s government bonds at ‘A3’ with a stable outlook.
The various economic challenges facing Malaysia, along with the current economic environment does pose a question on whether Malaysia is able to successfully embark on the next path of economic growth. Following the May 2013 General Election (GE), Prime Minister, NajibRazak, and his ruling United Malays National Organisation (UMNO) party returned to power, but with a slim majority, and a largely dissatisfied voting public. The upcoming Budget Announcement is an important event where many investors and market watchers are looking for any indications that Malaysia is serious in confronting the various economic challenges. The recent reduction in spending on public works projects could cause some investor concerns over the ongoing country’s developments. These include the high speed rail network agreement signed between Singapore and Malaysia (aimed to boost cross-border traffic, encourage foreign direct investors, etc.,) to be delayed or halted indefinitely. Prime Minister Najib has also taken additional measures including the reduction of state subsidies, broaden its tax base and manage its spending “prudently”. The Malaysian Parliament, where the Budget announcement will be broadcast live to viewers across the country, and in neighbouring countries, is scheduled to begin on October 25, 2013. Market observers will also be watching the Government for any decision on whether there is a widespread agreement among the Malaysian people to accept a goods and service tax. This is likely to provide an additional source of tax revenue as the Government tries to shore up its reserves to counter any potential economic shocks.
The Malaysian Ringgit currency, together with the rest of the broader regional currencies, including the Indonesian Rupiah, was substantially impacted during the month of July and August, leading up to the US Federal Reserve (US Fed) monetary policy meeting on September 17, and 18, 2013. Readers might recall that during that period, emerging economies such as Malaysia suffered some of the worst hits in terms of the rate of capital withdrawals. This resulted in major declines across the board for many regional currencies, including the Malaysian Ringgit. The stock market in Malaysia, Bursa, was also not spared as one of the regions’ worst monthly performance in terms of stock averages, etc. These various economic shocks, including the domestic fiscal woes have been evidenced by the apparent lack of broader tax reforms being implemented to shore up its reserves. The Prime Minister has also set his goal for the country’s overall GDP to come in by approximately 4.0 to 5.0 percent growth for 2013, and was quoted as saying in an October 11 interview that “I think probably slightly beyond 4.5 percent”.
In conclusion, I believe that Malaysia is trying to put its fiscal issues in order, while convincing investors, both domestic and foreign that it is seriously making the necessary reforms to manage these issues. However, one might question whether the new fiscal reforms being implemented were just a public relations (PR) tactic used by the UMNO-led government to please some of the dissatisfied voters from the May 2013 GE. In addition, the increased reduction in government spending at a time when the global economy is slowing might result in the country forgoing or delaying some of the public infrastructure projects. These include the cross-border high speed rail system between Singapore and the country, which could help revitalise foreign direct investments (FDI), tourism and trade. Such economic benefits will help ensure that the country remain one of the region’s premier financial centre, and major business hub for many years to come.
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