A Rotten Future Or What?

Today, I came across THIS LINK on the third issue of The Malaysia Economic Monitor (themed Inclusive Growth),November 2010 issued by the World Bank. The Preface of this 118-page report explained that the Government of Malaysia and the World Bank set up a knowledge partnership centered on the policy objective of transforming Malaysia into a high-income economy last year.

• Following a spectacular year-on-year recovery, the growth momentum of the Malaysian economy is ebbing.

• After a period of crisis-related volatility, the economy transitioned into more normal patterns of growth: the pronounced inventory cycle began to subside, private consumption became more buoyant, and fixed investment picked up as capacity utilization gaps were closed.

• Interrupting this process was the return of external weakness, with exports slowing in the second quarter and then contracting. Since import demand for export processing did not react immediately, inventory volatility picked up again.

• As growth patterns normalized, inflation has recovered. But, the small rise in inflation, reaching 2.1 percent in August, was largely due to food prices, with little impact from non-food subsidy reforms. Bank Negara pre-emptively responded to the recovery in activity and inflation by raising the policy rate by 75 basis points between February and July to 2.75 percent.

• Rates have subsequently remained flat, while a marked, yet relatively smooth, Ringgit appreciation helped contain price pressures. Asset price strength reflected resurgent investment inflows, as in the region, but outwards direct investment rose too. Steps were taken to liberalize the exchange rate regime, mainly to lower trade transaction costs.

• Fiscal policy has also started to normalize. The 2011 Budget targets a deficit of 5.4 percent of GDP, down from 5.6 percent in 2010 and 7 percent in 2009.

• The Government embarked on a first step to systematically reform subsidies in mid-July, raising energy prices, including gasoline and household gas, and sugar prices moderately. It also announced plans to adjust regulated fuel prices monthly, as a step towards indexation, but to date there have been no further adjustments.

• Economic activity is expected to further decelerate in the second half of 2010.

• Given the low base in 2009, growth of 7.4 percent is expected for 2010, before slowing to 4.8 percent in 2011. Domestic demand is set to continue to drive near-term growth.

• The strength of global demand, both from the G3 and China, remains a key source of uncertainty. In addition, domestic sentiment is sensitive to reform progress relative to expectations while uncertainty over the impact of the ongoing reforms and associated investments further complicates near-term forecasting.

• Achieving Malaysia’s Vision 2020 goal of high-income status requires average growth of 6 percent during the 10th Malaysia Plan period — a marked improvement on the 4.4 percent achieved over 2006-2010. The challenge is not only to boost the level of growth but to ensure that growth is inclusive and sustainable.

• The policies and projects of the Economic Transformation Program are key to meeting this challenge through greater, and higher-quality, investment and productivity improvements.

• Risks to medium-term growth remain – the extent of reform implementation and progress on fiscal consolidation.

• The Government is taking steps to address both areas, but risks remain, both upside and downside. Until solid implementation of reforms is seen there is unlikely to be a groundswell of positive sentiment of foreign investors towards Malaysia.

• In addition to the sustainability of public finances, the quality of public service delivery will be a crucial determinant of the success of the Government’s plans.

READ MORE HERE