Malaysia must prepare for an economic slowdown

There are a number of concerning signs

Murray Hunter

With the latest World Bank’s forecast warning that most economies will grow much slower in 2024 and 2025, Malaysia must be very cautious as the local economy is directly exposed to global events.

As of the first quarter of 2024, there are a number of warning signs for Malaysia, as is reflected in Malaysia’s official national account figures. Although GDP grew by 4.2 percent in Q1 2024, one of the major contributors to this figure was the 7.3 percent rise in public sector consumption. Private consumption growth of 4.7 percentage has been running along this consistent level, since the 2Q of 2023. The dramatic drop in imports, since Q1 2023 confirms this. Its not known if the 8 percent increase in imports in Q1 will continue throughout 2024. This will be a vital indicator.

The demand for services grew at 4.7 percent in Q1 2024. However, manufacturing is in a slump, with almost no growth over the last 9 months, where exports have been declining, until Q1 2024.

Malaysia’s FDI result of RM 926.3 billion over the fourth quarter of 2023 was not much higher than RM 914.9 billion achieved to the same time in 2022. So, its yet to be determined whether the government’s energetic investment drive is working as well as claimed. This must also be put into perspective with capital outflow of RM 662.8 billion to the fourth quarter in 2023.

To a great extent, government expenditure is driving GDP growth.

This year will see continued threats to global supply chains, where any increase in the price of oil will further increase transport costs, adding to food prices, i.e., supply side inflation. The continuing Russian-Ukraine war, and threats of it enlarging, the economic slowdown of China, Europe on the brink of recession, and the US also slowing down, make Malaysia’s trade and investment prospects look grim.

In such a downturn, foreign investment is likely to be subdued. In a worst-case scenario, projects like the ECRL and Forest City are in danger of completely stalling.

Malaysia’s Public debt has risen to RM 1.2 trillion. Public debt grew 8.6 percent in 2023. This is likely to dramatically increase, if the current government keeps running budget deficits. Malaysia cannot continue the high deficits it ran during the Covid-19 pandemic. The 2024 budget has allocated RM 49.8 billion or 12.6 percent of total budget expenditure just to pay the interest on existing debt. The current government must start paying back this inherited debt.

The current high debt levels will make it more difficult for the government to improve healthcare and revamp education, two areas in crisis mode. Current debt levels also potentially constrains government structural and infrastructure reform. Reducing the aggregate level of poverty will be also be more difficult, with budgetary constraints.

International instability will affect food security, as 55 percent of Malaysia’s food needs are still imported. The effects of the weakening Ringgit on inflation, especially, food is still yet to be fully felt, not to mention potential supply chain restrictions.

Bank Negara Malaysia (BNM) has been optimistic saying the value of the Ringgit doesn’t represent Malaysia’s strong fundamentals. Let us hope this was only a public statement, and BNM has said something different in its confidential briefings to the MOF. If this is not the case, then a grave miscalculation is possible.

The rest of this article looks at some of the measures the government may be forced to consider, if the current forecasts are found to be over optimistic.

Monetary Policy

Bank Negara Malaysia’s prime tool in monetary policy is the Overnight Policy Rate (OPR), which directly influences interest rates. BNM must seriously look at a rate cut to alleviate the current financial stress on borrowers and mortgage holders. This will have a direct bearing on the financial wellbeing of many households.

BNM must intervene and support the Ringgit. This can be achieved through talking up the Ringgit, buying up the Ringgit. With relatively low foreign reserves in comparison with other countries in the region, Malaysia could radically build up its gold reserves through increasing local mining and buying the bullion.

Fiscal policy

This year’s budget deficit is likely to be somewhere between RM 91-100 billion, depending upon taxation receipts. Spending must be radically cut to prevent the deficit from blowing out, especially if tax collection doesn’t meet the targets set in the last budget. The RM 90 billion development expenditure plan can be delayed until a better time in the future.

Other areas that must be considered in the medium term is comprehensive tax reform that is progressive, which provides equity in favour of the B60 in society. Malaysia should not be a tax paradise for the super-rich.

Poverty

Many households are still suffering from the effects of the MCOs during the Covid-19 pandemic. A recession descending upon the Malaysian economy would be devastating. The government could look at methods to put cash directly in the hands of the B40, rather than subsidies.

Employment

Any recovery in manufacturing will not benefit Malaysians. The manufacturing industry principally employs foreign workers. It’s the informal sector where Malaysians, who will be financially distressed are domiciled. The government must embark upon major initiatives to empower the informal sector through promoting the growth of the smaller MSMEs. There should be a shift from formal university education towards TVET, in-order for the marginalised to learn a trade and increase their incomes.

Identity-economics

Focus upon the Bumiputera sector, particularly the large companies and corporations, didn’t flow down to the people during the Covid-19 pandemic. There is no reason to see why similar pro-Bumiputera policies will be any different if Malaysia falls into recession. Projects with financial leakages, only increase public debt. Previous Bumiputera centric policies have been inefficient in providing real benefits for marginalized Bumiputeras. This is why the national rate of poverty increased after the Covid pandemic.

Productivity

The economy must be de-regulated to increase efficiency and productivity. Monopolies must be broken up to increase competition and lower prices. More competition will generate efficiency and force firms to improve productivity. The key to increasing productivity is increasing the value of what is produced. This is where Malaysia must look into creating an entrepreneurial economy with innovation, by producing the soft and hard infrastructure to nurture small MSME start-ups.

Public sector spending

Public sector operation costs in the 2024 budget are RM 95.6 billion, or 24.3 percent of total budget expenditure. The December 13 percent increase in civil service salaries will add another RM 10 billion to public service operating costs.

A major effort must be made to bring efficiency to the civil service through a freeze on new employees and the offering of early retirement to trim down numbers. Obsolete departments and agencies should be closed. Duplication in activities must be stopped.

Each ministry must be budgeted for using Zero Based Budgeting (ZBB), and Program Based Budgeting (PBB) to determine the most optimum budgets for the civil service.

This would be a major program to improve productivity in Malaysia.

Food security

Malaysia’s food imports were RM 71.6 billion in 2023. There needs to be a radical change in the way agriculture of organized in Malaysia focusing on the development of smallholders. These groups around the country must be trained and assisted to commence market gardening of vegetables and everyday staples, where supply chains are radically changed, so farmers can sell directly to consumers.

Corruption

Corruption is a major source of leakage of government funds. According to the MACC Chief Commissioner Azam Baki, RM 277 billion of public funds were lost to corruption over the last 5 years. This is around 30 percent of government spending, adding directly to the budget deficit. The Malaysia Anti-Corruption Commission (MACC) must radically change its strategy from investigating historical cases from the 1990’s, in favour of investigating current corruption cases that are happening within the civil service today. This will be a much greater deterrent in preventing future corruption.

The biggest risk is that advisors within the Ministry of Finance believe the optimistic forecasts and become complacent. An emergency supplementary budget should be prepared and introduced into parliament to take action and prepare for economic indices that don’t meet the optimistic forecasts. Doing this would also signal to the world that Malaysia is serious about economic management. This may be enough to stop the further ‘freefall’ of the Ringgit.

Any coming recession may force the government to become reform minded.