This article first appeared in The Edge Malaysia Weekly on December 25, 2017 - December 31, 2017

IN many ways, 2017 was a year that lived up to investor expectations and lifted market confidence. A synchronised global economic upswing in major advanced economies and still steadying pace of China’s economic restructuring will continue to lift global growth outlook in 2018 to an estimated 3.7% from 3.6% in 2017, although that remains well below the long-term average of 4.2% per annum in 1999 to 2008.

After enduring two years of setback in growth (5.0% in 2015 and 4.2% in 2016), the Malaysian economy witnessed a turning point as economic growth gained momentum. Firmer global growth and sturdy exports as well as unrelenting consumer spending spurred an expansion of gross domestic product to an estimated 5.8% for the full year of 2017, the highest in two years.

The economy is projected to grow by 5.1% in 2018, with domestic demand still taking the lead, albeit slower, while strong double-digit export growth and levels normalise and grow at a slower pace (estimated 7.5% in 2018 vs 17.5% to 18% in 2017) as the high base effect kicks in coupled with the waning effect of a favourable exchange rate valuation due to the gradual strengthening of the ringgit.

Is our growth momentum firmly secured in the challenging times ahead? Short-term growth could increase further as Budget 2018’s income support initiatives (yearly cash handouts, special financial payment for civil servants, personal income tax rate cut) will lend a helping hand to household consumption and spending. But setbacks are also possible as the bottom 40 and middle 40 income households face the headwinds of the high cost of living, inflation (estimated at 3% to 3.5% in 2018) and the expected small rise in interest rates. Bank Negara Malaysia has signalled its readiness to review the current degree of monetary accommodation (overnight policy rate of 3.00%) given the stronger economic prospects. Our baseline call is a 25 basis points hike for a start.

The market must prepare for a further rise in rates to a neutral level that will not discourage consumption, economic activity and investment. This is possible if the following conditions are met throughout 2018:

1)     If global growth and the domestic economy continue to sustain at strong levels, supported by domestic demand.

2)     Inflation expectations to be anchored should headline and core inflation continue to remain at elevated levels as oil prices remain a wild card. Bank Negara needs to stay ahead of the inflation curve.

3)     Balanced yield gaps should the US Federal Reserve hike rates aggressively.

The strengthening of the ringgit against the US dollar to more than 10% year to date, if it continues on a sustained basis, offers a ray of hope for Malaysians to enjoy the positive impact of a strong local currency. But the pass-through exchange rate effect comes with a time lag and as always, one should expect some price stickiness and slow transmission.

On the ground, grouses continue unabated over the state of economic conditions. The “feel good sentiment” remains absent and the Consumer Sentiment Index continues to stay below the optimism threshold. Many consumers remain severely cash constrained.

With B40 and M40 households’ net savings (difference between mean income and expenditure) at RM54 per month and RM365 per month respectively, they are walking a tightrope, and any unwarranted shocks to employment and income, or price and expenditure, could puncture their balance sheets and temper spending and consumption

Over the cumulative period of 2015 to October 2017, price increases were reflected in food (6.4%), transport (8.1%), health services (4.4%) and utilities (4%). The restraining factor that impacted households the most was high household debt, though that moderated to 84.6% of GDP at end-September 2017, from 88.4% at end-2016.

While better GDP growth numbers and the ringgit’s recovery helped to boost confidence somewhat, what really matters to households are real purchasing power and disposable income as well as better living standards. The establishment of the National Cost of Living Action Council to address issues involving cost of living is a welcome development. The focus areas are housing, transport, utilities as well as food and beverage. A closer examination of whole supply chains and distribution channels along which products travel from producers and manufacturers — to track how the process flows in terms of price structure, cost and ultimately the supply and demand dynamics — is warranted to keep a rein on excessive pricing.

On private investment, there is a chance that private investment growth could slow down a bit to an estimated 8.3% in 2018 from the estimated 9% this year. The implementation of ongoing and new major public infrastructure and connectivity projects (rail, ports, highways and high-speed rail) ahead are expected to keep up the investment momentum of both the public and private sectors over the medium term. While managing the rising cost pressures and new regulatory changes, small and medium-sized enterprises should leverage the budget’s funding programmes and credit facilities, including the establishment of the Digital Free Trade Zone to raise technological capability, expand into the borderless marketplace, and explore business and investment opportunities.

In the near term, lingering uncertainties ahead of the 14th general election, which has to be called by August next year, will weigh on investor sentiment. What investors really look for is policy continuity, uniformity and certainty to ensure an investor-friendly investment and business environment, backed by transparency, ease of compliance and less cumbersome regulations.

In the year ahead, Malaysian businesses will have to brace themselves for higher operating costs with the implementation of the Employer Mandatory Commitment (EMC), which was postponed in 2017, Employment Insurance System (EIS) and higher gas prices. Under the EMC, employers will be no longer be allowed to deduct the workers’ levy from their wages. Other related costs in the cards are the electricity tariffs adjustment, probable review of the minimum wage in 2018 and new foreign workers’ levy structure in 2019.

While the welcome cyclical global activity upturn and sustained domestic demand provides an opportunity for Malaysia to carry forward its current growth momentum, there are medium- and long-term challenges that could limit the potential for much faster growth.

Policy focused on qualitative growth factors, namely supportive tax policies and regulatory environment, growth inclusiveness, stronger productivity growth, further enhancement of technological capacity and labour skills, digitalisation as well as driving e-commerce growth, will help to sustain quality growth and provide better conditions for businesses to thrive over the medium term.

Monetary, financial and credit policies should continue to remain supportive of growth. Setting the right fiscal priorities matters. The future fiscal stance should continue to prioritise social and economic expenditure and transfer to foster balanced and inclusive growth so that the benefits of growth can reach all.

Lee Heng Guie is executive director of the Social-Economic Research Center 
 

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