The economic crisis is, in a way, a blessing in disguise because it provides the opportunity for policymakers to reassess the country’s growth model and take steps to change and improve. Hence, 2010 will be a year of transition — a year of recovery during which the government will lay the foundations to facilitate Malaysia’s transformation into a high-income economy. An earlier-than-expected global recovery is also a silver lining.
The good news is that the global recession is turning out to be less severe than initially expected. Recovery is taking place earlier than expected, prompting greater optimism that growth in many economies will see a smaller contraction this year before turning positive in 2010.
On the domestic front, the government has projected a 3% contraction in gross domestic product (GDP) for this year, which is smaller than the 4% to 5% contraction forecast earlier this year.
The Malaysian economy will turn around next year to grow between 2% and 3%, benefiting from stabilising global economic conditions and augmented by fiscal measures and accommodative monetary policy, according to the 2009/2010 Economic Report.
Growth will be driven by domestic demand, particularly private expenditure and supported by an expected recovery in external demand. The government is expecting a broad-based recovery with positive contribution from all sectors in the economy.
The services sector will continue to spearhead growth in 2010. It is projected to grow 3.6% (2.1% in 2009) with a higher share to GDP of 58.5% compared with 57.9% in 2009.
This will be followed by the construction sector, which is anticipated to expand 3.2% (3.5% in 2009), benefiting from the government’s pump-priming efforts under the second stimulus package. In addition, exploration activities by the oil and gas industry are expected to spur the sector.
After contracting 12.1% in 2009, the manufacturing sector is expected to turn around to grow 1.7% in 2010, where export-oriented industries are expected to benefit from the turnaround in global trade.
The agriculture sector is projected to rebound and grow 2.5% in 2010, compared with a contraction of 2.3% this year. The key growth driver is expected to be the recovery in the commodity subsector, where the production of crude palm oil is seen growing 4.9% to 17.8 million tonnes (production contracted 4.1% in 2009) on account of an expansion in mature areas to 3.98 million hectares.
The mining sector is also expected to turn around by growing 1.1%, compared with a contraction of 2.9% in 2009, boosted by a higher production of crude oil and natural gas.
Aggregate domestic expenditure is expected to grow 1.2%, largely due to an expected rebound in private sector expenditure of 2.9%, from a contraction of 2.4% in 2009. Private consumption is projected to grow 2.9%, faster than the 1.6% to be recorded in 2009 due to higher disposable income arising from better commodity prices and more stable employment conditions.
Fiscal consolidation
A key priority of the government in 2010 is fiscal consolidation and the trimming of the budget deficit, projected to be 7.4% of GDP this year or RM51.1 billion. For 2010, the budget deficit is projected to narrow to RM50.65 billion or 5.6% of GDP.
“The thrust of fiscal policy in 2010 is to strengthen and sustain the recovery process by further boosting domestic demand. Economic activity will be accelerated through revitalising private investment and consumption activity while ensuring public sector projects and programmes under the stimulus packages and the Ninth Malaysia Plan are completed on schedule,” the Economic Report says.
It notes that with the economy contracting in 2009 and a mild recovery expected in 2010, federal government revenue is expected to decline 8.4% to RM148.4 billion, compared with RM162 billion projected in 2009.
In tandem with the fall in revenue, the government is trimming its budget to RM189.5 billion, a decline of 11.3% over 2009.
Operating expenditure is projected to fall 13.7% due to lower allocations for subsidies, supplies and services as well as grants to statutory bodies.
Development expenditure will see an allocation of RM51.2 billion, down 4.4% from 2009, as fiscal spending is expected to taper off with the completion of projects under the 9MP.
Against this backdrop of cutbacks, the government has given the assurance that the welfare of the people, especially the vulnerable group, will not be compromised.
While the government will most likely continue to incur a budget deficit in the coming years, it has ensured its debts remain at a sustainable level.
As at end-June 2009, national debt remained low at 33.7% of GDP compared with 32% in 2008. Still, the government’s debt is expected to increase 18.3% by the end of 2009 due to higher domestic borrowings to meet financing requirements. This will result in the government’s debt-to-GDP ratio rising to 52.5% in 2009, from 41.5% in 2008.
Given the ample liquidity in the banking system, the funding requirements of the government will be raised from domestic sources and are not expected to crowd out the private sector, the report says.
This article appeared in The Edge Malaysia, Issue 778, Oct 26-Nov 1, 2009.