This article first appeared in The Edge Financial Daily on October 15, 2018

KUALA LUMPUR: As the government prepares to tighten its belt in Budget 2019 to offset high debt levels, top leaders have been emphasising the importance of economic growth being driven by the private sector.

Private-sector investment growth in Malaysia, however, slowed in the first half of 2018 (see chart). Market observers felt that there was no clear action plan from the government despite a general direction having been set.

This raises the question as to whether the government has been walking the talk when it comes to helping the private sector drive growth.

Economists and market watchers have mixed views on the government’s rhetoric and measures taken so far, which include strong hints at new taxes and the scrapping of contracts which most recently included the mass rapid transit Line 2 contract for the underground portion.

“What has been alluded to has not been totally positive. Taxes on capital gains and inheritance are negative for wealth creation, for innovation [and] for enterprise,” said Lim Chee Sing, an Asiamoney ranked senior economist.

Speaking to The Edge Financial Daily on the sidelines of the “Malaysia: A New Dawn” conference last week, Lim said although the review of major infrastructure projects could be rational and necessary due to excesses in the past, such action will also create policy uncertainty.

“It does slow down investment, not just public investment but there [will be] a spillover to private investment because of the uncertainty there. It does slow down the building of capacity for future growth,” he said.

However, Dr Bernard Ng, the principal economist of the Asian Development Bank’s (ADB) regional cooperation and operations coordination division, painted a different picture.

“There needs to be a balance between [current] consumption and investment. After all, you could say investment is just a postponement of consumption,” he said in an interview at the conference.

Although there is a belief that the private sector is better at allocating capital, it could be the case that it may not be allocating capital properly, he said, adding that it is the quality and not the quantity of investment that should be looked at.

Ng opined that the government had so far shown a clear rationale for reviewing projects.

“One cannot make everybody happy, right? What the government should focus on is creating the right business and policy environment — then investors will come.”

This need for the government to establish a supportive environment for private-sector players was a view that many, if not all, experts took.

New taxes could be boon or bane

Views among experts were divided on the introduction of new taxes. Many pointed out that Malaysia’s corporate tax rate of 24% is among the highest in the region after the Philippines’ 30% and Indonesia’s 25%.

Jalil Rasheed, the investment director of Invesco Asset Management Singapore Ltd, however is of the view that new taxes are not necessarily negative.

“There is a revenue shortfall that needs to be addressed. It does not necessarily mean a tax on the population; it could come in various forms,” he pointed out.

Ng also saw the introduction of new taxes as a potential positive as it could contribute to future growth via government investment.

Lim, however, argued that a complete overhaul of Malaysia’s taxation system is needed before piecemeal taxes are introduced. This is because some taxes are duplicative and incentives are not transparent, leading to opportunities for tax evasion.

“You cannot just look at it on an ad hoc basis. When you have a low income economy, how much can you tax?” Lim said, adding that a holistic plan to raise wages as well as productivity is needed.

Separately, the move to reduce broadband prices was seen as largely positive as lower broadband prices would help bring down costs and improve access to technological innovation, despite the negative impact the move will have on margins of telecommunications players.

That being said, there is still room for other sectors to be pushed to innovate, such as agricultural and commodity-based sectors, said Jalil.

“Malaysia needs to identify what it wants to be competitive in. I think Malaysia still hits below the belt in value-added industries. We export in raw form and buy back finished goods,” he explained, adding that the country should be doing more to encourage value-added manufacturing.

The breaking up of monopolies was also recommended as a key measure to boost private-sector investment.

“I think competition is the key to [encourage private players to] continue investing because monopolies can become entrenched,” Ng said, pointing out that it is important for the government not to crowd out private participation.

As a long-term investor, Jalil said Invesco is concerned about how contracts are negotiated, and had avoided investing in companies that were overdependent on government contracts.

“Not every company tied to the government [is a risky investment] because the government is the largest owner of businesses [in Malaysia]. But there is a risk if you [did not previously earn] your contracts in the most transparent way,” he said.

Although certain sectors such as energy may take a longer time to adopt more competition due to the scale of the current monopoly, breaking competition is a favourable move for both consumers and private-sector players, said Jalil.

What is most important to investors, he said, is that the government carries through with institutional and structural reforms instead of getting preoccupied with short-term fixes.

“You need sustained, consistent reform ... that narrative from the government needs to be persistent. If not there is a risk that things will go back [to the way they were],” Jalil said.

Biting the bullet as economic growth slows

In the absence of strong economic growth, Malaysia may need a longer time frame to meet goals such as lowering the debt-to-gross domestic product (GDP) ratio. The government should therefore be prepared to have a flexible approach towards fiscal policy in the medium term, Ng said.

“If we see some sort of global recession coming, the government should be willing to run a bigger deficit. And when things are better, then they should move towards a smaller deficit or even a surplus,” he said.

Although the world economy is still expected to chart growth for the next couple of years, forecasts by leading organisations have recently been lowered. Last week, the International Monetary Fund slashed its global growth forecast to 3.7% for 2018 from 3.9% previously. The ADB, meanwhile, cut its GDP growth target for Malaysia to 5% from 5.3% at the end of last month.

In such a situation, the government cannot afford to go into full austerity, Lim said.

“Prudent spending is needed, but in the face of slowing growth momentum, you still need the government to provide supporting growth. The good thing is that the finance minister appears to understand these challenges,” he said.

Jalil said the private sector may have to take the lead in certain areas, such as paying higher wages, in order to help the government “make some very hard structural decisions” such as weaning off subsidies.

“It is not going to be rosy in the sense that Malaysia’s economic growth may not be hitting the numbers that it used to. There may be a bit of a downside there before it gets better. [But] there are a lot that need to happen in tandem,” he said.