A global economic meltdown is looming. If we are lucky, the storm may soon blow over. Even so, it will be the fittest who will be least impacted by the turbulence and its contagion.

If we are unlucky, the current turbulence may snowball into the next global financial crisis. Unfortunately, latest economic indicators show that the Malaysian economy is not as well cushioned as it was during the 2008 global financial crisis. Statistics certainly don’t lie.

Yes, economic fundamentals still look strong at first glance — our international foreign exchange (forex) reserves are still high; we have a current account surplus, government debt is below the 55% prudent ceiling, the banking system is resilient, foreign-denominated debts are relatively low and so on.

But if we cut deeper to the bone, the picture tells a different story.

Forex reserves have fallen by more than 30% from a peak of US$140 billion in 2013 while the current account surplus has narrowed significantly over the last two years. Indeed, some economists are looking at a possible current account deficit in the next two years.

Malaysia’s exports have been impacted by falling commodity prices (especially crude palm oil and crude oil) while foreign investments showed a sharp drop in the first half of the year.

Even more worrisome is the fact that productivity growth, a key determinant of long-term economic growth, has been sluggish for the longest time.

Consumer sentiment and spending are deteriorating, hurt by the rising cost of living as the effects of subsidy removal and the implementation of the Goods and Services Tax begin to trickle down to the man in the street.

This could be the tip of the iceberg.

We can no longer take Malaysia’s strong fundamentals for granted because there are forces at work, gradually chipping away at that strong foundation.

Investor confidence is shaken, and this is evident in the selldown of ringgit assets and the sharp depreciation in the local currency against the majors like the US dollar, euro, Singapore dollar and pound sterling.

So, the newly minted 10-man special economic committee is faced with the task of restoring investor confidence and putting the economy back on a strong footing.

Coming up with solutions will be the easy part of their mandate, but implementation is another story. While one would not want to rain on their parade, it may be a timely reminder that Malaysia has come up with some great development blueprints in the past. However, the economy is where it is today because the toughest reforms were not pushed through and that takes political will.

If there is a global meltdown, what can our policymakers do to mitigate its impact?

Unfortunately, policy options are limited. Here is why.

Fiscal pump-priming is constrained by rising government debts and a protracted budget deficit of 17 years. As at the end of 2014, the government debt-to-gross domestic product ratio was 54.5% and this was without taking into consideration contingency liabilities, most of which would include quasi-government debts.

The budget deficit, meanwhile, persists. Despite measures to balance it, including the removal of subsidies and the implementation of GST, the fiscal gap is expected to remain in the 3% to 4% range for the next few years.

Clearly, should the domestic economy be in need of a shot in the arm to boost growth, fiscal policy is not the answer unless the government borrows to fund it. But that’s not an ideal solution. Given the current economic environment, borrowing cost could be high because of the risk premium, perceived or otherwise.

What about monetary policy?

As things stand now, the benchmark overnight policy rate is 3.25%. The dilemma with monetary policy is that Bank Negara Malaysia either defends the ringgit by raising interest rates or boosts growth by reducing rates. Doing the latter means letting the ringgit go where market forces drive it.

Given the prospects of a global slowdown led by China, it is very likely that Malaysia’s growth will be hurt in 2015 and 2016. China, notwithstanding Singapore, is today Malaysia’s biggest export market. Of course the central bank can intervene in the market to stem the ringgit’s slide, but for how long? With shrinking international forex reserves, that may not be an option in the longer run.

However, there will be some respite if the US delays raising rates next month, given the current global turbulence.

Of course, there is always the possibility of a ringgit peg but such a measure is only merited in a worst-case scenario.

The biggest challenge, though, is, there must be real reforms to build long-lasting strong fundamentals — in the education system, in the workforce, the whole economic ecosystem, in fact. Resilience is still the best defence against financial storms.

The Economic Transformation Programme was crafted to bring about that change. At the halfway point, the key economic fundamentals have deteriorated, not improved.

At the end of the day, the elephant in the room is politics. And it will take more than a 10-man special economic committee to deal with that.

This article first appeared in digitaledge Weekly, on August 31 - September 6, 2015.