Economic Report 2014/2015: Public sector to drive growth as private consumption slows

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THE Malaysian economy or gross domestic product (GDP) is forecast to expand at a steady pace of between 5% and 6% next year to RM876.45 billion, underpinned by resilient domestic demand and an improving external sector, says the Economic Report 2014/2015 released by the Ministry of Finance (MoF) last Wednesday. This is similar to the estimated 5.5% to 6% GDP growth in 2014.

The economy is expected to be spurred by public investment and consumption, and private investment, while private consumption is expected to grow at a slower pace as a result of the fuel subsidy reduction this month and the implementation of the Goods and Services Tax (GST) in April next year.

While private investment will remain vibrant with an estimated growth of 10.7% in 2015 — compared with 12% this year — supported by the ongoing implementation of the 10th Malaysia Plan (10MP), the Economic Transformation Programme (ETP) and the Government Transformation Programme (GTP), private consumption is expected to moderate and grow at a slower pace of 5.6% (2014: 6.5%), as consumers continue to be cautious on spending.

Nevertheless, government assistance through cash transfers and lower individual income tax as well as higher household income are expected to cushion the impact of higher prices on consumption.

Meanwhile, public consumption is anticipated to register growth of 3.8% (2014: 2.1%), reflecting the spending on supplies and services as well as emoluments. Public investment is expected to record a higher growth of 4.7% — compared with 2.6% this year — as the government expedites the implementation of projects towards the tail end of the 10MP.

“However, there remain downside risks on the external front, including slow and uneven growth in the eurozone, increased deflationary pressures in the advanced economies, slower growth in emerging markets and sooner-than-expected normalisation of interest rates in the US as well as geopolitical tensions that could affect global growth,” the report states.

Cognisant of its staggeringly high debt level, the government assures that it will continue to observe self-imposed guidelines on debt management to ensure the debt-to-GDP ratio does not exceed 55% while debt service charges are capped below the threshold of 15% of total revenue.

The country’s external debt-to-GDP ratio has been hovering at an all-time high of more than 50% since 2010. This is expected to be trimmed to 52.8% of GDP or RM568.89 billion in 2014 from RM54.7% or RM539.9 billion in 2013.

Meanwhile, with revenue growth surpassing that of expenditure, the budget deficit in 2015 is anticipated to further decline to 3% of GDP from an estimated 3.5% in 2014 and 3.9% the year before. Total government expenditure will continue to be stable at RM271.9 billion while revenue is estimated to increase to RM235.2 billion in 2015 from RM225.1 billion in 2014, according to the report.

Moving forward, the economic growth in 2014 is expected to maintain its momentum in 2015, driven by improving external demand and resilient domestic economic activity. “Growth will be private-led in line with government efforts to strengthen the private sector’s role in the economy,” says the report. 

“Nonetheless, as a highly open economy amid an increasingly liberalised global environment, Malaysia remains vulnerable to external shocks. Thus, there is a need to strengthen its external resilience through greater trade diversification and investment.”

On the supply side, the manufacturing and services sectors remain the drivers of growth, supported by sustained domestic economic activity and higher export-oriented manufacturing activities as well as trade-related services.

Based on the MoF’s forecast, the services sector is expected to grow 5.6% in 2015, accounting for 55.4% of GDP and supported by expansion across all subsectors. This is slower than 2014’s estimated growth of 5.9%.

The manufacturing sector is set to grow 5.5% (2014: 6.4%), followed by the mining sector, which is forecast to accelerate 2.8% in 2015, reflecting higher production of crude oil and natural gas. Additionally, the construction sector is projected to expand by 10.7% in 2015 (2014: 12.7%), supported by the commencement of oil and gas-related projects, such as the Refinery and Petrochemical Integrated Development (RAPID), as well as the ongoing transport-related infrastructure projects.

Meanwhile, nominal gross national income (GNI) per capita is expected to increase 8.1% to RM37,486 in 2015 compared with an expected growth of 8.9% to RM34,682 in 2014. Income per capita in purchasing power parity (PPP) terms is expected to increase 2.4% to US$23,512 compared with an estimated growth of 2.2% in 2014.

In the external sector, trade surplus is expected to be lower at RM74.1 billion in 2015 as import growth accelerates and outpaces exports, compared with RM85.6 billion in 2014. Gross exports are expected to increase 3.2% to RM787.2 billion, spurred by higher demand for manufactured products, in particular electrical and electronic (E&E), and steady demand for commodities.

Gross imports are projected to grow at a faster clip of 5.3% (2014: 4.3%), boosted by higher demand for intermediate inputs and broad-based capital spending. With the services and income accounts in deficit combined with imports growing at a faster pace than exports, the current account is projected to record a lower surplus of RM49 billion or 4.3% of GNI in 2015 compared with 5.1% in 2014.

Inflation is expected to remain manageable despite trending above the long-term average, partly due to the implementation of GST and the spillover effects of the fuel subsidy rationalisation early this month, says the report. Inflation is expected to increase to 4% to 5% in 2015 and be around 3.4% in 2014.

The government will continue to implement fiscal consolidation measures while supporting economic growth with the target of achieving a balanced budget by 2020.

The Malaysian economy registered a stronger-than-expected growth of 6.3% in the first half of the year, supported by resilient domestic demand and augmented by a strong recovery in exports.

Gross exports rebounded 10.7% in the first seven months of 2014 after contracting 2.8% in the previous corresponding period. Private sector expenditure expanded 8.4% and contributed 71.4% to the economy. Private investment surged to RM78.7 billion in the first half of 2014, accounting for 68.9% of total investment.

It is worth noting that the overnight policy rate (OPR) was increased by 25 basis points from 3% to 3.25% on July 10 this year due to a rising inflation rate on the back of higher domestic costs.

Although the implementation of GST in April 2015 is expected to see a one-off spike in inflation, the effect is expected to be temporary and wane after a few months, the report says.

Budget 2015 — the last one of the 10MP — will continue to address issues related to the strengthening of the growth momentum and human capital, and reinforcement of sustainable fiscal governance, it adds.

This article first appeared in The Edge Malaysia Weekly, on October 13 - 19, 2014.