Thursday 28 Mar 2024
By
main news image

KUALA LUMPUR: As the ringgit depreciates steeply, Malaysians believe the government ought to do something to stem the bleeding. However, some are of the view that it is more a confidence issue, with the country not facing major economic woes since the domestic economy is still growing.

“I don’t think that the economy needs any stimulus [measures] from the government now. The numbers show that the economic fundamentals are still intact. But yes, you can’t deny that there is a [shortage of] money supply and reserves,” said an economist, who declined to be named.

The economist said unlike the 1997/98 Asian financial crisis, the local economy isn’t contracting now.

“The government is looking at shoring up investments to boost confidence at the domestic level. If funds flow back into the economy, the ringgit should regain its strength,” said the economist when commenting on the RM20 billion injection into ValueCap Sdn Bhd to support the local stock market.

Bank Negara Malaysia last week reiterated its annual gross domestic product (GDP) growth forecast of 4.5% to 5.5% when announcing that it’s keeping the overnight policy rate at 3.25%.

The FBM KLCI shot up over 30 points after Prime Minister Datuk Seri Najib Razak, who is also finance minister, announced that an additional RM20 billion is to be injected into ValueCap, but the buying momentum has yet to gather steam on Bursa Malaysia.

Since the beginning of this year, RM11.7 billion in foreign funds has flowed out of the country, far exceeding the total outflow of RM6.9 billion in 2014.

The capital flight has exerted tremendous pressure on the ringgit, which has plunged about 23% against the US dollar year to date, making it one of the worst-performing currencies in Asia. Expectation of an interest rate hike in the United States is strengthening the greenback, with the devaluation of the Chinese yuan also depressing the ringgit. The ringgit was trading at 3.49 at the beginning of the year, and it has now hit 4.30 — the lowest level in 17 years. Being an oil-producing country is also not helping the ringgit as oil prices remain soft.

Exporters, such as rubber glove manufacturers, furniture makers and semiconductor companies, are over the moon about their strong US dollar-denominated earnings, but auto firms and retailers are hard hit by the weak consumer spending and more expensive imported parts.

Bank Negara’s international reserve shrunk below the US$100 billion mark to US$94.5 billion as at Aug 14, as a result of the heavy outflow of funds.

GDP growth decelerated to 4.9% in the second quarter (2Q) versus 5.6% in the 1Q, partly because more Malaysian consumers spent less after the implementation of the goods and services tax in April. Consumer spending expanded 6.4% in 2Q, compared with 8.8% in 1Q.

The Malaysian Institute of Economic Research’s Consumer Sentiments Index slipped to a six-year low of 71.7%. And household debts are still high at above 80%. Job retrenchments do not boost consumer sentiment either.

In the monetary policy statement dated Sept 11, Bank Negara said that while the global economic recovery is expected to continue, the downside risks to growth have increased due to the moderating growth momentum in major emerging-market economies, uncertainty in commodity prices and the heightened volatility in financial markets.

In other words, the external headwinds are getting strong — something that is likely to dampen the domestic economic growth. To withstand any possible external shock, the government needs to ensure the engines that drive domestic consumption and investments are working well.

Kenanga Research economist Wan Suhaimie Saidie said the government faces a tricky task to meet the fiscal deficit target. Meanwhile, national debt is near its self-imposed ceiling and the goverment committed to the hefty development costs under the 11th Malaysian Plan.

Wan Suhaimie believes fiscal consolidation needs to continue. “It depends on how much the government would be able to collect to offset the operating expenditure of its [targeted development],” he said.

He reckons the government might announce measures, for instance income tax cuts, in the upcoming National Budget expected next month, to alleviate the rising cost of living, especially among the middle- to low-income groups.

Economists are hopeful that measures in the upcoming budget would help to boost local confidence with the help of the newly formed economic committee.

“[This calls for the] government to get its house in order. It’s a huge task,” said another economist.

 

This article first appeared in digitaledge Daily, on September 17, 2015.

      Print
      Text Size
      Share