THE year 2014 has rattled past rather rapidly, raising fears and concerns as it did. There have been challenges on the economic side of things, and political conditions have been no less interesting. One of the government’s more impressive achievements has been the resolve it has demonstrated in trying to balance the books. It has tried to take a stab at bringing some stability to the prevailing fiscal indiscipline, a situation that Prime Minister Datuk Seri Najib Razak inherited from previous administrations.
Najib had announced his intention to reduce the fiscal deficit that has been plaguing the economy, and has worked consistently at it. The fiscal defict is expected to reduce from 3.5% of the GDP this year to the targeted 3% in 2015.
The government has also directed its attention to rationalising subsidies. It cut petrol and diesel subsidies by about 20 sen per litre on Oct 2 this year. The global price of oil has been falling, which is fortuitous timing for the subsidy cuts, as these would certainly be best executed when market prices are declining, as they are now.
Equally commendable has been the decision to introduce the Goods and Services Tax (GST) in April 2015. The announcement of this move was also well timed. With the elections safely behind him, and with the 14th general election a good mile ahead (four years to come), Najib can do the unpopular act of introducing the GST and then work to improve his political goodwill in the next few years, with the hope that the GST will be forgotten by the time the elections come around.
Timing is again in Najib’s favour. Although the low oil prices will slash the government‘s revenues, that will be compensated to some extent by the broad-ranging GST revenue collection, which will be initiated in the months to come.
Concerns about public and household debt, which are at alarming levels, have haunted Malaysia in recent years. Household debt stands at about 87.1% of GDP presently, while government debt is about 53% of GDP.
It is not satisfactory to say that high household debt is an international phenomenon, and to cite other countries as examples, as if to defend a weakness by saying that others, too, suffer from a similar ailment. That does not make the weakness a strength.
Similarly, the rising government debt is a source of anxiety, and rightly so. Government spending has to be scrutinised and reviewed, the size of the public sector (a vote bank though it may be) has to be reconsidered, and the worthiness of mega projects has to be questioned with the circumspection of a fussy accountant.
Undeniably, leakages are gushing from various sources. The Auditor-General’s Report documents cost overruns by the billions, computers worth RM3,000 being procured for RM84,000, facilities costing millions not being used, and a whole plethora of items indicating gross mismanagement.
If the Auditor-General’s Report is any indication of public sector mismanagement, then the government should probably be tackling issues of project management, transparency in procurement and efficiency and productivity in the public sector before it rolls out the GST.
Inflation rates have been moderating in the last few months. Early in the year, inflation was at about 3.4%, and it has softened to about 2.7% in the last few months. Even if the rate appears reasonable, the felt-inflation is higher and the public has been critical about the rising cost of living.
At any rate, official rates can be expected to spike next May with the introduction of the GST to as much as 4.5%. This is to be expected because the experience of other countries suggests a one-time spike of 1% to 2% in prices following the implementation of the GST. In the case of Malaysia, households will be constrained because they have limited disposable income and price hikes will erode their purchasing power.
The external sector does not seem ready to lend any solace. The Malaysian ringgit is taking a beating against the US dollar. The declining confidence in the ringgit, mainly because of the decline in oil prices, could stretch on for the next few months. That might, however, do Malaysian exports some good.
But dark clouds also loom over the export market. China, Malaysia’s biggest trade partner, is set for more domestic reforms. The focus will be more inward than externally-oriented. The lower growth rate in China, forecast to be 7% or slightly less, will lead to lower demand from the country, which in turn will have an impact on Malaysia.
The forecast for Japan’s growth next year, at 1%, is not terribly encouraging, and the European Union is expected to yield a figure that‘s about the same, perhaps 1.2%. The International Monetary Fund has downgraded its global growth forecast for 2015 to 3.8% from 4%. The saving grace will come from a stronger US market.
While the improving US market will help Malaysian exports, it will lead to higher interest rates in the US, and the resulting interest rate differential will draw funds out of Malaysia. All these factors in combination could cause the growth rate in Malaysia to weaken. In these volatile times, growth forecasts are as good as anybody’s guess, but it could hover within the range of 4.8% to 5%.
A higher inflation rate, as well as lower growth and a compromised cost of living may put the public on edge.
The next year will be a busy one for Najib, who will have to smooth the ruffled feathers of the people, who are not encouraged by the economy.
He will also have to be decisive about the Trans Pacific Partnership agreement and be seen to be taking a proactive stance, since little has been done to allay fears on the free trade agreement, particularly for the losers. Then there is the Asean Economic Community and the Regional Comprehensive Economic Programme, which have to be managed while Malaysia holds the chair of Asean.
There seems no doubt that 2015 will be buzzing with activity on different fronts, keeping the prime minister’s hands full.
Dr Shankaran Nambiar is a Senior Research Fellow at the Malaysian Institute of Economic Research. He is author of the recently published book The Malaysian Economy: Rethinking Policies and Purposes. Views in this article are his personal opinion.
This article first appeared in Forum, The Edge Malaysia Weekly, on December 29, 2014 - Jan 4, 2015.