This article first appeared in The Edge Malaysia Weekly on February 18, 2019 - February 24, 2019
AS Malaysia’s projected GDP growth of 4.9% this year largely hinges on domestic demand and private investment, economists say it is imperative for Putrajaya to arrest the alarming decline in private-sector investments.
Socio-Economic Research Centre (SERC) executive director Lee Heng Guie observes that the private-sector investment growth has been on a decline, sliding from 6.9% in the third quarter of last year to 4.4% in the fourth.
“Private investment momentum has not been very encouraging in the recent quarters, and this is a concern. This warrants policy attention as private investments are essential to boosting growth and creating jobs.
“We hope that the Economic Action Council (EAC) and the relevant ministries could do a study on why private investment growth has not been performing up to mark in the recent quarters,” he tells The Edge.
Growth in private-sector investments moderated to 4.5% last year, against 9.3% in 2017, while public-sector investments shrunk by 5.2%, from a growth of 0.1% in 2017.
That businesses are holding back in reinvesting or new investments, is borne out by two recent surveys. Sentiments on the ground seem to be trending towards caution, based on the findings of the Malaysian Institute of Economic Research’s 4Q2018 Business Conditions Index, which slipped to 95.3 points, below the threshold of 100 points.
Another poll — the RAM Business Confidence Index — showed that sentiment in the first six months of this year has fallen to the lowest level, since the index began tracking in 2017 — at 55.1 for corporate and 51 for small and medium-sized enterprises (SMEs).
“Caution among investors may prevail due to the lack of policy clarity and uncertainties on the external front. Though we continue to see high approvals from manufacturing investment numbers, hopefully, this will come into realisation,” says Lee.
Tellingly, Bank Negara Malaysia (BNM) governor Datuk Shamsiah Mohd Yunus stresses that reinvigorating private-sector investments ought to be a key priority for the newly formed 16-member EAC, tasked with finding solutions to issues holding back the economy.
“Policies should focus on how we could improve our competitive edge, which kind of economic policies we should adopt, and for the short term, some quick fixes that we can look into to support growth,” she proposed when announcing the fourth quarter economic data last week.
Affin Hwang Investment Bank Bhd chief economist Alan Tan is optimistic that tax refunds amounting to RM37 billion, owed to businesses, will be used to boost private investments this year.
“We think private investments and public investments as well, which slowed sharply last year, will see a recovery this year. To support an argument on this, we think the tax refunds due to businesses
[of RM37 billion ] will possibly lead to better investments where businesses may take the refund money and reinvest in their capital expansion.”
The investment bank also anticipates an improvement in sentiment on the back of a compromise or scaling down of tensions in the current US-China trade war, as it does not see the dispute escalating.
“Therefore, we see GDP growth trending higher at 4.8% in the second half of the year, whereas in the first half we see GDP growth in the range of 4.6%. So for the full year of 2019, we still expect GDP growth to remain at 4.7%.
“The downside risks for growth would come from the external sector as domestic demand is still sound, and should remain supportive of economic growth,” he tells The Edge.
In allaying fears of a global recession, Shamsiah says the central bank does not see an imminent economic crisis. Instead, she indicated that the current economic growth seen in major economies such as the US, China and the eurozone appears to be “normalised” and closer to their long-term trend. For example, economic growth in the US is forecast at 2.5% this year, not far from the 2.9% average, over the period of 2000 to 2018.
Given this scenario, she believes that Malaysia, being an open economy, will continue to experience external demand growth, which would provide support to economic expansion this year, albeit at a moderating pace.
Having expanded at a rate of 4.7% last year, the Malaysian economy is expected to remain on a steady growth path (of 4.9%) this year, driven by private-sector demand.
Even so, BNM is expected to release its assessment of the GDP projection next month, based on the latest economic data available.
“For this year, we see a more of sideways or slightly slower growth as exports are expected to slow down. On the domestic side, there are also challenges with consumer sentiments expected to come off. So, generally speaking, we are only going to rely on private consumption,” opines AmInvestment Bank chief economist Dr Anthony Dass.
Potential growth catalysts, he says, include foreign direct investments on the private investments side, and possibly a pickup in tourism, which would support retailers and provide some “spillover effect to the SMEs”.
UOB Malaysia senior economist Julia Goh notes that Malaysia’s current account surplus widened to RM10.8 billion, or 2.9% of GDP, in the fourth quarter of last year, taking the full-year surplus to RM33.5 billion, or 2.3% of GDP.
“For this year, we expect the current account surplus to remain in a comfortable surplus of RM38 billion, or 2.5% of GDP, premised on a stable merchandise trade surplus,” she says in a note to investors.
The ringgit, which depreciated by 1.8% against the US dollar last year, appreciated by 1.5% to 4.0770 last Tuesday. Going forward, BNM says that lingering uncertainties over global trade and the trajectory of monetary policy normalisation will continue to influence the performance of regional currencies, including the ringgit.
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