In a move to increase Malaysia’s attractiveness to investors, Malaysia’s government announced a number of investment liberalisation measures. Effective from 22 April, twenty-seven services sub-sectors were fully liberalised to foreign investors, on the premise that Malaysia lacks expertise and local investments in many of these. Among the sectors to be opened up are: computer and related services, health and social services, tourism services, transport, recreational, business services, and shipping. Additionally, on 30 June, the long standing 30 per cent Bumiputra equity requirement for newly listed companies was removed, making investment conditions less restrictive. This will bring Malaysia’s equity market closer to regional benchmarks, but given the many other factors that influence investment decisions, the final impact of the reforms remains to be seen, .
The government is also aiming to promote discretionary expenditure, with the personal income tax rate being reduced from 27.0 per cent in 2009 to 26.0 per cent in 2010. Individual relief and tax deduction will also be increased. However, the impact of such measures on consumption may only be limited, given that only 1 million out of 10.5 million workers pay income taxes. Moreover, the income tax cut only affects those earning more than RM 100,000 per year. The absence of a civil servant bonus is another negative factor.
On investment in Malaysia, the government’s reintroduction of a 5.0 per cent property gains tax will lower property sales. Furthermore, slightly lower development expenditure in 2010 may reduce public investment, as some major infrastructure projects could be funded off-budget, with slow rollout.
Meanwhile, Bank Negara Malaysia decided, in November, to leave the Overnight Policy Rate (OPR) unchanged at 2.00 per cent for the sixth consecutive meeting. While Malaysia’s economic contraction is expected to further decrease, the Central Bank’s monetary policy stance is still expected to be fairly accommodative for the remainder of the year. This is also facilitated by the absence of inflationary expectations in the near term. For these reasons, the Malaysia Institute of Economic Research (MIER) expects that the OPR will remain relatively unchanged, at least until the end of 2010.
All this is supported by the persistence of a cautious sentiment, as revealed in the in-house Consumer Sentiment (CSI) and Business Conditions Indices (BCI). Ongoing economic uncertainties – due to global financial deleveraging activities, low wage growth, and the possibility of a sudden withdrawal of economic stimuli – still continue to repress confidence among consumers and corporate entities. While both CSI and BCI settled above the crucial 100-point mark in the third quarter of 2009, the rate of change has decreased quarter-on-quarter
Although there are glimmers that the global downturn has stabilised, Malaysia’s economic recovery is still expected to be sluggish and uneven. The rebounding from the current crisis will even harder than ever previously, due to the synchronised nature of this downturn. It will take time and huge resources to revive the deeply entangled U.S. financial sector while policy options are running out. Faster recovery will be impeded by a weak external sector, with lower commodity prices not helping either. Banks are becoming more cautious, fearing that bad loans could rise soon, which is consequently limiting the flow of funds to firms. Still, the services sector will be the pillar of strength amidst a glum manufacturing sector.
The technical recession is likely to end in the fourth quarter of 2009. But Malaysia may not regain more strength until the global economy is back on track, which is going to be at a disappointingly slow pace.
In view of improving macroeconomic indicators, and somewhat better CSI and BCI as well as sectoral indices, MIER is maintaining a GDP growth forecast for Malaysia of -3.3 per cent year-on-year (YoY) in 2009 and +3.7 per cent YoY in 2010, while projecting 2011 GDP growth rate of +5.0 per cent YoY. Downside risks are still prevalent and might perturb the road to recovery, but there are stronger positive influences that led to MIER’s projections.
This is part of the special feature: 2009 in review and the year ahead.
Dr. Foong Kee Kuan is Senior Research Fellow at the Malaysian Institute of Economic Research