The economy needs just 4.1 per cent growth in the fourth quarter of 2012 to garner 5.0 per cent growth for the year as a whole. So all indications are that Malaysia’s GDP growth will slightly exceed the government’s target of 5.0 per cent growth in 2012. The main growth drivers are domestic consumption and investment, both private and public. Construction and services have been the fastest growing sectors in 2012.
It is noteworthy that inflation has become increasingly tame, decelerating from 2.7 per cent in January to 1.3 per cent in October 2012. The inflation rate for the full year in 2012 is projected to settle at 1.7 per cent. The unemployment situation has been somewhat steady, in the region of 3.0–3.3 per cent. The banking sector stayed healthy and well capitalised with a net impaired loans ratio of just 1.4 per cent. The central bank has kept its overnight policy rate at 3.0 per cent in the face of ample liquidity. Malaysia continues to register a current account surplus in its balance of payments, although the size of its surplus has been diminishing. International reserves at the end of September stood at US$135.6 billion, providing a retained import cover for 9.4 months, which is more than comfortable.
The Malaysian fiscal story, however, is unflattering, as the country has been continuously running budget deficits since 1998. With elections around the corner, government subsidies and cash handouts have been flying in the face of fiscal discipline, with no attempts made to address much-needed tax reforms that would reduce the current overdependence on oil and gas, which accounts for roughly 40 per cent of government revenue. Government revenue has failed to grow in tandem with GDP growth in recent times, with the ratio of revenue to GDP falling from 33 per cent in 2007 to 24 per cent of GDP in 2011 and to an estimated 22 per cent of GDP in 2012.
All this may have an adverse effect on the country’s international credit ratings, and hence the need to rein in sovereign debt. Government debt has ballooned to MYR 502.4 billion (US$164.6 billion) in the third quarter of 2012, breaching the self-imposed debt ceiling of 55 per cent of GDP. The debt ceiling was raised from 40 per cent to 45 per cent of GDP in April 2008 and lifted further to 55 per cent in July 2009. Malaysia’s debt-to-revenue ratio of about 250 per cent is close to Italy’s 260 per cent.
The near-term outlook for the Malaysian economy is very much dependent on the economic performance of its major trading partners. Export market diversification efforts currently underway may help reduce Malaysia’s vulnerability to external impacts but cannot lessen its exposure to the external world. Likewise, a dynamic domestic economy can contribute to greater resilience but cannot be a substitute for the more lucrative external sector, given the relatively small size of the domestic market. GDP growth in 2013 is forecast to be in the region of 5.5 per cent.
Malaysia, an advanced developing country with an impressive development track record, now caught in the throes of the current global economic slide, needs to escape the middle-income trap before it can join the league of developed nations as envisaged in its Vision 2020. Malaysia needs to reinvent itself to accomplish this goal. To this end, the government has taken a number of strategic reform initiatives to enhance the country’s competitiveness and improve its growth potential. While economic imperatives can explain the government’s reform agenda, the rapidly changing political landscape in the country appears to be the main driver of change.
After 55 years of one-party administration by the ruling coalition, Malaysia has arrived at a new crossroads with a strong opposition effectively offering an alternative government to the Malaysians. For the first time in history, the ruling coalition is facing a formidable opposition. All signs suggest that a two-party system is already in place, regardless of the outcome of the forthcoming elections, which remain too close to call. Malaysia has finally come of age politically after 55 years of independence. The race-based politics of yester year are giving way to an issues-oriented political process that cuts across racial boundaries. Simply put, it is not going to be business as usual any more in Malaysia — which bodes well for the nation’s future. To be sure, pluralism is Malaysia’s strength, not its weakness.
Mohamed Ariff is Emeritus Professor at the Department of Economics and Governance, Global University of Islamic Finance (INCEIF).
This is part of a special feature on 2012 in review and the year ahead.
What is often highlighted is the pressing issue of the budget deficit and that spending is higher than income. But what is never discussed is how the tax revenues of high net worth individuals even for those earning one million ringgit a month have been getting a tax cut since 2009. This shortfall is never mentioned.
The 2009 tax rate of 28 per cent has been gradually reduced to its present 26 per cent. In fact for individuals earning 100,000 USD the tax rate is even lower at 21 per cent. This compares to Thailand at 37 per cent.
Thailand’s GDP has been growing quite rapidly and their economy is even bigger than Malaysia at 345 billion USD vs Malaysia 278 billion USD.
So the high net worth individuals running away due to higher taxes does not make sense either since Thailand’s income tax rate is 37 per cent a full 11 percentage points higher than Malaysia’s. What is different is that Malaysia has been gradually reducing its tax rate for quite some time and now is 2nd lowest in Southeast Asia, with Singapore lowest at 20 per cent from 28 per cent before implementation of GST in 1994 and in 2007. What a scam the rich has done to pressure government to lower their tax rate so they can go holidays in Europe more with their reduced taxes. While 98 per cent of the population pays for them.
The biggest difference between Thailand and Malaysia was its protection Market for cars that resulted in flow of investment now forever lost to Thailand with Ford, Honda all investing billions into the Thai economy while Malaysia lost it all just to protect local car manufacturer.
In addition due to politics and ethnic policy, there has been a brain drain flowing to Singapore and the rest of the world. Degree holders, engineers, scientists, skilled workers have been lost instead of investing in industries in which there is higher value-added and technology where jobs would be available for them. We got in return 2,000,000 cheap uneducated foreign workers from Indonesia, Nepal, Myanmar to supply for MNCs and further depress Local wages by distorting original labour supply, mirroring Singapore and abandoning productivity growth and therefore higher wages. Moving to a high income society is now less and less possible and Malaysia will quite likely remain in the Middle Income Trap.
China on the other hand has even sent economists to study why Malaysia fall into this middle income trap and concluded lack of tertiary industry, the quality of education, technology know-how and addiction to low wage income economic model, poor infrastructure instead of taking active steps towards higher value chain production and gaining know-how and technology necessary to produce such products are the problems.
That local companies are supported through protected markets may be normal in any country smart enough not to be flooded by products by other countries but the point is to buy time to upgrade and move up the value chain so that they are competitive and can export and compete on international level not depend on government so they can continue to rack profits without the ability to stand on their own feet.
By 2015 an FTA with China will open our markets so by then if we still cannot stand on our own two feet China will flood our market with high-tech products and everything else from cheapest to most expensive and we will only able to continue selling palm oil back to them resulting in trade deficit instead of surplus today.
Such rubbish. Middle income trap! Please ask all the economists what is a middle income trap, zilch nothing.
Malaysia is posed for growth as it reaps the fruits of its demographic surplus which despite the so called mythical poor tertiary education are makng the most educated in ASEAN. You will be surprised to find more Malaysian executives in firms like Schlumberger.
Brain drain is a pathetic excuse to downplay Malaysia, Singapore proportionally lost more talent than Malaysia, its educaged prefer a more relaxed environment in larger cluntries while ironically the Chinese talents givem Singaporean scholarships springboard to other countries. Talents leaving for greener pastures is normal and does not mean a failed system, as a nation of 10 million workforce with 400k of cohorts leaving high school yearly, Malaysia can nurture sufficient talents for its innovation.
People squirm that Thailand steals the auto industry glamour from Malaysia, but structurally Thailamd amd Indonesia has been more alluring tl auto giants who prefers semi slave wages in these two countries. Being dependent on the auto industry is not idea. As demonstrated by Detroit, Malaysia auto industry is sufficient to maintain a domestic industrial base in the auto market that still has spill overs in the economy although I would welcomchanges in the NAP that will boost more investments from the auto giants.
Like many developed coumtries, Malaysia may eventually shift more of its workforce into the service sector. New industries like Sharia banking and finance is opening opportunities while Malaysian firms have become mature to become a regional force.
I dare say, Malaysia is entering its golden age. Decades of stability and uninterrupted development of its economy plus a demographic surplus will ensure its engine of growth gains more traction into becoming a developed nation.