Global demand also increased for several major Malaysian exports (namely electrical and electronic products). This change in global demand was triggered by the uptrend in the global electronic goods cycle and contributed to the strength of Malaysia’s trade balance during 2017. This improvement of the net current account balance put the balance of payments on more solid footing.
Private consumption and domestic demand also played a significant role in driving Malaysia’s economic growth. Domestic demand grew at an average rate of about 7 per cent in the first half of 2017.
Due to the rebounding export and GDP growth rates, Malaysia’s official reserves stood at US$101.5 billion in October 2017. Although this is a decline from the first quarter of 2015 when it stood at about US$105 billion, October’s figure is still an improvement over the third quarter of 2015 when it fell to nearly US$93 billion.
Malaysia’s government also continued to narrow the fiscal gap. The government’s steadfast attempts to balance the budget must be appreciated.
The 2018 budget showcased political acumen but occasionally compromised on fiscal prudence. The budget is an election budget, so it is only to be expected that the government would want to be generous in extending assistance and incentives of various sorts.
Some aspects of the budget were positive — promising initiatives included the emphasis on building infrastructure, assistance for disadvantaged citizens and support for entrepreneurship. But many of the budget’s various assistances and incentives existed mainly to drum up public support. The budget’s substantial dole outs for civil servants served political rather than economic interests. Instead of bloating the public sector, the policy debate should focus on reducing the size of the civil service and improving its productivity. Housing, healthcare and other key policy areas received less attention than they deserved.
Growth figures for 2017 were promising. In the first, second and third quarters of 2017, Malaysia’s GDP grew at a rate of 5.6, 5.8 and 6.2 per cent, respectively. The annual growth rate is expected to be approximately 5.8 per cent and may slide downwards slightly in 2018.
But growth is not all that a country lives on.
One pressing issue is that the benefits of this strong growth do not accrue proportionately to all Malaysians. There is substantial dissatisfaction with the rising cost of living, particularly among the bottom 40 per cent of income earners in urban areas. Low-income households are also concerned about car ownership, housing, healthcare and other unavoidable expenditures that cut into household income.
More can be done to improve the public healthcare system as demand currently outstrips the system’s capacity. A major obstacle to healthcare reform is the presence of government-linked companies that compete to provide healthcare to the top 20 per cent income bracket. These providers tend to run expensive private hospitals that are too costly for most Malaysians.
Housing costs are rising faster than household incomes. This may be exacerbated by the ill-advised government policy of directing government-linked companies to compete in more lucrative housing markets such as medium- and high-cost units. These market segments should be left to private-sector developers.
Both healthcare and affordable housing are long-term issues. A more immediate concern is Malaysia’s high household debt: the household debt-to-GDP ratio is a staggering 88.4 per cent. Equally worrisome is Malaysia’s high public debt. In 2016, the public debt-to-GDP ratio was 52.7 per cent.
One can take comfort in the fact that this is not necessarily a high ratio by international standards. Italy and India’s public debt-to-GDP ratios are 134.7 per cent and 69.5 per cent respectively. This may indicate that Malaysia is in a ‘safe zone’, but such a comparison is hardly meaningful in the Malaysian context. The government’s commitment to high contingent liabilities compounds Malaysia’s debt issue. Government-guaranteed liabilities stood at 13 per cent of GDP in 2011 and 15 per cent in 2016, but such a comparison might miss the complexities of the risk that are specific to each country. Even if the government is selective in its choice of projects, high contingent liabilities expose the economy to risk.
Issues such as the weak ringgit, fiscal deficit and support for the disadvantaged have received adequate attention this year. A different set of questions will now need attention if Malaysia is to continue its good streak from 2017 into 2018.
Dr Shankaran Nambiar is author of Malaysia in Troubled Times. He is also a senior research fellow at the Malaysian Institute of Economic Research.
An earlier version of this article was published in the Sun.
This article is part of an EAF special feature series on 2017 in review and the year ahead.