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Uphill Road Ahead For Malaysia’s Economy

Written by Yang Ming Wan

It has been more than two weeks since the 10th Malaysia Plan was unveiled, and the nation is still abuzz about this grand plan, which constitutes the first half of the New Economy Model, that will steer our country through the next 10 years. This master plan will replace the New Economic Policy, with the possibility that it might be in force for the coming decades. As such, the plan should be taken seriously.

The past two weeks of debate has served to clarify what the Plan entails. By now, everyone has a basic inkling of where we will be heading next: the anticipated changes to the New Economy Policy did not materialise, while the target of becoming a High-Income economy is on track, which means the economy will need to sustain or exceed 6% growth every year for the next 10 years.

With policies remaining unchanged while the growth target is pegged at such a high level, the way ahead for Malaysia’s economy is an uphill struggle. The first obstacle is domestic in nature; what comes next will be the trials the global economy throws in front of us along the way. Every change in the external situation may become a crisis, but it is more likely an opportunity to usher in a transformation of our economy. The outcome hinges on how the government and the private sectors respond to these changes.

Opportunities Presented By Floating Of Chinese Yuan
While we squabble among ourselves over the past two weeks, the world at large has moved on. The latest development that is most significant and closest to us is the floating of the Chinese renminbi exchange rate. This development will definitely impact our foreign trade and investment, while the outcome will be dependent on the reaction of our government policies.

The China Banking Regulatory Commission and the Malaysian Securities Commission could not have picked a better time to sign an MOU regarding the regulation of commercial off-shore banking businesses, which allows qualified institutional investors from China to invest in the Malaysian market. With this agreement, we will see in influx of Chinese investments into our financial and capital markets, apart from the traditional import and export trade and foreign direct investments.

No doubt allowing Chinese funds to flow into our financial and capital market is a piece of good news, but it should not be the main focus. The point is we should attract direct investments that bolsters our production industry to help our country achieve the desired average annual private sector investment growth of over 12%. This is a key contributor to achieving the target of becoming a high-income economy.

From the Plaza Accord of 1985 to the early 1990s, Malaysia had taken advantage of the influx of Japanese direct investments brought on by the rising yen to help us weather the depression then. The favourable exchange rates had attracted a large amount of Japanese capital into Malaysia to help us through the economic difficulties then. Though the economic situation in Japan then and China’s present situation is vastly different, the forces at work are still applicable today.

On the surface, floating the Chinese yuan is favourable to Malaysia; however, from a long-term perspective, this favourable exchange rate comes with its own set of challenges, as the financial and capital market will bear the brunt of the first wave of its effects.

These liquidity will be of real help to our economy only when they are channelled into direct investments in the production industry. The task of funnelling these funds into direct investments will depend on how quickly the authorities introduce attractive measures to prevent these direct investments from being swallowed up by short-term speculative portfolio funds.

Arduous Task Of Maintaining Double-Digit Growth
Before we can capitalise on these favourable developments, our immediate priority should be the economic challenges of the remaining second quarter.

The government had announced last month that the economy had achieved a double-digit growth of 10% over the first quarter. As the next 3 quarters will not have the advantage of a low basis of comparison that the first quarter had, the double-digit growth rate is unlikely to be sustained, at least within this year. To do so would be as difficult as scaling the Himalayas.

Discounting the differences in the basis of comparison, from an absolute value point of view, even if we could maintain the same GDP figure for Q2 as the first quarter, our real growth rate would only be half that of the first quarter, or a mite over 5%.

Looking forward, the situation is going to get even more rough-going. Since the GDP of Q3 and Q4 last year was higher than Q1 this year, the next three quarters this year will not have the advantage of the basis of comparison that Q1 enjoyed. We will need a greater push from foreign quarters to achieve a higher level of growth. That is why double digit growth is unlikely to be repeated.

The economic indicators for April released last week was already showing clear signs that economic growth during the first month of Q2 has begun to slow down: coincident indicators fell by 0.2%, while industrial production index (-0.2%), total real imports (-0.2%) and real wages in the manufacturing sector (-0.1%) all registered negative growths.

Of the remaining three indicators, besides the labour force engaged in the manufacturing sector growing from 0.1% growth in March to 0.2%, the other two indicators showed a slow down to stagnating to zero growth.

Similarly, leading indicators for April fell 2.7%, while industrial price index (-0.7%), the number of new companies registered (-0.6%) and number of new housing licenses (-0.5%) all retreated into negative territory.

Low Unemployment, Stable Fundamentals
In any case, the fundamentals of economic growth remains solid; it has slowed down but not heading for a reversal. The 6-months growth trend of the coincident indicators slowed from 9% in March to 7.4% in April,while growth trend of leading indicators plunged from 11.2% in March to 3.9%, indicating that while the economy is taking a breather but not yet in the negative doldrums, any future growth would be an uphill fight.

Despite the uphill climb, our economy is not really in a bad shape. Employment conditions is looking rosy, as demonstrated by the latest unemployment figure in April retreating to a low of 3.2%, the lowest unemployment level since June last year. The actual number of unemployed labour touched a low of over 370,000, the second lowest number since the financial tsunami and surpassing the record-low level registered in June last year by less than five thousand people. We have prevailed against the unemployment situation since the financial crisis that saw the number of jobless people persistently hovering above the 400,000 mark.

The disappointing series of government policy backtracks notwithstanding, the fundamentals of our economy are still sound enough to carry us forward. The issue now is how the government will ride on opportunities and make sound judgements to guide the economy over the crest.

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