A year of political and economic upheavals, to rebound in 2023?

30 Dec 2022 08:30am
illustrative purposes (123rf)
illustrative purposes (123rf)

The year has been filled with a slew of political upheavals and economic hiccups.

Political wranglings and back-stabbing hogged the newspaper headlines sending the ringgit into a downward spiral.

Foreign direct investments shunned from coming into the country while Bursa Malaysia wobbled simply gecause the country did not have a strong leadership.

It is only when Datuk Seri Anwar Ibrahim assumed the mantle of power that Malaysia managed some semblance in stability.

A choppy road ahead?

The World Bank and the International Monetary Fund have predicted that the world is expected to tailspin into an economic recession next year.

But will Malaysia follow suit to experience a recession just as well?

"In my opinion, Malaysia will not experience an economic recession next year albeit a slower economic growth, probably between 4-5 percent.

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Nevertheless, such growth will be higher than average global growth for next year and the services sector will contribute a majority of our economic growth," Associate Professor Dr Ahmed Razman Abdul Latiff told Sinar Daily.

Razman added the electrical and electronics sector will continue to be one of the main contributors to the economy as demand for technological products remain strong.

"High commodity prices such as petroleum and gas could support and strengthen our economic further.

In addition, the ratification of two free trade agreements (RCEP and CPTPP) enabled our local industries to be more competitive and able to explore new markets," said senior lecturer at the Universiti Putra Malaysia Business School.

He added expanding into digital economies allow Malaysia to remain resilient and sustainable by exploring new technologies such as Artificial Intelligence, green and hybrid technologies.

"A new potential source of revenue for government can also be initiated such as creating upstream, midstream and downstream ecosystems for non radioactive rare earth elements.

Recent parliament sitting and approval of the mini budget gave a clear and strong signal that the current government is stable politically, which will improve the confidence of industry players and foreign investors," said Razman.

How will the economy fare in 2023 amid the gloom

This year, Malaysia's unsustainable economic growth was aggravated by higher pre-election government spending and the slew of Employees Provident Fund withdrawals.

This has evidently pushed up inflation and interest rates.

"The opening up of the economy has provided baseline growth but the policy stance is responsible for the unsustainable high growth.

Next year should be better because we should have a return to more sustainable growth and less inflationary pressures," Professor Geoffrey Williams told Sinar Daily.

He added this should be the target for the government because during an uncertain global economy, a stable domestic economy is the best option.

"This will allow companies to recover properly and for consumers to manage price rises better.

There will be less pressure on interest rates and a more stable environment but only if we have a responsible budget and sound fiscal policy," said Williams who is professor of economics at the Management of Science and Technology University.

Inflation tapers down

Inflation has peaked globally and domestically and already annual headline inflation in Malaysia is falling and should average around 3 percent this year.

Next year it will continue to fall because major input costs such as oil are now less expensive.

This will put less of a drag on the economy and less pressure on interest rates," said Williams.

Will Malaysia experience a recession?

Malaysia's growth next year is expected to be at around the normal range of four to five per cent and this is a better outcome than the unsustainable growth this year.

There is some possibility of seeing negative growth because of the high baseline effects but hopefully a full recession can be avoided.

A global slowdown is almost certain and downgrades for regional growth will be seen soon.

There is a strong possibility of a recession but it is more pervasive in developed countries.

"Asean may avoid this even more if there is an extended downturn in China and Malaysia can avoid recession if there is a strong focus on the domestic economy, structural reforms and fiscal responsibility to create a stable competitive business environment.

External risks are a sharp global downturn or recession dragging on trade and investment but also risking a broader financial crisis. Global political risks remain high too.

Domestic risks are mainly in terms of the stability of the new unity government and whether irresponsible political manoeuvres cause problems.

Rejuvenating the economy

Malaysia needs a good budget and a good plan for structural reforms to rejuvenate the economy.

Budget 2023 should start afresh with more moderate spending and better revenue management.

"We need to look at tax reform holistically to make the tax system more efficient.

I would suggest increasing spending only in line with core inflation to around RM345 billion and aiming for similar revenue as last year. This would deliver a lower deficit," said Williams.

In terms of spending, wastage must be cut, excessive megaprojects should be reviewed, rescheduled or re-budgeted.

Reform the subsidies

Subsidies reform is essential and Prime Minister Datuk Seri Anwar Ibrahim had already started this and this is very good to see.

Malaysia needs to look at structural reforms in pensions, welfare and incomes because relying on handouts will not be enough if there is a downturn and will be expensive and wasteful.

Malaysia must introduce a basic income programme of some form to replace the current social protection system which had become almost completely ineffective.

Malaysia should introduce incentives for people to find multiple sources of income such as cutting taxes on secondary income, incentivise firms to allow flexible working and encourage higher labourforce participation especially among women.

Which sectors will perform next year?

Tourism, retail, consumer goods will continue to benefit from the opening of the economy.

Palm oil, construction and manufacturing will struggle due to labour shortages, continued corruption and forced labour issues.

Will foreign direct investments return?

FDIs has rebounded recently in terms of approved investments but overall net FDIs has been on the decline since 2016.

This is a long-term process and Malaysia has to compete with other investment opportunities overseas.

Regional markets especially Vietnam and Indonesia are larger and growing faster making them more attractive.

Preparing for future pandemics

To prepare for future pandemics, Malaysia needs to learn the lessons of the Covid-19 pandemic.

Locking down the economy caused more harm than good, medical advice was not based on sound science and commercial interests interfered with proper public health responses.

Malaysia must have a full, balanced review on what happened and build a contingency plan in advance instead of relying on ad-hoc responses run by the health ministry alone.

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