4.2pc GDP growth in 2016 shows econ­omy in mod­est ex­pan­sion­ary mode

New Straits Times - - Opinion - ir­wan­shah81@ya­ The writer is Di­rec­tor, Asian Re­search In­sti­tute of Bank­ing and Fi­nance, Univer­siti Utara Malaysia

ONCE again, the doom­say­ers have been proven wrong. Their temer­ity in in­ter­pret­ing the state of the Malaysian econ­omy — re­ces­sion, cri­sis, bank­rupt, failed state, among oth­ers — has not only ren­dered their “facts and fig­ures” hog­wash, but has turned them into “cred­u­lous fa­nat­ics”. At the end of the day, the proof is in the eat­ing.

The 4.5 per cent gross do­mes­tic prod­uct (GDP) growth for Malaysia in the fourth quar­ter of last year and 4.2 per cent GDP growth for the whole of last year, sur­mise things — that while fac­ing great chal­lenges, the econ­omy is still in an ex­pan­sion­ary mode, al­beit mod­estly.

In­deed, a growth rate of 4.2 per cent is not just meet­ing the tar­geted rate set by the gov­ern­ment un­der the re­cal­i­brated 2016 Bud­get, but also a re­spectable rate for both global and re­gional stan­dards. In to­day’s sce­nario, even the United States, un­der the new Pres­i­dent Don­ald Trump, as­pires to achieve a growth rate of four per cent. Thai­land, the dar­ling of South­east Asian economies, has barely reached 3.5 per cent for its growth level last year, and even Sin­ga­pore is strug­gling not to plunge into a tech­ni­cal re­ces­sion. Hence, it is ap­par­ent that Malaysia’s econ­omy is still on the right track and per­form­ing bet­ter in this era of mod­er­ate growth trend world­wide — one of the char­ac­ter­is­tics of the “new nor­mal”.

Do­mes­tic de­mand is still the driv­ing force of the econ­omy, thanks to the struc­tural re­forms ini­ti­ated by the Fed­eral Gov­ern­ment since 2009. Both pri­vate con­sump­tion and in­vest­ment have sup­ported the econ­omy in the fourth quar­ter of last year, where the for­mer is sus­tained by the con­tin­u­a­tion of wage and em­ploy­ment growth, while the lat­ter is un­der­pinned by an im­prove­ment in cap­i­tal spend­ing in the man­u­fac­tur­ing and ser­vices sec­tors. Net ex­ports have picked up too, where real ex­ports have out­paced real im­ports in the fi­nal quar­ter of last year. This has led to the widen­ing of the cur­rent sur­plus and lessens the risk of ex­pe­ri­enc­ing a twin deficit in the near fu­ture.

The sup­ply side of the story ap­pears to be promis­ing. All sec­tors, ex­cept for agri­cul­ture, ex­pe­ri­enced an ex­pan­sion at var­i­ous lev­els, speed and mag­ni­tude. Al­though the agri­cul­ture sec­tor is still in con­trac­tion, there is still signs of im­prove­ment go­ing for­ward where it con­tracted at -2.4 per cent in the fourth quar­ter, com­pared with -6.1 per cent in the pre­vi­ous quar­ter (2015). With con­tin­ued im­prove­ments in the com­mod­ity prices glob­ally this year, plus the RM1.3 bil­lion al­lo­ca­tion for the agri­cul­ture sec­tor un­der the 2017 Bud­get, the prospect for this sec­tor to record growth this year seems bright.

In­fla­tion dur­ing the fourth quar­ter and the full-year fig­ures for last year re­main sta­ble. It recorded at 1.7 per cent from Septem­ber to De­cem­ber, whereas for the whole of last year it av­er­aged at 2.1 per cent.

Per­haps the main con­cern now is the ring­git’s de­pre­ci­a­tion against other ma­jor cur­ren­cies, es­pe­cially the US dol­lar. But, it is im­por­tant to note that much of the fac­tors that caused the value of the ring­git to weaken are be­yond our con­trol, such as the rise in the US dol­lar, the drop in oil prices and the ex­pec­ta­tion of the Fed­eral Re­serves to hike in­ter­est rates thrice this year. The ring­git has de­pre­ci­ated by 7.6 per cent against the US dol­lar in the said quar­ter. But, mea­sures put forth by Bank Ne­gara Malaysia in Novem­ber has, to some ex­tent, less­ened the fall of the ring­git and sta­bilised the cur­rency since it was 4.4 against the green­back.

De­spite the ring­git de­pre­ci­a­tion, it is clear that the eco­nomic fun­da­men­tals re­main in­tact, as shown by the data above. The sit­u­a­tion was en­tirely dif­fer­ent in 1998, when the ring­git also de­pre­ci­ated sig­nif­i­cantly. It caused the growth rate to con­tract at -7.4 per cent, in­fla­tion rate to spike above five per cent and jobs had dis­ap­peared alarm­ingly. More wor­ry­ingly, Malaysian re­serves dur­ing that time was merely at US$20 bil­lion, and the non-per­form­ing loan ra­tio was at an all­time high of nine per cent. Es­sen­tially, the ring­git had to be pegged and cap­i­tal con­trols was im­posed, all of which had dented in­vestors’ con­fi­dence and sen­ti­ment to­wards our mar­ket.

To­day, peg­ging the ring­git and im­pos­ing cap­i­tal con­trols are ev­i­dently not on the cards. Mon­e­tary con­di­tions now re­main healthy, with the Overnight Pol­icy Rate re­main­ing ac­com­moda­tive to sup­port growth and sup­port fi­nanc­ing in the pri­vate sec­tor ac­tiv­i­ties, which now stands at three per cent level as the mon­e­tary pol­icy com­mit­tee had main­tained the rate dur­ing their meet­ing re­cently. The do­mes­tic fi­nan­cial sys­tem ap­pears to be rock solid. Fi­nan­cial in­sti­tu­tions (banks, in­sures and taka­ful) are well-cap­i­talised, with to­tal cap­i­tal buf­fers at RM172.5 bil­lion. Th­ese data point to a steady mon­e­tary and fi­nan­cial man­age­ment amid po­lit­i­cal and eco­nomic un­cer­tain­ties in the West.

Mov­ing for­ward, do­mes­tic de­mand, to­gether with net ex­ports, is ex­pected to be the main driv­ing force of the econ­omy. Early last year, Bank Ne­gara gov­er­nor Datuk Muham­mad Ibrahim had fore­cast that the econ­omy in 2016 would get bet­ter in the sec­ond half. He was right. The growth rate for the sec­ond half of 2016 was at 4.4 per cent, com­pared with 4.1 per cent in the first half. Es­sen­tially, the over­all growth rate of 4.2 per cent was also within the tar­get. And, for this year, I’m con­fi­dent that the four to five per cent tar­get of GDP growth is within our reach.

Mov­ing for­ward, do­mes­tic de­mand, to­gether with net ex­ports, is ex­pected to be the main driv­ing force of the econ­omy.

Datuk Muham­mad Ibrahim

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