All’s well at the moment

POLICY MATTERS

THERE is exhilarating economic news. Some of it gives needless grounds for excitement and some of it is actually worth being thankful about. There is no doubt that the economy is on the mend. It has picked up over the last year. Spurred by a favourable external sector and, more recently, by rising oil prices.

The growth figures for the whole of 2017 have not been officially released yet. But they could be in the range of 5.6%.

Sure, the export figures were excellent on the back of an electrical and electronics sector that enjoyed an upbeat global demand cycle. These figures have been grounds for enthusiasm, but they may not continue to be as vibrant in 2018 as they were in 2017.

In fact, the export figures may be more sedated.

India, Malaysia’s biggest buyer of palm oil, has imposed an increase on tariffs that has doubled from 15% to 30%.

The growth of the global economy could be improving ever since the lacklustre performance in 2016. The International Monetary Fund (IMF) predicts that global growth could be 3.9% in 2018, an estimated 0.2% increase over 2017.

The IMF set China’s growth at 6.8% for 2018. This is a slip from a rate that exceeded 7% in 2014, and there are reasons to expect China’s performance to miss its target. The rising debt and higher credit gap are among the possible culprits for pessimism.

IMF sees India’s economy growing at 7.4%, but that does not matter to Malaysia.

In addition, the ringgit has been recovering. A more expensive ringgit (which is not a bad thing in itself) may slow down exports, adding to the frictional forces that could hold back the quick rise in exports.

With a more tepid export scenario, one important engine of growth may be forced to engage a lower gear.

The price of oil has been unexpectedly high in recent months. It has surged from a low of US$43 per barrel in 2016 to almost US$63 at the moment.

One cannot be sure if the price of oil will remain at the high it is experiencing. There could be speed breakers to the cut in oil production: Russia might not want to cooperate with other countries in maintaining the supply reduction; shale producers might find high oil prices a good time to crack the market.

These factors could end the oil party that works in Malaysia’s favour. Although there is a risk to the oil price falling, it is not likely to fall too low – US$58 seems like a lower bound.

Then there is the value of the ringgit, which is improving. The upturn in the ringgit is not surprising.

The ringgit took a massive beating, and being as low as it was (being about the worst performer in Asean), it was an inviting currency to pick up for forex traders. The oil price hike, encouraging export numbers and the sustained budget deficit all added to its appeal.

The upward movement of the ringgit will not be without restraint. First, as mentioned earlier on, it will have an impact on exports. Second, there will be profit-taking once the ringgit reaches a threshold. Third, pre- election jitters might cause a slight slip. Fourth, events in the US (tax reforms and a rate hike as the US economy continues to improve) may shift funds away from Malaysia, discouraging a prolonged uptick of the ringgit.

Sadly, there is little debate in official circles on the more long-term issues that plague the economy. A short list would include outstanding concerns such as affordable housing, the cost of living, accessible healthcare, high public and household debt and the question of contingent liabilities.

A longer list would include the constraints on human capital, the large use of migrant labour, declining standards of education, transparency and governance, and questions of inequality.

To sum up, the economy is definitely looking better today than it did some months back. But then there are not a lot of reasons to lower one’s guard.

Dr Shankaran Nambiar is a senior research fellow at the Malaysian Institute of Economic Research. Comments: letters@thesundaily.com