Strong economic fundamentals prevail Domestic demand will still be the driver of growth
MOVING UPWARDS: Economy is robust amid uncertainty in financial markets
TDR IRWAN SHAH ZAINAL ABIDIN HE latest data on the state of the Malaysian economy, released by Bank Negara Malaysia, pointed to an economy that is relatively robust and fairly resilient. This is amid the moderate global economic growth and modest world trade expansion, plus the uncertainty in the financial markets due to the impact of Donald Trump’s election win in the United States and the renewed ambiguity of Brexit on the rest of the world.
Malaysia’s economy grew by 4.3 per cent in the third quarter this year, surpassing the median market’s expectations of four per cent. The economy has rebounded remarkably well from its four per cent growth in the previous quarter. Looking on a quarter-on-quarter seasonally-adjusted basis, the economy also recorded an expansion of 1.5 per cent, compared with 0.7 per cent in the second quarter of this year. Besides the expected support from domestic demand via private sector spending, this time around, net exports also play a significant role to boost economic growth.
As a result, the current account surplus of the balance of payments has improved to RM6 billion in the third quarter, compared with RM1.9 billion in the previous quarter, essentially squashing the possibility of Malaysia plunging into twin deficits in the near future. Malaysia’s international reserves, positioned strongly at RM405.5 billion in the third quarter, are ample to finance 8.4 months of retained imports. This is much higher than the 3-month international standard of financing retained imports. Malaysia’s reserves are also sufficient to meet external obligations, given the reserves to short-term external debt of around 1.2 times in the said quarter. As at Nov 15, the international reserve has improved further at RM407.8 billion.
The other important economic fundamental of Malaysia’s economy is the inflation rate. The rate remains stable at 1.3 per cent in the July-September period, clocking lower than 1.9 per cent in the previous quarter.
The concern here is food inflation. Even food inflation shows a decreasing trend. Under the food and nonalcoholic category, the data recorded at 3.4 per cent, lower than 4.2 per cent in the second quarter. But more measures to manage the pressure of inflation in this category are crucial as it directly relates to the issue of cost of living and the bottom 40 per cent (B40) group.
On the supply side, except for construction, all sectors have shown improvement from the previous quarter, albeit modestly. The agricultural sector, although still in the negative territory, has shown a better number from -7.9 per cent in the last quarter to -5.9 per cent in the third quarter of this year. For last year, the services sector was still the largest contributor to the total share of Malaysia’s gross domestic product (GDP) at 53.5 per cent, followed by the manufacturing sector at 23 per cent. For this year, both the services and manufacturing sectors are expected to contribute more in the GDP contribution, where it contributed 6.1 per cent and 4.2 per cent in the third quarter of this year. It is expected that the services sector will contribute more next year, following measures introduced in the 2017 Budget, such as the focus on the digital economy.
Essentially, more needs to be done to revitalise the agricultural sector moving forward. Measures to attract private sector participation in this sector are paramount, especially for research and development activities. Market accessibility and price mechanism for agricultural products must be competitive to attract youth in the labour market to engage in this industry. With new technologies and participation from the younger generation, the agricultural sector can be revitalised with better technology, innovation and productivity.
Perhaps the main concern now is the ringgit, which has depreciated at the new low level due to the stronger dollar in the aftermath of the Trump’s shocking win. It is important here to note that this recent plunge of the ringgit, which is due to the “Trump tantrum”, is beyond our control. Hence, it is commendable on the part of the government to reiterate that there will be no capital control or pegging the ringgit against the greenback in the near future. In fact, this move has been endorsed by International Monetary Fund managing director Christine Lagarde when she met Prime Minister Datuk Seri Najib Razak at the Asia-Pacific Economic Cooperation leaders meeting recently.
Moving forward, domestic demand will still be at the driver seat of Malaysia’s growth story. This year, I believe the government’s forecast growth of four to 4.5 per cent will be achieved. The economy seems to bottom out this year and will move upward next year onwards.
The Malaysian Institute of Economic Research, for instance, predicted growth rate of 4.5 to 5.5 per cent next year. With the 2017 Budget approved in Parliament and with the continued diversification exercise and structural reform initiatives, we can expect a better economic prospect next year.