Rethinking growth and business risks next year
IN two days, the curtain falls on an eventful year filled with surprises. Most notable was Donald Trump’s United States election victory against all odds. The others include Britain’s vote to exit the European Union (Brexit) despite the incumbency advantage of the stayers and Italy’s referendum against constitutional reforms that would brought the needed change in the old, ineffectual political system.
Of significance in the political winds of change is the fear of a rollback of globalisation and free trade, more insular and protectionist policies, heightened risks of currency and trade wars especially between the two largest economies in the world, the United States and China, and large scale reversal of capital flows out of emerging markets. to 1.1 percentage point, still a third of global growth.
Where global growth is concerned, the Chinese economy matters more because of its size and faster pace. Jitters early this year over its performance have abated somewhat as the economy expanded 6.7 per cent for three consecutive quarters, within the government’s 6.5 to 7.0 per cent target for this year.
The risk to China’s growth has shifted to longer-term concerns. The accompanying fiscal and credit expansion amid rising indebtedness, overheated real estate market and excess industrial capacity are seen to impede its desired transition to a more sustainable consumption-led and services-oriented economy from one driven by investment and manufacturing.
The investment slowdown in China has consequential effects on world trade including Malaysia’s exports of raw materials, intermediate and capital goods. Malaysian manufacturers and exporters will have to adapt to the changing patterns of Chinese demand where consumeroriented goods and services catering to the expanding middle class are gaining faster traction.
The investment slowdown in China, however, has not affected its outward investment strategy which are aimed at creating demand, both domestic and foreign. Its vision of a 21st Century Maritime Silk Road is being realised through its One Belt One Road (OBOR) initiative that is expected to gain momentum in the years ahead.
The Asean countries, where Malaysia is viewed as a strategic infrastructure hub, will be key beneficiaries of this strategy to spur the development of a network of regional infrastructure development covering roads and rails, energy pipelines, power stations and coastal ports.
The threats of punitive tariffs and counter-actions against China’s alleged currency manipulation under Trump’s presidency have raised the spectre of trade and currency wars between the two largest economies.
A faster pace of economic integration among the Asean economies and with China and other economies under the various megaregional trade agreements such as the Regional Comprehensive Economic Partnership led by China and the Free Trade Area of the Asia Pacific (FTAAP) promoted by the AsiaPacific Economic Cooperation (Apec) will help moderate the fallout of retaliatory trade and currency measures between the two protagonists.
While the dollar has strengthened against most currencies, from a country perspective it is important to look at the trade-weighted and inflation-adjusted exchange rate, called the real effective exchange rate (REER), to determine if its currency is misaligned. Based on a sample of 61 countries tracked by the Bank for International Settlements, nine countries including the US have experienced double-digit REER appreciation as at endNovember this year and since the end of the global recession in 2010.
Fifteen countries, including Malaysia and developed nations such as Japan, Canada, Ireland and Norway, had REER declining between 10 and 26 per cent, with the ringgit registering a 14.5 per cent drop. Although large currency overvaluations are associated with many currency crisis, under-valuation has been found to stimulate growth, especially in developing countries. While currency volatility and downward pressures will continue to prevail next year, the negative impact is not as worrisome for countries experiencing undervaluation.
Despite elevated policy uncertainties across the world, the pick-up in growth momentum in the US and stabilising growth in China suggest that the global economy may be more resilient next year than perceived currently.
Regardless of the extent to which US policies pivot inward under the new president, intra-Asian economic integration will be accelerated with China’s ambitious regional infrastructure network thrust that is expected to generate new sources of growth and investment opportunities in the years ahead.
While demand risk may have lessened with the expected improvement in economic growth, Malaysian firms still need to develop strategies specific to their business to cope with the higher currency risk and more volatile financial markets next year.
The writer