Friday, January 6, 2012

Malaysia’s fiscal and political uncertainties continue through 2011

After registering an impressive 7.2 per cent growth in 2010, the Malaysian economy visibly slowed down in 2011. GDP growth moderated to 5 per cent in the first half of the year, due mainly to sluggish export growth, but increased to 5.8 per cent growth in the third quarter, thanks to commodity exports and domestic demand. Manufactured exports, the main driver of growth, did not fare well over the year, owing to depressed demand conditions in the US and EU.

Malaysia should still be able to post 5 per cent growth for the year as a whole, but only if it can muster 4.2 per cent growth in the fourth quarter. This pall on the Malaysian economy is likely to worsen in 2012 with the export sector facing headwinds. Reputable think tanks and rating agencies have now revised down their 2012 GDP growth forecasts to a narrow range of 4.2 to 4.6 per cent.

The financial sector remained healthy throughout 2011, with stable monetary expansion, inflationary pressures notwithstanding. The consumer price index also edged up to 3.4 per cent year-on-year in September, a mild increase by regional standards. In the face of rising liquidity and bleak growth prospects, the central bank stopped raising the interest rate bar by keeping its official policy rate at 3 per cent.

But the fiscal side of the coin is tainted with perennial budget deficits spanning the last 14 years. In fact, Malaysia’s fiscal record is quite dismal; successive governments have pursued overwhelmingly pro-cyclical fiscal policies over the last five decades, without any serious effort to balance the books (with the exception of surpluses from 1993–97).

Government expenditure has risen disproportionately while tax revenue continues to trend down. About 40 per cent of government revenue comes from oil and gas, which is unsustainable in the long term. Federal revenue as a percentage of GDP has dropped from a 10-year average of 34 per cent of GDP to 22 per cent, a serious cause for concern, and attempts throughout the year to introduce a goods and services tax were scuttled by political expediency. The upshot of all this is the soaring government debt, hovering at around 54 per cent of GDP.

Looking to the future, Malaysia’s challenge is to free itself from the middle-income trap. Its vision is to achieve developed country status by 2020 with a per capita income of US$15,000. To be in the league of high-income economies, Malaysia needs to reinvent its economy and move up the value chain. This requires bold policy reforms, which do not sit well with the country’s powerful vested interests — the beneficiaries of the current order premised on patronage.

The country’s political landscape has changed dramatically since the 2008 general elections which deprived the ruling coalition of its traditional two-thirds majority. The opposition, led by former Deputy Prime Minister Anwar Ibrahim, poses a serious threat to the ruling coalition in Malaysia’s upcoming general elections, which must be held before 2013, raising their importance for the year ahead. This opposition is drawing large support from online media with unprecedented outreach, and is being fanned by numerous issues relating to governance and integrity. All indications are that Malaysia is moving toward a two-party system, with the opposition increasingly perceived as a credible alternative. But the ruling coalition of race-based component parties — which has ruled the country for 54 years since independence in 1957 — maintains a huge incumbency advantage, given its extensive control of the mainstream media and government machinery.

Be that as it may, gone are the days when Malaysia’s election results were a foregone conclusion, now that the constituencies are more demanding and discerning. It is estimated that there will be six million new voters at the next election, making the elections process a totally new ball game. Not surprisingly, the incumbents and the challengers are all out to win the hearts and minds of these young voters.

It is extremely difficult, if not impossible, to predict what will happen when Malaysia goes to the polls next — and where this will take the country after 2011. The ruling coalition, Barisan Nasional, is working hard to regain the two-thirds majority it lost in the 2008 elections. Yet the opposition, Pakatan Rakyat, is confident it can form the next federal government. While only time can tell, Malaysia is getting closer and closer to a tipping point. For now, only one thing is certain: politics in Malaysia will never be the same — and 2012 certainly will not be business as usual.

By Mohamed Ariff Professor at the Department of Economics and Governance, International Centre for Education in Islamic Finance, Malaysia. East Asia Forum

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