1st June, 2012
KUALA LUMPUR: Despite an uncertain international climate, Malaysia is set to put in another strong economic performance this year, says research consultancy Oxford Business Group (OBG).
While growth is not expected to hit the heights achieved in recent years, a rate of between 4.0 and 5.0 per cent would serve to keep Malaysia on the right track, it said in its latest country review of Malaysia.
In May, the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) announced a forecast 4.5 per cent growth in 2012, down somewhat from 5.1 per cent last year and 7.2 per cent in 2010.
This, OBG pointed out, was broadly in line with most expectations: in March, Bank Negara Malaysia (BNM) forecast a growth of between 4.0 and 5.0 per cent while the International Monetary Fund (IMF) put the figure at 4.0 per cent.
Prof Dr Mohamed Ariff Abdul Kareem, a professor at the Kuala Lumpur-based Global University of Islamic Finance, commented that Malaysia’s economy would be driven both by private consumption at home and commodity exports.
Oliver Paddison, the economic affairs officer at ESCAP, said countries in the Asia-Pacific area need to increase regional cooperation and realign their economies to increase domestic consumption.
“This will help offset the effects of a potential drop in exports to the developed world, which has been suffering the effects of debt and growth crisis,” he said.
OBG said Malaysia was already successfully moving in this direction, building trade with fast-growing emerging markets and supporting domestic demand.
China is now Malaysia’s largest trading partner, behind Singapore. Overall, exports grew 7.1 per cent, year-on-year, in the first two months of 2012, according to official figures.
OBG said the IMF reported in February that Malaysia’s “growth remains supported by robust consumption and investment”, praising “the ambitious reform agenda to boost potential growth, based on comprehensive diagnoses of the bottlenecks that hinder investment and productivity.”
The IMF noted that Malaysia was implementing a number of strategic plans to boost productivity and growth in order to achieve its goal of becoming a “developed country” by 2020.
These include the New Economic Model (NEM) and Economic Transformation Programme (ETP), which lay out reforms to increase the private sector’s role in driving growth and expanding value-added sectors in which Malaysia has competitive advantages.
Extensive infrastructure investments and urban and rural development plans would also support the economy’s long-term trajectory.
OBG said investors remain confident about the outlook for Malaysia. A May survey by international investment management firm, Franklin Templeton, found that 44 per cent of Malaysian investors felt the domestic economy was improving, while only 24 per cent felt it had worsened.
The research consultancy said foreigners were similarly upbeat: official figures show that foreign investment grew 12.3 per cent in 2011 to RM33 billion (US$10.59 billion).
This has been spurred largely by the implementation of the NEM and ETP, as well as, closer ties with other countries in the region.
Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz had said that domestic demand and investment by the private sector remained “highly robust”, despite global difficulties and some local inflationary pressures.
Inflation is expected to be between 2.0 and 3.0 per cent this year, underlining Malaysia’s reputation for macroeconomic stability, developed since the 1997-98 Asian financial crisis, OBG said.
While the outlook for this year and beyond was indeed positive, OBG also said officials and analysts are aware of the challenges Malaysia must tackle to continue its growth path.
In the IMF’s view, foremost among these is the need to maintain fiscal consolidation.
The budget deficit is expected to be around 5.1 per cent, down from 5.5 per cent in 2011, but unsustainable in the long-term, particularly given the country’s relatively high public debt.
Over-reliance on oil and gas income (which contribute around 40 per cent of the government’s revenue) and an unwieldy subsidy regime (which costs about 4.0 per cent of GDP) are issues that the government will have to address to strengthen its fiscal position in the future.
Subsidy cuts proposed in 2011 are currently on hold due to concerns regarding the effect on inflation.
As the IMF stated, Malaysia has done well to bring down the deficit in recent years.
To continue its growth path, OBG said Malaysia aimed to push on with its ambitious reform and investment programmes, which should strengthen the business environment, broaden and deepen its export markets, and accelerate diversification.