Malaysian Economic Outlook 3rd Quarter 2021
With globalization and interconnected economies around the world, the Covid-19 pandemic is affecting both developed and developing countries, especially countries with high urban population density, weak public healthcare system and medical services, entrenched inequalities, high mobility of people and strong individualist culture, among others. We have the “infectious disease burden”, affecting very hard and disproportionately vulnerable and marginalised groups. Pandemic-driven economic impacts extend well beyond the economic domain, impacting not only socioeconomic needs and desires of the Rakyat, but also making the politics very fragile. In fact, the Covid-19 has pandemic laid bare all structural weaknesses that need to be urgently improved and strengthened, moving forward. We have achieved greater political stability with a bipartisan approach and are heading towards Recovery ++.
The utmost priority in the current uncertain environment is to maximize the welfare of the Rakyat, minimizing their endless suffering by focusing more on their needs and requirements in dealing with sickness and tragic deaths, and also unprecedented economic costs. Healthcare and medical services, including privately provided facilities were tested and seemed to be inadequate, especially under extreme stress conditions.
There is certainly “connectedness” and interaction between, firstly, Covid-19 characteristics and its own dynamics, secondly, collective behaviour of the Rakyat and their individual actions, and thirdly, Government containment and suppression measures and policy actions that ultimately shape the whole environment. As such, collective will is necessary so that we can have seamless interactions for the benefit of society at large. Fortunately, the political landscape has turned for the better in recent months and recovery is in the horizon.
Looking at this year’s macroeconomic performance, unfavourable developments and tough challenges have certainly affected the performance of the Malaysian economy. Real GDP growth for 2021 is estimated to register at 4.0% (2020: -5.6%), well below the average of 4.9% (2015-2019) during the pre-Covid-19 pandemic period. However, there are clear signs of V-shaped recovery, especially with expanding aggregate domestic demand, comprising both private consumption and investment, continuing strong growth in net exports of goods and services, increasing net international reserves of BNM, and increasing inflows of both direct and portfolio investments by foreign investors. With the reopening of inter-state travel, following the success of well-administered National Immunization Program (PICK) and a lot less restrictive measures moving forward, real GDP growth is expected to pick up strongly to record between 5.5% to 6.5% in 2022, indicating that all resources are likely to be fully utilized, especially towards the latter part of next year.
The Unemployment rate moderated slightly to 4.6% of the total labour force in August 2021 (July 2021: 4.8%), while consumer price inflation continued to moderate in August 2021, registering 2.0% year-on-year, compared to 2.2% in July 2021 (June 2021: 3.4%, May 2021: 4.4%, April 2021: 4.7%), on account of mostly declining transport prices, improving food supply conditions, plus continuing better distribution and marketing of goods and services. Both the Unemployment Rate and the consumer price Inflation rate are expected to improve this year, registering 4.3% and 2.5%, respectively. These two macro ‘misery’ indicators are expected to further improve in 2022, registering lower rates of 4.2% and 2.1%, respectively. The latter is close to the inflation target of BNM, which is in line with potential output growth of 5.5% and approximately zero output gap.
The IMF in its latest World Economic Outlook (WEO, October 2021), revised downward the 2021 annual growth estimate for the world economy at 5.9% (2020: -3.1%). However, the IMF maintained the global growth forecast for 2022 at 4.9%, indicating that global recovery will continue next year. The balance of risks is still tilted to the downside.
Looking at short-term risks, the virus is still circulating and could resurface again, especially in emerging market and developing economies, where vaccination rates are lagging behind advanced economies. Other short term risks include rising major commodity prices, particularly food and energy; strong appreciation of the US dollar, on account of its robust growth; continued capital outflows in emerging market and developing economies; and greater volatility in global financial markets with expectations of new tightening of monetary policy in advanced economies.
Medium-term risks include turmoil in the financial markets, associated with the fallout of China’s largest property giant Evergrande and the energy crisis on its real side of the economy, resulting in slower-than-expected growth in China. Geopolitical risks remain one of the key concerns, especially in the immediate and near-term. These include tensions between super powers in the Indo-Pacific region. The recent formation of the power pact (AUKUS) between Australia, UK and the USA which could disturb the ASEAN’s long-standing principle of maintaining a Zone of Peace and Neutrality (ZOFPAN) in the region. Tensions between China and Taiwan are also brewing, representing as new risk in the South China Sea.
The Twelfth Malaysia Plan (2021-2025) has been tabled by the Government in Parliament on 27 September 2021, marking the starting year for the five year medium-term development plan. Alongside the 12th MP, we have the long-term 10-year perspective plan, namely the Shared Prosperity Vision 2030 or Wawasan Kemakmuran Bersama 2030 (WKB, 2021 – 2030). The Asian Financial Crisis (AFC, 1997/1998), Global Economic and Financial Crisis in 2008/2009, and more recently the unprecedented Covid-19 Pandemic have had, to a large extent, battered the goal of achieving high-income and developed nation status by the year 2020, as envisioned earlier under Vision 2020.
Under present circumstances the Prime Minister’s call for our “Malaysian Family” is timely and “political stability”, “racial harmony” and “national unity”, which used to be our great hallmarks, have to be re-strengthened. With the continuing trio of crises, namely Covid-19 pandemic, severe economic recession and fragile political stability, occurring almost at the same time, we are actually at a point of intersection. We have commendably managed these challenges and are poised to move forward.
While we can easily shift the current environment from a pandemic to the so-called endemic environment, we are all still susceptible to the promiscuous Covid-19 viruses and not back to the “normal environment”. Ten percent or less of unvaccinated adults plus, most worryingly, undetected infectious illegal migrants represent systemic public health risks, resulting in potentially new waves. As such, careful precautionary measures and adjustments are still necessary and required for all economic agents; consumers, producers, market players and the Government alike.
The Twelfth Plan represents to a large extent a “new policy framework”, with the objective of a Prosperous, Inclusive, Sustainable Malaysia, thereby renewing the Government’s commitment to economic and social development. The high wire act of debt-fuelled fiscal spending, stretching the debt ceiling limit to the so-called Debt Maximum (DMax) threshold should be considered carefully. Evidence even from high-income developed economies shows that high-debt economies have a high probability of debt default and economic crisis. Risk factors, include financial risk (insolvency, liquidity constraints); macroeconomic and systemic risk factors; and political risk factors.
We need to continue examining in-depth all binding constraints to economic and social development; existing distortions and imperfections in market microstructures; the breakpoints and structural weaknesses. The latter include weakening public healthcare, which has been neglected in the past years, resulting in health inequality in many aspects. Healthcare services should be considered as public goods, whereby there is no exclusion or inequity, although privately provided healthcare services can be encouraged, thereby not neglecting the needs of the poor and marginalised groups.
Stabilization measures, structural adjustments and policy actions require strong ownership and support by all stakeholders, irrespective of political affiliations, racial and religious associations. There must be a strong guiding hand, good signalling mechanisms and certainly credible policies for market participants to react adequately. Extensive consultations with relevant stakeholders will ultimately help to avoid uncertainty and negative perceptions of stakeholders, consumers, investors and rakyat alike. We need to ensure continued happiness and a good life for the rakyat by encouraging greater kindness and showing strong compassion to others, especially in these difficult times.
The world economy is gradually moving out of the pandemic-driven economic crisis, moving towards a more sustainable economic and social development. New advances in technologies need to be adopted through utilization of more high quality capital-embodied technology and intensification of educational and training opportunities, producing a greater number of skilled-and-educated work force. Medium and long-term structural adjustment and reform programs must continue to be the key priority of economic policy, supported by appropriate short-term stabilization measures and continued macro-prudential arrangements.
Specifically, continued accommodative monetary policy is not a valid option in the coming quarters, and more so continued “fiscal dominance” with unconstrained discretionary stimulus packages, as fiscal space is being constrained by lower non-oil revenue and a narrow tax base. The latter is to a large extent caused by the abandonment of built-in automatic stabilizer after PRU14 of an empirically valid option of consumption-based Goods and Services Tax (GST). The calculus of consent and community “willingness to pay” needs to be encouraged among all stakeholders, and more importantly among lawmakers. We have to seriously examine the possibility of harmonising the GST and SST. Political extraction of public-owned resources, such as through higher dividends of Petronas and use of natural resources, like timber need to be minimized, taking into account future generations, intra-generational equity and environmental sustainability. The ultimate goal is national well-being, encompassing family life satisfaction and happiness, moving forward.
For the full report, please contact us at
info@mier.org.my or call 03-21420091/5895/5897
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