10-6-2023 (KUALA LUMPUR) Over the past three years, the Malaysian economy has successfully weathered numerous challenges, including a health crisis, political uncertainty, and soaring prices that have plunged ordinary citizens into an unprecedented cost-of-living crisis. However, the country now finds itself on the brink of darker economic times as a global slowdown and tightening credit conditions point towards further weakening of the domestic economy. In the first quarter of this year, Malaysia’s economy grew by 5.6%, surpassing market expectations of 4.8% growth.
Nevertheless, the outlook is far from optimistic, warns BMI, a unit of Fitch Group. The first-quarter growth rate was significantly lower than the 7.1% increase recorded in the previous quarter. BMI predicts that Malaysia’s gross domestic product will only expand by 4.2% this year, half of the remarkable 8.7% growth seen in 2022, which marked a 22-year high.
These circumstances cast doubt on Prime Minister Anwar Ibrahim’s promise to lead a rebound, as he had pledged during the lead-up to the November 2022 general election. Malaysians had hoped that Anwar’s Pakatan Harapan (PH) coalition would provide a new direction for the country, but the economic prospects now appear grim.
The implications are significant. Delivering on promises to the ordinary citizens would boost both domestic and foreign investor confidence in Malaysia. MIDF Research, a local investment advisory firm, highlights the net outflows from the local equities market, with over RM2.9 billion (US$628 million) withdrawn in 16 out of the 22 weeks this year.
Failure to navigate the rough waters ahead for Malaysia’s economy would severely dent Anwar’s standing among the population, who are looking to him for a fresh start in both political and economic spheres.
While Anwar has emphasized that his government has brought greater political stability, which has consequently improved the national investment climate, challenges persist. As finance minister, he recently reported to parliament that approved investments for the first quarter amounted to RM71.4 billion, representing a 60% increase compared to the same period in 2022.
However, economists and business insiders within Anwar’s circle note that his efforts since assuming the premiership have primarily focused on consolidating government finances and addressing leakages. The government has frozen billions of dollars’ worth of contracts awarded through direct negotiations by the previous administration, shifting towards public tenders to reduce costs.
“There have been significant gains in introducing financial discipline to the government, but there isn’t a singular achievement that can demonstrate a full return of confidence,” remarked a close aide to the premier, acknowledging the ongoing challenges regarding the cost of living.
While Malaysia’s inflation rate slightly eased to 3.3% in April from the previous month’s 3.4%, the persistent cost-of-living pressures remain particularly felt in urban centers.
The prolonged investor ambivalence largely stems from the country’s unsettled political landscape. Although Anwar’s unity government, led by PH, holds a comfortable majority in the 222-member Parliament, concerns persist regarding support from the politically dominant ethnic Malay community, which constitutes over 60% of the population.
Answers to these concerns may emerge soon as six states prepare for their respective assembly elections. Anwar desperately needs to demonstrate that his multi-racial coalition government can reverse the tide in the Malay vote, which favored the opposition Perikatan Nasional coalition in the last election, consisting of Parti Pribumi Bersatu Malaysia (Bersatu) and the right-wing Parti Islam Se-Malaysia (PAS), both of which cater primarily to Malay interests.
The ethnically diverse states of Penang, Selangor, and Negeri Sembilan, currently controlled by the PH coalition and expected to remain unchanged, pose no major challenges. The uphill battle lies in the dominant Malay states of Terengganu, Kelantan, and Kedah, which are ruled by PAS.
Maintaining the status quo or even securing a victory in one of the PAS-led states would provide a significant boost to the Anwar government.
Setting aside the political landscape, economic headwinds present Anwar’s most pressing challenge. Once a budding tiger economy in the region, Malaysia has slipped to the fifth position among ASEAN economies, overtaken by Vietnam, which ranks in the top four alongside Indonesia, Thailand, and Singapore.
The impact of the global economic slowdown is evident in Malaysia’s declining export performance, with a 17.4% year-on-year contraction in April.
Mohd Afzanizam Abdul Rashid, the chief economist of Bank Muamalat, forecasts a 9% decline in overall exports this year compared to the remarkable 25% growth witnessed in 2022. He stated, “This will leave domestic demand as the main economic driver for overall growth.”
Economists note that since 2019, domestic demand, comprising government spending and private consumption, has accounted for over 70% of GDP. However, this growth model is no longer sustainable. Malaysia is grappling with the consequences of excessive spending, with government debt ballooning to RM1.08 trillion by the end of 2022, nearly doubling in just six years.
“The government’s policy of increased spending is no longer tenable, and Malaysia needs a new economic narrative,” said Professor Yeah Kim Leng from Sunway University, a member of a five-person panel advising Anwar on financial matters. He added, “The new path must involve shifting the economy towards value-added production by attracting technology-intensive industries that, in turn, will boost wages.”
