Tuesday January 1, 2013
Fiscal cliff and reforms
By GURMEET KAUR
THE global economy, at least for the first half of 2013, is expected to remain challenging as sentiments continue to be influenced by the ongoing struggling recoveries of advanced economies.
This new year will see uncertainties across markets – from the post-election “fiscal cliff” question in the United States to reforms in the Euro area – and the situation will continue to have global impacts on trade and investments, although these issues are perhaps less of a concern for markets than they were a year ago.
In the US, the looming fiscal cliff threatens to push its economy back into a recession as early as the first quarter of this year if the lawmakers and the White House fail to strike a compromise deal on tax increases and spending cuts. The European sovereign debt crisis, meanwhile, remains unresolved while EU countries are still mired in deteriorating economic conditions.
On a brighter note, the monetary stimulus provided by the US Federal Reserve’s latest quantitative easing known as QE3 and the monetary programmes by the European Central Bank have helped to lower the risk in global financial markets while saving the Eurozone from a possible worst case scenario, credit-wise.
Asia will again power the global economy, not unlike last year. In India, initiatives announced in September last year raises hopes that comprehensive policy reforms would follow for the Indian economy, while China’s historic leadership change this year is expected to be followed by reforms and fresh stimulus to bolster the Chinese economy.
These will be a boon to global economic recovery.
Locally, the Malaysian economy is expected to grow at a steady pace of 5% in 2013, albeit a marginal slowdown from an expected 5.2% gross domestic product (GDP) in 2012. The local economic growth will continue to be backed by robust domestic demand while the ongoing implementation of the Economic Transformation Programme (ETP) and the 10th Malaysia Plan projects will sustain private-investment growth.
But for the first half of the year, stock market sentiment is expected to be dogged by uncertainty over the political landscape because of the impending 13th general election, which must be held latest by May. The situation is expected to normalise in the second half as investors turn their focus back to fundamentals.
That said, many economists reckon that the market may be affected by any “surprises” in the outcome of the general election.
New legislation coming into force this year will shape the business operating environment, with implications for employers and employees in the private sector. These include the minimum wage policy, a higher private-sector retirement age of 60, up from 55, and the introduction of a private retirement scheme to supplement retirement income.
Here are some of the events to look out for in 2013:
1.The minimum wage policy takes effect from today. It has been set at RM900 for Peninsular Malaysia and RM800 for Sabah and Sarawak.
2. A new tax structure on crude palm oil (CPO) export takes effect from Jan. In October last year, the government announced the cut to export tax on CPO from 23% to between 4.5%-8.5%, and the end of free export duty quota on CPO, effective this month. These measures are expected to increase the competitiveness of Malaysian palm oil producers in the global market and to encourage refiners to export more processed palm products to the global market.
3. The Domestic Investment Strategic Fund with RM1bil funding under the Malaysia Industrial Development Authority (MIDA) is to be set up to encourage domestic investment and accelerate the participation of Malaysian companies in the global supply chain.
4. Further subsidy reduction may likely take place in 2013 as the Government looks to curb an increase in the budget deficit after the general elections. Also will the goods and services tax (GST), which has been deferred since 2007, be implemented?
5. Inflationary pressure may seep into domestic prices driven by higher global commodity prices and relaxation of subsidies. At the same time there could also be higher inflation coming from demand-pull pressures on the back of improved economic activities.
6. Malindo Airways is expected to take off May 1. The entry of the new low-cost carrier could possibly spark a price war in the already competitive aviation industry as competition heightens.
7. The second Penang Bridge is expected to open in September. The bridge linking Penang to mainland Malaysia will be a seismic-resistant bridge able to withstand tremors of 8.2 on the Richter scale with the epicentre at about 300km away.
8. Mega IPOs in the pipeline. Power producer Malakoff Bhd and long-haul budget airline AirAsia X Bhd are among companies which will list on Bursa this year. Several more big listings are expected to come on stream with investors’ eye glued on companies like Westport Malaysia Sdn Bhd, which is said to be looking at raising funds for its next phase of expansion.
1. How will the US’s looming fiscal cliff pan out? The political wrangling in addressing the US fiscal cliff remains a concern to investors as it threatens to push the world’s largest economy back into a recession if the US Congress fails to strike a compromise deal on tax increases and spending cuts by the end of the year.
However, many economists are of the view that US policymakers would prefer to avoid the fiscal cliff, raise the debt ceiling and make good progress towards a comprehensive plan to restore fiscal sustainability
2. The Euro debt crisis remains far from resolved, and in fact, has been worsened by deteriorating economic conditions in core and neighbouring countries. Although the outlook is less bleak than a year ago and economists expect Europe to come out of recession this year, the expected recovery remains fragile.
3. Will the US Federal Reserve (Fed) raise interest rates this year? The Fed has in the past said that it would keep interest rates at their current low levels until at least the middle the year. The delay in raising the rates is to ensure “optimal” policy response to the extraordinary circumstances the US has faced since 2008 and to see to it that economic activity recovers well.
However, should concerns over inflation pick up along the path to a stronger economic recovery, some economists believe there is no reason for the Fed not to raise interest rates.