Rising indebtedness is something a country like Malaysia needs to pay close attention to. Having larger tax revenues will allow the government to improve critical social services such as health and education, and also have sufficient money to upgrade national defence. — IZZRAFIQ ALIAS/The Star
THE numbers don’t lie and Malaysia’s recent economic rebound attests to it.
With a GDP growth rate of 5.9% in the second quarter (2Q24), only Vietnam and the Philippines had higher growth in South-East Asia at 6.9% and 6.3%, respectively. Indonesia is fourth at 5.1%.
The numbers show that the economy is doing well. Unemployment is down to “full employment” numbers at 3.3% and that is not the only indicator that is flashing a nice hue of green.
Private sector spending is up handsomely. Private consumption is up 6% and investments, a bellwether theme of the government this past few quarters, was up 12%.
OCBC in a report says that net FDI inflows improved to RM3.8bil versus an outflow of RM6bil in 1Q24, while net portfolio outflows remained large at RM21.7bil (versus RM23.7bil). It says net other investments turned to a big surplus of RM35.6bil versus RM9.8bil in 1Q24.
Exports and imports too were up decently, indicating a sufficient robustness in global trade and economy to see exports bounce by 8.4%. With the economy doing well based on the growth in the second quarter, imports were up by 8.7%. Strong import growth is a proxy to domestic economic activity.
On the supply side, construction is booming with a growth of 17.3%. It is not a fluke for the previously beleaguered sector.
The construction sector is an important barometer because it captures the low hanging fruits and has the biggest impact to the domestic economy. When buildings and other infrastructure are built, the factories produce the cement, steel and for the projects. Money is distributed fast, which in turn spurs activity.
Then there are tourist arrivals which were up 32.5% in the 1Q24 to 5.8 million. Tourist spending is an important foreign exchange earner. For instance, Thailand, despite its weak economy and political turmoil, has seen the baht move up in recent years thanks the the ballooning foreign reserves as a result of tourism.
The return of throngs of tourists from China and a growing number from India will fill Malaysia’s coffers.
Another vital aspect is the ringgit. It had been at an all-time low against the US dollar and Singapore dollar, but has since rebounded strongly.
The ringgit has climbed off the bottom as one of the worst performing currencies in Asia against the US dollar to among the best — all in a very short time.
Another bellwether indicator is the stock market. The FBM KLCI, once mocked by some as a laughing stock, has had a nice pop in the past year.
Corporate earnings are on the up with optimism that companies on Bursa Malaysia will be able to return double-digit earnings growth for 2024.
The last time the FBM KLCI was this high was in December 2020, driven in part by the data centre boom that has pushed investment numbers and also companies engaged in such activity on Bursa Malaysia.
Despite the ebullient economy and its proxies, Malaysia is not in the pink of health economically.
National debt is an issue. With government debt at RM1.5 trillion and growing, how will the government bring it under control and reduce it in the longer term?
The crux has been the continued deficit spending since the 1997 Asian financial crisis. Such spending has driven debt levels upwards and for people to say a country can shoulder a 3% deficit, that is just wrong.
We are now seeing the excesses of that and all debt will eventually need to be repaid. In fact, the government should be more aggressive in reducing its debt than what it intends to do under its medium-term fiscal framework. As someone once said, if the economy is growing nicely, then there is no need to continue with deficit spending.
It is wishful thinking to expect the government to cut its fiscal deficit to zero, especially when it can be argued that a chunk of economic growth being enjoyed now is fuelled by deficit spending.
But rising indebtedness is something a country like Malaysia needs to pay close attention to. With tax revenue expected to fall to 12.3% at the end of this year, that amount is small compared with regional peers.
Having larger tax revenues will allow the government to improve critical social services such as health and education, and also have sufficient money to upgrade national defence.
Tax increases are unpopular. The need for a Goods and Services Tax is obvious as it will bolster tax revenue needed to pay for the near-critical level of debt servicing and pension liabilities. Will the government risk its popularity and economic momentum to undertake such reforms?
This article first appeared in Star Biz7 weekly edition.
