Transformation on the Street: Setting the Economic Agenda for a New Malaysia

Malaysia’s Budget 2019 announced on 2 Nov 2018 has set the pace for the direction in which the country’s economy will be steered by its new government. The budget, which was also the first to be unveiled by the government, was generally well-received by the public for its focus on fiscal discipline as well as inclusiveness and societal well-being of the middle and lower-income groups.

However, with expectations of a slightly higher fiscal deficit of 3.7% in 2018 against an earlier projected 3.4%, as well as lower forecasted economic growth of 4.8% for the year versus between 5% and 5.5% targeted previously, the government has firmly established a New Malaysia that is more cautious than in the past. Given the prevailing global economic and industry trends, this approach may prove prudent as the country strives to remain relevant against a competitive and dynamic landscape. But, what are the essential considerations for the government to develop the economic agenda for the New Malaysia?

Nurhisham Hussein, the Employees Provident Fund Head of Economic & Capital Markets, observed at the Youth Economic Forum (YEF) 2018 recently that the economic environment has shifted considerably in recent times, with the emergence of multiple economic superpowers and greater inter-connectivity among economies. Coupled with a fast-paced landscape driven by tech disruptors, Nurhisham believes that the traditional practice of backing specific industries to achieve growth is no longer feasible. “We need to bet on making ourselves as structurally sound as possible by investing in human capital and ensuring the labour market is flexible and geographically mobile,” he said.

Aside from keeping an eye on trends, policymakers would also be wise to address vulnerabilities within the local economy. These vulnerabilities exist mainly in the form of lower government revenue from the removal of the Goods and Services Tax and the current level of fiscal debt. While Malaysia is recognised for having strong economic fundamentals, such as ease of access to capital and credit, Tan Sri Zeti Akhtar Aziz, chairman of government-linked investment firm Permodalan Nasional Bhd, observed that the government is currently utilising 12% of its operating budget on servicing debt, double that of Malaysia’s peers.

Zeti, who is the former governor of the Malaysian central bank and also spoke at YEF 2018, added that monetary policy around the world sees increasing interest rates towards the normalisation of rates, as global economies are no longer in crisis. To follow suit, Malaysia must first address its level of debt and avoid excesses in expenditure. It is by achieving this normalisation of monetary policy can the country realise fiscal sustainability.

Warning that there is a “tremendous” need to jump-start the economy, she also advised that rather than cancelling infrastructure projects, the projects should be reassessed in terms of their value-add and impact to the economy, society and the environment, as well as cost against global standards.

The country’s economic conditions have also been highlighted by ratings agency Fitch Solutions. In a recent note, it cautioned of a slowing economy resulting from the government’s fiscal prudence. With the external environment remaining uncertain, the government may have limited room to stimulate growth while it seeks to reduce debt. The ratings agency also observed a greater reliance on oil revenues instead of measures to increase other revenue, which will additionally constrain efforts to lessen fiscal debt.

Meanwhile, Dr Sukhdave Singh, a director at Khazanah Nasional Bhd and also a former central banker, highlighted Industry 4.0 as a further point to contend with in establishing Malaysia’s economic trajectory. “We do not have the luxury of time. Industry 4.0 is already here changing the economic landscape and is only expected to accelerate in its intensity and impact. But we’re not ready; we need a national effort,” he warned.

Echoing Nurhisham’s earlier point that the time is past for focusing on specific industries, the government must instead create a nurturing environment for companies to become champions. This will require an intensive knowledge-based economy, a high-quality labour force, modern infrastructure, sound institutions and robust governance. These, in turn, call for deep political will and emphasis on innovation. The country is also urged to collaborate with its neighbours to compete with large economies, leveraging on ASEAN’s resources and market size.

With the New Malaysia still in its early days, the country and its economy remain in a transitional period. However, the prevailing global economy and industry trends signal that time and a balancing act in fiscal prudence are of the essence for the new government to launch a resolute economic agenda.