The year that went well

DID the Malaysian economy perform well over 2017? On several counts, the answer could be a yes.

The country's export figures have been encouraging. They have risen more than was expected. A key driver – but not the sole one – for the increase in exports has been the strong global demand for electrical and electronic goods.

It is only reasonable that exports would have gone up with the drop in the value of the Malaysian ringgit against the US dollar.

Two forces were simultaneously at work. There was, on one hand, an increasing competitiveness in Malaysian goods due to their relative price going down (because of the falling ringgit).

On the other hand, and not tied to the exchange rate, there was an increase in demand for several export-oriented goods, the most prominent among them being goods from the electrical and electronics sector. The uptrend in the global electronic goods cycle triggered demand for these goods from Malaysia.

This explains why the trade balance was strong over most of 2017, but certainly since June 2017.

Net exports did contribute remarkably to real GDP, surging from a negative figure of -14.5% in 1Q 2017 to a positive growth of 1.4%.

Private consumption and domestic demand also played a significant role. Domestic demand grew at an average rate of about 7% in the first half of 2017. The domestic economy was a key force in driving the growth of the economy.

The balance of payments has also presented a pretty picture. The net current account balance improved, understandably due to the good export performance, putting the balance of payments on more solid footing.

It is not surprising that Malaysia's international reserves are more comfortable now. As at Oct 31, 2017, international reserves stood at US$101.5 billion. This is not as strong as it was, for instance, in 1Q 2017, when it was at about US$105 billion, but it is an improvement over 3Q 2015 when it fell below the US$100 billion level to touch the US$93 billion mark.

Further, the government has continued to attempt narrowing the fiscal gap. Its steadfast approach in trying to work towards a balanced budget must be appreciated. But there have been lapses in the journey to achieve fiscal discipline.

The Budget 2018 was a showcase of political acumen that, in parts, compromised on fiscal prudence. Taking note of the fact that the budget is an election budget, it is only to be expected that the government would want to be generous in extending assistance and incentives of various sorts.
Some aspects of the budget were positive. This includes the emphasis on building infrastructure, targeted fiscal expenditure to support the disadvantaged and support for entrepreneurship.

The huge dole-outs for civil servants proposed in the budget serves political interests, but is not at all rational when the debate should be on reducing the size of the civil service and improving its productivity.

Areas that received less attention than they deserve were housing and healthcare.

Growth figures have been looking good. In 1Q and 2Q, the growth rates were at 5.6% and 5.8%, respectively. There was a bright spurt in growth to 6.2% (y/y) in the third quarter of 2017. The annual growth rate is expected to be in the region of 5.8%, with potential to slide a bit in 2018.
Growth does seem satisfactory. But growth is not all that a country lives on.

One of the pressing issues is the fact that the encouraging growth rate has not been felt by large groups of Malaysians. There is a great deal of discontent on the rising cost of living, particularly among the bottom 40% (B40) of the population living in the urban areas.

Ownership of cars, housing and healthcare are sources of expenditure that cut into household income.

Perhaps more can be done to improve the public healthcare system which remains plagued by an excess demand that it cannot cope with effectively.

However, the GLCs are competing to provide healthcare for the top 20% of the population. They are content to run expensive private hospitals.
Affordable housing continues to be a worrisome matter for those in the B40 category. Housing costs are running ahead of household incomes. The government has diverted the resources of government-linked companies (GLCs) to compete in the more lucrative areas of the housing market, preferring to construct medium-cost and high-cost housing units, segments of the market that should be left to private sector developers.

Healthcare and affordable housing are issues that have to be attended to over a long stretch of time. More immediate is the high household debt that the economy faces. The household debt to GDP is a staggering 88.4%.

Equally worrisome is the high public debt. The 2016 figures indicate that public debt to GDP is 52.7%.

One can take comfort that public debt as a percentage of GDP is 90% for Italy and 66% for India, and so, by comparison, Malaysia is in a safe zone. But such a comparison is hardly meaningful.

Compounding the problem is the high contingent liabilities that the government has committed itself to. Government-guaranteed liabilities were about 13% of GDP in 2011, in 2016 they are about 15%. Allowing for the possibility that the government is selective in the choice of projects that it chooses to back, there is still no denying that high contingent liabilities induce an element that is best avoided.

Issues such as the weak ringgit, the determination to keep the fiscal deficit under control and fiscal support for the disadvantaged have received adequate attention this year. A different set of questions will now need attention. As we pass into 2018, there are risks that should be more carefully managed although we have had a good streak this year.

Dr Shankaran Nambiar is author of Malaysia in Troubled Times. Comments: