PETALING JAYA: Malaysia’s average growth rate for the next decade is forecast to come in at 3.4% compared to a 6.4% average over the past decade, weighed down by a contraction in 2020 due to the Covid-19 pandemic according to Fitch Solutions.
Furthermore, it views the extended political uncertainty during Malaysia’s transition away from one-party rule as leading to stalling, even backsliding, reform momentum.
“Combined with less favourable demographics and reduced fiscal space to cushion against future negative shocks to the economy, these factors all spell a much lower growth rate over the coming decade,” it said in a report.
On the political front, the research arm of Fitch Ratings laid out that the defeat of the long-ruling Barisan Nasional (BN) coalition in the 2018 election by Pakatan Harapan (PH) has resulted in a fluid and uncertain political landscape which will remain in the next decade.
With both politicians and electorate alike adjusting to the new reality, it expects power to change hands often, leading to questionable policy continuity and stalled reform momentum.
“Concerns over political stability were cemented with the political crisis in February 2020 after the PH government was deposed after backroom manoeuvres sparked by interpersonal and inter-party rivalries within the four-party coalition,” it said.
Though the research arm expects a more multiparty or two-party system similar to those in more mature democracies would eventually reap dividends for Malaysia, the uncertainty in the interim is likely to be a negative factor counted against it by potential investors.
“This is inopportune, given that businesses and countries around the world are accelerating plans to move at least part of their operations out of China in a bid to build more diversified and resilient supply chains, as an answer to the liabilities of relying too much on China exposed by the US-China Trade War that began in 2018 and the Covid-19 Pandemic in 2020.”
It highlighted that Malaysia would essentially be starting on the back foot against regional competitors, especially Vietnam, in the race to attract foreign direct investment.
Furthermore, this might be exacerbated by politicians resorting to populist appeal to shore up popularity which could lead to a worsening business environment over time as more protectionist measures are implemented.
Fitch also raises the risks of a resurgence of corruption and graft further weighing on investor confidence, given the political defections of MPs and even whole parties which have occurred in recent years.
In the next decade, it forecasts Malaysia’s active population growth to slow to an average of 1% over the next decade compared to 2.3% in the last one.
While it is slower than before, this is expected to provide a tailwind to the economy, but holding all other factors constant, this should result in slower real GDP growth over the coming decade.
“Worsening matters further is diminishing fiscal space left for future interventions. Public debt levels, including debt guaranteed by the government, exceeds 80% of GDP and is growing steadily,” it said.
In regard to monetary policy, it pointed out that the low interest rates in recent years have fuelled a household debt boom, which will act as a drag on growth and would pose risks to financial stability if interest rates need to be raised sharply.
“Although Malaysia’s deposit rates have been kept around consumer price inflation, suggesting they have been appropriate, lending rates have been about 200 basis points lower than nominal GDP growth over recent years, with the exception being during the 2008 Global Financial Crisis.”
Currently, Malaysia’s household debt as a share of GDP stands is close to 85%, one of the highest in Asia.
The research arm cautioned, while debt service ratios are still manageable, a rise in interest rates could tip service ratios to unsustainable levels, leading to a rise in defaults. Even if interest rates remain low and property prices do not undergo steep declines, high household indebtedness could act as a drag on growth over the coming years.
Howeverf, it said that Malaysia’s economic rebalancing from export driven growth towards domestic private consumption, will drag its overall headline real GDP growth, but it will see private consumption growth outperform, creating investment opportunities in catering for the domestic middle class rather than overseas demand.
“This is not to say that we see export growth collapsing. Malaysia has a well balanced mix of exports, not being over-reliant on commodities or a particular manufacturing industry, and also has a diversified export market, despite its heavy reliance on Chinese demand.”
Fitch Solutions says Malaysia’s economic rebalancing will see private consumption growth outperform, creating investment opportunities. – AFPPIX