Malaysians were given two big surprises last week. The first Bank Negara Malaysia announcement of a 25-basis point hike in the interest rate raising the OPR to 2% from 1.75% and the other was Malaysia’s growth rate which chalked an impressive 5% GDP growth for the 1Q22.
Economists were surprised at BNM’s move to increase the interest rates as they said while the economy had started humming in the fourth, they wondered if warranted a hike at that point.
The policy statement by BNM said that the latest indicators show that growth is on a firmer footing, driven by strengthening domestic demand amid sustained export growth. The labor market is further lifted by a lower unemployment rate, higher labor participation, and better income prospects.
The positives of the Malaysian economy must be weighed against the uncertainties surrounding the world notably developments surrounding the conflict in Ukraine, COVID-19, global supply chain conditions, commodity price shocks, and financial market volatility.
On inflation, BNM said that headline inflation is projected to average between 2.2% – 3.2% in 2022. Given the improvement in economic activity amid lingering cost pressures, underlying inflation, as measured by core inflation, is expected to trend higher to average between 2.0% – 3.0% in 2022.
Looking further down the horizon, there are some possible headwinds that Malaysia must manage notably the fact that Malaysia’s exports are likely to be affected by China and the US which constitute about 30% of Malaysian exports.
China’s lockdown would also affect tourist arrivals from China. It is estimated that Socio-Economic Research Centre Malaysia data shows that Chinese tourists to Malaysia made up about 11.9% of total tourist arrivals in 2019.
This might be interpreted to indicate that a smaller rebound in Malaysia’s tourism sector compared with pre-pandemic levels is to be anticipated despite Malaysia reopening its borders.
As for the US, the continued hike in interest rates could lead to a slow-down in the economy and this would certainly affect Malaysian exports to the US.
The government’s ability to front-run the economy through prime pumping is constrained by its limited fiscal space and it was now for the private sector to take the lead.
The economy must be driven by private investment and consumption; however, businesses are still grappling with lower-than-desired capacity, labor shortages, surging costs, and supply chain disruptions.
The minimum wage that came into force recently has further put pressure on cash flows and hikes in interest have put brakes on their expansionary plans.
On consumption, many households are still careful about spending, considering inflation has been on the rise and food inflation which constitutes about 40% weightage of the inflation has been increasing which deters them from making investments in big-ticket items.
In 2020, Malaysia imported RM55.5 billion in food products, compared to RM33.8 billion of exports – translating to a large deficit of RM21.7 billion. Such a trend is worrying as over the last decade, food imports in Malaysia have accumulated to RM482.8 billion whilst exports amounted to RM296 billion
If consumption and private investment are to be the main driver of the Malaysian economy, it is paramount that inflation is sufficiently contained particularly food inflation so that more money can be in the hands of consumers for other purchases.
Towards achieving this, Malaysia should immediately increase the production of food products vegetables, and fruits by incentivising farmers by providing financial incentives.
In addition, must expand domestic production of organic fertilizers and feedstock by applying oil palm biomass and waste such as fronds, leaves, and kernel meal.
The government should the availability of idle land for the cultivation of fruits and vegetables using technology such as drones to increase productivity.
Labour shortages in the agriculture sector should have been addressed quickly with anti-competitive arrangements, especially with government support, and should be dismantled.
In addition, a competitive environment for the distribution of rice might better help lower the price of rice rather than a subsidy. The government has agreed not to impose the Approved Permit (AP) requirement for the import of foodstuffs with immediate effect.
Once the problem of food inflation is tackled, consumers would have more money in hand to spend. Evidence of real wages in the manufacturing sector increasing between 5 to 6% and the service sector increasing between 3% to4% suggests that consumer spending would increase.
With the re-opening of the economic sector, there would be more jobs available and increased access to credit would keep the momentum of demand in the economy going.
With the increased demand for consumer demand, businesses would start expanding, diversifying, or upgrading their capacity would translate into increased income through the multiplier effect.
Government must also ensure speedier implementation of all government projects that had been allocated in the last budget to the tune of RM60 billion. This would also bode well for increasing the aggregated demand and income in the economy.
Another factor that Malaysia should look at is attracting high-quality foreign direct investment into the country by ensuring that we have quality people. A way to kick starts this is to allow foreign companies that have invested or have invested in Malaysia to bring in more expatriate staff from their home country so that the necessary expertise can be imparted that would help Malaysia move up the value chain. faster.
Currently, there are restrictions in the country on the number of positions to be filled by expatriates, but it can be elective on this as this would facilitate us moving up the trajectory.
If Malaysia is to attract top-tier investments, it needs top-tier people with technical skills and that would take a longer time for Malaysians to achieve, and investors may find neighbouring countries more attractive. It must liberalise the infusion of technical staff from overseas to help catapult Malaysia’s workforce to a higher level.
