By Dr Paul Anthony Mariadas and Dr Muhammad Sadiq Lecturers for the School of Accounting and Finance at Taylor’s Business School, Faculty of Business and Law, Taylor’s University
In the wake of global challenges, Malaysia finds itself at a pivotal juncture in its economic narrative. Anticipating a positive shift in Malaysia’s economic trajectory, the resilient domestic demand, supported by favorable inflation and interest rates, is poised to be a significant driver of growth. The projections indicate that economic growth could reach a range of 4.5% to 5.5% in 2024, building upon the estimated 4.0% growth in 2023. Growth will continue to be driven by the expansion in domestic demand amid steady employment and income prospects, particularly in domestic-oriented sectors.
However, these promising prospects are not without their share of risks. Malaysia’s growth trajectory remains tethered to the global economy successfully navigating a ‘soft landing,’ steering clear of further escalations in geopolitical conflicts. Potential challenges also loom on the domestic front, where a spike in global food and commodity prices could exert pressure on domestic demand. Moreover, the unintended ripple effects of a poorly executed retargeting of RON95 subsidies in the second half of 2024 pose a potential threat to the economic landscape.
In 2024, Malaysia is poised to achieve a noteworthy fiscal feat with a projected fiscal deficit of 4.2% of Gross Domestic Product (GDP), showcasing a substantial improvement from the estimated 5.0% in 2023. This positive shift underscores the government’s unwavering commitment to a trajectory of fiscal consolidation. The anticipated reduction in the fiscal deficit is set to be orchestrated through the adept management of the subsidy bill, stringent control over operating expenditures, and a boost in tax revenue collections. This fiscal prudence is expected to be further bolstered by an upswing in economic conditions in the upcoming year.
Despite the imperative to fund critical development projects, the forecast indicates that government debt will remain relatively stable at RM1.3 trillion in 2024, equivalent to 62.7% of GDP. However, a crucial facet to consider is the proportion of debt servicing within the total projected revenue. In 2024, debt servicing is anticipated to account for 16.1%, a notable increase from the 15.2% recorded in 2023. This underscores the challenge faced by policymakers in striking a delicate balance between fostering future economic growth and steadfastly maintaining fiscal consolidation.
Analysing the supply side dynamics, key sectors such as services, construction, and agriculture continued to serve as pillars supporting overall economic growth. Nevertheless, the manufacturing sector experienced a setback, marked by a decline in production. This contraction was attributed to subdued demand for electrical and electronic (E&E) products and reduced output of refined petroleum products. Cumulatively, the economy exhibited a robust performance throughout the first three quarters of 2023, registering an overall expansion of 3.9%. This positive growth trajectory underscores the dynamic interplay of domestic and external factors shaping Malaysia’s economic landscape during this period.
The trend of easing inflation persisted during the quarter, with the headline inflation rate continuing to moderate to 2% compared to 2.8% in the second quarter of 2023. This moderation was observed across both non-core and core inflation metrics. Notably, fresh food and fuel played significant roles in contributing to the decline in non-core inflation. Core inflation, which excludes volatile items like food and fuel, exhibited a further decline to 2.5%, down from 3.4% in the previous quarter. Despite this decrease, it remained above its long-term average for the period between 2011 and 2019, which stood at 2%. The moderation in core inflation was chiefly driven by selected services, including expenditures related to food away from home, dining in restaurants and cafés, and personal transport repair and maintenance.
A notable aspect of this moderation was the decline in the pervasiveness of inflation, which suggests a broader stabilisation in price movements, indicating a more controlled inflationary environment during the observed quarter.
The growth in credit to the private non-financial sector exhibited improvement, reaching 4.2% in the observed quarter, a notable increase from the 3.7% recorded in the second quarter of 2023. This enhancement was underpinned by a surge in business loans, which grew by 1.6%, compared to a more modest 0.5% in the previous quarter. The heightened growth in business loans was primarily fueled by an uptick in the expansion of working capital loans to non-SMEs (small and medium-sized enterprises).
Shifting focus to household credit, outstanding loans experienced a steady expansion of 5.4%, reflecting a consistent growth pattern across key loan purposes. This growth underscores the resilience of consumer credit demand and suggests a stable financial environment for households, contributing to the overall positive trend in credit in the private non-financial sector during the observed quarter.
Anticipated for the year 2024, we can project a continued upswing in tourist arrivals and spending. This forward-looking expectation indicates a sustained positive trend in the tourism sector, with the prospect of heightened visitor numbers and increased expenditure. Foreseen improvements in marketing strategies, bolstered tourism infrastructure, and a conducive economic environment contribute to this positive outlook.
Malaysia also plans to accelerate digitalisation across various industrial sectors. Initiatives involve implementing technologies like Artificial Intelligence, Internet of Things, Big Data Analytics, and cloud computing, with rapid advancements in emerging technologies such as robotic process automation, virtual reality, digital payments, 5G, and blockchain. The high demand for these digital tools in Malaysia creates export opportunities for companies in the United States. To encourage digital technology adoption, the government offers incentives, including tax breaks for the E&E sector, automation equipment capital allowances, and a $4.6 billion Industry Digitalisation Transformation Fund.
In conclusion, the future of Malaysia’s economic landscape hinges on the nation’s adaptability, foresight, and decisive action. While the road ahead may present obstacles, it is also marked by opportunities for growth, diversification, and technological leadership in 2024. The collaborative efforts of policymakers, businesses, and the broader society will determine whether Malaysia emerges with a burgeoning recovery, realising its full economic potential, or navigates a more challenging path, resilient in the face of uncertainties.
