North Port in Klang is one of the world’s 10 busiest ports.
Despite the general negative sentiments enveloping the country, with the depreciating ringgit and the fall in oil and commodity prices, the Malaysian economy is actually in a much better position than what it was during the 1997/98 Asian Financial Crisis.
In a detailed blog entry last week, Prime Minister Dato’ Sri Najib Abdul Razak states that the stabilisation measures implemented after the 97/98 crisis has made the country more resilient.
This includes economic diversification to move away from the over-dependence on petroleum and commodities; the increase in offshore investments by key Government –linked Companies (GLC), and the implementation of good governance and risk management policies, among others.
“Currently, oil and gas contributes only 18.2 % of the GDP as opposed to 26.9 % in 1998. And up to June this year, our direct investments overseas stands at RM522 billion as opposed to RM477 billion worth of capital flow into the country back then,” he says, adding that the returns from these investments have been repatriated home to be reinvested.
The inevitable perils of an open economy
Najib points out that the current economic challenges and uncertainty is something beyond Malaysia’s control, as we are an open economy. The volatility in the global currency market, along with the strengthening of the US dollar, as well as the forecasted increase in the US Federal Reserve rates have been detrimental to the value of the ringgit. The Malaysian currency has slid by more than 26% compared with the US dollar. But Malaysia is not the only country affected by this, he adds.
“This has further been aggravated by the plummeting prices of commodities like petroleum, palm oil and rubber, coupled with the continued decline of the economy of our top trading partner, China, and the devaluation of the yuan,” he says, adding that the negative sentiments over the political and economic situation of the country have made matters worse.
Malaysia’s revenue has also taken a hit with crude oil prices dropping by more than 50 % from US$100 per barrel in 2014 to US$48 per barrel in early September this year.
Growth is not stalled
The Prime Minister points out that despite challenges, our economy has grown by 5.3% in the first half of 2015 and it is expected to post a strong growth of between 4.5% and 5.5% for this year. “Our economy is expected to continue growing in 2016 as opposed to a contraction of 7.6% in 1998.”
He goes on to say that though inflation has increased marginally due to the implementation of the Goods and Services Tax (GST), it is still under control, standing at 3.3% as at July this year, compared with the inflation rate of 5.3% in 1998.
The national reserves currently stand at RM357.7 billion and is sufficient to sustain 7.4 months of retained imports. “This is far more that the RM59.1 billion we had in our national reserves in December 1997, which was only sufficient for 3.2 months of retained imports.”
The Prime Minister believes that ringgit’s decline is not expected to have an adverse impact on government debt as 97% of the debt is denominated in our currency and mostly funded by domestic sources.
In an effort to seek solutions to reduce the impact of global uncertainty on the national economy, the government recently established a Special Economic Committee. The committee, chaired by the Minister in Charge of Economic Planning Unit Dato’ Seri Wahid Omar, has on board economists, experts, stakeholders and key corporate figures. This dedicated task force will not only diagnose but also devise proactive solutions for the national economy, says the Prime Minister in his blog.
Since it was established three weeks ago, the committee has had numerous discussions with stakeholders for feedback on the state of the economy and national reserves.
Najib says numerous other measures have been put in place to ensure continuous growth. These include efforts to stabilise the equity market by reactivating ValueCap with RM20 billion to invest in undervalued Malaysian companies. GLCs and investment institutions have also been urged to repatriate profits to reinvest in Malaysia
To counter the impact of the depreciating Ringgit on small and medium industries, the government has allowed for the restructuring and rescheduling of loans.
Additionally, import duty exemption would be given to 90 tariff lines covering consumables, spare parts and research apparatus used in the manufacturing sector until the global economy recovered.
“This is in addition to the existing 319 tariff lines which have already been given an import duty exemption,” he says, adding that about 900 manufacturing companies would benefit in annual cost savings of between RM100,000 and RM500,000.
For the other sectors, the government has topped the working capital guarantee scheme with an additional RM2 billion, while RM5 billion has been set aside for the services sector.
There is also an additional RM1 billion allocation for the Domestic Investment Strategic Fund, aimed at accelerating the transition of local companies to high-tech and value-added companies.
For the tourism sector, the government is pumping in RM80 million to intensify the promotional activities in selected market including ASEAN, China and India. There will also be a RM1.1 billion allocation for the refurbishment of iconic national landmarks such as Tugu Negara (pic), National Museum and Taman Tasik, including direct rail connection from KL Sentral.
According to the Prime Minister, emphasis will be given to projects with high local content and the ability to generate a chain of economic activities as well as provide high income job opportunities.
He says the implementation of the proactive measures will not derail the government from its commitment to implement fiscal consolidation to lower the fiscal deficit to 3.2 % of gross domestic product this year, from 3.4% last year.
“The government will continue to monitor the impact of global economic uncertainty on the country’s economy.”