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Malaysia’s economic outlook clouded by debt and discrimination

Malaysia’s economic outlook clouded by debt and discrimination Ian Fraser

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For most of the past five decades, Malaysia has lived up to its billing as an “Asian Tiger”, with the Petronas Towers, the world’s tallest buildings from 1998 to 2004 serving a symbolic “roar”. Growth averaged 6.5% between independence in 1957 and 2005. The country’s $312.5bn economy rode out the equities sell-off which blighted other emerging markets over the past 12 months with aplomb.

Last year Malaysia ranked sixth in Bloomberg’s Top 20 Global Emerging Markets –after China, South Korea, Thailand, Peru and Czech Republic – and twelfth in the IMD World Competitiveness Yearbook rankings, up from 15th in 2013. That put South-east Asia’s third-largest economy two notches above Holland and four places above its former colonial masters in the UK.

Under current prime minister, Najib Razak, the country has been ramping up investment in infrastructure projects including the Kuala Lumpur mass rapid transit system, but also has an impressive track record where tackling poverty is concerned. According to the World Bank, the share of Malaysian households living below the national poverty line ($8.50 per day in 2012) fell from over 50% in the 1960s to less than 2% currently.

However in recent weeks economic commentators have argued the Malaysian miracle is at risk of unraveling – or that the outlook for the ex-Tiger is looking distinctly cloudy.

A CNBC article published on 23 June, Malaysia, Next Emerging Market Whipping Boy? Said Malaysia is more vulnerable to capital outflows than any other country in its region. Basing its views on those of market watchers, CNBC said this was because 45% of Malaysia’s government debt is held by foreigners, compared to 32.5% in Indonesia and less than 2% in India. The article said this means the country will be exposed when the US finally gets around to raising rates (i.e. there will be a sellers market in its bonds).

Oxford Economics recently declared Malaysia more vulnerable to external shocks than any other Asian country. The consultancy said this was because of "high levels of public debt, rising external debt and shrinking current account surplus.”

“Malaysia has generally been regarded as one of Asia's success stories", said Sarah Fowler, economist at Oxford Economics. “But all is not quite what it seems." She added it is now the "riskiest country in Asia of those we consider," more risky than India, Indonesia and even Thailand, a country notoriously prone to military coups. "Prompted by its high levels of public debt, rising external debt and shrinking current account surplus, there has been a shift in the perception of risks towards Malaysia and away from Indonesia," Fowler explains.

While the Malaysian authorities did manage to narrow the budget deficit to 3% in 2012 from 6.5% of GDP in 2009, the country still has the highest ratio in the region other than India. Total government debt approached a self-imposed ceiling of 55% of GDP last year, and is expected to remain above 50% for at least the next five years. Economies with high levels of public debt have less room for policy responses, and may struggle to finance the debt if interest rates rise.

"Our scorecard flags up reductions in a current account surplus as potentially risky," said Fowler, but noted the silver lining in the shrinking surplus. "If anything, this is a sign of strength, as it largely reflects a rebalancing of the economy towards domestic demand [away from exports]," she said.

Writing in The Market Oracle, Sam Chee Kong said too much easy credit swilling around the Malaysian economy – household debt has ballooned to 86.5% of GDP in 2013 up from 60% in 2008 – was inflating dangerous asset price bubbles. In an article headlined "Why Asian Economies are Faltering? Case Study: Malaysia", published on 5 June, Kong said:

“Malaysia’s debt-fueled economy on steroids was the result of Bank Negara’s policy of low interest rates causing abundant availability of credit [...] There will be bloodbath when the markets implode sooner or later.”

He added that the country’s debt-fueled consumer boom has in recently years led to “unscrupulous spending” culminating in many borrowers defaulting on their loans and opting for bankruptcy.

However the Bloomberg Views columnist William Pesek, said Malaysia’s biggest albatross was not excessive debt but its Bumiputra policy. Introduced in the 1970s, Bumiputra involves positively discriminating for the country’s ethnic Malay majority. Currently Malays represent roughly 60% of the Malaysia’s 30m population, while 30% are ethically Chinese and ten per cent are Indian.

Far from seeking to wind down this archaic and divisive policy, Razak’s government actually entrenched it last year, at the time of the last general election. The revised policy has seen Malay businesses offered low interest loans and Malay entrepreneurs given a leg-up and championed. Pesek wrote:

“[Malaysia’s] 40-year-old, pro-Malay affirmative-action program chips away at the country's competitiveness more and more each passing year. The scheme, which disenfranchises Malaysia's Chinese and Indian minorities, is a productivity and innovation killer. It also has a corrupting influence on the political and business culture.”

According to Nikkei Asian Review, it is driving away foreign investors and is a major obstacle on the road to Malaysia becoming an emerging economic powerhouse. Pesek added that the government's “deer in the headlights” handling of the disappearance of Malaysian Airline Flight 370 disaster was a product of the country’s insular culture and did not inspire much confidence in the Razak government:

“The trouble is, that insularity is holding back a resource-rich economy that should be among Asia's superstars, not its weakest links.”

On 27 June, the World Bank predicted that Malaysia’s GDP would grow by 5.4% in 2014, partly thanks to strong exports on the back of improved economic conditions in the developed world. However the UN arm said growth would slow to 4.6% in 2015.

In its Economic Monitor for 2014, the World Bank warned that domestic demand – the main engine of Malaysian growth – faces headwinds from subsidy cuts, higher taxes, public wage restraint, higher interest rates and general pressure on household budgets. The World Bank said the Malaysian government must cut subsidies and cap growth in public sector pay. Otherwise, said the World Bank, it will be unable to cut its budget deficit to 3.5% of GDP this year. It also urged the country to further boost its exports in order “to fully leverage on the improved external environment.”

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