Commentary: Malaysia’s Economy Faces Choppy Waters

The Malaysian economy has maintained its equilibrium for the last three years despite persistent difficulties, including a health crisis, political unrest, and sharp price increases that have driven the nation into the worst cost-of-living crisis ever experienced by the general populace.

Now that the world economy is slowing down and credit conditions are becoming more stringent, darker storm clouds are beginning to form. Malaysia’s economy grew by 5.6% in the first quarter of the year, far exceeding the market’s forecast of a growth of 4.8%

The situation is far from optimistic, according to BMI, a division of the rating agency Fitch Group. Compared to the 7.1% growth in the fourth quarter of last year, the first-quarter growth was noticeably lower.

The gross domestic product of Malaysia is projected by BMI to grow by 4.2% this year, which is less than half of the 8.7% growth recorded in 2022, a 22-year high.

All of this suggests that the recovery that Prime Minister Anwar Ibrahim promised to bring about before the November 2022 general election is looking bleak. At the time, he pleaded with Malaysians to give his Pakatan Harapan (PH) coalition a chance to lead the country.

There are grave consequences

Fulfilling promises made to common Malaysians will increase both domestic and foreign investor confidence in the nation. The local stock market has lost more than RM2.9 billion (US$628 million) in net outflows over 16 of the 22 weeks this year, according to MIDF Research, a local investment advisory firm.

It would be disastrous for Mr. Anwar’s reputation among Malaysians if he needed to steer the country’s economy safely through the choppy waters that lie ahead. They hope he can change the country’s course and rescue it from its longest-running political and economic funk.

CONFUSION IN POLITICS

Recently, Mr. Anwar has emphasized that his administration has succeeded in bringing about more political stability, which has enhanced the environment for foreign investment. The first quarter’s approved investment totaled RM71.4 billion, up 60% from the RM44.7 billion recorded in the same quarter in 2022, according to Mr. Anwar, who is also the finance minister, who reported this to parliament this week.

“I feel that the political stability has boosted investor confidence and spurred investments to flow in stronger than previously, but what is important is not just the announcements (of investments) and memoranda of understanding but also the implementation,” he was quoted as saying in local media.

According to economists and businessmen in Mr. Anwar’s inner circle, since assuming the position of premier in November 2022, he has primarily concentrated his efforts on streamlining government spending and sealing leaks. The current administration is insisting on public tenders because it believes they can help reduce costs. The government has frozen billions of dollars worth of contracts that were awarded by the previous administration through direct negotiations.

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A close aide to the premier noted, “There have been significant improvements in bringing financial discipline to government, but there is no one thing that we can trumpet to show that confidence has returned. Cost of living concerns continues to be a significant challenge for the administration.

Although Malaysia’s inflation rate decreased slightly in April from March’s 3.4% to 3.3%, cost-of-living pressures are still present, especially in urban areas.

The nation’s unresolved political situation is largely to blame for the protracted ambivalence among investors.

While the 222-member Parliament comfortably supports Mr. Anwar’s so-called unity government, led by PH, there are still concerns about the administration’s support from the politically dominant ethnic Malay community, which comprises more than 60% of the population.

When the upcoming assembly elections take place in six states, solutions to this issue will become apparent.

Mr. Anwar is under extreme pressure to demonstrate that his multiracial coalition government has been successful in turning around the Malay vote, which went in favor of the opposition Perikatan Nasional coalition, which consists of the right-wing Parti Islam Se-Malaysia (PAS) and Parti Pribumi Bersatu Malaysia (Bersatu), two solely Malay political organizations.

The three states up for election are the racially diverse Penang, Selangor, and Negeri Sembilan, whose legislatures are all currently run by the PH coalition and are expected to remain so. The dominant Malay states of Terengganu, Kelantan, and Kedah, governed by PAS, present the most difficult obstacles.

A continuation of the status quo, or even better, victory in one of the states governed by the PAS, would be a significant victory for the Anwar administration.

A POLICY STANCE ON UNSUSTAINABLE GOVERNMENT SPENDING

Putting politics aside, Mr. Anwar’s biggest obstacle continues to be the economy.

Malaysia, once one of the region’s emerging tiger economies, has slipped to fifth place among the Association of Southeast Asian Nations (ASEAN) economies. Vietnam, which ranks in the top four along with Indonesia, Thailand, and Singapore, has surpassed it.

The effects of the ongoing global slowdown were clearly visible in the country’s export figures, which fell 17.4% year over year in April.

The chief economist at Bank Muamalat, predicts that overall exports could decrease by 9% this year, compared to a 25% growth in 2022. He said domestic demand will now serve as the primary engine of overall economic growth.

According to economists, domestic demand, including public and private consumption, has contributed more than 70% of GDP since 2019.

However, this growth strategy can no longer be maintained. Due to its spending spree, Malaysia is currently experiencing severe financial consequences, with its government debt expected to reach 1.08 trillion ringgit by the end of 2022—nearly doubling in just six years.

The five-person panel that advises Mr. Anwar on financial matters includes Professor Yeah Kim Leng of Sunway University. He told CNA that the policy stance of government spending is no longer sustainable and that Malaysia needs a new economic narrative.

According to Prof. Yeah, “the new path must include transforming the economy to more value-added production driven by luring in technology-intensive industries that will in turn raise wages.”