While Asia today is experiencing a growth rate of about 4.9 per cent, China's expansion during 2015 fell below 7 per cent, which perpetuated the sentiment that the nation's economy was slowing. A point to note, however, is that this figure is still sizable when compared to the other economies like the US and Europe, where both economies saw growth rates of below 3 per cent1.
Comparatively, Malaysia grew by 4.7 per cent. And while there is proximity to China – both geographically and in terms of trade – Malaysia's exposure to any shifts in Chinese trade and investment is modest relative to other countries. "If you look at other economies, like Hong Kong, Taiwan and Singapore, they stand to be much more affected by fluctuations in the Chinese economy, due to close cultural and trading ties," explains Su Sian Lim, ASEAN Economist at HSBC Singapore, at the HSBC Economic & FX Outlook 2016 event staged in Kuala Lumpur.
A New Normal
Forum speakers agree that the perceived instability of the world's second largest economy can be attributed to the fact that China is still shifting to a new normal, and that market reactions may be myopic in light of the Chinese government's far-sighted plans and steady approach to reform. Forum speakers expect that growth should pick up in the medium- to long-term.
An additional tool to spur economic growth could be to cut interest rates, as some commentators suggest. Such action, however, might have an adverse effect and worsen the state of the Chinese economy. "Even with the government's limited fiscal headroom, it is unlikely that we will see interest rates being cut," remarks Lim. "Portfolio flows into the country have not been the strongest, evidenced by the weak Ringgit, and there has been a continued trend of structural outflow since 2012. It will therefore be too risky to cut interest rates in case that causes added capital outflow," she asserts.
Despite exerting caution, Lim is optimistic about certain facets of the Malaysian economy. Indeed, the nation's bond market remains one of the largest local currency bond markets in the Association of Southeast Asian Nations (ASEAN), which is due to the exceptional growth seen in the corporate bond and sukuk markets (the Islamic equivalent of bonds).
Price of Oil
Declining oil prices, however, are presenting notable challenges to the Malaysian economy. Having one of the largest oil and gas surpluses in the region, the nation will likely see a decline in exports revenue as a result of suppressed pricing. As a consequence, the original growth forecast for 2016 of up to 5 per cent may need to be revised downwards, with this figure having been based on the assumption that crude oil would trade at USD55 a barrel2 higher.
Conversely, declining oil prices could become an advantage for the government and Malaysian consumers, as lower oil prices will allow the former to reduce or even remove energy subsidies, and likely enable the latter to be able to access cheaper fuel prices. Both scenarios could result in an increase in domestic consumer spending and spur inflation.
"Today's drop in oil prices has also helped return inflation to comfortable levels of between 2 per cent and 3 per cent, and has helped stabilise domestic prices1. Furthermore, Malaysia's lost oil revenues have been buffeted by the introduction of the goods and service tax, which essentially produced a nett effect," explains Lim.
Accounting for today's low oil prices, the Malaysian government expects to collect MYR39 billion (USD9 billion) in 2016, according to Budget 20163. Areas like the electronics and IT segments, which performed gallantly during 2015, are expected to do the same in 2016 and drive the nation's exports agenda4.
Concerns loom, nonetheless. One such area is the total amount of debt the country holds. Malaysia – along with Singapore, Hong Kong, Japan and South Korea – has seen its debt grow exponentially in the last five years. Today, Malaysia's total debt to GDP stands at 57 per cent, which is significantly higher than China's, for instance, which is 41 per cent, according to the IMF5.
Of particular note, corporate debt is at 100 per cent of GDP, while bank lending is at 110 per cent of GDP. This situation is further accentuated by low prices, which signal that slight deflationary pressures may be setting in6.
There is also a possibility that core inflation is also slowing and there is a risk of deflation. Nonetheless, even though consumption is expected to moderate further in 2016, various consumer-friendly measures rolled out as part of Budget 2016 are likely to provide some relief to the lower-income group, boosting their disposable income and increasing their spending power.
Despite these challenges, some believe there is still cause for hope: "Savings today are higher when compared to the 1990s, and Malaysia is carrying a current account surplus, despite falling oil prices," observes Lim.
"In addition, the risk from short-term external debt is negligible as most of Malaysia's debt is internal. This means that a weakening of the nation's currency will not be a factor in its ability to pay off most of its total debt."
Despite the challenges posed by externalities, like global oil prices and a slowing China, Malaysia's economy points toward modest growth for the year ahead and beyond. Furthermore, as reliance on oil and gas production diminishes, production of newer industries, like consumer electronics goods, will gain momentum and help move the Malaysian economy to a more balanced and higher value economy.
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