By Stephanie Jacob
KiniBiz looks back on Malaysia’s economy in 2013, highlighting some of the key economic events of the year. We then look forward to 2014 to see what might be in store both locally and internationally.
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Looking back over 2013
Looking back over the year 2013 as it rapidly draws to a close, it is perhaps fair to say that it will be remembered as a year of two halves, especially in an economic sense.
In the first half of the year, the country’s attention was almost solely focussed on the lengthy and bitterly fought elections, and the long period afterward before the return to normalcy during which economic growth slowed as investors, especially foreign ones adopted a cautious wait and see attitude.
However as business as usual returned, the Malaysian economy turned around quickly and the latter half of the year showed stronger growth.
“After hitting a low of 4.2% in the first half of 2013 (1H13), the Malaysian economy has staged a dramatic recovery to post 5% growth in the third quarter of 2013 (3Q13),” said the Alliance Research economic team in their review of 2013. The team added that with the strong rebound, the economy is expected to achieve its gross domestic product (GDP) growth forecast of 4.6% this year.
TA Securities noted that in the early and mid-year months, the external economic situation was also in a state of uncertainty especially in view of the US Federal Reserve’s suggestion that it would begin to cut back on its massive bond buying programme when economic data started to show that the American economy was sufficiently strong.
Without a clear timetable accompanying the announcement, countries, especially emerging markets, were quickly caught up in a guessing game of when the tapering might begin and this proved to be detrimental.
Janet Yellen
Nonetheless, highlights the TA economic team, some measure of stability returned after the Federal Reserve announced that the current deputy chairman, Janet Yellen would replace Ben Bernanke, the current chairman when his tenure expired next year.
Yellen who is seen as ‘dovish’ and a believer in the usefulness of the bond buying programme gave strong indications that tapering was not likely to kick in anytime soon in view of the US’ weak labour market,” noted the research house, and this helped local markets recover somewhat.
Slightly after the mid-year mark, the economy was also threatened with a potential credit downgrade, after international credit rating agency Fitch Rating lowered its outlook for the economy to negative – on the back of what it saw as a lack of commitment by the Government towards fiscal discipline and addressing economic issues.
However, subsequent subsidy rationalisations in fuel, sugar and electricity (from next year), and the announcement that the goods and services tax (GST) will be introduced in April 2015, helped the country successfully dodge a downgrade.
Instead, the economy was given a boost when another international rating agency, Moody’s Investor Services upgraded its outlook for Malaysia’s A3 rating to positive from stable.
What does 2014 hold?
Looking ahead to 2014, Malaysia’s economy is expected to build on the momentum from the end of 2013.
In its 2013/2014 Economic Report released just before the Budget 2014 announcement, the Finance Ministry stated that on the back of strong fundamentals locally, a potentially better external outlook, and comprehensive measures in the Budget 2014 announcement, the government hopes that real GDP will expand at 5% to 5.5% in 2014.
Economists seem to agree with the government’s forecasts, with an Alliance Research report projecting that the country’s economy will likely grow strongly at 5% in 2015, while Standard Chartered Research’s Edward Lee said “we expect Malaysia’s GDP growth to pick up to 5.3% in 2014…in line with the government’s projection of 5% to 5.5% GDP.”
RHB Research’s Lim Chee Sing highlights that going into 2014, Malaysia has several factors working in its favour, including the implementation of bold reforms to improve public finances and macro-prudential measures to tame property prices and contain the increase in household debt.
As key international export economies recover in 2014 so should external demand, said Patricia Oh of AmResearch. She noted that the major export markets that the country trades with are showing signs of improvement, adding that exports have already rebounded by 7.6% in 3Q13 and that this is expected to continue into 2014.
Oh adds that she expects a continued trade surplus in 2014, in addition to the current account remaining in positive territory next year and registering 2.3% growth. RHB Research’s Lim concurs, saying that with export levels looking more promising and therefore improving the current account surplus in the balance of payments, the threat of a twin deficit situation in 2014 is becoming increasingly unlikely.
Domestically economists expect growth in demand to moderate next year, with Alliance Research’s economic team highlighting the government’s fiscal consolidation measures as the main cause.
With consumers feeling the impact of the removal of subsidies, and private sector spending being constrained by inflationary pressures triggered by the reforms, Alliance Research is estimating that growth in domestic demand will likely moderate at around the 6.8% mark next year.
That being said, economists are highlighting certain factors that might help mitigate the slowdown, among them being the strong labour market, which is expected to remain healthy and support wage growth and consumption, said Standard Chartered Research’s Edward Lee.
This will be especially seen in the manufacturing industry which boosted by improved external demand, should contribute good wage growth in a sector that accounts for around 17% of total employment.
The Visit Malaysia Year 2014 will be important an initiative, as it promises to boost not only the traditional tourism industry but also other areas of the services industry such as the retail sector, said the Kenanga Investment economic research team.
Standard Chartered Research’s report estimates that the headline consumer price index (CPI) inflation level is expected to rise to 3.4% in 2014, as it expects that the fuel price hikes in Sept 2013 “will continue to add to year-on-year (y-o-y) inflation readings until Sept 2014 and in line with expectations that there will be more subsidy rationalisation through 2014.”
However it expects Bank Negara Malaysia (BNM) to refrain from increasing policy rates until a firm growth trend is established, “the central bank may wait until demand-pull inflation emerges and starts to add supply driven inflation driven by subsidy cuts,” said the report.
With the current overnight policy rate (OPR) of 3.0% only being 50 basis points below its all-time high of 3.5%, the real policy rate will likely only turn negative in 2H14. This coupled with the fact the BNM might move to curb inflation expectations ahead of the implementation of GST in April 2015, are the reasons why the bank-backed research house is anticipating that should the central bank raise the OPR, it will likely only be by about 25 basis points and in 4Q14.
On the government side, policies advocating fiscal consolidation and discipline will likely continue to be implemented in view of trimming the fiscal deficit and avoiding any potential credit downgrade threats. The government is also likely to continue encouraging private investment rather than public, while emphasising projects which have high multiplier effects.
Economists have pointed out that while the government has so far shown that it is willing to implement fiscal consolidation measures, it has failed to clearly outline its plans to ensure that it practices prudent spending and stops waste as well as corruption which is rampant especially in government projects.
It will be necessary for the government to also address these matters if it hopes to convince both the economic experts, and the public at large that it is indeed committed to the fiscal discipline measures it is preaching.
The global outlook and its impact on Malaysia
In terms of the global economy, Kenanga Investment says the outlook in key economies will likely be better as we head into 2014, and it singles out the US economy saying that all indicators point that it is on the way to recovery, even if its journey is likely to be a bumpy one.
Although perhaps not as quick as the US, Europe too is showing signs of recovery with Ireland exiting the bailout and the UK economy showing signs of gaining traction said the Kenanga Investment’s team, adding that it believes that things are headed in the right direction, as the focus shifts from austerity to growth.
Closer to home, the bank-backed research house highlights Japan’s recovery via the so called Abenomics as promising, and says that progress should continue so long as the country sticks to the principles and plans it has outlined. Meanwhile, improvements in these major economies should benefit China’s manufacturing sector and by extension strengthen its economy.
With Malaysia being an open economy with a significant export industry, recovery in the global economy, especially in China, Japan and the US (which are among the country’s top export targets) should augur well for the economy.
Also on the international scene, Malaysia will continue to negotiate with 11 other countries on the contentious Trans-Pacific Partnership (TPP) agreement.
Negotiators had initially set the end of 2013 as the deadline for concluding talks and finalising the deal. However with almost all countries facing strong homegrown opposition to one section or another of the proposals, negotiations are now likely to stretch into 2014.
While the content of the trade deal and the extent of how far Malaysia is willing to compromise on certain matters is an important matter of debate, what is clear is the importance of free trade agreements to the country’s economy as it provides Malaysian companies unhindered access to wider markets and encourages healthy competition and innovation, said Kenanga Investment.
Overall, barring any massive shocks in the world economy or any big changes locally, Malaysia’s economy in 2014 should see good growth driven by improving external trade and stable domestic demand, and successfully meeting the government’s guidance of 5% to 5.5% GDP growth.
Tomorrow: Stock market outlook 2014
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