Malaysia Economic Report -- Top 10 Problems Undermining The Malaysian Economy

Malaysia's annual GDP growth rate is above Indonesia, Thailand, and Singapore. Thailand has been under a coup d'état government since 2014. Singapore is already a fully developed economy with a GDP PPP per capita more than three times of Malaysia, so it rightfully has a slower growth rate. Malaysia's growth in the last ten years is not exceptionally good or bad for a developing country at its current stage of development. Malaysia already has all the infrastructures and institutions set up for development. The senior government official might be highly corrupted, but as long as the private sector and foreign investment are doing well, the impact on its economy might not be as big as many people would have thought. Malaysia's challenge is how to break through the middle-income trap - the conundrum of staying at a mediocre growth while the surrounding regional economy is slowly catching up, with the existing advantages gradually eroding. Its demographic and apartheid policy resulting in massive brain drain and erosion of a culture of competitiveness and excellence is the major stumbling stone. The glass ceiling is getting thicker, and the breakthrough force is getting weaker. How to get out of this self-deprecating rat race will be an even more significant challenge than any Najib-scale corruption in years to come. Welcome to The Atlantis Report. Malaysia's GDP growth has been moderating over the decades as it climbs up the development ladder. From that perspective, the economic growth under Najib is merely in line with the historical trend. The main issue with Najib's BN government is the use of excessive borrowing and government guarantee to finance questionable projects — projects that have been overpaid with low or even negative future returns. The debt burden assumed by the nation will constrain future generations. The current government must better manage the inherited debt burden and pursue policies that raise long term growth potential. Over the past 60 years, Malaysia's GDP growth has been trending downward. Growth was 8-12% in the 1970s. After a recession in the mid-1980s, it resumed at 9%-10% in the late 1980s and 1990s until the Asian Financial Crisis. After the crisis, the growth rate settled at a lower range of 6%-7% in the 2000s. GDP growth became lower, still at 5%-6% in the 2010s. It was 4.7% in 2018. Najib's government simply presided over a period of normal GDP growth, which is slowly trending downward. The downward trend, however, does not mean the economy was better in the past and is getting progressively worse. As a national economy grows, low hanging fruits would have been picked, and each additional unit of growth becomes harder, and the growth rate reduces. In 2018 countries lower down in the development rank have a higher growth rate than Malaysia (for example, India 7.4% and The Philippines 6.2%). It is the other way round for more developed economies (for example , Hong Kong 3.0% and South Korea 2.7%). The exception is China, but that is for a different topic. The 2019–2020 consensus forecast growth for Malaysia is 4.5%, indicating a further moderation in growth. The same trend is also seen in most other countries. This is partly due to the headwinds of US-China trade tension. It is not possible to judge the relative performance of previous and current governments just by looking at the GDP growth alone. Malaysia's Debt Fueled GDP Growth. As we know, GDP can be measured as GDP = consumption plus investment plus government spending plus exports minus imports. That means over a short period of several years, through fiscal pump-priming, a government can "procure" a higher GDP growth by ramping up government spending. This is usually done by rolling out perks and megaprojects backed by borrowing or implicit government guarantees. The gross government debt to GDP chart from the IMF tells the other side of the story: The ratio was brought down to 30%-40% range in the late 1990s (under Mahathir) and 2000s (under Badawi). After Najib took over in 2009, it jumped from 40% in the previous year to 51%. OK, this can be excused as 2009 was a tough year. There were a global financial crisis and the economy. Hence the GDP contracted. However, the global economy, especially the regional economy, bounced back very strongly after 2009. East Asia emerging countries, including Malaysia, benefited from the China stimulus package. Malaysia experienced strong export growth. However, against this backdrop, government debt-to-GDP continued to climb from 51% in 2009 to a height of 58% by 2015. The debt level was higher than in other countries at a similar stage of development. Due to the debt pressure, the previous government had to introduce the 6% GST in 2015. After that, the debt ratio was brought under control at around 56%. While the move was welcomed by economists, the lower-income group shouldered the burden disproportionately, which contributed to Najib's government loss in the 2018 general election. Over these years, the Malaysian government debt trend has moved in the opposite direction of the ASEAN-5 average (consisting of Indonesia, Malaysia, Philippines, Thailand, and Vietnam). The other four neighboring countries have managed to achieve respectable economic growth despite lower government debt levels. Not reflected in IMF data, is Najib government has resorted to excessive government guarantee — both explicit and implicit, to finance its spending. Adding them up total debt was slightly over 80% by the end of 2017. The absolute amount was above the trillion Ringgit level. The debt data has shown that the GDP growth rate was maintained during Najib's government years through excessive debt financing. However, we still can't make a fair judgment just by looking at GDP growth and debt data alone. We need to know whether the government debt has been well spent and whether the projects implemented will boost long term growth. Malaysia's Wasteful Government Spending. There is nothing wrong with taking on more debt to finance well-designed projects. Past infrastructure projects like the North-South Highway have boosted long term productivity. Well implemented social spending like free bus services in PH states help lower-income groups and reduce traffic congestion. Unfortunately, many projects under the Najib administration were wasteful. A prime example is the East Coast Rail Link (ECRL). ECRL received a lot of attention, but bad spending was everywhere. Cost rationalization by the current government has seen MRT2 reduced from 39 to 30 billion Ringgit and LRT3 from 32 to 17 billion. The project scope has mostly remained the same despite drastic cost reduction, indicating poor judgment, or worse, by the previous administration. Note: There were also wasteful projects under Mahathir's first term, but Najib's record was worse. The group, MD of Gamuda, the MRT2 delivery partner, conceded the lavishness of MRT2 design. "In fact, I remember that during the tender for the underground works, we had proposed alternative designs to the (BN) government to omit certain aspects in order to reduce cost, but they did not accept the alternatives," he explained. The debt burden of these ill spending would only be felt in later years. In the meantime, GDP data still looks rosy since wasteful spending also counts towards GDP growth. Is that the GDP growth desired by Malaysians, given that they have to pay back the debt plus interest in the future. What really counts for a nation is the long term, sustainable economic growth, which is driven by productivity. The government's role is to raise that growth potential. On this count, despite criticism on PH government economic management (a lot driven by sentiment), I do see encouraging signs in the form of megaproject cost rationalization; GLC reform such as reorienting Khazanah portfolio; liberalization of telco and energy sectors. They are all right and necessary steps that will lay the foundation for future growth. And let's not forget that growth alone is insufficient. The country also needs inclusive growth and social justice. Using just GDP growth to judge a government may give the wrong conclusion. Below is a list of the problems undermining the Malaysian economy. #1. the concentration of wealth in the hands of relatively few families. #2. Reliance on rent-seeking activities - property being an obvious one. #3. resource extraction - palm oil, rubber, timber, and oil - providing 'free' money and tying up capital. #4. overly cost-focused which reduces investment in profitable opportunities. #5. lack of strong R&D base with exploitable IP management can do it belief - which makes getting outside help difficult psychologically. #6. Family businesses are not run professionally and are far less productive. #7. Too much reliance on government handouts. #8. Reliance on monopolies. Many Malay businesses are reliant on licenses from the government that give them large profits. Without licenses, they aren't viable businesses. #9. Low-quality education, which churns graduates who know nothing and can barely speak English. #10. Too much concentration of power at the prime minister level and too much government by fiat. In Conclusion : Malaysia's economy is clearly heading for the better. Naysayers often mix up their political opinion with the economy, relying on anecdotal evidence like weak currency or stock market performance to justify their belief. Malaysia was saved from the brink of financial disaster caused by Najib and Company. Najib was, in reality, a self-appointed Emperor, where the rule of law did not exist. Instead, Cash was King, corruption reigned, and kleptocracy on a massive scale was the doctrine. The new government won as the people finally became aware of what was going on. It had to grip a massive task: uncovering how bad the financial situation was, trying to install an anti-corruption ethos, rooting out the corrupt and criminal, and dealing with those who were still in power and wanted the old regime back. The country is not out of the woods yet, but a helluva good start with all that on their plate. Has Malaysia's economy Improved? Well, it could hardly have got much worse. In fact, it has made excellent progress. There is a long way to go, and it will not be easy. The road ahead will be hard, but let's hope the government can pull this off. Malaysia was like a sinking ship if you could use the saying. It leaked everywhere. Everyone suspected, but the Captain denied it. Now that the Captain has been replaced, the first thing he has to do is to find that leak, plug it, and remove the excess water before the ship could move again. This was The Atlantis Report. Please Like. Share. And Subscribe. Thank You.















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