The world is not short of problems. Geopolitical uncertainty, racial and religious tension, market and financial volatility continue to grab headlines and dictate water-cooler conversations. Behind closed-doors, governments struggle to find balance, dealing with what feels like a world economic system conspiring against them.
Malaysia is not shielded from the impact of external headwinds. With merchandise trade alone at 138% of GDP and as the 14th largest trading nation in the world, we are exposed to the vagaries of the world economy.
The tapering of Quantitative Easing has strengthened the dollar relative to other world currencies. China, in deliberately shifting from investment-led to consumption-led growth, demands fewer commodity imports. Greece and by extension the Eurozone are urgently trying to contain a full blown crisis of mounting debt woes and capital outflows, potentially threatening Greece’s exit from the Euro.
The heavy consequences of ill-preparedness – as we experienced during the Asian Financial Crisis of 1998 – are not something we care to repeat. Despite counter-measures, its effects created a heavy drag on our economy for many years.
True, the 2009 Global Financial Crisis was barely felt here in Malaysia. However, managing its effects required digging deep into Government coffers to create an expansionary economic environment.
You can do quite a bit with a combination of fiscal and monetary policy. However, as the global economy continues its course of rapid change, we too have to change. Sometimes we have no recourse but to bite bullets and take tough albeit unpopular measures to secure growth while creating resilience
Recently I had the opportunity to present the Malaysian approach to an audience of Finance Ministers at Harvard University.
I proposed that Governments should gradually reduce debt and deficit to get into a financial ‘Safe Zone’ (see chart 1) where public debt as a percentage of GDP is below 75% and deficit is at 4% or below.
Simultaneously, to create a platform for economic resilience, governments must focus on enabling sectors which constitute the lion’s share of economic activity. The private sector – not the government – must sit in the driver’s seat, fuelling investment and growth.
The talk was well-received; I am convinced governments should avoid the high-leverage high-growth model and take instead, the balanced debt-to-equity model to grow the economy and cut deficit.
The Economic Transformation Programme (ETP) was introduced in 2010 to do just that – to have growth by focusing on the 12 sectors where we have natural competitive advantage.
To put this into better perspective, two key decisions were made that put us in the correct trajectory to deal with challenging times:
1. Progressively create manoeuvring room by reducing our debt and deficit levels
Historically, some countries which thought they were heading towards high-income ignored debt management as they pursued growth.
We are doing it another way – going for high-income while reducing structural deficits and continuing to spend prudently in prioritised areas such as projects under the National Key Economic Areas (NKEA).
Imbalances in the system such as blanket subsidies had to be restructured to benefit the deserving. When we moved to managed float for automotive fuels in October last year, it was estimated we would save about RM10.7 billion in 2015.
Under the 11th Malaysia Plan, we have committed to reduce national debt from 53.3% currently to 43.5% by 2020. Fiscal deficits will drop from 3.2% of GDP in 2015 to 0.6% by 2020.
With the private sector leading the charge to draw in revenue and investments, the government can ease into its role as facilitator and problem-solver, and focus on its fundamental duty – to safeguard citizen welfare.
2. Diversify and restructure the economy while reducing dependence on commodities
Commodity prices are volatile and beyond our control. It’s insensible to volunteer ourselves as hostages to such volatility in this challenging economic environment.
We must extend our development strategy anchored on economic diversity, which is why the ETP focuses on developing 12 top sectors in the economy. How do we do this? By bringing government and private sector together to work together at a closer level, and removing barriers and red-tape.
Implementation of GST, which is aimed at broadening the tax base for the country, will put us in better stead to create stronger safety nets and improve quality of life for all Malaysians.
In 2009, oil and gas revenue was 40.3% of the Federal budget, but we managed to reduce this to 29.7% in 2014 by increasing revenue from other sectors. Unfortunately, there is a misperception that Malaysia is totally dependent on oil and gas when in actual fact we are far more balanced and diversified and no longer overly reliant.Facts are facts! The fact is Government revenue from oil and gas is now only 29.7% in 2014, a big reduction over the last five years. We are headed in the right direction in terms of economic diversification.
IMF managing director Christine Lagarde on her visit to Malaysia was impressed with the transformation of our economy from being export-led towards more balanced growth. She agreed it was important to combine short-term objectives with a longer-term vision. Lagarde also iterated her satisfaction to see that Malaysia has identified sectors to propel the economy, and bring together various ‘actors within the real economy’ in public and private sector.
Getting the nation on the right track is neither a walk in the park nor are the measures popular with all of Malaysians. Changing for the better is always hardest in the beginning.
As ratings agencies hawkishly eye developments in Malaysia and competing nations nip at our heels, it is crucial we have the stamina to stay on the right course.