Restructuring of Malaysia s economy Post-GE14 International Factors and Perspectives Impacting Malaysia s 2019 Economic Outlook

Transcription

1 Restructuring of Malaysia s economy Post-GE14 International Factors and Perspectives Impacting Malaysia s 2019 Economic Outlook Yeah Kim Leng Professor of Economics Sunway University Business School 24 September 2018

2 OUTLINE Global economic outlook, key drivers and risks Malaysia s economic restructuring post-ge14 Economic prospects and challenges in

3 Global economic outlook, key drivers and risks 3

4 Global growth cycle % annual change, constant prices 6% 5% 4% Actual, forecasted and trend global GDP growth 2004, 5.4% 1988, 4.7% 3.9% 3.6% 2007, 5.6% 2010, 5.4% 4.5% 2018f, 3.9% 3.8% 3.7% 3% 2% 1% 0% 1982, 0.6% 1993, 2.1% 1998, 2.6% 2001, 2.5% 2009, -0.2% 2016, 3.2% -1% World GDP growth (actual) Trend growth Growth forecast ( ) Source: IMF World Economic Outlook April 2018; trend growth own computation based on HP filter 4

5 Deviation from trend (% ppt) Smaller deviation from trend growth Current cycle ( ) shows smaller deviation from trend 2.0% Pre-GFC over-consumption in advanced economies 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% GFC -5.0% Source: Actual or forecasted growth minus trend growth in previous chart 5

6 Global outlook remains positive Leading indicators point to sustained growth in 4Q2018-2Q2019 but momentum easing Source: HIS Markit, 10 September

7 Asia s leading indicators easing :Asia Source: Markit 7

8 Global factors supporting growth Fundamental factors Low unemployment Rising income despite depressed wages Increased wealth due to higher asset prices Wider factors Global trade pickup Synchronised growth (less in 2018 and 2019) Stronger investment in advanced economies Resource availability (energy, raw materials) Accommodative monetary policies Benign inflation 8

9 What could derail world growth? Upside risks Rising employment Real income growth Strong consumer sentiments Over aggressive monetary policies US-China trade war Financial markets meltdown Chinese growth disruption Emerging markets crisis Downside risks US-China trade war Volatile financial market Aggressive policy tightening 9

10 Structural challenges to growth Anti globalisation Aging population Large scale immigration Resource depletion Global warming Megatrends: Structural challenges Job losses in digital economy Productivity slowdown Rising income inequality 10

11 Malaysia s economic restructuring post- GE14 11

12 Getting macro policies right Sound macroeconomic policies Prudent fiscal and monetary policies Growth-friendly financial market development policies Strong institutions and rule of law Efficient public sector and low regulatory burden Effective legal systems; enforcement of contracts & rights Investment in education and human capital development Key to productivity improvements and technological innovations Confidence in government macroeconomic management promotes growth Good quality governance and low government burden leads to higher growth Skilled human capital key to productivity and innovation-led growth Open and competitive markets Increased specialisation, efficient resource utilisation Diffusion of knowledge and technology Efficient resource allocation and utilisation results in better growth 12

13 Economic restructuring thrusts Domestic re-balancing Shift from consumption-led to investment-driven economy; from government- dependent to private sector-led economy Search for new markets Business expansion opportunities via the Asean Economic Community (AEC), TPPA and other bilateral and inter-regional trade and investment flows Structural reforms, upgrading and transformation Raise economic efficiency, productivity, competitiveness and higher governance standards through digital transformation and IR

14 Policy focus and priorities Short term (1-3 years) Reduce tax burden on consumers Consolidate government spending Increase allocation and support for improving people s welfare (B40) Dismantle monopolies, deregulate and enhance market competition Medium term (3-5 years) Rationalise need, timing and sequencing of large projects Raise minimum wage and skilled wages Reduce regulatory burden, including rent-seeking Increase efficiency and effectiveness of government spending Long term (>5 years) Higher innovation rather than input driven growth More competitive and efficient economy with lower regulatory burden More secure and attractive environment for investors due to institutional reforms More focussed role of GLCs in the economy 14

15 Key policy expectations Fiscal environment Smaller government in keeping with budget & debt constraints Higher social allocation in line with election mandate Stronger focus on tax & government administrative efficiency Government procurement Open tender/competitive bidding Spreading procurement contracts to a larger base Role of GLCs Review relevance and performance (no political appointees) Reduced government role in production economy (Privatisation 2.0) Industrial policy Emphasis on private sector-led growth Dismantling monopolies/oligopolies Promoting market competition and efficiency Trade policy Pursuit of regional trade agreements to widen markets Balanced trade focus among key trading partners Continue open market policy 15

16 Share of GDP (%) Private investment rising but still below desired level Private investment share-to-gdp trending up but total investment is still about 10 percentage points below pre-asian Financial Crisis as well as those in other countries Post-AFC Total investment, 25.9 Private investment, 18.2 National target: Achieve private investment level of 20-25% of GDP Public investment, 7.7 Source: Department of Statistics Malaysia Average annual real private investment growth must hit above 10% per annum 16

17 Investment below dynamic level INVESTMENT GROWTH: Average annual gross capital formation growth rate of selected countries ( ) Philippines Vietnam China Korea, Rep. Malaysia Indonesia European Union Singapore Japan Germany Australia Thailand Higher investment level in China, Indonesia, South Korea, Singapore and Australia while Vietnam and Philippines will catch up soon with their high investment growth rates Source: World Bank s World Development Indicators 16.7 China Indonesia Korea, Rep. Singapore Australia Malaysia Thailand Vietnam Philippines Germany Euro area Slower than fast growing economies while higher than the more advanced economies except for South Korea where investment is stronger INVESTMENT LEVEL: Gross fixed capital formation as a % of GDP of selected countries, average for

18 USD bn FDI tapering off in Malaysia while rising in other ASEAN countries Singapore a haven for high value FDI while Indonesia and Vietnam have overtaken Malaysia with Philippines fast catching up Singapore, Indonesia Malaysia Philippines Singapore Thailand Viet Nam Indonesia, 23.1 Viet Nam, 14.1 Malaysia, 9.5 Philippines, 9.5 Thailand, 7.6 National target: Raise FDI to USD15 bn annually Source: World Bank s World Development Indicators 18

19 Export growth needs a boost Double digit growth in Vietnam and Philippines while Australia and Germany recorded higher export growth than Malaysia. Average annual export growth in % ( ) Vietnam 13.7 Philippines 12.7 Australia 6.3 Germany 4.3 Malaysia Singapore Indonesia Korea, Rep National target: Average annual export growth of 6-8% over the next 5 years Thailand 1.0 Source: World Bank s World Development Indicators 19

20 Firms have to focus on technology and business environment Technology and market forces driving denser global supply chains and regional production networks but these could be reshaped by changes in trade policies Policy environment Trade and market liberaliza-tion Cross-border invest-ments Regional blocs Technological environment ICT advancement Logistics Infrastruc-ture Globalised business environment Market access Opportunities for new business models Higher innovation Rising competition and volatility in business cycles Common market under AEC; RCEP Lower cost of market penetration and delivery channels Greater specialization and competitive intensity 20

21 No; of industries No. of industries More industries facing productivity and cost pressures 30 More industries with negative labour productivity growth Productivity, wage and unit labour cost changes based on 107 manufacturing industries (Jan-Apr) Negative Positive Rising number of industries with increasing unit labour cost Larger number of industries with positive average wage per employee growth (Jan-Apr) (Jan-Apr) Negative Positive Source: Computations based on DOSM Monthly Manufacturing Surveys Negative Positive 21

22 Economic prospects and challenges in

23 Changes to baseline GDP forecasts Aggregate domestic demand sustained by private consumption with support from export demand GDP component Baseline GDP forecast 5.7% 5.3% Private consumption +1.1% +0.1% Public consumption -0.4% -0.1% Private investment -0.3% -0.1% Government investment -0.4% -0.1% Exports 1.0% -0.1% Imports -0.3% -0.2% Net exports -0.7% -0.1% Revised GDP forecast 4.9% 5.1% Note: Total may not tally due to rounding Source: Own forecasts and computations 23

24 GDP growth of % in 2018 &19 Malaysia s short term growth outlook remains positive with GDP growth slightly below 5% in 2018 and above 5% in 2019 Malaysia's GDP growth forecast for 2018 and F 2019F Low High Baseline Source: Own forecasts and computations 24

25 Budget 2019 to provide clarity Fiscal impact of new government policies/promises REVENUE IMPACT Zero-rating GST Increase in corporate taxes due to higher global oil prices 5.4? Higher dividends from GLCs 5.0? Proceeds from SST Net Revenue Impact EXPENDITURE IMPACT Hari Raya Special Assistance -0.7 Petrol price stabilization program -3.0? Expenditure rationalisation exercise 10.0? Net Expenditure Impact 6.3 Nett effect on the overall budget % of GDP GDP (RM billion, current prices) 1, ,548.9 Source: MOF 31 st May Press Statement; 2019 forecasts 25

26 Annual change %, % ppt Growth forecast by expenditure Private consumption and private investment to drive growth in 2018 and f 2019f Net exports Private consumption Public consumption Private investment Public investment Gross Domestic Product (GDP) Source: BNM Monthly Statistical Bulletin; f = own forecasts 26

27 Annual change % GDP growth forecast by industry Manufacturing and services to drive growth in 2018 and f 2019f Agriculture Mining Manufacturing Construction Services Real GDP Source: BNM Monthly Statistical Bulletin; f = own forecasts 27

28 Annual change % Inflation forecasts for 2018 and 2019 CPI inflation projected to dip below trend in 2018 and rise slightly above trend in , 3.7 Baseline, 2018f, 1.8 Baseline, 2019f, 3.0 World oil price SST (rate & coverage) Weak ringgit Demand-pull pressures GST removal Fuel subsidy Ringgit appreciation Baseline Low case High case Supply increase/ capacity expansion Source: BNM Monthly Statistical Bulletin; forecasts - own 28

29 RM billion CA as a % of GNI Current account surplus to continue Current account surplus to remain stable and unlikely to narrow further due to cancellation or postponement of mega infrastructure projects Goods Services Primary income Secondary income CA balance (% of GNI) Source: BNM Monthly Statistical Bulletin, own forecast 29

30 % of revenue GDP elasticity of govt spending % of GDP Enhancing sovereign credit quality Room to increase direct government debt while paring down more expensive indirect liabilities Continue to shrink fiscal deficit when private sector is able to pick up slack 60 Federal government debt Fiscal deficit as a % of GDP F 2019F Domestic currency Foreign currency Foreign holdings of RM debt -6.7 Reduce debt servicing burden through debt restructuring and asset sale Emoluments B Debt service charges Retirement charges Subsidies and social assistance Enhance government spending efficiency Trend 1990s, 1.58 Trend pre-gfc, 1.22 Trend post-gfc, 1.01 Source: Ministry of Finance, Malaysia; own computations 30

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32 Concluding remarks Global growth has become less synchronised with increased downside risks. US growth momentum will taper off as Trump s fiscal stimulus (tax cuts and deregulation) wind down and twin deficits (fiscal and current account), strong dollar and tariff war weigh on the economy. Emerging markets facing capital flow reversals due to rising US interest rate, tighter global liquidity, slowing export demand resulting in sharp currency depreciation and rising sovereign default risks but contagion will likely be contained especially for economies with stronger fundamentals. 32

33 Concluding remarks (cont d) Malaysia s growth trajectory to remain stable at % in 2018 and 2019 despite fiscal restructuring and consolidation due to sustained private sector and export demand. Key to improvement in future growth prospects lies in supporting private investment given the anticipated rise in investor confidence in response to tangible institutional reforms and economic restructuring to enhance competitiveness, reduce corruption and leakages and strengthen public finance. Firms need to drive industry upgrading through technological advancements and innovations specific to each industry needs and competitive dynamics. 33

34 Thank you Sunway University Business School Tel : Fax : H/P : klyeah@sunway.edu.my Website : 34