Malaysia’s economy stays strong amid Chinese stumble

Malaysia is coping with 2016 better than its Asean neighbours. Source: Wikimedia

From the global perspective, 2016 has already caused significant economic concerns, with the Asia-Pacific region feeling the pressure in particular.

China’s economic slowdown caused its share market to plunge, with the Shanghai Composite falling 5.30 per cent on January 11, having already dropped 15 per cent so far this year.

The Chinese crisis has had a knock-on effect through markets in the region, as shares in Hong Kong sank to their lowest level in approximately two and half years. Australian, Korean, Thai and Singaporean stocks all suffered dramatically too.

The market instability comes on top of declining oil prices, with the global oil benchmark now down by more than 13 per cent, year-to-date.

This economic volatility is playing out against the backdrop of tension to the west between Iran and Saudi Arabia and the continuing concern of rising extremism within Asean, particularly in the Philippines and Indonesia.

So while the external environment for the Asia-Pacific region is distinctly unstable, Malaysia has remained strong.

While its neighbours’ stock markets followed China’s slump, the Bursa Malaysia is relatively stable.

This might be seen as surprising as its largest trading partner is China, in terms of both exports and imports, and it is Asean’s largest oil exporter.

Malaysia’s economy is being tested and proving resilient. Indeed, on January 11th, Moody’s rating agency  reaffirmed the country’s issuer and senior unsecured bond rating at A3, and changed the outlook from stable to positive.

This resilient economy is at least partly due to the economic initiatives undertaken by Prime Minister Najib Abdul Razak with Malaysia’s stability “anchored” by the credibility of its banking sector and a record of low inflation, both priority areas of his government’s reforms.

Global rating agencies have recognised that Najib is dealing with tough issues like the country’s debt, ensuring that only 3.6 per cent of government debt is foreign-currency denominated, thereby protecting Malaysia from many foreign currency risks.

Whilst Malaysia’s economy grew by an impressive 6 per cent in 2015, such growth will be tough to maintain, given the uncertain economic times.

Its relative economic strength is new and it needs to be locked in for the long term if the federation is to achieve its goal of becoming a high-income economy by 2020.

Any weakening of Malaysia’s economy would put many of the achievements to date at risk, costing jobs, reducing investment, increasing cost of living pressures and risking progress on housing and education.

The recent Moody’s report warned that, despite progress in relation to fiscal consolidation, “changes in the external environment … have reduced government revenues over the period. Those environmental changes have also undermined Malaysia’s external position”.

Real risks also exist if Malaysia fails to diversify its economy. Some analysts at PriceWaterhouseCoopers estimate that, should Malaysia not join the Trans-Pacific Trade Agreement, its GDP could lose up to US$220 billion between 2018 and 2027.

In these tough economic times, Malaysia’s politicians need to work together to keep the economy growing. Despite the some upward risk for inflation in the short term, a drop in commodity prices, and a slowdown in the nation’s made trading partners, Moody’s said as the economy was recovering under Najib, it was set to grow faster than other A-rated countries.

While Former prime minister Dr Mahatir Mohammed is telling people “if the economy is to recover, Najib must cease to be prime minister” economic indicators paint a different picture. Although the bottom 40 per cent of households have seen mean monthly incomes grow by 76 per cent, former deputy prime minister Muhyiddin Yassin keeps saying the nation’s poorest were “under extraordinary pressure”.

In the febrile regional economic environment, domestic political discord only serves to undermine what is an increasingly isolated success story for Asean’s third largest economy, after Indonesia and Thailand.

Kuala Lumpur must have its sights set on displacing Thailand on that list. The Bangkok military junta’s increasingly authoritarian attempts to gag the population, which have stretched to the trial of a builder accused of insulting the king’s ailing dog on social media, have left people cowed but angry at rising prices and declining liberties.

There seems little prospect of the generals relaxing their grip on power until 88-year-old King Bhumibol Adulyadej dies, so elections will continue to be postponed and dissenters gagged until that historic event.

Investors will increasingly shun dictatorial Thailand with its increasingly unstable politics and if Malaysia can present an image of stability, they may be tempted to look beyond Thailand’s southern border. Myanmar is still too volatile and untested, the Philippines is labouring under a militant threat and Indonesia is notoriously corrupt. Maybe 2016 could be Kuala Lumpur’s year.

Too much is at stake for Malaysia, in terms of jobs security and reducing the cost of living, for the government to get distracted from maintaining a consistent economic policy.

Najib and his cabinet are taking tough decisions to keep the economic plan on track and to ensure that through the regional uncertainty, Malaysia remains a bastion of economic success.