Brace for a tough year ahead
Published on: Thursday, February 22, 2024
By:
Letter to the Editor, Muhammed Abdul Khalid, FMT
The Malaysian economy grew at a disappointing rate of 3.7% last year, below market expectation and government estimates of 4-5%. For the last quarter of 2023, the economy expanded by 3%, lower than the preceding quarter.
Government spending in Q4 helped to drive growth, but the biggest driver of economic growth – private spending and private investment – grew at a slower pace than in Q3.
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On a monthly basis, the economic growth slowed down, from 3.9% in October to 1.4% in December.
As we delve deeper into the latest economic data and indicators, various concerning factors emerge, shedding light on a challenging path ahead.
Several issues are worth highlighting – a diminishing current account balance, weakness in the manufacturing sector, slower-than-hoped-for recovery of the tourism sector post-Covid-19, the weakening ringgit and slow growth in real wages.
Diminishing trade surplus
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The current account balance is getting smaller.
In layman’s terms, the current account is the difference between our exports and our imports.
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We get a trade surplus if we export more than we import, and a trade deficit if we buy more than we sell.
In Q4 2023, our current account balance amounted to a paltry RM300 million, just 0.1% of the gross domestic product (GDP). This was much lower than the RM9.1 billion or 2% of GDP recorded in Q3.
This decline inches us closer to a potential deficit, evoking painful memories of the Asian Financial Crisis of the late 1990s.
The impact will be severe, as the ringgit will be affected given that we would require more US dollars to pay for imports, and thus, sell the ringgit.
Given that we have been recording a budget deficit (government spends more than it earns) over two decades, a trade deficit will put more pressure on the ringgit and by extension, the cost of borrowing.
It is worth noting that the ringgit is at its weakest now since the Asian Financial Crisis and at an all-time low against the Singapore dollar.
In the past 12 months, the ringgit has weakened about 10% against the greenback, the euro and the British pound, and about 8% against the Singapore dollar.
Weakness in manufacturing and services
Manufacturing, a key sector in the Malaysian economy, is losing momentum.
It grew just 0.7% in 2023. On a quarterly basis, it shrank by 0.3% in Q4, worse than the 0.1% decline in Q3.
Similarly, the services sector, the cornerstone of Malaysia’s economy, faces a notable dip in growth, signalling broader economic challenges. It recorded a 4.2% growth in Q4, down from 5% in the preceding quarter and much lower than the 7.3% seen in Q1.
Tourism
The tourist dollar helps but the Chinese have yet to come back in droves as they did before Covid-19.
Only half as many visitors came from China last year as they did before the pandemic.
A major portion of the visitors to Malaysia in 2023 were “weekend shoppers” from Singapore attracted by the weak ringgit, who spent their money mostly in Johor. Singaporeans accounted for nearly 40% of tourist arrivals last year.
Given that China has yet to recover fully from Covid-19, it may be premature to expect a surge in arrivals from there.
Declining exports
The ringgit may have weakened substantially but it has not helped to boost our exports.
In fact, net exports have declined – falling 35.6% in Q4 compared to 23% in Q3.
This was a major reversal from the 54% growth in Q1.
This underscores the persistence of weak global demand, further complicating Malaysia’s export prospects.
Weak wage gain
The marginal growth in real wages poses a threat to private consumption, a critical driver of Malaysia’s economic engine. Real wages grew marginally at 1.5% on Q4. With a decline in private spending growth – from 5.9% in Q1 to 4.2% in Q4, the economy faces heightened downward pressure.
What lies ahead
The year 2024 will be a challenging one.
As Bank Negara Malaysia governor Abdul Rasheed Ghaffour has correctly pointed out, Malaysia’s economy is highly susceptible to external factors.
A softening of the China economy, persistent geopolitical tension affecting major trade routes such as the Suez Canal and the Red Sea and weak global trade will put pressure on our purchasing power.
While the influence of external forces may be beyond our direct control, domestic policies are within our control. We need policies that boost investors’ confidence, leaders who respect governance, are hard-working, and truthful to the public.
Conflicting narratives and half-baked statements, exemplified by recent instances such as the handling of Madani rice and fluctuations in the ringgit’s performance, as well as delayed policy reforms, not only confuse the public and investors, but also undermine confidence and economic stability.
Furthermore, as we anticipate a rise in domestic inflation driven by increased and new taxes, and the phased removal of subsidies, it becomes increasingly urgent for the government to communicate clearly with the rakyat about the implications of these developments. Let us refrain from sugarcoating the challenges we face; honesty and clarity are essential in fostering public trust.
Given the current scenarios, it might be a challenge to hit the official growth target. Unless domestic issues are urgently addressed, 2024 will be a painful year for all of us.
Muhammed Abdul Khalid is a research fellow at the Institute of Malaysian and International Studies, Universiti Kebangsaan Malaysia.
# The views expressed are those of the writer and do not necessarily reflect those of FMT.
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