GEORGE TOWN: Economics professor Danny Quah said Malaysia is heading towards a rocky patch in the next two to three years due to external and internal factors, but more the latter for which trouble is being stored up.
Quah said while Malaysia’s economy will be affected by external headwinds like the possible “disappearance” of the Trans-Pacific Partnership (TPP) agreement, the soft global economy and China’s slower growth, what is more “depressing” for the nation is its political situation and fiscal condition.
“Malaysia is going to go into some rocky economic patches. I know [there are] people on different sides of that view, but our [Malaysian] political issues are much more profound than markets seem to have taken into account.
“We are storing up trouble out there. Our fiscal position has always been kind of dicey even when I was in the National Economic Advisory Council (2009 to 2011). I do not think we have repaired that,” he said.
Quah, who is Li Ka Shing professor of economics at the National University of Singapore’s Lee Kuan Yew School of Public Policy, was speaking to The Edge Financial Daily after presenting a talk titled “Global New Normal — It’s Not What It Looks Like” as part of Penang Institute’s second Towering Malaysians lecture series last week.
The Penang-born academic said while the goods and services tax — which had generated RM30 billion to the nation's revenue as at Oct 19 — has not “changed the numbers”, he is worried about the country’s fiscal situation.
Announcing Budget 2017 last Friday, Prime Minister Datuk Seri Najib Razak said that the government projected next year’s fiscal target to fall to 3% from 3.1% this year, with gross domestic product growth targeted at 4% to 5%.
The budget allocated RM260.8 billion for 2017, up 3.4% compared with the RM214.8 billion allocation in the recalibrated Budget 2016, with RM214.8 billion for operating expenditure and RM46 billion for development expenditure.
“Our fiscal situation does not determine everything [because] there are countries with large deficits that grow fast, and those with large deficits that do not grow,” said Quah.
“So it is a bit of a tricky thing [but] Malaysia remains a developing economy. There are parts of it like Kuala Lumpur and Penang that are extremely well-off and could be self-sustaining already, but there are many parts that are in need of greater infrastructure of [a] general sense, which only a government can provide, and the way ahead without that is going to be difficult,” he said.
“With luck, we would not notice [the rough patch and] we will find something that would take us out of the way. I think over the next two to three years, we will discover whether we can get through that.
“The next two to three years would be [years] to watch. The political situation, the global economy, the dangers or risks globally, the possible disappearance of TPP agreement and China’s slightly slower growth.
“[These are] the whole set of external considerations that will weigh heavily on Malaysia's trajectory. Secular stagnation, on the one hand, generally, but added to that a rising American mood for isolationism. That will show through in, among other things, a slowing down of foreign direct investment (FDI).
“[As for] internal ones, it has to do with our political situation and fiscal situation, part of it is depressing because I don’t see a clear way out, and we are at an impasse politically,” said Quah, who previously served as the head of London School of Economics’ Department of Economics and assistant professor at the Massachusetts Institute of Technology.
“Malaysia's economy sees bottlenecks still, and FDI is an important vehicle by which those bottlenecks can be relieved,” he said.
Quah said Malaysian ‘leaders’ “except for a few like CIMB Group Holdings Bhd chairman Datuk Seri Nazir Razak seem to be having a blind spot”.
“They seem to think it’s okay to muddle through. I don’t think that is going to work,” he said.
During his talk, Quah identified the US presidential election, Britain’s exit from the European Union, the South China Sea dispute with China, and the Islamic State as four big risks that are the “global new normal” now.
He said the world is moving to a “dangerous phase” with the global economy possibly becoming close, particularly if presidential candidate Donald Trump emerges as US president.
Quah said Trump, who has allegedly opened a dialogue of hate that has peeled the cover for “white nationalists” to talk openly about supremacy, was against trade deals and has threatened to end such pacts if he took over the White House.
“Political debates have changed. Views on globalisation have changed — [rival presidential candidate] Hilary Clinton was keen on large trade [deals], but she has backed off from all that. America has changed. That is a huge danger to the world,” he said.
He added: “For one thing, the TPP agreement might not happen now. And if Malaysia was banking on it to increase growth [even by] having to give up a few things to have that happen, that might be a big blow to that narrative”.
However, the impact would be nominal because Malaysia trades more with Singapore and China than with the US, said Quah.
On how Malaysia could emerge unscathed from a probable rocky patch, Quah opined that there are scenarios that are either “bad or not so bad”.
“The not so bad [solution] would be to come up with a new-formed coalition just like Barisan Nasional … form a new coalition and draw people with both vision and expertise.
“[However], we cannot say that the old system should go because the old system is where the expertise is and we need to be thinking about that now,” he said.
Looking at such discussions among groups, Quah said the National Consultative Council 2 (NCC2), proposed by CIMB’s Nazir, was probably what it [discussions] was driving towards.
“I know that when people look at that discussion, and I think that is probably what NCC2 is trying to drive towards, and they (certain quarters) say this is a coup. No,” he said. “I still think it is the best way forward, we have to have that conversation.”