This article first appeared in The Edge Malaysia Weekly on December 26, 2022 - January 1, 2023

THE prognosis for global economic growth is grim as 2022 draws to a close. Talk of the world being on the brink of a global recession and economic stagnation has gathered voice in recent months.

That’s not to say a recession is certain, even though major central banks in December signalled a willingness to risk growth and forge ahead in raising interest rates further to bring down inflation.

Whether the glass is seen as half-full or half-empty, at this time last year, no one foresaw Russia’s attack on Ukraine and the impact it would have on commodity and food prices globally, or that US interest rates would rise so much and so fast in the effort to rein in runaway inflation. Back then, inflation was “transitory” and rates were supposed to stay lower for longer, remember?

At this juncture, what’s certain is that governments and policymakers around the world have to be able to whip up practical solutions fast to ensure their people and economy can weather whatever is coming. And what is practical is closely tied to a country’s fiscal and monetary space.

Helped by a high vaccination rate and a low base in 2021, Malaysia’s 2022 headline gross domestic product growth is likely to top the official forecast of 6.5% to 7%, and may even exceed 8% for the full year if fourth-quarter GDP comes in above 4%. Headline GDP growth for the year is set to reach its highest since the turn of the millennium and will only fall below 6.5% if the economy contracts more than 2% in 4Q2022, a simple calculation shows.

In terms of the headline number, Malaysia is not expected to be in a recession in 2023, even though growth is expected to slow in tandem with slowing global growth.

The International Monetary Fund (IMF), which sees global growth slowing from 3.2% in 2022 to 2.7% in 2023, expects Malaysia’s GDP growth to come in slower year on year at 4.4% in 2023 — the same as in 2019.

The World Bank’s 2023 GDP forecast for Malaysia is 4.5%, in the mid-range of the official 2023 GDP growth projection of 4% to 5% made when (the old) Budget 2023 was tabled on Oct 7, but was not passed before parliament was dissolved for the 15th general election (GE15).

Malaysia’s economy should grow about 4% in 2023, according to a Bloomberg poll of 33 economists in mid-November. Apart from slower external growth, a delay in China’s reopening is also seen as a threat to the country’s economic prospects.

Every percentage point increase in China’s growth should add 0.5 percentage point growth to Malaysia’s headline GDP growth, economists at Maybank Investment Banking Group in Singapore, led by Chua Hak Bin, writes in an Oct 21 note, saying that Malaysia would be a beneficiary in terms of exports, tourism, investment and energy should China’s economy do well.

Indeed, the world, which saw maskless Fifa World Cup players and spectators in Qatar, is closely watching how China moves away from its zero-Covid policy and stimulates growth back to 5% levels.

For those watching Malaysia, the upcoming retabling of Budget 2023 will be keenly watched for policy direction. Of interest is also whether the official GDP forecast will be affirmed or updated when the federal budget is retabled in February, and if Bank Negara Malaysia affirms the forecast with the release of its annual report that usually comes out in March.

Asked if the halving of GDP growth from near 8% in 2022 to closer to 4% in 2023 may be likened to a recession, a seasoned economist says the experience could vary across sectors and much could be determined by employment, wage growth and “even the wealth effect from [a vibrant] stock market”.

“For the man in the street — depending on how old they are — [whether the slowdown in 2023 will be like a recession] may be closely correlated with how much they can buy or [have money available for] discretionary spending after paying for necessities and overheads [like] food, transport, rent or mortgage and utility bills,” says the economist.

If policymakers find themselves needing to stimulate consumption or pump-prime the economy in 2023, cutting the amount of subsidies going to people and businesses that can well afford higher prices should do the least damage to consumption and bring about sizeable savings, equivalent to at least 1% of GDP, that can be redirected to the lower income groups that have a higher propensity to spend. That is based on official statements that at least half of subsidies for electricity and fuel could go to conglomerates and the top 20% of households (T20) who do not need aid.

The speed at which Malaysia successfully implements targeted subsidies — especially for fuel and electricity — can make a world of difference to those who need the aid, as well as government coffers. Fiscal space, depleted during the Covid-19 pandemic, has to be rebuilt in order to channel money towards strategic capacity and productivity-enhancing investments, as well as to better stimulate growth and protect lives and livelihoods when the next crisis hits.

As a small, open economy that counts exports among its engines of growth, Malaysia’s economy will take a beating should there be a drastic slowdown in global growth and trade. Domestic consumption, the other local growth engine, will also be hit if inflation — especially food inflation — becomes a bigger problem for the general public.

For policymakers — many of whom are politicians rather than technocrats — averting a cost-of-living crisis for the vulnerable low- and middle-income voters is probably just as important as countering an economic recession, if not more.

For Malaysia, it may well be both. Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim’s cabinet has specific ministerial portfolios for not just the economy but also [agriculture and] food security, as well as [domestic trade and] cost of living.

Headline inflation came in at 4% in November — bringing the average for the first 11 months of 2022 to 3.4%, versus 2.3% in the same period last year — but food inflation remained elevated at 7.3% (up from 7.1% in October, 6.8% in September and 7.2% in August), driven higher by the increase in prices of chicken and flour-based cooked food.

A well-executed targeted subsidies programme is the most practical solution to ensure enough aid goes to those who need it, given the tight finances post-Covid-19.

Politics continues to be a wildcard, but fiscal tightness post-Covid-19 and 1Malaysia Development Bhd’s (1MDB) worsened debt burden may just give enough push — if not necessitate — an expenditure revamp, including targeted subsidy spending. The (old) Budget 2023, for instance, saw the US$3 billion 1MDB-related bond maturing in March 2023 parked under development expenditure, as the government can only borrow to fund development expenditure, and not operating expenditure. The special Covid-19 Fund that allowed more debt to be taken to fund operating expenditure during the pandemic expires at the end of this year.

Known as a gifted orator, well versed in both Malay and English, Anwar may well be able to rally enough support from the people by communicating well why certain changes are necessary for the country’s longer-term growth. The unity government he leads — made up of parties outside his own Pakatan Harapan (PH) coalition — may well be what is necessary to deliver the necessary policy changes that have hitherto been hampered by politics.

As policymakers work out improvements to Budget 2023, slated for a retabling in February, it may be worth remembering that Indonesia — which also subsidises fuel for consumers in the archipelago — managed to redirect some of the fuel subsidies to social spending as well as to set its budget deficit limit at between 2.85% and 3% of GDP for 2023, back below its pre-pandemic ceiling of 3% of GDP after allowing fiscal deficit to rise to 4.6% of GDP in 2021 and 6.1% of GDP in 2020 from only 2.2% in 2019 and 1.75% in 2018.

They are not perfect, for sure, with Malaysia’s export-leaning national oil company Petroliam Nasional Bhd (Petronas) vastly more profitable than Indonesia’s Pertamina that largely serves the domestic market. Yet, shouldn’t having a strong dividend-paying Petronas make fiscal consolidation easier for Malaysia?

Malaysia’s budget deficit was last below 3% of GDP in 1998.

Malaysia’s (old) Budget 2023 forecast a budget deficit of 5.5% of GDP (RM99.1 billion) in 2023 compared with 5.8% of GDP (RM99.5 billion) in 2022, 6.4% of GDP (RM98.7 billion) in 2021, 6.2% of GDP (RM87.6 billion) in 2020, 3.4% of GDP (RM51.5 billion) in 2019 and 3.7% of GDP (RM53.4 billion) in 2018.

The country is fortunate that it is able to tap Petronas to bridge the shortfall in its revenue needs, but having a budget deficit that is consistently below 3% of GDP during non-crisis years would make it much easier for policymakers to double its capacity to stimulate the economy when the need arises. That receivables rose to record-high levels at Tenaga Nasional Bhd and Petronas Dagangan Bhd also demonstrated just how tight the fiscal space has become in the post-pandemic era.

Years of excess spending have not only shored up Malaysia’s direct federal government debt to RM1.07 trillion, or 62.8% of GDP, at end-September from RM90 billion, or 32% of GDP, at end-1997, but also the annual cost of servicing interest payments for the debt alone to RM46.1 billion, or 16.9% of federal government revenue in 2023, according to (the old) Budget 2023. That would shore up cumulative interest payments on direct federal government debt above RM535 billion by end-2023 from RM489 billion between 1997 and 2022.

The RM46.1 billion is comparable to the RM55 billion in fiscal spending the government undertook through five Covid-19-related stimulus packages in 2020 and some RM20 billion bigger than the RM26.8 billion in fiscal spending across four Covid-19-related stimulus packages announced in the first half of 2021.

As interest costs rise across the globe, debt will cost more to service.

If Malaysia’s direct federal government debt continues to grow at around 8% a year, which is the average annual growth rate for the past decade, it will hit RM2 trillion by 2030, RM3 trillion by 2035 and RM4 trillion by 2039, a back-of-the-envelope calculation shows. If that happens, the debt-to-GDP ratio could cross 70% of GDP by 2024, 80% of GDP by 2029, 90% of GDP by 2033 and 100% of GDP by 2037, even if GDP growth averages at 5% a year, The Edge wrote in its Cover Story, “Urgent rethink of government spending and revenue needed” (Scan QR code on Page 8).

For Malaysia, which desperately needs to invest more in its people and production capacity to remain a relevant player in the global supply chain as well as to escape the middle-income trap, the right kind of policy changes need to be made fast and executed well.

Anwar’s global fame as prime minister-in-waiting for the longest period means more eyes will be watching.

“Political stability will be the first litmus test, followed by its will to reform. In our view, 20 years of budget deficit will force fiscal consolidation via targeted subsidy cuts,” JP Morgan Malaysia analysts wrote in a Dec 8 note, telling clients that the bellwether FBM KLCI “will not be insulated from global recession fears and Malaysia’s new government execution risks”.

Analysts at JP Morgan are not the only ones who reckon that it is “vital” for the government to expand its revenue base and that they see reinstating a broad-based consumption tax such as the Goods and Services Tax (GST) — cancelled by Pakatan Harapan in 2018 to deliver an election pledge, but implemented in 2015 by the Barisan Nasional government, a member of Anwar’s unity government — as “a wise move”.

If a vibrant stock market is able to help create a trickle-down wealth effect, then policymakers may want to note that JP Morgan told clients that policies to attract FDI and onshore manufacturing will structurally rerate the tech sector in Malaysia. “Passing an official gaming bill that stipulates the need for consistent reinvestment capex from Genting Malaysia Bhd will also boost tourism,” the JP Morgan analysts wrote in the note.

If the unity government is able to push through the necessary but long-overdue policy changes on revenue as well as expenditure, it would not only have more fiscal capacity to combat future recessions but also be able to invest in building a better Malaysia.

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