Shankaran Nambiar on the State of New Malaysia’s Economy

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Shankaran Nambiar on the State of New Malaysia’s Economy

A conversation on the state of Malaysia’s economy under its new government, and the implications for domestic and foreign policy.

Shankaran Nambiar on the State of New Malaysia’s Economy
Credit: Pixabay

Since elections last May in Malaysia brought to power the country’s opposition for the first time in history, the ruling Pakatan Harapan (PH) government led by Mahathir Mohamad has come under scrutiny for the slow pace of reforms. Among the major areas in question is the economy, which continues to be watched closely in the context of broader trends and developments, including Malaysia’s alignments with foreign powers and the country’s expected hosting of the Asia-Pacific Economic Cooperation summit (APEC) in 2020.

The Diplomat’s senior editor, Prashanth Parameswaran, recently spoke to Shankaran Nambiar, a senior research fellow at the Malaysian Institute of Economic Research, about the state of Malaysia’s economy, its future trajectory, and its wider implications for Malaysia’s domestic and foreign policy under the PH government.

The PH government is operating under a seemingly challenging context domestically and internationally, with developments such as the weight of public expectations as well the U.S.-China trade war. There will also be continued interest in the Malaysian economy through to next year, including as the country prepares to host the Asia Pacific Economic Cooperation summit (APEC) in 2020. How would you characterize the current context in which the PH government is operating?

It’s certainly a challenging environment, both domestically and internationally. The PH government is saddled with immense debts inherited from the previous regime that it is obliged to fulfill; but then the reality on the ground runs against easily achievable solutions. Against this context, PH is trying to distinguish itself from the previous government, but without a framework or ideology that is sufficiently different. The possibility of China’s growth softening does not help, neither does the likelihood of a prolonged U.S.-China trade war or slowing global growth.

The public – both households and businesses – had expected a new economic model with Malaysia’s new government coming in. The initial excitement seems to have died down, giving way to harsh realities. One manufacturer’s association claimed its members felt that the introduction of the SST [Sales and Service Tax] raised their cost of doing business.  The public may not be lowering their expectations out of a sense of sympathy for the tough tasks that PH has to face.

Since coming to power, the PH government has faced a series of domestic policy challenges with respect to the economy, including managing a huge debt burden and finding sources of growth. While it is still early days, we have seen some indications of the government’s approach, be it the retraction of the Goods and Services Tax (GST) or the issuance of Budget 2019. What is your assessment of how the government has fared so far?

It appears as if the government is trying to find its own voice, a timbre that is quite unique and people-friendly. It is not clear if the government has been successful in doing so, or if the voice it has found for itself has been convincing.

Indeed, the government retracted the GST, but that has not been without any cost. The retraction of the GST was prompted by an election promise to repeal the tax. But removing the tax and replacing it with the SST has created a tax revenue shortfall. That throws the government back on further reliance on revenue from oil, something that tosses the government into the throes of oil price volatility and uncertainty.

The government has taken comfort in using a definition of debt that is at variance with international practice (ie. what the IMF, for instance, uses). It has also highlighted the loss of government money following the irresponsible expenditure undertaken by the previous government (eg. projects that were supposed to have been done, but weren’t). That is fine as a political statement; it is fine as a declaration of the excesses committed by the previous government. But this does not show the road forward. It does not inspire confidence in the path ahead, something that is so very much required as we face the prospect of choppy times.

We’ve also seen the PH government move to address Malaysia’s economic challenges and also capitalize on opportunities through its foreign policy, whether it be on palm oil and Europe or infrastructure projects with China and the Belt and Road Initiative. How would you assess some of these key foreign economic policy moves? Are there particular elements of continuity and change on foreign economic policy that are visible relative to the previous government under Najib Razak?

On palm oil, Malaysia has put up a bold objection to the EU. It has sought to up the ante with a tit-for-tat move that reads as follows: “if you won’t buy palm oil from us, we won’t buy fighter jets from you.”  And, indeed, Malaysia can use the palm oil offset strategy; there would be takers including China and Russia. But that is not going to change the EU’s position on palm oil.  In fact, the EU has had roughly the same set of complaints against palm oil for decades. Aside from making a strong point, it is not clear if the stand will help change the EU position on palm oil.

On projects with China and the BRI, we have seen a complete turnaround from the present government. The prime minister has been on record criticizing China for its neocolonialist ways.  He now has revised his position on the infrastructure projects, albeit with some modifications. Sure, the cost of some of these projects has gone down, but the specifications have been changed as well. It is not as if China has simply given Malaysia a discount on these projects. When confronted with the reality on the ground, the present government has found that it has few options but to acquiesce to China – because, after all, Malaysia faces a tough domestic economy, high debts, and China offers the promise of investment, besides already being Malaysia’s top trade partner.

The PH government is also operating amid a broader regional picture where various regional trade agreements are at play, including the Regional Comprehensive Economic Partnership (RCEP) and the new Comprehensive Partnership for a Trans-Pacific Partnership (CPTPP). What do you see as the future prospects for these agreements, and how do they play into how Malaysia is managing economic challenges and opportunities?

In his earlier incarnation as prime minister, Mahathir did recognize the value of regional agreements, but with a political slant that sought to reduce the West’s dominance whilst including China and, of course, giving strength to ASEAN. This perspective had some elements of the nonalignment thinking that was characteristic of his era. It probably made sense to form a regional grouping that would not be subject to U.S. dominance, or rather a grouping that could form a counterbalance to the U.S. power.

Today, there is still sense in trying to assert a stronger, more independent ASEAN. The only difference though is that 30 years ago, one did not have to worry too much about China’s reach, whereas today to maintain a nonaligned position might mean leaning towards the United States, a declining power, given the fact that the increasingly likely situation is for Southeast Asian states to lean towards Beijing.

Mahathir probably wants to retain some aspects of his earlier thinking. He would want to place ASEAN in the center of his regional trade agreements. It is unlikely that he would want to play a leadership position in ASEAN, but he would want to support RCEP. And he would want to see China play a bigger role in the region. He has talked about a RCEP with China in it, but without India, Australia, and New Zealand in the arrangement, for the moment. It is not clear how long this ‘moment’ will last, although the thought of such a moment is, in itself, fascinating.

As for the CPTPP, Malaysia must be in something of a bind. It has signed the agreement but has yet to ratify it. Not ratifying will be an embarrassment. But there are two reasons to balk at a agreement: first, it is reminiscent of the Najib era; second, it is seen as being U.S.-inspired and worse yet, without the presence of the United States. If the clock could be turned back, Mahathir would probably not have gone into negotiations on the TPP in the first place.

At any rate, Mahathir will want to turn his attention to three issues: the consequences of the CPTPP on the cost of healthcare, the ISDS [investor-state dispute settlement], and government procurement. These are issues on which he has held strong views. If he decides to turn his back on the CPTPP, Malaysia’s tilt to China will be more pronounced. From an economic point of view, that may serve Malaysia well.

There are a number of indicators that will be important for hints as to how the Malaysian economy will fare, including interest rates and the weight of public expectations. What are some of the other key domestic and international indicators that you will be looking to?

Several institutions have put Malaysia’s growth forecast for the year at about 4.7 percent.  Less optimistic economists have placed the figure at 4.5 percent or slightly lower. The prime minister himself has been optimistic and has offered a growth rate of 5 percent for 2019.

The external environment does not warrant a great deal of optimism. The country has not solved its public debt equation, the household debt situation at 83 percent of GDP in 2018 remains high within the regional context, and the GDP growth figure is likely to soften. The ringgit has been dropping against the U.S. dollar. In recent quarters, the sentiments of consumers and businesses have been weak at best, perhaps declining.  Households perceive the cost of living to remain high.  The government has promised to construct a cost of living index.  What is at stake is public perception of the high cost of living, which a new index will not help mitigate.

Some of the things that will give some indication of the future include how the 2020 Budget will turn out, the 12th Malaysia Plan, and the fourth Industrial Master Plan.  These plan documents may give more reason for optimism and the path forward.  Particularly crucial are indications of future sources of government revenue and new growth areas.

The finance minister has admitted that he is not a “magician” (which he surely is not) and would need three years to put the economy back on track.  This is not comforting since this year and the next are likely to be testing years.  The economy definitely needs a huge shot of confidence to keep the “animal spirits” up.  The government seems to be ignoring this side of things in its preoccupation to shore up its political appeal.