Malaysia has recovered strongly from the COVID-19 disruptions of the past two years.
Thanks to an efficient distribution of vaccines and adequate healthcare capacity, the country has transitioned to the endemic phase of COVID-19 since April 2022. The resumption of interstate travel and reopening of international borders, in addition to a low base in June, helped the economy to grow by 8.9% year-on-year in the second quarter.
With the Q2 outturn topping most analysts’ expectations, including ours, Malaysia may well be on track to beat our 6.0% GDP growth outlook for 2022, as indicated in AMRO’s 2022 Annual Consultation Report on Malaysia. The latest GDP growth forecasts for 2022, according to a Bloomberg survey, have been revised higher to a median estimate of 6.8% from 6.2%.
Despite some moderation in momentum as pandemic support measures are unwound, growth may be close to double-digits this quarter, propped up by a low base from last year’s Delta wave-induced disruptions. Growth may normalise in the final quarter but would remain supported by the turnaround in the services sector and continued growth in the manufacturing sector.
But Malaysia’s economic prospects face multiple challenges
The war in Ukraine, and the global inflation that it has unleashed, followed by the higher global interest rates, have raised the odds of global stagflation. A situation where there is little or no growth in major economies, alongside high inflation complicates the outlook for a small open economy such as Malaysia.
How long can the robust performance of Malaysia’s exports—particularly electronic products and other manufactured goods—last as the world’s major markets slow down?
Malaysia’s international tourism revenues have begun to pick up only since April when borders were reopened. But how far can the recovery go with fewer western visitors and without the pre-pandemic volume of visitors from China?
Such concerns are set to grow as the world grapples with the economic fallout of geopolitical tensions, the aggressive monetary policy tightening in the United States and Europe, and China’s dynamic zero COVID-19 policy.
And how will Malaysia’s inflation, after the spike in 2022, evolve in the medium term as widespread supply chain disruptions linger, while supply chain resilience and environmental sustainability are increasingly integrated into business and policy decisions?
Subsidies and price controls have kept the surge in global food and energy prices from being felt fully in Malaysia, and thus inflation has remained relatively low at below 5%. But Malaysians may have to pay more for fuel and electricity from next year as the government—faced with a mounting subsidy bill—shifts from a universal to targeted subsidy scheme. That move, while welcome, will have to be timed wisely as global inflationary forces linger.
Emerging markets such as Malaysia will also have to contend with volatile capital flows and exchange rates as shifts in risk sentiments prompt a reallocation of global funds to safer assets.
With a tightening of financial conditions, many corporates, including Malaysian ones, will struggle to refinance their debt and some will have to cease operations or limit capacity expansion. How will investment and consumer appetite, employment and wages be affected?
And with diminishing fiscal space and larger spending requirements, such as for debt servicing and subsidies, how much more can the government support the economy in the face of growing headwinds?
Malaysia’s policy options
On a positive note, Malaysia has various policy options to help the economy ride out the headwinds and steer it toward greater medium-term resilience.
BNM has appropriately started to normalise monetary policy in response to Malaysia’s strong economic rebound and heightened inflationary pressures. Rising from a record low of 1.75%, the policy rate has scope for more “measured and gradual” adjustments to keep inflation anchored around the 2% long-run (2000-2019) average.
A supportive fiscal policy is also critical to help those left behind in the recovery. But this should be done by increasing spending efficiency to prevent a further build-up in debt. The authorities are right to review the existing subsidy scheme to ensure that financial support is channelled to households that most in need.
Ideally, the 2023 budget—to be tabled in parliament on October 7—should also provide guidance on tax reforms, especially with regard to broadening the scope of indirect taxes given their low base. Such reforms are necessary to strengthen fiscal buffers against adverse shocks.
Malaysia has attracted considerable foreign direct investment (FDI) in 2021 and 2022. Its success can be attributed to the authorities’ efforts to step up business facilitation services and capitalise on the reconfiguration of global supply chains.
Continuing to improve the business environment while investing in workforce upskilling programmes is key to ensuring that investment commitments are realised. More high-value FDIs mean more opportunities and greater income for Malaysians.
Lastly, Malaysia should stay focused on its commitment to fight global warming. For instance, implementing the planned emissions trading scheme while regulating Malaysian businesses to better manage climate-related risks could increase Malaysia’s attractiveness to foreign investors. That would mean greater funding for its low-carbon transition.
In steering the economy, some difficult decisions will have to be made. But a firm commitment to deliver on these policies can make Malaysia a stand-out for emerging market investors. It must seize the opportunity.
Diana del Rosario
Ms Diana del Rosario is currently the primary economist for Malaysia. She also supports the surveillance activities of Korea and Myanmar. Previously, she covered the Philippines and also provided support to the Japan surveillance team. Ms Rosario joined the ASEAN+3 Macroeconomic Research Office (AMRO) in August 2017. Prior to joining AMRO, she spent four years as an ASEAN Economist at Deutsche Bank in Singapore, initially covering Malaysia and the Philippines, then gradually expanding to include Singapore and Thailand. Prior to investment banking, she consulted for the Asian Development Bank and the World Bank in Manila for over two years, primarily on macroeconomic modelling and economic surveillance.