PETALING JAYA: Malaysia’s growth is expected to moderate to a 3.4% average rate over the next decade, compared to an 6.4% average over the past 10 years, dragged by the likely contraction in 2020 due to the Covid-19 pandemic, according to Fitch Solutions.
It also observed that extended political uncertainty during Malaysia’s transition away from one-party rule leading to stalling, even backsliding, reform momentum.
“Combined with less favourable demographics and reduced fiscal space to cushion against future negative shocks to the economy, these factors all spell a much lower growth rate over the coming decade,” said the research arm of Fitch Ratings.
On the political front, it expects power to change hands often, leading to questionable policy continuity and stalled reform momentum as evidenced by the political crisis in February 2020 which saw the Pakatan Harapan government deposed.
“While a successful transition to a more stable multi-party or two-party system present in more mature democracies could eventually reap dividends for Malaysia, the uncertainty in the interim is likely to be a negative factor counted against it by potential investors,” said Fitch Solutions.
It noted that this is inopportune as businesses and countries are accelerating plans to move at least parts of its operations out of China in a bid to build more diversified and resilient supply chains, in response to the liabilities exposed by the US-China trade war in 2018 and the pandemic in 2020.
The research house opined that Malaysia would essentially be starting on the back foot against regional competitors, especially Vietnam, in the race to attract foreign direct investment.
Against this backdrop, it observed that key reforms that could unlock further growth potential in Malaysia are likely to be put off.
Fitch Solutions pointed out a chief example of such reforms is the affirmative action policies favouring the ethnic Malay population, which is likely to continue to cause a ‘brain drain’.
It identified talent as a key ingredient for the country to move up the value chain and escape the middle income trap. The brain drain, if left unaddressed, would impede any such drive to upgrade the economy.
“Similarly, the lack of an even playing field in government procurement has also undermined efficiency. Affirmative action policies have contributed to corruption,” said the research house.
Ultimately, it stated that these race-based policies will be very difficult to address and look set to slow the pace of economic development for the foreseeable future.
The research house also noted that Malaysia’s active population growth is projected to slow to an average 1% in the next decade compared to 2.3% previously, while slower than before, this will still provide a tailwind to the economy.
It also pointed out that there is diminishing fiscal space for future interventions as public debt levels, including debt guaranteed by the government, exceeds 80% of GDP and is growing steadily.
“The inability of the government to mount a strong response to the Covid-19 pandemic in 2020 indicates that this constraint is already a binding one and will likely remain so over the coming decade,” Fitch Solutions said.
This is further complicated by the boom in household debt fuelled by low interest rate in recent years, which will act as a drag on growth and would pose risks to financial stability if interest rates need to be raised sharply.
Household debt as a share of GDP stands is close to 85%, which is one of the highest in Asia.
“While debt service ratios are still manageable, a rise in interest rates could tip service ratios to unsustainable levels, leading to a rise in defaults,” it said.
Fitch solutions noted that the Malaysian economy is undergoing a process of external economic rebalancing, which will act as a drag on overall headline real GDP growth.
At the same time, it will see private consumption growth outperform, creating investment opportunities in catering for the domestic middle class rather than overseas demand.
“Additionally, a more domestic focused demand picture will allow the economy to be more resilient to global demand shocks, reducing recession risks.”
source https://www.thesundaily.my/business/malaysia-s-growth-slated-to-average-34-in-the-next-decade-fitch-solutions-DX2624948
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