Transform fast to be competitive
Bank Negara Governor Tan Sri Zeti Akhtar Aziz did well to give an uncharacteristic press conference on our economic performance based on the Fourth Quarter economic data in 2014.
She gave the press conference to “address the misconceptions surrounding the impact of the fall in oil prices and the significance of the oil and gas industries to the Malaysian economy.”
She agreed that we are definitely adversely affected by the drop in oil prices, but that we could have had economic growth of 2%-3% , if we had not diversified our economy. But it raises the question as to whether we had diversified and done enough to face the challenges of these critical times?
Datuk Idris Jala of the Prime Minister’s Department told The Economist that he sought to correct the “big misconception” that Malaysia will suffer the brunt of the oil price slide because we are not a major oil exporter.
Actually, Malaysians generally refer to our oil and gas earnings together and recognise the major impact of this industry on our growth prospects .
After all as Idris carefully points out, the “oil gas and energy” sector constitutes 17% of the Gross Domestic Product (GDP). That is a very large chunk of our economy and it will have a major impact on our economy, if the oil and gas prices remain low and even slide further.
So we must appreciate the deep concern of Malaysians over the low oil and gas prices. We cannot afford to play down the problems and our serious concerns about our future.
When we claim credit for diversifying our economy, we also ask how successful economic diversification has really been ? The residual “other industries” constitute 30% of our GDP.
Education and health make up only 1% of the GDP .The rest of the sectors like tourism , electronics , agriculture and financial services constitute only 5%-7 % of the GDP each.
Could we not have done better over 58 years of Merdeka, to diversify much more and into much greater value added productivity ?
Yes, we may not be in crisis now, but I dare say that we are facing critical times ahead.
The major world’s economies are generally slowly recovering or still struggling to recover. Malaysia has done better at a 6% growth registered for last year. But how long can this higher growth last, in this sluggish world economy? What are the danger signals ahead?
> Inflation is reported at 2.8% in the Fourth Quarter. This will rise when the Goods and Services Tax (GST) is introduced soon. In any case, do Malaysians believe that our inflation rate is only 2.8 %? My mamak mee goreng has already got smaller and less tasty. There is a long standing credibility problem with our public perception of cost of living.
> The Malaysian ringgit, according to Bank Negara has declined about 12% against the US dollar between September last year to Feb 10 this year. Will the ringgit continue to weaken with the soft market sentiments and the low confidence?
There has been a large non-resident portfolio capital outflow amounting to US$18.6bil since last September. Will this trend continue and dampen the ringgit further and cause more imported inflation? There may not have been “no dislocation to the underlying economic activities”, but was there no adverse effects on business confidence and medium to long-term investment potential?
> Malaysia’s international reserves were about RM385bil at the end of January. It was sufficient to finance an impressive 7.9 months of retained imports. But if our balance of payments current account declines, due to lower export earnings and higher import payments, these high reserves can easily fall.
This is possible because of weaker external demand for our exports and higher costs of imports due to the weak ringgit.
The ringgit can be under attack, if we do not make structural changes to the economy, like following more closely the New Economic Model and phasing out faster, from the New Economic Policy and many of its non-competitive and protective practices. We have to be more realistic under globalisation or just withdraw from it and face the isolation.
> The short-term external debt is high at RM359bil, especially when more than half of it is denominated in foreign currency. The foreign debt can rise if the ringgit falls further. Our international reserves can only support 1.1 times of the short-term external debt. This is not a strong safety margin and does not generate confidence, especially to foreign investors. We cannot afford to be cavalier about the dangers we face.
> Our household debt expansion may have slowed down to 9.9% in 2014 compared to a large growth of 15% in 2010, but the total household debt is still unacceptably high and the banking system can be exposed to more risks.
Is there no crisis ahead?
We are now running the risk of looking at and emphasising on short-term economic growth, and losing sight of the medium to longer term critical challenges facing us.
We tend to talk of “no crisis now”, but how long can we honestly say so?
The critical issues facing us include not only economic concerns, but racial and religious and unfair policies and practices that can combine to cause social unrest and instability.
If we do not firmly address the rising polarisation problems, with greater urgency, the growing economic problems of inflation, the weakening ringgit, low productivity and slow income growth could consolidate and present us with a real crisis, sooner than later.
Idris asks for fair and reasonable comments to his remarks to The Economist. He confidently urges “local companies to be innovative, creative and competitive”.
But do all our national policies and practices encourage local companies to achieve their full potential or do many big companies feel constrained and denied development opportunities? Can they really innovate?
In fact the big brain drain and the considerable capital outflow, do not show much confidence in our economic prospects. So how to compete? We have to be more pragmatic.
Finally, We cannot wait for a crisis to happen. We have to act now to prevent a crisis, because we already know we are facing critical times and major challenges ahead.
We have to be prepared, but are we preparing enough for the hard times? We cannot console ourselves by saying “no crisis” but will it come and are we preparing for it. Let the people know. That will generate more public confidence.
We must transform faster. This means that we must be moderate in all our policies, in managing our economy, race and religion relations and in fighting corruption, cronyism and public wastage, much more effectively and with greater priority and less complacency.
In this Chinese New Year of the Goat, we will have to be more resolute and nimble to climb over our critical challenges ahead.
May Malaysia succeed and all Malaysians enjoy A Happy Chinese New Year and work together for national unity, resilience, progress and prosperity!
Article published in The Star.