Malaysia’s growth last quarter beat expectations, and the outlook for 2012 looks pretty solid too.
But with some reforms running into the sand, corruption scandals grabbing headlines, elections looming, and the general gloom enveloping export-driven nations, Malaysia risks backsliding in its attempts to make sure its middle-income economy doesn’t stall.
As was announced on Wednesday, GDP growth fell by less than forecast to 5.2 per cent year-on-year in the fourth quarter, compared to 5.8 per cent the prior quarter. Full year growth hit 5.1 per cent, from 7.2 per cent in 2010.
Behind those numbers: strong domestic demand (7.1 per cent growth), plentiful government spending (up 23.6 per cent) but slowing export growth towards the end of 2011, with an increase of 9.8 per cent in the last three months, compared to 11.4 per cent in the third quarter.
For the current year, expectations are marginally weaker. The World Bank has a forecast of 4.9 per cent GDP growth for 2012, BarCap’s figure is an even 5 per cent. Even Moody’s, with a more bearish view, is looking at 4 per cent.
“Economic momentum in Malaysia is beginning to ease against the backdrop of a weakening external environment,” said the IMF in a recent report.
Beyond the “near-term”- where much hinges on whether export demand from Europe and the US picks up – the country’s outlook “will depend to a large extent on the domestic structural reform agenda,” says the World Bank.
The government of prime minister Najib Razak has ambitiously proposed reforms aimed at improving the economy’s competitiveness and avoiding the so-called “middle-income trap,” in which rising economies find that growth eventually plateaus. According to the World Bank, per capital income in Malaysia in 2010 was $7,760, just below the level at which studies suggests the trap snaps.
The country, says Euben Paracuelles, an economist at Nomura, has successfully lured investment through some of the government’s reform programmes, which have prioritised investments to particular industries. FDI inflows increased – 2.9 per cent growth in Q4, from 2.4 per cent growth the prior quarter.
But the structural reforms the government has proposed have proven more challenging.
Things like implementing measures to improve productivity to make Malaysia a little more competitive… are still not there. For example, the freeing up of fiscal space by cutting subsidies and use the spending for more productive purposes to enhance the economy has happened, but on a very minimal basis.
A recent scandal to hit the ruling party, the United Malays National Organisation, adds to the challenges it faces. The family of a UMNO minister has been using government loans meant for a cattle-rearing project to instead buy luxury property and a Mercedes.
The opposition, led by a fresh-out-of-jail Anwar Ibrahim, is using the accusations as an opportunity to highlight what they describe as UMNO’s poor governance.
The prime minister has displayed weak leadership in managing the headline-grabbing scandal, says Bridget Welsh, a Malaysia specialist at Singapore Management University.
“It just reinforces the perception that the political and economic leadership is not heading in the right direction,” she says. Elections are due to be held sometime this year, but the prime minister has been slow in calling them – a reflection, says Welsh, of his lack of confidence that he would win.
Welsh and Paracuelles say the increase in government spending that helped buoy the economy is because the government is trying to improve its popularity in advance of the polls. From that weakened position, pushing through structural reforms is difficult.
In the mid-term, the elections and associated political uncertainty shouldn’t affect growth too much as the elections appear relatively far off, says Sukhy Ubhi, an analyst with Capital Economics. But the outcome of the elections once called could significantly influence investor faith in the country’s commitment to reform.