Vision 2020 likely to fail, say economists

Malaysia will likely fail to achieve Vision 2020 as political indecision and global economic uncertainty looks set to hamper economic growth over the next five years, according to economists.

With average GDP growth in the next five years projected to be just shy of the 6 per cent target set by the prime minister, the Najib Administration’s 10th Malaysia Plan (10MP) looks set to go the way of the last two Malaysia Plans, which also failed to achieve their GDP targets.

Under the 7th and 8th Malaysia Plans, the economy expanded by 5 per cent and 4.7 per cent respectively, well below the 8.6 per cent and 6 per cent targets set.

Similarly, under the current 9th Malaysia Plan, it is projected to grow by just 4.2 per cent annually, meaning Malaysia will once again fail to achieve its target.

This will put paid to Prime Minister Datuk Seri Najib Razak’s dreams of making Malaysia a high-income nation in 10 years’ time and, by extension, Vision 2020 as well.

Unveiled in 1991 by then-prime minister Dr Mahathir Mohamad, Vision 2020 laid out the government’s 30-year ambitious plan to make Malaysia a fully developed nation by the year 2020 by boosting GDP and per capita income.

Although there is no single definition, advanced nations are usually identified by their high per capita income and developed service and knowledge industries, coupled with high life expectancy and quality of education.

Calling the high-income goal a moving target due to inflationary pressure, Kenanga Investment Bank economist Wan Suhaimie Wan Saidie said Malaysia will be hard-pressed to achieve Vision 2020 even if it managed to maintain a growth trend 6 per cent per year for the next 10 years.

“We have another 10 years to go to achieve Vision 2020 and you’re still growing below your potential even in the next five years. So what does that say?” he asked.

“Theoretically, what they need to do is to grow more than 6 per cent. The way we are going right now they need to grow about 8 per cent (to reach the high-income goal).”

While admitting that it was not an impossible task, he nevertheless said it was going to be difficult unless the government did “something drastic” to lift itself above its current growth trajectory.

He cautioned that there could be turning points in the next five to 10 years that will either propel Malaysia forward or negate everything that it has built so far.

“It could be war, it could be disease, it could be new technology... Maybe they are banking on the X factor. That means they’re banking on a major turning point that may or may not happen,” he said.

At the same time, Wan Suhaimie felt that it was more important to focus on equitable distribution of nation’s wealth than obsess about economic expansion.

“They need to narrow the divide between the haves and have-nots. No matter how high your GDP growth, if you cannot address these issues, you’re going to have problems eventually,” he said, citing a possible drop in investor confidence as an example.

He said the government will have to deal with “structural issues” such as Bumiputera equity policies, which it can do away with or at least tweak to improve investor opinion of the country.

“They should do something with it to make sure they really implement it. Now it gives the impression that only the select few elites are benefiting,” he said. “It’s a perception thing.”

Wan Suhaimie also stressed that Malaysia needed to address this perception issue and improve the education and migration systems to attract talent so it could compete with regional rivals for foreign investment. However, he remained skeptical that such measures will do much good at this point, saying they might help but offered no guarantee.

Despite this, public confidence in Vision 2020 remains high, according to an International Islamic University Malaysia (IIUM) survey conducted last month. The survey polled 1,367 respondents, most of whom had high hopes for Malaysia based on the government’s current programmes, including those to do with development, peace and harmony, the economy and the 1 Malaysia concept.

Popular support notwithstanding, CIMB Investment Bank chief economist Lee Heng Guie explained that dissecting the 10MP revealed some “very challenging” targets for the country, and predicted that Malaysia will only achieve an average annual GDP growth of 5.5 per cent for the next five years.

This comes at a time when traditional regional rivals have outpaced Malaysia. Singapore booked a blistering 18.8 per cent growth in the second quarter — among the highest in the world — and looks well on its way to achieving a 14.9 per cent expansion for the year.

Thailand enjoyed 10.6 per cent economic growth in the first half, its highest in 15 years despite political turmoil, while Indonesia recently revised its projected GDP growth for this year upwards from 5 per cent to 6 per cent and expects to achieve 7 per cent growth next year.

Even upstarts Vietnam and the Philippines managed to make strong gains of in the first half. The Vietnamese government has revised this year’s GDP growth estimate to 6.7 per cent and set a target of 7.5 per cent for 2011 while the Philippine economy grew more than 7 per cent in two consecutive quarters, the first time since 2004.

Lee said the government was running into a high savings-to-investment gap and will have to work hard to pull in the RM115 billion in private investment needed yearly to reach its 10MP target of 12.8 per cent annual investment growth. In comparison, investments grew by only 2 per cent on average from 2006 to 2010.

Minister of International Trade and Industry Datuk Seri Mustapa Mohamed last month said he remained confident that the target was attainable despite the well-publicised 81.1 per cent drop in foreign direct investment (FDI) last year. It was the first time in history that Malaysia fared worse than the Philippines, long seen as the economic basket case of Southeast Asia.

“It’s the most challenging,” Lee said of the private investment target. “It’ll be interesting to see next year, the first year of the 10th Malaysia Plan.”

He believed the government had realised there were long overdue weaknesses and were now taking proactive measures to address them, noting however that private investment was still languishing due to perceived policy flip-flops.

“The government will have to show that they’re committed and has the political will,” he said, adding that it will also unwind its involvement in the economy.

An economist with a local private investment bank who declined to be named agreed that the private sector will be the main driver of growth going forward, which he expected to moderate from 6.8 to 7 per cent this year to 5 per cent next year.

However, he cautioned that growth was very difficult to forecast beyond 2011 given the uncertainty in external demand, and stressed that it was important to boost domestic demand to mitigate the effects of a possible global economic downturn.

“In order for domestic demand to drive growth, there’s a need for government to maintain accommodative monetary policies, ensuring access to financing, as well as bringing down the cost of doing business,” he said, adding that the Najib Administration should introduce incentives in the coming Budget to lower the cost of doing business and support private sector consumption.

“If government continues to adopt business-friendly measures... then, obviously, private sector in Malaysia will continue to be the growth driver beyond 2012.”

The economist said that, while next year’s performance depended on the sustainability of China’s growth and US economic recovery, Malaysia could not ignore Greece’s sovereign debt problem if the global economy slowed down more than expected.

“If Greece were to default on their sovereign debt or if something were to happen to the US economy, it will trigger a double dip recession,” he said.

“Whether we can achieve 6 percent will depend on the health of the global economy... Malaysia is a very open economy so it will be challenging for Malaysia to achieve 6 per cent (GDP growth) if the external situation deteriorates.”

Singapore-based UOB regional economist Ho Woei Chen voiced similar concerns that export-oriented Malaysia was still at the mercy of external factors.

“Eventually, the end demand is still very dependent on US, EU. No matter how your diversify you’ll be hit by a downturn in the major economies,” she said, pointing out that there were still many risks in terms of global growth, such as the battered housing sector and high unemployment in the US as well as fiscal issues in EU countries.

“There’s going to be a moderation in growth but I don’t see a very big risk of a double dip in Western economies.”

Ho, who predicts “decent” growth for Malaysia over the next one or two years, expects the country to book real GDP growth of 6.8 per cent this year, 5.1 per cent next year and an average of 5 per cent annual growth from 2011 to 2015.

She said there is still room for stronger growth but lamented the fact that Malaysia was still being hampered by policies inherited from the New Economic Policy (NEP).

“This thing has been entrenched and has been there a long time and it’ll take effort to move out of some of these policies,” she said. “I think FDI will have to be dependent somewhat on the changing political landscape.”

Maybank Investment Bank chief economist Suhaimi Ilias, on the other hand, believed it was “not practical” to project beyond 2011 as there were too many variables to consider, including the second half of the New Economic Model (NEM) due to be unveiled in the next couple of months.

He said that, the key concern at the moment was how to stem investment outflow from Malaysian companies in order to compensate for falling FDI. Net direct investment abroad reached RM5.8 billion in the first half of this year, up from RM3.3 billion during the same period last year.

“The key issue is to try to entice local companies to not sell out and invest overseas, which seems to be the trend,” he said.

He said Petronas and other government-linked companies (GLCs) should be encouraged to focus their capital expenditure locally in order to compensate for the drop in FDI that will accompany the expected global economic slowdown next year.

“Getting FDI now is already tough but getting FDI in times of uncertainty or even downturn it’s even tougher,” he said.

However, Suhaimi said that while it was possible for Malaysia to achieve a certain level of growth through domestic investment, it would be difficult for the country’s economy to expand without external demand.

“With a small market of not even 30 million people it’s difficult to see us growing without external demand,” he said, suggesting that the government’s current strategy of strengthening intra-regional trade was the right way to go.

courtesy of Malaysian Insider