Bigger hole in Malaysians’ pockets next year, predicts EIU report

WORST TIMES AHEAD FOR MALAYSIANS DUE TO THE INCOMPETENT & CORRUPT BARISAN NASIONAL ADMINISTRATION SO FAR

By Boo Su-Lyn

December 08, 2010

A fruit vendor selling longans waits for customers at a fresh market in Kuala Lumpur July 29, 2009. — Reuters pic

KUALA LUMPUR, Dec 8 — Prices of goods and services will rise from 2011 to 2015 as the Najib administration moves to cut subsidies gradually and rein in a deficit budget, according to a report by The Economist, despite speculation of imminent polls.

The Economist itself dismissed talk of early polls although it said the ruling Barisan Nasional (BN) government could lose more seats in the next general election due to declining Malay support. The next general election is not due until March 2013.

“Government efforts to rationalise the country’s extensive subsidy scheme will exert an upward influence on prices in the forecast period (2011 till 2015),” said the magazine’s Intelligence Unit report on Malaysia for December.

The price of fuel and sugar went up on December 4 as part of Prime Minister Datuk Seri Najib Razak’s ongoing drive to reduce subsidies although a Cabinet minister had assured no price hikes for the rest of the year.

The price of RON95 increased by five sen to RM1.90 per litre, diesel by five sen per litre to RM1.80 and liquefied petroleum gas (LPG) by five sen to RM1.90 per kg. Sugar also cost 20 sen more at RM2.10 per kg.

Through these price hikes, the government expects to save subsidy payments of RM621.9 million on RON95, RM213.2 million on diesel, RM63.5 million on LPG and RM283.5 million on sugar a year, or a total of RM1.18 billion annually.

The Economist Intelligence Unit (EIU) country report also expected the government to introduce the Goods and Services Tax (GST) within the next few years and predicted an annual inflation of 3.4 per cent from 2011 till 2015.

“An inflationary risk will also be posed by the new GST, which the government will attempt to introduce in the early part of the period. But deflationary influences will be strong,” said the report, pointing to a future removal of trade barriers and greater regional economic integration.

The EIU report also forecast an annual growth rate of 5 per cent for the Malaysian economy from 2011 till 2015, echoing the Asian Development Bank’s growth forecast of 5 per cent for 2011.

Najib’s goal to turn Malaysia into a high-income nation, however, requires a 6 per cent annual growth rate to reach a per capita gross national income of US$15,000 (RM46,500) by 2020.

However, analysts say the prime minister’s New Economic Model (NEM) plans are short on specifics for the high income nation status.

The EIU report noted that the third quarter this year experienced considerably slow growth, which was expected to persist in the fourth quarter.

“Data for the first half of 2010 show that the economy expanded by an average of 9.5 per cent year on year during that period, but data for the third quarter point to a marked slowdown in the rate of GDP growth, and this trend is expected to continue in the fourth quarter,” it said.

“The Malaysian economy is expected to move on to a more stable growth path in 2011-15, when we expect real GDP growth to average 5 per cent a year,” added the report.

Malaysia’s economy grew 5.3 per cent in the third quarter of this year after a strong first half due to slowing external demand and reduced government spending.

The economy had expanded by 10.1 per cent in the first quarter and 8.9 per cent in the second quarter.

The EIU report predicted 6.8 per cent growth for the country this year, which is within the range of 6-7 per cent estimated by the government.

It also highlighted private consumption and investment as primary drivers of growth in the next five years.

The EIU report further predicted that the ringgit would appreciate by nearly 10 per cent on an annual average basis in 2010.

“A positive interest-rate differential with the US will persist in the early part of the forecast period (2011 till 2015), continuing to provide support to the ringgit. We therefore expect the exchange rate to remain strong, reaching an annual average of RM2.95:US$1 in 2015,” it said.

The EIU report also expected Bank Negara Malaysia to allow the ringgit to be traded offshore in the latter part of the 2011-2015 forecast period, following further progress towards regional economic integration.

Offshore trading of the ringgit is prohibited under a rule that was imposed in the wake of the 1997-98 Asian financial crisis.

The report also said the services sector would form the largest chunk of the economy in view of increased government resources in the sector.

“In supply-side terms, the services sector will be the largest and most dynamic part of the economy, as the government channels more resources into the sector in its bid to ensure that Malaysia becomes a high-income nation by 2020,” said the report.

“The most dynamic services subsectors will be financial services, wholesale trade, and hotels and restaurants,” it added.

The EIU report pointed out that gradual liberalisation would spur growth in financial services and increase the competitiveness of Malaysia’s financial system, especially in Islamic finance products.

Najib has introduced a slew of plans and programmes under the NEM with a government unit running the ambitious Economic Transformation Programme (ETP) that involves 190 projects and business opportunities over the next decade worth RM1.4 trillion to generate a RM1.7 trillion economy by 2020.