Economist: Growth indicators 'not nice', externalities to blame

INTERVIEW | Kuala Lumpur-based economist Shankaran Nambiar (above) has predicted lower growth figures for Malaysia this year saying that the numbers were "not nice" due to external factors.

Although Finance Minister Lim Guan Eng said that "economic indicators are encouraging", Nambiar said the ministry's expectation that the economy will grow at 4.9 percent was an "optimistic” as growth could well fall to 4.5 percent.

He pointed out that Nomura Research was less optimistic setting the number at only four percent.

"The numbers that are expected to come out for 2019 are not nice, but neither is the external environment," said Nambiar, who is research fellow with the Malaysian Institute of Economic Research.

"The risks that lie ahead could be bleaker if our contingent liabilities crystalise into losses and appear on the balance sheet.

"Or if the domestic political environment breeds more uncertainty, or if foreign investors sense a lack of confidence in the Malaysian condition or if tensions between the US and China worsen," he added.

The Nomura research firm said Malaysia was hampered by low crude oil prices, a return to fuel subsidies and the removal of goods and services tax (GST). The firm said it expected Malaysia's GDP to grow at only four percent in 2019, down from 4.7 percent in 2018.

Trade war

According to Nambiar, there was legitimate concern that the Malaysian economy could slip into "slower growth mode."

While the global economic outlook is not terribly promising, the IMF has cut its growth forecast for 2019 from its earlier estimate of 3.9 percent to 3.7 percent, he said.

Nambiar noted that similarly, the Asian Development Bank had put the region’s growth rate expectation at 5.8 percent, down from an earlier forecast of 5.9 percent.

"A strong theme that contributes to these downward revisions is the US-China trade warand how it could upset markets," said the former economics don, who hails from Penang.

" If the US-China trade theme was a factor for low global growth during the IMF, World Bank annual meetings at Bali in October last year, it is probably more pronounced now with the tensions extending to China’s posturing over Taiwan," he added, referring to China's recent announcement that its military would have to be prepared for war.

Nambiar explained the two reasons why the US-China tension mattered to Malaysia.

First, because it affected global markets and the resulting global demand for Malaysian exports but more directly because China is Malaysia’s most important trade partner, he said. Malaysia’s export profile will also be impacted by the state of the global electronics industry in 2019, he noted.

"At least in the near-term, the global electronics industry is expected to grow at a slower pace, although one cannot rule out a downturn in electronics exports. Another important export item, palm oil, does not seem to have a bright outlook looking forward," he added.

Exchange rate

Meanwhile, the price of oil is another issue of concern, said Nambiar

Oil analysts are inclined to think that it could take another tumble with Goldman Sachs citing US$62 on grounds of oversupply, he said. This has repercussions for export revenue, but it also matters for fiscal soundness, he added.

"It should be remembered that Budget 2019 was based on the assumption that oil prices would average US$70.

"As a consequence of the above factor, one could expect to see a slowdown in exports with the current account surplus narrowing in 2019," Nambiar said. A prudent government that is bent on correcting the excesses of the previous regime will want to trim expenditure.

"Public expenditure will, therefore, be slower and capital spending in the public sector will also go down. What, then, will be driving growth?" he asked.

Nambiar said domestic consumption and private investment may be the more significant contributors to GDP. He added that employment has been doing well and that will be a saving grace since it will continue to fuel household spending.

"The exchange rate could fall. If it does, that may be a blessing in disguise because a weak ringgit could give Malaysian exports the impetus they need to make them more attractive," he said.

"In a weak external environment, a softer ringgit will turn out to be a positive," said the author of Malaysia in Troubled Times, published by Strategic Information and Research Development Centre in 2016. - Mkini