Malaysia able to manage price pressures - Zafrul

 

Malaysia still has some fiscal space to manage the challenges of price pressures given the country's debt to gross domestic product (GDP) ratio is at 60 percent.

Finance Minister Tengku Zafrul Abdul Aziz said there is still fiscal space as the government has increased the statutory debt ceiling limit to 65 percent of GDP from 60 percent previously.

The government has also maintained the deficit target at six percent of GDP, he added.

“We have inflation under control relative to our neighbours and relative to what we see in the rest of the world. Inflation is forecast to be between 2.2 to 3.2 percent.

“In fact, inflation was around 2.5 percent in the first six months of the year and that was largely due to the large subsidy we introduced.

“We are forecasting it (subsidy) to be around RM80 billion; that is close to US$20 billion," Zafrul said in a recent interview on CNN.

He noted that the government subsidises about 40 sen per litre for petroleum, with RON95 in Malaysia being one of the cheapest in the world.

He also said Malaysia is benefitting from stronger commodity prices, especially oil, as a commodity export country, with Brent crude currently slightly below US$100 per barrel. In the country's budget, the oil price was assumed at US$66 per barrel.

“Had we not implemented them (subsidies), (as) our Department of Statistics said, our inflation could be around 11 percent,” he said.

Zafrul further said the government is not planning to reduce subsidies this year as the country is slowly recovering from the Covid-19 pandemic.

He noted that the pandemic heavily impacted the baseline of the economy and the resumption of economic activities has resulted in a strong first quarter GDP growth of five percent this year with the second quarter likely to be stronger.

He also said that although the provision of subsidies does help the economy in the short and medium term, it is not sustainable to continue this over a longer term. Thus, the government is looking into more targeted subsidies.

“Today, it is a blanket subsidy. Everyone gets it. Those in the top 20 percent enjoy the same amount of subsidy as the bottom 40 percent of our population.

“We need to be responsible for what's happening globally and having said that, we are also cautious as our monetary policy is tightening as well,” he said.

Bank Negara Malaysia (BNM) increased the overnight policy rate (OPR) this year by 25 basis points (bps) in May and July, respectively.

This is an accumulation of 50 bps which led to the new OPR level at 2.25 percent. The rate, however, is still below what it was before the pandemic.

Economy outlook

On whether Malaysia is able to avoid a recession given its open economy, he said that based on the growth in the first half of the year and the expectation of a stronger third quarter, Malaysia is positive about achieving growth of between 5.3 and 6.3 percent this year.

“But the concern will be 2023. It will be a challenge to see how the world performs then and that is when I think we need to re-look at some of our policies.

“It is important that we prepare for a global economy that is slowing down," said Zafrul.

Malaysia, being a major trading partner with China, is also closely watching the tension over Taiwan.

He said Malaysia's economic performance is also dependent on how China tackles its Covid-19 situation.

“Obviously, it has been very conservative and this has affected our supply chain. So if anything happens with Taiwan, it will have some impact. Regional stability is crucial,” he said.

Comparing the economic situation between Malaysia and Sri Lanka, Zafrul reiterated that Malaysia is different. Malaysia’s economy is more diversified while Sri Lanka’s is focused on tourism.

“For example, our reserves are at US$106 billion compared to Sri Lanka's US$3 billion. Our debt to GDP ratio is 60 percent, Sri Lanka's is above 100 percent and the country is facing twin deficits. We are not.

“In terms of our foreign denominated borrowings, it is only 2.5 percent of our total debt, so 97.5 percent of our borrowings is in ringgit,” he added.

- Bernama