Structural reform key to growth in 2024

 

Bank Negara forecasts economic growth at 4.0-5.0% for 2024 supported by domestic demand and recovery in exports.

This is similar to last year because the economic environment and downside risks especially from global factors are largely unchanged.

Investment is forecast to grow at 6.2% above the pre-Covid average of 5.5%. There has been some good news on investment approvals and especially semi-conductor investment in Malaysia from major international players such as AT&S, Intel, Infineon, Texas Instruments, Ericsson, Bosch and Nvidia. The challenge is to reform the ecosystem to turn approvals into actual investments.

Net Trade in January and February has been weak although there is very little chance of a deficit. A big decline is in electrical and electronics (E&E) exports which fell 8.1% from RM91.39 billion in Jan-Feb 2023 to RM83.99 billion in Jan-Feb 2024. The E&E share of exports also fell from 40.6% to 35.9%.

The trade balance is tightening largely due to very weak external demand outside of the control of Malaysian policymakers. Global growth is forecast at 2.7-3.2% below the pre-Covid average of 3.5% and global trade is forecast to grow at 2.9-3.4%, below the pre-Covid 3.7% average.

The weakness of the ringgit has helped exports and the policy of encouraging repatriation of profits has worked in the short-term. Nonetheless the strength of the ringgit depends on long-term structural reforms and economic resilience to delivery growth during 2024.

Headline inflation is forecast at 2.0-3.5%, core inflation between 2.0-3.0% so price stability is improving and interest rates should remain around 3.0%.

Consumption is forecast to grow at 5.7% below the pre-Covid average of 6.9%. This conservative projection puts the focus on the government reform agenda, especially subsidy rationalisation and raising incomes as key drivers of growth for the coming year.

Industry estimates suggest that a free float of petrol and diesel prices might cut the government subsidy bill by RM29 billion but it would cost consumers RM29 billion too.

The biggest saving in the short-term without harming consumers is a hard crackdown on diesel smuggling and theft but the government savings would also have to be redistributed to low-income groups to raise their income so that they can afford to pay higher fuel costs.

By far the best way of raising incomes and eradicating absolute, relative and other forms of poverty is to set a Universal Basic Income (UBI) threshold based on Bank Negara, DOSM and EPF Belanjawanku estimates of living wages. Those below this threshold should receive direct cash transfers to top-up to the UBI level.

This is the basis of the new Padu system and can replace all other ad-hoc welfare handouts and even the minimum wage.

Direct cash transfers do not cost a great deal and can incorporate and be paid from the existing subsidies budget. A RM500 monthly transfer to B40 households would cost RM17.5 billion per year, much cheaper than the current RM80 billion subsidy bill.

Actually, a much bigger and better solution to hardcore poverty, absolute poverty and raising incomes is provided by the gig-economy and the Sharing Economy platforms through which people increasingly find new income opportunities.

Our estimates for MDEC suggest that the Sharing Economy can create 968,100 new jobs in a total workforce of 4.3 million with average earnings of RM6,072 per month. This is much more important and impactful; it can create RM300-400 billion in payouts to people in this sector.

The basic case is clear, macroeconomic policy and interest rates are well set to help growth but structural reforms to raise incomes are essential domestic drivers of growth and investment in the face of global headwinds. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.