Structural economic reforms: no time to waste
THE The Malaysian economy remains in recession, although it is slowly coming back to life. In the third quarter of 2021 (Q3’21), the economy contracted by 4.5%, compared to an expansion of 16.1% in the previous quarter.
On a seasonally adjusted quarterly basis, the economy appears to be experiencing a W-shaped recovery with gross domestic product (GDP) growth of -3.6% in Q3’21 marking the turning point of the second low of the ‘W “. For the whole of 2021, we estimate GDP growth at 3.3%.
Amid economic scars and high uncertainties, we remain cautiously optimistic about Malaysia’s prospects for recovery in the coming quarters. The dynamics of recovery are expected to improve as the immunization rate rises and the economy reopens more. However, the emergence of the newly identified Covid-19 variant Omicron could present other downside risks to the outlook for recovery.
For 2022, the government expects its record 2022 budget allocation of Ringgit 332.1 billion to boost economic growth to 5.5-6.5%. We expect GDP growth to be within the government’s forecast range, but close to the lower limit of 5.6% if the economic reopening is not further disrupted by lockdowns and Covid resurgences -19.
Unlike past crises, the game-changing Covid-19 pandemic not only triggered demand shocks but also supply shocks. The pandemic has also upset the supply of the economy, decision-makers must therefore be careful not to wage the last war. To put it simply, the mix of evolving government policies must be strongly business-friendly.
With the economy still in recession, the economic environment remains precarious. In Q3’21, the Malaysian Institute of Economic Research’s trading conditions index was still below the 100-point threshold at 97 points. Reading below 100 points indicates that the manufacturing sector remained in contraction mode in the third quarter.
It should be noted that the manufacturing sector is stagnating. In the aftermath of the Asian financial crisis (CFA) of 1997, the sector’s contribution to overall GDP fell in a downward trend (2000: 30.9%; 2019: 21.4%), as did its share of l employment (2000: 23.5%; 2019: 17.8%).
The double fall in the share of industry in production and employment – a sign of deindustrialisation – suggests a decline in productivity and competitiveness. As Malaysia has not yet fully industrialized, the phenomenon also reflects weakening opportunities for industrialization.
Malaysia’s premature deindustrialization is strong evidence of the weakening of its growth momentum after AFC. We believe this is one of the reasons the nation remains stuck in the middle income trap.
Given the destructive impact of the pandemic, we expect deindustrialisation to accelerate. This is a crucial concern because the manufacturing sector is an important source of technological innovation and productivity gains. It should be noted that even before the pandemic hit, labor productivity growth in the manufacturing sector had slowed (2017: 3.9%; 2018: 2.4%; 2019: 1.7%).
So there is no time to waste.
In the short term, the government will inevitably have to work towards economic normalization and recovery, for example, by alleviating bottlenecks and supply chain disruptions. Indeed, bottlenecks and disruptions can feed into each other and stifle resurgent domestic demand. The consequences for economic recovery are obvious.
However, even as we emerge from this crisis, the government must also start working on targeted long-term structural reforms on the supply side of the economy. Malaysia urgently needs reforms that can support industrial upgrading, improve productivity growth and resilience, as well as create new forms of enterprise. Without these developments, it will continue to deindustrialize.
In the final analysis, we must have a strong and dynamic offering if we are to regain lost ground, outperform our regional competitors and maintain our post-Covid-19 lead. The structural reforms of the 12th Malaysia Plan must therefore begin as early as possible in the coming fiscal year. We cannot afford to wait until the end of the pandemic crisis – after all, no one knows when that will happen.
This The article was written by the Malaysian Institute of Chartered Accountants (MICPA) and Malaysian Rating Corp Bhd (MARC).