I wrote this in December 2013 Currently, Malaysia is already burdened with macroeconomic risks of a potential crisis due to the following factors: 1. Goods and Services Tax, which will be introduced in April 2015, and the spate of price hikes from electricity to toll rates, will eat away disposable income and depress domestic demand, as well as cause inflation. 2. Quantitative easing (QE) is likely to end at some point. The interest rate is likely to be higher in 2015, if not in 2014. A higher interest rate depresses domestic demand further. As the US dollar appreciates, imports would be more expensive. On the other hand, exports may not be too good even with a depreciated ringgit largely because job growth in US and Europe would still be slow, thus demand of our exported goods would not be high. In addition, some US manufacturers currently operating in Asia are likely to be moving some facilities back to the United States, which means room for Malaysia’s export-led growth is limited. 3. Palm oil price is likely to further soften in 2015, if not already in 2014, mainly due to oversupply and a potential soya super harvest next year, despite the Haiyan catastrophe causes short-term shortages of coconut oil. The potential softening of palm oil prices will have major political consequences in Malaysia as small owners in small towns and rural areas depend heavily on commodities. 4. A question to ask: would there be a property bubble? What would be the combined effect of electricity tariff hike, GST implementation, higher interest rate (mostly as a result of QE tapering) and lower commodity prices? The moment someone begins to default, there is risk of a meltdown, especially in the context of very high domestic debt to GDP ratio. Beyond that, the rating agencies’ greater scrutiny of Malaysia’s poorly managed public finances would likely to result in more expensive borrowing costs to the government and consequently pushing interest rate for everyone else up further. The fundamental issue is that the Malaysian economy did not grow fast enough to pay for the Government’s excesses. Otherwise if the GDP pie were bigger, the ratio of debts and deficits would be seen as tolerable by the rating agencies as everything is relative to them. liewchintong/2013/12/doing-more-of-the-same-wont-help-our-economy/
Posted on: Tue, 02 Dec 2014 07:19:21 +0000
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