PETALING JAYA: Bank Negara has once again called for accelerated structural reforms in Malaysia, as economic activity remains well below pre-pandemic levels and the country’s jobless rate has yet to fully recover.
Speaking during the launch of Bank Negara’s 2021 annual report, governor Tan Sri Nor Shamsiah Mohd Yunus highlighted that structural reforms were pertinent to further a conducive investment climate and enhance Malaysia’s long-term competitiveness.
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“Structural reforms such as improving labour market flexibility and having stronger insolvency laws could speed up the reallocation of resources and increase productivity,” she said.
Structural reforms are also needed to address the elevated cost of living in Malaysia, which has disproportionately affected low-income households with low buffers.
Based on Bank Negara’s estimates, out of the RM230 net income made by the bottom 40% (B40) households, about RM203 is spent on items experiencing high inflation – excluding fuel and electricity.
In comparison, the top 20% (T20) households only spend RM922 on such items, out of their net income of RM4,081.
“Short-term solutions, while warranted in some circumstances, would not prevent this issue from recurring and may result in unintended consequences.
“Consequently, structural reforms addressing both income and cost factors are essential to enhance households’ resilience against future shocks,” the report added.
Economist Manokaran Mottain concurred that urgent economic reforms were necessary if Malaysia wanted to achieve a sustained average economic growth of 4% to 5% in the coming years.
The pace of reforms in Malaysia, according to Manokaran, has slowed since 2020.
“We need reforms in the social protection system as we head towards an ageing society. We also need to move towards targeted subsidy and the reintroduction of the goods and services tax (GST) fast.
“The GST is important for us to achieve an efficient tax management system. The government can introduce a lower rate of 3% but with a lower amount of exemptions. If possible, we should reintroduce the tax by the end of this year,” he told StarBiz.
Meanwhile, Malaysia University of Science and Technology (MUST) economics professor Dr Geoffrey Williams recommended reforms in the liberalisation of markets, restructuring of the labour market to encourage more flexibility in working practices while protecting incomes and social protection.
“We also need full reform of the investment climate and liberalisation for foreign investors to reverse the decline in net foreign direct investments and create a more friendly environment for foreigners here, given the competition from other Asean countries,” he said.
During the virtual briefing yesterday, Bank Negara also unveiled its new gross domestic product (GDP) growth forecast for 2022, expecting an expansion of 5.3% to 6.3% this year.
This is a slightly lower forecast from the previous official guidance of 5.5% to 6.5%. In comparison, the Malaysian GDP grew by 3.1% in 2021.
Manokaran, however, thinks that even the lower end of the forecast, or 5.3%, is “optimistic”.
He argued that businesses will take a minimum of three months to recover to pre-pandemic operating capacity, after the country moves to the endemicity stage on April 1.
“Even if international borders reopen, businesses cannot immediately recover. There remain constraints in the economy such as lack of business funding and the difficulties in finding adequate workers.
“I think we can only achieve a GDP growth of 4% to 5% this year, still it is a healthy growth,” he said.
MUST’s Williams is even more cautious on the economic prospects, and only forecasts a GDP growth of 3.5%.
“We are not so confident about external demand and we feel that structural damage is done to the economy, businesses and consumer balance sheets, and that debt levels are a drag on domestic demand.
“We are not so confident of pent-up consumption.
“Bank Negara has also struck a cautious note on business debt and we agree with this caution,” he said.
While risks to the economy remain tilted to the downside, the central bank still expects the Malaysian economic recovery to gain momentum in 2022.
Among the key growth drivers are the continued expansion in external demand supported by the technology upcycle, full upliftment of containment measures and the reopening of international borders.
Further improvement in employment and income prospects, as well as continued access to targeted policy measures, would also support the growth momentum.
Meanwhile, with commodities accounting for more than 10% of Malaysia’s total exports, the governor said the higher prices would provide further impetus to the Malaysian economy
Amid the more positive outlook, Nor Shamsiah cautioned that the key challenges in 2022 would be Covid-19 pandemic developments, ongoing geo-political conflicts especially the Russia-Ukraine war as well as the elevated cost and price pressures.
Specifically on the Russia-Ukraine conflict, Nor Shamsiah pointed out that Malaysia would not be able to escape from the impact, considering the country’s status as a small and open economy.
The ongoing conflict is likely to weigh on growth prospects via several channels, including disruptions from the trade and financial sanctions, higher commodity prices and volatile financial markets.
“But having said that, I also would like to highlight that Malaysia has a diversified economy with various sources of growth and an export structure, which underpins our economic resilience,” she said.
Nor Shamsiah added that the Russia-Ukraine conflict remains highly fluid and that “things can change very quickly.”
“How it affects the Malaysian economy..it will ultimately depend on the length of the conflict, the extent of the counter-measures and the resulting disruptions to the global supply chain.
“We will continue to monitor this closely and update our assessments accordingly,” she said.
For now, Bank Negara in its baseline forecast has assumed that global growth will remain above the long-term average of between 3.8% and 4.3%, and that the Brent crude oil price will range between US$100 to US$120 per barrel.
Despite the macroeconomic challenges, Nor Shamsiah said there has been noticeable improvements in the employment prospects amid encouraging signs of hiring activity in 2022.
In 2022, Bank Negara expects the total employment figure to jump to 15.6 million persons, as compared to 15.29 million in 2021.
The unemployment rate is projected to fall to 4% this year from 4.6% in 2021. However, it is noteworthy that the projected unemployment rate is still higher than the 3.3% rate seen in pre-pandemic 2019.
Meanwhile, Nor Shamsiah pointed out that Malaysians are highly indebted, and while the debt-servicing capacity of borrowers remained sound, further excessive debt accumulation can affect households’ spending power.
As at end-December 2021, Malaysia’s household debt-to-GDP ratio was recorded at 89%, compared to 9.9% in the Philippines, 17.2% in Indonesia, 69.7% in Singapore and 89.3% in Thailand.
“Malaysians are highly indebted but their capacity to repay remain supported by targeted assistance and prudent lending standards,” she added.
On the topic of price pressures, Nor Shamsiah said Malaysia is projected to see an average headline inflation rate of 2.2% to 3.2% in 2022, up from 2.5% in 2021.
The governor also said that core inflation is likely to average higher to between 2% and 3% this year, as compared to just 0.7% in 2021.
This is because of the fact that economic activity continues to pick up amid elevated input costs for businesses.
“Inflation outlook is subject to global commodity price developments amid risks from prolonged supply-related disruptions,” she added.
Amid the inflation outlook, Nor Shamsiah pledged that any changes to its accomodative monetary policy would be “measured and gradual”.
Changes in the benchmark interest rate or overnight policy rate, which currently stands at record-low of 1.75%, would be determined by new data amid uncertainties and fast-evolving conditions, she said.