Press Releases

Can the Government’s Initiatives Save Malaysia’s Plummeting Economy?

Press statement – 14 September 2015, George Town Penang

Dr Lim Kim-Hwa, Chief Executive Officer and Head of Economics
Tim Niklas Schoepp, Senior Executive Officer
Dr Lim Chee Han, Senior Analyst
Ong Wooi Leng, Senior Analyst

(George Town, Penang) – With the implementation of the Goods and Services Tax (GST) and the drop in Ringgit together with prices of commodities such as crude palm oil and crude oil, Malaysia faces challenging domestic and external economic conditions. On 14 September 2015, the Government launched a series of initiatives to tackle this. We comment on five of them.

Firstly, the Government is encouraging Government Linked Companies and Government Linked Investment Companies to repatriate foreign profits to stabilise the financial markets. With the repatriation of capital, foreign exchange reserves that has fallen from USD132.0 billion in August 2014 to USD94.7 billion in August 2015 should be replenished. Therefore, confidence in Ringgit should recover in the short term.

On the other hand, the US Federal Reserve is expected to meet on 16 and 17 September 2015 to decide on US interest rates. Whilst some economists believe that interest rates will not be raised on Thursday, most agree that interest rates will be raised by December 2015. Therefore this initiative is timely. However, it might not be sufficient. This is because Malaysia’s foreign exchange reserves has fallen by USD37.3 billion within a year and foreigners still own close to RM157 billion of Malaysia Government Securities as of 31 July 2015 versus approximately RM 30 billion in 2008. Therefore, Ringgit remains vulnerable to the withdrawal of foreign capital especially if US interest rates are increased.

Secondly, the Government is injecting RM 20 billion into the equity market via ValueCap. Whilst this will provide a cushion as investors exit the stock market, such direct market intervention brings into question the role of the government in the functioning of the stock market. Besides, if investments from ValueCap are misdirected, there is a risk that inefficiently run companies are artificially propped up by the Government, thus preventing new entrants from setting up which is a natural process required in rejuvenating businesses.

Thirdly, the Government has introduced many initiatives to help the SMEs. These are laudable initiatives. However, more focus should be given to increase productivity through capital investment and to reduce the reliance on foreign labour. With the Ringgit fall, such capital investments have become more expensive recently should imported equipment or services is required.

Fourthly, the Government plans to add more Kedai Rakyat 1Malaysia and Klinik 1Malaysia to provide goods and healthcare at reasonable prices to households. Most items sold in Kedai Rakyat 1Malaysia are basic and no-frill items; and are targeted at the lower income segment of the society. Therefore this might not address the pressure in higher cost of living faced by many middle income groups. Besides, with the establishment of more Kedai Rakyat 1Malaysia, the Government has become a retailer of goods, in direct competition with other private sector retailers. On the other hand, with the encouragement of medical tourism, healthcare provision in Malaysia seems to be segmented into private hospitals vs. public hospitals and Klinik 1Malaysia. This will have implications on the quality, affordability and accessibility of patients to the appropriate healthcare services.

Fifthly, the Government plans to develop iconic tourism products such as a RM4.5 billion development of Desaru Coast Destination Resort. Whilst proximity to Singapore is a strong plus point, the funding dedicated in this project could be better spread throughout other popular tourist destinations such as Sabah and Penang. Spreading the funding to more tourist attractions throughout the country will increase the breadth and depth of Malaysia’s attractiveness, thus catering to more tourists. Besides, financial management in mega projects should be competently executed to ensure efficient use of capital and to lower the risk of corruption.  

In conclusion, the Government initiatives are welcome. However, more needs to be done to regain confidence and trusts of the people, the business community and the foreign investors. With external factors such as low commodities prices and domestic factors such as high household and government debts, Malaysia remains vulnerable on the economic front.