Category: Economics

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Economics

[2988] Malaysia’s 2024 sweet spot for growth

After years of economic disruptions and wild growth swings, the Malaysian economy is now in a sweet spot. Strong GDP expansion rates in the past two quarters show us as much: 4.2% year-over-year in the first quarter and then 5.9% yoy in next. Lest somebody points to base effect playing a role (indeed the large variability is still a problem), adjusted quarter-over-quarter numbers are robust as well: 1.5% qoq during first and then 2.9% qoq in the second quarter. These qoq figures are respectable because the post-Covid-19 2021-2024 median qoq rate so far is 1.4%-1.5%.

The government is quick to claim credit. To some extent, it is deserving. The Malaysian government of all colors (2018-2020 PH, 2020-2021 PN-BN, 2021-2022 BN-PN and the current PH-BN-GPS) has been trying to capitalize on fraying global supply chain. Malaysia understood of the need to move quickly as early as 2019 (or possibly earlier). But political crisis (coupled with a health and economic crises) led to policy paralysis and that crisis only ended in 2022 with PH returning to power with unlikely partners. The stability plays an important role in sharpening the minds beyond domestic partisan survival, which allows us to pursue new tech investment opportunities and boost Malaysia’s role in the global manufacturing and technological services (it is not without concerns, especially with the influx of data centers which create little jobs and consume tremendous amount of water and electricity which could push out other manufacturing industries that are not necessarily low-tech).

But in some other ways, it is also about the stars aligning involving sectoral syncing and growth normalization. To understand this, we need to go back to 2020 when many parts of the world hunkered and locked down in response to the pandemic. Yes, the pandemic remains relevant four years after it spread.

The year 2020 was the ground zero, which everything in free fall. By 2021, the pandemic was still a concern but things were improving. Yet many could not move around freely. Services—a labor-intensive sector—had a weak growth and an incomplete recovery. In contrast, the goods sector experienced a surge and production surpassed pre-pandemic levels: XBox, IPhone and a whole lot of electronics were bought and sold to keep everybody sane at home. Afterwards when the economy opened up in 2022 with all the tangible stuff that could be bought were bought (notwithstanding orders unfulfilled due to the then supply chain disruption which kept the goods sector going), goods demand growth took a break in return for heightened services: tourism, restaurants and other related sectors boomed. That is more or less the story for Malaysia, as can be seen from the goods-services growth chart below:

Some rights reserved. Hafiz Noor Shams

The Malaysian cycle for goods and services almost synchronized at the top in 2022, which in return led to the synchronized whiplash a year later. From 8.9% growth in 2022 thanks to complete reopening of the economy, 2023 GDP rose by only 3.6%. The 2023 goods market was so bad and that was reflected in Malaysian industrial production and export figures. Only the almost complete tourism recovery helped the overall 2023 economy from doing worse.

What makes 2024 a sweet spot is that it is likely a proper normalization amid further synchronization. Normalization because the gyration of growth since 2020 is finally stabilizing for both sectors. Additionally, that normalization and stabilization are bringing balanced growth since both goods and services are expanding faster at the same time (so far).

Normalization, synchronization and balanced expansion. The government under Anwar Ibrahim has done well in adapting to changing global environment and lucky at the same time. Not only has growth been firm. Global prices have been kind to Malaysia as well, leaving inflation benign. Job creations are going well. In short, economic conditions are good. I would argue this leaves the government with a lot of leeway to commit to reforms.

The question now is if the great conditions brought by the cycles would persist. There is some hope (and bad news too) for that but we cannot run on hope that much this time around. With cyclical normalization from here on and definitely in 2025, the government would have to depend less on luck and more on its own initiatives.

Categories
Economics

[2985] Malaysia’s EV policy risks running obsolete

The government has been incentivizing electric vehicle purchases and use as a way to boost domestic electrification trend. Those incentives come in the form of zero import duty, zero excise duty, zero road tax and non-tax on EV and/or related equipment, among others.

Whatever the early rationale behind these incentives,[1] changing global conditions are making these policies dated. Rising trade barriers across the world are affecting EVs adversely, especially those made in China. Regardless of the appropriateness of US and more relevantly European policy in response to China’s dominance in the space, these barriers would redirect Chinese EV volume from places with high tariffs to other economies without similar restrictions. These other economies—many of them are small-to-medium sized (like Malaysia)—might be the ones having to absorb oversupply. In other words, there is an EV oversupply coming our way.

Under a scenario where there are downward pressures on EV prices, would Malaysia’s set of incentives still make sense? I would argue no, especially for the retail side of the equation.

There are several reasons for the negative answer.

First, the downward pressures on prices caused by manufacturers’ need to reduce their inventories would likely be good enough to encourage domestic electrification on the road.

Second, the prospects of higher petrol prices caused subsidy rationalization exercise should already be a big incentive enough for road users to migrate from internal combustion engine to EV. This is of course depending on the government going through with the rationalization exercise.

Third, the coming oversupply would be an opportunity for the Malaysian government to shift the burden of encouraging EV from the public towards private manufacturers. After all, these are private EVs we are talking about, not public transport. And even better, the burden would be shifted towards foreign manufacturers, which many of these manufacturers originating from China.

Fourth, the government faces fiscal pressures and the migration towards EV would be a chance for Putrajaya to reap the migration dividend in the form of more duty and levy revenue. This does not mean raising those duties and levies to punitive level. It could mean just normalizing it (i.e. undo the incentives). That additional revenue could be used to either finance electrification facilities, or other pressing needs in education, health or even defense… or finance public transport projects instead of boost private vehicle ownership.

If it were up to me, I would quickly cut short these incentives. Immediate reversal of policy is likely too disruptive to be good and that suggests undoing it by end of 2024 sounds reasonable.

Otherwise, these EV incentives do have sunset clauses. I would recommend letting them lapse. But waiting until 2025 might be too long for Malaysia to benefit for changing global landscape.

Hafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reserved

[1] — Given early (still?) focus on luxury electric vehicles and the government being overly focused on retail side of EV supply chain, the policy might have been captured by what I would call hobbyist lobbyists, i.e. rich men who take electric vehicle as a symbol of prestige.

It definitely didn’t help with the perception when early major lobbyist was an association named Malaysian Electric Vehicle Owners Club.

If the policy had not been captured, it would have focused early on the mass market, allowed leeway for cheap but reliable Chinese brands instead of the likes of Tesla, and also would provide better stress on industrial rather than retail.

Categories
Economics Politics & government Society

[2982] Insufficient law enforcement as a symptom of fiscal pressures

Rules and regulations would become non-credible if it is unenforced enough. Smoking ban at eateries. Running the red light. Private vehicles on bus lanes. Illegal parking by the roads. We all have seen these cases frequently that violations are expected to be the norm.

In frustration, a person recently publicly tweeted Health Minister Dzulkefly Ahmad to complain about zero enforcement of the smoking ban. The Minister replied that the Ministry indeed enforced the bans and shared some statistics of people caught violating the rules. He shared that more than 96,000 citations were given, and 42,000 alone were linked to violations at eateries. So, technically, the Minister is right. There has been a non-zero enforcement. Yet, a non-zero is not sufficient.[1]

After all, what is the percentage of 42,000 caught violators to total violations?

The actual answer might be difficult to get to without a proper survey. But we can run a guesstimate. One 2018 paper suggests there were 5 million smokers in Malaysia.[2] Let us assume several things:

  • The 2024 figure is the same as suggested by the paper.
  • 1% of the 5 million are regular violators.
  • These 1% visit a restaurant (mamak) at least once a month (12 times a year).
  • They violate the smoking ban during every visit.
  • There is no corruption.

If we agree these are reasonable assumptions (these assumptions all in all are very conservative, except maybe the no-corruption part), then the 42,000 citations (caught violations) would represent only 7% of total assumed violations (caught and uncaught). The 7% figure suggests a low rate of enforcement. The revealed preference suggests that if the 7% figure is right, then it is below the rate necessary to make the law credible.

But even if we reject these assumptions and reject that 7% guesstimate, there is also revealed preference at work here: the fact that violations keep happening suggests the actual ratio must be very low that many continue to ignore the regulation brazenly.

These smokers ignore the ban because they do not believe they would get caught. And if they do get caught at all, the cost they would suffer is low. This is true not for just the smoking violations, but other things as well.

The laws themselves are meaningless if people do not believe in it. It is the act of enforcing enough that make people believe certain laws are credible.

But enforcement is expensive. Enforcement has been funded and here is where there is a link between insufficient enforcement and the fiscal pressures the government faces. To put it differently, resources are scarce enough that funding has to be prioritized and not enough has been channeled to boost the ratio of citations/total violations.

I take this as yet another symptom of the government being underfunded, and a case of needing to raise taxation level in Malaysia from its current low levels.

Hafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reserved

[1] — Hi & Thanks Paul @paultantk Lest you missed these..lm attaching it here for you et al to peruse..for your ‘zero enforcement’ n ‘completely toothless’ law. [Dzulkefly Ahmad. X. Accessed March 31 2024]

[2] — Approximately 5 million Malaysian adults (22.8%), aged 15 years and over, were current smokers. The prevalence of current smokers was significantly higher in males (43.0, 95%CI: 42.0-44.6) compared to females (1.4%, 95%CI: 1.0-1.8), as a whole and across all socio-demographic groups. The Chinese (14.2%, 95%CI: 12.7-15.9) and Indians (16.5%, 95%CI: 13.9-19.4) had a significantly lower prevalence of smoking compared to other ethnic groups. Adults aged 25- 44 years (28.3%, 95%CI: 26.9-29.8) reported the highest prevalence of smoking, but those with tertiary educational attainment (14.9%, 95%CI: 13.5-16.3) and those with an income level at the lowest (16.5%, 95%CI: 14.6-18.6) or highest (19.3%, 95%CI: 17.7- 21.1) quintile had significantly lower prevalence of smokers. On the other hand, the smoking prevalence was significantly higher among the self-employed workers (35.4%, 95%CI: 33.2-37.6) and those who worked in the private sector (31.7%, 95%CI: 29.8-33.6), compared to government servants, retirees and homemakers [Prevalence and factors associated with smoking among adults in Malaysia: Findings from the National Health and Morbidity Survey (NHMS) 2015. National Center for Biotechnology Information. National Library of Medicine. Accessed March 31 2024]

Categories
Economics WDYT

[2976] Guess the 2Q23 Malaysian GDP growth

The second quarter GDP for Malaysia will be published tomorrow, at noon Malaysian time.

As a reminder, the first quarter economy grew by 5.6% year-on-year. That was a surprisingly resilient quarter, despite deceleration in growth.

How fast do you think did the Malaysian economy expand in 2Q23 from a year ago?

  • 2% or slower (8%, 1 Votes)
  • 2.1%-3.0% (38%, 5 Votes)
  • 3.1%-4.0% (23%, 3 Votes)
  • 4.1%-5.0% (23%, 3 Votes)
  • 5.1%-6.0% (8%, 1 Votes)
  • Faster than 6.0% (0%, 0 Votes)

Total Voters: 13

Loading ... Loading ...

All available statistics point towards a second quarter slowdown. Export numbers during the quarter have been horrible, and the country’s industrial output, given how Malaysia is an small, open economy, has not been doing well either.

Part of the reason why the decline in exports and industrial output is due to the extraordinary post-lockdown growth, amid severe supply chain complications: that created an extremely high base effect and that effect will likely persist until the third quarter.

But that should distract us from the ongoing global growth slowdown. Europe is in recession and China is in trouble. The only real bright spot is the US, which is surprising because much, much earlier, many had expected the country to go into a recession.

But the US strength itself is causing troubles elsewhere in the form of capital outflows and foreign exchange volatility, since it gives more room for the Fed to raise rates. The end of the hike cycle keeps getting delayed.

The good news is that the domestic labor market remains solid, and there has been a little bit more medium-term direction given out by this government. The political heat has come down a bit after the recent state elections, which hopefully, will convince the government to shift more attention towards the economy, and other nation-building exercise.

And challenges in the next several quarters will not be small. Next in the list is a strong El Nino phenomenon, resulting, very likely, the hottest season we will go through yet. That will require a little bit of preparation: water supply, electricity transmission, manufacturing inputs, health services, firefighting services, etc.

And I pray there will be no forest fire and haze this time around.

Categories
Economics Politics & government

[2970] Politics of living costs and the inevitable language of austerity

Extraordinarily, the Economy Minister has been holding press conference for every consumer price index release in the past few months. Extraordinary, because in the past, CPI releases were treated with silence by the government, and from time to time, cited in largely unread government press statements. But the new Minister, Rafizi Ramli, is focused on cost of living issues. He sees CPI statistics as a way to regularly talk about it.

He is not alone in focusing on living costs. Information Minister, Fahmi Fadzil in an interview recently said:

“The people don’t really care about the slogan, they care about the cost of living, prices of goods and internet access. Therefore, it is essential for every minister and ministry to act immediately to resolve issues of concern to the people.” [Fahmi: ‘Govt to solve people’s issues through Malaysia Madani concept’. Bernama. New Straits Times. January 25 2023]

A very, very short history of living costs politics

Component parties of Pakatan Harapan (and previously Pakatan Rakyat) have a long history of stressing on living costs politics. When energy prices were high in the late 2000s, DAP, Pas and PKR were pressing on the cost-of-living buttons furiously, and that played well to popular anger at that time.

Furthermore, the focus on living costs is a way to shift attention away from race and religion, towards more welfare-based issues. That shift is something to be welcomed, definitely.

Regression in policy

But as I have written earlier, while living costs deserve attention, the the politics of living costs is counterproductive in many ways. Such politics is the reason why policy progress Malaysia made in the past 10-15 years with respect to welfare policy has been partially reversed. Specifically, I am referring to the shift from subsidies to cash transfers. Cash transfers in many ways superior to subsidies in terms of welfare enhancing. Therefore, blanket subsidies and cash transfers are meant to be competing policies.

Yet, now, we have both and the government for the past 5 years have taken the two as complementary. The confused policy mix is proving to be expansive. And it does not help that the government is scared of new taxes, and prefer hard-to-implement-but-low/unstable-revenue taxes to easier-and-high/stable-revenue ones, which causes a severe fiscal constraint.

Rafizi, who previously was a strong believer in blanket petrol subsidies, appears to have walked back, perhaps after realizing the state of government finance, He, along with Prime Minister-Finance Minister Anwar Ibrahim, are now talking about targeted subsidies instead, which has been discussed since at least 2019, not long after blanket subsidies were reintroduced. But having both targeted subsidies and cash transfers are still a confused policy mix. The ideal would be to move to cash transfers fully.

Politics of living costs almost always means large subsidies

The politics of living costs is counterproductive because, with its logical framework, the easiest way to address it is through subsidies and price controls. Other ways—wage hikes for one, or competition regulations—are much harder to implement and takes longer to be realized. The thing with subsidies is (in some ways cash transfers too, but at least cash transfers is much, much more efficient in enhancing welfare while it can always be clawed back via taxes if the wrong persons received it), it tends to take resources away from other things, like funding healthcare, investing and maintenance infrastructure or building defense capabilities in a region has been taking peace too much for granted.

You cannot solve these structural long-term things, if politics of living costs that is always in the now, is the ultimate priority.

The language of austerity

Since such politics takes resources away from many things, it sets the tone of belt-tightening: pay cuts, no pay, RM1.5 trillion government debt (and liabilities), etc. When there is so little left for anything else, usually, a lot of people would be scared and pull back what they could, except subsidies.

Anwar Ibrahim, at a forum in Jakarta, quipped that Malaysia was no longer the country of the 1990s in response to a request by an Indonesia luminary for more Malaysian scholarship for Indonesian students.

Rafizi, just this week, said:

“It is like an overweight person. You know your ideal weight and you constantly remind yourself that you are getting worse,” he said at a forum titled ‘Resetting the Malaysian economy’ organised by Parliament.

“The solution is simple. You need to eat less. If you want to eat a lot, you need to run more. Doctors, gyms will tell you that. Most struggle despite the diagnosis.

“That’s where we are as a country. With the current fiscal trajectory, things will get worse. It takes a lot of courage, political will and cohesion with all stakeholders (to carry out changes).”

[Fixing economy like fat person trying to lose weight, says Rafizi. Joel Shasitiran. FMT. January 27 2023]

Fat. Diet. Those are words one typically associates with austerity. We do not have austerity, but using this kind of language, it would impress many that there is one.

And the source of this language, and the wider fiscal problem the government faces is the politics of living costs.

This second Pakatan Harapan government appears to be repeating some of the mistakes of the first Pakatan Harapan government: too much focus on government financial burden that it was accused of running austerity policies, despite the fact, clearly, there was no austerity at play.