The cost of living is rising. As developments advance across the world, global market trends fluctuate, unpredictable movements of currencies occur in major economies and its partners, and many other inflation factors, the cost of living is undeniably on the rise.
What may cost RM1 five years ago, might now amount to RM5 or even RM10. A RM800 minimum wage five years ago, is now probably not enough for a single adult to afford a comfortable standard of living.
While Malaysia’s consumer price index (CPI) saw only a three to 3.7 per cent increase for the last few years, Malaysia’s CPI has been on gradual rise for the last 10 years.
Bank Negara Malaysia (BNM) also reported that Malaysia’s headline inflation increased to 3.7 per cent in 2017 (as compared to 2.1 per cent in 2016).
“Inflation remained volatile during the year and was primarily driven by higher domestic fuel prices. Higher global commodity prices and disruptions in domestic food supplies also contributed to the higher inflation.
“This, however, was mitigated by the stronger ringgit exchange rate since April 2017, which helped contain the rise in production costs for domestic goods. Core inflation was also higher in 2017, averaging at 2.3 per cent for the year (compared with 2.1 per cent in 2016),” it said.
Nevertheless, it pointed out that demand-driven inflationary pressures remained largely stable given the lack of persistent tightness in capital stock and the absence of significant wage pressures.
Consumer sentiments had also taken a beating from the rise in the cost of living.
SOURCE: The Conference Board Global Consumer Confidence Reoort, in collaboration with Nielsen (Q4 2017)
Malaysia’s consumer sentiments index (CSI), which indicates Malaysians consumer spendings or Malaysians willingness to spend saw a rise of 8.4 points quarter-on-quarter (q-o-q) for the first quarter of 2018 (1Q18) but it still remains below 100-point optimism threshold.
Malaysia Institute of Economic Research (MIER), in its CSI 1Q18 announcement, it pointed out that Malaysia’s current household incomes are steady while job and financial expectations improve.
However, there are concerns over rising prices moderating. Hence, it believed that consumer spendings or shopping plans have weakened during 1Q.
According to the latest The Conference Board Global Consumer Confidence Survey, in collaboration with Nielsen (formerly known as the Nielsen Global Survey of Consumer Confidence and Spending Intentions report), while the confidence level in Malaysia remained steady last year, it climbed two spots to be the 30th most confident country globally in the quarter.
It noted that the Malaysia consumer confidence index remained stable in the fourth quarter of 2017 at 94 percentage points (pp), up one point from the previous quarter and up 10 points compared to 4Q16,
“The consumer confidence level for Malaysia has been largely flat for the third quarter in a row. While it remains below the neutral threshold, Malaysian consumers are more confident than they were this time last year,” said Raphael Pereda, Nielsen Malaysia’s managing director.
The report also pointed out that despite positive economic indicators such as GDP growth, positive FMCG growth and improvements in consumer spending compared to 2016, recessionary sentiments among Malaysians remained high, with 80 per cent of respondents saying that they believed the country was experiencing a recession (down five per cent compared to 85 per cent in 4Q16).
Even if economic conditions improve, close to a third of respondents said that they will continue to spend less on new clothes (37 per cent) and that they will continue to save on out-of-home entertainment (28 per cent).
“Malaysians, like their peers in Southeast Asia, have historically been prudent spenders and they continue to be mindful of discretionary spending, while placing more emphasis on building a financial nest for the future,” said Pereda.
As the cost of living rises, one way to elevate this pressure and improve consumer sentiments to further drive private consumption in Malaysia is to raise the people’s source of income.
Bank Negara Malaysia (BNM) has called for the citizens to aspire to attain an acceptable living wage level as Malaysia heads to becoming a high-income nation.
“Since 2014, the incomes of the bottom 40 per cent (B40) of households expanded by 5.8 per cent on an annual basis, equivalent to RM156 per month.”
“However, expenditures grew at a faster pace of six per cent, or RM120 per month, which leaves the B40 with little money to spend,” BNM Governor Tan Sri Muhammad Ibrahim told a media briefing after the release of the BNM Financial Stability and Payment Systems Report 2017.
Muhammad said living wages in Kuala Lumpur (KL) in 2016 was estimated at RM2,700 for an adult, RM4,500 for couples without children and RM6,500 for couples with two children.
“This is just a guideline used by many advanced economies to give an idea on what type of wage is considered decent. In Malaysia, the highest cost of living is actually here, and to a certain extent, the suggested minimum wage could also be applied in Penang and Johor Bahru,” he said.
“If you are single person living in Muar, and you earn RM2,700, you will live very comfortably because the rental rates and the cost of living are low,” he said.
He said such living standards went beyond having basic necessities, as it included meaningful participation in the society, personal and family development and freedom from severe financial stress.
The provision of living wage should also commensurate with productivity, and could be a step towards a higher quality of life in Malaysia, he said, adding that the living wage could serve as a guide of the income level needed to achieve the minimum acceptable living standard.
“There are two aspects to be considered – cost of living and improvement in income – and this is why the government has embarked on various strategies that could create high paying jobs,” he said.
Muhammad said BNM is planning to set up the Malaysia Bureau of Labour Statistics, which would enable the government to keep tabs on job creations and monthly salaries.
BizHive Weekly explores the possibility of raising the average minimum income in Malaysia:
High time for a wage raise
In 2010, Malaysia had announced that it will implement the minimum wage policy which made it compulsory for employees to be paid above the ‘legal floor wage’ in hopes to ensure employees would be able to afford a reasonable basic standard of living as well as to reduce poverty and inequality in the labour market in terms of wage distribution.
This policy also required the average minimum wage to be raised every two years.
The National Minimum Wages initiative in 2010 also led to the National Wages Consultative Council Act 2011 (Act 732) which was gazetted in 2011, and the establishment of the Minimum Wages Order 2012 which required employers with six employees and above, to raise their minimum wage by 2014.
Subsequently, the last time Malaysia’s average minimum salary had been called for a raise was in 2016, with the implementation of the Minimum Wages Order 2016. The minimum wage was expected to increase to RM1,000 per month for Peninsular Malaysia, and RM920 per month for East Malaysia and Labuan.
This year, most analysts are expecting that Malaysia’s minimum wages will be raised, despite the uncertainties the 14th General Election (GE14) brings.
Whether or not there will be a Minimum Wages Order this year or a new wages policy by the new government, Malaysia is now due for a review.
According to the research arm of Maybank Investment Bank Bhd (Maybank IB Research) in its special report on minimum wage, now, the expected level of minimum wage demanded by the trade unions and workers representatives is RM1,500 per month.
It noted that this was based on the basic metric or minimum benchmark suggested by the International Labour Organisation (ILO) to set/reset minimum wage, which is to use Poverty Line Income (PLI) as a guide to allow for workers to be able to cover the costs of basic needs, namely adequate nutrition, clothing and shelter.
Of note, the basis of the implementation of minimum wage in 2010 was to ensure that workers at the lowest level of wage distribution should receive above the PLI recommended by ILO.
“When the minimum wage was reviewed in 2016 to RM920-RM1,000, the PLI has risen further to RM960 for Peninsular Malaysia, RM1,020 for Sarawak and RM1,180 for Sabah & Labuan,” Maybank IB Research noted.
Using the compounded annual growth rate of PLI between 2009 and 2016 of 2.9 per cent per annum for Peninsular Malaysia, 1.4 per cent per annum for Sarawak, and 1.5 per cent per annum for Sabah & Labuan, the research team expected that the PLI for Peninsular Malaysia, Sarawa, and Sabah & Labuan to be at RM1,017, RM1,049, and RM1,216 respectively this year.
Nevertheless, while minimum wage should be raised this year, the prospects of a hike still hinges on the employers’ willingness to give the raise.
The research house pointed out that based on a survey on the impact of minimum wage reported in the National Employment Returns Report 2016, published by the Institute of Labour Market Information and Analysis (ILMIA), a majority of companies surveyed (60.8 per cent) experienced lower profits as a result of the implementation of minimum wage.
“However, the report highlighted that such high proportion was due to companies being accustomed to low-cost labour strategy. Following this, the second highest impact was the reduction in workforce (36.5 per cent of the companies surveyed) to contain both labour cost increase and profit margin erosion,” it stressed.
With higher income, comes higher productivity
While the average minimum salary in Malaysia needs to be increased, the pay-off should also be more productivity in the country to compensate for the cost to bear in increasing the overall minimum wage.
However, BNM in its ‘The Living Wage: Beyond Making Ends Meet’ report, pointed out that the Malaysian economy faces the challenge of modest productivity growth relative to its peers.
Based on data from the ILO, it noted that between 2011 and 2017, Malaysia’s growth of GDP per person employed – a measure of labour productivity – is only 1.7 per cent, less than half of the average labour productivity growth in upper-middle income economies (3.8 per cent).
“Persistently weak productivity growth risks lower wage growth, which could ultimately hamper the ability of households to afford at least a minimum acceptable living standard,” BNM warned.
It suggested that the move towards productivity-led wage growth relies on wide-ranging support from all parts of the economy.
“Governments can foster a conducive environment for employers to improve productivity by ensuring the availability of good institutional support, minimal regulation on productive
investment activities, and the affordability of training and higher-level education,” it said.
The central bank also advised that incentives are also key to drive motivation for employees to increase their productivity or upgrade their skills.
“Employees need to also recognise the importance of self-improvement to achieve a higher wage level that can sustain a minimum acceptable living standard, and take the initiative to upskill,” BNM stressed.
As Malaysia develops into a progressive high-income nation, it highlighted that all segments of society should reap the benefits and not be dislocated in the process.
“It is thus important that Malaysia overcomes the challenge of modest productivity growth, and strives towards creating high productivity, high-paying jobs that could afford a minimum acceptable living standard,” it said.
The promise of raising minimum wage
BNM in its Annual Report 2017 had highlighted that Malaysia’s transition to a high-income and developed nation is at risk, as long as firms are still engaged on a ‘race to the bottom’ in relation to labour costs. It stressed that companies are unwilling to pay more, despite commensurable productivity gains had they adjusted.
“Employment of cheaper foreign workers vis-à-vis locals allows employers to keep wages low and in doing so, obviates the pressure to change the status quo.
“This distorts the natural wage clearing mechanisms that would have otherwise driven wages upwards,” it said.
It added that median wages of foreign workers are generally lower than those of locals, especially in mid-skilled occupations where 60.8 per cent of locals are employed.
“It is entirely plausible that the very high presence of foreign workers in the private sector could widen wage differentials and deter job creation for locals.
“This is most evident in the Gulf Cooperation Council economies where 88 per cent of private-sector jobs created from 2000 to 2010 were taken by foreign workers, of which 85 per cent of them were low-skilled,” it said.
Therefore, in a move to what it hopes could increase minimum wage, the newly minted Pakatan Harapan (PH) government pledged to reduce the number of foreign workers from six million to four million in the first term of its adniminstration.
In its manifesto, it said, “Pakatan Harapan Government will raise the minimum wage there to be equal to that of the Peninsular. Minimum wage will be raised to RM1,500 per month nationwide in the first term of the Pakatan Harapan Government, and we will review this rate every two years.
“To reduce the burden on employers, the Pakatan Harapan Government will share 50 per cent of the due to the raise in minimum wage.
“This means that when the minimum wage is raised from RM1,000 to RM1,500, the Pakatan Harapan Government will share the cost difference of RM500 with the employer equally.”
If the new government successfully implements a new policy to ensure that Malaysia’s minimum wage continues to increase as the nation develops, private consumption, Malaysia’s main economic source, will also rise, driven by improved consumer
sentiments.
MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) highlighted, “MIER’s consumer sentiment index rose firmly to 91.0 points for the 1QFY18 from 82.6 in the previous quarter, this is the highest since 3Q14.
“With the expectation of GST abolishment and higher minimum wages, we expect that consumer sentiment will still be on its upward trajectory to pass the 100 optimistic threshold level.”
It also noted that at company level, it expected that no significant changes in bottom line performance in short to medium term.
“While the consumer sentiment will improve and encourage spending, and hence improve topline performance of consumer companies, the additional administration expenses involves in GST abolishment as well higher staff costs will increase overall operating expenses,” it noted.
The research arm of Affin Hwang Investment Bank Bhd (Affin Hwang) also pointed out that higher minimum wage is not expected to have a substantial impact on corporate earnings because it is expected to take place gradually, over several years.
“Also, companies can easily absorb it through the cost saving from lower tax rates or pass it to consumers.
“Despite the unexpected outcome of the election, we believe that consumer sector’s share price performance should relatively outperform, given the resilience of private consumption and consumers being net beneficiaries of PH’s manifestor,” the research team opined.
Meanwhile, Maybank IB Research noted that for companies, the minimum wage hike will have varying. However, it estimated the overall impact to be negative.
“While some sectors are able to pass on the higher wage bill in full or in part (auto, glove producers, technology), there are others which are unable to pass on the higher costs either due to the high degree of competitiveness in their industry (services), or the nature of their industry which does not allow cost pass-through (up-stream oil palm plantation).
“Among them, we believe the up-stream oil palm plantation will be the most affected as the industry is also labour intensive while the adoption of mechanisation especially in harvesting has its limitation,” it said.
It added, it is reasonable to expect across-the-board ‘knock on’ effect, on not just those currently earning at/around the present minimum wage of RM920 to RM1,000 per month and below the next-five-years target level of RM1,500 per month.
However, it pointed out that the PH manifesto did say that the government would share the cost of higher wages.
Overall, the minimum wage hike is mainly targetted at benefiting consumers.
MIDF Research viewed: “Moving forward, we view private consumption to remain expanding at solid pace, above the RMK’s target of 6.4 per cent. As for 2018, we project private consumption to rise by 6.5 per cent.
“On the other hand, despite of a slight tone down of Household Debt-to-GDP ratio from 88.3 per cent in 2016 to 84.3 per cent in 2017, further reductions of the debt is in need to ensure debt risk in
Malaysia on safe side.”
PH’s manifesto for people’s wages and possible impact on sectors:
Glove sector:
• Negative for the gloves sector as the sector is highly dependent on foreign
labours.
• Foreign labour makes up to about a majority of the total workforce employed by the gloves manufacturing companies in Malaysia and a shortage of foreign labours could potentially hurt the gloves industry’s earnings
• PH government has also proposed to bear half of the hike, therefore, the earnings impact could be lesser than anticipated.
Plantation sector:
• Negative for the plantation players as the industry is highly labour intensive and employs mostly foreign workers who are paid near or slightly above the current minimum wage.
• Compensation of harvesters will also have to be raised.
• Proposed minimum wage increase would be staggered over a period of five years, companies could improve workers productivity or invest in more mechanisation.
Property sector:
• Minimal direct impact for developers but possible indirect impact from the contractors.
• Higher labour cost could be passed on in terms of higher contract values.
• Margin compression to continue as developers may not be able to pass on the additional costs to buyers if a weak property market prolongs.