With the right measures we won’t need to revise our long-term targets
AS American folk singer Bob Dylan sang, “For the times they are a-changin’.”
And changing they surely are not for the better right now but for the worse. The World Bank has revised its forecast for the growth in the world economy this year down to 2.2 per cent from its earlier 2.4 per cent while the International Monetary Fund is lowering its forecast to 3.1 per cent from 3.3 per cent.
While there is recovery in the world economy, it is slower than earlier anticipated. And things will not be as good as earlier anticipated for a while at least until growth picks up again next year.
In line with this, Bank Negara Malaysia has revised its forecast for gross domestic product (GDP – sum of goods and services) to grow at a slower pace of 4.5 to 5 per cent this year instead of 5 to 6 per cent.
In the Eurozone, the recession has ended while the US continues with its recovery. Good news for the world economy, but in the short-term not great news for the developing economies as the US tapers off its quantitative easing policies to flood the system with easy money when it bought bonds.
As is common in capital markets, the impact from these moves have been exaggerated. While capital migrates back to the US because of a narrowing of the interest differentials between low US interest rates and higher ones in this part of the world, the likelihood that Asian currencies will remain depressed is unlikely.
But in the meantime, we have to manage our own economy well to dissipate and restore any short-term loss of confidence in our markets or economy.
For Malaysia, growth is still very important and will likely remain over 4.5 per cent for this year despite softer conditions in the world economy. Our gross national income is still increasing and we are still on target to achieve developed status by 2020 – an income of US$15,000 per capita. Our long-term investments are still showing growth and this is evident in strong domestic demand and private investment. Private consumption and investment are still the key drivers of growth growing 7.4 per cent and 11.8 per cent respectively in the first half of this year.
In the first half of this year, private investment was the highest in eight years, amounting to 18.6 per cent of GDP while public investment amounted to 9.7 per cent to make a total investment of 28.3 per cent of GDP.
The private sector accounted for the lion’s share of investment in the second half, accounting for 65.7 per cent. It is likely to exceed the targeted RM148.4 billion in investments for the full year with RM85.7 billion or 57.7 per cent of the target achieved in the first half.
These are NOT signs of an economy in decline but a vibrant one given the tough external conditions. While there is pressure on the ringgit currently because of capital outflows, this is not likely to be sustained and, like quantitative easing, will taper off.
Bank Negara governor Tan Sri Zeti Akhtar Aziz is confident we have enough tools in our kit to manage this without even having to resort to capital controls.
While much has been said about our budget deficit, the government is confident of keeping to the immediate target of reducing the deficit to 4 per cent of GDP for this year from 4.5 per cent last year and achieve the 3 per cent target by 2015. We still expect to balance the budget by 2020.
In terms of the national debt, we still plan to keep it below 55 per cent of GDP although many other countries have a level which is much higher than this. The ability to repay is actually more important than this.
Going forward, if necessary we will reschedule some projects to improve our current account (net trade in goods and services) position. The second quarter of this year showed a sharp decline in the surplus.
What we will do is to prioritise projects which have low import content and high multiplier effects, in other words we will bring forward those projects where we do not need to import but which have widespread impact on the economy. The government is studying this.
Meantime, our tax collection is good and after having collected RM95.4 billion in the first half, we are confident of passing last year’s record of RM207.9 billion as tax collection is seasonally higher in the second half. Also, we are setting the stage for broadening and streamlining the tax base in future years by consumption taxes via a goods and services tax which will tax more those who can afford it and who are not captured under the current system of income taxes.
We will also be considering a system of subsidy rationalisation, gradually replacing blanket subsidies with those which directly target the poor. If we do these things, we don’t have to revise our longer term targets. While exports are down, that is partly because of weakening global growth but this will accelerate next year. A depreciated ringgit will help make exports more competitive and likely bring in more foreign exchange. In tough times, transformation will still continue – in fact it is needed now even more than ever.
(Datuk Seri Idris Jala is CEO of Pemandu, the Performance Management and Delivery Unit, and Minister in the Prime Minister’s Department. Fair and reasonable comments are most welcome at idrisjala@pemandu.gov.my).