Malaysia on track to hit high-income status
09 Oct 2024
The World Bank says the Malaysian economy is in a “good place” with sustainable growth and believes that if the current per capita output can be sustained for the next three to four years, the country could achieve high-income status by 2028.
The World Bank’s lead economist for Malaysia, Dr Apurva Sanghi, said the local economy’s strong first half (1H24) growth beat expectations, leading the international multilateral lender to revise its real gross domestic product (GDP) growth projection up by 14% or 0.6 percentage point to 4.9% for the year from 3.7% in 2023.
“The Malaysian economy is in a rather good place. Growth is back. The second quarter (2Q) growth of 5.9% exceeded expectations. Inflation is less than 2%. It’s higher than in recent quarters, but still moderate.
“Investments are on an uptick. Year-on-year investment grew in 1H24, both in terms of approved foreign direct investment (FDI) and domestic direct investment (DDI). There’s been a turnaround in exports in both the electrical and electronics (E&E) and non-E&E sectors due to the global economic upcycle.
“The ringgit has become the best-performing currency in Asia and real median wage growth is strong,” he said at a media briefing yesterday.
The World Bank expects GDP to grow 4.5% in 2025 and 4.3% in 2026.
When looking at growth per capita in real terms, per capita output in Malaysia was outperforming many of its regional peers and was 12% higher than Covid-19 pandemic levels.
“This means that high-income status is within reach. Based on our assumption with the US dollar-ringgit rate of 4.54 and average growth rate of 4.3%, we expect Malaysia to reach high-income status by 2028.
“If the exchange rate stays at the current level of about 4.2, then the high-income goal reached would be a year earlier in 2027,” Apurva said, adding that high income is not the same as high development.
Apurva warned there’s always a risk of reversal in the income fortunes as witnessed in countries without the right policy support, such as Argentina and Russia.
Increasing political stability and a conducive policy environment, in particular, had been boosting confidence and mobilising investments, Apurva said.
However, he said that the bulk of FDI had been in manufacturing and the government may want to consider undertaking reforms to attract FDI into the upstream sectors such as services.
“In Malaysia, the holy grail is to improve productivity growth. Relaxing the restrictiveness in the upstream sectors can bring about even more FDI and quality investments and lead to productivity growth in downstream sectors,” he said.
DDIs’ were also crucial and would be supported by an initiative that will see six government-linked investment companies investing RM120bil over the next five years, which equalled some 6.6% of GDP.
Although quality DDI would be helpful, the World Bank warned that policy makers should remain vigilant against potential market distortions and inefficiency.
Apurva said the government’s plan to set up the Johor-Singapore Special Economic Zone (SEZ) should take into consideration global experiences and have harmonised customs, trade and labour regulations.
“Engaging the private sector early, supporting workforce training and building sustainable practices are really important success factors, which SEZ’s like the Panama SEZ and the Suzhou Industrial Park did well.
“It is also important to establish robust monitoring and evaluation systems right from the beginning,” he said.
The multilateral institution said a comprehensive fiscal strategy that enhanced the efficiency of government spending and increased revenue without adversely impacting the poor would be crucial for restoring fiscal space to sustainably finance the country’s longer-term spending needs.
Fiscal reform efforts must be complemented by effective policy communication to secure broad-based public support for reform.
Malaysia at present was not collecting enough revenue to meet its steady needs amid prospects of an ageing population, slowing productivity growth and climate challenges.
Age-related public expenditures are expected to increase by 0.8% of GDP to almost 1% of GDP yearly between now and 2030, and then an additional 0.5% of GDP every year.
“That’s a lot of money. Talking about climate challenges, for flood resilience alone, building adaptation measures would cost about 0.2% of GDP annually. To basically future-proof Malaysia’s public finances requires a proper assessment of the cost of these structural tensions,” Apurva said.
“Hence, the country needs to future-proof its public finances. Ultimately, it’s about raising revenues and subsidy rationalisation is a very good measure to support,” he added.
Another option is to improve governance and service delivery, Apurva said. “The goods and services tax would be an option to revisit, but will require engagement with the public as taxes are never popular with anyone.”
He advised subsidy rationalisation of RON95 petrol be done gradually with middle class buy-in, as this group will be impacted the most.
Source: The Star
