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Beacon of hope for economy, businesses in 2022

Beacon of hope for economy, businesses in 2022

KUALA LUMPUR: Looking back at the eventful 2022 when Malaysians voted for a new government while on the other side of the globe, the Ukraine-Russia war continues to sow death and destruction to the people, April 1, 2022, however, marked D-day for Malaysia as its borders finally reopened after two years of COVID-19 closure.

It means the country has officially entered the “transition to endemic phase” of COVID-19, and the people and businesses can eventually return to their nearly pre-pandemic normal life after being stuck in a quandary since 2020 due to the on-again-off-again lockdowns throughout the pandemic.

The reopening of borders is like a beacon that sends out light and hope at the end of the long, dark tunnel, although Malaysia, like every country in the world, continues to face challenges caused by external headwinds such as the Ukraine-Russia war, global crude oil price volatility, China’s economic slowdown due to strict COVID restrictions and inflation fears.

Back home, the formation of the unity government comprising Pakatan Harapan (PH), Barisan Nasional (BN) and Gabungan Parti Sarawak (GPS) led by the new Prime Minister Datuk Seri Anwar Ibrahim is set to revitalise the confidence of the people and investors.

He assured that the unity government under his administration will ensure the stability of the country and its economy, as well as uphold the spirit of the Federal Constitution.

Anwar also said Budget 2023 will be reviewed and modified, taking into account the views of the Finance Ministry (MoF) and newly appointed Unity Government Cabinet.

To recap, the then Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz had tabled a RM372.3 billion Budget 2023, the largest allocation in Malaysia’s history on Oct 7, 2022. Three days later, on Oct 10, Parliament was dissolved to make way for the 15th General Election (GE15) on Nov 19, 2022.

Under the Unity Government, Zafrul is Minister of International Trade and Industry (MITI).

On Dec 19, 2022, the 15th Parliament session will seek to approve the civil servants’ emoluments.

Borders reopening fuels GDP growth

Malaysia’s economy started to see green shoots in the first quarter (Q1) of 2022 when its Gross Domestic Product (GDP) expanded 5.0 per cent year-on-year (y-o-y), attributable to the easing COVID-19 containment measures which led to the improving domestic demand as economic activities normalised.

With the borders reopening alongside the special one-off withdrawal of RM10,000 from the Employees Provident Fund (EPF) in April 2022, the country’s GDP continued to grow strongly by 8.9 per cent y-o-y in Q2, outperforming several developed and regional countries, including China (0.4 per cent), the United States (1.6 per cent), European Union (4.0 per cent) and Singapore (4.4 per cent).

According to Bank Negara Malaysia (BNM), the Q2 performance was supported by the strengthening domestic demand underpinned by the steady recovery in labour market conditions and the ongoing policy support, despite the low-base effect from the Full Movement Control Order (FMCO) last year.

In Q3, Malaysia’s GDP sustained a stronger rate of 14.2 per cent, the fastest growth pace among its ASEAN peers as it was fuelled by continued expansion in domestic demand, robust electrical and electronics (E&E) as well as non-E&E exports, ongoing policy support as well as firm recovery in the labour market, whereby the unemployment rate shrank to the lowest rate of 3.6 per cent in September 2022 from a peak of 5.3 per cent in May 2020 during the pandemic.

Given the healthy growth in the first nine months of 2022 of which the GDP grew by an average of 9.4 per cent y-o-y, BNM governor Tan Sri Nor Shamsiah Yunus expected the full-year 2022 growth would exceed the 7.0 per cent target projected earlier, and the economy is projected to grow by 4.0-5.0 per cent in 2023.

Touching on foreign direct investment (FDI), data from the Department of Statistics Malaysia (DoSM) showed it grew to RM860.8 billion at the end of Q3 2022 against RM763.20 billion in Q3 2021, with the source for the FDI largely from Singapore (20.6 per cent), the United States (11.5 per cent) and Hong Kong (10.7 per cent).

On exports, DoSM statistics showed that from January to October 2022, Malaysia’s exports increased 28.5 per cent y-o-y to RM1.29 trillion against RM1.0 trillion in the same period last year, while imports surged 35.4 per cent y-o-y to RM1.08 trillion from RM801.0 billion previously, with trade surplus gaining 1.3 per cent y-o-y to RM205.61 billion versus RM202.91 billion.

Inflation, the culprit of interest rate hikes

It all started in the United States (US) when its consumer price index spiked since the beginning of the year to hit a 41-year high of 9.1 per cent in June 2022.

To stamp out the stubbornly high inflation, the US Federal Reserve aggressively raised the interest rate for six consecutive times since March this year with a total increase of 375 basis points. This had brought the benchmark rate to touch a range of 3.75-4.00 per cent in November 2022 from a range of 0-0.25 per cent in March 2022.

Compared with the US, inflation in Malaysia was relatively mild where the headline and core inflation increased moderately to 2.8 and 2.5 per cent in Q2 from 2.2 and 1.7 per cent in Q1, reflecting an improvement in demand conditions amid the high-cost environment, with price increases mainly driven by food prices.

However, inflation continued to climb higher in Q3 with the headline inflation rising to 4.5 per cent while core inflation increased to 3.7 per cent. It was mainly driven by the base effect from the discount on electricity bills implemented in Q3 2021, as well as sustained increases in core inflation and price-volatile items.

Although the governor expected the headline inflation to have peaked in Q3, she projected the inflation would remain elevated by year-end and reassured that Malaysia is not expecting a recession in 2023, in line with the improvements in economic growth.

On the overnight policy rate (OPR), in view of the hawkish US Fed’s interest rate hikes and rising inflation in Malaysia, BNM inevitably tightened the benchmark interest rate by a quarter-point in its May 2022’s meeting to 2.0 per cent.

This was the first OPR increase since the central bank retained the rate at a historic low of 1.75 per cent on July 7, 2020.

Subsequently, BNM continued to raise the OPR by 0.25 per cent each in July, September and November, respectively to end the year of 2022 with 2.75 per cent.

RM80 billion subsidy, the largest in history likely to be allocated in 2022

To fight inflation against the backdrop of surging crude oil prices where benchmark Brent crude once hit a 14-year high of US$123.21 per barrel in March 2022, the government has provided various consumption subsidies consisting of petrol, diesel, liquefied petroleum gas (LPG), cooking oil, flour and electricity to reduce inflationary pressures on the people.

The total amount of subsidies is expected to reach RM80 billion in 2022, which is the largest amount in Malaysia’s history.

Apart from that, the MoF said as of end-June 2022, Malaysia’s external debt had ballooned to RM1.128 trillion or 65.9 per cent of GDP, mainly contributed by higher interbank borrowings and the foreign currency exchange rate valuation effects following the depreciation of the ringgit, especially against the US dollar.

“In 2021, it stood at RM1.082 trillion or 70 per cent of GDP,” the ministry revealed in its 2023 Fiscal Outlook and Federal Government Revenue Estimates report released in October 2022.

MoF said that by end-2023, the overall debt is projected to be 65 per cent of GDP, while statutory debt is at 63 per cent as borrowings are still substantial due to higher allocation for development expenditure and high principal repayments obligation, which includes redemption of 1MDB’s maturing bond.

In terms of fiscal deficit, MoF expected it to be reduced to 5.5 per cent of GDP for 2023 from 5.8 per cent of GDP in 2022.

“The fiscal deficit is expected to consolidate at a gradual pace with the overall balance averaging at 4.4 per cent of GDP for the Medium-Term Fiscal Framework 2023-2025 period,” it added. – Bernama