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REALIGNING THE ECONOMY: RECENT MACRO TRENDS

The Malaysian economy did witness a burst in growth (6.4 per cent) in the last quarter

of last year, leading to an overall growth rate of 5.6 per cent for the year 2012, prompted

more by short-terms phenomenon. Worried about its long-tem implication, some disturbing

trends are now vividly appearing, which are certainly not immediately dangerous, but surelyworthy of attention. There are four emerging trends to be discussed below.

First, imports have been growing at a faster rate than exports since the beginning of

2012. While the trade balance still in surplus it has been sliding over the last year. For a

country such as Malaysia, which is export-oriented, it would be desiarable and the economy

would be more sustainable to expect exports to be increasing more rapidly than imports. It

will be unsustainable if the trend continue over a long period of time. The trend however is

not entirely bad because the rapid increase in imports was observed in the capital and

intermediate goods category. A positive account of this trend could be to point to the need

for more capital and intermediate goods to replinish old stock and to build new ones as the

economy is entering into global recovery cycle and gearing towards more sophisticated and

capital-intensive methods of production. Similarly, it will be unsustainable if the trend inimport occurs in the consumer goods category instead, in which no value-added will be

created as the expenditure is more towards satisfying consumer demand.

Second, public consumption expenditure touched an enviable year-on-year growth

rate of 10 per cent in 2012. This brings us to the question of the sustainability of public

sector account. It is an issue that has been repeatedly discussed publically. Without going

into the somewhat questionable fiscal policy approach that has been chosen, it may suffice to

add that it is best to use high government spending with degree of discrimination, for

instance, when the external environment is unfavourable. The trends that have been observed

in the previous years indicate areas of concern, issues that have to be deliberated upon, and

for which appropriate policy measures have to be devised. Fiscal policy is prominent among

the problems that have to be grappled with. The government has mentioned that it would like

to balance the books and keep fiscal deficits under control. The pressures that come with an

election year may have exerted some pressure in deviating from its well-meaning policy

intentions. But the need to return to sound economic principles cannot be over-emphasised.

The question of fiscal reform has been put on the shelf, or so it seems. There must be a return

to the issue of fiscal reform; it must be phased; and it cannot be in a year when externally

induced challenges are overwhelming and the economy takes a dip in growth.

The above respective external and internal macro-economic expenditures considered

together bring us to the third emerging trend, the issue of rebalancing the economy.

Although it has been widely reported that Malaysia is shifting to a domestic-demand-led

growth, the distinct growth rates for the macro-components of domestic demand is a cause ofconcern. The growth rate in 2012 was far higher for public consumption (10 per cent) and

gross investment (12 per cent) than for private consumption (6 per cent). There are two

points for debate here. It must be decided, and for good reason, whether it is necessary to

switch to a domestic-demand driven economy for a small economy like Malaysia. No less

important is the mechanism for accomplishing this objective. As it stands, exports are not

vibrant enough and weak exports cannot be sufficiently compensated for by a dynamic take-

off in domestic demand.

Turning to the supply-side economics, the fourth emerging trend that gives us some

cause for concern is the macro-economic performance of the broad economic sectors. It is

the services sector that has propelled the growth of the economy. This is hardly new or

surprising because the services sector has been driving growth by about seven per cent since2010. It would have been desirable to have seen growth driven by the manufacturing sector

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as well. The manufacturing sector registered a year-on-year growth of 11 per cent in 2010

only to crash to 4.8 per cent in 2012. The slack from the manufacturing sector seems to

have been taken up by the construction sector, therein in 2012 the sector grew at 18.5 per

cent, in stark contrast to an annual growth of 4.6 per cent in 2011, and six per cent in 2010. It

would be preferable to see greater growth in the services and manufacturing sectors, rather

than in construction as the former takes substantially bigger share of the GDP than the later.This is where the hitch lies. In a sense, the massive economic transformation programmes

that the government has embarked on have resulted in the sparkling growth exhibited by the

construction sector in 2012. But that is hardly sustainable, not one of the projects that can be

repeated year in and year out.

The year 2012 recorded a slowing down in the manufacturing sector, in terms of its

year-on-year growth. If this phenomenon is part of the rebalancing that is being spoken of, it

is not at all a good sign. Structural shift in the economy that we are hoping for should not

discriminate against manufacturing as we have not reach fully matured manufacturing sector.

There are still plenty of rooms for high value-added activities in maufacturing to be reaped.

It would be satisfying to note a shift towards a technology-intensive, high-productivity

manufacturing sector. It is not encouraging when the year-on-year growth of themanufacturing sector is indifferent.

Yet another important question that has to be swiftly addressed is the growth in FDI.

Malaysia has in previous years witnessed a higher pace of growth in FDI than it did last year.

Although there is an encouraging inflow of FDI recently it is not increasing fast enough as it

should. The state of foreign direct investments (FDI) gives little reason for jubilation.

Tracing FDI trends over the previous year (i.e. 2012), it is observed that FDI as a percentage

of GDP contracted by about five per cent in the first quarter. In the second and third quarters,

the same statistic hovered around an unexciting one per cent or so. And in the fourth quarter,

it declined to a worrisome negative nine per cent. Portfolio funds saw much volatility in

2012. Portfolio investments as a percentage of GDP was wildly positive in the first qaurter

(about 12 per cent), only to shrink into negative territory the following quarter. In the third

quarter it rallied up to 14.5 per cent. Portfolio investment gave the boost to push-up whatever

shortcoming there was on the FDI side of investments.

This, surely, must be a disconcerting feature for policy makers. Growth in 2012 has

been excellent, with the growth in the fourth quarter being nothing less than astounding. But

that is not ground for complacency. As the review of some macroeconomic trends in 2012

indicates, there are areas in the economy that should be re-visited. A variety of solutions is

possible. But it would not be prudent to ignore the underlying problems.