EcoTV Week

Malaysia: A new prime minister but still high political instability

12/08/2022

Summary: In November, Anwar Ibrahim became the new prime minister but the political environment remains particularly unstable. However, in the past three years, the Malaysia’s economy has been buoyant and resisted fairly well to successive external shocks. Economic growth is robust. Although public finances are still weaker than before the pandemic crisis, they have strengthened since the beginning of the year.

Transcript

On November 24th, the king of Malaysia was bound once again to choose the Prime Minister. The appointment of Anwar Ibrahim might not bring the political stability which the country needs to implement major reforms. To establish his authority, the new Prime Minister has already announced a vote of confidence in Parliament on December 19th.

Despite more than three years of great political instability, the economic situation in Malaysia remained strong. The economic growth is solid. The risk on refinancing of government debt is very limited. Malaysia managed to absorb the successive shocks.

In the first three quarters of 2022, the economic growth reached 9.4%. According to the last forecasts of the central bank, growth should exceed 7% for the full year. As a raw materials exporting country, Malaysia benefited from increasing prices. Internal demand remained strong. The government has implemented a subsidy policy to support household purchasing power. Besides, growth in the services sector has been supported by the gradual return of tourists.

The outlook for 2023 is less favourable. The Malaysian economy should be impacted by monetary tightening, reduced global liquidity and economic slowdown in developed countries. According to the central bank forecasts, the economic growth should settle between 4% and 5%.

Public finances have been supported by a strong rebound in economic activity even though they are still more fragile than before the COVID-19 pandemic. The budget deficit has been significantly reduced in the first three quarters. It should settle at 4.5% of GDP over the whole year against 6%, 6.5% of GDP in the last two years. Despite the huge increase in household subsidies, the dividend increase in oil and gas activities has offset this rise in public spending.

What matters is the budget strategy of the new government. The Prime Minister, who proclaimed himself minister of finance, has already announced his intention to continue to support household purchasing power. But instead of allocating subsidies to the whole population, he will focus his budget efforts on the poorest households. The budget for 2023 will be officially announced by the new government at the beginning of January. The question of interest to economists and markets is whether or not the new government will reintroduce the tax on goods and services that was removed in 2018. The reintroduction of this tax could allow the government to rise its budgetary revenues significantly and increase its room for manoeuvre to support the population in case of a new shock. There is no concern about the evolution of the debt. It should remain below the threshold of 65% of GDP, set by the Parliament. We will know within a few weeks.

THE EXPERT ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE