Large funds may be eyeing emerging markets (EMs) again on cheap valuations and in some cases, fundamentals, but it is unclear what can happen if US rates keep rising.

“The government must have the capacity to promptly react and implement policies to counteract dampening forces on growth,” says Lee Heng Guie, executive director, Socio Economic Research Center.

Malaysia is in an initial position of strength to navigate internal and external challenges, with “a healthy pace of growth, low inflation, strength and depth of its financial sector, manageable fiscal deficit and external position,” he says.

Short-term challenges mainly involve external factors such as “faster than expected increases in US rates, outflows from EMs and rising financial market volatility,” says Nor Zahidi Alias, chief economist, Malaysian Rating Corp.

While medium term prospects for the Malaysian economy remain encouraging, much attention will be on the new focus of tackling RM200bil of contingent liabilities (debts guaranteed by the federal government).

“This should help contain overall fiscal liability in the future,” says Zahidi.

Between 2010 and 2017, Malaysia’s contingent liabilities had surged by 13.7% on a compounded annual growth rate basis (2002-2008: 5.4%).

In comparison, government debt grew more moderately by 7.8% per annum during the same period (between 2002-2008: 10.9%).

Another closely watched area deals with medium term measures to address the RM20bil shortfall arising from the zero rating of the Goods and Services Tax and the re-introduction of the Sales and Services Tax.

With higher oil prices, the government can receive higher dividends from Petroliam Nasional; it can also receive more dividends from government-linked companies.

“There is a lot of room to cut government operating expenditure; cuts this year will flow through to next year,’’ according to Ching Weng Jin, head of research, Public Investment Bank.

For instance, reducing the budget for the Prime Minister’s Department by RM9bil (the allocation used to be RM17bil) constitutes huge savings.

Plugging the shortfall in revenue ensures that the path to fiscal consolidation is on track, a positive sign to the rating agencies.

“The slowdown in mega projects will prevent a further narrowing of the savings-investment gap and hence, ease the pressure on Malaysia’s current account balance,” says Zahidi.

(The current account measures exports and imports of goods and services, net earnings on cross border investments and net transfer payments).

“We should have more optimism although there is no clarity now. The new government will want to show it can manage the economy and ensure decent growth.

“There are bright people with high levels of education in the Cabinet, which can give the Singapore Cabinet a run for their money,” says Ching.

Prospects for an easing of trade tensions are still uncertain following the ceasefire in tariffs between the US and the European Union (EU).

“The dispute with Europe is mainly around tariffs on cars while that with China (which has room to escalate) is more complicated,” says Pong Teng Siew, head of research, Inter-Pacific Securities.

Apart from the uncertainty, “the slide in the yuan will not help to ease the tension, as US policymakers think that China is using currency to remain competitive”, suggests Zahidi.

Adding to the tension is the potential for the US-EU tariff talks to also tackle ‘unfair trade practices’ by China. “The strategic manoeuvre by President Donald Trump is also at work to force China’s hand,” says Pong.

Meanwhile, sentiment and growth will likely be impacted.

“The US markets are practically pricing in no impact from the trade war. Any unforeseen impact, the odds of which are very high, will give an ‘outsized impact’ to the US markets.

“Stocks are priced for perfection. Any imperfections in earnings will deal a blow to valuations,’’ postulates Pong.

Columnist Yap Leng Kuen is of the view that a policy cannot be that good if it causes so much misery. 

https://www.thestar.com.my/business/business-news/2018/07/30/can-malaysia-survive-external-and-internal-challenges/