Business and Finance

Six Key Factors Affecting Malaysia’s Economy

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Photo credit: Jorge Lascar / Foter / CC BY

By Ali Zara

Malaysia has never been hit hard all at once like this before. These six factors, external and internal, are impacting her economy and her people – the strengthening of the US dollar, the plunge in commodity and oil prices, foreign capital outflows, the political situation at home, China’s economic slowdown which hurts Malaysia’s exports, and the goods and services tax (GST) implemented in April this year.

First, the external factors comprising the oil price plunge, China’s economic slowdown and foreign capital outflows. According to analysts, global crude oil prices have plummeted by over 50% since June 2014 due to oversupply and weak demand. Palm oil prices were also on the decline. Malaysia is hit because oil-related industries account for a third of its revenue and the country is also the world’s second largest palm oil producer. All that narrowed its trade surplus and led to currency weakening issues like other commodities-exporting countries.

Meanwhile, the economic slowdown in China (Malaysia’s top trading partner) saw an overall decline in domestic consumption that led to a drop in Malaysia’s primary exports to China.

As to the third external factor, analysts said the foreign capital outflows were triggered by an impending interest rate hike in the US (see further information in the last two paragraphs). Malaysia saw outflows in equities and bonds, reported to total about US$8 billion. The analysts said Malaysia is not the only country having to contend with these global economic challenges but it has been hit particularly hard, noting the ringgit is the worst performing currency in Asia, having lost over 20% of its value against the US dollar over the past year. It is now 4.3 against the greenback.

They said while Malaysia’s economic fundamentals are assessed to be sound enough to withstand these external factors that are impeding growth, the protracted political crisis over the 1MDB fund’s troubles makes it more vulnerable to the effects of these external factors compared to her neighbors.

That is shown, they said, by the Malaysian currency’s dismal performance, slipping to over RM4 to the US dollar for the first time since the 1997 Asian financial crisis. The ringgit was on a downward slide the past year despite the government’s efforts to prop it up by spending its foreign reserves.

Malaysian Prime Minister Datuk Seri Najib Razak is chairman of 1MDB’s advisory board. According to a post by the S. Rajaratnam School of International Studies, when 1MDB’s debt troubles first emerged, it was framed as a political issue as it was mostly highlighted by his opponents. However, as more serious allegations emerged amid the ringgit’s rapid decline and the worsening global economy that impact investors and consumers alike, 1MDB was reframed as an economic issue.

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According to recent media reports, he is facing a backlash over the debt-ridden 1MDB and the RM2.6 billion donation channelled into his personal bank accounts. Increasing global scrutiny over 1MDB has also spurred several government agencies around the world into conducting their own investigations, including those from the UK, Hong Kong and Switzerland.

In the meantime, analysts said Malaysia’s economic woes also aggravated discontent over domestic economic policies that impact the cost of living.

The man in the street has been asking, if the government has said Malaysia’s fundamentals are strong and the economy is on solid footing, then why the need to introduce the goods and services tax (GST) which adds to the people’s burdens. It was reported that GST has added 15%-25% to prices of general items. In some cases, consumers complained of price hikes of a staggering 300%-400% of fresh produce even though these are GST-free.

Meanwhile, Asian shares fell on September 18 after the Federal Reserve held off raising interest rates, reviving concerns about weakness in both the US and global economies. Fed Chair Janet Yellen said the outlook abroad has appeared to become less certain and that recent falls in US stock prices and a rise in the value of the dollar already were tightening US financial market conditions. Some Fed policy-makers believe interest rates should not be raised until at least 2016.

On the global outlook, Yellen said the focus is on the economic slowdown in China and emerging markets, and whether there might be a risk of a more than abrupt slowdown in China. Analysts expect trade-dependent Asian economies to remain under pressure as China’s economy slows.

Read This: Malaysian Ringgit and Other Emerging Currencies Vs the US Dollar




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Comments

Ng Alex

For 46years with NEP, tis race still claim to be poor while the other races prosper. Maybe tis nep shuld be given to other races instead.

Gabriel Ravi

don b worried guys… .our superior n super race bumiputras n red shirts n perkasa knw hw to fix it.

Alfred Tiong Eng Chuah

U know what’s the make up of the gov?

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