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Thursday, January 2, 2014

Economy charges on

Publication: NST
Date of publication: Dec 31, 2013
Section heading: Supplement
Page number: 026
Byline / Author: By Khaidir A Majid; Rupa Damodaran

THE consensus - at least among the few interviewed for this article - is that 2014 will be challenging.

This need not necessary mean a bad thing because it summons the brave to action and rise further to the top while the meek, the least said of them, the better.

How does it challenge us?

Let us deal with the external front first.

Maybank Research, in a recent report, expects a faster global economic growth of 3.5 per cent in 2014 from an estimated 3.1 percent in 2013.

This is because the major adv anced economies - the United States, Europe, Japan - simultaneously expand for the first time since 2011.

This should generally be good for us but the research house said Asean's growth trends, however, are expected to be mixed on factors ranging from favourable impact of external demand rebound on Singapore and Malaysia, to transitory effects of domestic macroeconomic turbulence, political uncertainties, and natural disasters on Indonesia, Thailand and the Philippines.

And this is amid the continued sub-8 per cent expansion in China.

Nevertheless, the improving global Gross Domestic Product, led by developed countries, should be generally positive for a major exporting country like Malaysia.

There is another area of concern - the likelihood or not the certainty of a US taper. After months of speculation, the US Federal Reserve recently initiated the first step towards Quantitative Easing (QE) programme via reducing the size of its bond-buying activities. The move reflects the Fed's confidence in the outlook for the US economy going forward.

However, the major concern here is its implication on the ringgit. The local currency is expected to stay weak as the US scales down its QE. The ringgit was weakened by about 10 per cent as of Dec 18 following the Fed announcement.

AmResearch, in a report, said considering the unwinding would take effect gradually and would extend until at least mid-2014, the correction for the ringgit is expected to be over a longer period of time and is unlikely to be as steep as it was in 2011 when the Fed tapered QE2.

With the uncertainty of the US taper seemingly out of the way, barring any other unforeseen events, the expectation in 2014 is that external demand will continue to improve as advanced economies, a significant market for our exports, are on much firmer footing.

The challenge here is for the Malaysian exporters to take full advantage of the improving global scenario. While a lower ringgit would make some Malaysian exports more attractively priced, it should not lull the exporters who stand to benefit into complacency.

They should use the opportunity to improve their competitiveness so that their products continue to sell well, regardless of the ringgit's movements. And part of this is to enhance their productivity.

Malaysia, said HSBC chief economist for India and Asean, Leif Eskessen, in a recent media briefing here, needs to boost productivity levels via structural reforms to sustain its growth story.

It cannot - as in the case of most part of Asia - continue to rely on macroeconomic policies and cheap credit (as a result of a low interest rate regime) to fuel growth.

On the domestic front, the expected rising cost will no doubt be the biggest challenge.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng said there would be price adjustment pressures in 2014 brought about by the recent fuel and impending electricity tariffs hikes.

His sentiments were echoed by Asian Strategy and Leadership Institute's chairman for public policy studies, Tan Sri Dr Ramon Navaratnam,whostressed that apart from managing budget deficits and debt, structural reforms must be pursued further.

In this sense, the 2014 Budget tabled by Prime Minister Datuk Seri Najib Razak on Oct 25 had moved Malaysia in the right direction. The consolidation and reorientation of spending and taxation are timely.

Under the national budget, the Federal Government's expenditure for 2014 is expected to remain flat at RM262.2 billion, in tandem with concerted efforts to curb nonproductive spending, although revenue is forecast to be more favourable at RM224.1 billion from stronger economic activities, better tax administration and revenue collection.

The fiscal deficit to the GDP is also forecast to decline to 3.5 per cent in 2014 from four per cent through fiscal consolidation efforts.

Research houses hailed as "courageous" the government's move to announce the implementation of goods and services tax (GST) at six per cent from April 1, 2015. With the GST, the corporate tax rate will also be reduced to 24 per cent from 25 per cent, while personal income tax will be cut by between one and three per cent.

To rein in expenditure, the government resumed its subsidy rationalisation programme which saw an increase in fuel prices last September, and electricity tariffs in January 2014, as well as removing the subsidy on sugar.

This subsidy rationalisation will undoubtedly place the country's economy on a firmer footing to sustain future growth. As pointed out earlier, Malaysian should not expect to perpetually live on the cheap.

Subsidy makes sense if it is targeted to benefit those who need them most - the lower-income group.

But if businesses are dependent on subsidies and cheap credit just to be globally competitive, then the country's growth cannot be sustainable.

For consumers, the rising prices will call for more discerning spending. Businesses, too, will have to react. They will have to look at their cost structure and enhance their operational efficiencies.

With the countr y deeply negotiating for apossible in volvement in several free trade pacts, including the ambitious Trans Pacific Partnership Agreement (TPPA), businesses should be prepared for a more open market environment.

Here lies the challenge - change or be changed.

As we move to face the challenges in the new year, it is reassuring to see that Malaysia has emerged from the challenging external environment of 2013 with more optimism.

As the year draws to an end, optimism is already being reflected through the Leading Index Score, a forward indicator of economic activities.

Economists are looking up to export recovery and resilience of the domestic demand and private investment, which will continue to be supported by the ongoing Economic Transformation Programme.

Spending will continue to remain healthy in the construction, services and manufacturing sectors.

The economy in 2014 is expected to expand by 4.5 to 5.3 per cent next year from 4.5 to five per cent this year.

Such strong performance did not come unnoticed. Barclays Wealth and Investment Management, which did a simple data screening recently, churned out a list of emerging markets with favourable opportunities for investment.

The bank's wealth management division looked at four metrics.

* A current account deficit of no more than 4 per cent;
* Debt to GDP ratios of 60 per cent or lower;
* Real GDP growth of 3 per cent or higher; and
* Above average foreign direct investment.

Five markets passed the screen test - Chile, China, Korea, Taiwan and Malaysia

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