`Fiscal consolidation to put KL on solid ground'

Publication: NST

Date of publication: Mar 13, 2014

Section heading: Business Times

Page number: 006

Byline / Author: By Rupa Damodaran

KUALA LUMPUR: MALAYSIA'S fiscal consolidation efforts will position it on "solid ground to brace itself against any volatility arising from the United States Federal Reserve's quantitative easing (QE) programme", said a visiting European economist.

Professor Michael Heise, who is chief economist of Allianz SE, a leading insurer, also described the move to shrink the fiscal deficit to 3.5 per cent of gross domestic product (GDP) as sensible.

"This helps to prepare for the volatility," he said in his media presentation on "Perspectives for the world economy and Asia" here, yesterday.

Allianz projected Malaysia to grow by 5.2 per cent this year and five per cent next year, which are both based on the assumption that China will not go through a hard landing with its growth rebalancing efforts.

"Malaysia has been on a stable trajectory after the 2009 global crisis and the fiscal deficit will shrink further, thanks to fiscal reforms."

While stronger exports stimulated by uptrend commodity prices and higher private investment will drive the economy, he said the contribution from private consumption will decrease.

This is mostly due to the policy initiatives like the Goods and Services Tax (GST), which the government will introduce in April next year.

"The net effect will lower the private consumption growth and may lower the savings ratio."

Heise, who is the group public policy and economic research head, does not expect the recent uptick in prices in Malaysia to have a strong impact on the inflation level.

Keeping interest rates at the current level would be a plausible mo-ve by Bank Negara Malaysia, he added.

On the ringgit, he expects the currency to devalue by another five per cent by year-end mostly on concerns of the tapering.

The European Central Bank and the Fed's action may create "some noise" in the financial markets and put some pressure on the emerging markets but they would have already been factored in by these markets.

For the global front this year and next, he said higher inflation is expected through increase in demand and also higher commodity price (through the Ukraine crisis) and as interest rates normalise.

He, however, warned of the return of bubbles and financial volatility.

On the risks of the Ukraine crisis, Heise said oil prices were likely to trend upwards and a sovereign default (in Ukraine) increasing.

'If the conflict drags on, the world economy would suffer a substantial blow to growth and there would be substantial impact on the equity and bond markets."

Asia, however, remains a key driver of global growth, despite a less dynamic development.

The export industry in Asia will benefit from the recovery in Europe, which is estimated to grow by 1.7 per cent this year, contributing to a stronger global trade.

However, if the Fed tapering surprises and "prompts another sharp retrenchment" in capital inflows, the region (ex-China and South Korea) will face financial market volatility, especially in Indonesia and India.

The Malaysian insurance market is not among the largest in the region with total premiums amounting to ?10 billion (RM45.5 billion) last year.

It boasts a relatively high level of development, particularly compared with the Indonesian or Chinese markets.

"Over the next decade, we expect premiums to increase by an average of seven per cent a year," he said, adding that Malaysia's insurance market will have more than doubled in size by 2024.