Asia going full steam ahead

Publication: NST

Date of publication: May 3, 2014

Section heading: Main Section

Page number: 017

Byline / Author: By Alex Mourmouras

ASIA is well-positioned to capitalise on the largely favourable global trends and enjoy steady growth in 2014-15. Recent policy actions taken to address vulnerabilities have started to bear fruit.

With vigilance and further reforms, the region should remain resilient to global risks and continue to be a dynamic force driving the strengthening global recovery.

Against this backdrop, the outlook for Malaysia is favourable: growth is projected to accelerate to about 5.2 per cent this year as exports improve, offsetting some headwind from fiscal consolidation, and a slight moderation in consumption and investment growth.

The overall outlook for Asia is one of steady, robust growth and the International Monetary Fund's latest Regional Economic Outlook for the Asia-Pacific region forecasts growth of about 5.5 per cent in 2014-15; no longer as stellar as a few years ago, but still enviable.

The outlook for growth is supported by a firming up of global activity, which will help Asia's exports. Growth momentum has gathered steam in the United States and the euro area, thanks to a reduction in fiscal tightening and still-accommodative monetary conditions.

Additionally, the largest economies in the region are also doing relatively well, despite some challenges.

In China, the unveiling of the government's reform agenda has boosted sentiment and growth should moderate slightly to 7.5 per cent this year. Meanwhile, "Abenomics" has lifted confidence and inflation in Japan, and growth there should remain above trend at 1.4 per cent this year.

Furthermore, this favourable external environment is benefiting the rest of the region, together with healthy labour markets and robust credit growth in many economies.

So far so good for Asia, but there are tangible downside risks to this outlook. An unexpectedly rapid tightening of global liquidity would affect the region. For many countries, domestic vulnerabilities could magnify the impact: as interest rates rise, vulnerabilities stemming from pockets of high corporate leverage and household indebtedness could come to the fore.

Asia is also facing various risks originating from within the region. These include a sharper-than-envisaged slowdown and financial sector vulnerabilities in China, a waning impact of "Abenomics", and political tensions and uncertainty.

Throughout Asia, including in Malaysia, a continuation of the recent macroeconomic and structural policy momentum would help keep risks at bay, maintain investor confidence and sustain the region's growth leadership.

Last year was a breakthrough year for fiscal policy in Malaysia. With the 2014 Budget, the authorities clearly signalled their commitment to fiscal consolidation and meeting medium-term fiscal targets.

The establishment of the high-level Fiscal Policy Committee is welcome, and should enhance fiscal management and strengthen institutions. In addition, subsidies on fuel, electricity and sugar are being rationalised, and a Goods and Services Tax (GST) will be introduced in April next year. These vital steps will help shore up fiscal policy management and secure fiscal sustainability policy.

While still moderate, inflation has picked up over recent months. The uptick in inflation is largely the result of temporary factors, namely, higher fuel and food prices associated with subsidy rationalisation, and also the effects of dry weather conditions in the peninsula. Ongoing subsidy rationalisation and the implementation of GST can also be expected to increase inflation later this year and next year.

However, the increase is not expected to be long-lasting and inflation should moderate below three per cent over the medium term. Bank Negara Malaysia's (BNM) task in the near term is to allow the pass-through of these price increases, while remaining vigilant and taking decisive, preemptive action, if needed, to curb second-round effects.

As in other Asian economies, the strong growth in household debt and rapid increase in house prices present a vulnerability. Since end-2010, the authorities have imposed a series of targeted, gradual and escalating macroprudential policies to mitigate this vulnerability.

However, should credit growth remain strong, additional measures may be needed, with the scope and stringency depending on the evolving stance of monetary policy.

Nevertheless, Malaysia's financial system is sound, bolstered by a strong supervisory and regulatory system, and appears well-placed to withstand potential shocks, based on results from stress-testing analysis. With the gradual withdrawal of unconventional monetary policies in advanced economies, Malaysia and other emerging market economies may face renewed capital flow volatility.

Malaysia's vulnerability is related to its relatively high level of federal debt and large foreign holdings of government securities.

Nevertheless, the country had weathered recent bouts of volatility relatively well, reflecting its well-developed financial system, large base of institutional investors and strong external position; as a result, there was little impact on the real economy.

Looking ahead, the implementation of planned fiscal consolidation and reforms, together with the strong external position, should further enhance its resilience to shocks.