14 March, 2016 by Idris Jala
Writing has been on the wall for a while now that from an economic standpoint, we’re experiencing crunch time. Low oil prices and shrinking global demand are some of the factors forcing a ‘new normal’ of slower economic growth the world over.
In addition to being an oil producing country, Malaysia as a nation that trades heavily with the rest of the world - with total trade at 151.9% of our GDP (2015), will inevitably be affected by the drop in global consumption.
Progressing into 2016, we are aware that some industries, especially those involved in commodities and financial services are already tightening belts for the rougher ride ahead.
Against such a backdrop, I understand that it can be tempting to cave in to prophecies of gloom and doom and believe that our economy is in trouble. Except, it isn’t.
Malaysia’s economic performance in 2015, despite the challenging scenario, demonstrates resilience. GDP growth clocked in at 5 percent, our budget deficit target was met at 3.2 percent of the GDP, national debt remains at 54 percent below the ceiling of 55 percent of GDP and private investment continues to outdo public investment at a ratio of 65:35.
Despite lower private sector investment compared to 2014, public sector investment numbers remain below that – proof that the Government has decided not to step in and borrow just for the sake of growth because this would increase debt and affect our fiscal position.
In January, ratings agency Standard & Poor’s when commenting on the budget review announced by the PM, highlighted that Malaysia’s fiscal initiatives, such as the implementation of Goods and Services Tax and removal of petroleum subsidies have helped reduce some of the stress that previously slowed down fiscal consolidation.
As a matter of fact, all three ratings agencies – S&P, Moody’s and Fitch – have given Malaysia’s sovereign ratings a stable outlook in 2016 due to the Government’s discipline in pushing ahead with fiscal consolidation measures.
Beyond fiscal consolidation, a question we now need to ask is whether or not we have been building enough resilience in our key sectors?
Low oil prices may be good input for production but it certainly is bad for oil-producing countries.
Last month, at the invitation of their government, I was in Oman to share our national transformation initiatives. As a country that heavily relies on oil and gas, they are highly-exposed to the fluctuations in oil pricing. They liked the work we have done in Malaysia, and were keen on replicating the process.
I was also recently invited by the Saudi government to address their ministers and top civil servants and share our transformation experience as they are now embarking on their own national transformation. They are running more than 20 labs to figure out in Riyadh, how to move the economy forward in these current circumstances.
Malaysia has evolved past the stage of labs. In ensuring prudent fiscal management, the government recognised the need to mitigate risks from volatilities and scenario planned in 2010.
In implementing the Economic Transformation Programme, we set out to restructure the economy by moving away from being overly dependent on oil and gas revenue to build resilience in the top 12 sectors of the economy in which we enjoy comparative advantage. Through strategic reforms, we have been working to build a competitive business environment for the best run businesses to thrive.
Within the NKEAs, we looked at ways to expand from commodity extraction activities into high-value, downstream segments. Allow me to share some examples.
The Oil, Gas and Energy NKEA included an entry point project to increase petrochemical outputs through the development of the Pengerang Integrated Petroleum Complex. This provides a natural hedge against volatilities - when oil price comes down, raw oil and gas (O&G) input is much lower so when you sell it, you make a good profit. Deepwater terminal operator Dialog Group Berhad was able to ride the coat-tails of a contango in this industry to cater to increased demand for storage to the point that they reached maximum capacity. So getting serious about the downstream business was a spot on, absolutely good strategy.
During the Palm Oil and Rubber lab in 2010, we anticipated that crude palm oil prices would decrease at some point, and we were not far off the mark as prices have come down in the past year. Under the Palm Oil and Rubber NKEA, the Government works with the private sector to encourage businesses in high-value oleo-derivatives and bio-based chemicals.
Many of these initiatives may take a while to manifest benefits, but the point is these measures are in place and our economy is not crumbling beneath the weight of external pressures.
Today, instead of experiencing a contraction, we have modest growth. We did the hard work and made the tough decisions, and are now staying the course for a sustainable future.
Historically, when you look at the world economy, say every 40 years, 50 years or even a 100, you will find the global economy or even the economy within a country goes through ups and downs in cyclical fashion. There are those who just struggle and simply fizzle out. And then there are winners – people who can pick out opportunities during the down-cycles, who are then able to ride the wave during the upswing.
The last thing anyone should do in this current situation is to panic. In a recession, when governments panic, they end up borrowing money to stimulate the economy. Public sector investment is boosted at the expense of the fiscal position. It becomes the case of ‘kicking the can up the road’ because despite the ‘kicking’, problems of debt and deficit still remain. We do not want that here in Malaysia. Instead we should accept the reality that the world economy is in the doldrums, and stick to the plan.
The trick to survival in the long term across various business cycles lies in being resilient. And resilience is not something you build only when you have your back against the wall, you keep doing it – in good times and bad, so you are always ready for when the tide turns. In these current times, staying the course we have charted will ensure we get to our target of becoming a high income country by 2020.
(Datuk Seri Idris Jala is CEO of Pemandu, the Performance Management and Delivery Unit. Fair and reasonable comments are most welcome at firstname.lastname@example.org)