The good in Malaysia’s rising cost pains

MALAYSIA is unlikely to be spared from the global pains of soaring energy and food prices, interest rate hikes and geopolitical tensions. But relative to its South-east Asian peers, the fourth-largest economy in South-east Asia appears to have a few things going for it that could lessen the sting.

Despite inflationary pressures, Malaysia’s consumer spending - a key economic driver - is somewhat holding its own on “revenge spending” on the back of unleashed pent-up demand as a result of the reopening of businesses and borders after 2 gruelling years of pandemic-led lockdowns. Pundits expect private consumption this year to grow more than 7 per cent this year, compared with a 1.9 per cent jump in 2021 and 4.2 per cent contraction in 2020.

This, in no small part, is owing to extensive government subsidies for food, electricity and fuel, which total some RM80 billion (S$25 billion) - a record in the country’s history - to lessen the burden of rising costs on the people. In fact, among the region’s major economies (Indonesia, Thailand, Singapore and itself), Malaysia is said to have the “highest control” in terms of the government’s ability to manage prices given these “generous subsidies” coupled with extensive price controls. For this reason, economists expect the country’s inflation to be relatively milder than its peers.

It helps greatly that the public coffers have been plumped up by higher oil-related revenue and crude palm oil’s (CPO) duty collection amid surging commodity prices. The tight market conditions for both oil and CPO are benefiting Malaysia, which is a net oil exporter (this explains too how the country is able to subsidise rising oil prices) and the world’s second-largest palm oil producer. The potential rising supply for these commodities and lower demand amid a slowing global economy however are weighing on prices.

The other factors that are lending a boost to private consumption are largely to do with a recovery in disposable income as a result of cash handouts, more options to withdraw from retirement savings, better wages and an improving labour market.

Even so, it is important to note that the rosy consumption figures this year are led by last year’s low base effect, and even if they remain resilient in the second half, there is a possibility this may not last till next year if the monetary tightening trajectory led by rising inflation persists.

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Indeed, pressure points are aplenty. The US economy could be on the brink of a recession as the Federal Reserve raises rates to tame rising prices, while China’s economic momentum has been hurt by stringent lockdowns. The US and China - the world’s 2 largest economic powerhouses - are Malaysia’s key trading partners, accounting for a quarter of the country’s total exports. The country is also facing a foreign labour crunch, while businesses are feeling the heat of higher operating costs as raw material prices spike.

Even so, blanket subsidies by the government are not sustainable, particularly in an environment of elevated prices. With that in mind, Putrajaya has said it plans to introduce a more targeted subsidy mechanism. How this takes shape amid what could be a general election (GE) year for the country (most are expecting a GE to be called in Malaysia this year, well ahead of the September 2023 deadline) is anybody’s guess. Economists do not appear too concerned that Malaysia will backtrack on its fiscal consolidation goals. But that doesn’t mean one should not pay attention to the country’s fiscal discipline, more so if the clouds darken further in 2023.