Malaysian premier shrugs off looming threats to economy

By Stefan Wagstyl in London
Financial Times
July 3, 2013

A slowdown in the Chinese economy, plunging commodity prices and the looming end of US “QE3” quantitative easing might appear to be a perfect economic storm for Malaysia.

The commodity producer exports to China and has benefited handsomely from the cash that washed through emerging markets as a result of the US Federal Reserve’s aggressive bond-buying programme.

In an interview with the Financial Times on Wednesday, however, Najib Razak, Malaysia’s prime minister, played down the likely effects of the threats to growth coming from the world economy. As a leader fresh from an election victory, his confidence is understandable. But some might see it as misplaced.

Mr Najib insisted Malaysia remained on course to grow at 5 to 6 per cent annually and achieve the government’s target of joining the ranks of the world’s high-income countries by 2020.

Mr Najib was speaking during a visit to London, made as his government is settling back into office after the ruling United Malays National Organisation overcame the biggest-ever challenge to its power in May’s parliamentary elections. The opposition won 51 per cent of the vote, but Umno and its partners in the ruling coalition secured 60 per cent of the seats under Malaysia’s constituency-based voting system.

The prime minister pledged to accelerate economic reforms and show that the country could be modernised “from within” the existing political framework – a riposte to the opposition’s election claims that Malaysia needed a change of leadership after decades of unbroken Umno rule.

He said: “I want to prove the point that we can make changes from within. We can transform the government and the economy, as well as democracy in Malaysia.”

He was relaxed about the external challenges to an economy that has weathered global turmoil well, with economists expecting gross domestic product growth of about 5 per cent this year, after 5.2 per cent in 2012.

Asked about the coming end of the Fed’s QE effort, Mr Najib said money would “flow back into the United States”, but the US would “probably become a stronger market” for Malaysian exports.

While some emerging market turmoil might occur, “people are still positive about the capital markets in Malaysia”, the prime minister said. Mr Najib was equally sanguine about China’s growth slowing from last year’s 7.8 per cent to 7 per cent or even lower. A Chinese slowdown would mean Malaysia’s trade would “probably not grow as fast as we expected”, but Chinese investment “probably won’t change very much”.

Nor would the impact of a decline in Chinese demand on weakening commodity prices have a serious effect. Mr Najib said prices for palm oil, Malaysia’s biggest commodity export, might weaken, “but we are looking at finding new markets”, he said, listing Africa and South America.

For Mr Najib the challenges at home remain substantial. The softening in support for Umno and its allies was in part the result of what he dubbed a “Chinese tsunami” that saw disenchanted ethnic Chinese vote against the government. The shift was due in large part to frustration among ethnic Chinese over longstanding pro-Malay affirmative-action policies.

Mr Najib said he believed the government needed to phase out gradually such policies and to address better the concerns of the ethnic Chinese as part of a national reconciliation.

Other domestic economic concerns remain. The government had to cut its bill from fuel and other subsidies and Mr Najib said he believed “we do need to introduce [a goods and services tax] to improve government revenue”. Household debts – at 82 per cent of GDP – were also unsustainable and had to be reined in, he said. “People willy-nilly borrow for consumption. Civil servants willy-nilly borrow for consumption and then wonder why they don’t have enough money at the end of the month.”

Since the second world war, only four places in the developing world – South Korea, Taiwan, Singapore and Hong Komg – are regarded by economists as having made the ranks of the advanced economies, where high income is accompanied by modern economic structures based on industry, services and high education levels. Among those hoping to join them, Malaysia is seen as a hot favourite.

According to the World Bank, Malaysia had a per capita gross national income of $9,800 at the end of last year, compared with a minimum $12,615 for high-income countries. At the government’s projected growth rate of 5-6 per cent annually, Malaysia should easily make the grade by 2020.