Views differ on level of risk faced by Malaysia’s economy

Malaysia’s economy is on the path to recovery but the risk of a slowdown remains, according to two economists.

PETALING JAYA: Experts agree that challenges – both internal and external – will continue to plague the Malaysian economy.

However, opinions differ as to how high such risks will be or whether they will plunge the country into another recession.

A Singapore-based economist agreed with Bursa Malaysia Chairman Abdul Wahid Omar’s claim that Malaysia is unlikely to enter a recession. In contrast, a Malaysian economist sees stagflation on the horizon.

Lee Hwok Aun, senior fellow at the ISEAS-Yusof Ishak Institute in Singapore, said he was confident that Malaysia could avoid a recession thanks to the country’s healthy gross domestic product (GDP) growth.

In its quarterly report released on Aug. 12, Bank Negara Malaysia said GDP grew 8.9% in the second quarter of 2022, up from 5% in the first quarter.

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However, Nazari Ismail, an economist at Universiti Malaya, said stagflation was more likely.

Wahid had said in his presentation at the Invest Malaysia Forum on Sept. 14 that while US-China trade tensions, the Ukraine crisis and monetary tightening by various central banks could cause an economic slowdown, Malaysia’s well-diversified economy is holding up would the pressure.

Lee noted that Malaysia’s GDP growth was contributed by the service and manufacturing sectors, both domestically focused and driven by steady export demand.

“Services make up the bulk of the economy and are more domestically oriented and less dependent on global markets,” he said, adding that while the service sector cannot guarantee Malaysia would avoid a recession, it can be a buffer against turmoil in Malaysia could the global markets.

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“The manufacturing sector, on the other hand, is heavily export-oriented and could help Malaysia financially next year,” he said.

“In the past and even in the present, exports in general have helped Malaysia recover from recessions or financial crises. Exports were an important factor in the recovery from the 1997-98 crisis and the 2008-09 recession.”

Lee didn’t rule out the possibility that the country could experience a slowdown due to several internal and external factors.

“Depending on geopolitical issues, supply chain bottlenecks, labor shortages and an investment pause until the general election, there may be a slowdown,” he said.

However, he said it would take a major disruption to trigger an economic contraction.

He also expects expansionary public spending next year as the 2023 budget will be the last federal budget before the next general election.

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Nazari warned that Malaysia could be hit by an economic slowdown as it relies on exports to China and Singapore. It has been reported that these two countries are bracing for a sharp slowdown next year.

“A global economic slowdown will affect these two important markets, which in turn will affect Malaysia,” he said.

A slowdown, he said, would be compounded by the current high level of household debt, which could lead to a rise in bankruptcies and a downward trend in consumption.

Nazari said that coupled with the recent overnight rate hike, it would be challenging for Malaysia to deliver strong growth in 2023.

“That’s the worst-case scenario. If anything, stagflation is a strong possibility,” he said.

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