Short-term pain for long-term gain

Posted on 6 December 2013 - 05:40am

Liew Jia Teng
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PETALING JAYA (Dec 6, 2013): The subsidy and tax reform agenda that is being pursued by Malaysia will lead to higher inflation rate, said UBS Investment Bank's Asian economics team executive director and senior economist Edward Teather, but it promises long-term gain for short-term pain.
"Yes, it (the reform) may affect the spending power of Malaysians for now. But there is also possibility for the country to achieve high income nation status in future," Teather told a media teleconference on the Asean economic outlook 2014 here yesterday.
The investment bank is forecasting Malaysia's consumer price index (CPI) to rise by 3.4% next year and 3.6% in 2015 from the effects of the subsidy rationalisation and power tariff hike, while the implementation of the goods and services tax (GST) will also add to inflation in 2015.
Teather, however, expects Bank Negara Malaysia (BNM) to keep inflation rate in check by keeping the key interest rate on hold.
"Malaysia's economy isn't that strong. At the growth rate of 5% over the past few years, the economy is not booming and you don't want to hurt it (by raising interest rates)," he said.
"A loose monetary policy could support domestic growth, but given the increase in household debt level, we do not expect BNM to cut interest rate either," he added.
UBS Investment Bank expects the recovery in exports to help alleviate the drag effect from fiscal consolidation in 2014 allowing for a real gross domestic product (GDP) growth of 5% in 2014. The slowing domestic demand due to the weaker spending power, as well as the improved export growth however, should see the ringgit depreciate against the greenback.
"While we are still positive on the ringgit in an Asean context, it is unlikely to rise against the US dollar going forward. We forecast the ringgit to close at 3.35 against the US dollar for end 2014," he said.
Teather opined that in Malaysia's pursuit for high income nation status, it should not focus on GDP growth alone, but also look at maintaining the value of the local currency and the sustainability of its growth.
On future challenges of Malaysia's economy, Teather said the government should stick to its reform agenda and make the country as an easier place to do business.
"The main challenge is to keep the reform moving and keep people talking about the positivity of reform," he said.
Teather also reckons that Malaysia's willingness to take part in the Trans-Pacific Partnership (TPP) negotiations reflects a willingness to reform in coming years.
"TPP is sufficient, but not a necessity for economic reform. Reform is good for Malaysia, but you don't need the TPP per se to be in place to reform. I view it as a symbol that the government is willing to take risk and their willingness to negotiate makes me feel comfortable," he said.
On another note, Teather said Malaysia's export is yet to improve, but stands a good chance in next year to support the country's GDP growth.
"There's no guarantee of course, but most leading indicators from the US and Europe are heading towards a good direction," he said.
UBS Investment Bank expects the country's budget deficit to reduce to 3.7% of GDP in 2014 compared with the official estimate of 4% in 2013.
Broadly in line with government projections, the bank expects the federal government's debt to come close to but not breach the self-imposed limit of 55% of GDP.