PETALING JAYA: As 2023 dawns, research houses and economists are in consensus that Malaysia will likely dodge a recession this year, with a majority of them forecasting economic growth at between 4% and 4.5%.
Bank Negara Malaysia’s forecast is for the economy to expand by 4%-5% in 2023, according to its governor Nor Shamsiah Mohd Yunus.
While the consensus is that Malaysia’s economic outlook is relatively benign, it will be foolish for policymakers not to be prepared for events that could plunge the economy into a downward spiral.
Unexpected shocks that can cause catastrophic damage to economies are sometimes referred to as a “Black Swan” event. These are infrequent events, but a recent example was the Covid-19 pandemic.
In 2023, some possible Black Swans could be an escalation in the Russia-Ukraine war if Nato is somehow dragged into the conflict, or a military flare-up in the Taiwan straits between China and Taiwan, and the US.
Any such scenario would crash global stock markets, and precipitate a surge in oil and gas prices, fuelling inflation and more aggressive interest rate hikes. Or there could be the emergence of a deadly Covid variant that plunges the world into lockdowns once again.
A house of cards?
So, if a Black Swan event does occur, will the Malaysian economy show itself to be a house of cards, or built on solid foundation?
Sunway University Business School economics professor Yeah Kim Leng said while a “doomsday scenario” is possible, the probability of it happening is relatively low.
He said a worst-case scenario for the Malaysian economy would depend on whether the US encounters a severe recession and whether it can contain its high inflation with the current interest rate hikes.
“Another outcome is whether the Russia-Ukraine war will escalate or end. If there is an end, the global risk environment will improve, and that will result in a more positive outlook.
“If it doesn’t, inflation will continue due to disruption to oil and energy supplies, and that will lead to higher food and energy prices,” he added.
Policy levers available to the government
However, Yeah said there are various policy levers the government can leverage on in a worst-case scenario, with the two main ones being monetary policy and fiscal policy.
“Monetary policy will be largely related to lowering of interest rates, and loosening money supply which is akin to injecting liquidity into the economy. This may include bailouts of distressed companies and distressed assets.
“The second lever is fiscal policy, where the government can mount counter cyclical spending by increasing spending through various programmes to support the economy.
“This includes providing concessionary loans and grants, spending on infrastructure and other economic activities to boost demand,” he added.
If things turn sour, Yeah anticipates the Malaysian economy may see a “shallow recession” contracting for half a year or two consecutive quarters, resulting in a full-year GDP of less than 2%.
For comparison, he pointed out during the global financial crisis in 2009, Malaysia’s economy contracted by -1.9%, which is considered a shallow recession.
“During the 2020 Covid-19 pandemic, we contracted -5.6%. This was a fairly severe recession although the duration was relatively short,” he said.
Another factor in Malaysia’s favour is that its banking sector remains relatively robust following reforms instituted in the wake of the Asian financial crisis in the late 1990s.
BNM has reiterated that banks are well capitalised to support economic recovery and withstand potential stress, with its excess capital buffer of RM123.1 billion.
Domestic risks a factor too
For Malaysia University of Science and Technology economist Geoffrey Williams, the external risks are a sharp global recession leading to a broader financial crisis. Global political risks remain high as well.
However, risks at home are not to be under-estimated. “Domestic risks are mainly in terms of the stability of the new unity government and whether irresponsible political manoeuvres cause problems (resulting in political instability),” he added.
He said a global slowdown is “almost certain” but Malaysia can avoid recession if there is a strong focus on the domestic economy, structural reforms and fiscal responsibility to create a stable competitive business environment.
So, how should our economic custodians be preparing for a global slowdown?
Williams said Budget 2023 should start afresh with more moderate spending and better revenue management. “We need to look at tax reform holistically to make the tax system more efficient.
“I would suggest increasing spending only in line with core inflation to around RM345 billion and aiming for similar revenue as last year. This would deliver a lower deficit.
“In terms of spending, wastage must be cut. Excessive megaprojects should be reviewed, rescheduled or re-budgeted. Subsidies reform is essential,” he added.
Williams stressed there is a need to look at structural reforms in pensions, welfare and incomes because relying on government handouts will not be enough if there is a downturn and “will be expensive and wasteful”.
Austerity on the horizon?
Malaysian Institute of Economic Research senior research fellow Shankaran Nambiar noted there is much concern among analysts that the US economy will run a recession in 2023.
As such, he said the government needs to prepare for a more prudent fiscal framework. “We will need to adopt policies that lean towards greater austerity by trimming unnecessary government expenditure and reducing subsidies.
“This will give more space for the government to offer more assistance to disadvantaged groups in the face of weaker growth in 2023,” he added.