Is Malaysia prepared for next global economic shock?

THERE is growing chorus sounding global recession alarm bells. Two international Institutions – namely the International Monetary Fund (IMF) and the World Bank – as well as reputable investment bankers on Wall Street and central banks around the globe have started to warn about a sharp economic downturn in 2023.

Since the eruption of Russia-Ukraine military conflict in February, global growth prospects have seen a rapid deterioration tempered by high and longer inflation, as well as high level of energy and commodity prices though have eased off their peaks.

These headwinds coupled with accelerated interest rate hikes globally and tightening of financing conditions have ignited a debate about the possibility of a global recession in 2023.

As it is, currencies of emerging economies’ have slipped rapidly against a strong US dollar along with higher US interest rate.

If this happens for longer, there could be disruptive negative spill-over effects on those economies: capital reversals due to the interest rate differential, increased debt burdens, increased cost of imports and consumer price pressures.

Escalating business cost

(Photo credit: Peterson Institute for International Economics)


Bad vibes and the US Federal Reserve’s aggressive monetary tightening suggest we may be heading into a recession. The World Bank has warned that simultaneous global rate hikes in response to inflation could trigger recession in 2023.

With the increasing risk of global recession, will Malaysia be safer than we were during the COVID-19 pandemic crisis in 2020-2021 or the 2008-2009 Global Financial Crisis?

The answer is Malaysia will be manageable but will not be fully insulated from an external economic shock triggered by a global recession or a severe recession in the US economy and Europe. Both the US and Europe accounted for 19.0% share of Malaysia’s exports while that of China was 13.4% in January-July 2022.

While the Malaysian economy has recovered from the pandemic crisis to grow by 3.1% in 2021 and estimated 6.5% in 2022, the underlying recovery strength is still not spread out evenly among economic sectors.

Business costs, consumer price pressures, rising cost of living and the weakening of the ringgit against the greenback will continue to persist until the Fed is done with its cycle of aggressive rate hikes, probably by 1H 2023.

Malaysia’s domestic labour market has also not fully recovered as July’s unemployment rate of 3.7% is still a distance from the pre-pandemic jobless rate of 3.3%. In addition, skill-related (36.7% in 2Q 2022 vs 34.8% in 4Q 2019) and time-related (1.4% in 2Q 2022 vs 1.1% in 4Q 2019) under-employment still hinders a sustainable economic recovery.

So how should policymakers prepare and respond to a highly anticipated global economic shock in 2023? Policymakers need to navigate a narrow path that requires a comprehensive set of demand- and supply-side measures.

Little fiscal space

First, the inescapable reality is that Malaysia’s fiscal space is limited: a narrow tax base and weak tax efforts. Federal Government debt of 62.0% gross domestic product (GDP) at end-June 2022 is not too far from the debt ceiling of 65% of GDP.

Fiscal policy needs to prioritise productive yet quick multiplier spending, anchor medium-term debt sustainability while providing targeted support to vulnerable groups.

Some of the “low-hanging fruit” subsidy reform can be undertaken to free up some fiscal resources for other purposes. The fiscal support can be front-loaded on low-hanging fruits sectors (such as tourism, smaller scale socio-economic projects and community-based programs) that multiplier impact can be felt and be implemented fast.

Second, to be more reliance on domestic demand (private consumption and private investment) backed by public investment and that of government-linked investment companies (GLICs). Can Malaysian households brace for an economic slowdown?

The job market and wage growth will slow. Pent-up demand has fizzled out; rising inflation and high cost of living as well as higher interest rates will mean people lose purchasing power while consumption will normalise or even to slow markedly.

The roll-out of consumption boosting measures are limited now as a large number of Employee Provident Fund (EPF) contributors – especially those in the low-and middle-income groups – have exhausted their retirement savings (currently, about 52% of EPF members have less than RM10,000 in their accounts while 27% have less than RM1,000).

Both the re-current handling out of cash hand-outs, including e-wallet to assist the low-and middle-income households and individuals as well as the amount of higher payout, is also being constrained by bloated subsidies on fuel, food and others.

Spike in volatility

(Photo credit: Foreign Policy)


On businesses, policymakers need to put in place measures to ease the constraints that confront labour market, cost of doing business, regulatory as well as compliance cost, and trade networks.

As businesses are already facing increased business and operating costs (inputs, transportation and employment cost) as well as the impact of weak ringgit on imported inputs, some form of cost relieve measures are needed.

Banks have to work with weak business models and high levels of non-performing loans (NPLs) to clean up their balance sheets in addition to green-related financing and grants to support small medium enterprises (SMEs).

Both domestic financial and foreign exchange markets would witness persistent volatility arising from the negative spill-over effects from the global financial markets if a recession hit major advanced economies.

Our financial institutions must be strongly capitalised to withstand the impact of capital outflows and tighter liquidity conditions. Flexible ringgit exchange rate can help absorb shocks though the weakening ringgit has a varying degree of impact on different sectors.

Bank Negara Malaysia (BNM) will have the policy tools to ensure orderly foreign exchange market and also ensure sufficient domestic liquidity (both the ringgit and the US dollar) to support the economy.

Elsewhere, the monetary policy must be employed consistently to support domestic demand, in a timely manner, and to ensure price stability. – Oct 3, 2022


Lee Heng Guie is the executive director at Socio-Economic Research Centre (SERC) Malaysia.

The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.


Main photo credit: International Monetary Fund

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