DESPITE a trifecta of statistics suggesting 2017 was an excellent year for the Malaysian economy and notwithstanding a robust beginning this year, for many Malaysians, the “feel-good” feeling is missing.
Regaining the “feel-good” feeling this year is a key priority. Malaysians are expected to go to the polls either in March or more probably before Ramadan begins in mid-May. This means the turnaround time for the ruling Barisan Nasional to reinvigorate subdued consumer sentiment is short.
In GE14, BN is likely to target two objectives: regain its two-thirds parliamentary majority and wrest back control of some states lost in the 2008 election, particularly Selangor. To realise these two objectives in GE14, voters must feel upbeat.
The World Bank estimates the Malaysian economy expanded by 5.8% last year, the strongest performance since 2014.
Last year, the ringgit strengthened by 10.7% against the US dollar; the Malaysian currency was the second-best performer in East Asia after South Korea’s 13.2% gain.
Additionally, exports accelerated by a stunning 20.4% from January to November last year, significantly higher than the lacklustre 1.1% growth recorded for the whole of 2016 and 1.6% in 2015.
Last Friday witnessed two significant developments. For the first time since Aug 18, 2016, the ringgit broke through the RM4 level against the US dollar to close at RM3.99 while Bursa Malaysia’s key index, the FBM KLCI, pierced the 1,800 level to close at 1,817.97 – a level last breached for one day on May 20, 2015.
Despite this clutch of bullish economic data, two indicators reflect the absence of a “feel-good” feeling among Malaysian consumers.
First, the Malaysian Institute of Economic Research’s (MIER) Consumer Sentiment Index remained weak, declining by 3.6 percentage points quarter-on-quarter to 77.1 points in third quarter 2017 (3Q17).
Rising cost of living may be the reason for the subdued sentiment among consumers, MIER executive director Emeritus Professor Dr Zakariah Abdul Rashid said.
“Escalating prices remain a concern for the majority of the households surveyed. With the labour market looking fatigued, faster income growth looks quite unlikely anytime soon, and this could be a bane to consumer spending,” Zakariah said.
Second are weak retail statistics. The Retail Group Malaysia (RGM) reported retail sales contracted 1.1% year-on-year in 3Q17 after expanding by 4.9% in 2Q17 and dipping by 1.2% in 1Q17.
RGM’s lacklustre data, however, contradicts the Statistics Department’s data showing retail trade figures increasing while private consumption remained healthy.
Acknowledging the “feel-good” factor is missing, Second Finance Minister Datuk Seri Johari Abdul Ghani suggested three possible reasons: an oversupply of shopping malls prompting retailers to cannibalise sales from each other, increasing online sales and a time lag of six to eight months before the impact of economic growth spills over to consumers.
Some additional factors could also have dampened spending among consumers and local businesses.
First, Malaysia’s economic growth was primarily fuelled by the export sector; one example is the electronic and electrical (E&E) industry.
Because the E&E industry is highly import-intensive with low linkages to local suppliers, the local value-added is low. Moreover, because the industry is also largely foreign-owned, its profits are likely repatriated overseas.
An admittedly dated research paper published by the East-West Centre in June 2003 cited a Japanese researcher who wrote: “By late 1980s, the Malaysian electronics industry had to import almost 43% of the intermediate goods that were required for the production of one unit of final output, far more than Korea (37%) and Japan (8.2%).”
This means a 20.6% jump in exports of electronic products during the first 11 months of 2017 – compared with a meagre 3% in the same period in 2016 – had a negligible spillover impact on Malaysian consumers.
Second, a sudden cut in public spending, particularly public investment, in 2H16 and 2Q17, prompted possibly by the need to contain the budget deficit, adversely impacted small and medium-sized businesses as well as building materials-related companies, RHB Research writes.
Third, rising costs for businesses last year. This included higher minimum wages and a perception that the Inland Revenue Board is stepping up corporate tax collection.
Revenue from corporate taxes this year is estimated at RM67.8 billion. In the first nine months of 2017, corporate taxes collected totalled RM43.1 billion, resulting in a shortfall of RM24.7 billion to be collected in 4Q17.
Public-listed companies like Tenaga Nasional, MK Land’s fully-owned subsidiary Saujana Triangle, and Aeon Credit have announced they will challenge Inland Revenue’s claim to additional taxes and penalties of RM2.1 billion, RM80 million and RM97 million respectively.
If widespread and sustained, Inland Revenue’s increased diligence could spur more companies to husband their cash rather than spend it.
Overall, the high-income status that Malaysia aspires to requires top priority being given to develop export industry with strong local linkages and pre-eminent suppliers of intermediate goods.