The Malaysian economy

by Dr. Abey P. Philip

“Hold on a second – I guess you are not confident enough about the Malaysian economy!” This is a statement I often use in my class when my students look dismayed during my discussions on the Malaysian economy.

When I ask, “Which country has more GDP, Malaysia or Singapore?” my students, and I guess the majority of you, will think Singapore has more GDP but the reality is the opposite.

That is because we successfully defended the country from the global financial crisis and all its economic indicators are positive and resilient.

Recently, I heard a discussion on the radio in which the guests argued that inflation is increasing tremendously, especially after the rise in oil prices. Although the fact remains that the increase in oil prices has had an impact on the economy, as an academician, I believe that this scepticism is due to people generally having little trust in the credibility of the country’s macroeconomic policies, which in reality enhances the expected inflation and adds to existing inflation.

In other words, the people seem to lack confidence in the economic system which unnecessarily cultivates expected inflation. Currently, Malaysia has a moderate level of inflation of around 3.30%.

My sense of optimism may be because I am not a Malaysian and I can look at the economy from an outsider’s viewpoint. To illustrate my positivity in the economy, I usually talk to my students about buying fish because I love fish!

When I joined Curtin Sarawak in 2009, the price of Kingfish was RM20 a kilogramme in Malaysia and RM15 a kilogramme in India. Currently, the price of Kingfish is RM24 and RM44 a kilogramme respectively in Malaysia in India. This is a 20% growth in fish price in Malaysia and 193% in India over a period of five years!

Although the reasons for this could be different in each country, a general association gives a completely different image of our inflation. We are so concerned about rising inflation, and expect it in some way, and yet remain pessimistic about our macroeconomic policies.

Source: The World Bank-IBRD-IDA

Table-1 above shows that the Malaysian Wholesale Price Index (WPI) was as low as 109.2% compared to 125.077% in India in 2013. The percentage growth rate of prices per year is only 3.11 in Malaysia, whereas it is 10.91 in India.

Economists agree that this kind of creeping inflation is not bad for the economy as a certain amount of inflation aids economic growth.

In terms of GDP growth rate, Malaysia performs better than any other ASEAN country. Figure-1 shows that Malaysian GDP expanded around 4.7% percent in 2014 and it is expected to grow around 5.8% in 2015. In comparison, the Singapore growth rate is continuously dropping and the present contraction slipping into recession is not a distant possibility.

Let us look at the statistics. All macroeconomic indicators in Malaysia show positive signs; GDP is growing at around 4.7%, inflation is low at 3.3%, and unemployment is 2.80%, which is above full employment of 4%.

People in general think that the increase in the price of petrol has led to an increase in inflation. In the last five years, Malaysia increased its petrol price four times while India increased its price more than 25 times. It is expected that after a negative price shock, it takes at least 10 years for a country to come back to its previous position by self-mechanism. If that is true, Malaysia may take only 30 years to recover and India might take 250 years!

If you are still doubtful, refer to Table-2 from which we can calculate the price of petrol and diesel in Malaysia and India from year 2003 to 2014.

Bank Negara Malaysia is doing a brilliant job in keeping inflation consistent over a period of time (Figure 2). Now it is also the central bank’s obligation to communicate its course of action to stabilise the inflation activity due to the petrol price hike in October 2014, so that it creates confidence in the credibility of the policies and not give rise to expected inflation.

If the credibility is low, it will lead to an increase in expected inflation and high level of inflation with lower output. That in turn might lead to stagflation, which is increasing inflation coupled with less GDP growth.

The Malaysian central bank is competent enough to deal with any economic situation and the fact that Malaysia has not faced any financial turbulence after the Asian financial crisis is proof of this. Malaysians thus need to believe in the credibility of the financial system for the better future of Malaysia.

Dr. Abey P. Philip is a senior lecturer in the Department of Finance and Banking of the Faculty of Business and Humanities, Curtin Sarawak. He can be contacted at 085-443 945 or by email to abeypp@curtin.edu.my.