Malaysia’s economic growth will speed up this quarter after expanding at the fastest pace in a year. The growth is driven by private consumption as activities resume, Finance Minister Zafrul Aziz said.
“People are underestimating the strength of pent-up demand,” he said in an interview Saturday. “Restaurants are full, traffic jams have returned. The unemployment rate has fallen to less than 4%, and first-half tax collection has been well above our estimate.”
Malaysia’s GDP expanded by 8.9% in the April-June period from a year earlier, beating the median estimate of 7% in a Bloomberg survey. The economic recovery has also helped a boom in foreign trade, with export and import values reaching records in June. The central bank projects that full-year growth will be at the higher end of its forecast of 5.3%-6.3%.
“There are things that are not under our control,” he said. Pointing to fears about an escalation in tensions between the United States and China. It is after U.S. House Speaker Nancy Pelosi visited Taiwan. “We expect concerns about inflation in the United States to subside and for China to address its conservative Covid measures.”
Malaysia’s inflationary pressures expect to remain contained due to food price caps and fuel subsidies, Zafrul said. The government also recently refrained from raising electricity and water prices. The consequence: a subsidy bill by 2022 that will likely total 80 billion ringgit ($18 billion), compared to a budgeted ringgit of 31 billion.
“Our inflation has been under control relative to what we see in the rest of the world,” Zafrul said. “But this has a high fiscal cost.”
The government will rely on revenues from high commodity prices, strong tax collection, a one-time prosperity tax for businesses, and dividends from state-owned entities such as Petroleum Nasional Bhd. and sovereign wealth fund Khazanah Nasional Bhd., to offset the subsidy bill, he said.
“The easiest way is to borrow more,” Zafrul said, adding that there is scope to do so because the debt-to-GDP ratio of 60.4% is still below the legal debt ceiling of 65%. “But we are committed to a fiscal deficit target of 6% of GDP. Before the pandemic, our deficit was at 3.5%. We have to get there eventually.”
Excerpts from the interview:
On the targeting of fuel subsidies:
“We are testing the mechanism for the specific fuel subsidy system at some gas stations. We are testing platforms, including e-wallets, and hope to bring them to the Cabinet by the end of the year. It is up to the Cabinet to decide on its implementation.”
“The ringgit has depreciated against the US dollar, as have the currencies of many other countries. Ringgit isn’t the only one who has weakened, although some people are turning it that way.
“Apart from Bank Negara Malaysia making sure that currency fluctuations are not severe, it all comes down to the fundamentals of the economy. We need to strengthen them and the ringgit will reflect that. GDP data validates the recovery.”