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FMT: Top 3 economic challenges confronting new govt

By November 23, 2022November 2nd, 2023No Comments

People-oriented measures and gradual fiscal consolidation will be top priorities for the new administration.

PETALING JAYA: When the new administration finally settles in at Putrajaya, its leaders will have little time to celebrate their ascension to power. That is because the newly minted Cabinet will have to immediately tackle several tough economic challenges facing the nation.

The first thing on the agenda is the new finance minister having to oversee the drafting of a new set of proposals for Budget 2023.

RHB Investment Bank (RHB IB) said the outcome of the polls has created uncertainties over the federal budget announced on Oct 7, and deemed void following the dissolution of Parliament on Oct 10.

“Based on the latest developments, the balance of the risks is tilted towards a delay in Budget 2023 retabling following the election of a new government,” it said in a recent note.

The research house said the timeline for the retabling of the national budget, which ideally should be presented by December, is uncertain and that it would very much depend on the timing of the formation of the new Cabinet, which is still up in the air.

Malaysian Institute of Economic Research (MIER) senior research fellow Shankaran Nambiar anticipates that with a new government, “we will see changes to Budget 2023”.

No matter which coalition comes to power, he said, the new government faces three crucial economic challenges.

“The issue of rising prices and eroding purchasing power should be top of the list of challenges that the new government should tackle,” he told FMT Business, alluding to the inflationary pressures on the economy and its severe impact on the man on the street.

Malaysia’s headline inflation may likely have peaked at 4.5% in the third quarter, according to Bank Negara Malaysia (BNM).

The other problem that the new administration needs to grapple with is the depreciating ringgit vis-a-vis the US dollar. “No less important is the declining ringgit. This (decline) has to be arrested,” Nambiar said.

The ringgit has been pressured by broader US dollar strength driven by a hawkish Federal Reserve which has raised rates six times this year, with four three-quarter point hikes in recent months. In contrast, BNM raised the overnight policy rate (OPR) four times this year, each being a 0.25% increase.

Moving into 2023, the economic storm clouds gathering on the horizon will be an acid test for the new government.

“Finally, 2023 is expected to be a challenging year given the global circumstances. As such, the new government should be prepared to handle the difficult conditions that are imminent,” Nambiar said.

In view of the depressed global conditions next year, the new administration may be forced to adopt an expansionary budget, he said.

On whether the government may fall into the trap of overspending, he said spending, by itself, may not be harmful. “The problem arises when spending is directed at targets that do not merit expenditure, or when the return would be low.

“It is a question of good allocation of expenditure. The idea should be to generate the highest multiplier effects and aggregate demand,” he said.

There are certain givens when it comes to the Malaysian economy, including business-friendly policies and welcoming foreign direct investment (FDI). Nambiar does not expect the new government to depart from these policies which have benefitted Malaysia over the decades.

“Any government that takes over will have to be business-friendly. In that respect, I don’t expect any deviation from current policies.

“Being a small economy driven by the need for export-oriented growth and FDI, it will be imperative, whoever forms the government, to be responsive to the demands of foreign investors,” he said.

MIDF head of research Imran Yusof told FMT Business, FDI inflow does not depend on political parties. He said investment decisions are based on government policies, that is, government as an institution and not political parties leading it.

Imran said “stability of policies is important”, pointing out that FDI-related incentives offered by the international trade and industry ministry remain unchanged no matter which party leads the government.

Often, a government that comes to power with less than a solid majority is tempted to roll out populist policies to garner greater support from the masses. Invariably, the government will need to spend huge sums on such initiatives.

RHB IB said such measures may be on the cards. “Regardless of the outcome, we view that ‘people-oriented’ measures and gradual fiscal consolidation would remain top priorities for the new government, where cash transfers and other types of assistance to lower- and middle-income households are likely to be continued,” it said.

Nambiar opined that it would not be wise to be populist. “Some of the issues are demanding and require hard thinking and tough decisions. We are not at a point where we can treat the economy lightly,” he said.

For the new government, its success or failure in overcoming these economic challenges may well determine whether it gets a new mandate to rule in the next elections.