MALAYSIA — Southeast Asia’s third-largest economy — is now a highly open, upper-middle income economy. The growth rate was coupled with a dramatic poverty reduction from 49.3pc in 1970 to 1pc in 2014. It has achieved one of the highest levels of financial inclusion among Southeast Asian countries.

A major contributor to development success is its innovative, resilient, and inclusive financial sector.

From a major producer of raw materials, such as tin and rubber in 1970s, Malaysia now boosts of a diversified economy. It has become a leading exporter of electrical appliances, electronic parts and components, palm oil, and natural gas.

It is the world’s second largest producer of palm oil after Indonesia. Analysts forecast that an El Nino weather cycle is likely to slash palm oil output and boost its prices in 2016. But the ringgit has plunged more than 17pc this year versus the dollar, making palm cheaper for offshore buyers. A similar El Nino weather pattern in 2009 had boosted palm oil prices by 57pc.

Despite the declining international oil price and the sharp fall of Malaysian ringgit, the Malaysian Institute of Economic Research maintains the forecast for GDP growth at 4.8pc for 2015 and 5.5pc for 2016. The World Bank expects growth to slow to 4.7pc this year and next year before picking up to 5pc in 2017. The introduction of GST and elimination of fuel subsidies could help Malaysia weather the oil price shock.

In recent weeks, stock market has plummeted. Foreign investment inflow has fallen by nearly 50pc through the first-half of 2015. Globally low oil-price has also hurt Malaysia, a major exporter of oil and gas.

After growing by 5.3pc in the first quarter, the economy grew by 4.9pc in the second-quarter as both exports and private consumption fell. Business sentiment has been hurt by lacklustre prospects for exports, a sharp depreciation of the ringgit, a slide in stock prices, and spare manufacturing capacity.

The Malaysian central bank governor expects the economy to remain on a steady growth path, with domestic demand continuing to be the key driver of growth. The Malaysian Prime Ministerhas announced a multi-billion-dollar plan to help revitalise the country’s struggling economy.

The government is looking to stimulate growth through fiscal policy but is constrained by its pledge to narrow the budget deficit. The 2016 budget, scheduled to be tabled in Parliament on Oct 23, envisages a larger allocation for development expenditure with a reduction in revenue expenditure to contain the budget deficit.

The fiscal deficit for this year has been revised upward to 3.2pc of GDP due to the global challenges. The Malaysian finance minister is confident that his country can achieve developed economy status as it is on track for achieving its targeted income per capita of $15,690 by 2020.

INDONESIA’S economy, the largest in the Southeast Asia, grew by about 4.7pc in each of the first two quarters — the lowest growth since 2009. Private consumption remained robust despite being slightly affected by higher inflation following a domestic fuel price increase in late 2014. Recovery in investment was also weaker than projected. The contribution of net exports turned slightly positive as oil imports fell significantly.

Lately, the government has announced the third installment of the economic stimulus package to lure investment and reverse the economic decline. The new measures include loosening banking regulations on managing export profits in foreign currencies and simplifying procedures in granting business licences, lowering interest rate, reducing electricity tax and cutting fuel prices.

The government has also decided to increase the number of banks allowed to manage export deposits, relaxed requirements for lenders to manage funds. The policy is intended to support the second economic stimulus package, which encourages exporters to keep profits in Indonesia. The move aims to increase the dollar supply to support the rupiah, which is currently at the weakest level against the dollar since 1998. The government will also provide financial support to small- and medium-sized enterprises. It is considering suspending the payment of 40pc of the total electricity bill until 2016 to support companies suffering from the devaluation of the rupiah and economic recession.

Earlier the second installment of the ‘massive deregulation’ package, which included revisions to the negative investment list that details sectors restricted to foreign funds, following the first batch of stimulus package that also aimed at luring more investment and boosting consumer spending. The policy focused on the acceleration and simplification of procedure in business licensing in an industrial economic zone. However, the positive impact from these reforms will take some-time to materialise. Lower oil prices are already having a positive net effect on the external trade balance.

The depreciation of the Indonesian currency should boost exports. An expected recovery in exports and investment in the second half of 2015 could bring economic growth to 5.6pc in 2016. But the Parliament’s finance commission has cut the growth estimate for 2016 to 5.3pc while many economists project this year growth to be below 5pc. But the Bank Indonesia expects investment to record a robust growth in the third-quarter, mainly reflecting a surge in government spending.

The spending budget for 2016 is the highest ever proposed while assuming a budget deficit of 2.1pc of GDP. Reports suggest that rupiah surge since July 2014 and stocks heading toward the highest close in a more than a month indicate that investors are returning to the nation’s assets. The currency has strengthened 2.3pc last week, paring its loss this year to 13pc. The past month has seen the rupiah fall to a 17-year low, plunging from one of the best performing currencies to one of the worst in Southeast Asia.

Published in Dawn, Business & Finance weekly, October 12th, 2015

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