Published September 1, 2008
MALAYSIA INSIGHT
Don't knock the economy - it's fine
It's fundamentally resilient, although the rising budget deficit is worrying
By S JAYASANKARAN KL CORRESPONDENT

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CONTRARY to all the pessimism, the Malaysian economy is far better than most people give it credit for. The reasons for pessimism are understandable. Global oil prices are surging, inflation is persistently high, the stock market is torpid, the sub-prime problem continues to bedevil Western financial systems, there is political uncertainty and Malaysians generally do not feel good about the country's economic health.
The concerns could be misplaced. For the first half of 2008, Malaysia's gross domestic product grew at a very reasonable 6.7 per cent. The second quarter's trade surplus clocked in at a whopping RM40.8 billion (S$17.1 billion) compared to the first quarter's RM27 billion. Gross exports grew at a healthy 21 per cent although it was admittedly due to the high prices of commodities like oil and palm oil. Even so, manufacturing exports grew 12 per cent, which isn't half bad. And domestic demand grew 8 per cent, slightly lower than the 10 per cent growth experienced during the first half.
Fundamentally, the Malaysian economy remains resilient. In the past, Malaysian GDP growth used to track the leading indicator of the Organisation for Economic Cooperation and Development countries; in effect, when the OECD leading indicator plunged, Malaysian GDP growth followed suit. That is no longer the case with Malaysian growth rates remaining at between 5 and 6 per cent even as the OECD leading indicator fell, as evinced in recent years. This is, in part, due to the country's luck and the high prices of its natural resources like rubber, palm oil and petroleum. Another factor is the emergence of tourism as a significant growth sector: last year, visitor arrivals hit 21 million, a new record high.
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Globally, it's not all gloom and doom either. China is contracting - an event that its authorities say is planned. The housing market in the US is contracting and some banks are showing signs of shakiness but exports are up and the latest manufacturing and services indicators show that the economy has not fallen off a cliff.
The most worrisome aspect of the Malaysian economy is the rising budget deficit, which is now in its 13th straight year. It is beginning to get scary once again: this year, the government estimates it at 4.8 per cent of GDP - the highest since 2002. It's steep but don't expect the international rating agencies to downgrade Malaysian sovereign debt. That's because the total public debt of the federal government is 42 per cent of GDP, still below the international 'concern' level of 60 per cent.
But the deficit indicates that the public debt will grow and that the Malaysian government is spending more than it earns, borrowing now for future generations to repay. The government says it will bring the deficit down to 3.6 per cent of GDP next year but given that the 2009 Budget had no revenue-enhancing measure, one wonders how Kuala Lumpur can do it.
But it is not impossible. One way out is for the government to gradually cut subsidies in food and oil. The other is to insist that all government contracts be awarded on a basis of open and competitive tenders. For too long, the 'leakages' from bloated contracts to crony businessmen have plagued the Malaysian economy at the expense of taxpayers. It is time to stop.