In 2022, the economy grew 8.7%. However, growth does not always mean the economy is heading in the right direction, and there are some serious red flags that spell trouble for the people.
One major concern is our mounting debt. Malaysia’s government debt has ballooned from RM687 billion in 2017 to RM1.08 trillion in 2022 – almost doubling over six years.
But before we get there, let us look at our first dire warning – the quality and sustainability, or lack thereof – of our economy.
The problem with GDP
Essentially, gross domestic product (GDP) reflects the size of a country’s economy and is comprised of four main elements – consumption, government expenditure, investment and net exports.
Most economists though will warn you that GDP says little about whether that growth is of high quality or even sustainable.
And right now, that is the problem: investment is contributing less and less to GDP through the years, while total consumption is contributing more. In fact, consumption had accounted for more than 70% of GDP since 2019 versus investment which hovered at around 20%.
Malaysia’s investment appeal is waning. Foreign direct investment has been lagging behind neighbouring countries such as Indonesia, the Philippines and Vietnam, while domestic investment has been stagnant at less than 30% of GDP for years, according to World Bank data.
Investment doesn’t concern only policymakers – it has a direct impact on people. When investors expand their presence in Malaysia, whether through offices or factories, they’re creating jobs, training labour, and (ideally) buying and transferring technology that workers use to become more productive, more skilled and better paid.
Even more vital is investment that creates high-skilled jobs – something that Malaysia sorely needs. It’s no secret that:
- Insufficient jobs are being created annually, relative to the number of new graduates, with youth unemployment four times higher than the national unemployment rate at 12%, and that
- most of these opportunities involve low-skilled or semi-skilled labour, leaving 37% of highly educated Malaysians underemployed.
Falling investment will just perpetuate the “low-skills, low-wage trap”. This means
- Wages won’t grow as quickly,
- Inflation is going to hit Malaysians harder because incomes can’t keep up with rising prices, and
- Malaysians might have to keep burning through their savings and racking up debt to have a decent standard of living.
The people are already suffering. Aside from shrinking household incomes ( 12.5% more households earned less than RM2,500 a month in 2021), according to the Ministry of Finance, the median savings of Employees Provident Fund (EPF) account holders has reduced by 50% from RM16,600 in 2016 to RM8,100 in 2022 and household debt exceeded RM1.3 trillion in 2021.
Money, money, money
That brings us to the second red flag: Malaysia’s trillion ringgit government debt, which ballooned from RM687 billion in 2017 to RM1.08 trillion in 2022 – almost doubling in six years.
Exorbitant debt limits the government’s ability to support the people especially in bad times and restricts development spending.
Case in point, the previous government permitted pandemic-time EPF withdrawals due to inadequate safety nets.
Plus, according to The Edge, the government will continue spending around 20 sen of every ringgit earned on paying the interest on direct federal debt alone in 2023.
This money could be better spent on development, such as investing in the economy or improving social safety nets.
In fact, based on the first iteration of Budget 2023 tabled in October last year, 75% of revenue is going into operating expenditure (the cost of running the government, including debt servicing) versus 25% for development.
The debt is eating directly into Malaysians’ present and future. To make matters worse, it is becoming increasingly difficult to service the debt. Government revenue streams are under pressure while the World Bank notes that much of the fat in operating expenditure has already been trimmed.
Substantial government revenue is derived from tax and petroleum dividends. But the tax base in Malaysia is still narrow. Though oil money has kept the economy chugging along, Petronas can’t be a cash cow forever – especially if it is continuously abused. And with a global economic slowdown on the cards, demand for Malaysian exports will likely soften further too.
Is there a risk of Malaysia defaulting on its debt soon à la Sri Lanka? The odds are slim. But given how debt drags down the economy, and the interest rate hikes bumping up the cost of repaying creditors, taking the debt or the lessons from that episode lightly would be a disastrous mistake.
How to get back on track?
Malaysia has ideas on how to do this, ranging from improving investor engagement to diversifying the tax base to reducing leakages. But ideas alone are not enough.
What is urgently needed is continued political stability, and the right people at the helm to integrate and execute these ideas strategically and with integrity. The execution has to be effective and clean, so that Malaysians too can do their part in accepting short-term pain for long-term gain.
Otherwise, it won’t just be red flags but a red zone that awaits.