Shankaran Nambiar, Kuala Lumpur | August 15th, 2012
East Asia Forum

The world is on the brink of an economic crisis and the consequences are likely to be dire.

The current state of the global economy presents multiple challenges to Malaysia. While the effects will first be felt within the economic sphere, they will also have a significant impact on domestic politics. This will add to the prevailing state of political uncertainty.

Some of Malaysia’s key trading partners are already struggling economically. The crisis rocking the euro zone has received a considerable amount of analysis, but the economic situation in other countries also merits attention.

The performance of the US economy is a concern for Malaysia. US GDP, which saw growth of 3 per cent in the fourth quarter of 2011, decreased to 1.9 per cent growth in the first quarter of 2012. Growth in the US hardly recovered, but whatever recovery it had achieved now appears shaky. Analysts put the forecast for US growth at 1–1.5 per cent for 2012. Some have raised the probability of a recession to 50 per cent. The unemployment rate has not budged from 8.2 per cent, as the increase in employment opportunities has not kept pace with population growth.

Any hopes that could have come from China have been dashed. In the previous quarter, China grew by 8.1 per cent. The growth rate has now fallen to 7.6 per cent for the period stretching from April to June. This makes it China’s slowest quarter since the first quarter of 2009, when it was feeling the effects of the global financial crisis.

With the rest of the world experiencing a slowdown, Singapore’s economy has also been affected. Singapore is a significant trading partner for Malaysia, and what happens to Singapore will affect Malaysia greatly.

In light of the problems its trading partners are experiencing, Malaysia can also expect difficulties. On the economic front, it is hard to see where the export-oriented manufacturing sector will find demand for its products. Low global demand will translate, sooner or later, into low GDP figures. All indications are that the Malaysian economy will slow in the next quarter.

On the fiscal side, the problems are no less daunting. The Malaysian economy has had long stretches of fiscal indiscipline. The present political cycle adds pressure on government spending. With the elections ahead, there has been massive government spending on a variety of items, including salary revisions for civil servants, and payments for senior citizens and children with disabilities. The causes may be good, but they place a burden on the government’s purse. Current government spending that is a consequence of the political cycle will, in all likelihood, have to be followed by more spending to mitigate the effects of an economic slowdown, once it occurs.

Time and again, the state of the economy has influenced political shifts.

Current economic circumstances may have led to the election dates being delayed. Even strong governments crumble when the economy weakens. The Malaysian government, like any other rational government, will not want to take the risk of holding elections at a time when the economy is less than robust.

If the elections are delayed for too long and the global slowdown strikes in the meantime, the performance of the Malaysian economy will persuade some sections of the electorate to deny their votes to the ruling party. A wave of retrenchments and economic uncertainty will not be endearing to large sections of the public. Any stimulus package which is undertaken at a time of crisis — as can be expected to happen — will worsen the fiscal situation. This will be seen as a further sign of poor macroeconomic management and an indication of fiscal profligacy.

All this leads to a continuing trail of uncertainty, both political and economic. One can only hope that any ensuing instability, political or economic, does not have unduly disturbing consequences.

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Shankaran Nambiar is an economist who consults for various national and international agencies. He lives in Kuala Lumpur.

An earlier version of this article was published in the Edge Financial Daily on 25 July 2012.