The road ahead

While Malaysia’s economy shows encouraging signs, headwinds may hamper its progress

May 9, 2014

While Malaysia’s economy shows encouraging signs, headwinds may hamper its progress

The economy of Malaysia ended 2013 on a positive note, with economic growth gaining momentum and exports increasing. The International Monetary Fund (IMF) expects the country to grow 5% this year, up from 4.7% last year.
However, policymakers are facing two key concerns: high household debt and a potential housing bubble. “Although the government and the National Bank have taken steps to tackle these issues, doing so without destabilising the banking sector and the wider economy will be a challenge,” Akrur Barua wrote in a recent research note, published by Deloitte University Press.
Household debt is currently about 86% of GDP, up from 50% in 2008. “Predictably, this deterioration in household finances poses risks, both for consumers and for banks,” Barua stated.

Focus Aseab
Building blocs: Malaysia’s housing sector boom risks turning into a bubble. Photo: Creative Commons/Khairul Ariffin Mohd Aris

Given rising inflation – the IMF expects consumer prices to climb 3.3% on average this year – the central bank may be tempted to increase interest rates. Still, this would raise households’ debt-servicing costs, which are already burdened with high debt that could in turn push up loan defaults, hurting the health of the banking sector and overall economic development.
Against this background, observers expect to see no rate hike before the second half of the year.
The country’s housing sector boom could also cause quite a headache. Since 2009, house prices have skyrocketed 47%. “As consumer finances deteriorate and supply increases, the boom risks turning into a bubble,” Barua said.
The government and the central bank reacted with correcting measures such as higher property sales taxes and foreign investment limits, which aim, among other things, to cool demand from Singapore. At the same time, too rigorous measures could have negative repercussions for consumers and banks.
Finally, not all potential risks stem from the domestic side. “Malaysia’s economy remains vulnerable to exogenous shocks to global growth or risk aversion through international trade, commodity prices and financial channels,” the World Trade Organisation warned in a separate report.
Nevertheless, Deloitte’s Barua remains optimistic. “In the medium- to long-term, favourable demographics, increasing competitiveness, growing trade and investment links will keep the economy strong.”

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