High-income goal needs ‘reality check’

High-income goal needs ‘reality check’

Tags: 10MP | Developed high-income nation | GDP growth | High income goals | Kenanga Research | Per capita income | reality check | Wan Suhaimie Wan Mohd Saidie | World Bank

Written by Financial Daily
Thursday, 12 November 2009 11:00

KUALA LUMPUR: The country’s high-income goals needs a reality check and it would be a very challenging task to become a developed, high-income nation by 2020, said Kenanga Research.

“It’s a deceiving notion to believe that in order for Malaysia to achieve a developed nation status, its GDP needs to grow by only an average of 6% till 2020.

“For one, our average GDP growth needs to consistently expand by at least 8% annually to meet the current World Bank’s minimum classification to achieve a high-income nation [per capita income of US$17,000 or RM57,460],” the research house said in a report yesterday.

This was assuming that Malaysia’s population would grow at an average of 2.1% annually and the ringgit appreciated at a steady rate of 5% per annum against the US dollar, the research house said.

It added that this was a simplistic assumption, which does not take into account the rapid changes in global trade and TECHNOLOGY [] as well as the gradual socio-politico shift domestically and abroad.

“Plus, the World Bank’s minimum requirement may be adjusted even higher over time, not to mention the possibility of a devaluing US currency,” it said.

Economists said the success of the private-sector-led growth under the 10th Malaysia Plan (10MP) would be viewed in totality against the backdrop of a challenging global economic backdrop.

They said existing weaknesses in the US economy, the world’s largest, would still be a key factor in dictating Malaysia’s economic fortunes going forward. This is despite the rise of China as a major source of demand for local exports.

“Though China’s economic influence is catching up and growing steadily, it may not be sufficient to offset any demand shortfall in the advanced economies. At this juncture, a more realistic long-term growth trend for Malaysia would be between 4% and 5%,” economist Wan Suhaimie Wan Mohd Saidie wrote in the Kenanga report.

He said unless Malaysia took a more aggressive stance to stem human-capital loss and sluggish private-sector investments, it would be difficult for the country to rise above its minimum growth potential of 6%. “It’s going to be tough,” he said.

The 10MP is deemed crucial because the five-year plan from 2011 till 2015, is the second last blueprint before the 11MP from 2016 to 2020, in facilitating the nation’s goal of achieving developed-nation status by 2020.

Hence, policymakers have decided to table the 10MP earlier in June 2010, six months ahead of the initial year for the national initiative. Previous plans were usually tabled during the first year of their implementation.

A key theme is competitive private-sector-led growth to spur the country’s economic fortunes while the government functions as an effective facilitator.

As such, private-investment growth is expected to increase by 10.5% a year, surpassing public investment expansion of 0.7% during the five-year plan, translating into an annual real gross domestic product (GDP) growth of 5.5% during the 10MP compared with the projected 3.2% growth under the 9MP.

Policymakers have identified the services, manufacturing, and agriculture sectors as main growth drivers under the 10MP.

In a note yesterday, CIMB Investment Bank Bhd head of economics Lee Heng Guie said, while global dynamics were not within the country’s control, policymakers had to ensure that domestic resources were optimally utilised via the better management of government funds.

“The execution risk and leakage have to be brought down to the lowest possible point to ensure the resources are optimally allocated.

“Fiscal resources should be deployed for socio-economic development, education, human-capital formation as well as to promote a sustainable eco-friendly environment,” Lee said.

Meanwhile, Kenanga Research also said it would not be a surprise if the goods and services tax (GST) were to be announced as part of the 10MP.

It said the gradual reduction and realignment of both personal income tax and corporate tax rates was a step closer towards converting Malaysia’s current tax regime to the GST system, which had been postponed indefinitely since it was first announced in the 2005 budget.

Kenanga Research said the broader tax base was expected to be able to increase the government’s coffers and would likely more than compensate the shortfall in corporate and individual tax collections.

“Singapore and Australia are role models of successful GST regimes and they are less prone to declining income during an economic downturn,” it said.


This article appeared in The Edge Financial Daily, Nov 12, 2009.