The above matrix is a pointer to the
quo vadis of the Malaysian economy down the road. It displays the likelihood,transmission and impact of risks as well as suitable policy measures to manage these risks. The risks range from high to low.
Let us look at six indicators.
Side Effects from surge in financial volatility- High Possibility. This will invite capital reversals, the depreciation of the ringgit and falling export volumes. In the medium term the high share of foreign holdings in sovereign and BNM securities should be off-set by domestic buying. On the policy domain, stabilise the exchange rate as a shock absorber, provide liquidity support while temporary fiscal consolidation should be mounted upon well-targeted areas of the economy.
Financial Imbalances- in the medium term, the likelihood will be capital inflows and pressure on the exchange rate. Also there could be growth in leverage. On the low to medium scale, the high household and corporate debt will continue to make Malaysia vulnerable to external shocks. The recommended policy measures would include quickening the pace of fiscal consolidation, taking on macro-prudential measures while monitoring shadow banking.
Persistent Dollar Strength-In the medium term,disorderly readjustments can affect trade channels, cause contagion effects as well as result in capital outflows. As external debt are mostly in local currency, risk is low to medium. Also, on the positive side, it has been a practice to hedge by local resident companies. The policy instrument would be to stabilize the exchange rate as a shock absorber.
Protracted Slower Growth in Advanced Economies and Emerging Markets-The likelihood and transmission of such risks is high. It may affect trade and result in second round adverse effects on domestic demand. The expected impact is expected from low to medium. It would likely dampen domestic demand, lower growth, diminish housing and asset values and weaken corporate, banking and sovereign balance sheets. Policies for adoption would include adjustment to a slower rate of growth, start-up upon infrastructure projects as well as implement structural reforms.
Implementation Risks with GST-There exist the possibility of a low to medium risk with implementation of GST that could adversely affect the credibility of fiscal policies. On the risk impact side, this can result in higher financing costs,high public debt, public debt sustainability issues and potential sovereign downgrades which can then result in capital outflows. Counter- cyclical measures will have less effects. The exchange rate can be relied upon as a shock absorber.
Sharp Decline in House prices-The real economy could be affected by weaker household and banking balance sheets;there would be negative wealth and low confidence. The medium term risks takes the form of high household debt at 86% of GDP; of which 50% are mortgages. Policy initiative should include easing of monetary policy, having a flexible exchange rate as well as the provision of fiscal stimulus to support growth.
