IS Malaysia currently in a state of economic crisis? The answer is not quite. How could it be in an economic crisis when people can now fill up their petrol tank with less ringgit? Those in Peninsular Malaysia are also poised to enjoy lower electricity tariffs beginning next month.

Unlike Japan, Malaysia’s economy has not seen a contraction yet. In fact, it reported a surprise faster-than-expected growth of 5.8% in the fourth quarter of last year, mainly due to strong domestic demand. For the full year, the country registered a credible gross domestic product growth of 6% — higher than expectations, on the back of growth in the private sector.

Yet, beneath all these impressive statistics and feel-good sentiment, there are signs of turbulent times ahead. The continued fall in crude oil prices and depreciation of the ringgit in recent months are definitely concerns for Malaysia.

Low oil prices, in particular, have dire repercussions for the government’s finances as energy-related revenue accounts for at least 30% of its total revenue. In other words, the government will have to cut back its spending to prevent its fiscal deficit from ballooning again and threatening to cause a credit rating downgrade.

To be fair, the Malaysian government has not stood idle in this case. Prime Minister Datuk Seri Najib Razak recently delivered a special address on current economic affairs and the government’s financial position. He explained that the government’s 2015 budget, announced last October, was based on oil prices averaging US$100 a barrel, but this projection was no longer realistic as global crude prices have dropped over 50%.

He added that after lowering its oil price forecast to US$55 a barrel, the government will face a revenue shortfall of RM8.3 billion (US$2.3 billion), despite savings gained from the removal of fuel subsidies last month.

Najib then laid down some measures to cut spending and announced that the government had revised downwards its fiscal deficit target from 3% to 3.2% of GDP, and lowered its growth forecast for this year to between 4.5% and 5.5%, from 5% to 6%.

While the government is confident that “the country’s economy will continue to attain a respectable and reasonable growth and ringgit will eventually bounce back”, many seemed unconvinced, if market reaction were any indication.

After Najib’s special address, the ringgit hit a near six-year low of 3.6060/6730 against the US dollar. There appeared to be concern that the government may not deliver on its earlier promise of reining in its perennial fiscal deficit.

Many also interpreted the government’s revision of its fiscal deficit target and reduction in growth forecast for 2015 as clear “reinforcements of the fact that dependence on commodities remains a key credit weakness for Malaysia”.

Yet, who could fault them for holding such a view? The current episode of economic turbulence only serves as another warning that the country’s economy may be heading for a crisis if it does not take drastic actions to rectify the long-overdue structural weaknesses.

Chief among them is the increase in operating expenditure — now accounting for 80% of the budget. The ballooning of such expenditure is said to be primarily due to the ever-expanding and already bloated civil service. There cannot be any significant and meaningful fiscal consolidation without taking the bull by the horns — by trimming the civil service.

The other long-outstanding systemic risks in the economy are the three addictions — to petrol money, foreign labour and subsidies.

Apart from that, the perception of a deterioration of quality in education, widespread corruption, worsening race relations and dysfunctional political processes are not helpful in convincing the market and the people that the country is on the right track.

In economically turbulent times such as now, the least a government can do is to address these fundamental issues while, at the same time, trying to preserve jobs, stimulating consumer spending and enhancing the nation’s competitiveness.

However, the government should have realised by now that no policy — no matter how brilliant it looks on paper — can work if for whatever reason the people doubt the government’s capability, determination and sincerity in steering the nation back on track.

The people’s confidence in the government is key to the success of any policies, and can no longer be taken for granted. Now, the government needs to earn their confidence. This is the most challenging part for any government in these turbulent times.

If at all Malaysia were in crisis now, it would be a crisis of confidence in policymakers and implementers.

Khaw Veon Szu, a former executive director of a local think tank, is a practising lawyer. Opinions expressed in this article are his personal views.

This article first appeared in Forum, The Edge Malaysia Weekly, on February 23 - March 1 , 2015.

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