Published: Saturday December 14, 2013 MYT 12:00:00 AM

Updated: Saturday December 14, 2013 MYT 11:50:25 AM

Headwinds to domestic spending

BY CECILIA KOK
CECILIA KOK

A survey by the Malaysian Institute of Economic Research shows that consumer sentiment in the country has been on a declining trend since
the second quarter of 2013 because of rising inflationary pressure and less robust household incomes.

EXPECTING to be further squeezed by the rising cost of living next year, Albert Tan (not his real
name) is already making plans to cut down on his discretionary expenses.
I have to start planning now for next year, says the 43-year-old marketing manager.
I believe 2014 is going to be a rather tough year on my familys budget, what with the prices of
goods and services everywhere expected to creep up while my salary continues to play catch up,
the father of two a four-year-old boy and a six-month-old baby tells StarBizWeek.
Tan reveals that even his wife, after having left employment five years ago to be a homemaker,
will begin to take up freelance projects to help supplement the familys income, given the
foreseeably challenging year ahead.
It is not that we are entering into a desperate situation, but we thought that we could at least earn
some extra money to put into the familys savings, especially for the childrens future, Tan
explains.
Still single Adelina Yusof (not her real name), on the other hand, has decided to abandon her plan
to upgrade to a bigger-capacity car next year.
The 32-year-old account manager, who paid off her seven-year hire-purchase agreement for a
local make last year, says she now prefers to wait and see.

My company has already indicated that it is on an austerity drive, so the staff are not to expect
any big pay jump next year, Adelina explains.
And with the prices of goods and services expected to increase next year, I suppose Ill just have
to be more careful with my spending ... while I know that weve been assured that the increase in
prices will not be too much, it is still too early to gauge how much the change could affect my
lifestyle going forward, she adds.
Tan and Adelinas sentiments are reflective of the many households in the country who are feeling
the financial stretch because of the rising cost of living amid slower wage growth.
In fact, economists say they expect domestic consumer spending growth to moderate in the year
ahead, as increasingly more households are turning cautious about their expenditure.
A survey by the Malaysian Institute of Economic Research shows that consumer sentiment in the
country has been on a declining trend since the second quarter of 2013 because of rising
inflationary pressure and less robust household incomes.
Moderating consumption
Inflationary pressure in Malaysia is inevitable as the Government resorts to subsidy rationalisation
as part of an initiative to reform the countrys economy and strengthen public finances.
So far in recent months, the Government had reduced its subsidies for fuel, resulting in the
increase of the prices of RON95 petrol and diesel by 20 sen to RM2.10 and RM2 per litre,
respectively. It had also abolished the 34-sen-per-kg subsidy for sugar, resulting in the price of
domestic refined sugar increasing to RM2.84 per kg.
And starting next month, the average electricity tariffs in Peninsular Malaysia and Sabah and
Labuan will increase by 15% to 38.54 sen per kilowatt-hour (kWh) and 34.52 sen/kWh,
respectively, as the Government scales back subsidies for the power sector.
More rounds of subsidy rationalisation are only to be expected in 2014, as the Government
consolidates its expenditure.
While expecting higher inflation from these measures (subsidy rationalisation), we expect more
impact from the potential tariff adjustment for water and recent hike on assessment rates,
especially in Kuala Lumpur, when businesses pass over the additional cost to the consumers.
Overall, we forecast prices to spiral upwards in 2014, affecting all sections of the people,
Alliance Research chief economist Manokaran Mottain argues in his report.

According to Manokaran, the broader inflation rate, as measured by the annual change in
consumer price index (CPI), will likely breach the psychological level of 3% for most part of next
year. Thus, he points out that moderation in consumer spending growth is inevitable, as higher
inflation could eat into the disposable incomes of households and lower their purchasing power.
Meanwhile, tighter lending rules as Bank Negara moves in to rein in the countrys growing
household debt are also expected to further cap consumer spending. Malaysias household debt
currently stands at a critically high level of 83% of the countrys gross domestic product (GDP).
With credit conditions tightening, there may be increasing pressure to rebalance away from
leverage-driven private consumption growth model, Citigroup Inc economist Kit Wei Zheng says.
On a positive note, the increase in the 1Malaysia Peoples Aid, or BR1M, handouts to the lowincome group, as well as the full implementation of the minimum wage policy and salary
increment for civil servants are likely to somewhat mitigate the impact of higher inflation and
tighter lending rules on consumer spending.
Economists say higher tourism expenditure on the back of Visit Malaysia Year 2014 may also
offset the moderating domestic spending.
According to RHB Research Institute Sdn Bhd, consumer spending growth next year will likely
slow to 6% from a relatively strong pace of 7.2% estimated for 2013.
Despite a more moderate pace of growth, it is still commendable and growth of consumer
spending will likely be supported by rising consumerism, high savings and favourable labour
market conditions, says RHB economist Peck Boon Soon in his report.
Growth engine
Domestic demand comprising consumer spending, investment and government consumption
has been the pillar of growth for Malaysias economy in recent years amid a weak and sluggish
external environment.
While domestic demand is expected to remain resilient amid the rising uncertainties in the year
ahead, it is expected to grow at a slower pace given the existing constraints.
Domestic demand growth has shown signs of moderation in the fourth quarter of 2013 and will
probably soften in 2014, in tandem with stringent lending rules and fiscal tightening efforts,
AmResearch Sdn Bhd economist Patricia Oh says, while noting that the resilient domestic
demand in recent years has been driven mainly by strong growth in private consumption and
investment activities.

It may be hard to maintain such momentum in the year ahead as households are not the only
ones tightening their belts.
The Government is also expected to be more cautious in its spending and investments next year
as it intensifies its fiscal consolidation.
As it is, Malaysias public debt-to-GDP ratio at 54.8% currently is only a shade lower than its selfimposed limit of 55%. There is increasing pressure on the Government to lower its debt level and
not allow it to breach the self-imposed limit.
Then, there is the high expectation among foreign investors for the Government to trim its fiscal
deficit. They expect the Government to meet the fiscal-deficit target of 4% of GDP this year and
3.5% of GDP in 2014.
In general, economists expect growth in public consumption to moderate to around 3%-4% next
year from the expected 6%-7% this year, while public investment growth is expected to slow to
4% from the estimated 5% this year. The moderating pace of public consumption and investment
growth, economists point out, is in line with the Governments effort to contain its budget deficit
and debt.
Private investment, on the other hand, is expected to remain robust with a double-digit growth.
While Alliance Research expects private investment growth to slow to 11% next year compared
with 13.1% this year, RHB believes private investment will accelerate to a growth of 14.5% in
2014 from 14% this year.
RHB says the implementation of projects under the various economic programmes such as
those in the oil and gas, high value-added and knowledge-intensive industries will drive private
investment next year. It adds that higher business spending is also expected to cater for a
recovery in exports next year as the global economic recovery picks up pace.
Despite the headwinds and the recovery of advanced economies (which could be a boon to
Malaysian exports), domestic demand is expected to remain as the main engine of growth for the
countrys economy next year.
All in, domestic demand is expected to grow at a slightly slower pace of 6.5%-7% in 2014,
compared with an estimated growth of 7.5%-8.5% in 2013. Together with the expected recovery
in exports, the countrys domestic demand should be able to sustain the countrys GDP growth at
a healthy level of around 5% in the year ahead.
http://www.thestar.com.my/Business/Business-News/2013/12/14/Headwinds-to-domestic-spendingRising-cost-of-living-stringent-lending-rules-and-fiscal-consolidati.aspx