@ the IERP® Global Conference, August 2023
The moderator for this session was Associate Professor Dr Au Yong Hui Nee, Dean of the Faculty of Business & Finance, UTAR. Panellists were Dr Ray Choy, Chief Economist, MARC Ratings Bhd; Prof Dr Geoffrey Williams, Provost of Research & Innovation, MUST; and Dr Mohd Afzanizam Abdul Rashid, Head of Economics, Market Analysis & Social Finance, Bank Muamalat. Economic downturns or major crises tend to occur every ten to 12 years but many forecasters nowadays are considering more seriously the risks of greater economic slowdown caused by the policy mistake of raising interest rates too aggressively, Dr Choy stated at the outset of the panel discussion.
Apart from the higher interest rates in the UK, US and Europe, there could also be a domino effect stemming from China’s property market. “But the greater concern is the clustering of risks and the closeness of the pandemic,” he said. “What we are facing is a bit more than the usual ten to 12-year crisis.” Commenting on whether things will improve in 2024, Dr Williams said, “One of the reasons that we continue to say that things will improve in 2024 is that we don’t know if they will, in fact, improve in 2024 – but we are, generally speaking, hoping that they will!” He added that there was no failure of economic policy; the difficulties being experienced now were due to the pandemic.
“You cannot close down the entire global economy and expect that things will be the same afterwards,” he said. “It’s not possible. When you have the kind of disastrous public policy driven by medical advice which we have come to understand was wrong, then you will understand that the economic responses you had were limited, and though you may have disagreed with overspending during the crisis…the fact is, from the economic policy perspective, there was very little you could do when, on the basis of evidence – evidence that we now know to be wrong – you closed down the economy. We must recognise that everything we are seeing now is a consequence of that.”
The negative impacts seen in 2021 and 2022, as well as the rebound in 2022 and in the first half of 2023, have been the consequences of economic lockdown. However, prior to the pandemic period, global growth had been sustained since the start of the 1990s. This growth had been consistent worldwide, and had also been relatively easy to forecast. “What we saw during the Covid period was a very significant, massive economic break – in ways we still don’t understand,” he added. There was now no trends to follow. In the labour market, for example, there were now more people involved in the informal ‘gig’ economy, doing freelance-type work.
“Frankly, they’re doing better, and they’re doing even more,” he said. “We’ve seen shifts in global trade, shifts in the global balance of power, and active dispersion in terms of dollar dominance. But what is different now is that major economies are actually doing something in terms of moving on. Part of it is due to the pandemic; part of it is driven by technology; part of it is being driven by the greater desire of large economies – especially China – to have an increasingly important global role.” Considering all these factors, more volatility in GDP and in financial markets can be expected. Because of the increase in volatility, there should be more variation in policy, but this may not happen.
“In the US, the policy response is the same as it was 30 years ago,” he remarked. “In Malaysia, the inflation rate is being moderated by price controls and subsidies. Where inflation is coming down, it is because of global commodity prices. Inflation control in Malaysia has been much more successful because there has been a wider portfolio of policy response, unlike in the US and Europe.” Noting that we tend to look at positive growth and not so much at what is negative, there were indications of what may happen. Malaysia’s standard GDP volatility had increased, which may affect the country’s growth next year. A rise in unemployment is expected, Dr Afzanizam said.
With Covid amplifying the convergence of factors, central banks were still having a difficult time understanding the dynamics of the labour market; they were instead fixated on bringing down inflation through interest rates. “When you see this trend, there is a need to pivot towards this new economy,” he said. “There is a need for monetary policy to support this. You want to promote investment but if you continue to raise rates, you cannot expect investment to come in.” Urging risk professionals to be cognisant of these factors, he cautioned that things, including risks, were becoming short-term.
There was therefore a need to be practical about assigning risks, and how the organisation positioned itself. Advocating for flexible work arrangements, he noted it was one way of attracting talent. Reassessment of office space was also necessary; this was one of the risks arising from the changes in work arrangements. The risk here was likely to be elevated. To a question from Dr Auyong if the recently-announced Elon Musk/Tesla EV project was likely to have a spillover effect on other sectors or investors, Dr Williams said, “I think not. It is my professional opinion that things are worse now than they were 20 years ago in terms of the role of ESG and corporate responsibility amongst companies.”
He was of the view that the world, in moving towards ESG and social responsibility, had created a vacuum for investors – who lacked the resources/content, or did not want to take this direction – that Malaysia could fill. Dr Williams supported this assertion with the example of China and Saudi Arabia, which have also recently invested billions in Malaysia. “The Chinese do not care about ESG matters in the same way that Western investors do,” he said, adding that although it did not yet signal a reversal of current trends, it was good news.
Investors were coming to Malaysia but not because of good ESG or good sustainability regulations. Dr Choy gave some insights into local developments, noting that a lot of policy was actually being shaped by the UN Sustainability Development Goals (SDG). Within the fund management industry, insurance companies were being tasked with profiling ESG ratings for each of their investments. “The investment industry is taking steps to channel its monies to more ESG-compliant investments and industries,” he said. “There are some areas where we have had setbacks but global policy framework has been helpful for developing countries like Malaysia which want to get involved with ESG.”
Dr Afzanizam observed that there tended to be more emphasis on environmental goals. He said the Social part should carry more weight, with success stories that emphasised its importance, but how to assign weightage could be an issue. Describing climate change as not an imminent threat but a long-term trend, Dr Williams said that although the world was seeing some effects of climate change in the past five or ten years, it was unlikely that we would wake up one day to a climate disaster. “This is a long-term trend, which means there is the possibility of planning for it,” he said. “The science is clear. There is a link between human activity and global warming.”
However, because it is a slow-moving process, there is still some time to work out mitigative measures. “If all the lights and air conditioners were switched off, and everybody walked to work; even if all power stations were closed down, it wouldn’t make any difference at all to global power or the process of climate change,” he stated. “It would be devastating from the economic and social perspectives. What we need to understand is that net zero is net negative in terms of social and economic impact.” He suggested that the renewable energy generated by Malaysia be considered surplus energy, and be exported.
“It’s actually in the export of these renewables that Malaysia can create added value, rather than any plans to change the economy domestically,” he said. “This is the balance we have to strike: do we use these resources to protect the environment, or do we use them to improve social and economic outcomes? My vote is for social and economic outcomes.” Dr Choy said that China has achieved net zero, but that developed countries were always looking for backing while developing countries had to think about their economies and the social growth requirements for development. Concluding, Dr Afzanizam advocated proper measurement and correct data to determine if targets were being met; and if not, what adjustments needed to be made.
