KUALA LUMPUR: There is a general perception that Malaysia's road to reform will be paved with short-term pain for long-term gain.
While this is true in some parts, a year since it took a step on the road to reforms, some gains are already recognisable.
This is evidenced by the various rating upgrades by global financial institutions since July this year.
One such example was JP Morgan's upgrade of Malaysia to an "underweight" rating after six years of a "neutral" stance.
While Malaysia has a long way to go, this action by a reputable global financial institution shows that the wheels are turning and more importantly, the world is taking notice.
This confidence in Malaysia's pathway helped foreign fund inflows into the country grow to RM22.2 billion in the third quarter of 2024, its highest level since the third quarter of 2012.
UOB Global Economics and Markets Research said in its note recently, partly benefiting from sustained foreign portfolio inflows, foreign direct investments (FDIs) and gradual unwinding of net short position in foreign exchange swaps, Bank Negara Malaysia (BNM)'s international reserves improved for the fifth month in a row.
It posted the biggest jump in 10 months by US$2.9 billion month-on-month to US$119.7 billion as at end-September. It was also the strongest foreign reserves since November 2014.
Sunway University economics professor Dr Yeah Kim Leng told Business Times that the plans and strategies to sustain fiscal reforms to reduce fiscal deficit and debt levels, strengthen social protection systems, enhance good governance and stamp out corruption, have positively influenced foreign investment inflows and raised overall investor confidence.
He said key indicators pointing to the rise in investor confidence include the surge in FDIs and portfolio investments and numerous new and existing iconic global tech companies committing multi-year investments in the country.
"Also reflecting the rise in overall investor confidence is the increasing bullishness in asset markets such as equity, bond and property markets," he added.
Public Finance and Fiscal Responsibility Act 2023
The legislation of the Public Finance and Fiscal Responsibility Act (FRA) aims to improve governance, accountability, and transparency in fiscal and debt management.
"Fiscal and debt sustainability are critical for ensuring fiscal discipline and building strong fiscal buffers against future shocks," he said.
Economist Datuk Dr Nungsari Ahmad Radhi said the Public Finance and Fiscal Responsibility Act 2023 has put in place mechanisms that actually diminished many discretionary powers of the finance minister as well as making disclosures to Parliament more formalised and frequent.
"Shenanigans like 1MDB will likely not go unnoticed for so long," he said.
Nungsari said the FRA also imposes quantitative limits on government finances — limits on debts/borrowings, deficit levels as well minimum amount of annual public investments.
He said it also compels the government to disclose and report all types of liabilities.
"It imposes the necessary constraints that force the government to be prudent and make decisions more transparent for parliamentary oversight. The health of government finances is an important investment consideration.
"You want to preserve Malaysia's sovereign ratings linked to government finances. Otherwise, the cost of credit will increase and Malaysia will be seen as a high-risk market," he said.
Tax reform to bolster revenue
In an effort to tackle fiscal inadequacies, the Malaysian government introduced new tax measures, including an increase in the Service Tax and the implementation of a Capital Gains Tax.
These reforms are projected to generate about RM3.1 billion in additional government revenue.
This is a crucial step towards addressing the nation's fiscal deficit while reducing reliance on borrowing.
These measures represent a balanced approach to fiscal consolidation.
"The introduction of a Capital Gains Tax, in particular, reflects Malaysia's alignment with global tax trends and will help reduce income inequality by targeting wealth accumulated through asset appreciation.
"It is a necessary move to broaden the tax base while ensuring fairness," the expert said.
He also noted that the increased Service Tax is likely to impact certain sectors more than others, but this can be mitigated with targeted subsidies and exemptions for critical services.
This move reflects Malaysia's commitment to fiscal discipline and efficient revenue collection while aligning its tax policies with international best practices.
The additional revenue is expected to fund public services and infrastructure projects essential for long-term economic growth.
Subsidy reform
Subsidy reform has also become a cornerstone of Malaysia's fiscal policy, with particular emphasis on rationalising electricity and fuel subsidies.
Prime Minister Datuk Seri Anwar Ibrahim has reaffirmed his government's commitment to subsidy rationalisation, stating that the entire cabinet supports this policy.
In June, the cabinet agreed to implement targeted subsidy on diesel, projected to save the country RM4 bilion annually.
Yeah said the subsidy savings will help improve the country's fiscal position.
He said this is because it can reduce deficit and enable more spending in other more critical areas such as health, education and social welfare.
"It also contributes to better allocation of scarce resources. Higher fuel prices also motivate greater efforts towards lower fuel consumption and promotion of fossil fuel conservation and efficiency," he said.
"While the rationale for reducing subsidies to ease the government's financial burden is commonly understood, I believe the consequences on societal welfare remain to be fully explored," he added.
Social reform
Societal stability is an important risk factor investors consider over the longer term, addressing inequality and ensuring more inclusive economic growth.
Nungsari emphasised the need for policies that address inequality, particularly those encouraging greater female workforce participation and enhancing support for small and medium enterprises (SMEs).
"Programmes aimed at boosting female labour force participation, such as initiatives to support working mothers, are essential and should be expanded.
"Additionally, increasing the number of SMEs capable of exporting would improve Malaysia's competitiveness," he said.
Nugsari also stressed the importance of addressing gaps in education, human capital development, and technical expertise.
"Investors, particularly in the electrical and electronics sector, often cite the shortage of engineers as a major constraint. More needs to be done to develop our human capital and improve our schools and universities," he said.
These measures, he believes, are vital to ensure long-term growth and stability, which are key considerations for investors.