Millions of middle-class Malaysians are grappling with the biggest increase in state controlled electricity and gasoline costs since 2008, threatening consumer spending growth and reasserting Malaysia's reliance on exports this year.
Since winning a May election, Prime Minister Najib Razak has unleashed a series of price increases to cut subsidies and improve state finances, crimping scope for companies to boost wages while spurring inflation.
The moves, from a 14% jump in sugar costs in October to an 11% increase for gasoline in September and an average 15% to 16.9% climb for electricity this month, could slow private consumption growth by 0.9 percentage point in 2014, according to Alliance Financial Group Bhd. and Malaysian Rating Corp.
"Definitely it's difficult," Ng Wei Keong, a project engineer with two children aged five and three, said in an interview at a December protest against another strain on his living cost -- an increase in the annual property assessment rate in Kuala Lumpur. "My kids will be without toys, no more vacation, no new cars and we must be very wise on spending money."
Malaysia's middle class, forged during the economic boom of the early 1990s, is bearing the brunt of the fiscal trimming as they grapple with a cocktail of record-high property prices, elevated household borrowings, and slower pay increases than lower-income earners. Rebounding exports are set to counter the spending squeeze, giving Najib scope to put consumers through the immediate pain of surging living costs as he shifts the economy toward market-based prices for commodities and energy.
'Some pain'
"There will be some pain in moving towards market-based pricing of the currently subsidised-costs of essential food items, fuel and energy," said Suhaimi Ilias, chief economist at Maybank Investment Bank, part of the country's largest lender. "Over the long term the economy will gain from a generally more efficient economy."
Underscoring the threat to the domestic demand that held up growth in the past two years as exports faltered, consumer confidence in the third quarter fell to the weakest since 2009, according to a Malaysian Institute of Economic Research measure. An index of consumer stocks barely rose in the second half of 2013, gaining 0.02% compared with the benchmark's 5.2% climb.
The "headwinds to domestic demand in the near term" would make Malaysia's economic growth increasingly dependent on an export recovery, Citigroup Inc said in a November report. The banking group predicts a 5% expansion in 2014, at the lower end of the government’s forecast range, as it anticipates more fuel price increases that will cut discretionary incomes by a net 2 billion ringgit (US$608 million), or 0.2 percentage point of nominal gross domestic product.
Sandwich class
Those in the middle-income group, who make as little as 3,000 ringgit a month, do not benefit as much as other segments from planned government handouts or income tax cuts, said Wan Saiful Wan Jan, chief executive officer at the Institute for Democracy and Economic Affairs, a Kuala Lumpur-based think tank.
Malaysian families who earn 3,000 ringgit to 4,999 ringgit a month made up 27.8% of households in the population of about 30 million, according to government data for 2012, up from 4% in 1989. About 39% of households fall below that bracket, while the remainder of the middle class and the highest income groups -- those earning 5,000 ringgit and above - - account for 33.6%.
Inflation pressure
"The bottom 40% is helped by the various welfare programs, while the top 5% will benefit from the trend to reduce income tax and they are generally better off in a liberalising economy," Wan Saiful said in an interview. "For the middle income group, nothing has been done to help them but there are so many things that they can't afford anymore."
Inflation in Southeast Asia's No 3 economy may accelerate to 2.9% this year and a seven-year high of 3.3% in 2015, when Najib plans to introduce a new consumption tax, according to Bloomberg surveys. In contrast, the Malaysian Employers Federation estimates lower salary increases and bonuses in 2014 in the private sector as business costs rise.
"The faster inflation rate amid slower income rise erodes purchasing power, which will impact the consumer spending part of GDP," said Maybank's Suhaimi. He predicts the central bank will keep interest rates unchanged even as inflation reaches 3.5% in 2014, to avoid further deflating consumer sentiment. "The risk to growth is pretty much coming from consumers."
Pay increases
Executives will get a 5.63% average increase in salaries, down from 6.31% in 2013, and non-executives will get a 5.65% raise from 6.7 last year, according to an MEF survey of 257 companies. Lower-paid workers will fare better -- in addition to benefiting from a minimum wage, non-executives will get a bigger bonus this year while executives will get a smaller payout.
Government data show that the most well educated people in the workforce got the smallest wage increase in the two years through 2012.
"What we earn cannot cope with the rising cost of living," said Selena Tay, a freelance writer in her 40s who lives with and supports her elderly parents. She plans to cut out purchases of clothes, shoes, bags to save money for food. "The government is strangling us. We are now scared to read the daily newspaper because every day, the price of something is going up."
Political gamble
Najib is making a political gamble as he starts to dismantle decades of subsidies to address fiscal risks identified by Fitch Ratings, which cut Malaysia's credit outlook in July. Within months of the May election that returned his ruling Barisan Nasional coalition to power without winning the popular vote for the first time, he scrapped the sugar subsidy and unveiled plans for a goods and services tax at the risk of further alienating the urban voters who turned against him.
The next election is due by about mid-2018. Najib's predecessor Abdullah Ahmad Badawi, who introduced even bigger increases in electricity and fuel prices after the 2008 general election, stepped down to make way for Najib mid-term in early 2009.
49% of respondents in a survey released in December say the country is heading in the wrong direction, with rising living costs and unfavorable economic conditions cited as the main reasons, according to the Merdeka Center for Opinion Research.
Some Malaysians have already taken to public protests against the price increases. In December, hundreds gathered in front of the city council office in Kuala Lumpur to rally against an increase in property taxes. On New Year's Eve, about 4,000 people joined an illegal protest in the capital to demand lower living costs, disrupting a countdown concert, Bernama reported.
"My biggest worry is, financial difficulty will lead to ethnic tension," said Wan Saiful. "You go to a Malay area in Kuala Lumpur, Kampung Baru or Sentul, you already get the sentiment that they are accusing the Chinese of taking away all their economic wealth. If you go to poorer Chinese area in Cheras, Balakong, the sentiment you'll get is the ethnic Chinese will say of course they are poor, because the ethnic Malays are the ones being helped by the government."