Monday, January 05, 2009

Challenging Year Ahead

CHALLENGING year ahead but in a good position to stay afloat — this is the general consensus of economists and analysts regarding the country’s economic outlook come 2009.

While not discounting the possibility of a mild recession, most economic observers agree that Malaysia is in a much better position to weather the slowdown.

Malaysia’s strengths include high savings and reserves, a well-capitalised banking system, manageable debt and government’s fiscal position as well as a much healthier corporate sector, said CIMB Bank’s chief economist Lee Heng Guie.

“Reeling from the intense impact of the fallout in external demand and fast receding commodity prices, Malaysia’s growth momentum lost traction in the second half of 2008 (2H08) to around 3% to 3.9% from an average growth of 7.1% in 1H08.

“Under the worst-case scenario, the economy could slip into a mild contraction of 0.5% in 2009, if there is a major retrenchment of consumer spending and sharper drop in exports,” Lee told The Edge Financial Daily.

Nor Zahidi Alias, chief economist at Malaysia Rating Corporation Bhd (MARC), shared the same sentiment.

“In view of the rapid deceleration in global economic growth, there is an increasing likelihood that Malaysia would experience the slowest growth since 2001. This is especially true if commodity prices such as CPO remain at a depressed level.

“We are of the opinion that Malaysia’s GDP growth for 2009 might miss the government’s official target of 3.5% should the global economy remain in the doldrums,” he said.

UBS Research in its latest report also forecast a gloomy outlook for Malaysia in 2009. It projected a zero GDP growth in 2009, before recovering to 4.3% in 2010.

“Our 2009 GDP growth forecast reflects our pessimistic view on the global economy and assumes that exports contract by 13% y-o-y (year-on-year) and gross fixed capital formation declines by 4.9% y-o-y .

“The macroeconomic outlook for next year also assumes that inflation is no longer a key risk and that the ringgit stages a recovery in late 2009 as capital outflows ease,” said UBS.

Datuk Dr Mohd Ariff, executive director of the Malaysian Institute of Economic Research (MIER), said the institution was maintaining its position on the chance of Malaysia slipping into recession next year at 40%.

MIER has earlier said the 3.4% GDP growth projection for next year may be revised downwards, due to the worse-than-expected economic contraction in major economies.
Data obtained from the National Department of Statistics confirmed that the overall growth trend is slowing down. For example, the coincident index that measures current economic activities, decreased by 0.1% to 123.6 points in Sept 2008.

Industrial production index dropped by 0.3%, real salaries and wages shrank 0.2% and sales in manufacturing sector were down 0.1%.

The manufacturing sector grew at a softer rate of 2.6% y-o-y in October to RM45.9 billion versus 8.6% in September, as growth traction for petroleum and electronics sales moderated in line with easing demand.

In terms of inflationary pressure, there are signs that the pressure is finally easing, as the consumer price index (CPI) for Nov grew 5.7% y-o-y compared with 7.6% a month earlier, its slowest pace in six months. This was attributed to further reduction in domestic retail diesel and petrol prices. Up to November this year, the CPI has gained 5.5%.

Slowing exports
On the trading front, the continued slackening global demand for electronics and electrical products as well as lower commodity prices are expected to have a knock-on effect on Malaysia’s export growth in 2009.

Nor Zahidi said growth in global chip sales, which moderated to 3.8% in 2007, would likely decelerate further in view of the anticipated contractions in the sales of PCs and cellphones
Lee said: “We project export to contract by at least 3% in 2009, a sharp reversal from an estimated 10% in 2008.

“In tandem with a drop in exports as well as slowing domestic economic activities, imports compression is expected.”

The Ministry of International Trade and Industry (Miti) recently said Malaysia’s trade level was expected to be maintained at the record RM1.2 trillion achieved last year. Buoyed by the strong export performance for the first nine months, Malaysia’s total trade from January to October 2008 surpassed the RM1 trillion mark.

In addition, October also saw Malaysia registering the 132nd consecutive, albeit a lower trade surplus of RM9.62 billion compared with RM14.74 billion in September. However, on a month-on-month basis, exports for October dropped 14.2% from September, while imports were lower by 7.8%. The decline was mainly attributed to lower exports of electrical and electronic (E&E) products and commodities, namely refined and crude petroleum as well as palm oil.

Nor Zahidi said contrary to popular perception, Malaysia’s economy, especially in terms of trade was still largely dependent on the US, and the slackening trade was not expected to see a recovery anytime soon.

“It should also be noted that Malaysia’s total exposure to the US market has actually increased to 32% in 2006 from 25% in 1994, according to the IMF. That means, a sharp slowdown in the US economy will have a significant impact on Malaysia’s export sector,” he said.

FDIs to fall
A scenario where almost all rich and powerful economies are struggling for survival at a same time is rather rare in recent history. With the global credit crunch, questions now arise on what is in store for the country in terms of foreign direct investment (FDI) and trade, a major source of Malaysia’s economic growth.

Approved foreign investment in the manufacturing sector shot up 81.3% to RM39.5 billion, representing 73.2% of the total in January-September 2008, from RM21.8 billion in January-September 2007. The bulk of it was in basic metal products, accounting for 49.4% of foreign investment approvals.

For the key E&E sector, FDI was up 32.3%, chemical & chemical products increased 3.6% while food manufacturing went up 3.2%.

Australia replaced long-time leaders such as Japan and the US as the largest investor during this period, representing 31.9% of the total FDI, followed by the US with 15.9%, Japan 11.3% and Spain at 10.5%.

The Institute of International Finance (IIF) recently estimated that net direct investment in emerging Asia would decline from RM120.7 billion in 2008 to RM108.5 billion in 2009. Many now expect the worse for the coming year.

“We see weakening prospects for global FDI flows into the region as the global financial system deleverages and global investors’ sentiments turn far more guarded. Malaysia too will be impacted by the reduced FDI flows,” CIMB Bank’s Lee said.

He said Malaysia had implemented measures to strengthen its position in order to attract more foreign and domestic investments. These include the liberalisation of selected services sectors, easy manufacturing licences for non-strategic activities, scrapping of import duties on raw materials and intermediate goods, as well as the review of business licences and fees. More may need to be done.

With exports slowing, another area of concern for the economy going forward was the need for new sources of income and reducing the ballooning budget deficits, as most economists agree that over-reliance on commodities as the main source of national income is unsustainable.
CIMB’s Lee said the lower oil price was a double-edged sword, as based on sensitivity analysis, every US$10 per barrel drop in oil price would lead to a reduction of RM4 billion in total tax revenue, but also translate into savings of RM1.1 billion fuel subsidy.

“Pressure on crude oil prices is expected to continue over the next 12 months by the weakening global economy. Projected pick up in global growth would be unusually slow and gradual going into mid-2010, and a sustained rebound in oil price is expected on a steady recovery in global demand,” Lee added.

Fiscal, monetary sides of equation
According to the UBS report, the country’s budget deficit of around 4.8% in 2008 is the highest in the Asean region. In comparison, Singapore managed to post a surplus of 1%, the Philippines has a deficit of 0.9% while Indonesia and Thailand posted negative budgets of 1% and 2.2%, respectively.

The picture seems to get worse going into 2009, with the deficit expected to creep up to 5%, in tandem with the expansionary measures that would entail additional spending in an environment of shrinking income.

MARC’s Nor Zahidi said the need to ensure growth should outweigh the concern over the need to rein in spending.

“It is understandable that the government is concerned about its yawning budget deficit, estimated to be about 4.8% of GDP in 2009. However, at times like this — when the global economy is rapidly deteriorating, having a larger deficit is justifiable. After all, Malaysia used to run larger deficits in the early 1980s,” he said.

UBS also advocated an expansionary policy. “The Malaysian government would pursue expansionary policies in 2009 to avert a recession and this bodes well for banks and the construction sector.

“An accommodative monetary policy should ease the NPL risk for banks, as consumers and companies get access to affordable credit,” said UBS.

Nor Zahidi said both Bank Negara Malaysia (BNM) and the Ministry of Finance (MoF) had taken steps in the right direction.

“The reduction in SRR (statutory reserve requirement) is also a good move as the 50 bps reduction is expected to inject about RM2.8 billion into the system. We anticipate the OPR (overnight policy rate) to go down to as low as 2.75% in 2009 if more signs of further deterioration in macro outlook emerge.”

CIMB’s Lee said while the preemptive measures such as the stimulus packages were commendable, more could be done to ensure no sharp fall in economic activities.

“BNM has the flexibility and capacity to support domestic demand by adopting accommodative monetary policy and ensure the provision of credit flows to the consumer and business sectors. We expect the central bank to cut rates by another 50 basis points by 1H09,” he said.

However, he cautioned that execution issues on the fiscal stimulus must be resolved quickly to ensure a wider impact on the economy, and spending should be well targeted and structured so that its peak effects on the economy were felt when they were most needed.

In that regard, the project management unit under the MoF must be vigilant in ensuring the funds were used effectively and disbursed as quickly as possible, he said.

The economists reckoned that boosting domestic consumption was also key to ensure the economy did not sink into recession.

Nor Zahidi said: “It is noteworthy that the MIER’s consumer sentiment index has remained below its 100-point threshold level for two consecutive quarters since the second quarter of this year (2Q08).

“The index has declined by an average of 32% in the past two quarters, the largest contraction since 2001. As the government is counting on private consumption to shore up the economy, any factors that can boost consumer sentiment will provide a buffer to the economy.” said Nor Zahidi.

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