Friday, November 12, 2010

Strong Economic Growth Ahead For M'sia

Asia leading the global recovery
DURING the first half of this year, Asia was in the lead of the global economic recovery. As analysed in the International Monetary Fund’s (IMF) latest Regional Economic Outlook for Asia and the Pacific (REO), this strength in activity was fuelled by both strong exports and robust domestic demand.
As anticipated, export growth for the region has moderated in the second half, reflecting the sluggish recovery in the United States and western Europe, as well as the maturing of the global inventory cycle.
In line with regional trends, Malaysia too has rebounded impressively from the impact of the global financial crisis. Growth in the first half of the year was 9.5%. While export growth in Malaysia has moderated, domestic demand – in particular from the private sector – remains robust and a broad-based expansion is under way.
The outlook for Malaysia is strong
For Asia as a whole, still accommodative macroeconomic policies, robust consumer confidence, improving labour markets, and higher asset values are all expected to help sustain consumption. In line with this, we project that Asia will grow at 8% in 2010 and a more sustainable 7% in 2011 as the recovery matures further.
The near-term outlook for Malaysia also remains strong. Domestic demand, led by consumption, is expected to continue to make a substantial contribution to growth. Macroeconomic policy settings have been normalised to reflect the transition to private sector-led growth.
The resumption of fiscal consolidation is welcome, while the monetary policy stance has become less accommodative but still remains appropriately supportive of growth. Moreover, the ringgit has appreciated markedly, providing further support to domestic demand as the driver of growth over the near term. In line with the above, we expect Malaysia’s GDP growth to be close to 7% this year and 5.5% in 2011.
The region still faces risks
Despite the overall favourable outlook for the region, some important risks continue to cloud the horizon. The fragility and unevenness of the global economic recovery remains a concern. An unanticipated weakening in activity in the advanced economies would spill onto the Asian economies through weaker export growth. Asia as a whole has also attracted large capital inflows since the middle of 2009, reflecting ample global liquidity and favourable growth prospects for the region.
While asset markets in the region generally do not appear to be overvalued as of now, further capital inflows could pose vulnerabilities if they result in unsustainable asset valuations or excessive expansion of domestic liquidity. Inflation has already bottomed out in many countries across the region, and house price pressures have emerged in some economies.
This constellation of risks calls for a continued and cautious normalisation of macroeconomic policy settings, and careful monitoring of the financial sector. Macroprudential measures that have been implemented in some economies remain an important element of the toolkit to guard against financial sector risks.
Finally, should the downside risks to global growth materialise, Asian policymakers have ample room to readjust macroeconomic policies to counter any adverse effects on economic activity in their own economies.
In Malaysia, the financial sector has weathered the global crisis well and corporate balance sheets remain strong. The authorities have demonstrated an impressive track record in proactive financial supervision and sustained efforts to develop financial markets both in the conventional and Islamic finance areas. Nevertheless, there are some risks that need to be closely watched. For example, Malaysia too could be vulnerable to large capital inflows and excessive asset price rises. Household debt is also high, although this is mitigated somewhat by substantial asset holdings. We are confident that the authorities have the tools to address these risks, should they materialise.
The challenges for Asia over the medium term
What are the challenges for Asia over the medium term? The global financial crisis demonstrated the need for the region to rely more on a “second engine of growth” – namely domestic demand. Rebalancing towards domestic demand requires sustained steps to increase domestic consumption and investment, including through fiscal measures, structural reforms in labour, product and financial markets, as well as greater exchange rate flexibility.
Fewer motives for precautionary saving and greater incentives for businesses to increase investment in domestically-oriented sectors should be among the outcomes of such reforms. In the REO, we demonstrate that improving access to credit for small and medium enterprises operating in domestic markets, including services, as well as to increase investment in infrastructure, could help ignite the second engine of growth in Asia. Indeed, the development of SMEs and access to financing is an area Malaysia has emphasised and made progress on in recent years.
There are significant challenges for Malaysia too over the medium term. The growth momentum which propelled the country from low to middle income by the early 1990s stalled after the Asian crisis.
As a result, Malaysia continues to remain a middle income country while some of its peers that started from similar initial positions have achieved higher per capita incomes. As rightly recognised in the authorities’ Economic Transformation Programme and the 10th Malaysia Plan, rekindling the growth momentum requires deep structural and fiscal reforms to unlock Malaysia’s growth potential.
The key to success will be implementation. The reform process should proceed at a measured pace and take into account the need to protect vulnerable groups. At the same time it needs to be steady and sustained.
Key reforms under way must be pushed forward. In particular, poorly designed subsidies – especially fuel subsidies – should be phased out and replaced with targeted assistance. Improving the business environment by levelling the playing field through reform of government-linked companies and further labour market liberalisation will also pay dividends.
The IMF stands ready to contribute its international perspective and global expertise to the ambitious goals that the Malaysian authorities have set for themselves. We are looking forward to continuing a mutually beneficial engagement.

M'sian market at record high - so what is the next thing?
WHAT next? That might be a common question asked after the FTSE Bursa Malaysia KL Composite Index hit a new record high this week and therefore heads into uncharted territory.
That question is difficult to answer because unlike the previous rallies in 1993 and in 2008, the run-up this time around has been surprisingly orderly.
Volume, often an indicator of fervent euphoria, has remained sane and while the index has set a record, trading activity on Bursa Malaysia is nowhere close to previous high levels. This would suggest there is still more room to go.
Although the rise this time has less to do with direct retail interest as it did in the past, the professionalism in investing these days – where more Malaysians are putting their hard-earned money in the hands of professional managers to invest – is also a good sign.
It’s often joked that when retail interest shoots up and everybody becomes a tipster, it’s time to sell. Also a signal would be syndicate activity returning to the market in a big way.
That, to my knowledge, is nowhere close to the situation in previous rallies and surely is a contrarian indicator worth following.
Another fundamental backing to the rise this time would be borne by the efforts ongoing to revitalise the economy, especially the private sector and the investments it is expected to pour into the country.
Some may argue that economic growth might have some correlation to corporate earnings but the balance sheet and cash generation capability of most companies are far better now then in the past.
Maybe it’s also the better health and performance of the largest companies in the country where more focus and strict adherence to key performance indicators now then before have led to better financial performance and hence their attraction.
Furthermore, as more companies in Malaysia venture abroad and with the large commodity companies riding on skyrocketing crude palm oil (CPO) prices, the story at home might not swing investor focus as much as it did in the past.
But the surge in the local stock market also has to do with the amount of money that is swimming around globally, hunting for the best returns they can get.
Between the United States printing money from its quantitative easing and the still super-low interest rates globally, cash around the world has been hunting for returns.
They have so far got it from commodities. Among this group, CPO is rising and rubber has hit an all-time high.
And in emerging Asia, they might have also found an answer for now by buying the currencies of Asian economies.
The flood of money into Asian currencies has led to reciprocal rises in the stock markets in the Philippines and Jakarta, which have in recent months peaked at their all-time highs, suggesting that money is trying to capitalise on growth in equities as well as currencies. Markets in Thailand and Singapore are also rising strongly.
To pour more cold water on the rally, the market is said to be trading at high price to earnings ratio and economically, the horizon globally is less rosy.
Malaysia’s economic growth is forecast to fall next year to between 5% and 6% from a projected 7% this year.
Is 2010 a replica of the 1993 bull run? I don’t think so although most would love the ride, not the end.
The situation this time is vastly different but any time a market hits an all-time high, some caution should come into play. A market high does not happen often.
Deputy news editor Jagdev Singh Sidhu is cautiously optimistic that the rally this time would not be accompanied by companies with poor fundamentals promising a pot of gold for unsuspecting punters.


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