MALAYSIAN ECONOMIC OUTLOOK

Executive Summary

Although it may be too early to say that the global recession has ended, numerous indicators are suggesting that the downturn is somewhat subsiding. Massive national fiscal stimuli and monetary expansions have largely aided the gradual recovery. Questions have been raised as to whether economic activities can be sustained once these measures are withdrawn..

In Oct 09, the IMF anticipates that the global economy to expand by 3.1% yoy in 2010, from a 1.1% yoy decline in 2009. For 2010, the U.S. is projected to grow by 1.5% yoy, the euro zone at 0.3% yoy, Japan at 1.7% yoy, and China 9.0% yoy. The comparable yoy figures in 2009 are -2.7% (U.S.), -4.2% (euro zone), -5.4% (Japan), and +8.5% (China).

Regionally, the ADB has also lifted its GDP growth forecast for developing Asia to +3.9% yoy in 2009 and +6.4% yoy in 2010. The regional economies are seen to be more resilient to the downturn than initially feared. Underpinning the region's growth prospects is China, whose aggressive monetary easing and fiscal stimulus could accelerate the GDP growth rate to +8.2% yoy in 2009 and to +8.9% yoy in 2010.

Malaysia's GDP registered a smaller contraction of -3.9% yoy in 2Q09 (-6.2% in 1Q09) after rebound in the external sector. Although the external sector was still weak, public spending had cushioned the economy from a deeper slide. In view of the widening fiscal deficit, the government plans to reduce its expenditure in the 2010 Budget, possibly through reduction in energy subsidies and/or tax reform. On the supply side, the services sector had turned positive in 2Q09, while the manufacturing sector reported a smaller decline.

In order to make Malaysia more attractive to foreign investors, liberalisation measures of the services sector have been announced. Effective Apr 09, 27 services sub-sectors were fully liberalised to foreign investors, on the premise that Malaysia lacks expertise and local investments in many of these sub-sectors. Among the sectors opened up are computer and related services, health and social services, tourism services, transport, recreational, business services, and shipping. Moreover, on 30 Jun 09, the long standing 30% bumiputra equity requirement for newly listed companies was removed, making investment conditions less restrictive. This will bring Malaysia's financial market closer to regional benchmarks, but the impact remains to be seen since there are many factors influencing investment decisions.

Monthly indicators up to Jul 09 have shown some improvement, in line with regional economies, albeit at a slower rate. In Jul 09, industrial output fell by 8.4% yoy (-9.5% in Jun 09), signalling recovery across all industries. This is also supported by the fact that industrial production index (IPI), which surged 7.1% mom in Jul 09 (+0.3% in Jun 09).

Exports contraction moderated to -19.8% yoy in Aug 09 (-22.9% in Jul 09) due to better performance in crude oil, chemicals, electrical, and electronic products. On a mom basis, exports fell 2.0% (Jul 09: +8.3%) after three consecutive months of gains, indicating a patchy recovery. On the other hand, imports performance deteriorated to -18.6% yoy in Aug 09 (-16.2% in Jul 09) due to slower rate of re-stocking parts and components. On a mom basis, imports also sagged 6.6% (+14.0% in Jul 09). Stronger growth in export relative to import led to a larger trade surplus of RM 9.57 billion (RM 7.81 billion in Jul 09).

As a result of higher base effects, overall consumer price inflation fell for a third consecutive month, by 2.4% yoy in Aug 09 (-2.4% in Jul 09). Food prices moderated, while transport and communication decelerated further in Aug 09. Core inflation declined by 4.2% yoy in Aug 09 (-4.5% in Jul 09) due to higher recreation, services, and culture activities. On a mom basis, consumer inflation rose 0.2% in Aug 09 (+0.1% in Jul 09). This lends credence to MIER's expectation of a positive inflation to re-emerge in 4Q09. On the other hand, falling prices in both local and imported materials continued to drag down producer prices by 12.8% yoy in Jul 09 (-12.2% in Jun 09).

The Central Bank of Malaysia has left the Overnight Policy Rate (OPR) unchanged at 2.00% for the fourth consecutive meeting since Feb 09. While the economic contraction is expected to decrease from 1H09 into a slight positive growth in 4Q09, the monetary policy stance is expected to be fairly accommodative for the remainder of the year. This is also facilitated by the absence of inflationary expectations in the near term. Hence, MIER expects the OPR to be relatively unchanged at least until 2010 or when the economy recovers, both domestically and externally.

Moreover, this is also supported by the fact of the cautious sentiments as captured by the in-house Consumer Sentiment (CSI) and Business Conditions Indices (BCI). Ongoing economic uncertainties due to global financial deleveraging activities, low wage growth, and the possibility of a sudden withdrawal of economic stimuli continued to repress confidence among consumers and corporate entities. While both CSI and BCI settled above the crucial 100-point mark in 3Q09, the rate of change has decreased qoq. (CSI: 105.4 in 3Q09, 105.8 in 2Q09; BCI: 113.7 in 3Q09, 105.3 in 2Q09)

There are glimmer signs that the global downturn has stabilised somewhat, but the recovery is expected to be sluggish and uneven. The healing from the current crisis will be difficult compared to previous ones because of the synchronised nature of the downturn. It will take time and huge resources to revive the deeply entangled US financial sector while policy options are running out. The weak external sector will impede a faster recovery, and the lower commodity prices are not helping either. Banks are becoming more cautious as bad loans could rise soon, limiting the flow of funds to firms. The services sector will be the pillar of strength amidst a glum manufacturing sector. The technical recession in the 1H09 is likely to continue into 3Q09 before the economy could exit from it in the 4Q09. However, Malaysia may not regain more strength until the global economy is back on track, which is going to be at a disappointingly slow pace.

In view of improving macro indicators, and somewhat better CSI and BCI as well as the sectoral indices, MIER is revising Malaysia's GDP growth forecast upwards for 2009 to -3.3% yoy from -4.2% earlier. In addition, the GDP growth for 2010 is also upgraded to 3.7% yoy from 2.8% previously. Downside risks are still prevalent and might perturb the road to recovery, but there are stronger positive influences that led to MIER's upward revision.

Posted by suzy at 12:57 PM on October 14, 2009