M'sian Economy On The Road To Recession

Source : The Business Times, May 28, 2009

GDP shrinks for first time in years; exports battered

THE Malaysian economy shrank 6.2 per cent in the first quarter - its first contraction since 2001 - and there were signs that the decline would continue through the second quarter. This could push the country towards its first recession in a decade.

The worse-than-expected deterioration came as nearly all sectors - bar construction - reported sharp falls amid collapsing global demand. The manufacturing sector was the hardest hit, falling nearly 18 per cent.

In the fourth quarter of last year, the economy had managed a marginal gross domestic product (GDP) growth of 0.1 per cent; and quarter-on-quarter, the decline was about 7 per cent.

Bank Negara governor Zeti Akhtar Aziz said that there were signs of improvement in May - retrenchments have stabilised, bank lending has expanded by 10 per cent and commodity prices have strengthened - but only expected to see 'significant improvement' in the third quarter, the extent of which mainly depends on the pick-up in the external economy. But she was confident that the economy would expand in the final quarter.

A recession had loomed inevitably since late last year and in the coming days, Prime Minister Najib Razak is expected to revise the official full-year GDP forecast to a contraction of between 2-3 per cent from between one per cent to negative one per cent.

While the export-oriented sectors suffered - electrical and electronics shrinking 41 per cent year-on-year - the domestic-oriented sectors also declined by 16 per cent owing to the weakness in the consumer and construction related sub-sectors.

Aggregate consumer demand was down almost 3 per cent and private sector consumption - a previous mainstay of the economy - shrank 0.7 per cent from a growth of 5.3 per cent in the quarter before as consumers held back spending on fears that the economy would worsen and jeopardise jobs.

Even the normally reliable services sector fell into negative territory - albeit a marginal 0.1 per cent - as the sharp contraction in the trade services of utilities, transport and storage, and real estate offset the gains in the area of communications and other services.

Although public sector spending brought some support, the near 11 per cent drop in fixed capital formation revealed that planned projects had been slow in getting off the ground.

Even so, Ms Zeti noted that the economy was robust enough to weather the downturn. Inflation has moderated to about 3 per cent currently, while the trade surplus for the first quarter remains strong at RM33 billion (S$13.7 billion), with total external debt at RM244 billion or some 35 per cent of gross national income.

Net outflows of portfolio investment funds had further moderated to RM9.5 billion in the first three months of the year from RM25 billion in the fourth quarter, while net overseas investments by local firms - mainly in services - had also slowed to RM3 billion.

On Moody's placing of nine Malaysian banks on review watch with the possibility of a downgrade, she observed that the rating agency had previously been 'proved to be so very wrong', in the Asian financial crisis for example, in over-estimating by double the amount need by the country to recapitalise its banks.

In the current crisis, unlike the West, the Malaysian banking system was not in need of shoring up, and the RM67 billion in fiscal stimulus to date was to arrest the slump by stimulating economic activity.

Although the massive spending had blown the budget deficit to 7.6 per cent of GDP this year, Ms Zeti said that it was necessary to support the economy in these 'exceptional circumstances'.

She expects corporations to take over the reins soon, pointing to interest rates which are at historical lows.

'State intervention can only be temporary. Going forward, next year the government can gradually exit from the fiscal stimulus, while the private sector can assume greater responsibility.'