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The Malaysian Economy: Moving Cautiously Forward
Malaysia Perspective | 07 December 2010

By Mason Lim

Despite signs of a slowdown in the world economy next year, Malaysia remains confident of achieving at least 5% to 6% growth. In contradiction to the World Bank’s earlier report of a 4.8% growth for the country, this is the opinion of the Minister in the Prime Minister’s Department Tan Sri Nor Mohamed Yakcop. The World Bank in its bi-annual report of the Malaysian economy, titled “Malaysia Economic Monitor November 2010: Inclusive Growth”, said that in spite of a spectacular year-on-year recovery, the growth rate of the Malaysian economy has weakened.

World Bank’s senior economist, Asia and Pacific Department, Philip Schellekens, said Malaysia’s hard-won recovery remained tenuous as exports and some industrial production indicators weakened mid year and would continue to soften as the world’s major economies grapple with the fallout of a lengthy financial downturn.

“Economy activity is expected to further decelerate in the second half of 2010. Given the low base in 2009, growth of 7.4% is expected for 2010, before slowing to 4.8% in 2011,” he said at the launch of the book.

Meanwhile, Bank Negara Governor, Tan Sri Dr Zeti Akhtar Aziz announced on November 22, 2010 that Malaysia’s economic growth slowed to 5.3% in the third quarter compared to 8.9% in the second quarter of 2010, largely on slowing external demand.

Tan Sri Nor however is confident the country will sustain its growth momentum in 2011, based on the continuous focus in identified areas, its implementation and new policy interventions in the pipeline.

“Our momentum is fine, there are many programmes. We do not have problems but there are problems in the regions where developed countries will face challenges and this would affect our economy to a certain level.

“I believe the forecast is before new policy interventions. We will try our best to reach our goal and the forecast gives us more reasons to work harder.

“With additional policies, right measures, ensuring projects are on the ground with active participation from private sector and with a quicker implementation phase, we are confident of achieving the target. The key is implementation,” he told a press conference after launching the same World Bank’s report.

Question Marks Over The Horizon

The World Bank recently raised concerns over the development of the economies in China and Southeast Asia. The bank believes that growth is not only likely to slow down in 2011 due to lower government stimulus and struggling Western economies but a financial crisis is also looming.

The bank also believes that the exchange rates of regional currencies could increase to levels that will severely hurt exports and threaten economic growth in the whole region. The World Bank urges the governments of developing East Asian countries to agree on a common approach to prevent damaging exchange rate increases.

Back in Malaysia, Bank Negara left borrowing costs unchanged and indicated the need for greater vigilance against potential risks posed by capital inflows. These “capital inflows” have resulted in the almost 10% rise in the Ringgit as well as the excellent run of the local stock market. It has even led to calls by certain quarters for the imposition of capital controls once again to prevent the entry of “hot money” into the country.

Bank Negara however understands these risks and is threading with caution. It held its key overnight policy rate at 2.75% as expected for the second meeting in a row, after hiking three times this year on the back of strong economic growth.

“Monetary policy continues to remain accommodative and supportive of economic growth,” Bank Negara said in a statement.

“While domestic financial conditions remain orderly, greater vigilance will be accorded to the potential risks arising from large and volatile capital flows.”

The Malaysian Institute of Economic Research (MIER) while projecting a 5.2% growth for the Malaysian economy in 2011 warned that a strong dependence on exports alone contains a risk to the Malaysian economy. The institute adds that there needs to be increased growth in domestic demand to ensure stable longterm economic development.

Another tell-tale sign of worry can be seen in the decline of consumer confidence. Based on an index of consumer confidence registered by InsightAsia, consumer confidence in Malaysia dropped 5 points to 113 in the third quarter of this year as opposed to the second quarter. The figures for the first quarter were more positive with an index level of 125.

Although this is not a true worrying sign for the economy, it reflects the general fear consumers have based on the worsening economic situation in certain parts of Europe and the less than confident economic scenario in the US.

Meanwhile, Malaysia’s fiscal deficit is expected to be reduced to 5.6% of GDP this year, compared with 7% of GDP in 2009. The higher 2009 figures was a result of the two stimulus packages totalling RM67 billion to cushion the country’s economy from the effects of a global economic slowdown in 2008.

The Need For Talent

However, of greater concern for the economy going forward is the shortage of skilled workforce to spearhead the Government Transformation Plan. Malaysia currently lacks enough skilled manpower to transform the country into an economy that can grow up the value chain. To spearhead the effort, the government is setting up the “Talent Corp” to draw back lost talent and to make it conducive for existing talent to stay in the country.

There are currently 784,000 Malaysians working abroad. The government on its part said recently that it was serious in wooing Malaysians back by reducing bureaucracy and offering better perks. This is crucial as less than 1% of Malaysians working abroad have returned over the last decade.

Singapore has the highest number of Malaysians, with 303,828 people, followed by Australia with 78,858. This talent loss scenario was highlighted recently when Malaysian born Tan Zhongshan, who obtained a first class honours in law from Queens’ College in the University of Cambridge, joined the Singapore Legal Service. This comes as no surprise considering he was awarded the ASEAN scholarship by Singapore’s Education Ministry after completing his A-Levels there.

However, many believe Talent Corp can only be successful if it balances the monetary incentives offered with suitable freedom in social and political structures, as well as the development of world class facilities and the removal of “glass ceilings” or artificial barriers to growth prospects.

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