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Will There Be A Transition Stage For The Malaysian Economy?
Malaysia Perspective | 09 November 2011

By Mason Lim

All signs indicate that the Malaysian economy is suffering the same fate as its regional neighbours, as well as that of China and India. The economy is overheating, though not to the same extent as the two Asian giants. Interestingly, the fundamental factors of the inflationary scenario seemed similar, led by rising food and transportation costs.

It was announced recently that the Consumer Price Index (CPI) accelerated by 3.4% year-on-year in September. According to the Malaysian Statistics Department, the CPI increased by 3.2% to 102.9 for the first nine months of this year compared with 99.7 in the same period last year. Consumer prices are expected to rise to about 3% to 3.5% in 2011, said Bank Negara Governor Tan Sri Zeti Akhtar Aziz on 25 Sep-11. The monetary authority is expected to hold its final policy meeting on 11 Nov-11.

Similar to the situation in 2008, the rise in inflation has been triggered by the increase in commodity prices of oil and gas, and basic food items. Just as the Japanese supply chain began to recover from the devastating earthquake and Tsunami, Thailand was hit with massive floods which has reduced rice padi cultivation and harvesting, affecting global exports and prices. Although Malaysia has received commitment from Vietnam to make up the shortfall, the Indo-Chinese country is also suffering from floods in some areas and increased demand, which it might have difficulty addressing.

The situation in the Gulf region has also been plagued by worries of collapses in the regimes due to popular revolt. Though beneficial to the people of these countries, it has created uncertainty with regard to oil prices in the global markets. The debt situation in Europe and the weakening U.S. economy have left a dent on Asian goods, and even China is suffering from the reduced consumption of its goods in the U.S. and Europe. This situation has brought caution to the central bank governors in Asia in their decisions to raise interest rates or lower borrowing costs.

In the case of Malaysia, Bank Negara has left the overnight policy rate unchanged at 3% during its 8 Sep-11 meeting, saying a “more challenging” external environment has increased the “downside risks” to Malaysia’s economy. This has also put pressure on the government’s target for the country to grow at around 5% to 5.5% in 2011.

The Growth Story
The Gross Domestic Product (GDP) growth of the Malaysian economy has come under the spotlight recently when analysts gave conflicting views on whether the growth rate of between 5% and 5.5% is attainable. Most recently, the Malaysian Institute of Economic Research (MIER) cut its 2011 GDP forecast for Malaysia to 4.6% from 5.2%. “Increasing global uncertainties from the Euro zone is expected to dent the economic outlook in the U.S. and China, leading to weaker exports growth in Malaysia,” MIER said in its report.

The research house also indicated that Bank Negara’s monetary policy is expected to stay “fairly accommodative” to support growth. MIER believes Bank Negara’s benchmark overnight policy rate would remain at 3% for 2011 and 2012, with a downward bias should domestic demand wane. It also believes that the Ringgit would average around RM3.20 against the US Dollar in 2011, before appreciating to RM3.10 in 2012.

The Ringgit had its first week of decline in October as investors reduced holdings over concern that there will be no quick solution to the sluggish US growth and job numbers as well as Europe’s debt crisis. The Ringgit dropped 0.8% to RM3.154 against the US Dollar in the third week of October. However, the yields on the Malaysian government bonds were unchanged during the said week.

Meanwhile, Malaysia would look for more collaboration with China to reduce its dependence on the developed economies in the west and focus more on the growing Asian economies. In a roundtable dialogue with CEOs of leading Chinese companies at the China-ASEAN Expo held in China recently, Prime Minister Datuk Seri Najib Tun Razak reiterated the importance of the China market to Malaysia’s current and future trade:

“China is Malaysia’s largest trading partner, accounting for 12% of total trade, while Malaysia was China’s 8th largest global trading partner… it’s a relationship that cultivated US$46 billion in trade last year. And if trade continues to exhibit the trend of the first six months of this year, where it hit US$31 billion, we will surpass last year’s figures quite considerably.”

Also, he gladly noted that there was a great increase in Chinese Foreign Direct Investments in Malaysia. “Last year, this grew 300% to touch US$208 million (from 2009). The figure rose to US$337 million in August. There has already been an increase of 62% on last year’s total figure… While this development is both welcoming and encouraging, there is always room for this to grow,” said Najib.

The growing trade and significant emphasis given by China towards trade with Malaysia could turn out to be Malaysia’s salient point for its economy in the near future. Increased ASEAN cooperation and trade would also help boost Malaysia’s position in the large ASEAN trading area. Of equal significance would be the country’s close cultural and economic ties with India, culminating with the recent visit by Indian Prime Minister Manmohan Singh to Malaysia.

All these scenarios indicate a shift in trade from the dominant Western nations towards the fast-growing Asian economies. The success of the Malaysian economy, moving forward, would depend on how fast the nation can adjust itself to the changing global trade movement and development – just like it did from an agricultural nation in the 1970-80’s to a manufacturing nation in the 1990’s.

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