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Chaotic Current Affairs Cloud Economic Outlook
Malaysia Perspective | 12 January 2012
By:

By MIGB

In its report “Malaysia Economic Monitor” released end-November, the World Bank forecasted a slower economic growth for Malaysia at 4.3% for 2011 and 4.9% for 2012. These predictions were made based primarily on two factors: the weak external demands due to the sluggish economy in Europe and America, and the slow pace of the domestic economic structural reforms which failed to stimulate domestic demands effectively. As we factor in current international situations, even though the unfavourable external factors are set to stay in the short term, there is still a sliver of chance for Malaysia to achieve the Government’s 5% to 6% growth target next year if all the various economic reformation measures are implemented.
 
The Government remained rather optimistic in its economy forecasts when it expressed confidence in achieving 5% for the full year of 2011; this is especially convincing when we are presented by an astonishing 15.8% growth in exports in October, just when the market was expecting something modest in the range of 7% to 8%. Propelled by an increase in manufacturing and raw material exports, October exports chalked up RM63.57 billion, against RM50.35 billion worth of imports, which translates to a trade surplus of RM13.22 billion. In addition, October’s crude palm oil prices rose by 16%, injecting further confidence in Malaysia’s economic growth.
 
Even though analysts were surprised by the impressive economic growth of 5.8% that Malaysia achieved in the third quarter of 2011, this remarkable performance is certainly undergirded by sound economic support. Figures show that, despite the doom and gloom in the external economic environment, Malaysia’s export over the first 10 months grew by 9.1% to stand at RM577.16 billion, while imports also grew by 8.5% to RM474.72 billion, thereby yielding a trade surplus of RM102.44 billion. This stellar performance can be attributed to the steady economic growth in China, which is still Malaysia’s biggest export market. In addition, Malaysia also benefitted from other regional markets in Asia, especially from trades with ASEAN countries.
 
In order to sustain Malaysia’s economic development, the construction industry is still put in the role of the engine head. Despite Bank Negara’s recently introduced measure of assessing mortgage loans based on net income, the borrowers’ debt ratio remained unaffected. Apparently, the new housing policy poses a low risk to borrowers. On top of that, not only do transport infrastructure projects such as the Kuala Lumpur Mass Rapid Transit project bode well for property prices, they also created a spillover effect on the various auxiliary industries. The market is expecting interest rates to soften in the future, as a result of the US Federal Reserve’s decision to continue keeping its interest rates low through 2013. More crucially, the Malaysian banking system is fundamentally sound, offers a decent buffer for losses and boasts a professional level of risk management. For these reasons, our capital withdrawal risk is correspondingly lower.
 
On the other hand, with Malaysia’s foreign direct investments totalling RM26.4 billion over the first nine months of 2011, the market is looking forward to a full-year foreign direct investment (FDI) of between RM30 billion to RM32 billion. The 2011 FDI confidence index compiled by management consultancy A. T. Kearney indicated that Malaysia’s attractiveness to foreign investments had leapt from 21st position in 2010 to the 10th in 2011. This is because China can no longer lay claim to its dominance over the cheap labour market in recent years, as foreign investors have begun to favour the low labour cost markets in Southeast Asia.
 
However, some are holding to the view that external economic uncertainties will continue to sway Malaysia’s economic growth. The shocking news of North Korean supreme leader Kim Jong Il’s recent death has further complicated international affairs. Along with signs indicating that Malaysia is becoming less reliant on China’s exports, it is believed that Malaysia will soon face the repercussions, thereby affecting our source of growth momentum, namely private consumption and public investments. Market analysts also believe that the reason why the total value of raw material exports over the first half of 2011 has apparently returned to the level prior to the 2008 financial tsunami is in fact due to soaring commodity prices.
 
On a separate note, the coming general election will surely have a direct impact on the Malaysian stock market. Owing to the relatively high proportion of stocks held by government-related funds, the effectiveness of government interventions during a stock market plunge is naturally limited. For this reason, investors are going to cash out once the Prime Minister announces the dissolution of Parliament, thereby raising the risk of a weakened stock market. Fluctuations in stock prices will naturally dampen consumption and investment willingness, not to mention the fact that most Malaysian shares have performed poorly in the third quarter of fiscal year 2011. In the same way, whether Malaysia’s overall economic growth for 2012 stalls or experiences a breakthrough in spite of external difficulties will hinge on who will emerge triumphant after the general election. Keep your eyes peeled.


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