Malaysias Economy: resilient?

August 25, 2011

Responding to Kevin Browns Malaysias economy: resilient?

by Dr. Ibrahim Abu Ahmad

Kevin, you have put up a very interesting article (below) on the resilience of the Malaysian economy recently. Your opening statement has this to say: It depends who you ask. Your statement is so apt. Who you asked is really what matters. It is particularly true if one tries to justify and influence ones view that relies heavily on the opinions of others especially from reputable analysts such as like Goldman Sachs, Standard & Poor (S&P) and Credit Suisse.

It is tempting to say that all of these analysts have got their assessments or predictions right. So we just need to tweak their views and forms our own arguments on an issue. Its not that simple in economics. Its even more difficult to offer a good policy prescription. In all fairness, analysts are sometimes confronted with conflicts of interest that may have prevented them from forming their own fair opinions over a certain issue. We have seen in the past some financial and economic analysts offering differing and contradictory views. Some of them even flawed.

Amid the current unfavourable external economic conditions coupled with the downside risks, you raised key issue on Malaysias economic resilience. You seemed to be questioning whether Malaysia could still repeat the same spectacular economic rebound or recovery as it did in the past. But economic crises and rece! ssions a re not new to Malaysia. It has experienced quite a number of them in the recent past. Without fail, it has made a V-shaped economic recovery. Even in the worst Asian Financial Crisis of 1997-1998, with growth dipping to 7.4 per cent, Malaysia managed to pull through much faster than many would have thought. Similarly, in the recent 2008 Global Economic Crisis, the world has witnessed the repeat of such economic recovery.

In this respect, it appears that Singapore Paradox seems to be working in favour of Malaysia, a term coined by Briguglio (2003) on the seeming contradiction that a country can be highly vulnerable and yet attain high levels of GDP per capita. In his studies, Briguglio has empirically established that small open economies are notably high in terms of their economic resilience despite their economic openness and a high degree of export concentration. This is a strong piece of empirical evidence.

It apparently explains why the Malaysian economy is so resilient. Malaysias ability to withstand or recover from the effect of adverse external shocks undoubtedly has been due to its current pragmatic policy approach and wisdom adopting pro-Krugman policy posturing on fiscal spending while heeding Gregory Mankiws advice on tax cuts.

So it is not surprising BNM still maintaining its views on the Malaysian economy, remaining dynamic and resilient this year. Apart from countrys strong economic fundamentals and low exposure of local financial institutions to US sub-prime market, Malaysias robust growth will be driven by high commodity prices (rubber, palm oil and petroleum), expanding private domestic consumption and investments from Economic Transformation Programme (ETP). This view is echoed by Credit Suisse AG expert, Stephen Hagger (Bloomberg, February 9, 2011) and Kun Lung Wu,! Credit Suisse of Singapore. Credit Suisse projects growth to expand 5.6 per cent and inflation to register around 3 to 4 percent in 2011, much in line with BNM reported figures.

Other points youve raised are about Malaysias weak public finances and its strong revenue dependence on both oil and gas, based on the analyses of Goldman Sachs, and S&P. However, Moodys has ranked Malaysias sovereign ratings very favourably this year, on main factors such as Malaysias strong growth, healthy private consumption and low inflation apart from strong external payments position, high savings and foreign external reserves.

Fitch also stated external finances to be the key ratings strength apart from Malaysias macroeconomic stability. Lastly, the latest Nielson Global Online Survey has put Malaysia in the 4th spot out of 56 countries surveyed and even indicated Malaysias consumer confidence level is at its highest since 2006. Again this view is well echoed by Credit Suisse which also observes consumer sentiment returning to its pre-March level of 2008.

So Kevin, its too early to see the long faces in Malaysia. Not this year or even next year mate.

* Dr Ibrahim Abu Ahmad reads The Malaysian Insider.

http://blogs.ft.com/beyond-brics/2011/08/17/malaysias-economy-resilient/#ixzz1W2aRjctx

Malaysias economy: resilient?

August 17, 2011 12:46 pm by Kevin Brown

Is Malaysia set for sustained economic growth this year, or exposed to serious potential problems if wobbles in the West turn into another slowdown? It depends who you ask.

The central ! bank is in no doubt that growth will continue, in spite of a fall in the annual pace of growth from 4.9 per cent in the first quarter to 4 per cent in the second.

Inrobustly positive comments issued with the numbers on Wednesday, Bank Negara acknowledged the impact of weakness in the advanced economies, but insisted that growth prospects remained underpinned by the expansion of private domestic demand and strong exports of commodities and resource-based products for which read oil, gas and palm oil.

Part of this argument reflects the banks insistence that monetary policy remains supportive of economic activity in spite of a further increase in official interest rates to 3 per cent in May.

The bank paused the upward movement of interest rates in July, responding to growing fears about slowing growth, but wants to be free to start raising rates again to head off simmering inflationary pressures. The consumer price index hit 3.3 per cent on an annualised basis in the second quarter, up from 2.8 per cent in the first.

But the bank does also seem to believe that the global weakness in the second quarter was mainly due to temporary factors such as the supply chain impact of the Japanese earthquake in March. Resilient domestic demand will support growth amid sustained private consumption, strong private investment and faster progress on public works projects, it says.

The trouble is, the banks tone is at odds with rising uncertainty outside Malaysia about the countrys ability to keep growin! g. Goldm an Sachs downgraded its GDP forecast for the full year from 5.4 per cent to 5 per cent last week, while Standard & Poors, the credit rating agency, said the countrys growth prospects were poor in the event of a crisis. Both referred to its relatively open, export driven economy combined with weak public finances still recovering from the 2008-09 crisis.

The point was made even more strongly on Wednesday by Kun Lung Wu, an economist at Credit Suisse in Singapore, who argues that Malaysia is one of the two Asian countries least well placed to withstand a sharp slowdown caused by financial worries in the US and the eurozone. (The other is India).

Although Malaysia ran one of Asias most expansionary fiscal policies during the 2008 crisis, equivalent to about 10 per cent of GDP, its toxic combination of high government debt relative to GDP and a big primary fiscal deficit means it could not do so again without endangering its ability to reduce the debt ratio, says CS.

On top of that, the countrys fiscal position is extremely exposed to a fall in global prices. Oil and gas revenues amount to about 40 per cent of total government revenues each year, and about 8 per cent of GDP. So a $10 fall in the oil price strips M$2bn (about 0.3 per cent of GDP) out of government revenues.

Of course, the advanced economies may quickly recover, and oil prices may go up again. But if they dont, expect long faces in Kuala Lumpur.

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