The Malaysian economic growth this quarter and in the next is likely to return to positive territory (YoY), with the fiscal and monetary stimulus continuing, and exports expected to recover, according to the Asia Pacific Economic Outlook, a research report released by Deloitte.
The report on Malaysia also stressed that in the long term, however, the performance could depend on whether the economy is able to make the structural changes that look necessary.
It said that Malaysia, which has ambitions of becoming a high income nation by 2020, appears to be on the road to recovery. Achieving the high income nation status is estimated to require a growth rate of 5.4% (though estimates vary) every year for the next decade. However, the economy is expected to shrink between 2 and 3% this year and could show a growth of 4% plus next year.
The report notes that the slide started in 4Q 08 and appears to have bottomed out in 1Q 09. Given the economy’s huge dependence on exports — exports are more than 100% of GDP — the slump in key export markets was bound to trigger the recession.
“The contraction in exports, which started in 4Q 08, reached its peak in 2Q 09, when exports fell by 17.3% YoY. Private investment also suffered as businesses lost confidence following a compression of domestic and foreign demand,” says the report.
Expansionary fiscal and monetary policies have pushed up private spending, though most of the recovery in 3Q 09 has come due to a nearly 11% rise in government spending. Bank Negara has persisted with an overnight policy rate (an indicator of monetary policy stance since 2004) of 2% since February 2009, and left it unchanged in its monetary policy meeting on November 24, 2009.
Meantime, the Deloitte report notes that though the QoQ growth has shown a sharp v-shaped recovery, the economy is still below the level it was at last year. There are signs that the recovery could strengthen this quarter. In October, exports grew YoY for the first time in the past one year. The 1.6% gain came as most export markets improved, though most of the growth came from ASEAN countries and China. Though exports to the United States and Japan improved MoM, they still remain subdued when compared with a year ago. Growth in exports of electrical and electronic products led this recovery. In the coming months, crude petroleum and liquefied natural gas could benefit from strengthening prices. Palm oil tends to track the prices of crude petroleum. Demand for palm oil is expected to remain firm and rising prices will help generate higher revenues for exporters.
The report said the budget for 2010 remains expansionary, with an estimated budget deficit of 5.6% in 2010, though the deficit will come down from around 7.4% in 2009. Given the expected recovery in export markets, the return to fiscal prudence next year is a welcome step.
“A worrying feature could be that the lower budget deficit comes as a result of contraction in total government expenditure as revenues are expected to decline. However, a major portion of the fiscal stimulus of RM 60 billion unveiled in March 2009 is expected to carry over to the next year and will probably last till the middle of 2010,” it says.
The construction sector will likely benefit from the remaining fiscal stimulus spending, pushing up growth in related sectors. Further, most of the contraction in government expenditure in next year’s budget is due to reduced operating expenditure not development expenditure.
It said that consumer prices continued to decline in October. Food prices did rise in October and energy prices could begin to firm up as the global economy recovers, which could take the economy toward mild inflation in 2010. There are no signs of an asset bubble forming. The ringgit has appreciated slightly this year against the dollar, and the trend is likely to continue next year. The change is not expected to be strong enough to hurt exports. All these trends mean that the monetary policy stance will likely remain loose for some time, at least till the middle of next year. With the fiscal and monetary stimulus continuing, and exports expected to recover, the growth this quarter and in the next is likely to return to positive territory (YoY). The recovery could be stronger than expected.
“In the long term, however, the performance could depend on whether the economy is able to make the structural changes that look necessary," says the report, adding that a key feature would be the ability to attract private foreign investment, especially in the services sector. It notes that the policy measures announced recently, such as the abolition of the rule to offer an equity stake to bumiputera in many subsectors, are designed to do precisely that.
The Deloitte report reveals that Malaysia is also looking to attract investment from China and Singapore, apart from strengthening its trading ties with these countries.