The global financial crisis

The Bush Administration has announced that a rescue package of almost US$700 billion is required to save some of the prominent banks from following the footsteps of Lehman Brothers two weeks ago. JP Morgan, Merril Lynch and a host of investment banks in New York and other cities are already crying foul.

Some of us already know that the world’s economy is worth US$60.2 trillion and the American economy about US$12.5 trillion. Just imagine about 6.5 percent of the total American economy is now being used to save the ailing investment banks including one of the world’s largest insurers, AIG, which itself needs about US$85 billion to be resuscitated from receivership.

Money has four uses: used as a standard, used as a saving, used as an exchange for buying and selling and used for speculation. Investment is speculation. Almost US$100 billion is traded everyday in the European money market. Some currencies go up and some currencies go down. Some currencies are not even accepted for trading. One of the currencies that is not well traded is our Malaysian ringgit.

Based on an economic strength of about US$124 billion (GNP) and total banking capitalisation of about RM60 million, we are not in the position to even worry about how President Bush would rescue these investment banks.

Malaysia is financially a small and insignificant nation depending very much on the current trading of petrol and tertiary sector incomes. With a population of about 25 million and an average per capita income of RM4,200, we are now walking on a tight rope.

Option 1

President Bush is able to rescue these ailing banks and they go back into business much more aggressively. Now as investors, where would they find more investment? We must realise the investments of Lehman Brothers are now in a quandary. No one knows for sure how will that particular receivership affect the economy of the world in the next five to six months.

What will be the rate of return be from the investments made hereafter? How long will it take for these banks, if managed properly, to return the money to the government because the government will need the money to help other sectors of the economy? What if these banks are not managed properly?

Will they be in the red again? Will they need another rescue mission?

Option 2

President Bush gets only minimal help from the Congress and the Senate controlled by the Democrats. Of course, he cannot bulldoze his rescue plans without their collaboration. Hence some of the banks including AIG will have to wait for time to wind up, or play a far less insignificant role in the years to come.

It simply means, investors, depositors and policyholders will have to accept that they are now much more poorer than they thought they would be.

In the wake of this, interest rates cannot be raised and money in fixed deposit markets may become less valuable and those receiving pensions and indirect incomes will have to suffer heavily.

We were told by economists (based on the Keynesian concept) that if the interest rates go up, the share market would drop or vice versa. Now with no money with the investor, we will find, a low interest rate and less bullish stock exchange.

Hence Malaysians have to be ready for the following:

1. Investors will be pulling back to find more stable markets. This will mean loss of jobs and loss of income for thousands of people in tertiary sectors. People in the financial, banking and insurance sectors will be the worst hit. The insurance industry in Malaysia holds slightly more than 7 percent of the GNP.

2. Our banking industry will tighten its lending and if this happens, business will cool down and will drastically affect the retail industry. The Malaysian retail industry with more than 2 million provisions shops and nearly a 1,000 supermarkets will be hardly hit. The retail industry is worth around RM70 billion and this figure may be drastically reduced to RM40 billion or even less, with reduced prices and lesser purchases. This may be a very difficult problem for us, as a nation to overcome.

3. Our secondary sector hardly exists and most of the production is based on heavy industries such as automobiles and steel and shipyards. However, the vibrant nature of our small and medium industries could give us sustained strength to overcome some of the problems faced by the ailing steel industries and automobile companies. The government must gear up this sector and reduce the role of foreign workers in this sector to generate more opportunities for Malaysian job seekers.

4. The government must now seek a tough stand on foreign migrant workers and also on multiple entry visas and control those who do business away from Malaysia while staying in Malaysia.

Option for Survival

We need a very bold, tough and creative finance minister who can speak for all: the investors, the consumers and the workers. The government must now come up with bold contingency plans and reduce the role played by the non-productive government-linked companies. If need be, some could even be shut down.

Structural changes in the economy must be made and rates on utilities must be controlled. Consumer laws should be enforced very stringently on all sectors of the economy to ensure moderation of production and curbing of inefficient use of resources.

The government must now seriously enforce price checks on all items from a plate of fried rice to a unit of saloon car. Either we survive or we are doomed as a nation. The days are getting worse. Malaysians must get together.

BN and Pakatan Rakyat must find a way to work together.

Malaysia’s Economy Grows at Slowest Pace in 7 Years

Malaysia’s economy expanded at the slowest pace in seven years last quarter as exports fell, adding pressure on the government to boost spending to counter a global slump that’s cost thousands of manufacturing jobs.

Southeast Asia’s third-largest economy grew 0.1 percent in the fourth quarter from a year earlier, down from a 4.7 percent gain in the previous three months, the statistics department said in a statement today. Economists were expecting a 1.5 percent increase.

Malaysia’s central bank cut borrowing costs for a third straight meeting this week, saying the risk that the economy will contract in 2009 has risen. The government plans a second stimulus package in March to prevent the country from following Asian exporters including Singapore and Hong Kong into recession as sales of Intel Corp. chips and IOI Corp. palm oil slide.

“External demand collapsed in the fourth quarter, weighing heavily on Malaysia’s externally oriented economy,” said Nikhilesh Bhattacharyya, an economist at Moody’s Economy.com in Sydney. “I don’t believe any fiscal stimulus package can rescue Malaysia from recession. All that it will do is to limit the damage and severity. In this sense it is hugely important.”

The country’s benchmark stock index fell for a second day today and the ringgit declined for a fourth day to 3.7065 against the dollar, the weakest since March 2006. The economic data were released after markets closed.

Bigger Stimulus

The economy expanded 4.6 percent last year, the slowest pace in seven years. The government, which expects 2009 growth to slow to an eight-year low of 3.5 percent, will revise the forecast next month, Finance Minister Najib Razak said Feb. 17. The last time Malaysia posted an annual contraction was in 1998.

The second stimulus, due to be unveiled on March 10, may be as large as 30 billion ringgit ($8.1 billion), Citigroup Inc. said this week. The extra spending may exceed 10 billion ringgit to 15 billion ringgit, Trade Minister Muhyiddin Yassin said in an interview aired today on CNBC.

Najib, who is also deputy premier, is due to replace Prime Minister Abdullah Ahmad Badawi next month and needs to prevent the economic slowdown from fueling public discontent after the government suffered its worst election result in half a century last year.

The government unveiled a 7 billion ringgit plan in November and the central bank has cut its overnight policy rate to 2 percent, the lowest since the benchmark was introduced in April 2004, to bolster local consumption as companies cut jobs amid faltering demand.

‘Tough’ Environment

“The environment this year is going to be tough,” Bumiputra-Commerce Holdings Bhd. Chief Executive Officer Nazir Razak said Feb. 23. The Malaysian bank, which has had four consecutive quarters of profit declines, expects consumer loans growth to slow, he said.

Malaysian Pacific Industries Bhd., the nation’s biggest semiconductor assembler, plans to cut all its 1,700 temporary workers as it expects losses to widen, RHB Research Institute Sdn. said yesterday after its analyst met company officials. Profit at IOI, Malaysia’s second-biggest palm oil producer, has fallen two straight quarters.

Malaysian exports posted their biggest drop in almost seven years in December. Retrenchments in the country’s manufacturing industry jumped 86 percent to 18,578 last year.

Consumer Confidence

“There is a very real danger that Malaysia may witness the self-reinforcing vicious cycles gripping the developed world, where deteriorating job conditions feed into lower consumer confidence and depressed household spending, forcing employers to sack staff,” said Bhattacharyya at Moody’s Economy.com.

The $181 billion economy has “little chance” of avoiding a recession as exports and commodity prices tumble, he said.

Malaysia’s manufacturing industry shrank 8.8 percent in the fourth quarter, compared with a 1.8 percent gain the previous three months. Exports of goods and services plunged 13.4 percent, after growing 5.1 percent previously.

Investment as measured by gross fixed capital formation declined 10.2 percent last quarter for the first time since mid- 2002, the department said. Private consumption growth weakened to 5.3 percent.

Slowing growth will contain prices increases and lead to a continued easing in inflation this year, the central bank said in a separate statement. Malaysian policy makers will continue to focus on ensuring access to credit, it said.

“While global efforts have been intensified to counter the effects of the slowdown, risks remain on the downside and recovery is likely to be slow and protracted,” Bank Negara Malaysia said. “The timely implementation of the fiscal stimulus and providing the necessary policy support to strengthen the domestic sources of growth will also be vital to supporting the overall growth” in Malaysia.

Malaysia’s economy seen contracting in first quarter

Malaysia’s economy may have contracted above 3.5% year-on-year in the first quarter based on figures released in January and February that showed year-on-year drops in external trade and industrial output.

According to a poll of six economists by StarBiz, gross domestic product (GDP) is expected to contract due to a drastic drop in external demand since late last year, which became worse in the first two months of 2009 and also caused industrial output to fall.

Malaysian Institute of Economic Research (MIER) executive director Professor Datuk Mohamed Ariff Abdul Kareem said the first half of the year would be challenging for the economy.

He forecasts the economy to contract 2.2% this year. MIER does not give out quarterly forecasts.


“As for external trade, we’ve seen signs that it is moderating but (it) will still see a contraction in the teens,” Ariff said. The Statistics Department is scheduled to release external trade figures tomorrow.

“There will be significant contraction based on the economic figures already released in the first two months of the year,” CIMB Investment Bank Bhd economic research head Lee Heng Guie said.

For January and February, external trade contracted 27.8% and 15.9% respectively year-on-year while industrial output fell 20.2% in January and declined 14.7% in February.

Lee forecasts first quarter GDP to contract by between 5.5% and 6% while for this year as a whole, it could contract 3%. He said this would be in tandem with regional economic performance.

“Singapore’s economy in the first quarter contracted 11.5% year-on-year while South Korea’s shrank 4.3%,” Lee said.

He said the first quarter contraction would look bad when compared with the high base of the same quarter last year, when the economy grew 7.1%.

The economists pointed to the manufacturing sector as the biggest drag on the economy, with export-reliant segments of the sector being the most affected.

“The construction sector will not see much of an impact from the pump-priming activities that the Government has instituted until at least the end of the second quarter,” Lee said.

RHB Research Institute Sdn Bhd economist Peck Boon Soon said the manufacturing sector could contract 17% year-on-year based on the figures for industrial output released in January and February.

He expects the economy to contract 5.3% year-on-year in the first quarter and 3.5% for the full year.

“We believe the services sector may only see a 0.5% growth as private consumption falls due to rising unemployment in manufacturing,” Peck said.

For the construction sector, he said the drop in property development activity would likely drag the sector down to minus 2%.

Meanwhile, Citigroup Inc Asia Pacific economics and market analysis vice-president Kit Wei Zheng said there were some signs of stabilisation in the February statistics for external trade and industrial output.

“While year-on-year there is a contraction, quarter-on-quarter there is a moderation in the slowdown,” he said.

Kit forecasts the economy to contract between 2.5% and 3% in the first quarter and 1.5% this year.

On the services sector, he said it could probably manage a slight increase although trade-related services would take a hit.

“My own sense of it is that we’re approaching an inflection point as we see a stabilisation in exports,” Kit said.

Kenanga Investment Bank Bhd economist Wan Suhaimi Saidi said consumer demand in the United States would have to pick up significantly before there was any improvement in growth numbers.

The United States was Malaysia’s third-largest trading partner in February, according to the Statistics Department.

Wan Suhaimi forecasts the economy to contract 2.6% in the first quarter and to grow 0.6% full-year, premised on a recovery in the second-half.

United Overseas Bank Ltd economist Ho Woei Chen said although recent economic indicators had shown a moderation in the pace of declines, it was still too early to tell whether the numbers would hold up.

She expects the economy to contract 2.5% in the first quarter and 2.5% for the full-year.

Malaysia Economy

At present, Malaysia's industrial and service sectors are the 2 major pillars of the national economy. However, agriculture and mining were the 2 dominant sectors during its early history. Britain had slowly but steadily advanced into the region in the 18th and 19th centuries, establishing control over the territory of what would become present-day Malaysia. The British were attracted by the rich natural resources of this region and its convenient location along the Strait of Malacca, which was the main sea route connecting the Far East with British India and Europe. The British established large-scale plantations and introduced new commercial crops (rubber in 1876, palm oil in 1917, and cocoa in the 1950s). They also developed a large mining sector and encouraged migration of Chinese and Indian workers to these plantations and mines.

In August 1957, the Federation of Malaya was granted independence within the Commonwealth of Nations. In 1963, the Malaysian Federation was founded, comprising the Federation of Malaya, Sabah, Sarawak, and the State of Singapore. Singapore, however, left in 1965.

Since achieving independence, the Federation of Malaysia faced a need to develop and to diversify its economy, having a rapidly growing population. The country abandoned reliance on the export of primary natural resources and agricultural products and established itself as a rapidly industrializing country with a diversified export base. By the beginning of the 21st century Malaysia had become one of the fastest growing economies in Southeast Asia and third-richest state (after Brunei and Singapore) in the regional grouping known as the Association of South East Asian Nations (ASEAN).

The Malaysian government promoted the free market with limited state intervention and export-oriented industrialization. Its exports to the international market were used to promote efficient use of the country's resources and generate hard currency, which was necessary for catching up and further developing into areas of technological and industrial innovation. In the mid-1960s, Malaysia established 5-year planning, targeting certain areas of economic growth and social changes, and allocating public resources for priority sectors of the economy and for infrastructure development. Despite these efforts, the government was reluctant to institute centralized control over the state's economy. The 5-year plans became a basis for official development strategies. For example, the recently completed "Seventh Plan" (1996-2000) targeted productivity growth and moved the country towards capital-intensive, high-technology industries. The political and inter-communal violence that had undermined the country's stability and security in the 1960s and 1970s gave way to a period of remarkable stability. This has attracted international investors and greatly contributed to the rapid economic growth of the 1980s and 1990s, especially in the manufacturing and service sectors of the Malaysian economy. Unlike the government of neighboring Indonesia, the Malaysian government has managed to keep its external debt at a relatively moderate level. In 1998, external debt stood at US$42 billion, or 59 percent of GDP with debt service payments of about US$6.0 billion. Estimates for the year 2000 estimated that Malaysian official reserves stood at US$29.6 billion. However, the repatriation of the profits by foreign investors may cause a problem for the Malaysian economy in the future.

The structure of the Malaysian economy has changed during the last 2 decades. According to the World Bank, the proportion of manufactured production grew from roughly 20 percent of GDP in the early 1980s to 31.5 percent of GDP in the late 1990s. Manufactured products accounted for around 85 percent of gross export earnings in 1999, with electronic goods becoming one of the most important products. The role of mining has steadily declined during the last few decades (Malaysia was one of the world's largest exporters of tin in the 1970s), now contributing just 7 percent of GDP. Malaysia continues, however, to export tin, gold, bauxite, ilmenite (a titanium ore), oil, and gas. Meanwhile, the role of agriculture in the country's economy has also been declining, although it provides employment to large numbers of Malaysians. Nevertheless, Malaysia remains one of the world's leading exporters of rubber and timber and produces almost half the world's palm oil. Tourism is another important and rapidly growing sector of the economy, with about 7.5 million tourists visiting the country in 1999 and contributing RM10 billion to the national economy.

Malaysia has a very diverse economy. The manufacturing sector is dominated by large multinational corporations, with a heavy Japanese presence among the largest companies. Meanwhile, the agricultural sector is dominated by medium and small firms. In East Malaysia, Sabah, and Sarawak, and in some northern states, many farmers are still engaged in subsistence agriculture. In the service sector, especially in retail trade, large international superstores such as Marks and Spencer, SOGO, and Yaohan are complemented by a number of medium and small enterprises.

Rapid economic growth and stability brought economic prosperity to a large proportion of the population, especially in urban areas. It also helped to keep unemployment at a very low 3 percent (for comparison, unemployment in the United States was 4.2 percent in 1999). In some sectors, Malaysia has begun to experience a shortage of labor. In the late 1990s, there was an inflow of large numbers of foreign workers through legal and illegal channels from neighboring Indonesia, with whom Malaysia shares some linguistic and cultural similarities, and from Bangladesh, the Philippines, and Burma (Myanmar). This inflow is sometimes blamed for existing criminal activities and black market operations.

Drugs are another important issue; Malaysia is situated very close to the so-called "Golden Triangle" (an area between Burma, Laos, and Thailand) that is the world's largest producer of illicit drugs such as opium. Malaysia is among the few countries in the world to have adopted the death penalty for possession and sale of drugs. However, neither organized crime nor the black market have had a significant impact on the national economy.

Due to the tremendous economic growth and its ability to preserve stability and promote its multicultural environment, Malaysia has become an increasingly popular destination for tourists from Europe, Japan, and North America. Malaysian tropical forests and beaches, colorful festivals in major cities, and luxurious hotels provide a vibrant environment for the development of hospitality businesses.