Malaysia economy outlook for year 2009

2009 will bound to be a very challenging year for Malaysia, although Malaysia’s economy is holding up pretty well this year. The first half of 2009 is expected to be a very tough period for Malaysia. The impact on Malaysia this year has somehow been cushioned but many are beginning to feel the economic downturn towards the year-end.

Unlike Hong Kong, people here do not seemed to be frantically queuing at the banks to withdraw their money. The authorities have been very proactive to address the economic slowdown. Bank Negara has stepped forward to guarantee deposits and the Government introduced the RM7bil stimulus package.

Malaysia has come a long way since the Asian financial crisis in 1997/98. We are different from 10 years ago - economy, corporates and even politically. We learned our lessons during the Asian crisis.

Malaysian banks are deposit-funded and lowly geared. The banks also had sufficient reserves to buffer any credit crunch shocks. Malaysia’s external reserves of US$99.7bil could support 8.1 months of retained imports and 3.7 times short-term external debt. Malaysia had the ability for further pump-priming to stimulate the economy with its current external reserves and account surplus.

It is important that consumers continue to spend. The cycle has to continue to stimulate the economy. Those who can afford it should continue spending as we are facing a serious slowdown next year. However, it is still too early to tell if consumer confidence has been restored.

Inflation would not be a concern in 2009 as soaring inflation is likely to ease next year. Corporate profit forecasts are likely to fall significantly further next year. We should not be too concerned with the 2009 earnings as they are expected to be poor, probably charting low single digit growth. The unemployment rate is expected to remain high as corporate could be downsizing.

On foreign funds inflow, a lot of countries would be competing for the same foreign fund inflows during these times so Malaysia should continue to be competitive and make sure that it had reasons for investors to come in.

Although things are not looking very rosy, there are still opportunities to be tapped during this time of market uncertainty. Investors have to do their homework and understand their risk tolerance level before moving into the market at this time.

Malaysia’s Economy May Shrink 4.2%

Malaysia’s economy may shrink more than previously forecast this year as the global recession reduces exports and household spending, the Malaysian Institute of Economic Research said.

Southeast Asia’s third-largest economy will probably contract 4.2 percent in 2009, the institute said in a report released in Kuala Lumpur today, cutting its forecast from an April prediction for a 2.2 percent decline in gross domestic product. It lowered the 2010 growth forecast to 2.8 percent from 3.3 percent.

The country “takes the hit from the knock-on effects of a flagging global economy,” the institute said. “Malaysia may not regain more strength until the global economy is back on track, which is going to be at a disappointingly slow pace.”

Prime Minister Najib Razak has unveiled 67 billion ringgit ($19 billion) of stimulus measures and eased foreign investment rules to shore up growth as plunging exports push the nation closer to its first recession in a decade. The government cut its 2009 GDP forecast in May, predicting a contraction of 4 percent to 5 percent.

Exports of goods and services may plunge 21.8 percent this year before growing 7.3 percent in 2010, the partially government-funded research institute predicts. Inflation may average 1.6 percent in 2009 and unemployment may reach 4.8 percent, it said.

Recession Looms

“If exports and foreign direct investment shrink severely, the downturn could be more damaging,” the institute said. “The healing from the current crisis will be difficult compared to previous ones, because of the synchronized nature of the downturn.”

The institute expects Malaysia will fall into a recession after contracting for a second quarter in the three months to June. GDP may contract 6 percent in the second quarter, shrink 4 percent in the third and expand 2 percent in the last three months of 2009, Ariff said.

The $187 billion economy shrank 6.2 percent in the first quarter of 2009, and second-quarter GDP data is due in August.

The ringgit, the worst performer among the 10 most-traded Asian currencies excluding the yen this year, fell 0.1 percent to 3.5663 as at 10:17 a.m. local time today.

The currency has been hurt by declining exports and will remain “volatile” until the global economy recovers, Mohamed Ariff Kareem, the institute’s executive director, told reporters in Kuala Lumpur today. The ringgit may strengthen to 3.4 to 3.5 against the dollar by the end of 2009 and 3 a dollar by 2012, he said, adding that the U.S. currency is “overvalued.”

Interest Rates

Malaysia’s central bank has kept its benchmark interest rate unchanged for two straight meetings after reducing borrowing costs 1.5 percentage points to 2 percent from November to February, saying the economy may improve in the coming months as the government implements stimulus measures.

There’s no urgent need for Bank Negara Malaysia to further reduce interest rates, though there is space to cut, Ariff said. Deflation, while possible, isn’t yet a threat for the country, he said.

An improvement in exports and the government’s measures to boost the economy will help the economy grow in the fourth quarter, he said. The budget deficit may exceed 8 percent of GDP this year and reach as much as 9 percent in 2010, he estimated.

The 2010 shortfall “will probably be bigger because this crisis isn’t going away anytime soon,” Ariff said. “2010 will still be a difficult year” and the government may need to boost spending to support growth.

Confidence Improves

The institute’s consumer sentiment index rose 26.9 points to 105.8 in the second quarter from the previous three months, helped by the government’s stimulus measures. The business confidence index climbed 44.1 points to 105.2.

Private consumption is expected to “moderate” in 2009 “owing to the reduction in income, a dismal labor market, a volatile stock market and lower commodity prices,” the institute said. “There will be some lag before the effects of the fiscal spending are felt, making the speed and efficiency of implementation critical.”