Malaysian economy springs a pleasant surprise

The Malaysian economy beat market expectations with gross domestic product contracting 3.9 per cent in the second quarter, versus a consensus forecast by private economists of minus 5.1 per cent.

The smaller than expected contraction was a major improvement over the country's Q1 shrinkage of 6.2 per cent. With the latest numbers, the central bank said the economy retreated 5.1 per cent in the first half of the year.

Compared with other Asian economies, stimulus packages announced by Prime Minister Datuk Seri Najib Razak showed little sign of kicking in, with public consumption growing just one per cent.

“It's an impressive performance, given that most of us thought it would be worse,” said Manokaran Mottain, an economist with the Arab-Malaysian Banking Group. “But it seems clear that the stimulus money hasn't come in.”

The better than expected performance shows that Malaysia, like the rest of Asia, is exhibiting “green shoots”. But Kuala Lumpur must be worried about the economy's seeming lack of response to Najib's stimulus packages announced as far back as March.

The GDP figures, released by the central bank yesterday, show the economy's better performance was driven largely by services (1.6 per cent) and construction (2.8 per cent).

Manufacturing was hit hardest, shrinking 14.5 per cent in Q2 after a Q1 decline of almost 18 per cent.

This was evident in Malaysia's export performance. Output shrank 17.3 per cent, which the the central bank attributed to “weak external demand”. Imports registered a 19.7 per cent correction.

Surprisingly, the central bank provided no figures for investment — neither public nor private — although it did say total consumption grew 0.6 per cent in Q2, after contracting 0.2 per cent in Q1.

Inflation continued to fall. In July it dipped 2.4 per cent, allowing the central bank to keep interest rates low and conducive to growth. On Monday, the bank maintained its overnight policy rate at a historic low of 2 per cent. And with near-deflation persisting, it is likely to keep rates low until the second half of 2010.

“We expect a gradual recovery,” central bank governor Tan Sri Zeti Akhtar Aziz told a news conference. The economic contraction in 2009 will be smaller than expected, she said without elaborating.

Business and Market Overview on Malaysia

ECONOMY. Malaysia is a middle-income economy and has the third highest GDP per capita (US$4,625) among the Southeast Asian countries after Singapore and Brunei. The country was primarily a producer of raw materials but transformed its economy from the 1970s to the 1990s into a multi-sector economy. Malaysia's economic growth is export driven mainly from exports of electrical and electronic products.

Malaysia's economy is relatively stable with healthy foreign exchange reserves and a GDP of US$118.3 billion in 2004. From 2000 to 2004, Malaysia's real GDP grew by an annual average of 5.7% while inflation remained below 2.0% and unemployment below 4.0%. The Asian economic crisis of 1997 adversely affected Malaysia's economy during the period. It is unlikely that the country will experience an economic crisis similar to 1997 with current healthy foreign exchange reserves, low inflation and small foreign debt.

The manufacturing sector accounted for 48.5% of Malaysia's GDP in 2004, services accounted for 42.4% and the agriculture sector accounted for 9.1%. Major industries include electronic & electrical products, textiles, clothing & footwear, chemicals, petroleum, wood and metal products. Major agriculture industries include palm oil, rubber, cocoa, rice, poultry and timber.

DEMOGRAPHY. Malaysia comprises of Peninsular Malaysia and East Malaysia (located on the northern half of the island of Borneo) with a population of 26 million. Malaysia is a multi-ethnic society comprising of the predominant indigenous Malays (50%) followed by the Chinese (24%) and Indians (7%). Other indigenous groups (11%) include the Ibans, Kadazans, Melanaus and Kelabits. Major religion practiced is Islam followed by Buddhism, Taoism, Hinduism and Christianity. Major languages used are Malay (national language), English (commonly used in business), Chinese (mainly Mandarin, Hokkien and Cantonese) and Tamil.

Malaysia's population is becoming increasingly urban. The country's urban population increased from 54.7% to 62.8% of Malaysia's total population from 1995 to 2004. Main reason is increasing employment opportunities in the major urban areas. Major urban areas include the nation's capital Kuala Lumpur and the surrounding areas (known as the Klang Valley), Penang, Johor Bahru, Ipoh, Kuantan, Kuching and Kota Kinabalu.

Households in the urban areas have an average income that is twice than those in the rural areas. An estimated 5% of Malaysian households live below the poverty level while 50% are low-income households. The proportion of medium income households is 33% while high-income households are 10%.

INFRASTRUCTURE. Malaysia has a well-served international and domestic telecommunication system. Cities and towns are well connected by roads including highways and public transport. Internet broadband services are available in the cities and major towns. Malaysia has an international airport situated near Kuala Lumpur and airports across the country serving mainly domestic travel.

INTERNATIONAL TRADE. Malaysia's major trading partners include the United States, Japan, China, Singapore, Thailand, Taiwan and South Korea. Major exports from the country include electrical and electronic products, machineries, petroleum and liquefied natural gas (LNG), textiles, clothing & footwear, palm oil, furniture and sawn timber. High technology exports (mainly electrical and electronic products) account for more than 50% of Malaysia's exports. Major imports include electrical and electronics, machineries and equipments, petroleum products, plastics, iron and steel products, chemicals and foods.

CONSUMER USAGE OF TECHNOLOGY. Nearly 75% of all homes have fixed line telephones and there are 15 million mobile phone subscribers for a population of nearly 26 million in 2004. Penetration of personal computers in homes was nearly 30% during the period with 3.5 million internet subscribers and 10 million internet users. More than 90% of all Malaysian homes have refrigerators and televisions. Nearly all middle and high-income homes have cars and most have more than one. The estimated penetration of cars in homes is between 75% and 80%. Thus, many low-income homes have cars but tend to be lower-end models or cheaper second hand cars. Furthermore, nearly all lower income homes have motorcycles for their travelling needs.

RETAIL MARKET. Retail sales in Malaysia reached an estimated US$14 billion in 2004 and forecast to grow further to US$20 billion by 2010. The Klang Valley (Kuala Lumpur and the surrounding areas) contributes nearly 30% of the country’s total retail trade. The traditional "mom and pop" establishments dominate Malaysia’s retail industry while shopping at the modern retail establishments such as hypermarkets, supermarkets, departments, mini-markets and convenience stores is gaining popularity. These modern establishments account for nearly 25% of the total retail sales. Shopping at the traditional open-air markets remains popular among Malaysia’s low, medium and even high-income consumers because of their festivity atmosphere.

FOOD CULTURE. Malaysia has three major ethnic food cultures i.e. Malay, Chinese and Indian foods. Rice is the staple food followed by various types of noodles and Indian bread. Malay dishes tend to be hot and spicy, Indian foods are usually curry dishes while Chinese foods are salty. However, the various ethnic communities have adapted foods from other communities. Western baked bread and bakeries and fast foods are popular and affordable even among many in the lower income group.

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Malaysia's economic situation will bode well for luxury car sales

While a gloomy cloud is still expected to hover over the global motor vehicle market for the rest of 2009, BMW Malaysia Sdn Bhd is cautiously optimistic that the situation in Malaysia will be a little bit different, said managing director Geoffrey Briscoe.

He said the Malaysian economy was faring well compared with the rest of the world and this would bode well for the local motor vehicle industry, especially the luxury segment.

Geoffrey Briscoe ... “The Malaysian economy is holding up well.’

“The Malaysian economy is holding up well. People are still spending. We’re not bullish about the rest of 2009 because we still feel that there are still tough times ahead,” he told StarBiz in an interview, adding that the local motor vehicle industry should “pick up” in 2010.

“Our finance rates are low. BMW Malaysia also provides good financial packages through its credit arm, BMW Credit, and our inventories are still high, so there has never been a better time to buy a BMW,” he added.

For the first seven months of 2009, BMW Malaysia sold 2,048 units compared with 2,133 during the same period in 2008.

It sold 3,512 BMW vehicles and 201 Mini cars in total last year.

BMW Malaysia’s share of the luxury segment was north of 40%, Briscoe said, adding that despite the dip in the 2009 year-to-date sales, he was upbeat about the company’s prospects going forward.

“Given the current economic climate, we are just 4% down in terms of sales volume. There are still several months to go for 2009 and we would be delighted if we could sell as many cars as we did last year,” he said.

BMW Malaysia’s bestseller is its 3-series (which averages 150 units a month) and the 5-series models.

“Our 3- and 5-series tend to go neck and neck in terms of volume but it’s usually the 3-series that’s ahead. We provide great financial packages for these models through BMW Credit,” Briscoe said.

BMW Malaysia has a majority of its 3- and 5-series completely-knocked-down models built at its plant in Kulim, Kedah, which is operated in partnership with plantation giant Sime Darby Bhd. Briscoe said the plant’s capacity was virtually “limitless.”

“The capacity of the plant can be extended to where we need it to be. We’d love to build more cars, like the X1 and 7-series and we are working with the Government to build those and other models in Malaysia,” he said.

As part of its strategy to provide “efficient dynamics,” BMW Malaysia plans to launch four diesel-powered vehicles in the last quarter of 2009; three of them sedans. The vehicles are expected to be in the 2.0 to 3.0-litre range.

“The diesel segment in Malaysia comprises either SUVs (sport utility vehicles) or commercial vehicles. There’s no passenger market for diesel and we want to create one,” Briscoe said.

He added that diesel-powered engines provided better torque and were more powerful, more fuel-efficient and produced less carbon dioxide (CO2) emissions compared with their petrol-based counterparts.

Briscoe said about 60% of cars sold in Europe were equipped with diesel engines.

The high sulphur content in Malaysian diesel fuel has hindered performance and deterred many car companies from introducing diesel-powered vehicles.

While diesel-powered BMW vehicles were already capable of handling the substandard diesel quality here, Briscoe said the introduction of the four new models was timely as Petronas was launching its Euro 2M standard diesel nationwide tomorrow.

“The Euro 2M diesel has low sulphur content of less than 500 parts per million (ppm) compared to some 3,000 ppm. To a layman like myself, that sounds like a huge reduction and great for the environment!

“We feel that our timing is spot-on because we are bringing in the right diesel cars at the right time,” he said.

Meanwhile, Briscoe said BMW Malaysia was looking to expand its BMW Premium Selection (BPS) used-car programme to more dealers to combat the local motor vehicle industry’s growing “grey market.”

The grey market refers to the importation of used vehicles from foreign countries to Malaysia by non-franchise car dealerships, which are then sold at a cheaper price. The grey importers do not provide verifiable servicing history or factory-backed warranties.

“There’s nothing worse than having a customer say that they have a bad BMW car, which is why we offer a fully backed BPS car as a viable alternative to the grey imports,” Briscoe said.

Vehicles sold under the BPS programme need to have an approved and documented vehicle history as part of the criteria, pass a strict 72-point check by factory-trained BMW experts, are technically and visually refurbished, less than five years old or have less than 100,000-km mileage.

Two dealers currently run the programme – Auto Bavaria Glenmarie (launched in December 2008) and Ingress Auto (launched in August 2008).

“Sales for (Auto Bavaria) Glenmarie have increased 60%. The used car business currently makes up 40% of their business. It’s been an enormous success,” Briscoe said.

“We’re happy to have Ingress aboard. To be part of the BPS programme, the potential dealer needs to go through a rigorous approval process and sign our BPS agreement that’s three inches thick and we are looking at reaching out to more dealers,” he added.

On another note, Briscoe said he could not agree more with its principal in Germany to pull out of Formula One (F1) next season.

“To be in F1, one needs to make continuous progress and it wasn’t sustainable for BMW to remain in the sport.

“BMW is the greenest luxury car company in the world and spends billions on fuel efficiency and CO2 reduction measures under our ‘efficient dynamics’ programme. It’s only right that its resources are focused on that,” he said.

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.”

Consumer confidence in Malaysia increases

Optimism on economy helps boost consumer confidence.

Consumer confidence in Malaysia improved in the second quarter of the year compared with the first quarter as individuals began to feel “less negative” about the current state of the economy and more optimistic about its future, according to a recent study.

The local Consumer Confidence Index was up from 83 to 94 alongside increases in the indexes of other Asian countries, namely Singapore, China, Thailand and Indonesia, according to independent market research agency InsightAsia Research group’s latest survey.

“Consumers are substantially more positive in the second quarter than they were in the first,” it said in its latest report on Asian Consumer Confidence.

Even though economic growth was expected to remain negative this year, emergency economic policy measures and recovering equity markets had lent support to confidence, it noted.

The survey covered 2,300 people from urban areas that were asked their assessment of the current economic situation and expectations for the next 12 months. The level 100 is the neutral point in the index, where an index higher than 100 indicates a high confidence level (optimistic) and an index below 100 indicated a low level of confidence (pessimistic).

Of the five countries, Singapore registered the strongest growth, adding 26 points to 88 while Indonesia and Malaysia increased more than 10 points each and were now just below the neutral point, at 97 and 94 respectively, the survey revealed.

Singapore yesterday said its economy rebounded strongly by 20.4% quarter-on-quarter in the second quarter versus the market’s expectation of 13.4%, helped by recovery in its construction and manufacturing sectors.

The Singapore government has raised its 2009 forecast to between -4% and -6% year-on-year, up from a previous forecast of -6% and -9%.

In Malaysia, improvements in the local economy were expected in the second half and should extend into 2010 as the effects of the implementation of the various stimulus packages were felt.

Professor of economics and head of department at the London School of Economics Danny Quah does not think that the renewed confidence is unfounded.

“The severe fall-off in the first place was, in my view, an unwarranted over-reaction in any case,” he told StarBiz via e-mail yesterday.

Quah said the 1997 Asian financial crisis had previously already “cleaned out” a lot of financial weaknesses in the region and while exports to the rest of the world remained important for the region generally, the fundamentals on the supply side had been strong and domestic demand had continued to be supported by both high productivity and healthy balance sheets.

“However, caution and vigilance on the part of policy-makers will always be needed,” he added.

Asian economies needed to be more “profoundly aware” that the world’s centre of gravity had shifted eastwards sharply, and that whatever anaemic growth the West might offer in the next few months, strong performance from China would provide significant growth opportunity for the rest of Asia, he said.

Malaysia’s economy, going to be like US soon?

Economy getting worse. Consumer-related companies are having more sales than ever to promote consumer spendings. People become attracted to the cheap stuff and start to buy. Some buy without considering whether they need it, or if they can afford it. In the end, the amount they need to pay for their credit cards becomes shockingly large. Some will fail to pay. Banks end up in big trouble since many people cannot pay their bills and loans.

At the end of the day, the consumer-related companies earn the most. Those people who cannot pay will have to return their homes/cars to the banks, and some even forced to declare bankrupt. And when people cannot pay, the banks will not gain any benefits. They will start losing money if this continues. True, they can take back those cars and real estates, and resell them but they can only resell them at a much lower price. And reselling does not mean there will surely be a buyer. Those cars and real estates might stay with the banks for quite a while due to the poor economy.

In my opinion, I think all these started from the point when consumers (us) start to spend money like water and buy things which they cannot afford, and even borrow loans which they cannot pay (and the banks approve loans without thinking twice. Few months ago, the banks were competing fiercely with each other to get more people to apply for house and car loans. When competition is that fierce, the banks will become more linear when it comes to approving those loans).

So how serious is this?

Frankly speaking, I have a feeling that our country is actually undergoing such a situation, albeit in an early phase. True, encouraging people to spend more will certainly boost the economy since it improves consumer spending. But it does not take away the fact that people ARE getting poorer with the high inflation rate (and companies ARE doing badly due to the bad economy. Do bear in mind that not all companies are involved in consumer business..that’s why there is a possibility of job cuts).

I think perhaps it’s time for people to start being frugal and be prepared. And I do hope that Malaysia will not end up like US, though my gut feel is telling me our country is indeed heading towards that direction (maybe not as bad).