Economic Update
While Malaysia’s manufacturing sector has until recently benefited from the low value of the country’s currency against the US dollar, the country is now looking to move up the value chain and transform itself into a knowledge-based economy. With that in mind, an increase in productivity, and a rising currency in line with service-based economies such as Hong Kong and Singapore, is considered by observers as a positive step.

The ringgit, Malaysia’s currency, has now risen 4% against the US dollar, reaching a nine-year high of RM3.39 on May 22. This is partly to blame for slowing the growth in the export of manufactured goods compared to the rates seen in previous years.

Overall, manufactured goods account for 30% of Malaysia’s economy, and over 80% of all exports. Exports, the biggest contributor to Malaysia’s GDP, grew only 1.1% in the first quarter of 2007, slowing from 11.5% in the same period a year earlier.

The main area of the manufacturing sector that has felt the impact of the rising value of the ringgit has been Electrical and Electronics (E&E). With one third of these exports typically going to the US, the slumping US economy has also dampened the market for these goods. Malaysian Pacific Industries, the country’s largest assemblers of semiconductors, saw its first quarter profits slip by a third, while rival Unisem’s profits fell by 87% in the same period.

While the strong ringgit is adversely affecting the demand for Malaysian goods, the government and analysts see the trend as a signal that the overall economy is moving in the right direction. Even though the increase against other currencies has not been large – indeed in some cases the ringgit gained ground – with the emergence of low-cost bases such as Vietnam and China, the consensus is that competing on cost and currency is no longer a viable option.

Second Finance Minister Nor Mohamed Yakcop recently told the press, “We do not want to be too unduly dependent on exports. We want to be more diversified to make sure that our economy is hedged properly and we want to have more consumption-led growth.”

Direct beneficiaries from the strong currency have been companies that are dependent on imports like Nestle Malaysia, which imports 66% of its materials from around the world. Other companies, like Telekom Malaysia and Tenaga Nasional, the national telephone and utilities companies, benefit from the ringgit’s appreciation as they have substantial amounts of their debt issued in US dollars.

Piyush Gupta, CEO of CitiGroup Malaysia told OBG, “The appreciation is good, so long as it is in line with regional competitors, which it is. This does not deteriorate our export competitiveness. It serves as a policy tool to keep inflation in check without having to take recourse in a tighter monetary policy. It encourages inbound investment as well as assists the middle class by making overseas education and travel easier.”

Some analysts contend that the rise in the ringgit is a result of speculation regarding Asian currencies following China’s announcement on May 17 that it was widening its currency’s trading band to allow the currency to rise to accommodate its trade imbalance with the US.

Zeti Akhtar Aziz, governor of the Central Bank of Malaysia, was quick to defend the ringgit’s performance. She said, “The ringgit moved on its own merit and in line with the Malaysian economy, and not in tandem with the yuan.”

Lee Heng Guie, head research economist at CIMB Group, told OBG, “Far more important than the direction of the ringgit is assessing it in terms of its alignment vis-à-vis a basket of currencies of Malaysia’s major trading partners. Stability of currency is crucial, and any wide swings and volatility should be avoided as that disrupts business planning. […] the currency should not be allowed to be driven by speculative financial flows, as happened recently with the Thai baht. In Malaysia, we are okay, as even if the capital inflow is coming from people looking to ride the wave, should they subsequently withdraw their capital, the central bank has plentiful reserves they can use to stabilise things.”

Overall, market analysts feel the rise is justified, with the economy expected to pick up in the second half of the year. The stock market continues to perform well, investor confidence is high and the property market has been stimulated through lower taxes and various incentives. Money is being injected into the economy with the government, on May 21, announcing a pay hike for the nation’s one million civil servants with salaries expected to increase between 10 and 42%. As part of the Ninth Malaysia Plan, the government’s long-term economic programme, $59bn will be spent on infrastructure and development projects this year alone.