Economy Easing

Malaysia

Economic News

22 Jul 2010
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Though Malaysia's economy has contracted at a faster rate than previously predicted in the opening months of the year, as the effects of the global recession take their toll, there are signs the worst could be over.



On June 21, the government revised its predictions for the economy, forecasting GDP to contract by 4-5% this year, as opposed to the previously expected range of a -1% contraction to 1% growth. The revised estimate is in line with the 4.4% fall projected by the World Bank, in a report issued the same week.



The revision came amidst a welter of official data showing the economy was slowing at a greater rate than expected, with GDP falling by 6.2% in the first quarter and the value of exports falling in April, reversing a trend of slight increases in overseas sales seen in the preceding three months.



Sales in the manufacturing sector were down 26.2% in April from the same month in 2008, with output sliding by 15.7%, mainly due to a weak performance from the iron, steel and computing industries, and the slump in demand. This slowdown in the sector in turn lengthened Malaysia's jobless queues, with 7.7% of manufacturing jobs cut over the past seven months, according to figures released by the state statistics bureau in mid-June.



While many key indicators showed an economy locked in a recession, there are suggestions that the downturn has bottomed out and a moderate recovery could be on the horizon. Though both industrial production and output by the mining sectors were down in April, the declines were the lowest recorded since December.



Sales of passenger cars have risen in recent months, with 40,000 vehicles sold in May, a 10% increase over the November figure and almost 3000 up on April's total. Meanwhile, May's commercial vehicle sales of 3826 are 10% higher than for January.



With the easing of demand there has also been a decline in inflation, with Malaysia's consumer price index dropping from a high of 8.5% last September to 2.4% as of the end of April.



The recent rise in oil prices will also work in the government's favour. Last year, payments from oil and gas producer Petronas represented 44% of the state's revenues. With oil climbing again on international markets, the government will be better placed to fund its ambitious economic stimulus package from earnings, reducing its reliance on the debt market.



The effects of the $19bn stimulation package are starting to be felt in the local economy. With much of the funding being channeled into infrastructure projects, the increased spending will promote growth in the construction sector and also boost materials suppliers, in particular iron and steel manufacturers who fared poorly in April.



While working to steady the economic ship in the short term, the government is also preparing it for a much longer voyage on the open seas. Having already opened up 27 segments of the services industry, along with parts of the financial services sector, to wider foreign investment, Prime Minister Datuk Seri Najib Tun Razak announced on June 23 that a new series of measures aimed at liberalising the Malaysian economy will be made public by early July.



Najib said the liberalisation programme was not being pursued simply to attract foreign investments, capital or in order to conform to some new economic orthodoxy.



"Our objective is clear, to ensure that Malaysians, our people and our companies, benefit from the competitive dynamics that are shaping the global marketplace for ideas, talent and funds, so that Malaysian companies and Malaysians can emerge stronger, become more globalised and ultimately thrive in this new world order," he said.



Central to the government's liberalisation plans is reducing direct state contribution to the economy, which currently stands at more than 50% of GDP, and increasing the slice of the services sector from the present 55% to 70%, or above.



Ahead of the prime minister's statement that further reforms were in the pipeline, the deputy minister of international trade and industry, Datuk Mukhriz Tun Mahathir said that a step-by-step opening up of the economy would be implemented to facilitate increased foreign investment while ensuring that local entrepreneurs' interests were preserved.



"The non-governmental contribution to GDP in 2008 was 47.6%, while the percentage being aimed for 2020 is 60%," he said on June 22. "The GDP contribution of the non-government sector in many of the advanced countries exceeds 70%."



While it will take a long time for Malaysia to achieve this target, the government is seeking to put in place the policy incentives to achieve that goal. Combined with the substantial injection of state funding and the reforms already enacted, Malaysia's economic climate is showing signs of a recovery, which will be boosted by expected growth in the private sector.

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