Economy Stirring

Malaysia

Economic News

22 Jul 2010
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There has been mixed news on the Malaysian economy of late, with revised estimates suggesting it may fall further than first expected as a result of the global recession but bounce back more quickly, while some figures are hinting that the bounce has already begun.



On August 14, the IMF released its latest assessment on the Malaysian economy, with the report lowering its forecast for this year but raising expectations of higher growth rates in 2010.



According to the IMF's Article IV assessment, Malaysia's economy will contract by 4.5% this year, rather than the 3.5% it had predicted in April. On the upside, the fund said that the economy would expand by 2.5% next year, a solid improvement on its earlier estimates of 1.3%.



There was praise for the government's handling of the crisis, with the IMF saying that the fiscal and monetary policies being pursued were appropriate for the country's needs and Malaysia was well positioned to weather the severe impact of the global downturn.



While praising the positives, the IMF also gave a "to-do" list to Malaysia, putting forward a series of measures that would help economic recovery in the shorter term and assist in making it more resilient to shocks in the longer term.



Foremost among these recommendations was the broadening of the taxation base, including the introduction of the long-delayed goods and services tax, and a reduction in state subsidies.



The IMF also called for some tweaking of the economy, saying there was a need to move it away from a dependence on exports, especially of energy, and a rebalancing of the market more towards domestic-driven expansion.



To a degree, that recommendation is already being acted on, with the government of Prime Minister Datuk Seri Najib Razak rolling out a series of reforms opening up services industries. Most notable is dropping Bumiputera ownership requirements in 27 segments of the sector as part of its programme to increase the contribution of services to 70% of the economy.



Though giving an upbeat assessment of the Malaysian economy, the fund did warn there were some potential speed bumps on the road to recovery, though these were mainly beyond the government's control.



"Risks to growth relate to the duration of the global recession, the evolution of commodity prices and adverse macro-financial interactions," the IMF said.



The Malaysian government's own forecast for GDP retreat this year is in the 4 to 5% bracket, an assessment reached well before the IMF's recent revision, though there are signs that the economy is starting to set out on the road to recovery earlier than either local officials and the IMF have predicted.



Recent figures released by state agencies show the monthly decline in manufacturing production is easing off, having reduced for each of the past five months, while earnings from exports is again trending up, from $11.6bn in April to $12.8bn in June.



In June passenger vehicle sales had their best month of the year, with more than 41,000 cars sold, while 4100 commercial vehicles drove off the lots in the same month, the best result in a quarter.



The Malaysian central bank is also seeing indicators that the worst is over, having decided to leave interest rates unchanged at 2% at the last meeting of its monetary policy board at the end of July. It was the third time in a row that Bank Negara Malaysia had met to discuss rates but took no action.



"Signs of stabilisation of the global economy have emerged whilst conditions in the international financial markets have generally improved," the bank said in a statement issued on July 29 accompanying its decision to hold rates. "The assessment is that with the current low interest rates and with the fiscal stimulus gaining traction, the prevailing policy measures are sufficient to provide support to economic activity."



Another positive for Malaysia are suggestions some of its major export markets, including in some of Europe's biggest economies, are starting their own recovery. According to the deputy finance minister, Datuk Wira Chor Chee Heung, this augers well for Malaysia.



"Since Malaysia's major exports are to Europe, the recovery there is bound to have a positive impact on our economy," he told reporters on August 17.



Combined with the impact of the government's $19bn economic stimulus package, the effects of which are starting to be felt, the short- to medium-term prospects for Malaysia are improving. Though it is too soon to describe the health of the economy as robust, nor is it fragile, having already exhibited distinct signs of life.

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