World pins hope on a short war


BY JAGDEV SINGH SIDHU

THE IMPACT of the Iraq war on the world and Malaysian economies is very much dependent on the duration of the war and how messy it can get, according to many government and business leaders canvassed by StarBiz

“War is not good for anybody except the defence industry. Business everywhere will be curtailed,'' said AmInvestment Services Bhd chief executive officer Cheah Chuan Lok. 

Hopes of businessmen and governments are that the war would be short, as a quick war would see minimal disruption to economic activity and loss of human life. 

Those wishes were somewhat punctured by US President George W. Bush's comments that the conflict would be longer than earlier predicted. 

Many scenarios have labelled a campaign that lasts less than a month as a short war and a long war is categorised as an engagement lasting more than three months. 

A longer war would compound the uncertainty temporarily lifted by the start of war in Iraq and affect not only investments but important segments of the economy like private consumption, tourism, exports and the overall economy. 

The price of oil will have a major impact on the pace of global recovery. If the oil price, which has plunged drastically in recent days, continues its downward spiral and settles at around US$20 per barrel, as some American economists predict, then it would act as a powerful stimulus for world recovery. 

However, if war goes the wrong way and the oil price stays high, the world would be starring at another recession. 

The promise of a broad-ranging global economic recovery in the second half of the year would also be delayed as a result. 

Such expectations are no different in Malaysia where a short war would have minimal impact on crucial segments of the economy such as exports, tourism and consumer spending. 

“Much will depend on the next few days and whether there is significant resistance to the advancing US-UK troops towards Baghdad,'' said GK Goh economist Song Seng Wun, who has pegged Malaysia's gross domestic product (GDP) growth at between 5% and 5.5% if war is short. 

United Engineers (Malaysia) Bhd managing director and chief executive officer Abdul Wahid Omar said Malaysia would not be spared the adverse impact of war. 

“It is comforting to note that the Government is taking proactive measures to minimise the adverse effects of war on Malaysia. The fact that the ringgit is pegged to the US dollar also helps in the sense that we will not be subject to the potential fluctuation in exchange rates in times of world crisis,'' he said. 

Economists say the war-induced uncertainty that crimped activity over the past three months has so far had limited economic impact on Malaysia. 

“It has not been overly disruptive yet. Growth in Malaysia has been balanced by trade with and demand from China,'' said MMS International economist Dave Cohen. 

The US, Europe and Japan together absorb almost 50% of Malaysia's exports and the short-term outlook for the country would depend on exports to those countries. 

Economists do, however, point out that the fast growing markets in the Middle East, which account for about 2% of total exports, could see some disruption in shipment of Malaysian goods. 

Cohen expects Malaysia's GDP to grow at 5.5% this year but a short war could see expansion fall to a rate of 5%. 

Economists are hopeful that consumers, based on the Malaysian Institute of Economic Research's fourth-quarter data, would carry on propping up the economy, as they have not been affected by higher unemployment and the immediate threat to their job security. 

“Consumers should be able to maintain their pace,'' said DBS Bank senior economist Wong Chee Seng. 

Business sentiment, which has taken a dive in recent quarters, is said to be more sensitive to changes in the climate of global economics. 

The government's effort to counter the impact of war on business and consumer confidence would be done through the upcoming economic stimulus package, which some say is not a short-term magic bullet. 

“People have high hopes on the stimulus package but they shouldn't place too much hope on pump-priming,'' said CIMB economist Lee Heng Guie. 

Datuk Dr Zainal Aznam Yusof, a member of the National Economic Action Council (NEAC) working committee, said the package would pay more attention to growth prospects in the medium and long term. “It is the non-fiscal stimulus that will give the economy a bigger push,'' he said. 

Beefing up future growth potential is crucial, but Wong believes the government would give scrutiny to boosting short-term growth prospects. 

Economists say once the war is finished, the world would be assuming that there would be uninterrupted prosperity in the years ahead. 

“It will all depend on the health of the US economy. This time, however, the US may not have the same upside as it did back in 1991,'' said Song of GK Goh. 

Crucial to Malaysia's economy would be the impact of the war on the stock market. 

While valuation of stocks is cheap and the market seems to have been given a lift from the declaration of war, sentiment could still be subject to intense swings. 

“The KLSE does look close to the bottom from a fundamental point of view. But knee-jerk reactions do not necessarily depend on fundamentals,'' said S&P Investment Services, Asian equities, director of research Sharon Wong. 

To the Flashpoint Iraq website 

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