Strengthening the economy


  • Business
  • Saturday, 29 Mar 2003

BY RUBIN KHOO

AT a recent interview, when asked about expectations for of the year ahead, a corporate leader replied that much of the economic outlook hinged upon the then looming war against Iraq.  

“The US,” he said, “should get it over and done with. That would end the uncertainty once and for all.” Well, his sentiments appear to have been shared by investors the world over.  

Stock markets across the world reacted positively to the attack. But just as quickly as they rose, indices across the globe fell as expectations of a quick end diminished.  

On Wednesday, US President George W. Bush warned that the war in Iraq was far from over and the “uncertainty“ that so many craved an ending to, continues to hover over the global economy. 

Unfortunately, the US economy dominates the world economy and at the moment, the prognosis for the US economy is dim. And as a result, things across the globe are not looking all that bright either.  

The US is the region's biggest trading partner and a fall in consumption there would have an adverse effect on trade and consequently on economic growth across the region.  

Needless to say, Malaysia would not be spared.  

Last year, approximately 20 per cent of manufactured goods were exported to the US and with external demand now expected to tumble, economists are keeping a close watch on their forecasts for the year.  

On Wednesday, the central bank revised its official gross domestic product (GDP) forecast for the year to 4.5 per cent from the original 6.5 per cent. The revision concurs with those made by most research houses but the latter's forecasts are based on the assumption that the war will be short.  

While they are sticking to that forecast for the moment, they nonetheless do not rule out the possibility of further revisions once a clearer picture emerges.  

One local research house states the possibility of a downward revision of its 4.5 per cent GDP forecast once February's external trade and industrial production index (IPI) data is released in early April.  

This is based on the fact that IPI components make up 42 per cent of the Malaysian economy with two-thirds of manufacturing output by export-based industries. 

Intermediate goods, meanwhile, provide clues about the IPI and exports over the next couple of months. The data, they state, will provide an indication of first quarter real GDP growth for 2003.  

Furthermore, while exports in January rose strongly by 11.3 per cent year-on-year and 6.4 per cent month-on-month, IPI grew just by 1 per cent year-on-year and was down 8.3 per cent month-on-month, as a result of poor factory output.  

While things remain uncertain for now, economists concede that one thing is for sure – year 2003 will be challenging for the regional economies. 

“There is really nothing much that the governments in the region can do,” says one economist with a local stockbroking firm.  

“The impact on the Malaysian economy will be felt in two ways,” says Lee Soo Kai, economist at OSK Research.  

“It is not just the external sector. The tourism sector is also adversely affected by the war, terrorist fears and now the outbreak of pneumonia.  

“In 2001, we also had a weak external sector but then it was cushioned by tourism. Now that there is a slowdown in tourism and a weak external sector, that will pose a challenge for the Malaysian economy.” 

OSK's projected GDP growth for the year is at 4 per cent but it too does not factor in a long war and is based on an expectation of a 50-basis point cut in domestic interest rates. 

“The impact on the Malaysian economy can be seen from various standpoints,” says Zulkifli Hamzah, chief economist at Mayban Securities, “on commodities, crude oil, how the financial markets react.  

“All these things affect the Malaysian economy either directly (higher costs, weaker sentiments and business confidence) or indirectly (via its trading partners).” 

Mayban Securities had forecast a GDP growth of 5.7 per cent end of last year, which is likely to be revised downwards.  

Zulkifli adds that while the US is the country's biggest trading partner, the possibility of increased intra-Asian trade is something that should be looked into further. 

“Last year was a good year for exports but a large part of it was due to higher intra-Asian trade,” he explains. “China and Japan continue to fuel local manufacturing and that provides an alternative.” 

In 2002, trade with China expanded by a whopping 49 per cent making it Malaysia's fourth biggest trading partner with an increased share of 6.6 per cent of total trade.  

Exports to North East Asia and Taiwan also expanded, resulting in a higher trade share of 13.2 per cent compared with 11.9 per cent in 2001. This was also the case for exports to Asean countries (excluding Singapore), which increased to 9.7 per cent from 8.8 per cent a year earlier. 

What's next for the Malaysian economy largely depends on the stimulus package to be announced soon.  

Predictions are that the package will focus on boosting consumer demand, not unlike that which was introduced during the financial crisis of 1997.  

“In times of uncertainty like this, economies like Malaysia that employ fixed exchange rate have got the biggest leverage in terms of its stimulus package,” says one economist.  

And Malaysia, he adds, is in a relatively strong financial position to employ the use of a fiscal stimulus.  

Others, however, say that the present uncertainty will eventually blow away and the government should instead focus on strengthening the economy in the long term.  

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