In the second and final part of the interview with Bank Negara Governor Tan Sri Zeti Akhtar Aziz, she speaks on the continued solid and steady growth of the economy, with the private sector very much in the lead. She also reviews the performance of several growth sectors and touches on concerns over the ringgit peg.
Review of economic growth in 2004, and outlook for 2005
THE Malaysian economy has been experiencing solid and steady growth for a number of years now and we saw this growth strengthen in 2004.
Despite an uncertain environment, the economy has done quite well. The economic structure is becoming more diversified and our economic fundamentals have continuously strengthened.
The most encouraging factor is that this growth is driven by the private sector. This helps to ensure the sustainability of our growth prospects.
Going into 2005, we expect the underlying growth trend to remain intact. Consumption demand is expected to remain strong in an environment of rising incomes, stability in the assets market and stable labour market conditions. These trends are expected to continue to remain favourable in 2005.
In terms of investment activities, the positive trend is also expected to remain. Capacity utilisation is high, inventory levels low, and corporate balance sheets are now stronger with the increased levels of profitability.
In addition, there has been increased access to financing. Loans growth has increased and the import of capital goods has also increased.
The external environment has been more challenging. While we went through a period of higher oil prices we have seen the world absorb these price increases without significant implications on growth and inflation.
The global economy has been better able to withstand these higher prices. But prices have now receded as new supplies have come on-stream.
Global growth in the electronic sector, however, has also moderated. But again, this slowdown is modest compared with previously, and thus the impact in 2005 is not expected to be significant.
While the global economy is expected to experience some moderation in growth, the growth is expected to still remain high.
In the international financial markets, while there has been some volatility in both the international bourses and in the foreign exchange markets, it has not been destabilising on our economy.
The resilience of the Malaysian economy will continue in 2005. The economy is forecast to expand by 6% in 2005, driven mainly by domestic demand through higher private consumption and investment.
The region, including the larger economies in Asia, will continue to be a positive factor reinforcing regional growth.
These are some of the trends that will affect the outlook for 2005. Overall, the outlook remains positive.
Review of the yuan and regional currencies; the ringgit peg and its relevance
In an increasingly integrated world economy, any significant development that takes place in any major economy will have implications on other economies, particularly those economies that are highly open.
China is emerging as a major economy in the world economy. What happens in China in terms of its growth performance and its policies will indeed have implications not only on the region, but also economies outside the region.
The discussions taking place on whether the yuan should be revalued or its regime changed, should be looked at in terms of what is in the best interest for China.
Structural imbalances in the world economy do present a risk to the international environment. But this needs to be addressed by the countries where these imbalances exist.
Shifts in currency regimes or adjustments in the currencies in the global financial markets or in the Asian region are unlikely to bring about the shifts in comparative advantage that would correct these imbalances.
Should any change take place, however, whether in terms of currency regimes or in the adjustments in the major currencies, it would indeed have implications on the regional economies, regardless of their exchange rate regime.
The implications will not be unique to Malaysia just because we have a pegged exchange rate. It will also have implications on those economies that are under a floating exchange rate regime.
What will determine the country’s ability to cope and to adjust to any such change in an orderly manner will depend on the strength of their own economies and the soundness and stability of their financial system.
That is why we have focused on strengthening economies and our financial system and addressing any areas of vulnerabilities to ensure that we are able to respond to the new environment in an orderly manner.
It is our strengthened economy and financial system that will allow us to deal with any change in a manner that is in the best interests of Malaysia.
In terms of our own currency, the objective of our exchange rate policy is stability. In particular, we want to ensure exchange rate stability against the currencies of our major trading partners.
Role of the private sector in enhancing growth
As the recovery cycle has gained momentum, the private sector has been progressively moving to the forefront in driving economic growth. Private sector contribution to growth has steadily grown stronger since 2002.
By 2003, the private sector was the main engine of growth accounting for two thirds of growth in real gross domestic product. This contribution has since increased further in 2004.
Private consumption demand gained strength during the year encouraged by the firm commodity prices and a general strengthening of consumer sentiments.
It was also supported by the increase in loans to the household sector. The outlook is for continued growth in consumption.
The positive growth outlook and the favourable demographic structure that supports a higher marginal propensity to consume will reinforce this trend.
The financial position of the households is also sound with household deposits exceeding debts.
During the year, private sector investment demand also picked up and increased significantly. This increase has been driven by the high rates of capacity utilisation, with many companies in most of the sectors and industries now operating at near full capacity.
Further, the restructuring efforts of the previous years have now been completed, allowing firms to borrow for further expansion. Reflecting this the private debt securities now issued are mainly for new projects, rather than for restructuring purposes.
Smaller companies have also been helped by stronger cashflow positions arising from higher profitability, and the increased access to financing.
The private sector is expected to continue to be the main driver of growth in 2005. This provides the opportunity for the Government to sustain consolidation process that has been on-going.
Will the downturn in the global semiconductor industry have an impact on exports?
The impact of the consolidation of the global electronic sector will be modest compared with what we saw in 2001-2002 when it was quite severe.
This time round, we expect it to be quite modest. The inventory levels now are very low and we do not have a situation where there has been an over-investment in the sector, as was the case in 2001.
Previously, the downturn in the electronic cycle occurred during a period of global economic slowdown compared with now, where most economies are experiencing relatively stronger growth.
The latest assessment by the industry is that they expect a recovery in 2006 and, therefore, the downturn is expected to be shallow and for a shorter period.
The recovery is expected to be driven by the continued demand for chips with the wider applications being made and the higher chip content in consumer products.
The electronic segment in Malaysia has also become more broad-based in terms of product and market segment. Malaysia has diversified away from the computer memory chips into the production of other types of memory chips, wireless products and chips for smart cards which are areas that are now experiencing rapid growth.
2005 is said to be the year of liberalisation for the auto industry. How do you see this impact on car sales?
The liberalisation of the auto sector has already begun in the year 2004. Beginning Jan 1, 2004, the Government revised downwards the import duty structure as part of the phase – into the Afta framework in 2005.
The Malaysian consumer has already taken into account this new tariff structure in which import duties for CKD Asean cars have been reduced to 25% from 40% to 80% previously.
Car sales have, however, picked up significantly in 2004. In the first 10 months of 2004, car sales have reached levels achieved in the whole of 2003.
This strong demand is due to the favourable economic conditions. Higher income levels, job security and access to financing have prompted consumers to purchase these large ticket items. We expect this strong demand to continue into next year.
Is there pressure on interest rates since most countries in Asia have started to push theirs up?
Generally, those countries that are raising interest rates are those that had reduced their rates to historical lows in an environment in which they faced the threat of deflation.
The rates are now being raised to what has been described as to more neutral levels. The rates' increases being made however, have been gradual.
Malaysia was never confronted with deflationary conditions and so our rates were not reduced to such low levels.
Moreover, with capacity expansion taking place in our economy, we have not seen demand induced price increases.
Under these circumstances, there is no pressure or urgency to raise rates. Interest rate policy can, therefore, continue to remain supportive of the economy.
A review of new growth areas and their potential in 2005
Several new growth areas across the broad spectrum of the economy are being promoted to strengthen the resilience of our economy.
We are intensively diversifying our economy into several new growth areas. This will reduce our vulnerability and strengthen our economic structure.
The three main engines of growth will be manufacturing, higher-end knowledge-based industries and activities in the services and agriculture sectors.
The Government has provided the enabling environment by putting in place the necessary infrastructure, providing incentives and financing facilities for the private sector to invest in the new areas of growth.
These efforts have now begun to yield results, especially in the services sector, with a rapid expansion in the shared services industry, Islamic financial services, new products in the ICT sector and private education, health, and tourism.
Encouraging progress has also taken place in the new areas in the manufacturing and agriculture sectors. Going forward, the contribution of these new growth areas to GDP is expected to increase.
An area that we have seen a significant increase in the momentum of activities is in the Multimedia Super Corridor.
Total sales of MSC-status companies increased by 49% in 2003 to RM5.8bil. Many of the companies surveyed indicated that they are now already in the growth stage.
In the area of education, there has also been strong growth, with the number of foreign students increasing 11-fold in the period 1997-2003. The number is expected to increase to 50,000 in 2005.
In the health industry, there are currently 35 private hospitals catering to both local and foreign patients.
In Islamic finance, total Islamic banking assets have more than doubled over the recent four years to RM88bil. We can expect these trends to continue.
In agriculture, there has been a shift to high-yielding crops and a deepening of the linkages with the downstream industries.
Encouraging progress has also been seen in the promotion of large-scale commercialised food production; bio-technology, herbal products; fishery, aquarium fish and aquaculture; as well as horticulture.
In the manufacturing sector, strategic investments have taken place in new areas such as chemicals, pharmaceuticals and the higher-end electronic and electrical products.
Foreign reserves have been rising and are reaching high levels. Please provide an insight into the implications on the economy
Foreign reserves have now reached US$66.7bil, and this is a record high. It reflects the strength of our economy. It has been mainly built up by a steady inflow of export earnings, foreign direct investments and from time to time, portfolio flows.
While the portfolio flows have been relatively volatile but their volume has not been significant. Some of them are strategic investments but some are short-term in nature.
But we have a high level of reserves to adequately cushion the volatility in these short-term flows.
With this strong level of reserves, we have taken the opportunity to liberalise some of our exchange administration rules. We have done so in 2004 and will continue to do so during the course of this year.
The impact of these reserves on our economy is relatively neutral. These increases in reserves are sterilised, which means that it is absorbed by the Central Bank so as to prevent an environment of excess liquidity.
What has been important is the Central Bank has the capacity to continuously sterilise these flows to ensure stable conditions in our financial markets.
Please provide an insight into the levels of portfolio inflows and the management and implications of potential “hot money”
Malaysia is able to manage the portfolio inflows effectively. The cost of monetary policy in the sterilisation process has been relatively low. The current inflows are manageable and not all of the flows were “hot money”.
Some of the portfolio flows reflect decisions by international fund managers to increase their long-term strategic exposure to Malaysia, following continuous upward adjustments in ratings and improved economic outlook that have increased the attractiveness of Malaysian asset markets.