RAM sees GDP expanding at 5% to 6%

RAM Holdings' earlier forecast of 5.8% growth for Malaysia in 2008 was predicated on low US economic growth, a slight slowdown in the global economy and stronger government spending push in 2008 under the Ninth Malaysia Plan (9MP).

However, group chief economist Yeah Kim Leng said, domestic demand may be affected by a possible US economic recession, slower government spending as well as a more cautious investment sentiment in the aftermath of the local general election.

“As such, a growth of between 5% and 6% this year appears more realistic,” he said, adding that the forecast was no longer as definite as 5.8%.

Yeah added that a shallow US recession combined with a slight slowdown in the global economy and lower government spending could even tilt Malaysia’s growth to the 4% to 5% range.

Mining andagriculturalsectors willseecontinuinginvestmentinexplorationandproductionactivities

“On the domestic side, consumers are grappling with higher food prices while the strong investor sentiments last year (due to the surge in foreign and domestic investment project approvals) has been dampened by political uncertainties and announcements of further review and possible postponements of several mega 9MP projects,” he noted.

The Malaysian economy had been expanding at above 5% per annum since 2002 and hit 6.3% last year despite the sharp slowdown of the US economy in the final quarter.

“But in the first half of this year, the headwinds from abroad – ranging from a US economy teetering on the brink of a recession, record high and still rising prices of crude oil, primary commodities and in recent months, staple food, bouts of credit crunch, and rising credit spreads in the global financial markets – have taken a toll on the global economy,” he said.

The International Monetary Fund (IMF), in its latest world economic outlook report, revised its 2008 growth projection downwards by 1.1 percentage points to 3.7%.

The IMF projects world economic growth at 3.7% for 2008 or 1.2 percentage points lower than the growth achieved in the previous year, while the US economy is expected to slow down to 0.5% in 2008 from 2.2% a year earlier.

“The Malaysian economy is highly open whereby total trade is more than two times the size of its Gross Domestic Product. A global slowdown will have a concurrent impact on exports and consequently on imports of intermediate goods used in the production of exported goods,” Yeah said.

He said falling export earnings could translate into lower corporate earnings, reduced business spending and less income increases for employees, eventually dampening domestic spending.

“The other transmission channel of a global slowdown is lower investment and foreign direct inflows as firms become more cautious in spending, hiring and capital investment,” said Yeah.

He said RAM expected all sectors to contribute positively to growth although the manufacturing sector might see anaemic growth given that the global electronics and electrical sector was likely to be weighed down by lower US demand and a weak dollar.

Yeah added that resource-based industries would continue to do well on the back of high commodity prices and sustained demand of large economies.

“Mining and agricultural sectors, which are benefiting from the global commodity boom and high prices, will see continuing investment in exploration and production activities,” he said.

Yeah also said the services sector, which grew above trend rate in 2006 (7.2%) and 2007 (9.7%), would likely experience a moderation but should remain relatively healthy with support coming from continuing consumer and tourist spending and steady growth in real estate, financial and professional business services.

Role of stronger companies

Yeah said further easing of employment of foreign skilled personnel and their families was especially important in competing for world-class, high quality investment projects.

“Malaysian companies in the oil and gas, plantation and other resource-based industries are currently benefiting from high prices amidst strong global demand and tight supply.

“With accumulated cash reserves, strong earnings and large profit margins to cope with rising cost pressures, these companies should be well protected against various headwinds,” he said.

Yeah said stronger companies must play a crucial part in strengthening the economy.

“These companies are more well endowed to undertake green field projects or mergers and acquisitions (M&As) when opportunities arise as weaker companies fail or sell assets at cheap prices when economic conditions become more challenging,” he continued.

Yeah said most companies in RAM’s portfolio across the spectrum of industries had a stable outlook.

Preparing for the future

Yeah said Malaysian companies should re-examine their cost structure and find cheaper supplies arising from exchange rate changes and the strengthening of the ringgit against the dollar.

“With slower demand, they could devote more resources to improving the efficiency of internal production and management processes and enhancing market research and product innovation, “ he said.

Yeah also said these companies should also re-align their market strategies and focus on countries that were less susceptible to a US economic slowdown such as the oil-rich Middle Eastern countries and large growing markets in China, India, Russia and Brazil.

“Companies can also review their respective national and regional industry trends and consider synergistic M&As and other forms of tie-up that will enable them to better compete through improved efficiency and competitiveness.”

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