Strengthening domestic demand to sustain growth momentum

WHILE current economic indicators show that Malaysia is unlikely to fall into a recession, policymakers still need to look at ways to strengthen domestic demand to ensure that growth momentum is sustained going forward.

Economists contacted by StarBiz opined that private consumption had been a major buffer for the Malaysian economy, especially since the outbreak of the US credit crisis last year.

“Malaysia's macroeconomic strength lies in domestic demand,” said Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias.

“While growth in exports fell to 2.8% in 2007 from 9.8% in 2006, headline growth accelerated to 6.3% from 5.9%. This is pretty amazing considering that Malaysia's exports account for more than 100% of gross domestic product (GDP). It is a clear reflection of robust domestic demand.”

Malaysia's first quarter GDP this year grew 7.1%, underpinned by double-digit growth in private and public consumption spending.

Bank Negara said the strong growth in the quarter was led by domestic demand and reinforced by exports, especially of commodities such as crude oil and crude palm oil.

Nor Zahidi said rising oil revenue was another crucial factor that had aided the country amid the global slowdown.

“Higher oil revenue can be utilised for pump priming. In 2007, the amount of revenue from petroleum tax, royalty and export duty was about three times the amount of direct subsidy, “ he said.

Meanwhile, CIMB Investment Bank Bhd head of economic research Lee Heng Guie expects domestic demand to be the mainstay of economic growth.

“Policymakers need to drive high value-added investments to create jobs that command high incomes to support consumption. Investment in human capital forms the core element of sustaining growth going forward,” he said.

Stable interest rates, easier credit facilities and positive employment conditions would also help drive consumer spending, Lee said.

However, he said, there were some domestic-induced risks that could impact growth, including “the build-up of inflationary pressures, lingering concerns over political uncertainty and potential delays in the implementation of Ninth Malaysia Plan (9MP) projects.”

Lee said the near-term challenges for the country would be to keep a rein on inflation, counter the impact of rising prices on lower income groups and contain the budget deficit due to rising subsidy bills.

Robust private consumption and increased resource-based exports had helped Malaysia offset weakening electrical and electronics exports, said RAM Holdings Bhd chief economist Dr Yeah Kim Leng.

“The cushioning from resource-based exports such as oil and gas and palm oil should continue, as demand is not expected to be significantly impacted by a global slowdown,” he said.

Yeah said domestic demand could be further strengthened through expansion and upgrading of transportation infrastructure and communications, particularly broadband facilities and services.

“Growth and competitiveness of Malaysian industries can be enhanced further through incentives that encourage them to expand into high-value services such as design, testing and research and development centres, shared services and outsourcing, multimedia and e-commerce,” he said.

Yeah concurred with CIMB's Lee in that higher spending by the Government, including those planned under the 9MP and various regional development corridors, would stimulate domestic demand.

“Manufacturing and services investment projects approved in 2006 and 2007 amounting to RM101.5bil and RM125.3bil respectively will contribute to a rise in employment, wages, capital investment and demand for supporting services in 2008 and 2009,” he said.

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