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MEO 1Q2009

Executive Summary

The global growth prospects are reviewed almost every month in reaction to the release of grim data. Both the World Bank and the IMF are projecting the world economy to slide into a deeper recession in 2009. The US Federal Reserve stated that until the financial sector malaise is resolved, it is unlikely that the US economy will show improvement. In Mar'08, the IMF has slashed its global growth forecast to between -0.5 to -1.0 per cent in 2009 ('08: 3.7%), from +0.5 per cent in its Jan'09 projections. The latest revision projects the three major economies of US, Europe and Japan falling into deeper recessions in 2009. Japan is foreseen to contract the most (-5.8%) in 2009, trailed by Europe (-3.2%), and the US (-2.6%). The IMF projects the world economy to recover to around 1.5-2.5 per cent growth in 2010, with the US recording a meagre 0.2 per cent growth in 2010.

Not shielded from the global crisis, the impact of the global downturn on the Malaysian economy has worsened. As the external sector tumbles, Malaysia's GDP growth came to a grinding halt in 4Q08, registering a paltry 0.1 per cent growth. In 4Q08, resilient but easing private consumption and higher fiscal spending compensated the sharp contraction in real exports as external demand nose-dived. Given the deteriorating global economic prospects, a second stimulus package amounting to RM60 billion (about 9% of GDP) was unveiled in Mar'09.

The RM7 billion in the first package (Nov'08) was deemed to be insufficient to counter the deepening crisis. Although the second package appears larger, the actual direct spending is only RM15 billion (or 25% of total) to be spent over a two-year period. Other measures introduced are in the form of loan guarantees, investment through Khazanah and tax incentives. The loan guarantees will only work if there is demand from businesses, which is lacking at this point of time. The recurring concerns have been the speed and efficiency of implementation and the potential leakages. A notable point is the greater attention given to retrenched workers and unemployed graduates. With the second stimulus package, the fiscal deficit is estimated to rise to 7.6 per cent of GDP in 2009, up markedly from 4.8 per cent in 2008. The funding will mostly be sourced domestically, which is not a problem, given the ample liquidity in the system.

Monthly indicators up to Feb'09 have been losing momentum markedly, but the rate of decline has eased slightly. Industrial output registered a sharp contraction in Feb'09 (-14.7%), as the export-oriented sectors faced diminishing demand. Even the domestic-oriented sectors have felt the ill effects of the crisis. Exports have declined for five months in a row, but the decline in Feb'09 (-15.9%) has narrowed from -27.8 per cent in Jan'09. With imports showing steeper declines than exports, the trade surplus has been sustained. Thanks to reduction in local oil prices and slower rise in food prices, inflation has eased to 3.7 per cent in Feb'09, down from a peak of 8.5 per cent in Aug'08. Inflation will likely subside further in tandem with the softening economy.

In view of the deteriorating global economy and its adverse effects on domestic conditions, Bank Negara reduced the Overnight Policy Rate (OPR) by 50 basis points to 2.00 per cent on 24 Feb'09, the third time in five months. Bank Negara has slashed 1.50 percentage points from 3.50 per cent since Nov'08. To add liquidity into the system and reduce the cost of funds, the statutory reserve requirement (SRR) has been progressively cut from 4.0 per cent in Nov'08 to 1.0 per cent, effective Mar'09. Bank Negara has noted that lower rates could hurt savers and those who rely on incomes from deposits.

Consumer and business confidence has remained depressed in 1Q09, but the indices have registered minor gains. Both the Business Conditions Index (BCI) and the Consumer Sentiments Index (CSI) have stayed way below the 100-points threshold that separates expansion and contraction. The BCI, which is based largely on firm-level information, has inched up 7.2 points to stand at 61.1 in 1Q09, up from 53.8 points in 4Q08, but shedding 58.8 points from 119.9 points in 1Q08, indicating that business confidence still remains gloomy. Likewise, the CSI has notched up 7.5 points to 78.9 points in 1Q09, from 71.4 points in 4Q08, but down 36.6 points from 115.5 points in 1Q08. Despite the sharp declines in monthly indicators, the minor rise in sentiments could have been propped up by the release of the second stimulus package. MIER's sectoral indices have all remained far below the 100-points demarcation line.

The recovery from the current crisis will be difficult compared to previous ones because the scale has reached global proportions. It will take time and huge resources to revive the deeply entangled US financial sector, while policy options are running out. The weak external sector will impede a faster recovery, and the lower commodity prices are not helping either. Banks are becoming more cautious, limiting the flow of funds to firms. Domestic demand would be shored up by fiscal pump-priming and easier monetary policy, providing a partial cushion to the sagging Malaysian economy. The services sector will be the pillar of strength amidst a glum manufacturing sector. It is almost certain that Malaysia's growth will slide into a technical recession in the first half of '09, as it takes the hit from the knock-on effects of a flagging global economy.

In the light of the deep declines in macro indicators, the gloomy business and consumer confidence, and the dismal sectoral indices, we are obliged to revise Malaysia's growth forecast for 2009 downwards to -2.2 per cent from +1.3 per cent earlier. If exports shrink severely, the downturn could be more harmful. We have also downgraded the 2010 growth forecast to 3.3 per cent, from 3.8 per cent previously, in view of the anticipated gradual recovery in the global economy.

Posted by suzy at 03:48 PM