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MEO 4Q 2009

Executive Summary

Various economic indicators continued to show improvement ahead, albeit being subjected to occasional pullbacks. This progress is brought about by the efforts of numerous national policy stabilisation measures. Some countries may start to normalise their policies first, while others, depending on their economic conditions among other things, may opt to do so later.

In Oct 09, the IMF anticipated the global economy to expand by 3.1% yoy in 2010, from a 1.1% yoy decline in 2009. For 2010, the U.S. is projected to grow by 1.5% yoy, the euro zone at 0.3% yoy, Japan at 1.7% yoy, and China 9.0% yoy. The comparable yoy figures in 2009 are -2.7% (U.S.), -4.2% (euro zone), -5.4% (Japan), and +8.5% (China).

Regionally, the ADB has also lifted its GDP growth forecast for developing Asia to +3.9% yoy in 2009 and +6.4% yoy in 2010. The regional economies are seen to be more resilient to the downturn than initially feared. Underpinning the region's growth prospects is China, whose aggressive monetary easing and fiscal stimulus could accelerate the GDP growth rate to +8.2% yoy in 2009 and to +8.9% yoy in 2010.

In 3Q09, Malaysia's GDP improved to -1.2% yoy (2Q09: -3.9%) due to rebound in manufacturing, construction, and services sectors. Stabilising global and domestic demand conditions resuscitated manufacturing output, while large public expenditure contributed to expansion in both construction and services activities. Nevertheless, the external sector remained relatively weak in 3Q09.

To enhance the image of Malaysia to foreign investors, liberalisation measures were implemented on 27 services sub-sectors in Apr 09 and the 30.0% Bumiputra equity requirement for newly listed companies was removed in Jun 09. Moreover, the personal income tax rate will also be reduced from 27.0% in 2009 to 26.0% in 2010. Special income tax rate of 15.0% will be given for local residents and foreigners who work and stay in Iskandar Malaysia.

In tandem with regional economic performances, monthly Malaysian indicators have also signalled improvement. Overall CPI declined at a slower rate of 0.1% yoy in Nov 09 (-1.5% in Oct 09) due to effects from higher transportation cost. Sequentially, CPI increased by +0.3% in Nov 09 (+0.1% in Oct 09). Consumer inflation remained in positive at 0.5% on a year to month basis. Meanwhile, core CPI also declined at a slower rate of 0.6% yoy in Nov 09 (-2.6% in Oct 09).

Meanwhile, the Central Bank of Malaysia (BNM) has left the Overnight Policy Rate (OPR) unchanged at 2.00% for the sixth consecutive meeting in Nov 09. While the economic contraction is expected to decrease from 3Q09, the monetary policy stance is expected to be fairly accommodative until the economy recovers. This is also facilitated by the absence of inflationary expectations in the near term. Hence, MIER expects the OPR to be relatively unchanged at least until end-2010.

Against this background, both the in-house Consumer Sentiments Index (CSI) and Business Conditions Index (BCI) continued to show improvement. In the 4Q09, CSI rose 4.2 points qoq to settle at 109.6 points (3Q09: 105.4), while the BCI was higher by 5.1 points qoq to 118.8 points (3Q09: 113.7). Nevertheless, the hardship posed by the global financial crisis, domestic labour market rigidity, rising inflation, and early policy exit strategy may affect sentiments ahead.

There are glimmer signs that the global downturn has stabilised somewhat, but the recovery is expected to be sluggish and uneven. The healing from the current crisis will be difficult compared to previous ones because of the synchronised nature of the downturn. 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 as bad loans could rise soon, limiting the flow of funds to firms. The services sector will be the pillar of strength amidst a glum manufacturing sector. The technical recession is likely to end in 4Q09. However, Malaysia may not regain more strength until the global economy is back on track, which is going to be at a disappointingly slow pace.

In view of improving macroeconomic indicators, and better CSI and BCI as well as the sectoral indices, MIER is maintaining for now, its GDP growth forecast of -3.3% yoy in 2009 and +3.7% yoy in 2010, while concomitantly projecting 2011 GDP growth forecast of +5.0% yoy. Downside risks are still prevalent and might perturb the road to recovery, but there are stronger positive influences that led to MIER's projections.

Posted by suzy at 01:07 PM