While the global slowdown has led to negative revisions in Malaysia's outlook for gross domestic product (GDP) growth and inflation, the country should be able to count on increasing domestic demand, as well as strong performance in essential commodities, to help it weather the worst of the storm.
On March 26, Bank Negara Malaysia (BNM), the country's central bank, readjusted its growth forecast for the year. The reduced forecast anticipates 2008 gross domestic product (GDP) growth to fall into the 5% to 6% range, whereas the previous forecast was in the 6% to 6.5% range. Malaysia's GDP growth for 2007 came in at 6.3%, the fastest pace in three years.
This change in position is in line with the expectations of many external independent parties, including the Asian Development Bank and the UN, both of which recently revised their forecasts for the country's GDP growth to a similar range.
Zeti Akhtar Aziz, governor of BNM, told the press, "The external environment is expected to deteriorate with the continued unfolding of the financial crisis... It is now expected that the economic slowdown in affected countries will be more pronounced and protracted than earlier anticipated."
Malaysia's exports will be most affected by a slumping global economy, especially with the US serving as the country's largest export market. 2007 saw a downturn in export growth from 7.4% to 2.1%, according to the UN Economic and Social Commission for Asia and the Pacific (ESCAP), and this diminishing growth is expected to continue. The export-dependent manufacturing sector is projected to achieve growth of 1.8% in 2008 according to the local media, down from the 3.1% it registered last year.
Muhyiddin Yassin, the newly appointed minister of trade and industry, has called for Malaysian exporters to expand their share in non-traditional markets such as the Middle East and Central Asia to cushion against the US slowdown.
While a global slump is of concern, analysts are optimistic that Malaysia has the ability to weather the storm, and cite the fact that the country achieved increased GDP growth rates three years running despite a decline in manufactured exports. The country is insulated by its position as a net exporter of palm oil, natural gas and petroleum, with all three expected to benefit from surging global commodity prices in 2008.
Malaysia will also be buffered by increasingly strong domestic demand, which was credited for much of last year's strong growth. Private consumption grew by around 11% in 2007, against 7.1% in 2006, spurred on by the government's approval in July of a substantial pay rise to public sector salaries. In 2008, inflationary pressures, which could be compounded by an anticipated rise in heavily subsidised petrol prices and the introduction of a goods and service tax, should however, weigh somewhat on growing consumer spending.
In terms of the country's capital markets, the US, the UK, Hong Kong and Singapore accounted for 80% of the total foreign portfolio investment in Malaysia in 2007. Given that a substantial portion of available investments funds that flow into Hong Kong and Singapore originate in the US and the UK, the impact of a slowdown in both countries could be substantial.
Governor Zeti has indicated that should the US ultimately fall into a full recession and global growth deteriorate further, the central bank would be able to take measures to add as much as one percentage point to GDP growth. While she declined to list the specific actions that could be taken, she said policy packages could include measures to lift consumption, as well as incentives for companies to boost efficiency and cut costs.
BNM last week also revised its forecast for inflation to the 2.5% to 3% range, up from the 2% seen in 2007, in response to surging global prices. One of the key factors behind the increasing rate is the 5% appreciation of the ringgit against the US dollar in 2007, which has led to significantly higher import prices. Overall, the ringgit has appreciated 19% against the dollar since 2005.
Zeti has indicated that the country will not use interest rates to combat inflation risks, believing that an over reliance could lead to an "over-adjustment" of the economy. The central bank has suggested that inflationary pressures are imported and mainly driven by supply shocks rather than domestic pressures and as such, has said there are limits to the influence monetary policy can achieve.
Earlier this year, Zeti told OBG, "Currently, interest rates are at an appropriate level. The future thrust of monetary policy will depend on new information and our assessment of the change in the balance of risks to the medium-term outlook for inflation and growth. The future level of inflation and the sources of inflation would have to be carefully considered before a monetary policy reaction is undertaken."
