KUALA LUMPUR: Malaysia will be able to weather the global economic slump on the back of increasing domestic demand and strong performance in essential commodities, said Oxford Business Group (OBG).
It said that while the slowdown had led to negative revisions in Malaysia's outlook for gross domestic product (GDP) growth and inflation, Malaysia's economy would be resilient enough to weather the storm.
“While a global slump is of concern, most analysts we speak to 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,” said OBG country director Malaysia Laura Herrero.
OBG, a global publishing and research firm, has released a briefing on Malaysia resilience based on interviews and research done throughout the year, which are contained in The Report: Malaysia 2008.
OBG said Bank Negara Malaysia (BNM) had recently readjusted its growth forecast for the year anticipating 2008 GDP growth to fall into the 5% to 6% range, versus the previous forecast of 6% to 6.5%. GDP growth in 2007 was 6.3%, the fastest pace in three years.
It said the change in position was in line with the expectations of many external independent parties, including the Asian Development Bank and the United Nations, both of which recently revised their forecasts for the country's GDP growth to a similar range.
Herrero said: “Malaysia's export is to 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,” she said.
OB said Malaysia would be buffered by increasingly strong domestic demand, which was credited for much of last year's strong growth. She said private consumption grew by about 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.
It said while Malaysia’s economy was resilient, there would continue to be some concerns that needed monitoring.
OBG said in 2008, the team of researchers expected the inflationary pressures, which could be compounded by an anticipated rise in heavily subsidised petrol prices and the introduction of a goods and service tax, would weigh somewhat on growing consumer spending.
It said 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, hence may affect Malaysia’s capital outlay as well," OBG said.
OBG said an important factor to consider would be BNM’s revised forecast for inflation to the 2.5% to 3% range, up from the 2% seen in 2007, in response to surging global prices.
It said one of the key factors behind the increasing rate was the 5% appreciation of the ringgit against the US dollar in 2007, which had led to significantly higher import prices. OBG added that overall, the ringgit had appreciated 19% against the dollar since 2005.
Herrero said while interest rates were currently at an appropriate level, Malaysia’s future directions of its monetary policy would largely depend on new information and movements in the global economy and BNM’s assessment of the change in the balance of risks to the medium-term outlook for inflation and growth.