Economic & Monetary Trend as at Sept 2009

Malaysia Economic Indicators
1. Malaysia International Reserves July 2009: The international reserves of BNM amounted to RM321.5 billion (equivalent to USD91.2 billion) as at 31 July 2009. The reserves position is sufficient to finance 8.9 months of retained imports and is 3.8 times the short-term external debt.
2. 2Q2009 GDP Growth: -3.9%.
3. Balance Of Payments Jan – March 2009 (Bal On Current Acc + Bal On Capital & Financial Acc): For the period of January-March 2009, the current account balance of RM31.4 billion (equating to 20.2% of GDP), widened by RM1.8 billion or 6.0 % from RM29.6 billion posted in the preceding quarter.
4. External Trade June 2009: In June 2009, a total trade of RM81.09 billion was recorded, 7% higher from May 2009 with a trade surplus of RM9.12 billion, making it the 140th consecutive month of trade surplus since November 1997. During the first six months of 2009, Malaysia’s exports decreased by 23.4% to RM250.53 billion, compared with the same period of 2008.
5. Index of Industrial Production May 2009: IPI contracted 11.1% year-on-year in May 2009, registering the smallest decline in six months, following an 11.7% (revised) year-on-year decline in April 2009. Month-on-month, the industrial production index (IPI) increased by 1.6% while the cumulative index for the first five months declined 13.2% against the same period in 2008.
6. Consumer Price Index July 2009: The CPI for the period January to July 2009 increased by 1.7 per cent to 111.7 compared with that of 109.8 in the same period last year. When compared to the same month in 2008, the CPI for July 2009 registered a decrease of 2.4 per cent from 114.7 to 111.9. Compared with the previous month, the CPI increased by 0.1 per cent.
7. Unemployment Rate 1Q2009: 4.0%

Economic Outlook
Malaysia’s economy contracted at a slower pace of 3.9% in the second quarter ended June 30 2009 compared with a year earlier as the effects of the Government’s RM67bil stimulus packages began to kick in.

The contraction means the country is in a technical recession as this would be the second consecutive quarter of decline for the economy. Gross domestic product (GDP) fell 6.2% in the first quarter 2009.

Malaysia’s second-quarter GDP contracted at a slower pace due to higher public spending and positive growth in private consumption. She attributed the improved domestic demand to the emphasis on private consumption, which increased 0.5% (first quarter: minus 0.7%).

Growth continued to be affected by weak external demand – which fell 26.3% on top of a 20% contraction in the first quarter – for manufactured goods from major trading partners, while commodity exports fell 40.6%.

Full-year GDP forecast could be reviewed upward when Budget 2010 is tabled in October 2009. The third quarter 2009 to show further improvement, as the pace of decline slows, and the fourth quarter to show positive growth. Data pointed to a stabilising economic environment going forward.

It appeared the economy was improving and hoped this would be sustained in the fourth quarter 2009, “although growth will be nowhere near the good old days.”

All sectors of the economy showed an improvement in the second quarter 2009 versus the first, noting that manufacturing’s contraction narrowed to minus 14.5% from minus 17.9%, while construction expanded 2.8% from 1.1%,

The manufacturing sector’s pace of decline slowed due to an improvement in production on inventory stocking and higher domestic consumption. The construction sector expanded further as the stimulus measures began to be reflected in higher activities in the non-residential and civil engineering subsectors.
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In an article released by the International Monetary Fund (IMF) in middle of Aug 2009, it declares that the global economic recovery has begun. Most economies will probably see some growth for the next few quarters (32009 & Beyond), even though the recovery rates will be too tepid to reduce the prevailing high unemployment rates in their countries.

As it is, several countries have already emerged from recession since the second quarter of 2009. Surprising on the upside were some solid performances posted by industrialised economies such as Germany and France, both of which clocked a growth of 0.3% quarter-on-quarter (qoq) for the three months to June 2009, while Japan rode out of a slump with a growth of 3.7% year-on-year (yoy), or 0.9% qoq.

Few had expected any industrialised economies to pull out of the recession that fast, as they had been among the worst hit by the global financial crisis. Nevertheless, Germany, France and Japan managed to end their economic misery sooner than expected, thanks to the rebound in their exports, coupled with their aggressive government spending programmes.

The rebound in the exports of these industrialised countries is helped by the recovery of Asian economies that are seen to be leading the process. For instance, Germany’s exports grew at its fastest pace for nearly three years at 7% for the second quarter 2009, with particularly strong growth in demand from rapidly growing economies such as China.

In July 2009, China economic growth accelerated to 7.9% yoy for the quarter to June, compared with 6.1% yoy in the previous quarter. Tagging on China’s recovery was Hong Kong, with a growth of 3.3% qoq, after four consecutive quarters of contraction.

Other Asian economies that have entered the positive territory in the second quarter of the year are South Korea and Singapore with a growth of 2.3% qoq and 20.7%, respectively.

But Malaysia is still lagging, with the tide expected to turn only in the third or fourth quarter of 2009. Perhaps, Malaysia can learn the benefits of speedy implementation of economic stimulus programmes from some of these Asian countries that have successfully averted technical recessions, so that its economy too can recover alongside those of its peers.

On a cautious note, even as the global economic outlook is increasingly rosier, the next challenge is to sustain the recovery.

Sustaining the recovery will require some rebalancing acts, in that the global economy should refocus towards more US exports and more Asian imports (a reverse from the present scenario). The rationale is that the crisis has left some “deep scars” that will affect both supply and demand in the global economy for many years to come.

Given that the current global economic (Aug 2009) rebound is supported mainly by massive fiscal stimulus measures, the concern is that the rebound may not be sustained once the allocated spending is exhausted. Most economists see the factors driving the current economic rebound as temporary in nature.

So, the main call is for Asia to create its own demand to reduce its reliance on exports for growth, while at the same time, generate new opportunities for international trade.

Asian governments, including that of Malaysia, have announced earlier that they planned to create new economic models to ensure the future sustainability of their economies. Malaysia is expected to announce the outline of its new economic model towards the end of the year (2009).

Meanwhile, some economists are also concerned about the growing fiscal deficits faced by most governments as a result of their massive stimulus packages. Higher taxation – unpopular, but perhaps necessary – as the solution.

Recently, the IMF cautioned Malaysia not to delay plans to introduce goods and services tax (GST) and to remove subsidies to ease pressure on its federal budget.

To this, Finance Minister II Datuk Seri Ahmad Husni Mohamad Hanadzlah said over the week that the Government was seriously looking at the implementation of GST, but would need to be sure that the implementation of the new tax system would not burden the public.

Malaysia’s budget deficit is expected to hit 7.6% of GDP this year (2009).

Monetary Policy
Bank Negara has decided to leave the overnight policy rate (OPR) unchanged at 2%.

Since the previous monetary policy meeting, signs of stabilisation of the global economy have emerged whilst conditions in the international financial markets have generally improved.

The central bank said the pace of decline in economic activity in the advanced economies has slowed although overall economic conditions continued to be weak.

Measures to stabilise the financial systems in these countries combined with the cumulative effects of fiscal and monetary stimulus have continued to contribute towards a gradual improvement in economic activity in most countries.

Conditions in the domestic economy have also shown signs of stabilising in the second quarter 2009, with several indicators such as the industrial production index and retrenchments recording a slower pace of decline.

Going forward, improvements in labour market conditions and business as well as consumer sentiments would provide support to domestic demand.

In addition, the accelerated implementation of the fiscal stimulus, the continued access to financing and the lower rate of inflation will also contribute to the improvement in the domestic economy in the second half of 2009 and into 2010.

Inflation Outlook …
Amid hopes of a gradual economic recovery, rising oil and other commodity prices buoyed by a weakening US dollar have heightened concerns that inflationary pressures could be creeping back into the picture.Commodities such as crude oil, crude palm oil (CPO), soybean and metals have been on the uptrend since early this year (2009) while the dollar started declining in March 2009.Inflationary pressures will be back in the picture with the rise in commodity and consequently paper money. The economic recovery will increase demand for food, commodities and petrol. The rise in commodity prices will cause food prices to increase. All these will spur inflationary pressures.

However, inflation was not a threat at the moment as most countries would see low or negative inflation this year (2009). But next year (2010), we will see positive inflationary rate. It will likely spike in the second half of 2010. We will see a surge because of the recovery that is taking place now (Aug 2009). But it would still be a manageable rate.The commodity market is very speculative at the moment. People are expecting economies to be in an expansionary mode because of the recovery and so it pushes up demand. But economic numbers are still low. The worst may be over for the region but it is not necessarily on a rising trend for now (Aug 2009).

Meanwhile, there was pricing pressure in a global reflationary environment. Inflationary prices were already there before the collapse in commodity prices, but not right now (Aug 2009). There is pricing pressure around the world.

The dollar would continue to weaken (Aug 2009 & Beyond), perhaps due to quantitative easing and higher supply of money that would erode its value. The dollar strengthened in the second half of 2008 as it was seen as a safe haven amid the collapse of the global economy.

However critics said that the weakening of the US dollar was mainly due to outflow of investments into emerging markets as there were still worries about the strength of the recovery in the US. Emerging currencies remain very volatile despite the inflow of investments. So the dollar may strengthen towards the end of the year (2009) which will again affect the rise in commodity.Moreover although there were several factors driving the commodity uptrend such as stockpiling in China and a weaker dollar, there were neither the corresponding forecasts for demand nor fundamental reasons for the prices to go higher. The prices will adjust, and there will be corrections.The rise in commodity prices does not directly impact economic recovery so much, but if it rises too high, then the government may refuse to subsidise these commodities, and that’s where inflation will set in.