Poised for growth
19 February 2009
Malaysia defies expectations
The financial crisis has begun to affect Asian economies, as reflected in the downward trend in vital indicators – decreased exports, falling production, low demand, sluggish investment flows – affirming the wide spread of the malaise that was triggered by the massive restructuring of the US and European financial industry.
Asia is no stranger to financial contractions. Just a decade ago, the region suffered a mini-meltdown of its own. With the Asian crisis still fresh in many minds, Asian governments lost no time in implementing counter-recessionary measures: developing fiscal stimulus packages, shaving interest rates, reducing taxes, guaranteeing bank deposits, and increasing liquidity.
Asian economies resist the trend
While many of the world's leading economies will experience negative growth this year, most Asian economies are expected to resist that trend, maintaining growth, albeit at a sharply reduced pace. HSBC co-head of Asian Economics Robert Prior-Wandesforde expects Malaysia to be one such market.
Malaysia is the only major Asian country not to raise interest rates and it has no huge credit bubble
"Because it is an open economy with exports accounting for roughly 100 per cent of GDP, the outlook is still bearish. People expected that a fall in oil prices would be bad news, but it is actually good for the economy as a whole. It results in low inflation and therefore boosts profits and income in real terms. The economy will slow further in the coming months but despite the slowdown, Malaysia is well positioned to be among the top four or five outperformers in Asia," said Mr Prior-Wandesforde.
The positive outlook reflects the strong economic growth the country was experiencing, particularly in the financial sector, prior to the crisis. "Malaysia is the only major Asian country not to have raised interest rates last year and it has no huge credit bubble. The financial system is in good health, on a number of different measures. Banks are still prepared to lend, and while there was some slowing by international banks in December 2008, domestic banks picked up the slack," said Mr Prior-Wandesforde.
"Bank loans are adequately covered, with a capital adequacy ratio of 13 per cent. The overnight policy rate is now at 2.5 per cent, down 75bps over the last few months. The system is working smoothly and the bank metrics look fine."
The country's central bank, Bank Negara Malaysia, has also gained credibility, he said "It has done a pretty good job in preventing the credit bubble. It has sought more control over regulation to make sure that there will be no big credit bubble."
Government develops national strengths
Like most governments worldwide, the Malaysian government has supported its domestic economy with fiscal policy measures. A MYR7 billion (USD2 billion) stimulus package was released in November 2008, with a second wave scheduled for discussion in parliament in March 2009.
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Reduced employee pension contributions (from 11 per cent to 8 per cent in 2009)
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Reduced corporate income tax (from 26 per cent in 2008 to 25 per cent in 2009)
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Allocate 1.3 per cent of GDP for high-impact infrastructure projects
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Provide additional funding for low-cost housing
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The establishment of Iskandar Malaysia, a development region in Johor composed of five economic zones, has been a good example of how government infrastructural investments can boost growth, said Mr Prior-Wandesforde. "Iskandar has a good chance of becoming successful because of the benefits it offers locators. They are given tax holidays, relaxed ownership rules, additional incentives in education, healthcare etcetera," he said.
Similarly, the Malaysia International Islamic Financial Centre (MIFC), was launched in 2006 with the aim of making Malaysia a global Islamic finance hub. "Being a Muslim country, Malaysia truly has advantages in this area. They have tended to benefit from Middle East investment, which has become an important source of inward investment. It is positioning itself as an Islamic banking hub, and introducing new products compliant with Islamic banking, which is a huge long-term growth area."
Mr Prior-Wandesforde cautioned that development spending alone would not be enough in itself to turn the economy around. "The government needs to improve delivery and speed of its projects, plus pay more attention to its deficit. In 2009, we are looking at a deficit that is something like six per cent of the GDP. While this is not unprecedented, it is uncomfortably high. But even while the economy is slowing down, there is no fall in GDP yet and is looking to grow by 0.5 per cent this year and 5.5 per cent in 2010. In these extremely tough times, that's likely to represent a sizeable outperformance."
Malaysia: Diving or surviving?
While growth in the Malaysian economy is expected to slow further, this HSBC Global Research report sees potential for the economy to eventually bounce back more impressively than most expect.
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Robert Prior-Wandesforde
Robert joined HSBC in 1994, having previously worked for another bank where he was UK economist for three years. At HSBC, he was based in London for 12 years, covering various Continental European economies and becoming HSBC’s chief eurozone economist at the inception of the single currency in 1999.
Robert relocated to the Singapore office in June 2006 and is now co-head of Asian Economics, specifically responsible for the coverage of the Indian, Indonesian, Malaysian and Singapore economies for the Group. He holds a Bachelors and Masters degree in Economics from Warwick University in the UK.
Global Research subscribers and HSBCnet clients can view Robert Prior-Wandesforde's reports on emerging markets by accessing the Global Research website.
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