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Malaysia: Steady and growing

Despite global uncertainty, Malaysia looks set to achieve its GDP growth target this year, thanks to a benign domestic climate, rising investment and fiscal stimulus.

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Despite global uncertainty, Malaysia looks set to achieve its GDP growth target this year, thanks to a benign domestic climate, rising investment and fiscal stimulus.

According to Ahmad Husni Hanadzlah, the second minister of finance, Malaysia is on track to achieve its target of 4.5-5% economic growth for 2012. Husni, who was speaking to reporters on the side lines of a conference on October 16, said that he expected growth to be on the upper side of the target range, despite an expected slowdown in the third quarter.

Growth picked up to 5.4% in the second quarter from 4.7% in the first, but the third-quarter figure is expected to be lower

particularly after disappointing results in August, when exports fell by 4.5% year-on-year – the sharpest drop in three years – and industrial production shrank by 0.7%. The minister attributed the dip to the effects of the global economic environment.

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Despite global uncertainty, Malaysia looks set to achieve its GDP growth target this year, thanks to a benign domestic climate, rising investment and fiscal stimulus.

However, Zeti Akhtar Aziz, the governor of the central bank, said that both the third and fourth quarters should show “good growth”, and indeed, the markets seem to agree, with the ringgit lifting in the first two weeks of October. The Malaysian currency has been trending broadly upwards against the dollar since June.

In an interview with the international press in October, Zeti said that she expected growth in 2013 to be “much the same” as this year, barring a deterioration of the world economic climate.

Thus far, Malaysia has performed remarkably well, despite the international uncertainties caused by the eurozone crisis, the US debt crunch and a slowdown in China. According to Zeti, domestic demand and consumption are both growing at 7%, while investment is running at 10%. The stock market hit all-time highs in October.

There are a number of reasons for Malaysia’s strong performance

including relatively high prices for some of the commodities it produces, including crude oil. Low inflation (1.4%) in the year to August has allowed the central bank to keep interest rates on hold for eight successive meetings. Meanwhile, the banking system is stable and well capitalised. Investors looking to shift portfolios towards emerging markets and away from the troubled economies of the EU and the US have alighted on Malaysia, helping to sustain growth. Further quantitative easing in developed economies, including the US, is expected to increase the flow of capital to emerging markets such as Malaysia.

Malaysia is also starting to benefit from the government’s Economic Transformation Programme (ETP), a wide-ranging series of reforms intended to release the economy’s latent potential in the quest to achieve “developed nation status” by 2020. A central aim of the ETP is to strengthen value-added industries and services, raise incomes and reduce the historic reliance on volatile commodity earnings.

While the ETP’s raft of schemes is feeding through into the economy over the long term, there has also been a significant fillip from the 2013 budget, which is already buoying consumer confidence and should help support domestic demand. The budget lays out RM251.6bn ($81.73bn) in spending, including more generous benefits for the poor, bonuses for public sector workers, as well as tax cuts. The largesse is partly linked to next year’s election, in which the ruling Barisan Nasional will face a strong challenge from the opposition.

After the election, however, the government may need to tighten its belt.

While the 2013 budget foresees the deficit being reduced from 4.5% to 4% of GDP, this is still quite a high ratio, particularly as it adds to Malaysia’s debt pile, which currently stands at 52.6% of GDP – the highest in Asia after India and Pakistan, according to the international press. Malaysia is being urged to ponder long-term tax reforms to increase income and reduce its dependence on revenues from state oil and gas giant Petronas, which currently provides around 40% of government funds.

Should the global economic situation worsen, Malaysia will have limited scope for further fiscal stimulus without running the risk of undermining stability. Domestic demand has been an important factor in maintaining growth of late, which is a positive development both for the country and its international partners. But as a globalised economy, and an exporter, Malaysia cannot be isolated from the effects of international crises.

Nonetheless, Malaysia’s baseline scenario is continued impressive growth for the remainder of this year and 2013. The country is thus in a fortunate situation compared to much of the world, and it is now in a position to implement the investments and reforms that can keep it on course for its 2020 target.

Oxford Business Group

Oxford Business Group

Note: This article was written by Paulius Kuncinas, Regional Editor,  Oxford Business Group, the views and opinions expressed in this article are those of the authors and do not necessarily state or reflect the views of  Thailand Business News

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