Sunday, August 19, 2007

Kota Kinabalu Sabah

Global credit crunch could slow Malaysia's economic growth this year

Global credit crunch could slow Malaysia's economic growth this year - UPDATE
17/08/2007 18:15:00
KUALA LUMPUR (Thomson Financial) - The global credit crunch has the potential
to slow Malaysia's economic growth this year if it spreads to the wider US
economy, slowing it drastically or in the worst case scenario, sending it into a
recession.
The world's largest retailer Wal-Mart has already issued a profit warning for
the year, saying Tuesday that consumer spending has slowed in the US and abroad.
If the US economy slips into a recession, even the Malaysian government's
pump-priming efforts through its Ninth Malaysia Plan, will not help to avert a
sharp slowdown in the domestic economy.
The official forecast for GDP growth this year is six percent.
The economy grew 5.9 percent in 2006.
The US is Malaysia's single largest trading partner, absorbing the bulk of
Malaysian-made electrical and electronics products.
"The US economy has already slowed down sharply and if there is a recession, I
am sure it is going to be bad," said Suhaimi Illias, chief economist at
Aseambankers Research.
The impact of the current slowdown in the US economy has been reflected in the
domestic economy over the past few months, he said
Malaysia's industrial output for June recorded a slower growth of 0.5 percent
from a year earlier after exports fell 0.4 percent during the same month,
according to official data. Exports have slowed since the beginning of the year,
growing a mere 1.1 percent in the first-half from 2006.
"Based on what happened in 2001 when the US economy was in a recession, the
impact on Malaysia was big, as economic growth slowed down significantly to 0.4
percent from 7.5 percent in 2000," Suhaimi said.
Song Seng Wun, economist at CIMB-GK Research in Singapore, said a recession in
the US could lead to a global recession, although he thinks it's premature to
make that assumption now.
"Asian economies are highly dependent on trade, so in the event of a global
recession, we will not be immune," Song said.
"But it is premature now to say there will be a global recession," he said.
"As much as I hate it, things remain uncertain for now. The good news is as
long as the turmoil in the financial markets does not spread to the real economy
then everything will be fine," Song said.

Increased risk of recession in the US

"An imminent slide towards a recession (in the US) is a clearly plausible
scenario now with a looming credit crunch that will choke off credit to all but
the most obviously credit-worthy," MIMB Investment Bank head of research Pong
Teng Siew said.
However, the full impact on the US economy from the current turmoil will only
be seen in three to six months, Pong said.
The risk of a recession in the US has certainly increased now, Aseambankers'
Suhaimi said.
He said the major concern now is if the global credit squeeze will spill over
to the real economy via the financial system.
The credit crunch, which was initially confined to the US, has now been
"globalised" through the financial markets, he said.
The fundamentals of Asian economies, including Malaysia, remain positive for
now, Song of CIMB-GK said.
Asian economies may fare better this time as the region's two growth engines,
namely China and India, are on a much stronger footing now, he said.
Malaysian Institute of Economic Research (MIER) executive director Mohamed
Ariff said the global credit crunch could develop into a crisis that is more
painful than the 1997 Asian financial crisis.
He said during that time, regional economies could recover very quickly as
exports were cheap due to the sharp devaluation of regional currencies.
Mohamed Ariff said a drastic slowdown in the US will have a serious impact on
regional economies as it will have a knock-on effect on China and the whole
Asian region.
Regional economies need "budgetary and monetary concerted efforts" to overcome
the current crisis, he said.

Pump-priming may not be sufficient

Locally, many have argued that the Malaysian economy should be able to sail
through the current turmoil shielded by the government's ongoing pump-priming
efforts.
The government plans to spend up to 200 billion ringgit under its five-year
development blueprint, the Ninth Malaysia Plan, which will run to 2010.
Head of economic research at CIMB Investment Bank, Lee Heng Guie is expecting
the government to budget for a higher development spending of 50 billion ringgit
or 7.4 percent of gross domestic product in 2008.
This represents a rise of 12.4 percent over 2007's budgeted expenditure of 44.5
million ringgit or 7.2 percent of GDP, Lee said.
"It is true that rising public spending will help. But the issue is the
government has a limit too as to how much they can pump-prime," said Suhaimi of
Aseambankers.
Malaysia's budget deficit in 2007 is estimated at 3.4 percent of GDP or 21.4
billion ringgit.

(1 US dollar = 3.51 ringgit)
aipeng.soo@thomson.com


Source = Osk Wirenews