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Domestic demand-driven economy is the way for Malaysia [23-02-2011]  
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The nation needs to re-invent itself to move up value-added chain

AS expectations point to economic growth normalising at between 5% and 6% this year, growth would nonetheless face the same challenges as it does in any given year.

Given the outlook for this year paints a cautious hue over the volatile external situation due to high commodity and fuel prices, the domestic facilitators of growth for this year would also be confronted with their own issues that could make achieving the target a bumpy process nonetheless.

Domestic demand and the services sector are expected to reprise their roles in driving the economy but economists expect those sectors to face their own peculiarities, as inflationary pressure will put a strain on real income growth.

Although real income growth will face a hiccup from higher inflation, its effect on consumption will be keenly watched as the economy grows in dependence on domestic demand.

Affin Investment Bank Bhd economist Alan Tan said domestic demand would be healthy but the pace of growth would slow. “The swing factor for domestic demand is private investment,'' he said.

As debt build-up in households have grown as consumption grew in prominence, some questioned the sustainability of that.

Credit Suisse economist Wu Kun Lung said household debt-to-gross domestic product (GDP) ratio was high in Malaysia relative to its regional peers but that was not necessarily a bad thing for now.

“My view is that if household debt to GDP stabilises at the current level, then it shouldn't be a big problem. It only becomes a concern if the debt ratio continues to rise or accelerates,'' he said.

“I think Bank Negara is well-aware of the high household debt and will implement macro-prudential measures if needed.”

On the supply side of the economy, the subsectors of the services industry, namely tourism activity, along with the gradual higher income levels of Malaysians, tends to boost the retail, hotel and restaurant business.

Telecommunications and transport segments are also big contributors but more is needed to drive the industry from being just consumption-related.

“What you want is the export of services, as in consultants travelling and making money for the country,'' Wu said.

Construction activity, which was lifted by the stimulus package in 2009 and 2010, is expected to show growth, especially once the mass rapid transit project kicks off in the middle of the year.

Mining activity tends to bounce between growth and contraction as shutdowns of processing plants will affect output. Also not helping matters is the decline in crude oil production.

Agriculture, which is most sensitive to palm oil output, fell in the fourth quarter and the erratic weather will not be a help. Furthermore, as land for plantation gets scarce in the country, output gains from the opening of more plantations will have less of an impact.

But mining and agriculture carry little weightage on the overall economy that is relying heavily on the manufacturing and services sectors.

Economists have observed that the country's electronic and electrical (E&E) exports, which showed a contraction in the last four months of 2010, might be backdated in its products and not reaping the boost other countries are enjoying from their own E&E exports.

One economist points out that such exports from South Korea and Taiwan have shown a pick-up in recent months and that in Singapore's January non-oil domestic exports, the E&E segment grew by 5.8% and was below the broad headline number which got a lift from pharmaceuticals.

Wu does not see the declining trend as an issue at the moment.

“Given the low level of investment, it is beneficial for Malaysia to gradually rebalance toward a more domestic-demand oriented economy. The loss of competitiveness is a problem and Malaysia is at the stage where it needs to re-invent itself to move up the value-added chain,'' he said.

He said such reforms in labour market policies, education and the liberalisation of the services sector will help to improve the competitiveness of the economy.

Source:THE STAR
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