GROWTH has been slipping for Malaysia in the second half of 2010 on the back of a shaky recovery in the global economy.
Although 2010 would still indicate an impressive annual report card for the year thanks to the surge in economic activities in the first six months, a slower growth has already been pencilled in for the second half of the year by the government and the market.
Malaysia is well on the recovery path although the jury is still focused on the events which continue to unfold in the US and debt problems in Europe, asset bubbles in Asia and speculative capital inflow.
While the market expects slightly over 7 per cent growth in 2010, economists polled by Business Times anticipated it to moderate to about 5.3 per cent in 2011.
CIMB Investment Bank expects 2011’s growth to be driven by the continued expansion of domestic demand amid export headwinds.
Private investment, which staged a meaningful recovery in 2010, remains a wild card, said its chief economist Lee Heng Guie.
Real GDP growth slowed to 5.3 per cent year-on-year in the third quarter (from 8.9 per cent in the second quarter and 10.1 per cent in the first quarter), dragged down by weak exports and lower government spending.
Economists Kit Wei Zheng and Brian Tan of Citi blamed the softening and underperforming exports to cause growth to moderate over the next one to two quarters before reaccelerating by the second half of 2011.
Exports peaked in January 2010 at pre-recession levels and had been on the decline ever since, led by the electrical and electronics sector.
“Not only have exports slowed, they have underperformed massively vis-à-vis the region, a phenomenon which we believe is structural and not just cyclical,” Kit and Tan remarked, on the slow recovery of the sector.
They estimated that as at September 2010, seasonally-adjusted monthly export levels had remained about 18 per cent below their pre-recession peaks in July 2008, having recovered just 40 per cent to 50 per cent of losses during the recession.
In contrast, exports in other regional peers like Singapore, South Korea and China had already exceeded pre-recession levels.
The ringgit’s strength is only part of the export under performance as the fall in commodity prices and other structural competitiveness were to blame, they said.
They added that Malaysia’s structural export under-performance was most evident in the E&E (electrical and electronic) exports.
“Malaysia’s E&E export under-performance over the past decade was partly attributable to the country’s insufficient exposure to the fast-growing telecommunications sector, and its relatively heavy exposure to the PC-related sector, where China was also rapidly gaining market share.”
On their radar for 2011 are not only the incoming export and manufacturing data, but also signs for the implementation of key projects under the Tenth Malaysia Plan as well as the Economic Transformation Programme.
Apart from a possible general election in the first half, they are watching out for announcements to improve the investment climate as well as improve bilateral ties between Malaysia and Singapore.
Investments from the ETP will help boost growth in the next two years, with the majority of them from government-linked companies, said Wu Kun Lung, an economist with Credit Suisse.
Citing an example, he said Petroliam Nasional Bhd, the state-owned oil firm, planned to invest more domestically to improve oil recovery from mature oil fields and to build a new regasification terminal in the next one to two years.
Estimates are, this will result in a revenue of about RM8 billion (2.8 per cent of GDP) in the near term, but will add an average of RM2.5 billion (or 0.9 per cent of GDP) per year over the next 20 years, he added.
With the government’s priority for growth over fiscal consolidation, Malaysia’s budget deficit to GDP ratio is expected to remain high at 5.4 per cent in 2011, compared to the 5.6 per cent estimate for 2010.
“We also think the government will most likely overspend in 2011, especially given that the general election is approaching,” Wu said.
Economists are also expecting Bank Negara Malaysia to resume its hiking cycle in 2011 when the government hikes fuel prices or when credit growth steps up.
Wu expects one hike of 25 basis points towards the end of 2011 and another 50 basis points in 2012 while Kit expects the roll back of the subsidies to prompt Bank Negara to hike by another 50 basis points in the second half of 2011.
“When the economy eventually starts to gain momentum, Bank Negara Malaysia may resume rate normalisation to prevent a credit-financed bubble from emerging,” said Lee, who expects rates to be hiked in the second half.
The ringgit, which has received quite a bit of action due to its appreciation last year, is expected to be kept stable against its trading partners with the intervention of Bank Negara Malaysia.
OCBC Bank estimates the ringgit to strengthen to RM2.95 against the US dollar by the end of 2011. But the bank does not expect it to be an out-performer as it was for the first three quarters of 2010.
Its economist Gundy Cahyadi said the authorities would prefer a stronger local currency to support domestic investment drive.