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Malaysia seen faring better than global economy [29-08-2011]  
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Although weak economic sentiment and volatile equity markets have sapped investors' confidence in the state of the global economy, Malaysia may fare better driven by strong domestic consumption and further foreign inflows.

In an economic update report, AmResearch senior economist Manokaran Mottain ruled out the possibility of Malaysia's economy falling into a double-dip recession, saying robust levels of domestic demand along with ample liquidity will further drive growth, moving forward.

“Prospective gains from the Government's Economic Transformation Programme (ETP) will also provide additional support at the tail-end of the year, with some of the larger investments such as the MY Rapid Transit (MRT) project expected to be already under way in the last quarter of the year,” he said.

However, assuming a double-dip is averted, Manokaran said the short-term impact of an unstable global economy on Malaysia was certainly negative on the back of declining trade as well as external demand.

He said a sharp drop in the crude oil prices may also be a potential trigger for a gross domestic product (GDP) downgrade for Malaysia.

“While we expect a 5% growth rate to be achieved, given the current conditions, a negative would be the adverse impact of a very large drop in crude oil prices and any further delay in the ETP projects,” Manokaran said.

As a net exporter of oil, Malaysia still relies heavily on crude oil prices in terms of generating income for the country.

“As long as the full-year average lies between US$85 and US$90 a barrel, all is well within budget.

“While on a positive note, a sharp fall in crude oil may well mean a reduction in total subsidies spent by the Government, the net impact will however be detrimental to the Government's coffers and overall growth,” he said.

According to Manokaran, a possible quantitative easing in the United States would also lead to the appreciation of regional currencies, including the ringgit which is expected to rally further and appreciate beyond RM2.90 per dollar.

“As the risk of investing in developed countries increases by the day, investors will likely divert funds to the relatively safer emerging economies, as higher economic growth as well as interest rate differentials will result in a rise in inflows of foreign funds,” he said.

Meanwhile, Malaysia's industrial production index (IPI), which tracks overall industrial output, rose unexpectedly by 1% year-on-year, erasing a revised sharper contraction of 5.6% in May, with the higher IPI contributed by the manufacturing and electricity indices.

Responding to questions from StarBiz recently, Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said that although the global economy had lost its momentum following the bleaker prospects of the US economy and the adverse impact of European debt debacle, it was not likely to succumb to another round of recession if policymakers stood ready with another round of intervention.

“Many Asian countries, Malaysia included, will be the prime target as growth prospects are a lot better than that of the developed nations at this juncture.

“The trend of FDI (or foreign direct investment) inflows has changed for the better in the second half of 2000s in Malaysia. Going forward, as the ratio of investment to GDP normalises, Malaysia's FDI inflows are expected to gain momentum and will likely surpass the Government's target of US$10bil this year,” he said.

Even though the risk of a double-dip has increased tremendously in individual economies, especially the United States and the European Union nations, Manokaran believes that the global economic recovery would be supported by sustained growth in the emerging economies such as China and India.

“While slower rates of growth were seen in these countries recently, due to intensive monetary tightening earlier in the year, improving consumer sentiment on the back of falling commodity prices will likely kick start consumer spending across the region, fostering robust levels of growth across all sectors of the economy,” he said.

He said these economies should have no issue in further extending fiscal and monetary support to their respective economies if the need arose.

However, things do not look rosy in the developed Western countries, where he said concerns over a potential double-dip recession in the global economy had resurfaced, given the realisation the heavily-indebted developed Western countries could no longer spend their way out of any potential downturn.

“Emerging economies too are threatened by falling exports due to stagnant growth or recession in the Organisation for Economic Co-operation and Development economies, as well as persistently high inflationary pressures that force policymakers to maintain a much tighter grip on their monetary policy,” he said.

While the economic growth across the nations will likely fall in the near term, he is optimistic a global recession will still be avoided.

“While we believe that the risk of the US and EU entering a double-dip has increased, global growth, which is now largely supported by emerging economies, will remain at moderately high levels,” he said.

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