THE Malaysian economy is expected to face a challenging 2012, despite its strong domestic demand performance this year.
OCBC Bank expects fiscal spending to support the economy next year, especially with the possibility that the government may call for an early election.
Fiscal spending played a huge part in providing a boost to the overall economy in 2011, as seen in the 21.8 per cent growth year-on-year in the third quarter, the bank’s research team said in a note.
This has not taken into account the indirect impact from fiscal spending on private investment and household consumption, which averaged modest expansion of 5.2 per cent and 6.8 per cent year-on-year, respectively, this year.
“The momentum seen in private investment growth has been sustained well throughout the year, hardly surprising if we consider the fact that the government has kicked off its Economic Transformation Plan.”
The government, under the 2012 Budget, highlighted a two-pronged approach to boost the corporate sector and bolster household spending.
It has provided new funding schemes for small and medium enterprises, liberalised several services sub-sectors as well as taken up joint-venture programmes to develop the rural areas.
“The decision to maintain the current subsidy system, meanwhile, would urge more spending among households.
“As it is, double-digit fiscal expenditure growth looms even as the government aims for a smaller budget deficit target of 4.7 per cent of gross domestic products (GDP).”
OCBC Bank warned that the impact from an extended slow patch in the global economy will be quite significant next year and recent rhetoric from the government has clearly indicated increasing concerns on this front.
Total exports to the euro zone alone represented about 10.5 per cent of Malaysia’s GDP in 2010.
“Exports growth remains a dominant factor that leads overall economic growth, and given its high dependence on exports, domestic economic activities are likely to remain weighed in line with declining export earnings,” it said.
The marked drop in shipments of major commodities, like crude oil and palm oil, suggests that the economy will not escape the adverse impact of further softening of global growth momentum.
A further slowdown in global demand would only exacerbate the worsening employment conditions in the domestic manufacturing sector, which has seen a surge in the number of retrenched workers in the second half of 2011.
The OCBC research team identified the marked moderation seen in capital goods import growth as the most worrying sign, saying it may indicate slowing investment growth ahead.
Net foreign direct investment (FDI) has reversed to the negative in the third quarter of 2011 and may remain weighed by the lingering uncertainties in the global economy, at least for the first half of 2012.
The anticipated financial market volatility and a weakening bias in the ringgit that are likely to kick off may lead to further softening of
domestic sentiment, prompting businesses to hold back the bulk of
their investment plans until the global economy regains a stronger footing.
“As such, we expect private investment growth to slow towards 3.0 to 4.0 per cent in 2012.”
On the monetary policy front, it said the authorities will not hesitate to lower its benchmark interest rates if growth momentum is to soften further.
“Given Malaysia’s region-high fiscal deficit position, the government may not be in the best position to pump-prime the economy, leaving Bank Negara Malaysia with most of the brunt.”
OCBC Bank expects Malaysia to chalk up a 3.8 per cent year-on-year expansion in 2011.