Saturday August 7, 2004

Analysis: Malaysian economy looks on fire

By Sonia Kolesnikov-Jessop
UPI Business Correspondent

SINGAPORE, Aug. 5 (UPI) -- At last, foreign investors have something to look forward to in Malaysia. The Malaysian economy is powering ahead in all sectors, the local stock market is one of the few in the region to have posted gains on the year (up about 5 percent) and should improve even further with planned privatizations and the restructuring of government-linked companies.
Most importantly, the new reforms led by Prime Minister Abdullah Badawi could help the country lessen its dependence on foreign direct investment-dependent sectors.
"While it will be some time before we see the results, these policy measures combined should help reshape foreign investor's perception of Malaysia and may encourage both portfolio inflows and FDI," says UOB economist Sanchita Basu Das, "a new mood seems to have emerged within the economic and political scene in Malaysia."
Abdullah started his reform agenda immediately after taking the reign of power in October, promising to tackle corruption head on, while improving efficiency in the public sector.
Reforms have gathered pace since March after he received a resounding electoral backing. He has slashed spending on big infrastructure projects and shifted funds to social development. High priority has been given to pursuing structural development in the agricultural and small and medium sized enterprises.
The government is diversifying its attention to services sector (tourism, healthcare, education and cosmetic surgery) and even economic ties with old rival Singapore are improving with Singaporean companies now openly encouraged to invest in Malaysia in an effort to restructure the country's big state-owned corporate sector. Temasek, the Singapore government investment arm, was recently allowed to take a 5 percent stake in Telekom Malaysia and it is considering investing into Malaysian Plantations, whose crown jewel is Alliance Bank.
"With signs that the economy is already responding to the new policies, Malaysia's growth prospects are highly positive," Das said.
Indeed, Malaysia has emerged with one of the highest GDP growth rate in the region with Abdullah recently indicated that real GDP growth could exceed the government's 6-6.5 percent target. Many private economists are pegging growth for this year closer to 7 percent.
"For the first time since the Asian financial sector we have all the key pistons of the economy, exports, CAPEX and private consumption accelerating together," notes Adam Le Mesurier, economist at Goldman Sachs.
"This means the business cycle is broadening, making investors more confident and increasing their appetite for risk," he said, adding the economy was also better buffered to deal with any inventory shock because of the broad base of the recovery.
"We had been forecasting 7 percent growth since late last year, which at the time was out of tune with the rest of the market. It now looks like the market consensus is joining us," Le Mesurier noted.
CSFB is forecasting growth this year at 6.9 percent with the economy slowing down in the second half due to the softening external demand, while Morgan Stanley recently lifted its growth estimate from 5.7 percent to 6.7 percent.
"All growth engines are cranking," noted Morgan Stanley economist Daniel Lian, pointing to export, industrial production and private consumption.
Export growth surged to a four-year high in the second quarter suggesting economic growth accelerated. Export growth jumped 22.2 percent year-on-year in June from 20.5 percent in May.
Though most analysts believe growth is likely to have peaked in the second quarter, they also say strong domestic demand will provide a partial offset to a moderation in external demand in the second half of the year.
"Forward looking indicators in neighboring Singapore have already begun to ease after being very strong in the second quarter," says Sanjeev Sanyal, economist at Deutsche Bank.
Industrial production has continued a gradual but steady double-digit growth path, which started in the third quarter of last year.
That said, analysts agree many policy challenge remain.
The government has yet to reach fiscal sustainability with a budget deficit of about 5.3 percent of GDP. It is hoping to reduce it to 4 percent this year
"Structural unemployment is a key policy challenge despite the unemployment rate beneath 4 percent with sentiment improving. The consumers' spending patterns reflect this concern, choosing to spend more on discretionary retail items rather than property, a large financial commitment," noted Joseph Tan, analyst at Standard Chartered.
"The challenge for Malaysia is to find a niche market as some manufacturing activity hollows out," he added. Already efforts are in place to transform the Multimedia Supercorridor to a multi-sectoral business zone, different from the original vision of a tech-only corridor.

Parent site: "Focus on Malaysia"