MALAYSIA OUTLOOK - Overwhelming downturn

10th December 2008

The slowdown in the economy in the third quarter,
from 6.7% in 2Q08 to 4.7% in YoY terms and down
to only 1.3% in QoQ annualised terms, largely
reflected the drag from net exports. Since then there
have been indications of slowing private sector
demand compounding the fall in exports.
This has triggered both fiscal and monetary easing.
However, these will provide only partial offset
against sharply declining export revenues. Even
with further interest rate cuts and fiscal measures
pushing the official deficit to 5.8% of GDP (with
additional off-budget expenditure at 1% of GDP or
more) we still believe recession is unavoidable,
maintaining our negative real GDP forecast for 2009.
Private consumption growth slowed in the third
quarter but was still buoyant at 6.5% QoQ
annualised. Auto sales have provided the first signal
of consumption turning down with a 14.7% YoY
contraction in October. This has taken the trend
level of auto sales down to late 2007 levels and
heading south.
Malaysia’s cyclical vulnerability stems from its high
export to GDP ratio at around 100% of GDP. The
slump in global demand will lead to tumbling export
revenues which will spill over to falling investment
and employment growth thereby leading to a further
cutback in consumption. The export downswing has
already started with a 6.7% YoY contraction in
October (US$ terms).
Malaysia is doubly exposed on the export front. It
has suffered a reversal in its terms of trade as oil and
commodity prices have fallen. This year, combined
oil, gas and palm oil exports comprised 26% of total
exports. This was 6ppt higher than in 2007
highlighting the boost to export revenues during the
commodity boom. This will be more than reversed
though, at current low oil and commodity prices
leading to a steep decline in export revenues.
The other exposed sector is electronics with a high
38% share of total exports confronting a severe
global electronics downswing. The effects on the
domestic economy are apparent from job losses and
declining wages in the manufacturing sector (see
second chart). Manufacturing employment
contracted by 1.6% YoY in the third quarter (even
before the 19% YoY contraction in electronics
exports reported in October) while manufacturing
wage growth slowed to 2% YoY, well below the
7.3% average wage growth in 2007.
The trade surplus remained buoyant at US$2.7bn in
October despite the dip in exports. However, larger
outflows on the capital account were evident from
falling foreign reserves which continued through
November. Reserves have fallen by US$28.1bn
from the June peak, equivalent to 22% of total
reserves. As export revenues continue to fall, the
external liquidity squeeze will counter the central
bank’s efforts at fuelling private sector demand
through further interest rate cuts.