KUALA LUMPUR - Malaysia, one of Asia's most open economies with exports
accounting for over 120% of gross domestic product (GDP), has been particularly
hard hit by the collapse in global trade. With no clear sign that external
demand will pick up any time soon, some suggest the export-geared economy needs
a new model to sustain medium term economic growth.
Slowdowns in Malaysia's major trading partners, including the United States and
Europe, drove gross exports down by over 20% quarter-on-quarter in the first
three months of this year, the sharpest contraction ever recorded. The fall was
most precipitous in manufacturing exports, which usually account for about
35%-40% of total exports. Commodity exports, including petroleum,
palm oil and rubber, also sharply dipped.
Those declines have contributed to a bearish employment outlook, raising
concerns about social stability and a rising crime rate. The official
unemployment rate is expected this year to rise to 4.5%, up from 3.8% last
year. An estimated 33,000 jobs were lost in 2008, the bulk of which were shed
in the last few months of the year as key export markets slipped into
recession.
Local employers project even slacker times ahead: the Malaysian Employers'
Federation projects job losses will peak at 200,000, surpassing by a wide
margin the 85,000 jobs lost during the course of the 1997-98 Asian financial
crisis. For much of 2008, the Malaysian government was in denial that the
global economic and financial meltdown would severely impact the economy.
Officials maintained that the economy's underlying fundamentals were strong and
that the country was well positioned to absorb any external shocks. This may
have been true during the early stages of the crisis, which began in the US and
Europe in 2007 and intensified in the first half of 2008 with scant statistical
pass through to Malaysian growth.
The transmission effect was finally felt in the second half of last year, when
the global crisis started to pinch big Western economies' spending and income.
The Malaysian economy grew a mere 0.1% in the last quarter of 2008 compared to
the same period in 2007. When then prime minister Abdullah Badawi finally
launched a US$2 billion stimulus package to offset the losses, many analysts
believed it was too little, too late, to significantly curb the downturn.
The bad news has since continued to pour in. In March, the government revised
down sharply its previous 2009 GDP growth forecast from positive 3.5% growth to
a 1% contraction. Bank Negara, Malaysia's central bank, later announced that
the economy contracted a faster-than-expected 6.2% year-on-year in the first
quarter, prompting the government to revise down again its forecast a 4%-5%
contraction for this year.
That figure is closer to the World Bank's projected 4.4% contraction, a gloomy
forecast it said in a recent report was motivated by the economy's high and
undiversified dependence on exports of electronics, oil and crude palm oil
coupled with a relatively small domestic market. With the prospect of negative
growth for at least the next two quarters, Malaysia will technically be in
recession by the second quarter of this year.
Pumping the pedal
To be sure, the government has taken steps to temporarily boost domestic
demand, including options given to employees to reduce their mandatory
contributions to the country's pension fund. But rising unemployment and weak
job security have dampened private consumption, reflected in the sharp falls in
passenger car sales, goods and services imports and local food and drink
receipts.
A second and larger US$17 billion stimulus package was introduced in March and
is scheduled to be disbursed over the next two years. The plan will include
real economy fiscal injections, tax incentives and assistance for industry and
equity investment, and specifically aims to create jobs, assist the private
sector, ease the burden of day-to-day living and build capacities for future
growth.
At the same time, the fiscal program has been criticized for its emphasis on
bailouts for politically connected private companies. Nearly half of the
committed funds are scheduled to assist the private sector, while only 17% has
been earmarked for easing the general population's high and rising cost of
living.
The government has in response launched a special new website that allows the
public to monitor how funds under the government's two economic stimulus
packages are spent. The initiative aims to break new ground in official
transparency and is a reaction to the growing pressure for greater
accountability over a government often viewed as mired in corruption and
political patronage.
However, there are other sources of policy controversy. With mounting job
losses and expectations of more lay-offs, the government has commenced a review
of its foreign worker policy. With an estimated 2 million foreign workers for a
total population of 26 million, immigrants have in more buoyant economic times
provided a low-cost lifeline to several business sectors, but now are seen as a
potential source of instability as more Malaysians lose their jobs.
The government has already called on employers who need to downsize their
workforces to lay off foreign workers before retrenching locals. The government
has also banned the hiring of new foreign workers in the manufacturing and
service sectors and reportedly slashed its work permit approvals by over 70%
this year compared to last year. It has also approved a new proposal to double
the foreign workers' levy imposed on employers, a move aimed to discourage the
hiring of foreign workers.
Some economists point to Malaysia's comparatively strong economic fundamentals
and deft handling of the 1997-98 Asian financial crisis as indication that it
will weather the crisis better than others. The government contends that the
overall financial system is sound, largely because of regulatory measures taken
in the wake of the previous crisis. It has also said it is satisfied with the
results of periodic stress tests conducted by Bank Negara to monitor the health
of the overall banking sector.
While the banking sector may be steady now, it will eventually be affected as
businesses face declining revenues and hence more difficulty in repaying loans.
Systemic non-performing loans are for now considered manageable, but that could
rapidly change, as did the government's recent economic growth forecasts, if
the recession is more prolonged than expected.
To spark more domestic growth, the government has liberalized a number of
service sub-sectors, including health and social services, tourism, transport,
business and computer-related services. Foreigners have also been allowed to
take a greater equity share in the country's Islamic banks, investment banks
and insurance companies, while the government has also issued a number of new
banking and insurance licenses to foreign investors.
Whether that's enough structural change to offset the dramatic fall in exports
seems unlikely. New Prime Minister Razak Najib has recently formed a national
economic council, comprised of economists, sociologists and others, tasked with
charting a new economic model for the country. While clearly a state rather
than private-led initiative, it's an academic exercise many in Malaysia feel is
long overdue - if not too late.
Chee Yoke Heong is a freelance journalist and researcher based in Kuala
Lumpur, Malaysia.
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