New model needed in
Malaysia
By Chee Yoke Heong
Jun 26, 2009
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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