MIER says growth to fall from 5.3% in 2008 to 3.4% next year

KUALA LUMPUR, Oct 16 — While optimistically predicting Malaysia's economic to grow 5.3 percent for 2008, the Malaysian Institute of Economic Research (MIER) today forecasted the Gross Domestic Product (GDP) growth will contract to 3.4 percent in 2009 due to a gloomy global outlook.

MIER executive director Datuk Dr Mohamed Arif Abdul Kareem said it adjusted the GDP growth from 4.6 percent to 5.3 percent for 2008 due to the higher-than-expected domestic growth during the first half of this year and the resilient US economy earlier this year

However, Bernama reported that he cautioned it was likely that growth would deteriorate late this year as the Malaysian economy was taking a hit from the knock-on effects of a flagging global economy.

He added that the United States had managed to post a good performance in the second quarter of 2008, delaying a severe slowdown thanks to tax rebates, a stronger dollar and cut in interest rates.

According to him, Malaysia may experience a technical recession in 2009 or two consecutive contractions, “probably in the second and third quarter”. Mohamed Arif said indications also pointed to the Malaysian economy facing a “strong headwind” in the coming years.

“It is not something that we saw in 1997/98 Asian financial crisis where it saw sharp contractions and sharp recovery,” he said, adding MIER had revised the 2009 outlook to 3.4 percent from 5.0 percent earlier.

“The effect will be milder this time but it's going to last longer. We will not experience a growth contraction of 7.4 percent this time around,” he added.

Mohamed Arif said the economy should be back on track to growth trajectory in 2011 and until then “we will see sluggish growth as we have to wait others to recover as well”.

However, he said that Malaysia's fundamentals were generally good except the budget deficit.

“Budget deficit this year will exceed five percent of GDP and exceed four percent next year,” he said, adding that the expected widening of deficit was due to lower government revenue as crude oil prices came down to US$70 per barrel.

He also said that the 2009 Budget had envisaged the oil price at US$125 per barrel with the oil earnings contributing about 40 percent to the government revenue.

According to Mohamed Arif, the Malaysian economy is also one of the better ones in the region.

“It is in the sense that macroeconomy has been good, the financial sector is fairly stable and we continue to record current account surpluses. We are in a better position to weather the storm compared to others but we cannot take things for granted,” he said.

On the ringgit, MIER was of the view that the local unit was still undervalued though in weakening mode.

“The ringgit is weakening partly because the US dollar is strengthening. Ironically, the dollar is strengthening amid a weak economy. One salient explanation is that the US is continuing its borrowings. Capital is still flowing from the US, thus pushing up demand for the dollar,” Mohamed Arif said.

“We dont think the ringgit will go back to the three ringgit to a dollar as we have forecast earlier. The ringgit will strengthen as the dollar adjusts downwards. It may hit its low of 3.6 and settle around 3.3 or 3.4 next year,” he said.

On the interest rate, Mohamed Arif said that MIER did not rule out the possibility of the government revising downward the rate early next year.

“It is not going to be large. It could be 25 basis points. It is likely to happen in line with moderate inflation,” he said.

Regarding the political scene, Mohamed Arif said long-term investors were not disturbed by the current political development amid slower economic growth though “one may coincide the other and compound the difficulties”.

“They said we are heading in the right direction, political speaking. Malaysia is more mature, going for the dual party system. It is music to the ears because it can ensure good governance, transparency and accountability,” he said.

According to Mohamed Arif, MIER is worried about the secondary impact of the US recession as China's economy is not immune.

“There are already indications that China is beginning to feel the pinch.

If China doesnt export as much as before, our exports will also be affected. We cannot take this lightly,” he said.

He also said that the global rescue package would only provide some relief but it could not really prevent a recession. - Bernama