Published December 25, 2008

YEAR-END FOCUS
A tumultuous year for Malaysia

Political turmoil and commodities slump took their toll on country's economy

By PAULINE NG
IN KUALA LUMPUR
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A DOUBLE whammy of domestic political uncertainty coupled with the US-engineered global financial meltdown characterised the tumultuous year that was 2008 for Malaysia.

Recession fears growing: Unless global markets recover, the Kuala Lumpur stock exchange - which has fallen 40 per cent since the beginning of the year - isn't likely to go anywhere

If investors were on wait-and-see mode even prior to the 12th general election, they were content to remain on the sidelines in the shocking aftermath of the National Front coalition losing its customary two-thirds parliamentary majority - and, worse, control of five states, including two of the country's most industrialised.

Months on end of political bickering, coupled with threats by opposition leader Anwar Ibrahim to take over the federal government by Sept 16 merely confirmed the wisdom of sitting out the market.

Although the date passed without incident, Malaysia's biggest political party, the United Malays National Organisation (Umno), extracted a transition plan for Prime Minister Abdullah Ahmad Badawi to step down and be replaced by his deputy Najib Razak in March next year.

As an immediate concession, Mr Najib was given charge of the finance portfolio in September - a promotion which might not be entirely enviable given the raging global financial maelstrom which has already sunk numerous economies into recession.

The government maintains Malaysia can avert a recession next year, with economic growth projected at 3.5 per cent; independent economists are less sanguine as the worst is yet to hit home.

Weaker electrical & electronics exports aside, the collapse in crude and palm oil prices is expected to play havoc with government revenue given that some 40 per cent of the Treasury's revenue is derived from the oil and gas sector. Moreover, next year's budget was predicated on oil prices of US$100 per barrel; they are less than US$40 now.

Whether the RM7 billion (S$2.9 billion) economic stimulus package will be sufficient to cushion the impact of slower manufacturing output and slumping commodity prices, which will hit the rural sector the hardest, remains to be seen.

One of the earliest measures was the injection of an additional RM5 billion into Valuecap, a special quasi-government fund established in 2002 to acquire 'sound but undervalued stocks'.

Critics have charged that it is a move to prop up the stock market, when the funds could be better utilised to retrain retrenched workers or channelled as soft loans to help small and medium-sized enterprises ride out the tough times.

In any event, the internal and external uncertainties rendered 2008 a year of volatility for many equity investors.

It was also a year market regulators would rather forget after a major glitch in the trading system of the exchange led to a shutdown and the loss of a day's trade, and questions as to the integrity of the trading system.

The exchange is hoping to put the episode behind it with a new trading system which was launched in the last quarter. But unless global markets recover, the Kuala Lumpur stock exchange - which has fallen 40 per cent since the beginning of the year - isn't likely to go anywhere.

At this juncture, prospects for the coming year are not bright, as reflected in analysts' continuous revisions of corporate earnings - the first after hefty fuel, power and gas hikes in June and July led to higher operating costs and inflation hitting 8.5 per cent in August. This was a 26-year high.

Prices have since come off but the global slowdown now poses a greater threat to corporate earnings, as evident in the bottom line of even bellwether firms.

Palm oil prices, which are nearly a third of their March peak, as well as lower property and auto sales have exacted a toll on the world's largest planter and Bursa Malaysia's biggest company, Sime Darby.

Meanwhile, the country's biggest banking group, Malayan Banking, not only has to put up with a tougher operating climate but is also under pressure to make good its controversial purchase of Bank Internasional Indonesia after paying over 4 times book in a credit crunch.

Applying a 12 times price-earnings ratio to the benchmark Kuala Lumpur Composite Index, OSK Investment Bank Research pegs the index to hit 1,020 points by the end of next year. The KLCI is currently around the 865 mark.

Obviously, much hinges on the US economy regaining its feet. But with foreign direct investment likely to be greatly reduced next year, many are banking on Mr Najib, who enjoys greater support within his party, to start taking the bull by the horns and to address some of the long-standing issues which hinder the economy.

Mr Najib is expected to set the tone, starting with the further liberalisation of certain industries within the services sector - a decision which could help draw much needed investments to the country's five multi- billion economic corridors launched over the past two years.

Significantly, Mr Najib's banker brother Nazir has repeatedly stressed the need to review the country's affirmative-action New Economic Policy so that Malaysia can more ably compete in the global economy. 'Since the NEP was introduced, the competitive landscape of nations has changed dramatically, the complexion of our economy has transformed and Malaysians are quite different too,' Mr Nazir has observed.

A proposal to build a bullet train linking Kuala Lumpur to Singapore was indefinitely put on ice by the government. However, KL is likely to give the green light to the building of a new low-cost carrier terminal (LCCT) in Labu, Seremban, to be completed in 2011.