Published March 25, 2009

Recession on the horizon for Malaysia

Securities house forecasts worst case scenario of 4.5% contraction in GDP

By S JAYASANKARAN
IN KUALA LUMPUR

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A STEEP fall in Malaysia's exports in January (28 per cent year-on-year) has led a local securities' house to predict a recession in 2009 and suggest that Kuala Lumpur might have to trot out yet another stimulus package to mitigate its effects.

AmResearch, the research unit of the Arab-Malaysian banking group, said that January's export fall plus a similar decline in industrial production were the steepest in 28 years and foreshadowed the impending recession.

The 'collapsing trade activity', said the securities house, will drive Malaysia into three straight quarters of negative growth followed by a modest uptick in the fourth quarter.

In the best case scenario, AmResearch forecast a 2 per cent contraction of gross domestic product (GDP) while in the worst case, GDP falls 4.5 per cent.

AmResearch's forecast is in line with the industry trend where increasingly, securities houses abandon the optimism that they had shown as late as three months ago.

Even the government, once the most optimistic of them all, has revised 2009 growth to flat from 3.5 per cent previously.

The research unit noted that nearly all international agencies had begun predicting a global recession in 2009, with the International Monetary Fund (IMF) saying growth would slip below zero and the World Bank anticipating an even sharper contraction of 2 per cent.

The research house predicted that Malaysia's slowdown would mainly come from the contraction in demand, both external and domestic and that, in the worst case scenario, the country could actually run its first current account deficit since 1998.

The report didn't think that Kuala Lumpur's recent RM60 billion (S$24.9 billion) mini-budget - the second stimulus since November - would have any impact till late 2009 because of 'implementation delays by both administrative and bureaucratic concerns'.

It also pointed out that the actual stimulus, stripping off government guarantees, only came up to RM19 billion.

Given the heightened risk, AmResearch suggested that the government try more 'unorthodox' measures such as a personal income tax cut and 'more Buy Malaysia' campaigns as they were more effective in stimulating domestic demand.

'As such - we think - a third stimulus package of around RM15 billion may be needed in the short to medium term,' the report said.

It added that more monetary measures could be in the offing due to the reduced risk of inflation.

The main measure was likely to be a 50 basis point cut in the overnight policy rate to 1.5 per cent. If it pans out, it would be one of the lowest rates in Malaysian history.