Published May 26, 2009

KL may forecast contraction

The gloomier expectations signal new sobriety among policymakers

By S JAYASANKARAN
IN KUALA LUMPUR

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THE Malaysian government is likely to revise 2009's growth in GDP (gross domestic product) terms downwards from its current 'flat' estimate (between one and minus one per cent) to an outright contraction of between one and 2 per cent.

Positive aspect: Inflation eased to 3 per cent year on year in April, from 3.5 per cent in March, representing a yearly low. Economists expect the declining trend to continue throughout the year

The announcement could come as early as tomorrow when the central bank, or Bank Negara Malaysia (BNM), releases its first-quarter GDP figures, although private economists familiar with the matter said that BNM could reserve its yearly estimate for later when the prognosis for the second quarter becomes clearer.

The gloomier expectations for the Malaysian economy signal a new sobriety among policymakers who, even late last year, were making chirpy predictions of a 3.5 per cent expansion in GDP for 2009. In March, however, finance minister, and then deputy premier Najib Razak revised that downwards to flat growth.

It also illustrates how policymakers underestimated the extent of the contraction in global demand in the first quarter. Since then, central bank governor Zeti Akhtar Aziz has acknowledged that the first quarter 'would be' bad and that recovery was only likely to happen slowly and during the latter part of the year. For their part, private economists think that first-quarter growth could contract as much as 5 per cent.

The figures coming out continue to be bearish. For the first quarter, RM7.5 billion (S$3.1 billion) worth of investment in manufacturing projects were approved, a number that was 56 per cent down year on year.

Incidentally, Singapore companies were the single largest foreign investors during the quarter followed by companies from Japan and Taiwan.

Having said that, however, most economists think that the economy might be bottoming out because of a slower pace of export decline on a month-to-month basis. In addition, a minor consumption boom is taking place because of a wealth effect attributed to a two-month rally on the Kuala Lumpur stock exchange. Its benchmark index has jumped almost 20 per cent in the period.

On a slightly more positive note, inflation eased to 3 per cent year on year in April, from 3.5 per cent in March, representing a yearly low. Economists expect the declining trend to continue throughout the year with even dips into negative territory. This should give the central bank room to cut rates further. It now stands at 2 per cent, a historic low.

But Ms Zeti of the central bank seems to disagree, pointing out in repeated interviews that BNM thinks the current rates are 'adequate'.

On that basis, some economists have changed their views and indicated that rates will stay unchanged for the rest of the year.