BT: Malaysia's faltering growth

Business Times - 13 Nov 2007

Malaysia's faltering growth

LAST Friday, the ringgit rose to 3.31 units against the greenback, its strongest showing since capital controls were imposed on Malaysia in September 1998. It has strengthened close to 6 per cent against the US dollar since the beginning of the year. Should investors then conclude that things are looking good in Malaysia and the ringgit will continue to appreciate? In fact, things aren't particularly rosy in Kuala Lumpur. The ringgit strengthened against the US dollar only because the greenback is in secular decline for reasons that are well known: a stuttering economy amid declining US interest rates and higher risk premiums for US assets.

In fact, the ringgit is a relative laggard vis-a-vis the US dollar compared to its regional peers. The Malaysian unit has depreciated steeply against the British pound, the Australian and Canadian dollars and the euro while declining slightly against the Singapore dollar and the Indian rupee.

Seen in that context, Malaysia's currency appreciation against the greenback is par for the course. The fact is Malaysia's economic growth has fallen short of expectations. Officially, the projections are for 6 per cent GDP growth this year, against last year's 5.9 per cent. But most private economists consider the figure bullish and think that the final tally will come in lower than the official forecast. More to the point is the quality of the country's growth which, truth be told, is poor. Malaysia has grown primarily because the government has continued to run up fiscal deficits which have become a common budgetary feature since 1998. This is in contrast with other countries equally hard hit by the Asian financial crisis like South Korea, Thailand or Indonesia, which are in surplus or close to balance.

Moreover, Malaysian growth has come against a backdrop of robust global economic expansion. Even so, despite the large and sustained fiscal deficits, Malaysia has only managed to eke out growth not much better than average global growth. That should be worrying and should be of concern to the Malaysian authorities.

The trend has continued to persist. This is manifest in the fact that the Malaysian export machine seems to be stalling. September's export numbers grew only 1.1 per cent year on year, up slightly from August's 0.8 per cent. And all that coming from three straight months of contractions previously. Indeed, Malaysia's export performance in 2007 has been lacklustre, to say the least, and one of its weakest in a long time. Out of the 10 major exporting nations in the region, Malaysia came out last in year-to-date export growth. And the 10 ranged from the developed economies like Hong Kong, South Korea, Japan, Singapore and Taiwan to the low-income countries like China, Thailand, Indonesia and Vietnam.

The figures seem to suggest that Malaysia's competitiveness is being eroded. Malaysia needs to address the issue without delay.