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Monday, February 18, 2008

Steps to cushion US slowdown

The Government is pump-priming the economy aggressively via the 9MP

There's a saying that when America sneezes, the world catches a cold.

And the United States is about to have another big sneeze that could lead to a slowdown or even recession that ultimately would affect the rest of the world, including Malaysia.

Given the bleak scenario in the US, it would be wise for Malaysia to take some pre-emptive measures to cushion the impact.

The Sabah Development Corridor launched by Prime Minister Datuk Seri Abdullah Ahmad Badawi is expected to be a big boost to the economy.

Thankfully, the Malaysian government is cognisant of the fact that the country needs to be economically strong on the domestic front in the event of an acute and protracted recession in the US.

The rollout of a slew of projects under the Ninth Malaysia Plan (9MP), especially the various growth corridors, will support and stimulate the economy.

In fact, many economists believe the bulk of the projects, especially those related to infrastructure, will be dished out this year.

Moreover, many local companies have learnt from the Asian financial crisis of 1997 not to rely solely on local projects.

Those that survived the crisis have now expanded their businesses beyond local shores to China, Vietnam, India, and the Middle East.

A local economist said that if the US economy fell, there would be “casualties” as some countries would be more affected than the others, depending on their economic resilience.

“Some economies around the world should brace themselves for a rough and painful ride,” he said, adding that Malaysia was relatively fortunate as the country was a net exporter of oil and was buoyed by good crude palm oil prices. It has a proactive government that is pump-priming the economy aggressively via the 9MP.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said that taking into account the economic situation in the US, Malaysia's growth rate was still expected to be 4% to 6% this year.

“It's still decent, given the endless series of bad news coming from the US and other countries like Britain,” she said.

Zeti said Malaysia's economy was still on a growth path despite operating in a challenging environment. This should continue this year, as domestic demand remains strong, fuelled by strong inter-linkages with other Asian economies that were also doing well.

However, the Malaysian Institute of Economic Research (MIER) has a lower forecast of 5.4% growth for the country this year based on the assumption that the US recession would last only two quarters.

A recent MIER report said: “If the recession deepens and protracts longer than two quarters, then the forecast for Malaysian growth would have to be revised down to 4% to 5%.”

Most economists believe a recession in the US is inevitable this year.

However, many say it would be a mild and short one and that Malaysia was likely to be less impacted compared with other countries in the region because of its stronger economic resilience.

Still, not everything would be smooth sailing for Malaysia.

Inflation or rising cost of living is a major concern that the Government is grappling with, and a lot hinges on the micro and macro-policies applied by the authorities and whether the 9MP projects are implemented on time.

Another issue is the country's dependence on foreign direct investment (FDI) to spur growth. It's no big secret that in recent years Malaysia's FDIs have been stagnant or falling.

Since the Asian financial crisis, the changes in Malaysia’s FDI stock have been worrying, especially when compared with its Asian counterparts. Singapore and Vietnam have fared remarkably well in terms of FDI growth.

The falling FDIs are a distressing signal, considering that Malaysia provides attractive incentives to foreign investors.

The substantial fall in Malaysia's FDIs has to be addressed quickly by the authorities if the country wants a bigger slice of the FDIs.

By The Star (by Danny Yap)

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