By Sudip Roy
EM: We have entered a Federal Reserve tightening cycle. What impact, if any, will this have on Malaysia's economy over the next 12 months?
NMY: The Fed tightening has just started, with three interest rate hikes in June, August and September of 25 basis points each to 1.75%. Further interest rate increases are expected at a measured pace as indicated by the Fed.
At this point in time, the Fed's tighter monetary stance is not exerting much pressure for higher interest rates in Malaysia. Inflation remains low in Malaysia (CPI rose by only 1.2% in the first eight months of 2004). Our current low interest rates are supported by Malaysia's increased economic resilience and strengthened macroeconomic fundamentals, such as a low unemployment rate, rising international reserves, sustained trade surpluses, high national savings and a robust banking system. Furthermore, the interest rate differential is positive in Malaysia's favour (2.7%) vis-a-vis the US (1.75%).
To the extent that higher interest rates will soften global growth rates, we do not expect anything more than a modest impact on Malaysia's growth in the next 12 months. Malaysia's GDP is projected to grow by 6% in 2005, spurred by continued strength in domestic consumption and private investment.
EM: Malaysia's economy is one of the best performing this year. Even so, the ADB reckons growth will be only 5.8% this year compared to your official estimates of 6% to 6.5%. Is there a danger that you may have over-estimated growth for this year?
NMY: The ADB's estimate of 5.8%, which is based on data available up to March 31, seems to be on the low side. If anything, our previous estimates of 6% to 6.5% will most likely be surpassed. Recent indicators point towards higher economic growth. Real GDP grew steadily from 7.6% in the first quarter of 2004 to reach 8% in the second quarter, the highest since the third quarter of 2000.
Domestic demand remains strong and has been supported by a favourable external environment. The manufacturing sector registered growth of 12.3% during the first half of 2004, while the services sector expanded strongly by 6.8% in the same period. Based on the continued strength of our key sectors, our current estimates suggest a stronger growth of 7% in 2004.
EM: The economy is export oriented. What are you doing to diversify the
economy more?
NMY: As a small and open economy, Malaysia has emphasized and will continue to emphasize outward-looking and export-oriented strategies. Malaysia is the 17th largest trading nation, with external trade twice the size of its economy.
At the same time, growth in 2004 has been broad based, with domestic consumption and investment accelerating. The higher per capita income and purchasing power has translated into effective demand and will continue to support the domestic economy. The government is keen to pursue consumption-led growth. One shift towards diversification is a new emphasis on agriculture, both to enhance exports and at the same time to produce more for local consumption (therefore, reducing dependence on imports).
The main thrust of diversification, however, will not be so much on moving away from exports but in terms of diversification of products and industries. While our electronics exports can be cyclical, we are already diversified to an extent in petroleum and palm oil, which are less income elastic and less vulnerable to fluctuations in the global business cycle. We will enhance these sectors by developing further downstream activities.
More recently, Malaysia has built up its competitiveness in services. We have been successful in areas such as business process outsourcing. Companies such as DHL, HSBC, BMW Asia and Ericsson have set up centres to provide shared services for their global operations. We also intend to further build our financial and professional services, particularly in terms of Islamic banking and capital markets products. Tourism is another key area. The receipts from tourism, which touched 10.6 million arrivals in 2003, raked in RM21.3 billion. Tourism is being developed in many ways, including health tourism, educational tourism and eco-tourism.
We believe our economic base is being developed with sufficient diversity for long-term sustainable growth.
EM: What impact might a slowdown in China have on the Malaysian economy?
NMY: Malaysia's economy, like other Asean economies, has benefited from China's fast growing economy. A slowdown in China will affect Malaysia, but we do not believe the impact will be too great. China constitutes only 6% of total exports by Malaysia, and together with imports, represents about a 7.5% share in total trade. Further, we are confident that China will be able to manage a ?soft landing', and so not dramatically dampen global and regional growth.
EM: You've committed to gradually
reducing the budget deficit to 4% to 4.5% of GDP this year and 3.5% to 4% next year. How do you plan to do this without compromising spending in key areas
such as infrastructure, health, education and agriculture?
NMY: We will pursue fiscal consolidation without compromising spending in priority sectors. Firstly, the reduction in spending is being implemented on a gradual basis. The economy is stronger and revenues are growing, so a reduction in the fiscal deficit can be achieved without drastic expenditure cutbacks. Secondly, counter-cyclical measures have been taken in recent years to ensure continuity of economic growth. So, Malaysia has already made substantial investments in key infrastructure, which do not necessarily need to be maintained at the same levels. Thirdly, we are also focused on improving its delivery systems and getting better value for money, therefore optimizing outcomes for the same amount of expenditure.
EM: Which industries are you hoping to develop/grow in the next 12 months?
MNY:The manufacturing sector will continue to drive the economy in 2005 and sustain its share of about 32% to GDP. Some of the focus areas that have been identified for development include: developing higher value-added activities in the nation's main export items, particularly electrical and electronics. These include design and packaging of microelectronics and integrated circuits; intensifying downstream activities with strong export potentials such as the development of petro-chemicals and oleo chemicals, manufacturing of automotive and transport parts; developing further food-based processing and industry, particularly halal products; and focusing R&D particularly in ICT, biotechnology, advanced manufacturing and advanced materials technology.
Services are also expected to continue growing strongly, particularly: financial services, including Islamic banking; tourism, including health and education tourism; ICT, especially in business process outsourcing and shared-services; and professional and consultancy services.
The agriculture sector will be developed as our third engine of growth. We will focus on promoting further modernization and commercialization of the sector. We believe there is much untapped potential.