Global Trends by Martin Khor

Monday 2 March 2009

Global crisis reaches Malaysian shores

Data released last week show that the tidal waves of the global economic crisis have hit Malaysian shores as the country’s GDP, exports and balance of payments have all been deeply affected.

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The effects of the global economic crisis reached Malaysian shores at the end of last year, according to data released last week by Bank Negara and the Statistics Department.  Malaysia had thus joined the growing list of countries hit by the global turmoil.

Production and income have been hit, and this was led by the fall in exports in manufacturing, oil and agricultural products.

The falls in the key figures have been surprisingly steep, showing that the Malaysian economy started stalling and then falling in the last three or four months of 2008.

Malaysia is of course not alone in the economic turn-around, and is in fact part of the Asian region’s deep decline.

Although recessionary conditions have affected the Western countries which are the origin of the financial crisis, in fact they have affected Asian countries even more badly.

This is vividly brought up by a graph in the Financial Times of 26 February, showing that the exports in the latest month (compared to 12 months previously) fell in Japan by 46%, Taiwan 44%, the Philippines 40%, Singapore 38%, South Korea 34%, Indonesia 20%, China 18%, Thailand 16%, Malaysia 15% and Vietnam 5%.      

Last week, the Department of Statistics released data showing that Malaysia’s economic output (known as “real GDP”) was RM131.3 bil in the last quarter of 2008.

This was a sharp drop of 3.6% when compared to the third quarter of 2008 (whose GDP was RM136.2 bil).  It was also only 0.1% higher than the RM131.2 bil in the last quarter of 2007. 

The “real GDP” measures the volume of goods and services produced.  The economy’s performance can also be measured by the current value of production, which also takes into account changes in prices, and is thus a better measure of the current income of households and companies.

Here, the fall in the economy is even more pronounced.  The current GDP fell by 11% between the third and the fourth quarters of 2008 (from RM199 bil to RM177 bil).

All the sectors have been hit, in terms of deceleration of growth between the third and fourth quarter of last year.  The real GDP in manufacturing fell 12% from RM40.3 bil to RM35.3 bil, while agriculture fell from RM10.8 to 9.9 bil and construction from RM4 to 3.9 bil.   There was only a very slight growth from RM74 to $75 bil in the services sector.

There is no doubt that the negative trend was caused by the global crisis, since the trade sector has been the worst hit.

The latest data from Bank Negara’s Monthly Statistical Bulletin show that Malaysia’s gross exports fell 18% from RM185 bil in third-quarter 2008 to RM151 bil in the fourth quarter, while imports fell 17% from RM143 bil to RM118 bil.

The most worrying fall has been in manufacturing exports, and within that in the exports of electronics, electrical machinery and appliances.

Total manufacturing exports dropped 20% from RM138 bil in third-quarter 2008 to RM110 bil in the fourth quarter, and in the same period the exports of the electronic and electrical sector fell 20% from RM78 bil to RM62 bil.

Other export declines in the same period were in petroleum (from RM12.4 to 8.3 bil), palm oil (RM15.5 to 9.3 bil) and rubber (RM2.5 to 1.3 bil).  Fortunately these were to some extent offset by a rise in LNG exports (from RM9.3 to 14.7 bil).

Another sign of bad times is the sudden turnaround from good surpluses to significant deficits in the overall balance of payments (BOP) in the second half of last year.

The BOP comprises two main components – firstly, the current account (reflecting trade in goods and services); and secondly the capital and financial account (reflecting inflows and outflows of capital, including portfolio investment, loans, direct investment and placement of bank assets).

The overall BOP has been in high surplus for the past several years, but the tide turned suddenly.  The overall balance was a positive surplus of RM26.2 bil in the second quarter of 2008  but became a deficit of RM31.5 bil in the third quarter and this widened further to a RM62.5 bil deficit in the fourth quarter.

The change in trend in the BOP is also reflected in the decline in the country’s foreign reserves, which had climbed steadily to a peak of RM410.8 bil in June 2008 then fell to RM379 bil in September and further to RM316.8 bil in December.

Fortunately this trend was checked and on 13 February the reserves remained at RM317 bil, indicating that the overall BOP had stabilized in the first two months of 2009.

The most recent data from the Statistics Department shows that a large outflow of capital was the cause of the deterioration in the overall BOP.

The current account balance (mainly reflecting trade) remained in high surplus of RM38.7 bil in third-quarter 2008 but there was a massive RM61.4 bil outflow of capital, causing the overall BOP to dip into deficit by RM31.5 bil.

The fourth quarter BOP data is not yet released.  But the overall balance would have been around RM62 bil, since reserves fell by this amount.   As the current account has remained in surplus, the capital outflows must have been very large during the last three months of 2008.

When the financial crisis began in the United States and Europe in 2007 and worsened in the first half of 2008, there had been little effect on Malaysia or other Asian countries.

But then the financial crisis began to affect the Western countries’ “real economy” of production and incomes in the second part of 2008, and this has been increasingly transmitted to Malaysia towards the end of last year.

The transmission channels have been through trade (affecting export prices and volumes) and finance (affecting especially the outflow of foreign portfolio capital).

The global crisis did not start with Asia or Malaysia, and that we are the victims now feeling the repercussions.

Nevertheless now that the tidal waves generated elsewhere have hit the home shores, there is no alternative but to deal seriously with countering the crisis.