Malaysia may feel chill of US, Europe headwinds

Citi says Malaysia looks more exposed to weaker growth in these two economies with demand from the US and EU accounting for 16.4 per cent of gross domestic product.

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Kuala Lumpur: The Malaysian economy enjoyed a resilient growth in the first half but the performance of the second half is expected to be affected by the strong headwinds from the US and Europe, which will affect the demand for exports. US investment bank Citi said Malaysia looks more exposed to weaker growth in these two economies with demand from the US and European Union (EU) accounting for nearly 20 per cent of total exports, and 16.4 per cent of gross domestic product (GDP). According to economists Kit Wei Zheng and Brian Tan, within Asia, Malaysia has historically had the fifth largest growth sensitivity to the US and G-7 (seven industrialised nations) growth after Singapore, Hong Kong, Taiwan and Thailand. On average, every percentage decline in US GDP and G-7 growth would lower Malaysia's GDP growth by about 1.3 percentage points and and 1.6 percentage points, respectively. "The weakness in external demand is likely to manifest itself most strongly in an intensified pace of inventory de-stocking in the critical electrical and electronics (EandE) sector, which has yet to show any convincing signs of reversal after softening since February." The US and EU account for a hefty 27 per cent of Malaysia's total exports of machinery and transport equipment (where most EandE exports are classified under in the trade data). "While this share has declined substantially from 43 per cent in 2005, it is still almost twice as large as China's 15.2 per cent share - suggesting that demand from China may not be able to completely offset weak demand from the developed markets." Unlike regional technology exporting peers, Malaysia is comparatively exposed to the slower growing PC-related segments within the EandE segment. Citi shaved its GDP growth forecast to 5 per cent for 2011. Apart from the US and Europe factors, there were also other factors, including a softer crude palm oil prices denting rural consumption and the possible delay in some Economic Transformation Programme projects. Kit and Tan, however, expect growth to pick up to around 5.5 per cent in the second half. The pick-up could be due to support from reconstruction demand from Japan and possible re-stocking in EandE in the fourth quarter. They also expect a backloaded fiscal pump-priming to take place ahead of the general election. Kit and Tan added that inflation will remain elevated in the second half, with some demand-pull pressures likely of domestic demand remains resilient. Bank Negara Malaysia is expected to tolerate a period of negative real policy rates and keep the overnight policy rate at 3 per cent for the rest of 2012 to insulate domestic demand from weak exports. They also expect Budget 2012 to be people-friendly aimed at cushioning household incomes from inflation and slower growth.