Weathering the global financial crisis

by TAN SRI DR WAN ABDUL AZIZ WAN ABDULLAH
Finance Ministry’s secretary-general
wanaziz@treasury.gov.my

The subprime mortgage crisis in the US housing market became apparent in mid-2007 and rapidly escalated into a global financial crisis.

While the causality of the crisis is well documented, the depth, breadth and duration of its impact is mired in uncertainty.

Despite strong economic fundamentals, Malaysia, being a small, open and globally integrated economy, is not spared from the effects of the global financial crisis.

The domestic economy was affected through trade and investment channels, and contracted significantly in the first quarter of 2009. The impact of the crisis is expected to ease in the fourth quarter with mild recovery next year.

With world trade moderating significantly to about 3% by September 2008, Malaysia’s exports recorded double-digit declines in the final quarter of 2008 and the first quarter of 2009. Export-oriented industries, particularly the electrical and electronics, were badly hit.

Consequently, manufacturing output contracted sharply in the fourth quarter of 2008 and the first quarter of 2009. For the first time since 1998, the services sector registered a mild decline in the first quarter of 2009, in line with the lacklustre performance of trade-related activities.

The economic downturn affected labour demand, as reflected in higher retrenchments and lower vacancies. During the first quarter of 2009, total retrenchments rose 74%, largely in the manufacturing sector.

The crisis also affected investor sentiment. Equity markets worldwide plunged and in tandem, the Kuala Lumpur Composite Index (KLCI) fell to 872.55 points as at end-March 2009, from a high of 1,516.22 points on Jan 11, 2008.

Private consumption fell in line with lower disposable income and cautious spending of households. Weak external and domestic demand also impacted domestic investment sentiment, which saw total investments declining significantly in the first quarter of 2009.

We have experience in managing crises. During the 1997/1998 Asian financial crisis, Malaysia’s expansionary fiscal and accommodative monetary policies in resolving the economic crisis was viewed with scepticism.

Interestingly today, similar counter cyclical measures are viewed by many as the appropriate approach to reinvigorate their ailing economies.

Being a proactive and responsible Government, we introduced a RM7bil stimulus package in November 2008 to mitigate the impact of the global financial crisis.

Monetary policy complemented the fiscal stance. Among other measures, the Overnight Policy Rate and the Statutory Reserve Requirement were reduced to lower the cost of financing and financial intermediation.

With most advanced economies in recession and the outlook for emerging and developing economies deteriorating rapidly, the Government introduced a more comprehensive stimulus package amounting to RM60bil in March.

The second package primarily focused on training and job creation, easing the burden of the rakyat, sustaining credit flows to support private sector activities and building capacity for the future. The impact of the stimulus packages is expected to be fully felt in the second half of 2009.

Green shoots have emerged to indicate the possibility of recovery in global demand and with these encouraging signs, there is emerging consensus that the global downturn will stabilise in 2009 and recover next year.

However, given the extent and severity of the decline in global demand since the second quarter of 2008 as well as its lagged impact on the Malaysian economy, growth is expected to contract 4% to 5% in 2009 before registering mild growth in 2010.

The Government is mindful of the difficulties faced by the rakyat in these challenging times.

We have provided training opportunities and allowances for retrenched workers. We continue to extend assistance to students, the disabled, the elderly and the poor as well as provide subsidies on basic food items like sugar, flour and bread.

It is often said that we should not waste a crisis as it also opens up opportunities to restructure and move towards a more liberalised and high income economy. Moving forward, creativity, innovation and high value-added activities will be the key drivers of the new economic model.

We will intensify development of niche growth areas such as Islamic finance, halal industry and tourism, while leveraging on green technology. Low-skilled and low-cost labour will be replaced with automation and highly-skilled jobs.

With these measures, the new restructured economy will also see increased contribution of the services sector, from the current 58% to 70% of the gross domestic product.

We are committed to fiscal consolidation when the economy recovers. We will continue to ensure value-for-money in government spending, including competitive bidding.

More importantly, the Government will gradually roll back and facilitate the private sector to play a more active role to drive the economy. This requires the private sector to rise to the challenge and seize opportunities available.

At the same time, the Government will not neglect its responsibility to providing a more comprehensive social safety net for the poor and vulnerable groups.

Malaysia’s economic fundamentals remain strong. We have a sound banking and financial sector, strong international reserves, high savings and diversified sources of growth.

Building on these inherent strengths and with the implementation of policies consistent with the new economic model, Malaysia will be on a stronger footing to weather the crisis and resume its growth trajectory.

Having said this, there is only so much that the Government can do. The private sector and the rakyat too must respond positively. Together, we can make this a reality.