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Impact of the Crisis on the Malaysian Economy
Two economic indicators that show the impact of the current crisis are exports and the industrial production index. Export figures, which were doing well in the first three quarters of 2008, took a downturn towards the end of that year (Figure 3 [ PDF 24.3KB | 1 page ]). In January 2008, exports increased by 10.4% (year-on-year), and more–or-less doubled to 20.9% in April 2008. However, in October 2008, a negative figure was reported (-2.6%), only to decline more deeply as the months progressed. In December 2008 a decline was registered (-14.9%), which worsened in January 2009 (-27.8%).
Imports, which tend to follow export trends rather closely in Malaysia, reported a similar pattern. Imports increased by about 11% (year-on-year) in February 2008 and exceeded 10% in the months of June and July 2008 (12.5% and 15.0%, respectively). Again, the change in imports fell into negative territory from October 2008, falling from -5.3% in that month to -23.1% in December 2008 and dropping to -32.0% in January 2009. It is understandable that imports should fall along with exports because imports of intermediate goods are required to meet the production of exports. The strong demand for exports that comes from Malaysia's major trading partners (US, Japan, and the EU) having fallen, it should be expected that exports from Malaysia would also fall.
Since most of the manufacturing sector is driven by the growth of exports, the industrial production index reflects the poor export conditions of the global environment and has been sinking since September 2008 (-1.7%, year-on-year), deepening towards the end of 2008, particularly in December, and into January 2009 (-15.9% and -20.2%, respectively) (Figure 3 [ PDF 24.3KB | 1 page ]). These results are not surprising in view of Malaysia's heavy dependence on the environment and energy (E&E) sector and the fact that Malaysia's major trading partners were badly affected by the global crisis. Given these facts, claims that Malaysia has decoupled from the US do not seem valid. Others have claimed that Malaysia is shifting its trade towards the Association of Southeast Asian Nations (ASEAN). While there is evidence that trade with Singapore and Thailand has been increasing, this phenomenon must be contrasted with the nature of production networks. Units in other parts of ASEAN are a part of the production processes where the final products are ultimately exported to countries such as the EU and the US.
The effects of the crisis began to show in the GDP numbers by the third quarter of 2008. In no sector was this clearer than in manufacturing (Figure 4 [ PDF 33.5KB | 1 page ]). The manufacturing sector had a 5.6% increase (year-on-year) in the second quarter of 2008. In the following quarter it was positive, but closer to 2% (1.8%), and it was negative (-8.8%) by the fourth quarter of 2008. The construction sector also showed negative growth in the fourth quarter of 2008. In fact, real GDP slid to a 0.1% growth rate in the last quarter of 2008.
Viewed in terms of real GDP by demand expenditure, the most striking decreases in the fourth quarter of 2008 were observed in gross investment (-10.2%), exports (-13.4%), and imports (-10.1%) (Figure 5 [ PDF 33.5KB | 1 page ]). Private consumption also fell, but remained at a respectable rate of 5.3%. Comparatively, in the first quarter of 2008, private consumption had increased by 11.7% and similarly, in the same quarter gross investment increased by 6%, with exports and imports showing increases as well (at 6% and 3.4%, respectively). The net effect of all the decreases in the various components was a decline in real GDP growth to 0.1% for the last quarter of 2008 compared to 7% in the first half of the same year.
The capital outflows from Malaysia increased with the onset of the crisis. First, reverse investments that were high in the second half of 2007 (about RM21.9 billion) slowed in the fourth quarter of 2008 to RM5.6 billion. The outflows of portfolio funds from Malaysian markets reflected the reality of the global crisis. There was a surge of portfolio flows into the country in the first quarter of 2008 (RM21.0 billion), and starting in the second quarter, the outflows continued to be extremely large. In the second quarter, portfolio outflows amounted to RM21.9 billion and in the third and fourth quarter, they were RM56.1 billion and RM33.2 billion, respectively.
FDI did not compensate for portfolio outflows during the same period. In fact, FDI has been hovering at around RM5.0 billion every quarter in recent years (2006–2008). There have been occasional spurts of FDI inflows into Malaysia, particularly in the second quarter of 2007 and the second quarter of 2008. The large increases in FDI that took place in the second quarter of 2007 amounted to RM11.5 billion, increasing to RM15.9 billion in the second quarter of 2008. The first was due to foreign investors (from Japan, the US, Germany, and Singapore) making investments in E&E activities. The second was due to a large joint venture enterprise initiated by an Australian company relating to aluminum processing. There is no doubt that with the crisis and with Malaysia's traditional FDI sources being adversely affected, FDI inflows have also decreased. This can be seen distinctly in the third quarter of 2008 when FDI worth RM900 million was all that flowed into the country, although it recovered to RM5.0 billion the following quarter (Figure 6 [ PDF 20.6KB | 1 page ]). The full effects of the crisis on FDI are perhaps yet to be seen, since decisions by multinational corporations to invest in foreign countries will be made after the second half of 2008 and in the coming years.
The crisis has also prompted a drop in the value of Malaysia's foreign reserves. The economy held foreign reserves valued at US$82.4 billion in 2006. Reserves increased in 2007 (US$101.3 billion) and a further increase was noted in 2008 (US$91.5 billion). Although Malaysia's reserves have been high in the years following the 1997 crisis, the present crisis has taken its toll on reserves. Quarterly figures depict the reality of the crisis. In the second quarter of 2008, reserves were US$125.8 billion and fell to a limited extent in the following quarter of the same year to US$109.7 billion. However, in the last quarter of 2008, the fall was even sharper, reaching US$91.5 billion, a loss of US$18.2 billion.
The declines in FDI, foreign reserves, and portfolio funds had been cushioned by the relatively stable current account balance. In the fourth quarter of 2008, the current account balance dropped to RM29.8 billion from RM38.7 billion in the previous quarter. More striking, however, is the overall balance which has continued to drop drastically since the third quarter of 2008, falling from -RM31.5 billion to -RM61.9 million in the last quarter of 2008.
The impact of the crises has been felt most strongly in two sectors of the Malaysian economy: the manufacturing sector (discussed above) and the construction sector. The impact on the construction sector can be seen in several of its key indicators. The number of new sales permits has been falling since July 2008, but the figures have reflected the pessimism of the industry most distinctly since August 2008. The number of new sales permits, which earlier in the year reached 87 per month, fell to 58 in August and 41 in December 2008. The number of housing approvals has also been on the downtrend. The change in the production of construction-related products shows the bleak outlook of the industry. In September 2008, there was a 6.8% increase (year-on-year) in this index. It fell by 1.9% in October 2008, but most alarmingly there was a contraction of 5.1% in November 2008.
Figure 7: Property Sector Indicators [ PDF 23.5KB | 1 page ]
The more prominent sectors in the economy are already beginning to suffer from the impact of the crisis. With the negative reactions that have been felt by the E&E sector, construction industry, and property development, the outlook for local markets is bleak. Not surprisingly, this bleak outlook has also had an impact on the financial sector. Given the uncertainty in the economy and declining consumer confidence, the credit market has been affected. As a consequence of this weak confidence, loan approval has fallen (see Figure 8 [ PDF 28.8KB | 1 page ]). Particularly since September 2008, the growth in loan approval has been negative (-2.9%) and has continued to decline, especially in the months of October 2008 (-14.4%) and November 2008 (-44.0%) as well as January 2009 (-35.6%). The caution exercised in the banking sector is indicated by the growth in loans disbursed. This too declined in the months of October 2008 (8.2%), November (7.6%), and December 2008 (0.6%), finally becoming negative in January 2009 (-10.0%).
The overall atmosphere of negativity has also led to unemployment. Not surprisingly, the manufacturing sector has suffered the most from the crisis in terms of retrenchments. This can be seen in the second half of 2008. In the third quarter of 2008 about 10,000 workers were retrenched and about 5,000 lost their jobs in the last quarter of that year (see Figure 9 [ PDF 28.8KB | 1 page ]). Retrenchments were also high in the services sector in the third and fourth quarters of 2008. Except for the agriculture sector, retrenchments have been high, and about 20,000 workers were retrenched in the second half of 2008, according to published statistics (Bank Negara Malaysia 2009).
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