Malaysia: Smaller Contraction in Q2

KUALA LUMPUR, Nov 20 — Malaysia is still inching its way out of recession as the economy experienced a smaller contraction of 1.2 per cent from 3.9 per cent in the second quarter this year due to stronger domestic demand and “stabilisation of external demand.”

But while the country appeared to be heading out of recession, foreign direct investments in the third quarter fell to RM6.2 billion from RM9.1 billion in the previous quarter.

Bank Negara Governor Tan Sri Dr. Zeti Akhtar Aziz said today that the increase in domestic demand is due to stronger private consumption and higher public sector spending.

All of the country’s economic sectors also recorded an improved performance except for agriculture.

“The service sector expanded further by 3.4 per cent supported mainly by improvements in the wholesale and retail trade, finance and insurance, and real estate and business services sub sectors,” she told reporters when announcing the GDP figures today.

The growth in the construction sector was higher at 7.9 per cent from 4.9 per cent due to the implementation of construction projects under the stimulus packages while the manufacturing sector declined “at a slower pace” of 8.6 per cent.

The inflation rate has also declined by 2.3 per cent.

“Headline inflation rate, as measured by the change in the Consumer Price Index (CPI) declined by 2.3 per cent on an annual basis in the third quarter. The decline in consumer prices was largely due to the effect of the cumulative downward adjustment to retail fuel prices since the June 2008 price increase,” she explained.

The country’s trade surplus remained at RM26.7 billion as both gross exports and imports contracted.

“Gross exports declined by 22.3 per cent. A gradual recovery in demand from manufactured products and increased exports of LNG contributed to a smaller decline in commodity exports.

“A smaller decline in gross imports of 18.3 per cent was contributed by slower contraction in imports of intermediate and consumer goods which were in line with the improved manufactured exports and higher private consumption spending,” she said.

But there was some sobering news on the foreign direct investment (FDI) front.

The gross inflows of foreign direct investment (FDI) has decreased to RM6.2 billion from RM9.1 billion in the second quarter while the net FDI amounted to RM2.1 billion from RM6.5 billion.

“The bulk of the FDIs was directed mainly into the manufacturing and services sectors. Overseas investment by Malaysian companies recorded a large net outflow of RM3.4 billion mostly for investment in the services sector.

“Meanwhile, portfolio investment registered a net inflow of RM8.8 billion due largely to the proceeds of bonds issued abroad by a non-financial public enterprise in the oil and gas sector during the quarter to finance its future capital expenditure,” she said.

Zeti was confident that the economy is set to register positive growth due to the improvements in international economic and financial conditions.

“Economy activity in the advanced economies continued to stabilise while several regional economies have recorded positive growth in the third quarter.

This positive trend is expected to continue into 2010,” she said.

However Zeti still remained cautious because she believes that the global economic recovery is “likely to be gradual and uneven and the outlook remains uncertain.”