Malaysia: GDP forecasted at 5% in 2011

The Malaysian Institute of Economic Research (MIER) today maintained Malaysia's GDP will expand by 3.7% next year. They also admitted that the economy is doing much better than it has anticipated.

The country's economy would contract by 3.3 per cent this year and expand by 3.7 per cent next year, said its outgoing executive director, Emeritus Professor Datuk Dr Mohamed Ariff.

For 2011, the private think-tank was more optimistic, forecasting Malaysia's GDP to expand by a commendable 5.0 per cent.

With economic indicators showing signs of improvement, MIER expected the economy to exit out of recession in the fourth quarter of this year, as evidenced by the positive trend in the Industrial Production Index which means increased industrial activity.

This was also supported by the effects of the larger public infrastructure expenditure, manufacturing turnaround, improved service trade and higher domestic spending.

"The economy is doing much better than what we anticipated. It is the regional trend. Even India today reported third quarter growth of 7.9 per cent and China 8.9 per cent, which is way above our expectations," Mohamed Ariff told reporters.

He said MIER also expected exports to rebound to 9.3 per cent year-on-year in 2010 after bottoming out at -17.5 per cent this year.

Demand recovery from the global electronics and electrical sector as well as improving commodity prices would also lift exports growth to a small positive number by the fourth quarter of this year, he said.

Such performance, he said, was no surprise as Asia had a thick layer of savings and private consumption helped absorb the shock of global recession.

He said all that was needed now was for Malaysia to register a one per cent growth in the fourth quarter of 2009 to able to get -2.8 per cent for the year as a whole.

"But MIER is still holding on to the forecast of -3.3 per cent for the year as we want to wait for the fourth quarter results," said Mohamed Ariff.

He said all indications were that Malaysia would perform better than expected, within the range of -2 to -3 per cent growth for the year and not more than that.

However, he cautioned that the future was really uncertain, saying that "there are a lot of landmines to avoid as a lot of systematic risk is still underway".

"I think there is a 50 percent chance of relapse in the US in the first quarter of 2010.

"The growth we see in many countries is artificial growth, mainly by huge fiscal stimulus packages, which created a different set of problems," he said.

He said one could not sustain fiscal stimulus for too long as it had huge debt implications.

"Sovereign debt problems can be a serious one," he said.

For instance, he said, Dubai delaying its debt payment in itself had become a major concern worldwide though it could be rescued by Abu Dhabi.

"So, what I am saying is that maybe many things we may be seeing is just the tip of the iceberg; especially, private debt being replaced with sovereign debt, which is not good for the global economy," Mohamed Ariff said.

He said another cause for concern was that the economic recovery could be scuttled by fear of inflation which might lead to higher interest rates next year and possible increase in oil prices.

As of now, MIER expected the overnight policy rate to be relatively unchanged at least until the end of next year.

Mohamed Ariff also cautioned that there could be serious problems in the exchange rate alignment, especially with the repegging of Chinese yuan to the US dollar.

"The dollar is overvalued and the yuan is undervalued. How can you put these things together?. It won't hold on for long," he said, expecting a lot of exchange rate volatility in the coming months.

"It's going to be a serious problem that no central bank can single handedly deal with. They have to get together and take a coordinated measure," he said.