Friday, February 28 2003 (Business Times)- MALAYSIA’S export sector willnot escape the economic fallout should war break out in Iraq buteconomists say it can buffer the decline by concentrating on domesticeconomic activities.

Economists are uncertain just how bad Malaysian export figures would beaffected as a result of a war.

One head of research at a local securities firm said the pace of economicrecovery will depend on the duration of the conflict.

“But in the long run I believe the scenario will be positive. Meanwhile,we might just have to focus on the local front. That’s why the nextstimulus package deals more with structural and institutional measures,”the analyst said.

MIDF Sisma Securities economist Azrul Azwar Ahmad Tajudin said a short warmay reduce oil prices to below the US$30-per barrel (US$1 = RM3.80)threshold.

It could even drop to within the Organisation of Petroleum ExportingCountries (Opec) price target range of US$22-US$28 for its benchmark blendof crude oils.

“On the converse, a messy and protracted war will have seriousrepercussions on oil, stock, foreign exchange and other markets with adestabilising effect on the global economy,” he added.

However, in the event of war, he expects Opec to intervene in balancingthe supply and demand equation for oil.

“We believe Opec will stand ready to intervene as evidenced by its latestdecision to raise output ceiling by 1.5 million barrels per day to 24.5million barrels per day in response to the strike-crippled oil productionin Venezuela,” he said.

Song Seng Wun, a regional economist at GK Goh Research, said highercommodity prices may help lift the country’s exports in the near term butsubsequently if demand falls, little benefit could be derived from thehigh prices.

Song expects overall exports to slow down to between 6 and 7 per centyear-on-year in the January-March period this year, from 9.6 per cent inthe last quarter of 2002 and 14.5 per cent in the third quarter of lastyear.

“Lower electronics exports are likely to be offset somewhat by higherresource-based exports. Assuming a resolution to the Iraq or Korean crisisby the second quarter of this year, we are hopeful of a stronger pick-upin exports to deliver full year’s export growth of 8.5 to10 per centversus last year’s 6 per cent,” said Singapore-based Song.

Taking the 1991 Gulf War as a yardstick, MIDF Sisma Securities came outwith a growth forecast. Malaysian economic activities are expected to hita lull as negative implications of the war become evident in the secondquarter. MIDF Sisma believes that an intervention rate cut of between25-50 basis points in the first quarter is timely to buffer the softeningglobal growth.

The rate cut will help bolster consumer and investor confidence as itreflects that the authorities have the latitude to manoeuvre. However, asignificant rate cut might send negative signals to the market.

“Whether the authorities want to take a pre-emptive measure by slashinginterest rates now remains to be seen but we believe they may prefer towait until a slowdown is apparent,” its report says.

Changing the composition of Malaysia’s growth mix will help reduce itsdependence on external demand, hence reduce vulnerability to globalshocks.

For growth to be less trade-sensitive, viable sources of growth,especially those driven by domestic demand , have to replace exports asthe main engine of growth. “We believe Malaysia will be less US-centricamid an increasingly balanced pattern in global trade, thanks to strongerregional trade links upon the implementation of Asean free trade area,”Azrul said.

He added that significant increase in intra-Asean trade, especially withAsean and Asian countires that enjoy buoyant consumer spending, shouldprovide a sufficient buffer to offset slackening orders from other exportmarkets.