25/11/2011 (The Star) - Malaysia has the necessary tools to ensure the sustainability of the country's pro-growth policies, according to Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah.

“I assure you that the Government is closely monitoring the European situation,” he said in his keynote address at the 16th Malaysian Capital Market Summit yesterday.

He said any direct contagion from Europe on Malaysia's financial system and institutions would be limited because of the country's negligible exposure to the eurozone debt. In the short term, though, stock market volatility would be inevitable.

He also noted that the impact of the eurozone debt crisis on Malaysia's real economy through trade would be limited, as the country's trade exposure increasingly had been shifting away from the West to developing and emerging economies in the East.

Exports to the European Union (EU) in 2010, for instance, only accounted for 10% of Malaysia's total trade volume. Trade with India, on the other hand, rose 35% in the first nine months this year, while exports to China grew 43% last year from 2009.

Going forward, Malaysia's economy primarily would be driven by domestic demand.

Husni said Malaysia's gross domestic product (GDP) for 2011 was on track to grow between 5% and 5.5%.

“We have not detected any significant developments in our economy that could have tempered the growth momentum we have seen in the last six months,” he said, adding that he expected the growth momentum to follow through the remaining quarter of the year.

Not discounting the fact that Malaysia's growth could still be affected by global factors, Husni said: “We have calculated that a one percentage point movement in global growth translates to a change of 0.5% in our GDP.”

The International Monetary Fund's (IMF) latest forecast for the world growth is 4% for this year and 2012.

According to panellists at the summit, there was still a downside risk to Malaysia's economic growth forecasts if the external environment were to deteriorate further.

Affin Investment Bank Bhd chief economist Alan Tan pointed out that indicators were already showing that Asia's growth was moderating amid the global uncertainties.

He expects the IMF to cut its global growth forecast in the upcoming review.

Tan explained that any potential slowdown in the EU would directly impact growth in the United States and China, and subsequently other countries, including Malaysia. In addition, he said, a slowdown could also mean lower commodity prices, which would have an impact on Malaysia, which derives much of its income from commodities such as crude oil and crude palm oil.

Another risk that Malaysia needed to look out for, said P. K. Basu, the former managing director/chief economist (Asia ex-Japan) of Daiwa Capital Markets in Singapore, was the growing asset in China.

Expecting the risk to potentially manifest itself in early 2013, he said if China were to fall, most countries in Asia would also be affected, as China had become the largest export market for many countries in the region, as well as others such as Germany.

“We will have to go through a period of slower growth as China adjusts towards 2013,” Basu said.