MIER Revises Downwards Msia's GDP To 2.2 PCT This Year From 4.0 pct

KUALA LUMPUR, July 17 (Bernama) -- The Malaysian Institute of EconomicResearch (MIER) has revised downwards its forecast for Malaysia's GrossDomestic Product (GDP) growth this year to 2.2 percent from an earlierforecast of 4.0 percent based on global and domestic economic trends."The 2.2 percent is attainable given the present scenario and the presentpolicies that the government had put in place," MIER executive director,Dr Mohamed Ariff told reporters at the sidelines after presenting theMalaysian Economic Outlook 2001-2002, a Second Quarter 2001 Update at the16th National Economic Briefing here on Tuesday.

However, it expected the situation to be better next year with growthprojected at 5.0 - 6.0 percent in tandem with the expected rebound in theglobal economy and upturn in the electronics sector.

Dr Mohamed Ariff said Malaysia was still one of the better economy in theregion compared to other crisis-hit countries such as Indonesia, Thailandand Republic of Korea.

He added that the present policies, such as the present fiscal stimulus,keeping the interest low and maintaining the ringgit pegged and banks wereable to arrest and reverse the downslides in the reserves.

"We are not the only country that is stuck in the mud at the moment, it isa general trend that we see but we are able to perform a little bit betterthan the rest," he said.

"We are likely to end up with a better growth rate than the others," headded.

We see the second quarter, quarter-to-quarter (GDP) will be negative, butyear-on-year soon to be positive.

On MIER's Business Index (BCI), the institution reported that it dippedlower to 44.0 points while the Consumer Sentiments Index (CSI) stood at96.2 in the second quarter.

It said that private consumption growth was reduced by half to 4.1 percentin the first quarter 2001 from 9.9 percent in the last quarter of 2000,indicating that the impact of export contraction and the weak stock marketon consumption had been quite significant.

Private consumption is projected to decelerate to 3.4 percent in 2001. Oninvestment, it is believed that most of the growth emanated from publicsector outlays and less so from the private sector.

"Despite high approval figures, foreign director investment (FDI) inflowscould be less forthcoming given the slackening global economy," MIER said.

It added that a large reduction in the growth of capital imports andrising excess capacity suggested that investment was turning sluggish.

Private investment is estimated to grow by 7.1 percent in 2001.Underpinned by the fiscal stimulus package, public investment would expandby 9.1 percent, it said.

The deteriorating economic conditions in US and Japan will send realexports (volume) reeling to a modest growth of 1.3 percent. Meanwhileimports, which are closely tied to exports performance and domesticdemand, will show a growth of 3.4 percent.

"Sedated economic growth will ease pressures on inflation, projected to besubdued at below 2.0 percent," it said.

It added that in the balance of payments, merchandise exports would feelthe heat of dwindling external demand, sinking by 5.4 percent (2000: 16.9percent) while imports were projected to contract by 3.5 percent (2000:26.2 percent).

It reported that the resulting merchandise balance would narrow onlyslightly to RM70.2 billion from RM79.5 billion in 2000.

"With the services deficit amounting to RM37.8 billion, the currentaccount surplus is forecast to be at RM25.2 billion or 7.8 percent ofgross national product (GNP) (2000:RM31.9 billion or 10.2 percent of GNP).

MIER also reported the Malaysian economy slowed to a growth of 3.2 percent(year-on-year) during the first quarter of 2001.

"If not for higher palm oil production, economic growth would have beeneven lower," it added.

It said with industrial production and export showing steeper declines, itwas very likely that the second quarter growth could be more dismal.

In tandem with slower economic growth, non-performing loans (NPLs) of thebanking system were creeping up.

It added that after reaching a low point of 6.3 percent in March 2000(under six months arrears), NPLs had been climbing gradually to reach 7.4percent in April 2001.

Under the three-month arrears classification, NPLs have risen from a lowpoint of 9.6 percent in Dec to 10.6 percent in April 2001.

Bank Negara Malaysia mentioned that part of the reason for the rise inNPLs was the recent inclusion of some loans which were previously grantedexclusion status.

However, the sluggish Malaysian economy could send NPLs higher but atlevels seen during the previous economic crisis.

On a positive note, MIER said that the risk-weighted capital ratio (RWCR)remained at a healthy level of 12.3 percent in May 2001.

Meanwhile the number of workers retrenched was on the rise again. MIERreported that for the period Jan-June 2001, the number of retrenchedworkers stood at 16,091, which is 26.9 percent higher than the 12,680 laidoff during the same period in 2000.

Around 85 percent of workers retrenched were from the manufacturingsector, and about half of total lay-offs were reported in Penang (25.1percent) and Selangor (24.3 percent).

"With confidence softening and no sign of relief in external conditions,it will take some time for the economy to rebound," it said.

"The Malaysian economy is in the slowdown phase, but one thing for sureisthat it would not be as bad as the late crisis in 1998," it added.

It said that the fundamentals were relatively better than before, thanksto structural reforms carried out after the on-set of the Asian crisis.

MIER added that one of the possibly good thing with a lower GDP growthrate was that import compression was taking place again and that wouldhelp generate further trade surplus.

"This will be a great help to support foreign reserves from decliningfurther, reducing the pressures on the ringgit peg," it added.

MIER said that with the economic momentum decelerating sharply against thebackground of benign inflation, cushioning the effects of the globaleconomic slowdown and averting a recession would remain the government'stop priority.

The institution added that one traditional way of propping up the economywas to turn on the monetary tap which would in turn bring down lendingrates and spur loan demand.

However, it said that the current problem on the monetary front was notdue to the lack of cheap funds.

"In fact, the banking system is flush with funds, with Bank Negara havingto lock away an estimated RM30 billion from the system," MIER said.

It added that the domestic interest rates were at very low levels. "Giventhat the weak loan growth is due mainly to the dearth of qualityborrowers, there is certainly very little scope for monetary manoeuvre,"it said.

MIER said the whole burden of propping up the economy would fall squarelyon the shoulders of fiscal policy.

The fiscal policy had started the year on an aggressive note, it said.This suggested the government's concerted efforts to speed up theimplementation of projects.

MIER said that the total federal expenditure in the first quarter was up ahefty 60 percent on an annual basis resulting in a deficit of about RM1.6billion.

"Though the deficit in the first quarter is smaller than the reading inthe previous quarter, it is still seen to be expansionary given thatfiscal balance, traditionally, has always been in surplus in the firstquarter," it added.

MIER said overall, given that the risks were more obviously heavilyweighted towards a recession there was a need for the 2002 Budget to beexpansionary.

"But we believe, given the current economic backdrop, a mild expansionwould appear to be a more sensible course for the budget," it said.

It suggested that boosting expenditure aggressively in the face of weakerrevenue collections would be unwise, given that it could only serve topush up the overall deficits and inflate our foreign debt obligation.

"This would eventually have serious implications on the ringgit (or ourforeign exchange reserves) and on our international credit rating," itsaid.