The size of Malaysia’s export sector is huge at more than 100% of GDP. Hence its importance in driving domestic demand should not be exaggerated. The manufacturing industry is under severe assault due to the collapse in exports. Consequently, manufacturing employment has plunged by 10% from year ago and wages are also falling. In contrast, private consumption fell only 0.7% year over-year in the first quarter, and imports of consumer goods have been relatively resilient.
One reason could be that, even though exports are a significant part of the economy, manufacturing employment is relatively small – about 18% of total employment. By contrast, service sector accounts for close to 60% of total employment. Meanwhile, agriculture and plantation make up 9% of employment, and the construction sector 13%.
Resources/plantation exports such as palm oil, petroleum, natural gas and minerals account for about 30% of total Malaysian exports and the share is rising. China, being the past decade’s fastest growing economy with an seemingly insatiable appetite for resources, has naturally increased in bilateral trade with Malaysia. Trade between the two countries has increased four-fold since 2002.
Malaysia’s exposure to manufactured-goods exports to the G7 is still large, commodities and China are playing a more prominent role in terms of overall exports. The better outlook of these segments – compared with that of manufactured goods exports – will help pull the economy out of the slump.
Malaysia’s banking system is healthy and in a position to support a recovery in household spending. Remarkably, the lending rate of Malaysian banks has fallen to new lows in response to the central bank’s rate cuts and the authorities’ efforts to facilitate borrowers’ access to credit. There are already signs of stabilization in indicators of domestic demand. Housing approvals and loan disbursements for car purchases are bottoming.
Resources-related industries contribute over 50% of government revenues. Since late 2008, both palm oil and crude oil prices have rebounded strongly. Unless they collapse anew, exports of crude oil and palm oil, which accounts for 15% of total Malaysian exports, will boost both domestic income and government coffers and help plug the fiscal deficit.
The odds of recovery in domestic demand are notable, despite continued contraction in the export sector. The 1997-1998 Asian financial crisis was a watershed event for Malaysia’s banking industry. Although some post-crisis policy measures adopted by the Malaysian authorities – mostly notably capital controls – have long been a source of controversy and outright criticism, banking industry consolidation and much stricter supervision from the central bank have fortified the position of banks and largely insulated them from the current global
credit crisis.
Industry consolidation and continued enhancement in risk management have borne fruit in the form of enhanced returns on capital. Currently, the Malaysian banking sector is well capitalized, with a risk-weighted capital ratio of 14.2% as of March 2009. The private credit-to-GDP ratio has fallen since the Asian crisis, implying there has been no froth in bank lending over the past several years. Within the structure of banks’ loan portfolios, household loans account for 54% of all loans, while lending to the manufacturing sector is only 11%.
Malaysian banks are awash with liquidity as the country runs a large current account surplus (17.5% of GDP in 2008). The loan-to-deposit ratio in the banking system is 74%. Bank credit accounts for about 90% of gross financing to the private sector.
Still, Malaysia’s banking system is not without problems. Bankruptcies are rising sharply, access to credit has deteriorated markedly since the onset of the global credit crisis and banks remain somewhat wary of extending credit. The problems in Malaysia’s banking sector pale when compared with the difficulties in many other countries around the world. A relatively healthy banking system puts Malaysia in a better position to cope with economic challenges stemming from the synchronized global growth slump.
The government’s recent move to scrap the long-standing Bumiputera ownership requirement for 27 service sectors and to increase foreign ownership of its commercial banks (from 49% to 70%) could help unlock growth potential by encouraging investment and boosting productivity within domestically-oriented segments. This, along with other reforms within the public sector aimed at reducing red tape, corruption, government intervention and overall inefficiency, could unleash positive forces that will produce stronger growth in domestic segments of the economy.
Malaysia small caps offer a better outlook profile than many other emerging markets. They will benefit most from potential political and economic reforms. Besides, small-cap valuations are decent on both an absolute basis and relative to the emerging market small-cap universe. The currency’s outlook is bullish versus the U.S. dollar. The country has huge external surpluses and the ringgit will benefit from the U.S. dollar’s decline. Relative to other Asian currencies, the rating the outlook for the ringgit as neutral as the central bank is unlikely to allow for much appreciation due to export sector concerns. As for currency valuation, the currency is cheap versus the greenback but is fairly valued versus the Singapore dollar.
p/s photos: Hanako Takigawa
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