Malaysia is falling into recession soon?

WHILE the world is reeling from what is possibly the worst global economic crisis since The Great Depression, most Malaysians have been too preoccupied with its own political drama to pay much attention to the financial meltdown. Everyone is busy talking about politics. The opposition taking over, the opposition not taking over; the PM stepping down, the PM not stepping down; who will become the new PM's deputy, who will not; is Anwar guilty of sodomy, is he innocent. Based on the newspaper headlines, many seem to think that it only affects the US, Europe, and other countries in the region. Malaysians tend to think that based on strong commodities and crude oil prices that Petronas is selling, we are somehow insulated from what is happening elsewhere.

Well, if they have been reading reports closely, they would see that palm oil and crude oil prices have plunged also. Local newspapers have not been reporting the meltdown on a big scale. The coverage is still mainly limited to the business or foreign sections, and tend to present the 'official' side of things.

In today's publication of The Star, the biggest English daily, a story on local banks focused on the positives. The lead story of the business section of The Star said that banks were turning cautious but have not put the brakes on lending to businesses.
It also stressed that the country's high savings rate and healthy foreign reserves would enable local banks to weather the global credit squeeze. As a result, perhaps not many Malaysians are even aware of the spreading fear in global markets. This sort of thinking is perhaps further boosted by the country's leaders who kept insisting that Malaysia's economic fundamentals are strong, rather than preparing the ground for what is to come -- slower economic growth, and perhaps job losses.

Second Finance Minister Nor Mohamed Yakcob was quoted in today's papers as saying that Malaysia is unlikely to enter into a recession. He did admit however that "if the crisis creates a recession in the US and Europe, all countries will be affected."
Mass-selling Malay-language Utusan Malaysia played up Nor Mohamed's comments and made it their lead story for the business pages, with the headline saying "Malaysia confident will not fall into recession." Quoting the central bank, the government has said that both direct and indirect exposure of Malaysian financial institutions in terms of holding of securities linked to the US sub-prime mortgages and lending to entities associated with them, accounted for only 0.3 per cent of the banking system's capital base. Further supporting this argument is the fact that the Malaysian bourse also has not plunged to the depths seen by neighbouring Indonesia, which was forced to close for two days this week after huge falls.
But observers cautioned that Malaysians must pay careful attention to events happening elsewhere before they end up being taken by surprise. Some say this time, if the recession lands on Malaysian shores, it might well be worse than the 1997-98 Asian Financial Crisis.
First to go could be Malaysian exports, 20 per cent of which go to the US. A drop in exports could cause major job losses. This would then affect consumer spending and curtail growth.
We are already seeing the prices of commodities fall, particularly fuel and palm oil, two commodities which Malaysia depends on heavily for its earnings. This could result in a vicious bite soon enough unless prices recover. A big chunk of the Malaysian government annual revenue, about 46 per cent, comes from the petroleum funds. So falling oil prices could mean the government might have to crimp on building infrastructure and rural projects, like schools and drainage. Also, many palm oil growers are rural Malays in the government-backed Felda estates. During the Asian financial crisis, the sentiment against the government in the rural areas were negative because many growers found it tough to make ends meet. And job losses jumped as electronics factories closed or pared operations. Already in the papers, some companies have reportedly having difficulty in paying their debts as ringgit is declining while their debt payment is in US dollars. All these means that, like it or not, whether they pay attention to it or not, the global meltdown will soon enough knock on the doors of many Malaysians. (Hazlin Hassan: Straits Times Singapore)