A wish list for 2008

Malaysian Business, Jan 16, 2008 by Nor Zahidi Alias

IT'S THAT TIME OF THE YEAR AGAIN. THE ANNUAL RITUAL IS ON AND economists are ready to present new forecast numbers for 2008.

Some projections look conservative while others are so glaring that they raise eyebrows among those in the financial market. Nevertheless, forecasting macro variables for this year would undoubtedly be tricky as the global rout in the credit market persists.

But what would the man-in-the-street in Malaysia wish to see in 2008? I always imagine being stopped by somebody from a survey research company asking me for my wish list for 2008, from the economic perspective. Since I've never had such luck, I normally make casual conversation with strangers and ask them instead. These are some of their answers.

End of the subprime woes in the United States

A small group of people I talked to understand the impact of the US subprime woes on its economy and its possible repercussion for the Malaysian economy. It was to my surprise that some could even tell a good story about what might have contributed to such a debacle and how they were glad that such events have not unfolded in Malaysia. According to them, the housing market bubble was created by an extremely low level of interest rate.

Although it has not spread across the global economy, things could turn out worse-than-expected in 2008. Not surprisingly, many wish that the current woes in the US would end soon so that the impact will not spill over to the rest of the world.

A majority however opine that if such a massive drop in property prices happens in Malaysia, cash-rich individuals would take advantage of the situation to snap up these properties and make handsome profits in the next few years. This is based on historical evidence during the Asian Financial Crisis, when people made handsome profits selling properties after buying them at fire-sale prices during the recession.

Resilient US and Malaysian economies

Another group I spoke to fear the possibility of recession in the world's largest economy as major financial companies like Merrill Lynch and Citigroup have gone through a rough patch in the last few months. However, another group is more hopeful and wish for a resilient US economy so that global economic growth momentum can be sustained.

While the majority I spoke to were not very familiar with the situation in the Euro region and Japan, a small fraction seemed to know what is generally happening in the US economy. A resilient US economy would mean a better macro backdrop for Malaysia, according to them.

Others are optimistic about growth prospects for 2008 following the Government's efforts to further stimulate the domestic economy through regional developments. They believe economic activities in the Iskandar Development Region, Northern Corridor Economic Region and East Coast Economic Region will be the major catalysts for growth in the next few years.

At the same time, a possible general election in 2008 would mean further government spending to ensure better facilities for the rakyat.

Business and exports recovery

Businessmen are hoping for a stronger domestic economy and better business sentiment in 2008. That includes an improvement in consumers' purchasing power arising from higher salaries and a firm labour market.

These businessmen realise that in recent years, the Malaysian economy has been propelled by the strength of private consumption. The more they consume, the better the economy will be, at least in the short term. However, not many realise that consumption cannot be a long-term growth driver for any economy.

One side-effect of a consumption boom is a steady increase in consumer debt. One estimate shows that consumer debt in Malaysia has reached 60% of Gross Domestic Product (GDP). It is quite true that a large chunk of these debts are for housing and hire purchase of automobiles. But debt is debt. It has to be repaid sooner or later or the lenders would be in trouble if they are unable to collect. Which would eventually lead to weaker business sentiment.

Those involved in international business are praying for a recovery in the Malaysian exports sector. This is not surprising as exports grew by merely 2.4% in the first 10 months of the year, a far cry from the 10% growth of the previous corresponding period.

While it is quite true that the drag has been mainly in the electrical and electronics (E&E) sector, the overall sentiment is not helping. Thankfully, rising demand and high prices of palm oil and petroleum products have offset the weakness in the E&E sector.

Stronger ringgit

Malaysian exporters fret about the precipitous decline in the value of the US dollar against the ringgit. A softer ringgit definitely helps, but in the long run our competitiveness should not be dictated by the value of our domestic currency.

However, a majority of the people-in-the-street would love to see a stronger ringgit as that would mean better affordability of foreign goods and services. At the same time, overseas travel would be cheaper.

Another group which would favour a stronger domestic currency are the investors. Local investors realise that foreigners would prefer a steady and continuous appreciation of the ringgit as they could then benefit from both capital appreciation and foreign currency gains. More inflows of foreign money generally means a more vibrant stock market, which is good for local investors.