UBS AG Sees Malaysia Achieving Zero Growth Next Year

Tuesday November 4, 2008

UBS sees zero growth for Malaysia

KUALA LUMPUR: UBS Ltd, a subsidiary of Zurich-based UBS AG, sees Malaysia achieving zero growth next year in view of weakening demand from G7 countries.
Managing director for global economics Paul Donovan said exports growth would be negative for Malaysia.

“Asian governments, including Malaysia, are expected to continue applying fiscal and monetary stimuli to offset slower growth,” he told a media briefing yesterday.

He expects Malaysia to cut the overnight policy rate by 50 basis points to 3% as early as this month in line with monetary measures being taken by governments globally.
Donovan said unemployment in the country would rise gradually to 4% by 2010 in view of the slowdown in exports.

“Although Asia will recover faster than Europe, there’ll not be any above-trend growth until early 2011 while export-driven economies will have to wait for the rest of the world to recover before exports grow again,” he said.

He added that global growth would be slow for the next 18 to 24 months.

“This sort of weak growth normally follows a banking crisis because banks are reluctant to lend due to weak balance sheets while corporate debt, especially in Europe, have risen by 40% in the last four years,” Donovan said.

He said weaker borrowing and consumer spending would continue until the debt-to-income ratio went back to 2002 levels.

“It’ll take time to return to that level and will need a change in policy with lots of interest rate cuts and governments may need to encourage banks to pass on the lower rates to consumers in the form of lower commercial lending rates.”

Import orders by the US would be turning negative in the next few months while car sales there had slowed down, Donovan said, adding: “There will be no way to limit the impact in Asia while China will not be able to replace the lost car sales in the US.”

Among the Organisation for Economic Cooperation and Development (OECD) countries, he said, there would be negative growth next year except for Japan, which would see a slight growth. “Overall, the global economy is experiencing its weakest growth in 25 years,” he said.
The poor performance of most of Asian currencies was due to investors reassessing the fundamentals of growth in the region because the idea that Asia and Europe would decouple from the US economy did not hold true anymore, he said.

“The ban on short selling in the US and Britain had unintended consequences on these currencies because hedge funds had to sell some of their investments to cover short positions in Asia as well as Latin America.”

On a more positive note, Donovan said Malaysia’s inflation rate was set to come down rapidly next year to below 1% due to the lower energy and food prices.

“Semi-skilled labour costs, which are the main driver of food prices, are likely to be relatively stagnant, which means food prices will be lower,” Donovan said.
Statistics show that 80% of food price inflation in OECD countries was driven by semi-skilled labour costs, while in Asia, it was 40% to 60%.

He said crude oil price for next year would average US$60 to US$65 a barrel from US$120 this year.