Malaysia's economy in a sweet spot

Malaysia's economy in a sweet spot

Fund managers at a recent StarBiz roundtable on the economy and stock market sounded upbeat on business conditions. The economy is buoyant and so is the ringgit. Here are excerpts from the discussion on the economy. Part two on the stock market and their stock picks will appear on Wednesday

The panelists were: Phillip Capital Management Sdn Bhd chief investment officer (CIO) Ang Kok Heng, CMS Dresdner Asset Management Sdn Bhd CIO Scott Lim, Kurnia Insurans Bhd CIO Pankaj Kumar and AmInvestment Sdn Bhd CIO Andrew Wong.

Jagdev: What's your view on the Malaysian economy, Scott?

Lim: I think the economy is in a sweet spot now. There's a confluence of positive factors. The soft commodities are doing extremely well. Oil and gas are bringing in a huge amount of revenue, allowing the government to spend.

Pankaj: We're seeing a sustained growth in the economy. The first quarter may have been a bit disappointing in the exports and industrial production index which were below pace compared with last year. Of course, some of this is impacted by what's happening in the US. The US, too, is having a slowdown in its economy and that is why export economies like ours are feeling the heat of it.

Nevertheless, I agree with Scott’s view. Domestically, it's a confluence of factors that's driving investor sentiment. The government has been trying to be more liberal in terms of measures to attract foreign investments.



Jagdev: Is there a concern that global economic growth will slow and that it will impact Malaysia?

Pankaj: Not unless the US goes into a recession, which is still being debated now. This year's growth in the US will perhaps be slower than last year's but we don't expect the US to go into a recession.


The panellists (clockwise, standing from right): Phillip Capital Management Sdn Bhd chief investment officer (CIO) Ang Kok Heng (standing), CMS Dresdner Asset Management Sdn Bhd CIO Scott Lim, Kurnia Insurans Bhd CIO Pankaj Kumar and AmInvestment Sdn Bhd CIO Andrew Wong.
Andrew: The US accounts for a high percentage in terms of global consumption and GDP, so you can't run away from that. I agree there will be a slowdown in the US but it's going to be a mid-cycle pause. You've got a 10-year cycle and we're right in the midst of it. I think growth will resume late 2007 or 2008.

It's good that China and India are coming up but they have only 3% to 4% of the world's consumption and GDP.

With regards to Malaysia, net exports are negligible in terms of contribution to GDP. It was a slight negative last year, less than 1%. If the US slows down and, let's say, our exports fall by high double digits, (and I think there's not a chance of that) it might just knock off 0.3% to 0.5% of our GDP for this year, which is forecast to grow 5.5% to 5.6%.



Jagdev: Looking at the other sectors, there is hope of construction and property as well as the Iskandar region taking off. Do you expect other sectors of the economy to offset any shortfall in exports, no matter how negligible it may be?

Andrew: We've got strong commodity prices. The Ninth Malaysia Plan will spur expansion. Oil and gas are doing very well. The Iskandar project is important because that is your need to develop the necessary skill set to put Malaysia on a platform for it to compete over the next five to 10 years, whether its R&D, tourism or education. It is a software necessity.

What we see in the Ninth Malaysia Plan is the hardware. We need the software to bring us to the next level.

Iskandar is a property play in the beginning but if you look at the objectives, they want to build education and medical R&D centres. So, whether its technology or education, you need to develop your soft skill sets.

Lim: I think Iskandar is not a property play. It's a test bed for the government to implement new policies. In the last few years, we couldn't build the service sector sufficiently, like attracting IT companies to MSC. We did not grant them the free flow of information and people.

Iskandar is where they can bring the human capital they want. So, this is to test, whether this is really what the foreigners want? If they find success in this, I won't be surprised they'll open the same freedom to the whole country.

Ang: I'm not sure if they'll offer this to all the other states for political reasons. This may be a testing ground to see how successful it can be but it may also be a testing ground to see how people will respond to the concessions.

If it's successful, the government may expand it a bit more but I don't think they'll extend it to the whole country. It will lead to a lot of protests.

Andrew: Let's look at it 30 or 50 years down the road. You need the necessary skill sets to take you into the next decade and beyond to compete as a nation. If it works in Iskandar and you manage to bring industries here where you have talent development, you regain your human resources. Even in our industry, we're losing staff to Singapore. If you can't retain them, then how are you going to move forward? If it works as a pilot project in these few thousand acres, you go to another area and you plant it.

When people see the wealth effect, there's no way they are going to say no to you, and they'll probably say the government is doing the right thing.

Ang: Malaysia needs a new growth catalyst, otherwise, we'll be struggling at around 5% to 6% GDP growth. Singapore has IR (integrated resort), we add “D” there, and it becomes IDR. The government is bold in giving so many incentives.



Jagdev: Do you think we can be successful in growing our services sector to offset slower growth in manufacturing?

Lim: This kind of structural shift is normal as a country develops. We're in a mid-phase cycle. A successful transformation means your services sector is going to dominate the whole GDP, 70% maybe, like in the case of the US or Singapore. To do that, we have to seek a lot more human capital growth because the services sector is purely intellectual property and people, not so much building up hard assets.

Andrew: Our country needs both – manufacturing and services. You can't say “I want to concentrate on services.” Look at Singapore. They never said they are hollowing out their manufacturing industry. You need to be good at both, and find your niche in manufacturing.



Jagdev: What's your view of a strong ringgit?

Pankaj: The ringgit has its own strength, even when you compare it with the regional currencies. There seems to be a little bit more upside from here, perhaps to the 3.30-to-3.40 range for the rest of this year. We are seeing an inflow of funds that is driving the ringgit. We've seen inversion in the bond market because of this huge liquidity.

Ang: It's a policy of the government that allows you to maintain that strength. It'll send a message to exporters to be on their toes that their profit margins are not affected. At the same time, it'll help to reduce imported inflation.

Lim: The strength of a currency has always caused a mental block for a lot of economists, including policy makers. They always believe that a strong currency will hurt somebody, and therefore, you have to protect somebody. But history has shown that a country's economy will not be severely punished in the long term if you allow a currency to rise. Singapore and even the European countries have proven it. It enables them to transform their economic structure to a new level. So, why should we be afraid to let the currency strengthen?

Currency can be a good driving tool to change an economy that is unwilling to change. There is a big group of lobbyists trying to fight for a cheap ringgit so that they can export more. If you allow these lobbyists to perpetually ask for this subsidy from the government, it will affect the other group that has been wanting to grow from a strong ringgit, like the domestic side, because a weak ringgit affects importers.

The government should only look at the kind of structure it wants to transform the economy into. With that in mind, then you set the currency policy that is right for the economy. And that's why my optimism in this country is rising because the government is showing confidence that it sees a weak currency is not the way to go. A strong ringgit can bring a lot of benefits to this economy.

When the ringgit was weak in the last 10 years, the economy should have grown at 8% or more. But how is it we didn't? The ringgit was an obstacle in slowing down the transformation of this economy.

With a stronger ringgit, trade surpluses would weaken. But, if you want to decouple from the US, exports are not the way to go. The only way is to strengthen the domestic economy. To do that, you need a strong currency because you pay less for your imports, and there will be a different strength that will take place in your economy.

Andrew: There will always be one segment of the economy that's affected, like what Scott said, because they do not want to upgrade to a higher level of productivity, which everybody else is doing. And if you let this hold you back, perhaps it is the nation that is going to suffer.

Lim: If you impute it into your economic growth of 5% to 6%, and on top of that you've got a currency strength of, let's say, 5% every year, it's a very powerful multiplier.


Deputy news editor Jagdev Singh Sidhu moderated the discussion.