Malaysia reveals second stimulus package

Malaysia announces its largest ever stimulus package less than six months after its last economic pump priming exercise.

Malaysia is following the world's prevailing Keynesian winds, announcing yesterday a mini-budget to boost its flagging export-driven economy.

The M$60 billion ($16.3 billion) stimulus package came as a surprise to most analysts who were predicting a more moderate M$15 billion to M$30 billion package. The move comes just four months after Malaysia announced a M$5 billion stimulus with its 2009 budget.

The two-year package puts M$41 billion towards poverty and unemployment reduction, job creation and small business loan guarantees in an average citizen-oriented political play. The remaining funds will be used for infrastructure investments that provide "high multiplier effects and more job opportunities".

"Today, we face a global economic environment, which is more severe than in any other previous crises," deputy prime minister Najib Razak told parliament. Razak will become prime minister on March 31.

Malaysia's political future has been in flux since the ruling Barisan Nasional (BN) coalition, led by prime minister Abdullah Ahmad Badawi, lost its 39-year absolute parliamentary majority last March. In response to opposition coalition Paktan Rakyat leader Anwar Ibrahim's threats to form a new government and pressures within the coalition, Badawi announced his resignation and replacement last October.

After the stimulus announcement, Malaysia's benchmark index rose 0.4% yesterday to 855.25 points.

In January, Malaysia's trade balance totalled M$8.8 billion, down 9% year-on-year. Analysts estimate that exports contribute as much as 50% to the country's GDP. And during the fourth quarter, GDP growth stagnated at 0.1% year-on-year after growing 4.7% the previous quarter.

According to the latest official statistics, unemployment in the third quarter of last year was 3.1%, down from a peak of 3.6% in the first quarter. Analyst believe unemployment will rise to as much as 5% this year.

Despite the massive economic stimulus, worth roughly 9% of GDP, analysts remain sceptical about its impact. "The measures are too late to provide much support to growth in the first half of the year when the economic pain is likely to be at its maximum," says Robert Prior-Wandesforde, senior Asian economist at HSBC in Singapore.

Last week, Citi analyst Wei Zheng Kit wrote that a package in excess of M$35 billion could cause the budget deficit to surpass 10% of GDP and put the country in serious risk of a sovereign credit downgrade.

The government predicts the mini-budget will increase Malaysia's budget deficit to 7.6% of GDP this year from 4.8% in 2008. The government expects near zero growth in 2009.

Despite the pessimism, analysts' earlier calls for a larger package were met and exceeded. Last month Malaysia-based AmResearch called for a stimulus worth 5% of GDP -- roughly M$40 billion -- aimed at low- and mid-income groups.

Despite the bleak initial outlook, optimism remains about Malaysia's future. A combination of factors, including the central bank's overnight policy rate cut in January to 2.5% from 3.25% and other Asian countries' economic stimulus packages, are expected to ease credit markets and increase demand for Malaysian exports.

"We expect the package to have its biggest positive effect at roughly the same time as the impact of Bank Negara's rate cuts is being felt and a China-led regional trade recovery is taking hold," says Prior-Wandesforde. "This in turn supports the notion that the recession will prove extremely pronounced and the recovery equally so."

Still, the spectre of protectionism hangs above Malaysia's mini-budget which, like that of its neighbour Singapore, has an obvious bias towards local labour. This, and other non-tariff protectionist measures, have the potential to derail all expectations for a gradual economic recovery sooner rather than later.

¬ Haymarket Media Limited. All rights reserved.
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