Countries like Malaysia, India, China likely to escape recession

Reprinted from 'The Edge Daily"

KUALA LUMPUR, 13 October 2008: After claiming Singapore and New Zealand as its first casualties, the ongoing financial crisis is set to push more economies in the Asia-Pacific region into recession. But which countries are likely to head in the same direction as the two nations?

The short answer is that there is no clear prime candidate owing to the unpredictability of the financial market, analysts say. However, they agree that there are fundamental indicators that may help stave off economic contraction.

According to some analysts, the indicators show three countries in the region capable of avoiding a contraction — China and India, which are being propped up by vast consumer demand, and Malaysia, which has ample liquidity.

In China, retail spending in 1H08 stood at 5.97 trillion yuan (about RM3 trillion), up 21.4% year-on-year. Meanwhile, India’s domestic spending in 2007 was 13.3 trillion rupees (RM962.92 billion).

There are also suggestions that Indonesia and Thailand might stave off recession, the former because of its large population and the latter because of its sound financial fundamentals.

In the case of Singapore and New Zealand, their economies were crippled when external demand for their exports fell and as their interests in the foreign capital market turned sour.

However, as RAM Holdings Bhd chief economist Dr Yeah Kim Leng explained, export is not the only factor determining the economic growth of a country. If domestic spending is sufficient to maintain growth and if this spending can be maintained, then the country may very well be sustained by domestic demand alone.

“An economy does not necessarily go into a recession when external demand falls. It also depends on how much of the country’s growth is driven by domestic demand,” he said.

“If domestic demand, private-sector spending and government spending can be maintained, then the economy is strongly positioned to not slip into a recession. Fiscal and monetary stimuli could help.”

CIMB Research’s chief economist Lee Heng Guie agreed that macro-economic policy flexibility will be a key determining factor, at least until the financial situation stabilises.

“At this juncture, it’s hard to assess where the global economy is going. If equity prices and asset prices continue to fall, eventually it would have an impact on the real economy,” he said.

He added that government fiscal spending would be critical to maintain growth momentum. In that regard, a healthy balance of payments and sustained reserves would supply the state with sufficient ammunition should the economy require an injection of funds.

While China and India would be carried on the back of their strong consumer demand, Malaysia, which traditionally follows the performance of Singapore, would be saved by its financial system and ample liquidity, said Yeah.

“Our banking system’s lending is still growing at 10% to 11%. This is very unlike the (Asian financial) crisis 10 years ago where credit lines were clogged,” he said.

“There are still more job vacancies than job-seekers, so the employment situation is still strong. All this goes to show that we are looking at a strong buffer against a decline in exports.”

According to numbers from the finance ministry, exports accounted for less than 30% of Malaysia’s economic growth, so even if the export industry were to collapse, growth could still be sustained domestically.

However, export growth has begun to shrink, dropping to a five-month low in August with a y-o-y growth of 10.6% compared with 23.5% in July.

A report by CIMB Research also suggests that Indonesia is more likely to escape a growth crunch than Malaysia. A worst-case scenario suggests that Malaysia would be able to maintain 5.3% growth in 2008, before shrinking to -0.5% in 2009 and rebounding to 1.5% growth in 2010.

Indonesia, on the other hand, would be able to maintain positive growth throughout the same timeframe, according to CIMB. The report also suggests that Thailand would likely escape recession owing to its strong fundamentals and balance of payments surplus.

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