News Room - Business/Economics

Posted on 09 Jun 2008

Emerging economies still rely on the super powers

EMERGING Asian economies like Malaysia are not fully decoupled from industrialised economies such as Japan, Europe and the US. 

Malaysian Institute of Economic Research executive director Datuk Dr Mohamed Ariff Abdul Kareem said exports of final goods from emerging Asian economies were still directed largely to industrialised economies.

“Although intra-regional trade among emerging Asian economies have increased enormously, this trade is dominated by intermediate goods, especially components and parts, while the final products are exported to industrialised countries,” he told StarBiz.

Datuk Dr Mohamed Ariff Abdul Kareem

He said a global slowdown would adversely affect Asean economies given their close economic ties with Japan, Europe and the US.

“Economies that are dependent on manufactured exports and oil imports are likely to be worst hit,” he said, adding that any slowdown in exports of final goods would spill over to the exports of intermediate products as well.

Mohamed Ariff said Malaysia was highly trade-dependent, with a trade-gross domestic product (GDP) ratio of roughly two-to-one.

“The US is still Malaysia's biggest export destination, although its share has been declining in recent times. Changes in the US economy will affect the Malaysian economy, although the impact is likely to be less severe as the economy has become increasingly resilient thanks to structural changes which have made the services sector a major engine of growth,” he said.

CIMB Investment Bank Bhd head of economic research Lee Heng Guie said that on CIMB's sensitivity analysis, a 1% decline in US GDP growth could potentially trim Malaysia’s export growth by 0.8 percentage points, leading to a 1 percentage point decline in GDP growth.

“Although there were noticeable signs of growth pullback in Asian economies in the fourth quarter of 2007 and first quarter of 2008, our baseline projections suggest the four Asean countries (Malaysia, Singapore, Thailand and Indonesia) we track closely are unlikely to fall into recession, although the pace of growth will moderate in 2008 and 2009 compared to 2007,” he said.

Lee said policymakers in the region's economies, like Malaysia, were faced with the challenge of managing downside risks to growth and the upside risks to inflation.

“With some economies showing signs of moderation, they are reluctant to tighten interest rates too much to counter inflation for fear of slowing down growth further,” he said, adding that Malaysia's medium-term challenges would be to achieve sustained investment in the growth corridors, improving productivity and competitiveness, and reforming the taxation and incentives system to promote higher capital outlays.

Mohamed Ariff, however, opined that Malaysia had to “balance the books sooner rather than later.”

“Malaysia has the highest budget deficit as a percentage of GDP within Asean. Subsidies for food and fuel have risen due to rising food and fuel prices. There is a need to phase out all subsidies with a clear timetable,” he said.

He also said the country's tax system needed to be restructured, as it was overly dependent on oil revenue.

“Malaysia will become a net oil importer by 2011. The sooner we implement value-added tax or goods and service tax the better, as it will help make up for the shortfall. In addition, corporate taxes will have to be reduced to make Malaysia attractive for foreign investment,” he said.