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Saturday May 30, 2009

Bank Negara to keep overnight policy rate unchanged

By CECILIA KOK


THERE were hardly any surprises when Bank Negara announced over the week that it would keep its overnight policy rate (OPR) unchanged at 2%. With leading economic indicators suggesting that the worst could be over for the global economy, the Malaysian central bank is likely to keep its foot off the monetary policy easing pedal for the rest of the year.

This is in contrast to earlier views (when the global economy was still in a free-fall condition) that Bank Negara would likely reduce the OPR to around 1% to 1.5% by the end of the year.

Well, it is not necessary now that the local economy is seen to have already hit the bottom during the first few months of the year. The current OPR level is now regarded as conducive for the country as its economy journeys through the recovery process.

Consensus view is that Malaysia’s economic recovery will begin to kick in by the fourth quarter of this year. For the second and third quarters, though, the country is expected to continue posting negative growth albeit at an increasingly moderate pace.

Over the week, Bank Negara reported that Malaysia’s gross domestic product (GDP) for the first quarter of the year had registered a sharp contraction of 6.2% year-on-year (y-o-y), compared with a growth of 0.1% y-o-y in the preceding quarter.

This is mainly dragged down by sharp declines in exports and industrial production, which resulted in increased layoffs and decline in investment activities.

The dismal GDP performance was in line with the deep slump experienced by the world’s major economies. Although there are strong indications that the world economy has turned the corner, Tan Sri Ramon Navaratnam, the chairman of the Centre of Public Policy Studies at the Asian Strategy & Leadership Institute, says the country cannot afford to be complacent.

“We have to be prepared at all times for any contingency,” he explains, adding that there are many external factors beyond our control that could throw a spanner in the economic recovery works.

While Standard Chartered Bank Global Research economist Alvin Liew believes that the worst may be over for Malaysia’s economy given that the weakness in the external demand has somewhat moderated, his concern remains whether domestic consumption would deteriorate further in the next few quarters and exacerbate the GDP decline.

Most economists feel that the expansive government spending could help cushion any potential slowdown in domestic consumer spending. But Ramon emphasises that the Government’s massive stimulus packages can only have their full effects on the country’s economy if they are implemented without leakages of any kind.

Associate economist at Moody’s Economy.com Nikhilesh Bhattacharyya in its recent report expressed his views that domestic factors alone are not sufficient to contribute to a meaningful recovery for Malaysia. He says the country needs international trade and financial flows to stabilise and improve to help the economy get back on track.

Nevertheless, Ramon’s view is that while external factors are beyond our control, the Government should focus on building socio-economic resilience so that the country can effectively weather the current economic storm as well as future ones.

And this can be done by ensuring that the best Malaysians are used in critical economic roles, while economic protection should steadily give way to more healthy competition.

In general, Malaysia is considered to have recovered from the global economic crisis when it gets back to the trend of an average growth of 5%. Most economists see this possibly happening only in 2010.

With the country’s economy expected to remain weak for at least up to the third quarter of this year, the Government has said that it is going to revise its 2009 GDP estimate soon.

Malaysia’s GDP for the year is expected to contract more than the original estimate of between a growth and contraction of 1%.

With the country’s economy expected to remain weak for at least up to the third quarter of this year, the Government has revise its 2009 GDP estimate downwards. Malaysia’s GDP for the year is expected to contract between 4% and 5%.

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