By Yow Hong Chieh
The Malaysian Insider
Aug 08, 2011

KUALA LUMPUR, Aug 8 — Malaysia’s exposure to global markets, especially in Europe and the United States, as well as its budget deficit, is likely to hamper economic growth until next year, with international investment bank Goldman Sachs downgrading today its GDP forecast for the country.

Prime Minister Datuk Seri Najib Razak’s Barisan Nasional (BN) government is expected to face more pressure on the economic front after Goldman Sachs downgraded Malaysia’s GDP forecast for this year and the next.

Goldman Sachs’s downgrade was sparked by concerns that the tightening US budget will limit export growth in Asia over the next 12 months.

The investment bank revised its forecast for the national economy to five per cent from 5.4 per cent for this full year and similarly cut next year’s GDP growth projection to 5.2 per cent from 5.6 per cent previously.

“Korea and Taiwan have shifted quickly towards high value-added products like smartphones and tablets [and] have kept their exports resilient, whereas exports of semiconductors and PC components have generally had relatively poor growth,” it said in a report today.

In a separate statement ratings agency Standard and Poor’s also said that a new global financial crisis would hit Asia harder than the last one, especially nations heavily exposed to offshore markets or still repairing budgets from the 2008-2009 crisis.

Standard and Poor’s listed Malaysia as one of the countries still repairing budgets from the 2008-2009 crisis and pointed out that it would have limited capacity to intervene in the economy.

The Najib administration has been committed to trimming the budget deficit from a two-decade high of seven per cent in 2009 to 5.4 per cent this year but surging inflation — especially in urban centres where his coalition is weakest — has forced Putrajaya to rethink its timetable for subsidy cuts.

After hitting a two-year peak of three per cent in March, the consumer price index has continued to rise, hitting 3.5 per cent in June as the government increased fuel, electricity and sugar prices to prevent the subsidy bill from doubling to RM21 billion.

The Umno president is also expected to call for general elections soon despite his mandate only expiring in early 2013.

Both government and opposition lawmakers have said that Najib should announce an election budget for next year as sustaining subsidies continues to put a strain on the Treasury.

Pressure from hardline Malay ground to maintain Bumiputera quotas is also threatening the prime minister’s economic transformation programme that aims to double per capita income by 2020.

In its report today, Goldman Sachs also cut Singapore’s GDP growth estimates to 4.8 per cent this year and five per cent for 2012, down from 5.5 per cent and 5.4 per cent respectively.

Indonesia and Thailand remain unchanged at 6.2 per cent and 3.8 per cent respectively for 2011 and 6.2 per cent and 4.2 per cent for 2012.

Malaysia’s projected earnings per share (EPS) were also slashed by 4.4 points to 9.9 per cent while Singapore’s was reduced from 5.2 per cent to three per cent.

Goldman Sachs nonetheless upgraded its call on Malaysia to overweight in line with its recommendation that investors focus on domestic and Asean cyclicals following the downgrade of US long-term credit rating.

But Standard and Poor’s warned that while its historic downgrade of US credit rating last Friday would not have immediate impact on sovereign borrowers in the region, export-dependent economies would bear the brunt of any future disruption in developed markets.

“Given the interconnectivity of the global markets, an unexpectedly sharp disruption in developed-world financial markets could change the picture,” it said.

“In this scenario, the experience of the global financial crisis of 2008-2009 shows that export-dependent economies with large exposures to the US and/or Europe would feel the most pronounced economic impacts.”

Standard and Poor’s listed those countries particularly vulnerable to disruptions in offshore capital markets as Pakistan, Sri Lanka, Fiji, Australia, New Zealand, South Korea and Indonesia.

It also said Malaysia — along with Japan, India, Taiwan and New Zealand — as having less fiscal capacity to respond to a fresh global crisis as government finances were still recovering from the recent downturn.