Talk of ‘green shoots’ emerging and of nascent economic recovery is getting louder. But it is still insufficient to drown out the naysayers. The contrasting prognosis is clearly a reflection of the sketchy nature of the clues on the ground. Anecdotal evidence could be misread as sure signals, and vice-versa. It also highlights the disparities in the assessment of the global crisis, particularly the magnitude of its impact on global trade and fund flows, and results in distortions to recovery perspectives. The Edge Financial Daily spoke to Robert Prior-Wandesforde, HSBC co-head of Asian economics, global markets, and former Bank Negara Malaysia deputy governor Tan Sri Dr Lin See Yan. Here, Prior-Wandesforde and Lin offer their views and potent arguments on the ‘clouded’ outlook for the global economic landscape.

Worst is close at hand, recovery in 2H, says HSBC
Ellina Badri

KUALA LUMPUR: Recession-hit Asian economies are close to bottoming with recovery expected in the second half (2H) of the year, boosted by synchronised fiscal and monetary stimulus and an improvement in regional trade, HSBC co-head of Asian economics, global markets, Robert Prior-Wandesforde said.

“It’s been an extremely severe downturn, as bad or even worse than the 1997/98 Asian crisis. However, I think we are approaching the bottom. I think China is already showing fairly definitive signs of improving, and the rest of Asia, including Malaysia, will follow suit in the coming months and quarters,” he said.

While projecting a year-on-year decline of 3.5% in real gross domestic product (GDP) in 2009 for Malaysia, he said the economy was likely to hit a bottom, with a 5% contraction in 2Q09.

The government has announced two stimulus packages, totalling RM67 billion, since November 2008 while the central bank has slashed the overnight policy rate by 150 basis points (bps), also since November, to a record low of 2%.

“There is now enough (policy easing) in the system. If we’re right about the regional trade recovery, we would see Malaysia coming fairly impressively out of this recession in 2H of this year,” Prior-Wandesforde told The Edge Financial Daily.

The country is expected to return to positive growth of 5.5% in 2010, he added.

Singapore-based Prior-Wandesforde was in Kuala Lumpur last week for an economic and foreign exchange customer briefing held in conjunction with the launch of its publication titled HSBC’s Guide to Cash, Supply Chain and Treasury Management in Asia-Pacific 2009.

The guide book, now in its 12th edition, is an annual publication that provides insights into emerging trends, best practices and thought leadership on cash and treasury management in the Asia-Pacific region.

Prior-Wandesforde said in addition to fiscal and monetary policy easing, recovery in Asia, including Malaysia, would also depend on a pick-up in regional trade.

He said the sources of demand within the rest of Asia, which would eventually translate into strong growth, were the huge and synchronised easing of interest rates, a similar, and of good quality, easing of fiscal policy, and the fall in commodity prices, which effectively acted as a “tax cut” for the economies. “It’s a very positive outlook, and it is one that is not conditional on a similar recovery in the Western world, either.

“We need to see the Western world stop contracting, but we don’t necessarily need to see a strong recovery there to see a strong recovery in Asia, due to the combination of huge policy packages and falling commodity prices, which will stimulate demand and trigger regional trade recovery,” he said.

He added that evidence of the regional trade recovery was increasingly being supported by the leading indicators of growth, such as those in Taiwan and South Korea, which were “actually very good at predicting turning points in the regional trade cycle”, and had picked up “very smartly”.

In March and in a fifth-straight month of contractions, South Korean exports showed a 21.2% decline from a year earlier, but this was smaller than a fall of more than 26% in January and February combined. A measure of exports per working day also showed a rise to US$1.18 billion (RM4.19 billion) from US$1.16 billion in February and US$990 million in January.

“The worst is over, or at least very close at hand,” Prior-Wandesforde said.

Meanwhile, although the jury is still out on the theory of Asia’s decoupling from the Western world, he reckoned that China had clearly shown this was possible, via its hefty US$585 billion stimulus package.

Economists have largely lauded China’s spending plan as an effective one, mainly due to its focus on high-multiplier infrastructure projects.

Other stimulus packages announced across the region include Singapore’s US$13.6 billion plan and South Korea’s US$37 billion in tax cuts and infrastructure spending.

Asian central banks have also slashed interest rates to record lows in an effort to boost growth. Thailand has cut its interest rate by 250 basis points since December, to 1.25%, while South Korea has eased rates to a record low of 2%, slashing 325bps since last year.

On Malaysia’s fiscal and monetary policies, Prior-Wandesforde said: “I suspect we’ve seen most, if not all, of the monetary and fiscal easing that we’re going to see, and if recovery does come as projected, the need for more policy easing will diminish.”

“As such an open economy, its economic destiny is not fully in its own hands. But I think we’ve seen an appropriate monetary policy response, I think it’s also quite sensible to be thinking about ending the cycle of interest rate cuts.”

He added that the country’s financial system was in very good shape, and the interest rate reductions had worked in a fairly efficient and normal manner.

He said, however, the country could be faced with a worrying budget deficit position if its RM67 billion stimulus plan was spent in full, although there may well be leftovers from the allocations.

He said Malaysia was expected to post a budget deficit of 7% of GDP this year, which “will certainly need to be brought down once the recovery is more secure”.

Meanwhile, he said an important lesson from the current crisis was that Asian economies need to be less dependent on exports to the developed world.

“Demand in Asia is bigger than what most people appreciate, in particular investment demand and capital expenditure, and this is most certainly going to increase significantly, and significantly faster than it is in the developed world.

“There needs to be a re-orientation of exports to be increasingly in favour of the rest of Asia, and emerging markets in general, as that is where the long-term growth potential lies,” he said.

Recovery unlikely to be anytime soon, says Lin
Tony C H Goh

KUALA LUMPUR: While supportive of the increased spending via the stimulus measures, Malaysia’s economy is not expected to recover as long as the global economy is not showing any tangible sign of a turnaround, said Tan Sri Dr Lin See Yan.

The former deputy governor of Bank Negara Malaysia (BNM) and a member of the Prime Minister’s Economic Council and Innovation Council is doubtful that the economy will recover by the second half of this year, as envisaged by some.

“I think that in times like these, it is better to err on the side of aggressive stimulus spending. However, while some of the recent data might show that the worst is over, less worse does not necessarily mean recovery.

“While I do not want to be a pessimist, I just cannot see how the global economy can recover when the United States and Europe, which together account for around US$15 trillion (RM53.25 trillion) to US$16 trillion in consumption, continue to be mired in recession,” Lin said in an interview with The Edge Financial Daily last Friday.  

Lin said while China appeared to be doing well domestically, it was not in a position to act as the engine of growth for the global economy. “China’s total economic consumption of over US$1 trillion is just a fraction of those of the US and Europe,” said Lin.

Bloomberg recently reported that the US recorded a rise in the number of people collecting unemployment insurance, which surged in the prior week to 6.56 million, setting a record for the 15th straight week, and a clear indication that companies were still not hiring.

Commenting on BNM’s statement that the current overnight policy rate of 2% was accommodative enough to support growth, Lin concurred, saying that however, the main issue here was access to capital for businesses.

“There is no point in continuing to cut the interest rate level if it does not lead to an increase in access to funds, or when only a fraction of the cut is passed on to consumers,” Lin said.

He commended the move by the government to guarantee credit for small and medium-sized enterprises (SMEs), saying that right actions were being taken to tackle the crux of the problems faced by businesses.

“If the situation is not rectified, there is a danger of us falling into a liquidity trap, a situation where the lower cost of borrowings is not leading to an increase in access to capital,” he said.

The authorities have taken a slew of measures to ensure access to capital by businesses, such as Credit Guarantee Corp (M) Bhd’s partnership with financial institutions to guarantee loans to SMEs and the setting up of the BNM-backed SME Assistance Guarantee Scheme (SAGS). In addition, Danajamin Nasional Bhd, armed with an initial capital of RM1 billion, became operational last Friday, tasked with insuring up to RM15 billion in private debt and Islamic securities.  

On the recent recovery in the equity markets, which saw the KLCI surging over 20% to breach the 1,000-mark, Lin said this could most likely be due to “pessimism fatigue” among investors. He noted that corporate earnings were still weak, and it was important for the stimulus packages to have the right combination of programmes to help businesses scale upwards.

Lin said Prime Minister Datuk Seri Najib Razak’s administration had the opportunity to bring the economy to the next level, but there was still a lot more to be done. “The main challenge now has shifted to that of managing expectations, where the government has to be on top of the situation and bring optimism back to consumers. A real recovery is only possible when there is a real demand for goods and services,” added Lin.