Malaysia Heads Toward Recession After Economy Contracts 6.2%

By Stephanie Phang, Bloomberg

Malaysia’s economy contracted for the first time since 2001 last quarter as exports slumped, pushing the nation toward its first recession in a decade.

Southeast Asia’s third-largest economy shrank 6.2 percent in the first quarter from a year earlier, after a 0.1 percent gain in the previous three months, the central bank said in a statement in Kuala Lumpur yesterday. Economists were expecting a 3.9 percent decline.

Asia’s export-dependent economies from Japan to Singapore have shrunk as the deepest global recession since the Great Depression saps demand for Intel Corp. computer chips and IOI Corp. palm oil produced in the region. Still, Malaysia’s central bank kept its key interest rate unchanged at 2 percent this week, saying previous cuts and government stimulus measures will contribute to a recovery later this year.

“We expect the first quarter to be the worst in terms of the contraction,” said Suhaimi Ilias, an economist at Maybank Investment Bank Bhd. in Kuala Lumpur. “The strong fiscal impulse will lift the economy, especially in the second half of this year and 2010, with the implementation of the annual budgets and the two economic stimulus packages.”

Asian policy makers, who have slashed borrowing costs and pledged more than $950 billion of stimulus plans, have started saying their economies may be past the worst.

Bank of Japan Governor Masaaki Shirakawa said last week the region’s largest economy is improving after a record first- quarter contraction. Singapore’s government said the economy shrank less than initially estimated in the first quarter and the nation may have “hit the bottom” of its worst recession since gaining independence in 1965.

‘Gradual Improvement’

Malaysia’s central bank refrained this week from cutting interest rates for a second straight meeting after lowering it three times from Nov. 24 to Feb. 24, saying there’s “potential for a gradual improvement in the second half of the year.” It had reduced borrowing costs by 1.5 percentage points to the lowest since the benchmark was introduced in April 2004.

Overseas shipments from Malaysia fell for a sixth straight month in March in the longest slump since 2002, dropping 15.6 percent from a year earlier. The decline eased from a 28 percent plunge in January.

“The main drag on the economy in the first quarter came from the external front,” said Irvin Seah, an economist at DBS Bank Ltd. in Singapore. “Going forward, the headline GDP growth numbers are expected to rise gradually, reflecting the underlying improvement in the domestic economy as well as the broader external economic environment.”

Global Recession

A worse-than-expected slump in exports will force policy makers to lower the country’s full-year forecast from the current estimate of a contraction of 1 percent or growth of that much, Bank Negara Malaysia Governor Zeti Akhtar Aziz said earlier this month.

The deterioration in the global economy “sharply affected our export sector,” Zeti said yesterday. “From what we see, export demand continues to remain weak and the environment still challenging” in the second quarter.

Second Finance Minister Ahmad Husni Mohamad Hanadzlah said this week the economy will “definitely” shrink more than 1 percent in 2009. The last time Malaysia posted an annual contraction was in 1998.

Prime Minister Najib Razak, whose coalition has lost three of four regional elections this year, has unveiled two stimulus plans comprising 67 billion ringgit ($19 billion) of public spending, loan guarantees, tax incentives and other measures to spur growth.

More Optimistic

Malaysian companies are turning more optimistic. Bumiputra-Commerce Holdings Bhd., the nation’s second-biggest bank, said May 22 it plans to raise its profit and dividend targets for this year after posting the first profit increase in five quarters.

Unisem (M) Bhd., Malaysia’s second-biggest listed semiconductor assembler, said May 14 it expects sales and earnings to improve “substantially” in the second quarter, forecasting a return to profit for the rest of 2009.

Malaysia’s manufacturing industry shrank 17.6 percent in the first quarter from a year earlier and exports of goods and services plunged 15.2 percent, according to yesterday’s report.

Investment as measured by gross fixed capital formation declined 10.8 percent last quarter. Private consumption dropped 0.7 percent.

Inflation may average between 1.5 percent and 2 percent this year, Governor Zeti said yesterday.