NEM reforms brushed off in growth projections

KUALA LUMPUR, Sept 7 — The New Economic Model (NEM) has yet to make a significant impression on global economic research analysts who do not appear to be taking the Najib administration’s economic blueprint into account in their current forecasts of Malaysia’s GDP growth.

The NEM framework released in March prescribes economic reforms that are aimed at making Malaysia a developed high income nation by 2020.

A September 2 report on Asia by Goldman Sachs Global Economics, Commodities and Strategy Research did not mention the NEM and said it expects Malaysia’s growth to come in at 7.3 per cent y-o-y (year on year) in 2010 and 5 per cent next year, slightly below the 6 per cent annual growth target set by the Najib administration in order for Malaysia to achieve a high income nation status.

A Malaysia country report by the Economist Intelligence Unit (EIU) earlier this month said that the second portion of the NEM was held up by political resistance and had delayed radical reform measures required to restructure the economy to a high income one.

This comes after vocal Malays rights group Perkasa clamoured for the race-based New Economic Policy to be maintained even in the face of widespread acknowledgement that four decades of affirmative action had affected the country’s competitiveness.

The EIU said that it expects Malaysia’s economic growth to slow to 4.2 per cent in 2011 from 6.8 per cent in 2010.

Analysts could however be waiting to see more substantive policy measures from the NEM to be implemented.

The second and final NEM report submitted on September 3 was reported to contain 53 key policy measures aimed at eliminating cross-cutting barriers to a high income, sustainable and inclusive economy by 2020. It will be incorporated into the Economic Transformation Programme report to be released next month.

The NEM’s apparent lack of a strong initial impact on growth forecasts come as Asian economies excluding Japan and China (AEJ-ex China) are expected to slow over continued weakness in the US and tightening in China.

Goldman Sachs forecast growth for AEJ-ex China to slow to 3.5 and 3.2 per cent respectively in the third and second quarter of this year, down from 11.1 per cent and 7.3 per cent in the first and second quarter.

It said that investors should remain defensive as although Asian growth has remained resilient to the US downturn in the second quarter, it expects that to change, and noted that downside risks to its China forecasts are building.

“This sharp change in sequential growth is coming a quarter or so after the US has already slowed partly because of the unusual nature of the US growth/import relationship and the greater impact of the capex-biased slowdown expected in the US in the rest of the year,” said Goldman Sachs.

The investment bank said that it has revised US 2011 economic growth downwards from 2.4 per cent to 1.9 per cent. It also said that China has eased its deliberate economic tightening policies less than it had hoped in reaction to growth slowing down to moderately below-trend.

Goldman Sachs said it expects Malaysia to continue policy normalisation to help deal with inflation from food prices and core inflation, adding that pressure from gradually closing output gaps, or spare capacity, in 2011 may push inflation from 1.9 to 2.8 per cent sometime this year and up to 3.0 per cent in 2011.

“From our analysis, although the spill-over from easing food price inflation recently to core inflation could provide a degree of short-term relief, our findings suggest that the quantum could be small and even short lived. Going into next year, given our view that growth will likely remain steady, we expect core inflation to pick up,” the report said.

The report also predicts that Bank Negara will raise interest rates by 25 basis points before year-end followed by another 50 basis points in 2011 bringing interest rates to 3.5 per cent by the end of next year.