Better external trade ahead?

by **Cals** Mon 02 Sep 2013, 05:45

Published: Saturday August 31, 2013 MYT 12:00:00 AM
Updated: Saturday August 31, 2013 MYT 6:51:43 AM
Better external trade ahead?
BY CECILIA KOK
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Recovery of advanced nations may spell good news to exports, but it has led to massive capital outflow from emerging economies

ONE might think that the weak ringgit now can help boost Malaysian exports, as it makes the country’s produce relatively cheaper in the international market. What’s more in the present environment whereby developed nations seem to be heading towards a more convincing economic recovery, which suggests that global trade will likely improve further in the months ahead.
But depending on the weak ringgit to grow the country’s exports is not something that the authorities have in mind for the long-term benefit of the country’s economy.
“We’ve told exporters never to rely on the exchange rates to gain competitiveness,” Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz told reporters over the week.
“Export competitiveness must be gained through other measures such as enhancing productivity, being innovative, and enhancing the management of their (exporters’) businesses,” she emphasised.
Malaysia’s exports have been contracting since February through June this year due to weak demand for the country’s electronics and electrical products as well as weak commodity prices amid a sluggish global economy.
The Government is expected to announce the country’s external trade numbers for July 2013 in the week ahead. The prediction so far remains lacklustre, with most economists forecasting another round of contraction, albeit at a slower pace compared with the contraction of 6.9% year-on-year in June.
But with global manufacturing purchasing managers index trending upwards and semiconductor sales showing signs of improvement in tandem with the economic recovery of developed nations such as the United States and those in the European Union, economists seem optimistic that Malaysia’s exports could gradually improve in the subsequent months, as global demand for goods and services is expected to grow.

G3 recovering
If the latest data is anything to go by, the Group of Three (G3) economies, comprising Europe, Japan and the United States, are certainly on the mode of recovery after a prolonged period of sluggishness.
The United States, for instance, reported a stronger-than-expected growth during the second quarter of the year. Its gross domestic product (GDP) expanded at an annualised 2.5%, compared with an initial estimate of 1.7%, and a growth of 1.1% in the first quarter of the year, in a sign that growth was accelerating as the world’s largest economy overcame the effects of federal tax increases and budget cuts.
There were also signs that the US labour market was improving, as jobless claims in the week ended Aug 24 fell by 6,000 to more than a five-year low at 331,000.
Across the Atlantic Ocean, the debt-mired eurozone seemed to have emerged from its longest-ever recession, as the GDP of the 17-nation region grew 0.3% in the second quarter, after contracting 0.3% in the preceding quarter. The rebound of the eurozone’s economy was driven by growth in the region’s two largest economies – Germany and France – and an easing of recession in the region’s third and fourth biggest economies – Italy and Spain.
Japan’s economy also seemed to be blossoming under “Abenomics”, referring to the economic policies established by the country’s Prime Minister Shinzo Abe.
Japan’s GDP expanded at an annualised pace of 2.6% in the three months to June 2013 on growing domestic demand and rising exports. It was the third consecutive quarter of growth for the world’s third-largest economy, albeit at a slower pace when compared with its annualised growth of 3.8% in the preceding quarter.
Most emerging-market economies have been looking to the recovery of G3 economies, which have traditionally been their major export destinations, for recovery in global trade. But while improving G3 economies could spell good news to external trade, there are side effects with which emerging-market economies, including Malaysia, have to contend – reversal of capital that has led to the plunge of their equity and bond markets, and the weakening of their currencies.
As Zeti puts it, we are living in an environment that is so dynamic and increasingly challenging.
She explains: “As the recovery happens in the United States, and possibly Europe and Japan, these advanced economies will commence withdrawing some of their liquidity injections and eventually normalise their interest rates. And this will have consequences on us (as an emerging economy).”

Capital reversal
As in the case of many emerging-market economies, Malaysia has been a major recipient of foreign capital inflow since developed nations embarked on their quantitative easing (QE) programmes in 2009.
The QE programmes saw developed nations, in particular the United States, injecting massive amounts of liquidity into their economies in a move to prevent them from plunging into deep recession following the onslaught of the 2008/09 global financial crisis. The provision of such massive liquidity has continued to this day.
During the process over the years, a massive amount of that liquidity has flowed into emerging-market economies, including Malaysia, to seek higher rates of return.
But with the US Federal Reserve recently indicating that it has plans to soon taper some of its easy-money policies on the back of an improving economy, a reversal of foreign capital from emerging markets back to developed nations, notably the United States, has begun to take place.
This is evident in the declines of the equity and bond markets of emerging economies, as well as the significant depreciation of their currencies. Malaysia has not been immune to such trend.
Bank Negara’s stand is not to intervene in the foreign exchange market, but to allow market forces take their course.
“What is important for us is to ensure orderly market conditions. We do not focus on any specific level of exchange rate,” Zeti has said, adding that the central bank would only step in and intervene if there were disorderly movements in country’s financial markets.

Growth potential intact
Foreign capital outflow from Malaysia may have resulted in the country’s bourse and currency coming under significant pressure, but such disruptive flow is unlikely going to derail the country’s economic growth potential.
“The impact of hot money outflow on the country’s real sector will not be that severe because we have the capability to absorb the shock,” RAM Holdings Bhd chief economist Dr Yeah Kim Leng argues.
“Malaysia has a very sound banking system and a deep financial market. Also, we are not overly leveraged, and our foreign-currency debt is low. So, we can deal with the sharp outflows of these ‘excess’ liquidity as we have well-demonstrated previously when the same thing happened during the height of the 2008/09 global financial crisis and 2010 flare-up of the eurozone debt crisis,” he explains.
Yeah points to the recent uptick in the country’s bond yields and retracement of stock market losses as signs that Malaysia is weathering the massive foreign capital withdrawal relatively well.
On another note, he thinks that the short-term weakening of the ringgit would translate into gains for the country’s net exports in the coming months.
Affin Investment Bank Bhd chief economist Alan Tan believes recent developments are a wake-up call for the Malaysian Government to take immediate steps to further improve the country’s economic fundamentals. Among other things, he notes, it is important for the Government to accelerate fiscal consolidation and budgetary reforms, and take steps to safeguard the country’s current account surplus.
“The plan to sequence big mega projects with high import content and low-multiplier effect will have a positive impact on the country’s current account surplus,” Tan says.
“Our expectation is that the Government is resolved to improve the country’s economic fundamentals. With that, and coupled with our expectation that the tapering of QE will not come so soon, we believe capital outflow from the country will not be disorderly,” he argues, adding that Malaysia’s growth potential should remain intact.