UBS: Malaysia will not experience financial crisis

by **Cals** Fri 21 Feb 2014, 01:29

UBS: Malaysia will not experience financial crisis
Business & Markets 2014
Written by Charles Yong & Sulhi Azman of theedgemalaysia.com
Thursday, 20 February 2014 11:10

KUALA LUMPUR: UBS Investment Bank projects that emerging markets, including Malaysia but with the exception of Turkey and Brazil, will not experience a financial crisis as a result of capital flight.

“We have a crisis in Turkey because it had bad policy decisions and is now paying the price,” managing director and senior global economist Paul Donovan said at a media briefing on the global economic outlook yesterday.

He said Brazil is also in the same predicament as Turkey, while Indonesia is an economy to monitor after it was attacked last year by investors due to bad policies. Indonesian authorities reacted by unwinding some of its bad policies and reduced its current account and budget deficits.

“If Indonesia is attacked this year, that is a signal of a more serious crisis … but we don’t see a systemic problem coming out of the emerging markets this year,” said Donovan.

He projects that Asia will likely receive lower levels of capital inflows compared to the past. In the case of Malaysia, he said it will continue to receive capital inflows from two sources.

“The first is that Japanese companies are dramatically increasing their investments in Asia because they don’t want to invest at home [with] the cheap money given by the Bank of Japan,” said Donovan.

The second source of capital, he said, is the increasing willingness of Asian central banks to invest in Asian government bonds. According to a survey by UBS, no central bank was allowed to invest in Asian bonds in 2006, but 30% did so in 2013.

Japanese investors’ reluctance to invest in their home country is the reason Abenomics is failing, said Donovan. They are now embarking on an aggressive strategy to invest in Asia , including Malaysia, Thailand, Vietnam and South Korea, which in turn will support the growth of Asian economies and substitute for some of the drained capital from the US and Europe.

On the impact of the US Federal Reserve’s quantitative easing tapering programme, Donovan said it has entered into an “automatic pilot” mode where US$10 billion (RM33 billion) worth of bond buying activities will fall at each Fed meeting.

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Donovan expects the Malaysian economy to grow between 5.5% and 5.7% this year, led by exports as US consumers spend more.

“That means by end of this year, quantitative easing will be finished. There is nothing so far that is going to cause the Fed to stop doing that… unless something very dramatic happens,” he said.

Donovan expects the US Fed to raise interest rates starting next year. In anticipation of this move, emerging market currencies will continue to fall slightly this year.

He expects the Malaysian economy to grow between 5.5% and 5.7% this year, led by exports as US consumers spend more. Malaysia’s exports to China will remain strong too.

“Where Malaysian policymakers need to be careful is how long [strong exports to China] will carry on. China must reform its economic structure.

“If China moves away from infrastructure spending and credit growth slows, some of the Malaysian exports will not be in such demand. But that’s a story for next year onwards and not for this year.”

Donovan’s bullish estimate for Malaysia is higher than the Ministry of Finance’s forecast of 5% to 5.5% and the International Monetary Fund’s forecast of 4.9%.

On trade deals, he said the Trans-Pacific Partnership Agreement (TPPA) is worthwhile as it reduces tariffs. It will be overshadowed by the Transatlantic Trade and Investment Partnership (TTIP) between the US and EU if it goes through.

“TPPA is pretty much just about tariff reduction. TTIP is not about tariffs at all, it is about harmonising regulations. This matters because the US and EU together constitute 45% of the global economy and they are talking about common regulations across the entire production process,” Donovan said.

This article first appeared in The Edge Financial Daily, on February 20, 2014.