ADB: Local demand to anchor Malaysia's growth

THE Asian Development Bank has projected the Malaysian economy to grow by four per cent this year, with domestic demand as the anchor.


It, however, expects the growth to quicken to five per cent in 2013, lifted by an improved external environment.

In its Asian Development Outlook 2012 released yesterday, the Manila-based bank said weakness in the global outlook clouds Malaysia's prospects in 2012.

"Growth in merchandise exports is expected to be subdued in 2012 owing to torpid global trade and softer prices for export commodities, including palm oil.

"Similarly, imports will increase at a modest rate, in tandem with weakness in manufacturing industries and more moderate growth in private domestic demand," it said, adding that the current account will continue to record substantial surpluses.

Strong private consumption drove economic growth in 2011, supported by government spending and less so by fixed investment.

Private consumption, it added, will get support from government decisions in the 2012 budget to raise wages for the public sector and to make a one-time cash payment to low and middle-income groups (53 per cent of all households).

But it expects the labour market to soften in 2012, particularly in trade-exposed industries.

"Private investment in export-oriented industries such as electrical and electronics products will be subdued by the weak global outlook this year, although investment will likely be relatively buoyant in industries that depend on domestic demand," the Asian Development Bank said.

In the report, Asian Development Bank said the leading index of economic activity in January 2012 suggested slower economic growth in the near term, and the forward-looking Business Conditions Index, compiled from a survey of manufacturers, fell late last year.

"From the production side, services are likely to continue to drive growth in 2012."

Inflation is forecast to recede to 2.4 per cent in light of moderating domestic demand and generally lower prices for imported commodities.

It is expected to pick up to 2.8 per cent, in line with domestic demand.

Reining in subsidies remain a policy challenge, said the bank.

Cost of subsidies on fuel, staple foods, electricity, health, and education climbed to 14.3 per cent in 2011 (about four per cent of GDP).

Fuel subsidies alone amounted to 4.7 per cent of total government spending in 2010.

"Subsidies suppress inflation, but also contribute to the chronic fiscal deficit, reduce budget funding available for social and economic development, and distort resource allocation," the bank warned.

Asian Development Bank pointed out that the vast bulk of the subsidies benefited consumers, students, and companies in general, rather than the poor, because of inadequate targeting.

The government started to gradually reduce subsidies in 2010 on petroleum, cooking gas, electricity, and road tolls, and committed to better target remaining subsidies to lower income groups.

It offered partial compensation for the upward impact on inflation, including cash rebates to owners of motorcycles and small cars (below 1,000cc).

Budget savings estimated at about US$33 billion (RM99 billion) in the five years that subsidies were to be phased down were to have been applied to reining in the fiscal deficit.

However, the phase-down plan has since been suspended and it is unclear when it will resume.