MIER: 2008 will be highly challenging for Malaysia

The US economy is in the midst of major rebalancing with its budget in deficit and a large trade imbalance, reflected in the huge current account balance of payment, he said.

He said the worst case scenario was a recession for the U.S, as believed by some quarters.

Assuming that the U.S economy just slows down less than two percent and it is able to contain its deposit problems and bring all down to manageable proportions, the Malaysian economy could grow 5.4 percent next year, he said.

"We hope this kind of rebalancing probably will take place in 2008 and that's the time where the U.S economy will slow down most," he said.

And in this worst case scenario where the US does go into recession, meaning it registers two consecutive quarters of negative growth, then there will be negative impact on East Asia in general and China in particular, Dr Mohamed Ariff said.

"This is why we are worried that the whole of East Asia maybe paying the price for this," he told Bernama in an interview.

East Asia has not totally decoupled from the U.S, he said.

"It is true that East Asian countries are trading more among themselves. Intra-Asian trade is now roughly about 60 percent in total, but that does not mean that East Asia is safe.

"If you look at the trade composition, about 60 percent of trade is actually in intermediate goods, components and parts. The final destination is actually outside the region," he said.

Dr Mohamed Ariff said if anything were to happen to the U.S there would be some impact on China, Korea, Taiwan, Japan, Malaysia, Thailand and others because of the exposure.

China for instance has US$1.4 trillion of reserves, while Japan has about US$900 billion and in combination East Asia has trillions of reserves in the dollar currency.

He, however, stressed that "these are the worst case situations, but I hope there will be no recession in the US."

The World Bank has reduced the growth forecast for the U.S to 1.9 percent for next year.

He said countries which are very trade dependent, and with small domestic markets will be particularly vulnerable.

Big countries like China and India with huge domestic market and even Japan can survive this and will experience less pain.

But fortunately, in the case of Malaysia, its domestic market is getting bigger and more resilient and despite the slowdown in the U.S economy, the Malaysian economy is still growing at a respectable pace and the government initiatives to develop new economic growth areas will help to revitalise the economy and raise domestic demand.

By 2009, he said Malaysia would be in a better shape "so will the world economy because the rebalancing will take place next year," he explained.

As the U.S and the world economy begin to rebound, the Malaysian economy is expected to rebound to something like 5.7 by 2010, after which it should be growing at a faster pace of more than six percent per annum, he said.

"The near term looks a little bit less rosy but nothing to be alarmed about, it is not that bullish but I think if we compare ourselves with countries like Singapore, Thailand and others, I think our economic growth is somewhat comfortable." he said.

One of the factors is the price of oil. He said: "What will send the U.S. into a recession is not the simply the rebalancing of the imbalances but the high price of oil."

If the price of oil remained high, it will hurt many countries, but Malaysia as an exporter of oil will have mixed blessings. "As an exporter we stand to benefit, and as an importer we stand to lose out, but we are still an exporter.

But then subsidies could rise and on the other hand inflationary impact is something to worry about as the ringgit appreciates, Dr Mohamed Ariff said.

He said if the dollar sinks, the ringgit would appreciate,

If productivity is increased enormously and cost brought down, "then we may be able to offset the exchange rate appreciation effect, so our exports will still remain competitive," he said.

"But the saving grace here is that not only the ringgit is going to appreciate, but all the currencies in the region will be able to appreciate including the Chinese yuan, Thai bhat, Philippines peso, Singapore dollar, Taiwan dollar, and Korean won."