Malaysia’s Economy May Contract More Than Expected

(Bloomberg) — Malaysia’s economy may shrink more than the government’s most pessimistic forecast this year as exports tumble in the global recession, the Malaysian Institute of Economic Research said.

Southeast Asia’s third-largest economy will probably contract 2.2 percent in 2009, the institute said in a report released in Kuala Lumpur today, cutting its forecast from 1.3 percent growth. Exports may fall 24 percent, MIER said.

“The crisis has not hit the bottom,” Mohamed Ariff Kareem, MIER’s executive director, said in a speech. “It is almost certain that Malaysia will slide into a technical recession in the first half. If exports shrink severely, the downturn could be more harmful,” MIER said.

The government, which expects the economy to shrink as much as 1 percent or grow that amount at best this year, has unveiled two stimulus plans worth a combined 67 billion ringgit ($19 billion) to shield the nation from the worldwide slump. The benefits from those measures may only be felt at the end of this year and more may be needed, the institute said today.

“If the economy turns gloomier in coming months, another stimulus may be called for,” MIER said in the report. The “moderate” impact from the second stimulus will only partially cushion the economy, it said.

‘Worst Case’

In the worst-case scenario, Malaysia’s economy may shrink 3.8 percent this year if the stimulus packages fail, MIER said in its report. The partially government-funded research institute also cut its forecast for Malaysia’s growth next year to 3.3 percent from 3.8 percent.

There may be no global recovery until the U.S. dollar weakens, MIER said. The strength of the U.S. currency, which MIER says is overvalued, caps demand for U.S. exports, makes foreign goods cheaper, and risks fueling a rise in protectionism, Ariff said.

“The kingpin of the whole thing at this point of time is the exchange rate,” he said. “I can’t see how the U.S. can bring this crisis to an end without an adjustment.”

Of the G-10 currencies, only the Japanese yen is up against the U.S. dollar in the past 12 months. In Malaysia, the ringgit has lost 12 percent in the same period.

While Malaysia’s banks, which include Bumiputra-Commerce Holdings Bhd. and Malayan Banking Bhd., don’t need state aid, unemployment is a bigger worry for MIER. The jobless rate may reach 4.8 percent in 2009 from 3.7 percent in 2008, Ariff said.

Malaysian employers may cut 200,000 jobs in this slump, more than double the number lost in the Asian financial crisis more than a decade ago, according to Ariff. There’s no sign that domestic retrenchments are abating, he said.

Governments worldwide may also be setting up the next economic crisis by racking up budget deficits with domestic stimulus plans, Ariff said. Wider budget gaps lead to greater debt, the origin of the current crisis, which may in turn curb consumer spending and threaten future economic growth, he said.

“They may be inadvertently sowing the seeds of the next crisis,” he said.