Malaysia

According to the Asian Development Outlook Update for 2005, growth in Malaysian economy has slowed from a robust 7.1 per cent seen in 2004 and is now expected to be 5.1 per cent for 2005. This downward revision from the 5.7 per cent stems from extended weakness in the global semiconductor industry, softer external trade, and slack construction activity. Higher oil prices, too, may be negatively affecting the non-oil sector of the economy.

In the first half, the economy expanded by 4.9 per cent year on year. Growth in private consumption in that period was robust at 8.7 per cent, slightly lower than the year-earlier rate, while investment grew by 4.5 per cent, 1 percentage point faster than in the same period of the previous year. But public consumption contracted as the Government reined in expenditure. The overall economic growth is expected to pick up a bit in the second half as a result of the investment rebound and a forecast increase in exports, putting full-year growth at 5.1 per cent.

The services sector led the expansion on the supply side, growing by 5.8 per cent in the first half, year on year. Agriculture and manufacturing both rose by about 4.5 per cent, while mining output barely changed and construction, which bore the brunt of cuts in public spending, continued to contract.

Consumer price inflation rose to a 6-year high of 3.2 per cent in June, from an average of 1.4 per cent in 2004, as the Government reduced fuel subsidies and raised some non-fuel charges. For all of 2005, inflation is forecast at 3.3 per cent, revised up by nearly 1 percentage point from earlier 2005 estimate of 2.4 per cent, but is expected to ease thereafter. Factors helping constrain inflation included the moderating growth, intense competition in the retail sector, and excess capacity.

So far, slowing economic growth has not added to unemployment. The total jobless rate stayed near 3.5 per cent in the first quarter, but graduate unemployment remains a problem. Some industries faced serious labour shortages when an estimated 450,000 undocumented foreign workers left the country under an amnesty in early 2005. Malaysia has tapped new labour sources, especially Pakistan, to fill the gap.

Export growth slowed to 12 per cent over the first 6 months of 2005 from 20 per cent in the year-earlier period as a result of the slowdown in global demand, especially for electronic goods. Import growth decelerated even more abruptly over the same period, to 9 per cent from 28 per cent in the previous year. The main drag on imports was weaker growth in imports of intermediate goods, which account for 71 per cent of total imports.

The trade surplus rose by 28.3 per cent to RM47.9 billion at end-June and is expected to climb to RM88.6 billion by the end of the year, compared with the estimate of RM75.0 billion in 2005. The ratio of the current account surplus to the GDP for 2005 is now expected to be 12.7 per cent, up from 10.2 per cent forecast earlier. Both current and capital account surpluses will sustain a large balance-of-payments surplus this year.

The government missed expenditure targets in early 2005, recording a first-quarter fiscal surplus before returning to a deficit, equivalent to 2.3 per cent of GDP, in the second quarter. Faster disbursements for the rest of 2005 are expected to compensate for the shortfall in the first half, and a deficit of 3.8 per cent of the GDP is expected. Malaysia, as a net oil exporter, gains directly from higher global oil prices. The net oil export revenues jumped by RM1.1 billion to RM7.4 billion in the first half of 2005.

In 2006, the Malaysian economic growth is expected to be a touch stronger than in 2005 at 5.3 per cent, lifted by an expected upturn in the electronics cycle and new spending allocations under the Ninth Malaysia Plan (2006–2010). Inflation is forecast to ease to 2.5 per cent in 2006, kept in check by government price controls on selected essential goods and an expected tightening of liquidity.

Trade surpluses are set to remain high, but not as large as in 2005. The trade surplus has soared, mainly the result of a sharp slowdown in imports of intermediate goods. The current account is expected to register a slightly smaller surplus of 11.1 per cent of GDP in 2006, revised up from 8.3 per cent in 2005. This will lead to a build-up in foreign reserves, but at a slower pace.

Philippines

THE Philippines economy slowed to 4.7 per cent in the first half of 2005 from 6.4 per cent in the first half of 2004 and 6.0 per cent in all of that year. All major sectors decelerated. Agricultural output stagnated, showing the effects of a drought early in the year, while expansion in services and industry slowed to 6.5 per cent and 4.4 per cent, respectively. Transport and telecommunications, as well as finance, continued to lead the services sector, with both recording growth of around 10 per cent in the first half.

Growth in private consumption spending, though supported by the inflows of remittances, slowed to 4.9 per cent from 6.0 per cent in the year-earlier period. Government consumption rose by 7.1 per cent, boosted by cash payments for maintenance and other operating expenses. Capital formation, however, was dismal, contracting by 5.5 per cent, with spending on durable equipment shrinking by 7.2 per cent in the half.

Although economic activity slowed, inflation accelerated quickly in the first 7 months of 2005 from a year earlier, to 8.1 per cent, largely the result of increases in food prices due to poor harvests and the rise in fuel prices. The inflation estimate for the full year is revised up to 7.5 per cent, from 6.5 per cent, but this could well be exceeded if recent minimum-wage rise flow through into broader salary increases.

Forecasts for inflation are revised up by one percentage point, to 7.0 per cent in 2006 and 6.5 per cent in 2007. Although mitigated by improved weather after mid-2005, the impact of the weaker agricultural production on food prices will continue into 2006, while the higher than expected oil prices are likely to lead to demands by suppliers for higher power tariffs and transport fares, and by labour groups for wage increases.

Merchandize exports rose by 3.3 per cent to $19.4 billion in the first 6 months of 2005, slowing from 9.5 per cent for the whole of 2004. The global slowdown in demand for electronic products hurt exports from this important sub-sector, which accounts for more than half of total merchandise exports. Electronics exports inched up by only 0.3 per cent in the January–June period, a sharp deceleration from growth of 10.3 per cent recorded in January–December 2004.

Merchandize imports fell by 1.5 per cent to$21.5 billion in the first half, resulting in a 31 per cent narrowing in the trade deficit to $2.1 billion. A sharp rise in the bill for oil imports (14 per cent of the 6-month total) was offset by a fall in electronics imports (41 per cent of the total) as softer international demand for finished information-technology products reduced imports of intermediate components.

The current account surplus for the first quarter of 2005 rose fivefold to $546 million, mainly a result of the higher remittances. Gross international reserves reached $17.7 billion at midyear, from $16.2 billion at end-2004, equivalent to 4 months of imports of goods and services and 3.2 times the level of short-term debt.

The GDP growth of 4.7 per cent is expected for 2005, down from five per cent projected earlier by the Asian Development Bank. The main reasons are that exports have been hit harder than foreseen by the global electronics downturn and that agriculture was set back by bad weather early in the year. Due to the sustained rise in oil prices internationally and to higher food prices on agricultural weakness domestically, inflation rose sharply in the first seven months of 2005. This is now revised up by 1 percentage point the inflation forecasts for 2005 and 2006.

The ADO Update lowers projected GDP growth in2006 to 4.8 per cent from five per cent in ADO 2005. Investment is likely to remain weak through 2006, and the constrained budget position effectively rules out any major fiscal stimulus. Remittances from overseas workers will continue to assist consumption, and the expected upturn in the global electronics cycle will help industrialization. Growth in 2007 is expected to pick up to five per cent, provided that the global economy expands as projected and that weather conditions in the Philippines allow a sustained, modest recovery in agricultural output. The current account is projected to remain in surplus in the next two years, supported by remittances from overseas workers.

The Philippines is one of the more susceptible countries in the region to high global oil prices. It imports 96 per cent of its oil requirements, equivalent to 5.6 per cent of the GDP. The economy uses about 2.4 times as much oil per unit of the GDP as the average OECD country. Forecasts on the Philippines are subject to a greater than usual degree of uncertainty, given the impact that rising global oil prices have on the economy, disruptions to the tax legislation, and political uncertainty.