Malaysia, South East Asias third largest economy, is trying to turn its attention towards one of the best performing regions of the world, the Gulf region, an economic study reported on Tuesday.
The report, published by Kuwait-China Investment Company (KCIC), noted that amid weakening external demand from the US and the EU due to their faltering economies, Malaysia recently has announced its intentions to expand exports of its wood products to the Arabian Gulf and the Middle East companies, as announced by the Ministry of Commodities and Plantation Industries.
The report pointed out that the South East Asian country relies on its domestic demand. If the internal market holds firm, it could help cushion the downturn in external demand. This is the base case for the central bank, which explains why it has not eased its policy rate yet.
The robustness in domestic consumption can be mainly attributed to the governments cash giveaways to the poor and the implementation of the minimum wage for the very first time in May. Malaysias policymakers enacted a minimum wage law to help support low income households, in a bid to achieve a rich nation status by 2020 and amid speculation that the government may call elections soon, it said.
If futher noted that the policymakers are hoping that the lowest paid will now be guaranteed enough income to lift them out of poverty and meet the rising costs of living. Thus, if the cash giveaways and minimum wage do feed through into the hands of the consumer and the domestic economy does subsequently remain buoyant, then Malaysia should see consumer goods imports rise.
The shift from being an export-led economy to a domestically driven economy in Malaysia, to help sustain long-term economic growth, is in line with views for Asia as a whole and justifies reasoning as to why Asia will become increasingly attractive in the eyes of investors, the report stated.
Malaysia has witnessed a larger-than-expected contraction in its exports for the month of August, on the back of weakening external demand. The G3 countries (the United States, European Union and Japan) make up almost a third of Malaysias export demand, but with the US struggling to sustain a strong economic recovery and the EU sputtering due to its lingering debt crisis, Malaysias exports, a bulk of which are machinery and thus cyclical products, are faltering.
Although consensus was expecting a slight improvement, exports instead contracted further at 4.5 percent year-on-year. Imports also slowed down in August to 2.8 percent year-on-year but this was mostly due to a fall in intermediate imports and capital goods, almost half of Malaysias imports are machinery, that are either used to produce other goods or completed into finished goods.
Imports of consumer goods remained buoyant, pointing to some resilient domestic demand. If domestic demand does remain high, this could continue to offset dwindling export demand and help the nation achieve its targeted economic growth rate of 4 to 5 percent by year-end and, simultaneously, support company earnings.