How and in what areas is the country affected by the crisis?
Mohamed Ariff (MA): This crisis has now affected almost every sector of the economy. The manufacturing sector in particular is the hardest hit, largely because of the downturn in the US and Europe with exports falling since October.
The difference between now and the Asian financial crisis of 1997 to 1998 is that the manufacturing sector was almost intact then thanks to growth in the US and Europe but this is no longer true. Even the services sector has been hit with fewer tourists coming in. Retrenchments are taking place in almost every sector now.
What’s your latest forecast for 2009?
MA: For this year, the latest forecast by MIER is 1.3% GDP growth but that is based on assumptions that no longer hold.
Things are very fluid, chances are we’ll be revising the figures downwards. I cannot rule out the possibility of a full-blown recession this year – it’s more than a theoretical possibility.
The problems are very serious because it’s deepening by the day.
The best case scenario is a GDP growth of 0.5% if we use 2001, when the dotcom bubble burst and the electronics and electrical industries were in a downcycle, as a benchmark.
Then, Malaysia registered a growth of 0.5%.
What do you expect as the worst-case scenario?
MA: I don’t think it will be as bad in terms of GDP contraction this time around compared to 1997-1998. That year we saw a GDP contraction of 7.5%.
My fear is that we’re likely to stay at the bottom for a longer period of time.
Ten years ago it was a quick recovery, sharp contraction, sharp recovery but this time around we may be stuck in the mud for two to three years.
How much of this is a confidence game?
Lin See Yan (LSY): I’ve been watching the crisis unfold for a year now and every time I look at it, a few things come up. One is the continuing uncertainty.
The general feeling is that nobody knows what is going to happen in the next three years.
What makes it worse is that the recession that started in the US has now gone global and that’s what’s driving the uncertainty.
Every time we pick up the papers, we read that things are getting worst. In fact, Japan was getting better three weeks ago but is now getting worse.
The full impact is unclear and one of the things we don’t know is how much protectionism and how much beggar-thy-neighbour policies will come through.
Some of it is already there. The Obama administration is giving out mixed signals.
On the one hand, the administration tells US companies to use American steel but on the other hand, they say they’ll honour all their trade agreements.
If there’s a large contraction this year, do you expect a bounce back next year, at least?
LSY: We’re so used to it (the expectation of a rebound next year), our minds are trained to it. This is my eighth recession and it looks as though it’s going to be the longest. The longest I’ve witnessed is 13 months, the current one is almost 13 months and will go longer.
For most, we had bounced back fairly fast – even in the crisis 10 years ago. But this one is unusual, I’ve never seen anything like it in my life.
The thing that worries me is that it’s unhelpful to talk about growth next year for a number of reasons.
Whatever is said now will not make much of a difference because people are already feeling it and it’s affecting their expectations.
People told me that PA Samuelson (a notable academic economist), who said a year ago that the US economy would recover by the end of this year, is now saying that the economy will be lucky to recover by the end of 2010 and that again depends on what is defined as recovery.
He also said that the economy will not get back to normalcy until 2012 or 2014. Maybe he’s pessimistic but what I’m trying to get through is that it’s not useful now to place scenarios and if it’s to be done, then plan for the worst scenario.
You’re saying that the uncertainty is too great?
LSY: Yes, so plan for the worst-case scenario, anything less than that is fooling ourselves. In a situation like this, the risks are higher for doing less than doing more. So do more please.
What will be your worst-case scenario?
LSY: My worst-case scenario is a recession by the end of the year. Companies are already cutting their forecasts, the second-half of last year was still good but the first-quarter of 2009 will see quite a slowdown.
People are becoming more cautious, they’re holding back on investments and spending. There’s a loss of confidence among investors and consumers. Investments are either being deferred or if the slump prolongs, then it’ll be scaled down. Pessimism breeds pessimism.
Beng Ling, what’s your take on a recent report quoting a German minister who said he expects a recovery towards the last quarter of 2009? Is that optimistic?
Beng Ling (BL): I believe this downturn is going to be draggy because we can’t export our way out of it like we did 10 years ago.
I worry that this global recession will spur the developed nations to turn inwards and there may be more protectionist tendencies coming up in the next five years as they grapple with their domestic economic problems.
We also have to be prepared for a potential structural change in global trade and not expect the kind of trade we had in the past.
What about stimulating certain sectors such as construction or even putting more money into consumers’ pockets?
BL: A stimulus package can only cushion the impact of a severe recession. It’s a perception thing – when there’s news of job losses, people will lose confidence and won’t spend.
MA: This crisis has been in the making for almost a decade and this is simply a result of a serious fault line in the global economy and growing imbalances.
This cannot be corrected in such a short time. Governments around the world are running out of options in fighting this crisis. Monetary policy is almost exhausted and a number of countries are already facing a “liquidity-trap” situation.
A number of countries are also facing fiscal fatigue. Policies on exchange rates are also not helping because they’re erratic.
Strong currencies will not help countries that are in recession to get out of it.
What is the adjustment process that needs to be made to the international economic situation?
MA: We need coordinated efforts such as coordinated monetary, fiscal and exchange rate policies. However, there is the sticky question of sovereignty. Governments are becoming more nationalistic and that’s not going to help at all.
We’ve to cut across national boundaries. That’s easier said than done, of course.
BL: Yes, it’s easier said than done. The government in China, which is facing 20 to 30 million unemployed, will take care of its own first.
What are our positive factors in terms of facing the crisis?
LSY: The biggest thing going for Malaysia is palm oil. Besides being a food item, there are many things that we can do with it. It may be our saviour.
MA: There are many positive factors going for us. Compared to 10 years ago, Malaysia’s fundamentals are better. We have a current account surplus, before we were running deficits. The reserves are in much better position with more than 7 1/2 months equivalent of reserves for imports and we have a well-capitalised banking sector with low non-performing loans. Our external debt is small compared to what it was 10 years ago.
BL: In general, the corporate balance sheet is also better.
LSY: But don’t forget that in a bad situation, balance sheets can also deteriorate very fast.
That’s why the Government needs to do certain things to maintain that strength and part of it is to make people a bit more confident about the future.
But I think it’ll be a mistake to look at this problem and stimulate only certain sectors. It is a macroeconomic problem and one of lack of aggregate demand. The government has to look at it from that angle and of managing expectations.
The full and original interview transcript may be found here.