The Malaysian economic growth has been forecast to moderate from a GDP of 7% as at the close of financial year 2004 to 6% in 2005 though some economists are more optimistic than this in citing a GDP forecast of 6.5%.
This contraction is expected to take place against a backdrop of similar developments in the global and regional economies. The global economic growth will moderate from 4.5% to 4.2%. The Asian economy is expected to moderate from about 7% in 2004 to 6.5% in 2005.
The major regional economies such as China will cool down from a GDP of about 9% to 8% and India should be able to sustain its GDP growth of 8% in 2004 in 2005.
The main economic sectors that would be adversely affected are:
1) The electrical and electronics sectors with some economists predicting a cut back in production by as much as 50%. This sector has been the mainstay of the Malaysian manufacturing sector for more than two decades.
This anticipated slump may trigger further rationalisation of the industry in Malaysia. We must be ready for further closure and relocation to low-cost countries such as China or even Vietnam. Our banking industry would have significant exposure to this sector. Such developments as the above would result in permanent loss of business opportunities from established clients
2) China will continue to expand its market share in the furniture sector and for other wood products in the global market. It is believed that it has already captured no less than a 40% share of the global market, leaving only the high-end part of the market to traditional suppliers in Europe and North America.
Most of the established chain retailers in North America and Europe have been increasing their sourcing of furniture from China. China had also made tremendous progress in the design concept of furniture thereby reinforcing the country as the ultimate supplier of this product to the rest of the world.
3) The US will not be issuing any more GSP statuses (Generalised System of Preference) for textile and apparel as from this year onwards. This would mean that no country would be given favoured status in terms of export quota and this move marks the leveling of the playing field especially for the supply of low-end textile products to the US.
There would therefore be traumatic adjustments to the industry with the bulk of the business going again to China. Malaysia will not be spared from this. There have already been quite a number of major Malaysian players that have been in difficulties since the last recession. This development will be the final blow with the surviving ones following the tide by relocating to China.
In fact, quite a number of major names have already shifted a major part of their operations to China leaving only the so-called high value adding operations in Malaysia. This includes fixing the collar and other finishing touches to the apparel and putting the 'Made in Malaysia" label as some markets still perceive that apparel made in Malaysia is of better quality than those mass produced in China.
This development will again mean a permanent loss of established business to the banking industry in Malaysia whilst those clients which are already having difficulties and whose banking facilities have been classified as non-performing would be crystallizing into realised losses.
4) The agricultural sector has been expected to be affected by the El-Nino phenomena which is expected to give rise to climatic swings out of normal rhythm and therefore adversely affect yield from palm oil plantations.
The final commodity price would, of course, be dependent on how these climatic phenomena would affect other countries producing competing oil and fat products. This again is a major sector for the Malaysian banking industry in terms of both direct funding and trade finance business, the country's dominant foreign exchange earner.
Prospective growth sectors in 2005 are those where Malaysian corporations and businesses have a distinct competitive advantage or are in the process of developing them. Malaysian corporations do have their own strength especially in infrastructure, power generation, telecommunications, water supply and road and building construction among others.
In view of the limited prospects for them to continue doing their businesses in Malaysia, they have been encouraged by the government to expand their operations oversees such as to the Middle East, Africa, India and China apart from Asean countries.
As most Malaysian banks have limited sovereign risk in these countries, this would mean a loss of business to the banking industry, particularly those that are not represented in those countries.
Sectors that are promoted by the government such as high-end Information and Communication Technology and bio-technology are still in their infancy stage of development in this country. They are wrought with start-up risks that would be more appropriately financed by equity capital, venture capital and government grants.
Malaysians banks have a lot more to learn in order to equip themselves with the requisite knowledge and skills to enable them to assess and manage financial risks emanating from these new sectors. The most they can do is perhaps to provide foreign exchange and trade finance facilities to finance the importation of capital goods and technology apart from providing a small part of their working capital needs.
With the developments listed above, the banking industry would have to contend with small and medium industries (SMIs) and small and medium enterprises (SMEs) as their primary target for business customers.
Here again we need to be very selective as many of the feeder SMIs/SMEs - such as parts suppliers - will also be going through difficult times as their immediate customers relocate to other countries. In fact, many of them have decided to follow their customers overseas.
We need therefore to concentrate on those doing business locally or those that have established niche businesses in the local and global markets. This is actually is where the tough competition amongst local banks in Malaysia lie.
There seems to be continued uncertainty in the supply of materials and energy such as petroleum, steel, aluminum, timber and other building materials. This has resulted in escalation and violent fluctuation in the prices of these commodities. This has translated into higher risks in the form of cost overruns and delays in the implementation of projects. This means higher risk to banks and their customers.
The interest rate direction globally appears to be on the upward trend with better economic prospects in the US. This not withstanding its all-time high twin deficits in the balance of payments and the national budget.
The US is clearly set to increase its interest rate again at least by 0.25 bp during the next review, with those of the EU and UK likely to remain stable in the short run. The Malaysian interest rate is most likely to remain stable for at least the next six months.
And not withstanding the declaration by Bank Negara that the Malaysian economy has decoupled itself from the US economy, the increasing gap between the interest rates of the two currencies needs to be addressed by at least sometime in the third quarter of the year in the event the US interest rate is to increased by another 1.5% (almost a certainty) by then.
This is to prevent flight of foreign direct investments (FDIs) from Malaysia. The policy option chosen by the Central Bank (which could include a revaluation of the ringgit) would have far-reaching implications for Malaysia financial institutions. This needs to be monitored and examined closely.
With this scenario, Malaysian banks will have to continue to focus on the retail sector centred around products such as wealth management packages for the affluent, credit cards, bank assurance, mortgages and car financing for the mass market.
Local businesses catering for the domestic market will continue to be the main attraction for local bankers. This then will be the main battlefield for most Malaysian commercial banks in the year 2005.
The consolidation of the banking industry as envisaged by the Financial Services Sector Master Plan failed to register any development last year. The new prime minister has been reminding the industry that they need to consolidate to build scale and scope in order to be competitive. They were also reminded to go regional.
It would appear that as in the past, if local banks fail to do so on their own accord as originally envisaged, the effort it is likely to be brokered by the Central Bank or be shareholder driven. In the latter case, it would have to start with those nearest to home i.e. government-owned or those owned by government-linked institutions.
The government's budget for 2005 focused very strongly on balancing the six-year running deficit, the need to focus more on the less developed sectors of the economy and the maintenance of national infrastructures.
The years of high public sector spending on infrastructure is certainly over. Incentives for the development of the intellectual properties in the area of ICT, bio-technology and high-value adding manufacturing, including in-sourcing of high-value adding processes and out-sourcing of low-value adding processes, will now be given priority.
Established Malaysian corporations and businesses have been encouraged to expand overseas. This profound shift in the government's macroeconomic policy would result in major structural changes in the economy.
This repositioning is likely to happen in an environment when the global economy is likely to moderate whilst the process of globalisation will continue to gather momentum with the leveling of the playing fields by our local regulatory authorities and the US .
It is our hope that 2005, which is the last year covered by the 8th Malaysia Plan, will end with on a happy note bringing with it many pleasant surprises.
Meanwhile, government ministries are now busy preparing their proposals for the 9th Malaysia Plan which is due to be reviewed by the cabinet in June and tabled in the Parliament before year ends.
It is hoped that there would be no surprises other then an agenda to strengthen the financial services industry in Malaysia and the taking of further steps to ensure the industry's relevance and the enhancing of its scope and stature domestically and regionally.