Malaysia Matters Podcast

As an uncertain financial climate weighs on the US economy, appreciation for the significant bearing it has on the well-being of Malaysia’s economy is gaining attention in the press.

Shankaran Nambiar, writing for the Star, points out that, aside from the strain on the economy resulting from home-grown problems, that “shock waves” emanating from the US have a big impact on the Malaysian situation.

He points to data from the US dot-Com collapse in 2001 showing that the Malaysian growth rate slid to 0.5% In the meantime, with the US the largest destination for exports at 16% of the total, and with a substantial portion of the 15% that goes directly to Singapore eventually ending up in the US, a slowdown in US importation due to a shaky economic footing will mean a downturn for Malaysia as well. 

Nambiar points to milestones in making his case.

There was a double whammy June and July. After losing hundreds of thousands of US jobs in the first half of 2008 and with the rate of inflation at its highest in 17 years in June, the July IndyMac failure and Fannie and Freddie bailout underscored the enormity of the 2007 mortgage crisis, the full effects of which likely not yet have been felt.

With some reports that more than a million US citizens have been foreclosed upon.

In late February, Nouriel Roubini, in a written testimony to the House of Representatives’ Financial Services Committee, claimed that the US economy was at risk of a systemic financial meltdown. Roubini, a professor at the Stern School of Business, New York University, presented eight reasons why he thought a financial meltdown could not be avoided.

Structurally, the US economy has not been on solid ground for some time now. Its budget deficit has been rising, and now amounts to about US$357bil. It has a current account deficit of about 5.5% of gross domestic product, which declined from a deficit that stood at about 7%, a few years ago.

By many accounts worst is not over for the US economy. In addition to falling consumer confidence, high inflation, and reduced demand from firms, the US dollar is expected to drop further. The dollar, which has already dropped by 21% against the currencies of its major trading partners, is expected to drop further, reducing the purchasing capacity of Americans.

And with 60% of the economy reliant upon consumer purchase, that spells real trouble.

The result of all of this, according to Nambiar, is the likelihood that Malaysia will impose increasing interest rates in an attempt to stave off inflation in response to developments in the US, and thereby subsequently hamstring domestic investment.