PUTRAJAYA: Real wages in Malaysia have dropped dramatically over the last 10 years since the Asian financial crisis.

According to the Reshaping Economic Geography Report in East Asia, an East Asian and Pacific region companion volume to the World Development Report 2009, the growth in real wages, which refers to wages that have been adjusted for inflation, had reduced significantly to 1.9% post-crisis from 5.6% per annum for export-oriented industries.

Meanwhile, for domestic-orientated industries such as food, beverages as well as tobacco, growth in real wages had fallen to 1.4% post-crisis from 6.8% per annum.

According to report author Dr Yukon Huang, the fall in real wages was in tandem with the drop in gross domestic product (GDP) over the last 10 years.

Huang added that in terms of labour migration to Malaysia, although the number of migrant workers had increased over the same period, there was a fall in the number of highly-skilled expatriates.

Incidentally, over the last 20 years, Malaysia’s services sector contribution to the GDP had remained steady at 46.4% in 2007 from 46.2% in 1987.

“These indicators may reveal that Malaysia has not moved up the economic value chain successfully over the last 10 years and steps should be taken to address these issues,” Huang said at the launch of the World Development Report 2009 yesterday.

According to the Economic Planning Unit director general Tan Sri Sulaiman Mahbob, the latest report from the World Bank looks at the global economic development from fresh perspectives.

“Instead of emphasising on the role of government in initiating and dictating the shape and momentum of economic development, the report highlights the critical importance of natural, human and geographical forces at work such as density as well as distance that encourage the emergence of economic growth centres or hubs across the globe.”

He added that governments should not resist the emergence of these economic hubs but instead should encourage their development. “We share the World Bank’s view that we should approach economic development on a holistic level rather than on a central level.

“We believe that policies or approaches that work for one country or even a region, may not work for all regions within a particular country,” he said.

He said the Government had recognised the geographical differences when launching Malaysia’s five economic corridors, namely, Iskandar Malaysia, the Northern Corridor Economic Region, East Coast Economic Region, Sabah Development Corridor and Sarawak Corridor of Renewable Energy.

“The Government also recognise that each region possesses different economic resources and have adopted different sets of economic strategies designed to exploit the resources and maximise on the economic potential of each region,” he said.

For instance, Iskandar Malaysia would focus on the services, property and tourism industries, he pointed out.

He added that to date, Iskandar Malaysia had attracted investments totalling RM40.25bil.

The Star- Laalitha Hunt

KUALA LUMPUR: Political risk is no longer an overriding factor for the Malaysian market and the country could see a recovery by the fourth quarter of the year, says Citi Investment Research.

Its director and Malaysia head of country research, Choong Wai Kee, said that political risk was an issue after the March 2008 elections but it was no longer now as the political risk premium was lower. Risk premium refers to the extra return that an asset has to provide investors for the unique risk that it carries.

“One of the reasons for this (the risk premium coming down) is that while it was shocking that certain states had changed government (in March), in practice, the process has been quite smooth.

“This has led to Malaysia being one of the top performing markets as othersin the region have tumbled,” he told a press briefing yesterday.

As for the leadership change in March when Deputy Prime Minister Datuk Seri Najib Razak will take over as Prime Minister from Datuk Seri Abdullah Ahmad Badawi, he said: “I think the market had factored in leadership change already.”

Choong Wai Kee

On the economic outlook, he said Citigroup had reduced its gross domestic product (GDP) forecast to 0.5% for this year from 3.1% previously on rising macro-economic risks. The forecast was the lowest compared with a Bloomberg survey of an average 1.5% growth while the Government projected a 3.5% growth.

Choong said the weaker outlook was due to Malaysia’s declining exports and weakening economic data in export markets of Europe and the US. Exports fell for a second consecutive month in November, contracting 4.9% from a year ago.

He said the Government’s more optimistic GDP outlook could be due to proposed RM7bil fiscal pump-priming “which is the most relevant measure to take at this time” while another package was in the works.

Citigroup also maintained its expectation of a 50- to 75-basis-point cut in the overnight policy rate by Bank Negara in the first quarter from 3.25% now.

On its investment strategy, Choong said investors should stock pick and focus on companies which had been badly sold down, including AMMB Holdings Bhd, IGB Corp Bhd, KLCC Property Holdings Bhd and Tanjong plc. Citigroup liked the large capitalisation stocks with good liquidity.

On a quarterly basis, the bank is forecasting a 0.9% fall in GDP growth for Malaysia in the first quarter, then remaining flat in the second and third quarters at 0% growth and to recover in the fourth quarter.

“Hopefully the market will bottom out in the first quarter, giving you plenty of time to pick your stocks in the second and third quarters,” Choong said.

On the banking sector, Citigroup vice-president of financial institutions research Malaysia, Julian Chua, said asset quality would be the main concern for 2009.

“Banks would be unlikely to be looking at growth,” he said. While non-performing loans (NPLs) had been low so far, they were likely to rise “as economic activity declines”.

NPL risks lay in the consumer and manufacturing sector, he said.

“Consumers would be affected by retrenchment activity and manufacturing sector is already seeing strain in export slowdown,” Chua said.

Mitigating factors for Malaysian banks were that they had already beefed up risk management processes, generally lending had not been overly aggressive, the banking system was relatively liquid with low loan-deposit ratio and the banks were generally well capitalised.

As for mergers and acquisitions (M&A) of regional expansion ambitions, Chua saw this as unlikely.

“It is still too early to look at M&A. Because earnings visibility is low going forward, banks would rather conserve capital than make acquisitions,” he said.

Investment banking income this year was also expected to be low until the possible fourth quarter market recovery.

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The Star

AFTER the annus horribilis that was 2008, financial markets seem determined to start the year on a brighter footing.

In Asia, bourses have strung together a week of mostly rises, while in Europe, the expectation is for a significant easing of short-term money market liquidity and interest rates.

No one would seriously be thinking that the end to our economic troubles is anywhere in sight. The news streaming out of financial capitals is still unmitigatingly bleak.

The latest titbit to catch my attention was that the crash of New York’s unemployment claims computer system due to the overwhelming demands placed on it. My heart really went out to the poor snow-bound claimants.

Another was the suicide of the world’s 94th richest man, German billionaire, Adolf Merckle, who, among other things, took the wrong side of a very big stock trade. The rich obviously have different ideas about economic hardship from the rest of us.

Still, the idea that one should start the year with optimism and look for bright spots on an otherwise black canvas is a good one. One might equally ask what the bright spots on the Malaysian canvas are. Are there positives in the midst of the looming economic crisis?

There are most certainly positives although they could equally be considered hopes or windows of opportunity. I can think of three.

First, economic crises are a great opportunity for us to put aside our differences and work towards the common good.

Coming at a time when Malaysia is as ethnically and religiously polarised as ever, this can be a significant positive. After all, when a group of people has fallen into a deep hole, it is idiotic to quibble over race and religion or anything else when trying to find a way to climb out.

There is, of course, always the danger of gutter politics. This is politics that plays on our most elemental fears and exploits the most self-serving of interests.

It is a great pity that the political system, instead of penalising racists and religionists of every stripe and colour, actually seems to reward them. But that is another story.

It is my hope that the economic crisis does not slam us to the pavement. If it does, however, the logical choices are either to fight it together or, if possible, to flee separately. I, for one, am opting for the former.

Another bright spot of economic crises is that they force us to become more realistic and pragmatic.

Over time, human societies tend to become muddle-headed and complacent. We start to take economic growth and prosperity as a given. Worse, we start to develop fanciful ideas about we can achieve and what we are capable of.

This is when all kinds of grandiose and unproductive schemes leap from the drawing board. In the name of national pride, some countries today (which shall remain unnamed) have constructed some of the world’s tallest and most technologically sophisticated ghost towns.

The countries today that have broken through the so-called “middle-income trap” have kept their noses to the collective grindstone. They have largely declined ostentatious displays of wealth, at least relative to their growing piles of cash.

More than anything, they work feverishly to gather economic intelligence and position themselves to exploit and benefit from it. They do not, as seems to be a habit here, work until dinner devising another expensive plan or policy that will largely remain unimplemented and, in many cases, even unknown.

Economic crises should compel us to vigorously dispense with bureaucratic red-tape, appreciate those who are knowledgeable and capable and hold those who do not perform accountable.

The third and final positive is that the financial crisis on the doorstep promises to correct the yawning gap in relative incomes.

One of the reasons why this economic crisis is being acutely felt is that the economic growth of the past decade has been accompanied by increasing income disparities. The difference between blue collar and white collar pay is at a historic high.

In Malaysia, the bottom 40% of households earns much less than 20% of total income in a year. By contrast, the top 20% of households earns a little more than half.

It is perverse to welcome an economic crisis because it makes the rich poorer because it also hurts the poor.

Democratically-responsive countries, however, would use the opportunity to address equity issues and ensure that economic growth and prosperity are not only for the elite.

The richest and most dynamic countries in the world are not necessarily those with the lowest tax rates or the smallest governments. They are the most socially cohesive and best governed. If the economic crisis can shepherd Malaysia in this direction, it may not be as bad as it turns out.

Steven Wong is assistant director general of the Institute of Strategic and International Studies (ISIS) Malaysia responsible for the bureau of economic policy studies.

PETALING JAYA: Meg Tan, who has always dreamt of studying overseas, has had her dreams dashed by the current economic downturn.

After completing her Cambridge A-levels in a local private university college, she was looking forward to pursuing an accounting and finance degree in Britain.

Her parents, however, have decided for her to continue her studies locally instead – via a twinning or an external degree programme – to save costs.

“It is the prudent thing to do. We do not know how long the economic downturn will last and whether our jobs will be affected. We can always send her overseas for her last year if finances permit.

“The degree programmes in the private colleges here are pretty flexible in this aspect and our financial burden will be eased substantially as we save more than half of what we need to spend if we send her to Britain,” says Meg’s father Paul Tan.

With more families tightening their purse strings and letting their children study locally rather than abroad to save costs, the outlook for the private higher education industry is expected to remain positive this year, say industry players.

The Malaysian Association of Private Colleges and Universities (Macpu) executive secretary Ko Kim Hooi says the current economic downturn can be an incentive for students to look at twinning and external programmes as cheaper alternatives.

“The education industry is seen as a recession-proof industry as education is a necessity, so the outlook is still good for us.

“During the 1997/98 financial crisis, the local private higher education industry came up with various twinning programmes to help students save costs and this move boosted business as well,” he tells StarBiz.

Ko says more students studying locally will also help the country save on foreign exchange.

According to Monash University Sunway Campus pro vice-chancellor and president (Malaysia) Prof Robin Pollard, the university is showing above-normal application rates.

An artist's impression of Taylor's University College Lakeside campus

“So it appears as though some people prefer to study at home rather than face an uncertain future with higher cost commitments by going overseas,” he says.

Some may also decide to further their education rather than enter an uncertain job market, thus leading to a rise in enrolment even in a declining economy, adds Pollard.

“Of course, the hope is that when the economy improves, the additional learning will lead to benefits,” he says.

Moreover, most parents would have set aside education funds for their children since birth as education is an investment for the future.

“Most in the affluent market who can afford to send their children overseas, would have pre-planned and allocated money for their children’s education,” says Taylor’s University College vice-chancellor Professor Hassan Said.

He adds that Taylor’s has a strong line-up of new programmes in the pipeline for students, in addition to its own degrees such as engineering and architecture.

Taylor’s, which is one of the largest pre-university centres in Malaysia, providing British, Australian and Canadian education. has about 10,500 students this year, of which 18% to 20% are foreigners.

Vinayaka Missions University pro-chancellor Dr S. Sharavanan believes it is unlikely the economic slowdown will affect the higher education scenario, especially for bigger institutions offering professional programmes.

“As an investor, we see long-term prospects in the education sector in Malaysia beyond the current and anticipated economic slowdown,” he says.

An additional advantage of the economic slowdown can be an influx of foreign students into the country as Malaysia is seen as a relatively cheaper education hub compared with Britain, Australia and Singapore.

Currently, Malaysia has some 63,000 foreign students.

Very few education providers are listed on the local stock exchange. They are HELP International Corp Bhd, SEG International Bhd (SEGi) and Stamford College Bhd.

HELP International scored top marks for the financial year ended Oct 31, 2008 (FY08) with net profit jumping 22% to RM11.8mil compared with FY07.

SEGi’s financials also showed a marked improvement as net profit doubled to RM6.98mil for the nine months ended Sept 30 versus the previous corresponding period. Earnings were boosted by a gain from the disposal of a property in Kota Damansara, Selangor.

The Star-Elaine Ang

THE proposed RM7bil stimulus package, to be rolled out by the first quarter, should emphasise on speedy implementation of the projects, which include housing and facilities for schools and armed forces, economists say.

Of the total amount, RM4.7bil would be for small construction and development projects which include a RM1.2bil allocation for building low-cost houses and the rest for infrastructure, schools, police stations and army quarters.

The remaining RM2.3bil meant for human capital development will involve investment in strategic businesses, which have high value-add and impact.

In November last year, Deputy Prime Minister Datuk Seri Najib Tun Razak announced the RM7bil spending package to cushion the Malaysian economy from a deepening global credit crisis.

Under the plan, there was no new allocation of funds involved but the money would be rechannelled from savings from a reduction in subsidy following a decline in oil prices.

The Government had estimated the subsidies for 2009 would drop by RM10bil to RM11bil, of which RM7bil would come from fuel subsidies, based on crude oil forecast of US$70 per barrel.

Of the proposed RM7bil stimulus package announced recently, RM4.7bil will be for small construction and development projects which include low-cost houses

As a follow-up to the stimulus package, Second Finance Minister Tan Sri Nor Mohamed Yakcop announced on Wednesday the Government has another stimulus package in store.

What is crucial, economists say, is that the projects should be implemented quickly and the funds for the construction projects be disbursed fast, so that the expected multiplier effect on the broader economy can kick in without any delay.

Economists say it is essential that each ringgit invested in a project translates into demand for building materials, payments to the workers, hence promoting consumer spending.

It is imperative, they say, to ensure that there are no leakages from the funds to ensure effective implementation of the projects.

There is, however, a concern that the RM1.2bil allocated for low-cost housing may not have a significant effect, given the weakening private housing sector.

Another concern is that efforts to woo investors in the current uncertain climate may draw a muted response as the weakening global economy and slower growth in Malaysia could make potential investors more cautious.

TA Research expects the Government’s RM7bil stimulus package to work strategically with the Budget 2009 to cushion the economy from a deepening global financial crisis.

The introduction of measures such as voluntary reduction in employee’s EPF contribution to 8% from 11%; a reduction in personal income tax rate from 28% to 27% for top tax bracket and from 13% to 12% for those with tax bracket at RM35,000-50,000 are expected to free up more disposable income into consumers’ pockets to support consumer spending.

In addition, to encourage private investment, the research house points out that the Government has waived the requirement to seek Foreign Investment Committee (FIC) approval for real estate investment of above RM500,000 and removed import duties on cement, long iron and steel products.

As for the second stimulus package, analysts are not expecting a huge-scale plan as they say the Government is constrained by the Federal Government Budget deficit.

“The deficit in the Budget would be more of a concern which is expected to be 4.8% this year,” an economist says, adding that the second package is aimed at boosting the construction sector, promoting consumer spending and encouraging private sector investments in the manufacturing and services sectors.

As it stands, the Government expects revenue to fall to RM168.7bil (from RM176.2bil previously) on the back of a drop in oil revenue and tax collection this year.

According to TA Research, this indicates that the upcoming stimulus package, if any, “may be capped at RM10bil to keep the budget deficit at its comfort zone.

“This could have a modest impact on the economy. However, instead of stretching its budget, unless necessary, we expect the Government to align its resources toward rolling out those proposed high-impact 9MP projects,” it said.

The Star-Joseph Chin

Illegal foreign workers

ACCORDING to a study by Dr Jeyapalan Kasipillai, who is chair of the Malaysian Business Unit at Monash University Sunway Campus’ School of Business, construction is likely to be the sector in Malaysia that generates the highest hidden income.

Others on the list are the professionals, cuts and kickbacks from contracts, multinational companies, and smuggling and under-invoicing.

The building industry’s No.1 position may be partly due to its heavy reliance on foreign labour. The legal process of recruiting foreigners can be time-consuming and costly. As such, hiring illegal foreign workers is yet another unlawful cost advantage.

Other sectors with large numbers of foreign workers include plantations, manufacturing and services.

News reports say there are 2.1 million registered foreign workers in Malaysia and they make up 20% of the Malaysian workforce. It is anybody’s guess how many more foreigners are employed here without going through the official channel.

An indication of the extent of the problem is the fact that whenever there is an exodus of illegal foreign workers, either due to intense crackdowns or amnesties – certain businesses suffer.

This extends beyond the employers. For example, food companies and gaming operators have been known to blame the decline in the foreign worker population for slower sales.

Malaysia has thrice offered amnesty to illegal foreign workers in recent years. Some 140,000 foreigners went home in 1998, 290,000 in 2002 and 1.2 million in 2004.

Unlicensed moneylending

EVERYBODY knows about the Ah Longs, the loan sharks who charge excessive interest rates and who are not shy to use strong-arm tactics to get back their money.

Following a spate of cases of family tragedies and acts of intimidation linked to Ah Longs, illegal moneylending has been highlighted in the media last year and there were plenty of discussions about their role, the factors that encourage the business, and the ways to reduce their activities.

In 2007, the MCA Public Service and Complaints Department handled 520 cases of entanglements with unlicensed moneylenders. The figure would have climbed closer to 600 last year.

It has been argued that borrowers are forced to turn to loan sharks because the banking system cannot or will not help them. However, most people agree that unlicensed moneylending is a problem because of the lopsided repayment terms and the sometimes shocking loan recovery methods.

The lean economic times may dampen the moneylending business. Just like the bankers, the loan sharks will rather not lend if the risk of default goes up.

Prostitution

DESPERATION may see a rise in sex services industry. As it is, it is common to hear complaints about an increasing number of foreign women who come here to offer sexual favours, massage centres and karaoke lounges that offer extra services, and lively Internet discussions on the prostitution scene.

The perception is that if the economy worsens, livelihoods will be threatened and people may turn to offering sex for money.

Prostitution in Malaysia is not confined to seedy joints and back alleys. For one thing, mobile phones have made it easy for freelancers to operate without pimps and being tied to a place of business. The mushrooming of massage outlets has created another avenue.

The Internet has become a rich source of information, and knowingly or otherwise, the sex workers have expanded their reach because customers exchange details of the workers in online forums.

WASHINGTON (Reuters) - The U.S. recession will probably be the longest since World War Two and could worsen without heavy government spending, according to a closely-watched survey of economists released on Saturday.

The Blue Chip Economic Indicators poll of 52 economists from top financial firms, major companies and academia found that most expected a tepid recovery to begin later this year, with growth returning to more normal levels in 2010.

A majority of those polled thought the recession would officially end in the third quarter of 2009, which would make this the longest downturn since World War Two.

However, more than half of respondents thought unemployment would peak no earlier than 2010, suggesting that economic pain may linger long after the recession is technically over.

For 2009, the consensus view was that real gross domestic product would fall 1.6 percent, gloomier than the previous month's forecast for a 1.1 percent decline. A drop of that magnitude would be the worst yearly performance since 1982.

Merrill Lynch held the most pessimistic view, predicting a 2.8 percent decline, while Fedex Corp was the most optimistic of the bunch, forecasting just a 0.2 percent dip.

"Much likely will depend on the relative success or failure of ongoing and prospective stimulus measures applied by government," Blue Chip's monthly newsletter said, adding that absent a stimulus package, "prospects would be much darker."

The consensus opinion was that the stimulus plan would total $778 billion, with estimates ranging from $635 billion to $900 billion. President-elect Barack Obama has encountered some resistance in Congress, but a large spending package is widely expected to be approved next month.

The economists seemed to conclude that government efforts to push down mortgage rates may stall. On average, they expected rates on 30-year conventional mortgages at 5.1 percent at the end of 2009, roughly where they are now.

They forecast that the consumer price index would fall 0.4 percent this year, which would mark the first year-over-year decrease since 1955 and no doubt deepen investors' worries about deflation.

The panelists were split on the outlook for the U.S. dollar, which some economists have warned may be headed for a steep slide this year as the U.S. deficit soars and the Treasury Department issues a record amount of debt.

Nearly 48 percent thought the trade-weighted value of the dollar would end 2009 higher than its current level.

GIVEN its nature, it is no surprise that the black economy has many aliases. Because so much about it is unknown and because there are no universally accepted views on how it should be defined and measured, different people know it by different names.

Substitute black with any word in a long list – hidden, underground, subterranean, irregular, unofficial, submerged, parallel, informal, second, cash, traditional, shadow – and we are talking about largely the same thing.

Says Dr Jeyapalan Kasipillai of the Monash University Sunway Campus’ School of Business: “Essentially, the designation refers to those economic activities that should be reported or measured by the techniques and conventions currently used for measuring economic activity, but are not.”

He adds that these activities are concealed from the authorities because by doing so, those taking part make private gains. These gains may take the form of evaded taxes, non-compliance with costly regulations, income from prohibited and criminal activities, or fraudulent receipt of various government benefits.

However, some definitions exclude the criminal economy, which deals in illegal goods and services.

Arguably, the most widely used term is informal economy, which is interchangeable with the informal sector. However, the popularity of the latter has slipped of late, mainly because it suggests that the informality is confined to a specific sector of economic activity, rather than cutting across many sectors.

Also, “informal economy” is considered a better label because it supports the ideas that the formal and informal parts of the economy are linked, and that the informality encompasses enterprise and employment. English anthropologist Keith Hart claims to have coined the term. In a 1971 conference on urban unemployment in Africa, he argued that many unemployed Africans were in fact working for irregular and often low returns.

“The term I chose is negative, but polite; it names the unnameable, labelling the people by an absence, their lack of ‘form’, as understood by the bureaucracy,” he says in a 2006 paper.

In a 1972, an International Labour Organisation mission to Kenya discovered that the African nation’s traditional sector (comprising petty traders, small producers and casual jobs) had expanded to include profitable and efficient enterprises as well as marginal activities.

Hence, the mission decided that informal sector (instead of traditional sector) is an apt name for the range of small-scale and unregistered economic activities.

With these two developments, the economic and intellectual fraternities realised that the official data did not capture what went on in the black economy. More than three decades later, the experts continue to work on ways to improve the statistics on unregistered economic activities.

This is undoubtedly a major challenge, for how do you properly calculate that which is meant to be hidden?

The Star-Errol Oh

FEW people think that the black economy is all bad. There are certainly some aspects that yield benefits. One pro-consumer view is that the existence of the black economy compels legitimate businesses to be more innovative and efficient so that their products and services are more appealing than those offered by the illegal competitors.

Then there is the macroeconomic defence that it provides employment, boosts economic activity and supports the formal economy.

Among the strongest proponents of the informal economy are those who believe in its capacity to improve the lives of the poor. One of these advocates is a global research-policy network called Women in Informal Employment: Globalising and Organising (WIEGO).

In a 2002 booklet titled Addressing Informality, Reducing Poverty: A Policy Response to the Informal Economy, the US-based WIEGO asserts that governments need to develop innovative and supportive policies that recognise the informal economy’s contributions.

WIEGO also contends that there are a lot of outdated and inaccurate views on the informal economy. Below is how it addresses this matter:

Some people are convinced that the black economy will help reduce poverty

The Old View: The informal sector is the traditional economy that will wither away and die with modern, industrial growth.

The New View: The informal economy is increasing with modern, industrial growth – accounting for more than half of the new jobs in Latin America and 80% of new jobs in Africa. In India, more than 90% of the labour force is in it. It is a feature of economic transition as well as capitalist industrialisation.

The Old View: It is only marginally productive.

The New View: Virtually everywhere the informal economy is efficient and resilient, creating jobs. It is a major provider of employment, goods and services for lower-income groups. It contributes significantly to GDP.

The Old View: It exists separately from the formal economy.

The New View: It is linked to the formal economy – it produces for, trades with, distributes for, and provides services to the formal economy.

The Old View: It represents a reserve pool of surplus labour.

The New View: Much of the recent rise in informality reflects the decline in formal employment associated with structural adjustment and global competition. It reflects not only the incapacity of formal firms to absorb labour, but also their unwillingness to do so.

The Old View: Most of those in the sector are entrepreneurs of illegal and unregistered enterprises seeking to avoid regulation and taxation.

The New View: It should not be equated with the criminal or illegal economy. It is made up of non-standard wage workers as well as entrepreneurs and self-employed persons producing legal goods and services, albeit through irregular or unregulated means.

Most entrepreneurs and the self-employed are amenable to, and would welcome, efforts to reduce barriers to registration and related transaction costs and to increase benefits from regulation. Most non-standard workers would also welcome more stable jobs and workers’ rights.

The Old View: Work in the informal economy comprises mostly survival activities and thus is not a subject for economic policy.

The New View: Informal enterprises include not only survival activities but also stable enterprises and dynamic growing businesses. All informal enterprises are affected by economic policies.

The Old View: It comprises mainly unregistered businesses.

The New View: It comprises not only informal enterprises but also informal jobs, including employees of informal firms, casual day labourers, and domestic workers as well as industrial outworkers and other non-standard workers in both informal and formal firms.

The Old View: It comprises mostly street traders and very small-scale producers.

The New View: It is made up of a wide range of informal work arrangements – both “resilient old forms” and “emerging new ones” (temporary and part-time jobs plus home-based work for high-tech industries). Its two basic segments are informal enterprises and informal jobs.

The Old View: It is unregulated.

The New View: Some informal enterprises – such as street vendors – are highly regulated, so much so that regulations are impossible to enforce or comply with and are often not clear either to local authorities or to vendors. Regulations become a tool of harassment and control, not a way to encourage economic contributions of street vendors. On the other hand, the employers of most informal wage workers often seek to avoid complying with labour legislation.

The Old View: Because it is unregulated and untaxed, many working in the informal sector are wealthy.

The New View: Average incomes are lower in the informal economy than in the formal economy. A higher percentage of people working in the informal economy are poor. Most of the wealthy in the informal economy are micro-entrepreneurs who hire others. The poorest are, typically, informal wage workers, especially industrial outworkers.

The Old View: To regulate the informal economy is unnecessary interference with its workings.

The New View: In today’s globalised economy, the active role of government is needed in the regulation of economic activities, including the informal economy. Clear rules and appropriate legislation are needed to regulate the relationship between governments, foreign investors, local enterprises, and the workforce.

The Old View: Street traders are to blame for crime in the inner cities.

The New View: Criminals are a threat to the business interests of both formal and informal enterprises.

The Old View: It does not contribute to economic growth.

The New View: It contributes substantially to the economy and needs to be encouraged and facilitated.

The Star- Errol Oh

In the current global economic downturn, with people losing jobs and businesses suffering shrinking revenues, we may well see a more vigorous black economy

THE black economy is also known sometimes as the hidden economy or the underground economy, but in fact, a lot of it is right there in plain sight. Broadly, the term covers all unregistered and unregulated economic activities. Not all of these are sinister crimes that take place in the shadows.

Your favourite chicken rice stallholder, who has never filed a tax return, is part of the black economy. So are the illegal car workshop just down the road and the factory in Balakong that makes knock-offs.

And what about the handyman you turn to for household repairs, the accounts executive who earns some side income by giving tuition to your kids, and the professional who freelances outside office hours? If the Inland Revenue Board (IRB) knows nothing about the earnings, the trio come under the black economy banner as well.

The foreign worker you see going around housing estates on weekends offering to cut grass? Black economy too. And of course, how can we forget the pirated DVD seller who provides your weekly movie fix?

Dr Jeyapalan Kasipillai

Conventional wisdom has it that in the current global economic environment, with people losing jobs and businesses suffering shrinking revenues, we may well be seeing a more vigorous black economy. The perception is that in such desperate times, legal and ethical requirements are often likely to take a back seat.

Individuals may be forced to moonlight, join the ranks of the self-employed or work outside the law, thus avoiding the income tax net. Companies may cut corners by sidestepping rules and regulations in areas such as taxes and duties, licensing and registration, and employee benefits.

Copyright owners are among those who believe that the infringement rate will rise in tandem with the economic slowdown.

“Obviously, when the economy is tougher, it does give impetus to the pirates to promote their illegal wares to consumers,” says Shamsul Jafni Shafie, executive director of the Malaysian Federation Against Copyright Theft (MFACT), which represents the Motion Picture Association (MPA) and the Entertainment Software Association (ESA).

(MPA is the international counterpart of the Motion Picture Association of America, the lobby group of the American movie, home video and television industries. The ESA is a US organisation that looks after the interests of computer and video game publishers.)

Informal and unfair

Even in the industrialised countries, which typically have lower levels of unreported economic activity than those of the developing economies, there is anecdotal evidence suggesting that during a downturn, more businesses are compelled to operate in the informal sector.

Just ask the Irish Small and Medium Enterprises Association (ISME). Last August, chief executive Mark Fielding warned: “There has been a marked increase in black economy activities during the economic slowdown, with numerous companies complaining to ISME that they are being undercut by rogue operators.”

tan Sri Mohamed Yakcop

The association’s lament is just one view, but it is not a unique one. Many businesses paint themselves as victims of the black economy. For one thing, their illegal competitors do not comply with taxation and regulatory obligations, and therefore incur lower costs.

That gives them an unfair advantage over the legitimate businesses. Nowhere else is this more evident than in the industries that are levied sin taxes.

The alcohol, tobacco and gambling players pay such high taxes – it is the government’s way of discouraging these vices by making the products more expensive – that there is a huge incentive for others to enter the market through the back door.

It is almost routine for the listed cigarette manufacturers, numbers forecast operators and brewers in Malaysia to grumble about losing ground to smugglers, counterfeiters and unlicensed bookies.

The chairman’s review in British American Tobacco (M) Bhd’s (BAT) annual report 2007 talks about the impact of the surprise 25% excise increase in July 2007, which pushed up cigarette prices.

“As expected, consumers downtraded to cheaper alternatives in the form of illegal cigarettes, which reached an all-time high of 25%, a serious increase from 14% just three years ago,” wrote chairman Tan Sri Abu Talib Othman.

In Carlsberg Brewery Malaysia Bhd’s annual report 2007, managing director Soren Holm Jensen points out that only Norway has higher excise duties than Malaysia. He expresses hopes that the current rates in Malaysia will not rise for the next few years and argues that the steep taxes encourage smuggling.

Another group of industries that would love to see the black economy contracting are those that revolve around intellectual property (IP). In this case, perhaps the most unsavoury aspect of the illegal competition is that it gleefully piggybacks on the output of the legitimate businesses for free.

The pirates make gains from movies, music, software and books without having to create the works. The producers of fake goods merely copy and sell stuff. They need not fork out a cent for artistic input, research and development, and marketing. It is yet another unfair advantage.

The damage can be debilitating, like it has been for the music companies in Malaysia.

A wider impact

About a decade ago, they were selling about RM315mil worth of CDs. This has plummeted to an estimated RM60mil in 2008. After adding sales of about RM20mil through online and mobile channels, we are talking about a 75% plunge in revenue.

Recording Industry Association of Malaysia CEO Tan Ngiap Foo asks: “Which industry can withstand such a big drop. We are dying. How to create good music?”

In addition, counterfeiters inflict harm by diluting the reputation of the genuine products. The legitimate businesses risk losing a customer each time a consumer is misled into buying an imitation and gets lower quality than he has bargained for – over-the-counter medicines that lack efficacy, bags and shoes that fall apart soon after purchase, watches that do not tell time accurately, cigarettes with dodgy additives.

When businesses gripe about unjust competition from the black economy, they do not always get sympathy. After all, apart from crime, few facets of the black economy appear menacing and serious enough to warrant special attention from the authorities.

The current laws and enforcement measures ought to be enough, should they not? Why fret over petty traders and backyard industries that do not pay taxes and fees, when there are bigger fish to go after?

Also, it is hard for the public to grasp the idea that large and high-spending businesses such as the cigarette, beer and gaming companies and the Hollywood studios are at all troubled by illegal operators.

In addition, it is common for most folks to view IP piracy as victimless, and that the legitimate businesses are partly to be blamed for not lowering prices.

For that matter, there are the arguments that the gray market creates jobs and eases social tensions, and that if allowed to mature, the illegal operators will eventually join the formal economy.

However, this surely cannot be a zero-sum game. There are consequences when the black economy pummels those who conduct business above board, and the effects will ripple through their supply chains. The governments (and by extension, the public) will feel it as well.

Naturally, the industries affected by the black economy are rather persuasive in articulating this point.

The BAT website says the trade in illegal cigarettes may undermine the legitimate tobacco industry, reduce the demand for Malaysian-grown tobacco, reduce the potential amount of taxation that could be collected by the Government and make the tobacco market difficult to regulate.

Says Confederation of Malaysian Tobacco Manufacturers (CMTM) chief executive Shaik Abbas Ibrahim: “The underground economy expands at the expense of the legitimate economy. The Government loses revenue. It cannot fulfil its health agenda because of the availability of cheaper illegal cigarettes.”

Shamsul Jafni of MFACT argues that if video piracy goes unchecked, the output of the film and TV industries may decline, and this will hurt not only those in the creative communities, but also those working in the movie distribution line, including cinema operators and video stores.

The are social costs as well, he says, such as the fact that piracy and sale of pornographic videos often go hand in hand, and that there are links between movie thieves and organised crime.

He adds: “Piracy hurts all Malaysians. The pirates don’t pay tax on the illegal copies they distribute or sell, and thus they don’t contributing to the welfare of all Malaysians.”

The case for extra vigilance

Indeed, there are several big-picture reasons to justify governments taking a deeper interest in the growth of the black economy.

No.1 is that the informal sector is unrepresented in the official statistics and data. This may lead to information gaps and flawed policies.

Says Professor Dr Jeyapalan Kasipillai of the Monash University Sunway Campus’ School of Business, “The existence of the hidden economy has an important implication in determining macroeconomic variables, the functioning of the national economy and the implementation of economic policy.

“From this point of view, some observations of the hidden economy and knowing something about where it occurs is an extremely useful research exercise.”

When the Government decided to give a cash rebate to salve the pain from the substantial jump in petrol and diesel prices last June, it opted to rely on the Road Transport Department’s database to maximise the number of people who ought to receive the rebate.

Some observers say a better way to provide relief to the rakyat is to grant tax credits because this would be based on income levels. The snag is that the reach of the tax system is limited.

In an interview with StarBizWeek in November, Second Finance Minister Tan Sri Nor Mohamed Yakcop acknowledges that the idea is good but difficult to execute.

“We have about 12 million people who work. Only about two million are registered with the IRB, and over one million pay tax. So we have another 10 million of the working population who are not registered taxpayers,” he explains.

Here is a clear argument for doing more to ensure that individuals and businesses are included in the formal economy.

Another drawback of the black economy is that its players are usually small-scale, inefficient and relatively unproductive. They continue to be thus because it is hard for them to be weaned off the dynamics that comes with their illegal status.

More importantly, governments have to realise that factors such as red tape, burdensome taxes and regulatory requirements, and lax enforcement hasten the growth of the black economy.

There is an eternal conflict between the authorities’ instinct to let enterprise find its course and the cold logic that the black economy should be driven to the surface. It’s a taut interplay of many forces. Eventually, something has got to give.

An example: Lately, there has been talk that the copyright owners, frustrated by the rampant piracy, may push for Malaysia to be bumped from the US Trade Representative’s watch list (for IP rights protection and enforcement) to the priority watch list.

That will bring us a step closer to trade sanctions. Although this is a remote possibility at the moment, such a step will be a rude wake-up call for the Government.

The black economy should never have such power to make life difficult for law-abiding citizens.

The Star- Errol Oh

THE recession in advanced economies will set the tone for global economic outlook in 2009. Of importance is the extent of fiscal pump priming and monetary easing measures and how the combined action can help to bring the world economy back on its feet.

Against this backdrop, the prospects for the Malaysian economy will to a large extent depend on the strength of the domestic demand.

According to Malaysian Rating Corp Bhd’s chief economist Nor Zahidi Alias, the Malaysian government will remain vigilant and keep a close watch on how the global economy, particularly the US, evolves owing to the correlation between the US and Malaysian economy.

“The last time when the US succumbed to a recession in 2001, Malaysia’s growth almost screeched to a halt. We do not anticipate a quick recovery for the US economy as lethargic consumer sentiment will magnify weak business conditions. At the same time, we expect poor macro visibility to persist for Asian economies in 2009,” Nor Zahidi said.

MARC does not foresee the global economy plunging into a depression, as central banks around the world have been able to avoid the major mistake of restricting money supply that was made during the Great Depression in the 1930s, and with the strenuous efforts being made by the US government and the Fed to prevent the world’s largest economy from a total collapse.

Growth could decelerate more than expected

With huge stimulus packages and a Zero Interest Rate Policy (ZIRP) being implemented in the US, a mild recovery can be expected at the end of 2009 or the early part of 2010, MARC noted, adding that despite this, it remains cautious as possible risks may emanate from the weaknesses of other major economies, particularly the Euro Zone and Japan.

“Given the circumstance, we are penciling in a 2.5% GDP growth as our base case for 2009 while anticipating a 0.5% expansion in our worst case scenario,” Nor Zahidi said.

The downward pressure in export growth will also be magnified by sharp declines in prices of crude oil and crude palm oil, the country’s two major export commodities from record highs in 2008

Private consumption is our hope

According to MARC, the sustainability of domestic demand is the key assumption of its GDP forecast for 2009, in particular, the strength of private consumption will be a major factor in determining the overall performance of the economy over the next one year.

Should, for any reason, private consumption collapse in 2009, Malaysia’s GDP growth will drift away from MARC’s base case target of 2.5%. MARC anticipates a decline in the growth of private consumption to 4% in 2009 from an estimated 8.2% in the preceding year.

Private investment to slide on falling sentiments and rising risk aversion

Private investment will remain vulnerable when growth deceleration starts to gain momentum, Nor Zahidi said as two major factors – deteriorating business sentiment as evidenced by the decline in MIER’s business conditions index and rising risk aversion among investors – could cause a sharp decline in private investment.

Based on past experience, volatility in private investment increased immensely during periods of economic uncertainty, he added, citing an example in 2001 when private investment plunged by -15.7% from an expansion of 32.6% in the preceding year when the economy suffered a mild recession.

Similarly, in 1998 during the Asian Financial Crisis, private investment contracted sharply by 55.2% compared with a 9.4% expansion in 1997.

As for 2009, MARC anticipates private investment to stagnate after posting a 6.5% growth in 2008.”

Exports will bear the brunt of external weakness

Being an open economy, Malaysia will likely bear the brunt of slumping global demand, particularly for electrical and electronic products, MARC noted.

Highlighting major indicators such as the semiconductor book-to-bill ratio which has remained below unitary level since February 2007 and are expected to remain lacklustre following the rapid declines in major economies in the US, Eurozone and Japan.

With the global demand for PCs and cell phones expected to contract in 2009, Malaysia will likely experience a sharp decline in its exports of E&E products.

In addition, the downward pressure in export growth will also be magnified by sharp declines in prices of crude oil and crude palm oil, the country’s two major export commodities from record highs in 2008, despite some recent price gains on account of the tensed situation in Gaza.

With recession curbing the appetite for both commodities, MARC believes that real export will contract by 0.5% in 2009.

Inflation to moderate throughout 2009

On inflation, as measured by the CPI, MARC expects it to taper off in the coming months, mainly because of slower increases in transportation index and weaker consumer demand, although food prices will remain at elevated levels as “sticky downward” phenomenon persists.

Going forward, inflation rate is expected to moderate to an average of 5.0% in the 1H09 following slower consumer demand.

MARC envisages, stating that in the 2H09, however, year-on-year growth in CPI will likely decline drastically as the base effect sets in, leading to an annual average of 3.5% in 2009 from an estimated 5.5% in 2008.

Sovereign rating likely to stay unchanged

The current sovereign rating of A-/A3 from S&P/Moody’s for Malaysia is likely to be maintained in 2009 despite the many challenges faced by the country, Nor Zahidi opined, citing the commendable government debt-to-GDP ratio of 38.4% in the 3Q08 (2007: 41.6%) as a key reason.

One factor for any likely change in the rating outlook is a reversal in the declining trend of government debt to GDP, Nor Zahidi said, pointing out that “It is noteworthy that the downward trend in the debt ratio has continued since early 1990s.”

Nevertheless, given the high correlations between rating outlook and macro indicators such as growth, fiscal deficit, government debt level and current account balance, a change in the rating outlook by the big three cannot be ruled out, Nor Zahidi added, as conditions for a sharper-than-expected slowdown of the economy and higher fiscal deficit persists.

Fiscal policy remains expansionary

Up until the 3Q08, the government had been prudent in its spending. This is reflected in the budget deficit ratio which, in the first nine months, stood at only 3.1% of GDP compared with the full year target of 4.8%.

Unutilised allocations from 2008 carried forward to 2009 will give the government a bigger leeway to ramp up its spending in 1H09.

MARC foresees such a scenario will unfold as the recent RM7bil worth of stimulus package only represents about 1% of the country’s nominal GDP.

Although the fiscal deficit is expected to remain large in 2009, MARC does not foresee any major obstacle in financing the fiscal deficit as the country’s bond market should remain supportive of the growing fiscal deficit.

Monetary policy will likely ease further

In terms of monetary policy, MARC believes that the BNM will be flexible in using its tools to complement the fiscal measures in supporting the economy.

With declining inflationary threat, BNM will have more room to ease its monetary stance should global economic weakness continue to drag Malaysia’s economic growth, he said.

Against such a backdrop, MARC anticipates the overnight policy rate (OPR) to be reduced by a total 50 bps, bringing the key rate to 2.75% by the 1H09 which is expected to put additional downward pressure on the ringgit particularly against the US dollar in the near term.

As a result, MARC anticipates the ringgit to depreciate between RM3.55 and RM3.70 against the US dollar in the 1H09 but in the second half, the ringgit’s movement will likely hinge on the extent of the recovery of the Malaysian economy.

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GOING forward into the future, the world is likely to continue to be plagued by financial crisis. History has shown that there has been more than a hundred distinct banking crisis in the recent two decades.

While the trigger factors for such financial crisis may be different, for most, there was a general loss in confidence, disruptions in the financial intermediation process and a general downward spiral of asset prices. While it is argued that what is needed is the reform of the international financial architecture, for any individual country, the prospect of surviving such a crisis is not only about building resilience, but also having the capacity to effectively manage the crisis.

Such a crisis was experienced in the Asian region ten years ago. Several parallels can in fact be drawn from the Asian financial crisis and the current financial crisis. In both cases, the crisis followed a period of strong growth, rapid credit expansion and rising asset prices.

Prior to the Asian crisis, there was indiscriminate lending by the banking sector. Similarly, the current financial crisis originated from imprudent lending practices and excessive risk taking that resulted in the formation of asset bubbles. In Asia, domestic credit rose to unsustainable levels, reaching 180% of GDP. In the United States, the ratio was 240% in 2007.

In both cases, there was a lack of capacity to manage the increased risks associated with the transformation of the financial sector. For Asia, the increased liberalisation was not accompanied by the necessary financial infrastructure or the capacity to manage the associated increased risks. In the current crisis, financial innovation occurred at a pace that outstripped the ability to manage the associated risks with such innovations. This resulted in an underestimation of the risks involved and the capital buffers that were necessary.

The ensuing turmoil in the financial markets resulted in illiquidity in the markets and the subsequent breakdown in their functioning. As the crisis advanced, financial stress and insolvencies emerged in the financial sector. In both crises, this precipitated a pull back in lending activities and thus the damaging consequences on the economy.

In the Asian financial crisis, the economic contraction was severe, in the range of 7% to 13%.

In the current financial crisis, the spillover effect on the economy has yet to be fully felt. The Asian crisis, however, ran its course in a short period of time. Asset prices and the foreign exchange (forex) rate plunged to their lows following significant market adjustments that occurred. The policy focus during the crisis was on restoring the functioning of the intermediation process to promote economic recovery. For most countries, growth resumed within 18 months from the start of the crisis.

The important actions that need to be taken in managing a financial crisis seem to be already apparent, as evidenced by the series of policy announcements that have been made by the respective governments, the multilateral agencies and the various international groupings. The policy actions have included providing the massive liquidity injections into the system, removing the troubled assets from the portfolio of financial institutions, strengthening their capital position and providing depositors protection. In addition, the implementation of monetary and fiscal stimulus also promoted economic recovery.

These were in fact among the series of measures that were implemented during the Asian crisis. The experience with these measures may not produce similar outcomes in containing the severity of the current global financial crisis and the degree to which confidence is restored and conditions normalised.

Vital measures from Malaysia’s experience

Several key elements are vital to achieve the desired outcomes. From Malaysia’s experience, measures implemented at the early stage of the crisis raises the prospects for restoring stability and the resumption of lending. Such early and pre-emptive action requires anticipation of the trajectory of the crisis. Reacting to developments or delayed action diminishes the effect of the measures to contain the deterioration. It will also raise the cost of the crisis.

A second key element is that the response needs to be comprehensive. Having clarity of the objectives and being focused on the necessary actions are important in an environment in which the demands are for addressing everything that has gone wrong.

In Malaysia’s experience, institutional arrangements were put in place early to restore lending activities by the banking sector. This involved the establishment of an asset management corporation to carve out the bad assets from the banking system. The assets were for the most part acquired at a discount that ranged 40% to 60% of the value of the asset. The asset management corporation managed the assets to enhance its value.

On the disposal of the assets, any return in excess of the value at which it was acquired was shared with the banking institution. A special-purpose vehicle was also established, for the recapitalisation of affected banking institutions. To avoid foreclosures of borrowers at the margin, a corporate debt restructuring committee was also formed to restructure loans.

Vital to this process was the Government machinery to facilitate the establishment of these institutional arrangements. Within six months of the course of these measures, lending resumed and economic recovery commenced. Having the supervisory function residing at the Central Bank also facilitated the swift action that was taken.

Massive liquidity was provided during this period. The implementation of selective forex controls that were put in place more than one year into the crisis drew significant attention at the time. The purpose of the controls was to stabilize the forex market. This was important given that severe disruptions in this market did not abate after more than a year into the crisis. It must be recognised, however, that while the stability it provided was important, on its own, it would not have resolved the crisis. It was the comprehensive set of measures involving resolution and growth supporting policies that resolved the crisis.

Perhaps a significant difference in the management of the crisis in Malaysia was the adoption of a more pragmatic approach. Relying on ideologies that the market mechanism would eventually restore stability and equilibrium did not take into account the irrational market behaviour and herd instinct that occurs during a crisis. Deviating from the conventional approach may thus be necessary. Such policies however, need to be undertaken with a high degree of transparency.

Disclosure and communication in these circumstances was critical. Regular information was therefore provided, sometimes on a daily basis. Information was given on all measures that were taken. Extensive communication channels with the public, the industry, the exporters, the corporate sector and foreign investors were maintained to promote understanding of the developments and the policies.

Leadership in crisis management is also important. In Malaysia, a National Economic Action Council was established and chaired by the Prime Minister. For several months it met daily. These meetings involved the private sector, professionals and technocrats. It provided the potential for coordination, consistency and comprehensiveness of the policy actions. Another element was the key role that was given to professionals and technocrats which raised the prospect for achieving the desired results and avoided actions that were based on political considerations.

Ten years hence since the Asian crisis, structural transformation has taken place in most of the economies and financial systems in Asia. This has enhanced our economic flexibility to adjust to external shocks. In addition, financial reforms have also been aggressively pursued. Surveillance and supervisory oversight have also become more rigorous and robust. A more recent development, is the deepening of regional surveillance and cooperation. This has also been reinforced by an integrated regional crisis management framework that may be activated in the event of any potential destabilising financial developments in the region.

In this global environment of increased inter-dependence, the prospect of future shocks that could translate into a financial crisis cannot be ruled out. To deal with this vulnerability, the strategy is to further strengthen the foundations and thus the resilience and capacity to manage such shocks. This is the approach to be pursued to ensure sustainability through episodes of such financial turmoil.

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The Star-Tan Sri Zeti Akhtar, Gavenor of Bank Negara

KUALA LUMPUR: The lack of understanding of Islamic financing needs to be addressed so that people are not confused and misguided, says International Centre for Education in Islamic Finance (Inceif) chief academic officer/dean Prof Datuk Dr Syed Othman Alhabshi.

He said even some employees who worked at Islamic banks couldn’t fully understand the concept of syariah-compliance.

“We need to address this matter so that everyone will fully understand and have a clear picture of Islamic finance,” he told a press conference yesterday.

Syed Othman Alhabshi

Syed Othman said as the world was currently facing a financial crisis, Islamic banking could be an alternative for the conventional banks to regenerate their business.

“I’m not saying that Islamic banking is the only solution for the current problems faced by the conventional banks. However, if this system can be a vehicle or a better solution to help them, why not,” he said.

Inceif, in a joint partnership with Britain’s University of Reading, is offering a 12-month masters course on investment banking and Islamic finance. The first intake, which commenced in September, is one of the steps taken to produce more experts in the field.

At the event yesterday, University of Reading director of the ICMA Centre Professor John Board said whatever banking system being used by the banks, at the end of the day, it was all about the attitude of the people.

“If people are greedy, whatever system you use would surely collapse as what we can see now from the global financial crisis,” he said, adding that if the Islamic banking system could become a good vehicle to uplift the financial industry by raising more capital to run businesses, there should be no objection to implementing the system.

Board said as more conventional banks wanted to offer Islamic banking and finance, it was important to educate the professionals in the banking line to master the system.

The Star

In an interview with Business Times, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz says at prevailing rates, there is flexibility for further monetary stimulus to support the economy.

QUESTION: How vulnerable is Malaysia, at this point, to the global financial crisis?

Answer: Despite the increased volatility in the global financial markets, Malaysia's financial system remains solid and resilient.

The impact on the financial system is manageable - with low exposures to foreign currency denominated assets, a well-capitalised and profitable banking system, ample liquidity, and a stress test which reaffirms the capacity to withstand the higher risk levels.

The global crisis, which has turned into an economic crisis, is likely to be more prolonged than earlier envisaged and the recovery will likely be delayed as impact on the rest of the world is likely far-reaching.

Asia, including Malaysia, will be adversely affected but likely to record positive growth. Malaysia's economy will record a positive growth due to current account surplus, continued financial intermediation, strong foreign reserves and a resilient banking system.

Q: The Malaysian economy is not ailing but there are growing fears that Bank Negara Malaysia and Ministry of Finance could be underestimating the severity of the downturn which would adversely impact our growth. Your comments Tan Sri Governor.

A: We recognise the severity of the global problem and impact on Malaysia.

Indeed, as early as in the July (2008) monetary policy statement, we already stated that the Malaysian economy was expected to experience a more challenging environment in 2009.

As the global problems deepen, the impact on Malaysia is expected to be more substantial.

The government came up with the RM7 billion stimulus package while Bank Negara eased the monetary policy in November 2008 - all these measures are aimed to support domestic demand and avoid a more severe economic downturn.

Given the uncertainty on the depth and length of the global slowdown, Bank Negara has identified three scenarios on the outlook of the Malaysian economy and is developing policy responses for each scenario.

Q: Malaysia's international reserves have been on a declining trend. Is this a concern?

A: In the first half of 2008, our international reserves increased by about US$25 billion, raising it to US$125.8 billion. During this period, the exchange rate appreciated to RM3.15 against the US dollar.

A major factor explaining this trend was the inflow of short-term capital.

The decline in reserves is mainly due to a reversal of short-term capital flows following the deleveraging process by investors following the financial distress experienced in the US and in Europe.

In the first quarter alone, the inflow of short-term capital amounted to about seven per cent of gross domestic product (GDP). Such short-term capital does not represent a permanent part of our reserves. Reversals may happen at any time.

Our high level of reserves, which are more than seven times retained imports and more than three times our short-term debt, continue to be well-positioned to cope with such out flows.

The heaviest outflow occurred in October (2008) and has since continued to subside.

Our reserves are still high for a country like Malaysia.

Q: There is the risk of Malaysia's current account surplus weakening in the second half of the year, to below 16.7 per cent of the GDP. What happens in a situation when it (C/A surplus) falls below 10 per cent in the coming months?

A: Even if we were to apply a significant contraction in exports under a more extreme scenario for 2009, Malaysia's current account balance would remain in surplus at about 10 per cent of GDP (or RM68.8 billion), which is still very large by global standards.

The trade surplus is expected to remain sizeable as moderation in exports would be mitigated by slowdown in imports. About 70 per cent of Malaysia's imports are intermediate goods, which are mainly used as inputs for manufactured exports. Therefore, any decline in exports would also lead to import compression.

Malaysia's trade linkages with the rest of the world have become more diversified. Exports to Asia account for about two-thirds of Malaysia's total exports. This is noteworthy as parts of the Asian region are expected to continue experiencing positive economic growth in 2009.

Q: While Malaysia can handle a slowdown in 2009, brewing external risks could mean that Malaysia may have to lower its growth target again. What could be the engine of growth with a backdrop of a weakening external demand as well as a weaker domestic demand? Are current low interest rates enough to support the economy?

A: We are not projecting a recession for 2009. Although domestic demand is expected to moderate, it is still expected to be able to contribute to GDP growth in 2009. Key to achieving this is sustained private consumption and increased government expenditure.

Private consumption is supported by factors such as that there has been no widespread unemployment and that there has been continued access to financing. The lower inflation will also add to purchasing power. However, should external conditions deteriorate further, the government and the central bank have the flexibility to provide further stimulus to our economy.

Factors that will support private consumption in 2009 are:

* No widespread unemployment;

* Growth in income;

* High level of savings;

* Availability of credit;

* Lower prices that will add to purchasing power; and

* Fiscal stimulus package.

On the supply side, the manufacturing sector is expected to be most affected by the weaker external demand. While other sectors are expected to moderate, overall growth is expected to remain positive.

Agriculture will be supported by expansion in food production and sustained growth of palm oil and rubber production.

Growth in the construction sector will benefit from the stimulus package and the infrastructure projects under the Ninth Malaysia Plan while there will be continued expansion in crude oil production and consumption activities in the services sector.

Given the heightened downside risks to growth and diminishing inflationary pressures, Bank Negara reduced the Overnight Policy Rate (OPR) and Statutory Reserve Requirement (SRR), as a pre-emptive measure aimed at providing a more accommodative environment to ensure domestic demand is sustained and supportive of growth.

Bank Negara will undertake the appropriate monetary policy action and respond pre-emptively to mitigate a severe economic downturn. At prevailing rates, there is flexibility for further monetary stimulus to support the economy.

Q: Given that the services sector has been a significant contributor to Malaysia's economic growth, will the decline in tourism numbers by nine per cent (in 2009) have a significant impact in the services input in the real GDP?

A: The services sector, which has been the key driver of growth, has been largely domestically driven. As such, the anticipated decline in tourism activity is not likely to have severe impact on the services sector.

The services sub-sectors that are influenced by tourism are wholesale and retail; accommodation and restaurants; and transport and storage (18 per cent of GDP). However, the contribution of tourism to these sub-sectors is very small.

Although we do foresee some moderation in domestic demand, we believe that the services sector on the whole will remain resilient, and will be the key sector to support GDP growth in 2009.

Crisis may be the biggest strain yet on their web of ties

China and the United States should be kicking off 2009 with a celebration of three decades’ hard work building one of the world’s most crucial diplomatic relationships.

Instead the superpower and the rising power are fighting their way through an economic crisis that may be the biggest strain yet on the web of ties they have created.

Following a ground-breaking visit by former US President Richard Nixon in 1972, the United States switched diplomatic recognition from democratic Taiwan to Communist China on Jan 1, 1979, recognising “one China” and marking Beijing’s emergence from diplomatic and economic isolation.

It smoothed and accelerated reforms that would transform China from a Cold War backwater into the world’s fourth largest economy at astonishing speed.

“This is a very tough thing to manage because of historical precedents of rising powers and the reactions they provoke from other countries,” said Susan Shirk, a professor at the University of California San Diego and former US diplomat.

“Historically, rising powers almost always mean war.”

In the search for a relationship that will be the cornerstone of peace, they have weathered an embassy bombing and a spy plane crash, a military crackdown on pro-democracy protests, and more recently, tensions over trade and the value of China’s currency.

But US President-elect Barack Obama has vowed to put more pressure on China over export incentives and managed currency, and upbraided Beijing over human rights abuses and failure to enforce labour, environment and product safety standards. Analysts say a more aggressive US stance, particularly on trade, risks testing delicate relations amid rapidly rising unemployment and a gloomy economic outlook in both countries.

China’s leadership may be facing one of its biggest challenges since the Communists won the civil war in 1949. Struggling with unemployment amid the global economic crisis, short cuts to help Chinese products compete abroad, like subsidies and tax reductions, look increasingly attractive.

In the United States, protectionist calls are mounting as house prices tumble and pension savings collapse, but officially Washington trusts that mutual self-interest will keep either side from lashing out, said US Ambassador to China Clark Randt.

“The Chinese have understood clearly that they are our biggest creditor,” Randt told Reuters, referring to vast US debt accumulated in China’s coffers after years of trade surpluses.

“They are rooting for us, they hold a lot of dollars and they understand that we are in the same boat. If our economy is in trouble, they are in trouble.”

Political chasm

But the efforts needed to keep both sides talking as their economies fray risk being undermined by a basic mistrust, between advocates of democracy and communism.

“The fundamental problem, the challenge, is the real and perceived difference in each country’s political system,” said Wenfang Tang, political science professor at Iowa University.

Washington was once embraced as an ally and inspiration, when China began its slow recovery from Maoist policy experiments.

“In the 80s there was enormous naivety and a view of America as a very modern, democratic, corruption-free, intellectually vibrant epitome of what an advanced society looked like,” said Kenneth Leiberthal of the Brookings Institute.

Disillusionment for the Chinese government elite came in 1989, when they realised that Washington was prepared to openly support protesters in Tiananmen Square who sought their ouster.

For many ordinary Chinese, doubts set in a decade later, when Nato bombed the Chinese embassy in Belgrade during the war against Serbia. Washington said it was a mistake, caused by out-of-date maps, but China was unconvinced.

And good ties have not always been an easy sell in Washington either, particularly after the fall of the Soviet Union removed the bitter enmity that first united Washington and Beijing.

Repairing the Sino-US relationship is increasingly seen as one of the few clear foreign policy successes of a Bush administration bogged down in Iraq and Afghanistan.

Flexing muscles

With a growing economy and rising political clout, China has found big business increasingly tangled with strategic concerns, despite a doctrine of non-interference in other nations’ affairs.

Its firms are courting resource producers in Africa and have ventured far into Latin America, traditionally Washington’s “backyard”. Beijing says its interests are purely commercial, but strengthening ties with partners like top US oil supplier Venezuela have inescapable political implications.

China has also been discreetly flexing its military muscle with more peacekeepers overseas – from Haiti to Darfur – and its navy has joined an international crackdown on Somali pirates.

Nervous as these projections of power may make some hawks in Washington, Taiwan is the most volatile part of the relationship.

China has claimed self-ruled Taiwan since 1949 and vowed to bring the island under mainland rule, by force if necessary.

China long ago gave up regular shelling of Taiwan-held islands, and bilateral ties improved dramatically after the election of President Ma Ying-jeou, who opposes provoking China. But many in Taiwan still seek a formal declaration of independence from China and enough suspicion remains on both sides to make it one of the most dangerous flashpoints in Asia.

“The ‘Taiwan independence (movement)’ could destroy peace in the Taiwan Strait and severely damage the prosperity and stability of the Asia-Pacific region,” Tao Wenzhao, from the Chinese Academy of Social Sciences, wrote in a recent commentary. — Reuters

Factories in China, India and Russia slashed output and jobs at a record pace in December in another sign the world’s largest emerging markets were wilting under the recession that has gripped most industrialised nations.

Factory activity surveys in the United States and Europe yesterday are expected to show steeper contractions in December, as demand collapses at home and crushes growth in many of the developing nations that rely on Western consumption.

Economists and policymakers had seen China, Russia, India and Brazil, with their vast markets and rising wealth, as the engines of growth that could save the world from recession. Those hopes are fading fast and forecasts are getting gloomier.

For Chinese factories and policymakers looking to contain an economic slump, there was much cause for pessimism.

Manufacturing activity fell for a fifth month as the global financial crisis bludgeoned demand for exports, the Purchasing Managers’ Index (PMI) showed yesterday.

“With five back-to-back PMIs signalling contraction, the manufacturing sector, which accounts for 43% of the Chinese economy, is close to technical recession,” Eric Fishwick, head of economic research at CLSA.

PMIs in Russia and India offered similarly grim readings with the headline, employment and output indices sinking to record lows. — Reuters

The contraction in Russian manufacturing is deeper than the the slump during the 1998 financial crisis, which saw bank collapses and a default on sovereign debt. In India, factories cut jobs for the first time in the survey’s 3½-year history to reduce costs.

In all three countries, factories reported slumping export orders with recession chilling demand in the their largest markets — the United States, Japan and Europe. — Reuters

Government warns economy may shrink further by 2% this year

Singapore’s recession deepened in the fourth quarter as the global financial crisis took its toll on manufacturers and the services sector, and the government warned the economy may shrink by as much as 2% this year.

The economy contracted at a seasonally adjusted, annualised pace of 12.5% during the October-December quarter, following a revised 5.4% decline in July-September, data showed yesterday.

It was the third consecutive quarter of decline in gross domestic product and was worse than the most pessimistic forecast of nine economists polled by Reuters which was for a decline of 8.6%.

The government now expects Singapore’s GDP to come in between a decline of 2% and growth of 1% in 2009, lower than the previous forecast of 1% to 2% made in November.

But some economists are predicting an even deeper recession.

“If we are correct, 2009 will mark the most severe recession in Singapore’s history, surpassing the Asian Financial Crisis (when GDP contracted 1.4%) and the 2001 tech recession,” said Citigroup economist Kit Wei Zheng, who predicts the economy would shrink 2.8% in 2009.

“This sets the stage for more aggressive fiscal stimulus on the Jan 22 budget, and further monetary easing by MAS (the Monetary Authority of Singapore) in April, or even before.”

Shipping vessels at the PSA International's Pasir Gudang terminal in Singapore. - Reuters

The economy grew 1.5% for all of 2008, compared with 7.7% in 2007.

From a year ago, fourth quarter GDP fell 2.6% following a drop of 0.3% in the third quarter, advance estimates from the Ministry of Trade and Industry showed.

Meanwhile, Singapore private home prices fell for a second consecutive quarter in October-December according to advance government estimates, hurt by a drop in investor sentiment amid the global economic downturn.

The Urban Redevelopment Authority said yesterday its private residential property index declined 5.7% in the fourth quarter from the previous three months, worse than the drop of 2.4 % in July-September. — Reuters

NEW YORK (AP) - Gold prices edged lower in light post-holiday trading Friday as the dollar showed some strength against other major currencies.

Despite the slight dip, analysts were quick to note that the metal continues to show underlying strength as investors harbor fears of rising inflation.

George Gero, vice president at RBC Capital Markets Global Futures in New York, attributed Friday's decline in gold to some minor profit taking and short covering ahead of the weekend.

"Most people were more interested in book-squaring today, and not having positions be carried over for the weekend,'' he said.

Gold prices have been trending upward after dropping in mid-November due to heavy selling by hedge funds and other large investors.

Though still far from the $1,033.90 record high reached in March, gold managed to end the year up 5.4 percent.

"Looming on the horizon is a tremendous increase in money supply, which could in many countries weaken currency, so there has been underlying support for gold,'' Gero said.

Gold is often used as a hedge against inflation and a weak dollar, but it is uncertain how the U.S. currency will fare in 2009.

While inflation is a concern now that the Federal Reserve has sent U.S. interest rates about as low as they can go, central banks across Europe and Asia are also eyeing interest rate cuts.

This would further undermine their own currencies and potentially give the greenback a boost.

On Friday, the dollar rose against the euro and the British pound, but fell against the Japanese yen.

Gold for February delivery fell $4.80 to settle at $879.50 an ounce on the New York Mercantile Exchange.

Other precious metals prices advanced. March silver rose 19.5 cents to $11.49 an ounce, while March copper futures rose 5.1 cents to $1.4610 a pound.

On Wall Street, investors brushed off a weak report on manufacturing and sent stocks higher in light trading.

The Institute for Supply Management said Friday that its manufacturing activity index fell to the lowest level in 28 years in December - much worse than economists had expected.

But the reading did little to discourage investors, who have recently been looking past downbeat 2008 data and instead looking ahead for signs that the recession isn't worsening.

The Dow Jones industrial average rose 258 points to 9,034, its first close above 9,000 in two months.

Meanwhile, bond prices fell as investors bought up riskier assets.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.41 percent from 2.22 percent late Wednesday.

Energy prices rebounded on the Nymex, boosted by expectations that OPEC will carry out its largest production cut ever.

The Organization of the Petroleum Exporting Countries, which accounts for about 40 percent of global supply, has announced production cuts totaling more than 4 million barrels per day in the last few months.

Ongoing violence in Gaza also sent prices higher.

Light, sweet crude for February delivery rose $1.74 to settle at $46.34 a barrel.

One year ago Friday, crude prices surpassed $100 a barrel for the first time - beginning a climb that would peak at more than $147 a barrel by July.

Prices have since tumbled on fears of waning global demand amid a deepening recession.

In other Nymex trading, gasoline futures rose 3.15 cents to $1.0935 a gallon, while heating oil rose 3 cents to $1.472 a gallon.

Grain prices mostly rose on the Chicago Board of Trade, boosted in part by the climb in crude prices.

March wheat futures inched up 0.25 cent to $6.11 a bushel, while corn for March delivery rose 5.25 cents to $4.1225 a bushel.

March soybeans slipped 3 cents to $9.77 a bushel.

MANAGING finances is a very personal thing, and financial consultants and planners will tell you that different people have different risk profiles and criteria where managing their finances and investment is concerned.

Investors today have a number of financial products to choose from to fit their risk profile and criteria for returns and one of the more straight-forward ones is the unit trust fund.

A unit trust fund is an investment trust formed to invest in a portfolio of securities in which retail investors can participate by buying units of a fund. The trust fund is managed by professional fund managers.

However, investors may be put off by unit trusts due to the current turmoil in the equity and financial markets. Furthermore, unit trusts require long-term investment and patience, which at this point is a hard-sell because of the volatility of the markets.

In fact, according to the Federation of Malaysian Unit Trust Managers’ (FMUTM) website, the industry has seen its net asset value (NAV) drop by 20% over the year to RM135bil as at Oct 31, 2008.

However, the FMUTM says concurrent with the drop in the NAV, the industry NAV compared to Bursa Malaysia’s total market capitalisation increased to 20%.

This may be due to the KLCI having dropped 39.84% year-to-date because of the impact of the economic slump and the financial crisis that took a turn for the worst in mid-September when Lehman Brothers Holdings Inc collapsed and American International Group Inc needed a bailout.

A worker is seen carrying a box out of the US investment bank Lehman Brothers offices in the Canary Wharf district of London after it collapsed. – Reuters

Several financial planners StarBizWeek spoke to recently counselled that dollar-cost averaging or investing a fixed sum over a long period is the trick to reducing exposure to risk rather than making a single large investment.

The idea behind this is that the fixed sum can be spent on investing in a portfolio regardless of the price because the investment will eventually balance out in terms of cost.

These experts have heard stories of how investors have put all their money in one basket, thereby violating the most basic of investment rules, which is to diversify into different asset classes and also to diversify within a particular asset class.

In this respect, unit trust funds are generally divided into three types – fixed income, balanced/diversified and equity unit trusts.

“It all falls back on why you want to invest,” CTLA Financial Planners Sdn Bhd managing director Mike Lee said. “If you feel that the 5% dividend on average that you’re getting from the Employees Provident Fund (EPF) is not enough, than you may want to take a bit of a risk by taking money out from the EPF and invest long-term in unit trusts,” he says.

Lee says the issue is what type of unit trust to invest in. “At this point, due to the volatility of the equity markets, it is better to put more money in fixed income or balanced trust funds. I would advise to put at least 80% into fixed income,” he adds.

Lee says another way to secure a fairly stable income but that involves more risk is to invest in a mix of unit trusts where fixed income make up half the basket, balanced unit trust funds made up 30% and equity unit trusts made up another 20%. “This way you’ll be able to get a gross return of 7% to 8%, which is fair considering the fact that the KLCI is down by nearly 40%,” he says.

Lee says investing in the mix will allow for some risks and conservatism without speculating or trying to time the market. “At the same time you don’t want to miss the boat,” he says.

Gary Low, a senior financial consultant with Great Eastern Life Assurance (M) Bhd, says Malaysians in general prefer to invest in short-term, high-risk products that give higher returns than conventional savings such as fixed deposits or EPF dividends.

“You need to have invested at least five years before you can see any meaningful returns,” he says, adding that in more financially-matured markets, people invest for at least three years.

Low says a lot of people here are aggressive in their investments even though they say they are conservative. “These investors, if they had put their money into equity funds, would have lost it since the KLCI is down up to 40%,” he says.

“It’ll take them the next five years just to break even assuming an average 8% return on investment,” Low points out. His advice is to put 80% into fixed income and the rest into balanced trust funds. “Lets wait and see what next year would be like,” he says.

Datuk Peter Chin Fah Kui

The Plantation Industries and Commodities Ministry and the Malaysian Palm Oil Board (MPOB) came under heavy criticism lately from planters badly affected by the sharp fall in crude palm oil (CPO) prices. Planters are urging the Government to consider relaxing the payment of MPOB cess, CPO sales taxes and regulating the high fertiliser prices. Minister Datuk Peter Chin Fah Kui talks at length on the latest strategies and measures taken by his ministry.

The crux of the local planters’ problem is the sharp fall in CPO prices amid historically high palm oil inventory at about 2.3 million tonnes. How will the Government address this issue?

At this juncture, the ministry believes that palm oil prices could be strengthened through supply management activities. The immediate measures undertaken to stabilise prices and improve demand for palm oil include the RM200mil oil palm replanting incentive scheme, Malaysia’s biofuel implementation and Malaysia-Indonesia joint-cooperation particularly on the biofuel programmes.

We are also seeking assistance from independent power producers to use CPO as their energy feedstock.

I believe it is incumbent upon the ministry and the Government to make sure strategies that can influence the CPO price are put in place to ensure price will not slide and hit the bottom like in 2001, when it trades at RM800 to RM900 per tonne level.

In 2008, I think Malaysia’s early intervention i.e. announcement on the replanting and implementation of biofuel does help to influence the CPO price.

In the case of biodiesel, despite Malaysia having the capabilities to implement it years ago, we had to re-consider because at that point of time CPO (raw material for biofuel) was too high.

With CPO currently trading RM1,500 to RM1,600 per tonne, the Government will still need to subsidise “a bit” on the biodiesel initiatives which we will tap from the MPOB cess under the palm oil price stabilisation fund.

If the crude oil prices remain at current lows, then we will have to subsidise our biofuel initiative quite a bit. But if crude oil move up to US$65 to US$70 per barrel, then Malaysia will be in a comfortable position with its biofuel drive.

What are the new strategies in the pipeline for 2009?

Our short term strategy going into 2009 is about stabilising the CPO prices, of which we have undertaken via new measures like replanting, biofuel intiatives and the availability of fertiliser at not-too-costly prices.

The longer term strategy (which Malaysia is working closely with Indonesia) will be to ensure that CPO prices de-coupled from crude oil prices. Since the biodiesel hype, CPO has been tied down too much to fossil fuel prices.

The reason is simple. CPO is currently trading at a huge discount of about US$350 per tonne to its rival soybean oil.

The price of soybean is highly inflated by huge subsidies given to the soybean farmers in the US. Malaysia like to see CPO discount narrowing back to US$100 to US$150 per tonne – a more comfortable trading band for us. This will indeed be the long term challenge for the Malaysian oil palm industry.

Do you expect CPO demand to slowdown in 2009 given the current global economic turmoil?

Contrary to what is happening now, many palm oil users are still buying as reflected by our good export figures. The volume is poised to be higher going into 2009 as the cheaper priced CPO at current level is attractive to consumers.

Major consumers like India has started buying again significantly but China still has yet to come into the market in a big way. I’m told those importers who defaulted on their CPO orders recently, have also started buying from other parties at cheaper price.

This is what is happening now in the real consumers’ world market unlike previously, where the commodity market is played up by speculators.

Another major point is that Malaysian oil palm planters were able to counter criticism from the Western non-governmental organisations (NGOs) on climate change, deforestation, greenhouse gas emissions and the loss of biodiversity.

It will be a constant battle for planters to arrest these issues. Local big oil palm planters are aware of the importance in sustainability, whereby many are in the race to attain the Roundtable on Sustainable Palm Oil (RSPO) “green” certifications.

This will ensure speedier and better access to the stringent and environmentally conscious consuming nations like the European Union and the US.

Once the RSPO certifications on the local planters are completed, it will cover about 700,000ha of oil palm planted in Malaysia with a production of three million tonnes of CPO.

I personally believe that Malaysia has developed palm oil into such a sophisticated commodity.

It is so versatile in the usage in food, oleochemicals and the latest, biofuel. I don’t think there will be a substitute commodity as versatile as palm oil for Malaysia for a long time to come.

In your personal opinion, has the CPO price hit the bottom at RM1,400 per tonne recently and has since been traded above RM1,500 per tonne?

I believe that CPO price has hit the bottom. We can safely say that once CPO touched the RM1,400 per tonne, this level can be considered as bottom. Now prices have gone up to over RM1,500, we still have to wait and see whether this price level can sustain.

If the CPO price can stabilise between RM1,500 and RM1,700 per tonne range within the next six months, it will definitely be good news, given the slow recovery rate in the world economy despite various rescue packages put in place by countries worldwide.

Personally, I would like to see CPO price stabilising at RM2,000 to RM2,600 per tonne.

If the prices can move within these range, it will be good enough for local planters and they need not be too greedy to wish for higher prices than that.

In fact, major producers like Malaysia and Indonesia can progress satisfactorily if CPO stabilises above RM2,000 per tonne.

But realistically speaking, the RM2,000 level seems so far fetched now with palm oil prices creeping to stay above RM1,500 as excess inventory continues to dampen market sentiment.

I think over the next six months, CPO prices will be trade at RM1,500 to RM1,600 per tonne. This is taking into account the measures implemented by Malaysia including cutting down oil palm trees which are above 25 years old and implementation of the biofuel programme.

In addition, the global liquidity scenario is expected to improve which will make available more resources for trade financing.

At current spot CPO prices of around RM1,600, Malaysian planters will continue to see good profit estimated at RM1,600 per ha based on production cost RM1,200 per tonne and oil yield at 4 tonnes per hectare.

Stable CPO prices will sustain the rural economy from organised smallholders schemes under Felda, Felcra, Risda and independent smallholders.

Do you expect new form of attacks or allegations from Western NGOs on palm oil will intensify in 2009?

The NGOs will continue to focus their attention on questioning the sustainability of palm oil.

This is despite the fact that Malaysia on numerous occasions had provided numerous occassions had provided clarifications on the sustainability of palm oil produced by Malaysia.

In addition, the RSPO certification is a testimony to Malaysia’s effort to produce sustainable palm oil.

Malaysia and Indonesia will continue to collaborate in hosting joint seminar overseas to address this issue.

The Star