By Debra Chong
KUALA LUMPUR, May 28 — A slowdown in China’s economy could have a significant impact on Malaysia’s growth due to rising linkages between the two countries, a research report released today showed.
RHB Research Institute suggested that a 10 per cent decline in exports could push down Malaysia’s gross domestic product (GDP) by 1.2 per cent.
But it said that while a slowdown in China would largely have an impact on resource sectors like the palm oil industry, the current euro-debt crisis will have a major impact on the country’s manufacturing exports, especially in electrical and electronics (E&E), because developed nations remained the major final consumers of those goods.
“We believe a slowdown in China’s economic growth will likely have a greater impact on resource-based products such as animal & vegetable oils & fats (palm oil products), inedible crude materials, chemicals, manufactured goods and mineral fuels rather than on machinery & transport equipment,” it said in its country economic highlights report released today.
RHB’s research showed that China has grown to become the country’s largest trading partner in the last 12 years, with Malaysian exports to China jumping to 13.1 per cent last year from 3.7 per cent in 2000 compared to other traditional markets such as the US, Japan and the European Union (EU).
The research house noted too Malaysia’s growing imports from China over the years, resulting in a greater economic fallout due to the Asian giant’s recent slowdown.
For every 10 per cent decline in exports to China, it could reduce Malaysia’s real Gross Domestic Product (GDP) by 1.2 per cent due to the rising linkages, RHB Research Institute said.
Malaysia’s exports to China were largely machinery and transport equipment (47.4 per cent), followed by animal and vegetable oils and fats (16.1 per cent), inedible crude materials (nine per cent), chemicals (8.7 per cent), manufactured goods (8.6 per cent) and mineral fuels (6.3 per cent).
Malaysia also exported 21.9 per cent of its palm oil and 43.2 per cent of its rubber to China last year, more than double its exports to the US (5.7 per cent in palm oil and 3.6 per cent in rubber) and to the EU (25.2 per cent) respectively.
“This suggests that a slowdown in the Chinese economy will likely have a greater impact on these exports both in terms of volume and prices, and will likely affect Malaysia’s rural household spending as well as the government’s coffers,” RHB Research said.
However, it said that China was not the final consumer for the machinery and transport equipment (mainly electrical & electronic components) from Malaysia as developed countries like the US, Japan and in Europe are likely to be the final consumers for the bulk of these products given their relatively higher income per capita.
The US remains the largest consumer market in the world worth US$10.3 trillion, followed by Japan with US$3.2 trillion and private consumption, which accounts for 57.4 per cent of the GDP in the eurozone in 2010.
“As a whole, this suggests that the health of developed countries’ economies matters more for Malaysia’s exports of machinery & transport equipment,” RHB Research said in its analysis.
“In this regard, a deepening euro-debt crisis following the change of political landscape in France and Greece that has led to a possible Greece default and exit from the eurozone is posing a greater threat to Malaysia’s electrical & electronic (E&E) exports,” it added.
It noted further that if Greece defaults and leaves the eurozone, it would likely spread to other countries as bond yields in Italy and Spain have been going up.
“How well and how fast the contagion can be contained will depend on the strength of the political will of Germany and the rest of eurozone governments to keep the euro intact, as we expect the ECB to step in to stabilise the situation,” it said.
Malaysia exported 13.7 per cent of its total electrical goods to the EU, while exports of electronic goods to Germany and the Netherlands combined accounted for 7.7 per cent of the country’s total electrical goods exports in 2011, RHB Research reported.
But the research house said it expected the US to bounce towards the end of this year, “supported by a pick-up in consumer and business spending, on the back of a gradual recovery in job markets”.
“This is important and will likely augur well for Malaysia’s E&E exports in the 2H of the year,” it said.
It added that the E&E industry is poised to recover as global chip sales have started to turn around to grow by 1.6 per cent month-on-month in March this year, the first increase after five consecutive months of contraction, and the US manufacturing and housing sectors are sustaining its growth.
RHB Research reported that the US job market had improved and its borrowings had fallen, leading to more people buying homes and cars, and added that the two sectors were the main drivers behind the US economic recovery.
It said Malaysia is expected to grow by five per cent this year but it warned that there were still “bumps” ahead due to uncertainties over the US government’s budget deficit and debt that may drag the world’s biggest economy’s recovery into the first half of next year if its Congress does not address an impending “fiscal cliff”.
Malaysia’s economy grew at a slower pace of 4.7 per cent in the first quarter compared with 5.2 per cent in the previous quarter as global economic conditions continued to be challenging, Bank Negara announced on May 23.
Bank Negara governor Tan Sri Zeti Akhtar Aziz has said that the government was maintaining its GDP forecast of between four and five per cent for this year, adding that if conditions deteriorate, GDP growth could be closer to four per cent and if conditions prevail or improve, it would be closer to five per cent.
She also said that Malaysia enjoyed ample liquidity and a high savings rate which would help cushion it from external shocks.