How Malaysian economy, financial markets and system would be affected by the sub prime mortgage loan crisis in 2008

Monetary Policy on Interest Rate versus Inflation
In Malaysia, as most divisions are doing well and there is no need to decline the interest rate at this time to stimulate the economy growth. Lower dollar caused stronger Ringgit and stronger economy give further support to the Ringgit. Furthermore, stronger currency does help in containing a little on inflation and this given us an optimal economy development contrast with others. So, we have a better interest level with controllable inflation and growing GDP. Therefore, value of Ringgit today is around 3.27 for 1 dollar, 2.87 for 1 Aussie dollar and 2.28 for 1 Singapore dollar.
The insignificant concern is if Federal Reserve is to lower down its interest rate further in the coming quarters. Bank Negara Malaysia may face the stress to lower its rate and lessen the upwarding pressures on Ringgit that may harm industry of export and the potential global funds that looking for a higher return to Malaysia. In general, local front interest rate is steady and potentially heading south. Commodities prices will still be a potential set back with upward pressure for the Fed and BNM when managing monetary policy through interest rate. That means which both Malaysia property and stock market will take advantage from stable to a potential lower interest rate if it occurred. The only concern is hot fund will become speculative and re-generate another 1993 bull run and then move away. This will not be a good thing to the economy.


Currency Strategy
For the local front, Ringgit is already undervalued when all ASEAN currencies recovered from the currency crisis at year 1997. Some other currencies are even above the pre-crisis level. We could see Ringgit to move further around 3.0 to 3.1 levels depending on our Bank Negara’s policy. In fact, Ringgit should be traded around 3.0 to 3.2 levels due to BNM interference in 2007; it has closed around 3.3 to 3.4 level against US dollar in 2007. The cause is simple that it is Malaysia’s culture to protect the local manufacturing in order for them to have enough time to change into a high value added industry or move upstream before it is getting hurt by stronger Ringgit that still in a situation to compete cost with China.
In term of currency market trend, there is further sign that falling dollar can be good for US market and strengthening Ringgit trend will invite more local and foreign buyers for Malaysia property and a steady Malaysia economy. Needless to worry that cost of materials will continue to increase in 2008 giving more potential upward trend for local property price.

Stock Market
Contagion from the US sub prime crisis is expected to be limited to the capital markets as foreign hedge funds unwind their positions in Malaysia securities. The economic impact will depend on whether the sub prime crisis in the United States cascades into the real economy and affects employment and consumption, which economists say is not happening at the moment. The unwinding of sub prime debt and its problems has been snowballing in the United States over the past few weeks. Fear finally gripped the market when American Home Mortgage Investment Corp said that it could no longer fund home loans and might liquidate assets.
On KLCI front, it will breach 1500 level in 2008. So that will be many matured emerging markets have move up a lot in 2007 like Hang Seng, STI, KOSPI, Shang Hai SE, AllORDS, many global funds may find expensive to invest in those markets and they are higher require for higher return. Thus, Malaysia sound economy and most valuation of stocks are still relatively cheaper than those mentioned market above. Fund managers may turn aggressively into KLSE and this year potentially can be another good year for KLCI. Further supports are national election is under way, 9MP is still on going, tough corporate profits, regionalized results for some blue chips, lower corporate tax, stable to lower interest rate trend, positive fiscal policies from budget 2007/08 will create strong support to the stock market.
With Dow Jones able to hold up well and may re-challenge new high before end of year and KLCI is now set to go for another target at 1600 level. Stock market will give a sturdy support for another rally in 2008 for Malaysia property market. But bear in mind, in Malaysia, nothing is fast moving up due to our protectionism culture except Call Warrant traded in KLSE. In general, bullish from stock market that will spill out over to property market as well.


Growth of GDP
The Malaysian government’s aim that growth of GDP in 2008 is 6 to 6.5 percent could be at risk if the US sub prime mortgage crisis deepens and creates a steep drop in external demand. The International Monetary Fund (IMF) showed it ids expecting Malaysian growth to slow to 5.6 percent in 2008 from the 5.8 percent estimated for 2007.
The weaker outlook for the advanced economies is likely to slow down the growth of export to going forward. It is also slower demand for Asia’s exports and electronic goods in particular and the likelihood of further international financial market turmoil are particular negative aspect concerns. In September, 2007 the Asian Development Bank (ADB), Manila-based multilateral institutions were announced that it is expecting GDP of Malaysia will grow up 5.7 percent in 2008.
However, both the IMF and ADB numbers are lower than the official growth targets because there is a downside risk to the official predict as growth of export has already been slowing down. Malaysian export growth is highly reliant on demand from the US but the outlook for the world's major economy does not look good as chances are that the sub prime turmoil is not over yet and is likely to get worse. The latest trade figures showed that Malaysian exports to the US fell 12 percent from last year, suggesting that the slowdown in the US has already filtered down. The Malaysian economy grew 5.6 percent in the first half, somewhat short of the official was aim that 6.0 percent.
The government has recently announced additional measures to enhance the domestic economy and wish to maintain growth and to guard it from any external distresses.
Prime Minister Abdullah Ahmad Badawi is set to announce the East Coast Economic Region (ECER) which is one of the three growth projects outlined in the Ninth Malaysia Plan (9MP), the government invest RM200 billion on development blueprint which will run through year 2010.
Malaysia has set motivated investment goals for the development projects but analysts are not impressed with the progress so far. So, the three Corridors have helped to refresh investment interest, but actual investment commitments have been slow in coming.

Export of Malaysia
Malaysia's exports grew more slowly than expected at 2007 at 2.7 percent as shipments of electrical and electronic products shrank, but growth is expected to pick up in 2008..
Exports grew up to RM605.1 billion in 2007 as increasing sales to emerging markets such as China helped offset a slowdown in shipment to the United States, the country's top trading partner. Imports grew 4.9 percent last year to RM504.6 billion, resulting in a trade surplus of RM100.53 billion. Total trade hit a record RM1.1097 trillion it was grow up 3.7 percent from 2006.
Despite volatile global oil prices and a possible U.S. economic slowdown and make Malaysia's exports are expected to grow at 2008 in line with a World Bank forecast of 3.3 percent growth in the world economy and 7.6 percent growth in global trade.
These are difficult times but also confident exports will continue to be on upward trend, hovering around the global average forecast. Although we can see a better state of economy in the U.S. and other major markets, and continued growth in emerging markets, but we do not see that why Malaysian exports cannot expand.
Export growth last year came primarily from traditional and emerging markets such as Australia, China, Indonesia, Japan and the Netherlands, helping to equalize a 14.5 percent decline in exports to the U.S. Then, exports of electrical and electronic goods contracted 5.2 percent, but are likely to bounce back this year, advanced by a projected 7.7 percent rise in global semiconductor sales and local manufacturing expansion. Otherwise, manufactured products accounted for around 75 percent of Malaysia's total exports last year. Crude oil and other mineral fuels contributed 14 percent, while palm oil and other agriculture products accounted for another 9 percent.
Economists said Malaysia's export growth in 2007, which was a quick fall from expansion of 10.3 percent in 2006, was weaker than expected due to the U.S. sub prime crisis. The slowdown in U.S. demand has affected not just Malaysia but the region. We can expect have an insignificant recovery this year, backed by strong demand for petroleum and palm oil. The strengthening of the local currency is not a concern for exporters. Malaysia's managed float of the Ringgit provided "an element of stability" to the Ringgit. The Malaysian Ringgit, which has risen 2 percent so far in 2008, was trading at 3.243 to the U.S. dollar. If the currency is functioning against exporters, they should be competent to factor in this aspect b y being more competitive.