Corporate profits to improve, says RAM

A RENEWED sense of political stability and the liberalised investment environment under Prime Minister Datuk Seri Najib Tun Razak's administration are expected to help improve corporate profits, according to Rating Agency Malaysia (RAM).

The rating agency, in its "Economic Outlook Review and Update", said recent liberalisation policies such as the removal of restrictions on foreign ownership in selected services sub-sectors and the award of additional Islamic banking licences are likely to boost investments as business sentiment and corporate profits improve.

At the beginning of the year, RAM's initial gross domestic product (GDP) growth forecast for Malaysia of 0.8 per cent to 2.1 per cent, with a base-case of 0.9 per cent, had been premised on a flat to marginally negative global growth.

With the synchronised and sharper-than expected downturn in most developed economies, a contraction in global output is now inevitable in 2009, RAM said.

"Since our GDP forecasts released in February, there have been marked downward revisions in the growth expectations of Malaysia's trading partners. In this context, we revisit the risk of a deeper export shock and its second-order impact on domestic demand in Malaysia," it said.

With the sharper-than-anticipated decline in both external and domestic demand, RAM has revised its 2009 GDP forecast for Malaysia to -3.3 per cent from its mean forecast of 0.9 per cent.

On the other hand, RAM said it has raised the nation's 2010 GDP growth projection from 3.8 per cent to 4.9 per cent as the global recession eases and benefits from aggressive monetary and fiscal stimulus measures filter.

A key consideration in RAM's revised forecast is the identification of the turning point and magnitude of the recovery in external demand.

RAM said the collapse in domestic demand in first quarter 2009 had shown closer-than-expected linkage with the export-oriented sector, through the labour market and private investment.

"A unique feature of the current global recession is its highly synchronised nature, and the fact that such downturns tend to be more pronounced while recoveries usually take longer due to the magnitude of the financial crisis and associated housing and stock-market bubbles," it said.

According to RAM, countries hit by a financial crisis are often led out of recession by exports.

Examples include Malaysia during the Asian financial crisis in 1998, and Japan after its financial crisis in the 1990s, it said.

In the present circumstances, the lack of export demand in crisis-hit countries, mainly comprising advanced economies, to push growth implies that Malaysia's recovery in 2009 and 2010 will likely be modest, the rating agency said.

Similarly, economic growth in export-driven countries is also envisaged to remain weak over the same period, it said.

With only tepid recovery now the most likely outcome for advanced economies, Malaysia's export performance in 2009 has been revised downwards to -17.4 per cent (from -5.0 per cent), before a moderate 6.4 per cent recovery in 2010. - BERNAMA