Malaysia's economy is 64.5 percent free, according to 2008 assessment, which makes it the world's 51st freest economy. Its overall score is essentially unchanged from last year, reflecting worsened scores in three of the 10 economic freedoms.
Malaysia is ranked 8th freest out of 30 countries in the Asia–Pacific region, and its overall score is higher than the regional average.
Malaysia scores above average in eight of the 10 areas measured and scores highest in government size, freedom from corruption, and labor freedom. The labor sector is highly flexible, with simple employment procedures and no minimum wage.
The top income and corporate tax rates are moderate, and overall tax revenue is relatively low as a percentage of GDP. Inflation is minor, and direct subsidies do not widely distort market prices. The tariff rate is fairly low, and the government has been working to eliminate some non-tariff barriers.
Malaysia suffers from weak investment freedom and financial freedom. Despite efforts to liberalize procedures, impediments include limited voting shares in companies, enforced hiring of ethnic Malays, and case-by-case government pre-investment approval. The financial sector is fairly well developed but subject to government interference and some restrictions on foreign involvement.
Background:
Malaysia is a constitutional monarchy, and politics is dominated by the ruling United Malays National Organization. Prime Minister Abdullah Ahmad Badawi has pledged to achieve developed-nation status by 2020. A leading exporter of electronics and information technology products, Malaysia has industries that range from agricultural goods to automobiles. Government ownership in certain key sectors, such as banking and airlines, remains high. The government recently relaxed capital controls and foreign investment restrictions in a bid to attract foreign capital. It also indicated a willingness to ease politically formidable affirmative action policies that have discouraged foreign investment and economic development.
Business Freedom - 69%
The overall freedom to start, operate, and close a business is somewhat limited by Malaysia's regulatory environment. Starting a business takes an average of 24 days, compared to the world average of 43 days. Obtaining a business licenses takes more than the world average of 19 procedures and 234 days. Bankruptcy proceedings are relatively straightforward.
Trade Freedom - 76.2%
Malaysia's weighted average tariff rate was 4.4 percent in 2005. Liberalization has progressed, but import restrictions, high service market access barriers, high tariffs, import and export taxes, non-automatic import licensing for import-sensitive industries, non-transparent regulations and standards, non-transparent government procurement, export subsidies, and weak protection of intellectual property rights still add to the cost of trade. An additional 15 percentage points is deducted from Malaysia's trade freedom score to account for non-tariff barriers.
Fiscal Freedom - 82.2%
Malaysia has moderate tax rates. The top individual income tax rate is 28 percent, and the corporate tax rate has been reduced to 27 percent in 2007 and 26 percent in 2008. Other taxes include a capital gains tax and a vehicle tax. The real property gains tax has been abolished. In the most recent year, overall tax revenue as a percentage of GDP was 16.3 percent.
Freedom from Government - 80.8%
Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 25.3 percent of GDP. The retains considerable industrial and commercial holdings.
Monetary Freedom - 78.6%
Inflation is moderate, averaging 3.3 percent between 2004 and 2006. Relatively unstable prices explain most of the monetary freedom score. Most prices are determined in the market, but the government influences certain prices through state-owned enterprises; controls the prices of petroleum products, steel, cement, wheat flour, sugar, milk, bread, and chicken meat; and usually sets ceiling prices for a list of essential foods during major holidays. An additional 10 percentage points is deducted from Malaysia's monetary freedom score to account for policies that distort domestic prices.
Investment Freedom - 40%
Rules have been eased, but foreign investors still face such restrictions as limited voting shares, prior approval, and mandatory hiring of ethnic Malays. Investment is banned in the news media, lotteries, or security paper. Foreigners may own 100 percent of certain kinds of new companies, but most existing corporate equity requires that a 30 percent stake be Malay-owned, and foreign ownership is capped in most sectors. Certain kinds of investment are screened, though commercial operations can begin before approval. Residents and non-residents may hold foreign exchange accounts, subject in many cases to government approval. Nearly all capital transactions are prohibited, are subject to restrictions, or require government approval.
Financial Freedom - 40%
Nine of the 32 commercial banks as of September 2006 were domestically owned, and 13 were foreign-owned. Ten Islamic banks account for over 10 percent of assets. The government owns a majority of the two largest local commercial banks and is active in creating larger "anchor banks" to compete internationally. Banks must lend to certain groups like low-cost housing projects. There are several offshore banks, insurance companies, and other financial institutions. Non-performing loans remain a problem. The 41 insurance companies are subject to (among other limits) restrictions on expatriate employment and foreign equity. Foreigners may trade in securities and derivatives, but participation in stock brokering and trust management is restricted.
Property Rights - 50%
Private property is protected, but the judiciary is subject to political influence. Corporate lawsuits take over a year to file, and many contracts include a mandatory arbitration clause. The International Intellectual Property Association estimates piracy-related 2004 industry losses in Malaysia at $188 million. The manufacture and sale of counterfeit products and medicines have led to serious losses for producers of consumer products and pharmaceuticals.
Freedom from Corruption - 50%
Corruption is perceived as present. Malaysia ranks 44th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. Bribery is a criminal act, but perceptions of widespread corruption and "crony capitalism" persist.
Labor Freedom - 78.7%
Relatively flexible employment regulations could be further improved to enhance employment opportunities and productivity growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee can be difficult and costly. There is no national minimum wage, and restrictions on the number of work hours are flexible.
Malaysia suffers from weak investment freedom and financial freedom. Despite efforts to liberalize procedures, impediments include limited voting shares in companies, enforced hiring of ethnic Malays, and case-by-case government pre-investment approval. The financial sector is fairly well developed but subject to government interference and some restrictions on foreign involvement.
Background:
Malaysia is a constitutional monarchy, and politics is dominated by the ruling United Malays National Organization. Prime Minister Abdullah Ahmad Badawi has pledged to achieve developed-nation status by 2020. A leading exporter of electronics and information technology products, Malaysia has industries that range from agricultural goods to automobiles. Government ownership in certain key sectors, such as banking and airlines, remains high. The government recently relaxed capital controls and foreign investment restrictions in a bid to attract foreign capital. It also indicated a willingness to ease politically formidable affirmative action policies that have discouraged foreign investment and economic development.
Business Freedom - 69%
The overall freedom to start, operate, and close a business is somewhat limited by Malaysia's regulatory environment. Starting a business takes an average of 24 days, compared to the world average of 43 days. Obtaining a business licenses takes more than the world average of 19 procedures and 234 days. Bankruptcy proceedings are relatively straightforward.
Trade Freedom - 76.2%
Malaysia's weighted average tariff rate was 4.4 percent in 2005. Liberalization has progressed, but import restrictions, high service market access barriers, high tariffs, import and export taxes, non-automatic import licensing for import-sensitive industries, non-transparent regulations and standards, non-transparent government procurement, export subsidies, and weak protection of intellectual property rights still add to the cost of trade. An additional 15 percentage points is deducted from Malaysia's trade freedom score to account for non-tariff barriers.
Fiscal Freedom - 82.2%
Malaysia has moderate tax rates. The top individual income tax rate is 28 percent, and the corporate tax rate has been reduced to 27 percent in 2007 and 26 percent in 2008. Other taxes include a capital gains tax and a vehicle tax. The real property gains tax has been abolished. In the most recent year, overall tax revenue as a percentage of GDP was 16.3 percent.
Freedom from Government - 80.8%
Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 25.3 percent of GDP. The retains considerable industrial and commercial holdings.
Monetary Freedom - 78.6%
Inflation is moderate, averaging 3.3 percent between 2004 and 2006. Relatively unstable prices explain most of the monetary freedom score. Most prices are determined in the market, but the government influences certain prices through state-owned enterprises; controls the prices of petroleum products, steel, cement, wheat flour, sugar, milk, bread, and chicken meat; and usually sets ceiling prices for a list of essential foods during major holidays. An additional 10 percentage points is deducted from Malaysia's monetary freedom score to account for policies that distort domestic prices.
Investment Freedom - 40%
Rules have been eased, but foreign investors still face such restrictions as limited voting shares, prior approval, and mandatory hiring of ethnic Malays. Investment is banned in the news media, lotteries, or security paper. Foreigners may own 100 percent of certain kinds of new companies, but most existing corporate equity requires that a 30 percent stake be Malay-owned, and foreign ownership is capped in most sectors. Certain kinds of investment are screened, though commercial operations can begin before approval. Residents and non-residents may hold foreign exchange accounts, subject in many cases to government approval. Nearly all capital transactions are prohibited, are subject to restrictions, or require government approval.
Financial Freedom - 40%
Nine of the 32 commercial banks as of September 2006 were domestically owned, and 13 were foreign-owned. Ten Islamic banks account for over 10 percent of assets. The government owns a majority of the two largest local commercial banks and is active in creating larger "anchor banks" to compete internationally. Banks must lend to certain groups like low-cost housing projects. There are several offshore banks, insurance companies, and other financial institutions. Non-performing loans remain a problem. The 41 insurance companies are subject to (among other limits) restrictions on expatriate employment and foreign equity. Foreigners may trade in securities and derivatives, but participation in stock brokering and trust management is restricted.
Property Rights - 50%
Private property is protected, but the judiciary is subject to political influence. Corporate lawsuits take over a year to file, and many contracts include a mandatory arbitration clause. The International Intellectual Property Association estimates piracy-related 2004 industry losses in Malaysia at $188 million. The manufacture and sale of counterfeit products and medicines have led to serious losses for producers of consumer products and pharmaceuticals.
Freedom from Corruption - 50%
Corruption is perceived as present. Malaysia ranks 44th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. Bribery is a criminal act, but perceptions of widespread corruption and "crony capitalism" persist.
Labor Freedom - 78.7%
Relatively flexible employment regulations could be further improved to enhance employment opportunities and productivity growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee can be difficult and costly. There is no national minimum wage, and restrictions on the number of work hours are flexible.
Malaysia
Rank: 51
Regional Rank: 8 of 30
The Government of Malaysia has on the other hand refused to face up to economic realities for political considerations as the next General Elections is expected within the next 3 months. It has earlier been forecast that the Malaysian economy will grow between 6.0 to 6.5% for 2008. However, in the light of the rising oil prices, the global liquidity crisis and consequently the global economic slowdown, the Second Finance Minister has as recent as 19 December continued to insist that the country will be able to meet its growth targets
KUALA LUMPUR, Dec 28 (Bernama) -- The outlook for the Malaysian economy in 2008 is expected to be favourable with growth of between 6.0 and 6.5 percent despite adverse external factors as brisk activities from new growth corridors coupled with belt-tightening measures, high commodity prices, stable interest rates and inflation provide a crucial boost to the economy.
Gross domestic product (GDP) grew by 6.7 percent in the third quarter this year, its highest in three years, after posting 5.8 percent in the second quarter and 5.5 percent in the first quarter. For the whole year of 2007, the rate is expected to be 6.0 percent.
The positive performance in the third quarter was supported by the robust growth of the services sector of 10.5 percent, followed by construction (4.7 percent), manufacturing (3.4 percent), mining (2.3 percent) and agriculture (0.6 percent).
The trade account recorded a surplus of RM28.2 billion in the third quarter from RM22.6 billion previously.
The ringgit was also strong against the US dollar with the exchange rate in the first 11 months of this year more than 6.0 percent higher than the average for 2006 as a whole. This has created, through stable import prices, a stable investment climate for enterprises.
The local unit has year-to-date rose 4.9 percent and almost 12 percent since it was unpegged from the greenback in July 2005.
Prime Minister Datuk Seri Abdullah Ahmad Badawi had said the government was prepared to face any external negative effects generated by the global economic environment.
Abdullah, who is also finance minister, said the current economic situation in the country was improving, backed by ample reserves and strong fundamentals.
He also said Bank Negara Malaysia (BNM) has developed a system that enabled it to gauge "what is happening now and before" and analyse any kind of developments in countries with which Malaysia has strong investment and trade relations, such as the US, Japan, Singapore and Hong Kong.
BNM governor, Tan Sri Dr Zeti Akhtar Aziz, had said the country's growth momentum was expected to be sustained in the near term.
However, she said, there were greater uncertainties in the medium term such as a pronounced slowdown in the US economy which would make the global financial market volatile and the continued high energy prices.
"Overall, potential exists for the domestic economy to record steady growth. Malaysia's track record showed that each time it faces a challenging time, the country has the capacity and flexibility to respond and produce the desired outcome," she said.
Total investment will grow by 8.4 percent, accelerating slightly from the 2006 rate of 7.9 percent.
Meanwhile, Hong Kong-based Economist Intelligent Unit said Malaysian domestic demand would pick up to ensure that growth remained robust with private consumption to make the largest contribution to GDP this year followed by private investment.
Private consumption is set to grow by 7.3 percent this year, slightly higher than 2006's 7.1 percent while government consumption is expected to grow by 10.8 percent, a rate approximately twice the 5.0 percent posted in 2006.
Private investment is predicted to increase by 7.5 percent this year from 7.0 percent last year while public investment is expected to increase by 9.3 percent from 8.9 percent.
EIU's director of corporate network, Justin Wood, said the domestic demand would be contributed by government spending, particularly due to civil service pay increase while the private sector would invest in plants and machinery.
Demand from the public sector would be driven by infrastructure projects such as the Iskandar Development Region (IDR).
IDR, in southern Johor, is one of the three growth corridors outlined in the Ninth Malaysia Plan, the government's RM200 billion development blueprint which will run through 2010.
The IDR is the first regional development strategy that was launched by the prime minister in November last year to boost the domestic economy, to sustain growth and to shield it from any external shocks.
The other two corridors are the Northern Corridor Economic Region and the East Coast Economic Region which were launched in July and October 2007 respectively.
Meanwhile, in the event of the surge in global crude oil prices, Dr Yeah Kim Leng, group chief economist of RAM Holdings Bhd, said the economy would be spared the direct impact due to massive government subsidies, but cautions that there could be a need for belt-tighthening measures.
Crude oil prices currently hover around US$93 (US$1=RM3.33) per barrel.
While the government should continue to provide subsidies, Yeah nevertheless said that "it may not be sufficient for the government to increase subsidies further as it could exert pressure on the country's financial state."
Subsidies cost the government RM4.788 billion last year and are expected to increase up to RM8.959 billion this year.
The government has promised that the low-income group would not be affected if the petrol and gas prices were reviewed.
Second Finance Minister, Tan Sri Nor Mohamed Yakcop, had said the rising oil prices would help and hurt the economy.
"As a net exporter of crude oil, the country stands to gain RM250 million for every US$1 rise in prices. However, at the same time, the government will have to pay higher subsidies for retail fuel. "But the net effect is positive," he said.
Higher oil prices could translate into higher inflation but the country is confident of maintaining it at between 2.0 and 2.5 percent this year.
The consumer price index (CPI), the indicator for inflation, has increased 2.3 percent year-on-year in November, the highest in nine months.
THIS year, we believe the Malaysian economy will remain strong on the back of the expected significant investment growth and large government projects lined up to boost infrastructure spending within the three economic corridors of development. The country's growth is expected to remain robust between a moderate range of 6.0% to 6.5% in 2008. The Overnight Policy Rate (OPR) is expected to finish the year up 20 to 25 bps to between 3.7% and 3.75% barring any slowdown in growth; while the inflation is expected to rise to a range of 2.5%-3.0%. We also think that the Fed may cut the funds rate by a further 25 bps this year to 4% to avoid a recession.
On the fixed-income segment, we expect the Government’s financing need to add up to about RM44.3bil; hence we believe the Government will issue a minimum of RM45bil worth of government securities (both MGS and GII) in 2008. Meanwhile, the MGS curve is expected to get steeper in 2008 as yields in the longer tenured papers continue to rise. We expect the market to trade the bonds cautiously with bearish bias in response to the inflationary pressures and the unsettled credit issues in the US.
Elsewhere, issuance in the private debt securities (PDS) market is also expected to grow next year in facilitating bigger new corporate structures in the local market and the Private Funding Initiative (PFI). In the near term, continued speculation on further strengthening of the MYR currency leads us to expect a continual foreign interest in the local bond market.
KUALA LUMPUR, Dec 28 (Bernama) -- The outlook for the Malaysian economy in 2008 is expected to be favourable with growth of between 6.0 and 6.5 percent despite adverse external factors as brisk activities from new growth corridors coupled with belt-tightening measures, high commodity prices, stable interest rates and inflation provide a crucial boost to the economy.
Gross domestic product (GDP) grew by 6.7 percent in the third quarter this year, its highest in three years, after posting 5.8 percent in the second quarter and 5.5 percent in the first quarter. For the whole year of 2007, the rate is expected to be 6.0 percent.
The positive performance in the third quarter was supported by the robust growth of the services sector of 10.5 percent, followed by construction (4.7 percent), manufacturing (3.4 percent), mining (2.3 percent) and agriculture (0.6 percent).
The trade account recorded a surplus of RM28.2 billion in the third quarter from RM22.6 billion previously.
The ringgit was also strong against the US dollar with the exchange rate in the first 11 months of this year more than 6.0 percent higher than the average for 2006 as a whole. This has created, through stable import prices, a stable investment climate for enterprises.
The local unit has year-to-date rose 4.9 percent and almost 12 percent since it was unpegged from the greenback in July 2005.
Prime Minister Datuk Seri Abdullah Ahmad Badawi had said the government was prepared to face any external negative effects generated by the global economic environment.
Abdullah, who is also finance minister, said the current economic situation in the country was improving, backed by ample reserves and strong fundamentals.
He also said Bank Negara Malaysia (BNM) has developed a system that enabled it to gauge "what is happening now and before" and analyse any kind of developments in countries with which Malaysia has strong investment and trade relations, such as the US, Japan, Singapore and Hong Kong.
BNM governor, Tan Sri Dr Zeti Akhtar Aziz, had said the country's growth momentum was expected to be sustained in the near term.
However, she said, there were greater uncertainties in the medium term such as a pronounced slowdown in the US economy which would make the global financial market volatile and the continued high energy prices.
"Overall, potential exists for the domestic economy to record steady growth. Malaysia's track record showed that each time it faces a challenging time, the country has the capacity and flexibility to respond and produce the desired outcome," she said.
Total investment will grow by 8.4 percent, accelerating slightly from the 2006 rate of 7.9 percent.
Meanwhile, Hong Kong-based Economist Intelligent Unit said Malaysian domestic demand would pick up to ensure that growth remained robust with private consumption to make the largest contribution to GDP this year followed by private investment.
Private consumption is set to grow by 7.3 percent this year, slightly higher than 2006's 7.1 percent while government consumption is expected to grow by 10.8 percent, a rate approximately twice the 5.0 percent posted in 2006.
Private investment is predicted to increase by 7.5 percent this year from 7.0 percent last year while public investment is expected to increase by 9.3 percent from 8.9 percent.
EIU's director of corporate network, Justin Wood, said the domestic demand would be contributed by government spending, particularly due to civil service pay increase while the private sector would invest in plants and machinery.
Demand from the public sector would be driven by infrastructure projects such as the Iskandar Development Region (IDR).
IDR, in southern Johor, is one of the three growth corridors outlined in the Ninth Malaysia Plan, the government's RM200 billion development blueprint which will run through 2010.
The IDR is the first regional development strategy that was launched by the prime minister in November last year to boost the domestic economy, to sustain growth and to shield it from any external shocks.
The other two corridors are the Northern Corridor Economic Region and the East Coast Economic Region which were launched in July and October 2007 respectively.
Meanwhile, in the event of the surge in global crude oil prices, Dr Yeah Kim Leng, group chief economist of RAM Holdings Bhd, said the economy would be spared the direct impact due to massive government subsidies, but cautions that there could be a need for belt-tighthening measures.
Crude oil prices currently hover around US$93 (US$1=RM3.33) per barrel.
While the government should continue to provide subsidies, Yeah nevertheless said that "it may not be sufficient for the government to increase subsidies further as it could exert pressure on the country's financial state."
Subsidies cost the government RM4.788 billion last year and are expected to increase up to RM8.959 billion this year.
The government has promised that the low-income group would not be affected if the petrol and gas prices were reviewed.
Second Finance Minister, Tan Sri Nor Mohamed Yakcop, had said the rising oil prices would help and hurt the economy.
"As a net exporter of crude oil, the country stands to gain RM250 million for every US$1 rise in prices. However, at the same time, the government will have to pay higher subsidies for retail fuel. "But the net effect is positive," he said.
Higher oil prices could translate into higher inflation but the country is confident of maintaining it at between 2.0 and 2.5 percent this year.
The consumer price index (CPI), the indicator for inflation, has increased 2.3 percent year-on-year in November, the highest in nine months.
THIS year, we believe the Malaysian economy will remain strong on the back of the expected significant investment growth and large government projects lined up to boost infrastructure spending within the three economic corridors of development. The country's growth is expected to remain robust between a moderate range of 6.0% to 6.5% in 2008. The Overnight Policy Rate (OPR) is expected to finish the year up 20 to 25 bps to between 3.7% and 3.75% barring any slowdown in growth; while the inflation is expected to rise to a range of 2.5%-3.0%. We also think that the Fed may cut the funds rate by a further 25 bps this year to 4% to avoid a recession.
On the fixed-income segment, we expect the Government’s financing need to add up to about RM44.3bil; hence we believe the Government will issue a minimum of RM45bil worth of government securities (both MGS and GII) in 2008. Meanwhile, the MGS curve is expected to get steeper in 2008 as yields in the longer tenured papers continue to rise. We expect the market to trade the bonds cautiously with bearish bias in response to the inflationary pressures and the unsettled credit issues in the US.
Elsewhere, issuance in the private debt securities (PDS) market is also expected to grow next year in facilitating bigger new corporate structures in the local market and the Private Funding Initiative (PFI). In the near term, continued speculation on further strengthening of the MYR currency leads us to expect a continual foreign interest in the local bond market.
Global Outlook (US)
The first half of 2008 is expected to remain murky, until the actual depth of losses and the full impact of the credit crunch is realised although we expect further knock-on contagion effects to materialise no less from further mortgage resets and rising credit card defaults.
The focus of the second half will be on more control and fixing of the damage in the housing and credit market and limiting the effects of the same. Rising concerns over surging oil prices and the possibility of further deterioration of the US housing slump spreading to the wider economy and affecting consumer spending and business investment contributes further to a possible recession in the US.
The credit crunch did not hit only the mortgage industry but has also led many banks and financial institutions to tighten their lending requirements besides reducing their lending ability as losses hit their balance sheets. This has resulted in heightened risk aversions among investors and widening of interest rate spreads in both short and long-term rates; despite several cuts in the Fed fund rates.
Thus far, the forecast losses arising from the US subprime-related losses total about US$300bil and many financial institutions have warned that there will be more to come next year. However, the Fed was prompt in acknowledging the issues and reacted to it by lowering the Fed funds rate by 50 bps in September, 25 bps in October and another 25 bps during the recent FOMC meeting in December; leaving the rate to stand at 4.25% now.
The Fed has also been gradually injecting liquidity into the money market to contain the financial market turmoil and to avoid the economy from being thrown into an irrecoverable tailspin. In addition, the US Fed also agreed to freeze interest rates on subprime mortgages for the next five years although the effectiveness of this remains uncertain.
The Fed also decided to add liquidity to money markets in collaboration with some of the main central banks in the world such as the BOC, ECB, BOE and SNB with the objective of alleviating the credit crunch although whether this would help alleviate the underlying weakness in the economy remains questionable.
High crude oil prices will continue to threaten the economy next year, carrying forward the spillover effect from 2007. A weaker US currency coupled with market speculation resulted in crude oil rising to an all-time high of US$99.25 per barrel. The current situation however is one that is demand-led and the surge in oil prices is likely to reverse in the event of a slowdown in the global economy.
This situation is underlined by OPEC’s decision to maintain the crude oil production at 31.5 million barrel per day until early 2008 sufficient to meet the expected demand. This has calmed the raging seas not only in US but across the globe as well. However, the impact of market speculation on oil prices and as a hedge to a weaker USD cannot be underestimated.
As the economy continues to be burdened by the dollar depreciation, high oil prices and inflationary pressures, we believe that the Fed will not be complacent at the current funds rate and there may be more rate cuts next year. In the latest FOMC meeting in December, the Fed dropped the language from its previous statement that risks of slower growth and faster inflation were “roughly balanced”; adding that they are ready for further cuts if the housing slump and the credit crunch continue to deteriorate. Given the current release of weaker data and the strong hint by the Fed, we opine that there might be another rate cut in the first half of 2008 which will bring the Fed Funds Rate to 4.00%. However, the next course of action will be very much dependent on the economic data.
As such, we think the US Treasury yield curve will steepen further during the first half. In addition, the 10-2 year US Treasury benchmark spreads has been gradually widening, as the Fed continues its easing policies.
Asian Market
Despite increased risks following the financial turbulence/credit fears in the US economy coupled with surging oil prices, the global economy remains sustained by the continued strength in the emerging economies in the Asian region. Whether these Asian economies can fully support a prolonged and sustained weakness in developed markets' economies will depend on the rate of growth of internal consumption and spending.
Spreads between Asian high-grade bonds and US high-grade bonds had widened tremendously ever since the US market downturn and this trend is expected to prevail through the first half of 2008; as investors patiently anticipates for further signal on the development in the US market.
The outlook of Asian credit remains vague in 2008 following one of the most challenging years experienced by investors in this decade. Given the slowdown in the US economy (with more possible rate cuts in 2008), it should be a stepping stone for Asia to grow moderately while foreign investors continue to invest in Asia due to interest in the widened spreads.
As such, our recommendation for 2008 remains to be defensive, at least until the ongoing impact of the liquidity crunch becomes more visible.
