M’sia staring at recession with Greek euro exit

Syed Jaymal Zahiid

Investors are predicting a Greek departure by early 2013 that may trigger a global financial crisis, and Malaysia cannot escape from the repercussions.

KUALA LUMPUR: Malaysia is facing the threat of a second recession in just four years should troubled Greece leave the euro zone, which economists and analysts now say is likely.

Bloomberg quoted economists as saying that a Greek exit could reduce China’s growth to 6.4% this year from 9.2% in 2011 and Malaysia will be among those affected by slow demands from the world’s second biggest economy.

In recent years, Malaysia and the rest of Asia have increased their trade with China, betting on the Asian giant’s continued growth to offset weak exports to the West.

This meant China could no longer fill in the gap left from the US and EU economic crisis and Greece’s departure would trigger fresh market panic.

Prior-Wandesforde, a Singapore-based director of Asian economics at Credit Suisse, said the ongoing euro zone crisis “would also mean a renewed, deep recession would be highly likely in Hong Kong, Singapore, Malaysia, Taiwan and South Korea”.

Exports to the euro zone from these countries account for more than 5% of total gross domestic product (GDP), according to the Prior-Wandersforde’s calculation.

Malaysia had recorded a third consecutive quarterly drop since it posted a 7.2% increase in the second quarter of last year after it announced a mere 4.7% GDP growth, and analysts are predicting a sharper dip for the rest of 2012.

Collateral damage

Many of the reasons contributing to the projected slowdown had to do with the increased reliance on China, which economists say is headed for a sixth consecutive quarterly drop in growth. Analysts are saying the worse is yet to come.

Economists at China International Capital Corp (CICC) said Chinese exports slowed unexpectedly in April and may dip by 3.9% if Greece exits the euro compared with a 10% gain without an exit. About 19% of the country’s export goes to the EU.

Bloomberg reported Citigroup economists as saying that the probability of the Mediterranean country leaving the euro is higher than their earlier forecast of 75% and now are making a “base case” that Greece will leave at the beginning of 2013.

Bank of America Merrill Lynch strategists estimate the euro-region’s GDP would contract at least 4% should Greece depart, a scenario similar to the Lehman’s 2008 collapse that resulted in the global financial meltdown.

“A Greek departure from the currency would inflict ‘collateral damage’,” says Pacific Investment Management Co’s Richard Clarida, a view echoed by economists from Bank of America Merrill Lynch and JPMorgan Chase & Co, according to a Bloomberg report today.

Although Greece is only responsible for 0.4% of the world economy, anxiety over the June 17 Greek election has already helped wipe almost US$3 trillion (RM9.5 trillion) from global equities this month.

Malaysia had recorded a sharp drop in foreign direct investments in the wake of the eurozone crisis and despite slower growth predictions, Prime Minister Najib Tun Razak maintained that the country is on target to meet its 5% GDP target for 2012.