The fourth quarter of 2009 saw Malaysian economy recorded strong recovery on year-on-year basis. So strong it was that the monetary authority of Malaysia went for a rate hike, making Malaysia the second country after Australia to adopt a hawkish monetary policy. The question that should be asked now is, did we need the big stimulus?
The question is particularly relevant because the main driver of recovery has been external demand. This is something I have been stressing from the very beginning and it is the thrust of my opposition to economic stimulus, especially in the fashion of fiscal expansion, given the effect of the expansion on fiscal deficit, effect on future taxpayers as well as its potential adverse effect on private borrowers and therefore the economy sans the public sector.
Growth for external demand for domestic goods almost doubled the growth of domestic demand for goods. Add the fact that external demand makes up a very large part of Malaysian GDP, in fact approximately 100% in terms of exports-to-GDP ratio, the stimulus seems unnecessary.
Without the stimulus, recovery might have been less impressive than what was registered recently; it would be a recovery nonetheless. This however assumes that the government spending has no affect on interest rate and thus, the exchange rate. This is possible if the monetary authority, which is the Bank Negara, colludes with the executive branch of the government.
But expansion of fiscal policy does affect interest rate and the exchange rate assuming independence of the monetary authority, at least within the typical IS-LM model under open economy.
With that model with that particular settings, recovery without stimulus could have been just as impressive. If the extraordinary fiscal expansion were absent — the factor inhibiting exports that is higher exchange rate due to fiscal expansion would be absent — external demand for domestic goods could have increased much more than the already impressive level we saw at the end of 2009.
Remember, a lot of people were pleasantly surprised by the fourth quarter growth.
 — Malaysia’s economy expanded 4.5 percent in the final three months of 2009 from a year earlier, Prime Minister Najib Razak said yesterday. Economists expected a 3.2 percent expansion, a Bloomberg survey showed. Gross domestic product fell in the preceding three quarters as exports slumped amid the global financial crisis. [Malaysia May Beat Korea, India to Asia Rate Increase. David Yong. Bloomberg. February 25 2010]
 — March 3 (Bloomberg) — Malaysia may be the next Asian country to pull back monetary stimulus as its recovery strengthens, moving to raise borrowing costs or reduce excess cash in the economy ahead of neighboring Indonesia. [Malaysia May Pull Monetary Stimulus Before Indonesia . Shamim. David Yong. Bloomberg. March 3 2010]
 — The external sector performed favourably with both Exports and Imports turned over by 7.3 per cent and 6.9 per cent respectively. The improved demand for the products of Electrical & Electronics, Animal & Vegetables Oils & Fats and Chemicals have contributed to the increase in Exports. Meanwhile, the growth in Imports was due to the higher demand for intermediate goods and capital goods. [National Product and Expenditure Accounts Fourth Quarter 2009. Department of Statistics of Malaysia. February 24 2010]
 — Malaysia’s real GDP, population 29,992,577 in 2008 according to the World Bank, grew 4.5% compared to the same period one year ago. The impetus behind headline number was domestic demand (GDP minus net exports), +3.9% Y/Y and external demand (exports), +7,3%. [A tale of two recoveries: Malaysia vs. Germany. Rebecca Wilder. News N Economics. February 25 2010]