A year into what has been described as the most severe recession since World War II, many people are wondering if the economy will soon be recovering. With signs of optimism alternating with news of continued gloom, many are uncertain at what point along the down-cycle is the economy.

To understand where Malaysia is in the midst of all this, SGM invited Prof Cheong Kee Cheok, Adjunct Professor and former Dean at the Faculty of Economics and Administration, University of Malaya, to give an overview of the global crisis, both from the global as well as local perspective. His lecture entitled, "The Global Crisis and Malaysia: Where Are We Heading?" was held on August 15, 2009 at Wisma Kebudayaan SGM, Kuala Lumpur. Dato' Dr P H S Lim, Founder President of the Malaysian Investors' Association was the chairman of the lecture.

Speaking in an easy-to-understand manner, Prof Cheong started the lecture by providing some background on the origins of the financial crisis to the 200-odd crowd attending the lecture. He explained that the roots of the credit crunch have started a few years earlier. After the September 11 terrorist attacks, the US entered into a recession in 2002. Interest rates were cut to revive the economy but this also fuelled a credit binge. Most financial analysts link the current credit crisis to the sub-prime mortgage business, in which US banks give high-risk loans to people with poor credit histories. These and other loans, bonds or assets are bundled into portfolios or Collateralised Debt Obligations (CDOs), and sold on to investors globally. Between 2004 and 2006, interest rates in US rose from 1% to 5.35%, triggering a slowdown in the US housing market. Homeowners, many of whom could only barely afford their mortgage payments when interest rates were low, began to default on their mortgages. Default rates on sub-prime loans rose to record levels. The impact of these defaults were felt across the financial system in US and Europe as many of the mortgages had been bundled up and sold on to banks and investors.

According to Prof Cheong, Asian countries have been affected in a different way from the US and European countries, as the 1997-98 financial crisis has left the Asian countries with stronger financial sectors with relatively little toxic assets. However, the heavy dependence on exports to US has affected the real sector, which in turn weakens the financial sector.

Prof Cheong pointed out that Malaysia’s recovery is very much dependent on the state of the US and global economy, which at this stage does not look optimistic. Even if the economy recovers soon, unemployment is likely to remain at a high level for years to come. Although Malaysia's fortunes are inextricably tied to that of the world economy, our different starting point sets us apart in some ways. To move ahead, it is important for Malaysia to distinguish between the short-, medium- and long-term. Malaysia’s outlook for all three periods are affected by the government’s existing policies as well as the several initiatives it has taken to deal with this global crisis.

Prof Cheong feels the government’s short term stimulus package may not be sufficient to generate the desired impact to the economy as the package has too little fiscal expenditure and did not have any specific project targets. As for Malaysia’s middle term plan which emphasises investment liberalisation, the government needs to ensure that the implementation matches the policy, as Malaysia’s position as a key destination for foreign direct investment in the region is slipping away. While Prof Cheong lauds Malaysia’s long term plan to diversify out of an export-driven economy and to increase high value-added services, Malaysia is faced with the enormous challenge of human capital deficiency. Many manufacturing sectors specialise in assembly and packaging with little focus on developing R&D capabilities. The crux of the problem with human capital, as Prof Cheong sees it, is with the education system, which he feels require a major reform. Despite huge spending on education, standards in our schools are deteriorating and university rankings are falling.

All hope is not lost though. Prof Cheong feels that Malaysia can still be successful if we can overcome the various hurdles stated including the institution capacity, a vital factor in the success of policy implementation. We can learn from the success stories of some of our Asian neighbours who have been successful in technology and industrial innovation, as well as ensuring a steady flow of human capital through upgrading their education standards.

Prof. Dr. Cheong Kee-Cheok is a graduate of the University of Malaya and the London School of Economics, where he obtained his Ph.D. He spent nearly two decades at the World Bank as economist and then senior economist. After his return to Malaysia, he continues to consult for the Bank and UN agencies. A former Vice President of the Malaysian Economics Association, he currently researches and writes on Asia and its role in the international economy. His book “Asia Resurgent: Transformation, Growth and Integration” was published by the University of Malaya Press in 2006.