http://www.bizedge.com.my/article.cfm?id=6172

12-07-2001:

Layoffs put damper on private consumption growth

By Joseph Chin, 12.10pm

The current uncertainty about job security and the spate of retrenchments, especially in the electronics industry, would dampen private consumption as workers cut back on their spending, said economists.

The weaker private consumption would also affect the government's move to spur consumption credit as one of the key drivers to revive the economy. This would also see demand for passenger cars contracting if the slowdown continues, said an economist with a local research house.

According to HLG Research, for every 10,000 workers retrenched in the manufacturing sector, consumption was directly and indirectly expected to be reduced by RM36.6 million or about 0.02 per cent of total private consumption.

'As for the banking sector, the estimated impact would be more significant at RM110 million or 0.1 per cent of total private consumption,' the research house said in a recent report.

Another effect of the retrenchments could be a mild increase in non-performing loans (NPLs) as sub-contractors reel from the effects of shrinking orders from local and multinational corporations (MNCs) and face difficulties servicing their loans.

Current NPLs (based on a six-month classification) of the banking system totalled RM53.8 billion in April, the highest in nearly two years.

The net NPL ratio in April reached 7.4 per cent of total loans in the banking system, a level not seen since November 1999.

The Federation of Malaysian Manufacturers (FMM) northern branch chairman Datuk Lee Ow Kim said he expected small and medium-scale industries (SMIs) to be more adversely affected than the multinational corporations (MNCs) in terms of financing, especially in Penang.

While export-oriented industries were now feeling the brunt of the slowdown, especially in the electronics sector, it was a double whammy for domestic-oriented industries.

'The domestic industries were badly affected during the financial crisis of 1997-98 and have yet to recover. With the current downturn, they are in more difficulties and their loans could turn into NPLs,' Lee said in a telephone interview from Penang.

Penang, the northern hub for the electronics industry, had been hard hit by the global downturn in the industry. The Human Resources Ministry said 16,091 workers were retrenched from January to June 30, out of which 4,438 alone were from Penang.

The unemployment figures were higher as they exclude redundancy programmes such as voluntary separation schemes implemented by manufacturers and financial institutions.

The Malaysian Trades Union Congress (MTUC) had said about 90,000 workers in the electrical and electronics industry might be retrenched this year if the slowdown in global demand continued.

Lee said there were still many companies operating below normal capacity and they had not reduced the workforce, but had instead cut back on overtime and working days.

These were short term measures so that the companies could still retain the workers for any possible upturn.

'However, if the recovery does not come soon, the companies may have to further reduce cost, including work force. This is the potential threat to Penang's industry,' he said.

HLG Research chief economist Lee Heng Guie said the level of retrenchments would rise this year but not reach a level as bad as that seen in 1998 as they were mainly confined to the electronics sector.

'We don't expect it to reach a very alarming level. Retrenchments are now related to the downturn in the demand which has affected the electronics-based industry,' Lee said.

He said that there was still areas in the economy where jobs were still available such as the construction sector following the government's fiscal stimulus package to prime pump the economy.

Lee added that there would also be more job seekers in the market, especially following the anchor banks' move to reduce staff through voluntary separation schemes.

However, he said, there were also other areas in the financial services industry such as in the unit trust, insurance and the information, communication and technology sector that required workers.

'The problem is the mismatch of skills to the jobs. Retraining is needed,' he said.