http://www.asiaweek.com/asiaweek/daily/foc/ 0,8773,181376,00.html

Webfiles: Where Will It All End?

Malaysia's budget may not be enough to halt the coming economic crisis

By ARJUNA RANAWANA

Friday, October 26, 2001 Web posted at 01:05 p.m. Hong Kong time, 01:05 a.m. GMT

Everybody knows the Asian region is in for hard economic times. What we do not know is how bad and how long the downturn is going to be. A number of economies have unveiled plans to deal with the shock waves from the devastating attacks on the United States in September. Last week, the Malaysian government did the same thing, with a budget aiming for 5% GDP growth for the fiscal year 2002. Growth for the current year has been revised downward to around 3%. As ambitious as the package was in some areas, it may not be able to achieve that target, given the adverse conditions looming for the region.

The plan by Prime Minister Mahathir Mohamad, who is also finance minister, is to put money in people's pockets so that they can spend more and revitalize the economy that way. Individual income tax rates were lowered and bonuses and salaries increased for civil servants in the hope that the private sector will follow suit. The government will also increase its operating and developmental expenditure by 10.4% to $26.4 billion. This means Malaysia's fifth deficit budget in a row, although the 2002 deficit, planned at $4.7 billion, will be a billion dollars less than that for 2001. Partly to offset this, subsidies on petrol and diesel were reduced, raising pump prices marginally.

Few people in the business community were impressed. Jason Chong, Malaysian head of research of Merrill Lynch, voiced the feelings of many when he said the market had been expecting corporate tax cuts. "From the market perspective, it has been disappointing," he said. Some also feel that the fiscal stimulus package announced by the government immediately after the Sept. 11 terrorist attacks was insufficient. "In a $100 billion economy, $1.13 billion isn't very much," points out Song Seng Wun, regional economist for GK Goh Securities in Singapore.

The depressing truth is that the crisis ahead is going to be too big for Malaysia to deal with alone. Despite being a stable and relatively well-managed country, Malaysia always suffers badly when international commerce takes a knock. The figures show why. Trade with the U.S. is at $38 billion a year, while investment in Malaysia by American companies is worth nearly $20 billion, according to the American-Malaysian Chamber of Commerce. Things were bad enough when the tech wreck hit earlier this year. Now, though, there seems to be no letting-up in the bad news. In northwestern Penang where most of the country's chipmakers are located, some of the big boys announced more lay-offs in October. The latest was Intel, which cut its work force by 1,300. This followed similar moves by AMD (1,800 people laid off) and Seagate (7,000).

The other sector that will be hit is tourism. More than 10 million people visit Malaysia each year, a country of 23 million. The numbers are drying up, and the Malaysian Airline System carrier has announced route cancellations. The country's over-built hotel sector had been given a reprieve by some innovative marketing campaigns in the past two years, but with the world economic situation deteriorating, things are looking bleak. Mahathir has been urging travelers from Muslim countries to come to Malaysia. He recently told a meeting in Kuala Lumpur that as Muslims are being looked upon as terrorists in the West, they should instead opt to travel to other Muslim countries. The government has doubled the tourism fund for the next year, with a view toward further promotion overseas.

In the present climate of international mistrust, perceptions are important. "Being a Muslim country, Malaysia has to manage its image very carefully," says economist Song. "If tourists see it as a dangerous place, they will not come." Local manufacturers also worry that Western markets may stop buying Malaysian-made goods. So although Mahathir's budget proposals may have a feelgood effect at home, the bigger crisis is out there, beyond his control. Who knows where all this may end?