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IHT: Downturn Tests Malaysia's Mettle
By Philip Bowring

6/11/2001 1:19 am Tue

[Sekali pandang ekonomi Malaysia nampak mampu bertahan tetapi bank sebenarnya sudah semakin tertekan akibat hutang lapuk yang semakin mencengkam. Kadar faedah yang rendah menyebabkan bank terpaksa digabungkan dan membuang ribuan pekerja.

Jika bank tidak sakit ia tidak akan membuang pekerjanya.... Ini bermakna pekerja syarikat kroni yang kronik dan sarat berhutang hidup lebih tenteram dari pekerja institusi yang memberi hutang. Mahathir telah memihak kepada mereka yang melakukan kesilapan .....
- Editor

International Herald Tribune Monday, November 5, 2001

Downturn Tests Malaysia's Mettle

Philip Bowring

Keeping Up Growth Will Be Difficult Amid an Export Slump

KUALA LUMPUR Malaysia is a key test of whether medium-sized East Asian economies can keep up at least some growth in the face of the sharp global downturn. At first glance, the odds appear poor. Malaysia's total exports are 110 percent of its gross domestic product, one of the highest proportions in the region and well ahead of South Korea and Thailand. Electronics comprise 60 percent of exports. The country's currency, the ringgit, is pegged to the U.S. dollar, so its freedom to use monetary stimulus is small. And since Sept. 11, it has been suffering from knee-jerk Western nervousness about Muslim countries.

Officially, the government is keeping a brave face on things, despite its forecast of a 10 percent fall in exports this year and a slump in tourism. Its recent budget, focusing on further fiscal stimulus, forecast growth of 1 percent to 2 percent this year, rising to 4 percent to 5 percent in 2002. In contrast, the consensus of private forecasts calls for zero growth this year and 3 percent next year.

Some are even more bearish.

The electronics situation is certainly bad. Ten of thousands of people have been laid off as global demand has slumped. Malaysia has also lost some manufacturing to China as suppliers have followed the call of end users to the mainland.

This has more than offset some shifts from Singapore to Malaysia.

But the macroeconomic impact of the bust has been less than was feared. Because the value added to electronics is less than 30 percent, component imports have fallen as fast as exports, so Malaysia's terms of trade in electronics have not been affected.

Commodity exports - palm oil, oil and gas, rubber - have had mixed fortunes, but overall prices and volumes have been satisfactory.

The net result is that Malaysia will have a large current-account surplus this year of around $6.8 billion, or 8 percent of GDP. Most forecasts for 2002 are for a similar or only slightly lower figure.

So if there is a recession here, it will be of a very different kind from that of 1998, which was caused by excessive debt creation and current-account deficits. This time the problem is to spur monetary growth and stimulate domestic demand to the point where there is a sharp fall in the current-account surplus.

The budget announced last month endeavored to do that through a deficit of 6 percent of GDP, by means of a mix of personal tax cuts, infrastructure spending and a 10 percent pay increase for civil servants - partly politically motivated by the governing party's desire to win back the loyalty of Malays who dominate the public service.

The deficit looks big, coming on top of one totaling 7 percent of GDP this year, which has been bolstered by two anti-recession supplementary budgets. Deficits since the Asian crisis have now averaged 4.5 percent of GDP. Some observers worry that large deficits are becoming endemic and a long-term drag on the economy as the servicing costs outweigh the gains from public investment.

But others suggest that the huge external surplus is evidence of the need for more stimulus. Domestic demand, as much as exports, have to be the key to future growth. The ratio of government debt to GDP is still only 40 percent, half the peak reached after the recession of the mid-1980s.

For now the government is steering a middle course on the size of the deficit but has left itself room for additional stimulus should the picture deteriorate. That will depend not just on external factors but on whether consumers will spend their extra cash.

Also uncertain is whether government infrastructure spending will come close to its target amid bureaucratic delays and haggling over who gets what contracts. Little of the supplementary budgets has yet been spent, so there is plenty of stimulus to come.

And stimulus is needed. Local sentiment is fragile and probably will remain so while international political uncertainties reign. But capital outflow, which despite exchange controls was evident six months ago, has dried up with the improvement in the domestic political situation and the weakening of the dollar. Foreign-exchange reserves have risen, and the sharp fall in U.S. interest rates has ended fears that a rise in local ones would be necessary to defend the fixed exchange rate.

The local stock market is dull and a drag on consumer sentiment but does not appear vulnerable to a major downward slide from here. It represents the domestic and commodity economy, not the export manufacturing one. No sharp upturn seems imminent, but bank liquidity and low foreign exposure to Malaysia provide a basis for sharp recovery at some point. Valuations are higher than in Thailand or South Korea but undemanding by international measures, and many companies have dividend yields in excess of bank deposit rates. The government is showing belated determination to clean up corporate debt problems outstanding since 1998. The property sector is both active and resilient, thanks to low interest rates and favorable demographics.

All in all, Malaysia has the potential to outperform despite external adversity. Whether it has the self-confidence to do so is another matter.

[Portions Only]

Malaysia : hopes of faster economic reform have risen

By Saul Eslake from Australia & New Zealand Banking Group


The collapse of real GDP growth has been dramatic reflecting Malaysia's heavy dependence on electronics and the US economy. Economic growth fell to just 0.5% on a year-on-year basis in Q2 2001, down from an average of 8.3% in 2000 and the weakest growth since Q1 1999.

Industrial production has plummeted The severity of the slowdown is evident from the plunge in industrial production from year-on- year growth of over 20% in mid-2000 to a fall of 7.6% during June-August 2001. Recent US indicators on IT-related capital expenditure suggest that the slowdown in Malaysia probably deepened in Q3, while the terrorist attacks in September have seriously damaged hopes of an early recovery in the US.

The severe plunge in growth has occurred despite a significant loosening of fiscal policy. This is mainly because Malaysia is such an open economy - exports and imports together accounted for 231% of GDP in 2000 - but the slow implementation of new measures (see below) has also blunted their effectiveness.

GDP is expected to contract slightly in 2001 In October, the government lowered its real GDP growth forecasts for 2001 and 2002 to 1-2% and 4- 5% respectively, but these still seem optimistic. ANZ is forecasting a contraction of around 0.4% in GDP in 2001 and only a slow, paltry recovery in 2002 with real GDP growth not expected to exceed 2% for the year. Although the relative importance of the diversified natural resources sector (crude oil, timber, palm oil, and other agricultural commodities) has declined, it offers some protection in helping to prevent an even bigger economic downturn.

Inflationary pressures are subdued and inflation, which stood at 1.4% in September, seems unlikely to rise significantly over the next 12 months. Bank Negara cut its 3-month intervention rate by 50 bps to 5.0% in September, the first reduction for 2 years. Commercial banks responded by cutting their base lending rates from about 6.7% to 6.4%.

Bank lending to the private sector rose by 5.3% in the year to June 2001, below the long-standing 8% growth target set by the government. With the economic slowdown exacerbating the problem of NPLs, banks are likely to face increasing difficulty in finding lending opportunities with acceptable creditworthiness credentials.

Official figures show that non-performing loans were fairly steady around 6.5% of total lending (on a 6-month overdue basis) throughout last year, but have risen from 6.3% in December 2000 to 8.3% in August 2001 due to the economic slowdown. The increase on the 3-month basis was from 9.7% to 11.5% over the same period.