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Priming the Pump Again

By S. Jayasankaran

Issue cover-dated January 10, 2002

THE CONSENSUS FORECAST for Malaysia's economic prospects in 2001--from 15 securities houses--is zero growth. It isn't surprising, and doesn't vary wildly from the predictions of Prime Minister Mahathir Mohamad--currently also finance minister--who thinks growth will be 0%-1%, compared with 8.3% in 2000. A recession in the United States has shrunk demand for electronics and that's hurting Malaysia's exports. Industrial output fell by 12.3% in September compared with the same period the previous year.

The good news is that the economy is expected to grow "reasonably strongly" in 2002, with the consensus forecast at 2.9%. That could come about because of Mahathir's continued easy fiscal policy. In October, the premier unveiled a budget with a deficit of 6.5% of GDP, the fourth deficit in succession. He also encouraged private spending by reducing income taxes, cutting import duties on consumer durables and giving civil servants year-end bonuses as well as a 10% pay rise.

The other positive factor is the country's external balance sheet. Although exports are falling sharply, imports are falling faster. The result: the trade balance, estimated at $17.5 billion this year, will stay in the black while the overall current-account balance, estimated at $6.4 billion, will remain positive. Malaysia's reserves had reached more than $30 billion by the end of October.

On the downside, unemployment is rising and is estimated at 3.5% this year. Next year, bank, factory and airline layoffs are expected to rise and the effects on consumer confidence and spending are likely to be felt.

Then there's the rising budget deficit. "We've been doing it for four years, even during recovery, and the numbers are a cause for concern," says Jomo Sundaram, economics professor at University Malaya in Kuala Lumpur. The total deficit of the public sector is almost 7.5% of GDP.

Finally, there is the currency. The ringgit was pegged at 3.80 to the U.S. dollar in September 1998. Now capital controls only remain for Malaysians, but the peg is unlikely to be abolished. Economists warn that if the yen falls as far as 140 to the U.S. dollar, the peg could crack. They suggest setting up a floating exchange-rate band before change is forced on the currency by the market. But the peg is dear to Mahathir's heart, and the subject is apparently not open to debate for the time being.