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Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia
MalaysiaMalaysia has achieved an impressive economic recovery since the Asian financial crisis, and has made considerable progress in financial sector restructuring. The short-term growth outlook is somewhat clouded by the slowing US economy, while in the medium term, several corporate sector issues need to be resolved to sustain high growth rates. Recent Trends and ProspectsDespite a progressive slowdown in quarterly GDP growth rates in 2000 (on a year-on-year basis), GDP for the year is estimated to have risen by 8.5 percent, compared with a 5.8 percent expansion in 1999. The performance in 2000 was underpinned by robust external demand for manufactured goods, especially electronic and electrical products, buoyant consumer demand, and a recovery in gross fixed investment. Reflecting the stronger fiscal stimulus in 2000, public investment is estimated to have risen by 21.7 percent compared with an increase of 15.9 percent in 1999. Private investment activity also rose sharply, in a turnaround from the crisis-induced contractions of 1998 and 1999, and mirroring higher capacity utilization following economic recovery. Despite this improvement in both public and private investment, the level of gross fixed capital formation in 2000 is likely to have remained considerably below precrisis levels (see Figure 2.9). Private consumption demand, however, stayed at relatively high levels due to improved consumer confidence, resulting from both an increase in disposable incomes and low interest rates. On the aggregate supply side, higher growth was spear-headed by manufacturing, due to increases in the output of electronic products, electrical appliances, and transport equipment. While the overall improvement in economic performance led to a pickup in services subsectors such as wholesale and retail trade, increased manufacturing activity and stronger exports stimulated a recovery in the transport, storage, and communications subsectors. Construction saw a moderate improvement due to increased public spending on physical infrastructure and higher demand for low-cost housing. Agricultural output also rose marginally, as moderate growth in crude palm oil production and sawn logs was largely offset by a decline in rubber output. The budget deficit for 2000 is officially estimated at RM18 billion or 5.5 percent of GDP. Although this represents a steep rise over the 1999 actual deficit of RM9.5 billion (3.2 percent of GDP), the actual outturn is likely to be smaller due to stronger tax revenues resulting from higher economic growth. The continued economic recovery led to a decline in the rate of unemployment to 2.9 percent of the labor force in 2000, from 3.0 percent in 1999. The number of job vacancies during 2000 increased by 14 percent, whereas the number of retrenched workers decreased by 32 percent compared with 1999. Although wage pressures have remained fairly modest, the tightening labor market has led to quite high wage settlements in some areas of manufacturing. After averaging 2.8 percent in 1999, consumer price inflation decreased during 2000 to average 1.6 percent, despite a pickup in the last quarter of the year due to higher energy prices and bus fares. Overall inflation remained subdued due to moderate food price increases, minimal imported inflation, and the persistence of excess capacity in certain sectors of the economy. With inflationary pressures muted, the Government continued with its accommodative monetary policy stance, maintaining low interest rates and its fixed exchange rate regime. During 2000, the central bank’s three-month intervention rate (used by commercial banks to fix their base lending rate) was unchanged at 5.5 percent. This intervention rate had earlier been cut in several steps from a high of 11 percent in February 1998 to the current level in August 1999. The commercial banks’ base lending rate stayed within a tight range of 6.75–6.79 percent, down from a high of 12.3 percent in June 1998. Loan growth, however, remained subdued. Preliminary trade data for 2000 indicate robust export growth and even stronger import growth. The trade surplus narrowed to a still sizable $19.6 billion in 2000, from $22.8 billion in 1999. Export growth was buoyed by continuing strong growth in the country’s main export market (the US), buoyant global demand for electronic goods, and ongoing recovery in Asia. The surge in international oil prices also helped Malaysia, a small exporter of crude oil and liquefied natural gas. Import growth was stimulated by strong demand for intermediate and capital goods, reflecting the strength of demand from the import-dependent, export-oriented manufacturing sector. Available data suggest that a lower trade surplus was accompanied by a higher services and income deficit due to the economy’s dependence on trade-related services imports and greater outflows of profits and dividend payments from an improving national economy. These developments led to a fall in the current account surplus from 15.9 percent of GDP in 1999 to an estimated 8.8 percent in 2000. A smaller current account surplus and a deficit in the overall capital account— due to lower inflows of public long-term capital, higher nonfinancial public enterprise investments overseas, smaller inflows of foreign investment, and higher repayments of short-term debt—led to a considerably smaller balance-of-payments surplus. This in turn contributed to a decline in external reserves to $29.9 billion (or 4.5 months of retained imports) as at end-December 2000, compared with a reserve figure of $30.8 billion 12 months previously. The external debt position improved in 2000 due to higher repayments of short-term debt. The debt-service ratio correspondingly decreased from 6.0 percent at the end of 1999 to 5.0 percent at the end of 2000.  GDP growth is likely to slow to 4.9 percent in 2001 before accelerating to 6.0 percent in 2002 due to an expected sharp slowdown and subsequent pickup in US growth. Weaker net exports will increasingly exert a drag on GDP growth over these two years, which will be sustained, however, by relatively high private consumption resulting from an increase in disposable incomes due to higher wages and a reduced incidence of taxation. Fixed investment is also likely to pick up as capacity utilization increases. Although the expansion in public investment will remain solid as the Government continues to stimulate domestic demand, private investment may not reach precrisis levels despite a sharp increase in both domestic and foreign investment applications. Private investors’ lack of confidence is explained partly by uncertainty over the impact of the current US slowdown on Malaysia’s exports and the reduced attractiveness of countries in the Association of Southeast Asian Nations due to political uncertainties and incomplete corporate restructuring. Consumer price inflation is likely to rise gradually and average 2.6 percent in 2001 and 2.8 percent in 2002, as stronger domestic demand, due in part to higher real wages, is reinforced by a recovery in non-oil commodity prices. While slower export expansion will, to some extent, be offset by slower growth in intermediate imports for the country’s import-dependent export industries, growth of imports is nevertheless likely to exceed that of exports as a result of greater capital goods imports. The trade surplus is, therefore, likely to narrow further. This will probably be accompanied by a widening of services and income deficits. As a result, the current account surplus will likely narrow to 5.5 percent of GDP in 2001 and to 3.2 percent in 2002. Issues in Economic ManagementThe Government remains committed to pursuing expansionary fiscal and monetary policies for consolidating economic recovery and strengthening domestic demand so as to make the economy more resilient to external shocks. Toward this end, the fiscal deficit for 2001 is projected at RM16 billion, or 4.6 percent of GDP, moderately lower than the RM18 billion deficit estimated for 2000. However, government financial support for loss-incurring privatized companies risks straining national finances at a time when the economy is projected to slow and when domestic debt is already high. Reflecting higher levels of economic activity, new loans approved and disbursed by the banking sector amounted to RM360.7 billion and RM133.0 billion, respectively, in 2000, representing increases of 27.5 percent and 13.4 percent, respectively, over the 1999 levels. Loan growth has nevertheless been restrained compared with precrisis levels. Total loans outstanding in the banking system at end-December 2000 amounted to RM453.0 billion, an increase of 5.4 percent on the end-December 1999 figure of RM429.7 billion. This rise has been variously attributed to a higher level of loan repayments and to banks’ lingering concerns over their asset quality. It could, however, also signify a generally lower level of loan demand following the economic downturn of 1998, and a greater reliance on retained earnings by companies attempting to clean up their balance sheets by reducing leverage. The latter would have been a definite option for export-oriented manufacturers experiencing strong growth. In 2000, the Government introduced significant regulatory changes to simplify and expedite the issuance of private debt securities, in order to reduce overreliance on the banking sector as a source of finance and thereby lessen systemic risks. Although net issues of private debt rose rapidly in 2000, the amounts raised were small. The market remains fairly underdeveloped and secondary trading is thin. The development of a corporate bond market is a long-term issue and bank financing is unlikely to diminish in importance in the foreseeable future. Loan growth, therefore, needs to improve to sustain economic recovery in the medium term.
The Government is likely to maintain the ringgit peg at its current rate of RM3.80:$1 for the remainder of 2001 on the basis that it affords stability and predictability in an environment of volatile foreign exchange markets. The pegging of the ringgit to the dollar at this rate in September 1998 led to the ringgit’s undervaluation in 1999 against the currencies of its main regional competitors, after the latter had bounced back following their precipitous declines in the second half of 1997 and 1998. This initially helped improve the price competitiveness of Malaysian exports. In 2000, however, in tandem with the appreciation of the dollar, the ringgit appreciated slightly against the yen and the euro, and much more against regional currencies. This overvaluation of the ringgit is likely to continue. Persistent overvaluation could, in turn, lead to an erosion of price competitiveness of exports. The main risk, however, facing Malaysia’s short- to medium-term growth prospects is a sharper than anticipated slowdown in the US economy. The US is Malaysia’s biggest export market, especially for the electrical and electronic goods that account for around 60 percent of the country’s exports. If the US economy slows much more than envisaged, the current export-led growth momentum could be severely affected. Policy and Development IssuesDespite considerable progress in financial and corporate restructuring, the reform agenda has yet to be completed. As at end-September 2000, Danaharta, the agency set up to purchase the financial sector’s bad debts, had a total of RM46.8 billion in nonperforming loans (NPLs) in its portfolio, of which RM38.2 billion had come from the banking system. The latter figure constituted 43.2 percent of the NPLs in the banking system. Danaharta is now focusing on loan and asset management activities, and by the end of September 2000 had restructured and disposed of loans and assets worth RM35.3 billion, achieving an average recovery rate of 74 percent. Danamodal, the special purpose organization for recapitalizing and strengthening banks, has injected a total of RM7.6 billion into 10 troubled banking institutions since it was created in August 1998. As of 8 January 2001, seven financial institutions had already repaid their loans in full, with the remaining three owing Danamodal a total of RM3.7 billion. Progress has also been made in merging the country’s banking institutions to build stronger organizations able to withstand the eventual liberalization of the sector. Although not all banking institutions were able to meet the 31 December 2000 deadline to complete the merger process, at that date, 50 of the country’s 54 financial institutions had consolidated into 10 core groups. Faced with increased global competition, it is likely that this consolidation process will continue. However, progress in lowering the level of NPLs in the banking system is slow. On a three-month arrears basis, central bank figures indicate that the NPL ratio decreased from 11.0 percent of total outstanding loans at the end of 1999 to 9.5 percent at the end of November 2000. This ratio is, however, computed on a net basis, after the netting-out of interest in suspense and specific provisions from both total NPLs and total outstanding loans. If these omissions are included in both total NPLs and total outstanding loans, the NPL ratio would only have been reduced from a high of 19.9 percent at the end of December 1999 to 19.1 percent 12 months later. The slow pace of reducing NPLs could signify problems in restructuring the heavily indebted corporate sector. The lack of corporate restructuring, in turn, could undermine recovery over the medium term. The Corporate Debt Restructuring Committee, which oversees voluntary corporate debt workouts, had restructured debts of 28 companies worth RM23.1 billion as of 17 October 2000. However, a range of corporate issues are still unresolved. Many Malaysian firms, including privatized entities, remain heavily indebted and are unable to service their debt obligations. The weakness of the Kuala Lumpur Stock Exchange in 2000 also hindered corporate sector restructuring as it adversely affected plans to swap debt for equity. The Government continues to support firms that it considers strategically important. While this assistance has mainly taken the form of helping firms extend their repayment periods, the Government has also resorted to buying assets of heavily indebted privatized firms at prices well in excess of present market valuations. This is preventing an early resolution of corporate sector indebtedness. Moreover, the apparent lack of transparency in such asset purchases, the retention of considerable government influence in the management decisions of such firms, and a reluctance to let foreign investors own controlling stakes in these strategically important companies have clouded the investment environment. It has also prevented these firms from entering into strategic partnerships with foreign investors, which many commentators believe is the only way to ensure their long-term viability. Although established foreign investors are likely to increase investment in existing plants (especially in export-oriented manufacturing ventures) in the short term as capacity utilization improves, new investors are not likely to regard Malaysia as an attractive investment destination. This should be of some concern to top government officials in a country where current levels of private investment in general, and foreign investment in particular, are well below those seen before the financial crisis, and where significantly higher volumes of investment are required to meet the Government’s objective of achieving developed country status by 2020.
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