Malaysian Telcos

AFP
Sunday, April 2 9:52 AM SGT

Malaysia rebounds from crisis but analysts see pitfalls ahead

KUALA LUMPUR, April 2 (AFP) - Malaysia has rebounded impressively from
the Asian economic slump but analysts say there is no room for
complacency.

They generally agree the near-term outlook is rosy but say policymakers
must hold inflation in check and make the economy more competitive to
meet the challenges of liberalisation.

Central bank governor Ali Abul Hassan Sulaiman, who himself warned
against complacency, last week predicted the economy may grow even
faster than the official 5.8 percent forecast for this year.

"Malaysia's economy has lots of potential to grow higher," he said when
presenting the bank's upbeat annual report, which said domestic demand
would replace exports as the main driver of growth this year.

"Amidst the euphoria of recovery one must not forget the lessons of the
'boom and bust' of the 1990s," wrote Mohamad Haflah Piei of the
Malaysian Institute of Economic Research in Saturday's New Straits
Times.

"Many critical and probing quesitons still need to be addressed."

He cited similarities between then and now -- a perception that the
ringgit is undervalued, increasing liquidity partly due to an inflow of
foreign exchange earnings and portfolio funds, and an undervalued stock
and property market.

In the 1990s, he wrote, an economy growing unsustainably fast resulted
in overheating and bottlenecks. Poor corporate governance and a lack of
accountability also contributed to economic crisis.

"Malaysia must not repeat the same mistakes," Mohamad Haflah wrote. He
called for concerted efforts to expand "production frontiers" through
greater productivity and/or technological change, rather than a push for
runaway growth.

Export competitiveness must be improved to avoid over-reliance on an
undervalued ringgit, he wrote.

Malaysia fixed the ringgit's value at 3.80 to the dollar as part of
selective capital controls imposed in September 1998.

Sani Hamid, analyst with Singapore-based Standard and Poor's MMS
International, told AFP that imported inflation due to high oil prices
could be a threat.

Growth could also be stymied by a slowdown in the US economy and a
consequent downturn in Malaysia's electronics sector, Sani warned.

Bank Negara in its report said the main area of vulnerability for the
region would be a downturn in the US economy following a sharp
correction in its stock market.

Sani also said that when the economy achieves full capacity in 2001,
"domestic-created inflation" could arise. "Then comes the question how
high and how quickly the central bank will adjust interest rates."

He said the central bank's task this year was to monitor liquidity since
excess liquidity means inflation.

The bank forecasts inflation will rise to 3.2 percent this year from 2.8
percent last year. Ali Abul said it would try to keep the rate between
three and four percent.

Eddie Lee, economist with Singapore-based Vickers Ballas, said Malaysia
must position itself in Asia amid rapid technological changes and
liberalisation.

"Liberalisation needs to be speeded up. It could affect long-term growth
potential."

Referring to the central bank's announcement of a 10-year masterplan for
bank reform, Lee said: "In this new era, 10 years is a long period."

Since the economy has improved, Malaysia should address the issue of the
ringgit peg quickly. "The reasons in favour of the peg are diminishing
rapidly."

If foreign direct investment remains lacklustre in the second half of
this year, Lee said, this could also hurt growth.

Jason Chong, Merrill Lynch's country head of research, said the central
bank has adopted a loose monetary policy to spur growth. But the flip
side was that inflation could set in towards the end of the year to next
year.

Depending on the cause of the inflation the bank could either raise
deposit rates or re-peg the ringgit, he said.

Chong said another challenge is for Malaysia to remain internationally
competitive in the medium to long-term.

"But we think for the next six months to nine months the economic
climate will remain rosy and conducive for the stock market."