Recovery
Home ] Fokus ] Komentar ] Interest ] Arkib ] Maklumbalas ]  [Frame]


Currency Control
Recovery
Recovery II
Rezab Melayu
Sumber Bekalan
Syariah Index
Lebihan Dagangan


Last Update:
10 May, 2000

The Financial Times
MALAYSIA: Pace of recovery is proving to be slow

Opinion remains divided on the impact of the country's go-it-alone approach and whether there will be long-term effects, writes Sheila McNulty in Kuala Lumpur.

When Malaysia shocked the world by spurning the International Monetary Fund-style approach to the regional economic crisis and imposing capital controls, the overriding question was whether the move would do more harm than good.

A year later, it has become clear that the controls did not do as much damage as many had expected, and in some cases actually helped. But many years could pass before Malaysia completely recovers from the unorthodox experiment it undertook at investors' expense.

The controls set severe restrictions on the flow of funds in and out of the country, barred the repatriation of stock market investments for one year and withdrew the currency from international circulation to peg it at M$3.8 to the US dollar.

Analysts initially feared Malaysia would force imprudent bank lending and rapidly reflate the economy as the controls made it impossible for investors to punish the country by withdrawing. The authorities tried their best, threatening bank heads with the sack if they failed to achieve 8 per cent annual loan growth by the year's end and approving fiscal stimulus.

But the bank heads were already overwhelmed by bad loans, so they resisted the threats. And long-standing bureaucracy kept ministries from rapidly disbursing funds for stimulus projects designed to pick up the slack. The short-term damage brought by the controls was, therefore, contained.

The economy is now starting to recover but not at an unusual pace when compared to other regional economies. The authorities are predicting 1 per cent growth this year and private economists are forecasting 5 per cent growth. Anything in between would be a vast improvement over the steep 7.5 per cent year-on-year contraction recorded last year.

Zeti Akhtar Aziz, deputy-governor of Bank Negara, the central bank, credits the controls with the turnaround, insisting they enabled Malaysia to begin recovering before hitting bottom. The controls did limit outflows of much-needed funds and prevented a further sell-off in the stock market, where the benchmark Composite Index had already fallen about 80 per cent.

Malaysian private investment indicators
annual change (%)

1998 1999
Q1 Q2 Q3 Q4 Q1 Q2

Applications to MITI 4.7 6.7 3.1 4.4 3.8 3.7
Local 2.0 2.5 1.0 0.8 1.7 1.3
Foreign 2.7 4.2 2.1 3.7 2.0 2.4
MITI approvals 11.2 4.9 7.1 3.2 6.1 2.4
Local 6.3 2.9 1.9 2.2 0.8 0.7
Foreign 4.6 2.0 5.2 1.0 5.3 1.7
Sales of commercial
vehicles ('000 units)
4,833 4,225 5,004 7,595 6,589 7,538
Imports of capital
goods ($bn)
-16.7 -55.6 -42.1 -37.5 -36.0 -11.3
Imports of intermediate
goods ($bn)
16.8 -27.7 -23.3 -16.7 -0.6 16.5
Growth in loans extended by banking system
Manufacturing 19.5 12.3 10.2 -0.2 -8.9 -6.1
Property sector
(inc Cagamas)
27.9 20.1 11.6 4.4 0.4 -2.0
Growth in total loans approved by banking system
Manufacturing -56.4 -86.0 -66.5 -16.9 33.0 78.5
Construction -70.1 -85.7 -84.2 -82.0 22.0 87.0
MIER Business
Conditions Index (points)
41.0 42.3 41.8 44.7 48.5 60.3

Source:
MTI: Ministry of International Trade and Industry

MIER: Malaysian Institute of Economic Research

 

But economists note that even those countries that did not close off, and instead followed IMF-mandated reforms, are improving - some more swiftly than Malaysia. The conclusion many, therefore, draw is that, controls aside, Malaysia has simply ridden on the coat-tails of an overall regional recovery.

"If they had not imposed the controls, they would probably be in the same position, regardless of whether or not they closed the border, as you can see from the recovery of the region," says Song Seng Wun, regional economist at GK Goh Research. "To claim that capital controls helped revive the economy is probably an exaggeration."

They did, however, help Malaysia's export competitiveness. The pegging of the currency has kept the ringgit weak as surrounding currencies have strengthened with the turnaround in their economies. This has helped convince companies already established in Malaysia - from Seagate to Western Digital - to increase investments and take advantage of lower costs.

Another advantage brought by the controls has been social stability. Because the authorities did not have to fear large outflows of investors if they failed to provide the same level of corporate restructuring taking place in other parts of Asia, they were able to protect entrenched interests and prevent social dislocations. Instead of shutting down poorly managed businesses, resulting in massive lay-offs and the subsequent protests that have spread through much of the region, Malaysia has, under the shelter of the controls, rescued as many jobs and companies as possible.

C. Rajandram, chairman of the government-established Corporate Debt Restructuring Committee, says the reason the authorities had to be careful about corporate restructuring is because the social structure for the unemployed is not yet in place. It, therefore, has to first provide for the well-being of the people "and then try to find ways and means to incorporate (Malaysia) into the global process".

In the end, getting Malaysia back into the global process may not be as difficult as many had assumed. Morgan Stanley Capital International (MSCI) said in August it would restore Malaysia to its closely tracked indices in February since the country has relaxed some of its controls. The decision paves the way for the inflow of billions of dollars barred from investing in stock markets excluded from the indices.

But that money has not rushed back. There are certainly several months left for it to do so, but many analysts had expected foreign investors would want to get in early, before share prices started to climb. Fund managers explain they remain hesitant, underlining the longer-term damage the controls have done to Malaysia.

"The imposition of capital controls sets a dangerous precedent. If the government intervenes in the economy once, investors will fear subsequent interventions," says Kevin McGahan, south-east Asia analyst at Marvin Zonis + Associates, the political risk consultants.

This leads analysts to believe even new foreign direct investment, which has been slow to return to the entire region, might be even more careful about establishing a presence in Malaysia. Particularly since, in keeping with its new isolationist approach, Malaysia has been reluctant to relax barriers, as its neighbours have, to foreign investment in strategic sectors.

"While Malaysia thrived in the past on relatively liberal foreign investment rules, it is now in danger of being left behind by the very dramatic changes taking place in the region," says Lim Say Boon, an investment banker from Crosby Corporate Advisory.

 

Visionews : Thu 4 May 2000


GDP may hit 6.1% on rising domestic demand

Rating Agency Malaysia (RAM) said Wednesday that Malaysia's economic growth this year could top its previous forecast of 6.1 percent, thanks to rising domestic demand.

"The continuing positive demand conditions could render our GDP (gross domestic product) forecast of 6.1 percent for Malaysia on the low end of the attainable growth range for this year," RAM said.

The private agency said in its "economics chartbook" for April that import growth had outpaced the rise in exports. It said this reflected rising domestic demand -- a crucial factor in a self-sustaining recovery to offset the risk to exports of an US economic slowdown.

"More importantly, two drivers of final domestic demand, namely private consumption and investment spending, are strengthening in response to stimulative fiscal and monetary policies implemented over the last two years," it added.

The ratings agency said most recent projections, including that by the International Monetary Fund, expected a global upturn in 2000 despite some concern at the ability of the US economy to achieve a "soft landing."

Should the US economy slow down more sharply than expected in the second half, it said, some demand slack would likely be absorbed by rapidly recovering Asian economies and faster growth anticipated in Japan and Europe.

 

                             Back Home Next