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.