Malaysian economy – On the road to recovery

The Malaysian economy is the best among a group of emerging markets, and it has done it without international help. Although it has posted a loss, Malaysia is by far the best-performing emerging market in Asia for the 10 months to Oct. 31. It was down 7.9% in U.S.-dollar terms on the Morgan Stanley capital international index, compared with losses averaging 37.5% for the nine other emerging Asian markets on the index during the period. Last year, the Malaysian market rose by 111.6% on the MSCI, making it the region’s leading performer.

Strength in the stock market comes on the back of a surging economy, forecast to grow by 8.5% this year. In 1999, the Malaysian economy grew by 5.6%, after declining by 7.5% in 1998 — the year after the fallout from the Asian crisis.

GDP growth is being fuelled mainly by robust domestic consumption, broad-based recovery in the manufacturing sector, higher exports and increased government spending in areas that are expected to bring about improvements in efficiency and productivity in the economy.

Consumers have started to purchase big-ticket items such as cars and homes in the wake of buoyant economic conditions, while strong export demand and increased domestic consumption are fuelling the manufacturing sector.

Malaysia’s rebound has defied the predictions of many analysts who criticized the country for shunning IMF assistance following the 1997 Asian crisis. Instead of slipping into economic chaos as forecasted, it has emerged as one of the stronger economies in Asia, well ahead of its neighbours who swallowed tough IMF medicine.

Malaysia’s post-crisis strategy consisted of tight capital controls to stem the flow of money out of the country and strict limits on foreign ownership, combined with restructuring of the country’s financial sector.

The government has used strong-arm tactics to force bank mergers, while the central bank has kept a close tab on the growth of loans to control liquidity and reduce the risk of another crisis in the banking sector caused by non-performing loans.

The financial services sector is earmarked for further consolidation among its non-bank institutions, which include brokerage and insurance companies.

Although Malaysia is the third-largest recipient of foreign direct investment among non-OECD countries, behind China and Singapore, it is both sensitive and restrictive toward foreign investments.

Foreign-based companies with output geared substantially to the export market face substantially fewer restrictions than those that target the local market, while joint ventures with local companies are encouraged to facilitate equitable participation and income distribution within the domestic population.

It is estimated that foreign investment in Malaysia in 2000 will amount to US$3.8 billion, up from US$3.4 billion in 1999. Net inflows of foreign portfolio investments were positive in the first half of 2000, following net outflows of more than US$7 billion over the 1997-99 period.

The pace of foreign investing is expected to pick up as some multinational corporations have started to shift their operating activities to Malaysia to take advantage of low wages and a skilled workforce, especially in the electrical and electronics industry.

Canada and Malaysia maintain a strong trading relationship; bilateral trade reached $2.5 billion in 1999, and was up sharply in the first half of 2000. Malaysia enjoys a significant trade surplus with Canada, with its exports amounting to five times its imports in 1999.

Canada’s main imports include electrical and mechanical machinery and appliances, rubber, clothing, furniture, bedding and mattresses, while its exports include fertilizers, cereals, aircraft and spare parts, electrical and mechanical machinery and appliances.

Canada’s Department of Foreign Affairs and International Trade sees good opportunities for Canadian companies in Malaysia in telecommunications, transportation equipment, advanced technology products and services, power and energy equipment, agri-food products, and oil and gas equipment and services.

Malaysia’s 2001 budget, tabled Oct. 27, lifted the 10% exit levy on foreign portfolio investments that stay in Malaysia for at least a year. Prior to this change, portfolio funds brought into Malaysia since Feb. 15, 1999, were subject to a 10% levy on capital gains. Funds that were in the country before this date were not subject to the levy. The budget also eliminated import duties and sales taxes on a range of plant, machinery, equipment and spare parts, benefiting foreign companies operating in Malaysia.

As the Malaysian economy recovers, its political economy remains one of its weakest links. Although Mahathir Mohamed, Asia’s longest-serving leader, retained control of the country’s ruling coalition in general elections held in May, he did so under intense opposition pressure and a reduced majority. On the economic front, the government’s fiscal policy has been mildly expansionary.

However, borrowing to finance spending appears manageable and will not have a significant impact on the country’s current account deficit.

While the government has been largely responsible for stimulating the economy during the past two years, it will probably pull back and allow private investments to take over once it is satisfied that the economy is back on track. The development of a domestic private debt market is intended to reduce the reliance for capital on the equity markets and is a major step in increasing private investments.

From all indications, Malaysia is on pace to regain its prominence in Asia, having recovered without international help.

While its markets are currently overvalued relative to the rest of Asia, they are cheap on a historical basis. Improving efficiency on the Kuala Lumpur Stock Exchange, greater transparency and improving regulatory controls put Malaysia in good light with foreign investors.

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.

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