Malaysia recovers health

Harsh doses of domestic medicine worked

As Asia begins to recover from its 1997 meltdown, Malaysia has emerged as the region’s leading market, with a year-to-date return of 39.8% in US$ at April 30 on the Morgan Stanley Capital International Index.

As the crisis unfolded, Malaysia was unlike its neighbours in that it shunned Western and International Monetary Fund assistance. Instead, to stem the outflow of money it imposed tight capital controls, including minimum holding periods for assets and strict conditions on repatriation of profits, dividends, interest and rental income and commissions.

Malaysia’s “go-it-alone” stand results largely from prime minister Mahathir Mohamad’s belief that foreign investors and currency speculators were responsible for the devaluation of the ringgit and the subsequent collapse of the stock market.

When addressing an assembly of the country’s ruling party last June, Mohamad openly criticized foreign investors, saying “crony capitalism, corruption and non-transparency, which are said to be found in Asian countries, are only excuses to attack the economy and finance of these countries … [Westerners] cannot deny that that the attack on Asian currencies resulted in lots of profits for them … even though such [currency] trading could destroy people’s lives.” He went on further to say that “globalization, the borderless world, deregulation and liberalization are for [Westerners] own interest. Let us not accept all these without scrutiny, without suspicion.”

Although Mohamad broadsided the very investors and global developments that turned Malaysia into an Asian tiger pre-crisis, foreign investors largely ignored his attack and pumped money into the country. Foreign direct investment commitments, after declining during the crisis, have picked up since capital controls were introduced, with the total value of approved foreign investments rising almost 10% in 1998. Investors continue to see opportunities in the country as it comes off its bottom.

Several factors are supporting the turnaround in Malaysia:

• the imposition of capital controls brought stability to the economy, while the anticipated fallout from foreign investors did not materialize. Although the ringgit is pegged to the US$, analysts believe the currency is undervalued, making the peg sustainable and providing the government flexibility as it reinflates the economy;
  
• restructuring of the banking system is under way through two public vehicles that are injecting capital and acquiring non-performing loans;
  
• the government’s fiscal policy remains cautious but moderately stimulative, with the overall public sector deficit expected to increase to 2.5% of GDP this year from 1.1% in 1998. Although fiscal policy is mildly expansionary, government borrowing and contingency liabilities are expected to be quite manageable;
  
• on the monetary front, money market rates have been moving lower and the trend is expected to continue. This has been accompanied by improved credit supply. At the same time, the country’s export sector has remained strong since the crisis, supported by a sharp jump in US$ exports.
  
• domestic consumption, which fell in 1997-98, is regaining strength. Increased demand for big ticket items such as cars and homes – due in part to the government’s low-cost housing development plans and an increase in imports – has spurred inventory restocking.
  
• Malaysia is also benefitting from improved liquidity in the region. Its large current account surplus, foreign borrowings and restrictions on capital outflows have boosted liquidity in the economy. Capital controls have also spurred a repatriation of foreign ringgit holdings, further boosting liquidity.
  

Canada and Malaysia maintain a strong relationship, with trade between the two reaching $2.5 billion last year, more than double the volume five years earlier. Malaysia enjoys a significant trade surplus with Canada, with its exports amounting to more than three times imports last year. Canada’s main exports include fertilizers, transportation equipment, mechanical and electrical machinery and paper, while it imports mechanical and electrical appliances, clothing, furniture, bedding and mattresses.

Canada’s Department of Foreign Affairs and International Trade sees good opportunities for Canadian companies in construction, defence products, oil and gas, aerospace, agri-food processing, transportation, biotechnology and health industries, and information technology and telecommunications.

Behind the scenes, however, Malaysia is dogged by political problems. The imprisonment of the country’s deputy prime minister, Anwar Ibrahim, on various charges has created a significant degree of antagonism among segments of the population and drawn international attention.

Nonetheless, the ruling party, which has a two-thirds majority, remains strong and is expected to be victorious in elections due in April 2000.

This past February, Malaysia relaxed its capital controls and introduced a graduated system of capital repatriation. The government has also emphasized that its control measures are aimed at short-term speculative flows rather than genuine long-term investments.

This stance is somewhat more benign than the one taken at the height of the crisis and is positive for foreign investors targetting opportunities in Malaysia.

Malaysia’s growth is expected to outpace that of its neighbours which swallowed tough IMF medicine. From all indications, it is set to regain its status as one of the leading economies in the region, once investor sentiments swing again toward emerging markets.

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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