Malaysian tiger roars

And without international help

Malaysia has defied the doomsayers who criticized it for shunning International Monetary Fund assistance following the 1997 Asian crisis. Instead of slipping into an economic quagmire as forecast, it has emerged as one of the stronger economies in Asia, well ahead of neighbours that swallowed tough IMF medicine.

After declining by 7.5% in 1998 – the year after the fallout in the region – Malaysia’s real GDP grew by 5.4% last year and is projected to grow by 6.8% this year. GDP growth is being fuelled largely by robust domestic consumption, broad-based recovery in the manufacturing sector and increased government spending.

Influenced by buoyant economic conditions, consumers have begun to purchase big-ticket items such as cars and homes, which have become more affordable because of the government’s low-cost housing development drive. In the manufacturing sector, activity has picked up on the back of strong export demand, as well as increased domestic consumption.

In addition, short-term interest rates have remained low at around 3%, supported by the country’s fixed exchange rate policy. Lower rates have benefited consumption and domestic investments. The ringgit, which is pegged to the U.S. dollar, is about 30% undervalued, providing a boost to the export sector. An undervalued currency makes exports cheaper. Inflation is expected to remain flat year-over-year at 2.8% in 2000, after falling from 5.3% in 1998.

In 1999, the Malaysian stock market rose by 111.6% in US$ on the Morgan Stanley Capital International (MSCI) index, making it the best-performing market in Asia. As of May 15, 2000, the market maintained its position of leadership in the region with a year-to-date return of 14.3%, while all other markets, with the exception of Pakistan, produced negative returns. Some analysts contend the Malaysian market is overvalued relative to other emerging markets, but undervalued based on its own historical trends.

Malaysia’s post-crisis strategy was achieved by imposing tight capital controls to stem the outflow of money and placing strict limits on foreign ownership, in combination with restructuring the financial sector. Yet foreign investors kept pumping money into the country, albeit not at pre-crisis levels. It is estimated that foreigners will invest US$3.8 billion in the country this year, up from US$3.4 billion in 1999. The pace of foreign investing is expected to pick up as some multinational corporations start shifting their operational activities to Malaysia to take advantage of low wages and a skilled workforce, especially in the electrical and electronics industry.

In restructuring the financial sector, the government is using strong-arm tactics to force bank mergers, while the central bank is keeping a close tab on the growth rate of loans to control liquidity and reduce the risk of another crisis in the banking sector stemming from non-performing loans. Expect further consolidation of its non-bank institutions – brokerages and insurance.

Canada and Malaysia maintain a strong trading relationship, with bilateral trade reaching $2.5 billion in 1999 – almost double five years earlier. Malaysia enjoys a significant trade surplus with Canada, with its exports amounting to five times its imports last year. Canada’s main imports include electrical and mechanical appliances and machinery, 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.

Because of the turnaround, the MSCI has confirmed Malaysia will be reinstated into its Emerging Market and All Country indices at full market weighting. Investors should realize the country’s political economy may be one of its weakest links.

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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