The CNN

http://asia.cnn.com/2001/BUSINESS/asia/ 07/15/malaysia.economy/index.html

16th July 2001

Mahathir faces increasing economic challenges

Mahatir faces an uphill struggle with Malaysia's economy as he celebrates 20 years as prime minister

By Geoff Hisc0ck

Asia Business Editor

(CNN) -- Malaysia has made tremendous economic gains during Mahathir Mohamad's 20 years as prime minister, but the challenges are not getting any easier for the veteran leader.

The man who has always refused to jump at someone else's command now sees the Malaysian economy at the mercy of the global slowdown in information technology goods.

While not as devastating as the 1997 Asian financial crisis -- when Mahathir raged against what he saw as a conspiracy by Western capitalists to destroy his country's economy -- the downturn in the IT sector over the past 12 months has hit Malaysia hard.

From 1999 and into 2000, surging demand for semiconductors and other electronic components drove the country's export growth.

But the IT sector in the U.S. and Japan has been either flat or shrinking since the second half of 2000, stalling Malaysia's economy this year.

The March 2001 quarter saw the first contraction in gross domestic product since 1998, when the impact of the 1997 Asian financial crisis was being felt throughout the region.

Quarter on quarter, GDP fell 3.8 percent in the first three months of 2001.

Recession

Some analysts now believe the June quarter was also negative, meaning that Malaysia technically could be in recession.

Malaysia's government is sticking to its March forecast of 5 to 6 percent GDP growth this year, but the consensus among private sector economists is for a much lower figure -- possibly between 1 and 2.5 percent, depending on when, and how quickly, the global IT market picks up.

While Malaysia's export-oriented economy flourishes in the good times, its performance this year once again emphasizes its vulnerability to global swings and roundabouts.

Mahathir, who has also assumed the Finance Minister's role since the resignation last month of Daim Zainuddin, has acknowledged this in stressing that the 2002 Budget to be unveiled in October will push for greater domestic consumption and investment, rather than relying on foreign investment.

Mahathir has always sought to run Malaysia's economy on his own terms, rather than those defined by outsiders such as the International Monetary Fund or U.S. pension fund managers.

No role in Malaysia

During the 1997 Asian financial crisis he was adamant that the IMF had no role to play in Malaysia. He was outraged when money drained out of the economy, and claimed Western speculators were bent on destroying the country.

But the massive slump in the Kuala Lumpur stock market -- it lost 65 percent of its value between July 1997 and January 1998 -- was not just from foreign withdrawals. About 70 percent of the selling was by local investors worried about the country's prospects.

One response by Mahathir in September 1998 was to institute capital controls -- a move that made some institutional fund managers wary about returning to Malaysia -- and to fix the exchange rate for the Malaysian ringgit at 3.8 to the U.S. dollar.

That was a useful strategy in 1990 and 2000 when the ringgit was undervalued against other regional currencies. It also helped insulate the economy from inflationary pressures.

Impressive skyline

But recent falls in other currencies such as the Singapore dollar and Philippine peso are hurting Malaysia's export efforts, prompting export manufacturers to push for a competitive devaluation.

While Mahathir insists there will be no change to the peg, a change in September is being mooted by some analysts.

As George Worthington, Asia Pacific chief economist for analysts IFR, noted recently: "As the economic news worsens and a recession looms despite his best efforts to protect the country from external factors, Mahathir's legacy will become tarnished and his supporters restless".

One part of that legacy is a Kuala Lumpur skyline of impressive but profitless proportions. Another is a near-quadrupling of GDP -- from $27 billion when Mahathir came to power in July 1981 to more than $100 billion today -- and a lift in per capital income from less than $2000 in 1981 to about $4500 now.

Mahathir has outlasted critics and challengers during two tumultuous decades. With the economy in dire straits, can he deliver once again?