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Asia Feature: Tough Times For Malaysian Economy?
By C.J. Philip
16/8/2001 5:24 am Thu
By C.J. Philip
WITH Malaysia expected to release its second quarter gross
domestic product (GDP) figures this August, analysts are expecting
the economy to get worse before an improvement sets in.
According to a Merrill Lynch report issued in mid-July, it expects
the GDP growth for the second quarter to be near zero percent
versus the consensus' one to two percent.
It views the market earnings expectations for the full year to be
negative six percent, a sharp contrast to the consensus' positive
12 percent. That is not only the bad news which it sees
forthcoming - it also expects rising non-performing loans (NPLs)
to affect investors confidence.
Again it raises the concerns that the Malaysian ringgit, which has
been pegged at RM3.80 to US$1 since capital controls were
imposed in late 1998, could be devalued due to a weakening yen.
The research house sees the yen heading down to the 125 yen/US$
level and will hit the 135 yen/US$ level by year-end.
Other issues raised in the report were that Malaysia's export
recovery could come later while the valuations for the listed
companies were not compelling considering the weak economic
The GDP shrank to 3.2 percent in the first quarter, a sharp drop
from the 6.5 per cent in the fourth quarter of 2000. "We are
projecting the second quarter GDP growth to be close to zero and
recover only gradually in the second half," said Merrill Lynch.
It also highlighted than tight liquidity and the lack of investors'
confidence would likely inhibit growth. It added that the ringgit peg
continued to remain an issue and it would constrain monetary
On its outlook for the Kuala Lumpur Stock Exchange, it expects in
the near term, liquidity could push the market higher, in the absence
of strong foreign participation.
Local institutions are also said to have invested only 60 percent of
their funds in the market, while the rest are in bonds or other
"All it takes is a trickle of new money coming into the market to
push it up. The big question is what will happen to the market when
the money dries up or when fundamentals persist," it pointed out.
It is worried about the very weak economic numbers, possible
earnings disappointments and renewed fears of a ringgit
devaluation as the yen continues to weaken, and the rising NPLs.
"We believe a more sustainable rally will come with the confirmation
of Malaysia's export recovery, expected in the latter part of 2002,"
It cautions investors to be cautious since valuations are still not
convincing, adding that they should watch for new orders from the
U.S. for components and communications items.
"We believe investors should remain underweight in Malaysia. But do
not advise that they have zero weighting. Event risk is moderate to
high. Investors should look to selectively buy on dips," added Merrill
Meanwhile, the research house's outlook for the NPLs is of
concern. Malaysia's central bank - Bank Negara - recently
announced that the net NPLs (six-month classification) edged up
to 7.8 percent as at end-May from 7.4 percent as at end-April.
Gross NPL was 12.6 percent as at end-May compared with 12.1
percent as at end-April. The reclassification of the loans to NPL, which were previously
granted indulgence, accounted for about half of the increase in May.
The reclassification of the loans to NPL, which were previously granted indulgence, accounted for about half of the increase in May.
However, the analysts point out that with the capital position of
the banking system improving to 12.4 percent in June from 12.3
percent in the previous months, the banks should be able to absorb
the deterioration in loan quality without further injection of new
On Malaysia's external trade balance, economists said the trade
surplus for June fell 29.8 per cent to RM3.3 billion compared with
RM4.7 billion in May. Year-on-year the trade surplus was also very
much lower compared with RM4.7 billion in June last year.
Some economists paint a bleak picture. They expect the trade
surplus to narrow further in the next few months as exports,
especially of electrical and electronics items such microchips and
semiconductors, to weaken.
However, the strength of the crude palm oil price has continued to
insulate the country from the vagaries of the downturn, which has
hit export-driven Singapore.
Malaysia, the world's largest producer of palm oil, is saved again by
the golden crop, reminiscent of the 1997-98 Asian financial crisis
caused by hedge funds. The crisis wreaked havoc in Malaysia,
Thailand, Indonesia and South Korea, with the three except for
Malaysia, seeking the controversial aid from the International
Crude palm oil (CPO) prices, from 900 ringgit per tonne a month
ago, has surged to nearly 1,300 ringgit per tonne. Although
seasonal production is rising in Malaysia, the unusual weather
conditions globally may continue to support the CPO prices.
Malaysia, may face a tough time, but with the CPO again coming to
fore to provide some support for the economy, there is still some
The government-led corporate restructuring exercises, with it
taking over the United Engineers (Malaysia) Bhd and debt-laden
Renong Bhd, has given some hope that it is serious in getting the
ailing corporate Malaysia back on track.
A restructuring of the two corporations, which have close links to the ruling United Malays National Organisation, is considered to be necessary. Renong has billions of ringgit in debts. The restructuring would see the listed UEM being taken private, the settlement of the debts owed by Renong to UEM and possibility of UEM's prized assets being grouped together and listed. - Asiafeatures.com