http://www.asiafeatures.com/business/0108,2008,02.html

TOUGH TIMES FOR MALAYSIA'S ECONOMY?

By C.J. Philip
August 8, 2001

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 cycle.

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 flexibility.

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 financial instruments.

"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 said.

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 Lynch.

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.

Bank Negara, according to analysts, had indicated that the amount of loans granted indulgence and yet to be classified as NPLs had been reduced to RM217.4 million. But they expect the NPL ratio to rise over the next few months as old and new NPLs emerge.

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 capital.

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 Monetary Fund.

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 optimism.

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.