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ATimes: Persons Before Country [Economy]
By Anil Netto
25/8/2001 6:45 pm Sat
Persons before country
By Anil Netto
Malaysia has barely avoided slipping into a technical recession and
faces a testing time as it scrambles to cope with the global slump in
the electronics sector. Despite posting slightly better than expected
second quarter GDP figures, the country is likely to struggle to stay
in positive territory for the whole year. So far, it has been saved by
some deft pump-priming and its more diversified economy compared with
those of its neighbors, such as Singapore.
GDP grew by just 0.5 percent year-on-year in the second quarter after
recording a revised 3.1 percent year-on-year growth in the first
quarter. Last year, the economy grew by 8.3 percent. In a measure of
how times have changed, the authorities seem relieved that the economy
grew 1.0 percent over the first quarter to reverse a 3.9 percent
quarter-on-quarter contraction in January-March, thus avoiding a
The economy was hit by a 6.7 percent year-on-year drop in
manufacturing in the second quarter, largely due to a 25 percent
plunge in the electronics sector. Unemployment crept up to 4.0 percent
as multinational electronics firms slashed production forecasts and
trimmed their workforces. Some 20,000 workers have been laid off and
the Malaysian Trades Union Congress predicts that the figure could
rise to 90,000.
Other sectors, however, have cushioned the manufacturing slump.
Services grew 6.1 percent as a result of low interest rates, which
boosted bank lending for housing and consumer durables, and an
expansion in the telecommunications sector. Construction rose 3.2
percent as the effects of the government's expansionary policies and
pump-priming infrastructure projects began to be felt. Agriculture
increased by 1.3 percent due to higher crude palm oil production while
mining grew 0.7 percent, reflecting higher natural gas output.
"Based on the first-half performance [of the economy] and the global
outlook, it is likely that the third quarter growth will be similar to
that of the second quarter, while the fourth quarter will perform
better," Zeti Akhtar Aziz, Malaysia's first woman central bank
governor, said on Thursday.
That may be a trifle optimistic as no one can say for sure when the
electronics industry will climb out of the hole it is in. The central
bank has been way off the mark before: it earlier revised its economic
growth to 5-6 percent for 2001. Now even that is way too high. A
further downward revision in the official GDP growth forecast is in
the cards for October, when the 2002 budget will be presented.
Economists polled earlier by Bloomberg News had forecast growth for
2001 to slow to 0.8 percent. Many private analysts are now forecasting
anything from 0 to 2 percent growth for the whole year and that is
assuming things don't get any worse.
While Zeti may be banking on brighter fourth-quarter prospects, not
everyone in the electronics industry shares that optimism. "We are
looking at a turnaround only in the third quarter of next year," says
a components marketing officer at a giant Japanese multinational
electronics firm based in Penang, Malaysia's "Silicon Island".
Such a delayed turnaround could have far-reaching consequences for the
economy. Still, the positive GDP growth of 0.5 percent in the second
quarter is slightly better than expected as many analysts were
predicting a contraction. Some of them have suggested that the
positive second-quarter growth figure may not be sustainable as it was
secured on the back of government pump-priming (public sector
consumption grew by 4.8 percent) at a time when private sector
consumption remained weak, posting only 1.6 percent growth.
On a brighter note, net international reserves rose from RM98.8
billion (US$26 billion) in the second quarter to RM104.3 billion as of
15 August, largely as a result of the drawdown of proceeds from $1
billion 10-year Notes issued by the federal government, inflows from
trade and foreign direct investment, and a net inflow of portfolio
The reserve level is now equivalent to 4.1 months of retained imports
while external debt was RM158.4 billion as of the end of June,
equivalent to about 50 percent of GNP. The current account surplus
dipped from RM13.3 billion in the first quarter to RM12.5 billion, but
is expected to remain at 6-7 percent of GDP. But worryingly for future
production capacity, imports of capital and intermediate goods fell by
11 percent each.
How will the banking system fare? Nonperforming loans (NPLs) rose from
RM52.2 billion to RM58.6 billion during the second quarter, though a
third of the increase was "due to reclassification of loans previously
granted indulgence", said the central bank.
Based on an excess capital of RM18.6 billion above the 8 percent
minimum RWCR (risk weighted capital ratio) requirement as of June 30
and unaudited pre-tax profits of RM4 billion not yet included in the
capital base of the banking system, the central bank maintains "there
is sufficient capital to absorb any potential losses from any increase
Zeti said the government's growth strategies would continue to stress
the contribution of domestic demand to broaden the sources of growth
and to develop a more diversified, resilient economy. At the same
time, she said the authorities had introduced stronger measures in
order to hasten corporate reforms. These included "initiatives to
further de-leverage corporate debt and improve operational
But the key question, as always, is whether such reforms will be
enough in the wake of the departure of former finance minister Daim
Zainuddin, whose tenure was marred by several controversial corporate
deals that fueled allegations of cronyism and bail-outs.
In a recent commentary, political economist Terence Gomez predicted
that, with Prime Minister Mahathir Mohamad now serving both as prime
minister and as finance minister, government agencies would likely be
used to take over the enterprises of Daim's business associates.
"Eventually, ownership of most of this equity will have to be passed
back to the state or to individuals aligned to Dr Mahathir," he said.
With such executive hegemony over the state, the nature of corporate -
and public - governance henceforth will depend entirely on Mahathir,
who has now promised greater transparency and accountability, observes
Gomez. "However, as long as power is centralized in the hands of a
dominant executive, investors will be skeptical of corporate deals
undertaken in the 'public interest'."
Indeed, political and personal interests in corporate ventures can be expected to get in the way of much-needed corporate reforms.