The Mahathir malaise - Malaysia economic condition - Brief Article

Business Asia, Dec 13, 1999 by Ganesh Sahathevan

Despite some signs of economic recovery, not everyone is sure Malaysia's underlying economic problems have been addressed

Malaysia is likely to begin the new century with many of the problems that plagued it in the final years of the old.

The general elections in November are but one step towards the resolution of the political turmoil sparked by the sacking of the former Deputy Prime Minister Anwar Ibrahim by Prime Minister Mahathir Mohamed.

Mahathir, who will turn 74 as the new millennium begins, finds himself fighting not only forces aligned to Anwar; he faces pressure from the ruling UMNO, which he heads, to stand aside for a younger successor.

Despite signs that the economy has recovered, many problems remain. While GDP growth should return to the 4-6 per cent range, that rate of growth will also mean a blowout in the balance of payments, and strain the country's reserves, as was the case in 1997. Structural problems, which led to a current account deficit and eventually strained the country's foreign reserves, have not been addressed.

These include a preponderance of exports that depend on imported components and an over-reliance on foreign investment, which lead to, respectively, deficits in the trade and services accounts of the current account in the balance of payments.

The Mahathir Government managed to cushion the country from the more dreadful consequences of the Asian crisis experienced in Indonesia, South Korea and Thailand, but must now pay the cost.

The government has increased liquidity in the financial system as a means of reducing the financing cost to the country's many highly leveraged companies, and of ensuring that a credit crunch does not exacerbate the number of bankruptcies.

Nevertheless, many a company has found it necessary to dispose of prized assets merely to meet interest costs. A number of companies listed on the Kuala Lumpur Stock Exchange are actually insolvent but have been able to give the appearance of being otherwise by simply changing their accounting policies so as not to acknowledge their losses.

It is, therefore, likely that the first few years of the new millennium will see debt-laden Malaysian companies attempting to recapitalise, as did their counterparts in the rest of Asia over the past few years. Takeovers by foreign companies are likely to increase, but especially in the banking sector.

The strategy of merging the banks and finance companies to create more muscular institutions has stalled in the face of opposition from the present owners, and workers fearful that rationalisation will cost them their jobs. The millennium will begin with a sharp reminder that the rules of economics apply to Malaysians as they do to everyone else; and that there are costs to pay for having denied this fact for most of the past decade. Often, it was thought that this would mean that the Malay majority would be left at a financial disadvantage, compared to the Chinese and Indian populations.

However, given current trends, it is likely that the Malay race will dominate not only politics, as it has in the past, but also commerce.

MALAYSIA

Head of Government: Prime Minister Mahathir Mohamed

Population: 21.4 million (1998)

GDP: US$70.8b (1998)

GDP per capita: US$3300 (1998)

Strengths: Strong support for IT industries; stable economy

Unknowns: Question marks over Mahathir's successor; the Anwar factor

EXCHANGE RATES Spot Forecast

FX rates per US$

EXCHANGE RATES         Spot           Forecast

FX rates  per US$   12 Nov '99   6 months   12 months
AS$                   0.6435       0.68       0.70
RMB                   8.2778       8.28       8.30
HK$                   7.7716       7.79       7.80
INR                   43.401       46.0       48.5
IDR                   7120.0       6700       6200
KRW                   1170.5       1031        967
MYR                   3.8000       3.80       3.80
SG$$                  16,688       1.65       1.62
NT$                   31.765       33.0       32.0
BT                    38.805       41.0       42.0

(*) Ganesh Sahathevan is a Malaysian journalist based in Sydney.