Malaysia and Mahathir proving critics wrong; Malaysia was supposed to become the basket case of Asia after implementing capital controls in response to the 1997 crisis. In 2002, the country is far from being a no-hoper - Eye On Malaysia - Brief Article

Business Asia, May, 2002

Politicians love few things more than seeing their enemies proven wrong. It's a feeling with which Malaysian Prime Minister Mahathir Mohamad is in touch these days as some former nemeses are giving him his due.

Take financier George Soros, who just four years ago was calling Mahathir a "menace to his own economy". Mahathir had just implemented capital controls to halt outflows that sent his currency, the ringgit, into freefall. Nowadays, however, Soros is reportedly putting some money into Malaysian sovereign bonds.

Then there's the US, which demonised Mahathir's economic policies during the Asian crisis. At the time, Treasury officials claimed that Mahathir, by removing Malaysia from the global economy, would send his nation into poverty and chaos.

Yet last month, senior US State Department official James Kelly heralded Malaysia as a beacon of stability.

Malaysia's reversal of fortune has much to do with its economy's performance. As many Asian economies limp along, Malaysia is riding high thanks to robust consumer spending, strong foreign investment and a revitalised banking system. The nation also is well positioned to benefit from the ongoing rebound in global growth, especially in the US. Some analysts see Malaysia growing six per cent this year.

No credit

"Malaysia is doing remarkably well, yet no one wants to admit it because they don't want to give Mahathir the credit," Simon Ogus, chief executive at DSG Asia Ltd in Hong Kong, said.

Mahathir, after all, is an undisputed firebrand of the global economy, and has made his share of headlines over the years condemning Western-style capitalism and economic globalisation.

What Mahathir does deserve credit for is improving corporate governance and cleaning up Malaysia's banking system. He's marshalled through plans to force banks to write down bad loans, and he's had remarkable success.

But a reality check is in order.

For all its strengths, Malaysia is facing the same daunting challenge as its neighbours.

Mahathir has kept the ringgit pegged at 3.8 to the US dollar since September 1998, ignoring pressure from some investors to let the currency trade freely. The currency peg may reduce volatility in the economy, but it's hurting competitiveness.

Malaysia's situation "has highlighted the problems associated with over-reliance on export-led growth", the Asian Development Bank said in a recent report. The nation also has further to go to convince investors that its capital markets will remain open if things get dicey.

Mahathir's recent proposal of a world tax on wealthy nations to help poorer ones was but one reminder that Malaysian-style capitalism differs considerably from western ideals.

Workers' shortage

Beyond that, Malaysia is facing other impediments to rapid growth, including a shortage of skilled workers and overcapacity in its property markets.

Still, Malaysia has succeeded where many in Asia continue to fail. Tokyo has dragged its feet for over 10 years now on its own non-performing loan problem. Mahathir took his cues from investors who fled his economy in 1997 and 1998 and got actively involved in fixing the corporate and financial sectors. Rather than leaving the private sector to find a solution, Mahathir pushed institutions to sell bad loans to a new government agency, which then disposed of them.

By September, PK Basu, a Kuala Lumpur-based economist at Credit Suisse First Boston, predicts all major debt restructurings will be completed. With the worst of the forces that caused the Asian crisis now behind Malaysia, Basu says, bank lending and corporate bond issuance should grow at double-digit paces this year.

It's this progress that has ratings agencies mulling upgrades of Malaysian debt.

Malaysia also is getting high marks for stability since the 11 September terrorist attacks on New York and Washington. In the months that followed, investors worried about trends in a nation that's 60 per cent Muslim and one in which anti-US sentiment gets lots of attention.

The nation's leading think tank, the Malaysian Institute of Economic Research, thinks the stock market will gain 27 per cent this year. Analysts at CLSA Emerging Markets registered their vote of confidence last month with a report titled "Malaysia in Vogue".

Bloomberg

MALAYSIA
SNAPSHOT

Population: 22,229,040 (July 2001 est.)

Government type: Constitutional Monarchy

Capital: Kuala Lumpur

Administrative divisions: 13 states and two
federal territories.

Legal system: Based on English common law.

Suffrage: 21 years of age; universal

Executive branch: Chief of state: Paramount
Ruler Sultan Tunku Salahuddin Abdul Aziz
Shah Ibni Al-Marhum Sultan Hisammuddin
Alam Shah (since 26 April 1999);

Head of government: Prime Minister Mahathir
bin Mohamad (since 16 July 1981); Deputy
Prime Minister Abdullah bin Ahmad Badawi
(since 8 January 1999).

GDP: Purchasing power parity - US$223.7
billion (2000 est.).

GDP - real growth rate: 8.6 per cent (2000 est.)

Labour force: 9.6 million (2000 est.)

Labour force - by occupation: Local trade and
tourism 28 per cent; manufacturing 27 per
cent; agriculture, forestry, and fisheries 16
per cent; services 10 per cent; government
10 per cent; construction nine per cent
(2000 est.)

Source: CIA World Factbook