Malaysia on the move - aims to expand economy on global scale - Statistical Data Included

Business Asia, June, 2001 by Nadia Cameron

With the relaxation of capital controls and an overhaul of foreign investment policies, Malaysia is looking to expand its economy on a global scale. So is it time to go back?

UNLIKE MOST OF ITS ASIAN neighbours after the financial crisis of 1997/98, Malaysia has weathered the economic storm with what appears to be minimal damage.

One of Asia's fastest growing economies in the 1990s, Malaysia achieved real GDP growth of 8.5 per cent in 2000, well up from the 5.8 per cent achieved in 1999. Recent reforms to foreign investment policies, including the relaxation of capital control measures, as well as new diversified economic plans, have also given rise to hopes that Malaysia will rebound from the global economic downturn looking better than most of its neighbours.

Concerns, however, over the country's declining exports and stalling economy has led to doubts about Malaysia's economic about-face. Although Malaysian Prime Minister Dr Mahathir Mohamad has seen his country through the Asian financial crisis with a moderate hand, the downturn of the entire region over the past few months has left many foreign parties debating whether Malaysia's economy can sustain the growth and prosperity its new economic measures propose. The shock resignation of the country's chief economic officer Daim Zainuddin has also left international commentators doubtful about the nation's political stability.

One of the main changes to Malaysia's international investment outlook has been the scrapping of capital control rules for short-term foreign investment. Introduced in September 1998, the 10 per cent exit levy on profits generated by foreign investors within their first year of operations was implemented to encourage funds brought into Malaysia to stay in the country for at least one year. The levy was revised in February 1999 and only imposed on profits made from portfolio investments that were repatriated within one year.

While international government and industry leaders were initially aghast at the introduction of the capital control measures, many are now admitting the regulatory steps, such as pegging the ringgit, have allowed Malaysia to recover from the Asian crisis a good deal better than the majority of countries in the region. What now plagues international sentiment towards Malaysia is the fear that the country's two remaining capital controls -- the currency peg and the prohibition of offshore trading of the Malaysian currency -- will also be scrapped.

MALAYSIAN SNAPSHOT

KEY ECONOMIC INDICATORS                   1999    2000(p)       2001 (f)

Real Gross Domestic product (RM bil)     192.8      209.3    219.8-221.8
Growth rate -- GDP (%)                     5.8        8.5        5.6-6.0
Agriculture, forestry and fishery
 (%)                                       3.8        0.4           1.10
Mining and quarrying (%)                  13.5       21.0            8.5
Construction (%)                          -5.6        1.1            1.0
Services (%)                               3.3        4.7            3.6
Per Capita Income (RM)                  12,305     13,361         13,618
CPI (2000=100)                             2.8        1.6        1.5-2.0
PPI (1989=100)                            -3.3        3.1           -1.8

F = forecast    P = preliminary

Source: Bank Negara Annual Report 2000

Austrade's acting senior trade commissioner in Kuala Lumpur Hayden Williams is confident the Malaysian ringgit will remain regulated for some time yet.

Williams believes Malaysia's economy is stable, and will continue to provide opportunities for foreign investment both in the short and long-term. A lot of the criticism Malaysia has been exposed to, he says, derives from a general perception of political instability within South East Asia, and not necessarily from any fundamental economic problems within the country.

"Exports in Malaysia are now higher than pre-recession. Malaysia has got very good infrastructure and incentives -- it's stable, environmentally clean, the exchange rate is good, and Australian exports are cheap into the market," Williams said.

Williams also identifies the shift in foreign funds from the South East Asian region into China as another contributing factor to Malaysia's poor investment image. While most of the Asian region is experiencing a decline in growth rates and feeling the full weight of the US economy, China continues to record strong growth, with industries and investment now making its way into the country.

This shift, however, is only one factor, economists claim which has led to Malaysia's slowing growth rates and decline in manufacturing. The most pressing issue is the country's dependence upon its electronics exports to the US.

In a sign of waning foreign demand, slumps in Malaysia's export of electronic parts, which make up 57 per cent of the country's total shipments, saw exports of electrical and electronic goods fall 11 per cent in March this year to 16.7 billion ringgit. Total exports fell 6.9 per cent compared to the same period a year earlier, largely due to faltering demand from the US. In addition, Malaysia's industrial economic growth fell by more than half in the first quarter of this year, as factories cut back in response to a drop in foreign orders for semiconductors, household appliances and other goods.