Malaysian economy contracts 6.7 pc in 1998

Asian Economic News, April 5, 1999

KUALA LUMPUR, March 31 Kyodo Malaysia's economy contracted by 6.7% last year, worse than earlier forecast, but for this year it may perform better than the expected 1% growth, Malaysia's central bank governor said Wednesday. At a press conference held in conjunction with the release of the bank's 1998 annual report, Ali Abul Hassan Sulaiman said the contraction was initially projected at 4.8%.

The decline was the first after 12 years of growth averaging 7.8%. The significant contraction was partly because of the high base in 1997 when the gross domestic product (GDP) grew 7.7%. Another factor, Ali said, was the tight economic policies adopted in late 1997 and early 1998 that had caused demand to fall much more sharply than anticipated. The government then reversed its policy to expansion in the middle of last year to counter the downturn. For this year, the government has projected a budget deficit of about 6% of the gross national product (GNP) in 1999 to support the economy. As a result, Ali said, the recession seemed to have bottomed out in the third quarter when the GDP fell 9% before recovering to an 8.1% drop in the fourth quarter. ''There is a possibility GDP growth could be higher than projected in 1999. Barring any adverse external development, the prospect of higher real GDP growth, closer to 2%, is possible in 1999,'' Ali said. Construction was the hardest hit sector last year, plunging 24.5% because of, among others, completion of large projects and deferment of new infrastructure projects. The manufacturing sector declined 10.2% because of weaker domestic and external demand. Inflation was 5.3%, an increase from 2.7% in 1997, but it is expected to ease to 4% this year. Unemployment rose to 3.9% last year. Per-capita income in nominal terms declined from 4,284 dollars in 1997 to 3,018 dollars in 1998. On the plus side, Malaysia's current account in the balance of payments turned around to record the first surplus since 1989, amounting to 9.2 billion dollars, 13.7% of GNP. Due to the depreciation of the ringgit, Malaysia's total trade rose 16.6% last year to 515 billion ringgit, 196% of GNP. In dollar terms, however, it declined 16.5%. The United States remained Malaysia's largest trading partner, with a 20.8% share of total trade. Singapore was second with 15.5%, Japan third with 14.6%, down from 17.2% in 1997. The favorable balance of payments position and the stabilization of short-term capital flows following the implementation of selective exchange controls led to a significant strengthening of external reserves. It increased from 21.7 billion dollars in 1997 to 28.7 billion dollars at the end of February 1999, adequate to finance 6.2 months of retained imports. Ali said the increase in external reserves would make Malaysia less vulnerable to credit outflow in the short-term.