COUNTRY REPORT Malaysia Brunei Malaysia at a glance: 2002-03 OVERVIEW The government faces a by-election in Ketari in a constituency with a Chinese majority on March 31st. The result is likely to be close, but will probably be a victory for the government coalition, the Barisan Nasional (BN). The major government party, the United Malays National Organisation (UMNO), has become more confident that its electoral support has turned a corner, especially among the Malay population. The first quarter of 2002 is likely to prove the trough of the global recession. There was a broadly based improvement in the Malaysian economy in the fourth quarter of 2001, reducing the year-on-year contraction in real GDP to 0.5%, from a fall of 1.2% in the third quarter. Key changes from last month Political outlook • The UMNO leadership is becoming confident that it could win a general election, after a by-election victory for the BN in Indera Kayangan in January. It faces another by-election test in Ketari on March 31st. The BN is likely to be helped by a backlash against Islamist militancy after September 11th. UMNO alleges that the main opposition party, the Parti Islam sa-Malaysia (PAS), is closely linked to Islamist terrorism. Economic policy outlook • The Bank Negara Malaysia (BNM, the central bank) is expected to cut interest rates in the first half of 2002 to help the economy recover. Monetary and fiscal tightening remains unlikely before mid-2003. Economic forecast • Activity should begin to improve in the second half of the year, with the economy bottoming out. The Economist Intelligence Unit has raised its forecast for real GDP growth in 2002 to 3.2% (from 2.7% previously) and in 2003 to 5.6% (from 5.1%), after growth of 0.4% was registered in 2001. 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ISSN 0269-6703 Symbols for tables “n/a” means not available; “–” means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. 1 Contents 3 Summary Malaysia 5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2002-03 8 Political outlook 9 Economic policy outlook 10 Economic forecast 14 The political scene 17 Economic policy 20 The domestic economy 20 Economic trends 24 Manufacturing 26 Oil and gas 27 Agriculture 28 Financial and other services 29 Foreign trade and payments Brunei 34 Political structure 35 Economic structure 35 Annual indicators 35 Quarterly indicators 36 Outlook for 2002-03 36 Political outlook 36 Economic forecast 37 The political scene 38 Economic policy and the economy List of tables 10 Malaysia: international assumptions summary 11 Malaysia: forecast summary 13 Malaysia: gross domestic product by expenditure 20 Malaysia: federal government finances, 2001 21 Malaysia: real gross domestic product EIU Country Report March 2002 © The Economist Intelligence Unit Limited 2002 2 22 Malaysia: approved manufacturing projects 23 Malaysia: gross domestic product by sector 23 Malaysia: inflation indicators 25 Malaysia: production in the manufacturing sector 26 Malaysia: oil and gas production 27 Malaysia: agricultural sector production 28 Malaysia: services sector performance 30 Malaysia: foreign trade 32 Malaysia: current account List of figures 13 Malaysia: gross domestic product 13 Malaysia: Malaysian dollar real exchange rates 24 Malaysia: manufacturing production 30 Malaysia: exports of electronic and electrical goods 31 Malaysia: merchandise trade EIU Country Report March 2002 © The Economist Intelligence Unit Limited 2002 3 Summary March 2002 Malaysia Outlook for 2002-03 The government has benefited from the backlash against Islamist terrorism to strengthen its position, helped by internal reforms. The 76-year-old prime minister, Mahathir Mohamad, now has a firmer grip on power than has been the case for several years. The start of an economic recovery in 2002 is also likely to work to the advantage of the government, and a general election may be held in 2003. Notwithstanding a steep decline in manufacturing output, Malaysia avoided negative growth in annual real GDP in 2001. Real GDP is forecast to grow by 3.2% in 2002 and 5.6% in 2003. The decline in exports and imports has bottomed out. The political scene The leadership of the United Malays National Organisation (UMNO), the dominant party in the ruling Barisan Nasional (BN) government, is confident that it has regained its former strength and can count on a majority of the Malay vote, which it lost in the 1999 general election. UMNO considers itself strong enough to succeed without having to make a deal with the jailed former deputy prime minister, Anwar Ibrahim. The current deputy prime minister, Abdullah Badawi, remains the favourite to succeed Dr Mahathir. The BN inflicted a humiliating by-election defeat on the Parti Keadilan Nasional (PKN, or Keadilan) at the Indera Kayangan by-election in January. The opposition Democratic Action Party (DAP) is campaigning against the government’s declaration that Malaysia is an Islamic state. Economic policy Malaysia’s low unemployment figures may understate the true level of unemployment in the country, with employment in the crucial electronics sector particularly hard hit by the economic downturn. The government is taking action to reduce the number of foreign workers: work permits are being shortened and immigration controls tightened. Following disturbances, the government has decided to replace most Indonesian workers with workers of other nationalities. Protests from employers against this have had little effect. The reduction of foreign workers fits in with longer-term plans for a move to an economy with higher value-added production and increased wages. The government managed to spend almost its entire development budget in 2001. The domestic economy The decline in real GDP bottomed out in the fourth quarter of 2001, as domestic demand surged ahead. Aided by a powerful fiscal stimulus, Malasia managed to avoid a contraction in real GDP in 2001 as a whole. However, a legacy of the relatively slow growth in recent years is low private capital investment, which could affect future output. Investment approvals remained low in 2001; Malaysia is finding it difficult to attract new foreign direct investment (FDI). The economy was boosted in 2001 by consumption expenditure, while growth in the services sector continued at a surprisingly EIU Country Report March 2002 © The Economist Intelligence Unit Limited 2002 4 high rate. Inflation pressures have remained weak, but may now start to pick up. The contrast between the domestic-orientated and the export-orientated industries diminished during the fourth quarter of 2001. Capacity utilisation increased in the export industries, as demand in the electronics sector picked up. Hydrocarbons and agricultural production declined. Foreign trade and Exports bottomed out in the third quarter of 2001, led by electrical and payments electronic exports. Rising imports reduced the trade surplus in the fourth quarter. The current-account surplus has remained large and international reserves have continued to recover. Malaysia recorded a net outflow of FDI in the last quarter of the year. Brunei Outlook for 2002-03 Brunei’s economy will benefit in 2002 from a Br$1bn (US$549m) stimulus package, the largest since 1997. Activity in the private sector will be boosted by the injection of government funds, with real GDP growth projected to reach 3% in 2002. The construction sector, which contracted by 4% in 2000 and remained stagnant in 2001, is expected to rebound, spurred by new government contracts. Brunei will maintain its tight controls on religious and domestic activities and the sultan will continue to work to strengthen the role of Islam in public life. The political scene Islamist terrorism is not thought to pose a serious threat to Brunei, given the country’s relative wealth, strict system of social surveillance and supervision of religion.