COUNTRY REPORT

Malaysia Brunei 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 (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.

March 2002

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

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ISSN 0269-6703

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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, , 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, . 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

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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. Nevertheless, the government is cracking down on illegal immigration, after reports from abroad indicating links between Islamist terrorists and the Sultanate. After months of speculation, the government has admitted that it funded Global Evergreen, the corporation formed in October 2001 to allow it to settle disputes with creditors of Prince Jefri Bolkiah’s Amedeo Corporation.

Economic policy and the Oil and gas production levels have remained high. Brunei has embarked on a economy landmark recovery plan, with Br$1bn to be disbursed to revive the ailing economy. The Visit Brunei Year 2001 proved a flop, but the government is determined to press ahead with tourism promotion, which it views as a major future foreign-exchange earner. The Brunei International Financial Centre (BIFC), inaugurated in July 2000, attracted its first bank in January. Brunei tapped the international financial markets for funds for the first time in December 2001. Oil and gas exploration rights have been awarded in two deepwater blocks. The government has promised to start releasing quarterly economic data.

Editors: Frans Jonkers (editor); Graham Richardson (consulting editor) Editorial closing date: March 14th 2002 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report March 2002 © The Economist Intelligence Unit Limited 2002 Malaysia 5

Malaysia

Political structure

Official name Federation of Malaysia

Form of state Federated constitutional monarchy

The executive The king appoints a prime minister and, on the prime minister’s advice, a cabinet

Head of state The Yang di-Pertuan Agong (king or supreme sovereign) elected by the Conference of Rulers from one of the nine hereditary rulers

National legislature Bicameral federal parliament. The Senate () has 70 members, 30 of whom are elected from the state legislatures and 40 appointed by the king. The House of Representatives () has 193 directly elected members. The Senate serves a six-year term of office and the House of Representatives a five-year term

State government There are state governments in each of the 13 states, in nine of which the head of state is a hereditary ruler. Each state has its own constitution, a council of state, or cabinet, with executive authority and a legislature that deals with matters not reserved for the federal parliament. There are also three federal territories, Kuala Lumpur, Labuan, and Putrajaya

National elections November 29th 1999; the next election is due by January 2005

National government The Barisan Nasional (BN), the governing coalition—the main component of which is the United Malays National Organisation (UMNO) Baru—won 148 of the 193 seats in the Dewan Rakyat in the 1999 general election. The BN has the two-thirds majority required to pass constitutional amendments. The cabinet was reshuffled in December 1999

Main political organisations Government—the main parties in the Barisan Nasional are UMNO Baru, the Malaysian Chinese Association (MCA), the Malaysian Indian Congress (MIC), Parti Gerakan Rakyat Malaysia (Gerakan), Parti Pesaka Bumiputera Bersatu (PPBB) and the National Party (SNAP); Opposition—Parti Islam sa-Malaysia (PAS), the Democratic Action Party (DAP), Parti Keadilan Nasional (PKN, Keadilan), Parti Bersatu Sabah (PBS) and Parti Rakyat Malaysia (PRM)

Prime minister & finance minister Mahathir Mohamad Deputy prime minister & home affairs minister

Key ministers Agriculture Defence Najib Abdul Razak Education Energy, communications & multimedia Foreign affairs Housing & local government Human resources Information Khalil Yacoob International trade & industry Primary industries Public works Science, technology & environment Transport

Central bank governor Zeti Akhtar Aziz

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Economic structure

Annual indicators

1997 1998 1999 2000a 2001a GDP at market prices (M$ bn) 281.9 284.5 299.7 339.4 334.0 GDP (US$ bn) 100.2 72.5 78.9 89.3 87.9 Real GDP growth (%) 7.3 –7.4 6.1 8.3 0.4 Consumer price inflation (av; %) 2.7 5.3 2.7 1.5 1.4 Population (m) 21.7 22.2 22.7a 23.3 23.9 Exports of goods fob (US$ m) 77,538 71,883 84,052 98,432 87,213 Imports of goods fob (US$ m) –74,029 –54,378 –61,404 –77,572 –70,743 Current-account balance (US$ m) –5,935 9,529 12,606 8,872 6,415 Foreign-exchange reserves excl gold (US$ m) 20,788 25,559 30,588 29,523 30,475 Total external debt (US$ bn) 47.2 44.8 45.9 49.6 52.3 Debt-service ratio, paid (%) 7.4 7.4 4.8 5.7 6.6 Exchange rate (M$:US$; av) 2.81 3.92 3.80 3.80b 3.80b

March 14th 2002 M$3.80:US$1

Origins of gross domestic product 2001 % of total Components of gross domestic product 2001 % of total Agriculture 8.6 Private consumption 44.6 Mining 6.9 Public consumption 12.1 Manufacturing 31.5 Gross fixed capital formation 25.9 Construction 3.4 Stockbuilding –1.3 Electricity, gas & water supply 1.9 Exports of goods & services 112.5 Services 53.8 Imports of goods & services –93.9 GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports (fob) 2000c US$ bn Principal imports (cif) 2000c US$ bn Electronics & electrical machinery 60.6 Machinery & transport equipment 51.4 Petroleum & liquefied natural gas 6.7 Manufactured goods 8.7 Chemicals & chemical products 3.9 Chemicals 5.9 Textiles, clothing & footwear 2.7 Miscellaneous manufactured articles 4.7 Palm oil 2.6 Mineral fuels & lubricants 3.9 Wood products 2.3 Food 3.0 Total incl others 98.2 Total incl others 82.2

Main destinations of exports 2001 % of total Main origins of imports 2001 % of total US 20.2 Japan 19.2 16.9 US 16.0 EU 13.6 EU 12.9 Japan 13.3 Singapore 12.6 Hong Kong 4.6 Taiwan 5.7 Taiwan 3.6 China 5.2 South Korea 3.3 South Korea 4.0 a EIU estimates. b Actual. c Customs basis.

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Quarterly indicators

2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Federal government finances (M$ m) Revenue 11,219 16,682 15,421 18,542 14,634 20,738 18,477 25,718 Expenditure 7,805 12,760 14,662 21,320 11,303 13,369 14,326 24,760 Balance 3,413 3,922 759 –2,778 3,331 7,369 4,151 959 Output GDP at constant 1987 prices (M$ m) 50,191 52,006 53,395 53,773 51,723 52,241 52,741 53,484 % change, year on year 11.7 8.0 7.6 6.3 3.1 0.5 –1.2 –0.5 Industrial production index (1993=100) 175.5 186.2 194.1 197.2 182.7 176.6 180.8 182.9 % change, year on year 23.5 20.1 18.3 15.4 4.1 –5.1 –6.9 –7.2 Prices Consumer prices (2000=100) 99.7 99.8 99.9 100.6 101.3 101.3 101.3 101.8 % change, year on year 1.6 1.4 1.5 1.7 1.5 1.6 1.4 1.2 Producer prices (1989=100) 132.0 132.8 132.5 129.8 125.8 126.5 126.9 121.5 % change, year on year 3.9 5.6 4.1 –1.0 –4.7 –4.7 –4.3 –6.4 Financial indicators Exchange rate M$:US$ (av) 3.80 3.80 3.80 3.80 3.80 3.80 3.80 3.80 M$:US$ (end-period) 3.80 3.80 3.80 3.80 3.80 3.80 3.80 3.80 Interest rates (av; %) Deposit 3.3 3.3 3.4 3.5 3.5 3.4 3.4 3.2 Lending 6.8 6.8 6.8 6.8 6.8 6.8 6.7 6.4 Money market 2.6 2.5 2.7 2.8 2.8 2.8 2.8 2.8 M1 (end-period; M$ m) 70,132 69,431 69,526 80,656 74,997 75,565 79,650 83,879 % change, year on year 23.4 10.4 6.0 6.7 6.9 8.8 14.6 4.0 M2 (end-period; M$ m) 324,716 334,515 332,415 348,351 348,571 349,870 351,991 356,952 % change, year on year 18.5 11.9 7.2 9.9 7.3 4.6 5.9 2.5 KLSE composite index (end-period; 1977=100) 974.4 833.4 713.5 679.6 647.5 593.0 615.3 696.1 % change, year on year 93.8 2.7 5.6 –16.3 –33.5 –28.8 –13.8 2.4 Sectoral trends Electronic & electrical products index (1993=100) 237.8 269.8 289.9 292.2 240.6 220.4 222.8 235.3 % change, year on year 45.2 42.1 42.5 33.7 1.2 –18.3 –23.1 –19.5 Mining index (1993=100) 122.2 118.0 116.2 121.1 125.4 120.8 121.4 123.2 % change, year on year –1.6 2.6 –1.6 –0.4 2.6 2.4 4.5 1.8 Foreign trade (M$ m) Exports fob 84,758 90,968 101,706 95,876 86,153 82,919 82,402 83,500 Imports cif –68,231 –78,681 –86,713 –78,695 –72,805 –70,4321 –67,004 –70,500 Trade balance 16,527 12,287 14,993 17,181 13,348 12,487 15,398 13,000 Foreign payments Current-account balance (M$ m) 10,483 6,589 7,291 7,596 7,026 6,176 7,368 n/a Reserves excl gold (end-period; US$ m) 33,626 33,666 31,895 29,523 26,814 25,644 29,354 30,475 Sources: Central Bank of Malaysia, Monthly Statistical Bulletin; IMF, International Financial Statistics.

EIU Country Report March 2002 © The Economist Intelligence Unit Limited 2002 8 Malaysia

Outlook for 2002-03

Political outlook

Domestic politics The government faces a by-election in Ketari in the northern peninsular Malaysian state of Kedah, on March 31st, in a constituency with a Chinese majority. The result is likely to be close. The campaign will probably focus on Islamist extremism and terrorism, as well as on the claim by the United Malays National Organisation (UMNO), the dominant party in the ruling Barisan Nasional (BN) to have defeated internal “money politics.” UMNO alleges that the main opposition party, Parti Islam sa-Malaysia (PAS), is closely linked with Islamist terrorism. The opposition alliance Barisan Alternatif (BA) decided not to contest Ketari, and is instead supporting a candidate from the ethnic- Chinese-based Democratic Action Party (DAP), who almost defeated the government candidate in the 1999 general election. The government needs the support of the majority of the Chinese electorate to be sure of a victory in the next general election.

In January the BN soundly defeated the BA in a by-election in Indera Kayangan. It was the first test of the popularity of the government coalition after September 11th, which has had a strong, polarising impact on domestic politics. After its victory, UMNO stated that it had regained the majority of the Malay vote, which it lost during the 1999 general election. The BA, by contrast, claimed to have increased its support among the ethnic Chinese.

Over the past six months UMNO has become confident that its support among the electorate has turned a corner. Malaysia’s 76-year-old prime minister, Mahathir Mohamad, now has a firmer grip on power than has been the case for several years. There is speculation that a general election could be held some time in 2003, well before the due date of January 2005. The support for PAS is diminishing, and UMNO is confident that it can regain Terengganu, a state it lost to PAS in 1999, and maybe even Kelantan, lost in 1990. The Parti Keadilan Nasional (PKN, or Keadilan), a multi-ethnic party headed by Wan Azizah, the wife of the jailed former deputy prime minister, Anwar Ibrahim, is feeling the effect of UMNO’s renewed appeal in defections and disputes about strategy.

The left wing, mainly comprising the DAP, left the BA in September after PAS refused to reassure DAP that it would not set up an Islamic state if the BA coalition were to win the next general election. DAP is campaigning among ethnic Chinese and the non-Islamic population against the government’s declaration—made to outmanoeuvre PAS—that Malaysia is already an Islamic state. DAP claims that the government may change the constitution to reflect this, with increased Islamisation implying second-class citizen status for non-Muslims.

International relations Malaysia’s relations with the US have improved greatly since September 11th. However, in its annual survey of global human rights, the US State Department reaffirmed that it considered Mr Ibrahim a political prisoner, stating that his conviction was “politically motivated and patently unfair.” During his trip to

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the US in February Dr Mahathir did not secure his hoped-for meeting with the US president. In recent months Malaysia has become more sensitive to the harm Islamist terrorism is inflicting on its international image. Dr Mahathir has been at pains to point out that Malaysia is a moderate Islamic country, which is co-operating with the US to fight terrorism. It reacted furiously to the suggestion in Newsweek, a US weekly, that Malaysia had been a launching pad for the September 11th terrorist attacks. However, the heightened competition for foreign direct investment (FDI) in Asia puts Malaysia in a weak position vis- à-vis the US, which is its main foreign investor. A successful appeal by Mr Ibrahim against his conviction for sodomy would improve relations. A new row has developed with Singapore. Land reclamation by Singapore is said to be obstructing the approach to Tanjung Pelepas Port (PTP), the fast- growing container harbour in Johor state, which is being developed as a challenger to the Port of Singapore. In January one of the largest users of the Port of Singapore, the Danish container line, Maersk Sealand, moved its South- east Asian transit centre to PTP.

Economic policy outlook

Policy trends No change is expected in the next 12 months in the government’s policy stance: monetary policy will remain accommodative, fiscal policy will stay stimulative and structural changes in the economy will continue to be promoted. The economy will pick up, but the government is still likely to find that it cannot achieve the 7.5% annual average economic growth rate targeted for 2001-05 under the Eighth Malaysia Plan (EMP). Fiscal consolidation and a rise in interest rates are likely from mid-2003.

Fiscal policy After Dr Mahathir, who is also the finance minister, expressed his dissatisfaction with the budget delays in late 2001, the government made an extra effort to remove bureaucratic bottlenecks. In mid-February it announced that, unlike in most preceding years, it had spent almost the entire development budget for 2001. In order to prevent future under-spending, the government has decided to adopt a two-year development planning period, starting with the 2003 budget. There will be one budget for implementation and another document identifying projects to be undertaken in the following year, which have not yet incurred expenditure. The government is currently selecting projects for 2003. The 2002 budget incorporates the M$4.3bn (US$1.1bn) stimulus package that was announced in September. The successful implementation of the budget could result in a significant fiscal boost to the economy during 2002. Slow revenue and high expenditure growth were officially estimated to have resulted in a federal budget deficit of 6.5% of GDP in 2001, forecast to narrow to 5% in 2002. The Economist Intelligence Unit expects the federal budget deficit to narrow from 5.1% of real GDP in 2002 to 3.5% in 2003.

Monetary policy Monetary growth has slowed significantly, while bank lending activity remains sluggish and average bank lending rates continue to trend down. Part of the reason for the slow lending growth has been the impact of long overdue debt

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restructuring, taking the form of the removal of non-performing loans (NPLs) from banks’ books. Nonetheless, the NPL ratio—8.4% in January 2002—has remained high and may rise further as the need for corporate liquidity grows with the recovery of the economy. We still believe that the Bank Negara Malaysia (BNM, the central bank) is likely to cut interest rates in 2002, possibly during the first half of the year, to help the economy recover. The last time the BNM cut its intervention rate—a reference point for the base lending rates (BLR) of commercial banks and finance companies—was on September 20th 2001. The BNM then lowered the intervention rate by 0.5 percentage points to 5%. Our forecast of relatively low GDP growth in 2002 implies that there will be no rise in the intervention rate before mid-2003, by which time stronger demand will have greatly reduced the economy’s unused capacity.

Economic forecast

International assumptions The first quarter of 2002 is likely to prove the trough of the global recession; activity should gradually begin to improve in the second half of the year. The recovery in the semiconductor sector is positive for Malaysia, where electronic and electrical goods comprised almost 60% of total exports in 2001. Demand from the US, Malaysia’s largest market, will begin to pick up, but will remain fairly low by past standards, in part because of US excess capacity and over- investment, particularly in information and communications technology. US GDP growth fell from 4.1% in 2000 to 1.1% in 2001. The US economy is forecast to grow by 1.4% in 2002, and then by 3.6% in 2003. Many Asian economies have already begun to recover, but growth is being held back by a deep slump in the Japanese economy, although China remains robust. In the EU, low growth is expected to last well into 2002.

Malaysia: international assumptions summary (% unless otherwise indicated) 2000 2001 2002 2003 Real GDP growth World 4.7 2.2 2.5 4.1 OECD 3.8 1.0 1.1 2.9 EU 3.4 1.6 1.3 2.5 Exchange rates (av) ¥:US$ 107.8 121.5 135.3 129.8 US$:¤ 0.924 0.896 0.885 0.970 SDR:US$ 0.758 0.785 0.800 0.769 Financial indicators ¤ 3-month interbank rate 4.48 4.28 3.35 4.35 US$ 3-month Libor 6.53 3.78 2.17 5.07 Commodity prices Oil (Brent; US$/b) 28.5 24.5 19.6 20.5 Gold (US$/troy oz) 279.3 271.1 281.7 287.0 Food, feedstuffs & beverages (% change in US$ terms) –6.1 –1.0 11.4 13.6 Industrial raw materials (% change in US$ terms) 13.4 –9.7 1.3 14.8 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

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Economic growth There was a broad-based improvement in the Malaysian economy during the fourth quarter of 2001. The contraction in real GDP was reduced to 0.5% year on year from 1.2% in the third quarter; a renewed expansion could start as early as the first quarter of 2002, and certainly by the second quarter. The improvement in the final quarter of 2001 was due in part to the cumulative effects of the fiscal stimulus in that year, and its positive impact on domestic demand, but also to the start of a recovery in external demand. Foreign orders for electronic products picked up. The decline in the export-orientated sectors of the economy bottomed out, while capacity utilisation rose, and the domestic-orientated industries sustained production. Consumer demand was fairly robust, despite a fall in the consumer sentiment index in the fourth quarter. Exports recorded their first quarter-on-quarter rise since July-September 2000. Imports rose more strongly than exports, as manufacturers began to restock ahead of a renewed rise in production. However, gross domestic capital formation fell, as the government’s fiscal development spending was overwhelmed by a plunge in private-sector capital formation.

Malaysia: forecast summary (% unless otherwise indicated) 2000a 2001a 2002b 2003b Real GDP growth 8.3 0.4 3.2 5.6 Industrial production growth 9.4 –4.0 3.4 8.8 Gross agricultural production growth 0.6 2.0 1.0 1.5 Unemployment rate (av) 3.1 5.0 4.2 4.0 Consumer price inflation Average 1.5 1.4 1.5 2.2 Year-end 1.2 1.2 1.8 2.2 Base lending rate 6.8 6.7 6.4 7.0 Central government balance (% of GDP) –5.8 –6.8 –5.1 –3.5 Exports of goods fob (US$ bn) 98.4 87.2 89.7 99.8 Imports of goods fob (US$ bn) 77.6 70.7 73.5 86.1 Current-account balance (US$ bn) 8.9 6.4 8.2 5.0 % of GDP 9.9 7.3 8.7 5.4 External debt (year-end; US$ bn) 49.6 52.3 54.5 61.1 Exchange rates M$:US$ (av) 3.80 c 3.80 c 3.80 4.00 M$:¥100 (av) 3.53 c 3.13 c 2.81 3.08 M$:¤ (year-end) 3.54 c 3.35 c 3.63 4.19 M$:SDR (year-end) 4.95 c 4.78 c 4.98 5.48

a EIU estimates. b EIU forecasts. c Actual.

Malaysia’s real GDP grew by an estimated 0.4% in 2001, but it would be misleading to suggest that it has avoided a recession. In particular, the damage to private capital investment from the second downturn in four years has been serious, and it is highly unlikely that it will recover quickly: expenditure in 2001 reached only an estimated 40% of the 1997 peak level. A sharp decline in activity began in the fourth quarter of 2000, but this was moderated by additional fiscal spending from two stimulus packages announced in 2001. Overall gross domestic fixed capital formation is forecast to contract by 0.3% in

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2002, after falling by 2.1% in 2001. Meanwhile, we expect year-on-year growth in export demand to resume by the third quarter of 2002, resulting in an average 3.6% increase in exports of goods and services in 2002, after a fall of 7.6% in 2001. Government spending will remain strong, with firm public works investment and public consumption. Total domestic demand increased by 1.4% in 2001, after a sharp rise of 15.9% in 2000, but growth in 2002 is forecast to remain subdued at 3.2%, held back by a slow start to recovery in private investment. A pick-up in both consumption and investment in 2003 will lift total domestic demand more sharply. Overall GDP growth is forecast to increase by 3.2% in 2002 (revised up from 2.7%) and by 5.6% in 2003 (revised from 5.1%).

Inflation A turning point in inflation is likely as the Malaysian economy begins to recover from the economic downturn. The 7.9% year-on-year decline in producer prices in October 2001 was probably the trough of the price cycle; commodity prices have now begun to rise and the spare capacity in the economy is being reduced. Producer prices fell by 4.5% year on year in December, after dropping by 6.8% in November. The sluggish economy will keep consumer price inflation—which reached only 1.1% year on year in January—low in the initial phase of economic recovery. Consumer price inflation is forecast to average 1.5% in 2002, following a rate of 1.4% in 2001, and should rise to 2.2% in 2003, when demand in the economy will have strengthened.

Exchange rates A devaluation or repegging of the ringgit within the next 12 months is looking less likely at present. Malaysia’s foreign-exchange reserves have continued to rise, boosted in part by FDI inflows. Pressure on the ringgit from a weakening yen has abated. Dr Mahathir admitted in January that Malaysia might have to devalue the ringgit if the Japanese yen continued to fall against the US dollar and made China devalue its currency. The ringgit, pegged to the US dollar at M$3.80:US$1 since September 1998, has steadily appreciated against the currencies of its regional competitors from mid-2000. The coming recovery in exports will test the Malaysian authorities’ faith in the shift to a higher value- added and higher wage economy, which a strong ringgit is promoting. We believe that Malaysia will resist a change in its US dollar peg over the next 12 months, but expect a readjustment of the peg to prove necessary in the second half of 2003, to preserve competitiveness.

External sector The decline in exports and imports has bottomed out. After plunging by 19.2% year on year in the third quarter of 2001 (customs-cleared basis), the decline moderated to 13.2% in the fourth quarter. Manufactured exports, in particular, electronic equipment and parts, began to grow again (electrical and electronic products constituted almost 60% of total exports in 2001). Imports showed an even more pronounced turning point, as the rate of decline eased to 10.3% year on year in the fourth quarter, from 22.8% in the third quarter. Imports of consumption goods increased, while the decline in capital goods and intermediate goods moderated. Imports are rising as inventories are being rebuilt at the start of a renewed expansion of production. Export volumes and revenue will recover in 2002, although it will take some time before this is

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evident in the year-on-year figures. Based on our forecast of US import demand, a strong recovery in exports of electrical and electronic goods—as was the case in 1997-98—looks unlikely in 2002. The current-account surplus is forecast to widen from an estimated 7.3% of GDP in 2001 to 8.7% in 2002 and will then narrow to 5.4% in 2003. The trade surplus will remain high during the forecast period, dropping from an estimated US$16.5bn in 2001 to US$16.2bn in 2002 and US$13.7bn in 2003.

Malaysia: gross domestic product by expenditure (M bn at constant 1987 prices; % change year on year in brackets unless otherwise indicated) 2000a 2001a 2002b 2003b Private consumption 95.1 97.8 100.9 106.9 (12.2) (2.8) (3.2) (6.0) Public consumption 24.2 27.1 29.2 29.9 (1.7) (11.9) (7.9) (2.3) Gross fixed investment 64.4 63.1 62.8 68.0 (24.1) (–2.1) (–0.3) (8.2) Final domestic demand 183.7 187.9 192.9 204.8 (15.7) (0.2) (4.2) (5.6) Stockbuilding 2.2 –1.7 1.0 0.0 (1.0) c (–1.9) c (1.3) c (–0.5) c Total domestic demand 185.9 186.2 193.9 204.8 15.9 1.4 3.2 6.1 Exports of goods & services 246.8 228.1 236.3 261.0 (16.1) (–7.6) (3.6) (10.5) Imports of goods & services 223.3 204.1 213.3 236.7 (24.2) (–8.6) (4.5) (10.9) Foreign balance 23.5 24.0 22.9 24.3 (–4.8) c (0.3) c (–0.5) c (0.6) c GDP 209.4 210.2 216.9 229.1 (8.3) (0.4) (3.2) (5.6)

a EIU estimates. b EIU forecasts. c Contribution to real GDP growth.

EIU Country Report March 2002 © The Economist Intelligence Unit Limited 2002 14 Malaysia

The political scene

UMNO is confident that it Encouraged by the post-September 11th shift in public sympathy, and a has regained its strength remarkable victory in the Indera Kayangan by-election in January, the leadership of the United Malays National Organisation (UMNO), the dominant party in the ruling Barisan Nasional (BN) government, has begun to sound highly confident. In an interview in March with the web journal Malaysiakini, one of UMNO’s three vice-presidents, Muhammad Taib, expressed his strong belief that UMNO had left the difficulties of the past behind it and had regained the support of the majority of the Malay population that it lost at the 1999 general election. Internal reforms, action to eradicate “money politics”, a change in the development budget towards small-scale projects with a strong local impact, large civil service salary increases and bonuses were some of the methods UMNO has used to rebuild its support.

UMNO is considered strong Taking a long-term view, Mr Muhammad declared that UMNO had successfully enough without Anwar overcome the two major crises in its recent history, the challenge for the leadership by Razaleigh Hamzah in 1987 and the resulting party split, resolved when Mr Razaleigh returned within the party fold in 1996; and the dismissal of the deputy party president and deputy prime minister, Anwar Ibrahim, in 1998. Mr Muhammad said that Mr Anwar was no longer an issue. He declared that “no one was working towards bringing back Anwar” or his party, the Parti Keadilan Nasional (PKN, or Keadilan), into UMNO. The opposition front was divided, according to Mr Muhammed, and Keadilan, headed by Anwar's wife, Wan Azizah, was suffering from defections to UMNO.

A deal with Mr Anwar still Linking Mr Anwar with Mr Razaleigh invited renewed speculation about a makes sense rumoured deal between Mahathir Mohamad, the UMNO president and prime minister, and Mr Anwar, who is currently serving a 15-year jail term for sodomy and corruption. In September 2001 the two politicians were rumoured to have had a meeting—this was subsequently denied by Dr Mahathir. The backlash against Islamist extremism after September 11th has secured UMNO additional support, while accelerating the disintegration of the opposition front. A reconciliation with Mr Anwar and the return of Keadilan to UMNO would nevertheless fit in with the ambition of the party and of Dr Mahathir to represent all Malays. Leading UMNO politicians would be bound to see a return of Mr Anwar as a threat to their hopes of succeeding Dr Mahathir, and they are therefore likely to claim that the former deputy prime minister is not needed. It may be no coincidence that recent efforts have been made to smear Mr Anwar and undermine his support in the US by linking him to Islamist terrorism. Given Mr Anwar's bad health, it is not clear whether he would prove a threat to the UMNO leadership. However, if his final appeal against his conviction for corruption is successful, there is a possibility that he could be released on bail, and even pardoned, opening the way for his return to active politics.

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Mr Abdullah remains the Dr Mahathir took one month’s leave in February, leaving his deputy, Abdullah favourite successor Ahmad Badawi, in charge. If the prime minister's absence was intended as a test, Mr Badawi seems to have passed it. On his return, Dr Mahathir praised his deputy and denied that he was considering a cabinet reshuffle, as he has done after previous long foreign trips. The 76-year old prime minister, who is also a part-time finance minister—a post he “temporarily” adopted when stepped down in June 2001—is said to be looking for a replacement. Some political commentators have remarked on the fact that Mr Abdullah was not given the same powers his predecessor, Mr Ibrahim, received when Dr Mahathir went on a long foreign trip in 1997. While this could suggest a lack of confidence in Mr Abdullah, the fundamental reason is probably that Dr Mahathir has no desire to step down just yet—he may well contest the general election that is likely to be held in 2004, or possibly 2003 (the government's five-year term of office runs to end-2004). There continues to be a lack of clarity about the leadership succession, with Dr Mahathir preferring to keep the UMNO leadership in uncertainty and on its best behaviour. When the prime minister eventually gives up his position, or becomes incapacitated, it is widely believed that the meek Mr Abdullah would not be able to keep the political ambitions of other UMNO figures—bottled-up during Dr Mahathir's 20-year leadership—in check for long.

The BN wins in Indera On January 19th Keadilan suffered a humiliating defeat in the Indera Kayangan Kayangan by-election in the northern state of Perlis, in a constituency with a one-half Chinese and one-half Malay population. In a contest that pitched two ethnic Chinese candidates against each other—both teachers, chosen because of the importance of education to the Chinese voters—the candidate for the Malay Chinese Association (MCA), the second largest party in the BN, won with a large increased majority. The vote for Keadilan was affected by the departure of the Democratic Action Party (DAP) from the opposition alliance, the Barisan Alternatif (BA). DAP had forbidden its members to canvass for the BA. In spite of the opposition divisions, Keadilan stated that it raised its share of the vote in the mainly Chinese areas, but lost in the predominantly Malay parts of the constituency.

DAP campaigns against DAP is campaigning among the ethnic Chinese and the non-Islamic Islamic state status population against the government’s declaration that Malaysia is already an Islamic state. (The government’s declaration was itself made to outmanoeuvre the Parti Islam sa-Malaysia—PAS—which has refused to deny that it would set up an Islamic state if the BA coalition were to win the next general election.) DAP argues that the government’s statement is unconstitutional, but fears that the administration may wish to change the constitution to incorporate the claim. The party is arguing that increased Islamisation would imply second- class citizen status for the non-Muslims in Malaysia. It has accused the MCA of complacency in the face of this challenge to constitutional rights and Chinese interests.

The BN is confident it will Chinese votes are once again crucial in the forthcoming by-election in Ketari, win in Ketari in the northern peninsular Malaysian state of Kedah. The by-election will be held on March 31st. The majority Chinese seat (57% of voters were Chinese in

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1999) was previously held by the small, ethnic-Chinese-based Parti Gerakan Rakyat Malaysia (People’s Movement Party, or Gerakan), which in the 1999 general election beat DAP (then a member of the BA) by a narrow majority of 231 votes. The opposition has set its divisions aside for the by-election, with Keadilan having decided not to contest the seat (it initially hinted that it wanted to contest the vote with a candidate from the ethnic Malay population, which comprised 36% of the electorate in 1999). Overall, it was considered that the best strategy to deny a victory to the BN was to leave the opposition campaign to DAP. DAP has expressed the hope that Ketari may prove a repeat of the success of the November 2000 Lunas by-election held in Kedah, Dr Mahathir’s home state. On that occasion, the BA defeated the BN in a constituency with a majority of Chinese voters, reversing a large majority gained at the November 1999 general election, as the Chinese electorate switched its allegiance. At the time, some of the UMNO leaders put the blame for the defeat squarely on Dr Mahathir, who had upset the Chinese voters, comparing them to communists and extremists because of their complaints about discrimination and their rejection of the government’s Vision schools. DAP’s campaign against Malaysia being an Islamic state could in theory shift the Chinese vote, but it appears to have met with little response so far. Given the post-September 11th changes in Malaysia, the Chinese electorate is likely to prefer caution to the uncertainty of a DAP member of parliament. The BN is therefore confident that it will retain Kedari.

PAS is hurt by being linked PAS has meanwhile been harmed by its failure to distance itself from Islamist to extremism extremism. After the start of the US bombing of Afghanistan, the party issued a call for a jihad (holy war) against the US. The first arrests of Islamist militants in Malaysia date from before September 11th, but the party lost sympathy among the moderate Islamic electorate after the discovery of links with international terrorism and the government’s allegation that many of the militants were trained in Afghanistan. Among the militants arrested was the son of Nik Aziz, the chief minister of the PAS-ruled Kelantan state and the spiritual head of the party.

PAS fails to use its political PAS has also been harmed by its failure to become a broad-based, effectively advantages run political party. In the 1999 general election part of the party’s appeal to voters, fed up with “money politics,” was its reputation of incorruptibility. It lost this advantage when Dr Mahathir himself took action against money politics in mid-2001. PAS has remained rural and conservative, and uncompromising in its desire to set up an Islamic state. It has failed to reach out to a wider electorate, put off by its militant Islamist image. At a local level, in the Kelantan and Terengganu states which it rules, there is growing dissatisfaction with the party’s ineffective economic policies, made worse by ill- considered tax cuts and compounded by the federal government's refusal to pay Terengganu's M$1bn (US$263.2m) annual oil royalties, with the result that the PAS government has been starved of funds.

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Economic policy

Unemployment is hurting Although Malaysia’s official unemployment figures have shown a decline more than is reported during the current downturn, and official vacancies have continued to exceed the number of job searchers, anecdotal evidence suggests that there has been a disturbing rise in the number of jobless, not just for cyclical, but also for structural, reasons. Manufacturing suffers from a permanent shortage of skilled labour and can therefore be expected to postpone laying off workers for as long as possible during a downturn. Statistics show a drop in manufacturing employment in 2001 of 71,485 (6.8%), to 977,048. At the same time the official unemployment rate dropped to 3.3% in the third quarter of 2001 (the latest figure available), from 4% in the first quarter.

Employment in the With China looking more attractive as an investment location, retrenchments electronics sector is hit are continuing. The electronics sector, the mainstay of Malaysia’s manufacturing industry, is being hit hard. In , where the sector contributes 46% of GDP, a total of 15,321 workers were reported to have been retrenched in 2001; however, officials admit that this is an underestimate, because of under-reporting. In mid-February the Japanese electronics manufacturer Sony announced that it was seeking 3,500 voluntary redundancies at its Penang plant, which employs 9,000. The industrial malaise is hitting other sectors as well. On February 21st Perwaja Steel, a major steel- maker, announced that it would “temporarily” close its plants at Teluk Galong in Kemaman and at Gurun in Kedah, laying off more than 1,600 workers in Kemaman alone, while the company restructured its operations.

The government shortens The authorities have for some time wished to reduce the number of foreign foreign workers’ permits workers in Malaysia. In late 2001 the government announced that in order to protect jobs for local workers, permits for all foreign workers would in future be cut to three years, from the current six or seven years. The announcement upset many employers, especially in the plantations sector, who pointed out that their profitability would suffer if they had to get rid of their most experienced foreign workers.

The government adopts a Shortly afterwards the government instigated a “zero entry” policy, under “zero entry” policy which coastal security was increased in the narrow Straits of Malacca and along the northern Penang coast, to stop illegal immigration from Indonesia—a near impossible task, given the long coastline and well-organised people-smuggling operations. The deputy prime minister, Abdullah Badawi, who is also the home affairs minister, said that in future the government would repatriate illegal foreign workers within 24 hours of their capture, instead of putting them in detention camps for long periods. In March Mr Badawi told parliament that as a result of a tightening of immigration controls, 158,420 illegal immigrants had been arrested in 2001, over 37,000 more than in 2000. In the first two months of 2002, 15,037 illegal immigrants were arrested from Indonesia alone. A big sweep was underway in March in Sabah, with the intention of evicting a total of 30,000 illegal immigrants.

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Malaysia no longer wants In January the government announced that following a number of violent Indonesian workers incidents involving Indonesian workers in the preceding two months, it would sharply reduce the number of Indonesian workers in the country. According to government directives, Indonesians should be employees of last choice, and should be replaced by workers of other countries when their contracts have expired. The government said that employers could instead take workers from Thailand, the Philippines, Cambodia, Nepal, Vietnam and Laos, while domestic help could be hired from Sri Lanka. A cabinet committee, chaired by Mr Abdullah, was to decide on the extent of the reduction in each sector.

Employers protest to the The Malaysian Employers Federation (MEF) asked the government to government reconsider its decision on limiting the recruitment of Indonesian workers, saying that employers needed time to adjust. Recruitment of non-Indonesian foreign workers was likely to be more expensive, the MEF argued, because of higher transportation costs and the additional costs of training workers who did not speak Malay or share a similar culture. It was also inappropriate for the government to rush into the expulsion decision because of the disturbances involving foreign workers: these could have been avoided if there had been stricter controls on the entry of illegal workers. The Federation of Malaysian Manufacturers, representing over 2,000 member companies, asked the government to continue to allow the recruitment of female workers from Indonesia, who are employed in large numbers. The Federation said that these workers caused no problems and that recruitment from elsewhere would be difficult.

The government makes a Shortly afterwards, the government announced that it would allow exceptions few exceptions for the recruitment of Indonesian housemaids and for Indonesian agricultural workers in the plantation sector. Syed Hamid Albar, the foreign affairs minister, said that the move to reduce the number of foreign workers was not specifically targeted at Indonesian nationals. Malaysia had reached a stage, he said, where it had to limit its dependence on foreign workers.

The expulsion decision has The sudden decision to expel hundreds of thousands of Indonesian workers, a longer-term justification who form the bulk of Malaysia’s guest workers, bears all the signs of having been taken by the prime minister, Mahathir Mohamad. The unexpected change of policy will have disruptive short-term economic effects, but has a longer-term justification. The need for Malaysia to upgrade its labour force and production range has become more compelling after China’s admission to the World Trade Organisation (WTO). In addition, concerns about internal security have increased after September 11th—Indonesian nationals have been associated with Islamist terrorism in Malaysia. A reduction in reliance on foreign workers also fits in with the Eighth Malaysia Plan (EMP, running from 2001 to 2005), which targets a fall in the share of foreign workers in the total workforce from the current level of 9% to 5% by 2005. Foreign workers are often associated with rising crime and indiscipline, although the crime figures do not prove this. This may be because such workers are harder hit by unemployment than the official figures indicate.

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Foreign workers play an According to official figures, the number of foreign workers in the country essential role stood at 769,566 on January 1st 2002, of which 566,983 were Indonesians. However, the government readily admits that the total number of foreign workers is much higher. Such workers are playing an essential role in the Malaysian economy, performing low-grade, unskilled jobs that are unwilling to take. Anecdotal evidence suggests that these workers are also frequently exploited. Mr Arutchelvan, secretary-general of the Parti Sosialis Malaysia (PSM), a small opposition party, said that the incidents in December 2001 involving foreign workers were a manifestation of social problems, and the result of police harassment and brutality, deplorable hostel conditions and exploitation by employers.

A new policy on foreign The new foreign worker policy was announced in February by the deputy workers is formulated prime minister. Under the policy, foreign workers will be recruited from Thailand, Cambodia, Vietnam, Myanmar, Laos, the Philippines and Nepal for the services, plantation, construction and agricultural sectors. Workers from Turkmenistan, Uzbekistan and Kazakhstan may also be recruited for the manufacturing, services and construction sectors, and workers from India for the plantation sector. In manufacturing, the recruitment of foreign workers will only be permitted in export-orientated sectors. Foreign workers will only be allowed to work in the country for five years, unless they possess special skills and their services are still required; their skills will be tested and annual medical check-ups will be required. Children of foreign immigrants will no longer be allowed to enrol in government schools and existing pupils will have to leave. Indonesian workers in sectors forbidden to them under the new policy may, however, continue their employment until their work permits have expired. The government will try to balance the number of workers, Mr Abdullah said, to make sure that there are not too many from any one country. To secure compliance with the policy, the Immigration Act is to be amended in March, to include stiffer penalties, such as the caning of foreigners entering the country illegally, as well as of employers who engage and harbour them.

The government spends its In mid-February the government announced that, unlike in most preceding full development budget years, it had spent almost the entire development budget (99.6% of the allocation) for 2001. In the past, departments have tended to submit high development spending requests, to allow for planning delays and other bureaucratic snags, including lazy officials and local corruption. The slow implementation of the development budget had infuriated Dr Mahathir, who is also the finance minister. The prime minister was obliged to admit, shortly before the announcement of a M$4.3bn (US$1.1bn) stimulus package in September 2001, that only a tiny percentage of the March package of M$3bn of additional public works expenditure had been utilised. The finance ministry subsequently set up a task force to monitor spending progress and to identify and address implementation problems. A “flying squad” was also established, to make sure that public and privatised projects were carried out as scheduled. To prevent future spending delays, the government has adopted a two-year budget for development spending, under which planning and preparation are carried out during the first year.

EIU Country Report March 2002 © The Economist Intelligence Unit Limited 2002 20 Malaysia

Malaysia: federal government finances, 2001 (preliminary figures; M$ bn) 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Revenue 14.6 20.7 18.5 25.7 79.6 % change year on year 30.4 24.3 19.8 38.7 28.6 Operating expenditure 11.3 13.4 14.3 24.8 63.8 % change year on year 44.8 4.8 –2.3 16.1 12.7 Current balance 3.3 7.4 4.2 1.0 15.8 Gross development expenditure 5.3 5.7 7.3 16.9 35.2 % change year on year 110.1 –0.1 10.4 29.1 26.1 Loan recoveries 0.4 0.1 0.2 0.3 1.0 Overall balance –1.6 1.8 –3.0 –15.6 –18.4 Memorandum item Total federal government debt (end-period)128.9 129.3 138.4 145.8 n/a Source: Bank Negara Malaysia (BNM).

The domestic economy

Economic trends

The decline in real GDP Real GDP declined by 0.5% year on year in the fourth quarter, after a fall of bottoms out 1.2% in July-September. The main positive influences on the fourth-quarter performance were a strong rise in fiscal expenditure and firmer private consumption. The growth in public consumption accelerated to 16.2% year on year from 12.9% in the third quarter, while the pace of private consumption quickened to 3.5%, from 2.1% in the third quarter. The government rushed to complete the full programme of development spending budgeted for 2001 and development expenditure surged by 29.1% year on year in nominal terms (see Economic policy). Strong public investment helped to reduce the rate of decline in gross fixed capital formation to 7.2% year on year, from a fall of 9.3% in July-September. Clear evidence that the economy was bottoming out came with the reduction in the year-on-year rate of decline in exports of goods and services, from 16.8% in the third quarter to 11.9%, as global demand for electronics began to recover and palm oil prices rose. Further evidence came from the fall in the year-on-year rate of decline in imports from 20.1% in the third quarter to 10.4%, as all three categories of imports (capital, intermediate and consumer goods) recorded increases compared with the preceding quarter.

Domestic demand surges Malaysia’s GDP figures are not seasonally adjusted, but spending always picks ahead up during the final three months of the year, a period of holidays and religious festivities. Real GDP expanded by 1.4% during the fourth quarter compared with the preceding three months, double the rate of increase in the fourth quarter of 2000, when the Malaysian economy had just been hit by a severe fall in exports. The recent performance looks all the more impressive given the sharp contraction in net exports, which deducted 2.9 percentage points from quarter-on-quarter growth. Domestic demand more than made up for this,

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surging by 4.9% during the fourth quarter and contributing 4.3 percentage points to the quarter-on-quarter rate of expansion.

Malaysia: real gross domestic product (M$ m unless otherwise indicated; at 1987 purchasers’ prices, not seasonally adjusted) 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Private consumption 23,656 23,141 23,534 24,755 24,618 23,521 24,017 25,623 % change, year on year 14.5 13.4 11.3 9.9 4.1 1.6 2.1 3.5 Public consumption 4,369 6,089 6,352 7,375 4,872 6,448 7,171 8,568 % change, year on year 3.9 13.2 –8.0 1.3 11.5 5.9 12.9 16.2 Gross fixed capital formation 14,630 16,953 17,141 15,691 15,955 16,993 15,541 14,561 % change, year on year 21.0 32.6 32.6 11.3 9.1 0.2 –9.3 –7.2 Change in stocks 969 988 958 –714 –350 –530 –540 –292 % contribution to year-on-year GDP growth –0.1 –0.8 3.2 1.7 –2.6 –2.9 –2.8 0.8 Net exports 6,567 4,836 5,410 6,666 6,628 5,808 6,552 5,024 % contribution to year-on-year GDP growth –0.9 –7.1 –7.7 –3.2 0.1 1.9 2.1 –3.1 Exports of goods & services 55,853 60,422 67,048 63,450 59,596 56,852 55,811 55,882 % change, year on year 21.0 16.8 19.9 8.3 6.7 –5.9 –16.8 –11.9 Imports of goods & services 49,286 55,586 61,638 56,784 52,968 51,044 49,259 50,858 % change, year on year 25.7 27.7 32.0 12.8 7.5 –8.2 –20.1 –10.4 GDP 50,191 52,006 53,395 53,773 51,723 52,241 52,741 53,485 % change, year on year 11.7 8.0 7.6 6.3 3.1 0.5 –1.2 –0.5 Source: Department of Statistics.

There is no decline in real Malaysia’s real GDP increased by 0.4% during 2001 as a whole, outperforming GDP in 2001 the neighbouring Singaporean economy, which contracted by 2%. It is misleading to argue from this that Malaysia avoided a recession (in the generally accepted sense of two consecutive quarter-on-quarter falls in real GDP). The Economist Intelligence Unit estimates that the economy probably contracted on a seasonally adjusted basis in the first half of 2001. What is clear, in the absence of official, seasonally adjusted quarterly figures, is that the downturn has been brief and that the economy has benefited greatly from the powerful fiscal stimulus, a relatively large domestic market and a more diversified economic structure than Singapore. Agriculture and services continued to grow in 2001, while the domestic market responded positively to the fiscal stimulus, notwithstanding a decline in consumer confidence. Given the improving global outlook, the Malaysian economy is likely to enter a new period of expansion in 2002.

The legacy of slow growth The cause of the downturn in the Malaysian economy in 2001 was a plunge is low private investment in manufactured exports as the US economy went into recession, resulting in overcapacity and a drop in capital investment in the dominant export- orientated industries. Malaysia does not publish a quarterly breakdown of private and public capital investment and only releases annual figures with a lag. Total gross domestic fixed capital formation declined by 2.1% in 2001. As government development spending rose by 29.1% on a nominal basis, private fixed capital formation is likely to have plunged by around 20%. This

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will have reduced the share of private capital investment in real GDP to 12.3%, compared with 22.3% before the Asian crisis in 1997. Public investment far exceeded private investment in 2001, a situation that is unlikely to be sustainable from the point of view of maintaining the health of the public finances.

Investment approvals A continued low level of private fixed capital formation would severely restrict remain low the potential output of the Malaysian economy. The value of total investment approvals declined by 26.5% to M$24.7bn (US$6.5bn) in 2001, from M$33.6bn in 2000, according to the Malaysian Industrial Development Agency (MIDA), but the number of projects increased to 813, from 805. Foreign investment has been more resilient and less volatile than local investment. Approved investments with foreign equity participation amounted to M$18.3bn in 2001, only 8% lower than the outcome in 2000 of M$19.9bn. Foreign investments comprised some 74% of total approvals. The underlying trend of investment approvals is one of stagnation or, at best, a mild rise, in contrast with the aggressive increases that characterised the 1980s and the first half of the 1990s.

Malaysia: approved manufacturing projects (M$ m unless otherwise indicated) 1995 1996 1997 1998 1999 2000 2001 No. 898 782 759 844 725 805 813 Proposed capital investment 20,869 34,258 25,821 26,352 17,021 33,610 24,719 Local equity & loans 11,726 17,201 14,348 13,289 4,747 13,762 6,376 Foreign equity & loans 9,144 17,056 11,473 13,064 12,274 19,848 18,343 Foreign share of capital investment (%) 43.8 49.8 44.4 49.6 72.1 59.1 74.2 Source: Malaysian Industrial Development Agency.

It is difficult to attract new Despite the decline in approved investment in 2001, the minister of FDI international trade and industry, Rafidah Aziz, declared that the level remained within the average annual investment target of M$25bn set under the Second Industrial Master Plan for 1996-2005. The bulk of the approved investments in expansion and diversification projects—80% of total approvals and more in the case of foreign investment—came from retained earnings and reserves of existing investors and not from new capital inflows from abroad. Malaysia has experienced difficulty attracting new foreign direct investment (FDI), especially with the growing competition for funds from China. Nonetheless, approved investment in the crucial electrical and electronics industry was higher than might have been expected in 2001, at M$10.2bn or 40% of total approvals, with more than 90% of this (M$9.4bn) foreign investment. The US was the major foreign investor, but at M$3.3bn, sharply down from M$7.5bn in 2000, was only just ahead of Japan, while China surprised by taking third place.

The services sector drives The most surprising result of a sectoral analysis of the sources of economic the economy in 2001 growth is not that the decline in the manufacturing sector deducted only 1.7 percentage points from growth (worse might have been expected, given the severity of the downturn in the electronics sector). Neither is it that the construction sector stayed positive, adding 0.1 percentage points to growth,

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because of large-scale government help. The most startling result was that the services sector contributed 2.6 percentage points, growing even faster than during the preceding two years of rapid economic expansion (see Financial and other services).

Malaysia: gross domestic product by sector (M$ m unless otherwise indicated; at 1987 purchasers’ prices, not seasonally adjusted) 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Agriculture, forestry & fishing 3,777 4,335 4,745 4,831 4,300 4,417 4,652 4,761 % change, year on year –0.7 –3.7 1.6 5.0 13.8 1.9 –2.0 –1.4 Mining & quarrying 3,662 3,516 3,583 3,655 3,629 3,542 3,634 3,638 % change, year on year 3.9 5.6 2.7 0.7 –0.9 0.7 1.4 –0.5 Manufacturing 16,341 17,556 18,057 17,913 16,953 16,379 16,540 16,399 % change, year on year 27.3 20.9 20.3 16.4 3.7 –6.7 –8.4 –8.5 Construction 1,641 1,781 1,782 1,792 1,655 1,838 1,829 1,837 % change, year on year 1.2 1.4 0.3 1.2 0.9 3.2 2.6 2.5 Services 27,447 27,545 28,088 28,667 28,371 29,201 29,403 30,243 % change, year on year 7.3 4.8 3.5 3.6 3.4 6.0 4.7 5.5 Imputed bank service charges 3,874 3,967 4,044 4,205 4,306 4,386 4,426 4,609 % change, year on year 7.6 6.1 6.7 11.8 11.2 10.6 9.4 9.6 Import duties 1,196 1,241 1,183 1,121 1,121 1,250 1,108 1,214 % change, year on year 0.9 –18.7 –10.4 –12.9 –6.3 0.7 –6.3 8.3 GDP at purchasers’ valuesa 50,191 52,006 53,395 53,773 51,723 52,241 52,741 53,485 % change, year on year 11.7 8.0 7.6 6.3 3.1 0.5 –1.2 –0.5 a Totals may not sum, owing to rounding. Source: Department of Statistics.

Inflationary pressures The rate of consumer price inflation remained low in the fourth quarter of remain weak 2001, reflecting the relative weakness of domestic demand and the downturn of the global economy. The consumer price index (CPI) rose by just 1.2% year on year. The fourth quarter is likely to have marked the low point in the inflation cycle, although the increase in 2002 will probably be only gradual. Given the spare capacity in the economy, reduced labour shortages and limited wage pressures, it is not surprising that the tax and excise increases in the October government budget left no imprint on the inflation index.

Malaysia: inflation indicators (% change, year on year) 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Consumer price inflation 1.6 1.4 1.5 1.7 1.5 1.6 1.4 1.2 Producer price inflation 3.9 5.6 4.1 –1.0 –4.7 –4.7 –4.3 –6.4 Source: Department of Statistics.

The fourth quarter is likely The weakness of underlying inflationary pressures is illustrated more vividly by to be a turning point the sharp fall in producer prices during the fourth quarter. Producer prices are far more volatile than consumer prices, which are stabilised by the government for a number of basic goods. Upstream price pressure remains weak, and producer input prices fell by 6.4% year on year in the fourth quarter, declining

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by 5% for 2001 as a whole. The decline in producer prices reflects the depressed state of domestic and global demand and the related decline in commodity prices. However, given the forecast response of global commodity prices to an economic recovery in the US, the fourth quarter is likely to signify a turning point in producer price inflation even more clearly than for consumer prices.

Manufacturing

The dichotomy in economic Manufacturing production declined by 5.1% in 2001 on a real GDP basis, after performance diminishes expanding by 21% in 2000. During the fourth quarter of 2001 the sector began to show signs of stabilisation, as the external environment improved. The contrast between the recession in the export-orientated industries—exposed to the downturn in global demand—and the continued expansion in the domestic-orientated industries—benefiting from the government's fiscal stimulus—became less stark. The decline in value-added in the export- orientated industries slowed to 14.7% year on year, from 15.5% in the third quarter, while growth in the domestic-orientated industries dropped to 6.5% year on year, from 7.2% in the third quarter. With the forecast strengthening of US growth, and the projected positive impact of this on global demand, year- on-year change in manufacturing production could turn positive as early as the second quarter of 2002.

Capacity utilisation rises in The strongest evidence that the downturn in the export-orientated industries is the export industries bottoming out comes from a large improvement in capacity utilisation, to 79% in the fourth quarter, from 68% in the third quarter. The improvement was caused by a rise in manufactured exports across a broad range of sectors, resulting in a sharp fall in the year-on-year rate of decline, from 20.4% in the third quarter, to 12.4%. The improvement was also to some extent the result of a base effect, as the year-on-year comparison moved from the cyclical peak in the third quarter of 2000 to the lower fourth quarter. The greatest change occurred in the electronics industry, where inventory rebuilding and a rise in orders from abroad for new computer models and video games reduced the fall in electronics exports from 26.5% year on year in the third quarter to 16%,

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although the rate of decline in electronics production remained high, at 23.6% year on year, after a fall of 27.5% in the third quarter.

Malaysia: production in the manufacturing sector (% change year on year in value-added at 1987 prices) 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Export-oriented industries 25.5 24.7 21.3 2.0 –11.4 –15.5 –14.7 Electronics 46.9 46.4 37.8 –1.2 –25.3 –27.5 –23.6 Electrical 28.9 32.5 22.2 8.6 3.4 –10.4 –6.3 Textiles & apparel 5.0 13.0 5.3 3.0 –9.7 –11.4 –14.8 Chemicals & chemical products 17.1 10.2 9.2 –1.6 –7.2 –8.2 –13.3 Off-estate processing 0.5 –2.2 15.0 10.4 13.5 4.0 3.7 Rubber products 0.8 3.8 4.7 10.8 4.2 –0.7 –0.4 Wood & wood products 1.4 6.2 5.8 12.4 1.3 –2.0 –5.3 Domestic-oriented industries 26.4 20.7 14.1 12.1 4.3 7.2 6.5 Transport equipment 22.8 13.2 10.9 18.9 18.4 23.2 21.5 Fabricated metal products 35.8 38.2 22.6 10.6 6.4 4.7 –4.3 Iron & steel & non-ferrous metals 24.7 15.6 0.3 9.6 –7.3 –2.4 1.8 Non-metallic metal products 20.7 22.2 13.7 15.4 9.7 6.6 8.1 Petroleum products 39.3 15.2 12.1 21.0 8.7 18.6 30.4 Total 25.7 23.8 19.7 4.2 –7.9 –10.5 –10.2 Source: Department of Statistics.

Expansion continues in the Growth in the domestic-orientated industries continued to benefit in the domestic industries fourth quarter from the government’s efforts to boost domestic consumption and investment. Notwithstanding plant closures during the festive season in December, capacity utilisation remained high at 79%, only slightly down from 80% in the third quarter. The increase in production was sustained, at 6.5% year on year, from 7.2% during the third quarter, despite some falling off in the fabricated metals sector. Production of construction-related materials was boosted by a surge in government development spending. However, the strongest growth continued to be recorded by the sectors producing transport equipment and petroleum products.

The car industry is to be Auto sales, including of passenger cars, four-wheel drives and commercial restructured vehicles, increased by 16% during 2001 to 396,381 units, the highest total since 1997, boosted by the lowest lending rates in a decade. Passenger car sales rose by 11% to 343,234 units. The government is preparing the car industry for the increased competition it will face when Malaysia’s high tariffs on automotive products are cut to between zero and 5% from 2005. Malaysia’s import duties currently range from 42% to 80% for completely unassembled cars (CKD) and up to 300% for completely assembled cars (CBU). Tariffs will drop to 20% in 2005 and decline gradually to 5% by 2008. Under an agreement with AFTA (the Association of South-East Asian Nations Free Trade Area), Malaysia was granted a two-year delay in the implementation of the cuts; in the rest of AFTA, tariffs will come down in 2003. At the start of March the national oil company, Petronas, announced that it had sold just over one- half of its 27.4% stake in the national car manufacturer, Perusahaan Otomobil Nasional (Proton), to the government's investment arm, Khazanah. It is widely believed that Khazanah will use its enlarged 32.3% share to promote the

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consolidation of the auto sector, possibly to attract a foreign partner for Proton, in which the Japanese Mitsubishi group already has a 16% stake.

Proton expands abroad The prime minister, Mahathir Mohamad, has said that the government is prepared to sell up to 30% of Proton, which has a 65% share of the Malaysian car market. However, consolidation and restructuring in the car industry will also have to include local support industries: part suppliers are, according to industry experts, much less able to withstand increased competition than Proton. Meanwhile, the national car manufacturer, which is likely to be faced with a declining market share after 2005, is planning to become a global brand by 2006 and is expanding abroad. The latest initiative, announced in January, is a joint venture with a Chinese firm, Gold Star Heavy Industry Manufacturing, to make car parts in China and, at a later stage, to assemble cars.

Oil and gas

Hydrocarbons production Value-added by the mining sector, which largely comprises the oil and gas declines industries, fell by 0.4% year on year in constant 1987 prices in the fourth quarter, after a slight increase in the first three quarters of the year. The decline in the production of crude oil and condensates deepened slightly from the third quarter. Although crude oil production levels were fairly stable overall in 2001, the export value of crude oil continued to plunge as global prices dropped; by the fourth quarter the year-on-year fall in export values had steepened to 48.1%, compared with a rise of 2% year on year during the first quarter. Value-added in the production of natural gas fell by 0.9% year on year during the fourth quarter, in part because of lower demand for power generation, but also because of a drop in demand for gas from Japan, which is the major customer for Malaysia’s exports of liquefied natural gas (LNG). The export value of LNG declined by 10.5% year on year in the fourth quarter, down from a rise of 3.3% in the third quarter. Crude oil prices and global demand for crude oil are expected to start to increase when overall global demand begins to recover in 2002.

Malaysia: oil and gas production 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Total value-addeda % change, year on year 5.6 2.7 0.6 –0.9 0.8 1.4 –0.4 Crude oil condensates (‘000 barrels) % change, year on year 4.1 –5.4 –4.1 –4.2 –2.8 –0.7 –1.0 Natural gas (m standard cu ft) % change, year on year 10.1 11.5 10.6 5.9 5.2 2.8 –0.9 a Value-added at constant 1987 prices. Source: Department of Statistics.

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Agriculture

Agricultural production Agricultural production, although accounting (with forestry and fishing) for continues to decline only 8.6% of real GDP in 2001, is important because of the employment this traditional sector of the Malaysian economy provides. However, it is a sector in long-term decline. After a surprising 13.8% year-on-year rise in value-added in the first quarter of 2001—entirely thanks to sharply higher crude palm oil production—the increase turned into a 2% year-on-year decline by the third quarter and was followed by an only slightly less poor fourth quarter, when production fell by 1.4% year on year. The major reason for this was again crude palm oil production, which dropped by 4.1% year on year in the fourth quarter, owing to the start of the tree stress cycle (a decline in yield following strong growth in earlier years). Meanwhile, the production of rubber, saw logs and cocoa continued to fall.

Rubber production is to The government will extend the M$1.2bn (US$315.8m) aid scheme for rubber be sustained and oil palm smallholders that was announced in March 2001. Applications for aid with replanting had been lower than expected because of a recovery in palm oil prices. The deputy prime minister, Abdullah Badawi, said at the end of January that the government would not allow all rubber trees to be replanted with oil palm, as rubber is considered a strategic crop. Malaysia, which is a large producer of rubber-based products, had a rubber import bill of about M$11bn in 2001, according to Mr Abdullah. The government intends to keep 700,000 ha under rubber (although 1.4m ha are thought necessary to sustain the rubber industry).

Global recovery should The global economic downturn in 2001 depressed Malaysia's timber industry. boost the timber industry The sector recorded a 19% year-on-year decline in exports of timber and timber-based products in the first nine months of 2001, but some improvement became noticeable during the fourth quarter. The industry is moving towards the supply of higher quality and higher value-added products, and is becoming a major supplier of timber furniture, accounting for some 3% of the global furniture market, with exports growing on average by 45% a year since 1990. Demand for timber and timber-based products should pick up as global demand recovers in 2002. The industry has high hopes that China will become a new major market now that it has joined the World Trade Organisation (WTO).

Malaysia: agricultural sector production (% change year on year in value-added at 1987 prices) 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Total value-added 3.7 1.7 5.0 13.8 1.9 –2.0 –1.4 Production Crude palm oil –15.7 –2.1 11.8 27.6 17.2 2.4 –4.1 Rubber –14.6 –15.5 –18.3 –11.7 –21.8 –6.3 –5.7 Saw logs 5.6 1.5 –3.5 –16.3 –14.2 –16.8 –14.8 Cocoa –17.5 –34.8 9.5 –6.7 –14.6 –11.2 –37.5 Source: Department of Statistics.

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Financial and other services

Fast growth continues in Strong growth continued in the services sector in the fourth quarter. Value- the services sector added in the sector rose by 5.5% year on year, accelerating from a rise of 4.7% in the third quarter, as the impact of the government’s fiscal stimulus continued to be felt. The growth in the sector was broadly based, with only few exceptions. The increase in value-added in intermediate services once again exceeded the increase in final services, a feature that has been in evidence since mid-2001: intermediate services grew by 6% year on year in the fourth quarter, while final services increased by 5.2%. The negative impact of the sharp slowdown in global trade was most clearly seen in transport, storage, and communications; after rising by 4.5% year on year in the third quarter, growth in this subsector decelerated to 2.4%, the lowest rate of growth within the services sector, but a positive result nevertheless. Finance, insurance, real estate and business services benefited from higher bank lending activity and the stronger performance of the stockmarket towards the end of the year.

Activity in the retail trade Growth in final services accelerated for the fourth consecutive quarter, to show and restaurants rises an increase in value-added of 5.2% year on year, up from 4.1% in the third quarter. Production by the utilities tailed off, owing to a drop in power generation, to 4.5% year on year, from 7.1% in the third quarter. There was a strong performance by wholesale and retail trade and restaurants—the largest component in the services sector—with a 6.2% year-on-year increase, up from 3.2% in the third quarter. Salary increases and higher bonus payments for civil servants, together with tax cuts for wage earners, announced in the October budget, will have had a positive impact on consumer sentiment and boosted spending during the festive season. Given the cumulative effects of higher government spending, it was not surprising that growth in government services continued at a high pace during the fourth quarter, expanding by 5.4% year on year, slightly down from a rise of 6.1% in the preceding three months.

Malaysia: services sector performance (% change year on year in value-added at 1987 prices) 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Intermediate services 4.7 3.0 5.5 4.3 10.1 5.6 6.0 Transport, storage & communications 8.3 6.0 4.5 6.5 7.8 4.5 2.4 Finance, insurance, real estate & business services 2.5 1.2 6.2 2.9 11.6 6.4 8.3 Final services 4.9 3.9 2.4 2.8 3.5 4.1 5.2 Electricity, gas & water 5.0 6.9 7.2 5.1 5.8 7.1 4.5 Wholesale & retail trade & restaurants 8.5 6.3 1.7 1.7 1.8 3.2 6.2 Government services 1.6 1.4 0.6 3.1 7.1 6.1 5.4 Other services 1.1 0.2 3.5 3.5 2.3 2.5 3.4 Total services 4.8 3.5 3.6 3.4 6.0 4.7 5.5 Source: Department of Statistics.

Growth in loans Total loans outstanding rose to M$470.4bn (US$123.8bn) at end-December outstanding slows 2001, representing a year-on-year increase of 3.6%, down from a 5.7% rise in the third quarter. The most active lending category was loans for the purchase

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of residential properties and passenger cars. As in 2000, there was a sharp increase in loan disbursements towards the end of the year. However, repayments were larger than disbursements for the fourth quarter as a whole— the first time in eight quarters that this was the case. The major reason for this was the refinancing of bank loans through the issuance of private debt securities (PDS). In 2001 total PDS outstanding rose by M$17.1bn, exceeding the M$16.4bn increase in banking loans outstanding. PDS accounted for around 30% of the M$380bn outstanding in Malaysia’s bond market at end- 2001. After growing by M$35.3bn in the third quarter, loan approvals fell back by M$29.6bn in the fourth quarter. The growth in loan approvals showed some loss of momentum after a peak in August 2001; it may not be possible to overcome this until the economy begins to expand again.

Non-performing loans Despite higher loan repayment figures—repayments amounted to M$96.7bn in remain high the fourth quarter of 2001, up from M$91.8bn in the preceding quarter—the stock of non-performing loans (NPLs) has remained high. On a six-month arrears basis, NPLs stood at 8.1% of the total outstanding at end-December 2001, slightly down from 8.2% at end-September, but well above the outcome of 6.3% in December 2000. The rise in NPLs reflects the impact of the weak economy; the level may get worse when the economy picks up, with companies needing additional liquidity to finance their activities. The accelerated (and overdue) restructuring that the government is forcing on some of Malaysia’s corporate debtors may also cause a rise in NPLs during 2002.

Foreign trade and payments

Exports bottom out Exports (fob) fell by 13.2% year on year in the fourth quarter of 2001, compared with a decline of 19.2% in the third quarter. A recovery in the global demand for electronics reduced the rate of decline in manufacturing exports, while the value of agricultural exports was boosted by a rise in palm oil prices. Although the fall in mineral exports deepened to 30.6% year on year from 14.9% in the third quarter, largely because of lower crude oil prices, total exports are thought to have reached a trough in the third quarter of 2001. With the outlook for global demand continuing to improve, further moderation of the rate of decline in exports is expected in the first quarter of 2002.

Electricals and electronics Like previous turning points in the past two decades, the major reason for the lead the export turnaround changing trend was stronger demand for electrical and electronic products. The global electronics industry began to recover in the fourth quarter. Exports of electronics (semiconductors and electronic equipment and parts) increased by 8.7% from the preceding three months. On a year-on-year basis, electronics exports showed clear signs of having bottomed out when the third-quarter decline of 26.5% was followed by a fall of 16% in the fourth quarter. Exports of electrical products reversed direction less abruptly, moving from a decline of 16.8% year on year in the third quarter to a fall of 12.6% in the fourth quarter.

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High export growth will be Exports of electrical and electronic products accounted for 70.2% of more difficult to achieve manufactured exports and 59.9% of total gross exports in 2001. Exports of these products declined by 13% overall in 2001, the first fall since 1981; their decline contributed 9.5 percentage points to the 10.3% fall in Malaysia’s total manufactured exports. By destination, almost all exports recorded declines in 2001, except for those to China, which increased by 26.2%, and, surprisingly, those to France, which grew by 29.8%. China took 4.3% of total exports in 2001. In the new business upturn, Malaysia is likely to find it more difficult to re-establish strong export growth in electronic products. There are doubts about the strength and durability of the rise in US demand, while Malaysia’s competitiveness will be affected as more supply comes on stream from other Asian countries, especially China, as well as by the strong ringgit.

Malaysia: foreign tradea (M$ m unless otherwise indicated; not seasonally adjusted) 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Exports fob 84,758 90,968 101,707 95,979 86,152 82,826 82,163 83,280 % change, year on year 22.1 16.9 21.6 5.8 1.6 –9.0 –19.2 –13.2 of which: manufacturing 20.4 18.1 23.9 7.0 3.5 –9.1 –20.4 –12.4 agriculture –7.0 –19.0 –17.3 –22.7 –16.9 –17.6 –13.3 –4.8 minerals 111.6 65.2 42.5 28.8 1.5 –3.7 –14.9 –30.6 Imports cif –68,231 –78,681 –86,756 –78,569 –72,806 –70,432 –66,987 –70,467 % change, year on year 27.3 32.0 33.8 11.5 6.7 –10.5 –22.8 –10.3 of which: capital goods 28.2 58.1 39.8 28.9 42.4 –5.2 –24.4 –2.6 intermediate goods 29.1 32.0 36.3 11.8 2.1 –11.9 –25.6 –14.7 consumption goods 25.1 22.0 13.7 2.8 5.0 1.5 –5.8 11.4 Trade balance 16,527 12,287 14,951 17,410 13,346 12,394 15,176 12,813 a Customs-cleared basis. Source: Department of Statistics.

Rising imports reduce the There was a large reduction in the trade surplus in the fourth quarter of 2001, trade surplus to M$12.8bn, down from M$15.2bn in the third quarter, as a result of a broad- based recovery in imports. The decline in imports (on a cif basis) improved to

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10.3% year on year, from a fall of 22.8% in the third quarter. Imports of consumption goods expanded by 11.4% year on year, boosted by the government’s fiscal stimulus policy. More importantly, from the point of view of economic recovery, were the sharp reversals in the rate of decline of imports of capital goods (from 24.4% year on year to 2.6% in the fourth quarter) and of intermediate goods (from 25.6% year on year to 14.7%). The capital goods figure is somewhat surprising, given the weakness of private investment demand, especially for machinery and equipment. Rising intermediate goods imports are a harbinger of economic recovery, as demand for parts and components begins to pick up and inventories start to be rebuilt ahead of an increase in production. The manufacture of electronic and electrical products has a high import content.

The current-account Malaysia’s large trade surplus continues to underpin a significant surplus on surplus remains sizeable the current account. The current-account surplus widened in the third quarter of 2001 (the latest figures available) to M$7.4bn, from M$6.2bn in the preceding quarter. However, during the first nine months of 2001 the balance on the current account narrowed to M$20.6bn, from M$24.4bn for the same period of 2000. The main reason for the decline was a drop in the trade surplus for goods, which fell (on a balance-of-payments basis) to M$53.8bn in the first nine months, from M$57.8bn in the same period of the previous year. The decline was offset by a smaller deficit on services, which improved to M$6.6bn from M$7.9bn on the same nine-month comparison. This was caused by a strong rise in the surplus on travel, to M$10.3bn from M$7.4bn. The tourism industry is one of Malaysia’s hopes for the future. The industry was hit badly after September 11th and has taken some time to recover. The government is working towards a reduction in the services deficit in the years ahead, to make up for the expected long-term decline in the surplus on goods.

Investment income deficit The deficit on the income balance increased to M$6.8bn in the third quarter, remains large from M$6.7bn in the preceding quarter. The deficit is almost entirely caused by investment income outflows, which were surprisingly stable during the first nine months of 2001, at M$19.7bn. During the export-led economic recovery in 2000, repatriation of profits and dividends by foreign companies resulted in a sharp rise in the investment income deficit to M$27.9bn for the year as a

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whole. The start of economic recovery in 2002 could lead to another jump in the deficit in 2003.

Malaysia: current account (M$ m; not seasonally adjusted) 1999 2000 2001 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Merchandise exports 88,295 84,910 91,610 101,688 95,823 86,132 82,882 82,119 Merchandise imports –66,356 –64,442 –74,130 –81,800 –74,412 –68,420 –65,799 –63,076 Trade balance 21,939 20,468 17,480 19,888 21,411 17,712 17,083 19,043 Services & income credits 15,374 14,145 14,946 15,811 15,417 16,450 15,038 13,378 Services & income debits –23,923 –22,300 –24,170 –26,585 –27,030 –25,032 –23,822 –23,102 Services & income balance –8,549 –8,155 –9,224 –10,774 –11,613 –8,582 –8,784 –9,724 Transfers credits 1,094 698 627 694 715 596 433 505 Transfers debits –3,774 –2,529 –2,294 –2,517 –2,917 –2,700 –2,556 –2,456 Unrequited transfers balance –2,680 –1,831 –1,667 –1,823 –2,202 –2,104 –2,123 –1,951 Current-account balance 10,710 10,483 6,589 7,291 7,596 7,026 6,176 7,368 Sources: Department of Statistics; Bank Negara Malaysia (BNM).

Net capital flows reverse in The balance-of-payments figures for the third quarter reveal that there was a the third quarter net inflow of M$5bn on the financial account, in contrast to a M$8.9bn net outflow in the preceding quarter. While the net direct investment balance widened from M$1.1bn to M$2.5bn, net portfolio outflows of M$1.2bn changed to a net inflow of M$2.4bn, and the net outflow on other investment of M$8.7bn moved to a small net inflow of M$0.1bn. The impact of this reversal in capital flows was magnified in the overall balance of payments, which moved from a deficit of M$4.4bn in the second quarter to a large surplus of M$14.1bn; net international reserves held by the Bank Negara Malaysia (BNM, the central bank) increased by a corresponding amount to M$112.9bn at the end of September 2001.

Malaysia records a net The BNM reported a net outflow of foreign direct investment (FDI) of M$4.8bn outflow of FDI in the fourth quarter. It explained that this was entirely due to a single, large transaction. The BNM noted that gross FDI inflows amounted to M$3.8bn, in part for corporate expansion, but also for new equity for strategic alliances with Malaysian partners, especially in the automotive industry. The large outflow on a net basis was caused by a Malaysian company taking a controlling interest in its foreign partner. The BNM stated that the purchase was financed by issuing long-term debt and by taking out an offshore loan, and therefore had no impact on foreign-exchange reserves.

Net portfolio flows are Portfolio inflows were volatile in the fourth quarter. Although the third quarter negative recorded a net portfolio inflow, the financial markets were affected by the uncertain conditions after September 11th, which resulted in profit taking. Aggressive cuts in global interest rates and anticipation of a recovery in Malaysia’s exports then led to an improvement in financial market sentiment and a renewed rise in share prices. However, profit taking towards the end of the year once more caused portfolio outflows, with a net outflow for the fourth quarter. Malaysia's better economic outlook and increased political stability are

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expected to see positive portfolio flows in 2002, with this forecast backed up by the net inflows recorded in January and February.

International reserves International reserves have continued to recover, after declining over the first continue to rise part of 2001. At end-2001 they totalled US$30.5bn, above their end-2000 level of US$29.5bn. They further increased to US$31.5bn by the end of February 2002. The increase in reserves from a low point in July 2001 has been generated from trade inflows and long-term external borrowing. Major reasons for the renewed inflows and reduced outflows have included greater optimism concerning Malaysia’s equity market, with investors encouraged by a tightening of regulations and renewed efforts to restructure corporate debt; a reduction in pessimism about Malaysia’s medium-term prospects; and the reassertion of political control by the prime minister, Mahathir Mohamad. During the first few months of 2002 these influences strengthened further.

EIU Country Report March 2002 © The Economist Intelligence Unit Limited 2002 34 Brunei

Brunei

Political structure

Official name Negara Brunei Darussalam

Form of state Sultanate

The executive The sultan is advised on policy matters by four councils: the Religious Council, the Privy Council, the Council of Succession and the Council of Cabinet Ministers

Head of state HM Paduka Seri Baginda Sultan Haji Hassanal Bolkiah Mu’izzaddin Waddaulah

National legislature None

Legal system Courts of first instance exist on a local and religious basis; appeals go to the Religious Council in religious cases, and to the High Court and thence to the Court of Appeal in other cases. All major judicial posts are filled by the sultan’s appointees

National elections The last election was held in 1968

National government The sultan, close family members and his appointees control all organs of state power, including the Council of Cabinet Ministers, under the state of emergency that has been in force since 1962

Main political organisations The Parti Perpaduan Kebangsaan Brunei (PPKB, the Brunei National Solidarity Party), which split from the Parti Kebangsaan Demokratik Brunei (PKDB, Brunei National Democratic Party) in early 1986, is Brunei’s only legal party, the PKDB having been banned in early 1988. However, the PPKB is only intermittently active. The promotion of the national ideology of Melayu Islam Beraja (MIB), or Malay Islamic Monarchy, has been stepped up since 1990. The Parti Rakyat Brunei (PRB, Brunei People’s Party) has been banned since 1962 and operates in exile

Sultan, prime minister, minister of finance & defence Sultan Hassanal Bolkiah Mu’izzaddin

Key ministers Communications Zakaria Sulaiman Culture, youth & sports Hussain Mohamad Yusof Development Ahmad Jumat (acting) Education & health Abdul Aziz Umar (acting) Foreign affairs Prince Mohamed Bolkiah Home affairs & special adviser to the sultan Isa Awang Ibrahim Industry & primary resources Abdul Rahman Mohammad Taib Religious affairs Mohamed Zain Serudin

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Economic structure

Annual indicators

1997a 1998b 1999c 2000d 2001d GDP at market prices (Br$ m) 8.0 8.1 8.2 8.3 8.3 Real GDP growth (%) 4.0 1.0 2.5 1.5 c 3.0 Crude oil production (‘000 b/d) 165 155 180 175 170 Gas production (bn cu metres) 9.18 9.28 9.59 9.88 9.70 Consumer price inflation (av; %) 2.0 –0.7e 1.0 n/a n/a Population (‘000) 314.4 323.6 333.0d 342.0 350.0 Exports fob (US$ m) 3,973 1,979 2,552 3,161 n/a Imports cif (US$ m) –3,154 –2.353 –1,328 –1,420 n/a Reserves (US$ m) 3,656 4,011 n/a n/a n/a Exchange rate (av; Br$:US$) 1.48 1.67e 1.69 1.72e 1.79e

March 11th 2002 Br$1.82:US$1

Origins of gross domestic product 1998f % of total Oil & gas sector 32.5 Construction 6.6 Wholesale & retail trade 11.2 Community, social & personal services 33.0 GDP at factor cost incl others 100.0

Principal exports 1999f Br$ m Principal imports 1998f Br$ m Natural gas 1,860 Machinery & transport equipment 981 Crude petroleum 1,650 Basic manufactures 854 Refined products 111 Food & live animals 396

Main destinations of exports 2000g % of total Main origins of imports 2000g % of total Japan 42.8 Singapore 32.7 Thailand 15.4 Malaysia 19.4 US 12.6 US 11.0 South Korea 10.5 UK 5.8 a The source for most of the earlier data is the IMF, Staff Country Report, No. 99/19. b IMF estimates. c Brunei government estimates. d EIU estimates. e Actual. f Brunei Statistical Yearbook, 1999, estimates. g IMF, Direction of Trade Statistics.

Quarterly indicators

2000 2001 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Production Crude petroleum (‘000 b/d) 150 194 192 157 167 182 166 180 Foreign trade (US$ m)a Exports fob 738.8 659.4 719.9 873.5 908.3 688.9 799.9 800.9 Imports cif –310.0 –219.5 –373.5 –376.2 –450.9 –324.9 –392.1 –333.9 Trade balance 428.8 439.9 346.4 497.3 457.4 364.0 407.8 467.0 a IMF estimates. Sources: Oil & Gas Journal; IMF, Direction of Trade Statistics.

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Outlook for 2002-03

Political outlook

Domestic politics Brunei is cracking down on illegal immigration, as concern mounts in South- east Asia over the threat of Islamist terrorism, which the government considers mainly an external danger. Islamist radicalism will be given no room to develop in Brunei and the controls on religious activities and the press will remain extremely tight. The sultan will, however, continue to work to strengthen the role of Islam in public life, in order to shield the royal family from talk of scandals and corruption, and to defend his absolute rule. The conservative, religious factions are likely to keep the upper hand during the forecast period over the forces that wish to modernise Brunei’s economy and society.

International relations With the spectre of Islamist terrorism continuing to haunt the region, Brunei is intending to step up its intelligence co-operation with other countries. The government recognizes the danger that militant Islam poses to political stability and foreign investment in the country and also fears that it could threaten the existence of the monarchy itself. The sultan is seeking to position himself as a senior regional statesman, and his country as a moderate Islamic monarchy, supporting US-led action against terrorism while encouraging both Western and Islamic investment in Brunei.

Economic forecast

Economic policy The Eighth National Development Plan (NDP) for 2001-05, announced in September 2001, remains the policy guideline. The NDP places a heavy emphasis on the oil and gas sector, which will be the dominant influence on economic growth. The government is trying to diversify the economy and has started to implement a Br$1bn (US$549m) economic recovery plan in 2002, with a number of projects in a broad range of economic sectors. However, policy will remain constrained by lower revenue from oil and gas and by the lack of competitiveness of the country’s few non-oil exports. The unemployment rate, currently standing at around 10%, is not expected to be reduced. Given the government’s extreme caution, it also seems unlikely to go ahead with the highly desirable reform of the public finances and the privatisation of inefficient divisions of the large state bureaucracy.

Economic growth The Br$1bn stimulus package for 2002 is 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 on by new government contracts. The garment sector, the second largest industry after oil and gas, will benefit from stronger exports as demand from the US recovers. Oil and gas production levels will be high. However, global oil prices will be lower in 2002—the Economist Intelligence

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Unit expects prices to average just US$19.6/barrel in 2002, down from US$24.5/b in 2001—while demand from Japan, Brunei’s most important customer, is likely to remain weak, reducing petrochemicals revenue.

The political scene

Brunei cracks down on As concern has mounted over the threat of terrorism in South-east Asia, Brunei illegal immigration has announced that it will strictly enforce its immigration laws, to prevent illegal aliens from taking up residence in the country. The Brunei authorities were surprised by a report in the Singapore-based Straits Times that claimed that a radical South-east Asian Muslim group with suspected ties to the al- Qaida network had considered carrying out operations in Brunei. There were also reports in the Phillipines media that leaders of the Moro National Liberation Front, a militant Muslim separatist organization, had visited Brunei in November 2001. Immigration officials were put on high alert and hundreds of foreigners, mostly from Indonesia and the Phillipines, were arrested and deported for violation of immigration rules. The government also announced that employers would be held responsible for the return of their foreign workers to their home country when their contracts had expired. Brunei currently hosts some 60,000 guest workers. A Brunei Immigration Department official has admitted that at least 1,000 of the 25,000 Indonesians in Brunei are staying illegally in the country. He has said that stricter immigration controls are necessary because of problems with the selling and leasing of licences to employ foreign workers.

Islamist terrorism is no Despite these concerns, Brunei officials remain adamant that Islamist terrorism serious threat in Brunei is not a serious threat for Brunei. While radical Muslim groups in the region may have gained sympathizers in Brunei, the country’s relative wealth, its strict system of social surveillance and its willingness to ban the spread of teachings that advocate an Islamic state make it a poor base for terrorist activity. Islamist radicalism has little room to develop in Brunei because all religious activities are administered by the government and printed materials are subject to censorship. The authorities therefore perceive terrorism not as an internal problem, but as an external threat, which can be addressed through stricter controls on foreigners in the country and on the spread of information from abroad.

The government paid After months of public speculation, the government has admitted that it Prince Jefri’s debts funded Global Evergreen, the corporation formed in October 2001 to allow it to settle disputes with creditors of Prince Jefri Bolkiah’s Amedeo Corporation. Pehin Aziz, the chairman of Global Evergreen, claimed in an interview with Royal Television Brunei in January that it would have been a “national disaster” if creditors had not been paid and would have risked severe damage to Brunei’s reputation among foreign investors. Mr Aziz said that the government’s manner of resolving the case was in keeping with “the Brunei way.” (Mr Aziz also explained that he had named the company Global Evergreen after a vegetable store in Birmingham, Alabama, where he was a

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student during the 1960s.) The creditors’ lawsuits had been expected to lead to the exposure in open court of the inner workings of the Sultanate. Amedeo went bankrupt in 1998, leaving behind an estimated US$575m in debts, clogging Brunei’s court system with claims from the corporation’s 300 creditors and filling Brunei’s newspapers with controversy. Prince Jefri was charged in February 2000 with misappropriating US$14.8bn in state funds to subsidise his corporation and his lavish lifestyle, but the case was settled out of court in May 2000.

Economic policy and the economy

Oil and gas production Despite a drop in prices in the fourth quarter of 2001 for Brunei’s oil and gas levels remain high exports, petroleum production levels remained at record highs. Oil continued to be pumped at a rate of 193,000 barrels/day and the country’s gas exports reached more than 200 shipments in 2001, bringing in some Br$2bn (US$1.1bn) in foreign exchange. Brunei, the largest producer of liquefied natural gas (LNG) in the world, has agreed to host the international gas conference GASEX 2002 in May 2002.

The Economist Intelligence Unit expects prices for the Dated Brent blend to average US$19.6/barrel in 2002, down from US$24.5/b in 2001. Together with weak demand from Japan, Brunei’s major oil export market, this will see the Sultanate’s flow of petrochemicals revenue slow in 2002. Oil production levels will, however, remain high, with Brunei keen quickly to replenish a national Treasury depleted by Prince Jefri Bolkiah’s financial misdeeds (see The political scene). Brunei will use its petroleum profits to finance a large private-sector stimulus package, with Br$1bn in expenditure planned for 2002—up from a budget of Br$550m in 2001.

Brunei embarks on In January Brunei began to implement its largest government spending plan landmark recovery plan since the 1997 Asian economic crisis. Some Br$1bn is to be disbursed in 2002 to revive an ailing economy, with the aim of reaching GDP growth of 3-5% for 2002. Priority sectors in the 2002 budget include industrial development, education, roads, electricity, telecommunications, water, public buildings and national housing, with 50% of the budget allocated to new projects scheduled to commence in 2002. Awang Haji Kamis, the acting director-general of the Department of Economic Planning and Development, expressed confidence that the Br$1bn injection, together with investments from the oil and private sectors, would rejuvenate the economy.

Construction is expected Boosted by this injection of government funds, the private sector, which was to rebound sluggish in 2000 and 2001, is expected to pick up in 2002, with GDP growth likely to hit the government’s 3% target for the year’s end. The construction sector, Brunei’s third largest industry, which contracted by 4% in 2000 and was stagnant in 2001, is expected to rebound this year, spurred by government contracts. The 2002 budget allots Br$31m to public building maintenance projects to be tendered to small and medium sized enterprises and Br$77m to contracts for public building construction.

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Textile exports are likely to The textiles industry, Brunei’s second largest after oil and gas, will also expand recover in 2002, with exports projected to exceed Br$300m. Exports of textiles have increased steadily in recent years, reaching Br$159.8m in 1999 and Br$302m in 2000, but slowed to around Br$250m in 2001, owing to weaker demand from the US, Brunei’s major market, and a series of labour disputes with Filipino guest workers, which have since been resolved. While Brunei’s high labour costs will prevent it from becoming a major player in the textiles industry, political instability elsewhere in the region could increase its appeal to cautious investors.

Consumers remain Notwithstanding reports from Brunei retailers of a disappointing holiday confident season in 2001, the planned government spending seems to have had a positive impact on consumer confidence. A December 2001 survey by Royal Television Brunei found that 77% of Bruneians were confident that the economy was poised to start growing again. The survey also found, however, that consumers were putting off major purchases until there was clear evidence that the recovery had begun.

Visit Brunei Year 2001 is a Despite a concerted promotional effort for Visit Brunei Year 2001, which aimed flop to attract 1m visitors to the Sultanate, Brunei’s tourism development division announced that it had recorded only 583,384 foreign arrivals for January- August 2001, compared with 984,093 arrivals for the whole of 2000. It said that following September 11th, tourism had slowed to a trickle, with travellers wary of flying, although the situation had improved towards the end of the year. Tourism in Brunei has also been hurt by the country’s image as a strict Muslim monarchy where alcohol and nightclubs are forbidden.

The lacklustre response to Visit Brunei Year 2001 has not stopped the Sultanate from going ahead with plans to invest in tourism promotion as a major foreign-exchange earner. The 2002 budget has allocated US$4.4m for tourism promotion, up from US$1.6m in 2001. Brunei has also announced that it will set up a Brunei Tourism Board that will be government-funded but independent of the state bureaucracy, with board members from both the public and private sectors. The government-run Royal Brunei Airlines has also expanded its services by inaugurating a new service to Shanghai in January, in an attempt to tap the potentially lucrative Chinese market.

BIFC attracts its first bank In January Brunei announced that Royal Bank of Canada would be the first bank to be granted a licence to operate in the Brunei International Financial Centre (BIFC), which was inaugurated in July 2000. Royal Bank of Canada will be focusing its activities in Brunei on private banking for high net worth individuals and on assisting the Islamic Bank of Brunei with the management of its Islamic funds. Brunei is hopeful that an offshore financial centre will boost the private sector and provide appealing jobs for Brunei’s school leavers. At present, some 25% of school leavers are unemployed, but are reluctant to accept work in the low-prestige services sector. To attract business to the BIFC, Brunei has updated much of its antiquated legislative and regulatory framework and promoted itself as a politically stable Muslim monarchy, to try to tap the lucrative niche market of Islamic banking.

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Brunei arranges its first In December newspapers reported that Brunei had arranged a five-year syndicated loan syndicated loan for US$250m, to be used for general funding of the non-oil sector. This was the first time that Brunei had tapped the international financial markets for funds. According to a report in the Borneo Bulletin (a web journal), Brunei wanted to test the market’s perception of the Sultanate’s country risk, in preparation for a government bond issue at a later date. Brunei has previously acknowledged its interest in entering the capital market. The report also claimed that Brunei had been involved in talks with investment banking firms over a planned US$1bn-2bn five-year bond issue, but that it had not been amenable to the pricing spread offered. The report speculated that a syndicated loan would give Brunei some preliminary exposure to the international markets without the level of disclosure required for a bond issue.

Brunei awards contracts In late January Brunei announced that it had awarded oil and gas exploration for deepwater exploration rights in two deepwater blocks. Rights to Block J, consisting of 5,020 sq km located 100 km off the Brunei coast, were awarded to a joint venture between the exploration and production companies TotalFinaElf of the US and France, BHP Billiton of Australia and the UK’s Amerada Hess Corporation. TotalFinaElf, the designated operator, holds a 60% interest in the block, with BHP Billiton holding 25% and Amerada Hess 15%. The rights to Block K, consisting of 4,944 sq km of deepwater, were awarded to a consortium comprising the energy explorers and producers Brunei Shell Petroleum, Mitsubishi Corporation of Japan and Conoco Brunei.

The blocks are the first deepwater acreage in Brunei to be opened to exploration and are considered a crucial part of the Sultanate’s strategy to increase its petrochemicals revenue. Although these deepwater areas have been touted as holding significant oil reserves, production costs are expected to be fairly high, with 60% of the acreage in depths over 2,000 metres. In contrast to previous oil and gas projects that were operated on a concession system, the blocks will be operated under a production-sharing system, reflecting a shift in government policy that, according to the minister of industry, Pehin Abdul Rahman Mohammad Taib, will allow Brunei to be more “proactive” in managing its oil and gas revenue.

A new national oil Mr Abdul has announced that Brunei’s new national oil and gas company, company takes over Petroleum Brunei, will manage all assets of the government’s joint-venture oil and gas projects. Mr Abdul has explained that in addition to acting as the investment arm of the government in the oil and gas industry, Petroleum Brunei will serve as the government’s regulatory agency, taking over the roles of the Brunei Oil and Gas Authority and the Petroleum Unit, which will be deactivated late in the first quarter of 2002. The chief executive of Petroleum Brunei, Mohamed Alimin, stated that the company was also planning to invest in oil ventures in other South-east Asian nations. “We will follow almost the same pattern as Malaysia’s Petronas,” he said. In early 2002 Brunei held talks with the Phillipines to explore possible oil and gas partnerships.

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The prime minister’s office Brunei’s government, long secretive about the country’s finances, has promises economic data promised to begin releasing quarterly economic data. The new Department of Economic Planning and Development will be responsible for issuing the reports, which will cover GDP growth and economic forecasts, together with data on consumer indexes, the balance of payments and the exchange rate. A lack of economic transparency has long been considered a major barrier to the attraction of more outside investment to Brunei. The Sultanate can be expected to keep some of its secrets, however, with no mention made of repealing laws that make it a crime to divulge the size of the country’s financial reserves.

EIU Country Report March 2002 © The Economist Intelligence Unit Limited 2002