COUNTRY REPORT Malaysia Brunei Malaysia at a glance: 2002-03 OVERVIEW Malaysia’s longstanding prime minister, Mahathir Mohamad, has continued to benefit from the international backlash against Islamist terrorism, strengthening his position at home, in particular against the main opposition party, the Parti Islam sa-Malaysia (PAS). The opposition alliance, the Barisan Alternatif (BA), has fallen apart. Relations with the US have improved strongly. The execution of public works is being stepped up. Although the economy is contracting, Malaysia may just escape a drop in real GDP for 2001 as a whole. Key changes from last month Political outlook • The political position of Dr Mahathir and his party, the United Malays National Organisation (UMNO), has strengthened further. PAS has been compromised by being associated with extremism. The Democratic Action Party, which finds its support mainly among ethnic Chinese, has left the BA, while the Parti Keadilan Nasional (National Justice Party) has been hit by defections and internal disputes. The opposition Parti Bersatu Sabah (United Sabah Party) has asked to rejoin the ruling coalition. Economic policy outlook • After the 2002 budget presentation in October 2001, the government has set up new procedures to make sure that administrative delays that have hampered the execution of public works recently will be removed. Clearing the backlog may lead to a strong fiscal stimulus in the near term. Economic forecast • Third-quarter real GDP fell by 1.3% year on year, the first decline since the first quarter of 1999. The downturn in 2001 is unlikely to be as steep as expected previously. The Economist Intelligence Unit has changed its 2001 real GDP growth forecast from –1.3% to +0.4%, and raised the 2003 forecast slightly to 2.5% from 2.2%. 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ISSN 0269-6703 Symbols for tables “n/a” means not available; “–” means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. 1 Contents 3 Summary Malaysia 5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2002-03 8 Political outlook 9 Economic policy outlook 10 Economic forecast 14 The political scene 19 Economic policy 21 The domestic economy 21 Economic trends 26 Manufacturing 27 Oil and gas 28 Agriculture 28 Financial and other services 29 Foreign trade and payments Brunei 33 Political structure 34 Economic structure 34 Annual indicators 34 Quarterly indicators 35 Outlook for 2002-03 36 The political scene 38 Economic policy and the economy List of tables 11 Malaysia: international assumptions summary 12 Malaysia: forecast summary 13 Malaysia: gross domestic product by expenditure 22 Malaysia: real gross domestic product 24 Malaysia: gross domestic product by sector 25 Malaysia: inflation indicators 26 Malaysia: production in the manufacturing sector EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 2 27 Malaysia: oil and gas production 28 Malaysia: production in the agricultural sector 29 Malaysia: performance of the services sector 30 Malaysia: foreign trade 32 Malaysia: current account List of figures 14 Malaysia: gross domestic product 14 Malaysia: Malaysian dollar real exchange rates 23 Malaysia: exports of electronics and electrical goods 27 Malaysia: manufacturing production 31 Malaysia: exports EIU Country Report 4th quarter 2001 © The Economist Intelligence Unit Limited 2001 3 Summary December 2001 Malaysia Outlook for 2002-03 The international backlash against Islamist terrorism has provided the prime minister, Mahathir Mohamad, with a new focus to tighten his control over the political system and act against the main opposition party, the Islamic Parti Islam sa-Malaysia (PAS). The economic downturn raises the risk of social unrest but the continued fiscal stimulus will moderate the depth of the recession. Notwithstanding the steep decline in manufacturing output, Malaysia is likely to avoid a decline in annual real GDP: the Economist Intelligence Unit forecasts real GDP growth of 0.4% in 2001, followed by growth of 2.5% in 2002. The political scene Dr Mahathir has in recent months tightened his political control, rebuilt his support, divided the opposition and gained renewed international respect. He has been reshaping his party, the United Malays National Organisation (UMNO), and has removed some of the causes of his own unpopularity and that of UMNO. Members who in the past defected from UMNO are returning. The opposition alliance, Barisan Alternatif (BA), has fallen apart. Dr Mahathir has used the September 11th terrorist attacks on the US to discredit the opposition and associate it with extremism. PAS has called for a jihad against the US. The government has referred to Malaysia as an Islamic state and has upset the non-Islamic part of the population. The appointment of a new attorney-general has raised concern. Economic policy The fiscal stimulus continued in the 2002 budget, which did not offer major new incentives for the corporate sector. The budget also included price and tax increases for petrol and cigarettes. After protests, the government has revoked a diesel fuel price increase. The execution of public works has been speeded up; there is likely to be a strong impact on local activity from the fourth quarter of 2001. The domestic economy Third-quarter real GDP declined by 1.3% year on year, the first fall since January-March 1999. There was a sharp contraction in investment spending, which plunged by 9.3% year on year. Despite a steep decline in the export of goods and services—down by 18.1% year on year in constant prices—the external sector made a positive contribution to GDP growth in the third quarter because imports fell faster, by 21.3% year on year. Fourth-quarter GDP is likely to have declined again in year-on-year terms, but to have grown in quarter-on-quarter terms. The services sector remained relatively firm in the third quarter but was unable to offset the decline in manufacturing, which continued to be hit by weak global demand. Malaysia’s vulnerability to external shocks has grown in recent years because of its heavy dependence on exports, especially of electrical and electronic goods. Underlying inflationary pressures remain low. The manufacturing sector is in deep recession. Value EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 4 added in the mining sector is growing slowly. Agricultural exports have been hit by the strength of the ringgit. Expansion in the services sector helped to sustain overall economic growth. The stock of non-performing loans continues to rise. Foreign trade and The current-account surplus remained large in the third quarter, and payments international reserves continued to recover, easing the external pressure for a devaluation of the ringgit. Brunei Outlook for 2002-03 Politics and the economy will continue to feel the impact of the conservative, defensive response of the government to the bankruptcy of the Amedeo Corporation and scandals that have involved members of the royal family. The government will increase its stress on the role of Islam and become less tolerant of criticism. The economic outlook has deteriorated with the sharp fall in oil prices. Unemployment is likely to increase further, creating a potential source of unrest. The political scene The public auction of some of Prince Jefri’s assets has attracted international attention but yielded little compared with the huge debts of the bankrupt Amedeo Corporation. The small creditors of Amedeo may be paid in full but the larger, mostly foreign creditors are still waiting for a settlement. The government is seeking greater control over religion. The government has cracked down on press freedom with a new law regulating the press. Economic policy and the Business has slowed after the September 11th attacks on the US.