COUNTRY REPORT

Malaysia Brunei at a glance: 2002-03

OVERVIEW Malaysia’s longstanding prime minister, , 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 , 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%.

December 2001

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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 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

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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. The economy government has announced a new national development plan, which places renewed emphasis on the oil and gas sector. The government is seeking higher revenue from new taxes and privatisation in order to rebuild reserves. The deputy finance minister, considered an outspoken economic reformist, has been sacked. High youth unemployment continues to plague the economy.

Editors: Frans Jonkers (editor); Graham Richardson (consulting editor) Editorial closing date: December 12th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 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 (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), 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), 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

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 6 Malaysia

Economic structure

Annual indicators

1996 1997 1998 1999 2000 GDP at market prices (M$ bn) 253.7 281.9 284.5 299.7 339.4 GDP (US$ bn) 100.8 100.2 72.5 78.9 89.3 Real GDP growth (%) 10.0 7.3 –7.4 6.1 8.3 Consumer price inflation (av; %) 3.5 2.7 5.3 2.7 1.5 Population (m) 21.2 21.7 22.2 22.7 23.3 Exports of goods fob (US$ m) 76,985 77,538 71,883 84,052 98,240a Imports of goods fob (US$ m) –73,137 –74,029 –54,378 –61,404 –77,877a Current-account balance (US$ m) –4,461 –5,936 9,529 12,607 7,725a Foreign-exchange reserves excl gold (US$ m) 27,009 20,788 25,559 30,588 29,523 Total external debt (US$ bn) 39.7 47.2 44.8 45.9 44.4 a Debt-service ratio, paid (%) 8.9 7.4 7.4 4.8 5.2 a Exchange rate (av) M$:US$ 2.52 2.81 3.92 3.80 3.80

December 12th 2001 M$3.80:US$1

Origins of gross domestic product 2000 % of total Components of gross domestic product 2000 % of total Agriculture 7.4 Private consumption 42.5 Mining 4.2 Public consumption 10.7 Manufacturing 29.2 Gross fixed capital formation 25.7 Construction 2.5 Stockbuilding 1.3 Electricity, gas & water supply 1.9 Exports of goods & services 125.7 Services 56.7 Imports of goods & services –105.8 GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 2000b US$ bn Principal imports 2000b 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 2000 % of total Main origins of imports 2000 % of total US 20.5 Japan 21.1 Singapore 18.4 US 16.6 EU 13.7 Singapore 14.3 Japan 13.1 EU 10.8 Hong Kong 4.5 Taiwan 5.6 Taiwan 3.8 South Korea 4.5 South Korea 3.3 China 3.9 a EIU estimate. b Customs basis; exports fob, imports cif.

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Quarterly indicators

1999 2000 2001 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Federal government finance (M$ m) Revenue 17,861 11,219 16,682 15,421 18,542 14,634 20,738 18,477 Expenditure 15,285 7,805 12,760 14,662 21,320 11,303 13,369 14,326 Balance 2,577 3,413 3,922 759 –2,778 3,331 7,369 4,151 Output GDP at constant 1987 prices (M$ m) 50,592 50,191 52,006 53,395 53,773 51,723 52,241 52,675 % change, year on year 11.2 11.7 8.0 7.6 6.3 3.1 0.5 –1.3 Industrial production index (1993=100) 170.9 175.5 186.2 194.1 197.2 182.7 176.5 180.8 % change, year on year 17.9 23.5 20.1 18.3 15.4 4.1 –5.2 –6.9 Prices Consumer prices (2000=100) 98.9 99.7 99.8 99.9 100.6 101.3 101.3 101.3 % change, year on year 2.1 1.6 1.4 1.5 1.7 1.5 1.6 1.4 Producer prices (1989=100) 131.2 132.0 132.8 132.5 129.8 125.8 126.5 126.9 % change, year on year 0.3 3.9 5.6 4.1 –1.0 –4.7 –4.7 –4.3 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 3.3 3.4 3.5 3.5 3.4 3.4 Lending 6.8 6.8 6.8 6.8 6.8 6.8 6.8 6.7 Money market 2.6 2.6 2.5 2.7 2.8 2.8 2.8 2.8 M1 (end-period; M$ m) 75,602 70,132 69,431 69,526 80,656 74,997 75,554 79,650 % change, year on year 29.2 23.4 10.4 6.0 6.7 6.9 8.8 14.6 M2 (end-period; M$ m) 316,851 324,716 334,515 332,415 348,351 348,571 349,859 361,186 % change, year on year 16.9 18.5 11.9 7.2 9.9 7.3 4.6 8.7 KLSE composite index (end-period; 1977=100) 812.3 974.4 833.4 713.5 679.6 647.5 593.0 615.3 % change, year on year 38.6 93.8 2.7 5.6 –16.3 –33.5 –28.8 –13.8 Sectoral trends Electronic and electrical production index (1993=100) 218.5 237.8 269.8 289.9 292.2 240.6 220.4 222.7 % change, year on year 30.7 45.2 42.1 42.5 33.7 1.2 –18.3 –23.2 Mining index (1993=100) 121.5 122.2 118.0 116.2 121.1 125.4 120.8 121.0 % change, year on year –4.3 –1.6 2.6 –1.6 –0.4 2.6 2.4 4.2 Foreign trade (M$ m) Exports fob 90,679 84,758 90,968 101,707 95,875 86,152 82,917 82,402 Imports cif –70,453 –68,231 –78,681 –86,756 –78,696 –72,806 –70,432 67,004 Trade balance 20,227 16,527 12,287 14,951 17,180 13,347 12,485 15,398 Foreign payments Current-account balance (M$ m) 10,710 10,483 6,589 7,281 7,596 7,026 6,763 n/a Reserves excl gold (end-period; US$ m) 30,588 33,626 33,666 31,895 29,523 26,814 25,644 25,354 Sources: Central Bank of Malaysia, Monthly Statistical Bulletin; IMF, International Financial Statistics.

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 8 Malaysia

Outlook for 2002-03

Political outlook

Domestic politics Malaysia’s 76-year-old prime minister, Mahathir Mohamad, has in recent months successfully tightened his political control, rebuilt his support, divided the opposition, and gained renewed international respect. In the months ahead he is likely to strengthen his hold on power further. The international backlash against Islamist terrorism has provided Dr Mahathir with a new focus to reassert his political dominance. The recession in the Malaysian economy has given Dr Mahathir—who holds the post of finance minister as well as that of prime minister—a renewed determination to accelerate reform. The economic downturn raises the risk of social unrest, but rising unemployment has been kept in check by early intervention in the labour market. The success of the strategy to divide the opposition and brand its main component, the Parti Islam sa-Malaysia (PAS), as extremist and sympathetic to terrorism may backfire in the long term, by boosting the kind of Islamist extremism that currently hardly exists in Malaysia; but for the time being the increased use of the Internal Security Act (ISA)—which allows detention without trial for a period up to two years—is an effective means to control the dispirited opposition.

Since the beginning of 2001 the prime minister has also been reshaping his own party, the United Malays National Organisation (UMNO), the dominant component of the ruling 14-member Barisan Nasional (BN) coalition, while trying to remove some of the causes of his own unpopularity and that of UMNO. Dr Mahathir is rebuilding his internal support by fighting the crony culture within UMNO, even though political favouritism would appear to be an essential binding element in UMNO’s grip on political power. Accelerated corporate restructuring is being carried out, rather belatedly, among Malaysia’s biggest corporate debtors, who had benefited from government support during the 1997-98 financial crisis. Abuses are being punished, especially those committed by people associated with the former finance minister, .

This two-pronged policy has, at least in part, been successful. UMNO membership is growing and members who had defected to the Parti Keadilan Nasional (PKN, National Justice Party), the party set up by the wife of the jailed former deputy prime minister, , are returning. The opposition alliance, Barisan Alternatif (BA), has fallen apart. The Democratic Action Party (DAP), which finds its support mainly among ethnic Chinese, has left the BA because PAS, the major partner in the alliance, refused to give it an assurance that it would not set up an Islamic state should the alliance win the next general election. The PKN is riven by internal disputes. The Parti Bersatu Sabah (PBS, United Sabah Party), which left the BN in 1990, has asked to rejoin the ruling coalition. The government is confident that it has regained the support of the majority of the Chinese electorate—swing voters when the ethnic Malay electorate is divided—after courting it with promises of an easing of the much disliked positive discrimination policies that favour the bumiputeras (ethnic

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Malays and other native inhabitants). A confirmation of the BN’s unchallenged position was the landslide victory of the government parties in the Sarawak state election on September 27th 2001.

A protracted downturn of the economy would raise unemployment, increase the risk of social unrest and force another bail-out of well connected businesses. UMNO’s gains and the BN’s position, could look precarious if the 76-year-old workaholic prime minister, who also serves as finance minister and frequently travels abroad, were suddenly to die or be incapacitated. Although the succession appears assured and well established, too many political ambitions have been bottled up during Dr Mahathir’s 20 years at the helm for a smooth transition to be expected.

International relations Relations between Malaysia and the US have improved strongly after the terrorist attacks on the US. Malaysia is co-operating with the US in the fight against Islamist terrorism, despite objections against the US bombing of Afghanistan. Anti-terrorism measures being considered in the US and some countries in Europe may make Malaysia’s use of the ISA seem less objectionable to potential critics abroad. Malaysia, Indonesia and the Philippines have agreed to co-operate more closely in their response to the common threat of Islamist militancy. Dr Mahathir’s central role in a co-ordinated regional approach to Islamist terrorism and his new image of reason and moderation abroad are in part determined by domestic political considerations.

Economic policy outlook

Policy trends Monetary policy will remain accommodative, fiscal policy will stay stimulative and the government’s interventionism in the economy will continue in the next twelve months. Malaysia is targeting annual average economic growth at 7.5% in 2001-05 under the Eighth Malaysia Plan (EMP) as part of a long-term ambition to reach developed-nation status by 2020. The achievement of such high growth will depend critically on investment, which contributed two-thirds of GDP growth before the 1997 crisis. The EMP is posited on an annual average rise of 19% in private investment, which is highly unlikely under the present circumstances. Government investment will aim to make up part of the private-sector shortfall. New incentives to attract foreign direct investment (FDI) are to be expected.

Fiscal policy On October 19th 2001 the government presented the 2002 budget, which did not include a cut in the corporate tax rate, as had been expected, but instead reduced personal income tax by 1-2%—lowering the maximum rate from 29% to 28%—and raised the salaries of civil servants in order to boost domestic spending. Another conspicuous aim of the budget—likely to have political implications—was to ensure a more equitable income distribution between urban and rural areas and more developed and less developed states. In many low-income rural parts UMNO has difficulty maintaining popular support in the face of the PAS challenge. The budget sets aside a record M$5.3bn (US$1.4bn) for the improvement of facilities and amenities in rural areas. The budget also courts the female vote, improving widows’ pensions, encouraging

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 10 Malaysia

emancipation and the development of female entrepreneurs. The budget incorporates the M$4.3bn stimulus package, announced in September, although the government had previously admitted that only a small part of the M$3bn of additional public works announced in March 2001 had been utilised. Administrative procedures are being changed to ensure faster execution. This is likely to result in a significant fiscal boost to the economy during 2002.

The government has lowered its 2001 GDP forecast from 5-6% to 1-2%, which still appears rather optimistic. Slower revenue and higher expenditure growth are officially forecast to result in a federal budget deficit of 6.5% of GDP in 2001, narrowing to 5% in 2002. A prolonged downturn would increase the 2002 deficit and start to raise concern about the state of public finances.

Monetary policy The Bank Negara Malaysia (BNM, the central bank) cut its intervention rate—a reference point for the base lending rates (BLR) of commercial banks and finance companies—to 5% from 5.5% on September 20th. It said that the aim of the reduction was to boost business and consumer sentiment, in order to mitigate the adverse impact of a deterioration in global economic growth. In October the BNM lowered public lending rates (by 0.5 percentage points) and eased access to funds for small and medium-sized industries. The worsening economy notwithstanding, the government remains determined to find a quick solution—including management changes and restructuring—for the outstanding debt of large corporations. The BNM may cut interest rates further, possibly during the first quarter of 2002. Lower interest rates, the economic downturn and a rise in non-performing loans will harm the profitability of the banking system. No rise in the intervention rate is expected before early 2003, by which time economic growth is forecast to have picked up.

Economic forecast

International assumptions The terrorist attacks on the US have led to a further deterioration in global sentiment and cuts in global interest rates. Monetary and fiscal policies are becoming highly stimulatory across the OECD, especially in the US and, to a lesser extent, Europe. This may provide some limited relief for Malaysia’s exports by the second half of 2002 as global demand begins to recover slowly. Thus far, world import demand has continued to fall, particularly for electronic and electrical goods, which comprise 62% of Malaysian manufacturing exports, although there are some signs of a recovery in the semiconductor sector.

Malaysia’s largest export market, the US, is experiencing a sharp contraction in imports and a drop in investment in information and communications technology. US GDP growth is expected to drop from 4.1% in 2000 to 1% in 2001 and 1.2% in 2002, but is forecast to recover to 3.6% in 2003. Asian demand is being depressed by an even deeper slump in the Japanese economy but other parts of Asia are showing some resilience and the trough of the downturn may have been passed. In the EU, low growth is expected to last well into 2002.

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Malaysia: international assumptions summary (% unless otherwise indicated) 2000 2001 2002 2003 Real GDP growth World 4.7 2.2 2.7 4.2 OECD 3.7 0.8 1.1 2.9 EU 3.3 1.5 1.4 2.6 Exchange rates (av) ¥:US$ 107.8 121.1 124.0 121.5 US$:¤ 0.924 0.898 0.963 1.015 SDR:US$ 0.758 0.784 0.766 0.749 Financial indicators ¤ 3-month interbank rate 4.48 4.23 3.13 4.60 US$ 3-month Libor 6.53 3.80 1.64 4.72 Commodity prices Oil (Brent; US$/b) 28.5 24.3 18.3 20.2 Gold (US$/troy oz) 279.3 268.8 255.0 250.0 Food, feedstuffs & beverages (% change in US$ terms) –6.1 –1.0 11.9 13.4 Industrial raw materials (% change in US$ terms) 13.4 –9.2 0.3 14.5 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. Economic growth Third-quarter real GDP fell by 1.3% year on year, the first decline since the first quarter of 1999. Despite the government’s morale-boosting optimism that economic activity will strengthen in the fourth quarter of 2001, the Economist Intelligence Unit believes that the bounce-back will be largely seasonal (GDP figures are not seasonally adjusted), with an element of fiscal stimulation as government expenditure makes up for earlier delays in project implementation. It is likely that GDP will continue to decline in year-on-year terms in the next three quarters. Nevertheless, we have been too pessimistic about the likely GDP outcome in 2001: we have therefore raised our forecast from –1.3% to 0.4%, to be followed by growth of 2.5% (previously 2.2%) in 2002.

Our GDP forecast for the next two years may appear to suggest that Malaysia will avoid a recession—annual real GDP does not decline—but this is not true. A sharp downturn began in the fourth quarter of 2000, although it has been moderated by the additional fiscal spending from the two stimulus packages announced in 2001. We have become more pessimistic about private investment and forecast that overall gross domestic fixed capital formation will contract by 7.3% in 2002, compared with a fall of 2% in our previous forecast, after an estimated rise of 0.1% in 2001. We expect that there will be little growth in export demand until the third quarter of 2002, which will result in an average 1.6% decline of exports in 2002, after a fall of 9.2% in 2001.

Domestic demand is being undermined by declining confidence and rising unemployment. The downturn will have its strongest impact on business confidence, corporate profits and corporate investment. Private consumption will not be unaffected, despite the household income-boosting measures in the 2001 and 2002 budgets. The government has the resolve and the means to give the economy another powerful fiscal boost, following a 21.7% surge in real

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public-sector investment in 2000. Government spending will remain strong, with firm public-works investment and public consumption. Total domestic demand is nonetheless forecast to fall by 0.5% in 2001, in sharp contrast to an increase of 15.7% in 2000, and growth in 2002 is expected to remain subdued at 2.1%, as private investment recovers slowly. A pick-up in both consumption and investment in 2003 will lift total domestic demand more sharply.

Malaysia: forecast summary (% unless otherwise indicated) 2000a 2001b 2002c 2003c Real GDP growth 8.3 0.4 2.5 5.1 Industrial production growth 15.3 –3.5 –1.7 6.1 Gross agricultural production growth 0.6 1.5 1.0 1.5 Unemployment rate (av) 3.1 3.7 3.4 2.7 Consumer price inflation Average 1.5 1.5 2.0 3.4 Year-end 1.2 1.7 2.7 3.8 Base lending rate 6.8 6.5 6.4 7.0 Central government balance (% of GDP) –5.8b –6.5 –5.3 –3.4 Exports of goods fob (US$ bn) 98.2b 85.3 83.5 96.4 Imports of goods fob (US$ bn) 77.9b 69.5 68.9 81.8 Current-account balance (US$ bn) 7.7b 5.7 3.8 2.1 % of GDP 8.6b 6.2 4.1 2.2 External debt (year-end; US$ bn) 44.4b 44.7 45.4 49.4 Exchange rates M$:US$ (av) 3.80 3.80 3.80 4.00 M$:¥100 (av) 3.53 3.14 3.06 3.29 M$:¤ (year-end) 3.57 3.50 3.84 4.24 M$:SDR (year-end) 4.95 4.88 5.05 5.60

a Actual. b EIU estimates. c EIU forecasts.

Inflation The government raised cigarette, petrol and diesel prices in the October budget and broadened the application of the services tax, taking advantage of the low inflationary risks during the downturn, the growing spare capacity in the economy, easing labour shortages and reduced wages pressures. Declining producer prices—down by 3% year on year in August—reflect the depressed state of domestic and global demand more clearly than consumer prices. Consumer price inflation, which stood at 1.4% year on year in October, is forecast to average 1.5% in 2001, unchanged from 2000, and rise to 2% in 2002 (reflecting administered price increases in the budget) and 3.4% in 2003, as demand pressures increase again.

Exchange rates Foreign-exchange reserves, which had declined sharply from the second quarter of 2000, have continued to grow in recent months, indicating that some of the external devaluation pressure has abated. Since mid-2000 the ringgit has steadily appreciated against the currencies of its regional competitors. Malaysia’s competitiveness has not been helped by the firmness of the US dollar—to which the ringgit is pegged at M$3.80:US$1—despite aggressive interest-rate cuts by the Federal Reserve (the US central bank). The

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government’s willingness to keep its dollar peg unchanged may be tested if the Japanese yen were to fall precipitously against the US dollar (a development that is not contained in our baseline global forecast). In that case, the BNM would no longer be able to claim that the ringgit remained close to its fair value, and there would be potentially serious consequences for Malaysia’s economy, which is heavily dependent on trade and foreign investment.

We continue to believe that Malaysia will resist a change in its dollar peg of M$3.80:US$1 within the next 12 months, unless a regional currency depreciation turns into a rout. Changing the currency system now would add to the sense of economic (and political) instability in Malaysia and, if it did happen, would probably be accompanied by a tightening of exchange controls. However, we believe that a readjustment of the peg will be part of the economic recovery that is forecast for 2003.

Malaysia: gross domestic product by expenditure (M$ m at constant 1987 prices; % change year on year in brackets unless otherwise indicated) 2000a 2001b 2002c 2003c Private consumption 95,086 97,083 99,413 105,378 (12.2) (2.1) (2.4) (6.0) Public consumption 24,185 26,289 28,892 29,556 (1.7) (8.7) (9.9) (2.3) Gross fixed investment 64,415 64,479 59,772 64,853 (24.1) (0.1) (–7.3) (8.5) Final domestic demand 183,686 187,851 188,077 199,787 (14.5) (2.3) (0.1) (6.2) Stockbuilding 2,200 –2,898 850 950 (1.0) (–2.4) (1.8) (0.0) Total domestic demand 185,886 184,953 188,927 200,737 (15.7) (–0.5) (2.1) (6.3) Exports of goods & services 246,773 224,070 220,485 244,077 (16.1) (–9.2) (–1.6) (10.7) Imports of goods & services –223,294 –198,732 –193,962 –218,401 (24.2) (–11.0) (–2.4) (12.6) Foreign balance 23,479 25,338 26,523 25,675 (–4.8) (0.9) (0.6) (–0.4) GDP 209,365 210,292 215,450 226,412 (8.3) (0.4) (2.5) (5.1)

a Actual. b EIU estimates. c EIU forecasts.

External sector Exports fell by 12.7% year on year in October after plunging by 21% in September, making it clear that the export decline is beginning to bottom out. The major reason for the fall is shrinking exports of electrical and electronic products, which dropped by 13.2% year on year during the first ten months of 2001. Both export volumes and revenue are expected to decline on aggregate in 2001, but some recovery is forecast to start in 2002, although this will not be evident in the figures for the year as a whole. Based on our forecast of US import demand, a swift recovery in exports of electrical and electronic goods— as was the case in 1997-98—is unlikely in 2002. Slow growth in Malaysia implies that the contraction in the trade surplus and widening of the services

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and income deficits will be gradual. The current-account surplus is forecast to fall from an estimated 6.2% of GDP in 2001 to 4.1% in 2002 and 2.2% in 2003. The trade surplus will remain high during the forecast period, dropping from an estimated US$15.8bn in 2001 to US$14.6bn in both 2002 and 2003.

The political scene

Malaysia reacts to The Malaysian reaction to the September 11th 2001 terrorist attacks on the US September 11th was one of shock as well as concern over its own citizens who worked in the Twin Towers in New York. The government was quick to condemn the terrorist raids and declared itself willing to co-operate with the US to trace the culprits but it has not supported the US military attacks in Afghanistan. The intervention was called inappropriate and an attack on Islam. The prime minister, Mahathir Mohamad, said that Malaysia wanted clear proof of the involvement of Osama bin Laden, the Saudi-born militant Islamist thought to be behind the attacks. When he tried to give an explanation for the terrorist attacks on the US, Dr Mahathir—as usual—did not shy away from controversy, naming “the attacks by Jews” and the “state terrorism” by Israel against the Palestinians among the reasons. Demonstrations against the US-led military intervention in Afghanistan have been few and small-scale. The defence minister, , declared that Malaysia was prepared to contribute troops to a UN peace-keeping force in Afghanistan, should the UN make such a request. A special conference of Malaysian ulamas (Islamic scholars) called in December for a boycott of US goods and services. This caused Dr Mahathir to reply that such a request to the government was unfair and difficult to implement, and he put the ulamas in a dilemma by giving them the example of Malaysian pilgrims flying to Mecca in a US-built Boeing aircraft.

The government seizes an Nonetheless, September 11th has had a powerful effect on Malaysian domestic opportunity politics. The global action against Islamic terrorism has provided the government with a justification for its action against Malaysian Islamist militants and has created an unexpected opportunity to associate the main

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opposition party, the Parti Islam sa-Malaysia (PAS), with extremism. A number of arrests of suspected terrorists had already been made before September 11th. In August police arrested ten people, mostly PAS members, who were charged with planning to overthrow the government and committing a series of bank robberies, the bombing of a church and a temple, and the murder of the Kedah state assemblyman, Joe Fernandez. The ten were alleged to be members of the Kumpulan Militan Mujahideen (KMM, Chapter of Militant Holy Warriors), which in 2000 carried out a bungled attack on two army camps in which two people were killed. One of the ten was Nik Aziz Jr, the son of Nik Aziz, the chief minister of Kelantan state and the spiritual head of PAS. All ten had, according to the government, been trained in Afghanistan. On September 25th Nik Aziz Jr—a living proof to the government of the extremist connections of PAS—was detained under the Internal Security Act (ISA) and placed in the Kamunting detention camp. Government ministers strenuously denied that they had been pressured by the US to act against extremist groups. Dr Mahathir warned on September 29th that there would be more arrests of those involved in militant groups and that the government had identified one party whose members were “leaning towards militancy”.

PAS calls for a jihad against After the start of the US bombing of Afghanistan, PAS issued a call for a jihad the US (“holy war”), encouraged Malaysian Muslims to oppose the US and its allies, and staged a demonstration outside the US embassy. Mr Aziz, the spiritual leader of PAS, gave his approval of the call to Malaysian Muslims and added that it was good to die a holy death. On September 24th Mr Aziz had issued an appeal to “support Muslims who are under attack through whatever means necessary—with money, by sending people over (to Afghanistan) or through our prayers”. The moderates in PAS were upset by the appeal but it delighted the government by giving yet another example of extremist language.

Extremism and intolerance The US-led action in Afghanistan has encouraged Islamist militancy and are on the increase religious intolerance but the examples reported in the Malaysian press suggest that there has been no serious deterioration. It may be that the government has downplayed some of the incidents for fear of alarming its non- Muslim supporters. The deputy prime minister, Abdullah Badawi, said on November 15th that the five church fires reported in several states during October were isolated cases, which should not be linked to the work of extremist groups. There was also an anthrax scare at the National Evangelical Christian Fellowship headquarters in during September. Potentially the most serious incident was the alleged plot, foiled by the government, to attack US sailors on leave in Malaysia.

The US tightens visa The Malaysian government was upset—but cannot really have been regulations for surprised—when it was included in October with 24 other Muslim nations in the tightening of US visa regulations, covering all male Muslims between the ages of 16 and 45. Some members of PAS, who until mid-September had been welcomed in Washington, had already found out that it had become impossible for politicians deemed Islamic fundamentalists to get a visa to enter the US.

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Dr Mahathir improves his Dr Mahathir’s leading role in the regional fight against terrorism has made him standing abroad a crucial figure for US diplomacy. The US president, George W Bush, met Dr Mahathir during the summit of the Asia-Pacific Economic Co-operation (APEC) forum in Shanghai in October 2001, when they discussed terrorism. Dr Mahathir’s improved standing in the US and the US reservations felt towards the Islamist PAS opposition have strengthened Dr Mahathir’s position at home. Relations with the US had already started to improve under the Republican administration of Mr Bush. They could hardly have sunk lower after Al Gore, the US vice-president during the administration of the former president, Bill Clinton, interfered in Malaysia’s domestic politics by calling for reformasi (political reform) during the APEC summit in Kuala Lumpur in 1999. South-east Asia has re-emerged as an area of prime strategic importance, according to US officials, in the global war against terrorism.

Regional anti-terrorism On November 24th the Malaysian navy detained Nur Misuari, the rebel co-ordination fails its first test governor of the autonomous Muslim region on Mindanao island in the Philippines and the former leader of the Moro National Liberation Front (MNLF), together with six others on an island off Sabah for illegally entering Malaysia. Mr Misuari was fleeing from an attack by the Philippine army in a region where the Abu Sayyaf guerrillas—linked by the US to Osama bin Laden’s al-Qaida movement—are also operating. Malaysia wanted to deport Mr Misuari as soon as possible but found the Philippine government remarkably reluctant to accept him back, maybe because it feared that Mr Misuari would become a focal point for renewed Muslim resistance. The Philippine president Gloria Macapagal Arroyo, insisted that Mr Misuari should first be investigated by Malaysia and requested Dr Mahathir’s help in ending the latest revolt. , a minister in the prime minister’s department and the de facto justice minister, declared that he was “astonished” by the Philippine attitude and said that he suspected a political ploy by the Philippine government to have Mr Misuari imprisoned in Malaysia, which could cause security and other problems. Malaysia in particular fears an influx of refugees into Sabah if war were to spread in the southern Philippines. The Misuari episode suggests that the co-ordinated response to regional terrorism, agreed between the leaders of Indonesia, the Philippines and Malaysia, failed at its first test.

The government calls The sudden public awareness of the threat of Islamist extremism after Malaysia an Islamic state September 11th has interfered with the campaign that the government had organised in response to the plan by PAS to set up an Islamic state, should it win the next general election. In a nationwide programme, which started in August, the government argued that the Islamic state already existed in Malaysia. Even though Malaysia did not implement the hudud (Islamic criminal) laws advocated by PAS, it already fulfilled the requirements of an Islamic state. “If Malaysia is not an Islamic state just because it does not implement hudud laws, then there is no Islamic state in the world”, said Dr Mahathir in late September. The Ministry of Information issued a booklet entitled “Malaysia adalah sebuah negara Islam” (Malaysia is an Islamic state). It set out why and how Malaysia was carrying out its Islamisation policy, and stated that the policy would be continually implemented until the objective of establishing an Islamic state was fully achieved.

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The government campaign The government’s claims that Malaysia was already an Islamic state badly misfires and alarms misfired. The booklet—published in mid-2001 with an approaching aeroplane on its front cover under the national emblem—suddenly looked different after the Twin Towers attack, linking Malaysia with Islamist extremism, exactly the opposite of what was intended. Even more importantly, the arguments contained in the publication startled and offended the non-Muslim sections of the population, especially after September 11th. Non-Muslim parties and interest groups had expressed their concern over or outright rejection of the notion that Malaysia was an Islamic state but the briefings that accompanied the government’s nationwide programme had remained closed to the press. Lim Kit Siang, the chairman of the opposition Democratic Action Party (DAP), which finds its support mainly among ethnic Chinese, commented that he perceived in the government’s arguments “a tectonic shift in the focus on nation-building”. This had moved from an assumption that Malaysia is a secular state to the premise that Malaysia is an Islamic state. Mr Lim expressed his dismay that few Muslims dared to stand up and declare themselves against establishing Malaysia as an Islamic state. Yet it was crucial that not only non- Muslims protested against this.

Non-Muslims fear second- The government campaign upset Malaysia’s Chinese and Indian populations, class citizen status who were alarmed in particular by the barely hidden assumption that non- Muslim Malaysians would be treated as second-class citizens in an Islamic state. This would conflict with the constitution of Malaysia, which stipulates the equal rights of citizens. The arguments presented in the government’s campaign reflect the unsolved debate between modernisers and fundamentalists that has been apparent throughout Malaysia’s modern history. The arguments are also political dynamite, which—if they were put into practice—would threaten social harmony and make it impossible for Malaysia to develop into a high-income, knowledge-based society.

Dr Mahathir downplays Yet Dr Mahathir appears to be downplaying the risks connected with the risks Islamisation. In an interview in November 2001 with the French magazine, L’Expansion, that was reported in the Malaysian press, Dr Mahathir claimed that he personally enjoyed the “very strong support of the Muslim majority who are moderates”, which was the reason why he could succeed in making Malaysia a successful nation. “In every Muslim community”, he said, “you will find a minority of the people who would like to create an Islamic state and will try to stop the government from developing the country economically”. The minority insisted that Muslims only study religion and nothing else and this prevented Muslims from catching up. A large part of Muslim energy, said Dr Mahathir, “is wasted on managing these internal tensions”. The govern- ment has clearly been worried by the serious concern among non-Muslims in Malaysia. On December 4th the deputy minister of information, Khalid Yunus, announced that the government was withdrawing the controversial booklet “because it had caused harm”. However, there is no sign that the campaign itself has been abandoned, being part of a longer-term effort to regain the Malay vote.

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The PBS asks to be The self-destruction of Malaysia’s opposition entered a new phase when the readmitted to the BN Parti Bersatu Sabah (PBS) applied to rejoin the Barisan Nasional (BN, the 14-member ruling coalition). The PBS had left the BN 11 years earlier. The party is backed by Kadazan voters, who form the largest ethnic group in Sabah on Borneo island. It ruled Sabah from 1985 until 1994, when it won the state election with a narrow majority only to be outmanoeuvred by the BN, which persuaded a number of assemblymen to defect. The PBS pulled out of the BN a week before the 1990 general election (a “stab in the back”), but Dr Mahathir— never one to forget a slight—nonetheless said that he would consider the PBS application to rejoin because “I am a forgiving kind of person”. When the PBS joins the BN—the UMNO general assembly raised no objections—there will be no opposition left in Sabah’s legislative assembly. In the national parliament, the PBS holds 3 of the 193 seats and the BN 148; the opposition will be left holding 42 seats but the Barisan Alternatif (BA, the opposition alliance) has been weakened by the departure of the DAP, which has ten seats, leaving PAS with 27 and a divided Parti Keadilan Nasional (PKN), the party set up by the wife of the jailed former deputy prime minister, Anwar Ibrahim, with five.

Fears grow of government Every new appointment of Malaysia’s top legal officers and judges in 2001 has interference in the judiciary attracted attention ever since the new chief justice, Dzaiddin Abdullah, declared in January that it was his aim to restore public confidence in the judiciary, which had been eroded by repeated allegations of public interference and judicial corruption, culminating in the trials of Mr Anwar in 1999 and 2000. Following Mr Dzaiddin’s appointment in November 2000, there has been a revival of the autonomy of the judiciary, with the government regularly challenged or overruled in the courts. The background and political connections of new appointees to top legal and judicial positions are scrutinised by the reform-minded members of the legal fraternity. The nomination of Abdul Gani, the controversial chief prosecutor during the trials of Mr Anwar, as the new attorney-general has shocked the reformers.

The backlash against Abdul Gani will take over from the current attorney-general and the first Daim’s associates continues woman to hold the post, Ainum Mohamad Saaid—who has gone on leave suffering from longstanding thyroid problems. However, there were rumours that Ms Ainum’s demise was connected with the fall earlier in 2001 of her mentor, the former finance minister, Daim Zainuddin. Ms Ainum, who took up her job on January 1st for a period of two years, was previously the deputy chief executive of the Securities Commission in charge of market supervision and enforcement, an area where regulation has been tightened significantly in 2001. The justice minister, Rais Yatim, has denied that there was any investigation against Ms Ainum, who is said to have gained a high reputation for her ability. Her early departure, the appointment of Abdul Gani and Mr Dzaiddin’s forthcoming retirement as chief justice in a year’s time have raised fears that government interference in the judiciary will continue unabated.

A new king is elected on On November 21st 2001 Sultan Salahuddin Abdul Aziz Shah died, two years December 12th into his office as Malaysia’s 11th constitutional monarch and hereditary ruler of state. The king, or Yang di-Pertuan Agong (“he who is made Lord”), is elected by the Conference of Rulers from among the nine hereditary rulers,

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using a system of rotation. There is also a convention that, when a king dies in office, his deputy should ascend to the throne; this has happened three times since Malaysia became independent in 1957. The deputy in question is Sultan Mizan Zainal Abidin of Terengganu, one of the states ruled by PAS, with which the sultan is said to have close ties. After more than 20 years with Dr Mahathir as prime minister, the limited powers of the monarchy have been severely reduced. The federal government made it clear that it expected the Conference of Rulers to elect the rajah of Perlis—and not the sultan of Terengganu—as the next king, even though the choice was, in theory, at the discretion of the Conference of Rulers. The rajah of Perlis, the 58-year-old Syed Sirajuddin, was duly elected as Malaysia’s 12th king.

Economic policy

Fiscal stimulus continues in The 2002 budget, which was presented on October 19th 2001, continued the the 2002 budget stimulative fiscal policies that have been pursued during the past four years but also—for the first time in recent years—made it clear that the government wants to rein in the large budget deficit by raising some taxes and administrative prices. Budget expenditure for 2002 was raised by 10.4% to M$100.5bn (US$26.4bn). The main aims of the budget are strengthening economic growth, diversifying the sources of growth, and ensuring an equitable distribution of wealth. Total expenditure is split between operating expenditure (M$67bn) and development expenditure (M$33.5bn). The budget raised household disposable incomes and boosted public investment, in an attempt to stimulate domestic demand to reduce the impact of the drop in external demand. The budget cut the rate of personal income tax by 1-2 percentage points and lowered the maximum rate from 29% to 28%. Malaysia’s 900,000 civil servants were treated generously, receiving a special bonus of half a month’s salary—to be paid during the fourth quarter—as well as a 10% salary increase in 2002. The budget incorporates the M$4.3bn stimulus package that had been announced in September, to be spent largely on infrastructure works.

No major new incentives The 2002 budget focuses more on consumer spending by private households for corporations than on the corporate sector, which did not receive major new incentives. The company tax rate was left unchanged at 28%. The corporate sector has lobbied for the past few years for a reduction. The reinvestment allowance was extended from five to 15 years, which should stimulate capital investment and foreign direct investment by foreign companies already operating in Malaysia. There were incentives in the budget for the promotion of robotics and automation, information and communication technology (ICT), e-business and e-government, as well as education and training in ICT subjects. There were also new capital expenditure and reinvestment allowances in the agricultural sector to promote the growing of fruit, vegetables, flowers and traditional plantation products, and encourage fish farming, with the longer- term aim of making Malaysia self-sufficient in the supply of foods. To stimulate the export of services, the income tax exemption for companies

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engaged in the export of services is to be raised to 50% from 10% of the increase in export value.

Price and tax increases will Higher petrol prices, higher cigarette prices and a decrease in the threshold for cut the budget deficit the services tax are part of a package of proposed tax increases that are intended to reduce the 2002 budget deficit to M$18.6bn, or 5% of GDP, from an expected outcome of M$22.4bn, or 6.5% of GDP, in 2001. The government loses M$1.2bn in revenue from the proposed tax reductions, which also include cuts in import duties that Malaysia is obliged to implement by international treaty. The services tax threshold for restaurants, bars and coffee houses, clubs and advertising companies is to be reduced from an annual sales turnover of M$500,000 (US$130,000) to M$300,000. The services tax threshold for professional services is to be cut from M$300,000 to M$150,000.

Petrol price controls have The increase in petrol prices has proved highly controversial and has illustrated caused serious distortions how seriously distorted subsidised petrol prices have become. The increase in cigarette prices did not cause the same outcry in the media. The import duty on cigarettes and tobacco was raised by 20%, from M$180/kg (US$47/kg) to M$216/kg, while the excise was also increased by 20%, from M$40/kg to M$48/kg. The petrol and diesel prices were to have gone up by M$0.10 (2.6 US cents) a litre from October 20th. This was to reduce the total cost of the price stabilisation of petroleum products, amounting to M$4.4bn annually, of which the petroleum subsidy takes up M$1.4bn and the loss of revenue to the government M$3bn. The price increases would have reduced the subsidy by M$300-400m (US$79m-105m). Since April 1993 Malaysia has operated an Automatic Pricing Mechanism (APM) for petroleum products, which has become increasingly remote from economic reality, resulting in market prices well below those prevailing in surrounding countries. From 1998 the government has been reluctant to make major price adjustments for fear of jeopardising the economic recovery or provoking a political backlash.

Complaints mount about The Malaysian Trade Union Congress (MTUC) appealed to the government to petrol price increases reconsider the petroleum price increase. The M$0.10 rise was too much, argued the MTUC, whereas an increase of M$0.02-0.03 would have been more reasonable. The petrol station operators complained that, yet again, the government had not allowed them to increase their commission—unchanged for the past six years—although their costs and the petrol prices had gone up. They had previously asked for an increase in commission of M$0.04/litre on petrol and M$0.02/litre on diesel, and the government had promised to solve the issue by the end of 2001.

The government retreats When the operators of taxis, buses, and lorries started to raise transportation charges, the transport minister, Ling Liong Sik, warned that he would not approve any requests for increases in public transport fares, while some local governments began to conduct spot checks on prices. The minister of domestic trade and consumer affairs, , defended the M$0.10/litre increase in petrol prices and said that consumers had been compensated for the rise in the budget and that the cost of the government subsidy had become too high. Since 1983, Mr Muhyiddin said, consumers had been shielded by the

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government, which fixed the operational costs and profit of the oil companies, controlled the profit margin of petrol station operators, and subsidised and gave tax exemptions to petrol, diesel, and liquefied petroleum gas products. Despite this defence, the government became concerned that the publicity over the petrol price increases was overshadowing the budget benefits and blamed the media for only focusing on the M$0.10 increases. Faced with growing protests and unwilling to risk the goodwill created by the budget, it made a partial retreat, cutting the price of diesel fuel to its pre-budget level on November 15th.

The execution of public The embarrassing delays in the implementation of public works—owing to works is speeded up planning delays, lazy officials or local corruption—have made Dr Mahathir crack the whip. Shortly before the government announced the M$4.3bn stimulus package in September, it admitted that only a tiny percentage of the M$3bn additional public works announced in March had been utilised. In order to prevent delays in the implementation of projects, the Ministry of Finance has set up a task force to monitor the progress and identify and address implementation problems. As if this were not enough, the government also set up a “flying squad”, to make sure that the implementation of public and privatised projects is carried out as scheduled. Ministries and agencies have been given greater authority and powers to approve tenders, to overcome delays at local level. Payment of claims for work done is to be expedited: 50% is to be paid upon submission of the claims and the rest will be settled within 30 days. As many of the projects proposed in the 2002 budget are for small- scale, often rural, basic infrastructure, such as housing, roads and schools, their speedy realisation could have a strong impact on local activity from the fourth quarter of 2001.

The domestic economy

Economic trends

Third-quarter real GDP Real GDP expanded by 0.8% in July-September compared with the preceding falls by 1.3% year on year quarter, despite a 9.1% contraction in gross fixed capital formation. Declining investment was offset by a 12.9% quarter-on-quarter rise in public consumption and a positive contribution from net exports, as imports fell faster than exports. However, on a year-on-year basis, real GDP contracted by 1.3%, the first time that real GDP has fallen since the first quarter of 1999. The performance would have been dramatically worse were it not for the government’s programme of fiscal stimulation: consumption spending (private and public consumption combined) rose by 4.7% year on year in the third quarter, compared with just 2.5% in the preceding three-month period. Public consumption rose by 14.6% year on year, compared with an 8.2% year-on-year rise during the first half of the year. By contrast, private consumption rose by just 2.1% year on year in July-September. While this represented a slight improvement compared with the 1.6% year-on-year growth recorded in the

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previous quarter, this is well below the growth rate of 4.1% recorded in January-March and the 12.2% increase recorded for the whole of 2000.

Malaysia: real gross domestic product (M$ m unless otherwise indicated; at 1987 purchasers’ prices, not seasonally adjusted) 1999 2000 2001 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Private consumption 22,518 23,656 23,141 23,534 24,755 24,618 23,521 24,017 % change, year on year 8.9 14.5 13.4 11.3 9.9 4.1 1.6 2.1 Public consumption 7,282 4,369 6,089 6,352 7,375 4,872 6,448 7,278 % change, year on year 23.1 3.8 13.2 –8.0 1.3 11.5 5.9 14.6 Gross fixed capital formation 14,095 14,630 16,953 17,141 15,691 15,955 16,993 15,541 % change, year on year 5.9 21.0 32.6 32.6 11.3 9.1 0.2 –9.3 Change in stocks –1,564 969 988 958 –714 –367 –479 –552 % contribution to year-on-year GDP growth 4.5 –0.1 –0.8 3.2 1.7 –2.7 –2.8 –2.8 Net exports 8,261 6,567 4,836 5,410 6,666 6,645 5,758 6,391 % contribution to year-on-year GDP growth –2.0 –0.9 –7.1 –7.7 –3.2 0.3 1.8 1.9 Exports of goods & services 58,614 55,853 60,422 67,048 63,450 59,281 56,297 54,908 % change, year on year 18.9 21.0 16.8 19.9 8.3 6.1 –6.8 –18.1 Imports of goods & services 50,353 49,286 55,586 61,638 56,784 52,636 50,539 48,517 % change, year on year 25.5 25.7 27.7 32.0 12.8 6.8 –9.1 –21.3 GDP 50,592 50,191 52,006 53,395 53,773 51,723 52,241 52,675 % change, year on year 11.2 11.7 8.0 7.6 6.3 3.1 0.5 –1.3 Source: Department of Statistics.

Investment spending After growing by just 0.2% year on year in the second quarter of 2001, declines sharply investment spending contracted by 9.3% in the third. Private investment has been hit by a drop in business confidence as exports plunged by 18.1% year on year in the third quarter and corporate profits declined. The fall in imports of capital goods steepened to 28.5% year on year in July-September, compared with a decline of 11.3% in the second quarter and a rise of 30.3% in the first. Moreover, the outlook is poor, with the value of capital investment applications falling to M$11.4bn (US$3bn) in January-August, compared with M$46.3bn in the whole of 2000. With capacity utilisation in the important electronics industry having fallen to just 62% in the third quarter, and new capacity coming on stream in China, investment in this sector in Malaysia will be slow to recover. Public investment has been hit by the delay in the implementation of the two stimulus packages announced in 2001. Government spending accelerated in the third quarter—development spending rose by 29.5% compared with the preceding quarter and by 10.4% on a year-on-year basis—and another sharp rise is likely in the fourth quarter, after efforts to remove administrative delays.

Net exports are positive in Despite the sharp decline in exports of goods and services—down by 18.1% the third quarter year on year in the third quarter in constant prices—the external sector’s contribution to growth was positive as imports declined by 21.3%, boosting net exports. The extreme weakness of imports reflects declining demand for investment goods and also the fact that Malaysia’s most important export sector—electronic goods and electrical products—is highly import-intensive. The decline in exports of these products deepened in the third quarter:

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exports of electronics products fell by 26.5% year on year, hitting demand for imported components.

Real GDP is set to decline Apart from further fiscal stimulus, there is currently little to drive economic again in the fourth quarter growth and real GDP is expected to have contracted again year on year in the final quarter of 2001. Consumer confidence is weak, owing to rising job insecurity and weak asset prices, but has responded positively to the fiscal stimulus. The consumer sentiment index compiled by the Malaysia Institute of Economic Research (MIER) improved by 2.5 percentage points to 98.7 in the third quarter, remaining below the level that usually indicates a recession. Moreover, some of the responses in the consumer survey were given before the events of September 11th, which is expected to have hit confidence. There has also been a further decline in the index of business confidence—also published by the MIER—which fell by a further 1.4 points to 42.6 in the third quarter, far below the peak of 69.3 points recorded in the third quarter of 2000. Although there is no sign of an end to the slump in exports and manufacturing production, output in the fourth quarter will show its usual seasonal increase compared with the preceding three-month period. On a year-on-year basis, however, real GDP is likely to contract by 0.3% year on year in the fourth quarter, which, together with the 0.7% year-on-year expansion during the first nine months of the year, would translate into real GDP growth of 0.4% in 2001 as a whole.

Services fail to offset the Largely as a result of sharply lower output of electronic and electrical products, manufacturing decline value added by manufacturing declined by 8.4% year on year in the third quarter, compared with a decline of 6.7% in the preceding quarter. This compares with growth of 3.7% in the first quarter of 2001 and 21% in the whole of 2000. Although levels of inventories in the electronics and electrical sectors are relatively low, there is little sign of a recovery in demand. The weak performance of the manufacturing sector was partly offset by the performance of the services and construction sectors, both benefiting from expansionary fiscal and monetary policies. Value added by the services sector rose by 4.4% year on year in the third quarter, compared with growth of 6.1% in April-June. Low interest rates—the intervention rate was cut to 5% from 5.5% on September 20th—and higher public investment continued to drive the

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construction sector, which saw value added increase by 2.6% year on year, slightly below the 3.2% growth recorded in the preceding quarter.

Weak global demand hits The decline in the manufacturing sector reflects the extremely weak external manufacturing environment as the global economy experiences its most severe deceleration since the 1974 oil price shock. Moreover, the downturn has been led by a sharp drop in investment demand, in particular investment in computers and telecommunications equipment. This has exposed the acute dependence of Malaysia, along with the rest of East and South-east Asia, on the manufacture of electronic equipment and electronic components, and on US demand for these products in particular. The Economist Intelligence Unit forecasts that US investment in computer-related technologies will be slow to recover in 2002. This is likely to have serious implications for the recovery of Malaysia’s manufacturing industry. Although Malaysia—unlike neighbouring Singapore— benefits from a sizeable domestic market, its dependence on exports of electronic parts and components could become a liability as other lower-cost economies in Asia, especially China, increase capacity in this sector.

Malaysia: gross domestic product by sector (M$ m unless otherwise indicated; at 1987 purchasers’ prices, not seasonally adjusted) 1999 2000 2001 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Agriculture, forestry & fishing 4,602 3,777 4,355 4,745 4,831 4,300 4,417 4,648 % change, year on year 4.5 –0.7 –3.7 1.7 5.0 13.8 1.4 –2.0 Mining & quarrying 3,631 3,662 3,516 3,583 3,655 3,629 3,542 3,660 % change, year on year –1.9 3.9 5.6 2.7 0.6 –0.9 0.7 2.1 Manufacturing 15,394 16,341 17,556 18,057 17,913 16,953 16,379 16,540 % change, year on year 24.2 27.3 20.9 20.3 16.4 3.7 –6.7 –8.4 Construction 1,781 1,641 1,781 1,782 1,792 1,655 1,838 1,829 % change, year on year 4.2 1.2 1.4 0.3 1.2 0.9 3.2 2.6 Services 27,668 27,447 27,543 28,088 28,666 28,371 29,200 29,316 % change, year on year 7.7 7.3 4.8 3.5 3.6 3.4 6.1 4.4 Electricity, gas & water 1,877 1,886 1,957 2,030 2,013 1,983 2,070 2,174 % change, year on year 7.0 11.3 5.0 6.9 7.2 5.1 5.8 7.1 Transport, storage & communications 4,147 4,052 4,104 4,204 4,333 4,315 4,424 4,367 % change, year on year 14.3 11.0 8.3 6.0 4.5 6.5 7.8 3.9 Wholesale, retail trade, hotels & restaurants 7,792 7,654 7,631 7,742 7,922 7,787 7,771 7,942 % change, year on year 8.5 7.3 8.5 6.3 1.7 1.7 1.8 2.6 Finance, insurance, retail estate, & business services 6,370 6,490 6,404 6,501 6,765 6,680 7,145 6,912 % change, year on year 6.0 10.9 2.5 1.2 6.2 2.9 11.6 6.3 Government services 3,702 3,460 3,554 3,659 3,722 3,566 3,806 3,883 % change, year on year 7.3 2.1 1.6 1.4 0.6 3.1 7.1 6.1 Other services 3,780 3,905 3,893 3,952 3,911 4,040 3,984 4,037 % change, year on year 3.3 1.3 1.1 0.2 3.5 3.5 2.3 2.1 Imputed bank service charges –3,762 –3,874 –3,967 –4,044 –4,205 –4,306 –4,386 –4,426 % change, year on year 6.4 7.5 6.0 6.7 11.8 11.2 10.6 9.4 Import duties 1,287 1,196 1,241 1,183 1,121 1,121 1,250 1,108 % change, year on year 13.4 0.9 –18.7 –10.5 –12.9 –6.3 0.7 –6.3 GDP at purchasers’ valuesa 50,592 50,191 52,006 53,395 53,773 51,723 52,241 52,675 % change, year on year 11.2 11.7 8.0 7.6 6.3 3.1 0.5 –1.3 a Totals may not add owing to rounding.

Source: Department of Statistics.

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 25

Malaysia’s vulnerability to The slowdown has also highlighted Malaysia’s increasing dependence on trade: external shocks has grown exports of goods and services accounted for 125.7% of current-price GDP in 2000, compared with 93.2% in 1997. World trade growth has slowed dramatically in 2001. We forecast an increase of just 0.8% in 2001, compared with 12.8% in 2000, and growth of only 2% in 2002. Domestic demand has also remained relatively weak in Malaysia since the 1998 financial crisis, with the economic recovery being driven by exports. Fiscal stimulus and a weakness of import demand have prevented a sharper contraction in real GDP, but the outlook remains poor. Although the government has indicated that it is prepared to increase further spending if necessary, the prospects for exports and therefore industrial production and investment are not encouraging.

Underlying inflation The rate of consumer price inflation (CPI) remains low, reflecting the weakness pressures remain weak of domestic demand and the downturn of the global economy. There is growing spare capacity in the economy, and labour shortages and wage pressures have eased. The consumer price index rose by just 1.4% year on year in October 2001, the same rate that prevailed during the third quarter and a decline from the 1.6% rate of increase recorded over the first half of the year. The government took advantage of the low inflation to increase cigarette, petrol and diesel prices in the October budget and broaden the application of the services tax.

Malaysia: inflation indicators (% change, year on year) 1999 2000 2001 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Consumer price inflation 2.1 1.6 1.4 1.5 1.7 1.5 1.6 1.4 Producer price inflation 0.3 3.9 5.7 4.1 –1.0 –4.7 –4.8 –4.3 Source: Department of Statistics.

The weakness of underlying inflationary pressure is illustrated by a further sharp fall in producer prices. Upstream price pressure remains weak, with producer input price inflation falling by 4.3% year on year in the third quarter of 2001, compared with a drop of 4.8% in the first half of 2001 and growth of 3.2% in 2000 as a whole. The decline in producer prices reflects the depressed state of domestic and global demand and the related decline in commodity prices. The continued fall in producer prices suggests that consumer price inflation will remain marginal over the coming months.

The rate of unemployment stood at 3.7% in the second quarter of 2001—the most recent figure available—compared with 4% in the first quarter and a rate of 3.1% for the whole of 2000. Nevertheless, the deterioration in labour-market conditions is reflected in the low level of vacancies. This was most evident in the manufacturing sector, where the number of vacancies in the second quarter stood at the lowest level since the first quarter of 1999, with job losses at the highest level since the fourth quarter of 1998. Given that Malaysian manufacturers have continued to report declining orders, further substantial job losses are expected to have taken place in the third quarter of 2001. The number of workers laid off has remained fairly low, especially when compared with the previous downturn in 1998. The government attributes this to the

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 26 Malaysia

impact of flexible labour-market practices and governmental efforts to redeploy labour. Nevertheless, the poor outlook for the economy as a whole is expected to lead to a further deterioration in labour-market conditions, putting downward pressure on wage settlements.

Manufacturing

The manufacturing sector Production in the manufacturing sector fell by 10.2% year on year in the third is in recession quarter of 2001. This followed a decline of 7.9% year on year in the preceding quarter and confirmed that the sector is in deep recession. As would be expected, export-oriented industries have been hit hardest. The output of the pivotal electronics industry—accounting for around 20% of total manufacturing output—fell by 27.5% year on year in the third quarter compared with a decline of 25.3% in the previous three-month period. The biggest deterioration in the third quarter was seen in the production of electrical goods, which fell by 10.6% year on year, compared with growth of 3.4% in the second quarter. This reflected the weakening of consumer demand in the US, Europe and Japan for goods such as televisions and music equipment. The decline in the production of textiles and apparel also deepened, with output falling by 10.7% year on year, compared with a year-on- year decline of 9.7% in the previous quarter. The decline in this sector threatens to become a longstanding phenomenon if Malaysia fails to move into the production of more expensive clothing. The output of the chemicals and chemical products sector—which accounts for around 15% of total manufacturing output—fell by 7.9% year on year in the third quarter.

Malaysia: production in the manufacturing sector (% change in value added at 1987 prices; year on year) 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr External demand-related industries 33.0 25.5 24.7 21.3 2.0 –11.4 –15.2 Electronics 49.8 46.9 46.4 37.8 –1.2 –25.3 –27.5 Electrical 32.4 28.9 32.5 22.2 8.6 3.4 –10.6 Textiles & apparel 12.3 5.0 13.0 5.3 3.0 –9.7 –10.7 Chemicals & chemical products 25.6 17.1 10.2 9.2 –1.6 –7.2 –7.9 Off-estate processing 46.5 0.5 –2.2 15.0 10.4 13.5 4.0 Rubber products 7.0 0.8 3.8 4.7 10.8 4.2 3.3 Wood & wood products 2.7 1.4 6.2 5.8 12.4 1.3 –2.3 Domestic demand-related industries 29.2 26.4 20.7 14.1 12.1 4.3 7.5 Transport equipment 33.8 22.8 13.2 10.9 18.9 18.4 23.5 Fabricated metal products 41.8 35.8 38.2 22.6 10.6 6.4 8.8 Iron & steel & non-ferrous metals 30.8 24.7 15.6 0.3 9.6 –7.3 –1.2 Non-metallic metal products 27.4 20.7 22.2 13.7 15.4 9.7 4.6 Petroleum products 15.1 39.3 15.2 12.1 21.0 8.7 19.7 Total 32.1 25.7 23.8 19.7 4.2 –7.9 –10.2 Source: Department of Statistics.

Most domestically orientated industries managed to post growth in the third quarter, aided by the government’s efforts to boost domestic consumption. The transport equipment sector recorded the biggest increase in output, at 23.5%

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 27

year on year, up from 18.7% over the first half of 2001. This mainly reflects strong growth in the production of passenger cars, demand for which has been boosted by the availability of cheap credit. Growth in new car registrations accelerated to 19.7% year on year in the third quarter, up from 12% year on year in the first half of the year. As a result of high import taxes on cars, domestic producers control a sizeable proportion of the domestic market. The fabricated metal products sector—closely linked to the automotive and construction sectors—continued to register growth, with output rising by 8.8% year on year, compared with an increase of 8.5% over the first half of the year.

Oil and gas

Contrary trends in Value added by the mining sector, which largely comprises the oil and gas hydrocarbon output industries, rose by 2.1% year on year in the third quarter of 2001, compared with a slight decline in the first half of the year. Although growth in the output of natural gas slowed compared with the preceding quarter, growth in the value of oil output picked up to 1.3% year on year from a decline of 2.1% in the preceding quarter. Natural gas production slowed despite stronger external demand, with export volumes of liquefied natural gas (LNG) rising by 7% year on year in the third quarter, up from only 1.8% in the preceding quarter. By contrast, the volume of crude oil exports declined by 13.4% year on year, compared with a drop of 4.6% in the preceding quarter, suggesting that Malaysian stocks must have risen quite sharply.

Malaysia: oil and gas production

2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Crude oil condensates (‘000 barrels) 701 689 653 676 679 675 661 % change, year on year 1.0 4.1 –5.4 –4.7 –4.2 –2.1 1.3 Natural gas (m standard cu ft) 4,533 4,089 4,277 4,286 4,855 4,286 4,445 % change, year on year 11.0 10.1 11.5 3.8 5.9 4.8 3.9 Source: Department of Statistics.

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 28 Malaysia

Agriculture

The strength of the ringgit Value added by the agricultural sector contracted by 2% year on year in the hits agricultural exports third quarter of 2001, down from growth of 1.4% year on year in the second quarter of the year and 13.8% in the first. The principal reason for the deteriorating performance was much weaker growth in crude palm oil output, which rose by just 2.4% year on year, compared with 17.2% in the preceding quarter. Whereas the output of rubber fell by just 7% year on year compared with a decline of 21.8% in the previous quarter, the rate of decline in the output of timber and cocoa deepened. The worsening performance of the agricultural sector reflects the impact of the real appreciation of the Malaysian ringgit against the currencies of many of Malaysia’s competitors in this sector and the weakness of commodity prices. The government’s decision in September 2001 to scrap the 5% export surcharge levied on a range of palm oil products will do little to prevent Malaysian producers from continuing to lose out to lower-cost Indian rivals.

Malaysia: production in the agricultural sector (% change year on year in value added at 1987 prices) 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Crude palm oil 25.5 –15.7 –2.2 11.8 27.6 17.2 2.4 Rubber –29.1 –14.6 –15.5 –18.3 –11.7 –21.8 –7.0 Saw logs 20.8 5.3 1.5 –2.1 –15.3 –19.3 –22.0 Cocoa –14.4 –17.5 –34.8 9.5 –9.5 –13.7 –25.2 Source: Department of Statistics.

Financial and other services

Expansion continues in the The services sector continued to grow relatively strongly in the third quarter of services sector 2001, with value added rising by 4.4% year on year. This compares with growth of 6.1% year on year in the previous quarter and 3.4% in the first three months of the year. Growth in value added in intermediate services slowed to 5.4% year on year during the third quarter from 11.2% during the preceding quarter. Finance, insurance, real estate and business services benefited from higher bank lending activity and a stronger performance of the stockmarket. Real interest rates have continued to boost credit growth, although growth in the sale of insurance products has slowed. Value added in transport, storage and communications services was hit by the decline of the export trade but there were stronger performances in telecommunications and the transshipment trade. Growth in value added in final services remained solid at 3.8% year on year during the third quarter compared with 3% in April-June. The value of government services continued to rise strongly in the third quarter, up by 6.1% year on year, as a result of increased government spending. There was also an encouraging performance by the wholesale and retail trade— the largest component of the services sector—where growth in value added rose to 2.6% year on year during the third quarter from 1.8% in the preceding

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 29

three-month period. The continued rise indicates that, unlike 1998, there has been no severe cutback in consumer spending.

Malaysia: performance of the services sector (% change, year on year in value added at 1987 prices) 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Intermediate services 10.9 4.7 3.0 5.5 5.0 11.2 5.4 Transport, storage & communications 11.0 8.3 6.0 4.5 6.5 7.8 3.9 Finance, insurance, real estate & business services 10.9 2.5 1.2 6.2 2.9 11.6 6.3 Final services 5.2 4.9 3.9 2.4 2.3 3.0 3.8 Electricity, gas & water 11.3 5.0 6.9 7.2 5.1 5.8 7.1 Wholesale & retail trade & restaurants 7.3 8.5 6.3 1.7 1.7 1.8 2.6 Government services 2.1 1.6 1.4 0.6 3.1 7.1 6.1 Other services 1.3 1.1 0.2 3.5 3.5 2.3 2.1 Total services 7.3 4.8 3.5 3.6 3.4 6.1 4.4 Source: Department of Statistics.

The stock of non- Total loans outstanding rose to M$432bn (US$113.7bn) at end-September performing loans rises 2001, representing a year-on-year increase of 5.9% and an increase of 3.8% compared with the end-2000 level. After growing by an average of M$12.6bn a month in July-August, loan approvals fell back to M$10.1bn in September as the economy cooled. Despite better loan repayment figures—repayments averaged M$30.6bn in the third quarter of 2001, up from M$28.7bn in the preceding quarter and M$29.8bn in the first quarter of 2001—the stock of non- performing loans (NPLs) has continued to rise. On a three-month arrears basis, NPLs increased to 11.8% of the total outstanding at end-September 2001, up from 11.4% at end-June and 10.6% of the total in the first half of 2001. The rise in NPLs reflects the impact of the weak economy, and the slow place of corporate restructuring among Malaysia’s biggest debtors. The government is making an extra effort to bring about an acceleration in the pace of restructuring but the poor growth outlook and low interest rates are expected to hit the profitability of the banking sector over the coming months, provoking a further rise in the proportion of NPLs.

Foreign trade and payments

Export and imports decline Exports (fob) fell by 19.2% year on year in the three months to end-September sharply 2001, compared with a decline of 9% in the preceding quarter and growth of 1.6% in the first quarter of the year. The major reason for the fall was declining exports of electrical and electronic products, which dropped by 16.9% and 26.5% year on year, respectively, in the third quarter. Exports of electrical and electronic products account for nearly 70% of Malaysia’s manufactured exports. Nevertheless, the trade surplus expanded to M$15.4bn (US$4.1bn), up from M$12.5bn in the second quarter, as a result of an even steeper decline in imports, which fell by 22.8% year on year (cif basis). This compares with a 10.5% year-on-year decline in imports in the second quarter of 2001. The sharp

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 30 Malaysia

fall in imports partly reflects the weakness of domestic consumer demand, but more importantly the fall-off in electronics production (which has a high import content) as well as the sharp decline in private investment demand, especially for machinery and equipment. In the first three quarters of 2001 export earnings declined by 9.4% year on year to M$251.5bn, and import earnings fell by 10% year on year to M$210.2bn.

Malaysia: foreign trade (M$ m; not seasonally adjusted) 1999 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Exports fob 77,849 83,628 90,679 84,758 90,968 101,707 95,875 86,152 82,917 82,369 % change, year on year 14.3 14.1 19.0 22.1 16.9 21.6 5.7 1.6 –9.0 –19.2 Imports cif –59,604 –64,836 –70,453 –68,231 –78,681 –86,756 –78,696 –72,806 –70,450 –66,967 % change, year on year 8.8 13.9 25.7 27.3 32.0 33.8 11.7 6.7 –10.5 –22.8 Trade balance 18,245 18,793 20,227 16,527 12,287 14,951 17,180 13,347 12,485 15,402 Source: Department of Statistics.

Electronics demand will Exports of electrical and electronic equipment accounted for 56.2% of total remain weak export revenue over the first three quarters of 2001, down from 62% for the whole of 2000. This decline reflects the disproportionately large fall in exports from this sector that has taken place in 2001. However, at well over half of total exports, the dependence on this category of exports leaves Malaysia highly vulnerable to a cyclical downturn in the global economy, which in the case of the electronics industry tends to be steep. Exports of integrated electronic circuits alone accounted for 25% of the total in this category, and hence for 14% of total export revenue. Although there are some signs of an improvement in the semiconductor cycle, final demand for electrical and electronic equipment is expected to remain weak for most of 2002. With more supply coming on stream, especially in China, Malaysia will not find it easy to rebuild the value of its electronics exports.

Export revenue is hit by Export revenue from Malaysia’s second most important export category, palm weak oil prices oil and palm oil-based products, recovered in the third quarter of 2001, rising by 6.7% year on year. Export volumes grew by 13.7%, while palm oil prices fell by 6.2% year on year compared with a 32% price plunge during the first half of 2001. Palm oil export volumes rose by 25% year on year in the first three quarters of the year and export revenue increased by just 5%, accounting for 4.3% of total export revenue. Crude petroleum export revenue was hit the lower prices and increased supply on the global market. Export revenue from this sector fell by 27.7% year on year in the third quarter, with volumes down by 13.4% and prices down by 16.4%. Crude oil exports accounted for 3.7% of total export revenue in January-September, with volumes declining by 6.6% year on year and prices by 4.5%. Export revenue from the fourth largest category, liquefied natural gas (LNG), increased by 8.2% in the third quarter, lifted by a 7% increase in volumes. In January-September 2001 LNG export volumes rose by just 1.9% and revenue by 3.7%.

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 31

The US remains Malaysia’s The relative importance of the US, Singapore and Japan as destinations for most important market Malaysia’s exports remained largely unchanged in January-September 2001 compared with the year-earlier period, with these three markets accounting for one-half of total exports. While the US was the biggest market, accounting for 20% of exports, this understates Malaysia’s dependence on the US market, as a proportion of Malaysian exports to Singapore—the second largest export destination, accounting for 17% of exports—are re-exported to the US. A smaller, but still significant, proportion of Malaysian exports to Japan are also re-exported to the US. As a result, the US is the ultimate market for around 30% of Malaysia’s exports.

The current-account Malaysia’s large trade surplus continues to underpin a sizeable surplus on the surplus remains sizeable current account. The current-account surplus fell slightly in the second quarter of 2001 to M$6.8bn compared with M$7bn in the preceding quarter, but was above the surplus of M$6.6bn recorded in the year-earlier period. Although export and import values declined, the change in the size of the trade surplus was small, declining from M$17.7bn in the second quarter to M$17bn in the third, but the underlying downward trend in the trade surplus was maintained. The deficit on the services and income balance narrowed slightly, falling by 11.3% year on year, owing to a narrowing of both the services and incomes deficits. Revenue from tourism was sharply higher compared with the year- earlier period, whereas the deficit on the transport services balance narrowed as a result of the decline in import values. The deficit on the income balance fell by 6% compared with the preceding quarter, as a result of a decline in investment income outflows. Foreign trade data for the third quarter show that there was another sharp rise in the trade surplus, as export values stabilised while import values plunged, which is likely to result in another large current- account surplus in the third quarter.

The net outflow on the financial account was M$9.9bn in the second quarter of 2001, compared with M$12.8bn in the preceding quarter. Net inflows of foreign direct investment (FDI) were fractionally larger than in January-March 2001, at M$1.1bn, while outflows of portfolio and other investment continued to slow; portfolio outflows totalled M$1.2bn and other investment outflows M$9.8bn during the second quarter, compared with outflows of M$2.4bn and

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 32 Malaysia

M$11.5bn, respectively, in the preceding quarter. The overall balance of payments showed a deficit of M$4.4bn in the second quarter (down from M$10.3bn in the first quarter), and net international reserves held by Bank Negara Malaysia (BNM, the central bank) declined by a corresponding amount to US$26bn at end-June 2001.

Malaysia: current account (M$ m; not seasonally adjusted) 1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Merchandise exports 84,482 88,295 84,910 91,610 101,688 95,823 86,132 82,882 Merchandise imports –60,133 –66,356 –64,442 –74,130 –81,800 –74,412 –68,420 –65,818 Trade balance 24,349 21,939 20,468 17,480 19,888 21,411 17,712 17,064 Services & income credits 14,286 15,374 14,145 14,946 15,811 15,417 16,450 15,154 Services & income debits –22,961 –23,923 –22,300 –24,170 –26,585 –27,030 –25,032 –23,332 Services & investment income balance –8,675 –8,549 –8,155 –9,224 –10,774 –11,613 –8,582 –8,178 Transfers credits 761 1,094 698 627 694 715 596 433 Transfers debits –2,379 –3,774 –2,529 –2,294 –2,517 –2,917 –2,700 –2,556 Unrequited transfers balance –1,618 –2,680 –1,831 –1,667 –1,823 –2,202 –2,104 –2,133 Current-account balance 14,056 10,710 10,483 6,589 7,291 7,596 7,026 6,763 Sources: Department of Statistics; Bank Negara Malaysia.

International reserves have International reserves have continued to recover, following their decline over recovered recently the first part of 2001. At end-November they totalled US$30.7bn, above their end-2000 level of US$29.5bn. The proceeds of the government’s US$1bn global bond issue in July 2001 provides part of the explanation for the rise in reserves, but the main reasons for the renewed inflows and reduced outflows were greater optimism concerning Malaysia’s equity market, as investors were encouraged by tighter regulation and renewed efforts to restructure corporate debt, some reduction in the pessimism about Malaysia’s medium-term prospects, and the reassertion of political control by the prime minister, Mahathir Mohamad.

External pressure for a Judging by the renewed rise in reserves, external pressure for a devaluation of devaluation has eased the ringgit has eased. The government, for its part, shows no sign of moving imminently to change the currency system, fearing an increase in economic and political instability. Although Malaysia is running a sizeable current- account surplus and has adequate import cover (equivalent to around five months of imports), the risk of devaluation remains considerable. Malaysian exporters face mounting competitive pressures, partly as a result of the strength of the ringgit. Moreover, the possibility that the Japanese yen might begin to fall sharply against the US dollar has increased following the deepening of the Japanese slump. Although such a development is not contained in the Economist Intelligence Unit’s central forecast, were it to happen, it would almost certainly unleash region-wide competitive devaluations and make the ringgit’s current value against the US dollar unsustainable.

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Brunei 33

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 (acting) Ahmad Jumat Education & health (acting) Abdul Aziz Umar 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

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 34 Brunei

Economic structure

Annual indicatorsa

1996 1997 1998b 1999 c 2000d GDP at market prices (Br$ m) 7.7 8.0 8.1 8.2 8.3 Real GDP growth (%) 3.5 4.0 1.0 2.5 3.5 c Crude oil production (‘000 b/d) 165 165 155 180 175 Gas production (bn cu metres) 9.37 9.18 9.28 9.59 9.88 Consumer price inflation (av; %) 2.0 2.0 –0.7e 1.0 n/a Population (‘000) 305.1 314.4 323.6 333.0d 342.0 Exports fob (US$ m) 6,670 3,973 1,979 2,552 3,161 Imports cif (US$ m) –3,516 –3,154 –2.353 –1,328 –1,420 Reserves (US$ m) 5,937 3,656 4,011 n/a n/a Exchange rate (av; Br$:US$) 1.41 1.48 1.67e 1.69e 1.72e

December 13th 2001 Br$1.83: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

1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Production (prodn/day) Crude petroleum ‘000 barrels 140 150 194 192 157 167 182 166 Foreign trade (US$ m)a Exports fob 630.4 738.8 659.4 719.9 873.5 908.3 688.9 799.9 Imports cif –337.3 –310.0 –219.5 –373.5 –376.2 –450.9 –324.9 –392.1 Trade balance 293.1 428.8 439.9 346.4 497.3 457.4 364.0 407.8 a IMF estimates.

Sources: Oil & Gas Journal; IMF, Direction of Trade Statistics.

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Brunei 35

Outlook for 2002-03

Domestic politics The impact of the bankruptcy of the Amedeo Corporation will continue to dominate Brunei’s domestic politics. The failure of Brunei’s largest company in 1998 symbolised, at least in some respects, a defeat of the forces that wanted to modernise Brunei’s economy and society by the conservative, religious factions. The sultan will continue to strengthen the role of Islam in public life in order to shield the royal family from talk of scandals and corruption, and defend his absolute rule. Controls on the press and society will remain tight. The squeeze on oil revenue that is likely in 2002 will reduce the policy options available, further increase unemployment among young Bruneians and create a potential source of unrest in an increasingly Islamicised country.

International relations Brunei will be working to polish its international image, tarnished by the continuing publicity surrounding the sultan’s brother, Prince Jefri Bolkiah, and his bankrupt Amedeo group of companies. During Brunei’s boom days, before the 1997 Asian economic crisis and the 1998 collapse of Amedeo, the sultan ensured his international standing by handing out lavish gifts and loans to cash-strapped governments and non-governmental organisations. The sultan will now be 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. The sultan, as the current chairman of the Association of South-East Asian Nations (ASEAN), will also be taking a leading role in pressing for increased regional economic co-operation in the wake of the terrorist attacks on the US, which have been accompanied by a sharp slowdown in Asian economic growth.

Economic policy Brunei’s Eighth National Development Plan (NDP) for 2001-05, announced in late September, places a heavy emphasis on the oil and gas sector. A key element of the plan is the formation of a national oil and gas company, which will expand exploration activities and invest in downstream industries. At least for the short term, Brunei will be hanging its hopes for economic recovery on the petrochemicals sector, its traditional main income earner. Although the NDP has earmarked Br$1.1bn (US$600m) over a five-year period for commercial and industrial development, the growth of the private sector is likely to be constrained by weak global demand for Brunei’s few non-oil exports, a drop in international tourism and low consumer confidence. The pay-offs that have been promised to creditors of the bankrupt Amedeo Corporation will help the construction industry to recover, but consumer spending is unlikely to see much growth, with the unemployment rate still standing at around 10%.

The Eighth NDP—like the landmark Brunei Darussalam Economic Council report released in 1999—recommends a broadening of the revenue base by the implementation of new taxes and also the privatisation of inefficient divisions of the vast state bureaucracy. But the NDP cautions that these changes should be implemented with care and that they should be abandoned if they appear to threaten long-term economic development. In practice, this is likely to mean that Brunei will wait and watch oil prices, and will only go ahead with

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reforms that could risk a popular political backlash if there is no other option, particularly if the flow of petrochemical funds slows dramatically.

Economic growth Brunei’s economic expansion will slow sharply in the fourth quarter of 2001, owing to the fall in global demand for both Brunei’s oil and non-oil exports, a drop in tourist arrivals and the continuing stagnation in the private sector. As a result—and even though Brunei stepped up oil and gas production in the first half of 2001 to take advantage of high petrochemical prices—our GDP growth forecast for 2001 has been lowered to 1.5% from 2.5% previously. With oil prices forecast by the Economist Intelligence Unit to average US$18.26/barrel in 2002, down from a 2001 average of US$24.28/b, and global demand for Brunei’s exports expected to remain weak, GDP growth is expected to be in the 1% range in 2002, before recovering to 2.5% in 2003 as oil prices rise.

The political scene

The Amedeo saga continues The saga of Prince Jefri Bolkiah and his bankrupt Amedeo Corporation to dominate the headlines continues to dominate the headlines in Brunei. The sultanate’s aim of recovering Prince Jefri’s assets while keeping a low political profile appears to have hit new snags. In August 2001 Amedeo’s court-appointed liquidators, Foo, Kon & Tan, hosted an auction of some of Prince Jefri’s possessions— including luxury cars, fire engines, gold-plated toilet brushes and a flight simulator—that attracted international media attention. The sale raised US$7.8m—a modest sum by comparison with Amedeo’s estimated US$575m in outstanding debts. Brunei’s press also reported claims that tensions have been rising between the government and Prince Jefri, who was apparently reluctant to hand over the most valuable of his properties, while many of his assets appear tied up in complex webs of ownership. Brunei’s courts remain congested with cases relating to Amedeo. The government has lodged a suit claiming Br$5bn (US$2.7bn) from Amedeo, and Amedeo’s liquidators have lodged a Br$5bn suit against Prince Jefri, who in turn has lodged a counter- claim against the liquidators.

Small creditors of Amedeo Another chapter of the long-running Prince Jefri drama opened in October may be paid in full 2001, with the registration of Global Evergreen, a corporation set up by associates of Prince Jefri, including the current education minister, Abdul Aziz Umar, and the prince’s solicitor and private secretary, Pengiran Rakawai, to pay off many of Amedeo’s 300 creditors. Global Evergreen has promised to pay in full creditors owed Br$300,000 (US$164,000) or less, and to pay creditors of up to Br$2m (US$1.1m) 45% of their claims. Global Evergreen released a statement saying that this plan would account for 77% of Amedeo’s creditors at a total cost of Br$40m and that the liquidators and creditors had agreed to hold off on further litigation while the payment plan was being discussed. While the formation of Global Evergreen was hailed by many Bruneians as likely to help the economy, especially the struggling construction sector that accounts for many of Amedeo’s creditors, it also gave rise to questions over who is behind the corporation. Global Evergreen and the government have

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Brunei 37

kept quiet about the corporation’s finances, but Brunei’s newspapers have been publishing reports speculating that the payouts are coming from the government treasury in a bid to keep potentially scandalous information about the royal family from being made public in court.

The sultanate seeks more Over the past year, as economic crisis and political scandal have shaken the control over religion foundations of the sultan’s absolute rule, Brunei has stepped up attempts to strengthen the role of Islam in public life. Promoting the concept of Brunei as a Malay Islamic Monarchy, with the sultan as its rightful moral and political head, has proved an effective means of deflecting criticism of the royal family and state policy, and of cracking down on advocates of a more open system of government. In keeping with this trend, the sultan announced that religious schools are to be merged in 2002 with state schools and that Islamic education is to become a mandatory part of the national curriculum. This shift will allow Brunei to strengthen the religious faith of its majority Muslim population and also place religious discourse more firmly under its control. Brunei is continuing to prosecute people for engaging in “deviant” cultural and religious practices seen as violating Islamic teachings. The latest case to make local headlines was that of a practitioner of Chinese medicine, who was accused of being a “witchdoctor” and of causing the death of a former minister of culture, youth and sports. The Directorate of Syari’ah Affairs, the state body responsible for regulating Islamic practices, defended the government’s stance, stating that “deviant” practices were on the rise in Brunei. The director of the organisation added that citizens should be especially wary of non-Islamic teachings entering the country from abroad. The state had the right to control religious practices and to prosecute those engaging in unapproved religious activities.

Islamic fundamentalism is Brunei has also made it clear that it will not tolerate Islamic fundamentalism not tolerated that threatens the security of the state—and with it the ability to attract foreign investment. The sultanate issued a statement of condolence to the US after the September 11th attacks and affirmed its willingness to participate in an international war on terrorism. Brunei demonstrated its moderate Islamic position by declining to join its neighbours, Malaysia and Indonesia, in pressing the Association of South-east Asian Nations (ASEAN) to issue a condemnation of the US bombing of Afghanistan. Discussion of Islamist terrorism or the bombing of Afghanistan has been rare in Brunei’s state- censored press, indicating that the government is reluctant to encourage the same kind of anti-Western protests that have had a negative impact on foreign investor confidence elsewhere in the region.

The government cracks The government has issued a new law regulating the press, limiting the down on press freedoms number of media outlets operating in Brunei and encouraging restraint in their reporting. The law, which took effect on October 1st 2001, requires all newspapers to obtain a yearly permit from the Ministry of Home Affairs and lodge a deposit of Br$100,000. The law sets the penalty for the publication of “false news” at three months in jail or a fine of up to Br$40,000. Writers, editors, publishers and printers can be held jointly liable for such offences. The new regulation bans newspapers and their employees from receiving foreign funds. The new law was immediately criticised in the international press, and

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the New York-based Committee to Protect Journalists sent a letter to the sultan, calling the legislation regressive and a threat to press freedom. Even the local press, normally wary of challenging government policy, expressed dismay, with the Borneo Bulletin writing that “journalists and editors in the non-state media who practice self-censorship may now be called upon to be more cautious than ever before”. Azahir Abdullah, the permanent secretary in the prime minister’s office, responded to the criticism by accusing overseas press groups of “overreacting” and stressed that Brunei’s media was an “internal matter” in which there should be no “foreign meddling”. Mr Azahir saw no need for the negative foreign reactions as the new laws were much more liberal than those of more developed neighbouring countries. “Brunei stands for the freedom of the press. But we are against its many abuses”, he declared.

A month after the new ruling went into effect, Prince Mohamed Bolkiah, a younger brother of the sultan, announced through his legal representatives that he was beginning legal proceedings against the News Express newspaper. The newspaper had printed an article claiming that the prince had retained counsel to sue former advisers for misappropriating funds, a claim that the prince denies. The News Express is considered to be the most outspoken of Brunei’s newspapers and is the main competitor of the Borneo Bulletin, owned by Prince Mohamed’s conglomerate, the QAF Group.

Economic policy and the economy

Business slows after After GDP growth in the first half of 2001 averaging around 2.5%—almost September 11th entirely the result of high oil prices—Brunei’s economy has been hit by a renewed decline in oil prices, but especially by the global fall-out from the September 11th attacks on the US. As the global economic outlook darkened, world demand for oil dropped and oil revenue, Brunei’s main source of income, fell sharply. Activity in the private sector also slowed in line with the weakening of demand for non-oil exports. The garment industry, one of the largest private-sector employers with a workforce of 6,500, has experienced a sharp downturn owing to a drop in US demand, while the tourism industry has suffered a severe decline in arrivals. Prices for consumer goods, almost all of which are imported, rose as the Singapore dollar, to which the Brunei dollar is pegged, plunged on expectations of a further contraction in exports. The only economic indicator showing an improvement was new car sales, which picked up dramatically following a ban on imports of used cars and a November cut in import duties from up to 200% to 20%.

Brunei announces a new In late September Brunei unveiled its Eighth National Development Plan national development plan (NDP). The plan, which covers the five-year period from 2001 to 2005, places renewed emphasis on the oil and gas sector, despite calls made by the Brunei Darussalam Economic Council—in a landmark report released in 1999—to diversify the economy away from dependence on petrochemicals. The centrepiece of the NDP is the formation of a national oil company that will actively pursue petroleum exploration and invest in downstream industries. The head of the national oil company will be Mohamed Alimin, a former

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Brunei 39

director of the state-owned carrier, Royal Brunei Airlines and the permanent secretary at the Ministry of Defence. The oil and gas sector currently accounts for approximately 40% of Brunei’s GDP, 70% of its tax revenue and 80% of its exports.

The government will The new NDP also calls for government investment to stimulate the private borrow to finance its plans sector, allotting Br$1.1bn (US$600m) for the development of industry and commerce. In keeping with its plan to become an international offshore financial centre and create its own capital market, the government intends to raise 60% of the Br$7.3bn five-year budget by issuing new financial instruments. Brunei will also study the feasibility of setting up a local stockmarket. The NDP assigns a particularly large role to the information, communications and technology (ICT) sector, allocating Br$526m (US$287m) to ICT development programmes. Despite the current global economic slowdown, the NDP predicts annual average GDP growth of 5-6% for the five- year period, a figure that seems overoptimistic.

Higher revenue is sought to Another of the primary aims of the Eighth NDP is to ensure a balanced rebuild reserves government budget and replenish national reserves that analysts estimate to have been depleted from a high of US$30bn to US$15bn by Prince Jefri Bolkiah’s alleged misappropriation of government funds during his 13 years in charge of the Brunei Investment Authority. To achieve this goal, the NDP calls for the government to consider cuts in state subsidies and civil servants’ perquisites, and for a concerted effort to increase the efficiency of the government bureaucracy. It also recommends that Brunei move toward implementing new taxes, including income taxes and taxes on businesses employing foreign workers. The plan recommends privatising some government functions to increase efficiency and tax revenue. Agencies first in line for privatisation include the Employees’ Provident Fund and the Telecommunications Department. The government is also considering the privatisation of the Electrical Services Department, the Postal Service and several areas of the Public Works Department. The NDP stresses, however, that these reserve-boosting measures will be implemented slowly, and may be scaled back if they are perceived to be hampering long-term development.

Local business criticises the Despite the government’s promise that the Eighth NDP will lead Brunei out of National Development Plan its current economic slump, local business people seem less than enthusiastic. Members of the Malay Chamber of Commerce, an organisation of small and medium-sized business owners, expressed concern that government programmes promised in the last NDP had yet to be implemented. Razali Johari, the president of the organisation, disagreed with plans to call upon Brunei’s private sector to fund a percentage of national development through investment in government-issued financial instruments. Mr Razali said that there was an increasing gap between the government’s expectations for the private sector and the reality of business slowdowns. He warned that the government’s recent attempts to stimulate the economy had had “very little success”. He suggested that Brunei should not hang its hopes for recovery on local industry but should instead work harder to attract foreign investment, calling on the government to review the legislative environment to make it

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more attractive to multinational corporations and to develop a transparent and open procedure for implementing economic policies.

The outspoken deputy In October 2001 the sultan fired the deputy finance minister, Selamat Munap, finance minister is sacked replacing him with a former subordinate of his. The sultan—who also serves as his own finance minister—offered no explanation for the move. Brunei’s news website, Brudirect, commented that “Selamat’s removal came as a shock to many. He was regarded as one of the brightest and most capable men in the top echelon of Brunei civil servants and ministers”. Selamat Munap was the leading advocate of Brunei’s International Financial Centre, and is considered an outspoken economic reformist, frequently stressing the need to diversify the economy and strengthen the private sector. His replacement, less than a month after the Eighth NDP—which re-emphasises the importance of the oil and gas sector—was published, seemed to indicate that the government is backtracking on ambitious plans announced in 2000 to find a new economic model for Brunei.

Unemployment continues The government announced during the third quarter of 2001 that 2.5% of to plague Brunei the total population of 340,000 were registered as jobseekers with the Labour Department. Virtually all of those registered as seeking work are secondary school leavers. The actual unemployment rate as a percentage of the labour force is widely believed to be much higher, with some analysts claiming that it could be as much as 10%. In September 2001 the sultan addressed the problem, putting much of the blame on the unemployed themselves. He said that the government had provided a number of job training and apprenticeship programmes; graduates should make themselves more “marketable” in the private sector and not depend upon the prospect of government jobs. In the past approximately 75% of Bruneians have held positions in a vast government bureaucracy, receiving not only higher average wages than private-sector workers but also a host of lucrative benefits. There is currently a government freeze on hiring new employees.

The Eighth NDP proposes a new tax on businesses hiring foreign workers, in a bid both to boost government revenue and to encourage companies to hire Bruneians. Foreign workers currently make up approximately 40% of the workforce, filling around 60,000 of the 145,000 jobs in Brunei. The NDP also states that Brunei will seek to limit the total number of foreign workers to no more than 30% of the workforce, and that it will encourage employers to assign middle- and upper-management positions to locals.

Brunei takes part in a new In September Brunei signed a multilateral agreement with Saudi Arabia, Islamic Money Market Bahrain, Malaysia and Indonesia to participate in the establishment of the first Islamic International Money Market. Brunei’s participation signalled its commitment to establishing itself as an Islamic financial centre. The sultanate’s hopes that it might be chosen as the site of the new institution’s South-east Asian headquarters were dashed when it was decided to locate it in Malaysia.

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001