COUNTRY REPORT Malaysia Brunei 4th quarter 1998 The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group. 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ISSN 0269-6703 Symbols for tables “n/a” means not available; “–” means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK 1 Contents 3 Summary Malaysia 5 Political structure 6 Economic structure 7 Outlook for 1999-2000 13 Review 13 The political scene 17 Economic policy and the economy 22 Banking and finance 27 Agriculture 28 Industry 30 Energy 31 Transport and communications 34 Employment, wages and prices 35 Foreign trade and payments Brunei 37 Political structure 37 Economic structure 39 Outlook for 1999-2000 40 Review 40 The political scene 44 The economy 47 Quarterly indicators and trade data List of tables 9 Malaysia: forecast summary 12 Malaysia: economic results and forecasts 19 Malaysia: private investment indicators, 1998 47 Malaysia: quarterly indicators of economic activity 47 Brunei: quarterly indicators of economic activity 48 Malaysia: trade with major trading partners 49 Brunei: foreign trade 49 Brunei: direction of trade List of figures 12 Malaysia: real GDP growth 12 Malaysia: Malaysian dollar real exchange rate 19 Malaysia: interest rates, 1998 EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 2 22 Malaysia: Non-performing loans, 1998 26 Malaysia: Equity prices, 1998 28 Malaysia: Industrial production, 1998 29 Malaysia: foreign investment in manufacturing 35 Malaysia: Trade balance EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 3 November 9th 1998 Summary 4th quarter 1998 Malaysia Outlook for 1999-2000: The government’s harsh treatment of the former deputy prime minister, Anwar Ibrahim, who was sacked, arrested and is now being tried, will remain a political lightning rod. Street demonstrations will continue. The prime minister, Mahathir Mohamad, will come under increasing domestic pressure to reform the government. Despite the turmoil, he will remain in office until the next election. The economy will contract by 6% this year, shrink by a further 2.9% in 1999, then barely grow by 0.7% in 2000. Investment and private consumption have collapsed this year, and will fall again in 1999, although by smaller amounts. Cheap credit and government pump-priming will be of limited help to the economy. Exports will expand slowly in 1999, then pick up in 2000. Pressure to remove currency and capital controls will build later in 1999, and the restrictions will be gone by the year-end. The current account will be solidly in surplus. The political scene: Dr Mahathir will push hard for a conviction of Mr Anwar, whom he has accused of corruption and sex crimes. Mr. Anwar has vigorously denied the charges. Dr Mahathir will remain firmly in control of the ruling party. In 1999 he will choose a new deputy prime minister, who may event- ually succeed him. Following Mr Anwar’s lead, groups demanding reform of the country’s autocratic government have emerged. Overseas criticism of Dr Mahathir is building. Relations with Singapore have soured, but attempts are being made to repair them. Economic policy and the economy: Dr Mahathir has rejected IMF-style reforms in favour of sweeping capital and currency controls. The ringgit has been fixed at M$3.8:US$1. The economy contracted by 6.8% in the second quarter, following a decline of 2.8% in the first quarter. The government has lowered interest rates several times and is pursuing an easy money policy. Finance officials believe cheap credit will provide a basis for recovery. Concerned foreign investors are holding back. Malaysia’s credit rating has been reduced to junk status. The government will run a large budget deficit in a bid to revive the economy. Banking and finance: Banks are being pressured to lend, and financial sector regulations have been relaxed. The ratio of non-performing loans is rising. Reserve requirements have been lowered. Two government agencies have been set up, one to recapitalise troubled banks, the other to rehabilitate bad debts. The central bank has a new governor. The stockmarket hit a ten-year low in August, but has rebounded. Singapore’s over-the-counter market, which specialised in Malaysian shares, closed after capital controls were imposed. Agriculture: Farm output will fall by 5% in 1998, in part because of drought. Palm oil production has fallen, but export earnings will rise because contracts are dollar-denominated. Malaysia will withdraw from the rubber cartel. Drought has cut cocoa production in Sabah. Pepper growers in Sarawak are prospering. EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 4 Industry: Manufacturing output will fall this year because of declining de- mand, sharper price competition and the higher cost of imports. The output of the electronics sector, the main source of export earnings, shrank year on year through July. Auto sales have dropped dramatically. The government is offering new incentives for foreign investment. The economic slump has slowed the government’s plan to shift from labour-intensive to high-technology manufacturing. Energy: The state-controlled power utility, Tenaga, is suffering as revenue shrinks and costs rise. The firm has put new power projects on hold. Equity in its electricity production subsidiaries will be sold to foreign buyers. Tenaga has renegotiated its purchase contracts with independent suppliers. Transport and communications: The government will revive postponed road projects. Work on an important rail station has stopped. Renong, a polit- ically connected infrastructure conglomerate, has defaulted on its loans. The Malaysian national airline, MAS, continues to struggle. Telekom Malaysia is preparing for “equal access” by competitors. British Telecom has bought a firm with a strong mobile phone business. Employment, wages and prices: Unemployment remains low as displaced workers find new jobs. Wage pressures have abated as the economy has slowed. Consumer prices are estimated to rise by 5% this year. Foreign trade and payments: Merchandise exports, in ringgit terms, rose by 38.6% between January and August, year on year, and imports rose by 12.5%. Both, however, declined in dollar terms. The current account will move strongly into surplus this year. Traders welcomed the fixed exchange rate, but decried new restrictions from the central bank. Brunei Outlook for 1999-2000: The government’s competence is being questioned. Brunei will continue to suffer from the slump in the world price of oil, which is expected to fall by 31% year on year in 1998. The price is forecast to decline by a further 22% in 2000. Bruneian officials are estimating economic growth of 2.6% this year, down from 4% in 1997. Increased infrastructure spending will not provide much of a lift for the economy. Review: Prince Jefri, the brother of the sultan, has returned to Brunei amid allegations that he misused funds while head of the Brunei Investment Agency. The government has been embarrassed by Prince Jefri’s hedonistic lifestyle and by the collapse of the Amedeo group, a large and important conglomerate headed by the prince. The sultan has created a task force to investigate problems at the investment agency and is encouraging more accountability by govern- ment officials. Religious leaders are strongly supporting the sultan, further evi- dence of a shift towards religious conservatism. House and commercial rents have fallen. The government is resettling squatters. The peg between the Brunei and Singapore currencies will remain.