COUNTRY REPORT

Malaysia

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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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

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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

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November 9th 1998 Summary

4th quarter 1998

Malaysia Outlook for 1999-2000: The government’s harsh treatment of the former deputy prime minister, , who was sacked, arrested and is now being tried, will remain a political lightning rod. Street demonstrations will continue. The prime minister, , 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 . Pepper growers in are prospering.

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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. New car sales have fallen dramatically.

Editor: Leo Abruzzese All queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 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 (Dewan Negara) has 68 members, 26 of whom are elected from the state legislatures and 42 appointed by the king. The House of Representatives () has 194 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 which deals with matters not reserved for the federal parliament

National elections April 24th-25th 1995; next election due by April 2000

National government The , the governing coalition, the main component of which is the United Malays National Organisation (UMNO) Baru, won 164 of the 194 seats in the Dewan Rakyat in the 1995 general election. The Barisan has the two-thirds majority required to pass constitutional amendments. A new cabinet was appointed in May 1995

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 Sarawak National Party (SNAP) Opposition—Parti Islam Sa-Malaysia (PAS), the (DAP) and Parti Bersatu Sabah (PBS)

Prime minister, minister of finance & minister of home affairs Dr Mahathir Mohamad

Key ministers Agriculture Daud Defence Education Najib Tun Razak Energy, telecommunications & posts Foreign affairs Housing & local government Human resources International trade & industry Primary industries Public works Transport Youth & sports

Central bank governor Ali Abul Hassan Suleiman

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Economic structure

Latest available figures

Economic indicators 1993 1994 1995 1996 1997 GDP at market prices (M$ bn) 165.2 190.3 218.7 249.5 276.2 GDP (US$ bn) 64.2 72.5 87.3 99.2 97.9 Real GDP growth (%) 8.3 9.2 9.5 8.6 7.8 Consumer price inflation (av; %) 3.6 3.7 3.4 3.5 2.7 Population (m) 19.6 20.1 20.7 21.2 21.7 Merchandise exports fob (US$ m) 46,238 56,897 71,767 76,881 77,881 Merchandise imports fob (US$ m) 43,201 55,320 71,787 73,055 74,005 Current-account balance (US$ m) –2,990 –4,521 –8,470 –4,596 –4,791 Reserves excl gold (US$ m) 27,249 25,423 23,774 27,009 20,788 Total external debt (US$ bn) 26.1 29.3 34.3 39.7 42.7 Debt-service ratio, paid (%) 8.4 9.0 7.0 8.1 5.9 Exchange rate (av; M$:US$) 2.57 2.62 2.50 2.52 2.81

November 9th 1998 M$3.80:US$1

Origins of gross domestic product 1997 % of total Components of gross domestic product 1997 % of total Agriculture 11.5 Private consumption 44.4 Mining 6.5 Public consumption 13.3 Manufacturing 34.4 Gross fixed capital formation 47.1 Construction 4.6 Stockbuilding 0.7 Electricity, gas & water supply 2.3 Exports of goods & services 107.6 Services 40.7 Imports of goods & services 113.0 GDP at factor cost incl othersa 100.0 GDP at market prices 100.0

Principal exports 1997b US$ bn Principal imports 1997b US$ bn Electronics & electrical machinery 42.4 Manufacturing inputs 28.3 Palm oil 3.8 Machinery 8.5 Petroleum & LNG 2.9 Transport equipment 5.0 Chemicals & chemical products 2.9 Metal products 4.9 Textiles, clothing & footwear 2.7 Food 2.2 Wood products 2.3 Consumer durables 2.2 Total incl others 78.9 Total incl others 79.0

Main destinations of exports 1997 % of total Main origins of imports 1997 % of total Singapore 20.0 Japan 21.9 US 18.6 US 16.8 Japan 12.6 Singapore 13.1 Hong Kong 5.5 South Korea 5.1 Taiwan 4.4 Taiwan 4.8 Netherlands 3.9 Germany 4.4 Thailand 3.6 Thailand 3.9 a GDP less bank charges. b Customs basis.

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Outlook for 1999-2000

Malaysians are The turmoil unleashed by the prime minister, Mahathir Mohamad’s dismissal of questioning their political Anwar Ibrahim, his long-time deputy and heir-apparent, on September 2nd leadership— presages an eventful, but uncertain, forecast period. The sacking and the sub- sequent detention of Mr Anwar have transformed their largely private feud over Malaysia’s political and economic evolution into a far more open and vigorous national debate, exemplified by large crowds on the streets of the capital, , clamouring for reformasi (reforms). The prime minister’s critics say his dramatic show of assertiveness was a desperate, ultimately futile attempt at self-preservation by a vindictive, old-style autocrat. But many Malaysians cher- ish the prosperity and stability Dr Mahathir’s forceful leadership has brought, and believe he should remain at the helm. Clearly, the country has reached a major cross-roads.

—which will prompt a Malaysia’s arrival at this cross-roads is in no small measure due to the onset of vigorous defence by Asia’s economic crisis, which exposed the fundamental incompatibility of the Dr Mahathir— two men’s philosophies. Blaming the crisis on foreign speculators, Dr Mahathir insisted his strategy of nurturing a critical mass of local companies with cheap credit and government contracts, and directing the wealth thus generated across the economy, remained valid. Mr Anwar disagreed. As finance minister since 1991, he had seen Malaysia’s boom spawn a rash of big, but increasingly in- debted and inefficient firms, and an overheating economy. By sacking Mr Anwar in September, then arresting and trying him on questionable charges of sexual misconduct and corruption, Dr Mahathir has dramatically ended that debate, at least among Malaysia’s leaders. But it will continue among the Malaysian people and internationally, where Dr Mahathir will be subject to increasing criticism. Nonetheless, he is likely to remain defiant, and will staunchly defend his new economic programme and his strict style of government. As a result, easy credit, liberal government spending and selected corporate bail-outs will be the hall- mark of Malaysia’s economy for the next 12 months.

—against persistent The continuing street demonstrations—which briefly turned violent in late protesters— October—derive in part from the high-handed manner in which Mr Anwar was removed, and the apparent presumption that Malaysians should accept un- proved accusations against him as sufficient justification. Many found it diffi- cult to believe that a man generally regarded as a staunch nationalist, a devout Muslim, and a devoted husband and father could somehow, and suddenly, mutate into a traitorous and promiscuous bisexual. In their view, Mr Anwar’s real “crime” was that he had dared abandon subservience to Dr Mahathir. The protests seem certain to continue—and may, on occasion, again turn violent— now that the reformasi movement has deepened and other reformist groups have emerged.

—who will stand firmly Now that Mr Anwar’s trial on charges of corruption and sodomy has begun (it behind an embattled started on November 2nd), the authorities clearly hope that daily disclosures of Mr Anwar his allegedly unsavoury conduct will erode his credibility and blunt the anti- government protests. The lengthy trial—the attorney-general has said it will continue until at least June 1999—and the likelihood of further charges being

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brought would serve a similar purpose. Yet, the trial is just as likely to show that the police and senior government officials blindly follow Dr Mahathir’s every order, further exposing the autocratic nature of his rule. This was apparent during the opening days of the trial when the director of the police agency’s special branch admitted in court that he would lie if asked by the government to do so. Irrespective of the merits of the case against him, Mr Anwar is widely expected to be convicted and sentenced—to as much as 20 years in jail. While such a verdict would reinvigorate his supporters, many in the government believe—or at least hope—that all but the most die-hard will by then have lost their appetite for confrontation.

The demonstrators will be In the meantime, assuming they refuse to be cowed, the street protesters are challenged— likely to be increasingly portrayed in the government-controlled media as mali- cious troublemakers. There have been reports in the local press of stone-throw- ing and acts of vandalism, and of concerned residents groups demanding that demonstrators stay away from their localities. Such sentiments may also be invoked to justify a broad crackdown on dissenters, including academics, intel- lectuals, opposition politicians and others deemed to be undermining stability.

—but will win concessions Yet it also seems inevitable that the government will give some ground. Despite from the government— his autocratic tendencies, Dr Mahathir, unlike the former president of Indonesia, Suharto, is a popularly elected leader who has always shown himself responsive to the concerns of his constituents, albeit sometimes tardily. He is also an astute politician. As such, he is likely to seek to assuage his critics by making certain concessions—for example a cabinet reshuffle that would bring younger, more dynamic and acceptable faces into the government. The prime minister may even go some way towards meeting demands for a more meaningful democratic order, particularly if the pressure on him continues to build, while seeking to ensure that such gestures are not construed as those of a lame-duck leader.

—although Dr Mahathir At this stage, however, it seems unlikely that Dr Mahathir will be forced from will not be toppled office. Malaysians have been hurt by the shrinking economy, but unlike the people of Indonesia, who ousted Suharto, they have not suffered an economic shock so severe they are willing to risk their lives in anti-government riots. Malaysians have deferred many consumer purchases because of the economic contraction—auto sales, for example, are down by more than 60% thus far for the year—but they are not starving, as some Indonesians were in the spring.

Plans for an early election In late August, shortly before dismissing Mr Anwar, Dr Mahathir said he was have been shelved— considering calling an early general election. The United Malays National Organisation (UMNO) and the other 13 parties making up the ruling Barisan Nasional (BN) were told to prepare for polls “at any time”. The thinking behind this advice was that, with the adverse effects of the economic crisis certain to become more severe, the alliance could cut its likely losses by going to the country sooner rather than later. Since then, however, Dr Mahathir appears to have changed his mind. The upsurge in anti-government sentiment triggered by Mr Anwar’s removal and the emergence of the various reformist lobbies would doubtless result in a weakening of the BN’s mandate—it controls all but 24 of 194 seats in the Dewan Rakyat (parliament)—if an early ballot were held.

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Moreover, the government believes that the exchange controls introduced on September 1st, combined with various other stimulus measures undertaken in recent months, will provoke some degree of economic recovery before the next election, due by April 2000, is held. Nonetheless, it seems likely that whenever it is held, the existing opposition parties, including Parti Islam Sa-Malaysia and the Democratic Action Party, will fare rather better than they did in 1995, and perhaps even deprive the BN of its two-thirds majority.

—as UMNO insiders battle Of more immediate interest, and perhaps more significance, are UMNO’s next for power triennial leadership elections, which are due in 1999 and may be held as early as February. Once again, Dr Mahathir is likely to be returned unopposed as party president, a post which, by convention, entitles its holder to the premiership. The real contest will be for the post of deputy president, held by Mr Anwar until his ouster. The three main potential contenders are two of UMNO’s vice-presidents, the foreign minister, Abdullah Badawi, 58, and the education minister, , 44, and a former dissident, Razaleigh Hamzah, 61. Mr Razaleigh, having challenged Dr Mahathir for the party presidency in 1987 and lost by a narrow margin, set up a rival party, but returned to the UMNO fold in late 1996. In an apparent bid to rule him out of contention, Dr Mahathir has suggested that the next deputy president should be either one of the two current vice-presidents. But Dr Mahathir has deliberately not designated a deputy now, a shrewd move that will guarantee him the full support of all of the possible candidates. An intense, behind-the-scene contest is in prospect for the number two job.

Malaysia: forecast summary (US$ m unless otherwise indicated) 1997a 1998b 1999c 2000c Real GDP growth (%) 7.8 –6.0 –2.9 0.7 Consumer price inflation (av; %) 2.7 5.0 5.2 5.5 Merchandise exports fob 77,881 72,437 71,651 77,203 Merchandise imports fob74,005 59,809 60,474 66,089 Current-account balance –4,791 3,978 2,227 1,089 Exchange rate (av; M$:US$) 2.81 3.92 3.95 4.40

a Actual. b EIU estimates. c EIU forecasts.

Malaysia’s economic Malaysia in 1998 will experience its worst economic performance in a genera- slump will continue— tion. Dr Mahathir believes the economy will contract by 4.8% this year and grow by 1% next year, but those estimates are almost certainly too optimistic. The EIU estimates a contraction of 6% this year as private consumption falls by 10% and investment by 29%. The contraction in private consumption is likely to continue in 1999, although the decline, at 3.4%, will not be as great, as increased public spending in the important construction sector helps place a floor under the economy. However, corporate restructurings, rising unemploy- ment—forecast to reach 5% by end-1998—and a general reluctance by most consumers to make large purchases will contribute to the subdued demand. Although sales of some big-ticket items, such as cars, may rise slightly month on month in the next year—in part because of the flood of new credit—sales will remain well below comparable 1997 levels.

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—as foreign investors Foreign investors, long a mainstay of Malaysia’s economy, will vary in their reconsider their positions reaction to the country’s economic slump. More established investors with deep roots in Malaysia are certain to remain: despite the regional economic slump, Malaysia is a major producer of electronics with a strong infrastructure, and investors will not soon abandon that. New investors, however, are likely to be more reluctant because of the combined effects of the capital controls, the still-contracting economy and the ongoing protests over political reforms. Ap- proved foreign investment in manufacturing is not likely to exceed M$9bn (US$2.37bn) in 1998, based on Bank Negara Malaysia (central bank) figures; this compares with annual averages of M$13.5bn in the 1990s. Investment from all sources is forecast to contract by another 4.5% in 1999 as the world economy barely grows and Malaysia’s export prospects remain depressed. Investment is forecast to rise by 2% in 2000 on the back of a generally improv- ing economy and the abolition of capital and currency controls.

Capital controls are Dr Mahathir, on October 23rd, said the economy is responding well to capital permitting lower interest and currency controls and to the mid-year relaxation of monetary and fiscal rates— policy. Government officials insist that a progressive reduction in interest rates will facilitate borrowing for productive activities, such as manufacturing, and raise levels of consumption. Indeed, the introduction of capital controls on September 1st, and the fixing of the exchange rate at M$3.8:US$1 the following day, has allowed interest rates to be lowered without undermining the value of the ringgit. Bank Negara’s three-month intervention rate, the benchmark for commercial bank lending, has fallen from 11% to 7.5%, the level it stood at before the regional financial crisis erupted in mid-1997. Borrowing costs should continue to decline over the next six months, to just below the rate of inflation.

—as liquidity continues to The level of liquidity in the banking system has also increased significantly, increase— thanks partly to the fact that the sweeping exchange restrictions were designed to render ringgit remaining offshore after October 1st effectively worthless. A steady reduction in the Statutory Reserve Requirement—the proportion of their funds financial institutions are obliged to keep interest-free at the central bank—to 4% as of mid-September from 13.5% earlier in the year has also helped in this respect.

—although banks will still The availability of more funds and an easier monetary policy, however, does be reluctant to lend— not necessarily mean banks will be any more willing to lend than they were before the government abandoned financial conservatism last June. Indeed, total loans outstanding in the banking system actually fell 0.3% in September despite heavy government pressure to lend. Since consumers and businesses are concerned about their ability to repay loans, lending is not likely to in- crease much over the next several months. Moreover, with Bank Negara squeezing banks’ margins as well as interest rates, thus undermining their ability to charge commissions commensurate with perceived levels of risk, banks will remain reluctant to extend credit to all but their most trusted cus- tomers—notwithstanding a recent notice to the effect that any institution failing to increase lending by 8% this year could face sanctions.

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—because of continuing But the main deterrent to lending is the growing proportion of non-performing bad loans loans (NPLs) across the industry, which, on a three-month arrears basis, is ex- pected to more than double next year to over 30%. Official agencies have been established to buy up and rehabilitate bad debts and help underwrite the cost of recapitalising the sector, but the funds at their disposal are inadequate, in part because of limits on obtaining foreign funding. This was graphically illustrated by the end-September reversion to a six-month arrears standard for NPLs.

Increased government Higher public spending is giving a fillip to some sectors, notably the construc- spending may help some tion industry. However, the increased outlays this year have not fully compen- sectors— sated for cuts announced earlier. Moreover, the 1999 budget, although projecting an increase in the fiscal deficit to M$16.1bn (6.1% of GNP), from an anticipated M$9.6bn this year, indicates that total spending in 1999 will not be any higher than it is this year.

—but exports will remain The immediate outlook for the country’s export sector—the main driver of its depressed— economy—also remains bleak. All of Malaysia’s major export markets—Singapore, Japan, the US and Hong Kong—will either be in recession in 1999 or will experience declining growth. Foreign sales, in dollar terms, fell by 11.2% year on year in January-July. As the international market for electronic goods— which account for more than half of Malaysia’s foreign sales—is likely to re- main flat in 1999, a further contraction in exports in dollar terms seems inevitable. This should be followed by a modest revival in 2000, which will in turn fuel a resumption in import growth.

—and the economy will Our forecast of a further 2.9% contraction in GDP in 1999 assumes that the shrink again in 1999— impact on the economy of an easier fiscal and monetary policy will be limited. It is also based on our expectation that despite lower interest rates, both fixed investment and private consumption will fall further, hostages to the generally bleak economic environment. Investment and private consumption should begin to recover in 2000, pulling up GDP slightly. Year-end inflation is slated to reach 6.5% in 1999, before easing back to 5% in 2000. The economy also faces medium- and long-term risks from Dr Mahathir’s lend and spend policies. The loosening of bank lending standards, especially for property and share purchases, means that even if growth does occur, it will not be of high quality—that is, it will be more of a speculative, “asset bubble” expansion than for investments that can produce solid returns. This will create more problem loans at the nation’s financial institutions. Government borrowing locally to finance its budget deficit will also pose risks to growth if public demand begins to crowd out private borrowing.

—as the pressure to lift The negative implications of the currency curbs seem to outweigh the benefits. currency controls builds The fixed exchange rate—the ringgit has been set at M$3.8:US$1—theoretically eliminates the downside risk on the ringgit for current-account transactions. But with the ongoing fiscal pump-priming bound to provoke an inflationary response, the pegged ringgit risks becoming overvalued, eroding the country’s competitiveness and undermining exports, and encouraging disinvestment. Convertibility restrictions will encourage the retention of hard currency abroad, for example, via overinvoicing on imports, and the emergence of a

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distortionary parallel money market. Malaysia will also suffer from lack of access to international capital—credit agencies have reduced its rating to junk status because of the currency curbs—and from reduced lending from sceptical multilateral agencies. For these reasons, the controls will be difficult to sustain and pressure to lift them will intensify in the second half of next year. The controls are likely to disappear before the end of 1999.

The exchange rate will The exchange rate will remain at its fixed rate of M$3.8:US$1 for most of 1999, begin to slip in late 1999— but the ringgit will weaken after it is unpegged from the US dollar toward the end of the year. The annual average exchange rate is forecast to be M$3.95:US$1 in 1999, then slip further to M$4.4:US$1 in 2000 as the currency, again freely traded, suffers from Malaysia’s slower than expected recovery. But the weaker currency will help exports to recover toward the end of the forecast period.

Malaysia: economic results and forecasts (% change, year on year) 1997a 1998b 1999c 2000c Private consumption 4.7 –10.0 –3.4 1.5 Public consumption 4.8 3.8 3.5 2.0 Gross fixed investment 8.5 –29.0 –4.5 2.0 GDP 7.8 –6.0 –2.9 0.7 Exports of goods & services 9.8 2.0 2.0 5.5 Imports of goods & services 10.1 –9.5 2.8 7.0

a Actual. b EIU estimates. c EIU forecasts.

—but the current account Merchandise exports rose by 38.6% in ringgit terms year on year between will be solidly in surplus January and August of this year, while imports increased by a more modest 12.5%. But the weaker ringgit has meant trade is declining in dollar terms: exports on a current-account basis are estimated to contract by 7% in 1998. Imports, in the face of recession, falling private consumption and the high cost of imported inputs, are estimated to decline by a sharp 19.2% this year in dollar terms. The drop in imports will allow Malaysia to run a substantial US$12bn trade surplus in 1998, up from US$3.9bn the year before. This will help push Malaysia toward a current-account surplus—estimated at US$4bn this year—its first since 1989. But the surplus will decline gradually during the remainder of

Malaysia: gross domestic product Malaysia: Malaysian dollar real % change, year on year exchange rates (c) 1990=100 10 Malaysia 120 8 Asia excl Japan M$:US$ 6 110 M$:DM 4 100 2

0 90

-2 80 -4 M$:¥ -6 70 1996 97 98(a) 99(b) 2000(b)

(a) EIU estimates. (b) EIU forecasts. (c) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics. 1990 91 92 93 94 95 9697 97 98(a) 98 99(b) 99 20002000(b)

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the forecast period—to just over US$1bn in 2000—as imports begin to grow more rapidly and the services deficit starts to widen again.

Review

The political scene

Mr Anwar is expelled On September 2nd the prime minister, Mahathir Mohamad, sacked his deputy from the cabinet— and long-time heir-apparent, Anwar Ibrahim, dramatically exposing their deep but previously unacknowledged differences over economic and other policies, and triggering a major political crisis. The prime minister’s office gave no reason for the dismissal, which came a day after the imposition of wide-ranging cur- rency controls and within hours of the fixing of the exchange rate—moves opposed by Mr Anwar, a free marketeer and the finance minister since 1991. Mr Anwar was removed after rejecting an ultimatum to resign or be fired and face criminal charges. The previous evening Dr Mahathir had summoned senior members of the United Malays National Organisation (UMNO), the dominant party in the ruling Barisan Nasional (BN) coalition, to hear “evidence” of Mr Anwar’s supposed involvement in a number of adulterous and homo- sexual affairs. Homosexuality is a crime under Malaysia’s penal code. Late on September 2nd the country’s inspector-general of police, Rahim Noor, said Mr Anwar was under investigation in connection with allegations contained in a notorious book, 50 reasons why Anwar cannot become PM, published in June.

—prompting Lim Kit Siang, the leader of the opposition Democratic Action Party (DAP), said denunciations of the prime minister owed Malaysians an “immediate, convincing and over- Dr Mahathir powering” explanation. Human rights groups and non-governmental organis- ations (NGOs) expressed similar sentiments. One group, Suaram, described Mr Anwar’s ousting as a “serious blow to democracy” and illustrated the “autocratic nature” of Dr Mahathir, whom it accused of having “completely disregarded fairness, due process and political accountability to the public”.

As friends and allies are That Mr Anwar had fallen from favour had been clear since the UMNO general weeded out— assembly in June, when Dr Mahathir roundly criticised members of the party who had been making an issue of high-level “corruption, cronyism and nepo- tism”—evidence, he seemed to have concluded, of a gathering campaign initi- ated by his deputy to unseat him. Three days after the assembly, he rendered Mr Anwar effectively redundant as finance minister by appointing , a longtime confidant, as special functions minister in charge of the economy. On July 31st police detained Nallakaruppan Solaimali, a businessman and friend of Mr Anwar, under the Internal Security Act (ISA), after discovering 125 unlicensed revolver cartridges at his home while investigating claims made in 50 reasons. The book alleged that Mr Nallakaruppan procured women for Mr Anwar. The ISA authorises indefinite detention without trial, while illegal possession of ammunition carries a mandatory death sentence on conviction.

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—Mr Anwar makes a vain Rumours circulating for weeks that Mr Anwar would resign intensified. In pub- last-ditch pledge of loyalty lic, the deputy premier continued to dismiss them as unfounded. While some of his own party supporters urged him to quit and prepare to challenge Dr Mahathir for UMNO’s presidency, Mr Anwar had apparently resolved to stay put and seek to regain the prime minister’s confidence. During an UMNO function on August 11th, Mr Anwar reiterated earlier pledges of loyalty to Dr Mahathir and unequivocally ruled out a bid for the party presidency in 1999. But it was clearly too late.

Court documents Mr Anwar was dismissed from his post on September 2nd. Affidavits filed in implicate Mr Anwar in a court on September 3rd to support Mr Nallakaruppan’s continued detention— series of crimes— he had been taken into custody earlier—portrayed Mr Anwar as a promiscuous bisexual who had perverted the course of justice and leaked state secrets. They were reprinted in full in local newspapers. Many Malaysians were appalled by the contents of the affidavits. Mr Anwar, married with six children, had been widely regarded as a devoted family man and a devout Muslim. Others were outraged by the prominence given to them by the media, seeing it as part of a sinister campaign to destroy Mr Anwar politically.

—which he strenuously During a press conference on September 3rd, Mr Anwar, with his wife Wan denies, and launches a Azizah Ismail at his side, vigorously denied the allegations of sexual impro- reform movement— priety, corruption and treason, maintaining he was the victim of a conspiracy mounted by UMNO luminaries who saw him as a threat to Dr Mahathir. He also accused the prime minister of having monopolised power for too long, and said Malaysians were “sick and tired” of government repression and cor- ruption. He vowed to fight until justice was served, and called for reformasi (reforms), the slogan used by protesters in Indonesia who had forced the resignation of that country’s leader, Suharto, in May. Most senior UMNO fig- ures closed ranks behind Dr Mahathir. The reformasi movement was doomed, they said, because Mr Anwar was not a man of integrity.

—that gains growing Mr Anwar remained defiant. Since his ouster, large crowds of supporters had support been visiting him, first at the official residence of the deputy prime minister, and then at his more modest private home. They represented a broad cross- section of Malaysian society—ethnic Malays, Chinese and Indians, secularists and Muslim activists, students, professionals and farmers. They also included opposition leaders, such as the DAP’s Mr Lim and Fadzil Mohamad Noor of Parti Islam Sa-Malaysia (PAS), as well as disgruntled UMNO members, notably Ahmad Zahid Hamidi, chief of the party’s powerful youth wing. Mr Anwar made daily speeches in which he denounced Dr Mahathir and the govern- ment, and called for far-reaching political, social and economic reforms.

As critics denounce the On September 7th Dr Mahathir named himself first finance minister and the prime minister’s entrepreneur development minister, , as second finance “one-man government”— minister. The same day the Ministry of Finance issued a statement saying that Ali Abul Hassan Suleiman, a career civil servant heading the Economic Planning Unit, had been appointed governor of Bank Negara, the central bank. The previous governor, Ahmad Don, resigned in late August after failing to prevent

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an easing of monetary policy. Mr Lim said Malaysia was heading towards “one- man government”.

—Mr Anwar takes his case That Mr Anwar remained free to speak out—he repeatedly said he expected to be to the countryside— arrested under the ISA or the Official Secrets Act—was due in no small measure to the fact that Malaysia was preparing to host the Commonwealth Games, which took place on September 11th-21st. One of the biggest occasions in inter- national sport, the games were to have been a crowning event in Dr Mahathir’s political career. But the economic and political tensions changed all that. Yet the presence of thousands of visitors seemed to preclude the early detention of Mr Anwar. On September 12th he took his campaign to the Malay heartland. Fiery speeches over the next two days across five states attracted huge crowds, despite attempts by the authorities to discourage them. The ISA prohibits gath- erings of more than five people. But the pressure on Mr Anwar continued to grow. On September 19th his adopted brother, Sukma Darmawan, and a some- time speechwriter, Munawar Anees, pleaded guilty in court to having allowed Mr Anwar to sodomise them and were sentenced to six months in jail. Friends said their confessions had been extracted under duress.

—and on to the streets of The following day tens of thousands thronged the streets of central Kuala Kuala Lumpur— Lumpur to hear Mr Anwar reiterate his call for Dr Mahathir to step down. Nearby, Queen Elisabeth II, who had earlier arrived from the UK for a state visit, was attending a church service. Later in the day some of the crowd moved on to UMNO’s headquarters, where acts of vandalism were reported, while others attempted to reach Sri Perdana, the prime minister’s official residence. They were repulsed by riot police using tear-gas and water cannon. Dozens were arrested.

—before finally being By then, Dr Mahathir was ready to act. That evening masked policemen armed arrested with sub-machine guns burst into Mr Anwar’s home and detained him under the ISA for organising illegal assemblies and inciting riots. Other prominent supporters, including Mr Zahid, were also held. There were further clashes and arrests the next day when several thousand Anwar supporters gathered at a city centre courthouse where he was expected to be formally charged. No hearing took place. On September 22nd the police announced a nation-wide ban on all reformasi meetings.

As Mr Anwar’s wife takes With Mr Anwar and many of his top lieutenants in detention, Wan Azizah said nominal charge of the she would comply with her husband’s request and assume the leadership of the movement— movement. Although widely respected, many felt she would not be up to the task. Meanwhile, Mr Anwar, in a videotape interview made just prior to his arrest and broadcast by CNBC Asia on September 24th, again described the allegations against him as “vicious lies”, claiming he had been dismissed be- cause of fears that he would not protect the interests of Dr Mahathir’s family once the prime minister had left office. He also said the prime minister allowed senior UMNO members to siphon off party funds. Dr Mahathir, in turn, dis- missed the charges as “lies”.

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—two more pro-reform He also said Mr Anwar, whose whereabouts were unknown, would not be lobbies emerge brought to trial until his supporters stopped demonstrating. But the protests continued, and the reform movement gathered momentum. On September 27th two new umbrella groupings were formed to press for political change. One of them, Gagasan Demokratik Rakyat (Coalition for People’s Democracy), com- prised four opposition parties—DAP, PAS, the Malaysian People’s Party (PRM) and the National Socialist Party—as well as several human rights groups and NGOs. Its chief goal was the achievement of meaningful democracy. The other lobby, Majlis Gerakan Keadilan Rakyat Malaysia (Malaysian People’s Council for Justice), which incorporated many of the same parties and organisations, sought to abolish the ISA.

A battered Mr Anwar After nine days in detention, Mr Anwar was brought to court in Kuala Lumpur pleads not guilty to the on September 29th and charged with five counts of corruption—essentially charges— that he sought to interfere with police investigations—and four of sodomy. He pleaded not guilty to each of them. Corruption charges carry a maximum prison sentence of 20 years upon conviction, as do those of sodomy. With a black eye and bruised arms, Mr Anwar’s appearance shocked many who saw him. He lodged a formal complaint, saying the injuries were sustained during a beating by police. He said he had been handcuffed and blindfolded, then punched around the face and body. A police spokesman said Mr Anwar’s claims would be investigated. Dr Mahathir speculated the injuries might have been self-inflicted, a remark that fuelled growing worldwide outrage. It in- creased speculation that Mr Anwar would not receive a fair trial, set to start on November 2nd. In late September and early October a number of Anwar sup- porters who had been detained under the ISA were released. Mr Anwar was denied bail on October 5th and was transferred from Kuala Lumpur’s central police station to a prison on the outskirts of the capital. Although still in custody, Mr Anwar is no longer being held under the ISA.

—as Dr Mahathir decides A meeting of UMNO’s supreme council on October 6th decided to expel ten against filling his old perceived supporters of Mr Anwar from the party, and to require several others post— to explain why they should not suffer the same fate. Afterwards, Dr Mahathir said he would keep the post of deputy prime minister vacant until UMNO members chose a deputy president of the party at next year’s elections. His failure to name a replacement added to the political uncertainty. The following day he ruled out an early general election—the next poll must be held by April 2000—maintaining that most Malaysians still supported the government, which he said wanted to concentrate its energies on economic matters.

—and criticism from Influential admirers of Mr Anwar abroad, including the UN secretary-general, overseas builds Kofi Annan, expressed concern at news of his apparent ill-treatment. The US administration too was critical, saying it was horrifying that “one of the most respected of Asia’s new generation of leaders” appeared to have been beaten in detention. US officials said the scheduled visit to Kuala Lumpur by the pres- ident, Bill Clinton, for the November 17th-18th summit of leaders of the Asia Pacific Economic Co-operation (APEC) forum would be an unofficial one. Other countries, including the UK and Australia, also voiced concern over the treat- ment of Mr Anwar. More troubling for Mr Mahathir were the hostile reactions

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from key fellow members of the Association of South-East Asian Nations (ASEAN), including the president of the Philippines, Joseph Estrada, and his Indonesian counterpart, BJ Habibie, both personal friends of the deposed dep- uty premier.

Relations with Singapore The reaction of the Singapore government was rather more muted, reflecting its hit a new low— concerns about Mr Anwar’s religious convictions, and about the dangers of political instability in Malaysia. Nevertheless, relations with the island republic have plumbed new depths in recent months with the emergence of a host of new—and the eruption of old—disputes. There were allegations that Singapore was trying to undermine Malaysia’s already weakened economy by man- oeuvring to ensure a disproportionate share of Malaysia’s seaborne trade was routed through Singapore, to the detriment of local ports; allowing its banks to offer significantly higher interest rates on short-term ringgit deposits than local financial institutions; and permitting the short-selling of shares in listed Malaysian companies on its over-the-counter market, which was exerting downward pres- sure on their prices. The imposition of exchange controls resolved the share price and interest problems to Kuala Lumpur’s satisfaction, but caused major headaches for Singapore’s financial authorities.

—as old disputes flare up A long-simmering row over the location of a Malaysian customs and immigra- tion post monitoring rail traffic between the two countries erupted with a vengeance in August. Singapore had moved its counterpart facility from Tanjong Pagar station in downtown Singapore to a new station nearer the common border, and Kuala Lumpur refused to follow suit. Each side accused the other of reneging on agreements. Dr Mahathir declared he was considering the suspension of new bilateral dealings, and some UMNO members called for the cut-off of water supplies on which Singapore is heavily dependent.

The publication on September 16th of the memoirs of Singapore’s senior min- ister, Lee Kuan Yew, further aggravated tensions, not least because they con- tained unflattering reflections on the acrimonious 1963-65 merger of the countries and on some of Malaysia’s leaders. The following day Kuala Lumpur announced that Singaporean military aircraft could no longer enter Malaysian airspace without permission. Such flights had previously enjoyed a special waiver under the Five Power Defence Agreement (FPDA) involving the two countries, the UK, Australia and New Zealand. Malaysia said it would not be participating in FPDA naval and air force exercises planned for October, forcing the cancellation of the manoeuvres—and perhaps dooming the pact.

In early November Dr Mahathir showed some interest in repairing the strained relations with Singapore, possibly opening the way for a reduction in tensions.

Economic policy and the economy

The imposition of On September 1st Bank Negara, Malaysia’s central bank, announced sweeping wide-ranging exchange currency and capital controls to curb speculation in the ringgit and the stock- controls— market, and to encourage a further easing of monetary policy to jump-start the stalled economy. Underpinned the following day by a fixing of the exchange rate at M$3.8:US$1 (compared with its M$4.1-4.2:US$1 range over the preceding

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weeks), the controls abruptly reversed the liberal, open-market regime that had fuelled years of rapid growth. The new regulations required the repatriation by October 1st of all ringgit held abroad; an end to offshore trading in ringgit instruments, and to domestic credit facilities for overseas banks and stock- brokers; the retention of the proceeds of the sale of Malaysian securities in the country for one year; payment in foreign currency for imports and exports; and central bank approval for the conversion of ringgit into foreign currency.

—causes considerable The restrictions generated great confusion over which transactions required dismay and confusion official approval, how foreign trade was affected, the precise meaning of the one-year lock-in clause and a host of other issues. Bank Negara staff routinely issued contradictory explanations. The central bank’s stipulation that all off- shore trading in ringgit and ringgit instruments end on September 4th, effec- tively voiding all forward contracts, options and interest rate swaps due to be settled after that date, was a major challenge for bankers in Singapore, the centre of much of the trading. Bank Negara extended the deadline to September 9th, then said contracts could, after all, be settled on their original maturity dates.

Dr Mahathir says the “The free market system has failed and failed disastrously,” Dr Mahathir said, failure of the free justifying the controls. “The only way we can manage the economy is to market— insulate it from speculators.” From the outset, the prime minister had blamed the regional financial crisis on mercenary “speculators”. As the crisis deepened, infecting the real economy, his demands for international supervision to rein in speculators became ever more strident. The IMF paid little more than lip- service to his calls.

—justifies the strict new For the prime minister, the final straw was the confirmation, by official data policies— released on August 27th 1998, of an economy in deep recession. Bank Negara figures showed that GDP contracted by 6.8% year on year in the second quarter. Worst hit were the construction, agriculture and manufacturing sec- tors, whose output slumped by 22%, 9.6% and 9.2% respectively. The key electronics industry, which accounts for the largest share of exports, recorded its first contraction in almost a decade, albeit largely because of weakening external demand. Bank Negara also revised the decline in the first quarter’s GDP to 2.8% from 1.8%. In Dr Mahathir’s view, the havoc wrought by specul- ators had been compounded by the IMF-inspired tight monetary and fiscal policy pushed by Mr Anwar and his allies at Bank Negara.

—which force the The day after the second quarter figures were released, the central bank gover- resignation of the central nor, Ahmad Don, who had frequently sparred with Dr Mahathir on policy bank governor matters, resigned, as did the deputy governor, Fong Weng Phak. Mr Ahmad’s departure was less an admission of guilt—his commitment to firm interest rates to prevent further capital flight and shore up the ringgit had aggravated the economic slowdown—than a protest at the impending capital controls. Follow- ing his own removal on September 2nd, Mr Anwar criticised the controls as a “jingoistic outburst” that made little economic sense.

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“Speculators” are stymied Pegging the exchange rate, forcing in all ringgit held onshore and tying down and interest rates the proceeds from securities sales were designed to halt the speculative capital promptly lowered outflows that had battered the local currency and the share market for more than a year. Just as important, the lower interest rates Dr Mahathir and his supporters insisted were needed to reactivate the economy could now be engi- neered with no risk to the exchange rate. On September 3rd Bank Negara Malaysia: interest rates, 1998 % slashed its intervention rate—the benchmark for commercial bank lending—to

13 8% from 9.5%. It was the fourth cut in as many weeks. Officials promised that borrowing costs would continue to fall to just above the annual inflation rate.

12 The return of billions of ringgit from offshore in the run-up to the October 1st repatriation deadline—after which the currency was deemed to be no longer 11 legal tender abroad—boosted liquidity levels significantly. Much of the influx was from Singapore, whose substantially higher ringgit deposit rates had been 10 responsible for considerable capital flight over the preceding months. The

9 Statutory Reserve Requirement (SRR)—the proportion of their deposits banks must hold interest-free with the central bank—was also lowered again, from 6% to 4%, effective September 16th (it had declined progressively from 13.5% Jan Feb Mar Apr May Jun Jul Aug Sep Oct in mid-February). Surging liquidity and falling interest rates helped rally the Source: Bank Negara Malaysia. Kuala Lumpur Stock Exchange (KLSE) in the days after the controls were an- nounced. But much of the KLSE’s momentum was fuelled by desperate foreign investor buying to close out short positions.

Foreign investors are Despite the authorities’ claims that dividends and profits could still be freely concerned— repatriated, many foreign investors reasoned that any regime which restricted capital flows would inevitably disrupt such transfers. They also feared that the additional paperwork required by the controls presaged costly bureaucratic delays. While foreign direct investors with operations in the country saw some benefits in the pegging of the exchange rate, which dampened downside risk on the ringgit, most would-be investors put their plans on hold. A key concern was that, with Dr Mahathir now firmly in control of economic policy, on September 7th he appointed himself first finance minister and Ali Abul Hassan, a compliant civil servant, governor of the central bank—the government would not seize the opportunity afforded by the capital controls to reform the deeply indebted corporate sector and the increasingly fragile banking system. Such fears were reinforced by a relaxation of the definition of non-performing loans and of banks’ provisioning and disclosure requirements (see Banking and finance).

Malaysia: private investment indicators, 1998 (% change, year on year)

Jan Feb Mar Apr May Jun Jul Aug Sales of commercial vehicles –74.0 –77.8 –82.0 –84.1 –83.1 –82.7 –81.8 –81.7 Manufacturing projects/approvals (by value) 490.9 –22.3 108.3 68.0 –75.1 –31.4 –87.5 –70.5 Total loans by the banking system 22.7 19.2 15.9 13.6 11.0 9.5 8.1 7.0 Loans for manufacturing 22.3 17.4 19.5 18.5 14.0 13.2 16.9 14.1 Loans for property 30.9 24.9 25.6 22.7 19.6 18.4 16.7 15.5 Source: Bank Negara Malaysia.

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—which is underscored by The controls prompted international rating agencies to cut Malaysia’s sover- cuts in Malaysia’s risk eign credit risk ratings to junk status. Announcing its decision to do so on ratings— September 9th, Fitch IBCA said the curbs had set the economy on an unsus- tainable policy path that could adversely affect external creditworthiness over the medium term. The government, it added, had set a dangerous precedent by arbitrarily changing its rules and denying some investors access to their capital. While conceding the new strategy could bring some short-term relief to the economy, Fitch IBCA said it also risked perpetuating the flaws in the banking and corporate sectors and limiting access to the foreign capital required to restructure them. Standard & Poor’s (S&P) followed suit on September 10th, likewise warning that the controls, if sustained, would depress Malaysia’s fu- ture growth prospects. The agency said the controls would encourage a parallel exchange market, as well as capital seepage through overinvoicing of imports and other means.

—following earlier S&P’s previous downgrade, on July 24th, was based on what it said were downgrades— mounting pressures on the recession-hit economy, surging bad debts and the risk of further distortionary government-orchestrated bail-outs of troubled businesses and banks. That ratings cut came a day after the release by Daim Zainuddin, the special functions minister in charge of the economy, of a wide- ranging National Economic Recovery Programme (NERP). While advocating greater transparency across the economy and the relaxation of some restric- tions on foreign investment, it called for increased public spending, the chan- nelling of more and cheaper credit to the private sector, and the selective official rescue of crisis-ridden businesses. As a result, other ratings agencies promptly followed S&P’s lead.

—that scupper official Those downgrades imposed much higher premiums on overseas commercial plans to tap international borrowing. The government abruptly abandoned plans to tap the international financial markets capital market for funds to help underwrite the NERP (notably a US$2bn bond issue to launch Pengurusan Danaharta Nasional, an official agency set up to buy and rehabilitate banks’ bad debts), estimated at some M$60bn. More than two-thirds of this was earmarked for measures to strengthen the financial sec- tor, and much of the balance for stimulus schemes.

Most funds to underwrite Officials said much of the money would be raised locally. The NERP envisaged recovery are to be raised a M$20bn (US$5.3bn) government-guaranteed domestic bond issue to be locally— taken up by cash-rich state-controlled institutions, including the Employees Provident Fund (EPF), a mandatory pension scheme, and Petroliam Nasional (Petronas), the hydrocarbons corporation. Both Danaharta and its sister agency responsible for overseeing the recapitalisation of troubled banks, Danamodal Nasional, subsequently unveiled plans to issue government-backed bonds to locally incorporated financial institutions.

—although Japan and Soft loans were also being sought from “sympathetic” foreign governments, Taiwan agree to help— according to officials. In July Taiwan agreed to a US$1bn credit for Malaysia’s Export-Import Bank. By late September negotiations on a package of low- interest yen-denominated loans from Japan’s Overseas Economic Co-operation Fund, worth the equivalent of US$1.8bn, were said to be well advanced. In

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addition, Japan’s Ministry of International Trade and Industry offered to guar- antee a Malaysian bond issue aimed at raising the equivalent of up to US$1bn in the Tokyo debt market, likewise to fund basic infrastructure development.

—as the World Bank puts Some previously supportive multilateral lenders were less indulgent. On its lending programme September 23rd the World Bank said its plans to lend to Malaysia had been on hold “disrupted” by the imposition of currency controls. The Bank said it needed time to assess the policy reversal and would not reactivate its lending pro- gramme until at least the end of the year. In June the World Bank approved a quick-disbursing US$300m credit for a range of social schemes, and the govern- ment had subsequently requested a further US$700m. Officials said the government was hoping for some US$2bn from the bank over the next two to three years. Japanese officials, meanwhile, pointed to a growing consensus among economists and policymakers that moderate and temporary restrictions on inflows into emerging markets with underdeveloped financial systems were now appropriate. The proviso was that the breathing space afforded by the curbs be used to make necessary structural reforms. The IMF also acknowledged the need for international supervision of potentially damaging capital flows.

The 1999 budget is in line Dr Mahathir staunchly defended the exchange controls—which he insisted with the government’s were working—when he presented the 1999 budget on October 23rd. Provid- reflationary strategy— ing for a sizeable increase in the fiscal deficit and some generous tax breaks, the budget was consistent with the reflationary strategy the government had been pursuing since mid-year. It was also designed to dampen smouldering discon- tent with the prime minister’s leadership. As he spoke, riot police used baton- nes and water cannons to disperse a crowd of several thousand Anwar supporters.

—providing for a higher With spending forecast at M$63.3bn in 1999, about the same as expected for deficit than envisaged this 1998, and revenue slated to decline by 14.3% to M$47.2bn (following an year— anticipated 16.2% recession-induced slide this year), the 1999 budget projected a central government deficit of M$16.1bn (6.1% of GNP), sharply up on the M$9.6bn deficit (3.7% of GNP) officially envisaged this year. In 1997 a surplus of M$6.6bn (2.5% of GNP) was recorded, the fifth in succession. Government officials said the shortfall would be met by domestic bond issues, loans from the EPF and other cash-rich local institutions, and overseas borrowing—pre- sumably a reference to ongoing efforts to secure concessionary World Bank, Asian Development Bank and Islamic Development Bank funding. The officials insisted that the surpluses generated in previous years would not be touched.

—few tax increases— The few tax increases were targeted at those deemed best able to absorb them. Import and excise duties on alcohol were raised by some 20% each, and on tobacco products by 20-30%. While many Malaysians do not consume alcohol, they certainly smoke. Other so-called sin taxes, for example on certain gam- bling activities, were also increased, albeit less drastically. Exports of palm oil and palm kernel oil were to be subjected to a “windfall” levy of up to M$50/tonne for cargoes priced over M$2,000/tonne. Malaysian palm oil, de- nominated in dollars on the international market, has been selling well above that threshold since the ringgit began depreciating in mid-1997.

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—and numerous Fiscal concessions were more numerous, and were designed to realise a range of concessions specific policy objectives. They included a 70% tax exemption on increased export sales by Malaysian-owned companies; the abolition of excise duties (currently 6-10%) on locally manufactured refrigerators, television sets and air-conditioners; adjustment against the income of other units in the same Malaysia: non-performing loans, 1998 group of losses incurred by food production companies; the waiving of stamp % of total loans (a) duty and real property gains tax on mergers between financial institutions undertaken by mid-1999; the exclusion from consideration for income tax of Finance companies Commercial banks 50% of the amount in financial institutions’ interest-in-suspense accounts; the 30 waiving of stamp duty on loan refinancing instruments; full tax exemption on 25 interest income from unit trusts; and several incentives to promote tourism. 20 The most sweeping and significant incentive was the waiving of taxes on 15 corporate and personal incomes earned in 1999 and, starting in 2000, moving 10 the basis year for income tax assessment from the previous year—the current 5 practice—to the actual calendar year. In essence, this means that in 1999 0 individuals and companies will pay tax on income earned in 1998, and in 2000 Jan Feb Mar Apr May Jun Jul Aug on income earned that year. The upshot is that while they will not be taxed on (a) Computed on a net basis from December 1997. Source: Bank Negara Malaysia. income generated in 1999, the Treasury will still enjoy an uninterrupted reve- nue flow. The budget provided an additional sweetener by stipulating that companies incurring losses in 1999 could offset them against profits in future years. From 2001, corporate taxpayers will begin assessing their own taxable income, presently calculated by the authorities.

The finance ministry The finance ministry’s annual economic report, released in conjunction with expects GDP to expand the budget, predicted that GDP would contract by 4.8% in 1998 and expand by slightly next year— a modest 1% in 1999, owing to the easing of monetary policy and other stimulus measures. Given the likelihood of sluggish growth among Malaysia’s main trading partners, much of the turnaround would be fuelled by improved domestic demand, the report said. It forecast an increase in manufacturing output of 1% following an anticipated shrinkage of 5.8% this year, a rise in agricultural production by 3.9% (-5.9% in 1998), a further 8% decline in con- struction activity (-19.2% in 1998) and a 2.7% increase in value-added in the services sector (2.1% in 1998).

—and the current account The economic report predicted that the surplus of M$20.1bn anticipated on surplus to be lower the current account in 1998—the first in nearly a decade—would moderate to M$11bn next year. While merchandise exports were forecast to rise by a further 0.8% in 1999 (after surging by a projected 28.5% this year), import growth was expected to slow to 3.5% from this year’s estimate of 12.9%.

Banking and finance

With capital controls, The introduction of capital controls and the pegging of the ringgit to the dollar financial sector rigour is allowed a further easing of monetary policy—seen by Dr Mahathir as crucial to ominously relaxed— economic recovery—but reinforced fears that, in the absence of a far-reaching, market-based overhaul of the financial system, its problems could only deepen. Indeed, as soon as the controls were announced, Dr Mahathir made clear he had few qualms about abandoning the limited discipline the market and the central

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bank had previously imposed on the sector. The problem is that, without such discipline, the sector’s weaknesses—such as the tendency to indulge politically well-connected but less than worthwhile debtors—will be perpetuated, further undermining banks’ balance sheets and the health of the broader economy.

—as problems mount for The worse than expected results posted for the 12 months to end-June 1998 by even the best banks— Malayan Banking (Maybank), the country’s biggest—and one of its best managed—commercial banks, showed the depth of the sector’s problems. Group non-performing loans (NPLs) on a three-month arrears basis, reached 4.5% of total credits, up from 1.4% in its 1996/97 financial year. As a result, loan loss provisioning surged to M$2.9bn (US$763m), from M$664m the pre- vious year, and net profits slumped to M$129.6m from M$3.98bn.

—chief among them bad With the economy in recession, most other banks were grappling with far loans and lack of capital higher NPL ratios and a more rapid depletion of their deposits, not least be- cause of the better interest rates available offshore, particularly in Singapore. As a result, their capital adequacy ratios were being eroded too. The banking system’s gross NPL ratio climbed to 15% by end-July (up from 9.6% at end- April and just 3.6% in mid-1997), according to the government, which claimed the ratio would go no higher than 20%. It also put the sector’s 1998-99 recapi- talisation requirement, under a supposedly worst-case scenario, at no more than M$16bn. Independent analysts were less optimistic. S&P predicted that gross NPLs would exceed 30% within 12 months, and forecast the sector’s recapitalisation needs at more than 40% of GDP—some M$36bn.

Agencies set up to address The increasingly nationalistic government continued to resist domestic and these shortcomings— external pressure to take what most industry observers agreed would be the best path to recapitalisation: a lifting of the 30% ceiling on foreign ownership of local banks. Instead, it pushed ahead with the establishment of two fledgling home-grown agencies, Danamodal Nasional Berhad and Pengurusan Danaharta Nasional, respectively responsible for overseeing the recapitalisation of banks and the rehabilitation of their bad debts. Bank Negara pledged M$1.5bn as seed capital for Danamodal, whose additional funding was to be raised from multi- lateral lenders and ringgit bond issues. Government-guaranteed domestic and international bond issues were likewise expected to generate much of the M$25bn the authorities conservatively estimated Danaharta would need to buy up bad debts from banks and the assets supporting them.

—are deprived of foreign However, a planned international bond issue to raise US$2bn to help launch funds by downgraded Danaharta was abruptly shelved in late July after S&P and another US rating debt ratings— agency Moody’s Investors Service downgraded Malaysia’s sovereign debt to little better than junk status, rendering the cost of such borrowing prohibitively expensive. The downgrades followed the release of the National Economic Recovery Programme (NERP), which controversially recommended the channel- ling of more and cheaper credit to the private sector and selective, officially orchestrated bail-outs of troubled companies and banks.

—and obliged to rely on Effectively deprived of access to international financial markets, Danaharta scarce domestic resources officials said they would underwrite the purchase of NPLs and collateral by

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selling government-guaranteed bonds locally. The NERP had urged the govern- ment to raise funds to support the fragile banking system by issuing M$20bn worth of bonds to cash-rich, state-administered entities such as Petronas and the Employees Provident Fund (EPF), a national pension scheme. In late August Danaharta said it had negotiated the acquisition of its a first batch of NPLs from Perwira Affin, a merchant bank, but gave no details. The agency revealed that it would not be buying loans of less than M$5m.

The rating agencies’ downgrades also created funding problems for Danamodal, whose management is by and large made up of senior central bank and finance ministry officials. Nonetheless, on September 20th its managing director, Mohamad Daud, said it had accumulated a war-chest of some M$11bn: M$3bn from Bank Negara and M$8bn generated via a lowering of the so-called Statutory Reserve Requirement.

Several banks are Two weeks earlier Danamodal had made its first cash infusion, injecting earmarked for M$1.5bn into the merging commercial banking units of Rashid Hussain Berhad, recapitalisation— a financial services group, and Sime Darby, a multifaceted conglomerate (3rd quarter 1998, page 24). On October 6th Danamodal signed conditional recapitalisation agreements worth M$3.3bn with ten other banks and finance companies, part of a broader short-term plan to invest some M$9.3bn in 14 institutions. The government has long insisted it wants to see the emergence of a core group well-capitalised local banks capable of competing in the liberal- ised international financial market now taking shape.

—as Bank Bumiputra On September 17th a Memorandum of Understanding providing for an event- prepares to merge with a ual merger between troubled Bank Bumiputra, a wholly government-owned more solid institution commercial bank with assets of some M$55bn, and Commerce-Asset Holdings Berhad, a financial services group which controls Bank of Commerce, a well- managed, privately owned institution with assets worth M$24bn, was signed by representatives of both parties. The banks said there was no pressure to negotiate a merger, although the claim was less than credible. The following day Bank Bumiputra announced its results for the 12 months to end-March. As expected, they were disappointing. After loan loss provisioning of M$2.48bn, the group recorded a pretax loss of M$1.39bn compared with a pretax profit of M$724m in the previous financial year. While its net NPL ratio had risen to 12.6% from 5.7%, gross NPLs amounted to 24% of its total loan exposure of M$36.2bn. It was also revealed that Khazanah Nasional, the finance ministry’s investment arm, had spent M$1.1bn to recapitalise Bank Bumiputra.

Debtors’ recourse to legal On August 9th the government announced the creation of a Corporate Debt protection becomes more Restructuring Committee, under the auspices of Bank Negara, to aid the nego- difficult tiation of mutually satisfactory repayment schedules between businesses and their creditors. The move was partly designed to discourage firms from seeking temporary court protection from their lenders. Dozens of businesses had re- sorted to Section 176 of the Companies Act to avail themselves of such protec- tion. On September 30th parliament passed an amendment to the act requiring corporate borrowers to obtain the consent of creditors accounting for at least 50% of the value of their debts before applying for such legal protection.

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The official campaign for Having determined, against the advice of the IMF, that a significant easing of lower interest rates— monetary policy was a key prerequisite for turning the economy around, Dr Mahathir and Mr Daim, the special economics minister, continued to press for higher bank lending and lower borrowing costs. In August, despite warnings that reduced interest rates would accelerate capital flight and further undermine the ringgit, Bank Negara cut its three-month intervention rate—the benchmark for commercial bank lending—on three occasions, from 11% to 9.5%. More ringgit duly left the country and the exchange rate deteriorated further.

—intensifies following the On September 3rd, following the imposition of exchange controls and the introduction of capital removal of Mr Anwar, the intervention rate was slashed to 8%. The pegging of controls— the ringgit to the dollar meant that interest rates could now be lowered with no risk to the exchange rate, while the measures to render the local currency worthless beyond Malaysia’s borders minimised the risk of further capital flight. On October 5th the central bank’s three-month intervention rate was reduced to 7.5%, the level at which it had stood prior to the eruption of the regional financial crisis in mid-1997. Banks were also instructed to reduce their interest margins from 4 percentage points to 2.5 percentage points. Bankers argued the requirement would compromise their ability to price loans accord- ing to risk. Government officials countered that the lowering of borrowing costs would render debtors more viable, reducing the risk of default and there- fore higher NPL levels.

—which allows liquidity Steps were also taken to revive lending, mainly by boosting liquidity. The to surge increasing reluctance of banks to extend credit for fear of adding to their bad debt portfolios, and of potentially cash-strapped borrowers to take on loans, had led to a sharp slowdown in lending. By end-August annualised credit growth had fallen to just 7.5%, well below the 26.5% recorded in 1997 and the 15% target officially set for 1998 as a whole. Further cuts in the Statutory Reserve Requirement, which came down to just 4% on September 16th (having been progressively reduced from 13.5% six months earlier) injected billions of ringgit into the system. The required repatriation under the exchange control regime of all ringgit held abroad resulted in the return of M$12.7bn by September 22nd, according to Ali Abul Hassan, the newly appointed central bank governor. At the government’s behest, Bank Negara eased restrictions on credit for the purchase of shares and for certain categories of residential prop- erty and private cars.

Official pressure on banks While the 15% credit growth target was clearly unattainable, Mr Abul told to lend more worries bank chiefs on September 9th that any institution that failed to increase lend- many— ing by at least 8% in 1998 would be called to account. Although government officials insisted in public that loans should only be given for “productive” purposes, the relaxation of curbs on lending to the property sector and for share purchases clearly indicated that banks were again being encouraged to underwrite speculative investments, a policy that presaged a further weakening of asset quality.

—as does a more lax Mr Abul also told banks that they would now only have to report their results definition of bad debts every six months rather than quarterly. The tighter disclosure period had been

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introduced a year earlier to improve efficiency and transparency. On September 23rd the central bank made another significant concession: henceforth, it said, loans need only be classified as non-performing if they remained unserviced for six months or more. A three-month arrears basis had been imposed last year to bring Malaysia into line with international standards. The return to the more lax definition saw the banking system’s NPL ratio fall from 15.8% to 9.7% over- night. In addition, banks were no longer automatically required to make a 20% specific provision for sub-standard loans.

The KLSE’s benchmark The Kuala Lumpur Stock Exchange (KLSE)’s benchmark composite index, the index slides to its lowest KLCI, which tracks the fortunes of 100 blue-chip shares, continued to drift lower levels in years towards the end of July, amid concern about deepening problems in the corpor- ate sector and mounting NPLs. On July 29th, following the downgrading of Malaysia’s sovereign debt risk to near junk status by international ratings agen- cies, the index fell 18 points to 385.97, a new nine-year low. On August 11th it fell to 334.70, a ten-year low. Dr Mahathir’s August 18th comment that the government was considering a major purchase of shares “to punish speculators”

Malaysia: equity prices, 1998 —following Hong Kong’s example—triggered another rebound. Significant in- Kuala Lampur composite index terventions by local institutions, coupled with short covering by foreign funds,

650 saw the KLCI rise by 11%, to 343.47 points, over the next two days. However,

600 some foreign investors viewed the upturn as an ideal opportunity to bail out. By the close of business on August 28th the index had fallen to 302.91, weighed 550 down by the Bank Negara’s release of worse than expected second-quarter eco- 500 nomic data and the resignation of its governor, Ahmad Don. 450 Late on August 30th Mohamed Aslan Hashim, the KLSE’s executive chairman, 400 announced an effective ban on the overseas trading of shares in Malaysian 350 companies by requiring that all scrips be deposited with the exchange. The 300 essential target was Singapore’s over-the-counter market, the Central Limit Order Book (CLOB) International, long deemed to be undermining the KLSE. May Jun Jul Aug Sep Oct The CLOB arose in response to a 1990 ruling by Kuala Lumpur that all Malaysian Source: Bloomberg. companies delist from the Stock Exchange of Singapore (SES); as such, the CLOB focused on trading in Malaysian shares. Not only was the CLOB facilitating the short-selling of Malaysian shares—essentially betting their value would fall, which has been disallowed on the KLSE since last year—it further undermined the Kuala Lumpur market, and encouraged capital flight, by enabling Malaysians to sell shares bought on the KLSE. It was thus a loophole that had to be plugged before the institution of exchange controls, which led to the definitive closure of the CLOB on September 15th.

A new “lock-in” clause The imposition of capital controls on September 1st, and particularly confu- sends the local market sion over the precise meaning of the one-year lock-in clause affecting foreign tumbling again— investors, precipitated a massive dumping of shares, pushing the KLCI down 13.3%, or 40.21 points, to 262.70—an 11-year low—by the end of the day. Many foreign funds were obliged to sell because of trust deeds prohibiting investment in restricted markets. For the same reason, Malaysia was sub- sequently dropped from several international stockmarket indices.

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—before falling interest Yet over the next four trading days the KLCI soared almost 70%, closing at rates and surging 445.06 points on September 7th. The prospect of sharply lower interest rates on liquidity spark a rebound the back of a 1.5 percentage cut (to 8%) in Bank Negara’s three-month inter- vention rate and expectations of a significant expansion in liquidity with the enforced repatriation of billions of ringgit held offshore, spurred local retail investors to follow domestic institutional funds into the market. Foreign play- ers also bought heavily, mostly in order to close out short positions.

Agriculture

Farm output falls on In its latest annual report, released on October 23rd, the finance ministry esti- lower production of cash mates that agricultural output will decline by 5.9% in 1998. It essentially attrib- crops— uted the contraction to lower production of key cash crops including palm oil (-8%), rubber (-7.3%), cocoa (-15.5%) and sawed logs (-15%). According to the report, palm oil production is expected to fall to 8.33m tonnes this year from 9.06m tonnes in 1997, mainly because of drought caused by the El Niño weather phenomenon. But it projected 1998 export earnings of M$16.5bn (US$4.3bn), 52% up on the M$10.8bn recorded last year, thanks to the depreciation of the ringgit (palm oil contracts are denominated in dollars on the international market) and the positive effect on prices of the decline in Malaysia’s output. Other contributing factors included cutbacks in shipments from other leading producers (notably Indonesia) and continuing strong global demand.

—although a new tax is The government is seeking to cash in on the price boom for palm oil. The 1999 planned budget stipulates that export cargoes priced at more than M$2,000/tonne will be subject to a windfall levy of up to M$50/tonne. Natural rubber production will fall to 900,000 tonnes this year from 971,000 tonnes in 1997 owing to the decline in the area under cultivation, labour shortages and weak prices arising from abundant global supplies, the economic report said. Nonetheless, rubber exports are expected to yield M$3.12bn, 4.9% more than last year.

Kuala Lumpur presses According to repeated statements made recently by the primary industries min- ahead with plans to quit ister, Lim Keng Yaik, Malaysia will withdraw from the International Natural INRO— Rubber Organisation (INRO). The planned move was endorsed by local grower and processor lobbies. Malaysia first threatened to leave the Kuala Lumpur- based grouping of six producing and 18 consuming countries last April (2nd quarter 1998, page 19), saying its price stabilisation mechanisms unfairly fav- oured buyers at the expense of sellers. INRO’s failure to compensate for the adverse consequences of the sharp depreciation in the Thai, Indonesian and Malaysian currencies—including increased costs and diminished purchasing power—highlighted its ineffectiveness, Mr Lim said. The three countries collec- tively accounted for 71% of world rubber supply in 1997.

—and set up a producer’s Yet the dissatisfaction of Malaysia and other leading producers stems from the cartel fact that the price triggers governing intervention in the market by INRO’s buffer stock manager were set, at their insistence, in ringgit and Singapore dollars. Thus, while rubber prices have slumped by more than one-third since mid-1997 in US dollar terms, as denominated by INRO they have remained relatively stable. In mid-August, for the first time since December 1993, the

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buffer stock manager purchased 30,000 tonnes of Malaysian, Indonesian and Thai rubber after the trigger price dipped into the “may buy” band, but the intervention was too small to bolster prices. With consumer countries resisting pressure for an increase in intervention prices or for changes in the way they are configured, Malaysia has been floating the idea of a producers’ cartel.

Drought shrinks cocoa This year’s decline in cocoa production, to an estimated 89,600 tonnes from production in Sabah— 106,000 tonnes in 1997, is also largely attributable to prolonged El Niño- induced dry weather. This particularly afflicted Sabah, Malaysia’s main grow- ing area, which accounts for some four-fifths of the country’s output. Nonethe- less, ringgit prices have more than doubled since mid-1997 thanks to both the local currency’s depreciation and the combination of declining world output and increasing consumption.

—as Sarawak’s pepper Pepper growers in the neighbouring state of Sarawak, whose output this growers celebrate a year is officially slated to increase by 11.1%, to 20,000 tonnes, have been able windfall to capitalise on buoyant international prices for the spice—likewise fixed in dollars—owing to production declines in other major exporting countries. Their improved output is due to increased planting and higher yields—up by an average of 8% to 1.88 tonnes/ha. Sarawak accounts for some 98% of the country’s output, and Malaysia is the world’s fourth largest producer.

Industry

Manufacturing output Declining domestic and external demand, keener price competition from re- tumbles gional rivals, the higher cost of imports arising from the ringgit’s depreciation and the tight monetary policy pursued for much of the year will result in a 5.8% drop in manufacturing output in 1998—the first contraction since 1989— according to the finance ministry’s annual economic report. Hundreds of com- panies have closed down, as evidenced by the growing number of bankruptcy Malaysia: industrial production, notices in local newspapers, and many others are struggling to stay afloat. 1998 Index: 1993=100 The output of the electronics industry, which has generated more than 50% of 152 Malaysia’s export earnings in recent years, shrank by 0.4% year on year in 150 January-July, according to official data. The slippage derived in no small meas- 148 ure from slowing global demand and rising inventories, especially severe in the 146 semiconductor sector, which accounts for the largest share of the country’s 144 electronics sales. As such, it also reflected what critics said was the local ind- 142 ustry’s excessive dependence on semiconductor production, and thus its failure 140 to respond to a rapidly changing market by moving up the value chain. 138

136 The 53.6% plunge in the value of sales by transport equipment makers in the first seven months of the year was largely attributable to a recession-induced Jan Feb Mar Apr May Jun Jul Aug slump in motor vehicle purchases. In the first six months of this year, just Source: Bank Negara Malaysia. 61,298 vehicles were sold, a drop of 68.1% on the corresponding period of 1997, according to the Malaysian Motor Traders’ Association. Sales of “nat- ional” cars, including those manufactured by Perusahaan Otomobil Nasional (Proton), fell by 58.2%, to 47,416 units. By mid-year Proton was producing just 5,000 units a month—down from a peak of 20,000 units a month last year— and still had a stock of 250,000 unsold vehicles. Vehicle sales picked up slightly

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in July and August, reaching 13,797 and 15,432 units respectively (compared with 12,270 in June and the first-half monthly average of 10,200). The main contributing factor was the government’s decision to raise the credit limit on car purchases from 70% to 85% and extend the maximum repayment period from five years to seven.

Foreign investors are Despite the strict limits on outside investment in so-called strategic sectors, the offered fresh incentives National Economic Recovery Programme (NERP) unveiled in late July recom- mended that Proton be opened up to foreign interests, a proposal that under- scored the considerable problems facing many of Malaysia’s big manufacturers. It also urged the suspension of restrictions on foreign equity holdings for all new manufacturing projects implemented before the end of 1999—strategic Malaysia: foreign investment in manufacturing industries and those in which local firms have “adequate capabilities” ex- M$ bn cepted. The government formally approved the proposal a few days later, ex- 18 tending the grace period to end-2000. Previously, for example, manufacturing 16 companies could only be wholly foreign-owned if they exported at least 50% of 14 their output. The NERP recommended that the investment incentive regime 12 generally be revised to bring it into line with those offered by “neighbouring 10 countries”—presumably a reference to Singapore. 8 6 Such proposals and incentives were largely driven by the dictates of the deep- 4 ening economic crisis and growing wariness by foreign direct investors. Exist- 2 ing and potential investors were seeing an erosion of Malaysia’s 0 1990 91 92 93 94 95 96 97 98(a) competitiveness as production costs in other countries in the region became

(a) January-August. more favourable. They also were concerned about Dr Mahathir’s seemingly Source: Bank Negara Malaysia. uncompromising espousal of economic nationalism. Moreover, although the pegging of the ringgit to dollar on September 2nd minimised the exchange rate risk and thereby made forward planning easier, the capital controls announced the previous day gave rise to additional concerns.

The economic crisis The problems afflicting the electronics and motor vehicle industries underscore disrupts a long-term the extent to which the downturn is compromising the objectives of the industrial plan— Second Industrial Master Plan (1996-2005). This plan stressed the need to shift the focus of manufacturing activity from the labour-intensive assembly of imported components towards capital-intensive high-technology processes that are increasingly indigenous. It also emphasised the importance of strengthening linkages within and between industries, not least by encourag- ing the emergence of small-scale manufacturers to supply large “anchor” com- panies. With many anchor companies falling on hard times, the ancillary businesses are suffering too.

—and raises questions More fundamentally, the crisis has exposed the shortcomings of Malaysia Inc, a about an affirmative by-product of the government’s affirmative action programmes in favour of the action strategy— bumiputera majority (ethnic Malays and other indigenous groups), the most recent of which is the 1990 National Development Policy (NDP). Under Malaysia Inc, favoured businesses have enjoyed official sponsorship and concessions, including government contracts and cheap loans, which, during the boom years, allowed them to expand and diversify rapidly. But many became highly leveraged in the process. As a result, Malaysia’s domestic debt/GDP ratio, at some 170%, is the highest in the world. Years of favouritism and good fortune

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also encouraged corporate complacency and inefficiency, blunting the compet- itive instincts needed for survival in tougher times.

—which nonetheless For cultural, social and political reasons, however, the government is unwilling remains largely intact to let weak companies fail, while insisting it is primarily motivated by eco- nomic considerations. The NERP, essentially authored by Mr Daim, the god- father of Malaysia Inc, speaks of the need to adopt liberal, market-based eco- nomic policies and improve transparency, and urges relaxation of the NDP’s requirement that bumiputeras hold a minimum 30% stake in most locally in- corporated companies. But it also recommends reinforcement of other ele- ments of the NDP to bolster domestic businesses, including their more favourable consideration for government contracts. It also defends the use of public funds to bail out companies involved in activities that are deemed to be strategic (such as car manufacturing) or in the national interest.

Many companies apply for The government cannot, however, protect every company in dire straits. An court protection from increasing number of corporate borrowers unable to service their debts have creditors— resorted to Section 176 of the Companies Act to obtain court protection from creditors they feared might be planning asset seizures. By late August no less than 26 listed firms had availed themselves of the facility, and been granted periods of between two and nine months to devise restructuring programmes that could satisfy their lenders. The risk of the courts becoming swamped by such appeals led to a September 30th amendment of the act requiring would-be applicants first to obtain the approval of creditors accounting for at least 50% of their debts.

—as the government The establishment of a so-called Corporate Debt Restructuring Committee, launches a corporate debt under the auspices of Bank Negara, was likewise designed to discourage com- restructuring initiative panies from seeking legal restraining orders against their creditors. The com- mittee was aimed at facilitating the negotiation by debtors and creditors of mutually acceptable terms for the servicing and acquittal of amounts exceeding M$50m. Many doubted its utility, especially since the committee was given no powers of enforcement.

Energy

Burdened by mounting Tenaga Nasional, peninsular Malaysia’s state-controlled power utility, has con- outlays and declining tinued to see its revenue shrink and outlays rise as a result of the ongoing earnings— economic crisis. The hardships imposed on consumers have led to a sharp fall-off in demand and precluded a further hike in consumer tariffs—which had been due for a “review” 18-24 months after the 8% increase in May 1997. By contrast, the ringgit’s depreciation has swollen Tenaga’s debt portfolio to some M$20bn (US$5.3bn)—most of it denominated in foreign currencies—as well as the cost of servicing these borrowings and the price of imported capital equip- ment, oil and coal.

—Tenaga puts planned In late August, citing the decline in demand and the expectation that its power projects on hold— reserve margin—the difference between generating capacity and peak de- mand—would continue rising, the utility said it was deferring the construction

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of most planned generation facilities for three to five years. Its production capacity was then 9,742 mw, compared with peak demand of 6,182 mw. The shelved projects are believed to include a 2,100 mw coal-fired plant, valued at M$7bn, which was to have been built in the Manjung district of state. The late July termination of a provisional share swap agreement signed the previous month with Malakoff Berhad, a local company with wide-ranging interests in the power sector (3rd quarter 1998, page 30) had meant that Tenaga would again be responsible for securing funds for the facility’s construction.

—moves to sell equity in To help pay its debts and underwrite capital spending projected at a minimum existing plants to foreign of M$4bn annually over the next few years, Tenaga announced plans to break investors— up its wholly owned subsidiary responsible for electricity production, Tenaga Nasional Generation (TNG), into smaller units. Tenaga plans to sell up to 49% of the equity in these smaller companies to local and foreign investors. The executive chairman of Tenaga, Tajudin Ali, said that the divestment strategy will only involve thermal plants, and that he had received expressions of interest from potential investors in the US, the UK, Japan, Hong Kong and Australia. Foreign interests will hold no more than 30% of each entity, he said. The reluctance to divest stakes in Tenaga’s hydropower facilities, which have a combined capacity of 1,855 mw, essentially derives from their irrigation and flood mitigation functions.

—and seeks easier Tenaga also requested concessions from five independent power providers payment terms from (IPPs) with a combined capacity of 4,143 mw whose purchase agreements independent suppliers account for more than one-third of the utility’s operational spending. The five were licensed in the early 1990s when Malaysia experienced severe shortages and thus were granted generous bulk power tariffs of 13-15.54 sen/kwh, which must be paid even if the utility does not need their output. On August 10th Mr Tajudin warned that if the IPPs failed to show “flexibility in the national interest”, Tenaga might be obliged to default on payments. On September 30th Mr Tajudin said the IPPs were willing to accept payments monthly rather than weekly or fortnightly as provided for in the agreements, as well as the stagger- ing of outstanding dues and other concessions. While the package was less generous than Tenaga had lobbied for, the fixing of the exchange rate at M$3.80:US$1 on September 1st had gone some way towards alleviating its financial worries.

Transport and communications

The government commits In mid-September the public works minister, Samy Vellu, said the government funds for road projects— was allocating M$2.79bn (US$734m) to revive 36 road projects stalled by crisis- induced public spending cuts announced in late 1997. The money was to be sourced from a M$5bn Infrastructure Development Fund (IDF) launched in mid-year (3rd quarter 1998, page 21). The IDF is to be financed by domestic bond issues and, the government hopes, soft loans from multilateral institu- tions such as the World Bank and the Asian Development Bank. Mr Vellu said the 36 projects were in addition to 241 others designated for implementation under the Seventh Malaysia Plan (1996-2000), most of which were awarded to private-sector developers. Many of these too are facing financial problems. As a

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result, some have been earmarked for concessionary government credits, in- cluding the first phase of a planned highway between the federal capital and the recently opened Kuala Lumpur International Airport (KLIA).

—and says it may do Financing difficulties are also besetting key rail projects. Construction work on likewise for a train KL Sentral, a new train station in downturn Kuala Lumpur that is to be an station in Kuala Lumpur— important hub for existing and planned mainline and light rail networks, came to a halt in July. Contractors complained that the development company, Kuala Lumpur Sentral, had failed to meet agreed payment schedules. The stop- page triggered intensive negotiations on a revised funding arrangement, which officials said could include an element of government lending. By then the project, originally scheduled for commissioning in June 2000, was only 25% complete.

—whose delayed Projek Usahasanama Transit Ringan Automatik, the operator of a M$5bn, 14-km construction is costing elevated light railway network that went into commercial service on September 1st, transporters dearly— said that having to bypass KL Sentral would cut its average daily passenger load from a projected 140,000 to 90,000, and seriously jeopardise its viability. Sistem Transit Aliran Ringat, which manages a light rail network in service since late 1996 and has another coming on stream in December, said it too would be adversely affected by the problems at KL Sentral.

—as the government The transport minister, Ling Liong Sik, said on September 14th that the govern- considers a new airport ment had yet to decide whether to provide funds for the construction of a rail link dedicated 57-km express rail link between KL Sentral and KLIA. Little construc- tion work has been done so far because the three-company private-sector con- sortium that was awarded a 30-year concession to operate such a link failed to secure the requisite commercial bank backing. On August 5th the government ordered one of the three companies to surrender its 40% stake in the venture. Analysts believe the price tag of up to M$4bn for an express link may prove excessive in the present climate. Dr Ling has said a cheaper alternative scheme was also under consideration. This would involve using an existing track be- tween Kuala Lumpur and Nilai operated by Keretapi Tanah Melayu (KTM), the state-controlled railways corporation, and building a new 20-km line from Nilai to KLIA.

A local infrastructure The transport infrastructure company that has been the most affected by the giant goes into the red— economic downturn is Renong, a conglomerate of some 50 companies that in 1987 had taken over a large proportion of the considerable assets of the United Malays National Organisation. Awarded several large, long-term projects, Renong has accumulated debts estimated at up to M$28bn with some 60 local and foreign banks. Indeed, Renong is believed to account for 5% of the total loans outstanding to Malaysia’s financial institutions. On October 9th, nine days after reporting a pretax loss of M$818m for the year to end-June 1998—its first ever loss—the company unveiled a plan to address some of its liabilities through the merchant bank Credit Suisse First Boston.

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—and seeks to exchange Renong envisaged swapping M$10.5bn in short- and medium-term debt for its huge debts for government-guaranteed, ringgit-denominated, zero-coupon bonds with ma- government-backed bonds turities of at least 15 years. The instruments would be financed from future profits generated by Projek Lebuhraya Utara Selatan (PLUS), a Renong subsid- iary that manages the lucrative 870-km North-South Expressway, and from taxes the toll-road operator is due to begin paying in 2007. While conceding that PLUS’s anticipated earnings stream was strong, some market analysts won- dered whether foreign creditors would be prepared to accept the ringgit bonds given that they could not be traded overseas in the wake of the introduction of exchange controls on September 1st. Critics argued that the proposed scheme, which Dr Mahathir said was being given serious consideration by the govern- ment, effectively sought to “nationalise” Renong’s debts without penalising those responsible for accumulating them. On October 15th Renong announced it was in default on loans totalling M$4.4bn.

Companies are again Official pressure on Malaysian businesses to route their seaborne imports and prodded to use Port Klang exports through Port Klang rather than transshipping them via Singapore has intensified. Singapore handles some 40% of Malaysia’s international trade. Early in July Dr Ling said the government was considering legislation to compel local companies to use Port Klang for at least some of their cargoes. This prompted some shipping lines to suggest that its objective would be better served by improving facilities there. While Port Klang is cheaper than Singapore, it is generally considered to be less efficient. On July 16th he stepped up the pres- sure, warning that the levy on lorries carrying goods imported through, or for export from, Singapore could be raised from M$200 to M$1,000, a move that would further increase trading costs and damage the economy.

Troubled MAS restores Malaysian Airline Systems (MAS), the partly privatised national airline, an- some domestic flights to nounced on October 10th that it would later that month resume daily flights Subang— to nine domestic destinations from the old airport at Subang, 22 km south of central Kuala Lumpur. The airline admitted that the decision to route all its domestic flights out of KLIA, 70 km from the capital, after the new airport opened in June, had lost it valuable business to smaller local carriers still operating from Subang.

—while denying it needs MAS continued to implement a cost-cutting package forced on it by the eco- foreign capital nomic slowdown and the depreciation of the ringgit, which have led to weaker demand and rising costs. The company’s debts, more than four-fifths of which are denominated in US dollars, have risen to over M$12bn. In addition to deferring new aircraft purchases and selling some aircraft and parts, the carrier has scrapped unprofitable international routes. But MAS is still in need of fresh capital following the abandonment of a controversial restructuring plan whose details had been leaked (2nd quarter 1998, page 26). Industry analysts say the easiest option would be to sell equity to an overseas carrier, but on August 11th MAS officials dismissed the idea, saying the carrier did not need foreign capital.

Telekom Malaysia braces Similar sentiments were expressed the previous day by Mohamed Said, the for “equal access”— chief executive of Telekom Malaysia, the state-run market leader in fixed-line phone services. He had just announced a 17.2% year-on-year drop, to

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 34 Malaysia

M$737m, in Telekom’s pretax profits for the six months to end-June. Although the decline was largely attributable to the adoption of a more accelerated asset depreciation policy, Mr Said acknowledged that the company’s financial out- look was uncertain given the problems afflicting the economy. Industry ob- servers said the scheduled introduction from January 1st 1999 of “equal access”—under which other providers’ customers will be able to use Telekom’s network—would also hurt the company’s profitability.

—as a British Telecom On July 24th British Telecommunications formally agreed to pay M$1.8bn for investment in Binariang— a 33.3% stake in Binariang, an aggressive young company providing fixed, mobile and international gateway services. Binariang was seeking to raise up to M$4bn to fund a five-year expansion programme and pay off its estimated M$2bn debt. British Telecom’s buy-in raised the foreign equity holding in Binariang to 46%, while reducing that of its other overseas investor, MediaOne International (formerly part of Denver-based US West) from 19% to 12.7%. Earlier in the year the government had raised the permitted ceiling on foreign ownership of telecommunications companies from 30% to 61%, albeit with the proviso that such interests sell back down to 49% within five years.

—presages keener Much of Binariang’s planned capital spending, also to be financed by asset competition— sales, a bond issue and perhaps a stock exchange listing, is to go towards the development of the company’s mobile service, whose subscriber base rose by 70,000 to 490,000 in July-September. By contrast the company has only 20,000 fixed-line customers, having earlier this year announced the suspension of its development programme in this area. Binariang executives said the company would prefer to rent fixed lines from cash-strapped competitors rather than build more of its own.

—particularly if another On September 9th Tajudin Ramli’s Technology Resources Industries, the parent mooted coupling company of Cellular Communications (Celcom), the country’s biggest mobile materialises phone operator with a subscriber base of almost 1m, said it was negotiating a possible merger with Time Telecommunications, a unit of troubled Time Engineering, part of the Renong stable. Time Engineering, which in mid-July was granted legal protection from its creditors and given nine months to devise a suitable restructuring plan, had long been seeking a cash-rich suitor for Time Telecommunications, which accounts for the bulk of its estimated M$2.5bn debt. Time Telecommunications’ difficulties stem partly from the govern- ment’s decision to defer equal access—originally scheduled for July 1st 1996— thereby requiring hefty outlays on a fixed line network. Its main asset is a trunk fibre-optic network—the country’s largest—running the length of the North- South Expressway. Control of that would help Celcom become a significant competitor to Telekom Malaysia in the fixed-line business.

Employment, wages and prices

Although layoffs According to the Ministry of Human Resources, almost 66,000 workers were continue, unemployment laid off between January and September this year, of which 53.6% were from is lower than expected— the manufacturing sector. As a result, the finance ministry’s annual economic report projected a year-end unemployment rate of 4.9%, up from 2.6% at

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 Malaysia 35

end-1997. This forecast was nevertheless lower than the 6.4% rate contained in the National Economic Recovery Programme (NERP) unveiled in late July.

—thanks to buoyant One reason was that many of those who lost their jobs found work again (80% demand in some areas according to the human resources ministry), reflecting continued strong de- mand for labour in certain areas of manufacturing and in the plantation sector. Another reason was the relative success of the government’s efforts to revive the economy through increased public spending and an easing of monetary policy. Another was the repatriation during the year of about 150,000 foreign labourers who had been laid off or whose work permits had expired. Nonethe- less, the government renewed the permits of almost 100,000 other foreign workers it had previously promised to send home, citing the reluctance of Malaysians to take on undesirable jobs.

With wage pressures Rising unemployment eased upward pressure on pay levels. Official surveys abating— indicated that nominal wages in the manufacturing sector increased by an average of 6.4% in January-July, down from 11.1% in the corresponding period of 1997.

—inflation should be Reduced wage pressures, combined with the demand-curbing tight monetary more bearable and fiscal policies pursued in the first half of the year, kept inflation in check following the ringgit’s depreciation, according to the economic report. The government forecast that the Consumer Price Index (CPI) would rise by 5.2% in 1998, compared with 2.7% in 1997. Official data indicated that increases in the prices of foodstuffs, which account for about one-third of the CPI’s weight- ing, were largely responsible. However, critics continued to contend that the CPI basket contained too many goods subject to price controls accurately to reflect the real rate of inflation.

Foreign trade and payments

Exports grow in Merchandise exports rose by 38.6% year on year to M$187.1bn (US$49.2bn) in ringgit terms— January-August, according to official data issued in early October. Sales of electronic and electrical equipment increased by 42.9% to M$97bn, and ac- counted for 51.8% of the total. Exports of palm oil and its derivatives, the Malaysia: trade balance M$ bn second largest earnings category, soared by 71.7% to M$14.7bn, thanks to the

7 buoyancy of the dollar-based international market arising from strong demand and lower production by key players. That palm oil sales declined by 0.6% in 6 volume terms underscored the seemingly positive impact on exports generally 5 of the local currency’s depreciation. Exports of liquefied natural gas also rose in 4 value (by 26.1% to M$5.5bn), but declined in volume (by 5.1%). 3

2 Merchandise imports in January-August increased by a more modest 12.5%, to M$154.6bn, with purchases of intermediate goods up by 21.8% to M$108bn 1 (69.9% of the total), but those of capital goods down by 10.2% to M$26bn. The 0 result was a trade surplus of M$32.4bn in the first eight months, compared -1 Oct..Jan..Apr..Jul. with a deficit of M$2.5bn in the corresponding period of 1997. 1997 98

Source: Bank Negara Malaysia.

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—although flows contract Broken down on a monthly basis, the data pointed to a progressive weakening if measured in dollars of external demand. Year-on-year export growth, in ringgit terms, slowed from 43% in June to 40.3% in July and 25.4% in August. While the trend for imports was less consistent—they fell by 8.9% in June, rose by 11.1% in July, and declined again by 0.9% in August—it nevertheless underlined that the trade surplus in local-currency terms, much trumpeted by government officials, de- rived from a diminished capacity to purchase from abroad. Indeed in dollar terms, imports fell by 27.5% year on year in January-July (having risen by 23.3% in the first seven months of 1997), and exports declined by 11.2%.

The current account turns Based on January-July ringgit data, the finance ministry’s annual economic positive— report forecast exports rising by 28.5% to M$284.5bn in 1998, imports expand- ing by 12.9% to M$249.5bn, and thus an almost threefold increase in the trade surplus to M$42.7bn. With the services deficit officially expected to improve slightly from M$21.8bn to M$19.5bn (despite a 16.7% increase, to M$16.1bn, in net outflows of investment income, partly because of higher interest pay- ments on overseas borrowings), and the more modest transfers deficit to do likewise, the current-account surplus—the first since 1989—was projected to be M$20.1bn this year. In 1997 a current-account deficit of M$14.2bn was recorded.

—as capital continues Although net inflows of private and official long-term capital were forecast to to flee fall to M$13.9bn, from M$19bn in 1997, the basic balance-of-payments surplus was expected to rise to M$33.9bn, from last year’s M$4.9bn. Likewise, while the net outflow of private short-term capital—caused by the large-scale sell-off of ringgit and shares in the first eight months of the year—was slated to rise to M$31.8bn, from M$14.2bn last year, the overall balance of payments was expected to show a surplus of M$26.8bn, compared with a deficit of M$10.9bn in 1997.

Traders appreciate the These official projections factored in the anticipated effects of the exchange pegged currency— controls introduced on September 1st and the pegging of the ringgit to the US dollar the following day. Both had an immediate impact on all manner of current- and capital-account transactions. Although set somewhat higher than the levels at which it had been trading during the preceding weeks, exporters and importers generally welcomed the pegging of the ringgit, because it sharply reduced the currency’s downside risk and thus facilitated forward planning.

—but exchange controls However, they were less enthused by many of the accompanying restrictions. hit inward investment These included the requirement that all imports and exports be paid for in foreign currencies, and that all conversions of ringgit into such currencies be subject to approval by Bank Negara. With exporters obliged to sell their foreign- currency earnings to the government at the fixed exchange rate, and importers required to pay the same price for the funds needed to underwrite their overseas purchases, major leakages were expected.

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 Brunei 37

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 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 August 1962; next election due: not applicable

National government The sultan, close family members and his appointees control all elements 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 (the Brunei National United Party, PPKB), which split from the Parti Kebangsaan Demokratik Brunei (Brunei National Democratic Party, PKDB) in early 1986, is now the country’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 Muslim Monarchy, has been stepped up since 1990. The Parti Rakyat Brunei (Brunei People’s Party, PRB) has been banned since 1962 and operates in exile

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

Key ministers Communications Zakaria Suleiman Culture, youth & sports Hussein Mohamad Yosof Development Ismail Damit 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 Mohamad Taib Religious affairs Dr Mohamed Zain Serudin

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 38 Brunei

Economic structure

Latest available figures

Economic indicators 1993 1994 1995a 1996a 1997b Real GDP growth (%) 0.5 1.8 2.0b n/a 4.0 Consumer price inflation (av; %) 4.3 2.4 6.0 2.5 n/a Population (’000) 276.3 284.0 292.0 n/a n/a Exports fobc (US$ bn) 2.3 n/a n/a n/a n/a Imports cif (US$ bn) 1.2 n/a n/a n/a n/a Exchange rate (av; Br$:US$) 1.62 1.53 1.42d 1.41d 1.48d

November 9th 1998 Br$1.64:US$1

Origins of gross domestic product 1994 % of total Oil sector 37.4 Agriculture, forestry & fishing 2.6 Construction 5.5 Transport & communications 4.9 Wholesale & retail trade 10.0 Community, social & personal services 32.3 GDP at factor cost incl others 100.0

Principal exports 1995 Br$ m Principal imports 1995 Br$ m LNG 1,561 Electrical & industrial machinery 562 Crude oil 1,476 Road vehicles 207 Refined products 111 Iron & steel 203

Main destinations of exports 1997 % of total Main origins of imports 1997 % of total Japan 51.0 Singapore 41.6 UK 19.8 UK 24.1 Singapore 8.6 Malaysia 7.4 Thailand 7.3 US 4.6 US 2.1 Japan 3.9 a EIU estimates. b Official estimates. c Including re-exports. d Actual.

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 Brunei 39

Outlook for 1999-2000

Government Asia’s economic crisis and falling world energy prices are taking their toll on mismanagement has oil-rich Brunei. The country’s problems, however, go beyond the regional slow- dented public confidence— down. The collapse of the Amedeo group of companies (3rd quarter 1998, page 42), Brunei’s largest investment and construction enterprise, and the reve- lations of mismanagement at the Brunei Investment Agency (BIA) have dented local confidence in the government’s ability to manage its affairs. These con- cerns are sure to grow.

The government’s handling of its development budget has added to worries about its competence. Its decision to cut the budget earlier in 1998 as an economy measure upset local contractors, who were anticipating continued work on government infrastructure projects. The government subsequently reversed course and increased development spending to boost the local eco- nomy. Although businesses welcomed the reversal, it suggested the govern- ment had no clear programme for tacking the country’s economic problems. The creation of the Brunei Economic Council (BEC), comprising government officials and business people, suggests the government is aware of the need to improve its performance. The BEC over the next 12 months will recommend measures to help the local economy.

—leading to growing Although no one will challenge the government, discreet criticism has surfaced, criticism of the sultan and seems likely to grow as the economy continues to struggle. The opinion from the middle class— page of the local English-language newspaper has published letters raising con- cerns about the government’s handling of the BIA scandal. The paper is read by Bruneian business people and higher-level civil servants. Questions also are being asked about the government’s relationship with the Amedeo group (Brunei’s largest business enterprise), why it had such a large share of govern- ment contracts, and how it appropriated money from BIA. Favouritism and cronyism have been mentioned, and some have asked if the government is fit to perform its duties. There is no talk of revolt, or even of making the government more liberal or democratic, but the criticism exists, and is likely to continue.

—but continued support Religious officials, who are employees of the government, support the sultan from religious leaders and have stressed his Islamic credentials. Although the sultan and the govern- ment seem to have come under the influence of religious conservatives, this poses no immediate threat to his rule. The sultan has become noticeably more pious himself over the past decade, and is obviously annoyed with the antics of his playboy brother, Prince Jefri. The religious establishment in Brunei is very much part of the social and political establishment. Religious officials are un- likely to criticise the sultan or the social hierarchy of Brunei of which they are a part.

The sultan promises a Aware of the growing unease over recent government scandals, the govern- more open government ment will try to make its affairs more open and transparent. Organisations have been created to address public complaints, examine the country’s economic problems and investigate the BIA affair. If these initiatives are perceived to be working, the likelihood of more overt criticism will lessen.

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Growth will continue to Brunei does not publish official economic data, but growth is likely to slow to slow in 1999— about 2.6% in 1998 from 4% a year earlier, according to government officials. This will worsen economic problems that have already begun to appear. A glut of commercial and residential properties has pushed rents down during 1998. Even if the economy recovers in the next 12-18 months, the property glut is likely to continue.

Brunei’s income from oil, the foundation of its economy, will continue to shrink. The price of oil this year is forecast to decline by 31.2% from a year earlier, to US$13.15/barrel. The price is forecast to fall a further 22.6% in 1999 before rising by 24%, to US$12.63/barrel, in 2000.

Banks in Brunei are cutting back on easy credit, especially for car loans. Auto sales have plummeted, and are expected to stay low. Local retailers and restau- rants are losing customers to businesses in the neighbouring Malaysian states of Sarawak and Sabah, where the exchange rate against the Malaysian ringgit is very favourable.

—but Brunei should do When the economic climate improves in the region, Brunei is well positioned well when the regional to benefit. The government continues to invest heavily in the country’s trans- economy begins to recover port and telecommunications infrastructure, and is determined to be a major player in these sectors in the East ASEAN region.

Review

The political scene

The embattled Prince Jefri The Sultan of Brunei’s estranged brother, Prince Jefri Bolkiah, returned to returns to Brunei— Brunei on October 2nd amid allegations by government officials that he mis- used funds while head of the Brunei Investment Agency (BIA). Prince Jefri, who was dismissed from his post at BIA by the sultan in July, was also blamed by some in the government for causing the collapse of the Amedeo group, Brunei’s largest investment and construction firm, which Prince Jefri heads. A spokesman for the prince said he returned to discuss matters with the sultan and to clear his name following widespread speculation and innuendo in the foreign and local press.

Before his return, the French newspaper Le Monde alleged in September that Prince Jefri was in hiding and that his finances had collapsed. The prince responded in a letter to the newspaper, condemning the reports. He said he was the victim of “a power struggle (in Brunei) between various factions, ranging from an open, modern and pro-Western attitude, which I represent, to those who want a conservative, religious regime”. He said that conservative forces within Brunei had seized his Amedeo group’s assets (3rd quarter 1998, page 39). In an earlier report he accused Iranian and Libyan forces of influencing the government, charges Bruneian officials denied. Prince Jefri met managers of Amedeo after returning home, but since then there has been no comment or news about him from the government.

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 Brunei 41

—as the government The sultan in late September launched “Project Gemma” to investigate the investigates misappropriation of funds from BIA. The UK firm KPMG has been appointed to misappropriation of funds examine BIA’s accounts. BIA money appears to have been directed to private projects and property purchases. Government officials have suggested that Prince Jefri and his Amedeo group of companies were the culprits. On October 20th 1998 the government took a further step, announcing the creation of a Financial Task Force to find the missing money, which it said amounted to billions of dollars.

The government’s attempts to investigate the finances of BIA had been de- layed—temporarily, it turned out—in September when Prince Jefri obtained an English High Court injunction stopping KPMG from proceeding with investig- ations into BIA, as KPMG had been his personal accountants. The case went to appeal in October and was overturned, so KPMG is now working closely with the Financial Task Force.

Brunei officials deny the In late September 1998 the education minister and new head of the BIA, Abdul prince’s conspiracy Aziz Umar Aziz, denied Prince Jefri’s allegations that extremist Islamic forces charges— were influencing the Brunei government. According to the Borneo Bulletin (August 19th edition), the Iranian ambassador also dismissed the charges as false and irresponsible. Mr Aziz also said he was concerned by reports in the foreign press (such as the UK’s The Sunday Times, August 30th edition, and The Independent, August 31st) that Brunei had withdrawn billions of dollars from Western and Japanese banks because of growing financial problems at home. Mr Aziz said such allegations destroyed confidence in Brunei’s economy and finances.

Whether or not the allegations against him are justified, Prince Jefri’s extrava- gant lifestyle has left him open to charges of mismanaging the royal family’s and the government’s finances while at BIA and Amedeo. Although certain members of the government, particularly Mr Aziz, are religious conservatives, it does not follow that they are under the influence of foreign Islamic groups. Prince Jefri’s attempts to implicate members of the government in a foreign conspiracy have been given little credence in Brunei.

—but admit government Mr Aziz acknowledged that Brunei was not blameless in the handling of its secrecy has been financial affairs. He said the secrecy surrounding BIA, which controls most of damaging— the state’s assets, had been a major problem. This allowed those in charge of BIA (including, presumably, Prince Jefri) to misuse the country’s money. Despite the charges and counter-charges, a reconciliation between the sultan and his brother may be possible: on his return to Brunei, Prince Jefri was greeted at the airport by members of his family and senior Brunei officials.

—and call for more Following the sultan’s titah, or royal address, in July 1998 (3rd quarter 1998, transparency by officials— page 41) that government officials must be more honest, calls for greater trans- parency in government have been increasing. Mr Aziz has dwelt on this subject in discussing the problems facing BIA, although letters in local newspapers suggest the public is sceptical that the government can change its ways. A tradition of secrecy in the government bureaucracy, a rigid social hierarchy and the reserve of Malay society suggest that it will be difficult for the government

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 42 Brunei

to be more open. The concept of transparency is new to Brunei, but the scope of the scandals at Amedeo and BIA and the sultan’s desire to avoid blame means the government may conduct its affairs more openly.

—and the creation of a In keeping with this theme, and to provide a better response to citizens’ com- new agency to address plaints, the government set up a Management Services Department (MSD) citizen complaints under the prime minister’s office in July 1998. (The sultan is also the prime minister.) The public has been invited to lodge complaints about government departments with the MSD. Such matters as inefficiency, rudeness and poor service will be dealt with by the new department.

The sultan grants As part of his 52nd birthday celebration on July 15th the sultan announced new cost-of-living increases— cost-of-living allowances for civil servants, pensioners and needy families. The increased allowances, which will benefit lower-paid civil servants the most, will cost the government Br$60m (US$37m) annually. Most civil servants can expect to receive an additional Br$80-120 a month as a result of the increases. In announcing the higher payments—which are seen as giving a boost to the local economy—the sultan warned companies not to increase prices, and said the Brunei Price Control Unit would monitor the situation. The sultan said that although Brunei is suffering from Asia’s financial crisis, the government is con- cerned about the public’s welfare and took these steps to help.

—which cheer recipients Recipients of the allowances, as well as companies that hoped to benefit from and local companies the increased spending, welcomed the increases, although in theory they could be withdrawn at any time because they are not part of normal salaries. The payments will also give a much-needed boost to the sultan’s and government’s image, which have suffered because of the Amedeo crash and revelations about BIA. Although the sultan has not been criticised directly for the government’s financial scandals or for the extravagant antics of his brother, the reputation of the country and the royal family have been tarnished.

The government provides The government has allocated Br$106m of the additional development budget housing for squatters of Br$352m (3rd quarter 1998, page 42) to state housing. Most of this money will be spent on new dwellings as part of the government’s resettlement plan. These resettlement schemes are for the benefit of Brunei citizens, many of whom have been living in housing on the water village in the capital. Some Brunei citizens have been squatting on state land, and these people also will be resettled. In a surprise announcement on October 7th the government an- nounced that non-citizens, comprising about 500 households, would be eligi- ble for new housing, which they could rent or buy. The beneficiaries are primarily Iban families holding permanent residence status and long-term im- migrants from Sarawak and Sabah—two neighbouring Malaysian states—who have resided in the country for many years. The government has become increasingly concerned about the spread of shantytowns throughout the country, in particular the implications for public health.

The government’s announcement that it will re-house squatters has launched a debate in Brunei, with some residents warning that such benevolence will only encourage more squatting.

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Islamic officials stress Imams (Muslim prayer leaders) in the country’s mosques told worshippers loyalty to the sultan— following the sultan’s birthday on July 15th that Muslims “must show their undivided support and loyalty to the ruler .… He is the protector of Islam in the country and as long as Islam remains in safe hands, we can be sure that this divine teaching will fortify the nation against any undesirable element that could lead it to ruin.” Imams emphasised that a just monarchical system of government was compatible with Islamic teaching, and said Brunei’s Muslims must also continue to uphold the nation’s ideology of Malay Islamic Monarchy, which forms the basis of the country’s sociopolitical system. Religious leaders said support for the Brunei system would continue “as long as it stays within the Islamic teaching”, suggesting that officials within the Ministry of Religious Affairs are placing more emphasis on the Islamic part of the ideology than on the monarchical.

—while moving against Officials of the Islamic Religious Affairs Department confiscated religious ob- non-Islamic religions jects such as crosses and Buddha figurines from goldsmiths in Brunei in early September. Officials said they were acting under the Undesirable Publications Act, which covers visible representations in any form, not just printed material. Representatives of the department said Muslim sensibilities would be offended by the display of non-Islamic religious objects, and had warned shopkeepers in the past about the practice. Perhaps realising their enforcement of the law had been overzealous, the department later said shopowners could apply for the return of their merchandise, and that they would not be prosecuted.

The state Mufti The State Mufti Department, which renders legal judgments on Islamic matters Department launches a in Brunei, has set up a web site. This is a significant departure for Brunei’s web page religious authorities, which are regarded as conservative and reluctant to change. Religious and other government officials have often raised concerns about the damaging impact of information obtained on the Internet. The department apparently realises that it can now use information technology for its benefit, a step that complements the government’s push to develop the country’s communications infrastructure. The department, which also pub- lishes Islamic religious materials, has said the information on its web page will be distributed in English and other languages for the benefit of non-Malay speakers.

Queen Elizabeth II pays a Queen Elizabeth II and Prince Philip made a three-day state visit to Brunei on state visit to Brunei September 18th-20th. The last visit by a British monarch to Brunei was in 1972, when the country was still a British protectorate. (Brunei became fully sover- eign in 1984.) The British High Commission said the queen’s visit reflected “the special relationship between the two royal families as well as the UK’s commitment to Brunei and the Asean region”. The sultan noted that many Bruneians were educated in the UK, and the queen mentioned the strong ties between Brunei and the UK on defence matters. The UK, in fact, hopes that Brunei will purchase British defence equipment, although commercial pro- motion was not specifically on the royal agenda.

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The economy

Brunei reduces its growth The government has lowered its estimate for economic growth in 1998 as the forecast— Asian crisis takes its toll on Brunei. On August 9th the deputy finance minister, Selamat Munap, said the government expects GDP in 1998 to rise by between 2.5% and 2.7% compared with 1997. The government in February had forecast growth of 3.2% for 1998. Brunei’s GDP grew by 4% in 1997 compared with 1996, according to Mr Munap. The government’s development plan for 1996- 2000 had called for annual growth of 5%. Public consumption and investment have declined this year and the construction industry has been particularly hard hit, according to Borneo Bulletin. Brunei’s economy is dominated by petro- leum production, and the decline in world prices this year has been a major factor in the slowdown.

—as the private sector The banking community is optimistic about Brunei’s long-term future but asks for closer requested that the government give the private sector advance warning of consultation— changes in planned government spending. Brunei’s economy is heavily de- pendent on government outlays. Businesses, especially those involved in government infrastructure projects, invested heavily on the understanding that the government would proceed with its development programme. Earlier in the year (2nd quarter 1998, page 39), the government decided, with little warning, to slash its development budget by half. Business plans and commit- ments for many private-sector firms were suddenly thrown into disarray. The government later reversed its decision to cut spending.

The private sector is also concerned with ongoing delays in payment for government projects. Contractors, in particular, faced large interest payments because of the government’s delays. Although there has been some improve- ment recently, most companies believe the government must change its pro- cedures for contractors.

—and a new council meets The Brunei Economic Council (BEC), set up in June as the Ministerial Economic to discuss economic Council (3rd quarter 1998, page 42), has established several committees to ex- problems— plore ways of strengthening Brunei’s economy. Sectors under review include banking and finance, economic policy, infrastructure development, prod- uctivity and the regional economic crisis. Although Asia’s economic troubles were cited as the reason for setting up the BEC, the council is also expected to address the scandals surrounding Amedeo and the Brunei Investment Agency (see The political scene). Members from Brunei’s private sector are working alongside government officials on all committees, the first time there has been such close public-private co-operation.

—that have caused house The economic downturn in Brunei, coupled with an oversupply of rental prop- and commercial rentals to erties, has caused rents in the capital, , and in Kuala Belait, plummet to drop by more 50%. Landlords, concerned they will not be able to make remortgage repayments, have cut rents. A newly completed furnished flat in the capital now rents for less than Br$2,000 (US$1,227) a month. Six months ago the price would have been Br$4,000 a month. Similar problems have affected the commercial sector. Several large shopping centres have been built

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 Brunei 45

in and around the capital in recent years, leading to a glut of commercial properties.

The peg between the The 30-year-old agreement between Singapore and Brunei linking their curren- Brunei and Singapore cies will continue. Ministry of Finance officials in Brunei denied rumours in currencies will remain— early September that the two currencies would be delinked. According to the September 4th edition of the Borneo Bulletin, the rumours began after a Singa- pore member of parliament asked if Brunei’s economic and financial problems, particularly those surrounding Prince Jefri and Amedeo, were affecting the Brunei and Singapore dollars. The Singapore dollar had fallen against the US dollar on September 3rd, following the rumours. The Monetary Exchange of Singapore denied any change in the currency agreement, and the rate against the US dollar stabilised.

—as the Malaysian ringgit Following Malaysia’s decision to fix its currency at M$3.80:US$1 and the intro- controls cause confusion duction of controls on trading and repatriating ringgit, bankers in Brunei sus- pended transactions with Malaysia while they tried to interpret the new regulations, which were ambiguous. Those with Malaysian ringgit accounts in Brunei were advised to remit their deposits to an account in Malaysia or to convert their accounts to a US dollar account.

If Malaysian currency controls are in place for the long term, it is likely that a black market in ringgit will develop. The October 14th edition of the Borneo Bulletin reported that Brunei is likely to operate a black market in ringgit, as it borders the Malaysian states of Sarawak and Sabah and there are frequent crossborder shopping trips between Brunei and the Sarawak towns of Miri and Limbang.

Brunei’s vehicle industry New car sales in Brunei have decreased dramatically in 1998 compared with past suffers a major years as consumer confidence has fallen. Sales are unlikely to reach 8,000 cars downturn— this year; more than 14,000 cars were sold in 1997. Finance companies are also restricting credit for car purchases and are more cautious in their lending. Im- port duties, ranging from 40% to 200%, have also slowed down sales. Brunei’s 20 car distributors, selling European, Japanese, South Korean and Malaysian vehicles, are facing serious financial problems and have already started to lay off staff, with the likelihood that further cuts will follow. Car dealers say their problems are compounded by a requirement to pay duty on cars when they are delivered at the port of Muara, rather than when the car is sold. This means traders can pay duty up to six months before a car is sold. Larger and luxury model cars incur the highest duties, and Brunei’s auto motor traders have called on the government to reduce the duties. The president of Brunei’s only legal political party, the Brunei Solidarity Party, has also called for the abolition of the import tax on cars.

A record number of cars have been repossessed in Brunei this year as the economic downturn has eliminated some jobs, making car payments difficult. The increasing number of repossessed cars will eventually be sold off, further depressing the market in new car sales.

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 46 Brunei

—but Bruneians continue Local businesses have also been seriously affected by the outflow of money to to shop in neighbouring neighbouring Sarawak and Sabah. With the fall in the exchange rate of the Malaysia Malaysian ringgit, Brunei shoppers now find it increasingly attractive to shop in such Malaysian towns as Miri, Limbang and Labuan. Local business people say they have been unable to compete with prices across the border. The BEC is examining ways that local businesses can become more competitive.

The Port of Singapore The Port of Singapore Authority (PSA) has formed a joint venture with a local Authority expresses firm and is keen to put in a bid to run Brunei’s main port at Muara. Brunei’s interest in Muara Port Ministry of Communications has approved the contracting out of Muara port’s management and operations. The government wants the private sector to be involved in the construction, development and management of a container terminal at Muara. Upgrading facilities is an important part of Brunei’s plans to become a service hub for transport and tourism in the Brunei-Indonesia-Malaysia- Philippines East ASEAN Growth Area (BIMP-EAGA). PSA’s interest in running Muara port suggests Singapore is optimistic about the long-term future of the region. Singapore’s determination to be a player in the BIMP-EAGA will un- doubtedly irritate Malaysia.

The government plans for The government signed a Br$55m (US$33.7m) contract with a US company, a multimedia network Lucent Technologies, to implement the country’s information infrastructure, RAGAM 21. The company will install a countrywide multimedia “highway”, which will serve both the private and public sectors, by September 1999. The government is keen to show that, in spite of the economic downturn facing Brunei and the rest of Asia, it is determined to build up Brunei as the communi- cations and transport hub for the East ASEAN region.

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 Quarterly indicators and trade data 47

Quarterly indicators and trade data

Malaysia: quarterly indicators of economic activity

1996 1997 1998 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Production Crude petroleum m barrels/day 0.72 0.73 0.75 0.75 0.75 0.75 0.76 0.73 0.73 0.73a Qtrly totals Rubber ’000 tonnes 218 288 286 252 217 266 237 215 181 848b Tin-in-concentrates “ 1.4 1.2 1.1 1.4 1.3 1.2 1.2 1.5 1.3 0.4b Industrial production Monthly av General index 1990=100 182 192 194 193 203 211 214 191 194c n/a Prices Consumer prices 1990=100 127.6 128.4 129.2 130.6 130.8 131.4 132.7 136.2 138.3 138.8d change year on year % 3.7 3.5 3.4 3.2 2.5 2.3 2.7 4.3 5.7 n/a Wholesale prices: petroleum, spot, Tapis US$/barrel 20.40 21.53 25.28 23.92 20.07 19.53 20.00 15.02 14.37 13.53 rubber, Singapore No. 1RSS S$/tonne 2,101 1,861 1,773 1,722 1,593 1,351 1,288 1,221 1,206 1,181 tin, London US cents/lb 288.08 278.94 268.42 266.81 256.62 247.25 252.71 240.49 265.25 254.33 Money End-Qtr M1, seasonally adj: M$ bn 69.59 74.01 78.07 83.27 83.85 85.11 85.00 71.46 67.99 63.32e change year on year % 18.5 24.3 24.2 23.7 20.5 15.0 8.9 –14.2 –18.9 n/a Foreign trade Qtrly totals Exports fob M$ m 49,159 49,683 50,536 48,954 49,452 56,764 66,261 69,774 68,869 24,059b Imports cif “ 48,622 49,043 50,974 46,935 54,196 55,257 64,588 60,961 55,549 20,007b Exchange holdings End-Qtr Goldf US$ m 699 690 674 601 604 573 540 521 533 515e Foreign exchange “ 24,702 25,214 26,156 26,913 25,799 21,380 20,013 19,031 18,926 18,788e Exchange rate Market rate M$:US$ 2.50 2.51 2.53 2.48 2.52 3.19 3.89 3.65 4.17 3.80

Note. Annual figures for most of the series shown above will be found in the Country Profile. a Forecast for 4 Qtr, 0.74; forecast for 1 Qtr 1999, 0.74. b July only. c Average for April-May. d Average for July-August. e End-August. f End-quarter holdings at quarter’s average of London daily price less 25%.

Sources: International Energy Agency, Monthly Oil Market Report; International Rubber Study Group, Rubber Statistical Bulletin; World Bureau of Metal Statistics, World Metal Statistics; OMI; IMF, International Financial Statistics.

Brunei: quarterly indicators of economic activity

1996 1997 1998 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Production Prodn/day Crude petroleum ’000 barrels 160 155 148 147 143 144 150 147 126 130a Foreign trade Annual totals Exports fob US$ m ( 2,329 ) ( n/a ) ( n/a ) Imports cif “ ( 4,689 ) ( n/a ) ( n/a )

Note. Annual figures of most for the series shown above will be found in the Country Profile. a Average for July-August.

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

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 48 Quarterly indicators and trade data

Malaysia: trade with major trading partners (US$ ’000; monthly averages) Total importsa Singaporeb Japanbc USbd UKb Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Jul Jan-Jul Exports to Malaysia cif 1996 1997 1996 1997 1996 1997 1995 1996 1997 1998 Fish & products 27,633 27,135 6,878 6,004 389 452 263 435 435 473 Cereals & products 83,653 78,534 2,243 2,313 131 148 17,880 16,365 376 268 Fruit, vegetables & products 42,063 40,711 18,132 13,631 80 117 4,694 5,185 203 64 Sugar & preparations 28,974 29,060 1,148 1,372 37 25 127 161 92 50 Textile fibres 34,531 25,039 4,648 3,592 4,385 n/a 1,733 1,335 81 60 Metalliferous ores & scrap 41,572 41,651 3,339 3,907 295 34 5,093 6,673 1,680 227 Petroleum & products 148,397 162,404 115,794 115,553 1,126 1,198 1,032 1,285 706 138 Chemicals 441,562 455,414 116,486 126,192 83,377 82,588 39,730 43,762 12,715 12,302 Paper etc & manufactures 90,441 88,524 14,187 11,590 9,058 9,011 10,609 9,769 2,843 1,559 Textile yarn, cloth & mnfrs 114,441 101,972 54,031 47,916 7,209 10,236e 1,569 2,009 3,287 1,200 Non-metallic mineral mnfrs 90,747 78,058 22,934 17,250 23,015 24,917 14,415 11,438 10,970 1,969 Iron & steel 287,203 286,463 32,936 31,727 84,023 70,124 5,053 2,053 3,604 1,594 Non-ferrous metals 142,341 147,583 40,855 40,231 27,505 26,662f 5,278 5,892 2,339 1,468 Metal manufactures 120,861 118,899 35,654 37,240 19,604 31,130 4,398 6,233 3,272 1,504 Machinery incl electric 3,468,945 3,411,285 1,172,087 1,114,869 765,473 692,178 458,059 417,417 77,252 58,043 Transport equipment 455,513 522,817 33,962 29,285 154,239 166,032 21,845 27,640 27,333 4,570 Scientific instruments etc 166,945 189,232 55,004 56,937 40,703 42,036 23,660 26,129 7,459 4,579 Total incl others 6,534,433 6,546,035 1,876,057 1,818,707 1,277,316 1,209,123 682,569 661,691 172,964 102,103

Total exportsa Singaporeb USbd Japanbc UKb Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Jul Jan-Jul Imports from Malaysia cif 1996 1997 1996 1997 1995 1996 1996 1997 1997 1998 Coffee, cocoa, tea & spices 26,105 30,740 6,400 9,364 4,165 3,983 3,193 3,311 554 242 Rubber, crude 117,017 88,853 16,553 10,585 19,115 17,567 7,934 15,091 2,999 3,051 Wood, unmanufactured 205,565 180,133 12,498 12,005 4,797 4,056 92,203 156,755f 4,414 3,666 Metalliferous ores & scrap 10,919 9,660 2,899 2,759 1,902 1,750 8,838 4,148 90 243 Petroleum & products 344,506 321,216 78,853 61,969 6,696 8,596 89,490 140 17 231,305 Gas 181,595 224,875 47 134 0 0 143,679} 0 0 Animal & vegetable oils & fats 388,424 384,923 25,074 23,722 11,237 10,571 22,757 26,157 7,858 7,308 Chemicals 207,207 232,951 32,822 32,468 21,469 26,296 23,769 26,607 4,960 6,440 Wood manufactures 200,647 191,332 16,288 15,756 12,825 16,317 72,408 n/a 4,922 6,732 Textile yarn, cloth & mnfrs 108,468 107,268 18,449 18,101 5,647 5,272 7,358 13,741e 3,609 3,010 Non-ferrous metals 64,283 65,617 16,660 16,906 6,497 3,235 6,925 12,929f 2,232 1,562 Machinery & transport eqpt 3,608,054 3,668,902 1,060,500 1,091,471 1,162,644 1,162,260 359, 899 351,938 202,004 188,963 Clothing 197,988 194,040 62,118 61,178 104,448 107,950 12,803 7,873 18,917 15,434 Scientific instruments etc 103,309 115,908 30,524 31,175 22,949 26,918 16,931 18,964 3,258 4,330 Total incl others 6,526,031 6,558,515 1,643,499 1,658,375 1,498,403 1,527,559 979,202 948,010 281,479 263,636 a Figures from Malaysia’s statistics: exports fob; imports cif. b Figures from partners’ trade accounts. c Japanese exports to Malaysia averaged US$1,206.7m and US$791.9 per month for the periods January-June 1997 and 1998. Japanese imports from Malaysia averaged US$1,018.5m and US$74.32m per month for the periods January-June 1997 and 1998. d US exports (fas) to Malaysia averaged US$791.9m and US$786.0m per month for the periods January-August 1997 and 1998. US imports from Malaysia averaged US$1,481.9m and $1,547.8m per month for the periods January-August 1997 and 1998. e Including fibres. f Including manufactures.

Sources: Department of Statistics, Malaysia, External Trade Summary; Singapore Trade & Development Board, Singapore Trade Statistics; UN, External Trade Statistics, series D; UK HM Customs & Excise, Business Monitor MM20; US Department of Commerce news, FT900; OECD, Monthly Statistics of Foreign Trade.

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 Quarterly indicators and trade data 49

Brunei: foreign trade (Br$ m) Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Deca Jan-Deca Imports cif 1985 1986 1987 1988 1989 1990 Food 196.1 209.1 237.2 247.0 241.7 n/a Drink & tobacco 70.5 84.9 79.9 69.4 64.0 n/a Mineral fuels 23.9 14.6 15.6 13.6 14.6 n/a Chemicals 95.1 101.5 93.2 99.0 102.4 n/a Manufactured goods 289.9 305.7 330.6 354.7 433.2 n/a of which: iron & steel 90.1 68.9 115.1 100.8 n/a n/a metal manufactures 76.9 87.7 72.7 99.0 n/a n/a Machinery & transport equipment 456.3 550.8 402.8 490.4 597.8 n/a of which: electric machinery 94.3 138.3 95.8 135.2 n/a n/a road motor vehicles 127.0 132.0 104.5 124.8 150.5 n/a Total incl others 1,348.4 1,457.0 1,351.1 1,497.3 1,675.0 1,847.8

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Deca Jan-Deca Exports fob 1986 1987 1988 1989 1990 1991 Mineral fuels & lubricants 3,877.7 3,906.8 3,359.5 3,558.3 4,164.1 4,125.4 Total incl others 3,990.0 4,005.6 3,463.4 3,693.5 4,316.5 n/a a Ministry of Finance, Economic Planning Unit estimates.

Source: National sources.

Brunei: direction of trade (US$ m) Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Total exports foba 1993 1994 1995 1996 Imports cifa 1993 1994 1995 1996 Japan 1,287 1,079 1,220 1,269 Singapore 698 897 1,612 1,882 UK 414 416 182 411 UK 495 595 444 921 Thailand 206 166 263 195 US 526 414 209 413 Singapore 196 189 203 187 Malaysia 207 287 318 358 Taiwan 61 56 46 73 France 84 177 95 187 Total incl others 2,362 2,106 2,084 2,329 Total incl others 2,600 3,124 3,490 4,689 a DOTS estimates.

Source: IMF, Direction of Trade Statistics, yearbook.

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998