COUNTRY REPORT Malaysia Brunei At a glance: 2001-02 OVERVIEW Malaysia's political crisis has deepened further, as opposition to the 75-year- old prime minister, Mahathir Mohamad, from within his United Malays National Organisation (UMNO) continues to grow, relations with the Chinese community worsen, and proposed talks with the opposition on Malay unity fail to materialise. The economic slowdown that is expected for this year could trigger social unrest. Key changes from last month Political outlook • Malaysia's racial harmony is increasingly under threat as the political crisis deepens and the economy begins to turn down. The chances are growing that Dr Mahathir may be forced to retire by the UMNO party elders, concerned about the acute discontent among the grassroots. Economic policy outlook • Additional fiscal stimulation and larger budget deficits can be expected as the government responds to the increasingly evident slowdown in the economy. Economic forecast • Demand for Malaysian exports is expected to be hit as the US economy comes close to recession and the Japanese economy goes back into recession, harming private investment and slowing private consumption growth. Real GDP growth of only 4.1% is forecast for this year, but growth is expected to bounce back to 6.1% in 2002. March 2001 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. 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ISSN 0269-6703 Symbols for tables “n/a” means not available; “–” means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK 1 Contents 3 Summary Malaysia 5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2001-02 8 Political outlook 9 Economic policy outlook 10 Economic forecast 14 The political scene 18 Economic policy 23 The domestic economy 23 Economic trends 25 Manufacturing 27 Agriculture 28 Infrastructure 30 Financial and other services 31 Foreign trade and payments Brunei 33 Political structure 34 Economic structure 34 Annual indicators 34 Quarterly indicators 35 Outlook for 2001-02 35 Political outlook 35 Economic forecast 36 The political scene 38 Economic policy and the economy EIU Country Report March 2001 © The Economist Intelligence Unit Limited 2001 2 List of tables 10 Malaysia: international assumptions summary 11 Malaysia: forecast summary 12 Malaysia: gross domestic product by expenditure 24 Malaysia: real gross domestic product 32 Malaysia: current account List of figures 13 Malaysia: real gross domestic product 13 Malaysia: Malaysian dollar real exchange rates 19 Malaysia: money supply, M2 23 Malaysia: gross domestic fixed capital formation 24 Malaysia: quarterly gross domestic product 25 Malaysia: consumer and producer prices 26 Malaysia: industrial and manufacturing production 26 Malaysia: exports of electronics and electrical goods 27 Malaysia: sales of passenger cars EIU Country Report March 2001 © The Economist Intelligence Unit Limited 2001 3 Summary March 2001 Malaysia Outlook for 2001-02 Malaysia’s fragile stability will continue to be threatened as pressure on the government to become more democratic intensifies. An expected economic slowdown this year could trigger social unrest, accelerating the pace of change. The 75-year-old prime minister, Mahathir Mohamad, appears determined to carry on in office but opposition to him from within the United Malays National Organisation (UMNO), the dominant component of the ruling Barisan Nasional (BN) coalition, is growing, and he could be forced out prematurely. Since the previous Country Report, the EIU has sharply reduced its real GDP growth forecast for 2001 from 7.3% to 4.1%, recovering to 6.1% (previously 6.7%) in 2002, largely because of the expected downturn in the US economy and the return of recession to Japan. The political scene The discontent within UMNO over the leadership of Dr Mahathir has become more overt. A newly-set up Malay Action Front has become a forum for grievances. Malay unity talks have been rejected by the opposition Parti Keadilan Nasional (PKN) while talks with the Parti Islam sa-Malaysia have been called off at the last minute. Ethnic tensions are rising. Dr Mahathir has alienated the Chinese community which had called for an easing of the positive discrimination policies in favour of ethnic Malays. The intimidation of opposition supporters is continuing. The Malaysian Human Rights Commission has held a public inquiry into police brutality. Economic policy Officials are trying to find ways of limiting the impact of the US slowdown. Fiscal and monetary policies remain stimulative. The government has published “masterplans” for the financial sector and the capital market, which promise stricter corporate governance and the establishment of a single local exchange by 2002. However, the divestment policy has so far remained opaque and changes to the bumiputera policy are unlikely. Malaysia’s foreign investment incentives are no longer adequate. Support for international trade pacts is weakening in Malaysia, where concern about the growing number of free-trade agreements is arousing concern. The domestic economy Economic growth continues to slow and there has been a sharp deceleration in domestic demand growth. Inflation remains subdued. Sales of manufactured goods slipped in the fourth quarter and there has been a similar weakening of growth in the electronics industry. Malaysia’s manufacturing investment plans may paint too bright a picture of the investment outlook. The government has taken measures to reduce the glut of crude palm oil with new moves under way to boost demand. The government is buying up excess rice stocks. Some of Kuala Lumpur’s light-rail companies have been bailed out and the government is planning to take over some of the KL bus companies. After the government’s EIU Country Report March 2001 © The Economist Intelligence Unit Limited 2001 4 repurchase of a large stake in MAS there have been yet more accusations of a bailout. Concern is growing about future electricity supply shortages. Foreign trade and The value of exports declined in the fourth quarter and there was a payments corresponding drop in fourth-quarter imports. The current-account surplus was little changed from the third quarter. Brunei Outlook for 2001-02 As Brunei’s economy continues to falter, social control is likely to increase, notwithstanding the government’s calls for openness and transparency. Economic restructuring will be limited in scope. While economic growth will be a respectable 3-3.5% in 2001, weakness in the private sector will hamper a full economic recovery. Brunei’s non-oil external payments position is likely to worsen this year and next. The political scene The sultan’s visit to a US hospital, for undisclosed medical reasons, went unreported. A defamation ruling by the High Court worried the press. The chief justice pointed out the difficulty of trying to make Brunei an international investment centre while the government is immune from the process of the law. The government published new regulations to control Internet content. Policing of the citizens’ morality has been stepped up as the government banned public musical performances. Complaints about the public healthcare system are increasing.