Malaysia Brunei

COUNTRY REPORT

Malaysia Brunei

The full publishing schedule for Country Reports is now available on our web site at http://www.eiu.com/schedule.

3rd quarter 1999

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. 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.

London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent St The Economist Building 25/F, Dah Sing Financial Centre London 111 West 57th Street 108 Gloucester Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7830 1000 Tel: (1.212) 554 0600 Tel: (852) 2802 7288 Fax: (44.20) 7499 9767 Fax: (1.212) 586 1181/2 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Website: http://www.eiu.com

Electronic delivery EIU Electronic New York: Lou Celi or Lisa Hennessey Tel: (1.212) 554 0600 Fax: (1.212) 586 0248 London: Jeremy Eagle Tel: (44.20) 7830 1183 Fax: (44.20) 7830 1023 This publication is available on the following electronic and other media:

Online databases NewsEdge Corporation (US) Microfilm FT Profile (UK) Tel: (1.718) 229 3000 World Microfilms Publications Tel: (44.20) 7825 8000 (UK) DIALOG (US) CD-ROM Tel: (44.20) 7266 2202 Tel: (1.415) 254 7000 The Dialog Corporation (US) LEXIS-NEXIS (US) SilverPlatter (US) Tel: (1.800) 227 4908 M.A.I.D/Profound (UK) Tel: (44.20) 7930 6900

Copyright © 1999 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the EIU does not accept responsibility for any loss arising from reliance on it.

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 Contents

3 Summary

Malaysia

5 Political structure 6 Economic structure 7 Outlook for 1999-2000 13 Review 13 The political scene 18 Economic policy and the economy 24 Banking and finance 31 Agriculture 33 Industry 37 Energy 39 Transport and communications 42 Employment, wages and prices 43 Foreign trade and payments

Brunei

45 Political structure 46 Economic structure 47 Outlook for 1999-2000 48 Review 48 The political scene 52 The economy

56 Quarterly indicators and trade data

List of tables

9 Malaysia: economic results and forecasts 13 Malaysia: forecast summary 52 Brunei: gross domestic product 56 Malaysia: quarterly indicators of economic activity 57 Brunei: quarterly indicators of economic activity 57 Malaysia: trade with major trading partners 59 Brunei: foreign trade 59 Brunei: direction of trade

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 2

List of tables

13 Malaysia: gross domestic product 13 Malaysia: Malaysian dollar real exchange rates 19 Malaysia: loans extended by banking system 20 Malaysia: interest rates 21 Malaysia: non-performing loans 31 Malaysia: palm oil production 34 Malaysia: industrial production 36 Malaysia: consumption indicators 37 Malaysia: oil production 43 Malaysia: foreign trade, 1999

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 3

July 28th 1999 Summary

3rd quarter 1999

Malaysia Outlook for 1999-2000: The ruling coalition will win the next general election, whenever it is called, as the opposition alliance looks ideologically un- stable. The coalition’s rivals should gain ground, however. The prime minister, Mahathir Mohamad, will remain in office for now, but there could be a contest to succeed him. GDP is forecast to grow at a much faster rate than previously expected, led by rising industrial production, increased exports and slightly greater private consumption. Investment levels will be subdued. Inflation and interest rates will remain low, but the current account will again be in surplus.

The political scene: With the next general election imminent, four opposition parties have joined forces to challenge the ruling coalition. Important policy disagreements will keep them from becoming a potent force, however, and the government has been keen to exploit their differences. A new secretary- general has been appointed at UMNO, which may be suffering a crisis of confidence. The former deputy prime minister, Anwar Ibrahim, has again been put on trial, this time for allegedly committing illegal sex acts.

Economic policy and the economy: The economy contracted by 1.3% in the first quarter of 1999, owing to declining output and demand. The trade account remained solidly in surplus, however, as imports again fell. Official data showed the recession was abating, although constraints on public spending and reduced bank lending have raised concerns. Interest rates have continued to fall. A government bond offering was oversubscribed, but only after an attractive rate was offered. Foreign investment has declined as companies have questioned government policy. Many of the targets in the government’s five- year plan have been lowered.

Banking and finance: Lending slowed, but the non-performing loan (NPL) ratio, after rising early in the year, began to decline. Danaharta, the NPL acquisition agency, completed its purchase of bad loans and began offering assets for sale. Danamodal, the recapitalisation agency, is also keen to dispose of its acquisitions. An important bank merger has been completed. The stockmarket’s surge has been fuelled by local buying. Regulators have increased oversight of the banking system. The issue of Malaysian shares formerly traded on Singapore’s over-the-counter market remains contentious.

Agriculture: Demand for palm oil has been subdued. Rubber imports have been curtailed. A dioxin scare provoked a brief ban on European imports. The Nipah virus appears to be under control.

Industry: Manufacturing output has begun to grow again on improving external and internal demand. Investment in the electronics sector has increased over 1998 levels. Progress on the government’s high-tech zone has continued to lag. Lax enforcement of intellectual property laws remains a problem. Car sales continued to rise.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 4

Energy: Tenaga is reviving a shelved generating project following increased demand for electricity and a return to profitability. The Bakun dam scheme will proceed. Petronas insists it will not increase output of crude oil.

Transport and communications: Kuala Lumpur’s light rail network has continued to evolve. Construction on a monorail has resumed. The national airline has gone deeper into the red. Indebted telecommunications companies may be forced into mergers.

Employment, wages and prices: Fewer workers are being laid off by companies. The government has rejected a proposal for a retrenchment fund and a minimum wage. Inflation is moderating.

Foreign trade and payments: The trade surplus remained substantial through to May, driven by stronger sales of electronic goods. Export revenue was sharply higher year on year. Imports began to rise in April.

Brunei Outlook for 1999-2000: Rising world oil prices will help the government's finances, which are heavily dependent on receipts from the hydrocarbon sector. The regional economic recovery—and higher energy prices—have also improved Brunei's broader economic prospects, and the government is now forecasting growth in GDP of between 0% and 1% in 1999. The recession, however, exposed deep problems in Brunei's economic structure, and the government has pledged to pursue banking and financial sector reforms and to increase opportunities for private-sector participation in government enterprises.

Review: The government intends to introduce more business-friendly policies in a bid to increase foreign investment. A plan that would allow foreigners for the first time to own land in Brunei appears to be a part of this programme. Despite some signs of openness, the government continues the strict enforcement of religious laws, and has warned of "deviationist" forces within the Islamic religion. A major controversy over religious food laws has highlighted the importance the government still places on Islamic orthodoxy. Brunei's economy grew by about 1% in 1998, according to the IMF. Lower oil prices cut government tax revenue sharply, leading to a large budget deficit. The government financed this easily with proceeds from its overseas investments. The government continues to develop its plan to become a major regional trade and services centre.

Editor: Leo Abruzzese All queries: Tel: (44.20) 7830 1007 Fax: (44.20) 7830 1023 Next report: Our next Country Report will be published in November

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 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 70 members, 30 of whom are elected from the state legislatures and 40 appointed by the king. The House of Representatives (Dewan Rakyat) has 192 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 June 2000

National government The Barisan Nasional, the governing coalition, the main component of which is the United Malays National Organisation (UMNO) Baru, won 162 of the 192 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 Democratic Action Party (DAP), Parti Keadilan Nasional (PKN), Parti Bersatu Sabah (PBS) and Parti Rakyat Malaysia

Prime minister Dr Mahathir Mohamad Deputy prime minister & home affairs minister Abdullah Ahmad Badawi

Key ministers Agriculture Sulaiman Daud Defence Abang Abu Bakar Mustapha Education Najib Tun Razak Energy, communications & multimedia Leo Moggie Finance Daim Zainuddin Foreign affairs Syed Hamid Albar Housing & local government Ting Chew Peh Human resources Lim Ah Lek Information Khalil Yacoob International trade & industry Rafidah Aziz Primary industries Lim Keng Yaik Public works Samy Vellu Transport Ling Liong Sik Youth & sports Muhyiddin Yassin

Central bank governor Ali Abul Hassan Suleiman

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 6 Malaysia

Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998 GDP at market prices (M$ bn) 190.3 218.7 249.5 275.4 281.9 GDP (US$ bn) 72.5 87.3 99.2 97.9 71.8 Real GDP growth (%) 9.3 9.4 8.6 7.5 –7.5 Consumer price inflation (av; %) 3.7 5.3 3.5 2.6 5.3 Population (m) 19.7 20.1 21.2 21.7 22.2 Merchandise exports fob (US$ m) 56,897 71,767 76,881 77,881 71,939 Merchandise imports fob (US$ m) 55,320 71,871 73,055 74,005 54,260 Current-account balance (US$ m) –4,521 –8,470 –4,596 –4,791 9,196 Reserves excl gold (US$ m) 25,423 23,774 27,009 20,788 25,559 Total external debt (US$ bn) 30.3 34.3 39.7 47.2 43.5a Debt-service ratio, paid (%) 8.9 7.0 9.0 7.5 9.0a Exchange rate (av; M$:US$) 2.62 2.50 2.52 2.81 3.92

July 28th 1999 M$3.8:US$1

Origins of gross domestic product 1998 % of total Components of gross domestic product 1998 % of total Agriculture 11.5 Private consumption 44.7 Mining 6.9 Public consumption 11.3 Manufacturing 32.2 Gross fixed capital formation 30.3 Construction 3.6 Stockbuilding 0.0 Electricity, gas & water supply 3.4 Exports of goods & services 102.0 Services 42.4 Imports of goods & services –88.2 GDP at factor costb 100.0 GDP at market prices 100.0

Principal exports 1998c US$ bn Principal imports 1998c US$ bn Electronics & electrical machinery 41.3 Manufacturing inputs 27.6 Palm oil 4.5 Machinery 4.6 Petroleum & LNG 3.4 Transport equipment 3.4 Chemicals & chemical products 2.7 Metal products 2.7 Textiles, clothing & footwear 2.4 Food 1.7 Transport equipment 2.1 Consumer durables 1.3 Total incl others 73.2 Total incl others 58.2

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total US 21.6 Singapore 24.7 Singapore 17.9 Japan 15.9 Japan 10.0 US 13.8 Hong Kong 4.6 South Korea 6.7 Taiwan 4.1 Taiwan 5.1 UK 3.6 Germany 3.0 South Korea 3.5 Thailand 4.2 a EIU estimate. b GDP less bank charges. c Customs basis.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 7

Outlook for 1999-2000

The ruling Barisan The ruling Barisan Nasional (BN) coalition will emerge victorious from the next Nasional coalition will win general election thanks to the considerable advantages bestowed by long-term the next general election— incumbency, the innate conservatism of most Malaysians and the apparent inability of the fractious opposition to devise a sufficiently credible or appealing alternative programme of government. Many voters may be disenchanted with the prime minister, Mahathir Mohamad, but, being more materialistic than idealistic, and cherishing the stability it has brought, most can be expected to support his tried and tested administration. The United Malays National Organisation (UMNO), the BN’s dominant component, is duly projecting itself as the only party capable of protecting and advancing the interests of the ethnic Malay majority, and of simultaneously providing the enabling environment for the minority Chinese and Indian communities to prosper.

—whenever Dr Mahathir Although the general election and polls for most of the 13 state legislatures decides to call it— need not be held until June 200, the conventional wisdom is that Dr Mahathir will opt to go to the country sooner rather than later. The risk of the economy’s current revival being all too brief, and of opposition parties coalescing into a more formidable front, are the main reasons for forecasting an early ballot. The sheer intensity of the present campaigning by both sides is another. September is a distinct possibility.

Characteristically, Dr Mahathir has refused to be drawn on his intentions. He could choose to wait until after a populist 2000 budget, due in October 1999, is unveiled. He is likely to avoid the Muslim fasting month of Ramadan, scheduled to begin about December 10th. In fact, he may well bide his time until next year, concluding that a real economic recovery is under way and that the opposition is slowly imploding.

—because the opposition The fledgling four-party opposition alliance that will face off against the 14- alliance is ideologically party BN has little going for it. Its objectives of more just, equitable and open unsound government may be widely perceived as laudable and desirable, but, given its composition, are also seen as unsatisfactorily vague. The two most established partners, Parti Islam Sa-Malaysia (PAS) and the avowedly secular Democratic Action Party (DAP), are ideological opposites whose guarded and qualified promises of mutual co-operation are a source of unease for traditional supporters and detractors alike.

Many voters are wary of Hundreds, perhaps thousands, of DAP members have abandoned the party, al- PAS— ienated by PAS’s unflinching commitment to the establishment of an Islamic state and the implementation of the hudud, a criminal code prescribing ampu- tation for theft and stoning to death for adultery. These ambitions appeal to relatively few Malays either, and to few women in areas that are PAS strong- holds. They should also help ensure that the Chinese community, which accounts for around one-third of the population, once again sides largely with the BN.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 8 Malaysia

—and the government has The biased but influential BN-controlled media have been gloating over, and considerable resources at exaggerating, the differences between the opposition parties, and will continue its disposal to do so. The opposition’s main weakness is that it lacks the ruling coalition’s propaganda, organisational and financial resources. Deep pockets, extensive grassroots structures and a compliant national press will enable UMNO and its allies to pursue their winning strategy of cajoling and intimidating voters.

Yet the BN’s rivals will gain Nonetheless, the upsurge in anti-government sentiment since last September’s ground— sacking of Dr Mahathir’s popular deputy, Anwar Ibrahim, now serving a six- year prison sentence for “corruption” and being tried on a charge of sodomy, suggests the BN will not repeat the landslide victory it scored in 1995. Then, UMNO and its allies won 162 of the 192 seats in the national assembly, a tally that rose to 168 in 1996 with the return to the fold of Razaleigh Hamzah’s breakaway Semangat ‘46 party. This time around, the most realistic of the opposition leaders are hoping to deprive the BN of a two-thirds majority. But that target—65 seats—will be difficult to achieve, even assuming the anti- government alliance resolves acrimonious differences over which party should represent it in individual constituencies. PAS nominees are likely to predomi- nate in Muslim Malay northern areas, DAP candidates in largely Chinese constituencies along the west coast of the peninsula, and Parti Keadilan Nasional, founded by Mr Anwar’s wife, Wan Azizah Wan Ismail, last April, in ethnically mixed zones. The EIU expects the opposition to secure about 55 national assembly seats.

—and could win control of Both sides will focus much of their attention on the state assembly polls, more states traditionally held in conjunction with the general election. PAS, which already governs Kelantan in the north-east, could upset the BN in three other states: Terengganu, Perlis and Dr Mahathir’s native Kedah. Here again, the BN’s superior financial resources could prove decisive. It is now pumping money into these marginal states. Dr Mahathir is particularly keen to recapture Kelantan from PAS, and has charged Razaleigh Hamzah, an ambitious rebel- turned-ally whose now defunct Semangat ‘46 was a junior coalition partner in the state government between 1990 and 1996, with the task of doing so.

The prime minister is likely If the opposition manages to win a relatively modest 55 seats in the federal to stay put— parliament and control of two or three state assemblies, it would still be a major blow to the monolithic BN, and to UMNO and Dr Mahathir. Assuming such a scenario materialises, pressure on the prime minister from within the government to stand aside could build. But the signs are it would be minimal, and therefore easy to resist. Dr Mahathir is ambitious for Malaysia, and many of the items on his agenda remain to be achieved. Yet with a more substantial and vocal opposition in parliament, and a more demanding electorate outside it, he will feel obliged to bring fresh blood into the cabinet, heralding a parallel and overdue shake-up in the hierarchies of the government’s component parties.

—but there could be a The treatment of Mr Anwar—who is likely to be out of active politics for up to contest to succeed him a decade—would appear to preclude any premature push by other pretenders to the presidency of UMNO, which, by convention, carries the premiership

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 9

with it. The likelihood is that Dr Mahathir will be returned unopposed as UMNO president in the party’s leadership polls due to follow the general election. Abdullah Badawi, who has proven himself a competent deputy prime minister since being appointed to that position in January and is unobtrusively building support within the party, seems destined to be elected deputy president, filling another void left by Mr Anwar. That would put him first in line to eventually succeed Dr Mahathir. But if Mr Razaleigh, who narrowly lost to Dr Mahathir in the 1987 contest for the UMNO presidency, delivers Kelantan, his star would soar.

The growth rate will The EIU has significantly upgraded its forecast for GDP growth in 1999, from a accelerate— contraction of 0.5% year on year in our last report to growth of 3.7%. Our earlier forecast was based on the generally depressed level of most of Malaysia’s major economic indicators in January and February. However, a sharp accelera- tion in most measures of output—notably industrial production and exports— began in March and continued into April and May. Unexpectedly robust growth in Japan during the first quarter and the prolonged boom in the US— both are important export markets for Malaysia—have also caused us to raise our forecast. On an important technical matter, the government in the first quarter revised its national accounts series at constant prices, changing the base year from 1978 to 1987 and assigning a higher weight to the increasingly important manufacturing sector. This has had the effect of deepening last year’s GDP contraction, from -6.7% to -7.5%, providing a lower base from which to compare 1999 results and requiring a further fillip to our growth forecast. Growth is forecast to reach 4.5% in 2000 as exports continue to expand and private consumption strengthens.

Malaysia: economic results and forecasts (% change, year on year) 1997 1998 1999 2000 Private consumption 4.3 –10.8 2.2 4.6 Public consumption 7.6 –7.8 10.0 3.0 Gross fixed investment 9.2 –42.9 –2.0 4.9 Stockbuilding 0.9 0.0 –0.3 0.3 Exports of goods & services 5.4 –0.2 6.3 5.6 Imports of goods & services 5.7 –19.4 4.5 6.2 GDP 7.5 –7.5 3.7 4.5

—helped by rising private A slow revival in private consumption began early in the year, the result consumption— mainly of low interest rates, and it has gained momentum in recent months. Sales of passenger cars soared 232% year on year in February, helped by easy credit policies by the government and lower required downpayments. But the rate of increase—which is slightly misleading because of the low base in 1998— held up reasonably well in March and April, with car sales rising by an average of more than 150%, year on year. Other indicators were even more telling: monthly sales tax receipts rose in March for the first time since 1997—by a modest 3.8%—then soared in April by 45.8%. The results were much the same for imports of consumption goods, which limped upwards by 1.9% in March, then jumped by 17.2% in April. The combination of low interest rates—the

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 10 Malaysia

base lending rate at banks was lowered again in May, to 7.24%, down from a high of 12.27% last June—and pent-up consumer demand should sustain the recent gains in private consumption.

Nevertheless, we believe private consumption will not grow by much more than 2.2% this year. An overall 4% contraction in the first quarter, year on year, will be difficult to overcome. More importantly, lending by the banking system remains moribund. Although the value of loans by commercial banks rose slightly year on year, the total value of loans by all lending institutions— banks, finance companies and merchant banks—was 3% lower in May than in January. Until banks begin lending more freely, growth in private consumption—and in private investment—will remain capped at modest rates. A pick- up in lending should begin later this year, and we are forecasting growth in private consumption of 4.6% in 2000.

—and greater public Public consumption is forecast to rise by 10% this year as the government con- spending— tinues to try to fuel the recovery. Although ministries have had some trouble spending all of the funds allocated to them—creating something of a row among government officials—public consumption still rose 22% in the first quarter, year on year. If the leftover funding is disbursed as the year progresses, which seems likely in light of the recent criticisms, GDP could receive a further boost.

—although investment By all measures, investment remains seriously depressed. Gross fixed capital levels will be weak formation declined by 22% year on year in the first quarter, after falling by nearly 45% in 1998. While most other sectors of the economy showed a strong recovery in March and April, investment levels did not. Imports of investment goods fell 40.1% year on year in April, and applications—and approvals—for manufacturing projects were off by more than 50% each in the same month. Foreign investors, in particular, remained wary: applications for foreign capital investment barely reached M$3bn (US$790,000) in the five months to May, compared with M$12.6bn for the whole of 1998. Malaysia continues to suffer, to some extent, from the capital controls it imposed last September, which de- terred many investors, and from the continued harsh comments of Dr Mahathir, who continues to warn of “colonisation” by mysterious foreign forces. Partly for these reasons, we are forecasting a further 2% decline in gross fixed capital formation in 1999.

Paradoxically, the investment decline should not restrain output by much this year. Malaysia, which like many South-east Asian countries, built its economy on basic assembly and simple manufacturing, saw a portion of its industrial capacity laid idle by last year’s recession. As demand has increased in 1999, companies have had a relatively easy time—and have required little new investment—putting that capacity back on line. If Malaysia is to sustain GDP growth into 2000, however, investment will have to pick up. We believe it will, and are forecasting growth in investment of 4.9% next year.

Manufacturing is leading Recent manufacturing data support the view that production and demand are the recovery— on an upswing, and are likely to continue even without significant new investment. The index of industrial production has risen every month this year,

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 11

and was higher in May than in any month since December 1997, just as the Asian financial crisis was taking hold. Manufacturing comprises about one- third of GDP, and is therefore an important barometer of economic output. The gains in industrial production occurred in virtually all industries, lending credence to the view that the recovery is widespread. Only beverages and mining (including petroleum) reported declines in output in the first five months of the year.

The strong rise in industrial production, and the close link between manufacturing and exports—manufactured goods comprised nearly 83% of Malaysia’s overseas sales in 1998—have consequently caused us to raise our forecast for export growth, to 6.3% (national accounts, expenditure terms) from 2% in our last report. Total export earnings rose by 6.1% year on year in the five months through May, with all of the gain concentrated in the latter three months of that period. Within the manufacturing sector, electronics and electrical goods comprise the major share of exports—57.3% of total export earnings through May. Semiconductor sales, in particular, are critical to Malaysia’s export forecast, and the news here is encouraging: the Semiconductor Industry Association, a business group, is forecasting a 12.1% increase in sales worldwide in 1999, the first year of double-digit growth since 1995. Semiconductor demand has been especially strong in Asia—sales in January-May rose by nearly 13% year on year, faster than in any other region of the world—reinforcing the view that Asia’s economic recovery is under way.

—fuelled by demand for Malaysia’s export receipts will be held back by lower prices for palm oil, of Asia’s exports which Malaysia is the world’s largest producer. Although production is forecast to set a record this year, the international price has dropped by around 45% since the start of the year, and is not likely to recover because of overproduc- tion and less expensive substitutes. Precisely the opposite has been occurring with crude oil: Malaysian production has fallen so far this year, but prices are rising rapidly, and are now forecast by the EIU to average U$16/barrel in 1999, up from our previous forecast of US$14/b.

Imports fell year on year through May, but we are forecasting a recovery—and growth of 4.5% in 1999—partly because Malaysia’s electronics export industry requires imported components. Some evidence for this is already apparent in the data: while imports of capital goods fell by nearly 37% in the first five months of the year (consistent with low levels of investment), imports of intermediate goods rose by 2.4%. Imports of consumption goods also increased modestly to May, supporting the view that the recent turnaround in consumer demand is set to continue.

Inflation will remain low— Inflation is not expected to be a problem: the consumer price index (CPI) in June was just 2.1% above the year-earlier level, and for the first half of 1999 was up by a modest 3.3% year on year. Although the government has been trying to push up credit to fuel domestic demand, economic activity has not been expanding fast enough to create serious price pressures, or to stretch capacity. We expect inflation to average 4% this year, increasing slightly as the recovery accelerates, then rising to 5.2% in 2000 on the back of faster growth.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 12 Malaysia

—as well as interest rates— Low inflation may allow the government to reduce interest rates even further— the base lending rate fell from 8.04% at the start of the year to 7.24% in July. Yet, the limit on rate cuts may now have been reached. Real interest rates are only just above the inflation rate, and the government would probably be reluctant to let real rates turn negative. The fall in interest rates has also led to a large drop in deposit rates, which stood at about 3.75% at mid-year. Any further rate cuts could create an incentive for savers to take their money out of the banks, which would do nothing to increase bank lending. The EIU is forecasting an average lending rate of 7.4% this year, rising to 8.7% in 2000.

—but bank lending The banking system is clearly healthier now than at the depth of the crisis. A remains subdued special government agency created to purchase non-performing loans (NPLs) from the banking system had acquired just under US$7bn of NPLs—about one- third of the total—by the end of the April (although a senior government official in July said this figure had since risen above US$8bn). A separate agency has spent another US$1.7bn in recapitalising banks. These efforts were finally beginning to bring down the level of NPLs, which, on a three-month arrears basis, fell from 14.3% in February to 13% in April. Banks, however, have been no more eager to lend: the total value of loans has fallen this year. It will be at least another few months before bank lending returns to healthier levels.

Even with lacklustre lending, other monetary indicators have pointed to a revival of economic activity. The broadest measure of money supply, M3, was 4.5% higher in January-May than in the same period of 1998. In May alone, M3 was 7.1% higher.

The pegged exchange rate Malaysia’s exchange rate has been fixed at M$3.80:US$1 since September, and will hold— we believe it will remain at that level for the rest of the year and into the early part of 2000. Dr Mahathir has continued to say that the fixed rate will not be removed in the near future—he repeated this pledge in early June. The ringgit, however, has become undervalued as other currencies in the region have appreciated with the economic recovery. This has given Malaysia’s exports a boost, and the government is unlikely to jeopardise this advantage by remov- ing the peg. The undervalued ringgit, however, raises the cost of imports, and as the economy accelerates, this could feed through into higher rates of inflation. Rising levels of investment later in the year and into 2000 will also increase the demand for ringgit, putting further upward pressure on the currency. For these reasons, we believe the government will remove the fixed rate sometime during the first half of 2000. While the currency may strengthen initially, we believe it will average closer to M$3.92:US$1 for the year, in part because of the pressure from a forecast depreciation of China’s currency in 2000.

We are not expecting a huge capital outflow on September 1st, when the original one-year lock-in period on stockmarket investments—part of Malaysia’s capital controls scheme—ends. The government modified the controls in February, allowing invested principal to be removed immediately, but subject to a stiff tax. That tax disappears in September (although a profits tax remains), but we believe some investors may keep their money in Malaysia’s markets, buoyed by the economic recovery and solid returns in the stockmarket (up 35% for the year through mid-July).

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 13

—and the current account The current account will remain solidly in surplus in 1999, at an estimated will remain solidly in 10.8% of GDP, although this will be down from 12.8% of GDP last year. The surplus large surplus in 1998 was mainly the result of severe import compression: imports fell by nearly 27% last year in US dollar terms. They are forecast to rise by 6.7% this year as the economy recovers, with both consumption and intermediate goods imports leading the way. A higher services deficit, which usually accompanies a strong expansion in merchandise trade, will also pull back the current-account surplus, as will a higher income deficit as foreign companies repatriate profits from their more buoyant operations. The current-account surplus is forecast to fall to around US$7bn, or about 8.3% of GDP, in 2000 as merchandise imports grow faster than exports.

Malaysia: forecast summary (US$ m unless otherwise indicated)

1997a 1998a 1999b 2000b Real GDP growth (%) 7.5 –7.5 3.7 4.5 Consumer price inflation (av; %) 2.6 5.3 4.0 5.2 Merchandise exports fob 77,881 71,939 76,155 81,251 Merchandise imports fob 74,005 54,260 57,923 63,450 Current-account balance –4,791 9,196 8,677 7,091 Exchange rate (av; M$:US$) 2.81 3.92 3.80 3.92

a Actual. b EIU forecasts.

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

2 100

0 90 -2

-4 80 -6 M$:M$:¥¥

-8 70 1996 97 98 99(a) 2000(a)

(a) EIU forecasts. (b) 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 98 99(a) 99 2000(a) 2000

Review

The political scene

With the next general Government and opposition parties have been campaigning hard ahead of the election seemingly next general election, which need not be held until June 2000—two months imminent— after parliament’s current five-year term expires—but which the prime minister, Mahathir Mohamad, seems likely to call earlier. Recent pay increases and

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 14 Malaysia

bonuses for public servants, concerns that the modest economic revival now under way could prove shortlived and that opposition groups might coalesce into a formidable front, as well as the intensity of the exchanges between the ruling Barisan Nasional (BN) coalition and its rivals, all point to a ballot sooner rather than later.

—four opposition parties In late April four opposition parties—Parti Islam Sa-Malaysia (PAS), the join forces to take on the Democratic Action Party (DAP), Parti Keadilan Nasional (PKN) and Parti Rakyat ruling Barisan Nasional— Malaysia—agreed in principle to contest the federal and state elections as an alliance. Buoyed by the outpourings of anti-government sentiment triggered by the sacking, trial and conviction of Dr Mahathir’s charismatic former deputy, Anwar Ibrahim (2nd quarter 1999, page 13), the parties were united in their determination to end the prime minister’s 18-year reign. Their leaders also spoke of a need for greater respect for civil rights, more transparent and accountable government, and a fairer distribution of the nation’s wealth. A description of Dr Mahathir by the president of the PKN, Mr Anwar’s wife Wan Azizah Wan Ismail, summed up the feelings of many Malaysians. She characterised him as a “once respected leader who has lost all sense of perspective, all sense of right and wrong and all sense of reality”, and accused him of using the institutions of government to destroy any and all challenges to his hold on power.

—but are dogged by deep But beyond a shared desire to see off the prime minister and usher in a more ideological differences— responsible and responsive government, the four parties have little in common. PAS, which, like Dr Mahathir’s United Malays National Organisation (UMNO), draws its support from the majority Malay community, is ultimately seeking the establishment of an Islamic state. That concept is anathema to the secular DAP, most of whose members are ethnic Chinese. The DAP advocates a meritocracy, which, in turn, runs counter to the PKN’s effective endorsement of the affirmative action strategy in favour of Malays long pursued by the UMNO-led BN. Opposition leaders insist the differences are not a barrier to co- operation, and that each party respects the others’ ideologies and recognises that their biggest challenge is to end the alleged injustices of the present administration. But their common manifesto, which was still being finalised in late July, seems likely to be less a detailed blueprint for government than a declaration of general goals and ideals.

—and disputes over the There were more mundane disputes too. While PAS and PKN leaders said their fielding of candidates— aim was to defeat the BN, their DAP counterparts maintained such an objective was unrealistically ambitious. The best the opposition could hope for this time around, insisted the DAP secretary-general, Lim Kit Siang, was to deprive the BN of a two-thirds majority in the national assembly and to win control of a handful of state legislatures. The BN currently holds all but 24 of the 192 seats in the federal parliament, and rules all but one of the country’s 13 states. There was also friction over the defection of PAS members to the PKN following the latter’s launch in April, and over the PKN’s acceptance of disenchanted DAP luminaries. More crucially, while the four parties agreed that a single candidate should represent the opposition alliance in each constituency, there was the thorny issue of sharing out the constituencies among them. PAS antagonised

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 15

its allies by implying it was the senior partner in the coalition and therefore entitled to field more candidates. The BN has grappled with the same problem in the run-up to every election, but is therefore accustomed to dealing with it, a task facilitated by UMNO’s undisputed dominance.

—that are gleefully seized Government ministers and the media they control revelled in the opposition on by the government— parties’ discomforts, routinely misrepresenting their positions on key issues and exaggerating the differences between them. The BN’s message was clear, and contained more than a hint of menace: the opposition alliance was an unholy and unworkable one, and the stability and relative prosperity Malay- sians enjoyed would be lost if it were voted into power. Not that anyone in the ruling coalition believed such an outcome was likely, or even possible. The BN and Dr Mahathir were not contemplating defeat, but rather the margin of their inevitable victory. The vigour and venom of their campaigning, before the election had even been called, reflected an ill-disguised fear that despite its weaknesses, the opposition had a reasonable chance of winning one-third of the seats in parliament.

—which is accused of Malaysians were intimidated as much as they were cajoled. The prime minister intimidating the forecast, for example, that the opposition alliance would make the election the electorate— dirtiest and most violent in the country’s history. The warning prompted a stiff riposte from the four parties, who asked if Dr Mahathir was planning to do ex- actly what he had predicted. Opposition supporters did much of their campaigning on the Internet. One popular website ran what it claimed was an interview with a member of an UMNO “dirty tricks” department, detailing unsavoury tactics allegedly used to sway voters in previous elections, among them disinformation and the disruption of rivals’ rallies.

—and contriving to prevent Opposition politicians expressed outrage when, following a voter registration newly enrolled voters exercise in April-May, the newly appointed chairman of the supposedly inde- exercising their rights pendent Election Commission, Omar Mohamad, declared that the 650,000 people added to the electoral roll would only be eligible to vote next year. Most of those who signed on were young, and many were believed to be supporters of the opposition. Mr Omar also echoed Dr Mahathir’s rejection of the opposition’s call for the establishment of an independent committee, including foreign observers, to monitor the elections. Three days later, 41 local non- governmental organisations formed their own body, the Malaysian Citizens’ Election Watch. Its members said they would be on the alert for ballot-buying, “phantom” voters, instances of harassment and obstruction, as well as of abuse by the BN of state funds and machinery before and after the formal opening of the election campaign.

The Sabah success yields a A cabinet reshuffle on May 20th was clearly made with the election in mind. new secretary-general of The key change was the appointment of the long-time chief minister of UMNO— Pahang state, Khalil Yacoob, as information minister. More importantly, Mr Khalil was also named secretary-general of UMNO in place of the ailing and ineffective Sabaruddin Chik. He owed that promotion to his successful orchestration of the BN’s campaign ahead of the March state assembly elections in Sabah. Defying generally gloomy predictions, the BN took 31 of

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 16 Malaysia

the 48 contested seats, and all 24 UMNO candidates were returned. The Sabah campaign, which saw the BN promising to invest vast amounts of federal money in the Borneo state and threatening to cut off spending to constituencies that elected opposition candidates, had demonstrated the considerable advantages of incumbency (2nd quarter 1999, pages 18-19).

—which is said to be Some analysts attributed the exceptionally aggressive nature of the ruling coali- suffering a crisis of tion’s campaigning and the unprecedented disaffection with the government confidence— to a building crisis of confidence and identity within UMNO. Under Dr Mahathir, the party created to promote the interests of Malays generally had lost its ideal- ism, becoming a vehicle for the advancement of a mercenary, corruption-prone corporate minority, they said. In the process, concepts such as democracy, human rights and the rule of law were progressively discarded. The scope for a meaningful, much-needed renewal and rejuvenation was limited by the party leadership’s intolerance of even constructive criticism, the analysts contended. This was exemplified by the dismissal of Mr Anwar last September.

—as Dr Mahathir seeks to The shadow of Mr Anwar—now serving a six-year jail term—and of other per- forge unity by fostering a ceived troublemakers hung over UMNO’s annual general assembly in mid- siege mentality June. In a speech designed to shore up his position as UMNO president and portray the party as the only force capable of leading the government, Dr Mahathir mercilessly attacked his erstwhile deputy, the emerging opposition alliance and the West. Weaving an elaborate, scarcely credible conspiracy theory, he painted Western capitalists as stalking horses for racist foreign governments bent on recolonising Malaysia. Mr Anwar and opposition leaders, he said, were their stooges, with the prime minister and UMNO valiantly fighting off the threat.

Mr Anwar is denigrated— Fully one-third of Dr Mahathir’s 100-minute opening address was devoted to Mr Anwar, beginning with how, after long disbelieving the allegations of sexual misconduct against his former deputy, he had finally felt compelled by the results of police investigations to credit them. He again accused Mr Anwar of having aggravated the economy’s downturn with ill-advised IMF-inspired policies while finance minister, and of manoeuvring to seize the premiership. “Accusations that I conspired to overthrow Anwar are nonsense. On the contrary, I became a victim of a conspiracy to topple me,” Dr Mahathir said.

—a long list of his supposed Dr Mahathir’s attempt to convince delegates of his own innocence and of his cronies published— ousted deputy’s guilt was part of an ongoing campaign to convert, or at least neutralise, Anwar supporters within UMNO’s ranks. Many had already left or been expelled; others were lying low. During the general assembly the government published lists of supposed Anwar cronies said to have been awarded public works contracts and low-priced shares in state and parastatal companies between 1993 and 1998. Abdullah Ahmad Badawi, Mr Anwar’s successor as deputy premier, said the names were released in the interest of transparency. But many Malaysians wondered at the selective nature of the move, believing that those who benefited from the largesse of serving ministers were both more numerous and wealthy.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 17

—and a once staunch In the course of the conference it was announced that Ahmad Zahid Hamidi, loyalist pledges support for the former chief of UMNO’s youth wing who antagonised Dr Mahathir during the prime minister the previous year’s assembly by alleging high-level corruption within the party, had apologised to the prime minister. Bernama, the official news agency, reported Mr Zahid as saying he had been prodded by Mr Anwar to make the allegations. Mr Zahid was detained for a time following Mr Anwar’s arrest last September and later forced to surrender the UMNO youth job and the chair- manship of a government-controlled savings bank.

Another erstwhile Another erstwhile high flier who had challenged the prime minister, was con- Mahathir critic is co- signed to relative obscurity, and subsequently repented, also hit the headlines opted— during the assembly. Razaleigh Hamzah agreed to take charge of UMNO’s operations in his native Kelantan state, which is ruled by PAS. Mr Razaleigh was largely credited with UMNO’s defeat of the incumbent PAS government in the 1969 state elections. In 1987 while finance minister and UMNO vice-president, he ran against Dr Mahathir for the party leadership. After narrowly losing the bitter and divisive contest, he set up a breakaway party, Semangat ‘46, which teamed up with PAS to win Kelantan from UMNO in 1990. The coalition was re-elected in 1995. But the following year, exasperated by PAS and by the failure of Semangat ‘46 to make inroads at the national level, Mr Razaleigh and his splinter group returned to the UMNO fold. His latest role is indicative of the BN’s determination to recover control of the only state it does not currently run.

—but Mr Anwar remains Mr Anwar, by contrast, remained unrepentant, issuing a steady stream of unrepentant— statements from his prison cell accusing Dr Mahathir and cabinet members of nepotism and corruption, and reiterating that his own removal from the government resulted from his determination to root out such practices. He also denounced the prime minister’s characterisation of him as a puppet of foreign powers, saying it was the sort of tactic traditionally employed by dictators to eliminate threats to their authority. Lawyers defending Mr Anwar claimed Dr Mahathir’s tirade against their client during the UMNO general assembly amounted to contempt of court, because it sought to pre-determine the outcome of his second trial.

—as his second trial, on a Mr Anwar went back into the dock on June 7th to face a charge of sodomising sodomy charge, opens— his family’s former driver, Azizan Abu Bakar. Mr Azizan was a key prosecution witness at Anwar’s 77-day corruption trial, which centred on charges that the ousted deputy premier interfered in a police investigation into accusations of sexual misconduct made against him by the former driver and Ummi Hafilda Ali, the sister of his then private secretary. During the first trial Mr Azizan testi- fied that he was repeatedly forced by Mr Anwar to have sex over a period of several months in 1992, although at one stage he appeared to retract the claim under cross-examination.

—to controversy over the The second trial was immediately thrown into confusion when the chief prose- timing of the alleged cutor, the attorney-general Mohtar Abdullah, claimed the alleged offence took offence— place sometime between January and March 1993. Prosecutors had originally maintained it was committed in 1994 and subsequently, when Mr Anwar was

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 18 Malaysia

formally ordered to stand trial, in 1992. After days of wrangling, the presiding judge, Ariffin Jaka, dismissed a defence application for a mistrial that described the second amendment of the charge as prejudicial, oppressive and an abuse of the legal process.

—and the admissability of This time the former deputy premier was being tried jointly with his adopted his adopted brother’s brother, Indonesian-born Sukma Darmawan, who also stood accused of sodo- “confession” mising Mr Azizan, and of abetting Mr Anwar to do so.

Mr Sukma was jailed for six months in September after being convicted of allowing Mr Anwar to sodomise him, but appealed the verdict, claiming the police extracted a false confession under duress. That confession became the focus of a protracted trial-within-a-trial, with prosecutors and defence lawyers arguing over whether it could be admitted as evidence. On June 29th Mr Ariffin ruled that the confession was not involuntary, but said he would make a determination on its admissibility later.

Economic policy and the economy

The economy shrinks by GDP contracted by 1.3% year on year in the first quarter (January-March) of 1.3% in the first quarter— 1999, according to data released in late June by the Department of Statistics. This compared with a contraction of 10.3% in the fourth quarter of 1998, and of 7.5% for 1998 as a whole. The first-quarter data were computed using a new base year, 1987, ostensibly to better reflect structural changes in the economy such as its increased reliance on manufacturing and services and the diminishing importance of agriculture. The continued use of 1978 as the base year would have translated into a first-quarter contraction of 1.6%, compared with 8.1% in the fourth quarter and 6.7% in calendar year 1998.

—on declining output— Most sectors recorded sharply lower year-on-year declines in output in January- March 1999. Manufacturing production, which had fallen by 10.3%, 18.9% and 18.6% respectively in the second, third and fourth quarters of 1998, dipped by just 1.1%, largely owing to increased output of electronic goods and parts in the wake of stronger overseas demand. Although increased palm oil, rubber and cocoa production failed to offset lower log and fish output, the decline in the agricultural sector moderated to 3.5%, from 4.8% in October- December and a low of 6.9% in January-March 1998. Continuing demand for low- and medium-cost residential properties and the pursuit of certain infrastructural developments saw construction activity slow by l1.9%, an improvement on the contraction of 29% registered in the final quarter of 1998 and of 23% for 1998 as a whole. The services sector grew by a modest 0.1%, after shrinking by 3.4% in October-December and by 0.8% in 1998 as a whole. Lower crude oil production resulted in the mining sector, which had expanded by 5.1% in October-December and by 1.8% in calendar 1998, contracting by 2.3% in January-March.

—and demand— The slowdown in real aggregate domestic demand moderated in the first quarter, to 9.1% year on year, from 28% in the last quarter of 1998. Total consumption declined by 0.6% year on year (-14.8% in October-December), with private

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 19

consumption down by 4.1% (–13.8%) and public consumption rising by 22.4% (–17.9%). Total investment fell by 22.4%, having plunged by 42.7%, 56.4% and 45% respectively in the second, third and fourth quarters of 1998, year on year. Local direct investment was far more subdued than foreign direct investment (FDI), although FDI was also well below the rate of previous years.

—as another hefty trade Yet another substantial trade surplus, amounting to M$15.8bn (US$42bn), was surplus is recorded registered in the first quarter. In US dollar terms, exports rose by 4.6% year on year—the second successive quarterly increase. Sales of manufactured goods rose by 7.9%, with a 13.2% increase in volume more than offsetting a 4.7% decline in prices. The decline in total imports moderated to 6.8% year on year, from 20.5% in October-December, and 19.7% in July-September. Imports of consumption goods rose by 1.7% year on year, while purchases of intermediate and capital goods fell by 0.6% and 36% respectively. Foreign reserves continued to rise in the first quarter, and the inflation and retrenchment rates declined.

Subsequent data also Presenting the first-quarter data, the Bank Negara governor, Ali Abul Hassan support official claims of Sulaiman, insisted there was ample evidence the economy was out of recession. an abating recession— In February-March GDP had actually risen by 1.4% year on year, he said, thanks mainly to a 4.6% increase in manufacturing output. Official statistics for April showed further year-on-year improvements: manufacturing output up by 4.5%; the US dollar value of exports up by 14.3%; and the US dollar value of imports up by 2.5% (the first such increase since 1997), with purchases of intermediate goods turning positive. Mr Abul predicted positive GDP growth in the second and subsequent quarters, saying the government’s initial forecast of 1% expansion for 1999 as a whole was likely to be exceeded. He and other officials maintained that the home-grown reflationary strategy—based on strong public spending and low interest rates within the framework of capital controls and the pegged exchange rate—was making a major contribution to the recovery process.

—yet constraints on public Yet in key respects the pump-priming strategy was less supportive than in- spending— tended. Public spending, for example, fell well short of anticipated levels. The revelation that only 47% of development funding earmarked for disbursement during the first quarter was released, and that six of the 16 federal ministries Malaysia: loans extended by banking system spent none of their allocations, triggered an acrimonious round of finger- % change, year on year pointing. Ministers berated their bureaucrats, insisting that the speedy imple-

Total loans mentation of approved projects was crucial for a return to meaningful growth. Loans for manufacturing 20 Ministers also blamed each other for the shortfall in spending. The works min- 15 ister, Samy Vellu, claimed the Ministry of Finance’s failure to release the requi-

10 site funding was largely responsible. The charge, a thinly veiled criticism of the finance minister, Daim Zainuddin, was echoed by other members of the cabinet. 5 It brought a stinging rebuke, and a denial, from Mr Daim. Attempts to resolve 0 the problem stoked further controversy. On June 1st the second finance minis- -5 ter, Mustapa Mohamed, announced that government agencies had been -10 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr authorised to award contracts for priority projects directly to private companies. 1998 99 He insisted the decision to avoid competitive bidding was temporary, and Source: Bank Negara Malaysia. solely designed to expedite projects deemed vital to recovery. Inevitably, the

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 20 Malaysia

move was characterised by opposition politicians as further evidence of the government’s cronyistic tendencies.

—and subdued bank Lower interest rates, another key element of the reflationary strategy, did little lending— to spur borrowing for investment or consumption purposes in the first quarter of 1999. Excluding non-performing loans (NPLs) sold to Pengurusan Danaharta Nasional, the asset management arm of Bank Negara, outstanding credit to the private sector declined by about M$1bn in January-March. The value of loan approvals slowed to M$20.4bn, from M$23.4bn in October-December 1998. Officials reiterated that the attainment of the 1% GDP growth target for 1999 was heavily dependent on the realisation of the government’s credit growth target of 8%. Last year, the total value of loans extended by the banking system slipped by 1.8%, with a 3.3% expansion in commercial bank credits more than offset by declines in the value of loans owed to finance companies and merchant banks.

—despite still lower Moderating inflationary pressures allowed a further reduction in interest rates. interest rates— Bank Negara cut its three-month “intervention” rate—the determinant of in- terbank rates, in turn the basis of commercial banks’ base lending rates (BLRs)—from 7% to 6.5% on April 5th and to 6% on May 3rd (the intervention rate had fallen from a peak of 11% in August last year). As a result, the average Malaysia: interest rates BLR fell to 7.24% by mid-May, from 8.04% at the end of March. One reason % lower borrowing costs failed to boost lending was the continued growth in the Base lending rate One month fixed deposits level of NPLs as a share of total loans through March (on a three-month arrears 14 basis). That share came down in April, however, not least because lower inter-

12 est rates made doubtful loans easier to repay.

10 Sluggish bank lending and public spending raised some questions about the

8 durability of the nascent recovery. The government’s claim that its controversial imposition last September of capital and exchange controls had been vin- 6 dicated likewise seemed premature. There had been little doubt the controls 4 would bring short-term relief, since they allowed the authorities to inject large

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May amounts of cash into the economy and to slash interest rates without under- 1998 99 mining the exchange rate. The real issue was the effectiveness of the curbs over Source: Bank Negara Malaysia. the medium and long term. It is still too early for a definitive verdict. None- theless some independent analysts here argued that crisis-stricken Asian countries pursuing more orthodox, market-based restructuring programmes under the tutelage of the IMF—particularly South Korea and Thailand—are further along the recovery path. A dispassionate reading of the official data, they con- tend, indicate that the modest improvement in Malaysia’s economic fortunes derived essentially from stronger international demand for electronic goods in the run-up to January 1st 2000, and the push given to such sales by a pegged exchange rate that undervalued the ringgit.

—raise questions about the Sceptics have also interpreted the official praise for the supposed success of revival and the Malaysia’s controls as effective confirmation that the home-grown reform pro- commitment to reform gramme has gone about as far it was likely to go under a Mahathir-led administration—that is, not far enough. Most of the vulnerabilities that had sparked

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 21

or aggravated the country’s financial-turned-economic crisis were being ignored by the government, they have argued.

While official efforts to Nevertheless, the government has continued to win praise for its efforts to clean up the financial sanitise the previously profligate financial sector. By end-April Danaharta had system proceed apace— acquired M$25.6bn worth of NPLs from the banking system—nearly one-third of its bad debts—according to official accounts. Its sister agency, Danamodal Nasional, had injected M$6.2bn into ten undercapitalised institutions. In addition, the Corporate Debt Restructuring Committee (CDRC) had helped reschedule some M$9.8bn in doubtful loans owed by eight local corporations. These included Renong Berhad, the troubled infrastructure giant (2nd quarter 1999, page 25). Detractors saw such exercises as politically motivated attempts to shore up well-connected banks and businesses at taxpayers’ expense.

—corporate restructuring The government has been accused of failing to avail itself of the insulation af- continues to be resisted forded by the controls to overhaul corporate Malaysia. Although the CDRC was helping to alleviate the debt burdens of some of the biggest business bor- rowers, it lacked the power to enforce more meaningful and salutary structural changes in assisted companies. Consequently, many of the deficiencies caused by years of official indulgence—poor management, excess capacity and a less than optimal allocation of resources—were not being addressed, critics said. By contrast, heavy debts and shrinking markets were still taking a heavy toll on small and medium-sized businesses. The Securities Commission revealed in mid-June that 4,776 companies were dissolved in 1998, up from 1,898 in 1997.

A benchmark sovereign On May 26th the government completed the sale of US$1bn of bonds to inter- bond issue is national investors. The government characterised the response to the offering oversubscribed as hugely enthusiastic, although this seemed exaggerated. The sovereign issue— Malaysia’s first in almost a decade—was designed much more as a barometer of foreign investor sentiment than a revenue-raising exercise (the healthy international reserves position and substantial low-cost loans from bilateral and multi- lateral creditors ensured more than adequate coverage of the fiscal deficit). En- couraged by Malaysia’s rising trade surplus and stockmarket, high savings rate Malaysia: non-performing loans and low external debt, overseas institutional funds oversubscribed the 10-year % of total loans paper to the tune of 300%, Mr Daim said. 6 months arrears 3 months arrears 15 The bond carried a coupon of 8.75% and was priced to yield 8.86%, some 3.3 percentage points above benchmark US Treasuries. That spread, wider than the 2.2 and 2.4 percentage points prevailing at the time for comparable Thai and 10 South Korean sovereigns, indicated that investors saw Malaysia as a relatively risky bet—notwithstanding a high-powered pre-launch roadshow that took Mr Daim and Mr Mustapa to 14 financial centres in Asia, Europe and North 5 America. The premium also forced a belated halving of the planned issue: the government had hoped to sell US$2bn worth of bonds. Extraneous factors con- 0 Nov Dec Jan Feb Mar Apr tributed to that decision, and to the spread. Investors had become jittery about 1998 99 emerging markets in Latin America, and were expecting a rise in US interest

Source: Bank Negara Malaysia. rates.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 22 Malaysia

—as Malaysia welcomes a After the bond sale, Japanese officials said the apparent ease with which Malaysia Japanese offer to guarantee had been able to raise relatively cheap funds in the international capital market future flotations could deprive it of further low-cost bilateral credit. By then the Japanese government had disbursed or committed to Malaysia more than US$3bn in project and trade insurance loans within the framework of the so-called Miyazawa initiative. But its officials said Malaysia could avail itself of a facility unveiled in mid-May whereby Tokyo promised to partly guarantee the repayment of up to ¥2trn (US$17bn) worth of bonds issued by fellow Asian governments. The prime minister, Mohamad Mahathir, said the offer would be taken up. Last December Japan’s Ministry of International Trade and Industry partly guaranteed a ground-breaking five-year Malaysian government issue on the Tokyo capital market that generated ¥74bn (1st quarter 1999, page 25).

Falling foreign direct Official figures for January-March suggested that foreign direct investors had investment— become extremely wary of Malaysia. The value of FDI proposals submitted to the government totalled M$991m, compared with M$12.6bn in the whole of 1998, while the value of FDI proposals approved by the government amounted to M$1.3bn, compared with M$13bn last year. This meant that applications were running at just 30% of the 1998 rate, and approvals at only 40%. The pic- ture brightened over the subsequent two months. By end-May FDI applications had reached M$3bn, and approvals M$6.4bn. Divestment, meanwhile, became more than a threat. A number of foreign companies closed or downsized their Malaysia operations, and others were in the process of doing so. A major US multinational planning to invest some US$300m in Malaysia decided to site the manufacturing project in Singapore, which vigorously pursued the business and offered a more attractive tax and incentives package.

—reflects widespread Many of the grievances of foreign investors were discussed by the outgoing concern about government president of the 1,100-member Malaysian International Chamber of Commerce policies— and Industry (MICCI), Jorgen Bornhoft, in an exceptionally forthright speech during its annual lunch in Kuala Lumpur on June 15th. In a clear reference to Dr Mahathir’s oft-expressed anti-Western sentiments, he declared: “Potential foreign investors are understandably confused when one moment they appear to be being wooed, and the next they are warned off for being neo-colonialist.” Mr Bornhoft, the head of Carlsberg’s Malaysia operations, also cited the incon- sistency of official policy, including the imposition, then partial removal, of the currency and capital controls.

—including a restriction on One important issue was a restriction on the repatriation of profits that was in- the repatriation of troduced shortly before the main controls regime, as companies anticipating profits— the curbs rushed to remit earnings. This limited the permissible level of annual transfers to the average of those made in the previous two years, and was hit- ting some of the country’s biggest foreign-owned companies hard. Many of those affected said the measure was counterproductive. Instead of reinvesting locally a large proportion of their profits, as many had previously, they were paying the maximum possible dividend and banking the rest. If existing foreign investors were not reinvesting, would-be foreign investors were unlikely to be either, it was argued. Mr Daim said the obstacle was being reviewed.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 23

—ceilings on overseas Mr Bornhoft called for a “serious review” of the long-running affirmative ac- holdings in key sectors— tion strategy in favour of the ethnic Malay majority, especially those elements of it limiting foreign equity holdings in key sectors of the economy. While restrictions on foreign holdings in new export-oriented manufacturing projects had been suspended until end-2000, and the ceiling on overseas ownership of telecommunications companies raised from 30% to 61%, MICCI wanted the trading and services sectors liberalised too. Mr Daim suggested the 30% ceiling on foreign ownership of local banks might be relaxed, although insiders said Dr Mahathir remained strongly opposed to such a concession.

—and official corruption— While lauding the efforts of Danaharta and Danamodal to restore the financial system to health, business leaders also called on the government to acknow- ledge that it was still beset by problems, including a domestic debt/GDP ratio of some 170%. Mr Bornhoft also referred to perceptions that Malaysia was becoming more corrupt. The international trade and industry minister, Rafidah Aziz, the government’s representative at the lunch, challenged him forcefully on this issue. She urged chamber members not to offer bribes, and immediately to report any requests for them.

—although British firms, If many foreign investors were steering clear of Malaysia, others were capital- buoyed by sterling’s ising on crisis-stricken local companies’ need for cash—and hence their will- strength, buy in big ingness to sell assets cheaply—and the undervaluation of the ringgit. In the 12 months to June 1999 British companies invested almost £1bn, far more than in any corresponding period since Malaysia’s independence. The biggest deals were strategic acquisitions by major corporations—such as the cement giant Blue Circle, British Telecommunications, and the electricity generator National Power—in sectors deemed to have considerable long-term potential. A score of smaller British infrastructure, engineering, manufacturing and trading companies also invested, most of them likewise via joint ventures with local concerns.

Many of the 1996-2000 The crisis-induced weakness of private investment was one of several reasons plan’s targets are lowered— for the lowering of ambitious initial targets contained in the Seventh Malaysia Plan (1996-2000), Dr Mahathir told parliament on April 22nd while presenting the government’s mid-term review of the plan. Annual GDP growth would average only 3% over the five-year period, down from the originally projected 8%, he said. Public spending on development projects was slated to reach M$89.5bn, M$22bn more than initially forecast, with the biggest increases in outlays going on physical and social infrastructure.

—as the government Dr Mahathir made it clear that the government would continue giving top pri- reiterates its commitment ority to affirmative action programmes in favour of the ethnic Malay majority, to uplifting ethnic Malays which, he said, was more affected by the economic downturn than the Chi- nese and Indian communities. Malay-run firms were “especially hard hit since they were very inexperienced and were highly dependent on the government”, the mid-term review concluded. It estimated that Malays’ share of the nation’s wealth—defined as outstanding share capital at par value—fell back to 19.4% by the end of 1998, having risen from around 2% when the strategy was initi- ated in 1970 to 20.6% in 1995. The share of the ethnic Chinese minority de-

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 24 Malaysia

clined from 40.9% to 38.5% over the past three years, with much of the differ- ence going to foreigners.

Banking and finance

Lending slows— The value of total loans outstanding fell by M$11.3bn (US$3bn)—or 2.8%—to M$402.3bn between January and March 1999, according to Bank Negara. The lion’s share of the reduction was accounted for by the sale of M$10.3bn worth of non-performing loans (NPLs) to Danaharta. On a sectoral basis, the volume of credit to manufacturers fell by M$3.5bn, for the purchase of securities by M$2.5bn, to the construction sector by M$1.8bn and to the real estate sector by M$1.6bn. Loan approvals in January-March amounted to M$20.4bn, down from M$23.4bn in October-December 1998; disbursements totalled M$77.4bn, up from M$68.3bn. In April approvals and disbursements amounted to M$7.3bn and M$25.4bn respectively.

—but the NPL ratio Sales to Danaharta and debt workouts by the Corporate Debt Restructuring continues to rise, albeit Committee (CDRC) meant that NPLs were lower in absolute terms at end- more moderately— March than at end-December, although as a proportion of loans outstanding they continued to trend higher, central bank data showed. Gross NPLs on a three-month arrears basis declined to M$73.4bn from M$77.2bn, but the ratio edged up to 18.2% from 18.1%. On a six-month arrears basis, gross NPLs declined to M$52.1bn from M$52.3bn, while the ratio rose to 12.9% from 12.3%. Officials tended to highlight the seemingly more respectable net NPL ratio (that is, excluding interest in suspense and specific provisions) on a six-month basis of 7.9%—6.4% for commercial banks, 12.2% for finance companies and 11.2% for merchant banks—an improvement from 7.5% at end-December.

—as Danaharta begins In mid-June the Danaharta managing director, Azman Yahya, predicted that offering assets for sale— NPLs would peak at 20-25% by the end of 1999, although he did not specify the basis of his calculation. He said the agency was expected to assume responsibility for NPLs with a nominal value of up to M$40bn by the end of June, largely completing the acquisition phase of its work. He promised that rather than rushing to sell the seized collateral supporting them—such as property and shares—Danaharta would first do its utmost to maximise value. Having set up a number of subsidiaries to manage and dispose of assets, on July 1st the agency announced plans for its first sale. This was to involve the auctioning off of foreign loan assets worth US$142.8m to 15 pre-selected overseas investment houses including J P Morgan of the US and Germany’s Dresdner Kleinwort Benson. It set August 8th as the deadline for bids.

—and aims to dispose of its Danamodal, the recapitalisation agency, likewise stressed in June that its pri- acquisitions as soon as mary concern was the restoration of its charges to viability, but reiterated it was possible— also keen to dispose of its interests at the earliest opportunity. Ideally, this would involve reselling its equity holdings to the assisted institutions’ existing shareholders. Divestment to third parties would also be considered, it said, including sales to foreign banks—albeit while respecting the 30% ceiling on overseas ownership.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 25

—and the CDRC drafts On June 10th the CDRC said it had helped reschedule M$10.9bn owed by 11 more bond-for-debt corporations. This included the M$8.5bn bonds-for-debt workout in favour of schemes Renong and its subsidiary, United Engineers Malaysia (UEM), and a similar scheme to defer the repayment of almost M$500m by Tongkah Holdings, a hospital equipment company headed by Mokhzani Mahathir, a son of the prime minister. Both deals were still awaiting creditor approval, the CDRC conceded. The same day Rating Agency Malaysia (RAM) warned that Renong and UEM were unlikely to have sufficient funds to pay the M$16.7bn due to the holders of the zero-coupon seven-year bonds issued on their behalf by another subsidiary, the North-South Expressway (NSE) operator Projek Lebuhraya Utara Selatan (PLUS). As much as 60% would have to be refinanced, RAM estimated, but added that PLUS’s considerable cash-flow generating capacity—its NSE concession has been extended to 2030—suggested it could cope with additional debt obligations on such a scale. The CDRC said 13 additional workout plans, involving some M$3.3bn, were close to finalisation, and that a further 43, involving almost M$20bn, were still being drafted.

The government denies Officials sought to play down criticisms of the financial sector clean-up, espe- cronyism is driving the cially the persistent charge that the beneficiaries tended to be politically well- sanitisation effort— connected companies and executives. These were being forgiven rather than punished for past excesses, the critics argued, maintaining that the government’s reluctance to allow a purely market-based restructuring of indebted businesses was bound to cause considerable problems in the future. Dr Mahathir continued to defend the bailouts, insisting they were saving vi- able companies and pointing out that Malaysia lacked the sort of social safety- nets taken for granted in the West, such as unemployment benefit schemes.

—as formal charges are One allegedly wayward banker was brought to book. On April 30th a former made against a former chief executive of Sime Bank, Ismail Zakaria, was charged in a Kuala Lumpur head of Sime Bank— court with four counts of lending without proper authorisation and four counts of criminal breach of trust for approving the loans. The alleged offences related to credits totalling M$175m extended to a company called Everise Capital in September-October 1997. Mr Ismail, who pleaded not guilty, faces up to 20 years in jail if convicted. His trial is set to start on September 13th.

—whose merger with RHB Mr Ismail, aged 57, resigned from Sime Bank in January 1998, shortly after it Bank is finally completed reported a pre-tax loss of M$1.8bn for the six months ending December 31st 1997, largely as a result of heavy provisioning for bad and doubtful debts. This, in turn, led to a M$1.2bn capital injection from the government, and the initiation of proceedings to merge Sime Bank, then a unit of diversified blue-chip conglomerate Sime Darby, with RHB Bank, part of the financial services group Rashid Hussain Berhad. On June 3rd the group’s founder, Rashid Hussain, announced that the coupling, which involved a complex series of share issues and an additional M$1.5bn capital injection by Danamodal, had been completed. He said the merged entity’s NPL ratio would fall below 6% by end-1999, from 8% at mid-year and a peak of 14% in 1998. Danaharta had said a few days earlier it was “managing” some M$14bn NPLs on behalf of Sime Bank.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 26 Malaysia

Heavy provisioning causes On June 15th the financial services group, AMMB Holdings, reported a pre-tax big losses at AMMB— loss of M$1.85bn for the 12 months to end-March, compared with a profit of M$1bn the previous year. The result essentially was attributable to provisioning of M$2.1bn for loan losses and of M$815m for interest in suspense. Losses sus- tained by its commercial bank, merchant bank and finance company amounted to M$630m, M$426m and M$598m respectively. (In February Danamodal had announced capital infusions totalling M$1.7bn for the three units—2nd quarter 1999, page 29.) Despite large-scale sales to Danaharta, the group’s NPL ratio, on a six-month arrears basis, reached 14.6%.

—but a planned The decision to make a substantial write-off was generally applauded in view of restructuring exercise the economy’s apparently improving fortunes and expectations of a major re- brightens its outlook structuring within the group. In late June AMMB officials said that while negotiations on the possible sale of up to 10% of the group’s equity to US-based Advent International were well advanced, a divestment had become less urgent given the economic revival and the steady rise in its share price over the pre- ceding weeks.

Finance companies are On May 18th the governor of Bank Negara (the central bank), Ali Abul Hassan offered to foreign banks Sulaiman, disclosed that Malaysia’s 13 locally incorporated foreign banks had been invited to bid for some of the country’s troubled finance companies. Suc- cessful bidders would be allowed to convert finance company branches into banking outlets, he said. Some offers had already been received, he added, but none were deemed sufficiently attractive. The 13 banks, which are 100% foreign- owned, are limited in terms of the number of branches they can open. Last year the banks were authorised to absorb their own finance companies and transform their branches into retail outlets. The authorities have been striving with limited success to reduce the number of finance companies—whose lending operations are essentially restricted to the provision of consumer credit—through a programme of mergers and acquisitions.

The stockmarket’s surge is The upward trend in the Kuala Lumpur Stock Exchange (KLSE) that began with fuelled by local buying— the imposition of capital controls continued in recent months, fuelled by the more upbeat assessments of the economy’s performance and prospects, and declining interest rates. After falling back below 500 points in late March— having risen above 600 in late January from 263 in early September—the benchmark Kuala Lumpur Composite Index trended upwards, amid bouts of profit- taking, to breach 850 on July 9th. The positive momentum was initially accounted for largely by strong buying on the part of government-controlled institutional funds, and then by local retail players.

—as most foreign investors Foreign investors, who were largely responsible for more impressive recoveries stay on the sidelines— being staged by other bourses in the region, remained wary of the KLSE. Net inflows of portfolio funds amounted to a modest US$781.8m between Febru- ary 4th—when a one-year ban on the repatriation of investments was replaced by a regime of exit taxes on principal and profits (2nd quarter 1999, page 26)— and June 15th, according to finance ministry figures. Officials said they were encouraged by the fact that almost half the amount that came in between May 12th and June 10th. This was because the exit tax on early principal with-

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 27

drawals fell as scheduled from 20% to 10% on June 1st, and there had been concern that the reduction would trigger sizeable outflows. As the concern proved unfounded, officials confidently predicted there would be no rush for the exits either come September 1st, when foreign investors with funds in the market for 12 months or more can repatriate them without paying any tax. Another reason for staying put is that profits on funds invested since February are now subject to a tax of 30% if withdrawn within 12 months, and of 10% if taken out thereafter.

—pending Malaysia’s Brokers claimed that some of the inflows from overseas were the sort of “hot” reincorporation in MSCI money chasing short-term gains that the capital controls were supposed to dis- indices courage. Some of the investment was also said to have been placed by fund managers anticipating a major surge in the KLSE once Malaysia was reinstated in key stock indices operated by Morgan Stanley Capital International (MSCI), from which it was expelled following the imposition of the controls. Despite the relaxation of the one-year lock-in, MSCI said in February that Malaysia would not be reincluded in its benchmark barometers until it merited a “truly investible status”. Prior to MSCI’s quarterly weightings review in mid-May, rumours of an imminent readmission were rife on the KLSE. They proved to be unfounded.

Mindful of the need to Anxious to ensure that the KLSE is competitive and attractive, the authorities impress, regulators become have intensified their efforts to strengthen the regulatory framework, tighten- more vigilant— ing transparency and investor protection requirements and boosting their own enforcement capabilities. In recent months the exchange has publicly repri- manded and fined several listed companies deemed in breach of disclosure rules, and a number of stockbroking firms have been penalised by the Securities Commission for failing to maintain stipulated capital adequacy ratios.

—strengthening listing On April 30th the commission announced that the minimum share capital re- requirements— quired of companies seeking a listing on the main board of the KLSE was being increased to M$60m from M$50m. Firms with an existing listing were given three years to reach that level, with the exception of those proposing to undertake restructuring or capital-raising exercises. In March the commission had announced a fourfold increase, to M$40m, in the minimum issued and paid- up capital requirement for companies seeking a listing on the KLSE’s second board. The April 30th provisions also required a stronger profit record from companies seeking to list on the main or second board. They stipulated that firms had to be quoted for at least three years—up from two—before they can undertake a reverse take-over or back-door listing, and imposed restrictions on the sale of equity by individuals promoting the listing of a company.

On May 2nd the KLSE unveiled rules for the acceptance of depository receipts— securities that allow the purchase of a certain quantity of a company’s shares on a stock exchange—which it said would increase transparency and therefore foreign interest in the market. The rules required that all depository receipts accepted in Malaysia be registered with proper external regulators; limited to five the number of custodians for shares held in each receipt; and stipulated

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 28 Malaysia

that Malaysian companies can commit no more than 5% of their shares to such programmes.

—and trading suspension On June 8th the KLSE cut the maximum number of days a company’s shares rules— can be suspended from trading from ten to three, and promised that requests for suspensions would be vetted more stringently in future. Suspensions are granted to aid listed companies that are planning restructurings, mergers or acquisitions, or significant changes in business direction. They are often resented by minority investors who complain of being left in the dark. Market players generally welcomed the tightening of the suspension rule, while expressing the hope it would be rigorously enforced.

—and promising delivery In mid-June government officials said the KLSE had made proposals designed against payment for share to resolve a key grievance of foreign investors: the one-day lag between deliv- transactions— ery of shares bought on the bourse and payment for them. At present, pur- chased shares must be delivered to their new owners within four trading days of a transaction, but payment need only be made on the fifth day. Foreign investors have long expressed concern about the risk exposure involved, and some have been enticed away from the market by Singapore-based brokerages offering payment on delivery. The proposed resolution envisaged broadening the membership of the clearing and settlement system—currently limited to Malaysian stockbroking companies—to include resident custodian banks that hold shares for foreign investors. On July 1st new rules requiring stockbroking companies to adopt stricter standards for the treatment of non-performing accounts came into force.

—as well as a thorough Regulators repeatedly promised a sweeping overhaul of corporate governance overhaul of corporate laws generally in line with a series of proposals unveiled by the Securities governance legislation Commission in late March. Drafted by a special committee that included public- and private-sector representatives, these are aimed at strengthening legislation relating to shareholders’ rights and the responsibilities of company directors. A central objective is to minimise abuses by insiders at the expense of minority interests. To this end, the committee’s report urged that controlling shareholders be prohibited from voting on transactions in which they have a personal stake. It also envisages the creation of a minority shareholders’ watchdog body, and of a “merit” table classifying listed companies according to their disclosure and governance standards. The report identified the main deficiencies in the existing system as excessive ownership concentration; ineffective boards of directors; shareholder passivity; inadequate awareness of responsibilities; and poor enforcement. Analysts pointed out that success of the promised reforms depends heavily on the willingness of company directors and major shareholders to comply with them, and the rigour with which they are implemented.

But questions persist about In late April the chairman of the Securities Commission, Munir Majid, prom- enforcement provisions ised that investigations during 1997 and 1998 into suspected violations of legislation would lead to “major prosecutions” this year. He appeared to be referring to Soh Chee Wen, a former corporate high-flier who controlled eight listed companies. On April 20th the commission had disclosed it was seeking

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 29

to serve arrest warrants on Mr Soh and an associate. The charges to be brought against the two men were not revealed. But Mr Soh was questioned at length by commission officials in mid-1998 about his role in the takeover of a stockbroking firm, Omega Securities. He already had one such concern in his stable, and was not entitled to assume control of another without government approval. Mr Soh reportedly threatened at the time to name prominent brokers, bankers, business executives and politicians he claimed were involved in a rash of unsavoury corporate deals (3rd quarter 1998, pages 25-26). Mr Soh’s case is seen as a crucial test of regulators’ expressed resolve to clean up corporate practices, but his absence from the country when the commission revealed he was wanted raised questions about their commitment. By mid-July the arrest war- rant had still not been served on him.

Official handling of the A number of controversial proposals have been made in recent months to re- CLOB issue seems less than solve the thorny issue of Malaysian shares previously traded on Singapore’s sensitive— over-the-counter market, the Central Limit Order Book (CLOB) International, but in limbo since the imposition of capital controls last September. Trading of Malaysian shares on the CLOB was banned to prevent the controls being cir- cumvented via the purchase of equity on the KLSE and its resale in Singapore (4th quarter 1998, page 26). The CLOB shares—in more than 100 Malaysian companies, owned by some 172,000 mostly Singaporean investors and worth an estimated M$5bn immediately before the ban—have since been frozen in the KLSE’s central depository. The Malaysian government’s expressed priority was to ensure that any settlement of the issue would prevent a large-scale sell- off that could severely depress the recovering local market. But its role in the unfolding drama did little to alleviate concerns about the lack of protection for foreign investors.

—as a top businessman On April 30th Effective Capital, a newly created company headed by Akbar offers to buy frozen shares Khan, a Malaysia-based Singaporean businessman and friend of the finance at a huge discount—- minister, Daim Zainuddin, offered CLOB investors a cash payment it said represented an average premium of about 45% to market prices on September 15th, the day trading ceased. However, because it represented a discount of 30- 85% to current prices, CLOB shareholders reacted with a mixture of fury and scorn. There were also pointed questions about the mysterious emergence of Mr Khan, and, given the considerable financial and regulatory support he apparently enjoyed, about the government’s involvement in the plan. It subsequently transpired that Effective Capital was also willing to exchange the CLOB shares for units in a closed-end trust fund to be listed on the KLSE. While this option would give shareowners close to market value, it effectively meant them holding the full basket of counters, bad as well as good.

—and Dr Mahathir slams On May 4th Dr Mahathir further antagonised CLOB shareholders by claiming their owners— they were responsible for much of the KLSE’s 1997-98 slump and had not contributed to the recent rally. As such, they should accept a discount, he said. The remarks transformed the debacle into a political dispute. The following day the Stock Exchange of Singapore (SES) declared that Effective Capital’s offer fell “far short of generally accepted standards”. It also noted a September pact struck with the KLSE to transfer the CLOB shares to Kuala Lumpur’s clearing

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 30 Malaysia

system as a prelude to their resumed trading. On May 6th Singapore’s deputy prime minister, Lee Hsien Loong, accused the KLSE of breaking that “legally binding and enforceable contract”.

—who condemn two Mr Daim and other officials frequently said that anyone could bid to acquire further proposals the CLOB shares. Some analysts speculated that Effective Capital’s proposal was little more than a trial balloon designed to generate other offers. On May 21st Bintang Melewar, a subsidiary of the Malaysian property and insurance group, Melewar Holdings, proposed swapping the shares for units in a closed-end dollar-based fund to be listed offshore and managed by the Royal Bank of Canada. While this plan did not envisage a freeze on the sale of CLOB shares, Melewar promised that any disposal would not disrupt the KLSE. But it too met with an unenthusiastic reception, likewise because CLOB shareholders felt they were being asked to accept excessively discounted prices. On June 15th Effective Capital’s cash offer closed, and the ultimate response to it was predict- ably poor: 359 CLOB account holders sold just 9.2m shares worth M$11.2m.

On June 30th the predominantly state-owned Telekom Malaysia and politically well-connected Renong subsidiary, UEM, jointly offered to take the CLOB shares at a 25% discount to June 29th KLSE prices and place them in a special fund. In return, the owners would be given equal amounts of non-voting Class B shares in the two companies—convertible into ordinary shares after five years—priced at 30% above their stock prices on June 29th. CLOB investors concluded the offer was no better than the previous two, estimating that it represented an average discount of 42% to prevailing KLSE prices. By then the value of their shares had risen to an estimated M$14bn. Many analysts expressed concern at the willingness of Telekom and UEM—companies at once under considerable competitive and other pressures in their core markets and traditionally favoured by foreign investors—to venture into an area as unfam- iliar as fund management.

On July 7th the SES formally urged the KLSE to honour its September agreement to transfer the CLOB shares to individual accounts with Malaysian brokers, adding that the Malaysian government’s concern about a possible plunge in the market could be satisfactorily addressed by subjecting the accounts to selling restrictions.

Moves to develop the Central bank officials promised measures to accelerate the development of the corporate bond market are corporate bond market before the end of 1999, reflecting the official view that in the offing the financial and corporate sectors’ problems partly derive from the large proportion of long-term investments being financed by short-term borrowing. Analysts said any meaningful incentives package would have to address several current shortcomings. Their recommendations include creating an over-the- counter market to facilitate secondary trading, currently constrained by the tendency of banks, the main buyers of bonds, to lock in their investments; extending the tax exemption on interest income from bonds from individuals to corporate investors; abolishing the withholding tax on interest payments to foreign bondholders; relaxing the stipulation that only issues accorded a prior investment grading by Rating Agency Malaysia can be floated, so as to satisfy

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 31

of potential buyers willing to take higher risks; and promoting asset securitisation.

Agriculture

Demand for palm oil Problems in the important palm oil sector were aggravated by rising domestic remains subdued— raw material production and a continued weakening of the international market, forcing local refiners to cut back output and sparking fears among exporters of contract defaults by overseas buyers. In mid-July officials said the local fruit crop would be sufficient to produce a record 9.5m tonnes of oil this Malaysia: palm oil production ’000 tonnes year, compared with the estimated 1998 outturn of 8.3m tonnes. But by then

1,200 the market price had dropped to the equivalent of about M$1,240 (US$326) per tonne, from M$2,220/tonne in early January. The price slide was largely 1,000 attributable to a global oversupply of edible oils generally, and of soybean oil—

800 a cheaper substitute—in particular.

600 In May, following visits to India and Pakistan, the primary industries minister, Lim Keng Yaik, declared that Malaysia’s two biggest traditional buyers of palm 400 oil had committed themselves to taking at least as much as they did in 1998.

200 But traders subsequently said the increasingly attractive price of soybean oil was obliging importers on the subcontinent to request that agreed shipments 0 Oct Nov Dec Jan Feb Mar Apr May of Malaysian palm oil be deferred, warning that this almost inevitably presaged 1998 99 contract defaults. Another dampener was the announcement on July 2nd by Source: Department of Statistics. Indonesia, the world’s second biggest producer, that it was reducing its export tax on palm oil from 30% to 10%. Indonesia’s output is projected to rise significantly this year. In these circumstances, official forecasts that Malaysia’s export earnings from palm oil would exceed M$15bn (US$53.9bn) in 1999, compared with M$22.7bn last year, appeared optimistic.

—but the government urges Estimating that Malaysia lost about M$125m in earnings last year as a result of the domestic industry to a decline in the so-called oil extraction rate (OER) from 19.03% to 18.91%, boost productivity Dr Lim repeatedly insisted on the need to boost productivity. The lower OER saw the average yield per hectare of mature plantation slide to 3.3 tonnes, from 3.7 tonnes in 1997, he said. The government’s objective is to raise the yield to 5 tonnes/ha over the medium term. In the longer term, Malaysia risks losing its status as the world’s leading supplier of palm oil unless productivity improves, Dr Lim warned. Severe land and labour constraints preclude a significant increase in the area under cultivation, which amounted to about 3m ha in 1998.

Rubber is bought from The government’s planned scheme to buy natural rubber from smallholders at smallholders at a premium a premium, thereby creating a domestic buffer stock that could help exert a to market prices— positive influence on the depressed international market (2nd quarter 1999, page 33), came into effect on May 11th. It stipulated an intervention level of M$1.40/kg for 100% dry scrap rubber—M$0.70/kg for 50% wet scrap—some 20-30% more than prevailing farmgate prices. Two weeks later this was raised to M$1.43/kg. Dr Lim said the scheme would be a strictly temporary one, aimed essentially at helping growers through the current period of record-low returns. He added that priority would initially be given to the northern states

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 32 Malaysia

of Perak, Kedah, Kelantan and Terengganu, where farmers were supposedly being paid even less than those elsewhere.

—and imports are In a counterpart move partly designed to run down the existing domestic curtailed— stocks—believed to be equivalent to some six months’ consumption—only specially licensed importers were allowed to buy foreign rubber as of June 1st. Officials disputed the claim of the domestic rubber manufacturing industry that import restrictions and the higher price offered to growers would cut into profits.

—as Malaysia and Thailand The government pressed ahead with its plan to persuade other natural rubber agree to set up a joint producer countries to agree on a co-ordinated, market-boosting sales strategy. buffer stock— Following a meeting between Dr Lim and Thailand’s deputy agriculture minister, Newin Chidchob, in Kuala Lumpur on May 25th, it emerged that the two countries had decided in principle to establish a joint buffer stock of some 300,000 tonnes—Thailand’s stockpile was then about 220,000 tonnes—and to cut back exports. Thailand and Malaysia are respectively the world’s largest and third largest producer. Dr Lim said both countries were also hoping that Indonesia, the number two producer, would join their initiative. But Indonesia’s trade and industry minister, Rahardi Ramelan, promptly made it clear that it had no intention of doing so. He pointed out that producer countries alone would have to fund the scheme, whereas consumer countries shared the cost of market intervention initiatives undertaken by the International Natural Rubber Organisation (INRO). He urged Malaysia and Thailand to reconsider their decisions to withdraw from the latter grouping, attributing its inability to shore up market prices partly to their failure to pay their contributions.

—and resist pressure to Indonesia’s payment in May of arrears equivalent to some M$33.4m allowed remain in INRO— INRO’s buffer stock manager to buy a small quantity of rubber and briefly halt the market’s slide. But that intervention all but exhausted his resources. Traders said that given price trends in recent years INRO should have a buffer stock of 300,000 tonnes—instead of only about 100,000 tonnes—and be asking members for funds to establish an additional reserve of 150,000 tonnes. On June 24th INRO’s acting executive director, Frenchman Gerard Loyen, appealed to Malaysia and Thailand to remain in the organisation, which he argued represented the best chance of reversing the downward trend in prices essentially caused by excess supplies. He also asked that they honour their arrears, a request that both immediately turned down.

—which seems to have only Analysts say INRO can only survive if producing members, including Malaysia an outside chance of and Thailand, can be persuaded to accept a proposal presented by consumer survival countries at its last council meeting in April that envisages denominating support price levels in Singapore dollars, instead of the current Singapore dollar-Malaysian ringgit hybrid. That would allow the buffer stock manager to intervene and buy at slightly lower price levels, provided he has the funds to do so. The proposal is due to be considered at the next council meeting in September. Malaysia’s withdrawal from INRO is scheduled to take effect in October, and that of Thailand in March.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 33

The dioxin scare provokes a On June 7th the government slapped a temporary ban on imports of European shortlived ban on European meat, eggs and dairy products amid mounting international concern about the imports possible contamination of such foodstuffs by dioxin, a poisonous and carcino- genic chemical. The scare had originated in Belgium, where dioxin was discov- ered in chicken-feed, and quickly spread to other European countries. Malaysian retail outlets removed the banned items from their shelves, and in- coming goods were seized and sealed. Importers were told that the acceptance of these and future consignments was conditional on the provision of country of origin certificates guaranteeing them free of dioxin. Dairy product manufacturers who placed large advertisements in local newspapers assuring consumers of the safety of their merchandise were ordered to desist from doing so. On June 15th, following the implementation of the certification process, the Min- istry of Health began authorising the sale of embargoed items. On June 28th it said almost all European foodstuffs products had been certified dioxin-free.

The deadly Nipah virus A nationwide programme that began on April 21st to test farm animals for the seems to be under control Nipah virus that had killed some 100 people and forced the destruction of about 900,000 pigs in Perak, Negri Sembilan and Selangor (2nd quarter 1999, pages 34-35) showed the virus to be present in other states too. In early May it was detected on a pig farm in Johor, and later that month on farms in Kelantan, Malacca and Penang. It also surfaced in previously unaffected areas of Perak, Negri Sembilan and Selangor. All animals on the affected farms were put down, since goats, horses, dogs and cats also tested positive. Rats and fruit bats were also suspected of being carriers. On May 10th the World Health Organisation said the initial mass culling of pigs appeared to have brought the epidemic under control. There was another fatality—a worker on a pig farm in Negri Sembilan—a week later, but no more were reported in the subsequent two months.

Industry

Manufacturing output After falling for 11 consecutive months, manufacturing production turned starts to grow again— positive in February, rising by 2.6% year on year and by 9.6% month on month, according to the Statistics Department. In March and April there were month-on-month increases of 3.5% and 3.7% respectively. Nevertheless, output in January-April was 1.1% lower than in the first four months of 1998. In May manufacturing production declined by 2% month on month, but rose by 8.7% year on year. As a result, output in the first five months of the year was 1.2% higher than in the corresponding period of 1998.

—on improving external Government officials attributed much of this modest improvement to stronger and domestic demand overseas demand, especially for electronic goods and parts. Exports of these items increased by 13.4% year on year in January-April, to M$54.5bn (US$14.3bn), accounting for 57.1% of total export earnings. Yet the data also show that most of the highest production growth rates were recorded by industries that the authorities classify as “domestic-oriented”: transport equipment (essentially passenger cars and commercial vehicles), foodstuffs, iron and steel, chemicals and rubber products.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 34 Malaysia

Malaysia: industrial production Sales of manufactured goods likewise followed a largely upward trend, rising by 1993=100 6.1%, 14% and 14.7% year on year in March, April and May respectively. For 155 the January-May period sales amounted to M$95.6bn, 5.3% higher than in the first five months of 1998. Month on month, sales rose by 24.4% in March, and 150 declined by 2.7% and 1.5% in April and May respectively.

145 Most of the manufacturing investment approved by the government in Janu- ary-May was earmarked for the electronic and electrical product sectors, ac- 140 cording to the international trade and industry minister, Rafidah Aziz. Approvals for the two sectors during the five-month period totalled 135 M$5.52bn—compared with M$2.41bn in the whole of 1998—of which M$3.08bn was destined for the electronics industry, she said. Local press re- Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May ports on July 3rd claimed that the US-based Intel Corporation, the world’s larg- 1998 99 est chipmaker, was planning to invest a further M$2bn in Malaysia over the Source: Bank Negara Malaysia. next two years. The reports put Intel’s investments to date at M$6bn.

—but Dr Mahathir’s high- The Multimedia Super Corridor (MSC) south of Kuala Lumpur, the still nascent tech zone continues to lag— 750-sq km testing ground for the creation, use and distribution of multimedia products and services, again became a focus of attention. In June, Dr Mahathir moved his office into the corridor—to Putrajaya, the new but still skeletal ad- ministrative capital. The following month he unveiled the first phase of Cyber- jaya, another fledgling futuristic development designed to accommodate the tens of thousands of “knowledge” workers supposed to staff the cutting-edge high-technology firms he hopes will set up shop in the MSC. But those hopes, or at least the scale of them, are diminishing, victims of the recession and of the prime minister’s less than business-friendly reaction to it.

—despite painstaking Much of the groundwork for the MSC has been laid. The government has preparations— pledged some US$10bn for basic infrastructure, half of which is for a 2.5-10 gigabyte digital fibre-optic communications backbone. An attractive incentives scheme, providing investors with all manner of tax breaks as well as exemption from restrictive local ownership and expatriate employment regulations, is in place. Parliament has approved impressive legislation to protect intellectual property and prevent computer crime. Cyberjaya boasts an operational multimedia university that will soon be turning out engineers and researchers. In addition, a new stock exchange and a government-backed venture capital fund have been launched to help underwrite start-ups.

—because the downturn On July 8th Dr Mahathir disclosed that 228 companies, almost half of them deprives small investors of wholly or partly owned by foreign interests, had been granted “MSC status”. funding— Some 140 of these were functioning, other officials said. But few had moved into the zone and many, especially those run by Malaysians, were struggling for survival. If the corridor was largely spared the recession-induced public spending cuts that forced the postponement or cancellation of other mega- projects, the economic downturn was a major blow to many of the smaller would-be MSC enterprises, depriving them of expected funding.

—and the government’s More crucially, the initial enthusiasm of some of the giants of the global elec- attitude gives industry tronics industry has waned. An important factor was the transformation of pause for thought

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 35

Dr Mahathir, the project’s founder and driving force, into a seemingly hostile sponsor. His anti-Western rhetoric, the introduction of capital controls, and the increasing repression of domestic critics—including the official monitoring of Internet traffic—was perceived as less than conducive to the sort of innovation supposed to flourish in the corridor. There now seems little doubt that a project that was to have provided the momentum for Malaysia’s much-needed propulsion up the technological value chain will be rather more modest than originally envisaged.

Lax enforcement of Another reason for industry misgivings is that despite the recent overhaul of intellectual property laws intellectual property legislation, piracy is still rife, and therefore represents a is an inhibiting factor— major threat to those who might develop advanced applications in the MSC. Professing to be more than aware of the problem, the authorities stepped up their campaign against the illegal copying and use of software and audio-visual materials.

—notwithstanding high- During May, enforcement officers from the Ministry of Domestic Trade and profile crackdowns on Consumer Affairs, accompanied by officials from the Business Software Alliance users of pirated software— (BSA)—a global industry watchdog—carried out raids on dozens of companies in Selangor, Penang, Malacca and Sarawak. These led to the initiation of civil and criminal proceedings, including claims for aggravated damages, against a number of firms found to be using pirated software. Officials said the well- publicised raids were meant to serve as a warning to other culprits, and that the crackdown would continue. BSA figures from 1997—the latest available— estimate that seven out of ten software packages used in Malaysia are illegally copied.

—and vendors of Video piracy was also targeted, amid allegations that its central location and counterfeit audio-visual lax enforcement had helped to turn Malaysia into the region’s safest haven for materials this illegal activity. Millions of ringgit worth of counterfeit compact discs, laser discs and videocassettes were seized during a series of raids on retail outlets across the country that began in April. Officials declared they would be press- ing for the maximum possible penalties under the law, which include a fine of M$10,000 for each fraudulently copied unit found in a vendor’s possession. The domestic trade and consumer affairs ministry announced it was pushing for the incorporation of additional provisions in the Copyright Act. These included a requirement that all local manufacturers of audio-visual materials and all importers of copying equipment register with the ministry. Yet illicit trade has continued to boom. Compact discs of this summer’s biggest cinema box office successes were readily available at upmarket shopping centres and street- side stalls, for as little as M$5 (US$1.30) a copy, weeks before the films were scheduled to be screened locally.

The authorities are Government officials gladly cited the upward trend in motor vehicle sales as heartened by rising car evidence to support their argument that mounting consumer confidence was sales— helping to fuel manufacturing output and an economic revival. Sales of new vehicles were 123% higher in January-March 1999 than in the first quarter of 1998, according to the Malaysian Motor Traders Association, which represents local assemblers as well as manufacturers. After rising steadily from 18,397

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 36 Malaysia

units in January to 22,800 units in March, sales reached 23,427 units in April Malaysia: consumption indicators owing mainly to easier, officially orchestrated credit conditions and lower in- % change, year on year terest rates. Sales of passenger cars Sales of commercial vehicles 250 But in May sales slipped to 21,059 units—down by 10.1% month on month—

200 prompting officials to hint that additional measures to facilitate car purchases were in the offing. The national carmakers, Perusahaan Otomobil Nasional 150 (Proton) and Perusahaan Otomobil Kedua, sold 47,753 units and 23,554 units 100 respectively in January-March, matching the 83% share of the domestic market 50 they attained in 1997 but not the record 92% achieved in 1998. Last year af- 0 fordability was the primary factor limiting purchases, and, although the two -50 companies’ combined sales dropped by 50% to 126,000 units, they neverthe-

Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar less benefited from preferential duties on domestically produced vehicles and 1998 99 high tariffs on imported ones. However, sales of Protons fell by 18% month on Sources: Bank Negara Malaysia; Malaysian Motor Traders Association. month in May this year, to 7,631 units, a significantly steeper decline than the industry average, the cause of which was not immediately clear.

The leading national Neither was it clear how Proton managed a net profit of M$66.8m for the year carmaker posts a profit— to end-March, which it reported in late June. While 85% lower than the M$440.6m profit recorded for 1997/98, it defied the expectations of industry analysts. Noting the sharp drop in car sales, particularly in the first half of the financial year, the market had anticipated a loss of up to M$300m. Turnover fell by 40% to M$4.07bn in 1998/99, according to the unaudited results, with car sales slumping to 44,261 units in the first six months—from 105,778 units in the corresponding period of 1997/98—before recovering to 64,841 units in the second half of the year.

—that surprises industry The data presented by the company were insufficient to explain how it had watchers— turned around from a loss of M$122.9m in the first half to achieve a profit of M$189.9m in the second half. The yen continued to strengthen against the ringgit during much of the latter period—a significant proportion of components are imported from Japan. Analysts speculated that the high cost of research and development had been flexibly accounted for, and provisions made in the previous year written back. Most concluded the figures presented were an unconvincing attempt to pretend all was well. But the economic crisis un- derscored Proton’s ominous fragility, notably its dependence on imports of critical parts and technology and on a heavily protected domestic market. Lack of competition and of economies of scale fostered inefficiencies, and the company’s cost structure was some 20% above the international average.

—as Petronas announces a When the government late last year authorised the indebted conglomerate hefty buy-in Hicom Holdings to negotiate the sale of its 27.2% stake in Proton to the state- owned oil and gas corporation, Petroliam Nasional (Petronas; 1st quarter 1999, page 33), the primary motivation was the substantial investment funding needed by the carmaker to make meaningful inroads into the competitive global market. On July 6th Petronas’s chief executive, Hassan Marican, revealed that the negotiations had been concluded. He also sought to head off allegations of another government bailout by insisting that the price to be paid—about M$1bn—was “within the range” of an independent valuation.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 37

The deal envisaged Proton first acquiring Hicom’s other interests in the automobile business, including a 32% stake in the national car distributor, Edaran Otomobil Nasional, and several components manufacturers.

Energy

A return to profitability— Tenaga Nasional, peninsular Malaysia’s main generator and sole distributor of electricity, registered a group pre-tax profit of M$502m (US$132m) in the six months to end-February 1999, having suffered a loss of M$1.9bn in the corresponding period of the previous financial year. Presenting the half-year results in mid-May, the executive chairman, Tajuddin Ali, attributed the turnaround largely to the relative strength of the pegged ringgit, which lowered the cost of foreign-currency capital expenditure and debt servicing. One-third of Tenaga’s M$23.5bn long-term debt is denominated in US dollars and just over one- quarter in yen. (Although the yen appreciated against the ringgit during the accounting period, the swapping of dollar- for yen-denominated debt yielded a cashflow gain thanks to the latter’s lower interest rates.) As a result, Tenaga recorded a foreign-exchange gain of M$88m, compared with a loss of M$2.47bn in the first half of 1997/98. Turnover rose only slightly, to M$5.78bn from M$5.70bn, and operating profit fell by 23% to M$371m, owing to losses in- curred by the newly acquired subsidiary, Sabah Electricity, and on the sale of assets.

—and rising demand for Mr Tajuddin partly based his prediction of higher second-half profits on the electricity— positive trend in demand. After falling for much of 1998, the peninsula’s consumption began rising again in February 1999, and hit successive record peaks of 8,631 mw on April 12th and 8,680 mw on June 9th. Official forecasts antici- pate maximum demand reaching 9,330 mw next year and 13,540 mw in 2005. While the peninsula’s reserve margin is currently in excess of the recom- mended 33%, the energy minister, Leo Moggie, said in May that an additional 7,170 mw of coal-fired, gas-fired and hydro facilities would be built by 2007, at a projected cost of M$28bn.

—prompt Tenaga to revive One of the biggest plants will be a 2,100-mw coal-fired station on a man-made a shelved generating island off Lumut in Perak state operated by TNB Janamanjung, a wholly owned project— Tenaga subsidiary. The M$7.1bn project was shelved last year as the recession took hold, then reactivated early this year as demand picked up. On June 29th a renegotiated engineering, procurement and construction contract was awarded to a consortium led by the Anglo-French group, GEC Alsthom Power Plants. The same day the UK’s Midland Bank formally pledged the equivalent of M$2.6bn, a loan that is being underwritten by the British and French export credit guarantee agencies. Tenaga officials said the rest of the financing would be raised via bond and equity issues. Construction work was due to begin in July and the facility is scheduled to be fully on stream by September 2003. TNB Janamanjung has contracted to sell its output to Tenaga at 11.95 sen per kwh.

—and Dr Mahathir to On June 8th Dr Mahathir confirmed that Tenaga had been asked to oversee the confirm the Bakun dam implementation of a downsized version of the original Bakun dam project in scheme will proceed

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 38 Malaysia

Sarawak state (1st quarter 1999, page 35). He said work on the 500-mw hydroelectric facility could begin once the government resolved its differences with Bakun Hydroelectric Corporation (BHC), the grouping awarded the contract to build the initially envisaged 2,400-mw plant. BHC’s operating concession was revoked in September 1997 as the ringgit plunged, prompting a series of reim- Malaysia: oil production bursement and compensation claims. A senior finance ministry official told ’000 b/d parliament in May the government would pay M$950m to take over BHC’s as- 800 sets and liabilities.

750 On June 12th Mr Tajuddin revealed that Tenaga was in the process of setting up a joint-venture company with the Sarawak Electricity Supply Corporation to

700 manage the completion of three river diversion tunnels begun as part of the original project, and the construction of the smaller power plant. He said the 650 new plan, costed by independent analysts at up to M$5bn, envisaged using one of the tunnels as a water intake channel that would be buttressed by an 600 underground dam. Other officials estimated it would take at least five years to complete the entire project. This would supply electricity to Sarawak and the

Nov Dec Jan Feb Mar Apr May neighbouring Borneo island state of Sabah, and, pending a possible subsequent 199899 expansion of capacity, Brunei and the Indonesian province of Kalimantan, Source: Petronas. they said. Critics argued that the project was unnecessary, since Sarawak already had a reserve margin of some 40%. Its substantial cost was also bound to push tariffs much higher in a relatively poor region whose consumers are currently paying about 50% more than their peninsular counterparts.

Despite a crisis-induced Presenting its latest results on July 6th, Petronas blamed low oil prices and the drop in earnings— regional economic crisis for a 38% drop in net profit, to M$6.81bn, in the year to end-March 1999. Shrinking Asian demand and excess global supplies saw the average price of Malaysian crude fall to US$12.97/barrel, from US$18.60/b in 1997/98. In volume terms, crude exports fell by 8.4% to 114.8m barrels. The decline in crude prices duly undermined those of petroleum products and gas. Liquefied natural gas shipments fell by 14% to M$7.67bn, accounting for 46.2% of export earnings. Domestic and foreign sales of refined petroleum more than doubled to M$14.7bn, providing 34.7% of total revenue, up from 20.1% the previous year. As a proportion of total turnover, foreign sales fell to 39%, from 56% the previous year. A threefold surge in contributions from overseas operations to M$14.28bn largely accounted for the 21% jump in turnover to a record M$42.3bn. Borrowings amounted to M$31.9bn at end- March, up from M$26.2bn 12 months earlier.

—Petronas insists it will The chief executive of Petronas, Hassan Marican, said the significant not raise crude output improvement in crude prices since March, when other producer countries agreed to reduce output, presaged better fortunes in 1999/2000. But Petronas insisted it would not raise output to capitalise on the price recovery, despite suggestions of pressure from the government for it to do so. On July 13th a minister in the prime minister’s department, Siti Zaharah, said the government had agreed to an unspecified production increase given “the current stable prices and our high dependence on oil revenue”. The following day, however, Mr Hassan declared that the company had “no plans” to raise output from its then level of 630,000 barrels/day. Since the economic crisis erupted in mid-

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 39

1997, the government has relied even more heavily than usual on Petronas’s resources to support ailing local corporations, and hints of friction between the two have emerged. Disclosing the Proton buy-in deal on July 6th, Mr Hassan denied rumours that his resignation was imminent.

Transport and communications

Kuala Lumpur’s light rail The opening on June 1st of the second and final section of a light rail service in network continues to Kuala Lumpur enables users to travel easily between the eastern and western evolve— suburbs of the capital and gives them access to a north-south link through the city centre. The launch of the 14.9-km section of Projek Usahasanama Transit Ringan Automatik (PUTRA) between downtown Central Market and Gombak township to the north-east followed the inauguration last September of the 14- km western segment, serving heavily populated areas including the satellite town of Petaling Jaya and the upmarket suburb of Bangsar. Importantly, PUTRA now shares the downtown Masjid Jamek station with Sistem Transit Aliran Ringat (STAR), which has been operating the north-south route since late 1996.

—but hefty discounts are PUTRA, STAR and the government expressed the hope that the availability of a needed to entice cash- broader and more integrated light rail system would spur usage and thereby strapped travellers help to ease Kuala Lumpur’s worsening traffic congestion. The first phase of PUTRA was severely underutilised, carrying an average of just 10,000 passengers a day, compared with a projected 140,000. STAR faced similar problems. City residents said stations were too far apart, and had insufficient car-parking space and inadequate feeder bus services. Nor, critics complained, were PUTRA and STAR integrated enough. For example, each company has its own ticketing system. But the main complaint was cost. PUTRA sought to ease the burden, and familiarise potential customers with its service, by offering steep discounts for a three-month period beginning July 16th. The promotion reduced the one-way peak time end-to-end fare from M$4.50 to M$1.50 (US$1.18 to US$1.39).

Fresh funding allows the Another criticism was that neither company directly served the so-called resumption of work on the Golden Triangle, Kuala Lumpur’s main business district. This shortcoming will monorail— be addressed when a much-delayed monorail system is completed. Work on the elevated 16-km project, the first 8.6-km phase of which was originally due to be commissioned before last September’s Commonwealth Games, ground to a halt in late 1997 largely owing to crisis-induced cost increases and related financing problems. In May 1998 the government agreed to grant a M$300m (US$79m) soft loan to the development consortium, KL PRT. But construction only resumed in late June this year and the first stage is now scheduled to come into service early in 2001. There will be two interchanges with the STAR system and one with PUTRA.

—and on an express link to The monorail will also serve KL Sentral, a station being built in downtown the new international Kuala Lumpur that is to be an important hub for both light rail and mainline airport— train networks. Another recently reactivated project is a dedicated 57-km ex-

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 40 Malaysia

press rail link between KL Sentral and the new international airport at Sepang, south of the capital. The financial problems besetting the scheme, which is costed at some M$2.8bn, were significantly eased on April 30th when four German banks led by Kreditanstalt für Wiederaufbau formally pledged loans worth DM665m (M$1.37bn). This supplemented a M$950m credit committed by Bank Pembangunan dan Infrastructure, a development institution run by the Malaysian government. Executives at Express Rail Link (ERL), the local joint venture that was granted a 30-year concession to operate the service, said the rest of the funding could be raised later via equity and bond issues.

—whose developers fear On May 3rd the engineering, procurement and construction contract was may take years to turn a awarded to a German-Malaysian consortium led by Siemens. Originally due to profit be completed before the opening of the new airport last June, it is now scheduled to go into service in April 2002. ERL officials say they hope to attract at least 20% of the airport’s passengers. The fare for the non-stop 30-minute journey has been set at M$35 one way, and trains will depart from the airport and KL Sentral every 15 minutes. KL Sentral is to have flight check-in facilities, and immigration and customs counters. ERL will also operate a commuter service stopping at three stations along the route. But, like other new railway companies, it fears profitability is a remote prospect.

MAS goes deeper into the Despite a 6% increase in revenue to M$7.47bn, Malaysian Airline Systems red— (MAS) suffered a net loss of M$700m in the 12 months to end-March 1999, an increase of 169% on the previous financial year’s shortfall of M$260m. The national airline blamed the poorer results, released on June 8th, on recession- induced slack demand, especially in Asia, and on the relative weakness of the ringgit, which pushed up foreign-currency costs. The passenger load factor declined to 67.3%, from 67.9% in 1997/98, and the cargo load factor slipped to 59.3%, from 60.6%. During the year MAS took delivery of three new Boeing 777-200s and one 747-400, and sold two 747-400s and a McDonnell-Douglas DC10-30. But it also deferred delivery of five 747-400s and four 777-200s until after 2000. Capital investment in 1999/2000, the bulk of which is aircraft payments, was forecast at M$1.1bn, compared with the M$1.8bn originally bud- geted for 1998/99. The company said it would pursue efforts to cut costs and boost revenue by reducing flight frequencies on less remunerative routes and increasing them to popular destinations.

—amid renewed MAS put its borrowings as of end-March at the equivalent of M$10.3bn, of speculation of a change in which 79% was denominated in US dollars and 14% in yen. However, some shareholding structure independent analysts estimated the debt at more than M$12bn. The burden became increasingly onerous. On June 14th Naluri, an investment company through which the executive chairman, Tajudin Ramli, holds a 29% stake in the carrier, conceded it was experiencing difficulty servicing loans amounting to M$1.1bn. That admission fuelled speculation that some or all of Naluri’s interest would be acquired by the Malaysian International Shipping Corporation, part of Petronas’s expanding empire. MAS and Petronas said the rumours were unfounded.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malaysia 41

An article in the British newspaper, the Sunday Times, on May 9th landed the Allegations that the airline in trouble of another kind. The article, based on a report by a British national carrier pursues a government-funded watchdog group that encourages submissions on alleged dangerous fuel policy— safety breaches in the aviation industry, claimed that a MAS 747 had risked a catastrophic crash by flying over central London two weeks earlier with near- empty fuel tanks. The plane had so little fuel it would have plunged into a densely populated area of the city if obliged to abort its first approach to Heathrow airport, the paper said. It allegedly landed with just over three tonnes of fuel—sufficient for about 20 minutes’ flight—contravening British regulations requiring a minimum of 4.5 tonnes.

—seem to be well-founded— On May 12th Flight International, a respected industry weekly, claimed that British Airways, which provides MAS with engineering support services at Heathrow, had advised the UK’s Civil Aviation Authority (CAA) of at least ten similar incidents since 1997 involving the Malaysian carrier. Some of the flights had to be given priority clearance to land. As a result, senior CAA officials flew to Kuala Lumpur in February this year and “received assurances” that the situation would be rectified, according to the magazine. But a senior official at Malaysia’s Department of Civil Aviation privately told the EIU in mid- May that a deliberate policy of putting less fuel on its planes, adopted by the cash-strapped national carrier following the eruption of the regional financial crisis in mid-1997, was still in force.

—but are given little MAS and Malaysian transport ministry officials publicly insisted there was no credence by the local such policy, that minimum fuel regulations had not been flouted, and that the authorities carrier would never compromise the safety of passengers or aircraft. However, the transport minister, Ling Liong Sik, admitted in late May that “there were certain circumstances where fuel might have been low”. British transport ministry officials said they were investigating. Industry analysts said that if the airline was found to be at fault, it could be banned from British airspace. MAS flies twice daily to Heathrow and twice weekly to Manchester.

Indebted telecoms With merger talks between key players in the crowded telecommunications companies may be forced sector still yielding no apparent progress, the authorities indicated they could into mergers be obliged to force reluctant companies into couplings. In mid-June the Corporate Debt Restructuring Committee (CDRC), Bank Negara’s corporate debt resolution agency, said it was drawing up a rationalisation plan for the industry. This seemed to centre on Time Telecommunications, a unit of the heavily indebted Renong affiliate, Time Engineering, which in March had sought the agency’s assistance to restructure arrears estimated at M$4.5bn. Analysts reasoned that the most likely buyer was one of the sector’s three strongest operators: the predominantly state-owned fixed-line giant Telekom Malaysia, the fast-growing mobile service provider Binariang, or TRI-Celcom, likewise rapidly attracting new cellular subscribers. Time Telecommunications’ underused fibre-optic fixed-line network would constitute an ideal complement to Binariang or Celcom’s mobile business, the analysts concluded. But all three companies said they were not interested in a buy-out, seemingly because the price tag on Time Telecommunications was deemed to be excessive.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 42 Malaysia

Employment, wages and prices

As the redundancy rate According to the Ministry of Human Resources in mid-July, the number of slows— people made redundant in the first six months of 1999 dropped by 44.9% year on year to 21,758. Lay-offs in April-June totalled 10,304, 10% less than the 11,454 recorded in January-March. More than half had been employed in the manufacturing sector. Officials continued to insist there were more than enough jobs available for those retrenched. While 16,565 people were laid off between January 1st and May 8th, the Labour Department was notified of 31,885 vacancies during the same period, claimed the human resources minister, Lim Ah Lek. Employment in the manufacturing sector reached 928,402 at the end of May, 1.1% more than a year earlier and 0.9% more than at the end of April, according to the Statistics Department.

—the government rejects a On July 7th Dr Lim said the improving employment situation was one reason labour lobby’s proposal for for the government’s decision to reject a proposal for the establishment of a a retrenchment fund— National Retrenchment Fund to compensate laid-off workers. The proposal, made by the Malaysian Trades Union Congress (MTUC) in February last year, envisaged workers and their employers making a monthly contribution of M$1 each. Employers’ lobbies had earlier rejected the plan, claiming it would further increase production costs and thereby undermine competitiveness. The Federation of Malaysian Manufacturers also argued that, if implemented, such a scheme would engender a “dole” mentality among Malaysians.

—and a minimum wage Dr Lim used similar arguments to justify the government’s dismissal of the MTUC’s demand for the introduction of a minimum wage. Such a move would bankrupt many recession-hit businesses and discourage foreign investment, he contended. On May 1st, International Labour Day, the MTUC president, Zainal Rampak, had said he hoped the prime minister, Mohamad Mahathir, would soon honour a promise made in August last year to enforce a minimum monthly wage of M$1,200. The purchasing power of workers generally had been severely eroded by the economic downturn, he said, and some were earning as little as M$240. In his Labour day message, the prime minister said the path to higher incomes lay in higher productivity.

Inflation moderates too Having slowed to 4% year on year in January-March from 5.4% in October- December 1998, the annual inflation rate, as measured by the consumer price index (CPI), moderated further over the next three months. The CPI rose by 2.9% year on year in April, 2.8% in May and 2.1% in June, according to the Statistics Department. As a result, the annual inflation rate in the first six months of the year was 3.3%. The deceleration partly derived from slack domestic demand and low interest rates, but was also attributable to last year’s high base. Have reached 5% in March 1998, the inflation rate surged to 6.2% in June—a five-year high—largely owing to the depreciation of the ringgit.

Foreign trade and payments

Continued substantial Malaysia has continued to post substantial monthly trade surpluses. The trade trade surpluses— surplus rose from M$4.4bn (US$1.2bn) in January to M$4.9bn in February and M$6.5bn in March, dipped to M$6.2bn in April and edged back up to M$6.4bn in May. At M$28.2bn, the cumulative surplus for January-May—the product of a 6.1% year-on-year increase in exports and a 5.2% decline in imports—was 74% higher than the M$16.3bn achieved in the corresponding period of 1998.

—are fuelled by stronger Year-on-year trends in foreign earnings for the January-May period varied from electronics sales sector to sector, with exports of key manufactured goods up and those of important commodities down. Exports of electronic and electrical products rose by 16.8% to M$69.2bn, accounting for 57.3% of total revenue. Sales of integrated circuits were up by 12.7%, at M$19bn. Strong demand in some major markets, especially the US, provided the momentum. But the improvement Malaysia: foreign trade, 1999 M$ bn carried a cost: the increase in the volume of exports by these industries was achieved at the expense of lower prices. Exports Imports 28 The export price of palm oil also dropped (by an average of 10.8%) and the 26 volume of sales rose (by 5.7%). But earnings fell by 5.7% to M$6.1bn. Similar 24 trends prevailed in the liquefied natural gas market: a 10.7% increase in vol- 22 ume was insufficient to offset a 24.6% plunge in prices, with the result that 20 revenue fell by 16.5%, to M$2.3bn. Crude oil earnings dropped by 15.6% to 18 16 M$2.9bn, on price and volume falls of 13.1% and 12.5% respectively. 14 On a month by month basis, year-on-year revenue essentially trended up- 12 10 wards, a pattern the authorities cited as evidence of an economic recovery. Jan Feb Mar Apr May Having declined by 3.3% in January and 2.1% in February, earnings rose by 5.9% in March, 16.4% in April and 14.7% in May. But the month-on-month Source: Department of Statistics. pattern, a more instructive measure of current trends, was less conclusive. After dropping by 15% in January and stagnating in February, revenue rose by 17.2% in March and by just 0.8% in April, before slipping to 1.2% in May.

Imports pick up While the sizeable monthly trade surpluses were in some respects a comfort to the government, an important contributing factor in the early months of the year was the continued weakness of domestic demand for foreign products. Year on year, imports fell by 12.6%, 14.2% and 5.4% in January, February and March respectively. Month on month, they declined by 8.9% in January and 2.9% in February. Given the heavy reliance of many industries on intermediate and capital goods from overseas, there could be no meaningful economic revival without a prolonged turnaround in imports.

In recent months, there were some signs of a turnaround. Imports rose by 4.6% year on year in April and 3.2% in May. Month on month, they rose by 12.9% in March and 2.6% in April. Officials duly trumpeted these growth rates. But in both cases, the rates moderated in the second month. Also in May, imports were 2.5% lower than in April.

The curent exchange rate Highlighting the recent appreciation of the currencies of regional commercial fix will not last, officials rivals, importers continued to lobby for a revaluation of the ringgit vis-à-vis the caution US dollar. But the government resisted the pressure, insisting that the exchange rate would remain pegged at M$3.8:US$1 for the time being. Its stance acknowledged that exports could be less than competitive without an undervalued currency. Nonetheless, senior officials repeatedly stressed that the artifi- cial fillip being given to exports by the fixed rate should not be taken for granted. Foremost among them was the international trade and industry minister, Rafidah Aziz. The key to long-term competitiveness lay in lower costs, higher quality and better marketing, she said.

Brunei

Political structure

Official name Negara Brunei Darussalam

Form of state Sultanate

The executive The sultan is advised on policy matters by four councils: the Religious Council, the Privy Council, the Council of Succession and the Council of Cabinet Ministers

Head of state HM Paduka Seri Baginda Sultan Haji Hassanal Bolkiah Mu’izzaddin Waddaulah

National legislature None

Legal system Courts of first instance exist on a local and religious basis; appeals go to the Religious Council in religious cases, and to the High Court and thence to the Court of Appeal in other cases. All major judicial posts are filled by the sultan’s appointees

National elections Last election August 1962

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 Solidarity 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 & 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

Economic structure

Latest available figures

Economic indicatorsa 1994 1995 1996 1997 1998b GDP at market prices (B$ m) 6.7 7.4 7.7 8.0 8.1 Real GDP growth (%) 1.8 3.0 3.6 4.1 1.0 Consumer price inflation (av; %) 2.4 6.0 2.0 1.7 –0.5c Population (‘000) 284.5 296.0 305.1 314.4 323.6 Exports fob (US$ m) 2,154 2,390 2,603 2,676 1,894 Imports cif (US$ m) 1,713 1,979 2,364 2,013 1,718 Reserves (US$ m) 4,396 5,874 5,937 3,656 4,011 Exchange rate (av; Br$:US$) 1.53 1.42 1.41 1.48 1.67d

July 20th 1999 Br$1.701:US$1

Origins of gross domestic product 1998e % of total Oil & gas sector 32.5 Agriculture, forestry & fishing 2.8 Construction 6.6 Transport & communications 5.2 Wholesale & retail trade 11.2 Community, social & personal services 33.0 GDP at factor cost incl others 100.0

Principal exports 1997e Br$ m Principal imports 1997e Br$ m Natural gas 1,860 Machinery & transport equipment 1,229 Crude petroleum 1,650 Manufactured goods 804 Refined products 111 Food & live animals 352

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total Japan 50.9 Singapore 32.3 UK 14.2 UK 16.6 US 10.4 Malaysia 12.1 Singapore 8.1 France 11.5 Thailand 3.0 US 4.8 a Source for all data is IMF, Staff Country Report No 99/19, with information drawn from Brunei’s Ministry of Finance, National Development Plans and Statistical Yearbooks (various issues). b IMF estimates. c EIU estimate. d Actual. e Brunei Statistical Yearbook, 1998, estimate.

Outlook for 1999-2000

Higher oil prices will boost Rising oil prices have boosted confidence in Brunei’s economy, as has the pros- growth— pect of higher production levels. The sultanate will be pumping up to 180,000 barrels/day (b/d) of oil this year, up from 160,000 b/d in 1998. As most government revenue is generated by receipts from the hydrocarbons sector, the government’s fiscal position is also expected to improve.

The EIU has raised its forecasts for the average price of oil in 1999 from US$14/barrel to US$16/b. The forecast average price in 2000 has also been raised to US$16.5/b from US$15.5/b. While these prices are still well below the average of US$20/b in 1996, they should go some way towards stabilising the country’s finances.

Government officials believe that the worst of the Asian economic crisis is now past, and that Brunei’s economy will grow at a rate of between 0% and 1% in 1999. Early government reports had suggested GDP would contract this year. The region’s economic crisis, together with local business failures, the collapse of the Amedeo group of companies and mismanagement at the Brunei Investment Agency (BIA), have forced the government for the first time to address its economic shortcomings. Plans are under way to introduce banking and financial reforms, and to revise the land laws to allow foreign ownership of property. Privatisation and commercialisation of the public sector will continue, although the government has stressed that its objective is not merely to sell certain government assets but to introduce private-sector practices into the public sector. The government will also try to reduce subsidies in certain areas.

—but services will also be The government has again emphasised the importance of making Brunei the stressed region’s Service Hub for Trade and Tourism (ShuTT) by 2003, and will more ag- gressively pursue this objective. Singapore is involved in developing and managing the Muara Port Container Terminal and is likely to be involved in the Brunei-EAGA (East ASEAN Growth Area) Air Cargo Centre. Singapore’s involvement adds credibility to the government’s plans for developing Brunei into a major regional cargo handler.

The Amedeo probe The government has made no official comment about the collapse in 1998 of continues— the Amedeo group of companies (Brunei’s largest business enterprise), the financial mismanagement at the BIA, and the role of the sultan’s brother, Prince Jefri, in these affairs. The government stressed the need for transparency when these problems first surfaced last year, but little information has been forthcoming. An Arthur Andersen report into Amedeo has been delayed. Large sums of government money were lost in the Amedeo and BIA scandals, and although these losses will be absorbed, the government eventually must make some statement on the enquiries into these matters. The government, as is its custom, will divulge as little as possible, but is aware that public criticism of these affairs will not allow it to remain silent forever. Brunei, in fact, has expe- rienced an increasing level of public openness in recent years, manifested through criticism of the government in the local press.

—as religious issues take The ongoing debate over the supply of halal meat in Brunei—some govern- centre stage ment officials have blamed the strict imposition of religious regulations for causing shortages—has led to a strong response from religious authorities. This suggests that tensions remain between religious conservatives in government and those who wish to pursue a more modern, reformist line. Religious conservatives within the government still hold a good deal of influence and believe they can set the agenda. Although Brunei is keen to develop economically, and wants to play a major role in the EAGA, these goals will not be accompanied by a greater tolerance of religious and political dissent. The government argues that religious conformity has made Brunei strong. The antidote to rising social problems, it believes, is a more rigorous application of Islamic belief and practice. That the government dealt with such problems as forest fires, drought, the recent cholera outbreak and economic difficulties by organising mass prayers shows the importance of religion to the Brunei establishment, including the sultan.

Review

The political scene

The sultan outlines the In a titah (royal address) celebrating his 53rd birthday on July 15th, the sultan government’s programme— said the government would renew its efforts to boost local and foreign business confidence in Brunei. The sultan’s birthday address is an important window on the government’s agenda for the coming year, and the 1999 titah stressed economic development with greater private-sector involvement. The sultan also acknowledged that the government must be more sensitive to the interests of the people, especially in dealing with social problems, such as drug abuse. Much emphasis was also placed on Islamic religious conformity. The government is still concerned about unorthodox Islamic religious groups, and is now working with neighbouring countries in an attempt to monitor and control such groups.

—which includes some The sultan also announced the establishment of a Business Facilitation Scheme business-friendly policies— to encourage greater foreign investment in the country. No further information has been given about the scheme, although the government’s earlier announcement that land laws would be revised to allow foreign investors to own property in Brunei may have been part of the plan. The sultan also invited the private sector to participate in education at primary, secondary and vocational levels.

—an emphasis on tourism— Tourism is seen as increasingly important to the economy. To this end, the sultan announced that a Tourism Master Plan had been prepared. It is not yet known if the plan addresses the shortage of accommodation in Brunei, particularly outside Bandar Seri Begawan. This, together with an underdeveloped public transport infrastructure, will limit the growth of tourism.

The sultan insisted again that government departments and agencies must be more efficient, professional and responsive to the public’s needs. There are signs that the sultan is annoyed at the level of complaints directed at government departments.

—and the need for religious The tone of the titah was guardedly optimistic about the economy, and showed conformity concern about the social problems facing the country. Yet the sultan was also clear that unorthodox Islamic religious views, and attacks upon the government, would not be tolerated. Unity, conformity and piety are being stressed as nec- essary attributes for all Bruneians.

Islamic officials warn of The government said it would continue to watch out for Islamic “deviationist” “deviationist” movements movements operating in the country. Although there is no reason to believe such clandestine groups are functioning in Brunei, the government says it is co-operating with Islamic officials in neighbouring countries. Brunei is a member of MABIMS (Malaysia Brunei Indonesia Singapore), a regional Islamic council, whose members include ministers of religious affairs from Malaysia, Indonesia and Brunei. Singaporean Islamic authorities are also members. The 8th MABIMS conference, held in Malaysia in early May, addressed the question of unorthodox religious groups. Some officials are concerned that the Al- Arqam movement, banned in Malaysia as well as in Brunei, may be attempting to revive its activities. Brunei is wary of any Islamic group that is not part of the country’s religious establishment. The reasons go beyond hostility towards those who espouse different religious views; the government is also worried that outside religious groups may undermine the national ideology of “Malay Muslim Monarchy”. The government regularly warns its citizens about unorthodox views and teachings (3rd quarter 1998, page 40) and the sultan did so again in his birthday address.

The status of halal food The question of halal food (lawful food, according to Islam) has dominated exposes tensions— Brunei’s headlines in recent months: the issue has drawn in religious and trade officials, brought about a heated public debate on meat shortages, and led to allegations of protectionism and a meat cartel operating in Brunei. Critical comments on the subject from the head of Royal Brunei Airlines are thought to have contributed to his downfall in July.

Throughout 1998 and 1999 religious officials have been checking shops and supermarkets to ensure that halal food is kept separate from haram (unlawful) food. In July the sale of a traditional Malay dish, nasi lemak, which had been contaminated with pork, caused a public outcry. The Chinese vendor was issued a stern warning by the religious authorities.

In 1998 the Brunei government introduced new regulations related to food distribution and labelling (3rd quarter 1998, page 39). A Halal Meat Import Permit Certification Committee was set up. One result of this strict application of the regulations was that Australian lamb imports into Brunei ceased in 1998.

—that are made worse by Brunei has been subject to increasing shortages of meat since 1998, particularly shortages of meat— lamb. Sheikh Jamaluddin, the executive director of Royal Brunei Airlines (RBA) and Royal Brunei Catering, told the Borneo Bulletin in mid-May that the cater-

ing trade faced serious problems in Brunei. Repatriation of large numbers of foreign workers (1st quarter 1998, page 40) had hit the restaurant trade hard, and a serious shortage of lamb in Brunei had created further problems for both restaurants and RBA. He anticipated problems with catering at the forthcoming South-east Asian Games in August. The sheikh attributed the shortage of lamb, in part, to the strict regulations on imported meat imposed by the religious authority, the Halal Committee.

—harsh criticisms by Religious officials were quick to condemn Sheikh Jamaluddin, insisting that religious officials— there was no shortage of halal meat in the country. The chairman of the Halal Committee and general manager of the country’s main abattoir acknowledged that lamb was in short supply, but said that this was due to a “foreign government” introducing a ban on exporting livestock following an outbreak of blue tongue disease among sheep. A small quantity of live sheep had been imported from Australia to be slaughtered in Brunei, and this had been suspended. The Australian High Commission denied that there had been a recent outbreak of the disease. Brunei authorities had recently visited Australian abattoirs and are likely to agree to a resumption of meat exports to Brunei.

—and allegations of a meat Some commentators believe the issue goes beyond halal meat to the question cartel— of meat cartels operating in the country. Letters to the Borneo Bulletin in June 1999 suggested that trade protectionism may also be a factor. Halal meat from other countries is seen by some as undercutting the price of locally produced meat. Furthermore, the country’s main abattoir, which was recently privatised, would benefit if only domestic meat could be sold.

—leading to calls for The 5th meeting of the Association of South-east Asian Nations (ASEAN) Ad greater co-operation Hoc Working Group on Halal Food Guidelines, held in Brunei in mid-June, said it will explore ways of harmonising ASEAN halal food through the introduction of standard procedures for accrediting food premises. The halal episode highlights the continuing importance of religion in Brunei and the government’s determination to be seen as a defender of religious law.

An outspoken official is Sheikh Jamaluddin has been criticised for other comments in recent months. criticised— As executive director of RBA since October 1998 (1st quarter 1999, page 48), he explained that the airline had been made profitable by promoting employees on the basis of merit rather than seniority, as is done in government service. His comments brought a strong rebuttal from the permanent secretary in the office of the prime minister, who stressed that promotion of government officers was also based on merit.

—and then sacked At the beginning of July, Sheikh Jamaluddin was relieved of his duties as executive director of RBA and was also removed from the board of directors of the airline. He was transferred to the Ministry of Industry and Primary Resources, to take up the post of director of industrial promotion and tourism development. No reason was given for the transfer, but his statements on meat shortages in Brunei appear to have upset religious conservatives in the government. That he was also seen as critical of the civil service upset members of the political establishment. Sheikh Jamaluddin had introduced changes at RBA, includ-

ing streamlining management and upgrading the airline’s finance department. Under his management RBA has ordered two Airbus A319 planes and is selling off two Boeing 767s and two Fokker 100s. Staff morale had improved under the sheikh and his transfer has upset many RBA staff.

Brunei suffers a cholera In early June the first cholera cases were reported in Brunei, mostly in and epidemic around the capital, Bandar Seri Begawan. By July 1st 80 cases of the disease had been reported and authorities believed the epidemic had peaked. Health officials had closed down more than 35 restaurants and food outlets because of poor hygiene. Illegal food stalls on beaches were torn down. The director of medical and health services believed the outbreak would be contained before the start of the South-east Asian Games in August.

The government seeks help The official Narcotic Control Bureau has asked parents and youth organisations to fight drug abuse to help combat the problem of drug abuse in the country. An ASEAN-wide project, funded by the EU over the past four years, is establishing drug abuse programmes. Brunei has a growing drugs problem, particularly among young Brunei Malays (2nd quarter 1999, page 48). The Narcotics Control Bureau was set up in October 1998, and nearly 5,000 arrests have been made. Most of the offences relate to drug use rather than drug-trafficking.

Pakistan’s prime minister The Pakistan prime minister, Nawaz Sharif made a three-day official visit to visits Brunei— Brunei in mid-May. Mr Sharif and the sultan discussed bilateral relations and both stressed the need to increase investment and business relations between the two countries. Brunei is keen to build up relations with fellow Islamic countries, and places great importance on public statements of greater co- operation.

—as the sultanate improves Brunei and Thailand hope to establish a joint commission later this year to relations with Thailand boost bilateral relations, particularly in promoting trade, tourism and co- operation in education. The government of Thailand believes it can share its experience in tourism with Brunei and sees potential for joint marketing. Trade between the two countries had been increasing until the economic crisis hit the region in late 1997. Brunei’s imports grew from Br$76m (US$45m) in 1995 to Br$124m in 1997, before falling back to Br$80m last year. Brunei mainly imports food from Thailand (mostly rice and fruit), while Thailand purchases oil from Brunei. Although the value of imports from Thailand has dropped lately, the volume has not fallen as sharply, as cargo tonnage in the first half of 1998 was the same as the previous year. Brunei has benefited from a favourable exchange rate with the Thai baht.

The government clamps Brunei, as a member of the World Intellectual Property Organisation, will be down on copyright forced to act on intellectual piracy and copyright infringement, as the govern- infringement ment is obliged to comply with the Agreement on Trade Related Aspects of Intellectual Property Rights. Brunei must comply with these regulations by 2000. Pirated goods—computer hardware and software, cassette tapes, CD- ROMs, VCDs and designer clothes—have until recently been openly traded in Brunei. In a recent high-profile case, a local company was forced to pay

Br$750,000 plus legal costs to Canon for infringement of the company’s trademark.

The economy

Brunei’s economy barely Brunei’s economy grew by an estimated 1% in 1998, according to a Staff Country grew in 1998— Report released in April by the IMF. The economy was hurt by the sharp decline in world oil prices—oil sold for an average price of US$12.50/barrel in 1998, down from US$19.10/b the year before. (The EIU is forecasting an average price of US$16/b in 1999.) In addition to the low prices for oil and gas, the IMF said the economy was restrained by the collapse of a large local company (Amedeo), lower government capital expenditure and a related fall in consumption. The financial impact of these events on the balance of payments was absorbed through the Brunei Investment Agency (BIA)’s investment position. The effects on the real economy played out through the repatriation of large numbers of foreign workers and an overall decline in economic activity.

Brunei: gross domestic product (Br$ at constant 1974 prices)

1993 1994 1995 1996 1997 1998a Oil and gas sector 2,151 2,130 2,151 2,172 2,205 2,170 Community, social & personal services 933 997 1,059 1,131 1,202 1,257 Construction 109 115 125 135 147 150 Retail trade 119 120 123 129 138 141 Banking & finance 98 104 111 12 132 137 Transport & communications 94 99 107 116 126 131 Total GDP 3,728 3,795 3,911 4,050 4,215 4,257

a IMF estimates. Sources: IMF, Staff Country Report 99/19, Brunei Darussalam: Recent Economic Developments.

—as consumer spending— Private-sector spending was curtailed in 1998 by the appreciation of the Brunei dollar (which led to increased shopping across the border in neighbouring Malaysia), the repatriation of some 40,000 foreign workers and a reduction in construction spending. The initial decline in public spending was offset to some extent by a supplementary budget introduced later in the year to help boost the economy.

—inflation— In the first seven months of 1998, prices, as measured by the consumer price index (CPI), had fallen by 0.6% as declines in the cost of transport and communications more than offset slightly higher prices for food, clothing and footwear.

—tax revenue— Government revenue is highly dependent on taxes, royalties and dividends from the hydrocarbons sector. With the decline in energy prices last year, total revenue for the government as a share of GDP fell to 25.8% from 35.3% in 1997. Total expenditure, however, was unchanged at around 50% of GDP. This

resulted in a budget deficit equivalent to 24% of GDP, which was financed by a transfer from the BIA.

—and the trade balance Brunei’s trade surplus fell by an estimated 74% in US dollar terms last year as fall the prices of oil and gas collapsed. In most years, oil and gas sales comprise more than 90% of Brunei’s exports, although the share was lower than that in 1998, at 88%. Just under 50% of Brunei’s imports come from within the Asso- ciation of South-east Asian Nations (ASEAN), as does a substantial quantity of its food imports. (In 1997 US$166m of food was imported from ASEAN out of a total food import bill of US$236m.)

The Brunei dollar is pegged to the Singapore dollar, and although both have weakened against major currencies over the past 18 months, this has been offset by steeper falls in ASEAN currencies. Brunei’s import bill has dropped during the economic crisis. A strengthening oil price, and long-term contracts for natural gas, paid in US dollars, should ensure that Brunei’s trade position stays healthy. Brunei’s net investment income position also declined last year, but remained robust at a surplus of US$2.4bn. The current account also stayed solidly in surplus, at US$2.1bn, equivalent to 43% of GDP. Total international reserves in 1998 rose by 10%, to US$4bn, but were still well below the US$5.9bn recorded in 1996.

Higher oil prices and The increase in oil prices to US$19/b in July from US$10/b early in the year will production levels will boost boost Brunei government revenue, as will higher levels of production. In April the 1999 recovery— 1998 Brunei Shell Petroleum announced that oil production would be increased from the 1998 level of 160,000 barrels/day (b/d) to 180,000 b/d in 1999. Consistent with these developments, the sultan, in a speech to mark the visit of Pakistan’s prime minister in mid-May, said that Brunei’s economy was recovering from the economic and financial crisis that had affected the region.

—as economic reforms A report produced by the Ministry of Communications suggests that the eco- slowly move ahead nomic crisis has led to changes that have benefited the business sector. The drop in oil revenue throughout 1998 and the first half of 1999, combined with the regional and more localised economic and financial problems, forced the government, through the Brunei Economic Council, to take seriously the need for economic reform. The Council has said that legislation relating to banking and finance in Brunei needs to be overhauled.

The government remains Amid all the talk of structural reforms and economic recovery, there has been silent on Amedeo and BIA— no mention of the investigations into the scandal surrounding the collapse of the Amedeo group of companies and the mismanagement of the BIA (3rd quarter 1998, page 42), which resulted in substantial losses for the country. The sultan’s brother, Prince Jefri, who was implicated in the scandal, has left the country and now lives in London. A report into the collapse of Amedeo by the auditors, Arthur Andersen, has yet to be published.

—but continues to examine The government has shown a willingness to consider “commercialisation” of privatisation— the government sector, although its approach may vary depending on the service. Under outright privatisation, the government would sell off a depart-

ment in order to raise capital, with the department then becoming a private company. Under the corporatisation option, the government department would be transformed into a corporate body, preferably self-financing, but ownership would remain with the state. The state-owned company, Semaun Holdings, was at the forefront of setting up local industries, but the government admitted that progress had been slow.

—foreign investment In his birthday address on July 15th, the sultan announced the establishment schemes— of a Business Facilitation Scheme. No details have been given, but it is likely that the government will be improving the investment climate in the country. Proposals to allow foreigners to own property in Brunei have already been made. Although more light industry is being set up in Brunei, the government admits that foreign direct investment remains at low levels (only Br$3.2m, or US$1.9m, in 1998 according the Ministry of Finance). The Brunei Industrial Development Authority is co-ordinating the attempt to attract more businesses to Brunei.

The garment industry has had some success in recent years, with exports rising from Br$10.2m in 1989, when the first factory was set up, to Br$139.4m in 1998, when six factories were in operation. Garments are mainly exported to the US, Canada and the EU. The six facilities are joint ventures between local and foreign partners. The industry will face problems in 2005, however, when Brunei’s quota for garments expires. Most of those employed in the garment industry are foreign workers. Although the garment industry is used as an example of the government’s attempts at diversification, it has generated little local employment because most Bruneians refuse to work in garment factories.

—and the development of a Plans to develop Brunei as the service hub for trade and tourism (ShuTT) for transport hub— the BIMP-EAGA (Brunei Indonesia Malaysia Philippines-East ASEAN Growth Area) are progressing, and the sultan has stressed the importance of ShuTT to Brunei’s economy. Royal Brunei Airlines services destinations in EAGA, and Brunei’s air traffic control and management systems are state of the art. Air and sea cargo facilities are also expanding and being upgraded. The BIMP-EAGA International Air Cargo centre is being developed at Brunei International Airport, and the Ministry of Communications is looking for a private-sector partner to develop the facility.

Brunei is already well placed to be the EAGA region’s transshipment centre, but the government believes Brunei businesses must boost their trade and expand their market share in the region. The government acknowledges that many local businesses are too inward-looking and lack the confidence to operate outside Brunei.

—which has drawn interest Singapore continues to take an interest in Brunei’s ShuTT policy, and Singapore from Singapore trade and investment delegations, led by the Singapore Trade Development Board, visit Brunei from time to time. Singapore has expressed an interest in the new air cargo centre, and, given the Port of Singapore Authority’s success in running Brunei’s container port at Muara, Singaporean involvement in the air cargo facility is likely. Singapore believes Brunei can benefit from its expertise in infrastructure development, engineering and construction, and trans-

port and communications. Brunei intends to become the international gateway to BIMP-EAGA by 2003.

The BIMP-EAGA ASEAN Business Council announced that the area’s economy grew in 1998, compared with the rest of ASEAN. Home to more than 40m people, the council believes BIMP-EAGA has the potential for rapid economic growth. A major factor working against trade within the region has been the poor transport and communications infrastructure. Brunei has become the central player in remedying the transport problems.

Unemployment remains a Brunei officials estimate there are more than 6,000 unemployed in the country, concern which works out to an unemployment rate of about 5%. Reducing the number of foreign workers, who are mainly employed in construction and retailing, does not necessarily release jobs for locals, who consider these jobs to be menial. However, the government is determined to reduce the number of illegal immi- grants. The immigration department introduced new regulations in April that raise the minimum fine to Br$30,000 and the maximum fine to Br$100,000, for companies illegally employing foreigners.

Growing concern that too many expatriates are employed in professional posts in the public sector prompted the government to announce that the recruit- ment of expatriate officers is decreasing, and that they now comprise just over 5% of the civil service. Expatriates render a valuable service to the country, a spokesperson said, but they are slowly being replaced when locals have the training and expertise.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 56 Quarterly indicators and trade data

Quarterly indicators and trade data

Malaysia: quarterly indicators of economic activity

1997 1998 1999 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Production Prodn/day Crude petroleum m barrels 0.75 0.75 0.76 0.73 0.73 0.72 0.73 0.72 0.72a Qtrly totals Rubber ’000 tonnes 217 266 237 215 181 253 238 230 n/a Tin-in-concentrates “ 1.3 1.2 1.2 1.5 1.3 1.5 1.6 2.0 0.8b Industrial production Monthly av General index 1995=100 121 126 127 114 114 113 114 106c n/a Prices Consumer prices 1995=100 105.8 106.3 107.3 110.2 111.8 112.3 113.1 114.7d n/a change year on year % 2.5 2.3 2.7 4.4 5.7 5.6 5.4 n/a n/a Wholesale prices: petroleum, spot, Tapis US$/barrel 20.07 19.53 20.00 15.02 14.37 13.53 12.77 12.47 16.48b rubber, Singapore No. 1RSS S$/tonne 1,593 1,351 1,288 1,221 1,206 1,181 1,134 1,111 1,015b tin, London US cents/lb 256.62 247.25 252.71 240.49 265.25 254.33 244.41 236.74 250.04b Money End-Qtr M1, seasonally adj: M$ bn 79.11 81.64 82.10 69.29 65.64 56.57 58.06 57.33 59.33e change year on year % 14.5 10.1 11.9 –11.7 –17.0 –30.7 –29.3 –17.3 n/a Foreign trade Qtrly totals Exports fob M$ m 49,452 56,454 66,055 69,259 68,183 73,310 76,003 43,788f n/a Imports cif “ 54,196 55,235 64,567 60,156 55,242 56,608 56,204 34,543f n/a Exchange holdings End-Qtr Goldg US$ m 604 573 540 521 533 513 518 506h n/a Foreign exchange “ 25,799 21,380 20,013 19,031 18,926 19,898 24,728 26,334h n/a Exchange rate Market rate M$:US$ 2.52 3.19 3.89 3.65 4.17 3.80 3.80 3.80 3.80i

Note. Annual figures for most of the series shown above will be found in the Country Profile. a Forecast for 3 Qtr, 0.71; forecast for 4 Qtr, 0.72. b Average for April-May. c January only. d Average for January-February. e End-April. f Total for January-February. g End-quarter holdings at quarter's average of London daily price less 25%. h End-January. i End-May.

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.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Quarterly indicators and trade data 57

Brunei: quarterly indicators of economic activity

1997 1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Production Prodn/day Crude petroleum ’000 barrels 147 143 144 150 147 126 134 150 160a Foreign trade Annual totals Exports fob US$ m ( 2,375 ) ( n/a ) n/a Imports cif “ ( 3,946 ) ( n/a ) n/a

Note. Annual figures of most for the series shown above will be found in the Country Profile. a Figure for April 1999, 162.

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

Malaysia: trade with major trading partners

(US$ ’000; monthly averages)

Total importsa Singaporeb USbc Japanbd UKb Jan-Nov Jan-Nov Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Apr Jan-Apr Exports to Malaysia cif 1997 1998 1997 1998 1996 1997 1997 1998 1998 1999 Fish & preps 27,208 18,052 6,004 2,959 435 324e 452e 159e 561 277 Cereals & preps 78,460 58,677 2,313 2,704 16,365 3,512 148 152 235 209 Fruit, vegetables & preps 40,990 30,142 13,631 8,444 5,185 5,397 117 51 62 26 Sugar & preparations 30,245 23,707 1,372 582 161 229 25 21 62 38 Textile fibres 25,976 20,123 3,592 n/a 1,335 n/a n/a n/a 56 50 Metalliferous ores & scrap 41,302 22,091 3,907 527f 6,673 145f 34f 44f 114 187 Petroleum & products 164,902 128,161 115,553 102,950g 1,285 1,671g 1,198g 787g 161 101 Chemicals 458,671 346,408 126,192 114,000h 43,762 53,926h 82,588h 64,334h 15,089 7,776 Paper etc & manufactures 90,769 58,942 11,590 8,513 9,769 10,472 9,011 6,152 1,426 1,261 Textile yarn, cloth & mnfrs 104,050 77,113 47,916 26,841i 2,009 3,473i 10,236i 7,220i 1,287 1,260 Non-metallic mineral mnfrs 79,068 39,474 17,250 19,339j 11,438 23,920j 24,917j 20,865j 1,609 1,133 Iron & steel 288,601 144,758 31,727 28,996k 2,053 7,609k 70,124k 57,198k 2,035 2,500 Non-ferrous metals 150,388 106,136 40,231 30,373k 5,892 9,906k 26,662k 23,647k 1,475 1,121 Metal manufactures 119,465 88,481 37,240 11,116l 6,233 2,300l 31,130l 4,987l 1,358 1,087 Machinery incl electric 3,998,583 3,054,525 1,114,869 916,474 417,417 519,790 692,178 461,746 56,469 51,709 Transport equipment 555,891 309,690 29,285 8,800 27,640 119,965 166,032 55,648 5,202 4,180 Scientific instruments etc 182,257 1,410,040 56,927 45,825 26,129 38,952 42,036 38,709 3,676 3,129 Total incl others 6,634,096 4,840,705 1,818,707 1,396,850 661,691 860,894 1,209,123 776,682 102,097 86,896 continued

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 58 Quarterly indicators and trade data

Total exportsa USbc Singaporeb Japanbc UKb Jan-Nov Jan-Nov Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Apr Jan-Apr Imports from Malaysia cif 1997 1998 1996 1997 1997 1998 1997 1998 1998 1999 Coffee, cocoa, tea & spices 30,466 25,703 3,983 6,967 9,364 6,873 3,311 3,163 264 351 Rubber, crude 90,881 61,761 17,567 67,243k 10,585 13,793k 15,091k 11,449k 2,858 3,119 Wood, unmanufactured 184,692 110,312 4,056 n/a 12,005 16,297k 156,755k 77,826k 3,086 4,158 Metalliferous ores & scrap 9,457 7,621 1,750 441f 2,759 53f 4,148f 2,255f 249 163 Petroleum & products 320,618 229,475 8,596 19,137g 61,969 37,990g 231,305g 175,696g 29 0 Gas 210,179 146,389 0 n/a 134 n/a n/a n/a 0 0 Animal & vegetable oils & fats 384,344 457,988 10,571 17,712 23,722 22,720 26,157 27,229 6,749 5,054 Chemicals 234,974 212,382 26,296 23,664h 33,468 41,112h 26,607h 24,684h 5,224 3,976 Wood manufactures 193,318 124,001 16,317 16,934 15,756 16,297 n/a n/a 6,192 7,302 Textile yarn, cloth & mnfrs 108,042 91,439 5,272 5,931i 18,101 14,854i 13,741i 7,585i 2,857 2,641 Non-ferrous metals 65,875 61,980 3,235 17,188k 16,906 24,536k 12,929k 10,143k 1,846 1,784 Machinery & transport eqpt 3,709,495 3,554,820 1,162,260 1,185,021 1,091,471 891,795 351,938 299,766 190,816 183,245 Clothing 191,665 187,002 107,950 57,266 61,178 52,528 7,873 5,491 16,232 15,076 Scientific instruments etc 117,415 101,128 26,918 25,607 31,175 24,889 18,964 15,414 3,781 5,267 Total incl others 6,600,551 6,029,202 1,527,559 1,543,570 1,658,375 1,311,805 948,010 723,017 260,748 259,917

Note. Total Malaysia trade, Singapore 1997, US 1996 and UK based on SITC. All other trade based on Harmonised System classification. Figures are not strictly comparable. a Figures from Malaysia’s statistics: exports fob; imports cif. b Figures from partners’ trade accounts. c US exports (fas) to Malaysia averaged US$880.2m and US$664.6m per month for the periods January-April 1998 and 1999. US imports from Malaysia averaged US$1,480.5m and $1,595.0m per month for the periods January-April 1998 and 1999. d Japanese exports to Malaysia averaged US$831.2m and US$774.8 per month for the periods January-March 1998 and 1999. Japanese imports from Malaysia averaged US$798.3m and US$775.2m per month for the periods January-March 1998 and 1999. e Excluding preparations. f Ores, slag & ash. Scrap included with metals. g Total mineral fuels. h Including manufactures of plastics. i Including fibres. j Including precious metals & jewellery. k Including manufactures. l Tools and miscellaneous metal 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 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Quarterly indicators and trade data 59

Brunei: foreign trade

(US$ m)

Jan-Dec Jan-Dec Jan-Dec 1992 1993 1994 Imports cif Food 146.7 136.4 221.5 Drink & tobacco 5.3 5.0 5.9 Mineral fuels 8.7 19.7 7.6 Chemicals 77.9 69.9 86.7 Manufactured goods 335.8 360.6 429.9 of which: iron & steel 86.2 64.8 124.5 metal manufactures 94.3 137.4 101.9 Machinery & transport equipment 650.4 902.4 792.9 of which: road vehicles 144.4 176.0 164.2 other transport 133.0 279.6 101.5 Total incl others 1,475.7 1,820.5 1,873.6 Exports fob Mineral fuels & lubricants 2,284.2 2,087.9 2,082.7 Total incl others 2,301.2 2,093.9 2,110.3 Source: UN, International Trade Statistics Yearbook.

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 1994 1995 1996 1997 Imports cifa 1994 1995 1996 1997 Japan 1,079 1,220 1,269 1,279 Singapore 897 1,612 1,881 1,535 UK 416 182 411 498 UK 595 444 921 1,005 Singapore 189 203 204 193 Malaysia 287 318 358 298 Thailand 166 263 195 79 US 414 209 413 196 Taiwan 56 46 73 68 Japan 147 144 145 164 Total incl others 2,115 2,108 2,374 2,375 Total incl others 3,133 3,513 4,701 3,946 a DOTS estimates.

Source: IMF, Direction of Trade Statistics, yearbook.