COUNTRY REPORT

Malaysia Brunei at a glance: 2001-02

OVERVIEW In the wake of the departure of the finance minister, , in May and the takeover of the finance portfolio by the prime minister, , the pace of corporate restructuring has been stepped up, especially in those companies that had been shielded by Mr Daim. A one-year target has been set for the solution of the corporate debt problem. Meanwhile, the economic outlook continues to deteriorate, although the government is hoping that the economy will begin to grow again in the fourth quarter of this year. The Economist Intelligence Unit forecasts that real GDP growth will remain low in 2001 and 2002. Key changes from last month Political outlook • Accelerated corporate reform, growing repression and tightened control are part of the process by which the 76-year-old Dr Mahathir is re- asserting his control over Malaysia’s politics and resisting pressure for his retirement. Economic policy outlook • Additional fiscal stimulus is increasingly likely to be provided by the 2002 budget, to be presented in late October. The government’s 2001 real GDP growth target, currently at 5-6% for 2001, will be revised down. We forecast real GDP growth of just 0.5% in 2001. Economic forecast • Inflationary pressures are diminishing further. We have lowered our consumer price inflation forecast for 2002 to 1.7% from 1.9% previously, after an expected outcome of 1.5% in 2001.

September 2001

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. 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 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7830 1007 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7830 1023 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Website: www.eiu.com

Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office

Copyright © 2001 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 Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. 1

Contents

3 Summary

Malaysia

5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2001-02 8 Political outlook 9 Economic policy outlook 10 Economic forecast 14 The political scene 18 Economic policy 21 The domestic economy 21 Economic trends 25 Manufacturing 26 Oil and gas 26 Agriculture 27 Financial and other services 28 Foreign trade and payments

Brunei

32 Political structure 33 Economic structure 33 Annual indicators 33 Quarterly indicators 34 Outlook for 2001-02 35 The political scene 36 Economic policy and the economy

List of tables

10 Malaysia: forecast summary 11 Malaysia: international assumptions summary 12 Malaysia: gross domestic product by expenditure 21 Malaysia: real gross domestic product 23 Malaysia: gross domestic product by sector

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 2

25 Malaysia: inflation indicators 25 Malaysia: production in the manufacturing sector 27 Malaysia: oil and gas production 27 Malaysia: production in the agricultural sector 28 Malaysia: performance of the services sector 29 Malaysia: foreign trade 31 Malaysia: current account

List of figures

13 Malaysia: gross domestic product 13 Malaysia: Malaysian dollar real exchange rates 24 Malaysia: exports of electronic and electrical goods 26 Malaysia: manufacturing production 29 Malaysia: exports

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 3

Summary

September 2001

Malaysia

Outlook for 2001-02 The pace of economic reform is accelerating, and political repression is growing as the 76-year-old prime minister, Mahathir Mohamad, reasserts his domin- ation of his country’s politics and the party that he has led for the past 20 years, the United National Organisation (UMNO), the dominant com- ponent of the ruling 14-member (BN) coalition. Meanwhile, the deteriorating outlook for Malaysia’s economy spells trouble for the government. The Economist Intelligence Unit has progressively cut its forecast for real GDP growth in 2001 to 0.5%, with growth for 2002 reduced to 2.7%.

The political scene The process of remoulding of UMNO and reshaping policy towards the opposition has accelerated in recent months. After the prime minister sacrificed his closest ally, the finance minister, Daim Zainuddin—who in 2000 organised controversial bail-outs of several companies run by his cronies— corporate restructuring has been stepped up. Dr Mahathir has taken over the finance portfolio. Arrests under the Internal Security Act (ISA) have increased and political controls have multiplied, while the government has continued to emphasise the threat of Islamic extremism and the negative implications of Islamic fundamentalism for Malaysia’s economic development and social harmony. The government is actively seeking the support of the ethnic Chinese electorate by offering an easing of the positive discrimination policies that favour the bumiputeras (ethnic Malays and other native inhabitants).

Economic policy The government is considering more pump-priming measures as part of the 2002 budget. The Capital Market Masterplan has made a promising start. The government’s GDP growth target will be revised down. A total of M$29bn of corporate debt is likely to be restructured and an ambitious time-frame for debt restructuring has been set.

The domestic economy GDP growth was only minimal in the second quarter, when private con- sumption growth turned negative and investment demand weakened sharply. Imports fell faster than exports. Third-quarter GDP is likely to have declined, quarter on quarter. The manufacturing sector is leading the downturn. The country’s heavy reliance on the electronics sector has been highlighted, as has its increasing dependence on foreign trade. Consumer price inflation dropped to 1.4% year on year in July 2001, and falls in producer prices suggest a further decline is likely. The rate of unemployment continued to rise in the second quarter, with manufacturing output falling by 8% year on year. The mining sector remained relatively stable. Palm oil output grew strongly in the second quarter, but there was a further deterioration in the rest of the agricultural sector. Services expansion helped to sustain overall economic growth. Loan growth has accelerated but non-performing loans have risen again. Exports

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 4

declined sharply in the second quarter and there appears to be no improvement in sight.

Foreign trade and The current-account surplus remained large in the second quarter, and the payments decline in international reserves was reversed. To date, there has been no serious downward pressure on the ringgit.

Brunei

Outlook for 2001-02 The royal family will continue to capture media attention and dominate the political landscape in Brunei, as legal actions against Prince Jefri Bolkiah’s bankrupt Amedeo Development Corporation continue. No dramatic recovery appears likely in the economy and the sultanate will come under increasing pressure to justify its economic policies.

The political scene The assets of the bankrupt Amedeo Corporation have gone up for auction, and publicity surrounding the royal family has continued to dog the media-shy sultanate. In response, there has been an unavoidable increase in political openness. The sultan has announced a plan to crack down on corruption. The government remains committed to its “Islamicisation” policy.

Economic policy and the Most industries recorded slow growth in 2000 and the first half of 2001. The economy Brunei International Financial Centre (BIFC) is beginning to attract some interest. New foreign investment regulations have been announced. An infor- mation technology council has been formed.

Editors: Frans Jonkers (editor); Graham Richardson (consulting editor) Editorial closing date: September 20th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 5

Malaysia

Political structure

Official name Federation of Malaysia

Form of state Federated constitutional monarchy

The executive The king appoints a prime minister and, on the prime minister’s advice, a cabinet

Head of state The Yang di-Pertuan Agong (king or supreme sovereign) elected by the Conference of Rulers from one of the nine hereditary rulers

National legislature Bicameral federal parliament. The Senate () has 70 members, 30 of whom are elected from the state legislatures and 40 appointed by the king. The House of Representatives () has 193 directly elected members. The Senate serves a six-year term of office and the House of Representatives a five-year term

State government There are state governments in each of the 13 states, in nine of which the head of state is a hereditary ruler. Each state has its own constitution, a council of state, or cabinet, with executive authority and a legislature that deals with matters not reserved for the federal parliament. There are also three federal territories, Kuala Lumpur, Labuan, and Putrajaya

National elections November 29th 1999; the next election is due by January 2005

National government The Barisan Nasional (BN), the governing coalition—the main component of which is the United Malays National Organisation (UMNO) Baru—won 148 of the 193 seats in the Dewan Rakyat in the 1999 general election. The BN has the two-thirds majority required to pass constitutional amendments. The cabinet was reshuffled in December 1999

Main political organisations Government—the main parties in the Barisan Nasional are UMNO Baru, the Malaysian Chinese Association (MCA), the Malaysian Indian Congress (MIC), Gerakan, Parti Pesaka Bumiputera Bersatu (PPBB) and the National Party (SNAP) Opposition—Parti Islam sa-Malaysia (PAS), the (DAP), Parti Keadilan Nasional (PKN), Parti Bersatu Sabah (PBS) and Parti Rakyat Malaysia (PRM)

Prime minister Mahathir Mohamad Deputy prime minister & home affairs minister

Key ministers Agriculture Defence Najib Abdul Razak Education Energy, communications & multimedia Finance Mahathir Mohamad Foreign affairs Housing & local government Human resources Information Khalil Yacoob International trade & industry Primary industries Public works Transport

Central bank governor Zeti Akhtar Aziz

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

Economic structure

Annual indicators

1996 1997 1998 1999 2000 GDP at market prices (M$ bn) 253.7 281.9 284.5 299.7 339.4 GDP (US$ bn) 100.8 100.2 72.5 78.9 89.3 Real GDP growth (%) 10.0 7.3 –7.4 6.1 8.3 Consumer price inflation (av; %) 3.5 2.7 5.3 2.7 1.5 Population (m) 21.2 21.7 22.2 22.7 23.3 Exports of goods fob (US$ m) 76,985 77,538 71,883 84,052 98,108a Imports of goods fob (US$ m) 73,137 74,029 54,378 61,404 76,916a Current-account balance (US$ m) –4,461 –5,936 9,529 12,607 8,553a Foreign-exchange reserves excl gold (US$ m) 27,009 20,788 25,559 30,588 29,523 Total external debt (US$ bn) 39.7 47.2 44.8 45.9 44.1a Debt-service ratio, paid (%) 8.9 7.4 7.4 4.8 5.2a Exchange rate (av) M$:US$ 2.52 2.81 3.92 3.80 3.80

September 20th 2001 M$3.80:US$1

Origins of gross domestic product 2000 % of total Components of gross domestic product 2000 % of total Agriculture 7.7 Private consumption 42.5 Mining 4.1 Public consumption 10.7 Manufacturing 29.6 Gross fixed capital formation 25.7 Construction 2.5 Stockbuilding 1.3 Electricity, gas & water supply 1.9 Exports of goods & services 125.7 Services 54.2 Imports of goods & services –105.8 GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 2000b US$ bn Principal imports 2000b US$ bn Electronics & electrical machinery 60.6 Machinery & transport equipment 51.4 Petroleum & LNG 6.7 Manufactured goods 8.7 Chemicals & chemical products 3.9 Chemicals 5.9 Textiles, clothing & footwear 2.7 Miscellaneous manufactured articles 4.7 Palm oil 2.6 Mineral fuels & lubricants 3.9 Wood products 2.3 Food 3.0 Total incl others 98.2 Total incl others 82.2

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

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 7

Quarterly indicators

1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Federal government finance (M$ m) Revenue 13,997 17,861 11,219 16,682 15,421 18,542 14,634 20,738 Expenditure 12,158 15,285 7,805 12,760 14,662 21,320 11,303 13,369 Balance 1,839 2,577 3,413 3,922 759 –2,778 3,331 7,369 Output GDP at constant 1987 prices (M$ m) 49,603 50,592 50,191 52,006 53,395 53,773 51,723 52,241 % change, year on year 8.8 11.2 11.7 8.0 7.6 6.3 3.1 0.5 Industrial production index (1993=100) 164.1 170.9 175.5 186.2 194.1 197.2 182.7 176.5 % change, year on year 14.2 17.9 23.5 20.1 18.3 15.4 4.1 –5.2 Prices Consumer prices (2000=100) 98.4 98.9 99.7 99.8 99.9 100.6 101.3 101.3 % change, year on year 2.3 2.1 1.6 1.4 1.5 1.7 1.5 1.6 Producer prices (1989=100) 127.3 131.2 132.0 132.8 132.5 129.8 125.8 126.5 % change, year on year –4.2 0.3 3.9 5.6 4.1 –1.0 –4.7 –4.7 Financial indicators Exchange rate M$:US$ (av) 3.80 3.80 3.80 3.80 3.80 3.80 3.80 3.80 M$:US$ (end-period) 3.80 3.80 3.80 3.80 3.80 3.80 3.80 3.80 Interest rates (av; %) Deposit 3.8 3.3 3.3 3.3 3.4 3.5 3.5 3.4 Lending 6.9 6.8 6.8 6.8 6.8 6.8 6.8 6.8 Money market 2.6 2.6 2.6 2.5 2.7 2.8 2.8 2.8 M1 (end-period; M$ m) 65,616 75,602 70,132 69,431 69,526 80,630 74,997 76,089 % change, year on year 16.3 29.2 23.4 10.4 6.0 6.7 6.9 9.6 M2 (end-period; M$ m) 310,000 316,851 324,716 334,515 332,415 348,321 348,465 350,393 % change, year on year 17.1 16.9 18.5 11.9 7.2 9.9 7.3 4.7 KLSE composite index (end-period; 1977=100) 675.5 812.3 974.4 833.4 713.5 679.6 647.5 593.0 % change, year on year 80.8 38.6 93.8 2.7 5.6 –16.3 –33.5 –28.8 Sectoral trends Electronic & electrical products index (1993=100) 203.4 218.5 237.8 269.8 289.9 292.2 240.6 219.4 % change, year on year 23.1 30.7 45.2 42.1 42.5 33.7 1.9 –18.7 Mining index (1993=100) 118.1 121.5 122.2 118.0 116.2 121.1 125.4 120.8 % change, year on year –1.9 –4.3 –1.6 2.6 –1.6 –0.4 2.6 2.4 Foreign trade (M$ m) Exports fob 83,649 90,677 84,758 90,968 101,706 95,875 86,153 82,919 Imports cif –64,871 –70,450 –68,231 –78,681 –85,756 –78,695 –72,805 –70,451 Trade balance 18,778 20,227 16,527 12,287 15,950 17,180 13,348 12,468 Foreign payments Current-account balance (M$ m) 14,056 10,708 10,483 6,581 7,280 7,591 8,226 n/a Reserves excl gold (end-period; US$ m) 31,134 30,588 33,626 33,666 31,895 29,523 26,814 25,644 Sources: , Monthly Statistical Bulletin; IMF, International Financial Statistics.

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

Outlook for 2001-02

Political outlook

Domestic politics Reform is accelerating, repression is growing and control is being tightened as the 76-year-old prime minister, Mahathir Mohamad, reasserts his domination of his country’s politics and the party that he has led for the past 20 years, the United Malays National Organisation (UMNO), the dominant component of the ruling 14-member Barisan Nasional (BN) coalition. Meanwhile, the deter- iorating outlook for Malaysia’s economy spells trouble for the government. Since the beginning of this year Dr Mahathir has been trying to reshape his party, remove some of the causes of his own unpopularity and that of UMNO and divide the opposition. At the same time, he has been tightening controls, using the Internal Security Act (ISA) to intimidate the opposition, and warning about the negative implications of Islamic fundamentalism for Malaysia’s economic development and social harmony. Everything appears to indicate that the veteran prime minister considers his job unfinished and this attitude is likely to be strengthened by the sharp economic downturn taking shape. Social unrest and resistance is likely to increase in the next 12 months while the economy stalls, increasing the possibility that Dr Mahathir will eventually be forced by his party to retire.

The process of remoulding UMNO and reshaping of the policy towards the opposition has accelerated further in recent months. After the prime minister sacrificed his closest ally, the finance minister, Daim Zainuddin—who in 2000 organised controversial bail-outs of several companies run by his cronies—the pace of corporate restructuring has been stepped up. Dr Mahathir assumed the finance portfolio and ordered the take-over of United Engineers (Malaysia) (UEM), which is controlled by Renong, Malaysia’s heavily indebted biggest industrial conglomerate which has close ties to UMNO, after UEM’s head and a protégé of Mr Daim, Halim Saad, defaulted on repayment commitments dating from the 1997-98 financial crisis. Although the move was presented as a long overdue start to the restructuring of Renong’s debt, it is more likely part of an attempt by Dr Mahathir to secure UMNO’s—and his own—political survival.

The government continues to emphasise the Islamic extremism of the main opposition party, the Islamic Parti Islam sa-Malaysia (PAS), and has given women a greater role within UMNO, by way of contrast to UMNO’s attitude towards the Islamic conservatism of the PAS. It is seeking the support of Chinese voters by suggesting an easing of the positive discrimination policies that favour the bumiputeras (ethnic Malays and other native inhabitants). The government has so far succeeded in dividing the opposition by stressing that the desire of PAS to set up an Islamic state would lead to heightened tensions between Malays and Chinese. The Democratic Action Party (DAP), which finds its support largely among ethnic Chinese, is likely to depart from the opposition alliance, (BA), out of concern that PAS might want to set up an Islamic state, should the opposition win the next general election.

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 9

It is possible that a serious conflict will develop between the government and the judiciary in the next 12 months. Since the appointment of a new chief justice, Dzaiddin Abdullah, in November 2000, the judiciary has shown greater independence and a willingness to resist political interference, leading to a series of landmark decisions against the government. Possibly the most con- troversial decision would be the granting by the High Court of any one of the several appeals by the jailed former deputy prime minister, , against his convictions for obstruction of justice and sodomy. This could lead to Mr Anwar’s release on bail and change Malaysia’s political scene radically, maybe even leading to Mr Anwar’s return to the UMNO fold. But so far Dr Mahathir has shown no signs of softening his attitude. The use of the ISA has been widened recently to include university students, PAS members and Islamic extremists, and the dismissal of judges remains possible. The manner of Dr Mahathir’s retirement is unclear but it could still be involuntary.

International relations In early September Malaysia reached an outline agreement with Singapore on all the major outstanding issues which had troubled bilateral relations since the early 1990s. Singapore agreed to major concessions because, according to a barbed remark by its senior minister, Lee Kuan Yew, who led his country’s negotiating team, Singapore did “not want to deal with a government not led by UMNO”. Even before the terrorist attacks in New York on September 11th, there were indications that the administration of George W Bush might adopt a more favourable attitude towards Malaysia than the previous administration of Bill Clinton. Dr Mahathir has recently claimed that there is a network of Islamic extremists who are bent on destabilising the governments of Malaysia, Indonesia and the Philippines. After the World Trade Center attacks, the prime minister, who had been putting out feelers about a visit to the US, called for a world conference on terrorism.

Economic policy outlook

Policy trends Monetary policy is likely to remain accommodative and interventionist policies will continue. Fiscal policy will remain stimulative and new incentives to boost private investment and attract foreign direct investment (FDI) are to be expected. The government reconfirmed its long-term ambition of reaching developed-nation status by 2020 in the Eighth Malaysia Plan (EMP), which envisages annual average economic growth of 7.5% in 2001-05. Such high growth is only achievable with a sharp increase in investment, which con- tributed two-thirds of GDP growth before the 1997 crisis. The EMP is posited on an average annual rise of 19% in private investment, which is unlikely.

Fiscal policy The 2002 budget, to be presented in October, is likely to include a cut in the corporate tax rate, which currently stands at 28%, in addition to further measures to stimulate the economy. Dr Mahathir has admitted that only a small part of the M$3bn (US$789m) of public works expenditure—the major component of a stimulus package announced in late March—had been utilised. At the time, the government predicted that the extra spending would increase real GDP growth by 1.1 percentage points. The main effects of the fiscal boost

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

will probably be felt in 2002. The other major component of the March 2001 package, a cut in employees’ pension fund contributions from 11% to 9% of their salary for one year, will probably boost savings more than spending. Government investment and consumption are expected to grow strongly this year and next. Slower revenue and higher expenditure growth are forecast to widen the federal budget deficit from 5.8% of GDP in 2000 to 7.2% in 2001, before falling to 6% in 2002. A prolonged downturn would increase the 2002 deficit further and start to raise concern about the state of the public finances.

Monetary policy If economic activity remains weak in the next six months, Bank Negara Malaysia (BNM, the central bank) is likely to cut its intervention rate to 5% from the current level of 5.5%. The economic downturn and the government’s renewed determination to solve the outstanding corporate debt problem will lead to a further rise in non-performing loans: on a six-month basis, the NPL ratio increased to 8.1% of total loans at end-July from a low of 6.3% at end- 2000. However, the capital base of the banking system is strong, with a risk- weighted capital ratio of 12.6%. The downward pressure on lending rates will continue. No rise in the intervention rate is expected until late 2002, by which time economic growth is forecast to have picked up.

Economic forecast

Malaysia: forecast summary (% unless otherwise indicated) 1999a 2000a 2001b 2002b Real GDP growth 6.1 8.3 0.5 2.7 Industrial production growth 9.1 18.0 –1.4 3.8 Gross agricultural production growth 0.4 0.6 2.0 1.0 Unemployment rate (av) 3.4 3.1 3.7 3.4 Consumer price inflation Average 2.7 1.5 1.5 1.7 Year-end 2.5 1.2 1.7 2.4 Base lending rate 7.3 6.8 6.6 7.0 Central government balance (% of GDP) –3.2 –5.8 c –7.2 –6.0 Exports of goods fob (US$ bn) 84.1 98.1 c 94.4 98.7 c Imports of goods fob (US$ bn) 61.4 76.9 76.9 82.5 Current-account balance (US$ bn) 12.6 8.6 c 7.3 5.3 % of GDP 16.0 9.6 c 8.1 5.6 External debt (year-end; US$ bn) 45.9 44.1 c 44.6 46.6 Exchange rates M$:US$ (av) 3.80 3.80 3.80 3.80 M$:¥100 (av) 3.34 3.53 3.13 3.08 M$:¤ (year-end) 3.82 3.57 3.44 3.84 M$:SDR (year-end) 5.22 4.95 4.82 5.05

a Actual. b EIU forecasts. c EIU estimate.

International assumptions Malaysia’s external outlook remains poor, with no sign of a pick-up in global demand, particularly for electronic and electrical goods, which comprise 62% of Malaysian manufactures exports. Malaysia’s largest export market is the US,

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 11

which is experiencing a sharp contraction in imports and a drop in investment in information and communications technology. US GDP growth is expected to fall from 4.1% in 2000 to 1.5% in 2001, but is forecast to recover to 2.6% in 2002, boosted by lower interest rates. Asian demand is still weakening, depressed by the return of the Japanese economy to recession and slower growth in other export-dependent parts of Asia. Even in the EU, which until recently was expected to remain relatively unaffected by the US slump, growth has decelerated ominously. A slow recovery in global demand is likely to begin to take shape in 2002, as long as the US avoids a recession in the near term.

Malaysia: international assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.6 4.6 2.7 3.6 OECD 3.1 3.7 1.4 2.4 EU 2.5 3.4 1.9 2.4 Exchange rates (av) ¥:US$ 113.9 107.8 122.7 123.5 US$:¤ 1.07 0.92 0.88 0.96 SDR:US$ 0.731 0.758 0.791 0.768 Financial indicators ¥ 2-month private bill rate 0.27 0.24 0.18 0.10 US$ 3-month commercial paper rate 5.18 6.32 4.04 4.75 Commodity prices Oil (Brent; US$/b) 17.9 28.5 26.6 26.1 Gold (US$/troy oz) 278.8 279.3 263.0 255.0 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.1 1.2 15.0 Industrial raw materials (% change in US$ terms) –4.6 13.4 –3.9 3.9

Note. Regional aggregate GDP growth rates weighted using purchasing power parity exchange rates.

Economic growth Real GDP growth slowed to 0.5% year on year in the second quarter of 2000 compared with 3.1% in the first quarter, primarily as a result of a 6.8% year- on-year decline in exports in the same period. If the government were to publish seasonally adjusted GDP figures, they would undoubtedly have shown a decline in total output for two consecutive quarters in the first half of 2001—indicating that Malaysia’s economy was therefore technically in recession. The plunge in global demand for information and communi- cations technology products and weakening global growth make it now seem likely that there will be no recovery in export demand in the second half of 2001 but, at best, some stabilisation towards the end of the year. By that time, the decline in output will have bottomed out but external demand is likely to remain weak. Domestic demand will not be able to compensate sufficiently for the weak external environment, despite the government’s promise to increase the fiscal stimulus, if necessary. No renewal of the growth impetus can be expected until the second half of 2002. Real GDP growth of only 0.5% is therefore forecast for 2001, accelerating to 2.7% in 2002.

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 12 Malaysia

Domestic demand is being undermined by declining confidence and rising un- employment. However, the downturn will have more impact on business con- fidence, corporate profits and corporate investment than on consumption. The March fiscal package, which included a cut in employees’ pension con- tributions and an increase in tax allowances for the lower- and middle-income groups, will help to sustain household incomes. The government has the resolve and the means to give the economy another powerful fiscal boost, following a 21.7% surge in real public-sector investment in 2000. Government spending will be strong, with firm public-works investment and government consumption. However, total domestic demand is forecast to grow by only 3.1% in 2001, far below last year’s outcome of 15.7%, and remain subdued at 4.5% in 2002 as investment growth is expected to recover only slowly.

Malaysia: gross domestic product by expenditure (M$ m at constant 1987 prices; % change year on year in brackets unless otherwise indicated) 1999a 2000a 2001b 2002b Private consumption 84,719 95,086 98,794 102,746 (3.3) (12.2) (3.9) (4.0) Public consumption 23,776 24,185 26,120 27,295 (18.5) (1.7) (8.0) (4.5) Gross fixed investment 51,897 64,415 66,992 71,011 (–5.9) (24.1) (4.0) (6.0) Final domestic demand 160,392 183,686 191,906 201,052 (2.0) (14.5) (4.5) (4.8) Stockbuilding 219 2,200 –200 –800 (0.2) c (1.0) c (–1.1) c (–0.3) c Total domestic demand 160,611 185,886 191,706 200,252 (2.3) (15.7) (3.1) (4.5) Exports of goods & services 212,484 246,773 244,305 251,634 (13.4) (16.1) (–1.0) (3.0) Imports of goods & services –179,778 –223,294 –225,527 –235,676 (10.8) (24.2) (1.0) (4.5) Foreign balance 32,706 23,479 18,778 15,959 (4.1) c (–4.8) c (–2.2) c (–1.3) c GDP 193,317 209,365 210,484 216,211 (6.1) (8.3) (0.5) (2.7)

a Actual. b EIU forecasts. c Contribution to real GDP growth.

Inflation The downturn in the Malaysian economy will further reduce inflationary risks. Slower growth will increase the economy’s spare capacity, ease labour shortages and keep wages down. Declining producer prices, which reflect domestic and global demand more clearly than consumer prices, indicate that a further easing of price pressures is likely. Producer price inflation declined by 4.8% year on year in June, after peaking in June 2000, when year-on-year growth in producer prices was 7.3%. Consumer price inflation is forecast to average 1.5% in 2001, unchanged from 2000, and rise to 1.7% (revised from 1.9%) in 2002.

Exchange rates The government’s willingness to keep its exchange rate pegged to the US dollar at M$3.80:US$1 is likely to be tested in the next couple of months as the regional economic outlook continues to deteriorate. Fears of a competitive

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 13

depreciation of regional currencies could well return, if the Japanese yen were to slide against the US dollar. If this were to happen, the central bank would no longer be able to claim that the ringgit remained close to its fair value, and there would be potentially serious consequences for Malaysia’s heavily trade- and foreign investment-dependent economy. Although foreign-exchange reserves, which declined sharply in 2001, were boosted in July by the proceeds of the government’s US$1bn global bond issue, domestic pressure for a devalu- ation of the ringgit will continue as long as the US dollar remains firm and the currencies of Malaysia’s regional competitors reflect the gloomy economic and political outlook for South-east Asia. Nevertheless, we continue to believe that Malaysia will resist a change in its dollar peg of M$3.80:US$1 within the next 12 months, unless the regional currency depreciation turns into a rout. Changing the currency system now would add to the sense of economic (and political) instability in Malaysia and, if it does happen, could be accompanied by a tightening of exchange controls.

External sector The worst of the month-on-month decline in export revenue is probably over, although the year-on-year figures are likely to show falls of up to 25-30% for electrical and electronic products in the months ahead. Imports have also been slightly more stable in recent months. At current levels, the year-on-year rate of decline in exports and imports will begin to bottom out in the fourth quarter of 2001. Both export volumes and revenue are expected to decline in 2001 as a whole. Some recovery in export and import growth is forecast in 2002. Based on our forecast of US import demand, a sharp rise in exports of electrical and electronic goods—as was the case in 1997-98—is unlikely in 2002. With slow growth forecast in domestic demand, the contraction in the trade surplus and widening of the services and income deficits are also likely to be gradual. The current-account surplus is expected to fall from 9.6% of GDP in 2000 to a forecast 8.1% in 2001 and 5.6% in 2002. The trade surplus will remain high during the forecast period, reaching US$17.1bn in 2001 and US$15.9bn in 2002, after US$21.2bn in 2000.

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 14 Malaysia

The political scene

Reform, repression and Mahathir Mohamad, Malaysia’s 76-year-old prime minister, who in July control gain momentum celebrated 20 years in office, has in recent months demonstrated the kind of activism that is to be expected from politicians 30 or 40 years younger, not from a man who has long exceeded his retirement age. The workaholic prime minister, who also holds the post of finance minister, shows no sign of wanting to ease his iron grip on power or exit from the political stage. Instead, he has embarked this year on a campaign of accelerated reform, increased repression and tightened control, intended to keep his party, the United Malays National Organisation (UMNO)—the dominant component of the ruling 14-member Barisan Nasional (BN) coalition—in power and regain the allegiance of the ethnic Malays.

Since the prime minister launched an attack on “money politics” during April, 12 UMNO officials, including five division heads, have been suspended and nine others, two of whom are Supreme Council members, have been reprimanded by UMNO’s disciplinary committee. The most remarkable feature of the clean-up campaign was the departure in April of Dr Mahathir’s long- time confidant and chief economic policymaker, the finance minister and UMNO treasurer, Daim Zainuddin, supposedly one of Malaysia’s richest individuals. The falling out with Mr Daim was reputedly caused by the controversial and costly spate of bail-outs of government-linked companies and entrepreneurs in 2000.

Debt restructuring is Mr Daim’s official resignation in June was followed by reversals of several of stepped up the government-led corporate rescues that Mr Daim had been involved in and the loss of influence or purge of people closely connected with him. The most spectacular result of Mr Daim’s removal was the acceleration in corporate debt restructuring (see Economic policy), pushed through in typical fashion by Dr Mahathir. This suggests that Mr Daim had been an obstacle on the road to Malaysia’s economic renewal. In reality, of course, Dr Mahathir had been closely involved in the corporate rescues after the 1997-98 financial crisis. This was especially the case with Malaysia's biggest corporate debtor, Renong, which is considered to be under the control of UMNO. The Renong group involves 11 companies listed on the Kuala Lumpur Stock Exchange, including private com- panies, and is rumoured to have outstanding debts of M$20bn-24bn (US$5.3bn-6.3bn). Its chief executive, Halim Saad, who was a protégé of Mr Daim, had to abandon control of United Engineers (Malaysia) (UEM) when he defaulted on repayment commitments dating from the 1997-98 financial crisis. The government takeover of UEM is likely to be followed by a restruct- uring of the whole Renong group, which was postponed after the 1997-98 financial crisis.

UMNO’s secretary-general is A test of the prime minister’s determination to wipe out money politics will still being investigated come when UMNO’s disciplinary committee publishes its overdue report on the charges of impropriety made against its secretary-general, the information minister, Khalil Yacoob. In March Mr Khalil was accused by an UMNO member

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 15

of the legislature, Fauzi Abdul Rahman, of mismanaging public funds while chief minister of Pahang state during the 1990s. Mr Fauzi also lodged a police report detailing the manner in which timber contracts were awarded during Mr Yaacob’s period in office in Pahang.

Reform of UMNO’s women’s A potentially powerful influence on UMNO’s future electoral chances, movement continues especially against conservative Islamic forces, is the renewal of UMNO’s women’s branch. In February UMNO’s supreme council established Puteri UMNO, which is specifically aimed at women under 35. It was created in addition to the existing women’s movement, Wanita Umno, which has a middle-aged, dowdy image. The head of Puteri UMNO is , a solicitor, women’s rights activist and karate expert, who is also the chairman of the UMNO Civil Action Bureau (CAB) and a member of the UMNO Supreme Council. The CAB is establishing a legal aid centre, which will gather all the practitioners of Malay civil and syariah (Islamic) law, to deal with the diffi- culties that arise from the difference in the laws regarding marriage and divorce between states and races. (Divorce for a Muslim woman in the syariah courts, for example tends to take far longer than a divorce in a civil courts.)

The CAB is also acting as a pressure group, helping to draft a memorandum by non-governmental organisations to demand uniformity of laws regarding marriage and divorce matters for women, and bringing this to the attention of the Conference of Rulers, the cabinet and the minister of women and family affairs, Datuk . Puteri UMNO is trying to create a young and vibrant image, contrasting it with the conservative, religious education focus of the main opposition party, Parti Islam sa-Malaysia (PAS). Puteri UMNO’s latest initiative is a martial arts programme, started out of concern over the increasing number of sexual harassment cases and assaults on women.

ISA is used against Earlier in the year the government adopted initially a reasonable, conciliatory university students approach to the opposition. Under public pressure UMNO agreed to discuss the setting up of Malay unity talks, which met with little response from PAS, which considered the talks a trap set by a government not willing to make any concessions. Instead, this year the government started to make increased use of the widely reviled and draconian Internal Security Act (ISA), which allows for detention without trial for a period of up to two years. In April the government used the ISA to arrest ten Keadilan leaders and reformasi activists. Police said that they were planning violent demonstrations to overthrow the government and so posed a threat to national security. Six of the opposition figures have since been imprisoned for two years without trial at the Kamunting detention centre in , but they are appealing. In July the government arrested two university student leaders under the ISA for involvement in anti-government activities.

Good behaviour agreement The government has increasingly begun to focus on the universities, which it asked from the universities considers a source of political opposition. Stung by a newspaper suggestion that an estimated 2,500 students were involved in underground political movements, in early September the government announced that it would require undergraduates, lecturers and teachers but also civil servants to sign a

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 16 Malaysia

good behaviour agreement. The education minister, Musa Mohamad, said that existing regulations were too general; the agreement would have a detailed explanation of the duties and responsibilities of the civil servants and teachers. The National Union of the Teaching Profession (NUTP) has protested against the government’s proposal.

Friday sermons are The government, concerned about the religious activism focused on the monitored mosques, in September decided to take civil action against any of the more than 500 accredited Imams and religious speakers authorised to conduct Friday sermons who do not follow the official text, issued by the state Religious Affairs Council (MAINPP). The Council said that it had found that in up to 14 establishments the sermons were mostly politically inclined rather than adhering to religious thoughts based on Islamic teachings and the Koran.

Controls on religious On September 2nd Dr Mahathir said that the government could review the schools to be increased laws related to religious institutions, to make sure that Muslim students feel it is their duty to enrol in private religious schools. The prime minister said that at present 30% of Malay primary school students, mostly males, opted for private religious secondary education. The facilities at such schools were often inadequate, the teachers poorly trained, and the students had to pay fees. Dr Mahathir admitted that the students might prefer religious schools because they felt that religious teaching in national schools was too shallow. Instead, according to Dr Mahathir, they were taught to hate the government, with the result that “almost all of them end up with the opposition”.

The police forbids the As part of its effort to control political activity, the government in August holding of ceramah announced that the holding of ceramah or public talks by political parties was forbidden without police permission. PAS has continued to hold meetings, resulting in frequent police harassment and arrests. At the end of August the PAS leader in , Sanusi Daeng Mariok, said that 36 people, including eight PAS women members, had been arrested during ceramah on August 25th and 26th. This had brought the total number of arrested people in Johor to 103, following the police’s announcement of the ban on public talks. There were also frequent complaints of police brutality while they were breaking up the meetings.

Ethnic Chinese community The main reason for the BN’s spectacular defeat in the Lunas by-election at the receives concessions end of 2000—a seat which the coalition had held since independence—was a switch in support by the sizeable local Chinese minority to the opposition. Following the BN’s defeat, the leaders of the Malaysian Chinese Association (MCA) and Gerakan, the ruling coalition’s main Chinese parties, warned that the government needed to re-evaluate its attitude towards the Chinese if it was to regain the community’s support. It was the Chinese vote which kept the BN in power with a two-thirds majority in the 1999 elections, when half the Malay vote went to the opposition.

Dr Mahathir, who in the past has condemned ethnic Chinese requests for a dilution of affirmative action in the strongest possible terms, has therefore performed yet another volte-face. The prime minister has been particularly

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 17

conciliatory on education, which is a highly sensitive issue with the Chinese community. Disappointed with the uptake of university places by ethnic Malay students, the prime minister has agreed that future admissions will be based on merit—a potentially explosive issue, given the undoubted higher educational achievements of the Chinese population. In June Dr Mahathir appointed a Chinese political secretary to handle matters relating to the Chinese community. In July the current deputy editor of the Chinese daily, Nanyang Siang Pau, became one of Dr Mahathir’s press secretaries. The appointments are the first from a non-bumiputera (ethnic Malay) group and illustrate Dr Mahathir’s recognition of the need to bridge the divide between the government and the Chinese electorate.

Controls are tightened on Yet Dr Mahathir’s inclination remains to control rather than to make con- the Chinese press cessions. In June the prime minister confirmed that he personally gave the go- ahead for a M$230m (US$60m) deal whereby Huaren Management, the investment arm of the MCA, bought a 72% stake in the Nanyang newspaper group from Hume Industries, owned by tycoon Tan Sri Quek Leng Chan. Nanyang owns two of Malaysia’s top three Chinese-language newspapers, Nanyang Siang Pau and China Press, which have a combined circulation of 390,000. It also publishes the English-language newspaper, . The Chinese newspapers are known for their politically independent and often hard-hitting editorials. The purchase has been interpreted as another ploy by Dr Mahathir to silence his critics and an attempt to ensure one-sided coverage of the 2004 elections. Despite complaints by the Chinese community that the deal would compromise press freedom and link the MCA to negative allegations of government-to-business ties, the MCA general assembly approved the acquisition by a narrow majority.

The government plays up Dr Mahathir continues to try to instil fear into the electorate by emphasising fears of an Islamic state that PAS plans to set up an Islamic state would lead to heightened racial tensions between Malays and Chinese. He portrays PAS as a party at logger- heads with itself and characterises the Barisan Alternatif (BA) opposition alliance as a “marriage of convenience” of partners who have little in common. The BA, which was formed in the run-up to the 1999 parliamentary election, is far from unified. There are clear differences in political ideology between the BA members which need to be hammered out, and these centre on the role of Islam. PAS is committed to the building of an Islamic state, whereas the Democratic Action Party (DAP) wants a secular state and considers an Islamic state incompatible with a parliamentary democracy.

The DAP postpones a The DAP national chairman, Lim Kit Siang, has stated that “an Islamic state is decision on leaving the BA not a practical or feasible option for Malaysia”, adding that it goes against the BA manifesto, which supports the principles of the Malaysian constitution. During July and August, DAP failed to get reassurances from PAS on the setting up of an Islamic state, should the BA win the next general election. The DAP congress in August could not reach agreement whether to leave the opposition coalition. DAP state conventions have been rescheduled to enable party leaders to focus on campaigning for the Serawak state election, but also to gain more

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 18 Malaysia

time before taking a decision whether to break with PAS. The conventions will now be held between October 7th and November 26th.

UMNO’s electoral fortunes After the humiliation of the Lunas by-election in November 2000, the fortunes improve of both the UMNO and the BN have improved. The prospects for the July 21st by-election in the Likas constituency in Sabah state were ominous, after the High Court declared the election of Yong Teck Lee, a former Sabah chief minister and leader of the BN, in the 1999 state election null and void because of the use of “phantom voters” (non-existing voters). In the event, the BN, with the use of UMNO’s redoubtable election machinery, romped home. An election for the state assembly in Sarawak, on Borneo island, has been called for September 27th, and the BN again seems set to return to power with a sweeping majority in what is a traditional stronghold.

Dr Mahathir contemplates In his opening speech to the UMNO general assembly on June 21st, UMNO losing power Dr Mahathir tried to scare his audience by pointing out that divisions within the Malay community—the loss of votes from UMNO to PAS and the National Justice Party (Parti Keadilan Nasional, the PKN), the party founded by Wan Azizah, the wife of the jailed former deputy prime minister, Anwar Sadat—were likely to lead to a loss of “Malay rights”. Currently, 72 of the Malay representatives are from the government and 32 from the opposition. Dr Mahathir stated that it was “no longer difficult” for the opposition to gain more than 20 seats because of the existence of many marginal UMNO-held seats. A more equal distribution of seats would force the Malay parties to make compromises with non-Malay political parties and lead to a dilution of the special privileges now granted to the bumiputeras.

A new High Court judge is Further progress in the re-establishment of judicial independence was made appointed when the king appointed Wan Adnan as Chief Judge of the High Court in Malaya on September 6th. The post of appellate court president, the third highest in Malaysia’s judicial hierarchy, had remained unfilled since March 12th, as the government and the judiciary failed to reach agreement on a replacement. The appointment of a new chief justice, Dzaiddin Abdullah, in November last year has been followed by a revival of the autonomy of Malaysia’s judiciary. Mr Dzaiddin is a senior judge with a universally acknow- ledged reputation for independence and incorruptibility who has stated that he wants to restore public confidence in the judiciary after repeated allegations of political interference and judicial corruption, which culminated during the trials of Mr Anwar in 1999 and 2000. The next major development could well be connected with Mr Anwar’s appeal against his conviction for obstruction of justice, one of two counts that led to a 15-year term of imprisonment.

Economic policy

More pump-priming Notwithstanding the fact that the preparation of the 2002 budget, to be measures considered presented in October, was already at an advanced stage, the prime minister, Mahathir Mohamad, admitted in mid-September that Malaysia might again

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 19

have to resort to pump-priming measures to stimulate the economy. He admitted that Malaysia was likely to be affected by further weakening of the US economy after the terrorist attacks in New York. Surprisingly, Dr Mahathir admitted that of the M$3bn (US$790m) stimulus package, adopted in March, only M$200m had been spent. The package included plans for the develop- ment of infrastructure projects such as schools, community colleges and new universities.

Dr Mahathir rules out a In early September, while exports were plunging and economic growth was ringgit devaluation stalling, Dr Mahathir steadfastly ruled out the possibility that Malaysia might cut interest rates or devalue the ringgit. In an address to a capital markets conference in Kuala Lumpur, the prime minister denied that Malaysia’s competitiveness was fast eroding. The factors which supported Malaysia’s productivity were still in place. The level of the ringgit, which was fixed at M$3.80:US$1 in September 1998, remained sustainable and consistent with the country’s economic fundamentals, according to Dr Mahathir. Devaluation could “cause [an] economic collapse”, an argument which probably demon- strated the prime minister’s interest in stability, economic as well as political, to be defended, if necessary by reimposing capital controls.

The prime minister’s audience would not have expected him to say anything else. They may have been more impressed with Dr Mahathir’s pledge to speed up corporate reorganisations, ease the rules on the sale of stocks by companies in financial difficulty and improve stockmarket transparency. In August the government announced that banks and debtors had three months to submit plans on how they would deal with their bad loans. In spite of the inauspicious economic environment, the new approach to corporate restructuring and the apparent intention to reduce corporate favouritism has impressed the stock- market, which outperformed most global markets in July and August, and remained firm—until the US terrorist attacks—in September.

Capital Market Masterplan At the beginning of September the Securities Commission chairman, Ali Abdur, makes a promising start announced that more than 20% of all the recommendations outlined in phase one (2001-03) of the Capital Market Masterplan had already been completed or partially completed since the launch of the plan in February 2001. The Capital Market Masterplan has as its key priority the creation of a single Malaysian exchange. It has an all-encompassing vision involving all aspects of the capital market, with a three-pronged approach, six objectives, 24 strategic initiatives and 152 recommendations.

Official GDP growth target The governor of Bank Negara Malaysia (BNM, the central bank), Zeti Aziz, will be revised down admitted that the government was likely to revise its official GDP growth target for 2001, which is currently set at between 5% and 6%, after growth reached 8.3% in 2001. The new forecast and the outlook for 2002 will be announced when the 2002 budget is presented in late October. Mrs Zeti said that the government’s expansionary fiscal and monetary policies had resulted in stronger growth in the construction and the services sectors, but the slowdown in manufacturing had been more pronounced than anticipated. While presenting the second-quarter GDP figures, which showed growth slowing to

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 20 Malaysia

0.5% year on year from 3.1% during the first three months of the year, Mrs Zeti said growth in the third quarter would be about the same as in the second, with a recovery likely in the final three months of 2001. While this now appears optimistic, especially since the terrorist attack on the World Trade Center in New York on September 11th has increased the possibility of a global recession, it has been supported by the Malaysian electronics industry, which predicted that production was likely to begin to rise again in the fourth quarter.

M$29bn of corporate debt The Corporate Debt Restructuring Committee (CDRC), under its new head, will be restructured Azman Yahya, has set a one-year time frame for the restructuring of some M$29bn of corporate debt. In August Dr Mahathir put Mr Azman—who was then the head of Danaharta, the government’s asset-management company established in 1998—in control of the CDRC and appointed him an executive director of Syarikat Danasaham, a new organisation backed by the Treasury and authorised to buy selected companies. Mr Azman is expected to supervise the reforms and restructuring that many companies had long postponed after the 1997-98 financial crisis, depending instead on government protection and favouritism. The first basket case to be dealt with is toll-road owner-operator United Engineers (Malaysia) (UEM), part of the Renong conglomerate. Although Mr Azman has Dr Mahathir’s support, there could hardly be a worse environment for corporate debt restructuring than the middle of a severe economic downturn.

The time-frame for debt At the beginning of August the CDRC announced three new initiatives, which restructuring is ambitious ae expected to intensify the restructuring efforts. The CDRC was expanded to include representatives from Danaharta and the Federation of Public Listed Companies. This would ensure that all the relevant sectors were represented in the CDRC, the financial institutions, the corporate sector, the NPL resolution agency, the regulators and the government. The second initiative involved the setting of time limits: one month for evaluation; three months for the formulation of a workout proposal and its approval by creditors; and the remaining eight months for the implementation of the workout proposal. At the announcement of the scheme, Mr Azman stated that there had to be more commitment from the borrowers to carry out operational restructuring in addition to debt restructuring. But creditor banks also needed to be more realistic in their recovery expectations. Borrowers and bankers were expected to “take appropriate haircuts to ensure the viability of the restructuring schemes”. The third new initiative announced by the CDRC was a promise that it would issue a quarterly update on its progress to keep the market informed of its restructuring efforts, thus increasing the amount of corporate information in a market where foreign investors have often complained of a lack of transparency.

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 21

The domestic economy

Economic trends

GDP growth is almost flat Real GDP growth slowed to just 0.5% year on year in the second quarter of in the second quarter 2001, down from 3.1% (revised from 3.2%) year on year in the first quarter. Nevertheless, the second-quarter result was better than expected; consensus opinion was that there would be no growth. However, on a seasonally adjusted basis the second quarter would almost certainly have shown a contraction (the Malaysian authorities do not publish seasonally adjusted figures).

Malaysia: real gross domestic product (M$ m unless otherwise indicated; at 1987 purchasers’ prices, not seasonally adjusted) 1999 2000 2001 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Private consumption 22,518 23,656 23,141 23,534 24,755 24,618 23,521 % change, year on year 8.9 14.5 13.4 11.3 9.9 4.1 1.6 Public consumption 7,282 4,369 6,089 6,352 7,375 4,792 6,383 % change, year on year 23.1 3.8 13.2 –8.0 1.3 9.7 4.8 Gross fixed capital formation 14,095 14,630 16,953 17,141 15,691 15,955 16,993 % change, year on year 5.9 21.0 32.6 32.6 11.3 9.1 0.2 Change in stocks –1,564 972 993 965 –708 –287 –414 % contribution to year-on year GDP growth 4.5 –0.1 –0.8 3.2 1.7 –2.5 –0.2 Net exports 8,262 6,564 4,831 5,403 6,660 6,703 5,758 % contribution to year-on year GDP growth –2.0 –0.9 –7.1 –7.7 –3.2 0.3 1.8 Exports of goods & services 58,617 55,786 60,355 66,979 63,385 59,282 56,307 % change, year on year 18.9 20.8 16.6 19.8 8.1 6.6 –6.8 Imports of goods & services 50,355 49,222 55,524 61,576 56,725 52,636 50,549 % change, year on year 25.5 25.5 27.6 31.9 12.6 7.2 –9.0 GDP 50,592 50,191 52,006 53,395 53,773 51,723 52,241 % change, year on year 11.2 11.7 8.0 7.6 6.3 3.1 0.5 Source: Department of Statistics.

Private consumption Growth in domestic consumption fell to just 2.3% year on year in the second contracts quarter, compared with growth of 4.9% in the first quarter. Fiscal measures continued to underpin domestic demand, with public consumption rising by 4.8% year on year (down from 9.7% year on year in January-March), compared with a rise of only 1.6% year on year in private consumption (down from 4.1% year on year in the first quarter).

Investment demand The decline in the rate of growth of investment demand has been dramatic. weakens sharply Real growth in investment was just 0.2% year on year in the second quarter, down from 9.1% year on year in the first quarter. The drop in exports and deteriorating corporate profits has hit business confidence and with it investment demand. Imports of investment goods (capital goods, machinery and transport equipment) fell by 9.1% year on year in the second quarter, and overall private investment contracted sharply. Moreover, the outlook is poor,

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 22 Malaysia

with the value of capital investment applications falling to M$8.4bn (US$2.2bn) in the first half of 2001, down from M$46.3bn in 2000.

Imports fall faster than Despite the sharp decline in exports (export volumes were down by 6.8% year exports on year in the second quarter), the external sector’s contribution to growth was positive as import volumes declined by 9%, boosting net exports. The extreme weakness of imports reflects the fall-off in demand for investment goods in particular, but also the fact that Malaysia’s most important export sector— electronics and electrical products—is highly import-intensive. Exports of these products declined sharply in the second quarter, and hit demand for imported components.

Third-quarter GDP is likely The assertion by the governor of Bank Negara Malaysia (BNM, the central to have declined bank), Zeti Akhtar Aziz, that GDP growth in the third quarter of 2001 would be much the same as second quarter, before rebounding in fourth quarter, looks optimistic. Apart from further fiscal stimulus—the fiscal deficit is growing but the level of public debt remains low—there will be little to drive economic growth in the second half of this year. Consumer confidence remains weak, hit by rising unemployment (the unemployment rate stood at 4% in the second quarter, the highest rate for two years) and the weakness of share prices. The Malaysia Institute of Economic Research (MIER) consumer sentiment index declined further in the second quarter, falling to just 96.2, down from 105.7 in the preceding three months, and there is little reason to foresee any improve- ment in the short term. Unsurprisingly, the decline in the index of business confidence (also published by MIER) has been even sharper, with the index falling to 44.0 in the second quarter from a peak of 69.3 in the third quarter of 2000. Moreover, as discussed above, the outlook for exports has weakened further, with no sign yet of the forecast turnaround in the US, and there are signs of real weakness in the euro zone and of a renewed recession in Japan.

The manufacturing sector Value-added by industry declined by 6.7% year on year in the second quarter leads the downturn of 2001, compared with growth of 3.7% year on year in January-March and 21.3% for 2000 as a whole. The deteriorating performance of the industrial sector was partly offset by the performance of services, construction and agriculture, with services and construction benefiting from the government’s expansionary fiscal and monetary policies. Low interest rates and the govern- ment’s infrastructure programme continued to boost the construction sector, which saw value added increase by 3.2% year on year, the best performance since the fourth quarter of 1999. A robust increase in the services sector boosted value added by 6.1% in the second quarter of 2001.

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 Malaysia 23

Malaysia: gross domestic product by sector (M$ m unless otherwise indicated; at 1987 purchasers’ prices, not seasonally adjusted) 1999 2000 2001 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Agriculture, forestry & fishing 4,602 3,777 4,355 4,745 4,831 4,290 4,390 % change, year on year 4.5 –0.7 –3.7 1.7 5.0 13.8 1.3 Mining & quarrying 3,631 3,662 3,516 3,583 3,655 3,629 3,542 % change, year on year –1.9 3.9 5.6 2.7 0.6 –0.9 0.7 Manufacturing 15,394 16,341 17,556 18,057 17,913 16,953 16,379 % change, year on year 24.2 27.3 20.9 20.3 16.4 3.7 –6.7 Construction 1,781 1,641 1,781 1,782 1,792 1,655 1,838 % change, year on year 4.2 1.2 1.4 0.3 1.2 0.9 3.2 Electricity, gas & water 1,877 1,886 1,957 2,030 2,013 1,983 2,061 % change, year on year 7.0 11.3 5.0 6.9 7.2 5.1 5.3 Transport, storage & communications 4,147 4,052 4,104 4,204 4,333 4,315 4,445 % change, year on year 14.3 11.0 8.3 6.0 4.5 6.5 8.3 Wholesale, retail trade, hotels & restaurants 7,792 7,654 7,631 7,742 7,922 7,787 7,780 % change, year on year 8.5 7.3 8.5 6.3 1.7 1.7 1.8 Finance, insurance, retail estate, & business services 6,370 6,490 6,404 6,501 6,765 6,759 7,242 % change, year on year 6.0 10.9 2.5 1.2 6.2 4.1 13.1 Government services 3,702 3,460 3,554 3,659 3,722 3,487 3,726 % change, year on year 7.3 2.1 1.6 1.4 0.6 0.8 0.4 Other services 3,780 3,905 3,893 3,952 3,911 4,040 3,984 % change, year on year 3.3 1.3 1.1 0.2 3.5 3.5 2.3 Imputed bank service charges –3,762 –3,874 –3,987 –4,044 –4,205 –4,306 –4,386 % change, year on year 6.4 7.5 6.0 6.7 11.8 11.2 10.6 Import duties 1,287 1,196 1,241 1,183 1,121 1,121 1,250 % change, year on year 13.4 0.9 –18.7 –10.5 –12.9 –6.3 0.7 Total services 27,668 27,447 27,543 28,088 28,666 28,371 29,228 % change, year on year 7.7 7.3 4.8 3.5 3.6 3.4 6.1 GDP at purchasers’ valuesa 50,592 50,191 52,006 53,395 53,773 51,723 52,241 % change, year on year 11.2 11.7 8.0 7.6 6.3 3.1 0.5 a Totals may not add due to rounding.

Source: Department of Statistics.

Malaysia’s reliance on The weakness of the manufacturing sector reflects the global slowdown electronics is exposed (second-quarter global growth is expected to have fallen to near zero, the worst performance since 1975), and the fact that it has been led by a collapse in investment in computer and telecommunications sectors. This has exposed the acute dependence of Malaysia (along with the rest of East and South-east Asia) on the manufacture of electronic equipment and electronic components, and on demand from the US for goods. In 2000 exports of electronics goods accounted for 61.6% of total Malaysian gross exports, with exports to the US equivalent to almost 20.5% of GDP. US investment in computer-related technologies is expected to fall by around one-third in 2001, and the im- plications for Malaysia and its second most important trading partner, Singapore, have been severe. Singapore, which mirrors Malaysia’s dependence

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 24 Malaysia

on electronics and the US market, saw its real GDP fall by 3% year on year in the second quarter.

Increased dependence on The slowdown has also highlighted Malaysia’s increasing dependence on trade: trade shows vulnerability exports of goods and services accounted for just over 125.7% of GDP in 2000, compared with 93.2% in 1997. As growth in world trade is expected to slow dramatically in 2001 (the Economist Intelligence Unit is forecasting growth of just 3% in 2001, down from 13.4% in 2000), this leaves Malaysia highly vulnerable. Although it benefits from a sizeable domestic market, unlike Singapore, for example, domestic demand has remained relatively weak since the 1998 financial crisis, with economic recovery being driven by exports. Fiscal stimulus and a strong performance from net exports prevented the economy from contracting in the second quarter, but prospects for third- quarter growth look bleak. Although the government has indicated that it is prepared to increase further spending if necessary, the outlook for exports and therefore industrial production is poor.

Consumer price inflation Inflationary pressures remain soft, reflecting the weakness of domestic demand falls to 1.4% year on year and the downturn of the global economy. Consumer price inflation (CPI) was just 1.4% year on year in July 2001, compared with a rate of 1.6% year on year in the first half of the year. The only sector to record stronger price growth was transport and communications (18.8% of the CPI basket), in which prices in- creased by 4% year on year, mainly owing to an increase in administered prices.

Producer prices decline The weakness of underlying inflationary pressure is illustrated by the sharp further disinflation evident in producer prices. The decline in producer prices, which tend to mirror the strength of economic activity more closely than consumer prices, deepened further in the second quarter of 2001, with prices falling by 4.8% year on year. This followed a decline of 4.7% year on year in the first quarter, and a 1% decline in the final three months of 2000. In 2000 as a whole producer prices rose by 3.2%, with the rate of increase peaking in June at 7.3% year on year. Declining producer prices strongly suggest that consumer price inflation will decline further during the coming months.

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

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

The rate of unemployment The rate of unemployment rose to 4% in the second quarter of 2001, the highest continues to rise rate for two years. The deterioration in labour market conditions was most evident in the manufacturing sector, where the number of vacancies in the second quarter stood at their lowest level since the first quarter of 1999, with job losses at their highest level since the fourth quarter of 1998. Given that Malaysian electronics producers continue to report declining orders, further substantial job losses in this sector are expected in the third quarter of 2001. The poor outlook for the economy as a whole will lead to a further deterioration in labour market conditions, putting downward pressure on wage settlements.

Manufacturing

Manufacturing downturn The manufacturing sector, in particular the country’s large electronics industry, is led by electronics has led the downturn. Malaysian exports of electronics products declined by 18.4% year on year in the second quarter of 2001, with production of electronics products (accounting for around one-fifth of manufacturing pro- duction) falling by 25.2% year on year during the second quarter. Textiles and apparel also declined sharply, by 9.1% year on year. The decline seems to have been exacerbated by increasing competition from lower-cost East Asian suppliers, in particular China. The output of the important chemicals and chemical products sector, which accounts for around 15% of total manufact- uring output and is highly dependent on the electronics industry, fell by 6.6% year on year in the second quarter.

Malaysia: production in the manufacturing sector (% change, year on year; in value added at 1987 prices) 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr External demand-related industries 32.9 25.5 24.7 21.3 2.1 -11.3 Electronics 49.8 46.9 46.3 37.8 –1.2 –25.2 Electrical 32.4 28.9 32.5 22.2 8.6 1.3 Textiles & apparel 12.3 5.0 13.0 5.3 3.0 –9.1 Chemicals & chemical products 25.6 17.1 10.2 9.2 –1.6 –6.6 Off-estate processing 46.5 0.5 –2.2 15.0 10.4 13.5 Rubber products 7.0 0.8 3.8 4.7 10.8 5.5 Wood & wood products 2.7 1.4 6.2 5.8 12.4 1.1 Domestic demand-related industries 29.1 26.1 20.5 13.9 12.0 3.9 Transport equipment 33.8 22.8 13.2 10.9 18.9 18.7 Fabricated metal products 41.8 35.8 38.2 22.6 10.6 5.7 Iron & steel & non-ferrous metals 30.8 24.7 15.6 0.3 9.6 –8.1 Non-metallic metal products 27.4 20.7 22.2 13.7 15.4 9.8 Petroleum products 15.1 39.3 15.2 12.1 21.0 8.9 Total 32.1 25.7 23.8 19.7 4.2 –8.0 Source: Department of Statistics.

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

Manufacturing output falls Although most other sectors did record some growth in production, this was by 8% year on year not sufficient to offset the declines already mentioned, and manufacturing output as a whole fell by 8% year on year during the second quarter of 2001. Output of electrical products remained positive but, at just 1.3% year on year in the second quarter, compared with 8.6% year on year in the first quarter and growth of almost 30% during 2000, it also experienced a sharp slowdown. The transport equipment sector posted the biggest increase in output, at 18.7% year on year. This mainly reflected strong growth in the production of passenger cars, demand for which has been boosted by cheap credit. New car registrations were up by 12.7% year on year in the first half of 2001.

Malaysia: manufacturing production % change, year on year 40

30

20

10

0

-10

-20 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul 1997 98 99 2000 01

Source: Department of Statistics.

The slump deepens in June, The slump in manufacturing output deepened sharply in June, when output eases in July fell by 12.9% year on year. A further slump in electronics production was one of the main reasons, with output declining year on year in the same period by around 33%. This hit output of the related chemicals sector, which declined by 13.3%. The performance of the wood and wood products sector (another important sector, accounting for 7.6% of total manufacturing output) also deteriorated, with output declining by 4% year on year. The June decline in manufacturing was followed by some recovery in July, with production showing a decline of 9.8% year on year. The fall in manufacturing output during the first seven months of 2001 averaged 3.3% year on year.

Oil and gas

The mining sector remains Value added by the mining sector, which comprises largely the oil and gas relatively stable industries, rose by 0.7% year on year in the second quarter of 2001. This compares with a decline of 0.9% year on year in the first three months and growth of 3.2% in 2000 as a whole. Once again, the gas sector performed more strongly, with growth of 4.1% year on year, compared with a 2.5% decline in the value of oil output. The diverging performance of the two industries mirrored the differing external picture, with the value of natural gas exports rising by 12.8% year on year in the second quarter, compared with a 5.3% decline in the value of exports of crude oil.

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

Malaysia: oil and gas production 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Crude oil condensates (’000 barrels) 701 689 653 676 699 675 % change, year on year –0.1 4.1 –5.4 –4.7 –0.3 –2.1 Natural gas (m standard cu ft) 4,533 4,089 4,277 4,286 4,552 4,286 % change, year on year 11.0 10.1 11.5 3.8 –0.7 4.8 Source: Department of Statistics.

Agriculture

Palm oil output grows Growth in value added by the agricultural sector slowed to 1.3% year on year strongly in the second quarter of 2001, following unusually strong growth of 13.8% year on year in the first three months. Strong growth in the output of crude palm oil again underpinned the performance of the sector as a whole. Pro- duction rose by 17.2% year on year in the second quarter, driven by strong external demand (exports were up by 41% year on year in volume terms). In a move aimed at boosting the competitiveness of Malaysian palm oil producers, the government announced in August that the 5% export surcharge currently levied on a range of palm oil products would be scrapped in September.

Malaysia: production in the agricultural sector (% change year on year; in value added at 1987 prices) 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Crude palm oil 25.5 –15.7 –2.2 11.8 27.6 17.2 Rubber –29.1 –14.6 –15.5 –18.3 –11.7 –23.0 Saw logs 20.8 5.3 1.5 –2.1 –15.3 –19.3 Cocoa –14.4 –17.5 –34.8 9.5 –9.5 –13.7 Source: Department of Statistics.

The rest of the agricultural In contrast to the strong growth in the value of palm oil production, the sector deteriorates further declines in the output value of rubber, timber and cocoa deepened in the second quarter, falling by 23%, 19.3% and 13.7% respectively year on year. The main reason for the poor performance was the continued weakness of com- modity prices and Malaysia’s loss of competitiveness as a result of the real appreciation in the value of the ringgit against the currencies of many of Malaysia’s competitors in this sector.

Financial and other services

The services sector easily recorded the strongest performance in the second Services help to sustain quarter of 2001, with value added rising by 6.1% year on year. This compares economic growth with growth of 3.4% year on year in the first three months of the year and 4.8% in 2000 as a whole. The strong services sector performance was led by the financial and business services sector, where the value of output rose by 13.1% year on year. The strengthening of activity largely reflects the impact of low interest rates, which have boosted bank lending, in particular for expenditure

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

on housing and consumer durables, and also strong growth in the sale of insurance products. Transport, storage and communications services also recorded strong growth, up by 8.3% year on year in the second quarter, bene- fiting from the continued growth in telecommunications services. Finally, the value of government services picked up strongly, rising by 4.8% year on year, as a result of increased government spending. Growth in this category had been just 0.8% year on year in the first quarter and 1.4% in 2000 as a whole.

Malaysia: performance of the services sector (% change, year on year; in value added at 1987 prices) 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Intermediate services 10.9 4.7 3.0 5.5 5.0 11.2 Transport, storage & communications 11.0 8.3 6.0 4.5 6.5 8.3 Finance, insurance, real estate & business services 10.9 2.5 1.2 6.2 4.1 13.1 Final services 5.2 4.9 3.9 2.4 2.3 3.0 Electricity, gas & water 11.3 5.0 6.9 7.2 5.1 5.3 Wholesale & retail trade & restaurants 7.3 8.5 6.3 1.7 1.7 1.8 Government services 2.1 1.6 1.4 0.6 0.8 4.8 Other services 1.3 1.1 0.2 3.5 3.5 2.3 Total services 7.3 4.8 3.5 3.6 3.4 6.1 Source: Department of Statistics.

Loan growth accelerates Total loans outstanding rose to M$468.1bn (US$123bn) at end-July 2001, representing a year-on-year increase of 6.4%, and 3.1% above the end-2000 level. After averaging M$10bn (US$2.6bn) a month in the first quarter, new loan approvals rose to an average of M$10.4bn in the second quarter and M$12.4bn in July. Disbursements also rose, averaging M$31.1bn in April-July, up from an average of M$30.4bn in the first quarter and M$30.1bn in 2000 a as whole. However, loan repayment figures have been poor, averaging M$29bn in April-July 2001, down from M$29.8bn in the first quarter and M$30.5bn during the final three months of 2000.

Non-performing loans rise The disappointing loan repayment figures have contributed to a renewed rise again in non-performing loans (NPLs). On a three-month arrears basis, NPLs increased to 11.4% of the total outstanding at end-July 2001. This compares with an average of 10.5% of the total in the first half of 2001 and 9.8% in the fourth quarter of 2000. The rise reflects the impact of the weak economy, but also the government’s continuing failure to bring about needed improvements in corporate governance, and its continued readiness to ensure credit is avail- able for politically well-connected borrowers.

Foreign trade and payments

Second-quarter export Exports (fob) fell by 8.8% year on year in the three months to end-June 2001, performance worsens compared with growth of 1.6% year on year in the preceding quarter. Nevertheless, the merchandise trade surplus declined only moderately, falling

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

from M$13.3bn (US$3.5bn) in the first quarter to M$12.5bn in the second as a result of the corresponding decline in imports, which fell by 10.5% year on year (cif) in the second quarter. This compares with a 6.7% rise in imports year on year in the preceding three months. The sharp fall in imports partly reflects the weakness of domestic consumer demand, but more importantly the fall-off in electronics exports (these have a high imported content) as well as the sharp decline in private investment demand, especially in machinery and equipment. In the first half of 2001 exports earnings declined by 3.8% year on year to M$169.1bn, and import earnings by 2.5% year on year to M$143.3bn.

No improvement in sight There is no sign that the outlook for exports is set to improve in the short for exports term. In fact, the export performance deteriorated sharply in June, falling by 13.8% year on year to M$27.5bn (imports, cif, fell by 10.3% year on year). This took the trade surplus down to M$3.3bn, the lowest monthly surplus for five months. Global demand for electronics products continues to decline, and with more supply coming on stream, demand for Malaysia’s electronics products will have remained weak, and the third-quarter trade surplus is un- likely to show the usual seasonal rise. Moreover, weakening oil prices will hit revenue from oil exports, which are an important source of export revenue for Malaysia.

Malaysia: foreign trade (M$ m; not seasonally adjusted) 1999 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Exports fob 69,404 77,849 83,628 90,678 84,758 90,968 101,707 95,875 86,152 82,919 Imports cif –53,585 –59,604 –64,836 –70,453 –68,231 –78,681 –86,756 –78,696 –72,806 –70,450 Trade balance 15,819 18,245 18,793 20,227 16,527 12,287 14,951 17,180 13,347 12,469 Source: Department of Statistics.

Malaysia relies heavily on Exports of electrical and electronic equipment accounted for 56.3% of total exports of electronics export revenue in the first half of 2001. This was down from 59% in 2000, reflecting the disproportionately large fall in exports from this sector seen in 2001. Nevertheless, at over half of total exports, the dependence on this one category of exports leaves Malaysia highly vulnerable to cyclical downturns,

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

which in the case of the electronics industry tend to be steep. Exports of integrated electronic circuits alone accounted for just over one-quarter of the total in this category, and hence for around 14% of total export revenue.

In the first half of 2001 revenue from the second most important export category, palm oil and palm-oil based products, was hit by sharply lower prices, with a 30% year-on-year increase in volumes more than offset by a 31.9% price decline. This category accounted for 4.2% of total export revenue. Revenue from crude petroleum exports declined by 1.7% year on year in the first half to M$6.3bn, mainly as a result of a 3.1% decline in volumes, and accounted for 3.7% of the total. Export revenue from the fourth largest category, liquefied natural gas (LNG), increased by 4.4% year on year in the same period, lifted by a 4.7% price increase. The strongest growth in exports was recorded by the petroleum products category (2.4% of total exports), which rose by 18.2% year on year, mainly on the back of sharply higher prices.

The US remains Malaysia’s In recent years, the relative importance of the US, Singapore and Japan as biggest market destinations for Malaysia’s exports has continued to increase. In the first half of 2001 these three markets accounted for almost 52% of total exports, little changed on the year-earlier period. The US was the biggest market, accounting for 20% of exports. However, this tends to understate the dependence on the US market, as a proportion of Malaysian exports to Singapore—the country’s second largest export destination, accounting for 17% of exports—are then re- exported to the US. A smaller, but still significant proportion of Malaysian exports to Japan are also re-exported to the US. As a result, the US is the ultimate market for probably well over one-quarter of Malaysia’s exports.

The current-account The current-account surplus remained substantial in the first quarter of 2001, surplus remains large at M$8.2bn (US$2.2bn). This compares with a surplus of M$7.6bn in the fourth quarter of 2000 and M$10.5bn in the first quarter of 2000. Although the trade surplus declined by 13.7% year on year in the first quarter of 2001, both exports and imports rose in value terms, by 1.5% and 3% respectively year on year. The deficit on the services and income balance narrowed slightly, falling by 13% year on year, mainly as a result of a slight improvement in the services balance, while the income balance was largely unchanged. Foreign trade data for the second quarter show that the trade surplus remained substantial in the second quarter, suggesting that although there could have been a decline in the current-account surplus in that period, it will not have been dramatic.

The net outflow on the financial account was M$12.8bn in the first quarter of 2001, compared with M$14.1bn in the previous quarter. Net inflows of foreign direct investment (FDI) were positive, at Rm1.1bn, but outflows of portfolio and other investment totalled M$2.4bn and M$11.4bn respectively. The overall balance of payments showed a deficit of M$10.3bn in the first quarter of 2001, and international reserves held by Bank Negara Malaysia (BNM, the central bank) declined by a corresponding amount.

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

Malaysia: current account (M$ m; not seasonally adjusted) 1999 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Merchandise exports 77,594 84,482 88,137 84,693 91,408 101,473 95,616 86,132 Merchandise imports –56,296 –60,133 –66,042 –64,067 –73,748 –81,409 –74,018 –68,420 Trade balance 21,298 24,349 22,095 20,626 17,660 20,064 21,598 17,712 Services & income credits 11,726 14,286 15,455 14,244 15,032 15,907 15,512 16,450 Services & income debits –19,565 –22,961 –24,181 –22,584 –24,460 –26,887 –27,333 –23,832 Services & investment income balance –7,839 –8,675 –8,726 –8,340 –9,428 –10,980 –11,821 –7,382 Transfers credits 680 761 1,122 724 654 724 745 743 Transfers debits –1,799 –2,379 –3,783 –2,540 –2,305 –2,528 –2,931 –2,847 Unrequited transfers balance –1,119 –1,618 –2,661 –1,816 –1,651 –1,804 –2,186 –2,104 Current-account balance 12,340 14,056 10,708 10,470 6,581 7,280 7,591 8,226 Sources: Department of Statistics; National Bank of Malaysia.

Decline in international Despite the global economic slowdown, inflows of FDI into Malaysia have reserves is reversed continued to hold up well. Net FDI totalled M$2.4bn in the second quarter, compared with M$1.6bn in the first. The pick-up in FDI, together with pro- ceeds from the government’s July US$1bn global bond issue, reversed the decline in international reserves seen in the first half of 2001—reserves fell from US$29.5bn at end-2000 to US$25.6bn at end-June. Net international reserves had risen to US$27.7bn at the end of August. Although this is good news, the continued strength of FDI probably reflects decisions taken by foreign investors prior to the slowdown in global growth. In the light of the considerable overcapacity in the electronics sector and the expectation that the economic recoveries in the US, Japan and Europe will be modest during the next 12 months, the outlook for FDI has deteriorated.

The ringgit is yet to come Although the impact of the global slowdown on Malaysian economic prospects under serious pressure has been notable and reserves declined sharply in the first half of 2001, the ringgit peg to the US dollar—at M$3.8:US1—has yet to come under serious pressure. Although Malaysia is running a sizeable current-account surplus and has adequate import cover (at 4.1 months), the risk remains considerable. Although the likelihood of the Japanese yen falling sharply against the US dollar appears to have receded following the downturn in the US economy, the risk cannot be discounted given the poor outlook for the Japanese economy. This would almost certainly unleash region-wide competitive devaluations, calling into question the ringgit’s current value against the US dollar.

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 32 Brunei

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 1968

National government The sultan, close family members and his appointees control all organs of state power, including the Council of Cabinet Ministers, under the state of emergency that has been in force since 1962

Main political organisations The Parti Perpaduan Kebangsaan Brunei (the Brunei National Solidarity Party, PPKB), which split from the Parti Kebangsaan Demokratik Brunei (Brunei National Democratic Party, PKDB) in early 1986, is Brunei’s only legal party, the PKDB having been banned in early 1988. However, the PPKB is only intermittently active. The promotion of the national ideology of Melayu Islam Beraja (MIB), or Malay Islamic Monarchy, has been stepped up since 1990. The Parti Rakyat Brunei (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 Sulaiman Culture, youth & sports Hussain Mohamad Yusof 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 Mohammad Taib Religious affairs Mohamed Zain Serudin

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

Economic structure

Annual indicatorsa

1996 1997 1998b 1999 c 2000d GDP at market prices (Br$ m) 7.7 8.0 8.1 8.2 8.3 Real GDP growth (%) 3.5 4.0 1.0 2.5 3.5 c Crude oil production (‘000 b/d) 165 165 155 180 175 Gas production (bn cu metres) 9.37 9.18 9.28 9.59 9.88 Consumer price inflation (av; %) 2.0 2.0 –0.7e 1.0 n/a Population (‘000) 305.1 314.4 323.6 333.0d 342.0 Exports fob (US$ m) 6,670 3,973 1,979 2,552 2,997 Imports cif (US$ m) –3,516 –3,154 –2.353 –1,328 -1,394 Reserves (US$ m) 5,937 3,656 4,011 n/a n/a Exchange rate (av; Br$:US$) 1.41 1.48 1.67e 1.69e 1.72e

September 20th 2001 Br$1.74:US$1

Origins of gross domestic product 1998f % of total Oil & gas sector 32.5 Construction 6.6 Wholesale & retail trade 11.2 Community, social & personal services 33.0 GDP at factor cost incl others 100.0

Principal exports 1999f Br$ m Principal imports 1998f Br$ m Natural gas 1,860 Machinery & transport equipment 981 Crude petroleum 1,650 Basic manufactures 854 Refined products 111 Food & live animals 396

Main destinations of exports 1999g % of total Main origins of imports 1999g % of total Japan 42.3 Singapore 34.2 US 17.0 UK 15.1 Korea 14.4 Malaysia 15.1 Thailand 8.9 US 4.9 a The source for most of the earlier data is the IMF, Staff Country Report No. 99/19. b IMF estimates. c Brunei government estimates. d EIU estimates. e Actual. f Brunei Statistical Yearbook, 1999, estimates. g IMF, Direction of Trade Statistics.

Quarterly indicators

1999 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Production (prodn/day) Crude petroleum ‘000 barrels 157 140 150 194 192 157 167 182 Foreign tradea (US$ m) Exports fob 557.4 630.4 738.8 659.4 694.7 796.8 846.5 615.7 Imports cif –376.9 –332.6 –311.5 –219.4 –397.1 –374.2 -403.5 -301.1 Trade balance 180.5 297.8 427.3 439.9 297.6 422.6 443.0 314.6 a DOTS estimates. Sources: Oil & Gas Journal; IMF, Direction of Trade Statistics.

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

Outlook for 2001-02

Domestic politics Events surrounding the royal family will continue to capture media attention and dominate the political landscape in Brunei, as legal actions against Prince Jefri Bolkiah’s bankrupt Amedeo Development Corporation continue to clog Brunei’s court system. In the wake of the auction of the assets of Amedeo, which paraded a variety of luxury goods before the public, popular dissatisfaction with the government is likely to hit an all-time high. As a dramatic recovery in the economy is unlikely, the government will come under increasing pressure to justify its policies, although overt dissent is unlikely to emerge under Brunei’s strict system of social control.

Economic policy Since 1999, when the Brunei Darussalam Economic Council released a landmark report warning that Brunei’s economy was fundamentally unstable, the government has been trying to pump life into the private sector through a series of economic stimulus projects. Most of these efforts, however, have failed to pay off. A job training scheme attracted a mere 300 of Brunei’s estimated 7,000 unemployed, and a programme to loan funds to small business has disbursed only B$4m (US$2.3m) of the B$30m on offer. Given these disappointing results, the government is likely to scale back its ambitions for sparking private-sector growth, and concentrate instead on using its oil and gas revenue to replenish its foreign reserves, estimated to have been depleted by US$15bn out of a total of US$30bn by the misdeeds of Prince Jefri. This strategy, however, runs the risk of drawing more complaints from those Bruneians who feel the government is not doing enough to help them out of their present economic plight. Thus the government will likely hold off on its highly publicised plans to cut subsidies for its citizens’ housing and medical care and to institute the country’s first income tax until the time when economic recovery seems imminent.

In August the deputy minister of finance, Selamat Munap, announced that Brunei would be establishing its own capital market. He stated that Brunei intended to issue government bonds of various maturities in both US dollars and Brunei dollars, which could be used as benchmark securities and for international and domestic interbank transactions. The bonds will be Islamic securities, issued in keeping with religious requirements. The creation of a capital market, it is hoped, will improve Brunei’s ability to attract international financial business, especially Islamic banking, to the new Brunei International Financial Centre (BIFC). While such financial infrastructure development is a crucial part of ensuring the BIFC’s success, Brunei still faces stiff competition from more established offshore financial centres, which will keep the BIFC’s growth slow over the next few years.

Brunei has held high hopes for tourism as it seeks to diversify its economy away from dependence on oil and gas revenue. The government has invested US$3m in promoting “Visit Brunei Year 2001” with the goal of attracting 1m foreign visitors to the sultanate, up from 600,000 visitors in 2000. Many tourism officials are confident that Brunei can reach its target for 2001, claiming that tour group arrivals have already doubled over 2000 figures. But

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

others have cautioned that despite the immediate boost Visit Brunei Year will bring to the struggling tourism industry, it will be years before tourism has a major impact on Brunei’s economy. Overinvestment in the industry in the 1990s left Brunei with a glut of hotel rooms, the occupancy rates of which now hover around 20-30%. Business travellers have also been slow to return to Brunei, given the depressed state of the domestic economy. Perhaps most importantly, efforts to improve the tourism industry are unlikely to be success- ful unless Brunei can shed its image as a staid, conservative country where alcohol and music performances are banned.

Economic growth Brunei’s economic growth will remain slow, with a 3% rise in GDP forecast for 2001. Despite the fact that Brunei has increased its rate of oil and gas pro- duction by 15-20% to take advantage of high prices, continued private-sector weakness will hold the economy back. While the new BIFC will boost the banking sector, the construction industry, traditionally Brunei’s third larget income generator, is likely to continue to contract as a result of the soft real estate market and low investor confidence. Consumers will also remain caut- ious in their spending, as the unemployment rate hovers at around 10%.

The political scene

Amedeo’s assets go up for Publicity surrounding Brunei’s royal family continued to pursue the media-shy auction sultanate. In keeping with an out-of-court settlement reached in the State of Brunei’s case against the Sultan’s brother, Prince Jefri Bolkiah, assets of the prince’s Amedeo Development Corporation went up for auction in August, attracting the attention of the local and international press.

Amedeo went bankrupt in 1998, leaving behind an estimated US$1bn in debt and a severely depleted national treasury, from which Prince Jefri had skimmed an estimated US$14.8bn to finance his corporation and his lavish lifestyle. The collapse of Amedeo, which during the 1990s was Brunei’s largest private-sector employer, pumping around B$3bn (US$1.7bn) in projects into the economy, is widely held to be responsible for most of Brunei’s current economic misfortune. The publicity surrounding the auction—which included goods such as gold-plated toilet-paper holders, fleets of luxury cars and fire engines— proved another embarrassment for the government, which has tried to downplay such reminders of the royal family’s wealth amid continuing economic stagnation.

A new degree of openness is Despite the government’s official silence on Prince Jefri’s affairs and the tend- increasingly unavoidable ency of Brunei’s press toward self-censorship, a new degree of openness about the inside working of the sultanate has emerged since the scandal. Brunei’s High Court docket is crowded with cases related to the collapse of Amedeo, at which high-placed public officials are expected to be called to testify about internal government matters previously kept secret. In July the government strongly denied reports published in the international media that the sultan’s son, Prince Azim, had given a pair of diamond-encrusted shoes worth US$250,000 as a gift to a British pop star. This new openness has, as the

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 36 Brunei

government feared, given rise to increasing critiques, with Brunei’s newspapers filled with letters to the editors questioning—albeit cautiously—government policies. As yet, however, these critiques have not erupted into overt dissent with the Sultanate.

A new audit committee is In July the sultan, Hassanal Bolkiah Mu’izzaddin, announced the formation of formed a new audit committee to counter corruption in Brunei’s government. In the wake of the Prince Jefri case, which charged the prince, who had held the positions of minister of finance and head of the Brunei Investment Agency, with appropriating US$14.8bn in state funds, government accountability has become a major concern among Bruneians. The sultan promised that the new committee would offer a better system of checks and balances, by monitoring the disbursement of government funds and ensuring that proper procedures are followed in delivering public services. The government has not, however, given any indication that it plans to deviate from its policy of absolute rule, with decision-making power located in the hands of a few officials hand- picked by the sultan.

“Islamicisation” policy is Brunei’s government has continued to call for a greater role for Islam in society still supported and government. In July the sultan announced that he had reorganised the Islamic Syari’ah courts and given them greater power to decide matters of family law and moral offences. He also announced the formation of a national committee on youth issues, which would address rising rates of unemploy- ment, crime and drug use through the dissemination of religious values. Strengthening the image of the sultanate as an Islamic monarchy has become increasingly important as the royal family faces charges in the international press of lavish spending habits and free use of state funds. Similarly, spreading religious orthodoxy among Brunei’s population has been perceived by the government as a way to ensure social order and control.

Economic policy and the economy

Growth in most industries Statistics released in August by the Ministry of Finance confirmed that most of is slow Brunei’s industries grew only slightly in 2000. Mining, quarrying and manufacturing, the largest category, grew by 3.3%. Community, social and personal services grew by 2.4%, backed primarily by government support for social services. However, the construction industry, the third largest sector, contracted by 4%. The transport and communications sector grew by 2.2%, as did the retail business sector and banking and finance.

The first half of 2001 has also shown similarly slow economic expansion. New car sales were up by 1% in the first half 2000, while retailers were reporting a slight increase in consumer spending overall. The banking sector has exper- ienced modest growth, with the Brunei International Financial Centre (BIFC) beginning operations and Standard Chartered Bank opening a new banking branch in Brunei.

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

Trends in the construction industry are, however, uncertain. Although several large private-sector-funded projects have broken ground, Brunei’s newspapers reported in June that the government-backed Housing Expo ’99 project seemed to have been quietly halted. The project was part of a package of economic stimulus programmes recommended by the Brunei Darussalam Economic Council to jump-start Brunei’s private sector. An English-language daily newspaper, Borneo Bulletin, reported that Ministry of Development officials were denying knowledge of the project’s suspension, but developers claimed that they had been advised by the government to stop work.

BIFC attracts some interest Brunei has laid more groundwork for its new BIFC, which was inaugurated in July 2000. The government has continued to update its antiquated regulatory framework, issuing new policies on foreign investment and tax relief to com- plement laws controlling financial transactions issued in 2000. The lack of clear-cut policies regarding investment and finance has been perceived as a major obstacle to Brunei’s goal of becoming an international financial centre, although Brunei’s reputation as a centre for Islamic orthodoxy is expected to help it tap the niche market for Islamic banking.

The Bahrain-based Islamic Development Bank Infrastructure Fund was the first international financial group to announce it would open an office in the BIFC. In August Brunei’s deputy minister of finance, Selamat Munap, announced that the BIFC had attracted its first mutual fund company, the Islamic Mutual Fund. Mr Munap also stated that the government was processing six other applications for international banking licences, including two from Islamic financial services firms. In June news reports stated that the Australia and New Zealand (ANZ) Banking Group was conducting talks with the Brunei government about the possibility of establishing a branch in Brunei devoted to Islamic banking. Mr Munap has also announced that talks have begun between the government and the University of Brunei Darussalam to establish an institute of finance to prepare Bruneians for careers in the field.

New foreign investment In July the government announced new regulations governing foreign invest- regulations announced ment and tax relief. The new policies were designed to address criticism of the vagueness of previous legislation and to lure new foreign investment by extending tax relief periods and expanding the definition of a pioneer industry eligible for special status. Five-year tax holidays will be offered to companies investing between B$500,000 and B$2.5m (US$200,000-1.44m) in approved ventures; eight-year tax holidays for investments over B$2.5m; and 11-year tax holidays if the business is located in a high-tech park. The government may also extend tax holidays up to 20 years on a case-by-case basis. A variety of businesses are eligible for pioneer industry status, including engineering, technical services, laboratories, research and development, information technology and computer-related services, education, medical and financial services. Attracting foreign investment to Brunei has been a key part of the strategy for reducing economic dependence on government spending.

An information technology In mid-July the sultan delivered a speech stressing the importance of council is formed information technology (IT) to Brunei, arguing that it could create job oppor-

EIU Country Report September 2001 © The Economist Intelligence Unit Limited 2001 38 Brunei

tunities for the unemployed and make Brunei more attractive to international business. He announced the formation of the Brunei Information Technology Council (BIT), which would be charged with creating plans for the develop- ment of IT in the country. He also announced the allocation of B$11m for computer education projects in Brunei’s public schools. The minister of communications, Zakaria Sulaiman, later elaborated on the BIT’s role, saying that its objective was to implement an electronic business community in Brunei by 2004. He acknowledged the low level of computer skills among Brunei’s population, and promised that one of the BIT’s priorities would be to carry out IT literacy campaigns. He also stated that the BIT would form an international advisory panel to assist government officials with their IT development efforts. Brunei has already installed a high-speed broadband network, Ragan 21, which was designed to bring Internet connectivity to communities across the country.

In late July Brunei announced that it had contracted a Malaysian firm, Sapura, to open a centre for electronic government in Brunei. Sapura will assist with the implementation of plans for a “paperless bureaucracy” in Brunei, which the government hopes will improve public-sector efficiency and raise the quality of the workforce by increasing the competence of Bruneians in computer technology.

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