COUNTRY REPORT Malaysia Brunei At a glance: 2001-02 OVERVIEW Malaysia's ruling coalition, the Barisan Nasional (BN), suffered a defeat in a by-election in late November in Kedah state, which was directly attributable to the unpopularity of the prime minister, Dr Mahathir. The leadership of the United Malays National Organisation (UMNO), the dominant party in the BN, continues to resist grassroots pressure for reform, which could weaken the position of the prime minister. Key changes from last month Political outlook • The by-election defeat of the BN in late November in Kedah, while having no serious immediate impact on national politics, shows the deep unpopularity of Dr Mahathir. The leadership of UMNO has rejected mounting popular pressure for greater democracy both within and beyond the party. Such inflexibility could weaken the position of the prime minister. Economic policy outlook • The Bank Negara Malaysia, Malaysia's central bank, is likely to raise interest rates in the second half of next year as inflation gets close to the 3% limit set by policy makers. Economic forecast • US economic slowdown and South-east Asia's reduced attractiveness to foreign investors because of political uncertainty are likely to affect Malaysia's growth by the second half of 2001 and even more so in 2002. While have kept our expectations for GDP growth in 2001 unchanged at 7.3%, we have lowered our forecast for growth in 2002 from 7.9% to 6.7%. December 2000 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. 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ISSN 0269-6703 Symbols for tables “n/a” means not available; “–” means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK 1 Contents 3 Summary Malaysia 5 Political structure 6 Economic structure 6 Economic indicators 7 Quarterly indicators 8 Outlook for 2001-02 8 Political outlook 9 Economic policy outlook 11 Economic forecast 13 The political scene 18 Economic policy 23 The domestic economy 23 Economic trends 25 Oil and gas 27 Manufacturing 32 Agriculture 33 Infrastructure 35 Financial and other services 38 Foreign trade and payments Brunei 40 Political structure 41 Economic structure 41 Annual indicators 41 Quarterly indicators 42 Outlook for 2001-02 43 The political scene 45 Economic policy and the economy EIU Country Report December 2000 © The Economist Intelligence Unit Limited 2000 2 List of tables 11 Malaysia: international assumptions summary 12 Malaysia: forecast summary 19 Malaysia: federal government budgetary position 23 Malaysia: real gross domestic product 39 Malaysia: current account List of figures 10 Malaysia: money supply, M2 13 Malaysia: gross domestic product 13 Malaysia: Malaysian dollar real exchange rate 24 Malaysia: quarterly gross domestic product 25 Malaysia: consumer and producer prices 27 Malaysia: output of the construction industry 28 Malaysia: industrial and manufacturing production 31 Malaysia: sales of passenger cars 36 Malaysia: non-performing loans EIU Country Report 4th quarter 2000 © The Economist Intelligence Unit Limited 2000 3 Summary December 2000 Malaysia Outlook for 2001-02 Malaysia’s political crisis looks likely to get worse during the next two years as the prime minister, Mahathir Mohamad, continues to resist pressure for greater democracy from within and beyond the ruling Barisan nasional (BN) coalition. The opposition Parti Islam sa-Malaysia (PAS) has continued to gain popularity. There are signs of growing divisions within Dr Mahathir’s party, the United Malays National Organisation (UMNO), and the BN, but the opposition is probably only united in their desire to see Dr Mahathir ousted. Since the previous Country Report, we have kept our real GDP forecast for 2000 and 2001 unchanged at 8.6% and 7.3% respectively but, aware that slower US growth and political uncertainty will have a growing impact, lowered the forecast for 2002 from 7.9% to 6.7%. The political scene A November by-election defeat in Kedah state was a major setback for Dr Mahathir. Reform proposals from the UMNO grassroots have been rejected by the UMNO leadership. UMNO has stressed the defence of ethnic Malay rights and pushed for a more Islamic agenda, while trying to cast the opposition PAS as intolerant. The government has cut the revenues of PAS-controlled Terengganu state. The police have cracked down on opposition demonstrations and there has been public outrage over police brutality. Economic policy The 2001 budget has reiterated the government’s faith in expansionary policies. A budget deficit of 4.9% of GNP is forecast for 2001. There has been no cut corporate income tax but many incentives to boost a “knowledge economy”. Proposals to revise the National Development Policy are proving highly controversial. Mahathir has stamped on calls to abolish Malay privileges. The domestic economy Oil price rises have boosted export earnings. Petrol retail prices have been raised to check a surge in subsidies. Manufacturing production is set to growth by 17% this year. Electronics and electricals will retain a leading role in the economy. Output growth has slowed less than expected. The electronics industry is moving slowly upmarket. Malaysia’s relatively high labour costs have led to downsizing. Automation is keeping demand for labour down. Multinationals are playing a crucial role in the strong value-added growth in the electronics sector. Wafer-fabrication is to begin in Malaysia. Proton still has not found a strategic partner. Agricultural output will remain almost unchanged this year. Crude palm oil export tax has been temporarily lifted. Rubber production is likely to decline by 8.9% in 2000, while cocoa production is forecast to increase by 5.2% and sawn logs output to rise by 1.2%. Lending growth has remained slow. The bank merger programme continues to keep banks preoccupied. State-owned Bank of China has been allowed to re-open in Malaysia. EIU Country Report December 2000 © The Economist Intelligence Unit Limited 2000 4 Foreign trade and Substantial, but smaller, trade surpluses will continue as surging oil prices boost payments export values. Exports of electricals have grown faster than electronics. The services balance improved in the second quarter. The government is resisting another WTO round of negotiations. Brunei Outlook for 2001-02 Brunei politics will continue to be dominated by economic concerns. The official economic growth estimate for 2000 has been raised from 3% to 3.5%. Economic restructuring is to continue. The regulatory environment has been modernised, clearing a major hurdle on the path to becoming an international financial centre, with an emphasis on the provision of Islamic financial services. The political scene Malay ethnic nationalism is on the rise in Brunei. The APEC summit meetings have brought mixed reviews for Brunei. The policing of morality and religion has been stepped up in the wake of the BIA scandal. Economic policy and the Brunei’s oil and gas revenues have hit record highs. There has been no news of economy the promised civil service and welfare cuts. The private sector remains in a slump. Local confidence in the economy has waned. The APEC meetings have been a boost for Brunei tourism. Brunei signed new trade pacts at APEC meetings.