Malaysia's economic policy questioned<\/p>\n
By Sabyasachi Mitra<\/p>\n
KUALA LUMPUR (Reuters): Malaysia's short-term growth prospects
\nare glowing now, but some analysts worry it may lag behind
\ncompeting Asian economies in the long term unless it pursues
\ndeeper, more painful microeconomic reforms.<\/p>\n
Investors are being put off by a fixed ringgit exchange rate,
\nslow corporate reforms, stalled privatisations and perceived
\ncronyism, the analysts say.<\/p>\n
There is also a perception among analysts that the authorities
\nare sitting too comfortably on the laurels of a strong economic
\nrebound.<\/p>\n
Before the economic crisis of 1997-1998, Malaysia was seen as
\na progressive reformer ahead of its southeast Asian neighbors and
\nwalking in step with South Korea and Taiwan.<\/p>\n
"But after the crisis it has fallen behind in reforms even
\ncompared to some of its neighbors," said Eddie Lee, economist at
\nVickers Ballas. "It must act fast as it still has time on its
\nside".<\/p>\n
"Malaysia is doing quite well and it's only second to South
\nKorea in terms of growth rate," he added.<\/p>\n
Malaysia's gross domestic product (GDP) expanded by 8.8
\npercent year-on-year in the second quarter, higher than
\nSingapore's 8.0 percent, Taiwan's 5.43 percent and Indonesia's
\n4.13 percent in the same period.<\/p>\n
But South Korea grew at a torrid pace of 9.6 percent year-on-
\nyear in the April-June quarter.<\/p>\n
Malaysia's central Bank Negara says that full year growth,
\nfueled by strong exports and private consumption, will be
\nsignificantly higher than the official forecast of 5.8 percent.<\/p>\n
A latest Reuters poll of 10 research houses estimated
\nMalaysia's GDP to rise by 9.2 percent during the year and
\nmoderate to 6.2 percent in 2001.<\/p>\n
"What we are seeing in Malaysia is a cyclical recovery and
\nvery little of structural recovery," said Bhanu Baweja, regional
\neconomist at IDEAglobal.com.<\/p>\n
"It is countries like Taiwan, Hong Kong, China and Korea which
\nare attracting more foreign investment than Malaysia because of
\ntheir policies," Baweja said.<\/p>\n
Foreign investment applications in Malaysia recovered sharply
\nin June and July after stuttering in the first five months. But
\nthe quantum of investment is still below the pre-crisis levels.<\/p>\n
"It's not risks. It's a case of missed opportunities," said
\nChia Woon Khien, chief analyst at SEB Merchant Banking.<\/p>\n
Malaysia's strong economic fundamentals offered the government
\na window of opportunity to push ahead with painful micro economic
\nreforms, mainly in corporate and financial sectors and, move to a
\nhigher growth trajectory in the long-run.<\/p>\n
Analysts say the debt overhang in the corporate sector is
\nstill high and many firms have been postponing a clean-up by just
\nrolling over the loans.<\/p>\n
Aviation firm Naluri Bhd, which owns 29 percent of national
\ncarrier Malaysian Airline System Bhd, in May deferred re-payment
\nof 1.0 billion ringgit in debts and extended the maturity period
\nfor some of the debts for five years.<\/p>\n
"The government intervention is too high and it is there even
\nat the company level," said an economist at an investment bank.<\/p>\n
State-investment arm Khazanah Nasional in July extended a
\nlifeline to debt-laden telecommunication firm, Time Engineering
\nBhd, by buying up to 30 percent of Time's telecoms unit.<\/p>\n
In May, Time broke off talks to sell a stake to Singapore
\nTelecommunications, the island nation's largest listed company, a
\nmove which some say could choke off vital technology and funds to
\nthe telco firm.<\/p>\n
While governments across the region are relaxing their control
\nover industry, Malaysia is tightening its grip and rescuing debt-
\nladen firms.<\/p>\n
"The peg is symptomatic of the inertia that has crept in the
\nsystem," Eddie said. "All the original reasons for the peg have
\ndisappeared".<\/p>\n
Analysts say Malaysia's strong economic fundamentals gives it
\nthe flexibility to relax its controversial two-year-old fixed
\nexchange rate to boost investor confidence.<\/p>\n
The absence of a clear roadmap on the peg could drive
\ninvestors to other competing regional economies.<\/p>\n
But the central bank, which estimates the peg is undervalued
\nby between three to four percent, says the peg will stay for a
\nlong, long time and has showed no inclination to re-think it.<\/p>\n
Analysts have called for an open debate saying the benefits of
\nthe peg will soon start to fade and it's time to take a re-look
\nat the exchange rate policy.<\/p>\n
Malaysia pegged its currency at 3.8 units per U.S. dollar in
\nSeptember 1998 during the regional economic crisis and imposed
\ncapital controls to stem the outflow of short-term capital.<\/p>",
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