Complete cure for Malaysia still in doubt

Complete cure for Malaysia still in doubt

By Ken Stier

KUALA LUMPUR (DPA): While Malaysia seems well and truly on its way to rebounding from its worst-ever recession, local analysts say there are still some serious doubts about the long-term vitality of the economy.

The question marks are mostly linked to the controversial capital controls the country resorted to last September and how well Malaysia has used the breathing space they provided to reform for a more competitive future, the analysts said.

Nor is Malaysia completely out of the woods when it comes to the potential problem of capital flight -- the very threat the controls were meant to address in the first place.

"Until all the crisis-induced controls are lifted, and domestic and foreign investors have the freedom to re-allocate their capital as they wish, it will not be possible to ascertain the true degree of market confidence in the recovery and long- term growth prospects of the Malaysian economy," argued Dr. Linda Lim, a U.S. business school professor in recent U.S. congressional testimony about Malaysia.

But in the shorter-term, many economic indicators are encouraging.

While the government is sticking to its earlier prediction of about 1 percent growth this year, some foreign investment houses have projected much more optimistic scenarios.

The ABN-AMRO bank has predicted 2.0 percent Growth Domestic Product (GDP) growth this year, while SG Securities revived an earlier forecast of 2.5 percent growth to 3.1 percent in late June.

Perhaps most optimistic is Credit Suisse First Boston which is forecasting that real GDP growth of 3.9 percent this year.

The bullish readings are based on an upturn in the manufacturing sector -- which accounts for just less than one- third of the country's output.

This help triggered a spurt of 15 percent in exports in April, largely electronic goods benefiting from strong U.S. demand and a stable and under-valued ringgit.

Weak domestic demand has been a concern but the most recent government figures show a slight increase in imports and a bump in housing and Proton car purchases.

This has been eased by a modest increase in domestic bank lending -- averaging 6.9 billion ringgit (US$1.8 billion) per month in the first four months -- up from the 5.2 billion ringgit average in 1998.

"The latest data clearly shows the economy steadily recovering," says Khatina Nawawi, an economist with SG Securities in Kuala Lumpur.

Other positive indicators are mounting foreign exchange reserves -- now $31 billion or about six months' worth of imports -- and a stock market that has recovered more than 45 percent since the beginning of the year.

Low inflation -- expected to be about 3.0 percent for the year -- may allow already low interest rates to drop even lower.

Still, there are some rocky spots ahead. Non-performing loans -- roughly 15 percent of all Malaysian bank assets -- are still climbing, although there are some indications these are peaking.

Foreign direct investment has also been sluggish to return to Malaysia. Roughly $800 million in portfolio investment has come into the country this year, First Finance Minister Daim Zainuddin has told reporters, but it is unclear if this is "hot money" that will leave after short-term gains.

A frequent criticism of the government is the fact that no prominent Malaysian has been punished for the pre-crisis excesses, which P.K Basu, an analyst with Credit Suisse First Boston says "could undermine the credibility of Danaharta's good work," referring to the government entity charged with taking over bad loans.

A similar concern was raised by Jorgen Bornhoft, of Carlsberg Brewery (Malaysia) Berhad, in a recent speech he made as outgoing president of the Malaysian International Chamber of Commerce and Industry.

"The world's perception of Malaysia has deteriorated significantly in the context of corruption and cronyism (and) it is essential that Malaysia should be seen by the world to be doing something about it," he said.

But those concerns are likely to be raised by the government's recent decision to suspend open bidding for a whole range of government deficit spending on infrastructure worth some $2 billion.

Among the political opposition there is the strong suspicion that government-controlled funds are being used to boost the stock market.

Government officials are quick to claim that the rise in the stock market is a sure sign that the recovery is gathering momentum.

"I would argue that the relationship between the stock market boom and the real economy is very tenuous," counters K.S. Jomo, a Malaysian economist and government critic.

He says the ruling coalition has a history of ramping the stock market ahead of elections to drum up political support and to buttress the parties' electoral war chest.