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.