Economic and Financial Developments in Malaysia

Economic and Financial Developments in Malaysia

The Malaysian economy expanded at a stronger pace in the
second quarter of 2002. Sustained strength in domestic demand and
a recovery in exports raised real GDP growth to 3.8 percent on an
annual basis, from 1.1 percent in the first quarter.

Consumption spending was broad-based across the country and
gained momentum as an important source of growth in the quarter.
Private consumption increased at a faster rate of 5.6 percent
(1Q: 3 percent). Higher real incomes from the expansionary fiscal
operations of the Government, the improvement in export volume
and higher commodity prices, low interest rates and the easier
access to financing provided a strong stimulus to private
consumption.

The important development in this quarter has been the
significant income effect from improved export volume and prices.

For the first time since the first quarter of 2001, exports
recorded a positive annual growth of 5.3 percent due to the
stronger growth in electronic exports and positive terms of trade
from higher prices for palm oil, rubber, cocoa and sawn logs. The
impact of higher commodity prices on rural income and consumption
has been significant. Public consumption was also higher by 15.4
percent on account of the salary adjustment for government
employees and added supplies and services associated with the
fiscal stimulus.

On the investment front, the decline in total gross fixed
capital formation moderated significantly to 2.1 percent in the
second quarter (1Q 2002: -8.5 percent). In the private sector,
companies continued to utilize the existing capacity to meet the
increase in demand, resulting in a higher capacity utilization.

The low interest rate environment and the fiscal incentives
have continued to provide support for investment in residential
construction. Investment was also sustained in oil and gas;
transportation; and retail and wholesale trade. Improvements were
also seen in the imports of capital goods and capacity
utilization rates. Investment by the public sector was higher,
based on the significant increase in development expenditure of
42.5 percent in the second quarter. About one-half of the
expenditure was for financing the development of social services,
such as education, health and housing.

The services sector continued to provide the main support for
GDP expansion. In the second quarter, growth was further
strengthened by a recovery in the manufacturing sector. Activity
in the manufacturing sector rebounded in the second quarter of
2002 to take the lead, with value added increasing by 5.6 percent
(1Q 2002: -2.3 percent), the first positive growth since the
first quarter of 2001. The improved performance was attributed to
a stronger expansion in output of the domestic -oriented
industries, due primarily to an upturn in the electronics
industry. With the improved performance, the overall capacity
utilization rate in the manufacturing sector increased to 82
percent in the second quarter (79 percent in the first quarter).

The output of the export-oriented industries as a group
rebounded to record a positive growth of 5.7 percent (1Q 2002:
-5.5 percent), with capacity utilization increasing to 82
percent. The turnaround was more pronounced in the electronics
industry. Depleting inventories, improving orders, including
higher demand for electronics in the Asia Pacific region saw
electronics output and exports rising sharply by 23.5 percent and
16.5 percent respectively (1Q 2002: -0.8 percent and 1.1 percent
respectively). The increase in output was strongest in the
integrated circuits product segment. This was partly due to the
transfer of production lines in Malaysia from the high cost
production centers as MNCs undertook corporate consolidation as
well as inventory rebuilding.

The construction sector registered a higher growth of 3.4
percent underpinned by underlying demand for affordable houses.
Higher Government construction spending on public projects also
contributed to higher activities in the sector.

Supported by the overall strengthening of demand conditions,
growth in the service sector was sustained at 4.5 percent (1Q:
4.4 percent). Of significance, the finance, insurance, real
estate and business services sub-sector expanded by 7.7 percent
(1Q: 8.7 percent). The favorable growth in this sector was
reflected in higher bank lending, especially for housing and
consumer durables, higher demand for insurance products and
improved performance in the Kuala Lumpur Stock Exchange. Growth
in the utilities sub-sector was also strong, attributed largely
to higher demand for electricity from the industrial and
commercial users. Stronger growth was recorded in the wholesale
and retail trade, hotels and restaurants sub-sector, supported
largely by higher consumer spending. The Consumer Price Index
(CPI), remained low at 1.9 percent compared to the second quarter
of 2001 (1.4 percent in the first quarter).

Reflecting stronger economic activities and external demand,
both exports and imports increased by 5.3 percent and 10 percent
respectively. The overall trade surplus remained large at RM9.7
billion despite the stronger increase of imports. All broad
categories of imports registered positive growth. The increased
in imports of intermediate goods by 6.9 percent is indicative of
orders beyond the second quarter. These imports were mainly for
the export-oriented electronics industry, where imported inputs
for this sub-sector increased by 23.5 percent.

Inflows of funds for investment were higher during the
quarter. The Cash BOP Reporting System of Bank Negara Malaysia
indicated that the gross inflows of FDI in the form of direct
equity and inter-company loans amounted to RM3.3 billion in the
second quarter. The bulk of the funds were channeled into the oil
and financial services sectors. Due to loan repayments by non-
resident controlled by companies, FDI on a net basis was RM0.5
billion.

The international reserves of Bank Negara Malaysia increased
further to RM129.9 billion (US$34.2 billion) as at 15 August
2002, RM5.4 billion (US41.4 billion) higher than the level as at
the end of the first quarter. Reserves growth has been primarily
from repatriation of export income and long-term investment
inflows, which have more adequately offset the periodic net
short-term outflows. Since end-2001, reserves rose by RM12.6
billion or US$3.3 billion. The reserve of RM129.9 billion is
adequate to finance 5.6 months or retained imports and is 5.1
times the short-term external debt.

Malaysia's external debt position improved in the second
quarter. The total external debt declined to RM176.1 billion
(US$46.4 billion) as at end-June compared with RM178.4 billion
(US$46.9 billion) at end-March. External debt to GNP ratio
improved to 54.4 percent. The improvement was attributable to the
decline in both short-term external debt as well as medium and
long-term external debt of the private sector, reflecting mainly
the prepayments and repayments of loans as part of corporate debt
restructuring.

Since the last quarter the Corporate Debt Restructuring
Committee (CDRC) has completed an additional four restructuring
cases and discharged two cases. Another case is still pending
lenders' approval and would be monitored by Danaharta. The
closure of CDRC was effective on 15 August 2002, after
successfully resolving 47 cases or 98 percent of the number of
cases accepted with total debts amounting to RM43.97 billion. The
recovery profile of the resolved cases has shown that 83 percent
of the recovery proceeds were in the form of cash, redeemable
instruments and rescheduled debts.

Prospects for the Malaysian economy remain favorable. In the
second half-year, growth is expected to be supported by continued
expansion in domestic and external demand. On the domestic front,
the composite index of leading indicators registered the eleventh
consecutive positive growth in May, suggesting that the Malaysian
economy is in its expansion phase.

During the period March to April 2002, four international
credit rating agencies, namely Standard and Poor's, Moody's
Investors Service, Fitch Ratings and Rating and Investment Inc.
revised Malaysia's sovereign ratings outlook from 'stable' to
'positive'. Overall, these agencies attributed the positive
revision to the country's strengthening financial sector,
accelerated corporate restructuring activity, continuing large
current account surplus, robust international reserves and
liquidity and broad economic soundness.

On 7 August 2002, Fitch Ratings upgraded Malaysia's long-term
foreign and local currency ratings by single notches to 'BBB+"
from 'BBB' and 'A' from 'A-", respectively, with a 'stable'
ratings outlook. On 20 August 2002, S&P raised Malaysia's long-
term foreign and local currency ratings by single notches to
'BBB+' from "BBB' and 'A+' from 'A', respectively, with 'stable'
ratings outlook.

(Edited from Bank Negara Malaysia's Second Quarter Report)