Foreign investors pull out of Malaysia in droves

Foreign investors pull out of Malaysia in droves

By Madhav Reddy

KUALA LUMPUR (Reuter): After nine years of eight percent or
more growth, the Malaysian economy was everybody's favorite at
the start of 1997, a darling among emerging markets and for many
good reasons.

Bowing to international concerns, the country had slowed
growth to 8.2 percent in 1996 from a peak of 9.5 percent in 1995,
narrowed the current account deficit to five percent of gross
domestic product from over eight and kept inflation in check
below four percent.

But the honeymoon did not last beyond the first quarter.
Foreign investors began pulling out due to a series of policy
moves since March perceived as ill-timed, a sharp fall of the
ringgit over the last one month and some distressing economic
data in the past week.

Analysts say what started as a trickle in April has turned
into a veritable exodus of foreign investors.

Some economists believe there are serious underlying problems
in the economy, that it is showing strain after the long years of
fast growth.

"We believe Malaysia is entering a phase of structural
adjustment," said an economist at a Singapore-based U.S. research
house.

"High wage growth, labor shortages and the current currency
crisis are making the economy less competitive. And it has not
moved fast enough up the technology ladder," he said.

"While industries are moving out to lower cost production
centers like China, higher technology has not yet replaced them,"
the economist said.

He said while these were not immediate concerns, and the
economy would continue to grow at a very strong pace this year,
the problems would show up in the next couple of years.

But, some others say the problems are temporary and result
from a regional currency crisis. The ringgit has fallen nearly
eight percent to 2.70 to a dollar against 2.50 a month ago.

"Malaysia's economy is under a scrutiny like never before,"
said an economist with a European research house in Singapore.

He said the perception of even "genuine foreign investors has
been so shaken that every small event is being exaggerated and
projected as a long-term trend."

Economists said that the economic data released in the last
week has served to reinforce the view that there may be
overheating in the economy.

They said the concern about the economy followed Malaysia's
surprisingly high loans and monetary growth figures for June,
despite steps by the central bank, Bank Negara, to curb them.

Bank Negara announced last Wednesday that broad money supply,
or M3, grew by 21.9 percent year-on-year in June against 20.3
percent in May and 22.9 percent in the same month last year.
Loans growth in June rose to an annualized 30 percent from 29.5
percent at the end of May.

"The numbers helped fuse a change in views on Malaysia," said
Philip Wee, regional treasury economist at Standard Chartered
Bank in Singapore. "The focus has shifted to overheating of the
economy."

An unexpectedly large trade deficit for June and a weak stock
market added fresh pressure on the beleaguered ringgit.

Malaysia on Monday reported a trade deficit of 2.8 billion
ringgit ($1.04 billion) for June after a surplus of 156.2 million
ringgit in May.

Capital control measures, introduced by the central bank last
week to cool speculation in the ringgit and push down interest
rates, have rattled the stock market, driving down the benchmark
index more than seven percent last week.

But analysts said the curbs, which followed stinging verbal
attacks on speculators by Prime Minister Mahathir Mohamad, have
not helped the ringgit much and are unlikely to prevent further
gains in the dollar.

"The focus has now moved from the region to Malaysia due to
its domestic factors," said Wee of Standard Chartered Bank.

"The economy is growing at a stronger rate than what the
authorities want to see, and this is worrisome," he said.