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.