KL says economy is on the rise

KL says economy is on the rise

By Ranjan Roy

KUALA LUMPUR (AP): The good times are back -- or so the Malaysian government says.

Shopping malls were crammed with people jostling to buy gifts for the Islamic holiday of Ramadhan and then for the Chinese New Year, and more people are buying houses and cars.

As 1999 began, developers sold homes worth a total of US$1 billion, thawing the real estate market, which had been frozen for more than a year. The benchmark stock index hit a nine-month high in January.

The national car maker, Proton, boasted it outstripped records by selling 10,176 cars in December, the highest ever for one month.

Surprising signs for this Southeast Asian nation, which recently slipped into its worst recession in a decade, dragged down by the turmoil that battered neighboring economies.

Prime Minister Mahathir Mohamad, who turned his back on Western prescriptions for mending the economy, is forecasting growth of at least 1 percent this year. The economy shrank an estimated 6 percent last year.

In predicting the revival, Mahathir says he has been vindicated in rejecting austerity policies, including high interest rates, promoted by the International Monetary Fund (IMF).

But some independent analysts say the government is merely creating a period of euphoria that will delay a sound recovery. Unemployment remains high, and inflation is picking up.

After financial turbulence buffeted Asia, Thailand, Indonesia and South Korea were forced to seek bailouts totaling more than $100 billion from the IMF. In exchange, they pledged to raise interest rates to bolster weakened currencies, pare government spending and repair damaged banking systems.

But Mahathir pulled down interest rates and injected money into the market by borrowing from pension reserves to help sick Malay-owned companies.

He also imposed sweeping capital controls in an effort to prevent the kind of investor flight that wreaked havoc in other Asian nations. The controls locked in portfolio capital of $10 billion.

"Lowering interest rates may have avoided an imminent collapse," said Pierre Ellis, senior international economist at Primark Decision Economics, a New York-based research company.

"But the ultimate strong recovery may be farther away," he said, because foreign investors, critical to Malaysia's growth prospects, have been scared away by the capital controls.

The unpredictability of economic policy and Mahathir's anti- IMF stance "gets translated to a general hostility toward foreign investors," Ellis said.

But at home, many people share the government's optimism.

"Events of recent months have diminished many of our earlier concerns," said Yeoh Keat Seng, chief researcher for Merrill Lynch in Malaysia.

The upbeat feeling was echoed by a businessman shopping for designer shirts at Sogo, a pricey department store.

"Yes, definitely there is a sense now that salaries will be stable and people won't lose their jobs," said Lau Sak Kee.

But he said his trading company, which imports household goods from Japan, was still posting losses, like most local corporations.

Amy Lew, a part-time worker at an export house, also was optimistic. "Prices are high for imported goods, but unlike last year, I feel I can spend a little more," she said.

Local brokerages are optimistic foreign investors may be attracted to the country after the government recently eased capital controls. Investors will be allowed to take funds out of Malaysian markets after less than a year but will have to pay an exit tax.

Problems remain daunting.

Industrial production is sagging, and the unemployment rate is almost double that of 1997, when 2.6 percent of the country's work force of nine million didn't have jobs. In November, food prices were up nearly nine percent from a year earlier.

Foreign investors are skittish about the country's political stability. Unprecedented demonstrations broke out in September after Mahathir fired his popular deputy and finance minister, Anwar Ibrahim.

Anwar, who favored IMF-like economic remedies and called for more government transparency and less cronyism, is on trial for alleged corruption and illegal sex acts. He denies the charges and says they were fabricated to undermine his challenge to Mahathir.