Luster of 'Malaysian Miracle' begins to fade

Luster of 'Malaysian Miracle' begins to fade

By Bill Tarrant

KUALA LUMPUR (Reuter): The World Bank once referred to it as the "Malaysian Miracle" -- nearly a decade of 8 percent economic growth or better, with low inflation, little indebtedness, a strong currency and a surging stock market.

Malaysia was the toast of the emerging market crowd.

Foreign investment gushed into the stock market and a money market that offered high interest rates and a stable exchange rate.

Suddenly, in the wake of Thailand's financial crisis, it has all begun to look a little shaky.

The key Composite Index on the Kuala Lumpur Stock Exchange has lost some 25 percent over the past six months.

The ringgit has lost 13 percent against the U.S. dollar in the past month alone.

The Composite Index closed down 8.36 points, or 0.91 percent, to 910.18 last Friday.

Malaysian shares had been staging a shaky rebound until the ringgit fell to 2.8250 to the dollar, its weakest level since the currency was officially floated in 1973, before recovering to 2.7760 late last Friday.

Most analysts predict gross domestic product growth will dip below 8 percent this year for the first time since 1987. According to the average forecast in a Reuter poll of 12 research houses last week, Malaysian economic growth will be 7.9 percent in 1997 and 7.4 percent in 1998 against the government's projection of 8.2 percent.

"Most people are knocking down their numbers after recent developments," said Kevin Chew, economist at Caspian Securities. "The ringgit is weakening and the period of high interest rates is longer than what we have anticipated. This will curb domestic demand."

Almost no one is predicting that the six-month Malaysian bear market -- the longest in years -- will end soon. This is despite the fact that the average price/earnings ratio on the Kuala Lumpur Stock Exchange is around 13 times against an average in the 20s over the past several years.

In another Reuter poll last week of 10 research houses, the average forecast for the near-term resistance level in Malaysia's benchmark blue-chip index was 968. The index hit its year's high of 1278.94 in late February.

"There's been a big wealth impact," said an investment analyst with a foreign securities brokerage of the market sell-down. Noting that the market's capitalization was three times GDP earlier this year, he said: "A lot of wealth has been lost already and that will have a knock-on effect on the economy."

"You can say the market has been oversold but confidence has been shattered. It will take some time for a rebound."

The latest economic indicators present a bemusing picture of an economy that is either still showing lingering signs of overheating or coming to a screeching halt after nearly a decade of stunning growth, depending on which economist one talks to.

Loans growth and money supply figures remained high in June, despite tight monetary measures and lending curbs by the central bank, Bank Negara.

Loans growth in June rose to an annualized 30 percent from 29.5 percent in May. Broad money supply, or M3, rose 21.9 percent in June against 20.3 percent in May.

"The real side of the economy is slowing down," said Lum Chee Soon, chief economist at PhileAllied Securities in Kuala Lumpur. "The monetary side, as shown by M3 (broad money supply), is still strong."

"But we've got a negative growth effect from the stock market decline that should filter into economy in the form of slower consumption and investment," Lum said.

The central bank's lending curbs should start to bite in August and September, he added.

"I don't think people should take this (slowdown) negatively," Lum said. "A year ago people were saying the government should pare back because the economy was overheating. This is really a blessing in disguise."

The latest trade figures offered evidence of slower growth. Malaysia recorded a first half deficit of 2.7 billion ringit against a deficit of 688 million in the same period last year. Exports rose by only 1.9 percent.

For a country that relies on foreign trade for 90 percent of its GDP, a slowdown in exports is a big worry.

Malaysia embarked on its decade-long growth spurt after flinging its doors open to foreign investment, attracting more than $35 billion between 1990 and 1996 most of it in export- oriented manufacturing.

But the nearly 12 percent depreciation of the ringgit against the dollar over the past month should keep Malaysian exports competitive with its Southeast Asian neighbors, whose currencies have also depreciated, economists say.

Industrial production is continuing its double digit growth pattern, growing 12.2 percent year on year in June.

But with anemic export growth, some fear the excess production is piling up in the form of inventories. That could lead to factory shutdowns and layoffs if exports don't pick up. Lum said his research showed inventories are not increasing and the production is being exported -- just at lower prices.

"Exports are down in value terms, not volume. And with manufacturing volume still growing strongly, it means they are selling at low prices. Profit margins are being squeezed."

Some of Malaysia's problems have to do with confusion in the marketplace over economic policy.

Prime Minister Mahathir Mohamad has blamed U.S. fund manager George Soros for deliberately attacking the ringgit and other currencies in the Association of Southeast Asian Nations after Myanmar was admitted into the grouping.

He called currency speculators "rogues", "robbers" "anarchists" and "brigands" with a "political agenda" to "destroy all the progress we have made".

Mahathir hinted at darker forces at work when he told reporters last week: "They (speculators) are being backed by very powerful countries which think that destroying the economies of developing countries is great fun."

Last Friday, Mahathir said he was satisfied with the ringgit's level, saying the ringgit had not depreciated against the dollar as much as the German mark. He said the central bank would not intervene to prop up the currency.

The ringgit immediately lost another 2 percent against the dollar after his remarks.

Mahathir has made it clear on a number of occasions that Malaysia would continue a pro-growth policy in its ambitions to create a fully-developed industrialized economy over the next quarter-century, a policy he calls "Vision 2020".

Deputy Prime Minister Anwar Ibrahim said last week some big projects and big-ticket import items would be deferred.

Mahathir, whose hurry-up-and-grow-fast economic policy is hinged on a slew of infrastructure projects, said Malaysia would slow imports "but we will go on with these projects".

"The leaders have been contradicting each other. While one is saying projects will be deferred, the other says they will not be," said one analyst, who declined to be identified.

"The government is confusing people by saying too many things," said a dealer at a Malaysian brokerage. "There should be clarity when the markets are so volatile."

The central bank on the other hand, has maintained a high- interest rate regime with a tight monetary policy to contain overheating pressures in the economy.

Some economists have blamed the high interest rates on the poor performance of the stock market.

Malaysia's problems started shortly after Thailand's financial crisis, which was triggered by over-extended lending to a property sector whose asset bubble suddenly burst.

Foreign investors began pulling out of the Malaysian market fearing it was heading the same way as Thailand.

Most analysts agree that Malaysia has been unfairly tarred by Thailand's financial crisis.

Although Malaysia's total indebtedness is rising, it was only around 96 percent of nominal GDP last year compared with Thailand's 120 percent in 1995.

Malaysia is one of the least indebted countries in Asia, according to the Economist Intelligence Unit with total external debt expected to rise to $41 billion in 1997 from $38.3 billion last year.

Analysts say unlike Thailand, where banks borrowed heavily abroad to lend in the local market, Malaysia has done very little of that.