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.