Malaysia rebounds from crisis but pitfalls seen

By M. Jegathesan

KUALA LUMPUR (AFP): Malaysia has rebounded impressively from the Asian economic slump but analysts say there is no room for complacency.

They generally agree the near-term outlook is rosy but say policymakers must hold inflation in check and make the economy more competitive to meet the challenges of liberalization.

Central bank governor Ali Abul Hassan Sulaiman, who himself warned against complacency, last week predicted the economy may grow even faster than the official 5.8 percent forecast for this year.

"Malaysia's economy has lots of potential to grow higher," he said when presenting the bank's upbeat annual report, which said domestic demand would replace exports as the main driver of growth this year.

"Amidst the euphoria of recovery one must not forget the lessons of the 'boom and bust' of the 1990s," wrote Mohamad Haflah Piei of the Malaysian Institute of Economic Research in last Saturday's New Straits Times.

"Many critical and probing questions still need to be addressed."

He cited similarities between then and now -- a perception that the ringgit is undervalued, increasing liquidity partly due to an inflow of foreign exchange earnings and portfolio funds, and an undervalued stock and property market.

In the 1990s, he wrote, an economy growing unsustainable fast resulted in overheating and bottlenecks. Poor corporate governance and a lack of accountability also contributed to economic crisis.

"Malaysia must not repeat the same mistakes," Mohamad Haflah wrote. He called for concerted efforts to expand "production frontiers" through greater productivity and/or technological change, rather than a push for runaway growth.

Export competitiveness must be improved to avoid over-reliance on an undervalued ringgit, he wrote.

Malaysia fixed the ringgit's value at 3.80 to the dollar as part of selective capital controls imposed in September 1998.

Sani Hamid, analyst with Singapore-based Standard and Poor's MMS International, told AFP that imported inflation due to high oil prices could be a threat.

Growth could also be stymied by a slowdown in the U.S. economy and a consequent downturn in Malaysia's electronics sector, Sani warned.

Bank Negara in its report said the main area of vulnerability for the region would be a downturn in the U.S. economy following a sharp correction in its stock market.

Sani also said that when the economy achieves full capacity in 2001, "domestic-created inflation" could arise. "Then comes the question how high and how quickly the central bank will adjust interest rates."

He said the central bank's task this year was to monitor liquidity since excess liquidity means inflation.

The bank forecasts inflation will rise to 3.2 percent this year from 2.8 percent last year. Ali Abul said it would try to keep the rate between three and four percent.

Eddie Lee, economist with Singapore-based Vickers Ballas, said Malaysia must position itself in Asia amid rapid technological changes and liberalization.

"Liberalization needs to be speeded up. It could affect long- term growth potential."

Referring to the central bank's announcement of a 10-year masterplan for bank reform, Lee said: "In this new era, 10 years is a long period."

Since the economy has improved, Malaysia should address the issue of the ringgit peg quickly. "The reasons in favor of the peg are diminishing rapidly."

If foreign direct investment remains lackluster in the second half of this year, Lee said, this could also hurt growth.

Jason Chong, Merrill Lynch's country head of research, said the central bank has adopted a loose monetary policy to spur growth. But the flip side was that inflation could set in towards the end of the year to next year.

Depending on the cause of the inflation the bank could either raise deposit rates or re-peg the ringgit, he said.

Chong said another challenge is for Malaysia to remain internationally competitive in the medium to long-term.

"But we think for the next six months to nine months the economic climate will remain rosy and conducive for the stock market."