Malaysia rebounds from crisis but pitfalls seen

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."