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COUNTRY REPORT

Malaysia

Brunei

June 2001

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Malaysia at a glance: 2001-02OVERVIEWResponding to criticism from within his own party, the United MalaysNational Organisation (UMNO), the prime minister, Mahathir Mohamad,has embarked on a drive against corruption. The principal casualty has beenthe finance minister and UMNO treasurer, Daim Zainuddin. The purge isprimarily designed to safeguard Dr Mahathir’s own position within UMNO.The outlook for the Malaysian economy this year remains bleak and littleimprovement is likely in the near term. The EIU has cut its real GDP growthforecasts for 2001 and 2002.

Key changes from last monthPolitical outlook• Dr Mahathir’s determination to fight corruption within UMNO is inspired

by the need to strengthen his own position in the face of growinggrassroots criticism. The removal of major party political figures couldprove destabilising, possibly leading to further accusations and revelationsof scandals.

Economic policy outlook• The Bank Negara Malaysia (the central bank) is likely to cut interest rates

in the second half of 2001 if, as we expect, the economy continues tostagnate. Additional measures to stimulate the economy can be expectedin the October budget.

Economic forecast• We have lowered our real GDP growth forecast for 2001 to 3.1% from our

previous forecast of 4.6%; and for 2002 to 5.2% from 6.7%. Consumerprice inflation is now expected to average 1.6% this year, compared with1.8% previously.

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ISSN 0269-6703

Symbols for tables“n/a” means not available; “–” means not applicable

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1

EIU Country Report June 2001 © The Economist Intelligence Unit Limited 2001

Contents

3 Summary

Malaysia

5 Political structure

6 Economic structure

6 Annual indicators

7 Quarterly indicators

8 Outlook for 2001-02

8 Political outlook

9 Economic policy outlook

10 Economic forecast

14 The political scene

18 Economic policy

21 The domestic economy

21 Economic trends

23 Manufacturing

24 Oil and gas

25 Agriculture

27 Infrastructure

29 Financial and other services

30 Foreign trade and payments

Brunei

31 Political structure

32 Economic structure

32 Annual indicators

32 Quarterly indicators

33 Outlook for 2001-02

34 The political scene

36 Economic policy and the economy

2


List of tables

11 Malaysia: international assumptions summary

12 Malaysia: forecast summary

13 Malaysia: gross domestic product by expenditure

21 Malaysia: real gross domestic product

List of figures

13 Malaysia: gross domestic product

13 Malaysia: Malaysian dollar real exchange rates

22 Malaysia: exports of electronics and electrical goods

23 Malaysia: manufacturing production26 Malaysia: palm oil production and prices

3


Summary

June 2001

Malaysia

The veteran prime minister, Mahathir Mohamad, has responded to criticismfrom within the United Malays National Organisation (UMNO), the dominantparty in the ruling Barisan Nasional (BN) coalition, with a drive againstcorruption. The purge is primarily designed to safeguard Dr Mahathir’s ownposition within UMNO. There is a strong sense throughout the party that the75-year-old prime minister has become its biggest liability. Without animprovement in Malaysia’s near-term economic prospects in sight, we havefurther reduced our real GDP growth forecast for 2001 to 3.1% from 4.6%previously and cut the forecast for 2002 to 5.2% from 6.7%.

Dr Mahathir’s campaign against corruption in UMNO has seen the resignationof the finance minister and UMNO treasurer, Daim Zainuddin, while theparty’s secretary-general, Khalil Yacoob, is also being investigated. The secondlargest party within the BN, the Malaysian Chinese Association (MCA), hasbought two Chinese newspapers that have been critical of the MCA leadership.Ten prominent opposition politicians, mostly from the Parti Keadilan Nasional(PKN), have been arrested. Two of the detainees have been released on theorders of a High Court judge who criticised the use of the Internal Security Act(ISA). The Malaysian Human Rights Commission has called for a review of theISA. The Malaysian Trade Union Congress (MTUC) has complained about thepoor performance of the state pension fund, which has been used by thegovernment for bail-outs of government-linked companies.

Bank Negara (BN, the central bank) said that the government would aim for5-6% real GDP growth this year, after 8.5% in 2000. To bolster the economy’sflagging momentum, the government unveiled a stimulus package onMarch 27th. The Third Outline Perspective Plan (OPP3) anticipates real GDPgrowth averaging 7.5% a year over the next decade, up from the average of 7%recorded in 1991-2000. BN has continued to defend the fixed exchange rateagainst growing calls from business for a devaluation. Share prices haveremained depressed, reflecting the poor economic outlook as well as concernsabout the persistence of government bail-outs for troubled companies.

Real GDP growth slowed to 3.2% year on year in January-March, comparedwith a year-on-year increase of 6.3% in the fourth quarter of 2000. The primarysector and government spending boosted first-quarter growth. Non-performingloans (NPLs) are rising once again. The manufacturing sector, which raisedproduction by 25% last year, is being hit by the slowdown in the US economy.The electronics industry in particular is under pressure. Production of crude oiland gas rose in the first quarter. Unrest in the Indonesian province of Aceh isboosting liquefied natural gas (LNG) sales by the state-run corporation,

Outlook 2001-02

The political scene

Economic policy

The domestic economy

4


Petronas, to Japan and South Korea. The production of crude palm oil slowedlast year and prices have remained depressed. The government has postponed adecision on whether to increase electricity tariffs. Loan growth slowed duringthe first quarter after a pick-up at the end of last year.

Export growth slowed further during the first quarter and the trade surplusdeclined. The current-account surplus stood at M$7.6bn (US$2bn) in October-December, a slight increase compared with the preceding three months.

Brunei

Real GDP growth is likely to reach only 3% this year, notwithstanding the factthat crude oil prices are expected to be relatively firm. The continuedweakness of the private sector has led the government to scale back itsprivatisation plans. The government will continue its drive to attract foreigninvestment, especially in the financial sector and tourism. Brunei willcontinue to attract unwanted attention as the courts deal with the failure ofPrince Jefri’s Amedeo conglomerate.

The return of Prince Jefri, charged with misappropriating US$14.8bn from theBrunei Investment Agency, to Brunei has opened a new chapter in the long-running scandal. The failure of his Amedeo company has led to a spate oflawsuits around the globe. The court cases are likely to lead to unwelcomerevelations and criticism. In part to counteract this, the sultanate is promotingits orthodox Islamic image. Brunei’s only political party has announced that itwill admit ethnic Chinese members.

The repatriation of Filipino guest workers has ended Brunei’s longest andlargest strike. Brunei’s private sector continues to stagnate and unemploymentis increasing. New food regulations have attracted domestic criticism.Government regulations will require firms operating in the financial servicessector to be licensed. Brunei has signed a multilateral “open skies” agreement.Brunei has joined a forum of gas-exporting countries.

Editors: Frans Jonkers (editor); Graham Richardson (consulting editor)Editorial closing date: June 18th 2001

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2001-02

The political scene

Economic policy and theeconomy

Foreign trade andpayments

Malaysia 5


Malaysia

Political structure

Federation of Malaysia

Federated constitutional monarchy

The king appoints a prime minister and, on the prime minister’s advice, a cabinet

The Yang di-Pertuan Agong (king or supreme sovereign) elected by the Conference ofRulers from one of the nine hereditary rulers

Bicameral federal parliament. The Senate (Dewan Negara) has 70 members, 30 of whomare elected from the state legislatures and 40 appointed by the king. The House ofRepresentatives (Dewan Rakyat) has 193 directly elected members. The Senate serves asix-year term of office and the House of Representatives a five-year term

There are state governments in each of the 13 states, in nine of which the head of state is ahereditary ruler. Each state has its own constitution, a council of state, or cabinet, withexecutive authority and a legislature that deals with matters not reserved for the federalparliament. There are also three federal territories, Kuala Lumpur, Labuan, and Putrajaya

November 29th 1999; the next election is due by January 2005

The Barisan Nasional (BN), the governing coalition—the main component of which isthe United Malays National Organisation (UMNO) Baru—won 148 of the 193 seats in theDewan Rakyat in the 1999 general election. The BN has the two-thirds majority requiredto pass constitutional amendments. The cabinet was reshuffled in December 1999

Government—the main parties in the Barisan Nasional are UMNO Baru, the MalaysianChinese Association (MCA), the Malaysian Indian Congress (MIC), Gerakan, Parti PesakaBumiputera Bersatu (PPBB) and the Sarawak National Party (SNAP)Opposition—Parti Islam sa-Malaysia (PAS), the Democratic Action Party (DAP), PartiKeadilan Nasional (PKN), Parti Bersatu Sabah (PBS) and Parti Rakyat Malaysia (PRM)

Prime minister Mahathir MohamadDeputy prime minister & home affairs minister Abdullah Ahmad Badawi

Agriculture Mohd Effendi NorwawiDefence Najib Abdul RazakEducation Musa MohamadEnergy, communications & multimedia Leo MoggieFinance Mahathir MohamadForeign affairs Syed Hamid AlbarHousing & local government Ong Ka TingHuman resources Fong Chan OnnInformation Khalil YacoobInternational trade & industry Rafidah AzizPrimary industries Lim Keng YaikPublic works Samy VelluTransport Ling Liong Sik

Zeti Akhtar Aziz

Official name

Form of state

The executive

Head of state

National legislature

State government

National elections

National government

Main political organisations

Key ministers

Central bank governor

6 Malaysia


Economic structure

Annual indicators

1996 1997 1998 1999 2000

GDP at market prices (M$ bn) 253.7 281.9 284.5 299.7 339.4

GDP (US$ bn) 100.8 100.2 72.5 78.9 89.3

Real GDP growth (%) 10.0 7.3 –7.4 5.8 8.5

Consumer price inflation (av; %) 3.5 2.7 5.3 2.7 1.5

Population (m) 21.2 21.7 22.2 22.7 23.3

Exports of goods fob (US$ m) 76,985 77,538 71,883 84,052 95,314

Imports of goods fob (US$ m) –73,137 –74,029 –54,378 –61,404 –77,433

Current-account balance (US$ m) –4,461 –5,936 9,529 12,607 8,142

Foreign-exchange reserves excl gold (US$ m) 27,009 20,788 25,559 30,588 29,523

Total external debt (US$ bn) 39.7 47.2 44.8 45.9 44.3a

Debt-service ratio, paid (%) 8.9 7.4 7.4 4.8 5.2a

Exchange rate (av; M$:US$) 2.52 2.81 3.92 3.80 3.80

June 18th 2001 M$3.80:US$1

Origins of gross domestic product 2000 % of total Components of gross domestic product 2000 % of total

Agriculture 7.7 Private consumption 42.5

Mining 4.1 Public consumption 10.7

Manufacturing 29.6 Gross fixed capital formation 25.7

Construction 2.5 Stockbuilding 1.3

Electricity, gas & water supply 1.9 Exports of goods & services 125.7

Services 54.2 Imports of goods & services –105.8

GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 2000b US$ bn Principal imports 2000b US$ bn

Electronics & electrical machinery 60.6 Machinery & transport equipment 51.4

Petroleum & LNG 6.7 Manufactured goods 8.7

Chemicals & chemical products 3.9 Chemicals 5.9

Textiles, clothing & footwear 2.7 Miscellaneous manufactured articles 4.7

Palm oil 2.6 Mineral fuels & lubricants 3.9

Wood products 2.3 Food 3.0

Total incl others 98.2 Total incl others 82.2

Main destinations of exports 2000 % of total Main origins of imports 2000 % of total

US 20.5 Japan 21.1

Singapore 18.4 US 16.6

EU 13.7 Singapore 14.3

Japan 13.1 EU 10.8

Hong Kong 4.5 Taiwan 5.6

Taiwan 3.8 South Korea 4.5

South Korea 3.3 China 3.9

a EIU estimates. b Customs basis, exports fob, imports cif.

Malaysia 7


Quarterly indicators

1999 2000 20012 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Federal government finance (M$ m)Revenue 15,498 13,997 17,861 11,219 16,682 15,421 18,542 14,634Expenditure 10,059 12,158 15,285 7,805 12,760 14,662 21,320 11,303Balance 5,440 1,839 2,577 3,413 3,922 759 –2,778 3,331

OutputGDP at constant 1987 prices (M$ m) 48,169 49,603 50,592 50,191 52,206 53,395 53,773 51,804 % change, year on year 5.1 8.8 11.2 11.7 8.0 7.6 6.3 3.2Industrial production index (1993=100) 155.0 164.1 170.9 175.5 186.2 194.1 197.2 183.0 % change, year on year 6.6 14.2 17.9 23.5 20.1 18.3 15.4 4.3

PricesConsumer prices (2000=100) 98.4 98.4 98.9 99.7 99.8 99.9 100.6 101.3 % change, year on year 2.6 2.3 2.1 1.6 1.4 1.5 1.7 1.5Producer prices (1989=100) 125.7 127.3 131.2 132.0 132.8 132.5 129.8 n/a % change, year on year –5.0 –4.2 0.3 3.9 5.6 4.1 –1.0 n/a

Financial indicatorsExchange rate M$:US$ (av) 3.80 3.80 3.80 3.80 3.80 3.80 3.80 3.80 M$:US$ (end-period) 3.80 3.80 3.80 3.80 3.80 3.80 3.80 3.80Interest rates (av; %) Deposit 3.8 3.8 3.3 3.3 3.3 3.4 3.5 3.5 Lending 7.4 6.9 6.8 6.8 6.8 6.8 6.8 6.8 Money market 3.1 2.6 2.6 2.6 2.5 2.7 2.8 2.8M1 (end-period; M$ m) 62,876 65,616 75,602 70,132 69,431 69,526 80,630 n/a % change, year on year –3.7 16.3 29.2 23.4 10.4 6.0 6.7 n/aM2 (end-period; M$ m) 298,968 310,000 316,851 324,716 334,515 332,415 348,321 n/a % change, year on year 13.2 17.1 16.9 18.5 11.9 7.2 9.9 n/aKLSE composite index (end-period; 1977=100) 811.1 675.5 812.3 974.4 833.4 713.5 679.6 647.5 % change, year on year 78.0 80.8 38.6 93.8 2.7 5.6 –16.3 –33.5

Sectoral trendsElectronic and electrical products index (1993=100) 189.9 203.4 218.5 237.8 269.8 289.9 292.2 242.3 % change, year on year 10.6 23.1 30.7 45.2 42.1 42.5 33.7 1.9Mining index (1993=100) 115.0 118.1 121.5 122.2 118.0 116.2 121.1 125.5 % change, year on year –4.9 –1.9 –4.3 –1.6 2.6 –1.6 –0.4 2.7

Foreign trade (M$ m)Exports fob 77,864 83,649 90,677 84,758 90,968 101,706 95,875 86,437Imports cif –59,702 –64,871 –70,450 –68,231 –78,681 –85,756 –78,695 –72,827Trade balance 18,162 18,778 20,227 16,527 12,287 15,950 17,180 13,610

Foreign paymentsCurrent-account balance (M$ m) 12,340 14,056 10,708 10,470 6,581 7,280 7,591 n/aReserves excl gold (end-period; US$ m) 30,571 31,134 30,588 33,626 33,666 31,895 29,523 26,814Sources: Central Bank of Malaysia, Monthly Statistical Bulletin; IMF, International Financial Statistics.

8 Malaysia


Outlook for 2001-02

Political outlook

Advocates of reform both within and beyond the ruling Barisan Nasional (BN)coalition have scored some significant victories in recent months, suggestingthat more far-reaching change—and therefore greater ferment—may be ahead.A clean-up of the United Malays National Organisation (UMNO), the BN’sdominant component, seems to be under way. The veteran prime minister,Mahathir Mohamad, has announced that grassroots leaders must declare theirassets, that division-level chiefs are no longer eligible for governmentcontracts, and that the wealthy should not hold prominent positions in theparty. The most important casualty of the purge—if that is what is takingplace—has been the finance minister, Daim Zainuddin, the treasurer of UMNOsince 1984 and one of Malaysia’s richest individuals. He went on two months’leave in mid-April, and his resignation was announced at the start of June. Thedeparture of Mr Daim, orchestrator of the controversial government bail-outsof favoured businesses and entrepreneurs and the final arbiter when it came toawarding public-sector contracts, removes a major cause of the vocalallegations of corruption and cronyism levelled against Dr Mahathir’sadministration in recent years.

Formal charges against Mr Daim are unlikely. He is presumably privy to manyof the darkest secrets about the workings of the government and would betempted to begin divulging them if subjected to any form of legal action. OtherUMNO luminaries might not be so fortunate. But again, there could be abacklash against Dr Mahathir from within the upper echelons of the party ifattempts were made to bring alleged abusers of office to book. After all, anysuch purge would be primarily designed to safeguard the prime minister’s ownposition, and there is already a strong sense throughout the party that he isnow its biggest liability. Moreover, the departure of Mr Daim has deprivedDr Mahathir of the man who, for almost two decades, has been responsible forgathering the funds that helped him to stay in office. There is a growingpossibility that sufficient pressure will build within UMNO during the forecastperiod to force Dr Mahathir out, especially if the expected economic slowdownleads to increased social unrest and triggers a political crisis. If that were tohappen, Abdullah Badawi, his much less forceful deputy in the party and thegovernment would be likely to assume the top job. There is still a small chance,though, that the resourceful Dr Mahathir will ride out the present storm, andmay still be UMNO president—and therefore prime minister—as the nextgeneral election, which need not be called until end-2004, approaches; by thattime Dr Mahathir would be 78 years of age.

Something of a fin de règne atmosphere likewise prevails within the MalaysianChinese Association (MCA), the second largest party in the BN after UMNO. Itspresident and deputy president are locked in a bitter battle over who should beits next leader, and how and when the hand-over should be effected. The MCApresident, Ling Liong Sik, has compounded the problem by declaring that he

Domestic politics

Malaysia 9


intends to defend his post at the party’s next triennial elections, due in justover one year’s time. Yet it would appear that most members want him tostand aside. The factionalism could conceivably lead to a break-up of the MCA,although this is still unlikely.

Opposition parties and other critics of the government will not be as easilyintimidated or suppressed as they have been hitherto. The Malaysian HumanRights Commission, known as Suhakam, a government-appointed body, isrecommending a large-scale overhaul of legislation routinely invoked in thepast to deny dissenters permission to assemble, to break up their gatheringsand to arrest their leaders. In a landmark verdict handed down in late May, aHigh Court judge ordered the release from custody of two oppositionpoliticians detained the previous month under the controversial InternalSecurity Act.

Even lobbies previously supportive of—or merely cowed by—the governmentare becoming more assertive and are wringing concessions from it. TheMalaysian Trades Union Congress, exasperated by perceived official misuse ofworkers’ contributions to an obligatory state-run pension scheme, theEmployees’ Provident Fund, recently obliged Dr Mahathir to promise to lookinto its grievances after threatening nationwide pickets. With the economyslowing, an increase in such agitation seems inevitable.

Malaysia’s call for the establishment of a regional monetary fund in Asia has sofar gone largely unanswered. In April “ASEAN + 3”, the ten countries of theAssociation of South-East Asian Nations (ASEAN) and Japan, China and SouthKorea, agreed to set up a network of currency swap arrangements which linkthe disbursement of short-term liquidity to IMF conditions. Malaysia, whichavoided seeking IMF assistance during the 1997 Asian financial crisis, is nowproposing to develop the currency swap scheme further and strengthenfinancial co-operation among Asian countries.

Economic policy outlook

The government’s long-term ambition of reaching developed-nation status by2020 was reconfirmed with the publication in April 2001 of the EighthMalaysia Plan (EMP), which envisages 7.5% average annual economic growthin 2001-05. A return to a high-growth path is only possible if investment,which used to contribute two-thirds of GDP growth before the 1997 crisis,increases dramatically: the EMP plans an average 19% annual rise in privateinvestment. In the near term the government will try to reduce the impact oneconomic growth of a sudden export slowdown by boosting public investment.Fiscal stimulation, incentives to boost private investment and attract foreigndirect investment (FDI) are to be expected. Monetary policy is likely to remainaccommodative and interventionist policies will continue.

The change to a more stimulative fiscal policy may not be immediatelysuccessful. The major effect of the M$3bn (US$789m) of public worksexpenditure—part of a fiscal package announced in late March to counter the

Policy trends

International relations

Fiscal policy

10 Malaysia


impact of the US economic slowdown—will probably be felt in 2002, ratherthan in 2001. The other major component of the package, a cut in employees’pension fund contributions from 11% to 9% of their salary for one year, mayboost savings more than spending. The government predicts that theadditional public works will increase real GDP growth by 1.1 percentage points.Government investment and consumption will grow strongly this year andnext. Further stimulative measures have been promised, should the USslowdown be sharper than anticipated. The go-ahead given to the Bakunhydroelectric dam “mega-project” in Sarawak state, estimated to cost at leastM$15bn, should provide ample opportunity for the government to spendmoney. The EIU forecasts that slower revenue and higher expenditure growthwill widen the federal budget deficit in 2001 from a higher than expected 5.8%of GDP in 2000 to 7% in 2001, dropping to 4.8% in 2002.

There is a growing chance that the Bank Negara (BN, the central bank) will cutits intervention rate to 5% from the current level of 5.5%, if economic activityfails to pick up in the second half of the year. Non-performing loans (NPLs) arerising: on a three-month basis, the NPL ratio increased to 10.6% of total loansat end-March from 9.7% at end-2000. Further rises are likely, which willpartially undo the effects of banking recapitalisation and interfere with theBN’s aim of creating a profitable and internationally competitive bankingsystem. Weak export growth and sluggish private investment are expected tokeep lending growth in 2001 below the government’s ambitious target of 8%,maintaining the downward pressure on lending rates. Consumer credit andloans for the purchase of residential property are likely to show the fastestgrowth after new incentives in the March stimulative package. Money supplygrowth, at 4.8% year on year for M3 in April, should accelerate as thegovernment boosts the economy and draws down its central bank deposits.Monetary policy will remain accommodative and no rise in the interventionrate is expected until the second half of 2002, by which time economic growthwill have picked up.

Economic forecast

Malaysia’s external outlook remains depressed, with no sign of a pick-up inglobal demand, particularly for electronic and electrical goods, which comprise62% of Malaysian exports. The Malaysian economy is strongly influenced bythe performance of the US, its largest export market, which is likely to remainclose to recession during the second half of 2001. US growth is expected to fallfrom 5% in 2000 to 1.6% in 2001, but is forecast to recover to 2.6% in2002, boosted by lower interest rates. Asian demand is still weakening,depressed by the return of the Japanese economy to recession and slowergrowth in other export-dependent parts of Asia. Only EU growth is forecast tohold up fairly well.

International assumptions

Monetary policy

Malaysia 11


Malaysia: international assumptions summary(% unless otherwise indicated)

1999 2000 2001 2002

Real GDP growthWorld 3.6 4.9 2.9 3.7OECD 3.1 4.0 1.7 2.5EU 2.5 3.3 2.4 2.6

Exchange rates (av)¥:US$ 113.9 107.8 122.8 123.0US$:€ 1.07 0.92 0.95 1.08SDR:US$ 0.731 0.758 0.770 0.735

Financial indicators¥ 2-month private bill rate 0.27 0.24 0.18 0.10US$ 3-month commercial paper rate 5.18 6.32 4.09 4.75

Commodity pricesOil (Brent; US$/b) 17.9 28.4 24.2 24.0Gold (US$/troy oz) 278.8 279.3 258.8 255.0Food, feedstuffs & beverages

(% change in US$ terms) –18.6 –6.1 8.0 14.8

Industrial raw materials (% change in US$ terms) –4.6 13.4 0.1 4.7

Regional aggregate GDP growth rates weighted using purchasing power parity exchange rates.

Global demand for electronics and electrical products is a key variable inMalaysia’s economic outlook. Weakening global growth, together with aninventory correction in the semiconductor industry, make it now seemunlikely that there will be much of an increase in export demand in the secondhalf of 2001. Domestic demand will not be able to compensate sufficiently forthe weak external environment, despite the government’s promise to increasethe fiscal stimulus, if necessary. Malaysia’s manufacturing production is stillcontracting; by April 2001 manufacturing production had declined by 13%from its peak in October 2000. Real GDP growth slowed to 3.2% year on yearin the first quarter from the rate of 6.3% reached in the fourth quarter of 2000,largely because of a decline in exports. Little or no real GDP growth is forecastfor the second quarter of 2001, but output will begin to stabilise in the secondhalf. The fall in exports during the first half will reduce corporate incomes,raise industrial spare capacity, boost unemployment and limit householdincome growth, and lead to greater caution in private consumption andinvestment. We have lowered our real GDP growth forecast for 2001 to 3.1%from our previous forecast of 4.6% and reduced the forecast for 2002 to 5.2%from 6.7%.

Domestic demand will provide some support at this difficult time. Householdconsumption should hold up, notwithstanding a decline in consumerconfidence in the first quarter, and the increase in unemployment is unlikelyto be serious. The March fiscal package will boost spending this year, with a cutin employees’ pension contributions, and longer term also, with an increase intax allowances for those on lower and middle incomes. However, part of thismay be saved by more cautious households. Government spending will bestrong, although the effects of a rise in government investment will be mutedby a smaller rise in private investment. Total domestic demand is forecast to

Economic growth

12 Malaysia


grow by 6.3% in 2001, well below last year’s outcome of 15.2%, accelerating to9.1% in 2002 as investment growth takes off again.

Malaysia: forecast summary(% unless otherwise indicated)

1999a 2000b 2001c 2002c

Real GDP growth 5.8 8.5 3.1 5.2

Industrial production growth 9.1 18.0 2.2 5.6

Gross agricultural growth 3.8 0.4 2.0 1.0

Unemployment rate (av) 3.4 3.1 3.7 3.4

Consumer price inflation Average 2.7 1.5 1.6 2.0 Year-end 2.5 1.4 1.8 2.8

Base lending rate 7.3 6.8 6.6 7.2

Central government balance (% of GDP) –3.2 –5.8 –7.0 –4.8

Exports of goods fob (US$ bn) 84.1 95.3 95.6 107.0

Imports of goods fob (US$ bn) 61.4 77.4 83.5 97.4

Current-account balance (US$ bn) 12.6 8.1 2.1 –0.7 % of GDP 16.0 9.1 2.3 –0.7

External debt (year-end; US$ bn) 45.9 44.3 45.0 51.5

Exchange rates M$:US$ (av) 3.80 3.80 3.80 3.80 M$:¥100 (av) 3.34 3.53 3.10 3.09 M$:€ (year-end) 3.82 3.57 3.97 4.09 M$:SDR (year-end) 5.22 4.95 5.11 5.17

a Actual. b EIU estimates. c EIU forecasts.

Inflationary risks are becoming smaller. Slower growth will increase theeconomy’s spare capacity, ease labour shortages while keeping wages down andmake the government reluctant to allow higher energy costs to be passed on inelectricity tariffs. Declining producer prices, which reflect domestic and globaldemand more clearly than consumer prices, indicate that further easing ofprice pressures is in the pipeline. Producer price inflation declined by 5.9% yearon year in March, after peaking at 7.3% year on year in June 2000. We have cutour forecast for 2001 consumer price inflation from 1.8% to 1.6% and expect arise of 2% (previously 2.2%) in 2002.

Malaysia’s willingness to keep its exchange rate pegged to the US dollar atM$3.80:US$1 depends at least in part on the fate of the Japanese yen. If theJapanese unit were to fall sharply against the US dollar, the BN would nolonger be able to claim that the ringgit remained close to its fair value, whilethere would be potentially serious consequences for Malaysia’s heavily trade-and foreign investment-dependent economy. Fears of a competitivedepreciation of regional currencies were apparent during the first quarter ofthis year as the Japanese yen fell against the US dollar and such fears could wellreturn. Domestic pressure for a devaluation of the ringgit will continue as longas the US dollar remains firm and the currencies of Malaysia’s regionalcompetitors reflect the gloom about the economic and political outlook forSouth-east Asia. Nevertheless, Malaysia is unlikely to change its dollar peg of

Exchange rates

Inflation

Malaysia 13


M$3.80:US$1 within the next twelve months unless the regional currencydepreciation turns into a rout. Changing the currency system now would addto the sense of economic (and political) instability in Malaysia. However,foreign-exchange reserves have continued to decline and the suspicion is thatthe continued drain reflects speculation over a ringgit devaluation ascompanies hesi7tate to repatriate export proceeds.

Malaysia: gross domestic product by expenditure(M$ m at constant 1987 prices; % change year on year in brackets unless otherwise indicated)

1999a 2000b 2001c 2002c

Private consumption 84,068 94,459 99,276 105,233(3.1) (12.4) (5.1) (6.0)

Public consumption 23,905 24,321 27,239 28,656(16.3) (1.7) (12.0) (5.2)

Gross fixed investment 51,897 64,415 69,697 80,848(–5.9) (24.1) (8.2) (16.0)

Final domestic demand 159,870 183,194 196,212 214,737(1.7) (14.6) (7.1) (9.4)

Stockbuilding 219 1,174 –200 –800(0.2)d (0.5)d (–0.7)d (–0.3)d

Total domestic demand 160,089 184,368 196,012 213,937(2.0) (15.2) (6.3) (9.1)

Exports of goods & services 212,484 247,034 252,963 273,959(13.4) (16.3) (2.4) (8.3)

Imports of goods & services 179,778 222,134 233,240 260,996(10.8) (23.6) (5.0) (11.9)

Foreign balance 32,706 24,900 19,722 12,963(4.1)d (–4.0)d (–2.5)d (–3.1)d

GDP 192,795 209,269 215,735 226,899(5.8) (8.5) (3.1) (5.2)

a Actual. b EIU estimates. c EIU forecasts. d Contribution to real GDP growth.

Export revenue continues to decline from the peak reached in the second andthird quarters of 2000, led by electrical and electronic products; imports aretumbling even faster. We have become more pessimistic about Malaysia’sexport prospects, although we still do not expect export revenue to decline in

External sector

14 Malaysia


2001. With domestic demand expected to hold up fairly well, import growthshould be sustained once imports of intermediate goods for manufacturingproduction stabilise. This should result in continued contraction of the tradesurplus, the main cause of the reduction in the current-account surplus froman estimated outcome of 9.1% of GDP in 2000 to a forecast 2.3% in 2001 and asmall deficit of –0.7% in 2002. Some recovery in export and import growth isforecast to follow in 2002. The trade surplus will remain high during theforecast period, standing at US$12.1bn in 2001 and US$9.6bn in 2002, afterUS$17.9bn in 2000.

The political scene

There have been indications of late that the veteran prime minister, MahathirMohamad, may finally be willing to bend to the persistent pressure forsignificant change within his own party, the United Malays NationalOrganisation (UMNO), the dominant component of the ruling BarisanNasional (BN) coalition. During a speech on April 21st 2001 he said thatUMNO office-bearers would henceforth have to declare their assets, thatdivisional leaders would no longer be eligible for government contracts, andthat the “abundantly rich” should not hold key posts. Many ethnic Malayswere shunning UMNO because they believed it had “absorbed a dirty culture—a culture of corruption”, he conceded. While Dr Mahathir has long decried the“money politics” that pervades UMNO, he is widely perceived to be itsprincipal sponsor, because his considerable capacity to dispense largesse,directly or indirectly, is the source of much of his own authority. This time hiswords were accompanied by action. UMNO’s disciplinary committee sacked sixdivision-level leaders, concluding that they had bribed their way to victory inparty elections that month. The decision was upheld on May 21st by UMNO’stop decision-making body, the supreme council, which the prime ministerchairs. Nonetheless, there were claims that the action against the six wasmotivated by their supposed sympathy for the former deputy premier, AnwarIbrahim, who was expelled from the government and UMNO in September1998 and is now serving jail terms totalling 15 years after being convicted ofcorruption and sodomy.

Under the circumstances, how the party deals with charges of improprietyagainst its secretary-general, the information minister, Khalil Yacoob, will bemore telling. In March Mr Khalil was accused by an UMNO member of thePahang legislature, Fauzi Abdul Rahman, of mismanaging public funds whilechief minister of Pahang state during the 1990s. Supporters of Mr Khalil saidthat the allegations were unfounded and were a case of sour grapes arisingfrom the failure of Mr Fauzi, a sympathiser of Mr Anwar, to secure enoughnominations to defend his position as UMNO’s division chief for Kuantan, thecapital of Pahang, in party elections. Yet the allegations received extensivecoverage in the government-controlled media. On May 21st Dr Mahathir saidthat the disciplinary committee was preparing a final report on the complaint.

Dr Mahathir acts againstcorruption in UMNO

The UMNO secretary-general is investigated

Malaysia 15


Dr Mahathir’s insistence that the wealthy should not hold high-level posts inthe party appeared to have quick repercussions. One of his own sons,Mokhzani, an assistant treasurer of UMNO’s youth wing, sold his sizeablestakes in two listed companies at the end of April. He claimed to have done sowithout the prime minister’s knowledge, partly to counter the damage to hisfather’s and his own reputation from “false” allegations linking him withgovernment contracts. However, it was later claimed in parliament thatMokhzani’s corporate interests would remain largely intact.

A much bigger casualty may be Dr Mahathir’s long-time confidant and chiefeconomic policymaker, finance minister and UMNO treasurer, DaimZainuddin, who is reputed to be one of Malaysia’s richest individuals. OnApril 19th the prime minister revealed that a “tired” Mr Daim was taking twomonths’ leave, fuelling speculation that differences between the two mostpowerful politicians had become all but unbridgeable. They have clashedfiercely—albeit privately—in recent years over key policy issues. In mid-April,in an apparent snub to Mr Daim, Dr Mahathir appointed the former centralbank governor, Ali Abul Hassan Sulaiman, as a special economic adviser. MrDaim’s definitive departure was finally made official on June 2nd and theprime minister announced shortly afterwards that he himself would take overas finance minister and special functions minister for the time being, inaddition to his responsibilities as prime minister. Although Mr Daim had longprofessed a desire to return to private life, his departure could be presented, orat least interpreted, as part of the prime minister’s clean-up campaign, whichcould defuse party criticism ahead of the UMNO general assembly onJune 21st-23rd. As finance minister, Mr Daim had the last word on the awardof public-sector contracts, many of which have been controversially handedout, without competitive bidding, to favoured businesses. He was alsoperceived to be the driving force behind the controversial and costly spate ofbail-outs of government-linked companies and entrepreneurs. So hisretirement may deflect much of the damaging flak presently being directed atDr Mahathir. However, as a party treasurer, Mr Daim was also largelyresponsible for collecting and distributing the funds that helped to keep theprime minister in office.

The divisions within the BN’s second largest party, the Malaysian ChineseAssociation (MCA), have deepened, with some warning that it could break up.The main fault-line is that between its president, Ling Liong Sik, and hisdeputy, Lim Ah Lek. A simmering row between them erupted again afterDr Ling announced on March 11th 2001 that he would defend his post at theparty’s next triennial elections, scheduled for mid-2002. The declaration ofintent prompted Mr Lim to suggest that the president concentrate on healingthe rifts within the MCA and reversing the erosion of its support among themain minority community rather than the consolidation of his own position.There followed a war of words, waged mostly by their respective supporters,over the details of an agreement that the two men had been negotiating toeventually cede the leadership of the party to their protégés. Mr Lim insistedthat Dr Ling had given him to understand that he would not seek anotherterm in 2002. Ling loyalists countered that their mentor had made no such

Mahathir’s son, Mokhzani,sells his business interests

The finance minister, DaimZainuddin, resigns

The MCA buys two criticalChinese newspapers

16 Malaysia


promise. According to a survey in April of 145 grassroots MCA leaders by alocal Chinese-language newspaper, China Press, 65% of those polled wantedDr Ling, the party president since 1986, to step down next year; 19% wantedhim to stay put; and 16% were undecided. On May 30th the central committeeof the MCA voted 32-8 in favour of the party’s investment arm, HuarenHoldings, buying Nanyang Press Holdings, publisher of China Press and itssister paper, Nanyang Siang Paum, both of which have been critical of Dr Ling.The MCA already owns Malaysia’s largest-selling English-language daily,The Star.

There was also pressure on the government from the long-cowed labourmovement. In mid-April the Malaysian Trades Union Congress (MTUC), whichrepresents around 230 unions with more than half a million members,announced plans to picket the offices of the Employees’ Provident Fund (EPF),a mandatory state-run pension scheme, alleging that its resources were beingbadly invested. The bail-outs of crony companies were a major gripe. InFebruary the EPF had announced that it would be giving a dividend of 6% for2000, its lowest pay-out in 26 years. The MTUC also objected to theprivatisation last year of the EPF’s annuity scheme and a drastic reduction indeath and incapacitation benefits. Members of the government, includingDr Mahathir, warned the umbrella grouping against “creating trouble”, whilenewspaper editorials and commentators condemned its intention to protest. Ina letter to the New Straits Times, which tends to reflect faithfully thegovernment’s views, a reader accused the MTUC of threatening thegovernment and the EPF with “a gangster-style approach, similar to that of theopposition”. On May 9th the movement declared that it was calling off theplanned protest, scheduled for three days later, after Dr Mahathir agreed toaddress, or at least examine, most of its grievances.

Yet the government continued to take a hard line with opposition politicalparties. Ten prominent opposition politicians, most of them members of PartiKeadilan Nasional (PKN), nominally headed by Wan Azizah Ismail, Mr Anwar’swife, were arrested over a two-week period in April under the Internal SecurityAct (ISA), which allows indefinite detention without trial. Ministers and seniorpolice officers claimed that they were members of a secret cell plotting tooverthrow Dr Mahathir’s administration by force, and had been buildingstockpiles of grenade-launchers and petrol bombs. Part of their allegedpreparations involved plans for a 50,000-strong gathering in Kuala Lumpur onApril 14th to mark the second anniversary of Mr Anwar’s corruptionconviction, an event which would escalate into violent street demonstrations.The claims were not substantiated, and were widely ridiculed. Oppositionparties and sympathisers claimed that the real crime of most of those incustody was their plan to launch a nationwide campaign, dubbed “Save thePeople’s Money”, against the persistence of costly government bail-outs. TheApril 14th rally was attended by only a few hundred opposition supporters—owing in part to well publicised advance warnings by officials and the police tostay away—and was peaceful. Its centrepiece was the submission by WanAzizah to the Malaysian Human Rights Commission (known by its Malay

Mismanagement of thepension fund is claimed

Ten opposition politiciansare detained

Malaysia 17


acronym, Suhakam) of a memorandum, which inter alia demanded the right tofreedom of speech and of assembly, and an independent judiciary.

Opposition parties and a wide array of interest groups condemned the arrests,arguing that if the ten had committed offences, they should be charged andtried in open court. They also launched a campaign to press for a repeal of theISA. On April 17th the High Court judge, Augustine Paul, began hearing habeascorpus applications on behalf of five of the detainees, which contended thattheir detention was an abuse of the ISA and politically motivated.Characterising as preposterous the claim that they had been planning tooverthrow the ruling coalition by force, defence lawyer Zainur Zakariademanded: “What is there to prevent allegations that the detainees plan toacquire nuclear weapons from Russia to topple the government?” OnApril 24th Mr Paul upheld the arrest of the five, refused to allow lawyers accessto them and strongly endorsed the ISA, saying that it had the “highestobjective and purpose to serve—national security”.

Yet on May 30th ruling on habeas corpus petitions filed by two of the other ISAdetainees, Abdul Ghani Haroon and N Gobalakrishnan, another High Courtjudge, Mohd Hishamuddin, ordered their immediate release, concluding thattheir arrest was unlawful and mala fide. In the landmark verdict, MrHishamuddin said that the police had abused their powers, had failed to justifyproperly the arrests of the two, and had wrongly denied lawyers and familymembers access to them. He suggested that it was “high time for parliament toconsider whether the ISA, which was originally meant to counter communistterrorism in the early years of independence, is really relevant to the present-day situation”. On June 2nd police released Raja Petra, the webmaster of theFree Anwar Campaign website (freeanwar.com). The following day, however, thedeputy prime minister and home affairs minister, Abdullah Badawi, orderedthe detention of a further four PKN politicians—the vice-president, Tian Chua;the youth chief, Mohamad Nor; another youth leader, Saari Sungib; and asocial activist, Hishamuddin Rais—at the Kamunting detention camp inTaiping, Perak, where they may be held under the ISA for a period of two years.On June 13th the PKN politicians, Badrul Amin Baharom and Lokman NoorAdam, were also sent to Kamunting to be detained for two years.

Earlier, Suhakam had unsuccessfully urged the authorities to release all thosedetained under the ISA, and, if necessary, initiate court proceedings againstthem, describing detention without trial as a “fundamental human-rightsviolation”. In its first annual report, presented to parliament on April 19th,Suhakam identified the ISA as one of several repressive statutes in need ofreview, and promised to bring forward appropriate recommendations to thisend. Noting that Malaysians were demanding civil and political rights morevociferously than ever before, it said that government institutions had tobecome more aware of their responsibilities in protecting those rights.Dr Mahathir promptly replied that the government was not duty-bound toaccept all the conclusions of the 63-page report. The government and police,not Suhakam, were ultimately responsible for the security of the Malaysianpeople, he said.

A further four oppositionpoliticians are detained

Dr Mahathir dismisses theSuhakam protest

18 Malaysia


In another victory for critics of high-handed police action, the Court ofAppeal sent the former police inspector-general, Rahim Noor, to jail for twomonths on April 30th for assaulting a handcuffed and blindfolded Mr Anwarwithin hours of his arrest in September 1998. Rejecting a plea by Mr Rahimagainst the jail term, handed down by the High Court in March last year, theappeal court described the beating as “despicable and inhuman”, and rebukedprosecutors for not having pressed for a heavier sentence. Mr Rahim resignedas Malaysia’s top police officer after accepting responsibility for the assault.

The stand-off between the government and Mr Anwar over the treatment thatthe former deputy premier should receive for his slipped disc has continued.After the government refused Mr Anwar permission to travel to a clinic inGermany for endoscopic microspinal surgery—supposedly not available inMalaysia—on the grounds that he might not return home to complete hissentence, Dr Mahathir accused his erstwhile protégé of politicising his medicalproblem. In late April the health minister, Chua Jui Meng, said that Mr Anwarhad been offered the option of undergoing one of four kinds of surgery locally,or of going back to jail and having conservative treatment—essentiallyphysiotherapy and pain killers. Unwilling to be operated on by local doctors,Mr Anwar chose the latter. On May 10th after spending almost six months in aKuala Lumpur hospital, he was sent back to Sungai Buloh prison on theoutskirts of the city.

On May 12th prosecutors dropped five outstanding criminal charges againstMr Anwar—four counts of alleged sodomy and one of corruption. Mr Anwarsaid that he would have preferred the cases to go to court so that he couldprove his innocence of the “trumped-up” claims. Wan Azizah concluded thatthe charges had been dropped because the government reasoned that anotherpublic trial would expose the “conspiracy” against her husband and stir upopposition sentiment.

Economic policy

With external demand slowing, measures to boost domestic demand will becentral to the government’s strategy in order to achieve a GDP growth rate of5-6% this year, Bank Negara (BN, the central bank) said in its latest annualreport released on March 28th 2001. (This forecast is likely to be reviseddown by the government in the coming months.) The central bank projecteda slowdown in aggregate domestic demand growth to 8.4% in 2001, from14.6% in 2000, indicating that official pump-priming was expected toaccount for much of the impetus. Public-sector consumption was forecast toexpand by 12.3%, up from just 1.7% in 2000, and public-sector investmentby 8.9%, down from 21.7%. Private consumption growth was forecast tomoderate to 7% from 12.4%, and private investment growth to fall to 9.2%from 26.7%. The central bank said that monetary policy would continue tobe expansionary, a stance likely to be facilitated by the persistence ofsubdued inflationary pressures and still sizeable—if declining—balance-of-

Rahim Noor is sent to jailfor an attack on Mr Anwar

Mr Anwar may not leavethe country for surgery

Further charges againstMr Anwar are dropped

The government forecastsslower growth

Malaysia 19


payments surpluses. Fiscal policy would also remain accommodative, withexpenditure directed mainly at “industries with domestic linkages andthereby high multiplier effects” and the budget deficit financed largely from“non-inflationary domestic sources”, particularly the issuance of govern-ment securities.

On March 27th the government unveiled a stimulus package to complementthe 2001 budget presented last October and bolster the economy’s flaggingmomentum caused by the slowdown in the US, Malaysia’s biggest market andsource of investment. The package inter alia envisaged an additional M$3bn(US$789m) in public spending, the bulk of which would be spent on physicaland social infrastructure; fresh measures to encourage private consumption,including a reduction in workers’ obligatory contributions to the Employees’Provident Fund (EPF)—a state-run retirement scheme—from 11% to 9% oftheir monthly pay; an 8% increase in bank lending this year, up from the 5.4%growth achieved in 2000; easier access for small businesses to enlarged,government-controlled development funds; incentives to encourage the saleand purchase of private homes; measures to boost the output of the servicessector; and improved (but undefined) concessions for foreign investors.Officials said that the additional spending would increase the fiscal deficit to6% of GDP, up from the 5.1% forecast last October and the estimated 2000outturn of 4.7%. While the package was generally welcomed, doubts wereexpressed about some of its elements and objectives. The credit growth targetwas seen as ambitious, given banks’ concerns that slower economic growthcould trigger another sharp deterioration in asset quality. Analysts also arguedthat the cut in the EPF contributions would have little positive impact onconsumption levels, and that workers, faced with the possibility of reducedearnings or even redundancy, were at least as likely to save as to spend the gain.

On April 3rd Dr Mahathir presented to parliament the Third OutlinePerspective Plan (OPP3), a document setting out broad economic and socialobjectives for the 2001-10 period. The plan anticipates GDP growth averaging7.5% a year over the next decade, up from the average of 7% recorded in1991-2000. It is premised on a rapid transition from a production- to aknowledge-based economy, and sees domestic capital formation playing abigger role than foreign investment. Supposedly central to the achievement ofits targets will be the pursuit of the long-running affirmative action strategy infavour of bumiputeras (Malays and other indigenous groups), who make upalmost two-thirds of the population. OPP3 aims to increase their share of thenation’s wealth—estimated to have declined from 20.6% in 1995 to 19.1% in2000—to 30% by 2010. While affirmative action may help to maintain racialharmony, it is a less than efficient way of allocating resources. Members of thesizeable Chinese minority argue that the preferential treatment it accords tobumiputeras inhibits the realisation of the economy’s real growth potential.Their concerns are all the more valid in view of the competitive pressures beingimposed by globalisation, which OPP3 does little to address. Moreover, sinceforeign investment has accounted for much of the economy’s rapid growth inthe past, it is difficult to see how—or where—domestic capital formation couldadequately offset the current slide in inflows from abroad.

A new fiscal stimuluspackage is unveiled

Long-term economic andsocial objectives presented

20 Malaysia


The central bank’s annual report argued that the fixed exchange rate ofM$3.80:US$1, in place since September 1998, remained consistent withMalaysia’s economic fundamentals and continued to be supported by “a strongcurrent-account surplus, a high level of international reserves and a low andstable inflation rate”. The report added that the government’s policy hadalways been to maintain international competitiveness “through efficiency andproductivity gains and not to rely on the exchange rate”. Altering the latter“would only provide temporary gains in export performance and would do soat the expense of significant costs to the economy, including higher inflation,higher debt-servicing costs and the erosion of private-sector confidence in thecurrency”. The central bank insisted that the government “would not respondto marginal and short-term [currency] misalignments that can reverse within ashort period”.

The emphatic official defence of the existing peg coincided with demands fromvarious business lobbies for a devaluation of the ringgit to counter the adverseeffects on Malaysia’s export competitiveness of depreciating regional currenciesled by the Japanese yen. Export growth slowed to 0.2% year on year in April,from a peak of 25% last August. A steady slide in foreign-exchange reserves—toUS$26.1bn in mid-May 2001 from US$34.5bn a year earlier—also contributedto the pressure for a devaluation. Part of the depletion was attributable to agrowing tendency among exporters to hold earnings overseas in anticipation ofan exchange-rate adjustment on which they could capitalise. Many importerswere also expecting a devaluation and were rumoured to be large-scale sellers ofringgit to buy US dollars. But officials reiterated repeatedly that no such movewas either imminent or necessary. The export slowdown was essentially theresult of weaker external demand rather than price factors, they reasoned, whilethe decline in reserves stemmed in no small measure from higher external debtrepayments and investments overseas, and was therefore a sign of economicstrength rather than weakness. But despite the authorities’ expressed confidencein the utility and durability of the peg, there was doubtless concern in officialcircles about its sustainability and about the erosion of reserves. The abolitionon May 3rd of the controversial 10% levy on the repatriation by foreigners ofportfolio investment profits was partly motivated by the government’skeenness to stem the flight of overseas funds from the Kuala Lumpur StockExchange (KLSE), another significant contributor to the depletion of reserves.

The weakness of the KLSE partly reflects concerns about the persistence ofgovernment bail-outs for troubled companies. The benchmark compositeindex plunged to 553 points on April 9th and has moved sideways since then,closing at 567 points on June 1st, a drop of 22% from this year’s high of 736attained on February 2nd. A recent instance of a government bail-out was thepurchase by official agencies of shares in Time dotCom, a unit of the indebted,Renong conglomerate (which is linked to the ruling party, the United MalaysNational Organisation). Investors had pledged to buy just 25% of an initialpublic offering (IPO) by Time dotCom when subscriptions were sought inFebruary, reinforcing speculation that the value of the shares would plungewhen trading began. Yet the agencies, including a state-run pension fund, tooka sizeable proportion of the unsubscribed stock from underwriting banks at the

BN defends the fixedexchange rate

Business calls for a lowerringgit

Share prices remaindepressed

Malaysia 21


IPO price of M$3.30. The price of the shares tumbled by 26% to M$2.43 whenlisted on March 12th, and subsequently declined to M$1.94. Lim Kit Siang,chairman of the opposition Democratic Action Party, characterised thegovernment’s use of public funds for the share purchase as “tantamount tocriminal breach of trust”. Dr Mahathir was unrepentant. On April 8th hedeclared that his administration would continue to assist “viable” firmsadversely affected by “external” economic factors.

The domestic economy

Economic trends

Real GDP expanded by just 3.2% year on year in January-March 2001,compared with 6.3% in October-December 2000, according to data released bythe Department of Statistics on May 23rd, suggesting that the economicslowdown which set in during the latter half of 2000 was becoming morepronounced. On a quarter-on-quarter basis, output contracted by 3.7%.Growth of manufacturing production slowed to 3.7% year on year, adecidedly lame performance when measured against the runaway quarterlysurges notched up in 2000; for 2000 as a whole, manufacturing productionincreased by 21%. Growth of exports of goods and services, which hadaveraged almost 20% during the first three quarters of 2000, slowed to 6.6%year on year from 8.1% in the October-December period. The chief culprit,not surprisingly, was tumbling US demand for electronics equipment andparts. While total exports of these items fell by 13.4% year on year,semiconductor sales rose by 15%, reducing the overall fall in exports by thekey electronics sector to 2%. Average capacity utilisation declined to 68% inJanuary-March, from 76% in October-December.

Malaysia: real gross domestic product(M$ m unless otherwise indicated; at 1987 purchasers’ prices , not seasonally adjusted)

1999 2000 20014 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Private consumption 22,518 23,656 23,141 23,534 24,755 24,618 % change year on year 8.9 14.5 13.4 11.3 9.9 4.1

Public consumption 7,282 4,369 6,089 6,352 7,375 4,792 % change year on year 23.1 3.8 13.2 –8 1.3 9.7

Gross fixed capital formation 14,095 14,630 16,953 17,141 15,691 15,955 % change year on year 5.9 21 32.6 32.6 11.3 9.1

Change in stocks –1,564 972 993 965 –708 –264 % of GDP a year ago 4.5 –0.1 –0.8 3.2 1.7 –2.5

Net exports, goods and services 8,262 6,564 4,831 5,403 6,660 6,703 % of GDP a year ago –2.0 –0.9 –7.1 –7.7 –3.2 0.3

Exports, goods and services 58,617 55,786 60,355 66,979 63,385 59,482 % change year on year 18.9 20.8 16.6 19.8 8.1 6.6

Imports, goods and services 50,355 49,222 55,524 61,576 56,725 52,779 % change year on year 25.5 25.5 27.6 31.9 12.6 7.2

GDP 50,592 50,191 52,006 53,395 53,773 51,804 % change year on year 11.2 11.7 8.0 7.6 6.3 3.2

Source: Department of Statistics.

Real GDP growth slows

22 Malaysia


The previously lacklustre agricultural sector made a significant contribution tofirst-quarter growth, with output rising by 12% year on year. That was almostentirely the result of a 27% surge in palm oil production, even though slackinternational demand and abundant supplies of the commodity pushed pricesto ten-year lows. Likewise, crude oil and natural gas output were higher,although prices were sharply lower. Value added in the construction sector, amajor source of the economy’s past expansion, edged up by 0.9%, bolstered byongoing housing developments and public spending on infrastructure projects.

Official pump-priming accounted for most of the 6.4% year-on-year increase indomestic demand (excluding stockbuilding) in January-March 2001. Total grossfederal government expenditure (including development spending) rose by61% to M$16.6bn (US$4.4bn), with development outlays more than doubling,yielding an unprecedented first-quarter fiscal deficit. While monetary policy,too, remained accommodative—with the average lending rate of commercialbanks falling to a historic low of 7.27%—the slowdown in privateconsumption growth persisted. It moderated to 4.1% year on year in the firstquarter, from 9.9% in October-December. Loan approvals in January-March fellto an average of M$10bn a month, from M$12bn in 2000 as a whole. Thenegative wealth effect of the sliding Kuala Lumpur Stock Exchange (KLSE),whose benchmark composite index fell by 4.7% to 647 points during thequarter, also dampened consumer sentiment. The annual inflation rate,measured by the consumer price index, rose to a modest 1.5% in January-March, down from 1.7% in October-December.

Non-performing loans (NPLs), on a three-month arrears basis, rose to 10.6% ofthe total outstanding at end-March, from 9.7% at end-2000. The growth ofgross fixed investment slowed to 9.1% in January-March, from 11.3% inOctober-December and 32.6% in July-September, with the government beingthe main provider. Nevertheless, the value of private investment in themanufacturing sector approved during the first quarter stood at M$11.2bn, upfrom M$8.2bn in the final quarter of 2000 and M$2.7bn in January-March2000. Bank Negara (BN, the central bank) stated that inflows of foreign direct

Primary sector boosts first-quarter growth

Fiscal stimulus boostsdomestic demand

Non-performing loansincrease

Malaysia 23


investment, excluding retained earnings, reached M$4.2bn, fractionally downcompared with the M$4.3bn recorded in year-earlier period.

Manufacturing

Manufacturing output expanded by 25% last year, up from 12.9% in 1999,boosting the sector’s share of GDP to 33.4% from 30%, according to theannual report released by Bank Negara (BN, the central bank). The keyelectronics industry led the way, with output rising by 44.8%, more than twicethe previous year’s expansion rate of 21.2%. Production of integrated circuitsrose by 43.7% to 21.41bn units, that of semiconductors by 43.2% to 16.4bnunits, and that of electronic transistors by 32.1% to 17.48bn units. Theelectrical products industry expanded by 28.7%, compared with just 2.7% in1999, reflecting the strength of overseas demand for high-end audio-visualequipment such as video compact disc and digital video disc players. Otherindustries that registered strong growth in 2000 include fabricated metals(33.8%), petroleum products (19.9%), transport equipment (19.1%),construction materials (18.6%), food products (16.2%) and chemicals (15.1%).

The slowing US economy is adversely affecting the manufacturing sector,notably the dominant electronics and electrical product industries. Foreignsales of electronic and electrical goods, having reached a record M$22bn(US$5.8bn) in September 2000, totalled M$16.7bn in January 2001 andM$17.3bn in February. Exports of electronic equipment and parts, whichslipped from M$8.9bn in August to M$7.2bn in December 2000, were valued atM$6.6bn in January 2001 and M$6.3bn in February. Sales of semiconductorstotalled M$6bn and M$5.8bn in January and February, respectively, down froma peak of M$6.9bn in September 2000.

In late March Teh Chin Bin, chairman of the Malaysian-American ElectronicsIndustry (MAEI), which groups the local operations of 18 multinationals, saidthat members’ earnings could drop by 20-25% this year, reflecting weakeningoverseas demand. MAEI companies’ exports reached a record M$45bn in 2000,up from M$36bn in 1999. Mr Teh predicted lower capacity utilisation (many

Manufacturing productionsoared in 2000

Industry is hit by USslowdown

The electronics industry isunder pressure

24 Malaysia


companies have aggressively expanded capacity in recent years), price erosionand the redirection of planned investment to low-cost China. Malaysia-basedelectronics producers have been laying off staff, reducing working hours anddeferring capital expenditure. In March Seagate Technology, the world’s biggestdisk-drive maker, announced that it was shutting down a recording headsfactory in Penang and retrenching 4,500 employees.

The value of proposed manufacturing investments approved by the govern-ment in January-February 2001 was M$7.3bn, with foreign companiesaccounting for M$4.7bn. Foreign companies accounted for M$19.8bn of theM$33.5bn of approvals in 2000 as a whole. Applications for investment in themanufacturing sector—arguably a better indicator of future trends—amountedto just M$3bn in the first two months of the current year, with foreign firmsaccounting for M$1.8bn. Foreign companies accounted for M$29.7bn of theM$45.9bn of applications received last year.

Lobbies representing foreign business have been pressing for improvements inthe investment environment. In early April the Malaysian InternationalChamber of Commerce and Industry advocated the easing of a range ofperceived obstacles, including equity limits and restrictions on the hiring ofexpatriate personnel. The American Malaysian Chamber of Commerce calledfor a reduction in the corporate tax rate (currently 28%), a longer tax holidayperiod (currently 10 years), better incentives to encourage reinvestment (themain source of capital formation in the manufacturing sector) and measures toimprove the quality of the workforce.

Oil and gas

Crude oil production, including condensates, averaged 683,000 barrels per dayin 2000, down by 1.2% compared with the 691,000 b/d pumped in 1999,according to the end-March annual report by Bank Negara (BN, the centralbank). While the volume of crude exports fell by 5.9% to 16.7m tonnes, theirvalue surged by 53% to M$14.2bn (US$3.7bn) owing to a 62.7% increase, toUS$29.58/b, in the average price of shipments. Natural gas production rose by9.4% last year, to 4.3bn standard cu ft a day. Exports of liquefied natural gas(LNG) rose by 2.4% in volume to 15.4m tonnes, and jumped by 78% in valueto M$11.3bn on a 73.8% increase, to M$731/t, in average prices. Output ofcrude oil and condensates averaged 707,319 barrels a day in January-March2001, up by 0.9% year on year and 4.7% quarter on quarter, respectively.Natural gas production averaged 4.6bn standard cu ft/day, compared with4.53bn standard cu ft/day in the first quarter of 2000 and 4.29bn standard cuft/day in October-December 2000.

In late March the government dismayed foreign investors by announcing thatit would cease issuing licences to overseas companies to open new petrolstations. The move stemmed from a dispute between multinationals and theirlocal distributors over the terms of new dealership agreements, inter aliaenvisaging substantially higher rental charges for retail outlets. The domestic

Investment approvalsremain relatively firm

Industry calls for removalof investment obstacles

Crude oil and gasproduction rises

Oil multinationals areaccused of “arm twisting”

Malaysia 25


trade and consumer affairs minister, Muhyiddin Yassin, accused themultinationals of “arm twisting” the retailers into accepting unfair conditions.After the oil companies, which had argued that rising operating costs justifiedthe higher rentals being demanded, promised to seek a resolution of thedispute that would satisfy the dealers, and succeeded in doing so by mid-April,Mr Muhyiddin agreed to withdraw the ban on new licences. Multinationals,led by Exxon Mobil and Royal Dutch/Shell, own more than 2,000 retailstations in Malaysia, compared with around 550 owned by the state-runhydrocarbons corporation, Petroliam Nasional (Petronas).

The scheduled delivery to Malaysia from mid-2002 of natural gas from theCakerwala fields in the Gulf of Thailand has again been called into question,this time owing to objections by Thailand’s environmental authorities. Thesewere said to be concerned about the potentially adverse impact of a plannedpipeline between the Songkhla in southern Thailand—where the offshore gas isdue to reach landfall and be treated in separation plants—and Malaysia’sKedah state. Work on the separation plants and onshore pipeline was to havebegun by March 1st 2001 but was delayed by the lack of requisite environ-mental approvals. Residents in Songkhla have also staged protests against theproject. The chief executive of Petronas, Hassan Marican, said in mid-April thatalternative options to bring the gas to Malaysia—including piping it ashore inTerengganu state—were being considered. Petronas is developing theCakerwala fields together with the Petroleum Authority of Thailand. Inmid-1999 the project was briefly threatened when a Malaysian member of aconsortium that failed to secure the engineering, procurement andconstruction contract took legal action to have the award annulled.

In late March Petronas signed an agreement with its Indonesian counterpart,Pertamina, to buy 1.5trn cu feet of gas over 20 years from the West Natunafield in the South China Sea. Flows, by pipeline to Petronas’ Duyong field offTerengganu, and thence into the national grid, are due to commence inAugust 2002 at 100m standard cu ft/day, rising to 250m standard cu ft/day by2004. Earlier that month Petronas began shipping LNG cargoes to Japan andSouth Korea on behalf of Pertamina, after threats from separatist rebels inIndonesia’s Aceh province forced the closure of gas fields supplying itsprocessing plant at Arun. Pertamina needed the LNG to meet contractualcommitments to its buyers. One of these, Japan’s Tohoku Electric PowerCompany, signed a 20-year agreement in mid-April with the Petronassubsidiary, LNG Tiga, to buy 900,000 tonnes of LNG a year. The deal is worthan estimated US$4.2bn and shipments, from a plant at Bintulu in Sarawak, arescheduled to begin in 2005.

Agriculture

Value added in the agriculture, forestry and fisheries sectors edged up by 0.4%in 2000, having expanded by 3.8% in 1999. The slower growth rate wasprimarily the result of a modest 2.7% increase, to 10.84m tonnes, in theproduction of crude palm oil (CPO), after a 26.8% jump in output in 1999. The

The Thai governmentobjects to a gas pipeline

Unrest in Aceh boosts salesby Petronas

Crude palm oil productiongrows more slowly

26 Malaysia


growth decline was attributable to a downturn in the biological yield cycle ofoil palm trees and lower average yields caused by ageing plantations. HigherCPO output and generally poor offtake by overseas buyers resulted in a furtherincrease in domestic stocks to 1.4m tonnes at end-2000, from 1.2m tonnes ayear earlier. Weak international demand and abundant supplies saw theaverage CPO price fall by a further 30% in 2000 to US$263 (M$1,000) a tonne,a six-year low. While palm oil exports declined by 1.1% in volume to 8.86mtonnes, they fell by 31.3% in value to M$9.95bn (US$2.6bn).

CPO prices have continued to fall in 2001, reaching a low of M$680/tonne inApril before recovering to around M$760/t in May. Forecasts that 2001production could climb to a record 11.5m tonnes prompted the government toconsider novel market-boosting initiatives. In early March the primaryindustries minister, Lim Keng Yaik, announced that local producers would beasked to set aside 5% of their output—500,000 tonnes in all—for sale to thegovernment at M$725/t. He said that the tonnage would be sold on toelectricity generators for use as fuel. There were also government-to-government discussions with India and China, Malaysia’s biggest buyers, onpossible barter deals involving the trading of palm oil for contracts to upgradethe Malaysian railway network. During a mid-May visit, the Indian primeminister, Atal Bihari Vajpayee, said that his government would review theimport duties of 75% and 85% that it had levied on CPO and refined palm oil,respectively, since the end of February.

Production of natural rubber fell by 19.9% to 616,000 tonnes in 2000,undermined by weak prices, low yields and tapping rates, and the conversionof holdings to alternative crops. With such trends persisting this year, thegovernment announced in early April that it would provide up to M$1bn inloans and grants to enable smallholders accounting for the bulk of output toundertake replanting. This allocation was in addition to a M$500mreplanting fund promised for both rubber and oil palm smallholders amonth earlier. Output of cocoa beans fell by 16% to 70,000 tonnes last year,as poor prices arising from abundant global supplies encouraged growers toswitch to more remunerative crops. Cocoa export earnings slumped by70.7% to just M$33m with a 55.2% drop in the volume of sales and a 34.5%

Even weaker CPO prices arepossible in 2001

Incentives to replantrubber trees are tripled

Malaysia 27


fall in average prices. Sawn log production rose by 9.6% to 23.9m cu metresin 2000, largely in response to stronger demand from local wood-basedindustries. Exports declined by 3.8% in volume to 6.48m cu metres and by6.5% in value to M$2.49bn.

In the first quarter of 2001 production of CPO amounted to 2.8m tonnescompared with 2.9m tonnes and 3.3m tonnes in the third and fourth quartersof 2000, respectively. Output of natural rubber fell by 10.8% year on year to145,086 tonnes. Sawn log production, at 4.21m cubic metres, was down by15.5% year on year and 19.7% lower than in October-December 2000.

Infrastructure

The US-based Northwest Airlines became the latest foreign carrier to declarethat it would stop flying to Kuala Lumpur International Airport (KLIA) when itannounced the suspension of its thrice-weekly service from Osaka from theend of September 2001. It cited lack of profitability—essentially owing to itsfailure to attract a sufficient number of business-class customers—on the route.Lufthansa, British Airways, Qantas and Aeroflot have all terminated theirflights to KLIA for the same reason during the past two years. Most haveincreased the frequency of services to Singapore and Bangkok, which havemore local and international connections and therefore offer more passengers.In a bid to reverse the trend, the transport minister, Ling Liong Sik, announcedthat from May 1st, new or additional flights to KLIA by foreign carriers wouldnot be subject to either landing or parking fees, provided that they were at least25% full.

Mohamad Nor, an ex-banker appointed by the government in February asmanaging director of the troubled airline, Malaysian Airline Systems (MAS),revealed in mid-March that a restructuring plan was being devised to boostproductivity, cut costs and refinance the carrier’s substantial debts. Predicting“lousy numbers” for the financial year to end-March (industry analysts forecasta pre-tax loss of as much as M$1.3bn, or US$342m, up from M$255.7m in theprevious financial year), he indicated that this could involve scrapping flightsto unprofitable overseas destinations, lay-offs, and the separation ofinternational and (loss-making) domestic operations. The new boss said thatthe policy of selling and leasing back aircraft, vigorously embraced by theprevious management to help to repay loans and raise operating capital, hadceased. Aircraft would henceforth be used as collateral for any fresh borrowing.Talks on a possible sale of MAS equity were being held with unnamed foreigncarriers, Mr Nor said, but he suggested that they were unlikely to bear fruituntil the airline was restored to profitability.

Dr Mahathir said in early May that a decision on whether to increase the tariffscharged by Tenaga Nasional, peninsular Malaysia’s predominantly state-ownedpower distributor, would not be made until the end of 2001. Tenaga officialsreiterated that a rise in prices would be necessary if the price that it paysPetronas (the state-run hydrocarbons producer) for gas feedstock—accounting

The natural resource sectorremains weak in 2001

Another carrier stopsflying to Kuala Lumpur

An MAS restructuring planis being devised

A decision on electricitytariffs is postponed

28 Malaysia


for around two-thirds of its fuel costs—were to rise. Although a three-yearagreement pricing the raw material at M$6.40 (US$1.70) per million metricBritish thermal units (BTUs) formally expired at the end of December, asuccessor pact has yet to be finalised. With debts of around M$28bn(US$7.4bn) and big spending plans for the medium term, Tenaga has depriveditself of a significant source of funding by suspending the scheduled sale toprivate-sector operators of equity in its thermal generating plants. However,capital outlays in the short term need not be as high as previously envisaged,given that growth in demand for electricity is expected to decline to as low as7% in 2001, compared with an earlier forecast of 11% and the 12.8% ex-pansion in demand in 2000.

Tenaga may have to part-finance the construction of a controversial 2,400-mwhydroelectric facility and dam at Bakun in the Borneo island state of Sarawak.In late February the cabinet formally agreed to revive the project, which hadbeen shelved in 1997 following the onset of the last economic crisis. The costis now estimated at around M$9bn, down from the estimate made in 1997 ofM$16bn, because plans to lay an undersea cable to the peninsula have beenscrapped. The government hopes that the project will result in lower-costpower for Sarawak and neighbouring Sabah—thereby enticing morecompanies to establish themselves in the two states—and that part of itsoutput can be exported to Brunei and the Indonesian province of Kalimantan.In late May local press reports said that seven consortia had submitted bids tobuild the two temporary coffer dams needed prior to the construction of theBakun dam proper.

The latest official data indicate that excess capacity in the commercial propertymarket remains high. At end-June 2000, the overhang of purpose-built officespace countrywide was estimated at over 2.2m sq metres, and the incomingsupply at 2.5m sq metres. The glut was most acute in the Klang Valley (KualaLumpur and its hinterland). Based on an annual uptake of 479,000 sq metres—the yearly average during the past decade—it would take 5.3 years to fullyutilise the existing surplus, officials forecast. An estimated 1.3m sq metres ofoffice space in the commercial capital was vacant, yet an additional 1.8m sqmetres was under construction there, they said. As a result, the averageoccupancy rate at prime office complexes in the Klang Valley declined from apeak of 95.5% in 1996 to 75.4% in 2000. However, the average monthly rental,having fallen from a high of M$60 per sq metre in 1996 to M$42 in 1999, roseby 14.3% last year to M$48. Nonetheless, rental rates at secondary complexeshave continued to slide. The ongoing relocation of government ministries andagencies to the new federal capital of Putrajaya, 30 km south of Kuala Lumpur,can only exacerbate these trends.

The market for retail space has likewise remained severely oversupplied. Sparecapacity in shopping complexes nationwide amounted to 1.4m sq metres inmid-2000, and an additional supply of 1.4m sq metres was under construction.Again, the overhang was heaviest in the Klang Valley, where officials forecastthat it would take 4.3 years to absorb the existing surplus (at an estimated rateof 344,000 sq metres a year). Monthly rental rates for prime retail space in the

Tenaga will need funds tobuild the Bakun dam

The commercial propertymarket remains depressed

The oversupply of retailspace continues

Malaysia 29


Klang Valley, which had dropped from M$267/sq metre in 1997 to M$162/sqmetre in 1998, continued to recover slowly last year, reaching M$194/sq metre,mirroring the improvement in occupancy rates. But occupancy and rental ratesin secondary locations weakened further. In a bid to reduce the surplus, thegovernment announced in early May that foreigners could henceforth buy andwholly own any property costing more than M$250,000. Previously they hadto incorporate a company, at least 30%-owned by a Malaysian shareholder,before doing so, and reduce their own stake in it to 49% within five years.

Financial and other services

Total loans outstanding amounted to M$455.5bn (US$119.9bn) at end-March2001, an increase of just 0.3% compared with the end-2000 level. New loanapprovals in the first quarter of 2001 averaged M$10bn a month, down fromM$12bn a month last year. However, the value of approvals rose to M$11bn inMarch, from M$9.4bn in February and M$9.6bn in January. Disbursementsaveraged M$30.4bn a month, fractionally above the M$30.1bn monthlyaverage for calendar year 2000, but below the M$32.9bn average recorded inOctober-December 2000. Loan repayments averaged M$29.8bn a month in thefirst quarter of 2001, up from the average of M$28.9bn a month in 2000 as awhole, but down from the M$30.5bn a month in the final quarter of 2000.Partly as a result, the net non-performing loan (NPL) ratio, on the laxsix-month arrears basis preferred by the government, rose to 7.1% atend-March from 6.3% at end-2000. In value terms NPLs rose by M$3.3bn toM$28bn. Bank Negara (BN, the central bank) revealed that this figure did notinclude M$2.6bn in dubious loans, reportedly owed by two Kuala Lumpurlight-rail companies taken over by the government in 2000.

The Kuala Lumpur Stock Exchange (KLSE), depressed by poor corporateearnings and concerns about the economic slowdown and a possibledevaluation of the ringgit, remained a weak source of funding, with mostnewly quoted stocks quickly falling well below their offer prices. The bearishsentiment was compounded on May 19th when Morgan Stanley CapitalInternational (MSCI), a provide of global stockmarket indices, announced there-weighting of companies on its closely tracked investment indices. Malaysia’sweighting on MSCI’s All Countries Far East ex-Japan Index, for example, fell to5.3% from 8.6%. The revisions reflected the availability of companies’ sharesfor open trading rather than their market capitalisation—the previousdeterminant—with the result that stocks of government- and family-controlledMalaysian companies were either removed or downgraded. However, thechanges were not expected to trigger a major outflow from the KLSE as mostforeign investors, having sold heavily in the preceding months, were alreadyconsiderably underweight.

Loan growth slows afterthe year-end spurt

Investment indexre-weightings hit the KLSE

30 Malaysia


Foreign trade and payments

Gross exports (fob basis) totalled M$86.4bn (US$22.7bn) in January-March2001, almost 2% higher than in the year-earlier period, but 9.8% lower than inOctober-December 2000. Exports of electronic and electrical goods slipped toM$51.9bn, from M$59.5bn in the fourth quarter of 2000, an increase of only0.9% year on year but a fall of 12.7% quarter on quarter. Crude oil receipts inthe first quarter were valued at M$3.3bn, up by 2% year on year but down by11.9% compared with the M$4.2bn earned in the last three months of 2000.The decline was partly attributable to easier prices, since the volume of salesfell by 7.9%, to 4.16m tonnes. Earnings from liquefied natural gas (LNG) roseby 18.3% to M$3.62bn, with a 15.5% increase in the volume of shipments to4.47m tonnes. Earnings from palm oil in the first three months of this yeardropped by 11.8% compared with the fourth quarter of 2000 to M$2.2bn,while the volume of shipments remained almost unchanged at 2.6m tonnes.Total gross imports (cif basis) followed a broadly similar pattern to grossexports, largely reflecting the manufacturing sector’s heavy dependence onintermediate goods from abroad. Imports stood at M$72.8bn in January-March, up by 6.7% year on year but 7.5% lower than in October-December2000. The first-quarter trade surplus, at M$13.6bn, was 17.6% lower than theM$16.5bn recorded in the year-earlier period and 20.8% lower than theM$17.2bn registered for October-December 2000.

The current-account surplus amounted to M$7.6bn in October-December2000, 4.3% higher than the revised July-September figure of M$7.3bn, theStatistics Department announced in late May. This put the 2000 full-yearsurplus at M$31.9bn, 33% lower than the M$47.9bn achieved in 1999. Themerchandise trade surplus (fob-fob basis) rose to M$21.6bn in the fourthquarter, from M$20.1bn in the third. The deficit on the services accountwidened to M$11.8bn, from M$11bn. While outflows of investment incomeincreased by 11% quarter on quarter to a record M$8.1bn, largely owing to therepatriation of profits and dividends by multinationals, net payments forfreight and insurance fell by 13.5% quarter on quarter to M$3.2bn, reflectingthe decline in merchandise imports. The surplus on the travel and educationaccount edged up by 4% to M$2.6bn. Net payments for other services rose by23.3% to M$3.7bn. For 2000 as a whole, the services deficit increased by 26.5%to M$40.6bn, with the investment income deficit rising by 37.4% toM$27.9bn, net payments for freight and insurance increasing by 36.2% toM$12.8bn, earnings from travel and education rising by 63.9% to M$10bn,and net outlays for other services 11.5% higher at M$11.6bn.

The surplus on the long-term capital account surged to M$5.2bn in the fourthquarter, from M$2.8bn in the third, with government borrowings helping topush net inflows of official capital up to M$2.8bn, from M$1.6bn. For 2000 asa whole, the long-term capital account surplus was 11.9% lower, at M$11.1bn,with net official inflows down by 47.5% to M$3.9bn and net private inflowsup by 20.3% to M$7.1bn. Net outflows of private short-term capital amountedto M$34.9bn last year, compared with M$37.8bn in 1999. They rose toM$19.3bn in October-December 2000, from M$11.1bn in July-September.

Export growth slowsfurther

The current-accountsurplus increases slightly

Brunei 31


Brunei

Political structure

Negara Brunei Darussalam

Sultanate

The sultan is advised on policy matters by four councils: the Religious Council, the PrivyCouncil, the Council of Succession and the Council of Cabinet Ministers

HM Paduka Seri Baginda Sultan Haji Hassanal Bolkiah Mu’izzaddin Waddaulah

None

Courts of first instance exist on a local and religious basis; appeals go to the ReligiousCouncil in religious cases, and to the High Court and thence to the Court of Appeal inother cases. All major judicial posts are filled by the sultan’s appointees

Last election 1968

The sultan, close family members and his appointees control all organs of state power,including the Council of Cabinet Ministers, under the state of emergency that has beenin force since 1962

The Parti Perpaduan Kebangsaan Brunei (the Brunei National Solidarity Party, PPKB),which split from the Parti Kebangsaan Demokratik Brunei (Brunei National DemocraticParty, PKDB) in early 1986, is Brunei’s only legal party, the PKDB having been banned inearly 1988. However, the PPKB is only intermittently active. The promotion of thenational ideology of Melayu Islam Beraja (MIB), or Malay Islamic Monarchy, has beenstepped up since 1990. The Parti Rakyat Brunei (Brunei People’s Party, PRB) has beenbanned since 1962 and operates in exile

Sultan, prime minister, minister of finance & defence Sultan Hassanal Bolkiah Mu’izzaddin

Communications Zakaria SulaimanCulture, youth & sports Hussain Mohamad YusofDevelopment Ismail DamitEducation & health (acting) Abdul Aziz UmarForeign affairs Prince Mohamed BolkiahHome affairs & special adviser to the sultan Isa Awang IbrahimIndustry & primary resources Abdul Rahman Mohammad TaibReligious affairs Mohamed Zain Serudin

Official name

Form of state

The executive

Head of state

National legislature

Legal system

National elections

National government

Main political organisations

Key ministers

32 Brunei


Economic structure

Annual indicatorsa

1996 1997 1998b 1999c 2000d

GDP at market prices (Br$ m) 7.7 8.0 8.1 8.2 8.3

Real GDP growth (%) 3.5 4.0 1.0 2.5 3.5c

Crude oil production (‘000 b/d) 165 165 155 180 175

Gas production (bn cu metres) 9.37 9.18 9.28 9.59 9.88

Consumer price inflation (av; %) 2.0 2.0 –0.7e 1.0 n/a

Population (‘000) 305.1 314.4 323.6 333.0d 342.0

Exports fob (US$ m) 6,670 3,973 1,979 2,552 n/a

Imports cif (US$ m) –3,516 –3,154 –2.353 –1,328 n/a

Reserves (US$ m) 5,937 3,656 4,011 n/a n/a

Exchange rate (av; Br$:US$) 1.41 1.48 1.67e 1.69e 1.72e

June 12th 2001 Br$1.8160:US$1

Origins of gross domestic product 1998f % of total

Oil & gas sector 32.5

Construction 6.6

Wholesale & retail trade 11.2

Community, social & personal services 33.0

GDP at factor cost incl others 100.0

Principal exports 1999f Br$ m Principal imports 1998f Br$ m

Natural gas 1,860 Machinery & transport equipment 981

Crude petroleum 1,650 Basic manufactures 854

Refined products 111 Food & live animals 396

Main destinations of exports 1999g % of total Main origins of imports 1999g % of total

Japan 42.3 Singapore 34.2

US 17.0 UK 15.1

Korea 14.4 Malaysia 15.1

Thailand 8.9 US 4.9

a The source for most of the earlier data is the IMF, Staff Country Report No. 99/19. b IMF estimates. c Brunei government estimates. d EIUestimates. e Actual. f Brunei Statistical Yearbook, 1999, estimates. g IMF, Direction of Trade Statistics.

Quarterly indicators1999 20001 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Production (prodn/day)Crude petroleum ‘000 barrels 160 157 140 150 194 192 157 167

Foreign tradea (US$ m)Exports fob 625.3 557.4 630.4 738.8 659.4 704.6 784.4 n/aImports cif –306.8 –376.9 –332.6 –311.5 –219.4 –409.6 –381.5 n/aTrade balance 318.5 180.5 297.8 427.3 440.0 295.0 402.9 n/a

a DOTS estimates.

Sources: Oil & Gas Journal; IMF, Direction of Trade Statistics.

Brunei 33


Outlook for 2001-02

Since February 2000, when the Brunei Darussalam Economic Council (BDEC)released a landmark report calling for immediate efforts to restructure theeconomy away from reliance on oil-fuelled government spending, stateofficials have been calling for an increased economic role for the private sector.A series of economic stimulus packages for local businesses have beenlaunched, and the government has made a number of highly publicisedannouncements of its intention to scale back its extensive social welfareprograms. The government now seems, however, to be admitting that its plansfor privatisation of government functions were overoptimistic. In May HajiAbdul Wahab, the permanent secretary at the prime minister’s office and thedirector-general of Brunei’s Department of Planning and Development,suggested that lingering private-sector weakness left the government no choicebut to continue to subsidise Bruneian business. Mr Wahab stated that Bruneihad settled on a policy of “controlled entrepreneurship,” in which thegovernment would take a financial interest in strategic ventures throughfinancing, equity participation and management involvement. Only when theprivate sector was well developed would most of the government businessstakes be privatised.

Brunei, which relies almost entirely on oil and natural gas exports forgovernment funding, enjoyed record levels of petrochemical production andconsistently high prices for its main exports in 2000 and 2001, facilitating thereturn to a policy of extensive government subsidies. Continuing governmentpatronage of the private sector will also reduce the risk of a political backlashagainst the sultan’s absolute rule. Such a backlash had seemed a growingpossibility in 2000 and early 2001, when falling standards of living coupledwith publicity about the lavish lifestyles of the royal family, especially thescandal-ridden Prince Jefri, led many Bruneians to criticise the governmentopenly. In the long term, however, given that Brunei’s oil reserves are expectedto run dry in twenty to thirty years’ time, the government will have toresurrect its goal of transferring more economic responsibilities to its citizens.

Brunei’s GDP is likely to grow by 3% in 2001, slightly below the EIU’s 3.5%forecast for the Association of South-East Asian Nations (ASEAN) as a whole.We forecast that oil prices will remain fairly high, averaging US$24.2/barrel in2001. However, the expected weakening of demand from Japan, Brunei’s majorexport market, as well as the expected economic slowdown in neighbouringMalaysia and Singapore, will keep Brunei from achieving a faster rate forgrowth. Continuing stagnation in the private sector will also be a restraint oneconomic growth. Consumer spending rose during the first quarter of 2001,but the weakening of the Singapore dollar, to which the Brunei currency ispegged, as well as the cost increases resulting from new regulations requiringall food sold in Brunei to be halal—that is, prepared in accordance with Islamiclaws—will lead to higher inflation and cause a contraction in spending in thesecond half of 2001.

Privatisation plans arescaled back

GDP growth will remainslow

34 Brunei


Brunei is continuing its drive to attract foreign investment, which thegovernment hopes will boost the flagging private sector and create jobs for thegrowing population of university graduates. The sultanate has traditionallylooked to the West for such funds but it is now pursuing a policy of tappingthe potentially lucrative Islamic market for business. Brunei continues to tryto lure Islamic banks and insurance providers to its new InternationalFinancial Centre. However, business is likely to move slowly to Brunei, out ofconcern over the immature financial infrastructure and the lack ofexperienced personnel. Brunei is also repositioning its tourist industry to serveIslamic travellers, who are likely to be less discouraged than non-Muslims bythe bans on alcohol, non-halal food and public performances. In August 2001Brunei will host an International Islamic Expo, which is expected to bring in100,000 visitors.

The return of Prince Jefri to Brunei in May 2001 signalled the start of a newchapter in the corruption scandal in which the sultan’s youngest brother isinvolved. The government had charged Prince Jefri in February 2000 withmisappropriating US$14.8bn in state funds during his chairmanship of theBrunei Investment Agency (BIA) but the prince had settled the suit out of courtin October 2000 after promising to return the missing money to the state.With Prince Jefri back in Brunei, where he faces a Br$1bn (US$550m) lawsuitby the creditors of his now-defunct conglomerate, Amedeo, the court cases willgenerate critical headlines as the proceedings are likely to reveal a tangled trailof shady financial dealings. High-ranking government officials and prominentbusinesspeople are expected to be called to testify in court. Unless Prince Jefrimanages to reach another settlement with his creditors, the case can beexpected to bring to light many incidents that the normally secretivegovernment would prefer to keep under wraps.

The political scene

Prince Jefri’s promise to return the missing US$14.8bn of Brunei InvestmentAgency (BIA) funds, which were funnelled to his personal accounts and to hisnow defunct Amedeo corporation, will be difficult to realise. The liquidatorsassigned to collect his assets, Foo, Kon & Tan, encountered tremendousdifficulties when they tried to trace the funds. The liquidators have filed aBr$1bn (US$550m) debtors’ suit against Prince Jefri but have been unable toserve him with a summons to appear in court. Prince Jefri’s return to Brunei inMay 2001 immediately fuelled media speculation that the scandal of themissing billions, which had all but disappeared from the press, would againtake centre stage in Brunei. Seven cases related to the Amedeo corporation arecurrently registered with the Brunei High Court, while hundreds more havebeen filed around the world. In May the US-based property company, AmedeoLas Vegas Inc, filed a suit in a US court against Prince Jefri, the state of Bruneiand the BIA, claiming that Brunei’s High Court had issued an injunctionprohibiting Amedeo Vegas from disposing of its assets without the permissionof the Brunei government or the BIA, without providing Amedeo Vegas with a

The Prince Jefri scandalreclaims the headlines

The foreign investmentdrive will continue

The Amedeo failure leadsto hundreds of lawsuits

Brunei 35


chance to be heard in court. According to Brunei’s Borneo Bulletin newspaper,government officials expect hundreds of similar suits to be filed, which wouldcreate a bottleneck in Brunei’s court system that could take years to clear.

The government has continued to promote vigorously the concept of Bruneias a “Malay Islamic Monarchy,” led by an absolute ruler according to Islamicprinciples. Government agencies have increasingly cracked down onpractices deemed to be anti-Islamic. In March the sultan addressed thenation, confirming that “the government has been modifying the country’slaws to meet the requirements of the Islamic teachings”. Ever since the PrinceJefri scandal hit the headlines in February 2000, the government has beentrying to polish its tarnished political image by positioning itself as anexample of Islamic orthodoxy.

In March 2001 Brunei’s internal security department (ISD) announced that ithad detained three people, including a former police superintendent, andquestioned twenty-five others about their alleged involvement in anunregistered Christian association. The ISD claimed that the group’s membershad been trying to convert Muslims away from their religion, a punishableoffence in Brunei, and to “jeopardise religious harmony and stability”. In Maythe Ministry of Religious Affairs announced that all Muslim men are requiredby Bruneian law to attend mosques for Friday mass prayers or risk being fined.Also in May, Brunei announced that it would be reforming its publicadministration to bring it more closely in line with the Islamic ideal.Complaints have been heard for many years about the inefficiency and poorcustomer service of the government bureaucracy. The director of Brunei’s civilservice, Dato Malai, claimed that the programme—which he stated wouldinvolve training 500 senior government officials and offering 10,000 civilservants Islamic job counselling—will help to improve the functioning of thecivil service and reinforce Brunei’s status as a centre for Islamic orthodoxy.

In a case that seemed to signal growing discontent with the new governmentpolicies of “Islamicising” Brunei, a restaurant owner and his wife sued theminister of religious affairs and three employees of the government boardresponsible for issuing halal permits for alleged wrongful acts and defamationrelated to a raid on their restaurant in January 2001. The plaintiffs claimed thatthe government had no just cause to conduct the raid, which was intended todiscover the presence of non-halal food on the premises. They also chargedthat the restaurant owner’s wife, who is an ethnic Chinese convert to Islam,was insulted by those carrying out the operation, and claimed damages for thecollapse of their business following the raid. According to Brunei law, non-Muslims may not work in the food-handling business. The case, which hasattracted substantial media coverage, is significant in that it focuses attentionon growing concern over what many Bruneians perceive to be theoverzealousness with which the government has been enforcing its newIslamist policies, including anti-vice crackdowns and halal permits. Brunei’scourts have also long held to the principle that government personnel actingin their official capacities are immune from civil action. The fact that the caseis being allowed to proceed through the courts may therefore indicate that the

The sultanate promotes itsorthodox Islamic image

The minister of religiousaffairs is sued

36 Brunei


judiciary is considering changing its stance on the legal accountability of thegovernment. In February 2001 Brunei’s chief justice, Sir Denys Roberts,suggested that, in order to attract foreign investment, Brunei will need toreconsider the government’s immunity from legal action.

The largest and longest labour action in Brunei’s history ended in late May,with nearly 300 Filipino guest workers being repatriated at a cost of Br$100,000(US$55,000) to the Philippines. Almost 1,000 workers, mostly Filipinos, hadgone on a 15-day strike in early May, claiming that the management ofBrunei’s largest textile factory, Azhimujaya, had subjected them to unsafeworking conditions and failed to honour contractual obligations related toovertime pay. The factory management claimed that the workers weredemanding an unreasonable 23% pay increase. Brunei’s labour departmentsided with the factory’s management, claiming that such a strike was illegal inBrunei and that any complaints by workers should have been addresseddirectly to the government. Tensions grew between the Bruneian andPhilippine governments during the strike, when Philippine embassy personnelwere barred by the labour department from participating in negotiations toend the dispute. The Philippine ambassador, Enrique Zaldivar, stated that thePhilippine labour secretary had instructed the Philippines’ Overseas Workers’Welfare Administration to investigate the incident. Brunei currently hosts22,000 Filipino guest workers, most of whom hold low-skilled positions in themanufacturing and service sectors. Brunei relies heavily on such foreignworkers to fill low-status jobs that few Bruneians are interested in performing.Some Bruneians expressed concern that the strike could hurt Brunei’sinternational image, hindering its efforts to attract tourists and satisfy its needfor labour.

Brunei’s only registered political party, the Brunei Solidarity National Party(PPKB), which has only 50 members, announced that it would allow ethnicChinese to join its ranks. There are approximately 50,000 ethnic Chinese inBrunei, comprising around 15% of the resident population. The Chinesecommunity, although economically strong, has traditionally had littlerepresentation in Bruneian political circles. The PPKB’s chairman, HajiMohammad Hatta, announced that ethnic Chinese would be welcome in theparty, but that they would not be permitted to hold high-level posts. Heexpressed hopes that opening the party to ethnic Chinese would increase theparty’s membership and strengthen its finances. The PPKB, which like allorganisations in Brunei is closely monitored by the state for signs of overtdissent, does not function as a real opposition party in Brunei, but rather re-stricts itself to making carefully worded suggestions about government policy.

Economic policy and the economy

Despite efforts made by the government to stimulate the private sector, hardhit by the 1997 Asian economic crisis and the 1998 collapse of Prince Jefri’sAmedeo group of corporations, Bruneian business remains in a slump. The

The repatriation of guestworkers ends a strike

The only political partyadmits ethnic Chinese

Brunei’s private sector isstill lagging

Brunei 37


construction industry, the largest income earner after oil and gas exports,remains in the doldrums. Although the value of retail sales increased by 12%year on year during the first quarter of 2001, retailers reported that the rise wasprimarily the result of the higher prices that consumers are now paying forfood products after the introduction of halal laws—all food sold in Brunei hasto be prepared in accordance with Islamic law—as well as a crackdown oncheaper products smuggled from neighbouring Malaysia. The tourist industry,of which Brunei had high expectations following the successful hosting of theNovember 2000 APEC summit meeting, also remains slow. In April theDirectorate-General of Tourism reported daily tourist arrivals averaging 130 perday, not including those attending meetings and conferences. These are farfewer than are needed to fill the more than 2,000 hotel rooms in Brunei.

The continuing private-sector weakness has sparked a growing number ofcomplaints by businessmen that the government is not doing enough to liftthe economy out of its current woes. According to Brunei’s Borneo Bulletinnewspaper, the local business community is disappointed that high oil and gasrevenue for year 2000 has not led to increased support for the private sector. InMay the government appeared to respond to these criticisms, with Haji AbdulWahab, the permanent secretary at the prime minister’s office and director-general of the Department of Planning and Development, stating that thegovernment recognised that it must postpone privatisation until the privatesector is better developed. Mr Wahab said that the government was prepared toact as an “entrepreneur”, investing in strategic business areas to help theprivate sector to establish itself.

The government’s efforts to stem rising unemployment have made littleheadway. The official employment rate in Brunei is 6% but the governmenthas admitted that more than 25% of school leavers are currently unable to findjobs. Bruneians traditionally work for the large government bureaucracy upongraduation, where they enjoy higher salaries and more elaborate benefits thanthose available in the private sector. However, the stagnating economy hasforced the government to stop hiring new civil servants and promote private-sector employment instead. In February 2001 the government launched aBr$2.2m (US$1.2m) scheme in which unemployed graduates were offeredsix-month-long government-paid apprenticeships in local firms. However, ofthe estimated 7,000 unemployed graduates resident in Brunei, only 300registered for the programme. According to a series of articles in Brunei’s BorneoBulletin newspaper, the lacklustre response to the programme was owing to theperception that private-sector jobs are poorly paid and lacking in prestige. Butaccording to the deputy commissioner of the Department of Labour, HajiAhmad Baihaiki, the fault lies with some private-sector companies thatdiscriminate against local workers, perceiving Bruneians to be less competentand committed than their foreign counterparts.

In order to address the continuing problem, the sultan in May announced hisapproval of a new Br$30m micro-credit financing scheme for unemployeduniversity graduates. Under the new programme, which took effectimmediately following the sultan’s announcement, university graduates mayapply for credit lines of up to Br$30,000 (US$16,500) to start their own

Unemployment woescontinue

38 Brunei


businesses. Priority will be given to small-scale enterprise projects in theprimary resources sector, manufacturing and the service sector. The schemewill initially be implemented through the Islamic Development Bank of Bruneiand is intended to be expanded later to involve other banks. The governmentappears to hope that such a programme will prove more appealing to youngBruneians than job training in the tourist and other service industries, whichare perceived to have low social status.

The new regulations which require all food sold in Brunei to be certified halalremain controversial. Consumers have been complaining that the regulationshave led to a doubling or tripling of the price of meat, while economists havewarned that the lack of a local food-processing industry will cause a rise inimports. The government has defended its stance, suggesting that Brunei couldeventually become an international centre for the setting of halal standardsand the certification of food for other Islamic countries. Sheikh Abas, thedeputy president of the National Chamber of Commerce and Industry,speaking after a meeting in April with the Ministry of Religious Affairs todiscuss consumer discontent with the new halal regulations, stated that aninternational halal certification institute could create jobs for Bruneians andboost Brunei’s profile in the Islamic world.

The government issued new regulations in May which require all individualsand firms operating in the financial services field to obtain licences from theMinistry of Finance. The regulation was issued following a series of incidents inwhich Bruneians claimed to have been swindled by dishonest financial servicesfirms. The Ministry of Finance stated that the licensing and regulation of thetrading of securities and the offering of financial advice was a necessaryprerequisite for the establishment of an international financial centre. Late lastyear the government issued new laws to update the antiquated regulatoryenvironment and attract investors to its planned international financial centre.

In May Brunei signed an “open skies” agreement with the US, Singapore, NewZealand and Chile. The pact abolished restrictions on flights, foreigninvestment and airline marketing services between the five countries. Bruneiofficials hailed the agreement as clearing the way for more flights to Bruneiand for more outside investment in Royal Brunei Airlines. Brunei currentlysuffers from a lack of connecting flights, which has hampered its efforts topromote itself as a tourist destination.

At a meeting in Teheran during May, Brunei officials, together withrepresentatives of eleven gas-exporting countries, controlling two-thirds of theworld’s natural gas reserves between them, established the Gas-ExportingCountries Forum (GECF). The GECF will discuss issues of mutual benefit to gasproducers, including pricing policies, as well as ensure a secure world supply ofnatural gas. While the GECF is not intended to function as a price-fixing cartel,Brunei officials were optimistic that the establishment of the forum would helpto ensure better prices for its liquefied natural gas (LNG) products. Brunei, theworld’s fourth largest producer of LNG, produced 1.12bn cu ft of LNG per dayin 2000, up by 3% compared with 1999.

Financial services firmswill be licensed

Brunei signs multilateral“open skies” agreement

The debate over the newfood regulations continues

Brunei joins a forum of gas-exporting countries

malaysia brunei - iuj.ac.jp filethe economist intelligence unit the economist intelligence unit is a...

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