Keeping Up Growth Will Be Difficult
Amid an Export Slump
LUMPURMalaysia is a key test of whether medium-sized East Asian
economies can keep up at least some growth in the face of the sharp global
downturn. At first glance, the odds appear poor. Malaysia's total exports are
110 percent of its gross domestic product, one of the highest proportions in the
region and well ahead of South Korea and Thailand. Electronics comprise 60
percent of exports. The country's currency, the ringgit, is pegged to the U.S.
dollar, so its freedom to use monetary stimulus is small. And since Sept. 11, it
has been suffering from knee-jerk Western nervousness about Muslim countries.
Officially, the government is keeping a
brave face on things, despite its forecast of a 10 percent fall in exports this
year and a slump in tourism. Its recent budget, focusing on further fiscal
stimulus, forecast growth of 1 percent to 2 percent this year, rising to 4
percent to 5 percent in 2002. In contrast, the consensus of private forecasts
calls for zero growth this year and 3 percent next year.
Some are even more bearish.
The electronics situation is certainly
bad. Ten of thousands of people have been laid off as global demand has slumped.
Malaysia has also lost some manufacturing to China as suppliers have followed
the call of end users to the mainland.
This has more than offset some shifts
from Singapore to Malaysia.
But the macroeconomic impact of the bust
has been less than was feared. Because the value added to electronics is less
than 30 percent, component imports have fallen as fast as exports, so Malaysia's
terms of trade in electronics have not been affected.
Commodity exports - palm oil, oil and
gas, rubber - have had mixed fortunes, but overall prices and volumes have been
The net result is that Malaysia will have
a large current-account surplus this year of around $6.8 billion, or 8 percent
of GDP. Most forecasts for 2002 are for a similar or only slightly lower figure.
So if there is a recession here, it will
be of a very different kind from that of 1998, which was caused by excessive
debt creation and current-account deficits. This time the problem is to spur
monetary growth and stimulate domestic demand to the point where there is a
sharp fall in the current-account surplus.
The budget announced last month
endeavored to do that through a deficit of 6 percent of GDP, by means of a mix
of personal tax cuts, infrastructure spending and a 10 percent pay increase for
civil servants - partly politically motivated by the governing party's desire to
win back the loyalty of Malays who dominate the public service.
The deficit looks big, coming on top of
one totaling 7 percent of GDP this year, which has been bolstered by two
anti-recession supplementary budgets. Deficits since the Asian crisis have now
averaged 4.5 percent of GDP. Some observers worry that large deficits are
becoming endemic and a long-term drag on the economy as the servicing costs
outweigh the gains from public investment.
But others suggest that the huge external
surplus is evidence of the need for more stimulus. Domestic demand, as much as
exports, have to be the key to future growth. The ratio of government debt to
GDP is still only 40 percent, half the peak reached after the recession of the
For now the government is steering a
middle course on the size of the deficit but has left itself room for additional
stimulus should the picture deteriorate. That will depend not just on external
factors but on whether consumers will spend their extra cash.
Also uncertain is whether government
infrastructure spending will come close to its target amid bureaucratic delays
and haggling over who gets what contracts. Little of the supplementary budgets
has yet been spent, so there is plenty of stimulus to come.
And stimulus is needed. Local sentiment
is fragile and probably will remain so while international political
uncertainties reign. But capital outflow, which despite exchange controls was
evident six months ago, has dried up with the improvement in the domestic
political situation and the weakening of the dollar. Foreign-exchange reserves
have risen, and the sharp fall in U.S. interest rates has ended fears that a
rise in local ones would be necessary to defend the fixed exchange rate.
The local stock market is dull and a drag
on consumer sentiment but does not appear vulnerable to a major downward slide
from here. It represents the domestic and commodity economy, not the export
manufacturing one. No sharp upturn seems imminent, but bank liquidity and low
foreign exposure to Malaysia provide a basis for sharp recovery at some point.
Valuations are higher than in Thailand or South Korea but undemanding by
international measures, and many companies have dividend yields in excess of
bank deposit rates. The government is showing belated determination to clean up
corporate debt problems outstanding since 1998. The property sector is both
active and resilient, thanks to low interest rates and favorable demographics.
All in all, Malaysia has the potential to
outperform despite external adversity. Whether it has the self-confidence to do
so is another matter.