Malaysia continues to struggle with globalisation issues. Prime Minister Dr Mahathir Mohamad says the country is facing a difficult future given the increasing competition in the movement of money, capital and goods. Mahathir's globalisation strategy, he insists, will ensure that wages stay low and that goods are competitively priced for the world market, in effect focusing on increasing the country's purchasing power rather than wage earner income.
However, bankers, economists, manufacturers and stockbrokers indicate that the strategy has not shielded the country from the political and economic difficulties of its trading partners. The deceleration in Malaysia's key economic indicators following the terrorist attacks on the United States has Malaysia hoping for a strong American recovery.
Yeoh Keat Seng, CEO of Commerce Trust Bank, believes Malaysia will be a key beneficiary of a US economic recovery, which is expected to occur around mid-year. Leading indicators of Malaysia's GDP are turning upwards.
Kevin Chew, research fellow at the Malaysian Institute of Economic Research (MIER) is moderately upbeat. He says the fall in industrial output and exports has stabilised and the stock market has bounced back, but it's not all good news. "This does not tell us how strong the recovery would be and on the basis of a modest recovery in the US, it is likely to be a dull year."
Mahathir has expressed concern over Japan's slow economic recovery. Accounting for 17% of Malaysia's global trade, Japan is the country's second most important trading partner and its second largest foreign investor after the US.
Chew says that barring any other major global disaster, the Kuala Lumpur Stock Exchange (KLSE) main index should perform better than last year. "The key factors driving the upturn are a recovery in economic growth driven by a turnaround in the external sector, liquidity is plentiful, the government appears to be moving in the right direction in terms of speeding up corporate restructuring and slowing corporate debt problems, and better than expected progress in the Afghan war," Chew says. "The Malaysian market is under-owned by foreign investors and we expect greater participation going forward."
He expects the KLSE index will reach 800-850 by year-end with a recovery play in tech stocks, banking and gaming. "Remember the stock market leads the economic cycle by six months," says Chew. Commerce Trust's Yeoh agrees that the outlook for the stock market seems promising as earnings prospects seem to be improving and demand for stocks exceeds supply. Other positive indicators are an expected surge in liquidity, revival of investor confidence and likely return of foreign investors. "Growth is never stronger than in a year of economic turnabout, which seems to be where we are today," says Yeoh.
Last year, Malaysia's biggest export losers were semiconductors, textiles and wood products, while primary commodity exports have not fallen as much.
Intermediate and capital imports were the most affected imports, while consumer imports performed relatively better. Still, the deceleration in trade figures is slowing. Chew explains: "Since Malaysia is very dependent on intermediate imports with 70% of manufactured products containing imported components, improvements in intermediate goods imports suggest a recovery in the external sector in the near term." Yeoh believes that a pick-up in the electronics sector and a turnaround in exports will signal an economic recovery.
Wage earners, however, are keeping their eyes on their jobs and the unemployment figures. The government estimates that unemployment was 3.9% in 2001 compared with 3.1% in 2000. MIER says employment prospects for the first half of 2002 will be subdued. MIER data indicates that the northern region of Malaysia is the most affected by unemployment, followed by the southern, eastern and central states.
Employment concern drove consumer sentiment to its lowest levels in two years in the last quarter of 2001. While official inflation figures are subdued, inflationary expectation has been rising because of higher petrol prices, toll charges, insurance premiums and water tariffs. Retailers have had a bad year, stuck with excessive inventory and hesitant consumers.
"The situation was bad even at the beginning of 2001," says Chew. "but appeared to improve in August. Then September 11 brought the curtain down, severely affecting consumer confidence and hurting tourist spending."
The government hopes that salary and bonus increases for civil servants and a 1% reduction in personal income tax will improve consumer confidence.
But Chew thinks the unemployment rate will increase further this year, albeit modestly. "I expect the recovery in economic growth to be dull, perhaps improving to slightly above 3% this year. That will not be enough to generate adequate supply of jobs to meet the job demand from new entrants as well as from those who were retrenched earlier. Malaysia has also lost job creation capacity given that a number of major semiconductor companies have relocated to China."
Malaysia's leading recruitment firm, Jobstreet.com sent warning signals in January when regional senior company executives took pay cuts ranging from 20-30%. Jobstreet.com founder and CEO Mark Chang says, "This year will not shape up to be any rosier than last year. We expect it to be much tougher."
Jobstreet.com is considered one of Malaysia's most successful dotcoms with an average growth rate of 200% a year. While Chang says the salary cuts are a defensive move to increase operation efficiency to accomplish profitability rather than relying only on revenue growth, the news was greeted with concern by the dotcom industry, which has been struggling.
Malaysia's bank restructuring has proceeded quite smoothly and the growth in non-performing loans (NPLs) has eased recently. Banks are not lending aggressively due to the dearth of quality borrowers and the fact that many companies have resorted to private debt securities as a source of financing. Instead, banks have been pursuing retail businesses in offering services such as credit cards, mortgages and hire purchase for cars. SMI (small and medium industries) Association of Malaysia president Looi Teong Chye says its 90,000 members have not complained that banks have decreased lending to SMEs. Last year, the government directed banks to increase their SME loans to 8%. Looi believes such pre-emptive measures augur well for the SME sector amid the economic slowdown and decreased orders.
Deputy Finance Minister Chan Kong Choy has urged SMEs to improve production, operation and quality management systems to stay competitive. Chan says that being a low-cost producer is not enough in the face of globalisation and trade liberalisation.
Department of Statistics figures show the manufacturing sector's sales value in November dropped 17.2% compared with November 2000 sales of M$29.7 billion (US$7.8 billion). MIER's Chew says factories are producing well below capacity. "Apart from retrenching, some companies have resorted to operating their factories three or four days in a week, and have been destocking over the past few quarters." The outlook for manufacturing is a modest recovery in the second half of the year.
Despite indicators and analysis that the country's economic recovery is pegged to that of the US, Michael Yeoh, CEO of Asian Strategy and Leadership Institute in Kuala Lumpur says the country's improving economy, growing political stability and racial and religious harmony makes Malaysia one of the world's economic oases. But such optimism could prove to be a mirage.