Investors Jittery Over Malaysia Budget : New Clouds for Asian Currencies
International Herald Tribune
October 18, 1997
Thomas Fuller

Malaysia unveiled a budget Friday that stakes the country's future on information technology and a larger services sector, while discouraging investment in construction and other industries that rely on heavy imports.

However, the budget, which had been awaited by investors for signs that Malaysia was taking firm steps to avoid a deepening financial crisis, disappointed the markets. The country's currency, the ringgit, extended its recent losses, falling 2 percent against the dollar. The U.S. currency rose to 3.2660 ringgit, from 3.1727 Thursday.

Most analysts dismissed the budget as insufficient to deal with Malaysia's economic and financial difficulties.

In a speech that was closely monitored by investors looking for positive signals, Finance Minister Anwar Ibrahim called for a modest increase of 1.9 percent in federal spending. By comparison, the government expects output to expand by 7 percent next year.

Addressing concerns about the country's current-account deficit, Mr. Anwar confirmed the deferment of nearly a dozen large-scale infrastructure projects, including the Bakun hydroelectric dam and a bridge across the Strait of Malacca linking peninsular Malaysia with Indonesia. The cost of the postponed projects is estimated at $20 billion.

"The cut in government spending is not deep enough to bring a sharp shrinkage in the current-account deficit," Daniel Lian, head of Asian markets research at ANZ Investment Bank in Singapore, told Bloomberg. "There's no relief for the ringgit."

The ringgit has fallen nearly 30 percent since July, when the region's currency crisis erupted.

Jomo K. S., an economics professor at the University of Malaya, said that "one of the problems this year with the budget — and this partly explains the market response this evening — has been that there were all these unrealistic expectations." an economics professo

What the country needed, he said, was a comprehensive package of investment incentives similar to the Promotions of Investments Act passed in 1986, which was followed by nearly a decade of 8 percent growth.

"The kind of upturn later in the decade would not have been possible without it," Mr. Jomo said. "Given that we're talking about going from manufacturing into information technology, you're going to need a major new statement of policy priorities and incentives."

Mr. Anwar, who is also the deputy prime minister and is considered Prime Minister Mahathir bin Mohamad's heir apparent, also announced higher tariffs on imports of cars and construction equipment and unveiled tax incentives for exporters. Mr. Anwar referred to parts of the budget as bitter medicine, but sweetened the package with a cut in corporate taxes to 28 percent, from 30 percent.

Beyond immediate concerns about the current-account deficit, however, are deeper worries about the country's overall competitiveness. The budget comes at a pivotal time for Malaysia, which, like its neighbors, is being challenged by low-wage competitors.

"We must compete aggressively with low-cost producers in countries like China and Vietnam," Mr. Anwar said in his speech Friday.

The push into knowledge-based industries is seen as a way to move up the value chain and find a new niche in the regional economy. The budget contained help to develop government information-technology programs and allots 119 million ringgit ($37.5 million) for special schools that will teach computer skills to young students. Nearly 20 percent of the entire budget is earmarked for education.

"It is imperative that every Malaysian should be knowledgeable in the field of multimedia and be able to use a computer," Mr. Anwar said, adding that families would be provided a tax rebate of 400 ringgit for the purchase of a computer.

Following the speech, Mr. Mahathir called the shift to information technology industries imperative. "We have no choice. Already we have a shortage of workers. And in order to grow the economy, in order to increase the income of our people we have to switch into IT," the prime minister said, using the acronym for information technology.

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