'Downward Spiral' Has Not Stopped Yet : Malaysian Economy Contracts by 8.6% 
International Herald Tribune
November 30, 1998
Thomas Fuller

Malaysian economic output fell by 8.6 percent in the third quarter compared with the period a year ago, its worst performance ever, dashing hopes that stimulus measures carried out this year had helped stem the economic slide.

"The downward spiral has not been arrested yet," said Mohamad Ariff, executive director of the Malaysian Institute of Economic Research. "I think there will be a massive contraction this year."

Officials at Bank Negara, the central bank, were more hopeful. "The latest indicators suggest the contraction in the economy has bottomed out," the bank's governor, Ali Abul Hassan Sulaiman, said after the figures were released Saturday. The economy expanded by 2.3 percent when compared with the second quarter, he said, adding that car sales rose, banks were lending more and exports sharply increased in September.

It was the third consecutive quarterly contraction in gross domestic product compared with the corresponding period last year. The economy shrank by 6.8 percent in the second quarter and by 2.8 percent in the first quarter.

Malaysian economic performance has been closely watched around the region since June, when the country broke with the orthodoxy of the International Monetary Fund and abandoned austerity measures in favor of a stimulus package. The government has been prodding banks to increase lending and has used cash from its national provident fund and the state oil company to help relieve troubled companies of their debt.

The country also imposed controls on its currency, allowing it to lower interest rates while protecting against capital flight. Analysts said it was too early to judge how the controls had affected growth — they were imposed in September, the end of the third quarter. The government says the controls — which fixed the value of the dollar at 3.8 ringgit — have lifted currency reserves and helped restore market stability.

Some analysts are more skeptical.

"All the positive effects of the policy, like low interest rates, trade surpluses and increased reserves, are also taking place in other countries where there are no capital controls," Mr. Ariff said.

Although there are signs throughout Southeast Asia of economic recovery, such as buoyant stock markets and rising car sales, third-quarter data have been universally negative. Hong Kong's economy contracted at a 7 percent annual rate, South Korea's declined at a 6.8 percent rate and Indonesia's shrank at a 17.4 percent rate, while the Philippine economy contracted 0.1 percent in the third quarter from the second, and Singapore's shrank 0.7 percent. Thailand does not issue third-quarter data, but analysts have estimated the economy will contract by more than 7 percent this year.

Most worrying for Malaysia are investment data. While proposals for new investment are increasing in South Korea and Thailand, they have plummeted in Malaysia. Investment proposals dropped 57 percent in the first nine months of the year, according to the Malaysian Institute of Economic Research. Local investment proposals dropped by 72 percent, and foreign direct-investment proposals fell 28 percent.

Meanwhile, there are signs that Malaysia may change its peg to the dollar if currencies in neighboring countries continue to appreciate. In recent weeks, the Philippine peso, the Thai baht, the Indonesian rupiah and the Singapore dollar have all risen sharply against the U.S. dollar.

Prime Minister Mahathir bin Mohamad last week told members of the Japanese Keidanren, or Federation of Economic Organizations, that Kuala Lumpur would consider the changing the peg only if regional currencies moved 20 percent "either up or down," Kumagai Naohiko, vice chairman of the Keidanren, told Bridge News.

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