Forecast Comes as New Budget Trims Taxes to Stimulate Recovery : Malaysia Predicts Stronger Growth 
International Herald Tribune
October 30, 1999
Thomas Fuller

Malaysia sharply raised its forecast for 1999 economic growth Friday and announced measures intended to stimulate further recovery.

In the first complete picture of the country's post-crisis economy, the government released data showing greater confidence among consumers but steep plunges in proposals for future investment.

It estimated growth of 4.3 percent this year, a marked improvement from the previous 1 percent estimate and the 7.5 percent contraction last year.

Vowing to continue to prime the pump, the government unveiled a sugar-coated "people's budget" for 2000. The election-year budget gives civil servants a 10 percent raise and a one-month bonus, cuts a variety of taxes and tariffs and offers incentives to help ease the property glut.

"We can afford to lose quite a lot in taxes," said Prime Minister Mahathir bin Mohamad after the budget was announced. "We can afford to spend a bit more."

Faith in future growth is not shared by local and foreign companies, according to the data. The government predicts that total investment in the private sector will sink 21.5 percent for the year.

"People are not too sure where they stand," said Dominic Armstrong, the head of research for Singapore and Malaysia at ABN-AMRO. "They want to see a real turnaround in the economy and greater policy consistency before they're prepared to put more money into the system."

Malaysians have increased their spending on cars and other goods so far this year and foreign companies that make and export products like television sets and computer chips are ramping up production at their factories.

But the investment picture among local companies, many of which are saddled with bad debt, is far from rosy. Total investment approved by the government for projects by Malaysian companies fell a stunning 77.4 percent in the first eight months of the year. That drop is compounded by the fact that the data for this year are being compared with 1998, when the crisis had already reduced investment levels substantially.

Finance Minister Daim Zainuddin, who unveiled the budget Friday, said one of the main aims of the government was to "revitalize domestic demand as a primary source of growth."

"The private sector needs to play a more active role to accelerate economic activities," Mr. Daim said.

The recovery has been led in large part by foreign companies operating in Malaysia and exporting electronic goods to the United States, Japan and Europe. Some 85 percent of the country's exports are manufactured goods, of which television sets, stereo components and computer equipment make up a large part.

This makes the country particularly sensitive to economic conditions in other countries. Mr. Daim said the biggest challenge facing the Malaysian economy was "the ability of the United States to maintain its growth momentum."

The government's budget for 2000 addresses the issue by giving banks more incentive to lend through tax cuts.

Some analysts say the low investment figures for this year are normal — a result of the overcapacity that helped bring on the crisis. Investment, the analysts say, will only pick up once factories reach full capacity again.

"Investment is a bit of a lagging indicator," said Neil Saker, head of regional economic research at SG Securities (Singapore) Pte. "Given the excess capacity there was no reason to invest this year."

Without any significant investment to drive the economy, the government is playing a large role in spurring growth, putting more money into building roads, bridges and light rail systems.

The government expects a budget deficit of 13.7 billion ringgit ($3.61 billion) this year and about 13 billion ringgit next year.

"The focus of the budget is domestic," said Mr. Armstrong. It's a rural budget and a poverty alleviation budget for the ordinary voter."

Among other measures in the budget:

The government reduced income tax by 1 percentage point and increased deductions. With that change, 15 percent of the total number of taxpayers will no longer be required to pay tax.

A variety of funds aimed at helping finance high-tech projects and small- and medium-sized industries have been established.

The government is offering tax breaks to encourage stock brokerage and insurance companies to merge.

"The big challenge for this economy will be whether they can sustain this growth for the next two years," said Yeoh Keat Seng, head of research at Smith Zain Securities. "This year is already in the bag."

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