September 2000

Noted Harvard Economist and occasional Malaysia government critic Jeffrey Sachs last week singled out Malaysia and South Korea as the two economies worse affected by the Asia crisis to have made the most progress.

Amongst other recent positive assessments on the future of Asian economies in general, it's a great fillip for an economy that on the positive side is demonstrating good export growth (admittedly on the strength of an undervalued Ringitt), increased consumer spending, and stable savings rates.

The negative side is a stock market that at the time of writing is plunging steadily and last Friday hit a 9 month low.

The Malaysian KLSE Composite Index had a moribund 1999 while other Asian indices were rising. The first 3 months of 2000, however saw the Malaysian index outperform others and gain back most of the lost ground and more. In the 5 months since, however it has been a downward slide. So why the conflicting evidence?

Movements in stock indices are not the only or even the most important index of economic health and prospects, but they are a useful indicator of investor's sentiment.

Two factors are at work in Malaysia at the moment.

The first is that Malaysian fundamentals have always been strong. As suggested in our archives, Malaysia was never in the same state as Indonesia, South Korea and Thailand, being forced to run to the IMF and other funding bodies for rescue packages. Despite triumphal statements from Malaysian politicians that they "refused" to accept IMF funding and their economic prescriptions later to be proved to be quite disastrous and incorrect from those who did, Malaysia never came under any pressure to take the IMF medicine. Mahathir and Camdessus' message after their meeting was unequivocal - Malaysia didn't need it...

Malaysia's healthy economic fundamentals was also matched by advantages that South Korea, Thailand and Indonesia did not have in one package. Political stability, relatively higher wealth and the more even distribution of it, and an English speaking population. These outweigh disadvantages of a fairly casual employee work ethic, concentration of business and political power in increasingly fewer hands.

It takes more than a political crisis, the sacking of the Deputy PM in waiting, continued cronyism, and media censorship to destroy the sort of equity that Malaysia has earned over many years.

...And this brings us to the second factor.

Out of all affected Asian countries, Malaysia, perhaps just because of the advantages outlined previously, has been the least willing to embrace change, or even accept that it is necessary. To the Malaysian élite embracing change is seen as accepting that things need to be fixed, and consequent "loss of face". They are right that Malaysia has less problems than Thailand, South Korea, Indonesia and even Japan. Howwever change is always necessary, just to stay in front, as Singapore has proved emphatically in the past few years. It is difficult to ascertain what the Malaysian government policy really is, apart from staying in power, and building a brand as a fiercely independent nation that has resisted foreign interference and will go it alone.

Much is rhetoric of course, but with it has come an atmosphere of resistance to lift the remains of the currency controls which many credit for Malaysia's revival, and curious decisions such as the case where SingTel's agreement with Time Engineering was vetoed at the last moment, on the grounds that it "was not in the national interest". The key factor behind the lack of interest in the Malaysian stock market is that businesses still see the business environment in Malaysia as unpredictable, and too senstive to the often obtuse whims of the sitting power élite. Mahathir must resign in the next few years and deputy Abdullah is yet to prove his leadership qualities despite some excellent mentoring from his boss. There is conflict between component parties in the ruling BN coalition with non-Malay parties wanting more influence for their delivery of Chinese and Indian votes; at the same time, UMNO is casting a wary eye North where Anwar's sacking legitimized the reactionary and conservative Muslim PAS. UMNO is under pressure both from within to accommodate Chinese concerns, and at the same time to accommodate conservative Muslims who may jump ship to PAS. It's an unenviable position to be in, and must distract from other issues.

This resistance to change will not make it's down side obvious right now, but is a red flag to medium and long term growth prospects, unless Malaysian business and government speeds up reform and the rewarding of competence rather than patronage.

Add to that the reality that Malaysia is still a small market for foreign investors, and such lack of interest is a result of money not wanting to invest in a market with relatively small returns where uncertainty still exists. Better to go for other markets which have either one or the other. And Malaysia is not the only economy to suffer. Investors are looking further East for their "Far East" portfolios, putting South East Asia aside while showing more interest in China in particular.

All of which is not bad news for those with an interest in Malaysian business. If the big investors are looking elsewhere it increases the value for smaller investors, in a country where, as we said at the beginning, the fundamental business prospect equity is strong.

What is needed now is a demonstration that the government has lost some of their fear of loss of control in the global economy, where the employee work ethic starts to approximate that of Singapore, and where rewards are more closely tied to performance.

It's still business as usual at Malaysia Inc. - but in the global economy, that business may not be such a good thing...

Prospects: June 1998

Economic Indicators

Predicted GDP growth: 1999 (3-4%) 1998 (2%); 1987 (8.0%), 1986 (8.0%)
Consumer Price Growth: (from 3 months ago): (+3%)
Currency: (Ringgit vs USD): May 12th 1998 (3.85), Dec 15th 1996 (2.53)
Interest Rate: (Interbank 3 months) April 15th (12%)

Since our last capsule review, the Malaysian outlook moved to become one of the most positive of the affected Asian economies following fast austerity program actions from government resulting in a significant but short-lived boom in the currency and stock market following Chinese New Year.

However, later assessments were more measured. Several high profile bankruptcies a month ago, a controversial rescue package for Mahathir's son's company via government owned Petronas which smacked of patronage, and continued high debt saw stock markets and the currency reverse again. Some of this disenchantment with Malaysia can be traced back to too high expectations that Malaysia had the sound government/social infrastructure and stability which would ensure a quick recovery.

To a large extent, recent stock/currency falls are due to Malaysia becoming a victim of other ASEAN and international economies relying too much initially on the comparative strength of the Malaysian economy. And certainly also Malaysia believing too much in its own rhetoric and positive IMF and Japanese assessments. Recent history has shown however that the IMF and Japan are not always right..

It has become clearer that Malaysia needs more than austerity programs and stability. Apart from temporary relaxations on the ownership structure of Bumiputra companies, there have been few substantive reform measures taken and the same politico-industrial power elite that both lifted Malaysia to prosperity but also allowed conditions to develop that exposed it to the July crash remain ensconsed firmly in place. Denial of the extent of the crisis is still evident in policy, though the people themselves have been asked to make major sacrifices and support a ruling élite that has, to be very fair, delivered fast increases in standard of living in the past.

Nevertheless, smart money is still being readied for investment into Malaysia as soon as some clear commitment to reform becomes evident. And it remains a savvy investment choice for those businesses willing to take a long term view and accept the realities of Asia's changing market place.

Prospects: January 1998

Camdessus' visit to Malaysia in mid January elicited two statements from the IMF broker with deep pockets. Firstly he commented that Malaysia was not facing as critical a crisis as its neighbours and did not need IMF intervention in their economy. Secondly, a concise four short words....

...So far, so good

..And most of this relatively good news compared to certain other Asian economies, can be traced back to the steady work of Anwar, Deputy Prime Minister and Finance Minister. After months of defensiveness from his boss, Prime Minister Datuk Seri Dr Mahathir Mohomad, Anwar was the leader to usher in severe austerity measures to a clearly ailing economy in a "mini-budget" in November. Only then did it become clear to Malaysians that regardless of who caused the mess, it was time to knuckle down and do something at the grass roots level. While Mahathir sulked and mused away in the APEC meetings in Toronto on whether the free market was now such a good idea after it had turned against him, his previous student radical and grassroots deputy Anwar unveiled the beginnings of a plan that may well gave Mahathir's Vision 2020 dream a better chance of turning into reality, despite the last 7 months.

Anwar's positive leadership in this time of crisis made Malaysia the first Asian casualty to face realities head on, by itself, with no help from the lurking IMF's Western prescriptions. As a result the Ringgit is heading up again fast and so is the stock market.

Anwar's budget of carefully targeted increased taxes and reduced spending wont do it all of course. Mahathir has in the past masterfully orchestrated a potentially difficult politico/industrial complex of indigeneous Malay political administration, Chinese commerce, and a new breed of Bumiputra entrepreneurs to make Malaysia the latest Asian success story. His Vision 2020 was a classic of mission and strategic planning proving a success, which at first was scoffed at by many Western observers. His triumphant wheel around the world to promote his Multimedia-Super-Corridor (MSC) project had world leaders in the IT industry lining up to participate, and stole the march on his neighbours who also have a claim to IT leadership in ASEAN. Yet this success has been in large part also courtesy of the same factors that has caused Asia's slowdown, easy to obtain foreign investment, and a close and (maybe too) stable business/government elite. In the end this Asian way of management strangled itself on its own rope. There are many favours to be repaid in both directions, and any change threatens expectations of when debts and favours will be repaid. How well Mahathir and the government can handle this realigning of expectations will determine whether Malaysia's strong planning approach can be continued.

The Asian slowdown has in most cases been a shock to both government and business, local and international, depite warning signs in the past two years of growth out of control, a disturbing budget deficit, and deficiencies in corporate management competence caused by ignoring to a large extent training and development. Many mega-projects were planned with infrastructure assuming continued strong growth in the economy and investment. Save delaying or cancelling the more ostentatious of these which Anwar has foreshadowed, the prospects for Malaysia depend on how sucessful planners are in completing the substantive projects within new economic constraints.

Mahathir yesterday stated that the MSC is not at risk from the slowdown. It shows commitment and indeed the MSC is central to Malaysia's prospects. Overseas and local parners are showing no signs yet of disillusion. Anwar has predicted growth at 4 to 5% for 1998, the World Bank is predicting much less; whichever estimate you use it is a long way from the 8% to 9% of the past. From another angle, it is better than GDP/GNP estimates of almost all neigbouring countries. .. And Malaysia does not have the ethnic tensions of Indonesia.

In short, Malaysia certainly shares the problems of other ASEAN developing economies, but it is more stable than most and has a relatively small, manageable, and concentrated population of 20,000,000. If problems in transparency and inefficiencies in administration can be surmounted, and mega projects managed with less forgiving margins, Malaysia remains a good medium to long term consumer, service and industrial market.