In this paper I will analyse the performance of the Malaysian economy for the past 10 years between 1993 and 2002. The analysis will be divided into two eras, pre (1993 to 1996) and post (1997 to 2002) Asian Financial Crisis. I will also present the economy polices implemented during the period of review and in the process identify whether the government’s intervention had caused a positive or negative effect on the growth of the economy. In closing, I will conclude by commenting on the course of actions taken by the Malaysian government whether or not it could have been better.
This study is carried out in the context of the Malaysian economy for the period between 1993 and 2002. The key economic data was obtained from various sources; Gross Domestic Product (GDP), National Accounts from the Central Bank (Bank Negara Malaysia), Asian Development Bank and other statistics i.e. Inflation and Unemployment rates from the Malaysian Statistics Department. The GDP figures presented have been based on the 1987 constant price.
In the presentation of the GDP data, I will categorise the industries into four major sectors; agricultural, mining, manufacturing and services and present their contributions to the economic growth, as well as the industry’s growth rate itself by year-on-year (yoy). The other data used in this assignment would be the federal government finance and debt, inflation rate, unemployment rate, current account balances, gross domestic investments, gross domestic savings, merchandise export and import. Tables and graphs are also used as aids to illustrate the information presented by the data.
The structural transformation of Malaysia’s economy since it gained independence from the British in 1957 has been pretty spectacular. The agricultural and mining sectors were the main drivers of the economy back then. It laid the foundation by financing the development of the country. But in the last decade or more, the Malaysian economy has experienced significant structural change. It has transformed a commodity based economy into one which is based on manufacturing.
From being the world’s largest producer of rubber and tin, Malaysia is today one of the world’s leading exporters of electronic and electrical goods. Its manufacturing sector’s contribution to the GDP grew from 26% to 30% between 1993 and 2002. This sector is today the key driver of growth in the Malaysian economy. Besides manufacturing, other principal sectors would be agriculture, mining and construction. The other sector that is being promoted intensively is the service sector.
The structural change in the economy was to transform the country from a developing nation to a developed nation by 2020, as part of the aim of the vision launched by the Prime Minister, Dato Seri Dr. Mahatir Mohamad in 1990. In fact, the future economic expansion and the realisation of the country’s vision hinge on future growth of this sector with the targeted annual economic growth of 7% (visualised under Vision 2020) to be export led.
In its effort to develop the country, the Malaysian government has set up a planning agency known as The Economic Planning Unit (EPU). The Planning unit is placed in the Prime Minister’s Department as the central planning agency of the government which is responsible for formulating policies and strategies for the nation under the five-year Malaysia Plan. The latest, the Eighth Malaysia Plan (2001-2005) issued in April 2001, was aimed at sustaining economic growth and competitiveness in the face of growing globalisation and liberalisation.
The government has also taken on an active role in the development and industrialisation of the Malaysian economy. This includes significant state sector investment, a close alliance between the government and the private business sector, privatising government enterprises and a variety of policies and programmes to boost the economic status of the nation. Since the initiation of the privatisation programme in 1986, the government has played a progressively diminished role. However, the government continues to hold equity stake in a wide range of companies. As part of the National Economy Recovery Plan (NERP) launched in the mid 1997-98 economic crisis, the government has provided assistance to troubled corporations on the basis of three criteria: national interest, strategic interest and equity consideration under the new Economy Policy (NEP) and National Development Policy (NDP).
Economy Growth Trend
Prior to the Asian Financial crisis; from 1993 to 1996, Malaysia witnessed the continuation of rapid economic progress which started back in the late 1980s. During that period, GDP grew at an average annual rate of 9.5% with the highest growth rate recorded at 10% in 1996. [Figure 1, pp.7] In fact, 1996 marked the ninth consecutive year of rapid growth where the economy enjoyed the longest period of sustained robust growth. With this growth, per capita Gross Net Product (GNP) rose from RM 8,381 in 1993 to RM 11,428 in 1996. More significantly, this high growth was achieved with price stability as inflation was successfully contained below 4% throughout the whole period. The low rate of inflation resulted in better purchasing power without increase in cost.
Principal Growth Sectors
The manufacturing, construction, mining and services sectors contributed increasingly to economic growth while the agricultural sector declined steadily. The manufacturing sector has for almost a decade displaced the agriculture sector as the mainstay of the economy. Since 1993, the manufacturing sector accounted close to one third of GDP and more than three quarters of merchandise exports. The manufacturing sector’s share of 26% of GDP in 1993 increased to 29% by 1996. A similar trend was noted for exports of merchandise goods during the same period.
The period also saw the increasing role of the private sector as the engine of growth. Private investment grew at 16.6% per annum (1993-1996) amounting to RM 265.4 billion in nominal terms. This was due to the high inflows of Foreign Direct Investment (FDI). The accelerated privatisation programme also contributed to the growth of private investment as well as improved efficiency and productivity that led to rapid economic growth.
After registering a strong growth of 22.4% in 1995, Malaysia’s external trade grew by 3.9% to RM 375 billion in 1996. The slower growth in 1996 was due to sharp deceleration in both export and import growth during the year. The improvement in the external trade position has enabled the merchandise account of the balance of payments to record a significantly larger surplus RM 8.6 billion in 1996.
Consequently, the current account deficit narrowed down to RM 4.4 billion in 1996 from RM 8.7 billion in 1995. The deficit in the current account was largely financed by long term capital especially in the form of corporate investments. However the international reserves rose to RM 70 billion as at the end of 1996 from RM 63.8 billion in 1995.
The government’s total debt has reduced from RM 96 billion in 1993 to RM 89 billion in 1996. The reduction was largely due to settlement of external debt (about 9 billion). With the bulk of the debt being about 85% was obtained from domestic sources.
The market-oriented policy reforms were accompanied by a strong focus on restoring and maintaining macroeconomic stability. The Sixth (1991-1995) and Seventh (1996-2000) Malaysia Plans significantly reduced overall government expenditure and shifted spending from public sector enterprises to infrastructure projects design to enhance private sector development. The government has also pursued on ambitious privatisation programmes. Besides the Malaysia Plan, the government also launched the Industrial Master Plan in November 1996. The plan outlined the course of the industrial development, addressed issues to sustain and enhance growth in the manufacturing sector.
Throughout the 1990’s, budgetary restraints on operating expenditure were an important aspect of fiscal policy. The economy was growing rapidly during the pre 1997 period, the government’s fiscal stance was tight and the country registered fiscal surpluses from 1993 to 1996. The tight fiscal policy was intended to move the economy to a more moderate growth rate to ease the pressure on the external balance. Surplus in the operating account was largely due to the increase in revenue which increased from RM 41.6 billion in 1993 to RM 58.3 billion in 1996. The government reduced the personal tax from a maximum rate of 32% to 30% in the 1996 budget, bringing it to the same level as the corporate income tax rate. Though tax was reduced, the government’s revenue had increase due to the broadening of the tax base and increased efficiency in tax collection.
The Central Bank maintained a tight monetary policy to accommodate fiscal prudence. Monetary policy is aimed at controlling inflation while providing adequate liquidity to stimulate economic growth. Central Bank increase interest rates to curb rising inflation and strong credit expansion.
Post Asian Financial Crisis ~ 1997-2002
Economy Growth Trend
Malaysia is currently in its fourth year of economic growth following a deep recession caused by the Asian Financial Crisis of 1997-98. Until 1997, Malaysia experienced over a decade of uninterrupted economic growth, placing Malaysia as one of the fastest growing South East Asian economies [Table ]. The crisis trimmed Malaysia’s growth rate to 7.5% in 1997 before the country plummeted into an unprecedented recession in 1998 when the regional financial and economical crisis intensified. Real GDP contracted by 7.5% in 1998. The economy rebounded back in 1999, growing 6.0% that year, perking further in 2000 with 8.6% growth then slowed down again in 2001 with a technical recession of 0.3%. Once more in 2002 it rebounded to 4.1% GDP.
The fluctuation in the economic growth trend corresponds to the aftermath of the 1997 Asian Financial Crisis resulting in the decline in 1998. The global economy picked up with the boom in electronics in 2000 and finally slowed down with the external crisis of 2001. Besides the external environment, the government is spending for both investment and consumption has been a major factor in sustaining growth over the last five years.
Principal Growth Sectors
The manufacturing sector was affected by the slowdown in the world economy and contraction of global demand for electronic products and components. The sector recorded a steep decline of 13.7% in 1998, but recovered remarkably in the following year (1999) by registering a 13.5% growth. Between 1997 and 2002 the manufacturing sector’s contribution to the GDP on the average was 30%.
Other major sectors of the economy especially the services sector continued to expand strongly by 5% yoy on account of a better performance of government services and other sub-services. The fiscal stimulus measures, privatisation of infrastructure projects and housing developments contributed to a stronger growth of 2.3% in 2002 for the construction sector. Similarly, Value added in the agriculture sector expanded at a higher rate of 3% largely on account of greater palm oil production.
Malaysia’s external trade position remained strong despite the slowdown in global economic. The overall balance of payment position turned around and recorded surplus in 1998 and has continued up to now. The improvement was partly due to the lowered outflow of funds in the financial account. With the improved conditions, Malaysia’s international reserves strengthened further to RM117 billion as at the end of 2002. (End 2001: RM 114 billion). This reserve level is adequate to finance 5.2 months of retained imports. As for the nation’s debt position, its total external debt increased from RM 90 billion in 1997 to RM 165 billion in 2002. About 80% of the total debt is from domestic sources. The increase was due to the additional borrowings by the federal government to finance the budget deficit and implementation of fiscal stimulus package.
Economic Policy During The Financial Crisis.
The economic policy for 1997 was very much the same as in 1996. However, the policies were dramatically changed when the nation was hit by Asia Financial Crisis. In early 1989, the government established the National Economic Action Council (NEAC). The council was set-up to address the financial crisis issues. In July 1998, the government announced a comprehensive series of objectives for promoting economic recovery which is termed as the National Economic Recovery Plan.
The plan consisted six objectives for revitalising the economy:
* stabilising the Ringgit
* restoring market confidence
* maintaining market stability
* strengthening economic fundamentals
* furthering the socio-economic agenda
* reviving badly affected sectors
The government has formulated policy actions in line with these objectives.
In September 1998, Malaysia imposed selective capital controls and pegged the Ringgit at RM3.80/US$1.00. The measures were intended to eliminate offshore trading in the Ringgit and to insulate the domestic economy and monetary policy from currency speculators. The Ringgit can no longer be sent or received from abroad while trade transactions must be made in foreign currency. One year later in September 1999, Malaysia had relaxed certain capital controls implemented the previous year. It replaced a multi-tiered exit tax plan with a simplified flat 10% tax applied on profits repatriated from Malaysia. While recognising that the exchange rate must adjust in line with economic performance over the long term, the government has indicated repeatedly that it will lift controls only after the international financial community imposes stricter curbs on currency trading to prevent speculative attack on currencies.
In mid 1998, the government also accelerated a relaxation of monetary and fiscal policies that had been intended to stabilise the Ringgit and impose macroeconomic discipline. Bank Negara successively reduced the Statutory Reserve Requirement (SRR) – the percentage of reserve the banking institutions are required to deposit with the Central Bank – from 10% to 4%. The base lending rate (BLR) reduced from a peak of 12.27% in 1998 to 6.4% in 2002. Additional measures included reducing consumer credit card finance charges, lowering rates on hire purchase and housing loans as well as increasing funding for small and medium-sized enterprises.
The fiscal expansionary policy in the federal government budget was the countercyclical measure to stimulate domestic demand. The federal government budget deficit in 1998 amounted to 1.5% of GDP compared with a planned surplus when the 1998 budget was approved in October 1997. The bulk of the additional expenditures were channelled to sectors providing a strong multiplier effect on household incomes and manufacturing activity.
Inflation, as measured by the Consumer Price Index (CPI), has moderated significantly. CPI declined to 2.9% in 1999 following an increase of 5.3% in 1998. The inflation rate has since been contained below 2% level. As long as inflationary pressures remain subdued and loan demands remain weak, the Central Bank is going to maintain its policy of low interest rate.
The economic crisis revealed a number of fundamental weaknesses in the financial sector: rapid credit growth and high exposure to property and stock market sectors; high leverage of the corporate sector; and rapid increase in the non-performing loans. These weaknesses threatened the stability of the financial sector. The government undertook a number of significant measures to restructure and strengthen the financial system.
In June 1998, it established Danaharta, (also known as the National Asset Management Company) to acquire, manage and dispose of non-performing loans. (NPL) By May 2000, Danaharta had acquired some RM 37 billion in non-performing loans, which is equal to 42% of NPL’s in the banking system. System-wide, NPLs in April 2000 had declined to 10.8% of loans (measured on a three-month basis), down from the peak of 14.9 % (three-month basis) in November 1998. On the whole there was improvement in the management of NPLs. Danaharta has stopped acquiring NPLs since 2001. It is now actively engaged in maximising recovery from the NPLs in its portfolio.
Danamodal, a special vehicle was set up in August 1998 to recapitalise ailing financial institution and has injected RM 7.6 billion into the banking institution. To date, RM 5.5 billion has been fully repaid by seven financial institutions, with RN 2.1 billion still outstanding from three financial institutions. Danamodal is on track to cease operations by end 2003.
The government also established the Corporate Debt Restructuring Committee (CDRC) to facilitate voluntary corporate debt restructuring between creditors and viable debtors. CDRC has ceased operations in August 2002, after resolving 48 cases with debt valued at RM52.6 billion.
The government also decided that the financial sector to be consolidated. Consolidation of banks has also been a long running policy objective to prepare the Malaysia’s financial sector for the increased competition and globalisation. In February 2000, Bank Negara Malaysia (BNM), the Central bank gave approval to consolidate the country’s 54 domestic banks under ten “anchor” banks. The government originally announced plans to merge banks under pre-selected six “anchor” banks but increased to ten after appeal from the financial institution. The government has also announced plans to consolidate domestic brokerage houses into 15 “universal brokers” as part of a larger government effort to improve the strength and efficiency of Malaysia’s capital markets. The Securities Commission has been assigned the task to provide the framework on the capital market Master Plan.
The government also launched the Financial Sector Master Plan (FSMP) in March 2001. The plan outlined the medium and long-term strategies for the development of the financial sector. The FSMP is to be implemented in three phases over a 10-year period from 2001 to 2010. The objective of the plan is to bring greater innovation, flexibility and dynamism into the Malaysian financial system to meet the customers’ and business’s demands and also to face the challenges of globalisation and liberalisation of the financial sector.
After the financial crisis and slowdown in the external environment the government realised that the nation cannot rely on the manufacturing sector alone to provide for the economic growth. In order to sustain the economic growth, it needs to establish a more competitive economy. Such an economy must be able to sustain itself over a longer term while being dynamic, robust and resilient. Thus the government decided to embark on a diversified and balanced economy with a mature and widely based industrial sector, a modern and mature agriculture sector and an efficient and productive equally mature services sector.