Malaysian Economic Outlook, 1999-2000

Abstract

Economic growth in the Malaysian economy, having declined by 6.1 per cent in the first three quarters of 1998, is expected to remain anaemic in the final quarter of the year. Alarmed by the steep drop in the first half, policy-makers began to doubt the feasibility of the tight monetary policy and tight fiscal policy regime, and implemented capital controls in September. Following this, monetary policy was eased substantially to boost the economy. The fiscal policy announced in October was also an expansionary one. The capital control measures should not be regarded as a panacea for the problems that the economy faces. Programmes that were designed to alleviate problems pertaining to the banking sector, for example, should be carried out speedily and with the strongest intent and purpose. A current account surplus is important in supporting the exchange rate peg and capital controls. Given the projected rate of growth in the economy and therefore the demand for imports, we still expect a current account surplus for 1999, albeit a smaller one. But this will be further reduced in the year 2000, when the economy is anticipated to start picking up, although at a moderate pace. In this respect, taking advantage of the capital control measures in providing the necessary conditions to lower interest rates without affecting the ringgit, the authorities will need to implement most of the programmes for stabilisation within 1999. MIER's two surveys in the third quarter of 1998 on business and consumer sentiments show that there is little change from the previous quarter. Firms in the manufacturing sector are still cautious in their outlook and consumers are still not showing any rigorous signs of a rebound in sentiments. However, the results of the two surveys do indicate that sentiments may be stabilising. A turnaround may materialise in the first half of 1999. Given the latest available indicators, the estimate for 1998 real GDP growth is at -6.2 per cent. All the domestic components of national income will see sharp declines. The sharper decline in imports relative to exports will see a better net trade position for 1998, with the merchandise trade surplus estimated at RM46.1 billion. The services deficit is projected at RM19.7 billion and the current account balance will see a surplus of RM23.0 billion for 1998. This amounts to 8.5 per cent of gross national product (GNP). Unemployment rate is estimated at 5.5 per cent of the labour force while inflation rate is anticipated at 5.2 per cent, largely due to the ringgit depreciation. With the easing of monetary policy and a stimulating fiscal policy, aggregate demand will see a slight boost in 1999. Several factors will act as potential constraints to any huge gains in boosting growth. These include the high level of domestic debt that needs to be cleared up, the still tentative business and consumer sentiments affected by the still uncertain labour market outlook, sluggish stock market and property market, and weak external demand (though relatively better than in 1998). Private consumption is forecast to show some growth, at 0.8 per cent, following the easing of credit terms. The lower cost of financing and relative stability following the fixed exchange rate will also benefit the business community. Thus, private investment is projected to expand very marginally by 0.6 per cent in 1999. Public expenditure will be more expansionary in 1999, unlike the present year. However, it will be limited by a drop in revenue and the more difficult terms to borrow from abroad due to a declining sovereign rating. Public consumption is forecast to grow by just 0.3 per cent while public investment will expand by 2.2 per cent. In the external sector, following better growth prospects projected for the world economy and world trade, demand is expected to be relatively better. Nevertheless, exports are not anticipated to expand at a high rate, given that world economic growth prospects rest on somewhat fragile premises. Export of goods and non-factor services will grow by 1.0 per cent in 1999 while imports will rise by 1.7 per cent, in tandem with a slight growth overall in the economy. Real GDP is forecast to grow at 0.7 per cent for 1999, a slight turnaround after a steep decline this year.