malaysia brunei - iuj.ac.jp filemalaysia’s political crisis has deepened further, as opposition to...

COUNTRY REPORT

Malaysia

Brunei

March 2001

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

At a glance: 2001-02OVERVIEWMalaysia’s political crisis has deepened further, as opposition to the 75-year-old prime minister, Mahathir Mohamad, from within his United MalaysNational Organisation (UMNO) continues to grow, relations with theChinese community worsen, and proposed talks with the opposition onMalay unity fail to materialise. The economic slowdown that is expected forthis year could trigger social unrest.

Key changes from last monthPolitical outlook• Malaysia’s racial harmony is increasingly under threat as the political crisis

deepens and the economy begins to turn down. The chances are growingthat Dr Mahathir may be forced to retire by the UMNO party elders,concerned about the acute discontent among the grassroots.

Economic policy outlook• Additional fiscal stimulation and larger budget deficits can be expected as

the government responds to the increasingly evident slowdown in theeconomy.

Economic forecast• Demand for Malaysian exports is expected to be hit as the US economy

comes close to recession and the Japanese economy goes back intorecession, harming private investment and slowing private consumptiongrowth. Real GDP growth of only 4.1% is forecast for this year, but growthis expected to bounce back to 6.1% in 2002.

The Economist Intelligence UnitThe Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For over 50 years it has been a source of information on businessdevelopments, economic and political trends, government regulations and corporate practice worldwide.

The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis isupdated daily; through printed subscription products ranging from newsletters to annual referenceworks; through research reports; and by organising seminars and presentations. The firm is a member ofThe Economist Group.

LondonThe Economist Intelligence Unit15 Regent StLondonSW1Y 4LRUnited KingdomTel: (44.20) 7830 1007Fax: (44.20) 7499 9767E-mail: [email protected]

New YorkThe Economist Intelligence UnitThe Economist Building111 West 57th StreetNew YorkNY 10019, USTel: (1.212) 554 0600Fax: (1.212) 586 1181/2E-mail: [email protected]

Hong KongThe Economist Intelligence Unit25/F, Dah Sing Financial Centre108 Gloucester RoadWanchaiHong KongTel: (852) 2585 3888Fax: (852) 2802 7638E-mail: [email protected]

Website: http://www.eiu.com

Electronic deliveryThis publication can be viewed by subscribing online at http://store.eiu.com

Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, onlinedatabases and as direct feeds to corporate intranets. For further information, please contact your nearestEconomist Intelligence Unit office

London: Jan Frost Tel: (44.20) 7830 1183 Fax: (44.20) 7830 1023New York: Dante Cantu Tel: (1.212) 554 0643 Fax: (1.212) 586 1181Hong Kong: Amy Ha Tel: (852) 2802 7288/2585 3888 Fax: (852) 2802 7720/7638

Copyright© 2001 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication norany part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording or otherwise, without the prior permissionof The Economist Intelligence Unit Limited.

All information in this report is verified to the best of the author's and the publisher's ability. However,the EIU does not accept responsibility for any loss arising from reliance on it.

ISSN 0269-6703

Symbols for tables“n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

1

EIU Country Report March 2001 © The Economist Intelligence Unit Limited 2001

Contents

3 Summary

Malaysia

5 Political structure

6 Economic structure

6 Annual indicators

7 Quarterly indicators

8 Outlook for 2001-02

8 Political outlook

9 Economic policy outlook

10 Economic forecast

14 The political scene

18 Economic policy

23 The domestic economy

23 Economic trends

25 Manufacturing

27 Agriculture

28 Infrastructure

30 Financial and other services

31 Foreign trade and payments

Brunei

33 Political structure

34 Economic structure

34 Annual indicators

34 Quarterly indicators

35 Outlook for 2001-02

35 Political outlook

35 Economic forecast

36 The political scene

38 Economic policy and the economy

2


List of tables

10 Malaysia: international assumptions summary

11 Malaysia: forecast summary

12 Malaysia: gross domestic product by expenditure

24 Malaysia: real gross domestic product

32 Malaysia: current account

List of figures

13 Malaysia: real gross domestic product

13 Malaysia: Malaysian dollar real exchange rates

19 Malaysia: money supply, M2

23 Malaysia: gross domestic fixed capital formation

24 Malaysia: quarterly gross domestic product

25 Malaysia: consumer and producer prices

26 Malaysia: industrial and manufacturing production

26 Malaysia: exports of electronics and electrical goods

27 Malaysia: sales of passenger cars

3


Summary

March 2001

Malaysia

Malaysia’s fragile stability will continue to be threatened as pressure on thegovernment to become more democratic intensifies. An expected economicslowdown this year could trigger social unrest, accelerating the pace of change.The 75-year-old prime minister, Mahathir Mohamad, appears determined tocarry on in office but opposition to him from within the United MalaysNational Organisation (UMNO), the dominant component of the rulingBarisan Nasional (BN) coalition, is growing, and he could be forced outprematurely. Since the previous Country Report, the EIU has sharply reducedits real GDP growth forecast for 2001 from 7.3% to 4.1%, recovering to 6.1%(previously 6.7%) in 2002, largely because of the expected downturn in the USeconomy and the return of recession to Japan.

The discontent within UMNO over the leadership of Dr Mahathir has becomemore overt. A newly-set up Malay Action Front has become a forum forgrievances. Malay unity talks have been rejected by the opposition PartiKeadilan Nasional (PKN) while talks with the Parti Islam sa-Malaysia have beencalled off at the last minute. Ethnic tensions are rising. Dr Mahathir hasalienated the Chinese community which had called for an easing of thepositive discrimination policies in favour of ethnic Malays. The intimidation ofopposition supporters is continuing. The Malaysian Human RightsCommission has held a public inquiry into police brutality.

Officials are trying to find ways of limiting the impact of the US slowdown.Fiscal and monetary policies remain stimulative. The government haspublished “masterplans” for the financial sector and the capital market, whichpromise stricter corporate governance and the establishment of a single localexchange by 2002. However, the divestment policy has so far remained opaqueand changes to the bumiputera policy are unlikely. Malaysia’s foreigninvestment incentives are no longer adequate. Support for international tradepacts is weakening in Malaysia, where concern about the growing number offree-trade agreements is arousing concern.

Economic growth continues to slow and there has been a sharp deceleration indomestic demand growth. Inflation remains subdued. Sales of manufacturedgoods slipped in the fourth quarter and there has been a similar weakening ofgrowth in the electronics industry. Malaysia’s manufacturing investment plansmay paint too bright a picture of the investment outlook. The government hastaken measures to reduce the glut of crude palm oil with new moves under wayto boost demand. The government is buying up excess rice stocks. Some ofKuala Lumpur’s light-rail companies have been bailed out and the governmentis planning to take over some of the KL bus companies. After the government’s

The political scene

Economic policy

The domestic economy

Outlook for 2001-02

4


repurchase of a large stake in MAS there have been yet more accusations of abailout. Concern is growing about future electricity supply shortages.

The value of exports declined in the fourth quarter and there was acorresponding drop in fourth-quarter imports. The current-account surplus waslittle changed from the third quarter.

Brunei

As Brunei’s economy continues to falter, social control is likely to increase,notwithstanding the government’s calls for openness and transparency.Economic restructuring will be limited in scope. While economic growth willbe a respectable 3-3.5% in 2001, weakness in the private sector will hamper afull economic recovery. Brunei’s non-oil external payments position is likely toworsen this year and next.

The sultan’s visit to a US hospital, for undisclosed medical reasons, wentunreported. A defamation ruling by the High Court worried the press. Thechief justice pointed out the difficulty of trying to make Brunei aninternational investment centre while the government is immune from theprocess of the law. The government published new regulations to controlInternet content. Policing of the citizens’ morality has been stepped up as thegovernment banned public musical performances. Complaints about thepublic healthcare system are increasing.

Brunei has launched a private-sector stimulus programme to boost small- andmedium-sized companies. Consumer spending and lending are on the rise.Brunei’s halal food regulations, which raise retail prices, have drawn warningsabout the emergence of a black market. The government has promised a newjob training programme. Brunei Shell Petroleum has discovered more oil andgas. Brunei’s efforts to develop tourism are facing major obstacles.

Editors: Frans Jonkers (editor); Graham Richardson (consulting editor)Editorial closing date: March 13th 2001

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2001-02

Foreign trade andpayments

The political scene

Economic policy and theeconomy

Malaysia 5


Malaysia

Political structure

Federation of Malaysia

Federated constitutional monarchy

The king appoints a prime minister and, on the prime minister’s advice, a cabinet

The Yang di-Pertuan Agong (king or supreme sovereign) elected by the Conference ofRulers from one of the nine hereditary rulers

Bicameral federal parliament. The Senate (Dewan Negara) has 70 members, 30 of whomare elected from the state legislatures and 40 appointed by the king. The House ofRepresentatives (Dewan Rakyat) has 193 directly elected members. The Senate serves asix-year term of office and the House of Representatives a five-year term

There are state governments in each of the 13 states, in nine of which the head of state is ahereditary ruler. Each state has its own constitution, a council of state, or cabinet, withexecutive authority and a legislature that deals with matters not reserved for the federalparliament. There are also three federal territories, Kuala Lumpur, Labuan, and Putrajaya

November 29th 1999; next election due by January 2005

The Barisan Nasional (BN), the governing coalition—the main component of which isthe United Malays National Organisation (UMNO) Baru—won 148 of the 193 seats in theDewan Rakyat in the 1999 general election. The BN has the two-thirds majority requiredto pass constitutional amendments. The cabinet was reshuffled in December 1999

Government—the main parties in the Barisan Nasional are UMNO Baru, the MalaysianChinese Association (MCA), the Malaysian Indian Congress (MIC), Gerakan, Parti PesakaBumiputera Bersatu (PPBB) and the Sarawak National Party (SNAP)Opposition—Parti Islam sa-Malaysia (PAS), the Democratic Action Party (DAP), PartiKeadilan Nasional (PKN), Parti Bersatu Sabah (PBS) and Parti Rakyat Malaysia (PRM)

Prime minister Dr Mahathir MohamadDeputy prime minister & home affairs minister Abdullah Ahmad Badawi

Agriculture Mohd Effendi NorwawiDefence Najib Abdul RazakEducation Musa MohamadEnergy, communications & multimedia Leo MoggieFinance Daim ZainuddinForeign affairs Syed Hamid AlbarHousing & local government Ong Ka TingHuman resources Fong Chan OnnInformation Khalil YacoobInternational trade & industry Rafidah AzizPrimary industries Lim Keng YaikPublic works Samy VelluTransport Ling Liong Sik

Zeti Akhtar Aziz

Official name

Form of state

The executive

Head of state

National legislature

State government

National elections

National government

Main political organisations

Key ministers

Central bank governor

6 Malaysia


Economic structure

Annual indicators

1996 1997 1998 1999 2000a

GDP at market prices (M$ bn) 253.7 281.9 284.5 299.2 339.4

GDP (US$ bn) 100.8 100.2 72.5 78.7 89.3

Real GDP growth (%) 10.0 7.3 –7.4 5.8 8.5

Consumer price inflation (av; %) 3.5 2.7 5.3 2.7 1.5

Population (m) 21.2 21.7 22.2 22.7 23.3

Exports of goods fob (US$ m) 76,985 77,538 71,883 84,052 99,885b

Imports of goods fob (US$ m) 73,137 74,029 54,378 61,404 82,161b

Current-account balance (US$ m) –4,461 –5,936 9,529 12,607 8,974b

Foreign-exchange reserves excl gold (US$ m) 27,009 20,788 25,559 30,588 29,523

Total external debt (US$ bn) 39.7 47.2 44.8 45.9 48.0b

Debt-service ratio, paid (%) 8.9 7.4 7.4 4.8 5.2b

Exchange rate (av; M$:US$) 2.52 2.81 3.92 3.80 3.80

March 9th 2001

M$3.80:US$1

Origins of gross domestic product 2000 % of total Components of gross domestic product 2000 % of total

Agriculture 8.3 Private consumption 42.5

Mining 9.9 Public consumption 10.7

Manufacturing 34.4 Gross fixed capital formation 25.7

Construction 4.1 Stockbuilding 1.3

Electricity, gas & water supply 3.4 Exports of goods & services 125.7

Services 39.9 Imports of goods & services –105.8

GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 1999c US$ bn Principal imports 1999c US$ bn

Electronics & electrical machinery 51.3 Manufacturing inputs 24.5

Petroleum & LNG 4.1 Machinery 4.7

Palm oil 3.8 Transport equipment 3.5

Chemicals & chemical products 2.9 Metal products 2.8

Textiles, clothing & footwear 2.5 Food 1.8

Wood products 1.8 Consumer durables 1.3

Total incl others 84.5 Total incl others 60.1

Main destinations of exports 1999 % of total Main origins of imports 1999 % of total

US 21.9 Japan 20.8

Singapore 16.5 US 17.4

EU 15.7 Singapore 14.0

Japan 11.6 EU 11.6

Taiwan 4.5 Taiwan 5.3

Hong Kong 4.2 South Korea 5.2

South Korea 3.0 Thailand 3.8

a Actual. b EIU estimate. c Customs basis, imports cif.

Malaysia 7


Quarterly indicators

1999 20001 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Federal government finance (M$ m)Revenue 11,318 15,498 13,997 17,861 11,219 16,682 15,421 n/aExpenditure 9,198 10,059 12,158 15,285 7,805 12,760 14,662 n/aBalance 2,120 5,440 1,839 2,577 3,413 3,922 759 n/a

OutputGDP at constant 1987 prices (M$ m) 44,695 48,151 49,491 50,458 49,966 52,201 53,355 53,742 % change, year on year –1.4 5.0 8.6 11.0 11.9 8.5 7.7 6.5Industrial production index (1993=100) 142.1 155.0 164.1 170.9 175.5 186.2 194.1 197.2 % change, year on year –2.4 6.6 14.2 17.9 23.5 20.1 18.3 15.4

PricesConsumer prices (1995=100) 114.6 114.8 114.9 115.4 116.3 116.4 116.6 117.5 % change, year on year 4.0 2.7 2.3 2.0 1.5 1.4 1.5 1.8Producer prices (1990=100) 129.0 127.6 129.3 133.1 134.0 134.8 134.6 131.8 % change, year on year –4.1 –5.0 –4.2 0.3 3.9 5.6 4.1 –1.0

Financial indicatorsExchange rate M$:US$ (av) 3.80 3.80 3.80 3.80 3.80 3.80 3.80 3.80 M$:US$ (end-period) 3.80 3.80 3.80 3.80 3.80 3.80 3.80 3.80Interest rates (av; %) Deposit 5.6 3.8 3.8 3.3 3.3 3.3 3.4 n/a Lending 8.0 7.4 6.9 6.8 6.8 6.8 6.8 n/a Money market 5.3 3.1 2.6 2.6 2.6 2.5 2.7 n/aM1 (end-period; M$ m) 56,813 62,876 65,616 75,602 70,132 69,431 69,526 80,884 % change, year on year –17.3 –3.7 16.3 29.2 23.4 10.4 6.0 7.0M2 (end-period; M$ m) 274,103 298,968 310,000 316,851 324,716 334,515 332,415 348,158 % change, year on year 3.6 13.2 17.1 16.9 18.5 11.9 7.2 9.9KLSE composite index (end-period; 1977=100) 502.8 811.1 675.5 812.3 974.4 833.4 713.5 679.6 % change, year on year –30.1 78.0 80.8 38.6 93.8 2.7 5.6 –16.3

Sectoral trendsElectronic & electrical products index (1993=100) 163.8 189.9 203.4 218.5 237.8 269.8 289.9 286.8 % change, year on year –1.6 10.6 23.1 30.7 45.2 42.1 42.5 31.2Mining index (1993=100) 124.2 115.0 118.1 121.5 122.2 118.0 116.2 121.1 % change, year on year –1.3 –4.9 –1.9 –4.3 –1.6 2.6 –1.6 –0.4

Foreign trade (M$ m)Exports fob 69,260 77,864 83,649 90,677 84,758 90,968 101,706 95,859Imports cif –53,696 –59,702 –64,871 –70,450 –68,231 –78,681 –86,756 –78,758Trade balance 15,564 18,162 18,778 20,227 16,527 12,287 15,950 17,101

Foreign paymentsCurrent-account balance (M$ m) 10,798 12,340 14,056 10,708 10,710 7,879 7,654 n/aReserves excl gold (end-period; US$ m) 27,140 30,571 31,134 30,588 33,626 33,666 31,895 29,523

Sources: Central Bank of Malaysia, Monthly Statistical Bulletin; IMF, International Financial Statistics.

8 Malaysia


Outlook for 2001-02

Political outlook

Malaysia’s contrived and now fragile stability will continue to be threatened aspressure on the government to become more democratic intensifies. Anexpected economic slowdown this year could trigger social unrest, acceleratingthe pace of change. With the 75-year-old prime minister, Mahathir Mohamad,apparently determined to carry on for as long as possible and convinced thatsignificant concessions would hasten his departure, he is likely to pursue hisstrategy of resisting, frustrating and intimidating the reformists. Yet he couldbe forced out prematurely. Discontent with Dr Mahathir is most acute amongthe grassroots. The party elders of the United Malays National Organisation(UMNO), the dominant component of the ruling Barisan Nasional (BN)coalition, could ultimately be obliged to give it due recognition by confrontingthe prime minister and demanding his resignation, to try and restore theparty’s battered credibility. Under the present circumstances, it is likely that theincreasingly popular opposition would win the next general election, whichmust be called by end-2004.

There are concerns that the retirement of such a hugely dominant personalitycould generate more problems than it would resolve, precipitating a wholesaleshake-up of the political system he has fashioned and igniting all manner oflong-smouldering and potentially explosive animosities. While the deputypremier, Abdullah Badawi, by virtue of his elevation last May to the numbertwo position in UMNO’s hierarchy, is Dr Mahathir’s present heir-apparent, heseems less than qualified to manage that kind of tumultuous transition. Direwarnings by government and opposition leaders about a possible eruption ofracial turmoil suggest Dr Mahathir’s determination to hang on is assumingmore reckless dimensions. Critics accuse him of stoking racial tensions byantagonising the sizeable ethnic Chinese minority—whose leaders have calledfor an easing of the government’s long-running affirmative action strategy infavour of Malays—in order to portray himself and beleaguered UMNO as thetrue defenders of the divided Malay majority. Although the stand-off wasdefused after a reformist Chinese lobby agreed to shelve particularly sensitivedemands, a desperate Dr Mahathir could revive the issue, or stir otherpotentially destabilising controversies, to try to keep himself in office.

The jailed former deputy prime minister, Anwar Ibrahim, is still the joker inthe pack. It is possible that the Federal (Supreme) Court, headed by a new chiefjustice, Dzaiuddin Abdullah, with a reputation for independence andincorruptibility, may quash Mr Anwar’s convictions for corruption andsodomy. Mr Anwar could reasonably expect to be released on bail pending theoutcome of his second appeal. His return to the political fray would be a majorsetback for Dr Mahathir. But it is unclear whether a rehabilitated Mr Anwarwould join the opposition Parti Keadilan Nasional, set up following hisimprisonment and nominally led by his wife, Wan Azizah Ismail, or return toUMNO. Given the popularity he enjoys on both sides of the political divide,

Domestic politics

Malaysia 9


his choice would have a significant bearing on the outcome of the nextgeneral election.

Slower regional growth will make many Association of South-East AsianNations (ASEAN) countries less keen to remove internal trade barriers. Malaysiamay have seriously harmed the planned creation of an ASEAN Free-Trade Area(AFTA) by 2003 by insisting on the postponement of the lowering of itsautomotive tariffs, in order to protect its national car company, Proton.Concern about the impact of China’s expected membership of the World TradeOrganisation (WTO) has made some ASEAN countries pursue free-tradeagreements, usually on a bilateral basis, which could further weaken ASEAN.Japan’s adoption of trade bilateralism could undermine the broadly based tradeliberalisation process and discourage foreign direct investment (FDI) inflowsfrom the US and Europe into ASEAN.

Economic policy outlook

Developed-nation status by 2020 remains the government’s long-termambition, requiring the pursuit of a high rate of economic growth. Monetarypolicy is expected to remain accommodative and fiscal policy stimulative inthe next 12 months, as the government tries to reduce the impact of a suddenexport slowdown on economic growth. A return to the pre-crisis high-growthpath is only possible if investment, which used to contribute two-thirds ofGDP growth before the crisis, increases dramatically. Fiscal stimulation,incentives to boost private investment and attract FDI are to be expected.Interventionist policies and exchange controls are likely to continue. Thegovernment will set out its economic strategy in the Eighth Malaysia Plan(2001-05) and its social strategy in the revision of the National DevelopmentPolicy (NDP).

The government is likely to respond to the increasingly evident slowdown ineconomic growth by following a stimulative fiscal policy until 2003. This isevident from a sharp rise in the federal government deficit in the fourthquarter of last year. Slower revenue growth will widen the deficit in 2001. The2001 budget boosts development spending and forecasts a deficit of M$16.1bn(US$4.2bn), equivalent to 4.9% of GNP in 2001, only slightly down from thepredicted result for 2000 of M$18bn or 5.9% of GNP. The final outcome maywell be a larger shortfall than this. The government has announced it is goingahead with the Bakun hydroelectric dam “mega-project” in Sarawak state,estimated to cost at least M$15bn. Further initiatives are likely to follow.

The government is increasing social spending, supporting those parts of theeconomy left behind in the recovery. It is boosting education to upgrade skillsand productivity. It is also stepping up the development of new growth sectorssuch as knowledge-based industries, particularly high-technology manufact–uring and high value-added services. The 2001 budget promotes investment ininformation communications technology, education and retraining of workers.To stimulate domestic consumption, there are tax rebates for low- and middle-income groups.

Policy trends

International relations

Fiscal policy

10 Malaysia


The intervention rate of Bank Negara (BN, the central bank), may be cut to 5%from its current level of 5.5%—at which it has remained since the middleof 1999—if economic activity does not pick up in the second half of the year.The expected drop in export demand will keep lending and money supplygrowth low as private investment is likely to stay sluggish, maintaining thedownward pressure on lending rates. Money supply growth will be sluggish in2001, notwithstanding an encouraging rise in loans disbursed during the finalmonth of 2000. In January the year-on-year increase in total loans outstanding,including loans sold to the national companies, Cagamas and Danaharta,reached 5.9% from 5.4% in December. The forecast acceleration of economicgrowth in 2002 will induce the central bank to raise the intervention rate asinflation begins to rise.

Economic forecast

The major risk to Malaysia’s external outlook remains the possibility of the USdownturn developing into a full-blown US recession, which the EIU does notexpect to happen, although we suspect the downturn may be sharp enough tocall it a “hard landing”. US growth is expected to fall from 5% in 2000 to1.4% in 2001 but is forecast to recover to 2.9% in 2002, boosted by lowerinterest rates. Malaysia’s economy is strongly influenced by the performance ofthe US, its largest export market, particularly for electronic and electrical goodswhich comprise 59% of Malaysia’s exports. Additional risks to Malaysia comefrom the expected return to recession in Japan and slower growth in otherexport-dependent parts of Asia in 2001. However, EU growth is forecast to holdup fairly well at 2.6% in both 2001 and 2002, down from 3.3% in 2000.

Malaysia: international assumptions summary(% unless otherwise indicated)

1999 2000 2001 2002

Real GDP growthWorld 3.5 4.8 3.3 3.9OECD 3.0 4.0 1.9 2.7EU 2.4 3.3 2.6 2.6

Exchange rates (av)¥:US$ 113.9 107.8 119.5 120.0US$:€ 1.07 0.92 1.00 1.09SDR:US$ 0.731 0.758 0.755 0.731

Financial indicators¥ 2-month private bill rate 0.27 0.24 0.50 0.50US$ 3-month commercial paper rate 5.18 6.32 4.89 5.39

Commodity pricesOil (Brent; US$/b) 17.9 28.4 23.9 23.0Gold (US$/troy oz) 278.8 279.3 258.8 255.0Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.2 9.0 16.1Industrial raw materials (% change in US$ terms) –4.2 14.6 0.7 12.6

Note. Regional aggregate GDP growth rates weighted using purchasing power parity exchange rates.

Monetary policy

International assumptions

Malaysia 11


Malaysia’s manufacturing economy is in the middle of a sharp slowdown,which is likely to last two or three quarters, as the effect of much weaker USdemand for electrical and electronic goods feeds through. From November2000 to January 2001, manufacturing production declined by 3.6% from thepreceding three months. Signs of the output fall had first been picked up by asharp drop in business confidence in the third quarter, as foreign and domesticorders slowed and stocks began to pile up. A sudden year-on-year 10.9%plunge in December exports—the first fall for almost two years—also suggeststhat further export weakness is to be expected.

The loss of momentum was also evident in fourth-quarter real GDP figureswhich barely increased from the preceding quarter, although the year-on-yeargrowth rate reached a respectable 6.5%, after 7.7% in the third quarter. Exportsare likely to fall in the first half of 2001 but will begin to recover in the secondhalf. The fall in export revenue will reduce corporate incomes, limit householdincome growth, and lead to greater caution in private consumption and grossfixed investment.

Malaysia: forecast summary(% unless otherwise indicated)

1999a 2000b 2001c 2002c

Real GDP growth 5.8 8.5 4.1 6.1

Industrial production growth 9.1 18.0 5.3 7.9

Gross agricultural growth 3.3 0.4 2.0 1.0

Unemployment rate (av) 3.4 3.0 3.5 3.4

Consumer price inflation Average 2.7 1.5 1.8 2.2 Year-end 2.5 1.4 2.0 2.8

Short-term interbank rate 7.3 6.8 6.8 7.3

Government balance (% of GDP) –3.2 –3.6 –4.1 –2.8

Exports of goods fob (US$ bn) 84.1 98.5 103.6 115.5

Imports of goods fob (US$ bn) 61.4 79.8 88.9 101.4

Current-account balance (US$ bn) 12.6 9.0 4.7 3.8 % of GDP 16.0 10.2 5.1 3.8

External debt (year-end; US$ bn) 45.9 48.0 51.6 55.2

Exchange rates M$:US$ (av) 3.80 3.80 3.80 3.80 M$:¥100 (av) 3.34 3.53 3.18 3.17 M$:€ (year-end) 3.82 3.57 3.99 4.29 M$:SDR (year-end) 5.22 4.95 5.12 5.28

a Actual. b EIU estimates. c EIU forecasts.

Growth-sustaining influences in 2001 will be private consumption, slowerimports and public spending. Consumer confidence is still high and, althoughit is likely to be eroded by rising unemployment, no serious deterioration isexpected in 2001. A steep decline in import growth—imports of intermediategoods are closely linked to exports—will reduce the negative impact of lowerexports on overall GDP growth. Public spending is likely to be boosted shouldthe slowdown turn out to be prolonged. During the past three months we have

Economic growth

12 Malaysia


sharply revised down our real GDP forecast and now expect growth to reach4.1% in 2001 and recover to 6.1% in 2002, after an outcome of 8.5% last year.

We expect gross fixed investment growth to be relatively firm, owing mainly topublic-sector investment (part already planned, and part made up of additionalworks to compensate for the slowdown in GDP growth). Private-sectorinvestment, apart from residential investment, has remained depressed,standing at about half the level attained in 1997. However, if global demandfor electronic and electrical products continues to grow at a moderate rate,production facilities are likely to be expanded in the next two years. Total grossfixed capital formation, which rose by a remarkable 24.1% in 2000, is forecastto increase by 9.1% in 2001 and 12% in 2002 but may again surprise on theupside. Our forecast assumes that private consumption growth, boosted by asharp rise in disposable incomes from higher wages and increased taxallowances in the 2001 budget, will hold up fairly well. After the spendingrecovery which raised real consumption by 12.5% in 2000, privateconsumption growth is expected to amount to 4.2% in 2001 and 5.4% in 2002.

Malaysia: gross domestic product by expenditure(M$ m at constant 1987 prices; % change year on year in brackets unless otherwise indicated)

1999a 2000b 2001c 2002c

Private consumption 84,068 94,492 98,461 103,778(3.1) (12.4) (4.2) (5.4)

Public consumption 23,905 24,311 24,992 25,742(16.3) (1.7) (2.8) (3.0)

Gross fixed investment 51,897 64,404 70,265 78,697(–6.1) (24.1) (9.1) (12.0)

Final domestic demand 159,870 183,208 193,718 208,217(1.6) (14.6) (5.7) (7.5)

Stockbuilding 219 1,174 1,100 500(0.2)d (0.5)d (0.0)d (–0.3)d

Total domestic demand 160,089 184,382 194,818 208,717(1.9) (15.2) (5.7) (7.1)

Exports of goods & services 212,484 247,034 260,127 280,677(14.3) (16.3) (5.3) (7.9)

Imports of goods & services 179,778 222,242 237,132 258,236(11.8) (23.6) (6.7) (8.9)

Foreign balance 32,706 24,792 22,995 22,440(4.2)d (–4.1)d (–0.9)d (–0.3)d

GDP 192,795 209,174 217,813 231,157(5.8) (8.5) (4.1) (6.1)

a Actual. b EIU estimates. c EIU forecasts. d Contribution to real GDP growth.

A slower economy, growing spare capacity and a less tight labour market willkeep prices and wages down in 2001. Inflation, which began to resurface byearly 2000, was already fading by the end of that year. Consumer priceinflation fell to 1.4% year on year in December 2000 from 1.9% in November,as year-end price increases remained moderate, and reached 1.5% in January2001. Despite an oil price-related autumn inflation rise, consumer priceinflation averaged only 1.5% in 2000 and non-food inflation even less at 1.3%.

Inflation

Malaysia 13


Utility price rises will raise inflation slightly this year. Consumer prices areexpected to rise by an average of 1.8% this year and by 2.2% in 2002. Producerprice inflation, which peaked at 7.3% year on year in June 2000, shouldcontinue the decline which began towards the year-end.

There is a real possibility that the renewed weakness of the Asian economiesmost closely linked to the US may trigger unrest in the currency market in2001. Malaysia’s response is likely to be to stick firmly to the US dollar peg andthe remaining capital controls, even though the official belief in the benefits ofstability against the US dollar is increasingly being questioned and thedisadvantages of an inflexible currency regime have been pointed out. Theexpected weakening of the US dollar, to which the ringgit is fixed at a level ofM$3.80:US$1, is likely to bring some relief to Malaysian competitiveness,which the rise of the US dollar had reduced during 2000. Much of thecompetitive gain from the sizeable ringgit depreciation in 1997-98 hasdisappeared. Should there be a sharp fall in the currencies of the Asian regionalcompetitors, domestic pressure for a ringgit devaluation is likely to increase.However, we expect the fixed currency regime to continue this year and next.

Export and import growth will slow sharply in the next 12 months butdomestic demand is expected to hold up. This will be apparent in a continueddecline of the current-account surplus, from an estimated outcome of 10.2% ofGDP in 2000 to 5.1% in 2001 and 3.8% in 2002. The impact of the downturnin trade will be very different from the Asian crisis: neither a surging current-account surplus or a collapse of imports, as in 1998, nor a surge in exports, asin 1999 and 2000, are to be expected. Some recovery in export and importgrowth is expected to follow in 2002. The trade surplus expanded in thesecond half of 2000, initially because of surprisingly firm exports, then laterbecause of unusually weak imports. The trade surplus will remain high duringthe forecast period, reaching US$14.7bn in 2001 and US$14.1bn in 2002, afterUS$18.7bn in 2000.

External sector

Exchange rates

14 Malaysia


The political scene

Simmering discontent within the United Malays National Organisation(UMNO) over the leadership of Mahathir Mohamad has become more overt inrecent weeks, intensifying the already considerable pressure on the veteranprime minister to stand aside. This was graphically illustrated during aFebruary 4th rally in Kuala Lumpur organised by the newly created MalayAction Front (MAF), essentially a grouping of once high-flying politicians ofthe ruling Barisan Nasional (BN) coalition’s dominant party, UMNO.Intriguingly themed “Malays will not perish from the Earth” and attended bysome 3,000 people, the gathering heard speaker after speaker roundlycondemn the government and some of its key policies. The implementation ofthe affirmative action strategy in favour of bumiputeras (Malays and otherindigenous groups) was singled out for special treatment, with criticsdenouncing it as a vehicle for the enrichment of a small coterie of croniesrather than the advancement of the community generally. The governmentwas repeatedly advised to attend to concerns being ever more vocallyexpressed by grassroots UMNO members on issues such as corruption,transparency and injustice.

The former justice minister, Ibrahim Ali, the driving force behind the event,defended the public airing of the grievances, arguing that opposition partiesalone could not be seen to be capitalising on them. Yet opposition partiessought to extract as much mileage as possible from the thinly veiled attacks onthe prime minister by UMNO stalwarts. Harakah, a newspaper published byParti Islam sa-Malaysia (PAS), declared that the MAF had “openly challengedthe legitimacy of Dr Mahathir to remain in office”. The prime minister wasapparently initially under the impression that the forum would merely echohis calls for unity among the Malays. After belatedly realising it would proveless than supportive, he launched a damage-limitation exercise, urgingmembers of his party not to attend and contriving to change the venue to theUMNO-run World Trade Centre. Subsequently, Dr Mahathir accused the MAFof effectively creating a breakaway party, and decreed that it be given nofurther meeting permits.

Official efforts to reverse the polarisation of ethnic Malays—triggered by thecontroversial September 1998 ouster and imprisonment of the former deputyprime minister, Anwar Ibrahim—intensified following the BN’s surprisingdefeat in an end-November by-election in Dr Mahathir’s native state of Kedah.In early January, after UMNO’s management committee endorsed arecommendation by a local academic that the party’s president hold “unitytalks” with his counterparts from other Malay-based parties, invitations wereduly issued to Fadzil Noor of the PAS and Wan Azizah Ismail of Parti KeadilanNasional (PKN). The latter—who is Mr Anwar’s wife—promptly turned downthe offer. Questioning the rationale for such talks, she asserted that the large-scale shift in allegiance among Malays from UMNO to the opposition stemmedfrom a crisis of confidence in the government and was being fuelled byperceived misuse of power, corruption, police brutality, weak economic

UMNO grassroots challengeDr Mahathir

MAF: a new forum forgrievances

Malay unity talks arerejected by the PKN

Malaysia 15


management and judiciary subservience. Characterising the PKN as amultiracial party, she said ethnic Chinese and Indians were victims of officialoppression as well as Malays, and that unity talks should encompass all races.

PAS, while echoing PKN’s advocacy of talks on national rather than just Malayunity, nonetheless said it would take up UMNO’s invitation. But it too wasclearly suspicious of Dr Mahathir’s motives and intentions, demanding thatthere be prior agreement on the agenda and that this incorporate broad issuesof concern to all members of the four-party opposition Barisan Alternatif,which comprises PAS, PKN, the Democratic Action Party (DAP) and PartiRakyat Malaysia. During preliminary “technical” discussions on February 8thbetween representatives of the two parties, PAS insisted that the government’scontroversial decision last September to stop paying Terengganu state—controlled by the opposition Islamic party since November 1999—a 5% royaltyon offshore oil and gas production also be included. Two days later,Dr Mahathir announced that formal talks would begin on February 19th. Buton February 18th PAS declared otherwise, citing UMNO’s refusal to reconsiderthe royalty issue and recent heavy-handed police break-ups of gatherings ofopposition supporters. On March 8th Terengganu state filed a suit in the KualaLumpur High Court alleging that the federal government and its whollyowned hydrocarbons corporation, Petroliam Nasional, were in breach ofcontract by failing to make royalty payments.

UMNO’s attempts to portray itself as the true defender of Malay interestsprompted renewed condemnation by Dr Mahathir of members of the Chinesecommunity favouring a dilution of policies underpinning pro-bumiputeraaffirmative action. The prime minister had begun his attacks last August,targeting a respected umbrella grouping of Chinese lobbies, known as Suqiu,that issued an 83-point memorandum prior to the November 1999parliamentary elections calling, inter alia, for the abolition “in all respects ofthe bumiputera/non-bumiputera distinction”. Ironically, the grouping’srecommendations were “approved in principle” at the time by the UMNO-ledgovernment. Dr Mahathir was then angered by Chinese educationalists’rejection of a proposed pilot project to partially integrate some Malay, Chineseand Indian schools on the single campuses—the so-called Vision Schoolinitiative. His harsh criticism of opponents of the Vision School scheme and ofSuqiu was a key factor in the BN’s defeat in the November 2000 Kedah by-election. The prime minister alienated even more Chinese by declaring inparliament on December 11th that the government’s earlier acquiescence toSuqiu’s appeals was a political expedient necessitated by the looming elections.That admission prompted Lim Kit Siang, the chairman of the predominantlyChinese DAP, to accuse him of “deliberate and cynical deception”. The solidbacking of the main minority community at the polls had helped give the BNanother two-thirds majority in the federal parliament.

Mr Lim and other opposition luminaries likewise expressed outrage at thegovernment’s apparent acquiescence when Gabungan Pelajar MelayuSemenanjung (GPMS–the Federation of Peninsular Malay Students) announcedin mid-December that it would issue a list of demands to counter those of

Talks with PAS called off atthe last minute

Dr Mahathir alienates theChinese community

Malay students fuel ethnictensions

16 Malaysia


Suqiu. This advocated that the post of prime minister be reserved for a Malay,that Malays be guaranteed 70% and 60% respectively of the places in publicand private universities, and that passports be issued only to Malay-speakingMalaysians. The GPMS also threatened to organise demonstrations across thecountry unless Suqiu withdrew its appeal by mid-January. In his New Yearaddress on December 31st, Dr Mahathir claimed that bowing to demands formore egalitarian policies would aggravate existing imbalances and lead“inevitably” to race riots. In a clear reference to the prime minister, Mr Limwarned that “those who cynically play with communal fire can end up puttingtheir entire political legacy to flames”.

The situation was defused on January 6th when Suqiu, under intense pressureand citing the “prevailing ethnic tension”, agreed to shelve its most sensitivedemands. But it was a hollow victory for Dr Mahathir. While the controversywas raging, the DAP chairman also accused Ling Liong Sik, the president of theMalaysian Chinese Association (MCA), the BN’s second biggest party, ofpandering to the GPMS. Although the ruling coalition’s defeat in the Kedah by-election had prompted Dr Ling and other Chinese members of the governmentto call meekly for a re-evaluation of its attitudes towards the main minoritycommunity, they preferred to be seen professing loyalty to the prime ministerthan indulging their reformist constituents.

Barely concealed factionalism within the MCA erupted into a bitter war ofwords in February between supporters of Dr Ling and those of his deputy,Lim Ah Lek. It was sparked by claims in a Chinese-language newspaper thatMr Lim had asked Dr Ling to specify when he would step down as partypresident. The MCA’s two top office-bearers have long been grooming protégésto assume the leadership of the party upon their retirement. Once the best offriends, they fell out after the 1999 parliamentary elections when Dr Lingsupposedly reneged on a promise to ensure the appointment of Mr Lim’sprotégé, Chan Kong Choy, as a full minister, promoting his own, Ong Ka Ting,instead. The bad blood stirred by that episode provoked a mid-2000 threat byDr Ling to resign as transport minister, ostensibly to make way for Mr Chan.Suspicions that this was a tactical manoeuvre to silence his critics and toreassert his authority over the party were reinforced by apparently well-orchestrated displays of support that culminated in Dr Ling’s withdrawing hisresignation threat.

Negotiations between Dr Ling and Mr Lim on a succession formula resumed,reportedly resulting in an agreement early in February that Mr Chan wouldtake over the deputy presidency of the MCA before internal elections next year,thus becoming the top contender to head the party once its president bowsout. But newspaper claims of an ultimatum by Mr Lim to his boss againexposed the strained relations between them, a situation exacerbated byDr Ling’s refusal to endorse his deputy’s denial that such a demand had beenmade and vocal pledges of support for each by respective loyalists. With the riftdeepening ominously, party elders prevailed on both sides to end the publicslanging match.

Factionalism within theMCA flares up

Malaysia 17


Notwithstanding UMNO’s overtures to PAS and PKN, the judiciary and lawenforcement agencies remain ill-disposed towards dissenting opposition partyluminaries and supporters. On February 9th a former PKN vice-president,Marina Yusof, was found guilty of sedition by a court in Penang state and giventhe maximum fine of M$5,000 (US$1,315). She had been charged in January2000 with “provoking racial discord” during a speech prior to the 1999elections by urging voters not to support UMNO because, she alleged, it hadstarted the massacres of ethnic Chinese following closely contested polls in1969. Human rights groups have called for the repeal of the Sedition Act, acolonial-era law that criminalises any speech deemed to have a “seditioustendency”, regardless of its veracity. In mid-February anti-riot police used tear-gas and chemical-laced water to break up three rallies by PKN supporters, onein Kuala Lumpur and two in Kedah. The third gathering coincided with thepreliminary hearing of a court case against nine PKN members on charges ofinterfering with the November by-election. They were said to have interceptedseveral buses believed to be filled with would-be BN voters from outside theconstituency. Defendants said the charges were baseless, politically motivatedand designed to intimidate opponents of the government.

A landmark public inquiry by the Malaysian Human Rights Commission,known as Suhakam, into allegations of police brutality during a PKN-organisedrally near Kuala Lumpur in early November got under way in mid-December.Witnesses, who included Wan Azizah, testified that the police fired tear-gascanisters straight at members of the crowd after organisers had instructed it todisperse, beat up both participants and bystanders at the site, and assaultedseveral of the 120-odd people taken into custody. The police were reluctant tosend representatives to the Suhakam hearings, ostensibly because court casesagainst some of those detained—on charges of involvement in an illegaldemonstration and failure to disperse—were still pending, but eventuallyrelented. Officers who testified in mid-February denied all the allegations,claiming that any force used was legitimate and wholly justified given the“provocation” by certain members of the crowd. After the inquiry had begunDr Mahathir urged a gathering of senior police officers not to be disheartenedby the proceedings. He said the government realised that when confronted bydemonstrators who turned violent, their subordinates sometimes had to useforce. Suggesting that the allegations of police brutality were politicallymotivated, the prime minister declared that his administration would not beeasily influenced by any recommendations the commission might make.Suhakam, set up by the government to temper criticisms of its human rightsrecord, has no power to prosecute.

On February 23rd the Federal (Supreme) Court upheld rulings by lower courtsthat a M$100m (US$26m) defamation suit by Mr Anwar against Dr Mahathirwas frivolous, and refused to hear his plea. The former deputy prime minister,now serving jail sentences totalling 15 years after being convicted ofcorruption and sodomy, had accused the prime minister of slandering himduring a press conference two days after his arrest in September 1998 bygraphically describing the alleged sexual misconduct. Dr Mahathir argued thatthe statements were not calculated to disparage the detained politician, but

Intimidation of theopposition continues

Human Rights Commissionholds a public inquiry

Mr Anwar is said to needsurgery overseas

18 Malaysia


had been necessary to explain his dismissal. The hearing of Mr Anwar’s appealto the Federal Court against the corruption conviction was postponedindefinitely in December following his hospitalisation the previous month fora slipped disc. His lawyers said the least painful and risky treatment wasendoscopic microspinal surgery, which is not available in Malaysia, and askedthat he be allowed to undergo it abroad. The government turned down therequest, but agreed in early February to allow a Munich-based doctor, ThomasHoogland, to examine Mr Anwar and, if necessary, operate on him locally. Oneof several conditions imposed was that local doctors be absolved of any blamethat might arise from the treatment. Dr Hoogland told a press conference inKuala Lumpur on March 11th that Mr Anwar should undergo surgery overseas.

Economic policy

There has been little change in the general thrust of policy during recentmonths, with the authorities essentially reiterating their faith in theexpansionary strategy adopted in mid-1998 to propel the economy out of thethen looming downturn and sustain growth thereafter. To limit the adverserepercussions of the nascent slowdown in the US, Malaysia’s biggest marketand source of investment, officials have been stressing the need to broaden theexport base and identify new overseas markets; to boost domestic demand,inter alia by encouraging banks to lend and their customers to borrow, and byfacilitating access to non-bank sources of funding; to attract more foreigninvestment in manufacturing and other sectors; and to ensure public sectoroutlays are utilised speedily.

Fiscal policy has remained expansionary. Net development expenditurereached M$11.75bn (US$3.1bn) in October-December 2000, up fromM$5.34bn in July-September and M$7.79bn in the fourth quarter of 1999. Thegovernment has long been adamant that pump-priming will remain essentialuntil the private sector fully recovers from the 1998-99 recession. Theabundance of export-generated liquidity presently in the system means thatthe government can use domestic borrowings to finance a higher deficitwithout crowding the private sector out of the credit market. Monetary policycontinues to be stimulative. The average lending rate of commercial banksdeclined to 7.45% by end-December, from 7.6% at end-September. Thedownward trend was dictated by the sizeable liquidity surplus, the persistentslackness of demand for funds, and the weakness of inflationary pressures.Such pressures are likely to remain subdued given the US slowdown. Recentcuts in US interest rates have narrowed differentials between the two countries,discouraging the outflow of monies from Malaysia. The M$3.80:US$1exchange-rate peg and residual capital controls allow the monetary authoritiesmore freedom than their counterparts elsewhere in the region to keep interestrates low. The downside of the government’s determination to maintain ratesat low levels is that it props up borrowers less than deserving of such support,thereby impeding, for example, the much-needed restructuring of thecorporate sector.

Officials mull how to limitthe impact of US slowdown

Fiscal and monetary policyremain stimulative

Malaysia 19


On March 1st Bank Negara, (BN, the central bank), unveiled a ten-yearmasterplan for the financial sector. This is broadly aimed at developing a“more resilient, competitive and dynamic” system and facilitating theemergence of a core of “strong and forward-looking” domestic institutionscapable of facing the challenges of liberalisation and globalisation. During thefirst phase of its implementation, 2001-03, the focus will be on enhancing thecompetitive capacities of locally owned banks and insurance companies.Impediments to competition among such institutions are to be progressivelylifted during the second stage, 2004-07, paving the way for a fully liberalisedmarket, and the licensing of more foreign players thereafter.

The ongoing consolidation of the banking industry should eventually lead togreater efficiency and lower costs. It will also spur improvements in riskmanagement capabilities—the recent economic crisis stemmed in no smallmeasure from banks’ earlier profligacy—and in the range of products andservices on offer. Fifty of the country’s 54 domestic banks met an officiallyimposed end-2000 deadline to legally merge into ten groups. However, theactual integration process is likely to be fraught with hazards. Managementstrains are inevitable given differences in corporate culture and procedure,and this is bound to have an adverse affect on day-to-day operations in theshort term. Lending activities, which are already slack owing to a still heftybad debt overhang, seem set to recover only slowly. Customers will betempted to transfer deposits to locally incorporated foreign banks perceived asmore efficient. One danger implicit in the ten-year masterplan is that theprotective instincts which impelled the government to oblige domestic banksto merge could become protectionist ones, delaying the transition to full-blown foreign competition.

On February 22nd the Securities Commission presented a ten-year masterplanfor the capital market, essentially designed to render it more attractive forborrowers and investors. The plan promises measures to lower the cost offundraising, and to facilitate more innovative methods of doing so. Much ofthe focus is on accelerating the development of the corporate bond market,inter alia, by fostering greater liquidity, establishing benchmark yield curves,encouraging asset securitisation, promoting bond derivatives and bond funds,

The financial sectormasterplan is unveiled

Bank integration is likelyto be fraught with hazards

A capital marketmasterplan is presented

20 Malaysia


and permitting regulated short-selling. A phased programme to encourageinternational financial institutions and multinational corporations to issueringgit bonds should be considered, the plan said. Another key thrust is thedevelopment of the venture capital market, not least by encouraging theparticipation of foreigners and local institutional investors in such funds. Theplan acknowledges that the private pension fund sector needs to be promoted,and recommends that the management of government-controlled investmentinstitutions such as the Employees’ Provident Fund, a mandatory nationalpension scheme, be outsourced. Foreign majority ownership of unit trustcompanies is to be permitted from 2003.

Strengthening corporate governance is a major priority. The plan promises toimprove avenues for minority shareholders to exercise and enforce their rights.In late January the Kuala Lumpur Stock Exchange (KLSE) unveiled strictergovernance and disclosure rules as part of ongoing efforts to boost investorconfidence in the lacklustre share market. They were partly a response tominority shareholders’ concerns about dubious restructuring and otherinitiatives, undertaken in recent months by politically well-connected listedcompanies, that contributed to a substantial outflow of foreign funds. Thechanges prescribed minimum standards of disclosure to encourage the timelyprovision of material information to the market. They allow the KLSE to takeaction against the directors of listed companies, and against their advisers.Quoted firms are, inter alia, required to detail in annual reports the extent oftheir compliance with corporate governance best practices; to haveindependent directors constitute at least one-third of their boards, up from thepresent minimum of two such members; to send directors on KLSE-approvedgovernance training programmes; and to oblige auditors to review a widerrange of activities, including possible conflicts of interest.

The February 22nd masterplan pledges to implement a range of measures tospeed up the development of the fledgling derivatives market, includingentitling foreign firms to act as clearing agents. As part of its campaign toensure a liquid, efficient, secure and transparent trading environment, theSecurities Commission advocates consolidation of market institutions andintermediaries. This is expected to lead to the establishment of a single localexchange by 2002, and to the emergence of a core group of competitivebrokerages offering a wide range of products and services. Regulation is tobecome increasingly market-based, with enhanced incentives to promotegreater compliance. While industry players welcomed the masterplan, manypointed out that its success depends heavily on the sort of effectiveenforcement which the authorities have hitherto been unwilling to impose.

Expectations that the problems afflicting key “privatised” companies—graphically exposed by the 1998-99 recession—would yield a more cautiousand transparent divestment policy have not been borne out. Not only has thegovernment continued to award development contracts to favoured but lessthan experienced entrepreneurs without competitive bidding, it has also bailedout more troubled groups. In December it bought back the controlling 29%stake in loss-making Malaysian Airline System (MAS) held by Tajudin Ramli, a

The plan promises strictercorporate governance

A single local exchange tobe established by 2002

MAS experience isinstructive

Malaysia 21


prominent Malaysian businessman. The government also assumedresponsibility for two bankrupt light-rail companies in Kuala Lumpur,controversially agreeing to reward the assets’ owners handsomely for whatmany regarded as their poor management (see The domestic economy:Infrastructure). The MAS buy-back is instructive in many respects. Mr Tajudin’sexecutive chairmanship, which began in 1994, was characterised by big losses,bigger debts, mounting customer dissatisfaction and plunging staff morale. Yetthe government agreed to pay him M$1.79bn, or M$8 a share, for his stake,more than double the market value of the stock. Weak stewardship at MAS andthe recent economic crisis, which inflated costs and eroded revenue, are a largepart of the company’s problem. But the limited freedom to act independentlyof the government—a burden that it has in common with most privatisedcompanies—also dragged it down. The government has the last word in allMAS decision-making, meaning that it can impose its will regardless of thecommercial implications. The many unprofitable local routes the carrier mustserve, for example, are a big drain, because domestic fares have been frozensince 1992. The tightness of the rein and the hefty premium paid toMr Tajudin suggest that the government’s hopes of divesting a sizeable stake ofMAS equity to a strategic overseas carrier will be difficult to realise.

On more than a few occasions during the past several months it has seemed asif the government was about to cast off the protective cloak that restrictsforeign investors’ access to big chunks of the economy. Hopes of a significantopening up of the previously no-go “strategic” sector were stirred last Augustby the sale of a 30% interest in Johor’s Tanjung Pelepas port to Danishshipping giant Maersk Sealand, and of a similarly sized slice of Port Klang’sWestport to Hong Kong-based Hutchinson International Terminals. They weresubsequently heightened by official admissions that negotiations were underway with potential overseas partners on the disposal of equity in three of themost jealously guarded symbols of corporate national pride: MAS, the nationalcarmaker Proton, and Telekom Malaysia. In January the governmentannounced the rollover of a waiver introduced at the height of the Asian crisiseffectively allowing foreigners to set up wholly owned manufacturing plants ofalmost any kind, and broadened its scope to include investments for theexpansion and diversification of existing operations. In the same month thefinance minister, Daim Zainuddin, promised “instant” satisfaction for would-be investors in need of tailor-made incentives.

Yet a close look at these developments, and a plethora of discouraging newsstories over the same period, reveals that the government’s attitude to foreigncapital remains acutely ambivalent. The perceived need to continue protectingthe bumiputera majority (ethnic Malays and other indigenous groups) means itis still unwilling to allow unfettered competition among businesses. Not eventhe supposedly good news is that encouraging. The pledge of promptgratification for foreign companies keen on customised concessions, whiledoubtless welcomed by some, reinforces the general perception that a levelplaying field for all is still a long way off. Egalitarians also wonder why the100% foreign ownership entitlement was not extended to activities other thanmanufacturing, such as services. Nor, because of the government’s apparent

Some strategic sectors areopened up

Bumiputera policy remainsunchanged

22 Malaysia


reluctance to relinquish enough management control, have the mooted salesto outsiders of equity in the three prized state-run companies materialised.

Executives of established foreign-owned companies, such as those in the vitalelectronics sector, say the tax and other investment incentives on offer are nowgenerally inadequate, having been bettered by competitor countries in theregion. Regulations governing the setting up of new firms, and theirimplementation, are onerous, and seem set to remain so. Laws to safeguardintellectual property rights—no small issue given Malaysia’s ambition tobecome a “knowledge” economy—tend to be poorly enforced, even if theyappear admirable on paper. Many Malaysians share Dr Mahathir’s resistance togreater openness. Some believe the government is being too generous already.Ramon Navaratnam, an influential author, consultant and former seniorofficial at the Ministry of Finance, argued in January that giving free rein toforeign firms to establish wholly owned manufacturing plants cannot butretard the “build-up of Malaysia’s technological capacity and [its] participationin modern industries”. The same day, the prime minister called on Asiancountries to “examine liberal democracy and the unfettered market in aborderless world and determine what we should accept, reject and modify”.

The government’s reservations about the potentially adverse impact on localbusinesses of global and regional trade pacts have also been enjoying greaterdomestic support, increasing the possibility of its reneging on morecommitments already made and being a reluctant participant in futurenegotiations. In December a group of prominent non-governmentalorganisations (NGOs) endorsed the government’s concerns about plans for anew round of multilateral negotiations under the auspices of the World TradeOrganisation (WTO), which the US wants to begin this year. They called on itto resist outside pressure for the launch of a new round and introduction of“new issues” on the agenda, which, they claimed, would result in the“domination” of the economy by “big foreign firms”. The international tradeand industry minister, Rafidah Aziz, had earlier said that it would be“ridiculous” to launch a new round without setting an agenda first, reiteratingthe government’s view that priority be given to the resolution of outstandingproblems relating to the implementation of the Uruguay Round rather than tonew business.

Members of the House of Representatives have likewise expressed misgivingsabout the entry into force of the ASEAN Free-Trade Area (AFTA) on January 1st2003, when six of the group’s ten members, including Malaysia, are to havecut duties on most industrial products to between zero and 5%. Last May thegovernment controversially prevailed on its ASEAN counterparts to allowMalaysia to defer until 2005 the scheduled reduction in duties on motorvehicles produced elsewhere in the ASEAN area—American and Japanesemanufacturers have built up capacity ahead of liberalisation—reportedlythreatening to abandon AFTA if the concession was not granted. It presentlylevies tariffs of 140-300% on imported vehicles, and of 42-70% on importedkits and components, to protect national carmakers Proton and Perodua. DrMahathir’s admission that he was having “second thoughts” about the AFTA

Foreign investmentincentives are inadequate

Support for internationaltrade pacts weakens

Free-trade agreementsarouse concern

Malaysia 23


process generally fuelled speculation that the government might seek delaysfor other products too. China’s expected entry into the WTO later this yearand its offer in November to consider a free-trade agreement (FTA) withASEAN are also a concern to the government, especially in view of thenegative implications of the US slowdown for Malaysian exports. So too areFTAs that Singapore has signed with New Zealand and is negotiating with theUS, Japan, Australia and other countries. Dr Mahathir has insisted thatMalaysia would not accord duty-free access to goods redirected by Singaporefrom such third countries.

Noting that the ringgit’s appreciations in 2000 against key regional currenciescaused by the relative strength of the US dollar had been somewhat reversed,the central bank asserted in late February that the pegged exchange rate ofM$3.80:US$1 was close to its equilibrium value and would remain unchanged.A devaluation would give exporters only a temporary competitive advantageand involve “significant costs”, including higher inflation, the central bankargued. It also pointed out that by facilitating the pricing and planningdecisions of manufacturers, importers and exporters, the fix continues to enjoystrong private sector support. But the likelihood of further downward pressureon the US currency, and therefore the ringgit, in the months ahead, and thehigher import costs that implies, could render more vocal lobbies advocatingthat the ringgit be pegged to a basket of currencies—those of Malaysia’s maintrading partners—as a prelude to an eventual free float.

The domestic economy

Economic trends

Real GDP expanded by 6.5% year on year in the fourth quarter of 2000,bringing growth for the full year to 8.5%, in line with the EIU’s forecast of8.4%, according to data released by the Department of Statistics onFebruary 28th. On the supply side, the manufacturing sector was again themain contributor to growth in October-December, registering a 16.4% year-on-year rise in output. However, owing to a slowdown in external demand,particularly for electronic goods, the sector’s growth rate was significantlyslower than the 20.3% recorded in July-September 2000 and the 24.2%achieved in the fourth quarter of 1999. Thanks to a sharp increase in theproduction of crude palm oil and logs, agricultural output expanded by 4.4%year-on-year in October-December, more than reversing the 1.1% contractionexperienced in July-September. A continued decline in crude oil productionresulted in the output of the mining sector, which had eased by 3.3% in thethird quarter, shrinking by another 1.8%. Bolstered by government spendingon infrastructure projects and ongoing housing developments, value added inthe construction sector increased by 1%, up from 0.5% in the third quarter.Value added in the services sector rose by an unchanged 4.1%,notwithstanding the slowdown in trade-related activities.

US dollar peg is near itsequilibrium

Economic growthcontinues to slow

24 Malaysia


Malaysia: real gross domestic product(M$ m unless otherwise indicated; at 1987 purchasers’ prices, not seasonally adjusted)

1999 20003 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Private consumption 21,002 22,026 23,589 23,219 23,535 24,116 % change, year on year 5.0 7.0 14.4 13.7 12.1 9.5

Public consumption 6,920 7,276 4,495 6,167 6,354 7,305 % change, year on year 23.9 19.6 5.1 13.5 –8.2 0.4

Gross fixed capital formation 12,926 14,095 14,205 16,778 17,291 16,141 % change, year on year 11.6 5.9 17.5 31.2 33.8 14.5

Change in stocks –788 –1,031 423 526 119 107 % of GDP –3.9 6.0 –1.1 –1.2 1.8 2.3

Net exports 9,432 8,093 7,254 5,512 6,064 6,079 % of GDP 4.4 –2.5 1.1 –6.0 –6.8 –4.0

Exports, goods & services 56,146 58,453 55,169 59,685 67,298 64,885 % change, year on year 19.5 18.4 19.9 15.1 19.9 11.0

Imports, goods & services 46,714 50,360 47,915 54,173 61,234 58,806 % change, year on year 18.1 25.6 22.1 24.6 31.1 16.8

GDP 49,491 50,458 49,966 52,201 53,355a 53,747 % change, year on year 8.6 11.0 11.8 8.4 7.8 6.5

a Total does not sum in source.

Source: Department of Statistics, Malaysia .

Real aggregate domestic demand growth slowed to 9.6% year on year in thefourth quarter, from 12.2% in the third and 17.1% in the second; quarter onquarter, the annualised increase during the final quarter of 2000 was only3.2%. The expansion of private consumption moderated to 9.5%, from 12.1%and 13.7% in July-September and April-June respectively. Public consumptionincreased by 0.4%, having contracted by 8.2% in the third quarter. The growthof gross fixed investment slowed to 14.5%, from 33.8% in the third quarterand 31.2% in the second. No public/private sector breakdown was immediatelyavailable. But officials noted the sharp rise in government developmentspending and the positive trend in certain private investment indicators. Thevalue of manufacturing investment proposals and approvals increased by 314%

Sharp deceleration indomestic demand

Malaysia 25


and 63.5% year on year in October-December, to M$10.5bn (US$2.76bn) andM$8.2bn respectively, while imports of capital goods rose by 35.1%.

Despite several one-off cost-push factors (increases in the retail prices ofpetroleum products, in bus fares and in sales taxes on alcohol and tobacco), theannual inflation rate rose to only a modest 1.8% in October-December, andwas only 1.5% in 2000 as a whole. The subdued nature of price pressures waspartly attributable to the persistence of spare production capacity in certainsectors and the addition of capacity in others. The number of workersretrenched rose to 6,938 in the fourth quarter from 5,617 in the third, withmanufacturing and services accounting for 55.8% and 30.5% respectively ofthe total. However, the Ministry of Human Resources said that many of thoselaid off were re-employed elsewhere, and noted that the number of registeredjob seekers fell to 27,820 at end-December from 36,067 at end-September.

Manufacturing

While manufacturing production rose by 25.1% in 2000, almost double the1999 growth rate of 13.5%, the pace of expansion slowed towards the close ofthe year, declining from 26.5% year on year in October to 15.1% in Novemberbefore edging back up to 19.1% in December. Sales of manufactured goodsfollowed a broadly similar pattern. They increased by 29.9% for the year as awhole, to M$333.7bn (US$87.8bn), with the year-on-year growth ratemoderating progressively from 33.5% in September to 26.5% in October, 23%in November and 15.9% in December. Month on month, after expanding by2.3% in September, sales contracted by 4.8%, 0.3% and 4.4% respectively inOctober, November and December. The growth of exports of manufacturedgoods slowed sharply in the fourth quarter, to 7% year on year, from 23.9% inthe third. Exports rose by 8.5% in volume, while unit prices fell by an averageof 2.1%. Having reached a historical monthly peak of M$30.1bn in September,manufactured exports slipped to M$28.1bn in October and M$27.8bn inNovember. Average manufacturing capacity utilisation declined to 81% inOctober-December, from 84% in July-September, according to Bank Negara.

Inflation remains subdued

Manufactured goods salesslip in the fourth quarter

26 Malaysia


Similar trends were experienced by the key electronics industry. Its averagecapacity utilisation is officially estimated to have fallen to 80% in the fourthquarter, from 89% in the third, and its export growth slowed to 7% year onyear from 21.2%. Exports of electronic and electrical goods amounted toM$59.5bn in October-December, down from a record M$63.7bn in July-September. Foreign sales of semiconductors slipped to M$19.3bn, fromM$19.4bn, and those of other electronic equipment and parts to M$23.8bnfrom M$25.8bn. Aggregate figures for January-November 2000 put productionof semiconductors at 14.91bn units, compared with 9.96bn units in the wholeof 1999, of integrated circuits at 19.53bn units, compared with 14.9bn units,and of electronic transistors at 16.24bn units, up from 13.32bn units.

Figures released by the Malaysian Industrial Development Authority (MIDA) inearly February purported to show that proposed manufacturing investmentsamounted to M$45.9bn in 2000, a more than threefold increase on theM$14bn worth of applications registered in 1999. Applications from foreigninvestors were valued at M$29.7bn, up from M$9bn in 1999, while those fromlocal firms rose to M$16.2bn, from M$5bn. Proposed investments in theelectronic and electrical product industries surged to M$18.3bn, from less thanM$3bn, with foreign companies accounting for M$16.5bn, according to MIDA.Data on the value of manufacturing investments approved in 2000 were not

Electronics industrygrowth weakens

Manufacturing investmentplans may be overstated

Malaysia 27


provided. Statistics for January-October put total approvals (foreign and local)at M$21.7bn, compared with M$16.9bn in the whole of 1999. Approvedforeign investments were worth M$10.4bn, compared with M$12.3bn in theprevious year, while endorsed local investments were worth M$11.2bn,compared with only M$4.6bn in January-December 1999. As usual, no datawere available on the value of investments actually implemented, or ondivestments. Despite the apparently positive MIDA figures, weakening externaldemand is obliging many electronics firms to cut production, lay off workersand shelve investment plans.

Agriculture

Malaysia is the dominant world producer of palm oil. Crude palm oil (CPO)output reached a record 10.8m tonnes in 2000, up from 10.6m tonnes in 1999,according to official estimates; production could exceed 11.2m tonnes thisyear, traders said in February. The combination of a supply glut, subdued globaldemand and keen competition from rival edible oils producers continued toundermine prices and prompt more market-boosting and stockpile-reducinginitiatives by the government. In late February the primary industries minister,Lim Keng Yaik, said that a plan was being considered to offer growers M$1,000(US$263) for each hectare of ageing oil palm they replanted. He calculated thatthe replacement in 2001 of 200,000 ha of the estimated 340,000 ha ofplantations which are more than 25 years old would cut the country’s oiloutput by some 600,000 tonnes. He also urged growers to trim production bycutting down on fertiliser usage.

Local press reports the same month claimed that the government had decidedthat both crude and processed palm oil could be exported free of duty. Duringthe latter months of 2000 it authorised the duty-free sale of 500,000 tonnes ofCPO, and subsequently announced that up to 1m tonnes could be shipped onthe same terms this year. In addition, moves were made to extend the scope ofthe Palm Oil Credit and Payment Arrangement, a loan and deferred paymentfacility for developing countries, to east European nations unable to offersovereign guarantees. Officials also revealed that countertrade deals envisagingthe exchange of Malaysian palm oil for other goods were being discussed with

Measures to reduce the glutof crude palm oil

New moves to boostdemand for palm oil

28 Malaysia


American, Chinese and Indian trading houses. Perhaps most interestingly, thestate-controlled hydrocarbons concern, Petroliam Nasional, was reported to bedrawing up plans for the construction of a pioneering M$500m (US$131.6m)facility to produce diesel from palm oil, with an initial throughput of 500,000tonnes of raw material a year.

Farmers in the northern peninsular states of Kedah, Perlis and Penangcomplained at the turn of the year that they still had stocks of unsold riceamounting to more than 125,000 tonnes left over from the June-Julyharvesting season. With a new crop estimated at 700,000 tonnes due on themarket within weeks, they variously urged the government to buy up thesurplus, cut imports and take firm action against smugglers said to be spiritinglarge quantities of the staple grain across the border from Thailand. In lateDecember the agriculture minister, Mohd Effendi, effectively pledged to meetmost of their demands. Bernas, Malaysia’s main rice purchasing and marketingagency, was instructed to absorb a sizeable proportion of the excess supply andship it to the deficit Borneo states of Sabah and Sarawak. Stricter surveillance ofthe Malaysian-Thai frontier led to the seizure of a number of illicitconsignments, and an apparent reduction in smuggling. Malaysia consumesabout 1.8m tonnes of rice annually, some 1.3m tonnes of it grown bysubsidised local farmers.

On January 11th, following reports of fresh cases of so-called mad cow diseasein Europe, the government imposed a ban on imports of beef and beefproducts from all EU countries. The prohibition was extended to Brazil onFebruary 6th, and to Thailand on February 10th. The affected countries havetraditionally accounted for only a tiny fraction of the beef consumed inMalaysia. Major suppliers such as Australia, New Zealand and India wereunaffected by the restriction.

Infrastructure

In a move expected to presage a large-scale overhaul of the much-malignedtransport system in and around Kuala Lumpur, the Ministry of Financeannounced on December 22nd that the government was buying up the assetsof two of the commercial capital’s loss-making light-rail companies. It said thedevelopers of Projek Usahasanama Transit Ringan Automatik (PUTRA) andSistem Transit Aliran Ringat (STAR) were to receive some M$6bn (US$1.6bn)from the sale of government bonds to help repay their debts and wouldcontinue operating the networks as leaseholders. Critics said the dealsunderscored the government’s willingness to bail out already overindulged butpoorly run companies. Unable to attract nearly enough passengers to meettheir investment and running costs, PUTRA—a unit of troubled infrastructure-based group Renong—and STAR had turned for help to the official CorporateDebt Restructuring Committee (CDRC) following the eruption of the regionaleconomic crisis in mid-1997. Users complained fares were prohibitively high,stations were too far apart and lacking sufficient car-parking space, and thatfeeder bus services were inadequate. Local press reports subsequently claimed

Government buys up excessrice stocks

Import ban on beef andbeef products

Kuala Lumpur’s light-railcompanies bailed out

Malaysia 29


that PUTRA was seeking a further M$400m from the government for thepurchase of new trains.

In mid-January the transport minister, Ling Liong Sik, said that the state-owned Bank Pembangunan dan Infrastruktur had agreed to lend an additionalM$610m to KL Monorail System, which is building a third elevated trainservice in the commercial capital. Work on the project began in 1996 butground to a halt the following year owing to crisis-induced cost increases andrelated financing problems. It resumed in mid-1999 on the strength of aM$300m soft loan from the government, having been scaled back to 8.6 kmfrom 16 km. It is now due to be commissioned in July 2002, four years laterthan originally planned. Its cost has likewise been revised down to M$1.2bn,from M$2.1bn, partly because the rolling stock is being manufactured locally.CDRC sources said that as part of its strategy to devise an efficient, integratedand affordable transport network for Kuala Lumpur and its hinterland, thegovernment was also planning to take over some 20 bus companies. Othermeasures under consideration include taxing single-occupant motor vehiclesentering the city, and raising parking fees.

With electricity consumption having expanded by 12.8% in 2000 andexpected to continue growing strongly, but with little additional generatingcapacity due on stream in the immediate future, there are concerns in officialcircles about possible short-term supply constraints. In mid-January installedcapacity amounted to 12,045 mw, compared with peak demand of 9,712 mw,yielding a so-called reserve margin of 24%, which falls below theinternationally recommended minimum of 33%. Executives at predominantlystate-owned Tenaga Nasional, peninsular Malaysia’s main utility, warned thatthe margin would slip to 10-15% by early 2002, and urged the government toexpedite the approval of planned projects. As a stop-gap measure, Tenagaconcluded deals to buy surplus output generated by a number of existingindependent power producers (IPPs), albeit offering them less favourable termsthan in previous agreements. YTL Power, for example, accepted 10.9 sen perkwh (2.9 US cents per kwh), down from 15.1 sen per kwh earlier. Having optedin the late 1990s to focus primarily on transmission and distribution activities,Tenaga’s management nonetheless maintained that to ensure the constructionof adequate generating capacity in future, IPPs had to be promised sufficientreturns, ideally by guaranteeing to absorb a sizeable proportion of their output.The concept of “managed” liberalisation also found expression in Tenaga’s lateDecember decision to suspend its programme of divesting equity in its thermalplants. Defending the reversal, company executives argued that a wholesalederegulation of the local industry could ultimately expose Malaysia to the sortof chaos—high tariffs and blackouts—then afflicting the US state of California.

Yet a hike in electricity tariffs soon—the first since 1997—is a distinctpossibility. The size of the increase largely depends on the outcome of ongoingnegotiations between Tenaga and Petronas on the price the latter shouldcharge the former for the gas feedstock accounting for some two-thirds of theutility’s fuel costs. A three-year agreement under which Tenaga paid M$6.40(US$1.68) per million metric British thermal units formally expired at the end

Government assists KLmonorail project

Concern about futureelectricity supply shortages

Electricity tariff hike mayprove a hot political issue

30 Malaysia


of December, and Petronas has demanded that the price be raised to M$7.68,still well below the prevailing international market rate. The final decision,expected by the end of March, rests with the government, which owns 100%of Petronas and some 78% of Tenaga but is deeply concerned about thepotentially adverse impact of a power price hike on consumers, businesses, theinflation rate and economic growth.

Business and consumer lobbies protested against the 20-75% increase in watertariffs—the first in more than a decade—announced on February 21st by theSelangor state government, which oversees supplies to Kuala Lumpur and thesurrounding areas. Hikes of 50-60% were imposed on industrial andcommercial users. State officials argued that the increases were more justifiedby a steady and substantial rise in costs over the years, and the failure of manyconsumers to pay their bills. Moreover, tariffs would continue to be heavilysubsidised, they added.

Financial and other services

Total loans outstanding rose by 5.4% in 2000 to M$454.2bn (US$119.5bn),according to official data. Loans outstanding to commercial banks increased by6.4% to M$315bn. New loan approvals averaged M$12bn a month, comparedwith M$8.7bn in 1999 and M$5.6bn in 1998. However, the value of approvalsdeclined from M$12.6bn in November to M$10.5bn in December andM$9.6bn in January. Disbursements averaged M$30.1bn a month in 2000, upfrom M$26.5bn in 1999 and M$20.9bn in 1998. On a quarterly basis, they rosesteadily from M$84.1bn in January-March to M$98.8bn in October-December.Loan repayments averaged M$28.9bn a month last year, up from M$27.7bn in1999. Quarterly repayments increased from M$75.8bn in April-June toM$91.5bn in October-December. Partly as a result the net non-performing loan(NPL) ratio, on a three-month arrears basis, declined to 9.6% at end-Decemberfrom 10.5% at end-August. It had peaked at 14.9% in November 1998. On asix-month arrears basis—the more lax measure preferred by the government—the net NPL ratio fell to 6.3% at end-December from 6.9% at end-August.

Sentiment on the Kuala Lumpur Stock Exchange (KLSE) remained bearish.Market capitalisation fell by 9.1% in the fourth quarter of 2000 to M$444bn.The bourse’s benchmark composite index, the KLCI, declined by 4.7% to 680points. After sinking to a 20-month low of 653 points on January 2nd, theindex subsequently staged a modest rebound, reaching 736 points at the end ofbusiness on February 2nd, largely due to buying support from government-controlled institutional funds. It closed at 696 points on March 7th. Overseasinvestors, whose activities tend to dictate those of local retail players,continued to be heavy sellers. They withdrew some M$10bn from the KLSEbetween May and December 2000, to account for little more than 5% of theshares held by the end of the year.

Dubious corporate governance continued to dismay foreign funds. The toll-road operator, United Engineers Malaysia (UEM), a once much-admired blue-chip company, astounded the market in mid-November by unveiling a plan to

Water tariffs still heavilysubsidised after rate jump

Year-end spurt in loandisbursements

Foreign investors remainsellers of Malaysian equities

Renewed concern overcorporate governance

Malaysia 31


pay M$6.7bn to acquire a clutch of mostly loss-making firms pledged assecurity for huge debts owed by Renong, its parent company and UMNO-linked infrastructure-based conglomerate. The move was widely seen as abailout of the Renong chairman, Halim Saad. Three weeks later UEM wasdeemed to have added insult to injury by allowing Mr Halim to stagger over 17months payments for almost M$3.2 billion of shares that he pledged to buyafter a similarly shady deal between the two companies in 1997. The Renongchairman paid the first M$100m instalment on February 14th, but promptlyasked UEM’s board to postpone the deadline for the second from July14th toOctober 1st. Investors’ wariness was also graphically underlined by the poorresponse to an initial public offering planned by another Renong unit,Time dotCom, to raise M$1.89bn. It emerged on February 13th thatapplications had been received for only 25% of the 572m shares up for sale,priced at M$3.30 each. The issue was fully underwritten by ten local banks.

Bearish factors still abound. December’s announcement by Morgan StanleyCapital International (MSCI) of plans to weight companies on its widelytracked investment indices on the basis of the availability of their shares foropen trading rather than market capitalisation—the current measure—alsobodes ill for the KLSE. The transition to the new regime, due to begin inNovember and be completed six months later, presages significantly lessforeign institutional investor interest in the government- and family-controlledMalaysian companies which presently dominate the blue-chip market.

Foreign trade and payments

Gross exports (fob basis) totalled M$373.3bn (US$98.2bn) in 2000, 16.1%higher than the M$321.6bn registered the previous year. Sales slowed as theyear drew to a close, with the growth rate moderating to 5.7% in October-December from 21.6% in July-September. Indeed exports fell to M$95.9bn inthe fourth quarter from a record M$101.7bn in the third. The slowdown wasprogressive: from a peak of M$35bn in September to M$30.2bn in December.Sales of manufactured goods followed a similar pattern, declining to M$81.4bnin the fourth quarter from M$87.9bn in the third, and likewise eroding steadilymonth by month (see The domestic economy: Manufacturing). Buoyed byhigher prices, the value of crude oil sales surged to a record M$14.2bn in 2000,from M$9.3bn the previous year. In volume terms, oil exports fell to 16.7mtonnes from 17.7m tonnes. Similarly, while the volume of liquefied natural gasexports edged up to 15.5m tonnes from 15.1m tonnes, the value of salesalmost doubled to M$11.3bn from M$6.4bn. By contrast, earnings from palmoil dropped to M$10bn, from M$14.5bn in 1999, while volume sales, at 8.86mtonnes, were basically unchanged.

Gross imports (cif basis) rose by 25.7% in 2000, to M$312.4bn. But in line withthe slowdown in export growth, they too moderated during the latter monthsof the year: from M$86.8bn in July-September to M$78.8bn in October-December, and, on a monthly basis, from a record M$29.2bn in August to

Changes in MSCI indices arelikely to harm the KLSE

Value of exports declines inthe fourth quarter

A corresponding drop infourth-quarter imports

32 Malaysia


M$24.7bn in December. Trade surpluses of M$5.7bn in October, M$6bn inNovember and M$5.5bn in December yielded a fourth-quarter surplus ofM$17.1bn—up from M$16.0bn in July-September but down from M$20.3bn inthe final quarter of 1999—and a surplus for the year of M$60.9bn, down fromM$73.1bn in 1999.

The current-account surplus amounted to M$7.7bn in July-September 2000,fractionally down on the M$7.9bn surplus recorded in April-June, according tofigures released by the Department of Statistics in mid-February. It put thethird-quarter merchandise trade surplus (fob-fob basis) at M$19.7bn, up fromM$17.9bn in the second quarter. The deficit on the services account widenedfrom M$2bn in the second quarter to M$3.4bn in the third quarter, whenthere was a surge in services imports. On the income account, higher outflowsof investment income and freight and insurance payments increased the third-quarter deficit to M$6.9bn from M$6.4bn in the second quarter. The surplus onthe long-term capital account increased to M$2.8bn, from M$1.5bn.Government borrowing saw net inflows of official capital reach M$1.6bn, morethan reversing the M$388m deficit registered in April-June, while inflows ofprivate long-term capital declined to M$1.2bn, from M$1.8bn. Outflows ofprivate short-term capital, however, surged to M$12.7bn, from M$8.6bn,reflecting the strength of the sell-down of shares by foreign portfolio investors.

Malaysia: current account(M$ m; not seasonally adjusted)

1998 1999 1999 20003 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Exports of goods 281,669 318,946 84,482 88,137 84,348 91,491 101,323

Imports of goods –212,453 –232,411 –60,133 –66,042 –64,060 –73,584 –81,591

Goods balance 69,216 86,535 24,349 22,095 20,288 17,907 19,732

Services: exports 46,247 46,865 12,380 13,877 11,382 12,007 14,009

Services: imports –53,669 –58,724 –15,507 –16,232 –13,675 –14,034 –17,458

Services balance –7,422 –11,859 –3,127 –2,355 –2,293 –2,027 –3,449

Income: credits 5,308 6,385 1,906 1,578 1,580 1,704 1,800

Income: debits –20,125 –26,660 –7,454 –7,949 –7,049 –8,054 –8,715

Income balance –14,817 –20,275 –5,548 –6,371 –5,469 –6,350 –6,915

Transfers: credits 2,975 3,148 761 1,122 724 654 724

Transfers: debits –12,558 –9,647 –2,379 –3,783 –2,540 –2,305 –2,528

Transfers balance –9,583 –6,499 –1,618 –2,661 –1,816 –1,651 –1,804

Current-account balance 37,394 47,902 14,056 10,708 10,710 7,879 7,564

Source: Department of Statistics, Malaysia .

Little change in thecurrent-account surplus

Brunei 33


Brunei

Political structure

Negara Brunei Darussalam

Sultanate

The sultan is advised on policy matters by four councils: the Religious Council, the PrivyCouncil, the Council of Succession and the Council of Cabinet Ministers

HM Paduka Seri Baginda Sultan Haji Hassanal Bolkiah Mu’izzaddin Waddaulah

None

Courts of first instance exist on a local and religious basis; appeals go to the ReligiousCouncil in religious cases, and to the High Court and thence to the Court of Appeal inother cases. All major judicial posts are filled by the sultan’s appointees

Last election 1968

The sultan, close family members and his appointees control all organs of state power,including the Council of Cabinet Ministers, under the state of emergency that has beenin force since 1962

The Parti Perpaduan Kebangsaan Brunei (the Brunei National Solidarity Party, PPKB),which split from the Parti Kebangsaan Demokratik Brunei (Brunei National DemocraticParty, PKDB) in early 1986, is now the country’s only legal party, the PKDB having beenbanned in early 1988. However, the PPKB is only intermittently active. The promotionof the national ideology of Melayu Islam Beraja (MIB), or Malay Islamic Monarchy, hasbeen stepped up since 1990. The Parti Rakyat Brunei (Brunei People’s Party, PRB) hasbeen banned since 1962 and operates in exile

Sultan, prime minister, minister of finance & defence Sultan Hassanal Bolkiah Mu’izzaddin

Communications Zakaria SulaimanCulture, youth & sports Hussain Mohamad YusofDevelopment Ismail DamitEducation & health (acting) Abdul Aziz UmarForeign affairs Prince Mohamed BolkiahHome affairs & special adviser to the sultan Isa Awang IbrahimIndustry & primary resources Abdul Rahman Mohammad Taib

Religious affairs Dr Mohamed Zain Serudin

Official name

Form of state

The executive

Head of state

National legislature

Legal system

National elections

National government

Main political organisations

Key ministers

34 Brunei


Economic structure

Annual indicatorsa

1996 1997 1998b 1999c 2000d

GDP at market prices (Br$ m) 7.7 8.0 8.1 8.2 8.3

Real GDP growth (%) 3.5 4.0 1.0 2.5 3.5c

Crude oil production (‘000 b/d) 165 165 155 180 175

Consumer price inflation (av; %) 2.0 2.0 –0.7e 1.0 n/a

Population (‘000) 305.1 314.4 323.6 333.0d 342.0d

Exports fob (US$ m) 6,670 3,973 1,979 2,552 n/a

Imports cif (US$ m) –3,516 –3,154 –2.353 –1,328 n/a

Reserves (US$ m) 5,937 3,656 4,011 n/a n/a

Exchange rate (av; Br$:US$) 1.41 1.48 1.67e 1.69e 1.72e

March 9th 2001 Br$1.7562:US$1

Origins of gross domestic product 1998f % of total

Oil & gas sector 32.5

Agriculture, forestry & fishing 2.8

Construction 6.6

Transport & communications 5.2

Wholesale & retail trade 11.2

Community, social & personal services 33.0

GDP at factor cost incl others 100.0

Principal exports 1999f Br$ m Principal imports 1998f Br$ m

Natural gas 1,860 Machinery & transport equipment 981

Crude petroleum 1,650 Basic manufactures 854

Refined products 111 Food & live animals 396

Main destinations of exports 1999g % of total Main origins of imports 1999g % of total

Japan 42.3 Singapore 34.2

US 17.0 UK 15.1

Korea 14.4 Malaysia 15.1

Thailand 8.9 US 4.9

a Source for most of the earlier data is IMF, Staff Country Report No. 99/19. b IMF estimates. c Brunei government estimates. d EIU estimates.e Actual. f Brunei Statistical Yearbook, 1999, estimates. g IMF, Direction of Trade Statistics.

Quarterly indicators1999 20001 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Production (prodn/day)Crude petroleum ('000 barrels) 160 157 140 150 194 192 157 167

Foreign tradea (US$ m)Exports fob 425.2 557.2 630.5 738.9 840.5 688.4 n/a n/aImports cif –310.9 –373.8 –331.6 –311.6 –366.5 –408.8 n/a n/aTrade balance 314.3 183.4 298.9 427.3 474.0 279.6 n/a n/a

a DOTS estimates.Sources: Oil & Gas Journal; IMF, Direction of Trade Statistics.

Brunei 35


Outlook for 2001-02

Political outlook

Despite the government’s recent statements that Brunei must cultivate a newopenness and transparency to increase its economic competitiveness, it appearsthat the level of social control and censorship is rising instead. In the wake ofpublicity generated by the scandal of Prince Jefri’s misappropriation ofUS$14.8bn in government funds and the release of a negative economic reportby the Brunei Darussalam Economic Council (BDEC) in early 2000, thegovernment seems to have decided to return to its former policy of secrecy andstrict surveillance of its population. Economic data are becoming lessforthcoming as little good news is available for release and crackdowns onperceived immorality and media freedoms are intensifying. As Brunei’seconomy continues to falter, with complaints about high unemployment anda stagnant public sector becoming more vocal, the government has been tryingto cultivate the support of its mainly Muslim population through a new stresson the Islamic foundations of the sultan’s rule. This trend is likely to intensifythrough 2001 as the sultan seeks to forestall criticism of the country’seconomic performance by stressing his religious right to absolute power.

Economic forecast

Brunei will continue to implement the recommendations laid out in the reportof the Brunei Darussalam Economic Council (BDEC) released in February,2000. The government’s programme to inject liquidity into the economy isalready under way in the form of B$200m (US$114m) worth of projects andloans to local enterprise, with modest results in the way of increased consumerspending expected in 2001. Brunei’s goal of moving away from its heavyreliance on oil and gas revenue and diversifying the private sector remains,however, a long-term prospect. Foreign investment will move only slowly intoBrunei, drawn by the country’s political stability but wary of a lack of qualifiedpersonnel and business services.

GDP is officially forecast to grow by 3-3.5% in 2001, bolstered by a 25%increase in oil production rates. With the EIU forecasting oil prices to averageUS$23.85/barrel in 2001, it is likely that Brunei will reach this goal, a modestone compared with the 4.1% growth-rate forecast for the Association of South-East Asian Nations (ASEAN) overall. Weakness in the private sector willcontinue, however, to hamper full economic recovery. Despite thegovernment’s attempts to stimulate the economy through a series of loans andgrants to local businesses as well as a rise in available consumer credit, theprivate sector infrastructure remains too weak to sustain real growth. Brunei’splans to develop its competitiveness in three key areas, tourism, internationalfinance and information technology, while potentially feasible in the longterm, will also continue to be plagued by a lack of business infrastructure andtrained human resources.

Social control will increase

Respectable growth willconceal economic problems

Economic restructuringwill be limited in scope

36 Brunei


In December 2000 the Ministry of Economic Planning and Developmentannounced that the country’s trade and current-account balances had beendeteriorating steadily over recent years, with imports rising sharply and exportsstagnating. Although Brunei’s current account remained well in the blackbecause of oil and gas revenue in 2000 (with a surplus equivalent to 39% ofGDP), higher oil prices and output cannot conceal the downward trendindefinitely, with a marked deterioration possible in 2002. Little growth inprivate sector exports and a weakening of demand from Japan, Brunei’s majorexport market, are to be expected.

The political scene

In keeping with increasing self-censorship about the affairs of the royal family,Brunei’s media failed to report the fact that in March Sultan Hassanal Bolkiahchecked into a US hospital for a five-day stay for undisclosed medical reasons.The 54-year-old ruler is reported to have a history of heart problems, which thegovernment seems unwilling to discuss publicly for fear that it might weakenconfidence in his absolute rule.

Other issues are not being openly discussed either. The scandal of Prince Jefri’smisappropriation of US$14.8bn in state funds has virtually disappeared fromthe Brunei press. With one of Jefri’s most high-profile assets, the Plaza AtheneeHotel in Paris, handed over to the government of Brunei in February inkeeping with the out-of-court settlement reached in his case, the governmentseems reluctant to pursue the matter further.

In other cases, press self-censorship is being encouraged not merely bydeference to the ruling family, but by more straightforward legal threats.Brunei’s High Court ruled in December on a case brought by a local legal firm,Abrahams, Davidson & Co, along with two lawyers, Adrian Chan Choong Fattand John Lee Boon Leng, against the publisher of the newspaper News Express.The law firm sued the publisher after the paper printed a series of reports aboutdebt collectors repossessing the belongings of crisis-strapped debtors. The courtruled that the damages suffered to the law firm’s reputation by the paper’s useof “vitriolic language” outweighed any claim to freedom of the press. Brunei’spress has long struggled under government censorship, but over the past yearhad been cautiously pushing toward a new openness about political andeconomic problems. The ruling immediately placed a damper on mediawillingness to report on potentially controversial subjects.

In February Brunei’s chief justice, Sir Denys Roberts, criticised the governmentfor continuing to insulate itself from legal prosecution. In a speech to mark theopening of Legal Year 2001, Sir Denys pointed out the difficulties of trying toto make Brunei an international investment centre, while the government wasimmune from the process of the law. He argued that the government’simmunity would discourage potential investors and urged the sultan toreconsider his stance and transform Brunei’s laws “in a revolutionary manner”.Sir Denys also called on the government to consider providing free or low-cost

Non-oil external paymentsposition will worsen

Sultan’s hospital visit goesunreported

Defamation ruling worriesthe press

Chief justice asks for end ofgovernment’s immunity

Brunei 37


public defenders to those charged with crimes, and to adjust its system ofpunishment to include community service orders and special institutions foryouth. The chief justice, who has gained a reputation as one of Brunei’s fewreformist voices, is scheduled to retire from the court this year.

The media may also suffer from further moves to discourage perceived anti-Islamic coverage. (The government is keen to boost its Islamic credentials, as away of increasing its legitimacy.) In February the prime minister’s officeannounced the implementation of new laws to regulate Internet business andcontent, effective as of February 12th. The regulations liberalise entry into theInternet field by revoking the requirement that Internet Service Providers (ISPs)and Internet Access Resellers apply for a government broadcasting licence. ISPsmust still, however, comply with licensing requirements under the StateTelecommunications Act. This regulation was publicly hailed as a positive steptoward increasing competition in the industry and improving communityaccess to the Internet. The legislation also, however, included stricter controlsover Internet content, requiring that “contents should not offend the Islamicreligion or society and do not incite social disharmony and instability in thecountry.” In order to monitor Internet content, certain providers are nowrequired to register with the Government Broadcasting Authority. Thoseaffected include on-line newspapers, individuals or organisations publishingweb pages to promote religious or political causes, or any individual providinga programme for the propagation or discussion of political, religious or socialissues relating to Brunei. The government claimed that such regulations werenecessary to control the “dark side” of the development of the Internet and tobalance its economic benefits against the risks it posed to Brunei’s social andpolitical order.

Such policies go beyond simple media control. Over the past months, Bruneihas been stepping up its policing of its citizens’ morality and increasing itscommitment to “Islamicise” the country in keeping with its status as anIslamic sultanate. In February the Ministry of Home Affairs announced a banon all public musical performances, arguing that singing is unlawful accordingto Islam. The ban immediately sparked controversy, with critics arguing thatsuch a move would hamper Brunei’s efforts to develop itself as a tourismdestination and to promote Visit Brunei Year 2001. The Ministry of ReligiousAffairs has also been pressing for an increasingly strict interpretation ofIslamic law. While Brunei has long taken a harsh stand against cases ofadultery, with convicted males receiving jail sentences of up to five years andfemales up to one year, the ministry has recently intensified its policing ofkhalwat, defined as a man and a woman who are not blood relatives beingalone together in a private dwelling or in a quiet place away from public view.The ministry released statistics for 2000 showing a 77% rise in khalwat caseshandled by its Investigation and Prosecution Unit, and warned that suchincidents would continue to be dealt with harshly as they threaten the fabricof Bruneian society.

New regulations to controlInternet content

Public musicalperformances are banned

38 Brunei


The effect of all this may be simply to channel public dissatisfaction andcriticism into other channels. Over the past months, the Brunei press has beenfilled with letters of complaint about the deterioration of public healthservices. (Free healthcare for Brunei citizens has long been a cornerstone of theGovernment’s generous social welfare programme.) Brunei’s system is heavilyreliant on expatriate physicians, many of whom have left the country in thewake of the economic downturn, declining standards of living, andincreasingly strict government regulation of social and religious affairs. Largenumbers of Brunei medical students studying overseas have also, the Ministryof Health admitted, become reluctant to return to Brunei to seek employment.The Brunei public health system is now without specialist physicians in certainkey fields such as cardiology and anaesthesiology, and Bruneians are beingforced to leave the country or turn to private practitioners to access suchservices. While the ministry stressed its commitment to providing qualityhealth care, it acknowledged that economic conditions were pushing thesystem toward privatisation, in keeping with the sultan’s recent decision towean his subjects away from their reliance on an oil-funded “Shellfare” systemof social services.

Economic policy and the economy

In keeping with the recommendations of the Brunei Darussalam EconomicCouncil (BDEC) report released in February 2000, Brunei officially launched aWorking Capital Credit Fund for small to medium-sized enterprises (SMEs) inJanuary 2001. According to the BDEC, increasing SME competitiveness iscrucial to improving Brunei’s stagnant private sector and easing Bruneians,70% of whom are employed by the government, away from their reliance onoil-funded civil service jobs. Of the B$30m (US$17m) fund, 60% will be madeavailable to businesses owned by ethnic Malay Brunei citizens, with theremaining 40% open to all locally based businesses, including joint ventureswith foreign investors. While any business with assets not exceeding B$5m andwith less than 100 employees may qualify, the government is encouragingpotential applicants to focus on the public housing, information technology,tourism infrastructure and hospitality industries. Under the scheme, theminimum loan available is B$10,000 (US$5,700) and the maximum B$1.5mand interest rates are set at less than 4% per year. The fund is a joint venturebetween the government of Brunei and eight commercial banks, with thegovernment assuming 75% of the loan risk and the lending bank theremaining 25%.

Some, however, have expressed concerns about the opportunities forcorruption presented by the scheme. In the 1990s, Brunei’s EconomicDevelopment Board (EDB) suffered large losses after making loans to SMEs on apatronage basis, a situation which led to the privatisation of the loan section ofthe EDB under the Islamic Development Bank of Brunei. Even though thecurrent credit fund is to be administered by local commercial banks, reportshave been published in the local press that Bruneian businesses have beenusing funds obtained from the government through its economic stimulus

Complaints abouthealthcare system increase

Brunei launches a privatesector stimulus programme

Brunei 39


program for the construction industry to make overseas investments. TheBorneo Bulletin newspaper published a report alleging that some governmentofficials were aware of the situation but had done nothing to stop it.

Consumer spending appears to be on the rise, boosted by an increase inavailable credit. Business is up slightly at Brunei’s shopping malls andcommercial real estate occupancy rates have increased. Car dealerships–whichcomprise Brunei’s third-largest private sector industry after banking andconstruction–are reporting a rise in sales of new cars. But some critics arecalling this a “shopping bubble”, claiming that Brunei’s banks have beencapitalising on Bruneians’ reluctance to lower their standard of living even inthe face of economic distress by offering easily available long-term personalloans. Several Brunei economists have warned the government that it mustimpose restrictions on consumer credit, arguing that the average Bruneian’spersonal debt has become far too heavy a burden to handle and that banks’extended payment terms could cause serious long-term damage to privatesector recovery.

Complaints about new regulations that all food, including imports, sold inBrunei must be halal—prepared in accordance with Islamic practice—arebecoming more vocal. Many consumers are concerned that the additionalexpense of producing halal foods and obtaining the necessary certificates haveresulted in much higher retail prices at a time when most Bruneians are stillfeeling the crunch of economic crisis. Despite stepped-up border patrols, risingprices have provoked an increase in smuggling of food products fromneighboring Malaysia, and black-market meat is now being sold in Brunei for25% of the price of domestic meat. Brunei has stated its intention of becominga regional center for halal food production, but its goal is still far from feasibleas there are currently no medium- or large-sized food production businessesoperating in the country and 80% of Brunei’s consumer goods must beimported. Several Brunei economists have argued that the expense of obtaininghalal certifications for products will impede the development of small andmedium-sized enterprises (SMEs) and will pave the way for a return tomonopolistic trading practices, which were dismantled several years ago inpreparation for compliance with the Association of South-East Asian Nations(ASEAN) Free-Trade Area, to take effect in 2002.

Last year the Brunei government admitted for the first time thatunemployment was a serious and growing problem. The official unem–ployment rate stands at 6%, but more troublesome is the fact that at least 25%of school leavers are unable to find jobs. Brunei has traditionally cared for itsworkforce by providing them with well-paid jobs in the civil service, but recenteconomic conditions have made that impossible. In a televised speech to thenation in February, the sultan announced that Brunei would step up itscampaign to tackle the unemployment problem. He said that the governmentwas ready to implement a job training programme in which unemployedgraduates would be offered apprenticeships in state-owned and privatecorporations and provided with an allowance paid by the government. Thesultan stated that not only was such a measure necessary to forestall possible

Consumer spending andlending is on the rise

Halal regulations raiseprices and draw warnings

A new job trainingprogramme is promised

40 Brunei


social problems arising from unemployment but that it was part of a plan toreduce Brunei’s “dependence on foreign manpower”. Brunei currently employstens of thousands of workers from other Asian countries to fill its menial andservice positions, while executive positions in the oil and gas industry are filledmainly by Western experts.

In November Brunei Shell Petroleum (BSP) announced the success of one ofthe two exploratory wells that it had drilled in 2000 in the offshore Bugangasfield. Bugan-2 is expected to increase oil reserves by 65m barrels and gasreserves by 3.8 cu metres. BSP is optimistic about the potential of the Buganfield and announced that it was planning to drill three more exploratory wellsthere in the near future.

Pehin Yahya, the permanent secretary at the Prime Minister’s Office, laudedBSP’s progress, stating that in 2000 the company had increased averageproduction by 25% while cutting production costs by an average of 15% peryear over the past four years. He claimed that Brunei’s oil production outlookover the next 15 years was now approximately double the figure estimated in1997. He said this would increase investor support of BSP’s plan to investB$500m in modernising its offshore infrastructure.

The November 2000 Asia-Pacific Economic Co-operation (APEC) summitmeetings, which drew some 7,000 delegates to Brunei, and the January 2001ASEAN Tourism Forum (ATF), which hosted 2,000 visitors, lent momentum tothe country’s efforts to develop itself as a tourism destination. Brunei is nowinvesting heavily in Visit Brunei Year 2001, carrying out promotionalcampaigns and earmarking funds for tourism infrastructure development.Brunei has also expressed hopes that tourism can provide jobs for itsunemployed school-leavers.

But all is not likely to go as smoothly as hoped. While the high-profile, well-planned APEC summit proceeded with few problems, the smaller ATFmeetings, which generated less government support, were plagued bytransportation and co-ordination problems. Attendees complained aboutBrunei’s lack of public transportation and public taxis and about the lacklustreservice at its hotel and meeting facilities. Brunei’s hospitality industry stillremains dominated by foreign guest-workers from other countries, withBruneians themselves showing little enthusiasm for service industry jobsperceived to have little status. And while tourism in Brunei has always beenhampered by the country’s lack of entertainment and its ban on alcoholconsumption, a new ruling banning musical performances can only damage itsimage further. Plans to develop the country as an Islamic vacation destinationare perhaps Brunei’s best bet, but its distance from the centre of the Islamicworld in the Middle East and its lack of direct flights to most Muslim countrieswill continue to dissuade potential travellers.

Brunei’s highly publicised plan to develop itself as an Islamic financial servicescentre attracted its first participant, Emerging Markets Partnership (Bahrain),the general partner and manager for the Islamic Development BankInfrastructure Fund, which opened a regional office in Brunei in early 2001.

Brunei sets its sights onIslamic investment

Efforts to develop tourismface major obstacles

Brunei Shell Petroleumfinds more oil and gas

Brunei 41


But the deputy minister of finance, Selamat Munap, has admitted that Bruneistill faces a number of hurdles in attracting financial industry investors toBrunei. While Brunei recently announced a series of new laws to update itsregulatory environment, Munap stated that the international businesscommunity was not yet thoroughly satisfied and was demanding astrengthened financial infrastructure, especially a stronger accounting andauditing industry and greater government transparency. Brunei will continue,however, to work to take economic advantage of its position as an IslamicSultanate. An International Islamic Expo to be held in August is expected todraw 100,000 visitors, boosting the tourism industry and generating newbusiness networks with Islamic banking, insurance, communications andmanufacturing firms. By focusing on this niche market for Islamic business,Brunei could perhaps boost its rate of private sector growth.

malaysia brunei - iuj.ac.jp filemalaysia’s political crisis has deepened further, as opposition to...

Documents