Zeti Akhtar Aziz: The economic outlook for Malaysia in the aftermath of
11 September
Special luncheon address by Dr Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, at the CFO
Summit 2001 - The Economic Outlook in the Aftermath of 11 September, Kuala Lumpur,
8 November 2001.
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Ladies and Gentlemen,
Introduction
Even before the events of 11 September the global economy was already experiencing a slowdown in
growth. Although there were emerging signs that the downturn was beginning to level off, the events
of September 11, have increased the uncertainty of this prospect. The issue before us today is thus to
what extent these developments affected our own growth prospects? To what extent can we
mitigate the adverse implications on our domestic sector. And most of all, what can each of us do in
the current environment to better weather the economic slowdown?
It is my pleasure to be here today to have this opportunity to share some thoughts with you on the
implications of these developments on the Malaysian economy.
Current global economic environment
After a decade of rapid expansion, the US economy entered a period of cyclical slowdown beginning
in mid-2000, with GDP growth in the US slowing sharply from 8.3% in the first quarter of 2000 to less
than a half percent in the second quarter of 2001. Given that the US absorbs about one-fifth of world
exports, the slowdown has had far reaching implications on world growth. The sharper than
anticipated US slowdown before 11 September was due mainly to the adjustments in the technology
sector leading to cyclical declines in business investment and the unwinding of inventories
accumulated during the boom period. However, consumer spending, which accounts for two-thirds of
GDP in the United States and activity in the housing sector generally was still holding up prior to
11 September. This trend was supported by interest rate reductions by 300 basis points between
January and August 2001 and the tax rebates. In addition, adjustments in asset prices were seen
relatively moderate.
While the events of 11 September has affected business and consumer confidence, we need to
distinguish between the immediate term effects and the longer-term prospects for recovery and
growth. On an industry-specific basis, the impact is visibly seen in the tourism and travel-related
industries and in the insurance sector. In the immediate term, it can be expected that activity will be
dampened and some scaling back of expenditure and activity will take place. The unemployment rate
has also been seen to rise and the recently released National Association of Purchasing Managers
(NAPM) index, a short-term leading indicator of the US economy, showed a significant decline.
Nevertheless, the preliminary estimates of US third quarter GDP show that the decline was somewhat
less than expected. This allows for some cautious optimism. The US automobile industry also
recorded its largest ever monthly sales in October as consumers responded to promotions by auto
companies, indicating that the events of 11 September have not entirely curbed consumers' propensity
to spend. Furthermore, concerns for a sharp weakening in the US dollar have receded resulting in
relative stability in the major exchange rates. Amidst these developments, there has however also
been a simultaneous slowdown in the other major industrial economies resulting in downward
revisions in the growth for Europe and Japan.
While these reports are hardly comforting, it is important to keep our assessments in perspective. The
current external environment reflect reactions in the immediate aftermath of the attacks. Of importance
will be how the consumers would behave in the coming months. The answer to this question is, in
large part, still remains uncertain. Much depends on how households in the industrialised economies
assess their near-term job and income prospects, and how these assessments evolve over time as
events in global environment continue to unfold.
The final outcome would depend not only on analysis of the plethora of economic data before us, but
also on the policies emerging in the US, Europe and also the regional economies. Of course, the main
factor would be consumer and investor responses to these policy changes. In the US in particular, the
Fed has eased monetary policy further immediately following 11 September, bringing interest rates to
their lowest level since the 1960s. The US Congress has approved a series of fiscal packages,
bringing the total fiscal spending to about 15% of GDP. The prompt and co-ordinated monetary policy
response across the globe demonstrates the commitment to support global growth and avoid a tailspin
reaction that could lead into recession. In this light, while further economic weakness could be
expected in the near term, positive consumer responses to policy changes would point to more
positive medium-term prospects.
Given these emerging indicators, there is a preponderance of views that the current economic
slowdown would not be prolonged, that recovery can be expected to occur in the second half of 2002.
Other positive factors relate to the sharp inventory adjustment that has taken place which will allow an
upturn in demand to be promptly translated into higher production activities. At the same time,
structural changes at the corporate level including world wide cost-cutting measures would provide the
foundations for a sustained recovery in global growth.
Ladies and Gentlemen,
Weathering the slowdown
Being a highly open economy, Malaysia will continue to be affected by external developments. While
we may not be able to directly reduce the impact of these developments on our external sector we can
compensate for them by encouraging domestic activity. On the domestic front, Malaysia has over the
years has built strong foundations that places us in a position to weather this current slowdown. The
events of 11 September have not altered our positive economic fundamentals and our foundations.
This will continue to provide businesses with the platform to sustain their activity.
Firstly, structural adjustments undertaken over the recent decades and the more recent measures
taken since the crisis have resulted in a more diversified and productive economic base that is
more resilient to external shocks. The recent strong performance of the services sector and positive
growth in the agriculture and mining sectors in the first half of this year contributed to mitigating to
some extent the decline in electronics exports. For the services sector the domestic content is high
and several services sub-sectors are not linked to the manufacturing sector. These sectors continue to
respond positively to domestic policies. Even within the manufacturing sector, domestic-oriented
industries contribute about one-third of the total output of the sector. These sectors have benefited
from the fiscal stimulus package and the low interest rate environment.
Second, the Government's with outstanding debt being contained at
fiscal position remains strong,
37% of GDP and the debt service to GDP ratio of 2.8%. The increased fiscal deficit has been financed
from non-inflationary sources. Expenditure allocations have also been targeted to projects with
immediate and high spin-off effects.
Third, inflationary pressures are contained, thus allowing monetary policy to remain
accommodative. Our track record of low and stable inflation has also encouraged capital formation
through a high savings rate.
Fourth, the current account surpluses continue to remain large thereby lending strength to the
balance of payments. The current account of the balance of payments is expected to register a surplus
of 7.9% of GNP in 2001. The decline in exports has been offset by corresponding reduction in imports
as well as payments in services. This surplus is expected to continue to serve as a buffer to finance
volatility in short-term flows.
Fifth, our
external reserves have continued its rising trend and are ample and unencumbered.
The external reserves level have now breached the end-2000 level. The figures for 31 October shows
the reserve level is now US$30.2 billion. This reserve position is adequate to finance 4.9 months of
retained imports and 6.3 times the short-term external debt.
Sixth, our external debt levels are low, reducing our vulnerability to the current slowdown in external
demand. Total external debt was equal to 49.5% of GNP as at end-June, significantly lower than the
peak of 64% recorded at end-1997. The overall debt service ratio is also low at only 5%, even with the
slower export growth. In addition, the short-term debt component is low, accounting for 11% of total
external debt and 18% of external reserves holdings, giving Malaysia one of the most favourable
positions among regional economies.
Seventh, the Malaysian banking sector has been strengthened and is more resilient following the
recent restructuring and consolidation that has been achieved. This is reflected by the higher
capitalisation ratios, improved profitability and asset quality. The strong RWCR of 12.5%
(end-September) and core capital ratio of 10.6% provides adequate cushion to absorb increases of
NPLs from the economic slowdown. The latest stress tests indicate that the RWCR of the banking
system is expected to remain well above the BIS minimum of 8% in view of the strong capitalisation of
the banking institutions. Also domestic private debt to GDP has declined from the peak of 152% in
1998 to current level of 133% mid-2001.
Eighth, while we have seen an increase in retrenchment in the labour market, unemployment levels
Of importance is that the educated labour force has the mobility to adapt to a changing
remain low.
environment. Efforts are focused on upgrading the quality of the education system. While some labour
dislocation can be expected, efforts are being directed to encourage redeployment to alternate
activities.
Ninth, our is one of the best developed in the Asian region, facilitating
physical infrastructure
production, trade and communication.
Tenth, the allow for rapid, effective and
political stability and institutional arrangements in place
co-ordinated decision making to deal with ongoing developments. It allows for prompt response and
strategic planning in managing the management of the economy. Accelerated corporate restructuring
involving some of the largest corporations in the country is also underway with increased attention
being focussed on enhancing corporate governance.
Despite a more difficult external environment, these solid foundations have remained intact and will
continue to provide Malaysia the ability to ride out this current phase of slowdown while ensuring our
long-term growth prospects. More specifically, it will provide us with the agility to adapt, adjust and
respond to changes in economic conditions, changes in comparative advantage and changes in
opportunities that the current environment accords. The track record has shown that over the decades
the economy has been able to shift to new areas of growth with changing opportunities and changes
in comparative advantage. Prudent policies pursued and careful economic management have also
accorded us with a high degree of in policy options in responding to the new challenges that
flexibility
have emerged. Our resilience is on account of the combination of our strong foundations, and the high
degree of agility and flexibility of policy to respond to this difficult period thereby enhancing our ability
to weather the current slowdown.
Ladies and Gentlemen,
Of importances is therefore to look beyond the immediate term. Our history shows that the
economic downturns in 1985, in 1998 and in the current period have been externally driven. As a
highly open economy we will continue to be vulnerable to external developments. In these periods of
adverse external conditions, domestic policy responses have however, been successful in restoring
growth. The strategy adopted has been to be pre-emptive and to front load the policy initiatives. In
addition, these efforts have generally been supported by further efforts to strengthen the economic
base further and the restructuring and reform of the financial system. Despite the severity of the 1998
contraction, Malaysia recovered within a year with strengthened economic fundamentals. All this was
possible given the strong foundations of our economy and financial system. All too often this has been
taken for granted.
In the current period, the focus of policy is on promoting domestic sources of growth. It has so far
allowed us to mitigate to some extent the adverse effects on the slowdown in the export-oriented
manufacturing sector. In the first half-year, we saw positive growth recorded in the agriculture and
mining sectors, construction sector as well as domestic-market oriented manufacturing industries.
Going forward, pro-growth policies are targeted at improving consumer disposable income, increasing
expenditure skills enhancement and improving infrastructure. The impact of these policies together
with low interest rates would continue to filter into the domestic economy. Should global demand
strengthen, Malaysia will be well positioned to see a strengthening in the second half of the next year.
The Government has therefore directed policy measures to strengthen domestic sources of
The expected impact of the US economic slowdown was already built into the fiscal stimulus
growth.
package contained in the 2001 Budget and now in the 2002 Budget. Projects identified under the fiscal
stimulus include those with high spill-over effects, low import content and short gestation period.
Hence, higher allocations have been given to social services, education, training, low cost housing
and health services.
In early 2001, amidst signs that the slowdown in the US economy was more severe than earlier
expectations, further measures were taken in March 2001. The measures included an additional
and reduction in employees' share of EPF contributions by 2% for one
fiscal stimulus of RM3 billion
year are aimed at promoting consumer spending and overall economic activity.
Following the heightened uncertainty after the events of 11 September, an additional stimulus
package amounting to RM4.3 billion was announced prior to the Budget 2002. This early
announcement was aimed at providing enough lead time for higher expenditure to sustain growth. The
focus of allocations has also been also skewed towards small projects for which funds would be
promptly be disbursed.
Most recently, the Budget 2002 presented to Parliament in October reinforced the strategy to diversify
further the economic structure by increasing the significance of domestic sources of growth. The
Budget included measures to further promote economic activity through increasing domestic demand
while strengthening the private sector's resilience and competitiveness. In addition, to higher
development expenditure, the focus of Budget 2002 was directed at raising disposable incomes via
tax cuts and bonuses as a more direct measure to stimulate private consumption. Other fiscal
measures and allowances were also aimed at providing further incentives to businesses.
The question has often been raised concerns the sustainability of the fiscal deficit and its potential for
long-term risks to the economy. Previous prudent policies has accorded the Government the flexibility
for this expansionary policy. The deficits has been financed from non-inflationary sources and the high
rate of domestic savings has enabled access to such financing without crowding out the private sector.
Prudent policies have also kept debt levels low. Debt levels, in particular the external debt position
remains low. This continues to be an important strength of the Malaysian economy. Secondly, excess
liquidity in the domestic money market and strong demand for Government securities means that new
issues can be raised at low interest cost. The debt servicing would therefore not be a burden to future
generations. Thirdly, the expenditure is well-targeted and has high potential to achieve the desired
objectives. And finally, the plan is for a consolidation of the nation's fiscal position with a reduced
deficit in the year 2002 with a balanced position envisaged during the period of the Eight Malaysia
Plan.
On the monetary front, the strategy has been to front load the monetary measures to provide a
positive environment for the private sector. During the recent period, the already historically low
lending rates have been effective in stimulating domestic demand both in terms of rising loans for
residential property, passenger cars and consumer durables and for investments in the manufacturing
and services sector. Interest rates were not raised with the growth in 1999 and when growth was
exceptionally strong in 2000. Monetary policy during this period continued to be directed to support
domestic activity in an environment of low inflation.
Following the increased uncertainty after the events of 11 September, the 3-month intervention rate
to 5% on 20 September to support domestic economic activities in
was reduced by 50 basis points
the light of heightened potential for a more rapid economic slowdown. Currently, lending rates in
Malaysia are now among the lowest in the region. In addition, specific measures have also been
undertaken to increase volume and access to financing by SMEs. All these measures have
contributed to positive growth in bank lending.
While addressing short-term developments, policy also continues to focus on long-term areas to
strengthen further our foundations in the financial sector. With the successful completion of the
consolidation of the banking sector, it became necessary to address the remaining overhang of
corporate leverage. In this context, a series of
aggressive measures has been taken to expedite
the process of resolving the outstanding corporate debt of large corporations. Important
changes has been implemented in the management and implementation of this corporate sector
restructuring.
Similarly, the implementation of new rules with regard to has also ensured
corporate governance
improvement in standards and practices in the corporate sector. The Malaysian Code of Corporate
Governance has been implemented and various changes have been effected to the Securities
Commission Act 1993 and to the KLSE Listing Requirements to strengthen the regulatory and
statutory framework for corporate governance.
These developments in the economy and financial markets serve the ultimate goal to create an
economy that is responsive to change and resilient to external shocks thereby increasing our
prospects for long-term growth.
Conclusion
Ladies and Gentlemen,
Malaysia has a track record of ensuring that the economic environment is supportive of business
activities. Policies that have been implemented have demonstrated our commitment to preserve the
value of both domestic and foreign investments in Malaysia. While our foundations have provided us
with the agility to adjust, and the flexibility of policy to respond the resilience to weather the current
slowdown, it is recognised that we need to continue to strengthen our economic structure need to
continue with determined perseverance so as to enable us to effectively manage external shocks
without weakening our economic foundation.
While all these may provide some assurance, this will by no means ensure the desired results. The
reactions and responses by the business and consumers are vital to the success of these policies.
This requires an ability for a more balanced approach and distinguishing the longer-term economic
prospects that are not biased by short-term concerns from the immediate term conditions. Within the
context of domestic conditions, business must also be aware of global developments and the more
competitive external environment. In this regard, we need to strive to increase efficiency and
productivity to enhance our own competitiveness. Despite the current weaker conditions, businesses
should not hold back making the strategic investments to ensure that they are well-positioned to
benefit from an upturn when it occurs. Any hindrances to further progress should be eliminated and
new business segments for growth should be sought out. Research and development expenditure
should continue as this will be an important true sustainable source of competitive advantage in the
global economy. An integral part of this strategy is the need for enhanced training and upgrading of
human resources.
Bankers, in the meantime, should not overreact to the weaker short-term environment, and should
continue to provide access to financing for viable projects to support the growth process. A more
constructive approach needs to be taken by the financial institutions to assist borrowers, on their own
initiative, to reschedule and restructure the loans of viable borrowers. Finally, consumers should spend
productively and contribute to sustain domestic demand.
To conclude, the Government has acted swiftly to the global slowdown and the recent events in the
US. The Government has done its part. It is therefore the private sector response that will be the key
determining element in how Malaysia will weather the current challenging environment.