The Malaysian banking sector strengthened further and remained resilient to perform its intermediation function efficiently and effectively throughout 2001. The capital position of the banking system improved with the risk-weighted capital ratio increasing to 12.5% as at end-January 2002. Although non-performing loans had increased in 2002, it has remained at manageable levels. The net NPL ratio of the banking system stood at 8.4% as at end-January 2002, cushioned with a loan loss provision of 58.7% on the NPL amount or 146.5% if collateral are taken into consideration. The banking system continued to record profits in 2001 amounting to RM7.5 billion, which will further strengthen the capital position of the banking sector. In terms of potential risk to the banking sector, total outstanding loans in arrears have stabilised and continued to remain at manageable levels. Significant progress has been achieved in the financial restructuring undertaken by Danaharta and Danamodal. Progress in corporate debt and non-debt operational restructuring under the arrangement of the CDRC progressed at a more rapid pace in 2001 with the implementation of the new framework introduced in August. As part of debt restructuring, a number of large corporations have undertaken rigorous restructuring exercises in terms of management and ownership structure, and the disposal of non-core businesses and assets. The satisfactory progress of corporate debt restructuring under the new CDRC framework is expected to have a positive impact on the NPLs in the banking sector. The successful resolution of the larger CDRC cases has contributed towards reducing the NPL in the banking system.

This growth was sustained with a strengthened balance of payments position. Macroeconomic policies during the year were focused on supporting domestic activities as the main driver of economic growth. Private consumption remained resilient despite the lower export earnings. National savings remained high at about 35% of GNP. Public sector investment increased by 15.5%, while consumption expenditure increased by 11.9%, mitigating the impact of the contraction in domestic private investment. The more diversified economic structure of the Malaysian economy also moderated the impact of the decline in external demand faced by the export-oriented industries. The weaker growth in the export-oriented manufacturing sector which contracted by -10.2% was mitigated by positive growth in all other sectors. Stronger growth in the domestic-oriented industries, which increased by 7.4% compensated for the shortfall from declining external demand. The agriculture and the mining sectors, which expanded by 2.5% and 0.2% respectively, accounted for 15.5% of GDP. Domestic-oriented industries in the manufacturing sector now accounts for more than one-quarter of total output. Domestic content in the services sector is now higher, at about 80%. The construction sector, which has high local content and multiplier effects, also performed better during the year. The pro-growth policies to stimulate domestic activities benefited in particular the services sector which sustained a growth of 4.9% in 2001. The expansion was broad-based, with strong increases recorded for intermediate services, particularly finance and insurance as well as communication sub-sectors. Strong expansion was also recorded in the final services group, particularly government services and utilities sub-sectors.