World Bank President’s praise should not make Malaysians complacent that we are out of the woods of the economic crisis

(Petaling Jaya, Tuesday): The praise of the World Bank President, James Wolfensohn that Malaysia "has got the capacity to deal with the crisis" and that Malaysia was "not one of the countries I’m deeply concerned about now" should not make Malaysians complacent that we are out of the woods of the economic crisis.

A realistic attitude is particularly important especially as the Kuala Lumpur Stock Exchange, together with other Asian markets have "roared" into the Year of the Tiger with substantial gains, with evidence that foreign confidence in the region was returning.

Malaysians must prove that they are capable to taking both good and bad news, not being elated by the good but wanting to hide from the bad.

In this connection, Malaysians must give thought to last week’s report of the Institute of International Finance (IIF), a global assocation of financial institutions with over 280 members based in Zurich, Switzerland, which grouped Malaysia with Indonesia, Philippines, South Korea and Thailand as "the five economies most affected by the Asian crisis".

The IIF Report, entitled Capital Flows to Emerging Markets, stressed that net private capital flows into "the five economies most affected by the Asian crisis" fell from US$93 billion in 1996 to an outflow of US$12 billion in 1997. The IIF forecast that for 1998, there would be a continued private capital outflow from these five countries to the tune of US$9.4 billion.

Bank Negara and the Finance Ministry should issue a statement on the implications of the IIF report for Malaysia.

Other important aspects of the IIF report include:

• Net private capital flows to major emerging market economies fell to an estimated $200 billion in 1997, down from their peak of $295 billion in 1996, reflecting primarily substantially lower flows to Asia. This marks the first major retrenchment of capital flows to emerging markets this decade.
• Private capital flows to the five economies most affected by the Asian crisis fell from an inflow of $93 billion in 1996 to an estimated outflow of $12 billion in 1997.
• Flows to major emerging market economies not directly affected by the Asian crisis held up well, actually increasing modestly to $212 billion in 1997 from $202 billion in 1996.
• Equity flows grew once again in 1997, becoming an even more important part of private flows. Equity flows of $133 billion represented over 65 percent of total net private flows in 1997.
• Equity investment outside the Asian crisis economies was strong, rising to $138 billion from $108 billion in 1996. Foreign direct investment in Latin America increased from $35 billion to $50 billion, in part due to accelerated privatization.
• Portfolio equity investment outside Asia also increased impressively, growing to about $30 billion from $20 billion in 1996 as stock markets in many countries performed strongly for much of 1997. There was, however, some weakening towards the end of the year.
• The cutback in capital flows was concentrated in bank lending. From a level of approximately $100 billion in 1996, net lending by commercial banks appears to have been close to zero in 1997. This reflects significant gross lending, specially outside Asia, being offset by net repayments in Asia, as shortterm lines were reduced.
• Net official flows to 29 major emerging markets rose to $30 billion in 1997 from $3 billion in 1996 as the IMF and other international financial institutions provided very substantial assistance to Asian economies. Even so, total capital flows in 1997 fell to only $229 billion from $298 billion in 1996.

(3/2/98)