Negative stock exchange  reactions to official announcement of end of economic recession with 4.1% second quarter  GDP growth highlights market skepticism at pace and strength of Malaysian economic recovery

Media Statement
by Lim Kit Siang 

(Petaling Jaya, Friday): Negative stock exchange reactions to the official announcement of the end of economic recession with 4.1% second quarter GDP growth highlights market skepticism at the pace and strength of the Malaysian economic recovery.

Despite anticipation of good second-quarter economic figures by the Bank Negara after the end of trading, the  benchmark Kuala Lumpur Composite Index (KLCI) fell 6.75 points lower at 768.43 on Wednesday, and the slide continued yesterday slipping another 6.68 points to 761.75 yesterday.  The decline continued in the first three  hours of trading this morning.

There are several reasons for skepticism about the pace and strength of the Malaysian economic recovery.

Firstly, because Malaysia has not fared as well as other economies affected by the Asian economic crisis although Malaysia entered the crisis with the strongest position. Malaysia’s 4.1% second quarter  GDP growth is also not in the same league as the  second-quarter GDP  growth of  9% for South Korea, 6.7% for  Singapore and 6% for Thailand.

Secondly, the narrow base of the economic recovery, especially measuring and comparing it against a low base of 1998.

The second quarter GDP growth was very much due to the massive rebound in the semi-conductor industry as well as the tremendous increase in palm oil output, both of which actually have little to do with government policy and are dependent upon external conditions.

Semiconductors and other electronics components account for one-fifth of the manufacturing sector. In turn, manufacturing accounts for about 30 per cent of our GDP. As semiconductors and other electronics components grew by 14 per cent in the second quarter, compared to 1998, this alone would result in a one per cent growth, even if everything else stagnated.

The other major component of growth was in the car industry, partly a result of a rebound from a massive collapse in demand last year, partly a result of easier credit and easy purchase terms. The more than doubling of output in the car industry accounts for another one per cent of the growth.

Together with the growth in the semi-conductor  and palm oil industries, even if everything else stagnates, there would be growth of around 2.5 to 3.5 per cent largely due to these three components.

The rural economy, however, is now suffering a downturn. Palm oil is now under threat, prices now being less than one-half of what they were at the beginning of the year.  Rubber prices are down almost 20 per cent.  This impacts severely on  smallholders -- oil palm smallholders account for a half of the output of the country. There is as yet no end in sight of the massive downturn in palm oil prices, given that its main competitor, soya bean, is now at a 30 year low.

Thirdly, no real corporate reform, restructuring  or  clean-up of the corporate debt. Massachusetts Institute of Technology’s Ford International Professor of Economics, Paul Krugman warned in Jakarta two days ago that Asia’s current economic recovery could be a false dawn as the region had not yet addressed the fundamental reasons that led to its economic collapse two years ago.

Krugman said  that while the  national productive resources of the region  were intact, the region had "fallen into an ice age" as  true reform had not occurred and  there was no effective clean-up of the  corporate debt problem.

Krugman said  the region was still at the bottom of the  crisis even though some economies such as South Korea and  Thailand have displayed signs of recovery on the back of a  turnaround in a few sectors.

"Even if there is a successful rebound, there will be a limit to corporate recovery because the problem of crony capitalism has not been tackled and also because there is too much optimism," he   said.

In Malaysia, the problem of crony capitalism is getting even worse than before the economic crisis, with the unabated  public bail-out of crony companies.

The fourth reason for skepticism about the pace and strength of economic recovery is the controversial forced bank merger plan of the government, raising the fundamental question whether its purpose is to create a strong and competitive financial sector which could meet the challenges of globalisation and liberalisation or whether it is the latest  development of crony capitalism  to concentrate ownership, management and control of the banks in the hands of certain cronies.  This is why the government must explain the basis for the selection of Multi-Purpose Bank as one of the six core banks.


*Lim Kit Siang - Malaysian Parliamentary Opposition Leader, Democratic Action Party Secretary-General & Member of Parliament for Tanjong