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Malaysia tries for economic reset

Prime Minister Najib Razak took over a tough assignment when he took office in Kuala Lumpur at the beginning of April, following the election victory of the United Malays National Organization (UMNO). He faced an economy in contraction, with a decline of 6.2% in gross domestic product (GDP) in the first three months of this year and about the same is expected for the second quarter. Not surprisingly, he has announced a stimulus package amounting to US$19 billion.

Industrial production was down 11.4% in April compared with the equivalent period in 2008, a slight improvement over the previous year. The worst-hit industries were, in order, electronics, wood and paper, petrochemicals and manufacturing. Exports declined 26.3% year-on-year in the same month. Given Malaysia’s export-to-GDP ratio of 1.11, exports are expected to continue to decline since export markets will remain in recession, although Chinese demand may attenuate the decline in commodities exports.

In this context, it is significant that the Kuala Lumpur Composite Index (KLCI), is due to be replaced next month by a new benchmark gauge, according to Bloomberg News, citing a CIMB Investment Bank report.

The finance and power sectors, along with gaming stocks, are set for increased representation, while stocks in no fewer than seven sectors - building materials, construction, hotels, insurance, property, timber and technology - will largely disappear from the new index, to be called the FBM KLCI, for FTSE Bursa Malaysia KLCI.

The number of companies in the benchmark will be cut by more than two-thirds, to 30 from 102, and will include only the largest companies by market value having at least 15% of its shares available for public trading. Its predecessor is a broad-based capitalization-weighted index.

At nearly the same time as the CIMB report was published this week, the Bursa Malaysia said Najib would soon announce significant measures to roll back restrictions on foreign investment, this following on his mid-April announcement of a review of said guidelines.

The demise of the KLCI comes after a 22% gain this year, a laudable performance, albeit the weakest in Southeast Asia.

The KLCI closed on June 16 at 1,074, down from a high of 1,516 on January 11, 2008, for where it had fallen over the course of nine-and-a-half months to a closing low of 829 on October 29 last year, recovering from an intraday low of 801 the previous day.

While the patterns of the chart are hard to read, in part because of the destructive influence of the Asian financial crisis at the end of the 1990s, the most likely extrapolation of inferred current trends could bring it up as high eventually as 1,410, which (coincidence or not) matches the next highest resistance below the 1,516 mark from January last year. Technical indicators, however, suggest some mild short-term weakness.

Every effort is being made to ensure that the new FBM KLCI index is comparable to the old one in statistical terms, but its launching is likely to bring greater international attention to the Malaysian market. This, together with further financial liberalization announced by the new government, and the implementation of the announced stimulus plans in addition, may end up having significant upward pressure on the behavior of the new index.

Such a move in the new stock index would take place despite declines in fixed investment and corporate earnings, although companies' balance sheets will make them much less stressed than counterparts in many other countries. The central bank's place to reinvigorate the Corporate Debt Restructuring Committee will likely take up the slack of any hesitation in bank lending.

Median growth estimates for the current year (the variance is too wide to say that there is a consensus estimate) foresee a roughly 3% contraction and, for 2010, an expansion of about 2.7%. For reasons that are unclear, the Asian Development Bank is consistently more optimistic (or less pessimistic) than the International Monetary Fund, the World Bank, the Malaysian government and investment banks.

The political re-emergence of opposition leader Anwar Ibrahim, following his striking August 2008 victory in a by-election for a parliamentary seat, is unlikely to affect the country's economic course, notwithstanding its significance for domestic politics. He was convicted of sodomy and corruption in 1999 and was sentenced to nine years in prison in what many believe to have been a politically motivated trial.

Although the conviction was reversed in 2004 on appeal, Malaysian law prohibited him from engaging in politics until August 2008. Two months beforehand, he was again accused of and tried for sodomy; the new conviction is now being appealed.

Despite the international reaction to all these events, the security of the ruling UMNO's hold on power does not appear to be threatened, and national economic life proceeds under the assumption that Najib's rule will continue unimpeded. In the 2008 elections, UMNO won 79 seats and its ruling coalition comprises 140 of the 222 seats available.

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URL:  http://www.robertcutler.org/blog/2009/06/malaysia_tries_for_economic_re.html
First published in Asia Times Online, 19 June 2009.

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