In his press conference he elaborated on the sectoral contribution to the growth recorded. Briefly, he pointed out that the manufacturing sector (which accounts for almost a third of the economy) had grown by 9.3 percent, whilst the agricultural sector 8.7 percent. He acknowledged that the construction sector had continued to contract by 6.0 percent during the quarter. He further noted that exports had risen sharply; public sector spending had increased along with private consumption. He acknowledged further that private investment remained low. These numbers to say the least were selectively used.
The growth rates are computed by the change between the second quarter of 1999 versus the corresponding quarter of 1998, not quite the conventional measure of calculating change. A more conventional way is taking trend growth rates over the past four quarters. It should be recalled that the second quarter of 1998 was a period when the crisis was deepening. By basing comparisons with that quarter, the end result is to exaggerate the change.
Be that as it may, it is most curious that the Governor focused entirely on the second quarter comparisons and made no attempt to compare figures for the first half of 1999 with those for the same period of 1998. Had this been done, the overall performance in the first half of 1999 would have shown a feeble growth of 1.4 percent rather than the claimed robust rate of 4.1 percent. The Governor’s remarks have been picked up by both the media and other officials and have created an air of euphoria. There is now talk of growth being restored to pre-crisis levels over the next several quarters, a point disputed by Krugman in an interview in Kuala Lumpur, given that without substantial capital flows and fundamental restructuring investment is unlikely to revive.
There are some remarkable and curious features concerning the release of the numbers that by themselves raise eyebrows. In the first place, it is most odd that Bank Negara rather than the Department of Statistics, the agency responsible for compilation of the national accounts released the information. It is legitimate to ask: why? Is it that the Barisan Nasional now has the final say on release of sensitive data pertaining to the economy?
Secondly, the numbers released by Bank Negara thus far are growth rates and ratios rather than absolute numbers. A look at the Press Statement will confirm this . This practice appears to represent a departure from normal practice and is indicative of an approach adopted in the past by most centrally planned economies, not wishing to divulge the facts about the true state of affairs. The approach adopted runs counter to the claims of greater transparency and openness, and raises concerns about credibility.
A third factor worthy of note is that although the markets had anticipated improved performance, the KLSE indices fell both before and after the release of the numbers. This does say something about the return of confidence and the robustness of the recovery as claimed by officials. Market perceptions, therefore, continue to remain bearish.
An even more curious turn of events concerns the Prime Minister’s statement that the positive growth numbers would not lead to an upward revision of growth for the year as a whole – 1 percent for the year– despite the government’s own upbeat assessments of the prospects. He claimed that that he was not sure about the likely actions of speculators and the recolonisers and therefore would not predict a higher rate of growth for the year! It seems as if the Prime Minister does not fully believe the forecasts of his propagandists. He may well be right in not putting his faith in the numbers. This becomes clearer when the recently released numbers are analyzed more carefully. They reveal that the recovery is much weaker than what is made out to be the case in official pronouncements.
The Numbers
The official numbers posted on the Department of Statistics (DoS) website, reproduced below, merit closer scrutiny. Based on the accounts posted on the DoS website, and an analysis of first half-year performance shows that there was hardly a recovery in the first half of 1999. On a half-yearly basis, the overall growth rate was 1.4%. Thus, the economy performed far more sluggishly than the official Bank Negara release based on just second quarter figures would suggest. The recovery is anemic to say the least.
During the first half of the year, Agriculture grew at a rate of 2.4
% and Manufacturing at 4.6%; it was Government services that provided the
major stimulus to the economy by recording a growth of about 6%. Indeed,
were it not for the fiscal stimulus the economy would have remained in
recession. The private sector role in the growth was at best modest. It
is also pertinent to note that this is confirmed by looking at the demand
side. Government final consumption rose by almost 15 %. Despite all claims
that private consumption has revived, the numbers show that private consumption
fell during the first of the year. Some recovery in exports was noted but
this should be expected given the devaluation effect. The substantial external
balance is due in part to the compression in imports, which declined by
almost 3 %. The sharpest fall in any of the components of the macro accounts
is in terms of the Gross Capital Formation, which fell by almost 25%. His
citation of somewhat meaningless numbers of approvals by MITI does not
tell the whole story as evidenced by the investment estimates shown in
the national accounts. Indeed, were an adjustment made to the overall
estimates of Gross Capital Formation for public investment, the fall in
the private sector’s share of Gross Capital Formation would be even more
alarming:
| GDP GROWTH RATES:
1998 & 1999 |
. | . | . | . | . | . | . |
| . | 1998 | . | . | 1999 | . | . | . |
| . | I | II | 1st Half | I | II | 1st Half | % Change |
| GDP at constant 1987 prices (RM billion) | 45 | 46.2 | 91.2 | 44.4 | 48.1 | 92.5 | 1.4 |
| Agriculture, forestry & fishing | 4 | 4.2 | 8.2 | 3.8 | 4.6 | 8.4 | 2.4 |
| Mining and quarrying | 3.7 | 3.5 | 7.2 | 3.6 | 3.3 | 6.9 | -4.2 |
| Manufacturing | 12.8 | 13.1 | 25.9 | 12.7 | 14.4 | 27.1 | 4.6 |
| Construction | 1.9 | 1.9 | 3.8 | 1.6 | 1.8 | 3.4 | -10.5 |
| Government services | 2.7 | 3.6 | 6.3 | 3.1 | 3.6 | 6.7 | 6.3 |
| Services | 22.1 | 22.2 | 44.3 | 21.8 | 22.3 | 44.1 | -0.45 |
| . | . | . | . | . | . | . | . |
| Private Final Consumption | 21.7 | 19.8 | 41.5 | 20.9 | 20.4 | 41.3 | -0.48 |
| Government Final Consumption | 3.3 | 5.4 | 8.7 | 4.1 | 5.9 | 10 | 14.9 |
| Gross Capital Formation | 17.4 | 15 | 32.4 | 11.9 | 12.6 | 24.5 | -24.4 |
| Export of Goods and Services | 45 | 45.8 | 90.8 | 45.6 | 51.5 | 97.1 | 6.9 |
| Import of Goods and Services | 42.5 | 39.9 | 82.4 | 37.9 | 42.3 | 80.2 | -2.7 |
| . | . | . | . | . | . | . | . |
| GDP at constant 1987 prices (% change) | -3.1 | -5.2 | . | -1.3 | 4.1 | ||
| Agriculture, forestry & fishing | -2.1 | -6.9 | . | -3.5 | 8.7 | ||
| Mining and quarrying | 0.6 | 0.3 | . | -2.3 | -6 | ||
| Manufacturing | -5.8 | -10.3 | . | -1.1 | 10.4 | ||
| Construction | -14.5 | -19.8 | . | -16.6 | -6 | ||
| Government services | -14.9 | 12.4 | . | 14.5 | 1 | ||
| Services | 4.8 | 0.4 | . | -1.2 | 0.6 | ||
| . | . | . | . | . | . | ||
| Private Final Consumption | -5.4 | -8.9 | . | -4.1 | 3 | ||
| Government Final Consumption | -16.8 | 3.1 | . | 22.4 | 8.7 | ||
| Gross Capital Formation | -17.3 | -49 | . | -31.6 | -16.1 | ||
| Export of Goods and Services | -1.4 | 1 | . | 1.2 | 12.5 | ||
| Import of Goods and Services | -10 | 24.9 | . | -10.6 | 6.2 |
The Implications
It would almost appear that the authorities have painted a far rosier picture of the economy than actual performance measured appropriately would indicate. The authorities appear to be driven to these ends by the somewhat desperate need to project a healthier economy than the facts would indicate. This stance appears to be driven by several factors. Beyond the need to engender a "feel good" environment ahead of the election, it seeks to rebuild investor confidence, both domestic and foreign. Further recovery would be difficult without a restoration of confidence and revival of weak consumer and investment demand.
The government now faces an acute policy dilemma with few options. The scope for further fiscal stimulus has become limited. The fiscal deficit, (built into the 1999 Budget, and augmented through supplementary budget provisions,) is likely to be much larger than planned and is clearly unsustainable. There is another dimension to the fiscal picture. This relates to both the off-budget and budget linked contingent liabilities. Bailouts and commitments to various concessionaires of privatized entities run into the billions. Honouring these will further strain the fiscal balance.
These circumstances will preclude further pump priming to sustain the weak recovery. It will therefore fall upon the private sector to fill the breach. However, the private sector’s responses are likely to be muted, particularly if the government continues to implement policies that are judged hostile to the interests of the private sector e.g. the forced merger of banks.
Beyond the public sector, as other analysts have noted, the debt to GDP ratio for Malaysia is one of the highest – some 150% of GDP. There are limits to how much more debt can be borne by the economy. Despite, the clean-up of NPLs mounted by Danaharta, the banking system continue to carry very sizable amounts of NPLs – the six-month rule hides the amounts. Many of the crony corporations are insolvent, yet corporate restructuring and biting the bullet as Korea has done is not an option the government is willing to exercise. The Governor did not address these issues but took the opportunity yet again to attribute the "success" of capital controls. Capital controls continue to act as an albatross , with few foreign investors willing to invest in the economy.
These latest numbers give substance to the argument that selective capital controls have not quite contributed to a recovery. The authorities do not appear to have utilized the breathing room provided to embark upon effective corporate restructuring. In this context it is not invidious to make the comparisons with other countries that were affected by the crisis but are now in recovery. Malaysian performance of 1.4 % in the first half of the year needs to be seen in context – Korea, Singapore, Thailand are growing at 9%, 6.7% and 6% respectively. If anything, the latest numbers are likely to show to fence sitters that capital controls are taking their toll. Even though a bold front is being put on by officials that the likely outflow of US$ 5 to 7 billion in trapped funds after September 1 will not impact severely, given the size of the reserves, the reality is that a sharp drop in reserves will be seen as a negative factor. However, domestic capital flight is less likely as capital controls will largely reduce the ability to move funds. But a more worrisome aspect is that any further adverse development is likely to create the inducements for a circumvention of the controls.
What the numbers reveal may be dismal. But, the larger issues are that the room for maneveour and policy choices is becoming even more limited. Painting rosy scenarios is in one sense an act of illusion that the authorities seem to be indulging in. Using statistics in disingenuous ways will not mask the realities that growth thus far falls short of any notion of a robust and sustainable recovery.
(30/8/99)