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There are many favourable features of the Malaysian economy
prior to the crisis in 1997. During the five years leading up to 1996, its real GDP
growth averaged 8.7 per cent per annum, inflation was low around 3.8 per cent, and
the unemployment rate for 1996 was only 2.5 per cent.
Unlike some other East Asian economies with high external debt,
Malaysia has a relatively lower external debt of US$45.2 billion or 42 per cent of
GDP as at June 1997. The debt service ratio was only 6.1 per cent of exports as at
end-1996. The banking sector was healthy, with non-performing loans (NPLs) at only
3.6 per cent of total loans as at June 1997. The nationís saving rate at 38.5 per
cent in 1996 is one of the highest in the world.
Although aggregate or macro numbers can sometimes mask some
inefficiencies in the case of neighbouring countries, this was less so for the Malaysian
economy. However, the nervousness of the market over some issues in countries such
as Thailand, Indonesia and South Korea led to the ëcontagioní effect that brought
the economic crisis to Malaysia and resulted in gross undervaluation of our exchange
rate.
There were, however, some disturbing signs before the crisis.
These are listed below:
- Economic Growth Above Potential Output.
Since 1991, the economy has been consistently growing above what is deemed as its
potential growth path. Zero output gap is when actual and potential GDP are equal
in size. The output gap increased during 1994-96, as actual GDP grew faster than
potential GDP. This has generated price pressures, especially in the form of wage
increases above productivity gains. Instead of improvements to efficiency, growth
during this period was primarily brought about through augmenting input, a situation
that is clearly not sustainable in the longer term. It is a greater cause of concern
when a significant proportion of these inputs (both capital and labour) was imported.
Figure 1 : Total
Factor Productivity Growth (%), 1987-1997
- Loss of Efficiency in the Economy.
The efficiency in the utilisation of resources in the economy is indicated by
estimates of Total Factor Productivity (TFP) and the incremental capital-output ratio
(ICOR). Computations of TFP growth show that it had been declining over the years
(Figure 1). Growth has been driven primarily by a high rate of capital stock
accumulation. During 1995-97, the investment rate had been around 46 per cent of
GDP. The ICOR rose from 3.0 in 1988 to 6.5 in 1997. The steeply rising ICOR, especially
during the last 3 years, indicate that the use of capital have been increasingly
less efficient. Had the ICOR been constant, one could argue that economic growth
would have been much higher with the same amount of investment. The rising ICOR in
recent years may also be due to increasing investments into capital-intensive projects
with long gestation periods, leakages and initially underutilised capacity.
Table
2: Savings-Investment Gap (RM million)
| |
1993
|
1994
|
1995
|
1996
|
1997 p
|
|
Public gross domestic capital formation
Public savings
Deficit/surplus
Private gross domestic capital formation
Private savings
Deficit/surplus
Gross domestic capital formation
(as % of GNP)
Gross national savings
(as % of GNP)
Balance on current account
(as % of GNP)
|
23,760
27,339
3,579
38,700
27,195
-11,505
62,460
39.8
54534
34.7
-7,926
-5.0
|
24,833
32,733
7,900
52,070
29,400
-22,670
76,903
42.5
62,133
34.4
-14,770
-8.2
|
27,844
32,763
4,919
67,305
40,561
-26,744
95,149
45.7
73,324
35.2
-21,825
-10.5
|
27,970
39,729
11,759
75,799
51,788
-24,011
103769
43.6
91,517
38.5
-12,252
-5.1
|
32,183
47,204
15,021
86,499
58,078
-28,421
118,682
45.1
105,282
40.0
-13,400
-5.1
|
Source: Department of Statistics and Bank
Negara Malaysia
- Rising Current Account Deficit. The deficit in the current account corresponds to the saving-investment
gap. Despite having one of the highest savings rate in the world, Malaysia ran into
current account deficit problems because of its high investment rate (Table 2).
The investment boom led to the current account deficit, and when coupled with the
declining efficiency in capital utilisation, is a legitimate cause of concern. The
current account deficit was only partially financed by net long-term capital inflows
for some of the years. At the same time, reverse investments have steadily increased
from RM4.0 billion in 1993 to RM11.4 billion in 1996, an increase of 2.8 times. Malaysian
investment overseas in 1997 was estimated at RM9.9 billion.
- Excessive Credit Expansion to the Non-Tradable
Sectors.
Since 1995, total loans had been growing at a rapid pace (Table 3).
Table
3: Direction of Lending: Banking System and Financial Sector
|
|
Total Outstanding Loans
|
|
RM Millions
|
Growth (%)
|
| |
y-o-y
|
|
1990
|
107,781
|
23.9
|
|
1991
|
131,332.3
|
21.9
|
|
1992
|
143,959.6
|
9.6
|
|
1993
|
161,011.5
|
11.8
|
|
1994
|
184,237.7
|
14.4
|
|
1995
|
237,719.6
|
29.0
|
|
1996
|
300,316.7
|
26.3
|
|
1997
|
392,129.2
|
30.6
|
| 1997 |
January
|
329,824
|
28.8
|
February
|
331,373
|
27.9
|
March
|
344,701
|
29.6
|
April
|
351,705
|
28.5
|
May
|
359,047
|
29.5
|
June
|
365,699
|
30.0
|
July
|
369,485
|
28.8
|
August
|
376,013
|
28.6
|
September
|
384,796
|
28.4
|
October
|
392,681
|
28.4
|
November
|
398,545
|
26.9
|
December
|
401,963
|
25.9
|
| 1998 |
January
|
425,093
|
28.9
|
February
|
420,703
|
27.0
|
March
|
420,168
|
21.9
|
April
|
419,470
|
14.7
|
Source: Bank Negara Malaysia, Quarterly Bulletin
The monthly total loans growth (year-on-year) was around
28-30 per cent in 1997, except for November and December. For most of 1997, loans
to the property sector were growing above 30 per cent (year-on-year) and amounted
to 26 per cent of total loans. Loans for the purchase of stocks and shares during
1993-97 grew at an average rate of 35 per cent per year. Following the rapid expansion
of credit, private domestic debt escalated in the past few years.
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