At the beginning of the currency crisis, Malaysia's growth rate was estimated at 7 per cent in real terms for 1998. The estimate was done in October last year for the 1998 budget based on statistics that showed positive development for the first three quarters of 1997. In view of the continued economic difficulties, Malaysiaís growth rate for 1998 has been revised downward to -1.0 per cent for the Baseline Outlook and -2.0 per cent for the Low-Case Outlook (Table 5). The full impact of the crisis on the domestic economy will be felt in the first half of 1998. As shown by the statistics for the first quarter of 1998, real GDP growth rate was -1.8 per cent on an annual basis. The economy has slumped under business pessimism as the corporate sector is being weighed down by credit squeeze and mounting debts. Some economic sectors, such as construction, manufacturing, and services, have been badly hit and growing numbers of workers are being retrenched. The manufacturers expect declining sales, less new export sales, growing inventory levels, declining investments, and declining staff intake. The employment outlook for the next 6 months is dampened by the economic slowdown. Consumers have lower expectations regarding their expected financial income position and put their house-buying intentions on hold. Table 5: Malaysia- Key Economic Indicators, 1997-98   1998f   1997 p Baseline Low-Case Population (million persons) 21.7 22.2 22.2 Labour force (million persons) 8,606.4 8,793.7 8,793.7 Employment (million persons) 8,376.7 8,229.5 8,200.7 Unemployment (ë000) 229.7 564.2 593.0 Unemployment (as % of labour force) 2.7 6.4 6.7 NATIONAL PRODUCT (% change) Real GDP 7.8 -1.0 -2.0 (RM billion) 140.9 139.5 138.0   Agriculture, forestry and fishery 3.0 -4.4 -4.4 Mining and quarrying 4.6 2.0 2.0 Manufacturing 12.5 -2.5 -3.4 Construction 10.6 -3.2 -3.2 Services 7.9 3.4 2.9   Real aggregate domestic demand 4 6.4 -7.1 -7.7   Private expenditure 1 6.3 -7.4 -8.3 Consumption 4.7 -2.0 -3.5 Investment 8.3 -14.4 -14.4   Public expenditure 1 6.9 -6.2 -6.2 Consumption 4.8 -9.8 -9.8 Investment 9.2 -2.6 -2.6   Gross national savings (as % of GNP) 40.0 40.9 41.5   Nominal GNP 10.6 3.7 2.5 (RM billion) 263.1 272.8 269.6   Real GNP 7.5 -1.6 -2.6 (RM billion) 132.3 130.3 128.9 Note : Figures may not necessarily add up due to rounding p Preliminary f Forecast 1 Exclude stocks Table 5: Malaysia- Key Economic Indicators (Cont.)   1998f   1997 p Baseline Low-Case PUBLIC SECTOR ACCOUNTS Overall Balance Federal Government       RM billion 6.6 -7.9 -8.3 % to GNP 2.5 -2.9 -3.1   Consolidated Public Sector RM billion 9.1 -1.8 -2.2 % to GNP 3.4 -0.7 -0.8   BALANCE OF PAYMENTS (RM bn) Merchandise balance 11.1 31.2 28.9 Exports (f.o.b.) 218.7 279.3 274.9 Imports (f.o.b.) 207.6 248.2 246.0   Services balance -20.8 -25.8 -25.2 (as % of GNP) -7.9 -9.5 -9.3 Transfers, net -3.7 -3.1 -3.1 Current account balance -13.4 2.3 0.7 (as % of GNP) -5.1 0.8 0.2   PRICES (% change) CPI (1994 = 100) 2.7 7.0 8.0 PPI (1989 = 100) 2.7 12.0 13.0 The implementation of the Recovery Plan policies and measures to strengthen the balance of payments and the banking system will restore investor confidence and reduce the countryís vulnerability to external shocks. These are expected to improve the economic prospect for 1999 although the countryís economy will continue to be affected by developments in the international arena. The following are details on the expected economic performance for 1998. Sectoral Prospects The manufacturing sector, which had been the leading growth sector of the economy, will register a negative growth rate of 2.5 per cent in 1998. This is in view of the slower expansion of export-oriented industries, such as electrical machinery, apparatus, appliances and supplies, and a contraction of domestic-oriented industries, which will record negative growth. The agriculture sector is expected to contract by 4.4 per cent in 1998 because of lower output of palm oil and saw logs. The decline in palm oil output is related to tree stress following strong growth in 1997, while saw log production will face weak demand from traditional buyers, such as Japan, Taiwan Republic of China, and South Korea. Output in the mining sector will grow at a slower rate 2.0 per cent in 1998 due to the tapering of crude oil and gas production. The construction sector will be badly hit and output will contract by 3.2 per cent in 1998. The slower pace of growth takes into account slower infrastructure development and very subdued performance of the non-residential subsector. The residential subsector is expected to grow moderately with the continued strong demand for low- and medium-cost houses, which will offset the slack in the demand for high-cost properties. In view of the lower disposable incomes among the population, the services sector will slacken as a result of the moderation in wholesale and retail trade, hotels and restaurants activities. Activities in the transport subsector will be moderate with the slower growth in trade. The finance, insurance, real estate and business services sector will be affected by the economic slowdown and uncertainties. Private and Public Demand In 1998, growth in private consumption is expected to contract by 2.0 per cent, while private investment will decline by 14.4 per cent in real terms. This outlook assumes that investors will adopt a more cautious stance and FDI flows will only be moderate. In addition, investible funds from the banking system and the capital market will become more restrictive and expensive. In the face of the budgetary restraint, real public sector investment is expected to contract by 2.6 per cent in 1998 as a result of fiscal stimulus into development projects. Public sector consumption growth rate for 1998 is projected at -9.8 per cent. In the public sector accounts, the Federal Government overall balance is expected to register a deficit of 2.9 per cent to GNP in 1998. Current Account Deficit The current account deficit will improve substantially to 0.8 per cent of GNP in 1998 from -5.1 per cent of GNP in 1997. The depreciation of the ringgit will bring a drastic decline in imports and a surge in exports, which contribute to a large surplus in the merchandise account. Imports will also decline because of the measures to reduce imports. Inflation With fiscal prudence and tight monetary policy, the consumer price index and the producer price index have risen since the onset of the currency depreciation. The consumer price index (CPI) is expected to rise from 2.7 per cent in 1997 to 7.0 per cent in 1998. The producer price index (PPI) is expected to register a sharp increase at 12.0 per cent. In January-April 1998, the CPI and PPI were 4.6 per cent and 15.0 per cent, respectively. As a result of the currency depreciation, the increasing costs of imported goods and components will result in a higher price level. Unemployment The unemployment rate is expected to rise from 2.7 per cent in 1997 to 6.4 per cent in 1998. The number of unemployed workers is expected to rise from 229,700 persons in 1997 to 564,200 persons in 1998. The manufacturing and construction sectors will face rising retrenchments. Downside Risks There are downside risks to the projections that can result in a much lower economic growth rate and bring the economy to a recession. Among some of the downside risk factors are: A slowdown in global demand, and the regional economic and financial crisis continues in the medium term. Investor sentiments remain weak or worsen, while the inflow of foreign direct investment slows down. Continuing lack of confidence Continuing tight liquidity conditions for the private sector Slow response to the measures introduced by the Government Bureaucratic delays in policy implementation by government agencies that lack a sense of commitment and urgency. Depreciation of the yuan Japan fails to reflate its economy and the yen continues to depreciate A large market correction of the Dow Jones The US adopts a protectionist policy as a way of arresting deteriorating trade balances with Asian countries. It may be necessary to make some qualifications with regard to the economic growth projections. The Baseline Outlook real GDP growth estimate of -1.0 per cent for the 1998 takes into account an increase in public expenditure of RM7 billion fiscal stimulus as well as bank recapitalisation from the Asset Management Company. It is also premised on the speedy implementation of the Recovery Plan. There are certain downside risks on the attainability of the growth rate and a deepening of the recession. Although substantial, the fiscal stimulus for the remaining part of 1998 might not be sufficient to generate the growth impulse to reach the growth estimate for the year, especially if the economic crisis in the region worsen. In addition, the attainability of the baseline growth estimate also depends on how rapidly the fiscal stimulus is translated into economic activities in 1998. In any case, any delay in programme implementation in 1998 will spill over to 1999, which should benefit from the fiscal stimulus. Funds for Investment In an environment of slowing growth, it is important to ensure that productive activities receive adequate financing at the right time and cost. Limited accessibility of investors to investible funds as a result of credit tightening creates financial difficulties for business and leads to widespread individual and corporate bankruptcies. In the first quarter of 1998, the loans given by the banking system contracted by RM2.09 billion, while the deposits fell by RM4.01 billion. Interest rates have an important bearing on business viability. During the past few months, interest rates have risen. The 3-months fixed deposit rates increased from 7.43 in June 1997 to 9.06 in December 1997and 12.1 in June 1998. The base lending rates (BLR) are 9.5 per cent (June 1997) and 10.3 per cent (December 1997) and 12.1 (18 June 1998). However, these interest rates do not reflect the cost of funds faced by the lender. As a matter of course, banks charge an interest margin above the base-lending rate, which is the effective cost of funds to the borrowers. The maximum spread is 4 per cent above the BLR or cost of funds, and the lending rate was 16.2 per cent. Given this high level of interest rate on loan financing, many companies will suffer losses, let alone make profits.

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