From Asian Wall Street Journal
29th October 2000

AWSJ: Malaysian Budget Disappoints Some

By CRIS PRYSTAY Staff Reporter

KUALA LUMPUR -- Malaysia's budget is long on measures aimed at fostering a "knowledge" economy, but is short of incentives to boost consumption and foreign direct investment, both of which analysts say are needed to sustain the country's strong economic growth in the face of slowing global demand for its exports.

In his budget speech Friday, Finance Minister Tun Daim Zainuddin said the government expects economic growth to hit 7.5% this year, and slow to 7% in 2001 due to an expected slowdown in the U.S., one of the key destinations for Malaysia's electronics exports. Tun Daim said the government will spend 4.7 billion ringgit ($1.24 billion) on infrastructure projects to help boost the domestic economy, a move widely expected by analysts, but he delivered none of the tax cuts forecast by market watchers.

The finance minister did offer reinvestment incentives for foreign manufacturers, and axed a 10% levy now charged on portfolio funds repatriated after one year, part of the capital controls first imposed in September 1998. But he didn't say when the levy on portfolio funds withdrawn within one year will go, nor did he offer any new initiatives to attract fresh foreign direct investment.

"The overall spirit of the budget was to pump up consumption spending and FDI (foreign direct investment), and that didn't materialize," says Sebastian Chang, head of research at Vickers Ballas Securities in Kuala Lumpur. The budget mandated modest tax rebates of about $180 for low-income families; it contained neither the cut to personal-income tax, nor to the amount employees contribute to the Employee Provident Fund, that economists widely expected. "The pumping-up of consumption spending may not be that great at all," says Mr. Chang.

While figures for foreign direct investment, traditionally a key contributor to economic growth here, increased sharply this year for the first time since the regional economic crisis, the minister's economic report shows most of that growth came from a few bulky investments from the Netherlands, likely large oil projects by Royal Dutch/Shell Group, analysts say. Investments from the U.S., Japan and Singapore, in recent years Malaysia's biggest investors, are still down from last year.

In his speech, Tun Daim made strong statements about the need to attract more foreign investment to expand capacity and transfer both technology and training, and added that Malaysia welcomes the presence of foreign investors in "strategic alliances in sectors such as ICT (information technology), energy, ports and the financial sector." These remarks are a departure from the often bristling stance the government takes with foreign investors, analysts said. But there were no concrete measures announced on how the country planned to draw those investors back.

Some economists also worry that the government's budget is hinged on overly positive growth forecasts. Some private economists forecast growth rates ranging from 6.5% to 4.2%. "It's one of those budgets where they're effectively saying we're going to spend more because we're going to receive more. But that's dependent on how strong the (economic) growth is," says Sanjay Mathur, director of Asian economics at UBS Warburg. While the budget yields a current account surplus, development expenditures will put the federal government at an overall deficit of 4.9% of gross national product in 2001. In 2000, the deficit was 6% of GNP.

The budget focused largely on "knowledge" economy measures to develop the country's information-technology sector, including new technology training institutes and four new universities, incentives for New Economy companies, tax breaks for angel investors, and tax breaks for returning Malaysian professionals.

"In terms of ideas, it's good. But in terms of implementation of measures that will have an impact now, it's vague," says Sim Moh Siong, an economist at Citibank in Singapore.

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