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Seemingly encouraging signs on the economy may mask more trouble ahead for Malaysia. CHRIS BROWN--SABA FOR TIME
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Small Change
Malaysia's economy perks up amid talk of easing controls. Will Mahathir be as successful with his political standing?
By DAVID LIEBHOLD
Never before have so many Malaysians streamed through the heavy iron gates of Mahathir Mohamad's Kuala Lumpur home. Last Tuesday an estimated 40,000 well-wishers queued in the lavish corridors to greet their battle-weary leader on the Hari Raya Muslim holiday. "This is an expression of support for the government," declared the 73-year-old Prime Minister, visibly tired from the endless handshaking. And yet, like so much in contemporary Malaysia, the appearance may have been deceptive. Outside on the expansive lawns, the crowd evinced little interest in politics. Many of the visitors seemed to have been drawn largely by the spectacle-and the plentiful free food. "This is the first and last time I will come here," laughed Pari Davi, a schoolteacher. "He will soon be gone."
That judgment may be premature, but there is little doubt that Mahathir has his work cut out for him. The political damage from the perceived mistreatment of his former deputy, Anwar Ibrahim, is proving difficult to repair. Mahathir's best hope of deflecting public attention from Anwar is to revive the sagging economy, a task he has taken on with characteristic determination. The pundits are now suggesting that Mahathir might call snap elections in April, hoping that a quick economic recovery will give him a lift at the polls. His daring experiment in imposing capital controls has fared better than many experts predicted. Even investment bankers, among the first casualties when the controls were introduced last September, are taking another look at Malaysia. The latest Merrill Lynch Gallup poll finds that Asia-Pacific fund managers have turned buyers of Malaysian shares for the first time since March 1998. Says Sani Hamid, an emerging-markets analyst with Standard & Poor's in Singapore: "The controls have served Mahathir's purpose." What's less clear is whether they have accomplished any long-term benefits.
Mahathir thumbed his nose at conventional free-market wisdom on Sept. 1, pegging Malaysia's ringgit to the dollar, eliminating offshore ringgit trading and barring foreigners from repatriating the principal of their portfolio assets within 12 months of the investment. Having sealed Malaysia against capital flight and external economic vagaries, the Prime Minister sacked Anwar, assumed personal control of the Finance Ministry and launched a raft of reflationary policies. He increased government spending (targeting a 1999 budget deficit of 6.1% of GNP, up from 3.1% last year) and lowered interest rates from 11.1% to their current 6.7%. Most controversially, given the high level of bad credit in the economy, Mahathir relaxed prudential standards in the banking sector by dropping the central bank's reserve requirements, changing the definition of a nonperforming loan and directing banks to increase lending.
Five months after Malaysia was de-linked from the world's financial markets, the currency is stable, foreign exchange reserves have risen an average of $1.5 billion a month and the Kuala Lumpur composite index has more than doubled in value. Even the real economy is showing signs of life in response to Dr. M's unorthodox prescription: last year's sharp decline in industrial production has tapered off and exports, measured in dollars, are growing. Although tens of thousands of jobs have been lost since the economic crisis struck, the monthly rate of layoffs has been declining and unemployment remains low compared with most of Malaysia's neighbors. The bottom line: Malaysia is expected to achieve GDP growth of at least 1% this year, which would be an impressive turnaround from last year's nearly 6% decline.
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