Signs of stress behind Malaysia’s rosy growth
Wed Jul 5, 2006 4:04am ET

KUALA LUMPUR (Reuters) - Malaysia’s economy is growing at around 5 percent a year and exports are strong, but trouble is brewing for the government as consumers are squeezed and firms grumble about infrastructure spending cuts.

“I hear about how well the economy is doing but I don’t feel it,” said Choo Chin Teck, a 43-year-old lawyer who also runs a printing firm.

“Turnover in my printing business has fallen 20 percent from last year and legal work for property transactions has slowed down. I have to watch my spending these days.”

Choo’s experience seems widespread. As a result, confidence is flagging and cracks are appearing in the economy, breeding discontent with Prime Minister Abdullah Ahmad Badawi’s two-year-old government.

“It’s obvious that the economy is slowing down,” said Mohamed Ariff, executive director of the Malaysian Institute of Economic Research (MIER), an independent think tank.

“Consumer sentiment has been on the decline for some time and private investments are also down.”

Costlier petrol and electricity and rising credit costs are hurting consumers at a time when the economy is struggling to adjust to a cut in public spending on big infrastructure projects, an engine of growth under Mahathir Mohamad, who was prime minister for 22 years until late 2003.

One sign of softening consumer spending: total vehicle sales in car-mad Malaysia fell in May for the fourth straight month.

MIER’s widely followed index of consumer sentiment fell below 100 — the dividing line between growing and falling confidence — in the first quarter for the first time in four years, and the Malaysia Retailers Association cut its 2006 sales growth forecast in May by one point to 7 percent.

Abdullah’s fiscal prudence, aimed at cutting the government’s budget deficit, has not gone down well with ethnic Malay businessmen, particularly those in the ruling party, the United Malays National Organization (UMNO).

Many who benefited from government construction contracts under Mahathir are unhappy with the scarcity of large infrastructure jobs, which threatens to undermine Abdullah’s political base. “If the economy loses momentum … there will be discontent within UMNO itself,” said Chandra Muzaffar, a political analyst and head of an activist group.

Mahathir has fanned the doubts about Abdullah, criticizing his scrapping of projects such as a bridge to Singapore, raising concern in business circles about political instability.

Some voters seem to miss the dirigisme of the Mahathir era.

“We haven’t seen enough economic leadership from the powers that be,” said lawyer Choo.

JOBS OF THE FUTURE

Some analysts say Abdullah is right in trying to wean Malaysia off its dependence on government spending and channel money to social projects such as building schools and hospitals.

A $54 billion, five-year development plan announced in March switched the focus to easing rural poverty and educating people for the jobs of the future.

One of Southeast Asia’s fastest-growing economies, trade-driven Malaysia has grown 5 percent a year on average since 2000, underpinned by exports of electronics and crude palm oil.

But its future in electronics looks in doubt as efforts to move out of lower-end manufacturing and into the design and development of products and systems are hamstrung by the lack of a skilled labor force.

“Technology is displacing low-skilled workers and competition is making it difficult for people who do not have the best qualification,” said Manu Bhaskaran, a partner with economics consultancy Centennial Group.

“Malaysia has problems with its education system, as you can see with the very large number of unemployable graduates.”

Nearly 60,000 graduates were unemployed late last year, a government survey showed, most of them Malays with a poor grasp of English and fields of study that were not in demand.

The government has a goal of securing a third of national wealth for Malays, but little progress has been made despite more than three decades of quotas for business ownership, employment and education for ethnic Malays and other indigenous groups.

Malays make up just over half of Malaysia’s 26 million people but own only about a fifth of its wealth, well behind minority ethnic Chinese.

Foreign investors also need to be wooed and they have gone cold on Malaysian stocks, unhappy at the slow pace of reform.

The government controls or partly owns companies that account for at least a third of the stock market and investors had hoped for more privatization or management changes to lift profits.

The benchmark stock market index < .KLSE> is up some 3 percent in the past 12 months, against about 10 percent for Singaporean shares and about 18 percent for the Indonesian market.

“In terms of M&A activity, it’s very quiet. The restructuring of companies under the new government has not been very dramatic either. That’s why people have been ignoring it,” said Khiem Do, head of Asian equities at Baring Asset Management.