REAL GROSS DOMESTIC PRODUCT

Gross domestic product (GDP) growth in 1999 was stronger than forecast, while all other developments in the Malaysian economy were in line with expectations.

The selective exchange controls implemented in September 1998 allowed Malaysia to emerge from the recession with strengthened macroeconomic fundamentals. In 1999, GDP recorded a strong positive growth of 5.8 percent, from a contraction of 7.4 percentin 1998. The value of GDP has returned to almost the same level as in 1997. Following the increase in nominal gross national income of 3.8 percent, per capita gross national product (GNP) turned around to register a positive growth of 1.4 percent to RM 12,305 (US$3,238) in 1999 from RM 12,135 (US$3,093) in 1998. In 1997 per capita GNP was RM 12,310 or US$4,376.

The policy measures implemented by the government have been successful in addressing immediate-term issues without undermining medium-term growth potential. On the supply side, growth was initially driven by the strong performance of the export-oriented industries in the manufacturing sector. The recovery became increasingly more broad-based during the course of the year. Within the manufacturing sector, growth became broad-based from the second quarter onwards as both domestic and export-oriented industries registered positive growth rates.

In 1999, value-added in the manufacturing sector increased by 13.5 percent from a negative 13.7 percent in 1998, following expansion in output of the manufacturing sector since February 1999. With the overall improvement in the economy, the services sector turned around to increase by 3.3 percent in 1999.

On the demand side, strong economic growth was sustained by robust export performance, accelerated public sector expenditure and a revival in private consumption expenditure. Growth in real aggregate domestic demand (excluding stocks) increased by 1.7 percent in 1999, due mainly to the fiscal stimulus measures implemented by the government and the revival in private/business sector consumption expenditure.

INFLATION

The relative stability of the ringgit exchange rate, excess capacity in the economy and lower commodity prices led to more moderate price increases in 1999. Inflation as measured by the consumer price index (CPI, 1994=100) rose at an annual rate of 2.8 percent in 1999, lower than the earlier estimate of 3 percent.

TRADE ACCOUNT

The overall balance of payments position strengthened further to record a surplus of RM 17.8 billion or US$4.7 billion, driven by favourable external trade balance and a large net inflow of long-term capital. In the trade account, gross exports (in US dollar terms) have increased for five consecutive quarters, while import growth has turned positive since the second quarter of 1999. In US dollar terms, exports of manufactured goods rose by 18.2 percent, benefiting especially from strong global demand for electronic products such as semi-conductors, personal computers and other information and communications-related components. Following the rebound in exports, imports of intermediate goods in US dollar terms have recorded positive growth since March 1999. Nevertheless, export growth was stronger (13.2 percent) relative to import growth (9.4 percent), contributing to a record merchandise surplus of RM 86.5 billion (US$22.8 billion) and a large current account surplus of RM 47.9 billion (US$12.6 billion) or 17.1 percent of GNP in 1999.

The overall balance of payments recorded a surplus of RM17.8 billion, after adjusting for revaluation losses from ringgit appreciation, increased short-term trade credits, further reduction in short-term external debt of commercial banks and the non-bank private/business sector and some liquidation and repatriation of portfolio investment by foreign investors. Consequently, the net international reserves increased to RM 117.2 billion (US$30.9 billion) as at end-1999, from RM 99.4 billion (US$26.2 billion) at the end of 1998. This level of reserves was sufficient to finance 5.9 months of retained imports (5.7 months in 1998). In addition, the international reserves were 5.1 times the short-term external debt.

EXTERNAL DEBT

Malaysia¡¯s policy of active debt management, guided by prudential safeguards and an efficient debt monitoring system, has enabled the country to keep the overall external debt situation manageable. The nation¡¯s total external debt outstanding declined marginally by 0.4 percent to RM 160.5 billion at the end of 1999, reflecting reductions in the short-term debt as well as longer-term private sector external debt. The total debt was equivalent to US$42.3 billion compared to US$42.4 billion in 1998. The improvement in the debt situation in 1999 was reflected in the decline in the ratio of external debt to GNP and to exports to 57 percent and 43 percent, respectively. The Federal Government¡¯s external debt, although higher in 1999, accounted for only 11.4 percent of total external debt, while the non-financial public enterprises accounted for 36.5 percent. The balance was private/business sector debt, with the non-resident controlled companies in Malaysia accounting for a larger share of this debt (54%).

EXCHANGE RATE

In 1999, the ringgit remained pegged to the US dollar at the rate of RM 3.80. This pegged exchange rate has been effective since 2 September 1998. Under this arrangement, the ringgit exchange rate vis-¨¤-vis other currencies is determined through cross-rates based on the movements of the US dollar against those currencies in the international foreign exchange markets.

The ringgit was relatively stable against most major currencies in 1999. The volatility of the ringgit against major currencies, with the exception of the Japanese yen, was reduced significantly.

Overall, the pegged exchange rate regime has benefited the economy by offering a period of relative stability, which has aided the recovery of economic activity and allowed the acceleration of financial reforms. It has helped manufacturers conduct their pricing and investment decisions in an environment of greater certainty. The peg has been sustainable as it is consistent with the underlying fundamentals of the economy. At the same time, consistent macroeconomic policies have further ensured the viability of the regime.