The Dinner for International Fund Managers at Langkawi, 14 January 1994
It is probably an understatement to say that 1993 has been another favourable year for the Malaysian economy. Real GDP growth has been sustained at 8 per cent or more since 1988. Indeed, latest indicators suggest that growth in 1993 would probably be higher than the official estimate of 8 per cent, given that the outturn for the first three quarters was already more than 8.5 per cent. More importantly, the prospects for the near term remain equally favourable, with a projected growth of around 8 per cent a year. In all probability, the current economic expansion will become one of the longest in Malaysia's history, particularly if the expected recovery in the world economy finally gets under way during the course of this year.
It is very encouraging that we have achieved rapid and sustained economic expansion while at the same time maintaining price stability. In November the CPI has moderated to 3.1 per cent. As the average CPI in the first 11 months of last year has been reduced to 3.6 per cent there is every possiblity that we will be able to contain inflation well below 4 per cent level sooner than expected.
Notwithstanding the moderation in price pressures, however, the stance of monetary policy will continue to centre on managing excess liquidity to pre- empt any revival in inflation. In such an environment, we cannot allow any room for complacency.
For the Government, the basic stance of monetary policy is clear and definite: to permit monetary expansion to only accommodate much real growth in the economy as could reasonably be expected, without aggravating the underlying inflationary forces. We have never believed in "quick fixes" of stop-go solutions in the monetary arena in order to bring about "fast improvement" in economic activity at the expense of longer-term considerations. Underlying this policy posture is the Government's strong belief in financial discipline. In this respect, we have tried to aim, although targets are not officially announced, at a medium term rate of monetary expansion that is consistent with the underlying growth in real GDP and a desired low rate of inflation.
To date, the large excess liquidity is still prevalent in the system, with its main source continuing to emanate from inflows of funds from abroad. The high interest rates, which have moderated somewhat vis-a-vis certain countries by the end of 1993, continued to attract strong capital inflows. The bullish sentiment in the stock market was another major contributor to the large excess in liquidity. Active liquidity operations in the money market by the Central Bank have largely neutralised the impact on liquidity of these large inflows of funds. It should be reiterated that the Government has no intention of capping the exchange rate through complete sterilisation measures. The interest rate has never been a policy target in Malaysia, and its level is the result of demand and supply conditions in Kuala Lumpur foreign exchange market. As a matter of policy, the Central Bank intervenes only when necessary, in order to minimise fluctuations and to preserve short-term stability in the market.
The effects of the buoyant stock market activity on monetary policy are also being closely monitored. So far, while tight monetary policy has not unduly constrained credit for purchases of stocks and shares, both the banking institutions and stockbrokers have exercised adequate self-restraint and prudence in management of their loan portfolios. This reflects the growing maturity of the market players and is indeed encouraging.
The conduct of fiscal policy would also be tailored to complement the prevailing monetary stance to fight inflation. The more visible measures include the reduction in import duties as a way to reduce prices. As such, Malaysia has proceeded to reduce tariff on 1,000 items in the last two budgets, way ahead of our obligations under the Uruguay Round negotiations. We are equally committed to contain expenditure. Higher expenditure is only being considered in areas which will result in higher capacity to expand potential output. Our tax system is also undergoing continuous and comprehensive reform to maintain Malaysia's competitiveness as an attractive centre for investment, while also strengthening the public sector's revenue base to support future levels of growth and public sector investment programmes.
We will continue to exercise prudence in managing public sector finances. Sustained fiscal consolidation amidst robust economy contributed to a healthy public sector financial position in the last several years. In 1993 Budget speech I mentioned that we should now aim for a balanced budget as a long-term objective. We are pleased that in the same year, for the first time in history, we have achieved our goal of a balanced budget. Greater prudence in spending will also contribute to the objective of raising domestic savings to finance our investment programmes. Privatisation of Government activities and enterprises will also be actively pursued in line with the overall policy to downsize the public sector and reduce its direct participation in the economy.
The equity market, the government securities market and the corporate bond market, have undergone dynamic changes in recent years. Indeed, the remarkable growth posted in the capital market, in particular equity market, was attributable to the commitment on the part of the Government to promote the capital market to play a pivotal role as a reliable alternative source of finance for the private sector.
Recent growth of the stock market also reflected to a considerable extent, the privatisation policy of the Government. The implementation of this policy is expected to continue to provide a steady and significant source of new listings to the market. The impact of the privatised companies listed on the exchange is significant, accounting for about one-quarter of the market capitalisation at the end of 1993.
Measures were also instituted to promote an orderly growth in the other sub- markets, in particular the emerging private debt securities market. A milestone in its development was the incorporation of Rating Agency Malaysia (RAM), three years ago. In fact, RAM became the first credit rating agency in East Asia outside Japan. The most important function of RAM is to rate all issues of bonds and commercial papers and disseminate timely information to potential investors of both the primary and secondary issues of private debt securities. At the same time, it will provide the institutional backing to protect the public from abuse and misuse of bond financing.
In conclusion I must stress that the future of Malaysia is very much intertwined with the region. We have formulated pragmatic macroeconomic policies to ensure sustained growth and increased the resilience of our economy against the vagaries and continous flux in the international economy. Our success in the recent years to withstand the downswing of the economies which had traditionally been the engine of world economic growth reflects the soundness of that policies. We are now indeed poised to take full advantage of the growing economic strength of East Asia and also growth potential in other parts of Asia. Malaysia and its trading partners in the region are vigorously pursuing measures to accelerate intra-regional trade, cross border investments and effective industrial linkages. What is more encouraging is that the private sector themselves have started establishing strategic alliances among partners in the region. You will observe more exciting events in the many facets of Asian economies in the years to come and Malaysia is an important participant in that development.