KUALA LUMPUR, Wed. The World Bank expects Malaysia's real gross domestic product (GDP) growth this year to be around 3.5 per cent, compared with just 0.5 per cent last year, rising further to five per cent in 2003. The Malaysian economy's recovery from the Asian financial crisis of 1997-98 is on track, the Bank said today, and should be able to withstand the global downturn.
In its mid-year review on East Asia and the Pacific, titled Making Progress in Uncertain Times, the World Bank said Malaysia's output was now at pre-crisis levels, foreign exchange reserves were at a comfortable level, and non-performing loans (NPLs) had also declined.
However, challenges ahead include the rise in public debt and a slowdown in private investment and foreign direct investments (FDIs).
Manufacturing, construction and services sectors did well as a result of the expansion in the output of domestic-oriented industries as well as the turnaround in the electronics industries, it said in the report, released yesterday.
The World Bank said despite some uncertainty in global financial markets, policy responses across the world had been biased towards supporting recovery, and this should help Malaysia withstand the global downturn.
Malaysia has continued to operate close to its full employment level. Inflation rate has remained low at 1.9 per cent. The external balance of payments position has strengthened further (and) the surplus on the trade balance has remained large, it said.
The World Bank noted that fiscal policy had been the Government's main instrument in domestic recovery, with the overall fiscal balance for the Federal Government averaging a deficit of about five per cent of GDP per year between 1999 and 2001.
As a result, the total public debt had increased to 70.5 per cent of GDP at end-2001.
Although it is manageable, it will require increased attention from policymakers over the medium-term, the World Bank said.
The bank lauded Malaysia for its renewed commitment to financial and corporate reform, which helped to create the conditions for a sustained recovery.
Significant progress has also been made in improving corporate governance, including strengthening minority shareholder rights (and) enforcement powers of regulators, amendments to laws governing the listing requirements of the KLSE, and development of code-of-conduct guidelines, it added.
The World Bank said the challenges ahead included the need to ensure that restructured loans remain performing, strengthening corporate governance, and integrating the financial system with the global economy.
Regionally, the Bank said reforms were essential to counter a combination of global, regional and domestic uncertainties.
The report recommends improving law and order and public security, maintaining prudent macroeconomic management of external and domestic fiscal positions, and strengthening governance, administration and public financial accountability.
It also calls for tapping the energies of private individuals, entrepreneurs and firms, as well as tackling security concerns.
The Bank said output growth in developing East Asia was expected to rise to a little over six per cent for both 2002 and 2003 from about 5.5 per cent in 2001.
It will be led by China and Vietnam growing at six to eight per cent, with even post-crisis Southeast Asian countries such as Indonesia, Thailand and the Philippines expected to grow between three to four per cent.
It said such a pace of recovery, while exceeding other world regions, would be less than the 6.5 to 7.5 per cent reached in the post-financial crisis recovery of 1999-2000.
In short, things will still get better, just by less than had been hoped, said Homi Kharas, chief economist for the World Bank's East Asia region, in a Press release.
The outlook for the region is supported by China, which is seen registering strong growth in exports, continued high FDI flows and the build-up of manufacturing capacity in an increasingly broad range of high-tech sectors.
Furthermore, the Bank said, poverty was at an all-time low, expected to fall to around 41 per cent of the regional population in 2002.