Sebagai menepati tradisi Bank Negara Malaysia, kami dengan sukacitanya ingin mengedarkan secara rasmi Laporan Tahunan Bank Negara Malaysia bagi tahun 1998. Saya ingin memaklumkan bahawa Laporan Tahunan ini akan hanya boleh disiarkan selepas jam 5:00 petang ini.

Prestasi ekonomi pada tahun 1998

Ekonomi Malaysia telah menunjukkan kesan penuh krisis kewangan serantau pada tahun 1998, di mana KDNK telah menguncup sebanyak 6.7%. Kejatuhan yang lebih buruk dari jangkaan awal sebanyak -4.8% telah mencerminkan kemerosotan yang lebih ketara dalam ekonomi serantau yang telah melemahkan prestasi eksport mereka. Permintaan agregat turut menguncup lebih dari yang dijangkakan. Memandangkan penguncupan aktiviti ekonomi tempatan yang ketara, seramai 83,865 pekerja telah diberhenti kerja, tetapi Malaysia masih menikmati guna tenaga penuh pada tahun 1998.

Permintaan tempatan agregat benar merosot sebanyak 25.9%. Unjuran ekonomi dan prospek guna tenaga yang tidak menentu, penangguhan projek yang mempunyai kandungan import yang tinggi, kesan kekayaan negatif berikutan kemerosotan harga saham yang diiringi oleh penyelarasan ke bawah kunci kira-kira sektor kewangan dan korporat telah menyebabkan penguncupan yang ketara dalam penggunaan dan pelaburan sektor swasta.

Dari segi penawaran, jangkaan terkini menunjukkan kemerosotan tahunan dalam KDNK adalah paling ketara pada suku ke-tiga tahun 1998 (-9%). Kemerosotan KDNK menyederhana kepada 8.1% pada suku ke-empat. Walau bagaimanapun, tahap aktiviti ekonomi seperti yang diukur oleh KDNK benar mula meningkat untuk setiap suku sejak suku kedua tahun 1998. Untuk tahun 1998 secara keseluruhannya, aktiviti dalam semua sektor telah terjejas, kecuali sektor galian. Penyelarasan adalah paling buruk dalam sektor pembinaan, diikuti oleh sektor perkilangan dan pertanian.

Penyelarasan dalam sektor-sektor utama telah menyebabkan kelemahan dalam pasaran pekerja, di mana tahap pengangguran telah meningkat ke 3.9%. Namun demikian, permintaan untuk pekerja dalam sub-sektor terpilih kekal kukuh, dengan kekosongan jawatan dilaporkan sebanyak 74,610 untuk seluruh negara.

Kedudukan kewangan Kerajaan Persekutuan kurang baik, memandangkan hasil kerajaan merosot dengan ketaranya serta pelaksanaan pakej rangsangan fiskal sejak bulan Julai. Setelah lima tahun mencatat kedudukan lebihan, kedudukan fiskal secara keseluruhannya telah beralih kepada defisit yang mencakupi sebanyak 1.9% KNK pada tahun 1998.

Namun demikian, perkembangan positif nyata diperlihatkan di mana akaun semasa imbangan pembayaran negara telah bertukar dan mencatat lebihan untuk pertama kalinya sejak tahun 1989, iaitu sebanyak RM36.1 bilion atau AS$9.2 bilion. Lebihan tersebut mencakupi sebanyak 13.7% KNK. Sebagai kesan dari konsolidisasi aktiviti pelaburan sektor swasta, kemerosotan perbelanjaan pengguna serta permintaan eksport yang lebih lemah, import barangan modal, penggunaan dan pengantaraan dalam sebutan dolar Amerika Syarikat telah merosot sebanyak 40.3%, 32.7% dan 21.3% masing-masing.

Kedudukan imbangan pembayaran dan penstabilan aliran modal jangka-pendek berikutan pelaksanaan kawalan pertukaran asing tertentu telah menyumbang kepada pengukuhan ketara dalam rizab luaran Bank Negara Malaysia. Rizab antarabangsa bersih meningkat dari AS$21.7 bilion pada akhir tahun 1997 kepada AS$26.2 bilion pada akhir tahun 1998, cukup untuk membiayai 5.7 bulan import tertangguh. Rizab luaran terus meningkat kepada AS$28.6 bilion pada 15 Mac 1999 iaitu bersamaan dengan 6.2 bulan import tertangguh. Pada masa yang sama, hutang luaran menyusut sebanyak 6.4% kepada RM159.8 bilion pada akhir tahun 1998. Dalam sebutan dolar AS, hutang luaran adalah bersamaan AS$42 bilion. Justeru itu, nisbah hutang luaran kepada KNK menyusut kepada 60.9% pada akhir tahun 1998 dari 65.4% pada tahun 1997. Memandangkan nisbah hutang jangka pendek kepada jumlah hutang luaran secara relatifnya adalah rendah dan pegangan rizab luaran Malaysia, maka Malaysia kurang terjejas oleh pengaliran keluar kredit dalam tempoh jangka pendek.

Inflasi, yang telah meningkat menjelang akhir tahun 1997 dan separuh pertama tahun 1998 berikutan kesan turun nilai mata wang, telah menyusut setelah bulan Jun 1998. Penguncupan yang lebih dari yang dijangkakan untuk permintaan agregat dan lebihan kapasiti dalam ekonomi telah mengurangkan tekanan inflasi berikutan turun nilai ringgit. Kadar Indeks Harga Pengguna menyederhana kepada 5.3% pada bulan Disember 1998, setelah memuncak pada 6.2% pada bulan Jun. Indeks tersebut telah bertambah baik kepada 3.8% pada bulan Februari 1999. Untuk tahun 1998 secara keseluruhannya, inflasi meningkat sebanyak 5.3%, iaitu lebih rendah dari jangkaan sebanyak 7-8%.

Allow me now to continue in English. As a technical briefing on the performance of the economy in 1998 was given to the press yesterday, I will now move on quickly to discuss the thrust of macroeconomic management during 1998. This will be followed by our assessment of the outlook and the issues and challenges confronting the Malaysian economy in 1999. My remarks will then focus on the performance of the banking industry, with a brief discussion of developments in the insurance industry. I wish to inform you that we will be issuing a press release on the Annual Report today. We have another press release on the February 1999 issue of our Monthly Statistical Bulletin, which we are also issuing today.

Macroeconomic policy management in 1998 focussed on reducing risks in the economy to ensure macroeconomic stability and promote a stronger financial system. Initially, Malaysia adopted tight fiscal and monetary policies to stabilise the domestic financial markets and contain inflationary pressures. While these policies succeeded in containing inflation and restoring the balance of payments to a surplus position, they caused aggregate demand to fall more sharply than anticipated. Depositor confidence was adversely affected, causing shifts in deposits form some of the smaller banking institutions to the larger banks, especially towards the end of 1997. This led to a bidding up of interbank interest rates as the smaller institutions tried to source interbank funds to meet loan obligations. However, this put pressure on overall interest rates and some banks started lending on a "cost-plus? basis, pushing lending rates to levels that were significantly higher than the BNM intervention rate. Such high rates imposed by banks led to debt servicing problems in the corporate sector, contributing to the rising NPLs and threatened the stability of the financial system.

As the regional crisis became more entrenched, it was evident that growth in GDP would contract significantly. Consequently, Malaysia reassessed strategies to break the vicious cycle of destabilising developments in the financial sector and the economy reinforcing each other. As a result of these reassessments, the National Economic Action Council announced a comprehensive National Economic Recovery Plan to expedite recovery. Policy response since May 1998 focused on counter-cyclical measures to avoid a recession-deflation spiral. Fiscal policy was relaxed in March 1998 and monetary policy was eased in August when inflationary pressures were more subdued.

At the same time, BNM embarked on a comprehensive restructuring programme for the banking sector. The objective was to enable the banking institutions to focus on loans intermediation to support economic activities. As early as January 1998, the Bank announced a merger programme for finance companies to consolidate the sector. Subsequently, in June 1998, the Government set up Pengurusan Danaharta National Berhad (Danaharta), an asset management company, to purchase NPLs from the banking institutions. Danamodal Nasional Berhad (Danamodal), a special purpose vehicle was set up as an interim funding vehicle which would meet the required capital injections of affected institutions. In August, the Corporate Debt Restructuring Committee (CDRC) was set up to complement the restructuring of the financial institutions.

This restructuring program was, however, hampered by excessive volatility in the money markets. This volatility persisted due to uncertainty over international and regional developments and was further aggravated by outflows of ringgit to offshore markets. By the end of August 1998, the ringgit had depreciated by 40% against the US dollar from the pre-crisis level, while the stock market declined by 72% during the same period.

Given the continued adverse external environment, Malaysia imposed the selective exchange control measures on 1 September 1998 to eliminate the internationalisation of ringgit and stabilise short-term capital flows. On 2 September, the ringgit was also fixed at RM3.80 against the United States dollar. These measures were imposed only after measures to stabilise the economy helped to improve the balance of payments and the inflation situation. To complement the selective capital controls, measures were introduced to improve the liquidity flows in the banking system to enhance the intermediation process and generate lending to viable businesses. Monetary policy was eased further. Interest rates were brought down to levels prevailing at end-1995 following the progressive reduction in the BNM intervention rate and the statutory reserves requirement. The banking sector reform programme was also accelerated.

Overall, the exchange control measures resulted in greater stability in currency and stock markets and the financial system, as well as revival in consumer and investor confidence. Although the economy continued to contract in the second half-year, on a year-to-year basis, the fundamentals began to strengthen towards the end of 1998.

Outlook and prospects for the Malaysian economy in 1999

The Malaysian economy is expected to stage a recovery in 1999 with real GDP recording a positive growth of 1%. Export growth recovered strongly since October 1998 and going into the first quarter of 1999. However, given that its prospects remain uncertain, the main source of growth for the Malaysian economy will emanate mainly from domestic demand, supported by the fiscal stimulus.

Economic recovery in 1999 is expected to be gradual in view of the high inventory build-up in the first half of 1998, and the increase in capacity in many industries resulting from several years of expansion. Growth will likely be marginal in the first half-year, allowing the economy to consolidate. Restructuring of the financial and corporate sectors will intensify in the second and third quarters of 1999. This would create more favourable conditions for stronger growth in the second half-year.

There is a possibility that GDP growth could be higher than projected in 1999 should the prospects for the international environment improve or the private sector respond more favourably to the policy measures. Barring any adverse external developments, the prospect of a higher real GDP growth, closer to 2%, is possible in 1999, in view of the Government's commitment to accelerate work on a comprehensive restructuring programme for the banking and corporate sectors as well as measures to increase utilisation of excess capacity in the economy.

The forecast hinges on three important factors, namely, the international economic outlook, the timely implementation of the fiscal stimulus package and the private sector response to this package. On the international front, the potential downside risks would be a sharper-than-expected moderation of growth in the industrial countries and a delayed recovery of regional economies, including Japan. These developments would affect the projection for manufactured exports and output in the export-oriented industries for 1999. Secondly, the recovery of private consumer spending and a moderate increase in private investment activity will also be important determinants of domestic economic growth. A recovery in consumption is expected with the easing of inflationary pressures and improved liquidity as well as lower interest rates in response to the easing of monetary policy. Lastly, growth in 1999 also hinges on the expansion in public sector expenditure. The Government would need to press ahead with its planned spending and investment programmes to ensure orderly and timely implementation of projects in the pipeline.

On a sectoral basis, growth in real output in 1999 is expected to reflect positive growth in output in the manufacturing, services and agriculture sectors. The main impetus to growth in the manufacturing sector would emanate from the stronger expansion in output of the domestic industries in response to higher domestic demand. Activity in the services sector is expected to increase in line with the expansion of the leading sectors in the economy. The decline in the construction sector is expected to moderate.

Real aggregate domestic demand is expected to turn around to record an increase in 1999, reflecting mainly the positive response to the measures taken by the Government to stimulate domestic economic activities. The Federal Government targeted for a fiscal deficit of 6% of GNP in 1999 to support economic activities to spearhead economic recovery. However, the policy of fiscal prudence and discipline will continue to be maintained to contain the fiscal deficit at a manageable level so as not to jeopardise long-term growth.

The current account surplus of the balance of payments is expected to remain significant at 11% of GNP. The economic recovery is not expected to significantly affect this surplus on account of the excess capacity in the economy, while the focus of the fiscal stimulus package is targeted at economic activities that have low import content.

The total external debt outstanding is expected to increase moderately in 1999, reflecting mainly loans from multilateral and bilateral sources to finance the recovery and the restructuring programme. Malaysia would remain a moderately indebted country, with the ratio of external debt to GNP stabilising at 62%.

Inflation is projected to be contained below 4% in 1999. The absence of inflationary pressures from abroad due to the pegging of the ringgit at RM3.80 to the U.S. dollar, the low inflation in the industrial countries and lower commodity prices, particularly low oil prices, would help to contain domestic price pressures.

The recovery in the economy in 1999 is expected to generate increased employment opportunities in all the major sectors of the economy. However, in view of the higher entrance into the domestic labour market, the unemployment rate could increase above the full employment level. The pressure for wage increases is also expected to remain moderate as adjustments in the labour market continue in 1999.

The broad thrust of policy in 1999 will be to stimulate economic growth. Central to the counter-cyclical policy is the need to promote consumption. Given the build-up in inventory and excess capacity, promotion of consumption is necessary before investments can pick up. At the same time, Malaysia recognises the need for a large reserves cushion as a key element against unforeseen destabilising developments. The Asian crisis has shown that high reserves provide added strength to weather instabilities due to market failure.

Malaysia will continue to rely on non-inflationary sources of financing. As the total financing requirement of the recovery package and restructuring programme is not large, estimated at RM58 billion for 1998-99, the bulk of the requirements can be met through domestic savings. Malaysia's savings rate is high, at over 40% of GNP. In 1999, Malaysia expects to obtain some loans from multilateral and bilateral sources. Given the favourable developments, it would be advantageous for Malaysia to re-enter the international capital markets to establish a benchmark borrowing rate for Malaysia. Nevertheless, maintaining a low external debt level continues to remain an important policy objective.

Addressing structural issues in the economy will be pursued aggressively in 1999. Much of the reform process in the financial system would be completed during the course of the year. Other long-term issues on which work has begun in 1999 include addressing issues affecting competitiveness. These include strategies to lower the cost of doing business in Malaysia and improve industrial efficiencies. Development of human resource continues to be given priority attention, especially to meet the needs of industry for skilled labour.

Monetary Policy Concerns and Policy Stance in 1999

Monetary policy in 1999 will continue to be accommodative to support an expansionary fiscal stance as the risk of inflationary pressures from domestic demand is no longer a source of instability. The focus of monetary policy would be to create a conducive environment to support the economic recovery, by ensuring that adequate funds would be readily available to investors at reasonable cost.

At the same time, achieving growth with financial stability calls for a well co-ordinated and effective implementation of macroeconomic policies and structural adjustment measures. Based on past experience, the impact of monetary policy measures is only felt with a lag, unlike the more immediate impact of fiscal measures. Therefore, in the immediate term, the implementation of the wide range of fiscal measures already in place would need to be expedited to promote a revival of domestic demand.

Although nominal interest rates may fall further, real interest rates will remain positive. This is based on the premise that the inflation rate in Malaysia will continue to moderate during the year. The expected easing of interest rates in the industrial countries would provide the Bank with greater room for manoeuvre to support the economic recovery process without endangering price stability.

There will be no adjustments to the fixed exchange rate adopted since 2 September 1998 as long as it remains consistent with economic fundamentals and does not become significantly undervalued or overvalued. Malaysia will continue to maintain the fixed exchange rate regime until there is a discernible normalisation in the global financial and currency markets and the global financial system has been strengthened to ensure orderly conditions. Given the objective is to provide greater certainty for the conduct of real economic activity, there is no intention to make frequent changes to the exchange rate. On the whole, the comprehensive measures have accorded greater stability for producers, traders, investors and consumers. These, however, will be temporary gains unless investors and exporters take advantage of this period of relative stability to sharpen their competitive edge through enhancing productivity; improving the quality of products; expanding to non-traditional markets; intensifying market penetration to existing markets; and providing improved services to customers.

Looking at the performance of the insurance industry

The performance of the insurance industry was also affected by the recent developments in the economy, as evident from the sharp moderation in premium and asset growth in 1997 and 1998. While both the life and general insurance sectors were affected by the economic slowdown, the impact was more significant in the general sector.

Nevertheless, the industry had the benefit of facing the crisis from a stronger financial position following the implementation of the new minimum solvency and capital requirements introduced in the Insurance Act 1996, which came into force in January 1997.

Reflecting the need to consolidate and rationalise their operations to address structural weaknesses and meet new challenges arising from recent developments, 1998 saw increased activity in mergers and acquisitions (M&A) among insurers. This positive development augurs well for the industry to achieve greater penetration and enhance market position in an increasingly competitive environment. A total of seven M&A proposals involving 14 insurers are at various stages of negotiations, of which at least three are expected to be firmed up by the end of the year. To facilitate the successful conclusion of potential M&As, BNM issued a set of Guidelines on Mergers and Acquisitions which provides a framework for M&A negotiations in the domestic insurance industry.

The prospects of the insurance industry in the medium and long term remain good. The thrust of measures identified under the National Economic Recovery Plan is geared towards developing the role of insurers in facilitating economic recovery, particularly in the mobilisation of long-term funds for economic development and improving the services account of the balance of payments. In particular, the focus is on the development of pension and annuity business to enhance the market penetration of life insurance, and marine cargo insurance to support domestic and international trade activities.

Performance of the banking system

Following the downturn in the economy, the performance of the Malaysian banking system was adversely affected. The banking system recorded a pre-tax loss of RM2.3 billion in 1998 compared to a pre-tax profit of RM7.7 billion in 1997. Excluding three banking institutions, which recorded exceptionally large losses, the banking system recorded a pre-tax profit of RM793 million.

Despite the losses made by the banking system, the RWCR of the banking system nevertheless showed an increase of 1.3 percentage points to 11.8% as at end 1998 due to the injection of capital by Danamodal, the removal of NPLs by Danaharta and the decline of total risk weighted assets.

The asset quality of the banking system was also adversely affected during 1998. The net NPL ratio of the banking system increased from 4.1% as at end-December 1997 to 9% as at end-December 1998. Excluding the NPLs of 3 banking institutions that were most affected, the net NPL ratio for the industry as a whole was 8.3% as at end-December 1998. Loan loss coverage ratio of the banking system declined slightly with total provisions (interest-in-suspense, specific provisions and general provisions) set aside by the banking system amounting to 55.7% of NPLs. Including the value of collateral, however, the total loan loss coverage of the banking system amounted to 143.3% of NPLs as at end-December 1998.

Economic uncertainties caused the banking institutions to become overly cautious in extending credit during the first three quarters of 1998. On average, only RM4.2 billion a month of new loans was approved during this period. However, new loans approved doubled to an average of RM8 billion a month during the last quarter of 1998 under the more conducive business environment brought about by the reduction in interest rates, greater liquidity, the removal of the twin distraction of rising NPLs and erosion of capital, as well as rising consumer confidence. Overall, total loans outstanding (including loans sold to Danaharta) of the banking system grew marginally by 1.3% in 1998. Commercial banks achieved a positive growth of 7.1%, and if banks which do not have the capacity to lend due to capital and liquidity constraints are excluded, the loan growth of the remaining commercial banks is even higher at 8%.

Loans extended for the purchase of shares was 7.9% of total loans as at end-1998 as against the 20% limit. Given that the utilisation rate is less than 50%, and that the stock market at the current level appears undervalued, banking institutions should not be averse to finance applications for purchase of shares in the stock market, especially for long-term investments. This would boost long-term confidence in the stock market and enhance the value of listed companies which in turn would enable and facilitate these companies to secure financing at reasonable costs to fund their operations as well as expand their activities. This would then translate into more economic activities which would stimulate economic recovery.

The thrust of banking policies in 1998 was aimed at crisis management to stabilise the banking system and build a more resilient banking sector. Although Danaharta, Danamodal and the Corporate Debt Restructuring Committee have made great strides in minimising the sources of vulnerabilities in the banking system, BNM will need to intensify its supervision of banking institutions to ensure that the banking system remains resilient in facing future challenges and the difficult operating environment. In this regard, the frequency of BNM on-site examinations of banking institutions will be increased to at least once a year with the examination conducted on a consolidated basis. The focus of BNM supervisory approach would continue to stress on early detection of potential areas of vulnerabilities and to facilitate the implementation of timely corrective actions. To ensure that only fit and proper persons are appointed as directors and chief executive directors of banking institutions, BNM will review their appointments every two years. The appointment of any chief executive officer or director who no longer meets the fit and proper criteria could be terminated.

Measures to detect and minimise sources of systemic risks will continue to be developed. This will include addressing the issue of moral hazard over the availability of BNM's lender-of-last-resort facility. A clearer set of guidelines of BNM's lender-of-last-resort facility will be formulated which will specify conditions if such support is called upon. In addition, BNM will ensure that, in future, any increase in bank capital by bank holding companies and other controlling shareholders is funded by non-debt sources.

To ensure that the government safety net for depositors of banking institutions is not extended to non-deposit taking institutions within the group, BNM will be embarking on a policy of completely disassociating unsupervised entities from banking institutions so that crises affecting the unsupervised entities will not affect the stability of the banking institutions. This would involve re-organising group structure so that corporate linkages between the supervised entity and the unsupervised entity will be distanced. BNM will also restrict financial exposure between banking institutions and other related companies within the group.

Recognising the importance of a deep and liquid bond market to support the economic recovery process, BNM will introduce measures to accelerate the development of the bond market. Amongst the measures to be introduced are the guidelines on asset-backed securitisation and measures to further develop the repo market. BNM will also take steps to promote greater participation of institutional investors in the bond market. The development of active primary and secondary bond market would go a long way towards enhancing the financial system in Malaysia.

Bank Negara Malaysia
31 March 1999