Malaysia WT/TPR/S/92
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I. ECONOMIC ENVIRONMENT
(1) OVERVIEW
1. During the period since its last Trade Policy Review in 1997, Malaysia was struck by the
Asian financial crisis, which contributed to a severe deterioration in its economic performance in
1998.  The Government responded quickly to the economic downturn, with both macroeconomic and
structural policies.  These policies together with the fact that Malaysia's trading partners kept theirmarkets open to Malaysia's exports contributed to a swift economic recovery.
2. The deterioration in Malaysia's performance in 1998 occurred despite apparently strong
economic fundamentals (including full employment, low inflation, a high national saving rate, a
prudent fiscal position, and a reasonably sound banking system
1).  Nonetheless, both capital and total
factor productivity (TFP) growth had dropped sharply2, perhaps reflecting over-investment, if not an
increasingly inefficient allocation of capital.  The outcome was that, after having grown on average by
more than 8% annually since the recession of 1985, real GDP fell by 7.4% in 1998 owing to a large
drop in private domestic demand caused by a sharp decline in investment and, to a lesser extent, by
lower consumption (Table I.1).  As a consequence, the unemployment rate rose to 3.3% in 1998 up
from 2.5% in the previous year.  Consumer price inflation jumped from 2.6% in 1997 to 5.3% in1998, partly due to higher import prices resulting from the depreciation of the ringgit, which fell from
about RM 2.8/US$ in the third quarter of 1997 to RM 3.8/US$ a year later.
Table I.1
Main macroeconomic indicators, 1996-2000
1996 1997 1998 1999 2000
Real GDP per capita (US$)a3,194.0 2,990.8 1,985.9 2,082.0 2,152.8
Nominal GDP per capita (US$) 4,542.7 4,375.5 3,079.3 3,238.0 3,530.7
(Annual pe rcentage change)
Real GDPa10.0 7.3 -7.4 6.1 8.3
Real domestic demanda6.8 6.6 -25.2 2.0 14.5
of which:
Private consumption 6.9 4.3 -10.2 3.3 12.2
Gross fixed investment 8.2 9.2 -43.0 -5.9 24.1
Exports of goods and non-factor servicesa9.2 5.5 0.5 13.4 16.0
Imports of goods and non-factor servicesa4.9 5.8 -18.8 10.8 24.1
Consumer price index (1995 = 100) 3.5 2.6 5.3 2.8 1.6
Producer price index (1989 = 100) 2.3 2.7 10.7 -3.3 ..
Total factor productivity (TFP)b
Labour productivity 5.7 5.6 -1.8 3.9 6.1
Unemployment rate (%) 2.5 2.5 3.3 3.0 2.9c
Monetary and exchange rate
Money supply (M3) growth (end of period)d21.2 18.5 2.7 8.3 5.0
Three-month BNM interbank rate (end of year) 7.4 8.7 6.5 3.2 3.3
Nominal effective exchange rate (1995 = 100) 3.1 -2.7 -23.1 1.2 2.7
Table I.1 (cont'd)
                                                     
1 For example, the risk-weighted capital ratio was 12% in June 1997 compared to the Basle minimum
standard of 8%.  On the other hand, at about 130% of GDP in 1996, bank credit to the private sector was high.
2 TFP growth declined from an annual average rate of 2.4% during the period 1990-1995 to 0.9% in
1995-2000 (NPC, 2000, p. 17).WT/TPR/S/92 Trade Policy Review
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1996 1997 1998 1999 2000
Real effective exchange rate (1995 = 100) 4.3 -2.4 -20.5 3.0 2.6
Exchange rate (Ringitt per US$, period average) 2.5 2.8 3.9 3.8 3.8
(Per cent of GDP)
Fiscal indicators
Federal government balance 0.7 2.4 -1.3 -3.2 -5.3
Revenue 23.0 23.3 19.9 19.6 18.7c
Expenditure (including net lending) 22.3 21.0 21.2 22.8 24.0c
Federal Government Debt 35.3 31.9 36.2 37.4 37.1c
Domestic debt 31.2 27.3 31.0 31.3 31.4c
External debte4.1 4.6 5.2 6.1 5.7c
Investment-saving gap
Gross domestic investment 41.5 43.0 26.7 22.3 26.8
Private, including stocks 30.3 31.7 15.4 10.8 14.0
Public 11.2 11.3 11.3 11.5 12.8
Gross national saving 37.1 37.0 39.9 38.2 36.2
Private 21.4 17.0 25.1 22.5 21.7
Public 15.7 20.0 14.8 15.7 14.5
(US$ million)
Balance of payments
Trade balance 4,010 3,652 17,644 22,772 16,021
Exports 76,859 77,390 71,801 83,933 98,239
Imports 72,850 73,738 54,157 61,161 82,218
Service account balance -7,302 -8,103 -5,669 -8,456 -10,691
Current account balance -4,462 -5,935 9,532 12,606 8,201
(as percentage of GDP) -4.4 -5.9 13.2 15.9 9.4
Capital account balance 6,945 2,063 741 -7,917 -9,374
Medium and long-term 297 1,651 545 1,762 1,036
Net FDI 5,079 5,136 2,164 1,553 1,874
Short-term 4,101 -4,590 -5,260 -9,934 -9,185
Portfolio capital (including errors and omissions) -2,532 -134 3,292 -1,298 -3,099
Overall balance 2,482 -3,872 10,273 4,689 -974
Gross official reservesf27,703 21,706 26,196 30,859 29,886
Months of imports of goods and non-factor services 4.4 3.4 5.6 5.9 4.5
Total external debt (end of period) 38,628 43,840 42,900 42,522 41,514
Per cent of GDP 38.6 60.6 57.6 53.8 46.3
Per cent of exports of goods and non-factor services 41.0 63.4 48.9 43.4 36.4
Short-term external debt (per cent of total) 25.7 25.3 19.7 14.2 11.3
.. Not available.
a Based on 1987 prices.
b 1990-1995 = 2.4%;  1996-2000 = 0.9%.
c Estimates.d Defined to include currency in circulation and all private-sector deposits with Bank Negara Malaysia, commercial banks
(including Bank Islam), finance companies, merchant banks, and discount houses; excludes interplacements among these
financial institutions.
e Excluding non-financial public enterprises and short-term debt.
f Including gold.
Source: Ministry of Finance (2001a), Economic Report 2000/2001 , Malaysia;  Bank Negara  Malaysia (2000),  Annual
Report;   I M F ,  International Financial Statistics  (various issues);  and information provided by the Malaysian
authorities.Malaysia WT/TPR/S/92
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3. Among the factors probably contributing to the large drop in private domestic demand was
the negative wealth effect associated with the collapse in asset prices,3 and the impact on both
business and consumer spending of uncertainty regarding the direction of the economy.  The drop in
gross fixed investment was especially large (-43.0%) as in the rapidly deteriorating business
environment companies took steps to strengthen their cash-flow position.
4. A bright spot, however, was the improvement in net external demand, which partly offset the
large drop in private domestic demand.  Indeed, the current account experienced an unprecedented
surplus of US$9.5 billion in 1998 owing to a sharp po sitive turnaround in the trade balance.  The rise
in the trade surplus from US$3.5 billion in 1997 to nearly US$18 billion in 1998 was largely due to a
sharp fall in imports (26.5% in US$ terms), whic h was largely attributable to the slowdown in
business activities, deferment of major infrastructu re projects and weak consumer demand.  While the
U.S. dollar value of exports also declined, albeit by much less than imports, as a consequence of falls
in the prices of key exports (notably semi-conductors and electronics as well as commodities), export
volumes expanded by 1.1% in 1998.  The resilience of Malaysia's export volumes was due to the fact
that its trading partners kept its markets open throughout the crisis.  Whereas Malaysia's exports
destined for its ASEAN partners declined (by 19.2%) in 1998 as their economies contracted, those tothe European Union and the United States rose (by 4.2% and 8.3%, respectively, compared to 1997).
5. The large drop in gross fixed investment demand, together with a rise in gross national saving
resulted in national savings exceeding gross domestic investment by about 13% of GDP in 1998
instead of a shortfall previously.  At the same time, the current account moved from a deficit to a
surplus equivalent to roughly 13% of GDP in 1998.   Concurrently, the capital account surplus
narrowed further;  this narrowing can be attributed, inter alia,  to a continued increase in short-term
private sector capital outflows and a slowdown in  inbound portfolio investment owing to investors'
increased aversion to emerging markets.  This situation was compounded by a sharp drop in inbound
foreign direct investment (FDI) because of domes tic financial problems in some major investing
countries (notably Japan), global excess capacity, and continued uncertainty in the region.
6. Initially, Malaysia responded to the crisis by tightening financial policies, but with the further
worsening of the economic situation, the Government reversed its monetary and fiscal policy stancetowards the end of 1998, cutting interest rates and raising government spending in order to stimulate
the economy.  In addition, with a view to supporting the domestic financial markets, and to provide
scope for the easing of monetary and fiscal policies, temporary controls were imposed on selected
capital account transactions and the ringgit was pegged at RM 3.80 per US$.
7. The issue of whether these macroeconomic policies, especially the imposition of capital
controls, helped Malaysia to recover more quickly from the crisis has been highly debated. Indeed, at
the time the capital controls were put in place, markets both in Malaysia and elsewhere in South East
Asia appeared to have already stabilized.
4  Nonetheless, the economy did rebound as a consequence of
rising private consumption and a revival in domestic investment as well as strong export growth.
GDP grew by 6.1% in 1999 and by 8.3% in 2000.  At the same time, at the end of 2000, real output invalue terms exceeded the pre-crisis level;  how ever, per capita income was US$3,531 in 2000, still in
the order of 20% lower than the pre-crisis level.  Labour market conditions also improved
                                                     
3 After several years of spectacular gains, fuelled partly by bank credit, by the beginning of
September 1998, the Kuala Lumpur Composite Index (KLCI) had fallen about 75.5% since the end of 1996,
when the total value of stocks listed on the KLSE reached 318% of GDP.
4 Judging from offshore rates for Malaysia, and thus the interest rates faced in the open market, which
reflect exchange rate expectations, much of the pressu re had subsided prior to the imposition of controls.  By
August 1998, offshore rates had fallen to around 10%, well below the level reached at the peak of the crisis (see
Dornbusch, 2001).WT/TPR/S/92 Trade Policy Review
Page 4
significantly, with unemployment declining to 3.1% in 2000.  Inflation fell from 2.8% in 1999 to
1.6% in 2000.
8. A sustained recovery of the Malaysian economy depends not just on prudent macroeconomic
policies, but also on structural reforms.  The Asian crisis revealed weaknesses in several areas,
including in corporate structure and governance as well as in the financial system.  Accordingly, the
Government has taken steps or announced plans to restructure the corporate and financial sectors.These are in addition to a long-standing privatization programme and labour market reforms.  The
Government has also adopted measures to diversify the economy by further widening and deepening
the industrial base, enhancing the contribution of the agriculture to GDP, and by fostering the
development of the services sector.
5
9. Manufacturing's share of GDP, after declining from 29.9% in 1997 to 27.9% rebounded to
reach 33.4% in 2000 (Table I.2).  By contrast, services' share, after rising from 51.9% to 55.8% in
1998, fell to 53.4% in 2000.  The shares of agriculture, forestry and fishing;  mining and quarrying;
and construction have declined slightly during the review period.
Table I.2
Share of GDP and employment by sector, 1996-2001
(Per cent, based on 1987 prices)
1996 1997 1998 1999 2000a
Share of GDP
Agriculture, forestry and fishing 9.8 9.2 9.6 9.1 8.4
Mining and quarrying 7.7 7.3 7.9 7.2 6.9
Manufacturing 29.1 29.9 27.9 29.9 33.4
Construction 4.7 4.8 4.0 3.6 3.3
Services 50.7 51.9 55.8 55.2 53.4
     Electricity, gas and water 3.5 3.1 3.7 3.8 3.8
     Transport storage and communications 7.2 7.5 8.1 8.0 8.0
     Wholesale and retail trade, hotels and restaurants 14.9 15.0 15.6 15.1 14.8
     Finance, insurance, real estate and business services 11.0 12.2 12.9 12.9 12.5
     Government services 6.5 6.6 7.2 7.3 6.9
     Other services 7.5 7.5 8.3 8.0 7.5
Less:  Imputed bank service charges 6.0 7.0 7.7 7.7 7.7
Plus:  Import duties 4.0 3.9 2.4 2.8 2.3
Share of employment
Agriculture, forestry and fishing 17.7 16.7 16.3 15.9 15.5
Mining and quarrying 0.5 0.5 0.5 0.5 0.5
Manufacturing 26.5 26.9 26.5 27.2 27.5
Construction 9.5 9.9 8.9 8.5 8.1
Services 46.1 46.5 48.4 48.6 48.7
     Electricity, gas and water 0.8 0.8 0.8 0.8 0.8
     Transport, storage and communications 4.9 4.9 5.1 5.0 5.0
     Wholesale and retail trade, hotels and restaurants 16.2 16.3 17.0 17.1 17.1
Table I.2 (cont'd)
                                                     
5 With a view to supporting the services sector by building better institutional and physical
infrastructure, the Government released the Financ ial Market Masterplan (FMM) and the Capital Market
Masterplan (CMM), and upgraded transport infrastructure by, for example, building the Kuala LumpurInternational Airport, and upgrading facilities in the major ports and telecommunications.Malaysia WT/TPR/S/92
Page 5
1996 1997 1998 1999 2000a
     Finance, insurance, real estate and business services 4.6 4.9 4.9 5.4 5.5
     Government servicesb10.7 10.5 11.0 10.8 10.6
     Other services 8.9 9.1 9.6 9.5 9.7
a Estimates.
b Includes public administration, health, education, and defence.
Source: Ministry of Finance (2001), Economic Report 2000/2001 , Malaysia.
(2) MAIN POLICY DEVELOPMENTS
(i) Macroeconomic policies
(a) Monetary and exchange rate policies
10. Monetary policy is conducted by Bank Negara Malaysia (BNM), a statutory body overseen
by the Ministry of Finance.  During the period under review, the conduct of Malaysia's monetarypolicy has faced several challenges associated with the regional financial crisis, specifically the sharp
decline in the value of the ringgit, a severe fall in GDP, and pressure on the financial system. In 1997
and 1998, the aim of monetary policy was initially to contain inflationary pressures, but later in 1998
a more accommodative stance was adopted as a complement to expansionary fiscal policy in order to
arrest the economic contraction and promote recovery.  BNM used various instruments to achieve itspolicy objectives, including interest rate and statutory reserve ratio changes, lending directives or
guidelines, prudential measures, and, under severe economic conditions, selective exchange controls.
11. In the first half of 1997, monetary policy was intended mainly to contain domestic inflation
that was especially evident in equity and proper ty markets.  Accordingly, in April 1997, measures
were introduced to limit lending for purchases of shares and property.  Then in July 1997, as the
financial  crisis spread to Malaysia causing accelerated capital outflows and downward pressure on
the ringgit, BNM raised interest rates and interv ened in the exchange market.  BNM also raised
interest rates briefly to curb speculative attacks on the ringgit.  As the crisis became more prolonged,
interest rates were reduced to pre-crisis levels.  Towards the end of September 1997, interest rates
were adjusted upwards as inflationary expectations increased with the further depreciation of the
ringgit.  Subsequently, with signs of a severe co ntraction in domestic economic activity, declining
inflation, and an easing of downward pressure on the ringgit, the BNM began to relax monetary
policy in early August 1998.  However, in the belief that the scope for  the further relaxation was
severely constrained by concerns over its potentially adverse repercussions on the exchange rate,
particularly in the face of what the Government considered as growing speculation against the ringgit
in offshore markets, and with the economic situation continuing to deteriorate, exchange controls
were introduced in September 1998 and the ringgit was pegged at RM 3.8 per US$.  Exchangecontrols are thought to have permitted a quicker easing of monetary policy in an attempt to revive
demand.
12. The institution of capital controls in September 1998 was arguably the most important
development as regards monetary and exchange rate policies.  Their primary objective was to end
speculation against the ringgit, most of which was t hought to involve short-selling of the currency in
offshore markets.  In order to shut down offshore tr ading in ringgit, the Gove rnment confined the sale
of ringgit assets to authorized domestic intermedia ries, thereby, in effect, making offshore trading in
ringgit illegal.  Furthermore, fearing that these measures would lead to a further capital outflow and
thus depreciation of the currency, the Government prohibited foreign investors from repatriating
portfolio assets for one year, although on 15 February 1999 the BNM replaced this prohibition withWT/TPR/S/92 Trade Policy Review
Page 6
one graduated tax on the repatriated capital that entered Malaysia before that date and another
graduated tax on repatriated profits from capital entering Malaysia afterwards.  As the Government
was concerned about the impact of these controls on future capital inflows, especially FDI — upon
which Malaysia is highly dependent — the authorities attempted to ensure that the controls did not
impinge upon FDI or international trade.  Thus, investors were free to repatriate profits earned on
documented FDI;  moreover, no restrictions were imposed on foreign currency transactions forcurrent account purposes (including the provision of up to six months of trade credit for foreigners
buying Malaysian goods).  Whether the controls actually contributed to Malaysia's recovery has
sparked much debate.
6  In any event, they were gradually relaxed before being abolished in
May 2001.
13. The controls facilitated an easing of monetary policy, especially since late 1998.  With the
ringgit not being traded offshore, interest rates could be lowered without creating pressure on the
ringgit;  this facilitated not just the recovery of the economy but also financial and corporate
restructuring.  After the sharp contraction in 1998, the economy recovered to grow by 6.1% in 1999
and by 8.3% in 2000 owing to sustained external demand for Malaysia's exports and stronger
domestic demand.  However, the Central Bank predicts that growth will fall to between 5% and 6% in
2001 mainly due to the slowdown in exports to the United States (the Asian Development Bank has
forecast growth of 4.9% in 2001), even allowing for stimulative fiscal measures adopted in
March 2001.
14. Reflecting the favourable balance of payments, external reserves rose to US$30.9 billion at
the end of 1999 (equivalent to 5.9 months of imports).  But they then declined to US$29.9 billion
(4.5 months of imports) at the end of 2000, largely due to the narrowing merchandise trade surplus as
imports grew faster than exports;  external rese rves reached US$26 billion (3.9 months of imports) at
the end of June 2001.7
15. The BNM believes that a stable exchange rate regime facilitates trade and investment and that
the current exchange rate of RM 3.8 per US$ remains sustainable and consistent with Malaysia's
economic fundamentals.8  These fundamentals include a current account that is expected to remain in
considerable surplus in 2001 (at 6.8% of GNP), th e expectation that long-term capital inflows will be
sustained, the prospect of low domestic inflation, and low levels of government and external
indebtedness.9
                                                     
6 Some academic economists, notably Merton Miller, believed that the capital controls were at best
useless, if not actually harmful to Malaysia;  others, including Paul Krugman, have argued that the crisis was, inany event, about to abate at around the time Malaysia decided to make its break with economic orthodoxy.  Bycontrast, according to Kaplan and Rodrik (2001), comp ared to IMF programmes, these policies produced a
faster economic recovery, smaller declines in employment and wages, and a more rapid turnaround in the stockmarket.  In a more recent paper, Dornbusch (2001) concludes that there is no evidence of better performance
because capital controls were imposed af ter the crisis was over;  interest rates in the crisis economies, including
Malaysia, were already declining while cuts in U.S. inte rest rates were fostering a more stable global economic
environment.  Nor is there any compelling evidence that capital controls have yet had any obvious detrimentaleffects on the Malaysian economy.  However, there is also some evidence suggesting that capital controls mighthave facilitated the provision of support to selected firms (see Johnson and Mitton, 2001).
7 This is still considerably more than the internationally accepted minimum of three months cover.
8Bank Negara Malaysia online information, "The 2000 BNM Annual Report: Statement by the
Governor".  Available at:  http://www.bnm.gov.my/pa/2001/0328c.htm.
9 Whereas total (public plus private) external debt  as a percentage of GDP increased from 38.6% in
1996 to 60.6% in 1997, the ratio has since fallen, to 46.3% in 2000.  In addition, the proportion of such debt thatis short term has been reduced by half since 1996, thereby improving the maturity structure.Malaysia WT/TPR/S/92
Page 7
16. In May 2001, Malaysia and its ASEAN plus three partners reached a currency swap accord to
help protect participating countries' currencies from speculative attacks.
(b) Fiscal policy
17. Prior to the onset of the regional financial crisis, the Federal Government ran fiscal surpluses
for five consecutive years (1993-97).10  In 1998, however, as a result of the cyclical impact of the
crisis on tax revenues and increased spending intended to revive economic activity, the FederalGovernment recorded a modest fiscal deficit of 1.3% of GDP.  From 1998 to 2000, the federal budget
remained in deficit as the Government continued to support the economic recovery and took strategic
initiatives to enhance the country's competitiveness.  In addition to direct spending on infrastructure,
fiscal measures were taken to stimulate domestic demand, encourage exports, and help corporate and
financial restructuring.  Besides tax incentives, the Government set up several funds to support high-technology projects, venture capital companies, and small/medium-sized businesses as well as to
provide loans to selected sectors.  Given the potential for growth in agriculture and in services,
particularly tourism and information technology, several tax and non-tax incentives have been aimed
at improving productivity in these sectors and thereby fostering their development.  As a consequence
of these and other measures, the Federal Governme nt's fiscal deficit reached 5.3% of GDP in 2000.
18. Despite the growing fiscal deficit, public sector debt appears to be manageable.  Total federal
government debt to GDP reached 37.1% (compared to 31.9% in 1997) and the Government's external
debt amounted to 5.7% of GDP at the end of 2000;  servicing of the federal government debt
accounted for 16% of operating expenditures.  However, the foregoing figures do not reflect
contingent liabilities;
11  nor do they take account of possible off-budget assistance to certain firms
through government-linked funds and at least one state-owned enterprise.12  Furthermore,
PETRONAS, the highly profitable state-owned oil company, has major shareholdings in Proton, theMalaysia International Shipping Corp (MISC), and other firms.  However, full details of
PETRONAS's investments in other companies and its involvement in the economy were not available
to the Secretariat.
19. With the economy having successfully emerged from the crisis, the Government's attention
has recently focused on the slowdown in the U.S. economy, whose rapid growth during the 1990sprovided a large market for Malaysia's exports.  As  the economic slowdown in the U.S. together with
the continuing fragility of the Japanese economy is expected to adversely affect Malaysia's exports,
and thus its growth prospects, the Government took pre-emptive fiscal measures in March 2001 in an
attempt to maintain the economy's growth rate.  Th e package of measures constitutes an additional
fiscal stimulus of RM 3 billion in addition to the RM 28.8 billion already contained in the 2001Budget.
                                                     
10 This was also the case for state governments.
11 Government guaranteed debt was 14.5% of GDP at the end of 2000 compared with 16.0% a year
earlier.
12 In particular, the question arises of the extent to which funds accumulated by the Employees
Provident Fund (EPF), a virtually universal compulsory individual savings scheme designed to providemembers with retirement income and Malaysia's largest institutional investor, may be directed into favouredprojects whose financing would not otherwise be possible because they do not satisfy the normal market criteria.EPF funds have not only been largely invested at home, they have sometimes been used to assist troubleddomestic companies;  a recent case in point is the EPF's acquisition of around a 3% shareholding in
TimedotCom Bethad following the market's lukewarm response to the latter's initial public offering (IPO) in
2001.  Acquisition of this stake was the outcome of a partial conversion of a non-performing loan (NPL) intoshares.  The EPF's involvement in some enterprises is a sensitive issue;  reports indicate that the Prime Ministerhas reassured the trade unions that EPF funds would not be misused (see "Debts, Daim And Downturn", Far
Eastern Economic Review, August 9, 2001, pp. 42-43).WT/TPR/S/92 Trade Policy Review
Page 8
(ii) Structural policies
(a) Financial and corporate sector restructuring
20. In the wake of the Asian financial crisis and ensuing deterioration in the economic
environment and performance in 1998, the banking system and corporations encountered financial
difficulties, especially when interest rates were initially raised.13  The subsequent relaxation of
monetary policy, perhaps facilitated by selective ex change controls, resulted in lower interest rates,
which not only prompted growth in bank lendin g, but avoided a worsening of the debt-servicing
burden on companies.  This, in turn, facilitated corporate and financial restructuring.
21. When the crisis hit Malaysia, its banking se ctor faced rising non-performing loans (NPLs),
strained earnings, and declining capital.  However, the authorities took quick and concerted action to
arrest the deterioration in the banking sector by first moving to consolidate the finance companysector, the most vulnerable part of the system, in early 1998.  By mid-1998, this effort was
supplemented by a comprehensive strategy to restructure and vitalize the banking system, with the
Government creating Danaharta to acquire NPLs, and Danamodal to provide fresh capital.  The
Ministry of Finance and BNM provided Danaharta and Danamodal with their initial capital.
22. Net NPLs (based on three-month classification) reached a peak of 14.9% in November 1998;
they have since fallen, to 10.6% in April 2001.
14  In the corporate sector, steps have also been taken to
enhance corporate governance, transparency, minority shareholder protection, and proper accounting
and disclosure standards.  They include the issuance of the Malaysian Code of Corporate Governance,
increased disclosure requirements by the Securities Commission and the Kuala Lumpur Stock
Exchange, and the establishment of a Minority Shareholders Watchdog Group.  According to a study
undertaken jointly by the BNM and Danaharta, more than half of the companies to which Danaharta
has exposure have implemented or are planning to implement changes in ownership andorganizational structure, and business strategy, and to improve corporate governance.
15  Industry-wide
restructuring has also been undertaken, especially in the public transport, steel, and
telecommunications.
23. In 1998, the BNM also strengthened its supervision of the banking system through more
frequent on-site examinations by BNM supervisors and off-site surveillance.  In addition, aconsultative document was issued in 2000 containing measures that would be applied automatically to
banking institutions found to be operating in a manner detrimental to depositors' interests.
16
Furthermore, minimum capital requirements for domestic and foreign-owned banking groups were
raised by the BNM to RM 2 billion and RM 300 million (to come into effect on 1 January 2002),
respectively, in order to strengthen their capital position and thereby place them in a better position tomeet the changing demands of the economy;  as at 31 December 2000, only one domestic banking
group and five foreign institutions complied with this new requirement.
24. In order to complement Danaharta and Danamoda l, the Government also set up the Corporate
Debt Restructuring Committee (CDRC) in 1998;  ba sed on a framework involving a voluntary process
                                                     
13 The corporate debt-equity ratio in Malaysia was low by East Asian standards and the maturity of
debt was not markedly shorter than its neighbours (ADB, 1999, p. 27).
14 Based on six-month classification, net NPLs were 7.4% in April 2001.
15 Bank Negara Malaysia (2000).  The sample selection for the study was based on a cut-off of the top
20% of Danaharta's borrowers and included all the major restructuring schemes in Malaysia as well as involvingmajor corporations.
16 Bank Negara Malaysia (2000).  These measures have not been applied;  the Prompt Corrective
Measures Framework is being developed.Malaysia WT/TPR/S/92
Page 9
similar to that implemented in the United Kingdom and other countries, its purpose was to facilitate
the restructuring of large corporate loans.  The CDRC acts as a mediator between debtors and
creditors on the restructuring exercise.  As of 30 June 2001, the CDRC had succeeded in resolving
debts of 46 companies, amounting to RM 30.3 billion, out of the 75 applications received with total
debts of RM 47.2 billion.17  The majority of the 46 restructured companies are main-board listed
companies and investment holding companies.18  Excluding the 21 applications that were withdrawn
or rejected owing to lack of viability and another nine cases that were transferred to Danaharta, eight
cases (accounting for RM 9.2 billion) remain to be resolved.
(b) Financial sector reform
25. Upon signing the Fifth Protocol of the GATS, Malaysia made several changes to its 1995
GATS commitments.  For example, it bound 51% ownership in existing locally incorporatedinsurance companies by existing foreign sharehol ders that were the original owners of these
companies;  allowed the establishment of majority- or wholly-foreign-owned fund management
companies;  allowed some financial experts for selected professional purposes in each institution;  and
allowed new entry into offshore investment bankin g services.  The authorities maintain that these
changes have been fully implemented and are incorporated into Malaysia's current regulatoryframework.  In 1999, Malaysia unilaterally relaxed its regulation requiring offshore banks to lend in
foreign currencies only;  they may now lend in ri nggit, subject to certain conditions.  Since 1997, no
banking licence has been issued, except for three offshore investment banks.
(c) Privatization
26. The Government has had a privatization programme since 1983, although the onset of the
Asian crisis has slowed its progress;  indeed, the Government has bought back stakes in several
companies, sometimes at prices considerably above those prevailing in the market.
19  Thus, state-
owned enterprises continue to play an important role in the Malaysian economy, especially in the
petroleum, electricity, transportation, telecommunications, and postal sectors.  Some of these
enterprises (e.g., PETRONAS) apparently provide fi nance to each other a nd to private companies
Chapter III(4)(vii)).
(d) Measures to raise productivity
27. The Government has taken concerted action to address structural weaknesses by fostering
improvements in productivity and thereby establishing a more solid basis for future growth.
Accordingly, attention has been focused increasing ly on skills enhancement and the development of a
knowledge-based economy.  Many of the policy and implementation proposals in this regard are
contained in various plans released in early 2001.  They include increasing investment in humancapital, focusing on education and training, implementing a productivity-linked wage system, and
introducing an electronic market information system to assist labour mobility.
                                                     
17 Bank Negara Malaysia online information, "Sta tus And Statistic of CDRC Cases".  Available at:
http://www.bnm.gov.my/cdrc/statistic.htm.
18 The Kuala Lumpur Stock Exchange has two boards for listing.  Companies wishing to be listed on
the Main Board of the Kuala Lumpur Stock Exchange must, inter alia , have a minimum issued and paid-up
capital of RM 60 million;  listing on the Second Board requires a minimum paid-up capital of RM 40 million.
19 The authorities regard the purchase prices of the shares to have been reasonable given the companies'
potential and prospects.WT/TPR/S/92 Trade Policy Review
Page 10
(3) DEVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT
28. Imports and exports of goods and services we re equivalent to 106% and 117% of GDP on
average during the review period (1997-2000).  Inbound foreign direct investment (FDI) typically
accounts for between one quarter and one third of private investment in each year, while the stock of
inbound foreign direct investment (FDI) currently  amounts to nearly half of GDP.  Moreover,
according to a globalization index used in a recent independent survey, Malaysia is in the top 20 ofthe most globalized economies.
20
(i) Composition of trade
29. Most of Malaysia's merchandise trade involves manufactured goods (Chart I.1, Tables AI.1
and AI.2)).  In 1999, office machines, telecommunications equipment and other electrical machines
accounted for 57.7% of Malaysia's exports and 47.2% of it imports, considerable higher than theircorresponding shares in 1996.  Thus, just as the Malaysian economy has greatly benefited from the
strong growth in demand elsewhere in the world for electronic products, it is also extremely
vulnerable to any global slowdown in the demand for such products.
(ii) Direction of trade
30. Throughout the review period Japan, the United States, Singapore and the EU have been
Malaysia's main trading partners;  together they accounted for nearly two-thirds of its imports and
exports in 1999 (Chart I.2, Tables AI.3 and AI.4).  Between 1996 and 1999, however, the United
States' and EU's shares of exports rose while those of Japan and Singapore declined.  Given that the
United States and Japan account for roughly one-third of its exports, the sharp slowdown in the
United States together with the continuing bleak economic outlook in Japan in 2001 is expected to
dampen prospects for Malaysia's exports for the year.
31. Whereas ASEAN's share of Malaysia's imports rose from 19.9% in 1996 to 23.6% in 1999, its
share of Malaysia's exports declined from 28.5% in 1996 to 23.8%.  This suggests that the ASEAN
preferential trade provisions, notably the AFTA, might have led to some trade diversion as far as
Malaysia's imports are concerned, although ASEAN's increased share of Malaysia's imports (just like
ASEAN's falling share of Malaysia's exports) may also be due to the depreciation of ASEAN
countries' currencies in the wake of the Asian financial crisis.
                                                     
20 Developed by A.T. Kearney and Foreign Policy  magazine, and applied to 50 developed countries
and key emerging economies, the Globalization Index en compasses several key indicators:  globalization in
goods and services is measured through the share of international trade (exports of goods and services plusimports of goods and services) in gross domestic product (GDP), as well as the convergence of domestic pricesand world prices.  Financial globalization is measured through income payments and receipts, the inflow and
outflow of foreign direct investment, and the inflow and outflow of portfolio capital, all measured as a share ofGDP.  The globalization of personal contact is measured wi th international tourists and travellers as a share of
population, minutes of incoming and outgoing international telephone calls per capita, and transfer payments
and receipts as a share of GDP.  Finally, three elem ents comprise the Internet connectivity indicator—the
number of Internet users, the number of Internet hosts, and the number of secure servers, all measured on percapita basis. See "Measuring Globalization", Foreign Policy , January-February 2001 [Online].  Available at:
www.foreignpolicy.com/issue_janfeb_2001.Malaysia WT/TPR/S/92
Page 11
Chart I.1
Merchandise trade by product, 1996 and 1999
1996 1999
(a)    Ex ports 
Total: US$78,314.9 million
(b)    Im ports 
Total: US$77,904.7 million Total: US$64,939.2 million
Source :  UNSD, Comtrade database (SITC Rev.3).Per cent
Non-electrical
 machinery
3.4
Office machines & 
telecommunication equipment
44.7Other electrical 
machines 
4.4Textiles & 
clothing  4.7
Mining
9.3
Other semi-
manuf.  5.1
Office machines & telecommunication 
equipment
30.6Textiles & 
clothing  1.9
Other elec.
 machines
7.6Transport  
equipment
8.1Other
4.8Agriculture
6.6
Iron & steel
4.4
Chemicals
6.8Total: US$84,511.9 millionMining  
7.9
Office machines & telecommunication 
equipment
52.4Non-electrical 
machinery
2.8Other electrical 
machines
5.3Other 
consumer
 goods
5.5
Other semi-
manuf.  4.3Iron & steel
3.3Agriculture
6.9
Other electrical 
machines
8.3Chemicals
   7.5
Office machines & 
telecommunication equipment
38.9Textiles & 
clothing  1.8
Transport equipment
5.4Other
3.2Agriculture
13.9Agriculture
10.9
Non-electrical 
machinery
13.8Non-electrical 
machinery
9.2Mining
5.8
Manufacturing
82.8Mining
6.3
Manufacturing
83.7Manufacturing
75.7Manufacturing
80.3Textiles & 
clothing   4.0
Transport equip.   1.9
Other semi-
manuf.  4.6Chemicals  3.2Iron & steel   0.6Other
1.1Other 
consumer 
goods
6.0
Transport equip.
2.8
Other semi-
manuf.  5.9Chemicals  3.1Iron & steel  0.7Other 
0.9
Other 
consumer 
goods  
4.6Other 
consumer
goods
5.0WT/TPR/S/92 Trade Policy Review
Page 12
Chart I.2
Merchandise trade by partner, 1996 and 1999
1996 1999
(a)    Ex ports 
Total:   US$78,314.9 million Total:   US$84,511.9 million
Total:   US$77,904.7 million Total:   US$64,939.2 million
Source :   UNSD, Comtrade database (SITC Rev.3).Thailand  
4.1Singapore
20.4
Hong Kong, China 
 5.9 Chinese 
Taipei
4.1Africa  1.0United States
18.2
Japan
13.5EU(15)
13.7
Thailand  3.3Singapore
16.5
Hong Kong, China
4.5 Chinese 
Taipei
4.5Other ASEAN
4.1United States
21.9
Japan
11.6EU(15)
15.7
Other America
1.9
Thailand  
3.3
Other East Asia
  39.6
China  2.4United States
15.6
Japan
24.7EU(15)
14.5
Korea, Rep. of
5.2Singapore
13.4
Chinese 
Taipei
5.0Other America
     1.5
China 
 3.3
Korea, Rep. of
5.3Oceania  2.8United States
17.6
Japan
21.0Singapore
14.1
Chinese 
Taipei
5.4(b)    Im portsASEAN
28.5
Other East 
Asia  26.3
ASEAN
19.9
Other East Asia
37.5Per cent
Oceania 1.9
Korea , Rep. of  3.1Middle East  2.0Other Europe
  0.9Other America
2.0
South Asia  2.8Africa  1.0Middle East  
1.8Other Europe
  1.1Other America
2.0
Oceania  2.8
South Asia  3.4
Other Europe
2.5
Other  2.6
Oceania  3.4Other Europe
   2.4EU(15)
11.7
Other  2.9Thailand  
3.8Other East
Asia  29.0
Other ASEAN 
 3.9China  2.4ASEAN
23.8
China  2.7
Korea , Rep. of  3.0
Hong Kong, China 
      2.3Hong Kong, China 
 2.5
Other ASEAN 
 0.5Other ASEAN 
 3.1Indonesia 
2.7
Philippines
2.5ASEAN
23.6Malaysia WT/TPR/S/92
Page 13
(iii) Trends in inbound and outbound foreign direct investment
32. In 2000, foreign investors accounted for roughly two thirds of investment applications
received for the manufacturing sector, which totalled RM 46.2 billion.  Data provided by the
Malaysian authorities indicate that, in terms of actual investment, the manufacturing sector accounts
for about 40-60% of total foreign direct investments;  there is also significant foreign investment in oiland gas (20-30%) and the services sector, particularly in financial and business services, ports, and in
the Multimedia Super Corridor.  Between 1996 and 2000, total approved FDI in manufacturing
projects in Malaysia increased from RM 17.1 billion to RM 19.9 billion.  During this period, the
United States' share of total inbound FDI more than doubled from 17.0% to 37.7% and EU's share
more than quadrupled from 5.1% to 24%, making these two Malaysia's main sources of FDI (Chart
I.3).  They overtook Japan and Singapore, whose respective shares fell by nearly one half and by two
thirds.  Switzerland's share of FDI also fell, from 11.1% in 1996 to 0.5% in 2000.  The sharp fall in
other ASEAN countries' share, from 28.3% to 9.4%, suggests that there has been little, if any,
diversion of FDI owing to ASEAN's preferential trade and investment arrangements;  as in the case of
trade, any possible diversion of FDI was probably swamped by the effects of the Asian crisis.
Per cent
FDI in approved manufacturing projects only.
Malaysian Industrial Development Authority online information.   Available at:  http://www.mida.gov.my/
publications/ stats9600/Tab12.html.Chart I.3
Foreign direct investment by origin, 1996 and 2000
Note:
Source :Other East  0.6
Japan
27.0Singapore
27.9
Switzerland
11.1EU15
5.1East Asia
63.8Korea, Rep. of  3.8
Chinese Taipei  4.5
Total: RM 17.1 billion Total: RM 19.9 billion 2000 1996
United States
17.0Singapore
9.0
EU15
24.0Chinese Taipei  4.6
United States
37.7Hong Kong, China  1.7East Asia
34.1Other East Asia  0.7Japan
14.5
Korea, Rep. of   3.6
Other 3.1 Other 4.1
33. Net outbound FDI, which amounted to US$3.8 billion in 1996, declined to US$2.7 billion in
1997 and to US$0.9 billion in 1998.  Reflecting improved domestic corporate performance, outbound
FDI increased to US$1.4 billion in 1999 and to US$2 billion in 2000.  In terms of destination, the topfive recipient countries of Malaysia's outbound FDI since 1996 were Singapore, the United States, the
United Kingdom, Indonesia, and Hong Kong, China.  These accounted for about 54% of Malaysia's
total outbound FDI during the period 1996-2000.WT/TPR/S/92 Trade Policy Review
Page 14
(4) OUTLOOK
34. Malaysia is a trading nation, with exports and foreign direct investment playing an important
role in its economy  The recent sharp slowdown in  the U.S. economy, and Japan's further weakening
pose major challenges for Malaysia's trade and investment outlook and thus to Malaysia's short- and
medium-term economic prospects.  Indeed, the Central Bank predicts that growth will fall to between
5% and 6% in 2001, mainly due to the slowdown in exports to the United States (the AsianDevelopment Bank has forecast growth of 4.9% in 2001), notwithstanding stimulative fiscal measures
adopted in March 2001.
35. Another major challenge looming on the horizon is the impending accession of China to the
WTO.  Not only is China a formidable competitor in Malaysia's export markets, it is also competes
strongly with Malaysia for FDI.  Indeed, China has recently attracted a lion's share of inbound FDI in
the region.
36. The Government has made considerable progress in addressing structural weaknesses that
became more evident during the Asian crisis, by promoting corporate and financial restructuring.
Nonetheless, there are several long-standing barriers to trade, and particularly to foreign investment,
that still constitute potentially important impediments to Malaysia's sustained recovery from the crisis.A more liberal trade and investment regime could also contribute greatly not just to a sustained
economic recovery, but also to Malaysia's long-term economic development.