TITLE : ECONOMIC REPORT 1999/2000. (VOLUME 28).

MINISTER OF FINANCE MALAYSIA

PREFACE

The Malaysian economy has recovered from the severe contraction experienced in 1998. The recovery was largely the result of a series of measures including the adoption of an expansionary fiscal policy, an easing of monetary policy as well as the adoption of selective exchange controls since 1 September 1998 to insulate the Malaysian economy from externally generated risks and vulnerabilities in order to restore stability, revive economic activities and strengthen the resilience of the economy. When we instituted selective exchange control measures, we were severely reproached for being inward looking and unorthodox because we adopted an approach that did not comply with conventional economic wisdom. However, we persisted in our approach despite the criticisms as we believed that the special circumstances prevailing in our economy called for a different policy prescription.

We have come a long way in moving our economy ahead, beyond the crisis. The economy has not only recovered from the deflationary impact of the regional financial crisis but performed better than we had initially expected. Real Gross Domestic Product (GDP) has recovered with an annual growth of 4.1% in the second quarter of 1999 and is poised to register even higher growth in the second half of the year. For the whole of 1999, we should be able to record a real GDP growth of 4.3%. The turnaround in real GDP growth has been accompanied by a significant strengthening of macroeconomic fundamentals. The balance of payments, boosted by the stronger volume off-take in exports, recorded a significantly larger surplus, and this has contributed to the significant increase in the nation's external reserves. The economic recovery has been achieved in an environment of low inflation and improvirig employment prospects.

Investor confidence has also been restored as stability returns to the financial markets, following the imposition of selective exchange controls, improvement of economic fundamentals and the introduction of measures to strengthen the banking system. The benchmark index of the Kuala Lumpur Stock Exchange and market capitalisation have more than doubled since 1 September 1998, resulting in a positive wealth effect for the economy. This coupled with higher disposable income and a prevailing regime of low interest rates has led to a recovery in private consumption, lending further support to the impact of the fiscal stimulus already underway in reviving the growth of the economy. All these positive developments have broadened the base of the economic recovery and provided a stronger foundation for the economy to return to the path of strong and sustainable growth in the next millennium.

We are heartened by the progress we have achieved thus far but we remain vigilant to the risks prevailing in the international environment that could have adverse consequences for the economy if instability returns to the global financial markets. Given the current lack of speed and urgency to address the reforms needed in the international financial architecture, we need to continue to protect our interests and be committed to the reforms we have so boldly instituted and implemented during the crisis to increase resilience to external shocks Recognising that there remains no room for complacency, the commitment of all rakyat is required to ensure the sustainability of growth in the near and medium term.

This Economic Report is the 28th volume published by the Ministry of Finance in conjunction with the presentation of the 2000 Budget. l hope this Economic Report will serve to provide a comprehensive narration of the performance of the Malaysian economy in 1999, prospects for the year 2000, the issues and challenges we have faced in managing and overcoming the adverse impact of the crisis and the policy measures introduceiby the Government in engineering the recovery. In this regard, I would like to take this opportunity to record my appreciation to all segments of the Malaysian society, both the private and public sectors, for the support and confidence that they have placed in the Government's approach and pragmatism in addressing the crisis. I believe that. with your continued support, we can together look forward to a higher plane of economic development in the new millennium.

KUALA LUMPUR 29 October 1999

DAIM ZAINUDDIN