PRIME Minister Datuk Seri Dr Mahathir Mohamad's call to                                                                                               
Malaysians to be prepared for a worldwide deflation and to                                                                                            
find ways for Malaysia to insure itself against it is timely                                                                                          
advice.                                                                                                                                               
                                                                                                                                                      
Our Prime Minister attributes the general meltdown of the                                                                                             
worldwide economy to the activities of the currency traders                                                                                           
and stock market-raiders, which have wiped out high growth and                                                                                        
wealth creation of several vibrant economies.                                                                                                         
                                                                                                                                                      
The occurrence of a global meltdown is a strong possibility as                                                                                        
some parts of the global economy are already showing signs                                                                                            
that could dampen growth.                                                                                                                             
                                                                                                                                                      
The American economy, according to Federal Reserve chairman                                                                                           
Alan Greenspan, "continues to perform in an outstanding                                                                                          
manner" using "ample flow of capital to business and                                                                                        
households."                                                                                                                                     
                                                                                                                                                      
Greenspan further added that "sometimes moderation in economic                                                                                   
growth, however, might be required to sustain expansion".                                                                                        
                                                                                                                                                      
The US economy expanded at a 3.7% annual rate in the third                                                                                            
quarter of 1998 and economic analysts predict growth to                                                                                               
continue through the first half of 1999 at a rate of at least                                                                                         
one to two per cent.                                                                                                                                  
                                                                                                                                                      
However, this growth will be subject to the vagaries of the                                                                                           
economies of other major trading partners of the United States                                                                                        
namely Latin America, China, Japan and Asia.                                                                                                          
                                                                                                                                                      
The Dow Jones index, enjoying a historical high, may be                                                                                               
plagued by contagion effects that may spill over froth Latin                                                                                          
America and Asia.                                                                                                                                     
                                                                                                                                                      
Any substantial decline in the Dow Jones would trigger an                                                                                             
outflow of hedge funds and capital flow. In such an uneventful                                                                                        
Dow Jones meltdown, mutual funds, pension funds and social                                                                                            
security funds with trillions of dollars will be wiped out.                                                                                           
                                                                                                                                                      
But what is most important is that while the US economy is in                                                                                         
a period of robust growth, nothing has changed fundamentally.                                                                                         
                                                                                                                                                      
Its long-run growth rate has not accelerated, productivity has                                                                                        
not risen and the structural unemployment rate has fallen by                                                                                          
one percentage point.                                                                                                                                 
                                                                                                                                                      
Come the next recession, Greenspan's triumphalism will seem                                                                                           
silly.                                                                                                                                                
                                                                                                                                                      
From the United States, let us look at Japan's financial mess.                                                                                        
Japan's economic sluggishness is souring life at home and                                                                                             
setting off alarm abroad.                                                                                                                             
                                                                                                                                                      
Scandal after scandal has revealed shocking abuses: unethical                                                                                         
banking practices, illegal deals between financial                                                                                                    
institutions and politicians, and strong-arm tactics of                                                                                               
organised crime.                                                                                                                                      
                                                                                                                                                      
Moreover, Japan's financial sector is swamped by a                                                                                                    
mind-boggling array of bond debts and underfunded pension                                                                                             
liabilities amounting to US$1.5tril.                                                                                                                  
                                                                                                                                                      
Tokyo promises economic stimulus and deregulation, but the                                                                                            
results are disappointing. Resolving Japan's banking crisis                                                                                           
and moderating the strength of the yen will be fundamental to                                                                                         
pulling the economy out of its worst post-war recession and                                                                                           
bringing respite to the global economy.                                                                                                               
                                                                                                                                                      
The Brazilian financial crisis increases the possibility that                                                                                         
the country and the Latin American region will plunge into                                                                                            
recession and add to the global gloom this year.                                                                                                      
                                                                                                                                                      
The Brazilian real has fallen almost 30% to the US dollar,                                                                                            
leading to capital flight with the foreign reserve declining                                                                                          
to US$42.6bil in October 1998.                                                                                                                        
                                                                                                                                                      
With an external debt of US$228bil as at June 1998, the                                                                                               
capital flight is aggravating the debt repayment commitments.                                                                                         
                                                                                                                                                      
If the Brazilian crisis gets worse, it is likely to adversely                                                                                         
affect the US stock market.                                                                                                                           
                                                                                                                                                      
Under the current scenario of an economic meltdown coupled                                                                                            
with panic-stricken markets, we might see Europe and the                                                                                              
United States joining the rest of the world in a spiral of                                                                                            
falling output, inflationary pressures, rising structural                                                                                             
unemployment and social problems.                                                                                                                     
                                                                                                                                                      
Under conditions of imminent global deflation, how can our                                                                                            
economy survive the crisis?                                                                                                                           
                                                                                                                                                      
In September 1998, Malaysia imposed controls on capital flows                                                                                         
to unhook Malaysia from the world economy and currency                                                                                                
speculators.                                                                                                                                          
                                                                                                                                                      
The exchange control has provided relief and shown indications                                                                                        
of an economic recovery.                                                                                                                              
                                                                                                                                                      
Substantial sums of monies parked overseas have returned home                                                                                         
and, subsequently, interest rates have fallen. The increase of                                                                                        
the stock market capitalisation by RM220bil in five months and                                                                                        
a trade surplus of RM99.4bil last December are positive signs.                                                                                        
                                                                                                                                                      
However, against this backdrop of a positive scenario, the                                                                                            
Malaysian industrial production index fell sharply by 11.5% in                                                                                        
November, Malaysian GDP contracted 8.6% in the third quarter,                                                                                         
and applications to set up new manufacturing projects have                                                                                            
declined almost 50%.                                                                                                                                  
                                                                                                                                                      
The Government must address the issue of foreign investor                                                                                             
confidence and show a clearer commitment to reform.                                                                                                   
                                                                                                                                                      
It is inevitable the Government needs to encourage better                                                                                             
disclosure, corporate governance and legal framework on which                                                                                         
to build a sound functioning banking and credit environment.                                                                                          
                                                                                                                                                      
The pillars of restructuring framework, including Danaharta                                                                                           
and Danamodal, represent a solid foundation in undertaking                                                                                            
reforms. The manner in which these instruments conduct their                                                                                          
recapitalisation asset purchase and debt restructuring is                                                                                             
critical and must be in conformity with the best management                                                                                           
practices.                                                                                                                                            
                                                                                                                                                      
The cardinal principle in the restructuring procedures is                                                                                             
emphasis on stronger prudential guidelines, intensified                                                                                               
supervision of financial institutions and financial                                                                                                   
disclosure.                                                                                                                                           
                                                                                                                                                      
However, there appears to be relaxation of prudential                                                                                                 
standards and disclosure requirements.                                                                                                                
                                                                                                                                                      
There is delay in the revelation of massive losses by certain                                                                                         
banks, and information on the utilisation of proceeds of                                                                                              
rights issues of certain public listed companies is not                                                                                               
forthcoming.                                                                                                                                          
                                                                                                                                                      
These policy reversals have sent wrong signals to markets and                                                                                         
fuelled investors' perceptions or policy unpredictability a                                                                                           
strong deterrent against foreign and domestic capital in all                                                                                          
forms.                                                                                                                                                
                                                                                                                                                      
Finally, the Government's principal goals of averting further                                                                                         
economic stress and achieving a rapid recovery are                                                                                                    
appropriate.                                                                                                                                          
                                                                                                                                                      
As a prerequisite for sustainable long-term growth, highest                                                                                           
priority must be accorded to structural reforms and the                                                                                               
implementation of a comprehensive financial reform plan,                                                                                              
incorporating Stock Exchange listing criteria for foreign and                                                                                         
local firms, creating a civil right of action for insider                                                                                             
trading, comprehensive securities regulation, maintaining                                                                                             
market surveillance of trading, improving protective                                                                                                  
mechanisms of minority shareholders through transparency and                                                                                          
disclosure requirements and enforcement of commercial fraud                                                                                           
offences.