Success of the Malaysian experiment

                  MY intention is to present a broad picture of the state of Malaysia's economic
                  and financial situation. In 1997-98, the economy experienced a trauma so
                  devastating that even with recovery from the current 2nd quarter, the absolute
                  size of real gross national product (GNP) this year will remain at about the level
                  in 1996.

                  But in US dollar terms, because of the 50% devaluation of the ringgit, it will be a
                  third smaller. It is as if we had lost two years of our lives just living through this
                  crisis.

                  Imagine if you will, the trauma for the US in the event the US dollar suddenly
                  devalued against the yen by 50% (from 120 to 80) and falling and, at the same
                  time, the Dow and the rest of the New York equity market fell 80% leading to a
                  loss in market capitalisation of some US$10.5 trillion or 1.2 times the size of
                  your current GNP.

                  In Malaysia's case, the stock market capitalisation loss was RM685bil or a loss
                  in quoted equity wealth equivalent to 2.5 years GNP.

                  Imagine if you will, the disruptive impact that a shock of such vast magnitude
                  can exert to destabilise the political, economic, financial and social fabric of
                  everyday life.

                  I just wanted to give you, at the outset, a feel of the gravity of the impact and
                  the pervasiveness of its consequences.

                  After two difficult years, much is now history. Fortunately, we did emerge early
                  enough leaner but wiser, certainly more resilient.

                  Let me make a number of observations.

                  * One: The worst is now behind us. We are not yet out of the woods but we are
                  by no means floating either. The recovery you heard and read about is real. We
                  do see the key indicators moving in the right direction and more important we
                  feel the "fresh air" blowing through.

                  Each successive set of key macro economic indicators tell a consistent story
                  of recovery - indeed, rather robust growth numbers from the second quarter, and
                  early third quarter data appears to point in the direction of continuing recovery.

                  Data on income and wealth, value added production, spending as well as the
                  demand for and supply of money have all begun to come together to tell a
                  coherent story of gathering strength in the growth process.

                  Indeed, the leading, coincident and lag indicators now suggest that the
                  emerging recovery is sustainable. Most important has been the return of
                  business confidence, of investors confidence and of late, consumer confidence.

                  Taking stock at mid-year, 8 consecutive quarters of trade surplus arising from
                  persistently strong export growth have pushed the current BOP surplus to
                  exceed 12% of GNP. So much so that there is now enough international
                  reserves to finance 7 months of imports at a time when the nation remains
                  highly liquid, with a national liquidity ratio (relating these reserves to short debt
                  plus principal repayments due within a year) of about 3, one of the highest in
                  the world.

                  * Two: Malaysia's approach to recovery is by all counts unorthodox, using a
                  combination of fiscal pump priming and easy monetary policy working within a
                  new framework of a fixed exchange rate regime and supported by very selective
                  capital control measures to deal decisively with volatile short-term capital flows.

                  Within a year, this experiment with what I like to call pragmatic "free market
                  Keynesianism" (markets are good but not infallible; hence, pragmatic) has
                  achieved for now what the policymakers had set out to do, viz to re-establish
                  stability and instil confidence, and to get the economy moving again.

                  At the same time, the pre-requisite breathing space was realised through the
                  pragmatic implementation of a "soft system" of selective exchange controls.

                  Within 6 months, the controversial measures were essentially lifted and
                  replaced by an exit levy on the repatriation of capital gains arising from portfolio
                  equity investments.

                  Bear in mind that the ringgit was at no time at risk of becoming inconvertible.

                  Today, all controls have been lifted save for two major restrictions: first, in order
                  to effectively maintain a credible fixed exchange rate regime, lending by
                  non-residents in ringgit is disallowed; and second, continuing with the
                  time-tested prudential rule which discourages external borrowing to fund the
                  purchase of shares and property development. What is left in exchange control
                  today is really no big deal!

                  * Three: Contrary to most expectations, the freedom of action accorded by the
                  unconventional public policies was put to good use, viz to recapitalise and
                  reform the banking system and to critically restructure the corporate sector.

                  Compared with the IMF wards in East Asia, the 4-prong strategy appears to be
                  working well - indeed, well ahead of schedule.

                  First, to consolidate and rationalise the banking sector into 6 large and strong
                  universal banking groups; second, to use a special purpose vehicle
                  (Danamodal) to assist banks to recapitalise using essentially domestic
                  resources; third, to use an asset management company (Danaharta) to acquire
                  and manage banks' NPLs; and fourth, to provide a central framework for
                  voluntary debt restructuring (especially for viable businesses facing temporary
                  cash flow problems) through a Corporate Debt Restructuring Committee
                  (CDRC).

                  Within a year, this single minded commitment to reform was pushed hard to
                  yield results.

                  * Four: With bank reform, the new financial architeeture expected to emerge in
                  Malaysia will have at its heart a core of 6 large, strong and well capitalised and
                  managed banking institutions to spearhead development in an environment of
                  efficiency and competition. At the same time, these institutions are expected to
                  help: (i) broaden and deepen financial intermediation and markets; and (ii)
                  accelerate the development of an active bond market in all its aspects to
                  provide viable new avenues and mechanisms for the intermediation of funds and
                  risks, thereby enhancing badly needed secondary market liquidity with
                  immense multiplier benefits to national development.

                  Herein lies the challenge for American financial institutions to work with
                  Malaysian banks through smart pannerships, strategic alliances, transfer of
                  expertise and technology, and minority strategic investments (with
                  management leadership if needs be).

                  The core banks will need expertise, managerial skills, technology, and global
                  and regional networking to succeed in their mission.

                  Indeed, their growing size and large appetite for new capital offers unique
                  opportunities to the US; banks interested in a presence in Malaysia ahead of
                  WTO's next round.

                  The area which should attract particular interest must be the growing capital
                  market.

                  Here, the field is wide open to investment banks in particular since the
                  domestic market for medium to long-term private debt securities (PDS) and
                  securitisation is very much in its infancy.

                  Opportunities abound to structure, issue, underwrite and place issues as well
                  as invest in them, including assisting the 6 core banks in making an active
                  secondary market in these bonds.

                  The next step must be to seize the opportunities.

                  To conclude, I see a sound, progressive and resilient banking structure
                  emerging from the throes of the recent crisis. This augers well for the future.