LEADING INDICATORS

"There are unmistakable signs that the Malaysian economy is recovering," says Patrick Tan, senior investment analyst for ABN-Amro Asia Equity Research in Kuala Lumpur. "Imports are up, showing that consumption is increasing and that people are filling up their inventories. Second, we see consumer confidence improving, with car sales, always a good indicator of that, up significantly. Third, both public and private spending are beginning to gather some momentum." The turnaround in numbers certainly gives grounds for optimism. Imports grew around 2.5% in dollar terms in April year-on-year, recording their first increase in nine months. Sales of new passenger cars hit 21,080 in April against September's 12,883. Bank lending edged up to an average $1.81 billion per month in the first quarter from $1.36 billion in the same period last year. And energy use, another sign of recovery, is up 14% from September.

Government spokesmen also like to point to the Kuala Lumpur Stock Exchange as a sign that the good times are back. The KLSE's composite index has shot up to over 750 since hitting a low of 262.7 in September last year. And perhaps sweetest of all, when Malaysia launched a $1 billion sovereign bond at the end of May - the first time Kuala Lumpur directly tapped international investors since horrifying them last September by flouting economic orthodoxy and imposing currency and exchange controls - the issue was three times oversubscribed. "People have accepted that our economy has turned around," Mahathir crowed after the launch. "They are confident about the future of Malaysia and this is why they are willing to put money in the country."

If only it were that simple. Yes, the consensus is that Malaysia's economy has started to turn. But not all the positive signs are as auspicious as they seem. Take the oversubscribed bond issue. At issue, it was priced to yield 3.3 percentage points above U.S. Treasuries, when South Korean issues were trading around 2.4 percentage points above. Market analysts say that Kuala Lumpur may have offered the generous price in order to move the bonds in a difficult market (which at that time was nervous about Latin America and U.S. interest rates). Either that, or investors may have felt Malaysia was not as far along the reform road as South Korea. The stock market, too, looks to some like it has been pumped up by government-controlled pension funds and rah-rah coverage in the tame local press. "This is window dressing," says academic and government critic K.S. Jomo, who accuses the authorities of engineering the rally to pave the way for elections. And Kuala Lumpur's market capitalization in dollar terms remains 27% below pre-Crisis levels, compared to just 9% for Thailand and 5% for Seoul.

The state of the real economy also remains foggy. While some indicators have turned up, gross domestic product shrank 1.5% in the first quarter compared to the same period last year. (It tanked 6.2% in 1998.) GDP is expected to stop shrinking in the second quarter and may turn up after that, but part of any positive number will be due to the low base etched by 1998's sad performance. Much of the rest will be because of herculean government spending, such as the multi-billion-dollar administrative complex in Putrajaya that the government will move into this month. "Fiscal stimulus can temporarily lift GDP growth but it has little impact on consumer confidence," says Robert Rountree, regional strategist at Prudential-Bache Securities in Hong Kong. "If consumers are worried about jobs, they won't spend as fast." And the public is still skeptical, says James Wong Wing-Ong, a former opposition parliamentarian turned newspaper columnist. "People ask: 'Okay, if the economy is recovering, why are college graduates still driving taxi cabs?'" So economists remain confused, with forecasts for 1999 GDP growth ranging from -2% to +3%.

For all the carping, progress has been made. "Malaysia deserves credit for restructuring and recapitalizing its banking sector," says Christopher Wood, a strategist for ABN Amro Asia in Hong Kong. What nags is all that remains undone. Like corporate restructuring. "All the corporates are still sitting it out and aren't being dragged into the water screaming and kicking as they are elsewhere in Asia," says Rountree. Labor costs are tending upward when they are falling in the rest of the region. And foreign investment, despite the billion-dollar bond, remains sluggish compared with what is going into other Crisis-hit nations. Economist Manu Bhaskaran of SG Securities Asia is bullish about Malaysia's short-term prospects, expecting GDP to grow 2.5% in 1999. But he is concerned about the long term. "Lack of cost adjustments, lack of corporate restructuring and lack of policy mindset are the three biggest worries going forward," he says. Finally, there is politics, which have been unsettled since Mahathir sacked his deputy Anwar Ibrahim in September - sparking off street protests and fostering a stronger opposition to Barisan. "It is the only place in Asia where the political drama hasn't played itself out," says Wood. Only elections will settle the minds of investors on that front.

All of which makes things rather tricky for the PM. On the one hand, he wants to talk up the economy and take credit for it, as any politician heading into elections would. On the other, he doesn't want to talk it up so much that the public starts asking for a payback, which the economy may not yet be able to afford. "The working classes who were asked to cut back or to take a wage freeze now want their old salaries back," says Wong. "So the government is in a bit of a mess when it says the recovery is on." Master politician that he is, Mahathir is spinning both sides of the story to his advantage. "If we have a hung Parliament and no strong party to rule, then the good life [the public] are enjoying will no longer be there," he said last week at a training camp for youth members of Barisan's dominant party, the United Malays National Organization. "In fact, they will suffer economically, socially and politically." UMNO-led Barisan may have to yield some of its five-sixth majority in Parliament in the next elections. But with a reminder of his achievements and a warning of what may happen without his hand at the tiller, Mahathir is getting the voters ready.

- With additional reporting by Assif Shameen