Malaysia: Beyond the hype

Booming headlines in Malaysia's mainstream press assert that the economy, which shrank by an officially estimated 6.7% in 1998, is now firmly on the road to recovery. Car sales, exports and the stockmarket are surging, readers are told, thanks largely to a home-grown reflationary strategy based on low interest rates, strong public spending and the curbs imposed last September on disruptive capital flows. The confidence of foreign investors has been regained too, the papers say, echoing official claims that a US$1bn sovereign bond issue floated in late-May was 300% oversubscribed. But the local media have long pandered to prime minister Mahathir Mohamad's government, and headlines only ever tell part of a story.

There are undoubtedly some signs of a revival, yet there are also good reasons to doubt it will take firm hold. Foreign investors, the source of much of Malaysia's rapid expansion in recent years, are far less bullish than the spin-doctors pretend, notes the EIU's fortnightly newsletter, Business Asia. Flawed fundamentals The government's forecast of 1% GDP growth this year (the EIU still expects negative growth, of 2.7%) is largely premised on an anticipated recovery in local demand fuelled by the artificially low interest rates and plentiful liquidity. Yet despite an abundance of cheap funds, credit growth remains sluggish. With a domestic debt to GDP ratio of some 170%--one of the highest in the world--consumers and potential local investors are still as reluctant to borrow as recession-hit banks are to lend. While laudable in some respects, the increasing thriftiness of Malaysians-- gross national savings reached a record 41.2% of GNP last year--also betrays a fear of the future.

"Look at the US. Its savings rate is almost zero because Americans' confidence in their economy is supremely high", argues one Kuala Lumpur-based expatriate executive. Much of the manufacturing sector, which accounts for more than one-third of national output, is suffering from high inventories, excess capacity and subdued demand. While exports are trending upwards, the imports on which industry in Malaysia is heavily dependent will have to do likewise, and for a prolonged period, if a sustainable recovery is to be more than wishful thinking. The government is resisting pressure from importers for a revaluation of the M$3.8:US$1 exchange-rate peg set nine months ago to underpin the capital and currency controls, implicitly acknowledging that exports would be less than competitive without an undervalued currency.

The authorities have won praise for their efforts to sanitise the previously profligate financial system. Official agencies are buying up banks' non-performing loans and the assets supporting them, usually at hefty discounts, and recapitalising ailing institutions. Capital market regulators have approved measures to enhance transparency and protect minority shareholders, and say more are in the pipeline. But with the past excesses of wayward tycoons and bank chiefs all but going unpunished, suspicions that the stiffer legislation will not be rigorously enforced abound. In the stockmarket, the steady rise in stock prices over recent months is primarily attributable to the intervention of state-controlled institutional funds and local retail players rather than any renewed interest on the part of overseas investors.

The latter remain wary, despite the relaxation in February of arguably the most brutal of the capital controls: a one-year ban on the repatriation by foreigners of their investments in Malaysian securities. Incentives to encourage foreign direct investment (FDI), including the suspension until end-2000 of restrictions on overseas equity holdings in new export-oriented manufacturing projects, have likewise met with a muted response. The government approved FDI worth only M$1.32bn (US$347.4m) in January-March, compared to M$12.94bn in the whole of last year. Moreover, not all authorised projects are implemented, especially in crisis periods (official data on realised investments are not publicised). And despite the government's preference for capital-intensive, high-technology projects, the lion's share of recent approvals was for heavy industrial schemes such as oil refineries and petrochemical plants. The value of approved foreign and domestic investment in the key electronics and electrical sectors was trailing badly at M$1.54bn (US$405.1m) in January-September 1998 as against M$6.22bn in 1997 and M$13.06bn in 1996.

The value of FDI applications, perhaps a more telling indicator of future developments, totalled just M$991m in the first quarter of this year, against M$12.65bn in 1998. "So they're now running at only 30% of last year's rate", laments an official at the 1,100-member Malaysian International Chamber of Commerce and Industry (MICCI). Not so attractive Notwithstanding the upbeat tone being struck by official propagandists, few existing or would-be foreign investors appear to believe that Malaysia, measured against rival markets in the region, will be a particularly attractive destination over the medium term.

Concerns persist that real wage growth will again begin outstripping productivity gains once the recession abates, as do worries about the pricing and quality of infrastructural services such as electricity and water supplies. But it is the uncertain policy and political environment that is giving most pause for thought. Many fear that since his domestic popularity ratings continue to slide, Dr Mahathir's already well-rehearsed anti-Western rhetoric could become more vehement in the run-up to the next general election, due by mid-2000 but widely expected to be called much earlier.

The danger is that the invective could lead to more of the hostile policies that have characterised recent official decision-making. One burning issue is a restriction on the repatriation of profits introduced shortly before the imposition of the exchange controls regime proper, as companies anticipating the curbs rushed to remit earnings. This limits the permissible level of annual transfers to the average of those made in the previous two years, and has hit some of the country's biggest foreign-owned companies hard. "The irony is we were reinvesting a large proportion of our profits locally", fumes one chief executive. "Instead we're now paying the maximum possible dividend and just banking the rest. The measure is totally counterproductive." If existing investors are not reinvesting, newcomers are even less likely to be eager.

Finance Minister Daim Zainuddin has said the obstacle is being reviewed. But the adverse environment is doing considerable damage. Business Asia has learned that a major US multinational planning to invest some US$300m in Malaysia recently decided to site the project in Singapore. According to a source familiar with the deal, the switch was motivated in part by the aggressive tax-and-incentives package offered by the island republic's government. "The Malaysian authorities were asleep at the wheel", says the source. Disinvestment, meanwhile, has become more than a threat.

A number of big American companies have closed or significantly downsized their Malaysia operations, or are in the process of doing so. They include electronics concerns Readwrite and Seagate, and toy manufacturer Mattel. Investors want the capital and exchange controls, which inter alia prohibit offshore trading in ringgit and its derivatives and require that all imports and exports be paid for in foreign currency, lifted as soon as possible. This certainly is the wish of potential new foreign investors, and their boards in the US and Europe. This group is less prepared to understand the nuances of how, in some respects, capital and exchange controls have been partially discounted--indeed may even have benefited in limited ways--existing investors on the ground. All are agreed, though, that the controls must not drag on. "They have to be short-term. There must be a deadline", MICCI president Jorgen Bornhoft, the head of Carlsberg's Malaysia operations, said recently.

Wasted opportunities

Although reforms are under way in some areas, there is a widespread sense among foreign executives that the government has failed to use the breathing space afforded by the curbs to address some of the economy's more deep-seated and distorting structural problems. "Its not getting to grips with the cronies", says one, referring to the elite of local corporate leaders, most of them ethnic Malays, who benefited hugely from official largesse but whose businesses are now akin to a dragging anchor on the rest of the economy.

Critics say the onset of the Asian financial crisis exposed the shortcomings of the symbiotic relationship between government and business, known as "Malaysia Inc". During the boom period, favoured companies borrowed heavily to expand and diversify--routinely using now-devalued equity as collateral--becoming highly leveraged in the process. Years of good fortune and official indulgence also fostered complacency and inefficiency, blunting the competitive instincts needed for survival in tougher times, the system's detractors contend. Despite mounting pressure to let natural selection weed out the unworthy, Dr Mahathir refuses to allow market forces to assert themselves, dismissing calls for liberalisation as alien and inappropriate.

Defending officially orchestrated bail-outs of struggling corporations, he insists the government has a duty as well as right to ensure their survival, not least because of the virtual absence of Western-style social safety nets like unemployment benefits. Critics say the prime minister fears his own position would become untenable if the influential vested interests his policies have created and nurtured were to be cast adrift. Politics, not economics, and not a determined push to attract new foreign direct investment to leverage growth, is the driving factor of the moment. And will continue to be until Dr Mahathir's influence wanes.

Source: Business Asia Ketua Pengarang