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4/12/1999 11:17 am Sat

COMMENTARY by Michael Shari
December 2, 1999

Mahathir's Narrow Victory Won't Bring Broad Reforms to Malaysia

The reelected Prime Minister may find himself more beholden to
political cronies than ever

Throughout Malaysia's recent electoral campaign, there was hope that victory for Prime Minister Mahathir might finally bring economic reform. The theory: Once the election was out of the way,

Mahathir could, without fear of committing political suicide, tackle problems that were holding back economic recovery, such as a debt-plagued banking system and recalcitrant cronies who refuse to sell off a#sets to pay debts. Maybe Mahathir could even drop the country's capital controls and stop blaming Malaysia's problems on a Jewish conspiracy aimed at benefitting foreign investors.

But as the dust settles on what turned out to be a much narrower victory in the Nov. 29 elections than the government was counting on, any hopes for radical reform have been dashed.

"I have never known Mahathir to appease foreigners," says Francis Yeo, CEO of YTL Group and a long-time friend of the Prime Minister. "Nothing is going to change. That's as predictable as it can be."

Here's why. Although Mahathir's coalition government, the National Front, won more than the two-thirds majority in Parliament that he needs to claim vindication for his capital controls and other controversial economic policies, the "victory" came in razor-thin margins -- less than 300 votes in some constituencies. Mahathir's own party, the United Malays National Organization (UMNO), actually lost more than 20% of its own Parliament seats, and two of the three candidates for the party's second-highest post suffered humiliating defeats.

DEFLECTING CHANGE. "Mahathir now has to juggle a lot more balls, with the electorate becoming more sophisticated and bringing more issues into the open like governance, corruption, and even the integrity of public institutions," says Chew Ping, sovereign analyst at Standard & Poor's in Singapore.

The Prime Minister may find himself more beholden than ever to the UMNO leaders who are still in control of bankrupt banks and crumbling corporations. Thus far, they have staved off painful restructuring, thanks to political protection.

Take Time Engineering, a subsidiary of the Renong conglomerate run by Halim Saad, a protege of caretaker Finance Minister Daim Zainuddin. It defaulted on almost $800 million in debt on last month and remains untouched by the government's debt restructuring agency. Then there's Technology Resources
Industries, run by Mahathir a#sociate Tajudin Ramli. It defaulted on $175 in bonds on Nov. 28 despite claims by Japanese and European creditors that the company has $200 million in cash on its balance sheet. Under the current circumstances, says a political analyst in Kuala Lumpur: "You can't afford to dismantle your system of patronage."

Daim turned down a request for an interview.

The only urgent priority that Mahathir appears willing to address in the post-election landscape is bank restructuring, but even there it's unclear what form it will take. With a population of only 22 million people, Malaysia is hopelessly overbanked with 22 commercial banks, 12 merchant banks, and 25 finance companies that are afraid to extend credit for fear that the economic recovery is short-lived.

"VERY DILUTED." An early consolidation plan that would have seen ethnic Chinese-run banks swallowed up by ethnic Malay-run banks into six merged groups, was canceled at the last minute in September in return for the political support of ethnic Chinese business leaders in the election. "You'll probably see a very diluted form that will be much more acceptable to the Chinese," says Manu Bhaskaran, managing director of SG Securities (Singapore). YTL's Yeo says Mahathir has told banks they have "a year or so to sort it out amongst themselves" and pick the partners they want.

The bottom line: continued delay of the radical reforms that Malaysia's economy desperately needs for sustainable growth. Thanks to increased demand for Malaysia's electronics exports and a recovery in prices for Malaysian oil exports, the economy registered astounding 8% growth in the third quarter of this year, and it could easily grow 5% for the whole year. The challenge will be to make sure this external-led growth leads to new bank lending and consumer spending, both of which are just starting to pick up, says Bhaskaran. But, says Chew: "If investors don't see corporate restructuring, Malaysia won't get the foreign investment it needs."

Some argue that it's still too early to write off economic reform. They say Mahathir just wants to wait a few months to give him time to save face -- the most important aspect of doing business in Asia -- before moving discreetly on a wide range of fronts, from capital controls to debt restructuring. Mahathir might then remove the peg of 3.8 ringgit to the dollar. Many foreign investors think the Malaysian currency is 15% undervalued. "If foreign investment is still slow in coming, then the government will realize there still has to be some corporate restructuring," says S&P's Ping.

But few observers are holding their breath. A valuable opportunity may have been lost along with the political support from the majority Malay voters that Mahathir needed to get tough on cronies and aggressive with economic reform.
The farthest Mahathir is prepared to go, says Yeo, is to swap a "managed float" for the currency peg. At least for the foreseeable future.

Shari, Singapore bureau chief for Business Week, covered the
elections from the Malaysian capital of Kuala Lumpur


Komen: Apa macam mahath1r? Kroni punye pasal gagal nak bayar hutang kepada bank tapi bukan kroni yg lingkup - bank yg kekeringan terpaksa dicantum untuk menambahkan dana utk dituang N "dirompak" secara collar biru melalui dua tiga tanda tangan sehingga lingkup!. Bila lingkup pam lagi minyak Petronas banyak2 dengan dua tiga tanda tangan N setelah nama di ganggang talifon. Ini lah dia pemimpin yg sama yg cuma memegang ganggang talifon utk mengangguk kpd george bush supaya menyerang N membinasakan Iraq! Pemimpin inilah yg berkunjung ke Mekah tapi di tayang2 kan sebelum p/raya!! Wahai Mahath1r - ada org berpuluh2 kali pergi haji tapi tak pernah teringin atau mahu kena tayang kat TV. Org pergi Mekah berbuat ibadat kpd Allah bukan kepada kamera! Org yg betul2 menunaikan haji balik dgn keinsafan N menghayati perjuangan nabi2 tapi hang pula tak menyabar nak bergembira N menghayati tarian kucu kota hey!!.