Malaysia bids to attract investors
By Sheila McNulty
Published: August 15 2000 15:04GMT

Malaysia's economic growth rate is among the fastest in the region and is projected to continue accelerating next year. But analysts are concerned about its sustainability if foreign direct investment (FDI) does not recover to pre-crisis levels. "For the medium-term growth, the concern is on FDI," says Lai Tak Heong, research director at SG Securities in Malaysia.

It has been sluggish since the regional economic crisis began in 1997. That year, the value of FDI applications was down 18.4 per cent over the previous year. It was down 12.2 per cent in 1998 and 28.4 per cent last year, says Kostas Panagiotou, senior economist at Kim Eng Securities. Approvals also have been slow to recover: they were down 33 per cent in 1997, up 14 per cent in 1998, and down 6.1 per cent in 1999.

Though approvals were down 43.4 per cent from January to July, Mr Panagiotou says applications rose 24.7 per cent in "a good sign that things will be turning around".

But how quickly and a#suredly that happens, analysts say, depends on how well the government responds to concerns about corporate reforms, protectionism and the pegged currency. Last week, Daim Zainuddin, finance minister, said next year's budget would focus on raising private investment.

"Malaysia has in place some of the most potent raw materials for success of any Asian nation: widespread use of English, cheap and available land and offices, excellent tertiary infrastructure and communications, and, for now, a cheap currency offering a competitive edge over neighbouring countries," says Dominic Armstrong, ABN-Amro head of Malaysia research. "However, these components of success will deteriorate into irrelevance given the rapid pace of reform taking place in neighbouring markets if reform is not brought forward urgently."

NTT of Japan's recent decision against buying into Telekom Malaysia, apparently because it could not secure management control, underlines to analysts the need for further corporate restructuring. The UK's National Power's subsequent decision against a direct stake in Malaysia's biggest power plant because of financing risks reinforces their view that some investors feel uncomfortable committing themselves to the country.

C. Rajandram, chairman of the Corporate Debt Restructuring Committee, insists corporate reform is taking place but perhaps not at the pace the market expects.

"The perceptions of Malaysia are still negative," says Megat Najmuddin Khas, president of the Malaysian Institute of Corporate Governance, established to lift standards. Mr Megat told investors 80 to 90 per cent of boards of public listed companies are ineffective, dismissing most annual general meetings as "10-minute affairs with a handful of people". He said Malaysians cannot continue "whining and complaining" about lack of investor confidence, noting: "We are seen as isolating ourselves from the rest of the world."

After Malaysia's last crisis, in the 1980s, the authorities launched pro-trade, pro-liberalisation policies that made the country a leading FDI destination. But this time it responded with anti-foreign rhetoric and capital controls. Malaysia's recent demand for more time before reducing regional trade barriers and refusal to follow competitors such as Singapore in liberalising strategic sectors are seen as confirmation that policymakers are heading in the opposite direction.

"They're going backwards as the world is going forward," says Manu Bhaskaran, SG Securities' managing director. Malaysian leaders believe it more important to maintain social stability than attract FDI. That is understandable, given how bankruptcies and layoffs led to bloody unrest in neighbouring Indonesia - which has the same potent mix of a commercially dominant ethnic Chinese minority amid a majority Malay population.

But analysts are concerned that the ruling party might be too willing to sacrifice economic efficiencies for popular support after losing ground in elections last November. "We are concerned about the high risk of imbalances emerging as political necessities continue to dictate policy formulation," Mr Bhaskaran says. "The unwillingness to embrace global trends such as globalisation, corporate transparency, and disclosure mean the economy may not grow in the optimal way."

This is particularly important given the restructuring that is under way in competing nations. Analysts note Malaysian policies to keep strategic sectors under its control mean FDI is by-pa#sing Malaysia for such countries as South Korea, where there have been more inflows into manufacturing.

The need for Malaysia to be attracting more of this FDI was featured in a recent column by A. Kadir Jasin of the government-controlled New Straits Times newspaper: "Being a small economy, we need global partners and collaborators to survive globalisation and liberalisation,"

Mohamed Ariff, head of the Malaysian Institute of Economic Research, considers the fixing of the currency against the US dollar - introduced during the crisis initially to stop the decline of the ringgit - a big part of the problem. That the currency is now undervalued encourages re-investment by existing investors, analysts say. However, some labour-intensive multinationals have left because of Malaysia's policy to promote higher-valued industries or to position themselves in China before its entry to the World Trade Organisation.

In addition, analysts say, the peg deters new investment by making imports needed to get started more expensive and creating uncertainty about what the currency will be worth when operations begin.

If investment does not pick up, analysts suspect technology transfers will not occur fast enough to sustain the 7 per cent long-term economic growth sought by the government. "This problem is particularly acute in key sectors, such as telecommunications and finance, where large capital requirements may limit the ability of indigenous corporates to keep up with the intense global competition," Mr Bhaskaran says.