Malaysia Hopes for Crumbs

Little solace amid the market gloom

By ARJUNA RANAWANA

December 13, 2000
Web posted at 10:00 p.m. Hong Kong time, 9:00 a.m. EST

Malaysia's premier bourse, the Kuala Lumpur Stock Exchange, shows no signs of recovering from lackluster trading and low prices, slowing the full recovery of the economy from the financial crisis. Market-watchers are convinced that the benchmark Composite Index is headed downward in January for a variety of reasons. This will mean a lack of liquidity that will hamper the debt restructuring of a number of key conglomerates.

In the 1990s Kuala Lumpur's was considered the third-most-attractive market in the region for investors, excluding Japan, behind Hong Kong and Singapore. Now it cannot break into the top 5 and is behind Korea, Taiwan and India in terms of investor funds. There are a number of reasons. After following open-market principles and benefiting from them for many years, Malaysia imposed capital controls and locked in investor funds in 1998 in response to the Crisis. This spooked foreign investors, who gradually moved their funds away as the controls were lifted. The Central Bank reports that $2.6 billion has been taken out by foreign funds since May this year. Currently, foreign funds hold an estimated 4% of stocks, down from more that 25% just a few years ago.

Malaysia has also finished most of its major privatization exercises, and as a result there have been few important listings to attract serious investors. "The only important listing in recent times has been Malaysian Airports, which unfortunately was a disappointment," says Yeoh Keat Seng of the online stock advisory Malaysiastreet.com. These privatized enterprises have also not performed up to expectations. "There is also nothing exciting in the third-quarter earning reports from the corporates," says Yeoh.

The country's poor record of corporate governance is also an issue. Manipulation of large, politically connected conglomerates, at the cost of minority shareholders, has depressed sentiment. One of the largest groups, Renong, is a typical example. On Dec. 11, its chairman, Halim Saad, was given a further 15 months by affiliate United Engineers to honor a pledge to buy back a huge block of Renong shares. United Engineers, which owns and operates the lucrative North South highway, had earlier taken over all the non-performing assets of Renong. Long considered the crown jewel of the Kuala Lumpur exchange, United Engineers saw its share price plunge, bringing down the index 1.5% in a single day.

These very manipulations are delaying corporate restructuring. Renong was hoping to relieve itself of debt by listing two key parts of the company, TimedotCom and PLUS, the operating arm of the North South highway. But with the market in its current state, both listings have been postponed several times. "There just isn't enough liquidity in the market to list these companies," says Hoo Ke Ping, an independent market analyst. The Renong group's $5.7 billion debts constitute a hefty 15% of the non-performing loans in the Malaysian banking system. Pulling Renong out of the debt hole is therefore crucial to the overall economic recovery of Malaysia. Analysts have calculated that the index could drop to around 685 from its current 730 level by January 2001. This is a precipitous fall from the height of 1,071 recorded in February this year. Hoo says it could be even lower, at 630 by end January.

The only ray of sunshine is that it couldn't get any worse. "Very little can go wrong after January," says Hoo. Many in Kuala Lumpur are hoping that if there is a major correction on Wall Street and an outflow of funds toward Europe and Asia, Malaysia would get some "spillover" as well. "Naturally the funds will look at Hong Kong and Singapore first. But after that, we may get something," says Hoo. A lot depends on that faint hope.