Asia Times: Malaysia: Malaysia: All dressed up with nowhere to go


	July 4, 2000	atimes.com

Southeast Asia

Malaysia: All dressed up with nowhere to go
By Anil Netto

The Kuala Lumpur Stock Exchange has been drifting listlessly of late, reflecting what analysts say is the slow progress in implementing corporate reforms that can be enforced impartially. Despite rising corporate earnings, apparent political calm, and a relaxation of capital controls, the KLSE has not headed upward.

How times have changed. As recently as February, analysts were saying the KLSE's Composite Index was heading for 1,000 points. But the hype surrounding the reinstatement of Malaysia into the benchmark Morgan Stanley Capital International (MSCI) indexes soon faded and the mood of over-optimism has now given way to more realistic expectations. The index continues to hover largely in the 800s.

Economist Subramaniam Pillay comments: ''To be fair, the markets are coming down everywhere [in the region]. Eight hundred to 900 seems fair value to me.''

However, lack of progress in implementing reforms may have jeopardized investor confidence in the economy. Since mid-April, foreigners are reported to have withdrawn more than a billion ringgit (US$263 million) from the KLSE. And while some analysts say investors may have felt that the market was already fairly valued, intense speculation of a rift between Prime Minister Mahathir Mohamad and Finance Minister Daim Zainuddin has made investors jittery.

Foreign investors are also probably put off by perceived cronyism, policy flip-flops, the reintroduction of mega-projects, and the losses incurred by huge privatized enterprises.

Foreign direct investment is still below pre-crisis levels despite a sharp economic rebound. FDI declined by 29 percent to RM9 billion in 1999 from RM12.6 billion in 1998. Applications for new investment, both local and foreign, for the first four months of 2000 totalled RM3.9 billion, about a fifth lower than the corresponding period in 1999.

And all the while, Prime Minister Mahathir Mohamad lashes out at the global financial architecture and Western dominance of the global economy. Much of the criticism is probably justified, but there is such a thing as overdoing it. ''All the anti-Western jingoism doesn't seem to help,'' notes Subramaniam. Malaysia, despite all the tough talk, is in a vulnerable position. The United States topped the list of investors in Malaysia with projects approved last year totalling RM5.2 billion, more than half of the total.

It's not all bad news. Foreign reserves have surged on the back of positive trade balances, reaching RM131 billion. First quarter economic growth hit 11.5 percent, the fastest in four years, though this was off an unusually low corresponding period last year. It is almost certain that growth in the subsequent quarters of 2000 will be much smaller as the preceding year's base rises.

The slow rate of technology transfer in key areas such as electronics, telecommunications and finance is also eating into Malaysia's trade surplus. The country's favorable trade balance has fallen from RM4.5 billion in January 2000 to RM3.4 billion in April after peaking at RM6.9 billion in March. The once sharp growth in exports seems to be tapering off while imports have surged. Total exports for April 2000, for instance, rose by 11.9 percent from the same month last year to reach RM29.0 billion. Imports, on the other hand, surged a worrying 29.4 percent to reach RM25.5 billion in April.

Electronics and electrical products are Malaysia's largest revenue earner at 58 percent of total exports in April. Imports in the same sector, however, make up 49 percent of total imports and have been increasing steadily since 1998. They now are equivalent to roughly two thirds of the value of electronics and electrical exports, reflecting a relatively low level of value-added input.

Given its heavy reliance on the electronics sector, much of Malaysia's recovery - like that of South Korea, Singapore and Taiwan - will hinge on the growth prospects of the US economy. The US absorbs 20 percent of Malaysia's total exports. ''Electronics plays a big role in these countries' exports and they are doing well,'' observes Subramaniam. ''But if the bubble bursts in the United States, all of Southeast Asia could be affected.''

In the longer term, the lack of reforms within Malaysia and other East Asian economies could prove their undoing. Mohammed Ariff, the director of the Malaysian Institute of Economic Research, says in a commentary published in a local daily: ''If the Japan experience is anything to go by, monetary and fiscal measures are no substitutes for structural change.'' The best way to deal with what he sees as an impending crisis ''is to pre-empt it by undertaking serious reforms and restructuring while the going is good. But, alas, the recovery seems to have robbed the urge to bring about real changes.''

Not everyone believes that cronyism is a key factor holding back the KLSE. Cronyism never affected the willingness of investors to buy into crony-linked firms in the past, points out the research head of a Kuala Lumpur-based foreign stock broking firm. ''But lack of corporate governance, in particular lack of trust in some managements, is reducing investors' appetites especially in certain infrastructure and gaming firms.''

He adds: ''I believe that CLOB [Central Limit Order Book] is an underestimated deterrent to investors coming into the market'' - a referrence to the unfreezing of Malaysian shares in Singapore which were trapped following the imposition of Malaysian capital controls in September 1998. ''If you know that almost 15 percent of market volume for the period is going to hit the market (based on present low volumes) over the next 13 months, would you go in to buy?''

The recent removal of a restriction against listing a subsidiary that contributes more than 50 percent of a listed parent's profits may also have affected investor confidence. And bank lending has been sluggish, with banks still loath to lend in the wake of the economic crisis.

Economist and writer Edmund Terence Gomez blames the torpor of the stock market on ''a combination of events''. He says most foreigners bought local equity anticipating the MSCI reinstatement, and then divested just before the event. Many are now hesitant to re-enter the market. He also points to the speculation about a Mahathir-Daim rift, a situation he describes as serious. The perceived rift, he adds, is related to the lack of corporate reforms and recent attempts to concentrate economic wealth through bank and securities industries mergers. Insecurity over the future of the US economy is also weighing down the market.

Gomez sums up: ''The prognosis for the future, I feel, is uncertain - bleak in my opinion - in spite of all the hype about GDP growth prospects. The KLSE is definitely a reflection of the state of the economy, in so far as it reflects our long-term prospects.''

All these factors contribute to a lack of confidence in the Malaysian economy among many investors, and add up to a downward trend.

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