January 6, 2003

Malaysia must sing a consistent tune

By Eddie Toh

MALAYSIA has had an uneven track record in sending the right signals to foreign investors over the years.
On the one hand, the government has been pragmatic in setting up a friendly regime to attract foreign investments into its stock market and manufacturing sector. The country's export-oriented drive, coupled with the government's prudent fiscal and monetary policy, has also generally been consistent over the years.
To cope with dwindling foreign money during the regional financial crisis in 1997-98, the Malaysian government even suspended its sacred cow - the bumiputra policy to help the predominant Malay community prosper - in the manufacturing sector. Foreigners are allowed to boost their ownership in certain segments of the manufacturing sector during this window of opportunity, which closes at the end of this year.
And in the previous budget announcement, Prime Minister Mahathir Mohamad dangled carrots to woo more multinational corporations to set up their operational headquarters in Malaysia and help speed up the country's plan to become a major air and sea cargo hub to rival Singapore.
The premier is also mulling over the possibility of granting honorary citizenship to foreigners in a bid to attract foreign talent to help boost its economy.
Another right signal is the government's drive to remove mounting debts in the corporate sector regardless of the owners' political connections.
As a result of these pragmatic policies, Malaysia emerged as one of the top destinations for foreign investors in the region in the last two decades.
Visitors to Malaysia will not miss the obvious signs of a huge foreign presence in the country. Foreign banks - like Citibank, Standard Chartered and Singapore's United Overseas Bank - control over one-fifth of the country's banking assets. Foreign hypermarkets like Carrefour, Giant and Tesco pepper the urban landscape. And foreign carmakers like BMW, Honda and DaimlerChrysler are racing to beef up their presence in Malaysia ahead of the opening up of the sector under the Asean Free Trade Area.
On the other hand, however, there have been policy faux pas along the way.
Among them are the levy of RM100,000 (S$45,887) on property transactions by foreigners, the handling of the release of the Malaysian shares previously traded on Singapore's Clob International, and certain aspects of the country's capital control regime.
Flaws in the system of capital controls include the barring of foreigners from repatriating their proceeds from the sale of equities for one year, and the confusing exit levy on equity profits.
The first banking merger blueprint drafted in 1999 didn't fly. Fortunately, the government changed course and allowed banks to pick their own merger partners following strong objections to the first forced merger plan.
Malaysia has paid a high price for some of these policies. For instance, foreign portfolio managers dumped Malaysian stocks indiscriminately ahead of the imposition of the repatriation restrictions in September 1998.
The Kuala Lumpur Stock Exchange Composite Index crashed to below 300 points then. It has since doubled to more than 600 points, but the market barometer is still less than half the level of over 1,300 points recorded 10 years ago.
Given the volatile global outlook, it is highly unlikely that the KLCI could double in the next few years.
It has also not helped market sentiment when Malaysia raised the ante in recent weeks in its ongoing spat with Singapore.
The word 'war' has been used by Malaysian politicians a tad too liberally as they clamoured to assert Malaysia's claim to a disputed islet off the coast of Johor state and Singapore. The other thorny problem is the pricing of Malaysia's supply of water to Singapore.
Investors are surely following how the two countries will resolve their differences.