Mahathir to the Rescue

Prime Minister Mahathir Mohamad is leading a charge to restructure debt-burdened conglomerates. It's long overdue, but if sustained it should attract foreign investors

By S. Jayasankaran (Issue cover-dated August 23, 2001)
SIGNS ARE MOUNTING that the tide has finally turned against politically connected conglomerates that have remained mired in debt since the Asian Crisis hit in 1997. And it is Prime Minister Mahathir Mohamad who is showing the muscle to tackle corporate debt-restructuring.
Take events at Malaysian Resources, or MRCB, struggling under 1.8 billion ringgit ($474 million) of debt. On August 9, the government announced that two former consultants with the state asset-management agency were taking over its management. MRCB chieftain Abdul Rahman Maidin, the controlling shareholder who also had links to former Finance Minister Daim Zainuddin, resigned as chief executive but retained the figurehead position of nonexecutive chairman.
The state-led initiative to hasten restructuring is winning cautious applause from investors and has demonstrated the power of the government over private companies when debt is the issue. Terence Gomez, a political economist at University Malaya in Kuala Lumpur, says the government--if it has to--decides the fate of major shareholders. "Ultimately," he says, "it's always been about control" by the political elite.
MRCB was tipped to be a target after the government in July launched a 3.7 billion ringgit takeover of United Engineers Malaysia, an affiliate of the Renong conglomerate, the country's most indebted group. If the government succeeds, it would take control of Renong from Executive Chairman Halim Saad, a protégé of Daim, because of cross-holdings between both companies. Mahathir has denied Halim is under investigation, but was frank about his fall. "He is not under investigation. He's not in charge, that's all," he told reporters.
The relative ease with which tycoons like Halim and Rahman are being sidelined underscores Mahathir's involvement. More broadly, however, their fate illustrates Mahathir's belated recognition that getting tough on debt-restructuring is the only way for Malaysia to attract foreign investors. If the number of international conference calls that Lai Tak Heong, the head of SG Securities in Kuala Lumpur, has taken in recent weeks is an indication, foreign interest is reviving. "We're back on the radar screen," says Lai, "Now we have to convince them that we're serious."
Signs that the government is serious were bolstered--again on August 9--when the Corporate Debt Restructuring Committee, the state debt-workout agency, announced tough guidelines to accelerate restructuring of 29 billion ringgit in debt owed by 32 firms. New CDRC head Azman Yahya said both shareholders and banks would have to take losses and had to come up with workable plans in three months. Azman said lax management would be punished, companies could go bust if they didn't cooperate and reluctant bankers would be referred to the central bank. "We've got to hit them where it hurts--their pockets," said Azman, giving himself a year to resolve the problem. "There has to be discipline."
It may be too early to talk of the end of Malaysia Inc.--the cosy symbiosis between the state and private sector to develop Malaysia as part of the preferential treatment for ethnic Malays, who make up more than 60% of the population. But some things are changing, say financial executives close to the government. Protecting troubled corporate favourites is barred, and also out is Daim's strategy of allowing a handpicked group of businessmen to feed on state patronage.
Malay entrepreneurs may continue to emerge but they are unlikely to get the same sort of generous treatment. Officials say Malay business participation will be ensured by state-owned institutions set up for that purpose--such as the National Equity Corporation and state development agencies.
Despite Mahathir's past diatribes against neo-colonialists, the officials say that foreigners may be allowed to play a bigger role in the restructuring by being invited, for example, to take meaningful stakes in strategic industries or even manage them. Meanwhile, ethnic business lines may be further blurred. Malaysian-Chinese businessmen are likely to participate in the break-up of "Malay" conglomerates like Renong. Malay institutional interests are equally likely to be involved in the asset sales of, for example, the Lion Group--the Chinese-owned conglomerate which, with more than 10 billion ringgit in debt, is the country's second-largest debtor.
Mahathir's conversion seems to have occurred shortly before Daim resigned in June, following a series of bailouts seen by critics as benefiting government cronies. Mahathir became acting finance minister and will apparently remain there to see through the campaign. Speedier restructuring will lead to a rise in the federal government's liabilities, especially when it has to nationalize troubled firms such as Renong. It will increase nonperforming loans, leading to a drop in bank profits. But "it's just short-term pain really," says Gan Kim Khoon, the research head of Arab-Malaysian Securities. "I don't think any bank will need to be recapitalized."
It says much about Mahathir's pragmatism that he gave in after resisting since the Asian Crisis and defending troubled tycoons. For him to accept that the state has to spearhead corporate restructuring and nationalize some enterprises is to signal that there were flaws in his privatization policy. Similarly, building up Malay businessmen may have been Daim's idea but it was one that Mahathir embraced. "Let's give credit where it's due, "says Tan Teng Boo, managing director of investment adviser Capital Dynamics. "Whichever way you look at it, these are the right things to do."
Government insiders say a major player behind the change is Nor Mohamad Yakcop, a former central bank assistant governor. Nor was briefly in the limelight in the early 1990s after he took responsibility for over 13 billion ringgit in foreign-exchange losses and resigned. A close associate says he's been "working ever since to redeem himself." He caught Mahathir's attention in 1998 when he advised on how to implement capital controls. He was re-appointed to the central bank before becoming economic adviser to Mahathir in May last year.
Insiders say Nor came into his own with the government takeover of loss-making Malaysia Airlines in December. He advised Mahathir that the best way to deal with Tajudin Ramli, the airline's controlling shareholder, was to buy him out at market prices. But Daim pushed through a deal for the state to pay Tajudin almost three times the market share price. The ensuing furore strained ties between Mahathir and Daim and gave Nor credibility. Since then, the insiders say, Nor has been dubbed "Doctor No" because he refuses many of the deals brought to him for the approval of the prime minister.
The Renong revamp, the bell-wether of Malaysian restructurings, will make or break Nor. According to the insiders, he persuaded Mahathir that to replace Halim with another tycoon would be a mistake, as it would only lead to fresh borrowings by an individual. Only the state had the resources and power to see it though, argued Nor. Mahathir agreed. So far, there is no evidence of a bailout and analysts generally praise the move. The stockmarket even began to rally in July. The acid test will be what happens after Renong is taken over.