Sept. 6 (Bloomberg) -- Investors rarely care much about what Amnesty International says about anything. Yet the group put it best when it called the release of former Deputy Premier Anwar Ibrahim "a new beginning" for Malaysia.
By freeing Anwar after six years in prison, Malaysia's top court last week closed a highly controversial chapter in the nation's political history that's long spooked investors. The surprise verdict showed how much things are changing in one of Asia's most promising economies. It even sent stocks higher.
"The release of Anwar completes the process of bringing Malaysia back into the ranks of the civilized world," said Christopher Wood, Jakarta-based strategist at CLSA Ltd., recommending that investors buy Malaysian stocks amid signs of a more liberal political climate.
Anwar's release is mostly symbolic and probably won't alter Malaysia's political landscape anytime soon. Yet it's hard to believe it could have happened if Mahathir Mohamad were still prime minister. In October last year, he stepped down after 22 years and handed the reins to Abdullah Ahmad Badawi.
Since then, Abdullah has quietly cracked down on corruption, demanded greater transparency, improved ties with neighboring countries and reviewed deals between politically connected businesspeople and the government. He's also avoided the combative rhetoric of the Mahathir era that often roiled markets.
Of course, much remains to be done to entice investors into Asia's 10th biggest economy. Even though it grew 8 percent in the second quarter, Malaysia isn't pulling in the kinds of foreign direct investment you'd expect. China's dominance explains some of the capital drought, but not all of it. Malaysia, simply put, needs to work harder to persuade investors to return there.
In some ways it's a legacy of what many consider Mahathir's finest hour: his handiwork during the Asian financial crisis in 1998. Rather than follow the International Monetary Fund's advice -- tighter fiscal policy and high interest rates -- Mahathir went his own way. Six years ago this week, Mahathir imposed capital controls and pegged Malaysia's currency.
Mahathir's moves seemed to work. Malaysia didn't implode the way Indonesia, South Korea and Thailand did. Nor did it need to go hat-in-hand to the IMF. Avoiding the worst of the Asian crisis buttressed the domestic standing of a man who helped turn an agricultural and mining backwater into a thriving economy that's now the production base for Intel Corp., Dell Inc. and others.
Yet Mahathir's steps in 1998 also left a palpable taint on the economy. His sacking of Anwar was an example.
Mahathir's move to sack his deputy on Sept. 2, 1998, and the subsequent jailing of Anwar on sodomy charges two weeks later were among the ugliest episodes of the Asian crisis. Anwar's real crime probably was challenging Mahathir. The perception remains that Anwar's imprisonment was politically motivated.
The taint of the affair contributed to Malaysia becoming a pariah among investors. Never was that more on display than when former U.S. Vice President Al Gore criticized Anwar's imprisonment on Malaysian soil in late 1998. A free-market enthusiast, Anwar was a favorite of the U.S., Malaysia's biggest export market.
Anwar's release puts the controversy to rest and provides signs of a more independent judiciary. Since that's something "a lot of foreign investors were concerned about," said Bruce Gale, a political risk analyst at Hill & Associates Ltd. in Singapore, last week's news could be a plus for Malaysian markets.
If Malaysia is going to get back on investors' radar screens and stay there, it needs to accelerate a variety of reform efforts. Here are three of the biggest.
One, un-peg the ringgit. A legacy of the Asian crisis, the currency's exchange rate of 3.8 to the U.S. dollar has outlived its usefulness. The government is reluctant to scrap it because it has brought stability and predictability to the economy. It's also thought to be undervalued, something that's helping boost exports.
Freeing the ringgit would be a sign of confidence, indicating that Malaysia's financial system has undergone sweeping change is again ready to face the judgment of global markets. It's also an important step toward Malaysia playing a big role in Asia's efforts to create a regional bond market.
Two, name a finance minister. After sacking Anwar, Mahathir assumed the role of finance czar and Abdullah continued the tradition. Economic brainstorming should take place away from the prime minister's office. That way, Abdullah can be presented with a variety of options, allowing him to weigh the pros and cons.
Three, weed-out Mahathir-era cronies. Malaysia's global reputation has long been tarnished by its "rent-based" way of doing business. The politically connected get the big projects; others get the scraps. This is the thorniest issue Abdullah needs to tackle, but it would score big points with foreign investors.
While he's had an impressive start, Abdullah will need to shake things up to improve transparency, accountability and fairness in the economy. Doing so also would empower the private sector, boosting entrepreneurship and creating jobs from the ground up.
Anwar summed things up in an interview with Bloomberg News last week: "This is a good beginning. Prime Minister Abdullah had made some very bold steps in the right direction. Although I must admit that this is just the very beginning."
Parent site: "Focus on Malaysia"